Boston Beer Company Inc (SAM) 2013 Q1 法說會逐字稿

Good afternoon. My name is Hope and I will be your conference operator today. At this time, I would like to welcome everyone to the first-quarter 2013 earnings conference call. (Operator Instructions). Mr. Jim Koch, Founder and Chairman, you may begin your conference.

Thank you. Good afternoon and welcome. This is Jim Koch, Founder and Chairman.

I'm pleased to be here to kick off the 2013 first-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 over the microphone to Martin, who will provide an overview of our business. Martin will then turn the call over to Bill, who will focus on the financial details for the first quarter, as well as a review of our outlook for 2013. Immediately following Bill's comments, we will open the lines for questions.

I'm pleased that the Boston Beer Company achieved record depletions in the quarter, as the health of our cider and tea brands offset slight softness with Samuel Adams. This is a testament to the hard work of our employees and wholesalers and our continued brand innovation efforts.

While we continue to experience increased competitive activity from both domestic specialty and craft beer brands that have made it challenging to grow Samuel Adams as fast as we would like, we remain positive about the future of craft beer and our potential for long-term growth.

I'm pleased to report that Samuel Adams Boston Lager packaged in our new unique can will be available at wholesalers and retailers in May. Over the last two years, we undertook a significant research effort to see if we could create the can that we felt was worthy of holding Samuel Adams beer. I wanted to ensure that the can we developed would deliver the same quality drinking experience as Samuel Adams in a glass or a bottle and would protect the balance and flavors of our beers. I look forward to enjoying Samuel Adams beer this summer in locations where bottles are not allowed.

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 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 first quarter, our depletions growth of 16% benefited from the strength in our Angry Orchard and Twisted Tea brands, offset by a slight decline in our Samuel Adams brand, primarily due to our seasonal program not meeting our expectations during the quarter. Despite this softness, we still accomplished the conversion from our Spring seasonal to Summer Ale in most markets in March, due to the improved inventory planning allowed by our Freshest Beer program.

To address increased competition and to take advantage of positive brand momentum, we again increased our investment in our sales force and our support behind our brands. We're also making capital improvements in our brewing and packaging capabilities to position us well for long-term growth. Specifically, in support of the new Samuel Adams can launch, we recently installed a can line capable of filling can design. And in support of our long-term packaging needs, we will add more bottling capability this summer.

We anticipate the capital investments and high level of brand investments to continue as we pursue growth, innovation, efficiency improvements, and address certain capacity constraints. We're prepared to forsake the lost earnings that may result from these investments in the short term as we pursue long-term profitable growth.

Alchemy & Science, our craft beer incubator, continues to progress with its existing investments and explore potential opportunities. It has had minimal sales to date, but our 2013 financial projection includes increased estimated brand investments attributable to existing projects of between $2 million and $4 million. This estimate could change significantly if new projects are added, and there is no guarantee that Alchemy & Science volume and revenues will fully cover these expenses and others that could be incurred.

We continue to look for complementary opportunities that do not distract us from our primary focus on Samuel Adams, as we believe our portfolio of growing brands is a good outcome for our wholesalers and for us.

We currently have 92 wholesalers representing over 60% of our volume in 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 inventory levels further and to invest in the breweries to improve their support of the program.

Based on information in hand, year-to-date depletions through the 16 weeks ended April 20, 2013, are estimated to be up approximately 18% 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 $6.9 million, or $0.51 per diluted share, for the first quarter, representing a decrease of $600,000, or $0.05 per diluted share, from the same period last year. This decrease was primarily due to higher cost of goods and increased investments in advertising, promotional, and selling expenses that were only partially offset by net revenue increases and a favorable tax settlement in the first quarter of 2013.

Core shipment volume was approximately 632,000 barrels, an 18% increase compared to the first quarter of 2012. We believe that the wholesaler inventory levels at March 30, 2013, were at appropriate levels. Inventory at wholesalers participating in the Freshest Beer program was lower by an estimated 112,000 cases at March 30, 2013, compared to March 31, 2012. Our first-quarter 2013 gross margin decreased to 50% from 55% in the first quarter of 2012.

Increased brewery processing and ingredient costs, combined with $2.2 million of customer programs and incentive costs that are now recorded as reductions of revenue, were only partially offset by pricing increases. In the first quarter of 2012, customer programs and incentive costs were recorded as advertising, promotional, and selling expenses. We intend to continue to focus on cost-saving initiatives at our breweries and are currently maintaining our full-year gross margin target of between 53% and 55%.

First-quarter advertising, promotional, and selling expenses, excluding 2013 customer programs and incentive costs of $2.2 million that were reported as reduction of revenues, were $5 million higher than costs incurred in the prior year. The combined increase of $7.2 million in advertising, promotion, and selling and the customer program and incentive costs was primarily the result of the timing of planned brand investments compared to prior year, increased costs for additional sales personnel, increased investments in advertising, and increased freight to wholesaler due to higher volumes.

General and administrative expenses increased $3.1 million, compared to the first quarter of 2012, primarily due to increased salary and benefit costs and consulting expenses.

Based on information of which we are currently aware, we have left unchanged our projection of 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 increases in cost of goods and freight costs.

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 costs for the shipment of our beer products to our wholesalers.

We estimate increases of between $2 million and $4 million for continuing investment in existing brands developed by Alchemy & Science, which are currently 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 & Science and advertising, promotion, and selling expenses.

We believe that our 2013 effective tax rate will be approximately 37%.

We are continuing to evaluate 2013 capital expenditures. Based on information of which we are currently aware, we have left unchanged our estimated range of $70 million to $85 million, most of which relates to continued investments in our breweries and additional keg purchases in support of growth and increased complexity. However, the actual amount spent may well be different from these estimates.

We believe that our capacity requirements for 2013 can be covered by our breweries and existing contract capacity by third-party brewers.

We continue to maintain a strong cash position with $32.3 million in cash as of March 30, 2013.

During the three months ended March 30, 2013, we repurchased approximately 102,000 shares of our Class A common stock for a total cost of $14.7 million. From March 31, 2013, through April 26, 2013, we repurchased an additional 44,000 shares of Class A common stock for a total cost of $7 million. Through April 26, 2013, we have repurchased a cumulative total of approximately 10.8 million shares of Class A common stock for an aggregate purchase price of $291.6 million and had approximately $8.4 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). Judy Hong, Goldman Sachs.

First, just, if I look at your year-to-date depletion growth of 18% versus Q1 depletion of 16%, it does imply a pretty strong acceleration in the three weeks of April. So can you just talk about what drove that acceleration? Is it just kind of weather getting a little bit better? Is it beer? Is it cider or tea? Just talk a little bit about kind of what's driving that acceleration in April.

Sure, Judy. First of all, let me talk a little bit about the first quarter, and then I'll talk about the last four or five weeks.

I think in the first quarter, as we note in the press release, we had good trends, obviously, as a total company, but the Sam Adams trends were just basically not positive. And that was primarily due to some weakness in our seasonal program that we identified about halfway through the quarter. And I think that was a drag on us in February and for the first half of March.

But due to some of the things we've done around inventory planning and Freshest Beer, we were able to escape the first sort of the spring seasonal period with a relatively on-time conversion to Summer Ale, not totally clean given the significant change in trends we saw, but we were able to get Summer Ale into most of the markets in late March, maybe a week later than we might otherwise have seen.

And I think since then, we have seen good trends not only for Summer Ale, but also for Boston Lager, and I think even those trends are even showing up in the [IR] numbers that are public, which is why I'm comfortable talking about them.

So I think that's sort of the major difference. Your math is correct. Obviously, we saw an acceleration in April after the quarter, and that's probably the primary driver.

Okay. And just keeping the guidance the same 10% to 15% despite the acceleration you saw, is there any conservativism as you kind of think about the rest of the year?

Yes, well, I think historically we've been uncomfortable changing our projections after the first quarter, so I would put that out there first. Yes, we're three months smarter, but it's not that much smarter for the full year.

I think the Sam Adams trends did not meet our expectation in the first quarter, so therefore we're a little cautious. I don't think that four or five weeks of trends are enough for us to say that the brand is directionally stronger. Obviously, we're pleased and hopeful, but we're not going to project that into full year.

And as we look at our total business, you know, the strength of cider and tea has offset that Sam Adams weakness, and we would hope for that to continue. I think if Sam Adams was to accelerate, then obviously we would be at the high end of our range or would have to adjust the range after the second quarter.

As we look at the rest of the year, it was this time last year that we rolled out Angry Orchard nationally. So the Angry Orchard comparisons start to get much tougher. And certainly if you were laying out the year, you would expect Angry Orchard's contribution to total Company growth to be significantly less in subsequent quarters.

Okay. And then, just in terms of the competitive environment in the craft category, I'm just curious as how you would characterize the current environment versus maybe a year or two ago. It seems like what's changed at the margin is you've got some of these value crafts that are coming into price points below the craft. You know, the Bud Black Crown or the Third Shifts of the world. So, is that making it more difficult for your brands? Just how you think about the changes in the competitive landscape.

I think, Judy, I mean, it's a beer business. It's always extremely competitive.

Today, virtually all of the growth in the beer category is in the high end, in the better beers. So you have kind of a land rush going on of Big Brewers with multiple entries as they premiumize their portfolios. You've got probably two new craft breweries opening a day. So last year to this year, there may be 800 new craft breweries, many of them quite local. So I think it's just an extremely competitive landscape from above and below.

But the good news is the overall category growth seems to be remaining firmly entrenched in double digits. And we want to keep riding that wave. It enables us to grow without necessarily having to match the category growth with all of these new entries certainly happening in the first half of this year.

Okay. And then, just finally, Bill, just looking at gross margins for the quarter, it seemed like the 50% you reported in Q1 is certainly below your full-year targets. So can you talk about if there are any timing factors that actually made the Q1 gross margins much lower? And then, is there risks to that 53% to 55% full-year gross margins if pricing is more difficult to come by in this sort of heightened competitive environment?

Judy, let me address the first part of your question on the timing. There was some timing issues relative to our cost of goods in the first quarter that I don't expect to have the remainder of the year. And yes, we do believe, based on the information that we have today, that we will be within the 53% to 55% gross margin range for the full year.

Okay. Thank you.

Vivien Azer, Citigroup.

Just to follow up on Judy's question on the gross margin, as I look at the decline in the quarter, which came in a little bit bigger than I was anticipating, I recognize the $2.2 million shift was a piece of it. But order of magnitude, can you lay out how much of an issue mix was versus input costs, and then the offset of price, just to give us a sense of kind of how things should flow for the rest of the year?

Yes, we -- this is Bill -- we actually do not lay out the differences in mix and differences among product and packages. You know, we look at the whole -- the business as a whole. And so, I can tell you that there was some timing differences in different parts of our cost of goods, but I do not see that continuing through the rest of the year.

I would just add that from a mix perspective, I think we talked a little bit about how we finished last year with basically no cider in the system. We had a pretty big cider push to raise the inventory at wholesalers, so our mix for the first quarter was certainly unusual from a shipments perspective.

And then, on top of that, we're in the process of starting up a can line to support the launch of Sam Adams in cans and also to bring some canning for other beer styles and cider styles in house, and that had some ongoing startup costs associated with it that would have hit the end of that quarter.

So I think Bill is right that we anticipate a gross margin projection that we still are quite comfortable with. And obviously, that could be affected if our total mix was very significantly different from what we expected it to be, but there are a number of one-off factors in the first quarter that produced the result that it did.

That's helpful. Thank you very much. As you commented on the weakness in seasonals that you identified at mid-quarter, I'm curious, was the weather a function at all in that where seasonals would've historically performed better had the winter not been quite as cold and rainy? Or was it more of a price gap issue? Because I can at least see in the scanner data that as you took down your average unit pricing and raised some promo ahead of the category, certainly the inflection point in seasonals is readily apparent, at least in AOC.

Yes, we don't track weather. I think -- obviously, there is some weather impact to beer purchase behavior, but I think we've always felt that it sort of evens itself out over time. So we don't really track that or try to measure that in depletions.

I think what I would say is -- and what, again, I think shows up in some of the public IRI data is we had a great transition from Winter Lager to Alpine Spring. Everything appeared to be going really well, and then I think in February, March, we suffered a little bit with a great wave of new spring seasonal products that were introduced competitively. And obviously, our offering did not perform as well as we would like.

And I think it's much more that than anything else, and as we, in our current trends, I'm not sure we're doing anything different on a price promotional basis. Certainly if we're offered ads and features, we'll take them. But we aren't doing anything. We did not react aggressively to try and stem that tide.

Understood. And my last question has to do with the can launch. Can you give us a sense of what percent ACV you think you'll be able to achieve when that begins to ship in May?

You know, we really don't know, and I would perhaps answer the question a little differently.

We are outside some of the set timing, so realistically speaking, we're now looking at full set processes on certainly the chain markets. There certainly are some chains that have agreed to put us in, for which we're very grateful, given we're outside of that timing. There's obviously opportunities in independent markets.

I can tell you that we'd like to see the cans in any account that has lager 12-ounce bottles and lager 12-pack -- six-packs and 12-packs. We'd like to put cans in there.

But we're just going to have to see. And based on publicly-available information, it looks like cans as a percentage of craft beer are, order of magnitude, somewhere between 3% to 8%, depending on market, and the market impact seemed to be water markets or hiking markets, camping markets, fishing markets. So we just don't know how our business is going to line up against that. For instance, New England has a lot of water, but we just don't know how that's going to play.

So we're optimistic, but cautious, and we're trying to roll out sensibly and not flood the market and have stale beer. But until we see some initial depletions and get a sense for the acceptance at retail, I just can't give you an estimate of ACV.

That makes a lot of sense. Thanks very much.

Caroline Levy, CLSA.

Good afternoon. I was just wondering if you could talk a little bit about the margin impact of your -- the mix that you determine. If you sell Sam beer versus Sam seasonals versus cider versus anything else, and again with cans, does that impact gross margin? Anything but selling base Sam, is that bad for gross margin?

It's very product or beer liquid specific, and so that's a very hard thing to talk about. And I would add that on the cider front, we have a slightly different taxation which results in slightly lower taxes to the government and a higher realized price to us than otherwise you might expect, which also sort of makes the whole gross margin discussion very difficult.

I think we've always felt that mix issues don't really show up that much in our gross margin across the Sam Adams brand portfolio. Certainly, some of our more expensive beers or higher alcohol beers have higher liquid costs and that can come through, but the volumes are relatively small and it's never been an issue for us.

With the introduction of Twisted Tea, it really wasn't an issue for us until the introduction of tea cans, and then we started to see some mix effects on gross margin, but again, not significant enough to really worry about from a planning point of view.

Cider, with its different sort of net price realization, and it's totally unclear what the exact mix of cider it's going to be, cans versus bottles versus draft, so we don't yet fully understand how it's going to impact us. But certainly cider with the expensive apples that we're buying has some pretty high liquid costs.

Right. And the increase in advertising and selling expense in the first quarter, was much of that related to non-beer? And you know, it looked like it was a good-sized increase this quarter, but it sounds like you're expecting increases throughout the year.

Yes, I think the most significant impact is, again, the investment in the sales organization that we've talked about before.

As we address this very competitive environment, one of the investments we are very comfortable making is in our people and in the number of those people that are in accounts on a day-to-day basis. And that, we started ramping up, I want to say, last summer again and you're seeing basically full staffing effects.

But then on top of that, we suddenly have some opportunities with a couple of brands to invest and get to a good position in their categories first. And we certainly tried to do that in the first and second quarters of this year.

Thanks. Okay, and then, the G&A growth, you cited the fact volumes came in ahead of plan. As long as volumes stay robust, should we expect high G&A increases, or again, were there some one-time items there?

We have some one-time items. We certainly would hope to get leverage on G&A over the long term.

I do think that the complexity of our business is changing somewhat, as you can sort of see in this discussion, and that is imposing some stress on the G&A side of how we manage that. And then, we also have the projects with Alchemy & Science, which, as of yet, haven't generated volume that's significant enough to talk about, but we are hopeful they will, but that has its own G&A component run as a separate entity.

So I think the G&A increases that you see in the recent timing, there's some complexity, and then there's also some A&S factors that we hope will pay back to us in future years from future volume growth.

Thank you, and just lastly, do you have a sense of what the craft category grew in the quarter?

We'd just be guessing, but probably low double digits, somewhere over 10%. So it (multiple speakers) very healthy growth.

Do you include cider and Twisted Tea and stuff in that or are you just talking about the beer business itself?

No, that would be just craft beer as defined by the Brewers Association, so not including what I would call the domestic specialty beers, the entrants from the large brewers, things like Blue Moon, Leinenkugel, and Goose Island, et cetera, the craft brewers don't include those.

(Operator Instructions). James Watson, HSBC.

A question, I just wanted to get a better understanding of the Angry Orchard lap that you mentioned. And just in thinking about how you've grown volume in the first year since you've rolled it out nationally, how much of that volume was the initial inventory stocking when you go to a new retailer, how much of that has been -- vaguely, how much of that has been repeat usage, and then how we think of volume growth going forward after lapping the initial introduction?

Sure, let's see. We initially launched Angry Orchard in September of 2011 in New England and basically tested it out. And based on its reception, we decided to go national in April of last year.

For much of last year, we were pretty constrained on the availability of the apples that we needed, wanted to use in Angry Orchard. And at the end of last year, we actually discontinued some -- temporarily discontinued some styles in order to support the marketplace.

So last year, we saw a first quarter which was basically New England in months four through six, and then national launch for the rest of the country sort of months one through nine. And what we've just seen in the first quarter this year is New England year on year and national months 10 through 12.

I think it's fair to say that when we launch a brand, we don't necessarily get that big tidal wave of a pipeline fill. We certainly get pipeline fill, but it's taken us 12 months to get national ACV, what, around 50% or whatever the public IRI number is. And by contrast, looking at some competitive products launched in the last two months from the Big Brewers, they already have ACV above that in a month and a half. Now that just goes to the scale of those companies, their relationships with the retailer, and the muscle, and perhaps exactly how the sets are made.

So we're still building distribution, and because that's a slow build process, certainly some of the cider shipments are pipeline filled, certainly some of the cider shipments in the first quarter were a reaction to us not having any juice in the fourth quarter and basically having our wholesalers down at inventory levels that none of us were happy with.

But we are seeing -- so I suppose we've built it slowly. We haven't yet got good data on year-on-year growth rates because all we really have is New England first quarter versus first quarter last year, and even then, we didn't have the penetration of distribution from our New England launch because we hadn't produced enough cider to support it this time last year.

So in answering your second part of your question, which is ongoing growth, it's really hard to tell because we don't yet have year-on-year numbers. And because it's been a slow build, all the growth rates look fantastic. If you look at the IRI public information, the growth rates are huge, but we haven't -- we don't know when it's going to stop and we don't know what the endpoint is. So I know that doesn't help you that much, but as you think about our trends over Q2, Q3 for Q4, the comparisons on the cider front get harder and harder.

And to follow up, you mentioned competition there, and we've heard from the Big Brewers certainly -- well, we never, ever heard about cider from them before; now we're definitely hearing about it. So I was just wondering if you've seen this impacting you in the marketplace at all, impacting your ability to get into new retailers as well?

And then, if you could just talk broadly about the size of the cider market compared to the size of the craft beer market, just where it is now in comparison and where you think it could be in, say, like five years in comparison?

Sure. Let me -- so first question, I think the biggest impact we're seeing from Big Brewer activity is just their total innovation pipeline efforts across all categories absorbing shelf space at retail.

And so, there hasn't been a huge amount of new activity in the cider space. But for instance in the apples space, Shock Top seasonal, which I think was crisp apple taking shelf space. You've got Redd's Apple Ale that's taking shelf space. And those are just two examples out of maybe 10 new brand introductions between those two big players.

And so, the challenge, frankly, as a small supplier and with cider being a small category, is to try and maintain that category's presence on the shelf amid this other battle that is going on, which leads me to your second question.

Cider is a category -- I think if we had to estimate, the cider category for last year, we're estimating 8 million to 9 million cases, which, put in perspective, is order of magnitude 0.25% of the beer category? 0.3%?

Yes, even maybe 0.5%.

Last year?

No.

(Multiple speakers). Last year? Yes. And this year, I don't know the growth rate, maybe it's 30%, but very hard to tell. Certainly the IRI growth rate is a little faster, but I think the on-premise growth rate is a little slower. So again, it's small.

And as a percentage of craft, depending how you define craft, I'm going to guess that it's one-20th of craft right now, and Jim's just jotting down some numbers because I'm doing this from my head here. Disagree if he wants to.

One, I think the most important thing is this. It's a small category. Cider has always been a small category. This is the second time cider has boomed a little bit, and I don't think we really know how big it's going to be this time around, but it's small relative to total beer and it's small relative to craft.

And so, I think we're delighted that Angry Orchard has, based on the publicly-available information, sort of taken a nice share of that and we're certainly trying to grow the cider category, but I'm not sure we anticipate it going -- you know, maybe it will get to 1% of beer, maybe it will get to 1.5% of beer. But certainly, that seems to be realistic expectations. Maybe the 1.5% is optimistic.

There are other people who've noted that in Europe or at least in the UK, it's much bigger. But I'm not sure we'll see that in the UK. And to us, it seems to be a small niche that we can have a good position in, and that's what we're trying to do.

Bear in mind, it took the craft category 30 years to get to the 6% of 7% of the beer market that it has now. 30 years.

You mentioned supply in your earlier answer. You had some supply issues. So one, I just wanted to ask you about your current supply, where you're getting the supply from, if you want to reveal, and whether you're confident in your current supply.

And then, also, is this cider going to be an industry segment most likely dominated by the larger brewers and yourself? Or is this something where smaller competitors can come up? Barriers -- significant barriers to entry for smaller competitors here?

To answer the supply question, the apples for Angry Orchard come from orchards in Normandy and in northern Italy.

As a certainty of supply, it's an agricultural product. And you know, we feel comfortable with normal harvests that we'll be able to get the apples that we currently anticipate needing. But there are bad crop years and there are good growth years. So I can't tell you that there won't be some potential pressures on it, but we need those apples to make the flavor profile that we like.

And will it be dominated by the big guys? Who knows? If I had that kind of crystal ball, life would be a lot easier. We currently view it as something of a niche category. It's got some explosive growth right now, largely driven by the arrival of Angry Orchard, but we have no idea when that growth will stop. We just don't anticipate it growing as fast as it's currently growing forever.

And I would add to what Jim said. I think the category is sort of interesting. There are lots of small suppliers, small farms, ranging from roadside stalls to small cideries with local distribution. So in some ways, the small supplier piece in cider is already there with people who have land, have orchards, and are in this business and have been in this business for a while.

Very interesting. Thank you, guys.

(Operator Instructions). There are no further questions at this time. I would like to turn the floor back over to management.

Well, I'd like to thank you all. We're going to go and have a Boston Lager out of a can to celebrate and we look forward to updating everybody on our second-quarter call, which I think is late July. Cheers.

Thanks.

Thank you. This does conclude today's conference call. You may now disconnect.