Boston Beer Co., Inc. Q3 FY2024 earnings call

• Market Environment: Near-term industry volume fluctuates due to macroeconomic factors, pricing stable with ~2% increases (high end of prior guidance).
• Boston Beer's Position: Narrowed 2024 volume guidance, strong core brands, innovation pipeline for 2025, margin initiatives showing progress with gross margin up 60 basis points in Q3.
• Brand Portfolio: Twisted Tea has 85% market share but growth decelerated; investing in Twisted Tea college football program. Truly focusing on lighter flavors and Unruly. Sun Cruiser performing well. Samuel Adams American Light expanding nationally.
• Supply Chain and Margins: Progress on productivity initiatives (procurement savings, waste, network optimization, brewery performance), with gross margin benefiting from price increases, procurement savings, and lower returns.

For the Boston Beer Company, key segments include: Twisted Tea, the number one hard tea brand with 85% market share, category volume up 18% and dollars up 20% YTD through Q3; Truly, the number two hard seltzer brand, focusing on lighter flavors and Truly Unruly (8% ABV); Sun Cruiser, a premium can cocktail performing well; Samuel Adams, with a strong craft legacy and Samuel Adams American Light expanding nationally in 2025; and Hard Mountain Dew, with positive depletion trends but in early stages.

• Narrowed 2024 volume guidance to reflect first nine months performance, expecting low single-digit decrease in depletions and shipments.
• Price increases ~2%, higher than prior guidance range.
• Non-GAAP EPS guidance $8-$10, excluding noncash impairment charge.
• Capital expenditures revised to $80-$95 million, share repurchase authorization increased to $1.6 billion.

• Macro environment impacting near-term volume trends.
• Potential cannibalization from innovation, though not significant yet.
• Sensitivity of Q4 results to short-term volume movements and shortfall fees.

Q: Just wanted to come back to how to think about 4Q. I know you've got the full year volume guidance that gives us a good -- some guardrails on how to think about it. But you have been talking about some new distribution pipeline fill for Hard Mountain Dew driving some potential upside against sell-through it sounds like the inventory build in 3Q more than makes up for that and maybe some of the other new innovation getting ready to go out in early 2025. Is that the right way to think about it? And can you just talk about some of the puts and takes besides just the current inventory level A: Yes. I think as we've laid out before, Q4 is our smallest quarter and therefore, is very sensitive to volume moves. So we're currently on our 2025 plan right now, we'll come back and talk about it next quarter. But as we look at that, we're looking at what are the dates that we're launching in different markets, Hard Mountain Dew, what the growth of Sun Cruiser is at the beginning of the year. So, those would be the two branded driven pieces that might change the volume between Q4 and Q1 a little bit. And then the third one is the one you mentioned, our inventories are a little bit long, not a lot, but that can drive a handful of points up and down. So those three things are the reason why you see a little bit of a bigger -- kind of a bigger range in Q4 just because of the relative size of Q4 versus those three things.

Q: Two questions. One, just wonder if you could give us any kind of early sense of how October looks things getting a little bit better. I understand some pricing came into the market in certain areas. Any reactions to that? And then second, if you kind of go into Twisted Tea in a little bit more depth, at least in the scanner data, it's slowed a bit, velocities seem to be down, and wondered what you're kind of diagnostic is for that and maybe we're not reading the data right, but that's what we're seeing. And how do you think about the momentum of the brand going into 2025 A: Perfect. So, on the first part, I think as we laid out the last 42-week number has a 2%. So, it's a little bit better than the year-to-date at the end of the quarter. That being said, just given, again, the relative seasonality in the low side of Q4, I think it's a little bit too soon to tell, but it's a little bit better if you look at the two numbers we've laid out. Yes. And on the second part of the question regarding Twisted Tea. One, we're on we're working off a much larger base this year. But secondly, it was a year that a fair amount of competition came into the space, seeing the great success that we've had, and we've built this brand over a long period of time. It's built in a very sustainable way. We feel like what's the head for us is to claw back that long tail that had kind of come in. there was a lot of trial in moving on. So, we feel confident that going into next year, we'll be on track with Twist Tea growth.

Q: Hoping, you could talk a bit about Sun Cruiser, maybe talk a bit about what your expectations are in terms of shelf space for next year? And where do you expect that space to come from in accounts that are able to sell small based and spirits based? And then at the consumer level, what are you seeing in terms of interaction between Sun Cruiser and Twisted? Obviously, significantly incremental, but for the part that does overlap, what do you -- what kind of trade-offs are you seeing at the consumer level? And then a quick follow-up.

A: So, we see it as an incremental proposition to Twisted. We haven't seen any really cannibalization of that franchise with it. We're looking at both from a product standpoint, it's a higher-margin product for us, which is, as we've talked about in past calls, we're looking to introduce innovation that's margin accretive, which it is. It's part of a highly focused canned cocktail strategy. And so, we're looking at this as taking from other vodka-based canned beverages. So, as you look around the store, you can see who the dominant players there are, and we feel confident that we can grow our business at the expense of others versus ourselves.

Q: I had a question on Truly. You mentioned you're not satisfied overall with Truly's performance. So, I guess I'm hoping for some more color on some of your initiatives. First, you mentioned adjusting your marketing strategy. So, I'd love to hear maybe some of the changes you might be making. And then second, you mentioned success with lighter flavors. So, could you give us a sense of what percentage of Chili's mix is lighter right now? And then, I guess, finally, you also talked about possible pruning. So again, hoping maybe for a little bit more color on that? And what percentage of Truly's volume you might consider discontinuing A: Yes. Thanks, Bonnie. I think one, we've basically taken '24 as a year to reassort the flavor profile of what's in front of the consumer, and we're driving more lighter flavor. We're also seeing, as we've mentioned, the higher Truly Unruly has some nice momentum. We're looking to drive those as well as really focusing on the convenience store channel. In terms of -- I wouldn't necessarily break down the numbers in terms of where we are. I would say we're heading in the right direction. And in terms of the marketing spend, we're elevating our spend, and we also have -- we won't announce yet. It will probably be for fourth quarter, but some kind of dynamic part that we think can help charge the business.

Q: I wanted to ask a broader question about the beer industry. We've clearly seen some softness this year into the summer, particularly a bit of an improvement if you include the fourth category, as you guys talked about. How are you seeing the evolution for the balance of the year and into next year? You think this was like more of a temporary headwind in '24 that might lap it to '25? Or do you see any more structural headwinds that might continue into next year A: Yes, there are structural headwinds to the beer industry. None of them is very big. It's hard to isolate and measure any one of them, but you've got things like cannabis, Ozempic, moderation, health concerns and pricing over the last four years that has been in excess of inflation. None of them is big enough, but you put them all together and you've got a beer industry that's down 2%, maybe 2.5% whatever the number of the week happens to be, but it's between two and three, and that's about where our depletions have been for the year. I don't see any of those necessarily going away, except the pricing. At this point, beer pricing looks like it's actually at least for us, and it's been below inflation even at 2%. So, we've been able to recover our cost increases and also have our price come down in real terms. I believe that the beer industry will get disproportionate volume from the fourth category. I think the fourth category is kind of in the wheelhouse of beer for a bunch of reasons that I talked about. So, I see that coming back. I can -- the rhythms of our volume over 2024. In the beginning of the year, the first three or four months was pretty good. And then the industry went into a slump kind of after Easter. And you look at the same syndicated data I do, it's come back over the last six weeks. These aren't huge movements, a point or two. But we are, at this point on an upswing over the last six weeks. And as Diego mentioned, our shipments year-to-date going backwards from today are a little bit higher than they were at the end of the third quarter. So almost mathematical necessity, our October numbers are coming in better. I don't have a crystal ball. I don't know whether that will continue. There are headwinds. They're not major for the beer industry, and I'm hoping that as an industry, we can pick up share of alcohol as the fourth category becomes more important. And if we can outcompete wine and spirits for that volume.

Q: So, I'm trying to understand the earnings outlook a bit better. I have year-to-date adjusted EPS at $10.76 and so at the midpoint of the 8 to 10 guided range, that would imply almost negative $2 in EPS for 4Q. Looking back at the model, that's one of the lowest 4Qs I can see. Is that math right? Am I missing something in the comparables or something? Or if it is right, can you help us better understand the details that would drive such a loss in 4Q A: So first of all, the reason we have a range is, again, as I mentioned before, Q4 is relatively small and therefore, very susceptible to movements -- short-term movements back and forth, right? That's why we tend not -- we don't love seeing our business in a Q-by-Q point of view because any movements in between inventory, orders, loading and products, yes or no, makes a big difference. And we're still laying out when we're going to ship out some of the innovation next year, for example, what pieces we're going to move. That's one. The second one is, Q4 is usually when we have our shortfall fees. And therefore, that is a direct shift to the margin profile of Q4 versus the rest of the quarters. And that's something that consistently will happen because that's where we tend to fill in our factories instead of using some of our external capacity. So, there's no underlying reason that changes either the trends of the brands or any specific onetime things coming in. It's more of the sensitivity to the volume, the full fees either doing the margin and just how sensitive it is to those pieces.