Hansen Natural (HANS)

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Hansen Natural (NDAQ:HANS), is the largest energy drink company in the United States with sales of more than $1.3 billion in 2009.^[1][2] The company's flagship Monster Energy® brand accounts for approximately 92% of revenue and has 29% market share for energy drinks, only behind Red Bull's more than 40%.^[3]

Unlike other beverage companies, Hansen does not produce, bottle, or distribute any of its products. Instead, the company relies on agreements with third party producers and bottlers for the manufacture of its drinks line.^[4] In the US, Hansen has distribution agreements with Coca-Cola Company (KO), Anheuser-Busch Companies (BUD), and other smaller distribution companies. Through these agreements, Hansen is able to gain economies of scale in distribution that allow it to compete with larger diversified beverage companies.^[5] Since Hansen does not produce its own beverages, its primary purpose is to develop and market its products. Because of this, Hansen is a relatively lean company, with fewer than 1,300 employees.^[6]

The energy drink sector in the US has continued to grow despite contraction of the soft-drink market but Hansen's major growth opportunities lie overseas. The company is aggressively expanding to new markets and expanded to at least nine new countries in 2010.

Hansen is highly exposed to raw materials costs. Prices for the most important input materials, aluminum, PET plastic, sugar, and juice concentrates fluctuate widely. For example, aluminum prices have fallen more than 40% from their 2008 highs of $1.50/pound to less than $0.90/pound.^[7]

Company Overview

Number of Cases Sold and Case Price^[8]

Hansen is the largest US-based developer and marketer of energy drinks, with approximately 29% of the domestic market.^[1] The energy drinks sector is amongst the fastest growing in the beverage industry and "alternative" beverage market sales in 2009 were approximately $29.9 billion in 2009.^[9] Led by its Monster energy drink brand, the firm has generated impressive growth since 2004. In 2009, the company posted revenues of $1.3 billion, a 10.7% increase from 2008; net earnings jumped 93.2% to $208.7 million.^[10]

Hansen's revenues since 2004 have grown through both higher sales volume and retail price increases. Hansen reports its sales in terms of cases, which are equivalent to 192 US ounces of beverage. Between 2004 and 2007, the company's case volume increased at a nearly constant rate. The growth rate shrank in 2008 due to weak sales in Q4 prompted by the economic downturn, but began to rise again in 2009. Average price per case has also risen since 2004.^[11][12]

In December 2009, Hansen launched a line of ready-to-drink iced teas under the "Peace Tea" brand. The brand competes with products by iced tea market-leader AriZona, Snapple, Coke, Anheuser-Busch, and Pepsi, however in 2009, the iced tea market grew 1.8%.^[13]

Quarterly Earnings

Q3 2009

In the third quarter of 2009, Hansen Natural 's revenues were $307.9 million, an increase of 8% from Q3 2008; net income grew nearly 7.8% to $56.5 million.^[14] The increased revenue was due primarily to record third quarter sales of Monster Energy drinks, however it was slightly offset by a decrease in sales of Java Monster beverages. As the company's second largest brand, Java Monster accounted for 13.1% of total sales in this quarter.^[15] Total Case sales increased 6.4% compared to the same period last year.^[16] The energy drink sector accounted for 91.7% of the company's net sales in Q3 2009, compared to 90.4% in the previous year. For the energy drink industry as a whole, sales declined by 1.1% during the third quarter compared to the previous year, however sales of Monster grew 3.3%. During the quarter, Monster's market share increased 1.2 points to 28.8%.^[17] Hans Natural continues to grow their international presence with gross sales increasing nearly 63% to $50 million, which includes sales to the US military.^[18] Expanding their product line, the company plans to launch a new line of ready-to-drink iced teas under the "Peace Tea" label on December 21, 2009.^[19]

Q4 2009

In the fourth quarter of 2010, Hansen Natural posted revenues of $329.6 million, up 13.8% from the previous year; net income was $53.4 million. Operating income for the quarter $85.8 million, compared to what would have been $79 million in Q4 2008 if not for charges related to the termination of the company's previous distribution agreements.^[20] Income this quarter benefited from a 61% decrease in operating expenses and advance purchases from distributors prior to a per-case marketing contribution program that began on January 1.^[21] For the energy drink sector as a whole, retail sales (excluding Wal-Mart) for the quarter increased 3.7% compared to the previous year and sales of Monster grew 12.2% compared to only 9.4% for its primary competitor, Red Bull. During the quarter, Monster's market share grew 2.2% to 29.2%.^[22] Java Monster, the company's second largest brand accounted for 13% of the company's sales, down 1.6% from the previous year, primarily as a result of competition with Starbucks' coffee energy drink products.^[23] Compared to the previous year, overseas sales more than doubled to $43.3 million, while revenues for North America increased 6% from the previous year. However, this increase for North America included the advance purchases, which accounted for approximately 4% of the increase, leaving North America's actual revenue increase closer to 2% for the quarter.^[24] The company also announced that it had finally received government authorization to open a new production plant in Brazil, which should be operation in the near future, and they plan to continue their brands' global expansion in Europe, South Africa, and the Middle East. Hansen's management said that they don't expect Coca-Cola's recent purchase of Coca-Cola Enterprises to have any major effects on their current distribution. This quarter also saw the launch of Peace Tea in late December 2009, and while it was too soon to see any major effect on revenues, sales were 1.4 million in December and CCE increased their orders for early 2010.^[25]

Q1 2010

In the first quarter of 2010, Hansen Natural posted revenues of $238.1 million, a decrease of 2.5% from the previous year; net income was $32.6 million, down 21.7% from Q1 2009. Operating income for the quarter decreased 22.8% to $50.8 million.^[26] Case sales for the quarter increased 3.1%, however the quarter suffered as a result of many customers' advance purchase of products in Q4 2009 to avoid the per case marketing contribution program that began on January 1, 2010 as well as the company's transition to a new computer system.^[27] Despite a soft beverage market in general, energy drink sales grew 7.5% during the quarter; sales of Monster increased 8.8% while Red Bull grew 13.3% and Rockstar grew by 3.1%. According to Neilsen, Monster's share of the gas and convenience markets is 27.7%, second to Red Bull's 31.8% and ahead of Rockstar's 9.6%.^[28] Starbucks' new coffee-energy products continue to compete with Hansen's Java Monster, which accounted for only 12.3% of sales for the Monster brand, down 1.2% from the previous year. Java Monster sales were 0.6% lower than last year while Starbucks Double Shot Energy is up 24.1%.^[29] International sales grew to represent 13.8% of gross sales for the quarter, supported by increased sales in Canada and Mexico, and in Europe (excluding the company's initial sales to Coca-Cola Enterprises (CCE) in 2009). During Q1, the company also began selling its products in Norway, Czech Republic, Slovakia, Hungary, and Brazil.^[30] Hansen's energy drinks grew to represent 91.2% of the company's net sales, up from 90.5% in the previous year; the company's newest product line, Peace Tea, is slowly growing with sales of approximately $5 million in the first quarter.^[31]

Q2 2010

In the second quarter of 2010, Hansen Natural posted revenues of $365.7 million, an increase of 22% from Q2 2009; net income increased 11.4% to $63.8 million. Operating income increased 18.2% to $109.7 million.^[32] Sales of Monster Energy drink was the primary driver of the quarter's growth, with a 12.7% overall increase in sales. This increase was the second largest in the energy drink sector, behind a 15% increase for Red Bull. Monster's market share of the gas and convenience channel was 27.9%.^[33] The company's DSD ("Direct Store Sales") segment accounted for 93.3% of total sales in the quarter with the remaining revenues coming from the warehouse segment (6.7%).^[34] Java Monster sales, as a percentage of the company's total sales, decreased 1.8% in the quarter as the brand continues to directly compete with Starbucks' Doubleshot Energy Plus Coffee product.^[35] International sales continued to grow in the quarter, accounting for 16% of the company's gross sales, compared to only 11.4% in Q2 2009.^[36] In Europe, sales were 230% higher than Q2 2009. The company is aggressively expanding to new markets with expansion to Slovakia, Czech Republic and Norway happening this quarter, and expected launches in Germany, the UAE, Lebanon, and Jordan later this year. Sales in Australia and Brazil both suffered from various operational setbacks such as problems with the distributor's strategy in the former and problems getting ingredients through customs in the latter. Lastly, the company's new Peace Tea product line continues to grow, generating $7 million more than last quarter.^[37]

Q3 2010

In the third quarter of 2010, Hansen Natural posted revenues of $381.4 million, up 24% from the previous year; net income increased nearly 18% to $66.5 million. Operating income for the quarter increased 16% to $107.6 million.^[38] The higher earnings were driven by increased volume for Monster and Peace Tea products while sales of X-Presso Monster decreased. Total case sales increased by 27%; DSD sales grew by 27% while Warehouse sales fell by 7%.^[39] Sales of non-carbonated beverages, spurred by sales of Peace Tea, increased by 44% from Q3 2009. In this quarter, the company launched Monster in Germany, the UAE, Lebanon, Jordan, and Tahiti. The company is planning expansion to Switzerland, Austria, Iceland and Bulgaria by the end of the year.^[40] The company launched Monster Energy Absolutely Zero in the quarter and is planning the launch of two new energy drink products in 2011.^[41]

Operating Segments

Hansen operates two main business segments (operating expenses are not allocated to either segment so individual segment net income is not reported):

Trends & Forces

The Global Economic Recession Threatens Overall Demand

As the world economy slides deeper into recession, Hansen will become subject to the trade-down effect, in which consumers trade down to cheaper goods to save money. With the 2008 Financial Crisis putting the brakes on consumer spending, Hansen may be forced to cut prices to maintain demand.

Federal Ban on Caffeinated Alcohol Products

After a spate of highly publicized deaths on college campuses in late 2010, the FDA forced manufacturers of seven caffeinated alcohol products to stop selling their products in their current form. The drinks combined large amounts of caffeine and alcohol - the most popular, Four Loko contained the equivalent of three cups of coffee and three cans of beer - and were very popular on many college campuses across the nation.^[42] Extrapolating from reports of one recycling company that was assisting with the recall, it is possible that Four Loko sold as many as 25 million cans per year. In the wake of the FDA's warning, nearly all energy-alcohol products have been removed from shelves, leaving customers looking for other ways to get the same result. It is possible that Hansen's Monster products will be able to capture some of these customers as they turn to non-alcoholic energy drinks which can then be mixed with alcohol.^[43]

Competition

The beverage industry is highly competitive. Hansen competes against a variety of companies in two markets: soft drinks and energy drinks.

Soft Drink Market Share

Hansen is a relatively small contender in the soft drink market. Although Hansen's Sodas may appeal to a small group of organic minded shoppers, they cannot compete on a national scale with established soda companies like Coca-Cola Company (KO) or Pepsico (PEP).

Energy Drink Market Share

Hansen is the second largest energy drink brand in the US, with approximately 14.4% of 2010 US market share.^[45]

The remaining 21% of the Energy Drink market is divided among brands that all have less than 3.6% market share.

References

1. ↑ ^{1.0 1.1} Coke signs deal to distribute Monster Energy drinks.
2. ↑ HANS 2009 10-K, Item 6: Selected Financial Data, p.33
3. ↑ hans 2008 10-K pg. 35  
4. ↑ hans 2008 10-K pg. 7  
5. ↑ hans 2008 10-K  
6. ↑ hans 2008 10-K pg. 17  
7. ↑ Aluminum Price Charts.
8. ↑ name=HANS58> hans 2008 10-K pg. 58  
9. ↑ HANS 2009 10-K, Item 1: Business, p. 5
10. ↑ HANS 2009 10-K, Item 6: Selected Financial Data, p. 33
11. ↑ hans 2008 10-K pg. 43  
12. ↑ hans 2008 10-K pg. 58  
13. ↑ Peace Tea eyes a future with Coca-Cola, Atlanta Journal-Constitution, 12/30/2009
14. ↑ HANS 10-Q Q3 2009, p. 4
15. ↑ HANS Q3 2009 Earnings Call Transcript, Seeking Alpha
16. ↑ HANS 10-Q Q3 2009, p. 36
17. ↑ HANS Q3 2009 Earnings Call Transcript, Seeking Alpha
18. ↑ HANS Q3 2009 Earnings Call Transcript, Seeking Alpha
19. ↑ Peace Tea Website, "Give Peace A Chance"
20. ↑ Hansen Natural 8-K, Hansen Natural Reports Record Fouth Quarter and Full Year Financial Results, Wikinvest, 2/25/10
21. ↑ Sales, Rise, Costs Fall and Hansen Posts Q4 Profit, San Jose Mercury News, 2/25/2010
22. ↑ Hansen Natural Q4 2009 Earnings Call Transcript, Seeking Alpha, 2/25/2010
23. ↑ Hansen Natural Q4 2009 Earnings Call Transcript, Seeking Alpha, 2/25/2010
24. ↑ Hansen Natural Q4 2009 Earnings Call Transcript, Seeking Alpha, 2/25/2010
25. ↑ Hansen Natural Q4 2009 Earnings Call Transcript, Seeking Alpha, 2/25/2010
26. ↑ HANS Q1 2010 10-Q, Wikinvest, 5/10/10, p.28
27. ↑ HANS Q1 2010 10-Q, Wikinvest, 5/10/10, p.28
28. ↑ HANS Q1 2010 Earnings Call Transcript, Seeking Alpha, 5/6/10
29. ↑ HANS Q1 2010 Earnings Call Transcript, Seeking Alpha, 5/6/10
30. ↑ HANS Q1 2010 Earnings Call Transcript, Seeking Alpha, 5/6/10
31. ↑ HANS Q1 2010 Earnings Call Transcript, Seeking Alpha, 5/6/10
32. ↑ HANS Q2 2010 10-Q, p. 4
33. ↑ HANS Q2 2010 Earnings Call Transcript, SeekingAlpha, 8/5/2010
34. ↑ HANS Q2 2010 10-Q, p. 29
35. ↑ HANS Q2 2010 Earnings Call Transcript, SeekingAlpha, 8/5/2010
36. ↑ HANS Q2 2010 10-Q, p. 30
37. ↑ HANS Q2 2010 Earnings Call Transcript, SeekingAlpha, 8/5/2010
38. ↑ HANS Q3 2010, Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations, p. 35-38
39. ↑ HANS Q3 2010, Item 1: Business, p. 26
40. ↑ Hansen Natural Q3 Beats Street, Benzinga, 11/4/10
41. ↑ HANS Q3 2010 Earnings Call Transcript, Seeking Alpha, 11/4/10
42. ↑ FDA Calls 7 Caffeine-Alcohol Drinks Unsafe, CNN, 11/17/10
43. ↑ 4 Loko Ban May Give Hansen Natural Shares a Better Buzz, SeekingAlpha, 1/20/11
44. ↑ [www.beverage-digest.com/pdf/top-10_2010.pdf Beverage Digest, Top 10 Carbonated Soft Drinks in 2010]
45. ↑ Energy Drinks: An Assessment of Their Market Size, Consumer Demographics, Ingredient Profile, Functionality, and Regulations in the United States, p. 304