Q1 2023 Boston Beer Company Inc Earnings Call
Greetings and welcome to the Boston Beer company's first quarter 2023 earnings call.
At this time all participants are in a listen only mode.
<unk> and answer session will follow the formal presentation.
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As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host Mike Andrews Associate General Counsel and corporate Secretary. Thank you you may begin.
Good afternoon. Welcome. This is Mike Andrews Associate General Counsel, and corporate Secretary of the Boston Beer Company.
Pleased to kick off our 2023 first quarter earnings call joining the call from Boston Beer are Jim Koch founder and chairman.
Burwick, our CEO and Matt Murphy, our Chief Accounting officer, and interim CFO before.
Before we discuss our business I'll start with our disclaimer.
As we stated 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 is important to note that the companys 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.
Paint 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 will now pass it over to Jim for some introductory comments.
Thanks, Mike I'll begin my remarks. This afternoon 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 Matt who will focus on the financial details of our first quarter results as well as our outlook for the remainder of 2023.
Immediately following Matt's comments, we will open the line for questions.
As we mentioned on our February call. Our plans for 2023 reflected comparatively lower first quarter volume or it was just the balance of 2023 due to the timing of our truly marketing plans and lapping are truly Margarita launch in the first quarter of last year.
First quarter total company Depletions decline of 6% was in line with our expectations and measure to off premise channels twisted tea continued its strong dollar growth up 34%, which was offset primarily by declines in truly Dave will later take you through.
The details of our second quarter plans for truly which we expect to help improve the brand performance starting in the second half of this year.
Meanwhile, we are implementing the operational plans, we discussed on our last call to adjust to a lower volume environment. This includes simplifying our business to reduce needless complexity and improve margins as well as adjusting our cost structure to be more closely in sync with our volume.
Expectations. These operational plans are on track and should begin to impact our margins positively in the second half of the year. We are focused on keeping the strong momentum behind twisted tea and improving our truly trends, while continuing to invest broadly across our entire portfolio.
<unk> and the new innovation with the goal of returning our company to long term sustainable growth.
We continue to believe that the beyond beer category, where we have an advantaged portfolio will grow faster than the traditional beer market over the next several years, we expect the operational changes we are making this year combined with our history of innovation strong brands and our top rated <unk>.
Phil's Force will help lead us to long term success, our strong balance sheet enables us to continue to invest in our brands and has allowed us to repurchase $27 million in stock thus far in 2023.
I will now pass it over to Dave for a more detailed overview of our business.
Thanks, Jim and good evening.
As Jim mentioned, our first quarter volumes were in line with our plants.
<unk> results during the first quarter were negatively impacted by our decision to rebrand and relaunch truly Barker seltzer is truly vodka soda, while expanding its flavor assortment and by a decision to make a nonrecurring payment to a third party contract Brewer that we expect will benefit our supply chain costs going forward.
Well both decisions resulted in a charge that impacted first quarter profitability. They have set us up for greater success and profitability for the balance of the year.
Matt will discuss our financial results in detail in his remarks.
I'll focus my commentary on our operating performance.
Our strategic priorities remain unchanged.
Focusing our resources on sustaining twisted tea is industry, leading growth and improving truly volume trends, while simplifying our business to improve our gross margin.
We're continuing to invest in all of our brands and our top ranked industry sales force.
I'll now provide some color on our brands.
Twisted tea accelerated its growth trajectory in the first quarter were 34% dollar sales growth, while adding $3 share points and expanding its overall share leadership and is now 27% of total FNB dollar sales in measured off premise channels.
The robust demand as a result of an effective brand building campaign, our increased investment in media during Q1 and additional retail program focused on the Super Bowl that significantly increased our display execution better distribution of 12 packs and improved service levels versus the first quarter of last year.
In addition, well.
Category off premise sales are still nascent twisted tea holds a 50% volume share of F. N B's with an on premise and has delivered 82% of the on premise F&B volume growth year to date. According to the Nielsen CGA consumer survey.
We will continue to increase our total marketplace spend to broaden twisted tea is still narrow consumer base and advance its favorable position with them beyond beer.
We remain confident that twisted tea will sustain a strong double digit growth for the remainder of 2023 for a number of reasons first theres upside in growing brand awareness and household penetration second there's still room to expand package distribution across channels, including on premise.
Third the brand is making progress in bringing new drinkers, such as Latino and African Americans into the fold and fourth theres opportunity to widen the branch presidents underdeveloped markets, such as California, and Texas <unk>.
Additionally, we're in the early stages of launching 110 calorie twisted tea light nationally and repeat is very strong and while it's proven to be highly incremental to the traverse city portfolio.
Meanwhile, as announced on our February call, we're launching a major advancement of the truly brand in the second quarter that includes a simplified product lineup real fruit juice, new easier shop packaging more motive versus product centric brand communication.
The weighted media spend with a focus on digital and social media and aggressive marketplace support to improve product availability and visibility.
So far over the past four months, we've seen sequential improvement in our core variety packs performance as market share has stabilized and sales per point has improved while more recently the total truly brand has gained share almost half of the 63 markets measured by spring.
Formerly known as IRI in the past four weeks each.
These trends have been obscured by the lapping of the truly Margarita launch from 2022 and the subsequent to discontinuation of should we see as the year progresses. These headwinds will be mitigated while our chewy refresh takes hold in the market.
Despite the rough going truly has the second highest sales per point in hard seltzer in the third highest sales per point and all of you on beer. So there remains a strong base to build from.
We expect to have full distribution of the mutually packaging and a new AD campaign running before memorial day, and our new truly vodka soda packaging and Skus will hit the market in early June .
Additionally, we have a special red white and true lightly flavored variety pack limited time offer tied to the U S soccer team hitting the market in the next few weeks and have received a lot of wholesaler and retailer support behind this initiative that should help the brand gained displays and inventory heading into the summer.
While maintaining twisted tea is double digit growth in approving truest trajectory are top priorities for the year, we have a broad portfolio and will continue to support and build out our smaller brands.
Samuel Adams is holding its own in a difficult craft beer category and will continue to invest behind our new remastered Boston Lager campaign and our seasonal in addition to our non op portfolio, including just the Hayes and the newly released called Rush Pilsner, which have grown 66% in dollars. So far this year are measured off Prem.
S channels.
While truly vodka soda makes a play in vodka based Selzer's dogfish head is gaining a foothold in the traditional canned cocktails segment and grew volume approximately 70% in the first quarter across all channels.
We will support other innovations, including the launch of Jim beam, Kentucky, Coors and the continued rollout of hard mountain Dew, but expect these to be smaller volume contributors in 2023, as they ramp distribution and find their audience.
Turning to our supply chain.
As we've previously discussed we're in the process of modernizing our supply chain to investments and equipment capacity and improved systems and processes I'd like to probably discuss the three categories. We're focused on to drive improved margins.
Procurement savings, we targeted savings initiatives across multiple areas, including raw materials and packaging.
We're also reviewing our contracts with our raw pack suppliers with the aim of adjusting needs to be more reactive to changes in demand.
Second brewery performance, while we expect to always have a mix of internal and external production. We're focused on moving volume back to our internal breweries where possible given our production cost advantage.
Valuation of our mix in a disciplined manner and focusing on improving our internal line stability and efficiencies as well as adjusting contracts with our co manufacturers as we adapt to changes in our volumes and product mix.
Third waste and network optimization.
We have initiatives to optimize our logistics, which will reduce freight and warehousing costs over time also as we discussed on our last call. We're currently implementing systems to improve our forecasting and inventory management, which we expect to reduce inventory obsolescence over the balance of the year.
We have multi year savings plans across each of these categories, which we expect to generate significant long term gross margin expansion.
While it will take time to realize the full benefit we do expect to begin to see some impact in the second half of 2023.
We're also closely managing our operating expenses, we expect to use the cost savings that these efforts will generate to support increased brand spend while and within brand spend both converting non working to working dollars and shifting our mix from traditional to digital and social media.
Turning to guidance.
Our depletion trends for the first 16 weeks of 2023 have declined 6% from the comparable period in 2022, we're reiterating our shipments and depletions expectation of down 2% to down 8% for the full year 2023.
Where we land within that range is dependent on a variety of factors, including the overall economic environment and consumer demand and our upcoming peak season.
Now I'll hand, it over to Matt to discuss first quarter financials, and our full year guidance.
Thank you Dave Good evening, everyone. This.
As Jim and Dave mentioned first quarter volumes were in line with our plans and we are in the process of implementing our strategies to invest behind twisted tea, while enhancing.
The truly brand proposition and improving our supply chain.
Some of these actions resulted in charges, which impacted our first quarter financial performance, which I'll discuss later in my remarks.
Depletions for the quarter decreased 6% from the prior year, reflecting decreases in our truly hard seltzer angry Orchard, Samuel Adams, and dogfish head brands, partially offset by increases in our twisted tea and hard mountain Dew brands.
Shipment volume for the quarter was approximately one 6 million barrels a seven 6% decrease from the prior year.
We believe distributor inventory as of April one 2023 averaged approximately five weeks on hand and was at an appropriate level for each of our brands.
Our first quarter 2023 gross margin of 38.0% decreased from the 42% margin realized in the first quarter of 2022.
This decrease was primarily due to higher inventory obsolescence costs.
And higher brewery processing costs, partially offset by price increases.
During the first quarter, we recognized two charges as we implemented our operating plans.
The first is hire truly inventory obsolescence costs, primarily related to re launching truly vodka seltzer to truly vodka soda and the second is a nonrecurring payment to a third party contract Brewer that we expect will benefit our supply chain costs going forward.
Together. These two charges had an unfavorable impact of 210 basis points on our first quarter gross margin.
Advertising promotional and selling expenses for the first quarter of 2023 decreased $5 $2 million or 4% from the first quarter of 2022.
Merrily due to decreased freight to distributors par.
Partially offset by an increase in brand investments.
General and administrative expenses increased by $4 million or 10, 1% from the first quarter of 2022.
Primarily due to increased consulting costs.
For the first quarter, we reported a net loss of $9 million or 73 per diluted share.
Compared to a net loss of $2 million or <unk> 16 per diluted share in the first quarter of 2022.
This change between periods was primarily driven by lower net revenue and gross margins, including the charges I discussed earlier.
Offset by lower operating expenses.
Turning to guidance as a reminder, the first quarter is our smallest volume quarter of the year with.
With the second and third quarters, including the seasonally higher shipment and depletion months.
Just on information of which we are currently aware.
We are reiterating our full year 2023 guidance range of shipments and Depletions down, 2% to 8% and earnings per diluted share of $6 to $10.
Yeah.
This projection is highly sensitive to changes in volume, particularly related to the hard seltzer category.
Supply chain performance and inflationary in recessionary impacts on consumer spending.
We project increases in revenue per barrel of between 1% and 3%.
Full year 2023, gross margins are expected to be between 41% and 43%.
We continue to expect to cover inflationary cost increases through pricing.
Our full year 2023 investments in advertising promotional and selling expenses are expected to change between a decrease of $5 million and an increase of $15 million.
This does not include any changes in freight costs for the shipment of products to our distributors.
We estimate our full year 2023 effective tax rate to be approximately 28%.
Finally, as you model out the remainder of the year. Please keep in mind these factors.
First our guidance on Depletions and shipments includes the estimated negative impact of approximately one percentage point due to the fact that fiscal 2022 had 53 weeks in fiscal 2023 will have 52 weeks.
On a 52 week comparable basis, we expect depletions and shipments to decrease between 1% and 7%.
Also first half 2023 shipments are expected to be at the low end of the full year guidance range, primarily due to lapping last year's truly Margarita launch.
Lastly year over year margin improvement is expected to be weighted to the second half of the year based on volume expectations. The expected timing of cost reduction efforts.
And the timing of obsolescence expense recognized in 2022.
Turning to capital allocation, we ended the quarter with a cash balance of $123 million and an unused credit line of $150 million.
Which allows us to invest in our base business.
Fund future growth initiatives and return cash to shareholders.
In 2023, we expect capital expenditures of between 101 hundred $40 million.
These investments will be primarily related to our own breweries to build capabilities and improve efficiencies.
During the period from January <unk> 2023 through April 21, 2023, the company repurchased 82000 shares at a cost of $27 $5 million.
As of April 21, 2023, we had approximately $62 $8 million remaining on the $931 million share repurchase authorization.
We will now open up the call for questions.
Thank you.
Ladies and gentlemen at this time, we will be conducting a question and answer session.
If you'd like to ask a question you May press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May Press Star two if you would like to remove your question from the Q4 participants using speaker equipment. It may be necessary to pick up your handset before pressing the starkey.
Our first question comes from the line of Nik Modi with RBC. Please proceed with your question.
Thanks, Good morning, sorry, good afternoon, everyone. It's been a long day Oh.
The question is for Jim I mean, if we take a step back and you know we've had a lot of moment, although a decade plus of yeah.
New segment kind of emerging and then.
<unk> if you will.
And Jim I'd, just love your thoughts on kind of how you look at the beyond beer space.
It is today and kind of where do you think the biggest pockets of opportunity will be and I asked this within the context of some of the experiments that you have in the marketplace right now as you kind of pet innovation model.
Yeah. Thanks, Nick.
I guess my view.
Over the long term somewhat reflects the past I mean, certainly the last five years.
Traditional beer has not grown but the beer business has been reasonably healthy.
And.
The.
Decline in traditional beer has been offset some years more than offset by the emerging.
What people call beyond beer or to me, it's a fourth category because it's not just beyond beer, it's beyond why it's beyond.
Or and it's an opportunity for for Brewers.
<unk> like us to come out with new products, and new flavors, and that's certainly driven business for the last 10 years and especially.
Last.
Five.
So I and.
The projections for this sort of category I think sometimes it's called a b E.
Alternative.
Maybe a b alternative adult beverages projections are that it will grow sort of in the.
Low to mid single digits.
And I think Thats true consumers are responding to the new entries.
There is certainly a tie.
Tidal wave.
New products coming from literally everywhere, it's not even just a traditional alcoholic beverage producers.
And soft drink producers and all the way to energy drink producers so.
It's a receptive market there was a flood of products only some of them will succeed and.
That category represents the vast majority of our business. So I guess the way I look at our our growth opportunities are.
Two things one.
Hum.
Holding your share.
This growing beyond beer category.
And then second innovating on top of that.
With with new products and that is.
A core strength of Boston Beer company and it does mean that.
In innovating most of our products.
Fail.
So we.
We feel like we need a fairly robust innovation pipeline to find the next truly the next twisted tea.
And.
We feel like.
Our credit credentials as a craft maker.
Our high quality products with a lot of care and attention into the ingredients the quality of the taste.
And our respect for the consumers and for the makers of these products, which is part of sort of the kraft ethic that coupled with.
They're very very effective sales force and a great distribution network will give us the same kind of advantages going forward that we've enjoyed in the last five or 10 years.
Yeah.
That's very helpful.
And if I could just ask a just a quick follow up on some of the contract termination date can you just.
Any context.
Any other issues that we need to worry about over the next couple of quarters or do you think a lot of these kind of termination or client contract costs are out of the system.
Nick It's Matt.
Just.
We've been through a cycle here with.
But truly declines and we've been working together with our partners to find the best balance between our requirements and the capacities are that they are holding for us.
We've been able to make some contract modifications.
Reduced our our shortfall fees quite substantially.
As we've gone in.
Work with those partners.
In the first quarter, we did have.
A charge.
Included in the nonrecurring items of 210 basis points.
We thought it was the right business decision.
Our supply chain.
Better going forward.
More efficient so we feel good about that but.
We feel like we're getting through the cycle.
Where we have more consistency as far as the volumes of the company.
We've been at the 6%.
Volume declined now for.
Since the beginning of 2022, so so from a planning perspective everything is getting easier.
<unk>.
We feel good that we're you know we're getting close to the end.
Great. Thanks, I'll pass it on.
Our next question comes from the line of Rob <unk> with Evercore. Please proceed with your question.
Great. Thank you very much.
Two questions one.
Bench put out something yesterday.
Which he is hearing about a lot of price rollbacks.
Particularly.
Led from the API side.
But.
Potentially having an impact on the industry as a whole so wondered if you could kind of just talk.
Big picture about the beer industry in terms of pricing dynamics and demand at the start of the year, which seems a little rocky.
That's question number one and then question number two is is more about.
From an organizational perspective.
It's been a lot of a lot of bumps.
A little bit of a roller coaster recently.
And just sort of how how the organization is doing the sales force morale.
Is there unusual attrition or everybody pretty much onboard and rolling in the right direction, just kind of a sense of how youre kind of keeping things things together given kind of the unprecedented.
Ups and and then more recently downs. Thank you.
Okay.
Hey, Thanks, Rob I'll start and Jim you can jump in if you wanted as well on the on the pricing front I mean, it looks like the pricing increases were starting to lap last year's price increases. So they are moderating, but I think year to date, it's like 6% of pricing.
Which gives yielded.
3% volume declines.
And I think.
Everybody's paying a little bit careful about this because it is still an unsettled environment, where we go with inflation with where you end up with do we end up with a recession is it hard is or not.
Our goal is to be competitive. So we're you know, we're obviously not price leaders in the market, we're going to make sure we're competitive.
The board and that's we were looking at 1% to 3% this year, which is less than what we did last year.
Right now we are.
In the first quarter, we've achieved sort of toward the upper end of that and.
We will keep going down this path.
As long as the consumer seems to.
To be responded okay, but it's still it's a whole category changes. We obviously have to have to look at that but we have no intent of doing anything different than what we've already seen it from a pricing perspective.
As it relates to the organization I think yes, we've been through some obviously been through some damage, but I think this is a very gritty resilient organization with a with a sales organization is fired up.
Obviously, selling a lot of twisted tea, but also getting very excited about what's to come very soon with truly.
The brand teams the rest of the organization have been working really hard over the last six to nine months, we've been learning as much as we can about what's happening in the category not just hard seltzer, but in general and we've been putting in place really quickly plans.
Two to grow again, and I think the truly plans.
Reflect.
Some important insights that we gathered over over that time, and we're excited to see them hit the marketplace and that's where the rubber meets the road. So I think we're ready summers here.
People are are energized and we're ready to go and we think we think that.
I'd like to think that the worst is behind us and we are.
We're rolling ahead now into Q2.
Can you just you have one of your greatest assets as Youre phenomenal Salesforce, which everybody tells me, it's the best and retailers at praise them to the skies, It's an amazing group that you have.
Can you just give us a sense of the.
In a normal year, whatever that means the compensation mix between fixed and variable.
Yes, it's Matt.
It's.
Pretty pretty pretty heavily weighted towards fixed there on sort of what I would call a normal normal bonus program.
Mostly weighted weighted towards fixed.
It's a career.
Our sales team.
We grow our own firm.
From the beginning people coming out of college and they they worked for Boston Beer for 10 20 years, all of our Division directors.
Rone up.
In the industry. So it's.
It's a unique culture and we're very proud of it.
Terrific that's very helpful. Thank you.
Our next question comes from the line of Kevin Grundy with Jefferies. Please proceed with your question.
Great.
Hey, good evening guys.
I wanted to pick up on on gross margin. So it was it was good to hear the focus it was good to hear sort of the three key areas of improvement just kind of picking up on this so a few questions number one is the low to mid 50 gross margin target that Frank had previously spoken to is that still the right ambition.
Two are you prepared to put a timeline on achieving that goal or is there kind of still too much uncertainty with the top line deleverage and then three do you feel like at this point the organization has the right incentive structure.
To achieve this goal so said differently the organization would be well served by once you sort of embraced this prioritization that youre pushing down this gross margin target to the right level. So your thoughts there would be helpful. And then I've a follow up thanks.
Great.
It's Matt I'll take that.
Kevin So.
Yes.
Absolutely our goals is to get back to where we were.
Sort of sort of pre COVID-19.
49, 50% gross margins.
That is.
We wake up every day.
Chasing that and we feel like we've got a good path to get.
There.
Always a little guarded about giving a timeline given it's heavy.
Dependent on volume.
And we've been through quite.
Quite a swing in volume from just just a few years ago being up 20%.
Down down six now since the beginning of last year or so.
Yes volume is is an important components.
Puts us a little more.
Hesitant.
A specific timeline, but we feel like it's in the it's in the three to five year.
Time horizon.
The building blocks.
We've talked about are.
In today's comments or the procurement savings, we're making great progress on that.
That's probably going be the first hit.
Brewery performance.
We've got a lot of advantages as far as the mix swinging more from from external to internal allows us to.
Control.
Our activities at our breweries and get the benefit of <unk>.
Fixed costs absorption and efficiencies from our from our equipment. So we feel pretty good about that and then waits to network optimization as well so.
We think we have the right incentive programs.
It's.
Embedded in the company's goals and management goals in all.
All the way down.
Two.
All the members of supply chain and the rest of the organization. So we feel like we're set up for success, but we have to prove it.
We certainly didn't didn't prove it in Q1, but we feel like we'll make progress for the rest of the year and we will be able to show it.
And Kevin to say, one more thing to add to that just in terms of the incentives we did.
We everybody's on the same bonus plan.
And what we just did in the last year is we actually alternate it was very heavily weighted toward Depletions and we took up the oi component to rough to reflect some you know some of these initiatives that we're after so we think the best match sort of alluded to even the bonus payout for everybody has more of a profit component than it had been in the past.
Got it.
A quick quick follow up quick follow up if I can.
Question for Jim I can appreciate the sensitivity of the topic, but nevertheless, it's pertinent.
A very real impact on what we're seeing in the Nielsen data. So the social media fallout from one of your key competitors.
It seems to be largely impacting competing premium light brands.
Okay.
Jim maybe just thoughts on the duration of the impact obviously is going to play out.
And whether you see any impact on your portfolio, but really sort of the impact more broadly and the duration of it.
As best you can tell thank you for that.
Honestly.
Something we haven't seen before and beer.
And.
Making beer for 38 years this was a burst.
It's had a duration of depth.
Is that.
Nothing that's happened before.
We've all had missed steps I've had in mind.
We.
We've all recovered from them without any permanent damage.
So I really don't know.
What the duration is going to be I was talking to some wholesalers today that.
<unk> told me that it's real and it's large and even they don't know how to.
How to predict this.
And I don't think it's really had an effect on our.
Business our portfolio.
Kind of hoping it.
Does that cause.
I don't think anybody in the beer business, what's the profit from.
The misfortune of others, but rather from the fruits of our own labors are it seems to be mostly around below premium and premium beers, which.
We don't really compete.
But the closer to the heart of the Abi portfolio. So I.
I've never seen anything like this so this is a new world to all of US maybe in this more polarized society that we're seeing.
And the effective social media.
This is going to be a new phenomenon I don't know.
Okay I appreciate the thoughts. Thank you guys. Good luck good luck.
Our next question comes from the line of Viviana ever with.
Cowen. Please proceed with your question.
Hi, Thank you good afternoon.
Wanted to follow up on a comment that you made earlier in the Q&A acknowledging.
Yeah.
Alright.
Hey.
They try to find that.
And I was wondering if you could just reflect back on the learning from the south that proposition, but I believe you will be mutually agreed to pull from the market recently.
Yeah.
The biggest learning is you've got to try step to see.
If it gets traction.
Uh huh.
And yes, we.
We don't I don't have a great deal of learning from it it was something that.
You really didn't get consumer traction from the beginning it certainly a very good brand.
But I guess if I.
Talk about learning.
Morning.
It probably would indicate that it's hard to.
Have a malt based product that.
His liquor branded.
So I think there was some learning there that would be it.
That's interesting. Thank you for sharing that and then my follow up question.
For you.
The competitive landscape you noted that the wide range of outcomes.
The macro environment I'm curious, whether you guys.
Sure.
Oh the knee launch.
In other words like how are you.
Marcelo.
All our parks I was just kind of future proof of the portfolio.
But economic headwinds.
Thank you.
Sure thing I think.
Yeah.
We did not we did not we did not change pack sizes. We are we are focusing a lot on single serve and convenience and we're spending a lot of money to really create excitement around the brand and around the category.
Just to get people back to the category, but in terms of the economic environment. I think again, we're going to be we'll be competitive so wherever the market goes we will be there, but there was nothing unusual we did as it relates to the truly relaunch in terms of the package size or price price point. So we went for and really the focus is about is about building the brand.
Building, the brand and really focusing on the core the core flavors and we have been very successful and established a very strong number two position by launching a full flavor innovation one after another and we realize that success of innovations orange is incremental and actually white flavors of what people instead of mature still the majority of the category and Thats what people.
What so what we're really trying to bring attention back to those skus.
And back to the fun honestly the final and the.
<unk> of drinking.
Think in hard Seltzer.
That's helpful. Thank you.
As a reminder, its star one to ask a question. Our next question comes from the line of 19 saw lot with Bernstein. Please proceed with your question.
Hi, everybody. Thank you for taking my question circling back on the supply chains. After the contract termination you flagged in your prepared remarks could you comment if you're still under utilizing both internal and external capacity and how do you expect the utilization to progress moving.
Ward.
And then just a second small housekeeping item I called out the higher consulting costs in your G&A expense. This quarter is this a one off or is this an incremental expense that we can expect to see what kind of a coming quarter. Thank you.
Great I'll take the take them in reverse order.
The G&A is a one off so we won't see that.
Pop.
Any more in the quarters for the remainder of the year and then just going to the internal versus external and capacity.
So internal where.
We're operating at full capacity is our plan.
Wherever you get cost savings, that's where we get fixed cost absorption. So.
We model out to be full.
And then from there.
An external perspective.
We have we have a significant amount of capacity, we think of it at this point now as an insurance policy.
As we work to turn the brands.
And towards growth and.
As we.
Would achieve those.
Those growth targets, we would we would have the capacity and we wouldn't have to go.
Go go try to find it which can be expensive as you know.
From a progress perspective.
But we disclosed and talked about in February was we were about 65%.
35 between.
Internal and external last year.
Our plans that we communicated.
Between our 70% internal and 30 external so we're continuing to try to get the benefit of internal production.
But we value our.
Our co man suppliers and they're important part of our strategy.
Yeah.
Great. Thank you.
Our next question comes from the line of Bonnie Herzog with Goldman Sachs. Please proceed with your question.
Thanks, Hi, everyone.
I am just had a few questions.
Julie if I may I mean can.
Can you guys give us a sense as truly declines in the quarter and maybe whether those declines.
Accelerated versus Q4, or possibly got a little bit better or less negative.
And then you mentioned Kelly bag to sell jewelry brand had a negative impact in the quarter. So could you quantify this as well as maybe cost associate with Chile with formulation and then.
Any or should we think about any further expenses associated with those initiatives.
Hmm.
Yeah.
Okay funny, we got cut off at the end, but I think we got the we got to just sit here punching all good so on the truly front I mean, the first quarter of what we're lapping the Margarita launch last year of Margaret It was like a 515 to share. So I think it was about over 25% of the total truly business in the first quarter last year.
So it's a big overlap for us and that that will moderate over the course of the year.
I think the biggest overlap we just we just went through although there is still as year progresses. There is still some overlap there, but the whole intent of our of the refresh program is really to get get some attention get some heating get some focus against the core three wider flavor variety packs.
In addition, we're going to have some some limited time offers that come out over the course of the year.
As it relates to the backup.
Cause soda transition I mean, basically what we decided we have got some learning at the end of last year, we got in the marketplace early and we saw some things that made US decide we wanted to give to change the proposition. We're adding a couple of variety packs, we decided the named blocker soda was better than market Seltzer. So with that came a decision do we take a do we.
Take a write off to take a hit in Q1 to get into the market in time for the summer, which is very important to take advantage of the opportunity or do we not which we could have chosen to do and then get into the market like end of the summer or beginning of the fall and we decided that it made theres much more upside to it.
We know we need to do make the changes to get out there and go I'm not sure. If we're actually talking about the exact number or not.
To add on.
It's 100 to 150 basis point impact in Q1 margin if that helps.
Definitely house Okay.
And then I understand Dave what you mentioned about my read on the laughing, but is there a way or would you share with us if we were to exclude.
Marguerite I you know what the rest of truly is doing I mean are you seeing signs of improvement in our year over year or even sequentially.
Yes.
Yes, we are actually I mean, if you look at if you. If you look at the Margarita overlap in Q1 add to add to the fact that we're discontinuing truly T.
That's over half of the declines on the trademark right there.
So those are over half of the fee.
The losses in terms of what we're seeing if you look at when you look at the core business. So look at Barry tropical citrus.
When you look at those variety packs, how they performed over the past three or four months, you're seeing we're seeing a stabilization and sure we're.
We're seeing a stable is it actually even an increase in sales per point.
If you look at.
Sure.
Alright.
The former IRI, Chicago 63 markets that they track and almost half of them. The total truly trademark has actually grown share in the last month. Okay. So these are these agreements. These are green shoots so they don't have the obviously you have a matched up to the top number yet, but we're starting to see some some signs that we are.
Covered from the base business as we as this overlap mitigates and as we start to do other things behind the brand.
Create some more excitement around the brand.
That's helpful and I might be pushing it that just in the context of back to your guidance to remind us.
What your expectations are for truly if I remember your guidance I thought implied continued share loss is that correct and I guess you guys haven't really talked about your expectations for the hard Seltzer category.
It still is.
And the 15% this year.
There would help.
Yeah, I mean I think it's.
Sorry, Mark I'm, sorry by.
That's it.
Okay. Okay. So I think in terms of the category. So we're thinking that.
Mid teens or so year.
Year to date in this volume I'm talking volume.
Year to date, I think it's down closer to 20.
We're thinking of mid teens mid teens mid to high teens is where it looks right. Now if you. If you include the blocker based sensors, which are which should be included AD like five points for volume if you will since five points.
Five points better than that.
What was your other question was around I'm, sorry, what was the first part of the question.
That you just said you are expectations for truly and what's kind of factor.
Yes. Thank you so.
To hit the midpoint of the range.
Now we're twisted tea is at the moment and where true is truly doesn't really need to change trajectory that much. So therefore that would mean losing share right.
So we factored that in so we came out with our guidance in the last call.
We gave those numbers presuming that we're not going to get much with truly we're obviously working to do a lot better than that but we're not it doesn't have to happen and obviously I think if you look at the overlaps for the first half of the year.
We're not going to gain share.
We're truly however, we are hopeful the things that we're doing they hit the market in May and June and carry through the summer if those things take hold them, where we're hoping that it will see better improvement on from a share perspective, and obviously volume perspective on the second half of the year.
Super helpful. Thank you so much for that color.
Sure.
Our next question comes from the line of Eric's Serota with Morgan Stanley . Please proceed with your question.
Hi, good afternoon, everyone.
First one is talk a bit about the shelf space gain you talked last quarter I think about.
Plans for for twisted space being up north of 30% this year.
Are you seeing hopeful that truly would hold shelf space.
The long tail.
<unk> dot trends.
Wondering now that we're.
Almost.
Done with the first four months of the year, how has that played out versus expectation.
Sure thing we've got it's a good time to have this conversation we have a lot more information that we did in our in our last call. So we probably have about inflammation, maybe 70% of our customers right now.
On shelf resets I'll talk about hard Seltzer first hard seltzer looks like it's going to go the category from about 10%.
A beer to maybe closer to 8% of beer. So it gets going down we had expected that given given the performance of the category.
Within the category.
Good news for truly is a truly is going to go from about 25% of that hard seltzer to about 27% apart seltzer.
Number one players also gaining share of all of.
The segments and those are the only two that are really gaining share as far as we know now of the segments. So again hard seltzer and total shrinking truly and the.
The other major competitors gaining share of space.
As it relates to twisted tea twisted tea, we're looking at close to 45% increase in space. So we said 30 before we actually our original.
The objectives events exceeded so far with these customers, there's a lot of enthusiasm behind twisted tea, there's lots of enthusiasm behind F&B as well in general although truly choose almost a twisted tea is almost is.
30% of it so that's a good thing and we expect that will not only will get there.
Increase in shelf space, but we're expecting to get with it.
Feature.
More feature and display activity certainly than we did.
A year ago.
Great.
Following up on that.
Certainly your expectation for shelf space has gone up a lot.
Last quarter I think you spoke about your various scenarios within the depletion range for this year.
Both.
The low end of guidance.
Assuming a moderation in twisted growth.
As we got into the second half.
Given the higher shelf space gains and the momentum today.
Are you looking at twisted momentum for.
For the year, what are you planning for and where do you see.
Gross.
Sort of.
Significant white space either from.
Channel perspective, or in terms of getting the 12 pack.
The 12 pack.
Michelle.
Okay, Yeah, So I think I mean, we're.
We're very we're very happy with twisted tea is growth right now and in fact that it's been accelerating since.
Since the fourth quarter of last year I think.
We don't our expectations.
Or that it doesn't have to go back to the middle of the range twisted tea could come off its growth rate and truly can say the same as I just mentioned to Bonnie and we're in the middle right, we'd like to obviously exceed the middle desperately wed like to do that.
Twisted tea some of it I mean, some of the tailwind the shelf space that I've mentioned, well along with that will come.
Feature.
In display activity.
Got a lot of media planned for the summer.
Another thing that we haven't really talked about is it.
If you look at our service levels last year, we struggled last year.
We want to get to at least 95% service levels, we didn't hit that number on twisted tea last year until the first or second week of September .
Now we are above that so we're going to able to ride through the summer with much higher service levels, and we did a year ago and I think we're going to need them.
Given what we're seeing so that's that.
That's a positive the other thing I'd say is that last year. If you look at the household penetration.
Last year was about it was about 15% growth in.
And household penetration in the first quarter. It was closer to 28%. So we're seeing the acceleration of households, and the repeat rates are basically theres still they're up slightly so we have more households, coming in rapidly and they are in their frequency is the same as those who have been in the franchise before so these are all good things.
That are better that will buoy twisted tea, but theres a lot of it on the other hand, there's a lot of competitive activity out there. It's a very large number on a on a growing base. So can we sustain 30% I'm talking about quote IRI, 34% that'll be that would be wonderful if we could but I think it's going to be a challenge, but again, we don't we're not expecting it to we don't have to.
But if we can hold it we will and so everything is in place on twisted tea to do that.
For the balance for the balance of the year.
Great.
Thank you.
Thanks.
Next question comes from the line of Brett Cooper from consumer Edge Research. Please proceed with your question.
Thanks, Good evening borrowed one of Jim's phrases from earlier with respect to tidal wave of new products coming in to beyond beer.
I think much of that is coming into F&B in even into these more specifically.
And then just want to take that.
Some of your comments you've made in the past with respect to saturation, causing problems in the seltzer market. So how do you think about the impact of saturation of twisted tea and is there a way that you can insulate or protect the brand from all of these products and that saturation.
Thanks, Brett.
Jim do you want to jump in or Jim generally had appointed fever, the 20 year history with twisted tea.
Yeah.
Yeah.
We've seen.
Over there.
Now I'd like two three years four years.
And when <unk> started getting successful everybody's drone.
Uh huh.
Competitors added from Mikes.
T to and has the bushes had several entries I think thing like hoop now.
Probably a couple more.
Hi.
My point of view is it's a bit late to come into a category that so.
Uh huh.
Kind of owned by one product. It's got 90 some percent of the category in the next product might have five.
So and when you go into a store there was a.
Shelf of twisted tea or two shelves.
In some cases.
Real core markets, even a dor of it.
And so I I don't see what would differentiate.
Another T.
Two.
Make.
Significant inroads and twisted tea and we have slowly.
And in a very disciplined way spread out on that shelf from the original.
To half and half.
And now we have multiple other flavors like rats.
Raspberry.
H.
We have a variety pack and where he had twisted tea light. So I feel like we are answering pretty much all of the consumers.
<unk> needs.
Needs that have that.
T category for products that have any kind of volume there are there are niche.
Tea products some of them at higher prices, but they are less than 1% share. So I'm not seeing anything that I would consider meaningfully.
Different or better.
Then twisted tea and then there is always the flavor profile and twisted tea has.
<unk> and delicious flavor profile that nobody has been able to copy either that uses very high quality teams they come from the Atlantic rainforest.
Didn't even ingredient story that we don't talk much about behind it but.
It's not easy to duplicate the flavor twisted tea and though many have tried.
If I can just follow on the light proposition is there any way that you guys or how did you speak to how you think about the proposition and the potential size relative to the base twisted tea business.
Sure.
Right now, it's not as big as one would think.
Because what we've learned.
Overall these years is when the twisted tea drinker.
Oxford twisted tea they are doing it because they want.
Something that is.
<unk> full flavored and they're there.
Not really that concerned about.
The the calories.
And even the sugar and it does have.
Less calories less sugar than a lot of other F N b entrants because the tea flavor is so powerful.
So.
I think in the second of numbers, it's probably less than 5% at this point of the twisted tea volume.
But it's an important part of our portfolio.
Did you have something out there in case.
You know that that lower calorie and of.
F N b category grows significantly and also.
It does protect the brand from a potential.
A point of vulnerability and somebody coming in with a.
Their own version of a twisted tea that was.
Third 20 calories instead of 190 like the regular strength with so it is a flanker that protects that flank and it's growing quite nicely, but on a small base.
Twisted tea drinkers, just not that worried.
Like somebody like an ice cream, either you know theres not much volume.
The locale and of the ice cream market, because we all know, it's an indulgence and we're okay with it.
Great. Thank you.
As a reminder, its star one to ask a question. Our next question comes from the line of Peter Grom with UBS. Please proceed with your question.
Thanks, operator, and good evening, everyone. So I have a question on inflation.
But maybe just.
Specifically around freight.
Thus far in <unk>.
Pretty positive callout from CPG companies in terms of how to think about the path forward.
So.
In your press release today, so how much of a tailwind could this be.
As you look ahead, and I guess to the extent that it does continue to moderate how do you think about balanced letting some of these savings flow to the bottom line versus stepping up reinvestment.
Yes, we're definitely stop.
Suffered as you can see the numbers there is a benefit.
Some companies have in cost of goods sold we have it.
And SG&A.
But you can see we benefited we expect to continue to benefit.
For the year.
And.
We'll make the decision based on how how the truly refreshes working another other opportunities, whether we reinvest that or bring it to the bottom line.
Okay understood and then just a follow up I would love to get an update on our mountain Dew.
How is the brand performing versus your expectations and then just within that any initial views on whether monsters new product offering.
It could impact the growth trajectory of hard view thanks.
Yes sure.
Sure. Peter This is Dave I think so it's right now it's in 13 13 states.
Primarily primarily <unk>.
And actually if you look at if you look at doing those in those markets is the number 212 pack twisted tea. The velocity is probably number three or four within the market. So there is still I mean, it's interesting Paul S remote Macquarie.
Pepsico I think.
Those kinds of earnings yesterday, the day before he mentioned the approach for for Blue cloud is kind of more or less a slow and steady kind of wins the race and there's not a rush they want they want to do it right and we agree with that and so we think we think we have a brand. That's got that's got a lot of interest obviously got huge trial when it launched a year ago because of the novelty.
Down, but it's still it's still turning really well and we're just kind of where we're not we're not betting on like huge growth fourth this year.
We're going to we're going to go with the right pace at the same pace that Pepsico once ago at work. So we're fine with that as it relates to <unk>.
Monster.
I don't know, it's hard to say because neither brand now the brand has energy components in it.
So I think it's more going to I think these brands will be.
Judge based on who they are they are refreshing and good tasting.
And something that people want to drink instead of instead of a beer or another F&B or not so I think the monster stuff is just really obviously, a great brand, but it's really early to tell what.
We're even with a trajectory that will be and where its kind of sources volume, but we'll know by the end of the year, we'll know more.
Thanks, Dave I really appreciate it I'll pass it on.
Okay.
There are no further questions I'd like to hand, it back to Mr. Cook for closing remarks.
Well, thanks, everybody and we'll talk again in a few months thanks for joining us.
Ladies and gentlemen, this does conclude today's conference you may disconnect. Your lines at this time and have a wonderful day.