Boston Beer Company Inc (SAM) 2014 Q2 法說會逐字稿

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

I would now like to introduce your host for today's conference, founder and Chairman Jim Koch. You may begin.

Thank you. Good afternoon to everyone, and welcome. This is Jim Koch, founder and Chairman, and I am pleased to be here to kick off the 2014 second-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 second quarter as well as review of our outlook for 2014. Immediately following Bill's comments, we'll open the line for questions.

We achieved depletions growth of 23% and record total depletions in the second quarter. I'm tremendously proud of the efforts of our employees in achieving this record while also maintaining a focus on brewing quality and innovation. We believe that our depletions growth is attributable to strong sales execution and support from our distributors and retailers as well as our quality beers and our strong brands.

We were also delighted to learn that, for the sixth year in a row, our distributors ranked us the number one beer supplier in the country in the annual poll of beer distributors conducted by Cameron Consulting, a consulting firm specializing in the alcoholic beverage distribution industry. This is a testament to the efforts of all Boston Beer employees who service and support our distributors' business and to the relationships we have built with them.

Overall, our brand portfolio is healthy, and we remain positive about the future of craft beer.

I will now pass it 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 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 second quarter, our depletions growth benefited from strength of our Samuel Adams, Angry Orchard and Twisted Tea brands. We believe that the growth we see in our main brands reflects a response to our increased investments in media, local marketing and point-of-sale and the efforts of our increased sales force even as we faced a more competitive environment.

Accordingly, we have increased our expectations for full-year depletions growth to between 20% and 24% to reflect the most recent trends. We are planning continued increases in investments in the 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.

Our supply chain performance still remains below our expectations, but it is improving. The high demand levels and the large number of expansion and efficiency projects ongoing during the quarter caused us to experience higher operational costs than we had originally expected.

We are also seeing pressure from our transportations suppliers and experiencing increased freight cost to secure the performance and capacity that we need. Despite our best efforts, we had some continued product shortages and service issues during the quarter.

Many of our major capital projects were completed during the last 45 days, allowing us to focus more on training, process improvement and predictable operations. We are appreciative of the tremendous effort of our brewery and engineering teams to complete these projects successfully while we operate at peak levels.

Looking forward, we expect a continued high level of brand and capital investments 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 depletions through the 29 weeks ended July 19, 2014, are estimated to be up approximately 27% 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 $25.4 million, or $1.88 per diluted share, for the second quarter, representing an increase of $5.7 million, or $0.42 per diluted share, from the same period last year. This increase was primarily due to shipping increases partially offset by increased investments in advertising, promotions and selling expenses.

Core shipment volume was approximately 1.1 million barrels, a 25% increase compared to the second quarter of 2013. We believe distributor inventory levels at June 28, 2014 were at appropriate levels. Inventory at distributors participating in the Freshest Beer program at June 28, 2014 increased slightly in terms of days of inventory on hand when compared to June 29, 2013. We have over 65% of our volume on the Freshest Beer program, and we believe participation in the program could reach up to 70% of our volume by the end of 2014.

Our second-quarter 2014 gross margin decreased to 53.1% compared to the 53.6% in the second quarter of 2013. The margin decrease was a result of product mix effects and increases in packaging and ingredients cost, which were only partially offset by price increases.

We are currently maintaining our full-year gross margin target of between 51% and 53%.

Our second-quarter advertising, promotion and selling expenses were $15.7 million higher than costs incurred in the second quarter of 2013. The increase was primarily the result of increased investments in media advertising, increased costs for additional sales personnel and commissions, point of sale and local marketing, and increased freight to distributors due to higher volumes.

General and administrative expenses increased $1.8 million compared to the second quarter of 2013, primarily due to increases in selling and benefit costs.

Based on information which we are currently aware, we have left unchanged our projection of 2014 earnings per diluted share of between $6.00 and $6.40, but actual results could vary significantly from this target.

We are currently planning 2014 shipments and depletions growth of between 20% and 24% and national price increase of approximately 2%. Full-year 2014 gross margins are currently expected to be between 51% and 53%.

We intend to increase investments in advertising, promotional and selling expenses by between $37 million and $45 million, an increase in the range from the previously communicated estimate of $34 million to $42 million. This does not include any increases in freight costs for the shipment of our products to our distributors.

We estimate increases of between $3 million and $5 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 to $180 million dollars, a narrowing of the range from the previously communicated estimate of $160 million to $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 keg purchases in support of the growth and increased complexity. These estimates include capital investments for existing Alchemy & Science projects of between $7 million and $9 million.

We expect our June 28, 2014 cash balance of $31.3 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 relating to your guidance, which I'm a little bit puzzled why your EPS guidance did not go up. If I look at your depletion guidance going up by 4 percentage points, the marketing spending it looks like it's only going up by $3 million. So it seems like there is actually a pretty meaningful increase just based on your sales growth coming in higher. So are there any other cost increases that you're not calling out here or anything else to kind of think about as it relates to earnings guidance?

Sure, Judy, it's Martin. I think there's a couple of things going on, and I don't necessarily have them in order of importance. But one was seeing pretty significant freight increases. Primarily due to rates but also partially due to our operational supply chain issues where we're not filling the trucks efficiently. So we've got sort of a double impact there, and that is one effect.

The second effect would be mix and the gross margin perhaps not being -- from a mix perspective not being exactly where we thought it was going to be.

And then the third thing I would put in there is while we're very happy with our operations team and the fact that we are obviously supporting the growth and maintaining momentum, there's still a lot of opportunity in our breweries and how we're fulfilling demand to improve the operational costs and efficiency of those breweries. And, frankly, that's probably a multi-month, maybe multi-year effort. We're just chasing the growth. But that is sort of driving that gross margin a little bit. There's some mix issues, and then there's the operating issues.

Okay, so just to clarify. The gross margin guidance didn't change, but this year really was hitting you more just in terms of the demand coming in better than expected. It's really more the operational costs more and the SG&A line and freight costs. Those types of items?

Yes. Bill, would you agree?

Yes, absolutely. I think the transportation and freight situation has definitely increased our costs more than we originally planned for.

Okay. And then secondly, just in terms of your sales trend and looking really more at the recent trends. So if we look at the recent scanner data, it looks like the category growth, the broader beer category growth, has slowed a little bit. Your depletion growth year-to-date number would also suggest that there's a bit of a slowdown for your numbers. And I understand the comps are getting tougher for you guys. But just in terms of recent trends, anything that you're seeing that might be a little bit different both at the broader category level and sort of your portfolio level?

Sure. Well, I think we have a pretty unique portfolio. We have different things going on. From a Sam Adams perspective, our growth for the year is likely to be weighted towards the front end of the year due to both the introduction of Cold Snap, the launch of Rebel, and the sort of 30th anniversary celebrations, all of which took part in the first quarter really.

So while the Sam Adams brand is still healthy and growing, the growth in the second quarter wasn't as strong as the first quarter. But then from an Angry Orchard perspective, we have obviously some nice momentum there. It's a little unclear whether what's happening in the cider category -- the category is growing, but we've seen some pretty big new entrants from the major brewers. That's a little unclear as to how it's going to sort itself out. The comparisons for Angry Orchard get tougher as we go forward, so that will be a little bit of a tailwind on our comps.

And then finally, Twisted Tea, predominantly a summer season. It's very strong seasonally. And we're benefiting a little bit in the second quarter and maybe a little in the third quarter we'll benefit a little bit from that from a mix perspective and a growth rate. So from a total Company perspective, we've got all these sort of different portfolio issues going on. I think, as Jim said, we're happy that the health of all of those brands. We'd obviously like them all to be doing better, but I'm sure every supplier would.

I think from a Sam Adams perspective, we are not growing as fast as craft category is, but there's a lot of fragmentation going on. And we're doing, we think, reasonably well, although not as well as we would like in maintaining the strength in our core SKUs.

And then just generally to the total beer business, we seem to -- it's a little hard to tell what is going on. Our business is healthy both in the on- and off-premise maybe due to our new launches where the on-premise business, at least based on the reports we read, is generally weak. Our off-premise data you sort of see in the scan data, and we're maintaining momentum there relative to the category. So we're optimistic.

Okay, that's helpful. And then just lastly just in terms of the pricing environment, I think there's been a little bit of noise around maybe some of the major companies holding their line on the draft pricing. So just wondering what you're hearing on that front. And how does that perhaps impact your pricing strategy, particularly on the on-premise channel?

Well, I think it's a little early. You're seeing -- hearing very early reports of what other people might be doing. And until you actually get to those dates and actually work out what they're doing, it's tough to know.

I think from our perspective, we're seeing some increased freight costs. We've got some increased ingredients cost that we're expecting next year. We have some challenges on cider to maintain the margins that allows to invest in the brand and support it.

So we're certainly still anticipating trying to leave price up. It's a little early to announce what that target will be for next year, and we're still in discussion everywhere.

I think from an on-premise perspective, the good news is we're in categories where the on-premise retailer can charge a good price to the drinker and the drinker is willing to pay that price for a high-quality product. So I'm not sure that we will see a huge amount of price competition affecting us in that channel, but you never know. And again, it's too early to tell with the big guys are doing.

Great. Thank you.

Caroline Levy, CLSA. Your line is now open.

Just a follow-on on something you said to Judy. The brewery inefficiencies right now, it sounds like over time there's a long -- a significant opportunity then to improve efficiency and drive margins higher once you kind of right-size. And I'm wondering if that's correct.

And number two, to get at that opportunity, do you need to spend capital? Do you need to add people? Or was it just a matter of time?

Well, I think you are certainly right in assuming that as we look at our breweries, we see a lot of opportunity to run the more efficiently. And I don't think we would want to give a sense for how much right now.

We're going through a period of growth with growth rates 15%, 20%, 25%, 30% in a very capital-intensive business. We've also seen growth in our own complexity with the addition of cider, which is obviously a separate and distinct liquid stream and process, as well as fragmentation even within our portfolio.

So our operating teams have been quite severely challenged by growth rates, but, frankly, we're ahead of what we thought we were going to be. And then complexity that has mushroomed on them, primarily because that's what the drinker wants. And we're trying to address that through aggressive expansion, trying to get out ahead of it. But we're still in the process of doing that. And in that environment, we've made conscious decisions to chase the volume and build the business as opposed to taking the pressure off the brewery team.

So as it relates to is there an opportunity, yes, there is. Is it a significant change in gross margin? I'm not sure it's a significant change in gross margin, but certainly we would hope to move the gross margins back to where they've been historically. And how long will it take? Well, frankly, I'd love to tell you next year. But if we maintain this growth rate, we will -- it's hard to make those moves with this growth rate and the capital that we're expanding going on simultaneously.

So, again, I just would want to tip my hat to those teams, both the employees running lines and also everyone on the capital projects, that we're holding it together. When and if it slows down, we would hope to then see significant opportunities to actually get better and provide better service.

Right. Thank you. And then on the CapEx itself, you're coming in -- you pulled down the high end of your CapEx guidance. Is that just because you can't get it spent in time or because you're finding ways to avoid the high end of that number?

Well, as part of the previous answer, we've recognized that the very high pace of capital investment has placed significant strains on our operating teams. And we're trying consciously to look for other solutions to support the growth that aren't as disruptive to them. And I think at this point time we've delayed a couple of projects that we thought we were going to initiate this year, probably just pushing them off a year. And we think we have solutions to supporting that need, whether it be in innovation need or a capacity need.

So what you're seeing is little bit of deferring. If the growth rate continues, we will come back and do those projects. But we have to consciously decided to try and take -- it's not going to be a pause because we're not stopping, but to basically not overload the groups.

Right. And then maybe can you tell us about the core? You said that there was growth, but you lost share. And that's not surprising just given how many new entrants and so on. But when you talk about the core, you're talking straight Sam Adams or including the seasonals? If you can you give us any color on that, it would be very helpful.

No, I was thinking about the total Sam Adams portfolio in terms of growth. Obviously, we're happy it's growing. Obviously, Jim has been doing this 30 years; and to be growing after 30 years, given everything that's happening around us, we feel good about but I wouldn't say we feel great about.

And the craft category in total is growing mid- -- double-teens, I suppose. I can't remember what that craft -- that the Brewers Association reported. I think plus 18, anyway.

So we're not at that level. We have other initiatives within our portfolio with Alchemy & Science that maybe will help us grow our beer portfolio that fast, but generally we're happy.

And with Sam Adams, we don't have geographic distribution expansion opportunities. It's all about penetration and driving pull. So to be growing like we are now, I think we feel good about but not great. And maybe Jim would like to just comment over the top of that.

Yes, I think to be getting 23% growth 30 years in to a consumer product is something that we all feel good about here. I think we also feel very good about the continued growth prospects for the entire craft beer category. There are going to be, what, another 600 or 700 new breweries starting this year, and the category and volume in the first half of the year was up 18%. That's a pretty strong performance.

And it's part of a premiumization that is beyond just beer. You see it in FMBs, and you see it in cider. And we are fortunate enough to be in three categories that are all growing maybe even double digits. So we can grow; we don't necessarily have to grow share within our categories.

Thank you so much.

(Operator Instructions) Marc Riddick, Williams Capital.

I wanted to sort of question on retail, and I was wondering if you had any thoughts or views as to what you're seeing there, particularly how difficult it's been obviously to generate top-line growth. And I was wondering if you're seeing any maybe different behaviors in ordering patterns or shelf space at this point of the year than maybe you were seeing at the beginning of the year. Or if there's any way to sort of quantify the changes that retailers may be making in order to generate growth for themselves. And then I have a couple follow-ups.

I don't know that we have an informed opinion on the overall retail environment. We're pretty focused on our little niche. And in our little niche, there is a lot of excitement at retail because, for us, the categories that we're in our driving growth for retailers. And overall with beer, while there's been a slight decline in beer volume, and probably add cider and FMBs, it's been an even smaller decline.

There's been a very healthy increase in dollars. So that equation of selling less but making more money is a pretty good situation for certainly wholesalers, beer industry itself, and I think retailers are benefiting from it.

So at least with our categories, we are growing strongly. And in overall beer, cider and FMBs, the dollars are still performing pretty well and better than the majority of the categories that retailers are carrying. So beer is a pretty healthy category for retailers today.

You had mentioned, I think, once before about your shelf space expectations. And if I remember correctly, the idea was that the warm shelf space might have a little more of an opportunity maybe than the coolers just from being a -- the coolers being maybe a little bit more capacity constrained. And I was wondering if that was still the case of what you're seeing today.

I think that's still a fair assessment that as retailers try to add more variety and assortment of craft beer to the beer category, they are little reluctant to put in new doors in a C store -- it's expensive -- or new coolers in a supermarket. So they are looking to find adjacent space. And I'm even seeing some retailers pushing into the wine space with some of the higher-end craft beers.

Interesting. So just sort of heading in a bit of a different direction. You had -- I know that the advertising has been there, and it certainly seems to be pretty effective. I was wondering, it seemed to be focused on maybe expanding exposure to other parts of the portfolio beyond the flagship Boston Lager. And I was wondering if you got a sense or maybe it was too early to tell how that reach was -- how effective that reach is currently.

Well, the ads that we had on the past almost two months have, for Sam Adams, focused on variety. But that has been a theme that has come and gone over the years as we've been advertising. It's really part of the whole character and complexion of craft brewing that craft brewers like Sam Adams tend to be innovative and tend to like to play around in different beer styles, and I think consumers accept that fact.

So I wouldn't read too much into the exact content of the ads that we've had on in the last couple of months. They really all are about supporting the core values that Sam Adams shares with other craft brewers.

Okay, excellent. And finally, if I remember correctly, you had the limited-release editions of some of the sort of limited-release seasonals. I was wondering if that is something that could be expanded going forward as well or how you were seeing that in addition to just the general strength of the standard seasonals. Thank you.

Well, again, as a craft brewer, we're always kind of pushing into new beer styles. So, for example this summer and last year, we had a beer called Porch Rocker, which is a Radler. It's a German-styled beer, very popular in the summer, and actually means bicyclist. And it's a mixture of a Helles lager and some lemon-lime flavoring that bicyclists in Bavaria for many years have used as a refreshing drink. It's a little lower in alcohol, so you can get back on your bike and ride to the next bar.

Sounds good. I appreciate it. Congratulations on a good quarter, Jim.

(Operator Instructions) I'm showing no further questions at this time. Ladies and gentlemen --

I'd like to thank everybody for joining us, and hopefully you guys will get a good beer tonight. And we look forward to talking to you for the third quarter.

Cheers.

Take care.

Cheers. Bye.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program, and you may all disconnect. Have a great day, everyone.