The Boston Beer Company, Inc. (NYSE:SAM) Q4 2023 Earnings Call Transcript
The Boston Beer Company, Inc. (NYSE:SAM) Q4 2023 Earnings Call Transcript March 1, 2024
The Boston Beer Company, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Greetings, and welcome to the Boston Beer Company Fourth Quarter 2023 Earnings Call. [Operator Instructions] And as a reminder, this conference is being recorded. It is now my pleasure to introduce to you Mike Andrews, Associate General Counsel and Corporate Secretary. Thank you, Mike. You may begin.
Michael Andrews: 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 we state 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.
James Koch: 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 at 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.
David Burwick: 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. We 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 forecast. 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 all have contributed to these improving brand trends. As previously announced, we're planning some innovations for the Truly brand launching this quarter that include a new 8% ABV truly unruly variety pack, which will replace our Truly Margarita pack and a new truly party pack, which to replace our Truly tropical pack.
In addition, we've approved the recipe of 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 and 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 to wholesalers, and we believe it puts us in a great position to expand the reach and consumption of hard do 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 had demonstrated good results in test markets in the fourth quarter. Meanwhile, Dogfish Head's award-winning can 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 RTE 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 depletions 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.
Diego Reynoso: 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 cocktail. Fiscal calendar shipment volumes for the quarter was approximately 1.5 million barrels, a 12.2% decrease from 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 and 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 meaning 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 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%. And dependent 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, 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 form. 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 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 for questions.
Operator: [Operator Instructions] And the first question comes from the line of Nik Modi with RBC. Please proceed with your question.
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