Boston Beer Company Inc (SAM) 2005 Q2 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the second quarter 2005 Boston Beer Company earnings conference. My name is (Caitlin) and I will be your coordinator today.

[OPERATOR INSTRUCTIONS]

As a reminder today's conference call is being recorded for replay purposes. I would like to now turn the presentation to your host, founder and chairman of Boston Beer Company, Mr. Jim Koch. Please go ahead.

Thank you, good afternoon everybody and welcome. This is Jim Koch, founder and chairman and I am pleased to be here to kick off the 2005 second quarter earnings call for the Boston Beer Company.

Joining me on the call from Boston Beer will be Martin Roper, our CEO, Bill Urich, our CFO, and Monica Martin, our corporate controller.

I will begin my remarks this afternoon with a few comments on where we stand and then pass onto Martin who will provide an overview of our business. Martin will then turn the call over to Bill who will provide financial details for the quarter. Immediately following Bill's comments we will open the lines up for questions.

We are particularly pleased with our first half 2005 depletion and financial results. Boston Beer's increase in core brand depletions of 4% in the second quarter of 2005 has resulted in an increase of 2% for the first half of 2005. While the first quarter proved difficult for us and for the entire industry, our Samuel Adams and Twisted Tea brands showed solid improvement during the second quarter with a particularly strong June. Our packaged and draft trends all improved during the second quarter and we're encouraged by these results.

While it is too early to determine if our new brand messaging has impacted sales, we have received very positive feedback on our advertising campaign. We're currently airing three ads nationally and are continuing the development of new ads that exhibit the values of the brand. I expect to have a better sense of the impact of the campaign towards the end of the year.

We're also encouraged by the continued health of the better beer category by which I mean the imports in craft beers. We believe the better beer is benefiting from continuing consumer trends to trading up their beverage choices and that we're in a good position to gain our fair share of this growth.

I will now pass over to Martin for a more detailed overview of our results.

Thank you, Jim, good afternoon, everyone.

As Jim noted, we are excited by the depletions growth achieved in the second quarter. During the quarter we saw continued strong growth in Twisted Tea, Samuel Adams Seasonals and our Brewmasters Collection, offset by some declines in Samuel Adams Boston Lager and Sam Adams Light.

On-premise trends were positive for the latest quarter, driven by growth in our seasonal draft business and improvement in lager draft trends. Off-premise we saw growth in our bottled beer packages, which was driven primarily by the growth in our Seasonal and Brewmasters Collection styles.

The Samuel Adams brand continues to maintain strong brand equity with drinkers, primarily exhibited by the strong growth in Samuel Adams Seasonals and Brewmasters collection. Although we believe this growth may be coming with some cannibalization of Samuel Adams Boston Lager, trends for Samuel Adams Boston Lager and Sam Adams Light improved during the second quarter suggesting some brand health and we are encouraged by these results.

As Jim noted it is too early to conclude whether the improvement in trends have been impacted by our recent brand initiatives. However, we remain optimistic that our current Sam Adams brand messaging and associated programs are aiding brand health.

During the second quarter 2005 our advertising spending returned to more normal levels after our delay in the first quarter awaiting commencement of the company's new campaign. The new national television media campaign began on March 9, 2005, and we currently plan to continue with the brand message advertising through the rest of this year.

Other elements of the campaign such as sales materials and promotional programs rolled out during the second quarter and we will continue to be and will continue to be implemented over the remainder of the year. We believe that it positions us well relative to other craft beers and imports.

We believe that strong brand equity in the Samuel Adams brand is vital to the continued health of our business and remain committed to investing behind the Samuel Adams brand to ensure long-term success. We continue to test and evaluate our initiatives to determine their effectiveness, and to identify the optimum investment required to generate sustainable volume growth.

During the second quarter of 2005 our pricing and operating margin improved due to price increases taken and our continued efforts on cost reduction and control. Pricing remains stable for the quarter although we have recently seen some better beer discounting in a couple of markets and have chosen so far to respond to this selectively. Our price increases have offset the inflationary increases in materials and supplies that we've experienced as well as the impact of higher energy prices and freight costs.

We are currently anticipating a stable pricing environment going forward but will react if appropriate to any competitive pricing actions. During the quarter we generated 9.7 million in operating cash flow and continue to maintain a strong balance sheet with adequate cash positions to support our business strategy.

The expansion project at our Cincinnati Ohio brewery is on schedule to be completed in the third quarter and we plan on producing over two-thirds of our volume at this traditional brewery next year. With these investments in our business and certain other initiatives we expect our capital expenditures for the year to be between 12 and 15 million for the full year 2005. The exact number being dependent on the timing of completion of the many projects.

We continue to evaluate attractive projects that utilize our capital and support of brand and brewing strategies while providing considerable return for investors. On another note shipments and orders in hand suggest the core shipments for July and August 2005 could be up approximately 11% when compared to the same period in 2004. Actual shipments for the current quarter may differ and no inferences should be drawn with respect to shipments in future periods.

Now Bill will provide the financial details.

Thank you, Jim and Martin. Good afternoon, everyone.

The Boston Beer Company realized earnings for fully diluted share of $0.35 in the second quarter 2005 compared to $0.37 per share in the second quarter 2004. The decline in earnings is primarily a result of a decrease in shipments of 2.8%, partially offset by price increases. For the second quarter the company recorded net revenue of 61.6 million, a .6% decrease from the second quarter 2004. This decrease is a result of the 2.8% decrease in shipment volume, which was partially offset by a 2.2% increase in net revenue per barrel.

The increase in net revenue per barrel to $174.60 is due primarily to price increases and a shift in product and package mix, which was somewhat offset by an excise tax adjustment of approximately $500,000.

The decrease in shipment volume can be attributed to decreased shipments of Samuel Adams Boston Lager and Samuel Adams light.

Our wholesale inventory levels at the end of the second quarter 2005 are believed to be at normal historical levels. Our gross margin as a percent of net revenue was 59.9%, down .6% compared to the second quarter of last year. This decrease was driven by the excise tax adjustment and a 3.7% increase in cost of goods sold per barrel related to changes in product and package mix and the costs of packaging compared to the prior year.

Total operating expenses for the quarter increased 225,000 as a result of higher general and administrative expenses. This was offset somewhat by slightly lower advertising, promotional and selling expenses for the quarter compared to the same period last year. Our general and administrative expenses increase is primarily a result of an increase in salary and benefit costs, accounting, audit and legal fees.

For the six months ended June 25, 2005, the company recorded net sales of $110.3 million, a 3.4% increase from the same period in 2004 primarily driven by increase in shipment of core brands of 1.5% and price increases of approximately 2% implemented in the first quarter of 2005.

Net income increased by 2.5 million to $9.1 million or $0.62 per diluted share, a $0.16 per diluted share increase over the same period in the prior year. For the six month period, the net revenue per barrel increased by 2.3% during the period, primarily due to net increases and a shift in the product and package mix.

Gross margins as a percent of net sales increased to 60.5% from 60.1% in the same period last year, principally due to net price increases partially offset by increased production costs.

Advertising, promotional and selling expenses for the first six months were down by 1.9 million or 4% compared to the same period last year. General and administrative expenses increased by 1.2 million compared to the same period due to increases in salary and benefits costs, accounting, audit and legal fees.

Our balance sheet remained healthy with 64.7 million in cash and short term investments as of the end of the second quarter 2005. Additionally we have available a $20 million unused line of credit.

Our capital expense for the second quarter was 4.5 million as a result of normal operating capital spend and the Cincinnati expansion project. For the first six months the Company has invested $7 million in capital investments. The company depreciation and amortization expense was 2.1 million for the first six months.

During three months ended June 25th, 2005, the company repurchased $3.6 million of its class A common stock. Effective July 26, 2005, the Company's board of directors increased the aggregate expenditure limitation on the company's stock repurchase program from 80 million to $100 million.

As of August 2, 2005, the company has repurchased the total of approximately 7.3 million shares of its class A common stock from aggregate purchase price of $80 million and had $20 million remaining on the $100 million share buy back expenditure limit.

Based on current plans and market trends we currently expect earnings per share for the full year 2005 to be between $0.94 and $1.00 versus the $0.86 per diluted share in earned in 2004. This earnings per share growth is expected to be driven by volume increases for the full year and price increases of approximately 2% that were implemented in the first quarter.

We expect gross margin percent for the rest of the year to be approximately equal to our year-to-date rate, provided product mix is stable. The increases in revenue are expected to be offset somewhat by increases in advertising, promotional and selling expenses of between 3 million to $5 million and normal inflationary production cost increases and general administrative expense increases.

Our currently anticipated 2005 advertising, promotional and selling expenditures may be adjusted up or down as management deems appropriate for the benefit of the company's long-term volume growth.

We will now open up the call for questions.

[Operator Instructions] First question from Lori Hahn of Deutsche Bank.

Looks like a good quarter.

My first question has to do with the three to five million increase -- forecasted increase -- in marketing and advertising. That looks lower than the 47 million from last quarter.

Can you talk about what's changed since last quarter and also the timing of these expenses, how much, at least percentage-wise has fallen into the first half, and how much do you think is going to fall into the second half at this point?

Hi, Laurie, it is Martin.

The projection for the selling expense line includes freight, advertising, people costs and a number of factors and it is not purely, sort of, marketing spend, as an immediate spend. It is a combination of a number of factors and this is our best guess at this pointed in time based on our current plans.

As for how it falls, I think it would be fair to say that the remaining spend will be equal between the two quarters.

Okay. You can't give any idea of how much of the three to five you have already seen and how much you will see in the next half? 50% or --

Laurie, I think what we're saying is that we'll be between 3 to 5 million over 2004 from a full year basis.

Right.

Okay?

I am trying to get a sense how much of that increase has already taken place?

If you take a look at our advertising promotional spend for -- on a full-year -- I am sorry, on a year-to-date basis through June, we are down $1.9 million from the prior year.

Okay. That makes sense.

We're looking forward to the next two quarters of spend in advertising promotional, freight and so on.

So, a lot of it still has to take place -- most of -- all of it basically still takes place?

I would say so.

Okay. Also on the pricing actions that you talked about, do you see that getting any worse, getting any better, stabilizing?

I think as we indicated, we've seen some isolated pricing actions, some of which we've chosen to respond to and some of which we have chosen not to respond to. I would say that this isn't nearly as prevalent as the pricing that we're seeing in the mathematics side of the business. Again, I would use the word "isolated," and our outlook is therefore stable, and that's what we're currently planning.

Okay. Thanks a lot.

[OPERATOR INSTRUCTIONS] Your next question from Andrew Sawyer of Goldman Sachs.

I was wondering if you guys could give more color on your -- you obviously have the re-up on the authorization and the incremental capital spending from Cincinnati going to wrap up at the end of the year.

I'm wondering if you can give an update on what your thinking is as far as share buy-backs and what the appropriate level of cash reserves you see for yourself, going forward. Thanks.

Andrew, our philosophy about it has been to kind of hold back amounts that we think might be required to cover additional capacity up to 100% of our needs.

With Cincinnati's investment and the ability to take that up over two-thirds of our volume, we felt very comfortable freeing up an additional $20 million to return to shareholders through the buy-back, and we will review it again after we spend that money. It is a dynamic kind of circumstance, but at this point we were very confident that we could free up 20 million.

Could you follow up on that -- a third of your volume is like 400,000 barrels a year or so?

Yeah, a bit more than that, but roughly that.

How much cash would be required to cover getting emergency capacity for that -- for the 400,000 barrels?

You know, that is a big source of some of the uncertainty here. The capacity in Cincinnati, we were able to acquire opportunistically, a quality small batch traditional brewery that was in the right location and was about the right scale for us, and we've expanded that very cost effectively.

On the other hand, without those kinds of opportunities, the cost of Greenfield capacity can be in excess of $100 a barrel at our scale.

That would be 40 or $50 million at one end but our philosophy has been to try to be patient and selective and take advantage of opportunities as they come and therefore be able to increase our capacity at lower -- at numbers that are much lower than if we had to run out and build a Greenfield brewery.

Can I ask one other question on the STR up-turn -- what's driving the Twisted Tea volume growth and, to what extent, as you look into the second half of the year and you see this upturn in July and August. To what extent is that driven by continued growth of the teas versus the better performance in the core of Sam Lager and Sam Light brands?

I think there are two questions. The tea business appears to be helped by the warm weather and continued better levels of execution by our wholesalers on our sales on sales drivers such as distribution and visibility, and we would I think expect that to continue through the summer.

With regards to what is driving the increase in orders that we are projecting for July and August, I think it is fair to say that it is strength in Seasonals, Brewmaster's Collection, and Tea and I believe also Lager Flat and other good signs, but again, the order numbers are somewhat reflective of what happened last year at this period of time, so there's issues around what wholesalers' inventories were and we would encourage you not to draw conclusions for the quarter on -- based on orders and order numbers.

Okay. Thanks very much, guys.

[OPERATOR INSTRUCTIONS] Next question comes from (Jeff Cantor) of Varden Capital Management.

Good afternoon, everybody. A question for Jim.

Just in reference to your stock sales, can you walk us through -- and I know that's it a program you have -- but can you walk us through why, as founder of the company why you're doing stock sales like that, relative to, let's say paying out a dividend or paying out a special dividend where you could also get the same type of personal liquidity. Is there a reason for it? Thanks.

Hi, Jeff. Well, there is an explanation for it.

Whether there is a reason who knows. Those sales came out of a family trust that I have no involvement with and, frankly, didn't even know they were going on until the SEC returns were filed, so those sales, while they're reported under my name, are done completely independently.

Okay. And as far as -- Martin or Jim or Bill -- as far as returning cash to shareholders, I am glad to see that you started a repurchase your stock. You feel that's the best way to return money to shareholders relative to, again, a special dividend?

We continue to have a lot of confidence in the upside in front of Samuel Adams. We feel like we're in the best part of the beer business (inaudible) and among the best sectors in the entire alcoholic beverage business and we continue to have a lot of confidence in our ability to execute at high levels against what we view is a very attractive opportunity for the continuing trade-up going on in everything, in general, alcoholic beverages, in particular, and beer, for us.

So the answer is share repurchase over dividends?

Yes, right now that's the decision that we made.

Okay. Thank you very much, Jim.

Welcome back.

Thank you.

[OPERATOR INSTRUCTIONS] Okay, Mr. Urich, that was your final question. I'll hand the call back to you.

Thank you, everyone, for attending the earnings call and have a nice day.

Cheers.

Cheers.

Ladies and gentlemen, that concludes your conference.