Monster: Coke Energy Dispute Revealed in Q3 Earnings

Monster is fighting against increased competition in the energy space, CEO Rodney Sacks said during the company’s Q3 earnings report yesterday, including from one of its most prominent shareholders: The Coca-Cola Company.

In his opening statements during Wednesday afternoon’s call with investors and analysts, Sacks acknowledged pending arbitration between Monster and Coke over the latter’s development of a new energy line. According to story published by Reuters, the new products, set to be branded at “Coca Cola Energy” and “Coca Cola Energy No Sugar,” will use natural caffeine sourced from guarana — a violation of the ownership agreement between the two companies. Coke owns a 16.7 percent stake in Monster.

“We have some information, but we don’t have full information and I think that now that an arbitration has been filed between us to try and determine our respective rights, we just believe that it isn’t appropriate for us to provide additional comments at this time,” Sacks said in response to a request for more comment on the arbitration. “Commercial business activities and [the] relationship is continuing as in the past and we are looking to just get a third-party determination for the correct interpretation of our respective rights.”

According to Reuters, the two companies have a “difference in interpretation” of the agreement which prohibits Coke from developing specific types of energy products. Stifel analyst Mark Astrachan told Reuters he did not think Coke’s energy play would “gain meaningful share as consumers of energy drinks opt for something edgier,” adding that the company is likely looking to increase consumption of its trademark Coke products.

Coke has moved the release date of the energy line back to April 2019 in order to allow time for further negotiation between itself and Monster, Sachs said. It is not clear when Coke initially planned to launch the line.

At market opening today, Monster’s stock price plummeted 14 percent following the announced arbitration, which was submitted on October 31, but by end of day the price had recovered to a net 3.17 percent loss at $54.05 per share.

“We continue to be partners with Coca-Cola and with the bottlers,” Sacks said when asked about Monster’s ongoing relationship with Coke. “There will just be another product being sold by Coca-Cola bottlers, but the impact and effect on us would be something I think wouldn’t be appropriate for us to deal with that. We don’t believe it will have a majority impact on our relationship. We just believe we have to manage it in an appropriate way if and when it occurs.”

Wells Fargo Securities analyst Bonnie Herzog wrote that Monster’s management has been reserved about sharing details of the arbitration, but suggested that the move by Coke could signal that the conglomerate is not exploring acquiring the rest of the brand at this time.

But it’s not just competition from Coke that is posing a challenge to Monster’s category dominance. While Monster continues to grow, Sacks said the company is paying attention to the “performance energy category,” a space where products typically lean toward fitness need states and contain beneficial ingredients such as creatine. Although he did not name brands, Herzog noted Bang Energy maker VPX Sports — which Monster is currently suing over functional claims made by that company — has recently put considerable pressure on Monster.

“There is some sales on that, there are a number of reasons that those products are all sort of starting to gain some traction,” Sacks said. “But if I look at the sales levels, they are still behind the increase in sales. So, I think overall, we are getting additional products in the category, but the category itself is continuing to grow.”

Despite these concerns, net sales for the quarter were increased 11.7 percent year-over-year to $1.02 billion, up from $909.5 million in Q3 2017. Gross profit as a percentage of net sales was up 59.8 percent, compared to 62.6 percent in 2017. Net income was $267.7 million, up 22.4 percent from $218.7 million last year.

Distribution costs as a percentage of net sales were 4.1 percent, up from 3.2 percent last year for a total increase of $12.8 million due to higher carrier contract rates in the U.S.

Herzog viewed the quarter as mixed fortunes, noting a strong total top-line growth but lamenting “very weak” international sales gross and pressured gross margin. Herzog also questioned whether Monster’s recent price increase would stick given that Red Bull has not followed suit.

“We’re worried that [Monster’s] top-line could decelerate over the next few quarters, especially considering they will soon start to lap tough Java comps,” Herzog wrote. “Although we are cautiously optimistic about new innovation, such as a new high performance energy drink possibly called Reign, we’re not sure this will be enough of an offset to some of the aforementioned concerns.”