U.S. Markets open in 2 hrs 57 mins

Edited Transcript of MNST earnings conference call or presentation 7-Aug-19 9:00pm GMT

Q2 2019 Monster Beverage Corp Earnings Call

Corona Sep 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Monster Beverage Corp earnings conference call or presentation Wednesday, August 7, 2019 at 9:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Hilton H. Schlosberg

Monster Beverage Corporation - Vice Chairman, President, COO, CFO & Secretary

* Rodney Cyril Sacks

Monster Beverage Corporation - Chairman & CEO

================================================================================

Conference Call Participants

================================================================================

* Andrea Faria Teixeira

JP Morgan Chase & Co, Research Division - MD

* Caroline Shan Levy

Macquarie Research - Senior Analyst

* Mark Stiefel Astrachan

Stifel, Nicolaus & Company, Incorporated, Research Division - MD

* Vivien Nicole Azer

Cowen and Company, LLC, Research Division - MD & Senior Research Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good day, ladies and gentlemen, and welcome to the Monster Beverage Corporation's Second Quarter 2019 Financial Results Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference Mr. Rodney Sacks, Chairman and Chief Executive Officer. Sir, you may begin.

--------------------------------------------------------------------------------

Rodney Cyril Sacks, Monster Beverage Corporation - Chairman & CEO [2]

--------------------------------------------------------------------------------

Good afternoon, ladies and gentlemen. Thank you for attending this call. I'm Rodney Sacks. Hilton Schlosberg, our Vice Chairman and President is with me today; as is Tom Kelly, our Executive Vice President of Finance.

Before we begin, I would like to remind listeners that certain statements made during this call may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended and are based on currently available information regarding the expectations of management with respect to revenues, profitability, future business, future events, financial performance and trends. Management cautions that these statements are based on our current knowledge and expectations, and are subject to certain risks and uncertainties, many of which are outside the control of the company that may cause actual results to differ materially from the forward-looking statements made during this call.

Please refer to our filings with the Securities and Exchange Commission, including our most recent annual report on Form 10-K filed on February 28, 2019, and our most recent quarterly report on Form 10-Q filed on May 3, 2019, including the sections contained therein entitled Risk Factors and Forward-Looking Statements for a discussion on specific risks and uncertainties that may affect our performance. The company assumes no obligation to update any forward-looking statements whether as a result of new information, future events or otherwise.

An explanation of the non-GAAP measure of gross sales and certain expenditures, which may be mentioned during the course of this call, is provided in the notes and designated with asterisks in the condensed consolidated statements of income and other information attached to the earnings release dated August 7, 2019. A copy of this information is also available on our website at monsterbevcorp.com in the Financial Information section.

Consumer beverage preferences and tastes are continuing to evolve and we are endeavoring to address them through our ongoing innovation of new products. In the second quarter of 2019, net sales were $1.1 billion, up 8.7% from $1.02 billion in the second quarter of 2018. Net sales in the second quarter were negatively impacted by approximately $25.9 million of foreign currency movements. Without these foreign currency movements, net sales for the quarter would have been up 11.2%.

Gross profit, as a percentage of net sales for the 2019 second quarter, was 59.9% compared with 61.1% in the 2018 second quarter. For the quarter ended June 30, 2019, gross profit as a percentage of net sales was positively affected by increased sales prices of our products sold in the United States and Canada as well as by reduced aluminum costs. Gross profit as a percentage of net sales was primarily negatively affected by geographical and product sales mix and increases in certain input costs.

Distribution cost as a percentage of net sales were 3.4% for the 2019 second quarter as compared to 3.7% in the 2018 second quarter. Selling expenses as a percentage of net sales were 11.2% for the 2019 second quarter as compared to the 11.4% in the same quarter in 2018.

General and administrative costs as a percentage of net sales were 10.9% for the 2019 second quarter as compared to 10.7% in the same quarter in 2018. In the quarter, payroll expenses as a percentage of net sales were 6.6% compared to 6.5% in the same period in 2018. Payroll costs increased $7.4 million, primarily due to head count growth both domestically and internationally as well as an increase in payroll taxes.

Stock-based compensation, which is a noncash item, was $15.6 million in the second quarter of 2019 compared to $14.9 million in the same quarter in 2018. Our effective tax rate decreased from 24.6% in the 2018 second quarter to 23.4% in the 2019 second quarter. The decrease in the effective tax rate was primarily due to the increase in profits earned by certain foreign subsidiaries in lower-tax jurisdictions than the United States.

Net income was $292.5 million in the 2019 second quarter compared to net income of $270.1 million in the 2018 second quarter, an increase of 8.3%. Diluted earnings per share for the 2019 second quarter increased 11.9% to $0.53 from $0.48 in the second quarter of 2018.

We continue to make good progress in the implementation of our strategic alignment with Coca-Cola Bottlers globally. We transitioned the distribution of Monster Energy Drinks from Big Geyser's territory, which is located in the New York metro markets, to Liberty Coca-Cola in early April 2019. As of April 6, 2019, the United States was fully transitioned to Coca-Cola network bottlers.

In the second quarter of 2019, Monster Energy was launched by Coke bottlers in Azerbaijan, Paraguay and Saudi Arabia. We are planning further international launches later this year. We launched Predator, our affordable energy brand, in the second quarter of 2019 in certain markets in Europe, namely Greece, Bulgaria and Cyprus. We are planning to launch Predator in selected additional markets in Eastern Europe, Central Asia, the Middle East and Africa throughout the second half of 2019.

In China we completed the rollout of Monster Ultra in the second quarter and also launched Monster Mango. We have significantly expanded our sales pace for Monster with 3 SKUs in our targeted top 40 cities and key accounts. We continued the rollout of Monster across India, and are planning additional SK launches in the India in 2019.

I will now briefly discuss our arbitration with The Coca-Cola Company and litigation with Vital Pharmaceuticals, Inc., VPX, the maker of Bang energy drinks. As we have previously disclosed, in October 2018, Monster Beverage Corporation and The Coca-Cola Company mutually agreed to submit to arbitration the issue of whether Coca-Cola is permitted to manufacture, market, sell or distribute energy drink products it had developed under the Coca-Cola brand. On June 28, 2019, the arbitration panel issued a final award in favor of Coca-Cola. Regardless of this outcome, Monster and Coca-Cola value their relationship and look forward to continuing their partnership.

I have also previously addressed the lawsuit filed against VPX in September 2018 for false advertising and VPX' trademark lawsuit against Monster filed in March 2019. Both proceedings are ongoing. In one of the court filings in May 2019, we stated that sales of Reign beverages from June through December 2019 were projected to exceed $235 million. Our sales of Reign for June and July, while solid, as illustrated by the Nielsen numbers, were lower than our initial expectations. As with any new product launches, sales may be affected by many factors including authorizations, the date or dates on which listings are secured for products with major retailers and introductions of new flavors. The company has not changed its practice with respect to projections, and will not be providing projections with respect to Reign or any other products. As our litigation with VPX is sub judice, we will not be answering any questions on this matter on today's call.

According to the Nielsen report for the 13 weeks through July 27, 2019, all outlets combined, namely convenience, grocery, drug, mass merchandisers, sales in dollars in the energy drink category including energy shots, increased by 9.9% versus the same period a year ago. Sales of the company's energy brands, including Reign, grew 5.6% in the 13-week period. Sales of Monster were down 1.4%. Sales of NOS decreased 0.6 of a percent and sales of Full Throttle decreased 12.7%. Sales of Red Bull increased 4.6%; sales of Rockstar decreased by 14.4%; sales of 5-Hour decreased 8.1%; and sales of Amp decreased 48.1%.

As there were no comparable sales to our Reign products last year, we have not included Reign in the above statistics. According to Nielsen, in the 4 weeks ended July 27, 2019, sales in the convenience and gas channel, including energy shots, in dollars, increased 8.1% over the same period the previous year. Sales of the company's Energy brands, which include Reign, grew 4.7% in the 4-week period in the convenience and gas channel. Sales of Monster decreased by 3.9% over the same period versus the previous year; NOS was down 1.5%; Full Throttle was down 11.4%; sales of Red Bull up 3.3%; Rockstar was down 18%; 5-Hour was down 10%; and Amp was down 40.9%.

According to Nielsen, for the 4 weeks ended July 27, 2019, the company's market share of the energy drink category in the convenience and gas channel, including energy shots, in dollars, decreased by 1.3 points over the same period the previous year to 41.1%. Monster's share decreased 4.2 share points to 33.5%; Reign's share was 3.4%; NOS' share declined 0.3 of a share point to 3.5%; and Full Throttle's share declined 0.2 of a point to 0.7 of a percent; Red Bull's share decreased 1.6 points to 33.7%; Rockstar's share was down 1.6 points to 4.9%; 5-Hour's share was lower by 1.1 points at 5.4%; and Amp's share decreased 0.3 of a point to 0.4%; VPX Bang's share was 8.1%.

According to Nielsen, for the 4 weeks ended July 27, 2019, sales of coffee plus energy drinks which, includes Caffe Monster and Espresso Monster, in dollars, in the convenience and gas channel, increased 9.8% over the same period the previous year. Sales of our Java Monster alone were 6.6% higher than in the same period the previous year. Sales of our other coffee plus energy drinks were 3% lower while sales of Starbucks energy were 18.3% higher. Our company share of coffee plus energy category, which includes Java Monster, Caffe Monster, Espresso Monster, Starbucks Double Shot and Rockstar Roasted for the 4 weeks ended July 20, 2019, was 49.1%, down 6.5 points. Java Monster's share on its own for the 4 weeks ended July 27, 2019, was 43.9%, down 1.3 points while Starbucks Energy's share was 47.7%, up 3.4 points.

According to Nielsen, in the convenience and gas channel in Canada for the 12 weeks ended June 22, 2019, the energy drink category increased 4% in dollars. Monster's brands sales increased 9% versus a year ago; Monster's market share increased 1.3 share points to 33.6; NOS' sales decreased 4%, and its market share decreased 0.1 of a share point to 2.6%; Full Throttle's sales decreased 17% and its market share decreased 0.3 of a point to 1.2%; Red Bull's sales increased 2% and its market share decreased 0.6 of a point to 36.9%; Rockstar's sales increased 2% and its market share decreased 0.6 points to 16.6%.

According to Nielsen, for all outlets combined in Mexico, the energy drink category grew 12.6% during the month of June 2019. Monster's sales increased 11%. Our market share in value decreased 0.4 of a point to 28.6% against the comparable period the previous year. Sales of Burn were down 33.8%. Burn's market share decreased 0.6 points to 0.9%; Red Bull's sales decreased 2.9% and its market share decreased by 1.3 points to 8.2%. Vive 100 sales increased 12.5% and its market share remained the same at 38.2%. Vault's sales increased 56.2%, and its market share increased 4.5 share points to 16.1% while Boost's sales increased 4.7% and its market share decreased 0.5 of a point to 7.2%; Amp, an affordable energy brand launched in March, increased its market share to 6.2% in June 2019.

The Nielsen statistics for Mexico cover single months, which is a short period that may often be materially influenced positively and/or negatively by sales in the OXXO convenience chain which dominates the market. Sales in the OXXO convenience chain, in turn, can be materially influenced by promotions that may be undertaken in that chain by 1 or more energy drink brands during a particular month. Consequently, such activities could have had significant impact from the monthly Nielsen statistics for Mexico.

I would like to point out that the Nielsen numbers in EMEA should only be used as a guide because the channels read by Nielsen in EMEA vary from country to country and also are reported on varying dates within the month referred to from country to country. According to Nielsen, in the 13-week period ended July 2019, Monster's retail market share in value as compared to the same period the previous year grew from 12.2% to 12.7% in Belgium; from 22.1% to 27.4% in France; from 19.5% to 20.9% in Great Britain; and from 7.2% to 7.3% in the Netherlands; from 17.8% to 24.5% in Norway; and from 30.3% to 32.5% in Spain.

According to Nielsen, in the 13-week period ending June 2019, Monster's retail market share in value as compared to the same period the previous year, grew from 16% to 16.1% in Germany; from 11.2% to 14.3% in Poland; from 14.8% to 16.5% in South Africa; and from 12.6% to 12.8% in Sweden.

According to Nielsen, in the 13-week period ending May 2019, Monster's retail market share in value as compared to the same period the previous year, grew from 12.6% to 13.4% in the Czech Republic; from 31.8% to 34.7% in Greece; from 14.6% to 17.8% in Ireland; and from 14.3% to 18.5% in Italy.

According to Nielsen for the month of June 2019 in Chile, Monster's retail market share in value increased from 34.2% to 37.4% compared to the same period the previous year.

According to Nielsen in Brazil, Monster's retail market share for the month of June 2019 increased from 17.9% to 22.6% as compared to the same period the previous year. We launched Monster Energy in Argentina in mid-February 2018.

According to Nielsen, for the month of June 2019, Monster's retail market share in value increased from 12% to 25.4% compared to the same period the previous year.

According to IRI in Australia, Monster's market share in value for the 4 weeks ending June 30, 2019, increased from 7.7% to 9.3% as compared to the same period the previous year. Mother's market share in value increased from 14.3% to 14.5% during the same period.

According to IRI in New Zealand, Monster's market share in value for the 4 weeks ending June 30, 2019, increased from 6% to 7.7% as compared to the same period the previous year. Lift Plus market share in value decreased from 10.6% to 8.4% and Mother's market share in value increased from 6.2% to 6.6%.

According to Nielsen, in South Korea, Monster's market share in value in all outlets combined for the 13-week period ended June 30, 2019, grew from 34.8% to 38.6% as compared to the same period the previous year.

According to INTAGE in Japan, Monster's market share in value in the convenience store channel for the 13-week period ended June 30, 2019, grew from 48.7% to 53.3% as compared to the same period in the previous year. We again point out that certain market statistics that cover single months may often be materially influenced positively and/or negatively by promotions or other trading factors during those months.

Net sales for the Monster Energy Drinks segment for the second quarter of 2019, which includes Reign, increased 9.6% from $929 million to $1.02 billion from the comparable period in 2018. Net sales for the Monster Energy Drinks segment in the second quarter of 2019 were negatively impacted by approximately $22.1 million of foreign currency movements.

Net sales for the Strategic Brands segment, which includes Predator, our affordable energy brand, were $79.1 million for the second quarter as compared to $79.8 million in the same quarter in 2018. Net sales for the company's Strategic Brands segment in the second quarter of 2019 were negatively impacted by approximately $3.8 million of foreign currency movements.

Net sales for the other segments which includes third-party sales made by AFF were $5.8 million in the second quarter as compared to $6.6 million in the same quarter in 2018. Net sales to customers outside the U.S. were $343.3 million, or 31% of total net sales in the 2019 second quarter compared to $292.8 million

--------------------------------------------------------------------------------

Hilton H. Schlosberg, Monster Beverage Corporation - Vice Chairman, President, COO, CFO & Secretary [3]

--------------------------------------------------------------------------------

$293.8 million.

--------------------------------------------------------------------------------

Rodney Cyril Sacks, Monster Beverage Corporation - Chairman & CEO [4]

--------------------------------------------------------------------------------

$293.8 million, sorry, which is 28.9% of total net sales in the corresponding quarter in 2018. Foreign currency exchange rates had the effect of decreasing net sales in U.S. dollars by approximately $25.9 million.

Included in the reported geographic sales are our sales to the company's military customers which are delivered in the U.S. and transshipped to the military and their customers overseas.

In EMEA, supply chain and production issues were considerably reduced versus the previous quarters but still continued to affect performance in the second quarter. As mentioned earlier, our Nielsen growth rates and market share continues to be strong in the territory. We are continuing to manage through and reduce these supply chain and production issues. Certain of our co-packers that contributed in the part -- in the past to these issues are back on track. Furthermore, we have secured and are continuing to secure additional production capacity.

In EMEA, net sales in the second quarter increased 10.9% in dollars and increased 21.1% in local currencies over the same period in 2018. Gross profit in this region as a percentage of net sales for the quarter was 39.5% compared to 43.8% in the same quarter in 2018. Gross profit percentage for the region was impacted by country and product mix as well as increases in manufacturing costs.

We are pleased that Monster continued to perform well and gained market share in Belgium, Czech Republic, France, Germany, Great Britain, Greece, Ireland, Italy, the Netherlands, Norway, Poland, South Africa, Spain and Sweden.

In Asia Pacific, net sales in the second quarter increased 35.1% in dollars and 41.5% in local currencies over the same period in 2018. Gross profit in this region as a percentage of net sales was 43.6% versus 49% over the same period in 2018 as a result of country and product mix.

In Japan, net sales in the quarter increased 33.5% in dollars and 37.8% in local currency. In South Korea, net sales increased 38.8% in dollars and 48.6% in local currency as compared to the same quarter in 2018. In Oceania, which includes Australia, New Zealand, Tahiti, French Polynesia, New Caledonia, Papua New Guinea and Guam, net sales increased 5.1% in dollars and 13.4% in local currencies.

In Latin America, including Mexico and the Caribbean, net sales in the second quarter increased 22.9% in dollars and 34.7% in local currencies over the same period in 2018. Gross profit in this region as a percentage of net sales was 43.3% versus 47.4% over the same period in 2018 largely due to increases in cost of goods affected by adverse foreign exchange rates and country mix.

In Brazil, net sales in the quarter increased by 97.7% in dollars, and increased 126.8% in local currency. Net sales in Chile decreased 2.4% in dollars but increased 8% in local currency in the quarter.

Our new product launches in the U.S. largely took place in the first quarter of 2019. We plan to launch a number of products in the United States later this year, namely Monster Mule, Reign Orange Dreamsicle, Reign Strawberry Sublime and Reign Mango Magic as well as Monster MAXX Mango Magic and Monster MAXX Red-Red extra strength with zero sugar as well as a new innovative Java Monster line extension, the details of which will be revealed at a later date.

We launched Monster Pacific Punch in May with the convenience chain customer as a first-to-market exclusive in Canada with a national launch in July 2019, and are also launching Monster Mule late in 2019 in Canada.

In Mexico, we launched Monster Mango Loco in April 2019. Through the second quarter of 2019, we launched Monster Pacific Punch in the Caribbean and extended our range in Puerto Rico. We also launched Predator in Trinidad in May 2019. In the second quarter of 2019, we launched Monster Mango Loco in several countries across EMEA. Monster Mango Loco is now available in 31 EMEA markets. We continue to launch different Monster line extensions and our strategic brands in several countries across EMEA markets.

Monster Pipeline Punch was launched in South Africa in the second quarter of 2019, and will be launched in a further 6 markets in the second half of 2019. We also launched Espresso Monster and Espresso Monster Vanilla in France, Norway and Sweden. We are planning to expand the rollout of our Espresso Monster line in Europe, and we anticipate that Espresso Monster will be available in 29 countries in EMEA by the end of 2019.

We are planning to launch Monster in Israel in the fourth quarter of 2019. We're also planning to launch Predator, our affordable energy brand, in additional markets in EMEA, and Predator should be available in 19 EMEA countries by the end of 2019.

We launched Pipeline Punch in Japan in May for a limited period. We also launched Mango Loco in Hong Kong, Macau and Taiwan and Ultra White in Malaysia and Vietnam in the second quarter. We plan to launch a number of products in Asia Pacific later this year, including a full country launch of Pipeline Punch in Japan in the spring of 2020.

Turning to the balance sheet, cash and cash equivalents amounted to $888.3 million at June 30, 2019 compared to $637.5 million at December 31, 2018. Short-term investments were $358 million at June 30, 2019 compared to $320.7 million at December 31, 2018.

Net accounts receivable increased to $688.2 million at June 30, 2019, from $484.6 million at December 31, 2018. Days outstanding for accounts receivable were 48.5 days at June 30, 2019 compared to 41.4 days at December 31, 2018.

Inventories increased to $299.5 million at June 30, 2019 from $277.7 million at December 31, 2018. Average days of inventory were 60.9 days at June 30, 2019 compared to 67 days at December 31, 2018.

We estimate July 2019 gross sales to be approximately 16.1% higher than in July 2018. On a foreign currency adjusted basis, July 2019 gross sales would have been approximately 17.4% higher than comparable July 2018 gross sales. There was 1 more selling day in July 2019 than in July 2018. In this regard, we caution again that sales over a short period are often disproportionately impacted by various factors such as for example, selling days, days of the week in which holidays fall, timing of new product launches and the timing of price increases and promotions in retail stores, distributor incentives as well as shifts in the timing of production, in some instances, where our bottlers are responsible for production and unilaterally determine their production schedules, which affects the dates on which we invoice such bottlers as well as inventory levels maintained by our distribution partners which they alter unilaterally for their own business reasons. We reiterate that sales over a short period such as a single month or even 2 months should not necessarily be imputed to are regarded as indicative of results for a full quarter or any future period.

During the 2019 second quarter, no shares were repurchased under the previously authorized share repurchase program. As of August 7, 2019, approximately 520.6 million shares remain available for -- sorry, $520.6 million, remain available for repurchase under our previously authorized repurchase programs.

In conclusion, I would like to summarize some recent positive points. Retail sales statistics for many countries around the world demonstrate that the energy category is continuing to grow and that Monster is generally growing ahead of the category in line with the earlier periods. The new additions to the Monster family continue to add to the company's sales. We are excited about the prospects for our brands and our new product launches. While encouraged by the prospects for our Reign Total Body Fuel high-performance energy drinks, and note that Reign launched at Walmart last week. We are pleased with our performance in our international markets and reiterate the growth potential for us in China and India. We are continuing with our plans to launch Monster Energy drinks with Coca-Cola Bottlers in certain new markets. We are proceeding with our plans for future launches of our affordable energy brands internationally. We are also proceeding with our plans for the launch of Reign Total Body Fuel high-performance energy drinks in certain countries outside of the U.S.A.

I would like to open the floor to questions about the quarter. Thank you.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question comes from Caroline Levy with Macquarie.

--------------------------------------------------------------------------------

Caroline Shan Levy, Macquarie Research - Senior Analyst [2]

--------------------------------------------------------------------------------

Just hoping you could give a little background on what you see happening in the performance energy category, whether you were doing the BOGOs in the second quarter and if those pulled back. And just what the impact of Reign had on your business and whether you see any slowdown in Bang's progress. Just anything you could talk about with that sort of disruptive area.

--------------------------------------------------------------------------------

Rodney Cyril Sacks, Monster Beverage Corporation - Chairman & CEO [3]

--------------------------------------------------------------------------------

Well obviously, the performance category has had an impact on the overall energy category. And Reign has continued to perform up to our expectations. We're comfortable with the performance. It's a new product. It's got out and it's obviously going to find its feet in different markets and in different channels. The BOGO did not hit all at one time. In some parts, the BOGO took place through the end of June and I think 7-Eleven, and there were some others that bleed into July.

--------------------------------------------------------------------------------

Hilton H. Schlosberg, Monster Beverage Corporation - Vice Chairman, President, COO, CFO & Secretary [4]

--------------------------------------------------------------------------------

We're continuing that.

--------------------------------------------------------------------------------

Rodney Cyril Sacks, Monster Beverage Corporation - Chairman & CEO [5]

--------------------------------------------------------------------------------

Totally continuing. When we look at the BOGO, we looked at -- if you look at the average Reign sales on a weekly basis in Nielsen, it's been reasonably consistent over the past number of weeks. And so we don't believe that the BOGO -- and the tailing off of the BOGOs had a really marked influence on the sale rates. So we're comfortable with the ongoing sale rate of Reign. And a lot of it depends on timing, getting our products onto the shelves, getting shelf space. As we've launched it, we've had to create shelf space. In many cases, the products are still worked into schematics. They are still being -- the schematics are being reset now and later in the year. So those things will continue to, I think, affect the performance of the performance energy category.

Now there are a number of other performance energy drinks, there's Bang, and there are also some other performance energy drinks that are seeking to obtain listings in space in the convenience channel, such as CELSIUS and C4 and others. And so we think that there will ultimately be an additional space allocated to the performance energy drinks. As part of the broader energy drink category in the existing space, all probably will start seeing some additional space being allocated in C stores in coolers alongside or adjacent to the energy space. We think there will be some development of a sort of subset or category of performance-based drinks that will be lumped together. Then we also take into account products we think like Hydro and other performance energy drinks that just generally fall outside of the pure carbonated sparkling sort of traditional energy drinks.

--------------------------------------------------------------------------------

Hilton H. Schlosberg, Monster Beverage Corporation - Vice Chairman, President, COO, CFO & Secretary [6]

--------------------------------------------------------------------------------

And I think we should not omit the Walmart listing, which has really been a few good days now. And the team had done an incredible job of getting out and really stacking products at Walmart. So I think good things from that to come as well.

--------------------------------------------------------------------------------

Rodney Cyril Sacks, Monster Beverage Corporation - Chairman & CEO [7]

--------------------------------------------------------------------------------

But as with everything, it's timing, and so that only happened in the last few days as opposed to earlier in the year. So we do think that, that will start having a positive impact, again, on Reign's sales and numbers. And we've also got good listings with Dollar General, and a lot of other nontraditional retail stores for Reign.

--------------------------------------------------------------------------------

Operator [8]

--------------------------------------------------------------------------------

Our next question comes from Andrea Teixeira with JPMorgan.

--------------------------------------------------------------------------------

Andrea Faria Teixeira, JP Morgan Chase & Co, Research Division - MD [9]

--------------------------------------------------------------------------------

Just to clarify, the July figure includes the selling to Walmart for Reign. And can you help us quantify the benefit of Reign in the quarter in both sales and the negative impact of the margin for the BOGO promotion?

--------------------------------------------------------------------------------

Hilton H. Schlosberg, Monster Beverage Corporation - Vice Chairman, President, COO, CFO & Secretary [10]

--------------------------------------------------------------------------------

So just please remember that we don't sell to Walmart directly. It goes to the distributors. So it's hard for us to extrapolate those numbers at this time for July. Those are regular July numbers that the distributors would order from us.

--------------------------------------------------------------------------------

Andrea Faria Teixeira, JP Morgan Chase & Co, Research Division - MD [11]

--------------------------------------------------------------------------------

But you can confirm that it started -- that you got the distribution at Walmart for Reign.

--------------------------------------------------------------------------------

Hilton H. Schlosberg, Monster Beverage Corporation - Vice Chairman, President, COO, CFO & Secretary [12]

--------------------------------------------------------------------------------

Yes, they anticipated the distribution for Walmart. But they knew when it was going to happen. We knew when it was going to happen. And they built up inventory according to their schedules to accommodate that listing, which is a big listing, as you know.

--------------------------------------------------------------------------------

Rodney Cyril Sacks, Monster Beverage Corporation - Chairman & CEO [13]

--------------------------------------------------------------------------------

Yes. That started in the beginning of August. So obviously there will be some sales.

--------------------------------------------------------------------------------

Hilton H. Schlosberg, Monster Beverage Corporation - Vice Chairman, President, COO, CFO & Secretary [14]

--------------------------------------------------------------------------------

The listing happened in August.

--------------------------------------------------------------------------------

Rodney Cyril Sacks, Monster Beverage Corporation - Chairman & CEO [15]

--------------------------------------------------------------------------------

Yes, listing in August. Yes.

--------------------------------------------------------------------------------

Hilton H. Schlosberg, Monster Beverage Corporation - Vice Chairman, President, COO, CFO & Secretary [16]

--------------------------------------------------------------------------------

There will be sales...some...

--------------------------------------------------------------------------------

Rodney Cyril Sacks, Monster Beverage Corporation - Chairman & CEO [17]

--------------------------------------------------------------------------------

There'll be some but we don't know...

--------------------------------------------------------------------------------

Hilton H. Schlosberg, Monster Beverage Corporation - Vice Chairman, President, COO, CFO & Secretary [18]

--------------------------------------------------------------------------------

There may be sales in June as well and -- we don't know.

--------------------------------------------------------------------------------

Rodney Cyril Sacks, Monster Beverage Corporation - Chairman & CEO [19]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Operator [20]

--------------------------------------------------------------------------------

Our next sales comes from Vivien Azer with Cowen and Company.

--------------------------------------------------------------------------------

Vivien Nicole Azer, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [21]

--------------------------------------------------------------------------------

I was hoping to get your thoughts on what's happening with the core Monster brand and whether you've done any diagnosis around some of the pressures there. Is it primarily from Bang? Is it more from Reign? And if it's the latter, how is cannibalization tracking relative to your expectations?

--------------------------------------------------------------------------------

Hilton H. Schlosberg, Monster Beverage Corporation - Vice Chairman, President, COO, CFO & Secretary [22]

--------------------------------------------------------------------------------

Are you talking about the U.S. or internationally? I'm just trying to get an understanding of what you're referring to.

--------------------------------------------------------------------------------

Vivien Nicole Azer, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [23]

--------------------------------------------------------------------------------

The U.S., please.

--------------------------------------------------------------------------------

Rodney Cyril Sacks, Monster Beverage Corporation - Chairman & CEO [24]

--------------------------------------------------------------------------------

The emergence of this performance energy sort of subcategory or subset within the energy category clearly has had an effect on the sales of Monster generally, which is -- and as well as on the sales of other energy drinks that have really been in the market historically, which is Red Bull and Rockstar, and others, even our other brands, NOS and Full Throttle. So there has been an effect on all of those brands.

The -- when you look at us on a stacked basis, The Monster Energy category had a really good year in 2018. So you got to look at it all over. There clearly has been an impact in this year and in the second quarter. We are seeing some stabilizing of the other brands. And -- but overall, we look at the business on an overall bases. And on an overall basis, the category is continuing to grow. It's -- we are still participating and our overall brands within the category are continuing to grow. And this is not that dissimilar to certain other markets internationally where you've got disruptors or lower affordable energy brands going into the market. So you take a market like Mexico, for example, while there was an energy -- premium energy category, shares -- our shares were higher. As affordable energy brands got into that market, they grew the market overall and our sales grew -- continued to grow. Although our share of market, if you take those affordable brands and then recategorize the market into a broader market, obviously our share percentage-wise starts -- to started to -- and just dropped and was lower in Mexico, although we've continued to see continued increases and positive sales in Mexico throughout the period that the category has gone through this redefinition.

And so that's where we think we are seeing the category in the U.S. And it will all continue to grow and evolve. But overall we obviously are looking to new innovation. We've got new innovation planned for later this year and next year, and we do believe that we will continue to have -- Monster will continue to grow in the U.S. as well as the other products in our portfolio

--------------------------------------------------------------------------------

Hilton H. Schlosberg, Monster Beverage Corporation - Vice Chairman, President, COO, CFO & Secretary [25]

--------------------------------------------------------------------------------

But yes, there has been some cannibalization of Monster. There's been -- Reign is taking share from other brands as well and indeed, as has Bang. So you're looking at a category, the energy category which includes both the traditional energy drinks that we know of and the performance energy drinks, and that together makes up the total energy drink category today.

--------------------------------------------------------------------------------

Operator [26]

--------------------------------------------------------------------------------

Our next question comes from Mark Astrachan with Stifel.

--------------------------------------------------------------------------------

Mark Stiefel Astrachan, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [27]

--------------------------------------------------------------------------------

Lots of questions. I guess just starting on the U.S. so I'm curious just the cadence of the quarter. We obviously know what the month of April did. It implies May, June were up like 4% on an all-in basis. U.S. sales, up 6, I guess, sort of in line with scanner data. But if you exclude your commentary about Reign sell-in, it basically implies you didn't sell another product in the quarter. So maybe give a bit more detail about just what channel inventories look like, what shipments look like. Was there some sort of issue in the quarter in shipping product from a retailer standpoint? And then completely different, just what happened in international gross margins? I heard what you said but what specifically is going on there that's driving the overall continued weakness there?

--------------------------------------------------------------------------------

Hilton H. Schlosberg, Monster Beverage Corporation - Vice Chairman, President, COO, CFO & Secretary [28]

--------------------------------------------------------------------------------

So maybe I can start with the second question about gross margins internationally. So there are a number of reasons for the decline in international margins, and many of these reasons we've actually spoken about it on previous calls. So we said that our Monster Energy drinks have a lower gross profit percentage than our Strategic Brands which are largely sales of concentrates. So as international sales and Monster grow at a faster pace than the Strategic Brands, overall gross profit percentages are negatively impacted.

Our international innovation in the quarter was in part driven by the juice SKUs, which we spoke about on this call; and Espresso Monster, principally in EMEA, which also have lower margins than our non-juice Monster SKUs. This also had an impact on the gross profit percentage in the quarter. Country mix was another factor. We sell in some countries that have lower percentage margins than in other countries. Mark, I'm giving you the whole shopping list. In the quarter, ForEx negatively impacted the cost of goods in certain countries, particularly in Lat Am that import Finished Products from the U.S. and from Mexico. This impact obviously was less when certain ingredients only are imported, not the Finished Goods.

In certain overseas countries, as you know, we operate at different value sharing models with certain bottlers and that could, and did, have an impact in the quarter. Production issues and capacity constraints in EMEA also impacted margins in the quarter. So some of these items should not be really reoccurring. And frankly, we are confident with our operating model. We've had a number of issues in EMEA which we've referred to. We're getting to the end of those, we believe. But we are comfortable with the model and also with our ability to manage our costs. So I hope that answers your question, probably in more detail than you wanted.

--------------------------------------------------------------------------------

Operator [29]

--------------------------------------------------------------------------------

Ladies and gentlemen, this does conclude today's question-and-answer session. I would now like to turn the call back over to Mr. Rodney Sacks for any closing remarks.

--------------------------------------------------------------------------------

Rodney Cyril Sacks, Monster Beverage Corporation - Chairman & CEO [30]

--------------------------------------------------------------------------------

I would like to thank everyone for their continued interest in the company. We continue to believe in the company and our growth strategy and remain committed to continuing to innovate, develop and differentiate our brands and to expand the company both at home and abroad; and in particular, to expand distribution of our products through the Coca-Cola Bottling system internationally. We're also particularly excited by the new opportunities that we have going forward with a portfolio of energy drink products throughout the world comprised of our Monster Energy brand together with our Strategic Brands as well as Hydro, Predator and Reign. Thank you very much for your attendance.

--------------------------------------------------------------------------------

Operator [31]

--------------------------------------------------------------------------------

Ladies and gentlemen, thank you for participating in today's conference, this does conclude today's program and you may all disconnect. Everyone, have a wonderful day.