Boston Beer Company Inc (SAM) 2004 Q4 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Boston Beer Company fourth-quarter and full year 2004 earnings release conference call. My name is Megan, and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference. (OPERATOR INSTRUCTIONS).

I would now like to turn the presentation over to your host for today's conference, Mr. Jim Koch, Chairman of Boston Beer Company. Please proceed.

Thank you. Good afternoon and welcome. This is Jim Koch, Founder and Chairman. And I'm pleased to be here to kick off the 2004 fourth-quarter earnings call. Joining the call from Boston Beer Company are Martin Roper, our CEO, and Bill Urich, our CFO. And I will begin my comments this afternoon with a few comments on where we stand. Then pass it on Martin, who will provide an overview of our business. And Bill will then turn the call over -- Martin will turn the call over to Bill, who will provide financial details for the quarter and the full year. And immediately following Bill's comments, we will open the line for questions.

We finished the year 2004 strong with 4.6-percent depletions growth, which we believe compares favorably to the rest of the industry. We experienced particularly strong off-premise growth, as evidenced by the published IRI and Nielsen data, while seeing some on-premise weakness. We believe that to some extent, outstanding retail execution is supporting this growth more than the current brand messaging. We have therefore decided to introduce new brand communication, which will be in the market very soon. We believe that this communication will capitalize on the roots and the essence of Samuel Adams' success and position us better for future growth. It would appear that based on industry data, craft beers are experiencing better growth than imports for the first time in almost 10 years. And we are determined to benefit from this and are evaluating the best ways to do so.

So all and all, I am very excited by our new direction and looking forward to 2005. I will now pass over to Martin for a more detailed overview of our results.

Good afternoon, everyone. As Jim mentioned, total depletion volume was up approximately 4.6 percent for the fourth quarter, as compared to the same period last year. The growth was driven by Samuel Adams Boston Lager, Samuel Adams Seasonals, Samuel Adams Brewmaster's Collection, and Twisted Tea. While Samuel Adams Light depletions were still down in the fourth quarter, the decrease was significantly lower than in previous quarters.

The fourth-quarter growth was stronger than the full year for which depletions were up approximately 1.6 percent from the prior year. For the full year, Samuel Adams Boston Lager, Samuel Adams Seasonals, Samuel Adams Brewmaster's Collection and Twisted Tea all grew offsetting the declines in Sam Adams Light. We are pleased with the full year net revenue and net income growth that we accomplished in 2004 but do not feel as positive about the full year depletions or volume growth.

As previously announced, during the fourth-quarter 2004, we increased our media spending behind the Samuel Adams brand compared to 2003 and as a result increased our total advertising, promotional and selling expenses for the full year 2004 by 3.1 million as compared to 2003. This also resulted in lower net income in the fourth quarter than in 2003.

During 2004, pricing and operating margin improved due to price increases taken and continued efforts on cost reduction and controls. These efforts offset the inflationary increases in materials and supplies that we have experienced and the impact of higher energy prices. During 2004, we generated over 18.3 million in operating cash flow and continued to maintain a strong balance sheet with adequate cash positions to support our business strategy. As we have previously stated, we continually evaluate our cash needs and potential uses for our cash. And while we did not repurchase any stock in 2004, the stock repurchase program ever authorized by the Board of Directors continues and still has potential funds available for stock repurchases.

While we are pleased with the good depletion volume in the fourth quarter, we believe that strong retail execution helped this volume more than our brand messaging. During the second half of the year, we saw that on-premise trends were not as strong as off-premise. And we are evaluating the cause and potential solutions. Our new brand messaging is part of our response to these issues. As Jim mentioned, we plan to rollout this new communication during the first half of 2005. Initial quantitative testing of these concepts has been encouraging. We are quite excited about the new program and believe that it will position us well relative to other craft beers and imports. We are currently finalizing the strategy and have just started communicating plans to our wholesalers. We expect the new advertising and point-of-sale in the markets very soon.

We have previously announced our 2005 expansion project for our Cincinnati brewery, which contemplates the capital investment of approximately 6.5 million for an additional 200,000 barrels of brewing capacity. We believe that this project provides us with an attractive return on our investment as well as greater security of production, as we anticipate almost two-thirds of our brewing in Cincinnati are traditional small batch brewery.

We continue to evaluate other investment opportunities, which may have attractive returns for our investors. On another note, shipments and orders in hand suggest that core shipments for the first quarter will be up approximately 5 percent, as compared to the same period 2004. Depletions for January and February combined look like they could be down a couple of percentage points. Actual shipments for the current quarter may differ, and no inferences should be drawn with respect to shipments in future periods.

Now, Bill will provide the financial details.

Thank you, Martin and Jim. Good afternoon everyone. The Boston Beer Company realized earnings per fully diluted share of $0.19 in the fourth-quarter 2004, as compared to $0.25 per share in the fourth-quarter 2003. This decrease is primarily a result of the increased advertising spend that we announced during the third quarter of 2004. The fourth quarter, the Company recorded net revenue of 55.8 million, a 9.9-percent increase from the fourth-quarter 2003.

This increase was primarily due to a 5.9-percent increase in shipment volume of core brands and a 3.8 percent increase in net revenue per barrel to 173.84. The increase is due primarily to product mix, including shipments of a specialty beer, a shift in our package mix towards bottles from kegs, and net price increases. As Martin indicated, the increase in shipment volume was primarily caused by increased shipments of Sam Adams Seasonal, Brewmaster's Collection, and Twisted Tea. Our core shipment volumes for the fourth quarter were lower than the wholesalers' sales to retail by 32,000 barrels. We estimate that our wholesaler inventory levels at the end of the fourth quarter were at levels reasonably comparable to 2003.

Our gross margin as a percent of net revenue was 59.4 percent, up 2.8 percent over fourth quarter of last year. This primarily reflects the fact that the Company expensed during the fourth-quarter 2003 a non-recurring $1.5 million charge relating to securing long-term production alternatives. The fourth-quarter increase in advertising, promotional and selling expenses resulted in a 4.5 million or 22.2-percent rise over the prior year quarter. The main drivers of these increases were television advertising, point-of-sale merchandise purchased and freight costs.

Our general and administrative expenses for the quarter increased 1.3 million compared to the same period last year. This increase reflects accounting and audit fees related to the implementation of Section 404 of the Sarbanes-Oxley Act and the fact that the fourth-quarter 2003 expenses were reduced as a result of the favorable award received in our arbitration proceedings with Miller Brewing Company.

Our balance sheet remains helping healthy with 59.8 million in cash and short-term investments as of the end of the fourth-quarter 2004. Additionally, we have 20 million online, unused line of credit. The Company also continues to generate positive cash flow, delivering 3.2 million in operating cash flow for the fourth-quarter 2004.

Our capital expense for the fourth quarter was 1 million, as a result of normal operating capital spending. And the Company's depreciation and amortization expense was 1.2 million.

The Company earned 12.5 million in net income or $0.86 per diluted share for the 12 months ending December 25, 2004, as compared to net income of 10.6 million and $0.70 per diluted share earned during 2003. For the 12-month period ended December 25, 2004, Boston Beer recorded its highest ever full year net revenue of 217.2 million, a 4.5-percent growth over the same period in 2003. Our increase in net revenue is primarily due to volume increases in the styles that Martin previously discussed -- price increases and product mix.

The net revenue per barrel for the full year increased by 1.9 percent to $171.43. This increase was primarily driven by our net price increases and favorable product mix. Boston Beer's gross margin, as a percent of net revenue, was 59.5 percent, up 0.7 percent over 2003. This is driven primarily by net price increases and operating efficiencies. It also reflects the non-recurring charge related to the production alternatives in connection with the arbitration proceedings with Miller, as discussed earlier.

During 2004, we have continued to achieve cost savings and efficiencies in our manufacturing and operating expenses. Although we continue to see increases in packaging and freight costs, primarily energy related costs that have placed pressure on our margins, we plan to offset them with plan price increases in the first quarter of 2005 and continued initiatives against efficiency of our spending.

As Martin mentioned, our advertising promotion and selling expenses increased by 3.1 million or 3.3 percent for the full year 2004, as compared to 2003. These increases were primarily due to increases in promotional activities, advertising costs and freight costs -- offset somewhat by higher costs in 2003 for new tap handles and glassware.

Boston Beer's effective tax rate was 37.8 percent for the 12 months ended December 25, 2004, which was the same rate as in the prior year.

We are currently expecting earnings per share for the full year 2005 to be in the range of $0.94 to $1.00 based on current plans and market trends. This estimate is prior to the effect of the adoption of FASB 123R, which relates to the accounting for the future effect of stock options on the Company's earnings. The Company currently estimates that the adoption of FASB 123R will reduce full year earnings per share between $0.05 and $0.07 in 2005. We expect earnings per share growth to be driven by continued volume increases and price increases of approximately 2 percent planned for the first quarter, offset somewhat by increases in brand support in advertising, promotional and selling expenses of between 4 and 7 million.

Additionally, we have plans for normal inflationary production and general and administration expense increases. In 2005, total advertising, promotional and selling expenses currently anticipated may be adjusted as deemed necessary for the benefit of the Company's long-term volume growth.

The 200,000 barrel production expansion project at the Company's Cincinnati brewery will cost approximately 6.5 million and is expected to realize reduced production costs of approximately 300 to $400,000 in 2005. We have included this in our 2005 estimates and included is 1 million. And thereafter, we expect 1 to 1.2 million annually. We are currently planning capital spending between 9 million to 12 million, including the Cincinnati expansion for 2005. We continue to evaluate attractive projects that utilize its capital in support of the brand and brewing strategy while providing suitable returns for our investors.

We have 5.2 million remaining under the 80 million aggregate Board authorization limit related to the stock repurchase program. From the inception of the programs through March 8, 2005, the Company has repurchased a total of 7.1 million shares of Class A Common Stock for an average purchase price of 74.8 million. Weighted average shares outstanding for the 12 months ending December 25, 2004 were 14.5 million shares.

We will now open up the call for questions.

(OPERATOR INSTRUCTIONS). Laurie Hahn, Deutsche Bank.

First of all, in the 4 to 7 million forecast increase in marketing -- would you say you could adjust that throughout the year? Are you saying it could be more than 7 million? Can you give any sort of idea of what the magnitude of that could be? Are we talking a couple million more? Or we talking 5 million more -- more than that? And what is the potential?

It is Martin. Let me try to provide an answer to that. I think the 4 to 7 million guidance is our best estimate today based on what we know in current market trends. We are obviously in the midst of rolling out new communication plans that we will test their effectiveness. And if they were effective and warranted further money, we would increase our investment behind those. I think it is logical to assume that testing that and evaluating that will take several months. So we're talking really about investment levels in the latter half of the year. So I think that would sort of cap how far up we could go. But if that were to occur, we would come back to you, I think.

Okay. Can you tell me how much you ended the year with total media spends?

I think that's a number that traditionally we have chosen not to disclose. Bill, can you comment as to what our total SG&A -- selling expense number was?

Yes, our total SG&A expenses -- I'm sorry, total advertising, promotional, selling expenses for the year was 94.9 million, almost 95 million.

Could you kind of talk on a little bit more detail about -- you talked the execution at retail. What's going on there that is driving the strength?

Jim, do you want to comment?

Yes, it's a number of things. It is things like -- as the supermarket chains have consolidated, I think we have done a better job in showing them the rationale for focusing their advertising on high profit brands like Sam Adams. So we have gotten more ads. We've also gotten more effective at making sure that when we do have ads, there are displays and large displays that are up in the chain stores. We have gotten better distribution in the club stores by adapting packages and programs to them. And we work with our wholesalers to have Samuel Adams set to our standards in the independent off-premise stores. So it is things like that that make Sam Adams more available and more visible to the consumer.

Jeff Kanter, Prudential Equity Group.

Bill, a quick question for you -- you have us worth -- essentially cash on the books, even with your CapEx going a little bit up because of the brewery initiatives. You have so much cash on the books. I know I kind of ask you this every call, but have you ever considered just dividending it out to shareholders? I mean, not buy back stock -- is that in your sample set of options?

We have talked about this before. We continually evaluate the options for utilizing cash increase to shareholders' value for the long term. Dividend is a possibility. And we are constantly analyzing what our different options are, Jeff.

It would just be a pretty shareholder friendly move. What's -- I realize that you are analyzing options. But I mean that is a pretty nice option, isn't it? What is holding it back? Is there something else going on that we should be thinking about? And maybe that is a question for you, Jim.

You know, there are basically three major options, I think, that we see as ways of increasing the shareholder value with that cash. And dividends are one of those three. And share purchases are something we have used with large amounts of money in the past. And that is still an option. And then potential investments are the third.

It is a good question and one you have asked in the past. I guess the answer is -- we still don't see enough clarity to commit to any of those three. We did find a very good option to invest significant money at our brewery in Cincinnati and that our own capacity up to about two-thirds of our volume. So we are continuing to look for opportunities like that and have not made any decision.

And when you say investments, Jim, does that potentially mean an acquisition?

It could. We have over the years looked at a number of them. And we have never found one where we thought it was a good use of the shareholders' money. But it is not something that we rule out.

Okay and Martin, every time you talk to either a spirits company or one of your major brewers, the battle -- they are always talking about they are heating up on -- focusing more on on-premise. Everything is on-premise, on-premise. Your on-premise has been weak for not only in this quarter. But I think it was the last quarter as well, just a tad. I'm just curious -- do you feel as though you're caught in the middle at all?

Jim, I do not think we feel like we are caught in the middle. We see the activity going on around us from the mass domestics and the importers and also from the wine and spirit companies. And I think we look at ourselves as uniquely placed in the beer category to respond to some of the challenges that the wine and spirits companies are putting on the beer category. The wine and spirit companies are upselling. They are selling brandy, they are selling excitement, they are selling news. And we, I think, see a unique opportunity for Sam Adams to react to that and to benefit from that. And I think -- we believe that the new messaging will help us enormously in that direction.

Okay, so with SRTs though down in the first couple of months, it is fair to assume then that those trends you saw on on-premise in the fourth quarter are still with you? I mean the comparison is pretty easy. But it's fair to assume that it probably has not gone away yet?

I think it is fair to say that we have not seen a significant change in what is happening within our business from the fourth quarter to the first quarter. Obviously, the first quarter depletion numbers aren't complete, and so it is tough to tell. It is also tough to tell what the other brewers are seeing. And our sense is with Bill sort of trending slightly better.

(OPERATOR INSTRUCTIONS). Marc Cohen, Goldman Sachs.

Hey Jim, could you talk a little bit more about your analysis of what drove depletions here in the fourth quarter and the determination that it was more execution driven versus message driven? You talked a little bit about getting more displays and better ads and that part of it. But I'm just wondering what your analysis of the communication side of that is. And what is different about the new communications that give you some optimism that the recent weakness in depletion trends is fleeting?

Jim, are you there?

Okay, Martin, how about you?

I apologize, Jim is on his cell, and I do apologize to the group. And he will come back here. And let me -- I think it is very difficult for us to tease apart three sort of things that are going on as it relates to our depletion trends. One is it appears to us that across beers and in fact more full-flavored beers are experiencing somewhat of a bounce back. And that is obviously exciting. And we are determined to get more than our fair share of it.

The second thing is we like the current campaign. We thought it worthy of investment. We believe it helped our business in the last 18 months. And we just don't believe it helped enough when we were faced with an alternative that we felt more attractive. So we believe it helped. As we look at our fourth quarter, we obviously saw some on-premise weakness and some off-premise strength. The off-premise strength, we can assign some of that strength, not all of it, but some of it to retail execution.

So it's very difficult for us to drag all of those pieces apart. And I think what we are trying to say is -- we do not believe that all of the fourth-quarter growth is a sign of brand strength. And that is one of the supporting conclusions at least is to our new messaging direction.

And is this new messaging direction for lager or is it for light or both?

It is for the whole brand family.

Okay. So are you going to continue to have sub-campaign for each style? Or how is this going to work?

Our current plan is to support both lager and light with elements of the campaign but for the umbrella to be much tighter than it has been in the past.

What do you mean by tighter?

What I mean is -- is the ads will be more supportive of the Sam Adams family message than separate messaging. But they will be specific to the brand.

(technical difficulty)

Yes, you're still breaking up Jim. Hey Martin, can you give us better perspective on the orders of magnitude of this on-premise and off-premise trend. In other words, how fast do you grow it off and how fast are you declining on?

I think Mark, what I prefer to do is just point you to the IRI or Nielsen data, which gives you a pretty good sense I think -- a published sense as to what our supermarket line is doing. And then allow you to draw your own conclusions. I do not have numbers we wish to disclose.

Can we assume that the convenience store trends are similar to the food store trends?

I don't --

Are they indicative of the take home business?

I don't know whether you can make that assumption, primarily because I have not looked at that data in the last couple of weeks. And I apologize. And I do not have it in front of me.

And are you doing anything from a sales execution standpoint to change around the on-premise business?

We are. It's part of our total brand messaging but also part of our continued work with the on-premise retailers on a trade up message and our profitability message, which we believe they are reacting to positively. So yes, we are.

Jeff Kanter, Prudential Equity Group.

A quick question with respect to your revenue per barrel assumption for '05. It's going to be up 2 percent, I think you said. Or was that just in the first quarter? Was that 2 percent '05 or the first quarter?

I think what we said was we had increased or we had planned increased pricing for the first quarter of 2 percent, is that not correct, Bill?

That is correct.

Okay. And when you say continued volume increases, that is just based -- all right, okay. Now, with respect to that 2-percent increase, if you're selling a lot more bottles, your mix is up. So can you kind of dissect -- break that down a little bit, Martin? What is rate? What is mix? What's promotional?

I think our intention by saying that we intended to push approximately 2-percent price increases was that was how it averaged across the board based on our current mix.

Okay, so a 2-percent rate mix maybe helps you and then promotion on the other way? Or just there's no benefit from that?

No, I think you have a good read of it.

(OPERATOR INSTRUCTIONS). Marc Cohen, Goldman Sachs.

The one question I have is -- you say you are going to adopt this option expense. When do you plan on doing that?

I think we would plan on doing that, as we are required to do in the third quarter. And we are still evaluating exactly how our adoption will be. We wanted to give guidance as to what the effect would be if we were to adopt it for the full year.

So let me reduce full year earnings by $0.05 to $0.07 in '05. So you are saying that that would be a $0.10 to $0.14 annualized hit? Or are you saying that it is $0.05 to $0.07 annualized hit?

I believe we are saying 5 to 7 annualized. But Bill, could you correct me if I am wrong?

No, that is correct -- 5 to 7 annualized.

So it would actually be less in '05 if you adopt it in the third quarter?

If we adopt it and didn't restate.

If you adopt it and didn't restate.

Yes.

Well, why would you do that?

Why would we restate?

No, why wouldn't you just adopt it now? Why aren't you just adopting this now and cleaning it all up, so we do not get to the middle of the year and have to freak out?

Because it has been our experience on this subject that the rules keep changing. We were waiting for the definitive definition of what the rules are. I think Mark, it's been a moving target the last 80 months, and we are actually pretty happy we waited.

Ladies and gentlemen, this concludes the question-and-answer portion of today's call. I would now like to turn it over to Bill for closing remarks.

I thank you very much everyone for joining the call, and this concludes the call.

Thank you, everyone.

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