Monster Beverage Corp
NASDAQ:MNST
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
45.01
60.85
|
| Price Target |
|
We'll email you a reminder when the closing price reaches USD.
Choose the stock you wish to monitor with a price alert.
This alert will be permanently deleted.
Monster Beverage Corp
You don't have any saved screeners yet
Good day to everyone. My name is Devin, and I will be your op -- 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. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions]
Mr. Rodney Sacks, you may begin your conference.
Thank you. Good afternoon, ladies and gentlemen. Thank you 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, as well as the future impact of the COVID-19 pandemic on the company’s business and operations.
Management cautions that these statements are based on our current knowledge and expectations, and are subject to certain risks and uncertainties, many of which are outside the control of the company that may cause actual results to differ materially from the forward-looking statements made during this call.
Please refer to our filings with the Securities and Exchange Commission, including our most recent annual report on Form 10-K filed on February 28, 2022, 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 Sacks.
Thank you, Tom. The company achieved record second quarter net sales of $1.66 billion in the 2022 second quarter, 13.2% higher than net sales of $1.46 billion in the 2021 comparable period and 16.9% higher on foreign currency adjusted basis.
Since the beginning of the COVID-19 pandemic and the subsequent increased demand for the company’s energy drinks, the company prioritized ensuring product availability for its customers and consumers. This 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 and solidify the continued long-term growth of the company’s brands.
During the 2022 second quarter, the company experienced a significant increase in cost of sales relative to the comparative 2021 second quarter, primarily due to increased freight rates and fuel costs, including costs relating to the importation of aluminum cans, 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 second quarter of $250.3 million, approximately $164.4 million was comprised of; one, approximately $66.7 million due to increased freight rates and fuel costs, including costs relating to the importation of aluminum cans; two, approximately $45.9 million due to increased ingredient and other import costs, including secondary packaging materials and increased co-packing fees; three, approximately $27.5 million due to increased aluminum can costs attributable to higher aluminum commodity pricing; four, approximately $15.1 million due to geographical and product sales mix; and five, approximately $9.2 million 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 air freight substantial quantities of certain ingredients internationally, particularly to EMEA, Asia-Pacific and Latin America 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 continued to address the challenges in its supply chain as it navigates through the uncertainty of the current global supply chain environment.
Gross profit as a percentage of net sales for the 2022 second quarter was 47.1%, compared to 57.2% in the 2021 second quarter. The decrease in gross profit as a percentage of net sales for the 2022 second quarter was partially offset by pricing actions.
Operating expenses for the 2022 second quarter were $406. 9 million, compared with $310.9 million in the 2021 second quarter. The comparative operating expenses for the 2021 second quarter included a $16.9 million reversal of amounts previously accrued in connection with an intellectual property claim.
As a percentage of net sales, operating expenses for the 2022 second quarter were 24.6%, compared with 21.3% in the 2021 second quarter and 25.6% in the 2019 second quarter pre-COVID.
Distribution expenses for the 2022 second quarter increased to $87.9 million, which is an increase of 36% or 5.3% of net sales, compared to $64.6 million or 4.4% of net sales in the 2021 second quarter and 3.4% of net sales in the 2019 second quarter pre-COVID.
The $23.3 million increase in distribution expenses was primarily due to increased freight out expenses of $13.5 million as a result of higher outbound freight rates and fuel, increased volume and out-of-orbit freight, as well as higher warehouse expenses of $9.7 million 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. Certain of these increases were the result of the company’s return to activities consistent with pre-COVID-19 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.
We rebuilt and increased finished product inventory levels across the United States and EMEA to reduce the excessive cost of long distance freight to satisfy demand and to return to our orbit strategy of producing in closer proximity to our customers. The cost of repositioning finished products to distribution centers are included in freight-in costs.
Operating income for the 2022 second quarter decreased 29.1% to $373.0 million from $526 million in the 2021 comparative quarter. Net income decreased 32.3% to $273.4 million, as compared to $403.8 million in the 2021 comparable quarter. Diluted earnings per share for the 2022 second quarter decreased 32.2% to $0.51 from $0.75 in the second quarter of 2021.
Through pricing actions, the company was able to achieve positive pricing appreciation in the United States and in EMEA. 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 2022 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%.
Sales of Red Bull increased 3.8%, sales of Rockstar increased by 2.1% and sales of 5-Hour decreased 3%. VPX Bang’s sales decreased 14.5%. The sales growth of the Monster brand exceeded that Red Bull in the period.
According to Nielsen for the four weeks ended July 23, 2022, sales in dollars in the energy drink category in the convenience and gas channel, including energy shots in dollars increased 6.6% over the same period the previous year.
Sales of the company’s energy brands, which include Reign, increased 5.6% in the four-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%, NOS was down 1.8% and Full Throttle was down 2.5%. Sales of Red Bull were up 3.9%, Rockstar was down 1.8% and 5-Hour down 3.5%. VPX Bang sales decreased 16.3%.
According to Nielsen for the four 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 point to 36.1%. Monster share decreased from 30.6% a year ago to 30.5%, Reign share decreased 0.1 of a share point to 2.3%, NOS share decreased 0.2 point to 2.5% and Full Throttle share remained at 0.7%.
Red Bull share decreased one percentage point from 37.4% a year ago to 36.4%, Rockstar share was down 0.3 point to 3.5%, 5-Hour share was lower by 0.4 at 4.2% and VPX Bang share decreased 1.6 points to 6%.
According to Nielsen for the four 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 and Java Monster Nitro Cold Brew were 2.3% higher in the same period versus the previous year. Sales of Starbucks Energy were 9.4% higher.
Java Monster share, including Java Monster 300 and Java Monster Nitro Cold Brew of the coffee plus energy category, which primarily includes Java Monster, Java Monster 300, Java Monster Nitro Cold Brew, Starbucks Doubleshot and Tripleshot, Rockstar Roasted and Bang Keto Coffee for the four weeks ended July 23, 2022 was 50.9%, down 1 point, while Starbucks Energy share was 47.7%, up 2.2 points.
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 point to 34.8%. NOS’ sales decreased 9.6% and its market share decreased 0.4 to 1.5%. Full Throttle sales increased 13% and its market share remained at 0.6%.
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% against the comparable period the previous year. Sales of Predator increased 53.1% 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 sales in the OXXO convenience chain, which dominates the market. Sales in the OXXO convenience chain in turn can be materially influenced by promotions that may be undertaken in that chain by 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 for the month of June 2022, compared to June 2021, Monster’s retail market share in value increased in Argentina from 46.9% to 49.2%. 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 in value increased in Brazil from 35.7% to 39.9%. 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% due to a shortage of shipping containers.
I would like to point out that the Nielsen numbers in EMEA should only be used as a guide because the channels read by Nielsen in EMEA vary from country-to-country and are reported on varying dates within the month referred to from country-to-country.
According to Nielsen in the 13-week period ending July 17, 2022, Monster’s retail market share in value as compared to the same period the previous year, grew from 25.8% to 31.6% in France from 27.8% to 32.1% in Norway and from 37.6% 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% in Germany, from 28.9% to 29.9% in Great Britain and from 19.4% to 19.8% in Poland. Monster’s retail market share in value as compared to the same period the previous year declined from 20.5% 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, Monster’s retail market share in value compared to the same period the previous year declined from 8.5% to 6.6% in the Netherlands and from 29.3% to 28.1% in the Republic of Ireland.
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 in 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-ewek 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% to 27.5% in Denmark.
According to Nielsen in the 13-week period until the end of May 2022, Predator’s retail market share in value as compared to the same period the previous year grew from 17.1% to 26.8% 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% to 14.2% as compared to the same period the previous year. Mother’s market share in value decreased from 11.5% to 10.2% during the same period. The market share of the company’s brands in Australia for the month ended July 3, 2022, decreased from 24.7% to 24.5%.
According to IRI in New Zealand, Monster’s market share in value for the four weeks ended July 10, 2022, increased from 12.4% to 12.6% as compared to the same period the previous year. LIVE+’s market share in 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 four weeks ended July 10, 2022, decreased from 25.6% to 24.5%.
According to INTAGE 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%.
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% to 59.9%.
We again point out that certain market statistics that single months or four-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 million, 39.2% of total net sales in the 2022 second quarter, compared to $546.3 million or 37.4% of total net sales in the corresponding quarter in 2021. Foreign currency exchange rates had a negative impact on net sales in U.S. dollars by approximately $53.4 million in the 2022 second quarter. Included in reported geographic sales are our sales to the company’s military customers, which are delivered in the U.S. and transshipped to the military and their customers overseas.
In EMEA, net sales in the 2022 second quarter increased 13.8% in dollars and increased 26.8% in local currencies over the same period in 2021. Gross profit in this region as a percentage of net sales for the second quarter was 26.7%, compared to 39.8% in the same quarter in 2021. Gross profit in the second quarter was impacted by increased freight for imported cans, increased raw material and ingredient costs and increased co-packing fees, higher aluminum commodity pricing and air freight costs. In local currencies, 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 are also pleased that in the 2022 second quarter, 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 second quarter decreased 1.1% in dollars and increased 8.2% in local currencies over the same period in 2021. 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 second quarter 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-19 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 2021. Monster remains the market leader in Japan and South Korea.
In China, net sales decreased 2.1% in dollars and 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 second quarter.
In Latin America, including Mexico and the Caribbean, net sales in the 2022 second quarter increased 66.7% in dollars and increased 69.7% in local currencies over the same period in 2021. Gross profit in this region as a percentage of net sales was 36.4% for the 2022 second quarter versus 40.7% in the 2021 second quarter.
In Brazil, net sales in the 2022 second quarter increased by 8.8% in dollars and 63.9% in local currency. Net sales in Mexico increased 49.3% in dollars and 49% in local currency in the 2022 second quarter. Net sales in Chile increased 26.1% in dollars and 45.3% in local currency in the 2022 second quarter. Net sales in Argentina increased 200.1% in dollars and 26 9.4% in local currency in the 2022 second quarter.
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. In June 2020, Monster Energy Company, which I will refer to as MEC and Orange Bang, Inc., a family-owned beverage business and the rightful owner of several trademark registrations to the Bang marks initiated an arbitration against VPX.
MEC and Orange Bang alleged that VPX breached a 2010 settlement agreement with Orange Bang that restricted VPX’s use of the Bang trademark to products that are creatine-based or marketed and sold only in nutritional channels, as well as claims that VPX infringed Orange Bang’s trademark rights to the Bang marks.
In April 2022, the arbitrator issued a final award finding in favor of MEC and Orange Bang on all claims. The arbitrator awarded MEC and Orange Bang $175 million to remedy VPX’s past misconduct, as well as attorneys’ fees and costs, which amounted to nearly $9.3 million.
The arbitrator also ordered VPX to pay MEC and Orange Bang 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 Bang, the award and future royalties will be shared equally between MEC and Orange Bang.
On July 1, 2022, the United States District Court for the Central District of California granted MEC and Orange Bang’s motion to confirm the arbitrator’s award and denied VPX’s motion to vacate the arbitrator’s award.
MEC and Orange Bang have requested that the court end to final judgment. On July 28, 2022, VPX filed a notice of appeal to the United States Court of Appeals for the non-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 Reign energy drinks infringed the trade rest of its line of Bang energy drinks.
MEC’s lawsuit against VPX for force 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 are subdued, 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 CANarchy will be a full bodied flavored malt beverage that will be launched late in the 2022 fourth quarter 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 four great tasting bold flavors, which are based on certain of Monster’s well-known and popular flavor profiles.
Beast Unleashed 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 use of such additional alcohol beverage products at a later date.
We are excited about the planned launch of our new Monster Energy Zero Sugar energy drink in the 2022 fourth quarter initially in the United States. Monster Energy Zero Sugar was specifically developed as an indistinguishable Zero Sugar analog of our original unique Monster Energy Green flavor. We are excited about the opportunity that this 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 Seltzers in sleek 355 ml cans in three flavors Cucumber Lime, Black Cherry and Grape fruit Lemonade in Canada. At the end of June 2022, we expanded our core Monster Energy portfolio in Canada by launching Monster Reserve in two 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 2022 second quarter. In April 2022 in New Zealand, we launched LIVE+ Watermelon, our fourth LIVE+ flavor.
In EMEA, in the second quarter 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 second quarter.
During the 2022 second quarter, we also launched additional SKUs of Burn, Relentless, Nalu and Reign in certain countries. During the second quarter of 2022, we launched Predator in Turkey and we continued the national rollout of Predator in India and Vietnam in June, expanding the brand to East India and North Vietnam. We also launched Predator in Cambodia in July 2022. We are planning to introduce the Predator brand in several additional countries in APAC in the second half of 2022.
In Japan, we launched Monster Super Fuel Killer Kiwi and Monster Energy Ultra Sunrise in China. We estimate July 2022 sales, including to be CANarchy to be approximately 12.9% higher than in July 2021 and 11.2% higher than in July 2021 excluding CANarchy.
On a foreign currency adjusted basis, excluding CANarchy, July 2022 sales would have been approximately 16.6% higher than 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, days of the week in which holidays fall, timing of new product launches and the timing of price increases, and promotions in retail stores, distributor incentives, as well as shifts in the timing of production in some instances where our bottlers are responsible for production and unilaterally determine their production schedules, which affects the dates on which we invoice such bottlers, as well as inventory levels maintained by our distribution partners, which they alter unilaterally for their own business reasons.
We reiterate that sales over a short period such as a single month should not necessarily be imputed to or regarded as indicative of results for a full quarter or any future period. If the COVID-19 pandemic and related unfavorable economic conditions continue, in certain regions our new product innovation launches in those regions could be delayed.
In conclusion, I would like to summarize some recent positive points. One, the company is increasing its raw material and finished product inventories to better service its customers and ensure availability of its products.
Two, 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.
Three, we are pleased with the new additions to the Monster Energy portfolio.
Four, we are planning to continue additional launches of our Reign Total Body Fuel high-performance energy drinks in additional international countries.
Five, 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 an additional number of international countries.
Six, we are enthusiastic for the planned launch of the Beast Unleased, our first flavored malt beverage alcohol product and for the opportunity that the CANarchy acquisition presents.
Seven, we believe that we will be able to address many of the challenges we have experienced in our supply chain.
Eight, 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. Thank you.
[Operator Instructions] Our first question will come from the line of Bonnie Herzog with Goldman Sachs.
Hi. Thanks. Hi.
Your line is now open.
Okay. Thank you. I guess a question on gross margins. I simply don’t understand really why they were the bad in the quarter. I guess I was under the impression that you were already buying a fair amount of your aluminum cans from U.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 three times the level they were last year. So, I guess, help us understand that and just trying to think through, is this really the right way to manage the business? And then, Hilton, you mentioned these pressures are transitory or it was in the release, but I guess, they are 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?
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 have always taken a stance that objective is to support our customers and our consumers.
We went through entire times in 2020 and 2021 when we did not have enough capacity to service our customers and our consumers. We had bottler 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, but the cost of importing a cans, the container costs, the marriage, the which you guys call the merge, just everything relating to the importation of aluminum cans.
So that was an absolute conscious decision. As cans started arriving late in 2021, EMEA was the most affected. I think we have had a number of discussions about how EMEA was affected and a substantial number of those cans went into EMEA and 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 have got the Apex Legends promotions now and the cans that come in are not promotional cans.
So, they are using production when there’s market and market demand. So, in EMEA, we stopped importing cans. We thought we would 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 have had [inaudible] coming in the U.S. and we will soon be out of those cans as soon as we get over this Apex Legends promotion. But in the U.S., the percentage of imported cans in our furnish is very low compared to what it was in the second quarter in EMEA.
So, I hope that answers your question. We did it as a conscious effort to support and to supply our customers because we are in this business for the long-term. We are not in this business for the second quarter of 2022. We are in this business for the long-term and it’s important to us to ensure that our customers and our consumers continue to have energy products.
Your next question.
So is there anything else that I didn’t answer that or I should have answered, Bonnie?
But, I guess, for me, it’s still back the question as you are 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 are going to work down that inventory now? Is that starting to happen or will happen in Q3 and Q4, and I assume it’s very elevated cost. So do we think about these pressures on your gross margin, quite frankly, very much continuing Q3 and Q4, is that right about the product?
No. As I -- yeah. Okay. Great question. As we look at the future, I mean, that in cost of sales, fuel is coming down, we know that. We know that freight is coming down. We are in that every day of our lives. We know that ocean freight is coming down.
We know that we have been able now to really diminish the amount of materials that we having to airfreight to keep the wheels moving with product that’s coming out of the U.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 -- 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 7th. We buy where we are not hedged -- the portion that’s not hedged is bought at M minus 1.
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 is 1.36. So, it’s come down from a peak of 1.81 to 1.36. So we know that’s a fact, right?
We also know that we built up inventories, which we had to because there’s inventories we were talking about in 2021 were just not sustainable. They were just not sustainable. So we built up inventories and we are 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 forecast. I don’t want to start giving forecast. 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 are supporting our customers and our business in the long-term.
Your next question comes from the line of Andrea Teixeira with JPMorgan.
Hi. Good afternoon. Thank you. On the same topic and I tried to do the phasing of the cost pressures and the pricing, would you say pricing both domestic, international would be by that mid single-digit and could probably cover about a third of this $250 million that you quoted? And then you have, of course, and I appreciate the breakdown that you gave, you can phase out some of this higher cost for aluminum, also the $67 million that you said to bring cans imported. So would you end up to about from the $250 million to about $100 million to $150 million in pressures into the fourth quarter, I want to check that? And then on the Monster Zero Sugar, congrats on that, should we think like we obviously have seen Coke Zero Sugar recruit new customer -- new consumers into the category, are you thinking how incremental that could be against Ultra? I am 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 and some more masculine and more into the core consumer, is that fair? Do you have the shelves coming in, how much support you believe you can give to the launch? Thank you.
Okay. So those were two questions all in. I will start with the first one. So we don’t give guidance and what I have tried to do on this call is give some direction. That’s what we are saying -- 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 as, since we don’t give guidance, I have given some general direction, which I hope you will find helpful and the other analysts will find helpful in analyzing where we go from here.
But I just want to repeat yet again that we are in this business for the long-term. We are in this business to support our customers. And yes, maybe we did take a hiccup in gross margin in 2022 -- the second quarter 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 are able to service customers and we are 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 have done our very best to stay on track and to work within a very, very difficult supply chain environment.
Perhaps. Thanks. Hilton, I could address the second part on the actual Zero Sugar. I think that we have hedge Zero sugar products. We have the full Ultra line. We have low carb and absolutely zero.
But none of them have been really an analog of our original Monster Green. The original Monster Green flavor, which we have had now for over 20 years is still our leading product pretty much in every the world.
Consumers do want a choice, and as consumers, I think, get a little older, they do start looking to -- for a sugar -- zero sugar or sugar-free alternative, but we 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.
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 Zero Sugar and also to retain and broaden our existing consumer base, as we bring younger consumers in, 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 an issue.
There are also in many countries around the world, they have 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 zero-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 and 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. So, the plans are to obviously roll this out after the U.S. very extensively.
[Operator Instructions] Your next question comes from Mark Astrachan.
Yes. Hey. Good afternoon, guys. I guess I am going to ask one question in two parts, but I swear it’s related. So, the first one, Hilton, I mean, obviously, I get everybody gets what you are saying about guidance, what you think about cost pressures. I just think it would be immensely helpful based on just the commentary that I have been getting from folks or feedback from your shareholders. If you could at least just directionally confirm the gross margins should get better from here and if you could give a sort of magnitude around it, I think it would be helpful. But the related and more serious question is, you have a lot of volatility historically in gross margin, and I have asked this question before, but I am 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 the U.S.? 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 are working with them more closely?
Yeah. So, with regard to your first point, I think I have already answered that. I believe that the second quarter is probably -- we are probably going to see the lowest margin in the year. And as regards better direction than that, Mark, we just don’t do it. We just don’t give guidance.
So, that’s the first point. And then on the second point is, we are really not sure and we have had discussions with our distribution partner on a number of issues. And we are 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 will -- we definitely will.
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 procuring 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.
Your next question comes from Peter Grom with UBS.
Hey. Good afternoon, everyone. Hope you are doing well. I guess I will ask about topline 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 and kind of what do you expect as they kind of transition to distributors? And I guess, do you see a potential opportunity for you to capture some of that incremental shelf space?
I think generally in transitions…
Yeah.
… 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 Cos and despite that you guys have seen their shares decrease over the last 24 months or so.
So I don’t want to say any more than that. I am not sure if Rodney wants to say anymore, but I would say that, obviously, we continue to grow up 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, on the other hand, we work in with the Pepsi space and with the Pepsi coolers.
Yeah. Just to bullet lightly. I mean, the -- if Bang transitions out of the Pepsi coolers, you have obviously all aware of the announcement that Celsius who’s been trying to secure and has been securing additional shelf space, we will go into the Pepsi system. So there will be a lot of fighting going on. There’s the Ghost brand lining you to a lesser degree and C4.
So you have got all of these sort of performance brands basically fighting for some more shelf space, and obviously, we will do the same. So there will be a lot of transition going on and we believe that we are obviously focused on that as well and our own brands and increasing our own shelf space.
Your next question comes from Kaumil Gajrawala with Credit Suisse.
Hi guys. One of the things we have been watching care…
Hi, Kaumil.
Hey. Hi, Hilton. We have been watching carefully about the impact on inflation on the consumer with gas prices and stuff. It doesn’t seem like we have seen a slowdown at all. I am curious which you are observing and maybe if you have done any test in markets like maybe Midland, Texas or Phoenix, or some of those markets where inflation is much higher than it has been nationally if you are perhaps seeing different trends?
So what I’d like to comment on is, one, retailer and I am not going to mention who they are in terms of their own schematics and their own structures, 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 a continuation of the growth in the category. Yes, it has slowed somewhat, but look in Europe, where the categories are a lot older. The growth has been escalating there faster than in the U.S.
So we have seen that and now we are seeing the other concern may be abating everyone is asking questions about gas prices and well gas prices affect the consumption of energy drinks, and frankly, we said at the time that when we have seen high gas prices a portion that hadn’t affected the sale of energy drinks and we are seeing gas prices now coming down slowly, but truly they are coming down. So I think that maybe answers your question as well.
And our final question for today’s Q&A will come from Charlie Higgs with Redburn.
Hi, Hilton, Rodney. Thanks for the question.
Hi, Charlie. Totally fine.
Hi. 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 maybe if you could just touch on the scope of the price increases you are planning for in H2 2022, maybe just some information on what countries and what products would be very useful please?
Yeah. There’s a range of countries that we took prices in the first half of 2022, either directly in price increases or through a reduction in promotions. And we see an uplift effecting the quarter already of the impact of those price increases.
As regards the second six months, there’s really a list of countries and I don’t think we have 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 have gone -- if you have had one price increase in a year, you cannot go with the second price increase.
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 have been doing this on a consistent basis, not to profiteer from inflation, but really to mitigate the whole cost in the system has -- you guys will appreciate.
Thank you. On behalf of Monster, I would 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, develop and differentiate our brands and to expand the company both 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. We hope that you will stay safe and healthy. Thank you very much for your attendance.
This concludes Monster Beverage second quarter 2022 conference call. Thank you for attending today’s presentation. You may now disconnect.