Boston Beer Co Inc Q4 FY2023 Earnings Call

Thank you. Good afternoon, and welcome. This is Mike Andrews, Associate General Counsel and Corporate Secretary of the Boston Beer Company. I'm pleased to kick off our 2023 Fourth quarter earnings call. Joining the call from Boston Beer are Jim Koch, Founder and Chairman; Dave Burwick, our CEO; and Diego Reynoso, our CFO. Before we discuss our business, I'll start with our disclaimer. As stated in our earnings release, some of the information we discuss and that may come up on this call reflects the company's or management's expectations or predictions of the future. Such predictions are forward-looking statements. It's important to note that the company's actual results could differ materially from those projected in these 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-Q and 10-K. The company does not undertake to publicly update forward-looking statements, whether as a result of new information, future events, or otherwise. I will now pass it over to Jim for some introductory comments.

Thanks, Mike. I'll begin my remarks this afternoon with a few introductory comments and then hand over to Dave, who will provide an overview of our business. Dave will then turn the call over to Diego who will focus on the financial details of our fourth quarter results as well as our outlook for 2024. Immediately following Diego's comments, we will open the line for questions. As I look back on our 2023 performance, I'm encouraged that we saw steady sequential improvement in depletions as we move through the year. On a comparable week's basis, our depletions improved from a decrease of 7% in the first half to a decrease of 3% in the third quarter and a decrease of 1% in the fourth quarter. We made progress across the portfolio, and we have innovations that are launching this quarter, which Dave will review in more detail. Gross margins improved by 120 basis points in 2023 and as we made progress on our operating plans to generate procurement savings, improved brewery efficiency, lower waste and optimize our network. Our entire organization is focused on driving margin improvement. And I want to thank all of our cross-functional teams for their continuing efforts. Diego will provide more details on our gross margin outlook in his remarks and why we feel good about our long-term gross margin potential. As we move into 2024, we have the strategy and team in place to continue to deliver progress on depletions and margins. We've provided a range of guidance for 2024 with the pace of improvement depending on how the consumer environment plays out and the pace and success of our innovations. We continue to have a highly cash-generative business that delivered over $200 million in free cash flow and ended the year with an all-time high cash balance of almost $300 million and no debt. Our strong balance sheet enables us to invest in our brands and continue to return cash to shareholders with over $128 million in stock repurchased over the last 14 months. Overall, I'm confident that our diversified portfolio across categories, strong brand equities and the best sales force in the industry position us well for long-term success. And finally, I am thankful to our outstanding coworkers, distributors and retailers who continue to support our business. And I'd like to close with some comments on the press release we issued today regarding Dave's retirement from Boston Beer, which is effective April 1. I've known and collaborated with Dave for the past 19 years first as a valued Board member and then for the past six years when he served as our CEO in an extraordinary period. During that time, Dave has had a tremendous impact on our company. We've grown from $850 million in revenue when he began as CEO to more than $2 billion in revenue with a portfolio of powerful brands and attractive categories. He's built a strong team across the company and his deep beverage industry expertise and brand building and innovation skills have fortified our portfolio to successfully compete in the broader alcoholic beverage environment. Dave has positioned the company very well for ongoing success in 2024 and beyond. I can't thank Dave enough for his partnership with me over the last two decades, and I wish him the very best. And I know many of you on this call have known Dave for years and have experienced his intelligence and integrity. I have certainly been proud to have him represent Boston Beer Company to the community of investors and analysts. And I look forward to introducing you to our incoming CEO, Michael Spillane, on the April earnings call. Michael joined Boston Beer's Board in 2016 and has been our Lead Director since May of last year. He has a broad business background with extensive consumer products experience and has spent the past 17 years at Nike. Given his already extensive knowledge of our company and our culture, we expect Michael to hit the ground running as he steps in to help lead us into our next chapter. I will now pass the call over to Dave.

Thanks, Jim, and good evening, everyone. It's been my privilege to be connected to the company since I joined the Board of Directors in May 2005, and have greatly enjoyed adding whatever value I could to build our people capabilities and improve our growth prospects over the years, whether as a Board member or in the last six years as CEO. My tenure as CEO has included the pandemic as well as significant shifts in consumer behavior in the competitive dynamics in our category. We've had our ups and downs during that time as we've adjusted our approach in our organization to meet the challenges. With great plans lined up for 2024, I believe we're poised for growth and now is the right time for me to move on. I'd like to thank Jim for giving me the wonderful opportunity to lead this organization as well as our wholesalers for their dedication and partnership. I'm especially grateful for the talented, committed and passionate people at Boston Beer, who taught me much about leadership and myself over the past six years. I'd also like to thank our investors and analysts who have supported the company during my tenure. Boston Beer has a very unique and powerful culture, and I'm confident the organization is in great hands to take advantage of the opportunities ahead of it. And now I'll turn to a discussion of our business results. As Jim mentioned, our fourth quarter volumes showed continued improvement. We remain focused on sustaining Tri-City industry-leading growth and turning Truth volume trends while improving our supply chain performance to enhance our gross margin and provide more funds to invest in our brands and our top-ranked industry sales force. I'll now provide some color on our brands. Twisted Tea in the forward quarter had 29% dollar sales growth while adding $2.4 share-points and expanded its overall share of leadership to 28% of total FMB dollar sales in measured upcoming channels. This sustained demand is a result of balanced efforts at growing both physical availability, the improved geographic channel and package distribution and mental availability via a highly effective advertising campaign, increased media investment and expanded college football tailgating platform in the fourth quarter and optimized packaging design that highlights the brand's distinctive assets. Twisted Tea Party pack is now the third largest and the fastest-growing SKU among all FMBs, and our wholesaler service levels, we're in a very good position to support further growth. Importantly, our superior product quality and brand relevance have sustained our success as the fastest-growing major brand in beer the past three years. We intend to invest heavily in 2024 with a goal of continuing Twisted Tea's trajectory in the face of more competition. We remain confident that Twisted Tea will accomplish this goal in 2024 for many reasons. First, there remains upside in growing brand awareness and household penetration and our ad campaign is working. Second, there's still ample room to broaden distribution through shelf space gains and new channels. As I mentioned on our last call, Twisted Tea continues to increase shelf space and those benefits will further fuel the business in 2024. Having said that, while it holds a 28% dollar share in FMBs, it still only has 18% of FMB shelf space. The on-premise channel Twisted Tea's underpenetrated versus other FMB competitors, it has a 60% share and drove 96% of the volume growth in beyond beer for the full year in 2023. Third, the brand is underdeveloped with Black and Hispanic and Latino consumers. We enjoyed a 55% household penetration increase within these demographics in 2023 as a result of our marketing efforts, and we plan to aggressively expand our investment this year. Fourth, there's opportunity to widen the brand's presence in underdeveloped markets, and we're making great progress in places like Texas and California, where our household penetration on Hispanic and Latino consumers is above 40%, underscoring the future potential with this emerging new consumer group brand. Fifth, last year represented the early stages of Twisted Tea Lights national launch, and we've seen the sales per point accelerate and exceed our expectations. It's approximately 85% incremental to the Twisted Tea portfolio. Given the excellent response among consumers, retailers and wholesalers, we believe Light is an x factor for brand growth in 2024 and therefore, plan to more aggressively expand our distribution and marketing support. Lastly, in the second half of 2023, we began testing in several markets, Twisted Tea Extreme, a higher ABV version of Twisted Tea. Twisted Tea Extreme is part of our efforts to increase drinking occasions and add new drinkers, and we will expand distribution during 2024. Now on to Truly. We remain confident in the changes we made to the brand proposition starting in the second quarter of 2023 and have seen sequential improvements in our results. In essence, we're re-crafting a new Truly brand to stand for light refreshment versus bolder flavors and are shifting the mix in that direction. This takes patience and time and we're seeing progress in our efforts. For example, during this time, the brand has moved from a 35% mix of lightly flavored styles to 55% and the lightly flavored part of the portfolio is actually growing 2% year-to-date and has gained two full share points versus a year ago. Given Twisted Tea's strong growth, Truly continues to become a smaller part of our portfolio mix, with Twisted Tea now 1.9x larger than Truly and measured off-premise channels in the fourth quarter. We expect hard seltzer category volumes to decline low teens in 2024 compared to a decline of 21% in 2023 and remain focused on investing in innovation, advertising and growing fiscal availability of our lightly flavored portfolio to hold share. In the fourth quarter in measured off-premise channels Truly's dollar sales declined 22% and a last $2.9 share points versus a 27% decline in dollar sales and a loss of $3.4 share points for the full year of 2023. Underlying this improved trend is much better performance in our lightly flavored variety packs and 24-ounce single-serve cans. Our lovely flavored variety packs gained 0.4 share points in the fourth quarter and grew share broadly in almost every Sircana multi-outlet market. Meanwhile, our 24-ounce single-serve cans grew 5% in the fourth quarter, while gaining 0.7 share points while velocity also increased. Additionally, Berry and Citrus variety pack trends are improving across the country as our new party pack is now starting to hit the market. Lastly, our rotator strategy of offering new flavors in a variety pack three times a year, utilizing the same UPC is building momentum. Our newest entry, the Getaway pack has exceeded forecasts and in the latest four weeks is Truly's #4 selling SKU and has the fastest sales per point in the portfolio. Over the past nine months, our packaging refresh, merchandising and innovation focus on light flavors, new rotator program pushed behind single-serve in the convenience channel, new ad campaign and higher media spend have all contributed to these improving brand trends. As previously announced, we're planning some innovations for the Truly brand launching this quarter that includes a new 8% ABV Truly unruly variety pack, which will replace our Truly Margarita pack and a new Truly party pack, which replaces our Truly Tropical pack. In addition, we've approved the recipe for both Truly Lemonade and Fruit Punch to create a lighter, more refreshing finish addressing the key issue with lapsed drinkers. Also, late this quarter, we will start the national launch of Truly Tequila soda, which tested successfully in several markets in the fall. We believe these innovations will better position the Truly brand offering and set it up well for continued improved trends in 2024. While maintaining Twisted Tea's double-digit growth and improving Truly's trajectory remain our top priorities as we enter 2024, we have a broad portfolio, and we'll continue to support and build out our smaller brands. Our Samuel Adams brand grew its share of craft by 0.2 points across all channels in the fourth quarter according to the Beer Institute. We'll continue to invest behind Boston Lager and our seasonals in addition to our nonalcoholic portfolio, including just the Haze and Gold Rush Golden Lager, which grew 79% in dollars and 1.1 share points in the fourth quarter in measured off-premise channels. We're very excited to share today that in May, we'll start to broadly expand the Hard Mountain new distribution footprint beyond the existing 17 states currently serviced by Blue Cloud to all 50 states serviced by our own beer wholesaler network. There is tremendous excitement within our distribution network about this move from Blue Cloud to beer wholesaler, and we believe it puts us in a great position to expand the reach and consumption of Hard Mountain Dew, which has demonstrated very strong sales per point and repeat but has not yet benefited from extensive distribution. It will take some time to fully transition to the Boston Beer wholesaler network, and we expect to benefit primarily in the second half of 2024 and into 2025. While currently a small part of our portfolio, we see incremental opportunities in spirit-based RTDs. Truly Vodka Soda has strong repeat and continues to gain distribution, and Truly Tequila Soda has demonstrated good results in test markets in the fourth quarter. Meanwhile, Dogfish Head's award-winning canned cocktails have gained a solid foothold in the traditional canned cocktail segment, and we have new packaging in the styles, including 12% ABV offerings coming to market in the first half of 2024 to enhance our brand offering and drive growth. To add to our spirits-based RTD portfolio, we're very excited about the launch of Sun Cruiser, a new vodka-based Hard Tea brand, which has been enthusiastically embraced by wholesalers and retailers. While we originally had planned to launch in only 15 markets across the U.S. late in the first quarter, given the opportunity we now see, we've decided to launch it starting next week with the intent of being national by the end of the year. Turning to our supply chain. We continue to modernize our supply chain through investments in equipment, capacity and improved systems and processes. We're maintaining our focus on our three key areas of savings: procurement, brewery performance and waste and overall network optimization and have multiyear savings plans across each of these categories, which we expect will generate significant long-term gross margin expansion. Diego will discuss gross margin in more detail in his remarks. We're also closely managing our operating expenses. We expect to use the cost savings that these efforts generate to nurture new innovation and support increased brand support and within brand spend, both converting nonworking to working dollars and shifting our mix from traditional to digital and social media. In summary, we're optimistic about the long-term outlook for our diversified beverage portfolio. Our company has exceptional innovation and brand-building capabilities, the top sales organization in beer in a cash-generative business model with an excellent balance sheet to support long-term growth. We're building depletion momentum, and we believe our focus on Twisted Tea and Truly and an exciting innovation offering across multiple brands, including Sun Cruiser, the Hard Mountain Dew rollout into our beer wholesaler network, Angry Orchard Crisp Light and others not yet announced, put us in a very strong position to continue to improve our volume trends and return to growth later in 2024. I'll now hand it over to Diego to discuss our detailed financial results and our 2024 guidance.

Thank you, Dave. Good afternoon, everyone. Before I discuss the fourth quarter results in detail, I'd like to give an overview of 2023 performance. We delivered depletions down 6% for the year, which was at the midpoint of our guidance. Shipments were slightly below the midpoint as wholesale inventories declined by one week in the fourth quarter. Gross margin expanded 120 basis points for the year to 42.4%. Excluding increases in contractual prepayment expenses and shortfall fees, which I will discuss in more detail later in my remarks. Gross margin was 44.3%. Non-GAAP EPS of $7.17 was at the lower end of our guidance due to the volume impact of lower than estimated wholesaler inventories at year-end and a fourth quarter income tax adjustment. Turning to fourth quarter results. Our 2023 fiscal fourth quarter included 13 weeks compared to the 2022 fiscal year, which included 14 weeks. We've included the full details of our fourth quarter performance in today's earnings release. So I'll just briefly discuss the key drivers. Fiscal calendar depletions for the quarter decreased 9% from the prior year. Depletions on a 13-week comparable basis decreased 1% from the prior year, primarily due to declines in Truly Hard Seltzer partially offset by growth in Twisted Tea, some Adam's nonalcoholic offerings and Dogfish Head canned cocktails. Fiscal calendar shipment volumes for the quarter were approximately 1.5 million barrels, a 12.2% decrease from the prior year. On a 13-week comparable basis, shipments decreased 3.5% in the fourth quarter. We believe distributor inventory as of December 30, 2023, averaged approximately four weeks on hand compared to five weeks on hand at the end of the third quarter. Our fourth quarter gross margin of 37.6% increased 60 basis points from the 37% margin realized in the fourth quarter of 2022. As we mentioned on our last earnings call, the majority of our shortfall fees are booked in the fourth quarter. Excluding shortfall fees and third-party production prepayments that I'll discuss in more detail later in my remarks, gross margin was 40.7%. Advertising, promotional, and selling expenses for the fourth quarter of 2023 decreased $10.6 million or 7.6% from the fourth quarter of 2022, with lower freight costs fully offsetting increased brand investment and selling costs. We reported a net loss of $18.1 million or $1.49 per diluted share. The year-over-year change in net loss and loss per diluted share was driven by lower revenues, including the loss of the 53rd week, partially offset by higher gross margins and lower operating expenses. Now I'd like to provide some detail on the components of our gross margin and why we feel confident we can improve our margins over the long term. The key operational drivers of our gross margin are volume, commodities, labor costs, and our productivity efforts around procurement savings, brewery performance, and waste and network optimization. Additionally, to the extent we experienced significant growth in partnership brands and variety packs, there will be some mix headwinds. Most of our productivity savings during 2023 came from procurement and reducing waste at our breweries. In 2024 and beyond, we expect more equal contributions from all three saving buckets for which I'll provide some color. We continue to see opportunities for procurement savings on material and packaging, primarily due to the price negotiations and recipe optimizations. Brewery performance in absolute volumes as well as the mix of internal versus external production impacts our ability to leverage fixed costs in our plants. We experienced volume declines in 2023, and our margin guidance for 2024 reflects a range of potential outcomes for volume. We had a 71% internal and 29% external volume mix in 2023 and plan to continue to move more volume internal over time while balancing our commitments to external manufacturers. With more consistent and predictable volumes and improved supply chain processes and systems, we have more savings opportunities in waste and network optimization. In the first half of 2024, we are implementing an automated customer ordering and inventory management system, that we believe, along with other improvements in our supply chain processes will help further reduce waste and optimize our network. In addition, as previously discussed, before the decline in volumes related to hard seltzers in the second half of 2021, we entered certain contractual agreements to access third-party production capacity, which continued to impact our gross margin. The costs associated with these agreements include shortfall fees for not meeting contractual production minimums and third-party production prepayments. They are expensed over the estimated life of the related agreements. Together, these contractual items negatively impacted gross margins by 185 basis points in 2023 and are expected to have a 175 to 225 basis points negative impact in 2024. Excluding these two items, the midpoint of our gross margin guidance for 2024 would be approximately 46%. As these contractual terms expire, we will reassess our capacity needs and commitments with our third-party production partners. The multiyear operational improvements we are making in our business together with the diminishing impacts of the contractual items I just discussed give us confidence that we have a strong pathway to significantly improve our gross margin over time to high 40s to 50% depending on volume, product mix, and commodity inflation. Now I'll discuss our 2024 guidance in detail. Our fiscal week depletion trends for the first eight weeks of 2024 have decreased 2% from 2023. We are currently planning 2024 depletions and shipments to change between a decrease of low single digits to an increase of low single digits. We expect price increases of between 1% and 2%. Full year 2024 reported gross margins are expected to be between 43% and 45%. We expect commodity inflations in 2024, but at a lower rate than 2023, primarily driven by sweeteners and flavorings. We expect to cover commodity inflation dollars with pricing and expect some additional margin headwinds from higher labor costs in our breweries in 2024. Our investments in advertising, promotional, and selling expenses are expected to change between a decrease of $5 million and an increase of $15 million. This does not include any changes in freight costs for shipments of products to our distributors. We estimate our full year 2024 effective tax rate to be approximately 27.5%. We are currently targeting full year 2024 earnings per diluted share of between $7 and $11. This projection is highly sensitive to changes in volume projections, particularly related to the hard seltzer category, mix of owned versus partner brands, supply chain performance, and inflationary impacts on consumer spending. As you model out the year, please keep in mind that our business is impacted by seasonal volume changes with the first quarter and the fourth quarter being lower volume quarters and the fourth quarter typically being our lowest absolute gross margin rate over the year. Turning to capital allocation. We ended the quarter with a cash balance of $298.5 million and an unused credit line of $150 million, which provides us with the flexibility to continue to invest in our base business, fund future growth initiatives and return cash to our shareholders through our share buyback program. For the full year 2024, we expect capital expenditures of between $90 million and $110 million. These investments will primarily relate to our own breweries to build capabilities and improve efficiencies. During the 52-week period ended December 30, 2023, and in the period from January 3, 2024 through February 23, 2024, we repurchased shares in the amount of $92.9 million and $35.6 million, respectively for a total of $128.5 million of repurchased shares since January 2023. As of February 23, 2024, we had approximately $230 million remaining on the $1.2 billion share repurchase authorization. This concludes our prepared remarks. And now we'll open for line questions.

And the first question comes from Nik Modi with RBC. Please proceed with your question.

Yes, thank you. Good evening, everyone. Dave, best of luck moving forward, and Diego, welcome. I have a couple of questions, primarily for Jim. Regarding Michael, is this a permanent role, or is it intended to be temporary? I would appreciate your insights on that. Additionally, concerning the gross margin situation, it seems like visibility on volume has been quite weak, and innovation has historically been vital to Boston Beer’s growth. How do you all view the challenge of achieving more consistent volume growth, given that it is so essential for the company's profitability and margin improvement?

Thanks, Nick. I'll take the first part of that question. Michael is a permanent fixture. It's not fill in a gap for a year. This is a significant commitment for him. So this is not an interim caretaker situation.

And I'll take the second part, Nick. You are correct. Volume is one of our biggest pieces in our gross margin journey. So we've done a few things. As I mentioned before, we implemented a new system to help us integrate with our distributors and really work on our volume forecasting. But the second thing is we've got a lot of exciting innovation coming down our path. You saw the announcement today on Mountain Dew. We've got some strong innovations coming with some Cruiser and some other brands that we haven't talked about yet. So I think as we go forward, I feel positive that those will help us down the path both again on the operations part of that volume forecast, but also on the branded side of that forecast.

And Nick, I want to build on Diego's comments as well. We need to achieve broad-based growth across our entire portfolio. We are seeing success with Twisted Tea, and while Truly may not see growth this year, we are making progress. It really comes down to strengthening the five brands we have, which are quite strong, and we need to grow them without relying solely on innovation. Nevertheless, we do have line extension innovations this year and new innovations that are unique to the market. For instance, with Sun Cruiser, which fits our strategy as fast follower innovation, we believe we have numerous avenues for growth as we enter this year. Twisted Tea Light currently makes up only 14% of the ACV, indicating significant growth potential. We're planning to expand Twisted Tea Extreme, and there's notable interest in our Hard brand now being distributed to wholesalers. The Sun Cruiser brand, which we initially planned for regional distribution, will go national due to strong interest from wholesalers and retailers. With Truly, we anticipate it will be a high ABV product that will replace Margarita, and we have the Party Pack set to replace the tropical pack. Additionally, we have three limited-time offer packs that are all lightly flavored, along with new formulations for Lemonade and Fruit Punch, among other innovations. We believe this is a year where we need to showcase our ability to achieve growth across multiple brands in our portfolio, not just with one or two. We feel prepared to accomplish that.

Best of luck again, Dave.

And the next question comes from the line of Kaumil Gajrawala with Jefferies. Please proceed with your question.

Congratulations, Dave. In the coming days, I'm sure you'll receive this question privately, but I’ll ask it publicly as well. One of the things you've done is enhance your outreach to investors, which has been beneficial for both investors and analysts. We hope that this continues. Regarding the business, you mentioned the success of RTDs. Can you elaborate on how significant that is within your portfolio and how those businesses are growing collectively?

Sure, Kaumil. As I mentioned earlier, it's a small portion of our portfolio. RTDs have emerged as the next trend in the market, and we are competing in various areas. We believe Dogfish offers an exciting opportunity for that brand. We have a 12% ABV product launching this year, which is key for our canned cocktail segment. Truly Vodka Soda has performed reasonably well but is not a major player at this time, while High Noon continues to lead in that category. We also have Tequila coming out and are introducing Sun Cruiser, which we find quite intriguing in the RTD market, an area we are familiar with. We're making a significant effort in this space, although it won't constitute a large part of our portfolio—likely around 2% to 4% of our total business. It's an area we need to engage in, and so far, we've managed to do this with existing brands like Dogfish and Truly, along with the new launch of Sun Cruiser, and we'll assess its performance.

Got it. It sounds like you might have the free time now, so we would love to see you again.

I might just be there, Kaumil.

I’d like to share our perspective on the ready-to-drink space. It's still early in this segment, as it often takes a decade or more for trends to develop in our industry. Currently, ready-to-drink products account for about 2.5% of beer volume, which encompasses various spirits-based canned products, from Crown Royal in a can to High Noon. Interestingly, traditional spirits companies don't dominate this category; data suggests they hold less than 10% of that volume. The leading player is the wine company Gallo with High Noon, followed by Anheuser-Busch with Cutwater, Neutral, and Double Backbone, among others. We see this as a significant opportunity that may not necessarily go to spirits companies; it's quite open for competitors like us. These products are typically produced in breweries since they require high-speed can lines and mixing equipment. We believe that beer wholesalers may be the best sellers, given their access to the cold box, making it a compelling opportunity for us, especially since we've historically focused on the beyond beer market. New-to-world brands seem to be thriving in this space, constituting about 80% of the volume. We believe this is a space where we can actively participate and leverage our competitive advantages against established competitors, particularly the spirits companies.

And the next question comes from the line of Steve Powers with Deutsche Bank. Please proceed with your question.

Hey, thanks. Good evening, guys. Dave, best of luck from me as well. A couple of questions, probably for Diego, actually, if I could. First one, just a little bit of a cleanup. I think coming into the quarter, you guys had guided the extra week to be a 6-point impact; I think it ended up being more of a 9-point impact. So maybe just talk me through the math there and what caught you by surprise?

Yes. As we mentioned earlier, we observed that wholesaler inventories were lower than we anticipated, particularly in the final weeks of the year. The additional week that we accounted for had a significantly larger impact than we initially predicted. This is what caused the guidance to shift from a six-point impact to a nine-point impact.

Okay. Perfect. Okay. That's helpful. And then as we think about '24, the gross margin step-up that's embedded in the guide. You talked about inflation some pricing offsetting that, but not a lot of pricing. And it sounds like the shortfall fees and the third-party production payments are going to be around about the same year-over-year, if not maybe a little bit more. So what drives the gross margin expansion? Is it all productivity? Or are there other levers that you're seeing that maybe I'm not thinking about?

No. I think you've read it really well. So we have pricing to 1% to 2%; that should help us offset the majority of the inflation, but we will continue with the savings agenda that we talked about last year. Initially, a lot of our savings we thought came from scrap and other pieces. Now we're really focusing on the other areas, which is the network optimization and some of our purchasing and contract thesis. So we think those pieces will continue in the next two years, three years to provide some opportunities for growth in gross margin.

And the next question comes from the line of Rob Ottenstein with Evercore ISI. Please proceed with your question.

Thank you very much and best wishes, Dave. Jim, I'm curious about your ability to analyze and understand competition. If this isn't too sensitive, could you share your thoughts on why High Noon has been so successful, what you’ve learned from that, and how you might adapt from those insights? That’s my first question. My second question, which could be directed to anyone, is about the development of the hard tea category. With many new entrants, are you noticing an increase in shelf space for the overall category? How do you see this evolving over time? Will you need to adjust your competitive strategies to maintain your strong leadership position?

I'll start with High Noon. I believe they have done several things well. They began with Gallo, a really strong company, and we modeled our sales force on them 35 years ago. They've executed retail effectively. First, they recognized the opportunity to elevate hard seltzer to a premium level, and they approached this correctly with a straightforward message of real vodka and real fruit. They deserve credit for that. Additionally, they have really excelled in the liquor channel by working through liquor wholesalers, who can often execute strategies that aren’t typical for beer wholesalers, such as offering big discounts. This has contributed to their strong performance and serves as a good example for us all. Regarding the development of Hard Tea, Twisted Tea currently leads the market. Despite numerous competitors emerging over the years, none have significantly affected its position. Now, there are hundreds of new competitors trying to enter the space, but I haven’t seen much success from most of them. There is a possibility that a brand like Arizona, Mara, or Monster could gain traction, but they face a significant challenge because Twisted Tea is the original and has established the flavor profile. For a hard tea drinker, the taste should resemble Twisted Tea, making it difficult to replicate. The flavor aspects of tea, including tannins and polyphenols, add to this complexity. We believe Twisted Tea can continue to grow at the same rate as the category, which represents about 85% of the market, with the remainder shared among several competitors. I do not anticipate a strong contender emerging to take the second position. Nevertheless, we have robust competition from companies like Monster and Coca-Cola, and Gallo is contributing to significant growth outside of Mexican imports. As we move forward, we expect increased participation from these brands. We have a 25-year advantage, but we are reinforcing our brand support, having substantially increased our investment in recent years. This overinvestment is aimed at maintaining our leadership, and while we will share some market space with quality competitors, we are committed to sustaining our momentum.

The next question comes from the line of Eric Serotta with Morgan Stanley. Please proceed with your question.

Good afternoon, guys, and congratulations and best of luck. Dave, we'll miss hearing from you on these calls. A question for Jim and one for Dave. Jim, just wondering to get your latest thoughts in terms of beer category growth, particularly in traditional beer as opposed to beyond beer, or if you want to talk total beer category, that's fine too. One of your competitors recently has talked about improving trends in the category exiting 2023 and certain expectation that the category would get to back to historical trend line of kind of flat to down 1% this year. So that's for Jim. And then for Dave, hoping you could give some color on the slowdown in Twisted Tea growth in scanner over the past couple of months; probably some weather impact over the past month or two. And to be fair, you guys have been very upfront that Twisted isn't going to grow 30%, 40% forever. But do you think we are sort of downshifting into a more sustainable rate of growth here? Is there something else going on in terms of distribution or velocity that you would point out?

I'll address both of your questions and then pass it over to Dave. Regarding the beer category growth, we have noticed a slowdown in the first eight weeks of this year, which is evident in the Circana numbers we are analyzing. The category growth has decreased slightly from a robust finish in 2023. I see three contributing factors: one is permanent, while the other two are transitory. The permanent factor relates to January and the trend towards dry January, which seems to be gaining traction. The category has slowed approximately 1.5% in the last eight weeks, with possibly one-third attributed to dry January. The transitory factors include ongoing disruptions in the beer category due to issues related to Bud Light, which have led some consumers to switch brands or leave the category for spirits or non-alcohol options. This accounts for about one-third of the 1.5% to 2%. Additionally, we experienced a significant price increase last year, around 6%, which resulted in initial stockpiling by retailers, but we did not see a similar bump this year. Consequently, we may have a less optimistic view of the overall beer category compared to what we've heard from Molson Coors. Their analytics might be more favorable than ours, and I remain hopeful that they are correct. Analyzing last year's data, traditional beer, which makes up 80% of the beer category, likely decreased by about 4%. This was balanced out by about a 7% growth in beyond beer. The net effect indicates a decline in the beer category of roughly 2%. This trend may persist, but there remains significant growth potential for brewers like ourselves, Molson Coors, and others in the ready-to-drink segment. This market presents opportunities for creativity and could lead to innovative categories in spirits-based high-flavor drinks, which I believe should also be part of the beer category. My definition of beer encompasses products made in breweries and sold through traditional beer wholesalers, which represents an opportunity that offsets the performance of both traditional and beyond beer categories. Now, regarding Twisted Tea, I expect to see continued double-digit growth this year and potentially next year, especially if we can expand the market for products like Twisted Tea Extreme and Twisted Tea Light. Twisted Tea has broad appeal, attracting consumers ranging from upscale college students to blue-collar NASCAR fans, and we still have significant growth opportunities, particularly within Hispanic and African American demographics where our penetration is lower. We aim to enhance Twisted Tea's appeal to a wider audience. It's a unique product with a fun, non-carbonated character, and I see various pathways for sustaining double-digit growth, as Dave noted.

Yes, I think Jim addressed your point well. Eric, the slowdown you mentioned is anticipated. If we look at the numbers, we see a 27% growth over the last 52 weeks and 22% over the last 13 weeks, which is still above our expectations for the year. We are gaining market share, and this period is a time for us to reload the brand. We have a lot of activities planned for the upcoming spring. While we recognize that we won't maintain high growth rates throughout the year, we are comfortable with our position. We are confident for various reasons, including the potential for growth Jim discussed, such as capturing more of the Hispanic and African American markets and the introduction of Twisted Tea Light. We also gained significant shelf space last year, and we still have room to grow, currently holding 28% of the category with only 18% of the shelf space. We anticipate gaining at least 20% more shelf space in large formats for Twisted Tea this spring. Furthermore, we are experiencing growth and gaining share across various VDIs. We are not taking our success for granted because there is considerable competition, and we're making significant investments in all areas. As for innovation, we are cautious about over-innovating this brand, focusing instead on expanding our core offerings like the original and half and half flavors. As we close out the year, we feel positive about our position and our plans for '24, ensuring we support our efforts with Twisted Tea.

And the next question comes from the line of Brett Cooper with Consumer Edge. Please proceed with your question.

Thanks. Good evening. I would add my congratulations to Dave, and thanks for the humble and frank commentary for the ups and downs in the last six years. So the question is on the portfolio. Can you just speak to Boston Beer's capacity to operate with a portfolio of brands that I don't know, it could be 10, 15 brands or whatever the right number is versus the five or so that you do today? And I guess I'm asking this from both the production standpoint and then how your brand support budgets will need to change to address those.

I can handle the production aspect. Our brewery has a unique set of capabilities, and our product mix has become increasingly complex over the past five years. Our manufacturing strategy focuses on producing a complex product mix while achieving scale economics. In the beer industry, manufacturing typically involves long production runs and minimizing portfolio complexity, potentially outsourcing some challenges. The packaging and equipment are designed for long runs, and our strategy reflects that. However, we don't have the same flexibility; for instance, we can't run Miller Lite on a can line continuously for a year. We utilize specialized equipment for automating variety packs, enabling us to conduct very short production runs for canning, bottling, and kegging. We're also working on reducing our finished goods inventory and will be implementing a new ordering system and sales operations planning in the next two weeks to enhance our inventory management through a replenishment model. Our breweries operate differently than larger commercial breweries, and we aim to balance this approach without sacrificing economies of scale. We follow a production philosophy similar to that of Toyota, which pioneered these methods decades ago. Early in my career as a manufacturing consultant, I studied Toyota's methods for achieving higher quality, shorter production runs, and lower costs, and we are trying to emulate that.

I will expand on Jim's point. We also discussed shortfall fees and how they provide us with complexity and flexibility in our network. The reason we maintain a 30-70 mix is to ensure we can delegate some of this complexity to those who can manage it effectively. We are confident that on both the operations and distribution sides, we can meet our planned targets.

Brett, I want to address the 15 brand portfolio. We don't necessarily need to have 15 brands. The demand from consumers is definitely increasing. Currently, we have five excellent brands, and this year we plan to launch Mountain Dew nationally, alongside introducing a new brand, Sun Cruiser. Our sales organization has the capacity to effectively sell and support these brands in the market. Additionally, it's crucial to invest in these brands, and our gross margin initiatives provide us the flexibility to expand our portfolio, as we aim to meet the evolving needs of the market across various segments. Regarding innovation, we believe we are well-positioned; we have made significant progress and are ready to move forward. Our company emphasizes long-term growth, and we have a sales team that excels at execution, as well as strong relationships with wholesalers and retailers. Our extensive experience gives us an advantage in recognizing market demand signals, allowing us to swiftly translate these signals into actionable ideas, products, and market tests. Thus, our ability to innovate, combined with the development of our core brands, will rely on this strength, supported by the production capabilities that Jim mentioned.

And the next question comes from the line of Peter Grom with UBS. Please proceed with your question.

Thank you, operator. Good afternoon, everyone. Dave, I wish you the best moving forward. I have two questions for you. The first is about the long-term gross margin comment. I remember that the previous target was firmly set at 50%, but you mentioned it might be in the high 40s to 50%. Has something shifted in your expectations that leads you to now include a lower end of that range, or am I reading too much into that? Jim, my second question is broader. I wanted to discuss your comment on dry January. You mentioned that the movement is gaining traction, but I'm curious about your thoughts on the trend of consumers moving away from beer and alcohol. There seems to be a notion that younger consumers are becoming less interested in alcohol. Do you think this trend associated with dry January is just a seasonal spike, or does it indicate a more lasting shift in consumer behavior? How do you see the industry evolving as this could pose a greater challenge to growth?

Perfect. First of all, I'd say we're still on the same path we were before. We want to return to the profitability we had in 2019. The reason we have a range is because there's quite a few things in there. Part of it will be the mix of brands. Part of it is just how commodities and some of the inflation piece behave in the next few years. But our target continues to be the same to return to previous profitability. And I think we have a plan to get there. So I wouldn't read more than that into it.

I agree with that. Our goal remains at 50%, a target we've achieved before. We've experienced over 50% growth in the past, which suggests we can reach that level again, especially considering the investments we've made in our breweries and the ongoing changes in our manufacturing processes, with this being just the first year of that transformation. Regarding dry January, I can't predict the future, but I have a feeling about a couple of things. First, alcohol consumption per capita has remained quite stable over the last 70 years, so any changes will be gradual. I've noticed a slightly different mindset among young adults in their twenties. While alcohol plays a role in their social lives, they also seem more conscious of their overall wellness. There are some minor shifts towards moderation instead of total abstinence, and we have seen small movement towards cannabis, but those figures are negligible, perhaps under 1% year-on-year. It’s a slow-moving trend when we examine the historical data from the past 70 years.

And the next question comes from the line of Filippo Falorni with Citi. Please proceed with your question.

Hey, good evening, guys. A quick question, Dave. You mentioned in the prepared remarks that you expect hard seltzer category to decline at a low teens rate in 2024. You also mentioned a lot of initiatives in Truly. So are you expecting Truly to grow in line with the category to gain share? And then longer term, when do you think we're going to see kind of a new moderation or like a normalization into hard seltzer category? Do you think it's something that could happen at the tail end of '24, maybe '25? Just a sense of how you see hard seltzer evolving from here?

Sure. Last year, the category was down about 20% to 21% in volume, but we are seeing gradual improvements. The latest numbers show a decline of around 14%, so we're projecting a decline of 10% to 15% for the category. Some projections are more optimistic, suggesting low single-digit declines, but overall, it is improving. For Truly, we're nearing a year into our effort to redefine the brand, focusing on lightly flavored varieties rather than bold flavors. We found that bold is part of the category, but it isn't as significant as we initially thought. We've made progress; a year ago, our business was 65% bold flavors and 35% light, but now it's shifted to 55% light and 45% bold. Our light flavor SKUs, including single-serve packages, have seen a 9% increase in sales year-to-date. This segment constitutes 45% of our business and is growing, confirming that consumers prefer lighter flavors. We run a promotional program three times a year, and previously, all our featured flavors were bold. Since last summer, we’ve transitioned to all light flavors, and the response has been much better, with strong repeat purchases and approximately 10% of new consumers coming through that program. Additionally, our efforts in single-serve and convenience stores are showing positive results, with a 23% increase year-to-date, particularly driven by flavors like Wild Berry and a new offering called Citrus Squeeze. While we know shifting the brand towards lighter flavors will take time, we don't anticipate tracking the category's decline closely. We expect to perform better than the category showing, likely remaining below that decline rate. Personally, I want to see this brand maintain improved growth rates, and it's been gradually getting better. A year ago, we were experiencing declines in the low 30s, and now it's around 20% to 21%, with hopes to improve to below 20%. From a market share perspective, it’s probably unlikely that we will gain share with Truly this year. However, if we can maintain share as we enter summer, that would be a positive indicator moving forward.

And I would add, thinking about this long term, the fundamental factors that drove the success of seltzer are still out there. And it is very much in tune with long-term consumer trends in alcoholic beverages, which are movement to flavors to lower-calorie drinks and sort of, and hard seltzer is a quintessence of those. And it also represents a very drinkable refreshing alternative to beer to hard liquor to wine. It offers category benefits that you really only get in hard seltzer in just the consumption experience of interesting, varied, light, refreshing, low calories and a very drinkable, poundable level of alcohol. So long term, I think we're thinking that there can be a second act for seltzer. So very much like craft beer had; it grew like crazy for like the first 12 years. This category started in '84, and then it had a flat period for some years. And then it's, I think, quadrupled when it started growing again in 2004. So I think we've just seen the first act for this hard seltzer space. And the last thing I'd add is, and it's a category where you have two strong creative players, us and Marc Anthony, very committed to it and who see a long-term future if we can innovate around new consumer needs and occasions.

Great. Thank you, guys. And best of luck, Dave.

There are no further questions at this time. And now I would like to turn the floor back over to Jim Koch for any closing comments.

I want to thank you all for joining with us, and thank you for your main thoughts about Dave, who has done an outstanding job here. When he joined, we were $850 million, and now we're over $2 billion. So that's pretty damn good in six years. So thank you, Dave, and we'll talk in a couple of months.

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