Boston Beer Company Inc (SAM) 2007 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to the first quarter 2007 Boston Beer Company earnings conference call. My name is Tanya, and I will be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question and answer session towards the end of this conference. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to Mr. Jim Koch, 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 to kick off the 2007 first quarter earnings call 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 will open the line up for questions.

We feel very positive about the 18% depletions growth achieved in the first quarter and the continued overall positive craft beer category trends. I believe that as the leading craft brewer, Boston Beer Company should continue to benefit from the increasing support of retailers and wholesalers for craft beer as they recognize the potential of this fast-growing and profitable category. I believe the long-term trend of beer drinkers trading up to better beers will continue and the quality of the Samuel Adams brand and our unique beers positions us well to meet this growing drinker interest.

During the first quarter of 2007, we released Samuel Adams Honey Porter in addition to our brewmaster's collection, and released a long shot mixed six-pack, containing the winning home brews from a national home brewing competition, conducted last year, as well as the winning home brew from our own employee home brewing contest. The interest of drinkers in these types of contests and beers continues to impress me and reinforces my positive feeling for the future. Our ability to implement price increases in the first quarter was also favorable, although this did not fully offset our cost increases. The challenges in maintaining margins are expected to intensify due to future expected cost pressures on hops, barley and packaging material.

While we believe it is a great time to be an American craft brewer, we do anticipate increased competition from other craft brewers, imports, and large, domestic product partnerships, innovations and brand repositionings. We believe we are well-positioned to compete and continue our leadership in the craft beer category. I will now pass 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 first quarter. Our first quarter depletions growth reflected double-digit growth in the Samuel 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 in media, our sales force, point of sales materials and promotions. We continue to evaluate incremental investments in order to maintain our leading position in the craft category.

Twisted Tea brand family depletions growth was lower than in previous quarters, but we believe that we maintained share of the flavored malt beverage category in markets where we compete. There were several new entrants into the alcoholic tea market during the first quarter, so we expect the summer to be very competitive. We are planning increased investment behind Twisted Tea and other competitive steps to protect our position.

The Samuel Adams depletions growth achieved in the first quarter of 2007 reflected growth of all of our major beer styles. We believe that our brand health has been positively impacted by the strength of the craft category, which continues to experience growth from increased drinker interest in better beer, more flavorful beers and in variety. The strength of the Samuel Adams brand family trends during the quarter suggests that Sam Adams continues to maintain strong brand equity with drinkers. We believe that maintaining 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 a 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 our net revenue per barrel for core products for the quarter by approximately 3%. During the first quarter of 2007, we saw significant cost pressures, particularly unfavorable ingredients in packaging material costs. Despite these cost pressures, we were able to increase our investment in advertising, selling and promotional support behind the brand and continue to invest in our organizational infrastructure, even while growing net income. 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 on the potential site in Freetown, Massachusetts. We're working through a thorough evaluation of the site, which we anticipate will be completed by mid-year 2007. We're obtaining final design and cost estimates for initial 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. 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 given the growth of the craft beer category and known and unknown risks in supply chain alternatives. We announced in April that we signed an agreement with a wholly-owned subsidiary of City Brewing Company to brew some of our beer in Latrobe, Pennsylvania. Work is underway to upgrade the brewery by purchasing equipment to allow for Samuel Adams' traditional brewing process, use of proprietary yeasts and extended aging time and beer bottling and kegging. This agreement gives us increased flexibility to meet the growing demand we are seeing for full-flavored craft beers like Samuel Adams and to support our current growth trends. We felt it was very important that we arrange additional brewing capacity to augment what we can brew in our other brewing locations and provide security and flexibility of supply while we continue to review our long-term brewing strategy. We are delighted to partner with City Brewing in reviving this classic old brewery.

Our shipments and orders enhanced the core shipments for the second quarter 2007 could be up approximately 10%, resulting in the first half shipments being up approximately 15% 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. April year-to-date depletions are estimated to be up approximately 17% over 2006. We believe this sets us up well to make our 2007 growth targets. While disappointed that our price increases in the first quarter have not fully covered our increased costs, we are pleased that our depletions have maintained the momentum post-price changes and believe that we are on track to implement net price increases of approximately 3% during 2007.

Looking forward, we remain confident that our full-year depletion growth will be in the low-double digits, just below last year's depletion growth performance. While we believe that as the leading craft brand, we are well-positioned in the better beer category, we anticipate increased competition this summer and matching first quarter depletions and shipment growth trends for the full year could be challenging. Now, Bill will provide the financial details.

Thank you, Jim and Martin. Good afternoon, everyone. The Boston Beer Company realized earnings of $0.40 per fully diluted share in the first quarter of 2007, compared to $0.13 per fully diluted share in the first quarter of 2006. This increase in earnings is primarily a result of an increase in net revenue, partially offset by increases in costs of goods sold, selling and advertising expenses, general and administrative expenses, and an increase in income taxes.

For the first quarter of 2007, Boston Beer recorded net revenue of $72.4 million, or a 27.4% increase over the first quarter 2006. This increase is primarily a result of the 23.7% increase in shipment volume and an increase in net revenue per barrel. The 3% increase in net revenue per barrel of core products is due primarily to price increases and favorable changes in package and product mix.

The increase in shipment volume can be attributed primarily to increases in Samuel Adams Seasonals, Samuel Adams Brewmasters collection, Sam Adams Boston Lager and Sam Adams Light. We view that wholesale inventory levels at March 31, 2007 were ahead of preferred levels for this time of year as reflected in the shipments exceeding depletions by a larger amount than would usually be for the first quarter. We expect this inventory build to unwind through the rest of the year.

Gross margin, as a percent of net sales, was 55.7% in the first quarter of 2007. Down 1.7 percentage points from the 57.4% reported in the same quarter last year. This decrease in gross margin was primarily due to cost increases related to higher ingredient and package material costs, and a slight shift in product mix. Advertising, promotion and selling expenses increased by $1.1 million during the quarter, as compared to the prior year, primarily due to increases in freight expenses to wholesalers and advertising.

General and administrative costs increased by $400,000 during the quarter as compared to the prior year, driven by salary and benefit costs. The effective tax rate for the first quarter increased to 40.2% from the 2006 rate of 39.7%. This was primarily the result of an increase in state income taxes. During the three months ended March 31, 2007, the Company did not repurchase any of its class "A" common stock.

Consistent with our earnings release of March 13, 2007, our 2007 full-year earnings per diluted share is expected to be between $1.42 and $1.55. This is absent of any significant change in current planned levels of brand support. The earnings per share range estimate does not include any significant brewery expenses associated with the new brewery construction or ownership. As of March 31, 2007, we had capitalized $3 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 have increased our estimates of total capital expenditures in 2007 to be between $17 million and $21 million, primarily driven by the need to purchase additional kegs to support our draft business. This revised estimate includes an investment of between $3 million and $7 million in the Latrobe brewery to support the restarting of this historic brew house and modifications in order to accommodate our beers. Consistent with Boston Beer's commitment to the brewery, the parties are discussing the potential of Boston Beer acquiring an ownership interest in the brewing facility. This capital expenditure estimate is exclusive of any further investment in the new brewery project or any other major investments that result from our evaluation of our long-term production strategy. Our capital investment would be significantly higher if a major brewing investment project was initiated. We will now open up the call for questions.

(OPERATOR INSTRUCTIONS). You -- your first question comes from the line of Brian Spillane with Banc of America. Please proceed.

Good afternoon, guys.

Hey, Brian.

Hey, Brian.

Hey. A couple of questions -- first, it looked like the -- that the advertising expense was a little bit -- it certainly was below where we were modeling it. On a per-barrel basis it's down pretty good in the first quarter versus last year. Are you expecting -- especially in light of the competitive -- the competition you're expecting, should we expect that you'd see some increase on that line over the balance of the year?

Hey, Brian. It's Martin. I think what you're seeing is just a timing issue. For the full year, we'd expect everything to balance out.

Okay. And then -- and then when you looked at your -- when looking at gross margins for the first quarter, is it -- is it roughly in line with where you were expecting in terms of -- it looks like the pricing is -- has come in pretty much in line with where you were looking or hoping for earlier in the year, and I know that costs -- your cost of goods are up, but it looks like it's -- it's roughly in line with the ranges you were suggesting back earlier in the year. Is that fair?

Yes, Brian, it's Bill, hi.

Hi.

The answer is yes. I think what we said in our earlier press release, we're looking at cost pressures of approximately 2% on margin for the year and at 1.7, I think, we've realized these cost pressures.

Okay. And then in terms of wholesaler inventories, how much of the excess inventory -- or the extra inventory are the winter seasonal? I guess I'm asking is there a potential that you either would have to discount some product before, the season changes or maybe take some product back that you don't want on the shelf at this time of the year.

Hi, Brian, it's Martin. I think our comment on, slight inventory build wholesaler reflects to shipments in the first quarter being higher than depletions by about half, a slightly larger amount than we'd normally anticipate. Looking at the orders for -- that we've put forward that we have in hand right now, you will see that the orders in the second quarter aren't showing the same growth rate as they were in the first quarter. That could be correcting itself. I think if you were to walk into stores around your home market or even selectively around all the markets, you'll see we've made a pretty smooth transition to Summer Ale already. So, I don't perceive there to be, all seasonal product awaiting discounting.

Okay. And then -- and then also in terms of -- if you could talk at all about the channel on premise versus off premise trends at all in the quarter -- just how you performed, this quarter?

We don't historically -- you know, have not spread that out. Let me try and answer the question with generalities about our business that we feel comfortable sharing and then if Jim wanted to add anything, he can feel free. I think for the last year or so, our keg bottle mix has been holding pretty steady, maybe with a slight drift towards bottles. For that to have happened, you'd have had to have seen growth in both channels. And we didn't see anything in the first quarter that would change that trend.

Okay. Great, thanks. I will get off and let someone else ask a question. Thanks, guys.

Thanks, Brian.

Your next question comes from the line of Andrew Kieley with Deutsche Bank. Please proceed.

Hi, Andrew.

Just to follow up on the previous question on the SG&A line, would you still be guiding for a full-year increase of the brand support of around $10 to $15 million, or would you expect that to be a little bit lower now?

I'm sorry? The branch support being what?

I think you mentioned last call that full year brand support, which I guess would encompass all of advertising and promotional activity would be around 10 to $15 million for the full year?

I don't think we've changed our estimates at all.

Okay. Second question was on the new City Brewing contract. Would that fully cover some of the capacity that will come offline when the Miller contract expires, since you probably wouldn't have the new brewery in place by that time?

Hey, Andrew, it's Martin. The current contract that we have in place requires -- or provides us access to the brewhouse and the brewery, to produce a significant amount of beer, when Rolling Rock was brewed there. They were about 1 million barrels. 1.1 million. So, there's certainly ample capacity there to cover what could happen in 2008 when the Miller contract is up.

Okay. And any ability, I guess, to give us any parameters on what per-unit cost difference might be between the new Latrobe contract and your existing contract rates -- brewing rates? Would there be a meaningful difference there?

I would be uncomfortable with disclosing specifics. Obviously that's competitive information. But I think as we look -- for the impact of brewing there, as it relates to our gross margins for this year, that we've previously provided you guidance with, we haven't felt it appropriate to change that guidance.

And finally, I wanted to ask, when you're discussing potentially taking an ownership interest in that plant, what are sort of the considerations that would decide that? And what sort of magnitude of investment would that be?

I think in Bill's script he talked about an investment range for this year, at least, for Latrobe of between 3 and $7 million and that could include some form of ownership. We're currently in discussions with the management ownership group there about partnering -- partly because we foresee we could be a very significant user of that facility, potentially the primary user and maybe a partnership makes sense.

So, the 3 to $7 million is inclusive of any ownership?

The 3 to $7 million is inclusive of ownership as we currently understand it, but, of course, that might change.

Okay, thanks.

(OPERATOR INSTRUCTIONS) Your next question comes from a follow-up from the line of Brian Spillane with Banc of America. Please proceed.

All right, thanks for letting me back in. Question for you, Jim, you've seen, I guess, over the last six months -- Bud has -- Anheuser Busch has stepped up their investment in better beer. I guess FEMSA and Heineken have signed a longer-term commitment or made a longer term commitment to each other and you've talked here in your remarks today about expectations that you will see more competition in better beer. How do you think that competition is going to manifest itself? I would be surprised if it was pricing. So, do you think that it's going to be more salespeople elbowing each other at the right accounts? Is it going to be more marketing dollars? How do you think that might play itself out?

Well, it will probably be the kinds of form of competition that you'd be familiar with. I guess I see it coming from a number of sources. As you mentioned, there are -- there's increased attention to the offerings from the large domestic brewers, things like Blue Moon, the Leinenkugel rollout, A-B's equity brands like Red Hook and Widmer and Goose Island and Dominion. And the imports are all getting more active. I think it will come in -- retailers having more brands they can use to meet this increasing demand. So, at the same time that there is more people out there, there's more shelf space.

I think there will also be increasing competition for a wholesaler's share of mind, which is also increasing. So, on one hand, we've got growing demand from consumers, retailers and wholesalers and the other, we've got more people interested -- I can't tell you whether it will grow faster than the competitors or not. I don't see it driving pricing at this point because of the cost pressures that pretty much everybody is facing. I think it's just going to be more elbowing in the channels and in the trade.

Do you think that it will -- as there's more emphasis put on better beer and the industry in total, and thinking about different use indications like pairing beer with food, for instance, do you think there is an opportunity just to gain more share of throat from other beverage alcohol? So maybe there's a chance to reclaim some of the ground that was lost to wine and spirits?

I do believe that. I think better beers in general and craft beer in particular, have some of the same consumer appeals, as well as retailer appeals that wine and spirits have. They have variety. They have heritage and authenticity. They have a higher flavor profile and maybe less refreshment, but more flavor. In some ways, I think Craft Beers are kind of at the leading edge of either taking share from or preventing share loss to wine and spirits.

And just one last question. With -- with -- I guess the uptick in prices in barley and hops, I'm assuming some of it is, they're harder to get? And so is there a risk that the raw materials needed to provide or produce better beers might be in short supply? And so, there's not enough demand to make enough high-quality beer in the near-term?

I'm going to let Martin --

Yes, hi, Brian. I think the simple answer to your question is no. Obviously what's going on the sort of barley side is the pressure from corn and ethanol production and corn feed prices. But ultimately you can get malted barley if you're willing to pay the appropriate price. It is really a pricing issue as opposed to an availability issue. At least for us. That may not be the same for smaller players, but certainly for ourselves and I would imagine the other big global brewers, that are able to lock up their needs on an annual basis.

With regards to hops, we are heavily dependent on some pretty small brewing or upgrowing regions of Germany, where our noble hops are grown. And last year's crop was just particularly weak, both in yield per acre and also in brewing value per acre, which has resulted in us using even perhaps more pounds of hops than we would have historically done per barrel of beer. And the net result is -- is that a large number of the global brewers who do use hops from those regions are -- have shortages of those hops. I think in the past when this has happened, everyone has sort of balanced which hops they used and found ways through it. We are very dependent on this area and we've basically gone forward into future contracts to try and reserve our position in line for future years. We would certainly like to see a favorable hop crop in Germany this year, but we think we can survive another bad one. As we look forward, we're always evaluating what our alternatives would be, if it continues to be three years of, 10-year, 20-year bad crop.

Okay, thanks again, guys.

There are no further questions at this time. I would like to turn the call back over to Bill Urich for closing remarks.

Thank you, everyone for joining us. We will see you at the next quarterly earnings call.

Thank you.

Thank you.

This concludes the presentation. You may now disconnect, and have a great day.