Boston Beer Company Inc (SAM) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Boston Beer Company first-quarter 2015 earnings call. (Operator Instructions) As a reminder, today's conference call is being recorded.

I would now like to turn the conference over to Mr. Jim Koch, Founder and Chairman of the Boston Beer Company. Sir, please go ahead.

Thank you. Good afternoon and welcome. This is Jim Koch, Founder and Chairman, and I'm pleased to be here to kick off the 2015 first-quarter earnings call for the Boston Beer Company.

Joining the call from Boston Beer are Martin Roper, our CEO, and Bill Urich, our CFO.

I will begin my remarks this afternoon with a few introductory comments, including some highlights of our results, 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 2015. Immediately following Bill's comments, we will open the line up for questions.

I am proud that we continue to lead the craft industry in both innovation and variety. In the first quarter, our spring seasonal Samuel Adams Cold Snap, a unique and approachable white ale brewed with a blend of exotic spices, was well received by drinkers, retailers and distributors. Late in the first quarter, we had a smooth transition from Cold Snap to our summer seasonal Samuel Adams Summer Ale, which is now in its 20th year and still the leading summer seasonal beer in the craft industry.

During the quarter, we rolled out our new Session IPA, Samuel Adams Rebel Rider IPA, and our new Double IPA, Samuel Adams Rebel Rouser IPA, which complement our Samuel Adams Rebel IPA, a West Coast style IPA brewed with hops from the Pacific Northwest. Rebel continues to receive great support from distributors and on- and off-premise retailers. We are pleased 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 stated 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 the Company does not undertake to publicly update forward-looking statements whether as a result of new information, future events, or otherwise.

We are pleased with the start of the year and the continued growth of our business. In the first quarter, our depletions growth of 8% benefited from strength in our Angry Orchard, Twisted Tea, and Traveler brands that offset slight declines in some of our Samuel Adams styles, as the comparables were tough due to our 30th anniversary celebration, the rollout of Samuel Adams Rebel IPA, and the launch of Samuel Adams Cold Snap all in the first quarter last year.

We continue to invest in our brands and in new opportunities such as Traveler, and we will increase investments and advertising, promotional and selling expenses commensurate with the opportunities and the increased competition that we see.

Our national rollout of our Traveler brand is currently in progress and supported by national media. Thus far, the rollout is being (technical difficulty) by distributors, retailers and drinkers, but it is too early to tell how successful the rollout may be. We will continue to look for complementary opportunities to leverage our capabilities provided that they do not distract us from our primary focus on our Samuel Adams brand.

Our supply chain focus for the year continues to be taking greater advantage of our increased capacity through improved training, stable scheduling, and operating, efficiency and reliability improvements. We will continue to make supply chain improvements intended to improve the freshness of our beers and enhance our customer service.

Our sales focus for 2015 is to ensure a successful second-year growth of our 2014 launches and to support the national launch of our Traveler brand.

Looking forward, we expect to maintain a high level of brand investment as we pursue sustainable growth and innovation. 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 through the 16 weeks ended April 18, 2015 are estimated to be up approximately 8% 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 $13.7 million or $1.00 per diluted share for the first quarter, representing an increase of $5.4 million or $0.38 per diluted share from the same period last year. This increase was primarily due to shipment increases and slightly improved gross margins.

Core shipment volume was approximately 885,000 barrels, a 6% increase compared to the first quarter of 2014. We believe distributor inventory at March 28, 2015 was at an appropriate level. Inventory and distributors participating in the Freshest Beer Program at March 28, 2015 decreased slightly in terms of days of inventory on hand when compared to March 29, 2014. We have over 68% of our volume on the Freshest Beer Program, and we believe participation in the program could reach between 72% and 78% of our volume by the end of 2015.

Our first-quarter 2015 gross margin increased to 50% compared to 49% in the first quarter of 2014. The margin increase was a result of price increases partially offset by product mix effects.

First-quarter advertising, promotional, and selling expenses were $1 million lower than costs incurred in the first quarter of 2014. The decrease resulted primarily from decreases in point-of-sale and local marketing due to timing of new product launches that were only partially offset by increased investments in media advertising and higher cost of freight to distributors attributable to higher volumes.

General and administrative expenses increased by $1.3 million over the first quarter of 2014, primarily due to increases in salary costs. Based on information, of which we are currently aware, we have left unchanged our projection of 2015 earnings per diluted share between $7.10 and $7.50, but actual results could vary significantly from those (technical difficulty).

Our depletions for the 13 week period ending March 28, 2015 grew by 8% from the comparable 13 week period ended March 29, 2014, and full-year estimated depletions and shipment growth remain unchanged at between 8% and 12%. We are targeting national price increases 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, promotion and selling expenses by between $25 million and $35 million for the full year of 2015, not including any increases in freight costs for the shipment of products to our distributors.

We estimate increases of between $10 million and $15 million for continued investments in Traveler and other existing brands developed by Alchemy & Science, which are included in our full-year estimate increases in advertising, promotional, and selling expenses. These estimates could change significantly at 2015 volume from Alchemy & Science brands is unlikely to cover these and other expenditures that could be incurred. We believe that our 2015 tax rate will be approximately 38%.

We are continuing to evaluate 2015 capital expenditures and currently estimate investments of between $80 million and $110 million, which could be higher depending upon the capital required to meet future growth. These investments relate to continued investments in our breweries and additional keg purchases in support of 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 breweries. These estimates include capital investments for existing Alchemy & Science projects of between $3 million and $5 million.

We expect our March 28, 2015 cash balance of $122.2 million, together with our future operating cash flows and our $150 million line of credit, will be sufficient to fund future cash requirements.

During the first quarter and the period from March 29, 2015 to April 24, 2015, we repurchased approximately 53,000 shares of our Class A common stock for an aggregate purchase price of approximately $14.3 million.

As of April 24, 2015, we had approximately $28.3 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). Vivien Azer, Cowen and Company.

So my first question has to do with the weather impact. Gosh, you guys just got slammed up in Boston, and I know that's an important piece of your business. Do you guys have an estimate for how much weather impacted your business in the first quarter?

I think it's just anybody's guess. You know what the weather was like. I would say that historically we have had an aversion to turning the quarterly earnings calls into weather reports. So we really don't take credit for great weather or ask for forgiveness for bad weather.

Well, I think that's fair. Thanks for that. Jim, or anyone on the team, can you guys comment a little bit on the trends that you're seeing in the on-premise versus the off-premise for your business, in particular, in light of the heightened competition that you've called out?

Yes, the on-premise piece of the business generally is still a little bit weak. It hasn't fully seen what some people might have expected from the increase in discretionary income as a result of gas price decreases.

On-premise is quite competitive. There are sort of roughly, maybe order of magnitude 10% more draft lines in the universe every year against a business that is only growing a little bit in dollars. So the pie keeps getting split up among more and more draft lines, and more more people are flipping lines. So it has probably become more competitive for craft beers on-premise than it has off.

Terrific. That's very helpful. My last question has to do with the investment spending outlook. I know you guys don't typically like to offer quarterly guidance, but is there any help you can give us in terms of the cadence of the investment spending through the remainder of 2015?

Yes, we struggle a little bit with quotas because there's lots of stuff going on year on year, and we don't like to get into too much detail. I think I would answer the question with a reference to -- in the first quarter of last year, we had this big activity around Sam Adams, around Rebel launch, and Cold Snap launch, but didn't occur this year. We are obviously choosing not to change guidance, so we anticipate that our spending timing will drift into Q2 or Q3, and I think the one thing I would say is we launched Traveler nationally on distribution in Q1, but the major media started very late March and is running now. So that is going to wait through the summer, and obviously we will continue that spend as long as we continue to see the traction that we are seeing with the traveler brand, and that will distort these numbers a little bit.

Very helpful. Thanks a bunch.

Judy Hong, Goldman Sachs.

So my first question is on your depletion trend in Q1 and then your depletion guidance for the full year. So you had talked about depletion running up 12% through mid-February, and then that implies obviously a pretty meaningful slowdown in your March depletion. So just wanted to see if there's anything you can call out in terms of what drove that slowdown for your depletion. Whether that is really impacted by the lapping of the Rebel IPA launch or just whether or any of the issues that impacted that March trend specifically.

And then as relates to your guidance, it's interesting because the last quarter talked about a very tough competitive dynamics, and you anticipated some deceleration in terms of your depletion growth. And then as we sit here today, you did 8% dilution through April. The full-year guidance, 8% to 12%, implies actually an acceleration from the current trend.

So just wondering what you're seeing in terms of the more recent trend and the competitive dynamics and the anticipation acceleration that you are expecting. Do you feel better about the competition? Do you feel better about the traction that you're getting with Traveler's or Rebel line extensions?

Well, just speaking to March, I think March was the toughest comparable over last year from an impact of the Rebel launch last year and also of the Boston Lager 30th anniversary program. So that was just the toughest month.

I think it's fair to say that it's hard to tell how much of the softness is due to that versus not due to that, but just looking at our first-quarter trends last year, we just obviously had a huge quarter. I think it was -- I don't remember how big it is, but I think it was in the 30%, and I just refer you to look back at that. It was just a huge quarter.

Just looking forward and I would say it is generally about our guidance, we don't like to change guidance if we think that the guidance is still reasonable based on our information. And certainly three months worth of data is not sufficient for us to want to change any of our guidance.

And as we look at the summer, we do have some brands that have some seasonality to them, and their growth rates help us more in the summer months than they would do in the first quarter. Obviously, as you look at our brand trends and the publicly available information, that while the beer -- the Sam Adams beer business is slightly positive, if you were to pull all the numbers together, the tea business is up very healthy double digits. Obviously cider in a slowing category is maintaining share, and both of those categories have some seasonality to them, which means that the impact on us in the Q2 and Q3 is going to be much greater than it was in Q1.

And then on top of that, we have the Traveler launch, which only really hit its stride in the fourth week of March. In fact, we still have a lot of distribution to close. We are still waiting on a lot of chain distribution to close, which you will see in the Nielsen or their IRI numbers.

So I think as we look at it, we have some belief that our trends could improve in Q2, Q3, if all of those things come to pass. Obviously there is no guarantee, but as we laid out the year, we knew the first quarter was the toughest.

That's really helpful. If I can just follow up on that, just thinking about your beer being down in Q1, obviously a very tough comp as you have noted on the Cold Snap launch and the 30th anniversary in lager. But does your guidance also kind of embed some acceleration on your core beer trends as you get into the latter quarters? I think the lager and just the broader seasonal portfolio had a bit of a bright spot in the earlier part of last year and have started to soften in the latter part of last year into earlier this year. So what are some of the steps to accelerate growth of your core Sam Adams trademark?

I think again we are optimistic believing the first quarter is a little bit of a comparable issue, but we have a number of levers, some of it which we have already pulled with the introduction of Rebel Rouser and Rebel Rider. It is still too early to tell how impactful those will be.

We also have advertising spend that we are looking at, and we like our current advertising. It is possible we'll increase the investment of that. We're trying to dig into the quantitative information that would support such a decision.

As we look a little bit longer-term, we have major packaging redesign in the works, which I can't commit for exact timing, but will happen sometime in Q3, and we also have some tap handle work that may hit Q3, too.

So we have been looking at all the levers that we can pull, and I think we believe we're going to have some slightly easier comparables, but again, truth will tell.

Okay. Got it. Thank you.

Caroline Levy, CLSA.

A couple of questions. Can we talk a little bit about capacity utilization and optimization on distribution? Last year you had such dramatic growth and some of it unexpected that you had some inefficiencies. And I'm wondering if you are satisfied with all of your plants and if there are opportunities, you do talk about those other opportunities to improve capacity utilization and efficiency that will benefit gross margin separate from pricing going forward.

So it's a great question. One, we are very proud of our breweries and the employees there who have supported the business growth over the last three years under incredible pressure and a company of our size experiencing the growth we've had.

We have completed a major expansion in some cases. Maybe we've built what we thought we might need if those growth rates had continued. So I think from a capacity perspective, we've done a nice job of building capacity maybe slightly in excess of our needs this year. We are still challenged in the onboarding and training of our employees to run the equipment and even in some cases in the commissioning of highly specialized equipment where perhaps we have not -- because we're moving so fast, we did not appropriately train and commission around that.

So we do think that there's a lot of opportunity at our breweries to increase both productivity and also reliability and service. We are happy to report we are making some progress against that, but it probably hasn't shown up in the numbers yet. I would never want to guarantee that it would show up in the numbers, but it's a major area of focus for us.

That's great to hear. And on the freight side, I know that it's harder and harder to get truck drivers, and you had higher freight costs last year. Maybe that was more around not being able to plan for that kind of volume. Are the freight issues still a major concern, and is it for different reasons?

Yes, I think it's an area of concern just because, one, it is certainly a cost issue for us, and that's disappointing, but it's much more of a service issue, particularly when our wholesalers expect us to hit a delivery time on time and an appointment time on time.

What we've seen is the decrease in the rates on diesel have been more than absorbed by increased payments to truckers and/or equipment owners. And so we haven't I don't think seen any real benefit of the collapse in oil prices.

And as we try to improve our service levels to our wholesalers from a reliability and predictability point of view, which is I think a core part of our strategy of delivering fresh beer and allowing us to run with less inventory than a typical brewery is running both at our wholesalers and in our breweries, we need reliability of transportation, and we are finding we are paying, I won't say dearly for it, but sometimes it feels that way.

Right. Your April comp looked as if it would be easier than the first quarter, but your depletion growth through April is unchanged from the first quarter. Are there any -- even though Travelers sounds like it's going well and so on, is there anything that would account for that? I would have thought with easier comps you would have a slight acceleration in April.

Yes, I think -- it's only one of the two, three weeks. We've got Easter moving around. I just think it's too murky to even speculate on.

Got it. And then my last question would be on the use of excess cash. You've really got quite a lot, and you did some buybacks but not a lot. Would you expect to fully utilize the cash on hand for buybacks while still staying debt-free?

That's an open-ended question with no timeframe on it, which I appreciate. We are obviously cautious in how we manage the balance sheet. We have a long track record of returning cash to shareholders in buybacks. We have been somewhat selective at the times that we bought back. Mostly that has benefited our shareholders enormously.

As you note, our cash balances have sort of swelled a little bit, some of that through some capital slowing down, some of that through option exercising generating significant sums of cash, and it's something we're looking at closely. As you know, we don't go into specifics of our plans, but I would think it's reasonable to expect that management's intent is to run the business as it has been run in the past in a similar fashion as it relates to returning cash to shareholders, although as always, we would reserve the right to change our minds.

Thanks so much. That sounds great.

(Operator Instructions). Nik Modi, RBC Capital Markets.

Guys, can you maybe talk a little bit about the on-premise in terms of the pricing environment? 2% price mix looks actually pretty darn good considering all the negative chatter going on about promotional activity in that channel. So I was hoping you can just talk about that and if you're seeing any of that bleed into the off-premise well.

Well, we are seeing some significant price decreases on kegs in on-premise, primarily big brewers, who are pricing their domestic specialty beers that compete with craft beers at significant discounts. We have resisted pressure to do that. We feel pretty confident in the strength of our brands, so we have not responded to some of those deep price cuts, and I think that would be more generally true about other craft brewers. So there is maybe an on-premise.

You are seeing kind of a divergence between the craft brewers and the domestic specialty injuries like Goose Island, etc., Shock Top that come from the big brewers. So maybe you are seeing a different price tier of real craft and then some of the competing entries from big brewers.

So I think we've been confident enough to hold our pricing levels for on-premise, and I think the consumer awareness of real craft beer has helped us there. Whether it has spilled over into off-premise, maybe not quite so much, but it's really too early to tell.

And then the last question from me is just as we think about Curious Traveler and the incrementality of that category to Boston Beer, what -- how do we think about the interplay between the consumer of cider, shandy, and other flavored beers? Is there a lot of cannibalistic behavior that goes -- do those consumers shop across all those different subcategories?

I think in general, we are seeing a more promiscuous customer, a more experimental customer who is pretty much open to what tastes good to them and not bound as much into traditional categories as you would see drinkers in the past five years ago, 10 years ago. We've got craft beer drinkers drinking wine, drinking bourbons, drinking craft spirits, and vice versa.

So we are optimistic that Traveler, as an important player in the shandy category, will benefit from some of that experimentalism of consumers and willingness to try maybe nontraditional beer categories, whatever they are, whether it's IPAs or shandies or whether you're talking cider. So it's not as clearly cannibalistic as you would of thought with a more rigid model of consumer behavior.

Yes, thanks, Jim.

Judy Hong, Goldman Sachs.

I just had a quick follow-up on Traveler's actually. Martin, did you quantify how much that added to your depletion in Q1? And then just broadly speaking, the traction that you're getting in terms of distribution for Traveler's, as well as the Rebel Rouser and Double IPA, if you compare that against the Rebel IPA you launched last year, the velocity on those line extensions and the distribution, that could just be helpful to understand what's going on with those innovations.

We don't break those out, so I can't really answer that piece of it. What I think might be helpful is that last year, Rebel launched earlier and bigger than Rebel Rider, Rebel Rouser, Curious Traveler as well. We're a little later in the quarter, and our launches take a while. I mean we exist in a different world than the big brewers where they can get 85% distribution in two weeks. We can't do that.

So our distribution ramp-up is much slower than you might be used to seeing. So I think we are watching Traveler ramp up a lot of the launches. It really hit April 1, so we're in the first quarter, and the Rebel Rider and Rebel Rouser launches were more slow, steady ramp-ups.

Rebel IPA was the most successful launch in craft beer history, and we're not going to be able to repeat that every year. Though maybe Traveler this year will do it again. We will see.

Okay. Great. Thank you.

Edward Mundy, Nomura.

Just on Traveler again, you are able to find a bit of feedback on what you're hearing from trade. How excited are your key customers on that brand ahead of the summer launch?

And secondly, within your Alchemy & Science division, were there any other rising stars that you think have got potential as you look out over a couple of year horizon that is starting to show some real potential?

The reaction we've gotten to Traveler from retailers and wholesalers has been very strong. The beer itself -- just the feedback we got on the taste of the beer has been very good. People really like the way it tastes, both Illusive Traveler, which is grapefruit, and Curious Traveler, which is lemons and limes. So that part has been very encouraging.

We've been happy with the pace of the rollout. It's pretty much on plan. The pull we've been happy with, and we've also gotten very positive comments about the advertising support, and both retailers and wholesalers are very happy to get that kind of level of support from a craft brewer. So I guess words I can give you, so far, so good.

Looking at the rest of the Traveler portfolio, it's really too early to tell. So we are pretty much focused on getting Traveler launched over the next 12 months.

Thank you.

Caroline Levy, CLSA.

Just wondering two things. On cider in particular or cider and teas, do they tend to be positive for mix or negative in terms of the margin impact?

Yes, I think on the tea side, I don't think we've ever discussed margin impact, and I think -- I can't remember if we ever have. I do think on the cider side, we've given an indication that each bottle has two apples in it or close to it, and that's a pretty expensive proposition. Obviously it's been an attractive proposition for us, but there are definitely mix impacts with cider.

Thank you. And then you haven't discussed international growth, I don't know if ever or certainly not recently. Do you spend any time thinking about that as an opportunity?

I spend a lot of time thinking about it because our international division of 2.5 people reports to me directly. And so I spend a fair amount of time thinking about it.

To be fair, it's never been that material to our bottom line. Obviously, we are shipping liquid long distances into highly regulated, highly competitive markets. And certainly there is some growth there, but it's not high margin for an exporter from the US, and you need the right partner and the right market. So it's not everywhere, and it's not with every importer that would be happy to carry us.

So we are pretty cautious on our international strategy. We have a number of countries where we have great relationships, and we are working on very long-term building viable business there, but hopefully long-term might be significant. But right now it probably is not.

Thank you so much.

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

Thanks, everyone.

Thanks, everybody.