Q2 2022 Boston Beer Company Inc Earnings Call
Our 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.
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.
Thanks, Mike and I'll begin our I'll begin my remarks with a few introductory comments 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 second quarter results as well as our outlook for the remainder of 2022.
Immediately following Frank's comments, we'll open up the line for questions.
Given truly hard seltzer is growth last year, we knew we would be facing tough volume comparisons. This year. The continuing decline of the hard Seltzer segment, which was down 17% in volume and 13% in dollars and off premise channels in Q2 is deeper than previous.
As we expected, which impacted our second quarter results and is expected to continue to impact truly performance for the balance of 2022.
Our 2022 second quarter revenue grew slightly over the second quarter last year driven by pricing gains.
Our second quarter, Depletions declined, 7% and our shipments declined 1% against prior year comparisons of 24% Depletions growth and 27% shipment growth.
We made progress improving our second quarter gross margin despite negative impacts from lower than expected volume as Frank will discuss in more detail later in the call. We also returned to profitability and generated more than $100 million in operating cash flow.
Based on our first half performance, our view of the remainder of the year and the current.
Economic environment, including uncertain consumer demand and broader supply chain challenges, we've reduced our volume and earnings guidance for the remainder of 2022.
And then in the second half, we will focus our efforts on twisted tea truly and hard mountain Dew, which we believe have the.
Potential to positively impact our business, our multi brand strategy plus our long history of innovation have supported our growth over the long term and we will work hard to capitalize on these strengths going forward.
We're also thankful to our outstanding coworkers distributors and retailers, who continue to support our business.
We're proud to have just been named the number one beer industry supplier in the Tamron survey the annual poll of beer distributors conducted by camera on consulting a consulting firm specializing in the alcoholic beverage distribution industry. It is our fifth number one ranking in a row 11.
And the last 13 years. This is a result of the efforts of all Boston beer coworkers to service and support our distributors business and to the strong relationships. We've built with them over many years. We continue to believe that we have the best group of distributors in the beer business.
I'll now pass it over to Dave for a more detailed overview of our business.
Okay, Hey, Thanks, Jenn and Hello, everyone.
Our second quarter depletion declines were primarily driven by declines in truly hard seltzer and <unk>.
Partially offset by growth in our twisted tea and hard mountain Dew brands, excluding the declines in truly our depletion volumes for the remainder of our business.
Creased, 14% in the second quarter and 11% in the first half.
Our strategy is to become the number one player in the fast growing beyond beer segment by creating a broad relevant brand portfolio.
Enables many pathways to growth.
This portfolio is led by the number one F&B and twisted tea number two heart seltzer and truly the number one hard cider and angry orchard and the newly launched hard mountain Dew, which is the number one F&B in seven states, where it's currently distributed.
Towards that end, we improved our number two position in beyond beer in the second quarter with a 27% volume share up one five share points versus the second quarter of 2020 once means.
Meanwhile, we will continue to experiment and planned new season, our search to cultivate the next big contributor to our future growth.
For the remainder of the year, we're focused on fueling twisted tea and heart mountain Dews growth and remaking truest core original flavors with improved formulations, a new AD campaign to communicate those changes and superior distributor support and retail execution. We're also targeting margin improvements as we continue to enhance our supply chain performance.
And inventory management, and offset commodity cost pressures.
Hard Seltzer dollar sales declined by 13% in the second quarter of 2022 and measured off premise channels. We believe there are two primary drivers to the continued deceleration of the segment.
First art Seltzer as losses novelty as consumers have been distracted by many new beyond beer products entering a hyper crowded marketplace.
And tied to the macroeconomic environment, we're seeing a volume shift from hard Seltzer is back to premium light beers with their lower pricing, particularly among 35 to 44 year olds, whether this continues into the future reverts back there's still to be determined.
The truly brand has not yet overcome these headwinds in 2022.
Dollar sales declined in the second quarter by 17% in the last one three share points.
Despite losing share to is week to week sequential share has held steady since early January at around 27 percentage points and it's been a 28 for the past four weeks, maintaining our continued strong number two position.
Innovation has been well received by consumers as Margarita is the number one innovation year to date and all of beer with a $4 two dollar share and our poolside limited time offer also has performed very well.
However, our core light flavor truly business has suffered and not performed as we'd expected as consumers easily adopt what's new and interesting. Despite this.
This challenge truly is year to date household penetration remains strong across all age groups and is number one in all of beer among 21 to 34 year olds.
Our go forward plan is to activate this large base of drinkers by bringing new excitement to our core original flavors to better complement our innovation.
Despite the recent trends we believe hard Seltzer is will remain an important beer industry segment in the future, but its trajectory remains unclear.
<unk> silica meant a large consumer base with 29% household penetration over the latest 52 weeks, but the first half of 2022 penetration declined 12% from the first half of 2021.
While the hard Seltzer segment was 10% of total beer dollars in the second quarter of 2022 down from 11, 4% in the second quarter of 2021.
Consequently, as we look at our forecast for hard Seltzer category growth for the year, we have adjusted down our category volume growth from between flat to plus 10%.
To down between 15 and 20%.
Regardless of where the category grow sales in 2020 to our longer term goal is to outgrow the category and improve our truly brand trends driven by a renewed focus on building our core business Smart brand innovation and strong distributor supports and retail execution.
With respect to innovation, there's significant wholesaler and retailer excitement around our upcoming Shui vodka Seltzer launch this fall.
Our truly flavored bottled butka, which has been sold by beam Suntory since late in the first quarter has been well received by consumers and we believe this bodes well for the <unk> launch.
Important to improving <unk> trends as the performance of its core flavors. So today, we're announcing a reformulation and improvement of our core truly flavors that includes adding real fruit juice for an even smoother easier to drink and refreshing taste profile.
A similar exercise in the fall of 2019 led to retrial in share gains and we believe we can do the same again.
Our reformulated citrus variety pack is in the market now and the other truly variety packs will transition in August and will be supported by a new AD campaign focused on the flavor improvement a significant investment in shopper marketing activity and other promotional programs to drive volume and core flavors.
Twisted tea expanded its position as the number one F&B in the second quarter by five share points and grew double digits, primarily by improved distribution of 12 packs and a unique product and brand proposition that resonates with more and more consumers.
We improved our service levels and reduced out of stocks during the second quarter compared to the first quarter, which helped support this growth and measured off premise channels as volume growth has accelerated from 21% year to date to 27% in the latest 13 weeks to 39% in the latest four weeks.
Twisted tea has been the fastest growing brand among the top 20 in all beer for the past 10 months in the second quarter became the 11th largest brand and all appear.
It also has the highest sales per point of any beyond beer brand.
Twisted tea single serve 24 ounce can is the fourth largest single serve beer of any kind nationally underscoring its residents with convenience to our shoppers. This is despite many competitive offerings entering the market.
And as a testament to the brand's growing falling and the potential upside that remains as we close distribution gaps across the country.
Retailers are excited about twisted tea and and the recently finished spring resets twisted tea space grew 28% and now has 13, 4% of F&B space.
Because of its growing 12 pack distribution the brand is receiving unprecedented retailer support including expanded promotional and display activity. Additionally.
Additionally to support Paul we're advertising the brand year round to increase brand awareness and we've received a strong response from consumers to our current T drop advertising campaign will work to maintain momentum from the summer into the fall with a large college football themed initiatives significantly building on our college activities from 2000.
'twenty one.
And the seven states, where it's been launched quite mountain Dew is showing good promise within 18 share of Smbs and measured off premise channels, where it's attributed in those markets will continue to roll the brand out and expect it to be launched in up to five additional states in 2022.
The brand rollout has been delayed with certain states steward to due to a slower than expected regulatory process.
While this will result in fewer depletion in 2022 than originally envisioned we're in this for the long term and we're very encouraged from the early consumer response has been spent so positive.
In the first half our Samuel Adams brand Depletions were down low single digits. The brand had growth in seasonal and the draft business and held share in a difficult craft beer market.
Meanwhile, angry Orchard remains the number one brand in Hearts cider with a 48 share of the segment and measured off premise channels angry Orchard brand Depletions are down consistent with a low double digit declines in cider category trends.
Total dogfish head brand Depletions in the second quarter also declined against a difficult craft beer market.
However, our expanded lineup of award winning dogfish head can cocktails, including the new APAC bar cart variety pack grew depletions significantly in the second quarter off a relatively small base bar cart is now the largest friday packed and ready to drink cocktails and measured off premise channels.
So far in 2022, where we've continued to experience out of stocks on certain brands and packages, primarily with truly is our supply chain is still struggling to react to changes in demand.
We also have had issues with availability of some of our ingredients and packaging materials.
We've we're managing these issues and have the capacity ingredients and packaging in place to improve service levels and reduce our out of stocks during the second half.
In summary, we're optimistic about the long term outlook for our diversified beverage portfolio, we benefited from the unprecedented growth in hard seltzer during the pandemic and are now experiencing changing consumer demand as the environment becomes more normalized.
This resulted in a revision to our 2022 guidance.
Our company has proven innovation and brand building capabilities, the top selling organization in beer and an excellent balance sheet to support long term growth even as we navigate some challenges in the near term now going to hand, it over to Frank to discuss our second quarter financials as well as our outlook for the remainder of 2022.
Alright, Thank you Dave good afternoon, everyone.
For the second quarter, we reported net income of $53 3 million.
About $4 31 per diluted share.
<unk> to a net income of $59 2 million or $4 75 per diluted share in the second quarter of 2021.
This decrease between periods was primarily driven by lower gross margins, partially offset by increased revenue and lower operating expenses.
Our second quarter results showed sequential shipment gross margin and profit improvements and generated over $100 million in operating cash flow.
During the quarter, we continued to work through the 2021 truly inventory overhang as we lap the back end of the 2021 peak season inventory build.
While margins have improved from the first quarter, the lower than expected volumes and higher returns in scrap for truly an bevy brands have negatively impacted our margins and offset some of the margin improvement programs. We have achieved in our brewery network.
In addition, our supply chain challenges have not improved to the level, we expected twist.
Twisted tea service levels in out of stocks have improved.
But truly service levels and auto stocks continued to be below our internal targets.
Shipment volume for the quarter was approximately $2 4 million barrels to one 1% decrease from the prior year, reflecting decreases in all brands other than our twisted tea and Hot Mountain Dew brands.
We believe distributor inventory as of June 25, 2020 to average approximately four weeks on hand, and it wasn't an appropriate level for each of our brands, except for low inventory levels for certain truly brand packages.
We expect distributors will keep inventory levels for the remainder of the year below 2021 levels in terms of weeks on hand.
Our second quarter 2022 gross margin of 43, 1% decrease from the 45, 7% margin realized in the second quarter of 2021.
Primarily due to higher material costs and higher returns in scrap only partially offset by price increases.
Our second quarter operating expenses decreased $1 $2 million for 0.6% from the second quarter of 2021.
That decrease was due to a decrease in grant investments of $11 3 million, mainly driven by lower media costs, partially offset by increased general and administrative expenses of $5 9 million.
Mainly driven by increased salary and benefits costs and increased freight to distributors of $4 $6 million.
Our depletions and shipments for the first 29 weeks of 2022 has declined 7% and 11% respectively from the comparable periods in 2021.
Based on information of which we're currently aware we are decreasing our full year 2022 earnings guidance per diluted share to between $6 from $11.
Between $11 and $16.
However, actual results could vary significantly from this target.
This projection excludes the impact of ASU 2016 does through nine and is highly sensitive to changes in volume projections, particularly related to the hard seltzer category and supply chain performance as well as inflationary impacts that.
The 2022 fiscal year includes 53 weeks compared to the 2021 fiscal year, which included only 52 weeks.
Full year 2022 changes in depletion and shipments are now estimated to be between a decrease of 8% and a decrease of 2%.
<unk> from our previous estimate of an increase of between 4% and 10%.
As discussed earlier, the revision is driven by a change in expectations in our truly hard seltzer business and the launch timing of hot month view in certain states moving from 2022 into 2023.
We estimate the 50 <unk> week will have a positive impact of between one and one five percentage points on a full year depletions and shipments growth rates.
And between 4% and six percentage points on our fourth quarter, Depletions and shipments growth rates.
We continue to expect increases in revenue per barrel of between 3% and 5% full.
Full year 2022, gross margins are expected to be between 43% and 45% of.
The decrease from our previous estimate of 45% and 48% due to the impact of lower volume expectations and continuing supply chain impacts.
We continue to expect to cover higher commodity costs through pricing.
Full year 2020 to investments in advertising promotional and selling expenses are expected to decrease between 30 and $50 million.
It changed from our previous estimate of a decrease between zero and $20 million, reflecting our reduced volume expectations.
This does not include any increases in freight costs for the shipment of products to our distributors.
We estimate our full year 2022, non-GAAP effective tax rate to be between 26 and 27% excluding the impact of ASU 2016 December nine.
Change from our previous estimate of approximately 26%.
We're continuing to evaluate 2022 capital expenditures and currently estimate investments of between $110 million and $140 million a change from a fee base estimate of between $140 million and $190 million.
The capital will be spent mostly on continued investments in our breweries to further build our capabilities and improve our efficiencies.
We expect that our cash balance of $137 8 million as of June 2005, 2022, along with our future operating cash flow and unused line of credit of $150 million will be sufficient to fund our base business and future growth initiatives. We will now open up the call for questions.
Sure.
At this time, we'll be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is no question queue. You May press star two to remove your question from the queue for participants using speaker equipment may be necessary for you to pick up your handset before.
Pressing the star keys, one moment, while we poll for questions.
Our first question comes from the line of <unk> <unk> with Credit Suisse. You May proceed with your question.
Hey, guys good.
Good evening.
Couple of questions I guess, starting with with.
Truly and maybe how it's been trending.
Particularly with <unk>.
Around <unk> of July .
Is it looked like it's stabilized.
The July kind of the end of the period of where comps are particularly difficult just any read you have on them.
We think it could go would be helpful.
Yes.
Hey, Carlo this is Dave.
I'll answer that I think I mean, you're right the big the big overlaps really started to decline rate right. After July 4th of last year I can tell you that we have we've got great execution on July 4th weekend, we had more adds than any other any other hard seltzer brand in the marketplace.
We're being very prudent about interpreting anything right now because it's been so hard to do that so.
I wouldn't look at one week it was it was okay.
But I am not sure its necessarily a trend breaker for us and I think we're going to be looking actually ups. Each week subsequent to here to see what's happening I could tell you what's what's good to summarize what's happened that's going well I mean, the innovation is doing quite well, particularly margarita poolside or pulling of.
Loss of everything looks great. The issue as I mentioned in my prepared remarks, the core flavors are likely flavored.
Packages, the variety packs like tropical and <unk>.
<unk> citrus have really not have really.
Dave disappointed us and their performance and that's why we're really focusing our effort to them because consumers really in the end hard seltzer, they like flavors, they like bolder flavors, but they also.
They like the light refreshment refreshing easier to drink nature of the core flavors. So as I mentioned, we just announced that we are we've already re formulated corn in the market now. So I think we just want to see how that plays out.
The new flavors of support behind it and we have chewbacca seltzer coming in behind that which really is the high end of hard Seltzer and we'll see we'll see where it goes but there is no.
There was no epiphany that happened on July 4th weekend.
Okay got it and then just on margins.
Of the.
The success of truly has also been a drag on margins as you know.
Growth in third party manufacturing distribution, all those sorts of things.
Truly is obviously coming off now, but it sounds like.
The conversation has shifted from the.
The inefficiency of truly versus the rest of the portfolio too.
Volume deleverage and use of the brewery. So can you just help maybe.
Maybe it's Frank can you just help square.
How we think about margins in the context of what had been happening in the margins in the years prior with truly success.
Yes sure.
And as you know margins have declined during during the growth period of truly because we added a lot of external production and that came at a higher at a higher cost than double with internally and we said, okay. As we increase our internal volume.
We should gradually see an improvement in the margins.
What what has happened here, especially when it comes to the first quarter and I talked about in the first quarter as well we had an overhang from.
From the inventory that we had in 2021 that clearly impacted margin in the first quarter in the second quarter. What we are seeing two things. One is that we had because of the lower volume we had higher product returns of scrap and there was weighing on the margin.
And hopefully that's going to normalize as we go forward.
<unk>, saying is that if you look at our supply chain, we had made certain assumptions on bringing.
Capacity intuitive variety pick a variety pack capacity.
Up to speed, we implemented two or we installed two integrated variety pack lines in our own facilities in Ta and in Pennsylvania and Ohio.
And the startup is taking longer than what we had expected. So as such we don't have as much internal kopeck capacity as we had projected we're getting there we can see that in Pennsylvania, we're making really good progress.
Ohio is slightly behind so we will ultimately get there, but we don't have the capacity that we have projected for this year or originally so those are the two things it's literally.
The volume based returns of scrap and a delay in the supply.
And the internal capacity authorized it back.
Got it thank you guys.
Alright.
Our next question comes from the line of Rob <unk> with Evercore. You May proceed with your question.
Thank you very much.
<unk>.
I guess, when you kind of stand back and reflect on the year to date, obviously some negative.
Surprises.
I do.
I mean, when you kind of think.
Think about that.
Do you think it's something that you know.
Kind of relatively minor tweaks.
Like you know, putting some more fruit and truly is enough to address or do you think something maybe more fundamental needs to be done either in terms of your approach to the hard seltzer category or execution or just kind of very big picture strategy just trying.
To get a sense of.
Kind of a big picture takeaways.
That you have.
And how that May impact how you look at the business over the next few years. Thank you.
Hey, Thanks, Rob This is Dave.
I would say in the short term the reformulation is bigger than you might think it is more than just putting a little bit of fruit into into truly is actually reformulated and optimizing all the flavors. So we have so it so it is meaningful but if I take a step back from that and just kind of look forward. There's a number of things that we have to do.
I think others in the category you have to help but clearly we have to do in order to really drive sustainable growth again for truly and the first is we really really need to reengage consumers back into the hard Seltzer category and remember the category is really the category that has the most refreshing easier to shrink.
Alternative to any kind of alcohol beverage and I think we've kind of lost track of talking about the easier to direct nature of the refreshment.
The flavors, we happen to have as I mentioned actually in my in my script.
We actually have the largest household penetration of 21% to 30 40 roles across all appear so of all brands within the beer World of <unk>, where we have a big base. So we have to do is to activate that base right and we have to bring them something new and different too to get them to reengage in the category. So what are we going to do so one thing is.
It's clear the category has become very complicated right. We thought by now the long tail will be gone potentially in and there'll be less of this kind of sameness that exists out there.
But.
It's not there yet I think I think it's complicated for consumers.
And if that is to think too hard they're going to go find something else. So we have to simplify the choices for the consumer and part of that is really talking about light flavors into flavor versus bolder flavors and helping them make choices more easily.
At the shelf or on display. It also includes scale eliminated skus that are performing I would say also is creating news without skus, which really this cases this reformulation that.
That I just referenced.
Around the core flavors, but also tweaking our bolder flavors as well and constantly improving that again, we've proven before that consumers are.
Very willing to retry something when they when they believe it's been approved.
Other thing I would say we use the <unk> have been successful for us. They are cannibalistic Theres. No question that success of innovations are more cannibalistic from ones that came before but with <unk>. We can become we can be smarter and more strategic in how we use them and so youll see more of that next year.
And how we do that so I think and lastly, I'd say is just delivering the message is not wavering from our message that.
Truly it's the most authentic refreshing fun alternative to two severe right and really thinking about how can truly deliver that across multiple segments not maybe not just hard seltzer. So we're venturing out into into the Doctor Seltzer, the RTD Voka Seltzer.
Soon and there might be other ways for us to play down the road. So there's a number of things that have to be done to change the trajectory of the brand and the category.
We think we have a pretty clear roadmap of what we need to do and right now right here right now this summer we think making this formulation change.
And really it's about it's about the best tasting flavors ever that happened to have real fruit in them, it's not just about.
Real fruit its about the taste, because what people care about and we think that can make a difference and the last thing I'll say is we've had amazing support so our wholesalers have been have stuck with us over our retailers.
So we have the we have the execution support we need we need to just deliver.
Simpler fewer better ideas to get them charged up.
And then just one follow up on all of that you did mention.
In the in the.
And it's starting narrative that you had seen a certain amount of consumers.
Go back to.
Light beers and premium light beers and you mentioned that maybe that was I think you said you maybe that was because they were lower priced.
Is there is there a an affordability issue.
Because that is that what you were trying to suggest or I'm, just trying to better understand.
What youre seeing in terms of going back to premium light beers and what your analytics say is actually happening.
Yes, I think when we look we're looking at Rob we're looking at.
As the numerator data and were seeing particularly really in that 35 to 44 age break we're seeing like most of the shifting out of hard seltzer.
Significant proportion went to two.
Back to white Beard I think it.
It's partially affordability, but it's also partially the fact that might be a offers while at the same benefits that hard seltzer is provide so it's like I'm getting some of those same benefits and in fact, we think a lot of these folks had obviously were light beer drinkers before and it came to hard seltzer now they might be shifting back out there's about a 7% price gap on average right now between hard Seltzer and premier.
Some light beer, so that that can be part of it but you don't you definitely see it in the data and if you want and in fact, that's the majority of the volume that shifts out of hard Seltzer has gone back to white light beer and again, whether it's transitory or not.
We'll see but I think again it also speaks to the need to reinforce and remind people why hard seltzer has been successful in the first place and why it's 10 sure appears because it has some unique attribution benefits.
That that people like.
Does that suggest that you may need to somehow either lower price or come out with a lower priced variant.
In an economy truly or I'm, just trying to trying to get a sense of how how to address that issue.
Yes, I think it's I don't think it's not going to be through price.
We're we're we're sticking to that to that approach I think again it goes back to we need to do a better job I believe communicating the benefits of hard seltzer, because they arent. They do provide a unique benefit that even light beer cannot provide and if.
For example, one is flavor variety and that's that's really important you see it across all the different segments and beer right now hartzell, Sir can deliver the variety. Unlike any other segment within within beer. So it's it comes back to the two leaders in the category to deliver that message and to do it in a compare.
<unk>, but not <unk>.
Not about reduced reducing price or to be more compressed competitive to what peers got it. Thank you very much.
Sure thing.
Our next question comes from the line of.
Sabah with Bernstein you May proceed with your question.
Hi evening guys cute.
Two questions from me first can you. Please walk us through the various assumptions behind your updated guidance and what gives you confidence that you can hit this guidance.
Secondly, what was hard mountain <unk> contribution to your Q2 shipments and what do you expect its contribution to be part of the full year.
Okay now this Frank let me, let me take you through the assumptions so.
You know we had our original guidance.
Yes to a large extent based on the overlaps that we had versus last year and last year started as you know extremely strongly.
48%.
Growth in Q1 and that moderated in Q2.
So we were expecting.
An improvement in our trends this year when we hit those those lower growth months from last year, and we're expecting that at the end of May.
Beginning of June and.
When that didn't come through and we looked at the Depletions. It was predicted there was saying they're pretty stable and you see that in the results that we have been reporting it's 7% on a depletions essentially so we set a gain instead of really relying too much on the overlaps and expecting a trend change based on the <unk>.
<unk>, we just project out.
The growth rates that we have seen broadly.
Year to date and more recently and then.
We get a benefit in the second half was really to get a benefit from the 50 <unk> week that we have.
Put out so that gets you kind of to the midpoint of the guidance that we have projected shipments is a slightly different story because.
Shipments.
Faced very differently last year, because we didn't have enough capacity for the volume that we had planned for in 2021 and as such we built significant inventory.
At wholesalers and internal debate, which peaked essentially at the middle of the year.
Which is when the volumes really.
Volume growth came to a halt.
Didn't sell through the inventory that we had built and two things happened we need it we really have reduced significantly our production and our shipments to wholesalers because to wholesalers there were selling through what they have in the warehouses. So theres a significant imbalance between the first half of the end of the second half of the year, where we had significant growth in the first half and shipment.
Declines in the second half of the year, but if we align that.
If we meet our Depletions target that I explained just before the shipments that we that we need to to satisfy that will get us to the range that we have is that gets you broadly to the midpoint.
And then we looked at okay whats.
What's the risk profile around that number and it cannot go lower than what we did is instead of just projecting out the trends we looked at the different brands and what <unk> seen probably in IRI as well that truly.
What's getting versus the declines intends to slide a little bit and then you look at twisted tea that performance accelerated so in the last four weeks in the last 13 weeks. The performance is significantly better than on the year to date, but we projected out and assume that that twisted tea would stay on the year to date rate and we are.
Assume.
The declines of the first half to be projected out for the remainder of the year and that kind of gets us to the low end of the range. So those are kind of the broad assumptions for the depletions and shipment guidance.
And then the second question.
On the Hot Mountain view so.
I mean, we don't break out the numbers, but the majority of the Hot Mountain Dew volume is coming into the year to go as opposed to what <unk> seen in the first two quarters.
Got it thank you.
Our next question comes from the line of Bonnie Herzog with Goldman Sachs. You May proceed with your question.
Thank you everyone I just wanted to know.
A little bit of a follow up.
One of the things he talked about regarding guidance I guess.
Wanted to maybe switch.
Typically I understand what your shipment guidance.
<unk> declined for Chile, I guess.
When I did the math and just thinking about the midpoint I think based on our model implies that Q&A shipment volume declined more than 20% for the full year just wanted to get a sense of that.
Is in line with your expectations and then if that's right.
Think about that in the context of your <unk>.
Guidance or outlook for the category being down 15 to 20, just wondering if you think you can still take share.
And then I also.
Had a question about the second half materially decline, just given where the stock prices.
This year I think it does imply that the declines moderate a bit in the second half. So just kind of wanted to check on that item.
Yeah. So Bonnie we don't give specific guidance for brands, but I think.
Your assumption is right that you mentioned I mean, we didn't take an optimistic view on truly.
And as I said before if you look at Iis Iis is pretty pretty representative for the trends.
That's kind of what we projected out.
Which is which is in the <unk>.
Yes.
Negative 20% for the rest of the year to get to the guidance.
In terms of share again, we haven't taken the optimistic approach because we haven't we haven't really gained share sofa.
Let Dave talk to that and also to the future to the future volumes, we haven't we haven't assumed in <unk>.
<unk> for the remainder of the year versus the year to day out and yes as it relates to share so 15 to 20.
We came up with that just by looking again similar like it looks at the last four weeks.
The category, which I think were down like 19%. So we said lets assume it doesn't get any better Thats best low point, that's your minus.
'twenty and then we looked at the Lynch I'm sorry, so that was the way. It is poised to look at the year to date, which is minus 14. So I think it will be somewhere in the middle we think as it relates to share for truly we've lost like one five share points or so this year.
One three in the quarter, but the way I look at it is obviously.
That is our goal our goal is to is to grow share and I think balanced balance of year. We're looking at it as balance of year with them with re formulations on the core business investment behind that to launch a truly blocker, seltzer, which will which we will count.
If you look at it from a consumer perspective that is a hard seltzer.
Business. Our goal is to grow share balance of year, where does that sound at the end of the year, we don't know.
But that's that's the intent is to us from <unk> returned one right now.
On a different performance in the second half from Raymond for it but as Frank said our guidance. Our guidance is very prudent is not expecting that we're not anticipating share growth to hit our guidance.
Okay. That's helpful. And then I just had a second quick question maybe on your <unk> guidance.
One hand, I guess I get the card given the slowdown in the hard seltzer category, but on the other hand I question.
How youre going to get consumers interested in the category again without incremental spending you know just hoping to hear a little bit more color on how youre balancing that especially in the context of the reformulation that you're mentioning.
Yes, so so due to the A&M cut I mean honestly its really reflecting the volume declines that we have.
Very healthy spending that we have in general.
And if you look historically at our Atms spending.
Like in the 17 18 period, we were like at 25% that that came.
It came down with a tremendous volume growth that we had in 'twenty 'twenty. One then moving.
Two to slightly below 20%.
And then we went up in 2021, because we are spending frontloaded.
In anticipation of higher volumes the volumes didn't come through so we had to adjust the spending.
We feel really healthy spending.
Behind behind truly, especially but also the other brands.
If you look into bigger context, what we what we hope we have supported it historically.
Don't have enough spend and Bonnie I would just say that we could do.
Okay.
The gross number but we can and we do we move we move funds between brands, where the opportunity is so we have plenty of ability to do that and that infringe sofa for truly that's one of the ways, where we're spending this year.
August September into the into the Cavaco Seltzer launch.
The new flavor, Slovakia Seltzer, we're we have we have dollars we can reallocate. So it's important I think as I said.
We have to get people to start thinking about the categories, where they did a couple of years ago.
And again it also get a new ways to think about it so that you can't do that unless you invest.
Great. Okay. Thank you so much.
Our next question comes from the line of Eric <unk> with Morgan Stanley You May proceed with your question.
Good afternoon.
Dave you called out the switching particularly among.
Cohort I think you said, 35% to 44 back to premium I'm wondering if you have any perspective as to whether you are seeing some leakage from the hard seltzer category to the broader RTD, particularly spirits based RTD.
As well as full flavored F&B.
Okay, Erica yes, let me answer that so I think and I'll use the data I'll cite it comes comes from numerator. So I know there's been a lot of talk about the RTD shifting well first I'll tell you what the what's the numbers looked like again.
So where does it go where's the hard seltzer shifting going too far.
Bottle spirits are picking up about a third of it so people back to bottle spirits whitebeard, 26%, while 14, and then you get to ready to drink cocktails, which is about nine so its not there is a lot of noise in the RTD cocktail space right. It's one it's 114.
<unk> share of beer.
But then if you split that into a little more than half the call 0.8 of the one four is actually <unk>.
<unk> like high noon and others of that ilk, we consider those those are really hard those are we can talk about that separately those are hard shelters and so really you are talking about <unk>, 8% of dollar sales are really traditional RGD cocktails, which are different occasions different abv's different consumers lower lower repeat rate.
Lower buy rate et cetera, they are having an impact I think the interesting thing I just looked at the other day and RTD is is that they have about the same number of brands and Skus like call. It 258 brands and over 1000 Skus as hard Seltzer is due right now in the market, but there are 7% of beyond beer in hard seltzer or 40.
8% of beyond beer, so clearly theres a lot of noise and excitement I would say that noise is larger than the volume right now in that space. So it is taking I mean, it is taking some from harvest from ourselves, particularly if you look at the <unk> part of it but.
But the other part of RTD cocktail is really not a factor here I think what you have in the marketplace, though.
<unk> watches that everybody goes one direction really hard and some in some cases, we saw with hard seltzer can become self fulfilling and others you might they might hit a dead end and it doesn't play out the way they are thinking they'll go somewhere else. So right now I'd say, there's more support and execution and focus in RGD cocktails that maybe.
As warranted by what's the consumer saying.
And then all of that has had a bit of an impact but again it comes back to the other big segments like white beer bottle spirits wine. So maybe reclaiming some of those consumers that at Hartsville shall have still won over the last few years.
Great.
Helpful.
Other question I know, it's still very early in a context of things, but what are you guys seeing in terms of hard mountain dew repeat rates.
You are talking about a category mountain Dew, obviously has tremendous brand equity, but youre talking about a category thats kind of notorious for flavor churn and people chasing the new new thing.
So I guess what are you seeing in terms of repeat rates and what are you. How are you positioning for next year to have.
So some continued growth there.
Then the distribution tailwind from expanding to more states.
Sure thing I'd say I'd say, it's I would say right now it's a little early to make a call on repeat rates because it's it's a strange launch is in seven markets right. It's gone in different different times, it's been focused on great.
Great execution on large format stores by large grocery stores, it's not up and down the street.
Theres only one take home package and I think for single serve packages and basically been sold warm because of some large format.
It's it's hard to give a firm number on that now having said that.
If you look at all of those markets, where it's distributed as I mentioned in my remarks, it's an 18 share right now the last time, we spoke it was it was higher in the twenties, but but the amount of trial. There was delivered offered US is extraordinary I've never seen anything like it quite honestly, there's a novelty around mountain dew that drove drove huge trial rates now having said that is coming.
It's come down to an 18 share, but that 18 share makes it the number one F&B and.
And every single one of those those markets it's.
It's velocity is two to five acts with the number two F&B is in those markets. So we just look at the share and the velocity right now.
We like what we see.
But we just want to we need to get into and we were in seven states now I think I. Just said, we will get to probably 12 to 10 by the end of the summer is locked through more and then a couple by the end of the year, but then ideally next year, we want to go all out and.
I think so there is an opportunity here to read it as we go as we get more distribution and importantly, like deeper distribution within these markets. Then we will get a real sense of repeat because repeat you can't have you can't read repeat if you. If you can only go to one chain in a market to find that product any broader distribution.
So again I would just say we're trying to we're trying to be tempered about this but.
What we see so far is very positive and we need to keep running the running the game plan and and the beauty is we keep adding as we go and we'll learn as we go in and next year, we expect it to be a big contributor but it's.
It's too early to talk.
Too many details about that.
Great Thanks for that.
Yeah.
Our next question comes from the line of Stephen Powers with Deutsche Bank. You May proceed with your question.
Yes, hey, thanks, good evening.
You talked earlier about the need to simplify the hard seltzer category to make it easier for the consumer and I think I heard within that.
<unk>.
Proceed mute on your part to simplify the truly portfolio as well.
Question. One is did I hear that correctly and question two is if I did I guess I'm.
I'm curious as to what portion of but truly portfolio you would at this point consider relative noise that you'd ideally like to simplify to optimize.
[noise] versus versus the core that's with higher performing I'm, just trying to assess how big a tail you think you need to cut before getting down to that higher performing base that you can grow off of from here.
Hey, Thanks, Steven It's a good question I think you did hear me correctly.
We do need I think we definitely need to them makes it makes those decision we're not really ready to talk about what part of it but if you just look at the least the underperforming generally the underperforming Skus I think I think also we probably we went after the bolder flavor thing and we did we own we own the bold flavors segment, if you will with laminated <unk>.
And Margarita, but as I mentioned before I think we neglected a bit delight flavored.
Segments, which again is like Archrock tropical and are buried in our citrus. So I think one thing we need to shore up the core likely flavored because consumers really do like that and they want that and so we're.
We're also going to improve.
Profile across the whole.
Portfolio as released Okay, what hits the chopping block, it's probably you know I can't I can't tell you before we talked to our wholesalers. So it's a little premature to share that information, but but but we do agree that it's not just a fewer skus fewer skus is important I think also making it easier for when the consumer shops to see something to know exactly.
What it is and what they're going to get out of it with the flavor profile will be.
The patient experience is going to be we need to we just start with the put ourselves back into consumer shoes.
And look back from there to the shelf and make sure we're delivering what they are looking for so I'm, sorry, I didn't I didn't really fully answered.
The second part of the question, but we're not quite ready to go there now.
Okay fair enough if I can.
Could I also just follow up on the <unk>.
The advertising piece.
I guess it was more but im just curious the mechanics.
At the midpoint of the guidance cut.
Advertising promotion and selling costs, it's like a it's like a $3 EPS.
P. S terms that 50 million Bucks, so how much of that is mechanical like it's variable.
With where the volume is.
Volume goes down selling costs go down versus how much of that is actually you guys are electing to cut $50 million out of the budget.
At the midpoint.
Yes, Steve.
We don't really do mechanical very well if you look at APM that spend right now and I think Greg.
Talked about that also.
So in previous earnings calls when we.
The approach that we take to APN as as we look at what can we make a difference and if you see an opportunity and we feel good about our advertising we invest.
And we don't really focus too much on the quarter too much on the year, what you get is our best estimate.
Long term.
We're getting leverage out of our <unk> spend and Thats, what youll see over the years and we do.
On a percent basis percent of net revenue basis, that's the leverage that we get by growing the company, but we go after opportunities as we see them we feel actually.
What we have I mean, clearly we're looking at the P&L, but we're looking at where can we cut where we don't really get a lot of mileage out of our spending and where do we put the money where we get the biggest return that's kind of how we think about it and.
The reduction that we have.
As I said it is in response to the volume, but it's more driven by what we believe we get the biggest return on our investments and we feel fairly comfortable with the level of spending that we have that we're putting behind our brands.
Okay. So.
As you.
Those are calling the year now from a demand perspective, you feel that the advertising spend is now.
Appropriate it's not like you're.
Guaranteed a big catch up next year based on based on the revenue line.
No I mean as I said like short term, we always when we see the opportunity was.
We'll spend.
But it's not while we keep the P&L in mind, it's not that we mechanically reduce automatically the Aps spend just to hit a certain number.
I wouldn't be relatively stay about that it's the topline growth is that we feel is really important and that's driving the long term value creation. So you see variations quarter to quarter or year to year, but long term you're going to get to the leverage.
Okay. Thank you very much.
Alright.
Our next question comes from the line of Kevin Grundy with Jefferies. You May proceed with your question.
Great. Thanks, Good evening guys two for me as well first on gross margin and then a broader question for Jim and Dave Perhaps the gross margin question just comment on how big of a priority is to restore gross margins at the company and then longer term understanding with truly theirs.
The wider range of possibilities here with some of the uncertainty that exists with consequences on your fixed cost absorption, but based on your current projections internally how quickly can you return to a low to 50% gross margin for the business and then I have a follow up thank you.
Yeah. So.
Kevin the gross margin is really important.
Typically when we talk about our business, we talk about the top line, we talk about the gross margin with the priority that grows Trump's gross margin because we know over time, we will get the company to the right place.
The importance.
So we've talked.
Talk about the supply chain transformation, we were investing.
We are making significant investments into our transformation, we get to our concept of four anchor breweries.
We have a more distributed network between the east coast and the West coast, bringing costs down we are focusing on getting.
Two a portfolio you'd like to do.
Network that can significantly reduce the cost of a variety pack costs, which is our highest cost.
We are optimizing the supply chain and we're doing that over time, we're very much focused also in improving our service levels, which is very much related to the supply chain into the entire value chain. If you look across the company.
It's not only the narrow.
Focus on the breweries, it's really on the broader supply chain across the entire company, which starts with wholesaler inventory and ends with Allstate in the inventory. If you will that is a significant focus for us and we want to get it right.
We will see I mean, yes, the guidance for this year, we will see improvements over the years to come.
The targets that have communicated previously has not changed that drive us hasnt changed but we are literally late as I as I mentioned earlier on the implementation on creating the internal capacity, we definitely have the right equipment. It just takes us a little longer and that's just one piece to get us up to speed, but it is a significant probably.
Archie.
Okay understood and then Jim and perhaps Dave just comment.
From a macro perspective expectations broadly for the beer category and perhaps even total beverage alcohol.
Given the inflationary pressures that the consumers under and then maybe just also comment that would be great to disappear on the industry's pricing posture, which has been to take less price than we've seen in <unk>.
Most other consumer staples categories, frankly, and I'll pass it on thank you guys.
Yes.
Yes, let me jump in on it.
Basically per capita consumption of alcohol in the U S has been extremely stable.
Over the decades, so you're kind of getting a.
LDA population, that's growing one 1.5% a year something like that that's probably going to be.
The grocery to alcohol consumption in terms of.
Amount of ethanol.
And then you can parse that out between wine spirits and beer.
And beer has been losing share.
Ethanol to spirits.
A little bit to why.
But.
The growth of.
What I've called the fourth category things like hard Seltzer F&B.
That.
The drug consumers in just from beer, but from wine.
And spirit occasions has.
<unk> helped beer grow over the last few years I think from like 2008 to 2008.
18 beer declined most years.
And since then it's actually grown.
In hard Seltzer, and F&B has had been a big part of that but you're not talking about huge numbers terrible year in the beer business is when you are down 1% and a great year as when you're you breakout the Sam Adams, because you are up 1%. So it's not a big band.
In there.
But.
You do have.
Traditional beer declining and.
The growth being driven by fourth category type products also called beyond beer, where Boston beer is very strongly positioned.
Positioned in to has been a leader in innovation for decades. So.
In a macro sense I guess, that's what I see.
In.
Total alcoholic beverages in it.
Having.
A bigger impact on beer and wine.
And maybe spirits, it's largely.
The growth of this category in beer getting the vast majority of that may be 70% to 80% of it has.
Change the beer growth rate by maybe as much as 2% over the last three years and.
Last point is its my belief that beer is currently quite advantaged.
And.
What it takes to be successful in this fourth category they are products that basically.
It looked like beer there.
Largely in 12 ounce servings and cans in the cold box.
And because one of the advantages is.
Convenience portability ease of consumption they tend to.
Sell for beer type price points, so you need the <unk>.
<unk> sees in the beer distribution system and the reach of a bigger distribution system.
And you need producers that have.
Hi speed can lines.
Medium scale and so forth and then there is of course, the big tax differential that basically says a spirit based product gives you four cans for 10 Bucks.
And.
A quote unquote malt based which can be sugar based.
Gives you those for 10 Bucks you get six cans so.
There's a 50% price premium when you go to the spirits space.
All of those things tell me I guess fundamentally.
Alcoholic beverages, the fourth category is going to drive the growth and beer is advantaged in that category.
Does that help.
Yeah very good thanks, Dave did you want to add anything with respect to the macro I expect the category to holdup and whether the industry is taking the right path to you from a pricing perspective, I E less than other staples category.
And there's not much I can say that that would add to what Jim has to say I mean, the pricing I would say on the pricing piece I mean, 5% four 5% pricing in this category and Jim can talk this that Eni is a lot and I think also it's a category where people can choose to drink less in that moment, maybe over time Jim.
Right, but I think we're not we're not leading with price we're following.
But we agree with the levels and we think they are reasonable.
And you can look at the you can see what the volume is the volume is less than.
It's worth the minus 1% right now the dollars are a lot better but the volume is so and Jim I don't know if you have a point of view about the rate of pricing thats happened in the marketplace or not.
I don't know that I have any great insights I guess, what gives me some comfort about where were.
We are at the 4% to 5% level that kind of tracks peoples wage and salary growth.
I know headline inflation is eight or 9%.
But.
Peoples.
And salary growth is four five so in terms of.
The dollars available.
Uh huh.
Beer.
Uh huh.
Is not going up in as a percent of peoples.
Income.
And so that I think supports the.
Minimizing the volume hit from inflation.
Okay very good thanks for all the time and have a good night.
Our next question comes from the line of Peter Grom with UBS. You May proceed with your question.
Hey, good evening, everyone I hope Youre doing well, so I was kind of hoping to shift gears away from truly for a second and kind of just talk about the strong performance of twisted tea can you maybe unpack the drivers there and I apologize if I missed this in an earlier in response to your question, but what is your expectation for the brand as we think about the guidance for the back.
Half of the year.
And then maybe more importantly bigger picture how do you think about the long term growth potential of twisted tea beyond this year, particularly as the.
The brand grow comps get more difficult et cetera. Thanks.
Sure thing Peter I'll answer that part.
And then maybe hand over to Frank for a little bit there. So in terms of twisted tea I think what's happening right. Now is we have it's like the perfect combination of push and pull happening in concert with each other at the right moment in the thing. This spring as you know this brand has been around for over 20 years, it's been growing steadily on.
On average unit low double digits for all those years.
But it's really been still arguably like a regional brand and I think what happened over the last over the last year and you look at just look at our 12 pack distribution is something like 58% of the HCV right now and a year ago. I think it was about half of that and I think that was sort of the tipping point once we get distribution of 12 packs.
We have three of them.
And then that's where everything is starting to come into play with our wholesalers and with our retailers. So what's happening now is that all the major retailers now can can promote and support this brand on a national basis, So thats and in turn driving a lot of trial and is in our household penetration is up 10 or 10 or 12%. So you've got.
The <unk> really started it at the same time, you've got this brand that was built very slowly so right way. So we started with a narrow demographic target.
And <unk>, which are.
Blue collar guys driving pickup trucks, who made some who had had we had decent income who went to the convenience store to buy it and the narrow geography tend to be northern new England in Montana or Michigan.
Don't ask why but it just was and then and then it sounded space and what we've been able to do is very carefully grow that base grow the demographic to broaden the demographic appeal grow the geographic distribution to broaden the geographic reach.
And.
The brand has got a unique combination of product attributes.
And brand new sort of emotional benefits since kind of creating this has created a little bit of a moat around the brand and that's very hard to sort of replicate exactly which was trustee provides the product and as a brand. So so it's a really good example of.
Building the brand the right way over a long period of time and and working in concert to get the push and pull so you've seen the brand's accelerated growth over the course of the year and the way I think I said in the last four weeks and our array was up high <unk>. So we've got a lot of activity all through the summer into the fall and we're going to keep.
It does seem there we also have by way of an AD campaign that scored in the top quintile. It's an incredible campaign is resonating as well that certainly helps and we're spending behind it and it's coming together, but it but I've learned over the last year or so never to predict anything.
At all other than but we're taking it one step at a time, we ship, we got something here that's debt.
That is really finding its level and we're going to keep supporting it and again last thing I'll say is that still despite the success the household penetration the distribution.
The brand's awareness far lower than it's been as primary competitors in the space. So there's still a lot of upside to two to grow the brand.
Okay.
I think the other question I will go to questions.
Sure.
You were asking about the guidance on the other side before.
We took a relatively simple approach and look at the growth rates that we've demonstrated over the last 13 weeks basically okay and projected the dollar then that.
When it comes to Depletions, that's essentially what we also have year to date no.
Within that you have a mix impact and as I said before truly has decelerated. So the last 13 weeks of worse than what you see on a year to date basis. If you look at a variety of data and twisted tea is better than it has a higher growth rate in the last 13, then the year to date, we have not taken the.
Latest four two.
<unk> is growing even stronger than the growth rate for twisted tea in the last four it's basically double what you have on the year to date, we have not taken that we've taken a relatively.
Straightforward approach.
13 weeks and then when you go to the low end of the range. We've just assumed for twisted tea they get to the year to date and have projected out for the rest of the year.
So that's kind of the approach that we've taken for the guidance and then just as a reminder.
Our guidance our full year guidance also includes the benefit of the 50 <unk> week, which is of course not reflected in the year to date growth rates, but will be reflected in the year to go is not reflected in the year to date and will be reflected in <unk>.
<unk>.
Great. Thank you so much have a great night.
As a reminder, if you would like to ask a question. Please press star one on your telephone keypad.
Our next question comes from the line of Vivien <unk> with Cowen You May proceed with your question.
Hi, Good evening. Thank you I wanted to follow up on <unk>.
Dave last quarter, you articulated for Berry.
In terms of game, both in terms of shelf space as well as placement distribution can you just update on how you're tracking against those goals.
Sure Vivien.
I mean, the shelf space I can remember I mentioned in the opening remarks, but twisted tea grew shelf space by 28%. So it's getting it's getting the support now and I think again a lot of that is it's 12 pack distribution, but it's also 24 ounce at convenience stores and so it is tracking really really well.
Household penetration is up about 13%. So that's also.
Really good but I think the big thing again like I said before the tipping point is getting <unk> out there where retailers can now promoted and supported on a national basis. So that's really been the big driver. The only thing I would suggest again a sign of the strength of the brand to believe in it is that.
It's.
From a single serve perspective, it's by far and away the number one F. N B's 24 ounce, it's number four in all beer.
So theres three beer brands that come ahead of it maybe guests where they might be and then it's twisted tea. So it really and that channel is so special and important because consumers are going in and they are in there and they are picking the brand they want them not being swayed by promotion pricing generally.
Or or displace because they walk into a coal it's like the most egalitarianism.
Place for our branch present itself and twisted tea as Scott is getting.
The attention and we're also adding a <unk> to <unk> 24 hour swelled to broaden that yellow bar.
And that Youll see in convenience stores and the last thing I'll say is when we have a national promotion with Doritos right now, which is a big one for us to that place across all off premise channels that again, we can tap into that the connection between that those two brand groups or those two consumer groups and.
I can't keep driving household penetration.
Got it that's interesting on the Pepsi partnership, Ontario quick follow up for me I know, it's very small pieces of business in very early days, but any update on key patents on it.
Yes, I mean, so T. Part is I can tell you. This it's a great it's a great.
That's a great tasting product great name, we're very excited about is launching and where else where else would you want your product like cheap, but first but Saskatchewan.
I was going to Saskatchewan actually I think this week and then at that it moves too.
To Manitoba.
Cochrane the big the biggest provinces of Canada first and then eventually to Ontario, which obviously is.
Most populous.
Province of Canada sometime in the fall. So it's just just getting going.
Five milligrams of THC, great tasting tea.
Leveraging obviously, our experience in making great tea products.
And we're looking forward to seeing what it can do.
Perfect. Thank you.
Ladies and gentlemen, we have reached the end of today's question and answer session I would like to turn this call back over to Mr. Jim Koch for closing comments.
Ladies and gentlemen, we have reached the end of today's question and answer session I would like to turn this call over to Mr. Jim Koch for closing comments.
Well.
My apologies I was on mute.
Just wanted to thank everybody for.
Sitting in on this end.
We'll talk again in three months.
Cheers.
This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation you may disconnect your lines.
Yeah.