Boston Beer Company Inc (SAM) 2005 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to your Q4 2005 Boston Beer Company earnings conference call. My name is Rob, I'll be your operator today. Throughout this conference, all lines will be on listen-only.

[OPERATOR INSTRUCTIONS]

At this time, I'd like to turn the conference over to your host for today's call, Mr. Jim Koch, Founder and Chairman.

Thank you. Good afternoon, everybody, and welcome. This is Jim Koch, and I'm very pleased to be here to kick off the 2005 fourth quarter earnings call for the Boston Beer Company. Joining the call for Boston Beer will be Martin Roper, our CEO, Bill Urich, our CFO, and Monica Martin, our Corporate Controller.

I'd like to begin my remarks this afternoon with a few comments on where we stand, and then pass the microphone over to Martin, who will provide an overview of our business. Martin will then turn the call over to Bill, who will provide financial details for the quarter and our 2006 outlook. Then immediately following Bill's comments, we will open up the lines for questions.

We are very pleased with our full year 2005 financial and depletions results. Boston Beer's core brand depletions increased by 6% in the fourth quarter of 2005, resulting in an increase of 5% for the full 2005 fiscal year. The Better Beer category grew approximately 7 or 8% in 2005 and Craft beer grew approximately 9%, while the domestic beer category has experienced flat trends this year. We believe that the Craft beer and Better Beer categories are benefiting from continuing consumer trends to trading up their beer choices, and that we are in a very good position to gain our fair share of this ongoing growth. Our "Take Pride in Your Beer" advertising campaign communicates a brand message that the consumer can clearly connect our authenticity and heritage with the superior quality of our Sam Adams beer. And we believe that this communication, launched in early 2005, has contributed to our depletions growth, and better positioned Samuel Adams to benefit from these category trends. While it's very difficult to directly correlate the effectiveness of the brand messaging with depletions, we plan to continue with this campaign while monitoring its continued effectiveness and our ongoing depletions results. Aiding our confidence level is the positive feedback we've received from our drinkers and our wholesalers that have led us to believe that this program is helping our brand. We are encouraged by the continued health of the Craft beer category and believe that it will continue to grow as a trade up to better beers and drinking better continues.

I'd now like to pass the call over to Martin for a more detailed overview of our results.

Thank you, Jim. Good afternoon, everyone.

As Jim noted, we are encouraged by the depletions growth achieved in the fourth quarter. This is our second year in a row of depletions growth. The depletions growth achieved through the end of the fourth quarter reflected improvements almost all of the major brand trends.

During the fourth quarter, we saw growth in the total Sam Adams Brand Family, with double-digit growth in Sam Adams Seasonals and Brewmaster's Collection. We believe that our brand health has been positively impacted by the strength of the Craft beer category, which continues to experience growth from increased consumer interest in drinking Better Beer and a greater variety of beers. The improvement in the Samuel Adams Brand Family trends during the quarter suggest that the Samuel Adams brand continues to maintain strong brand equity with these drinkers. We believe our brand health has also been positively impacted by the "Take Pride in Your Beer" communication. We have been airing this "Take Pride in Your Beer" communication television commercial nationally since March of 2005 and are continuing to develop this message, consistent Sam Adams' positioning in the growing Craft beer category. We believe that the strong brand equity in the Samuel Adams brand is vital to the continued health of our business and remain committed to investing behind it as the number one priority to ensure long-term success. During 2005, our Twisted Tea brand family showed double-digit depletions growth and we expect to invest more effort toward Twisted Tea in 2006. Through our pricing initiatives, we were able to increase net pricing for our products during the year by approximately 2% and we hope to continue to be able to maintain a healthy pricing approach in 2006.

During 2005, we saw significant cost rushes, particularly on our freight, packaging and other energy-related costs. Despite these operational cost pressures, we were able to increase our full-year investment in advertising, selling, and promotional support behind the brand by over 6%, and continue to invest in our organizational infrastructure. During the quarter, we continue to maintain a strong balance sheet with adequate cash positions to support our business strategy.

The expansion project at our Cincinnati, Ohio brewery was completed in the fourth quarter and we plan on producing approximately 2/3 of our volume at this traditional brewery this year. We invested over $11 million in capital expenditures in our Cincinnati Brewery for the full year 2005 to expand the brewery and increase efficiencies. We are in the process of evaluating our long-term brewing strategy. Our evaluation includes a range of possibilities from continuation of our contract strategy to full ownership of our production capacity. If we were to build a brewery in order to own 100% of our brewing capacity, an investment in the magnitude of $70 to $90 million could be required. This estimate could change based on the actual production capacity and capability built. This investment would likely improve our operating and freight costs slightly, our evaluation of all of these options is ongoing.

Our shipment and orders in-hand suggest that core shipments for the first fiscal quarter of 2006 could be up approximately 14% when compared to the same period in 2005. Actual shipments may differ, however, and no inferences should be drawn with respect to shipments in future periods. January and preliminary February 2006 depletions are estimated to be up 17% over 2005. We believe our 2006 depletions were favorably impacted by milder weather in the northeast in 2006, one additional selling day, and the continued positive trends of the Craft beer category.

Now Bill will provide the financial details.

Thank you, Jim and Martin. Good afternoon, everyone.

The Boston Beer Company realized earnings of $0.16 per fully diluted share in the fourth quarter of 2005, compared to $0.19 per fully diluted share in the fourth quarter of 2004. This decrease in earnings is primarily result of a $4.4 million increase in advertising, promotional, and selling expenses for the fourth quarter versus last year. For the fourth quarter of 2005, the Company recorded net revenue of $64.8 million, a 16% increase over the fourth quarter of 2004. This increase is a result of the 14% increase in shipment volume and a 1.8% increase in net revenue per barrel to $176.92. The increase in net revenue per barrel is primarily due to price increases and a shift in package mix. The increase in shipment volume can be attributed to increases in Samuel Adams Seasonals, Twisted Tea, Samuel Adams Boston Lager, Samuel Adams Brewmaster collection and Sam Adams Light.

Wholesaler inventories levels at the end of the fourth quarter of 2005 are estimated to be approximately 30,000 barrels higher than at the end of fourth quarter 2004. We estimate that wholesaler inventory levels have grown approximately 15,000 barrels, due to the increase in depletion trends and the remaining 15,000 barrels are related to inventory build that should unwind in the first half of 2006.

Gross margin, as a percent of net sales, was 57.7% in the fourth quarter of 2005, down 1.7% from the 59.4% reported in the same quarter last year. The 1.7% decrease in gross margin during the fourth quarter of 2005 was primarily due to increases related to production costs, higher package material costs and a shift in product and package mix. Advertising, promotion, and selling expenses increased by $4.4 million during the quarter as compared to the prior year, primarily due to higher freight fuel costs, selling costs, and promotional expenditures. General and administrative costs increased $800,000 during the quarter as compared to the prior year, primarily driven by increases in salary and benefit costs, legal and consulting fees, and insurance costs.

For the 12 months ended December 31, 2005, the Company recorded net sales of $238.3 million, a 9.7% increase in the same period in 2004, primarily driven by a 7.2% increase in the shipments of core brands price increases of approximately 2%, and a shift in package mix. Net income increased by $3.1 million to $15.6 million, or $1.07 per fully diluted share, an increase of $0.21 per fully diluted share over the same period in the prior year. For the 12-month period, the net revenue per barrel increased by 2.4%, primarily due to net price increases and a shift in package mix.

Gross margin as a percent of net sales was virtually flat at 59.4%, compared to the 59.5% in the same period last year. This is principally due to net price increases being offset by unfavorable packaging material and production costs.

Advertising, promotion, and selling expenses increased by $6 million or 6.3% for the 12 months ended December 31, 2005, compared to the same period last year. These increases were driven by higher freight fuel costs, selling cost, and promotional investment behind the brand. General and administrative expenses increased by $2.5 million compared to the same period last year, primarily due to increases in salary, benefits, consulting, and legal fees.

Interest and other income increased $1.6 million compared to the same period last year, primarily due to interest income earned on cash investments. Operating cash flow generated for the full year 2005 was strong at $28.8 million, resulting in $63.9 million in cash and short-term investments as of the end of the year. Additionally, we have available a $20 million unused line of credit.

Capital expense for the fourth quarter totaled $3 million, reflecting normal operating capital spend at the Cincinnati, Ohio brewery and the expansion project. Capital expenditures for the full year 2005 were $14 million.

During the three months ended December 31, 2005, the Company repurchased $1.7 million of its class "A" common stock. Through March 6, 2006, the Company has repurchased a cumulative total of approximately 7.7 million shares of its class "A" common stock for an aggregate purchase price of $89.2 million, and we have $10.8 million remaining on the $100 million share buyback expenditure limit.

Looking forward in 2006, the Company is targeting depletions growth for 2006 to be in line with the 2005 Craft beer category depletions growth. Our pricing plans include an overall 2% increase, which may be more difficult to achieve than in the past few years given the current pricing environment. Based on our current known information, we are facing overall production and freight cost increases of approximately 5% over the full year 2005. These could vary depending upon the actual energy costs in 2006.

Based on current knowledge, 2006 gross margin could be down as much as 1% below the full year 2005. We believe that our 2006 effective tax rate will be similar to our 2005 effective tax rate. Based on these assumptions, 2006 earnings per share are expected to be between $1.10 and $1.18, absent any significant changes in planned brand support and before accounting for the adoption of FASB 123R, the accounting of stock-based compensation. With the adoption of FASB 123R, it is expected to reduce earnings per share by between $0.06 and $0.10 in 2006. This impact will depend on the vesting of certain performance-based options. After accounting for this impact, the diluted earnings per share will be between $1.04 and $1.08.

Our ability to achieve these type of earnings growth in 2006 is dependent on our ability to achieve challenging targets for volume, pricing and cost. We are continuing to pursue savings initiatives and pricing opportunities to preserve our economics and allow for continued support of our brands with the appropriate investment in order to grow volumes and earnings.

We will now open up the call for questions

Okay, thank you, sir.

[ OPERATOR INSTRUCTIONS ]

Sir, I have your first question today coming to you from Mr. Bryan Spillane.

Hey, good afternoon, guys.

Hi, Bryan.

Hi, Bryan.

Hi, Bryan.

A couple of questions. First -- and I guess for either Jim or for Martin. You've seen over the last couple of -- last couple of months, plans from some of your competitors to spend more money in the Better Beer category. I know Heineken is planning to spend somewhere in the neighborhood of $50 million launching Heineken Light. SAB is going to spend some money on Peroni. We just came back from a Coors presentation, they're talking about a national rollout of Blue Moon. And so I guess, you know, it's -- on one hand it's good that they're validating your strategy. On the other hand, is there anything that you have to do differently, do you foresee having to put more resources, whether it's salespeople or marketing, behind what you're doing now in order to maintain your share of voice in front of consumer.

Bryan, it's Martin. Why don't I just talk a little bit about what our existing 2006 plans are and then allow Jim to comment perhaps on the competitive landscape.

Our plans for 2006 already call for a reasonable increase in SG&A around people and advertising, and then obviously, due to the fuel costs on the freight side, which hits our SG&A line. So, we're already upping the investment in our plans and in our projections for this year. And most of those plans are in place and being executed against. We certainly welcome the recognition from some of our competitors that the Better Beer category and indeed the Craft category is a very exciting place to be. I think we have a very strong brand in Samuel Adams with very strong brand communication and equities and a lot of the brands you talk about are not coming directly at our position in the marketplace. So, we welcome the additional competition, we are encouraged that more suppliers will be talking to retailers about trading up and allocating more of their, you know, space to Better Beers and to Craft beers and we think that can only be good for the category.

Jim, do you have any additional thoughts?

I would second that. I think from our point of view, those new developments are not a reason at this point to think about changing the support levels. As Martin said, we're going to be increasing them as the volume goes up, and my overall experience has been historically that, because Better Beer drinkers drink many different beers, when one competitor pushes on their brand, it often helps the other brands by bringing new drinkers into the category and those new drinkers are not monogamous at all.

All right, that's helpful. And then as a follow-up, Bill, I just -- I want to make sure I understand your -- the gross margin guidance for '06. The cost of goods -- if I calculated this right, the cost of goods per barrel was up about 6% in the fourth quarter. And so are you expecting a similar type cost of goods per barrel increase for all of '06? Or would it moderate at some point over the course of the year?

I think what we indicate -- or what I've indicated is that it's a 5% increase, and our production and freight costs, 2006 over 2005, that's based on the current knowledge we have, Bryan, that's what we would estimate.

And that's net of any savings from, you know, the efficiencies from brewing in Cincinnati.

It's net of any savings that we know of at this time, but again, we continue to pursue savings initiatives and we will do that throughout the year.

Okay, great, thanks, guys.

Okay, thank you, sir. Your next question will be from Mr. Matt Sherwood.

Hey, guys, great quarter. Just -- I was looking at the guidance and it just looks like given the cost trend that you experienced, it being more weighted toward the second half of this year, would you say that we should look for your guidance to be a little bit more back-end weighted when we build up our models? From a growth perspective.

From a growth of revenue or growth of EPS?

Growth of EPS. So, for example, the first two quarters you might have down year-to-year earnings, but the back half you'd be up, rather significantly.

It's very difficult to say, because we get a fair amount of movement on the shipment side, as wholesalers adjust inventories and stuff. So, historically we haven't provided any sort of core for the earnings guidance and we prefer to focus on the full year, and the quarters will come out as they will based on how the wholesalers decided to order product and how our spending initiatives, where there's also some timing issues around, does point-of sale arrive on time and when does the program start, et cetera. There's enough moving pieces that we don't feel comfortable giving any quarterly guidance.

That's great. Okay, that's fine. And just one other question. If you just look over a longer run perspective, I mean you guys seem to have done an incredible job this year when you look at the depletion growths and the sale to wholesalers, but when you look over a longer term perspective, the volume trends, it just -- the two-year and three-year growth rates would be something we haven't seen since the mid-'90s time period. So, I was just wondering has there been changes that you think will make the growth rate larger on a go-forward basis?

Well, let me take a crack at that and then if Jim wants to -- has any additional --

You guys are obviously doing a good job. I just don't want to get too optimistic in my expectations.

Yes, let me take a crack at it. Obviously, this is our second year of depletions growth and over the last four or five years, we've had, I think, low single-digits growth on our average basis, coming from a couple of jump steps with the launch of Light, then more recently, the two years of growth that we experienced.

Yep.

I think we're looking at that and going, that's great, we're growing the brand, that's good. We're seeing strong brand equity and we're also seeing strong opportunity for growth as the Craft category and Better Beer categories continue to grow. So, we're feeling better that we're growing closer to those category trends, but disappointed we're not growing at the category trends and certainly our financial goal this year is to match the Craft category. So, that's what we're setting out to try and do and hopefully we can do it.

Great. Hope so.

Jim, any other thoughts or...

No.

Thank you.

Thanks.

Okay, thank you, sir.

[ OPERATOR INSTRUCTIONS ] Sir, I have Mr. Bryan Spillane back online.

Hey, guys.

Hi, Bryan.

Just, Jim, I'd like to get your perspective on where you see we are in this whole trading up trend, this has been going on for a few years now, you've seen it a lot -- we see it across a lot of other product categories. Get the question, one, what's the -- what's the sensitivity to changes in the economy? And guess the other would be, just, from your perspective, where do you see this -- is this something you think will go on for a number of years? Do you think we're halfway through this?

Yes, I -- I think it will continue to go on for quite a while. I think it's very fundamental, very long-term. It's something that we have seen for 30 years. And today Better Beers, meaning imports and Craft beers, represent about 16% of beer business. In wine and spirits, the similar categories which you can define a number of different ways, but in those beverages, the high end represents about twice that level, somewhere 30 -- 35%, and is continuing to grow and drive the growth of wine and drive the growth spirits. So, it's my belief that our piece of the beer pie, if you will, that we share with imports and Craft beers can double, and not in five years, but in -- at historical rates it could double in another 10 years. So, I see a lot of upside.

And as you look at that, how much of it is -- or is it -- is focusing on the product -- the liquid, the most important thing? Or is the brand image equally important? Just from your perspective, what's -- what's the most important characteristic that you need to succeed, to continue to grow with that trend?

Well, you need a cluster of things. You need a beer that really delivers on the promise of higher quality and more flavor. You need a -- I believe a portfolio of beers, because consumers are willing to experiment even within a brand. And you need a good consumer -- consumer communication and we've certainly seen better results when we've had good advertising than when we've had mediocre advertising. So, I think it requires all of those, and you can drive that a little bit better with excellent retail execution, with your own salespeople and through your distributor network.

Okay. Thanks. And then just one last question on pricing. Have you put any pricing -- new pricing into the market yet? Or is your -- does your guidance assume some sort of additional pricing later in the year?

We have put price increases in place in certain markets against certain packages in the first quarter, mostly effective first of February or first of March, in order to try and reach our 2% price -- net price realization target for the year.

So, was there any buy-in in front of those price increases that drove -- has driven some of the shipment trends early in the quarter?

It's certainly possible. We don't have a level of detail on the data to assess how much.

Okay. Great, thanks, guys.

Thank you, Bryan.

Thanks, Bryan.

Okay. Thank you, sir. We will go to Mr. Jeff Kanter.

Good afternoon, gentlemen.

Hi, Jeff.

Jim, it's good to see that you actually may have a use for your cash. With respect to this brewery. My question to you is -- is what's kind of going through your mind as far as your decision tree -- as far as whether you're going to build this out or not. And somewhat related, is this an offensive or a defensive move? In other words, are one of your co-packers -- are you having trouble with one of your co-packers where they don't want to brew you anymore and have to take it further in house? If you could answer those two related questions, that would be great.

Jeff, it's Martin. Why don't I take sort of a first cut at it and Jim can comment.

Sure.

I think we're always evaluating what the right short-term, medium-term ,and long-term brewing strategy has been, and obviously you've seen from us a migration from pure contracts to a mixture of contract and ownership that was somewhat opportunistic, but also, as I think, proven to be strategically right and also operationally right. So, we always looking at these things and as we look out at the future, with increasing freight costs in particular, we see some benefit to trying to optimize the production locations of our beer closer to market for freshness and beer quality, as well as for the operational economics, and I think what we're seeing is a change over time of the economic advantages for the two strategies. I think, you know, we're very comfortable with the quality of the beer that we are brewing and shipping today. But I'd certainly -- it was fair to say that if we owned a brewery, we'd perhaps have control, which might be even greater because of design parameters we could put into such construction. So, we're evaluating all of those factors. It's still in the evaluation stage. We don't have, you know, full economic estimates and some of the decision making is based on assumptions as to what happens to costs and to our contract partners over long periods of time. So, it's an ongoing evaluation, but one that we think -- we hope to make progress on this year and that certainly has offensive and defensive opportunities with it.

Okay, thank you.

Okay, thank you, sir. We will go to Mr. Andrew Sawyer.

I just had one quick follow-up question on Jeff Kanter's question. And that's that, your estimate for building out capacity, it looks like you're talking about $150 to $200 a barrel. That -- has the production -- or cost of building production facilities gone up in the last couple of years? It strikes me that's higher than numbers in the low hundreds I'd heard in the past.

I'm not totally sure that your calculation is correct. I think that construction of breweries is a function largely of stainless steel prices and certainly stainless steel prices have gone up significantly. One of the key decision factors is how large of a brewery would you need and then for how much capital would it take? And, without getting into specifics that I'm not prepared to get into at this point in time, I don't think that the cost of construction in breweries increased as much as your calculation would suggest.

Okay. And just on the one quick follow-up question, on the pricing environment, you're talking about the challenging pricing environment, you're talking about the decision Heineken has made to kind of refrain from increasing prices? Are you talking about what's going on in the mainstream, you know, Anheuser-Busch, Miller, price bets, or both?

I think we look at the pricing of Better Beer, and certainly in the last two, three years there has been consistent movement from, least Corona and sometimes Heineken, and this year would appear to be the first year where they have indicated -- or initially indicated, at least, a desire to hold pricing flat. And that certainly does not create the best of pricing environments for us, as a large player in the Better Beer category and also the leader Craft category, we try to take a leadership position on pricing, and we're also consistently trying to optimize the pricing structures that we have to maximize our revenue and our partner's revenue. So, certainly, when we describe it as difficult, we're referring to the Better Beer environment. And it's certainly not as friendly to price increases as it was a year ago, but that doesn't deter us from attempting.

Thank you.

Okay, thank you.

[ OPERATOR INSTRUCTIONS ] Sir, I have no further questions queueing up for you at this time.

Well, thank you all. We will hear -- you will hear from us next quarter.

Thanks very much, guys.

Thank you.

Okay, thank you, sir. Thank you again, ladies and gentlemen, this brings your conference call to a close. Please feel free to disconnect your lines now at any time.