Q3 2022 Boston Beer Company Inc Earnings Call
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Yeah.
Greetings and welcome to the Boston Beer Company third quarter 2022 earnings Conference call. At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad.
And as a reminder, this conference is being recorded it is now my pleasure to introduce to you Mike Andrews Associate General Counsel and corporate Secretary. Thank you Mike you may begin.
Thank you good afternoon and welcome. This is Mike Andrews Associate General Counsel and corporate Secretary of the Boston Beer Company.
I am pleased to kick off our 2022 third quarter earnings call.
During the call from Boston Beer are Jim Cook, founder and Chairman Dave.
Dave Burwick, our CEO and Frank smaller our CFO .
Before we discuss our business I'll start with our.
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. Additionally.
Additional information concerning 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.
The company does not undertake to publicly update forward looking statements, whether as a result of new information future events or otherwise.
I'll now pass it over to Jim for some introductory comments.
Thanks, Mike I'll begin my remarks, with a few introductory comments and then hand it over to Dave who will provide an overview of our business. Dave will then turn the call over to Frank will focus on the financial details of our third quarter results as well as our updated outlook for the remainder of 2022 immediately following Frank's.
Comments, we'll open up the line for questions.
This quarter, our Depletions declined, 6%, which is slightly better than our year to date trend of down seven we grew revenue for the second quarter in a row driven by the continuing growth of twisted tea, while improving our wholesaler service levels and reducing out of stocks.
Towards the end of the third quarter, we reached our current target wholesaler levels.
And currently have the best wholesaler service levels since 2000.
Declines in the hard Seltzer category and truly continue to negatively impact our business.
Seltzer category in measured off premise channels is down 15% on a volume basis through the first nine months of 2002 with truly down 21%, we were working to improve truly trends through a major product re formulation, including the addition of <unk>.
Oh fruit juice and sharpening our brand communication and increasing our media investment.
Early in the fourth quarter, we launched truly vodkas Seltzer and early response from wholesalers retailers and drinkers has been positive with the launch of truly vodka Seltzer, along with our award winning dogfish head canned cocktails. We believe we are positioned well in the emerging ready to drink spirits category.
It's been growing 79% in measured off premise channels through the first nine months of 2022.
For the remainder of the year and into next year, our strategy is to gain market share and the beyond beer category, where we are currently a strong number two.
Beyond beer is growing faster than the traditional beer market and we believe that this trend will continue for the next several years, our multi brand strategy plus our long history of innovation have supported our growth over the long term and we will work hard to capital.
Lives on these strengths going forward.
We're thankful to our outstanding coworkers distributors and retailers, who continue to support our business I will now pass it over to Dave for a more detailed overview of our business.
Thanks, Jim and Hello, everyone.
Our long term goal is to become the number one player in the fast growing beyond beer segment by creating abroad relevant brand portfolio that enables many pathways to growth.
We have the number one F&B and twisted tea, the number too hard seltzer and truly and the number one hard cider and angry orchard.
In the near term our priorities are continuing to focus on fueling twisted tea supporting the launch of dogfish I can't cocktails and working to stabilize truly trends.
We're also experimenting in planting new seeds in our search to cultivate new contributors to our future growth.
Our third quarter depletion trends reflected continuing growth and twisted tea and positive contributions from hard mountain dew offset by declines in other brands, primarily truly hard seltzer.
Excluding the declines in truly our depletion volumes increased 14% in the third quarter and 12% for the first nine months.
I'll say more about twisted tea in a moment, but first let's talk about truly.
<unk> volume declined by 17% in the third quarter and measured off premise channels.
We believe there are four primary drivers of the continued decline.
First hard Seltzer has lost its novelty as consumers have been distracted by many new beyond beer products entering a hyper crowded marketplace.
The large amount of hard seltzer skus as caused consumer confusion. It makes the segment hard to shop.
Third no one is communicating the core category benefits of refreshment easier to drink and variety.
Lastly, and partially 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 45 plus rules whether this continues into the future reverts back is still to be determined.
The truly brand has not yet overcome these headwinds truly volume and measured off premise channels declined in the third quarter by 25% in the last 2.8 share points compared to the third quarter of 2021 are truly innovation has been well received by consumers as Margarita remains the number one innovation year to date and all appear but the $4 one volume share.
Hard seltzer, however, our existing flavors have not yet stabilized since consumers easily adopt what's new and interesting. Despite the current headwinds choice household penetration remains strong across all age groups and is number one all beer among 21% to 34 year olds for the latest 52 weeks.
As I mentioned on our last call. We're re formulating all choice flavors by adding real fruit juice for an even smoother easy to drink and refreshing taste profile reformulated truly variety packs for in the market now and supported by a new AD campaign focused on the flavor improvement a significant investment in shopper marketing marketing activity in <unk>.
Other promotional programs should drive volume, we've received favorable response from consumers retailers and wholesalers to these changes, but the products. The only been in market for a short time and the full business impact will be felt over the longer term.
With respect to innovation, there's significant wholesaler and retailer excitement around should we block a seltzer, which we launched earlier. This month are truly flavored bottled backer, which has been sold by beam Suntory since late in the first quarter has been well received by consumers as the number one new innovation full bottle spirits in 2022 and.
We believe its success bodes well for the truly bought yourselves or watch we continue to believe Harte <unk> will remain an important beer industry category in the future, but the trajectory of the category in the near term remains unclear. While the <unk> segment was nine 8% of total beer dollars in the third quarter of 2022, it's down from 11.
4% in the third quarter of 2021.
Consequently, as we look at our forecast for hard Seltzer category growth for the year. We continue to believe the category volume will decline between 15 and 20%.
Regardless of where the category growth settles in 2022 in future years, our longer term goal is to outgrow the category and improve our should we brand trends driven by a reformulation of all flavors, along with brand investments Smart brand innovation and strong distributor support and retail execution.
Let me turn now to our other brands beginning with twisted tea, our growth leader twisted tea is a unique product with brand positioning that resonates with more and more consumers in the third quarter and measured off premise channels twisted tea expanded its position as the number one F N b by gaining four three share points over its position at the end of the third quarter.
2021, and had a 7.2 share point lead over the number two F&B brand.
Again grew double digits, driven by improved distribution of 12 packs twisted tea has been growing double digits for 20 years now off a larger and larger base and Theres clear evidence, we can sustain a healthy growth rate we.
We improved our service levels and reduce satisfying during the third quarter compared to the first half, which help support this growth and measured off premise channels twisted tea has been our fastest growing brand among the top 20 in all beer for the past 12 months and its volume growth has accelerated.
From 24% year to date to 33% in the latest 13 weeks twist.
<unk> 24 ounce can is the fourth largest volume single serve beer brand nationally underscoring its residents with convenience store shoppers. This is despite many competitive offerings entering the market and is a testament to the brand's growing following the potential upside that remains as we close brand awareness and distribution gaps across the country.
Because of its growing 12 pack distribution the brand is receiving strong retailer support including expanded promotional and display activity.
In addition, additionally to support Paul we're advertising the brand year round to increase brand awareness and have received strong response from consumers to our current T drop advertising campaign, and our large college football themed initiative building significantly on our activities for 2021.
In the nine states, where it's been launched hard mountain Dew is showing good promise with a 12 share of F. N B's in the measured off premise channels, where it's distributed in those markets. We will continue to roll the brand out and expected to launch up to two additional states later in 2022.
In the first nine months, our Samuel Adams brand Depletions were down low single digits, but the brand did produced growth in seasonal and craft and held share flat in a difficult craft beer market.
Your cousin from Boston campaign is continuing to attract younger drinkers. In addition, we're seeing growing trends in our emerging non OE business, where Samuel Adams, just the Hayes won the gold medal in the non our category at the Great American Beer Festival.
Meanwhile, angry Orchard remains the number one branded hard cider with a 46 share of the segment and measured off premise channels angry Orchard brand Depletions were down consistent with a low double digit declines and cider category trends.
Total dogfish head brand Depletions in the third quarter also declined against a difficult craft beer market.
However, our expanded lineup of award winning dogfish I can't cocktails, including the APAC Burkhart variety pack grew depletions significantly in the third quarter off a relatively small base dogfish I can't cocktails are gaining share and are now the sixth largest can cocktail brand and matched off premise channels.
Turning to our supply chain performance, we're continuing our efforts to improve our supply chain performance and inventory management, we believe our investments in equipment capacity improved systems and processes will help improve our gross margins have continued to improve our service levels over the coming years.
In the third quarter, while we saw margin expansion year over year. It was lower than planned due to higher inventory obsolescence, primarily driven by the truly product transition and the continued slow ramp up of line efficiencies and our internal breweries.
As a result, we've updated our guidance for gross margins for the full year 2022, as I mentioned earlier, we're working hard on our supply chain transformation initiatives and are committed to improving gross margins over time.
In summary, despite near term headwinds we are optimistic about the long term outlook for our diversified beverage portfolio. We continue to recover from the slowdown in the hard Seltzer segment that experienced unprecedented growth up to the second half of 2021 and are now experiencing change in consumer demand as the environment becomes more normalized our company has proven.
<unk> brand building capabilities, the top sales organization in beer and a cash generative business model with an excellent balance sheet to support long term growth, even as we navigate some challenges in the near term.
Now I'll hand, it over to Frank to discuss third quarter financials, as well as our outlook for the remainder of 2022.
Thank you Dave good afternoon, everyone for.
For the third quarter reported net income of $27 3 million or $2 21 per diluted share.
Compared to a net loss of $58 4 million or $4 76 per diluted share in the third quarter of 2021.
This increase of $85 7 million.
It was $6.97 per diluted share was due to lapping the 2021 combined direct and indirect costs related to the 2021 slowdown in hard seltzer category growth.
As well as increased net revenue and lower advertising promotional and selling expenses, partially offset by increased income taxes and noncash impairment charges in the current quarter and increased supply chain costs.
In the third quarter, we recorded a $27 $1 million noncash impairment charge for the <unk> brand as a result of the company's annual impairment analysis.
The impairment determination was primarily based on the latest forecast of brand performance, which has been below our initial projections made at the time of the transaction.
We believe there is strong potential for future Brian growth, particularly in the <unk> category, which is in its early stages of development and we remain committed to growing the doctor's share brand overall.
The third quarter continued to show sequential shipment and revenue improvements and generated over $100 million in operating cash flow. Following the strong second quarter cash flow performance.
However, the volume performance, primarily related to truly and the corresponding inventory obsolescence continued to negatively impact gross margins.
Shipment volume for the quarter was approximately $2 3 million barrels of one 4% increase from the prior year, reflecting increases in the Companys twisted tea Hot in mountain view and <unk> brands, partially offset by decreases in our truly hard seltzer angry orchard and dogfish head brands.
We believe distributor inventory as of September 24, 2020 to average approximately five weeks on hand and was at an appropriate level for each of our brands.
We expect the stewardess will keep inventory levels for the remainder of the year between four and five weeks on hand.
Our third quarter 2022 gross margin of 43, 2% increased from 37% margin realized in the third quarter of 2021, primarily due to lapping prior year costs related to the 2021 hard seltzer slowdown, partially offset by higher inventory obsolescence costs and return.
<unk>.
The higher obsolescence costs, primarily related to the recent truly product re formulation and lower than expected shipments inflationary cost increases primarily due to increased packaging ingredient and energy costs were offset by increased pricing with a net neutral impact on gross margin.
Our third quarter advertising promotional and selling expenses decreased $13 1 million or seven 9% from the third quarter of 2021, primarily due to a net decrease in Brian investments of $9 5 million.
Mainly driven by lower media costs and decreased freight to distributors of $3 6 million.
Primarily due to lower freight rates.
General and administrative expenses increased by $5 3 million or 16, 6% from the third quarter of 2021, primarily due to increased salaries and benefits costs.
Our depletions and shipments for the first 42 weeks of 2022 have each declined 6% from the comparable periods in 2021.
Based on our year to date performance and current projections for the fourth quarter, we are narrowing our full year two.
2022 earnings guidance per diluted share to between seven and.
And $10 from between $6 and $11. This projection excludes the impact of the noncash impairment charge of $27 1 million or $1 61 per diluted share and is highly sensitive to changes in volume projections, particularly related to the hearts of the category supply chain performance.
Inflationary impacts on consumer spending.
The 2022 fiscal year includes 53 weeks compared to the 2021 fiscal year, which included only 52 weeks.
Full year 2022 changes in Depletions and shipments are now estimated to be between a decrease of 7% and a decrease of 4% a change from our previous estimate of between a decrease of 8% and a decrease of 2%.
Estimated the 50 <unk> week will have a positive impact of between one and one five percentage on our full year, depletions and shipments growth rates between 4% and six percentage points on our fourth quarter Depletions and shipments growth rate.
We expect increases in revenue per barrel of between 4% and 5% a change from our previous estimate of between 3% and 5%.
Full year 2022, gross margins are expected to be between 42% and 43, 5% a decrease from our previous estimate of 43% and 45% primarily due to the impact of higher inventory obsolescence as well as the lower efficient brewery efficiencies as we slowly ramp up our new integrated for.
<unk> live.
We continue to expect to cover inflationary cost increases through pricing.
Our full year 2022 investments in advertising promotional and selling expenses are expected to decrease between 35 and $45 million a change from our previous estimate of a decrease of between $30 and $50 million.
This does not include any increases in freight costs for the shipment of products still at distributors.
We estimate our full year 2022 effective tax rate to be between 26 and 27%.
We expect capital expenditures of between $105 million and $125 million a change from our previous estimate of between $110 million and $140 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 $222 1 million as of.
September 24th 2022, along with our future operating cash flow an unused line of credit of $150 million will be sufficient to fund our base business and future growth initiatives.
Lastly, we're planning to give full year 2023 financial guidance on our fourth quarter earnings call in February 2023.
This timing better aligns with our detailed internal budgeting process and will be based on more current information about the state of the consumer and the supply chain environment. We will now open up the call for questions.
Thank you we will now be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate that Youre line is in the question queue. You May press star two if he would like to remove your question from the queue.
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One moment, please when we poll for any questions.
Our first question comes from the line of Nik Modi with RBC. Please proceed with your question.
Yes. Thank you good evening everyone.
Okay.
Hey, how are you I have two questions. One is on twisted tea and I. Appreciate some of the details you gave about 12 pack expansion in advertising.
More during the year all across the year, but there's still a lot of questions. Obviously from investors in terms of sustainability of this brand, especially given some of the situations that happened with truly over the last couple of years. So maybe you could provide a little bit more detail on why you guys are still comfortable that you can grow this brand.
Going forward and more importantly, what lessons can you learn from truly to really apply to twisted tea to make sure that you can mitigate risk of category fatigue, especially as more competitors enter the fray and I have one more question.
Great. Okay. Thanks, Nick this is Dave.
I'll take a shot at that so I think when we think about building any brand and particularly twisted tea digitally two key levers that we think about one is about driving physical availability, which is really about making the brand easy to find and the second is really about mental availability, which is making it easy to think about as a brand I think what's happened over the last 12 months was.
The brand is that we kind of hit a tipping point on both of those from a physical availability perspective, and we talked a little bit about this I think in the last call, but <unk> distribution kind of got to that point is about 64% ACD right now so a lot of our larger customers, putting that then promote and support the brand much more aggressively than they had in the past. We also increased space by about <unk>.
35% this year, so that increased the physical availability kind of helped vault the brand forward.
A mental availability perspective, we've essentially doubled down on media last year, then we increased it again this year on a campaign that we know workspace on our testing and we also are on air almost 52 weeks of the year really.
Driving for incremental reach so the two of those together have really helped.
Generate this sort of accelerated growth off of a growing base now having said that when you. When you look deeper into where we are today from a physical availability perspective, if you look at convenience stores as an example, which is the biggest channel for F N B's.
Twisted tea original 24 ounce, which I referenced in the script is about 69% of the ECB, So thats really well distributed but our other single serve flavors like half and half Peach raspberry have much less distributions is also very little 12 pack distribution within within that channel. So we still see a lot of upside in fact, if you look at our higher developed markets. They will have.
Like maybe three or four single serve.
Skus in a C store and our low developed is like only one or two so.
See upside in that channel also if you look at large format.
Where it's really about 12, <unk> game and again, our twisted tea original 12 pack and 64% of the HCV. If you look at our we have three other <unk> the party pack half and half and now light, which we just launched kind of software. This year much less distributions. So we still think there's a lot of upside there and again high developed market will have.
Probably three <unk> low developed market one or two.
We see that also we haven't talked about it but on premise as a fertile ground worn draft our primary packages original.
The original 12 ounce can.
Twisted tea is almost half of the share of F&B as an on premise and we barely got going there should we see something there. So that's sort of the last I'll say on the physical availability side is as we get as we talk more about the brand our wholesalers, particularly in a low developed markets are getting more and more excited about what they see happening in the rest of the countries from a mental availability perspective.
Household penetration is about four 7%, we use we use mike's hard lemonade sort of ESI as a proxy or our comp. It's seven five so still the comparison there is upside there and also brand awareness, we're seven or 10 points less in mics I think.
Twisted tea brand awareness is around low <unk> and mikes as low 90%.
Lastly, I will say on that then I'll get your second question is around multicultural consumers to the brand began sort of a rural.
Maybe non multicultural consumer in certain geographies, it's growing <unk>.
<unk> in that space. So in the last five years, we've almost quadrupled the number of house multicultural households, who buy the brands.
But there is still it's still off a very low base. So there's still a lot of opportunities. So again, so we feel like the formula of physical and mental availability is working and I would say to jump into your second question about what do we learn I think building a brand slowly the right way.
Making sure you really care about the consumer and staying really focused in on message and combining both physical and mental availability.
Has it really worked with twisted tea and again.
So a lot of brands are trying to come into the category and they haven't succeeded because thus far twisted tea has been able to do those things really well and I think for twisted tea is a whole lot with it and I'll, let Jim and Frank jump up on this one but the hard seltzer category, where such a.
Unusual unprecedented moment it was it was basically it.
Land grab a gold rush whenever you want to say and I think.
I would suggest that we we innovated.
Successful, but maybe too much and I think we were part of creating that consumer confusion that I referenced in my script. So I think.
It was just one of those things where that was the moment was there and we had a rabbit, but I think which was achieved Fortunately we have built the right way and so and the last thing I'll say about it and I hope sorry, it's a long answer I hope, but its important subject for us we haven't overextended. This brand like you don't need to Overwind extend this brand to get growth, we can get growth at very healthy appropriate way and thats.
Yes.
Sort of where we are at the moment.
Very helpful and the second question is just on truly I mean looking at numerator data, it's pretty clear that the top four brands in the category of top five are basically responsible for all the category penetration and all the rest are not really helping the overall category increased penetration is just more share shifting so as.
One of the category leaders I'm, just curious like as you engage with retailers on this topic.
What's the feedback of how do you get this category moving in the right direction again in terms of household penetration.
Yeah. That's a good one I think I mean, we're talking about obviously, we're talking to retailers for the last few months about next year I think retailers finally understand that now whats interesting is that we do.
The RTD space has now more brands than the hard seltzer space. So they are pivoting in that direction. We would expect that next year that that the bottom, 5% or so brands would probably disappear in any given market and likely hard seltzer share of space right. Now is 11%, which is probably appropriate it might shrink, but the brands that are.
Left the top three or four brands or so we will have a larger piece of that space and I think I think the clutter will be removed next year. It is the time when thats going to happen I think and I think our customers recognize that in there.
They are planning to do that the question then becomes <unk>.
Does RGD cockfield become what hard Seltzer became in a big mess and we think it is really hard to shop, but we likely will see that I think the other thing I would say is that we.
We're part of it.
There are reasons why people came to hard seltzer in the first place like it's the most refreshing easier to drink.
Fund variety filled category or segment.
Placement for beer or for traditional beer and other and other alcoholic beverages and those characteristics are refreshing easier drink variety has been somehow loss and diluted through all the noise and all the.
All the things that have happened over the last year or two I think getting back to that and we've tried to do that with our AD campaign now thats out there and there'll be more evolutions of that but we're trying to remind consumers why they came in in the first place to hopefully help with the category and I think the last thing I'll say is that.
Proliferation proliferate in Skus is not the way to go probably because I will add to more confusion. So I think smarter innovation.
What we're trying to do is focus back on the lighter flavors. We spent a lot of time, focusing our bold flavors. This year with Margarita, which as I mentioned has been very successful, but it hasnt been nearly enough to impact the total business, because we've probably taken our eye off the ball and white flavored seltzer.
And Thats work a lot of consumers have been gravitating toward lately and we have great flavors, that's what we re formulated them again, and we need to remind people.
What they are so.
I think those are sort of the things that you would look to see as we enter 2023.
Helpful. Thank you.
Thank you and the next question comes from the line of Camille.
Does raw Wala from credit Suisse. Please proceed with your question.
Can you talk about gross margins a little bit.
Maybe even if you.
Are you able to give a read on how much of the <unk>.
Launching of the automated the new variety pack line impacted this particular quarter and are you are you up and running now where we're no longer feeling the drag from that.
Yes.
Speed to do that so gross margin clearly for the quarter came in below our own expectations.
And.
I think the main reason is.
You mentioned it in the in the prepared remarks was high obsolescence that was mainly due to the changeover to the new truly formulation that was there was one of the.
Largest projects that we have done if you look at the complexity of the portfolio. The number of variety packs that we have in the different flavors that are in there. So so that was.
There was a big project and nothing you have to.
See that in conjunction with like the current supply chain situation that we're in.
We've upped it as we've mentioned before to run slightly higher inventories for two reasons one is.
We want to make sure that we increase our service levels and we have enough we have enough inventory to service. Our wholesale is the other one as you look at the global supply chain situation of the disruptions that we're seeing we wanted to make sure that we're not running out of out of packaging materials. So this is this is nothing new but what happened is that the volumes for truly.
And.
With an unfavorable mix came down and we were left with more stranded product than what we had originally expected. So this this was impacting that was the main reason why the gross margins were impacted and lower than our expectations.
That is clearly not something that will happen all the time that that's more onetime in nature.
<unk> seen some progress in.
And in the rest of the drivers if you remember when I lay out the drivers to get back to 250%, where we're making progress.
Variety pack lines.
We've given a range and we said well it's going to take.
Some time two to improve the efficiencies we have seen slight improvements, but there's still a lot of room left to get to the target deficiencies that.
That we're seeing in that that we're looking.
Looking for to get back to 50% so.
I'd say overall.
The overall building blocks have not changed the target Hasnt changed but this quarter was clearly impacted by the additional obsolescence.
It sounds like it's complete.
Yes.
Obsolescence, it's all done that Youre operating under the new.
We are now we're now pretty much fully transitioned to the new.
<unk> formulation.
All of the product so that showed up in it.
Okay, Great and then can you maybe just add a little more detail on the dogfish head impairment.
Seltzer.
Which came in so fast stockfish, that's been around for a while.
So just maybe just some color on what happened there.
Yes, so yes.
It's a relatively straightforward accounting assessment, if you'll recall the transaction happened.
In the middle of 2019, which was literally offer before COVID-19 and we had our.
Our own business proposition, which was the basis for <unk>.
Defining the brand value that we put on to the balance sheet.
So we had certain assumptions in there then.
You have to compare your revenue assumptions to what youre really achieving and thats. The annual impairment test that everybody is doing typically.
The revenues.
Below what we had defined into business proposition and the main reasons I would say is like Covid came in the middle of the integration took a little longer.
Clearly the craft beer market. If you look at the total beer category the traditional BSI the craft beer side.
It has been suffering a little bit.
So that contributed basically to the lower revenues versus what we had in the business position from a business perspective.
I wanted to be clear.
We like the asset we think dogfish head is a terrific brand and I think what has changed since 2019 is that we.
Have now dogfish head Ken cocktails.
Which we're not really part of our consideration in 2019 at the Cannes Cockpits as you know.
They are playing in the growing segment of the beer category and the beyond beer segment.
They are getting tremendous attractions, we have extremely high growth rates. So if a if I look at the <unk>.
Profile of the Dr <unk> brand portfolio.
Im really happy with that and I think it will provide a lot of growth.
And of a different quality quite frankly going forward than just having.
Purely the profit.
Kind of considering in 2019, so I think the structure is the healthiest structure, but given the size of canned cocktails, it'll take a little bit longer and Thats why we took the impairment.
Okay got it thank you.
Alright.
Okay.
Thank you and our next question comes from the line of Eric Cerrado with Morgan Stanley . Please proceed with your question.
Great. Thanks for taking the question.
Wondering if you could give us some more color around truly performance since the re formulation I realize it's still early but it has been in the market for a couple of months now.
Any green shoots any.
<unk>.
Any more specific data that you could point to because when we look at the overall data for the truly.
Lately flavored packs it looks like it's going in the wrong direction.
Isn't really improve so.
Any help there would be appreciated.
Okay. Eric This is hey, this is Dave I think so we started it was a number of a lot of like six variety packs.
We switched over the first was citrus and start that were started in early August and we finished up probably at the end of September So theres not a lot of impact in terms of our Q3 results youre not going to really see anything there.
But of course, I know youre looking at IRI or Nielsen wherever youre looking at it which is up to the second.
And I think it's still I would say, it's still we first of all the anecdotally what we're seeing is social media, what we're hearing from consumers from customers and from wholesalers are positive about the change in the products. So we have people we feel very good about the re formulation and the quality of product that we.
We delivered.
And it's going to take a while I mean this is this is a very it's a very competitive market as you know and it's not something that would show up like immediately overnight in terms of green shoots I mean.
I can tell you I'm looking at if we look at numerator data for example, and I'm seeing again this is but I wouldn't draw any big conclusions, but over the last four plus weeks, we've seen by rates increase.
Actually our buy rate, we had been going the other way onshore. We this year, we've seen an increase we're not seeing that actually as you're suggesting that kind of share numbers or the volume numbers, but.
That's a good sign there are other customers that where we've seen actually the brand is growing.
Can't really name those customers.
Because we won't be selling their tomorrow, if I did but we are seeing some green shoots but again.
And a couple of large customers, but yes.
Still early and I think we are in this moment with this category literally people living week to week and trying to make big conclusions.
And that kind of pace and it's just not something that we expect to see I think as the quarter plays out.
Then we will look to see something thats more visible that I don't have to explain to you on an earnings call something you should see if it's working again the other thing I would say is the <unk>.
We'd like the advertising has scored very highly and we have a pretty elaborate way to test ad copy.
But again, we're not it's not like when we increase it I think.
So I think we cant remember if we said how much but we definitely increased it but it's still it takes a while for that it doesn't have instant results and it takes a while for that to settle in and the last thing I'll say is.
The truly Voka seltzer launch.
What we like about that is is putting it as cash and white back onto truly rights on the brand itself and.
As I mentioned, we do have.
A very large base of consumers still.
We have a high penetration is actually the highest penetration corner numerator and hard Seltzer and 21 to 34 in beer and so we know they want to try our product I think.
So they'll get to it and I think as we as we go into next year Youll see the advertising continue and you also see all the things that we'll do in the market to clearly signal that what's in the package has changed.
So again I would just say that this is really if I look at this three months to six months.
To really know for sure what the impact is going to be.
Okay, and then as you look at the broader truly portfolio you kind of alluded to you guys being part of the part of the problem in terms of the category.
Confusion or consumer.
Confusion or are there plans to further rationalize the portfolio.
Picked up that you were.
But you were discontinuing the truly ice tea, but even with that do you have too many variety packs out there given where you see the shelf space going and are there plans to.
<unk> analyzed that.
I think thats.
Partly our decision to parlay, our customer how customers' decisions, but yesterday of surety is going away I think what youre going to see is more of a focus of communication focus on the core brands the core lighter flavor brands sits.
Citrus tropical WILDBERRY Margarines performed really well.
And eliminated fruit punch.
We'll stay.
<unk>.
They're part of the re formulations as well. So we think we're probably not going to be adding permanent skus next year, it's unlikely and I think what we're going to do is really double back down on the core lighter flavors, and we'll see where that goes but I think.
We have been increasing at a pretty at a pretty good pace youre not going to see that kind of pace continue.
Okay. Thanks ill pass it on.
Thanks.
Thank you and our next question comes from the line of Kevin Grundy with Jefferies. Please proceed with your question.
Hey, great. Good evening guys two for me if I could just.
Understanding the 'twenty three and beyond a lot more important.
The guidance for this year implies.
Really wide range I guess, given where we are and the fact that much of the way through October .
So Frank maybe maybe just comment on that.
Such a wide range, where are you where are you within the range now I think would be helpful to folks and then a broader question for Jim and Dave.
Both now if that's okay.
Given the impairment charge the dogfish.
For the reasons that Frank talked about I don't think its lost on folks in terms of what's what's happened within the craft beer industry, but Jim it.
It would be great to kind of get your updated thoughts on the state of the Union here in terms of your outlook or beer category volumes within sort of the fourth category that's emerging here.
Ready to drink and I think sorry for being for both.
The elephant in the room here.
Love to get your thoughts on why should investors be confident that <unk> sell throughs don't go the way it mainstream beer and we're potentially looking at low single digit declines I know, it's a lot worse than that but.
At the moment, but as we level off here.
What gives you confidence that that's going to return to growth.
And that I appreciate your thoughts thank you all.
Alright, Kevin let me start with the guidance. So I mean first off we have narrowed the guidance based on what we've seen.
It's still relatively volatile to be honest.
<unk>.
And I think maybe for the shipment guidance that we have likely narrowed from to a minus two to minus eight minus four to minus 7%.
You narrowed the pricing range, a little bit so so broadly at the mid point, we left net revenue largely unchanged.
<unk>.
Where we have a bit of volatility and we will be seeing that I guess in the fourth quarter. If you look at last year last year, we had significant shipment declines in the fourth quarter shipments were declining.
Versus the prior year versus 2020 by by roughly 25% with Depletions going up 15%.
And that is versus a quarter.
Quarter in Q3 that was growing at 11%. So there will be some some volatility and we just wanted to make sure that that we kept that in the guidance range.
And then clear.
Clearly as you know and we've mentioned that a number of times.
You have the.
The 50 <unk> week.
That will add a little bit of growth so year to date.
Roughly as you know between six and 7%.
At the end of the quarter, 6% to 7% that is that is improved trends have improved which is a good sign.
That's going to continue.
But then you add the 50 <unk> week and then the innovation that we have is a little bit back end loaded primarily with.
Truly what's that's coming mainly in the fourth quarter, that's kind of where we are where we on the on the topline.
On the margin side I think.
We have narrowed it down.
A little bit and as you know there's this there's volatility in the supply chain into our supply chain and external supply chain I talked about the obsolescence.
Which was higher than what we had expected.
But but.
We've narrowed it down we feel with.
We have a good handle on it on an on the.
To go with it but it clearly depends also on the volumes.
As we said before how much progress we also making on an hour.
Efficiencies.
And then on the EPS I think that the midpoint doesn't really change we just haven't narrowed it down to three bucks. So we feel fairly confident that we are going to come in within the range.
But its really the volatility on the top line that provides the other drives the width of the range. If you will.
Okay understood.
Kevin I will try to pick up.
The second part of your question, which had.
A bunch of different moving parts to it if you will as I interpreted it. Your first question was kind of what's the state of the Union.
In craft.
And.
I would say.
Craft is a mature.
The category at this point it has become a mainstay in <unk>.
American beer.
The substantial drinker base and it's hard to go into a bar today that doesn't have.
At least one and often multiple craft beers. So it's.
It's a relatively stable and mature category also.
Competitive.
Theres still innovation driving it.
As you can see from Boston Beer company with the addition of <unk>.
Just the haze or non alcoholic <unk>.
Craft beer that just got picked as the best non non alcoholic beer in America, the Great American Beer Festival, so we do still see opportunities.
<unk>.
Innovate at an extremely high <unk>.
Industry, leading quality level in craft.
But overall as a category is pretty stable.
And mature.
What we are.
See with dogfish head.
We believe that is a.
Strong some ways unique brand.
And we.
We believe that it.
Brings some special attributes to the RTD category, which as I mentioned was it's growing 79% so far this year.
Doug Fischer is now the number five or six.
RTD.
It's got a reputation for great quality and for innovation and for culinary ingredients and it has a unique positioning in some ways in this very crowded RTD space.
It's a craft.
Producer.
Bringing craft values of it.
Innovation, great ingredients, great taste and overall quality.
Two and kind of offset entered thinking and off centered.
Tumors to this crowded RTD space.
So we feel very good about the strength of the dogfish head brand.
In the mature craft category, but also has a unique vehicle for us to bring something special to RTD canned cocktails.
You also asked about whats the future for more.
<unk> based cell twos is it going to just start to decline like traditional beer.
I don't have a crystal ball on it but I would say that.
Malt based self service as opposed to traditional beer.
They obviously skew much younger.
Theyre not theyre very appealing to the 21% to 35 year olds as opposed to traditional beer, which.
Is struggling a little more with with that demographic and they're.
A very relevant too.
New younger drinkers, they're built on variety and innovation, they're built on unique flavors that are.
Easy to consume theyre not an acquired taste.
And they also carry with them a little bit of a health halo given the lack of bad stuff.
Mainly sugar and carbohydrates in them. So they are more in tune with the.
Characteristics that younger drinkers want and bring something new to drinkers all across the age range. So I think.
There is the opportunity.
With mall based cell towers to continue growth there, whether that's mid single digits low single digits.
Double digits I don't know, but they do have attributes that.
A significant part of the drinker base find really attractive.
Okay very good thanks for all the time guys I appreciate it good luck.
Thank you.
Thank you and as a reminder, if you'd like to ask a question. Please press star one on your telephone Keypad you May press star two if he would like to remove your question from the queue.
Our next question comes from the line of Bonnie Herzog with Goldman Sachs. Please proceed with your question Alright.
Alright, Thank you hi, everyone.
I wanted to circle back on guidance with a follow up I guess.
Just thinking about your updated guidance ranges you narrowed the ranges right.
The midpoint of your Depletions and shipment guidance down by 50 bps and the midpoint of your gross margin guidance down by 120 bps.
You left the midpoint of your gas.
The EPS guidance the same so I guess I'm just trying to reconcile that I mean should we.
In your full year EPS realistically I guess comes in towards the low end again your range or are you just may be being conservative on some of the other range yet.
No.
It's more the latter.
Any add on.
I wouldn't we're not putting a range is out of what we believe we are going to come in at the low end.
Adjusting the ranges accordingly, I wouldn't read too much into.
The shipments.
The half half percentage point.
On pricing so the way we're looking at it as really.
Revenue is going to be is going to stay about the same.
At the volatility that we have.
Seeing in the market.
<unk>, two also especially the growth rates versus prior year, especially when you look at shipments I don't think we have the privilege.
Precision of half a point quite frankly so.
That's it on the growth on the gross margin. We we had we had a few surprises. So so I think it would be the latter so but I wouldn't expect that.
I wouldnt interpret that that we would target the low end of the EPS range, that's not the case.
Yes.
Thank you and our next question comes from the line of Steve Powers with Deutsche Bank. Please proceed with your question.
Great. Thanks.
I actually wanted to go back to the twisted if I could.
Two questions. The first one I think is.
Pretty short.
I don't know if you've got any updated thoughts as to how much if at all.
Twisted in the current environment is itself benefiting from consumers moving away from Seltzer experimentally in finding twisted.
Yes, I think on that.
I went back a year ago and looked at this.
Hard seltzer sourcing volume it really didn't impact twisted tea very much at all I mean, it does to an extent I mean every brand everybody drinks everything but it didnt over index by any means.
With hard Seltzer, so I don't think its getting like a setup.
Tailwind now.
As the hard Seltzer goes down, but I am sure there is some.
Consumers are switching but its not I would say, it's not material to twist as current growth.
Okay and actually if you look at it and see great actually if you look at it you really it goes back to really like this things started to really kind.
Chip I would say.
Last summer like last maybe last year, maybe the first quarter of last year. So when this thing started to accelerate from sort of a low 10%, 12%. So plus 20. It was really one hartzell so were still going strong.
Yes, okay.
And that kind of leads to my second question.
Maybe part of the answer is and what you just said.
I just.
Kind of going back to.
<unk> started off on the topic.
You talked a lot about growing the brand double digits for 20 years.
Every patient deliberate.
Robust, but relatively deliberate growth.
So it feels like the brand has been sort of pulling pull.
<unk> demand.
Got it.
Ahead of ahead of ahead of availability.
Now I, just I guess I'm a little concerned I think this is the route of kind of what Nick was asking about <unk>, but all of a sudden.
As the brand has accelerated that there's a really big distribution push and a big advertising push kind of almost getting ahead of the natural poll.
And then maybe.
As consumers are out there exploring for the next the next kind of novel thing.
They are kind of finding twisted as part of that search.
Experimentation as part of part of what's driving the growth right now, but then as we fast forward.
A year 18 months from now after a big distribution pushed but just like you were talking about with with sell through that the novelty of kind of worn off that we look back and say the novelty on twisted tea has worn off so I guess.
Any additional thoughts you might have on what I'm, saying and how you're you're comfortable that that's not happening.
Yeah, I mean, I would say I'll go back to where it was before which is there is.
The depth of distribution is still has a lot of runway. So it's not like we're not even close to the end in terms of when you look at it by channel whether it be small fab format convenience store large format single serve skus.
Multi pack Skus, there is still significant runway to get to drive distribution and then from an old from <unk>.
Mental availability perspective.
We've increased our media we've increased our awareness.
Household penetration, but it's still very very low I mean, it's so low so it's not we don't think that we're coming close to sort of peaking I mean, where are we going to grow 30% every year, probably not very unlikely, but we still see a lot of a lot of growth there and I think some of the other things to look at I mean, when I look at when I look at this brand as I just look at convenience store.
I almost can stop right. There because that is like that is think of that thats. Your freedom of choice channel, that's where the consumer walks and theyre not tripping over displays are not seen big price promotions, they are going in and they're making a choice and this brand is by far and away. The number one player in F&B and in fact like I said before it's one of the top three or four brands and all appear a convenience store.
<unk> and its always been that way, but again then you have the geographic disparity where you go when you walk into Montana or remainder of Vermont, and Youll see Youll see youll see a full shelf of twisted tea walk into New York City, or L a or or.
Or Houston, Youll see maybe one or two one or two can so.
This is this is a brand that clearly has a following its been quite narrow.
And now it's starting to grow but it's growing we're not I don't think we're forcing it on people, we're pushing it too hard.
We do a lot of work on social media.
Not trying to feel like a big brand and people are finding it so.
Obviously time will tell.
What we feel like.
Again, when you can balance that.
The physical history, the physical availability of the mental availability and you have still have upside in both of those.
That's a good that's a very rare place to be and I would argue is probably two to three brands in this entire category that are sitting in that position.
Yes, Okay, that's fair and very helpful. I appreciate it thank you very much.
Sure thing.
Thank you and our next question comes from the line of Rob <unk> with Evercore. Please proceed with your question.
Great. Thank you very much.
So Jim I'd love to get your thoughts kind of standing back now on.
What youre learning about consumer behavior.
In beverage alcohol, and then how that informs your strategy and tactics, particularly on truly and so.
At least what we're seeing with.
Is spirits.
Pruneau today was kind of like growing mid single digit.
Led by premium position, so the spirits seem to be doing really well mainstream beer.
Falling a couple of points or so which is what it has been doing.
And then in the middle there.
<unk> and obviously, we're in an adjustment period there.
But my question kind of is is.
No.
Our seltzer is priced right, particularly kind of going into a recession, where.
<unk> or I guess $30 or so of case Bud light's $20 a case.
You did mention that some of the you were seeing some people trade down, particularly older demographics, but given that seltzer skew younger.
And in a recession.
Do you think the pricing is right for <unk> in general relative to spirits in mainstream beer and is the pricing right for truly and do you need more.
Promos or some sort of.
Clever marketing to provide more perceived value that would be my first question.
This is my opinion on it.
<unk>.
We are not really seeing a lot of trade down in alcoholic beverages as a whole little bit of bump for some sub premiums but.
Yeah.
The growing categories like twisted tea or Mexican imports.
They are premium priced at about that kind of premium not quite 50%, but that that order of magnitude.
And.
That's where the growth is in beer and in Cogs beverages in general is more.
<unk> is a premium and then.
The cheap products and we've seen this in recessions in the past.
A.
Our craft beer or a truly are.
Twisted tea things that are different unique.
They are they.
They have sailed right through recessions.
No.
<unk>.
Guessing that and it's partly because you're talking about a very affordable indulgence, you might not be able to go out for a steak dinner, but you can come home with <unk>.
<unk> Pak.
Premium product and feel good about yourself, so that would be my experience.
From the past.
And I think.
<unk> in general.
My view of the World is that traditional beer.
Is probably not going to grow maybe not.
Maybe not in our lifetime.
Though I can't see that far out because.
Tend to live for a while.
I believe the same thing is probably true about traditional wine.
As their demographics age out and.
And in hard liquor I think the growth is going to be in.
This fourth category that is not traditional beer not traditional wine not traditional spirits and my belief is that the.
The beer industry is pretty well positioned there because it generally looks like beer. It's in the cold box, it's kind of AB <unk> of beer.
In beer type packaging.
And its heavy.
And you need.
Hi speed can lines to make it and distributors that can move tonnage so I.
I see.
Boston Beer is well positioned in the growing segment.
Alcoholic beverages, we are the number two in this beyond beer category.
It's <unk>.
Vast majority of our business and we're organized around making that kind of products. Both in the capital that we've put in.
With Tysabri can lines and automated variety packing and then other capabilities.
Like.
Sensory and flavor people.
And.
A wholesaler network that can get this stuff on the shelves very well.
And advantageous positions.
Great that's terrific and certainly fair enough.
Great.
And then just one follow up on Frank maybe could you kind of.
Update us on your latest thoughts in terms of capital allocation and cash is building nicely on the about I mean, you've got a fabulous balance sheet, which is great.
Is it time to look at dividend share buybacks.
Are there strategic acquisitions that may make sense, just trying to get just updated thoughts on those sorts of questions. Thank you.
Yes sure.
So.
As you know I think we haven't really changed our approach to how we think about capital allocation clearly the.
The business comes for US, we're a growth company.
Ups and downs, but long term were growth company, that's where the investments go in terms of capital.
And other investments and then.
We have like the last few years are highly volatile and bumpy for globally for the world in which we're operating so.
Typically whatever's left over that is not needed for the business, we returned to shareholders.
We have a preference for four.
For share repurchases.
In the past.
I don't see that changing in the near term over dividends. When the time is right and to your point as you look at the balance sheet that cooks.
Lee I think we feel more comfortable.
Then a year ago, but when the time is right.
Well Paula.
Announce that.
Terrific. Thank you very much.
Alright.
Thank you and the next question comes from the line of Nadine Sahwa with Bernstein. Please proceed with your question.
Thank you alright, so two questions for me first.
Providing guidance over the last 12 months has been challenging for Boston beer, given what's been happening with the hard seltzer category the uncertainty.
Your decision to commit to providing fiscal 'twenty three guidance.
Your next results and then secondly.
Coming back to twisted tea, there are many new entrants coming into the heart T space, most notably lift.
<unk> with its alcoholic brand how do you anticipate twisted tea performing in this increasingly competitive environment.
Okay.
Yeah.
Yes, <unk>. So clearly on the 2023 guidance I mean, we've talked about this quite a bit of volatility and I think we.
We want to provide guidance.
We feel more comfortable with the data.
Yes, I think it's.
Typically its industry practice.
You announced with your Q4 results, which is what the majority is doing.
And that makes sense in an environment like this so we are.
The way we are planning we are.
Significantly better handle on where the category is.
Going where the consumer is going.
<unk>.
See the progress of our supply chain. So that's the reason why we said okay with there is no point in giving preliminary guidance now with the Q3 earnings call, we'd rather do that once.
The Q4 earnings call that Thats the reason why we.
We decided to do that and I think it's easier for you guys as well, it's going to be better guidance than what we'll be able to provide at this point.
Well I'll pick up the twisted tea question.
And.
It's a good question there is a.
Title wave of.
Competitors coming into T. Because it's a large sizable category that's.
Growing extremely fast and we live in a very competitive environment.
I would say historically this is the first time, we've had a bunch of competitors coming at it.
It's twisted tea has been around over 20 years and the literally been dozens of twisted tea competitors launch from small startup entrepreneurs to great breweries like Anheuser Busch or.
Molson Coors and the.
The dust settled over 20 years and twisted tea is 90 plus percent of the category there really is no.
Significant number two in the category now that being said.
I don't want to dismiss.
Both the quantity and the quality of.
The next wave of competition coming from again, everybody from small entrepreneurs too.
Big.
Multi hundred billion dollar market cap company with a great track record of beverages like Pepsi So.
This is a.
Another level of competition, but we withstood it in the past because we have a very very.
Loyal.
Very strong drinker base people been drinking twisted tea for.
Decade or two.
It's the only brand that really comes to mind, when you think about hard T.
It kind of.
Owns that category as Dave was talking about both in physical distribution, where you walk into a store and there is a blue.
Lock of yellow and Blue and then there is other unknown things that are next to it let's say.
On it but they don't have the credibility or the longevity of the reputation.
And has the mental availability for thinking about how you think about twisted tea.
So it's really not much else that comes to mind so.
Sure.
It does.
It's a very competitive business and whenever you're successful you're going to get a whole bunch of competitors and we're going to amp up our investment we have tremendous support from our wholesalers. Because this has now become a meaningful part of their business and they're going to.
Expand our shelf space.
But.
That's all we can do we can keep people out and we can't keep them from trying to be successful, but certainly it is a category where we dominate it.
Have for 20 years and the dust has kind of settled I guess, the nearest analogy would be Mike's hard lemonade and they've had a couple of dozen competitors in there 90% of the hard lemonade.
Market and have been for over 20 years. So it is not.
Not be an exception to what goes on in this business for twisted tea to maintain its 90% share.
Got it that's very helpful and maybe just a clarifying point I didn't mean.
Why wouldn't you provide fiscal 'twenty three guidance today I simply meant that some companies might elect to.
Postponed providing guidance at the next results simply because of the lack of.
Simply because of the uncertainty around heart health centers or the macro environment.
You guys have committed to providing guidance I guess, that's what I was asking.
Yes.
At this point, we Havent made any decision to not provide guidance, we just provided.
With our Q4 results yes.
Understood Alright, thank you very much I'll pass it over.
Okay. Thanks.
Thank you and as a final reminder, if you'd like to ask a question. Please press star one on the telephone keypad.
Permission tone will indicate that your line is in the queue.
And our next question comes from the line of Peter Grom with UBS. Please proceed with your question.
Hey, good evening, everyone hope you're doing well, so maybe going back to that last point on our guidance.
Now that you're choosing not to provided today I was just hoping to get your view on whether you have visibility on kind of the gross margin trajectory.
I guess, specifically how should we really think about the pace and magnitude of margin recovery as we look out into 'twenty three.
Kind of lapping some one time issues that hopefully shouldnt repeat here.
Kind of the root of the question is I'm really just trying to understand based on what you know today.
How quickly can you return to that long term gross margin goal of kind of north of 50%.
Yes, no no fair question.
Probably an idea.
Try to answer as best as I can.
Without giving guidance through the back door.
But but clearly idea as I think I have indicated before we see.
Good about the building blocks of our gross margins so yes.
When we add this quarter nothing has really changed that.
We know exactly what it takes to get back to 50%.
<unk> indicated also at the last earnings call.
It will take some time and we're going to see kind of more proved to see it come through we have seen we've started on that journey.
For next year.
We expect on those different streams, we expect progress clear.
Clearly.
The one timers that we've talked about the obsolescence charges a lot of things that happened in the first half of the year.
In the aftermath of what happened in 2021.
We'll take this all into consideration when providing guidance and I think yes.
What I can tell you fundamentally when it comes to the gross margin and nothing has changed versus what we what we've already said.
In the July earnings call.
Thanks, So much I appreciate it best of luck.
Right.
Thank you.
At this time there are no further questions and I would like to turn the floor back over to Jim <unk> for any closing remarks.
Thank you everybody.
We look forward to speaking again in February .
Thank you everyone. This does conclude today's conference call. You may disconnect. Your lines at this time. Thank you for your participation and have a great day.
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