怪物飲料 (MNST) 2016 Q1 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Monster Beverage Corporation first-quarter 2016 financial results.

(Operator Instructions)

As a reminder, this conference call is being recorded. I would now like to turn the conference over to Rodney Sacks, Chairman and CEO. You may begin.

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

Before we begin I'd 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 which 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 February 29, 2016 including the sections contained therein entitled risk factors and forward-looking statements for a discussion on specific risks and uncertainties that may affect our performance. The Company assumes no obligation to update any forward-looking statements, whether as a result of new information, future events, or otherwise.

An explanation of the non-GAAP measure of gross sales and certain expenditures which may be mentioned during the course of this call is provided in the notes designated with asterisks in the condensed consolidated statements of income and other information attached to the earnings release dated April 29, 2016. A copy of this information is also available on our website at monsterbeveragecorp.com in the financial information section.

At the outset I should mention that the release of our quarterly results and this call are almost a week earlier than normally scheduled. The reason for this change is that Hilton and I will be attending the Coca-Cola Global System Meeting that starts early next week. We will revert to our normal schedule for the second and subsequent quarters.

We're continuing to make good progress in the implementation of our strategic alignment with Coca-Cola bottlers worldwide. We have successfully concluded negotiations with Coca-Cola bottlers in many countries, and are planning to launch Monster with these bottlers in most of their international markets in the near future. As previously reported, we have concluded agreements with Coca-Cola Amatil, which distributes Coca-Cola products in Australia, New Zealand, Indonesia, Papua New Guinea and Fiji. We will be launching Monster in Australia on May 1 and in New Zealand on May 9 with Coca-Cola Amatil.

Additionally as previously reported we have concluded agreements with BIG, the 100% owned Coca-Cola bottler that operates in a number of international markets, for the distribution of Monster in certain of these markets. Further to these agreements we are planning to launch Monster on May 13 in Singapore. Our plans to launch Monster in China are continuing to move forward with the Coca-Cola system. In Shanghai we have received the required product approval and manufacturing license, and are planning for production of Monster there. In Beijing we have received the required product approval and are awaiting the manufacturing license. We have commenced the required approval process in Xiamen in Southeast China. We are still planning to launch Monster in China later this year, but as previously discussed the launch could be delayed by various factors including regulatory approvals and finalization of distribution agreements.

We are targeting a relaunch of Monster in India later this year following discussions with the regulatory authorities. We continue to make good progress in our discussions with FEMSA, Arca and other bottlers operating in South America. We have signed a distribution agreement with the Coca-Cola bottler Lindley, which is controlled by Arca, for distribution of Monster in Peru and are planning to launch Monster in Peru on June 2. We're also planning to launch or transition a number of international markets to Coca-Cola bottlers in the ensuing quarters. We continue to make good progress in the repositioning, repackaging and reformulation of many of the Coca-Cola energy brands that we were acquired as a result of the Coca-Cola transaction.

We successfully completed our acquisition of the concentrated flavor business operated by American Fruits & Flavors for $690 million in cash on April 1, 2016. We remain excited by this acquisition, which aligns us with our principal flavor supplier and will enable us to expand and secure most of our flavors at an economical cost. The integration of the acquired business is proceeding well.

Consistent with the company's previously announced plan to return capital to shareholders, in 2016 the Company currently intends to commence a tender offer in May to purchase up to $2 billion in value of its common stock through a modified Dutch auction tender offer at the price range to be specified. The Company will fund the tender offer with cash on hand.

In the first quarter, sales in the beverage industry in general and of carbonated beverages in particular continued to show weakness. However, sales of Monster products accelerated during the quarter. In the first quarter of 2015 in anticipation of the closing of the Coca-Cola transaction we transitioned approximately 84% of the targeted distribution rights in the US to the Coca-Cola system, with an additional 5% transitioned in May 2015. Consequently, the results of the comparable first quarter of 2015 were impacted by the acceleration of deferred revenue of $39.8 million, distribution termination costs of $206 million, and Coca-Cola transaction costs of $3.6 million. Our ensuing discussion compares our 2016 compares first-quarter results with our 2015 first-quarter results after adjustment for the acceleration of deferred revenue, distribution termination costs, and Coca-Cola transaction costs referred to above.

In the first quarter the Company achieved gross record sales of $777.5 million, up 16% from $670.4 million in the first quarter of 2015. Net sales were $680.2 million up 15.9% from $587 million in the first quarter of 2015. Net sales in the first quarter were adversely affected by unfavorable changes in foreign currency exchange rates of approximately $12.3 million.

Our original green energy drink, Monster energy drink, continued to perform well at retail. Retail sales of the Ultra Line continued to show good growth in the United States during the first quarter, as did our Java Monster line. Gross profit as a percentage of net sales was 62.2% as compared to 56.1% for the comparable 2015 first quarter. The increase in gross profit as a percentage of net sales was largely attributable to increased net sales of the concentrate segment, which has higher gross margins than the finished product segment, the disposable of our non-energy brands and the price increase in our 16-ounce Monster energy drinks effective August 31, 2015.

Distribution costs as a percentage of net sales were 3.4% as compared to 4.4% in the same quarter last year. Selling expenses as a percentage of net sales were 10.2% compared to 10.6% in the same quarter a year ago. Sponsorship and endorsement costs, merchandise display costs, and social media expenses were all higher in the first quarter as compared to the first quarter of 2015, while commissions were lower. General and administrative costs, excluding distributor termination costs and Coca-Cola transaction costs, as a percentage of net sales in the 2016 first quarter were 10.6% as compared to 10.8% for the corresponding quarter in 2015.

Payroll expenses were up $1.5 million consisting of a $5 million increasing payroll due partially to increased offering in connection with our acquisition of the strategic brands and an increase in stock-based compensation, a non-cash item of $3.7 million, which were offset by a reduction of payroll taxes of $7.2 million following the exercise of certain stock options in the first quarter of 2015. Also including general and administrative costs is amortization of trademarks, a non-cash item of $1.8 million attributable to our acquisition of the strategic brands.

Distributed termination costs were $3.4 million in the first quarter as compared to $206 million in the 2015 first quarter. Regulatory matters and litigation concerning the advertising, marketing, promotion, ingredients, usage, safety, and sale of the Company's products were $5.4 million in the 2016 first quarter as compared to $4.9 million in the 2015 first quarter. In addition, other legal costs were $2.4 million higher for the 2016 first quarter.

Our effective tax rate decreased from an adjusted 38% to 35.8% in the first quarter, primarily due to the domestic productions deduction. On an ongoing basis we expect that our normalized tax rate will be approximately 36%.

Net income was $166.1 million compared to net income of $110.8 million during the first quarter of last year, an increase of 49.9%. However, despite the substantial increase in the number of shares on a fully diluted basis from 173.8 million to 206.9 million following the issuance of shares to Coca-Cola, diluted earnings per share increased to $0.80 after adjusting for distributed termination expense for the first quarter from $0.64 in the 2015 comparable quarter.

Gross sales to customers outside the United States were $184.4 million in the 2016 first quarter compared to $141 million in the corresponding quarter in 2015. Net sales to customers outside the United States were $149.1 million in the 2016 first quarter compared to $113 million in the corresponding quarter in 2015. As stated earlier, gross sales and net sales to customers outside the United States were higher in local currencies by approximately $15.1 million and $12.3 million respectively, including geographic sales reported or our sales to the Company's military customers which are delivered in the United States and trans-shipped to the military and the customers overseas.

According to the Nielsen reports for the 13 weeks through March (technical difficulties) 2016 for all outlets combined, namely convenience, grocery, drug, mass merchandisers sales in dollars in the energy drink category including energy shots increased by 7.1% versus the same period a year ago. Sales of Monster grew 10.8% in the 13-week period while sales of NOS increased 2.5% and sales of Full Throttle decreased 9%. Sales of Red Bull increased 4.1%. Sales of Rockstar increased by 14.2%. Sales of 5-hour decreased 0.1%. And sales of Amp decreased 8.1%.

According to Nielson for the five weeks ended March 26, 2016 sales in the convenience and gas channel including energy shots in dollars increased 5.9% over the same period last year. Sales of Monster increased by 9.6% over the same period last year, while NOS was up 5.4% and Full Throttle sales decreased 5%. Sales of Red Bull increased 1.3%, Rockstar was up 12.6%, 5-hour was up 1.9%, and Amp was down 4.5%.

According to Nielsen in the five weeks ended March 26, 2016 Monster's market share of the energy drink category in the convenience and gas channel including energy shots in dollars increased by 1.2 points over the same period last year to 35.2%. NOS' share remain the same at 3.7% and Full Throttle share decreased 0.1 points to 1.1%. Red Bull's share decreased 1.6 points to 35.1%, slightly below Monster's share. Rockstar's share was up 0.5 points at 7.9%. 5-hour's share was lower by 0.3 points at 8.3%. And Amp's share decreased 0.2 points to 1.8%.

According to Nielson for the five weeks ended March 26, 2016 sales of energy plus coffee drinks in dollars in the convenience and gas channel increased 20.6% over the same period last year. Java Monster was 18.4% higher than the same period last year, while Starbucks Doubleshot Energy was 25.2% higher. We'd like to mention there have been some changes in the dollar base we used to report on this category.

According to Nielsen in the convenience and gas channel in Canada for the 12 weeks ended March 5, 2016 the energy drink category decreased 2%. Monster sales were unchanged versus a year ago. Our market share increased 0.3 share points to 27.8%. Red Bull sales decreased 1%, and its market share increased 0.7 points to 37.3%. Rockstar sales decreased 9%, and its market share decreased 1.2 points to 18%.

According to Nielsen for all outlets combined in Mexico the energy drink category grew 33.1% during the month of February 2016. Monster sales increased 8.3%. Our market share decreased 5.7 points to 25% against the comparable period last year. Sales of Burn, one of our acquired strategic brands, increased 4.9%, although Burn's market share decreased 1.7 points to 6.5%. Red Bull sales increased 0.7% and its market share decreased by 5.1 points to 15.7%. Vive 100's market share increased 14.3 points to 34.9%, while Boost's market share decreased 3.4 points to 11.3%. 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 their chain by one or more energy drink brands during a particular month. Consequently such activities could have a significant impact on the monthly Nielsen statistics for Mexico.

According to Nielsen in the 13-week period ended March 2016, the actual 13-week periods vary by a few days between different markets, Monster's retail market share in value as compared to the same period last year grew from 12.1% to 13% in Great Britain, from 9.3% to 11% in Sweden, from 8.4% to 9.7% in Belgium, from 6.5% to 9% in Norway, from 5.7% to 7% in the Netherlands, and from 18.4% to 20.9% in France. For the 13-week period ended February 2016 according to Nielsen Monster's retail market share in value as compared to the same period last year grew from 11.2% to 13.6% in Germany and decreased from 17.5% to 16.4% in South Africa, although value sales were 19.3% higher according to Nielsen. We note that for South Africa is one of those markets that has not transition to Coca-Cola bottlers. Monster's retail market share in value for the 13 weeks ending February 2016 in Ireland increased from 7.4% to 8.7%, and from 21.5% to 24.8% in Spain.

According to IRI Monster's market share in Greece decreased in the 13 weeks through the end of February 2016 from 29.3% to 29.1%. I would like to point out that the Nielsen and IRI numbers in EMEA should only be used as a guide because the channels read by Nielsen and IRI in EMEA vary from country to country.

According to Nielson for the month of March 2016 in Chile Monster's retail market share in value increased to 20.4% as compared to 15.3% last year. And in Brazil Monster's market share for the month of March 2016 declined from 4.7% to 3.1% as compared to the same period last year. In South Korea for the month of March 2016 Monster's retail market share in value increased from 10% to 18.7% compared to the same period last year. According to INTAGE for the month of March 2016 in the convenience and store channel in Japan Monster's market share grew from 33.8% to 39.9%.

Net sales for the Finished Product segment in the first quarter were negatively impacted by approximately $10.3 million of foreign currency movements in the first quarter. Net sales for the Finished Product segment in the first quarter of 2016 increased 12.3% from $555.7 million to $624.3 million from the comparable period last year after adjustments for acceleration of deferred revenue.

Net sales for the Company's Concentrate segment were negatively impacted by approximately $2 million of foreign currency movements in the quarter. After adjustment for such foreign currency movements, net sales for the Concentrate segment would have been $57.9 million for the first quarter. As a result of the Coca-Cola transaction which closed on June 12, 2015 there were no sales for the Other segment during the first quarter of 2016 as compared to $31.3 million of net sales in the first quarter of 2015.

In Europe, the Middle East and Africa net sales in the first quarter increased 47.2% in dollars and 58.6% in local currencies over the same period last year. Gross profit in this region as a percentage of net sales increased from 39.4% in the same period last year to 50.2% during the 2016 first quarter. EMEA sales were negatively impacted by supply disruptions that were encountered by CCE in Great Britain, Monster's largest market in EMEA during the quarter following the implementation of new software.

Monster continued to gain momentum and increase market share in Europe in the first quarter. Overall EMEA is now operating well. And we have made good strides in achieving increased distribution levels and in-store execution, including securing distribution by Coca-Cola bottlers in new countries and territories within the region. We are pleased with the launch of Ultra in Europe. We commenced distribution of Ultra in an additional eight markets in EMEA in the first quarter. Ultra will be launched in 10 additional markets in EMEA in the second quarter of 2016. In particular in Germany, France, Denmark, Belgium, Hungary, Ireland, the Netherlands, Norway, Poland, and Sweden Monster achieved increased sales gains as well as increased market share.

In Asia Pacific net sales in the first quarter increased 93.5% in dollars and 97.7% in local currencies over the same period last year. Gross profit in this region as a percentage of net sales increased from 31.2% in the same period last year to 45.2% during the 2016 first quarter. In Japan net sales in the quarter increased 63.4%, 62.5% in local currency as compared to the same quarter last year. We continue to experience strong performance in Japan. In South Korea net sales increased 283.4%, or 312.6% in local currency as compared to the same quarter last year.

In Mexico, Central America and South America net sales for the first quarter decreased 3.2% in dollars and increased 9.2% in local currencies over the same period last year. Gross profit in this region as a percentage of net sales increased from 39.8% in the same period last year to 41.1% during the 2016 first quarter.

Net sales decreased in Brazil, largely due to the overall difficult economic and market conditions together with the ongoing uncertainties for our distributor relating to the Coca-Cola transaction. In Mexico net sales decreased, in part due to customer destocking during the quarter and delivery disruptions during the month of March. However, as reported by Nielsen, Monster sales at retail in Mexico grew during the quarter. In Chile net sales in the quarter increased 52.3% in dollars and 74.9% in local currency as compared to the same quarter last year. As previously mentioned we are moving ahead with planning for local production in India and anticipate reentering the market in India later in 2016.

As mentioned earlier, we are optimistic that we'll be able to finalize agreements with Coca-Cola bottlers in numerous countries in the near future. We are also continuing to evaluate production opportunities with Coca-Cola bottlers, both in the US and internationally, which we believe will yield cost reductions.

Turning to the balance sheet. Cash and cash equivalents amounted to $2.5 billion at March 31, 2016 prior to the close of the AFF transaction compared to $2.2 billion at December 21, 2015. Short-term investments were $508.2 million compared to $744.6 million at December 31, 2015. Long-term investments decreased to $7.4 million from $15.3 million at December 31, 2015. Days outstanding for accounts receivable were 48.7 days at March 31, 2016 and 43.2 days at December 31, 2015 compared to 46.4 days at March 31, 2015. Inventories increased to $165.9 million from $156.1 million at December 31, 2015. Average days of inventory was 58.1 days at March 31, 2016, which was higher than the 58 days of inventory at December 31, 2015 and lower than the 69.1 days at March 31, 2015.

During the 2016 first quarter we launched our new Gronk energy drink and salted caramel Java Monster. Initial consumer response has been positive. We are planning to launch Mutant, an exciting new beverage that will be positioned as refreshment energized in the third quarter 2016. For competitive reasons we intend to provide further information on this new beverage at the stockholder meeting on June 14. As previously disclosed we have also -- we have additional new products planned for later this year.

As this call is a week earlier than usual, we can only provide an estimate for April 2016 gross sales. Based on gross sales through April 28, 2016 we estimate April 2016 gross sales in dollars will be approximately 15% higher than in April 2015. In local currencies we estimate April 2016 gross sales will be approximately 16% higher than in April 2015. We note that April 2015 sales included the old warehouse segment and Peace Tea and April 2016 includes the Concentrate segment. 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, and should not necessarily be imputed to or regarded as indicative of results for the full quarter or any future period.

In conclusion I would like to summarize some recent positive points. Our acquisition of AFF is exciting and represents an important milestone for the Company through the ownership of the proprietary formulas for our principal products. This transaction will be accretive to the Company's earnings from the closing of the transaction on April 1, 2016.

Consistent with the Company's previously announced plan to return capital to shareholders in 2016, the Company currently intends to commence a tender offer in May to purchase up to $2 billion in value of its common stock through a modified Dutch auction tender offer at a price range to be specified. The Company will fund the tender offer with cash on hand. While Hilton and I may participate in the offer for asset diversification reasons, we will continue to own a substantial majority of our current holdings following any successful tender offer.

North American and international gross margins remain healthy and continue to improve. The US Nielsen market statistics and equivalent market statistics for many countries around the world show that the energy category is continuing to grow and that Monster is generally growing ahead of the category. The new additions to the Monster family continue to gain momentum and add to the Company's sales. We are excited about the prospects for our new Mutant beverage, which we are planning to launch in the third quarter.

We're particularly pleased with our performance in our international markets. We have successfully transitioned a number of international countries to Coca-Cola bottlers. And we have reached an advanced stage to transition many more markets to Coca-Cola bottlers from the second quarter of 2016. I would like to open the floor to questions about the quarter and the year. Please note that we will not be taking any questions with respect to the tender offer on this call. Thank you.

(Operator Instructions)

Kevin Grundy, Jefferies.

Thanks. Good morning, guys.

Good morning.

I wanted to start with China. Given the importance of your launch in that market, can you talk a little bit about building upon the timing of that around the brand positioning, the investment that's going to be required for trial there, and to raise brand awareness? That would be helpful. Thank you.

To give most of the information that you're asking would be giving future estimates and indications, and even more difficulties in a market that we are just going into. We are -- all I would like to say about China is that we are planning to enter China in a similar way to which we've entered other markets. We look at building distribution on a store-by-store basis. We are going into the market with one SKU, which is Monster Green, which is primarily our main product. As I indicated in the call, we are still looking to finalize negotiations with our distribution partners on the distribution agreements, and those negotiations have been taking -- have taken some time.

We are progressing with registration. So we are in a new country. We are looking at -- obviously we don't have a lot of experience there because we've have not been there. So to say more than that, I don't know. We are looking to continue later this year. But there could be some delays in getting the registrations. But we are continuing to focus on China. And I just don't believe that there is more at this point that we will be able to say. Obviously we will need to make investments in the market, which we will do as appropriate, to establish the brand. But it's a slow traditional build for us going into China.

Can I ask a follow-up?

Yes.

Thank you. Just switching gears to the US. Some of the Nielsen data has slowed a bit broadly for the category. And some of this may have been that we've cycled the pricing that Red Bull has taken, and you won't cycle that until the fall. But can you talk a little bit about some of the slowing that we're seeing broadly in the category in the US, whether that's concerning at all or whether you think it's a bit of a blip? And then what is your expectation broadly for the category for the balance here of the year? Thank you.

The category may be seeing a slowing slightly, but it's obviously so growing at a good and a positive rate. You better look at the category in the context of beverages generally. I think the point you made is one of the important points, is that part of that category's growth is that we are cycling on price increases now. And if you look at the growth, and it's largely influenced -- the category growth largely gets influenced by the growth that obviously Red Bull and us contribute to the category as the major participant in the category.

As you know, you have seen the slowing in the Red Bull numbers and that really has probably a large influence on that category. So we don't see much difference. We're positive about the category but obviously we don't -- we can't tell where the category will grow, what sort of innovation will come from our competitors. We have innovation, as I've indicated, coming. It's going to come later in the year. But we do have quite a robust innovation pipeline.

Judy Hong, Goldman Sachs.

Thank you. Good morning.

Morning, Judy.

So broadly speaking it seems like your international sales growth has accelerated in Q1 versus Q4. And I was just hoping to get a little bit more color just in terms of how much is this really lapping some of the inventory issues that you've had, and are we now mostly behind some of that issues? How much are you getting growth in some of the transition markets? And as you look out over the next six months, markets like Australia where you're transitioning to Amatil, and then you've got Nigeria and some of the newer markets you're entering. Your expectations in terms of how quickly you can see growth accelerating just broadly from an international perspective.

Again, like everything in life everybody would like things to happen instantaneously, but it takes time. And as we transitioned, we are starting to see once you've had an opportunity to settle down with the particular bottler in that market, we are starting to see good progress. But again, it also depends on the commitment of a bottler and each bottler has his own priorities, his own commitments. And it's varied. But if you talk about the trends, Judy, which is clearly from what we've given the indication on each of the countries on our market share, the trend generally is continuing to be positive and we are continuing to take market share.

I would say look at the German numbers, Judy, that we spoke about on the call and also South Korea. Those are two markets that have been transitioned to the Coca-Cola system. Those may give some indications. But the other markets that we have not seen that amount of growth. And those are some of the Hellenic markets. So as Rodney said, it does differ from country to country. Those are two good indications.

So we just think generally that it's positive. And as we go forward, obviously we do work our way through the choppiness and the transition issues that we had in the past.

Mark Astrachan, Stifel.

Good morning, guys.

Hi, Mark. Good morning.

I wanted to ask about the concentrate business. It still seems to be a little bit weaker, I think, than it was originally trending going into the deal close. I guess I'm curious if you were to try to parse it out sort of differently maybe then some questions have been asked about it in the past. How much of the under-performance has been driven by some of the larger brands like Relentless in particular, but also like Burn in terms of what has happened from relaunches, repositionings, potential reductions in shelf space in favor of Monster and the like? In other words, is there a way to sort of think about it split out by the bigger brands, and maybe even comment on some of those smaller brands that could be getting discontinued?

I think it's a mixed bag. I actually have done a full analysis of these strategic brands. Like you, we also need to understand what the position is with regard to those brands. Some of it is relating to weakness in the brands themselves that we are addressing in various ways. Some of that, of course, is foreign currency. And there's another factor in that in certain countries we have been unable to structure ourselves in a way that we can actually sell concentrates. And what we do in certain countries is we get a royalty from the Coca-Cola Company which equates to effectively what we would have done had we sold the concentrate. It's a structure of setting up those countries to accommodate the concentrate, but -- so there's a lot of factors that one has to take into account in evaluating the concentrate business. But largely there is some weakness. But we are not -- you are not seeing in these numbers the full extent of the concentrate business because of some of these adjustments that have to take place.

I would just add that I think that one of the things we did mention previously, that we did find that in some of the cases the investment in the strategic brands, prior to and during the transition had been trimmed and cut back. And that did affect sales. So we did see a reduction in sales in those countries as a result, we believe, of that. So what we've had to do is not only go in and blindly obviously reinvest in marketing. But we've had to relook at how we're repositioning these brands. And at the same time get the repositioning done, both in repackaging and designs, in flavors. And then obviously then recreate marketing plans to put those -- the new positioning that we have looked at for these brands, particularly the Burn brand and Relentless are two of the larger brands that did have some weakness.

We've also in many ways repositioned NOS a little bit in the US, although we haven't changed packaging. We are going to modernize that packaging. And that's still coming through now. So this is a long process because there were many brands in many countries. And lay it on top of our own staffing and our own business, obviously, at Monster. It just takes a long time to get a lot of these -- this repositioning done. So we think that's partially the reason for it. And yes, it has been weaker than we had estimated. But we are -- the way we're doing the repositioning, we're doing focusing. We are starting to see some strong signs and we do believe that will continue to be positive.

Some of the other brands, although smaller, again it's a mixed bag. You can't put it into one category because in some cases the brand's off more and may go away. But in other cases some of the smaller brands are very good and very strong brands. And we are actually looking to long-term growth from those brands. But again, it's going to be a positioning and a pull that's not going to happen overnight. But there are some really good brands that we see in the mix that we do believe we will see growth from going forward.

Does that answer your question, Mark? It's kind of a mixture of (inaudible) pieces in certain brands that are being addressed and other factors (technical difficulties).

Bill Chapell, SunTrust.

Thanks. Good morning. Rodney, could you talk a little bit more about Mexico? From kind of the numbers you were reeling off I couldn't tell if there were just some short-term turbulence or maybe you could give a little bit more color what's going on there?

There were obviously some challenges in March, as we indicated. That is a market that has not transitioned. So it's just there is obviously some uncertainty relating to the market. The market, we have still grown just short of 10%. So the brand has continually grown from quarter to quarter. But there is the emergence of a low-cost brand, Vive 100 in the market, that have been very aggressive. And they have really expanded the market. And that's why when we look at the market we say our market share has decreased, but it is of a very much increased market. And maybe a little bit different.

And then we had a debate earlier as to does Vive 100 really fit into the category or are we really in the premium category and Vive 100 is in a lower price category? Are they really different? And should be splitting them? And we think that we have traditionally put them into the one category. But that's really what's happened. So if you look at the underlying market, bearing in mind the uncertainties and et cetera, it's still growing and obviously one of the issues is ForEx and affordability. But we are still growing. So we are comfortable with that market. We think it's a good market. And we think that in the future we will continue to see pretty good growth from there.

Bill, since you like numbers, let me quote the numbers in OXXO for Vive 100. Their 340 milliliter package type, which is their leading product in pesos sells for MXN10. Our product, our 473 milliliter US product, that's sold in Mexico sells for MXN30 to MXN32. So that's the comparison in pricing. It's a very, very aggressive competitor. And we don't want to go down, and we will not go down to that type of pricing for Monster.

John Faucher, JPMorgan.

Yes, thank you. Just want to follow up on the last couple of questions. You had talked about sort of preaching patience in terms of getting these bottler deal -- bottler deals done. Totally understand that. Can you tell us what goes into the negotiations? It sounds like some of these sort of brand shifts, what the underlying support levels are. The transition maybe out of some of the Coke concentrate brands into the Monster brand, and how you manage that transition. It sounds like that's part of the negotiations. And so is that really why this is taking longer? And so I guess a little bit of color in terms of what you need to nail down with the bottlers as you do these deals? Thanks.

I think you put it into two different buckets. The one bucket is although we're trying to get -- have ourselves -- the whole spirit of the deal is that we will become more integrated into the Coca-Cola system, we are still nevertheless an independent publicly-traded Company. And as a result it's been important for us to continue to negotiate agreements on terms that we believe are -- will put us in a position where we can protect ourselves and our brand if things or relationships didn't go as planned.

And so the contracts that we have agreed to with the Coca-Cola Company as a principal, and obviously now you take that to the individual bottlers. They have their own lawyers, they have their own local laws, they have their own view of life, and very respectfully many of them are not used to signing a contract of this nature, which is more akin to a finished project distribution agreement as opposed to a manufacturing concentrate bottler agreement. Which puts a lot of more discretion and decisions in the hand of the bottler whereas we tend to keep and want to keep most of those decisions about global marketing, about some of the local marketing and a number of things. The other thing is that we've obviously got to be very cautious that we don't get into a situation, we have a large line of products, for example, and we don't want to be in a position that if the bottler decides he wants to take one SKU or three SKUs and not the rest that we are kept out of the market for the rest of the SKUs.

So there are bones of contention that keep going up and down between the legal agreements. And we're getting through them. But it's in many cases, it's really a question of literally educating a bottler in a country with their lawyers about why our agreement is in the form that it's in and why we need the protections.

Than the other -- obviously, the other bucket is -- it goes back to the old life, money. How do you share the value trend that's available in the country? And it's just arm-wrestling between us and the bottlers as to how do we get to a fair value share. And in some cases, we are at odds with the bottlers on what we believe we want out of the value share. And we are not going to compromise the value share and take less in order to simply try and get deals done because we want to move quickly.

What we've done is negotiate, is going to stay with us for 20 or 30 years, or however long the agreements are. So we really do want to have a fair relationship and a fair share of the value chain, bearing in mind that we spend and do a lot more than is normally done by Coca-Cola Company in a bottler relationship. When they split -- whatever the split is, when they split their value chain, the bottler picks up a lot more of the obligation. In our case, we do. And we don't want to be in a position where we split the chain and we end up with still the lion's share of the marketing and other expenses which are fairly shared. So it's been a negotiation. We just are getting through them one by one. And I think that's really the color I've got. Hilton, if you'd like to add to it.

I think that's absolutely right. One of the big issues, the legal stuff can be negotiated and it is. But it's got to be a fair agreement in terms of -- on commercial terms for us and a fair agreement for the bottler. And often the bottler feels he's entitled to more. And we as a brand owner have substantial expenses, have substantial marketing expenses. And we have to ensure that after those marketing expenses, we do a good deal for our shareholders. So it's a bit of a haggling. But as you can see from the agreements that have been finalized, we're moving forward and we'll move forward in due course with some of the other bottlers. Or we won't. And if not, there are other distribution partners that we'll be working with.

Yes, I agree.

Caroline Levy, CLSA.

Thanks so much. Good morning. My question relates to margins, which were just outstanding in the quarter. 840 basis points improvement, I believe. And as you move into the next four quarters, I believe you'll get about a 250 basis point lift from the benefit of the acquisition.

That's your estimate.

Yes. (Multiple speakers). I just want to be sure that within the margin expansion we did see there were no unusual items in the first quarter. And obviously there's the benefit of the acquisition, which will continue I think through most of the second quarter. But if there are any moving parts you can elaborate on a little bit more on margins, or is this the new status quo? (Multiple speakers)

We spoke about the price increase, number one. Number two, we've got the concentrate business has now kicked in. It wasn't in the first quarter of last year. So those are two factors that influence margin in this quarter. There's product mix, which has also influenced margin. So apart from those, I'm not aware of anything unusual apart from those that influence margin in the quarter.

And I'm wondering --

And in going forward -- sorry, in going forward, yes, we will have the benefit of the AFF transaction.

Just because I think the strategically the million-dollar question on the Company is, do you think over time international margins get pretty close to domestic? And, I mean, we could talk in 5- or 10-year increments, I guess. Is there a reason why international structurally would always be below the US?

Well, pricing differs from country to country, obviously. And we have very good pricing in the US. And in some countries internationally we don't benefit from the same pricing structures. So what we've done, we don't give projections, as you know. We don't give guidance. But what we've done in this quarter is we've actually given you the margins in the international territories in aggregate. So you can see the trends in margin in EMEA and the trends in Asia Pacific and Central and South America.

I think the only thing I'd like to just add is that if you look at international margins, I think we should expect them to be lower than the US because of pricing. And in many of those cases our cost of goods, it seems to be higher. We've been producing out of the US, particularly for, in the immediate future, when volumes really get to the levels of the US we will see some reduction. But even then I think we should expect cost of goods to be higher internationally.

The other thing is that we go through -- in looking at the mix, it's a mixed bag, Caroline, because even internationally we've obviously got concentrate business which has traditionally the higher margins. But as Monster, and we think that ultimately the growth in the long term for the Company's is that the Monster brand will grow. While again, we think we will get growth from these key brands -- there's some nice brands in the strategic group that will continue to grow, as well. If you looked -- if we looked at it, we think that ultimately the larger growth will come from Monster. And then as Monster, there will be a -- because they are international, there will be some slight reduction in overall margin. But you want to take a mix of it.

Because it's a finished-goods model. That's what he's saying.

And that regard. So again, I just want to bear that in mind. So that's why you can't just take, I think, just a straight line and then take the incremental margin we should get from AFF and simply apply it going forward. So while we do expect there to be an improvement, there is some remediating of factors that one should take into account.

And we don't give projections.

I'm showing no further questions. I would now like to turn the call back to Rodney Sacks for any further 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 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 bottlers system internationally. We are also particularly excited by the new opportunities that we have going forward with the robust portfolio of energy drink products throughout the world comprised of our Monster energy brand together with the strategic brands. Thank you very much for your attendance.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone have a great day.