Boston Beer Company Inc (SAM) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2007 Boston Beer Company earnings conference call. My name is Tonya, and I'll be your operator for today. At this time, all participants are in a 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 presentation 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 kickoff the 2007 second 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'll open the line for questions.

We achieved 16% depletions growth in the second quarter. This was our sixth successive quarter of double digit growth. We believe these results are driven by drinkers trading up to our full flavored craft beers and by increasing retailer and wholesaler support for the craft category and Samuel Adams. This is a great time to be an American beer drinker due to the variety and availability of so many great craft beers. I believe that the quality and variety of distinct beers that Samuel Adams brews positions us well to meet these drinker tastes.

We recently announced the entry into a contract of sale for the Lehigh Valley Brewery in Pennsylvania just outside Philadelphia. We're excited about this agreement and look forward to exploring during the due diligence process the full costs of starting up this historic and award winning brewery where we brewed some of our beers from 1994 to 2001. I'll 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 second quarter. Our second quarter depletions growth reflected double digit growth in the Samuel Adams brand family, offset by a slight decline in the Twisted Tea brand family. Our Samuel Adams brand continued to benefit from increased drinker interest, increased retailer support, and the hard work of our wholesalers supporting our retail initiatives. We believe that our Samuel Adams brand health continues to benefit from our significant brand support investment in media, our own salesforce, points of sales materials and promotions, and we continue to evaluate incremental investments in order to maintain our leading position in the craft category.

Twisted Tea brand family depletions declined slightly in a very competitive flavored beverage category with several new tea entrants in the first half of 2007. We expect the remainder of the year to be very competitive but we are encouraged by Twisted Teas resiliency and we plan to continue to invest in the Twisted Tea brands to improve our position.

The Samuel Adams depletion growth achieved in the second 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 butter beer, more flavorful beers and in variety. The strength of the Samuel Adams brand family trends during the quarter suggests that Samuel Adams continues to maintain strong brand equity with these drinkers. We believe that maintaining strong brand equity in the Samuel Adams brand is vital to the continued health of our business and we 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 our net revenue per barrel for core products for the quarter by approximately 2%. During the second 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. During the quarter we continued to maintain a strong balance sheet with adequate cash positions to support our business strategy. On August 1, 2007 we entered a contract of sale to purchase from [IGA] North America a brewery located in Lehigh Valley, Pennsylvania for 55 million. We have a due diligence period during which to fully evaluate the brewery and its potential and until such evaluation is complete it is impossible to estimate precisely the total cost and impact.

As Jim mentioned we are excited to start that process and we currently believe the brewery will be an efficient solution to our long term supply needs. Until we are satisfied with our evaluation we will continue to evaluate and hold open other options. As we have discussed previously, we have been assessing the viability of constructing a brewery in the Northeast and secured an option on a site in Freetown, Massachusetts. But as the probability of proceeding on this site has significantly decreased due to entering into the contract of sale with Diageo for the Lehigh Valley Pennsylvania brewery we determined that it is appropriate to write-off $3.4 million, the amount capitalized to date on the Freetown, Massachusetts project not related to the purchase of the land.

We currently anticipate preserving our right to purchase the land in Freetown, Massachusetts in case the due diligence on the Lehigh Pennsylvania brewery proves unsatisfactory. This may require further extensions of time for closing under the purchase and sell agreement or actually closing on the purchase of the land in Freetown, Massachusetts. If the due diligence is unsatisfactory on the Lehigh Valley Pennsylvania brewery, the due diligence costs associated with the Lehigh Valley Pennsylvania brewery would be required to be expensed.

During the quarter we began brewing and packaging some of our beer in Latrobe, Pennsylvania under an agreement with a wholly owned subsidiary of City Brewing. We have invested in Latrobe to upgrade the brewery to provide for Samuel Adams traditional brewing process, use of proprietary use, and extended aging time, and beer bottling and kegging. This has a positive impact on our brewing factorability. We have experienced some issues at our Cincinnati brewery that we feel we can and should address through additional maintenance and upgrades through equipment and processes. The addition of Latrobe should provide the capacity to allow for additional Cincinnati shut downs as such improvements are implemented.

Our shipments and orders in hand suggest that core shipments for the nine months ended September 30, 2007 could be 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.

July 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 half have not fully cover our increased costs we are pleased that our depletions have maintained the momentum post-price changes and believe that we're on track to implement net price increases of approximately 3% during 2007. Looking forward, we remain confident that our full year depletion growth will continue in the double digits. We continue to be optimistic about pricing but remain pessimistic about cost pressures particularly for volume, hops, and glass. We continue to work to maintain or improve our gross margins in this difficult cost environment. While we believe that it's the leading cross brand we're well positioned in the better beer category we anticipate increased competition and matching first half 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 $0.46 per fully diluted share in the second quarter of 2007 as compared to $0.56 for fully diluted share in the second quarter of 2006. This decrease in earnings is primarily a result of the write-off of brewery costs, increases in cost of goods sold, selling and advertising expenses and general and administration expenses partially offset by an increase in net revenue. For the second quarter of 2007, Boston Beer recorded net revenues of $92.9 million or a 17.1% increase over second quarter 2006. This increase is primarily a result of the 14.6% increase in core brands shipment volume and an increase in net revenue per barrel. The 2% increase in net revenue per barrel of core brands is primarily due to price increases offset by a shift in package mix from cases to kegs.

The increase in shipment volume could be attributed primarily to increases in Samuel Adams Seasonals, Samuel Adams Brew Masters Collection and Samuel Adams Boston Lager. We believe that wholesale inventory levels at June 30, 2007, were at appropriate levels.

Gross margin as a percent of net sales was 56.8% in the second quarter of 2007, down 2.5 percentage points from the 59.3% reported in the same quarter last year. This decrease in gross margin was primarily due to cost increases related to higher ingredient and package mineral costs and a slight shift in product mix. Advertising, promotional, and selling expenses increased by $3.3 million during the quarter as compared to the prior year, primarily due to increases in freight expenses to wholesalers, advertising, and promotional costs. General and administration costs increased by 700,000 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 42.4% from the 2006 rate of 39.4%. This was primarily a result of a trueup in federal income taxes.

During the three months ended June 30, 2007, the Company did not repurchase any of its Class A common stock. We now expect earnings per diluted share to be between $1.42 and $1.70 after accounting for the asset write-off in the second quarter, but absent any significant change in the currently planned levels of brand support. The earnings per share range estimate does not include further significant brewery expenses associated with the Lehigh Valley, Pennsylvania brewery or the evaluation of our other brewing options. Our ability to achieve these type of earnings growth in 2007 is dependent on our ability to achieve challenging targets for volume, price, and cost.

Consistent with our earnings release of May 8, 2007, we estimate total capital expenditures in 2007 to be between 17 and $21 million primarily driven by the need to purchase additional kegs to support draft business growth. Keg purchases are higher than planned due to the faster volume growth rates, higher throughput cost and potentially higher keg losses. This estimate includes an investment between $3 million and $7 million in the Latrobe brewery to support the restarting of the historic brew house and modifications to accommodate our beers. Consistent with our committment to the brewery, we are discussing the possibility of acquiring an ownership interest in the Latrobe Brewing Facility. This capital expenditure estimate does not include the amounts payable for the purchase of the Lehigh Valley, Pennsylvania brewery. The possible purchase of the land in Freetown Massachusetts. Nor does it include any major investments that maybe recur at the Cincinnati brewery or that might result from the evaluation of our long term production strategy. Our capital investment this year could be between 31 million and 48 million if our due diligence process on the Lehigh Valley, Pennsylvania brewery is concluded successfully.

This is Martin, and I just have a clarification to what Bill just said. The effective tax rate for the quarter increased to 42.4% and the 2006 rate of 39.4 and I think Bill misread he first instead of second quarter but that is actually second quarter data. I think we will now open up the call for questions.

Thank you, Martin, open the call for questions, please.

(OPERATOR INSTRUCTIONS) Our first question comes from the lion Andrew Kieley with Deutsche Bank. Please proceed.

Hi, good afternoon, everyone.

Hi, Andrew.

Hi. Just a point of clarification on the revised EPS guidance, so that would include the write-off of the Massachusetts evaluation costs but not any incremental promotional spending?

That's correct.

Okay and we're also not including any cost for the potential new costs from the Pennsylvania brewery?

That's correct.

Okay. Secondly, when you're talking in the release of continuing to evaluate appropriate level of CapEx, does that simply refer to improvements that might be needed in the Cincinnati facility or are you considering a sustainable higher level of run rate CapEx into the future?

Andrew, it's Martin. I think it includes a number of factors including the projects that we're contemplating in Cincinnati including kegs are required to support our growth rate and keg prices have increased significantly with stainless steel prices and obviously our growth requires the addition of keg flow but it also includes other ongoing capital costs at other facilities, IT costs, and certainly as we look forward, potential capital costs at Lehigh.

Okay, great and is there a way to quantify what the impact of the disruptions in the Cincinnati facility this quarter were or did you have to shift production over to Latrobe or other facilities because of that?

I'm not sure we're in a position to quantify. I think we just identified that that having run the brewery 24-7 for quite a long time in support of our business, it's time to spread that capacity around a little bit and make sure that we make the needed upgrades to Cincinnati.

Last question I had, the release talking about the plant purchase from Diageo, talked about ability to start renovating the facility after due diligence process was over so does that imply that you would, assuming due diligence goes right that you'd start renovations around the fourth quarter to get online, producing in that facility by the second half of '08?

Well, let's see. We're not in a position to make any investments until the due diligence period is up and we've confronted Diageo with our intent to proceed with the transaction. I think it's possible that we could see some capital expenditures in the fourth quarter but until we complete the due diligence, it would be probably foolish of us to try and quantify that.

Okay, great. Thanks.

Our next question comes from the line of Andrew Sawyer with Goldman Sachs. Please proceed.

Hello, guys. First to Jim. I was kind of wondering, you mentioned this is your sixth straight quarter of double digit depletion growth and I'm guessing that you haven't had that happen since the mid '90s. I was wondering if you could maybe walk through how this feels different or the same relative to the type of growth rates you were seeing at that time?

Well, in the mid '90s, you had just a flood of new entrants among craft brewers and new drinkers who had never been exposed to craft beer. This time, it feels a fair bit different. I think my colleagues in the craft brewing industry are much more seasoned. The sort of flakes and wing nuts that came in in the mid '90s have shaken out and you have very solid professional Brewers and business people involved in the industry for the most part. Most of whom have 10 years more experience than last time. And on the drinkers side, you have people who have been around craft beer for many years, and for the younger drinkers, they don't remember a time when there was no Sam Adams, so it's not novel. It feels like the attraction is more profound. It's a less flighty, probably more permanent and it feels like it's got some years to run through the cycle.

As you look at your demographics, you used to always say that the average Sam drinker drinks, as a sampler they drink five or six different beers in their collection set or even bigger numbers than that. Are you finding that your growth is coming from increased occasions among existing drinkers or do you think you're really drawing in a lot of new drinkers?

Well, anything I'd say at this point is a guess. The research isn't that solid. I would have to guess that we're getting both, that we are getting revived levels of interest and the millenials are finding craft beer exciting again. I guess that a bigger part of it comes from people who drank a little bit of craft beer but now, they're increasing their consumption because there's a lot more good beers and craft beer is hot and the idea of quality and flavor and taste is quite appealing to younger people.

And then just one last question on this topic. I was wondering if you could maybe talk a little bit about why you think it is that the craft segment seems to have taken a lot of the momentum away from the import segment and how that dynamic seems to be playing out?

Well, this is just kind of speculation on how karma is working here. The imports had a pretty good long run, nearly 10 years of very strong growth and in some ways that probably pulled in most of the people they were going to get. Since I started 23 years ago, there has been some sort of rhythm of when I started imports were hot and then they stopped growing in '87 and didn't grow for probably another seven years as craft beers took off and then in '97, the momentum swung to imports and then sort of seven or eight years later it swung back to craft beers so the cycles have been more than just a couple of years and I'm cautiously optimistic that we have a significant number of years of growth and don't know if it will be double digits.

All right, thank you very much, Jim and then a quick one for Bill or maybe not so quick. As I look at your numbers, if you add back the charge, the mid point of your guidance range has gone up almost $0.20 or so. I guess I have two questions, one I was wondering where in your forecast that's coming from? And second I was wondering why you widened the range out so much at this point in the year?

Yes, Andrew, I think that we feel very positive, but there are a lot of unknowns as we move into the year, depletions cycling on pretty significant growth last year. We still have a variety of brewing options open so there are a number of unknowns and we felt that it was prudent to widen the range if everything goes so to speak our way, that it may be one way and if things are more conservative it may be others so we really don't know at this time and that was the reason.

Thanks very much, guys.

Andrew, if I could add, I just think to Bill's comment, as we look out for the year because we have so many moving pieces right now, that we found it very difficult to provide good guidance and that explains the range, just there were so many moving pieces in things that are going on that it was very difficult for us. And then just commenting on Jim's thoughts, I think we do feel good about where we are right now, but none of us really knows what the future holds and we would not want it to lead anyone astray by predicting our future years.

I was going to flow through 15% volume growth into perpetuity.

Thanks very much, guys.

I'm hoping you don't expect us to comment on that.

(OPERATOR INSTRUCTIONS) Our next question comes from the line of Brian Spillane with Banc of America Securities. Please proceed.

Good afternoon, guys.

Hi, Brian.

I think all of the flakes and wing nuts are probably trying to think of the next flavor of flavored vodka at this point.

Yes, or Gin.

There you go. A couple of questions. First, I guess for Bill, if I understand the guidance, it implies that the second half you're going to have a pretty good ramp up in earnings growth, and I guess if you assume, if we assume that the midteens type of volume run rate holds, is there anything else that we should be thinking about in terms of the back half of the year? Do costs moderate that might help margins or is there something else below the operating line? Are you expecting something lower for the tax rate? I'm just trying to make sure I square in terms of how I get to the earnings growth that you're expecting in the back half of the year. That would be implied by the top end of your guidance.

Yes, I don't think it's been anything that we've indicated previously. We've still looking at trying to achieve 3% price increases. We have, as you see, cost increases that we don't believe are going to go away anywhere in the near future relative to cost of goods, and I think it's what we have predicted depends really on where the depletions are through the third and fourth quarter.

There's nothing that's really changed in terms of or you're not expecting anything to change in terms of your input cost basket in the second half versus what you saw in the first half?

Well, outside of the write-off of the Massachusetts brewery, I would say, no. I don't know, Martin?

It's possible we could see some depreciation from the capital projects that we're thinking about and we're still adding to the capital base through keg purchases, so I'm not sure that that's significant enough to impact anything in your modeling, but certainly as you look at our spending, our capital spend is still growing.

But no change in terms of input costs, things like glass, agriculture inputs, like that's roughly that you're expecting the same sort of trends in the second half relative to the first half?

Well, we are experiencing as I think we alluded to some pressure on barley and on hops and at this point in time it's unclear how it's going to flow through to us because the crops are yet to be harvested and the quality of those crops is yet to be determined, but certainly, I think our gut feel is those cost pressures are upwards.

And then the Diageo facility, are they currently making Smirnoff Ice and their ready to drink products there?

Yes, I would be uncomfortable telling you what they're making there. I would be comfortable telling you that they are running.

Okay.

And that I think we have disclosed that if we do enter into -- if we do close the transaction that we will have a contract back to Diageo for the production for some of those products that you mentioned.

Okay and then finally, Jim, I think on the first quarter results call we talked a little bit about just the competitive environment and the idea that you've got, Bud is certainly spending more money now in the better beer space and Heineken has done the same and now you've had, I guess a half a year of seeing what the Crown joint venture will look like. Can you just talk a little bit about just what you've seen in the marketplace, if you have seen any difference in terms of more money being spent or is it becoming more competitive to get tap handles? Just how you're seeing that increased level of attention in the better beer space sort of show up in your day-to-day?

Yes. Well, I think as the growth momentum has shifted to craft beer, on one hand there's more opportunities for taps and retailers and wholesalers are more interested and on the other there is more competition, and this is an extremely competitive industry on an every day basis all the way down to the Street level, and the competitors that we face every day are very very good. The craft brewers have gotten much better over the last 10 years, and the big players in this industry are enormous. They tend to be 100 times our size, and some of them are, some of the great global marketing powerhouses, so yes, it feels pretty competitive.

All right, thanks, guys.

Your next question comes as a follow-up from the line of Andrew Sawyer.

I just have one quick one. Regarding the potential to make a further investment against your brands, what kind of timing and what are you looking at as you evaluate that decision and if possible, are you thinking more media, more salespeople, and how should we frame that up?

Hi, Andrew, it's Martin. I think as we've indicated we're always trying to evaluate what the most efficient spend for our money is both in terms of the vehicle for that spend or indeed the content of that spend if it relates to media. I think we've expressed before that we're pretty happy with our Take Pride, and our BRTV campaign and certainly among the options that we're considering are further investment in that, further investment in like non-TV media along the similar lines. We also continue to evaluate the addition of people with the growth that we're experiencing, so markets can now support people that perhaps didn't. So I think it's probably fair to say that all of those things are are options and at this point in time, we haven't committed as to where our number one priority is.

Thank you very much, guys.

(OPERATOR INSTRUCTIONS)

There are no more questions?

Yes, we do have a question from the line of (inaudible) with Boston Beer Company. Please proceed.

Actually it's with [Skurdie Capital], but hi, guys. Good quarter.

Hi.

Was going through the press release and just had a question about, was hoping you could talk a little bit about what exactly is going on in Cincinnati with the brewery there.

We just have been running the brewery 24/7 all summer and we're experiencing some production issues throughout some that we've struggled through and we have decided I think to take some planned maintenance shut-downs and address those issues, I think the Latrobe facility allows us to do that and until we fully evaluate what the needs are, we can't determine what the cost impact is.

Okay, and if I understand it correctly, any spending there that hasn't been factored into the CapEx guidance so that would be any further expense would -- is not basically part of that 17 million to $21 million that you're expecting to spend?

That spend is based on current knowledge.

Okay, perfect. Thank you.

Thank you.

There are are no further questions at this time.

Okay, thank you, everyone, for joining. We'll talk to you in the next call.

Thanks.

Thank you.

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