Boston Beer Company Inc (SAM) 2004 Q1 法說會逐字稿

Good afternoon and thank you for attending Boston Beer's first quarter 2004 earnings release conference call hosted by Mr. Jim Koch, Founder and Chairman. At the request of Boston Beer, today's conference call is being recorded. If you object you may disconnect. I would not like to turn the meeting over to Mr. Jim Koch. Sir, you may begin.

Thank you. Good afternoon to everybody. This is Jim Koch, the Founder and Chairman. I'm pleased to be here to kick off the 2004 first-quarter earnings call for the Boston Beer Company. Joining the call from Boston Beer are Martin Roper, our CEO; Bill Urich, our CFO; and Monica Martin, our Controller and Director of Finance. I would like to begin my comments this afternoon with an overview of the marketplace and our business, then I'll turn the call over to Bill who will provide some financial highlights for the quarter.

Immediately following Bill's comments we will open the line for questions. The first quarter of 2004 produced some positive results for Boston Beer Company. Earnings per share increased over first-quarter 2003. Pricing and operating margin improved again. Our Sam Adams advertising strategy appears to have favorably affected the brand depletions for Sam Adams Lager and seasonals. However, as anticipated, total depletions for the first-quarter were down from the first quarter of 2003 which had higher depletions of Sam Adams Light. We believe the Q1 2003 depletions reflect trial sales for the final markets where Sam Adams was introduced -- Sam Adams Light was introduced.

In our 2004 first-quarter, we began a national print and outdoor campaign in support of Sam Adams Light. We're also supporting Sam Adams Light in the second quarter with TV and print advertising, but it's too early to determine what effect this investment will have on light volumes. Sam Adams Boston Lager and seasonals combined, grew about 6 percent in the first-quarter helped by strong growth trends in our on-premise draft business. This growth was offset by the declines of Sam Adams Light as compared to the first quarter of 2003. We see similar trends in the order mix received for the second quarter of 2004. We continue to be pleased with the current Sam Adams Boston Lager advertising while working aggressively to develop stronger Sam Adams Light messaging. Now, Bill will give you the financial highlights of the quarter.

Thank you Jim. Good afternoon everyone. Boston Beer Company earnings per share diluted were 9 cents in the first-quarter of 2004 as compared to negative one cent last year. Wholesaler sales to retail or depletions for the first quarter of 2004, were down approximately 1.8 percent versus last year. This decrease is directly attributed to Sam Adams Light first-quarter volume decline when compared to the high consumer trial during first-quarter 2003. For the first quarter of 2004 the company reported net revenue of 44.7 million. This represented a 1.5 percent decrease from the first-quarter 2003 which was due to a 2.6 percent decline in shipment volume offset by net price increases and changes in package mix of 1.1 percent.

The decrease in shipment volume is primarily related to reductions in shipments of Sam Adams Light which were higher during the first-quarter 2003. Shipment volume trends for the first-quarter were lower than trends for wholesaler’s sales to retail, primarily due to the trial sales that occurred completing the final rollout of Sam Adams Light to the final markets during first-quarter 2003. The normal first-quarter wholesaler inventory build resulted in an approximate 10,000 barrel increase over year end 2003 which was approximately 21,000 barrels less than the inventory at the end of the same quarter last year.

The gross profit margin for the quarter was 59.5 percent of sales which was up versus the 58 cents reported in the first-quarter 2003. This increase in gross margin was primarily due to net price increases implemented in the first-quarter 2004 and certain operating efficiencies at Cincinnati which were partially offset by changes in package mix. Advertising, promotion and selling expenses decreased by 1.8 million or 7.7 percent to 21.5 million for the first-quarter 2004 versus last year. This decrease was primarily due to improvements made in purchasing of media while maintaining the same level of advertising reach as the first-quarter 2003.

Additionally, point-of-sale expenditures declined by $800,000. The higher 2003 level was driven by investment in new style (indiscernible) handles. We remain committed to advertising and promotional support of the Sam Adams brand and have targeted our spending at our core growth consumers through cable TV, outdoor and print advertising. Sam Adam Light continued to suffer from a difficult year on year comparison, but we believe that a significant growth opportunity exists in the better beer category.

We plan to continue to invest in Sam Adams Light brand and are in the process of determining the exact advertising and promotional programs to achieve our aggressive long-term growth goals and expect to launch these in the third quarter. The general and administrative expenses for the first-quarter 2004 decreased $594,000 versus the prior year. This decrease resulted from reduced employee related expenses and legal costs. Our balance sheet remains healthy with 46 million in cash and short-term investments as of the end of the first-quarter 2004.

Additionally we have a $45 million unused available line of credit. The company's cash flow remains strong delivering 2.8 million in operating cash flow for the first-quarter 2004. Our capital expense for the first-quarter was 900,000 and depreciation and amortization expense was 1.3 million. While we did not repurchase any shares during the first-quarter we remain committed to reinvesting in the company's stock. We have 5.2 million remaining under an 80 million aggregate board authorization spending limit related to the stock repurchase program. Through April 23, 2004, the company repurchased a total of 7.1 million shares of Class A common stock for an aggregate purchase price of 74.8 million.

Shipments and orders in hand suggest that core shipments for April and May will be up approximately 8 percent as compared to the same period 2003. The order mix appears to reflect a continuation of the depletion pattern seen in the first quarter. Actual shipments for the quarter may differ and no inferences should be drawn with respect to shipments in the future periods. While the company is beginning to face cost pressures related to freight and brewing costs, based on our current information we still expect double digit earnings growth for 2004. We remain prepared to increase our brand investment activities to drive long-term growth at the expense of earnings, if we have proven growth vehicles worthy of such investments. Another note, we are planning to file our first-quarter 2004 10-Q with the SEC on May 6, 2004. We will now open up the call for questions.

(OPERATOR INSTRUCTIONS). Jeff Kanter of Prudential Equity Group.

Good afternoon gentleman. Question for Jim or Martin. What do you mean by core shipments in hand in April or May up 8 percent? What exactly is a core shipment? Can you define that please?

That would be orders that we have received from our wholesalers for shipment in April and/or May for core brands, core brands being those brands that we own as opposed to the brands that we produce at Cincinnati under contract for other people.

Okay. So it includes Sam Adams Light?

Yes, it would be the Sam Adams family of beers and Twisted Tea and HardCore.

When you're talking about -- with similar depletion patterns, obviously -- are we still expecting Sam Adams Light to be down in the second quarter?

I think we're expecting depletions of retailer sales to continue to have weak light trends for another couple of quarters. With regard to shipments, what we see is our orders are up approximately 8 percent for April, May for those core brands, and within that mix it is reflective of the depletion trends that we saw in the first-quarter. And obviously in the first-quarter we reported lager and seasonals were up and light down. So you should infer perhaps that in the orders we are seeing continuation of those trends.

But lagers is certainly -- lagers has certainly rebounded here and that's what 60, 70 percent of your volume, correct?

Approximately. I'm not totally sure that is the number that we've ever talked about. But that is not far off.

How come you weren't buying back stock in the quarter?

We're always trying to figure out what is the best way to return excess cash to the investors, and during the first-quarter we decided not to do that and we can't really talk about what drives the actual timing of stock repurchases. But we are committed to continue to buy shares back on a timing that we see appropriate.

But that cash that is building up on your balance sheet, I guess you plan to use that to fund advertising spends? I'm just trying to figure out what you're going to do with it?

No, I don't think we would run such a loss on advertising that it would significantly deplete the cash on the balance sheet. Obviously we have a substantial cushion of earnings that we would chew through before we started sucking up cash from the balance sheet. It's more a question of the optimum timing and method to either invest at appropriately in something with good returns or to return it to the shareholders.

As far as your revenue for barrel increase, what was the rate component? I would imagine that's a more shift to kegs (technical difficulty) a little bit. Can you break that down between rate and mix?

Hi, Jeff. It's Bill. Our shift from kegs to cases has been continuing to be about 20 -- the shift is about one percent roughly for the quarter.

That one percent mix had -- from selling more kegs?

Yes.

Okay, fine. Your inventory turn slowed down whether year over year or certainly sequentially. Does that have anything to do again with just your mix shift?

Are you talking about our inventory of values on the balance sheet?

Yes.

It's just related to an increase -- a slight increase in hop inventory and a slight increase of finished goods inventory which is related to some mix issues around repack units where we carry the finished goods on our books a little longer than we might otherwise do during the course of repack.

Just finally, last question. What was Sam Adams Light down and where is it running now as we move through the second quarter here?

We haven't traditionally broken out trends by individual product lines. I think we're looking at double-digit declines on it and if current trends continue we would project that for another couple of quarters.

Fair enough. Thank you very much gentleman.

Skip Carpenter of Thomas Weisel Partners.

Good afternoon guys. Jim, I'll start with you. You guys highlighted the benefit that the pricing environment did on the gross margins. Maybe if you could also just give us a little bit of assessment in terms of what you guys are seeing in the market place with regards to pricing, given what continues to be fairly choppy volume trends for the category. Has there been anything at this point in time that we are seeing that is more concerning versus where we have been over the last couple of years?

Here's what I'm seeing, is the Corona price increase is just starting to show up at the consumer. It's been slowly working its way through but it's really just now, in the second quarter, beginning to be apparent to the consumers. The other better beers, I think Skip, your term choppy is a good one. The other better beers are showing a less healthy pattern than that and there is some pressure from wholesalers and retailers for sort of category uniformity.

Their wholesalers and retailers are saying Corona (technical difficulty) and we may take other beers that we carry up just to keep category uniformity. So that means some money gets left on the table by the brewers. There is some pressure for upward movement particularly with the currency devaluations, but we haven't seen it work through yet. I believe the second quarter we'll see it happen with Corona and maybe in the third quarter we'll see people responding and reacting.

Have you guys seen any, maybe not so much at the Corona level or better beers, but maybe with some of the other domestic players, are they getting a little bit more sporadic or has discounting kind of propped up a little bit maybe more this time of year versus what we're used to?

I'd say a little more than we've seen in the last couple of years. But it's really not anything widespread or dramatic. It's just, my sense is, just a little bit of noise at the margins but the fundamental category pricing right now still looks pretty healthy.

Terrific. Second question. Anything you guys would be willing to share with us in terms of when you guys go to the next leg, I guess, is the message for light? And what attributes you are going to be wanting to focus in on here and particularly how that will differ from when you guys first brought this product to market particularly the advertising and media at the television level?

Here's what I can say at this point. The initial Sam Adams Light TV advertising was, in our view, particularly effective. It drove very high trial rates and we're very happy with it and it was focused around really just announcing that there is a new beer out there called Sam Adams Light, that has a lot of taste, and that was it. As we -- that was the message we needed for an introduction and it was quite effect.

As you can see and the numbers, the trial was substantial and as the brand settles into whatever level it settles to and we begin to build from that, we will be looking at continuing to stoke demand based on how consumers are fitting Sam Adams Light into their repertoire of beers and pushing and amplifying those kinds of situations where it appears that Sam Adams Light settles into a good fit.

Lastly, I was struck by, in the press release, I guess it was the last sentence when you guys say you're prepared to make, to increase investment in our brand to drive long-term growth at the expense of earnings, if we have proven growth vehicles worthy of such investments. Care to elaborate a little bit more in terms of what you guys would designate as proven growth vehicles? Is that -- are you guys pinpointing or are you guys highlighting the fact that we are maybe going to be seeing some new brands coming into play here, acquiring brands? What are you kind of alluding to in terms of that statement?

I think the statement is there merely to reflect that the company's position has always been that if we have new products or media against existing products that can drive growth in a way that generates acceptable returns to shareholders, then we're willing to do so at the expense of earnings. I think, as my quote in the press release refers to, we anticipate having new work behind Light against the new positioning in the third quarter. And probably at that point in time it will be sort of unproven but we will obviously test it extensively and if we were to believe that increases in media spending either behind the existing lager work or behind the new light work, could generate significant growth on the topline, we would obviously be willing to pursue that.

So this may be, again if I'm hearing you correctly when I look at this statement, it's more as we move past the summer selling season in terms of some of the issues that you have, particularly for the light, if they are bearing fruit they way you have therefore you may be willing to ratchet it up in terms of the investment as we're going into an '05 timeframe. Is that fair to say?

That is certainly not a bad read. We obviously reserve the right to change our mind.

Fair enough. Thanks, guys.

Thank you Skip.

(OPERATOR INSTRUCTIONS). Marc Cohen with Goldman Sachs.

Hi guys. I guess I would like to elaborate a few things. Some of this you already covered so let's just -- I want to make sure I got it right. The pricing situation, Jim, that you are describing, if I've got it right, what you are saying is that wholesalers and retailers are basically talking about pricing up other imports and better beers anyway, so unless -- this seems to me to be something that you either have to do something about your P&L or you are basically leaving money on the table, right?

Yes, that's right. It's not universal, but I've seen more markets where it has happened in the past four months than I traditionally have.

Have you seen -- is there any sense of anybody else following the Corona moves at this point out there in the marketplace or is it too soon to avert anything?

There is a little bit. Heineken looks like they are going up on some packages on May 1st in Chicago and on some others on June 1st. So that is a big and fairly competitive market, so that is starting to happen. I don't see anybody taking price increases sort of 5, 6, 7 percent magnitude that Corona announced last fall. But I think there is a little bit of an umbrella created by Corona. It may just end up showing up in people staying flat or going up a little rather than discounting. But the Corona price increase, I believe will show up pretty much across the board in retail in the second quarter. It really hadn't hit much through the middle to the end of March.

How does that work with the (technical difficulty) because all better beers, whether they are imports or a craft beer, really aren't line priced by retailers, are they? You can't get -- IRI data at least shows us that Corona is at a different price than Heineken. Sam McGinnis is a different price. So how is it that the wholesalers could even be thinking about trying to -- why do they feel pressure to move these things in tandem?

Because particularly where you have a two wholesaler market, an AB guy and then an all other. They don't want to cannibalize a higher priced item with a lower-priced item, particularly -- and retailers on discount will want to, if they've got say Heineken and Corona on ad, they'll want to put them both at the same price, it just makes their ad easier.

So they are in the same houses, in other words?

Yes, and a (multiple speakers).

And it is a matter of promoting down to -- Corona goes on (indiscernible) it then promotes down to the other guy's regular price?

Yes.

You talked a little bit about Sam Adams Light down year on year, but can you give us a sense of sequentially what is happening with that brand? Obviously you're rolling against these trial comparisons but I'm really curious as to whether the thing is finding a base level and beginning to grow or sort of, what do you see happening there?

My gut feeling is that it's starting to find a base level and some of the markets where we're now into the third year, it is starting to stabilize. The declines are less in the longer markets and I believe sometime before the end of the year it will stabilize at a percentage of our overall brand business. I don't know what that percentage is but as I'm looking at sequential trends on a market by market basis, I'm guessing that before the end of the year it will stabilize. And so our objective would be to bring in new advertising sometime in the second half of the year that we think can grow it from that stable base.

I guess what I -- I guess you are sending two messages today. One is that you're introducing TV advertising in Q2, and then second, you're changing that advertising in Q3. Can you connect those dots for me?

Yes. We feel like we should have TV support for Light sooner rather than later. We have an extension of our original campaign that is on the air in Q2. Since last year we've been working on positioning for Sam Adams Light and we've completed that and we are now towards the end of the ad development process based on that positioning. It takes then a certain amount of time to go out and shoot and test the commercials. We believe, though you just never know, sometimes things that you think are good don't test well and you've got to go back to the drawing board. Our belief is that in the second half of the year we should have new Sam Adams Light that is based on the positioning work that we've done.

Bill, maybe -- can you help me understand how this is going to travel into the advertising, selling and promotion budgets because it's not clear to me how to think about this. If you guys have a vision of launching this new campaign and a certain volume attached to it, the way I understand accounting you should be accruing for that now. This should be impacting the -- this should be reflected in the numbers even though your year on year spending for marketing is down. Can you help us understand how this travels into the marketing budgets?

We are on an expense basis, Mark, so we expense as we incur the cost. I'm not sure I follow. We're not putting contracts out there and then because we've got the contracts accruing against it and expensing against it or expensing because we're paying at the time we are incurring the cost.

So you haven't used what some of these other companies use and call sales (indiscernible) accounting. Basically when you spend dollars on production they are spent, when you spend dollars the same way on media, they get expensed when they are -- when the media airs?

Correct.

Well actually if we go out and produce media, we expense it as we produce it, now when it airs.

But that's a production cost, Jim. What about the air -- what about the cost -- if you're going to do a TV commercial on NBC tonight, is the expense of that TV commercial booked this quarter or do you guys have to basically accrue for marketing on a plan basis?

We pay for it as it airs and we expense it that way.

Finally, can you talk about this second quarter indication of eight percent orders in hand. This sounds like this could be, that there could be some inventory building going on here in the second quarter and I'm wondering what really might be prompting that, or if you think this is really final demand really kicking up?

Obviously it's very difficult to tell. The order number is driven by solid trends on lager and seasonals and offset by continued declines on light. I think, as Bill said in his opening comments, current inventory levels relative to last year are down, I think he said 21,000 barrels. So we're operating off a lower inventory level at wholesaler than last year. So I think part of that number perhaps is easy comparisons and at this point in time, certainly well at least at the end of March, the wholesaler inventories appear to be pretty balanced.

Now you're confusing me. If (indiscernible) balanced but they are down from a year -- I mean if they're 21,000 barrels behind, are you saying that basically you think some of the improvement to eight percent shipment and orders in hand reflect that the wholesalers are continuing to sort of catch up a little bit on that?

I think part of it could be that. Part of it is, I think, that last year's second quarter we had some inventory decreases going on at wholesaler and we wouldn't expect that to happen this quarter.

I see. So it's an easy comp.

I think it's a combination of the two effects. The underlying message I think we wanted to pass was that it looked like it was indicative that our depletion trends were be projecting -- our historic depletion experience was being projected forward into those order numbers.

Basically you think the depletion record that we saw in the first quarter is kind of continuing in the second quarter and there are inventory changes that are causing this shipment inflection?

That would be my personal best guest at this point in time.

Thanks.

(OPERATOR INSTRUCTIONS). At this time we have no further questions. I would like to turn the meeting back over to Mr. Bill Urich for closing remarks.

Thank you everyone for joining us and have a nice day.

Bye now.