Boston Beer Company Inc (SAM) 2003 Q1 法說會逐字稿

Thank you. Good afternoon everyone and welcome to the 2003 first quarter earnings call for the Boston Beer Company. Joining me today is our Founder and Chairman, Jim Koch and our Controller and Interim CFO, Monica Martin. I will begin this afternoon’s call with some financial highlights of the quarter, and we will provide some commentary on expected performance, and then I will turn the call over to Jim, who will provide an overview of the marketplace and our business strategy. Immediately following Jim’s comments, we will open the line for questions.

For the first quarter 2003, net revenue decreased less than 1% from last year due to a decline in shipments volume of 1.8%, partially offset by normal price increases. Wholesaler sales to retail were up approximately 2% as compared to the first quarter last year. Shipments volume is trending lower than wholesaler sales to retail due to an inventory build at wholesaler that occurred in the prior year and this effect is expected to continue for the rest of the year as this inventory is run down. Based on shipments-to-date and orders in hand, we currently anticipate shipments volume to be down mid-single digits for the first half of 2003 as compared to the same period 2002. Gross profit was recorded at 58.6% of net sales versus 59.5% reported in the first quarter of 2002. The two primary factors that negatively impacted the gross profit during the first quarter 2003 were an increase in the returns of balance to reflect increased wholesaler inventory levels for our seasonal brands and increased operating cost at our brewery in Cincinnati. These were partially offset by favorable changes in the product mix and moderate price increases that were initiated during 2003. Assuming no competitive price movements and some improvement on cost, we still expect to see an improvement in total year gross profit as a percentage of net sales as compared to 2002.

The reported loss per share of 1 cent during the first quarter of 2003 as compared to prior year first quarter earnings per share of 8 cents was primarily due to an increase in advertising and promotional expenditures related to the continued support of Sam Adams Light at the national level during the first quarter of 2003. Sam Adams Light continues -- sorry, Sam Adams Light currently comprises approximately 20% of our total business, and we continue to believe that a significant growth opportunity exists within the better light beer category. We plan a significant investment in the second quarter behind our brands while maintaining advertising and promotional spending during the full year 2003 at similar levels to the full year 2002. Given these plans, we continue to expect earnings improvements for the full year 2003 as compared to 2001. Jim will comment in greater depth on volume trend strategy going forward.

Our balance sheet remains healthy with 48m in cash and investments as of the end of the first quarter and 45m in an available line of credit. We remain committed to reinvesting in the Company’s stock and currently have 10m remaining under a 60m aggregate board authorized spending limit related to the stock repurchase program. To date, the Company has repurchased a total of 5.4m shares of its Class A Common Stock for an aggregate purchase price of 49.9m. CAPEX and depreciation were $595,000 and $1.4m respectively for the quarter consistent with prior year. I am now going to turn the call over to Jim.

Thank you. The first quarter of 2003 did not meet our expectations-- in particular depletions were up only 2%. Our on-premise business has been particularly soft, probably driven by a weak economy, low consumer confidence levels in the first quarter and bad weather conditions in the northeast. In this environment, we were up slightly despite industry trends, but we are disappointed because we didn’t do better.

Sam Adams Light currently comprises about 20% of our business and the incremental depletion volume from Sam Adams Light is only slightly exceeding declines experienced in the other styles. Our shipments relative to last year are down due to these declines of Sam Adams brands, except Sam Adams Light. And in addition to the factors I’ve just mentioned, higher wholesaler inventory levels at the end of the 2002 have negatively impacted shipment volume during the first quarter. Orders for April and May continue to be sluggish. These orders are probably indicative of expected weak brand performance outside of Sam Adams Light, overall business conditions, and a winding down of wholesaler inventory levels from the end of 2002.

While the off-premise business tracking from Nielsen and IRI suggest that in supermarkets the total Sam Adams brand family is up 15%, which is 10% higher than the 5% increase for better beer. That growth is due to Sam Adams Light and the total depletions for the company are much lower, which appears to be affected by weak on-premise conditions overall, and by some cannibalization of Lager and Seasonals by the Sam Adams Light. This cannibalization appears to due to decisions made by retailers, wholesalers, and Boston Beer Company people, to focus our resources behind Sam Adams Light, as well as some cannibalization at the consumer level. We are actively working to fix these cannibalization effects at the retail, wholesale, and Boston Beer Company level.

In 2002 and most of the first quarter in 2003 the vast majority of our brands support resources were put behind the launch of Sam Adams Light. We believe this made for a successful product launch, and we remain optimistic about the significant growth opportunity for Sam Adams Light. We believe, however, that the investment behind the entire Sam Adams family is necessary at this point to sustain the overall long-term growth of the company and to maintain our strong brand umbrella, so that Sam Adams as a total brand can reach its full potential.

Beginning at the end of March, we moved our TV advertising investment from Sam Adams Light to a new campaign for Sam Adams Lager, and we are using radio to provide the continued support for Sam Adams Light. We would expect this strategy to last at least through the summer. We remain very optimistic about our strategy in the Better Light Beer category with Sam Adams Light and the success that it’s enjoyed so far. And we believe that investing now in the entire Sam Adams brand family will grow the right equities to continue to grow overall. We anticipate that our current volume trends are strong enough to allow us to sustain our planned advertising spending in 2003, while also increasing our 2003 earnings at a low double-digit rate over the 2001 base, before the introduction of Sam Adams Light, of 62 cents per share. Now, let me open it up for questions.

Thank you. At this time, we are ready to begin the question-and-answer session. If you wish to ask a question please press "*" then “1” on your touchtone phone and you will be announced prior to asking your question. To withdraw your question you will press "*" "2" Once again, to ask a question please press "*" “1” now. Our first question is from Jeff Kanter.

Good afternoon everybody. Question for you based on your second quarter the way the second quarter is trending up -- starting out. Do you think your earnings are going to be up year-over-year in 2Q 03?

I don’t think we have publicly made a statement as to what our quarterly earnings are going to be Jeff. I think, I would rather answer the questions with referring you to one, the statements that we project earnings growth over the full year and then two, the comment that we made that we have heavy investment lined up in the second quarter.

Yeah, but I guess -- shipments -- here is what we do know -- we know that shipments probably in the second quarter are going to be down figure around 7% or so and the advertising is still going to be up. So you have -- the operating leverage is not really working in your favor through your P&L that’s fair to say -- is that?

That would be a fair analysis.

And can you grow this double digit, it’s obviously a backend loaded year, which not too many people like to hear, but can you grow this double-digit rate with continued cannibalization of the Lager -- of Sam Adams Lager?

I think, we believe that we have to correct the cannibalization that is being driven by decisions that we have consciously made related to focus and investment for us to be able to do so.

Okay so the answer is -- yeah you got to stabilize that.

Yeah.

Okay, fair enough. Thank you very much.

And our next question is from Skip Carpenter.

Yes, good afternoon.

Hey, Skip.

A couple of questions. First, could you give us -- I know you guys -- at least with regards to the K -- any update with regards to the situation with Miller’s specifically Tumwater brewery out in the West Coast where that stands right now -- where kind of -- I guess the two parties are with regards to Sam producing the product for you?

Okay, I think it’s fair to say that nothing much has changed from what we have reported in the K, but I can summarize that as reported in the K we are in arbitration with Miller Brewing Company over their claim termination of our brewing relationship, but their claim termination being effective from May 2004. Miller Brewing Company currently brews for us in two locations; one of which is the Tumwater Brewery that you mentioned with approximately 30% of our production. Miller has announced the closure of Tumwater some time effective for May, June, July this summer. The date does seem to be moving a little bit and they are transferring their production obligations to us to their Eden facility.

Did they pickup freight?

Yes they did.

So, there is no incremental cost to your organization due to this change from -- away from Tumwater at this point?

That is correct.

Okay.

And then as it relates to the overall relationship with Miller -- you know we currently believe that we have adequate supply available to us to fulfill our brewing needs over the foreseeable future regardless of the outcome of the Miller arbitration. Nevertheless, we continue to evaluate additional brewing supply options to maintain our flexibility that we have always liked to maintain and also to maintain our cost position.

Okay. Can we go -- circle back to the advertising and selling. I just want to make sure I got what you guys have talked about in some of the decisions -- can you be a little more specific with regards to the decisions you guys made in the organization and why it appears that the cannibalization was much higher in this quarter than we have seen previously? Was there anything that you would be able to kind of enlighten us on with regards to that?

Yeah. I think a couple of things have worked themselves out with the original introduction of Sam Light in the various markets when we rolled it out. The overall excitement about Sam Adams and the way that the TV advertising helped the entire brand; however, what happened overtime was that at the retail level we lost some of our shelf space that we had on Lager and Seasonals to Light. And at the wholesale level, their excitement about Sam Adams Light and having a hot brand meant that they focused more on Sam Adams Light and somewhat neglected the Lager and Seasonal volume. And as that initial excitement wore off, we began to see some cannibalization because we had less shelf space; we were now sharing displays with Light as well as Lager and Seasonal and wholesalers were very focused on Sam Adams Light because everyone, including us and our sales people, wanted to guarantee a successful launch of Sam Adams Light. We knew we only had one shot at that and we wanted to put everything behind it.

At this point, we have been in virtually all the markets in the country with Sam Adams Light for at least 6 months. It has added substantially to our business, and even now continues to offset those declines. We were up in our sales to retailers in the first quarter. We think it is now time to go back, having successfully launched Sam Adams Light, and begin to support Lager and Seasonals which, you know, are -- continue to be the bulk of our volume. So -- and those who have been neglected in a sense as we put our resources behind guaranteeing a successful Sam Adams Light launch. Now we have had anywhere from a year and half to 6 months with heavy advertising behind Sam Light. We are pretty comfortable about where it is and we think we have a strong Sam Adams Lager campaign that we wanted to put on TV, so that hit TV at the end of March.

Yeah, Jim, I mean when was the last time that when you look at your Lager business -- I mean there seems to have been prior to the launching or getting into the Light category, there was repeated attempts to give the right marketing message and move the needle for the Lager brand and it did not seem to ever materialize; and for some reason now maybe you think that this is the right campaign effort. Is there a concern that with the focus now on TV -- I mean on Lager, it just is I am a bit surprised that why you would want to take the peddle off -- I know you are doing it on radio why would you want to take the momentum of what was clearly strong product in terms of the Sam Light product, at a time when we are going into the summer selling season, particularly when all these wholesalers got burnt last year with these more malternatives, you’d think if anything you guys wanted to continue to drive that momentum. And given that in fact that the Lager’s never participated in the better beer growth category.

Couple of things. On Light we feel pretty comfortable that the momentum is there and I think the wholesalers would support that there it has been around long enough and is now a year and a half in some markets, and continues to be strong. So wholesalers are pretty comfortable that this not like the malternatives, this is a hot brand that’s here to stay. The business though is almost 70% Lager and Seasonals; and those are particularly Sam Adams Lager, the flagship brand. And we have never been able to give Sam Adams Lager the level of TV advertising or even overall advertising that we are able to afford now. The growth that Sam Adams Light has contributed to the company, which we believe is stable and we can continue to grow, that has taken us to another level in our advertising capabilities. We can advertise Sam Adams Lager today at weights and levels that we have never been able to do in the past, and still we believe increase our earnings per share significantly.

Do you think when you look at your advertising and selling expense for the full year I mean last year in ’02 was up 26% to approximately 100m on the P&L -- is that figure for ’03 then? I mean are we talking that you are actually going to see an increase even above and beyond the 100m spending on advertising and selling for ’03 then?

No, we expect to be roughly at the same levels as last year.

Okay. So again, therefore, in order to get this double -- I’m still trying to get to the numbers here. Just it seems then we’re going to have to get this big back half acceleration in terms of top-line performance to get anything close to the double digit earnings per share growth that you guys seem to be forecasting at this juncture. Is that fair?

I don’t know whether it’s -- we would look at it as a big lift. I think there are some factors in the shipment comparisons that are favorable from last year, again, due to a very weak fourth quarter.

Okay, thank you.

Yeah. There was a lot of inventory build…

In the first half of…

In the first half of last year as distributors geared up.

Yeah, but fair enough. [It has been] --it did -- my understanding is that Sam Light was national at the end of the last year. And if you look at -- where was it, in terms of, at the end of the first quarter ’02, what portion of the markets were you in, and what portion were the markets at the end of the second quarter of ’02? Just if you have any kind of rough estimates on that?

Roughly, I’m making a wild guess, Skip. So roughly, we were between 20-50% at the end of the first quarter, and at the end of the second quarter, probably 30-60%.

Okay. Alright, thank you very much.

Once again if you wish to ask a question, please press “*” “1” on your touchtone phone now. And we do have a question from Marc Cohen. Marc, your line is open.

Hi Jim, hi Martin.

Hi.

Hi Marc.

You know, can we just go back and discuss a little bit here about what you’re really seeing in depletions. I think if I’m not mistaken, in early March you talked about seeing about a 4 -- having a look at about 4% depletion growth, came in at about 2%, which implies March was pretty soft. And I’m wondering if you could just expand a little bit on kind of what happened here -- breakout for us what you think is going on in the on-premise business? And also give us some indication of -- consistent with this single digit -- mid single digit shipment decline for the first half, what’s your vision on depletions here early in the year, so that we can get a sense of what you really think the top-line is doing?

Well, the top-line was up a couple of percent, and we had expected more than that. March was weaker than we thought, particularly the back half of it. We don’t know what impact the war had on people’s consumption, but it appeared to affect the on-premise more than the off, Marc. You know, our supermarket volume through the latest Neilsen’s at the beginning of March was still up double digits. But what we’ve heard from wholesalers is that the on-premise business has been disproportionately affected, and we skew more heavily to the on-premise.

Right. So, is that just your business they’re speaking about or are they just talking about the business broadly?

No, they’re talking about their business broadly.

And is there a geographic dispersion to it?

The first quarter, according to the wholesalers I’ve talked to, was disproportionately bad in the Northeast. Now there’s probably a little bit of that that had to do with the weather, because the weather wasn’t very good and they missed a delivery day or two. But the Northeast appeared to suffer a little more.

No, but I’m talking more about this back half of the month thing because that seems to be where the sales surprise is, right. So it seems to me that what you’re saying is that the on-premise business in the second half of March was just below expectations. And would you say that the share -- I mean you probably don’t know, but is it your judgment that that’s a market share issue or a market growth issue?

Its -- that’s judgmental. So again, I’m making a guess without a lot of data, just anecdotes from the wholesalers. But they’re feeling significant pressure at the high end. And I do know that the last three months, December, January, and February -- imported beers in total fell, that their shipments into the U.S. were reported to be down for the first time in a long period. So, there may be some evidence of more pressure at the high end.

Okay. So when you play this out over the second quarter and the third quarter, what’s you -- give us some -- can you give us some vision of what you think is -- what your expectations would be around here on depletion growth?

Yeah. At this point we are -- we continue to be optimistic about it. And I guess I am wary of extrapolating a whole lot from the month of March and the impact of the war on people going out, on just a shift in mentality. I don’t want make any projections off of what I believe was kind of an emotional rollercoaster.

What would -- so what you are saying is that you think that that last 2 weeks in March was impacted by people staying home watching TV -- watching the war and you don't want to project off of that. So is it that you are approaching this that you think the next couple of quarters show you double digit depletion growth; as you -- I guess you had to be thinking before, right?

Yes. At one point I expected double digit growth for the first two quarters and I am disappointed that it was only 2%.

I guess what I am asking you Jim is thinking about the shipment number for the first half, give us -- give me some sense of what are you thinking for depletions and what you are thinking for inventory behavior?

Well, I think we are going to draw down some inventory for the full year and at this point I just -- I think it’s too early to project anything on depletions. We were up for the first quarter. I am optimistic for the next three quarters, but there’s a lot of other variables; and frankly the first quarter was below of what I thought it was going to be.

Well. Is it your sense at the pressure on depletions late in March has eased -- has changed it all at this point?

I don’t know. It’s too early for us to get midmonth numbers from the field. So, I will know better in a week.

Okay. What specifically are you guys thinking of doing in respect to regaining some of the distribution in shelf space that you think you might have lost on the Lager brand to the Light brand. Are there specific programs you are putting into the field right now to, kind of, encourage people to expand shelf space now that they have got this broader brand family?

Let me answer that Marc. We have a direction and programs in place that are designed to return distribution on all of our SKUs back to where it was pre-Light and to specifically address any replacement of cannibalization issues. And we are being helped in that regard by the weakness in the alternative segment and –that there is currently shelf space that we got. So, our people and our wholesalers, as we programmed them, are going out and reclaiming the distribution points that we lost and we’re having some success in that direction.

Okay, so basically is it a distribution drive. How does it work Martin?

Our people are targeted up distribution games and bonused off it and we program the wholesalers to put incentives in place against the wholesaler people to increase the distribution and return it to the level it should be. We try to do it based on targeted distribution and key accounts. And we also work hard with the chain accounts to fix the shelf sets. Now one of the issues in rolling out Light, sort of, as we did was it didn’t coincide with shelf sets being set at the chain level and so as those shelf sets -- so in a chain where we were unable to get incremental space, we made trade-offs within our own portfolio to get Light in. And now as the shelf sets come up for resetting, we’re actively showing the SKUs that we took out deserves to be in there with the Light as opposed to being replaced by the Light.

Alright. So just my final question is just I mean it sounds to me as if you have basically pared back your -- let me back up, I was encouraged that you had basically stuck with the indications that earnings growth -- earnings would grow 10% or more above the ’01 level. But it looks to me and it looks to me as if your confidence about that is really predicated on a spending change decision. In other words, rather than growing the SG&A line, you’re holding it flat and now expecting a softer depletion trend than you were thinking before. Is that accurate?

Yeah. Well, again in really rough terms, in the first quarter we’re still up a little bit. So if one projected that, you could see continuing the same high level of advertising and other brand support and still having enough left over to create double digit growth in earnings.

Thanks guys.

And we have a question from Jeff Kanter.

Hi, just a quick follow-up. How much inventory did you have at the wholesale level at the end of the first quarter?

Jeff I’d like to answer that, sort of, more in reference to how much more we had in the start of the year and then reference that back to pre-Light launch days. During the quarter we built wholesaler inventories by approximately 9,000 barrels. That was on top of the approximate 30,000 barrel increase that we had throughout the course of last year. Relative to this time last year, on inventory we’re about 17,000 barrels higher.

Higher. Okay, so that 35,000 barrels that you had at the end of 4Q'O2, is now about 17,000 barrels higher?

The difference relative to last year, yes. Relative to this time last year.

Okay. Is the tax rate still going -- still 41% or so or is that coming down?

Tax rate, I think, we’re projecting for the full year around 39.

Okay, its 39. And Jim didn’t you say – I thought the plan all along was to keep advertising spends relatively flat? Wasn’t that kind of -- wasn't that the goal from the get go going back a quarter or two?

Yes, though we had hopes that if we got the double-digit volume growth that we could put some more of that extra gross profit into advertising again to just keep the momentum going. So, we certainly had a base plan and a plus plan, and the base plan was on the order of flat, just slightly up or slightly down, and the plus plan was a continued increase.

Okay, for now that we again -- is that kind of just so I understand Mark's question or the answer to Mark’s question. The fact that advertising was up a little bit in the first quarter, but now we’ve kind of gone - we’ve kind of go -- gone to below a base plan. For the next couple of quarters SG&A as year-over-year maybe slightly down.

Jeff, if I can jump in. I think in the second quarter, as we indicated, we’re expecting continued hike.

Yeah.

And relative to last year and in the third and fourth quarters as we launched nationally, we had very high spends.

Yeah.

And I think that’s where you would probably draw an inference, that there would be a difference.

Okay, thank you very much.

And our next question is from Skip Carpenter.

Hi, Skip.

Either Martin or Jim. With regards to advertising and selling, now that -- and I guess Jim you were talking about this is just the size of that business where you guys stand on in terms of the -- you mentioned in terms of where, in terms of advertising and selling. What would you, kind of characterize, that would be a rate of advertising and selling? Whether you want to put that on a per barrel metric or kind of as a percentage of net revenues? Is there anything now -- because there clearly is a quantum leap up, if you look at I don’t know percentage in net revenue, going from where you guys have been historically been in a 37-40% range to now, pushing 47%. And you know is that kind of -- in this kind of beer market needed to that kind of the high spend levels? Is that kind of where we should pace this company going forward?

Well, right now, we are looking at levels that are consistent with last year for the advertising in promotional expenses, which as you point out is quantum leap over where we were pre-light.

Correct.

So, we think we can sustain the brand support at that level, and looking forward to seeing what that level of brand support can do to the Lager and Seasonals which make up close to 70% of our volume.

Yeah. But I guess understood you’re now kind of at a new level in terms of support. So is that kind of -- goes to my question in terms of -- I remember the last, last couple of quarters whether it was Rich or you pointing out in terms of leveraging. So, there will never be a time where your organization will return down to as a least percentage of revenues on a per barrel basis kind of those prior levels of spending. Is that fair?

I wouldn’t rule it out. It really depends on, you know, whether we are getting results for the additional money spent. We feel that with Light the additional money spent was a good decision, and this is the first time we’ve been able to support Samuel Adams Lager at those levels. So it really is a matter of do we get results from that. Clearly, our advertising spend on a per barrel basis is significantly higher than most other people in the industry because we think there is continued long-term upside in our brand. But, if there were not results coming from the higher level of advertising spending we don’t have any necessity or commitment to doing it absent good results.

And I guess if you look, you know, you talked about a lot in terms of earnings growth this year really vis-à-vis kind of '03 versus an '01 timeframe. Have you guys given a little bit more thought to kind of establishing any kind of a longer-term growth metrics for this company, I mean, you said in your prepared comments talking about realizing the true growth of the company and I guess, full potential. And what would you kind of subscribe to as kind of a realistic growth objective, both from a top-line and bottom-line for the Boston Beer Company longer-term once we get beyond these kind of introductions of a new product and kind of the ebb and flows of -- what you as an organization need to do to get a product launch successfully? What would kind of characterize this kind of realistic growth expectations?

Yeah, I wish I had that kind of crystal ball. I can tell you a few things, you know, the long-term growth of better beer has been between 5-10%, it’s been closer to the 10% over the last probably 5 or 6 years. So, there maybe a little slackening of that in the next few years back to the norm but I continue to believe that there is significant growth at the high-end of the beer business, and I believe Sam Adams is well positioned to take advantage of that. You know, as to the expectations for top-line and bottom-line growth, to some extent they probably don’t grow exactly in lock step but rather in some kind of sequence, and right now we are clearly investing at high levels in our brands. If we were to pull that back to '01 levels, you can run the numbers but it would have a major impact on the positive side on EPS.

Fair enough. I guess I am just looking at, you know, at your in terms of -- from a net income perspective, that is kind of you know creating shareholder value. I look at kind of your, you know earnings per share levels, you know, over the last several years, you know, with the exception I guess, kind of, you know seeing some kind of a jump this year. It hasn’t really shown up in terms of because of the share with buyback activity and through that that the net income really hasn’t grown much for some time despite a top-line growth that is actually kind of picked up at here. And I am just trying to gauge, you know, if you look at this business model, I mean how do you see I mean, you know, because you guys haven't been participating in the better beer growth category, and I am just trying to gauge, do you think that you know, you guys can [inaudible] at this point now, with the size of the business, positioning of the brands, match that growth, you know, kind of exceed it or do you think you are going to be slightly trailing, kind of, better beer growth then?

Man, I can tell you that my personal objective is to exceed it.

Yeah. Well thank you.

Our next question is from Gary Schiral (ph.), JP Morgan.

Can you talk a little bit more about what the available capacity is out there for switching your brewing?

I’ll try to answer you the best I can Gary, without sort of compromising discussions that you know, that we have and that are ongoing. There are obviously a number of breweries available to us. Some of which we currently contract with and some of which we don’t. We currently contract with City Brewing in La Crosse Wisconsin, we currently contract with High Falls Brewing in Rochester, New York, and we contract with FX Matt Brewery in Utica. And we have, you know, discussions with some of those players ongoing about expanding our access to their facilities. We own the brewery in Cincinnati, which has expansion capability with capital investment to a number of levels. So we evaluate the benefit of expanding our own capacity versus contracting or indeed investing and expanding other people’s breweries. There are obviously other breweries out there that have production capability, and at this point in time I would rather not comment on them as it relates to our negotiations.

Okay, is there much difference from brewery to brewery in terms of brewing or is it pretty much a commodity?

There’s some differences, you could think of it as a kitchen. Not all kitchens are the same, but if, you know, if the chef goes in there with his or her ingredients, they might have to bring a pot or two in, but basically it's pretty similar.

Right.

We typically have to make changes, investments, you know, do test brewing; it can take some time to exactly match the process and the taste. But that’s something we have considerable experience over the last 18 years with doing. So, I have a high degree of confidence that we can do it. It may just take some time and investment.

Okay. Thanks very much.

And our next question is from Marc Cohen, Goldman Sachs.

Yeah, hi. I just want to -- try and follow-up on something that – that’s going on here in the second quarter. So, you are indicating -- you’ve made two indications, one is that shipments are orders-in-hand indicate shipments down double-digit for April-May. And two, that you will make some allowance for inventory related to the Seasonals in the first quarter. So, I wonder if you can just give us a little bit better visibility to what you think wholesalers are doing right now with inventories in the second quarter? I guess, specifically, is the indication for April-May, a function of wholesalers now moving into an inventory-depletion mode for the second quarter or is that really just a comparison against the build last year?

I think, you know, as we currently look at what’s going to happen in second quarter, we would anticipate that we will see some wholesaler inventory reduction continuing to willow away at the relative size of wholesaler inventories to where they were a year and half ago.

In the second quarter?

Yeah.

So, as how do you play this out, does it deplete pretty evenly across the year now or had it -- you must be what -- 40,000 barrels above where you were a year -- a year and half ago, right?

What you said 40,000 barrels above, what do you mean?

Well, the inventory levels out in the field must be about 40,000 barrels above where you said that you know, where they were a year and half ago, right? Roughly about a 40,000-barrel excess inventory?

Yes, we are about 17,000 barrels higher than what we were this time last year.

But that's not the -- but there was an inventory build throughout the balance of the year?

Yeah. There was a -- in the second quarter last year, there was an inventory build of around 34,000 barrels.

Right. So, that is 17 -- I mean, look, I mean just what I am trying to get at the bottom of this -- it seems that we have excess inventory right now of about 40,000 barrels, is that correct?

Excess over a year and half ago, Marc, or over last year?

I guess, I just tripped up on that Jim. What I am really trying to get a sense of is from where we stand today, how much inventory between now and the end of the year, how much inventory has to be taken out of the pipeline in order to get you back into balance and so that we can just get a sense of basically when do you think that’s going to basically essentially happen? Because it seems like some of it’s happening this quarter, no?

Yes, I think some of it is happening this quarter. I think it’s a difficult number to put a firm number on, but the range is 30-40,000 barrels.

Right.

That if we would have finished the year with what we would describe as normal inventory levels would need to back out.

Right. Now, how do you expect that to come out? Because it seems like, especially, in light of the allowance you made in the first quarter, it seems like wholesalers are pushing back on it right now?

I think we anticipate that based on the orders that are in hand that a significant part of that is happening in the second quarter.

Okay. Thanks.

Thank you.

And I am showing no further questions at this time.

Okay. I would just like to thank everyone for their participation, and we will see you all next quarter. Cheers.

Bye.

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