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Net sales rose 8.5% to $680.2 mil and operating income soared 45.5% to $258.2 mil even after excluding termination-related costs that had clobbered earnings a year earlier. (Among these costs, termination payments shrank from $206 mil a year earlier to just $3.4 mil.) International sales surged 31.9% to $149.1 mil despite softening in markets like South Africa where incumbent distributors have slackened efforts in anticipation of brand transition to Coca-Cola. By contrast, markets like Germany and S Korea, where transition has occurred, have been among strongest performers. Energy brands inherited from Coke, including Full Throttle, NOS, Relentless and Burn and designated as concentrate sales, generated somewhere north of reported $55.9 mil in qtr. (In some markets, where production agreement hasn't been reached, Monster gets royalty payment instead.) Gross margin popped up to 62.2% from 58.9% a year earlier thanks to greater share of more profitable concentrate-based products picked up from Coca-Cola in brand swap 2 years ago, even as co ceded to KO less profitable brands like Hubert's Lemonade and Peace Tea and took price hike on core Monster Energy line. Analysts are hopeful that recently concluded $690 mil acquisition of American Fruits & Flavors should further boost margins as flavor house is integrated with its biggest customer, tho further expansion in concentrate-based overseas markets may offset that.
"Monster's results came in ahead of our and consensus expectations driven largely by the international business," wrote RBC's Nik Modi in early note on results. He added, "importantly, the US business held strong at 12% gross sales growth." April is looking to be up roughly 15%, chmn/ceo Rodney Sacks offered.
Most of discussion on conference call this morning - a week earlier than usual because MNST's top brass is heading out to Coke system confab next week - was devoted to international biz, as co proceeds thru laborious round of negotiations with Coke bottlers to transition brand while figuring out role of legacy Coke brands and getting Monster up to speed in new markets like China and relaunching ones like India. In recent quarters, for first time in co's history, MNST execs have been touting promise of forthcoming innovations well before they're ready to actually disclose them, but ceo Sacks offered at least a peek at one, due in Q3: Mutant, positioned as "Refreshment energized." Sacks said he'll offer details at annual shareholder meeting on Jun 14, but positioning suggests it may be sparkling water entry that's been rumored to be in mix. And in move that holds implications for co's US copackers, Rodney said he's in talks about moving more production in US and internationally to Coke system, with cost decreases as reward. No further details on that one either.
US Saw Strength in Green Can, Ultra, Java Monster MNST brass cited good growth in US of core line, including Ultra zero-calorie entries and Java Monster coffee-inflected bevs. NOS brand, due to get "modernized" soon, continues to perform well, tho Full Throttle's performance has been spottier, per scanner data cited by co.
Ultra Rides into More Overseas Markets; Pending Kickoffs in Asia; Fly in Ointment in Mexico Tho it always leads with green can, co has been riding appeal of Ultra into greater overseas presence. This past qtr it brought Ultra to 8 more markets in Europe/Middle East/Africa (EMEA) territory, and will add 10 more markets in Q2. Deal with Coke Amatil will result in Australia launch May 1, New Zealand May 9. Brand has won approvals in Shanghai and Beijing but co is still dickering with local Coke bottler over contract. Singapore will go live on May 13. Sacks reported progress with key Latin America bottlers as FEMSA and Arca, with Arca's recently acquired Lindley unit in Peru ready to launch on Jun 2.
Mexico has proved particularly tough market lately. That's in part because brand hasn't transitioned to Coke bottler, but also because of emergence of low-cost, guarana/tea-based player called Vive 100% that sells at 10 pesos per 340-ml can in dominant Oxxo c-store chain vs Monster's own 30-32 pesos per 473-ml can. "We will not go down to that type of pricing for Monster," vowed vice chmn Hilton Schlosberg.
Why Overseas Negotiations Can Be So Hairy Monster's among coolest new brands to emerge over past decade and a half, and now it's member of the Coke family. So why's it taking so long for co to complete deals to switch over to Coke bottlers in so many markets? That, in essence, is what JPMorgan's John Faucher wanted to know, and his question prompted illuminating response from Sacks and Schlosberg that goes to heart of unique relationship MNST has with KO, as allied but still independent, and publicly traded, co. As noted here before, it's emblematic of new model of arms-length relationships that Coke has cut with other innovation plays, Fair Oaks Farms in dairy and Keurig Green Mountain in bev systems.
"While we try to become more integrated into the Coke system, we're still an independent, publicly traded company, so it's important to negotiate terms that put us in a position where we can protect ourselves and our brands if the relationship doesn't go as planned," explained Sacks. Meanwhile, many Coke bottlers overseas are unfamiliar with partnership that calls for them to receive finished goods rather than producing brand themselves from concentrate, and that reserves lotsa sales and marketing discretion, as well as financial burden, for supplier, Monster. "Many of them are not used to signing a contract of this nature," Rodney said.
A further complexity: "We have a large line of product and don't want to be in a position, if the bottler decides to take 1 or 3 sku's, that we're kept out of the market with the rest of our sku's . . . It's literally a question of educating a bottler in a country on why our agreement is in the form it is."
Then there's old-fashioned "arm-wrestling": given the larger contribution Monster makes on marketing side, "how do you share the value chain in the country? . . . We're not going to compromise the value share and take less simply to get deals done," particularly since contract may stretch over 20 or 30 years, Sacks said. "We do a lot more than is usually done by The Coca-Cola Company in a bottler relationship, where they (the bottlers) pick up a lot more of the obligation." Added Schlosberg: "We have to insure that after those marketing expenses we do a good deal for our shareholders." If not, he advised, "there are other distribution partners that we'll be working with."
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04/29/2016
ANALYSIS: For First Time, There's Chance Several Big Bev Winners of Past Could Enjoy 2d Big Success
Count among them Fuze creator Lance Collins and Vitaminwater's #2 exec Mike Repole, who together created Body Armor sports drinks, which has received investment and distribution from DPS (as well as Kobe Bryant). Collins also may have prove to have a hit on his hands with Core water and its Core Organics extension; Core water just entered the DPS distribution network, too. And David Smith similarly this week won DPS endorsement, after having successfully cofounded Sweet Leaf Tea with Clayton Christopher and flipped it to Nestle Waters. (Another Vitaminwater vet, Rohan Oza, has had success as investor and advisor to Bai, also ensconced in DPS network, tho he's not founder/creator or hands-on operator. Founder of Bai is relative newcomer to bevs, Ben Weiss.) Christopher, too, has enjoyed success on new venture - but not in NA bevs. His biggest post-Sweet Leaf success appears to have been on alcoholic side, with Deep Eddy vodka brand. Of course, none of these NA brands is out of the woods yet, and in any case none is likely to attain exit on magnitude of $4 bil acquisition of Vitaminwater and Smartwater marketer Glaceau by Coca-Cola, kind of deal we may never see again.
Among past winners, there's one who's been building momentum who's been operating entirely outside DPS orbit as far as we know: Odwalla creator Greg Steltenpohl, who's been making lotsa noise on refrigerated side at dairy-alternative player Califia Farms, after earlier misfire at Adina. (His partner there for part of ride was SoBe creator John Bello, whose subsequent ventures have included likes of failed Firefighter bev and snack line.) So that's become one of intriguing sub-themes heading into peak summer selling season of 2016: whether any of these will truly break out and, in the process, break that longstanding jinx.
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He noted that the small equity positions DPS has been taking "carry no real governance rights, whether they be board seats, managerial strategy, what have you. That's why we spend a lot of time with these management teams understanding their strategy, the opportunity they see, does it square up with the opportunity that we see? Are they credible? What have they done in the past? There's a whole checklist we go through."
"And at some level, we want them to be able to fund the costs that they need to fund as the brand owner, and not come from us" because to do so "we would therefore have to buy them or acquire a majority position, which would cause the spirit of the company to go away. The ownership would leave. It would just become a nascent brand inside Dr Pepper that we would have to, in essence, grow from a very, very low base. That's why we're not doing these, because there's no proven model."
"The whole strategy is about capturing the passionate spirit of these people, and bringing something to the party that they absolutely need and we need. And like I said, the pipeline is full of opportunities. I don't know how we could ever have had an innovation pipeline like we're seeing . . . Would we have ever invented coconut water, for example, and had the success in Vita Coco? Would we ever have created a Bai and had the success of a Bai? If Larry had come to you and said -- and here, the example is Body Armor - we are now going to compete in sports drinks, you know that category, and you know it's a highly competitive category, and anybody would have said, You're crazy, and they would have had the right to say that. But here we come with a brand that we don't have capital at risk in any meaningful way. And yet we have a chance -- that management team, which is a very credible management team, has a point of difference. We think they've got a great strategy. They've got a great approach, from the product to the pricing to the positioning to how they're going to approach the channels. This is the opportunity. And some may go over time, but I'm telling you, we are just full."
As for Core Water coming into allied-brands fold, Marty said: "It's a somewhat crowded category, but some would say you can't have too few waters [we assume he meant you can't have too many], given the growth in that category. And it should remind everybody here that this strategy enables us to move with the consumer quickly, quicker than we believe we could do on our own. And we think we're taking advantage of that."
As for general strategy, besides latest 2 additions, "there's probably more than two dozen opportunities," Ellen said. But general idea is to "pivot with the consumer. We're not fighting the consumer, we're not trying to push back on the consumer, and throw our money and resources at an effort to try to do that. We're not going to try to make brands that consumers have said serve a certain purpose for them, and under the names of those brands, and try to change them and change the perception of them in the marketplace. So of course, this is about innovating with a very, very fast-changing consumer. And while we are getting growth in some of these categories today, and that's really good, we'll see where the growth curves go. Some may fade over time, just because consumers change over time and they're changing quickly. So we play this without capital at risk, and we get to capture the growth quickly. And we've got a lot of people lined up to talk to us" because they're anxious "to leverage something that is not so easily replicatable, which is 170 warehouses, 8,000 trucks and a massively powerful distribution system."
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Moves were disclosed on investor call yesterday in which Big 3 CSD player reported first qtr in which net sales rose 2% to $1.48 bil, with outside partner brands providing much of the lift. Operating income rose 15.9% to $313 mil. Asked about contribution of those allied brands, DPS cfo Marty Ellen said, "If you look at volume on the allied brands, you're probably just under half, okay, in the 40% range, in terms of contributed volume growth. And of course, in dollars, they're going to be even higher, because on a rate-per-case basis, they are higher than our core brands, with lots of good profitability." So suddenly, allied brands have become key element in growth of Big 3 soda player that still has nearly 80% of its biz tied to CSDs, albeit in flavored segment that's proved more robust than colas.
The moves add to sense of building momentum at one-time laggard DPS in innovation realm, even as they threaten to take out of mix for indie DSD distributors several of the most promising potential growth engines, launched by figures with proven track record with whom the DSD operators had prospered on earlier brands. High Brew was launched by Sweet Leaf Tea cofounder David Smith, while Core is from Lance Collins, entrepreneur behind Fuze, NOS Energy and Body Armor. Body Armor, of course, already is in DPS allied brands portfolio and recently received further investment from Plano, Tex-based bevco. Other allied brands in mix include Fiji Water, Vita Coco Coconut Water, Bai antioxidant infusions and Neuro functional line, tho latter is rarely mentioned by DPS and its star may be waning in face of Bai's current momentum. Addition of Core likely isn't being greeted with great enthusiasm by longtime partner Fiji, nor by Bai for that matter, which may be concerned it opens door to future addition of Core Organic subline, electrolyte bevs that some see as competing for similar consumers and occasions as Bai. As for indie DSD houses that are losing High Brew, quite a few got pieces of pool of shares distributed among initial distributors, somewhat easing pain of transition.
Tho cold-brew segment is proliferating with new entries, many are refrigerated entries or concentrate products, making canned, shelf-stable High Brew rare entry that's DSD-friendly, tho some houses have privately complained that $2.49-2.99 SRP is too high for small can and brand has been slow to ignite, particularly with little kicking in so far in field support. (That's key priority for 2016.) At Beverage Forum in Chicago earlier this week there was some chatter about pullout of High Brew from indie houses in Midwest, and brand also is switching to DPS operations in NY and several Tex markets, including Dallas, Houston and Austin, where High Brew is based. DPS cfo Marty Ellen made it clear on yesterday's investor call that more cutovers are looming. "That's going to phase in," he said. "They have some existing distributors, some we can take over immediately, some over time. But we've begun the process." In meeting with BBI in Chicago yesterday, marketing vp Mari Johnson said DPS was starting in some of its strongest distribution territories in order to get good read on potential of High Brew. (She was joined by her husband Brian Johnson, former DPS exec who just signed on with High Brew to run Midwest sales, meaning he'll bring great familiarity to new DSD partner.)
DPS Brands: Dr Pepper Up but 7 Up Struggles; Snapple Up 4% Among brands owned outright by DPS, Dr Pepper trademark rose 4% thanks to brisk fountain biz, tho half was accounted for due to sales to large bottling customer that co had anticipated for Q2. Its co-called Core 4 brands decreased 3%, as Canada Dry growth was more than offset by declines in struggling 7 Up, Sunkist Soda and A&W. Among other CSDs, Crush rose 6% and Schweppes 10%, thanks to greater promo activity at unidentified large retailer. Squirt rose 3% and Penafiel increased 5%, lapping 20% growth a year earlier.
On noncarb side, Snapple rose 4%, Hawaiian Punch fell 7% after price increases on single-serve packs kicked in, and Mott's slipped 4% on lower promo activity within sluggish juice category. Clamato surged 10% on increased promos, and bottled water segment soared by 22%, including double-digit gain by Mexican Aguafiel brand and growth from such allied brands as Bai and Fiji.
DPS Finally Ready to Play in Smaller, Premium Packs With rivals Coke and Pepsi having experienced solid success wielding smaller-size packs as way to tap new occasions and get price realization in challenging CSD category, DPS finally is ready to play game with new 7.5-oz slim can entering mix. Noted prexy/ceo Larry Young, "it is very small. And we're just getting them rolled out. I was in the trade last week down in Florida, there was lots of great response back from not only customers but consumers." It could prove to be 5% of mix, he guesstimated.
High Brew Pulls in $4 Mil Round from CAVU, Venture Fund Co-Launched by Ex-Sweet-Leafer Christopher A $4 mil capital infusion from CAVU Partners also announced yesterday reunites High Brew founder David Smith with his former partner at Sweet Leaf Tea, Clayton Christopher, who recently launched CAVU with former Vitaminwater exec Rohan Oza and CPG vet Brett Thomas. They'd earlier invested in Health-Ade Kombucha. Wholesaler said High Brew did about 100K cases last year.
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04/27/2016
SPONSORSHIP: Aiming at Substantial Base of Paleo Dieters, Zevia Natural Soda Ties to CrossFit Games
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In other news disclosed by Don at this week's Beverage Forum, hosted by Beverage Marketing Corp and Beverage Industry mag, he indicated co is building brewery in NJ to support augmented push into alc-bev space, tilting knack for flavor development of co and its longtime ally Allen Flavors into burgeoning malternative segment, at time alcoholic sodas, seltzers and other NA styles have been coming on strong. "There's a lot of growth in the future going to be tied to alcoholic beverages," he promised. Recall co started on alc side with malt liquors like Midnight Dragon and Crazy Horse (now Crazy Stallion) before taking a leaf from Snapple and entering tea/juice biz, and counts among such brands Mississippi Mud. And on distribution front, co continues to expand its self-distribution footprint, currently opening up in Georgia. It's self-distributed in NY, Fla and Chicago for some time, and more recently added Texas to mix, too.
Don received Bev Forum's Lifetime Achievement Award to standing ovation. He noted drily that someone had warned him such accolades mean "you're at the end of the line." Not in his case, he emphasized. "I have no intention of retiring, I'm having too much fun," working across the table with sons Wesley and Spencer and tight-knit team. In presenting award, Michael Bellas, ceo of Beverage Marketing, cited such innovations as priority on package design, ability to build brand without spending on media and inauguration of hybrid distribution system. We'll carry Don's reminiscences of how these came about in next issue of BBI.
Is Former Partner Ferolito Eyeing Bev Acquisitions, Too? Is recently exited partner John Ferolito looking to get back into bevs? Contact at Bev Forum who's not affiliated with AriZona Holdings but is immersed in bev deal flow told BBI NJ-based Ferolito has been actively looking for bev investments on his own. That's a bit of a surprise, considering that Ferolito had not had active role operating AriZona for well over a decade as he turned his attention to other interests, from operating country club/antiques biz in NJ to resuscitating legendary D'Angelico guitar brand. After long, acrimonious feud with Vultaggio over Ferolito's desire to cash out his 50% stake in co, Ferolito finally was bought out a few months ago.
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Crio Bru is offered in 10-oz bags denoted as "100% ground cocoa beans" and positioned as a "coffee alternative," or "healthy energy." Price is in $9-10 range, in general realm of higher-end coffees like Peet's or Caribou. A serving contains 358 mg of theobromine, which has diuretic, stimulant and relaxation effects. Format resembles what Teeccino successfully has been doing on tea side in specialty food retailers, with offerings like Maya or Dandelion that can be brewed like coffee.
The Tenn-born Durtschi, whose dad worked for Russell Stover, had always had interest in chocolate, experimenting as a kid with various recipes. When he decided to take plunge on cocoa brand, he toured hundreds of growers before settling on rare cocoa bean dubbed Criollo, inspiring Crio Bru name, and developed roasting profile that avoids bitter or harsh tone. Since he couldn't find commercial option to grind cocoa into required granular size without melting it, and thereby releasing the valuable cocoa butter, Durtschi says he had to come up with solution on his own. He self-financed modest launch on West Coast in 2010 and 18 months ago brought in first significant outside investors, mainly entrepreneur who'd developed liking for Crio Bru as a customer.
He's going broadly into retail rather than focusing only on higher-end or nutritional chains, and is happy to be shelved next to coffees, since brand is pitched as coffee alternative. By now he's in Sprout's, Wegmans and several Whole Foods divs, while also doing about 20% of his biz online. Deepak Chopra Foundation sells Crio Bru and lotsa doctors push it too. Even tho some consumers blend Crio Bru with their coffee, he's nixed for now the idea of doing a coffee/cocoa blend on grounds it might be too confusing. As for RTD, Eric says he's working with pair of copackers now, and says he's found way to do shelf-stable version that retains key nutritional benefits, tho he hasn't decided yet whether that's route to take.
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