The Boston Beer Company, Inc. (SAM) Earnings Call Transcript & Summary

Yes. I guess -- it's a tough one. I'd say this is something we haven't seen before. This is a black swan. I mean it's -- when it happened, I don't know -- I mean I thought this will blow over, and my wife was very adamant. Yes, she's one of those red hat people. And she thought they'd really stepped in it. It was going to be bad, and she would be more right than I was. It's a new world. We polarized society to land mines out there. I'm very sympathetic to our friends at Anheuser-Busch. That could have been any of us. And we have not found any benefit in our numbers. We've not seen those drinkers coming to Twisted Tea or any other products. And we have consciously not tried to take advantage of it. I mean none of us -- I don't think people in the beer business want to benefit from the misfortune of others. We'd rather earn it through our own good fortune and the fruits of our labor. So we're kind of going and doing everything the same. And it hasn't affected any of our plans or projections.

Okay. I'm just also thinking in the context of what ABI does next. We know that they're going to triple spend behind Bud Light, which was really already in the works. And then I think it's fivefold behind Bud, but I was also hearing before this situation that some of their promos were stepping up a bit. And I'm just thinking about that as we head into the summer, and I'm already seeing intensified promotional spend. So are you seeing any of that? Or how do you think that plays out for the summer?

Yes. And they're just trying to get their cases back. But there's just that much interaction between Bud Light and -- I mean we share a lot of drinkers because everybody drinks everything these days. But we're not in the same occasion and mentality that you're going to have a Bud Light, you're going to have a Twisted Tea or a Truly. So at least we haven't seen interaction from their loss coming into us. It seems to be staying primarily within other premium lights as you've seen.

Okay. All right. Switching gears again, I want to go back to Twisted given how strong it's been. It's growing double digits. You said 30%, which is kind of what we're seeing as well. Do you still believe this will be a $1 billion brand?

Pretty close to -- yes, I mean...

It is, isn't it?

Yes.

In revenue, Jim? Yes.

I mean our revenue. So it's not there yet, but before the end of the year, it should hit that run rate. But yes, it's -- I think it's bigger than like Miller High Life. I mean if you told me when we started Twisted Tea that, that would ever happen, but you have to -- this is a 25-year overnight success. We have had it since 1999. It was BoDean's Twisted Tea. It failed and they turned out to be a band called the BoDean that sued us. So that was a debacle, but we -- I believed in it. I like the flavor profile, and it just made sense for our tea. So we then changed it. We relaunched it nationally as Twisted Tea. And that failed, but it collapsed back into these pockets that were basically states that started with M but weren't Mississippi. And luckily, there's a lot of M states. There's like Massachusetts, Maine, Michigan, Montana, Missouri, probably one I forgot, Minnesota.

Minnesota, where I'm from. There you go.

There you go. And that's where it sort of took root and we -- I mean, we introduced it to California, I think, 4 maybe, 5 times, failed every time until the last one. So it's grown double digits every year since 2001. And it's an example of something that maybe we in our DNA and as a company of our size can do. It's really hard for something like that to happen in a big company. Nobody wants to be the brand manager on it. It clogs up your breweries because you got small runs. And there's just -- it's easy to lose patients and just say, all right, we got -- because every 5 years, there's a wave of let's get rid of the clutter. Let's get rid of all those stuff. And they take them all out and shoot them. And we were able to be much more patient and grow. I mean, actually, at one time, the Board said, "Why don't you just sell it?" And we went and talked to banks and came back and said, "We can't replace this. It's just not bad -- it's a bad decision," and the Board agreed.

Right. Well, given how successful it's been and how fast it's growing, you again touched on this earlier, companies are watching and taking notice the competition in this area. So how worried are you with some of the new products that are being launched and just more recently rolled out? What's on your radar, maybe all, but what are you most concerned about? And maybe some that haven't yet been announced, one in particular, like a Monster, and wondering if that's something that they might consider doing.

Surely, it's the obvious thing. It's like what's growing, let's mimic it. I mean I worry all the time. When you have 4.5% market share and everybody's multiple times as big as you are you're, you have to worry. But I will say we've had -- ABI's thrown 2, 3, maybe 4 products at it, things you don't even remember like Intensitea.

Yes. I don't.

No. That was the first. So it withstood many competitors. The -- it's got a unique flavor profile. It's not easy to duplicate it. Tea is not a homogeneous thing, how you process it from the leads, how you get it into the product. So one of its advantages is the people who are drinking hard tea love the flavor profile of Twisted Tea, and people are not going to duplicate that. And the analogy would be Mike's Hard Lemonade, same thing. Mike's Hard Lemonade, everybody's thrown something at them. Then they're 27 years into it, and they still have, I don't know, 95% of the hard lemonade market. So that's what I'm hoping. Most of the products that I've seen are knockoffs, and they don't taste as good. And so there's no reason for a consumer who likes flavor Twisted Tea to go drink Hoop Tea or Das Tea or Peace Tea or all these other knockoffs. It's just what's the rationale.

Okay. Well, hopefully. And then as you think about...

The entry point is probably through the Bud distributors because the Miller distributors, they don't really want to -- like why aren't they going to mess with something that's got 95% share? I mean the best that can happen is they split that between 85 and 4 other products. They don't want that.

Yes. True. So switching a little bit because they're -- staying with this notion that you've seen this tremendous growth for Twisted. It's now larger than Truly. And I'm thinking about the margin profile. This is a mix benefit within your portfolio. Talk a little bit about your gross margins and op margins because I know you've got some guidance right now for this year. How dependent is it that you hit maybe even the high end of your shipment guide to achieve those gross margins?

The percentages you mean?

Percentages.

Yes. They're not that volume dependent because -- for a bunch of reasons. But I mean the gross margin is $10 a case. Absorbing more overhead in the brewery is only a small piece of that. The real issue for us is taking out waste, if you will, unnecessary costs that we added a lot of capital and a lot of people during the boom of Truly. I mean we genuinely anticipated being double our current size, and the projections were seltzer is going to be 20%. Beer, it was on track to do that. A lot of analysis of smart people, not including us, but even among the analyst community, we all look that way. It really did. And so we got to take those costs out. And I mean we used to be at a 50% margin for a decade, and then came Truly and COVID. And Truly is a different animal. It's a very -- it's a problematic product to make because it's like the only consumer product that everybody wants in a variety pack. I mean I can't think of anything where 85% of the volume is in a variety pack. And that's a nightmare in a brewery because you've got -- well, for us, we had 8 variety packs. That's 32 products, 32 liquid streams, and you can't make the thing that you ship until you have all 4 of them. So you have this enormous work in process. I mean 32 -- you want to -- let's say 12-hour shift on a packaging line is close to 30,000 cases. And you've got 32 of those. That gives you 900,000, 1 million cases of work-in-process inventory that your brewery was never designed to digest. So that caused a lot of problems, warehouses, off-site warehouses. We think we have the capital in place to make variety packs in a completely automated way. It's equipment -- it's never been used before to do this. There's only like 6 of them in the world and 2 of them don't work. I mean it's a bad order of difficulty, but we now have equipment where there's no manual handling. It goes from the depalletizer to the palletizer. So -- but getting operating efficiencies up is hard with that. So -- but at the end of the day, we can and should get back to 50. I don't know whether it's 3 years, 4 years, 5 years, 2.5 years. But there is an enormous amount of waste of -- in our current system. And that's easier to get at than innovating and guessing, I mean, because you can see it. There's just -- it's there. There's like $15 million, $20 million of the empty space on our trucks where we don't -- we fill them at 88%, so that's -- we have $25 million worth of excess warehousing. So there's just these -- I mean you can identify them, set a team on them and go after them. It might take a little while. But I feel very confident that we can get back to 50% gross margin. I would like to see it in 3 years.

Or sooner, as you think. But it sounds like realistically, it's 3.

Yes. Some of it is changing the work systems in the breweries. You could think of it as a lean transformation. It's roughly what it is because in beverages, they're set up for long runs of -- I mean they're set up for mass production. Long runs of products. We live in -- the piece of the alcoholic beverage business is very fragmented. And so we have to reinvent some of how -- the manufacturing side of beverages for small runs, lots of flexibility, lots of complexity. And the equipment is not set up to do that. The people are not set up to do that. But it is doable.

But ultimately, if I'm hearing you correctly, improving profitability, is it important to you? Because I also ask it, not just on the gross margin, but you look at your EBIT margin at least in Q1. I mean it was...

It's like 6 and it used to be 12.

I mean it's like a multi-deck.

It ought to double. There is -- yes, yes, absolutely.

Okay. And that's something -- and then culturally speaking, this is a priority -- I mean, thinking about your organization, this is a big focus for you to return to -- okay?

Absolutely. Absolutely. That's -- I mean it's just very frustrating for me. My background is -- I was a manufacturing consultant for 7 years, did Boston Consulting Group. That's what I did. So this is frustrating. It was never -- they've been a great marketing company, been okay. But we -- our focus has been -- we've been good at product quality. We've had a great sales force. And there's no reason that we can't embrace the problem that everybody runs away from, which is complexity. Complexity is where we should live because we're not a big company. We're not built on mass production, mass marketing, mass distribution. And that's an advantage in a fragmenting consumer base, a fragmenting market where the growth is in there's never going to be another Bud Light. There may not in the next 30 years be another Truly. That was a phenomenon. So I see a premiumizing, fragmenting set of products available to consumers. Just think about -- go to a C-store. Look at the non-alc. Those 6 or 8 doors are non-alcs. Pepsi-Cola, Coca-Cola, they have half a door. Those big power brands have given way to 7 doors of everything from Celsius to Muscle Milk.

As you think about your company -- and we're basically out of time. Because you touched -- you're embracing complexity, which, on one hand, could be great given the consumer and the preferences and the blurring of the lines and the shift, but on the other hand, there comes execution risk.

Well, that's -- yes, and that's -- I mean this is a little off trip. That's the problem Toyota solved. The Toyota production system, which everybody calls lean manufacturing, came into place because they had one factory. They had to make all the styles in that factory. And the Japanese consumers are very mercurial, bounce around and are addicted to innovation. Toyota had to do that in a manufacturing system that Henry Ford invented to make -- you can have any color that you want as long as it's black. So that problem has been solved, and we have to -- but not in the beverage industry. So we have to bring that to beverages.

So that's the plan in the next couple of years in your company.

Yes, absolutely.

Anything else that excites you? I know, again, we're over, but as you think about your portfolio, there's no doubt that Twisted is continuing to grow. And it's very strong, and the momentum is there. You're hopeful that Truly will be stabilized. Anything else that you are positive on or maybe that you don't think investors or the market appreciate right now?

Well, I think investors, aided by analysts like you, are pretty smart. They've made good decisions. So I would not say that there's anything that investors are ignoring. My experience after whatever how long we've been public, you guys took us public 28 years ago, and I've been very impressed with the buy side of this whole equation. I think they're seeing what I see, I guess. To me, what excites me is we are extremely well positioned on the most attractive part of the market. And that's [ when I was consulting, I was just ] like okay, you have a strong position in an attractive market. And if the answer is yes to both of those, you're probably going to outperform. So we just have to execute.

I wish you the best of luck.

Thank you.

Thank you.

My pleasure.

Thank you so much for your time. Thank you, everyone, for joining us. And now I think we're going to kick off our reception. And thank you for sponsoring. Boston Beer sponsored our reception along with Constellation Brands. I hope a lot of you can join us outside the auditorium. Thanks, everyone, for attending.