Boston Beer Company, Inc.

greetings and welcome to the boston beer company's first quarter 2021 earnings call at this time all participants are in a listen only mode a question and answer session will follow the formal presentation if anyone should require operator assistance during the conference please press star 0 on your telephone keypad as a reminder this conference is being recorded I would now like to turn the conference over to your host, Mr. Jim Cook, founder and chairman. Please go ahead.

Thank you. Good afternoon and welcome. This is Jim Cook, founder and chairman, and I'm pleased to kick off the 2021 first quarter earnings call for the Boston Beer Company. Joining the call from Boston Beer are Dave Berwick, our CEO, and Frank Smola, our CFO. I'll begin my remarks this afternoon with a few introductory comments, including some 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, as well as our outlook for 2021. Immediately following Frank's comments, we'll open the line up for questions. As the world slowly reopens and the COVID pandemic winds down, our primary focus continues to be on operating our breweries and our business safely and working hard to continue to innovate and meet customer demand. Before I turn to our key first quarter operational achievements, I want to note that working with the Greg Hill Foundation, our Sam Adams Restaurant Strong Fund has raised over $7.5 million thus far to support bar and restaurant workers who are experiencing hardships in the wake of COVID-19. And it's committed to continue to distribute 100% of its proceeds through grants to bars and restaurant workers across the country. We are thankful to our outstanding coworkers, distributors, and retailers for their continued focus and diligence in in operating and helping us grow our business. The company's depletions increased 48% in the first quarter, and we achieved double-digit volume growth for the 12th consecutive quarter. This just would not have been possible without the outstanding coworkers in our breweries and our sales force and the frontline workers at our distributors and retailers. So thanks go to all of them. Early in 2021, we launched Truly Iced Tea Hard Seltzer, and during the second quarter, we plan to launch Truly Punch Hard Seltzer. Both combine refreshing hard seltzer and bold flavors, and we believe these new launches continue to demonstrate our innovation leadership within the hard seltzer category. We are also making steady progress in improving our brand support and messaging for our beer and cider brands to position them for long-term sustainable growth in the face of the difficult on-premise environment. We're optimistic that our on-premise business will significantly improve in 2021 as restrictions are lifted. We're excited about the response to the introduction in early 2021 of several new Sam Adams beers, including Sam Adams Wicked Hazy, Sam Adams Wicked Easy, and Samuel Adams Just the Haze, our first non-alcoholic beer, as well as the positive reaction to our Samuel Adams, Your Cousin from Boston advertising campaign. We are confident in our ability to innovate and build strong brands that complement our current portfolio and help support our mission of long-term profitable growth. I will now pass over to Dave for a more detailed overview of our business.

Thanks, Jim. Hello, everybody. Before I review our business results, I'll start with our disclaimer. As we state in our earnings release, some of the information we discuss in the release and the men who 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. It's important to note that the company's actual results could differ materially from those 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. We are happy with our strong starts of the year and our record first quarter shipment and depreciation volumes. First quarter shipments growth was significantly higher than depreciation growth as we took active steps to ensure that our distributor inventory levels were adequate to support drinker demand during the peak summer months. Our depreciation growth in the first quarter was a result of increases in our Trulia Heart Seltzer and Twisted Tea brands, partly offset by decreases in our Sam Adams, Angry Orchard, and Dogfish Head brands. The recently launched Truly Iced Tea hard seltzer has accelerated Truly brand growth, which has more than doubled since last year. In the first quarter, in measured off-premise channels, the Truly brand outgrew the hard seltzer category by nearly two times, or 50 percentage points, resulting in a share increase of 6.5 percentage points. The Truly brand has now reached a market share of over 28%, accounting for approximately 40% of all growth cases in the hard seltzer category year-to-date, which is two times greater than the next largest growth brand. Truly iced tea hard seltzer has achieved a 4.3 percentage point market share in measured off-premise channels, well ahead of all other new entrants in the entire beer category. We expect to launch a truly punch hard seltzer during the second quarter to continue this positive momentum. We will invest heavily in the launch of Truly Punch Hard Seltzer and the Truly brand, evolve our brand communications, and further improve our position in the Hard Seltzer category as more competitors enter. Truly Tea continues to generate double-digit volume growth rates that are significantly above full-year 2020 trends. In the first quarter, we measured off-premise channels higher than its closest competitor, and we believe Twisted Tea is on its way to becoming the number one flavored malt beverage by the year's end. We see significant distribution and volume growth opportunities for our truly Twisted Tea brands, and are looking to continue to expand distribution of our Dr. Jet brand. Pursuing these opportunities in 2021 remains a top priority. Our Sam Adams, Andy Orchard, and Dr. Jet brands will hit the most by COVID-19 and the related on-premise closures. We continue to work hard on returning these brands to growth and are optimistic that they will return to growth in 2021. Overall, given the trends for the first three months and our current view of the remainder of the year, we've adjusted our expectations for a higher 2021 full-year volume and earnings growth, which is primarily driven by the strong performance of our truly interesting two brands. During the quarter, we've taken various steps to ensure we have capacity to support this accelerating growth. We continue to work hard on our comprehensive program to transform our supply chain with the goal of making our integrated supply chain more efficient, reduce costs, increase our flexibility to better react to mix changes, and allow us to scale up more efficiently. We expect to complete this transformation over the next two to three years. We'll continue to invest in capacity to take advantage of the fast-growing hard seltzer category and deliver against the increased demand through a combination of internal capacity increases and higher usage of third-party breweries, although meeting these higher volumes through increased uses of third-party breweries has a negative impact on our gross margins. While we anticipate delivering gross margin improvements in 2021, our gross margins and gross margin expectations will continue to be impacted negatively until our volume growth stabilizes. While we're a very competitive business, we're optimistic for continued growth of our current brand portfolio and innovations, and we remain prepared to forsake short-term urges as we invest in sustained long-term profitable growth, in minding the opportunities that we see. Based on information in hand, year-to-date depreciation reported to the company through the 15-weeks ended April 10, 2021, our estimate is an increase of approximately 49% from the comparable weeks in 2020. Now Frank's going to provide the financial details. Thank you, Kim and Dave. Good afternoon, everyone. For the first quarter, we reported net income of $65.6 million, or $5.26 per due to share, an increase of $3.77 per due to share from the first quarter of last year. This increase was primarily due to increased net revenue, partially offset by higher operating expenses. In the first quarter of 2020, we recorded pre-tax COVID-19-related reductions in net revenue and increases in costs that totaled $10 million plus $0.60 per diluted share. In 2021 and going forward, we have chosen not to report COVID-19-related direct costs separately as they are viewed to be a normal part of operations. For the first quarter of 2021, shipment volume was approximately 2.3 million barrels a 60.1% increase from the first quarter of 2020. Shipment volume for the quarter was significantly higher than depletion's volume and resulted in significantly higher distributor inventory as of March 27, 2021, when compared to March 28, 2020. We believe distributor inventory, as of March 27, 2021, averaged approximately seven weeks on hand from what is an appropriate level based on the supply chain capacity constraints and inventory requirements to support the forecasted growth of our truly and twisty brands over the summer. We expect wholesaler inventory levels in terms of weeks on hand to be between three and seven weeks for the remainder of the year. Our first quarter 2021 growth margin of 45.8% increased from the 44.8% margin realized in the first quarter of last year. The increase was primarily a result of price increases, the absence of the COVID-19-related direct costs incurred in the first quarter of 2020, and cost-saving initiatives, company-owned breweries, partially offset by higher processing costs due to increased production at third-party breweries. First quarter advertising, promotional, and selling expenses increased by $43 million from the first quarter of 2020, primarily due to increased brand investments of $21 million, mainly driven by higher media and production costs, higher salaries and benefits costs, and increased freight to distributors of $21.9 million due to higher volumes and rates. General and administrative expenses increased by $4.9 million from the first quarter of 2020, primarily due to increases in salaries and benefits costs. During the first quarter, we recorded an income tax expense of $11 million, which consists of income tax expenses of $19.6 million, partially offset by an $8.6 million tax benefit, related to stop option exercises in accordance with ASU 2016-09. The effective tax rate for the first quarter excluding the impact of ASU 2016-09 increased to 25.6 percent from the 23.6 percent from the first quarter of 2020. Based on the information of which we are currently aware, we are targeting 2021 earnings for the group to share of between $22 and $26. an increase from the previously communicated range of between $20 and $24, excluding the impact of ASU 2016-09, but actual results could vary significantly from our target. We are currently planning increases in shipments and depletions of between 40 and 50%, an increase from the previously communicated range of between 35 and 45%. We are targeting national price increases per barrel of between 1 and 3%, an increase from the previously communicated range of between 1 and 2 percent. Full year 2021 gross margins are currently expected to be between 45 and 47 percent. We plan increased investment in advertising, promotional, and selling expenses of between $130 and $150 million for the full year 2021, an increase from the previously communicated range of between $120 and $140 million. These amounts do not include any increases in freight costs for the shipment of products to our distributors. We estimate our full year 2021 effective tax rate to be approximately 26.5%, excluding the impact of ASU 2016-09. We're not able to provide forward guidance on the impact that ASU 2016-09 will have on our 2021 financial statement. and fully yet effective tax rate, as this will mainly depend upon unpredictable future events, including the timing and value realized upon the exercise of stock options versus the fair value when those options are granted. We're continuing to evaluate 2021 capital expenditures and currently estimate investments of between $250 million and $350 million, a decrease in our previously communicated range of between $300 million and $400 million. The capital will be mostly spent on continued investments in capacity and supply chain efficiency improvement. We expect that our March 27, 2021 cash balance of $144.7 million, together with the future operating cash flows and the $150 million remaining on our line of credit, will be sufficient to fund future cash requirements. We will now open up the call for questions. Before we go there, similar to the last couple of calls, to the DMC on our side and coordinate the answers as needed since we're in different locations.