Boston Beer Company Inc (SAM) 2015 Q3 法說會逐字稿

Good day ladies and gentlemen, welcome to the Boston Beer Company's third quarter conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, and instruction also follow at that time. (Operator Instructions).

As a reminder, this call may be recorded.

I would now like to introduce your host for today's conference, Founder and Brewer, Mr. Jim Koch. Please go ahead, sir.

Thank you, good afternoon and welcome. This is Jim Koch, Founder andChairman, I am pleased to be here to kickoff the 2015 third quarter earnings call for the Boston Beer Company. Joining the call from Boston Beer, are Martin Roper, our CEO, andBill Urich, our CFO. I'll begin mi remarks this afternoon with afew introductory comments, including some highlights of ourresults, then hand over the microphone to Martin, who willprovide an overview of our business. Martin will then turn thecall over to Bill, who will focus on the financial details forthe third quarter, as well as a review of our outlook for theremainder of 2015, and our initial outlook for 2016. Immediatelyfollowing Bill's comments, we'll open up the line for questions.

Our total Company depletions trend of 6% in the thirdquarter of 2015 matched our year-to-date trends, but represents aslowing from our expectations, primarily as a result of weaknessin our Sam Adams brand, due to increased competition, and a slowingin the Cider category. While our total growth is testament to our strategy of adiversified brand portfolio, our Sam Adams trends appear to representa very competitive craft beer category, where drinkers areseeing greatly increased choices, and established brands areimpacted. We believe that quality, freshness, innovation andvariety will be the basic requirements for success in this environment.

During the fourth quarter, we expect to introducenew styles to the Samuel Adams Rebel IPA family, including theNational Draft launch of Rebel Grapefruit, a grapefruit IPAfeaturing Mosaic hops, and the introduction of Rebel Raw, anunfiltered double IPA that will be available on a very limited basis,only in 16-ounce cans, with a 35-day freshness coding. We're energizedby the challenges and excited about the planned introduction of ourSamuel Adams Nitro series in the first quarter of 2016. We remain confident about the long term outlook for the craftcategory on our Samuel Adams brands.

I will now pass over to Martin, who will sound a little different because he's calling fromsomewhere in LaGuardia, for a more detailed overview of ourbusiness.

Thank you Jim. Greetings from New York. Good afternoon,everyone. As we stated in our earnings release, some of theinformation we discuss in the release and that may come up onthis call, reflect the Company management's expectations ofpredictions of the future. Such predictions and the like of forward-looking statements. It is important to note that theCompany's actual results could differ materially from thoseprojected in such forward-looking statements.

Additional information concerning factors that could cause actual results todiffer materially from those in the forward-looking statements iscontained in the Company's most recent 10-K. You should also be advised that the Company does notundertake to publicly update forward-looking statements, whether as aresult of new information, future events, or otherwise. In thethird quarter, our depletions growth benefited from strength in ourConey Island, Twisted Tea, Traveler, and Angry Orchard brands, that offset a decline in some of our Samuel Adams styles. This declineparticularly in our Samuel Adams seasonal beers and Boston Lager is dueto increased competition, most notable in off premise sales, where the drinker sees more choices, andwe believe our share of displays and features has been impacted.

We're worked hard to improve the Samuel Adams brands trends andhave plans to introduce new beers and a new advertising message supporting beer education. Duringthe third quarter, we completed our national roll out of ourConey Island Hard Root Beer, which was well supported by distributors, retailers, and drinkers. The Hard Root Beer category is early in its development, and it isunclear how it will develop long-term, as innovation and newcompetitors emerge. During the third quarter we also saw aslowing of the cider category, but believe Angry Orchard maintained itsshare, even as competitors continued to enter or increase investment. We remain positiveabout the long-term Cider category potential, but short-termgrowth is less certain. We're are planning continued investments in advertising, promotional, andselling expenses, as well as innovation commemorate with theopportunities and the increased competition that we see.

We continue to make supply chain improvements, intended to further increase the freshness of our beers and ciders, and enhance our customer service. Despite some glass supply bottle challenges in the quarter, we believe we haveimproved our seller's level. Our focus in 2016 will be on innovation within the Sam Adamsfamilies, integrated programming across point of sale promotions and media of all ofour brands, and prioritizing the four styles of Angry Orchard andTwisted Tea, for increased distribution and promotion, and maximizing theConey Island Hard Root Beer opportunity. It's too early to predict accurately our 2016 growth rates, but we are increasing investmentin our new beer and cider development capabilities, so that we canmaintain the pace of innovation, and also be positioned to reactquickly to any opportunities that emerge. We expect to maintaina high level of brand investment as we pursue sustainable growthand we continue to be prepared for the earnings that may be lost as a result ofthese investments in the short-term, as we pursue long term profitable growth.

Based on information in hand, the year-to-date depletions through the 42-weeks ended October 17,2015 are estimated to be up approximately 6% to the comparableperiod in 2014. Now Bill will provide the financial details.

Thank you Jim and Martin. Good afternoon everyone. We reported net income of $38.6 million,or $2.85 per diluted share, for the third quarter, representing anincrease of $0.06 per diluted share from the same period lastyear. This increase was primarily due to increased net revenue,increased gross margin, and a lower income tax rate, partiallyoffset by increases in advertising, promotion, and sellingexpenses. Net revenue for the third quarter was $293.1 million,a 9% increase compared to the same period last year, mainly dueto core shipment growth, and increased revenue per barrel due toproduct mix. Core shipment volume was approximately1.3 million-barrels, a 4% increase compared to the third quarterof 2014. Our third quarter 2015 gross margin increased to 53.6%,compared to 53% in the third quarter of 2014, this is primarilydue to price increases and lower ingredient costs, that werepartially offset by product mix effects.

Third quarter advertising, promotion and selling expenses were $13.2 millionhigher than costs incurred in the third quarter of 2014. Theincrease was primarily a result of increased investments in media advertising, increased salary and benefit expenses,increased local marketing and point of sale, and increasedfreight to distributors due to higher volumes. General and administrative costs were $2 million higher than costsincurred from the third quarter of 2014, primarily due toincreases in salary and benefit expenses, and facilities andconsulting costs. Our income tax rate decreased to 36% from37.1% in the third quarter of 2014. The 2015 rate decrease wasprimarily the result of an increased Federal manufacturingdeduction, and lower state tax rates.

Impairment of assets were $1.4 million lower than was incurred in the third quarter of 2014, primarilydue to the write-down in 2014 of certain Pennsylvania Breweryassets. Based on information we are currently aware, fullyear 2015 earnings per diluted share are now estimated to between $7 to $7.40, a decrease in the range from the previouslycommunicated range of $7.10 to $7.50, but actual resultscould vary significantly from this target. We estimate full year2015 depletions and shipment growths of between 3% and 6%, a decrease in the range from the previously communicated estimate of between6% and 9%. We estimated price increases of between 1% to 2%, we intendto increase investments in advertising, selling and promotion expenses bybetween $30 million and $35 million. This does not include any increases in freight costs for the shipment of product toour distributors. We estimate our full year 2015 effective taxrate to be approximately 37%.

We are continuing to evaluate 2015 capital expenditures, and currently estimate investments of between $60 million and $80 million, a decrease in the range from the previouscommunicated estimate of between $70 million and $100 million. Lookingforward to 2016, we're in the process of completing our 2016planning process, which represents a 53-week fiscal year, comparedto the 52-week fiscal year in 2015, and we will provide furtherdetailed guidance when we present our full-year 2015 results. Based on information which we are currently aware of, we aretargeting depletions and shipment percentage growths of mid to high singledigits, and price increases of between 1% and 2%. We intend toincrease advertising, promotion, and selling experiences by between $15 million and $25 million forthe full year 2016, not including any increases in freight costsfor the shipment of products to our distributors. We estimateour full year 2016 effective tax rate to be approximately 37%.

We are currently evaluating 2016 capital expenditures and ourinitial estimates are $70 million to $90 million, which could besignificantly higher depending upon capital required to meetfuture growth. Based on information currently available, webelieve that our capacity requirements for 2016 can be covered byour breweries and existing contract capacity at third partybrewers.

We expect that our cash flow balance of $134.6 million as of September 26, 2015, along with future operating cash flowand our unused line of credit of $150 million will be sufficientto fund future cash requirements. During the third quarter andthe period from September 27, 2015 through October 27, 2015,we've repurchased approximately 431,000 shares of our Class Acommon stock, for an aggregate purchase price of approximately$99.2 million. On October 15, 2015, the Board of Directorsapproved an increase of $50 million, to the previously approved$475 million share buyback expenditure limit, for a new limit of$525 million. As of October 27th, we had approximately$118.4 million remaining on the $525 million share buybackexpenditure limit set by our Board of Directors. We'll now openup the call for questions.

(Operator Instructions). .

Our first question comes from the line of Vivien Azer with Cowen and Company. Your line is open.

Hi, good afternoon.

Good afternoon.

Good afternoon, Vivien.

So I'm struggling a little bit with the depletion outlook for2015. Just given that we're nine months through the year, I'mhaving a very hard time understanding how we get to the 3% to6% for the full year, in particular as you're cyclinga fairly easy comparison from the fourth quarter of 2014, so anyhelp you could offer there would be great?

Sure. Vivien, we look at the outlook, we are looking at the most recent trends and projecting thatout over the next eight to ten weeks. We've seen, you've probably seen too, on the public IRI Nielsen datathe weakening in the cider category, and while we think it's structuralissues related to share of ads, displays, features, and sort of focus from everybody, given otherthings that have exploded into the space, including root beer,and then a whole bunch of full seasonal beers, we're looking at that and going how dowe project that forward. I think the third quarter benefited aswe've indicated from launch of Coney Island Hard Root Beer, thatcategory has also exploded onto the scene over the summer, and wewere in a position to take advantage of that, which was obviouslyhelpful to our numbers, but It's a little unclear the seasonalityof that, and exactly how that's going to behave in the fourthquarter. I think you'll see combinations of those two thingscausing us to be a little cautious as we look at Q4.

That's helpful. Can you quantify how much of a lift the shipments of Coney Island were to yourshipments in the third quarter?

I think as according to our historical practice, we'reuncomfortable breaking out shipments by brand, and the best placeto look is at the publicly available IRI Nielsen numbers, to try and assess that.

Okay, that's fair. But then if I think about the fourthquarter, if you shipped all of this Coney Island, I guess theinitial features in retail would be an outside lift, but I would think that you're going to replenish some of that stock in thefourth quarter, and given how meaningful of a contribution it wasin the syndicated data, I guess I'm a still little bit surprisedby the guidance?

Sure. I think one of the things that happened on the rootbeer side was there was an under appreciation for drink in demandfor what they were willing to pour, and therefore there were acrossthe category from the two suppliers, ourselves, and (inaudible). Out of stocks in July and August, I think everyone reacted to that andloaded up, and I think you do have some inventory build that'shappened both at retail and at wholesale. I also think if youlook at the actual IRI Nielsen numbers, just the weekly sales rate hasfallen significantly from its peak period in August andSeptember, and so that's you will draw a conclusion maybe there is some seasonality, maybe there has been some trial,maybe there has been some stock-up in people's home refrigerators, and at this pointin time while the demand is steady, It's not at the level it wasin August, and in reaction to the August peaks, or early September peaks,wholesalers and retailers sort of loaded up. There is some correction there. I don't think our shipments and depletions are that far out of line.

I think my answer to you on the depletions guidance is more a function of us looking at the depletions rate, which is closer to the IRI rate than anything else, and thinking that hard rootbeer had either a strong summer seasonal impact or a strong launch earlyadoption trial impact, everyone else is settling down to maybe more sustainable numbers.

That's very helpful. Thank you very much.

Thank you. Our next question comes from the line of Kevin Grundy with Jefferies. Your line is now open.

Thanks. Good evening, guys.

Hey, Kevin.

Hey. With respect to the guidance, everyone can appreciatethe difficult environment now at this point, was there any thought to hold off on providing your initialoutlook for fiscal 2016, some of the shortfalls this year, again understanding it's beena difficult environment, but three guide downs in four quarters,that being number one, just visibility on the business, and thoughts around theguidance? Then number two, sort of related to that, it soundslike you have some good innovation coming out. What sort ofvisibility on the contribution from that, particularly withrespect to the Rebel family?

Sure. I think we felt it important to stick with our regular cadenceto give you our best answer for the business. As with any guidance, it'sour best sense of the business at the time that it is given. As we lookat next year and based on what we experienced this summer, wethink we have some opportunity for volume lift from the ConeyIsland family, and also our other A&S brands, and also from TwistedTea. I think on Sam Adams and Angry Orchard it is a little less clear. Wecertainly think we can stabilize the Sam Adams trend with theinnovation plan that we have for Q1, and we're putting a lot of effort into thatright now into communicating that to retailers and wholesalers. And are receiving positive responses to those initiatives. TheCider trends for next year are obviously much harder to predict, and it's probably a guessat this point in time.

I think we just decided that it was appropriate to provide someguidance. We also have the extra week next year, and that's ourbest guess right now on what we'll probably do financial, or frankly, are doingfinancial planning around, but obviously as trends develop, and as wetalk to you again in February, we'll have a much better feel forit. I do think there seems to be an industry that's got some, Idon't know whether transitions or flux, or just some curve balls goingaround, pointing to the slowdown in cider for instance, or slowdown in fall beers, like ourOctoberfest, there's just some undercurrent there that we don'tfully have a grasp on, and therefore are hard to predict. So Iwould say the guidance number is not, is the best guess, butobviously it could be quite a wide range. As it relates to theinnovation on major primary innovation efforts for Q1 are great forRebel and the Nitro series of beers, available in draft and in can, withNitrogenized widgets, and there we think those can help the family. I thinkthey can also help raise the visibility of the brand, and the relevance of the brand, and the excitement around the brand.

I think we saw in 2014 when we launched Rebel that it actually lifted thewhole brand family. Boston Lager was up in that period of timefor the first six months of 2014, and it basically lifted the wholefamily. I think our plan is to have a Q1 focus with some majorinnovations that we hope to get really good retail and drinkerexcitement around, and that should lift the whole boat. To put itinto an exact volume number around that is hard, but we sort of thinkabout its impact on the total brand and the activity aroundthat, that lifts the brand up, and again, can't give you a firmnumber, but that contributes to our guidance.

Thanks for the color, Martin. I'm not sure if you can comment on this or not, but the depletionout look for fiscal 2016, does that include total Samuel Adamsfamily flat depletion growth?

Yes, I don't think I should comment on that, other than that wewould be disappointed if that wasn't the case.

That's helpful. One last one for me, then I'll pass it on. The share buyback,encouraging to see you guys out in the market buying back at apace accelerated to what you've done historically. Can you comment on usesof cash used on the stock at this level, and whether we shouldanticipate similar levels of buyback in Q4 and the next year?

I think what I would say that historically we have chosen tobuyback when we felt it was a better use of our cash, and we'resort of cycling on our capital plans, and our comments on capacity thatwe don't expect capacity to be a major use of cash in the nexttwelve months, and obviously we have a healthy cash balance, and ahealthy cash generation capability, and I think I would then point youto our past practice, but when that's been the case, we've usedit to buyback, without committing to what might happen in thefuture, of course.

Understood. Very helpful. Thank you, guys, good luck.

Thanks.

Thanks.

Thank you. Our next question is from the line of Judy Hong with Goldman Sachs.

Thank you. Good evening.

Hi, Judy.

I wanted to ask a little bit more about the Cider category, and obviouslywe've seen the slowdown in the category, and that now the AngryOrchard itself is slowing down as well. It sounds like you'retalking more about some of the short-term disruptions, and youstill seem to be positive about the long-term category potential. What gives you the confidence that the long term trajectory isactually pretty constructive from a Cider category perspective,and we don't continue to see this multiyear decline for thecategory itself, and then Angry Orchard continuing to be pressured?

Sure. When we do drink research, we get very positivefeedback on the aggregates of Cider, the refreshment of the sort of all naturalelement of it, the gluten-free element of it, and sort ofassociations with the farm or orchard that Cider brings, so theCider as a category has these very positive associations, whichfrankly seem to link pretty well to some of the other thingsgoing on in people's consumption patterns about natural,gluten-free, and things like that.

I think as we look forward, one, I would note that Cider is probably 1% of the beer business inthe US right now, and depending on the data you look at other verydeveloped Cider markets are anywhere from 5% of beer to10% of beer, so those are markets that have had a longer history ofCider, but it would suggest there's a good pathway there in the US,at least to get beyond 1% of beer.

I think, two, the category has been through this incredible explosion, and maybe we're justseeing a little bit of the trial rejecter sort of walking away,and we really don't have good data on that to suggest it's true,but it's certainly possible. The other thing would seem to bethat Ciders are a sweet, the US palate is sweeter than perhapssome of the international palates, and certainly the other things thatexploded this summer in the root beer space are also very sweet,so we think that there's something at play there, but again it's hard to tell. We don't have firm data from shopper studies or anything like that, to say that's real, butthose seem to be us to be reasonable causes.

So we think with the number one brand, and the market share that we have, we have aresponsibility to educate people on Cider. There's certainly some drinkerconfusion as to Cider, versus for example Red's Apple Ale. Wethink there are opportunities there to educate people what isgluten-free and what actually has fermented apples. If you were to think about all ofthe apple flavored alcoholic beer-like drinks that are out there, then you would actuallyget to a category that is already at 1.5% of beer, and I think it's up to us as grandstewards and communicators, to make sure that our drinkers havethe opportunity to drink fermented apples, rather than appleflavored malt beverages.

Judy, I might also add that our long-term confidence in thecontinued growth of the Cider category is consistent with what wesee from drinkers who are continuing to look for variety. They are continuing to broaden their preferences and the products that are in their consideration set. Generally,they are looking for things that have authenticity, that arenatural, that might each have elements of something wholesomelike an orchard, and also are refreshing to drink. When you rollall of those things up, we continue to have confidence that long-term theCider category will be bigger than it is today.

Okay. If I can just follow-up. So when you kind of look atthe interactions, and kind of what consumers are drinking, isthere direct correlation between Cider slowing down and theexplosive growth in root beer, then if you think about then a lotmore innovations coming into that space from you guys and fromothers in the marketplace, how are you able to even maintain theshelf space on Angry Orchard?

Well, a couple of things. What you're seeing isthis continued drinker journey for more and more differentalcoholic beverages, much the same way that you've seen in thelast 20 years, in how they drink non-alcoholic beverages with newcategories emerging and growing.

And second, Angry Orchard has in our NIR data has almost 60% of the volume in the Cider category, but itdoesn't have 60% of the space on the shelf. Our belief is as ifthere is contraction in the category, it is probably more likelyto come from some of the weaker brands that have gotten shelfspace as Cider exploded, and that eventually retailers will kindof set their shelves with a space to sales ratio.

Okay, that's helpful. I guess my last question is just interms of pricing and gross margins. If I look at some of the recent data, it does seem like yournewer innovations, like the root beer and the Rebel lines arehigher priced than the core beer product. Just maybe a littlebit more color, in terms of as you think about the innovation fornext year, are you looking to actually see some mix improvementon those innovations, and how does that kind of impact your grossmargin outlook for 2016?

Yes, great question. I think we're trying to enhance ourmargins in the innovation front, obviously the hard sodaline, there's a higher price point than established, and we'rehopeful that the competitive activity might move it. Our plan isto try and stay in the higher price point, higher quality, imageperspective position, and from that perspective, I think ourgross margins have improved a little bit, but the dollars percase have improved slightly more. As we look at the other stuffthat we're doing on the Nitro and the Rebel front, again we have ahigher price point per ounce, and some slight margin improvement ona percentage basis, but we think based on what we think ourcosts are going to be, obviously we're not in full scale productionyet, we think our dollar per case might improve.

Got it. Okay. Thank you.

(Operator Instructions). Our next question is from the line of Caroline Levy with CLSA. Your line is open.

Hi, good afternoon, thanks a lot. Just on your pricingguidance of this year of 1% to 2%, you're running well above that. Does that imply you think you won't get that 1% to 2% in the fourth quarter?

Bill, can you handle that?

Yes. No, I think we are running close to the 1% to 2% rightnow, and we have through the year, and we're expecting that to bethe rate through the remainder of the year, Caroline.

Okay, great. Thank you. And then on Sam Adams, this isreally a question I think for Jim and for all of you, but I thoughtyou were doing some new packaging. How do you think you canbreak through? Natural is obviously a start, but there is nodenying that there seems to be more and more beercompanies opening up every year, it just doesn't seem to be gettingany better, so is there anything that would give you confidencethat you really can stem the declines next year?

What we're looking at is a category that is very driven by atthis point, new, interesting. Drinkers are exploring it, they are quitepromiscuous. So what we think is the right response to that is to continue to bringmeaningful innovation to the category. Things like Samuel AdamsNitro, which will be in widget can. It is a very differentflavor experience. We're basically replacing carbonation withNitrogenation. As we saw last year with Rebel, that cast a haloover the rest of the Sam Adams brand. I think for us, part of what enables us to breakthrough is tocontinue to bring innovation that actually has something new thatis not duplicative of what is already out there.

And so Nitro itself, you think will be more of a niche product, and thenit's more around the halo, and it will be more on premise, or will you sell it inlarge format as well?

It will primarily be off-premise with multiple styles of beerthat are presented, Nitrogenated rather than carbonated, and then wewill probably have one lead style, which will be on draft, and ourprinciple push for on-premise distribution.

Right. I think I heard you say off-premise competition was moreintense than on-premise last quarter, is that true?

That's right. Particularly competition for ads, displayspace, shelf space, but both of them are quite competitive. Justthe number of craft brands available on draft continues to grow,probably double digits every year. Similarly, the number ofcraft brands that show up in our IRI numbers, and show up onretailers shelves is also growing double digits. When you actually look at the numbers, you basically find thateven though craft is growing in a quite, almost explosive manner,the average craft brewer is getting smaller, and the average salesper draft line, or per SKU on the shelf are going down, because thenumber of draft lines out there keep going up, and the number ofSKUs on the shelf keeps going up.

The data we have seen suggests that your actual sales trends were worse on-premise than off-premise, is that wrong?

We don't have really great on premise data. It isgetting better, but at least what we have available to us, and Ithink to the industry is still developing, and is not nearly asstable and mature as you get from IRI and Nielsen. It's a muchsmaller universe, and it's getting better rapidly, but it's not atthe level of accuracy that the off-premise data is.

Right, thank you so much. I have a couple of quick ones, and thankyou very much for the guidances, because while it may be imperfect, I definitelyappreciate that you give us your best effort on 2016, so I hope youwill continue to do that. Does the extra week affect depletionsor just shipments in terms of your guidance? And finally, whatgives you margin confidence in some improvement next year?

Bill.

Yes, you want me to take that. The extra week, the way we look at our depletions, we look atit on a comparable 52-week basis right now, so next year we'll be looking at 53 versus52 for both shipments and depletions, I think. I say I thinkbecause I want to check with our Chief Accounting Officer in terms ofhow we are exactly going to handle that. But shipments for surewill be 53 versus 52.

I think the numbers we provided are 53 week over 52 weekguidance. On the gross margin side, I think we remain positiveabout pricing in the category.. I think craft drinkers are showing willingness to pay more for our alcoholand flavor. And some of our innovation, and certainly on the Sam Adams side is going on, and we are hopeful that will maintain the margins, even given the competitive pressures.

Thanks so much.

Thank you. That concludes our Q&A session for today. I'd like to turn the call back over to the presenters for closing remarks.

Thank you everybody, and we'll see you at full-year. Thank you.

Yes, thank you, everyone.

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