Boston Beer Company Inc (SAM) 2012 Q3 法說會逐字稿

Good day. My name is Lisa and I will be your conference operator. At this time, I would like to welcome everyone to the third quarter 2012 earnings 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).

At this time, I would now like to turn the call over to your host, Mr. James Koch, Founder and Chairman. Please go ahead.

Thank you, good afternoon and welcome. This is Jim Koch, Founder and Chairman and I am pleased to be here to kick off the 2012 third quarter earnings call for the Boston Beer Company. Joining the call from Boston Beer are Martin Roper, our CEO and Bill Urich, our CFO. I 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 third quarter, as well as review our outlook for the remainder of 2012 and our initial outlook for 2013. Immediately following Bill's comments, we will open the line for questions.

We achieved depletion growth of 15% for the quarter and 11% for the first nine months of the year, which is attributable to strong sales execution and support from our wholesalers and retailers, as well as our great quality beers, innovation capability, and strong brands. We believe that craft beer will continue to grow and that we are well-positioned to share in that growth. We released some excellent beers this Fall, including Sam Adams Harvest Pumpkin, and a new small batch brew, Sam Adams Fat Jack, a double pumpkin. And I believe that these styles have been well received. We remain confident about the long-term outlook for the craft category and for Samuel Adams. 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. I remind you that such predictions and the like are forward-looking statements and 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.

In the third quarter, our depletions growth benefited from strength in our Samuel Adams seasonal, Twisted Tea, and Angry Orchard Brands, offset by some slight decline in some of our other Samuel Adams brand styles. Based on the strength of the national rollouts of our Twisted Tea and Angry Orchard brands, and the continuing growth of our Samuel Adams brand family, we have increased the investment levels in our sales force and our support behind our Samuel Adams brand. We expect to continue to increase investments in advertising, promotional, and selling expenses behind existing brands and also innovation, commensurate with the opportunities and the increased competition that we see.

During the quarter we updated our packaging for all Samuel Adams styles and continued the evolution of our brand communication, For the Love of Beer, that builds on our previous messaging. Our higher than normal capital investment projects in 2012 support the increasing complexity of our portfolio and our Freshest Beer Program. And have expanded the capacity and capabilities of our breweries to meet anticipated future growth. These projects have done well. We expect a similar high-level investment will be needed in 2013, after which we should return to an annual capital investment level of between $30 million and $45 million, including the capacity expansion initiatives to accommodate our expected growth. We're making appropriate investments in brand building activities and capital improvements in our brewing and packaging capabilities to position us well for long-term growth and continued efficiency gains. We have prepared to forsake the lost earnings that may result from these investments in the short-term.

Alchemy & Science, our craft beer incubator continues to make progress and explore potential opportunities. It's House of Shandy brand added additional markets and a new style Tenacious Traveler, while Angel City Brewery launched two new styles on draft in the Los Angeles market and expects to have its brewery open to the public by the end of the year. These projects have had minimal sales to-date. Our 2012 financial projection includes estimated expenses, net of gross profit contribution attributable to Alchemy & Science projects of between $3 million and $5 million. But this estimate could change if new products are added. We will continue to look for complementary opportunities to leverage our capabilities, provided that they do not distract us from our primary focus on our Samuel Adams brand and on our wholesalers. We believe that as a result of our Freshest Beer Program, we are delivering better, fresher Samuel Adams beer to our drinkers while lowering wholesale inventories, reducing costs and improving efficiencies throughout the supply chain.

We currently have over 70 wholesalers signed up and at various stages of inventory reduction. We have over 50% of our volume on our Freshest Beer Program and believe this could reach between 65% and 75% by the end of 2012. We continue to evaluate we whether we can reduce these inventory levels further. Year-to-date depletions through the 43 weeks ended October 27, 2012, are estimated to be up approximately 12% from the comparable period in 2011. Now, Bill will provide the financial details.

Thank you, Jim and Martin. Good afternoon, everyone. We reported net income of $20.8 million or $1.53 per diluted share for the third quarter, representing an increase of $4.5 million or $0.34 per diluted share from the same period last year. This increase was primarily due to an increase in core shipments, which was partially offset by increased investments in advertising, promotional and selling expenses, which included freight costs to wholesalers. Core shipment volume for the third quarter was approximately 772,000 barrels, a 17% increase over the third quarter of 2011. We estimate that inventories to wholesalers participating in the Freshest Beer Program were lowered by 296,000 cases as of the end of the third quarter, as compared to the third quarter of the prior year. We also believe that inventory levels at the end of the third quarter for all wholesalers were at appropriate levels.

Our third quarter 2012 and 2011 gross margin was 56%. Cost increases in barley, hops, and other ingredients were offset by pricing increases and lower operating cost per barrel, due to increased volume and efficiencies. We continue to expect our full-year gross margins to be between 54% and 56%. We intend to continue to focus on cost saving initiatives at our breweries and are pleased with the improvements we have made to date.

Third quarter advertising, promotional and selling expenses were $8.3 million higher than those incurred in the prior year, primarily as a result of increased investments in local marketing, advertising, and point-of-sale, cost for additional sales personnel and freight to wholesalers due to higher volumes. General and administrative expenses increased $2 million, compared to the third quarter of 2011, due to increases in salary and benefit costs and Alchemy & Science startup costs.

Our effective tax rate for the third quarter of 2012 was approximately 38%. Based on information, of which we are currently aware, we have left unchanged our projected 2012 earnings per diluted share of between $3.80 of $4.20 for the 52 week period ending December 29, 2012. Our actual 2012 earnings per diluted share could vary significantly from the current projection. We continue to expect that 2012 depletions growth will be between 8% and 12% for the 52 week period ended December 29, 2012, compared against the 52 week period ending December 31, 2011. We expect 2012 shipment growth will be between 7% and 10% for the 52 week period ending December 29, 2012, compared against the 53 week fiscal period ending December 31, 2011. We estimate an aggregate inventory reduction in wholesalers participating in our Freshest Beer Program of between 100,000 and 300,000 case equivalents as of December 29, 2012, compared against December 31, 2011. We continue to target price increases per barrel of approximately 3%.

We now estimate that increases to advertising, promotional and selling expenses, not including any increase in freight cost for the shipment of products to our wholesalers, to be between $14 million and $18 million, up from the previous communicated estimate of $11 million to $15 million. Approximately $10.5 million of this projected increase has been incurred in the nine months ended September 29, 2012. We believe that our 2012 effective tax rate will be approximately 38%. We continue to evaluate 2012 capital expenditures and have narrowed our estimated 2012 expenditures to between $65 million and $75 million, up from the previously communicated estimate of $55 million to $75 million, most of which relates to continued investment in our breweries and additional keg purchases in support of growth.

Looking forward to 2013, we are in the process of completing our 2013 planning process and we'll provide further detailed guidance when we present our full-year 2012 results. Currently, we using certain targets and assumptions based on information of which we are currently aware. We are targeting high-single digit depletion trends and price increases per barrel of between 1% in 2% to partially offset anticipated barley, hops, and other ingredients, packaging freight and processing cost pressures. Full year 2013 gross margins are currently expected to be between 53% and 55%, due to anticipated price increases not fully covering anticipated cost pressures and some other product mix changes. We intend to increase advertising, promotion and selling expenses by between $6 million and $12 million for the full-year 2013, which does not include any increases in freight costs for shipment of our products to our wholesalers.

We estimate increased expenditures of between $2 million and $3 million for continued investment in existing brands developed by Alchemy & Science, which are included in our full-year estimated increases in advertising, promotions and selling expenses. Additional projects, yet to be developed or acquired, may significantly increase investments in Alchemy & Science and advertising, promotion and selling expenses. We estimate our full-year 2013 effective tax rate will be approximately 38%. We are currently evaluating 2013 capital expenditures and our initial estimates are between $55 million and $65 million, most of which relate to continued investment in our breweries, as well as additional keg purchases. Based on information currently available, we believe that our capacity requirements for 2013 can be covered by our breweries and existing contract capacity at third-party brewers.

We continue to maintain a strong cash position with $62.8 million in cash as of September 29, 2012. During the first nine months of 2012, we repurchased approximately 120,000 shares of our class A common stock for a total cost of $12.6 million and repurchased approximately an additional 25,000 shares during the period September 30, 2012 through October 26, 2012 at an approximate cost of $2.7 million. On October 1, 2012, the Board of Directors approved an increase of $25 million to the previously approved $275 million share buyback expenditure limit for a new limit of $300 million. Through October 26, 2012, we have repurchased a cumulative total of approximately 10.7 million shares of class A common stock for an aggregate purchase price of $267.1 million and had approximately $32.9 million remaining on the $300 million share buyback expenditure limit set by our 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.

Hi, Judy.

So, a few questions. First, just in terms of your spending going up for the full year, can you give us some perspective on what brands or kind of what the nature of the investments that are going up for the year? Is it more towards the Angry Orchard, Twisted Tea or is it going towards the Sam Adams brand family.

And then just broadly speaking, if you can talk about the payoff that you're getting from these investments. You know, clearly, the overall sales growth has been pretty impressive, but the Sam Adams -- the core beer family is still down, it sounds like, based on your comments. How are you thinking about the investments that you are making on the core beer portfolio and whether your starting to see some traction on those investments?

Sure, Judy. Let me, first of all, start out -- obviously we were very pleased with the quarter and I think, as it is available from publicly standing data, we had a strong quarter on Sam Adams as a total brand family versus sort of year-to-date trends. So we were very pleased.

As we think about what might driving that, we certainly introduced new packaging in late June, early July. I think we talked about that on the last call. We also rolled out the evolution of our communications, messaging under the For the Love Beer moniker, which we are following up with the point-of-sale, and that rolled out also in the end of June. Also, in parallel to that, and I think we mentioned this on previous calls, we have added to our sales force that's operating at a high level and we're approximately 60 people more than this time last year.

And all of those things seems to have helped us in the quarter, basically executing against the Sam Adams brand family, increasing distribution and availability and displays. And I think we are also helped by having the leading position in the seasonal category in that quarter.

Beyond a Sam Adams, we are also pleased with Twisted Teas' progress and its continued growth -- solid growth across the country. And then also the progress that Angry Orchard after its national launch in April.

As we look forward, one of the biggest expense numbers is the people number, which is sort of -- not directly targeted behind any specific brand. But we have increased are spending on the Sam Adams brand, communication to drinkers through the medias we buy, particularly the online space. And we are commensurate with the growth that we are experiencing, increased plan-spend behind Twisted Tea and Angry Orchard just to take advantage of the momentum that we have.

Okay. And then, just in terms of guidance, first on depletions, just given the strength that you have seen on your depletion trend year-to-date, I am just wondering if there's any reason why you didn't take up the 8% to 12% depletion guidance? And whether you do expect some slow down in the fourth quarter?

And then just in terms of the gross margin guidance for 2013, I guess I'm just curious as to hear from your perspective on the pricing side, is there any reason why you wouldn't take up pricing more just to kind of manage through gross margin pressure more aggressively?

Sure. As we look at the fourth quarter, we don't see some of the mix sort of growth issues that we experienced in the third quarter being quite as beneficial to us. But obviously, we could be wrong and we certainly have been happy from the year-to-date number, you would conclude that we have started off that quarter strong. So we are certainly happy with where we are and that's are current best guesstimate. But of course, we could be wrong at sort of related to mix issues.

As you think of next year, we certainly would try to optimize our revenue per barrel, as we have in previous years. I just think as we look forward, we don't think the competitive landscape, at least in the price points where we are playing in are quite is favorable as they have been historically. And that is based on signals that we are reading as to retailers' happiness and drinkers' happiness with craft pricing going up year after year, at rates to cover our costs.

But we're starting to feel some pushback on that and therefore, we're probably not as optimistic that we will be able to, but that being said, we have a very real cost increases next year. A lot of them driven by what is going on in the corn markets this summer, and therefore barley price pressures but there are other pressures too. So we will certainly try, but in doing our financial planning and also in providing guidance, we didn't think we could be as optimistic as in previous years.

Okay. And then just, finally Bill, you have a strong cash position, but CapEx has been going up and you're going to have another year and 2013 we are CapEx is up, as well. So just in terms of your willingness to take on debt and pay for some of those CapEx increases or fund share buyback, can you just talk about what your willingness is on that front?

Well, historically, we have elected not to take on any debt and to fund any capital projects through our cash flow. That's what we have done year-to-date, and have current plans right now, but that could change.

Got it. Okay, thank you.

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

Hi, James.

Just wanted to follow-up first on that pricing statement, you talked about getting more pushback (technical difficulties) and from consumers. I guess I'm more concerned with the retailers.

Just wondering if you can give a little more color on which are seeing there? Because year-to-date your pricing for barrel is up above your guidance this quarter, it looked like it was up 5%, which is very strong. So I'm wondering what you are seeing there? And just how that relates to increase competition for shelf space with retailers?

Yes, I think, James, we are looking forward and we are reacting to of the conversations with retailers that we have either had, or we read about, that other people have had where retailers have gone public with some concern about where the pricing is going. I think, just like in anything, we've gone up and not everyone else followed and I think that somewhat shows up in some of the IRI Nielson data by market, and we're also reacting to that. Obviously we us wish to be competitive and wish to maintain our position in the marketplace.

So based on both of those sort of factors, we are just not convinced that our ability to uptake pricing cover our costs, which is what we're trying to do; that we're going to be able to do that next year. You know, there have been years in the past when that is been the case and then we've been able to recover, or indeed the cost elements have recovered. But just as we look at next year, we're not as confident as we were this year.

Okay. And it is it that you guys are seeing more competition from Longtail or is the pressure kind of from a domestic, specialty brands priced just below you? Is that applying more pressure next year?

Well, I think it's a combination of things. One is more craft beers on the shelf with a greater variance of prices on the shelf, which inevitably provides a different competitive dynamic than, let's say, six or seven years ago when there were only three or four craft beers on the shelf.

Secondly, on the domestic specialty front, you have one of the lead domestic specialty brands, pretty aggressively competing on price. And that threatens, basically, the category of price stability and they seem to be driving volume very successfully based on that. And so, we have to watch that and think about price gaps and monitor those.

And then you also, at least, as we understand it, have some indication that there's going to be some introductions of new domestic specialty brands, potentially at lower price points still to combat that activity. And so the whole pricing and structure of the high-end American craft beer and domestic specialty beer is sort of evolving a little bit and it's not quite as clean as it was five, six years ago. It is also done on a market-by-market specific basis, obviously.

We are reacting to what we see him what we think is going to happen. Obviously, we be happy to be wrong.

It's pretty interesting about the changing nature of the pricing. How much of a gap do you feel these new competitors can come into, compared to, I guess the core of craft beer and still be drawing from the consumer and still be relevant competitors? Or at what point with the price be too low to almost not be seen as a craft competitor? Is that a problem?

James, I would say, yes, there are not absolutely clear lines of demarcation, in this part of what I will think of as the better beer category. I mean, in some ways, we compete for customers and for ads and for shelf space with a wide range of other beers. And you would have to throw imports into the mix, as well, where we compete with ads and shelf space and customers.

And if you look at the IRI Nielsen data, for this year, you will see that our price increase has been higher than -- particularly on 12 packs which is the big promotable package -- we have taken price higher than the 12 packs of the major imports and the major crafts. So you have got that dynamic across imports and the other crafts, the same thing is true with domestic specialties. Martin mentioned some of the interaction there.

And there are new quote-unquote value crafts coming from big mass domestic producers. And you've even got things like Yuengling that effect our volume. So we compete in a pretty comprehensive space and this year our price increase has been higher than the comparable brands so there is a little bit of that as well. That, we went up pretty aggressively this year.

Just one quick last one on this topic. Do you guys consider yourself as having an entry in any of this value craft? Or is this a place that you would be kind of interested, if the industry moves there, you would feel that you'd have to kind of have an entrant there?

It's hard to have a crystal ball, but right now, to answer your first question, we really don't consider ourselves as having an entry in that. We have always competed as a craft brewer and have often taken price leadership. So we don't have a lot of incentive or desire to take the category price down. Our economics in the cost of our ingredients put us at a disadvantage, if that's part of the game.

Great. Thank you very much guys.

(Operator Instructions)

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

Hey, Andrew.

Good afternoon.

Hi. You can hear me?

Yes.

Okay. I just want to understand, the acceleration in depletions this quarter. Could you just talk a little bit about the mix of that, how much maybe cider was a part of that. How much might have been, I think you launched Octoberfest a little bit earlier than usual, maybe just some of the moving pieces in there?

Sure. I'm not sure, what -- one total Sam Adams family grew nicely and that was reasonable numbers and some of that, perhaps, was due to a clean cut-over from Summer Ale to Octoberfest, compared to last year. Because I don't think we launched it earlier this year than we did last year, I think that cut-over with manage much tighter. Obviously we spent a lot of time trying to get those things right to minimize obsolescence, or beer in the market at the wrong time. I think that's one of the hidden benefits of Freshest Beer, frankly, it is a greater ability to manage that on a significant piece of our volume.

So that certainly helped, but across our Sam Adams portfolio, we've seen strength from seasonals and some of the Brewmasters styles of some of the eclectic beers that we have at the high-end. Twisted Tea continued to grow and obviously we continue to benefit from the new markets we've entered in the last 24 months. That so that showed solid growth.

And then, our cider brand, Angry Orchard, that rolled out, was obviously rolling out against no comparable volume in that time period last year. Although [diminuous] volume, we did have it in New England in September a little bit, but obviously, that was all incremental.

And so they all contributed. I think we're happy -- we're very happy with the Sam Adams brand family growth. I should mention our variety pack business also did very well. We're just going to try everything we can to maintain that momentum into the fourth quarter.

Yes, okay. And then the second question was just on the cider and the tea. You mentioned getting to the full national footprint. Our both of those products fully national now? Or when do you anticipate that would happen?

Well, I think it's fair to say that we have launched them, nationally in all the states, but that doesn't really mean they are national because they are a different levels of penetration on the distribution side. Certainly we are not good enough to click our fingers and get national distribution of a brand just like that.

So, if I were to talk about tea, yes, we have national distribution but it ranges from very strong penetration in a couple of markets, like in the Northeast, and in the central, to -- we're still sort of building distribution and have lots of distribution opportunities in the South, the Midwest, and the West Coast, or at least Southern West Coast. Yes, we are national but we still have very significant distribution opportunities. And I think with the Nielsen IRI numbers you'll see that.

Angry Orchard, we launched in New England in September of last year. And then sort of rolled national in sort of March, April, May timeframe. We are happy with the distribution penetration that we have gotten, but we are still at a fraction of where we are with Sam Adams.

So, to us, yes, we're national but until we can close the distribution gaps a little bit, we haven't yet reached are national potential. So we still see upside from growing the distribution numbers. And again, I think it's very apparent in the IRI Nielsen numbers.

Okay, thanks. The other question is just on the product pipeline. I guess, how are you feeling about the innovation pipeline?

Anything -- I mean it sounds like the next 12 months will be mostly like blocking and tackling on the new brand you already have. Are there any big new projects we should be thinking about?

Well, I think we always have Sam Adams beer development ongoing. So that's ongoing and you should expect us to continue to innovate and lead in that fashion with new beers for our Brewmaster's collection for our barrel room, for our single batch series and also for our variety packs to be introduced next year. That's all sort of the brand building elements of our brewing and our innovation. And also some efforts to increase shelf space.

I think from a major brand volume perspective, you're right, we're going to be focusing on optimizing the potential of sort of three larger brands, obviously Sam Adams, easily the largest and then Twisted Tea and Angry Orchard. And that's going to be our primary focus in planning for next year.

But we do have, with our relationship with Alchemy & Science, a couple of projects that are in market right now that if they prove to have attractive opportunities for maybe more significant national pushes, we could choose to roll next year. And there are also things under consideration or discussion that could emerge into such opportunities. Certainly, as we think about our financial planning, we're planning on blocking and tackling and optimizing the opportunities that we see on the brands we have rolling right now. And anything else, obviously, would be icing on that cake.

Okay. Maybe just one last, for Jim.

Just given some of the comments about the pricing environment and all the headlines we've seen, it seems like there's more activity, not just in the beer, but in the cider side. Does it change at all, how you think about the competitive environment, or is it just more of the same as a very active competitive environment that it has been for the past few years?

Yes. I think it's certainly been a very active competitive environment, as you say, for the last few years. Probably becoming even more so. I think everybody is looking for smaller and smaller pockets of growth. And there are now thousands of craft brewers, so if there is a hot style, you're going to have hundreds of new entries very, very quickly.

So innovation is important but you're not going to have the field to yourself for more than a few weeks. That does drive us to make sure that we focus on the blocking and tackling of the brands that we have today and the big volume packages and products within those brands.

Okay, thanks very much. Hope the storm did not treat you too bad up there.

We just had wind. You guys had Noah's Arc.

(laughter) All right, thanks. Take care.

There are no further questions at this time.

Well, thank you everybody. We know for many of you it has been very difficult the last couple of days.

We do appreciate you joining the call. And we look forward to talking to you in the new year. Cheers.

Cheers.

Thank you.

This includes the conference. You may now disconnect.