Boston Beer Company Inc (SAM) 2003 Q3 法說會逐字稿

Welcome to the third-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 should anyone wish to ask a question. I would now like to turn the call over to our moderator today, Mr. Bill Urich.

Good afternoon. Welcome to the 2003 third-quarter earnings call for The Boston Beer Company. To introduce myself, I'm Bill Urich and I joined The Boston Beer Company as the Chief Financial Officer on September 8, 2003. Joining me today is our founder and Chairman, Jim Koch, and our CEO, Martin Roper. I'll begin this afternoon's call with some financial highlights for the quarter, and I'll 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'll open the lines for questions.

Wholesaler sales to retail were up approximately 1.5 percent as compared to the third-quarter last year. This is our ninth consecutive quarter of depletion growth. Depletion trends for Samuel Adams Boston lager and Samuel Adams seasonal brands have significantly improved over first six months. For the third-quarter 2003 net revenue decreased by 1.8 percent versus the same period last year. Shipment volumes declined 0.8 percent and net price per barrel was down 1 percent as a result of a shift in the mix of shipments from bottles to draft attributable to the inventory build of Sam Adams Light bottles to support last year's rollout.

Shipment volume is trending lower than wholesaler sales to retail due to an inventory pipeline build at the wholesalers that occurred in the prior year resulting from the completion of the rollout of Sam Light. While wholesaler sales to retailers were up approximately 5,000 barrels, wholesaler inventories decreased approximately 8,300 barrels, resulting in a decline in Boston Beer shipments to wholesalers of 3,300 barrels. We expect wholesalers to continue reducing their inventory levels which should result in lower shipments than depletions during the remainder of 2003.

Gross profit, reported at 58.9 percent of net sales, was up versus the 58.3 percent reported in the third-quarter of '02. The increase in gross profit percentage is directly related to a 1 percent price increase on overall volume. Advertising and promotional and selling expenses decreased by 7.1 million or 24.3 percent to 22.2 million for the third-quarter 2003 as compared to the third-quarter 2002. This decrease is primarily due to the high-level of support for the launch of Sam Adams Light during the third-quarter of 2002.

The general and administrative expenses for the third-quarter 2003 increased 951,000 versus the prior year quarter primarily due to legal fees and related expenses incurred in connection with the Miller Brewing Co. arbitration. The reported income per share of 28 cents during the third-quarter 2003 was significantly higher versus the prior year third-quarter earnings per share of 2 cents. This was mainly a result of the decrease in advertising, selling and promotional expenditures related to the heavy support for the launch of Sam Adams Light during the third quarter of 2002.

We are continuing to evaluate the effectiveness of our current advertising campaign as well as testing a new Sam Adams Light campaign. Jim will comment in greater depth on the volume trends and the strategy going forward. We are also continuing to evaluate the optimal production supply alternatives, and are confident in our ability to maintain adequate sources of supply for the long term.

We expect a decision by the arbitrators regarding the pending dispute with the Miller Brewing Co. sometime during the fourth-quarter 2003. The outcome of this arbitration may impact fourth-quarter earnings as well as capital expenditures and ongoing costs in securing future reliable capacities (ph). Exact economic details will not be known until a decision is received and (indiscernible) are analyzed. We currently expect to achieve our previous earnings guidance of double-digit earnings growth over the 62 cents earned in 2001.

Our balance sheet remains healthy with 35 million in cash and investments at the end of the third-quarter, and 45 million in available lines of credit. CAPEX and depreciation were 279,000 and 1.4 million respectively for the quarter. CAPEX is down from prior year by 437,000 which is related to the purchase of new kegs in the third quarter of 2002.

We remain committed to reinvesting in the company's stock, and through October 23, 2003, we have 5.3 million remaining under an $80 million aggregate Board authorization spend related to the stock repurchase program. Through October 23, 2003, the company had repurchased a total of 7.1 million shares of its Class A common stock for an aggregate purchase price of 74.7 million.

Another note, we have filed our third-quarter 10-Q today. I will now turn over the discussion to Jim who will provide an overview of the marketplace and our business strategy.

This year's third quarter was very much in line with our expectations. Depletions grew by a point and a half. Lager and seasonals as a whole were up for the quarter, reversing the negative trend of the first six months of this year. Light also grew as we lapped the rollout of last year while the Signature series continued its decline.

Wholesalers reduced their inventory builds that they had last year in the third quarter, when inventories were built up to support the launch of Sam Adams Light, and that all resulted in a small decrease in our shipment volumes.

Net income was quite strong, reflecting a return to more normal advertising levels after the successful launch of Sam Adams Light last year. The current TV advertising appears to be working. Our trends on lager and seasonals have strengthened; and we're now working on the next wave of advertising for Sam Adams Light, building around the message of the best-tasting light beer in the world, supported by the gold medal awarded by the judges from the World Beer Championships.

The first executions will break this quarter in print and outdoor; and based on the consumer reception to Sam Adams Light so far, we continue to believe that there is long-term growth in better light beers. And we're committed to stand behind effective advertising to drive Sam Adams Light.

Overall the beer business seems to have improved after the difficulties in the first six months of this year. We believe the pricing environment continues to be favorable, and have seen about half a point of gross margin improvement this quarter over last year. I'll now open the call up for any questions. Thank you.

(OPERATOR INSTRUCTIONS) Jeff Kanter of Prudential Securities.

Where are we with respect to the inventories delivered at the wholesaler level?

I think we're not yet through with it. The wholesaler inventories were fairly high at the end of the fourth quarter last year, so we would expect continuing deload through the fourth quarter of this year.

That explains the 8 to 9 percent decline in orders at hand, is that correct?

Yes, that's about in line with what we would project.

Should we also start to see with -- if you think that you've -- I don't know if "turned a corner" is the right word, but turned the corner with lager? Should we see sequential acceleration of STR growth?

We would guess at this point for the rest of the year that we will probably not lap the light rollout numbers, because the fourth quarter of last year was sort of the crescendo of the rollout. It's when we completed the whole national rollout. So there was inventory fill at the distributor level; but also pipeline fill at the retailer; and a lot of early trial because we did get very, very good distribution very quickly. So our guess is that we will not lap the rollout numbers on light.

The lager and seasonals, it's a guess at this point. But I would say right now, I would stand by the guess that I made at the last quarterly call, that the year is going to come in somewhere around flat. That could be up a point or so, or down a point or so, but I think I don't see anything that would make me change the guess that I made three months ago.

Are we at a good level for advertising and promotional spending on a per barrel basis?

Yes. I think just in broad strokes what has happened over the last two years as we've introduced Sam Light and started the first national TV campaigns for Sam Adams is the combination of the increase in our rate of sales and improvements in our cost, and in our pricing, have generated significantly more gross profit dollars. That put us at a sustainable advertising level that's significantly above where we were.

Sam Adams as a brand is in the top 10 beer brands in terms of advertising. It's somewhere around seven or eight, so it has an advertising spend and a media level that is way in excess of its volume. So we have share of voice above share of market.

And just finally, when you look at your cash flows, your cash flows are terrific. I guess some of that is just due to the change in the credit terms. But it's almost like you're in, I don't know if "liquidation" is the right word, but it almost feels that way, looking at your cash flows going up. Can you kind of comment about how you're thinking about managing your cash flows? And what's going on with the cash flow levels?

We do try to run the business with as little cash as possible. We felt that changing some of the credit terms was appropriate, given where everybody else in the industry was and what we thought was suitable. In the past we've had to buy kegs, which has been quite expensive. That's largely over, and we're now in a replacement cycle. But we do continue to maintain significant cash on our books sort of pending any final resolution of the supply issues.

Thank you.

Marc Cohen of Goldman Sachs.

I'm a little confused about this inventory thing. Jeff touched on it a little bit, and maybe this is language, but frankly you guys shipped 333,000 barrels and you depleted 349,000 barrels, and that to me is an addition to inventory. It's not a depletion to inventory.

Yes.

So can you square that up? And just sort of -- that put us at a point at the end of the third quarter where you guys had built about 32,000 barrels on top of the 40 or so that you had at the end of the year. Do you have to pull all 70 out of that in the fourth quarter?

Probably not, though that's somewhat dependent on what wholesalers decide to do, not us. So we really respond to wholesalers' decisions. It is a little complicated. You have to, to answer your first question -- wait a minute, you still shipped more than you depleted, so aren't you building inventory? The answer to that is, yes. But this is typically a period where wholesalers have built inventories faster than they built them this year. Last year there was a much bigger inventory build.

So it's that difference between the inventory build this year, which was relatively minor, and the inventory build last year, which was quite significant. It's that difference that drives the shipment number, not the absolute level. It's the amount that they build it during a quarter.

Right, I understand. The reference point you're making is they just didn't build it by as much as they did last year; it's not what happened this year. So where does that put you on the full year? I think the number is roughly 40,000 barrels last year that were built into the pipeline as shipments exceeded depletions. Some of that obviously had to be this issue of building up the wholesaler pipeline on Sam Light.

Yes.

It's permanent, right? How much of this comes out, Jim?

No, it is our belief that that will come out, and maybe more.

So you're really going to have quite a challenging top-line picture here in the fourth quarter. Because if the depletion situation is, as you described, going to be close to flat, and you're going to have to take out 60,000 or 70,000 barrels of inventory, that's going to put your shipment numbers well down on the year ago.

Yes, the first two months, and we're two-thirds of the way done through the fourth quarter. We have reasonably firm orders, and they're down 8 percent. So it wouldn't be out of the question, since that's two-thirds of it to project from that for the final quarter.

As I said, it's out of our hands. Distributors frequently put on top orders so sometimes it improves. But we've got two-thirds of the numbers out there, and that's what they are, down 8 percent.

So how do you make -- in order to get a 10 percent earnings gain for the year, relative to that 62 cent number two years ago, you need something like a 24 cent quarter or something which is compared to 13 cents. How do you make up that 8 percent top -- how do you make up the gross margin you'll lose there from that 8 percent top-line drop? Is this still a period where you're really rolling against just very high introductory ad spending last year, and how do we get a sense of what's a more normal picture?

You have answered the question. We're rolling against very high introductory ad spending for the fourth quarter of last year to support Sam Light and we don't think we'll have that same level this year. We'll have something more normal, and we believe that even with the shipment levels that one might project at this point, we will still be -- we're still comfortable with the projection of double-digit earnings growth over the 2001 base.

And just taking a step back and thinking about the brand health, I mean clearly an acceleration here in Sam lager, and I presume you mean by saying it's improved it's now moved into actually positive territory?

The combination of the lager and seasonal which are driven by the advertising, yes, have moved into it. The lager is about flat and the seasonal is up some.

So that's a -- because lager was down earlier in the year.

Yes, yes.

So can you talk a little bit about how you see the brand, the different elements of the brand, in terms of the health and strategically what you would like to be seeing develop here, in terms of those sales trends over the next 6 to 12 months? Specifically I'm thinking about are you satisfied with Sam Light and how it is growing? Because it doesn't like you feel comfortable with the ad message there?

I think that is right. We feel very good about the lager TV. As a result we are advertising at higher levels than we have ever advertised against lager on TV. It is paying off. So we feel very good about that and intend to continue doing that.

We are now working on trying to develop an equally effective advertising message for Sam Adams Lager on TV. We have some print and billboards that we are ready to pull the trigger on; and they will be appearing in the next couple of weeks. We are trying to get a TV message for Light, sort of post introduction. We're happy with the original Light TV, but it was an introductory campaign.

We are now trying to develop the next wave of that. We believe that going forward we have the resources to support both Lager and seasonals and Light at pretty significant levels that would keep us easily in the top 10 beer brands, in terms of overall advertising support.

How is the brand, I mean Sam Adams Light brand, performing in your judgment?

It is doing well. The way I look at it is, it has pretty clearly established itself as one of the top three better light beer brands. There is basically Amstel, Corona Light, and Sam Adams Light; and really no other significant players. Our challenge is now to build year on year on a pretty nicely established base.

In a year we are at levels that took Amstel Light 10 years to get to. So we are happy about that. But we do believe there is a lot of upside. And now we are into the mode of digging in and trying to get hopefully double-digit year on year growth for Sam Light, at the same time that we continue to support lager and seasonals on national TV at pretty effective weights.

Okay, thanks, Jim.

(OPERATOR INSTRUCTIONS) Jim Call (ph) of Lombard Securities.

Are you all happy with our pipeline of products at this point? And do you see anything new productwise in the foreseeable future?

We are happy with the pipeline. To me, Sam Adams Light is still sort of in the pipeline. The percentage of Light beer that is better light beer is at this point still very small; on the order of 2 or 3 percent. Regular strength beer, about 25 percent of that has been upgraded to better beer.

So I think there is a huge opportunity with better light beers, and we have one of the three strong entrants in there. To me that really is where the pipeline is. We always have in the signature series or other beers, but they are really there to refresh the signature series, and to maintain our credentials as brewers of really interesting beers.

But for us, the focus brands are Sam Adams Lager, Sam Adams seasonals, and Sam Adams Light. And the real mission is to get all three of them growing simultaneously.

Does anybody do just a brand name ad, instead of say going with a Sam Lager or a Sam Light? Are any of the brewers -- I'm never familiar with any of the brewers that have done just a brand ad, rather than just a focus on an individual product. Are you aware of anything like that?

There are occasional sort of umbrella ads like that. Anheuser-Busch runs ads in what they call the Heritage series, where they will talk about their brewing heritage, or one might consider the Clydesdale ads to be in that category. But I think you are right; typically the ads include both the overall brand name and the specific product.

Okay, thanks, Jim.

At this time I would like to turn the call back over to Mr. Bill Urich for closing remarks.

Thank you, everyone, for joining us today. If there are any further question, you can contact me at the Boston Beer office. Thank you.

Thank you.

Thank you, participants. This does conclude today's conference call. You may disconnect at this time, and thank you very much for your participation.