Boston Beer Company Inc (SAM) 2015 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Boston Beer Company's second quarter 2015 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. (Operator Instructions). As a reminder, this conference call is being recorded.

I would like to introduce your host for today's conference, Martin Roper, President and CEO. Please go ahead, sir.

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 that the Company does not undertake to publicly update forward-looking statements, whether as a result of new information, future events or otherwise.

This is Martin Roper. I'm President and CEO, and I'm pleased to be here to kick off the 2015 second quarter earnings call for the Boston Beer Company. Joining the call from Boston Beer are Bill Urich, our CFO, and I have to announce that Jim Cook, our Founder and Chairman, is currently in traffic and will hopefully join us during the call. But if he doesn't, I feel more than comfortable that myself and Bill can answer your questions, and we apologize for that traffic delay.

I'll begin my remarks this afternoon by covering what Jim had planned to say in a few introductory comments, including some highlights of our results. I will then focus on the financial details of the second quarter as well as a review of our outlook for -- sorry, then I will talk about the business in a little bit more detail and then turn it over to Bill, who will focus on the financial details for the second quarter as well as the review of our outlook for 2015. Immediately following Bill's comments, we will open the line for questions.

Our total Company depletions trends of 6% in the second quarter of 2015 have slowed in comparison to prior quarters due to some developing weakness in our Samuel Adams brand. While our total growth is testament to our strategy of diversified brand portfolio, our Samuel Adams trends appear to represent a very competitive category where drinkers are facing greatly increased choices and established brands are being impacted. We believe that quality, freshness, innovation and variety will be the basic requirements for success in this environment.

We believe that craft beer will continue to grow and that we are positioned to share in that growth through the quality of our brands and beers, our innovation and speed to market capability, and our sales execution along with our strong financial position and ability to invest in growing our brands.

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

I will now move on to my own planned detailed -- comments on the detailed overview of our business. In the second quarter, our depletions growth benefitted from strength in our Angry Orchard, Twisted Tea and Traveler brands that offset declines in some of our Samuel Adams styles. The decline in some of our Samuel Adams styles is due to increased competition, which particularly impacted Boston Lager and some of our seasonal beers.

Accordingly, we have decreased our expectations for full-year depletions growth to between 6% and 9%, to reflect the most recent trends. We are working hard to improve the Samuel Adams brand trends, and in the second half of the year, we expect to introduce new packaging and advertising to support our planned promotional activity.

The national rollout of our Traveler is currently in progress, supported by national media, and in mid-July, we began our national rollout of Coney Island Hard Root Beer. Both of these rollouts are being well supported by distributors, retailers and drinkers. We are pleased with Traveler's progress this year, but it's too early to tell how successful the Coney Island Hard Root Beer introduction will be.

We are planning continued investments in advertising, promotional and selling expenses, as well as in innovation, commensurate with the opportunities and the increased competition that we see.

We continue to focus on our supply chain, with ongoing investments in improved training, stable scheduling and operating efficiency and reliability improvements. While we have made progress, we believe we still have capacity and cost improvement opportunities.

We also continue to make supply chain improvements intended to further increase the freshness of our beers and enhance our drinker service. This includes piloting one wholesaler on a pure replenishment service model within our Freshest Beer program, which, if successful, would further reduce wholesaler inventories.

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 29 weeks ended July 18, 2015, are estimated to be up approximately 6% from the comparable period in 2014.

Now Bill will provide the financial details.

Thank you, Martin. Good afternoon, everyone. We reported net income of $29.9 million, or $2.18 per diluted share, for the second quarter, representing an increase of $4.5 million, or $0.30 per diluted share, from the same period last year. This increase was primarily due to shipment increases, improved gross margins, a slightly lower income tax rate, partially offset by increased investments in advertising, promotional and selling expenses.

Core shipment volume was approximately 1.1 million barrels, a 7% increase compared to the second quarter of 2014. Our second quarter 2015 gross margin increased to 54%, compared to 53% in the second quarter of 2014. The margin increase was a result of price increases and lower ingredients costs partially offset by product mix effects. We are currently maintaining our full-year gross margin targets of between 51% and 53%.

Second quarter advertising, promotion and selling expenses were $5.4 million higher than costs incurred in the second quarter of 2014. The increase was primarily a result of increased investments in media advertising, increased costs for additional sales personnel and commissions, point of sale and increased freight to distributors due to higher volumes.

General and administrative expenses increased $1.4 million compared to the second quarter of 2014, primarily due to increases in salary and benefit costs and consulting costs. Our income tax rate decreased to 36.2%, from 37.5% in the second quarter of 2014, due to lower state tax rates.

Based on information of which we are currently aware, we have left unchanged our production of 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 6% and 9%, and price increases of between 1% and 2%.

We intend to increase investments in advertising, promotion and selling expenses by between $25 million and $35 million. This does not include any increases in freight costs for the shipment of products to our distributors. We believe that our 2015 tax rate will be approximately 37%, a decrease from the previously communicated estimate of 38% due to the favorable impact of lower state tax rates.

We are continuing to evaluate 2015 capital expenditures and our current investments of between $70 million to $100 million, a decrease of the range from the previously communicated estimate of $80 million to $110 million.

We expect that our June 27, 2015, cash balance of $147 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 26-week period ended June 27, 2015, and the periods from June 28, 2015, through July 24, 2015, we repurchased approximately 170,000 shares of our Class A common stock for an aggregate purchase price of approximately $41.4 million.

As of July 24, 2015, we had approximately $51.2 million remaining on the $400-million share buyback expenditure limit set by the Board of Directors. On July 29, 2015, the Board of Directors approved an increase of $75 million to the previously approved $400-million share buyback expenditure limit, for a new limit of $475 million.

We will now open up the call for questions.

Thank you. (Operator Instructions). Vivien Azer, Cowan and Company.

So my first question has to do with kind of the state of the portfolio, and Martin, you mentioned in your prepared remarks that the beer consumer today expects a couple of key characteristics, right -- quality, innovation, freshness. You named a number of different characteristics, but in my mind, given where you guys sit in the competitive landscape, quality and freshness I think are almost a given. So as you talk about and think about your plans for the Sam Adams brand in the back half of the year and potentially into 2016, can you talk about the role that innovation is going to play in terms of reinventing the brand, please?

Sure, Vivien. First of all, before I answer, I'd just like to announce to the call that Jim Cook is currently on the call and is able to join us and will be able to comment and also answer questions as appropriate. But on your question, I would say that I think -- and it wasn't explicit in your question, but we certainly believe we have some of the freshest beer in the market, and one of the things we can do is work on education of drinkers as to the taste impact of that and the benefit of that, so that's still an opportunity for us, and we continue to wrestle with how best to present that.

I think as we look at the next 12 months, we're working on a number of innovation ideas, both within the Sam Adams family and with a view to trying to have some innovative, new beers and packages that will help, much like Rebel helped last year to raise the level of interest in the brand and the retailer execution of the brand, which obviously help each other.

And as we look at that, our expectation for those sorts of things is Q1, and we're not in a position yet to talk publicly about that, but probably in October we'll be talking to our wholesalers and retailers to secure that execution and promotional support. And then, also, innovation plays a big part in the rest of the portfolio too. Within our craft beers, they're seeing the same sort of thing that Sam Adams is seeing, so we're working hard on unique beers for each of those brands.

And then in the cider category and with Angry Orchard, from its leadership position and strong market share, it's seeing -- well, we're seeing a startup of small, local ciderers on a pretty accelerated scale, certainly much faster than it took for that to be seen in craft 20, 30 years ago. This is happening in 12 months, and that's leading to innovation and high in ciders and different tastes. And so we have that as an opportunity for our cider brand too, and on a similar basis, we're falling into a planned innovation cycle around the chains for a Q1 launch.

That's terrific. Thank you very much. My second question, on the guidance specifically and taking what you said kind of in context, then, as we think about the 6% to 9%, embedded in that, is there an expectation that the Sam Adams brand should be growing again through the back half of the year, or are you guys anticipating continued pressure on the results year on year?

I think we're anticipating continued pressure, and we've modeled continued pressure. Would we be delighted to see an improvement from some of the initiatives mentioned in my comments? Of course, but I think a significant change in trends is more likely to be delayed to the more significant activity in Q1. But I could be pretty surprised.

Thank you very much.

Kevin Grundy, Jefferies.

So, first, a housekeeping question. So the depletions are up 7% through 2Q, but then it looks like 6% -- and there might be some rounding in here, so correct me if I'm wrong, but up 6% for the 29 weeks through July 18th. My back-of-the-napkin math suggests that depletions would be down 3% through mid-July. Is that correct?

Kevin, I think we're sort of trapped in the fact that we have chosen historically to not disclose decimal places on that number, so I would just comment on -- say that and say that you should interpret these numbers to be rounded to the nearest full number.

That's fair. Maybe you can just talk, I guess, qualitatively, then, about trends in July.

Yes, well, I would refer you to (inaudible) numbers and just say that I think our July trends, as we've seen them to date, have mirrored what we've seen in the previous periods or immediately previous periods, and we haven't seen anything that significant in changes in what's been going on.

If I was to summarize, again, obviously Sam Adams is competitively -- in a very competitive environment, and those trends have been pretty consistent over that period of time. Tea has been healthy and somewhat in its own small niche, and that's great, and we're obviously happy with that, and with some ups and downs around holidays and other sorts of things.

And then Angry Orchard has regained -- at least based on the publicly available data, has regained some share of cider from this time last year, but the cider category as a whole has slowed, and obviously that's impacted the Angry Orchard volume numbers. And that's, again, looking at the publicly available data, so I'd say all of those things have continued.

Okay. That's helpful. And then, Martin, I have a question on margins. So gross margins are down for the Company over 300 basis points. I know some of that is mix. You guys have had a tremendous amount of success with Angry Orchard, but how should investors think about the gross margin opportunity for this Company? Can you get back to levels where you were going back three to four years ago, and is there a bigger impetus now to go after the margin opportunity given some of the top-line pressures and the more competitive environment that you guys are dealing with?

Yes, it's really hard. I think I would just say that you're right, that the gross margin squeezes are somewhat mix related, somewhat operating cost related and input related, and certainly a number of those we can go after. Back in the 1990s, when growth stopped for us, that's what we did, and I think we proved to ourselves we were pretty good at it. I'd like to tell you that we'll do that every year anyway, but it's certainly an opportunity for maybe an increased level of focus.

And as we look forward, we have opportunities, as I said in my comments, for operational efficiencies at our breweries, which we're working hard on, and also for capacity throughput, which would defer any required capacity expansions. And as always, there are always opportunities for other sorts of savings in those areas. But flipping the question a little bit, our number one priority remains to focus on the top line and ensuring that that remains healthy.

Okay. And just one more, if I -- thank you for that, Martin. Jim, I have a question. So you made some interesting comments today. You obviously have voting control of the Company. I was curious to the extent that you can comment at all how you ultimately -- and then the comments, I'm referring to today's with respect that you be the last US owner of the Boston Beer Company.

Can you help investors better understand how you ultimately foresee your role with the Company progressing and your ownership with the Company progressing over time? Would a sale of the Company make sense, and over what period of time? How should investors be thinking about that? How are you ultimately thinking about an exit from the Company that you've so admirably built? Thank you.

I don't think investors should be thinking about my exit, because I'm not. So my comments today really reflected the flaws in the current corporate tax structure that, along with my other panelists who had similar points of view, make American-owned companies more valuable to somebody who can move income out of the US and reduce the taxes paid to the US government, but they were not in contemplation of an exit.

Thank you for that.

Judy Hong, Goldman Sachs.

So Martin, I just wanted to go back to your depretion [sic] guidance, and just given the year-to-date trend up 6%, I'm just struggling a little bit to sort of get to even kind of the mid to high end of that range, so I guess maybe some color just in terms of what's happening in terms of on-premise trend, because that is a channel that is a little bit difficult for us to gauge, and how you see the on-premise playing out for the balance of the year. And within that 6% to 9%, how much do you think that you can actually get from innovations this year with Travelers and the root beer that you're launching right now? So just some color on that would be great.

Sure. On the on-premise, I think we see sort of overall on-premise volumes pretty stable, plus or minus one or two percentage points. It's a very competitive environment, with a lot of new startups pitching draft and stuff, so it's very challenging. I think we've been happy with being able to, I think, hold our share of the on-premise, based on sort of the tracking data that's available.

Again, it's a little bit of a murky trade, cost of trade, but I think we're happy with what we've been able to do. We're not, perhaps, gaining handles like we were last year with Angry Orchard and Rebel sort of launches, but we're certainly sort of holding our share, we believe.

With regards to looking forward, when we do these ranges, we look at everything that we have going on and try and project out the next four or five months, and we have a lot going on. We have new packaging, new tap handles for Sam Adams. We expect that we are likely to have new media sometime in Q3, Q4. We've got some things going on on the Angry Orchard side with the planned opening of our cidery probably in Q4. So there's a lot of stuff going on that could impact the numbers positively, obviously, or, I suppose, potentially negatively.

Plus, Traveler is entering its full season. Traveler actually does a little better in the fall than it does in the summer. The share of the shandy market, our Jacko, which is going to be hitting retail probably in the next week or so, should have a nice bump on that and be a bigger impact for us on a national basis than perhaps our summer shandy was, so we have that in mind. And then we have the unknown of Coney Island Root Beer, which launched last week, which we just don't have a feel for.

Okay, that's helpful. And then maybe just on Angry Orchard, I think the category certainly has slowed down a little bit. You're obviously doing still very well in terms of Angry Orchard growth. It does look like distribution gains are going to be more difficult to see, just given it's pretty high in terms of the ACV, so how do you think about kind of the same-store sales transfer on Angry Orchard? Can you talk about some of the innovations in the back half that could potentially drive even better velocity for the brand, just some thoughts on how you see that playing out?

Yes, I think the -- what I would say is the deceleration of the growth of cider has been pretty dramatic as a category, and I want to say this time last year, the category growth was 70% and maybe today, the last full week 13-week type time periods, it's down maybe in the teens, so this has been a little bit of a surprise to us.

We've obviously watched it and been very happy that we've maintained share and we've maintained growth, and we're studying it, trying to understand is it the trial in the cider category that stopped but the underlying drinker base is still strong, or is it something else like maybe other sweet beverages coming in, and we're still looking at that.

So I really don't think we're in a position to say exactly what it is or what the future is. I think we remain confident that cider as a category is a viable category, one with a long history and pedigree on a global basis and even on a US basis going back to when the settlers came. And so we don't think it's going to go away, and we certainly think there's a lot of room for it to grow.

We're guessing that it's probably around 1% of beer orders of magnitude, so that leaves a lot of opportunity still, and certainly relative to other countries, that's a low percentage of beer for the cider market. So we remain positive and just watching what's happening and trying to understand it, but very comfortable in, obviously, our position and our ability to hold share in that environment.

Okay. And then my last question is this year's innovations, the Travelers and then the Rebel line extentions -- just some thoughts on how those are tracking versus your expectations, and particularly on the Travelers side. I know we haven't seen the full impact of the launch, but sort of how do you think it's tracking versus some of your prior innovations at this point?

Yes, well, sometimes we're conservative in our expectations, and sometimes we're unrealistic in our expectations, and I don't know which one our expectations were. I think it's meeting our expectations, and would I be happier if it was doing better? Of course, but I'm certainly happy that it's got the trends it has, and I think we're set up well for Q3 as it relates to our potential and our strength.

And we've also, through the elusive grapefruit shandy, had introduced a different flavor of shandy, which has been well received, so that's also been, I think, a win for us. And I think -- so looking forward, we'll see, but I don't -- certainly it's not that we're unhappy.

That's good. Okay. Thank you very much.

(Operator Instructions). Caroline Levy, CLSA.

I'm really interested, Jim, if you could comment on the phenomenon of brew pubs. My understanding is they're becoming a really large part of the market in certain cities and that the margins in operating a brew pub are quite enormous and allowing brew pubs to then fund more capacity additions. Do you think this is a change that's going to spread through the country, and is this creating the rebirth of so much competition? I mean, you've always had competition, but it seems very fierce right now.

Just to some extent, yes, it is creating a bigger wave of competition. We have some experience with brew pubs. Actually, we opened the first brewery in Philadelphia in the early 1990s as the Sam Adams Brewhouse, and we currently have some insight into it through the alchemy and science incubator, because we're basically operating brew pubs in Los Angeles and Miami and about to open one in Brooklyn and Coney Island in the next couple weeks.

And, I mean, you're quite right, they basically generate on order of magnitude $1,000 a barrel -- I mean, a half barrel, $1,000 a keg versus $100 a keg selling it through a distributor. So if you have a successful social hall or bar as part of your brewery, you can be profitable at fairly small volumes, so it allows basically people to try things out and see if they can grow from there.

And I don't see that trend abating, just because it's not only quite profitable, but drinkers like it, so I think we will continue to see a large number of openings of craft brewers, and many of them will have that quite successful business model, depending on the state law.

So my follow up would be are you interested in being in that business in a bigger way, and could we see you put a push behind that? Because the economics sound amazing.

Well, the economics are attractive, but of course you do have considerable investment, and you're also running sort of a small-scale business and it's very suited to sort of a one-man operation, a one-woman operation, so I don't think we see ourselves as opening enough of these kinds of places to make a meaningful contribution to our financials. I think for alchemy and science, they've really been, while profitable, focused on being brand-building exercises that give drinkers a good experience, and hopefully they'll go out and purchase a six pack off premise.

So then just talking about the competitive environment, again, it does seem brew pubs maybe are one part of it, but what else has changed this time around? I mean, you've had fierce competition in the past. Do you think it's any different now?

Well, it's always been extremely competitive. I think it's a very fast growing environment right now. People are expecting maybe the craft segment will double, so it's bringing in lots of new entries, something like 700 a year, though even the Brewers Association isn't able to keep track of all the new openings. And you also have an increase in talent throughout the industry. You've got private equity coming in, you've got foreign ownership expanding, so it's attracting very good, very capable people who -- I think all of us together are expecting to be able to continue to grow the craft beer category.

Are you looking at exports in any more aggressive way? You've never done that aggressively in the past.

Again, I don't see them in the short term being a huge source of growth. I guess our perspective on it is that we have a little over 1% of the US beer business, and we can all imagine doubling that, and that's what we are focused on rather than trying to get a smaller amount of volume spread out through 50 countries.

Great, and then one last question, for Martin, if you could just elaborate a little bit on what the opportunities are specific to brewery efficiencies. As you add new products, does that go against efficiency, or can you make significant progress, as you have done, even as you innovate?

Yes, a great question. To give you a sense of -- this is something we've been working on pretty hard. Our breweries today are operating a little more efficiently than they were last year, but they're actually doing twice the changeovers, and so that's just in a year. What they've been able to accomplish is absorb twice the changeovers while increasing the total throughput slightly.

That's pretty cool, and we have a big focus on designing our processes and running the breweries to get the freshest beer and produce what we need when we need it, and that's led to that scheduling cadence of doubling of changeovers across all our lines, some more than doubling, and we've been able to do that and absorb it. And I think we see a path to, frankly, decreasing the time required for those changeovers further and getting better at them as we do them more often, and also addressing the operating efficiency of the lines and the equipment reliability.

I would say that we've grown over the last three years, four years pretty aggressively in terms of our own capacity and equipment, and we have a lot of great new employees that are part of the organization, and we have, as you would expect, the usual opportunities in training and rotation and getting them involved in how to run our breweries better.

So we have lots of opportunity, both on capacity by improving throughputs and how we use the equipment and also on costs by reducing waste. And I'm not that comfortable putting a hard dollar number on it, but it's part of our long-term vision as we try to get back to historic gross margins.

Thanks so much.

Kevin Grundy, Jefferies.

I appreciate you taking the follow-up question. It's just with respect to the balance sheet and uses of cash. So given the pullback in the stock here, would you think about announcing perhaps a much larger buyback than what you guys have done in the past, which has generally just sort of been to offset share creep from option exercises? Can you do M&A in a sensible way such that it doesn't cannibalize the existing portfolio? Some commentary there would be appreciated. Thanks.

Sure. As it relates to the buyback is you see that we've announced an increase in the authorized buyback that was approved -- I think it was dated yesterday -- that increases our ability to buy back. Historically, we've approved buyback quantities sufficient to support us for a while as opposed to very large quantities.

And I think as we look at how we run the business, we're very focused on growth, and we never know when an opportunity might present itself for investment to get there. And therefore, in our history, we've avoided that and have wanted to make sure that our cash flow is adequate to support our capital needs as we see them or any acquisition needs prior to the buyback. So we have, I think, a nice history of a steady buyback, and obviously the announcement is intended to signal whatever it signals.

In regards to mergers -- I think that was your second question, acquisitions?

Yes. Yes.

Yes. We've done a few little ones. We've done them in two categories. One is brewing capacity. We built the Cincinnati brewery in 1997 and the Pennsylvania brewery in 2008, and we remain open to capacity acquisitions. If we need that capacity, it's certainly a potential avenue for us.

On the brand side, our acquisitions have been somewhat limited. We've put out just a couple of small, existing brands with limited wholesaler footprints. We're very concerned about having multiple wholesalers in a market, which might occur if we were to buy a brand and be unable to move the wholesaler to our current wholesaler, so we have been reluctant to do that unless it's an exceptional opportunity.

And we look at that sort of multiple wholesaler network as being a little bit of a negative synergy of an acquisition, so in our evaluation of the acquisitions, we tend to perhaps not take all the synergies because we recognized some pretty significant negative ones, and I think in the past we, therefore, haven't been the high bidder. That doesn't mean to say that we wouldn't entertain things and for the right things, and we certainly have done some small ones quite successfully where the wholesaler footprint has been able to be adjusted to meet our needs.

Okay. Thanks for taking the follow up.

Thank you. I'm not showing any further questions in queue. That ends today's Q&A session. Ladies and gentlemen, thank you for participating in today's conference. That concludes today's --

Yes, thank you very much for joining us. We look forward to talking to you after our third quarter, if not before if we bump into you. Cheers.

Cheers.

Thank you. This does conclude today's program. You may all disconnect. Everyone have a wonderful day.