The Boston Beer Company, Inc. (NYSE:SAM) Q4 2022 Earnings Call Transcript
The Boston Beer Company, Inc. (NYSE:SAM) Q4 2022 Earnings Call Transcript February 15, 2023
Operator: Greetings, and welcome to the Boston Beer Company Fourth Quarter 2022 Earnings Call. . 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 2022 fourth quarter earnings call. Joining the call from Boston Beer are Jim Koch, Founder and Chairman; Dave Burwick, our CEO; and Frank Smalla, 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 over to Jim for some introductory comments.
James Koch: Thanks, Mike. I'll begin my remarks with a few introductory comments and then hand over to Dave, who will provide an overview of our business and our 2023 plans. Dave will then turn the call over to Frank who will focus on the financial details of our fourth quarter results as well as our outlook for 2023. Immediately following Frank's comments, we'll open the line for questions. Over the last few years, our company has experienced rapid growth, ending 2022 with a revenue base of $2.1 billion, which is almost double the $1.2 billion in revenue generated in 2019. A large portion of this increase is attributable to the outsized growth of the Hard Seltzer category. As we mentioned on previous calls, the Hard Seltzer category dynamics have been challenging as the economy reopened and it's been difficult to predict where consumer demand will ultimately fall.
We had expected early trends to improve in the second half of 2022 against easier prior year comparisons. Truly performance has not yet turned around, and Dave will take you through additional plans we have for Truly we expect to help improve the brand performance in the second half of this year. Looking back on 2022, our projections for Truly and some of our new brands were too high, and we produced and sourced materials at the upper end of our projections to avoid out of stocks. We've also had an expansion of product offerings that has introduced more complexity into our supply chain, and we planned our cost structure at higher levels of volume. This has resulted in financial performance that is below our expectations. In 2023, we are working to simplify our business to reduce complexity and improve margins as well as adjusting our cost structure in line with our current volume expectations.
We believe the actions we are taking will benefit the company over the long term and that the Beyond Beer category, where we have an advantaged position will grow over the next several years. We expect the operational and supply chain changes we are making this year, combined with our history of innovation, strong brands and our top-ranked sales force will lead us to long-term success. A strong balance sheet enables us to continue to invest in our brands. And today, we announced that we repurchased $8.9 million in stock thus far in 2023. We released our first-ever environmental, social and governance report, which established a baseline of data that we will work to improve over the long term. We now have a more standardized approach for understanding our energy use and our water use.
The ESG report also allowed us to highlight our focus and continued progress against our efforts to cultivate a culture of inclusion through awareness, engagement and accountability across the company. As shared in this report, our coworkers gave Boston Beer high scores on questions related to pride in working with the company, belief in our values, our concern for their safety and well-being and their confidence in the future of Boston Beer. To close out my remarks, I would like to thank our outstanding coworkers, distributors and retailers who continue to support our business. And now I'll pass the call to Dave for a more detailed overview of our business.
David Burwick: Thanks, Jim. Hello, everyone. Our 2022 full year volumes and revenue came in at the higher end of our financial guidance. However, the mix of volume came in differently than planned, and we also produced and sourced to ensure we would not have out of stocks or retail. This resulted in supply chain inefficiencies, particularly outside scrap on Truly, which impacted our margins and earnings. For the 2022 full year, we generated very strong operating cash flow of about $200 million, which gives us financial flexibility to invest in our brands for the long term. Importantly, we've learned much in the past year, understand where opportunities exist and have new plans in place to improve overall performance with an emphasis on getting Truly back to share growth.
We operate in attractive categories as the Beyond Beer category grew 4% in dollars over the last 52 weeks and had a CAGR of over 25% over the last 5 years. Our plans include reducing the complexity in our supply chain, while allowing us to better focus our resources on our top 2 priorities, sustaining Twisted Tea's industry-leading growth and gaining share in Truly. We've also evaluated all our operating expenses to ensure we spend in a more disciplined manner while continuing to invest in advertising and other initiatives to support our brands. In 2023, we expect overall volumes to decline with strong growth in Twisted Tea, offset by our expectation for continued negative Truly volume growth as the Hard Seltzer category likely will decline between 10% and 15%.
We also believe we have opportunities to be more focused on our product offering. We expect this to strengthen the underlying health of our business and contribute to future margin improvement. Additionally, we're lapping against the 53-week fiscal year 2022, which will lead to a headwind of approximately 100 basis points on our volume and top line growth performance in 2023. I'll now provide some color on our brands. Twisted Tea was the #1 growth brand in all of beer in 2022 and increased its lead as the #1 FMB by more than 8 volume share points, gaining 3.4 share points in 2022 in off-premise measured channels. As evidence of its durability, the brand's fourth quarter dollar sales growth in off-premise measured channels accelerated to 33% versus the full year's 31% and Twisted Tea's 2023 year-to-date growth rate has further accelerated to 36%.
This is a result of an effective brand-building campaign, our growing annual college football Tailgate program to extend the season, improved distribution of 12 packs and improve service levels. In 2023, we'll continue to increase our brand spend to advance Twisted Tea's position within Beyond Beer. We remain confident that Twisted Tea will sustain a strong double-digit growth in 2023 for a number of reasons: First, we see a significant upside to introducing Twisted Tea to a much wider audience and growing the base of Twisted Tea drinkers. While household penetration and brand awareness is lower than its competitors, its brand consideration and purchase intent remain the highest in the category. Household penetration grew by 20% in 2022, and the buy rate was up 7%.
We'll continue to invest in our top quintile ad campaign to drive awareness and expect increased trial and adoption to follow. Second, there's still room to grow through increased distribution. While we've achieved 50% ACV distribution on our original 12-pack, we have 2 other 12 packs, half and half and Party pack with much distribution upside. 24-ounce single-serve offerings that are sold primarily in convenience stores have made Twisted Tea the #3 selling single-serve brand in all of beer. -- but we also see the opportunity for increased distribution across all of our single-serve flavors. Third, Twisted Tea Light has proven to bring in new drinkers and prior brand rejectors. We've received an encouraging early response to our new Twisted Tea light 110-calorie product that we launched in high developed markets last year.
Photo by Wil Stewart on Unsplash
It only has 9% ACV distribution as we start 2023. Twisted Tea Light is bringing new drinkers into the brand family who are looking for lower calories but big flavor. Fourth, there's much opportunity to increase brand awareness and availability in Twisted Tea's under developed markets. We still have many historically underdeveloped geographies such as Texas and California where the brand's awareness is 10 points lower than the national average and is just now starting to catch fire. For example, in 2022, we increased investment in Texas and 1 year became our largest volume state, accounted for 10% of total Twisted Tea volume while growing 50%. Lastly, we also have underdeveloped consumer demographics, such as Latinos and African Americans, who represent an opportunity to grow the brand.
Only 24% of Twisted Tea households are multicultural, but they're growing 18%. We have plans to continue to grow Twisted Tea with a diverse audience through investment in awareness driving media and increased product availability. As Jim mentioned in his remarks, we're disappointed that the reformulation of Truly has yet to improve trends and are planning a major refresh of the Truly brand in the second quarter of 2023 that includes new easy-to-navigate packaging, more motive versus product-centric brand communication elevated media spend across all channels, especially digital and social media and aggressive marketplace execution to improve product availability and visibility, especially with our lightly flavored variety packs. We've learned a lot and are putting that learning into action this year.
For example, we realized in last year's second quarter after launching Truly Margarita that adding further bold flavor variety pack innovation was not going to be as successful as we had experienced with prior innovations as consumers were clearly overwhelm category news. Further, despite Truly Margarita's very good performance, it was the #1 new brand launch in beer in 2022, it was not as incremental to the Truly trademark as prior launches. It also became clear that consumers in their confusion were going back to the category basics and seeking more lightly flavored Hard Seltzers. And we have put too much executional attention towards our Boulder flavor lineup to the detriment of our variety packs. The reformulated CHO products that we launched in the fourth quarter have been well received by those consumers who know about the change, but we did not do a good enough job communicating those improvements on our packaging and then our advertisers so that more people will learn about the change.
Our upcoming package redesign will present a cleaner, easy-to-shop look and forcefully communicate that we have a now more refreshing taste that includes real fruit juice. Our internal consumer testing work validated that we made big product improvements. Now we need to better communicate it to consumers to trigger trial and win back lapsed drinkers. We sharpened our advertising communication in January to reinforce that point, and the new packaging and more motive ad campaign will hit the market at the start of the second quarter. Based on this new work and stepped up brand investment, we're expecting to gain share this year, although the first quarter will be more challenging as we lap last year's Truly Margarita launch. We deliberately did not add new permanent flavor innovation in the first quarter of 2023, so we can focus on the reformulated lightly flavored core lineup and build the brand more sustainably without adding new permanent product offerings.
Lastly, we launched Truly Vodka Seltzer in the fall ahead of 2023 to gain consumer learning and our experience with that launch has informed our approach with 2 new variety packs and updated packaging design and branding that will also hit the market in the second quarter. Without questions, sustaining Twisted Tea's double-digit growth and Truly trajectory are our top priorities for the year and will have our full attention and significant investment. Having said that, we have an excellent portfolio of brands, and we'll continue to broaden their shoulders and build them out. Sam Adams started the year with another buzzword of Super Bowl spot announcing our remastered Boston Lager that utilizes the same Cook family recipe, but through enhanced brewery techniques provides a smoother finish.
We also are investing more behind our seasonals portfolio, which is the only national seasonal beer and showcases summer rail on October feast. Lastly, we've added a new nonoutbeer called Gold Rush to go with Sam Adams' Just The Hays recently named the #1 on out beer in the country at the Great American Beer Festival. We'll continue to support other innovations, including the expansion of Dogfish Head can cocktails, the launch of Jim Beam, Kentucky Coors, FMB and the continued rollout of Hard Mountain Dew, but expect these to be smaller volume contributors in 2023 as they ramp distribution and find their audience. Turning to our supply chain. As we previously discussed, we're in the process of modernizing our supply chain through investments in equipment capacity and improved systems and processes.
Our product portfolio has expanded over the last several years. This expansion and the volatility of the hard seltzer category has increased complexity. We're working hard on our supply chain transformation initiatives to improve line efficiencies in our internal breweries and better manage our inventory. The disciplined portfolio management I mentioned earlier as well as our new supply chain systems and processes should lead to better operational performance over time. It will take time for these is to take hold. And as we previously disclosed, we expect to pay some shortfall fees to contract manufacturers in 2023 because of the lower Truly volumes. Given our expectation for lower volumes, we're closely reviewing and adjusting our operating expenses while continuing to invest in our brands.
We expect to use these cost savings to support increased brand spend. And within brand spend, we're both converting nonworking to working dollars and increasing the effectiveness of our spend through greater investment in digital and social versus traditional media. Despite near-term headwinds, we continue to believe that our business has significant margin improvement potential. In summary, we believe the investments we're making this year in enhancing our marketing plans and packaging for Truly continuing to fuel Twisted Tea's momentum, reducing supply chain complexity and lowering our cost base should drive operational effectiveness and improve top line growth market share and margin performance over the next few years. Now I'll hand it over to Frank to discuss fourth quarter financials as well as our detailed outlook for 2023.
Frank Smalla: Right. Thank you, Dave. Good afternoon, everyone. The fourth quarter continued to show sequential shipment and revenue improvement. However, as mentioned earlier, our gross margin was lower than expected primarily due to higher-than-expected inventory obsolescence and lower internal brewery volume. Shipment volume for the quarter was approximately 1.71 million barrels, a 16.7% increase from the prior year, partly due to an additional week in 2022 compared to 2021, reflecting increases in our Truly Hard Seltzer, Twisted Tea, Hard Mountain Dew, Angry Orchard and Dogfish Head brands, partially offset by decreases in the Samuel Adams brand. We believe distributor inventory as of December 31, 2022 average approximately 5 weeks on hand and was at an appropriate level for each of our brands.
Our fourth quarter 2022 gross margin of 37% increased from the 28.7% margin realized in the fourth quarter of 2021, primarily due to lapping prior year costs related to the 2021 Hard Seltzer slowdown, partially offset by higher brewery processing and inventory obsolescence costs. The higher obsolescence cost were primarily related to our adjusted volume projections for Truly shipments and the Truly brand transition to real fruit. Inflationary cost increases primarily due to increased packaging, ingredient and energy costs were offset by increased pricing with a net neutral impact on gross margin. Our fourth quarter advertising, promotional and selling expenses increased $1.5 million or 1.1% from the fourth quarter of 2021, primarily due to higher media spend and higher salaries and benefits costs partially offset by lower local marketing investments.
Freight to distributors was flat as higher volumes were offset by lower rates. General and administrative expenses increased by $5 million or 13.5% from the fourth quarter of 2021, primarily due to increased salaries and benefits costs. For the fourth quarter, we reported a net loss of $11.4 million or $0.93 per diluted share compared to a net loss of $51.8 million or $4.20 per diluted share in the fourth quarter of 2021. The. This decrease in the net loss of $40.4 million or $3.29 per diluted share was due to lapping the 2021 combined direct and indirect costs related to the 2021 slowdown in Hard Seltzer category growth as well as higher net revenue in the current quarter, which were partially offset by increased supply chain costs and slightly higher operating expenses.
Turning to guidance. Our depletions for the first 6 weeks of 2023 have declined 4% from the comparable periods in 2022. Our 2023 fiscal year includes 52 weeks compared to the 2022 fiscal year, which included 53 weeks. We are currently planning 2023 depletions and shipments to decline 2% to 8%, inclusive of an approximately 1 percentage point negative impact from the comparison against the 53rd week in 2022. We expect price increases of between 1% and 3%. Full year 2023 gross margins are expected to be between 41% and 43%. We continue to expect to cover inflationary cost increases to pricing. Our full year 2023 investments in advertising, promotion and selling expenses are expected to change between a decrease of $5 million and an increase of $15 million.
This does not include any increases in freight costs or the shipment of products to our distributors. In 2023, we expect non-brand savings to be largely offset by an increase in incentive compensation, which did not fully pay out in 2022. We estimate our full year 2023 effective tax rate to be approximately 28%, up approximately 160 basis points versus 2022. We are currently targeting full year 2020 fully earnings per diluted share of between $6 and $10. This projection is highly sensitive to changes in volume projections, particularly related to the Hard Seltzer category, supply chain performance and inflationary impact on consumer spending. Finally, as we model out the year, please keep in mind a couple of factors. We currently expect first quarter shipments to be at the low end of our full year guidance range as we lap the launch of Truly Margarita that mostly impacted the first quarter of last year.
And we also expect Hard Seltzer trends to remain challenging. Margin improvement will be weighted to the second half of the year based on volume trends, the expected timing of our cost reduction efforts and the phasing of obsolescence expense in the prior year. As a result, we're expecting a net loss in the first quarter. Turning to capital allocation. We ended the year with a cash balance of $182 million and an unused credit line of $150 million which allows us to invest in our base business, fund future growth initiatives and return cash to shareholders. In 2023, we expect capital expenditures of $100 million to $140 million. These investments will be primarily related to our to build capabilities and improve efficiencies. During the 2022 fiscal year, we did not repurchase any shares of our Class A common stock.
During the period from January 3, 2023 through February 10, 2023, the company purchased 25,000 shares at a cost of $8.9 million. As of February 10, 2023, we had approximately $81.5 million remaining on the $931 million share repurchase authorization. We will now open up the call for questions.
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