Monster Beverage Corp Q3 FY2024 earnings call

• Global energy drink category continues to grow. In the U.S., energy drink category growth varies by channel; excluding convenience, it's growing faster. In EMEA, energy drink category grew ~11.1% on FX neutral basis for tracked markets in 13-week periods. In APAC, ~13.6% growth on FX neutral basis for tracked markets in 13-week period ending September 2024. In LatAm, ~21.1% growth on FX neutral basis for tracked markets in 13-week periods. - Net sales reached record $1.88 billion in 2024 third quarter, 1.3% higher than 2023 comparable quarter. - Alcohol segment's brewery in Brevard, NC closed for a week due to Hurricane Helene, partially operational and expected to be fully operational by mid-November 2024. - Implemented a 5% increase on brands and packages (excluding Bang, Reign, and Reign Storm) in the U.S. effective November 1, 2024; continuing to monitor pricing actions in international markets. - Launched various new products globally, e.g., Monster Ultra Vice Guava in U.S., Monster Ultra Peachy Keen in Mexico, etc.

In the 2024 third quarter, Monster Beverage achieved record third quarter net sales of $1.88 billion, which is 1.3% higher than the comparable 2023 quarter and 4.7% higher on a foreign currency adjusted basis. Net sales on a foreign currency adjusted basis excluding the Alcohol Brand segment increased 5% in the 2024 third quarter. The Alcohol Brand segment had net sales of $39.8 million in the 2024 third quarter, a decrease of approximately $2.5 million or 6% lower than the 2023 comparable quarter. Gross profit for the 2024 third quarter was 53.2% of net sales, adversely impacted by the Alcohol Brands inventory reserves. Net sales to customers outside the U.S. were $760.1 million, 40.4% of total net sales in the 2024 third quarter.

• Continues to monitor opportunities for further pricing actions in international markets. - No specific upward/downward revision of financial guidance mentioned beyond ongoing monitoring of pricing and market conditions.

• Hurricanes Helene and Milton impacted sales at retail in certain states in September and October 2024, but impact on business cannot be determined. - Unfavorable foreign currency exchange rates had an unfavorable impact on net sales for the 2024 third quarter by $62.8 million and adversely impacted diluted earnings per share by approximately $0.03 per share. - Intellectual property claim brought by descendants of Hubert Hansen incurred $16.7 million provision and $1.2 million of Company incurred legal expenses. - Alcohol Brands segment had excess inventory levels requiring $10.6 million inventory reserves. - Fluctuations in raw material costs, especially aluminium, pose risks to cost and gross margin.

Q: I want to just go back to the expectation of the flow through from pricing and how much you had to deal back on that? And how is your view on the state of the energy drink category given what’s happening in particular now with October understandably, but one extra selling day, it might be a little soft from what I think investors would expect.

A: When we have a price increase, we have to see where that price increase settles. It’s a really difficult question to answer at this time. Regarding the energy drink category, foot traffic in convenience is a factor. We think we’ve reached the bottom and are close to recovery. The category trends show some improvement with latest Nielsen data showing increases.

Q: Can you just maybe touch on how you see inventory levels or how you saw inventory levels going into October? And really what I’m getting at here is, is it just a comp or because you sound quite good on consumption trends, but maybe distributors were still a bit reticent to take on more inventory.

A: The way our business works, we sell to the Coke distributors. They place orders and we execute those orders according to customer requirements. Our business doesn’t have issues with inventory hiccups as we supply orders based on customer orders.

Q: I wanted to ask about just your comment about the improvement in the category in October. How much do you think innovation plays a role as well? You sounded excited about the Vice Guava.

A: Innovation does drive some consumption. We’ve had new products, but overall, the improvement in the category is also due to macroeconomic conditions improving and foot traffic in convenience showing positive signs.

Q: I wanted to ask about gross margin in EMEA. I know it’s sort of specific, but it’s one of those questions that I think a lot of people are curious about and don’t have a huge amount of color. The trends have really improved over the last couple of years, but you’re still decently below 2021 levels.

A: We have taken price in international markets and continue to examine pricing opportunities. We use a ladder strategy to manage aluminium exposure. Cost of production and raw materials have increased, but we're working to manage costs. EMEA margins have improved in the quarter and we're focused on further improvement.

Q: I guess, I just wanted to go back to the advanced purchases. I get it’s a lot of moving pieces and the hurricane noise probably makes it harder. But I think back in 2018 when you did the November price increase, you were at that point at least able to estimate the impact from advanced purchases ahead of the price increases. I’m just curious, is there a reason why this time may be different and you’re not able to kind of estimate that? And then just on gross margin, obviously, you would love some perspective on the path from here.

A: The difference this time is that we cut off our price increase mid-October, making it difficult to estimate the impact of advanced purchases on October sales. Regarding commodities, we have a ladder approach for aluminium exposure and are monitoring other commodities; generally, we see increases in some commodities like aluminium and sugar while others are relatively stable.