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

Okay. Great. Okay. We're going to get started. So really happy to have Jim Koch, Chairman of the Board, Founder and Brewer from Boston Beer with us today. Now that nonalcoholic is a part of the portfolio, we can move the time of our presentation from the last of the day to any time of day. And Jim is tasting to make sure I'm drinking the right one.

We're giving you the alcoholic.

Keep it fun over here. So thank you for being here. Thank you to you and your team for always prioritizing this conference. It really is a highlight and important for a lot of people that cover your name. So thank you. So where I wanted to start is just hearing -- you always have a unique perspective on the industry broadly. So I thought we could start there. It feels like there's -- you call it an existential debate about the future of alcohol consumption. Gen Z, are they drinking less or not, the rise of other mood-altering options like cannabis, adaptogenic drinks or GLP-1 is a factor. So how are you thinking about the direction of travel for total beverage alcohol consumption in the U.S.?

It's been stable for a really long time, like centuries almost. And so what I'm seeing, we're not going to have huge down 5% or anything like that. That would be tectonic. There is -- so against that background of long-term stability in per capita consumption, maybe going down a little, but the capitas go up. So you're talking about a fairly narrow band. I would -- against that background, to me, there are some small things that are chipping away at alcohol consumption. None of them is as much as 1 point a year, the fractions of a percent, but you've got things like weed and delta-9. So you've got alternatives, though they're usually not in beverage form. You've got moderation being a thing among Gen Zs. And then you've got the GLP-1, maybe slightly reducing total calorie consumption among the population. And then you've got the help dialogue has shifted a little bit, partly because you can trace it back 10 years. Brewers used to fund objective independent research at -- run out of Johns Hopkins, and we stopped doing that. And I think it was a mistake. So because there was dispersions cast on any kind of industry-sponsored research, even though all the drugs that go through our pipeline are based on industry-sponsored trials that meet certain standards. And as a result, most of the research in alcohol over the last 10 years have been funded by anti-alcohol group. So that was a self-inflicted wound. You add those 4 things up. Do you have a point or 2 of decline? Maybe. And then there's a little bit of population growth. So I see more headwinds than tailwinds, but they're relatively minor. It's pretty, pretty, pretty stable industry in that respect.

Okay. And how do you think about beer share within that versus RTDs, FMBs, spirits? There's been a proliferation of things in a can. So how do you think about traditional beer share?

Well, I think about it a little differently. I think about maybe beer-accessible share. To answer your question, traditional beer, and I said this 5 years ago, it's not going to grow again. It's going to be smaller. You take a 5-year moving average, it's going to be smaller, I think. But I think that's true about wine, and I think that's becoming true about traditional liquor. What is growing, and it's the area that we are -- 80% of our volume is in is what I call the fourth category, that is, it's beyond beer, but it's also beyond wine, it's beyond liquor. It blurs lots of lines. We've -- in our whole lives, we've all thought about these 3 sort of separate channels. There's beer, wine, there's spirits. Well, now the growth is in what I'll call a fourth category that blends elements of all of those. And that category is now getting to be pretty significant, depending on how you want to define it, and it's growing, again, depending on how you want to define it, somewhere between 2% and 5%. And what's, I think, very relevant there is beer should win in that category. And most of the volume from that category will probably not come from beer. So I mean it's a category that -- regardless of what it comes from. I mean, you've got all kinds of things out there. You've got BuzzBallz. What's the alcohol in there? It says wine on it, but it's actually made, I believe, from the remnants of squeezing oranges to get orange juice, and that's a fruit, so that's technically a wine and taxed and treated as a wine, but is that a wine, not really. And there's other -- all these lines are getting blurred. But what they tend to be is beverages that tend to be sweet and fruity. But what's relevant to me is they, in terms of their making and distributing of them, they look like a lot like beer. They're priced at the high end of beer. They need to be sold in the cold box. They have different margin structures than, even if they're vodka-based, they don't look like full-proof spirits. They're in a can. They have beer-type prices and margins. You need to have good equipment to manufacture them, you need distributors that have big trucks that are used to carrying high-bulk, low-margin products versus a liquor or wine house. Beer should win. Beer, to me, should get, call it, 80% of this growing category. So with all these crosscurrents, I guess our focus is on -- even though alcohol is not growing, there is a big segment that we are very good at and are set up to access that is growing. And so that's -- we're able to defy the overall industry dynamics by focusing there.

Okay. Great. So compared to this time last year, the industry is showing similar volume softness as we saw, down kind of 3%-ish in scanner data. And things ticked up a little bit in the first half of the summer, but slowed again in late July and August. So just want to check more shorter term, how you're feeling about -- summer is largely behind us. I know Labor Day weekend just happened, but...

Yes.

Yes. So just kind of a closer-term check-in and then the U.S. consumer environment as well.

Frankly, this month-to-month noise is pretty -- it's noise. And everybody is like trying to read all these tea leaves, but they're trying to read relatively random data and get meaning from random data. And so I see things fluttering around from week to week, even month to month, but I don't consider it very meaningful. And honestly, with respect to the U.S. consumer and their attitude and so forth. I mean, I don't know. I'm not -- they're smarter people, a lot of smarter people in this conference who pay more attention to those kinds of things. I'm not the Delphic oracle, the consumer is going to do what they're going to do. Our efforts are in responding to and taking advantage of trends that we can't control.

Okay. Are you seeing anything notable broadly in this promotional environment, though, as the industry has been challenged all year? So take out the July or August question, what are you seeing in terms of promotional environment?

I would say it's been healthy. Given the volume softness, there's really nobody panicking and pulling the price lever hard, like used to happen 20 years ago in the beer business, August Busch would be like, we lost 1/10th of a point of share. We need to go out and promote and get it back. People are responding rationally to those kinds of short-term variation. I mean we're seeing towards, I think, our guidance is 1% to 2% price increase this year. We're leaning towards the higher end of that range.

Okay. That's great. And then I also was just curious about at-home versus away-from-home dynamics, kind of what you've been seeing. I know you've previously acknowledged that on-premise may not have been really adequately supported. So what are you kind of doing differently to support that channel if anything?

That's a good question. We are -- I do feel like on-premise has been somewhat neglected. I think COVID changed particularly at the wholesaler level, on-premise is not nearly as profitable as off-premise. A lot of really smart wholesalers would love to see on-premise go away. And because the drop sizes are smaller, the service levels are higher. So they tend to be -- and things like keg, that are huge pain in the neck for them. In some states, they have to clean draft lines. The keg trucks contribute to their workmen's comp problems. It's hard to find people to do that. But I see that for us as an opportunity. We've always been very strong on-premise. That's kind of where we built our brands. So we see opportunities there. When you look at industry data on draft handles out in the market, what the #1 draft handle is open, meaning the retailer has a draft handle and nothing on that line. So to us, that's an opportunity for someone with this broader portfolio as we have. We've got something that can and should go on that line, whether most on-premise places that have 10 handles, which is what you would have to have an open line or 2. They should have a seasonal. We are the #1 seasonal. They should have a hard cider. We have the #1 hard cider. They should have a national IPA along with their local IPAs, Dogfish had 60 Minute, it's one of the top national IPAs. And we now have Twisted Tea on draft. So we have something that should be appealing to a lot of retailers. And we believe that, that sampling is how we build brands. So for us, on-premise, even though it's not profitable, I mean, it's expensive to have a sales force that goes in and you got to make 3 calls to get a draft line and they do 1 keg every 2 weeks. That might not be profitable, but we consider that, while not profitable, long-term brand building.

Okay. Great. So also in the vein of doing things differently and allocating more resource to on-premise. It's been about 5 months, I think, since Michael took over as CEO. So can you talk a bit more about the types of conversations you've been having, fresh pair of eyes on the business and some of the things he's doing or beginning to talk about to refine the strategy?

Yes. I mean, I will be hesitant to put words in Michael's mouth since he's been very careful as he's come in to make sure that you didn't mess anything up but now really starting to mobilize. Our conversations have been around the opportunities and the strengths, I think he recognizes what have always been our core strengths. One is just product quality. We've been focused since the day I started on having better-tasting products, and we've got a lot of people now that, that's all they do is make sure that if we put a product out, it is better than a leading competitor. So we continue to bring that to the market. And second is the sales force. I mean it's always rated the best sales force in the beer business. It's also the largest. So those strengths continue. I would think maybe -- and again, I'm hesitant, but I think he would say we can execute better, we can have accountability better, we can fix a lot of the plumbing, if you will, the processes. Again, Michael has had terrific experience ranging from starting his career in basically doing nitty-gritty businesses with small margins that were on the edge of bankruptcy and saving them, he's experienced turning around an established brand at Converse, which was a dying brand and became trendy and now it's a big deal for Nike. So -- and then he's had experience with Nike [ in Beaverton ] and big company and dealing with processes and making them work like a small company should work. So we're very much in sync about those things being the opportunities. Did I get there? Okay. Thank you.

Let the record show there was a thumbs up from the audience. Great. So the phrase fewer things better came up more than once during second quarter earnings. But at the same time, I think that can feel like a bit at odds with the sort of fickle nature of this beyond beer, the fourth category in the U.S. where there's just high brand and flavor churn. So how would you say your innovation process has changed or needs to change to be able to do both of these things, right, keep up with this kind of fickle category, but fewer things better?

I'd start with sort of the nature of our business and our interface with the market, if you will. We're -- kind of our sweet spot in many cases is smaller niches, smaller products, and especially smaller products that can develop into what for us is sizable and meaningful, though for our competitors, whether it's a Diageo or a Heineken or Molson Coors or an ABI or Constellation, they may not be interested in something that's a couple million case brand in its first year, might be 1 million cases in its second year, 1.5 million and so forth. So that's always been an opportunity for us. Twisted Tea is now 25 years in. And that was -- so that took a lot of patience. It failed at the beginning. It failed twice. It was BoDean's. That failed and turned out there was a band called the BoDean's and they sued us, and it became Twisted Tea and that failed, but we had a few markets that we nurtured and now it's a top 10 brand in all of beer, but that's 25 years of patient work, trial and error. Hard cider was the same thing. That was, ooh, I think we introduced it in '98 under the name HardCore. That failed and then maybe 14 years later, it's -- cider started to take off. And now it's a category and we have a little under half of it. So those are kind of the nature of our opportunities. So we have to be careful about not weeding stuff out too soon and be willing to be patient. So one of the things we've done is introduce products in a small number of test markets, 2, 3, 4, 5, and see if they can scale and do more of those, but kill them if they don't -- if we don't feel that they're promising. But our experience has been a lot -- except for Truly, all of our innovation started slowly and built over a time frame measured in a decade or more. And that's -- big companies generally don't have that level of commitment and patience to do that. So that's kind of our niche. To the extent our approach has changed, it's more things smaller, but a pipeline, a continual pipeline. I mean, our objective would be 4 products a year, every year, but kill them if they're not getting traction. And I think that's paying off. I think we're very happy with what's going on with Sun Cruiser. We've always wondered what does the high end of the hard tea market look like? Well, maybe that's what it is. I mean, Twisted Tea is now a big number. Hard tea is a big market, something that's 20% of that's meaningful to us, and that may be the role of Sun Cruiser and we're very happy with the results we're seeing. It's only -- we launched it in a handful of markets. It did really, really well. So now we're rolling it out nationally. We're starting to -- Surfside was there first. They've done a great job with their product, especially in New Jersey, Philadelphia and New York. But in the rest of the country, we've just overtaken Surfside. So in the rest, you strip out that core market where they've been for years, and Sun Cruiser is not only growing faster, but in volume is now the leader. So we feel -- again, that's not going to be 20 million cases. We all got spoiled by the success of Truly. That had never happened before. The hard seltzer category took off faster than anything in my lifetime in the beer business. And we sort of -- it grew like this, and as Michael said, our strategy was growth at all costs in that because we felt very strongly it's going to be a 2-player market, and we want to be one of those 2. So we just ignored a lot of other things, put capacity and so forth, we're unwinding all of that. I see the future of our innovation is not big things that deliver huge numbers right away, but more what we've seen historically of patient brand building.

Where do you think those consumers are going, the people that were drinking all that hard seltzer? Where have they migrated to? And how sticky are they as consumers within a brand or a category?

Category. It grew so fast that it drew in a lot of what I would characterize as trier-rejectors. Basically, if you drank alcohol, you had to try it. I mean it was such a thing for a summer or 2, and we saw it in our data, people were coming in from everywhere. I mean, even things like a scotch drinker, who it's 9 at night, when they in solitary moment or something pour themselves a scotch, they would try a hard seltzer instead. But then they eventually migrated back. So for the most part, it was people who migrated back to what they'd been drinking before. If you were to rank them, it was probably like beer drinkers was number one. It was mostly people tried it. They might have liked it the first time, and then they tried it again. And then -- but at some point, they said, well, I like this, but it's not going to replace my scotch or my light beer or even my craft beer.

Yes. Is it still a point of entry, if you will, for new LDA consumers? Are they still kind of entering the market with hard seltzer? Or is it more in the teas and various flavored options?

I think the latter. I mean, what I'm seeing is there's just so many choices. And one characteristic of the fourth category that you don't find in traditional beer, wine or spirits is that those beverages are inherently appealing and enjoyable to consumers. They're not acquired taste. Beer, wine and liquor all are acquired tastes, very worth acquiring, but beer is bitter because we use hops and it has that tongue sting of carbonation that is not inherently pleasant. Wine is acidic and tannic. Those are not characteristics that we are wired as humans to enjoy. And liquor has -- it has that ferocious ethanol attack on your pallet. Again, we're not wired to like ethanol, it's a poison in its pure form. So all of these things developed historically with flavor characteristics that are not inherently enjoyable, but actually we'll preserve the liquids, they're bacteria static. They make it stable, but they're not inherently pleasant. We are wired to like things that are sweet and fruity. That's what our biology wants. And in the fourth category as a producer there, you have this taste plasticity. You can make something taste like what you want it to taste like. You can make something taste like, I don't know, gin and grapefruit juice, if you want. I mean it has this enormous range that you can bring to the consumer, and that gives you -- and young drinkers, so it's an easier entry point for young drinkers. It's not an acquired taste to drink hard seltzer, fruity, there's a tiny bit of sweetness and fruity. They're just inherently likable, much less things like BuzzBallz and BeatBox, they're -- the alcohol is hidden. They are the ultimate sweet and fruity thing.

Yes. Okay. So stabilizing Truly remains a work in progress. And so I just thought maybe a status report kind of where things stand today and what gives you confidence you can get the brand back to growth over time?

Yes. I mean, honestly, it's been harder than we thought. We would have thought we would be closer to flat now than we are. There are some green shoots, if you will, and we're migrating out of the fuller flavored end of the spectrum. It turns out that we were wrong that we could seltzerize a lot of things. We thought maybe it could be a seltzer version of hard tea, a punch of Margarita. Those things were extraordinarily successful at first, but they didn't have the sticking power. It seems like the core for hard seltzer is familiar fruit-based flavors, maybe a range within those. And those products in our portfolio are doing much better. We discontinued a couple of flavors this year. So we're cycling against numbers that are significant last year and 0 this year. We introduced Truly Unruly, which is an 8% ABV that is alongside, I think, Surge for White Claw and that's doing well. So we have some pockets of success, but I'm being totally honest, it's been harder than I thought.

Okay. And I just want to go back for a moment on tea, because there is an uptick in competition broadly in hard tea. So do you think that the rest of the segment seeing the same kind of boom/bust that we saw with seltzer, or less so because the size of the category is so different?

Much less so. I mean, we're not bringing in tons of trier-rejectors. This is not the hot new thing. This is something that has grown literally for 25 years. So I mean, hard seltzer took off after 25 weeks. So I'm not that worried about a boom/bust, but it has attracted an enormous number of new entries. I mean we're in a business where it's very competitive. People are very aggressive throwing products out there because everybody's got a product development group and they've all got a route to market through our distributors, thank goodness for the 3-tier system, where there's independent distributors out there that aren't blocking stuff. And we've seen, I think, this year, over 100 new hard teas of all kinds of shape, sizes and names and so forth. And so as a result, we used to have close to 90% of the shelf space, it was basically us and Arnold Palmer and then a few kind of nonentities, Hoop Tea or Intensitea or a whole bunch of -- Mike's had a hard tea, but we had well over 90% of the shelf space and 95% of the volume. And we now have 85% of the volume, but only like 60-ish percent of the shelf space. So what I'm hoping will happen -- and I think retailers have gotten much quicker at cleaning out the clutter and crap in the category. So I think we will get a share of shelf space back. And with Twisted Tea, we've slightly expanded the portfolio to kind of fill all the niches. So we've added over the last few years, a Twisted Tea Light, because we felt like that was a competitive entry point, and we wanted to shut that off. And then Twisted Tea Extreme, which we have in some markets, and we'll be taking national next year at the high end because there have been a few high-end entries. So we feel like the retailers who probably look at all these new entrants, and a lot of them are from good companies, good brands, things like Monster Nasty Beast. But they're not cycling their rollout numbers. And I mean hard tea is not a huge category. Do you really need a product that has 1% of a relatively small category, 2%? Nothing that's come in is over 5%.

Okay. Okay. Great. Let's just move on to margins. Sorry, complete change -- like, eeer, change of course. But I think people were struck by the gross margin expansion achieved in the second quarter despite the volume decline. So can you talk a little bit more about the drivers there and the kind of key puts and takes for margins from here?

Yes. In the Truly explosion, we were all about just getting product out the door regardless of the cost. We felt very strongly, this is ultimately going to come down to 2 players' share, we want to grab share. So we ignored a lot of costs. So we're going back and focusing on that. Michael and Diego, our CFO, have done a really good job on that. The gross margin improvement is basically kind of in 3 buckets. First is procurement. We paid a lot of money for cans and things like that when we needed them and they were in short supply and other things. The second is brewery operating cost improvement, operating efficiencies on our lines. We put in a huge amount of new capital. Some of it fairly complicated, like automating doing variety packs. I mean you buy a variety pack and you think, "Oh, okay. Well, it's a 12 pack, it's got 4 things in it". Well, from the producer's point of view, that's a b*tch. It's really hard to automate that kind of operation. At one point, I mean, I think we had 250 people in our Pennsylvania brewery just making variety packs. So we automated that with this big piece of equipment. There's only like 5 of them in the world. We're getting that going, but it took those 250 people down to 0. So those kinds of things within our breweries are happening, and we have a different manufacturing strategy than the rest of -- I mean we're in between the little guys, who are inefficient, but flexible, because a lot of it is manual, and then the big guys who are super efficient, but you need to put Bud Light on that can line and run it for all year doing Bud Light 12 packs and that sucker will do 30-plus million cases of that. We're in the middle. And essentially, our strategy is making a complex product mix without losing scale economics. And that's -- I won't go into it, but that was essentially Toyota's -- that's the Toyota production system. So we're focused on that. And then the third area is just inefficiencies within the system. We, for example, with the product mix and the complexity, we basically ship everything from our brewery to a warehouse, the DHL runs, and then they ship it out, they mix it and so forth. Our warehouses weren't big enough. Long term, we can get rid of that. We've got to make our production run shorter. So those kind of inefficiencies in the system, we are slowly taking out. And we think there's still quite a bit of running room. My personal objective is to get our gross margins over 50% where they were before the product complexity exploded 6 or 8 years ago.

Okay. Great. I just wanted to end today's conversation by just circling back to this notion of refining the strategy and broadly kind of refreshing the organization. So you have a new CEO, you have 2 new directors recently appointed to the Board and one was a net new seat added. Are there any more board changes expected in the near term? And do you feel like you've got the leadership, the organization structure, the capabilities in place so you can deliver on your goals and it's really just about kind of execution and the macro backdrop from here?

The latter is true. I mean on the Board, with Michael's elevation to the CEO, we had a Board seat open, and we're probably going to have one open up in the next year or 2. So we thought let's get a second person in so we can have a seamless movement there. We were very fortunate to have 2 totally different people. I'm a big believer in -- I mean, I need the Board for good advice and points of view, and I don't want a bunch of sort of people who all think alike. And so we ended up with a super operating guy, who runs Domino's and has done a great job there. And then a super sort of creative talent who actually, I think, got voted Nerd of the Year, named Biz Stone and Biz is one of 2 founders of Twitter and one of the most creative minds in Silicon Valley. So he is fascinated by Boston Beer and our category. So we got both of them to join the Board, but that's just a normal kind of refreshment of it. And we have our senior leadership team, executive leadership team is, in my opinion, the best we've ever had. The majority -- I mean, almost all of them are new within the last 5 years. There's a couple of internal promotions, but we've had a bunch of the people who started with me many years ago and retired. And so it's flat-out the best leadership team we've ever had.

Well, that's great. We have to end there. So Jim, thanks so much for being here. This is delicious.

I'll give you a taste test. You can have the nonalcoholic and the alcoholic and see which you prefer.

Before this gets crazy, will you please join me in thanking Jim and Boston Beer.