Title

Presentation

The Boston Beer Company, Inc. misses on earnings expectations. Reported EPS is $-0.73 EPS, expectations were $-0.31.

Operator: Greetings and welcome to the Boston Beer Company’s First Quarter 2023 Earnings Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mike Andrews, Associate General, Counsel and Corporate Secretary. Thank you. You may begin.

Mike Andrews: Thank you. Good afternoon and welcome. This is Mike Andrews, Associate General Counsel and Corporate Secretary of the Boston Beer Company. I am pleased to kick off our 2023 first quarter earnings call. Joining the call from Boston Beer are Jim Koch, our Founder and Chairman; Dave Burwick, our CEO; and Matt Murphy, our Chief Accounting Officer and Interim CFO. Before we discuss our business, I will start with our disclaimer. As we stated in our earnings release, some of the information we discuss and that may come up on this call reflects the company’s or management’s expectations or predictions of the future. Such predictions are forward-looking statements. It’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 will begin my remarks this afternoon with a few introductory comments and then hand over to Dave who will provide an overview of our business. Dave will then turn the call over to Matt who will focus on the financial details of our first quarter results as well as our outlook for the remainder of 2023. Immediately following Matt’s comments, we will open the line for questions. As we mentioned on our February call, our plans for 2023 reflected comparatively lower first quarter volume versus the balance of 2023 due to the timing of our Truly marketing plans and lapping our Truly Margarita launch in the first quarter of last year. Our first quarter total company depletions decline of 6% was in line with our expectations.

In measured off-premise channels, Twisted Tea continued its strong dollar growth, up 34%, which was offset primarily by declines in Truly. Dave will later take you through the details of our second quarter plans for Truly, which we expect to help improve the brand performance starting in the second half of this year. Meanwhile, we are implementing the operational plans we discussed on our last call to adjust to a lower volume environment. This includes simplifying our business to reduce needless complexity and improve margins, as well as adjusting our cost structure to be more closely in sync with our volume expectations. These operational plans are on track and should begin to impact our margins positively in the second half of the year. We are focused on keeping the strong momentum behind Twisted Tea and improving our Truly trends while continuing to invest broadly across our entire portfolio and in new innovation, with the goal of returning our company to long-term sustainable growth.

We continue to believe that the Beyond Beer category, where we have an advantaged portfolio, will grow faster than the traditional beer market over the next several years. We expect the operational changes we are making this year, combined with our history of innovation, strong brands and our top-rated sales force will help lead us to long-term success. Our strong balance sheet enables us to continue to invest in our brands and has allowed us to repurchase $27 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 evening. As Jim mentioned, our first quarter volumes were in line with our plans. Our financial results during the first quarter were negatively impacted by our decision to rebrand and relaunch Truly Vodka Seltzer as Truly Vodka Soda while expanding its flavor assortment and by a decision to make a nonrecurring payment to a third-party contract brewer that we expect will benefit our supply chain costs going forward. While both decisions resulted in a charge that impacted first quarter profitability, they’ve set us up for greater success and profitability for the balance of the year. Matt will discuss the financial results in detail in his remarks, while I’ll focus my commentary on our operating performance.

Our strategic priorities remain unchanged. We’re focusing our resources on sustaining Twisted Tea industry-leading growth and improving Truly volume trends, while simplifying our business to improve our gross margin. We’re continuing to invest in all of our brands and our top-ranked industry sales force. I’ll now provide some color on our brands. Twisted Tea accelerated its growth trajectory in the first quarter with 34% dollar sales growth while adding $3 share points and expanding its overall share leadership and is now 27% of total FMB dollar sales in measured off-premise channels. The robust demand is a result of an effective brand-building campaign, our increased investment in media during Q1 and additional retail program focused on the Super Bowl that significantly increased our display execution, better distribution of 12 packs and improved service levels versus the first quarter of last year.

In addition, while category on-premise sales are still nascent, Twisted Tea holds a 50% volume share of FMBs within on-premise and has delivered 82% of the on-premise FMB volume growth year-to-date, according to the Nielsen CGA consumer survey. We’ll continue to increase our total marketplace spend to broaden Twisted Tea’s still narrow consumer base and advance its favorable position within Beyond Beer. We remain confident that Twisted Tea will sustain a strong double-digit growth for the remainder of 2023 for a number of reasons. First, there’s upside in growing brand awareness and household penetration; second, there’s still room to expand package distribution across channels, including on-premise; third, the brand is making progress in bringing new drinkers, such as Latinos and African Americans, into the fold; and fourth, there’s opportunity to widen the brand’s presence in underdeveloped markets, such as California and Texas.

Additionally, we’re in the early stages of launching 110-calorie Twisted Tea Light nationally. And repeat is very strong, while it’s proven to be highly incremental to the Twisted Tea portfolio. Meanwhile, as announced on our February call, we’re launching a major advancement of the Truly brand in the second quarter that includes a simplified product lineup, real fruit juice, new easy-to-shop packaging, more motive- versus product-centric brand communication, elevated media spend with a focus on digital and social media, and aggressive marketplace support to improve product availability and visibility. So far, over the past 4 months, we’ve seen sequential improvement in our core variety packs performance as market share has stabilized and sales per point has improved, while more recently, the total Truly brand has gained share at almost half of the 63 markets measured by Circana, formerly known as IRI, in the past 4 weeks.

These trends have been obscured by the lapping of the Truly Margarita launch from 2022 and the subsequent discontinuation of Truly Tea. As the year progresses, these headwinds will be mitigated while our Truly refresh takes hold in the market. Despite the rough going, Truly has the second highest sales per point in Hard Seltzer and the third highest sales per point in all of Beyond Beer, so there remains a strong base to build from. We expect to have full distribution of the new Truly packaging and a new ad campaign right before Memorial Day, and our new Truly Vodka Soda packaging and SKUs will hit the market in early June. Additionally, we have a special Red, White and True lightly flavored variety pack limited time offer tied to the U.S. soccer team hitting the market in the next few weeks and have received a lot of wholesaler and retailer support behind this initiative that should help the brand gain displays and inventory heading into the summer.

While maintaining Twisted Tea’s double-digit growth and a proven Truly trajectory are our top priorities for the year, we have a broad portfolio, and we’ll continue to support and build out our smaller brands. Samuel Adams is holding its own in a difficult craft beer category, and we’ll continue to invest behind our new remastered Boston Lager campaign and our Seasonals, in addition to our non-alcohol portfolio, including Just The Haze and the newly released Gold Rush pilsner, which have grown 66% in dollars so far this year in measured off-premise channels. While Truly Vodka Soda makes a play in vodka-based seltzers, Dogfish Head is gaining a foothold in the traditional canned cocktail segment and grew volume approximately 70% in the first quarter across all channels.

We’ll support other innovations, including the launch of Jim Beam Kentucky Coolers and the continued rollout of Hard Mountain Dew, but expect these to be smaller volume contributors in 2023 as they ramp distribution and find their audience. Turning to our supply chain. As we’ve previously discussed, we’re in the process of modernizing our supply chain through investments in equipment, capacity and improved systems and processes. I’d like to broadly discuss the 3 categories we’re focused on to drive improved margins. First, procurement savings. We have targeted savings initiatives across multiple areas, including raw materials and packaging. We’re also reviewing our contracts with our raw pack suppliers with the aim of adjusting these to be more reactive to changing demand.

Second, brewery performance. While we expect to always have a mix of internal and external production, we’re focused on moving volume back to our internal breweries, where possible, given our production cost advantage. 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. Third, waste and network optimization. We have initiatives to optimize our logistics, which will reduce freight and warehousing costs over time. Also, as we discussed on our last call, we’re currently implementing systems to improve our forecasting and inventory management, which we expect to reduce inventory obsolescence over the balance of the year.

We have multiyear savings plans across each of these categories, which we expect to generate significant long-term gross margin expansion. While it will take time to realize the full benefit, we do expect to begin to see some impact in the second half of 2023. We’re also closely managing our operating expenses. We expect to use the cost savings that these efforts will generate to support increased brand spend while – and within brand spend, both converting nonworking to working dollars and shifting our mix from traditional to digital and social media. Turning to guidance. Our depletion trends for the first 16 weeks of 2023 have declined 6% from the comparable period in 2022. We’re reiterating our shipments and depletions expectation of down 2% to down 8% for the full year 2023.

Where we land within that range is dependent on a variety of factors, including the overall economic environment and consumer demand in our upcoming peak season. Now I’ll hand it over to Matt to discuss first quarter financials and our full year guidance.

Matt Murphy: Thank you, Dave. Good evening, everyone. As Jim and Dave mentioned, first quarter volumes were in line with our plans, and we are in the process of implementing our strategies to invest behind Twisted Tea while enhancing the Truly brand proposition and improving our supply chain. Some of these actions resulted in charges, which impacted our first quarter financial performance, which I’ll discuss later in my remarks. Depletions for the quarter decreased 6% from the prior year, reflecting decreases in our Truly Hard Seltzer, Angry Orchard, Samuel Adams and Dogfish Head brands, partially offset by increases in our Twisted Tea and Hard Mountain Dew brands. Shipment volume for the quarter was approximately 1.6 million barrels, a 7.6% decrease from the prior year.

We believe distributor inventory as of April 1, 2023, averaged approximately 5 weeks on hand and was at an appropriate level for each of our brands. Our first quarter 2023 gross margin of 38.0% decreased from the 40.2% margin realized in the first quarter of 2022. This decrease was primarily due to higher inventory obsolescence costs and higher brewery processing costs, partially offset by price increases. During the first quarter, we recognized two charges as we implemented our operating plans. The first is higher Truly inventory obsolescence costs primarily related to relaunching Truly Vodka Seltzer to Truly Vodka Soda, and the second is a nonrecurring payment to a third-party contract brewer that we expect will benefit our supply chain costs going forward.

Together, these two charges had an unfavorable impact of 210 basis points on our first quarter gross margin. Advertising, promotional and selling expenses for the first quarter of 2023 decreased $5.2 million or 4% from the first quarter of 2022, primarily due to decreased freight to distributors, partially offset by an increase in brand investments. General and administrative expenses increased by $4 million or 10.1% from the first quarter of 2022 primarily due to increased consulting costs. For the first quarter, we reported a net loss of $9 million or $0.73 per diluted share compared to a net loss of $2 million or $0.16 per diluted share in the first quarter of 2022. This change between periods was primarily driven by lower net revenue and gross margins, including the charges I discussed earlier, partially offset by lower operating expenses.

Turning to guidance. As a reminder, the first quarter is our smallest volume quarter of the year, with the second and third quarters including the seasonally higher shipment and depletion months. Based on information of which we are currently aware, we are reiterating our full year 2023 guidance range of shipments and depletions down 2% to 8% and earnings per diluted share of $6 to $10. This projection is highly sensitive to changes in volume, particularly related to the hard seltzer category, supply chain performance and inflationary and recessionary impacts on consumer spending. We project increases in revenue per barrel of between 1% and 3%. Full year 2023 gross margins are expected to be between 41% and 43%. We continue to expect to cover inflationary cost increases through pricing.

Our full year 2023 investments in advertising, promotional and selling expenses are expected to change between a decrease of $5 million and an increase of $15 million. This does not include any changes in freight costs for the shipment of products to our distributors. We estimate our full year 2023 effective tax rate to be approximately 28%. Finally, as you model out the remainder of the year, please keep in mind these factors. First, our guidance on depletions and shipments includes the estimated negative impact of approximately 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%. Also, first half 2023 shipments are expected to be at the low end of the full year guidance range, primarily due to lapping last year’s Truly Margarita launch.

Lastly, year-over-year margin improvement is expected to be weighted to the second half of the year based on volume expectations, the expected timing of cost reduction efforts and the timing of obsolescence expense recognized in 2022. Turning to capital allocation. We ended the quarter with a cash balance of $123 million and an unused credit line of $150 million, which allows us to invest in our base business, fund future growth initiatives and return cash to shareholders. In 2023, we expect capital expenditures of between $100 million and $140 million. These investments will be primarily related to our owned breweries to build capabilities and improve efficiencies. During the period from January 3, 2023, through April 21, 2023, the company repurchased 82,000 shares at a cost of $27.5 million.

As of April 21, 2023, we had approximately $62.8 million remaining on the $931 million share repurchase authorization. We will now open up the call for questions.

Operator: Thank you. Our first question comes from the line of Nik Modi with RBC. Please proceed with your question.

Nik Modi: Thanks. Good morning – sorry good afternoon, everyone. It’s been a long day. I guess this question is for Jim. I mean, if we take a step back, and we’ve had a lot of moments over the last decade plus of new segments kind of emerging and then demerging, if you will. And Jim, I just – I’d love your thoughts on kind of how you look at the Beyond Beer space as it is today? And kind of where do you think the biggest pockets of opportunity will be? And I ask this within the context of some of the experiments that you have in the marketplace right now, as you kind of test it on the innovation model?

Jim Koch: Yes. Thanks, Nik. I guess my view of over the long-term somewhat reflects the past. I mean, certainly in the last 5 years, traditional beer has not grown, but the beer business has been reasonably healthy. And the decline in traditional beer has been offset, in some years more than offset, by the emergence of what people call Beyond Beer or to me it’s a fourth category because it’s not just Beyond Beer, it’s beyond wine, it’s beyond hard liquor. And it’s an opportunity for brewers like us to come out with new products and new flavors, and that’s certainly driven our business for the last 10 years and especially last 5. So and the projections for this sort of category, I think sometimes is called ABA, alternative – maybe AAB, alternative adult beverages, the projections are that it will grow sort of in the low to mid-single digits.

And I think that’s true, consumers are responding to the new entries. And there is certainly a tidal wave of new products coming from literally everywhere. It’s not even just traditional alcoholic beverage producers, soft drink producers and all the way to energy drink producers. So it’s a receptive market. There is a flood of products, only some of them will succeed. And that category represents the vast majority of our business. So I guess the way I look at our growth opportunities are two things: one, holding our share of this growing Beyond Beer category; and then second, innovating on top of that with new products. And that is a core strength of Boston Beer Company. And it does mean that in innovating most of our products do fail.

So we feel like we need a fairly robust innovation pipeline to find the next Truly, the next Twisted Tea, and we feel like our credentials as a craft maker of high-quality products, with a lot of care and attention into the ingredients, the quality of the taste, and a respect for the consumers and for the makers of these products, which is part of sort of the craft ethic, that coupled with a very, very effective sales force and a great distribution network, will give us the same kind of advantages going forward that we’ve enjoyed in the last 5 or 10 years.

Nik Modi: That’s very helpful. And if I could just ask just a quick follow-up on some of the contract terminations. Dave, can you just provide any context on – do we have any other SKUs that we need to worry about over the next couple of quarters? Or do you think a lot of these kind of termination or one-time contract costs are out of the system?

Matt Murphy: Nik, it’s Matt. Just we’ve been through a cycle here with the Truly declines. And we’ve been working together with our partners to find the best balance between our requirements and the capacities are – that they are holding for us. We’ve been able to make some contract modifications. We’ve reduced our shortfall fees quite substantially as we’ve gone and worked with those partners. In the first quarter, we did have a charge that’s included in the non-recurring items of 210 basis points. We thought it was the right business decision. It sets up our supply chain better going forward, more efficient. So we feel good about that. But we feel like we’re getting through the cycle where we have more consistency as far as the volumes of the company. We’ve been at the 6% volume decline now for – since the beginning of 2022. So from a planning perspective, everything is getting easier, and we feel good that we’re getting close to the end.

Nik Modi: Great. Thanks. I will pass it on.

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

Rob Ottenstein: Great. Thank you very much. Two questions. One, Benj put out something yesterday in which he’s hearing about a lot of price rollbacks, particularly led from the ABI side, but potentially having an impact on the industry as a whole. So I wondered if you could kind of just talk big picture about the beer industry in terms of pricing dynamics and demand at the start of the year, which seems a little rocky. That’s question number one. And then question number two is more about, from an organizational perspective, been a lot of bumps, a little bit of rollercoaster recently. And just sort of how the organization is doing, the sales force morale. Is there unusual attrition or everybody pretty much onboard and rolling in the right direction? Just kind of a sense of how you’re kind of keeping things together given kind of the unprecedented ups, and then more recently downs. Thank you.

Matt Murphy: Thanks, Rob. I’ll start, and Jim, you can jump in if you want as well. On the pricing front, I mean, it looks like the pricing increases were starting to lap last year’s pricing increases, so they are moderating. But I think year-to-date, it’s like 6% of pricing which gives yielded 3% volume declines. And I think everybody’s being a little bit careful about this because it’s still an unsettled environment. Where we go with inflation, where we end up – do we end up with a recession? Is it hard? Is it not? I mean, our goal is to be competitive. So we’re obviously not price leaders in the market. We’re going to make sure we’re competitive across the board. And that’s – we’re looking at 1% to 3% this year, which is less than what we did last year.

And we – right now, we’re through the first quarter, we’ve achieved toward the upper end of that, and we will keep going down this path as long as the consumer seems to be responding okay, but if the whole category changes, we would obviously have to look at that, but we have no intent of doing anything different than what we’ve already stated from a pricing perspective. As it relates to the organization, I think, yes, we’ve been through some ups, we’ve been through some downs. I think this is a very gritty and resilient organization with a sales organization that is fired up. Obviously, selling a lot of Twisted Tea, but also getting very excited about what’s to come very soon with Truly. The brand teams, the rest of the organization, have been working really hard.

Over the last 6 to 9 months, we’ve been learning as much as we can about what’s happening in the category, not just Hard Seltzer, but in general, and we’ve been putting in place really quickly plans to grow again. And I think the Truly plans reflect some important insights that we’ve gathered over that time, and we’re excited to see them hit the marketplace, and that’s where the rubber meets the road. So I think we’re ready. Summer’s here, people are energized, and we’re ready to go. And we think that – I’d like to think that the worst is behind us, and we’re rolling ahead now into Q2.

Rob Ottenstein: Can you just – one of your greatest assets is your phenomenal sales force, which everybody tells me is the best, and retailers praise them to the skies. It’s an amazing group that you have. Can you just give us a sense of the – in a normal year, whatever that means, the compensation mix between fixed and variable?

Matt Murphy: Yes, it’s Matt. It’s pretty heavily weighted towards fixed. They are on sort of what I would call a normal bonus program. So mostly weighted towards fixed. And it’s a career. Our sales team, we draw our own from the beginning, people coming out of college, and they work for Boston Beer for 10, 20 years. All of our division directors have grown up in the industry. So it’s a unique culture, and we’re very proud of it.

Rob Ottenstein: Terrific. Thanks really helpful. Thank you.

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

Kevin Grundy: Great, thanks. Good evening, guys. I wanted to pick up on gross margin. So it was good to hear the focus. It was good to hear sort of the three key areas of improvement. Just kind of picking up on this, so a few questions. Number one, is the low to mid-50 gross margin target that Frank had previously spoken to, is that still the right ambition? Two, are you prepared to put a time line on achieving that goal? Is there kind of still too much uncertainty, with the top line deleveraged? And then three, do you feel like, at this point, the organization has the right incentive structure to achieve this goal? So sort of said differently, would the organization be well served by once you sort of embrace this prioritization that you’re pushing down this gross margin target to the right level? So your thoughts there would be helpful, and then I have a follow-up. Thanks.

Matt Murphy: Great. It’s Matt. I’ll take that, Kevin. So yes, absolutely, our goal is to get back to where we were sort of pre-COVID, 49%, 50% gross margins. That is – we wake up every day chasing that, and we feel like we’ve got a good path to get there. Always a little guarded about giving a time line given it’s heavily dependent on volume. And we’ve been through quite a swing in volume from just a few years ago being up 20% to being down 6% now since the beginning of last year. So volume is an important component. So that puts us a little more hesitant to set a specific time line, but we feel like it’s in the 3 to 5-year time horizon. The building blocks, as we’ve talked about, are – in Dave’s comments, are the procurement savings.

We’re making great progress on that. That’s probably going to be the first to hit brewery performance. We’ve got a lot of advantages as far as the mix swinging more from external to internal, allows us to control our activities at our breweries and get the benefit of fixed cost absorption and the efficiencies from our equipment. So we feel pretty good about that and then waste and network optimization as well. So we think we have the right incentive programs. It’s embedded in the company’s goals and management goals and all the way down to all the members of the supply chain and the rest of the organization. So we feel like we’re set up for success, but we have to prove it. We certainly didn’t prove it in Q1, but we feel like we will make progress for the rest of the year, and we will be able to show it.

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

Kevin Grundy: Got it. A quick follow-up, if I can. A question for Jim, I can appreciate the sensitivity of the topic, but nevertheless, it’s pertinent and it’s having a very real impact on what we’re seeing in the Nielsen data. So the social media fallout from one of your key competitors, it seems to be largely impacting competing premium light brands . Can you – Jim, maybe just thoughts on the duration of the impact, how this is going to play out and whether you see any impact on your portfolio, but really sort of the impact more broadly and the duration of it as best you can tell? Thank you for that.

Jim Koch: Honestly, this is something we haven’t seen before in beer. I’ve been making beer for 38 years. This is a first. It had a duration and a depth that it’s nothing that’s happened before. We’ve all had missteps. I’ve had in mind. And we’ve all recovered from them without any permanent damage. So I really don’t know what the duration is going to be. I was talking to some wholesalers today that told me that it’s real and it’s large. Even they don’t know how to predict this. And I don’t think it’s really had an effect on our business, our portfolio, kind of hoping it doesn’t because I don’t think anybody in the beer business wants to profit from the misfortune of others, but rather from the fruits of our own labors.

It seems to be mostly around below premium and premium beers, which we don’t really compete, but it’s closer to the heart of the ABI portfolio. So I’ve never seen anything like this. So this is a new world to all of us, maybe in this more polarized society that we’re seeing the effect of social media. This is going to be a new phenomenon, I don’t know.

Kevin Grundy: Okay. I appreciate the thought. Thank you, guys. Good luck.

Operator: Our next question comes from the line of Vivien Azer with Cowen. Please proceed with your question.

Vivien Azer: Hi, thank you. Good afternoon. Jim, I wanted to follow-up on a comment that you made earlier in the Q&A, acknowledging the deal possibly to try to find that next big win. I was wondering if you could just reflect back on the learning from the seltzer proposition that I believe you and Dean mutually agreed to pull from the market recently? Thanks.

Jim Koch: Yes. The biggest learning is you’ve got to try stuff to see if it gets traction. And we don’t – I don’t have a great deal of learning from it. It was something that really didn’t get consumer traction from the beginning. It’s certainly a very good brand. But I guess if I talk about learning from it, it probably would indicate that it’s hard to have a malt-based product that is liquor branded. So I think if there was some learning there, that would be it.

Vivien Azer: That’s interesting. Thank you for sharing that perspective. And then my follow-up question, Dave, for you. On the competitive landscape, you noted the wide range of outcomes to be seen in terms of the macro environment. I’m curious whether you guys kind of tweaked your approach to the new Truly launch. In other words, like have you leaned towards more single-serve, smaller pack sizes, just to kind of future proof the portfolio to the extent that economic headwinds become more intense for the consumer. Thank you.

Dave Burwick: Sure thing. I think we did not change pack sizes. We are focusing a lot on single-serve and convenience. And we’re spending a lot of money to really create excitement around the brand and around the category, to get people back to the category. But in terms of the economic environment, I think, again, we’re going to be – we will be competitive. So wherever the market goes, we will be there. But there was nothing like unusual we did as it relates to the Truly relaunch, in terms of a packet size or price point that we went for. Really, the focus is about building the brand and really focusing on the core flavors. We’ve been very successful and established a very strong number two position by launching a bold flavor innovation, one after another.

And we realized that successive innovations aren’t as incremental and actually light flavors of what people – is still the majority of the category, and that’s what people want. So we’re really trying to bring attention back to those SKUs and back to the fun – honestly, the fun and the lightness of drinking – of drinking hard seltzer.

Vivien Azer: That’s helpful. Thank you.

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

Nadine Sarwat: Hi, everybody. Thank you for taking my question. Circling back on the supply chain, after the contract termination you flagged in your prepared remarks, could you comment if you’re still underutilizing both internal and external capacity? And how do you expect this utilization to progress moving forward? And then just a second small housekeeping item. I see you called out the higher consulting costs in your G&A expense this quarter. Is this a one-off? Or is this an incremental expense that we can expect to see recurring in the coming quarter? Thank you.

Dave Burwick: Great. Nadine, I’ll take them in reverse order. The G&A is a one-off. So we won’t see that pop in any more in the quarters for the remainder of the year. And then just going to the internal versus external and capacity, so internal, we’re operating at full capacity is our plan. That’s where we get cost savings, that’s where we get fixed cost absorption. So we model out to be full. And then from an external perspective, we have a significant amount of capacity. We think of it at this point now as an insurance policy, as we work to turn the brand towards growth. And as we would achieve those growth targets, we would have the capacity and we wouldn’t have to go try to find it, which can be expensive, as you know.

From a progress perspective, what we disclosed and talked about in February was we were about 65%, 35% between internal and external. Last year, our plans that we have communicated are between our 70% internal and 30% external. So, we are continuing to try to get the benefit of internal production, but we value our co-man suppliers, and they are an important part of our strategy.

Nadine Sarwat: Great. Thank you.

Operator: Our next question comes from the line of Bonnie Herzog with Goldman Sachs. Please proceed with your question.

Bonnie Herzog: Hi. Thanks. Hi everyone. I have just had a few questions on Truly, if I may. I mean first, can you guys give us a sense of Truly’s declines in the quarter and maybe whether those declines accelerated versus Q4 possibly got a little bit better or less negative? And then you mentioned Truly Vodka Seltzer rebranding had a negative impact in the quarter, so could you quantify this as well as maybe costs associated with Truly reformulation? And then is there any – or should we think about any further expenses associated with those initiatives moving forward…?

Dave Burwick: Okay. Bonnie, you got cut off at the end, but I think we got the gist of your question. I am good. So, on the Truly front, I mean, the first we are lapping, the Margarita launch last year, Margarita was like a 51, 52 share. So, I think it was about over 25% of the total Truly business in the first quarter last year. So, it’s a big overlap for us, and then that will moderate over the course of the year. But I think that’s the biggest overlap we just went through, although there is still – as the year progresses, there is still some overlap there, but the whole intent of our – of the refresh program is really to get some attention, get some heat, and get some focus against the core three wider flavored variety packs.

In addition, we are going to have some limited time offers that come out over the course of the year. As it relates to the Vodka Soda transition, I mean basically, what we decided, we have got some learning at the end of last year. We got in the marketplace early and we saw some things that made us decide we wanted to give – to change the proposition. We are adding a couple of variety packs. We decided to name the Vodka Soda, it was better than Vodka Seltzer. So, with that came a decision do we take a write-off, do we take a hit in Q1 to get into the market in time for the summer, which is very important to take advantage of the opportunity, or do we not which we could have chosen to do, and then get into the market like end of the summer or beginning of the fall.

And we decided that it made – there is much more upside to like let’s make – we know what we need to do, make the changes, get out there and go. I am not sure if we are actually talking about the exact number or not.

Matt Murphy: Yes. Just to add on, it’s 100 basis points to 150 basis point impact in Q1 margin, if that helps, Bonnie.

Bonnie Herzog: Definitely helps, okay. And then I understand, Dave, what you mentioned about Margarita and the lapping. But is there a way or would you share with us if we were to exclude Margarita what the rest of Truly is doing? I mean are you seeing kinds of improvement year-over-year or even sequentially?

Dave Burwick: Yes, we are. Actually, I mean if you look at the Margarita overlap in Q1, add to the fact that we are discontinuing Truly Tea, that’s over half of the declines on the trademark right there. So, those are over half of the losses. In terms of what we are seeing, if you look at the core business and look at the very tropical citrus, those – when you look at those variety packs, how they performed over the past three months or four months, we are seeing stabilization in share. We are seeing – it actually even an increase in sales per point. And if you look at the former IRI Circana’s 63 markets that they track, almost half of them, the total Truly trademark has actually grown share in the last month, okay. So, these are green shoots now.

They don’t – they obviously haven’t laddered up to the top number yet, but we are starting to see some signs that were – of recovery from the base business as this overlap mitigates and as we start to do other things behind the brand to create some more excitement around the brand.

Bonnie Herzog: Okay. That’s helpful. And I might be pushing it, but just in the context of that for your guidance, remind us what your expectations are for Truly? If I remember, your guidance, I thought implied continued share loss, is that correct? And I guess you guys haven’t really talked about your expectations for the Hard Seltzer category or if in fact it still is 10% to 15% this year. So, any help there would help.

Dave Burwick: Okay. Yes. And I think it’s certainly that survey.

Bonnie Herzog: That’s it.

Dave Burwick: Okay. So, I think, yes, in terms of the categories, so we are thinking down mid-teens or so. Year-to-date and this is volume, I am talking volume. Year-to-date, I think it’s down closer to 20%. We are thinking mid-teens – mid to high teens is where it looks right now. If you include the vodka-based seltzers, which should be included, add like 5 points for volume, if you will. So, it’s 5 points – it’s made 5 points better than that. What was your – your other question was around – I’m sorry, what was the first part of the question?

Bonnie Herzog: To that, you just said your expectations for Truly, and what’s kind of factored in?

Dave Burwick: Yes. Thank you. So, to hit the midpoint of the range, right now, where Twisted Tea is at the moment and where Truly is, Truly doesn’t really need to change trajectory that much. So therefore, that would mean losing share, right. So, we factored that in. So, we came out with our guidance in the last call. We gave those numbers, presuming that we are not going to get much with Truly. We are obviously working to do a lot better than that, but we are not – it doesn’t have to happen. And honestly, I think if you look at the overlaps for the first half of the year, we are probably not going to gain share with Truly. However, we are hopeful that the things that we are doing to hit the market in May and June and carry through the summer, if those things take hold, then we are hoping that we will see better – we will see improvement on it from a share perspective and, obviously, volume perspective on the second half of the year.

Bonnie Herzog: Super helpful. Thank you so much for that color.

Dave Burwick: Sure.

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

Eric Serotta: Hi. Good afternoon everyone. First one is, talk a bit about the shelf space. Dave, you talked last quarter, I think about plans for Twisted space being up north of 30% this year. And you seem hopeful that Truly would hold shelf space as the long tail got that trend. Wondering, now that we are almost done with the first four months of the year, how has that played out versus expectations?

Dave Burwick: Sure thing. We have got – it’s a good time to have this conversation. We have a lot more information than we did in our last call. So, we probably have about information of maybe 70% of our customers right now on shelf resets. So, I will talk about Hard Seltzer first. Hard Seltzer looks like it’s going to go the category from about 10% of beer to maybe closer to 8% of beer. So, it’s going down, it’s – we had expected that given the performance of the category. Within the category, the good news for Truly is that Truly is going to go from about 25% of that, of Hard Seltzer, to about 27% of Hard Seltzer. The number one player is also gaining share of the segment. And those are the only two that are really gaining share as far as we know now of the segment.

So, again Hard Seltzer, in total shrinking, Truly and the other major competitor gaining share of the space. As it relates to Twisted Tea, Twisted Tea we are looking at close to 45% increase in space. So, we said 30% before. Actually, our original objectives have been exceeded so far with these customers. There is a lot of enthusiasm behind Twisted Tea. There is a lot of enthusiasm behind FMBs as well, in general, although Truly is almost – Twisted Tea is almost 30% of it. So, that’s a good thing, and we expect that will – not only will we get that increase in shelf space, but we are expecting to get with it future – more future display activity certainly than we did a year ago.

Eric Serotta: Great. And following up on that, certainly, your expectation for shelf space has gone up a lot. Last quarter, I think you spoke about your various scenarios within the depletion range for this year, both sort of the low end and the high end assuming a moderation in Twisted growth as we got into the second half. Given the higher shelf space gains and the momentum to-date, how are you looking at Twisted momentum for the year? What are you planning for? And where do you see growth sort of significant white space either from a channel perspective or in terms of getting the 12 pack on the shelf?

Dave Burwick: Okay. Yes, so I think – I mean we are very happy with Twisted Tea’s growth right now. And in fact, it has been accelerating since the fourth quarter of last year. I think we don’t – our expectations were that it doesn’t have to – let’s go back to the middle of the range. Twisted Tea can come off its growth rate and Truly can stay the same, as I just mentioned to Bonnie, and we are in the middle, right. We would like to obviously exceed the middle desperately, and we would like to do that. For Twisted Tea, I mean some of the tailwinds, the shelf space that I have mentioned, along with that will come feature and display activity. We have got a lot of media plans for the summer. Another thing that we haven’t really talked about is if you look at our service levels last year, we struggled last year.

I mean we want to get to at least 95% service levels. We didn’t hit that number on Twisted Tea last year until the first or second week of September. And right now, we are above that. So, we are going to be able to ride through the summer with much higher service levels than we did a year ago, and I think we are going to need them given what we are seeing. So, that’s a positive. The other thing I would say is that last year, if you look at the household penetration on Twisted Tea last year, it was about 15% growth in household penetration. In the first quarter, it was closer to 28%. So, we are seeing the acceleration of households. And the repeat rates are basically – they are still – they are up slightly. So, we have more households coming in rapidly, and their frequency is the same as those who have been in the franchise before.

So, these are all good things, that buoyed Twisted Tea. But there is a lot of – on the other hand, there is a lot of competitive activity out there. It’s a very large number on a growing base. So, can we sustain 30%-plus, I am talking about, to quote IRI, 34%. That would be wonderful if we could, but I think it’s going to be a challenge. But again, we don’t – we are not expecting to. We don’t have to. But if we can hold it, we will. And so everything is in place on Twisted Tea to do that for the balance of the year.

Eric Serotta: Great. I will pass it on. Thank you.

Dave Burwick: Thanks.

Operator: Our next question comes from the line of Brett Cooper from Consumer Edge Research. Please proceed with your question.

Brett Cooper: Thanks. Good evening. I will borrow one of Jim’s phrases from earlier with respect to a tidal wave of new products coming in to Beyond Beer. And I think much of that is coming into FMB and even into teas more specifically. And I just want to take that with some of your comments you have made in the past with respect to saturation causing problems in the seltzer market. So, how do you think about the impact of saturation on Twisted Tea? And is there a way that you can insulate or protect the brand from all of these products in that saturation? Thanks.

Dave Burwick: Thanks Brett. Jim, do you want to – I can jump in or Jim, if you have a pointed view of a 20-year history with Twisted Tea.

Jim Koch: Yes. We have seen over – it’s now like 23 years, 24 years, when Twisted Tea started getting successful. Everybody’s thrown competitors at it, from Mike’s Hard Tea to Anheuser-Busch has had several entries. I think they have like Hoop now, and probably a couple of more. So, I think my point of view is it’s a bit late to come into a category that’s so kind of owned by one product. It’s got 90%-some of the category, and the next product might have 5%. And when you go into a store, there is a shelf of Twisted Tea, or two shelves. In some cases, in real core markets, even a door of it. And so I don’t see what would differentiate another tea to make significant inroads in Twisted Tea. And we have slowly, and in a very disciplined way, spread out on that shelf from the original to half-and-half, and now we have multiple other flavors like raspberry and peach, and we have a variety of pack and now we have Twisted Tea Light.

So, I feel like we are answering pretty much all the consumers’ needs that have – in the tea category for products that have any kind of volume. There are niche tea products that are on the higher prices, but they are less than 1% share. So, I am not seeing anything that I would consider meaningfully different or better than Twisted Tea. And then there is always the flavor profile, and Twisted Tea has a unique and delicious flavor profile that nobody has been able to copy either. It uses very high-quality teas. They come from the Atlantic rainforest. I mean there is a genuine ingredient story that we don’t talk much about behind it. But it’s not easy to duplicate the flavor of Twisted Tea, though many have tried.

Brett Cooper: If I can just follow-on, the light proposition, is there any way that you guys – or how do you speak to how you think about the proposition and the potential size relative to the base Twisted Tea business?

Jim Koch: Sure. Right now, it’s not as big as one would think because what we have learned over all these years is when the Twisted Tea drinker opts for a Twisted Tea, they are doing it because they want something that is delicious, full-flavored, and they are not really that concerned about the calories and even the sugar. And it does have less calories, less sugar than a lot of other FMB entrants because the tea flavor is so powerful. So, it’s – I think in the Circana numbers, it’s probably less than 5% at this point of the Twisted Tea volume, but it’s an important part of our portfolio to have something out there in case that lower-calorie end of the FMB category grows significantly. And also, it does protect the brand from a potential point of vulnerability of somebody coming in with their own version of the Twisted Tea that was 120 calories instead of 190 calories, like the regular strength.

So, it’s a flanker that protects that flank. And it’s growing quite nicely, but on a small base. The Twisted Tea drinker is just not that worried. It’s like somebody’s – it’s like an ice cream eater. There is not much volume in the low cal end of the ice cream market because we all know it’s an indulgence, and we are okay with it.

Brett Cooper: Great. Thank you.

Operator: Our next question comes from the line of Peter Grom with UBS. Please proceed with your question.

Peter Grom: Hi. Thanks operator. Good evening everyone. So, I have a question on inflation more broadly. But maybe just – specifically around freight. Thus far, in earnings season, it’s been a pretty positive call-out from CPG companies in terms of how to think about the path forward. And it was also called out in your press release today. So, how much of the tailwind could this be to you as you look ahead? And I guess to the extent that it does continue to moderate, how do you think about balance letting some of these savings flow to the bottom line versus stepping up reinvestment?

Dave Burwick: Yes. We are definitely suffering through the numbers as a benefit. Some companies have it in the cost of goods sold. We have it in SG&A. But you can see we benefited. We expect to continue to benefit for the year. And we will make the decision based on how the Truly refresh is working and other opportunities, whether we reinvest that or bring it to the bottom line.

Peter Grom: Okay. Understood. And then just a follow-up, I would love to get an update on Hard Mountain Dew. How is the brand performing versus your expectations? And then just within that, any initial views on whether Monster’s new product offering could impact the growth trajectory of Hard Dew? Thanks.

Dave Burwick: Sure, Peter. This is Dave. I think – so right now, it’s in 13 states, primarily 12 packs. And actually, if you look at in those markets, it’s the number two 12-pack to Twisted Tea. The velocity is probably number three or four within the market. So, there is still – I mean there is interest. There is pull. As Ramon Laguarta from PepsiCo, I think those guys had earnings yesterday, the day before, he mentioned the approach for Blue Cloud is kind of more or less slow and steady kind of wins the race and there is not a rush. They want to do it right. And we agree with that. And so we think we have a brand that’s got a lot of interest. So obviously, we have got a huge trial when we launched a year ago like because of the novelty.

That’s settled down, but it’s still turning really well, and we are just going to – we are not betting on a huge growth for us this year. We are going to go at the right pace, at the same pace that PepsiCo wants to go at. We are – so we are fine with that. As it relates to Monster, it’s – I don’t know, it’s hard to say because neither brand have energy components in it. So, it’s more going to – I think these brands will be judge based on are they refreshing and good tasting and something that people want to drink instead of a beer or another FMB or not. So, I think the Monster stuff, it’s just really obviously a great brand, but it’s really early to tell what – even what the trajectory of that will be and where it’s going to source its volume.

But we will know, – by the end of the year, we will know more.

Peter Grom: Thanks David. I really appreciate it. I will pass it on.

Dave Burwick: Okay.

Operator: There are no further questions. I would like to hand it back to Mr. Koch for closing remarks.

Jim Koch: Thanks everybody and we will talk again in a few months. Thanks for joining us.