Boston Beer Company Inc (SAM) 2010 Q2 法說會逐字稿

Good evening. My name Chasity and I will be your conference operator today. At this time I would like to welcome everyone to the Boston Beer Company second quarter 2010 earnings conference call. (Operator Instructions). I would now like to turn the conference over to Mr. Jim Koch, Founder and Chairman of Boston Beer Company. You may begin, sir.

Thank you. Good afternoon and welcome. I'm pleased to be here to kick off the 2010 second quarter earnings call for the Boston Beer Company.

Joining the call from Boston Beer are Martin Roper our CEO and Bill Urich our CFO. I'll begin my remarks this afternoon with a few introductory comments including some highlights of our results and then hand 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 second quarter as well as our outlook for the remainder of 2010.

Immediately following Bill's comments we'll open the line up for questions. We achieved depletions growth of 13% in the second quarter. This record second quarter for depletions is due to our strong sales execution and continued support from our wholesalers and retailers.

While we are pleased with the results, we believe some of the increase benefited from an easy comparison to the second quarter of 2009 which was up only 2% compared to the second quarter of 2008. We continued to see expanded distribution of domestic specialty brands and local craft brands which is increasing competition in our category.

We're happy with the health of our brand portfolio and remain positive about the future of craft beer. I'll now pass 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. We believe we executed well in the first half of the year and that the business may have responded to our increased investments in local marketing and media advertising and increases in sales force personnel.

However, there appear to be slowing trends towards the end of the second quarter due to tougher comparisons and the timing of certain promotional activities. We therefore believe it is unlikely that depletions will continue at the first half growth rate for the remainder of the year, but we are working hard to maintain these trends.

We have raised our full year depletions targets and earning per share range based on the strong quarter and our current expectations of future trends. As we look forward to 2011, we are evaluating increasing our investments in brand support in order to grow our brands appropriately given the opportunities we see. It is possible that these decisions might result in slower earnings growth as we may for sake some earnings in the short term in order to build our organizational capabilities and increase brand spending.

Year-to-date depletions through July 2010 are estimated to be up approximately 11% from the same period in 2009. Shipments and orders in hand suggest the core shipments year-to-date through August 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.

Now Bill will provide the financial details.

Thank you, Jim and Martin. Good afternoon, everyone. We reported net income of $16.3 million or $1.13 per diluted share for the three months ended June 26, 2010 representing an increase of $4.4 million or $0.30 per diluted share from the same period last year.

The increase is primarily due to increased core shipment volume partially offset by increased selling expenses. Core shipment volume for the three months ended June 26, 2010 was approximately 627,000 barrels, a 9% increase versus the same period in 2009.

The increase in shipments for the quarter is due to double-digit increases in Twisted Tea and Samuel Adams Seasonals as well as increases in Samuel Adams Boston Lager and the Samuel Adams Brewmaster's Collection. We believe that wholesaler inventory levels at June 26, 2010 were at appropriate levels.

Our second quarter 2010 gross margin of 56% represented a 3 percentage point increase from the 53% gross margin realized in the second quarter of 2009. The increase reflects the lower growing and packaging cost per core barrel at our Pennsylvania Brewery resulting from our cost savings initiatives and pricing increases of approximately 1%, as well, as the fact that the 2009 second quarter had some lower margin contract production for Diageo North America, Inc.

Second quarter 2010 advertising promotional and selling expenses were $3.9 million higher than those incurred in the second quarter of 2009 primarily as a result of increased investments in point of sale materials, local marketing, radio advertising and our sales force, partially offset by lower television advertising costs. Based on information of which we are currently aware we are increasing our projected 2010 earnings per diluted share to a range of $2.85 to $3.15.

We currently project full year depletions growth of between 8% and 10% based on our analysis of year-to-date depletions versus 2009 and 2008. We continue to believe that the current competitive pricing environment is very challenging and full year price increases of between 1% and 2% through minor price optimizations as the competitive environment permits, but there will be no assurances that we will be able to achieve these planned revenue per barrel increases. We are committed to trying to grow market share and to maintain volume and healthy pricing and are prepared to invest to accomplish this, even if this causes short terms earnings decreases.

We continue to evaluate 2010 capital expenditures and based on our current information, now expect them to be between $12 million and $18 million, primarily for continued investment in the Pennsylvania Brewery as we pursue further efficiency initiatives and equipment upgrades, as well as additional keg purchases to support continued growth.

The actual amount spent may well be different from these estimates as we continue to analyze our investment opportunities. We continue to maintain a strong cash position with $53.7 million in cash as of June 26, 2010.

This is an increase of approximately $15 million from the first quarter balance, despite repurchasing approximately $16.7 million of shares under the stock repurchase program during the quarter. On July 28, 2010 the Board of Directors approved an increase of $25 million to the previously approved $165 million share buyback expenditure limit for a new limit of $190 million. We have approximately $29.9 million remaining on the $190 million share buyback expenditure limit set by the Board of Directors.

We will now open up the call for questions.

(Operator Instructions). Your first question comes from the line of Judy Hong with Goldman Sachs.

Hey guys. How are you?

Hi, Judy.

Great.

Jim or Martin, I just wanted to get a little bit better understanding just in terms of your depletion trend throughout the quarter, you have talked about some slowing down towards the end of the quarter and then July looks like it's a little bit of a slowdown as well. So can you just maybe quantify the magnitude of the slowdown and other than the comparison issue, is there any other factor that's driving the sequential slow down in terms of your depletion trends?

Sure, Judy. I think we started offer the quarter very strong with a very clean cut over from Noble Pils to Summer Ale and that's certainly benefited us, obviously in the first quarter indicated that our Noble Pils trends were very good, and that led to, I think, to a very efficient and sharp cut over early in the season and that helped the trends early in the quarter.

I think later in the quarter we had much tougher comparisons to last year and we saw those come through. I think as it relates to the July year-to-date numbers with we're still basing our number that we disclosed on estimates and so it's a little hard to get a really good read, but July had a -- a day less and so we have a day less year-to-date and then some of the July versus the second quarter trend is also due to how July 4th fell this year.

Okay. And then just in terms of the pricing environment you've talked about the competitive environment being more challenging, just in terms of the pricing and outlook, yet you've got some of the domestic players that are taking price increases again, so maybe just broadly speaking, as you think about the industry from a pricing perspective is it just more challenging for the higher end to get pricing? How does kind of what the domestic guys are planning to do impact your ability to take more pricing going forward?

Well, I think we haven't made any decisions yet about pricing going forward because 2011 is a long way away and typically we have done most of our pricing actions in the beginning of the year. With respect to the announced plans of some of the bigger brewers, I guess I would have to say that our pricing is going to be driven by our own costs and our own opportunities, so it's not necessarily going to happen that we would move in lock step with the mass domestic brewers. I think we're somewhat at a different dynamic.

Okay. And then, Bill, just in terms of the quarterly results, did G&A actually pick up in the second quarter, probably a little bit more than what we have seen in the past couple of quarters? Can you just talk about what drove that -- that increase and as you kind of look out for the balance of the year the rate of increases that the G&A line is that likely to continue?

Yes. If I understand your question you're saying the G&A this quarter was -- grew higher than last quarter or than typical quarters?

As it gets more -- I mean the last quarter you certainly had G&A , down 10%, this quarter it was up 12% or so. So, it just seemed like maybe it was a timing issue I'm not sure but just seems like it was a little bit higher than what we were looking

Yes. I think the first quarter, if you remember, we had a stock option expense that was reversed and the -- in the second quarter we had some other G&A expenses but it was pretty normal and typical expenses. There was nothing unusual and we continue to -- to invest in our G&A but very cautiously.

Okay. And then just in terms of -- as you think about your marketing spending, particularly in the advertising side, you've got again a trend where a lot of other domestic brewers are actually reducing advertising spending. You guys, obviously are increasing. So can you maybe just talk a little bit about the efficiencies of your spending and at some point do you think that you can get more operating leverage as you wrap up spending a little bit at a lower pace than what you've been doing?

Sure. I think for the philosophically, as it relates to our advertising spending, our spending levels are take a number of things into effect. Both the cost of the media, both how effective we think the media is and both the opportunities that we're faced with and where our brands are positioned in those markets.

I think in the last two years we've benefited a little bit from some of the media costs coming down as the amount of media money chasing the available media sort of declined and we saw some --- you know attract -- opportunities to buy media efficiently and effectively and I think we're very happy with where we are for this year year-to-date relative to previous years. We've been able to increase our sort of share of actual voice not just on a -- on a delivered basis but also on a dollar spent basis but obviously the delivered --- on the delivered basis it is more important to us.

As we look forward we'll continue to evaluate the appropriate media spend given the opportunities that we see. We are now, for Sam Adams, buying TV and radio where as two years ago it was just TV. And for Twisted Tea we support the markets where it has strong presence.

With radio as we look forward those decisions could change based on the opportunities we see in the media that we have available to us. We certainly are currently being told that there is some media inflation as it relates to next year versus this year's costs. I'm sure some of that is due to the political races that are going to be going on the next four months and we'll have to wait and see what happens after that for exactly how that will play out.

Okay. Thank you very much.

Thank you. Our next question comes from the line of James Watson with HSBC.

Hi, James.

Hi, James.

Moderator, do you want to come back to James?

Oh, hold on.

Oh, hi, James.

Hi. How are you? Sorry about that. Question --.

We hope you were enjoying a beer.

Not yet. Not yet. That's later on.

Okay.

Question for you on shelf space. I read in the last couple of months, statements from a few retailers saying they were either maintaining or expanding shelf space for craft beers. I was wondering what you guys have seen on that front. I'll start there.

Yes. Yes. I think over, not just this year but -- but previously in 2008 and 2009 we've seen a significant increase in shelf space for craft beer typically at a greater rate than the sales. So craft beer is certainly benefited from more shelf space. The shelf space has grown faster than the sales that eventually has to, come to an end because sales per SKU or per foot of craft beer space have been declining as the category has expanded itself.

So I -- I think we -- we may be at an inflection point where the rate of increase for craft shelf space may slow down, maybe it'll -- I certainly hope that it would match the volume growth of the category but it can't exceed it forever.

Okay. But looking at it in that way, I mean that still implies craft beer shelf space expanding. You're just saying that the rate is going to slow?

Yes. That's right. Assuming that the category grows in volume then I would expect the shelf space to continue to grow but just maybe it might grow a little less than the volume growth where as for the past probably three years it's grown in excess of the volume growth.

Okay. And if we were to think about the -- the possible price increase coming from some of the big brewers, they said on mainstream but especially on value brands does that -- do you see that affecting shelf space? Do you see that taking away from the bigger brands or --?

You know, I don't know because, one would assume that there's price elasticity so if the prices went up, the volume would go down but, the dollars may -- while the volume may go down the dollars may go up and retailers are really looking at dollar turnover per SKU or per linear foot. So it's not clear to me which way that will work itself out.

Okay. Switching tracks a little bit. On the Miller Coors call this morning, they mentioned increase in freight costs and that there was some sort of a capacity constraints around trucks for shipping. I was wondering if you guys had seen any of that. Obviously, it really didn't seem to be in second quarter numbers, but if that's something that might be an issue for you.

I didn't have a chance to -- to review the report of the call, so I'm not totally sure of the specifics of what they were saying but to just as it specifically relates to us, I think we have seen some fuel surcharge increases which are some what linked to gas prices or -- at the pump, but beyond -- and those have been sort of marginal relative to what we saw two years ago. And from availability point of view, I think what we're lucky enough [in our] locations to date haven't seen that. Could we see it, of course, but to date we haven't.

Great. And last just -- we have seen wheat costs really shoot up, have you guys seen anything in terms of your outlook for barley change in the last quarter?

We primarily purchase Canadian [torop] and so that's the -- the market we look at and I think to date it's been a little reaction to the wheat situation but not a huge amount. We're not yet fully covered for next year and so I really can't say exactly what our barley costs are going to be next year.

Okay. That's great. Thank you, guys.

Thank you.

Our next Andrew Kieley with Deutsche Bank.

Hi. Good afternoon.

Hi, Andrew.

Hi.

I was just wondering this quarter it looks like the core shipments were lagging the depletions a bit. I was just wondering do you expect that to catch up a bit in the third quarter?

I think typically we would expect that on a full year basis all of this stuff corrects itself and there's certainly some month to month variation, there's even some seasonal build and going into the summer and then that somewhat unwinds a little bit and certainly unwinds significantly in December. So for full year planning basis I think that's a good assumption.

Okay. And then just in terms of the pricing environment. I mean is most of that -- are you seeing more pressure just in the high end in terms of maybe imports or other craft competitors? Is that mostly where it's more competitive?

Well, there's some divergent trends. The imports have been less able over the last couple of years to raise their prices and in many markets they're drifting below craft beer whereas five years ago they tended to be above craft beer. So there -- yet craft beer pricing is strong, so there seems to be a little bit of a decoupling within better beer.

Right. Okay. And then, Jim, I just wanted to go back to the competitive and the shelf space question. As you see some of the big domestic brewers putting more activity into craft and we see some of these very small craft brands grow at very high rates but you are seeing shelf space still expand. Does that leave room for everyone in the craft category to grow, especially more established brands, craft brands, like yours, is there enough space for everyone to grow at good rates?

Well, there's always more people wanting to get on the shelf than there is shelf to get onto so that's going to be a permanent situation. I think it does open up opportunities in the short term for us to get distribution of other styles beyond lager and light and seasonals, sixes and 12s and it'll depend on the market, how many additional styles and SKUs we can -- we can gain.

And I think longer term it does give us an opportunity as our volumes continue to grow to get second facings because there are starting to be, you know, out of stock situations of some of the stronger selling craft beers like Sam Adams because you've got, a shelf one -- one slot for Boston Lager sick packs and that maybe holds four six packs and somebody comes in and buys two of them and then on Friday at 5.00 and somebody comes in and buys the other two on Friday at 7.00 and you have out of stock maybe even for the whole weekend.

So as our volume grows it does give us opportunities to prevent out of stocks by double facings of some of the faster moving packages and you've seen that for years in the other strong better beer brands like Heineken and Corona.

Okay. And then just last question if you could just update us on -- on capacity utilization at the Pennsylvania plant, where that stands and then in the past you have given sort of in the long term gross margin target I think like high 50s. Is that still sort of the long term goal of the Company?

Andrew, on the capacity side I think, we have now had full ownership and full control of that facility with only beer now for 12 months and I think I'm pleased to say that we're going to get through this summer with all of our Sam Adams beer brewed in those facilities and we're still identifying areas to increase capacity and de-bottle neck.

I think our expectation is based on the growth rates we see for the next 12 months we'll be able to get through our pinch points next summer in our only facilities too. But, you know, frankly, the growth rates are difficult to assess. The beer styles that we may introduce may require different processing so we have and continue to maintain relationships with third party contract breweries which affords us some flexibility to move peak volume.

Okay. Thank you.

Thank you there are no further questions at this time. Mr. Koch, are there any closing remarks?

No. Thank you all for joining us and we'll speak again in about three months.

Cheers.

Cheers.

Thanks.

Thank you for joining today's conference call, you may now disconnect.