Boston Beer Company Inc (SAM) 2014 Q4 法說會逐字稿

Good day ladies and gentlemen, and welcome to The Boston Beer Company fourth quarter 2014 earnings release call.

(Operator Instructions)

As a reminder, this conference is being recorded. I'd now like to call in the call over to host for today Mr. Jim Koch, Founder and Chairman. Sir, you may begin.

Thank you. Good afternoon and welcome. This is Jim Koch, Founder and Chairman, and I'm pleased to be here to kickoff the 2014 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'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 fourth quarter and FY14, as well as our outlook for 2015. Immediately following Bill's comments, we'll open the line for questions.

I'm pleased with our depletions growth of 13% for the quarter and 22% for the year. And that The Boston Beer Company, after 30 years of brewing, continues to help lead the craft beer industry both in innovation and variety. Our drinkers still get excited by our beers and our growth is attributable to great beer innovation coupled with strong sales execution and support from our distributors and retailers. I'm especially proud of our employees for growing Samuel Adams in a very competitive environment and learning to brew, manage, and sell a more complicated portfolio.

At the end of the fourth quarter, we had a smooth transition to our spring seasonal Samuel Adams Cold Snap, which is in its second year. Cold Snap is a unique and approachable white ale brewed with a blend of exotic spices that's been well received by drinkers and retailers alike. In the fourth quarter, we also began a national rollout of our new session IPA, Samuel Adams Rebel Rider IPA; and our new Double IPA, Samuel Adams Rebel Rouser IPA; which we expect will complement Samuel Adams Rebel IPA which had a successful launch in 2014.

We remain confident about the long-term outlook for the craft category and 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 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 fourth quarter our depletions growth remains strong and benefited from growth in our Samuel Adams, Twisted Tea, Angry Orchard, and Traveler brands. As we anticipated, depletions growth rate slowed from earlier in the year as we faced tougher comparables and we did not benefit from new product launches as we did earlier in the year. In the fourth quarter, we had lower sales and marketing spending and higher shipments than expected, which resulted in higher earnings than anticipated.

Looking forward, we are excited but expect the competitive environment to be tougher. We therefore, anticipate the need to increase investing and advertising promotional and selling expenses behind existing brands and to support national rollouts of brands and test future innovations. We remain committed to investment in innovation, commensurate with the opportunities and the increased competitive activity that we see. With the launch of several new beers and ciders in the first quarter of 2015 and our planned increased investment behind Samuel Adams Twisted Tea, Angry Orchard and Traveler brands, we believe we are well-positioned to maintain our momentum.

Over the past two years, our supply chain struggled under unexpected increased demand and we experienced higher operational and freight costs than we had planned. During that period, we completed significant capital and efficiency projects that increased our capacity and capabilities. Our focus for 2015 will be to take full advantage of these increased capabilities through improved training, stable scheduling, and operating efficiency, and reliability improvements. We will also continue to make supply chain improvements intended to improve the freshness of our beers and enhance our customer service.

As we absorb and optimize our 2013 and 2014 investments we are slowing the pace of our capital expansion. Our sales focus in 2015 will be to ensure successful second year growth of our 2014 launches and to support the national launch of our Traveler band. Looking forward, we expect to maintain a high level of brand investment as we pursue sustainable growth and innovation. And we remain 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 reported to the Company through the seven weeks ended February 14, 2015, are estimated to be up approximately 12% from the comparable period in 2014.

Now, Bill will provide the financial details.

Thank you, Jim and Martin. Good afternoon, everyone. We reported net income of $19.1 million or $1.40 per diluted share for the fourth quarter, representing an increase of $1 million or $0.07 per diluted share from the same period last year. This increase was primarily due to shipment increases, partially offset by a higher tax rate.

Core shipment volume was approximately 983,000 barrels, a 4% increase compared to the fourth quarter of 2013. Fourth-quarter shipment growth rates were lower than depletion growth rates. Primarily due to the timing of shipments and a decrease in distributor inventories. We believe distributor inventory at December 27, 2014, was at an appropriate level.

Inventory at distributors participating in the Freshest Beer Program at December 27, 2014, decreased slightly in terms of days of inventory on hand when compared to December 28, 2013. We have approximately 68% of our volume on the Freshest Beer Program and we believe participation in the program could reach 72% to 78% of our volume by the end of 2015.

Our fourth-quarter 2014 gross margin at 50% was lower than the 51% realized in the fourth quarter of the prior year. Primarily due to higher brewery processing costs and unfavorable product mix effects that were partially offset by price increases.

Fourth-quarter advertising, promotion, and selling expenses were flat compared to the fourth quarter of 2013. Increases in local marketing, costs for additional sales personnel and freight to distributors due to higher volumes were offset by decreases in point-of-sale and media advertising, due to the timing of these brand investments and the new product launches during 2014 compared to the prior year. General and administrative costs increased by $600,000 from the fourth quarter of 2013, primarily due to increases in salary costs that were partially offset by lower consulting costs.

Our full-year net income increased $20.3 million or $1.51 per diluted share to $90.7 million or $6.69 per diluted share compared to the prior year, primarily due to growth in shipments, which were partially offset by increased advertising, promotion, and selling expenses. Full-year 2014 core shipment volume was approximately 4.1 million barrels, a 20% increase from the prior year.

Full-year 2014 gross margin decreased to 51.5% from 52% in the prior year. The margin decreased as a result of increases in ingredient cost, product mix affects, and increased brewery processing costs which were partially offset by price increases.

Full-year advertise, promotion, and selling expenses were $42.8 million higher than the cost incurred in the prior year. The increase was primarily a result of increased investment in media advertising, increased costs for additional sales personnel and commissions, point-of-sale and local marketing, and increase in freight to distributors due to higher volumes. Full-year general administrative expenses increased by $3.6 million from the prior year, primarily due to increases in salary costs.

Looking forward to 2015, based on information of which we are currently aware, we are targeting 2015 earnings per diluted share of between $7.10 and $7.50, but actual results could vary significantly from this target. We are currently planning 2015 shipments and depletions growth of between 8% and 12%. We are targeting national price increases per barrel of between 1% and 2%.

Full-year 2015 gross margins are currently expected to be between 51% and 53%. We intend to increase investments in advertising, promotional, and selling expenses by between $25 million and $35 million for the full-year 2015, not including any increases in freight costs for the shipment of products to our distributors.

We estimate increased expenditures of between $10 million to $15 million for continued investments in Alchemy & Science brands which are included in our full-year estimated increases in advertising, promotion and selling expenses. These estimates could change significantly and 2015 volume from these brands is unlikely to cover these and other potential Alchemy & Science brand investments.

We believe that our 2015 effective tax rate will be approximately 38% based upon current tax laws and underlying regulations. We are continuing to evaluate 2015 capital expenditures and currently estimate investments of between $80 million and $110 million which could be significantly higher dependent upon capital required to meet future growth. These investments relate to continued investments in our breweries and additional tank purchases in support of the growth and increased complexity.

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. These estimates include capital investments for existing Alchemy & Science projects of between $3 million and $5 million. We expect that our cash balance of $76.4 million as of December 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 fourth quarter and the period from December 28, 2014 through February 20, 2015, the Company repurchased approximately 31,900 shares of its class A common stock for an aggregate purchase price of approximately $8.6 million. We have approximately $41.9 million remaining on the $350 million share buyback expenditure limit set by the Board of Directors. We will now open up the call for questions.

(Operator Instructions)

Judy Hong, Goldman Sachs.

I wanted to just ask you about the shipments in depletion guidance for 2015 coming down a little bit versus what you've given in the last quarter. What's sliding that and just a little bit more color in terms of beer versus cider or tea or some of the other categories that you're participating in?

I think since we last spoke to you the level of competition in, frankly, all of the categories that we're playing in is rising. And certainly, you've probably seen from the publicly available data around Nielsen that it's tougher to maintain the trends that we enjoyed last year. I think based on that we thought it appropriate to adjust down. I think craft beer remains very healthy with increased competition both in new entrants and number of beers and continues to be challenging for brands that have been around a while to maintain solid growth without very significant innovation.

I think we're excited by our launch of Rebel Rider and Rebel Rouser but it's way too early for us to read what that might do to help us. And it's also a little tough comparing to last year because we're going up against some interesting comparisons from the launch of Cold Snap and Rebel last year. So, I think we're being cautious based on what we see from a competitors environment.

On the cider side, I think you're seeing that the cider market is still very healthy and growing but perhaps not growing at the rates that we saw this time last year. Obviously, it's very hard to judge how that's going to evolve over the next 12 months. You are seeing increased competition primarily at the local level with a lot of startups and small cideries opening up and we still have the competition from the national players who have chosen to invest and compete in the category.

But it's just really hard to read that and I think our read on it now is a little softer than our read on it, whatever it was,10 weeks ago. I think we're still happy, again on the publicly available data, the Angry Orchard continues to maintain a good share. Obviously a lower share than it had this time last year, but we're happy with its share presence and it's just a little unclear what the growth rate of cider will be this year. There's a wide range and we're obviously taking our best guess at it.

On the Twisted Tea front, tea continues to be a small niche brand in its own area. There's lots of competitive activity around it with the other flavored malt beverages that affects it but we are happy with its continued strength. Again, via the publicly available data, it's just chugging along, although small, but chugging along. And I think, at this point in time, we're optimistic that tea will have another solid year.

And then beyond that as it relates to our full-year projections, we're including estimates for Traveler which we are launching nationally with significant TV media investment, plus obviously all the other sorts of investments that a national launch would require. That media would hit end of March and while we're excited about that possibility and obviously believe based on our prior year of experience in development of the packaging and the liquid that it's a promising opportunity, we really have literally no clue what the total volume may be.

So that one's a little more uncertain. I think we're excited about the category. We've received nice, in fact, very nice support from retailers and wholesalers alike and they seemed excited and it's just too early to tell. We've got some shipments under our belt that have the wholesalers that have chandies ready to launch end of this month, beginning of next and ready for that media wave. But it's really hard to tell what's going to go on.

So we've got a lot of uncertainty because we haven't yet really seen our own business trends that will drive this end number. Because a lot of it will depend on Travelers success, on cider total category and our ability to maintain share. And then as some of the innovations in the Sam Adams space, plus other things that we have planned to hold the brand strong, and I think versus 10 weeks ago, we just think it feels tougher to do all these things to deliver an end result.

If I can just follow up on the competitive landscape because as long as I've been following you guys you've always been talking about the competitive activity being challenged and your need to continue to invest in the category and the brand. So is there anything different about what you're seeing in the marketplace today, whether it's from the bigger brewers or some of the smaller start-ups across the beer and cider that makes you a little bit more nervous? Or just the reality of the growth in the cider category that you're seeing continue that trend and obviously the craft category has been seeing a lot of inventions in the category. So the question is really, is there anything different that you're seeing from a competitive perspective that makes you think about spending increases for next year and some of the share trends that you're expecting for 2015?

I think you're right. We've spoken about increasing levels of competition for quite a while and that's been the reality. And I don't see this as anything discontinuous or dramatically different. I think perhaps if there's any difference, as the base gets bigger, the attractiveness to competition becomes higher. So we're just seeing a continuation of what's been happening for many years.

Craft beer is kind of the darling of certainly the beer business, maybe the entire alcoholic beverage business, and it just -- as it gets bigger, everybody wants to play there. And we're seeing some of that in cider and certainly FMBs have wave after wave of innovation and new entries.

Caroline Levy, CLSA.

You do call up the risk of an increase in freight cost. Could you talk about why that is? I think your freight has been up the last couple of years because of such high demand.

I'm not sure exactly what we called out but I can talk about what we're seeing on the freight front. On the one hand, with diesel prices coming down, we're starting to see the fuel surcharges of the last two, three years start to dissipate. So that's obviously nice. That's somewhat of a small factor in the total pie. The bigger factor is the rate increases that the carriers are looking for to basically compensate them both for reduced driving time but also, frankly, for a tightness in the marketplace of equipment.

We're doing our best to move shipments where we can to intermodal and other forms of transportation to try and compensate. But our emphasis on freshness and delivering the best beer we can to our drinker prevents us from perhaps going the full way on those because of the transit times. And so, even with diesel prices coming down, we're seeing our actual costs of getting a case from brewery to market on average across the country increase.

Would you mind telling us how on-premise is doing versus the big box and versus other channels?

I think last year we were just really delighted with our on-premise trends. I think the -- again, the publicly available tracking which had some noise in it sort of ascribed to us some gain in share in the on- premise. I'm not sure whether that's the reality, but for us, the on and off tracked pretty closely together and a lot of that was due to the investment in our sales organization. They are fighting for every handle they can get. We obviously rolled Rebel out, which gained incremental volume for us and helped us with our calls with those accounts and we're very appreciative for that business.

So I think last year we look at it even-even but a lot of that was driven by that Rebel piece and I'm not sure that's going to continue. Our major draft initiative, in addition to our existing brands this year, is Traveler and again, it's a little early to tell. So generally the on-premise business is a little tougher and even more competitive than the off-premise business, but I think we're a little bit of an anomaly in that both of them have been healthy for us over the last 52 weeks.

And I just want to clarify. You said that Alchemy & Science was part of the increase. Are you talking about part of the $25 million to $35 million increase is that Alchemy & Science spend?

Yes. This is Bill, Caroline. Yes. That's correct.

And so, are you convinced, given the competitive environment, that a roughly $15 million increase in the all-other A&M is enough to grow your position and can you just talk about what the base Sam business looks like?

I think we are, right now, based on the plans, we have I think, as always we would say that if we come across something that would change the trajectory significantly we would prefer to invest even at the cost of short-term earnings. But based on what we currently have in the hopper, we think the planning numbers are right and for providing guidance and for modeling right now. Again, that could change. I think we -- Sam Adams had a great year last year. It's a little more competitive and we're going up against some very tough comparables.

We're try to focus on making the second year of Rebel and Cold Snap as successful as the first year and basically building franchises. And that's our primary focus the first three or four months. We've got other things planned later in the year and it's too early to think about how those may help us.

Vivien Azer, Cowen and Company.

I had a question about your advertising spending in the fourth quarter. Coming out of the third-quarter earnings call, it sounded like there had been some shift in the timing of spend that came out of the third quarter and would have hit on the fourth. So I was a little surprised that your A&P was flat in the fourth quarter. Can you elaborate on some of the decisions you made around A&P?

Yes. I don't think it was necessarily an advertising thing. The advertising spend came in pretty much exactly as we anticipated. I think our comments in the third quarter related to some timing of some promotional and point-of-sale purchases. And at the time, as we were looking at the full-year, we, frankly, were anticipating some more point-of-sale and local marketing spend happening in the fourth quarter than actually occurred. Now, some of that might have been due to our bad planning or some of it might've been an organization telling us they were going to spend it. But it wasn't really going to happen but they were keeping their powder just in case.

And we're trying to look at that because it was a little bit of a surprise for us, but the sort of difference in the spending versus what we had indicated we thought it would be is more in the point-of-sale which is a timing of purchase issue and actual purchase delivery being accepted. And then also in the local marketing, which is a sales force, we think we're going to spend this and then it doesn't actually happen, for whatever reason that may be. So we're going to take a look at that and try and get better at that, particularly around the year end.

That's incredibly helpful. If I could just follow with a separate question? Can you talk a little bit about your distribution expectations for Traveler and maybe if you could kind of benchmark it to the distribution that you were able to achieve for Rebel and for Cold Snap?

I think they're both -- those are both interesting sort of benchmarks. Cold Snap is a seasonal benefits from the seasonal conversion from Winter Lager which has obviously been a style and a seasonal that we've had in distribution for 20 years. So it's got all the benefit of that, so Cold Snap had great distribution but it was building off that solid base. Rebel, obviously, was built handle by handle and was a terrific success. I think it's been described as one of the most successful craft launches of last year and so to expect that for Traveler might be optimistic.

I think of Traveler more as a -- in its full-year, I think of it more sort of building slow. And I'd hate to link these two brands together but I'd be happy if we got Angry Orchard first full-year distribution with Traveler. That would be pretty cool. I'm not saying that in any way to suggest that we think Traveler is going to burst on the scene like the cider category, but that's sort of more how we're thinking about its first year.

I think Sam Adams Rebel IPA had both the very strong Samuel Adams brand name on it and the very strong IPA style. And you put those two together and it was, as Martin said, actually I think it was described as the most successful craft introduction ever. So we just don't think we're going to be able to do that in a second year, because Traveler is a new brand that we're building and the flavored IPA and the flavored ale is, again, something new, something interesting that will take longer. It's just not going to jump out of the gates like Rebel did, but maybe two or three years from now, that's sort of the way we're thinking about it. It's going to take longer and be a little harder.

(Operator Instructions)

Edward Mundy, Nomura.

Two questions, if I may? The first is just to follow up on your comments on last [month] coming from cider. A bit unclear as to the growth rates of start-up. I'd be interested in a little bit more granularity there. What exactly do you think it is that's resulting in the slow down in cider that you've seen year-to-date so far? And second on general and admin expenses. What's your outlook for gross there for 2015?

Why don't I take the first one on cider and I'm not sure I'm not sure I tracked the second one so I'll pass it to Bill. The cider category growth rate, if you look at the publicly available information, has been declining for at least 12 months, maybe 15. It was 150% and it's just been coming down. I want to say more recently it's in the 30% to 50% range. I don't have those numbers right in front of me. So it's obviously slowing.

Now, it's slowing partly because the base is so much bigger. Maybe because the drinker penetration has happened and it's returning to what I would describe as a more normal growth rate than the high growth rate that we were sort of experiencing. So just in the -- you're seeing it and I just think it's laws of big numbers and probably penetration trial acceptance and now we're trying to grow the base. That's what I would ascribe it to, but that's not to say that we aren't optimistic and we believe that it cannot grow double digits for several more years.

Cider category probably is still, order of magnitude, 1% of beer, maybe just a little under that, and versus other countries where there's good data that's obviously low. And so we're just not seeing it growing at the explosive growth rate that we saw over the last two years. So that sort of was my -- what I was trying to say, and I apologize if that wasn't clear.

And the second question was outlook for cider. We're 1% of the beer business. I would love to tell you it could get to two, but who knows? And that one, I just don't know. If you'd asked me six months ago what the growth rate for cider would be six months from now, I would never have guessed that we'd have seen the slowdown. But when you look at it analytically, the big numbers sort of say it has to. And, frankly, I'd be high with low double-digit growth in the category for 10 years.

That would be pretty cool. That would take the category up to 2.5% of beer. That would be pretty cool. Certainly, if we were able to maintain our position in that, that would be cool as well.

My second question was more on your financial guidance. You've given guidance on A&P increases for 2015, but I'd be interested in general and administrative expenses and what type of [inflation] we should look at for that line in the P&L?

That's all part of our SG&A expenses. I think that we've indicated we're looking at advertising and personal selling, we really haven't laid out what our SG&A total expenses are.

Right, got it. Okay.

And I'm showing no further questions in the queue, which will end our question-and-answer session as well as our conference for today. Ladies and gentlemen, thank you for your attendance. You may all disconnect. Have a great rest of your day.

Thanks very much, guys.

Thank you.