The Boston Beer Company's Management Presents At Barclays Back To School Conference (Transcript)

The Boston Beer Company, Inc. (SAM)

Barclays Back to School Conference Call

September 06, 2012, 03:45 pm ET

Executives

Jim Koch - Chairman

Analysts

Presentation

Unidentified Analyst

Alright, good afternoon. Thank you for joining us. We are delighted to welcome back Jim Koch, the founder and brewer at the Boston Beer Company and he is joined by Bill Urich and [Matt Murphy]. Jim founded the company back in 1984 and brings many years of brewing and business experience. Quite honestly, we always look forward to hearing Jim’s perspective on the Beer category, particularly from his unique vantage point and of course we’ll have a chance to share some of Jim’s top quality product.

And with that, I'll hand things over to Jim.

Jim Koch

Thank you for coming and I am honored that anybody’s here with Craft in the next room, so if any of you think you are at the Craft presentation, this is Craft Beer; it’s a little different. So, let me, I guess, it wouldn’t be a presentation if I didn’t give you a word from our attorneys, I am about to make different statements; practically, everything I say won’t come true and if you want to know why, you can look at the 10-K and the 10-Q and see all the risk factors.

So, let me just start out with setting the stage for the part of the Beer world that we compete in which is United States and in the past few years, the primary dynamic has been driven by the new appearance of ABI and MillerCoors. Today’s those two global brewers produce 92% of the beer made in America, which is a striking transformation.

Now, the U.S. businesses are really just part of larger global and the role of the US businesses has become generating cash to invest in synergistic acquisitions and emerging markets and that cash generation has been quite extraordinary; I believe ABI tripled the free cash of Anheuser-Busch which was a reasonably well run company when they took it.

So these are just world-class managers running the US businesses. They've generated the cash by cutting costs and raising prices in a much more concentrated industry and not by driving volume or share growth. And some of that is I think coming bit to an end because synergies are largely gotten and my guess is they will turn attention in energy to trying to find pockets of growth through an innovation pipeline or small acquisitions like ABI buying Goose Island and then spreading those out through their national distribution footprint.

So we’ll be moving from cost cutting and price raising to maybe more innovation and search for pockets of growth, you see it with the successful launch of but Bud Light Platinum at significantly higher price points than Bud Light and about 1 million barrels in five months. So they are pretty impressive entrants with that.

On the other hand the growth in the US beer industry has been in the craft category; I call it craft and domestics’ specialty. Craft is small independent traditional brewers like Sam Adams and 2,100 other small traditional independent traditional brewers. Domestic specialty is one of the Craft look a like beers from the big brewers, things like Shock Top, Blue Moon, Goose Island, Leinenkugel, that the big brewers have sort of pushed into the craft category and started to be quite successful.

I think craft domestic specialty in the US this year will be about 8% of the volume, probably 11% of the revenue and the gross margin, of that 8% is about 6% is craft and 2% and change is domestic specialty. So a small piece of the US beer business, but a lot of opportunity to grow.

And this is, those of you who have been to the conference in previous years, there is a slide that I keep showing, actually first drew it in 1992. This is kind of my sort of simplified dump down to the level that you get after you have a beer understanding of what’s going on in the US beer industry and this is kind of, you could of think of these lines as 40 year moving average.

But if you go back to the US beer business in 1970, 99% of the beer sold in the United States was regular strength domestic beers from a much larger variety of producers than today that you had Pabst and Stroh and (inaudible) and Olympia and Lone Star and Old Style and Natty Boh etcetera.

But 99% of the beer was regular strength domestic beer. The import category was very small, less than 1% and there were no craft brewers. So that was little over 40 years ago. You fast forward today and that scene has changed dramatically. That 99% is down to 24%. The leading brand in the regular strength domestic beer is Budweiser, which may still be the largest brand in the world. In the U.S., they had their last year of growth for that brand, great brand run by a great company, great marketing, frogs, lizards, [wassup], all kind of cool stuff. Their last year growth despite all of that was 1987. Ronald Reagan was President.

They have had 25 consecutive years of decline and it's because of this dynamic, despite everything they’ve done, the consumer has gone away from what was 99% of the business and the consumers gone in two directions. They’ve gone in one direction to light beer and basically the consumer is pretty rational.

Read the rest of this transcript for free on seekingalpha.com

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