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

Okay. So thanks, everyone, for joining us. [indiscernible] This particular conversation is always the highlight of the conference for me. The opportunity to sit down and have a beer on stage generally just awesome and more awesome because I'm with Jim. So really happy to have.

I hate drinking alone.

I kind of love it, too. Thank you. So I had my perfectly poured beer. I'm really happy to have you here again this year, Jim. So thank you so much. These conversations are always really informative because your perspective on the industry, obviously, is really priceless to have. So really thank you for joining us.

So maybe -- take your sip and then we'll start. Yes. So we can then just maybe start with some industry-wide perspective on beer trends on volumes. Shipments have been more challenged year-to-date, I think, than the historical average, is kind of like minus 1 plus 1 type range we've seen. So just curious what you think have been the primary drivers of that? And what do you think the sort of right ballpark is from medium-term shipment growth for the industry?

Really good crystal ball question. I think I got the same explanation for the -- being outside the band this year that you've heard. I mean, pricing was also outside the band of kind of 2%, 3% over the last 4 years. I think since 2019, beer prices are up 17%, which is above inflation. And then traditionally, it's been kind of about inflation. So in real dollars, we've raised price, and that always affects demand, it's basic economics. So we're seeing some of that, and that will work itself out. I think pricing will be much less aggressive in the next 12 months than even the last -- I think for this year, beer pricing is up to the consumer at 5.5% for 2023. So that affects volume. No question about it. Longer term, what do I think the right band is for beer, I would put it back to the traditional plus 1 to minus 1, even though I believe there is more pressure on alcohol consumption today than there was 3 or 4 years ago. There's more sobriety. The health news is less favorable than it's been in the past. There is some minor effect, I believe, from the expansion availability of weed. It's not catastrophic like some people thought, but it probably 0.5% or something like that. And what I'm kind of wondering about is for this whole century, beer has been under pressure as spirits have taken share of alcohol and wine has taken share of alcohol. I believe the beer industry would be 25% bigger had we not lost share of alcohol to liquor and wine, 25% bigger. It's like 40 million or 50 million barrels, so that's been a primary pressure on beer. And going forward, my belief is that beer will continue to be under pressure, but -- so will wine and so will liquor because fundamentally, we all -- all 3 of us beer, wine and liquor make products that humans are not wired to actually enjoy the taste of. I mean we all make products that are an acquired case. Beer is bitter and it has the tongue sting of carbonation, those are not pleasant inherently. Liquor has that ferocious ethanol attack on your palate. When you first have a sip of vodka, you blow it out. And wine is tannic and acidic. So these are all things that evolutionarily we are wired to not like. And the liquor guys figured something out before the rest of us did, which is, don't encourage people to drink your product per se, make it sweet and fruity, which I think 80% of liquor is consumed as a mixed drink. And beer -- the wine guys are behind beer and liquor in figuring this out. And I believe they will lose share of alcohol going forward. They'll be the share donor rather than picking it up. And -- but beer has figured out that it's -- people call it Beyond Beer. I think it will be the fourth category that's not beer, wine or liquor because it's not just Beyond Beer, it's beyond wine, it's beyond liquor and that's where the growth is. And that's this category where we've taken our traditional base and made it taste like something more pleasant and different. And for us, that's something like Truly Hard Seltzer, which is very few calories, more alcohol and fruity and sometimes sweet or Twisted Tea, which uses tea and sugar, gets a nice complex flavor, carries different fruits on it. And there's a long list of those. I believe that -- take that category, call it the fourth category, it grows about 5% a year. And different people define it differently, but 3% to 5% a year growth. And the second thing that's where I think the growth in alcohol is going to be. Secondarily, beer should win. That plays into our strengths. That stuff is -- it looks like you make it in brewery, whether it's High Noon that's made in a brewery or a canned cocktail, those are generally made in breweries because you have high speed canning lines and mixed blend and it's sold through the beer system. You want it in the cold box. And there's laws inhibiting -- the tax laws and distribution laws inhibiting liquor guy's ability to compete with their products. So that, to me, should give beer a chance to gain back some of this loss that we've seen over the last 20-some years and get closer to flat. So I believe that will -- despite these downward pressures from less alcohol, weed so forth, I believe beer may stop losing share of ethanol. If you define beer as things made in a brewery, sold through a beer wholesaler to a beer retailer.

Okay. Great. So for Boston Beer specifically, for 2023, your shipment guidance is for 2% to an 8% decline. And that leaves a wide range of potential outcomes for the second half. So what sort of assumptions underpin either end of the range?

Yes. Well, I mean, the extremes are the extremes. So kind of the assumptions that are going -- the dynamics that are going on within our product mix, it's kind -- we have Twisted Tea growing 25%, sometimes closer to 30%. And that's been relatively stable this year. A little bit surprising to us that it's held up and last, whatever, 4 weeks in Circana, I don't know whether it is 25%, 26%, hasn't dropped very much. And that is being offset by the decline in Truly Hard Seltzer. And they have -- and over the course of the year, Truly has got a smaller base and Twisted Tea has got a bigger base. And the lines are right now in September probably sort of crossing and the rest of our portfolio is, you add it all up, it's close to flat. Maybe it's down a few percent, some weeks up. And that's the dynamic. And so we are getting to the point where there -- as long as those trends continue, the lines are going to cross and we will cross into growth. So -- and you can just look at it in Circana data. Our -- we were losing share of beer for most of this year. It's almost stabilized. I think last week, it was like 0.3%, our growth versus the industry growth. So it's -- in terms of share in the beer industry, we're getting to flat. The trends are definitely going in that direction and have been since May, I think the lines that I look at it sort of 13-week moving average of depletions have gone the way you would predict if you just looked at from the outside, what's our volume in Truly and what's the growth rate? When does it -- is it offset by Tea.

Okay. Great. And the last 2 quarters have been particularly disruptive for U.S. beer, the market share shifts and so on. And so shelf resets have become pretty topical of late. So just curious what you're hearing or seeing in terms of fall resets, has kind of the cadence or scope of resets been any different than has been the historical norm and how that may or may not be influencing your business?

Yes. Well, over -- the quick answer is, yes. It's the -- I mean, historically, fall tweaks have been pretty minor and been recognizing a few products that have had exceptional growth, and the retailers want to catch up the shelf space. So in a normal year, we would see Modelo and Twisted Tea, who've been the 2 big share gainers in the business, get a little more shelf space. And that's going to happen again this year. What's unique this year is reshuffling within the premium light beer category. It's this Black Swan that is just landed and nobody expected it. We don't know what to do with it. How long is it going to stay. Is it going to poop on the lawn. We're just watching this. Nobody with any delight or glee, it's been an odd thing, and it could happen to any of us. And so there -- that's what's different this year. There's going to be maybe -- Bud Light is going to lose some facings. They're going to largely go to Coors Light and Miller Lite. Yuengling may pick up some in the states where they're a new player. Pabst will get a little bit of it and that's what's different this year.

Okay. Okay. Great. And then just one more sort of higher level industry question was going to be around the promotional environment, kind of what you're seeing on that front?

We're all holding our breath a little bit starting April and into May and Memorial Day had some very aggressive pricing, not a lot, but striking stuff where you could get enough of a rebate that the beer was free, that kind of thing. And I think we're all thinking on what [ A-B ]is going to do and it didn't materialize. The promotional environment this summer, that I saw, has been very normal. I mean, people executed the 4th of July programs, and there are similar things just like last year.

Okay. Great. So let's talk a bit about your portfolio. So you've already touched on the tremendous growth for Twisted Tea and still the momentum the brand has. So there's also been some new entrants to [indiscernible] and more to come. So just how do you feel about the competitive landscape? And how are you thinking about the runway left in terms of driving household penetration and brand awareness? And again, the new competition coming in?

Yes, it's -- I mean, frankly, there has been Tsunami of new tea entrants. I mean, I think 2 weeks ago, I mean, it almost got comical. So Dunkin' Donuts, Hard Tea, I mean I'm waiting for Jiffy Lube to come out with Hard Tea. It's like everybody. There must have been 50 entrants, new Hard Teas this year. And so far, it hasn't really slowed down Twisted Tea. My reading is none of them are particularly -- none of them have a reason for being. They're me-toos to Twisted Tea, somebody hoping to strike lightning, whether it's lover boy from a social media influencer or dads from a bunch of little happy dad, we have guys drinking buddies. They are smart guys, there's some that come in with a brand name probably the most serious would be Arizona, but they're not known for alcohol. And they have a known brand in non-alc, but if we came out with Twisted Tea non-alc, I don't think we take much share from Arizona, and I -- [ juries ] out, but we'll see. I just don't see a strong consumer reason to pick that instead of Twisted Tea. They're just not known for it. And there'll be Peace Tea, I think, from Coca-Cola. But tea is of interesting flavor. It's very complex. It's just not something that you pull off the shelf like, I don't know, lemon flavor or something. And when you put alcohol in it, it has some interesting flavor interaction. So you got to know what you're doing. It's not that easy. And we've been doing this for 24 years. We work with the 200-year-old tea vendor who has their own tea estates, they're a 200-year-old tea merchant in London. And we buy tea from certain states. So it's -- again, it's not like syrup from Coca-Cola or something. It's a little bit complicated. And Twisted Tea has defined the flavor profile of Hard Tea and it's not that easy to exactly duplicate it. So you could have a sort of an equally good one, but it's different than Twisted Tea and therefore [ view ] from the consumer is somewhat inferior. So far, we just haven't seen a big -- I mean you see the numbers haven't really slowed it down. And we're mindful of how do we, in some ways, shut off the entry points for competition. So if I'm thinking about, I want to compete with Twisted Tea, do something, which means I'm going to do something that Twisted Tea doesn't do. The obvious things are -- well, I'll make a lower calorie, Twisted Tea has 190 calories. I'll make something with 100 or 110 calories. A year ago, we realized that we started really developing Twisted Tea Light which is doing very well. The growth is very high. So we're trying to shut off that entry point. And the other way people might come at is like higher alcohol version like an 8% version. We are testing in 3 or 4 markets, Twisted Tea Extreme at 8% alcohol. So we'll see. There's a lot of smart people out there. I don't want to underestimate, [indiscernible], super smart people. Arizona guys a new, gosh, 40 years ago, when they were selling midnight drag and Malt liquor out of the back of their car in The Bronx, it was Ferolito and Vultaggio, and Ferolito went off and did whatever. But Don is still in it, supersmart people. So maybe -- I mean they know what they're doing, I do want to underestimate people like that.

Okay. Truly. So another month under your belt since the refresh -- the latest refresh began in second quarter. Just is there any additional perspective you can share about how the new packaging, the simpler messaging is resonating and maybe like what's the next big milestone or indicator you're watching for on your end with this brand?

It's early. We are -- there are some green shoots, if you will. The core Twisted Tea packaging, which are like the berry, the tropical, the citrus than the variety packs that are back to the core of basically LaCroix with alcohol. Those have started to gain share actually. So we're no longer losing share with the core Truly product. We're actually gaining share. We're gaining share in singles. But we're bleeding out of Margarita. We discontinued Truly Hard Iced Tea, that's gone. Punch is -- continues to lose share. So it's slowly getting better. The rate of decline is slowly improving, but there's nothing dramatic or discontinuous that we're seeing yet in the data.

Okay. Where do you think Hard Seltzer settle out, I guess, as you think about -- how you want to define the market, but the fourth category? How much of that fourth category do you think ultimately when things have kind of settled out, do you think is Hard Seltzer?

Today, on the fourth category, I think Hard Seltzer is something like 20%, 15%, 20%, something like that. I don't know. To be totally honest, I believe that the category will grow. I don't believe Seltzer will grow this year or next year.

Yes. Yes. Okay. It's been about a year since you launched the Truly Vodka Sodas. So kind of what are learnings from that launch? How do you think about the spirits-based RTD space more broadly, and I know we're talking about this earlier offstage, but kind of the surge of new brands, the SKUs, there's been so much activity in that space.

Yes. That's -- I don't believe that spirits based and spirit-branded RTDs have a big future. I know everybody is throwing stuff at it. I know it's some of the strongest, best spirit companies with really strong brands are coming in. I mean then you just -- it's a lot of them. It's pretty much 2/3 of the spirits brands out there. I'm waiting for Glenlivet or Macau in [ 20 ] to come out with an RTD. But I don't believe that they will be a significant threat or even volume for a bunch of reasons. It's -- I'm not afraid of competing with -- Jamieson is a great brand. I'm not afraid of competing with Jamieson's coming through Southern Wine and Spirits. It's not their bread and butter. It's not -- they don't work the cold box. They don't like the crappy margins in their minds, they're salespeople. I mean if you're a salesman, you want to make a dollar commission, fighting for cold box space for a spirit-branded RTD that doesn't have a lot of volume versus selling a $40 case of Jamieson's trying to jack that into a cooler to a $350 case of Jamieson's that sits on the floor over in the liquor department. It's really not their sweet spot. It's a beer sweet spot. And the volume you will get in the -- the Spirits brands are great brands, but they're all in verticals. This is Irish Whiskey. This is Rum. This is [ Gin ]. This is Vodka. This is Tequila. And the volume, because your brand has to limit itself to that, it's fine where over in the liquor department where you merchandise with a feather duster to get the dust off the bottles, it's not going to earn you a place in the cold box and they're going to be stuck on a warm shelf, and that's death. So I'm not -- despite all this enthusiasm, I'm not a believer.

Okay. And specific for you guys Truly Vodka Soda, how has that performed and kind of learning?

It's been a nice addition. But still small. And if I had to guess, I'm going to say it's going to remain small. And there'll be enough volume to get cold box space, so it's going to outsell 90% of spirit-based products, but it's dominated by High Noon, dominated. [ NÜTRL ] has done well [indiscernible]. They're very good. They get it on the shelf. So those 2 have done well. Cutwater, I think is to me, Cutwater is an example of a good way to approach the spirit-based RTDs because Cutwater is the brand, which then gets rid of, well, if I'm Jamieson's, I'm only selling Irish Whiskey. Cutwater is the brand and it sells 10 different spirit-based products. And that, you can get shelf presence and hold it. So I believe the successful RTD brands will largely be new-to-world brands. And for us, that's mainly the Dogfish Head Canned Cocktails because that works like Cutwater does. We can have Vodka, we can have Gin, we can have different spirits, and it becomes its own brand independent of the underlying source of liquor.

Yes. Yes. Okay. Great. Let me switch to talk a bit about costs or really cost savings opportunities. So where do you stand on the journey to simplify operations, better align complexity and cost structure with the strength in your portfolio as you've discussed?

Well, essentially, during the boom of Truly, we didn't care what it costs. We just threw money. I mean it's all about. This was a once in a lifetime opportunity. It was transformative for Boston Beer Company. All of a sudden, tens of millions of cases, which is hundreds of millions of dollar of gross profit were dropping on us, and we're up for grabs, and our strategy was look, at the end of the day, there's going to be 2 viable competitors in Hard Seltzer. We want to be one of them. We will do whatever we need to do to make sure we are one of them. And everybody thought it would be Bud Light or it will be somebody else and it wasn't. It was us and Mark Anthony and the established players have got eventually kind of shut out from it. But we incorporated a lot of waste into our system. And now we're going back and fixing. We signed contracts because we needed -- I mean, we needed cans, we need flavoring, we needed all this stuff. It didn't really matter what it costs. And everybody was bidding for some of the same resources. So we've been able -- the first thing is what we've been able to do is go back and renegotiate. So the purchasing savings. We've got a fair bit of those this year. There are other longer-term contracts like our glass price for 2023 and '24 is set, our can price for '23 and '24 is set. We can't do anything about it until 2025. But there's other things we were able to negotiate this year. There's still a little bit of unwinding. I think there's a [ short policy ] in the fourth quarter that will impact margins. There's basically 3 sources of savings, purchasing savings, which is the easiest to get quickly, but there'll be some significant ones come in longer term. Second is brewery operations. We put in a lot of new equipment. Some of it's very complicated. We're just really learning to run this crazy contraction that makes variety packs without any human touching of them. There's only 6 of them in the world. We have 2 of them. One of them is owned by the U.S. Post Office, and they've never been able to make it work. So it's -- we've -- but it is -- ultimately, it makes variety packs with no human touching them from the time they -- or forklift or anything from the time the pallets of empty cans get loaded on the depalletizer to the back end when the pallets of shrink-wrapped full cans get offloaded with another forklift. So I believe we'll put us in a very good cost position, but there's those kinds of things to get worked out in the breweries. And then there's just waste that we had from over-producing one thing because we were having trouble predicting the volume or what was going like this and then it went the other way, also much inventory and other shipping from Pennsylvania to Los Angeles, before we had Irwindale Brewery up and running, a bunch of just system inefficiencies that we didn't have time to fix and they weren't priority. So that's the third bucket is waste and system inefficiencies.

Okay. Great. This summer with results, you announced an incremental $20 million of advertising spending behind Twisted Tea and Truly. So can you talk a little bit more about the additional brand support opportunities that you're pursuing this year?

That's a big one. And I'm thinking it seems that it's paying back because I would have expected the growth rate of Twisted Tea to settle more rapidly than it has. It's pretty much maintained itself. And we're talking about some sort of green shoots with Truly. So I'm happy that we spent the money on advertising. And you always have to make that decision. Is that go to the bottom line? That would have been $20 million of more EBITDA, but we, as a company, very much lean into growth. And if we can spend the money and breakeven or even lose some money, but we get growth, we do that. That's just our -- I don't know, our DNA. We've always been a growth company from the time I started making this in my kitchen. So growth has always been our key driver, and we probably lean into it more than maybe really true financial management would have us do. But in the long term, it pays off. And we don't worry about next quarter. I think I mean we don't really worry that much about what are we going to make next year or what the stock values, I hate to say this, but what the stock value is going to be next year, but I worry a whole lot about where to be in 5 years. And that's been a pretty successful strategy for us, really focus where are we going to be in 5 years? Are we going to be significantly stronger, more profitable if we have to suck it up for a year or two, that's okay.

Yes. As you invest, whether it's incremental A&P or just how you normally start the year, are you finding there's a change in the way that you reach consumers most effectively? Is there a change in media? Is there a change in events on premise? What's the mix that's working fast now?

Well, a couple of responses. I mean, during the Truly boom, we spent money on all kinds of things that we're stupid, but we didn't know which was going to work. So we had tens of million dollars worth of sponsorships that we probably shouldn't have done and everything. I don't want to go into all of it. But -- so we have learned from that. And there was a lot of nonworking dollars that just -- we were throwing stuff against the wall to make sure we were one of the two winners. We have learned that we are moving -- the best evidence we have -- has told us we need to be -- we need to move from TV -- some money from TV to digital. The digital is more cost effective. So we've learned that we're going to be, as I said, way more selective about our sponsorships, strip out nonworking dollars, move cable TV to digital, social and digital. So those would be our key learnings, and we're constantly trying to [indiscernible] I mean it is really kind of weird and unacknowledged problem, but none of us really know how much -- I mean we like John Wanamaker was 150 years ago, half of my advertising doesn't work. I just don't know which half. So it's 150 years later, and there hasn't been that much progress on it. They can get sort of black box, what is it, media mix, something, MMM numbers, but they're not super credible.

Okay. So you touched on carrying more -- being more concerned with where the stock is in 5 years and investing in the growth bias. But I did just want to hone in a little bit more on -- you talked about the cost savings opportunities, you talked about brand support, but there's also a goal for margin expansion, right? There's a commitment to growth, there is a concurrent goal for margin expansion. So if you end up with more flexibility in the P&L than you anticipate in a given year, I mean, how do you think about that, right? What is that decision tree for reinvestment versus flowing through?

Well, the first thing that we'll look at is, can we -- if we spend more money, what kind of volume do we think will follow. And we have kind of a longer tail. We're not just looking at how much -- what's the volume response in the next 3 months. But we will give it benefit of the doubt, 6 months, 9 months out in terms of the value of investing against getting new customers. We also look at the actual media that we have, and we probably more than most companies, we invest against what we believe is effective media instead of saying, this brand needs so much and this brand gets so much. We'll look at it and say, if we don't have good media for Sam Adams, let's not spend money on media that we don't think is going to work and [ brand people scream ], but we've learned to invest against effective media. Right now, we believe we have effective media actually in Angry Orchard, in Sam Adams, in Twisted Tea and in Truly. So we're kind of in a good position that way and we spend it on things we think will grow the brand. And then what's left over goes to the bottom line. It's nothing a [ matter ]. We're putting it on the bottom line. But if we've got media that we think will grow our brands, that's where it's going to go.

Okay. Great. We are out of time. So please join me in thanking Jim for helping us to wrap up another super successful conference and a very successful chat up here, too. [indiscernible] thank you. Thank you everyone.