Boston Beer Company Inc (SAM) 2002 Q4 法說會逐字稿

Good afternoon, and welcome to the Boston Beer Company's fourth quarter earnings call for 2002. All participants will be able to listen only until the question and answer portion of the call. Today's conference is being recorded. If you should have any objections, you may disconnect at this time.

I would now like to turn the meeting over to Mr. Richard Lindsay, chief financial officer. Sir, please begin when you're ready.

Thank you. Good afternoon, everyone and welcome to the 2002 fourth quarter earnings call for the Boston Beer Company. Joining me on this call is our chairman, Jim Koch, and our CEO, Martin Roper.

I'll begin the call with financial highlights for the quarter and then I'll turn the call over to our chairman who will provide an overview of the marketplace. Immediately following Jim's comments will be a short question and answer session.

For the fourth quarter, 2002,we've previously released the income statement both for the quarter and year-to-date earlier today. But I would like to note some highlights. Net revenue for the quarter increased 14.6% from last year, along with 11.8% increase in branded product shipments. Wholesaler sales to retail were up 12.7% over fourth quarter of last year. Revenue per barrel was up approximately 3% versus Q4 of 2001, and gross profit was recorded at 57.8% of net sales versus 48.4% reported in 2001.

However, I do want to highlight that in Q4 01, the company did take a $4.3 million charge related to the disposal of excess hop inventories. Excluding this charge, gross margin for Q4 01 would have been 57%. Reporting earnings per share of 13 cents were higher than fourth quarter prior year due to higher volume pricing effects on gross profit and the effect of the hop write-off last year. Excluding the effect related to hop inventory disposal, Q4 2001 earnings would have been a loss at 4 cents a share.

Some cash-related items of interest, during the quarter, we did not repurchase back any stock. Depreciation and amortization was approximately $1.7 million. Cap-ex approximately 673,000. And EBITDA of approximately $4.3 million.

2002 year summary, again, I'm just going to stick to some highlights given that you already have the financial statements. Volume shipped was up 10.4% driven by a very successful Sam Adams Light rollout. Net revenue per barrel increased 4.4% for the year, again due to some normal pricing increases and some product mix changes. Gross margin, 59% was slightly higher than previous year compared to 58.6% net of the hop disposal charges.

Advertising promotion and selling investments were up significantly, 25.7% due to our successful rollout of Sam Adams Light. Net income of 52 cents was recorded this year versus 47 cents recorded in 2001. Again, there's a couple of items that you want to be aware of. If you exclude the additional income recorded in 2002 related to the insurance demutualization gain and the charge that we took in 2001 for the hops write-down, the comparable earnings numbers would have been 47cents per share in 2002, and 62 cents a share in 2001.

So now I'm going to turn the call over to Jim for some industry comments.

Thanks, Rich.

I'm very happy to be able to report our second consecutive quarter of double-digit depletions growth, which has resulted in depletions growth for the year 2002 coming in at a little over 10%, and this was the first year of double-digit growth in depletion since 1996. The bulk of this new growth is being driven by the successful rollout of Sam Adams Light, which is now pretty much over and Sam Adams Light is available almost nationwide.

We are seeing some cannibalization of our lager and seasonal and signature series packages from the light beer because there is some evidence that a few consumers are switching from other Sam Adams styles to Sam Adams Light. And there's also some shift in focus at wholesale and retail as we focused our efforts on rolling out Sam Adams Light, but overall, we are tracking studies and everything else continues to lead us to believe that the majority of the Sam Adams Light volume growth is truly incremental, and you see that in the depletion numbers, and we expect to continue to see the incremental depletion volume from the introduction of Sam Adams Light through the first half of 2003, as we cycle the first full year of the rollout and the increased volume that it's brought us.

We're currently working on programs to maintain this double-digit top line growth for the second half of the year and beyond, working on programs that focus on the core Sam Adams brand equity of quality. During the first half of 2003,we'll be adjusting our priorities for investments to find the right balance between support for lager and seasonals while we continue to invest in Sam Adams Light, which we believe can be a leading player in better light beer, and we see that as the biggest growth area in the beer business within the next five or 10 years. And we've seen a lot of support from distributors and retailers because they want to see the high end grow for light beer too.

There's just a lot more money in it for them, and they've supported the introduction of Sam Light very strongly. We as a result feel comfortable that the investments we made in the national TV and in support of the light rollout was a right one as we continue to see increasing advertising awareness and trial and trial intent from the investment, and we continue to plan on high media investment levels in support of all of our Sam Adams brands as we continue to pursue the opportunity in high end light.

We see right now a healthy beer environment, though, the last three months have been a little bit choppy. We believe that first quarter 2003 shipments will be a tough comparison versus 2002 due to some load-in from the Sam Adams Light rollout in the first quarter of last year, and some extra wholesaler inventory hanging over from the end of 2002, but our depletions to date in 2003 appear to roughly match the last quarter of 2002 trends.

Better beer as a whole appears to be continuing to grow at the same sort of 8% rate that's characterized the category for the last 30 years. And finally, pricing at the high end remains quite healthy. We, therefore, currently anticipate that the growth trends that we're experiencing will allow us to continue to increase our advertising support in 2003 as we planned, while also increasing 2003 earnings at the low double-digit rate over the 2001 base of 62 cents a share.

Now why don't I open it up for anybody's questions.

Thank you, sir. At this time, if you would like to ask your question, please dial star1. You will be announced prior to your question, to withdraw your question, dial star 2. Once again, if you would like to ask your question, dial star 1 on your telephone keypad now.

Your first question comes from Jeff Kanter (ph) representing Prudential Securities.

Good afternoon, gentlemen. Rich, if you could just help me through the fourth quarter transition into the first quarter. It looks essentially --you gave us a little more than what I was expecting but it looks like you just borrowed a little bit from the first quarter. Is that fair, so when you think about this double-digit earnings growth, you know, how do we think about this developing throughout the year? Is the first quarter going to be down year over year or can it just help put something on the bone, please?

The first quarter is definitely going to be a challenge from the earnings perspective as the wholesalers adjust their inventories. So the overall shipment volume is going to be down in mid single digits versus Q1, and then we expect in Q2,Q3 and Q4 for those to flip back up into the significant positive sides.

Ok. So -- but you're seeing no change to consumption patterns against Sam Adams Light? I guess that's the most important thing, is that people are drinking your beer, and that appears to be the case still?

Yes. The month to month numbers will vary a little bit, but we are not seeing a dip at all in Sam Adams Light consumption. We're seeing, you know, a rapid growth over the, say, roughly the first six months as we roll it out, and then it tends -- and it's a market phenomenon -- tends roughly to level out and start to grow from that, and that's probably our biggest uncertainty, is what is the slope of that line, you know, after the first six months roughly of excitement and trial. And the good news is we are seeing level to growing from that. We are not seeing any significant declines in Sam Adams Light, even in markets where we've been for a year and a half. So we do continue to see a very attractive growth opportunity in Sam Light.

In these established markets, how fast - you know, what are the year over year changes?

There's only a limited number of markets at this point. We're really only talking about two. So it's hard to extrapolate, but they are - and they're somewhat different, but we're only talking about two data points. So all I can really deduce from them at this point is there appears to be no decline, there appears to be some growth, and we really haven't yet determined what is the slope of that growth. But it is -- there appears not to be any decline, so we're very comfortable that, you know, this is a long-term trend and not one of these introductions like the beer business has seen a lot of in the last few years that just kind of comes and goes.

Fair enough. I'll let somebody else on. Thank you.

Your next question comes from Skip Carpenter (ph) representing Thomas Weisel Partners.

Hi, Jim. Congratulations on a great year.

Thank you.

And all that you guys have been able to accomplish in what was clearly a lot of activity going on in the beer market this year. Couple things. One, in terms of -- you talk in terms of investments, not just Sam Light for 03 but specifically with regards to lager seasonals. Is that something that you guys are going to be ramping up as we go into the summer sell?

We're still in the process of trying to figure out how we allocate in our media - in particular our media investment in those brands, and we may switch it, but at this point, we're anticipating bringing some increased national media on Sam Adams lager sometime end of the first or beginning of the second quarter. Because at that point, we'll have had, depending on the market, somewhere between six months and 14 months of TV on light. So we are going to move, we believe, depending again on exactly how the creative comes in, move some of the support to lager, because lager and seasonals represent roughly two-thirds of our business, and we want to make sure that they continue to be healthy as well.

Well, in aggregate, therefore, you talk about the allocation, but you are looking for an advertising or media budget to be up in 03 versus where it was in 02?

Yes.

Do you think -- if you look, and again, Jeff talked about this in terms of the first quarter, is this simply because of the load-in that occurred during the first quarter 02, why we're getting these kind of negative shipments, because it doesn't look from the fourth quarter given that your STRs tracked ahead of shipment, it doesn't look like there was a big inventory build occurring. Is this just a year-over-year comparable thing that's causing the declines? Is that what's going on?

Yeah, there was some inventory build at the end of last year, and there is also -- was a significant amount of inventory build in the first quarter as the wholesalers throughout the Northeast and in several other rollout markets loaded up in anticipation of the Sam Light introduction.

You think given all the new products that came to market in 02 and how many of them have not proven to be successful, whereas in contrast, your brand clearly was one of the more successful brands, does that give you leverage when you talk to the wholesalers going into 03 as they plan for 03, given that this is a product that clearly gained traction in the marketplace and that you feel has a lot more legs to it?

Oh, yeah. There is a certain amount of, oh, disgust is probably too strong a word, but a lot of wholesalers were -- given a number of alternative products to introduce, and, you know, they just bombed. They are very excited about Sam Adams Light because it has the core brand equities of Sam Adams. It appears to be leading a very sensible long-term trend of better light beer, and they see it as helping to pull the whole category up. So yes, this is probably the - most wholesalers, their favorite product introduction of 2002.

Great. And I guess two last questions. In terms of the cannibalization you referred to, is that more pronounced in the lager or seasonals, any data points on that, and then I guess lastly and I'll let other people jump on, 8%, you talk about as a kind of a better beer volume growth metric. Do you think as we go into maybe 04-05,that now is an attainable growth rate for, say, the Sam Light product and maybe you look specifically for light, do you think light can grow at a long-term growth rate that would kind of track the better beer category?

Two questions. One is the cannibalization, and we are seeing some of it from lager, some from seasonal, some from the signature series, and the cannibalization comes at a number of different levels. One is a consumer who decides to drink Sam Light instead of one of the other Sam Adams beers. It comes at the retailer level where all of the shelf space may not be incremental, and it comes at the wholesaler level where their focus will -- they'll take a little focus off our other Sam beers to focus on the opportunity with Sam Adams Light, and then fourth, it comes from our company focus on Sam Light and how we've allocated our attention, and importantly, our media dollars.

Your second question, would I project that Sam Light could grow at kind of the 8% growth rate to better -- better beer has had over the last 30 years? Obviously I'm making a projection and trying to look into a crystal ball here, but I would certainly hope so. In fact, I would hope that it could settle in at a double-digit growth rate. It's somewhat higher because I think the opportunity in high-end light beer is very much in its early days.

Great. Thank you so much.

Have you a follow-up question from Jeff Kanter representing Prudential Securities.

Jim, if you could comment, just talk about your pricing outlook. How do you think about putting forth or the timing of price increases as we trend into 2003? And given that, you know, we've seen Heineken go after Corona pretty hard. Are you seeing any aggressiveness against Sam Adams Light as it gains traction here, and if so, does that kind of put a kink into your pricing architecture? Thank you.

Quick answer is no. I don't see it sort of being a tact. I think that at least so far, most of the Sam Adams Light volume has been an upsell, so it has expanded the better light beer category to the benefit of everybody, and we see - you know, pricing for us is very opportunistic, it's market by market, it's package by package. So we don't have any overall trends but we look to Heineken as a benchmark. We basically try to price towards the high end of the better beer category.

And what is that benchmark doing?

You know, again, they, I think, are very market to market, but I would anticipate that the better beer category will continue, you know, to move its prices up, at least a point or two.

Ok. Thank you very much.

Once again, at this time if you would like to ask your question, please dial star 1 on your telephone keypad now.

Gentlemen, I'm showing no further questions.

Ok. Thank you, everybody, for joining us