Boston Beer Company Inc (SAM) 2004 Q3 法說會逐字稿

Good day, ladies and gentlemens. And welcome to the Boston Beer Company earnings conference call. My name is Jim and I will be your coordinator for today. At this time all participants are in listen-only mode. We will break periodically throughout the presentation to facilitate any questions you may have. If at any time during the call you require assistance, please press star followed by 0 and an operator will be happy to assist you. As a reminder this conference call is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Mr. Jim Koch, Chairman and Founder. Please proceed, sir.

Thank you. Good afternoon and welcome. This is Jim Koch and I am pleased to be here to kickoff the 2004 third quarter earnings call for the Boston Beer Company. Joining us on the call from Boston Beer are Martin Roper, our CEO, Bill Urich, our CFO, and Monica Martin, our Controller and Director of Finance. I will begin my comments this afternoon with an overview of our business and then I will turn the call over to Bill who will provide financial insights for the quarter and then immediatly following Bill's comments we will open the lines for questions. For the third quarter of 2004, Boston Beer's total depletion volume was down very slightly about 0.5% as compared to the same period last year with the decrease in the lager and light brands somewhat offset by increases in seasonal brands. Depletions for the 9 months are up approximately 0.5% from the prior-year as a result of favorable results for lager and seasonals. Samuel Adams Light volumes appear to be stabilizing on a month-to-month basis.

As previously announced during the third quarter 2004, we increased our media spending behind both lager and light compared to 2003. We introduced a new advertising campaign for Sam Adams Light in the third quarter to position light beer for growth and it still too early to know the effectiveness of the new advertising. At present, we expect the total advertising promotional and selling expenses for the full-year of 2004 will increase between approximately 1.5 to $2.5 million as compared to 2003. During the first 9 months of 2004, pricing and operating margin improved and we generated over $15 million in operating cash flow. We are currently evaluating an expansion project for our Cincinnati brewery which contemplates a capacity, I'm sorry, capital investment of approximately $6 million to generate an additional 200,000 barrels of brewing capacity. A final decision on this project is expected during the fourth quarter. Shipments and orders-in-hand suggest that core shipments for October and November will be up approximately 5.8% as compared to the same period in 2003. Actual shipments for the quarter may differ and no inferences should be drawn with respect to shipments in future periods. Now, Bill Urich will provide the financial highlights.

Thank you, Jim. Good afternoon, everyone. The Boston Beer Company realized earnings per diluted share of 21 cents in the third quarter of 2004 as compared to 28 cents per share in the third quarter of 2003. For the third quarter, the Company recorded net revenue of 54.7 million, a 1.5% decrease from the third quarter 2003. The decrease was primarily due to a 3.6% decrease in the shipment volume of core brands. This was offset somewhat by 2.2% increase in the net revenue per barrel to $170.51. This increase is primarily due to price increases and to a lesser extent a shift in package mix from kegs to bottles. The decrease in shipment volume was primarily caused by a decrease of shipments of Sam Adams Boston Lager and Sam Adams Light, partially offset by increases in seasonal brands.

Shipment volumes for the third quarter was lower than the wholesaler sells to retail volume by 7,000 barrels. We estimate that wholesaler inventory at the end of the third quarter was at levels comparable to 2003 and down from 2002. The gross profit margin for the quarter was 58.5% of net sales, down from 58.9% reported for the third quarter of 2003. This decrease in gross margin was primarily due to the fact that our price increases were more than offset by increases in packaging and utility costs. We continue to experience cost pressures, especially from packaging materials and utilities coupled with a shift in package mix from kegs to bottles. While we currently expect the gross margins for the year to be similar to the year-to-date numbers, this could be adversely affected by changes in the market conditions or further cost pressures. Advertising promotional and selling expenses increased by 1.2 million or 5.2% to 23.4 million for the third quarter 2004 versus last year. This increase is primarily driven by increases in media spending. The general administrative expenses for the third quarter 2004 decreased 9.7% or 400,000 as compared to the same period in 2003. This decline primarily reflects the legal expenditures incurred in 2003 in connection with the arbitration proceedings with Miller Brewing Company.

Our balance sheet remains healthy with 57 million in cash and short-term investments as of the end of the third quarter 2004. Additionally, we have a $20 million unused line of credit. The Company also continues to generate positive cash flow delivering 3.2 million of operating cash flow for the third quarter 2004. We are continually evaluating opportunities for utilization of our cash to increase shareholder value for the long-term. Our capital expense for the third quarter was 1.5 million and depreciation and amortization expense was 1.3 million. We have 5.2 million remaining under the $80 million aggregate board authorization spending limit related to the stock repurchase program. Through November 2, 2004, the Company has repurchased a total of 7.1 million shares of Class A common stock for aggregate purchase price of 74.8 million. Weighted average shares outstanding for the 9 months ending September 25, 2004, was 14.5 million shares. While the Company continues to face cost pressures related to freight and packaging costs, based on current information, we still expect earnings per share for full 2004 fiscal year of between 82 and 90 cents per share, a double-digit increase. Final note, we are planning to file our third quarter 2004, 10-Q with the SEC on November 4, 2004. We will now open up the call for questions.

Ladies and gentlemen, [OPERATOR INSTRUCTIONS]. Jeff Kanter.

Shipments for October and November, orders-in-hand up 5.8%. Can you give us a sense on how consumption has been doing since the end of the third quarter?

It's -- for us it's too early in the cycle to have any reliable fourth quarter numbers. As you know we get them in from distributors and that's just the third of the month. So we don't have anything that is real firm at this point. So that I can't really do. It appears that the 5.8% increase in shipments in the first 2 months of the fourth quarter is pretty much in line with what we would have projected for wholesaler inventories at this point in the year. And consistent with the trendline depletion growth that we have been seeing for the year.

I guess -- let me try also a different way. You said that Sam Adams Lager was a little weak in the third quarter and I was wondering, one, why, and two, have you seen it stabilize a little bit as of late, being that that's still your biggest brand?

Yes, it is sort of the flagship brand. The weakness that we saw in the third quarter in lager tended to be more on premise and draft than off premise and packaged. And we are not really sure whether the data that we saw for September is showing a stabilization partly because of the way the Labor Day moved into September this year when a lot of the loading was in August last year. We are not able to tell.

Everybody is taking up price increases, Heineken is, Miller, Bud, are you?

Yes, we price -- we basically look at our competition and try to be competitive. And the cost pressures throughout the industry, I think, are pushing everybody to make sure that none of us leave money on the table unrecovered. So we are continuing our philosophy of looking at the kind of prices that competitors, such as Heineken are putting in and then pricing based on what we feel is appropriate given the cost pressures that we are facing and value of our brands and the competitive opportunities in the market place.

So you have followed and if so, by how much?

The statement that we have followed is roughly true and we are intending to do that. But we do our pricing primarily in the first quarter of the year. So we don't do it as much on a rolling basis. But we generally are looking at pricing in the February, March, sometimes January time horizon depending on market conditions. But our overall strategy is to be at the same kind of price point that Heineken is at and we have seen them announcing price increases, implementing them in some markets, and we are taking those into consideration as we are putting through our price increases for 2005. But we are right in the middle of that planning process with distributors and it isn't really complete until the middle of December.

And finally, what are you going to do with all this cash? I mean it's almost like you are trying to compete with your local bank.

Well, we don't take deposits and we don't have checking accounts. But right now I would say that we haven't changed any of our posture. We continue to look at opportunities to either invest it or to disperse it. The investment in Cincinnati is something that we are evaluating very, very seriously. We think it has an attractive rate of return on it. And so that's one thing that we are pretty far along the path in terms of evaluating.

And just a clarification, your inventories you said were at the same level as the end of 3Q, '03; is that correct?

That's correct.

Lori Haun.

I just have one quick question for you. A lot of companies in the industry have talked about raising spending on premise. And I know you guys have raised spending this year. But I am wondering how much you thought about 2005 if you might be able to share? If you can't really give hard numbers just what you are thinking about for 2005 in terms of spending.

Lori, it's a little early for us to respond to that. We typically try to give some guidance in our first quarter in our announcement with our full-year results. We are in the middle of a planning process. We obviously have observed what the competition is doing. We think that we were already very strong on premise, but obviously we need to equip our brand and our people to compete and who have more to say I think when we have our annual results announcement in February/March.

Marc Cohen.

In July when you talked about shipments and orders-in-hand for July and August, you gave the impression -- you had the viewpoint that things were looking flattish. They came in a little weaker than that and I'm wondering if you could just take us through where the business softened up in that August/September time frame and how your analyzing that situation in terms of, is there something sustainable there? The reason I want to talk about that is that it seems to me that that is kind of when you began to put this incremental marketing spending to work. So I would have thought you would have been seeing some strengthening. Can you square that up, Jim?

Yes. We are slightly weaker than we thought and here, I'm really talking about depletions. Not a whole lot. We were down about 0.5 point. I think the industry was a little bit weaker than we expected. Across our product portfolio the Sam Adams Light appears to be stabilizing. As we have anticipated. And we are seeing -- beginning to see month-to-month comparisons that are pretty stable. Lager, seasonals were -- continued to be strong. Lager was really the area where we saw a little more weakness than we anticipated. And that is roughly where that 0.5% or so difference came in. Partly industry a little softer and for us, on top of that lager, a little softer yet.

So this indication in July would have been indicative of your depletion expectations, too? So you are really only about 50 basis points off of where you would have thought, not a material difference is the way you characterize this?

Yes. I can't quite cut it all that fine. So yes, it was not a material difference.

Now, wouldn't you -- when you talk about light stabilizing now and you do that in the context of having elevated marketing spending and brought some new advertising out on the brand, are you surprised that the brand hasn't responded even more favorably to that?

That's a subjective answer, but I would say, yes. Here would be my take on it. And we are in the middle of it. But my take at this point would be that it's too early to tell on the Sam Light ad campaign, but we were expecting it to get to somewhere around flat before the end of the year and we still have that anticipation. The lager spots that we put on the air in the third quarter, I'm less saying about now than I was then. And it's very subjective. It's just an opinion. But we did not see as much sales response as we were hoping for from that new round of creative.

When you talk about Light being flattish by year, are you talking about the month-to-month run rate year-over-year? Or are you talking about the full-year just kind of being -- getting back to probably the full-year is flat?

The first, the month-to-month, perhaps even quarter-to-quarter run rate.

But year-on-year, you would be -- I mean, if you looked at November -- or the month of November, the month of December versus the year ago, is that a level that is substantially different, higher or lower than it was a year ago?

It's on a month-to-month basis, like November '04 versus November '03?

Correct.

We are thinking that comparison somewhere around flat, plus or minus mid single-digits. It's kind of in the difference between exit polls and actual.

Right. You have to count the other ballots?

We have a few preliminary drinkers and we are not sure if they are going to stay. Provisional drinkers.

Provisionals ballots, right. Okay, thanks Jim.

Again, ladies and gentlemen, [OPERATOR INSTRUCTIONS]. Gentlemen, you have no further questions at this time.

Thank all of you. We will talk to you in about 4 months.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect.