Boston Beer Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
July 25, 2024

There are 13 speakers on the call.

Operator

Greetings, and welcome to the Boston Beer Company Second Quarter 2024 Earnings Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. And it is now my pleasure to introduce to you Mike Andrews, Associate General Counsel and Corporate Secretary.

Operator

Thank you, Mike. You may begin.

Speaker 1

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 2024 second quarter earnings Call. Joining the call from Boston Beer are Jim Koch, Founder and Chairman Michael Spillane, our CEO and Diego Reynoso, our CFO.

Speaker 1

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 ks.

Speaker 1

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.

Speaker 2

Thanks, Mike. I'll begin my remarks this afternoon with a few introductory comments and then hand over to Michael, who will provide his view of the business and the actions we are taking to position the company for a return to long term growth. Michael will then turn the call over to Diego, who will focus on the financial details of our 2nd quarter results as well as our updated outlook for 2024. Immediately following Diego's comments, we will open the line for questions. I'll begin my remarks with an overview of the market environment.

Speaker 2

In the Q1, we were pleased to see flat depletions and solid shipment growth, with shipments benefiting somewhat by shipping ahead of the implementation of our new customer order management system. As I mentioned at a recent investor conference, April depletions began to slow across the industry with Easter time shifting results and coming in soft. May June depletions improved somewhat from April, but continued to decline compared to the prior year periods. Our current assessment is that demand appears to be improving from April lows and that April trends likely reflect the comparison against significant dislocations in the beer industry that began in April of last year. Our shipments for the Q2 reflect the impact of shipping ahead of depletions in the Q1 and not fully shipping into improving demand in the latter weeks of June.

Speaker 2

We are working in July August to build inventories at our wholesalers back to target levels. I'm pleased to have Michael complete his Q1 as Boston Beer's CEO and he will discuss his assessment of the business and areas where we plan to focus to reach the full potential of our strong brands. We've also updated our guidance to reflect the 1st 6 months of results and our view of potential outcomes for the second half, which Michael and Diego will discuss. In summary, we saw soft volume trends early in the second quarter, which we have reflected in our revised volume guidance, but we're confident in our plans to grow our brands over time and have our brands reach their full potential. The commitment to invest and innovate across both our core brands and in new Beyond beer categories remains unchanged.

Speaker 2

Our margin initiatives are taking hold with gross margin expanding over 2 50 basis points year to date and potential for continued meaningful improvement in the coming years. The high cash generative nature of our Year to date, we've generated over $90,000,000 in operating cash flow and repurchased $125,000,000 worth of stock. I'd like to thank our Boston Beer team, our distributors and our retailers for their continued support. And I'll now pass the call over to Michael.

Speaker 3

Thanks, Jim, and good afternoon, everyone. I've spent my first 90 days as CEO evaluating the business in detail. Boston Beer is a great company with great brands, a strong team and a legacy of innovation and great service to our customers. We started as a craft beer company with a visionary founder and evolved into a $2,000,000,000 company with a diversified portfolio of brands across beer and beyond beer. Over the last few years, we've experienced more volatility with shifts in consumer preferences away from beer to beyond beer categories with an unprecedented surge in demand for our products during the pandemic and navigating the macroeconomic impact of high inflation on consumers.

Speaker 3

Over the past few years, our focus has been on growing our portfolio of products, ensuring access to production capacity and beginning to build the systems and infrastructure to support our diversified portfolio. Going forward, we'll be focused on improving end to end execution, which unlock additional revenue as well as improving margins and lowering costs. Our status as a diversified beyond beer company requires being more precise in our execution from product development all the way to getting our products into the marketplace. We'll be focused on nurturing our core brands, developing margin accretive innovation, leveraging the capital investments we have made in our breweries and IT systems and driving efficiency and operating expenses. To position ourselves for return to volume growth, we'll be implementing plans to grow our core brands while developing a disciplined product roadmap of innovation.

Speaker 3

We continue to expect category growth to come from Beyond Beer and believe we have opportunities to improve execution across our portfolio. I'll now provide some color on our brands. In Beyond Beer, hard tea continues to be an attractive category, which we'll participate in through our category leader Twisted Tea and accretive innovations like Sun Cruiser. We continue to see potential in additional distribution, underpenetrated consumer demographics, variety packs for quarter Twisted Tea as well as multiple areas of growth for Twisted Tea Light and higher ABV Twisted T Extreme. Despite increased competitive activity year to date in measured off premise channels, Twisted Tea has grown 15.1 percent in dollars and increased dollar share of FMBs by 1.6 share points while increasing shelf space approximately 30% over the prior year period.

Speaker 3

In the 2nd quarter, the growth of Twisted Tea slowed in measured channels, which we believe is primarily due to difficult prior year comparisons and naturally slowing against the larger base. We continue to believe that Twisted Tea is a strong brand with many avenues towards growth and we will grow share in the FMB market and grow volume for the remainder of 'twenty four and beyond. We also see potential for our vodka based tea innovation Sun Cruiser, which expands our tea portfolio to bring new consumers to the category who prefer a spirits based beverage. The initial feedback on the brand from wholesalers, retailers and drinkers has been very positive. It's early in the launch with most of our focus on the New England and Atlantic regions, but we are encouraged by consistently improving weekly sales trends and distribution gains.

Speaker 3

Turning to Hard Seltzer, we are continuing to see declines in the overall Hard Seltzer category as consumers have an increasing number of choices across Beyond Beer. In measured off premise channels, Hard Seltzer is down 14.9% in volume with Truly declining 22.8% and losing 2.1 share points. However, within our Truly portfolio, there's bifurcation between the performance of lighter core packages compared to the bolder flavors with Truly lighter core package down mid single digits year over year in measured channels. We're focusing on our efforts on gaining share and additional shelf space for light flavors, optimizing our bold flavor assortment, innovating with higher alcohol offerings and continuing our successful lighter flavored rotator pack strategy. We are also seeing good results from our launch of the higher ABV Truly Unruly with positive trends in depletions, distribution and sales per point.

Speaker 3

The Truly Unruly Variety Pack has performed particularly well in grocery, where it was the number one Truly SKU and one of our largest national chains. Overall, the efforts we are taking to reposition the portfolio towards lighter flavor offerings and higher ABV innovation are gaining traction and we expect these efforts to continue to improve Truly's volume trajectory over time. We've almost completed the transition of Hard Mountain Dew from Blue Cloud to our wholesaler network in existing states and are continuing to work through obtaining regulatory approval and distribution in additional states. There is opportunity for Hard Mountain Dew across expanded pack sizes and channels including convenience stores, but these efforts will take time and have more of a positive impact in our 2025 results. In 2024, we expect Hard Mountain due to primarily benefit 4th quarter shipments given our expectation to launch in some larger states in the Q1 of 2025.

Speaker 3

For our Samuel Adams brand, we continue our efforts in seasonals in our award winning non ELK styles and have recently launched a distinctly American light craft Lager we call Samuel Adams American Light. American Light launched late May and it's available in 6 12 pack cans and a small number of on premise locations. The initial distribution began in New England to dependence and is further expanding to New England large format retailers as well as Florida and Texas. Early feedback is promising and we expect sales per point to increase as distribution moves more fully into large format channels. We're pursuing a measured launch strategy and will further expand distribution and increase market support as we have more data on the consumer acceptance.

Speaker 3

With respect to other innovations, we plan to focus on line extensions for our core brands including IRABV and targeted seasonals and rotator pack offerings. We also continue to develop our new product pipeline in a disciplined fewer things better approach. While we'll always need multiple ideas to find the next winning product, we will be thoughtful about the number of projects we take on to ensure that we provide sufficient Additionally, we will be paying careful attention to product mix with all internally developed new products designed to be gross margin accretive as Sun Cruiser and American Lidar today. Turning to margins. We're modernizing our supply chain through investments in systems and processes and are continuing our productivity initiatives across 3 buckets of procurement savings, waste and network optimization and brewery performance.

Speaker 3

We've achieved our savings target thus far in our ingredient purchasing, which you've seen positively impact our results over the last year and we'll continue to focus on these efforts as this area continues to have significant opportunities for further savings in the near term. With respect to waste and network optimization, our investments in systems such as planning tools and automated customer ordering systems are helping us refine our inventory management. The fewer things better process that I mentioned earlier should also enable additional progress on lowering scrap and return levels. Our strategy to improve brewery performance and generate cost savings is unchanged. Line efficiencies in our breweries have been slightly improved, but are not yet where we want them to be across all of our breweries.

Speaker 3

As we have previously communicated, our line of efficiencies is a significant focus and these savings will take more time to achieve. We believe we have the capital in place, but need more time to capture these savings and demonstrate that we can consistently and reliably improve performance, especially during the peak summer season. This the timing and ultimate amount of the volume that we in source will be dependent on our progress in our own breweries as well as the product and geographic mix of our sales. In summary, we have the plans in place to generate cost of goods sold productivity, help offset near term volume headwinds and expand margins over the next few years. There is also opportunity in the product mix as we make adjustments to our portfolio through new innovations.

Speaker 3

In the Q2, these efforts allowed us to deliver 60 basis points of year over year gross margin expansion despite volume declines. Turning to operating expenses, we're committed to supporting our brands with the appropriate levels of advertising investment for both brand awareness and in store marketing. Our 2024 investments will be across the portfolio, but we'll be particularly focused on supporting those brands that are driving growth, which include category leading Twisted Tea, Sun Cruiser and Hard Mountain Dew. Our advertising spend is more heavily weighted to the second half to position us well for the remainder of the summer selling season and into 2025. With respect to the non advertising selling and brand costs, we're continuing our efforts to better align internal costs with revenue.

Speaker 3

To summarize my comments, I've spent the last 90 days in deep dives with our team members across all functions, visiting our breweries and meeting with our distributors. I'm confident that there is a great deal of opportunity ahead for Boston Beer. During my time in the board, I saw Boston Beer transform into a diversified alcoholic beverage company with $2,000,000,000 in revenue. The company modernized its brand and selling functions, built strong teams, made investments in production capacity and technology that sets us up with a good foundation for future success. We've also lived through changes in our consumer demand, a pandemic and the impact of abnormally high inflation on the consumer environment.

Speaker 3

We now have the opportunity to turn focus to optimizing all aspects of execution from product development to manufacturing to how we allocate investment in selling our product portfolio. These changes are beginning now and will continue through the second half of twenty twenty four. While the pace of improvement in our results is somewhat dependent on the volume environment, I believe there are multiple areas of opportunity and I believe that the changes we are implementing this year will set us up well for 2025 and a return to long term growth. And most importantly, our strong operating cash flow provides us with the resources to fund investment in the business while returning cash to shareholders through share repurchases. I'll now pass the call to Diego for a detailed review of the Q2 and our updated 2024 guidance.

Speaker 4

Thank you, Michael. Good afternoon, everyone. Completions in the 2nd quarter decreased 4% and shipments decreased 6 0.4% from the prior year, primarily due to declines in Truly Hard Seltzers that were only partially offset by growth in our Twisted Tea and Sun Cruiser brands. We believe distributor inventories as of June 29, 2024 averaged approximately 3.5 weeks on hand compared to our target wholesaler inventory levels of 4 to 5 weeks for our peak summer season. These lower than targeted wholesaler inventory levels were the result of the variability of demand across the months of the quarter and inability to ship enough product in the last few weeks of the quarter that Jason mentioned earlier.

Speaker 4

Revenue for the quarter decreased 4% due to lower volumes partially offset by pricing and lower returns. Our underlying pricing for the first half was consistent with our full year guidance range and additional benefits from lower returns. Please note that we do not expect the benefit from returns in the first half to continue at the same rate for the balance of the year. Our 2nd quarter gross margin of 46% increased 60 basis points from the 45.4% margin realized in the prior year. Gross margin primarily benefit from price increase, procurement savings and lower returns, which more than offset higher brewery processing costs per barrel due to lower volumes and increased inflationary costs.

Speaker 4

Excluding shortfall fees and 3rd party production prepayments that we've discussed on prior calls, gross margin was 47.6%. Advertising, promotional and selling expenses for the Q2 of 2024 decreased $5,100,000 or 3.4 percent from the Q2 of 2023 due to lower freight costs and a result of both lower rates and lower volumes and lower brand investments. General and administrative expenses increased $3,100,000 or 7% year over year, primarily due to inflation in salaries and benefits costs. We reported EPS of $4.39 per diluted share, which was $0.32 lower than the Q2 of 2023. The year over year decrease was driven by lower volumes, partially offset by higher gross margins.

Speaker 4

Our tax rate of 29.5 percent in the 2nd quarter was slightly higher than our plan rate, which was driven by an increase in non deductible stock compensation expenses related to CEO transition costs. Now I'll discuss our 2024 guidance. Our fiscal week depletion trends for the 1st 29 weeks of 2024 have decreased 2% from 2023. We are updating our 2024 volume guidance to reflect the first half performance and current outlook for the remainder of the year. Our volume outlook differs from our prior guidance due primarily to a softer second quarter and a slower than expected rollout of hard Mountain Dew.

Speaker 4

We now expect 2024 depletions and shipments to range between a decrease of low single digits to flat versus our prior guidance of a decrease of low single digits to an increase of low single digits. We continue to expect price increases of between 1% 2%. We also continue to expect full year 2024 gross margins between 43% 45%, commodity inflations in 2024, but at a lower rate than 2023, primarily driven by sweeteners and flavorings that we will cover commodity inflation dollars with pricing and we'll have higher labor costs in our breweries Where we land within our range of our margin guidance will be somewhat dependent on the mix of products sold during the remainder of the year. Contractual shortfall fees and production prepayments amortization that we will that we've discussed on previous calls will have a negative impact on our full year 2024 gross margin of between 135 basis points to 185 basis points. These contractual terms expire, we will reassess our capacity needs and commitments with our 3rd party production partners.

Speaker 4

Our investments in advertising, promotional and selling expenses were ranged from a decrease of $5,000,000 to an increase of $15,000,000 This does not include any changes in freight costs for the shipment of products to our distributors. Our estimated tax rate will be 28.5 percent, which is higher than the previous year's rate due to the CEO transition cost impact in the first half. We are continuing to target full year 2024 earnings per diluted share of between 7 dollars $11 as we expect our declines in volumes to be offset by slightly better margins and lower operating expenses. Please note that our EPS projection is highly sensitive to changes in volume projections, mixed of own versus partner brands, supply chain performance and inflationary impacts on consumer spending. As you model out the year, please keep in mind the following factors.

Speaker 4

During the first half shipment trends were below depletion trends and we currently estimate that they will rebalance resulting in shipment trends being higher than depletion trends in the second half. As Michael mentioned earlier, our advertising spend is more weighted to the second half of the year. Also, please note that the 4th quarter is typically our lowest absolute gross margin rate of the year. Turning to capital allocation. We ended the quarter with a cash balance of $219,300,000 and an unused credit line of $150,000,000 which provides us with the flexibility to continue to invest in our base business, fund future growth initiatives and return cash to shareholders through our share buyback program.

Speaker 4

For the full year 2024, we continue to expect capital expenditures of between $90,000,000 $110,000,000 These investments will be primarily related to our own breweries to build capabilities and prove efficiencies. During the 26 week period ended June 29, 2024 and the period from July 1, 2024 through July 19, 2024, we repurchased shares in the amount of $113,000,000 $14,000,000 As of July 19, 2024, we had approximately $140,000,000 remaining on the $1,200,000,000 share repurchase authorization. This concludes our prepared remarks and I will open the line for questions.

Operator

Thank you, sir. We will now be conducting a question and answer session. And the first question comes from the line of Kamil Gajrawala with Jefferies. Please proceed with your question.

Speaker 5

Hi. I'd like to dig in a little bit on your commentary that sort of April was the trough and things are getting better. Just curious what you're seeing specifically. Is it related to some of your own launches in your own work? Or is it sort of more macro on what you're seeing for the category overall?

Speaker 4

Excellent. Hi, Hore. This is Diego. What I would say is, if you look at the overall industry had a really rough start to the quarter and also our brands within that had some challenges. As we've seen the rest of the quarter come back, we've seen both our brands, particularly in Twisted Tea and some of the overall category recover throughout the quarter.

Speaker 4

So we are expecting the back end of the year to look more Mountain Dew

Speaker 5

or hard Mountain Dew, is it just Mountain Dew or Hard Mountain Dew, is it just a transition that was slower or is it the something going on with sort of the brand and the marketing?

Speaker 3

Thanks for that question. This is Michael. Yes, it was a fairly complex transition. And so that was really it. It was more complex than we thought and it took longer than we thought.

Speaker 5

Okay, got it. Thank you.

Operator

And the next question comes from the line of Rob Ottenstein with Evercore ISI. Please proceed with your question.

Speaker 6

Great. Thank you.

Speaker 5

Thank you.

Speaker 6

Just wondering if you could talk a little bit about how you see the development. I mean, any new thoughts in terms of how you see the development in Beyond Beer and specifically, Surfside has kind of been the star product this year by many accounts. Why do you think it's doing so well? What does that say about the category? Does it suggest any pivoting on your side?

Speaker 6

And then I have a follow-up.

Speaker 3

I think 1st and foremost, the Surfside product is a great product. It resonates with consumers, both taste and just a certain spot in the market. We've been very thoughtful about where we launched it. We've learned over the course of time to be very thoughtful and make sure that the launch is resourced correctly. So we think it's a new drinker and we're finding that it's not at the expense of Twisted Tea, but it's in addition to.

Speaker 4

So again, to build on Michael's comments, we're talking about SunCruiser. So you're correct that Surfside, I think has been a good product this year. We've launched SunCruiser, which we think is an even better product and it's doing well in the markets that we've launched to Michael's comment.

Speaker 3

Yes. Sorry, I apologize. We're so deep in Sun Cruiser here that I thought you were mentioning that because we just had a discussion about that. But we have a product that is right up against that that is performing really well and you'll be hearing more about that as we go along.

Speaker 6

Great. And then I was just wondering if we could just kind of touch on the beer side of the business, which we really haven't paid much attention to for a number of years. I mean, you've got phenomenal liquids. You've got the best sales force arguably out there. How were you thinking about this business because the volumes keep going down and the levels of the decline are at least in the scanner data are not encouraging.

Speaker 6

And so what can be done to stem that? Does the portfolio need to be pruned? What are you thinking is missing on the beer side of the business?

Speaker 4

Tim, would you like to take that question? Yes, I think we're having some technical difficulties. Okay.

Speaker 3

So great. I think we lost Jim there. But look, I think our American Light is a good example of how we're approaching the category where we've got a profile of a younger drinker. We've done a very thoughtful launch, as I've mentioned before, like we have with Sun Cruiser and we're getting it into the right place and we plan to scale that at the right pace. There's a macro proposition here that just overall beer is at a particular place.

Speaker 3

But we feel very strongly that with the right attention, a big part of our opportunity here is that through the disruption in seltzer, both the ride up and the ride down and the steady increase in Twisted Tea, we probably could have given more attention to the rest of our portfolio. So when I talked last time about supporting and growing our core, The intent will be to do that through a balanced portfolio and supporting all our brands and Bayer is a big part of that.

Speaker 7

Thank you. Yes, I would add, can you hear me okay on this?

Operator

Yes.

Speaker 8

Yes.

Speaker 7

Okay. I would add, we in particular took our eye off of draft along with our wholesalers. So, we are making changes in the priorities for our salespeople to move some of the calls that they made with the explosion of Truly and now the rise of Tea, those are off premise brands. As Michael kind of alluded, we neglected the on premise. And so we are reorienting our sales force and expect to see more draft lines and more on premise business for Sam Adams and for Angry Orchard.

Speaker 8

Thank you.

Operator

And the next question comes from the line of Michael Lavery from Piper Sandler. Please proceed with your question.

Speaker 9

Thank you. Just wanted to unpack the SG and A piece a little bit better. You've called out the higher marketing and push in the second half. Overall SG and A was kind of flat in first half versus last year. And so just maybe trying to understand, are there some non marketing savings that are meaningful enough that you are suggesting might still run flat?

Speaker 9

I know you gave the marketing guide on the year. Are we right to think that SG and A could be going up in the second half as well?

Speaker 4

So just to clarify, we are down in marketing spend in the first half of the year. That marketing spend that we're down in the first half of the year, some of that will come back in the second half of the year where most of our spend is. So the second half of the year should be higher than the previous year. We think there's opportunities to support some of our key launches like Sun Cruiser and American Light, which we have high hopes for from a volume point of view. So that's where you will see the increase in marketing spend in the second half.

Speaker 4

Overall, as we said before, the savings that we're looking for on the operation piece partially is to increase the gross margin so that we can reinvest some of that back in our brands. So as we see the performance of the different brands, we'll be allocate accordingly.

Speaker 9

Okay. That's helpful. And just back on Hard Mountain Dew, you've got the transition sounds like mostly done. For any of the states that might have gone sooner than later, have you seen some executional improvement or uptick just that would suggest that the brand is already in better hands even though it's still quite early?

Speaker 3

I would say it's still early. We're seeing fairly consistent results across all the territories. So we'd like we'd probably have a better handle on that after next quarter.

Speaker 9

Okay, great. Thanks so much.

Operator

And the next question comes from the line of Peter Grom with UBS. Please proceed with your question.

Speaker 5

Thanks, operator. Good evening, everyone. Hope you're doing well. So going back to Kamil's question on just the sequential improvement, maybe just have you seen that sequential improvement continue as we move through the important summer selling season here, 4th July? Just really curious to get your perspective both from a Boston beer standpoint and maybe just what you're seeing across the category?

Speaker 4

So I would say through the quarter, we've seen the improvement and we've seen the improvement of the trends through 4th July. We'll know more once we get past, I'd say the next 3 or 4 weeks, but especially SunCruiser has been a great success so far from 4th July till now. Twisted Tea has recovered a little bit of growth as we came out of Q2. And those are probably the 2 biggest turnarounds that I would say from the start of the quarter.

Operator

And the next question comes from the line of Eric Sarada with Morgan Stanley. Please proceed with your question.

Speaker 10

Hey, good afternoon, everyone. Thanks for taking the question. I was hoping to get some color around your kind of midterm outlook for Twisted. You obviously have a very impressive 20 year track record with low double digit growth that really massively accelerated since COVID. Even if we smooth out the first half for some of the noise, it does look like it slowed pretty significantly.

Speaker 10

What do you see as sort of the midterm growth profile for the brand over the next few years? And I know Jim has spoken about other competitor offerings being overspaced at retail. How long do you think that Jim, do you think that process will take to clear out knowing that I think the long tail and hard seltzer lasted a lot longer than a lot of people thought? Thanks.

Speaker 3

So thanks. Thanks. Look, I think we're expecting another strong year of growth in Twisted Tea and we still see a really bright future ahead for it. We think there's a lot of unrealized potential there. We remain the market leader and we still are expanding our space.

Speaker 3

We'll continue to expand our brand support and we'll offer more advertising spend, more sponsorships, more programs. We're bringing in new drinkers. We're increasing household penetration with Hispanics and African Americans. We'll continue to optimize our package design to keep it fresh. Also Twisted Tea Light, which has been introduced is showing to be highly incremental and bringing in new drinkers.

Speaker 3

And so as is Twisted Tea Extreme, which is the high ABV. So we know there's a lot of competition, well noted that there is a lot of clutter out there much like the seltzer area. We've grown this brand in a cleaner way with fewer flavor extensions. And we feel very strong that the core of it and we'll be there and continue to perform. So can't control the rest of it.

Speaker 3

The marketplace will behave as it does, but we like our positioning and we like our plan going ahead.

Speaker 7

Okay. I don't want to add, I think retailers believe they hung on to the long tail and seltzer too long. And they're going to prune the hard tea category more quickly. And basically the numbers you're seeing is Twisted Tea has something like 85 plus percent of the volume and depending on how you want to judge it, call it 65% to 70% of the space. And that's a and the number 2 RT after the 85% for Twisted Tea is 4% share and it goes down from there.

Speaker 7

So that long tail on tea is much smaller share than the tail on seltzer was the 1st year or 2. So I'm going to bet that a lot of it will get cleared out next spring after a little over a year because nothing's gotten the kind of tracked in that a retailer would like to see. There may be a couple of those 4% brands left, but the hoops and the 2 hoots and the Happy Dads and things like that that are 1% share, they're not going to be on the shelves so much. And we'll get we believe we will get that shelf space back, that share itself base.

Speaker 10

Great. Thanks for that additional color, Jim. And then just a quick housekeeping one for Diego. Your inventories on the balance sheet were up pretty substantially. Any color around what was that?

Speaker 10

What drove that? Was that tied to sort of the not being able to catch up to demand towards the end of the quarter, but your inventories are also up across raw materials and work in progress. So some color around that would be helpful.

Speaker 4

Yes, I would say, as you know, we have a seasonal business, but the reason part of the reason we have higher inventories right now is, as we mentioned before, we did not produce as much as we thought at the back end of the year. And therefore, our raw materials and some of our finished goods and work in progress materials are higher for the month than we would have expected. So there's no significant change to what we think the full year will be. It's more of within the 2 week period of the close of the quarter and the next quarter. So no significant driver other than that.

Speaker 10

Got it. Thank you.

Operator

And our next question comes from the line of Bonnie Herzog with Goldman Sachs.

Speaker 11

I had a question on inventory. Hoping to hear if distributors started to build up their inventory levels of your brands in July. And then I guess if not, curious to hear what gives you the confidence that distributors will want to carry historical levels, inventory levels of your brands when thinking about in the context of your depletions being down 2% year to date through the end of July. I guess, is it realistic to think they might carry less going forward?

Speaker 4

That's a very good question, Bonnie. I'd say yes. And as we said before, we were we traditionally have carried 4 to 5 weeks. Our wholesalers usually want us to carry even a little bit more, especially going into the high season. If you look at where we closed, we closed about 3.5%.

Speaker 4

And when you measure in weeks, you're measuring in a variable rate, not in absolute. So we definitely feel that and our partners are telling us that those inventory levels need to recover so that they can have the service levels that they require. So we're very confident that we can go back to where we need our stock levels to be for the year.

Speaker 11

Okay. That's helpful. And then, Jim, you and I talked about this a couple of months ago, but hoping to hear your updated thoughts on, I guess, opportunities for growth. 80% of your volume is in the Beyond VR 4th category. So curious to hear what you believe is the long term growth for that category?

Speaker 11

And then ultimately, what you believe is the real long term top line growth for your entire business? Thank you.

Speaker 7

Yes. It's a good question. You could think of it in 2 pieces. There's the 80% that is in what I call the 4th category, other people call beyond beer. And then there's 20% in more traditional year including, I'd put hardtiter probably in that category.

Speaker 7

And the 4th category, where 80% of our volume is, my guess is 3% to 5% in volume. It's that's been about the historical rate. Everybody defines it differently, so you'll get different numbers. But 3% to 5% is pretty much in the middle of the different calculations. So our belief is we should be able to hold our share there.

Speaker 7

And then there is upside from innovation. And I do see it as kind of a more blue ocean sort of environment, the way things were within craft beer 20 years ago. And we will see Sun Cruiser has come out of the gates pretty strong. I think in the surf side is doing really well. They're both a new approach.

Speaker 7

It's a vodka based hard tea. And we're seeing very good results where we have fully launched it in New England. We're outselling Surfside like 2 to 1. In some of the other markets like Ohio, we're seeing similar numbers. We just got put into MetLife Stadium and replaced Surfside.

Speaker 7

So we're getting great support from retail and wholesalers for Sun Cruiser. As Diego and Michael said, it's still early. We're fully launched in maybe 6 or both states. But we see upside there that is, I believe, indicative of the opportunity in this Blue Ocean category. And then the other 20% of our volume is probably it's competing in categories that are not growing.

Speaker 7

So we're not we think we missed some growth there over the last 5 years as we focused on Trulie and then P. So we believe we can outgrow the category over on that side of the business, but it's not going to have the kind of explosive growth that we've seen in Beyond Beer in the last 5 years.

Speaker 11

Right. Okay. Very helpful. I appreciate it. Thank you.

Operator

And the next question comes from the line of Filippo Falerni with Citi. Please proceed with your question.

Speaker 12

Hey, good afternoon, everyone. I wanted to ask you guys about innovation and where are you most excited in terms of as you think about not just this year, but like over the next couple of years, obviously, you have Sun Cruiser this year. But as you think about the next growth opportunities for Boston Beer, Jim, you clearly developed a very strong innovation and track record. What are you guys thinking? Like is it more in the ready to drink spirit space?

Speaker 12

Is it other areas of Beyond Beer, maybe non alcoholic? Like just curious of what you're thinking about the next legs of growth for the company?

Speaker 3

Yes. So I'll take I think there's I'll start Jim and then it's okay. I'll pass

Speaker 7

it on to you.

Speaker 3

Juan, I think it's all of the above. And I think one of the things, we have great opportunity here. I've mentioned a few times to be really focused and make sure that what we are launching in terms of innovation is well resourced. So right now, again, just to reiterate Twisted Tea Light and Extreme, we're very excited about. We think that's bringing in new drinkers to the space.

Speaker 3

Truly Unruly has performed really well and we think that will help us stabilize the seltzer category for us faster than it would have. The Hard Mountain Dew expansion is ready to go and we see that helping us in 2025 and again Sun Cruiser. American Light is an important part of our beer family and we feel like we have a great platform there. And then in addition to the innovation, again, just driving the core and waking up our other franchises that we probably stepped away from that have that are nowhere near their potential. So but all of those categories that you mentioned, we have arguably the best innovation engine in the industry And we have a number of projects that we're very excited about and we're probably more disciplined than we've ever been in terms of the rigor to get those to market.

Speaker 3

So we will, in some cases, identify space that has already been proven out and we will fast follow and try to make a do a better job with it. And then there are other times where we will have a concept that no one could have imagined and we will bring that to consumers. So we feel very good about our innovation pipeline going forward.

Speaker 7

And I can add there, Jim. Yes. The question was what's next and my answer is we don't know. If we knew we'd be introducing it next month, the innovation space at least in our experience, has been quite unpredictable, very much littered with failures. I once started for a conference, they asked about our failures and I started writing a list and when I got to 24 different brands that had failed.

Speaker 7

It was just too depressing and I stopped. So you need to just constantly be trying things, probing the market and just innovating and then innovating on the innovation, which is the case with Angry Orchard. We had a site or it failed, but we finally hit it. It was the case with Twisted Tea. It was originally Bodine's and we finally hit it and we grew slowly.

Speaker 7

So it's a lot of trial and error. So I really can't tell you what is the next big thing. It's different than what Michael mentioned, many products that are line extensions. Those are more predictable and we feel quite good about American Light, Twisted Tea Light, Twisted Tea Dream, really unruly, those are predictable. But our strength, I guess, has been in totally new ideas.

Speaker 12

Great. That's very helpful. And then maybe one for Diego. On the gross margin expansion, I know you said on the release and in the call that Q4 is the lowest gross margin quarter in an absolute percent term. But how should we think about margin expansion on a year over year basis in the second half of the year?

Speaker 12

Is it more skewed towards Q3 versus Q4 or like on a more of a on a year over year basis? Thank you.

Speaker 4

Yes. So if you look at our guidance, we are still guiding to 43% to 45%, which is a substantial improvement. Even in the Q2 quarter where our volumes were down, our production volumes primarily, which is what drives that, our gross margin was still up. So we're still confident that the plans we've put in place will get us over the next few years to high 40s. We'd like to get closer to 50, but right now we have a plan to high 40s.

Speaker 4

So as you look through the year, you can get very bumpy results based on how the production volumes and the shipment volumes move between quarters. But you should expect the best margins to come up in high season, which is really kind of Q2, Q3 with Q4 really being the lowest one and Q1 being kind of in the middle. That's kind of the way we traditionally will work. But again, very sensitive to changes in production volumes within a couple of weeks of the quarter ends.

Speaker 12

Great. Thank you,

Operator

Our next question comes from the line of Steve Powers with Deutsche Bank. Please proceed with your question.

Speaker 8

Hey, thanks guys and good evening. Jim, I normally wouldn't ask a question on this topic, but I feel compelled. The Wall Street Journal story a couple of months ago related to Boston Beer being talked to sell itself to some story. It generated a lot of investor discussion, which to be honest, carries on through the current day. So I guess to the extent possible, I was hoping you could comment on whether there's been any change to your intention of maintaining Boston Beer as an independent public company and really an acquirer in its own right or what to what extent there's openness on your part or on the Board's part in any form to consider partnering with another player?

Speaker 7

I'm afraid I meant to give you the answer that we always give, which is we don't comment on rumors. You can make your own judgments based on what's happened in the whatever month or 2 since that story came out. And I would reiterate, we continue to be focused on growing our business as an independent company. Hope that helps.

Speaker 8

It does. Thank you. Thank you. Michael, I guess pivoting to running the company as an independent company, you talked in the opening about working to optimize really across the board execution from product development, manufacturing, selling all the way through the allocation of capital. And I know you had familiarity with a lot of those things from your time on the Board, but as you settled in to the current role, I guess the question is, where do you think the organization has the most opportunity to improve?

Speaker 8

And is there a way to make those optimization efforts more tangible to those of us on the outside?

Speaker 3

Yes. So look, I think we all recognize that the number one thing this company needs to do is grow and grow the top line and then everything else looks a whole lot better. There are some macro reasons for the slowdown and then there are some that are just again, I go back to the disruption of COVID and the And we've been putting ourselves back together. A lot of that was operating discipline. And and we've been putting ourselves back together.

Speaker 3

A lot of that was operating discipline and we just the things and the principles that Jim built this company on, we were always so sharp and because of that sort of explosion, we lost our edge. So I was fortunate that Diego joined the company a while before me and already started implementing some of the operating discipline as well as a couple of other great teammates that are here and following up. So I think we know what to do. This company has done it before. But the power that this company has is it has a fantastic portfolio of brands and none of them are reaching their potential at the moment.

Speaker 3

Most have given back market share. Most have given back points of distribution. And we're in the business of taking that back. We have the best sales force in the industry And I think it's just a matter of making sure that they have what they need. And we're giving them clear direction on what success looks like.

Speaker 3

And that has shifted because we have at times been guilty of having a single product focus. So in the end, you will all feel better when we start to grow. And I know a big part of that growth is going to be getting to the bottom of truing and trust. I know it's frustrating for all of you to look at those numbers. It's more frustrating for us.

Speaker 3

We're trying to get to the bottom as fast as we can responsibly to put the right product in the marketplace and sort of get this next wave of growth going. So hope that answers your question.

Speaker 8

It does. Thank you very much.

Operator

There are no further questions at this time. I would like to turn the floor back over to Jim for any closing comments.

Speaker 7

Thank you everybody for joining us and

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Earnings Conference Call
Boston Beer Q2 2024
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