Boston Beer Company Inc (SAM) 2002 Q1 法說會逐字稿

Good afternoon, and welcome to the Boston Beer first quarter earnings conference call. All participants will be able to listen only until the question until the question-and-answer portion of the call. This call is being recorded for instant replay purposes. If you have any objections, you may disconnect at this time.

I will now like to turn the call over to Mr. Rich Lindsay, CFO of the Boston Beer Company. Sir, you may begin when ready.

Thank you. Good afternoon, everyone, and welcome to the 2002 first quarter earnings call for the Boston Beer Company. I'm joined with our chairman, Jim Koch, and our CEO, Martin Roper for today's call.

This afternoon, I'd like to begin with some financial highlights for the quarter. Then I'll turn the call over to Jim, who will provide an overview of the marketplace. Immediately following Jim's comments will be a question-and-answer session.

Since we've already released the income statement for the quarter that compares the financial performance with the prior year, I thought what I would do is just highlight some key points that I think are particularly important.

Branded product shipment volume rose significantly during the period, principally from Sam Light, and we also enjoyed some depletion growth of 7.4 percent in comparison to the prior year. Our revenue and gross profit per barrel also increased during the quarter due to pricing increases and a shift in products mix away from third-party contract volume and some more packaged product.

This increase in volume and gross profit per barrel increased gross profit significantly from the same period in the prior year. Operating income was lower in Q1 2002 than 2001 due to rollout of Sam Light and associated brand support investments. There was no stock purchase reactivity for the for the quarter.

I'll now turn the call over to Jim. Jim?

Thanks, Rich.

The first quarter of 2002 I think was a successful quarter for Boston Beer Company. Our base business is up. The pricing in our sector and for Sam Adams is healthy. Our margins are up again, and the experience we're having with Sam Adams Light leaves us cautiously optimistic.

At this point, the downside of that is that this increase in volume is accompanied with an increase in the expenses of brand support, especially media advertising. We think that the environment in the beer business over the last few years has shifted more towards brands with large media budgets, and product introductions have become more expensive. We believe that this increased investment against our brands the ones that have the potential to produce double-digit volume growth is the right strategy for Boston Beer Company.

As we noted in the press release, we're currently estimating volume growth of roughly ranging between 10 and 20 percent, based on what we're seeing now and the projections that we can make from them. Of course, this is subject to change as we get more information and the year goes on, but if this projection turns out to be accurate, it would mean that we would gain share in the better beer category of crafts and imports for the first time since 1996. And we believe that the high end of the beer business is the right place to be, and we'll continue to get growth on the historic lines of eight to 10 percent a year. So we think we are well positioned in the right part of the beer business.

And now, let me open it up to questions.

Thank you. At this time, we are ready to begin the question-and-answer portion of the call. If you would like to ask a question, please press star, then one on your touch-tone telephone. You'll be announced prior to asking your question. To withdraw your question, please press star, then two. Once again, to ask a question, please press star, then one. We will wait a moment to for the questions to register in our queue.

And our first question comes from .

Good afternoon, guys. Jim, I was wondering if you could flesh out a little bit more in regard to that the Sam Light. You talked in the press release that you're going to be rolling it out in some more markets in the second quarter. Would you be willing to tell us specifically which markets?

And also you said that you'd be kind of hitting kind of a national rollout by the end of the year. Maybe could you walk us through, you know, how you're going to get into that national market kind of as the quarters progress?

And of the kind of targeted 1.25 to 1.35 million barrels, how much of that do you foresee will be Sam Light at this point?

OK. Well, let me give you some guesses at this point. Right now, it is our intention in the second quarter to roll out the New York metro area, Phoenix, and the Chicago metro area. And we're also looking at Hawaii, though we haven't made a decision on that one. How that will play into a national rollout is that we're continuing to look at sort of the August, September time period for national rollout, but we believe that we can be more effective if we don't try to do it all at once, and kind of build up to it.

So we think that rolling out some markets before then will just enable us to get those out of the way, if you will. It does have higher costs in doing that because we have additional media in advance of the national launch media in the markets that we roll out before the national launch. So it does cost more money to roll them out in pieces than it would if we just launched everything and ran national media.

...

And the rationale and I'm just saying in terms of, like, the rationale, is that do you think you're going to be getting more attention within these markets by if you do it in this platform versus kind of just kind of quickly going out more under national format?

Frankly, it's more organizational constraints.

OK.

You know, trying to do, you know, 50 significant markets all kind of in the same week is hard for us to digest. But if we can take it, you know, take the big markets and do some of those earlier, we feel like we can do a better job organizationally.

OK. And I guess another thing aside from just the just the size of barrels that you're looking for this year, have you been getting any feedback from your sales force in terms of, again, what demographic this is hitting, you know, what kind of cannibalization, if any, is it having on your Samuel Adams Lager brands, or do you find that this is really finding and really getting new incremental drinkers to your business?

So far, the cannibalization, we believe, based on the market research data we're getting and our experience in the markets where we've been for longer periods of time, the cannibalization is fairly minimal. Essentially, you know, a Sam Adams drinker is a Sam Adams drinker because they want the bigger, richer, fuller taste of Sam Adams. And we're with Sam Adams Light, we're able to get people who probably wouldn't be having a Sam Adams for that occasion, and they might be trading up from a regular domestic beer because it looks like we're trading drinkers up rather than pulling them down from Sam Adams.

Do you is it also are you seeing the it would also suggest you're stealing some from the import drinkers?

We're not sure of that modestly, but our guess is that if it may even work the opposite. It may help accelerate the growth of, you know, imported light beer drinkers, in some ways similar to the way Sam Adams Lager, you know, helped bring new people into richer, better tasting beers, and ultimately was very beneficial to the imports.

OK. Great. Thank you very much.

And our next question comes from .

actually. here with me, but I had a couple of questions. The first question is related to the spending behind Sam Adams Light. Obviously, this year, you're putting a lot of investment behind the brand as you're introducing this product nationally. But as we go out further into next year and going forward, how do you think about kind of the investment behind this brand in order to get the volume lift that you're expecting to get from the from this brand?

Guess it's a few things. As I mentioned earlier, it's my belief that, you know, the ante has been raised by, you know, product introductions like Smirnoff Ice and SKYY and things that are on the table like Captain Morgan. Brands that are spending $40 to $60 million in media. And I believe that, you know, that may be the new sort of ante for a significant brand.

The good news is that there are very few brands in the high end that are able to sustain that. You know, among the real beer brands, you're basically talking about Heineken, Corona, and potentially Sam Adams. But the flip side of that is I believe that that may be a new par, and for us to get, you know, if you then just sort of run the numbers, for us to get leverage on the bottom line, we have to have several years of growth. You know, the impact of Sam Light's introduction in 2002 will probably be negative to our earnings per share, at least based on what we're seeing now in the spending levels and volume levels that we're currently projecting. So only with several years' growth do we see EPS leverage from Sam Adams Light.

OK. The other question I had is related to your base Sam Adams business. Can you just talk about whether you're seeing improving performance on your base business? In the first quarter, you saw Corona raising prices, and I'm just wondering if that's been benefiting Sam Adams' performance the base performance.

Yeah, we don't think we've seen yet the impact of the Corona price increases. In most markets, Heineken has not followed or followed at much lower levels, and the Corona price increase really hasn't yet worked its way through to the consumer. We may see a little bit of an impact in the second quarter, but frankly, my belief, Corona is doing so well the brand has got so much momentum behind it that I would not view those price increases as, you know, causing a lot of people to shift out of Corona into Sam Adams.

OK. Thanks, Jim.

And our next question comes from .

Good afternoon.

Hi, .

Congrats on your record depletions.

Yeah, it feels nice.

Yeah. I was wondering if you could give me the shipment volume in the first quarter.

Say again, please?

If you could give me the shipment volume? Not depletion volume, but shipment volume?

Yeah ...

...

... shipment volume is 275,000 barrels.

Yeah, that would be at the top of the press release.

OK.

It's of our Boston Beer Company brands and 1,000 of third-party contract brewing.

OK. And your projection for shipment going into April and May, can you break that out between how much is the inventory build for Sam Adams Light?

Yeah, it's hard to know, but it's significant. So I don't think we would look at the 18 percent for April and May and, you know, say that we're sure that's going to, you know, be projectable going forward. I think the safer sort of range that we have is the 1.25 to 1.35 million in barrels that we're currently projecting based on the rollout that we have on the boards.

All right. And what tax rate be using for the year now?

Rich?

Should be about 40 percent.

About 40? And can you give me long-term debt and shareholders' equity as of the end of the quarter?

Yeah. Liability and stockholders' equity is 79,800.

All right.

And there is no debt.

No debt. OK. That's it. Thanks.

Thanks, .

And our next question comes from .

, Jim, if you it's interesting is that if you look at the beer market right now, obviously, last year marked the time where Bud Light now surpassed Budweiser as the number-one-selling beer in the United States. You look at Coors, the vast majority of their business is Coors Light, and same for Miller in terms of Miller Lite. I guess, looking out a couple years, how big do you think potentially this product could be for you, and could it ultimately be, you know, the majority of your business in the next several years?

Boy, I'm just speculating at that point, so I'd rather not do that. What I would say is that we continue to view Sam Adams Lager as our flagship. It stands for the kind of quality that makes people interested in a light beer from Sam Adams. So we're very committed to long-term continuing support for Lager. And for this year, a lot of the media, the bulk of it is probably going to go to support the Sam Light introduction, but long term, we need to we believe that we need to continue to support Sam Adams Lager just because the numbers are so much bigger there.

Yeah, but, I mean, if you look, I guess, wrong, but, I mean, it just seems that over the last decade or so, there has just been an ongoing trend for the American consumer to drink, you know, a lighter tasting profile product. And ...

.

... do you think that that going to change or, you know, and if that is a persisting theme? And if you'll even look at Corona now being kind of in the number one imports and much more lighter tasting import beer versus some of the other Europeans, why wouldn't you guys want to continue to take advantage of that, and maybe, you know, many years down the road, Sam Adams Light could potentially surpass Sam Adams Lager?

Yeah, I wouldn't rule that out, but it would just be pure speculation at this point. And, you know, what you do see with American taste profile is two very pronounced and long-term trends. You know, trends that have gone on for close to 30 years, which is that the high end of the business with the more flavorful beers, largely imports and crafts, has been growing at sort of an eight to nine percent compounded rate for over 25 years.

And similarly, light beers have grown, and then the middle has been what's dropped out. So we've used Sam Adams being sort of in both of those. We view Sam Adams Lager as taking part in the growth trend in richer, more flavorful beer, and Sam Adams Light as allowing us hopefully to revolutionize consumers' expectations for what a light beer can taste like in the same way that Sam Adams Lager revolutionized people's expectations for what an American beer could taste like.

So, you know, long term, I'm happy to get growth from either one. I believe we need to support the base brand to just keep the overall brand identity strong, and if some day, you know, Sam Adams Light was bigger than Sam Adams Lager, that would be fine with me.

OK. Do you do you and going back to the lager, how do you feel right now in terms of kind where the media is directed? How do you feel in terms of that health regarding kind of the supporting that brand is as we're going into the summer selling season?

Well, we've made a decision to move most of our media behind Sam Light to support the introduction, so we don't have the media that we would have behind it if we weren't introducing Light. So I'm, you know, I wish we had more, but even without Sam Adams Light, the base brand the all the different styles lager and seasonals and the signature series in total, they grew a little bit last quarter. So I'm happy that we've got modest growth in the base brands at the same time that we have a lot of upside in Sam Light.

OK. Great. Thank you.

And our next question comes from .

Hi, Jim.

Hi, .

I guess to I wanted to follow up on a couple of things. You one is, you know, one is the question about how you see wholesalers sorting out some of the congestion. I mean, what we've seen in the last couple of years clearly are Miller and Coors wholesalers increasingly getting together. That changes the scale of the wholesalers, but has raised some questions about whether those guys have enough focus to really, you know, you know, market, you know, market the correct brands. And obviously, yours is in a space there where there's a lot of congestion given imports and flavored alcoholic beverages. So what do you see right now?

And I guess, as you talk to them, and light of what we hear about Miller and , what are what are they thinking the implications of that could be?

Well, there's a couple question in there, and I'm I'll rephrase it a little and hopefully answer it.

There is a lot of congestion at the wholesalers. I think my experience has been with the consolidated Miller, Coors, all other wholesalers. They have not hit their stride yet. They have not yet developed the portfolio, selling skills, and so the account-based selling that would be more appropriate, they've gone away from the old world of, "I'm a Miller wholesaler, and Miller is my bread and butter," to realizing that their viability is largely driven by the success of the better beer brands in their house. But they haven't quite gotten to the point that some of the better liquor wholesalers are, who sell very, very large books really successfully.

For us, it means that we fight for a share at the wholesaler largely successfully. Our brand is big enough in its critical mass with the majority of our wholesalers that, you know, we do impact their bottom line and so they're committed to our success. And secondly, we do have, you know, people in the field who work in their markets, who they see every day, and we believe that that helps us as wholesalers have to pick and choose which brands they're going to support.

Right now, I, you know, they are introducing a lot of ready-to-drink beers or malternatives. And I think their attitude is "Hey, this is all going to get thrown against the wall. Is it a fad like wine coolers? I don't know. I'll put it out there, and I'll see what sells." With Sam Adams and Sam Adams Light, they're much more familiar with them, they've seen the success of Sam Adams, and Sam Adams Light makes a lot of sense to them. So we have been very successful at getting the kind of wholesaler commitments that we think we deserve and we need.

OK. Now, the other thing is, you know, just sort of tracking back on earnings and maybe Rich wants to help out here. I think what you said, going back a few months ago was essentially that with the Sam Adams Light rollout, you expected earnings to be plus or minus a few cents a share this year and that you could get leverage next year. That seems a little you seem to be getting be getting a little bit more precise here that we're going to see a dilution this year, and I think I heard you say we're not going to get leverage next year. Did I did I get that right?

Rich, you want to start with that one, and I can finish?

Yeah, I can I can start with that one.

Basically, the guidance that we gave at the end of the year while we were trying to, you know,still formulate, you know, some of these rollout scenarios is that it wouldn't be it wouldn't be crazy to expect that there wouldn't be incremental earnings growth in 2002. You know, depending on the timing of the markets that we rolled out and the investment . And this is still a fairly fluid situation to really try and nail down.

I think the, you know, what we tried to do in this press release, which, you know, you probably can appreciate, , is something much more aggressive than we've done in the past as far as provide, you know, some guidance, is give some ranges of what the volume potential could be and the and the advertising spend.

.

But where it is right now, it is still it is still being developed as we go into, you know, the back half of the year, and, you know, we may need to come back in the second quarter and tighten it up some more for you.

And as far as leverage into next year, I think that the theme continues in that, you know, depending on the timing of what we get accomplished this year and the traction we get, will determine a lot of what the impact will be in the following year.

OK.

Yeah, that makes sense to me.

OK. Thanks.

Once again, to ask a question, please press star, then one. At this time, I show no further questions. I turn the call back to you, Mr. Koch and Mr. Lindsay.

Great. Well, thank you, everybody. Those were very good questions, and we're looking forward to another successful quarter.

Yes, thanks, everyone, and we'll see you next quarter.

Thank you for participating in today's call. Please disconnect at this time.

END