Boston Beer Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 27, 2023

There are 13 speakers on the call.

Operator

Greetings, and welcome to the Boston Beer Company Second Quarter 2023 Earnings Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mike Andrews, Associate General Counsel and Corporate Secretary.

Operator

Thank you, Mike. You may begin.

Speaker 1

Thank you. Good afternoon and welcome. This is Mike Andrews, Associate General Counsel Corporate Secretary of The Boston Beer Company. I'm pleased to kick off our 2023 Second Quarter Earnings Call. Joining the call from Boston Beer are Jim Koch, Founder and Chairman Dave Burwick, 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 is contained in the company's most recent 10 Q and 10 ks.

Speaker 1

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

Speaker 2

Thanks, Mike. I'll begin my remarks This afternoon with a few introductory comments and then hand over to Dave, who will provide an overview of our business. Dave will then turn the call over to Matt, We will focus on the financial details of our Q2 results as well as our outlook for the remainder of 2023. Immediately following Matt's comments, we'll open the line for questions. Our 2nd quarter depletions decrease of 3% On a fiscal calendar basis and 7% on a comparable weeks basis was in line with our expectations.

Speaker 2

We saw strong performance in our largest brand Twisted Tea and we expect its continued success to have an even larger impact on our overall growth rates In the second half, in measured off premise channels Twisted Tea continued its strong dollar growth, up 38%, which was offset primarily by continued declines in Truly Hard Seltzer. We are making progress On operational plans to enhance our margins and began to see some benefits this quarter, our multi year initiatives To simplify our operations by mastering the complexity of our business and to align our cost structure more closely The volume expectations are progressing well. 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 and a new innovation with the goal of returning our company to long term sustainable growth. Based on our Q2 financial results, We've established plans to invest incrementally in media behind our Twisted Tea and Truly brands starting immediately. We are thankful to our outstanding coworkers, distributors and retailers who continue to support our business.

Speaker 2

We are proud to have just been named the number one beer industry supplier in the Tamaron survey, the annual pool of beer distributors Conducted by Tamaron Consulting, a consulting firm specializing in the alcoholic beverage distribution industry. It is our 6th number one ranking in a row and 13th in the last 15 years. This is a result The efforts of all Boston Beer co workers to service and support our distributors businesses and to the strong relationships We've built with them over many years. We continue to believe that we have the best group of distributors in the beer business. We 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.

Speaker 2

We expect the operational changes we are making this year combined with our history of innovation, strong brands and our top ranked sales force will help lead us to long term success. Our strong balance sheet enables us We continue to invest in our brands and has allowed us to repurchase over $50,000,000 in stock thus far in 2023. I will now pass it over to Dave for a more detailed overview of our business.

Speaker 3

Thanks, Jim, and good afternoon, everybody. As Jim mentioned, our 2nd quarter volumes were in line with our expectations. Our fiscal calendar quarter depletions decreased 3% while our comparable weeks depletions decreased 7%. This is due to the timing of the July 4 holiday relative to our 2023 2022 fiscal calendars. We improved our overall financial performance during the quarter and achieved gross margins of over 45%, while generate Approximately $120,000,000 in operating cash flow.

Speaker 3

Matt will discuss the financial results in his remarks, I'll focus my commentary on our operating performance. Our strategic priorities remain unchanged. We're focusing our resources on sustaining Twisted Tea's industry leading growth and turning Truly's volume trends, while improving our supply chain performance to enhance our gross margin and provide more funds to invest in our brands in our top ranked industry sales force. As Jim also mentioned, we're encouraged by our Q2 financial performance and we're investing in incremental media to further fuel Twisted Tea's growth and moderate Truly's declines. We're doing so immediately to create an impact over the next several months.

Speaker 3

I'll now provide some color on our brands. Twisted Tea accelerated its growth trajectory in the second quarter with 38 percent dollar sales growth, while adding 3.3 dollars share points and expanding its overall share of leadership to 27 Robust demand is a result of balanced efforts at growing both fiscal availability, The improved geographic, channel and package distribution and mental availability via a highly effective brand building campaign, Increased media investment and optimized packaging design that highlights the brand's distinctive assets. While we struggle to keep up with demand for the Twisted Tea Party Pack that is now the 2nd largest and the fastest growing SKU among all FMBs, We've improved our overall service levels versus the first half of last year and can support further growth acceleration. We remain confident that Twisted Tea will sustain its strong double digit growth for the remainder of 2023 for many reasons. First, there's upside in growing brand awareness and household penetration and we know our ad campaign is working.

Speaker 3

2nd, the brand is underdeveloped Black and Hispanic and Latino consumers, but we're now seeing large household penetration increases as a result of our marketing efforts. 3rd, there's still ample room to expand distribution across channels and packages where other F and B competitors have far more presence. This includes on premise, where Twisted Tea has close to a 60 share of FMBs and has driven the 5th most incremental cases year to date of any brand family across Total Beer. Additionally, Twisted Tea finished the spring space reset season with a 49% increase in shelf space and those benefits will continue to fuel the business during the balance of the year and into 2024. 4th, there's opportunity to widen the brand's presence in underdeveloped markets from Florida to Texas to California.

Speaker 3

5th, we're still in the early stages of Twisted Tea Lights national launch and the sales per point is accelerating and exceeding our expectations and is proving to be about 85% incremental to the Twisted Tea portfolio. We've also expanded our light portfolio offerings with a new variety pack available in select We developed markets and we're seeing some early success. Lastly, we recently announced we're testing a higher ABV version of Twisted Tea in select markets This summer, called Twisted Tea Extreme, it is 8% ABV as part of our efforts to find future pathways to growth for all our brands by increasing occasions and adding new drinkers. Now on to Truly. We launched a major Truly refresh late in the second quarter, including brighter, easy to shop packaging that calls out our product improvement with real fruit juice, a new more emotive and high scoring ad campaign called LIGHTLY FANTASTIC, Increased media spend with a focus on digital and social and new wholesaler execution priorities that focus on our lightly flavored lineup.

Speaker 3

We now have full distribution of the new Truly Hard Seltzer packaging and our ad campaign has been running for 6 weeks. Our 2 new Truly Vodka Soda SKUs and package design hit the market starting in late June and will continue its rollout into early August. Additionally, during the Q2, we launched the Red, White and True lightly flavored variety pack limited time offering In support of our partnership as the first ever official Hard Seltzer of U. S. Soccer and received strong in store wholesaler and retailer support.

Speaker 3

While the brand remains down about 3.3 volume share points year to date, we're seeing green shoots that we expect will have an accumulated impact In the balance of some, we're an inch of the 4th quarter. For example, our lightly flavored lineup of variety packs has gained both volume and dollar share of hard seltzer In the past 4 13 week time frames, while 24 ounce single serve gained 0.6 share points in the 2nd quarter, driven by our lead style Wild Berry, which grew 16% in the last 4 weeks. Lemonade and fruit punch share losses stabilized during the 2nd quarter, While the Margarita overlap and the Ice Tea discontinuation from 2022 are still weighing on total brand share and have accounted for about 75% for the brand share losses year to date. These overlaps will continue to moderate through the summer and drop off in the 4th quarter. While we're disappointed that we've not yet stemmed Truly share losses, we believe we've made the necessary changes to set the brand up for success and now need to keep our focus on the execution we know our wholesalers are capable of achieving.

Speaker 3

As evidence of our confidence in our direction, We're increasing our media spend for the balance of the year and we'll ensure that Truly is on air every single week. We're only 8 weeks into the refresh, so we need to keep pushing hard with the initiatives we put in place. We're encouraged that Truly maintains the 2nd highest sales per point in Hard Seltzer, 52% more productive than the number 3 brand and the 3rd highest sales per point in all of Beyond beer. So there remains a strong consumer base to build upon. Of note, Truly's share position has improved by 1 point from March to June, so we're trending in the right direction.

Speaker 3

We recently announced we're testing a new Truly Tequila product in several markets this summer as part of our efforts to grow the brand and all the occasions where refreshment, Sessionability and variety intersect. While maintaining Twisted Tea's double digit growth and improving Truist trajectory are our Our priorities for the year, we have a broad portfolio and will continue to support and build out our smaller brands. Sam Adams is holding its own in a difficult craft beer category and will continue to invest behind our new remastered Boston Mater campaign and our seasonals In addition to our non alcoholic portfolio, including Just the Hays and the newly released Goldrush Pilsner, which grew 94% in dollars in the 2nd quarter and measured off premise channels. Our Sam Adams Boston Lager remaster program has improved Boston Lager volume trends by 6 points and the total brand gained 0.3 share points of craft in the 2nd quarter based on Beer Institute numbers. While Truly makes a play in vodka and tequila based seltzers, Dogfish Head has gained a foothold in the traditional canned cocktails segment and grew volume approximately 81% in the 2nd quarter across all channels.

Speaker 3

Turning to our supply chain. We continue to modernize our supply chain through investments in equipment, capacity and improved systems and processes. I'd like to broadly discuss the status of the 3 categories we focused on to drive improved margins. The first category is procurement savings. We've targeted savings initiatives across multiple areas, including raw materials and packaging and achieved some benefit during the Q2.

Speaker 3

We continue to review our contracts with our raw pack suppliers with the aim of adjusting these to be more reactive to changing demand. Next category is 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 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. The final category is waste and network optimization.

Speaker 3

We have initiatives to optimize our logistics, which reduce freight and warehousing costs over time. Also as we discussed on our last call, we're currently implementing systems to improve our forecast 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 began to see some benefit in the Q2, primarily related to procurement savings and expect to see further benefits in the remainder of the year. We're also closely managing our operating expenses.

Speaker 3

We expect to use the cost savings that these efforts will generate To support increased brand spend and within brand spend, both converting non working to working dollars and shifting our mix from traditional to digital and social media. Now turning to guidance. Our fiscal week depletion trends For the 1st 29 weeks of 2023, have declined 6% from 2022. We're reiterating our shipments and depletions expectation of down 2% down 8% for the full year 2023. Where we will end within that range is dependent on a variety of factors, including the overall economic environment and consumer demand balance of the year.

Speaker 3

Now I'll hand it over to Matt to discuss Q2 financials and our full year guidance.

Speaker 4

Thank you, Dave, and good afternoon, everyone. As Jim and Dave mentioned, 2nd quarter volumes were in line with our expectations, 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. Fiscal calendar depletions for the quarter decreased 3% from the prior year, reflecting decreases in our Truly, Angry Orchard, Hard Mountain Dew and Samuel Adams brands, partially offset by increases in our Twisted Tea and Dogfish Head brands. Shipment volume for the quarter was approximately 2,300,000 barrels, a 4.5% decrease from the prior year. We believe distributor inventory as of July 1, 2023, averaged approximately 3 weeks on hand and was at an appropriate level for each of our brands, except for certain Twisted Tea brand packages that were below targeted levels due to higher than forecasted consumer demand.

Speaker 4

Our 2nd quarter gross margin of 45.4 percent increased 230 basis points from the 43.1% margin realized in the Q2 of 2022. This was primarily due to price increases and procurement savings, which more than offset inflationary costs. Advertising, promotional and selling expenses for the 2nd quarter decreased $5,500,000 or 3.6 percent from the Q2 of 2022, primarily due to decreased freight to distributors, partially offset by an increase in brand and selling costs. General and administrative expenses increased by $6,100,000 or 15.6% from the Q2 of 2022, primarily due to increased consulting and legal costs And higher salary and benefits costs. For the Q2, we reported a net income of $58,000,000 or $4.72 per diluted share compared to prior year net income of $53,300,000 or $4.31 per diluted share.

Speaker 4

This increase between periods was primarily driven by higher gross margins and lower operating expenses, partially offset by lower net revenue and a higher tax rate. Turning to guidance. Based on information of which we are currently aware, we are reiterating our full year 2023 guidance range 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 expected to be between 41% 43%.

Speaker 4

Our full year investments in brand spend within advertising, promotional and selling expenses are expected to increase between $20,000,000 $40,000,000 Which is an increase from our previous guidance range of a decrease of $5,000,000 to an increase of $15,000,000 This guidance does not include any changes in freight costs for the shipment of products to our distributors. We've experienced lower than expected freight costs year to date, which in addition to gross margin performance allows us to further support our brand. We continue to estimate our full year effective tax rate to be approximately 20%. 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 Approximately 1 percentage point due to the fact that fiscal 2022 had 53 weeks and fiscal 2023 will have 52 weeks.

Speaker 4

On a 52 week comparable basis, we expect depletions and shipments to decrease between 1% 7%. 2nd, the 53rd week overlap is expected to negatively impact 4th quarter volume trends by approximately 6 percentage points. Also, as we had anticipated, we finished the first half at the lower end of our shipment guidance range on a comparable weeks basis. We estimate that second half shipments will benefit from the expected continued growth of Twisted Tea, which is our largest brand, the lapping of last year's Truly Margarita launch and additional investments in advertising spend in the second half of the year. And finally, our guidance incorporates an expectation of shortfall fees, which primarily impact the 4th quarter.

Speaker 4

Therefore, we expect year over year gross margin improvement to be lower in the 4th quarter relative to earlier quarters. Turning to capital allocation. We ended the quarter with a cash balance of $208,000,000 and an unused credit line of 1 $150,000,000 which allows us to invest in our base business, fund future growth initiatives and return cash to shareholders through our share buyback. For the full year, 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 July 21, 2023, the company repurchased 161,000 shares at a cost of $52,500,000 As of July 21, 2023, we had approximately $307,000,000 remaining on the $1,200,000,000 share repurchase authorization.

Speaker 4

I will now pass the call back to Dave for some closing remarks.

Speaker 3

Thanks, Matt. As you may have seen from our announcement a few days ago, We're very excited that Diego Reynoso will be joining us as our new Chief Financial Officer effective September 5. Diego has significant financial and operational experience in the consumer industry, particularly the alcoholic beverage category. I'm confident he'll bring valuable perspective to Boston Beer and look forward to introducing him to you on our Q3 call. I'd like to take this opportunity to thank Matt for his leadership of the finance team and his We're very fortunate to have Matt as a senior finance leader, and we look forward to him playing a significant role in our future success.

Speaker 3

And now we'll open the line up for questions.

Operator

Thank you. We will now be conducting a question and answer session. One moment please while we poll for questions. Thank you. Our first question is from Nik Modi with RBC.

Operator

Please proceed with your question.

Speaker 5

Yes, thanks. Good afternoon, everyone. I was hoping you can just comment on obviously In the process of reset discussions with retailers and there just seems to be a lot of volatility in the industry with what's going on with Bud Light and Potential opportunities for perhaps some shelf space gains. And so just wanted to kind of get your state of the union on how those discussions are going with retailers, particularly as it relates to Truly and kind of what's going to go on with the hard seltzer category, if you can just provide any updates there. Thanks.

Speaker 3

Sure. Thanks, Nick. This is Dave. Hey, Nick, are you referring to this fall or next spring?

Speaker 5

Yes. Fall and spring because I know sometimes these discussions tend to overlap, So

Speaker 3

Yes. Okay. I mean spring it's a little early for spring, so we're not there yet. I think it won't be till really Like after Labor Day, the retailers have the data that they need to determine what they want to do for spring. But as it relates to fall Of this year, there will be some changes, but we don't right now, we're not and we know there's a lot of noise out there about what could happen.

Speaker 3

We're not hearing back from retailers if there's anything significantly different that's going to happen this fall. We do know, I As it relates to us, we mentioned that we finished at plus 49% on Twisted Tea Space. That will benefit us as the year goes on and that We have to enforce that and make sure we get compliance and make that work. And we don't necessarily see anything changing really with Truly or hard seltzer in the fall. Based on what we again, based on our conversations we've had with retailers up to this point.

Speaker 3

Great.

Speaker 5

And then just as it relates to the consumer and seltzer, obviously, it tends to be higher priced Relative to beer, some of the work we've done with the best, there was some shifting of consumption, especially with older Our consumers out of seltzer and into beer, I'm just promotions seem to be ramping at least from what I'm hearing in the industry. Just wanted to get your state of the union Kind of how you think about the promotional environment right now?

Speaker 3

Yes. I think, I mean, if you look at the SIRCONA data, you don't see a lot of Promotional activity built in. There is I mean, there is a digital coupon and other things going on to create value that's out there, but I wouldn't say it's extraordinarily different than what has been in prior years. I think you're right, Nick. I think when you look at the pricing on Hard Seltzer, the gap to imports and to premium beer, light beer has increased pretty continually over the last 2 or 3 years and the gap actually on the other end to RTG cocktails actually shrunk.

Speaker 3

So it is in a sort of a place where you probably don't want to see it to go much higher. But in terms of like mass promotional Stuff happening, we don't see it. I mean, occasionally things will happen in certain markets, but it's fairly limited to this point.

Speaker 5

Great. Thanks. I'll pass it on.

Operator

Thank you. Our next question is from Vivien Azer with TD Cowen. Please proceed with your question.

Speaker 6

Hi, good evening. Thank you for the question. So I'm just trying to reconcile the unchanged guidance on the top and bottom line relative to the $20,000,000 in incremental And key at the midpoint of the range. So recognizing the top line was expected to improve in 2 half 'twenty three and that was always part of the plan, I'm interested to better understand your confidence in holding the EPS range given that if my simple math is correct, dollars 20,000,000 in incremental A and The midpoint is $1.50 headwind to EPS and certainly it would be more than that if you took the extremes of old and new guidance. So any

Speaker 4

Sure. Hi, Vivien. It's Matt. We feel good about our overall guidance, certainly on the top line. The range is between the 2% and the 8% and it's not there's no magic in it as far as Achieving the middle of the range, if you just keep looking at the trends of Twisted, which is a little less than 30% Growth and then Truly, which is probably a little worse than 30% decline.

Speaker 4

If you extrapolate those out, As Switzer gets to be a bigger part of the mix, you get overall company Decline of a minus 2 for the back half of the year. So that probably gets you to the middle of the range. So we feel good about that. We could have tightened it a little bit, but it just felt like with these two brands that are moving in different directions and that we still have a Couple months left to the peak season, we felt that range was still appropriate. As it relates To margins, we were at the 40%, 42%, a little better than 42% For the first half of the year, so we're seeing the same type of Achievement during the second half.

Speaker 4

And then on the operating expenses, just a real important Item is we're seeing a lot of freight savings. So to keep it real simple, the freight savings that we're seeing both in the first half of the year, which we realized, which is off the prior year about $28,000,000 We're looking at that along with Other operating expenses for the second half of the year and we're investing that in the brand. So That's the reason when we give you guidance on AP and S, we exclude the freight components. So I think the freight component will get you to reconcile that difference. Does that help?

Speaker 6

That helps a lot. Thank you very much for that clarification. And just quickly as a follow-up, David, you enumerated the P3 strategic priorities in terms of driving medium to long term growth improvement. Have any of those come in quicker than expected? Thanks.

Speaker 3

I'm sorry, which part I'm not sure I got caught that question. Which priorities are you referring to?

Speaker 6

Sorry. Yes. So you've laid out kind of 3 key initiatives to drive gross margin improvement over the medium to long term. And I'm just wondering Whether any of those are hitting a little bit sooner than expected relative to initial guidance? Sure.

Speaker 4

Sure, Vivien. I'll take it. It's Matt again. The 3 key items, the procurement savings, the brewery performance, the waste and network optimization, We talked about those as sort of equal opportunities that get us from around low 40s to upper 40s Over the next 3 to 5 years, we've seen some benefit in procurement savings. You can see from the Q2 results that we were realizing some of That benefit and that as we sort of signaled that was going to be our first area where we saw we'd see it hit.

Speaker 4

And then brewery performance is we're stabilized and we're not having The same one off items that we've had in the prior quarters that have kept the margin in the high 30s and achieving the 45 just gives us a sense that Things are more stable. So good progress on the procurement savings And the both brewery performance and waste and network optimization are a little longer term, but we're happy to see that they're not negatively impacting the margins at this point.

Speaker 6

Absolutely. That's really helpful. Thank you.

Operator

Thank you. Our next question is from Rob Ottenstein with Evercore. Please proceed with your question.

Speaker 7

Great. Thank you very much and congratulations to you and your team on another great result in the Tamarind survey. So first, just kind of looking at the hard seltzer category as a whole, Are you surprised that the category hasn't seemed to benefit at all From the Bud Light controversy. So that would be question number 2. And question I'm sorry, question number 1, Long day.

Speaker 7

And question number 2 is on the second half margins, if you excluded The shortfall fees, would they be how would they compare to first half margins? Thank you.

Speaker 3

I can take one. I guess the first one and then I'll take the second. Jim can maybe Jim may have a point of view on the Bud Light. Well, I think we're not that surprised because when you look at the demographics, the geographies and such where Bud Light might be struggling. Those are really hardcore light beer drinkers.

Speaker 3

So we're not shocked That is going basically more back into white beer. I mean, there's another factor at play on the whole hard seltzer piece as well, which is Obviously, RTDs, if you throw RTDs in, Rob, into that number. So I think like according to Turkana, like call it 23% volume decline year Dave, on Art Seltzer, RTDs would add like probably 6 points of volume on top of that to the benefit. So you have a lot of dynamics at play, But we're not really surprised about the volume not coming back straight to hard seltzer. So And Jim, I don't know if you have any thoughts on that.

Speaker 3

If not, we can Mac can take number 2.

Speaker 2

No, I just second What you said, it seems like the beneficiaries of the Bud Light The issue, I'll call it, are near end, Coors Light, Miller Lite, even Pabst, Yingling. So they're the near end substitutes. And we never had that much interaction with the hardcore light

Speaker 4

Great. On the second question, Rob, you can see through our 10 Q filings the shortfall fees we're estimating for the half of the year about $9,000,000 So I guess that's about a point of margin. We feel like Our progress we demonstrated in procurement savings and the general inflation commodity environment We'll offset that, so that allows us to offset that impact.

Speaker 7

And then just one other on the margins. Did the 4th July timing Impact the margins in the second quarter at all?

Speaker 4

No. A little bit of benefit on Volume in shipments, but no impact on margins.

Speaker 7

Terrific. Thank you very much.

Operator

Thank you. Our next question is from Nadine Sarwal with Bernstein. Please proceed with your question.

Speaker 8

Hi, good afternoon everybody. Two questions from me. One, could you comment on where your capacity utilization is today? Are you still underutilizing both your internal and external capacity? And then curious, I know you called out a number of changes you made To the Truly brand family, in attempts to drive improved performance, although it does look like the brand is still struggling when we look at track channels.

Speaker 8

So it would be helpful to provide some color behind your conviction that Truly can see improved performance over the remainder of the year. Thank you.

Speaker 4

Hi, Neogene. It's Matt. I'll take the first one and then Dave will take the second. So on internal and external, Our model is to fill our internal breweries and I wouldn't say we're at 100 100% capacity, but we try to keep them full and well over 90%. So that's the model.

Speaker 4

And then what Yes. The access goes to external and that external given Where we were from a volume perspective a few years ago and the expectations we have significant capacity Externally, should we return to growth, which is what we intend to do. So It's hard to put a number on how much external capacity we have available, but we have quite a bit. And we feel like It's a good insurance policy for when the company gets back to growth. We'll have that capacity.

Speaker 4

We won't need to enter new contracts Or go out and try to contract for additional capacity.

Speaker 3

Hey, Nadeem. Okay, Dave here. I'll try to answer your second one. I I mean, the intent of the Chuy refresh program was really to slow down on the hyper innovation Behind the brand and make the brand just easier to understand quite honestly. And so there's a number of things, I won't go through the whole Whitney, but the package redesign To make it easier to shop and easier to find and deliver those refreshment queues, new ad campaign, we are stepping up the ads.

Speaker 3

We have stepped up the advertising investment and now as we mentioned on the call, we're going to step it up further for the balance of the year. And really the focus has been bringing attention back to the core. So the bolder flavors have been important. They're more than half the brand. We spent a lot of time and a lot of effort in the last couple of years trying to lap that innovation and to focus on those flavors.

Speaker 3

The effort Thus, over the last call in 8 to 10 weeks, really in market has been to focus on those 3 core 12 packs, Berry, the Tropical, the citrus and also our single serve. And if you look at the results, I mean, you don't in a declining category like this with a lot of change to be done. It doesn't happen overnight. So but what we do like is when we look at where we've been over the last 8 weeks or so, and I guess I'll try not to repeat what I said in the script, but those core 312 packs are actually growing share. For the last 4 weeks, the last 13 weeks, they're growing share, which is important.

Speaker 3

It's very important. Also, if you look at our single serve and convenience, it's basically 24 ounces, it's actually gained share been gaining share really since April. And so part of that was really actually fixing the mix. So if we had 3 SKUs, in a convenience store, 2 of them would be bolder flavor, 1 would be lighter. Now it's 2 light, 1 bold.

Speaker 3

We're getting the mix right. We have been we are still down 3.3 share points year to date. But sequentially, we're starting to gain share. Again, We gained about a share point. We still have a significant delta between us and number 3.

Speaker 3

So we're 18 share points away from the number 3 player, which is about exactly where it was a year ago at this time. So in the last thing I'll say, when you look at the margarita overlap And the discontinuation of Tea, year to date, that's about 75% of our share loss, okay? So And that will definitely moderate, as I mentioned also earlier in the call, as the year goes on, particularly as we get into the fall, it will moderate. So for all of the for those reasons and others, we believe that we will continue to make progress and we will get this brand back. And ideally, we're not going to grow share when the year is over, but ideally, we're close to growing share as we get into the Q4 based on all of these initiatives.

Speaker 8

Understood. Thank you very much.

Operator

Thank you. Our next question is from Bonnie Herzog with Goldman Sachs. Please proceed with your question.

Speaker 9

All right. Thank you. Hi, everyone. I had a quick clarification question on your guidance. I just wanted to Clarify if you're reinvesting 100% of the lower than expected freight costs and improved gross margin performance That you've mentioned back into your business in the form of incremental media spend or you plan to let some of those benefits flow to the bottom line?

Speaker 4

Hi, Bonnie, it's Matt. I would say that the majority of the freight savings are going to be invested In media, but those are decisions that we'll make over the second half of the year. Certainly, we want to make sure that we're confident in the investments and the plans that we have. So, we currently have that those dollars allocated for that, but we'll see what we spend and what we bring to the bottom line Should that come about?

Speaker 3

Hey, Bonnie, this is Dave. I could just Bill, just before you ask, I'm going to ask another question, I can tell. Before you do, I think it's we feel really good about this investment because first of all Twisted Tea, there's about 100 reasons why we should be investing even further in this brand. It's got the momentum, Got a great message. And there's still a long way to go in terms of household penetration and brand awareness, etcetera.

Speaker 3

So we feel terrific about that. And for Truly, we feel like we've got everything lined up now the way it needs to be. And so now we just need to bring the message to people, we need to create Better awareness of our changes and we have a campaign that we test pretty rigorously that also tested very well. So We're being very thoughtful about how we're making this investment and we're thinking about it and we're breaking it down by geography, by consumer, And that's why we're moving forward pretty quickly with this investment.

Speaker 9

No, that's helpful. And definitely, I understand the confidence. And so in Context that, yes, I did have another question, if I may. It's just trying to get a sense of sort of Truly's declines In the quarter and have those declines moderated versus Q1? So I know you've talked about on the green suit, but just maybe in Total.

Speaker 9

And then definitely wanted to clarify something as you've talked about this before about your guidance and what it implies for Truly this year. Could you maybe update us And then in your press release, you've called out that your guidance is Pretty sensitive to any potential changes for the hard seltzer category. So maybe help frame that for us as well In terms of your latest expectations for the category? Thanks.

Speaker 3

Okay. So I think The first part of that question was just more about how Truly has changed from I think from a share perspective, we're seeing as I said before, we're seeing that core the core business The lighter flavors improving their share position and we're seeing single serve improving its position as well. We're seeing the bolder flavors share loss moderate and then we're sort of riding that curve on We'll have a margarita, which will diminish over time. So in terms of total volume change, if you guys could look at Connor and Nielsen, it probably hasn't changed much between Q2 and Q1. I think for balance of year, we're not Based on the guidance, we're not expecting it to change much either necessarily, we're not.

Speaker 3

So we're not we don't have Some high hurdles or unrealistic expectation for what's going to happen in the second half versus what's happened in the first half. We Hope to beat that. And again, I think the category is probably going to be volume wise, let's say, minus 20 to minus 25, right? So right now, it's minus 23. So that's probably a fair Midpoint for where we'll end up and it's unlikely that we would be between we're not going to be at the category growth rate.

Speaker 3

I'm going to be straight with you because There's too much ground to be gained here, but we want to be as close as we can. We think in the second half, the idea is to basically By the Q4, as I mentioned, we should be at least holding share across the board, ideally in the Q4. But again, that's a little bit aspirational. It depends on where the numbers come in, but we're not expecting like a big, huge change in the second half in terms of Truly depletions.

Speaker 9

Right. So that's what's baked in. But then like you mentioned, as you step up spending, maybe, right, behind Trulink?

Speaker 3

It is. It's kind of an insurance think of it as insurance policy and a way to help maybe to nudge it forward. It just gives us more confidence that we're going to get to the finish line we want to get to.

Speaker 9

Okay, sounds good. Thank you for that.

Operator

Thank you. Our next question is from Eric Serotta with Morgan Stanley, please proceed with your question.

Speaker 10

Hey, good afternoon, everyone. Couple of questions, Starting with a follow on to Bonnie's on your initial expectation. If I remember correctly, was that Twisted growth would moderate somewhat in the second half as you Lapped some of last year's distribution gains. Given the robust growth that you've had so far year to date And the additional media, how have your second half plans for Twisted changed? Are you still looking for a material slowdown there?

Speaker 10

Or do you think it could maintain this kind of momentum into the second half?

Speaker 4

Okay, Eric. I think

Speaker 3

I mean, For the first half of the year, I would say that Twisted Tea has exceeded our expectations of growth. So we don't Foresee and don't we're not planning that it's going to sustain the same growth rate balance a year. We don't see a material slowdown, depends how you define material. We don't see it as material, but we do see A bit of a slowdown. If you look at last year, the Q4 last year, the brand decelerated.

Speaker 3

It's not a huge it's not like we have a big overlap. We have a reasonable overlap to hit, but we're just going to keep doing what we're doing and we'll see where it ends up. But We're not going to be surprised if it slows down a little bit because you can't sustain it's unlikely to sustain this 30% growth rate on a larger and larger

Operator

Does that make sense?

Speaker 10

Yes, that's helpful. And then, want to come back to the gross margin question. Your first half was a little over 42. Your guidance for the full year is 41 to 43, which is a pretty large range considering the year is half done and you're above the or But above the midpoint to the first half. So I guess maybe can you talk about areas where you have visibility and where you may Don't as it pertains to the short term margin picture.

Speaker 10

And then somebody's got to ask about the confidence In the longer term, getting back to the high 40s, low 50s in gross margins, so I figured it's my turn to ask that. So Does your progress to date with respect to the supply chain savings, the Procurement savings, increase your confidence in getting there, or I guess what do you see as the key swing factors?

Speaker 4

Yes. Hi, Eric. It's Matt. Thanks. Just Overall, we've been through this is the best margin we've had in 2 years.

Speaker 4

So we're at 45% and That was a lot of work took a lot of work to get there. We've had probably more quarters with high 30s over the last eight quarters. So it's a great sign that Our plans are working and we've talked to them. After Q1, it was We got a lot of great plans, but we've got to demonstrate that they can be successful. So we feel like this is a good step forward.

Speaker 4

And certainly, the procurement savings are probably our best line of sight. And in Q2, they offset any of the inflationary impacts, which was good and let pricing sort of flow through. So we're building our confidence, but it is 1 quarter. So we feel like We the 42 that we demonstrated for the first half is we can continue that for the second half of the year. But we've had a lot of surprises in the past 8 months and we're just trying to be as prudent and continue to demonstrate some slow progress in this area.

Speaker 10

Great. Thanks. I'll pass it on.

Operator

Thank you. Our next question is from Brett Cooper with Consumer Edge, please proceed with your question.

Speaker 2

Good evening. Just a question on Truly and how do you guys Think about or frame how extendable the brand is, whether that be in flavors or alcohol levels. And then I guess, Do you take lessons or learnings from what you did on Truly in your phasing or your pace of that extension? Thanks.

Speaker 3

Thanks, Brad. We do think, I mean, I think Truly can play where Sessionability, refreshment, variety all intersect. And so that's why we're in vodka. That's why we're testing tequila. And we think that we think the brand can play in those spaces pretty well.

Speaker 3

I think within the category, the category as everybody knows exploded so quickly and it just became a gold rush to get As many SKUs and as many flavors out there as possible. And I think in the end, it probably wasn't good for a lot of brands. And I think we're pairing maybe overextending Truly, I think we would take that learning, shoulder with us to Twisted Tea. I mean Twisted Tea, we have a lot of room to extend. We are testing The high ALK version of that, we're doing that very carefully and we're not we don't know which way it's going to go.

Speaker 3

We're not necessarily in our minds thinking we have to do A, B or C as it relates to Twisted Tea because one of the strengths of Twisted Tea is that it's a very simple idea and there's always a risk to overextend. So I think Yes, we've learned a lot from the Hard Seltzer story. And I think we're absolutely applying that every day As we prepare and get truly back on track as well as how we think about Twisted Tea. And I think actually maybe and Jim probably has Some good perspective on this because he's seen this rodeo or done this rodeo before. So Jim, you want to add to that?

Speaker 2

Yes. One of the unique features of Part Seltzer We've never seen before and it's fairly rare even in consumer products is the core SKUs were all variety packs. That's quite unusual, especially in beer. So with Truly, our belief was it can go into more varieties. In fact, a part of The appeal of the category is a fair amount of variety.

Speaker 2

So I think that's always going to be there With Truly, it's not exploding anymore, so we don't feel like we need to bring out a new flavor or 2 every year, but we do think that the seasonal variety packs will probably be A permanent part of the brand. With Twisted Tea, it's been kind of the opposite. It's always been led by Twisted Tea Original. We're 23 years now into the brand, And we're just beginning to test a different alcohol level. We have introduced other flavors, but Yes.

Speaker 2

Fewer of them in 23 years than we did in the 1st 3 years with Truly. So there are some lessons in each of them that apply, I believe differently So the 2, they're both in F and B type brands, but the consumer base is

Operator

Okay. Thank you. Thank you. Our next question is from Peter Grom with UBS, please proceed with your question.

Speaker 11

Hey, guys. This is Brian Adams on for Pete. Thanks for taking the question. So first, apologies if I missed this in your response to Vivien or one of the other responses to that matter. But are you able to give us a rough Like numeric sense of how much of a benefit you saw in 2Q margin from those procurement savings, just trying to think about How we should think about the Xavians in the Downhill and looking further up?

Speaker 4

Yes. Hi, Brian, it's Matt. You probably haven't

Operator

had a chance to look at

Speaker 4

the queue, but I think we call it out. It's about an $8,000,000 benefit in the first half of the year. So that's what we've seen and it offset. As we've said, our inflationary impact, so that's the details.

Speaker 11

Okay. Awesome. And then one more, just longer term thinking about that march back to 50% gross margin. Obviously, looking at just the complexion of the business, The buckets in terms of the size of Truly versus the size of Piston Tea have changed pretty meaningfully here over the last couple of years. So it's a bit of Boston Beer 101 question, but is there a demonstrably different gross margin you see in those products or are they pretty comparable?

Speaker 11

Thanks.

Speaker 4

Yes, thanks. It's they have different factors. For Truly, There's more variety packs for Twisted Tea, there's more 24 ounce.

Operator

So

Speaker 4

generally, they're the same. Some of it just depends on the mix between the various different packages. But we operate our business With all our products generally in the same margin zone, so I would just think of them as having similar margins.

Operator

Our next question is from Filippo Palorno with Citi. Please proceed with your question.

Speaker 12

Hey, Good afternoon, guys. Question on Twisted Tea. Clearly, this year, you made significant gains from a distribution standpoint. As you think about the 4 shelf space resets, what kind of visibility you have that you can get further shelf space Next year, particularly as competition hits up in the hard tea category with new entrants and new launches being announced?

Speaker 3

And so we're obviously, as I mentioned, we're picking up a lot this year. I think even with that whatever that 49% increase, Our space to sales is still underrepresented, so we still arguably could advocate for more. So I think we and I don't think we compete more with more than just the other tea brands, it's really within F and B land. So We'll see how we I mean, if we continue on the same pace of growth, we have a good story to take to our retailers next year to get more.

Speaker 12

Got it. Okay. Thank you. And then on kind of the extension of Truly, can you talk about like how Truly vodka soda, how the launch Is Gong relative to your initial expectations and like maybe give us some more color on the tequila experimentation with Truly like when expected to launch and your initial expectation for that as well?

Speaker 3

The first question about the web share was about the margin. Is that the question? No.

Speaker 12

No, sorry. I was asking about Truly vodka soda performance relative to your expectations Sure.

Speaker 3

And then

Speaker 12

a little more color on the tequila.

Speaker 3

Yes. I think if you look at the on the vodka, it's about it's sitting about a 3 share of Avaca based spirits, the number 4 brand, it's a different channel, it's independence, Liquor stores, it's a new it's really a new frontier for us. And I think we're making progress, but we're not we haven't knocked it out of the park yet. But we are getting a Great response to the new products, the 2 new variety packs we put in the marketplace just recently. So we feel great about the product.

Speaker 3

We feel great about the rebrand. And now it's just the hard work of driving distribution. But so far, we're getting good response from consumers, but it's not going to be an overnight thing. It's going to take a while We're committed to it because the reality is this is it sources from traditional hard seltzer occasions and we need to be in there. The Tequila test just started maybe a few weeks ago in a handful of markets.

Speaker 3

And if you're in Rhode Island or Delaware Or Minnesota or LA or San Diego, you can find it. And again, it's just this belief that this brand, I think Brett was asking the question before. This brand can play in certain spaces where it's about refreshment and sessionability and variety. And we love the product. We absolutely love this product and we're but we've learned a lot in the last couple of years, one of which is not to launch too many things too quickly and also to do maybe Ask a little bit more to get something to its optimum state before we go national.

Speaker 3

And that's what we're doing right now. So we'll see how it goes. And depending on the results in these lead markets, we'll determine what we do with it next year. So we're hopeful. And again, this is the whole spirits piece is a different Play for us.

Speaker 3

We're committed to it. And we have, of course, we have Dogfish Head out there doing quite well. And it's going to be It's like a street fight is what it is, but we're prepared. I don't know, Jim, I don't know if you have any other thoughts about this space.

Speaker 2

No, it's obviously a crowded and confused space with a lot going I think it's probably getting more attention, because it's new And nobody is really sure where it's going to go, then the actual volume will merit for it. High Noon has certainly done extremely well, but after High Noon, the volumes are quite small. And I there's just all these new brands being thrown at it and even from big name spirits brands, but their volumes At the end of the day, are not going to be large enough for them to sustain a place in the cold box. So there will be a warm shelf with A lot of these brands and the warm shelf is kind of it's not where you're going to get any volume. It's In some ways, the kiss of death.

Speaker 2

So there will be a big shake out, I think, next year.

Speaker 12

Thanks, guys.

Operator

Thank you. There are no further questions at this time. I'd like to hand the floor back over to Jim Cook for closing comments.

Speaker 2

Thank you. We look forward to the next few months with Hopefully, some improvement in a bunch of different things. I hope we can continue and we'll see you in 3 months.

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Earnings Conference Call
Boston Beer Q2 2023
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