Boston Beer Company Inc (SAM) 2010 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 Boston Beer Company fourth-quarter 2010 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 Mr. Jim Koch, Founder and Brewer. Please go ahead, sir.

Thank you. Good afternoon, and welcome. This is Jim Koch, Founder and Brewer, and I am pleased to be here to kick off the 2010 fourth-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 will begin my remarks this afternoon with a few introductory comments, including some highlights of our results, and then 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 fourth quarter and 2010 fiscal year, as well as our outlook for 2011. Immediately following Bill's comments, we'll open the line for questions.

We achieved depletions growth of 12% in the fourth quarter and total depletions for the year grew 11.5% to 30.9 million case equivalents. This record total depletions for the fourth quarter and the full year is attributable to our strong sales execution, and continued support from our wholesalers and retailers. While we continue to see expanded distribution of domestic specialty and local craft brands, which is increasing competition in the category, we're happy with the health of our brand portfolio. After 26 years, we continue to grow our flagship beer, Samuel Adams Boston Lager, even as we continue to innovate and develop new beer styles such as Samuel Adams Noble Pils, the Barrel Room Collection and Infinium.

This kind of innovation runs deep in our Company, and it is not limited just to brewing. For example, in 1988, we introduced legible freshness dating, so that drinkers and retailers would know that their Samuel Adams beer was fresh. We followed that with a program of buying back beer not meeting our freshness standards from wholesalers and retailers. For many years, we have executed an ambitious program of draft quality audits across the country, where our brewers and sales representatives inspect the draft systems, pouring our beer for a variety of standards, including temperature, cleanliness, and freshness. In 2007, we introduced our Samuel Adams Boston Lager glass to enhance the drinker's experience by presenting the beer in a unique way.

I want every Samuel Adams to reach our drinkers with the same flavor and fresh taste that I enjoy when I have a beer at one of our breweries. A new initiative, our Freshest Beer program will help us reach that standard. This program substantially reduces both the time and the temperature our beer experiences at wholesaler warehouses before reaching the market. This reduction in time and temperature is not only good for our beer, we believe it will also be financially and organizationally beneficial to our wholesalers, and in the long-term, good for our business.

We began last year by testing the Freshest Beer program with 5 wholesalers in different markets. We're pleased with the preliminary results, and we're expanding this program to an additional 10 wholesalers in the first quarter of 2011. We believe that in the long term, this program will deliver better, fresher beer to our drinkers and should reduce costs and improve efficiency throughout the supply chain. We're excited by this innovation opportunity the Freshest Beer program presents and intend to expand this program to cover more of our volume. I will 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 performed well in the fourth quarter, and that the business continues to be healthy and may be responding to our increased investments in our brand. As we look forward to 2011, we expect to augment our sales force and brand support levels further, to address the increasing competitive activity and to grow our brands appropriately, given the opportunities we see. It is possible that these decisions might result in slower earnings growth in 2011, as we may forsake some earnings in the short-term in order to build our organizational capabilities, and support our brands at appropriate levels.

Our 2011 earnings may also be negatively affected by the systems costs associated expanding our Freshest Beer program. We're currently planning that 2011 depletions growth will be approximately 9%, which is slightly lower than 2010 trends. Historically, our wholesalers have carried three to five weeks of packaged inventory, and three to four weeks of draft inventory. In testing our Freshest Beer program in 2010 we successfully reduced the inventories of participating wholesalers by approximately two weeks, resulting in fresher beer being delivered to retail. We estimate that this move lowered shipments in 2010 by approximately 50,000 case equivalents. We continue to monitor these markets for any unexpected effects, and the overall business benefit of this program, but at this point, we are encouraged by the trade offs we see and excited by the enthusiasm this program is generating with our wholesalers.

While our pilot program is teaching us that we still have much to learn and adjustments to make, we're planning to expand this program to additional wholesalers. If the outcomes continue to be positive for us and for our wholesalers, we will expect to support 50% of our volume with our Freshest Beer program by the end of 2011. If we reach the target expansion levels for the Freshest Beer program, we would expect 2011 shipments to be lower than if we had not implemented the program, reducing shipments by approximately 500,000 to 800,000 case equivalents based on current depletion trends. Our current estimate of the reduction in shipments and costs associated with the program lead us to believe that 2011 earnings per diluted share will be $0.20 to $0.30 per share lower than what we might have expected, if we did not execute the program.

Once the transition to the program has been implemented, we expect shipments and depletions to return to their historical relationship. If we were able to execute the Freshest Beer program more quickly, or with greater inventory decreases than currently envisioned, the result would be that 2011 shipments growth will lag depletions growth by more than originally anticipated, and result in a greater decrease in earnings per diluted share. Year-to-date depletions through February 2011 are estimated to be up approximately 9% from the same period in 2010, with one more selling day in the 2011 period.

Shipments and orders in hand suggest that core shipments year-to-date through April 2011 will be up approximately 6%, compared to the same period in 2010. Actual shipments may differ and no inferences should be drawn with respect to shipments in future periods. Now Bill will provide the financial detail.

Thank you, Jim and Martin. Good afternoon, everyone. We reported net income of $12.2 million or $0.87 per diluted share for the three months ended December 25, 2010, representing an increase of $4.7 million or $0.35 per diluted share from the same period last year. The increase is primarily due to increased core shipment volume and improved margins, partially offset by increased advertising, promotional and selling expenses. Core shipment volume for the three months ended December 25, 2010, was approximately 565,000 barrels, a 7% increase versus the same period in 2009.

The increase in shipments for the quarter is primarily -- due primarily to increases in Samuel Adams Seasonals, the Samuel Adams Brewmaster's Collection and Twisted Tea, partially offset by declines in Samuel Adams Boston Lager and Samuel Adams Light. We believe that inventory levels at wholesalers at the end of the fourth quarter are similar to previous years, except for those wholesalers participating in the Freshest Beer program, whose inventories were lower. Our fourth quarter 2010 core gross margin of 57%, represented an increase of 5 percentage points over the fourth quarter 2009 core gross margin.

This increase includes a $2.1 million, or a 2 percentage point favorable impact for forfeited deposits attributable to kegs and pallets that we deem are no longer in our distribution system. The remaining increase of 3 percentage points reflects lower brewery processing and packaging costs per core barrel at our breweries, driven by higher volume and the impact of our cost savings initiatives and pricing increases of approximately 1%. Fourth quarter 2010 advertising, promotional and selling expenses were $5.1 million higher than those incurred in the fourth quarter of 2009, primarily as a result of increased investments in point-of-sale materials, advertising, and higher costs for additional sales personnel, as well as increased investments in local marketing programs.

General and administrative expenses were flat compared to the prior year, due to increased legal and consulting expenses, and salaries and benefit costs, offset by a decrease in stock compensation expense. Our effective tax rate for the fourth quarter of 2010 was 35.5%. For the year ended December 25, 2010, total Company depletions increased approximately 11.5% due primarily to increases in Samuel Adams Seasonals, Twisted Tea, the Samuel Adams Brewmaster's Collection and Samuel Adams Boston Lager, partially offset by declines in Sam Adams Light.

Core shipment volume for the year ended December 25, 2010, was approximately 2.3 million barrels, a 12% increase compared to the same period in the prior year. The increase in shipments is due primarily to increases in Samuel Adams Seasonals, Twisted Tea, the Samuel Adams Brewmaster's Collection and Samuel Adams Boston Lager, partially offset by decreases in Samuel Adams Light. Our net income of $50.1 million or $3.52 per diluted share for the year ended December 25, 2010, represented an increase of $19 million or $1.35 per diluted share, compared to the same period last year.

The increase in net income is primarily due to the increases in core shipment volume, and improved gross margins, partially offset by higher advertising, promotional and selling expenses, and general and administrative expenses. Advertising, promotional and selling expenses incurred during 2010 increased by $14.1 million, as compared to 2009. The increase was primarily due to increased investments in point-of-sale materials, local marketing and advertising, as well as higher costs for additional sales personnel.

General and administrative costs increased by $2.2 million during 2010, as compared to 2009, due to increases in legal and consulting expenses, stock compensation expense, and salaries and benefits, partially offset by the reversal of a stock compensation expense for an option that did not vest. During the 12 months ended December 25, 2010, we recorded a provision for income taxes of $31 million, as compared to $23.2 million in the prior year, due to the increase in pre-tax income. Our effective tax rate for the 2010 year decreased to 38.2% from the 2009 rate of 42.8%, as a result of higher pre-tax income, but with no corresponding increase in non-deductible expenses, and an increase in research and development credits.

Looking forward to 2011, based on information which we are currently aware, and including the estimated negative impact of the Freshest Beer program of $0.20 to $0.30 per diluted share, we are targeting earnings per diluted share for 2011 of between $3.45 and $3.95, but actual results could vary significantly from this target. We believe that the competitive pricing environment will continue to be challenging, and are planning to achieve revenue per barrel increases of approximately 1%. If we successfully execute our Freshest Beer program for the 50% of our volume in 2011, we would expect shipment growth of 6% to 8%, reflecting an anticipated aggregate inventory reduction at wholesalers of approximately 500,000 to 800,000 case equivalents.

We will continue to focus on efficiencies at our Company-owned breweries and are not currently aware of any significant increases in cost of packaging and ingredients for 2011, but continue to monitor energy costs, where any increases could have a material impact on our 2011 costs, particularly freight. Full-year 2011 gross margins are currently expected to be between 54% and 56%, after considering the current known impact of implementing the Freshest Beer program. We intend to increase the investment in our brands by between $12 million and $18 million in 2011, commensurate with the opportunities for growth that we see, but there is no guarantee such increased investments will result in increased volumes.

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 believe that our 2011 effective tax rate will be approximately 39%. We are continuing to evaluate 2011 capital expenditures, and based on current information, estimate a range of $15 million to $25 million, most of which relates to continuing investments in the Company-owned breweries and additional keg purchases. However, the actual amount spent may be well different from these estimates.

Based on our current information currently available, we believe that our capacity requirements for 2011 can be covered by Company-owned breweries and existing contracting capacity at third party brewers. We continue to maintain a strong cash position with $49 million in cash as of December 25, 2010. During the 12 months ended December 25, 2010, we repurchased approximately 1.1 million shares of our Class A common stock for a total cost of $68 million. From December 26, 2010, through March 4, 2011, we repurchased an additional 14,400 shares, for an aggregate purchase price of $1.3 million. We have approximately $34.6 million remaining on the $225 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 Andrew Kieley of Deutsche Bank.

Just wanted to ask-- I guess I will start with the revised guidance. Even if we take out, say, $0.25 for the freshness program, it looks like the low end of the guidance has come down a bit from where you initially put it, at $3.95. Is that reflecting more SG&A and advertising investment in sales force, or is there also some commodity inflation or other cost issues in there?

Andrew, it is Bill. The $3.95 that was published back at the end of December was before any impact for the Freshest Beer program.

Okay. With the change today, you're not adding any other cost pressures or factors into that guidance, it is purely the freshness program?

I think, Andrew, it is Martin. I think the changes to our guidance just reflect our current best guess as to the impact of Freshest Beer. From a cost perspective, I think we indicated the biggest cost exposure we have is energy, linked to freight, outbound primarily, a little bit of inbound. I know there have been observations of cost increases on some of the agricultural materials that we use, but we are in actual good position, when we made our arrangements for our 2011 purchases. So, we think we're actually covered there in the guidance that we had given previously, so that hasn't really changed since we last gave that guidance. And on the other packaging material items, we haven't seen too much movement, and certainly nothing that you wouldn't just put as noise, at least to date.

Okay. So that was my next question, the coverage on the packaging is fairly good for the coming year?

Well, we're exposed to paper mill-type cost changes and on a glass bottle front, we're exposed to changes in natural gas, but other than that we're in pretty good shape.

Okay. And then, Martin, I want to ask on the freshness program can you talk about breakdown at all where the costs are for that program? Then timing; is it going to be mostly in the first half of the year, sort of evenly spread over the course of the year, as you roll it out?

Sure. I think the primary costs we have visibility to today, as we have indicated in our release, are related to the fact that in order to take inventory down, we're going to have shipment shortfalls this year. That's the primary driver of the EPS reduction that we have indicated. Obviously the size of that reduction is then dependent on how much inventory reduction at wholesale we can execute, and support reliably, and how many wholesalers we can put into the program.

Our goal currently that we're working towards is to try and get 50% of our volume in the program by the end of the year, and that led us to estimate the range of inventory reductions that we might be able to achieve. I think as we go through the year and we start to see the impact of how the highest service demands impact our breweries. It may be that we reduce the inventory levels a little slower than we have done in our pilot program and that leads to the sort of wide range that we have as to how that may affect shipments versus depletions and that then flowing through to EPS. So, that sort of explains the wide range. It totally depends on how deep we go and how fast we go and what problems we may or may not encounter as we go through it.

We do anticipate some other costs in the program. In the breweries, both capital to make the breweries more flexible to be able to deal with the higher service demands. We may also have some changes to order systems, so IT investment and stuff, but we think that most of the costs that we can identify today at least are primarily related to not having the shipment volume this year.

With regards to your second question on timing, we're trying to go as fast as we can without creating business risk, or basically biting off more than we can chew. We are asking for things from the wholesalers as we execute this program, including cold storage at the wholesalers for our beers, beyond what they currently provide, and some other trade activity information flows. So, as we get wholesalers to agree to those, we'll bring them on. I think we would hope for a little wave in March, which may actually drag out into April, and then we'll settle down maybe at 15% to 20% of our volume under the program. I hope that we're able to operate that successfully through the second quarter, and then we'll start to add more wholesalers if we haven't seen any system breakdowns in how we're supporting that business.

Okay. So the drag that you're anticipating, I think the 2% drag on shipments versus depletion, that will sort of be spread over the year, maybe a little bit more in March and April?

I think a little bit more in March and April and then a little bit more towards the end of the year. Yes.

And just to clarify, there was no impact on your costs in Q4 from the freshness program?

I think we indicated that we felt that wholesaler inventories were reduced by 50,000 cases, that they wouldn't otherwise have been reduced by, if the program had not existed, so you can sort of work out our gross margin per case and get to a number from there.

Okay. And just final question, on the plants and the capacity utilization. I just want to see coming out at the end of this year, where are you on capacity utilization? Is it at 100%? And how much more do you think you can expand Lehigh with just incremental CapEx, and is the new plant at some point, is that totally out of the picture in your thinking?

Great question. I think we're obviously second year of running the Pennsylvania brewery and actually the first year of having it solely for our beers, and I think we have a better feel for that. We certainly, in the way we were running it last year, started to reach some capacity constraints in peak months but not for the rest of the year, and we actually think we can, through more efficient running and planning, ease those constraints a little bit.

Our anticipation is that our breweries could actually deal with the peak month volume that's higher than last year's. Obviously, they have spare capacity in non-peak months, so we actually have pretty significant capacity-- ability to add. Our strategy is sort of focused on maximizing throughput in peak months, and making sure we have back up plans for third-party brewers to where we can take over the brewery and brew beer in peak months, if we should need to. And if there is a possibility we may need to do that in 2011, and we'll certainly have plans in place to do that if we would be blessed by growth which would require us to do that.

Then looking forward, we think that the breweries can be expanded with moderate amounts of capital. Certainly if you were to project out our growth rate over the next three to four years, we certainly think that we can support that with moderate amounts of capital. Expanding breweries-- you can sort of get a couple of percentage points a year, I think, is what the big brewers perhaps are doing. Whether we can do that or not, I don't know, but we certainly can add tankage and address tank constraints we have. Certainly it is possible to add packaging lines to address packaging constraints we have. We are in pretty good shape on brewing capacity, although we do need to spend a little bit of money to bring that online.

So as we look forward, we're feel pretty good about where we are for the next few years, and don't foresee a major brewery purchase in that timeframe, unless a particular brewery was to land in our lap that we really wanted. We're very happy with our ability to service the West Coast from our existing breweries based on the freight lanes that we have. So, certainly we don't have a major, Pennsylvania Brewery-type purchase in our medium-term plans, but again we would obviously would love to be in the position where we had to do that.

Thank you very much.

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

Good afternoon. First, to go back to Freshest Beer for a second. I was just wondering if you could say, just clarify a little bit more, how you're going to measure the success and if that's just being able to actually execute it with the wholesaler or if there is another measure that you guys have to measure that?

Well, I think obviously a simple measure is wholesaler inventory reduction, but I think on a bigger picture, I think Jim and I want to be able to visit a market and drink two week-old beer. So, if we do that successfully, 75% of the days that we're in the market, I think we'll be pretty happy and we think our drinkers will be, too. Beyond that, obviously, we want to minimize business disruption. When you take inventory out of the system, there is obviously risks for out-of-stocks and planning errors, so we want to minimize those and find a system that's robust enough to be able to react to those. And in doing so we want to try and streamline some of our order services and inventory and scheduling practices at our breweries.

We think as a result of this program, there could be operational efficiencies at the breweries, in terms of smoothing out how orders leave the breweries and taking out the noise that the wholesalers here create on matching brewery shipments, to actually what the drinker is buying at retailers. So, I think we'll see that as a success, too, if we get some smoothing of our order flow and then back actually to Andrew's question that, potentially helps us a little against peak capacity.

Great. Two more questions, related. One, how do you think this new inventory relates to other craft brewers and does that give you an advantage versus those other craft brewers? I mean, obviously, in terms of taste, but in terms of your standing with the wholesaler?

This is Jim. Not sure if we sort of think about it as an advantage relative to other craft brewers, because they each have their own unique operating situations and strategies. We are comfortable and feel strongly that it makes a significant improvement in Samuel Adams, in the quality and taste of the beer that the consumer is getting, and in our friendliness, user friendliness perhaps, with the wholesalers. That we are rethinking the supply chain in a way that takes costs out of the wholesaler system. Ultimately, we think that will make them more excited and enthusiastic about supporting Sam Adams, because we have considered their costs, delivered some quite worthwhile savings to them, and they can sell Sam Adams as a salesperson with confidence that it is going to be fresh, and perhaps the freshest beer in any market, wherever it is in the US.

Great. And is there anything that would prevent you from rolling this out over the long-term with all of your distributors?

Not really. At the very tail end of them-- a guy who might get a delivery every month-- it is not going to make much of an impact at that long tail of small-volume wholesalers, but certainly if you're talking about 80% to 90%, maybe 95%, shouldn't be any inherent impossibilities there. There will be more learning as we do that.

James, it is Martin. Just building off what Jim said, I think what we're implicitly trying to do is match our shipments to what the wholesaler actually needs in a much tighter synchronization. So, the ultimate level of inventory that we can achieve at a wholesaler is going to be partly a function of how often we're delivering, to Jim's point on the tail. We do think we can probably take 2 to 3 weeks out of the tail, because the tail may be has been holding 5 weeks, and we can probably do much better than that and in some cases maybe 6.

We're already making moves to adjust how we allow the wholesalers to order certain items with a view to reducing inventory requirements on slow moving SKUs, and certainly against the big wholesalers that we're going to be doing this year, we think week take two weeks out quite comfortably. I think the next wave will be the medium-size wholesalers, and while we may not get the inventory levels down to the level we get the big guys, we're certainly going to make a big improvement to our beer freshness in the marketplace.

That's very helpful. Last question. You mentioned a possible $12 million to $18 million increase in the investment behind your brands. I was just wondering, one, if that's ad-promotion centric, or if that's around just expanding the sales force? Then was there anything specific that you saw that prompted this increase? Is this all incremental by the way?

Yes, it is all incremental, and frankly it comes on top of an increase last year that was $14 million, so I think two years ago, we recognized that we were in a phase of growth for the category, that we wanted to compete in and get our fair share of and we also recognize the category was becoming more competitive. I don't know whether all the data is out, but there is a number of new brewers, breweries starting up is still pretty high, it is obviously way more competitive than it was five years ago. We wanted to build an organization and have a brand investment that would allow us to compete while all of that was going on.

So the incremental spend over those two years is pretty dramatic. I don't have the full numbers in front of me, but I want to say that we have added over 30 people to our sales force, maybe 40 in that time period. We have increased our media spend, increased our point of sales spend, increased our local marketing spend, and spread out across all the sort of brand spend elements. And we just view it as a way to make sure that our brand stays relevant, that our message is clear, and that we have the people calling on the accounts to generate the business relationships we need in order to be long-term successful.

Great. Thank you very much, guys.

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

Thank you for joining us. We'll talk to you on the next quarterly earnings call.

Thank you.

Cheers, guys, we're going to go have a beer.

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