Boston Beer Company Inc (SAM) 2013 Q3 法說會逐字稿

Good day, ladies and gentlemen and welcome to The Boston Beer Company third quarter 2013 earnings conference call. (Operator Instructions). I would now like to turn the conference over to Mr. Jim Koch, Founder and Chairman. Sir, you may begin

Thank you. Good afternoon and welcome. This is Jim Koch, Founder and Chairman. I'm pleased to be here to kick off the 2013 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'll begin my remarks this afternoon with a few introductory comments, including some highlights of our results, and then hand the microphone to Martin, who will provide an overview of our business. Martin will then turn the call over to Bill, who will focus on the financial details for the third quarter as well as a review our outlook for the remainder of 2013 and our initial outlook for 2014. Immediately following Bill's comments, we'll open the lines for questions.

We achieved depletion growth of 26% and record total depletions in the third quarter. I am pleased with our depletions growth, which is attributable to strong sales execution, support from our wholesalers and retailers as well as our great quality beers, innovation capabilities and strong brands.

A lot of people work very hard to create and support this growth, and I would like to personally and publicly thank all of our Boston Beer Company employees for this achievement. I am particularly pleased with the growth in the quarter of our flagship Samuel Adams Boston Lager which will be celebrating its 30th anniversary in 2014 and in our fall seasonal Sam Adams Oktoberfest. Our fall seasonal program also included the limited release of some excellent beers including Samuel Adams Harvest Pumpkin and an innovative small batch brew Samuel Adams Fat Jack a double pumpkin ale. We remain confident about the long-term outlook for the craft category and our Sam Adams brands.

I will now pass it over to Martin Roper for a more detail overview of the business

Thank you, Jim. Good afternoon everyone. As we state in our earnings release, some of the information we discuss in the release and that may come up on this call, reflect the Company's or management's expectations or predictions of the future. Such predictions and the like are forward-looking statements. It is important to note that the Company's actual results could differ materially from those projected in such forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained in the Company's most recent 10-K. You should also be advised that the Company does not undertake to publicly update forward-looking statements, whether as a result of new information, future events or otherwise.

In the third quarter our depletions growth remained strong and benefited from growth in our Samuel Adams Twisted Tea and Angry Orchard brands. We believe the strength of our main brand is reflective of strong sales execution and our increased investments in media, local marketing and point of sale and the efforts of our increased sales force. We have raised our expectations for full year 2013 full year depletion growth to between 21% and 24% to reflect the current trends. To take advantage of the opportunities that we currently see and expected competitive activity we are increasing our planned investment in media, our sales force and other support behind our brands for the remainder of the year.

I would like to recognize all the employees involved at our breweries and in our operations support groups for their efforts this quarter in supporting our growth. The growth has been challenging operationally and despite our best efforts we have had some product shortages and service issues during most of the quarter. Our supply chain struggled under the increase volume and we experienced increased operational and freight costs as we reacted.

We commissioned our new bottling line during the quarter. This line and our new can line are starting to achieve their design capacities and ease our packaging constraints. We have however remained tank constrained in our breweries, andthis is not expected to be resolved for several more weeks. To address these challenges we initiated significant capital improvements in our breweries that will help support our growth in 2014 once completed. We expect a continued high level of brand investment and capital investment as we pursue growth and innovation. We are prepared to forsake the earnings that may be lost as result of these investment in the short term as we pursue long-term profitable growth.

Alchemy & Science, our craft brew incubator, continues to progress with its existing brand, which include Angel City Brewery, Traveler Beer Company and the Just Beer Project. During the quarter Alchemy & Science completed the acquisition of the Coney Island brewery brand. Also Alchemy & Science is also finalizing plans to build a small brewery and beer hall in Miami, Florida named Concrete Beach Brewery. To date sales from Alchemy & Science brand have not been significant.

Our latest 2013 financial projection includes estimated brand investments attributable to Alchemy & Science projects of between $4 million and $6 million. And capital investments of between $7 million and $10 million which include the brand acquisition cost of the Coney Island Brewery but these estimates could change significantly. It is unlikely that the 2013 volume of Alchemy & Science brands will fully cover these and other expenses that could be incurred this year.

We currently have 120 wholesalers representing over 65% of our volume in our Freshest Beer Program and believe this could reach 70% by the end of 2013. The systems and processes supporting Freshest Beer helped us significantly with product allocation during the quarter. We continue to invest in the breweries to improve their support of the program particularly during peak selling periods. Year-to-date depletions through the 42 weeks ended October 19, 2013, are estimated to be up approximately 23% from the comparable period in 2012.

Now Bill will provide the financial details.

Thank you, Jim and Martin. Good afternoon every one. Reported net income of $25.7 million or $1.89 per diluted share for the third quarter. Representing an increase of $4.9 million or $0.36 per diluted share from the same period last year. This increase was primarily due to shipment increases partially offset by increase investments in advertising, promotion and selling expenses and the $0.10 per diluted share write-down of the Freetown Land. Core shipment volume for the third quarter was approximately 993,000 barrels a 29% increase over the third quarter 2012.

Inventory at wholesalers participating in the Freshest Beer Program was lower by an estimated 208,000 case equivalents compared to the end of the third quarter in 2012. Our third quarter 2013 gross margin decreased to 53% from 56% in the third quarter 2012. This was primarily driven by increase brewery processing costs, increase ingredient cost and product mix effects and the $3.3 million of customer program and incentive costs that are now recorded as reductions in revenue.

In the third quarter of 2012 customer programs and incentive cost were recorded in advertising, promotional and selling expenses. Third quarter advertising, promotion and selling expenses excluding the 2013 customer programs and incentive costs now reported as reduction of revenues were $8.5 million higher than those costs incurred in the prior year. The combined increase of $11.8 million in advertising, promotion and selling and customer programs and incentive costs was primarily the result of increase cost for additional sales personnel and commissions, increased investments in local marketing and media advertising and increase freight to wholesalers due to higher volume.

General and administrative expenses increased $3.5 million compared to the third quarter of 2012. Primarily due to increases in salary and benefit costs and consulting cost. Impairment of long lived assets increased $1.3 million compared to the third quarter of 2012 due to the write-down of land owned by the Company in Freetown, Massachusetts. Based on information of which we are currently aware we estimate 2013 earnings per diluted share to be between $5.05 and $5.35 a decrease from our previously communicated estimated range of $5.10 and $5.40 due to the land write down and increase brand investments that will only be partially offset by increased shipment volumes.

Our actual 2013 earnings per share could vary significantly from the current projection. We now estimate 2013 shipments and depletions growth of between 21% and 24%. An increase from the previously commuted estimate of between 17% and 22%. We estimate price increases of approximately 1%, that will partially offset ingredients, packaging, freight and processing costs.

Pressures. Full year 2013 gross margin are still expected to be between 52% and 54%. We intend to increase investments in advertising, promotional and selling expenses by $26 million and $32 million for the full year 2013. Not including any increases in freight costs for the shipment of beer products to our wholesalers. Up previous from the communicated estimate of between $20 million and $26 million primarily due to the planned increase investment behind the Company's brands.

We estimate our full year 2013 effective tax rate to be approximately 38%. We continue to evaluate 2013 capital expenditures most of which relate to continued investments in our breweries and additional keg purchases in support of our growth. And have narrowed our 2013 capital expenditures to between $100 million and $120 million from the previously communicated estimate of $100 million to $140 million.

Looking forward to 2014, we are in the process of completing our 2014 planning process and will provide further detail guidance when we present our full year 2013 results. Based on information of which we are currently aware we are targeting depletions and shipment percentage growth in the mid teens and national price increases per barrel of between 2% and 3% to offset anticipated upward pressure on ingredients, packaging and freight as well as increased investments behind our brands.

Full year 2014 gross margin are currently expected to be between 52% and 54%. We intend to increase advertising, promotion and selling expenses by between $34 million and $42 million for the full year 2014. Not including any increase in freight costs for the shipment of products to our wholesalers. We estimate increased expenditure of between $3 million and $5 million for continued investment in existing brands developed by Alchemy & Science. These expenditures are included in our full year estimated increases in advertising, promotion and selling expenses. Brand investment in Alchemy & Science brands could vary significantly from current estimates.

We estimate our full year 2014 effective tax rates to be approximately 38%. We are currently evaluating 2014 capital expenditures, and our initial estimates are between $140 million and $180 million in increases in the range from the previously communicated estimate of $100 million to $130 million. Based on information currently available we believe our capacity requirements for 2014 can be covered by our breweries and existing contract to capacity at third party brewers.

We expect our cash balance of $43.7 million as of September 28, 2013, along with future operating cash flow and our unused line of credit of $50 million will be sufficient to fund future cash recurrent. During the third quarter and the period from September 29, 2013 through October 25, 2013, we did not repurchase any shares of our Class A common stock. As of October 25, 2013, we had approximately $25.5 million dollars remaining on the $325 million share buy back expenditure limit set by our Board of Directors.

We will now open up the call for questions.

Thank you. (Operator Instructions). Our first question comes from Vivien Azer from Citi.

Good afternoon.

Good afternoon.

In terms of your 2014 outlook for shipments and depletions so healthy at mid teens rate, but as I look back at your guidance historically I do not think we have seen you start of the year with such an optimistic outlook for several years now. I was hoping you could dig a little deeper in to what is bolstering your confidence as you head into the next fiscal year?

Vivien, it is Martin. I will respond and if Jim wants to comment on top he can. I think obviously it is still early in our planning process. We can only project based on what we currently know. I think we see a number of positive signs not least of which is return to growth of Sam Adams Boston Lager and the general health of the Sam Adams brand and on top of that we have Twisted Tea growing and Angry Orchard while lapping first year numbers still showing healthy growth. As we project that out to next year and the activities we have planned next year we are pretty optimistic. On the other hand I think there are some headwinds notably competitive activity. Some of it announced some of it rumored that could impede that growth. So at this point in time we are just trying to balance all those factors and come up with our best guess and obviously we will have a better feel for it in February.

Absolutely. To follow up on that, it sounds like right now as you see it, 2014 looks to be a nicely balanced year across your portfolio, which raises the question in my mind about your outlook for net revenue per barrel increases at plus 2% to 3%. As we think back to your guidance progression of 2013 that has come down a bit, I thought because of the negative mix shift from Angry Orchard and Twisted Tea. Should I think you are actually going to take better than that pricing on the beer portion of the portfolio to get total net revenue per barrel to plus 2% to 3%, if you have to offset that negative mix shift?

I think when we give that projection that is an average mix adjusted number as opposed to after mix. So I think as we look at it we are faced with a number of cost pressures. On the beer side we have ingredient pressures plus there is some move to perhaps more flavorful beers, more hop beers and beers with higher cost structures for us to cover. On the tea side and on the cider side we have some cost pressures there and perhaps not the margins that make the most amount of sense for the capital we are putting in.

Our intent is to trying to take some price to cover those things and obviously the last two years we haven't been able to. I think there are some signs in the industry the big brewers have announced price increases. It is totally unclear how much of that is sticking. And as we put our plans together next year we are expecting to be able to take some price where we are not competitively priced and also where the ingredients costs have gone up that we have to. Whether we can achieve that or not it is currently just a planning number.

I think that is reasonable. My last question has to do with the Freshest Beer Program. I think last quarter you were still targeting 75% by the end of the year and it looks like that has come down a bit. Can you delve into that a bit please?

I think we are now at a point where we have a clearer vision of who is going to be on the program by the end of the year. We are excited that wholesalers are continuing to sign up. It requires some commitment on their part operationally and information flow wise and there continues to be people enthusiastic to join. And I think that is what we have line of sight to. I think we would have liked it to be more. I think we have been through a quarter where we have had some operational service issues for which we have apologies to those wholesalers effected.

So we have not been able to bring on as many as we would like given that. But as we look forward it is something we are very committed to. We believe that having fresher beer in the market place and the best tasting beer that we and our wholesalers can deliver is an important competitive advantage. And we continue to look for ways to bring wholesaler inventory down while still maintaining high degrees of service and the quality of our product.

Very helpful. Thank you very much.

Thank you. And our next question comes from Judy Hong with Goldman Sachs.

This is Mike filling in for Judy.

Hi, mike. How are you doing?

Good. So first question obviously you've seen really nice acceleration in Boston Lager. I think we have seen some of the other big beer craft brands also start to accelerate recently. So I was wondering if you could talk a little bit more about what you are seeing behind the acceleration of that brand and if you are seeing more of a shift of craft demand into the bigger craft brands?

Mike, it is Martin. I will comment and then Jim can comment. I certainly think we are happy with what we are seeing. And certainly the major craft brands seem to be seeing somewhat similar in terms of growth against the core brands. But it is not universal. It is across the top 30 craft brewing companies it is sort of just the top three or four. And there is some other activity going on. Within craft we are still seeing some strength in volume with the tail. We are still growing pretty fast. I do think the amount of shelf space that is available is not growing as fast as it used to and also the number of tap handles available are not growing as fast as they used.

So we are starting to see some replacement of beer SKUs with other beer SKU and some churn in the middle there. I think you are seeing start ups doing okay and the bigger brands doing okay as maybe there is a return to quality and familiarity and in the middle there is this fight for space going on. And I will let Jim comment.

I think at this point what Martin said there is starting to be the inclines in some retailers variety fatigue and retailers realizing just turning their tap handles confuses their staff makes the beer ordering process longer generates more bad beer in kegs that do not turn fast enough, et cetera. So you are starting to see a few retailers making sure they carry the lead brands in the craft category because that is what a lot of their consumers want.

So there is still is a lot of variety. There is still two or three new craft breweries opening every day. Retailers and distributors dealing with this avalanche of new SKUs, finding places in warehouses and on shelves to continue to expand the variety offered to the consumers. But I think it is a positive sign for the craft category that lead brands from the strong craft brewers, brands that are well supported in the marketplace, are seeing growth.

Got it. Thank you. One other quick question. Just as we look at the promotion and selling line more specifically on the amount of sales people you are using. Can you talk a little bit more on how you think about that? How you are growing that, whether it is just keeping in line with your sales growth, or are you getting closer to a point where you can see more leverage on the existing sales base that you already have?

I think our decisions on people are based on the opportunities and what we see the future growth to be. Obviously, some markets can support sales people and some can't, but with this sort of growth rate there start to be more markets that can support and justify and there is enough activity to be efficient. So we are filling-in, in markets where we haven't had people before or splitting up roles. I think we are also seeing an interest from major retailers to have more representation from us, more visibility to us, so we are putting more people into teams against the major retailers than we have before so our national account team continues to grow.

To your leverage point, I think we are seeing leverage against our total sales people costs. Although there is a competitive market and we are adding relatively quickly and we see salary increases there and other sorts of stuff that decreases that leverage. But in general I think over the last three to four years we are seeing some leverage over that number.

Great, thank you.

Thank you. Our next question comes from Marc Riddick from Williams Capital.

Good evening every one.

Hi, Marc.

I wanted to follow up on Sam Can and see if there were some updates you could provide as to that, and as far as the perhaps future brands and maybe some other SKUs that could be utilized there? And then I have a couple of follow-ups after that.

Marc, I think one we are very happy with the launch both from a timing and execution from the brewery teams and the technical teams. I think we launched with Boston Lager on a national basis, and I think we seen pretty much what we expected. I think on one of the previous calls we indicated that cans as a percentage of bottles was mid low single digits for craft and not nearly close to where it is for mass domestic. And that is basically what we have seen. We still have distribution opportunities. We launched when we had the technology as opposed to with six months, nine months planning windows.

Soare still getting distribution and getting cut into the sets. But I think it is meeting our expectations which I think were perhaps lower than other people's expectations. We also had Summer Ale cans in New England and that did nicely for us. We rolled that to Oktoberfest in cans nationally and again we had a little bit better lead time so we got a little bit better distribution activity. But still for us we will take 12 months to fill out full distributions of seasonals in cans. So we are a six months in. We are happy. We very much like the Sam Can and the taste of the beer out of the can and think it presents the beer really well and we are still filling out distribution. As we look on year-on-year comparable we obviously did not have seasonals in cans last year on national basis for the full year so we have that to help us too.

Okay, excellent. Thank you. I was wondering as far as the strength of Boston Lager we were really at the beginning of touching on that last quarter. It was a little bit of a surprise and now with an extra quarter behind you to see the strength building there. I was wondering if there was any tie in leading into the 30th anniversary do you believe? And if not, perhaps maybe press would be advantageous with the 30th anniversary coming up next year does that then change your approach or maybe strengthen it as to your marketing and advertising plans around the anniversary?

We don't think there is any recognition around this year's (Inaudible) around the 30th anniversary. Certainly as we plan our brand activities and retail execution activities for 2014 we intend to incorporate the 30th anniversary of Jim founding the Company and brewing Boston Lager into that, but we don't think it is the driver at this point in time in the current trends we are seeing.

Excellent. Finally, I know there is planning not just on the sales side but also on the production side. I was wondering if you could give a little bit of an update and when we might see a little bit more of that as far as the timing goes, either at the end of this year or going into early next year? Thank you.

I think one of the things we were obviously caught a little bit by surprise by the acceleration of the business in Q2 and Q3. And I think it is fair to say our breweries waded through that, but we were probably understaffed and a lot of people worked a lot of days many of them in a row. As we look at next year and we think about the growth number that we have put out there, we recognize we need to hire and train in advance of our peak season. So we certainly will be doing that consciously over the next six months to get out ahead of it.

But it is possible it could be a little more concentrated in calendar of 1Q of next year?

We want to get out ahead of it and have people trained. We also have needless to say a fair number of sizable capital projects and we are hiring right now the project management and commissioning skills to be able to incorporate that in out plans next year so we are effective as we get to Q3.

Okay. Thank you very much.

Thank you. (Operator Instructions). I am showing now further questions at this time. I would like to hand the conference back over for any closing remarks.

Thank you every body. And we will be speaking in another three months. Cheers.

Cheers.

Ladies and gentlemen, thank you for participating in today's conference. You may all disconnect and have a wonderful day. Moderators, please stay on the line.