The Boston Beer Company, Inc. ($SAM)

Good afternoon, everyone. So thanks for joining us today. It's a pleasure to introduce the last speaker of our conference this year, Jim Cook, who is the Co-Founder and Chairman of the Boston Beer Company. It's been another an exciting and challenging year for Boston Beer. The company drives growth and innovation in [ Beyond Beer ], one of the fastest-growing alcohol segments, led by its fast-growing Sun Cruiser brand while navigating a return to long-term sustainable growth by stabilizing Twisted Tea and Truly. Now not forgetting its roots Boston Beer also sees areas of opportunity to drive growth beyond its core Sam Adams, Angry Orchard and Dogfish Head brands, which remain an important part of Sam's portfolio. So with that, I'm very pleased to welcome Jim back to our event. So thank you, Jim.

Thank you for having me.

Trying to think how many years it's been for you. Thank you. I should have known it.

I believe 20.

I think maybe more, but yes.

Yes. You guys -- Goldman took us public in 1996.

And we've been doing this conference long before me, so thank you.

We've showed up.

Yes, I appreciate it. And probably we got to have a beer.

All right. All right. So I wanted to kick things off with, I guess, a big picture on the landscape in beer. You just had your earnings a couple of weeks ago. And I would say back -- there were some encouraging signs about the category during Q1. And then I kind of want to frame that in the context of your portfolio. But could you first talk to some of the early signs of improvement we've been seeing with the category this year through Q1, but to be honest, things seem to have not been going so well in April, maybe a little bit in May. Any idea as to what's going on there and then kind of frame that within your portfolio?

Okay. So when we look at the category, we have -- and the growth of it, we define it a little differently because for us, we put RTDs in with beer because they actually -- while they're spirits-based, they operate in the real world through the channels, as beer does. They're in the beer cooler, they're about the ABV of beer. They largely in beer occasions. They go through beer wholesalers. So -- and you can make -- they tend to be made in a brewery, not in a distillery. So to us, they operate like beer, we put that in with the overall beer category, which means for us, we view our sort of addressable market as a couple of points better than the overall beer category. And for us, the trends have improved a little bit. We were down 6% in the first quarter of last year and down 4% year-to-date. But the whole category got a whole lot better. Last year, we actually gained share relative to beer. This year, we're losing share. So we were -- I mean, we put a good face on, but that did not meet our expectations.

What do you think some of the drivers of that were, Jim? And then from a strategic perspective, are there changes that you're making?

Not fundamentally. I mean, we've always recognized that growth is not cheap, and you view ourselves as a growth company. And we are willing to invest for the long term. What -- and now we're seeing the growth not happening in the traditional beer market. It's happening in what people call -- it has a bunch of names. It's beyond beer. I like to think of it, I call it a fourth category because it's not just beyond beer, it's beyond liquor, it's beyond wine. And for us, that's attractive because you can innovate in that environment. It creates opportunities that might -- I mean to me, traditional beer -- and I think I said this at a conference 10 years ago when people thought I was a trader, but I said traditional beer is not going to grow again in our lifetime. And it hasn't.

I know. Right?

But there are these other opportunities. And that's what we've been focusing on. I started Sam Adams, we're the Boston Beer Company. Beer is our middle name. But today, beer is 15% of our volume. And we've -- over all these years, gotten to where we are by finding opportunities. All of them, they have some characteristics in common. One is they taste good, and we spend a lot of time on the flavor developments. And the second is they're premium products and have higher margins. So that's our niche is developing against those.

To that point, on premiumization, I do feel like that's been one of the areas. And broader, whether it's beer, beyond beer, the premiumization opportunities, which I think is still happening, but maybe not to the same degree as what we saw.

Would you almost -- Within beer itself. You're right. All the growth has been in craft and imports for decades. But if you factor in the RTD opportunities, if you do well there, as we saw with our friends at Anheuser Busch, it has a certain amount of magic to it. And when you're talking about premiumization, you've probably seen this, but -- here is a great example of it. This is [ lit ]. It's, obviously, not anything you've seen before, comes in a lightbulb. It's 15% alcohol. It's about 7 ounces here. And the -- so -- and they sell for $3.99. So it's -- we will see.

I just announced that, yes. For those listening, it's 7-ounce shaped like a lightbulb.

Very high flavor intensity.

Glows in the dark, I believe, right? The packaging?

And it's resealable. There's buzz ball.

It is.

But you open it, and you can't reseal it. You can reseal, you can recycle them, and it's very flavor intensive. So we'll see, but I think it's -- so it sells for -- on a case equivalent basis, 2.5x, even something like Truly or hard seltzer. So yes, premiumization is still out there and possible, and consumers will pay through this.

And just in time for the summer. So that's rolling out?

These are for your children.

Yes. Thank you.

It's not for you, Bonnie.

No, no, no. All right. Well, or me. But thank you. That's exciting. So we'll see how that does.

So you have your kids like it.

Yes, I will. And I'll report back. So in terms of the beer category, more recently, you are seeing a slowdown. How would -- or how are you seeing within beyond beer? Are you also -- at least I'm thinking of the scanner data. We are seeing just kind of a broad slowdown, whether it's April and May. Any thoughts as to what's driving that, other than maybe gas prices, the pressure on the consumer?

I don't know. I guess I'm the wrong person to ask. These are all like noise. I'm really worried about how is the year going to end, but it's hard to read these tea leaves. I like to try to stay focused on the bigger picture.

What you can control. Okay. Well, okay. Let's talk about heading into the summer. We've got Memorial Day around the corner. We've got a couple of events, whether it's World Cup and then our country's 250th anniversary. I think about that as more drinking occasions. What is it, I don't know, specifically that you're doing to kind of leverage these upcoming events? And how are you thinking about that?

Yes. I guess we look at it. I don't think there's going to be a burst of consumption. It would be a big deal if it went up 1%. We look at it differently. What we're looking at is they changed the retailer's strategies and approaches. So for us, we think the World Cup will be important for Truly because we're -- but it will happen because we're sponsoring them in the soccer team. So -- and that will give the retailers a reason to put Truly on the floor. That will drive Truly volume. Not the World Cup per se, but the fact that given our sponsorship, our teams, the POS, the retailers now have a reason to build a big stack of Truly instead of White Claw. So that, and from our consumer research, White Claw is more top of mind. Truly sells. We do a BOGO in [ Publix ], it's enormous. But we're not as top of mind as we would like to be. So we'll use the World Cup really as a way to get displays. The same thing with Sam Adams. What beer are you going to put on the floor for America 250? It's not going to be Corona. So we look at it from the retailers' lens and backwards.

Speaking of Truly, because I know that's a big initiative and focus for you, and it has been to stabilize the brand. To be honest, are we -- is it in decline? Is it 3 or 4 years now, I believe, of the decline?

Yes, almost 4.

And what, I don't know, structural changes are you may be making to this brand and to have it better compete again, some of the [ severe ] based RTDs? And then in conjunction with that, I definitely want to get into the topic of increased advertising spend and investments, the cost of growth. At what point do you make the decision potentially to kind of pull back maybe on spend levels behind Truly?

Sure. Truly continues to be important in our portfolio. Fortunately, it's a big enough brand. It's important to our wholesalers and our retailers. So they would like to see it stabilize. And it's hard for us to grow as a company. Truly is declining mid-teens. So it's -- I don't have -- but I'll be honest, I don't have an answer. We're trying to sort out -- is there some -- there's nothing fundamentally wrong with the brand, but White Claw has become kind of the default brand in that category. So we're trying to figure out do we differentiate ourselves in some way. Obviously, the World Cup sponsorship will help, but that doesn't fix any problems. That just gives us a little more time. So we're trying to understand that, and we -- honestly, we've failed to do so in the last 4 years.

Well, no. And we've talked about this for a few -- you've changed the flavor profile. You've leaned in, but that hasn't necessarily been enough. So you haven't discovered maybe what it is that's not resonating and keep working at it, I guess. All right. So then is there a decision that you're making in terms of the dollars spent behind Truly? Because I know you're still stepping up incremental advertising. Is there going to be less money focused towards Truly and more on behind Sun Cruiser, maybe Lit?

Well we look at our advertising spend differently than basically -- I mean, we're advertising against the creative content that we're putting on that media. So we don't say, well, Truly is going to get this much money because it's this percent of our volume and we have these goals. We basically have -- I mean, today, you can get pretty good data about is the advertising actually working. In all the direct-to-consumer stuff, it's very, very good. And businesses, consumer products, less good because it goes through these other channels. But just in the last year or 2, a few problems have been solved by -- that allow you to get all the way to the consumer and see if an exposure to the ad changed their purchase behavior because there's now different players here integrating loyalty card data with the IP address. And so you know what social and digital went into that home. You know their IP address and you've got loyalty card data. And then AI allows you to set up a control group not exposed to the ads. And you can actually get similar to DT to DTC data on, all right, how much of this ad cost to serve it to these 10,000 IP addresses? And how much did purchase behavior change? So that gives us a much better -- and we've been working on this for 12 years. So we've -- basically, we advertise against creative that works on media that works, and we are somewhat brand-agnostic.

Okay. So you feel like with these capabilities, maybe you're getting smarter, more efficient. And then ultimately, as you step up advertising spend, I think the goal is to drive accelerated top line growth. But how do you eventually kind of balance that with being able to deliver on the bottom line, the cost of growth?

Well, we're starting to get better ROI. I mean, all right, we spent this -- $1 million on social digital on Truly. What purchase change did we get? And I mean, frankly, the answer has been so far, not much. And we've taken over the last 3 years, a lot of the advertising off of Truly and put it against with [ Satiser ] where it worked and Sun Cruiser where it worked.

Okay. I want to go to your guidance. You made the decision recently during your Q1 call to narrow your volume range to down low single digits to mid-single digits. At prior was flat to down mid-single digits. So just trying to understand if that reflects in part you sort of being prudent or the environment that we're seeing today with the broader consumer and maybe the broader category? And then what would need to happen to put you at the low end of that range? And then how realistic would it -- better? Yes. Yes.

Yes. I'll answer your first question. It was some of prudence, but it was -- to be honest, we were disappointed by where we were. So in that sense, it was prudent to sort of tweak it a little bit. What would have to happen would be -- I mean there's a number of different pathways. One would be that being more visible with Truly over the summer begins to mitigate the declines. Like maybe it would have to -- I mean cutting that half would, by itself, get us closer. That's one possibility. We're -- Sun Cruiser is continuing to grow triple digits. It's the fastest growing RTD right now. And I think right now, it's the #4 RTD in 2 years from nothing. So for me, that's been a -- more than just the volume, it's been an affirmation of our innovation capabilities to continue to develop meaningful innovation. We're sort of counting on that growth diminishing, but coming in fairly high. So we -- and that's all happening. I guess the other thing would be we're working and -- which we're working on Twisted Tea and trying to reduce the declines there. And Twisted Tea, it's a big number. It's our biggest brand by far. So we're growing a lot against it. We've got new packages, both at the 24 unit value pack and then a 4-time 16 unit that hits a $9.99 price point for the Dollar Store for -- so for both of those things, we actually increased our distribution points and the resets because of the success of Twisted Tea Extreme. So we got new points of distribution for that and really didn't lose much because Truly is still a pretty big brand. We're reinforcing some of our sort of more blue-collar base with NASCAR, with Barstool Sports, with [ Stagecoach ] and with Realtree Camo, so refreshing that base. So there's a bunch of things. And adjusting our price point. Some markets, it's priced at Stella pricing, which kind of was growing 25% a year. Everybody, including the distributors and the retailers push their margins up. So we're couponing some of that back. So there's a bunch of tactical things with Twisted Tea. And at the end of the day, our share of hard tea, well, Twisted Tea and Sun Cruiser is actually up a little at better margins and better price -- pricing. So again, Twisted Tea, the decline is mitigating significantly. That would do it. And then we haven't really factored in the innovations. We have Sinless, which is a vodka cocktail. And then Lit was just announced yesterday. So we haven't factored those in either one of those.

That's not even -- that could be upside on.

Yes.

So when I think about the high end of your guidance, which is down, right, low single digits?

Right.

So your point is if Truly declines or, I don't know, cut in half and then Twisted declines or mitigated or stabilizing, then you could hit that? In addition to...

Yes. I mean, if all 3 of those hit, we could be positive.

Okay. Have you in the context of all this -- okay, I guess if I go back to -- maybe I should go back to like Twisted Tea because like you mentioned that it's interesting because now it is your largest brand. It wasn't so long ago that Truly was. And -- but together, they are still very big. And then you touched on this, and I definitely want to get into Sun Cruiser and the amazing success you've had there. Is that, I assume, also contributing to some of the pressure you've seen on Twisted, meaning it's cannibalizing to some extent?

Yes. The answer is yes. It's cannibalizing it in a funny way. It's harder to see in the data because when you think you're cannibalizing your media line, well, somebody's drinking Twisted Tea, and now they're drinking Sun Cruiser. That's only like 20% of the decline at Twisted Tea. But it's been -- it's more subtle than that, I think. What the advent of vodka tea did is allow people to question, well, what's truly made out of. And then that's like, "Oh, it's malt." People don't know what malt is. And the only thing they know is malt liquor. And it's -- so this is malt liquor with tea, oh. So it, in a way, depositioned Twisted Tea as having an inferior ingredient. Yes, that would be my theory of what's happening.

Yes. Yes, that's interesting. That could very well be without the understanding from the consumer. Yes. In terms of [ Tricity ] innovations, you touched on both Extreme and Light. How have they been contributing right now? And then do you think to some extent, those can create a halo effect just for, I don't know, the Twisted Tea family based on potential success of those innovations?

Yes. The answer is yes. But probably only at the retailer in the wholesaling level, where it's important. I'm not -- I don't see it [ failing ] for the consumer. But for the retailer, it's like, oh, all right, this is an important brand. It's generating -- I mean, Twisted Tea Extreme is triple-digit growth. So we got more shelf space this year than we had last year. For Twisted.

Right. Okay. So it's interesting as I sit here, and we've been talking about Twisted for a number of years. And within reason, you were sort of the only player, right? And you create the category, and there's success. So of course, what happens, competition.

It's not the FMB, no. Well, yes, it brought in competition. None of it's stuck. I mean, what it brought in Arizona, not a factor. It brought in Lipton. Not a factor. It brought in Monster. Not a factor. So there's 1 other 1, brought in AB with, not a factor. Oh, new [ Belgium ] was hard charged. None of those have really stuck. I wouldn't be surprised if today our percent of the FMB tea is bigger than it was 2 years ago. It's really the, A, the depositioning and b, the vodka tea. Yes. I think.

Okay. That makes sense. And so is there more innovation coming on Twisted other than what you've announced potentially?

Nothing in the pipeline. But it will probably happen, I don't know what it will be.

And then you mentioned this a little bit, the spring or shelf reset, you've got more space for Twisted. Remind us, I think you said you expect slightly -- or to slightly increase your shelf space this spring? That's happening? Yes, in total. And primarily, is that -- is it for across the board? Or is it more Twisted.

It's Sun Cruiser, Twisted Tea Extreme, a few -- a little more cider.

Is it -- but then is Truly losing, but total company are still...

Total company's up, Truly's losing.

And was that in line with your internal expectations? Or did that surprise you a little? I mean, in totality that you are working?

Pleasantly surprised that we were up.

Okay.

I think we were 1 of 3 suppliers at Walmart, that got more shelf space. And beer shelf space is under a lot of pressure.

Yes. Yes. which is, I guess, understandable given what we talked about with the category. You touched on Sinless. Can you share a little bit more about Sinless Vodka cocktails? What do you see as the opportunity for the brand?

Yes. It's -- what it offers to the consumer is you can have a vodka cocktail instead of a cosmo or something like that in a bar. You know you're only getting 100 calories. You know you're getting no carbs, no sugar. And you know how much alcohol you're getting. You don't have a bartender free pouring and you ended up with 2 shots in there and don't expect it. So those are the -- and then that's on-premise, and off-premise is portable. You can take -- it's harder to have a mixed drink on the beach. You don't bring, but there's a lot of people who want that experience. So that's what it offers. It kind of fits in with no sugar, healthier, portable, convenient. We'll see.

You touched on on-premise channel. How is that channel been trending so far this year? And do you still see that as a big opportunity for some of the brands that we've been talking about?

Yes. We're up on-prem, sort of low to mid-single digits. So -- and that's always been a strength for us, and we believe that's where brands are built. So Sun Cruiser in its most successful markets is 30%, sometimes 40% on-premise. So that's -- I mean, 5 years ago, I would've said they can't happen. Why would a bar sell a $6, $7 vodka tea instead of pouring it from their well vodka and having it cheaper and being able sort a premium? But the on-premise places have been surprisingly receptive to it, partly because labor costs are higher, harder to find good bartenders. And they make all their money on those nights when they're just cranking and they got 2 bartenders. And they can put a dozen Sun Cruisers on the server's tray in the time it takes them to do 2 mixed drinks. So they -- and consumers have been very accepting of it. And it's much more controllable. You know what your costs are going to be, how much they're putting in a drink and those things. So I've been surprised that retail -- the on-premise accounts have not been resistant.

Yes. No, that's interesting. And I definitely want to talk a little bit more about Sun Cruiser because it really has been a standout another 1 from you since the launch 2 years ago. So what is your outlook for Sun Cruiser's performance? I mean if we're sitting here, I don't know, 2, 3 years from now, is this going to be 1 of your bigger brands in your portfolio?

It's a good question. I don't -- I see -- look, the answer is probably not -- it's not going to be Twisted Tea. It's not going to be hard seltzer. I think what we're seeing is when you get into beyond beer, where there's exciting growth, it's also very fragmented. So we're -- there may never be again something like Bud Light was in its heyday where it had 20-plus percent of the market. We're going into a more of a liquor world. I mean, I don't know what's the biggest liquor brand, Fireball or [ Tedos ]. I think they have 6%, something like that. So I don't -- as we -- as things premiumize, they fragment.

So to that point, I mean some innovations. So should we expect in the next 2, 3 years, just more innovation for organic growth from you and/or would you consider M&A ever?

Probably not. That was a unique -- I mean, Sam and I have been friends for a long time. He brought a lot of cultural stuff, and he was willing to take a lower price, and we're probably willing to pay more. But that one worked for a bunch of intangibles. I guess my view of it is, when these brands come up, it's an auction. All right. So you know what your odds are in an auction, the winner is going to be the seller 80% of the time. Loser is going to be the buyer 80% of the time. So -- and we're not set up to do that. We don't have M&A capabilities, post-merger integration. What we do have is I believe, unmatched innovation capabilities. We are built for that. We've structured. We have different kind of people in place. I could go on. But -- so for us, that's the most efficient way of doing it.

Yes. That honestly makes sense. And again, we'll see, and you've had great success. Your track record, incredible. So in terms of gross margins, kind of switching gears again, you recently maintained your margin guidance of 48% to 50%. But now we talked about you do see a little bit more downside risk on volumes this year. So just trying to understand the confidence you have in achieving that gross margin range, especially in light of rising cost of oil and everything else.

So far, we're pretty confident. I mean, we have a plan and agenda. The savings are coming in as we expected. And I think we -- our supply chain people have done a great job and our finance people have done a great job of bringing those savings in, and I see them continuing for this year. But I mean, who the hell knows? They can start bombing everything in sight in the Persian Gulf, and we could lose whatever it is, 13 million barrels of oil a day, all the 10% of the 20% of natural gas and 10% of the aluminum. If all the -- I mean, all bets are off if that happened.

Yes, that's due to that -- you don't hedge, right? So there's some exactly right. We have a couple of minutes left, and I wanted to ask my final question for you. I would love to hear your thoughts about the broader consolidation trends in this challenging industry, for example, [ Brown-Forman ]. What an iconic American company, fifth generation of family involvement. It's in discussions recently may or may not still be in discussions with [ Penella ] French company. So do you think that this is just an acknowledgment that it's really difficult to go it alone when the pie is shrinking and not growing? How do you think about that for the broader alcohol industry think about it for your company?

Yes. That's kind of up there in the stratosphere with me. It's just a normal evolution when the pie is not growing and people need to EPS growth out of it. You merge, you strip out overhead. That's a hard thing to do. I guess I view, just for Boston Beer, which is what I know about, I mean, I believe we're in a unique position in the beer industry in that we are big enough to have the capabilities that we need to succeed. We're important to our distributors. We're important to retailers. And we have internal scale and capabilities against the things that matter to us. We have the largest sales force in the beer business, which gets us into -- we can execute on-premise, because retailers, I mean, because distributors don't really do that. But we've got salespeople that go into bars. And we've got a very large innovation capability. It's not just 1 or 2 people anymore. There's -- it's a fairly big effort. So we are at scale in the things that we need to be at scale. And I believe we have a different culture. And I started my career working for big companies many years ago with BCG, and they realized they're culturally handicapped in lots of ways. So I don't know that we would be better off inside of a corporate culture.

Okay. That's helpful and interesting. Well, best of luck to you. So nice seeing you, and thank you again for your time. Appreciate it.

Always a pleasure. You always have good questions.

Yes. Well, thanks. Thanks, Jim. Thanks, everyone, for joining us today.