Greetings and welcome to The Boston Beer Company Second Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn this conference over to Mr. Mike Andrews, Associate General Counsel and Corporate Secretary. Thank you, sir. You may begin.

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 2022 second quarter earnings call. Joining the call from Boston Beer are Jim Koch, Founder and Chairman; Dave Burwick, our CEO; and Frank Smalla, our CFO. Before we discuss our business, I’ll start with our disclaimer. As we stated in our earnings release, some of the information we discuss and that may come up on this call reflects the Company’s or management’s expectations or predictions of the future. Such predictions are forward-looking statements. It’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.

Thanks Mike. I’ll begin my remarks with a few introductory comments and then hand it over to Dave, who will provide an overview of our business. Dave will then turn the call over to Frank, who will focus on the financial details of our second quarter results as well as our outlook for the remainder of 2022. Immediately following Frank’s comments, we’ll open up the line for questions. Given Truly Hard Seltzer’s growth last year, we knew we would be facing tough volume comparisons this year, the continuing decline of the hard seltzer segment, which was down 17% in volume and 13% in dollars in off-premise channels in Q2 is deeper than previously expected, which impacted our second quarter results, and is expected to continue to impact Truly’s performance for the balance of 2022. Our 2022 second quarter revenue grew slightly over the second quarter last year, driven by pricing gains. Our second quarter depletions declined 7% and our shipments declined 1% against prior year comparisons of 24% depletions growth and 27% shipment growth. We made progress, improving our second quarter gross margin despite negative impacts from lower than expected volume. As Frank will discuss in more detail later in the call, we also returned to profitability and generated more than $100 million in operating cash flow. Based on our first half performance, our view of the remainder of the year and the current economic environment including uncertain consumer demand and broader supply chain challenges, we’ve reduced our volume and earnings guidance for the remainder of 2022. In the second half, we will focus our efforts on Twisted Tea, Truly and Hard Mountain Dew which we believe have the most potential to positively impact our business. Our multi-brand strategy plus our long history of innovation have supported our growth over the long term, and we will work hard to capitalize on these strengths going forward. We’re also thankful to our outstanding coworkers, distributors and retailers who continue to support our business. We’re proud to have just been named the number one beer industry supplier in the Tamarron Survey, the annual poll of beer distributors conducted by Tamarron Consulting, a consulting firm specializing in the alcoholic beverage distribution industry. It is our fifth number one ranking in a row and 11th in the last 13 years. This is a result of the efforts of all Boston Beer coworkers to service and support our distributors business and to the strong relationships we built with them over many years. We continue to believe that we have the best group of distributors in the beer business. I’ll now pass it over to Dave for a more detailed overview of our business.

Okay. Hey. Thanks, Jim. Hello, everyone. Our second quarter depletion declines were primarily driven by declines in Truly Hard Seltzer and were partially offset by growth in our Twisted Tea and Hard Mountain Dew brands. Excluding the declines in Truly, our depletion volumes for the remainder of our business increased 14% in the second quarter and 11% in the first half. Our strategy is to become the number one player in the fast-growing Beyond Beer segment by creating a broad relevant brand portfolio that enables many pathways to growth. This portfolio is led by the number one FMB and Twisted Tea, number two Hard Seltzer and Truly, the number one hard cider in Angry Orchard and the newly launched Hard Mountain Dew, which is the number one FMB in the seven states where it’s currently distributed. Towards that end, we improved our number two position in Beyond Beer in the second quarter, with a 27% volume share of one half share point versus the second quarter of 2021. Meanwhile, we’ll continue to experiment and plant new seeds in our search to cultivate the next big contributor to our future growth. For the remainder of the year, we’re focused on fueling Twisted Tea and Hard Mountain Dew’s growth and remaking Truly’s core original flavors with improved formulations, a new ad campaign to communicate those changes and superior distributor support and retail execution. We’re also targeting margin improvements as we continue to enhance our supply chain performance and inventory management and offset commodity cost pressures. Hard seltzer dollar sales declined by 13% in the second quarter of 2022 in measured off-premise channels. We believe there are two primary drivers to the continued deceleration of the segment. First, Hard seltzer has lost its novelty as consumers have been distracted by many new Beyond Beer products entering a hyper crowded marketplace. Second, and tied to the macroeconomic environment, we are seeing a volume shift from hard seltzers back to premium light beers with their lower pricing, particularly among 35 to 44 year olds. Whether this continues into the future or reverts back is still to be determined. The Truly brand has not yet overcome these headwinds of 2022, as Truly dollar sales declined in the second quarter by 17% and lost 1.3 share points. Despite losing share, Truly’s week-to-week sequential share has held steady since early January at around 27 percentage points and has been at 28 for the past four weeks, maintaining our continued strong number two position. Our Truly innovation has been well received by consumers as Margarita is the number one innovation year-to-date in all of beer with a 4.2 dollar share and our Poolside limited time offer also has performed very well. However, our core light flavored Truly business has suffered and not performed as we’d expected as consumers eagerly adopt what’s new and interesting. Despite this challenge, Truly’s year-to-date household penetration remains strong across all age groups and is number one in all of beer among 21 to 34 year olds. Our go-forward plan is to activate this large base of drinkers by bringing new excitement to our core original flavors to better complement our innovation. Despite the recent trends, we believe hard seltzers will remain an important beer industry segment in the future, but its trajectory remains unclear. Hard seltzers still command a large consumer base with 29% household penetration over the latest 52 weeks, but the first half of 2022 penetration declined 12% from the first half of 2021. While the hard seltzer segment was 10% of total beer dollars in the second quarter of 2022, it’s down from 11.4% in the second quarter of 2021. Consequently, as we look at our forecast for hard seltzer category growth for the year, we have adjusted down our category volume growth from between flat to plus 10% to down between 15% and 20%. Regardless of where the category growth settles in 2022, our longer-term goal is to outgrow the category and improve our Truly brand trends, driven by renewed focus on building our core business, smart brand innovation and strong distributor support and retail execution. With respect to innovation, there is significant wholesaler and retailer excitement around our upcoming Truly Vodka Seltzer launch this fall. Our Truly flavored bottle Vodka, which has been sold by Beam Suntory since late in the first quarter has been well received by consumers and we believe this bodes well for the Truly Vodka Seltzer launch. Important to improving Truly’s trends is the performance of its core flavors. So today, we are announcing a reformulation and improvement of our core Truly flavors that includes adding real fruit juice for an even smoother, easy-to-drink and refreshing taste profile. A similar exercise in the fall of 2019 led to retrial and share gains, and we believe we can do the same again. A reformulated citrus variety pack is in the market now and the other Truly variety packs will transition in August and will be supported by a new ad campaign, focusing on the flavor improvement, a significant investment in shopper marketing activity and other promotional programs should drive volume in core flavors. Twisted Tea expanded its position as the number one FMB in the second quarter by 5 share points and grew double-digits, primarily by improved distribution of 12 packs and a unique product and brand proposition that resonates with more and more consumers. We improved our service levels and reduced out of stocks during the second quarter compared to the first quarter, which helps support this growth. In measured off-premise channels, its volume growth has accelerated from 21% year-to-date to 27% in the latest 13 weeks to 39% in the latest 4 weeks. Twisted Tea has been the fastest-growing brand among the top 20 in all beer for the past 10 months, and in the second quarter became the 11th largest brand in all of beer. It also has the highest sales per point of any Beyond Beer brand. Twisted Tea single-serve 24-ounce can is the fourth largest single serve beer of any kind nationally, underscoring its resonance with convenience store shoppers. This is despite many competitive offerings entering the market and is a testament to the brand’s growing following and the potential upside that remains as we close distribution gaps across the country. Retailers are excited about Twisted Tea. And in the recently finished spring resets, Twisted Tea space grew 28% and now has 13.4% of FMB space. Because of its growing 12-pack distribution, the brand is receiving unprecedented retailer support, including expanded promotional and display activity. Additionally, to support pull, we’re advertising the brand year-round to increase brand awareness, and we’ve received strong response from consumers to our current tea-drop advertising campaign. We’ll work to maintain momentum from the summer into the fall with a large college football-themed initiative significantly building on our college activities from 2021. In the seven states where it has been launched, Hard Mountain Dew is showing good promise with an 18 share of FMBs in measured off-premise channels where it’s distributed in those markets. We’ll continue to roll the brand out and expect it to be launched in up to five additional states in 2022. The brand rollout has been delayed in certain states due to a slower-than-expected regulatory process. While this will result in fewer depletions in 2022 than originally envisioned, we’re in this for the long term, and we’re very encouraged from the early consumer response has been so positive. In the first half, our Samuel Adams brand depletions were down low single digits. The brand had growth in seasonals and the draft business and held share in a difficult craft beer market. Meanwhile, Angry Orchard remains the number one brand in hard cider with a 48 share of the segment in measured off-premise channels. Angry Orchard brand depletions were down consistent with low-double-digit declines in cider category trends. Total Dogfish Head brand depletions in the second quarter also declined against the difficult craft beer market. However, our expanded lineup of award-winning Dogfish Head can cocktails, including the new 8-pack bar cart variety pack, grew depletions significantly in the second quarter off a relatively small base. Bar cart is now the largest variety pack in ready-to-drink cocktails in measured off-premise channels. So far in 2022, we continued to experience out of stocks on certain brands and packages, primarily with Truly, as our supply chain is still struggling to react to changes in demand. We also have had issues with availability of some of our ingredients and packaging materials. We believe we’re managing these issues and have the capacity, ingredients and packaging in place to improve service levels and reduce our out-of-stocks during the second half. In summary, we’re optimistic about the long-term outlook for our diversified beverage portfolio. We benefited from the unprecedented growth in hard seltzer during the pandemic and are now experiencing change in consumer demand as the environment becomes more normalized. This resulted in the revision to our 2022 guidance. Our company has proven innovation and brand-building capabilities to the top selling organization in beer and an excellent balance sheet to support long-term growth, even as we navigate some challenges in the near term. Now, I’m going to hand it over to Frank to discuss our second quarter financials as well as our outlook for the remainder of 2022.

All right. Thank you, Dave. Good afternoon, everyone. For the second quarter, we reported net income of $53.3 million or $4.31 per diluted share compared to a net income of $59.2 million or $4.75 per diluted share in the second quarter of 2021. This decrease between periods was primarily driven by lower gross margins, partially offset by increased revenue and lower operating expenses. The second quarter results showed sequential shipment, gross margin and profit improvements and generated over $100 million in operating cash flow. During the quarter, we continued to work through the 2021 Truly inventory overhang as we lapped the back end of the 2021 peak season inventory build. While margins have improved from the first quarter, the lower-than-expected volumes and higher returns on scrap for Truly and Bevy brands have negatively impacted our margins and offset some of the margin improvement programs we have achieved in our brewery network. In addition, our supply chain challenges have not improved to the level we expected. Twisted Tea service levels and out of stocks have improved, but Truly service levels and out of stocks continue to be below our internal targets. Shipment volume for the quarter was approximately 2.4 million barrels, a 1.1% decrease from the prior year, reflecting decreases in all brands other than our Twisted Tea and Hard Mountain Dew brands. We believe distributor inventory as of June 25, 2022, averaged approximately 4 weeks on hand and was an appropriate level for each of our brands, except for low inventory levels for certain Truly brand packages. We expect distributors will keep inventory levels for the remainder of the year below 2021 levels in terms of weeks on hand. Our second quarter 2022 gross margin of 43.1% decreased from the 45.7% margin realized in the second quarter of 2021, primarily due to higher material costs and higher returns in scrap, only partially offset by price increases. Our second quarter operating expenses decreased by $1.2 million or 0.6% from the second quarter of 2021. This net decrease was due to a decrease in brand investments of $11.3 million, mainly driven by lower media costs, partially offset by increased general and administrative expenses of $5.9 million, mainly driven by increased salary and benefits costs and increased freight to distributors of $4.6 million. Our depletions and shipments for the first 29 weeks of 2022 have declined 7% and 11%, respectively, from the comparable periods in 2021. Based on information of which we are currently aware, we are decreasing our full year 2022 earnings guidance per diluted share to between $6 and $11 from between $11 and $16. However, actual results could vary significantly from this target. This projection excludes the impact of ASU 2016-09 and is highly sensitive to changes in volume projections, particularly related to the hard seltzer category and supply chain performance as well as inflationary impacts. The 2022 fiscal year includes 53 weeks compared to the 2021 fiscal year, which only included 52 weeks. Full year 2022 changes in depletions and shipments are now estimated to be between a decrease of 8% and a decrease of 2%, a change from our previous estimate of an increase between 4% and 10%. As we discussed earlier, the revision is driven by a change in expectations in our Truly Hard Seltzer business and the launch timing of Hard Mountain Dew in certain states moving from 2022 into 2023. We estimate the 53rd week will have a positive impact of between 1 and 1.5 percentage points on our full year depletions and shipments growth rates and between 4 and 6 percentage points on our fourth quarter depletions and shipments growth rates. We continue to expect increases in revenue per barrel of between 3% and 5%. Full year 2022 gross margins are expected to be between 43% and 45%, a decrease from our previous estimate of 45% and 48% due to the impact of lower volume expectations and continuing supply chain impacts. We continue to expect to cover higher commodity costs through pricing. Our full year 2022 investments in advertising, promotion and selling expenses are expected to decrease between $30 million and $50 million, a change from our previous estimate of a decrease between zero and $20 million, reflecting our reduced volume expectations. This does not include any increases in freight costs for the shipment of products to distributors. We estimate our full year 2022 non-GAAP effective tax rate to be between 26% and 27%, excluding the impact of ASU 2016-09, a change from our previous estimate of approximately 26%. We are continuing to evaluate 2022 capital expenditures and currently estimate investments of between $110 million and $140 million, a change from our previous estimate of between $140 million and $190 million. The capital will be spent mostly on continued investments in our breweries to further build our capabilities and improve our efficiencies. We expect that our cash balance of $137.8 million as of June 25, 2022, along with our future operating cash flow and unused line of credit of $150 million, will be sufficient to fund our base business and future growth initiatives. We will now open up the call for questions.

Our first question comes from Kaumil Gajrawala with Credit Suisse.

Couple of questions, I guess, starting with Truly and maybe how it’s been trending, particularly with around 4th of July, as it looked like it stabilized, or is 4th of July kind of the end of the period of where comps are particularly difficult? Just any read you have on where we think it could go would be helpful.

Hey Kaumil, this is Dave. I’ll answer that. You're correct, the significant overlaps started to decrease right after July 4th of last year. I can share that we executed exceptionally well over the July 4th weekend and we have more advertisements than any other hard seltzer brand available. We are being very cautious in interpreting any data right now because it has been challenging to do so. Therefore, I wouldn’t focus too much on one week; it was satisfactory, but I’m not certain it indicates a broader trend for us. We’re actually going to monitor the following weeks to observe what unfolds. To summarize our positive developments, the innovation is performing well, especially the Margarita and Poolside flavors which are driving velocity. Everything looks promising. However, as I pointed out earlier, the core flavors and the lightly flavored packages, such as Tropical, Berry, and Citrus variety packs, have underperformed and that’s why we’re concentrating our efforts on improving them. Consumers tend to prefer flavors; they enjoy bolder tastes but also appreciate the light, refreshing, and easy-to-drink characteristics of the core flavors. We've just reformulated these, and they’re hitting the market now. We want to see how that develops, supported by new flavors. Furthermore, we have Truly Vodka Seltzer launching shortly after, which represents the premium segment of hard seltzer. We’ll see how this progresses, but nothing remarkable occurred over the July 4th weekend.

Okay. Got it. And then just on margins, one of the factors has been that the success of Truly has also been a drag on margins due to growth in third-party manufacturing and distribution. Truly is obviously declining now, but it seems that the discussion has shifted from the inefficiencies of Truly compared to the rest of the portfolio to volume deleverage and the use of the brewery. So, can you help me, perhaps Frank, clarify how we should think about margins in light of what has been happening to margins in the years prior to Truly’s success?

Yes. Certainly. As you're aware, margins have decreased during the growth phase of Truly due to our reliance on external production, which was more expensive than our internal costs. We anticipated that as we ramped up our internal production, margins would gradually improve. However, particularly in the first quarter, we experienced challenges stemming from excess inventory from 2021 that negatively affected margins. In the second quarter, we observed two key issues. Firstly, lower production volumes led to increased product returns as scrap, further impacting margins. We expect this to stabilize moving forward. Secondly, regarding our supply chain, we had anticipated ramping up internal variety pack production capacity more quickly. We installed two integrated variety pack lines in our facilities in Pennsylvania and Ohio, but the startup process is taking longer than expected. Consequently, our internal capacity is below our initial projections for this year. We are making good progress in Pennsylvania, but Ohio is slightly lagging. Overall, the two main factors affecting our margins are related to volume-based returns on scrap and delays in increasing our internal variety pack capacity.

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

Thank you very much. When you take a step back and evaluate the year so far, there have been some negative surprises. Do you believe that relatively minor adjustments, like adding more fruit to Truly, would be sufficient to resolve these issues, or do you think that a more fundamental change might be necessary, whether in your approach to the hard seltzer category, your execution, or your overall strategy? I’m trying to understand your key takeaways and how they might influence your perspective on the business in the coming years. Thank you.

Thank you, Rob. This is Dave. In the short term, the reformulation is more significant than it may seem. It involves optimizing all our flavors rather than simply adding a bit of fruit to Truly, which is meaningful. Looking ahead, we have to reengage consumers in the hard seltzer category, which is refreshing and easy to drink, and I believe we've lost sight of that message. We have strong household penetration among 21 to 34 year olds in the beer category, so we need to activate that base and offer them something fresh to encourage reengagement. The hard seltzer category has become complicated, and if consumers are overwhelmed, they might opt for other options. We must simplify their choices by emphasizing light flavors versus bolder options and ensuring choices are more straightforward. This includes cutting underperforming SKUs and reformulating our core and bolder flavors, since we've seen that consumers will try improved products. We've had success with limited time offerings, though they're cannibalistic. We aim to be more strategic with them in the coming year. It's also crucial to consistently communicate that Truly is the most authentic refreshing alternative to beer and explore our presence in other segments, such as vodka seltzer. To change the brand's trajectory, we have a clear roadmap. This summer, we're focused on formula changes to enhance flavor quality, which is ultimately what consumers care about. We believe this will make a difference. Additionally, we have strong support from our wholesalers and retailers, and we need to present simpler, better ideas to energize them.

I have a follow-up regarding your earlier comments. You mentioned that some consumers have returned to light beers or premium light beers, possibly due to their lower prices. Are you implying that affordability is a concern? I’m trying to understand the dynamics surrounding the shift back to premium light beers and what your data indicates about this trend.

Yes. We are looking at the data and noticing significant movement in the 35 to 44 age group, where many consumers are shifting back from hard seltzer to light beer. This change seems to be influenced by both affordability and the similar benefits that light beer offers. It's likely that a lot of these consumers were light beer drinkers before trying hard seltzer and are now returning. Currently, there is about a 7% price difference on average between hard seltzer and premium light beer, which may play a role in this shift. The data clearly shows that most of the volume lost from hard seltzer has gone back to light beer. While we can't determine if this trend is temporary, it highlights the importance of reminding consumers of the unique attributes and benefits that made hard seltzer successful and its position as the number 10 share beer.

Does that suggest that you may need to somehow either lower price or come out with a lower-priced variant and economy Truly, or I’m just trying to get a sense of how to address that issue.

Yes. I believe we should focus on effectively communicating the benefits of hard seltzer because they offer unique advantages that light beer does not. For instance, the variety of flavors is a significant aspect, and it's evident in the current trends across different beer segments. Hard seltzer stands out in terms of variety compared to other beer categories. Therefore, it's crucial for the leaders in this market to convey that message compellingly, rather than considering price reductions to compete with light beers.

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

Two questions for me. So first, can you please walk us through the various assumptions behind your updated shipment guidance? And what gives you confidence that you can hit this guidance? And then secondly, what was Hard Mountain Dew’s contribution to your Q2 shipments? And what do you expect its contribution to be for the full year? Thanks.

Okay. Let me take you through the assumptions. Our original guidance was largely based on the overlaps we experienced compared to last year, which started off very strongly with 48% growth in Q1, moderating in Q2. We anticipated an improvement this year as we reached those lower growth months from last year around the end of May, beginning of June. However, when that didn't materialize and we examined the depletions, it became clear that they were stable, as reflected in our reported results, showing a 7% decline in depletions. Instead of relying heavily on overlaps and expecting a trend shift from them, we projected the growth rates we've observed broadly year-to-date and recently. We also expect a benefit in the second half from the additional week we have accounted for, which aligns us with the midpoint of our guidance. Shipments, on the other hand, present a different scenario as they were influenced differently last year due to insufficient capacity for the volume planned in 2021. This led us to build considerable inventory at wholesalers and internally, peaking mid-year, coinciding with a halt in volume growth. We did not sell through this built-up inventory, resulting in a significant reduction in our production and shipments to wholesalers, who were focused on selling what they had in stock. This created a notable imbalance between the first and second halves of the year, with significant growth in the first half and declining shipments in the latter half. If we meet our depletion targets that I mentioned earlier, the shipments required to achieve that will bring us within our projected range, aligning with the midpoint of our guidance. We then assessed the risk profile around that number to see if it could fall lower. Instead of simply projecting trends, we analyzed different brands. As noted in IRI reports, Truly faced intensified declines, while Twisted Tea saw an acceleration in performance over the last 4 weeks and 13 weeks, outperforming year-to-date trends. However, we projected Twisted Tea’s performance to align with year-to-date rates and assumed the steepest declines from the first half would continue for the rest of the year, which brought us to the low end of the range. These are the broad assumptions behind our depletions and shipment guidance. Regarding Hard Mountain Dew, we don't disclose specific numbers, but most of the volume for Hard Mountain Dew is anticipated to come in the latter part of the year, rather than what was observed in the first two quarters.

Our next question comes from the line of Bonnie Herzog with Goldman Sachs.

I just wanted to maybe ask a little bit of a follow-up just on some of the things you talked about regarding guidance. I just wanted to maybe specifically understand what your new shipment guidance assumes in terms of declines for Truly. I guess, when I did the math and just thinking about the midpoint, I think based on our model implies that Truly shipment volume could decline more than 20% for the full year. Just wanted to get a sense of that is in line with your expectations? And then if that’s right, just trying to think about that in the context of your guidance or outlook for the category being down 15% to 20%. So just wondering if you think you can still take share. And then, I also had a question about the second half for Truly declines, just given the sharp declines we’ve seen so far this year, I think it does imply that the declines moderate a bit in the second half. So just kind of wanted to check on those items.

Yes. So Bonnie, we don’t give specific guidance for brands, but I think your assumption is right that you mentioned. I mean we didn’t take an optimistic view on Truly. And as I said before, if you look at IRI, I think IRI is pretty representative for the trends. That’s kind of what we projected out, which is in the more negative than 20% for the rest of the year to get to the guidance. In terms of share, yes, again, we haven’t taken an optimistic approach because we haven’t really gained share so far. But, I’ll let Dave talk to that and also to the future volumes. We haven’t assumed an improvement for the remainder of the year versus the year-to-date.

As for shares, we estimated a range of 15 to 20 by analyzing the last four weeks in the category, which were down approximately 19%. We decided to assume it won’t improve, so that represents a low point or minus 20. Additionally, looking at the most recent four weeks year-to-date, we see a decline of about 14%. We believe the outcome will fall somewhere in between. For Truly, we have lost about 1.5 share points this year, although I mentioned 1.3 in the last quarter. Our objective remains to grow our share. For the balance of the year, we are focusing on reformulating our core business, investing in that effort, and launching Truly Vodka Seltzer, which we will include in our projections. From a consumer standpoint, this pertains to the hard seltzer sector. We aim to expand our share through the end of the year, although we cannot predict where we'll be at that time. Our intention is to achieve better performance in the second half, and we are working towards that goal. However, as Frank mentioned, our guidance is intentionally conservative and does not factor in anticipated share growth.

Okay. That’s helpful. And then I just had a second quick question maybe on your A&M guidance cut. On one hand, I guess, I get the cut given the slowdown in the hard seltzer category. But on the other hand, I question how you’re going to get consumers interested in the category again without incremental spending? Just hoping to hear a little bit more color on how you’re balancing this, especially in the context of the reformulation that you’re mentioning. Thanks.

Yes. Regarding the A&M reduction, it truly reflects the decrease in volume that we’re experiencing. Overall, our spending remains quite robust. Historically, looking back to 2017 and 2018, our AT&S spending was around 25%, which decreased due to significant volume growth. In 2021, that figure dropped to just below 20%, and we increased spending that year as we prepared for anticipated higher volumes, which ultimately did not materialize. Therefore, we had to adjust our spending accordingly. We believe our investment in Truly and our other brands is strong, and in the broader historical context, we don’t think we’re under-investing.

And Bonnie, I would just say that while you’re looking at the gross number, we can and do move funds between brands where the opportunity arises. We have plenty of ability to do that. For Truly, one of the ways we’re allocating our resources this August and September is with the Vodka Seltzer launch, alongside new flavors. We have dollars available for reallocation, which is important. As I mentioned, we need to get people to start thinking about the categories as they did a couple of years ago, and it also provides them with new perspectives. However, you can’t achieve that without investing.

Our next question comes from the line of Eric Serotta with Morgan Stanley.

Dave, you called out the switching particularly among male cohort, I think you said 35 to 44 back to premium lights. I’m wondering if you have any perspective as to whether you’re seeing some leakage from the hard seltzer category to the broader RTD, particularly spirits-based RTD, as well as full flavored FMBs?

Okay. Let me address that, Eric. Based on the data from Numerator, there's been considerable discussion about the shift in ready-to-drink (RTD) beverages. To give you a clearer picture, about one-third of the shift is going towards bottled spirits. Additionally, light beer accounts for 26%, wine for 14%, and ready-to-drink cocktails make up around 9%. It's important to note that while there's a lot of activity in the RTD cocktail market, it only represents a small share of the beer market. Specifically, out of the 1.4% dollar share of beer attributed to RTD cocktails, approximately 0.8% is from vodka seltzers, like High Noon. These are categorized as hard seltzers. What we're actually seeing is that only 0.8% of dollar sales is from rational RTD cocktails, which cater to different occasions, have different alcohol by volume levels, target different consumers, and show lower repeat and purchase rates. While RTDs have a similar number of brands and SKUs as hard seltzers in the market, they only represent 7% of the Beyond Beer category, whereas hard seltzers comprise 48%. This indicates that there is a lot of buzz but not necessarily a corresponding volume in that space. RTDs are indeed taking some market share from hard seltzers, particularly the vodka seltzer segment. However, the impact of the other RTD cocktails appears to be minimal. It's also noteworthy that there is significant support and emphasis on RTD cocktails right now, which may not fully align with consumer trends. Overall, this has influenced the market, but we still see stronger demand for traditional segments like light beer and wine, possibly reclaiming some consumers that hard seltzer has drawn away in recent years.

Great. Really helpful. Another question. I know it’s still very early, but what are you seeing regarding Hard Mountain Dew repeat rates? Mountain Dew has strong brand equity, but this category is known for flavor changes and consumers shifting to new options. So, what are the repeat rates looking like? And how are you planning for next year to ensure ongoing growth, aside from the benefits of expanding distribution to more states?

It's a bit early to assess repeat rates since this launch has been quite unique, occurring in seven different markets at various times. The focus has been on strong execution in larger grocery stores rather than small local shops. We have only one take-home package and four single-serve options which have received a warm reception due to the large format. This makes it challenging to provide a precise figure for repeat rates. However, in the markets where it's available, it currently holds an 18 share, down from the higher 20s we reported last time. The level of trial we have seen is remarkable—unlike anything I've witnessed. The novelty of Mountain Dew has attracted substantial trial rates. While the share has decreased to 18, it still leads as the number 1 FMB in all those markets and has a velocity that is 2 to 5 times greater than the number 2 FMB. Looking at the current share and velocity, we are pleased with the progress, but we still need to expand further. We're currently in seven states, and I anticipate that we will reach ten by the end of summer, with more states added by the year’s end. Next year, we plan to fully capitalize on the opportunity as we increase our distribution and depth within these markets, which will help us gain a clearer understanding of repeat rates. Repeat purchases are limited if the product is only available in one chain; broader distribution is necessary for that. So, we aim to approach this cautiously, but the signs we see are encouraging. We will continue following our strategy, learning and adapting along the way. We expect next year to be a significant contributor, but it’s too soon to provide many specifics.

Our next question comes from the line of Stephen Powers with Deutsche Bank.

You mentioned earlier the necessity of simplifying the hard seltzer category to enhance consumer understanding. I also sensed a desire to streamline the Truly portfolio. First, did I understand that correctly? Second, if I did, could you share what part of the Truly portfolio you view as less essential that you would like to simplify, as opposed to the core items that are performing well? I'm trying to gauge how much you believe you need to reduce before reaching that strong base that you can build on going forward.

Thanks, Stephen. That’s a good question. I believe you heard me correctly. We definitely need to make those decisions, but we’re not ready to discuss which parts yet. If you look at the generally underperforming SKUs, we have focused on bold flavors like lemonade, fruit punch, and margarita. However, we may have overlooked the lighter flavor segments, such as tropical, berry, and citrus. One of our priorities should be to strengthen that core of lightly flavored options because consumers enjoy them and are asking for them. We also plan to enhance the overall profile of our portfolio. Regarding what might be removed, I can’t provide details before we speak with our wholesalers, so it’s too early to share that information. We recognize the importance of reducing the number of SKUs, but we also want to make it easier for consumers to identify and understand what they are purchasing, including the flavor profile and taste experience. We need to step into the consumers' shoes and evaluate from their perspective to ensure we are meeting their expectations. I apologize for not fully addressing the second part of your question, but we’re not quite ready to discuss that now.

Okay. Fair enough. I would like to follow up on the advertising aspect. I'm curious about the mechanics involved. At the midpoint of the guidance, the reduction in advertising promotion and selling costs translates to a $3 decrease in EPS terms, amounting to $50 million. Could you clarify how much of this reduction is mechanical, meaning it's variable with volume—so as volume decreases, selling costs also decline—versus how much of this is a deliberate decision to cut $50 million from the budget at the midpoint?

Yes, Steve, we don’t handle mechanical aspects very well. If you look at AP&S, as I've mentioned in previous earnings calls, our approach is focused on identifying areas where we can make an impact. When we see opportunities and feel confident in our advertising, we decide to invest. Our focus isn’t too much on specific quarters or the yearly outlook. What we provide is our best estimate. Over the long term, we achieve leverage from our AP&S spending, which is evident over the years. We have also reduced this spending on a percentage basis in relation to net revenue, reflecting the leverage gained from growing the company. We pursue opportunities as they arise, and while we monitor our profit and loss statements, we also seek areas to cut expenditures that yield less benefit and redirect funds where we can achieve the greatest return. The reduction we've implemented is a response to volume but is primarily motivated by our belief in maximizing our returns on investment. We feel quite comfortable with the spending level supporting our brands.

Okay. As you assess the year from a demand perspective, you believe the advertising spend is now suitable. However, you don't guarantee a significant catch-up next year based on the revenue line.

No, as I mentioned, in the short term, we always invest when we identify an opportunity. However, even though we consider the profit and loss, we do not automatically cut back on advertising and promotional spend just to meet a specific target. I want to make that clear. We believe top-line growth is crucial and is what drives long-term value creation. You may notice fluctuations from quarter to quarter or year to year, but over the long term, you will see the leverage.

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

Two for me as well. First on gross margin and then a broader question for Jim and Dave, perhaps. The gross margin question, just comment on how big of a priority is to restore gross margins at the company? And then longer term, understanding with Truly there’s a wider range of possibilities here with some of the uncertainty that exists with consequences on your fixed cost absorption. But based on your current projections internally, how quickly can you return to low to 50% gross margin for the business? And then I have a follow-up.

Yes. Kevin, gross margin is crucial for us. When discussing our business, we usually emphasize the top line and gross margin growth because we believe that, over time, this will lead the company in the right direction. We have focused on our supply chain transformation and are making significant investments to achieve our goal of establishing four anchor breweries with a more distributed network on both the East and West Coasts to reduce costs. Our aim is to optimize the Truly portfolio to create a network that can significantly lower the costs of variety packs, which represent our highest expenses. We are gradually enhancing the supply chain while also concentrating on improving our service levels, which are closely linked to the supply chain and the entire value chain of the company. Our focus is not limited to just the breweries; it encompasses the entire supply chain, starting and ending with wholesaler inventory. This is a major priority for us, and we aim to get it right. We anticipate improvements this year and in the years ahead, with our established targets remaining unchanged. Although the drivers are consistent, we have experienced some delays in building our internal capacity. We have the right equipment, but it takes additional time to get everything running smoothly, making this a significant priority for us.

Okay, understood. And then, Jim, and perhaps Dave, just comment from a macro perspective, expectations broadly for the beer category, Jim, perhaps even total beverage alcohol, given the inflationary pressures that the consumer is under. And then maybe just also comment, it would be great to get your thoughts on the industry’s pricing posture, which has been to take less price than we’ve seen in most other consumer staples categories, frankly. And I’ll pass it on. Thank you, guys.

Yes. Let me share my thoughts. Per capita alcohol consumption in the U.S. has remained quite stable over the decades. We see a population growth of about 1% to 1.5% per year, which is likely to reflect the growth rate for alcohol consumption in ethanol terms. When looking at the division among wines, spirits, and beer, it's clear that beer has been conceding some of its ethanol share to spirits and a bit to wine. However, the emergence of new products such as hard seltzers and flavored malt beverages, which appeal to consumers across all categories, has contributed to beer's growth in recent years. From 2008 to 2018, beer sales declined for most years, but since then, there has been growth driven in part by these new categories. The numbers are still modest; a poor year for the beer industry might see a 1% decline, while a good year could mean a 1% increase. Traditional beer continues to decline, but growth is coming from these emerging products, also referred to as Beyond Beer, where Boston Beer has been a leader in innovation for many years. Overall, the trend in the alcohol sector is influenced significantly by this new category, impacting beer more than wine or spirits. Beer has captured a substantial portion of this growth, possibly around 70% to 80%, which may have enhanced beer's growth rate by about 2% over the past three years. I believe beer currently holds a competitive advantage in this new category because these products resemble beer, are often packaged in convenient 12-ounce cans, and benefit from the established beer distribution system. They typically sell at prices comparable to beer, allowing for the efficiencies of the beer distribution network and requiring producers to have high-speed can lines and economies of scale. Furthermore, there’s a notable tax difference; spirits-based products might offer four cans for $10, while malt-based products often provide six cans for the same price, translating into a 50% price premium for spirits. These factors indicate that in the alcohol beverage industry, the new category will drive growth, with beer positioned favorably in that space. Does that clarify things?

Yes. Very good. Thanks. And Dave, did you want to add anything with respect to the macro, how you expect the category to hold up and whether the industry is taking the right path here from a pricing perspective, i.e., less than other staples categories?

There's not much I can add to what Jim said. Regarding pricing, I would say that a 4% to 5% increase is appropriate for this category, and Jim can elaborate on this topic better than I can. It's also a category where consumers might choose to drink less at times, and Jim is definitely correct about that over a longer period. However, we're not primarily focused on price; we are following the market trends, and we agree with the current pricing levels, which we find reasonable. If you look at the data, the volume is currently declining slightly, at worse than minus 1%. While the dollar figures are stronger, the volume is down. Jim, do you have any insight on the pricing trends in the marketplace?

Our next question comes from the line of Peter Grom with UBS.

So, I was kind of hoping to shift gears away from Truly for a second and kind of just talk about the strong performance of Twisted Tea. Can you maybe unpack the drivers there? And I apologize if I missed this in an earlier response to a question. But what is your expectation for the brand as we think about the guidance for the back half of the year? And then, maybe more importantly, bigger picture, how do you think about the long-term growth potential Twisted Tea beyond this year, particularly as the brand grows, comps get more difficult, et cetera? Thanks.

Sure, Peter. I’ll address that part and then I’ll pass it over to Frank for a moment. Regarding Twisted Tea, what we’re experiencing right now is an ideal blend of factors working together at the right time. As you know, this brand has been established for over 20 years and has consistently grown by an average of low double digits each year. However, it has still been largely considered a regional brand. Over the past year, our 12-pack distribution has increased to about 58% of the ACV, which is a significant rise from approximately half that a year ago. This increase marked a tipping point; once we achieved distribution for the 12 packs, everything started to change with our wholesalers and retailers. Now, all the major retailers can promote and support this brand nationally, leading to increased trial. Our household penetration has risen by 10% to 12%. The rise in 12-pack availability was crucial. At the same time, our brand has been carefully built over the years, starting with a specific target demographic of blue-collar individuals driving pickup trucks with decent incomes, often purchasing it at convenience stores. This started in narrow geographies like Northern New England and parts of Montana and Michigan. From there, we have managed to grow that base, broaden our demographic appeal, and expand our geographic reach. The brand possesses unique product attributes and emotional benefits that create a strong position in the market, making it difficult to replicate exactly what Twisted Tea offers. This is a prime example of building a brand effectively over a long period and achieving integrated growth. The brand has accelerated its growth this year, showing high growth rates recently. We have many initiatives planned throughout the summer into fall, and we will continue to invest. Our ad campaign has also performed exceptionally well and resonates with our audience, giving us confidence in our direction. However, I’ve learned not to make predictions, so we’re taking it one step at a time. We believe we have something that is establishing itself well, and we will continue to support it. Despite its current success, household penetration, distribution, and brand awareness are still lower than its main competitors. Therefore, there is significant potential for continued brand growth.

Yes. Peter, regarding the guidance, we approached it simply by examining the growth rates from the past 13 weeks and projecting those forward. This has essentially been the case for our year-to-date depletions. However, there is a mix impact to consider. Truly has seen a slowdown, so the last 13 weeks show weaker performance compared to the year-to-date figures based on IRI data. In contrast, Twisted Tea has performed better, with a higher growth rate over the last 13 weeks than the year-to-date. We have not included the latest four weeks where Twisted Tea has shown even stronger growth, which is roughly double the year-to-date rate. Our approach has focused on the last 13 weeks. For the lower end of our range, we've simply used the year-to-date rate for Twisted Tea and extrapolated that for the remainder of the year. That summarizes our approach to the guidance. Also, remember that our full year guidance includes the advantage of the 53rd week, which is not reflected in the year-to-date growth rates but will be in the year to come.

Our next question comes from the line of Vivien Azer with Cowen.

I wanted to follow up on Twisted Tea. Dave, last quarter, you articulated some very specific targets in terms of gains, both in terms of shelf space as well as points of distribution. Can you just update on how you’re tracking against those goals, please?

Sure, Twisted Tea has increased its shelf space by 28%, which shows strong support. A significant part of this growth comes from the 12-pack distribution, as well as the 24-ounce sizes in convenience stores. The brand's tracking is looking promising, with household penetration rising by about 13%. A key factor in this success has been getting the 12-pack out to retailers, allowing for national promotion and support. Additionally, Twisted Tea is the top 24-ounce flavored malt beverage and ranks fourth overall in beer, just behind three other major beer brands. This channel is crucial because consumers choose their brands independently of promotional pricing or displays. Twisted Tea is gaining attention, and we're also introducing new flavors in the 24-ounce size to enhance its visibility in convenience stores. Moreover, we currently have a significant national promotion with Doritos that engages both brands and helps further increase household penetration.

Got it. That’s interesting on the Pepsi partnership on Doritos. A quick follow-up for me. I know it’s a very small piece of business in very early days, but any update on TeaPot in Canada.

Yes. I can tell you that TeaPot is a fantastic product with a great taste and name. We are very excited about its launch. It will first be introduced in Saskatchewan this week, followed by Manitoba. We are starting with the largest provinces in Canada, and then we plan to move to Ontario in the fall, which is the most populous province. The product will feature 5 milligrams of THC and will be a great tasting tea, utilizing our expertise in creating excellent tea products. We are eager to see the results.

Ladies and gentlemen, we have reached the end of today’s question-and-answer session. I would like to turn this call back over to Mr. Jim Koch for closing comments.

My apologies, I was on mute. I just want to thank everybody for sitting in on this. And we’ll talk again in three months. Cheers.

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