Boston Beer Company Inc (SAM) 2006 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the fourth quarter 2006 Boston Beer Company earnings conference call. [OPERATOR INSTRUCTIONS]

I would now like to turn the call over to Mr. Jim Koch, Brewer, Founder and Chairman. Please proceed, sir.

Thank you. Good afternoon, and welcome. This is Jim Koch, Founder and Chairman, and I'm pleased to be here today to kick off the 2006 fourth quarter earnings call, and recap a great year for the Boston Beer Company. Joining the call from Boston Beer are Martin Roper, our CEO, and Bill Urich, our CFO. I'll begin my remarks this afternoon with a few comments on where we stand competitively, and then pass the microphone on 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 2007 outlook. Immediately following Bill's comments, we'll open the line up for questions.

We're excited with the 18% depletions growth achieved in the fourth quarter, which contributed to 17% growth for the full year of 2006 and we believe that we gained share of both better beer and the Craft Beer categories during 2006. Craft Beer is benefiting from increased support from retailers and wholesalers, as they recognize the potential of this fast-growing and profitable category. I am optimistic about Craft Beer trends and believe that as the leading Craft brewer, the Company should be able to benefit from them in 2007. I'm delighted to find more beer drinkers sharing our passion for great full-flavored beer, and I believe the quality of the Samuel Adams brand and our unique beer positions us well to meet this growing drinker interest.

Our Take Pride In Your Beer advertising campaign communicates, a brand message highlighting our commitment and heritage, along with the superior quality of our Sam Adams beers, and we believe that this communication has contributed to our depletions growth and better positioned Samuel Adams to benefit from the Craft category trends. We're encouraged by the continued health of the Craft Beer category, and believe that it will continue to grow as the trade up to drinking better beer continues. I'll now pass it 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. Our fourth quarter depletions growth reflected double-digit growth in the Sam Adams brand family and single-digit growth for the Twisted Tea brand family. We believe that our Samuel Adams brand health continues to benefit from our significant brand support investment and media promotions, point of sales materials, and our sales force. We continue to evaluate incremental investments in order to maintain our leading position within the fastest growing category in beer. Our Twisted Tea brand family depletions growth flow slowed in the fourth quarter mirroring the malternative category slowdown. We plan to continue our investment behind this brand in 2007.

This is our third year in a row of depletions growth. The depletions growth achieved in 2006 reflected improvements in all of our major brand trends. We believe that our brand health has been positively impacted by the strength of the crop category which continues to experience growth from increased drinker interest and drinking better beer and a greater variety of beers. The improvement in the Samuel Adams brand family trends during the quarter suggest that Samuel Adams continues to maintain strong brand equity with drinkers. We believe that 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. We continue to test and evaluate our initiatives to determine their effectiveness and to identify the optimum investment required to generate sustainable volume growth.

Through our pricing initiatives, we were able to increase net pricing for our products during the year by approximately 2% and expect to continue to be able to maintain a healthy pricing approach in 2007. During 2006 we saw significant cost pressures particularly unfavorable packaging material and supply chain 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 12%, and to continue to invest in our organizational infrastructure.

During the quarter, we continued to maintain a strong balance sheet with adequate cash positions to support our business strategy. The Company continues to assess the viability of constructing a brewery in the northeast and has secured an option on a site in Freetown, Massachusetts. We are working through a thorough evaluation of this site, including obtaining the required permits which we anticipate will be completed by mid year 2007 . We continue to finalize engineering for production capacity in excess of 1 million barrels of Samuel Adams brand products and Twisted Tea. Our current best estimate is that total project costs could be between $170 million and $210 million, including land acquisition and development, facility construction, equipment, and other start-up costs and we believe financing for this to be available. The cost of the project will ultimately depend on the final specifications. We also continue to evaluate other supply strategies in order to ensure that any decision to build is the best decision for the company, given the growth of the crop beer category and known and unknown risks in supply chain alternatives.

Our shipments and orders in hand suggest that core shipments for the first fiscal quarter of 2007 could be up approximately 23% when compared to the same period in 2006. Actual shipments may differ, however, and no inferences should be drawn with respect to shipments in future periods. January and February 2007 depletions are estimated to be up 23% over 2006, benefiting from an extra selling day. While there is no guarantee that these trends will continue, we are encouraged by the strong start to 2007. Our 2007 plan calls for depletions growth in the low-double digits which is slightly lower than 2006 full year trends. Now Bill will provide in the financial details.

Thank you, Jim and Martin. Good afternoon, everyone. The Boston Beer Company company realized earnings of $0.17 per fully diluted share in the fourth quarter of 2006 compared to $0.16 per fully diluted share in the fourth quarter of 2005. This increase in earnings is primarily the result of an increase in net revenue mostly offset by increases in general and administrative expenses including employee stock option expense due to performance-based stock options, and the adoption of FASB 123R and an increase in income taxes. For the fourth quarter of 2006, Boston Beer Company recorded net revenue of 73.3 million, a 13% increase over fourth quarter 2005. This increase is a result of the 12% increase in shipment volume and a 1% increase in net revenue per barrel. The increase in net revenue per barrel is due primarily to price increases offset by changes in package and product mix. The increase in shipment volume can be attributed primarily to increases in Sam Adams seasonals, Sam Adams Brewmasters Collection, and Samuel Adams Boston Lager. We estimate that wholesale inventory levels at the end of 2006 are at appropriate levels given the current volume and trends.

Gross margins as a percentage of net sales was 56% in the fourth quarter of 2006 down 1.7 percentage points from 57.7% reported in the same quarter last year. This decrease in gross margin was primarily due to cost increases related to supply chain costs caused by growth in demand for our beers, higher package material costs, and a shift in product mix. Advertising promotional and selling expenses decreased by $200,000 during the quarter as compared to the prior year primarily due to the timing of point of sale expenditures offsetting increasing in advertising and local marketing costs. General and administrative costs increased by $2.1 million during the quarter as compared to the prior year, driven by increases in salary, bonus, and benefit costs, including employee stock option expense of 1.3 million, due to performance based stock options, and the adoption of FASB 123R, and bad debt expense. Income tax expense included an increase in state income taxes of $1 million, related to certain states for fiscal years 2003 through 2006.

For the 12 months ended December 30th, 2006, the Company recorded net sales of 285.4 million, a 20% increase from the same period in 2005, primarily driven by a 70% increase in shipments of core brands, price increases, and a slight shift in package mix. Net income increased by 2.6 million to 18.2 million or $1.27 per fully diluted share, an increase of $0.20 per fully diluted share over the same period in the prior year. For the 12-month period, the net revenue per barrel for core products increased by 2.1% primarily due to net price increases and a slight shift in the package mix.

Gross margin as a percent of net sales was 57.6% as compared to 59.4% in the same period last year, principally due to net price increases that were more than offset by unfavorable packaging material, and supply chain costs. Advertising, promotion and selling expense increased by 12.8 million, or 12.7% for the 12 months ended December 30th 2006, compared to the same period last year, driven by higher freight fuel costs, selling costs, promotional and advertising investment behind the brands. General and administrative expenses increased by 5.4 million compared to the same period last year, primarily due to increases in salary and benefits, including stock-based compensation of 1.9 million due to performance based stock options and the adoption of FASB 123R, consulting, insurance, and depreciation, and insurance expense.

Interest and other income increased by 1.6 million compared to the same period last year, primarily due to interest income earned on cash investments. The effective tax rate for the full year 2006 increased to 42.7%, from the 2005 rate of 39%. This was primarily as a result of the increase in state income taxes recorded in the fourth quarter. Operating cash flow generated for the full year 2006 was strong, at 29 million resulting in 82.4 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 expenditures for the full year, 2006, were 9.1 million. During the three months ended December 30th, 2006, the company did not repurchase any of its class A common stock. Through March 9th 2007, the company has repurchased a cumulative total of approximately 7.8 million shares of its class A common stock for an aggregate purchase price of $92.6 million, and had $7.4 million remaining on the $100 million share buyback expenditure limit.

Looking forward in 2007, the Company is targeting depletion growth in the low double digits, which is slightly lower than the 2006 trends. Our pricing plans inclose an overall 3% increase, which we believe is attainable given the current market conditions. Based on current known information, the Company is facing overall production cost increases between 7% and 10% over full year 2006. The increases are primarily driven by malt increases caused by poor worldwide barley crops, and potential glass cost increases driven by energy costs. These cost increases will be somewhat offset by price increases, but we anticipate that our 2007 gross margin could be down two percentage points below full year 2006.

We believe that our 2007 effective tax rate will be approximately 40.5%. Based on these assumptions, 2007 earnings per diluted share are expected to be between $1.42 and $1.55, absent any significant change in current plan levels of brand support. Current plans are to increase brand support by $10 million to $15 million, including freight expense, to wholesalers. The earnings per share range estimate does not include any significant brewery expenses associated with the new brewery construction or ownership. As of December 30th, 2006, we had capitalized 1.7 million of new brewery project expenses that would need to be expensed if a decision was made not to proceed with the new brewery. Our ability to achieve this type of earnings growth in 2007 is dependent on our ability to achieve challenging targets for volume, pricing and cost. We continue to pursue cost savings initiatives and pricing opportunities, and strive to preserve our economics to allow for continued support of our brands, with the appropriate investment in order to grow volume and earnings. We will now open up the call for questions.

[OPERATOR INSTRUCTIONS] Your first question comes from the line of Ms. Judy Hong from Goldman Sachs. Please proceed.

Hi.

Hi, Judy.

The first question related to pricing. Can you talk about how much have you put through in terms of price increases already, and then just generally speaking how you see pricing in the better beer segment and, really, just kind of the overall marketplace.

Hi, Judy. It's Martin. I think, as Bill indicated, our expectation is we will achieve net pricing increase for 2007 of 3%, and historically we've done pricing in the first quarter, and while I can't talk specifically or comment specifically about what we've accomplished in first quarter, we're are certainly comfortable making the statement that we anticipate 3% for the full year. I think as we look out at the pricing environment, obviously the craft category and to a lesser extent perhaps the better beer category are experiencing strong demand from drinkers interested in variety, full flavor, and trading up, and those are obviously good tailwinds for pricing, and as the first few months of 2007 unfolded, I think we've seen favorable pricing actions from some of the bigger better beer competitors that allows us to feel comfortable that our pricing initiatives taken during the first quarter and planned for later in the year will stick.

Okay and just to clarify, the 3% planned increase this year, is there a little bit of offset to that from a mix shift in your portfolio, to get the net revenue per barrel numbers?

Yes, there are certainly things going on with the mix. I think the 3% net price increase that we have planned for the year is before any mix effects, which obviously we have problems predicting right now. So does that answer your question, Judy?

Yep,

thanks.

All right. And then the second question just in terms of the new brewery project. At this point, can you talk more about the financing options? I mean you've talked about you believe that there is financing available. What kind of options are you looking at at this point, and then from a timing standpoint, can you give us any more clarity in terms of when you would have to really make a final decision on this?

Yes, Judy, let me try and answer both aspects of that. With regards to the finances, we're obviously looking at pretty significant project for company our size, but given our cash flows, we've had offers of financing ranging from bank loans to secured loans to convertible type issuances. We've had everyone knocking on our door looking at this project, and nothing we've seen to date would cause us to believe that we're not in a position to finance the project, and I think our current thought is to delay an exact decision on the finance to be used until we know the full scope of the project, the risks that we're taking on, and how we wish to match our balance sheet to those risks. Obviously we are currently over 80 million in cash, at least at year-end we were over 80 million in cash, so we can finance a fair a mount of that ourselves, and when the time comes for making that decision, we will look at what we can finance ourselves and what we wish to finance externally, and make the decision for the right form of debt based on the risk we're looking at.

With regards to the second part of your question, which I think was how are we looking at timing. I think it's fair to say that as the size of this project has increased on us slightly, and with the increased sort of volume trends that we're experiencing in the health of the craft category, the project has sort of grown on us a little bit, and because of that, we have take an strategy, I think, of deferring a decision until absolutely necessary. At this point, I'd say if I was to tell you when I think that was, I know I would be wrong, but as I think I said in my prepared comments, you know, we're hoping to finalize the engineering and permitting process by the end of the second quarter, and certainly if we were able to do that, that would put us in a position to make a final decision, but as I also commented, we continue to proceed on the project as a priority, but we also evaluate the alternatives, so that when we are in a position to make the decision, we're making the best decision for the Company.

Thank you.

Your next question comes from Mr. Bryan Spillane from Banc of America Securities. Please proceed.

Good afternoon, guys. A couple of questions. First on the tax rate and the taxes. The $1 million was just a settling up of former state tax accruals, or outstanding, I guess, tax disputes, is that right?

Yes, it was the $1 million expense we took with regard to years 2003 through 2006 for certain state tax expenses. And you still have about a -- you still have a deferred tax liability out there, so there are any other deferred tax disputes that you are coming close to the point of resolution? I think that we have reflected any of our deferred tax accruals in either our balance sheet or expense.

Okay. Okay. And then in terms of just bad debt expense, are you having -- is there something about your customer mix that's changing your abilities to offer receivable terms, or just something else in general that's happening that's causing that to run up? Bill, it looks like also your allowance for doubtful accounts has gone up.

We had a -- I think it's probably fair to say a slight increase in allowance for bad accounts in the fourth quarter of last year, and it just relates to the mix of receivables we have and timing, and not indicative of an ongoing issue.

Okay, and then as it relates to building the brewery, I guess I was under the impression that you kind of wanted to have a -- if you didn't have a shovel in the dirt by April, you ran the risk of not having a brewery built in time by the time that the Miller contract expires. So are there any contingencies, you know? Is it possible to have that Miller contract extended for few months, or have you made any other contingencies that give you and room on the back end in case you don't have a brewery built in time?

I think your recollection is probably correct of earlier conversations. I think as we've looked at the brewery project, we're managing it to ensure that we have -- or attempt to ensure we have security of supply, and in my answer to Judy, I referred to a deferring of the decision or a delaying a decision until we have the most amount of information In doing that, that obviously exposes us to some of the risks you're talking about, and we have been active in that area to try and mitigate those risks.

All right and when you think about the considerations, beyond the financial consideration, if you are evaluating a third party, what are some of the factors you're considering? Is it water supply? Is it proximity to the markets you need to ship to?

Bryan, is your question as it relates to alternatives to building? [OVERLAPPING VOICES]

Right.

Sure, yes. Well, we're obviously, I think if you look down the list of potential things that we would consider, I think geographic location and proximity to market is a key driver, particularly -- and it probably gets more important given what oil prices have been doing and freight costs have been doing -- and then behind that, there's obviously issues around whether the brewery is suited for our products, which are obviously unique in their brewing, and whether the brewery is basically capable of packaging the packages that we needed, and beyond that, I think we're looking at issues of financial stability of that brewery, or brewing partner. It's availability. What we expect its long-term cost structure to look like in comparison to the cost ownership. Things like that.

Okay. All right. Thanks, guys.

Thank you.

[OPERATOR INSTRUCTIONS] There are no further questions in the queue at this time. I would like to turn the call back over to Mr. Jim Koch for closing remarks.

Thank you, everybody, and we'll talk to you again in a couple of months.

Thanks, guys.

Thanks, guys.

Thank you for your participation in today's conference. This conclude this presentation. You may now disconnect. Good day.