Greetings, and welcome to The Boston Beer Company First Quarter 2024 Earnings Call. As a reminder, this conference is being recorded.

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 2024 first quarter earnings call. Joining the call from Boston Beer are Jim Koch, Founder and Chairman; Michael Spillane, our CEO; and Diego Reynoso, our CFO. Before we discuss our business, I'll start with our disclaimer. As we 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 Michael, who will provide an overview of our business. Michael will then turn the call over to Diego, who will focus on the financial details of our first quarter results as well as our outlook for the remainder of 2024. Immediately following Diego's comments, we will open the line for questions. We were pleased to see flat depletions in the first quarter and to deliver revenue growth. Twisted Tea continues its strong momentum, and we continue to make steady progress on our margin enhancement initiatives. Our strategy to return to long-term sustainable growth through investing in our powerful brands and continuing to innovate in Beyond Beer remains unchanged. The cash-generative nature of our business and our strong balance sheet supported our repurchase of $65 million in stock thus far in 2024. I'd like to thank our Boston Beer Company team, distributors, and retailers for their support in a solid start to the year. And I'm delighted to have on the call today, Michael Spillane, who formally joined as our CEO earlier this month. Michael's strong operational experience in consumer products and his long history with our company make him the ideal choice to continue the implementation of our strategy to return to long-term growth. I'd also like to take this opportunity to thank Dave Burwick for his 19 years of excellent contributions to Boston Beer and his assistance to Michael in the transition. I will now pass the call over to Michael.

Thanks, Jim, and good afternoon, everyone. I'm excited to join Boston Beer as President and CEO after serving as a Board Member for 8 years. I spent my first few weeks meeting with our team, our distributors, and visiting the breweries, which has reinforced my conviction in the opportunities that lie ahead for the company. Boston Beer has powerful brand equities, the best sales force in beer, and a strong team with a unique entrepreneurial culture. The cash generation of this business is powerful and allows us the optionality to invest in our brands and long-term innovation. We remain focused on implementing our strategy to deliver long-term sustainable growth and improve our operational efficiency while being disciplined stewards of capital. Our highest priority as a company is to return to delivering sustainable volume growth. This involves protecting and nurturing our core brands so that they may reach their full potential while continuing to drive innovation in Beyond Beer, which we expect to drive category growth. In our core brands, we're highly focused on providing the appropriate levels of marketing spend on both working media to drive awareness and attract new customers as well as in-store at the point of sale to drive conversion. Working with our distributors and retailers, we will continue to focus on maintaining strong service levels and ensuring we capture and recapture the share of shelf that our core brands deserve. Finally, we'll continue to innovate on our core brands, and we'll be fine-tuning our product roadmap to manage innovation and line extensions in a disciplined area. Within our core brands, Twisted Tea momentum continues, with dollar sales up 21% in the first quarter, while growing share by 1.4 points in measured channels. We continue to increase distribution while maintaining strong sales per point and achieved additional space in the spring shelf resets. Twisted Tea is the original hard tea brand with strong brand awareness and loyalty, and we intend to invest appropriately to maintain the #1 share position with strong growth. Twisted Tea Light continues to be highly incremental, and we're encouraged by the early results in test markets of our higher-ABV Twisted Tea Extreme. We remain focused on stabilizing Truly and have seen sequential improvement in our lighter flavor variety packs and single-serve packages. However, the hard seltzer category remains under pressure in 2024, and we continue to expect category volume declines in the low teens. Truly is now a smaller part of our business mix with Twisted strong growth, but remains a 20% share of hard seltzer in measured channels, and we're working diligently to improve its trajectory. Across our other core brands, Sam Adams, Angry Orchard, and Dogfish Head, we see areas of opportunity and remain focused on nurturing these brands, which remain an important part of our portfolio and the company's craft legacy. We introduced the new Sam Adams packaging late in the first quarter, and we'll continue to invest in Boston Lager, Seasonals, and new innovation as well as our non-alcoholic offerings. Sam Adams' non-alcoholic grew 52% in dollars in the first quarter in measured channels. In addition to supporting our core brands, we'll continue to focus on long-term product innovation to plant seeds for future growth. Our goal is to generate a steady cadence of brand innovations, which will test in smaller markets to determine the winners and move forward to national launches. Our 2024 innovation is in the early stages of rollout and will have more significant impact in the second half of the year. Sun Cruiser, our vodka-based tea, is in its early stages of on-shelf availability and thus far, has been well received by distributors and retailers. HARD MTN DEW has begun to transition to our network and positions us well to expand the reach and consumption of HARD DEW as we eventually will achieve national distribution. Today, we are reiterating our 2024 volume guidance of down low single digits or up low single digits. While the first quarter was a solid start to the year, it's a smaller quarter and our key selling season remains ahead of us. In my first few months at the company, I will continue to focus on further refining our product roadmap and innovation process. I believe we have the right teams, infrastructure, and strategies in place to return to long-term volume growth. I'm excited to work with the team, our distributors, and retailers to deliver on our objectives, and look forward to meeting investors and analysts in the month ahead. I'll now pass the call over to Diego to review our first quarter results and 2024 guidance.

Thank you, Michael. Good afternoon, everyone. Depletions in the first quarter were flat and shipments increased 0.9% from the prior year, primarily due to the growth in Twisted Tea, offset by declines in Truly Hard Seltzer and our other brands. Shipments were higher than depletions as distributors built inventories to support our peak selling season, and we shipped some additional product to support the implementation of our new automated customer ordering and inventory management system. We believe this system, along with other improvements in our supply chain process, will help us further reduce waste and optimize our network. We believe distributor inventories as of March 30, 2024, were at an appropriate level for each of our brands and averaged approximately 4.5 weeks on hand compared to 4 weeks on hand at the end of the fourth quarter of 2023 and mirroring the 4.5 weeks at the end of the first quarter of 2023. Revenue for the quarter increased 3.9% due to volume increases, pricing, and lower returns. Our underlying pricing for the first quarter was consistent with our full year guidance range, with additional benefits from lower returns. Please note that we do not expect the benefits from the returns in the first quarter to continue in the balance of the year. Our first quarter gross margin of 43.7% increased 570 basis points year-over-year on a reported basis. Gross margin was up 360 basis points year-over-year, excluding one-time in the prior year quarter related to a Truly Vodka Seltzer rebrand and the nonrecurring payment to a third-party contract brewer. The underlying gross margin expansion in the quarter was primarily related to pricing, including a benefit from lower returns, procurement savings, and improved brewery performance on higher volumes, offset somewhat by inflationary costs. Excluding shortfall fees and third-party production prepayments, which we've discussed in prior calls, our gross margin was 44.9%. Advertising, promotional and selling expenses for the first quarter of 2024 decreased $5.2 million or 4.1% from the first quarter of 2023 due to lower freight costs as a result of both lower rates and efficiencies. Within brand investment, we increased our media spend, which was more than offset by declines in other promotional spending. General administrative expenses increased $6.7 million or 15.3% year-over-year, primarily due to higher salaries and benefits costs, which include Chief Executive Officer transition costs that were fully expensed in the first quarter, partially offset by decreased consulting costs. We reported EPS of $1.04 per diluted share compared to a net loss of $0.73 per diluted share in the first quarter of 2023. The year-over-year improvement was driven by higher revenue and higher gross margins. Our tax rate of 33.0% in the first quarter was higher than our planned rate, driven by nondeductible compensation expense related to the CEO transition costs. Now I'll discuss our 2024 guidance. Our fiscal week depletion trends for the first 6 weeks of 2024 have decreased 2% from 2023. We are reiterating our 2024 volume and EPS guidance from our February call and updating our full year tax guidance to 28.5% due to an increase in estimated nondeductible compensation expenses related to our CEO transition costs. We continue to expect 2024 depletions and shipments to range between a decrease of low single digits to an increase of low single digits. We expect price increases between 1% and 2%. Full year 2024 reported gross margins are expected to be between 43% and 45%. We expect commodity inflation in 2024, but at a lower rate than 2023, primarily driven by sweeteners and flavorings. We continue to expect to cover commodity inflation dollars with pricing, but do expect some additional margin headwinds from higher labor costs in our breweries. Where we land within the range of our guidance will be somewhat dependent on the mix of products sold. The contractual shortfall fees and production prepayments that we've discussed in our last call are expected to have a lower negative impact on full year 2024, reducing from 175 to 225 basis points to 135 to 185 due to changes in the timing of our production prepayment amortization. As these contractual terms expire, we will reassess our capacity needs and commitments with our third-party production partners. Our investments in advertising, promotional, and selling expenses are expected to range from a decrease of $5 million to an increase of $15 million. This does not include any changes in freight costs for the shipment of our products to our distributors. 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, 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 revenue performance is impacted by seasonal volume changes and timing of shipments. During the first quarter, shipment trends were above depletion trends and it is currently estimated that they will rebalance, resulting in shipment trends being lower than depletion trends in the second quarter. Also, please note that the fourth quarter is typically our lowest absolute gross margin of the year. Turning to capital allocation, we ended the quarter with a cash balance of $205.4 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 be primarily related to our own breweries to build capabilities and improve efficiencies. During the 13-week period ended March 30, 2024, and the period from April 1, 2024 through April 19, 2024, we repurchased shares in the amount of $50 million and $15 million. As of April 19, 2024, we had approximately $200 million remaining on the $1.2 billion share repurchase authorization. This concludes our prepared remarks. And now we will open the line for questions.

Our first question comes from Rob Ottenstein with Evercore ISI.

Great. Congratulations, Mike. I have a few questions. First, can you provide any insight into what was happening in April? Should we consider this in relation to Easter, and is it better to assess the entire 16-week period for a clearer understanding of current trends? Secondly, could you discuss the shelf space gains for Truly in the spring shelf sets for the core products? I've heard that some flavors and innovations may have lost shelf space. Did you manage to gain any shelf space for the core business? I'll stop there.

Perfect. I'll take the first question. We're looking at a period of at least 16 weeks or 13 weeks because, as you mentioned, there are year-on-year comparisons to consider. Easter has shifted, and there are specific ordering patterns from distributors that differ from year to year. Whether you analyze 1 week or 4 weeks, you can always find a basis for comparison. From our perspective, a 13-week comparison gives us sufficient insight to observe the trends of our brands.

Right. And then in terms of the Truly shelf space, it continues to be a very fluid situation where we're moving to some of the lighter flavors. We also have this year, Truly, and really rolling out as a new addition to the line. So again, I think we'll look for continued adjustments where we will be losing some shelf space with the flavors that are tracking and adding in some of the lighter flavors.

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

Congratulations, Michael, and I have two questions. First for you, I would appreciate it if you could share any new priorities you have for the organization, including any strategic or operational points of emphasis as you take on your role. Secondly, Diego, the start of the year appeared to be much stronger than expected in terms of gross margin. How does this align with your expectations for the quarter, and does it make you feel more confident about achieving the upper end of the gross margin range for the year, or is it still too early to determine that?

Okay. So I appreciate the congratulations. I'm really excited to be here. I'd start off by saying, I've been on the Board for 8 years. So I was very familiar with the team and the strategy, and I'm really impressed by both. Where I think I'm leaning in is just making sure that we're truly executing to that strategy and making sure that we have end-to-end alignment. We're really focused on growth and getting back to the long-term sustainable growth and probably trying to get a little bit sharper on our innovation, making sure that it's distinctive, it's profitable, and it's scalable. So again, but I want to emphasize we have a fantastic team in place and walked into a really good plan that we're just going to drill down to and make sure that we execute at a really high level.

All right. Steve, in your gross margin question, what I would say is we're still very confident with our gross margin plan. And that's why we're maintaining our guidance. Similar to the question around year-on-year comparisons, the gross margin has year-on-year ups and downs when you compare. But overall, we think we have a strong plan, and we are maintaining our guidance to arrive at high 40s to 50s in the next 3 years. So I think this is just one more positive step down the line in that plan.

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

All right. Congratulations from me too, Michael. I have a question on your advertising, which was down in the quarter. What do you believe is the right level of advertising spend, I guess, as a percentage of sales moving forward? I'm trying to understand, I guess, on some level, why you maybe don't see a need to increase spending as competition intensifies in the hard tea and then in an attempt to return Truly and maybe quite frankly, some of the other brands to growth. Your thoughts there would be helpful.

Great. And thanks, Bonnie. We're always looking at opportunities to invest where we see good returns. And again, a lot of this could be timing. To the extent when we have upside in our performance this year, we may choose to invest back in. We're continuing, again, to look where we can drive sustainable growth. Look, for Twisted Tea, we continue to invest and we'll have the strong investment there. And we assess the rest of the portfolio as we'll see fit. But we're aligned that where we see upside in the performance, we will probably choose to reinvest in marketing.

Bonnie, as a general rule of thumb for us, we are a growth company, which is a very important objective. Therefore, we tend to have a higher share of voice in our advertising compared to our share of market because, in the long run, that leads to share gain, and we operate in growing categories.

Okay. So you guys feel good about the spending levels to kind of maintain the momentum behind Twisted and then reaccelerate some growth or stabilize, I should say, Truly.

Yes, I think that's a fair statement.

Okay. That's helpful. And then if I could just ask another question on HARD MTN DEW. I'd love to hear a little bit more color on the performance for the brand in the quarter and again, maybe whether it's lived up to your expectations. And ultimately, what are your ambitions for the brand this year, especially in light of the comments you made earlier about your expectations for the hard seltzer category to decline in the low teens. And then could you guys confirm whether HARD MTN DEW is in your guidance or not?

I think a lot of the performance is in areas where we have not yet transitioned the brand. As we mentioned before, the process of shifting from Blue Cloud to our distribution network will take some time. We do anticipate some fluctuations during this transition, but in the long run, we believe it's a strong brand with solid equity. Integrating it into our distribution networks will be very effective. It aligns with our current rollout plan, but there may be opportunities for upside or adjustments if we can expedite the transition in certain territories.

And the next question comes from Eric Serotta with Morgan Stanley.

Great. Could you share your thoughts on the recent slowdown in Twisted Tea and craft channels? While mid- to high-teens growth is still impressive, it represents a significant decline compared to previous performance. How do you analyze this slowdown in relation to competition from other brands, tougher comparisons, or a larger market base? Mike, what is your perspective on the opportunity or growth potential for Twisted from this point forward? I know your predecessor mentioned the concepts of physical and mental availability. What framework do you use to evaluate this, and what growth potential do you see?

In terms of recent trends, it's a very short timeframe, and we will continue to evaluate it. We wouldn't categorize it as something significant right now, but we don’t see it leading to long-term changes for the business. As mentioned, we will be investing appropriately in marketing for Twisted Tea. We are introducing Twisted Tea Light, which we believe will attract an additional customer base without impacting our current customers. We also have the Extreme product, which has a higher alcohol content and we are optimistic about its potential. I believe we will be able to maintain this momentum as it remains a high priority for the company, and consumers are strongly committed to the product. Additionally, we have the opportunity to engage new consumers, particularly within Hispanic and African-American communities, which we are actively targeting.

And the next question comes from the line of Nadine Sarwat with Bernstein.

Two questions from me. First, a question for Michael. Boston Beer has obviously had, as you know, many successful waves of innovation in the past year across multiple categories over the last couple of years. So as you come into this role, I would love to hear how you view the future of Boston Beer's portfolio, taking on a long-term view, perhaps over the next 3, 5 years? And how do you see the mix between the new world innovation versus line extensions? And then a second question, obviously, some very nice gross margin performance this quarter. Could you give us an update on the level of your capacity utilization, both for your internal production and your third-party contracted capacity?

Great. I'll address the first part. I see us continuing to maintain a balanced portfolio. We need all our strong brands to reach their full potential, and there's significant opportunity with both beer and brands like Dogfish and Angry Orchard. We're aiming to stabilize Truly and regain its growth while also driving Twisted Tea. I'm excited about this role, particularly because we're known for our innovation. We have some excellent new products in the pipeline, including Sun Cruiser, a vodka-based hard tea that has been well-received. Our ability to replicate our successful formula means that innovation will always be an integral part of our identity. The Beyond Beer category is growing faster than traditional beer, and we believe we excel in that area. We'll keep supporting and developing that segment of our business. It's crucial for us to find a balance between our core products and innovation. In the past, we may have focused too heavily on one aspect, but moving forward, we will ensure that both elements are optimized to achieve their potential.

Regarding the second part of your question, I will confirm the exact numbers later. However, we have been transitioning from an 85-15 production mix to a 90-10 mix, as our goal is to have 90% of our production done in-house while utilizing external resources for high complexity products. We will provide confirmation on the Q1 numbers when available.

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

Michael, congrats on the new role. So I have 2 questions, one on Twisted Tea. Clearly, you've done very well over the last couple of years, including last year with significant distribution and shelf space gains. Maybe you can give us some level of context on these current spring shelf space resets and how much are you expecting to gain incrementally for Twisted Tea. And then my second question is a follow-up on gross margin. Diego, I think you mentioned Q4 is the lowest gross margin of the year. But typically, your gross margin is higher sequentially in Q2 and Q3. Should we expect a similar sequential improvement in gross margin in the next 2 quarters? Or is there something in particular that we should think about from a gross margin cadence?

I'll jump on the first part of that, and then I'll pass to Diego. So again, just reiterating on Twisted Tea, we're the market leader. We're continuing to expand our space. We're continuing to add brand support and making sure we're spending both on sponsorships and marketing to drive demand. We're bringing in new drinkers, which is really how this is going to continue to grow. And then we're bringing in energy. So for instance, the Rocket Pop Party Pack will be dropping now, which was a big driver of business last year. And again, I mentioned Twisted Tea Extreme, which is the higher ABV, which we think is going to energize a new consumer for us. So we'll consistently feed that business with new energy, and we see opportunities to expand our shelf space.

On your gross margin question, yes, we will see higher gross margins in Q2 and Q3. We also did mention that we had a really strong production and shipment quarter in Q1. So a little bit of that will come out of Q2. So the jump between Q1 and Q2 might not be as high as we've seen in other years. So we're maintaining our full year guidance because we still believe that we have a really strong gross margin roadmap.

And the next question comes from the line of Michael Lavery with Piper Sandler.

Congratulations, Michael. I have a follow-up regarding HARD MTN DEW and the distributor transition. You've mentioned that this process takes time. Are we likely to see interruptions in existing distribution markets during this transition, or will it be more seamless? Could you help us understand the mechanics of this? Also, regarding the new innovation, was pipeline fill a significant factor this quarter, or are you just referring to typical trade loading and deloading in the first and second quarter dynamics?

So I'll start with the second part of the question. Yes, exactly, it's just the normal flow of the business and sort of timing. And I will also add, as we talked about before, we've implemented a new material sourcing and inventory management system with our distributor. So we loaded up a little bit before we put it in place just in Q1 just to make sure that we think we were able to correctly source and supply all our customers. So it's not a huge piece, but it's a little bit of what I discussed. And then in terms of MTN DEW, we feel like the transition is tracking. But again, I would say it's a little bit fluid, and we're hoping within a reasonable time that we'll have national distribution.

And the next question comes from Bill Kirk with ROTH Capital Partners.

I have a follow-up regarding one of Nadine's earlier points. It appears that in the 10-Q, the in-house production number was 79%. This is the highest it has been in years. My question is, seasonally, during the larger production months in the summer, what could that number look like? Specifically, what could the 79% in Q1 become during the busier summer months? Additionally, regarding the shortfall fees, it seems you received a prepayment from a third party in Q1. Is this related to the loan you provided them at the beginning of the year? Are there any other methods to lower shortfall fees by offering them money upfront, like in the form of another loan?

So again, as I mentioned, when we talk about where we would want to be, we want to be at 90-10. We know right now, we're between 80% and 85%, from 79 specifically in the quarter. But we'd like to get to 90-10, and that's our plan. But it also depends on the mix of products that's flowing through our facilities. There are some specific products that we only have externally. So that is one of the key drivers of where we end up. But that's our target to get to those levels as we go forward. So can you just repeat that question for a second, please?

Yes. It appears there is nearly $3 million coming in from third-party production prepayments, which is a positive cash flow from that partnership. I was curious if this is connected to the loan you provided them at the beginning of the year. Are there any other strategies, similar to that loan, that could help minimize prepayments in the future?

There are still effective elements in our operations. Firstly, the timing of the payment amortization is not related to the loan. Additionally, we have modified our payment amortization because we expanded certain terms. Secondly, we have issued a loan to City, which will be repaid. The amount of this repayment will share some similarities with the fees we previously incurred, although they are distinct and merely coincidentally comparable to the agreed repayment amounts. Does that make sense?

I want to mention that achieving a 90-10 balance of internal to external operations is a long-term objective. We have the potential to reach this goal within this year. For the time being, City Brewing will remain our primary contract partner and is essential for our progress. Therefore, it will take some time before we can achieve the 90-10 balance. It’s unlikely to happen this year or next year, but in the long run, we can definitely envision it.

Ladies and gentlemen, there are no further questions at this time. I would like to turn the floor back over to Jim for any closing comments.

Well, thanks to everybody for joining us and for giving Michael a warm welcome, and I'm going to recognize Dave Burwick's contribution this quarter because most of it was under his guidance and direction. So I've been very fortunate to have 2 amazing people help lead this company. Thank you.

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