Boston Beer Company Inc (SAM) 2009 Q4 法說會逐字稿

Good afternoon. My name is Bonnie and I will be your conference operator today. At this time I would like to welcome everyone to the fourth quarter 2009 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will a question and answer session. (Operator Instructions) Thank you. I would like now to turn the call over to Mr. Jim Koch, Chairman and Founder of Boston Beer Company. Please go ahead, Sir.

Thank you. Good afternoon and welcome everybody. This is Jim Koch, Founder and Chairman. I'm pleased to be here to kick off the 2009 fourth quarter earnings call for the Boston Beer Company. Joining the call from Boston Beer are Martin Roper, our Chief Executive Officer and Bill Urich, our Chief Financial Officer. I'll begin my remarks this afternoon with a few introductory comments including some highlights of our results. 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 fourth quarter and 2009 fiscal year as well as our outlook for 2010. Immediately following Bill's comments, we'll open the line for questions. We reported 5% depletions growth in the fourth quarter bringing depletions growth for the second half of 2009 to 6% as compared to a decline of 1% in the first half of 2009. We believe that our fourth quarter depletions continued the improved tends that we identified at the end of the second quarter. Looking to 2010, we're excited about the introduction of our new spring seasonal Samuel Adams Noble Pils, a hoppy pilsner beer brewed with a recipe that calls for all five varieties of Noble hops. It's been initially very well received by drinkers, retailers and wholesalers. While it's too early to judge repeat consumption, we believe that its introduction and our 25th anniversary celebration are helping us to start 2010 strongly. And our challenge is to maintain this momentum as we continue to face increase competition from the expanded distribution of domestic specialty brands and regional craft brands. We continue to explore ways to improve 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'll now turn the microphone over to Martin for a more detailed overview of our business.

Thank you, Jim. Good afternoon, everyone. As we state in our earnings release, some of the information we discussed 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's 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 10K. 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.

Since the end of the first half of 2009, we have seen an improvement in the trends of our brands. 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 feel we are in good position to compete effectively through the strength of our brands and sales force. We are currently projecting that we should finish 2010 with depletions growth slightly lower than the second half of 2009 trends. We continue to believe it is a good time to invest in our brands and have increased our investment in our sales force and have added year around radio advertising in order to achieve this goal. We are prepared to forsake some earnings in the short term in order to make appropriate investments in brand owning activities that position us well for future growth, as we remain confident about the long term prospect for the craft category and our brands. We completed our first full year of ownership of our Pennsylvania Brewery which continues to brew great Samuel Adams Beer. During 2009, we continue to make high quality beers while significantly improving our cost and efficiencies at our breweries which have contributed to our improved gross margins. Most of these efficiency gains and margin improvements were achieved in the second half of the year after the completion of the Diageo contract in 2009 which was at the very low margins. With our focused on a multi year program to identify and execute projects that will continue to reduce costs, drive efficiency and increase productivity at both our Pennsylvania Brewery and our Cincinnati brewery. Looking forward to 2010, we expect a continued improvement in the efficiencies at our breweries and other resource efficiency projects will contribute to improved gross margins compared to 2009. But this will not return us to the historic gross margins levels experienced prior to 2006 before the recent significant increases in brewery operating costs and packaging and ingredient costs. Now Bill will provide the financial details and our outlook for 2010.

Thank you, Jim and Martin. Good afternoon, everyone. We reported net income for the fourth quarter of 2009 of $7.5 million or $0.52 per diluted share, an increase of $3.9 million or $0.27 per diluted share from the fourth quarter of 2008. The increase in net income is primarily due to increased core shipments, improved gross margin and a reduction of impairment charges. Offset by increases in the provision for income taxes and general and administrative expenses.

Core shipment volume for the three months ended December 26, 2009, was approximately 528,000 barrels, a 5% increase versus the same period in 2008. We believe wholesaler inventory levels at December 26, 2009, were at appropriate levels.

Our fourth quarter 2009 gross margin of 52% represented an increase of 5 percentage points over our fourth quarter 2008 gross margin. This increase is due primary to price increases, improved cost of operating our breweries, driven by lower energy costs and the impact of low margin contract production for Diageo North America in the fourth quarter of 2008. This is partially offset by increased costs of package materials. Fourth quarter 2009 advertising, promotion and selling expenses were flat with those incurred in fourth quarter of 2008. Primarily as a result of decreases in freight expenses for shipping beer to wholesalers driven mostly by reduced fuel cost, offset by an increase in advertising and salary and benefit costs related to the addition of sales personnel.

Fourth quarter 2009 general administrative costs were $1.4 million higher than those occurred in the fourth quarter of 2008, primarily as a result of increased stock compensation expense and legal costs. We incurred impairment charges of $0.5 million in the fourth quarter of 2009 based upon our review of the carrying values of our fixed assets compared to $1.9 million impairment charge for machinery and equipment in the fourth quarter of 2008. We recorded a tax provision in the fourth quarter of 2009 of $5.4 million, compared to $2.7 million in the prior year. Our fourth quarter tax rate was approximately 42%.

For the year ended December 26, 2009, total Company depletions increased approximately 3% due primarily to increases in Samuel Adams seasonals, Twisted Tea and the Samuel Adams Brewmaster's Collections which were partially offset by decreases in Sam Adams Boston Lager and Sam Adams Light. Core shipment volume for the year ended December 26, 2009 was approximately 2 million barrels, a 1% decrease compared to the same period in 2008. Excluding the impact of the 2008 product recall, 2009 core shipment volume increased 1% from 2008 levels. Our net income of $31.1 million or $2.17 per diluted share for the year ended December 26, 2009, represented an increase of $23 million or $1.61 per diluted share compared to the 2008 year.

The net increase in income is primarily due to the impact of product recall costs of $22.8 million in 2008. Improved gross margins of approximately 5% and lower advertising promotional and selling costs in 2009, offset by increases in provision for income taxes and general and administrative costs.

Advertising promotional and selling expenses incurred during 2009 decreased by $11.3 million as compared to 2008. The decrease was primarily due to significant reductions in freight expenses to wholesalers and to a lesser extent better advertising rates and more efficient spending, partially offset by increases in salary and benefits due to the addition of sales personnel. General and administrative costs increased by $1.9 million during 2009 as compared to 2008. Driven by a full 12 months of operating costs at the Pennsylvania Brewery compared to only seven months in the same period in 2008, and increased consulting costs.

We incurred impairment charges of $1 million in 2009 compared to $1.9 million impairment charge in 2008. Our effective tax rate for the 2009 year decreased to approximately 43% from the 2008 rate of approximately 49% as a result of higher pretax income but with no corresponding increase in non-deductible expenses. Year to date depletions reported to us through February 2010 increased approximately 9% from that same period in 2009 with one less selling day in 2010. The improvement in depletions trends is primarily due to the launch of Samuel Adams Noble Pils.

Shipments and orders in hand suggest that core shipments year to date through April of 2010 will be up approximately 9% compared to the same period in 2009. Actual shipments may differ and no inferences should be drawn with respect to shipments in future periods.

Looking forward to 2010, based on information which we are currently aware, we believe that the current competitive pricing environment is very challenging, and have reduced our expectations for revenue per barrel increases. We currently project increases of between 1% and 2% through minor price optimizations as the competitive environment permits. But there can be no assurances that we will be able to achieve the planned revenue per barrel increases.

We continue to forecast cost stability for packaging and ingredients and a continued improvement in operating costs at the Pennsylvania Brewery. If successful, we could have a full year 2010 gross margin of approximately 54%. We intend to increase investment in our brands between $5 million and $10 million in 2010, commensurate with the opportunities for growth that we see, but there is no guarantee such increase in investments will result in increased volumes. Based on our best estimate at this time, we are targeting 2010 earnings per diluted share to be between $2.35 and $2.65, but the actual results could vary significantly from this target. We are evaluating 2010 capital expenditures and based on 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 further efficiency initiatives and equipment upgrades. The actual amounts spent may well be different from these estimates as we continue to analyze our investment opportunities. In addition, higher volumes than currently expected could require additional take purchases that are not included in these estimates.

We expect that our cash balances as of December 26, 2009, of $55.5 million, along with future operating cash flow and our unused line of credit of $50 will be sufficient to fund future anticipated cash requirements. We continue to be in compliance with all the covenants under our credit facility.

During the 12 month ended December 26, 2009, we repurchased approximately 209,000 shares of class A common stock for the total cost of $1.7 million. From December 27, 2009, through March 5th, 2010, we repurchased an additional 287,400 shares of our class A common stock for a total cost of $13.5 million. On March 4, 2010, our Board of Directors approved an increase of $25 million to the previously approved $140 million share buy-back expenditure limit for a new limit of $165 million. Through March 5, 2010, we repurchased accumulated total of approximately 9 million shares of class A common stock for an aggregate repurchase of $134.6 million. The Company has approximately $30.4 million remaining on $165 million share buy back expenditure limit set by our Board of Directors. We will now open up the call for questions.

(Operator Instructions) Our first question comes from James Watson of HSBC.

Good afternoon, everyone.

Good afternoon. Hi James.

Good afternoon. Before you ask a question, James, let me make a correction. I said $1.7 million in terms of our, what we repurchased, 209,000 shares during the 12 months ending December 26, it should be $7.1 million. $7.1 million. Sorry James.

No problem. First question. I just really wanted to broadly talk about the Craft segment. Looks like it gained about 5% in 2009 versus overall US beer losing a couple points. I was wondering if you guys can give some color on why you thought Craft beer was so successful in 2009, whether it was from retailer support, demographics or channels, just where you guys felt this support came from?

It's a good question, James, and the number is actually a little higher than the 5%. I think the Association of Brewers, the Brewers Association just announced about 7% increase in the Craft category in 2009, along with reasonably strong pricing. And their figures aren't final. So it will get sorted out, but that's the direction it's gone. And of course the beer industry was off a couple of percent. I attribute it to a couple of factors. I think in a very sort of big picture, 2009 was obviously a year where consumer's pocket books were pinched a little bit. And as a result, they put a higher premium on value and in beer. That seems to have meant two things: One is trading down from premium to sub premium beers because the consumers believe that they still got the same quality and taste with a sub premium beer that they got with a premium, so it wasn't worth sort of paying the extra money for kind of image and status. And I think the same thing has happened a bit at the high end where consumers have been willing to pay more money for Craft beer because they believe it delivers real taste, flavor, ingredients. And that represents a higher value than let's say the imports which you have sort of dominated better beer for decades and whose beer deliver maybe more image and prestige and status rather than dramatic taste differences. I think secondly, there's not a lot of growth in beer and Craft category has got growth in volume and margin. So retailers and wholesalers have focused on craft beer because it's the primary growing segment with good margins.

That's great. And then that leads to the next question of actually where is the current price gaps between you guys and other Craft beers and versus imports right now?

James, we currently are sort of right in the middle of the pack of the main stream craft brewers from a price perspective. There are obviously some beers that are available in limited quantity that are above us. We're right in the pack. And relative to imports, we believe that over the last three years, Craft has narrowed that gap and actually may be at a higher price point than at least the really big import brands.

Right.

So, three years ago Craft was below, that gap has closed and we now think Craft now leads on price and we're right in the middle of it.

And in talking about the more challenging price environment that we're seeing, is that something new? I mean because obviously you guys and Craft Beer in general did very well. Last year which implies that the pricing gap was correct. So has something changed such that 2010 looks like a more challenging environment? Are competitors taking down pricing?

I think in 2009 Craft generally took pricing as did we. We didn't really see imports moving so we moved relative to imports as I previously responded. So, as we look out right now, we're not seeing a lot of movement on price. If we try to initiate something, we're not seeing other people responding. And we just don't see that we're going to be able to make the type of price increases that we were able to make last year.

Thinking along the lines that the cost of goods is not increasing as much, is it harder to push through any top line?

I think it's much harder to explain pricing. A lot of the pricing last year was already planned before everybody hit the wall in what, October and November of 2008. So it was already planned and communicated and everyone had their heads around it. I think it's much more difficult to get your heads around it. And on the cost side, certainly we're seeing some cost increases but they're not as dramatic and they're much more difficult to explain to a retailer or wholesaler drinker.

Right. Thank you very much, guys.

Thanks, Jim.

Our next question comes from Andrew Kieley of Deutsche Bank.

Hi, good afternoon, everybody.

Hi Andrew.

The 9% depletions year to date that you're talking about in the release, could you talk about, Jim or Martin is that a sustainable, high single digit growth, is that sustainable for the year? How much of that is a function of easier comps that you had in the first half of 2009? And then, if you could also talk about new distribution opportunities you might still have ahead as we go forward?

Yes. I would say we don't currently view it as sustainable. I think it was a happy outcome of easy comps as well as the success of Noble Pils and the 25th anniversary programs that happened in the first quarter of 2010 and are continuing to happen. So, we don't view it as sustainable through the year, but we're real happy about it. And going forward there continue to be distribution opportunities. We're under-represented in many, many segments ranging from the C-store segment where we find significant opportunities to super centers where we real upside. And then just geographically, there are a lot of parts of the country with Sam Adams is much more developed than others. And if the less developed parts of the country continue to move towards the more highly developed parts of the country for Sam Adams, there continues to be very worth while upside.

Okay, And Jim, I wanted to ask in terms of your marketing investments and sales force additions, are you seeing more of an opportunity there as maybe some more of the bigger players pull back and don't invest as much?

Yes. I think that's a part of it. I think there was some very talented individuals who became available. And finally I think we see a lot of long-term steady growth that is possible for the Craft beer category. And we're, therefore, willing to invest against that long-term growth.

Okay. And then just a final question, I wondered if you could talk briefly about the status of the on trade channel. How that was in the fourth quarter. Are you starting to see any improvements in that channel as we start 2010?

Yes, I'm not terribly close to it, but my opinion, we're seeing slow but steady improvement. I don't think people are expecting 2010 to be as bad as 2009. But I do think people in the on premise channel, they understand it will take a little while to get back to sort of 2006 and 2007 where there was pretty strong growth.

Okay. Thanks very much.

Yes.

(Operator Instructions) At this time, there are no further questions. Mr. Koch, do you have any closing remarks?

No. We will talk to you again in a few months. Thank you for attending today.

Cheers.

Cheers.

This concludes today's conference call. You may now disconnect.