Boston Beer Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
April 27, 2023

There are 9 speakers on the call.

Operator

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. A question and answer session will follow the formal presentation. 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.

Operator

Thank you. You may begin.

Speaker 1

Thank you. Good afternoon and welcome. This is Mike Andrews, Associate General Counsel and Corporate Secretary of The Boston Beer Company. I'm pleased to kick off our 2023 First Quarter Earnings Call. Joining the call from Blossom Beer are Jim Koch, our Founder and Chairman Dave Berwick, our CEO and Matt Murphy, our Chief Accounting Officer and Interim CFO.

Speaker 1

Before we discuss our business, I'll start with our disclaimer. As we state in our earnings release, some of the information we discuss and that may come up on this call reflects the company's or management's expectations or predictions of the future. Such predictions are forward looking statements. It's important to note that the company's actual results could differ materially from those projected in these forward looking statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward looking statements It's contained in the company's most recent 10 Q and 10 ks.

Speaker 1

The company does not undertake to publicly update Forward looking statements whether as a result of new information, future events or otherwise. I will now pass it over to Jim for some introductory comments.

Operator

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 Q1 results as well as our outlook for the remainder of 20 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 Q1 volume versus the balance of 2023 due to the timing of our Truly marketing plans and lapping our Truly Margarita launch In measured 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 Q2 plans for Truly, which we expect to help improve the brand performance starting in the second half of this year.

Operator

Meanwhile, we are implementing the operational plans we discussed and improved 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 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 sales 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 $27,000,000 in stock thus far in 2023. I will now pass it over to Dave for a more detailed overview of our business.

Speaker 2

Thanks, Jim, and good evening. As Jim mentioned, our Q1 volumes were in line with our plans. Our financial results during the Q1 were negatively impacted By our decision to rebrand and re launch chulibaca seltzer as chulibaca soda, while expanding its flavor assortment and by a decision to make a non recurring payment to a 3rd party contract brewer that we expect will benefit our supply chain costs going forward. While both decisions resulted in a charge that impacted 1st quarter profitability, they set us up for greater success and profitability for the balance of the year. Matt will discuss the financial results in detail in his remarks, while I'll focus my commentary on our operating performance.

Speaker 2

Our strategic priorities remain unchanged. We're focusing our resources on sustaining Twisted Tea's industry leading growth And improving Chewy volume trends, while simplifying our business to improve our gross margin. We're continuing to invest in all of our brands In our top ranked industry sales force. I'll now provide some color on our brands. Twisted Tea accelerated its growth trajectory in the Q1 With 34% dollar sales growth, while adding $3 share points and expanding its overall share leadership It is now 27% of total FMB dollar sales in measured off premise channels.

Speaker 2

The robust demand is 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 Q1 of last year. In addition, While category on premise sales are still nascent, Twisted Tea holds a 50% volume share of FMBs within on premise and has delivered 82% of the on premise F and B volume growth year to date according to the Nielsen CGA Consumer Survey. We'll continue to increase our total marketplace spend to broaden Twisted Tea's still narrow consumer base and advance its favorable position within Beyond Beer. We remain confident that Twisted Tea will sustain its strong double digit growth for the remainder of 2023 for a number of reasons. First, there's upside in growing brand awareness and household penetration.

Speaker 2

2nd, there's still room to expand package distribution across channels, including on premise. 3rd, the brand is making progress in bringing new drinkers such as Latinos and African Americans into the fold. And 4th, There's opportunity to widen the brand's presence in underdeveloped markets such as California and Texas. Additionally, We're in the early stages of launching 110 calorie Twisted Tea Light nationally and repeat is very strong while it's proven to be highly incremental to the Tricity portfolio. Meanwhile, as announced on our February call, we're launching Major advancement of the Truly brand in the Q2 that includes a simplified product lineup, real fruit juice, new easy to shop packaging, More emotive versus product centric brand communication, elevated media spend with a focus on digital and social media And aggressive marketplace support to improve product availability and visibility.

Speaker 2

So far over the past 4 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 in almost half of the 63 markets measured by SIRKCONA, formally known as IRI in the past 4 weeks. These trends have been obscured by the lapping of the Truly Margarita launch from 2022 And the subsequent discontinuation of Truly Tea, as the year progresses, these headwinds will be mitigated while our Truly Refresh takes hold in the market. Despite the rough going, Truly has the 2nd highest sales per point in Hard Seltzer and the 3rd highest sales per point in all of Beyond beer. So there remains a strong base to build from. We expect to have full distribution of the new chile packaging and a new ad campaign running We have a special Red, White and True lightly flavored variety pack limited time offer tied to the U.

Speaker 2

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 gain displays and inventory heading into the summer. While maintaining Twisted Tea's double digit growth and improving Truist trajectory are our top priorities for the year, we have a broad portfolio We'll continue to support and build out our smaller brands. Samuel Adams is holding its own in a difficult craft beer And we'll continue to invest behind our new remastered Boston Lager campaign and our seasonals in addition to our non ALK portfolio, While Truly Vodka Soda makes a play in vodka based seltzers, Dogfish Head is gaining a foothold in the traditional canned cocktails segment and grew volume approximately 70% in the Q1 across all channels. We'll 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.

Speaker 2

Turning to our supply chain. As we've previously We're in the process of modernizing our supply chain through investments in equipment, capacity and approved systems and processes. I'd like to broadly discuss the 3 categories we're focused on to drive improved margins. 1st, procurement savings. We've targeted savings initiatives across multiple areas, including raw materials and packaging.

Speaker 2

We're also reviewing our contracts with our raw pack with the aim of adjusting these to be more reactive to changing demand. 2nd, 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. We're evaluating 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. 3rd, waste and network optimization.

Speaker 2

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 multiyear 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 twenty twenty three. We're also closely managing our operating expenses.

Speaker 2

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 1st 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 in our upcoming peak season.

Speaker 2

Now, I'll hand it over to Matt to discuss Q1 financials and our full year guidance.

Speaker 3

Thank you, Dave. Good evening, everyone. As Jim and Dave mentioned, Q1 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 Q1 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.

Speaker 3

Shipment volume for the quarter was approximately 1,600,000 barrels, a 7.6% decrease from the prior year. We believe distributor inventory as of April 1, 2023, averaged approximately 5 weeks on hand and was at an appropriate level for each of our brands. Our Q1 2023 gross margin of 38.0 percent Decreased from the 40.2% margin realized in the Q1 of 2022. This decrease was primarily due to higher inventory obsolescence costs and higher brewery processing costs, partially offset by price increases. During the Q1, we recognized 2 charges as we implemented our operating plans.

Speaker 3

The first is higher Truly inventory obsolescence costs, primarily related to relaunching Truly Vodka Seltzer to Truly Vodka Soda and the second is a non recurring payment to a 3rd 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 Q1 gross margin. Advertising, promotional and selling expenses for the Q1 of 2023 Decreased $5,200,000 or 4% from the Q1 of 2022, primarily due to decreased freight to distributors, Partially offset by an increase in brand investments, general and administrative expenses increased by $4,000,000 or 10.1% from the Q1 of 2022, primarily due to increased consulting costs. For the Q1, we reported a net loss of $9,000,000 or $0.73 per diluted share, Compared to a net loss of $2,000,000 or $0.16 per diluted share in the Q1 of 2022. This change between periods was primarily driven by lower net revenue and gross margins, including the charges I discussed earlier, partially offset by lower operating expenses.

Speaker 3

Turning to guidance. As a reminder, the Q1 is our smallest volume quarter of the year, with the 2nd and third quarters including the seasonally higher shipment and depletion months. Based 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 This projection is highly sensitive to changes in volume, particularly related to the hard seltzer category, Supply chain performance and inflationary and recessionary impacts on consumer spending. We project increases in revenue per barrel of between 1% 3%. Full year 2023 gross margins are Our full year 2023 investments in advertising, promotional and selling expenses are expected to change Between a decrease of $5,000,000 and an increase of $15,000,000 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%.

Speaker 3

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 1 percentage point Due to the fact that fiscal 2022 had 53 weeks and fiscal 2023 will have 52 weeks, On a 52 week comparable basis, we expect depletions in shipments to decrease between 1% 7%. Also, first half twenty twenty three 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 expense recognized in 2022. Turning to capital allocation.

Speaker 3

We ended the quarter with a cash balance of $123,000,000 and an unused credit line of $150,000,000 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 $100,000,000 $140,000,000 These investments will be primarily related to our owned breweries to build capabilities and improve efficiencies. During the period from January 3, 2023 through April 21, 2023, the company repurchased 82,000 shares at a cost of $27,500,000 As of April 21, 2023, We had approximately $62,800,000 remaining on the $931,000,000 share repurchase authorization. We will now open up the call for questions.

Operator

Thank you. Ladies and gentlemen, at this time, we will be conducting a question and answer Our first question comes from the line of Nik Modi with RBC. Please proceed with your question.

Speaker 4

Thanks. Good morning sorry, good afternoon, everyone. It's been a long day. I guess this question is for Jim. I mean, if we take a step back And we've had a lot of moments over the last decade plus of new segments kind of emerging and De merging, if you will.

Speaker 4

And Jim, I just I'd love your thoughts on kind of how you look at the Beyond beer space As it is today and kind of where do you think the biggest pockets of opportunity will be? And I ask this within the context of some of the experiments that you have in the marketplace right now As you kind of test the new innovation model.

Operator

Yes. Thanks, Nick. I guess My view of the long term somewhat reflects the past. I mean, certainly the last 5 years, Traditional beer has not grown, but the beer business has been reasonably healthy. And the decline in traditional beer has been offset in some years more than offset Hi.

Operator

The emergence of what people call beyond beer or to me, it's a 4th category, It's not just beyond beer, it's beyond wine, it's beyond our liquor, and it's an opportunity For brewers like us to come out with new products and new flavors and That's certainly driven our business for the last 10 years and especially last 5. So I and the projections for this sort of category, I think sometimes it's called ABA, Alternative maybe AAB, alternative adult beverages. The projections are that it will grow sort of in the Low to mid single digits. And I think that's true. Consumers are responding to the New entries, and there is certainly a tidal wave of new products Coming from literally everywhere, it's not even just traditional alcohol and beverage producers, soft drink producers, All the way to energy drink producers.

Operator

So, it's a receptive market. There's 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 growth opportunities are 2 things. 1, Holding our share of this growing beyond beer category. And then second, Innovating on top of that 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.

Operator

So we feel like we need a fairly robust Innovation pipeline to find the next Truly, the next Twisted Tea. And we feel like Our credentials as a craft maker of high quality products With a lot of care and attention into the ingredients, the quality of the taste And a respect for the consumers and for the makers of these products, which is part of sort of the craft ethic that coupled with 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 5 or 10 years.

Speaker 4

That's very helpful. And if I could just ask just a quick follow-up on some of the contract terminations. Dave, can you just provide any context on Do we have 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 event time contract costs are out of the system?

Speaker 3

Nick, it's Matt. Just We've been through a cycle here with the 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're holding for us. We've been able to make some contract modifications. We've reduced our shortfall fees quite substantially as we've gone and work with those partners. In the Q1, we did have A charge that's included in the non recurring items of the 210 basis points.

Speaker 3

We thought it was the right business Decision, it sets up 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 decline now for since the beginning of 2022. So from a planning perspective, everything It's getting easier, and we feel good that we're getting close to the end.

Speaker 4

Great. Thanks. I'll pass it on.

Operator

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

Speaker 5

Great. Thank you very much. Two questions. Benj put out something yesterday in which he's hearing about a lot of price rollbacks, Particularly, led from the ABI side, but potentially having an impact on the 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 1. And then question number 2 is more about from an organizational perspective, Been a lot of bumps, a little bit of roller coaster recently.

Speaker 5

And just Sort of how the organization is doing, the sales force, morale, is there Unusual attrition or everybody pretty much on board and rolling in the right direction. Just kind of a sense of how you're kind of keeping Thanks, Rob. I'll start and Jim, you can jump in if you

Speaker 2

want as well. Hey, thanks Rob. I'll start and Jim you can jump in if you want as well. On the pricing front, I mean, it looks like the pricing increases, we're starting to lap last year's pricing So they're moderating, but I think year to date, it's like 6% of pricing, which has yielded 3% volume declines. And I think everybody's being a little bit careful about this because it's still an unsettled environment.

Speaker 2

Where we go with inflation, where we end up with do we end up with a recession? Is it hard? Is it not? I mean, our goal is just to be competitive. So we're obviously leaders in the market, we're going to make sure we're competitive across the board and that's we're looking at 1% to 3% this year, which is less than what we did last year.

Speaker 2

Right now, we've through the Q1, we've achieved sort of toward the upper end of that and we'll keep going down this path As long as the consumer seems to be responding okay, but if the whole category changes, we would obviously have to look at that. But we have no intent of Doing anything different than what we've already stated from a pricing perspective. As it relates to the organization, I think, yes, we've been through some ups, we've been through some downs, but I think this is A very gritty resilient organization with a sales organization that 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 6 to 9 months.

Speaker 2

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 To grow again. And I think the Truly plans reflect some important insights We've gathered 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, summer's here, People are energized and we're ready to go. And we think that, like to think that the worst is behind us and We're rolling ahead now into Q2.

Speaker 5

Can you just you have one of your greatest assets This is your phenomenal sales force, which everybody tells me is the best and retailers 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?

Speaker 3

Yes, it's Matt. It's pretty heavily weighted towards fixed. They're on sort of what I would call a Normal bonus program, so mostly weighted towards fixed and it's a career. Our sales team, we grow our own from the beginning. People come out of college They worked for Boston Beer for 10, 20 years.

Speaker 3

All of our division directors have grown up In the industry, so it's a unique culture and we're very proud of it.

Speaker 5

Terrific. That's very helpful. Thank you.

Operator

Our next question comes from the line of Kevin Grundy with Jefferies. Please proceed with your question.

Speaker 3

Great. Thanks. Good evening, guys. I wanted to pick up on gross margin. So It was good to hear the focus.

Speaker 3

It was good to hear sort of the 3 key areas of improvement. Just kind of picking up on this, so a few questions. Number 1 is The low to mid-fifty gross margin target that Frank had previously spoken to, is that still the right ambition? 2, 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?

Speaker 3

And then 3, do you feel like at this point the organization has the right incentive structure to achieve this So sort of said differently, would the organization be well served by once you sort of embrace this prioritization You're pushing down this gross margin target to the right level. So your thoughts there would be helpful. And then I have a follow-up. Thanks. Great.

Speaker 3

It's Matt. I'll take that, Kevin. So yes, absolutely, Our goal is to get back to where we were sort of pre COVID, 40 9%, 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 heavily dependent on volume. And we've been through Quite a swing in volume from just a few years ago being up 20% to be down 6% now Since the beginning of last year.

Speaker 3

So, volume is an important component. So that puts us a little more Hesitant to set a specific timeline, but we feel like it's in the 3 to 5 year time horizon. The building blocks as we've talked about are in Dave's comments or the procurement savings, we're making great progress on that. That's probably going to be the first to hit. Brewery performance, we've got a lot of advantages as far as the mix Swinging more from external to internal allows us to control our activities at our breweries and get the benefit of fixed cost absorption and the efficiencies from our equipment.

Speaker 3

So we feel pretty good about that and then waste and network optimization as well. So we think we have the right incentive programs. It's embedded in the company's goals and management goals and all the way down To all the members of supply chain and the rest of the organization. So we feel like we're set up success, but we have to prove it. We certainly didn't prove it in Q1, but we feel like we'll make progress for the rest of the year and we'll be able to show it.

Speaker 2

And Kevin, just one more thing to add to that. Just in terms of the incentive, we did everybody is on the same bonus plan And what we just did in the last year is we actually altered it. It was very heavily weighted toward depletions and we took up the OI component To reflect some of these initiatives that we're after. So we think even as Matt sort of alluded to, even the bonus payout for everybody Has more of a profit component than it had in the past.

Speaker 3

Got it. Thank you both. Quick follow-up, if I can. Question for Jim. I can appreciate the sensitivity of the topic, but nevertheless, it's pertinent and it's having a very real impact on what we're seeing in the Nielsen data.

Speaker 3

So the social media fallout from one of your key competitors, it seems to be largely impacting competing premium light brands. So Can you Jim, maybe just thoughts on the duration of the impact, how this 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.

Operator

Honestly, this is something we haven't seen before in beer. I've been making beer for 38 years. This is a first. It I had a duration and a depth that is it's nothing that's happened before. We've all had missteps.

Operator

I've had mine. And we've all recovered from them without any is going to be, I was talking to some wholesalers today that told me that it's real and it's large They and even they don't know how to predict this. And I don't think it's really had an Got it. Because I don't think anybody in the beer business wants to profit from the misfortune of others, but rather from the fruits of our own Labors, it seems to be mostly around below premium and premium beers, which We don't really compete, but it's closer to the heart of the ABI portfolio. So I've never seen anything like this.

Operator

So this is a new world to all of us, maybe in this more polarized society that we're seeing In the effect of social media, this is going to be a new phenomenon. I don't know.

Speaker 3

Okay. I appreciate the thoughts. Thank you, guys. Good luck.

Operator

Good luck. Our next question comes from the line of Viviana Aver with Cowen, please proceed with your question.

Speaker 6

Hi, thank you. Good afternoon. Jim, I wanted to follow-up on a And I was wondering if you could just reflect back on the learning from the salsa proposition that I believe you and Dean mutually agreed

Operator

Yes. The biggest learning is you've got to try stuff to see If it gets traction, and we don't I don't have a great deal of learning from it. It was something that Really didn't get consumer traction from the beginning. It's certainly a very good brand. But I guess if I talk about learning, it probably would indicate that it's hard to You'll have a malt based product that is liquor branded.

Operator

So I think if there were some learning there, that would be it.

Speaker 6

That's interesting. Thank you for sharing that perspective. And then my follow-up question, Dave, for you. On the competitive landscape, you noted the wide range of outcomes In terms of the macro environment, I'm curious whether you guys kind of your approach to the new Should we launch? In other words, like have you lean in more single serve or smaller pack sizes?

Speaker 6

Just to kind of future proof the portfolio to the extent that economic headwinds become more intense for the consumer. Thank you.

Speaker 2

Sure thing. I think we did not change pack sizes. We are focusing a lot Single serve inconvenience and we're spending a lot of money to really create excitement around the brand and around the category 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'll be there. But there was nothing like unusual we did as relates to the Truly relaunch in terms of the package size or price point that we went for.

Speaker 2

And really the focus It's about building the brand. Building the brand and really focusing on the core flavors and we've been very successful and establish a very strong number 2 position by launching a bold flavor innovation one after another. And we've realized that successive innovation incremental and actually light flavors are what people is the majority of the category and that's what people want. So we're really trying to Bring attention back to those SKUs and back to the fun, honestly the fun and the lightness of drinking a hard seltzer.

Speaker 6

That's helpful. Thank you.

Operator

Our next question comes from the line of Nadine Sarwat with Bernstein. Please proceed with your question.

Speaker 7

Hi, everybody. Thank you for taking my questions. Circling back on the supply chains, after the contract termination you flagged in your prepared remarks, Could you comment if you're still underutilizing both internal and external capacity? And how do you And then just a second small housekeeping item. I see you called out Higher consulting costs in your G and A expense this quarter.

Speaker 7

Is this a one off? Or is this an incremental expense that we can expect to see recurring in the coming quarter? Thank you.

Speaker 3

Great, Nadine. I'll take them in reverse order. The G and A is a one off. So We won't see that pop in anymore in the quarters for the remainder of the year. And then just going to the internal versus external and capacity.

Speaker 3

So internal, We're operating at full capacity as our plan. That's where we get cost savings. That's where we Fixed cost absorption, so we model out to be full. And then from An external perspective, 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 towards growth and As we would achieve those growth targets, we would have the capacity and we wouldn't have to Go try to find it, which can be expensive, as you know.

Speaker 3

From a progress perspective, What we disclosed and talked about in February was we're about 65%, 3.5% between internal and external. Last year, our plans that we've 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 co man suppliers and they're important part of our strategy.

Operator

With your question.

Speaker 7

All right. Thanks. Hi, everyone. I am just had a few questions on Truly, if I may. I mean, First, can you guys give us a sense of Truly's declines in the quarter and maybe whether those declines Accelerated versus Q4 possibly got a little bit better or less negative.

Speaker 7

And then You mentioned Truly Vodka Seltzer rebranding had a negative impact in the quarter. So could you quantify this as well as maybe Costs associated with Truly reformulation? And then is there any or should we think about any further expenses associated with those initiatives moving

Speaker 2

Okay. Bonnie, you got cut off

Operator

at the end, but

Speaker 2

I think we got the gist of your question. All good. So on the Truly front, I mean the Q1, we're lapping the Margarita launch last year. Margarita was like a 5.1, 5.2 share. So I think it was about over 25% of the total Truly business in the Q1 of last year.

Speaker 2

So it's a big overlap for us and that will moderate over the course of the year. But I think that's the biggest overlap we just went through, although there's still as the year progresses, there's still some overlap there. But the whole intent of our The refresh program is really to get some attention, get some heat and get some focus against the core 3 lighter flavor variety packs. In addition, we're going to have some limited time offers that come out over the course of the year. As it relates to The vodka soda transition, I mean, basically what we decided, we've 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.

Speaker 2

We're adding a couple of variety packs. We decided the name vodka soda was better than vodka seltzer. So with that came a decision, do we take a write off, do we 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 there's much more upside to like let's make we know we need to do, make the changes, get out there and go. I'm not sure if we're actually talking about the exact number or not.

Speaker 8

Yes. Just

Speaker 3

to add on, it's 100 basis points to 150 basis points impact in Q1 margin, if that helps, Bonnie.

Speaker 7

Definitely helps. Okay. And then I understand, Dave, what you mentioned about margarita and the lapping, but is there a way Or would you share with us, if we were to exclude Margarita, what the rest of Truly is doing? I mean, are you Seeing signs of improvement year over year or even sequentially?

Speaker 2

Yes, we are. Actually, I mean, If you look at the Margarita overlap in Q1, add to the fact that we're discontinuing Truly Tea, That's over half of the declines on the trademark right there. So those are over half of The losses in terms of what we're seeing, if you look at I mean, look at the core business and look at the berry, tropical, citrus, Those when you look at those provided tax, how they performed over the past 3 or 4 months, you're seeing we're seeing a stabilization in share. We're seeing the stabilization and actually even an increase in sales per point. And if you look at The former IRI, Surcona's 63 markets that they track and almost half of them, the Total Truly trademark has actually grown share in the last month.

Speaker 2

Okay. So these are green shoots. Now they don't they obviously haven't laddered up to the top number yet, We're starting to see some signs that we're of recovery from the base business as we as this overlap mitigates and as we start to do other things Behind the brand to create some more excitement around the brand.

Speaker 7

Okay. That's helpful. And I might be pushing it, but just in the context of that for your guidance, remind us You don't know what your expectations are for Truly. If I remember, your guidance, I thought, implied continued share loss. Is that Correct.

Speaker 7

And I guess you guys haven't really talked about your expectations for the hard seltzer category or if in fact it still is accelerating 10% to 15% this year. Any help there would help.

Operator

Just thinking about Yes.

Speaker 2

I think it's sorry, Mark. Sorry, Bonnie.

Speaker 7

That's it.

Speaker 2

Okay. So I think, yes, in terms of the category, it's so we're thinking down mid teens or so. The year to date and this is volume, I'm talking volume. Year to date, I think it's down closer to 20. We're thinking of mid Mid teens, mid to high teens is where it looks right now.

Speaker 2

If you include the vodka based seltzers, which should be included, Add like 5 points for volume, if you will. So it's 5 points. It's made 5 points better than

Speaker 4

that.

Operator

What was the other

Speaker 2

your other question was around I'm sorry, what was the first part of the question?

Speaker 7

Since that, you just said your expectations for Truly And what's kind of factored in your guide?

Speaker 2

Yes. Thank you. So to hit the midpoint of the range, right now, we're Twisted At the moment and where Truly is, Truly doesn't really need to change trajectory that much. So therefore, that would mean losing share, right? So we're and we factor that in.

Speaker 2

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 honestly, I think if you look at the overlaps for the first half of the year, We're probably not going to gain share for Truly. However, we're hopeful if the things that we're doing to hit the market in May June And carry through the summer, if those things take hold, then we're hoping that it will see better we'll see improvement on it from a share perspective and obviously, volume perspective on the second half of the year.

Speaker 7

Super helpful. Thank you so much for that color.

Speaker 2

Sure.

Operator

Our next question comes from the line of Eric Saroda with Morgan Stanley. Please proceed with your question.

Speaker 4

Hi, good afternoon, everyone. First one is to talk a bit about shelf space. Dave, you talked last quarter, I think about plans for Twisted Space being up north of 30% this year. And you seem hopeful that Truly would hold shelf space as the long tail dot trend. Wondering now that we're almost done with the 1st 4 months of the year, how is that played out versus

Speaker 2

Sure thing. We've got it's a good time to have this conversation. We have a lot more information than we did in our last call. So we probably have about information of maybe 70% of our customers right now on shelf resets. I'll talk about hard seltzer first.

Speaker 2

Hard seltzer looks like It's going to go the category from about 10% of beer to maybe closer to 8% of beer. So it's going down. It's we had expected that given the performance of the category. Within the category, the good news For Trul is that Trul is going to go from about 25% of that of Hard Seltzer to about 27% of Hard Seltzer. The number one player is also gaining share of the segment and those are the only 2 that are really gaining share as far as we know now of the segment.

Speaker 2

So again, Hard Seltzer In total shrinking, Truly and the other major competitor 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, actually our original objectives have been exceeded so far with these customers. There's a lot of enthusiasm behind Twisted Tea. There's a lot of enthusiasm behind FMBs as well in general.

Speaker 2

Although, Chewy is almost Twisted Tea is almost it's 30% of it. So that's a good thing and we expect that will not only will we get that 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.

Speaker 4

Great. And 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 sort of the low end and the high end, Assuming a moderation in Twisted growth as we got into the second half, given the Higher shelf space gains and the momentum to date, how are you looking at Twisted momentum for the year? What are you planning for? And where do you see growth, significant white space either from a Channel perspective or in terms of getting the 12 pack, the 12 pack Michelle?

Speaker 2

Okay. Yes. So I think, I mean, we're very happy with Twisted Tea's growth right now and the fact that it's been accelerating Yes, since the Q4 of last year, I think, we don't our expectations were That it doesn't have to. Let's go back to the middle of the range. Twisted Tea can come off its growth rate and truly can say the same as I just mentioned to Bonnie and we're in the middle, right?

Speaker 2

We'd like to obviously exceed the middle desperately and we would like to do that. For Twisted Tea, some of the tailwinds, The shelf space that I mentioned, along with that will come feature and display activity. We've got A lot of media planned for the summer. Another thing that we haven't really talked about is, if you look at our service levels last year, we struggled last year. I mean, we want to get to at least 95% service levels.

Speaker 2

We didn't hit that number on Twisted Tea last year until the 1st or second week of September. And right now, we're above that. So we're going to be able to ride through the summer with much higher service levels than we did a year ago. And I think we're going to need them given what we're seeing. So That's a positive.

Speaker 2

The other thing I'd say is that last year, if you look at the household penetration on Twisted Tea, last year it was about 15% growth In household penetration, in the Q1, it was closer to 28%. So we're seeing the acceleration of households and the repeat rates are basically They're still they're up slightly. So we have more households coming in rapidly and their frequency is the same as those who've been in the franchise before. So these are all good things That will be Twisted Tea, but there's a lot of on the other hand, there's a lot of competitive activity out there. It's a very large number on a growing base.

Speaker 2

So can we sustain 30 plus percent, I'll point out quote IRi 34%, 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 of the year.

Speaker 4

Great. I'll pass it on. Thank you.

Speaker 2

Thanks.

Operator

Our next question comes from the line of Brett Cooper from Consumer Edge Research. Please proceed with your question. Thanks. Good evening. I'll borrow one of Jim's phrases from earlier with respect to a tidal wave of new products coming into Beyond beer.

Operator

And I think much of that's coming into FMD, even entities more specifically. And I just want to take that with some of your comments you've made in the past with respect Saturation causing problems in the seltzer market. So how do you think about the impact of saturation on Twisted Tea? And is there a way that you can insulate or protect the brand From all of these products and that saturation. Thanks.

Speaker 2

Thanks, Brad.

Operator

Jim, do

Speaker 2

you want to I can jump in or Jim, do you have a point of view of 20 year history with Twisted Tea?

Operator

Yes. We've seen Over the it's now like 23 years, 24 years. When Twisty started getting successful, Everybody's thrown competitors at it, from Mike's Hardtete to Anheuser Busch has had several entries. I think they have like Hoop now and probably a couple more. So I think my point of view is, it's a bit late to come into a category that's So, kind of owned by one product.

Operator

It's got 90 Some percent of the category and the next product might have 5. So and when you go into a store, There's a shelf of Twisted Tea or 2 shelves, in some cases, in real core markets, even a door of it. And so I don't see what would differentiate another key to Make significant inroads in 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 So I feel like we are answering pretty much all the consumers' Needs that have in the tea category for products that have any kind of volume. There are niche Tea products on the higher prices, but they're less than 1% share. So I'm not seeing anything that I would consider meaningfully different or Better than Twisted Tea.

Operator

And then there is always the flavor profile and Twisted Tea Has a unique and delicious flavor profile that nobody's been able to copy Either, it uses very high quality teas. They come from the Atlantic rainforest. I mean, there's a genuine ingredient story that we don't Talk much about behind it, but it's not easy to duplicate the flavor of Twisted Tea, though many have tried. If I can just follow on the light proposition, is there any way that you guys or how can you Sure. Right now, it's not as big as one would think, because What we've learned over all these years is when the Twisted Tea drinker Ops for a Twisted Tea, they're doing it because they want something that is delicious, full flavored and They're not really that concerned about the calories And even the sugar, and it does have less calories, less sugar than a lot of other F and B Entrance because the tea flavor is so powerful.

Operator

So it's I think in the Surcona numbers, It's probably less than 5% at this point of the Twisted Tea volume, But it's an important part of our portfolio to have something out there in case That lower calorie end of the F and B category grows significantly and also it does protect The brand from a potential point of vulnerability of somebody coming in with Their own version of a Twisted Tea that was 120 calories instead of 190 Like the regular strength. So it's a flanker that protects that flank and it's growing quite nicely, but on a small base. The Twisted Tea Drinker is just not that worried. It's like somebody it's like an ice cream eater. There's not much volume in the low cal end of the ice cream market because we all know it's an indulgence and we're okay with it.

Operator

Great. Thank you. Our next question comes from the line of Peter Grom with UBS. Please proceed with your question.

Speaker 8

Thanks, operator. Good evening, everyone. So I have a question on inflation More broadly, but maybe just specifically around freight. Thus far in earnings season, it's been a pretty positive Call out from CPG Companies in terms of how to think about the path forward. And it was also a call out in your press release today.

Speaker 8

So How much of a tailwind could this be to you as you look ahead? And I guess to the extent that it does continue to moderate, how do you think about balance Letting some of these savings flow to the bottom line versus stepping up reinvestment?

Speaker 3

Yes. We're definitely suffering. You can see it in the numbers as a benefit. Some companies have it in cost of goods sold. We have it in SG and A.

Speaker 3

But you can see we benefited we How the Truly refreshes working and other opportunities whether we reinvest that or bring it to the bottom line.

Speaker 8

Okay, understood. And then just a follow-up, I would love to get an update on Hard Mountain Dew, how is the brand performing versus And then just within that, any initial views on whether Monster's new product offering could impact

Operator

the

Speaker 8

growth trajectory of hard do? Thanks.

Speaker 2

Yes. Sure, Peter. This is Dave. I think so it's in right now, it's in 13 states, Primarily 12 packs. And actually, if you look at doing those in those markets, it's the number 2 12 pack To twist the T, the velocity is probably number 3 or 4 within the market.

Speaker 2

So there's still I mean, there's interest, there's Paul As Ramon Maguire from PepsiCo, I think was had those guys had earnings yesterday or the day before. He mentioned the approach for Blue Cloud is kind of More or less slow and steady kind of wins the race and there's not a rush. They want to do it right and we agree with that. And so we think we have a brand Got a lot of interest. Obviously, you got huge trial when it launched a year ago like because of the novelty that's settled down, But it's still turning really well and we're just going to we're not betting on like huge growth for it this year.

Speaker 2

We're going to With the right pace, at the same pace that PepsiCo wants to go at, so we're fine with that. As it relates to Monster, it's I don't know, it's hard to say because Neither brand have energy components in it. So I think it's more going to I think these brands will be Judge, based on are they refreshing and good tasting and something that people want to drink instead of So I think on the Monster stuff, it's just really obviously great brand, but it's really early to tell what We're reading what the trajectory that will be and where it's going to source this volume, but we'll know by the end of the year, we'll know more.

Speaker 8

Thanks, Dave. I really appreciate it. I'll pass it on.

Speaker 2

Okay.

Operator

There are no further questions. I'd like to hand it back to Mr. Cook for closing remarks. Thanks everybody and we'll talk again in a few months. Thanks for joining us.

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Earnings Conference Call
Boston Beer Q1 2023
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