Boston Beer Company Inc (SAM) 2014 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to The Boston Beer Company third-quarter 2014 earnings conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Instructions will follow at that time. (Operator Instructions) As a reminder, this conference call is being recorded. I will now introduce your host for today's conference, Jim Koch, Founder and Chairman. You may begin.

Thank you. Good afternoon and welcome. I'm pleased to be here to kick off the 2014 third-quarter earnings conference call for The Boston Beer Company. Joining me on 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 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 third quarter as well as a review of our outlook for the remainder of 2014 and our initial outlook for 2015. Immediately following Bill's comments, we will open the line for questions.

Our depletions growth this quarter was 21% and quite strong as a result of a number of factors including effective sales execution, support from our distributors and retailers, not to mention the quality of our beers, innovation, and strong brands. During the quarter we had a smooth transition from Sam Adams Summer Ale to our fall seasonal, Sam Adams OctoberFest.

Our fall seasonal program also included the limited release of seasonal favorites including Sam Adams Pumpkin Ale and a small batch, double pumpkin ale, Sam Adams Fat Jack. In addition, for the first time we released a small batch of Kosmic Mother Funk Grand Cru, which is currently on a 12-city tour after commencing in the barrel room of our Austin brewery for about two years. So it's an exciting time for us, and we remain confident about the long-term outlook for the craft category and our Sam Adams brands.

I will now pass over to Martin for a more detailed overview of our business.

Thank you, Jim. Good afternoon, everyone. As we state in our earnings release, some of the information we discuss in the release and that may come up on this call reflect the Company's or management's expectations or predictions of the future. Such predictions and the like our 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 the growth of our Samuel Adams, Twisted Tea, and Angry Orchard brands. We believe that the strength of our main brands reflects strong sales execution and our increased investments in media, local marketing, and point of sale, and the efforts of our increased salesforce.

We do not expect that the depletion growth rates we have experienced so far this year be maintained for the remainder of the year as we faced tougher comparables and the benefits in the first half from new product launches will not be replicated during the fourth quarter of 2014. Accordingly, we have not increased our estimated full-year 2014 depletion growth rate.

Our supply chain performance has improved during the quarter, but we still have plenty of room for further improvement. We have completed a number of significant capital and efficiency projects that have further increased our capacity and capabilities. Our focus now is on taking full advantage of these increased capabilities through improved operator training and unmaking supply chain improvements intended to increase the freshness of our beers and enhance our customer service.

We expect our capital expansion pace to slow in 2015 as we absorb and optimize our 2013 and 2014 investments. Our sales focus in 2015 will be on second-year growth of some of our successful 2014 launches rather than continue our recent high pace of new brand launches.

It is too early to accurately predict 2015 growth rates. We expect to maintain a high level of brand investment as we pursue sustainable growth and innovation. And we continue to be 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 your information in hand, year-to-date depletions through the 42 weeks ending October 18, 2014, are estimated to be up approximately 24% 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 $37.9 million, or $2.79 per diluted share for the third quarter, representing an increase of $12.2 million or $0.90 per diluted share from the same period last year. This increase was primarily due to shipping increases and lower than expected operating costs per barrel during the third quarter, due to lower employee benefit costs and the timing of certain advertising, promotion and selling expenses.

Core shipment volume was approximately 1.2 million barrels, a 23% increase compared to the third quarter of 2013. We believe distributor inventory levels at September 27, 2014, were at appropriate levels. Inventory at distributors participating in Freshest Beer Program at September 27, 2014, increased slightly in terms of days of inventory on hand when compared to September 28, 2013. We have over 65% of our volume on Freshest Beer Program and we believe participation in the program could reach 70% of our volume by the end of 2014.

Our third-quarter 2014 gross margin of 53% was equal to the third quarter of 2013, primarily due to unfavorable product mix effects and increases in packaging and ingredient cost that were offset by price increases.

Third-quarter advertising, promotion and selling expenses were at $8.9 million higher than the cost incurred in the third quarter of 2013. The increase was primarily a result of increased investments in media advertising, increased cost for additional sales personnel, point-of-sale, and increased freight to distributors due to higher volumes.

General and administrative expenses were equal to the third quarter of 2013, primarily due to increases in salary costs that were offset by lower benefit and consulting cost.

Impairment of long-lived assets increased $300,000 compared to the third quarter of 2013, due to the write-down in 2014 of Pennsylvania Brewery assets of $1.6 million compared to a write-down in 2013 of land owned by the Company in Freetown, Massachusetts, of $1.3 million.

Based on information of which we are currently aware, we have left unchanged our projected 2014 earnings per diluted share of between $6 and $6.40. The third quarter benefit of lower operating cost per barrel is expected to be offset by slightly lower than previously planned volumes in the fourth quarter. Our actual 2014 earnings per diluted share could vary significantly from the current projection.

We estimate 2014 shipments and depletions growth of between 20% and 24% and national price increases of approximately 2%. Full-year 2014 gross margins are expected to be between 51% and 53%. We intend to increase investments in advertising, promotion and selling expenses by between $37 million and $45 million for the full year 2014, not including any increases in freight costs for the shipment of beer products to our distributors. We estimate increases of between $3 million and $5 million from continued investment in existing brands developed by Alchemy & Science which are included in our full-year estimated increases in advertising, promotion and selling expenses.

We estimate our full-year 2014 effective tax rate to be approximately 37.5%, based on current tax regulations and underlying regulations.

We are continuing to evaluate 2014 capital expenditures, most of which relate to continued investments in our breweries and additional keg purchases in support of growth and currently estimate investments of between $150 million to $160 million, a decrease from the range -- from previously communicated estimate of $160 million to $185 million. These estimates include capital investments for existing Alchemy & Science projects of between $7 million and $9 million.

Looking forward to 2015, we're in the process of completing our 2015 planning process and will provide further detailed guidance when we present our full-year 2014 results. Based on information which we are currently aware of, we are targeting depletions and shipment percentage growth of between 10% and 15% and national price increases of between 1% and 2%. Full-year 2015 gross margins are expected to be between 51% and 53%. We intend to increase advertising, promotion and selling expenses by between $25 million and $35 million for the full year 2015, not including any increases in freight costs for shipment of distributors.

We estimate increases -- increased expenditures of between $6 million and $12 million for continued investment in existing brands developed by Alchemy & Science. These estimates could change significantly and 2015 buying from these brands is unlikely to cover these and other expenditures related to these projects that could be incurred.

We estimate our full-year 2015 effective tax rate to be approximately 38% based on current tax laws and underlying regulations.

We are currently evaluating 2015 capital expenditures, and our initial estimates are between $80 million and $100 million, which could be significantly higher, dependent upon capital required to meet future growth. These estimates include capital investments for existing Alchemy & Science projects of between $5 million and $7 million. Based on information currently available, we believe that our capacity requirements for 2015 can be covered by our breweries and existing contract capacity at third-party brewers.

We expect that our cash balance of $57.2 million as of September 27, 2014, along with future operating cash flow and our unused line of credit of $150 million will be sufficient to fund future cash requirements.

During the third quarter and the period from September 28 through October 24, 2014, we did not repurchase any shares of our Class A common stock. On October 9, 2014, the Board of Directors approved an increase of $25 million to the previously approved $325 million share buyback expenditure limit for a new limit of $350 million. As of October 24, 2014, we had approximately $50.5 million remaining on the $350 million share buyback expenditure limit set by our Board of Directors.

We will now open up the call for questions.

(Operator Instructions) Judy Hong of Goldman Sachs.

My first question is just relating to your full-year guidance, and there seems to be a bit of confusion just looking at the fourth quarter implied guidance. So first, in terms of depletion outlook, you have talked about the expectation for a bit of a slowdown as the comparisons get tougher. I think if I look at the last year, the fourth quarter comparisons are actually a little bit easier than the third quarter, so just a little bit of color around why you think that the comparisons are getting tougher here. And then from an earnings perspective your guidance, the full-year earnings guidance implies you're going to have a down like a 30% year over year in terms of earnings. So just trying to understand why that would be the case.

Hello, Judy, it's Martin. I think if we look at the fourth quarter, we've got a couple of things going on. I think if you look at the publicly available IRI or Nielsen data you'll see that our growth rate as a company is slower than the year-to-date numbers and slowing. That's reflective of, obviously, the brand health and what is going on with our brands. I think the other thing that is affecting growth year to date that doesn't help the first quarter is some of our brands have some seasonality to them and that seasonality -- the growth rate is up much bigger numbers in the summer months. And so, we benefited in the second and third quarter on a depletions basis from that seasonality.

As we look at the Q4, we don't have the benefit of an introduction of a new seasonal. The Angry Orchard brand is going up against much larger numbers from last year. Last year we were less inventory constrained at this period of time and we had really great weekly depletions there. And so that comparison is much more different. So it's just the net effect is our projection of Q4 is based on what we currently know and we currently think, based on the total mix of our business. And I think if you look at the publicly available IRI/Nielsen trends you will see that showing up a little bit in the slowing there.

With regards to the fourth order earnings, we had some -- we have some inventory reduction on wholesale that has to happen. Our inventories are certainly healthy by a couple of days, as we indicated the Freshest Beer wholesalers. So our shipment is going to be a little weaker than depletions trends, perhaps. And there are some timing of advertising, selling and promotional costs that we anticipate hitting Q4 that perhaps were deferred from Q3 or might have occurred in Q1 last year, so we have some timing issues.

Okay, that's helpful. And if I think about, then, your 2015 outlook, and you gave some color around how you are thinking about the depletion guidance. So within that 10% to 15% projection, can you give us a little bit of color just in terms of how you are thinking about the craft beer category growth? And then in terms of your mix of growth from beer versus cider or non-beer, how are you thinking about the makeup of that 10% or 15% growth as you look out 2015?

I think we are generally very positive about the craft category and the growth that's available to that category. We certainly are excited by what we see when we talk to drinkers about their propensity to drink craft, and obviously from retailers and wholesalers, too. So we think that craft is likely to maintain a low double-digit growth rate next year, and we would like to get a reasonable share of that. Certainly, the larger craft brands perhaps have not been growing as fast as the craft category, but it would be our expectation that we could grow our craft brand portfolio in the high single digits would be my guess.

The cider category -- currently we believe it's still under 1% of the beer category in the US, and we believe that has some upside. We don't think the category will grow as fast as it has this year. There's obviously a lot of interest in the category, a lot of competitive activity, and a lot of support for the category from retailers and wholesalers. So it's certainly possible that it could maintain that momentum but it's obvious you have a much bigger base. So I think that's little unlikely, but we do think that there's room over the next five years for the cider category to double or triple maybe in the 10-year time period. So, we are pretty upbeat on that.

And as we look at it this year, again if you look at the publicly available numbers, Angry Orchard maintained its share in the category. It lost a little bit of share as there were some pretty major competitive efforts going on. And then we seem to be recovering that share on a last four-week, sort of eight-week basis, although slowly. So, we're optimistic but very difficult to tell. And based on what we hear on competitive activity, it could be a very competitive year again. And much as we did this year, we are committed to investing in our brand to support its leadership position.

Tea remains healthy, just chugging along, slowly -- slow, steady, slow growth. And we would hope that we could achieve similar sort of trends next year.

So as you think about 2015, then, it sounds like maybe your focus is shifting little bit from a lot of innovations that you have seen in the last couple of years to really maybe a little bit more harvesting some of the recent innovations, which I guess could imply that maybe the margin could be a little bit better as you look out in 2015. Would that be a fair assessment of how you are thinking about 2015 and beyond now that you've got a lot of innovations in the marketplace, that your focus is shifting a little bit more on profitability as opposed to top line?

Great question. No, I don't think that's a particularly fair read of what we are trying to communicate. On the margin front there's a number of things going on in our portfolio and also with the drinker. As the drinker moves to greater interest in IPAs, the cost of producing IPAs is higher perhaps than the cost of producing lower BU beers, so there's some margin impact there.

On the cider front with our use of very high quality apples, and the apple contained in our ciders, that, as we have previously indicated, is a little bit of margin erosion force against our average portfolio. So as we look at what's going on with the drinker and what they are interested in and then also our own growth projections, our margins are -- at the gross margin level are hundred pressure just from mix trends and drinker interest.

As it relates to our statements on focusing in 2015 on building brands, I think it's merely indicative that we have currently no significant major new launches for Sam Adams or for Angry Orchard that might generate significant amounts of growth next year and that our focus is actually on building year two success on top of year one success on some of the things that were successful in 2014.

Our belief is that we have to invest in those beer styles in order to ensure that they are long-term successful. So we don't want to just rest on our laurels, having thrown something out into the marketplace, but we want to continue to drive and continue to build on the distribution of visibility and drinker favorable perceptions of some of the successes this year to ensure that they are long-term successful.

Okay, got it. Thank you.

(Operator Instructions) Caroline Levy of CLSA.

Just wondering if you can help us. It looks like your ad, promotion, selling expense is on track to grow little faster than sales even this year. And is that a trend that you expect to see continuing, because my understanding is you already have pretty enormous salesforce relative to the size of your sales base? So, can you help us think about that over the next few years?

Sure. I think, one, we do have a large and talented sales organization, and I think that's part of ability to go to market, support our wholesalers, support our retailers with a very retail-oriented salesforce. We are very proud of that group, and we are committed to growing and adding to that group as the market warrants.

With the growth rates that we generated over the last couple of years we've had the opportunity to put people into markets that perhaps could not support a salesperson before. We have had the opportunity to add people in states that never had salespeople before. And we have also, with the growth in penetration of some of our brands into classes and trades like the C-stores have developed C-stores specialized teams to support that. So, we see that as an important part of how we built brands long-term, and we are committed to investing in supporting that group both with training and products, and also by adding people as our growth warrants it in markets which can support it.

So as we look forward, I think we are committed to investing behind our brands and making sure we can compete successfully. I think in 2014 we had a couple of new launches, one being Rebel, one being Cold Snap on the Sam Adams side, that warranted launch-type efforts that grew our marketing investment slightly higher than perhaps would otherwise have warranted, and that's what you are seeing. In addition, in anticipation of the competitive activity on the cider side, we drastically increased investments that we have for brand support on cider, which is really the first large-scale national cider media campaign.

So, we would anticipate our investments in 2015 being a reaction to what is going on competitively in the marketplace. And at this point in time we are planning on continuing the high investment levels. We see the big brewers adding salespeople to try and compete with us and with others, obviously, so they are stepping up their investments, too. So we will react to what we see, again focused on long-term profitable brand health and growth.

Right, that makes sense. And then could you help us with where the operating efficiencies might kick in from not having such supply constraints? I assume that you are probably going to be in better shape in 2015. So does that hit the COGS line? Is that a benefit to COGS?

We would certainly like to improve our supply chain operating performance next year and have that show up on gross margin and a little bit on freight, which is in our SG&A line. We certainly believe we can make progress over the next six, 12 months with a slight slowdown in our capital expenditure efforts, and we think there's a lot of upside to training our employees and using the investments that we've made perhaps more efficiently.

We are facing some headwinds on the cost side that we don't have full visibility to yet. This year we face significant headwinds on the freight side, on the outbound freight side, both in availability of transportation and also cost of transportation. And that has been a big impact to us and we suspect that's going to continue into next year. And we are also at the early stages of trying to work out exactly what the barley situation means, and that's a little unclear right now, as everyone accesses the harvest. We think the biggest impact is likely to be quality, which may result in lower yields and some other impacts.

But again, it's way too early to tell. And we'll have better feel for that in February.

Thank you. And then just finally I'm wondering if you could talk a little bit about the market overall. It's obviously very healthy, the craft market. If you have any better read on this -- my sense is it's about 8% of volume and 16% of sales in the category. Don't know; I think it's growing double digit. You have lost some share because of all the new entrants. But are there any big picture commentaries you can add to and where you think this might go? Jim, it would be really interesting to hear your thoughts on how big product could be, in your mind.

Yes. I think right now we and most other craft brewers are very optimistic about multiple years of double-digit growth. As you point out Caroline, it's only 8% of the market now. And I think most of us are optimistic that it could double over some reasonable period of time. So, I see very good future for those of us who are already in. At some point it will be tougher for new entrants. There are probably, I'm just going to guess, maybe 700 new craft brewers who will start up this year. It's hard to know because there are so many that even the Brewers Association is having trouble tracking them and keeping count. And along with that phenomenon is just drinkers becoming much more eclectic and drinking across categories. As you know, we have been involved with cider for almost 20 years and that has popped in the last few years. So there's also going to be over the next five or 10 years other opportunities for all brewers, big and small, to innovate and engage drinkers in ways that aren't obvious now.

Dare I sneak in one just about your Concrete and your Angel City, just any updates on that would be really helpful as to -- are they in the marketplace, how are they doing?

Not really that much to support. Concrete Beach has launched in package in the last few weeks. But at some point maybe it will be meaningful for our results. But right now these are -- basically, it's an incubator. And quite tiny, they don't really move the needle at this point. They are part of our long-term perspective. Things take years, sometimes even, as we know with Angry Orchard, decades before they give meaningful results. So, I can't tell you that we are going to see meaningful numbers from the next quarter.

Thanks so much, that's really helpful.

(Operator Instructions) Judy Hong of Goldman Sachs.

Thank you for taking the follow-up. Martin, I just wanted to go back to your comment about some of the timing issues in the third quarter. That sounds like it's may be getting pushed out into the fourth quarter from an expense perspective. So I guess your guidance for advertising, promo and selling expenses, the investments around those expenses for the full year -- I think it's still $37 million to $45 million increase. Can you tell us how much of it you have incurred so far through nine months?

Hi, Judy, it's Bill. So as you know, in terms of the advertising, promotion and selling expense, we have transportation included in that number. And I don't have the breakout just in front of me in terms of what transportation is, in that number. But if you look at it, you could see for the first nine months of the year or first 39 weeks that it's up approximately $42 million. But that includes any increase in the transportation. I think Martin indicated that we have been challenged on transportation both from a cost perspective this year, and obviously it's up because of our growth.

Okay. So just in terms of the timing of some of the expenses that is going to hit the fourth quarter, is there any quantification of how much shifted from third to fourth quarter?

No, we don't have a quantification to share with you.

Okay. All right, thank you.

Marc Riddick of Williams Capital.

So one quick question I want to go over with just a thought on IPAs. And I wanted to get a sense of the growth and the strength of that's there and maybe get a sense of does it make sense for that category to be something that ends up growing as a percentage of the overall business going forward?

Well, it's certainly providing a lot of energy in growth for craft beer now as it moves to becoming the largest style designation within craft beer. And at this moment continues to gain share. I don't know how much longer that will be. Everybody is asking: what's the next IPA? And it turns out the next IPAs is just more IPA. We've obviously become a player in IPA with the success of Sam Adams Rebel IPA. It has been, actually, the largest, most successful craft beer launch in history. So it's a category that we think will continue to grow, and we are going to continue to support Rebel and look at some product line extensions off of Rebel within the IPA category, because it is continuing to just sort of blossom and bloom with session IPAs, with double IPAs. So there's a lot of activity around just standard IPAs as well.

Okay, and one last follow-up there, and more so on the straight advertising side, I guess. Are you getting a sense that -- is there a change as far as the kind of bang for your advertising buck that you are getting from the television advertising? And how maybe that looks compared to a year ago, because we are certainly used to seeing your commercials, especially on sporting events and things like that. I was wondering if from a pricing standpoint that you are seeing what type of difference there may be this year versus last. Thank you.

Measuring the effectiveness of advertising is incredibly hard. It's less of a variable to pricing, to sales force activity, to retail activation. So, I don't think we have a sense that the advertising effectiveness has changed year on year. Certainly with the noise in the measurement of effectiveness, I don't think we have any conclusion that our advertising has changed in effectiveness. We continue a strategy of buying for media which has been pretty consistent since about 2005 that for us has been pretty effective as measured in total Company growth. So, we're pretty happy with our approach to media. And when we have media that we like and that we believe tests well, then we will increase the spend.

I'm not sure if I've ever come across anybody who has been able to actually quantify the effects of their advertising and that goes over quite some time. But as far as the CPMs that you are paying now versus last year, do you see any major difference or is it sort of similar to what we have seen with the spot market and that type of thing?

We are mostly on the upfront, and so whatever the reported upfront important increases were, is the sort of stuff we are seeing.

Okay, excellent. Thank you very much.

Caroline Levy of CLSA.

Just a follow-up on on-premise versus off-premise what you are seeing there in terms of the trend differences.

Yes. We are actually very happy with both. And frankly, aren't really seeing too much difference in trend. Obviously, the publicly available information in the on-premise is somewhat limited, there being no currently data available like IRI and Nielsen with broad coverage. But we are pretty happy. We obviously, as I mentioned, strategically salesforce is focused on retail execution and we drove both seasonal handles, lager handles around our 30th anniversary, and Rebel handles, and Angry Orchard handles throughout the year. So, we are happy and I think we are seeing pretty similar trends on and off-premise.

That's excellent. Also the big rumors -- you did allude to the fact they are each very dedicated to bring their craft business. Have you got any sense of what the consumer knows about which brands are coming from big brewers versus not and whether they are actually competitive in what they are up to?

My sense is they are quite competitive. This is a growing and important part of the business, and they participate in that through their domestic specialty brands that are quite successful like Blue Moon and Leinenkugel and Shock Top and Goose Island. So I guess we view them as a permanent fixture of the beer landscape, and they, I think, will continue to step up their efforts. But you would have to ask them more specifics.

Great. Thank you for that, Jim. I was also wondering whether lower fuel prices are with any help on the transport side, which you said had been some cost pressure.

We hope so.

Yes, we hope so, but the availability and the driver hours seems to be a much bigger inflationary factor right now.

Got it, thank you.

Thank you. I'm showing no further questions at this time. Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Have a great day, everyone.

Thank you.

Thank you, guys.