The Boston Beer Company, Inc. (NYSE:SAM) Q2 2023 Earnings Call Transcript

The Boston Beer Company, Inc. (NYSE:SAM) Q2 2023 Earnings Call Transcript July 27, 2023

The Boston Beer Company, Inc. beats earnings expectations. Reported EPS is $4.31, expectations were $3.51.

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. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Mike Andrews, Associate General Counsel and Corporate Secretary. Thank you, Mike. You may begin.

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

Jim Koch: 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 second quarter results, as well as our outlook for the remainder of 2023. Immediately following Matt’s comments, we’ll open the line for questions. Our second quarter depletions decrease of 3% on a fiscal calendar basis and 7% on a comparable week’s basis was in line with our expectations. We saw strong performance and 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 multiyear initiatives to simplify our operations by mastering the complexity of our business and to align our cost structure more closely to 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 second quarter 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.

We are proud to have just been named the number one beer industry supplier in the Tamarron survey, the annual pull of beer distributors conducted by Tamarron Consulting, a consulting firm specializing in the alcoholic beverage distribution industry. It is our sixth number one ranking in a row and 13th in the last 15-years. This is a result of the efforts of all Boston Beer coworkers 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.

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 to continue to invest in our brands and has allowed us to repurchase over $50 million in stock thus far in 2023. I will now pass it over to Dave for a more detailed overview of our business.

Dave Burwick: Thanks, Jim, and good afternoon, everybody. As Jim mentioned, our second quarter volumes were in line with our expectations. Our fiscal calendar quarter depletions decreased 3% or our comparable weeks depletions decreased 7%. This is due to the timing of the July 4th holiday relative to our 2023 and 2022 fiscal calendars. We improved our overall financial performance during the quarter and achieved gross margins of over 45%, while generating approximately a $120 million in operating cash flow. Matt will discuss the financial results in his remarks, while I’ll focus my commentary on our operating performance. Our strategic priorities remain unchanged. We’re focusing our resources on sustaining Twisted Teas, 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 and our top ranked industry sales force.

As Jim also mentioned, we’re encouraged by our second quarter financial performance 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. I’ll now provide some color on our brands. Twisted Tea accelerated its growth trajectory in the second quarter with 38% dollar sales growth, while adding $3.3 share points and expanding its overall share leadership to 27% of total FMB dollar sales and measured off-premise channels. The robust demand is a result of balanced efforts at growing both physical availability, the improved geographic, channel and package distribution, and mental availability via a highly effective brand building campaign, increased media investment, and optimize 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 second 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 a 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. Second, the brand is underdeveloped, with Black and Hispanic and Latino consumers, but we’re now seeing large household penetration increases as a result of our marketing efforts. Third, there’s still ample room to expand distribution across channels and packages where other FMB competitors have far more presence.

This includes on-premise where Twisted Tea is close to a 60 share of FMBs and has driven the fifth 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. Fourth, there’s opportunity to widen the brand’s presence in underdeveloped markets from Florida to Texas to California. Fifth, we’re still in the early stages of Twisted Tes White’s national launch and the sales for points accelerating and exceeding our expectations, then it’s proven 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 highly developed markets, and we’re seeing some early success.

Lastly, we recently announced we’re testing the higher ABV version of Twisted Tea in select markets this summer called Twisted Tea Extreme 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, easier to shop pack chain 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. We now have full distribution of the new Truly Hard Seltzer packaging, and our ad campaign has been running for six weeks.

Our two 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 second quarter, 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 have received a strong in-store wholesaler and retailer support. 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 summer and into the fourth quarter. For example, our Lightly Flavored lineup of variety packs has gained both volume and dollar share of Hard Seltzer in the past four and 13-week time frames, while 24-ounce single-serve gained 0.6 share points in the second quarter, driven by our lead style, Wild Berry, which grew 16% in the last four weeks.

Lemonade and Fruit Punch share losses stabilized during the second 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% of the branch share losses year-to-date. These overlaps will continue to moderate through the summer and drop off in the fourth quarter. While we’re disappointed that we’ve not yet stemmed Truly share losses, we believe we 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. As evidence of our confidence in our direction, we’re increasing our media spend for the balance of the year and will ensure that Truly is on air every single week.

We’re only eight weeks into the refresh, so we need to keep pushing hard with the initiatives we’ve put in place. We’re encouraged that Truly maintains the second highest sales per point in Hard Seltzer, 52% more productive than the number three brand, and the third highest sales per point in all of Beyond Beer. So there remains a strong consumer base to build upon. Of note, Truly share position has improved by 1 point from March to June, so we’re trending in the right direction. 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 in all the occasions with refreshment, sessionability and variety intersect. While maintaining Twisted Tea’s double-digit growth and improving Truly’s trajectory our top 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 Remaster Boston Lager campaign and our seasonals, in addition to our non-alc portfolio, including Just the Haze and the newly released, Gold Rush pilsner, which grew 94% in dollars in the second quarter in measured on-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 second quarter based on Beer Institute numbers. While Truly makes a play in vodka and tequila-based seltzers, Dogfish Head is gaining a foothold in the traditional can cocktail segment and grew volume approximately 81% in the second quarter across all channels.

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 three 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 second quarter. We continue to review our contracts with our raw pack suppliers with the aim of adjusting these to be more reactive to changing demand. The 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 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. The final category is ways to network optimization. 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 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 began to see some benefit in the second quarter, 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. 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 depletions trends for the first 29-weeks of 2023 have declined 6% from 2022. We’re reiterating our shipments and depletions expectation of down 2% to down 8% for the full-year 2023. Where we’ll land within that range is dependent on a variety of factors, including the overall economic environment and consumer demand balance of the year. Now I’ll hand it over to Matt to discuss second quarter financials and our full year guidance.

Matt Murphy: Thank you, Dave, and good afternoon, everyone. As Jim and Dave mentioned, second 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 2.3 million barrels, a 4.5% decrease from the prior year. We believe distributor inventory as of July 1, 2023, averaged approximately three 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.

Our second quarter gross margin of 45.4% increased 230 basis points from the 43.1% margin realized in the second quarter 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 second quarter decreased $5.5 million or 3.6% from the second quarter 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 $6.1 million or 15.6% from the second quarter of 2022, primarily due to increased consulting and legal costs and higher salary and benefits costs. For the second quarter, we reported a net income of $58 million or $4.72 per diluted share, compared to prior year net income of $53.3 million or $4.31 per diluted share.

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 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% and 3%. Full-year 2023 gross margins are expected to be between 41% and 43%. Our full-year investments in brand spend within advertising, promotional and selling expenses are expected to increase between $20 million and $40 million, which is an increase from our previous guidance range of a decrease of $5 million to an increase of $15 million.

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 28%. 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 and shipments to decrease between 1% and 7%. Second, the 53rd week overlap is expected to negatively impact fourth 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 fourth quarter. Therefore, we expect year-over-year gross margin improvement to be lower in the fourth quarter relative to earlier quarters. Turning to capital allocation. We ended the quarter with a cash balance of $208 million and an unused credit line of $150 million, which allows us to invest in our base business, fund future growth initiatives and return cash to shareholders through our share buyback.

For the full-year, we expect capital expenditures of between $100 million and $140 million. These investments will be primarily related to our own 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 $52.5 million. As of July 21, 2023, we had approximately $307 million remaining on the $1.2 billion share repurchase authorization. I will now pass the call back to Dave for some closing remarks.

Dave Burwick: 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 third quarter call. I’d like to take this opportunity to thank Matt for his leadership of the finance team and his strong partnership with me during the transition period. 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. And now we’ll open the line up for questions.

Q&A Session

Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question is from Nik Modi with RBC. Please proceed with your question.

Nik Modi: 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 I just want 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.

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

Nik Modi: Yes. Fall and spring because I know sometimes these discussions tend to overlap so…

Dave Burwick: Yes. Okay. I mean, spring, it’s a little early for spring, so we’re not there yet. And I think it won’t be until really like after Labor Day that 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. We’re not hearing back from retailers if there’s anything significantly different that’s going to happen this fall. We do know — I mean as it relates to us, we’ve 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 force 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 — again, based on our conversations we’ve had with retailers up to this point.

Nik Modi: Great. 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 there was some shifting of consumption, especially with older 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. I just wanted to get your state of the union on kind of how you think about the promotional environment right now?

Dave Burwick: Yes. I think — I mean, if you look at the Circana 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 it’s been in prior years. I think you’re right, Nik. 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 two or three years. And the gap actually on the other end to RTG cocktails has actually shrunk. 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.

Nik Modi: 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.

Vivien Azer: 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 million in incremental A&P at the midpoint of the range. So recognizing the top line was expected to improve in 2023, 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, $20 million incremental A&P, just at 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 incremental color there would be helpful. Thank you.

Matt Murphy: Sure. Hi, Vivien, it’s Matt. We feel good about our overall guidance certainly on the top line, the ranges 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. If you extrapolate those out, as Twisted gets to be a bigger part of the mix, you get overall company decline of 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, that range was still appropriate.

As it relates to margins, we were at the 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. And then on the operating expenses, just the 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 million, 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 AT&S, we exclude the freight component. So I think the freight component will get you to reconcile that difference. Does that help?

Vivien Azer: That helps a lot. Thank you very much for that clarification. And just quickly as a follow-up, Dave, as you enumerated the key three strategic priorities in terms of driving medium- to long-term gross margin improvement, have any of those come in quicker than expected? Thanks.

Matt Murphy: I’m sorry, which part? I’m not sure I caught that question. Which priorities are you referring to?

Vivien Azer: Sorry. Yes. So you’ve laid out kind of on the three 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.

Matt Murphy: Sure, Vivien. I’ll take it. It’s Matt again. The three key items, the procurement savings, the brewery performance, the ways to network optimization, we talked about those as sort of equal opportunities that get us from around low 40s to upper 40s over the three to five 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 thought we’d see it hit. 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 both brewery performance and ways to network optimization are a little longer term, but we’re happy to see that they’re not negatively impacting the margins at this point.

Vivien Azer: Absolutely. That’s really helpful. Thank you.

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

Rob Ottenstein: Thank you very much and congratulations to you and your team on another great result in the Tamarron 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 two. And question — I’m sorry, question number one, long day. And question number two 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.

Dave Burwick: I could take, one, I guess the first one, and then…

Jim Koch: I’ll take the second.

Dave Burwick: Matt and Jim can maybe — Jim may have a point of view on the Bud Light. 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 hard core light beer drinkers. So we’re not shocked that is going basically more back into light 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 Robinson, that number, so I think like according to Serkana, like, call it, 23% volume decline year-to-date on hard 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 Jim, I don’t know if you have any other thoughts on that? If not, we can — Matt can take number two.

Jim Koch: I’d just second what you said. It seems like the beneficiaries of the Bud Light issue, I’ll call it, our near end, Coors Light, Miller Lite, even Patts, Yeungling, so they’re the near-end substitutes. And we never had that much interaction with the hardcore light beer drinkers with Truly and I think with the best of hard seltzer.

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

Rob Ottenstein: And then just one other on the margins. Did the 4th of July timing impact the margins in the second quarter at all?

Matt Murphy: No. A little bit of benefit on volume in shipments, but no impact on margins.

Rob Ottenstein: Terrific. Thank you very much.

Operator: Thank you. Our next question is from Nadine Sarwat with Bernstein. Please proceed with your question.

Nadine Sarwat: 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 and attempts to drive improved performance, although it does look like the brand is still struggling. When we look at tracked channels, 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

Matt Murphy: Hi, Nadine. 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% capacity, but we try to keep them full and well over 90%. So that’s the model. And then what — the excess goes to external. And that external, given where we were from a volume perspective a few years ago and the expectations we have, 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. We won’t need to enter new contracts or go out and try to contract for additional capacity.

David Burwick: Nadine, okay. Dave here. I’ll try — I’ll answer your second one. I think, I mean the intent of the Truly 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 really make it easier to shop and easier to find and deliver those refreshment cues, the new ad campaign. We are stepping up the ads. We have stepped up the advertising investment. And now we’re — 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. The effort thus over the last, call it, eight to 10 weeks, really in market has been to focus on those three core, 12 packs, the 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 eight weeks or so, and I guess I’ll try to repeat what I said in the script, but those core three 12 packs are actually growing share. For the last four weeks, the last 13-weeks, they’re growing share, which is important.

It’s very important. Also, if you look at our single-serve and convenience is Twisted 24-ounce is actually gained share and gained share really since April. And so part of that was really actually fixing the mix. So if we had three SKUs in a convenience store, two of them would be bold in favor, one would be wider. Now it’s two light, one bold. 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 against this April. So we’re up — we gained about a share point. We still have a significant delta between us and number three. So we’re 18 share points away from the number three player, which is about exactly where it was a year ago at this time. And 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 of loss, okay?

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 the — for those reasons and others, we believe that we will continue to make progress, and we look at 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 fourth quarter based on all of these initiatives.

Nadine Sarwat: Understood. Thank you very much.

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

Bonnie Herzog: Alright, 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 improve gross margin performance that you’ve mentioned, back into your business in the form of incremental media spend? Or do you plan to let some of those benefits flow to the bottom line?

Matt Murphy: Bonnie, it’s Matt. I would say 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.

David Burwick: Hey Bonnie, this is Dave. If I could just build, just before you ask — or you’re going to ask another question, I can tell. Before you do, I mean, 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 and just got the momentum. It’s got a great message. And there’s still a long way to go in terms of household penetration and brand awareness, et cetera. 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, et cetera, to make sure we get the most — the best return we can on this investment. But we really believe now is — and literally like right now, not in September, but now is the right time to do it, and that’s why we’re moving forward pretty quickly with this investment.

Bonnie Herzog: No, that’s helpful. And definitely, I understand the confidence. And so in the 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 some of the green shoots, but just maybe in total. 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 on that? And if that’s changed at all? 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.

David Burwick: Okay. So I think the first part of that question was just more about how Truly’s changed from — I think from a share perspective, we’re seeing — as I said before, we’re seeing that core — the core business of 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 Margarita, which will diminish over time. So in terms of total volume change, you could look at [Sarcone] (ph) and Nielsen, it probably hasn’t changed much between Q2 and Q1. I think for the balance of the year, we’re not — based on the guidance, we’re not expecting it to change much either necessarily, we’re not.

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 will end up. And it’s something that we would be between — we’re not going to be at the category growth rate. We’re going to be straight with you. Because that’s — 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 fourth quarter, as I mentioned, we should be at least holding share across the board ideally in the fourth quarter.

But again, that’s a little bit aspirational. It depends on where the numbers come in, but we’re not expecting like a big — a huge change in the second half in terms of Truly depletions.

Bonnie Herzog: Right. So that’s what’s baked in. But then like you mentioned, as you step up spending, maybe, right, behind Truly?

David Burwick: Well, it’s — it is. It’s kind of an — think about it as an insurance policy and a way to help maybe to nudge it, 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.

Bonnie Herzog: 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.

Eric Serotta: Hey, good afternoon, everyone. A couple of questions. Starting with a follow-on to Bonnie’s on your initial expectations. If I remember correctly, the expectation 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 funds for Twisted change? Are you still looking for a material slowdown there? Or do you think it could maintain this kind of momentum into the second half?

David Burwick: Okay. guy, I think, I mean, for the first half of the year, I would say that Twisted Tea’s exceeded our expectations of growth. So we don’t foresee and don’t — we’re not planning that is going to sustain the same growth rate balance of the year. We don’t see a material slowdown. It 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 fourth quarter last year, the brand decelerated. So 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 we can’t sustain — it’s unlikely to sustain this 30% growth rate on a larger and larger base like this. Does that make sense?

Eric Serotta: Yes, that’s helpful. And then I 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’s half done and you’re above the midpoint to the first half. So I guess maybe can you talk about areas where you have visibility and where you maybe don’t as it pertains to the short-term margin picture? And then somebody has got to ask about the confidence in the longer term getting back to the high 40s, low 50s in gross margins. So figures, I’m not turning 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?

Matt Murphy: Eric, it’s Matt. Thanks. Just overall, we’ve been through — yes, this is the best margin we’ve had in 2 years. 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 8 quarters. So it’s a great sign that our plans are working. And we’ve talked on after Q1, it was — we’ve 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. 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 one quarter.

So we feel like we — the 42 that we demonstrated for the first-half, we can continue that for the second-half of the year. But we’ve had a lot of surprises in the past eight months, and we’re just trying to be as prudent and continue to demonstrate some slow progress in this area.

Eric Serotta: 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.

Brett Cooper: Good evening. Just a question on Truly and how 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.

Matt Murphy: Okay, thanks, Brent. We do think — I mean I think Truly can play where sessionability, refreshment variety all intersect. And so that’s why we’re in — 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. 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 preparing maybe overextending Truly. And I think we would take that learning certainly with us to Twisted Tea. I mean, Twisted Tea, we have a lot of room to extend.

We’re testing the high alc version of that. We’re doing that very carefully. And we’re not — we don’t know which way it’s going to go. 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, do you want to add to that?

Jim Koch: Yes. I mean one of the unique features of Hard Seltzer that 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. 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 fewer of them in 23-years than we did in the first three years with Truly. So there are some lessons in each of them that apply, I believe, differently to the two. They’re both an FMB type brands, but the consumer base is much tighter in what they’re looking for with Twisted Tea.

Brett Cooper: Great. Thank you.

Operator: Thank you. Our next question is from Peter Grom with UBS. Please proceed with your question.

Brian Adams: Hey, guys. This is Brian Adams on for Pete. So first, apologies if I missed this in your response to Vivien or one of the other responses for that matter. But are you able to give us a rough like numeric sense at how much of a benefit you’ve got in 2Q margin from those procurement savings? Just trying to think about how we should think about those savings in the downhill and looking further out?

Matt Murphy: Yes. Hi, Brian, it’s Matt. You probably haven’t a chance to look at the Q, but I think we called it out as about an $8 million benefit in the first-half of the year. So that’s what we’ve seen, and it offset. As we’ve said, our inflationary impacts. So that’s the details.

Brian Adams: 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 bucket in terms of the size of Truly versus the size of Twisted Tea have changed pretty meaningfully here over the last couple of years. So it’s a bit of a Boston Beer one-on-one question. But is there a demonstrably different gross margin you see in those products? Or are they pretty comparable? Thanks.

Matt Murphy: Yes, thanks. It’s — they have different factors for Truly. There’s more variety packs for Twisted Tea. There’s more 24 ounce. So 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.

Brian Adams: Awesome. Thanks, guys.

Operator: [Operator Instructions] Our next question is from Filippo Falorni with Citi. Please proceed with your question.

Filippo Falorni: Hey, good afternoon, guys. Question on Twisted Tea. Clearly, this year, you’ve made significant gains from a distribution standpoint. As you think about the fall’s shop-space reset, what kind of visibility you have that you can get further shelf space next year, particularly as competition heats up in the hard tea category and with new entrants and new launches have been announced?

Matt Murphy: Yes, 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. And I think — I don’t think we compete more with more than just the other key brands. It’s really within FMB, 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.

Filippo Falorni: Got it. Okay. And then on kind of the extension of Truly, can you talk about like how Truly Vodka Soda, how the launch has gone relative to your initial expectations? And like maybe give us some more color on the tequila experimentation with Truly? And like when expected to launch and your initial expectation for that as well?

Matt Murphy: Was the first question about the — was it about the margin? Is that what the question?

Filippo Falorni: No. No, Sorry, I was asking about Truly Vodka Soda, the performance relative to your expectations and then maybe more color on the tequila?

Matt Murphy: Yes. Well, I think if you look at the — on the vodka, it’s about — it’s sitting about a 3 share of Vodka-based spirits. The number four brand, it’s a different channel. It’s independence. It’s 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 two new variety packs we’ve put in the marketplace just recently. So we feel great about the product. 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 to get there.

But 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. And if you’re in Rhode Island or Delaware or Minnesota, or L.A. or San Diego, you can find it. And again, it’s just this belief that this brand — and I think Brent was asked 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 test a little bit more to get something to its optimum state before we go national, and that’s what we’re doing right now.

So we’ll see how it goes. And depending on the results on 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. We’re committed to it. And we have — of course, we have Dogfish Head out there doing quite well. And — but 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.

Jim Koch: No. Obviously, a crowded and confused space with a lot going on. 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 certainly done extremely well, but after High Noon, the volumes are quite small. And I — it’s just all these new brands being thrown at it. And even from big name spirit 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 cause of death. So there will be a big shape out, I think, next year.

Filippo Falorni: Thanks, guys.

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

Jim Koch: Thank you. We look forward to [Technical Difficulty] months with hopefully some improvement in a bunch of different things. I hope we can continue, and we’ll see you in three months.

Operator: This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation.