Good afternoon, and welcome to the Monster Beverage Company Fourth Quarter 2023 Conference Call. All participants will be in listen-only mode. Please note this event is being recorded. I would now like to turn the conference over to Rodney Sacks and Hilton Schlosberg, Co-CEOs. Please go ahead.

Thank you very much. Good afternoon, ladies and gentlemen. Thanks for attending this call. I am 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 Kelly will now read our cautionary statement.

Before we begin, I would like to remind listeners that certain statements made during this call may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended, and are based on currently available information regarding the expectations of management with respect to revenues, profitability, future business, future events, financial performance, and trends. Management cautions that these statements are based on our current knowledge and expectations and are subject to certain risks and uncertainties, many of which are outside the control of the company that may cause actual results to differ materially from the forward-looking statements made during this call. Please refer to our filings with the Securities and Exchange Commission, including our most recent annual report on Form 10-K filed on March 1, 2023, and quarterly reports on Form 10-Q, including the sections contained therein entitled Risk Factors and Forward-Looking Statements for a discussion on specific risks and uncertainties that may affect our performance. The company assumes no obligations to update any forward-looking statements whether as a result of new information, future events, or otherwise. Before I turn the call over to Rodney Sacks, I would like to mention a clerical error that we had with the filing of our most recent press release that was filed just within the last half hour. Under the income statement section, under the 3 months ended December 31, 2023, the amount reported as gross profit of $983,372,000 should have been $938,372,000. Aside from that clerical error, all other numbers on the press release are correct. I would now like to hand the call over to Rodney Sacks.

Thank you, Tom. The company achieved record fourth quarter net sales of $1.73 billion in 2023, which is 14.4% higher than the $1.51 billion reported in the same period in 2022, and 16.1% higher when adjusted for foreign currency. The gross profit margin for the fourth quarter of 2023 was 54.2%, up from 51.8% in the fourth quarter of 2022. However, the Bang Inventory Step-Up negatively impacted gross profit by approximately $5 million in the fourth quarter of 2023. Excluding this impact, the gross profit margin would have been 54.5%. The increase in gross profit margin compared to the previous year was mainly due to effective pricing actions, reduced freight-in costs, and lower input costs. We will also address impairment charges of about $39.9 million related to the Alcohol Brands segment in the fourth quarter of 2023, which were partly due to ongoing challenges in the craft beer and seltzer markets. These are termed alcohol impairment charges, affecting certain non-amortizing intangibles and properties acquired from the CANarchy transaction. Operating expenses for the fourth quarter of 2023 were $504.4 million compared to $390 million in the fourth quarter of 2022, inclusive of the alcohol impairment charges. Operating expenses as a percentage of net sales rose to 29.2% from 25.8% in the previous year. Excluding the alcohol impairment charges, operating expenses were 26.8% of net sales. Distribution expenses for the fourth quarter of 2023 amounted to $79.6 million or 4.6% of net sales, compared to $76.1 million or 5% in 2022. Operating income increased by 10% to $434 million from $394.4 million a year prior. Adjusted operating income, factoring in the Bang Inventory Step-Up and alcohol impairment charges, grew by 21.4% to $478.9 million. The effective tax rate for the fourth quarter was 18.5%, down from 23.3% in 2022, primarily due to an increased stock compensation deduction. Net income rose 21.6% to $367 million, compared to $301.7 million in the same quarter last year. Net income adjusted for the Bang Inventory Step-Up and alcohol impairment charges increased 33.1% to $401.5 million. Diluted earnings per share for the fourth quarter improved by 22.3% to $0.35 from $0.29 in the fourth quarter of 2022, and adjusted diluted earnings per share was $0.38, reflecting a 33.8% increase. The company has introduced price increases in the first quarter of 2024 for certain international markets and is exploring further pricing initiatives in the U.S. and abroad. We maintain our market share leadership in the energy drink sector across all U.S. outlets for both the 13-week and 4-week periods ending February 17, 2024. As reported by Nielsen, energy drink category sales rose 5.5% year-over-year in the same timeframe. Excluding Bang, our energy brands saw sales rise by 0.9%, while Monster declined by 0.7%. However, Reign saw a significant rise of 21.6%, while NOS and Full Throttle also reported gains. For the 4-week period ending February 17, 2024, dollar sales in the energy drink category within convenience and gas channels increased by 3.7%. Despite a slight dip for our energy brands excluding Bang, Reign and NOS experienced notable increases, demonstrating resilience in the market. Looking at market share in the convenience and gas channel, we observed slight decreases for Monster and increases for Reign and NOS. Market share figures for competitors are as follows: CELSIUS at 8.1%, C4 at 3.5%, 5-Hour at 3.4%, Rockstar at 3.2%, and GHOST at 2.9%. The coffee and energy drink category, which includes our Java Monster line, saw a decline of 10.3% in sales over the past year. Java Monster's sales dropped by 4.6%, while Starbucks Energy saw a decrease of 16.9%. Despite these challenges, Java Monster maintained a market share of 58.2%. Looking globally, Quebec and the energy drink category in Canada saw an increase of 9.2% in dollar sales. Our energy drink brands in Canada experienced an 8.6% increase in sales, although market share declined slightly to 41.3%. In Mexico, the energy drink market grew by 10.9%, with our Monster sales increasing by 10.5%. Nevertheless, we saw a minor decline in market share to 29.4%. Notably, our brands performed exceptionally well in certain regions; in Brazil, sales surged 33.6%, while in Argentina, we saw a staggering 178.2% increase amid hyperinflation. This positions Monster as the leading energy brand across Argentina, Brazil, and Chile. In Europe, we noted increases in market share across several countries. The retail environment in Australia and New Zealand showed promising growth trends, with notable increases in our market share. Initiatives to launch new products continued in 2024, with several key innovations rolling out across our markets. We also executed share repurchases amounting to $43.2 million in the fourth quarter of 2023. Looking ahead, January 2024 sales showed a 20.5% increase compared to the same period last year, and we remain cautious about interpreting short-term sales data as representative of long-term performance. In conclusion, I'd like to summarize some recent positive points. One, the energy category continues to grow globally. Two, we are pleased to report that our pricing actions have not significantly impacted consumer demand. Three, 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. We are in the process of constructing a juice facility at our AFF flavor facility in Ireland. We have a robust innovation plan for 2024. The Beast Unleashed is performing to expectations. We're excited for Nasty Beast Hard Tea as well as the additional alcohol opportunities that Monster Brewing Company presents. 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 additional countries internationally. We are excited about the opportunities that the acquisition of the Bang Energy brand presents to us and believe that the brand will fit well within our broader portfolio of energy drink brands. And lastly, the company achieved record fourth quarter net sales of $1.73 billion in the 2023 fourth quarter, 14.4% higher than net sales of $1.51 billion in the 2022 comparable period and 16.1% higher on a foreign currency adjusted basis. I would now like to open the floor to questions about the quarter and the 2023 year. Thank you.

Our first question today is from Peter Grom with UBS. Please go ahead.

Thanks, operator, and good afternoon everyone. Hope you're doing well. So I wanted to ask a question specifically on gross margin. Clearly, the quarter came in a bit better relative to some of the commentary from the investor meeting. Maybe first, did something surprise you in the quarter? And then second, just going back to that same commentary from the investor meeting, there seemed to be a lot of optimism that the gross margin trajectory would improve nicely from 4Q looking out to '24. I know you don't give guidance specifically, but just any thoughts on how we should think about the margin trajectory given the very strong exit rate? Thanks.

So I think at the Investor Meeting, as I recall, we already spoke about 2023 Q4. As you know, we don't give guidance, and we really do try not to give guidance. So if I could just talk about Q4 for a minute, Q4 was strong. But there were a number of really nonrecurring items included in GP in Q4, mainly related to true-ups of various promotional items, and various true-ups with partners, as well as some rebate programs. So looking at Q4 of 2023, I would say to you that on an ongoing basis, Q4 came up very much in line with what we expected, which was an increase over Q3. And it's at the level probably of about 53.5% on a kind of standalone basis excluding these nonrecurring items.

The next question is from Filippo Falorni with Citi. Please go ahead.

Hey, good afternoon, guys. I wanted to ask you about the energy drink category in the U.S. We've seen a bit of a slowdown in January. How much do you think it was the weather? How much do you think were some other external factors affecting the consumer? And then maybe you can comment a bit on market share trends in the U.S. We've seen a little bit of pressure on the core Monster brand. So any color you could give would be helpful.

Yes. Firstly, I believe the weather played a role. Additionally, we have many non-measured channels. If you listened earlier in the call, the sales in January were quite impressive. Furthermore, Nielsen does not capture everything, and there were notable developments in January, such as a major club store that is significant but not included in Nielsen's data. Looking back to January 2023, we experienced strong increases, primarily due to the successful launch of two brands: Monster Zero Sugar and Ultra Strawberry Dreams. You may have heard that our innovation efforts for 2024 began in February and will continue through March, so we didn't benefit from that earlier in 2023. These are all factors to consider when assessing the perceived slowdown in Nielsen volumes. Additionally, we have several important resets coming up, starting from January into the early part of the second quarter. We expect significant increases in shelf space for our existing brands, the new SKUs we are about to release, and the Bang brand, which several retailers are reinstating after previously discontinuing it due to litigation issues. We anticipate seeing the benefits of this starting in the first quarter and continuing into the second quarter.

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

Thank you, operator. You mentioned that you are still exploring opportunities for pricing in the U.S. What is holding you back from making a pricing announcement now? We noticed that a key competitor announced their pricing during our last meeting in New York. You also mentioned looking at the impact of elasticities, and it seems things have been moderately positive. Is there a specific reason for the delay? Additionally, Hilton, when you referred to a normalized gross profit margin of 53.5%, should we expect margins to continue improving from this point? The high 50s is still below your pre-pandemic margin of 60. Are there any reasons these new plans might not scale up as quickly or any structural factors that could keep you under the high 50s?

No, the only structural reason is we don't give guidance. That's the only structural reason I can think of. Obviously, we're working on margins. I'm proud to say that the Midwest premium and aluminum, which is one of our costs, are coming down. But against that, we've said that we have increases in other commodities and other pricing. So we're bringing up our own manufacturing facilities and doing whatever we can to improve gross profit percentages. But we don't give guidance, and I don't know what's going to happen with freight, for example. We had a good benefit from freight-in this last quarter, and I'm not sure what is going to happen as we look forward into 2024 and the implications of the election and everything else. So that's about that. And then on pricing, we're taking pricing in a number of markets internationally. We've taken pricing in January in a number of markets. We're moving through with an aggressive price increase program internationally. As regards to the U.S., we really are just waiting and evaluating. We run a very sizable business here. We have a number of customers that we deal with. We want to make the right decision. So we're not saying no to a price increase, and we're not saying yes to a price increase this time. What we are saying is that we are really evaluating the retail pricing environment. If we believe there are opportunities, we will take them.

The next question is from Dara Mohsenian from Morgan Stanley. Please go ahead.

Hi, guys. Good afternoon. So the comments on some of the U.S. performance were helpful. Just given the strength of that global January number, can you spend some time discussing what you're seeing internationally in terms of category growth and your market share progression? Any thoughts on maybe key expansion plans internationally in terms of some of your key brands and how we should think about that for 2024? Thanks.

So, Dara, on the call, we did talk about progress internationally in very great detail. I think sometimes we give far more detail than we should, but we do. We gave market shares in various countries we indicated the new product innovations that are going to happen throughout our international territories, and I'm not sure what other part of your question we possibly have an answer. And I don't mean to be disrespectful. I just feel that a lot of your question has been covered. Rodney, I don't know if you've got anything to add.

No. The international markets have been somewhat inconsistent, but generally performing well. There was a slight slowdown in Asia Pacific, and we are taking steps to encourage growth. We are significantly established in those markets, which have been relatively flat. However, there are great opportunities emerging in some international markets, particularly in China and India. We are at the start of a growth phase in India, focusing on both Monster and Predator. Overall, it's mixed—some markets have experienced fluctuations, but we are seeing growth in most regions, which is very promising. Additionally, despite the Nielsen numbers, we continue to experience good growth in the U.S. as seen in our January results.

The next question is from Steve Powers with Deutsche Bank. Please go ahead.

Yes. Hey, good afternoon, guys. Two questions for me, if I could. The first one is just on G&A expenses in the quarter. They were up a lot relative to our expectations of almost 25% in the fourth quarter. Just anything to unpack there and anything anomalous in that number?

Yes, we discussed the impairment charges of $40 million this quarter related to the Alcohol Brands.

Yes. Sorry, I'm excluding that. It's still up a lot, excluding the impairment charges.

We'll look at that, but it's not what I've been seeing.

Okay. The second question is, in January, you highlighted plans just to step up focus on in-market execution in the U.S., specifically commercialization around placing of the full portfolio and innovation. Just any update you can share on progress made and cooperation you're getting from the Coke system on that effort?

I believe this is not a simple issue to resolve. It's an ongoing process, and we are collaborating with the Coke bottlers to enhance our execution. As I mentioned earlier, we are launching several new products, with the new sets set to roll out in the first quarter starting in February and continuing into the second quarter. I think you will notice a different positioning in our upcoming report compared to our current status.

The next question is from Mark Astrachan with Stifel. Please go ahead.

Yes. Hey, afternoon guys. I wanted to go back to international because I feel like it's one of those things that doesn't get the credit that's due, right? You built nearly a $3 billion run rate business at this point. And I think from the outside, it's a little bit hard to get a sense of what's going on there. So not necessarily to Dara's question, but maybe talk to some of the dynamics in terms of the number of SKUs that you have on shelf, not obviously by country, but broader strokes of the opportunity you have to still develop your portfolio within those markets? How much opportunity is there broadly to develop the energy category? And sort of related to that, margins have improved, but they're obviously still a lot lower than your domestic margins, both gross margin and EBIT margin in that international business. How do you think about improving that over time? Is that possible relative to current levels? And how do you think about the progression of that?

We have consistently highlighted that internationally, we face strong competition primarily from Red Bull. We maintain a pricing strategy that aligns closely with Red Bull's pricing, as deviating from this often results in a significant loss of market share. Our partnerships with Coca-Cola provide some structure, but we also have a pricing ceiling to consider. While we strive to enhance gross margins, there are challenges in achieving those margins in certain areas. I have noted previously that reaching the gross margin levels we've achieved in the U.S. may be quite challenging on an international scale. For instance, in EMEA, there was only a 1% increase in margins in the fourth quarter. Improving margins remains a constant struggle, especially considering the market dynamics we face.

This concludes, please continue, sir.

Sorry, I just finished the other part of the question that Mark had raised just before we sign off. Just to talk about the international opportunity, I think what Mark is alluding to is correct. In many markets, the international markets have really followed the U.S. We have a far broader portfolio in the U.S. Innovation continues from year to year. The benefit that the international markets have is they see what we've introduced in the U.S. and the large number of additional SKUs and literally brand families we have in the U.S. They are able to try and look to those and try and introduce selected SKUs, which gives them a very large runway. In some markets, the runway is focused on the Monster premium brands. In some markets, growth is coming from an affordable sector. That is where we are starting to grow brands like Predator in many international markets, and that will help us continue to see growth. Predator also has a lot of depth. We are launching Predator in China this year and just launched it in India in cans. We're now just rolling out PET in India. We are trying to address some volume production issues because there's not a lot of availability, but that will sort itself out reasonably soon. We see enormous opportunity once we get some availability for production in PET for PET in India. So there are a lot of opportunities, but they vary from market to market and continent to continent. As you know, we've just recently launched, for example, in Egypt, and we launched both Monster and Predator. Predator's quickly made a name for itself as a growing brand. We have these opportunities in different countries around the world. We are quite excited about seeing that. As I said, we did have some slowdown in some of the more developed countries in Asia. The category slowed, but we are taking steps to address and introduce more and different innovation in those markets to grow them. We look forward to having a really attractive runway around the world for us.

This concludes our question-and-answer session. I would like to turn the conference back over to Rodney Sacks for any closing remarks.

On behalf of Monster, 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 continuing to innovate, to develop and differentiate our brands and to expand the company both at home and abroad, and in particular, capitalizing on our relationship with the Coca-Cola bottler system. We believe that we are well-positioned in the beverage industry and continue to be optimistic about the future of our company. We hope that you remain safe and healthy, and thank you very much for your attendance.

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