Boston Beer Company Inc (SAM) 2010 Q1 法說會逐字稿

Good afternoon, my name is Bonnie, and I will be your conference operator today. At this time, I'd like to welcome everyone to the first quarter 2010 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there'll be a question-and-answer session.

(Operator Instructions) Thank you. I would now like to turn the call over to Mr. Jim Koch, Founder and Brewer. Please go ahead, sir.

Thank you, good afternoon, everybody, and welcome. This is Jim Koch and I'm pleased to be here to kick off the 2010 first quarter earnings call for the Boston Beer Company.

Joining the call from Boston Beer will be Martin Roper, our CEO; and Bill Urich, our CFO. I'll begin my remarks this afternoon with a few introductory comments, including some highlights on our results and then I'll hand over the microphone 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 as well as our outlook for 2010.

Immediately following Bill's comments, we'll open up the line for questions. Our sales force and wholesaler execution in the first quarter propelled us to a record first quarter for depletions. The introduction of our new spring seasonal Samuel Adams Noble Pils and our 25th anniversary celebration were both successful in driving retail execution in drinker trial while also allowing us to expand our promotional activity.

We achieved depletions growth of approximately 14% during the quarter which benefited from an easy comparison to the first quarter of 2009. We continue to face increased competition from expanded distribution of domestic specialty brands and regional craft brands, but are very optimistic on our prospects.

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. I will now pass it 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 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.

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. First quarter 2010 depletions growth benefited from the weak performance in the first quarter of 2009 which was down 6% compared to the first quarter of 2008.

We believe it is unlikely that depletions will continue at the first quarter growth rate for the remainder of the year, but we are working hard to maintain these trends by adding investment behind key programs and modifying our plans based on what we believe worked well during the first quarter.

We continued to increase our investments in media advertising and our sales force during the quarter and we remain 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. Now Bill will provide the financial details.

Thank you, Jim and Martin. Good afternoon, everyone. We reported net income of $6.3 million, or $0.44 per diluted share for the first three months ended March 27, 2010, representing an increase of $4.9 million, or $0.34 per diluted share from the same period last year.

The increase is primarily due increased core shipment volume, partially offset by increased advertising, promotion and selling expense. Core shipment volume for the three months ended March 27, 2010, was approximately 454,000 barrels, a 19% increase versus the same period in 2009.

The increase in shipments for the quarter is due to double-digit increases in Samuel Adams Seasonals, Twisted Tea and Samuel Adams Boston Lager. The Company believes that wholesaler inventory levels at March 27, 2010, were at appropriate levels. Our first quarter 2010 gross margin of 51% represented a 4 percentage point increase from the 47% gross margin realized in the first quarter of 2009.

The increase was primarily due to the impact of lower margin contract production for Diageo North America in the first quarter of 2009 and pricing increases of just under 2%. First quarter margins are lower than our full year target of 54% due to the negative impact of buying seasonality on gross margins per barrel in the first quarter.

Advertising, promotion and selling expenses increased by $3.2 million during the quarter as compared to the prior year primarily as a result of increased investments in advertising and increases in salary and benefits costs related to the addition of sales personnel.

General and administrative costs decreased by $400,000 during the quarter as compared to the prior year, primarily as a result of the reversal of stock compensation expense for an option that did not vest that was only partially offset by increases in salaries and benefits and legal fees.

The first quarter of 2009 included $600,000 in impairments of long-lived assets at the Pennsylvania Brewery resulting from the replacement of equipment that was not yet fully depreciated in order to improve the efficiencies of the brewery.

The Company's effective tax rate for the first quarter of 2010 decreased to 39% from the first quarter of 2009 rate of 51% as a result of higher pre-tax income, but with no corresponding increases in non-deductible expenses. The Company has reduced its expected full-year tax rate from 42% to 40%.

Year-to-date depletions through April 2010 are estimated by the Company to be up approximately 14% from the same period in 2009. The Company believes this comparison benefited from the weak depletions in the comparable 2009 period, strong wholesaler and sales force execution in the first four months of 2010, and the introduction of Samuel Adams Noble Pils in 2010.

These depletion trends may not be indicative of prospects for the balance of the year, where the future comparisons are more difficult and no major new product introductions are currently planned. Shipments and orders in hand suggest that core shipments, year-to-date, through May 2010 will be up approximately 14% compared to the same period in 2009.

Actual shipments may differ and no inferences should be drawn with respect to shipments in future periods. Based on information, of which the Company is currently aware, the Company is increasing its projected 2010 earnings per diluted share to a range of $2.65 to $2.95. The Company currently projects full-year depletions growth of between 6% and 8% based on its analysis of year-to-date depletions versus 2009 and 2008.

The Company continues to believe that the current competitive pricing environment is very challenging and projects full year price increases of between 1% and 2% through minor price optimizations as the competitive environment permits, but there can be no assurances that the Company will be able to achieve these planned revenue per barrel increases.

The Company continues to forecast cost stability for packaging and ingredients and currently believes that full year 2010 gross margins will be approximately 54%. The Company is committed to trying to grow market share and to maintain volume and healthy pricing and is prepared to invest to accomplish this even if this causes short-term earnings decreases.

The Company continues to evaluate 2010 capital expenditures and based on current information now expects them to be between $10 million and $20 million, most of which relate to the continued investments in the Pennsylvania Brewery as the Company pursues further efficiency initiatives and equipment upgrades. The actual amount spent may well be different from these estimates as the Company continues to analyze its investment opportunities.

In addition, higher volumes than currently expected could require additional keg purchases that are not included in these estimates. The Company expects that its cash balance as of March 27, 2010, of $38.7 million along with future operating cash flow and the Company's unused line of credit of $50 million will be sufficient to fund future anticipated cash requirements.

The Company continues to be in compliance with all of the covenants under its credit facility. During the three months ended March 27, 2010, the Company repurchased approximately 287,000 shares of its Class A Common stock for a total cost of $13.5 million.

On March 4, 2010, the Board of Directors approved an increase of $25 million to the previously approved $140 million share buyback expenditure limit for a new limit of $165 million. From March 28, 2010, through April 30, 2010, the Company repurchased an additional 84,000 shares of its Class A Common stock for a total cost of $4.5 million.

Through April 30, 2010, the Company has repurchased a cumulative total of approximately 9 million shares of its Class A Common stock for an aggregate purchase price of $139.1 million. The Company has approximately $25.9 million remaining on the $165 million share buyback expenditure limit set by the board of directors. We will now open up the call for questions.

(Operator Instructions) Our first question comes from Lindsay Mann of Goldman Sachs.

Hey, good afternoon, everyone.

Hi, Lindsay.

Just, your volume performance in the quarter is, is rather striking in light of every other big brewer we've heard from talking about very difficult consumption dynamic and also how tough the economy is. Considering your brand's more premium, I was wondering if you could shed some light on what's really driving that delta?

Sure, Lindsay, we can try it. Obviously, we don't have good data to be able to pinpoint exactly why uh, our volume performance in the first quarter, perhaps, differed from the other brewers and they obviously have much more data and economists to draw on.

But I think what we see, starting in the early part of the second half of last year, we started to see positive brand trends after a very tough first half. And I think we think that continued into the first quarter and I think that's a starting point of a difference between us and the companies that you refer to. We obviously benefited in the first quarter from easy comparisons to the first quarter last year and that is why in our analysis we've also gone back to look at what our trends are versus 2008 in trying to project what full-year trends are.

So basically trying to ignore what happened in 2009 and think about what our trends might be versus 2008 and that's how we're working up our guidance. We also, as we planned this year, changed our spring seasonal to Noble Pils which created some excitement, both in the Company and also with our wholesalers and retailers and actually pulled through very cleanly for us and that is part of the delta, I think a lot of trial of Noble Pils helping us.

And in addition, in the first quarter, our first quarter promotional program was around our 25th anniversary. I think we're very proud to say that we've been, or Jim has been doing this for 25 years and we celebrated that with our drinkers and with our retailers with promotional effort. That promotional effort allowed us to extend the, sort of, promotional period that we typically have enjoyed.

Previously our promotion for the first quarter of the first year was around basketball which was sort of an end of March program, and our 25th anniversary allowed us to get more programming activity throughout the quarter. I think you'll see that showing up in the sort of IRI numbers as increases in ads and displays, and weeks of ads and displays and that also helped too. That is partially the sales execution, wholesaler execution, BBC Team execution that we referred to.

So for all those reasons I think we had an exceptional quarter and obviously we're happy with it, but we're not sure that some of those factors are [duplicatable] going forward. We don't have a new seasonal or major new product launch planned for Q2 or Q3 and also the sales execution comparisons in Q2 and Q3 are much, much tougher in that our levels of sales executions in prior years probably has been much higher than it was in Q1 due to the design of that program.

Can you dimensionalize, maybe, how much of the real strong growth was a function of Noble Pils versus, let's say, Lager?

I think, one, historically we haven't broken out growth rates by our different brands and are reluctant to do so, but we are acknowledging that with the introduction of a new seasonal, that with significant trial and perhaps more excitement than you might otherwise expect.

And just, when did Noble Pils actually hit the market?

It sort of varied from market to market. It was designed to sort of switch over in early January. Some markets may have seen it late December and some not to the end of January, but on average, early January.

Okay, and then at the rate you guys are going, I know you're just getting the new brewery together, but it feels like you may need to start considering purchasing or building another one, especially considering how long it took you to get this one off the ground. So is that something that's, that you're thinking about, or at least kind of how much time do you envision you have until you have to start making that decision?

Well, there are some capital investments that we may be required to make if we see continuation of the current growth rate. I think at our expected growth rate, we're very comfortable that we're in good shape this year, but if we were to see an acceleration there are some things we need to do including kegs as well as potentially to the breweries.

We do believe that the current brewery infrastructure we have is underutilized and with modest investment that the Pennsylvania Brewery can be expanded to support likely or even unlikely growth over the next couple years. So I think we have not in any of our short-term planning, let's say, one to three years, thought about additional breweries.

Okay. Thanks very much.

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

Good afternoon, everyone.

Hey, James.

Hi, there.

Hey, James.

All right, let's get back to this good volume performance in the first quarter, you guys talked about a lot, the changes to your sales force and the better performance from your sales force. I was hoping you could give more detail around that, whether that's based on increased numbers in the sales force, if there's a new structure, new mission for them, are they just pushing greater availability? If you could help us out with some details there?

Yes, well, I think we talked about an increased investment in our sales force and certainly we've added positions over the last 12 months, 24 months, adding depth of experience and obviously there was some talent available due to the market conditions, and also adding geographic coverage as we've enjoyed the growth we've had over the last three or four years. It allows us to put people into markets that we perhaps we hadn't considered cable of supporting people.

But as it relates to your question as to whether the structural design of the sales force has changed, it really hasn't. I do think that part of the first quarter was the 25th anniversary promotion which allowed a broader promotion window for execution of ads, displays and features.

And that has obviously shown up in the IRI numbers of the Nielsen numbers that are available to folks through increased ads and displays and pricing features. And I just think that the momentum that we had coming out of the, of Q4, our sales group rattled around and drove it even harder and in celebrating the 25th anniversary gave them something to talk to accounts about and something accounts, frankly, were very receptive to.

Along those same lines, talking about geographic expansion, where did a lot of the growth come from? Was it primarily based in areas that you were underrepresented versus your traditional base? And also, on or off the premise, where did the strength come from?

Sure. Again, we haven't historically broken out growth by geography, but obviously growth in markets where we are over penetrated is much harder to get than markets where we're underpenetrated. And we saw that in the first quarter.

As it relates to on and off premise, I think we commented previously that our on-premise trends were surprisingly good given what the retailers themselves were reporting on their same-store sales numbers. I think certainly last year we believe we gained share in that channel based on what data was available to us.

We saw growth in that channel in the first quarter, but it wasn't as strong as the off-premise growth and, again, I'll refer you to the published IRI Nielsen numbers which appear to be tracking faster than our depletions trends for you to get a feel for how that may have broken out.

Okay, and just one last on the Pennsylvania Brewery. In all the gross margin gains that you guys are talking about, you actually didn't mention too much of potential savings from the improvements at the brewery this quarter, so I was wondering how improvements are coming along both in the short term and in the longer term?

Yes, we're very happy with the team that we have in place there and the progress that they've made. We are yet to cycle up against a pure beer month versus a pure beer month in that we had production for Diageo in there this time last year.

So it's hard to make good apples-to-apples comparisons, but we're very happy with where it is. We still think there's opportunities for improvement and we certainly haven't reached the point that we want to be.

Okay, thank you very much, guys.

Our next question comes from Andrew Kieley of Deutsche Bank.

(inaudible) everybody.

Hey, Andrew.

Good. Good to see some growth in the category. I was wondering, if I look back at the guidance you gave for shipments last quarter, in March, you were talking about shipments up, maybe 9% to 10%, I was wondering, did something change in the last month in the quarter?

Was it just a lot of those promotions you spoke about came at the end of the quarter? Was something going on with trade inventories in March?

Andrew, I'm, there's a couple of confused looks in the room as to what guidance you might be referring to. I don't have--

Sorry, just, if I look at the last release, which was given in March, it said outlook, shipments, and orders in hand suggest that shipments would be up something like 9% to 10% in the first quarter. And with this up 19% number you posted today, I was just wondering what changed in the last half of the quarter?

14.

Andrew, again, I don't have the release in front of me. If you have it in front of you, were we talking orders through end of March or end of April?

I believe it was through end of March.

Okay, it's not unusual in the course of months for there to be significant add-ons, particularly if the sort of volume trends are sort of pulling away from what everyone anticipated. It's also possible that at the time we gave that guidance it was very early in the order cycle.

What I would say is point to the underlying depletions trends compared to the orders for the year, as we currently see them through the end of May, and they're pretty consistent in the plus 13%, 14%, 15% range. We got a significant amount of on-tops that we were able to fill, that could be part of it. But other than that, I just can't comment.

Okay. And then just going back to the underlying depletions growth, you did have easy comps in the quarter, but is there new distribution that's coming on? Do you think that distributor focus is just shifting to you increasingly as some of the bigger competitors stumble, are some of those things helping the numbers here?

I think there's certainly continued support for the Sam Adams brand as well as the craft category strengthening at retail and among the wholesalers, partly because craft category is really the only place that they are getting volume growth and high margin, profitable products. So, and as the category grows year after year, it becomes a bigger, more visible part of their portfolio.

So we're kind of a position where if they're going to get good growth from a profitable category, it's going to be craft or to a lesser extent, domestic specialties.

Right, okay, and then, Jim, I was just wondering your view. You guys have been a little bit more cautious on the pricing outlook here. What's the risk that as some of the bigger import brands and the domestic guys struggle with volume growth that price promotion gets a lot more aggressive into the summer? Is that a risk --

Yes, I mean, it's hard to have a crystal ball. Looking at the IRI numbers and Nielsen numbers, it looks like the imports haven't been able to raise price at the same levels that craft beers have, so imports are starting to be priced in many markets and in many comparisons at or below craft from, reversing the situation of three or four years ago.

But I guess, again, I don't have a crystal ball, but I don't see a price war at the high end. We're all selling higher image products, hopefully, higher quality products and certainly what craft has done is shown the rest of the beer industry that if you're in the right situation you can have healthy pricing and volume growth.

Right, okay. And then just last question on Noble Pils. I know you said, is it a normal seasonal rotation? Does that come out of the market in April or May? How does that work?

Yes. As Martin mentioned, we try to transition from Winter Lager to Noble Pils, the spring seasonal, during the month of January and then sort of around the end of March, during the month of April, we have transitioned to Summer Ale. So there's still some around, but most of it has transitioned to Summer Ale at this point.

Okay, and just, sorry, one last one. On the depletions, I think in the release you said depletions growth, part of it was due to Noble Pils, but part of it was Boston Lager was also growing. I wasn't sure, did Boston Lager also grow at a double-digit rate, or was it just positive growth?

We don't normally, we haven't broken those out so, probably wouldn't do that going forward. But in general, the whole portfolio got healthier over, in this quarter, certainly, over last year and strengthened a bit even over the final quarter of 2009.

Hey, Andrew, it's Martin. In our press release, we did indicate double-digit increases in seasonals and Twisted Tea and high-single-digit growth in Lager.

Okay. I just wanted to clarify that. Okay, thanks a lot.

(Operator Instructions) Our next question comes from Lindsay Mann of Goldman Sachs.

Thanks for the follow-up. Jim, in the past you mentioned last year, some of the issues you were having in grocery store was perhaps the Bud distributors opening up to some of the newer, smaller craft brands and maybe getting some shelf space taken away from you as a result. Have you seen any of that kind of switch or shake out among some of the smaller craft brands? Less proliferation? Any SKU rationalization as we start to anniversary that?

Very little. Very little coming through and cutting SKUs. I think there's still very strong interest in the craft category and additional brands at wholesale and retail. I don't have any numbers to support it, but my sense is that there were a few yellow flags starting to go up, the pull per point on new items seems to be going down.

The category, people are pointing out that the category is, in many stores, overspaced relative to its volume and I do think retailers are trying to figure out what is the optimum amount of variety recognizing that it's not limitless.

So I think the retailers, particularly the chains, are asking themselves when do we have too much and when we put in all this variety, how do we, not only how much, but how do we space it and how do we set the shelves? How do we billboard the lead brands and make sure the consumer can shop the category effectively.

I think we're, my personal opinion is we're beginning to see a few yellow flags, but it's very early, and in general, there's, I think retailers and wholesalers are still adding SKUs but maybe not at the same percentage growth that they were six or 12 months ago. But I don't have data, that's just my feeling.

Okay, thanks, and then, Martin, as you guys talk pretty consistently about taking the opportunity to invest against your brands when you need to do so, even at the sake of earnings in a short term. When you find yourself with these pretty big gross profit upsides from very strong volume growth and healthy pricing.

How should we think about the degree to which overbalance of the year, you're thinking about investing any of that on the advertising line? You had a pretty healthy year-over-year increase in ad spend this quarter, is that sort of a decent run rate to consider?

Are you going to be ramping up even further than this pretty high level since your gross profit's been so good?

Well, I think one way to think about it is to reflect on our guidance, which in some ways combines our volume guidance, our pricing guidance, our gross margin guidance to an earnings guidance. And the number that isn't in there is the range, obviously, of what we think SG&A is.

Now SG&A includes freight, and the freight number is directly proportional to volume. So as the volumes are higher or the shipments are higher, the freight goes up significantly. I think we talked about on one of our previous calls how we added radio to our advertising mix last year as a second half build, and we've continued that in the first quarter and plan to continue to do so.

We've seen some opportunities, perhaps, to increase investment in some of the activities that seem to have helped our first quarter performance. So we're reviewing requests from our sales group and our marketing group for those programs and we fund them where we think they drive incremental volume. And certainly we'd like to think they pay for themselves initially, but if they pay for themselves in year three, that obviously works as well for us.

So it's pretty fluid. Where we see an opportunity and we think we have something working that will maintain the momentum or increase the momentum then our bias is to spend it at the expense of short-term earnings.

Hopefully, those programs don't dilute earnings, but sometimes they do and I think that's why we're always consistent in raising this as a possibility.

Do you see a need to, or an opportunity to add to your sales force?

Yes, I think there are always things that we see and we review, sort of on a regular basis and, again, as we grow in these markets, the market's ability to provide a return on a person change. Sometimes that means an additional person, sometimes it means a different type of person, sometimes you come to the conclusion that perhaps it doesn't support a position, but it's very fluid.

And we review that constantly with the growth that we're having and the possibilities that exist looking forward longer term for what sort of sales organizational structure we might want. We're continually evaluating whether to add people.

Okay, thank you.

(Operator Instructions) Our next question comes from Andrew Kieley of Deutsche Bank.

Got a couple of follow-ups. Martin, the full year completions guidance that you gave us, up 6% to 8%, would there be any reason that would vary much from your actual shipments?

Let's see, yes, it might do a little bit. Last year, at the end of 2008, we finished 2008 with what we believe was slightly higher wholesaler inventories than perhaps we would normally expect.

And in the course of 2009 those sort of went away, so our 2009 shipments perhaps were, or could be could be viewed as being slightly understated as to what the real sort of pull through rate was which would make the shipments comparison for 2010 to 2009 a little easier. But with that exception, we typically financially plan for our shipments to approximate our depletions growth.

Okay, great. And then the second one I had is, some of the data we get for C-stores, I mean, the growth there for some of your brands has been pretty phenomenal. I know that was usually, I think, a channel you had not been as well-represented in. Can you talk about growth in that channel? Are you just getting more [poolish] base there, and what's behind that?

Sure. Well, I think if you have the data you'll see a lot of that growth is coming from distribution, which we're obviously very excited about. For a long time, we had struggled, frankly, to penetrate that channel which has historically been largely dominated by the big mass domestic players, particularly in how the [sets] are laid out.

But the success of Heineken and Corona in that channel in the last 10 years plus some success that Coors had with Blue Moon in that channel really opened the doors to an interest in having a craft shelf in a lot of those stores.

And that appears to be allowing us to drive distribution of a couple of our lead SKUs into that channel, and I think that's what you're seeing.

Okay, thank you.

At this time, there are no further questions. Are there any closing remarks?

We'll see you all again in about three months.

All right, yes, we'll be back in three months. I just had one build to a question Lindsay asked.

She asked about brewery capacity and I was negligent in not mentioning that we have contract arrangements with third parties that could allow us to support incremental growth in peak months or even on a year-round basis and that helps us in thinking about when to plan for a new brewery and basically allowing us to potentially fully load our own breweries prior to doing so.

That's the one build I have, and Bill doesn't have anything else. We thank you for your attendance, and your questions and your continued support. We look forward to talking to you in three months. Cheers.

Thanks, guys.

Cheers. Good-bye.

Thank you, this concludes today's conference call. You may now disconnect.