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

Okay.

So when, I'm just curious to talk a little bit about the interaction with Twisted Tea, whether there's been a little bit of, you know, some interaction between the two. How do you think about optimizing the IT portfolio as a whole rather than, you know, looking at the brands individually?

Well, we kind of look at them individually. I'm a big believer in, I guess it was Steve's job, Jobs' aphorism about, well, if we don't cannibalize ourselves, somebody else will. So, uh, go full blast on Twisted Tea. Don't worry about hurting Sun Cruiser and vice versa. Just maximize meeting consumer needs through the portfolio and recognize there's going to be interaction and don't hold back to try to protect 1 brand over another.

Great. So, but in that vein, Twisted Tea has faced some headwinds the last couple of years. Your recent commentary has talked a bit about, you know, executional fixes, whether it's like pricing in certain markets, price pack architecture, supporting faster-growing line extensions. Do you do you think that the path back to healthier trends for Twisted Tea is really a matter of execution? Or do you think that like consumer preferences have changed and you want to, you know, you need to rethink some of the positioning of the brand?

Both are true. Um, and I think what has happened is that it's not that Sun Cruiser stole a lot of Twisted Tea drinkers. We had reasonably good data on that, and it was like 20%. However, something subtler happened. T's sort of de-positioned Twisted Tea. Uh, and by that I mean, um, a lot of people thought Twisted Tea was from vodka, for example. Even more people didn't care. It tasted good. And the vodka teas are 100 calories. So they raise questions about, well, what's in the tea? Twisted Tea. And the exact same thing happened to Mike's Hard Lemonade. Their exact numbers track Twisted Tea. People said, huh, oh, it's malt and malt beverage. And that historically has meant like malt liquor and low end stuff. So that was a deep positioning, and then the 100 calories, people said, well, what's in Twisted Tea? And the Twisted Tea Light's 110, but Twisted Tea and original is 190, and it hit Mike similarly. I think they're like 230, so it was that deep positioning more than a direct migration of 1 drinker who was Twisted Tea replacing it with Sun Cruiser.

Okay.

And so from here then, I know a couple things. 1 is you started a Hispanic retail program oriented the United States' first ever branded retail program this summer. So I'm just curious about how that's gone. Maybe it's a little too early to say, but any read on that and just execution things specifically that you may be doing on Twisted. You mentioned Light, but things that you're doing to kind of try to get your brand back. Yep. Well, the first question, from 1.

And what I can see, the Hispanic consumers come back a little bit. They're no longer sending their kid out to buy their groceries, because they're worried that ICE is going to scoop them up. So there's a little bit less of that concern. But they're also hit probably more badly than the rest of the population with the increase in fuel and basic staples. Then the second question was about execution of things. And, you know, I think everybody in this conference is always worried about executional things. You can always get better and they should be because, you know, and particularly for us, we're in a route to market business. So how we show up at retail, how we get the distributors to, you know, merchandise our product, all those kinds of things really matter. I And 1 of our issues is as this past summer, through this whole year as vodka teas took off, they became and other RTDs they became the hot category, so we lost display space. So we're always fighting for display space, the pricing kind of, the shelf price in some markets got away from us. I mean, basically we were growing 20%, so we took price. And then our distributors took even more price and the retailers. So we got to the point where, and Twisted Tea historically has been a more, you know, middle America, type of brand, and it's got to the point where it was priced above Stella and Modelo and some of the bigger imports, and that's not really where it should be positioned. So, you know, a $19.99 12-pack is the right price point. And we were at even $22.99 in some places. The margins were quite attractive and we tried to jawbone people down. We were successful in some markets and we actually saw the volume respond. And then we did some, we're just starting to dip our toe into revenue growth management. And that led us to say, well, we need a $9.99 price point, but the 6-packs aren't going to make that. So we had a 4-pack of 16 ounce, and that got us into several thousand dollar price point type of stores because it hit a $9.99 price point. So things like that.

Okay, great. Just while we're on the topic of kind of closer in trends and what's been going on with these brands. Any thoughts on how the balance of the summer trended versus your expectations? Obviously, we had an amazing few weeks for beer and vodka. Yes. But do you think the World Cup might have, I'm an optimist at heart, might have helped remind people that it's, like, fun to socialize and meet people? Meet up with friends outside the home and enjoy Fourth Category or the beer category. I mean, it obviously reminded us in Boston. Yes. Um.

That was a true story. The Tartan Army literally drank us out of Boston Lager at our tap room twice in 1 night. We had to send a bartender down to the brewery to load up his station wagon with more kegs. Twice. We were pouring a Boston Lager every 12 seconds for a couple of hours there. But to your point, I don't know if it carried over. I have to believe it did in some ways. But you're and hopefully that expanded beyond the original 11 host cities. So at the headline, fun story level, it was very cool. I'm not, it takes a lot to change fundamental habits that, but I believe we're slowly rolling back the COVID slumber, and people are realizing, you know, it's part of a happy lifestyle to have friends and to socialize with them. And alcohol has been a part of that for at least 10,000 years. But it's going to take, unfortunately, more than just the World Cup. The summer didn't matter, not improve, at least from our point of view. And I think that's, there's, nobody really knows what the real numbers are, but I think the trend has not been good.

So investors naturally spend most of their time talking about Sun Cruiser, Twisted Tea, and Truly. I was just curious what brand or business within the portfolio do you think is the most underappreciated today?

Oh, um, well, Angry Orchard is sort of a sleeper. But uh, it's started growing again over a year ago. So, and it's well over 40% of the hard cider category. I mean, it's kind of Angry Orchard. There is no number 2, but. So that's driving category growth for Angry Orchard. It's exciting to me because, again, it shows that we can take a a 30-year-old category. We've been making hard ciders since I think '96 or something like that, and bring growth back to it. And to me, a priority is to bring growth back to Sam Adams. I mean, craft categories struggled for a bunch of reasons, it's mature. Um, there's 10,000 craft brewers. Everything got centered around IPA, and so there's not really other growth vehicles for it. But I'm encouraged by some early green shoots with Sam Adams, we will see. We have very effective advertising. Our Holy Grail methodology is indicating that we're getting a 2-to-1 ROI on advertising expenditures, so we're going to be expanding that. We actually, and then we validated that in some matched market testing, so I'm feeling much, much better about Sam Adams, so it hasn't shown up in the trends.

Let's shift gears and talk about the margin transformation, which has been a significant part of the story. Spoken about procurement savings, brewery efficiencies, network optimization, and now revenue management is another element. Those earlier productivity areas mature, what do you see as the next wave of kind of self-help coming? Where does that come from over the next 3 to 5 years?

Well, I think all of them have some ways to go. There is still a lot of, you know, what the Japanese would call Muda, um, waste in our systems. And I began my career as a manufacturing consultant. That was what I did for 7 years. I knew nothing about marketing, CPG and so forth. Uh, but I knew a lot about foundries and things like that. Uh, and it is not unrealistic in today's world where Kaizen and continuous improvements and Six Sigma, all those, Lean Manufacturing, all those, they're basically variations of the Toyota Production System, you sort of expect 3% real dollars to come out of your supply chain. So that in and of itself, I think, can continue to drive our margins up. I mean, I know there are some already significant savings for next year that are, you know, in our contracts, in pricing, like aluminum cans. We have had these extra warehouses outside of the breweries. At 1 point we're spending $50 million on them. That is complete Muda and nothing good happens to beer when it's sitting in an unnecessary warehouse. We will be fully out of those. We're out of them almost fully in Cincinnati and working on it in Pennsylvania. So, and there's other things like, you know, can we use a different, I mean, there's a lot of million or $2 million items for the... will continue with the momentum next year. Beyond that, it may settle. We've been taking more than 3% out of our our cost structure every year for a few years. So, and that's where I want to end up is at least 3% a year out of the cost structure.

So 1 visible outcome of these productivity efforts has been a significant increase in the percentage of volume you're producing internally. As you continue optimizing the network, how do you think about balancing manufacturing efficiency against the flexibility that third-party production can give you in a business particularly where consumer trends can change so quickly?

We've always had backup capacity. I think of the third-party production, you know, you have to pay for it. You have shortfall fees or you buy equipment. There's lots of ways. We and we end up paying for it, but it's not free. Some of it justifies itself because it's in, I mean, we use a city brewery outside of, well, it's in Los Angeles. We don't have any breweries close to Los Angeles. The closest one's Cincinnati. Otherwise it's Pennsylvania. Uh, so that justifies itself. Then there are capabilities that we don't have. I mean, we just set up 2 manufacturing sites to make a new, uh, our newest innovation product, which is called Lytt, L-Y-T-T. It's a little out there. It's a light bulb, like a 60 watt. Think of a little light bulb, and that little light bulb has 200 milliliters of 15% alcohol liquid. The concept is pre-gaming, which, you know, our kids have done, but now you have adults doing it. Because before you go out and you're in a bar where you're buying $18 cocktails, you get a head start. Or if you're going into a venue where, I forget what a Sam Adams in Fenway is, maybe it's over $20. You might sneak in a Lytt. It's the equivalent of 2 light beers. And it's also, it tastes delicious. It's a really good mixer. And consumers are taking, we put out capabilities and then they figured how to use them. So consumers are just mixing it with, uh, technology La Croix or Polar to make what tastes like a mixed drink. It's a lot of fruit base in most of them, though there's even, we're working on a a milk base like an espresso martini. It's very pliable in terms of the flavor profile that we can create in those. I don't know how big it'll be, but we have now, we're set up to accomplish to accommodate a reasonably significant demand with 2 facilities, and it's like $15 million worth of equipment, but we didn't want to put them in our brewery because it's just so different. Nobody's got conveyors to convey light bulbs. And it's different. We're set up to bring in cans and fill them. This stuff you bring in little plugs and injection mold them into the container itself. So when there's weird things like that that we don't want to mess up otherwise quite efficient breweries with, we will do that with a.

Co-packer. Okay, great. Um, we only have a few minutes left, so just before we conclude today, and hopefully everyone here will join us outside for some delicious Boston Beer beverages, we'd just love to get your perspective on what you think investors are most likely underestimating today about the business.

I would say our ongoing capabilities that set us apart and make us kind of different. I mean, it's a lot of different things. I mean, we still have an entrepreneurial culture after 40 years. I'm still there, you know, driving things and working with an incredibly talented team. We have a clearly very strong, if not best in class, innovation capabilities. We are becoming the low cost producer of our very complex product mix. We have a product mix that would cripple, you know, 1 of the big breweries because they're set up for long runs and economies of scale and everything. We're set up to be flexible, adaptable, but not lose efficiency. We've got what is almost universally acknowledged as the best sales force in the business. That gives us a route to market, especially through on-premise and through independents that nobody else has. We have a great distributor network. There's been hand-picked and really great relations with them. You know, everybody, it's I don't know if anybody in this rumors heard of the Tamarand survey, but beer distributors rate their suppliers every year. I think the They've done it for 18 years and we've been rated as the number 1 supplier. I believe 14 of those 18 years. Um, and this is a route to market. Business distributors are super important. We have a very healthy balance sheet. You know, we've never borrowed money. We generate cash, so we're not distracted by by the financial things that characterize most companies. We're not good at it, and maybe we should have been more leveraged, but we don't have distractions like that. We're just focused on growth.

Well, thank you so much for being here again this year. Um, everyone, please join me in thanking Jim and the rest of the Boston Beer team for being with us. This live transcript is auto-generated without human intervention or review. This live transcript is auto-generated without human intervention or review.