Boston Beer Company Inc (SAM) 2004 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to second quarter 2004 Boston Beer Company earnings conference call. My name a Brian, and I will be your coordinator for today. At this time all participants are in a listen-only mode and we will be facilitating a question-and-answer session towards the end of today's conference call. If at any time during the call you require assistance, please press star followed by zero and a coordinator will happy to assist you. As a reminder this conference call is being recorded for replay purposes. I would like to now turn the presentation over to your host for today's call, Mr. Jim Koch, Founder and Chairman. Please proceed, sir.

Thank you. Good afternoon and welcome. This is Jim Koch, and I am pleased to be here to kick off the 2004 second quarter earnings call for 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'd like the begin begin my comments this afternoon with an overview of market place and our business, and then I'll turn the call over the Bill, who will provide financial highlights for the the quarter. Immediately following Bill's comments we will open the line for questions.

The second quarter of 2004 produced positive results for Boston Beer Company. Our total depletion volume was up approximately 2% for second quarter as compared to same period same period last year. This increase was primarily driven by lager and seasonals and was offset by declined in Sam Light. Lager and seasonal brands were up approximately 5% during the second quarter of 2004 as compared to prior year, offsetting offsetting continued declined in Sam Adams Light. Total depletion volume for six months is up approximately 1% from the prior year. The Sam Adams Boston Lager advertising campaign continues to produce positive results, and our strategy seems to be working. We have recently begun airing a new television ad under this campaign. Sam Adams Light volume appears to have stabilized on a month-to-month basis, although we expect continued declines versus last year into the fourth quarter. We're now finalizing a new advertising advertising campaign for Sam Adams Light to position Light for growth, which we expect to air during the during the third quarter of 2004 as an incremental spend over existing lager campaign.

Pricing conditions in the market were stable allowing us to cover cost increases with increases in pricing. We continue to experience some cost pressures especially from corrugated, utilities, and freight. And while we currently expect gross-margins for year to match 2003 numbers, this could be adversely affected by changes in market conditions or further cost pressures.

Our financial performance was also strong. Earnings per share increased to 37 cents per share versus 20 cents per share in the second quarter of of 2003. Pricing and operating margins improved again, and we generated 12 million in operating cash flow during the first six months of 2004.

Now, Bill Urich will provide financial highlights.

Thank you Jim. Good afternoon, everyone. As Jim indicated, the Boston Beer Company financial results were strong for the quarter with earnings per diluted share of 37 cents in second quarter of 2004, a 17 cent per share improvement over the second quarter 2003. This represents a 10.1% increase from the second quarter 2003. This increase was due to a 10% increase in shipment volume, complimented by a net price increases offset by changes in package mix. The increase in shipment volume is primarily related to increased shipments of Sam Adams Lager and season brands. The shipment volume trends for second quarter were higher than trends for whole seller sales to retail, primarily due to normal inventory builds at whole saler for peak summer selling season. Our estimates of whole seller inventory at end of the second quarter represented the same levels as 2003 and a decrease from 2002. The gross profit margin for the quarter was 60 .5% of net sales, which was down from the 61% reported in second quarter of 2003. This decrease in gross-margin was primarily due to the fact that our price increases were offset by increases in packaging costs.

Advertising, promotional, and selling expenses decreased by .8 million or 3% to 25.2 million for second quarter of 2004 versus last year. This decrease was primarily due the improvements made in purchasing of media as well as decreased in point of sale expenses related to purchases of new tap handles in 2003. The general and administrative for the second quarter 2004 were similar to same period of 2003. Our balance sheet remains healthy with 55.1 million in cash and short term investments as of end of second quarter 2004. Additionally, we have a 45 million unused available line of credit. We are evaluating the appropriate sizes of line for our future requirements. The company's cash flow remains strong, delivering 9.2 in operating cash flow for second quarter 2004. We are continuing evaluating options for utilizing our cash to increase shareholder value for long term.

Capital expense for second quarter was 1.2 million, and depreciation and amortization was was 1.3 million. We have 5.2 million remaining under an $80 million aggregate board authorization limit related to to stock repurchase program. Through July 26, 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 July and August will be even as compared to the same period 2003. The actual shipments for the quarter may differ, and no inferences should be made -- drawn with respect to shipments in the future periods. While the company continues to face cost pressures related to freight and packaging costs, based on current information for the full year 2004, we we still expect double-digit earning growths as compared to 2003. On another note, we are planning to file our second quarter 2004 10-Q with the SEC on August 5, 2004.

We will now open up the call for questions.

Ladies and gentlemen, at this time if you wish to ask a question, please key star followed by one from touch-tone phone. If your question has been answered or you you wish to with draw your name from the queue, you may key star followed by two. Once again, star one for questions. We will take questions in the order they are received. Your first question is Jeff Kanter of Prudential Equity Group. Please proceed.

High it is it is Jeff Kanter with Prudential. Good afternoon, gentlemen.

Hi, Jeff.

Jim, back in the envelope math, I guess Sam Adams Light was down about 5% in the quarter; is that fair?

We don't typically break out the individual product lines, but I think if you you look at -- the publicly available information is in IRI and Nielsons, and I think for the last 13 weeks we'd be looking at a number around 14%.

Okay. You said shipments in orders in hand flat. I think a lot of us are more concerned about consumption. Have seasonals and lagers continued along that same trajectory as we go into the summer here?

Well the only firm numbers we have from whole salers go through the end of the second quarter. We have got shipments, but as you point out that's not consumption. And that's often often driven by the way whole salers build their inventory during the year, so those numbers can move around from month to month or quarter to quarter without reflecting underlying demand. But, in the second quarter our depletions were up 2%, and they are up about 1% for the year. So to me, those are the meaningful numbers.

Okay. With new advertising coming out, I thought we would see more of a hit in the second quarter. It sounds like we're just going to see much greater spends in second half of year; is that fair?

Yes. We're currently planning on adding to our advertising spend in the second half of the the year to support Sam Adams Light. We believe we are nearing the end of the sort of new product curve where you get building trial, trial to a peak, and then some of that trial falls off, and you settle into a stable demand base. We believe that we're going to get there sometime during the fourth quarter, and we're happy with the level we believe it will will stabilize at and believe that is strong have to justify advertising spending to grow it from that base.

So on an absolute basis advertising should be up in 2004 relative to 2003?

I'm not sure that we have a good handle on that one way or the other. We're not looking at a dramatic total increase in the advertising dollars 2004 over 2003. What will increase is the media rates, the reach, the frequency the GRPs, because we have been more effective at our buying of advertising. We are not looking for the huge and expensive reach numbers that you can only get on network, and so we've been able to buy more efficiently this year than last. So dollars might not change a whole lot but reach in frequency will.

Okay. And just a last question with respect to share repurchase. You really haven't been active at all in last three quarters relative to what we saw in -- certainly in 2003. What are you going to do? What are you going to do with the cash? I'm just curious as to what you meant by utilizing its cash to increase shareholder value for the long term. Can you kind of break that down and tell us what your thoughts are? Thank you.

Thank you. It is a fairly cryptic comment, I guess, but I'd have to say we are always looking at our options for using cash to increase share holder value for the long term. I don't really have any comment on what the future plans would be other than confirming the existence of approved programs like our stock repurchase program and the status of that. But I don't have any comment on what our intentions and plans are going forward, other than to say we try to use the cash to increase shareholder value.

Okay. Thank you very much Jim.

Thank you very much Jeff.

As a reminder, ladies and gentlemen, it is star one to ask a question. And your next question comes there Marc Cohen of Goldman Sachs. Please proceed.

Hi, guys.

Hi, Marc.

Can you help us understand a little bit about how you are seeing potential of the Sam Adams Light brand here? I guess this stabilization is going to to put the brand somewhere, you know, in the range of 15-20% the size of lager at the moment. Just from sort of fumbling through the numbers. What I'd like the understand is, you know, kind of where you see this brand developing over the next couple of years. How much money money do you need to spend to support that growth on advertising? And what is it about the new campaign that we should understand, that is giving you optimism that you can drive that kind of growth this the brand?

That is sort of several questions posed. Again we don't break out each style separately. If you you took a look at IRA and Nielson numbers, I think you'd would get sort of 20 to 25% of lager as stabilization point. That level to us is pretty acceptable. It makes Sam Adams Light a reasonably strong third player after Amstel and Corona Light in better light beers. So we are kind of in the club of three, which is where we want to be. We believe that light is a long term growth prospect. By long term, I'm thinking five years, even ten years. But, I believe there will be better growth in the light beer part of the better beer category than regular strength part of the better beer category. We believe we have the volume base to invest against that. We also view them as not quite two separate brands, so having some advertising synergy between the two. If you look at 2003 advertising levels, we were looking at sort of media levels of, I think, 25 to 30 million. We roughly think going forward that's a pretty good number number for what it is going the take to support what is effectively one and a half brands.

What's that number this year?

Well we are only half way through the year, so we're not sure. We're estimating, and based on current situation and our current plans that it is going to be about level with 2003 in terms of dollars, but, higher in terms of media weight because we have two brands and haven't had to buy the most expensive GRPs.

Bill, can we go to earnings statement of double digit growth falling off from what Jim just said? To get double digit growth, you basically would have to to bump -- you would have to bump up your SG&A spending by something like 10 million bucks in the second half of year, which is kind of inconsistent of what Jim is saying about advertising. So can you square comments of double digit growth with those ad comments?

I'm not sure I understand your complete question, Marc, but double digit growth --

Well, double digit growth is a promise of no more than 77 cents, right? To get to the 77 cents back half of year would have to be down 50%.

Yeah. But that's double digits anywhere from what? 10 to 99%, Marc.

I understand that.

It is not necessarily suggesting 77 cents or any other particular percentage.

Okay. So if that spending is not going to be moving much around on the selling expense line, are selling expenses -- do they need to move around to support this Sam Adams Light investment, or does selling expenses need to move around or will they move around to support the lager growth?

I think, as Jim said, we are half way through the year, and we are looking at our plans in terms of what we need to support support this. We'll do what makes sense to support the brand to get the growth of what we are looking for when we have worthy investments both on the selling expense side and media side.

Okay. So I guess what -- I would assume you would. So I guess what I am asking what do you think makes sense?

We're back to double digit earnings growth. If you are asking me for what that number is, it is double digit earnings growth.

Okay. Well, I am asking you -- I'm literally asking whether it makes sense that selling and advertising expenses would be up something like 10 million bucks in the second half of the year.

I think what Jim said is we don't believe that we'll be spending, at the present time, much more than the previous year in terms of advertising. I would say that goes for similar against selling expenses.

Okay. Great. Thanks.

And your next question comes from Isaac Schwartz of CBT Investments. Please proceed.

Hello. I was hoping you could talk a little bit about inflation on the end of input prices, if you could talk a bit about that for a minute?

I think as we indicated in releases, we've seen cost pressures from packaging costs, primarily corrugated, utility costs, and freight. The freight costs have been driven by diesel and some changes in regulation as to how many miles can be driven. Those costs have been somewhat present throughout the year, but intensifying in the second quarter. It is unclear to us what is going to happen in the second half of the year. We will wait with baited breath to see.

What about in terms of the cost of goods?

Well those are the cost of goods we are seeing inflationary price increases on. A lot of other cost of goods, we have annual contracts on.

Okay. Could I call you then, later to ask ask a little bit more about that? When do they come up for renegotiation?

That is not information we publicly disclose.

All right. Could you talk about more about freight cost increases?

As I said, they are driven by diesel costs increases, which I think are widely known, which were certainly driven by the general petroleum cost issues and then also by changes in regulations as to how many hours drivers can actually drive and what is a definition of an hour driven.

At what times are those deals negotiated? Are they done on a case-per-case basis?

Again, that is information we do not publicly disclose.

Well congratulations on the quarter. Thanks.

Thank you.

And the next question comes from Skip Carpenter of Thomas Weisel Partners. Please proceed.

Hi, Jim.

Hi, Skip.

How are you today?

Very good. How are you?

Good. I'm doing well, thanks. Just to clarify something in terms of comments. You said second quarter, I believe, lager and seasonals were, from a depletion standpoint, up 5%? Or was that a year-to-date result?

That is, I believe, second quarter. Let me -- no, I'm sorry. That is year-to-date for the first six months.

Okay. Thank you. I guess I'd like to get more insight from you, Jim, on the category. I guess as we went into this year there were hopes that there would be more of a healthier rebound in terms of category growth in consumption patterns given the easy comparisons and given some of the headwinds that have flipped in the category this year. I was wondering if maybe you could give us a little bit of a sense of why we haven't seen a better trend line, if you will, for the category. Secondly, with regards to pricing. Pricing you guys realized in the quarter was up about 1% offset by a little bit of mix issue here. Do you feel that given the sluggishness that we are seeing broadly here in the category that we're going to see another round of price hikes broadly, as we've seen in prior years for the beer market?

I think, yes. Just speaking sort of generally, what I see is the Corona price increase has stuck. By in large it is now really starting to to materialize in widespread fashion at retail, and it is being accepted. Depending on the markets, they've shown decent growth to fairly stable, but there hasn't been a lot of declines in their volume. I believe that the Corona brand, a very strong brand, will grow through the price increase. And I am starting to hear more about Hieneken price increases. So our feeling about pricing is that when we go to do our annual price increases, which tend to happen in the January, February time period period in each year. So when we look at that for 2005, I feel like it will be fairly healthy. I believe that some of the category leaders like Hieneken and Corona will help lead the way in that. I'm feeling fairly good about that part of the equation for 2005.

On the category volume growth, I think you maybe were going into this year a little bit more cautious in terms of category growth versus maybe some other expectations. As we look in '05, '06, do you feel the overall beer -- domestic market can kind of regain that kind of 1 to 1 1/2% growth rate?

I don't know. It might be a little below that. As you said, I was not as saying about the entire beer category and better beer at least in the first half of the year. I think if the economy improves, we will see the high end regaining more momentum than we've had for the last year so --

Okay. All right. Great. Thank you so much.

Just a quick reminder, ladies and gentlemen, if you'd like to ask a question please key star followed by one. And we do have a follow up questions from Marc Cohen of Goldman Sachs. Please proceed.

Hey, Jim, can you elaborate on this Hieneken pricing you just talked about a minute ago? Are you seeing increases in the marketplace, you can sight, or are you hearing from whole salers that they more receptive to thinking about it for 2005, which is part number one? Part number two of that same question, if Corona is really sticking with these increases and Hieneken is moving up, I guess to what extent do you think this is giving you some lift on the Sam Lager brand, and why wouldn't you think about some price adjustments sooner than that? Is there thing about taking pricing in the middle of the summer that is just taboo in the industry? It doesn't make sense to do it? it just upsets all the dynamics.

Let me comment on a couple of questions. The Corona price increase is a nice umbrella. Corona is, by in large, in its own world relative to us. Hieneken is the closer. And with Hieneken, it is the later of your options. I am hearing from whole sellers about more receptiveness and more plans to sort of follow to some extent the Corona price increase. And typically they are talking about September until the end of the year, so things happening in the last four months of the year. I don't know that it is an absolute taboo to raise prices in the summer, but there is there is so much more going on and it's hard to execute it. People tend to wait until after Labor Day and take their moves then and execute them in the slower part of the year so that they are set up for for spring and summer. So for us, that means -- typically, we would sit down as part of market planning with whole salers in the fall, and pricing is one of the issues that we discuss with them and decide on. Then it is implemented in a January/February, time frame when maybe retailers aren't paying so much attention to it, and that's when they are used to it.

On in the advertising for Sam Lager and Sam Light and and how they interplay with one another. I guess this is it a TV campaign you are talking about for Sam Light.

Yes, and for Lager as well.

How do we think about the interplay of that? And is this something you have to work on sliding? In other words you kind of run separate flights over the balance of the year for each? Or are you basically going to take Sam Lager to a low level while you launch Sam Light ads for balance of year? How does that media plan look?

It is a a good question. As you know there is there is as much art as science in this. What we typically will do is look at lager weight and not reduce them below a threshold level. So we believe that we will need a certain level of lager advertising. We track it. We track TV awareness and have a history of it, and we have and and idea of what the weights need to be the maintain high levels of awareness. Then we put the Light on top of of that separately. So they are more separate media plans than together, though we believe there is some synergy between them, much as you would see between Bud and Bud Light. But we basically plan them more separately than together.

I see. Can you put the 25 to $30 million level of spending on those two brands into context against what you think, I guess, what are the comps? The comps being, I guess, Amstel, Corona, and Hieneken, right? What are the comps, and kind of, how do we put into perspective this level of spend relative to those brands and scale?

I think it is roughly 60 plus, 60 to 75%. I don't have hard numbers for them. You can think of it as - you have somewhere between 60 and 75% of them. Again, to compare it, it puts us in the top ten beer brands in the country. It is somewhere after the big ones, but it would put us in top ten brands in terms of advertising spending.

When you say 60 to 75 you mean absolute dollars?

Absolute dollars.

Okay. Thank you.

And the next question is a follow up question from Skip Carpenter of Thomas Weisel Partners. Please proceed.

Hey, Jim. Another industry question. We've -- it seems like over the last couple of months there has kind of been a re-ignitement, if you will, in terms of some consolidation activity, ordeal activity surfacing both domestically as well as internationally. When you are speaking to your whole salers and everything of that sort, is it becoming that much more clearer that scale is that much more important for these guys in terms having the number of brands that they need to get to be effective in market place? If that is the case, given we haven't some consolidation in the smaller arena for the regional and craft names, do you anticipate that to be something in the coming years?

Well, there are two questions there. First, with respect to whole salers, it has been our experience that whole sellers look at brands more than suppliers. When they are figuring out how to allocate their effort, they are basically going to push the brands that move regardless of the supplier that's represented. So putting a whole bunch of weak brands together doesn't really create a lot of excitement from the whole saler. They are very rational about allocating their effort, and it tends to be behind brands rather than saying this supplier gets X percent of my effort. In terms of consolidation reaching down to the smaller brands, there hasn't been that much of it. I don't anticipate seeing a whole bunch of it in the next few years.

So there's no real competitive positive that are you see in terms that would come from two kind of small regional or craft brewers coming together, given some of the moves that we're seeing in the marketplace? You don't see that being the reaction on the part of the smaller brewers, given what the larger guys are doing?

There will be some of that, but I don't see it being a big deal. It can be helpful, but there is off a trade off between scale and focus. The loss of focus is as important a negative as the increase in scale is to positive in my view.

Okay. Thanks so much.

And you have one more follow up question from Jeff Kanter of Prudential Equity Group. Please proceed.

Hi, Jim. Since everybody is asking a follow up --

You are welcome to. Please do.

One brand that is creating excitement particularly on the eastern seaboard is (INAUDIBLE). Talking to a lot of whole salers, they are putting a lot of taps in. A lot of whole salers say it is coming out of the bud man. They are obviously creating a lot excitement. There is a lot of word of mouth. Is there something that they are doing when you study their business that has just everybody completely -- a lot of whole sellers all juiced up? And they are growing like a weed. Is there something they are doing that you are not that you think you should be doing? To put it another way, does that bother you the fact that they are growing like a weed? They are bigger than you without really any advertising.

I think they have done a very good job. They have a quite different strategy than us, which they executed very successfully, and that is to price their brand at the mass domestic pricing. It is priced against Budweiser, and has been very successful doing that. Dick is a very -- Dick Kingman [PH] is a very smart man and single-minded about it, and it has worked. God love him. But it is -- they are at a different price point and therefore different place in the whole salers portfolio than than Sam Adams is. It is a very good selling proposition. They can walk into a bar in New York and say we have a $50 keg, and it is a $5 pint, and there is 120 in that keg. That a good selling proposition. But, for us, given our brand support levels, we need and entirely different amount of gross-margin, and we have much different tasting beer. Theirs is closer to Bud than to Sam Adams in flavor, profile, and price, and it has been a brilliant and very successful strategy for them. But it is not for us.

So that tap that is being put in, that Yingham [ph] tap that is being put in, that is not coming at your expense?

By in large, not.

Okay. That is what I wanted to know. Thank you very much.

Gentlemen, your next question is follow up from Marc Cohen of Goldman Sachs. Please proceed.

I want to come back to Sam Light in the growth. To what extent is the Sam Light growth from here a function of consumer pull from this advertising versus some things you can do to drive expanded distribution? And maybe you can put that into focus by giving us a sense of Sam Light's distribution compared to Sam Lager in various channels and regions.

Quick answer, Marc, is pole. We think the distribution is pretty darn good. In most of the off-premise change, if we have lager we also have have seasonals and and Light. So, on-premise is a little harder, but our on-premise distribution with Sam Light is also something that we are happy with. Our belief is we have a good base out there. It is established distribution. The movement through the places that have it is acceptable. And we are in good distribution. What we need do to grow it is increase the consumer pole through effective advertising at appropriate weights.

So what's the key here at this stage of this brands development on pole? is it driving higher awareness in trial or is it driving basically just a lot more usage occassions out of people using it now?

I think it is the latter. It is presenting the consumer with a clear brand identity and a clear emotional benefit from the consumers' point of view. They know Sam Light, there is a good awareness of Sam Light. It is comparable to Amstel. And now we got -- give them the occasion when they are going to drink it and the reasons why. And we think we can do that through effective advertising.

But they tried it already?

Yes. We believe we've been through the trial curve. We've got very execution from whole salers. We had very good advertising. We had a lot of it. People became aware of Sam Adams Light in a very brief time frame. It basically basically got within the first year in most markets pretty close to the distribution levels that we got with Sam Lager after five to ten years.

So does that suggest to you the repeat purchase rate and conversion rates weren't what they could have been?

No. We are pretty happen happy with the conversion rates, but you are not going to convert everybody that tries it. So our belief would be that the distribution awareness and trial was very driven successfully, and it is now settled to a pretty strong distribution and consumer base. Now we need to start the long process of growing that for the next five or ten years. Bear in mind Amstel Light has been in the market place for nearly 25 years. We're a reasonable percentage of Amstel Light after a couple of years.

I am trying to understand the proposition. The proposition is to now go back -- is not to get new people to try it. It is to get people who have tried it to come back and repeat purchase and convert, right?

Yeah. Or people who drink it occasionally, and it is in their brand set, to drink it more frequently. We have a lot people out there who drink one bottle a month on average. That is really the opportunity is to get them to drink two bottles a month so.

So you are looking at just increasing frequency among converted people, not converting new people?

By in large, yes.

Okay. Great. Thanks.

As a reminder, ladies and gentlemen, star one for any questions at this time. Gentlemen, it appears there are no more questions from the audio queue at this time.

Thank you. We'll talk to you in three months.

Thank you very much. Cheers.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect your lines, and have a great day