Boston Beer Company Inc (SAM) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Boston Beer Company first-quarter 2014 earnings conference call. (Operator Instructions) As a reminder, this conference call is being recorded.

I'll now introduce your host for today's conference, Jim Koch, Founder and brewer. You may begin.

Thank you. Good afternoon and welcome. This is Jim Koch, Founder and Chairman and brewer and am pleased to be here to kick off the 2014 first-quarter earnings call for the Boston Beer Company. Joining the call from Boston Beer our Martin Roper, our CEO; and Bill Urich, our CFO.

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

I'm pleased that the Boston Beer Company achieved record depletions in the quarter and that Samuel Adams Boston Lager, our flagship beer, has continued to grow as we celebrate our 30th anniversary. In the first quarter, we introduced our new spring seasonal, Samuel Adams Cold Snap, and I was excited that Cold Snap was well received by drinkers, retailers, and wholesalers.

Late in the first quarter, we had a smooth transition from Cold Snap to our summer seasonal Samuel Adams Summer Ale, now in its 19th year and still one of my favorites.

During the quarter, we initiated our national rollout of Samuel Adams Rebel IPA, a West Coast-style IPA brewed with hops from the Pacific Northwest. It continues to receive great support from distributors and on- and off-premise retailers. I'm particularly pleased with the early success of Rebel IPA and we believe that three months into our national launch of Rebel, it is already among the top three selling IPAs, according to off-premise scan data. And we are still building the distribution.

We're happy with the health of our brand portfolio and remain positive about the future of craft beer. 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 affect the Company's or management's expectations or predictions of the future. Such predictions are in the light of 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 34% benefited from strength in our Samuel Adams Angry Orchard and Twisted Tea brands. The Samuel Adams brand benefited from our 30th anniversary celebration, the rollout of Rebel IPA, and the strength of our seasonal beers. Our brands also benefited from increased brand support, including increased media spend, expansion of our sales force, and other brand support investments.

We are planning continued increases in investments in advertising, promotional, and selling expenses behind existing brands in an attempt to maintain the momentum as well as in innovation commensurate with the opportunities and the increased competition that we see.

We do not expect that the depletions growth rates we experience in the first quarter will be maintained for the remainder of the year, as we faced tougher comparables and the first quarter benefit from new product launches is unlikely to be replicated during the balance of 2014. Accordingly, we have not increased our estimated full-year 2014 depletion growth rate.

Our supply chain performance improved during the quarter, but still remains below our expectations. The high demand levels, unseasonal weather, and planned shutdowns for maintenance and efficiency improvements caused us to experience higher operational and freight costs than we had originally expected. While our growth continues to challenge us operationally, we have improved our service level to our distributors and decreased our product shortages.

Projects at the breweries to add capacity in preparation for peak volumes later this year are starting to be commissioned and we expect most to be fully operational during the second quarter. Compared to this time last year, we will have significantly increased our brewing, packaging, and shipping capabilities and our tank capacity at our Pennsylvania Brewery and our Cincinnati brewery.

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 a result of these investments in the short term as we pursue long-term profitable growth.

Based on information in hand, year-to-date completions through the 16 weeks ended April 19, 2014, are estimated to be up approximately 33% from the comparable period in 2013. Now Bill will provide the financial details.

Thank you, Jim and Martin. Good afternoon, everyone. We recorded net income of $8.3 million or $0.62 per diluted share for the first quarter, representing an increase of $1.4 million or $0.11 per diluted share from the same period last year.

This increase was primarily due to shipment increases, partially offset by increased investments in advertising, promotion, and selling expenses, and the impact of a favorable federal tax -- income tax -- sorry -- settlement of $0.06 per diluted share in the first quarter of 2013.

Core shipment volume was approximately 835,000 barrels, a 32% increase compared to the first quarter of 2013. We believe wholesaler inventory levels at March 29, 2014, were at appropriate levels. Inventory at wholesalers participating in the Freshest Beer Program at March 29, 2014, was unchanged in terms of days of inventory on hand when compared to March 30, 2013.

We have over 65% of our volume on the Freshest Beer Program and we believe participation in the program could reach between 70% and 75% of our volume by year -- end of the year 2014.

During our first-quarter 2014, gross margin decreased to 49% compared to 50% in the first quarter of 2013. The margin decrease was a result of product mix effects, increases in brewery reprocessing cost, and increases in consumer, program, and incentive costs, which were only partially offset by price increases. We are currently maintaining our full-year gross margin target of between 51% and 53%.

First-quarter advertising promotion and selling expenses were $17.8 million higher than costs incurred in the first quarter of 2013. The increase was primarily a result of increased investments in media advertising, point of sale and local marketing, increased costs for additional sales personnel and commissions, and increased freight to distributors due to higher volumes.

General and administrative expenses increased $1.2 million compared to the first quarter of 2013, primarily due to increases in salary and benefit costs and consulting expenses. Our effective tax rate increased to 37% from 28% in the first quarter of 2013 due to the impact of a favorable federal income tax settlement of $0.06 per diluted share in 2013.

Based on information which we are currently aware, we have left unchanged our projection of 2014 earnings per diluted share 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 of approximately 2% to offset increases in ingredients, packaging and freight costs, and increased investments behind the Company's 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 cost for the shipment of beer products to our distributors.

We estimate increases of between $4 million and $7 million for continued investment in existing brands developed by Alchemy & Science, which are included in our full-year estimated increases in advertising, promotion, and selling expenses. These estimates could change significantly, and 2014 volumes from Alchemy & Science 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 $200 million, which could be significantly higher dependent on capital required to meet future growth. These investments relate to continued investments in our brewery and additional keg purchases to support the growth in increased complexity.

Based on our information currently available, we believe that our capacity requirements for 2014 can covered by our breweries and existed contract capacity at third-party brewers.

These estimates include capital investments for existing Alchemy & Science projects of between $7 million and $9 million. We expect our March 29 cash balance of $28 million, together with our future operating cash flows and our $150 million line of credit, will be sufficient to fund future cash requirements.

We will now open up the call for questions.

(Operator Instructions) Judy Hong, Goldman Sachs.

So my first question is just given very strong depletion performance in Q1 and even into April, just the decision not to really take up depletion guidance for the full year -- Martin, you talked about the comparisons getting tougher, but just wanted to better understand what are the drivers behind the potential slowdown that you're expecting in the back half of the year. And implicit in that guidance, how are you thinking about Rebel's contribution for the balance of year?

Well, Judy, I think -- first of all, let me just note some sort of one-off factors that contributed to the first-quarter growth. And I'd start off with the launch of our new spring seasonal, Cold Snap. We had, as we noted in the call, strong seasonal performance. We don't plan any new seasonal launches for the rest of the year. So we're not sure that that will maintain its momentum.

We certainly launched in the first quarter Rebel, and as Jim noted, we feel very good about where it is. We still have a number of (inaudible) to be built in the spring set process, so the distribution gains are not final yet, and given its scan data performance, maybe we'll still have some more opportunities to add distribution there.

So that's going to probably flow through the rest of the year. It's certainly true, is I am sure you'd expect -- you're seeing a little bit of cannibalization in the portfolio, so it's not purely incremental. But we've planned it out for the year based on what we see the currents trends to be, and obviously, there's upside and downside from that once the trial period ends.

Also in the first quarter, we launched Twisted Lemonade. That launched in the February, March time. That provided a boost to the quarter and hopefully that will continue, but certainly, as you think about that, the summer volumes are much bigger and so its impact could be bigger, if it's successful, but also the base is bigger. So if it continues at its running rate, it's not going to be as big a contributor.

And then, finally, you have Angry Orchard, which, again, should be apparent from the scan data has had an unbelievable 12 months since last year. And that has obviously contributed to the growth rates we saw in the first quarter and the comparisons to the first quarter last year are obviously significantly easy. As the year goes forward, that gets much tougher.

I think, historically, we been very reluctant to adjust full-year guidance after one quarter. It's our smallest quarter and, frankly, we don't have a really great read on everything we're doing as to how well it's going to do. And I would put Rebel in that category, although as Jim, again, mentioned, we are very pleased. But it's really too early to know whether all of that is going to stick.

And, frankly, there's a lot of uncertainty. As we look at what's going on in the category, we've got two or three major players pushing brands into the cider category or reinvesting behind existing brands. We don't really know how that's going to go. It's way too early to tell.

And while we might be quietly confident, it would be foolish of us to not anticipate some trial -- them achieving some trial and some distribution. And then elsewhere within our portfolio, there are other competitive activities going on as well.

So I think as we looked at it and as we look forward, we felt comfortable not changing the guidance based on just three months' worth of data. It's certainly safe to say that we were pleased with the first quarter, but even if you extrapolate out the numbers we provided for the additional three weeks, you would notice that it slowed.

In those weeks, we're dropping the full number from 34 to 33, so you can back into what we saw in that three-week period. And we just don't think it will be wise to project three very successful months out to a full year based on all those factors.

Okay, that's helpful. And then on the gross margin side -- so the first quarter you called out some of the factors. But just wanted to better understand, maybe, if you can better quantify what was the biggest driver, whether it's the mixed impact or just the product cost or you called out weather -- and we've certainly seen poor weather impact. Not just demand, but supply chain as well, for many of our companies. So how much was really that issue?

And then as you're thinking into the next few quarters and expecting improvements there, how much of that is also hinging on the fact that the volume is going to slow down as well? So in other words, if you have depletion running up 30% plus for the balance of the year, can you actually improve the supply chain fast enough that gross margins actually do improve even in the back half of the year?

Okay, let me take those in two parts. As we look at the first quarter, there are a number of factors going in to what I would call our cost issues that we experienced. Probably the biggest one is the brewery process costs. Q1 is our slowest quarter, therefore our lowest quarter for brewery absorption costs and fixed costs. We've actually added a fair amount of cost to deal with the growth that we are encompassing.

As I note, we have a large number projects that have been commissioned to come online in Q2, and I just want to commend our brewery employees for actually achieving the quarter they did, given all the activity that is going on around them. So we have a lot of spending going on at the breweries. It's reasonably fair to say that creates some distractions from a focus on efficiency.

And I think it's also fair to say that we haven't been able to drive efficiency and continuous improvement in the last 12, 15 months like we had in the prior years and in fact even taking a step back.

But within the quarter and specifically related to it, the cold weather caused some very significant energy cost impacts in the breweries, with surcharges for our ability to stay online that were relatively significant relative to our cost structure. I think long term, we're very comfortable with the leadership of our breweries and the team we have there. We're very comfortable that we will come through this.

It is certainly very hard to drive efficiencies at the breweries when you have the spending we have going on on-site and the focus on building capacity. So you'll notice that in the capital guidance, we sort of lowered the top end a little bit.

We're certainly thinking it might make sense to take a little bit of a pause and try and drive those efficiencies little bit. Obviously, that will sort of depend on what our growth rates are and we'll probably have a better view on that when we talk to you in July, August.

So brewery process costs are the biggest, but we will continue to have some product mix issues that are the benefit of growth coming in liquids that have higher cost structures. Somewhat inherent to those liquids, and the two obvious ones are Rebel IPA, which has a -- some beautiful hop notes, but it happens that those hop notes are not cheap to deliver.

And then also Angry Orchard, obviously made from the best juice that we can get and that has some margin challenges for us relative to, for instance, what our business mix looked like five years ago with no cider and no IPAs in it.

So those are the two biggest factors that affected it, and the mix issues probably aren't going to go away unless the business mix changes. We're working on efficiencies and improvements to try and make those products better, but our fundamental belief is capturing great flavor in a bottle and presenting that to the drinker and so we're not going to cheapen any ingredients in any shape or form.

But on the brewery operating efficiency side, we'd certainly like to see better progress there. I'm not going to commit to progress this year, although we've asked the teams to deliver it. We're obviously prioritizing the growth over that right now.

With regards to your second point, which I think was about the anticipated increased depreciation load in the next few quarters -- you're absolutely right. That will be a burden on us from a cost point of view. On the plus side, those are our bigger quarters.

So we'll get -- I don't want to claim leverage on depreciation, because that sounds awful, but that's how the math works, obviously, and they are much bigger quarters for us.

So we've just been through our smallest quarter from a productions perspective. And we just weathered very high growth rates and got through that and now we're focused on the second quarter. And I think then our depreciation will get absorbed over much more volume and we'll probably be discussing this exact issue first quarter next year when our volume goes back down again.

Okay. The second part was actually related to how much of the gross margin improvement you're expecting as you're anticipating some slowdown in terms of volume in the back half. So in other words, it seemed like you had better-than-expected depletion growth in the last few quarters and the supply chain costs have been a bit more challenged as you were really cranking up to meet that depletion.

So if in the back half, you have depletion still running up 30% plus. Whether that does have some negative impact in terms of gross margins or whether you are at a point where supply chain issues are resolved enough that you can actually deliver even with volume coming in better than you would have anticipated.

Yes, that one is really tough. If the growth is there, then the breweries will operate smoother, and we'll probably have better operating behavior, but the absorption of the fixed cost of the breweries will be worse. And if the volume is there and we're running flat out, we won't run that efficiently, but the fixed-costs absorption will be better.

So I'm not sure that we've actually thought about that too much. And we left our guidance the same because I think inherently in the first quarter, we think there was some significant one-off effects and, frankly, if the volume is slightly ahead, maybe at the high end of our guidance, we'll get some benefit on that against the fixed costs.

So, again, too early to panic after three months on our gross margin projections. I would refer again to my comment about our volume is we tend not to change our projections after three months. And again, we'll probably have a better feel for will we talk to you in July.

Okay, got it. Thank you very much.

And -- oh I see it. No. Yes, that's it.

Caroline Levy, CLSA.

Hi, this is Brian Doyle stepping in for Caroline. I just had two questions. The first one was on the Rebel IPA rollout. If you could help us out with about how far along just on the distribution side you are. Whether that's sort of been specific to any particular -- whether there is any regions where you still have more room to go or just maybe in terms of what inning that's in.

Brian, this is Jim. I think it's not really regional. I think there's a couple of factors. Maybe the biggest one right now is we're in the midst of a lot of change to our resets. That's getting implemented in the spring. So some of them have been done; some of them haven't. But we do get pretty good raft of authorizations for Rebel IPA.

And then, additionally, there is just the sort of grind it out distribution, both on-premise and off-premise in package stores and in C stores. So I can't give you a hard and fast number on how much more there is. We're certainly well over halfway there, but we're not 100%.

Great, thanks. And then the other one was on CapEx and I realize it's probably pretty early, but I was wondering if you could help us better understand what your current guidance assumes in terms of where you are capacity-wise at the end of 2014? I know it's dependent on volume growth, but are you thinking you will have any spare capacity at that point or should we think about CapEx being at pretty much the level that it is in 2014 again next year, provided you're still growing volumes?

Yes, it's a great question. We'll have a better feel for this once we get through the summer for the following reason. Obviously capacity is sort of driven by peak period. Our peak periods haven't happened yet and we won't have a feel for how the breweries behave with that peak monthly, weekly volume in it.

As it relates to my answer to the previous question, we're not happy with how the breweries are operating from an efficiently throughput perspective in certainly with some of the investments we've made, but also some of the equipment's been there for a while, just because of the distraction of the growth in all the other projects.

And so our capacity is a function of both the investments we've made, but how well we run it. And if we can make progress on how well we run it, then our capacity goes up.

So we certainly have put plans in place and contemplated in the capital that we have is a capacity to support the business this year and if the growth rates are at the lower end of what we talk about and then maybe even lower still next year, we might define next year except for some peak week contracting that we might need to do.

Ultimately, we have to decide when the timing should be for the next big leap. We've just been through two years of very big leaps in different areas of the brewery. Last year it was in the packaging side. This year it's on the tank side and in the ability to produce the liquid, but we have to decide when the next big leap is and that -- we won't really -- don't really have to make some firm decisions on much before Q3. So we'll probably have a better feel for that when we talk to you in October.

Okay, great. But you don't anticipate meeting a new greenfield brewery or anything like that in the next year or so?

Well, now that one goes to growth rates. If we were to maintain first-quarter growth rates for another year, then we probably would be talking to you about that.

Got it.

But I'm not sure we're projecting that growth rate. So I would further say currently, no, but we're always thinking about these options, and I think we have cause to support a range of growth rates. Let's assume a range of different capital solutions and we're always looking at all of those options, ranging from greenfield to expanding our own breweries to seeing if anyone wants to partner or sell a brewery.

We're always looking at everything, but ultimately, what happens will be a function of what's available and then what timeframe we have to deliver it.

Great, thanks very much.

(Operator Instructions) Marc Riddick, Williams Capital.

I wanted to start with the progress on limited edition seasonals. Some of the -- like White Christmas and Escape Route. I was wondering if you could sort of give us an update there and how that was received in the marketplace?

Sure. Mark is referring to four beers that we issue on a limited release but not on a continuous basis, but we sell into the market at the start of each season, and I think we started this program about 18 months ago. We're happy with its contribution to our seasonal program and we will count it within that. We've chosen to do it as limited because it's a little easier to execute. And we've also chosen to try and run out.

So I think we're happy with how it's going. I don't really know how much we could sell, because we try to run out and try to build on it each year and build some following. And we're currently -- for those of you who want to try the beer that's currently out, that's Porch Rocker, our Radler-style beer is out there, and I would encourage you to try.

Great. Also, I think the last time we spoke, we discussed what's taking place with the stores, with their resets and sort of maybe the trends that we're seeing there and maybe how they've evolved a bit over time. And I was wondering if you could give a little bit of a summary as to what you're seeing so far?

I know you mentioned that that's taking place now, but if there are any differences in behavior or any particular trends we should be looking for in their resets?

Let me handle that one. A very complex matrix when you're talking about stores -- thinking off-premise. It's a really complex matrix of store type and then region. Because a convenience store in Alabama is a whole different animal than a club store in Portland, Oregon. So with that big caveat there, that there are enormous differences across this matrix, in general, yes, I think that we're seeing continued increases in the shelf space devoted to craft beer.

But we may be getting to the point where those increases are going to slow just because there's only a limited amount of space that can be taken out of the mass domestic beers before they start running into out-of-stocks or inadequate package -- your other SKU variety. And there are some stores where you'll go in that you really can't see a lot more space coming out of that end of the cooler and unlikely that the store is going to build new cooler space to take in more craft beers, though that does happen.

So I'm starting to see a little bit more warm shelf activity. It's much easier to make space for craft beer on warm shelves that are already there in the store and carrying something else. But that is less shopped and less desirable space. So bottom line, it's continuing to increase -- there's still some running room, but it's pretty visible that it can't go on forever at this point.

Right. Right. Thank you. And one last question for me. You'd mentioned as far as the growth of the advertising and promotional line and I was wondering if you could share a little more detail as to the mix of contribution to that growth? I know that it was up about $17 million or so, but I was wondering if there were any that were a little more -- a greater contributor, if you will, to the increase there?

Was it a primarily a function of media spend or were we looking more from the standpoint of adding personnel? Thank you.

I'm afraid we don't fully understand your question. If you could just reword it, thank you.

Sure. The increase of advertising and promotional selling expenses for the year-over-year increase, I wanted to get a sense of -- because you mentioned in the press release that there are several contributors there between the increase of staffing as well as increased media spend, that type of thing. I was wondering if any one of those had a greater contribution than others.

Sure. Well, we've had a number of things going on and I think the first thing I would say is our freight costs, which land in that number, are very significantly higher. I know we note that. That's how we've always reported. On the freight side, we have volume affects and we also actually have seen a significant tightening in the availability of carriers to the point where we've seen rate increases.

So one of the big increases in that number is freight, and beyond that, starting about this time last year, we started adding salespeople. We are currently up around 400. And that's a pretty significant increase over this time last year and that's just commensurate with our view that the real work happens face-to-face with the account and we can influence that with great people, great products, great training.

And one of the other big impacts is starting last October; we started advertising Angry Orchard on national TV. That's a program that's been running and, obviously, from the scan data, I think appears to have helped our share of the cider category. And that was purely incremental over last year.

Beyond that, we moved our big lager promotion to the first quarter, so we moved some local promotion point-of-sale type activity that might otherwise have run in the second quarter -- that moved to the first quarter, celebrating our 30th anniversary. So that is some of it, too.

We've not historically broken out all these different things and, frankly, we make decisions as to what is right for our brands based on what we see going on and what the opportunities are and it's probably cleaner just to think about it as a big bucket.

Okay, excellent. And last question for me, I promise. I think the capacity in the Q, it said it went up to about -- the production went up to about 95% or so of the core brands and you'd mentioned as far as the increases that took place during second quarter.

I was wondering if you are looking at that being completed during the back half of the second quarter, going into the third quarter? If there was any particular timeframe that you think that -- the main crux of that capacity increase would subside? Thanks.

Okay, the capacity that we have coming online, as I alluded to, is largely tanks. And they are starting to come online in literally the next few days and it's sad to say that we couldn't be happier. Those sorts of projects don't all just come online at once. We have some projects -- like one of the projects we have is 24 fermenters in Pennsylvania and we hope to get two online every two or three days, maybe every week.

And so it's kind of come on gradually, but basically, if we can get those tanks commissioned -- to start commissioning -- to be active in the next two or three weeks, we're in good shape.

Okay, great. Thank you very much.

Again, I would say we're in good shape based on what we think the growth is going to be.

Thank you. I'm not showing any further questions in queue. I'd like to turn the call back over to management for any further remarks.

Well, we certainly appreciate everyone attending. Hopefully you guys can grab a beer and we appreciate your interest in the Company and support and we look for to talking to you in, I think, July. Cheers.

Thank you.

Thanks.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may now disconnect. Everyone, have a great day.