Beam Earnings Call Insights: Honey Impact and Distributor Inventories

Beam Inc (NYSE:BEAM) recently reported its second quarter earnings and discussed the following topics in its earnings conference call.

Honey Impact

William Chappell – SunTrust Robinson Humphrey: Just a couple quick questions. I guess, one is there any way to kind of quantify what Honey has done in the U.S. in terms of consumer takeaway or did it have a meaningful impact on the quarter in terms of sell-in?

Matthew J. Shattock – President and CEO: Yes, Bill. That is more pertinent to the second part of your question, the selling has been very strong, but continuing to grow distribution on Honey in the channels where it’s gained distribution we’re very encouraged by the early signs the way it is felt. So, we’re not seeing its full potential impact on our share in the market, but I will say that based upon very strong performance we’ve seen in its launch markets Germany then Australia and the early signals from some of the data that we have it’s doing well and certainly being sold in very well and it’s contributed some of that pipe that Bob mentioned in his prepared remarks.

William Chappell – SunTrust Robinson Humphrey: So, is it fully distributed in the U.S. and all the channels and have return on marketing I mean in full board behind it?

Matthew J. Shattock – President and CEO: Yeah. It’s on its way. We will continue doing that through as we come to the second into the third quarter and you will see the back part of the year is when we’ve already begin activating in the brand off of our strong distribution base. You will see good retail activation where it’s distributed and then we will turn to the consumer later in the year…

William Chappell – SunTrust Robinson Humphrey: Then just switching to the commentary on serving a promotions on white spirits and some of the lag there, is that mainly tequila or are you seeing a weakening in kind of the vodka market? I mean how do you look at that kind of split in term of your spend behind the brands?

Matthew J. Shattock – President and CEO: I think there’s a couple of perspectives there. You talked about tequila, clearly in tequila, we continue to see an excess of supply over demand. That’s allowed other players into the market and as that inventory continues to be burnt off, you will see promotional activity taking place. I think that will go for another sort of 12 to 24 months, and then those people like us, have their own integrated supply chain. On the secured supply, we’ll take advantage, so you will see some more promotional activity in that period. We’ll also participate in that as appropriate to look after our share and then going forward over the medium term, we will see that supply demand come into balance, and that will phase those like us with integrated supply chains. In vodka, you are seeing a market that continues to be robust but clearly there is a quite a bit of promotion going on in that market, but it continues to be one of three drinks of our important market. I think overall, what this reflects is the price dynamics in the white spirit market and the competitive dynamics there reflects solid performance in the context of an overall strong spirits category. But clearly the move towards brand spirits and the strength we’re seeing particularly in markets like Bourbon and premium whiskies is really where all the action is and that’s the environment where we’ve seen more pricing opportunity and we’ve taken select price increase as Bob has said in our premium whiskies.

 

Distributor Inventories

Mark Swartzberg – Stifel Nicolaus: I guess following on Bill’s questions, you’ve mentioned one of the reasons your distributor inventories are little higher here at the end of 2Q is because of comparatively weak level of takeaway and in a generally healthy category, but could you give us some idea from depletions or consumer perspective what kind of slowdown magnitude you think happened for the larger spirits category overall and then within that can you give us a little more color on that distinction between brown and white spirits.

Matthew J. Shattock – President and CEO: Certainly, let me just give you a little bit of perspective on the overall category. And let me step back because obviously we look at this on sort of long term integrated basis. And supplement to the headline as I said in the prepared remarks is we see a fundamentally steady market as we analyze the various data points that are virtuous. As we said in Q1 we saw a global market trending towards 3% value with the U.S. tracking more towards 4% based upon the strong U.S. candidate. As we come into the second quarter we are seeing that market tamper due to a couple of factors. In the U.S. we are seeing a softer ready-to-serve category that’s certainly being exacerbated by the weather and appear that that sort of category softness helped turn the U.S. market growth to low single digits during the second quarter and if you look at the sort of composition of that market in the second quarter. We saw some volume go from slightly positive to negative and most of that I think is probably due to ready-to-serve and then if I had to point to price, which is sort of flat in that level on a couple of points that mix. Global level as we said coming into the year we saw the emerging markets growing at double digit we said in our last call. We saw that moderating a bit a certainly that trend has continued to the second quarter. So really we see those impacts as being relative temporary as we cycle through what is a very seasonal ready-to-serve market, and we go through to the back-half of the year. We see the fundamentals of the market being pretty much impacting the core drivers, that really are the sort of long term industry fundamentals like premiumization, the share gain from beer and solid growth from innovation continuing and taking us back to a market that we see growing pretty solidly and the 3% level, but at sort of 3% to 4% market growth in the U.S. Bob I don’t know if you want to provide additional color on the brown versus white spirits…

Robert Probst – SVP & Chief Financial Officer: What I’d add in addition to the market is to reinforce that the emerging markets we saw softening a bit in terms of the growth rate in the first quarter, that’s continued here in the second quarter. Obviously, in the back half of the year, we expect some gradual improvement there but not immediate. In terms of brown, I think on that question, we’re certainly seeing that the strength of the brown spirits more broadly and of course we like that. 60% of our portfolio is brown spirits, and within that of course the strength in Bourbon is fantastic with our Bourbon portfolio, as a third of our business. White spirits is still a huge space. So, we’re not in any way discounting vodka. It’s still one in three drinks in the U.S., still plenty of opportunity there. Similarly, we really like tequila. So, the main state of portfolio, the dynamics we see in meeting the long-term there. So, the dynamics here of a shift towards brown, we think is fantastic, fundamentally the overall dynamics of spirits winning share throughout, we think is benefitting the category overall.

Mark Swartzberg – Stifel Nicolaus: And if I could ask two follow-ups specifically relating to white spirits here in North America in light of what you just said. One is, are you saying that the white spirits vodka, tequila everything combined gin, are you saying that they did not slow down, the slowdown overall for spirits was entirely driven by ready-to-serve or was there also an element of the white spirit slowing down, that’s one question? Then, two, Diageo announced comparatively high price increases on some of their lower end white spirits, Gordon’s and Popov specifically. What do you think of that, not so much those increases themselves, rather the opportunity to take comparatively high increases on some of the lower the lower end brands to encourage trading up in the white spirits segment?

Matthew J. Shattock – President and CEO: I did not get the first part of your question there, certainly the predominant driver we see in the dip in the market in the second quarter came from ready-to-serve but relatively speaking, as Bob said, brand spirits grew faster than white and you saw a little bit of a tempering, but I wouldn’t say a dramatic change into the underlying growth of the white spirits market. As it pertains to pricing, we certainly see that there is a range of price points across the market in various elasticities. Certainly the bottom end, it’s a more price competitive environment and you’ve seen us manage our portfolio. We made some selective disposals from our portfolio in the year and certainly we managed the revenue there very closely, but that is certainly a more competitive pricing environment in that part of the market.

A Closer Look: Beam Earnings Cheat Sheet>>

More Articles About:    

More from The Cheat Sheet