Boston Beer Company Inc (SAM) 2003 Q2 法說會逐字稿

All sites please stand by, today's conference is ready to begin. Hello, welcome to the Boston Beer Company second quarter 2003 earnings conference call. All lines will be in a listen only mode until the question and answer portion of today's program. At that time, instructions will be given for anyone who wishes to ask a question. I will turn the call over to our moderator, Mr. Martin Roper, CEO with Boston Beer. Sir, you may begin when ready.

Thank you. Good afternoon, everyone, and welcome to the 2003 second quarter earnings call for the Boston Beer Company. Joining me today is our Founder and Chairman, Jim Cook, and our Controller and Interim CFO, Monica Martin. I'll begin this afternoon's call with some financial highlights for the quarter and will provide some commentary on expected performance. And then I'll 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.

All sales in retail were up approximately 2% as compared to second quarter last year. This is our 8th consecutive quarter of year-on-year depletions growth. For the second quarter, 2003, net revenue decreased by 4.3% from last year, due to a decline in shipment volume 6.5%, partially offset by a 2% increase in net price per barrel.

Shipment volume is trending lower than wholesaler sales to retail, due to an inventory build at wholesaler that occurred in the prior year resulting in difficult comparative shipment numbers during 2003 versus 2002. Wholesalers had increased inventory levels by approximately 52,000 barrels during the first six months of as compared to 24,000 barrels in 2003. During the second half of 2002, inventory levels decreased at wholesale by approximately 27,000 barrels, ending the year with a cumulative inventory build in 2002 of approximately 35,000 barrels. As a result, we expect wholesalers to continue reducing their inventory levels which should result in lower shipments and depletions during the remainder of the 2003 . Gross profit was recorded at 61% of net sales, versus 60.3% reported in the second quarter 2002. The increase was primarily due to price increases and changes in the product mix. Assuming no competitive price movements, we still expect to see a slight improvement in total year gross profit as a percentage of net sales as compared to 2002.

The reported net income per share of 20 cents during the second quarter of 2003 was lower versus prior year second quarter earnings per share of 29 cents, partially due to an increase in advertising and promotional expenditures related to the support of the entire Sam Adams brand at a national level during the second quarter, 2003.

Additionally, during the second quarter 2002 the company received shares of stock from the de-mutualization of a third party insurance, impacting EPS for the second quarter 2002 by 5 cents per share. Excluding this transaction, net income was $4 million or 24 cents per diluted share for the quarter ended June 29th, 2002.

Total brand support is expected to be lower by approximately $10 million for the remaining two quarters as compared to 2002, as last year included significant spending behind the rollout of Sam Light during that period. We will continue to evaluate the effectiveness of our current advertising campaign and our current spending projections may change as we make decisions in line with our long-term volume objectives.

Given current plans, we continue to expect low double digit percent earnings improvement for the full year of 2003 as compared to the pre Sam Light launch base year 2001 when the company earned 62 cents per share after adjusting for a charge related to the disposal of excess hop inventories. Jim will comment on volume trends and strategy going forward. Our balance sheet remains healthy with $32 million in cash and investments as of the end of the second quarter. And 45 million in an available line of credit. We remain committed to reinvesting in the company's stock and through July 25th, 2003, we had $774,000 remaining under a $70 million aggregate board authorized spending limit related to the stock repurchase program. Through July 25th, 2003, the company had repurchased a total of $6.8 million shares of its class A common stock for a aggregate purchase price of $69.2 million. Cap ex and depreciation was $630,000 and $1.4 million respectively for the quarter. Cap ex is up from $377,000 in the prior year due to the purchase of new kegs. I would like to note that we filed our 10-Q today and then turn our presentation over to Jim for comments.

Thank you. We saw business conditions in the beer industry remaining challenging through most of the second quarter 2003. In the face of that, our depletions were up 2%, consistent with what we believe better beer trends were in the first half of the year. Our shipments were down relative to last year with the disparity between depletions and shipments being the result of the inventory build at the wholesaler during 2002 as Martin discussed.

We spend a significant amount in support of the entire Sam Adam brand family during the first half of 2003, especially including the introduction of new lager TV campaign that began airing at the end of March 2003. Our focus has been to minimize any cannibalization of Sam Adams Boston Lager and the seasonal brands that resulted from the introduction of Sam Adams Light and to strengthen the whole Sam Adams brand.

Orders for July and August are currently down 5%, however, the numbers are showing signs of lager trends strengthening as well as seasonal trends. The continued decline in orders is due to the load-in of Sam Adam's light at the wholesale level in 2002 and the winding down of those increased inventory levels in 2003. Overall, I'd say that our market results are solid, but not exciting in a beer market that was a little challenging. We appear from us to have grown our depletions at approximately the overall growth rate of the entire better beer category, and within our volume, the Light continues to be strong and holding its volume and neither experiencing year-on-year growth nor decline, but holding its drinker base as we work through the trial that probably juiced up the numbers at the beginning. We continue to hold volume.

The lager and seasonal volume trends improved during the quarter as we got back loss distribution and focus at the wholesaler and retailer level, and we spent more effort advertising lager and the whole Sam Adams brands. And pricing for us. and we believe in the better beer category, continues to be quite rational and we do anticipate continuing our policy of modest pricing improvements.

With respect to the current advertising strategy, it's probably still a little too early to measure results, but the current lager TV campaign shows early signs of working as the erosion rates of lager and the seasonal brands that happened during the Sam Adams Light introduction appear to be diminishing. But I'd have to say it's still too early for any kind of clear reading on it. It's still like reading tea leaves and we're trying to separate the effect of the advertising from what we perceive to be a general improvement in the beer market. So we'll continue to work on new initiatives.

Sam Adams Light continues to be approximately 20% of the total business, and we believe that the Sam Adams Light offers significant long-term growth potential for Boston Beer Company and we remain optimistic about our position in the better light beer category. Given the current volume projections, we roughly anticipate total year depletions to be somewhere around flat, hopefully slightly above and shipments to be down due to the inventory adjustments.

We will continue to evaluate the current advertising strategy and the impact on our focus brands of lager, seasonals and light. Our decision on brand spend is dependent on the effectiveness and the results from the advertising and what we believe it's doing for long-term growth potential -- for long-term growth potential. Based on the information we currently we have, we would anticipate that our total brand spend in the second half of 2003 will be approximately $10 million lower than the same period in 2002, when we were making a very heavy one-time investment in the Samuel Adams Light national launch. Obviously the spending projections might change depending on what we see in our volume trends and our market tracking results that will we'll be getting over the next couple of months.

Given these current assumptions, we are still anticipating, as Martin mentioned, increasing 2003 earnings at a double digit rate over the 2001 base of 62 cents a share before the adjustment for hops. Among the factors that might affect this are further significant reduction in wholesaler inventories beyond our expectations, as well as economic and competitive factors. Now, I want to turn the call back to the moderator so we can open it up for any questions that you might have.

Participants, if you would like to ask a question, simply press star 1 on your phone keypads. If your question has been answered and you wish to withdraw, press star 2. Once again, star 1 to ask a question, and star 2 to cancel. One moment while questions register, please. Thank you. Our first question comes from Jeff Kanter of Prudential.

Good afternoon, gentlemen. Martin, you gave out a lot of Numbers. How many barrels did you have, excess barrels at inventory that you had at the end of the quarter?

Jeff, it's very difficult to judge, you know, totally accurately, so we gave out the numbers that we thought would allow people to project.

Yeah.

I think if you were to put those numbers against the previous numbers that we have disclosed, you probably will include -- conclude that there would be approximately 15,000 barrels excess.

Okay.

But it depends on what assumptions one uses and that number could be plus or minus 5,000.

Okay. Because I thought at the end of the first quarter, there were -- you were around 17,000 barrels higher; is that correct? Again, I apologize if this is repetitive.

Based on the numbers, Jeff, that I'm looking at right now, that's 17,000 would be overstated. And the number I have right now is closer to 10,000.

Okay, so it was 10,000 in the first quarter, 15,000 in the second. And, Jim, I thought you said depletions flat for the year. They are running up around 2% through the first half. Is that a surprise to you?

The flat for the year, the 2% for the first half?

Yeah. That would imply that the second half would be lower.

Oh, yeah. The difference between zero and 2 is a little too fine for me to cut right now. I'm considering 2% approximately flat

Okay. And you know, the reduction in marketing spends of $10 million, you know, a lot of us were thinking, you know, we were going to have about, advertising promotional and selling, basically flat with last year, which was around $101 million. Basically what you are saying now is it's going to be around $90 million? Is that fair? I mean, is that the simple math or is there something else I should -- is there an offset?

Well, let's see, the simple math would be in the first half of the year, we spent about $3 million more in brand spend than we did in the first half of 2002. The second half of 2002 was the heavy spending with national TV advertising on networks to support the Sam Adams Light launch, which at the time we said this is a one-time launch expense. So, in the second half of the year, we're currently projecting about $10 million less than that one-time expense, which would, for the whole year, mean about $7 million less than the launch year.

Okay, but the point is that, I'm delighted that you -- that's You're endorsing guidance, but it seems like one of the reasons why you are getting into this double digit growth off of the pre Light launch is because you are dialing back on the advertising spend a little bit because the top line isn't moving. Is that the way you're thinking about it? Is that fair?

Roughly right. We spent more heavily to launch the Light. We got an increase in volume which appears to have stuck, so we are continuing to believe that if paid off but that we don't need to continue doing it every year.

Okay. Fair enough. And Jim, very quickly, if you could give us an update on what's happening with Miller and also your search for a CFO. Thank you.

Well, we continue to be actively searching for the right CFO, and with respect to Miller, we are in arbitration with them and it's difficult to predict when there's going to be a decision and a resolution of it, but we would project that the quasi trial part of it would be done before the end of the year.

Okay, okay, thank you.

Thank you. Our next question comes from Skip Carpenter of Thomas Weisel Partners.

Hi guys. Couple things in terms of -- I mean, maybe you mentioned something on this earlier. I'm trying to gauge in terms of -- you went into this year basically from an earnings outlook, that hasn't changed yet, the performance of the business given the category and given the kind of the overall environment has been far more difficult. Is it just in the sense that we -- are we thinking of that of it correctly in the sense that despite the top line softness, just you guys have changed your budget plans in the back half of the year to meet that original earnings per share guidance?

Yeah, I'd put it a little differently, that with only 2% growth, we don't feel excited about spending as much in brand support as we were projecting when we thought the growth might be higher.

Okay. And when you look to the back half of this year, Jim, where will, I guess is there -- are you going to continue on with the current lager advertising campaign? Is that going to be visible for the remainder of the year as well as will Light be predominantly radio as well for the back half of this year?

That would be our current plan. We are happy with the results we're seeing from the current lager TV, both for lager and for the overall brand, and you know, we're happy with just the general results that we're getting from, you know a heavy advertising program behind Sam Adams. Even with the current spending rates that we're projecting, they are a significant increase over the amount that we spent to advertise our brand in 2001. So, the success and incremental volume from Light has taken us to another level in terms of national TV advertising, and we would project continuing that if things keep going the way they are going.

Okay. One other thing on the advertising for lager. Is there any data that you guys have been able to go through that would support -- is this a benefit or is this kind of an advertising that you stabilized the lager performance or were there any -- is there any evidence that maybe it did have an overall portfolio effect with regards to, you know, impacting the Light as well, or is this really more from what you've been able to see stabilizing lager?

Again, it's sort of murky, but the overall brand trends look better in the places where we had heavier advertising, so there appears to be some response to it, and it appears to have an effect beyond just lager and at least into seasonals and hearing and seasonals represent two-thirds of our volume.

Uh-huh, okay. And one other just kind of a question on the press release about the lower tax rate. You said something in the release it said restructuring of the company's corporate entities. Any color on that, what that's referring to?

Skip, this is Monica Martin, and the restructuring of entities is primarily due to a projected reduction in state income taxes due to some corporate entity restructuring, as well as some improvement gain from tax exempt investments.

Ok, and then lastly, on the Miller situation, Jim, for next year and beyond, is Miller -- do you still have -- are you guys -- is part of this battle in terms that you have contracts for Miller to continue to produce product for Boston Beer and you know, could you just kind of give me a little bit update in terms of where that stands? I know you said something about going into trial by the end of the year, but are they contractually obligated by your stance to continue to produce your product? I know obviously the water has been shut down, but are you guys challenging the fact that they continue to be producing product for you out of, let's say the eating facility and shipping it out west?

Let me answer that. Our dispute with Miller revolves around our belief that they do not have the right to terminate the production contract, and they are claiming that they do have the right and for that termination to be effective May 2004. We're claiming they don't have that right, and they are not able to do that.

What year did you feel that they -- in the contract that you continue that you continue to believe they were going to produce product for you, then Martin?

At least through 2008 and potentially through 2010.

Okay.

And so, because we're in a situation which goes through arbitration, what we have done is we have gone out and secured capacity to the best of our abilities to guarantee our own supply, and that's what we have in place. I think we're very comfortable that we can, if Miller was to shut its doors on us at the end of May 2004, that we have production locations tested and set up with some capital still to go into them to firm them up from a production process point of view. We're comfortable we can continue to produce and deliver products to the marketplace.

What portion is that? What portion is Miller as of this year, producing for you in terms of your overall production level?

Between 20 and 30%.

Okay. All right. Thank you so much.

Thank you. Once again, participants, if you would like to ask a question, please signal by pressing star 1 on your phone keypads. Our next question comes from Marc Cohen of Goldman Sachs.

Hello, guys.

Hello, Marc.

Can we just come back and talk a little bit about the sales outlook? Because let's call it a 2% depletion growth. That came in the first half in the industry where industry-wide, depletions had to be down a low single digit number. So I guess I'm puzzled or I'd like your insight on, you know, in an atmosphere where we would be -- I think we would be expecting the industry depletion atmosphere to just generally be getting better, you know, what explains your more temperate view, why wouldn't that be translating into some sales lift for either the lager brands or the light brands? Let me just end it there and we'll see where that goes.

Yeah, the statements I made about projecting the rest of the year was assuming that, you know, the beer industry trends continue to be soft. I can say that the indications that we have for July, which are still, you know, speculative, we don't have hard numbers, but the overall atmosphere appears to be significantly better, particularly in the northeast. We haven't factored that in.

Okay. So on the -- I mean, on the first half of the year, the industry depletions were probably down a low single digit number; is that --

I think that's right and, yes, the growth rate of better beer, you know, took a hit because of its heavier reliance on the northeast and on premise.

So if we see the industry coming back to sort of a positive number here in the second half, would you -- I mean, to expectation would be to see your depletion numbers coming back up in the middle single digits; right?

Yes, I think that's fair to say. You can add on what you think is going to be the change in the swing in overall industry volume, add on to the kind of projection that I was making of, you know, flat to up a little bit.

Okay. Now, can we just talk about two more things in that respect. You talked about Sam Light and you know, holding onto last year's levels, even though that was a heavy trial period. And that sounds encouraging. But I'm wondering how to put that into context in terms of getting a sense of a growth trajectory of that brand or maybe you need to talk about this as a brand family relative to better beers. In other words, as you look at that experience, how does it affect your thinking about being able to sort of grow the whole line or just elements of the line in relation to better beer?

A couple of things, you know, right now, just the way the numbers work, lager and seasonals are two-thirds of our volume. So, if they are not stable to maybe growing a little bit, it's tough to grow Light, which is 20% of our volume, enough to you know, offset, either a decline or a stability there. If I step back our issues are how do we grow Light year-on-year or at least participate in what I think is going to be, you know, a growth segment for the beer industry. The better light beers. And then the second issue for us is how do we simultaneously get modest growth in lager and seasonals, and add those together to get to mid-single digits to above.

Uh-huh. Do you talk about how you see those two things?

Yeah, so far, the lager trends tend to show us getting to a certain volume level on a market by market basis and holding that, maybe slightly growing it. And what we don't know yet is the early trial, which happens in the first, you know, six or eight months washes out.

You said lager, did you mean Light?

I mean Light, I'm sorry. With Light, as the early trial washes out, we've been able to hold our volume. So that part is encouraging. And longer term, it's an issue of growing drinkers there. We're also encouraged that we don't see that much consumer level cannibalization of lager and seasonals from the Light growth. The erosion of lager and seasonals that accompanied the Light introduction tended to be more from wholesaler and retailer in Boston Beer Company shifting its focus, and we've corrected that and we think those trends are rectifying themselves.

Okay. So can you then square -- now, on the inventory side, maybe this is a question for Martin here, on the inventory side, you said 15,000 above normal at the middle of the year. Where did you look to be on the end of the year on this, Martin, so we get a sense of kind of how much inventory depletion to anticipate over the balance of the year?

Let me just look at the numbers and I'll be right with you.

Hey, Marc. I'm just trying to look up the numbers and there is obviously a fair variation based on different assumptions, but I think we're anticipating a inventory unwind from today to the end of the year in our sort of planning process, of approximately 30,000 barrels.

So $30,000 barrels from June 30 to the end of the year.

Of inventory unwind, that's what we would project based on historical sort of experience and trends and getting inventory levels back to where they were in 2001.

Ok, and while we're on the subject of inventory and the --I assume it's related, in terms of credit to the wholesalers, can you explain sort of what you are doing in terms of changing these credit terms to the wholesalers and how it ties into this, if at all, into this issue of inventory reduction, and if not, what is that about?

Sure. We announced to our wholesalers about three, four weeks ago, an intent to change credit terms, while we were legally able to, and we responded to that feedback and negotiated such credit term changes that we anticipate partially taking effect August 1st of this year and fully taking effect January 1st of 2004. In response to our credit term move, a number of wholesalers indicated that they would want to reduce inventories. Frankly, that's something that we support as it results in fresher beer and better inventory returns for everybody. The scope of exactly how much inventory change there will be is unclear.

Is that in the 30,000, Martin?

It's not in the 30,000 Marc..

So the question I have is if you are giving them -- are you giving them better terms or worse terms?

We are tightening terms.

Tightening terms.

Yes.

Why would that -- why would that cause a working capital outflow for you? Unless I read this 10-Q wrong.

It would cause a cash inflow improvement to us.

Right, but -- okay. So, can you, then give us, the working capital outflow on the first half of the year compared with an inflow in the first half last year, can you tell us what to expect for the full year based on these -- considering that you are changing these credit terms?

Marc, we're going to see if we have that in front of us, otherwise, we'll have to get back to you.

Okay.

Marc, I would say overall, we really encourage wholesalers to reduce their inventories, and we do believe that, you know, there might be some continuing pressure on wholesale inventories, partly abetted by us.

How much more would you like to get -- where are they now in terms of days and where would you like them to be, Jim?

Well, they tend to be between 20 and 30 days, and we would be happier with whatever their minimum is so they don't run out of beer, but if they took 10 days out of their inventories, we would view that as a good thing.

So basically this encourages it in a way?

Yeah, yeah. And we've encouraged them to do that for several years and this kind of brings it to the fore. We do believe it's a good thing for our business but over the short term, which can be 12 months, it causes the kind of gaps between depletions and shipments.

I see. And you can -you will size spending accordingly?

Well, we're going to spend to support the brand according to what we think the market opportunities are, and you know, obviously, when you look at our brand spending per barrel, it's quite high. So, we think we're in a pretty good position without increasing it.

Okay.

Thank you. Once again, participants, if you would like to ask a question, simply press star 1 on your phone keypads. Our next question comes from Kathy Lieberman of Fidelity.

One quick question. On the $10 million reduction of advertising support in the second half of the year, that's about 20% relative to second half last year. And I understand that you've kind of had a blitzkrieg or whatever you want to call it with the launch of Light, but why won't depletion be affected by 20% lower media voice?

Because, even at that lower brand support level, it's higher than it's been in any year except last year with the Light launch. And the Light launch, spending and advertising was very focused on Light, not really on the whole brand, but very focused on Light, and we felt that was appropriate because the Light launch just had to be successful. You don't didn't we didn't feel like we would ever have a second chance. So, we've plateaued our spending at a higher level than it's been in any year previous to 2002.

Remind me, I just can't remember what depletions were up in the second half of '02? Around.

Well, for the whole year, they were up a little over 10%.

Okay.

A little stronger than that in the second half.

And looking out into '04, what would you guess the relative media spend will be in '04 versus '03? Will that $10 million come down even more so you'll be back more towards '01 media spend levels? Help me out with that.

Well, you are asking me to really speculate. I would certainly hope that we find the message compelling so that we decide to add to the brand support. And you know, we are generating increased operating profits through ,you k now, cost savings and price increases, so the operating profits are going up faster than the shipments.

Right. So it sounds like you'd hope that could dial media or at least keep it constant even maybe dial it up if the brand is doing well?

Right.

Last question, on the Coors arbitration.

Miller?

Oh, yeah, sorry, misspoke there, whoops. What do you think it costs to replace that capacity? Do you have a guess? I mean, if it's the same kind of costs, why even arbitrate? Why not just walk away?

You know, I think at this point in time, we're trying to mitigate our damages. We certainly believe we have damages. We're in the process of mitigating them, and it would be, I think, inappropriate for me to comment on the size of those damages prior to the hearing.

Okay. Great. Thanks so much.

Thank you. And this does conclude our question and answer portion on today's call. I would like to turn the conference back over to Mr. Martin Roper.

Thanks, everybody, and we look forward to chatting with everyone in the next quarter. Cheers. Thank you.