Boston Beer Co Inc Q1 FY2021 Earnings Call

Thank you. Good afternoon, and welcome. This is Jim Koch, Founder and Chairman, and I'm pleased to kick off the 2021 first quarter earnings call for The Boston Beer Company. Joining the call from Boston Beer are Dave Burwick, our CEO; and Frank Smalla, our CFO. I'll begin my remarks this afternoon with a few introductory comments, including some highlights of our results, and then hand over to Dave, who will provide an overview of our business. Dave will then turn the call over to Frank, who will focus on the financial details of our first quarter results as well as our outlook for 2021. Immediately following Frank's comments, we'll open the line up for questions. As the world slowly reopens and the COVID pandemic winds down, our primary focus continues to be on operating our breweries and our business safely and working hard to continue to innovate and meet customer demand. Before I turn to our key first quarter operational achievements, I want to note that working with the Greg Hill Foundation, our Samuel Adams Restaurant Strong Fund has raised over $7.5 million thus far for restaurant workers who are experiencing hardships in the wake of COVID-19, and it is committed to continue to distribute 100% of its proceeds through grants to bars and restaurant workers across the country. We are thankful to our outstanding coworkers, distributors, and retailers for their continued focus and diligence in operating and helping us grow our business. The company's depletions increased 48% in the first quarter and we achieved double-digit volume growth for the 12th consecutive quarter. This just would not have been possible without the outstanding coworkers in our breweries and our sales force, and the frontline workers at our distributors and retailers. So thanks go to all of them. Early in 2021, we launched Truly Iced Tea Hard Seltzer. And during the second quarter, we plan to launch Truly Punch Hard Seltzer. Both combine refreshing hard seltzer and bold flavors, and we believe these new launches continue to demonstrate our innovation leadership within the hard seltzer category. We are also making steady progress in improving our brand support and messaging for our beer and cider brands to position them for long-term sustainable growth in the face of the difficult on-premise environment. We're optimistic that our on-premise business will significantly improve in 2021 as restrictions are lifted. We're excited about the response to the introduction in early 2021 of several new Sam Adams beers, including Sam Adams Wicked Hazy, Sam Adams Wicked Easy, and Samuel Adams Just the Haze, our first nonalcoholic beer. As well as the positive reaction to our Samuel Adams Your Cousin from Boston advertising campaign. We are confident in our ability to innovate and build strong brands that complement our current portfolio and help support our mission of long-term profitable growth. I will now pass over to Dave for a more detailed overview of our business.

Thanks, Jim. Hello, everybody. Before I review our business results, I'll start with our disclaimer. As we state in our earnings release, some of the information we discuss in the release that may come up on this call reflects the company's or management's expectations or predictions of the future. Such predictions and the like are forward-looking statements. It's important to note that the company's actual results could differ materially from those projected in such forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained in the company's most recent 10-K and first quarter 10-Q. You should also be advised that the company does not undertake to publicly update forward-looking statements whether as a result of new information, future events, or otherwise. Okay. Now let me share a deeper look at our business performance. We are happy with our strong start to the year and our record first quarter shipment and depletion volumes. First quarter shipments growth was significantly higher than depletions growth as we took active steps to ensure that our distributor inventory levels are adequate to support drinker demand during the peak summer months. Our depletions growth in the first quarter was a result of increases in our Truly Hard Seltzer and Twisted Tea brands, partly offset by decreases in our Sam Adams Angry Orchard and Dogfish Head brands. The recently launched Truly Iced Tea Hard Seltzer has accelerated Truly brand growth, which has more than doubled since last year. In the first quarter in measured off-premise channels, the Truly brand outgrew the hard seltzer category by nearly 2x or 50 percentage points, resulting in a share increase of 6.5 percentage points. The Truly brand has now reached a market share of over 28%, accounting for approximately 40% of all growth cases in the hard seltzer category year-to-date, which is 2x greater than the next largest growth brand. Truly Iced Tea Hard Seltzer has achieved a 4.3 percentage point market share in measured off-premise channels, well ahead of all other new entrants in the entire beer category. We expect the launch of Truly Punch Hard Seltzer during the second quarter to continue this positive momentum. We will invest heavily in the launch of Truly Punch Hard Seltzer and the Truly brand, evolve our brand communications and further improve our position in the hard seltzer category as more competitors enter. Truly Tea continues to generate double-digit volume growth rates that are significantly above full year 2020 trends. In the first quarter in measured off-premise channels, case growth in Twisted Tea brand products was almost 3x higher than its closest competitor, and we believe Twisted Tea is on its way to become the number one flavored malt beverage by year's end. We see significant distribution and volume growth opportunities for our Truly and Twisted Tea brands and are looking to continue to expand distribution of our Dogfish Head brand. Pursuing these opportunities in 2021 remains a top priority. Our Sam Adams, Angry Orchard and Dogfish Head brands were hit the most by COVID-19 and related on-premise closures. We continue to work hard on returning these brands to growth and are optimistic that they will return to growth in 2021. Overall, given the trends for the first 3 months and our current view of the remainder of the year, we've adjusted our expectations for higher 2021 full year volume and earnings growth, which is primarily driven by the strong performance of our Truly and Twisted Tea brands. During the quarter, we've taken various steps to ensure we have capacity to support this accelerated growth. We continue to work hard on our comprehensive program to transform our supply chain with the goal of making our integrated supply chain more efficient, reduce costs, increase our flexibility to better react to mix changes and allow us to scale up more efficiently. We expect to complete this transformation over the next 2 to 3 years. We'll continue to invest in capacity to take advantage of the fast-growing hard seltzer category and deliver against the increased demand through a combination of internal capacity increases and higher usage of third-party breweries, although meeting these higher volumes to increase usage of third-party breweries has a negative impact on our gross margins. While we anticipate delivering gross margin improvements in 2021, our gross margins and gross margin expectations will continue to be impacted negatively until our volume growth stabilizes. While we're in a very competitive business, we're optimistic for continued growth of our current brand portfolio and innovations, and we remain prepared to protect short-term earnings as we invest to sustain long-term profitable growth in line with the opportunities that we see. Based on information in hand, year-to-date depletions reported to the company through the 15 weeks ended April 10, 2021, are estimated to have increased approximately 49% from the comparable weeks in 2020. Right now, Frank is going to provide the financial details.

Thank you, Jim and Dave. Good afternoon, everyone. For the first quarter, we reported net income of $65.6 million or $5.26 per diluted share, an increase of $3.77 per diluted share from the first quarter of last year. This increase was primarily due to increased net revenue, partially offset by higher operating expenses. In the first quarter of 2020, we recorded pretax COVID-19-related reductions in net revenue and increases in costs that totaled $10 million or $0.60 per diluted share. In 2021 and going forward, we have chosen not to report COVID-19-related direct costs separately as they are viewed to be a normal part of operations. For the first quarter of 2021, shipment volumes were approximately 2.3 million barrels, a 60.1% increase from the first quarter of 2020. Shipment volumes for the quarter were significantly higher than depletions volume and resulted in significantly higher distributor inventory as of March 27, 2021, when compared to March 28, 2020. We believe distributor inventory as of March 27, 2021, averaged approximately 7 weeks on hand and was at an appropriate level based on the supply chain capacity constraints and inventory requirements to support the forecasted growth of our Truly and Twisted Tea brands over the summer. We expect wholesaler inventory levels in terms of weeks on hand to be between 3 and 7 weeks for the remainder of the year. Our first quarter 2021 gross margin of 45.8% increased from the 44.8% margin realized in the first quarter of last year. The increase was primarily a result of price increases, the absence of the COVID-19-related direct costs incurred in the first quarter of 2020 and cost-saving initiatives at company-owned breweries, partially offset by higher processing costs due to increased production at third-party breweries. First quarter advertising, promotional and selling expenses increased by $43 million from the first quarter of 2020, primarily due to increased brand investments of $21 million, mainly driven by higher media and production costs, higher salaries and benefits costs and increased freight to distributors of $21.9 million due to higher volumes and rates. General and administrative expenses increased by $4.9 million from the first quarter of 2020, primarily due to increases in salaries and benefits costs. During the first quarter, we recorded an income tax expense of $11 million, which consists of income tax expenses of $19.6 million, partially offset by an $8.6 million tax benefit related to stock option exercises in accordance with ASU 2016-09. The effective tax rate for the first quarter, excluding the impact of ASU 2016-09, increased to 25.6% from the 23.6% for the first quarter of 2020. Based on information of which we are currently aware, we are targeting 2021 earnings per diluted share of between $22 and $26, an increase from the previously communicated range of between $20 and $24, excluding the impact of ASU 2016-09. But actual results could vary significantly from that target. We are currently planning increases in shipments and depletions of between 40% and 50%, an increase in the previously communicated range of between 35% and 45%. We are targeting national price increases per barrel of between 1% and 3%, an increase from the previously communicated range of between 1% and 2%. Full year 2021 gross margins are currently expected to be between 45% and 47%. We plan increased investments in advertising, promotional and selling expenses of between $130 million and $150 million for the full year 2021, an increase from the previously communicated range of between $120 million and $140 million. These amounts do not include any increases in freight costs for the shipment of products to our distributors. We estimate our full year 2021 effective tax rate to be approximately 26.5%, excluding the impact of ASU 2016-09. We're not able to provide forward guidance on the impact of ASU 2016-09 on our 2021 financial statements and full year effective tax rate as this will mainly depend upon unpredictable future events, including the timing and value realized upon the exercise of stock options versus the fair value when those options were granted. We're continuing to evaluate 2021 capital expenditures and currently estimate investments of between $250 million and $350 million, a decrease in our previously communicated range of between $300 million and $400 million. The capital will be mostly spent on continued investments in capacity and supply chain efficiency improvement. We expect that our March 27, 2021, cash balance of $144.7 million, together with the future operating cash flows and the $150 million remaining on our line of credit, will be sufficient to fund future cash requirements. We will now open up the call for questions. Before we go there, similar to the last couple of calls, Chase will be the emcee on our side and coordinate the answers as needed since we're in different locations.

Your first question comes from the line of Vivien Azer with Cowen and Company.

This is Harrison Vivas on for Vivien. So with 13-week depletions having come in only 3 points ahead of the top end of your previous guidance and with the growth in the hard seltzer category having decelerated notably since March, can you all offer an updated view on full year growth for the hard seltzer category just considering how tough the comps will continue to be?

Sure thing. Harrison, this is Dave. I'll answer that. Over the past year, we've discussed a range of about 70% to 100% for the hard seltzer category. Since then, we've gathered more data and re-evaluated our model. We're primarily focusing on household penetration growth as a driver in the category, and we believe there's base growth and significant incremental innovation. In 2020, there was a lot of unmet demand, and currently, there are several shelf space expansions occurring. At Truly, we've seen approximately a 35% increase in shelf space just in the last month. Even though we don't have the exact growth rate, it is certainly on the rise. When we revisit our model, we maintain that the category will see significant growth, estimating it will be around 60% to 90%, compared to our previous range of 70% to 100%. However, it could potentially exceed 90% depending on various factors. We see several tailwinds supporting this growth, including persistent consumer trends towards health and wellness and premium products. The increase in shelf space is substantial, with expectations for an additional 30% shelf space in the category, which was not the case a year ago. Moreover, new channels are emerging, such as on-premise locations, which are beginning to open up. The household penetration in these environments is much lower compared to grocery stores, indicating potential for growth. We're also seeing new packaging options and substantial innovation in the market. Many players are investing heavily, which we believe will generate excitement this summer. We anticipate a return to normal stock levels compared to last year, and hard seltzer remains very suitable for social occasions like barbecues, beach outings, and parties. Considering the emerging markets, we continue to see a robust off-premise business. Overall, we have strong reasons to believe that the category will begin to reaccelerate, and that's part of our calculations.

Your next question comes from the line of Bonnie Herzog with Goldman Sachs.

Congrats on a great quarter. I guess I wanted to ask a follow-up on something that I think you were just discussing, Dave. It's a little hard to hear you, but just thinking about bars and restaurants opening up, I guess there's a bit of a view that this could negatively pressure the hard seltzer category. So I'd love to hear maybe a little more thought on this and what you see as the real opportunity for seltzers on-premise? I mean do you guys think of this as a headwind or quite possibly a tailwind for the category? And then any visibility so far with things opening? Are you seeing maybe greater interest for hard seltzers now on-premise? And ultimately, what's your strategy for Truly there? I think that would help and frame everything and possibly that's contributing to your increased guidance on depletions.

Sure, Bonnie. I'm going to try to speak clearly so you can hear me. As Jim mentioned earlier, last summer was supposed to be the summer of hard seltzer in bars, but that hasn't really happened for understandable reasons. We're currently seeing significant growth, with many bars actively calling for hard seltzer brands. Our on-premise team has been working hard to drive distribution in that sector, making us optimistic about the presence of Truly in the overall category. Additionally, I noticed a report from Nik Modi with Numerator this week. They examined Florida's off-premise situation, which opened up aggressively early on, and found that off-premise growth there is picking up pace. So, we believe there will be increased demand for Truly and other hard seltzer brands in bars, while people continue to enjoy gatherings and events at home which supports the category. Ultimately, time will tell, and we will have more data in the next call. But right now, the gradual reopening of the country appears favorable for the category.

All right. And just on the increased guidance for depletions, is that one of the drivers for you in terms of feeling comfortable to raise your outlook for depletions this year?

I think it's two things. It's the growth of Truly that we just talked about. And I think the early success we've had with tea, and excited to launch Punch pretty much right now gives us a lot of confidence. Also, the Twisted Tea continues to perform very, very well. And to be honest, beyond our expectations. So when you combine those two together, that's what is driving that guidance.

Your next question comes from the line of Kevin Grundy with Jefferies.

Not to belabor the seltzer topic, but I did want to come back to it. So I guess, Dave, for you. Just in terms of visibility on market share when you guys are building the model, because I guess what's noteworthy is that your outlook for the category has come in, right? And I think where you guys were before, and everyone is sort of sympathetic, there's a wide range of outcomes here. It's sort of a high-class problem for the industry. But the 70% to 100% growth was high relative to what other folks were saying. So the midpoint previously was 85%. Now it's 70%. So the category outlook comes in. So sort of implicitly, you're feeling increasingly optimistic about your market share within the context of reportedly, what's a really strong start for Cacti. We see that in the data. Topo Chico is off to a blazing start in Texas. Constellation is just leaning in here and kind of playing catch up. So I guess the question is, what's the visibility on the market share? And really, I guess, the reason to sort of increase the guidance at this juncture, just given the flood of competition and the amount of investment that's coming into space. So a lot there, but comments really specific on market share visibility.

We believe the midpoint is around 75%, but we think we can exceed that figure. It's early to draw conclusions, especially when considering brands that just launched a few weeks ago. Well-known brands typically generate a lot of trial, and brands connected to larger beer companies will likely attract significant attention. It's also too soon to make definitive statements about Truly Tea, although we are pleased with our first-quarter results since launching in January and the year-to-date forecast looks promising. We've conducted extensive consumer research and testing with Punch, which is on its way and has shown better results than anything we've developed so far. We are confident Punch will make a significant impact and help us keep pace with the market trends. There is considerable activity in the marketplace, which will clarify over the coming months. The trajectory for tea looks positive, and to provide some context, Truly Tea's velocity is twice that of the brands we've just mentioned. Truly Lemonade, in its year-to-date performance, ranks number three in its category and maintains that position in terms of velocity as well. Currently, its velocity is twice that of the other competing hard seltzer lemonade brands in the market. We're closely monitoring these developments, and we are committed to planning for share growth throughout the year. Regardless of the category's growth, we are determined to grow at a faster rate.

Your next question comes from the line of Eric Serotta with Evercore.

Great. Dave, your voice is better but still a bit muffled. Could you provide more clarity on that? I have a couple of questions. Firstly, regarding the pricing environment, I noticed you raised the guidance from the 1% to 2% range to the 1% to 3% range. Is this increase driven by the seltzer category, beer, or Twisted Tea? Constellation mentioned increased price competition in seltzers. Are you experiencing this as well? The next question pertains to your long-term innovation strategy. To play devil's advocate, much of your recent success has come from adapting non-alcoholic or alcoholic categories, like lemonade or tea, into seltzers. How do you view future innovation? Are there limitations on appealing categories or styles to convert into seltzers? I'll stop there.

Okay, Eric, this is Frank. Let me take the first question on pricing. So we increased our pricing range slightly as you have seen in the midpoint. The pricing is across the board. It's not like that we take 1 national price increase. It's deliveries, it's by region. But overall, Truly's Hard Seltzers is the biggest product of our portfolio. Without that, you don't get to do the price increase. We don't see really any negative price pressure because at the end of the day, I think we're competing on quality and on brand. And we have seen that pricing that we put into the market actually starting last year, what you're seeing is pricing that we put in that's carrying over plus new pricing, and we feel fairly confident about that across the entire portfolio.

David here. I'll address the second part of the question regarding future innovation. I hope you can hear me well. We have numerous ideas as we move forward and I'm not concerned about that. There are various ways we can approach this category. The advantage of being a dedicated seltzer brand allows us to navigate and redefine the category in ways we believe will lead to success, unlike entering as a beer brand trying to compete in the seltzer space. We see more opportunities ahead. We have plenty of concepts, and innovation doesn’t just rely on specific profiles; there are different aspects we can explore. We are confident in our knowledge of consumer preferences, especially their desire for new products. In this category, they are particularly seeking fresh options. You may have noticed that we have accelerated our innovation cycle, enabling us to develop ideas quickly, which we consider a key strength. We plan to keep this momentum until the market demands otherwise. Rest assured, we have an abundance of ideas, and we are not too worried about it.

Your next question comes from the line of Laurent Grandet with Guggenheim.

Congratulations on an outstanding quarter. I have two follow-up questions. Regarding the shelf reset in March, you mentioned that you gained market share. Can you share how much shelf space you gained? Additionally, did you see an increase in your terminal percentage share compared to your competitors?

Sure. I'll answer that. So it's as good as 45% shelf space thus far.

45%. And what is your percentage gain compared to last year?

Yes. So we gained 45% more shelf space across the board in on-premise versus a year ago.

I would like to understand the repeat purchase rates for Truly Tea and Lemonade. After three or four months since the launch of Truly Tea, could you share what the repeat purchase rate is? Additionally, has the launch of the new lemonade affected the repeat purchase rate of Truly Lemonade?

Yes, it's still early to make definitive conclusions about repeat rates for Truly. Currently, they are in the mid to high teens, and the data for the past three months looks promising. However, it's slightly below where Lemonade was last year, which was successful with the highest trial and repeat rates. Truly Tea is performing well, though lower than expected, but still strong. It's important to note that it's still early, and we will monitor how it holds up against other innovations in the market. Regarding Truly Lemonade, it remains a strong product and is currently the number three SKU in its category. Its sales velocity is more than double that of new competitors in the market, except for Truly Tea, which remains close. Overall, it appears to be maintaining its performance. We are neutral about how the product mix develops since consumer preferences will ultimately guide this. It’s unclear if consumers are substituting one lemonade or tea for another; they seem to be seeking a quality hard seltzer experience and a brand they enjoy. As the year progresses, we will observe how the flavor mix evolves. Currently, there seems to be minimal interaction between Mike's Hard Lemonade seltzer and Truly's Lemonade, based on early data.

Yes. My last question is about capacity. And what's the driver behind reducing kind of the CapEx for this year?

Laurent, this is Frank. The driver of the CapEx, and we came up with a fairly wide range. We knew we're looking at different options to build capacity. And what has happened between when we came out and now is that we've fallen a bit away and a more effective way to build the capacity. So the scope has not changed. We just have found a solution that requires less capital than what we had envisioned at the beginning of the year. So we're becoming more effective in our CapEx spend, but the scope has not changed. It's exactly the same as before.

Thanks so much.

Ladies and gentlemen, we have reached the end of the question-and-answer session, and I would like to turn the call back to Mr. Jim Koch for closing remarks.

Thanks, everybody, and we really enjoyed celebrating the quarter with you and we look forward to talking to you in 3 months. Take care.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.