Boston Beer Company, Inc.

Greetings and welcome to the Boston Beer Company first quarter 2020 earnings call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during a conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jim Cook, founder and chairman for the Boston Beer Company. Thank you. You may begin.

Thanks. Good afternoon and welcome to everybody. This is Jim Cook, founder and chairman, and I'm pleased to kick off the 2020 first quarter earnings call for the Boston Beer Company. Joining the call from Boston Beer are Dave Berwick, our CEO, and Frank Smala, our CFO. In keeping with these times of social distancing, Dave, Frank, and I are in separate locations for this call. I'll begin my remarks this afternoon with a few introductory comments, including some discussion on the COVID-19 pandemic and the highlights of our results, and then hand over to Dave, who will provide an overview of our business. Dave will then turn the call over to Frank, who will focus on the financial details of our first quarter results. Immediately following Frank's comments, we'll open up the line for your questions. As the world's grappling with the COVID-19 pandemic, our primary focus is on operating our breweries and our business safely and supporting our partners in the beer industry. We have a strong cash position and balance sheet. and feel very fortunate to be in a position where we can help others. Supporting the communities in which we live and work is one of our core values. After all, our business got its start in bars and restaurants, and we recognize the role we can play right now in giving back. We're proud to share some of the initiatives we've gotten off the ground in a very short period of time that we hope will make a difference. We've established the Samuel Adams Restaurant Strong Fund and donated over $2.1 million to support bar and restaurant workers that have been impacted by pandemic-related closures in 20 states. In addition, we're a founding partner of Restaurant Relief America, which is committed to helping the restaurant industry workers experiencing hardship in the wake of COVID-19. Both funds will distribute 100% of their proceeds through grants, to bar and restaurant workers. Also, to support our internal needs as well as local hospitals, we began production of hand sanitizer at our Dogfish Head distillery in Milton, Delaware. We're thankful for our outstanding coworkers, distributors, and retailers for their focus on our business during COVID-19 and their diligence to continue to operate and help us grow our Boston Beer Company business. The company's depletions increased 36% in the first quarter, of which 30% is from Boston Beer legacy brands, and 6% is from the addition of drug efficient brands. Our business in the first quarter was strong, though there remain some significant uncertainties due to COVID-19. These uncertainties include our continued ability to operate our breweries at a level of safety that meets our standards, the continued ability to distribute to the off-premise retail locations, the duration of the current on-premise shutdown, and how long consumer pantry loading will continue in the weeks ahead. We will continue to work hard throughout the COVID-19 pandemic and prioritize safety above everything else. I'm proud of the passion, creativity, and commitment to community that the Boston Beer Company has demonstrated during this I'm now going to pass over to Dave for a more detailed overview of our business.

Thanks, Jim. Hello, everyone. Before I review our business results, I'll start with our disclaimer, which, given the current circumstances, we've modified. As we state our earnings release, some of the information we discuss in the release, and that may come up on this call, reflect the company's or management's expectations or predictions of the future. Such predictions and the like are forward-looking statements. I would also note, as we state in our earnings release, and Frank will later discuss in more detail, the company is not in a position to accurately forecast the future risks to revenues and earnings resulting from the impact of disruptions and other effects related to COVID-19 and has withdrawn its full-year fiscal 2020 financial guidance. All that said, the company's actual results could differ materially from any results projected in such 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-K and first quarter 10-Q. You should also be advised that the company does not undertake to publicly update forward-looking statements, whether as a result of new information, future events, or otherwise. Okay, now let me share a deeper look at our business performance. Consistent with the first quarter of last year, our first quarter shipments volume was significantly higher than depletion's volume, as we took active steps to ensure that our distributor inventory levels are adequate to support drinker demand. Our depletionist growth in the first quarter was a result of increases in our Truly Hard Seltzer and Twisted Tea brands, in addition to the Dogfish Head brands that were only partially offset by decreases in our Angry Orchard and San Luis Ables brands. The growth of the Truly brand and the recently launched Truly Hard Lemonade has accelerated and continued to grow beyond our expectations. Since early January, Truly has accelerated its velocity and maintained its market share, while other national hard seltzer brands have seen its share. We'll continue to invest heavily in the Truly brand and involve our brand communications and work to improve our position in the hard seltzer category, even as more competitors enter. We're ready to launch an exciting new Truly advertising campaign, but have postponed the launch due to the uncertainty surrounding COVID-19. Twisted Tea continues to generate double-digit volume growth rates that are above full-year 2019 trends. We see significant distribution and volume growth opportunities for our Julia Twisted Tea brands and are looking to continue to expand distribution of our Dogfish Head brands. Pursuing these opportunities in 2020 remains a top priority. Sam Adams and A.B. Orchard's volumes continue to decline as they're more deeply impacted by the on-premise shutdown. We continue to work hard on returning these brands to growth but do not expect them to grow during 2020. We've reacted decisively to COVID-19 and continue to work to control what we can control, with our primary focus being the safety of our coworkers, our distributors, retailers, and our drinkers. We've worked aggressively to put in place many safety protocols at our breweries, including entrance screening and temperature checks, face mask requirements, reorganizing work to increase social distancing between and among shifts, and adding cleaning time to each shift. Additionally, we've closed all of our hospitality locations beginning on March 13th. We're working hard to rebalance our supply chain to address additional demand in can and bottle packages at off-premise retailers against very low demand for kegs given the shutdown of on-premise venues. This shift in boiling mix is likely to come at a higher incremental cost due to the increased uses of third-party breweries, which negatively impacts our gross margin. we deferred some of our new marketing campaigns as we closely assess and manage the situation. Drinker demand for our brands continues to be very strong, particularly our Truly and Twisted Tea brands. Pre-COVID, our depletionist growth through the nine-week period ended February 29th, was approximately 32% from the comparable period in 2019, and we saw a further acceleration in demand for our brands beginning in the second half of March. It's not possible for us to estimate the amount of the new demand that is a temporary reaction to COVID-19. We're in very competitive business and we're optimistic for continued growth of our current grant portfolio and we remain prepared to forsake short-term earnings as we invest to sustain long-term profitable growth in line with the opportunities that we see. Based on information at hand, year-to-date depletions reported to the company through the 15 weeks ended April 11, 2020, are estimated to have increased approximately 32% for the comparable weeks in 2019. Excluding the doctor's head impact, completions increased 27%. Now, Frank will provide the financial details. Thank you, Jim and Dave. Good afternoon, everyone. For the first quarter, we reported net income of $18.2 million, or $1.49 per diluted share. a decrease of 53 cents per diluted share from the fourth quarter of last year. Net income decreased as higher net revenue was more than offset by increases in operating expenses and lower growth margins. We began seeing the impact of the COVID-19 pandemic on our business in early March. Prior to then, we were on track to maintain our full-year fiscal 2020 financial guidance. Given the many rapidly changing variables related to the pandemic, we are currently not in a position to accurately forecast the future impact of the pandemic and are therefore withdrawing our full-year fiscal 2020 financial guidance. To date, the direct impact of the pandemic has primarily shown a significantly reduced get demand from the on-premise channel and higher labor and safety-related costs at our breweries. In the first quarter of 2020, we recorded COVID-19 pre-tax-related reductions in net revenue and increases in other costs totaling $10 million. This amount consists of a $5.8 million reduction in net revenue for estimated tech returns from distributors and retailers and $4.2 million of other COVID-19-related direct costs. of which $3.6 million are recorded in cost of goods sold and $600,000 are recorded in operating expenses. In addition to these direct financial impacts, COVID-19-related safety measures resulted in a reduction of internal capacity. This has shifted more volume to third-party breweries, resulting in increased production costs and lower gross margins. We will continue to assess and manage the situation and will provide further updates in our second quarter earnings release to the extent that the effect of the COVID-19 pandemic will then be known more clearly. Shipment volume was approximately 1.42 million barrels, a 32.2% increase in the first quarter of 2019. Excluding the addition of the doctor shed burns beginning July 3, 2019, shipments increased 27.5%. Shipment volume for the quarter was significantly higher than depreciation volume and resulted in significantly higher distributor inventory as of March 28, 2020 when compared to March 30, 2019. We believe distributor inventory as of March 28, 2020 averaged approximately six weeks on end and was at an appropriate level based on supply chain capacity constraints inventory requirements to support the forecasted growth of Trulie into the key brands over the summer. We expect wholesaler inventory levels in terms of weeks on hand to return to more normal levels of approximately four weeks on hand later in the year. Our first quarter 2020 gross margin of 44.8% decreased from the 49.5% margin realized in the first quarter of last year. The decrease was primarily the result of higher processing costs due to increased production of third-party breweries and higher processing costs on finished goods keg inventory write-offs at company-owned breweries, partially offset by price increases and pot-saving initiatives at company-owned breweries. Excluding our current assessment of the impact of COVID-19 keg returns and other related direct costs, first quarter gross margin was 46.8%. First quarter advertising, promotional, and selling expense increased by $26.2 million in the first quarter in 2019, primarily due to increased investments in media, production, and local marketing, the addition of darker-shed brand-related expenses beginning July 3, 2019, higher salaries and benefits costs, and increased trade to distributors due to higher volume. General and administrative expenses increased by $3.6 million from the first quarter in 2019, primarily due to increases in salaries and benefits brought and the addition of doctor shed general and administrative expenses beginning July 3, 2019. We drew down $100 million from our existing line of credit in March 2020 to enhance our cash position and our ability to address the impact of the COVID-19 pandemic. We expect that our March 28, 2020 cash balance of $129.5 million, together with future operating cash flows and the $15 million remaining in our line of credit, will be sufficient to fund future cash requirements. We will now open up the call for questions.