Boston Beer Company Inc (SAM) 2005 Q3 法說會逐字稿

Good day ladies and gentlemen, thank you for standing by and welcome to the Boston Beer Company third quarter 2005 earnings conference call. My name is Carlo and I will be your coordinator for today's presentation. (Operator Instructions). It is now my pleasure to turn the presentation over to your host for today's conference, Jim Koch, Chairman and Brewer. Please proceed sir.

Thank you. Good afternoon and welcome. This is Jim Koch, Founder and Chairman and I'm pleased to be here to kick off the 2005 third 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 Corporate Controller.

I'll begin my remarks this afternoon with a few comments on where we stand then pass on to Martin Roper who will provide an overview of our business. Martin will then turn the call over to Bill Urich who will provide financial details for the quarter. And then immediately following Bill's comments, we'll open the line for questions.

We are very pleased with our first nine months of 2005 financial and depletion results. Boston Beer's increase in core brand depletions of almost 9% in the third quarter of 2005 has resulted in an increase of almost 5% for the first nine months of 2005.

The Craft beer category has grown this year and our Samuel Adams brands have shared in this growth. We believe that the "Take Pride in Your Beer" advertising campaign that was launched in March of 2005 has better positioned Samuel Adams to benefit from this category trend. While we don't have any definitive proof yet that this campaign is contributing to growth, we plan to continue with this campaign while monitoring its effectiveness. The improvement in depletion trends and feedback from our drinkers and our wholesalers has led us to believe that the program has a good chance of helping our brand. We are encouraged by the continued health of the Craft beer category. We believe that the category is benefited from continuing consumer trends to trading up in their beverage choices and that we're in a good position to gain our fair share of this trend in this growth.

I'll now pass the call over to Martin for a more detailed overview of our results.

Thank you Jim. Good afternoon everyone. As Jim noted, we are encouraged by the depletions growth achieved in the third quarter. During the quarter, we saw continued growth in the Samuel Adams brand family and improvements in all major Samuel Adams style trends. The growth in the Samuel Adams brand family was driven by growth in Samuel Adams Seasonals and Brewmaster's Collection that was somewhat offset by declines in Samuel Adams Boston Lager and Sam Light.

The improvement in the Samuel Adams brand trends during the quarter suggests that the Samuel Adams brand continues to maintain strong brand equity with our drinkers. We believe our brand health has been positively impacted by the "Take Pride in Your Beer" communication but we believe our volume trends are primarily benefiting from the health of the Better Beer and the Craft category generally. We have been airing the "Take Pride in Your Beer" television commercials nationally since March and are continuing to develop this appropriate message consistent with the brand's positioning in the growing Craft beer category. We are also benefiting from significant growth trends in our Twisted Tea brand, which remains a regional brand. We are currently evaluating the appropriate brand strategies in order to maximize the economic return from this brand.

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 it as the number one priority 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.

Pricing remains stable for the quarter. However we are experiencing significant cost pressures, particularly on our freight costs, the size and consistency of which we have not seen before. We are evaluating potential price increases for 2006 and our ability to raise pricing will be affected by competitive moves and an assessment of such increases on our volume trends.

Shipments and orders in hand suggest that core shipments for October and November 2005 could be up approximately 20% when compared to the same period in 2004. These growth rates are significantly ahead of known depletion brand trends, which is unexpected. And it is unclear at this time, what impact if any this will have on wholesaler inventories at year-end.

During the quarter, we generated 21.6 million in operating cash flow and continued to maintain a strong balance sheet with adequate cash positions to support our business strategy. The expansion project at our Cincinnati Ohio brewery was substantially completed in the third quarter and we plan on producing approximately 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 approximately $15 million, the exact number being dependant upon the timing of various project completions. Now Bill will provide the financial details.

Thank you Jim and Martin. Good afternoon everyone. The Boston Beer Company realized earnings of $0.29 per fully diluted share in the third quarter 2005 compared to $0.21 for fully diluted share in the third quarter of 2004. The increase in earnings is primarily the result of an 11.8% increase in shipments partially offset by an increase in operating expenses.

For the third quarter, the company recorded net revenue of $63.2 million, a 15.5% increase from the third quarter 2004. This increase is a result of the 11.8% increase in shipment volume and a 3.3% increase in net revenue per barrel to $176.07. This increase in net revenue per barrel is due primarily to increases -excuse me - price increases and shift in product and package mix.

The increase in shipment volume can be contributed to increases in Sam Adams brand family and Twisted Tea. Samuel Adams Seasonals, Samuel Adams Boston Lager and Samuel Adams Brewmaster's collection all grew and were offset somewhat by declines in Sam Adams Light. Wholesaler inventory levels at the end of the third quarter 2005, are believed to be at normal historical levels.

Our gross margin as a percent of net revenue was 59.1%, up 0.6% compared to the third quarter last year. The increase was primarily driven by net price increases that were partially offset by increases in package material and production costs. Advertising, promotional and selling expense increased by $3.4 million to $26.8 million for the third quarter due to higher fuel costs and advertising expenditures. General administrative expenses for the quarter increased by $400,000 as a result of increased salaries and accounting and legal fees.

For the nine months ended September 24, 2005, the company recorded net sales of $173.6 million, a 7.5% increase from the same period in 2004 primarily driven by a 5.1% increase in shipments of core brands, price increases of approximately 2% and a shift in product and package mix.

Net income increased by $3.6 million to $13.3 million or $0.91 per diluted share. An increase of $0.24 per diluted share over the same period in the prior year. For the nine-month period, the net revenue per barrel increased by 2.6% during the period primarily due to net price increases and a shift in the product and package mix.

Gross margins at a percent of net sales increased to 60% from 59.5% in the same period last year, also principally due to net price increases, only partially offset by increased package material and production costs. Advertising, promotion and selling expenses for the nine-months increased by $1.6 million or 2.2% compared to the same period last year, due to higher freight fuel costs and increased selling expenses.

General and administrative expenses increased by $1.6 million compared to the same period last year due, as with the third quarter, to increases in salaries, accounting and legal fees. Our balance sheet remains healthy with $61.6 million in cash and short-term investments as of the end of the third quarter 2005. Additionally, we have a $20 million unused line of credit.

Our capital expenditures for the third quarter total 4 million reflecting normal operating capital spending and the Cincinnati, Ohio brewery expansion project. For the first nine months, the company has invested 11 million in capital investments.

During three months ended September 24, the company re-purchased $7.2 million of its Class-A common stock. As of October 31, 2005, the company has re-purchased an accumulative total of approximately 7.6 million shares of its Class-A common stock for an aggregate purchase price of $86.2 million and had $13.8 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 $0.96 and $1 versus $0.86 per diluted share earned in 2004. This earnings per share charge-off assumes that the forth quarter shipments will be in line with year to date depletion trends. We expect gross margin percentage for the rest of the year to be slightly below our third quarter rate as we are experiencing significant cost pressures on all items. We also now expect advertising, promotional and selling expenditures to be between $5 million and $8 million, which is higher than our previous estimate because of increase-related -- I'm sorry -- related freight fuel costs and continued advertising and selling investment behind our brand.

As we look forward to 2006, we are seeing extraordinary cost pressures on all items but especially freight costs. Based on current cost increase knowledge and preliminary pricing expectations, 2006 gross margin could be down as much as one percentage point below full year 2005. We continue to pursue cost savings initiatives and pricing opportunities in order to preserve our economics and allow us to continue to support our brands with appropriate investment and grow our volumes and earnings. Thank you and we will now open up the call for questions.

Thank you sir. (Operator Instructions). Our first question is from the line of Laurie Hahn from Deustche Bank.

Hi everybody.

Hi Laurie.

Hi Laurie.

Hi Laurie.

Just wanted to dig a little bit more into your guidance for the year. Even when I put a lot of your assumptions into my model, it still seems conservative. I was wondering if you could talk a little more in detail about what you are seeing so far in the forth quarter with retail demand and the pricing outlook. And if you can give any sort of perspective on packaging costs in the fourth quarter as relative to the third quarter that would be helpful.

Hey Laurie it's Martin. It's a little to early for us to comment on retail demand in the fourth quarter. We really don't have a picture yet on October. What I would say is that we're seeing stable pricing in the third quarter and we have not heard anything in the marketplace that would cause us to expect that to change at the fourth quarter. We are seeing significant cost pressures primarily driven by cost of fuel, but I think all consumer packaging companies are experiencing -- and that obviously is going to put a crimp on our gross margins going forward. We are evaluating pricing increases but we can't at this point in time commit to anything happening in the forth quarter. As we look into 2006, we're unsure whether the pricing that we can achieve will actually fully cover the cost increases leading to our guidance for gross margin to be down.

With regards to volume, I think in the press release we've indicated what our orders on hand are for the quarter and those can change and we certainly allow our wholesalers to cut and add, at will, up to the very last minute. And as we look at what we have in hand they are unexpectedly higher than depletion - known depletion trends. And when that has happened in the past, typically there has been a correction in order to bring wholesaler inventories to appropriate levels at the end of the year. But, obviously, we can't predict whether that will happen in this case and it does make forecasting our full year very tough.

Okay. And then for 2006 when you mentioned that the gross margin could be up to a 1 point decline, what sort of fuel price assumption is that? Is that saying fuel prices stay the same as they are right now? Or - and as far as our pricing assumption, preliminary pricing assumption I think you had mentioned, is that assuming, say a like increase you had this year or just, any help on that would be good.

Yes. Hi Laurie, it's Bill.

Hi, Bill.

For the first part of you question on fuel costs, we are looking at fuel costs now. We're certainly not estimating any changes in that because we don't know. So it's basically what current fuel price is now is what we're assuming. Okay. And from a pricing perspective, we are in the midst of evaluating the different pricing potential in the market and we will take price where it's feasible for us to take pricing where it makes sense from a competitive environment.

Okay. I'll let someone else have it. Thanks.

Laurie, I'm just going to comment and add on the pricing. I think we're looking forward trying to understand what the competitive environment will be.

Right.

At this point the only competitive data point that we have, and it may not be a real data point, is Heineken's apparent announcement to their wholesalers of no planned increases next year. And obviously, that will affect our ability to take a price leadership position.

Okay. Okay, thanks.

And, sir, our next question is from the line of Brian Spillane with Banc of America Securities.

Hey good afternoon.

Hi Brian.

Hi Brian.

Hi Brian.

A couple of questions. First just to -- I want to make sure I've got the cost breakouts right. I guess I was under the impression that freight costs fall under SG&A, and so I just want to make sure I'm sort of clear on what's impacting gross margins versus what's driving up the advertising, promotion and selling line.

Brian, it's Martin. Obviously we're being affected by inflationary cost increases on a number of items, most of them sort of coming back to what's going on with energy prices. And energy prices affects us in a number of ways. It affects us in our brewing operating costs, which are very energy intensive, it affects the packaging costs, which are also very energy intensive, particularly the glass bottles, and then obviously it affects the outbound freight.

You are right that the outbound freight shows up in SG&A, and I think we acknowledged that somewhere in the press release, talking about SG&A increase being driven significantly by freight costs. So you're right, that's where freight shows up. But there are other energy related costs that we see coming through and we are currently experiencing.

And to Laurie's question, the way we do our sort of planning is off current knowledge of current rates. We don't anticipate changes to that, we just use the best information at the time we have it and as we look forward, that's what we're projecting.

Okay. And then in -- with packaging costs, when do your -- when do those packaging costs reset? I guess what I -- was there any increase in your gross margins this quarter? Were increases in glass costs, I guess, or bottle costs, reflected in your gross margin? Or is that part of what is lowering your gross margin assumption going forward?

I think I'd rather not comment specifically on the timing of any price resets. I think that we regard that as competitive information and probably confidential to our vendors. But as you look at the cost pressures we experienced in the last quarter, it was primarily being driven by brewery operating costs and energy costs related to that and then obviously the freight costs, which shows up in the SG&A.

Okay. And then with the orders -- first of all, the depletion numbers being up as strongly as they are and then the order in the -- the order log in the future looking good. Martin, can you talk a little bit about are you seeing increases in display inventory? Are there new customers? Is there something incremental in terms of point to distribution that's helping drive that?

Brian, it's Jim. Not -- there is not a significant distribution driver there. It would be closer to the equivalent of same-store sales.

Okay. And then just one last thing. Do you have any customers that were on allocation?

We wish.

Well, we have some products that are on allocation because they're short runs, such as our Utopias or products like that, our smaller run products that we eventually have to allocate. On a general basis, we don't have wholesalers on allocation that I know of. And -- but on a day-to-day basis, we're obviously making decisions as to what beer is available and to who to ship to. So on a day-to-day basis, absolutely, but on a week-by-week or month-by-month basis, no.

Okay, great. Thanks guys.

(Operator Instructions). And, sir, our next question is from the line of Jeff Cantor with Varden Capital Management (ph).

Good afternoon, gentlemen.

Hey Jeff.

Hey Jeff.

Hey Jeff.

Jim, quick question for you. Your depletion rate was outstanding and it's being driven by seasonals and what have you. But your depletion rate for obviously lagers and light were less than outstanding, which, to me, that's the majority of your volume still and so that, to me, is less than outstanding. Can you talk a little bit about your plans to get people drinking lager and light again?

Yes, it's not as simple as breaking them out by style because what can happen as the brand strengthens is, for example, people may drink a lot more seasonals and lager and/or light may be flat, but because they're going largely through the same bars, restaurants and stores, there's a natural cannibalization. So the fact that the seasonals grow significantly without a corresponding drop in lager is typically a result of strengthening lager trends -- the overall brand is strengthening. It shows up numerically in seasonals, but the fact that the natural cannibalization there is offset by the growth in lager is a healthy thing.

So basically you don't really care what's growing, just as long as the whole pie is growing?

Well, we care first and foremost that the whole pie is growing. And our focus brands are lager, light and seasonals, so we want to see growth there. But we're not going to give up a distribution opportunity, say, for seasonals, in order to protect lager or light. We believe that the brand health involves all of them.

Okay. And as far as orders in hand being up 20%, that's a huge -- that's a huge number. Is it that -- is it that your wholesalers are just being -- are being overly optimistic or is it just a belief that the brand strength is just going to accelerate here through the holiday season? Any thoughts there?

I'd have to say after many years of doing this, I've learned not to put a tremendous amount of credence in projected shipments and wholesaler orders. They always tend to come back to following the depletion trends. And those numbers of almost 20%, as we said, are way in excess of our approximately 5% year to date depletions growth. So bottom line, I don't know what to make of them and I wouldn't read a whole bunch into them.

Okay, except that that's going to -- that your P&L must be doing pretty well for the first two months. But I hear your point. Finally, billed CapEx for next year. Any thoughts?

We're just putting together our real plans for next year. So not at this time.

But all things being equal, it should be less than $15 million, a lot less.

Can't say either way at this time, Jeff. We're evaluating a number of different things.

Okay. Thank you.

Thank you.

(Operator Instructions). And, sir, we have no further questions. Back over to the group for any further remarks.

Thank you, everybody, and we look forward to talking to you on our next quarterly call.

Cheers.

Cheers. Take care.

Ladies and gentlemen, we thank you for your participation in today's conference. This concludes your presentation and you may now disconnect. Good day.