Dollar General Q2 2021 Earnings Call Transcript

Quartr
Provided by Quartr
August 5, 2021

There are 7 speakers on the call.

Operator

Good day, and welcome to the Monster Beverage Company Second Quarter 2021 Conference Call. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note that this event is being recorded. I would now like to turn the conference over to Rodney Sacks, Co CEO to begin the call.

Operator

Please go ahead.

Speaker 1

Good afternoon, ladies and gentlemen. Thank you for attending this call. I'm Rodney Sacks. Hilton Schlossberg, our Vice Chairman and Co Chief Executive Officer is on the call, as is Tom Kelly, our Chief Financial Officer. Tom Kelly will now read our cautionary statement.

Speaker 2

Before we begin, I would like to remind listeners that certain statements 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 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 as well as the future impact of the COVID-nineteen pandemic on the company's business and operations. 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 ks Filed on March 1, 2021, including the sections contained therein entitled Risk Factors and Forward Looking Statements for discussion on specific risks and uncertainties that may affect our performance. The company assumes No obligations to update any forward looking statements, whether as a result of new information, future events or otherwise.

Speaker 2

I would now like to hand the call over to Rodney Sacks.

Speaker 1

Thank you, Tom. The company's top priority remains the health, safety shipment facilities have operated throughout the COVID-nineteen pandemic. The company's bottlers and distributors are operating And the company's products remain generally available to consumers. In limited countries, the operations of the company's bottlers and distributors have in part Be negatively affected for varying periods of time. Despite the ongoing impact of the COVID-nineteen pandemic, The company achieved record 2nd quarter net sales.

Speaker 1

Currently, the company does not foresee a material impact On the ability of its co packers to manufacture and its bottlers and distributors to distribute its products as a result of the COVID-nineteen pandemic, The company's supply chain remains largely intact. However, the company continues to experience shortages In its aluminum can requirements in the United States and EMEA, given the company's volume growth and the current supply constraints In the aluminum can industry, the company is also experiencing delays in procuring certain ingredients, both domestically and internationally. As a result, the company was unable to fully satisfy demand in the 2021 Q2 in the United States And EMEA, we expect such challenges to continue for the next few months. The company has taken steps to source additional quantities of aluminum cans From the United States, South America and Asia, the company has entered into new supply agreements with 2 new aluminum can suppliers in the United States and which are expected to be operational in the 2021 Q4. We expect deliveries of additional quantities of cans Increasing sequentially during the latter part of the year, logistical issues, including shortages of shipping containers and Port of entry congestion could delay ongoing international supply of aluminum cans.

Speaker 1

Separately, we are continuing to experience Freight inefficiencies as well as significant increases in domestic and international freight costs and like other beverage companies Are incurring increased aluminum can and other costs in the current environment, all of which, in addition to other factors, will continue to adversely Impact gross margin percentages. In the Q2 of 2021, net sales were 1,460,000,000 Compared with $1,090,000,000 in the Q2 of 2020, an increase of 33.6%. Adjusting for foreign currency movements, net sales for the 2021 Q2 would have been up 30.1%. Gross profit as a percentage of net sales for the 2021 Q2 was 57.2% compared with 60.3 The decrease in gross profit as a percentage of net sales for the 3 months ended June 30, 20 21 was primarily the result of geographical sales mix and increased input costs, mainly increased raw material Freight in costs and aluminum can costs. Operating expenses for the 2021 second quarter With $310,900,000 compared with $252,200,000 in the 20 22nd quarter.

Speaker 1

As a percentage of net sales, operating expenses for the 2021 Q2 were 21.3% compared with 23.1 percent in the 22nd quarter. Operating income increased 29.1 percent to 520 $403,800,000 compared to $311,400,000 in the 2020 comparable quarter. Diluted earnings per share for the 2021 20. According to the Nielsen reports for the 13 weeks through July 24, 2021, for all outlets combined, namely Sales in dollars in the energy drink category, including energy shots, Increased by 14.2% versus the same period a year ago. Sales of the company's energy brands, including Reign, were up 8.6 in the 13 week period.

Speaker 1

Sales of Monster were up 11.1%, sales of Reign were down 6.1%, Sales of NOS decreased 4.1% and sales of Full Throttle increased 7.9%. Sales of Red Bull increased 15.3%. Sales of Rockstar decreased by 15.7 percent and sales of 5 Hour increased 8.5%. VPX Bangs sales increased 20%. According to Nielsen, for the 4 weeks ended July 24, 2021, sales in dollars in the energy drink category in the convenience and gas channel, Including energy shots in dollars increased 7.4% over the same period the previous year.

Speaker 1

Sales of the company's energy brands, Which include Reign, increased 3.6% in the 4 week period in the convenience and gas channel. Sales of Monster increased by 5.8% the same period versus the previous year, Reign sales decreased 6.8%, NOS was down 10 point 7% and Full Throttle was up 13.2%. Sales of Red Bull were up 9%, Rockstar was down 18.6% And 5 Hour was up 3.2%, VPX Bang sales increased 12.2%. According to Nielsen, for the 4 weeks ended July 24, The company's market share of the energy drink category in the convenience and gas channel, including energy shots in dollars decreased 1.3 points to 36.5 percent. Monster's share decreased 0.4 of a point share point to 30.6 percent.

Speaker 1

Rains decreased 0.4 of a share point to 2.2. Sorry, 4% NOSA share decreased 0.5 of a point to 2.7% Full Throttle share remained at 0.7%. Red Bull share increased 0.6 points to 37.4%. Rockstar share was down 1.2 points to 3.8%. 5 Hour's share was lower by 0.2 points at 4.6%.

Speaker 1

BPX Bank share increased 0.3 points to 7.6%. As previously reported, Coca Cola Energy is being discontinued in the United States and Canada by the end of G Work 0.4 percent higher. Java Monster share, including Java Monster 300 of the coffee plus energy category, Which primarily includes Java Monster, Java Monster 300, Starbucks Double Shot and Triple Shot, Rockstar Roasted and Bang Keto Coffee For the 4 weeks ended July 24, 2021, was 51.9%, up 0.9% of a share point, while Starbucks Energy share was 45.5 percent, down 1.7 points. According to Stackline, which tracks energy drink sales by Amazon in the United States, In the 4 week period ending July 3, 2021, sales in dollars in the energy category by Amazon, including energy shots, Increased 104.5 percent over the same period the previous year. Sales of Monster increased 59.9% And its share was 28.1%, down 7.8 share points versus the same period a year ago.

Speaker 1

Red Bull sales increased 109.4% And its share was 16.6%, up 0.4 points. Celsius' sales increased 133.1% 2.9%, VPX Bank sales increased 216.1% and its share increased 1.8 share points to 5.2%. Rains' share decreased 0.1 of a share point to 5.3%. Rockstar's share increased 0.9 of a share point to 3.9%. According to Nielsen, in all major channels in Canada, for the 12 weeks ended June 19, 2021, the energy drink category increased 17.9% in dollars.

Speaker 1

Sales of the company's Energy Drink Brands increased 28.3% versus a year ago. The market share of the company's Energy Drink Brands was 41 point 5%, up 3.4 points. Monster sales increased 18.3% and its market share increased 5.1 of a point to 35.4 percent sorry 35.4 percent. NOS's sales increased 12.6% And its market share decreased 0.3 of a point to 1.9%. Full Throttle sales Decreased 2.1% and its market share decreased 0.1 of a point to 0.6%.

Speaker 1

Red Bull sales increased 18.1% and its And its market share decreased 3.3 points to 11.4%. Guru's sales increased 35.9% And its share increased 0.5% of the share point to 4%. According to Nielsen, for all outlets combined in Mexico, The Energy Drink category increased 45.2% for the month of June 2021. Monster sales increased 38.7%. Our market share and value decreased by 1.3 points to 27.2% against the comparable period the previous year.

Speaker 1

Red Bull sales increased 41.4% and its market share decreased by 0.2 of a point to 6.5%. VIVE 100 sales increased 30.2% and its market share decreased by 2.4 points to 20.5%. Vault's sales increased 41.1 percent and its market share decreased 0.5 of the share point to 18.5%, While Boost's sales increased 15.7% and its market share decreased 1.3 points to 5.1%. AMPAS sales increased 91.9 percent and its market share increased 4.4 points to 17.9%. Predator, which was launched in March 2020, achieved a market share of 3.1%.

Speaker 1

The Nielsen statistics for Mexico cover single months, 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 Consequently, such activities could have a significant impact on the monthly Nielsen statistics for Mexico. According to Nielsen, for the month of June 2021 compared to June 2020, Monster's retail market share in value increased in Argentina From 40.1 percent to 46.9 percent and in Brazil from 29.6% to 35.4%. In Chile, Monster's retail market share decreased from 45.7% to 41.9%. Monster Energy continues to be the leading energy brand in value in Argentina. 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 are reported on varying dates within the month referred to from country to country.

Speaker 1

According to Nielsen, in the 13 week period ending July 18, 2021, Monster's retail market share in value as compared to the same period the previous year Grew from 34.2 percent to 37.4 percent in Spain. According to Nielsen, in the 13 week period the end of June 2021, Monster's retail market share in value as compared to the same period the previous year grew from 14.5% Share in value as compared to the same period the previous year grew from 12.5% to 16.2% in Belgium, from 24.2% to 20 5.3% in Denmark from 25.8 percent to 28.2% in France from 25% to 29% in Great Britain From 6.7 percent to 8.4 percent in the Netherlands, from 27.1% to 31.2% in Norway, 25.6 percent to 29.3 percent in the Republic of Ireland and from 13.4% to 14.5% in Sweden. According to Nielsen, in the 13 week period till the end of May 2021, Monster's retail market share in value compared to the same period the previous year Grew from 13.3% to 14.5% in the Czech Republic, from 35.1% to 37.9% in Greece From 16.6 percent to 29% in Italy. According to Nielsen, in the 13 week period till the end of May 2021, Predator's retail market share in value as compared to the same period the previous year grew from 5.1% to 17.3% in Kenya from 0% to 8.1% in Nigeria.

Speaker 1

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. According to IRI in Australia, Monster's market share in value for the month ending June 2021 Increased from 11.6% to 14% as compared to the same period the previous year. Mother's market share and value decreased from 13.3% to 11.6% during the same period. The market share of the company's brands in Australia for the month ended June 2021 increased From 24.9 percent to 25.5 percent. According to IRI in New Zealand, Monster's market share in value for 4 weeks ended July 11, 2021 increased from 9.9% to 12.4% as compared to the same period of previous year.

Speaker 1

Lyft Plus Market share in value remained the same at 6.9% and Mother's market share in value increased from 6.2% to 6.3%. The market share of the company's brands in New Zealand for the 4 weeks ended July 11, 2021, increased from 23.1% to 25.6%. According to Nielsen, in South Korea, Monster's market share and value in all outlets combined for the month of June 2021 increased from 53.3% to 61.9 percent as compared to the same period in the previous year. According to Intaj, in Japan, Monster's market share in value in the convenience store channel for the month of June 2021 was 50.6% as compared to 51% in the same period the previous year. Monster remains the market leader in Japan.

Speaker 1

We again point out that certain market statistics that cover single months or 4 week periods may often be materially influenced positively and or negatively by promotions or other trading factors during those periods. Net sales to customers outside of the U. S. We're $546,300,000 37.4 percent of total net sales in the 2021 Q2 Compared to $328,300,000 or 30 percent of total net sales in the corresponding quarter in 2020, Foreign currency exchange rates had a positive impact on net sales in the U. S.

Speaker 1

Dollars by approximately $38,600,000 in the 2021 Included in reported geographic sales are our sales to the company's military customers, which are delivered in the U. S. And trans shipped to the military and their customers overseas. In EMEA, net sales in the 2021 Q2 Increased 105.7 percent in dollars and increased 86.5% in local currencies over the same period in 2020. Gross profit in this region as a percentage of net sales for the 2nd quarter was 39.8% compared to 38.1% in the same quarter in 2020, primarily due to a favorable country and product mix.

Speaker 1

We are also pleased that in the 2021 Q2, Monster gained market share in Belgium, the Czech Republic, Denmark, France, Germany, Great Britain, Greece, Italy, the Netherlands, Norway, Poland, the Republic of Ireland, South Africa, Spain and Sweden. In Asia Pacific, net sales in the 2021 Q2 increased 5.2% in dollars and decreased 0.1% in local currencies over the same period in 2020, largely due to sales in Japan and China. Gross profit in this region as a percentage of net sales Quarter decreased 15.1 percent in dollars and 13.9% in local currency, largely due to COVID-nineteen restrictions in Japan And distributor inventory adjustments, depletions increased 7% during the quarter. Monster remains the market leader in Japan for the month of June 2021. In South Korea, net sales increased 63% in dollars and 50.4% in local currency as compared to the same quarter in 2020.

Speaker 1

In China, net sales decreased 21.4 In this regard, we note that sales in the Q2 of 2020 included the initial launch of Dragon Tea. We are reevaluating the viability of this SKU And the optimal product range for China going forward. We remain optimistic about the prospects for the Monster brand in China. In Oceania, which includes Australia, New Zealand, Tahiti, French Polynesia, New Caledonia, Papua New Guinea and Guam, Net sales increased 146.5 percent in dollars 98.2 percent in local currencies. Sales of the Monster brand in Oceana increased 210% in dollars and 155.6% in local currency as compared to the same quarter in 2020.

Speaker 1

In Latin America, including Mexico and the Caribbean, Net sales in the 2021 Q2 increased 119.7 percent in dollars and increased 117.6% in local currencies over the same period in 2020. Gross profit in this region as a percentage of net sales was 40.7% compared to 41.2% over the same period in 2020, primarily as a result of foreign exchange rates, Certain raw materials and ingredients for products in this region are purchased in U. S. Dollars. In Brazil, net sales in the 2021 Q2 Increased by 194.9 percent in dollars and 201.7 percent in local currency.

Speaker 1

Net sales in Chile increased 77.5 percent in dollars 52% in local currency in the 2021 Q2. Net sales in Argentina increased 291.4 percent in dollars and 4 58% in local currency in the 2021 Q2. In March 2019, VPX, the maker of Bang Energy Drinks sued Monster, alleging that its Reign products infringed VPX's bank trademarks and trade risks. A trial was held last year and on August 3, 2021, The court issued an order denying all of VPX's claims and holding that VPX is entitled to no relief whatsoever. In fact, the court specifically found That VPX copied its bank trade risk from the original Monster Energy Cans.

Speaker 1

The court's decision confirms that Monster and its bottler and retail partners Are free to continue to sell our RAIN products without any changes and without any restrictions. Monster always believed and maintained that VPX's As other pending proceedings with VPX are sub judicay, we will not be answering any questions on this matter on today's call. Our new product introductions in the United States in the first half of twenty twenty one were primarily focused in the Q1. In the United States, during the Q2 of 2021, we refreshed our can graphics on our Rehab Monster brand family as well as our Full Throttle line, Also updating the name for Blue Agave to True Blue. Monster Energy Ultra Fiesta received a refresh and updated cam graphics as well as a name change Monster Energy Ultra Fiesta Mango.

Speaker 1

In May 2021, we launched Monster Ultra Fiesta in a 24 ounce option With an update to our Ultra Fiesta Mango plan for later this year. We are in the process of launching a new line of non alcoholic pure energy Celsius under the True North brand name in 12 ounce lead cans, which contain an organic plant based energy blend And ingredients for immunity support. True North is being offered in 6 flavors, cucumber lime, black cherry, Grapefruit lemonade, watermelon mist, white peach pear and mandarin yuzu. True North has a limited Customer target in 2021 with plans for a full launch into mainstream channels in 2022. While cognizant of the can shortages, We believe that it is important to continue with our innovation plans.

Speaker 1

And to this end, we will be launching our new flavorsome reserve line of Monster Energy Drinks in Watermelon and White Pineapple in October 2021. We have deferred the launch of our new line of Java Cold brew coffee plus energy drinks until early 2022. In Canada, during the Q2, we launched 2 new products, Monster Punch Papillon and Monster Punch Chaotic, both in a 4 73 ml can. In April 2021, we launched Rain Orange in Puerto Rico and our 2nd SKU in Bolivia with Monster Energy 0 Ultra. In El Salvador, we launched FURY Mean Green in May 2021.

Speaker 1

In the Q2 of 2021, we launched Juice Monster, Pacific Punch and Monarch in a number of countries in EMEA. We also launched Ultra Paradise and Ultra Fiesta in a number of countries during the quarter. During the quarter, we also launched our strategic brand innovation and Predator in additional countries. In January 2021, we launched UltraRosa Market wide in Australia following an exclusive lead launch with 1 Chain in the Q4 of 2020. In March 2021 in Zealand, we launched Monster Super Fuel in both purple passion and sugar free flavors.

Speaker 1

During the 2021 Q2 in Japan, we launched Monster Energy Super Cola with our distributor, Asahi of Soft Drinks. Additionally, we effected the relaunch at retail of Ultra Paradise And began shipments in anticipation of the launch of Superfuel early in the 2021 Q3. Superfuel has just gone on the shelves in Japan this week. We also launched Mango Loco in Korea in July 2021. During the 2021 Q2, we launched Pipeline Punch in Taiwan, Hong Kong and Macau.

Speaker 1

We also began distribution of Monster Energy 0 Sugar in the Philippines. As previously mentioned, in the Q2 of 2021 in China, we extended the national rollout of our new Monster Dragon Gold, which is non carbonated. Our national summer on pack promotion began in May with one of China's top consumer ambassadors. As a result of the COVID-nineteen pandemic, Certain of our planned launches and innovation of new products in a number of Asia Pacific markets have been deferred for a few months. However, we still anticipate such launches taking place towards the end of the 2021 calendar year.

Speaker 1

We are planning to launch a number of additional products and or product lines in our domestic and international markets later this year. We estimate that July 2021 sales to be approximately 1.8% than in July 2020. On a foreign currency adjusted basis, July 2021 sales would have been comparable to the July 2020 sales. July 2021 had one less selling day than July 2020, which was 15.8% above July 2019 And which was 17.1% higher on a foreign currency adjusted basis. Certain production facilities, Mainly some coke bottlers in EMEA in particular delayed production from July to August 2021.

Speaker 1

Furthermore, as mentioned earlier, the company has not been able to fully satisfy demand in the United States and EMEA due to a shortage of aluminum cans, which adversely impacted July sales. Such shortage was exacerbated in July as can availability did not keep pace with increased demand during the months. Additional cans have been sourced from domestic and overseas suppliers with expected deliveries increasing Additionally, the company also experienced delays in certain ingredients, which impacted supply. Our depletions remain solid as do our measured market data As previously mentioned on this call, 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 Should not necessarily be imputed to or regarded as indicative of results for a full quarter or any future period.

Speaker 1

If the COVID-nineteen pandemic and related unfavorable economic conditions continue in certain regions, our new product innovation launches in those regions could be delayed. In conclusion, I would like to summarize some recent positive points. Currently, the company's flavor manufacturing facilities, Co packers, warehouses and shipment facilities and bottlers and distributors are all operating. We are continually addressing our aluminum can requirements given our volume growth supply constraints in the aluminum can industry. We are pleased with the new additions to the Monster Energy portfolio And are planning additional launches later in the year.

Speaker 1

We are planning to continue additional launches of our Reign Total Body Fuel High Performance Energy Drinks In additional international countries, we are pleased with the rollout of Predator and Fury and our affordable energy drink portfolio internationally. We are proceeding with plans to launch our affordable energy drinks in a number of international countries during the year. I would like to open the floor to questions about the quarter. Thank you.

Operator

Thank you. We will now begin the question and answer session. The first question will come from Dara Mohsenian with Morgan Stanley. Please go ahead.

Speaker 2

Hey, guys.

Speaker 3

Hey, John.

Speaker 4

Great top line growth in the quarter, But we have seen share losses in the U. S. Track channel data worsen recently. A, just short term, How much of that do you think is attributable to out of stocks and the supply constraints that you mentioned? Is that a material factor in retail sales?

Speaker 4

And then maybe B, from a longer term standpoint, it has been a couple of quarters now where the share losses have reaccelerated year over year, just some progress in beginning of the year or so, I was just hoping you could review some of the key factors that have been driving the share losses in the U. S. And How you think about those factors going forward in terms of continuing or dissipating and how you guys are positioned?

Speaker 3

Thanks.

Speaker 1

I think Hilton, if you take that, and I'll also say something once

Speaker 3

you deal with that. I think, Dore, what's important is that that's not a result and not due to us not growing. We are not keeping up with our share, but our business is certainly growing. And you can track that From Nielsen, you can also track that from the non measured channels, which are growing really very nicely. So while we're not keeping up necessarily with Red Bull In the measured channels, as I've spoken on previous calls, Red Bull had a very large on premise business, which Move to off premise and move to off premise during COVID and that led to an acceleration in their share.

Speaker 3

However, We mentioned that we had and are continuing to sustain can issues and results in supply. And of course, that's having an impact on the share numbers that you are seeing. So I think on balance, the business is growing. You've seen the results. It's continuing to grow.

Speaker 3

And we are growing, but not at the extent of the market. I think with a full deck of cards, The situation may well be very different. But right now, we really are struggling with Sufficient supplies of aluminum cans really to keep up with demand, which is, I suppose, a good position to be in and on the other hand, not such a good position The business is growing and that's the message I want to leave you with and other investors.

Speaker 1

I think in I'll just add 2 points in that regard. I think what we've tried to do is to try and also basically focus on our faster selling and our larger SKUs, which is necessarily resulting in some of Small SKUs, which normally have their own traction and followers, so those haven't got onto shelf. And then the one additional thing that I think that Has negatively affected our distribution sales and distribution levels in the U. S. Is labor shortages.

Speaker 1

And I think that what we've seen is that many of the bottlers, coke bottlers are experiencing labor shortages. And while one would ordinarily say, well, everybody's got going to have the same problem, I think that where you have Red Bull is our main competitor. They have a dedicated system. I think they've been able to And that has also, I think, detrimentally affected our distribution levels going forward. But again, I think those are things that Once things start settling down and things will get back to normality, that's something that I think that will also in due course write itself.

Speaker 3

Yes. I think we should also Dara, I think we should also add that what we're seeing With cans is something that will persist Through this year, I'm a bit more optimistic about the Q4 because we have 2 new can suppliers coming on board, But the situation will persist. And then next year, we should be in we believe we'll be in very good shape. But again, It all depends on consumer demand, which is growing and you've seen that month by month and quarter by quarter.

Operator

And the next question today will come from Bonnie Herzog with Goldman Sachs. Please go ahead.

Speaker 5

Thank you. Hi, everyone. I just wanted to ask about your gross margins. Clearly, they continue to be pressured as broadly expected, which Guys have been discussing with us, but just want to get your outlook for these pressures in the back half of the year. Hilton, you just mentioned that you're optimistic.

Speaker 5

So Just wanted to verify that you still expect some of these pressures to ease by Q4? Or do you think it's going to take a little bit longer, especially in light Of the recent spike in aluminum prices, so trying to understand how that factors in. And then just A clarification on the can shortages that you mentioned that you're still experiencing. I guess it sounds like it's getting worse, but I really did want to clarify that. And is there any way that you guys could quantify how big of an impact the supply shortages had on your top line either in the quarter or in July?

Speaker 5

Just trying to understand how much you think your shipments would have been up in July without these shortages, for instance? Thanks.

Speaker 3

Okay. So let me deal with the first issue first, if I may. I spoke about optimistic about can suppliers. I really didn't talk about margins. You'll recall on the last call, I spoke about the issues that we were confronting With margin pressures like most other beverage companies.

Speaker 3

And where we are right now with aluminum, I mean, nobody knows. So you could talk to the leading banks in the field, which we do on a regular basis, and they really are poles apart About their projections for aluminum in 2022, let alone 2021. So, in the last couple of days, you've seen a spike in the Midwest premium from this tax that is expected to be imposed on Russian aluminum. And as you know, the Midwest premium is strongly factors the last tonne of aluminum to enter the U. S.

Speaker 3

And the cost of that and so we've seen a spike in the Midwest premium and we continue to see spikes in aluminum. So from that score, I think we just are in uncharted territory. I've been in this business for a long time as you know and I've never seen aluminum Where it's at right now, and I've never seen the Midwest premium at these kind of levels. So aluminum, I really cannot talk about. And also, When you look at our business and you look at the factors that really have affected gross margin, number 1, the fact that we're sending a lot more internationally, so earlier about 37.4% of our sales in this Quarter outside of the U.

Speaker 3

S. 30% last year, that obviously impacts margins. We are importing cans From a number of countries that obviously impacts margins. In fact, The China and India cans that we are using in the United States and in EMEA Will only be filled in August, they're roughly July, and they will be filled this month. So that In itself, the importation will impact gross margins.

Speaker 3

And then to cap everything else, we have ingredient issues. We had ingredient issues, as we mentioned, in July, which again reduced The amount that we would actually sell because we didn't have sufficient ingredients to meet themselves, particularly with NOS. And So there are a number of factors that are increasing our cost of goods. And last quarter, I said I didn't think that margins would get better In the 2nd and third quarters, I read they will not I think margins will deteriorate In the Q3 in Q4, we're getting some relief in terms of supplies from the U. S.

Speaker 3

On cans that are have been contracted for and they were Contracted for 2 years ago, and we saw the opportunity to work with 2 major suppliers to get additional cans Produced in the U. S. And that's why we have 2 new suppliers opening and we are an important and an anchor customer of So both those facilities. But even that, you're still dependent on aluminum. We have some hedges in place, but obviously Not enough to take into consideration the amount of sales and the amount of consumer demand that is out there.

Speaker 3

And then just getting to your second question because you really were only allowed one. But to get to your second question, We have quantified or tried to quantify the impact on can shortages In July and in this quarter and in the potentially in the Q3, But I really don't want to I'm not comfortable with those numbers yet. A lot of detailed work is being done on them. And I just I can't in good conscience give those numbers because we still are in the throes of kind of finalizing what we think It's probably correct. Rodney mentioned in his script earlier that a number of the bottlers, You mentioned particularly in EMEA, but there were cases in the U.

Speaker 3

S. As well. And there were substantial cases in the U. S. With the bottlers, we're obviously focused on other things in the quarter, and we're producing Coca Cola brands.

Speaker 3

And a result, I think we our production got moved from July to August. So when I look at July, it doesn't I don't get overly concerned because I know the sales are going into August.

Speaker 1

Perhaps if I just on the percentage on the shortage level, just to add that, when we buy cans and contract For our annual amounts, they usually are sort of reasonably flatlined across the year, and we use the first half of the year to build up can Inventories and finished product inventories with ourselves and our bottlers, earlier this year, obviously, demand sort of was strong. So we really didn't have that opportunity. So what has happened is that in June July, which is your normal peak months, The demand has been higher, but our supply has been more level until we can get more can inventories into The market, so what happened is just that we have had a sort of a heartened increased shortage In the last month in July and probably will be a little bit in August and then obviously as we start increasing The cans we're getting in and then we're able to balance it more and our demand balances more, we'll start to have less of a difference delta between these Demand and supply and eventually be able to we're hoping to be able to build up our inventories and supply back to normal by The end of the Q4 or Jerry or by the end of

Speaker 3

the Q4. Yes. No one's comfortable with the level of finished goods inventories That we're running at, but it's a sign of the times. I mean, we're doing everything we can to supply our customers and that's why We spoke about freights. Freight's a big issue, not only getting raw material ingredients into Co packing system and into our bottling system and but also distributing from our co packers.

Speaker 3

And obviously, the one It goes into cost of sales and freight out goes into operating expenses. So that's why you'll see freight really hitting Both of those line items.

Operator

The next question will come from Andrea Teixeira with JPMorgan. Please go ahead.

Speaker 6

Hi. Thank you. Hi, good afternoon. Hi, Andrea. So on the

Speaker 3

Hi, Andrea.

Speaker 6

How are you, Vincent? Hi. Just on the gross margin, because your gross margin comments were very helpful and given this deterioration obviously that it's Probably here to stay in the next few quarters. How are you thinking about pricing? Obviously, you Can't supply the service levels that are used to with the retailers.

Speaker 6

So is that something that Obviously, you have to take into account or perhaps as you get more informed of how the aluminum costs will evolve, You may contemplate it again.

Speaker 3

Yes. With regard to pricing, we continue To evaluate pricing, honestly, on a very, very regular basis, if not weekly. So we continue to evaluate it, And we want to make a good decision. Last time around, as I mentioned on previous calls, we We went out alone, and we would like to be in a situation this time where we followed our competitor, but We have to evaluate, obviously, the business as we see it and the impact for us. What we've done is we've reducing our promotional allowances.

Speaker 3

So we're taking a price increase the other way through reducing Promotional allowances, but the impact of that reduction in the second quarter was not as We would have liked. So we are we really put the accelerator down and are more aggressive in reducing our promotional allowances. But we are continuing to evaluate pricing and price increases. And I have to leave this call with my favorite saying and that is we don't bank gross profit margins, we bank gross profit dollars. And to me, the fact that we're doing everything we can to satisfy our customers as best as we can Is impacting gross profit margins, but at the end of the day, we don't want to lose gross profit dollars, which is really important to ensure the sustainability of the brand.

Speaker 3

And that's the most important thing for us right now.

Speaker 6

Thank you. That's fair. Thank you both.

Speaker 1

Yes. Just to basically just to make it clear, at this point, we are watching and we're not planning a Price increase, we're not adverse to pricing, but we'll wait and see what the market does and what our competitors do.

Speaker 6

Thank you, Robin.

Operator

This will conclude today's question and answer session. I would now like to turn the conference back over to management for any closing remarks.

Speaker 1

Thanks very much. Thank you everyone for your continued interest and support of the We continue to believe in the company and our growth strategy to remain committed to continuing to innovate, develop and differentiate our brands and to expand the company, both domestically and abroad, and in particular, expand distribution of our products through the Coca Cola bottler system internationally. We believe that we will be able to navigate through the challenges ahead as a result of the COVID-nineteen pandemic and hope that this unfortunate situation will resolve itself In the near future, we believe that we are well positioned in the energy drink category and will continue to be and are Optimistic about our total portfolio of energy drink brands. We hope that you will stay safe and healthy. Thank you very much for your attendance.

Operator

The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.

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Earnings Conference Call
Dollar General Q2 2021
00:00 / 00:00
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