Boston Beer Company Inc (SAM) 2016 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first-quarter 2016 The Boston Beer Company earnings conference call. (Operator Instructions) As a reminder, this call is being recorded.

I would now like to introduce your host for today's conference, Mr. Jim Koch, Founder and Chairman. You may begin, sir.

Thank you. Good afternoon and welcome. This is Jim Koch, Founder and Chairman, and I'm pleased to be here to kick off the 2016 first-quarter earnings call for The Boston Beer Company. Joining the call from Boston Beer are Martin Roper, our CEO; and Frank Smalla, 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 Frank, who will focus on the financial details for the first quarter as well as a review of our outlook for 2016. Immediately following Frank's comments, we'll open the line for questions.

Our total Company depletion trends declined 5% in the first quarter, even as the better beer and craft categories appear healthy. We believe Sam Adams has lost share due to the increased competition and continued growth of drinker interest in variety and innovation.

During the quarter, we rolled out new beers, including Sam Adams Nitro White Ale, Sam Adams Nitro IPA, and Sam Adams Nitro Coffee Stout, as well as Sam Adams Rebel Grapefruit IPA. These beers have started slowly, but their momentum continues to build. We believe that we are well positioned to meet the longer-term challenges of this competitive environment through the quality of our beers, our innovation capability, and our sales execution strength, coupled with our strong financial position that enables us to invest in growing our brands.

I'll now pass the call 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 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 first quarter, our depletions volume was significantly below our expectations, as the declines in our existing styles of our Samuel Adams and Angry Orchard brands were not offset by our new styles or the growth of the rest of our brand portfolio.

The lower volume, combined with the higher planned spending and excess brewery capacity, significantly impacted our financial results for the quarter. We are focused on adjusting our cost structure based on our lower volume expectations and on driving efficiency throughout the organization, so that we can direct funds to the highest growth initiatives.

While we are prioritizing these efforts, some of the adjustments will benefit this year, and others may take more than a year to fully implement. As we pursue and achieve cost savings through improved efficiencies and more effective processes, we plan to invest part of these savings into strengthening our brands and our sales force and in new beer and cider development capabilities, so that we can react quickly to any opportunities that emerge. We remain prepared to forsake short-term earnings as we strive to return to long-term profitable growth.

Our depletions decline in the first quarter was primarily due to decreases in our Samuel Adams and Angry Orchard brands that were only partially offset by increases in our Twisted Tea and Coney Island brands. The Angry Orchard decline appears largely due to softness across the cider category, as casual cider drinkers are testing hard sodas and other new alternative beverage options.

We are working hard to improve the Sam Adams brand trends through continued innovation, executional focus on our core styles, and a full review of our brand messaging and packaging, which we hope to complete during the second half of the year. We are also developing programs to reverse the cider category decline that began in late 2015 after several years of high growth.

We believe the recent declines are not indicative of long-term cider category potential and are happy that Angry Orchard has maintained a very high share level. The trends for larger craft beer brands and the cider category are very difficult to predict, and we have therefore broadened our guidance on full-year depletion volumes and earnings while reducing our target commensurate with current trends.

Based on information in hand, year-to-date depletions reported to the Company through the 15 weeks ended April 9, 2016, are estimated to have decreased approximately 5% from the comparable period in 2015. As previously announced, Frank Smalla, our CFO, joined the Company and has been transitioning responsibilities from our former CFO, Bill Urich, since early January. We are excited to have Frank on board, and Frank has proven to be a great addition to our leadership team. Now Frank will introduce himself and provide the financial details.

Thank you, Jim and Martin. Good afternoon, everyone. Boston Beer is a remarkable company, and I'm honored and excited to be part of such a great team. I've had a smooth transition over the last three months, and I look forward to meeting with you today and in future earnings calls and investor meetings.

For the first quarter, we reported net income of $7 million or $0.53 per diluted share, representing a decrease of $6.7 million or $0.47 per diluted share from the same period last year. This decrease was primarily due to decreases in net revenue, a decrease in gross margin, and increased general and administrative expenses.

Core shipment volume was approximately 830,000 barrels, a 6% decrease compared to the first quarter of 2015. We believe distributor inventory of March 26, 2016, was at an appropriate level. Inventory at distributors participating in the Freshest Beer program at March 26, 2016, decreased slightly in terms of days of inventory on hand when compared to March 28, 2015. We have approximately 73% of our volume on the Freshest Beer program.

Our first-quarter 2016 gross margin of 48.5% decreased from the 50% margin realized in the first quarter of last year, mainly due to increased brewery processing costs per barrel and product mix effects, partially offset by price increases.

First-quarter advertising, promotional, and selling expenses decreased $1 million compared to the first quarter of 2015, primarily due to decreases in freight to distributors due to lower volume and lower freight rates, partially offset by increases in point-of-sale and salaries and benefits. General and administrative expenses increased by $3.8 million from the first quarter of 2015, primarily due to increases in stock compensation, salaries and benefits, and facilities costs.

Based on information of which we are currently where, we're now targeting earnings per diluted share of between $6.50 and $7.30, a decrease in the range from the previously communicated estimate of between $7.60 and $8.00. However, actual results could vary significantly from this target.

The 2016 fiscal year includes 53 weeks compared to the 2015 fiscal year, which included only 52 weeks. We are currently planning for a change in full-year 2016 shipments and depletions of between minus 4% and plus 2%, a decrease from the previously communicated estimate of mid-single-digits growth. We are targeting national price increases per barrel of between 1% and 2%.

Full-year 2016 gross margins are currently expected to be between 51% and 53%, a decrease in the range from the previously communicated estimate of between 52% and 54%. We intend to increase investments in advertising, promotional, and selling expenses by between zero and $10 million for the full-year 2016.

Previously we had communicated an estimated increase of between $10 million and $20 million. This estimate does not include any increases or decreases in freight costs for the shipment of products to our distributors. We believe that our 2016 effective tax rate will be approximately 37%.

We are continuing to evaluate 2016 capital expenditures and currently estimate investments of between $50 million and $70 million, a decrease in the range from the previously communicated estimate of between $60 million to $80 million. The capital will be mostly spent in our breweries to support future growth and product innovation and to drive efficiencies and cost reductions.

We expect that our cash balance of $51.1 million as of March 26, 2016, 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 first quarter and the period from March 27, 2016, through April 15, 2016, the Company repurchased approximately 450,000 shares of its Class A common stock for an aggregate purchase price of approximately $75.7 million. We have approximately $53.2 million remaining on the $575 million share buyback expenditure limit set by the Board of Directors.

We will now open up the call for questions.

(Operator Instructions) Caroline Levy, CLSA.

Thank you for the question. I just really would love to get, Jim, from your perspective, how long you think this prolonged period of competition could continue? We don't see anything on the horizon that makes it look like there's any slowdown in the rate of new local openings, and brewpubs, and so on. So do you think it's reasonable to expect it to remain very, very competitive for the next 2 to 3 years?

Yes, that's probably a reasonable expectation. I think I've actually been on record that there could be as many as 10,000 craft breweries in the United States, up from roughly 4,500, 4,800 open today.

I think what we will begin to see, maybe a bit sooner than that two- or three-year horizon is the distribution channels beginning to close up as distributors and retailers kind of run out of space for craft beer. So I think the gating mechanism will probably be retailers reaching the point where adding more tap lines does not add to the craft beer sales. And we may be closer than the two or three years on that one.

I believe the latest publicly available data is that craft beer has kind of peaked at 30% to 40% of the volume in on-premise accounts. And I believe that first quarter was basically flat in on-premise accounts. So we may be fairly close to that saturation point, though our draft surveys from distributors over the last roughly year have indicated that the -- at least in the past year, the number of draft lines on premise has gone up, very roughly, something like 10%. And that's certainly an issue for a very widely distributed brand like Sam Adams, because it means that the pull per draft line is down 10%, maybe even 13% since on-premise volume in beer is off 3%.

And I think in off-premise accounts, there's still room to expand the shelves and the selection in some types of accounts -- liquor stores, even supermarkets, less so in convenience stores.

So the short answer, I guess, to your question is: the number of craft breweries may well continue to grow at a fairly strong rate, but the number of craft breweries that will enter into the distribution in a meaningful way will probably not grow as fast, as the new entrants tend to rely on volume out of their taprooms rather than getting space on the shelves.

Right. That's really helpful, Jim. And I'm just wondering if you could prioritize -- one, two, and three -- what your main goals are for 2016?

Yes. Very easy. One is strengthen the brand pull on Samuel Adams and Angry Orchard. Two would be reevaluate our cost structure and continue to drive to get the organizational -- I'm sorry, the operational efficiencies that we weren't really able to capture over the last five or so years as we've doubled our volume and therefore doubled our capacity.

So we spent a lot of time getting the new capacity and the new capital in on budget and on time, and then ramping up the volume out of it. So now we're going to be circling back and achieving operational efficiencies.

And third would be to continue to drive innovation, focusing on the recently introduced beers, and ciders, and teas. And also continuing to look for other opportunities. So those would be I think my, and therefore the organization's, three priorities.

Thank you. The last question would be: would you consider acquisitions?

We always look at stuff. And we haven't bought anything yet. I think historically our philosophy has been that our innovation capabilities and our craft beer incubator in Alchemy & Science have been a much more cost-effective way to generate bolt-on volume.

Got it. Thank you so much.

Judy Hong, Goldman Sachs.

So, Jim, maybe just a bit of a follow-up on Caroline's question. And I guess the other dynamic that's happened from a competitive standpoint is these big brewers really gobbling up a lot of the local brands, and sort of the competitive disadvantage that's been created for a Company like you. So I'm just wondering, how do you sort of address that competitive disadvantage? And certainly the priorities that you've laid out perhaps make sense to focus on, but is there sort of a deeper strategic review that you need to sort of conduct in the context of some of the major changes that have taken place in the industry?

Well, the acquisitions mainly have been by ABI. I think SAB -- MillerCoors has bought one relatively small brewery, Saint Archer's (sic - Saint Archer) out of San Diego, but -- and Anheuser-Busch InBev, I believe, in the last year or two has had eight or nine craft beer acquisitions.

And at least so far, the arc of growth of those acquisitions hasn't really changed that much as a result of the ABI acquisition. And they seem to be building a portfolio of strong regional brands rather than national brands. But that being said, I don't have a crystal ball nor great insight into how these craft brands will get prioritized within the portfolio that ABI currently has.

Okay. And then you talked about some of the innovations in Nitro and others, off to a bit of a slower ramp initially, and then it seems like they are gaining momentum. So can you just explain perhaps why was it slower initially? And then, if you think about the next 6 to 12 months, sort of where do you think the distribution build could be, and your expectations for some of the contributions from some of these new brands.

Yes, the major new brands within the Sam Adams portfolio are the three beers of the Sam Adams Nitro project. And they are very innovative. There's really nothing out there within craft beer like they are -- nitrogenated rather than carbonated. And they come in a 15-ounce can that contains a nitrogen capsule, also known as a widget.

So that was something that took us almost 3 years to figure out, implement, source from overseas, et cetera. So it's a fairly new concept, and I think it will build momentum, but not as fast is something like Sam Adams Rebel IPA did, because that was a major new entrant from the number-one craft brewery in a well-established and rapidly growing category.

So the Nitro project is entering into what is one of the few, like, large areas of white space out there. And it's really too early to tell where that will go.

And then we also added a Sam Adams Rebel Grapefruit IPA that participates in one of the major growing segments of this big cluster of IPAs, which is fruit-based IPAs. And again, I don't think by itself it's going to get the kind of volume that Rebel IPA did. It is a sub-brand rather than as big a brand as Rebel was going to be.

And then we have smaller innovations in Angry Orchard, with the Orchard's Edge series at a higher price point and very interesting innovative flavors, like old-fashioned and a pear and cardamom cider. And within Twisted Tea we have a Bourbon Barrel Tea. So I think what we're seeing is that you need more innovations to make up the same volume that one big one did. And I think everybody is looking for the next whatever, the next IPA or whatever. So one has to probably have a larger number of innovations

Okay that's helpful. And then, Martin, just on the gross margin trends -- so first quarter, the pressure you saw. If you could just walk us through a bit more just in terms of the drivers of that decline?

And then obviously, you're focusing on getting more efficiencies as you focus on the cost structure. But what are some of the actions that you're taking that can drive quicker improvement versus some of the longer-term actions?

Sure. First of all, I think the first quarter -- you know, it's obviously our smallest quarter. It's one where we're very sensitive to loss of volume. Last year around this time, we set the breweries up to deal with peak volume by going to 24-hour ship patterns. And we turned on extra shifts on certain lines and have maintained that through the winter.

And so this was the first quarter where we had our slowest quarter against that increased cost structure. And that's showing up in the gross margin line -- and then obviously aggravated by the fact the volume shortfall that we saw. So obviously a double hit there.

As it relates to total spending, we had planned the year, as we had indicated, for growth. We had even hired for that. We had put investment plans behind our brands for that. And that obviously hasn't occurred, and that's obviously squeezed the operating income line as well.

As we look at the opportunities, we are going, okay, what we're doing isn't working or may not be working. And we're going through and identifying things that aren't working, or things that may not be working, and trying to validate and trying to take that money that we free up and reallocate it to either things that work, or basically preserve it so that we can invest it in later quarters behind new programs that we have coming, such as I mentioned in my prepared remarks.

So I think the sort of evaluation of the SG&A is a little easier to sort of see a pathway to short-term gains, although our bias is to move it into programs that are more effective in building, as Jim pointed out, the brand pull of Sam Adams and Angry Orchard, which is obviously the key, number-one priority.

We had plans to expand our sales force, and we had -- and other parts of the organization to support the growth that we were expecting. And those hiring plans were in place, and many of them were fully effected. And so we're looking at that and making decisions going forward as to continue those plans, and obviously have a values base within our Company that we would prefer to deal with any of this through normal attrition. And so we're looking at that and trying to work out how long such adjustments might take as we adjust our capabilities to be in line with both the volumes we're seeing and also the effectiveness of those programs.

The brewery sort of fixed-cost/variable-cost structure will take a little longer to effect. We do actually need that peak capacity for summer. So it is actually capacity we need, even at these volume numbers. So we certainly have some significant room for improvement on efficiencies which might allow us to maybe reduce our needs in those areas.

But we're still outsourcing some contract production that can be brought in. And there are other things we can do that would have impact. But those sort of impacts are likely to take longer to see, because, again, we're dealing with them in ways consistent with our values.

Got it. Okay, that's helpful. Thank you.

(Operator Instructions) Kevin Grundy, Jefferies.

So a question for Martin on the depletions guidance. You guys edged it down now to down 4% to up 2%. And, Martin, I was just hoping you could possibly build on that a little bit -- the potential range of outcomes. So I guess it implies probably about down 4% to up 4% for the balance of the year, which is a pretty wide range. Maybe just talk about, if things go right, what gets you to the high end of the range; if things don't go as you hope, you're at the low end of the range.

And I guess given some of the challenges in the industry, and particularly with respect to guidance over the past year or so, talk, maybe, Martin, a little bit about your level of confidence in this difficult environment about delivering on the low end of the range.

Sure. So obviously projecting trends is hard, given the uncertainty that we see. I think for us to come in at the top end of our range, we would be looking to modify and stem losses on Sam Adams and Angry Orchard by the second half of the year and expect to see continued success and growth in our other brands and our other new product launches. So that's the path to that.

It obviously requires a turn of a trend. It's very hard to know with any of these trends: are we going up against easier comparables in the latter half of the year, because they definitely are easier, and how much that weighs into this. To come in at the bottom end of the range, I think we have to assume that the trends that we're seeing sort of continue with little sort of moderation.

So we've widened the range, because we don't really know how that's going to play out. But we obviously believe that we can develop programs to change those trends. But the confidence on -- is that an absolute ability to change those trends? -- obviously isn't 100%.

So we have a wider range, which we're comfortable with based on all of the information we have right now. We as a leadership group would love not to change the range on you, but obviously I can't guarantee we won't. But that's certainly how we're thinking about it.

Okay, that's helpful. And then maybe a question for Jim. On the new innovation, Jim, what has been -- I know it's still early days. How cannibalistic as the new innovation been on the existing portfolio at this point?

We don't have any hard data on it. I guess my gut would be not that cannibalistic, just because there are so many choices and varieties in front of the consumer today that they are clearly drinking and shopping across brands anyway. So because of that, I don't see the innovations as particularly cannibalistic. And I think that was kind of our experience when we introduced Sam Adams Rebel IPA several years ago. It was mostly incremental.

Okay. And then just one more, if I may. On the cost cutting piece, just to build upon Judy's question, Martin, and maybe Frank: is that something you guys are going to put a number on for investors? Is there going to be either restructuring or a productivity program announced, and such that it's going to be quantified for investors?

And then maybe, Frank, if you could just more broadly -- just adding to the question, what are sort of your early impressions? Understanding it's still early days, early impressions here? And then sort of what you see as the biggest opportunities, whether this is on the cost side; whether this is with respect to capital structure. Some of your comments there, I think, would be interesting as well.

That's it for me, thank you.

Thanks, Kevin.

I'm sorry. Remind me the first part of that question. I was so (multiple speakers).

Sorry, I kind of rambled on there a bit. The question was, Martin, are you guys going to put a number on the cost cutting opportunity, which you are now more focused on? Is that something that you're going to put a number on? As an example, announce like a $25 million, $50 million productivity program or something, and then share that number with the Street? Or is this just more sort of belt tightening you're going to speak to broadly?

Yes, I think it falls into the latter. But that doesn't mean to say that we don't have our own internal goals. And I think in the past we have talked about those goals being tens of millions of opportunities related to the things that both Jim was talking about about our growth chase, which basically created a supply chain where we believe we have a lot of opportunity to address efficiencies and waste.

And then also, obviously, on the brand side, where if things aren't working, then we should take a hard look at them and decide how to reallocate that money. And is that a saving, or is that a reallocation to a better use? We also track that internally.

We struggle a little bit with actually coming out and saying hard numbers, because we're not sure what our sort of baseline is on that for everybody. And you sort of get into this sort of baseline discussion. What's the baseline? What is it saving off of?

So our current approach and, hopefully, a good approach that works for everybody is to provide earnings guidance that reflects those sort of initiatives for this year. And obviously, as we get into later in the year, we'll do the same for next year. So that's sort of our current approach to it and the reasons behind it.

And I'll let Frank give you his first impressions of the Company.

Well, I mean, it's clearly early days with a couple of months into the job. What I will have to say, though, it's kind of impressive if you look at the commitment of the employees of the Group, the set of values -- it's like the strength of the Company has.

There are many strengths that you cannot buy that are really, really hard to build, that the big companies try to build. But again, they are just, like, very difficult to come by. Like, high agility, nimbleness, the can-do and winning attitude. The really, really strong brand equity. So there are a lot of things that we have that we need to put together.

On the opportunity side, as you know, this Company has seen a long streak of double-digit growth over the last eight years. And everybody was really focused on delivering the volume against this growth, which had, quite frankly, the highest return on investment.

So speed was of the essence. It was not of the essence to get it in in the most cost-efficient way. So -- and Jim and Martin both pointed to the opportunities. So now, as the growth has slowed a little bit, I think we should take this opportunity, this pause, to focus more on becoming more efficient and more effective within the breweries, but also in the office.

And I think balancing the growth -- because we still, as I think you've heard from Jim and Martin -- we are still clearly very much pursuing the growth, given where we are in terms of market share. But build the base for the next wave of growth through looking -- by looking at the efficiencies and effectiveness opportunities that we have across the Company.

Okay. Thank you. Good luck, guys.

Pablo Zuanic, SIG.

My question is more related to the distribution part of the business. And the reason why I ask this, maybe naively -- you know, when I look at your market share in Massachusetts, right; and then I look at your market share in Oregon or Texas, other companies talk about ACV opportunities. And I wonder whether there's been ACV opportunities there for you that you really haven't tapped into.

And the backdrop for my question is that here we have national craft brands like Sierra, Lagunitas, right, gaining distribution. And it seems that while you would still have potential to gain distribution, you are not able to do that.

So is it you face competition from local craft brands as well as these brands going national, and the bigger breweries buying craft brands? But I just wondered about the distribution side of the business. So that's one question.

And second to that, just remind us what percentage of your volume goes through the Anheuser-Busch wholesaler network. I understand, of course, it's an independent network; and the MillerCoors network. And is distribution at the wholesaler level part of the problem? I imagine that some of those wholesalers cannot be very happy with the performance of these brands right now. Are changes coming? If you can talk about that, please. And then I have a follow-up. Thank you.

Yes, let me respond to that. We do have greater distribution in Massachusetts than we do in Oregon, but we also have a national sales force. And we have very good relationships with the chains throughout the country, that -- so between the sales force and the chain relationships, we are able to drive and maintain distribution.

I think our biggest issue is not really losing distribution. It is that retailers are expanding their offering. They are expanding their coolers, their shelves to put more and more craft brands as well as other innovations, like hard soda and some FMBs. So we are losing our share of distribution more than our ACV volume.

The second question about A-B distributors. We have a relatively small share of A-B distributors. I've always been very concerned about the greater ability of Anheuser-Busch InBev to influence their distributors, because they often have 90% plus of the gross margin generated in an A-B wholesaler.

So we are -- I don't know the exact number. If I had to guess, it's something like, I don't know, 10%, 15% of our volume is A-B distributors. And probably equally important, if we are in an A-B distributor now, that is going to be an A-B distributor that is probably not as dependent on A-B as the average one in their network is. And that's also going to be an A-B distributor that has had our brands for 10, 20, even 25 years. So they have a history of operating independently and doing what's best for their business rather than responding to pressure from A-B.

Thank you. And just a quick follow-up, Jim. I mean, I guess I am going to date myself here and talk about Lee Iacocca and Chrysler back in the day, but you're obviously an iconic figure in the industry. And I wonder: how involved are you really? Obviously, you are involved in the business, but how involved are you rolling up your sleeves, visiting stores, talking to wholesalers, talking to distributors?

Is there an opportunity for you to take maybe a more active role in front of the consumer and the customers -- by that I mean the retailers, the bars -- to help the business grow? Or you are doing so much already that there is no upside from that point of view? Sorry to ask.

Yes, I'm very actively involved in the business every day. I've been on the road all week. So I'm actually not in Boston, and I was on the road pretty much all week last week. So I spend a lot of time with wholesalers. I was with our wholesaler in Chicago last night. So that really hasn't abated between wholesalers, and market visits, and being the face of the Company to the public.

Thank you.

And that does end our Q&A session. Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone have a wonderful day.

Thanks, everybody. We look forward to talking to you at the end of the next quarter.

Thanks, everybody. Bye now.