Boston Beer Company Inc (SAM) 2003 Q4 法說會逐字稿

Good afternoon, and welcome to the fourth-quarter 2003 earnings teleconference. Following today's presentation there will be a formal question-and-answer session. At that time instructions will be given should anyone wish to ask a question. Until that time, all lines will remain in the listen-only fashion. At the request of the Boston Beer Company, today's conference is being recorded. Should you object, you may disconnect at this time. I would not like to turn the meeting over to today's host, Chairman and Founder, Mr. Jim Koch.

Good afternoon and welcome to the 2003 fourth-quarter earnings call for the Boston Beer Company. Joining me on the call from Boston Beer is Martin Roper, our CEO; Bill Urich, our CFO; and Monica Martin, our Controller and Director of Finance. I will begin my comments this afternoon with an overview of the marketplace and our business, and then I will turn the call over to Bill who will provide financial highlights for the quarter and commentary on the full year's performance. Immediately following Bill comments we will open the line up for questions.

Overall, the year 2003 produced some positive results for Boston Beer Company. Earnings per share increased by 35 percent over 2002. Pricing and operating margins improved again. Sam Adams Light completed it's first full year in national distribution as the number three better light beer, and the new advertising for the Sam Adams brand changed the decline in the first half of the year for lager and seasonals into modest growth for the last six months.

However, as anticipated, photo depletions for the year were basically flat. Additional volume provided by full year of Sam Adams Light distribution 2003 was offset by the first-half declines in Sam Adams Boston Lager and declines in the Samuel Adams Brewmaster collection throughout the year.

During the fourth quarter depletions were down approximately six percent as Sam Adams Light volume was higher during the initial launch period in 2002. We recently began a national print and outdoor program to support Sam Adams Light. Lager and seasonals were up slightly for the quarter, and we remain committed to the successful, always a good decision TV campaign that we began running in April of 2003.

Overall the successful introduction of Sam Adams Light has increased the Company's total sales volume, ran support investment and earnings. The favorable decision in the arbitration proceedings with Miller now gives us operational stability as well. This will allow us to devote the majority of our energy and resources towards growing our brands, and I believe we are in good position to do so. We look forward to building on these successes in 2004.

Now Bill Urich will give you the financial highlights.

Thank you, Jim. Good afternoon everyone. Boston Beer Company earnings per diluted share was 25 cents in the fourth-quarter of 2003 as compared to 13 cents last year. This 92 percent increase in earnings is due to higher spending in 2002 in support of the Sam Adams Light national rollout.

Wholesaler sales to retail for depletions for the fourth-quarter of 2003 were down six percent versus last year. This decrease is directly attributable to the Sam Adams Light fourth-quarter 2003 volumes recycling on the national rollout volumes which occurs through the fourth quarter of 2002. The depletion trends for the second half of the year improved for Boston Lager and seasonal brands over the second half of 2002. As a result, these brands were up slightly in the last six months of the year.

For the fourth-quarter of 2003 the Company recorded net revenues of 50.8 million. This represented a 6.5 percent decrease in the fourth quarter of 2002, which was mainly due to a 6.3 percent decline in shipment volume. This decrease in shipment volume is primarily related to the reduction in shipments of Sam Adams Light, which were higher during the fourth quarter 2002 when the Sam Adams Light rollout was launched to the national marketplace.

Shipment volume trended lower than wholesaler sales to retail. Which is primarily due to an inventory pipeline fill at the wholesaler that occurred as part of our completing the rollout of Sam Adams Light. During the fourth-quarter of 2003 wholesalers reduced their inventory levels. This resulted in lower shipments than depletions of approximately 35,000 barrels.

The net price per barrel remained flat as a result of price increases of slightly over one percent. These were offset by a shift in the mix of shipments from bottles to draft. This shift was attributable to higher shipments of the Sam Adams Light bottles in 2002 to support last year's rollout.

The gross profit margin was recorded at 56.6 percent of net sales, which is down versus the 57.8 percent reported in the fourth quarter 2002. The decline in gross margin was primarily due to a $1.5 million charge expensed during the fourth quarter 2003. This charge related to securing production alternatives to provide adequate capacity in the event of an unfavorable outcome relating to the arbitration with Miller Brewing Company. Excluding this charge, the fourth-quarter gross margin was 59.6 percent.

Our advertising promotion and selling expenses decreased by 4.8 million or 19.2 percent to 20.3 million for the fourth quarter 2003 versus last year. This decrease was primarily due to the high level of brand support associated with the national rollout of Sam Adams Light during that fourth quarter of 2002.

The general and administration expenses for the fourth quarter 2003 also decreased 828,000 versus the prior year. The decrease resulted from the award by the arbitrators of a significant portion of the Company's legal costs incurred in connection with the Miller Brewing Company arbitration.

For the twelve-month period ending December 27, 2003, Boston Beer recorded net revenue of 207.9 million. This represented a 3.4 percent decrease from the same period in 2002. The decline in net revenue was primarily due to a 3.9 percent decline in shipment volume. This was partially offset by the price increase.

For the full year 2003, Boston Beer reported income per share of 70 cents on a fully diluted basis. Earnings are up versus prior year by 18 cents per share or 35 percent and up 13 percent over 2001, including the -- excluding the effect of the 2001 hops write-down.

The 35 percent year-over-year earnings growth increase was mainly the result of the decrease in advertising, selling and promotional expenditures related to the heavy support for the national rollout of Sam Adams Light during 2002. We are continuing to evaluate the effectiveness of our advertising campaign, as well as the testing of new Sam Adams Light campaign.

Our balance sheet remains healthy with 43 million in cash in short-term investments as of the end of 2003. Additionally we have a $45 million unused available line of credit. Our capital expense for the year was 1.7 million, and our depreciation and amortization expense was 7.1 million.

We remain committed to reinvesting in the Company's stock and through February 10th, 2004 we have 5.2 million remaining under a 80 million aggregate board authorization spending limit related to our stock repurchase program. Through February 10, 2004, the Company repurchased a total of 7.1 million shares of Class A Common Stock for an aggregate purchase price of 74.8 million. On another note, we are planning to file our 2003 10-K with the SEC on March 11, 2004.

We will now open the call for questions.

(OPERATOR INSTRUCTIONS) Jeff Kanter of Prudential Securities.

Bill, questions for you regarding the P&L. How much was the award in G&A this quarter? Legal award from your lawsuit with Miller?

Our legal award was approximately 800,000.

That's basically what you spent in the third quarter, right? So you just got your money back essentially, is that correct?

That's correct.

That was the first question. My second question is as I look at your receivables or days sales receivables plummeted. I guess that has to do with your change in terms, is that correct?

That's correct.

Okay, your inventory turnover, though, slowed when you strip out the costs incurred for additional production. Can you just kind of get into that a little bit? Any particular reasons why?

The inventory change related to hops received in the third quarter -- I'm sorry -- in the fourth-quarter of '03.

Okay.

I can just elaborate. I think historically we received those hops in the first quarter of the year and we actually received them early as part of and improved supply line process we have to optimize the hop brewing value.

That's helpful. When you think about Jim or Martin, I thought you ere going to deload a lot more in the fourth quarter because that would explain maybe why your shipments may be flat year-over-year in the first quarter, which is kind of surprising considering that you have an extra day -- you have the day shift around New Years and as crazy as it sounds don't you have a leap year this year? Aren't there an extra day or two in the first quarter? Can you just kind of get into that a little?

I'm not sure I fully understand the question. Yes there will be an extra day in the first quarter, but ask the question again.

Weren't you expected to deload in the fourth-quarter a little bit more than you did, which could partially explain why even with the extra day your shipments in the first quarter are going to be flat? In other words, did you end the year with higher inventory levels than you would have liked?

No, I think our inventory levels were about what we expected. I would caution extrapolating even from the first two months. We don't have a firm order system, so people can add or cut orders. And we've only got two months, and our data is probably 40 percent into the quarter in terms of shipping. So I wouldn't hang too much on the projected shipments for the first quarter. Those can swing.

And as you kind of think about this year -- I have seen your new commercials for lager, are you feeling pretty good that you can grow both of these brands based on the research that and the diagnostics that you're looking at?

I'd have to say that I'm feeling pretty good about the results that we've seen from the current TV campaign, particularly in its impact on lager and seasonals. There has been a marked shift in the depletions trends there. I believe that with the extra volume and gross margin dollars generated from the Light introduction, we have the resources to support lager seasonals and Light. I would have to say that I'm not sure yet that we have the same level of comfort about advertising that will drive Light sales. We have demonstrated success with lager and seasonals, and it is now eight months, nine months into it. And the trends are good.

We are not so far along with Light yet. We had a great introductory campaign. I can't tell you that I have the same level of confidence yet with our Light advertising as I do with the advertising for the base brands.

And Martin, if you could just comment on your stock sales that we've been seeing hit the tape. Is there something -- it's not sending a powerful signal or a positive signal, pardon me.

Is that question directly related to my personal stock sales? That is related to options expiring.

Okay, have you been reloading those options though at a higher price or -- ?

I think you looked at the historical proxy information which is the public information available that you can see that I have granted options on an annual basis in the order of magnitude around 20,000 shares, which is a much lower level than the options that have been expiring.

Okay, thank you very much. I'll get off the line.

Skip Carpenter of Thomas Weisel Partners.

Quick question on pricing. If I heard you guys correctly you indicated you've implemented a one percent price hike. One, did I get that number correct, and two, it seems to be a little bit more conservative than some of the other participants in the category. Is there potential where you could have another round of pricing as you're going into next year or this year, excuse me?

The price increase was a little over one percent, and correct me if I wrong, Martin, but that is we calculate that is a net number -- net of any changes in the amount of discounting.

Okay.

We are feeling pretty good about the pricing environment in Better Beer going forward. It looks like at this point Corona price increases appear to be sticking. So we do feel that there continues to be a healthy price environment in beer in general and in Better Beer in particular.

Second, I guess maybe just kind of continuation from something that Jeff was asking you with regards to Sam Light. You had mentioned that there seems to be a little bit more of a question in terms of moving into kind of the next advertising phase for Light. Is that just a function of wanting to continue to remain focused on the efforts that you have behind lager and seasonals, or is it more of a function in terms of trying to find the right message at this point for Light brand?

It's a little bit of both, but primarily the second one. We will continue to support the always a good decision campaign, which is primarily directed at lager and seasonals, but it's obviously an umbrella campaign around the whole brand. I believe we've got at this point the resources to support Light effectively, as well and with Light it is more than issue of finding effective advertising that proves itself to drive sales. And we're not there yet.

I will add that we currently have a print and outdoor campaigns running supporting Light so Light is not naked, and we are comfortable with those executions.

Fair enough. Lastly in terms of when you look at as we started this year it seems as though many of the on premise channels, whether that is the bars, casual diners, many of the restaurant companies have seen a very healthy start to the year in terms of their January trends. Could you talk a little bit about what you're seeing in terms of the two channels that is kind of the on channels vis-à-vis off and have you seen the on channel seen any kind of a pickup in tone really over the last couple of months?

Let me comment principally on the fourth quarter. I would support that it looks to us like our draft business continues to strengthen, and that is almost exclusively on premise. So we are very happy about our lager draft trends because to us to be a strong brand, first you've got to be strong on premise, and our draft numbers have strengthened in the last quarter.

Thank you very much.

Marc Cohen of Goldman Sachs.

Jim I wonder if you can give as a little bit of help on how you see the key performance drivers as you layout 2004, notably missing here from the press release. Talk a little bit about how you see volume and the cost behavior and spending needs of the business developing across the year.

Okay. I think it's too early to have a good feeling about volume other than to save the first four, five months of last year were pretty crummy. So comparisons should be a little better. And with respect to costs, we're pretty comfortable there given that a lot of our costs are locked in by contract that our cost of goods sold increases will be at or below the level of our price increases.

So we feel pretty comfortable barring some huge jump in freight or some of the things that we don't have under contract. We are pretty comfortable that we can hold the gross margin that we attained. And we are getting close to 60 percent. So I'm pretty happy about the steady increases in gross margin that we've had for the last five or six years. Hopefully those volume trends and favorable cost environment relative to pricing will allow us to spend, particularly on advertising, against our brands at levels that are that will put us in the top 10 beer advertisers. So our share of voice should continue to be significantly greater than our share of market.

Do you think you have to raise marketing spending this year? I don't think you really had to do that -- pardon me but I don't think you had to do that as much last year given the Sam Light intro. What about the marketing spending this year versus '03?

I think we basically if we have campaigns that demonstratably are growing volume, then we are committed to investing behind them. Lacking significant change in volume trends then we will be at what were probably regard as support levels which one might think about as equating to 2003.

So in other words, 2003 is a good base to start from if we don't see unit growth and you will stay at those levels as a going in and as you see unit growth deliver some gross profit you have some upside to spend into that?

That sounds like you have it.

But you know in each of the last couple of releases -- if I am not mistaken, you guys have talked about being able to grow double digits. Is that this year or is that a comment on '04? That was this year, right?

Yes, the projections we made where we felt with the increased volume of Sam Light and the expansion of gross profit that once we got over the initial investment numbers that you saw in 2002 that we could take earnings per share in 2001 as a base and that we could get double-digit growth off of that.

Care to make any comments about to 2004?

No, not without a word from our lawyers.

In that case, let's go back to the depletion trends. Is what we're seeing in early 2004 at all dampened by trial activity on Sam Light the way the fourth quarter was? Is there something unusual in the base here that is making these early-year numbers and indications about the first quarter with all the caveats you threw around and looked a little bit weaker than they might otherwise look?

It is my guess and supported by some experience as we rolled out Sam Adams Light that the first 5, 6, 7, 8 months there was a lot of trial. And the national rollout completed itself in about September of last year. So yes, the first quarter still has some of the initial trial of Sam Adams Light.

If I might add, I think from a shipment point of view, when you have that trial bubble in the first six months of a launch, you tend to get wholesaler inventory overbuild. So again, that would be sort of still unwinding in this period, and Bill, I don't know if you have a comment on this as to how our first quarter shipment 2004 compared to 2003?

I'm sorry, Martin, in terms of? What is the comparison to 2003 first quarter depletions? I don't have that number in front of me.

It was down approximately 6 to 7 percent.

Shipments are down (technical difficulty) projected quarters down that much what was the first quarter depletions last year?

Up two percent.

My impression would be and I don't have the numbers in front of me, but my impression would be that what we are seeing is that last year in the first quarter there was still inventory build going on.

All right. Maybe I will try this differently. In the past you have talked about the Better Beer part of this industry growing five, mid single digits I think?

Historically over the last 30 years it has been about 8 percent.

Okay, so what do you see now, and how do you think Boston Beer's positioned with respect to market share within -- market share behavior within the Better Beer segment this year?

The trendline growth over the last three years has been about 8 percent. It has been higher in the period from '96 to 2002, more on the order of 10. So we have been above trendline for five or six years. And then in 2003 the numbers aren't in yet, but if I had to guess I would guess Better Beer growth was on the order of two, maybe three percent in depletions. And almost all of that being Corona. That if you take Corona out, you're talking about on the order of zero to one percent. So there is some correction going on in Better Beer growth.

I'm going to guess that probably has another year or so to work itself out, and I'm going to also guess that Michelob Ultra took two or three points out of that growth rate. So if I had to guess, I'd say it's going to be on the order of three percent going forward in 2004. And I would certainly -- I would hope that we could match that, but that is at this point a hope, and it's too early in the year to make any projection other than say what I hope.

So you don't include -- just to be clear you don't include Michelob Ultra in that count, right?

I do not, right.

So zero to one percent ex Corona meaning that there was a Corona load in at year end that will be depress it this year so including that depressing effect we look at something like three percent as your best guess?

Yes -- what I was referring to is Corona actually depletions grew faster than shipments, particularly in the second half of the year. So if you look at import shipment numbers, they're probably lower than the growth in depletions.

So you're talking depletions?

Depletions, yes.

So, all right. So the hope in planning would be to do as well as that category? I mean you plan around doing that well?

Roughly.

Okay, thanks.

(OPERATOR INSTRUCTIONS) At this time I show no further questions. I will turn the meeting back over to Mr. Bill Urich for any final statements or closing remarks.

Everyone, thank you very much for joining and if there is any further questions, you can contact me. Thank you.

Thank you for participating in today's teleconference, and have a nice day.