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

So really, as we're sticking with gross margins, and I think it came up on the quarterly call, you have this expectation to get your gross margins back to the high 40s and maybe low 50s, and I thought you said in the next three years. And it's sort of some of the items you just mentioned or maybe within next three years?

I don't have a total crystal ball on this. I can tell you that it's slower than you think for a bunch of reasons, 3 years would be great. I mean my personal goal is to get it over 50% in the low 50s in the next 5 years. But I'm also very impatient. I don't -- it bothers me, when I see how much money is leaking out of the business unnecessarily. It's just waste, it's a lot, there's just a lot of it. During Truly, we basically -- it was a once-in-a-lifetime opportunity. We said there's going to be two competitors. We want to be a survivor. And it was kind of make sure we are one of the two who remain standing at all costs. And we did at all costs, and now we're taking those costs out.

Well, let's talk a little bit about Twisted if we could. And it's been a great success, Jim. Honestly, congratulations. That brand, the sustainable growth that we've seen coming out of it. What do you see is ultimately the opportunity for the brand? And how big do you think this brand could ultimately get, especially -- I'm even thinking in the next year or two. And I'm also thinking that in the context of more and more is coming in terms of competitive products. And I know you've had great success over the years, spending off competition. But we've got more recent -- or most recently, High noon now is coming, you've got Arizona, Lipton, [indiscernible], the list goes on.

[indiscernible] I mean, we got everybody. We got Dunkin' Donuts.

It's starting to sound like something else.

Yes, I'm waiting for like Jiffy Lube to come out with or National Geographic or God knows where it's going to come from.

But I mean as we're thinking about that. And lastly, it feels a little familiar to Right. So how do you not have what happened with Truly or hard seltzers happen here? I feel like [indiscernible]

Well I sort of hope that what happened there happens here and that there's -- I mean, it's basically to me, it looks like this. We've got like 85%, 86% share of Hard Tea from the publicly available data. And the nearest competitor has been around for like 6 years, I think it's Arnold Palmer, and they have 3.9%. And then you've got a couple of others that are 2%, 3% in Arizona, like you said, in STBs. [indiscernible] Ranger is a couple of points and you've got -- and so that's another, call it, 10%. So now you're at 80% -- 95%, 96%. And after that, you've got $100 million, $150 million long tail of just you name it, piece, Goop, two hoods , happy dad on and on and on. My view is that you can kind of write off that long tail. They're not going to be around in 3, 4 years because the volume just won't hold shelf space. They're on there is a trial because we used to have maybe 95% of the shelf space for Hard Tea. And with all this competition, I don't know it's anecdotal, but what I'm seeing is maybe we're down to 70% of the space, but 85% of the volume and a whole bunch of meaningless undifferentiated brands that just have why would a consumer buy them? Why would a consumer even remember them. So my projection would be there's some strong brands in there. But 150 of them that are called Peace and Hoop and Two Hoops and you name it or not among those, and they will get washed out because the Hard Tea category isn't that big that a retailer can devote a lot of space to it and how much space are they going to do. I mean 85% of volume, eventually, we're going to be 85% of the space and that doesn't leave a lot of room for other people. So we're very aggressively investing in Twisted Tea. We in the beginning of the year, raised our advertising and promotional budget by 35%, just to make sure that we would be able to maintain our dominant position as this title wave of clutter rolls over the category.

And so when you mentioned in the beginning, you stepped up spend behind Twisted or that's the plan for this year, 35%. So in the context of that, your guidance is assuming Twisted grows. I mean, what's this -- how fast can this brand continue to grow?

I mean we don't know, we will see. And it's -- because it's had -- we're now 25 years in with Twisted Tea. It started small. It failed, and then we relaunched it and failed again, but we thought we had something and we grew it from a core was basically states that started with him and weren't Mississippi. So it's core of assume like Massachusetts, Montana, Michigan, Missouri, Minnesota. I mean there's a lot of M states out there. And it was a blue collar but upscale blue collar drinker, and we've -- so we've grown it, I think it's had like 23 years of great growth from a small base. So I don't know how fast it will grow, but I foresee it growing for the next three years. We're kind of putting shoulders on it with Twisted Tea Light and Twisted Tea extreme. So -- and it's starting to get more traction in Hispanic markets. So we see that continuing runway maybe describe what do you think the answer the goal is up ultimately and I mean, ultimately, we're all dead. So I don't know why I can't answer that question.

And then to that point about the innovation, that's been predominantly incremental? Or has there certainly been some cannibalization as you've innovated?

There has to be cannibalization but our role is go ahead. If there's an opportunity to take volume from Twisted Tea, we'd rather keep it in our own portfolio. So we don't really constrain our sales and brand development people, like don't cannibalize, keep going. If there's an opportunity to go take advantage of...

I wanted to spend some time on truly, right? I know and I think about us sitting here 3, 4 years ago, what a difference but...

Don't remind me. It's seared in my mind your comment on the earnings call, do you remember that?

Maybe.

Okay. We can talk about it afterwards. That's seared in my mind.

Okay. Well, sitting here today, I mean, you've done a lot to refresh the brand and worked on it. So as you focus on continuing to stabilize it, how are you feeling right now? I mean, I myself am tracking some of the different SKUs within [indiscernible] and seeing some of the green shoots. But it is only, I think, on about 20% of the volume. So are you feeling good about some of the changes you've made in trying to stable this brand?

I think I'm probably more optimistic. I would -- to me, it's probably a much bigger percentage of [indiscernible] the things in the within the portfolio where I would call that are long-term defensible would be Berry variety pack, singles of Strawberry Lemonade, Wild Berry itself, Truly Unruly which seems to be doing quite well and Lemonade as a category. So those are -- and there may be some other party pack and the variety pack rotator, all of which are kind of have a unique position that's differentiated from White Claw. And to me, long term, it just a White Claw and the rest just does not have a meaning -- If I'm setting a retailer shelf, there's no point in putting anything other than those two because a huge percentage of the volume buys either White Claw or Truly, during the course of the year. It's like 96%. So the people who don't drink either one of those, they're not really in the category so -- and I see we have defensible areas. White Claw has the areas where they dominate. And my long-term view is over the next year or two, Truly will stabilize and then at a viable level where it deserves shelf space and where we can afford to support it. And if we can win in innovations going forward, in that category, we can reclaim market share.

They'll return it [ for growth ]?

In a stable category, the category is slowly stabilizing.

Yes. And the challenge is the definition of the category and how the it's blurring. [indiscernible] of the consumer, right?

You can define it really easily by saying it's Truly in White Claw. That's the category.

All right. We only have a few more minutes. I definitely wanted to talk to you about Sun Cruiser and then certainly, the opportunities you see for HARD MTN DEW, especially with some of the changes. So what are you most excited about? Or Sun Cruiser has been a fairly recent launch, vodka-based Hard Tea. So curious to hear how the consumer reception has been? Are you seeing trial, repeat, et cetera?

Yes. Well I'll start with Sun Cruiser, it's really too early to tell. And I was reading the trade press, Early signs are encouraging, and somebody put two pallets on the floor in Texas and things like that. I don't know. It's too early. It's only been out for a little matter of weeks. So we'll see long term, to be very interesting, [indiscernible] is an interesting flavor base. When you think about tea, it's kind of -- if you look at [indiscernible] tea, most of the volume is in tea with fruit flavors on it. And tea is a nice base for that, it's tanic, it's phenolic. So it has a drying kind of character in your mouth, which is hard to get from anything else, but that tends to be refreshing used right. So I like the flavor base. Obviously, Twisted Tea has shown that it has broad appeal. The Vodka base positions it differently and I think there's long-term upside with vodka-based flavors. I mean, High Noon has shown that everybody. High Noon is now. I mean, who would have ever thought 5 years ago that the largest spirits company in America would be Gallow, Gallow? But they are. So to me, that's a nice blue ocean and where Sun Cruiser will go don't know mean it took High Noon like 7 years to get to where it is. So one needs to be persistent and have a great product and be patient. So I'm -- it's early days, but there's a strategic rationale for it, and the margins are good. So -- and then your second question was HARD MNT DEW. I mean we're going through this disruption of distribution. It was through Pepsi, the Blue Cloud and now it's transitioning to a beer network, which as we were talking at the very beginning, is advantaged with this kind of product. They know how to deal with things in the cooler that sell at scale and where you need efficient distribution. So we're not going to see much first half of the year. It will be the second half where we're going to [indiscernible] expectation rebuilding distribution because it's kind of been abandoned in transition. And the real test will be 2025 when we can actually get it in the sets on a national basis.

So we'll stay tuned for both. But you're optimistic. It sounds like. All right. We just have a...

I m always [indiscernible].

I know, which I like. We just have a couple of minutes left. So Jim, maybe in closing, when you and I are sitting here next 3 to 5 years, I put it out there, okay? Hopefully, we'll both be here. What is your vision for Boston Beer? And as you think about your business, a couple of things. Do you think you will have struck lightning in a bottle again and/or what do you think ultimately is the real long-term growth for your company?

Yes. I'll answer the first question because it's easiest. The lightning in a bottle thing, having done it multi time. It's not predictable. And there are a lot of failures. I gave a talk at the beer marketers insights a couple of years ago. Benjie asked me to list all our failures, and I got to like 25. It was so depressing. And I knew there were lots more. So you have a lot of failures, we're kind of okay with that. But it's hard to predict when the next we started with Boston Lager, that was the foundation. And we had seasonal and that got to be [indiscernible]. And we did -- I mean our mission as a company, we wrote it down 32 years ago, haven't changed a word of it. And it's to seek long-term profitable growth by offering the highest quality products to the U.S. beer drinker. That's our mission. We wrote it in 1992. We have stuck with that. Growth is the core of it. The sandbox we play in is the highest quality products in the United States, because I believe and I always have, this is -- there's great opportunities and huge profitable, I'll call it, beverage business. So let's play in that sandbox. So your second question is what's the fundamental algorithm. And I was listening to Martin. He was very clear about his at Vita Coco, which I think is a great company and ours would be roughly this that we are focused in a growing category, the fourth category, unrecognized even as a category, but I believe it's coherent and consistent. And that category has been growing. You can make up a number, but it's low to mid-single digits, so call it, 3%, 4%. That's 80% of our volume. So just inherently, that should generate growth for us even if the other 20% is declining 2% a year. And we've got a large amount of cost to be taken out of our system. And we can and will take those out. Half of them will go to the bottom line. Half of them will go to increasing our brand support, advertising, we have this very large sales force, over 500 people are out on the streets every day, which is a unique advantage and allows us to penetrate in places that where retail execution matters, and you can't just drive it with advertising. So that gives us to simplify it a greater share of voice and we have share of market. And you ought to -- if your share of voice is greater than your share market, you ought to be gaining market share. That's the -- pretty simple algorithm. So you add that on top of the underlying growth, and that's the base growth. And then if every once in a while, we have an innovation that adds 5% or 10% to our volume, you can get to mid- to high single-digit volume growth. You put pricing on top of that, hopefully offsets inflation, maybe a little more, generates cash, buy stock back. And that's -- I'm the biggest shareholder, and I'm very optimistic.

Win-win. All right. Well, thank you so much, I appreciate it. Wonderful having you. Thank you, everyone, for joining us today. Appreciate it.