Dollar General Q2 2022 Earnings Call Transcript

Quartr
Provided by Quartr
August 4, 2022

There are 9 speakers on the call.

Operator

Day to everyone. My name is Devin, and I will be your conference operator today. At this time, I would like to welcome everyone to the conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer We also ask you to please only ask one question for today's Q and A session.

Operator

Mr. Ronnie Sachs, you may begin your conference.

Speaker 1

Thank you. Good afternoon, ladies and gentlemen. Thank you for attending 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 Keeley 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 including the sections contained therein entitled Risk Factors and Forward Looking Statements, for a discussion on the 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. I would now like to hand the call over to Rodney Sachs.

Speaker 1

Thank you. Tom, the company achieved record 2nd quarter net sales of $1,660,000,000 In the 2022 Q2, 13.2 percent higher than net sales of $1,460,000,000 in the 2021 comparable period 16.9% higher on a foreign currency adjusted basis. Since the beginning of the COVID-nineteen pandemic and the subsequent increased demand for the company's energy drinks, the company prioritized ensuring product availability for its customers and The strategic direction has remained in place throughout the global supply chain challenges and disruptions, Despite adversely impacting the company's profitability, the company continues to stand by its strategy to ensure product availability The company experienced a significant increase in cost of sales relative to the comparative 2021 Q2, Increased ingredient and other input costs, including secondary packaging materials and increased co packing fees, Increased aluminum can costs attributable to higher aluminum commodity pricing, geographical and product sales mix and production inefficiencies. The company estimates that of the increase in cost of sales in the 2022 Q2 of $250,300,000 approximately $164,400,000 was comprised of 1, Approximately $66,700,000 due to increased freight rates and fuel costs, including costs relating to the importation of aluminum cans to approximately $45,900,000 due to increased ingredients and other import costs, including secondary packaging materials and increased co packing fees.

Speaker 1

3, approximately 27,500,000 Due to increased aluminum can costs attributable to higher aluminum commodity pricing 4, approximately $15,100,000 due to and product sales mix and 5 approximately $9,200,000 due to production inefficiencies. The company continued to experience additional global supply chain challenges, including the lack of adequate shipping containers and port congestion, which resulted in shortages of certain ingredients and finished products. As a result, the company continued to airfreight at additional costs and inefficiencies. Furthermore, the company experienced significant increases in distribution expenses, including increased fuel, freight and warehousing costs, which adversely impacted operating expenses. 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

Gross profit as a percentage of net sales for the 2022 Q2 was 47.1% compared to 57 0.2% in the 2021 Q2. The decrease in gross profit as a percentage of net sales for the 2022 Quarter was partially offset by pricing actions. Operating expenses for the 2022 Q2 were $406,900,000 compared with $310,900,000 in the 2021 Q2. The comparative operating expenses for 2021 Q2 included a $16,900,000 reversal of amounts previously accrued in connection with an As a percentage of net sales, operating expenses for the 2022 Q2 were 24.6% Distribution expenses for the 2022 Q2 increased to $87,900,000 which is an increase of 36% 5.3 percent of net sales compared to $64,600,000 or 4.4 percent of net sales In the 2021 Q2 and 3.4 percent of net sales in the 2019 Q2 pre COVID, The $23,300,000 increase in distribution expenses was primarily due to increased freight out expenses of $13,500,000 as a result of higher outbound freight rates and fuel, increased volume and out of orbit freight, as well as higher warehouse expenses of $9,700,000 as a result of higher raw material and finished product inventories in the United States and EMEA. The increase in other operating expenses was primarily due to increased payroll expenses, increased expenditures for sponsorships and endorsements and increased expenditures for travel and entertainment.

Speaker 1

Certain of these increases were the result of the company's return to activities consistent with pre COVID-nineteen levels. We have decreased our reliance on imported cans and are currently purchasing aluminum cans from local sources in both the U. S. And EMEA. We anticipate seeing a reduction in cost of sales Through increased use of domestic cans as we cycle through existing inventories of imported cans over the next few quarters.

Speaker 1

We rebuilt and increased finished product inventory levels across the United States and EMEA to reduce the excessive cost of long distance freight The costs of repositioning finished products to distribution centers are included in freight in costs. Operating income for the 2022 Q2 decreased 29.1 percent to $373,000,000 from $526,000,000 in the 2021 comparative quarter. Net income decreased 32.3 percent to $3,400,000 as compared to $403,800,000 in the 2021 comparable quarter. Diluted earnings per share For the 2022 Q2 decreased 32.2 percent to $0.51 from $0.75 in the Q2 of 2021. Through pricing actions, the company was able to achieve positive pricing appreciation in the United States and in EMEA.

Speaker 1

Due to continued cost pressures, the company is implementing a net sales price increase in the range of 6% market wide in the United States effective September 1, 2022. The company will also be implementing price increases In the second half of twenty twenty two, in certain international markets, some in addition to price increases or pricing actions taken earlier this year in order to mitigate inflationary cost pressures. According to the Nielsen reports for the 13 weeks Through July 23, 2022, for all outlets combined, namely convenience, grocery, drug, mass merchandisers, Sales in dollars in the energy drink category, including energy shots, increased by 8.2% versus the same period a year ago. Sales of the company's energy brands, including Reign, were up 6% in the 13 week period. Sales of Monster were up 7.4%, Sales of Reign were down 5.6%, sales of NOS decreased 3.9% and sales of Full Throttle decreased 0.8 percent.

Speaker 1

Sales of Red Bull increased 3.8 percent, sales of Rockstar increased by 2.1% and sales of 5 Hour decreased 3%. VPX Banger's sales decreased 14.5%. The sales growth of the Monster brand exceeded that of Red Bull in the period. According to Nielsen, for the 4 weeks ended July 23, 2022, sales in dollars in the energy drink category in the convenience and gas channel, including energy shots, RAIN increased 5.6% in the 4 week period in the convenience and gas channel. Sales of Monster increased by 6.4% Over the same period versus the previous year, Reign sales increased 0.9 percent, NOS was down 1.8 and Full Throttle was down 2.5%.

Speaker 1

Sales of Red Bull were up 3.9%. Rockstar was down 1.8 5 Hour was down 3.5%. VPX Bang sales decreased 16.3%. According to Nielsen, For the 4 weeks ended July 23, 2022, the company's market share of the energy drink category in the convenience and gas channel, including energy shots in dollars decreased 0.4 of a point to 36.1 percent. Monster share decreased from 30.6 Naza's share decreased 0.2 of a point to 2.5 percent and Full Throttle share remained at 0.7 Red Bull share decreased 1 percentage point from 37.4 percent a year ago to 36.4%.

Speaker 1

Rockstar's share was down 0.3 of a point to 3.5 percent. 5 Hour's share was lower by 0.4 of a point at 4.2 percent. And VPX Bankshare decreased 1.6 points to 6%. According to Nielsen, for the 4 weeks ended July 23, 2022, Sales in dollars of the coffee plus energy drink category, which includes our Java Monster line in the convenience and gas channel Increased 4.4% over the same period the previous year. Sales of Java Monster, including Java Monster 300 Java Monster Nitro Cold Brew were 2.3% higher in the same period versus the previous year.

Speaker 1

Sales of Starbucks Energy were 9.4% higher. Java Monster share, including Java Monster 300 and Java Monster Nitra Cold Brew of the coffee plus energy category, which primarily includes Java Monster, Java Monster 300, Java Monster Nitro Cold Brew, Starbucks Double Shot And Triple Shot, Rockstar Roasted and Bang Keto Coffee for the 4 weeks ended July 23, 2022 was 50.9%, According to Nielsen, in all measured channels in Canada, for the 12 weeks ended June 18, 2022, the Energy Drink category increased 12.8% in dollars. Sales of the company's Energy Drink Brands increased 8.5% versus a year ago. The market share of the company's Energy Drink Brands was 40%, Down 1.6 points. Monster sales increased 10.8% and its market share decreased 0.7 of a point to 34.8%.

Speaker 1

NOSIS sales decreased 9.6% and its market share decreased 0.4 of a point to 1.5%. Full Throttle sales increased 13% and its market share remained at 0.6 percent. According to Nielsen, for all outlets combined in Mexico, the Energy Drink category increased 21.2% for the month of June 2022. Monster sales increased 26.9%. Monster's market share in value increased 1.3 points to 28.4 percent against the comparable period the previous year.

Speaker 1

Sales of Predator increased 53.1 percent and its market share increased 0.8 of a share point to 4%. The Nielsen statistics for Mexico cover single months, which is a short period that may often be materially influenced positively and or negatively 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 statistics for Mexica. According to Nielsen, for the month of June 2022 compared to June 2021, Monster's retail market share in value increased in Argentina From 46.9 percent to 49.2 percent, Monster Energy continues to be the leading brand in value in Argentina. According to Nielsen, for the month of June 2022 compared to June 2021, Monster's retail market share and value increased in Brazil from 35 point 7% to 39.9%.

Speaker 1

Monster is now the leading energy brand in value in Brazil, marking another important milestone for our brand in South America. In Chile, Monster's retail share for the month of June 2022 decreased from 41.9% to 38.1 This 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 The same period the previous year grew from 25.8% to 31.6% in France From 27.8 percent to 32.1 percent in Norway and from 37.6 percent to 39.7% in Spain. According to Nielsen, in the 13 week period until the end of June 2022, Monster's retail market share in value as Compared to the same period the previous year grew from 15.3% to 16% in Belgium, from 15.1% to 15.4% 19.8% in Poland. Monster's retail market share in value as compared to the same period the previous year Declined from 20.5 percent to 20% in South Africa. According to Nielsen, in the 13 week period ended June 19, 2022, Monster's retail market share in value as compared to the same period the previous year grew from 14.5% to 15.6% in Sweden.

Speaker 1

Monster's retail market share in value as compared to the same period the previous year declined from 8.5% to 6.6 According to Nielsen, in the 13 week period until the end of May 2022, Monster's retail market share in value as compared to the same period the previous year Grew from 15% to 17.5% in the Czech Republic and from 37.9% to 38.7% in Greece. Monster's retail market share and value as compared to the same period the previous year declined from 30.1% to 28.3% in Italy. According to Nielsen, in the 13 week period ending May 22, 2022, Monster's retail market share in value as compared to the same period the previous year Grew from 25.7 percent to 27.5 percent in Denmark. According to Nielsen, in the 13 week period Until the end of May 2022, creditors retail market share in value as compared to the same period the previous year grew from 17.1% to 26.8 percent in Kenya and from 8.1% to 15.4% in Nigeria. According to IRI in Australia, Monster's market share in value for the month ending July 3, 2022 increased from 13.2% 14.2% as compared to the same period the previous year.

Speaker 1

Mother's market share in value decreased from 11.5% to 10.2% The market share of the company's brands in Australia for the month ended July 3, 2022 decreased from 24.7 percent to 24 point 5%. According to IRI in New Zealand, Monster's market share in value for the 4 weeks ended July 10, 2022 Increased from 12.4 percent to 12.6 percent as compared to the same period the previous year. Lyft Plus' market share and value decreased from 6.9% to 6.5% and Mother's market share in value decreased from 6.3% to 5.3%. The market share of the company's brands in New Zealand for the 4 weeks ended July 10, 2022 decreased from 25.6% to 24.5%. According to Intaj in Japan, in the month ending June 2022, Monster's market share in value in the convenience store channel As compared to the same period the previous year grew from 50.6% to 56.7%.

Speaker 1

According to Nielsen, in South Korea, In the last month ending June 2022, Monster's market share in value in all outlets combined As compared to the same period the previous year decreased from 61.9 percent to 59.9 percent. 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 the U. S. Were 649,000,000 39.2 percent of total net sales in the 2022 Q2 compared to $546,300,000 Exchange rates had a negative impact on net sales in U.

Speaker 1

S. Dollars by approximately $53,400,000 in the 2022 Q2. Included in reported geographic sales are our sales to the company's military customers, which are delivered in the U. S. And transshipped 13.8 percent in dollars and increased 26.8% in local currencies over the same period in 2021.

Speaker 1

Gross profit in this region as a percentage of net sales for the 2nd quarter was 26.7% compared to 39.8% in the same quarter in 21. Gross profit in the 2nd quarter was impacted by increased freight for imported cans, increased raw material and ingredient costs Gross profit as a percentage of net sales for the quarter was 27.1%. The company is continuing to address the controllable challenges in its supply chain in EMEA. We're also pleased that in the 2022 Q2 Monster gained market share in Belgium, Czech Republic, Denmark, France, Germany, Great Britain, Greece, Norway, Poland, Spain and Sweden. In Asia Pacific, net sales in the 2022 Q2 Decreased 1.1 percent in dollars and increased 8.2% in local currencies over the same period in 2021.

Speaker 1

Gross profit in this region as a percentage of net sales was 40.4% versus 44.4% over the same period in 2021. In Japan, net sales in the 2022 Q2 decreased 9.6% in dollars and increased 3.3% in local currency. Sales performance for the comparable period in 2021 was largely impacted due to COVID-nineteen restrictions in Japan. In South Korea, net sales decreased 5.2% in dollars and increased 3.8% in local currency as compared to the same quarter in 21. Monster remains the market leader in Japan and South Korea.

Speaker 1

In China, net sales decreased 2.1% in dollars 1.8% in local currency as compared to the same quarter in 2021, largely impacted by COVID related lockdowns. 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 1.3% in dollars and 7.6% in local currencies. Sales in Australia and New Zealand were negatively impacted by shipping delays of certain flavors, concentrates and ingredients. Furthermore, sales in Australia were also impacted by severe flooding in that country in the 2022 Q2.

Speaker 1

In Latin America, including Mexico and the Caribbean, net sales in the 2022 Q2 increased 66.7% in dollars and increased 9.7 percent in local currencies over the same period in 2021. Gross profit in this region As a percentage of net sales was 36.4 percent for the 2022 Q2 versus 40.7% in the 2021 Q2. In Brazil, net sales in the 2022 Q2 increased by 82.8% in dollars 63.9 percent in local currency. Net sales in Mexico increased 49.3% in dollars and 49% in local currency In the 2022 Q2, net sales in Chile increased 26.1% in dollars and 45.3% in local currency In the 2022 Q2, net sales in Argentina increased 200.1 percent in dollars and 200 and 9.4 percent in local currency in the 2022 Q2. I will now provide the most recent update on our litigation with Vital Pharmaceuticals, Inc, which I will refer to as VPX, the maker of Bang Energy Drinks.

Speaker 1

In June 2020, Monster Energy Company, which I will refer to as MEC and Orange Bank Inc, a family owned beverage business and the rightful owner of several trademark registrations to the bank marks, Initiated an arbitration against VPX. MEC and Orange Bank alleged that VPX breached a 2010 settlement agreement with Orange Bank That restricted VPX's use of the bank trademark to products that are creatine based or marketed and sold only in nutritional channels, as well as claims that VPX infringed Orange Bank's trademark rights to the bank marks. In April 2022, the arbitrator issued Final award finding in favor of MEC and Orange Bank on all claims. The arbitrator awarded MEC and Orange Bank 175,000,000 To remedy VPX's past misconduct as well as attorney's fees and costs, which amounted to nearly $9,300,000 The arbitrator also ordered VPX to pay MEC and Orange Bank an ongoing 5% royalty on all future sales of VPX Bang's energy drinks and other Bang branded products. Pursuant to the terms of the agreement between MEC and Orange Bank, the award and future royalties will Shared equally between MEC and Orange Bank.

Speaker 1

On July 1, 2022, the United States District Court for the Central District of California Granted MEC and Orange Bank's motion to confirm the arbitrator's award and denied VPX's motion to vacate the arbitrator's award. MEC and Orange Bank have requested that the court enter final judgment. On July 28, 2022, VPX filed a notice of appeal to the United States Court of Appeals for the 9th Circuit. The company will not recognize the award or royalties until such time as they are realized or realizable. Yesterday, the United States Court of Appeals for the 11th Circuit issued a ruling affirming the decision of the United States District Court in the Southern District of Florida, in which the District Court rejected VPX's claim that MEC's line of RAIN Energy Drinks infringed the trade dress of its line of Bang Energy Drinks.

Speaker 1

MEC's lawsuit against VPX for false advertising, unfair competition and misappropriation of trade secrets in The Central District of California is still pending with trial scheduled to begin later this month. As this litigation and other pending proceedings with VPX As a duty Kay, I will not be answering any questions on those matters on today's call. The first alcohol based product line That we plan to launch since the acquisition of Kanaki will be a full bodied flavored malt beverage that will be launched late in the 2022 Q4 under the brand name, the Beast Unleashed. Beast Unleashed will leverage Monster's brand equity, While carving out its own unique space in the beverage alcohol sector and will be distinguishable from the many hard seltzer brands that have become So ubiquitous over the last several years. The Beast Unleashed will have a 6% alcohol content by volume and will come in 4 great Tasting bold flavors, which are based on certain of Monster's well known and popular flavor profiles.

Speaker 1

Vista Leach will be launched Through beer distributors in the United States, utilizing a phased state launch approach with the goal of being national by the end of 2023 and will initially be offered in 16 ounce single serve cans as well as a 12 can variety pack in 12 ounce sleek cans. Our alcohol innovation pipeline is robust with a number of additional innovative product lines currently under development. We look forward to sharing news of such additional alcohol beverage products at a later date. We're excited about the planned launch of our new Monster Energy 0 Sugar In the 2022 Q4, initially in the United States, Monster Energy 0 Sugar was specifically developed product will provide to our Monster consumers who have come to enjoy the unique taste profile of our original Monster Green flavor, which remains our leading flavor. In April of 2022, we launched Pure North Energy Celsas in sleek 355 ml cans in 3 flavors, cucumber, lime, black cherry and grapefruit lemonade in Canada.

Speaker 1

At the end of June 2022, we expanded our core Monster Energy portfolio in Canada by launching Monster Reserve in 2 flavors, watermelon and white pineapple, both in 473 ml cans. In Latin America, we introduced several new energy drinks in our Monster Energy, Predator and Fury product lines in certain Latin American countries in the 20 In April 2022 in New Zealand, we launched Liv plus Watermelon, our 4th Liv plus Flavr. In EMEA, in the Q2 of 2022, we launched Monster Nitro and Monster Assault in a number of countries. In certain countries, we also launched Juiced Monarch and Chaotic during the 2022 Q2. During the 2022 Q2, we also launched additional SKUs of We also launched Predator in Cambodia in July 2022.

Speaker 1

We are planning to introduce the Predator brand in several additional countries In APAC in the second half of twenty twenty two, in Japan, we launched Monster Super Fuel Killer Kiwi and Monster Energy Ultra Sunrise in China. We estimate July 2022 sales, including Kanarki, to be approximately 12.9% higher On a foreign currency adjusted basis, excluding Kanopy, July 2022 sales would have been approximately 16.6% higher Then the comparable July 2021 sales. July 2022 has had one less selling day compared to July 2021. The company had sufficient can capacity and co manufacturing facility capacity across all regions to address demand for July. 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, Distributor incentives as well as shifts in the timing of production, in some instances where our bottlers are responsible for production and unilaterally determine 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 In conclusion, I would like to summarize some recent positive points. 1, the company is increasing its raw material and finished product to better service its customers and ensure availability of its products. 2, our AFF flavor facility in Ireland is now providing a large number of flavors To our EMEA region, enabling better service levels and lower landed costs to our EMEA region. 3, we are pleased with the new additions to the Monster Energy portfolio. 4, we are planning to continue additional launches of our Reign Total Body Fuel high performance energy drinks We are proceeding with plans to launch our affordable energy brands in an additional number of international countries.

Speaker 1

6, we are enthusiastic for the planned launch of the Beast Unleashed, our first flavored malt beverage alcohol product and for the opportunities that the Kanarki acquisition presents. 7, we believe that we will be able to address many of the challenges we have experienced in our supply chain. We consider that certain of the increased costs we have experienced in the quarter may well be transitory. For example, the current cost of aluminum has reduced materially from its recent March highs and we are beginning to see a reduction in fuel and freight costs as well as reductions in the cost of shipping containers and ocean freight. I would like to now open the floor to questions about the quarter.

Speaker 1

Thank you.

Operator

Our first question will come from the line of Bonnie Herzog with Goldman Sachs.

Speaker 3

All right.

Speaker 4

Thank you.

Speaker 5

Your line

Speaker 3

is now open.

Speaker 4

Okay. Thank you. I guess a question on gross margins. I simply don't And really why they were this bad in the quarter? I guess I was under the impression that you were already buying a fair amount of your aluminum cans in the U.

Speaker 4

S. And therefore should have been less reliant on the importation of cans, I guess at least in the U. S. So I thought that was The plan, however, I do see your inventory levels in the quarter went even higher and are almost 3 times the level they were last year. I guess help us understand that and just trying to think through, is this really the right way to manage the business?

Speaker 4

And then Hilton, You mentioned these pressures are transitory or was in the release, but I guess they're not really feeling like it. So When do you guys expect to be 100% buying in the U. S. And EMEA for your supply and really no longer importing aluminum cans?

Speaker 6

Sure. Bonnie, thank you for that question. I think a lot of people probably may want to ask the same question. So Thanks for addressing it early on. We've always taken a stance that objective Is to support our customers and our consumers.

Speaker 6

We went through torrid times in 2020 2021 when we did not have enough Capacity to service our customers and our consumers. We had bought the screaming. We had retailer screaming. And at the time, we made a very conscious effort that we were going to import cans at expensive costs, not in terms of the actual cost of the can, The cost of importing the cans, the container costs, the demurrage, the which you guys called demurrage, the just everything relating To the importation of aluminum cans. So that was an absolute conscious decision.

Speaker 6

As can started arriving in late in 2021, EMEA was the most affected. I think we've had a number of discussions about how EMEA was affected and a substantial number of those cans went into EMEA and we have been consumed over a period of time. It's difficult with our business because we have Promotions from time to time, for example, we've got the Apex Legends promotions now, and the cans that come in are not promotional cans. So They use and they use in production when there's market and market demand. So In EMEA, we stopped importing cans.

Speaker 6

We thought we'd still have to import cans during 2022. We stopped that and There's no longer importation of cans into EMEA in 2022. In 2021, We've had dribs and drabs coming in the U. S. And we will soon be out of those cans as soon as we get over this Apex Legends promotion.

Speaker 6

But in the U. S, the percentage of imported cans And our furnace is very low compared to what it was in the Q2 in EMEA. So, I hope that answers your question. We did it as a conscious effort to support and to supply customers because We're in this business for long term. We're not in this business for the Q2 of 2022.

Speaker 6

We're in this business for long term And it's important to us to ensure that our customers and our consumers continue to have faith in the company's supply Of Energy Products. So is there anything else that I didn't answer that I should have answered, Bonnie?

Speaker 4

But I guess for me, it still begs the question as you're making this conscious decision to keep Have a bigger supply of cans and have elevated inventory. How do we think about that as I assume you're going to work down that inventory now? Is that starting Happen or will happen in Q3 and Q4, and I assume it's very elevated costs. So do we think about these Questions on your gross margin, quite frankly, very much continuing Q3 and Q4. Is that quite

Speaker 7

a bit? No.

Speaker 6

Okay. Great question. As we look at the future, I mean, you know that in cost of sales fuel is coming down. We know that. We know that freight is coming down.

Speaker 6

We're in that every day of our lives. We know that ocean freight is coming down. We know that we've been able now to really diminish the amount Of materials that we're having to airfreight to keep the wheels moving with product that's coming Out

Speaker 1

of the U.

Speaker 6

S. With concentrates, we know that AFF is producing and up and running in Ireland. We know that the percentage of aluminum cans is coming down. We know that aluminum costs are coming down. Aluminum reached a peak.

Speaker 6

See if I can find it just very quickly. The maximum level of aluminum including the Midwest premium was 1.8073 In March on March 7, we buy we were not hedged. The portion that's not hedged It's bought at M-one. So the March cans so the April cans would be based on March pricing. So and we know that aluminum today including let me find that, including the Midwest premium It's $1,136,000,000 So it's come down from peak of $181,000,000 to $136,000,000 So we know that's a fact, right?

Speaker 6

We also know that we built up inventories, which we had to because those inventories we're talking about In 2021, we're just not sustainable. They were just not sustainable. So we built up inventories and we're now able To avoid a lot of the shipping, the freight that's been out of orbit. So you add all of that together. And We don't give forecasts.

Speaker 6

I know when you start giving forecasts, but it's very clear that 2022, the second quarter, As in fact, we had anticipated would probably be our worst quarter in terms of margin. But I just want to stress again That we are in business for the long term and we're supporting our customers and our business in the long term.

Operator

Your next question comes from the line of Andrea Teixeira with JPMorgan.

Speaker 3

Hi, good afternoon. Thank you. On the same topic, and I tried to do The phasing of the cost pressures and the pricing, we just say pricing both domestic international would be like that mid single digit And could probably cover about a third of this $250,000,000 that you quoted. And then you have, of course, and I appreciate the breakdown that you Gabe, you can phase out some of these higher costs for aluminum, also the $67,000,000 that you said to bring cans imported. So would you end up to about from the $250,000,000 to about $100,000,000 to $150,000,000 in pressures into the Q4?

Speaker 3

I want to check that. And then On the Monster 0 Sugar, congrats on that. Should we think like we obviously have seen Coke 0 Sugar Recruit new consumers into the category, are you thinking how incremental that could be against Ultra? I'm assuming, As Rodney said, it attracts the need state for the typical Monster consumer because of the taste profile And also because of the packaging, I'm assuming more masculine and more into the core consumer. Is that fair?

Speaker 3

Do you have new shelves coming in? How much Support you believe you can give to the launch? Thank you.

Speaker 6

Okay. So those were two questions, the whole one. I'll start with the first one. So we don't give guidance. And what I've tried to do on this call Is give some direction.

Speaker 6

That's what we are seeing. That's what we are seeing is coming down. It's not going to happen overnight, Because there are costs in the system that will take their time to work through. So in principle, Since we don't give guidance, I've given some general direction, which I hope you'll find helpful and the other analysts We'll find helpful in analyzing where we go from here. But I just want to repeat yet again That we're in this business for the long term.

Speaker 6

We're in this business to support our customers. And yes, maybe we did take a hiccup In gross margin in the Q2 of 2022, but there have been a lot of other cost pressures including imported cans, imported cans being one of them, But at least we were able to bring our inventories back to a situation where we're able to service customers and we're able to service consumers. Look, it will be a terrible situation when our price goes up in September 1 and we don't have sufficient inventories to satisfy demand. I mean, that would just be the end. So, we've done our very best to stay on track And to work within a very, very difficult supply chain environment.

Speaker 1

Perhaps thanks. First of all, I could address the second part on the actual Zero Sugar. I think that we've had 0 sugar products. We have the full ultra line. We have low carb and absolutely 0.

Speaker 1

But none of them have been really an analog of our original Monster Green. The original Monster Green flavor, which we've had now for over It's still our leading product pretty much in every country around the world. Consumers do want a choice. And as consumers, I think, get a little older, They do start looking to a for a sugar 0 sugar or sugar free alternative, but would obviously like to Stay in the same franchise with the same product, with the same personality. It's in a black can with a sort of green claw.

Speaker 1

And so we feel there is a way to A, increase the franchise to bring additional consumers Who really want that original Monster flavor, but in a 0 Sugar and also to retain and broaden our existing consumer base as we bring younger They tend to not be as worried or concerned about the sugar content. As you get a little older, I think sugar content does become Nishu, there are also in many countries around the world, they've started to tax products with sugar, have label requirements. So We think that by having an offering our original Green Monster in a sugar free, a 0 Sugar version With a very similar can, it's distinguishable, but very similar with as I said, it still has the same personality and image. We believe we will further entrench our consumer base and expand it for many years to come. So we think this is a very important Development in an important way, we can continue to solidify and make Monster and keep it unique because the Monster flavor is its own unique flavor That is so popular and we would like to continue to expand on it and build on it.

Speaker 1

So the plans are to obviously roll this out After the U. S. Very extensively.

Operator

Your next question comes from Mark Astrachan.

Speaker 5

Yes. Hey, afternoon, guys. I guess I'm going to ask one question in 2 parts, but I swear it's related. So The first one, Hilton, I mean, obviously, I get everybody gets what you're saying about guidance, what you're saying about cost pressures. I just think it would be immensely helpful based on just the commentary that I've been getting from folks or feedback from your shareholders, And if you could give sort of magnitude around, I think that would be helpful.

Speaker 5

But the related and more serious question is, You have a lot of volatility historically in gross margin. And I've asked this question before, but I'm curious given The current environment, how you think about whether you want to do more with the Coke system from a procurement standpoint, potentially manufacturing through their co packers in the U. S. Or their bottlers in And has there been any sort of change in how you might be thinking about that given obviously what's happened over the last, Call it 12 months where you would have less to worry about, I suppose, if you were working with them more closely.

Speaker 6

Yes. So With regard to your first point, I think I've already answered that. I believe that the second quarter is probably we're probably going to see The lowest margin in the year. And as regards Better direction than that, Mark. We just don't do it.

Speaker 6

We just don't give guidance. So that's the first point. And then on the second point is, we're really not sure and we've had discussions with our distribution partner on a number of issues. And we're not sure that further Engagement with them on any of these topics would be positive, but Positive in terms of lowering cost of sales, but we are continuing to have those discussions. And if it makes sense, then Definitely, we definitely will.

Speaker 6

I don't want to disclose too much, but one of our partners In Europe, that is actually part of the Coca Cola system, did not fare better in curing cans than we were able to. So I just want to just put all of this in perspective that it's not necessarily a panacea.

Operator

Your next question comes from Peter Grom with UBS.

Speaker 8

Hey, good afternoon, everyone. Hope you're doing well. I guess I'll ask about top line, I guess. So Rodney, Hilton, I guess I just wanted to ask about Bang. Like what are you seeing there in terms of shelf space?

Speaker 8

And kind of what do you expect As they kind of transition distributors and I guess do you see a potential opportunity for you to capture some of that incremental shelf space?

Speaker 6

I think that So generally in transitions, there's always upheavals, okay? It's Transitions never happen cleanly overnight. There's always upheavals. And remember That Bang is in a lot of the Pepsi shelf space and a lot of the Pepsi Cooters. And despite that, You guys have seen the shares decrease over the last 24 months or so.

Speaker 6

So, I don't want to say any more than that. I'm not sure if Rodney wants to say any more. But I would say that, Obviously, we and we continue to grab as much shelf space as we can. We contract for a lot of our own shelf space And we work with the Coke bottlers. And then Van, on the other hand, would work in with the Pepsi space and with the Pepsi coolers.

Speaker 1

Yes. Just to build slightly, I mean, the if bank transitions out of the Pepsi coolers you have, you're You're all aware of the announcement that Celsius, who's been trying to secure and has been securing additional shelf space We'll go into the Pepsi system. So there will be a lot of fighting going on. There's the Ghost brand, Lonnie Yu To a lesser degree and C4. So you've got all of these sort of performance brands Basically fighting for some more shelf space.

Speaker 1

And obviously, we will do the same. So There will be a lot of transition going on and we believe that we're obviously focused on that as well and our own brands and

Operator

Your next question comes from Kummil Rajwaal from Credit Suisse.

Speaker 8

Hi, guys. One of the things we've been watching Hi, hi, Hilton. We've been watching carefully about the impact on inflation on the consumer As with gas prices and stuff, it doesn't seem like we've seen a slowdown at all. I'm curious What you're observing and maybe if you've done any test in markets like maybe Midland Texas or Phoenix or some of those markets where

Speaker 6

So What I'd like to comment on is, 1 retailer and we're not going to mention who they are In terms of their own schematics and their own structures, we went early on the price increase. They rolled out early And not only with us, but with the competition as well. And they have seen no reduction in sales based on that action. So what we are seeing anecdotally is Continuation of the growth in the category, yes, it has slowed somewhat. But look in Europe where the categories have got older, the Growth has been escalating there faster than in the U.

Speaker 6

S. So we've seen that and now we've seen the other Concern may be abating. Everyone is asking questions about gas prices and will gas prices Affect the consumption of energy drinks. And frankly, we said at the time that when we've seen high Gas prices in the past, no, they hadn't affected the sale of energy drinks and we've seen gas prices now coming down. Slowly but surely, they're coming down.

Speaker 6

So I think that that maybe answers your question as well.

Operator

And our final question for today's Q and A will come from Charlie Higgs with Redburn.

Speaker 7

Hi, Josh and Rodney. Thanks for the question. Hey, I was wondering if you could talk a bit about the price increases you put through in your international markets and what the response is there? And then maybe if you could just touch on the scope Of the price increases you're planning for in H2 2022, maybe just some information on what countries and what products would be very useful, please?

Speaker 6

Yes. There's a range of countries that we took prices in the first half of twenty twenty two either directly in Price increases all through a reduction in promotions. And we've seen an uplift, In fact, in the quarter already of the impact of those price increases as regards the 2nd 6 months, there's really a list of countries and I don't think we've got the time to go through them now. But there's a list of countries where we will be taking further price increases where we can. For example, in France, you cannot if you've gone if you've had one price Increase in a year, you cannot go with the second price increase.

Speaker 6

So there's a range of different countries where we will be taking Price increases Brazil, we took price increases earlier this year. Chile, we took a price increase earlier this year. So we've been doing this On a consistent basis, not to profiteer from inflation, but really to mitigate the whole cost in the system as So you guys will appreciate.

Speaker 1

Thank you. On behalf of Monster, I would like to thank everyone for their continued interest in the company. We continue to Company, Buzz at Home and abroad, and in particular expand distribution of our products through the Coca Cola bottling system internationally. We believe that we are well positioned in the beverage industry and continue to be optimistic about the future of our company.

Operator

This concludes Monster Beverage Second Quarter 2022 Conference Call. Thank you for attending today's presentation.

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Dollar General Q2 2022
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