Monster Beverage Q4 2021 Earnings Call Transcript

Quartr
Provided by Quartr
February 24, 2022

There are 8 speakers on the call.

Operator

Good afternoon, and welcome to the Monster Beverage Company's 4th Quarter and Full Year 2021 Earnings Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. I would now like to turn the conference over to Rodney Sacks and Hilton Schlosberg, Co CEOs. Please go ahead.

Speaker 1

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

Speaker 2

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 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 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 Sachs.

Speaker 1

Thanks, Tom. The company achieved record 4th quarter and Despite certain challenges in the 2021 Q4, the company achieved solid results overall. We note that the comparative 24th quarter included a non recurring tax benefit of $165,100,000 as well as reduced marketing, Sponsorships and certain other operating expenses, largely as a consequence of the COVID-nineteen pandemic. These items should During the 2021 Q4, the company continued to procure additional quantities of aluminum cans from suppliers in the United States And abroad in response to increased consumer demand. In addition, the company continued to experience additional global supply chain challenges, including freight inefficiencies, shortages of shipping containers, port of entry congestion and delays in the receipt of certain ingredients.

Speaker 1

In the United States, the company lacked sufficient co packing capacity to meet increased demand for certain of its products. As a result, the company was not able to fully satisfy increased demand for its products in a number of markets in the 2021 Q4. During the 2021 Q4, the company experienced increased aluminum can costs attributable to higher aluminum commodity pricing, As well as the cost of importing aluminum cans. In addition, the company experienced increased ingredient and other input costs, including shipping and freight, Labor, trucking, fuel, co packing fees, secondary packaging, materials, increased outbound freight costs and production inefficiencies, which resulted in increased costs of sales and increased operating costs in the 2021 Q4. The company continues to address the challenges in its supply chain as it navigates through the uncertainty of the current global supply chain environment.

Speaker 1

In the Q4 of 2021, net sales were $1,430,000,000 compared with $1,200,000,000 in the Q4 of 2020, An increase of 19.1%. Adjusting for foreign currency movements, net sales for the 2021 Q4 would have been up 19.3%. The comparative net sales for the 20 24th quarter were negatively impacted By $15,200,000 related to product returns from our customers as a result of a European formulation issue With a limited number of products in Europe and labeling issue concerning one product in Japan, which we will refer to as the 2020 product returns. Gross profit as a percentage of net sales for the 2021 Q4 was 53.9% For the 2021 Q4 was primarily the result of increased freighting costs, increased aluminum can costs attributable higher aluminum commodity pricing, geographical and product sales mix and production inefficiencies. Operating expenses for the 2021 Q4 was $354,700,000 compared with $288,400,000 in the 20 2Q4.

Speaker 1

As a percentage of net sales, Operating expenses for the 2021 Q4 were 24.9% compared with 24.1% in the 20 24th quarter and 28.9% in the 2019 Q4 pre COVID. The increase in operating expenses was primarily due to increased outbound freight And warehouse costs, increased expenditures for sponsorships and endorsements and increased expenditures for other marketing activities, including social media and digital marketing and increased payroll costs. During the comparative 2024 quarter, The company decreased expenditures for sponsorship and endorsements and decreased expenditures for travel and entertainment, Each largely as a consequence of the COVID-nineteen pandemic. The impact of the COVID-nineteen pandemic was less pronounced on our sales and marketing programs during the 2021 Q4. Distribution costs for the 2021 Q4 increased to $69,800,000 which is an increase of 48.4 percent or 4.9 percent of net sales compared to $47,000,000 or 3.9 percent of net sales in the 20 24th quarter and 3.5% of net sales in the 2019 Q4.

Speaker 1

Operating income increased 2.6 percent to CHF 412,900,000 From $402,300,000 in the Q4 of 2020, we believe that a portion of the increasing costs that we experienced in the quarter And the 2021 full year are likely to be transitory. With our 2 new suppliers of aluminum cans in the United States operational, We will begin to decrease our reliance on the use of imported aluminum cans in the United States, although we will continue to import aluminum cans into the United States, Although at a reduced level in the first half of twenty twenty two. In 2022, we expect to continue to import aluminum cans into EMEA, Reducing such imports in the second half of twenty twenty two. The supply chain challenges we are experiencing are significantly increasing and The logistic costs of importing and shipping raw materials and ingredients as well as other freighting costs, which are included in cost of sales. The The cost of repositioning finished products to distribution centers are included in freight in costs.

Speaker 1

We are rebuilding and increasing inventories in an effort to reduce the excess cost of trucking long distances to satisfy demand and to return to our orbit strategy of producing in proximity to our customers. Increased freight in costs, including the shipment costs of importing cans, amounted to approximately $38,000,000 in the 2021 Q4 And approximately $100,000,000 for the 2021 full year. Our out of orbit freight costs, which are included in distribution expenses, amounted to approximately $15,000,000 in the 2021 Q4 and $54,000,000 for the 2021 full year. Net income decreased 31.9 percent to $321,300,000 as compared to 471 point $7,000,000 in the 2020 comparable quarter. Net income for the 20 24th quarter was positively impacted by the recognition Our non recurring tax benefit of approximately $165,100,000 Net income for the Comparative 20 20 4th quarter excluding the non recurring tax benefit, the impact of the 2020 product returns Associated inventory provisions and other related costs was $328,600,000 Diluted earnings Per share for the 2021 Q4 decreased 32.1 percent to $0.60 from $0.88 in the Q4 of 2020.

Speaker 1

Diluted earnings per share for the comparative 20 2Q4 excluding the non recurring tax benefit, The impact of the 2020 product returns, associated inventory provisions and other related costs was $0.62 According to the Nielsen reports for the 13 weeks through February 12, 2022, for all outlets combined, namely convenience, grocery, drug, Mass merchandisers. Sales in dollars in the energy drink category, including energy shots increased by 13.3% versus the same period a year ago. Sales of the company's energy brands including Reign were up 8.1% in the 13 week period. Sales of Monster were up 10.5%. Sales of Reign were down 1.7%, sales of NOS decreased 12.5%, and sales of Full Throttle increased 12.4%.

Speaker 1

The decrease in sales of NOS at retail during the Q4 was as a result of shortages in the supply of concentrate for NOS. The NOS supply issues are improving. Sales of Red Bull increased 13.8%, sales of Rockstar decreased by 1.3% And sales of 5 Hour increased 2.1%. Sales of VPX Bang increased 0.4 Including energy shots in dollars increased 7.4% over the same period the previous year. Sales of the company's energy brands, which include Reign, Increased 4% in the 4 week period in the convenience and gas channel.

Speaker 1

Sales of Monster increased by 5.7% over the same period This is the previous year. Reign sales decreased 0.9 percent, NOSA sales was down 10.8% and Full Throttle was up 6.3%. Sales of Red Bull were up 8.3%, Rockstar was down 4.5%, and 5 Hour was down 1.3%. VPX Bang's sales decreased 4%. According to Nielsen, in the 4 weeks ended February 12, 2022, Company's market share of the energy drink category in the convenience and gas channel, including energy shots in dollars, decreased 1.2 points to 37.2%.

Speaker 1

Monster share decreased 0.5 a share point to 31.6 percent. Reigns share decreased 0.2 of a share point to 2.4 percent. NOSA's share decreased 0.5 of a point to 2.5 percent and Full Throttle's share remained at 0.8%. Red Bull share increased 0.3 of a point to 36.2%. Rockstar share was down 0.5 point to 4%.

Speaker 1

5 Hour share was lower by 0.4 of a point to 4.5 percent and BPX Bang share decreased 0.8 of a point to 7%. According to Nielsen, for the 4 weeks ended February 12, 2022, sales in dollars in the coffee plus energy drink category, which includes our Java Monster line In the convenience and gas channel increased 2.3% over the same period the previous year. Sales of Java Monster including Java Monster 300 were 4.2% higher in the same period versus the previous year. Sales of Starbucks Energy were 0.7% Higher. Java Monster's share, including Java Monster 300 of the Coffee Plus NEG 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 February 12, 2021 was 53.7%, up 1 point while Starbucks Energy Share was 44.1%, down 0.7 of a point.

Speaker 1

According to Nielsen, in all measured channels in Canada, for the 12 weeks ended January 29, 2020 2, the energy drink category increased 12.3 percent in dollars. Sales of the company's energy drink brands increased 10.8% versus a year ago. The market share of the company's Energy Drink Brands was 40.8%, down 0.6 of a point. Monster sales increased 13.9% The energy drink category increased 25.9 percent for the month of January 2022. Monster sales increased 24.5%.

Speaker 1

Monster's market share in value decreased 0.3 of a point to 27.8% against the comparable periods the previous year. Sales of 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 a significant impact on the monthly Nielsen According to Nielsen, for the month of January 2022 compared to January 2021, Monster's retail market share in value increased in Argentina from 41.3% to 43.8%. Monster Energy continues to be the leading energy brand in value in Argentina. According to Nielsen, for the month of January 2022 compared to January 2021, Monster's retail market share in value increased in Brazil from 32.2% to 37.8%.

Speaker 1

In Chile, Monster's retail share for the month of January 2022 decreased from 47.2% to 33.1% due to a shortage of shipping containers. I would like to point out that the Nielsen numbers in EMEA should only be used as a guide 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. In addition, the company experienced supply issues in EMEA during 2021, which impacted the Nielsen statistics in different countries. According to Nielsen, in the 13 week period ending January 29, 2022, Monster's retail market share in value as compared to the same period the previous year grew from 27.3% to 29.5% in Great Britain, Monster's retail market share in value as compared to the same period the previous year declined from 15.3% to 14.2% in Belgium And from 31.1 percent to 30.3 percent in France and from 20.1% to 19.3% in Poland. According to Nielsen, in the 13 week period ending January 2, 2022, Monster's retail market share in value as compared to Same period the previous year grew from 26.4 percent to 26.5 percent in Denmark From 15.1% to 15.8% in Germany and from 14.5% to 14.6% in Sweden, Monster's retail market share in value as compared to the same period the previous year declined from 27.9% to 27% in Italy, 29.3 percent to 25.3 percent in Norway and from 28.3 percent to 27.6 percent in the Republic of Ireland.

Speaker 1

According to Nielsen, for the 13 week period ending December 31, 2021, Monster's retail market share in value as compared to the same period the previous year Grew from 15.2% to 15.6% in the Czech Republic, from 37.4% to 38% in Greece, And from 20.4 percent to 20.5 percent in South Africa. According to Nielsen, in the 13 week period until the end of December 2021, Predators retail market share in value as compared to the same period the previous year grew from 12.9% to 20.8% in Kenya value for the month ending February 6, 2022 increased from 12.2% to 12.8% as compared to the same period the previous year. Mother's market share in value decreased from 11.8% to 11% during the same period. The market share of the company's brands in Australia for the ended February 6, 2022 decreased from 24% to 23.8%. According to IRI in New Zealand, Monster's Market chain value for the 4 weeks ended February 6, 2022 increased from 11.6% to 13.3% As compared to the same period the previous year, Lyft Plus' market share in value remained the same at 7.1% and Mother's market share in value decreased from 6.3% to 6%.

Speaker 1

The market share of the company's brands In New Zealand, for the 4 weeks ended February 6, 2022 increased from 25% to 26.4%. According to Intej in Japan, for the month ended January 2022, Monster's market share in value in the convenience store channel as compared to The same period the previous year grew from 50.8 percent to 56.3%. According to Nielsen, in South Korea for the month of December End of December 2021, Monster's market sharing value in all outlets combined as compared to the same period the previous year Grew from 56.5 percent to 60.2%. Monster continues to be the leading energy brand in Japan and South Korea. 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.

Speaker 1

Net sales to customers outside the U. S. We're $508,100,000 which is 35.7 percent of total net sales in the 2021 Q4 compared to $384,800,000 or 32.2 percent of total net sales in the corresponding quarter in 2020. Foreign currency exchange rates had a negative impact on net sales in U. S.

Speaker 1

Dollars by approximately $2,400,000 in the 2021 Q4. Included in reported geographic sales are our sales to the company's military customers, which are delivered in the U. S. And tranchep to the military and their customers overseas. In EMEA, net sales in the 2021 Q4 increased 47.5% in dollars and increased 46.1% in local currencies over the same period in 2020.

Speaker 1

Net sales adjusted for the 2020 product returns in this region For the Q4 was 32.6% compared to 30.2% in the same quarter in 2020. Gross profit in the 4th quarter was impacted by KN freight and raw material air freight costs. In local currencies, gross profit as a Percentage of net sales for the quarter was 32.2%. Gross profit as a percentage of net sales excluding the impact of the 2020 product returns in this region, Associated inventory provisions and other related costs was 40.1% for the 20 24th quarter. In 2021 Q4, can supply shortages, lack of ingredient availability, Insufficient canning capacity and a shortage of trucking availability together had an adverse impact on sales in EMEA, In some cases impacting the availability of our products on shelf at retailers.

Speaker 1

However, the shortages of trucking availability were largely resolved In the latter part of the quarter, the company is continuing to address the controllable challenges in its supply chain in EMEA by continuing to import cans and expanding its co packing capacity. We are also pleased that in the 2021 Q4, Monster gained market share in the Czech Republic, Denmark, Germany, Great Britain, Greece, the Netherlands, South Africa, Spain and Sweden. In Asia Pacific, net sales in the 2021 Q4 increased 19.2% in dollars and increased 22.8% in local currencies over the same period in 2020. In Asia Pacific, excluding the impact of the 2020 product returns And the labeling issue in this region in the 2024 quarter, net sales in the 2021 Q4 increased 10.7% in dollars and 14.1% in local currency over the same period in 2020. Gross profit in this region as a percentage of net sales was 41.4% versus 34.8% over the same period in 2020.

Speaker 1

Excluding the impact of the 2020 product returns in this region, Associated inventory provisions and related costs, gross profit as a percentage of net sales would have been 40.3% in 2020. In Japan, net sales in the 2021 Q4 increased 12.7% in dollars and 20.% in local currency. Without the impact of the 2020 product returns in Japan, net sales decreased 1.2% in dollars and increased 5.2% in local currency over the same period in 2020, largely due to COVID-nineteen restrictions in Japan. In South Korea, net sales increased 31 0.3% in dollars and 35.5% in local currency as compared to the same quarter in 2020. Monster remains the market leader in Japan and South Korea.

Speaker 1

In China, net sales increased 22.6% in dollars And 17.6% in local currency as compared to the same quarter in 2020. We are reevaluating 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 7.5% in dollars and 4.8% in local currencies Due to timing of sales into bottlers. In Latin America, which includes Mexico and the Caribbean, net sales in the 2021 Q4 17% in dollars and increased 21%, 31.6% in local currencies over the same period in 2020.

Speaker 1

Gross profit in this region as a percentage of net sales was 38.6% for both the 2021 and 2020 4th quarters. In Brazil, net sales in the 2021 Q4 increased by 36.9% in dollars and 30 9.6% in local currency. Net sales in Chile increased 6% in dollars and 9% in local currency in the 2021 Q4. Net sales in Argentina increased 30.7 percent in dollars and 66.7% in local currency in the 2021 Q4. There are a number of pending proceedings with VPX, but as they are sub judicay, we will not be answering any questions on this matter on today's call.

Speaker 1

In the United States, we launched our new True North Pure Energy Salsa line in e commerce and selected natural channels in the Q3. In early 2022, we launched the cit line nationally into mainstream channels with our Coca Cola bottlers. In October 2021, we commenced the launch of our new reserve line of Monster Energy Drinks in 2 flavors, watermelon and white pineapple. We have launched multiple innovation SKUs, 2 new 12 ounce flavors as well as new package configurations in the 2022 Q1. This month, we launched 4 new flavor extensions in 16 ounce cans to the retail trade, namely Ultra Peachy Keen, Juice Monster Aussie Style Lemonade, Rehab Watermelon and Rainbow Sherbet.

Speaker 1

In January 2022, we launched Additional multipack options such as 4 pack ultra watermelon, 4 pack rain white gummy bear, 2 ultra variety packages in a 12 pack format. Additionally, we have launched 12 ounce 6 packs of Monster Energy, 0 Ultra, our new Peachy Keen Ultra, Java Monster Mean Bean and Java Monster Loco Mocha. Ultra Picha Keen is also launching in a 12 ounce option along with our ultra watermelon. In addition, Java Monster Nitra Cold Brew is scheduled to launch in the twenty 22 Q2 with 2 lower calorie SKUs, Sweet Black and Latte. In the 2022 Q1 in Canada, we are planning to launch 9 new innovations, including the transition into a 355 mille 8 pack for Monster Energy, 0 Ultra and Ultra Paradise.

Speaker 1

In January 2022, we launched Ultra Gold in a 4 73 ml single can And 4 pack. We also launched Ultra Watermelon in a 4 pack and Ultra Paradise in a 7 10 mil can. We are in the process of launching a 4 pack Rain Razzleberry as well as introducing Rain White Gummy Bear in a 473 ml can. In the 2021 Q4, we launched Monster Energy Mango Loco in Uruguay and Ecuador as well as Monster Ultra Watermelon and Predator Goldstrike in Trinidad. In Honduras, we expanded our FURY package offerings with a 355 ml returnable glass bottle.

Speaker 1

We are planning a national launch of Monster Pacific Punch, Monster Dragon Tea Peach, Rain Orange Dreamsicle And RainMangoMagic in Brazil in the first half of twenty twenty two. Additional 2022 Q1 LatAm Innovations Include Monster 0 Sugar in Ecuador Pipeline Punch in Central America and Trinidad Monster Mango Loco in Peru and Colombia VR46, the Doctor in Argentina. In Chile, we are launching Rain Melon Mania, Rain Lemonheads and Rain Orange Dreamsicle. In Mexico, we will introduce our 2nd Predator flavor with Predator Mean Green. In the 2021 Q4 in New Zealand, We launched Monster Ultra Fiesta Mango.

Speaker 1

In the 2022 Q1, we launched Monster Ultra Gold and Mother Kiwi Sublime in Australia And are planning to launch Super Fuel Tropical Thunder in New Zealand. In EMEA in the Q4 of 2021, we launched Monster Green, Monster Nitro and Monster Assault in a number of countries. We also launched Ultra Watermelon, Golden Paradise and Juice Monarch, Mango Loco and Pacific Punch in a number of countries during the 2021 Q4. Monster Super Fuel, Mean Green, Watermelon and Sub Zero We launched in 2 countries in the Q4 of 2021. During the 2021 Q4 and 2022 Q1, we So launched our strategic brands innovation and Predator in additional countries.

Speaker 1

In particular, we launched our Predator Spicy Ginger and Tropical in South Africa. During the Q4 of 2021, we launched Monster Rossi in Japan In October and the Predator brand in Vietnam in November 2021, we are planning to introduce the Predator brand in several additional countries in APAC In the course of 2022, we are planning to launch a number of additional products or product lines in our domestic and international markets later this year. On February 17, 2022, we completed our acquisition of Kanaki Craft Brewery Collective, a craft beer and hard seltzer company for $330,000,000 in cash. Subject to adjustments, the transaction brings the Cigar City, Hai Lai IPA and Florida Man IPI, Oscar Blues, Dale's, Pale Ale and Wild Basin Hot Seltzer, Deep Ellum, Dallas Blonde and Deep Ellum IPA, Perm Brewing, Black Ale, Squatters, Hop Rising, Double IPA and Juicy IPA and Wasatch, Apricot, Heffernweissen Brands to our beverage portfolio. The transaction does not include Kanarki standalone restaurants.

Speaker 1

Our organizational structure for our existing energy beverage business will remain unchanged. Kanopy will function independently, Retaining its own organizational structure and team, we are enthusiastic about the opportunities that this acquisition presents to us in the alcohol space and through distribution network. We estimate January 2022 sales to be approximately 20.2% higher Then in January 2021, on a foreign currency adjusted basis, January 22 sales 2 had one more selling day than January 2021. Although we see some improvement, the company has continued to experience supply chain challenges in January, which adversely impacted sales. 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, Distributing 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.

Speaker 1

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. 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'd like to summarize some recent positive points. Currently, the company's labor manufacturing facilities, Its co packers, warehouses and shipment facilities and bottlers and distributors are all operating. The company continues to address the challenges in its supply chain As it navigates through the uncertainty of the current global supply chain environment, we are continuing to experience increased costs in our operations, some of which may be transitory and we have and are in the process of implementing reductions in promotions and other pricing actions in the United States And EMEA to mitigate against such increased costs.

Speaker 1

Our AFF flavor facility in Ireland is operational And is providing flavors to our EMEA region and will improve service levels in EMEA. We are pleased with the new additions to the Monster Energy Portfolio, 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, our affordable energy drink portfolio internationally. We are proceeding with plans to launch our affordable energy brands in a number of international countries. Our supply chain challenges are improving.

Speaker 1

We are enthusiastic about the opportunities that Kanarki presents. I would like to now open the floor to questions about the quarter and the year. Thank you.

Operator

We will now begin the question and answer session. The first question is from Kamil Gajrawala from Credit Suisse. Please go ahead.

Speaker 3

Thank you, operator. Hey, everybody. You talked a lot about improved supply and the things you're doing to increase Supply, your margins obviously were down quite a bit, I think 540 basis points. Speaking can you speak maybe more to margins as opposed to Just availability of product and how we should be thinking about that within the context of some of the changes that are being made for 2022?

Speaker 4

Kamil, I think that we've been through and listed the supply chain challenges. And I'm not sure it's worthwhile repeating what we said earlier. But what we did mention On the call and gave some numbers was that the certain of those costs in the supply chain are expected to be transitory. And that is, for example, to satisfy demand, we opened up What we regarded as Orbitz, where we manufactured and distributed within specific geographies. And to satisfy demand, we had to open up those orbits.

Speaker 4

And the cost of that was pretty exceptional and we detailed that I think on this call. Also to import cans From abroad is a very expensive exercise as you can imagine. And that we see kind of mitigating in 2022. We have 2 new suppliers Coming on stream and they are in fact they are on stream. So we will be reducing our dependence on imported cans certainly in the U.

Speaker 4

S. And then, we'll buy some cans not to the same degree as we did in the first half. And the second half will be we believe will be Self sufficient with cans in the U. S. In the EMEA, we'll continue to import cans, but they will kind of tail off in the second half of the year.

Speaker 4

So there are some of these costs that are transitory. Some of the costs may stick. There's It's been crossed across the board and we had a big shock this morning as no doubt you guys did as well with aluminum, Where aluminum plus the Midwest Index went up to $1.97 a pound As opposed to what we were paying in last year of just It's kind of half of that. So there are a lot of costs that are coming to us, the costs that we can mitigate, the costs that we may not be able to mitigate. Now Will aluminum stay at this level?

Speaker 4

I don't think anyone knows. So overall, we I think we are navigating well through these supply chain challenges. And we're doing the very best we can to ensure that our customers receive product because at the end of the day, As I've always said to this audience, we bank dollars, we don't bank margins and we have enough profitability in the system to be able Do what we've been doing and make a profit. And unfortunately, the result is that the GP percentage does come down, But we expect that this will not last forever and net margins will be back to some degree as we move forward.

Operator

The next question is from Chris Carey of Wells Fargo. Please go ahead.

Speaker 5

Hi, good evening, everyone. Thank you for the question. I just wanted to follow-up on that If I look at, not to be so short sighted in a way, but where the Street is modeling your gross margins, it's Slightly up for 2022, but if I hear you right, as you have aluminum inflation still coming through, you're still going to be sourcing cans From other places, so you have freight costs, pricing, as you noted, at the annual Yes. Investor Day will be a positive story, but maybe not enough to offset this inflation. And so I just want to make sure I'm hearing Right that the top line of course remains a very good story here, but that gross margins It should remain under pressure in 2022 and then really building into 2023 as these costs are a bit And then if I could just on the quarter to date number, is that mostly international versus the U.

Speaker 5

S, just given the disconnect to Nielsen sales. So thanks so much for that perspective.

Speaker 4

Well, let's go back to the your second question. That number, the U. S. Is very close to that number for January. So we can we have a lot of on measured channels in our system and Nielsen is not always a good indicator of our sales to our distributors.

Speaker 4

So let's go if we can, let's take a step back and look at your and address your first question. So Aluminum jumped up today significantly. It's been moving up. I gave you the number as of today. As of yesterday, It was $0.10 a pound less than that.

Speaker 4

So with this war and everything else going on in the world, I can't say for certain and I don't think anyone can tell you what aluminum is going to do and what it's going to be. And obviously, with most of our products being Packaging aluminum cans that is a significant item. Looking back at some of your other comments, I mentioned that We mentioned at least on the script that we have sufficient cans now. So we're able to Start working towards closing off and close game back to the orbits, which means that fading costs should significantly Reduce when? I can't say for certain, but it's going to happen.

Speaker 4

Other costs in the system are being controlled. And so what looking forward, I think that we will continue to Have a difficult 2022. Will the margins stay at the level that we talk about on this call? I don't know. Honestly, a lot depends On what happens with aluminum.

Speaker 4

So the rest of the stuff is coming under control. I mentioned that we were importing less cans into the U. S. Than we did in 2020. That will have a positive impact on margins.

Speaker 4

From the second half of the year, we'll be we believe we'll be totally self sufficient with cans in the U. S. So that's a positive factor. And then in EMEA, we will be importing cans in the first half with a significant reduction in the second half. So there's a lot of good things in the cost story, but unfortunately, it is what it is.

Speaker 4

On the sales side And price increases, we spoke about that on previous calls. As you know, we have a play that we're running, Irrespective really, I think of what Red Bull is doing, we've come to the conclusion that we're going to run our own play. We know what we want to do and we're working on reducing promotional ounces. You've seen prices go up already in the trade And you've seen them going up in Nielsen. So that is something that is happening as well.

Speaker 4

What else I want to say? So we spoke about prices went up in the The reduction in promotional ounces in the quarter that we look at, although at a very modest degree. And as we go through 2022, you'll see Price increases in our business accelerating.

Operator

The next question is from Andrea Teixeira of JPMorgan. Please go ahead.

Speaker 6

Hi, how are you? I just want to perhaps elaborate more on what You said Hilton on the pricing front.

Operator

Are you saying that you we should be able to see pricing beyond what was passed through by third by manufacturing at some point in 2022? And then regarding that, are you seeing any impact from the gas stations given the gas prices going up? Or this is not a concern for affordability at this point?

Speaker 4

So you've seen the convenience and gas numbers in Nielsen. They are somewhat lower than the rest of the market Well, recent, but we've been through higher gas prices before and they haven't really impacted sales. But we are seeing If you look at the Nielsen, you'll see that the numbers in convenience and gas in the energy category are reducing. So, whether they'll stay at that level, I don't know. But, we have been through this before and we haven't seen a slowdown In sales in the energy and gas in the convenience and gas market.

Speaker 4

And then looking at pricing In

Speaker 1

a little bit of a pickup, I may add. Sorry, is this been exactly what? Yes, Carol. A little bit of a pickup in the last If you look at the single last week's numbers, again, that's a very short period, but we are seeing a pickup in convenience with the price increase Effective price increase, it still is translating. So we'll see how that extends out.

Speaker 4

Yes. It's a 1 week number. Sure. And with regard to pricing, we spoke about what we were doing to increase pricing. We're running our play 24 ounces going up April 1 in low double digit numbers.

Speaker 4

So that will be a nice percentage in 24 ounce. And the rest we're working on, as you know, with our revenue growth management department, working on Taking promotional allowances down to achieve the same result as a price increase, but we're continuing to monitor whether we need And if we have to, we will. And in particular, with regard to metal, and we don't know where metal is going. But with regard to metal, if it becomes a permanent situation, yes, then we probably have to reconsider and decide what else Could be done on the pricing front, but we're not ruling out a general price increase.

Operator

The next question is from Kevin Grundy of Jefferies. Please go ahead.

Speaker 7

Great. Thanks. Good afternoon, guys. I wanted to come back to your strategy in alcohol. So now with the Canarkey deal closed, Do you think the company has the right product portfolio, distribution and capabilities at this point in time To deliver against your ambitions, you've been talking about this for the better part of 2 years.

Speaker 7

And now with this deal closed, do you think you have everything that you need To deliver. And I guess specifically just to kind of drill down a little bit, do you think that you need more in terms of capabilities with respect to spirits, both consumer capabilities, a broader wholesaler distribution network. And if the answer to that is yes, How do you intend to sort of address that and is larger scale M and A a possibility? Thanks.

Speaker 1

I think that the Canopy acquisition is not the complete answer to everything. They are Kraft Brands. They are they have a distribution network. They have some Salsa Brands. We do have a good infrastructure in staff there and we have We're going to use that to build on.

Speaker 1

We are going to look at taking the distribution system refining a little bit. We're looking at addressing their products and taking steps to Invigorate their sales and looking at our own products that we've been developing that we did have discussed previously and taking and deciding where to And how to launch those through the Kanarki system. And we will separately address the possible M and A of additional brands Whether in a sort of in the malt side, beer side or the spirit side, those are things that are opportunities. But again, We're looking at the whole business now and reviewing it, but it's the platform that is really good for us. And I think that is what it's That's the function that's going to serve for us.

Speaker 1

We are going to obviously have to address issues and other matters in Getting that fully implemented, it's not just a perfect system that we've taken over, but it's a good base for us and we're going to build on it. And we're very confident and we're very We're very pleased with having closed that acquisition, which will give us the springboard from here on.

Operator

The next question is from Vivien Azer of Cowen. Please go ahead. Hi, good evening. Thank you for the question. I was wondering if you could just offer some better detail on your supply chain And the Ukraine and if you could quantify your exposure to those two countries, please?

Operator

Thank you.

Speaker 4

Yes. Well, those countries, Including Belarus and Kazakhstan, which really work within that region, account for about 10% of our sales in Our EMEA sales. So we have a nice business in Russia, which We have to see what happens there and we have reasonable business in Ukraine. We have staff and we have people in Those countries and it's really concerning as to we don't know what will happen and it's really concerning frankly.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Rodney Sachs To Hilton Swassberg for closing remarks.

Speaker 1

Thank you. On behalf of the company, I'd 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 continue 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 believe that we are well positioned in the beverage industry and

Operator

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

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Earnings Conference Call
Monster Beverage Q4 2021
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