Boston Beer Company Inc (SAM) 2013 Q4 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. And welcome to The Boston Beer Company's fourth-quarter 2013 earnings conference call.

(Operator Instructions)

As reminder, today's conference may be recorded. It's now my pleasure to turn the call over to Jim Koch, Founder and Chairman. Sir, the floor is yours.

Thank you, and good afternoon, everyone, and welcome. This is Jim Koch, Founder and Chairman. And I'm pleased to be here to kick off the 2013 fourth-quarter earnings call for The Boston Beer Company. Joining the call from Boston Beer are Martin Roper, our CEO; and Bill Urich, our CFO.

I will begin my remarks this afternoon with a few introductory comments, including some highlights of our results. And then I will hand the phone over to Martin, who will provide an overview of our business. Martin will then turn the call over to Bill, who will focus on the financial details for the fourth quarter and 2013 fiscal year, as well as our outlook for 2014. Immediately following Bill's comments, we will open the line for questions.

I am pleased with our depletions growth of 20% for the quarter and 23% for the year. And I am especially gratified that our flagship, Sam Adams Boston Lager, one of the original craft brews, continued to grow in 2013, as we enter our 30th year of brewing this beer.

I am also pleased that The Boston Beer Company continues to help lead the craft beer industry, both in innovation and variety, and that drinkers remain excited by our beers. Our growth is also attributable to strong sales execution and support from our distributors and retailers, as well as our great quality beers, innovation capability and strong brands.

During the first quarter, we are releasing several new beers that should continue this momentum. Our new spring seasonal brew, Samuel Adams Cold Snap, a unique and approachable light ale, brewed with a blend of exotic spices, has launched, and appears to be well-received by drinkers and retailers.

We also began a national rollout of Samuel Adams Rebel IPA, a West Coast-style IPA brewed with hops from the Pacific Northwest that created a lot of excitement in its test markets last year. It's already receiving great support from distributors and on- and off-premise retailers.

We believe that these styles and packages are being favorably received by drinkers, and we remain confident about the long-term outlook for the craft beer category and for our Samuel Adams brand. 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 managements' 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 fourth quarter, our depletions growth remained strong, and benefited from growth in our Samuel Adams, Twisted Tea and Angry Orchard brands. The timing of our transition to our new Sam Adams spring seasonal, Cold Snap, was planned a week later than last year, and was accomplished by mid-January in most of our markets.

We expect to continue to increase investments in advertising, promotional and selling expenses for high-end existing brands, and also in innovation, commensurate with the opportunities and the increased competition that we see. With the launch of several new beers and our increased investment behind Twisted Tea and Angry Orchard, we believe we are well-positioned to maintain our momentum.

Over the past year, our supply chain struggled under the unexpected increased demand, and we experienced higher operational and freight costs as we reacted. While our growth continues to challenge us operationally, we improved our service levels to our distributors during the fourth quarter, and decreased our product shortages. In preparation for 2014, we have significantly increased our packaging and shipping capabilities, and our tank capacity at our breweries, to address the opportunity and meet these challenges.

Given the opportunities that we see, 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 investments in the short term, as we pursue long-term profitable growth.

We believe that one benefit of our Freshest Beer Program is better visibility into distributor inventory needs. This allowed us to better allocate available product in 2013, when we were at capacity and experiencing shortages. Overall, we remain committed to the program, and continue to believe that we are benefiting by delivering better, fresher Samuel Adams beer to our drinkers, while lowering distributor inventories.

We also recognize that we have significant opportunities to ensure that our on-time product shipping performance meets expectations. And to ensure that as we grow, we are reducing costs and improving efficiencies throughout the supply chain, without the cost of lost sales.

We currently have more than 120 distributors participating in the program at various stages of inventory reduction, representing over 65% of our volume. We believe participation in the program could reach between 70% and 80% of our volume by the end of 2014.

We continue to evaluate whether we can reduce distributor inventory levels even further, and are making investments in our breweries to improve their service in support of the program. Based on information in hand, year-to-date depletions reported to the Company through the seven weeks ended February 15, 2014 are estimated to be up approximately 35% from the comparable period in 2013. Now, Bill will provide the financial details.

Thank you, Jim and Martin. Good afternoon, everyone. We reported net income of $18.1 million or $1.33 per diluted share for the fourth quarter, representing an increase of $1.2 million or $0.08 per diluted share from the same period last year. This increase was primarily due to shipment increases, partially offset by increased investments in advertising, promotional and selling expenses.

Our core shipment line for the fourth quarter was approximately 941,000 barrels, a 29% increase over the fourth quarter of 2012. Fourth-quarter shipment growth rates were higher than depletion growth rates. Primarily due to production shortages of certain brands experienced during the third quarter that were filled in the fourth quarter as distributor inventories were rebuilt.

We believe distributor inventory levels at December 28, 2013 were at appropriate levels. Inventory at distributors participating in the Freshest Beer Program was lower by an estimated 212,000 case equivalents, compared to the end of the fourth quarter in 2012.

Our fourth-quarter 2013 gross margin decreased to 51% from 52% in the prior year. The margin decrease is a result of increases in ingredient costs, product mix affects, and brewery reprocessing costs, which were only partially offset by price increases.

Advertising, promotion and selling expenses were $19.1 million higher than costs incurred in the fourth quarter of the prior year. This increase was offset by a decrease of $1.5 million in customer programs and incentive costs.

The combined net increase of $17.6 million in advertising, promotion and selling -- and customer programs and incentive costs -- was primarily a result of increased costs for additional sales personnel and commissions, increased investments in point-of-sale, local marketing and media advertising, and increased freight to distributors, due to higher volumes.

General and administrative expenses increased $3.5 million compared to the fourth quarter of 2012, primarily due to increases in salary and benefit costs, and consulting fees. Our full-year 2013 core shipment volume was approximately $3.4 million barrels, a 25% increase from the prior year.

Full-year 2013 gross margin decreased to 52% from 54% in the prior year. The gross margin decreased is a result of increases in ingredient costs, product mix affects, increased brewery processing costs and increase in customer programs and incentives, which were only partially offset by price increases.

Full-year advertising, promotional and selling expenses -- excluding the 2013 customer program incentive cost of $13.4 million that we reported as a reduction in revenue -- were $38.6 million higher than costs incurred in the prior year. The combined net increase of $45.6 million in advertising, promotion and selling, and customer programs and incentive costs, was primarily the result of increased costs for sales personnel and commissions, increased local marketing, point-of-sale and media advertising, and increased freight to distributors due to higher volumes.

General and administrative expenses increased by $12.2 million from the prior year, due to increased in salary and benefit costs, and consulting fees. Impairment of long-term assets increased $1.4 million from the prior year, due to the further write-down of land owned in Freetown, Massachusetts.

Looking forward to 2014, based on information of which we are currently aware, we are targeting 2014 earnings per diluted share of between $6 and $6.40. But actual results could vary significantly from this target.

We are currently planning 2014 shipments and depletions growth of between 16% and 20%. We are targeting national price increases per barrel of approximately 2% to offset increases in ingredients, packaging and freight costs, and increased investments behind our brands.

Full-year 2014 gross margins are currently expected to be between 51% and 53%. We intend to increase investments in advertising, promotion and selling expenses by between $34 million and $42 million for the full year of 2014, not including any increases in freight costs for the shipment of beer products to our distributors.

We estimate 2014 brand investments attributable to existing alchemy & science projects to be between $5 million and $7 million, which are included in our full-year estimate increases in advertising, promotion and selling expenses. These estimates could change significantly, and 2014 buy-ins from these brands is unlikely to cover these and other expenditures that could be incurred.

We believe that our 2014 effective tax rate will be approximately 38%. We are continuing to evaluate 2014 capital expenditures, and currently estimate investments of between $160 million and $220 million, which could be significantly higher depending on capital required to meet future growth. These investments relate to continued investments in our breweries and additional [cake] purchases to support our growth and increased complexity.

Based on information currently available, we believe that our capacity requirements for 2014 can be covered by our breweries and existing subtracted capacity of third-party powers. These estimates include capital investments for existing alchemy & science projects of between $7 million and $9 million.

During January 2014, we amended our line of credit to increase the amount available from $50 million to $150 million, and extended the scheduled expiration date to March 31, 2019. Our amended line of credit has terms and covenants similar to the previous line of credit. We expect that our December 28, 2013 cash balance of $49.5 million, together with our future operating cash flow and the $150 million line of credit, will be sufficient to fund future cash requirements.

During the fiscal year ended December 28, 2013, we repurchased approximately 196,000 shares of our Class A Common Stock for a total cost of $29.6 million. From December 29, 2013 through February 14, 2014, we did not purchase any additional shares.

We have approximately $25.5 million remaining on the $325 million share buyback expenditure limit set by the Board of Directors. We will now open up the call for questions.

Thank you, sir.

(Operator Instructions)

Michael [Lenny] with Goldman Sachs.

Really just want to get a little bit more color on your quarter-to-date depletions being a very large 35% number, and your full-year guidance not coming up as much as you perhaps would think, given that core date number. So is there anything with the wholesaler inventory or anything going on there that is inflating that number artificially?

Sure. Let me ask both the inherent questions in there. One is, it's only six weeks, seven weeks into the year. And historically, we have not found that to be a great indicator for full-year trends. So historically, we have not adjusted full-year range on the basis of basically a month and a little bit.

And then as it relates to the number, obviously it gets exciting, but this is actually a pretty slow time for the business for craft and tea and cider. Generally this is a slow month.

We have launched a couple of new products into that time period in Cold Snap and in Rebel. So there is a fair amount of pipeline fill going on that, again, would cause us to be a little reluctant to project those numbers out on a full term. So we are just waiting, and expect the numbers to settle down a little bit once that pipeline fill has sorted itself out.

And trial.

And trial, yes.

Right. And then on the pricing and margin guidance -- gross margin guidance -- both coming down a little bit. I presume a lot of that is perhaps Angry Orchard doing better than you had initially forecasted for the year. But is there anything on the pricing side unrelated to that, that has changed versus your previous guidance?

No, I think the pricing outlook looks much like it did when we spoke to you last. Our intent is to shoot for 2%, on average, across the board. But obviously, it will vary by market to cover both the ingredients, and processing cost increases and freight increases, that we see.

I think if there is been any change on margin, it more relates to: we continue to struggle a little bit on the operational side to get the leverage that we anticipated from the volume. Frankly, we are focused on just servicing the customers with shipping of beer, cider and tea to them as they need it. And we are not so focused on the cost side.

Right now, we are basically supporting the growth. And I think that probably would be our expectation for most of the year, as that's what the primary focus of the Company will be operationally. So we are not expecting to see some of the cost leverage we might have expected -- we have expected. Obviously, we would like to see that long-term, but we don't expect to see it this year.

Got it, thank you.

Marc Riddick with Williams Capital.

One of the things that caught my attention during the prepared remarks was Jim mentioning the term, approachable, when talking about Cold Snap. And I thought that was interesting, because for those who have introduced it to and that type of thing, it seems to be -- I don't know if this is the best way to put it. But it's almost an entry-level offering for some folks who maybe haven't had a lot of experience with craft beer.

It is not as strong and as flavorful as some of the more hard-core things. So I was wondering if you could talk about that a little bit.

Because it seems as though the offering is something that would really get a little bit more mass appeal for those who are not already in the space? And then I have a couple follow-ups.

Yes, I use the term approachable because it is a beer that has a quite different flavor profile. It is obviously based on the tradition of Belgian white ales, which have substituted various spices for hops.

So instead of hop character and bitterness, you're going to get a spiced character -- traditionally, coriander, which in a beer, tends to have a sort of bergamot, Earl Grey tea character to a lot of people, and then orange zest. And we added eight other spices for a very complex, intriguing spice package in that beer.

And it seems to have hit the right note this time of year. It is been a pretty cold first few months of the year. And we might have wondered -- a lighter more spice-forward beer where that would fit. But so far, we have been very pleased.

Excellent, thank you. And I was wondering as far as the -- some of the thoughts going forward with cans. And forgive me if I missed this, because I did lose a little connection here on my end.

But I was wondering if you could give an update on what we would expect to see as far as -- whether it's seasonals or what have you. So an update on where you see cans this year?

Sure. We launched Boston Lager in the Sam Adams can last April. We did a little bit of Summer Ale in New England just to see how it would play out, and then rolled Octoberfest nationally in the can in August. And Winter Lager and Cold Snap were also rolled.

I would say that the can volume has met what our expectations were, which perhaps were lower than other people's. If you look at craft beer generally, somewhere between 3% and 8% of a brand -- the volume is in cans, somewhat depending on the market they are in and the season that they do well in.

And that has certainly been the range that we have seen, matching what our prior research had been from the IRI data. So it has basically met our expectations.

It's added some occasions, some venues, that has been helpful. And it certainly contributed to the growth, but it hasn't [passed again] as big as some of the people who are projecting it would be.

Okay, thanks. And one last question as far as on the marketing side, and I just wanted to get a sense of the mix of marketing, what have you. Clearly, the commercials are certainly resonating, and certainly seem to be helpful from the standpoint of top-line growth.

I want to just make sure that -- are you really looking at a similar mix of marketing spending? How you're allocating the marketing and advertising dollars this year? Is it similar to last year? Or should we expect any meaningful changes to that type of mix? Thank you.

I think the principles are similar, but some of the brand spend is a little different. We always start with a very strong sales organization, and we continue to invest in the appropriate markets where we need to. And the appropriate cost of trade, where we have opportunities to add talented people to help us with the business, and that remains the number one priority.

I think the secondary priority would be the point of sale and promotional support at retail. And again, we continue to increase that.

And then on the media side, I think -- which is where perhaps the biggest change this year versus last year is -- last year we had media spend for Sam Adams and Twisted Tea, and only for Angry Orchard just in the fourth quarter. And this year, we anticipate supporting all those brands with media spend for the majority of the year.

Great, thank you very much.

(Operator Instructions)

Carolyn Levy with CLSA.

This is Brian Doyle in for Caroline. We were just wondering on IPA how you think about this potential revenue opportunity in terms relative to Angry Orchard. And then, related to that, if it were margin accretive, at least on a gross margin line, versus base Boston Lager?

Sure. Hi, Brian. It is really too early to tell. Because we were just seeing pipeline fill, and as Jim mentioned, early trial to project a volume number for Rebel IPA, and so I am really hesitant to do that.

From a product cost-margin perspective, the beer features obviously hops of various Northwestern varieties at relatively high levels. And those hops have been really expensive the last couple of years, due to supply-demand issues. So from a margin perspective, it's probably not as exciting as we would like.

But obviously we need to go where the drinker is going. And the drinker seems to be interested in more unique or different flavors perhaps than they were five years ago. We have seen some interest in cider, which has some similar margin issues.

And then obviously, growth with the IPA category within craft has been very healthy, and that I think also has some margin issues. So net-net, I think, we expect if Rebel was to be significant for us, it would probably have a negative impact on margin.

Thanks very much. I just had one follow-up, and that was on your comment around complexity as a headwind on gross margin.

Is that -- I'm thinking in terms of three buckets. If one is the package complexity, obviously the rollout of cans, and then another is between categories with Angry Orchard versus beer, and then, within beer. What is the biggest -- of those three, what are the bigger drivers of the gross margin pressure from a complexity standpoint?

I would actually say the biggest driver is probably just the sheer volume growth, and us racing to keep up with it from a supply perspective has not allowed us to get the efficiencies that we would like. Obviously, we have a pretty complex portfolio relative to -- I am going to choose a point -- 15 years ago. But we have invested in both the people and some of the equipment to deal with that within our breweries.

That is not to say that it isn't difficult. And I will certainly take this opportunity to tip my cap to everybody in the breweries for last year's performance, which was truly incredible, given the volume acceleration that we experienced in Q2, Q3. So I would say it's part of the issue.

But the bigger issue is really that we are adding capacity really fast, and we're trying to keep up with demand. And that posed certainly some challenges in Q3 last year.

Great. Thanks a lot.

(Operator Instructions)

Marc Riddick with Williams Capital.

Just one quick follow-up that I wanted to go over with you. I was wondering if you could give a sense now versus last year if you are getting any sense of retailer feedback? And what you're experiencing with them, as far as changes within the industry?

If there's anything that you would see as different from what they are looking for, the kind of feedback that you are getting from them? Not just as far as sales space, but just the general views of the craft industry. Thank you.

Well, I think retailers, both on-premise and off, remain very positive about craft beer. It is the major source of volume growth and profit growth for them. And they are seeing the same double-digit growth that we are, and that is a very exciting thing for retailers.

They are probably struggling a little bit with how to configure the SKUs that they carry, how to make decisions among all the possible SKUs that are out there. How much to expand their coolers, if at all. Should they put in warm space for beer? Where should that be?

So this is a new world for them in terms of merchandising beer. Almost like wine, with lots of different SKUs, and then trying to rationalize it around brands, which they don't do with wine. I think retailers are excited to support the continued growth of craft beer, and will be evolving their merchandising strategies going forward.

Great, thank you very much.

Thank you. And presenters, at this time I'm currently showing no additional phone questioners in the queue. I would like to turn the program back over to Management for any additional or closing remarks.

Thank you, everyone, for joining our call. And we will talk to you next quarter. Cheers.

Cheers.

Thank you, gentlemen. And thank you, ladies and gentlemen. This does conclude today's call. Thank you for your participation, and have a wonderful day.