Boston Beer Company Inc (SAM) 2012 Q4 法說會逐字稿

My name is Hope and I will be your conference operator today. At this time I would like to welcome everyone to the Boston Beer Company fourth-quarter 2012 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 question.

(Operator Instructions)

Thank you. Mr. Jim Koch, Founder and Brewer, you may begin your conference.

Thank you. Good afternoon and welcome everyone. This is Jim Koch, Founder and Chairman, and I'm pleased to be here to kick off the 2012 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'll begin my remarks this afternoon with a few introductory comments, including some highlights of our results. Then I'll hand the microphone over to Martin, who will provide an overview of the business. Martin will then turn the call over to Bill, who will focus on the financial details for the fourth quarter and 2012 fiscal year, as well as our outlook for 2013. Immediately following Bill's comments we will open the lines up for questions.

We achieved depletions growth of 16% for the quarter and 12% for 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. I'm pleased that in 2012 the Boston Beer Company continued to help lead the craft beer industry both in innovation and in variety.

In 2012 we brewed and sold more than 50 distinct styles of Samuel Adams beers. We continue to innovate and recently released some excellent new beers, including Samuel Adams Double Agent IPL, and Samuel Adams White Lantern, as well as our Hopology IPA, and Spring Thaw variety 12 packs. We believe that these styles and packages have been favorably received.

Also we recently worked with Jack McAuliffe, a craft brew pioneer and founder of the New Albion Brewing Company, to re-release New Albion Ale for the first time in 30 years in honor of Jack and his contributions to craft brewing. We're also excited about the second year of our spring seasonal Samuel Adams Alpine Spring, an unfiltered lager that showcases Tettnang Noble hops. We continue to explore ways to improve our sales execution, our brand strength, and our position within the craft category, and we remain positive about the future of craft beer and our potential for future growth. 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.

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 the Company does not undertake to publicly update forward-looking statements, whether as a result of new information, future events, or otherwise.

In the fourth quarter, our depletions growth benefited from the strength in our Sam Adams seasonal Twisted Tea and Angry Orchard brands, offset by some slight decline in some of our other Samuel Adams brand styles. The timing of our transition to our Samuel Adams spring seasonal was consistent with last year, as we accomplished a conversion from our winter seasonal to Alpine Spring by early January in most of our markets. We expect to continue to increase investments in advertising, promotional, and selling expenses behind existing brands, and also in innovation commensurate with the opportunities and the increased competition that we see.

During the quarter we may have benefited from our updated Samuel Adams packaging and from our brand messaging For the Love of Beer that builds on our previous campaigns. 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 to obtain efficiency gains and address certain capacity constraints and service issues we experienced during the fourth quarter. We are prepared to forsake the lost earnings that may result from these investments in the short term as we pursue long-term profitable growth.

Alchemy and Science, our craft beer incubator, completed its first year and continues to make progress and explore potential opportunities. During the year, Traveler Beer Company rolled out in test markets with its Curious Traveler and Tenacious Traveler Shandy style beers and it is likely we will launch more markets in 2013. Its Angel City Brewery launched two beers, Angeleno IPA and Eureka Wit on draft in the Los Angeles market, and in The Brewery Beer Hall in downtown Los Angeles, which is opening to the public in the first quarter of 2013 after some limited special events in 2012. These projects have had minimal sales to date.

Our 2013 financial projection includes estimated brand investments attributable to existing Alchemy and Science projects of between $2 million and $4 million, but this estimate could change significantly if new projects are added. There is no guarantee that 2013 volume of Alchemy and Science brands will fully cover these expenses, and others that could be incurred.

We will continue to look for complementary opportunities to leverage our capabilities, provided that they do not distract us from our primary focus on the Sam Adams brand and our wholesalers, as we believe a portfolio of growing brands is a good outcome for our wholesalers and ourselves.

We believe that as a result of our Freshest Beer Program we are delivering better, fresher Sam Adams beer to our drinkers, while lowering wholesaler inventories, reducing costs, and improving efficiencies throughout the supply chain. While we did not achieve our goals in 2012 for Freshest Beer Program, we currently have 89 wholesalers in the program, and at various stages of inventory reduction, and we remain committed to the program. We have over 59% of our volume on our Freshest Beer Program and believe this could reach between 65% and 75% by the end of 2013.

We continue to evaluate whether we can reduce these inventory levels further and to invest in the breweries to improve their service and support the program. Based on information in hand, year-to-date depletions reported to the Company through the six weeks ended February 9, 2013, are estimated to be up approximately 15% from the comparable period in 2012. Now Bill will provide the financial details.

Thank you Jim and Martin. Good afternoon everyone. We reported net income of $16.9 million or $1.25 per diluted share for the 13-week fiscal 2012 fourth quarter, compared to the 14-week fiscal 2011 fourth quarter. This represents a decrease of $900,000 or $0.08 per diluted share. This decrease was primarily due to the favorable impact of a state income tax settlement in the fourth quarter of $0.16 per diluted share, and the loss of one week.

Core shipment volume was approximately 729,000 barrels for the 13-week 2012 fourth quarter, a 9% increase compared to the 14-week fiscal 2011 fourth quarter. Fiscal 2012 fourth-quarter and full-year shipment growth rates were lower than depletion growth rates, primarily due to one week in the fiscal 2011 fourth quarter and the full year.

We believe wholesaler inventory levels at December 29, 2012 were at appropriate levels. The inventory at participating wholesalers as a result of the Freshest Beer Program was lower by an estimated 241,000 cases as of the end of the fourth quarter, reducing reported earnings per diluted share by approximately $0.08 for the year.

Advertising, promotion, and selling expenses for the 13-week fiscal 2012 fourth quarter were $2.8 million lower than those incurred in the 14-week fiscal 2011 fourth quarter, primarily as a result of having one less week in the quarter, partially offset by higher cost for additional sales personnel, increased investments in advertising in local marketing, as well as increased cost of freight to wholesalers.

The lower 2012 expense also reflects the change in accounting treatment for certain customer programs and incentives that is discussed in the full-year summary of results, and occurred during the quarter. General and administrative expenses for the 13-week fiscal 2012 fourth quarter increased by $1.7 million compared with those incurred in the 14-week fiscal 2011 fourth quarter, primarily due to increases in salary and benefit costs. Our effective tax rate for the fiscal 2012 fourth quarter increased to 37% from 30% in the fiscal 2011 fourth quarter, due to the favorable impact of a state income tax settlement in the fiscal 2011 fourth quarter of $0.16 per diluted share.

Net income for the 52-week 2012 full year decreased $6.6 million or $0.42 per diluted share compared to the 53-week fiscal 2011 full year, due to the benefit in 2011 of the recall settlement of $0.92 per diluted share, the favorable impact of state income tax settlement of $0.16 per diluted share, and increased investment in 2012 in advertising, promotion, and selling expense not being fully offset by the benefit of net revenue increases in 2012.

Core shipment volume was approximately 2.727 million barrels for the 52-week fiscal 2012 full year, a 10% increase compared to the 53-week fiscal 2011 full year. Gross margins for the 52-week fiscal 2012 full year decreased to 54.3%, compared to 55.5% in the 53-week fiscal 2011 full year. Increased cost of barley, hops, and other ingredients combined with a change in accounting treatment for customer programs and incentive costs were partially offset by pricing increases.

Advertising and promotional and selling expenses for the 52-week 2012 full year were $12 million higher than those incurred in the 53-week fiscal 2011 full year, primarily as a result of increased investments in advertising, local marketing, and sales personnel, and increased cost of freight to wholesalers. Advertising, promotion, and selling expenses for the 52-week fiscal 2012 full year excluded approximately $6.3 million in payments for certain customer programs and incentives for the full year that in the fourth quarter of 2012 were classified as reductions in revenue. These brand investments have historically been recorded as advertising, promotion, and selling expenses.

General and administrative expenses for the 52-week fiscal 2012 full year increased by $6.7 million, compared to those incurred in the 53-week fiscal 2011 full year, primarily due to increases in salary and benefit costs and Alchemy and Science start-up costs.

Looking forward to 2013, based on information which we are currently aware, we are targeting 2013 earnings per diluted share of between $4.70 and $5.10, but actual results could vary significantly from this target. We are currently planning 2013 shipments and depletions growth of between 10% and 15%.

We are targeting price increases per barrel of between 1% and 2% to partially offset anticipated barley, hops, 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 cost pressures and some product mix changes.

We intend to increase investments in advertising, promotion, and selling expenses by between $18 million and $26 million for the full year 2013, not including any increases in freight cost for the shipment of beer products to our wholesalers. We estimate increases of between $2 million and $4 million for continued investment in existing brands developed by Alchemy and Science, which are included in our full-year estimated increases in advertising, promotion, and selling expenses.

Additional projects yet to be developed or acquired may significantly increase investments in Alchemy and Science and advertising, promotion, and selling expenses. We believe that our 2013 effective tax rate will be approximately 38%.

We are continuing to evaluate 2013 capital expenditures and estimate that they may be higher than 2012 capital expenditures of $68.2 million. Based on current information we estimate a range of $70 million to $85 million, most of which relates to continued investment at our breweries and additional keg purchases in the support of growth and increased complexity. However, the actual amount spent may be well different from these estimates. Based on information currently available we believe our capacity requirements for 2013 can be covered by our breweries and existing contract capacity at third-party brewers.

We continue to maintain our strong cash position with $74.5 million in cash as of December 29, 2012. During the 52-week ended December 29, 2012 we repurchased approximately 165,000 shares of our Class A common stock for a total cost of $18 million. From December 30, 2012 through February 13, 2013 we repurchased an additional 82,000 shares for an aggregate purchase price of $11.5 million. We have approximately $18.5 million remaining on the $300 million share buyback expenditure limit set by the Board of Directors. We will now open up the call for questions.

(Operator Instructions)

Marc Riddick, Williams Capital.

I wonder if you could share some thoughts on the news out yesterday regarding your foray into the beer can area? And if you could just sort of the background there a little bit, and maybe if we're at the point where that can be discussed, maybe some of the feedback from distributors and what type of things that you see there.

Okay. What you saw announced this week was culmination of several years of work around trying to redesign the standard beverage can for something that would improve the Sam Adams drinking experience. We are putting a can line into our Pennsylvania Brewery, and we believe that we will have the capability with that can line to fill this can.

Now the announcement came out because we're pretty confident that sooner or later this is all going to work, but bear in mind no one has ever mass-produced this can in significant quantities and nobody has ever filled it in significant quantities. So it is part of our ongoing innovation. The timing on it we don't know for sure yet. We are hoping some time in early summer, but again that is subject to being able to do several things that have not yet been done. And in terms of reaction I think our distributors welcome it, retailers welcome it. What its effect on our volume will be it's way too early to tell.

Okay. Excellent, thank you for that. Turning to the one other area, which I get a lot of questions on I suppose is the area of consolidation. And I was wondering if you had some thoughts as far as over the last few months given the overall strength of the craft brewing area, we'll leave the big guys off to the side for a moment. I was wondering if you saw any opportunities for additional consolidation within the craft beer industry?

Well it's hard to speculate on the future but when you look at the patterns of the past there really hasn't been very much. Everybody keeps looking for a rollup and it doesn't happen. I think for a bunch of reasons. One of them is this is a fun business to be in. It's growing, so it's very exciting, so you don't have a lot of people who are willing sellers. Second, people want to protect the spirit of their own brewery and its brand. And that doesn't lend itself to consolidation.

And third, there are often negative synergies in the consolidation because the franchise laws, which force a consolidator into incompatible footprints. You have a certain wholesaler footprint, you buy somebody else, they're in different wholesalers, franchise laws prevent in many cases your putting them into a common wholesaler, so you have negative synergies because you are now competing with your primary wholesaler.

Okay, thank you. And finally, I won't take up too much time, but finally the area as far as the strength of Angry Orchard and what have you, I was wondering if you could touch on sort of your current progress on the rollout there and some of the continued opportunities. Because clearly that ends up looking like an area that might be even a stronger growth driver right now than the craft beer area.

What you have to look at with cider is it is a very small base, so it's very easy to get significant growth. It is right now on the order of magnitude 0.3% of the beer business I think last year. So it's quite tiny. I believe in the short term there is upside. In my personal opinion, I don't see it becoming the size of craft beer anytime soon. It took 30 years to get craft beer to where it is. So it's very small. It's an interesting category that's just developing.

Excellent. Thank you very much.

Michael Luddy, Goldman Sachs.

Can you just talk a little bit about your confidence in pricing in 2013 and elaborate a little bit more on what impact, if any, you think Black Crown or Third Shift is going to have on your demand.

I think on pricing we're still where we were last time we talked to you, which is we don't see -- we're not all excited about being able to raise pricing as much as we would like, and certainly don't believe we will be able to raise pricing to fully cover cost increases this year.

It doesn't seem that we were followed on our prices last year. We're now not as aggressively or relative to other people in each market. And obviously it's a market-by-market specific thing. We don't have as much room to move, or feel we've moved and are now above the category or not as competitive within the category as we would like.

As we look at it on a market-by-market basis and roll it up, we don't see our ability to fully cover the cost increases. That's why we are projecting as we are projecting on both this revenue side and also on the gross margin side. And I'm sorry could you just repeat your second question?

Just the impact of Black Crown and Third Shift. If you think that's going to have an impact on your demand or your pricing power in 2013.

Yes, I think it's too early to tell. I do think the introduction of brands between the lower price craft brands and the domestic premium is going to be an interesting thing to watch as to whether it trades people down and is therefore bad for the retailers and the wholesalers, or whether it trades people up and is therefore good for the retailers and the wholesalers. It certainly I think long term is beneficial to have more entry-level craft beer styles for people to trade up, and I think long term that will be good, but that the short-term impact on that is it's way too early to tell.

And the only other question I had was if I look at some of the scanner data that we get early on in the year, it seems like a lot of your innovations was you have to take something off the shelf and put something new on, but I think in the last three months or so, if I look at that data it seems like you are doing a much better job of getting incremental shelf spacing with some of these new innovations. Just want to get any color if you think that's an accurate assessment, and what's driving that.

We certainly would never argue with what the numbers tell you. I think we recognized a while ago that there was -- that we weren't gaining our fair share of the additional shelf space and we launched a number of innovation efforts and incremental SKUs at different price points, and in different packages such as our single-serve packages to try and help us maintain presence on those shelves where we perhaps did not have presence. And certainly it sounds like you're seeing some of those efforts show up.

I would note that it continues to be very competitive and there's a lot of new SKU proliferation throughout the category, not just from new breweries starting up but basically from each brewery introducing new beers and trying to remain fresh with the drinker to the big brewers coming out with some of the brands you mentioned and others that you didn't.

So it's very competitive, and we continue to fight those shelf wars every day, and as a result of which I think one of our reactions has been to increase the investment in our sales team, which we greatly value and believe is a competitive advantage, and to increase SG&A accordingly. And you obviously have seen some of the results of that both on the financial side but also coming through in our ability to show up on the shelf.

Great, thank you.

Caroline Levy, CLSA.

Would it be possible to talk about who you think the consumer of Twisted Tea is as compared to your mainstream brands, and how concerned are you about the base Sam being down?

The Twisted Tea drinker has to us always been distinct and separate from the Sam Adams craft beer drinker. To be honest, we continue to learn about that drinker and it varies by geography too, which is interesting to us and we continue to work out how to deal with that. Oversimplifying it, perhaps not as -- they're not craft beers drinkers I suppose would be the simplification of it, and that's probably the best way to address the issue.

I think it's reasonably obvious that craft drinkers are educated, have a little bit of disposable income, and tend to be more urban. And so I think it's fair to take the opposite of that for Twisted Tea drinkers, but I think one plus is that Twisted Tea drinkers tend to be very loyal. And Caroline, can you repeat your second question. I didn't write it down, I'm sorry.

Well now, I've forgotten it.

I think it was around the health of Sam Adams brand. I think that was basically the question. We're obviously disappointed in that we're not able to grow that at the rate of the craft category, some of that is for some of the reasons discussed within Michael's question around shelf space and competition for shelf space and some of the sort of natural dynamics of the environment that we are living in right now.

But naturally we are not happy and that continues to be our number-one priority within the Company, and the one that we have our best teams focused on and also from a prioritization point of view is the number-one thing we try to work on at the sales execution end.

And we were happy last year that in a market where I think there were 400 new craft brewers, Sam Adams did grow. We were able to grow Sam Adams despite this huge influx of many brewers.

That's right. I was wondering by channel if you noticed any distinct better-than or worse-than trends.

I don't think so. All the channels have their own unique competitive issues, but I think our trends across all the channels were pretty uniform. For different reasons in different channels but we didn't see anything noticeably odd.

And then just finally on your outlook for '13 and the gross margin of course you mentioned you don't expect to get enough pricing to offset input costs, but are there any other factors in there that impact gross margin such as mix?

Yes, there are some other factors and I would put mix into that. I think we've stated before -- at least said before -- because I'm going to state now that Twisted Tea and cider have slightly different gross margins for different reasons. One for product cost reasons, one for tax reasons, and the tax treatment of the tax levels. And the other thing going on is over the last couple of years we've spent a fair amount on capital and continuous improvement-type projects, and some of those actually get completed this year, so there are some offsets that are slightly favorable, but not sufficient for us to project increasing gross margins.

Thank you so much.

James Watson, HSBC.

I have a few follow-ups on some topics we have already been on. The first is on the cans. I just wanted to know what kind of new occasions you hope this can will hit. What it will allow you to do in the marketplace that the bottles won't, and what the main things you are looking to get out of it are, whether it's cheaper production or tap into a new consumer?

It's primarily different occasions rather than a new consumer. It's going to be the craft beer drinker, the Sam Adams drinker, but the can offers them the option of bringing our beer to a lot of places where bottles aren't convenient. Beach, boat, golf, barbecues, and certain venues that won't carry bottles and things like airlines that will only carry cans. So they are not the huge core of our occasions and many of our drinkers will bring bottles to some of those places. So it's primarily a way of allowing our drinkers to take Sam Adams into those handful of occasions where bottles weren't convenient.

Actually to continue on that, in terms of growing the craft beer industry, you mentioned airplanes and I think stadium, certain places where traditionally beer choice is very limited; you get a domestic light and then an import of your choice. And craft beers haven't really cracked open the door into those occasions. Beyond this can, do you see craft beer being able to really get into that -- those locations, those occasions where traditionally beer choice has been very limited?

Yes, primarily just plain consumer pull is bringing Sam Adams and other craft beers into those occasions. Those are mainly dominated by the big brewers because of the marketing spends involved. Craft beer like Sam Adams is more profitable to those venues than a regular domestic beer because they can upcharge for it more than the cost goes up. There are often relatively upscale drinkers at a stadium or a concert, and those are craft beer drinkers and they are expecting that you get a craft beer now. We are getting pulled into those places without the massive marketing spend that it used to basically keep us out.

Great, and so do you have to fight for those inclusions or is this a case where eventually someone comes to you and say we have enough consumers asking for these products that we're willing to go for it?

Well it's a little of both. But it starts with having to go in and make a compelling sales presentation to the customer. So in that sense it's no different than walking into the corner bar. You've got to show the retailer the benefits from carrying Sam Adams.

Okay. And my last question was on craft beer growth over the next year, maybe three years. I'm just wondering in broad categories where you saw beer growth coming from. That is, do you see it coming much more -- is this industry-wide from a Long Tail and the introduction to a lot of new competitors versus the core brands, like your Boston Lager, or your competitor's name brands, or do you see it more from the domestic guys, their craft entries?

Well right now is kind of a rising tide that is lifting all the boats. The Long Tail, the lead brands like Sam Adams, and what I will call domestic specialty beers from the big brewers. With double-digit growth in the category, everybody is benefiting.

Okay. I just feel like we've seen the Long Tail leading that a little bit more over the last year or two. Do you think that would continue going forward?

Well it's hard to predict. Certainly right now as consumers are coming into craft beer they are in a extended period of trial and experimentation looking for variety. I don't know where is the point where they settle down into their favorite brand and where the brand loyalty of the lead brands begins to be stronger than the search for trial, experimentation, and variety.

Got you. Thank you very much.

Vivien Azer, Citi.

I have a follow-up question first on the potential can launch. It sounds like the timing is a bit uncertain, so I just wanted to clarify that a midsummer launch is not embedded in your guidance either for depletion, shipments, cost of goods sold, or A&P?

I think it's fair to say that our guidance currently includes all known information.

Okay. Fair enough. As you guys think about the impact of the can launch potentially in the back half of 2013, how are you guys thinking about the gross margin impact on your business?

I think you know we have lots of extra costs of the new can and filling it, and ultimately the gross margin impact will be a function of both how large the opportunity is and how efficiently we can sell it. Our current guidance includes our current knowledge of all known facts. And so then backing out based on other experience that we'd have, the can package, if it could run as efficiently as bottles, would probably have slightly better gross margins than bottles. Until we actually run it and know where we are and what volume we are getting and how efficient our can lines runs are at the can producer, and all the other impacts, it's really hard to tell.

That's totally fair. In terms of the volume opportunity, the new white space makes a ton of sense to me wherever you can consume a can but not a bottle, but can you talk to how you are going to attack the existing retail footprint for the Sam Adams brand? Are you looking for incremental shelf space or is this really just incremental expectations?

No, we will be looking for incremental shelf space for the can. We would not anticipate very many retailers taking the bottles off the shelf and replacing it with the cans. Our anticipation is that bottles will continue to out-sell cans as we have seen with other craft brewers who offer both.

That makes perfect sense. My last question has to do with your new guidance in terms of A&P spend. Clearly you are seeing opportunities across your portfolio, terrific growth in Twisted Tea and Angry Orchard and the seasonals. Can you just help bridge the delta between your prior guidance for 2013 A&P spend and your new guidance? Just bucket it.

We're probably going to have to look and see at whether we track down the numbers that we provided in prior guidance, but one of the comments would be that in Q4 we chose to move some advertising and promotional spend from the expense line to a revenue line. And that previous guidance was before that.

Fair enough. Thank you very much.

Michael Luddy, Goldman Sachs.

I just wanted to get your thoughts, now that you've been with the Freshest Beer Program for a little while now, on what you are seeing from the wholesalers for the program in there versus wholesalers that's not, whether you're seeing more support from them because you're actually saving them money by reducing their inventory. And whether or not your plans of getting a better on-premise presence from this is working out as you planned.

I think when we talk to our wholesalers about it and when we track them collectively as a group relative to non-Freshest Beer wholesalers, we do see a slight improvement in brand trends. And so we think it's good for the ultimate drinker and that ultimately comes through. And certainly we think it lowers costs. We are still refining the program and any supply chain interruption causes some issues, and in our notes we talked about some supply chain issues in the fourth quarter related to capacity constraints that did cause some issues.

So we're still working through how to deal with that and addressing it with capital spend and changes in process and planning, but overall we are happy and we think our wholesalers are happy, and they would like us to minimize any disruptions, so that's what we're working on.

Was the capacity constraint in the quarter a significant impact on the results that you reported?

I think it's fair to say that we experienced some. I'm not sure that it impacted total depletions by anything significant, but to us where we had a long history of very good supply service performance, it was noticeable in terms of the noise that it caused. And some of it was driven by the shipment growth that we experienced in the fourth quarter that was higher than we had anticipated. Even when we last spoke to you and we just didn't have the beer, the cider, the tea in system to deal with it.

Got it. Thank you.

(Operator Instructions)

There are no further questions at this time.

Okay, just before leaving the call to clarify the increase in SG&A guidance, it did increase also in line with our increase in top-line guidance. So that is another factor in that and I apologize for my earlier answer if it wasn't complete. I'd like to thank everyone for joining the call. Very much enjoyed it, and obviously we look forward to updating everyone on our Q1 results when we'll probably have a better crystal ball into what's happening in the business and what our timing is on some of these projects. So we look forward to talking to you then.

Go have a beer. Cheers.

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