Boston Beer Company Inc (SAM) 2009 Q1 法說會逐字稿

Good afternoon, my name is Tasha, and I will be your conference operator today. At this time, I would like to welcome everyone to the first quarter 2009 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions). Thank you.

I would now like to turn the call over to our host, Mr. Jim Koch, Founder and Chairman. Please go ahead, sir.

Thank you, Tasha. Good afternoon, and welcome. This is Jim Koch, Founder and Chairman, and I'm pleased to be here to kick off the 2009 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 introductory comments, and then I'll hand the microphone over to Martin, who will provide an overview of our business. Martin will then turn the call over to Bill, who will focus on the financial details for the first quarter. And immediately following Bill's comments, we'll open the line up for questions.

We reported first quarter depletions decrease of 5% compared to the first quarter of 2008, adjusted for comparable selling days. Our depletion trends during the quarter softened, as we were faced with both increased competition and adverse economic pressures affecting our drinkers and retailers. B

Based on information currently available, we believe our depletion trends in April improved, as compared to our first quarter trends, even after considering the impact of the product recall in April of last year. And we remain positive about the long-term prospects for our category and for our brand.

We believe that the quality of our beers, our innovation capability, and our sales execution, coupled with our strong financial position and ability to invest in growing our brand, position us well for future growth, as conditions improve.

I will now pass over to Martin for a more detailed overview of our business.

Thank you, Jim. Good afternoon, everyone. As we started 2009, we experienced some slowing of trends in our brands. We appear to be simultaneously suffering from some trade-down due to economic conditions, decreases in inventory levels at retailers and wholesalers, declines in the promotion activity at retail for Better Beer's relative to premium and sub-premium brands, and increased competitive activity through new products and geographic expansion.

Having grown faster than the category for several years, we think we are being more impacted by these factors than some of our competition, who are still benefiting from increasing distribution of primary and secondary styles. We have adjusted our activities accordingly to focus on efficient brand investments and improving retail execution.

During the quarter, we raised our prices slightly to partially offset the significant cost pressures we have seen over the last 12 months in our traditional brewing ingredients and in our packaging materials. In the last two years, we have seen above-inflation price moves from most crop brewers that have not been universally matched by all competitors. Our crop beer is now priced at parity two or higher than the major import brands, reflecting our higher costs.

We are unlikely to see our cost pressures ease until the end of the year at the earliest, and are monitoring appropriate price activity based on our long-term goals and competitive actions.

Looking forward, we feel we are in a good position to compete effectively through the strength of our brand and our sales force. Furthermore, we are prepared to forsake some earnings in the short-term in order to make appropriate investments in brand-building activities to position us well for future growth.

Our Pennsylvania Brewery continues to brew superior quality beer and we have been able to transition production from our contract brewers, and continue to supply our drinkers without disruption. Our brewing there has not yet reached its full potential, as the packaging services agreement with Diageo ended on May 2, 2009.

We do not believe we will know the full impact of this brewery on our costs until the end of the third quarter, which will be our first full quarter with no contract volume. The major investments necessary to upgrade the facility have been completed. And we saw some promising signs of efficiency and cost improvements late in the first quarter.

We are now focused on projects that will drive efficiency and increase productivity to bring this brewery's economics closer to what we had planned and to maximize capacity.

Year-to-date depletions reported to the Company through April 2009 were down approximately 2% from the same period in 2008, with one less selling day in 2009. Shipments and orders in hand suggest that core shipments year-to-date through May 2009 will be down approximately 4% compared to the same period in 2008, after adjusting the 2008 shipments for the total volume credited to wholesalers for the product recall during 2008.

We believe we are seeing inventory reductions at wholesalers and retailers compared to prior years that could be depressing the year-to-date shipments ordered in-hand and depletion numbers. And the shipments and orders in-hands are generally consistent with the depletion trends.

Considering those inventory adjustments, shipments for the full year should more closely mirror full-year depletions trends. Actual shipments may differ and no inferences should be drawn with respect to shipments in future periods.

Now Bill will provide the financial details.

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

We reported net income for the first quarter of 2009 of $1.4 million or $0.10 per diluted share, an increase of $5.1 million or $0.37 per diluted share from the first quarter of 2008. The increase is largely due to the fact that we incurred $15 million of costs in the first quarter of 2008 for the product recall, partially offset by increases in 2009 in the cost of goods sold, and general and administrative expenses.

Core shipment volume for the three months ended March 28, 2009 was approximately 382,000 barrels, a 4% decrease versus the same period in 2008. Excluding the impact of the product recall, core shipment volumes decreased 13% versus the same period of 2008.

Our first quarter 2009 gross margin of 47% is consistent with our fourth quarter 2008 trends. This 47% gross margin represented an 8 percentage point decrease from the 55% gross margin realized in the first quarter of 2008, excluding the impact of the product recall.

The decrease was primarily due to increases in cost of package material and brewing ingredients, and the impact of lower margins under the Diageo co-pack agreement, which were partially only offset by price increases of 3% on core products. We expect that our gross margin percentage for the full year may be below the 2008 gross margin we realized before taking into account the impact of the recall on the 2008 gross margin.

Advertising, promotion, and selling expenses decreased by $5.6 million during the quarter as compared to the prior year, primarily as a result of decreases in freight expenses for shipping beer to wholesalers, driven by reduced fuel costs as well as reduced advertising expense and more efficient purchasing of media in the first quarter of 2009.

General and administrative costs increased by $1.8 million during the quarter as compared to the prior year, primarily as a result of startup and recurring planned administrative costs related to the Pennsylvania Brewery, as well as approximately $600,000 in impairment of long-lived assets at the Pennsylvania Brewery, resulting from the replacement of equipment that was not yet fully depreciated in order to improve efficiencies of the brewery.

We recorded a tax position in the first quarter of $1.4 million compared to a tax benefit of $2.8 million in the prior year. We currently expect our full year tax rate to be approximately 44%.

Consistent with our earnings release on March 10, 2009 and based on information which you are currently aware, we are projecting 2009 earnings per diluted share to be between $1.40 and $1.70, but actual results could vary significantly from this target. The current conditions make it difficult to predict what full year volume trends for shipments and depletions will be.

We are committed to maintaining volume and healthy pricing, and are prepared to invest to accomplish this, even if these investments cause short-term earning decreases.

We continue to evaluate 2009 capital expenditures and now expect them to be between $15 million and $25 million. This amount includes approximately $7 million of carryover projects committed to in 2008 at the Pennsylvania Brewery, and mostly completed during the first quarter of 2009.

We are focused on projects that will increase efficiency and productivity at our breweries. Decisions as to which projects will actually be undertaken will depend in part on their projected returns on investment. Accordingly, actual 2009 capital expenditures may well be different from these estimates.

We expect that our cash balances as of March 28, 2009 of $4.1 million, along with future operating cash flow and our unused line of credit of $50 million, will be sufficient to fund the future cash requirements.

We continue to be in compliance with all of our debt covenants and we have affirmed the availability of our line of credit. We have not borrowed any funds under the line of credit, and the timing of future borrowings will depend on the timing of inventory purchases and capital expenditures. We may use a line of credit at some time in the next 12 months, as we continue our capital investments and have seasonal inventory changes related to hops purchases and other timing issues on certain payments.

We currently anticipate ending 2009 with no outstanding borrowings under our line of credit, and do not expect to incur any other debt.

We will now open up the call for questions.

(Operator Instructions). Andrew Kieley, Deutsche Bank.

Martin, I just wanted to start with the volume outlook. If I look at the year-to-date number that you have in the release, it seems like the trend, the depletions trend is getting slightly better in April. And I was wondering, is that a function of the underlying trends getting better? Or is that just a function of April being very weak last year because of the recall?

Andrew, it's a great question. I think -- we're looking at very small differences in trends and numbers, and actually trying to understand exactly how the depletion number in April was reported last year, because of the recall, is sort of tough. And one month does not make a trend.

But I think what we're comfortable saying is that during the quarter, we saw some deceleration of trends, continuation on from Q4. And that as best we can tell, April does not reflect a continuing weakening of trends. I think we're a little uncomfortable coming out and saying that April represents a bottom or a turnaround, just because the numbers are so difficult to read.

Okay. And then just trying to read through all the differences that we had with the core shipments and the inventory adjustments, but do you think that the timing of shipments is going to help the second quarter number relative to where depletions are? Is there any major timing issue on the shipments that we should be aware of for second quarter?

Not that I'm aware of. I think what we're trying to communicate is that based on the numbers available to us and our own visits into the marketplace, we've seen a decrease in inventories at wholesaler and retailer, which would explain why our shipments are lagging.

But as we look forward to the rest of the year, we'd expect our shipments and our depletions to more -- be evenly balanced. I think for the full year, whether our shipments would come back up to depletion levels would be largely based on where the wholesalers build their inventory levels back up to more normal levels. And that will be a function of, obviously, the economy and how their own finances are working.

So I'm not sure I would count on that; but we would certainly expect going forward, that shipments and depletions should be more equally aligned.

Okay. Because I -- on the last call, you were talking about you weren't seeing the same build going into the summer season that you typically would. Is that still the case?

Yes, that's still the case. I think the last call was middle of March and nothing's really changed. I think we believe that inventory levels at wholesaler are lower by a not-insignificant amount than they were this time last year, on an actual basis as well as on a comparable basis to what the sales trends are.

And I think while it's hard to put a finger on, we suspect that inventory and retailer is the same, and that would explain the difference that we've seen in the last six months between orders and depletions.

Okay. And then just changing gears on pricing -- the 3% pricing in the release, is that the core product pricing?

Yes, it is.

Okay. And then just one for Jim. Respectful of the need to protect the brand equity, do you think that pricing is holding you back here in volume terms? Do you think you need to start focusing more on getting volume going, given the added fixed costs that you have now with the new brewery, and given that some of the import brands are promoting more?

Well, we feel like our pricing is in the right place at this moment. The underlying cost trends really forced us to pass along at least some of those cost increases. And we didn't get all of them passed along. That does mean that we have raised our prices faster than the major imported brands that consumers also drink alongside Sam Adams, and faster than some of the craft competitors.

But in the long run, we feel we needed to do that and that we are at the appropriate price point. And with that being said, we will be monitoring this going forward. And if we feel like we need to make adjustments because of pricing action from others, in order for Sam Adams to remain competitive, we'll look at that. And we might make a different decision. But right now, we're comfortable with the price increases that we've achieved based on the cost increases that we had to pass through.

Okay. And maybe just one more for Bill. I noticed in the release that the cost guidance that you had previously given us, the 7% to 9% is no longer there. Does that still hold? Or has that expectation changed?

Well, I think we're focusing on the margin, so we were still at the margin level of last year. And I think we believe that we may be able to hold that margin level or slightly below that margin level.

For the full year?

For the full year.

Okay, thanks very much.

James Watson, HSBC.

A question about some costs in the quarter. You guys had a large SG&A savings. I was wondering if, well, first, is that -- what we were looking at in the first quarter, is that something you would consider an appropriate run rate for the year? I mean, do you see that sort of ad rate savings all year and the shipping cost savings all year?

James, it's Martin. One of the drivers behind the reduced SG&A was a reduction in selling costs. And we account, in our selling costs, outbound freight, because we pay our own freight. And obviously, that was down both because the volumes were down but also because the freight rates were slightly more favorable. And that was probably one of the biggest drivers.

The other factor going in was -- we typically buy media upfront committed for a year and have options to cancel some portion of that. As we entered a trigger point last Q4, where we had to make some decisions on Q1 media investment, it was right as all the uncertainty over the economy was sort of bubbling over in October of last year.

And we elected to take some of those options to cancel some Q1 media. So our Q1 media spend was lower than it was planned. And we did that primarily because we just did not have any great vision as to what our volumes were going to do and, indeed, what the general economic situation was going to be. And we thought that was a prudent thing to do, to conserve cash.

As we look forward, we're not exercising those options at this point in time, or at least haven't, as we go forward. So the media spend will actually return to the level that it was planned, which was similar to last year, although we will benefit a little bit from lower media costs.

And then I think, as we indicate in the release, we're exploring and contemplating additional media support to support the brand as we enter the key selling months.

Great. Any idea what percentage of the reduction in media costs was cancellation versus lower rates?

I don't think that's something we've disclosed, James, but I think there's a little bit more information on this subject in the 10-Q, I'm looking for bill, which will be out tomorrow.

Okay, that's useful. I'll take a look at that. And just a question -- on the last call, we were talking about losing some shelf space and retailers, and that being a bit of a difficulty with the volumes. And I was wondering if that's still applicable and really what you guys have done in the last month or two, or perhaps are looking to do, to start to regain the shelf space and retailers?

Yes, let me respond to that. I think what we've seen is that we have continued to gain distribution points and shelf space, but not as fast as the overall craft category and the craft plus the domestic specialty beers from the big brewers. And basically, retailers have just allocated more space to that part of their Better Beers. And while we've gained more space, we've lost some bit of our share of that now expanded category.

And I don't see that continuing at the same rate as it has been in the last six months, though it's always hard to guess at that. But at some point, retailers are going to stop expanding that part of the high end of their category. And we have actually increased our overall distribution through this period, just not as fast as the whole craft and domestic specialty category has increased its space.

Great. And is the similar trends on-premise or off-premise? Are you seeing better in one versus the other?

The expansion of SKUs and of space has occurred at a higher rate off-premise than on. It's probably just easier to allocate your space around in an off-premise account, you can move shelves quite easily; but it's harder to drill new draft systems. So, we've seen that happening more in the off-premise channel.

And does that have mix effects on your overall numbers?

In what sense?

Driving overall pricing down, or overall margins down, if more of your volume shifts to the off-premise?

A little bit, because the pricing on kegs, which is our primary package on-premise, is lower on a per-barrel basis than the pricing for bottles, which is the primary package, almost the exclusive package off-premise. So yes, if our mix shifts on-premise versus off, there is a little bit of pricing effect because of the kegs versus bottles.

Okay. That's very helpful. Thank you, guys.

(Operator Instructions) Lindsay Mann, Goldman Sachs.

So, Jim, I wanted to go back to a comment you referenced in your opening remarks, where you said that you thought that the brand come under perhaps some pressure from increased competition. I was hoping you could just expand on who and where and how -- maybe not the who, but where and how you're seeing that play out?

Well, I think the double-digit growth that Sam Adams has experienced over the last three years has reinforced the attractiveness of the craft category. And some of the things that we've done over the -- starting 20 years ago, that have proved to be successful, like developing a line of seasonal beers; like developing a number of other styles of beer, we call it the Brewmaster's collection, have allowed us to perhaps grow faster than the craft category.

And now there is a bit of catch-up from other people who are adding their own seasonal lines and adding more styles to their product portfolios. So, we're seeing some of that, especially on the craft side. And then the attractiveness of this category has brought in entries from the two major breweries. So they've expanded there, I'll call them, domestic specialties, as opposed to craft.

Do you get the sense that some of the very promotional activity we're seeing among some of the key import brands is impacting Sam?

I haven't seen any clear empirical evidence of it, but I think it just stands to reason that some of the promotional activity that we're seeing, not only from imports, but from the mass domestic beers, has to have an impact on Sam Adams.

I have been in stores where after rebate, you can buy a 30-pack of a mass domestic beer for $7.99 and a six-pack of Sam Adams is $8.99. And when there's that kind of discrepancy between -- you can buy a 30-pack of one beer for less than a six-pack of another, I have to believe that there is some effect on our volume.

Okay. And the big changes we've seen in terms of industry consolidation among the major brewers this past year, is there any way that you feel that that's impacting your business, whether it be on the distributor side, supplier, or retailer side?

I'd have to say that it's hard to believe that it won't have an impact eventually, but right now, the dust really hasn't settled on that. And we haven't seen any fundamental shifts in the environment in which we operate that have resulted from these two changes in consolidations. So, not yet, but the dust really hasn't settled.

Okay. And then following on a question on your fuel expense, Martin, I remember -- I guess in a prior conference call, you had said that you were anticipating perhaps higher fuel costs because you were shipping further distances with the newer brewery. Is that -- am I remembering that incorrectly? Or is the pullback in lower oil prices enough to totally offset that drag?

I think what we said previously was that the implicit freight subsidy that we were receiving from Miller for our West Coast business ended in October of last year. And therefore, we were then going to be paying the freight for our beer to get from its eastern production locations to the West Coast.

So we're certainly seeing that increase, because we're shipping beer more miles than previously we were paying for, because of that Miller subsidy. So I think net, our freight costs are up, but that being said, we have seen some benefit relative to this time last year from the lower oil prices.

And we're actually quite surprised by the freight rates we've been able to achieve out of our Pennsylvania location that have exceeded our estimates in the favorability to the West Coast and are helping to off-mitigate some of those increases.

Okay. And then lastly, just -- obviously, the quarter is pretty noisy because we're lapping the recall. Beyond the impact to shipments and perhaps depletions from the lumpy timing of the recall, are there any other areas of the P&L where perhaps you're getting fixed cost leverage or deleverage from lapping those -- the lumpiness of the volumes, that we should be aware of?

Not that I can think of. I think we're still working through exactly what the costs of the Pennsylvania Brewery will be. We've got the contract volume in the first quarter that goes through May, that makes it complicated.

And indeed, until we get clear of that and have an opportunity to stop the brewery and run it as just a brewery and not as a co-pack facility, we won't have good leverage. But obviously, the brewery has fixed costs that are -- perhaps didn't exist in our prior contract environment. So that's just one thing to think about.

Okay. And then -- sorry, just -- this is really the last one. You mentioned that May shipments are down 4% adjusted for the recall last year. What are they unadjusted?

I think what we said was that orders and shipments through the end of May are down 4% versus what the number last year for the same period, after netting out all of the credits for recalled product. So that's the number we've disclosed.

We think that's the fairest way to present the number. If you were to add back in the total credit -- volume credits for the recall for the year, you'd also get a higher number. And I'm just waiting for someone in the room to come up with it.

(Operator Instructions).

Yes -- Lindsay, we don't have that number in the room. I think if you were to look at our reports last year, I think you can work out what the total volume credits for the wholesalers were, and you can probably back into it.

You do have a follow-up question from Andrew Kieley with Deutsche Bank.

Martin, there was some news -- I just wanted to ask you about the New York bottle issue. There was some news that you would be raising prices to cover the cost of that program. I was wondering if that was still the case? And that being a big state for you guys, do you see that as an obstacle for the rest of the year?

Sure. Maybe for other people on the call who aren't aware of the background, New York passed a budget bill that included some provisions in it related to bottle deposits and initiating bottle deposits, and the state both claiming unclaimed bottle deposits, which are typically called escheating. And then also requiring bottlers to have a unique UPC code for packages that are shipped into the state or sold in the state that's unique to New York.

Let me take each of those aspects and comment on them separately.

We do initiate bottle deposits for the state of New York because we have, for a long time, had a program of retrieving those bottles and recycling them as part of both our environmental sort of contribution, but also because it was good business. As such, we had kept the deposit escheating as it relates to New York. And that was part of the economics that supported the sourcing and the washing and the re-use of those bottles.

The change in the way that New York proposed to treat that escheating and to have 80% of it remunerated to the state would be a significant cost increase to us. And it is also affecting our wholesalers on the products where they initiate the bottle deposits.

So it's a very big change in economic contribution from that effort and we are evaluating exactly how to proceed on it. Our initial communications to the wholesalers, which I think got republished in some parts in some of the trade magazines, was that our initial reaction was to take a cost increase so that we could continue to pursue that endeavor and to re-use the bottles. That's our initial reaction.

And as the final details of the bill and the timing of the bill, and all the other things that are being talked about in New York, get finalized, that may change. But we talked about increasing our pricing in New York. And our belief is that many of our competitors or, indeed, the wholesalers may follow suit because of the significant change in the economics of doing business in New York as a result of this measure.

Secondly, on the unique UPC code. It, quite frankly, will be very expensive to have a unique UPC code for New York for smaller packages and smaller runs, of which we obviously have many. And we're waiting for New York to finalize exactly what their requirement is going to be; but we have heard some noises that they're at least looking at what the costs are to everybody following through on this proposition.

And I think a number of competing brewers have indicated plans to basically discontinue some of their small SKUs in the state. And while we haven't committed to that, that's certainly part of our thinking.

Okay, thank you.

(Operator Instructions). There are no audio questions at this time.

Okay, great. Well, we appreciate everyone's attendance and we look forward to chatting to everybody end of July, beginning of August, after hopefully, a clean quarter.

Thank you. This concludes today's conference call. You may now disconnect your lines.