Boston Beer Company Inc (SAM) 2009 Q3 法說會逐字稿

Good afternoon. My name is Cynthia, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Boston Beer Company's third-quarter 2009 earnings release 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.

It is now my pleasure to turn today's call over to Mr. Jim Koch. Please go ahead, 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 2009 third-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'm begin my remarks this afternoon with a few introductory comments and then 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 third quarter, our outlook for the rest of 2009 and our initial outlook for 2010. Immediately following Bill's comments, we'll open the line up for questions.

Our 6% depletions growth in the third quarter exceeded our expectations. We believe that these results continued the improved trends that we began to see towards the end of the second quarter. While trends have improved, we continue to face increased competition from expanded distribution of domestic specialty brands and from regional craft brands. We're happy with our sales execution, our brand strength and our position within the craft category and remain positive about the future of craft beer and our potential for future growth.

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

Thank you, Jim. Good afternoon, everyone.

As we stated in our earnings release, some of the information we discuss in the release and that may come up on this call reflect the Company's or management's expectations or predictions of the future. Such predictions and the like are forward-looking statements. It is important to note that the Company's actual results could differ materially from those projected in such forward-looking statements.

Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained in the Company's most recent 10-K and 10-Q. You should also be advised that the Company does not undertake to publicly update forward-looking statements, whether as a result of new information, future events or otherwise.

During the third quarter, we experienced an improvement in our underlying brand volumes. The brands may have responded positively to the redesign of our packaging and the increased investment in media advertising and our sales force. But it is also possible that some of the drinkers of the competitive variety introduced in the last 24 months may be returning to our beers.

Looking forward, we have no certainty that these trends will continue, but we intend to continue our increased investment in sales activity levels. We feel we're in a good position to compete effectively through the strength of our brand and our sales force and are currently projecting that we should finish the year with depletions growth of approximately 2% to 3%.

Our Pennsylvania brewery continues to brew great Samuel Adams beer and has now completed its first full quarter dedicated solely to brewing our products. Our gross margins improved again, as the Diageo contract volumes were very low margin. We have also seen some efficiency gains as the brewery focuses on brewing and packaging beer. The third-quarter costs also benefited from increased utilization of capacity relative to prior quarters.

We believe we're on the right track to bring the Pennsylvania brewery's economics closer to what we anticipated and to increase capacities to support future growth. We are focused on a multiyear program to identify and execute projects that will continue to reduce costs and drive efficiency and increase productivity at both our Pennsylvania brewery and our Cincinnati brewery.

Looking forward to 2010, we expect that continued improvement in the efficiency at our breweries will contribute to improved gross margins compared to 2009 but that this will not return us to the gross margin levels experienced prior to 2006, due to the significant increases in brewery operating costs and packaging ingredients costs experienced since 2006.

Year-to-date depletions reported to the Company through October increased approximately 2% from this same period of 2008, with two fewer selling days in 2009. Shipments and orders in hand suggest that core shipments, year to date, through December 2009, will be up approximately 1% 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. Actually shipments may differ and no inferences should be drawn with respect to shipments in future periods.

We believe inventories at wholesalers at the end of the third quarter were at appropriate levels given the current volumes and trends.

Now Bill will provide the financial details, our outlook for the rest of 2009 and our initial outlook for 2010.

Thank you, Jim and Martin. Good afternoon, everyone. We reported net income for the third quarter of 2009 of $10.4 million, or $0.72 per diluted share, an increase of $10.7 million or $0.74 per diluted share from the third quarter of 2008.

The increase in net income is primarily due to increased shipments and improved gross margin, lower advertising, promotion and selling costs, driven by lower freight costs but offset by increase in the provision for income tax.

Core shipment volume for the three months ended September 26, 2009, was approximately 538,000 barrels, a 7% increase versus the same period in 2008. Excluding the impact of the product recall in 2008, core shipment volume increased 6%. Our depletions in the third quarter increased 6%, adjusted for comparable selling days.

Our third-quarter 2009 gross margin of 54% represented an increase of 10 percentage points over our third-quarter 2008 gross margin. That included the impact of the 2008 product recall and shortfall fees. Excluding the impact of the product recall and the shortfall fees in 2008, our gross margin has increased by 6 percentage points. This increase is primarily due to price increases, improved cost of operating our breweries, driven by lower energy costs, and the impact of the low-margin Diageo contract production in the third quarter of 2008, partially offset by increased costs of package materials.

Advertising, promotion and selling expenses decreased by $1.3 million as compared to the third quarter of 2008, primarily as a result of decreases in freight expenses for shipping beer to wholesalers, driven primarily by reduced fuel costs and the timing of certain marketing programs, offset by an increase in advertising and salary and benefit costs related to the addition of sales personnel.

We recorded a tax provision in the third quarter of 2009 of $6.8 million, compared to $0.9 million in the third quarter of 2008. We currently expect our full-year tax rate to be approximately 43%.

Based on information of which we are currently aware and our projection that depletions in 2009 will increase approximately 2% to 3% compared to 2008, we now project 2009 earnings per diluted share of between $1.75 and $2.05, but actual results could vary significantly from this target. This is an increase from our previous guidance of a range of $1.40 to $1.70.

We are committed to maintaining volumes and healthy pricing and are prepared to invest to accomplish this, even if these investments cause short-term earnings decreases. We currently expect 2009 capital expenditures to be between $14 million and $18 million. This amount includes approximately $7 million of carryover projects committed in 2008 for the Pennsylvania brewery and competed during the first half 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 be well different from these estimates.

Looking forward to 2010 based on information of which we are currently aware, we hope to increase revenue per barrel by 2% through minor frontline and deal-level adjustments and forecast stability on our cost of packaging and ingredients and continued improvement in operating cost at the Pennsylvania brewery. If successful, we could have full 2010 gross margins that are consistent with gross margin levels realized in the third quarter of 2009. While we continue to experience healthy pricing environment, there is no guarantee that we will be able to achieve the planned price increases.

We intend to increase investment in our brands in 2010, commensurate with the opportunities for growth that we see, but there is no guarantees such increased investments will result in increased volumes. We will provide further 2010 guidance when we present full-year 2009 results.

We are currently evaluating 2010 capital expenditures. And based on the current information, our initial estimates are between $15 million and $25 million, most of which relate to continued investments in the Pennsylvania brewery as we pursue efficiency initiatives. The actually amount of spend may be well different from these estimates as we continue to analyze our investment opportunities. Based on information currently available, we believe we could support growth in 2010 in excess of 10% without significant capacity expansion.

We expect that our cash balances, as of September 26, 2009, of $44.8 million, along with future operating cash flow and our unused line of credit of $50 million, will be sufficient to fund future cash requirements. We continue to be in compliance with all of our covenants under our credit facility.

We will now open up the call for questions.

(Operator instructions.)

Your first question comes from the line of James Watson with HSBC.

Good afternoon, everyone.

Hi, there.

Hey, James.

I had a few questions just first about the brewery -- the new Pennsylvania brewery.

One, just was there anything unexpected that you learned given the first quarter without Diageo, the contract brewing, compared to what we were thinking about last quarter?

James, no, I think that the brewery's performance in the quarter was sort of in line with expectations. Obviously, there's positive improvements in some areas and maybe disappointments in others. But in totality, I think it met our expectations.

Okay. And the gross margins, the 54% this quarter, I wanted to know how that would've compared to the first half of this year if we tried to exclude the Diageo volumes. I mean, I know a lot of the improvement was due to the lack of the Diageo brewing. But if we ignored that, is there still a solid improvement this quarter?

Yes, I think there is. There's certainly a benefit from having breweries more fully utilized, and it was obviously a big quarter from a shipment point of view. And then I think underlying against that we saw operating metric improvements at both our breweries.

Okay. And just to switch over to the operating costs for a second, I was wondering about the increase in marketing. I was expecting -- or we talked about, last quarter, an increase in marketing spend, and I thought it was going to come through this quarter, but it didn't seem to. In your release, it seemed to imply that there was some timing benefits from marketing expenses, but then you also mentioned increased marketing as a reason for increased volume. So I was wondering did we see increased marketing hit the marketplace this quarter, and when do we see the expenses for that marketing?

James, in our SG&A costs, we report freight, which makes the numbers a little difficult to compare, and we break that out on an annual basis, not on a quarterly basis. But as we look at the quarter, within our SG&A numbers, advertising was up, selling headcount was up, and freight was down. And then within the rest of the spend, obviously compared to a year ago, we're in quite a different economy, so some items we're able to purchase more efficiently and stuff like that. But the reality -- I think the reality is that freight is most of that decrease you see and actually offsets the increase in media.

Okay. And just the last question on the increase in sales force, can you give us any clues to just the magnitude of the increase in the sales force and whether the focus is on-premise or off-premise or sort of any hint as to what they're going for?

Yes. We haven't historically broken out our sales force headcount because I think we would view it as proprietary. But as our -- over the last three years, our volume has grown double digits for several of those, and we'll seen the opportunity to add people in geographies that previously have not had dedicated headcount and then also have increased our headcount support of chain partners, both on and off-premise. And so those would be the primary areas where we've added people.

Okay. Thank you very much, guys.

(Operator instructions.)

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

Hi, everybody.

Hey, Andrew.

I was wondering if you could talk a bit about the commodity cost coverage for 2010. Do you have significant coverage in place? And secondly, I wanted to ask, as we see oil and fuel prices rise, how much variability in the cost space for next year is there in terms of your glass costs and your shipping costs and any help you can give us on the coverage you already have in place.

Sure, Andrew. As we run through our commodity costs, one of our big ones is malt. And we are locked in for next year on barley, which we did last summer. And that cost is reflected in our indication as to what we think gross margins will be next year.

The next biggest factor probably is oil and delivery costs. And obviously, this year, we've benefited from those costs being down, but that we do not take any forward position on. And the next big one probably is natural gas. And that has a couple of impacts for us, the first of which is in our glass costs, where any natural gas' variation is passed through to us. And that actually, this year, has obviously been favorable, and natural gas remains favorable right now relative to levels of the last two years I think.

And then we also have natural gas hitting our brewery operating costs for boilers and such. And there, we've historically had a practice of just tying in a future six to nine months worth at some percentage of our usage just so that the breweries in the operating cost metrics are not penalized for natural gas moves. But that's a much lesser number than the impact on glass.

So when you -- so for 2010, when you're saying -- I think in the release it said something to the effect of costs will be flattish for 2010. Does that -- that includes variability on the fuel costs and oil costs, shipping costs?

I think that that includes basically -- we have barley locked up. We have locked up a piece of the natural gas for the breweries. We have not locked up glass, natural gas. But certainly, as we look out, that looks favorable. And the freight piece hits SG&A, so that would not be counted.

Right, right. Okay.

And then the second thing, on the pricing indication for 2010, 2%, I think that's a little bit below what you've targeted in previous years. Is that just a function of we have a better commodity cost situation for next year, so pricing needs aren't as great, or is there anything else to consider there?

Well I think over the last few years, we've been hit by some very significant cost increases certainly since 2005 that have severely impacted our gross margins. And longer term, we'd like to get our gross margins back to where they were in 2004, 2005. So we're committed to trying to do that both through operating improvements and efficiencies within our cost structure and also making sure that our pricing is optimized. We think pricing is never done within an isolated environment. We're looking at what the competitive issues are.

And again, over the last three years, we've probably moved above some of the key big import brands and certainly have taken a leadership role in setting a price point for craft, which I think is ultimately good for craft beer and also for our retailers. As we look at that, it's not unclear exactly what the competitive set's going to be doing and unclear what the consumer will bear. And I think, therefore, as we look at next year, we're less optimistic about pricing opportunities. But we do see opportunities within our pricing -- the deal structures and stuff like that to potentially increase revenue per barrel while not necessarily passing it on to the drinker.

Okay.

And last question I had, just on the volume trends, you usually split them out by the on-premise and off-premise. So I was wondering if you could talk about, in the off-premise, how is the trade-down trend changing, I guess, sequentially? And then in the on-premise, is there any pickup in traffic for that channel overall that's helping at this point?

Sure.

I think historically we've just sort of commented generally on what's going on as opposed to actually making any spread out. I think we think that the on-premise channel continues to be weak. Certainly based on data available to us on industry shipments to that channel, it appears to be weak. And it would appear that we are perhaps gaining share in that channel, which I think would measure with our actual sales activity and measures there. But the general channel is weak, and I'm not sure we've seen any pickup there.

In the off-premise, in the IRI numbers, I think you see that the craft category has been healthy for most of the year and actually, in the most recent quarter, perhaps accelerated a bit. And certainly our brand performance mirrors that and may be losing share in the first half of the year and perhaps matching craft growth in the last four-week -- 13-week type period. So we've seen a pickup there, and obviously we're pleased with that.

Okay. Thanks very much.

Ladies and gentlemen, we have reached the end of the allotted time for the question-and-answer session. I would like to turn the call back to management for closing remarks.

Thank you all very much, and we'll talk to you in the New Year.

Thanks.

Thanks, everybody.

Ladies and gentlemen, this concludes today's third-quarter 2009 earnings conference call for the Boston Beer Company. You may now disconnect.