Boston Beer Co Inc Q3 FY2022 Earnings Call

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 third 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 state in our earnings release, some of the information we discuss and that may come up on this call reflects the company's or management's expectations or predictions of the future. Such predictions are forward-looking statements. It's important to note that the company's actual results could differ materially from those projected in these forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained in the company's most recent 10-Q and 10-K. The company does not undertake to publicly update forward-looking statements whether as a result of new information, future events, or otherwise. I will now pass it over to Jim for some introductory comments.

Thanks, Mike. I'll begin my remarks 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 Frank, who will focus on the financial details of our third quarter results, as well as our updated outlook for the remainder of 2022. Immediately following Frank's comments, we'll open up the line for questions. This quarter, our depletions declined 6%, which is slightly better than our year-to-date trend of down 7%. We grew revenue for the second quarter in a row, driven by the continuing growth of Twisted Tea, while improving our wholesaler service levels and reducing out of stocks. Towards the end of the third quarter, we reached our current target wholesaler levels and currently have the best wholesaler service levels since 2000. Declines in the Hard Seltzer category and Truly continue to negatively impact our business. The Hard Seltzer category in measured off-premise channels is down 15% on a volume basis through the first nine months of 2022, with Truly down 21%. We are working to improve Truly trends through a major product reformulation, including the addition of real fruit juice and sharpening our brand communication and increasing our media investment. Early in the fourth quarter, we launched Truly Vodka Seltzer, and early response from wholesalers, retailers, and drinkers has been positive. With the launch of Truly Vodka Seltzer, along with our award-winning Dogfish Head canned cocktails, we believe we are positioned well in the emerging ready-to-drink spirits category, which has been growing 79% in measured off-premise channels through the first nine months of 2022. For the remainder of the year and into next year, our strategy is to gain market share in the Beyond Beer category, where we are currently a strong number 2. Beyond Beer is growing faster than the traditional beer market, and we believe that this trend will continue for the next several years. 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 thankful to our outstanding coworkers, distributors, and retailers who continue to support our business. I will now pass it over to Dave for a more detailed overview of our business.

Thanks, Jim. Hello, everyone. Our long-term goal 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. We have the number one FMB in Twisted Tea, the number two hard seltzer in Truly, and the number one hard cider in Angry Orchard. In the near-term, our priorities are continuing focus on fueling Twisted Tea, supporting the launch of Dogfish Head canned cocktails, and working to stabilize Truly trends. We're also experimenting and planting new seeds in our search to cultivate new contributors to our future growth. Our third quarter depletion trends reflected continuing growth in Twisted Tea, and positive contributions from HARD MTN DEW, offset by declines in other brands, primarily Truly Hard Seltzer. Excluding the declines in Truly, our depletion volumes increased 14% in the third quarter and 12% for the first nine months. I'll say more about Twisted Tea in a moment, but first, let's talk about Truly. Hard seltzer volume declined by 17% in the third quarter measured off-premise channels. We believe there are four primary drivers of the continued decline. First, Hard Seltzer has lost its novelty as consumers have been distracted by many new Beyond Beer products entering a hyper-crowded marketplace. Second, the large amount of Hard Seltzer SKUs has caused consumer confusion and makes the segment hard to shop. Third, no one is communicating the core category benefits of refreshment, easy-to-drink, and variety. Lastly, and partially tied to the macroeconomic environment, we're seeing a volume shift from hard seltzers back to premium light beers with their lower pricing, particularly among 45-plus 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. Truly volume in measured off-premise channels declined in the third quarter by 25% and lost 2.8 share points compared to the third quarter of 2021. Our Truly innovation has been well received by consumers, as Margarita remains the number one innovation year-to-date in all of beer with a 4.1 volume share of hard seltzer. However, our existing flavors have not yet stabilized as consumers easily adopt what's new and interesting. Despite the current headwinds, Truly's household penetration remains strong across all age groups and is number one in all beer among 21 to 34-year-olds for the latest 52 weeks. As I mentioned on our last call, we're reformulating all of Truly's flavors by adding real fruit juice for an even smoother, easy-to-drink and refreshing taste profile. Reformulated Truly variety packs were in the market now and supported by a new ad campaign, focused on the flavor improvement, a significant investment in shopper marketing activity and other promotional programs to drive volume. We've received favorable response from consumers, retailers, and wholesalers to these changes, but the product has only been in the market for a short time and the full business impact will be felt over the longer term. With respect to innovation, there's significant wholesaler and retailer excitement around Truly Vodka Seltzer, which we launched earlier this month. Our Truly flavored bottled vodka, which has been sold by Beam Suntory late in the first quarter, has been well received by consumers. It's the number one new innovation in full bottled spirits in 2022, and we believe its success bodes well for the Truly Vodka Seltzer launch. We continue to believe hard seltzers will remain an important beer industry category in the future, but the trajectory of the category in the near term remains unclear. While the Hard Seltzer segment was 9.8% of total beer dollars in the third quarter of 2022, it's down from 11.4% in the third quarter of 2021. Consequently, as we look at our forecast for hard seltzer category growth for the year, we continue to believe the category volume will decline between 15% and 20%. Regardless of where the category growth settles in 2022 and future years, our longer-term goal is to outgrow the category and improve our Truly brand trends, driven by a reformulation of all flavors, along with brand investments, smart brand innovation, and strong distributor support in retail execution. Let me turn now to our other brands, beginning with Twisted Tea, our growth leader. Twisted Tea is a unique product with brand positioning that resonates with more and more consumers. In the third quarter in measured off-premise channels, Twisted Tea expanded its position as the number one FMB by gaining 4.3 share points over its position at the end of the third quarter of 2021 and had a 7.2 share point lead over the number two FMB brand. It again grew double digits, driven by improved distribution of 12 packs. Twisted Tea has been growing double digits for 20 years now off a larger and larger base, and there's clear evidence we can sustain a healthy growth rate. We improved our service levels and reduced out-of-stocks during the third quarter compared to the first half, which helped support this growth. In measured off-premise channels, Twisted Tea has been the fastest growing brand among the top 20 in all beer for the past 12 months and as volume growth has accelerated from 24% year-to-date to 33% in the latest 13 weeks. Twisted Tea's 24-ounce can is the fourth largest volume single-serve beer brand 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 brand awareness and distribution gaps across the country. Because of its growing 12-pack distribution, the brand is receiving strong retailer support, including expanded promotional and display activity. Additionally, to support pull, we're advertising the brand year-round to increase brand awareness and have received strong response from consumers to our current Tea Drop advertising campaign in our large college football themed initiative, building significantly on our activities for 2021. In the nine states where it's been launched, Hard Mountain Dew is showing good promise with a 12 share of FMBs in the measured off-premise channels where distributed in those markets. We will continue to roll the brand out and expect it to launch up to two additional states later in 2022. In the first nine months, our Samuel Adams brand depletions were down low single digits. But the brand did produce growth in seasonals and draft and held share flat in a difficult craft beer market. The Your Cousin From Boston campaign is continuing to attract younger drinkers. In addition, we're seeing growing trends in our emerging non-alc business, where Samuel Adams just the haze won the gold medal in the non-alc category at The Great American Beer Festival. Meanwhile, Angry Orchard remains the number one branded Hard Cider with a 46% share of the segment and measured off-premise channels. Angry Orchard brand depletions are down consistent with the low double-digit declines in cider category trends. Total Dogfish Head brand depletions in the third quarter also declined against a difficult craft beer market. However, our expanded lineup of award-winning Dogfish Head canned cocktails, including the 8-pack bar cart variety pack, grew depletions significantly in the third quarter off a relatively small base. Dogfish Head canned cocktails are gaining share and are now the sixth largest canned cocktail brand in measured off-premise channels. Turning to our supply chain performance, we're continuing our efforts to improve our supply chain performance and inventory management. We believe our investments in equipment, capacity, improved systems, and processes will help improve our gross margins and continue to improve our service levels over the coming years. In the third quarter, while we saw margin expansion year-over-year, it was lower than planned due to higher inventory obsolescence, primarily driven by the Truly product transition and the continued slow ramp-up of line efficiencies in our internal breweries. As a result, we've updated our guidance for gross margins for the full year 2022. As I mentioned earlier, we're working hard on our supply chain transformation initiatives and are committed to improving gross margins over time. In summary, despite near-term headwinds, we're optimistic about the long-term outlook for our diversified beverage portfolio. We continue to recover from the slowdown in the Hard Seltzer segment that experienced unprecedented growth up to the second half of 2021 and are now experiencing change in consumer demand as the environment becomes more normalized. Our company has proven innovation and brand-building capabilities, the top sales organization in beer, and a cash-generative business model with an excellent balance sheet to support long-term growth, even as we navigate some challenges in the near term. Now, I'll hand over to Frank to discuss third quarter financials, as well as our outlook for the remainder of 2022.

Thank you, Dave. Good afternoon, everyone. For the third quarter, we reported net income of $27.3 million or $2.21 per diluted share, compared to a net loss of $58.4 million or $4.76 per diluted share in the third quarter of 2021. This increase of $85.7 million was $6.97 per diluted share and was due to lapping the 2021 combined direct/indirect costs related to the 2021 slowdown in Hard Seltzer category growth, as well as increased net revenue and lower advertising, promotional, and selling expenses, partially offset by increased income taxes and a noncash impairment charge in the current quarter and increased supply chain costs. In the third quarter, we recorded a $27.1 million noncash impairment charge for the Dogfish Head brand as a result of the company's annual impairment analysis. The impairment determination was primarily based on the latest forecast of brand performance, which has been below our initial projections made at the time of the transaction. We believe there is strong potential for future brand growth, particularly in the canned cocktails category, which is in its early stages of development, and we remain committed to growing the Dogfish Head brand overall. The third quarter continued to show sequential shipment and revenue improvements and generated over $100 million in operating cash flow, following the strong second-quarter cash flow performance. However, the volume performance primarily related to Truly and the corresponding inventory obsolescence continued to negatively impact gross margins. Shipment volume for the quarter was approximately 2.3 million barrels, a 1.4% increase from the prior year, reflecting increases in the company's Twisted Tea, Hard Mountain Dew, and Samuel Adams brands, partially offset by decreases in our Truly Hard Seltzer, Angry Orchard, and Dogfish Head brands. We believe distributor inventory as of September 24, 2022, averaged approximately five weeks on hand and was at an appropriate level for each of our brands. We expect inventory levels for the remainder of the year between four and five weeks on hand. Our third quarter 2022 gross margin of 43.2% increased from 30.7% margin realized in the third quarter of 2021, primarily due to lapping prior-year costs related to the 2021 Hard Seltzer slowdown, partially offset by higher inventory obsolescence costs and returns. The higher obsolescence costs were primarily related to the recent Truly product reformulation and lower-than-expected shipments. Inflationary cost increases primarily due to increased packaging, ingredients, and energy costs were offset by increased pricing with a net neutral impact on gross margin. Our third quarter advertising, promotional, and selling expenses decreased $13.1 million or 7.9% from the third quarter of 2021, primarily due to a net decrease in brand investments of $9.5 million, mainly driven by lower media costs and decreased freight to distributors of $3.6 million, primarily due to lower freight rates. General and administrative expenses increased by $5.3 million or 16.6% from the third quarter of 2021, primarily due to increased salaries and benefits costs. Our depletions and shipments for the first 42 weeks of 2022 have each declined 6% from the comparable period in 2021. Based on our year-to-date performance and current projections for the fourth quarter, we are narrowing our full-year 2022 earnings guidance per diluted share to between $7 and $10 from between $6 and $11. This projection excludes the impact of the noncash impairment charge of $27.1 million or $1.61 per diluted share, and is slightly sensitive to changes in volume projections, particularly related to the Hard Seltzer category, supply chain performance, and inflationary impact on consumer spending. The 2022 fiscal year includes 53 weeks compared to the 2021 fiscal year, which included only 52 weeks. Full year 2022 changes in depletions and shipments are now estimated to be between a decrease of 7% and a decrease of 4%, a change from our previous estimate of between a decrease of 8% and a decrease of 2%. 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 four and six percentage points on our fourth quarter depletions and shipments growth rate. We expect increases in revenue per barrel of between 4% and 5%, a change from our previous estimate of between 3% and 5%. Full-year 2022 gross margins are expected to be between 42% and 43.5%, a decrease from our previous estimate of 43% and 45%, primarily due to the impact of higher inventory obsolescence, as well as lower brewery efficiencies as we slowly ramp up our new integrated variety pack lines. We continue to expect to cover inflationary cost increases through pricing. Our full-year 2022 investments in advertising, promotional, and selling expenses are expected to decrease between $35 million and $45 million, a change from our previous estimate of a decrease of between $30 million and $50 million. This does not include any increases in freight costs for the shipment of products to our distributors. We estimate our full-year 2022 effective tax rate to be between 26% and 27%. We expect capital expenditures of between $105 million and $125 million, a change from our previous estimate of between $110 million and $140 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 $222.1 million as of September 24, 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. Lastly, we are planning to give full-year 2023 financial guidance on our fourth quarter earnings call in February 2023. This timing better aligns with our detailed internal budgeting process and will be based on more current information about the state of the consumer and the supply chain environment.

Thank you. We will now be conducting a question-and-answer session. Our first question comes from the line of Nik Modi with RBC. Please proceed with your question.

Yes. Thank you. Good evening everyone. I have two questions. One is on Twisted Tea. I appreciate some of the details you gave about 12-pack expansion and advertising more during the year all across the year. But there are still a lot of questions obviously from investors in terms of sustainability of this brand, especially given some of the situation that happened with Truly over the last couple of years. So maybe you could provide a little bit more detail on why you guys are so comfortable that you can grow this brand going forward? And more importantly, what lessons can you learn from Truly to really apply to Twisted Tea to make sure that you could mitigate risk of category fatigue, especially as more competitors enter the fray? And I have one more question.

Great. Thank you, Nik. This is Dave. I'll attempt to address that. When considering brand development, especially for Twisted Tea, there are two main factors we focus on. The first is physical availability, which means ensuring the brand is easy to find. The second is mental availability, making it easy for people to think of the brand. Over the past year, we've reached a tipping point in both areas. Regarding physical availability, we've discussed previously that our 12-pack distribution has grown to about 64% ACV, allowing our larger customers to support the brand more actively than before. We also expanded shelf space by approximately 35% this year, further enhancing our physical presence. On the mental availability front, we significantly increased our media spending last year and built on that this year with a proven campaign based on our testing. We're also advertising nearly all year round to boost incremental reach. Together, these strategies have fueled accelerated growth from an expanding base. However, if we dig deeper, in convenience stores, which are the largest channel for FMBs, our original Twisted Tea 24-ounce has around 69% ACV and is well distributed. Yet, some single-serve flavors like half-and-half peach raspberry are less widely available, and there's limited 12-pack distribution in that channel. We see considerable growth potential here, especially since higher developed markets typically have three or four single-serve SKUs in convenience stores, while lower developed markets often only have one or two. When we look at larger formats, our focus remains on the 12-pack, with the original Twisted Tea at 64% ACV. We have three other 12-pack varieties: the party pack, half-and-half, and our newly launched light version, which still has lower distribution. Again, higher developed markets tend to have three 12-packs, while lower developed ones have one or two. Additionally, we believe there are opportunities in the on-premise space, where we offer the draft version and our primary package is the original 12-ounce can. Twisted Tea holds a considerable share of FMBs on-premise, and we are only beginning to penetrate that market. Lastly, from a physical availability standpoint, as we continue discussing the brand, our wholesalers, especially in less developed markets, are becoming increasingly enthusiastic about our momentum in other parts of the country. In terms of mental availability, household penetration stands at about 4.7%. Using Mike's lemonade as a comparison, which has a penetration of 7.5%, indicates that we have room for improvement. Also, in brand awareness, we are 7 to 10 points behind Mike's. Twisted Tea's brand awareness is in the low 80s, compared to Mike's low 90s. To conclude, we haven't overly extended our brand; we've focused on sustainable growth without the need for excessive line extensions, and we believe we can continue to grow healthily from here.

Very helpful. And the second question is just on Truly. I mean, looking at numerator data, it's pretty clear that the top four brands in the category, top four or five, are basically responsible for all the category penetration, and all the rest are not really helping the overall category increase penetration is just more share shifting. So, as one of the category leaders, I'm just curious, as you engage retailers on this topic, I mean, what's the feedback, or how do you get this category moving in the right direction again in terms of household penetration?

Yes, that's a good question. We've been talking to retailers over the past few months about next year, and it seems they are starting to get it. Interestingly, the ready-to-drink category now has more brands than the hard seltzer category, so retailers are shifting their focus. We expect that the bottom five brands in any market will likely disappear next year, and hard seltzer currently holds about 11% of the market share, which seems reasonable. While that share might shrink, the leading brands will take up a larger portion of the market, and we anticipate some cleanup in this space, with retailers recognizing the need for it. A major point of discussion is whether RTD cocktails will experience the same challenges that hard seltzer faced. Shopping for these can be quite complicated. Additionally, there were specific reasons why consumers initially gravitated toward hard seltzer as a refreshing, easy-to-drink alternative to beer and other alcoholic beverages. Unfortunately, those appealing qualities have been diluted amid the influx of options over the past couple of years. We aim to address this with our current advertising campaign and future iterations to remind consumers why they chose this category in the first place. I also believe that continuously adding more SKUs isn’t the way forward, as it can further confuse consumers. Instead, we should focus on smarter innovation and return to lighter flavors, which consumers seem to prefer. Although we've successfully promoted our bold flavors, like Margarita, this hasn’t significantly impacted our overall business as we've lost sight of the demand for light-flavored seltzers. We have great flavors to offer, and it’s essential to remind consumers of those offerings as we move into 2023.

Helpful. Thank you.

Thank you. And the next question comes from the line of Kaumil Gajrawala from Credit Suisse. Please proceed with your questions.

Hi. Can you talk about gross margins a little bit? And then maybe even if Frank, you're able to give a read on how much of the launching of the automated that the new variety pack line impacted this particular quarter? And are you up and running now, we're no longer feeling the drag from that?

Yeah. No, happy to do that. So gross margin, clearly, for the quarter came in below our own expectations. And I think the main reason, as I mentioned it in the prepared remarks, was higher obsolescence. That was mainly due to the changeover to the new Truly formulation. There was – one of the largest projects that we have done, if you look at the complexity of the portfolio, the number of variety packs that we have and the different flavors that are in there. So that was a big project. And I think you have to see that in conjunction with like the current supply chain situation that we're in, we've opted, as we've mentioned before, to run slightly higher inventories for two reasons. One is we want to make sure that we increase our service levels and we have enough inventory to service our wholesalers. The other one is, you look at the global supply chain situation and the disruptions that we're seeing. We wanted to make sure that we're not running out of packaging materials. So this is nothing new. What happened is that the volumes with Truly and with an unfavorable mix came down, and we were left with more stranded product than what we had originally expected. So this was impacting, that was the main reason why the gross margins were impacted and lower than our expectations. That's clearly not something that will happen all the time. That's more one-time in nature. We've seen some progress in the rest of the drivers. I mean, if you remember, when I lay out the drivers to get back to 50%, we're making progress, the variety pack lines. We've given a range, and we said, well, it's going to take some time to improve the efficiency. We have seen slight improvements, but there's still a lot of room left to get to the target efficiencies that we are seeing and that we are looking for to get back to 50%. So I'd say, overall, the overall building blocks have not changed. The target hasn't changed, but this quarter was clearly impacted by the additional obsolescence.

Got it. And it sounds like it's complete any additional obsolescence is all done that you're operating under the new.

Well, we are now pretty much fully transitioned to the new formulation on all the products. So that should have been it.

Okay. Great. And then can you maybe just add a little more detail on the Dogfish Head impairment? Unlike seltzer, which came and turned so fast, Dogfish has been around for a while. So just maybe just some color on what happened there.

Yes. So this is a relatively straightforward accounting assessment. If you recall, the transaction happened in the middle of 2019, which was literally half a year before COVID, and we had our own business proposition, which was the basis for defining the brand value that we put on the balance sheet. So we had certain assumptions in there. Then you have to compare your revenue assumptions to what you're really achieving, and that's the annual impairment test that everybody is doing typically. The revenues are below what we had defined in the business proposition. And the main reasons, I would say, is like COVID came in the middle of the integration, it took a little longer, clearly, the craft beer market, if you look at the total beer category, the traditional beer side, the craft beer side has been suffering a little bit. So that contributed basically to the lower revenues versus what we had in the business position. From a business perspective, I want to be clear, we like the asset. We think Dogfish Head is a terrific brand. And I think what has changed since 2019 is that we have no Dogfish Head canned cocktails, which were not really part of our consideration in 2019. And the canned cocktails, as you know, they are playing in the growing segment of the beer category. In the Beyond Beer segment, they're getting tremendous traction, we have extremely high growth rates. So if I look at the profile of the Dogfish Head brand portfolio, I'm really happy with that. And I think it will provide a lot of growth and of a different quality, quite frankly, going forward than just having purely the craft beers, which we're kind of considering in 2019. So I think the structure is a healthier structure, but given the size of canned cocktails, it will take a little bit longer, and that's why we took the impairment.

Got it. Thank you.

All right.

Thank you. And our next question comes from the line of Eric Serotta with Morgan Stanley. Please proceed with your question.

Great. Thanks for taking the question. Wondering if you could give us some more color around Truly performance since the reformulation. I realize it's still early, but it has been in the market for a couple of months now. Any green shoots? Any more specific data that you could point to? Because when we look at the overall data for the Truly lightly flavored packs, it looks like it's going in the wrong direction and it hasn't really improved. So, any help there would be appreciated.

Okay Eric, this is Dave. We started with a number of six variety packs, the first being citrus, which we launched in early August and completed by the end of September. Consequently, there's minimal impact on our Q3 results, so you likely won't notice anything there. However, I understand you are looking at IRI or Nielsen data, which is current as of the second. Based on what we're observing through social media and feedback from consumers, customers, and wholesalers, the response to the product change has been positive. We feel confident about the reformulation and product quality we delivered, but this is a competitive market, and changes won't show immediate results. Regarding early indications of improvement, our recent numerator data indicates a rise in buy rates over the past four weeks. Notably, our buy rates for Truly have increased this year, contrary to your concerns. We are witnessing growth in the brand with certain customers, though I can't disclose their names due to confidentiality. While we're seeing some positive signs, it's still early on. We're in a phase where people are evaluating the category week-to-week, and forming large conclusions based on short timeframes isn't something we anticipate. As the quarter progresses, we expect to see clearer outcomes that won't require explanation on an earnings call. Additionally, we are pleased with our advertising performance, which rated highly, and we have a comprehensive way to test our messaging. Although we've increased our advertising efforts, these changes take time to yield results. Lastly, the introduction of Truly Vodka Seltzer is beneficial as it draws attention back to the Truly brand. We have a substantial consumer base with the highest penetration in hard seltzer for individuals aged 21 to 34, indicating a willingness to try our product. As we move into next year, you'll observe continued advertising efforts and other market activities to clearly communicate the enhancements in our product. Ultimately, I believe we will need around three to six months to accurately assess the impact of these changes.

Okay. And then as you look at the broader Truly portfolio, you kind of alluded to you guys being part of the problem in terms of the category confusion or consumer confusion. Are there plans to further rationalize the portfolio? I had picked up that you were discontinuing the Truly Iced Tea. But even with that, do you have too many variety packs out there given where you see the shelf space going? And are there plans to rationalize that?

I think that's – probably our decision and probably our customers decisions. But Truly Tea is going away. I think what you're going to see is more of a focus, a communication focus on the core brands, the core lighter flavor brands. Citrus, Tropical, Wild Berry, Margaritas performed really well. Lemonade and Fruit Punch will stay. And they're part of the reformulation as well. So we think we're probably not going to be adding permanent SKUs next year is unlikely. And I think what we're going to do is really double back down on the core lighter flavors. And we'll see where that goes. But I think we've been increasing at a pretty good pace. You're not going to see that kind of pace continue.

Okay. Thanks. I'll pass it on.

Thank you. And our next question comes from the line of Kevin Grundy with Jefferies. Please proceed with your question.

Hey, great. Good evening, guys. Two for me, if I could. Just, look, understanding the 2023 and beyond is a lot more important. The guidance for this year implies a really wide range, I guess, given where we are and the fact that we're much of the way through October. So Frank, maybe just comment on that. Why such a wide range? Where are you within the range now? I think would be helpful to folks. And then a broader question for Jim and Dave, I'll just ask them both now if that's okay. I guess, given the impairment charge to Dogfish for the reasons that Frank talked about, I don't think it's lost on folks in terms of what's happened within the craft beer industry. But Jim, it would be great to kind of get your updated thoughts on sort of the state of the union here in terms of the outlook for beer category volumes within sort of the fourth category that's emerging here with ready-to-drink. And I think, sorry for being for both, but kind of the elephant in the room, here is I'd love to get your thoughts on why should investors be confident that multi-sell through don't go the way of mainstream beer? And we're potentially looking at low single-digit declines. I know, it's a lot worse than that. But as we – at least at the moment, but as we level off here, what gives you confidence that, that's going to return to growth. So a lot in there. I appreciate your thoughts. Thank you.

Thank you, Kevin. Let me begin with the guidance. We have refined our guidance based on current observations, and it remains somewhat volatile. Specifically for shipment guidance, we have adjusted it from a range of minus 2 to minus 8 million down to minus 4 to minus 7 million. We have slightly narrowed the pricing range as well. Overall, at the midpoint, our net revenue expectations are largely unchanged. However, we anticipate some volatility in the fourth quarter. For context, last year we experienced significant shipment declines; fourth quarter shipments were down about 25% compared to the previous year and 2020, while depletions increased by 15%. This followed a Q3 where growth was at 11%. We want to ensure this volatility is reflected in our guidance. Additionally, the 53rd week will contribute some growth. So far this year, we’re seeing improvements, with our trends indicating an increase of roughly 6% to 7%. We hope this momentum continues, especially as the innovation we've planned, particularly for Truly, is skewed towards the fourth quarter. Regarding margins, we have also refined our expectations a bit. There is volatility in both internal and external supply chains, and we have seen higher obsolescence than anticipated. However, we feel we have a solid grasp on the situation compared to last year, although it still relies heavily on volumes and our efficiency progress. As for EPS, the midpoint has remained consistent, and we have narrowed it to $3. We are confident that we will remain within this range, but it is the volatility on the top line that affects the width of our range.

Kevin, I'll address the second part of your question, which had several components. Your initial question was about the current state of the craft beer category. I would say that craft beer is now a mature category. It has established itself as a staple in American beer culture with a significant consumer base. It's uncommon to find a bar today that doesn't offer at least one, often several craft beers. Therefore, it is a stable and mature category, albeit quite competitive. There is still innovation occurring, as demonstrated by Boston Beer Company's introduction of Just The Haze, a non-alcoholic craft beer that was recently recognized as the best non-alcoholic beer in America at The Great American Beer Festival. We continue to see opportunities for high-quality innovation in craft. Overall, the category remains stable and mature. With Dogfish Head, we view it as a strong, somewhat unique brand that offers special qualities to the rapidly growing RTD category, which has increased by 79% this year. Dogfish Head is currently ranked as the fifth or sixth RTD brand. It has a reputation for high quality, innovation, and culinary ingredients, which sets it apart in the crowded RTD market. As a craft producer, it embodies the values of innovation, quality ingredients, great taste, and appeals to consumers looking for off-centered options. We feel very positive about Dogfish Head's strength within the mature craft category and its distinctive role in the RTD canned cocktail market. You also inquired about the future of malt-based seltzers and whether they will decline like traditional beer. While I don’t have definitive insights, I would note that malt-based seltzers tend to attract a younger demographic, specifically those aged 21 to 35, compared to traditional beer, which is facing challenges with that age group. Seltzers are relevant to new, younger drinkers because they offer variety and innovation, with unique flavors that are easy to enjoy and do not require an acquired taste. Additionally, they are often perceived as healthier options due to lower sugar and carbohydrate content. As such, malt-based seltzers resonate with the preferences of younger drinkers and could continue to grow, whether by mid-single digits, low single digits, or even double digits. However, the exact growth trajectory remains uncertain.

Okay. Very good. Thanks for all the time guys. I appreciate it. Good luck.

Thank you.

Thank you. And our next question comes from the line of Bonnie Herzog with Goldman Sachs. Please proceed with your question.

All right. Thank you. Hi everyone. I wanted to circle back on guidance with a follow-up. I guess, just thinking about your updated guidance ranges, you narrowed the ranges, but you took the midpoint of your depletions and shipment guidance down by 50 bps and the midpoint of your gross margin guidance down by 120 bps. But I guess you left the midpoint of your GAAP EPS guidance the same. So I guess I'm just trying to reconcile this. I mean, should we assume your full year EPS realistically, I guess, comes in toward the low end of your new range, or are you just maybe being conservative on some of the other ranges?

No, I think it's more of the latter, Bonnie. I don't – I wouldn't – we're not putting ranges out where we believe we're going to come in at the low end. I mean, we're adjusting the ranges accordingly. I wouldn't read too much into the shipments, the half percentage point, we narrowed it on pricing. So the way we're looking at it is really revenue is going to stay about the same. I mean, it's the volatility that we are seeing in the market. And I referred to also especially growth rates versus prior year, especially when you look at shipments, I don't think we have the precision of 0.5 point, quite frankly. So that's it on the gross – and on the gross margin, we had a few surprises. So I think it would be the latter. But I wouldn't expect that – I wouldn't interpret that that we would target the lower end of the EPS range. That's not the case.

Thank you. And our next question comes from the line of Steve Powers with Deutsche Bank. Please proceed with your question.

Great. Thanks. I actually wanted to go back to Twisted, if I could. And two questions. The first one, I think, is pretty short. Just – I don't know, if you've got any updated thoughts as to how much, if at all, Twisted in the current environment is itself benefiting from consumers moving away from seltzer and experimenting in finding Twisted?

Yeah. I think on that – if we went back a year ago and looked at this where hard seltzer is sourcing volume. It really didn't impact Twisted Tea very much at all. I mean, it does sort of extend. Every brand, everybody drinks everything, but it didn't over-index by any means with hard seltzer. So I don't think it's getting like a tailwind now as the hard seltzer goes down. But I'm sure there are some consumers that are switching, but it's not – I would say, it's not material to Twisted's current growth.

Okay. Okay. And that kind of leads to my second question. And maybe part of the answer isn't what you just said. But I just – I kind of going back to how Nik started on the topic. You talked a lot about growing the brand double digits for 20 years, very patient, deliberate robust, but relatively deliberate growth. And so it feels like the brand has been sort of pulling demand kind of ahead of availability. And now I just – I guess I'm a little concerned, I think this is the root of kind of what Nik was asking about, too, that all of a sudden, as the brand has accelerated, there's a really big distribution push and a big advertising push, kind of almost getting ahead of the natural pull. And that maybe as consumers are out there exploring for the next kind of novel thing that they're kind of finding Twisted as part of that search. And that the experimentation is part of what's driving the growth right now. But then as we fast-forward a year, 18 months from now, after a big distribution push, just like you were talking about seltzer, the novelty had kind of worn off, that we look back and say the novelty on Twisted Tea has worn off. So I guess just any additional thoughts you might have on what I'm saying and how you're comfortable that that's not happening.

Yes. I would say that the distribution has significant potential for growth. We're not nearing the end of our opportunities, whether through various channels like small format convenience or larger single-serve and multi-pack options. There's still a considerable amount of distribution to develop. Regarding mental availability, while we've boosted our media presence and increased awareness and household penetration, it remains very low. We're not close to peaking. While we might not be able to sustain 30% growth every year, we still see ample room for expansion. When I think about our brand, I immediately consider convenience stores—they represent our freedom of choice channel where consumers engage without heavy promotions. Our brand is the leading player in the flavored malt beverage sector and ranks among the top in all beer categories within convenience stores. However, there's a geographic imbalance; for instance, in states like Montana or Vermont, Twisted Tea is prominently displayed, whereas larger cities like New York or L.A. only have limited availability. The brand clearly has a loyal following, which has been relatively small but is now expanding without aggressive pressure on consumers. Our social media efforts are genuine without making us feel overly commercial. Time will reveal the outcomes, but we believe that balancing physical and mental availability, with potential for further growth in both areas, puts us in a unique and advantageous position—one that likely only a few brands in this entire category occupy.

Yes. Okay. That's fair, and very helpful. Appreciate it. Thank you very much.

Sure. Thanks.

Thank you. And our next question comes from the line of Rob Ottenstein with Evercore. Please proceed with your question.

Thank you very much. Jim, I'd like to hear your insights on the current trends in consumer behavior regarding beverage alcohol and how this shapes your strategies, especially for Truly. We're noticing that spirits are experiencing mid single-digit growth driven by premiumization, while mainstream beer is declining a few points as it has been. Seltzers occupy a middle ground, and we're currently in an adjustment phase. My question is whether seltzers are priced appropriately, especially as we face a potential recession, considering that seltzers cost around $30 a case while BudLight is $20 a case. You've mentioned that some consumers, particularly older demographics, are trading down. With seltzers appealing to younger consumers, do you believe the pricing is fair in comparison to spirits and mainstream beer? Is Truly's pricing competitive, and do you think additional promotions or innovative marketing could enhance perceived value? This is my initial question.

I believe that we are not witnessing a significant shift towards lower-priced alcoholic beverages overall. While there is some movement towards sub-premium products, the categories that are expanding, such as Twisted Tea and Mexican imports, are priced at a premium, although not quite at a 50% markup. The growth in the beer and alcoholic beverage market is leaning more towards premium and lower-end products. Historically, we’ve seen unique offerings like craft beers or innovative drinks like Truly and Twisted Tea thrive even during recessions. This may be because they represent an affordable indulgence; while you might forgo a fancy dinner, you can still treat yourself to a 12-pack of premium drinks. In my view, traditional beer likely won’t see growth in the foreseeable future, and the same may hold true for traditional wine as demographics shift. I see growth potential in a new category that doesn't fit conventional beer, wine, or spirits. The beer industry is well-positioned within this emerging segment, as it generally resembles beer in format and packaging, requiring specific production and distribution capabilities. Boston Beer is well-positioned in this growing Beyond Beer category, which constitutes a significant portion of our business. We have focused our investments and resources accordingly, including high-speed can lines and an effective distribution network to ensure our products are prominently placed on store shelves.

That's great to hear. Can you provide an update on your current thoughts regarding capital allocation? The cash is accumulating nicely, and your balance sheet looks excellent. Is it time to consider dividends or share buybacks? Are there potential strategic acquisitions worth exploring? I'm looking for your latest insights on these matters. Thank you.

Yes, definitely. As you know, our approach to capital allocation remains unchanged. We are a growth company, and while we experience fluctuations, our long-term focus is on growth, which directs our investments. The last few years have been quite volatile for the global environment we operate in. Typically, any excess funds not required for the business are returned to shareholders, and historically, we have preferred share repurchases over dividends. I don't anticipate that preference changing in the near future. With our balance sheet looking strong, we feel more secure than we did a year ago, and when the appropriate time comes, we will make a formal announcement.

Terrific. Thank you very much.

All right.

Thank you. And our next question comes from the line of Nadine Sarwat with Bernstein. Please proceed with your question.

Thank you. All right. So two questions for me. First, providing guidance over the last 12 months, I mean, has been challenging for Boston Beer given what's been happening with the Hard Seltzer category, the uncertainty. So what's behind your decision to commit to providing fiscal 2023 guidance at your next results? And then secondly, coming back to Twisted Tea, there are many new entrants coming into the hard tea space, most notably Lipton with its alcoholic brand. How do you anticipate Twisted Tea performing in this increasingly competitive environment?

Yes, Nadine. Regarding our guidance for 2023, there is a lot of volatility, and we want to provide guidance when we feel more confident in the data. Typically, it's standard practice in the industry to announce guidance with our Q4 results, which most companies are doing, and that approach makes sense in the current environment. Our planning has improved significantly in understanding category trends, consumer behavior, and the progress of our supply chain. That's why we decided it wouldn't be beneficial to give preliminary guidance now. With the Q3 earnings call, we prefer to wait and provide guidance alongside the Q4 earnings call, which we believe will be more helpful for everyone involved.

It's a relevant question. There's a surge of competitors entering the tea market because it's a large and rapidly growing category. We operate in a highly competitive landscape. Historically, this isn't the first time we've faced an influx of competitors. Twisted Tea has been established for over 20 years, and numerous competitors have emerged, from small startups to major breweries like Anheuser-Busch and Molson Coors. Over the years, Twisted Tea has maintained over 90 percent of the category, with no significant rival. That said, I acknowledge both the quantity and quality of the new competition, which includes everyone from small entrepreneurs to large companies with proven beverage track records like Pepsi. This represents a new level of competition, but we've successfully navigated such challenges in the past due to our loyal and strong customer base. Many people have been drinking Twisted Tea for ten to twenty years. It's the brand that comes to mind when discussing hard tea, effectively dominating the category. As Dave mentioned, you can see it prominently displayed in stores, while other lesser-known brands sit next to it without the same credibility, longevity, or reputation. Twisted Tea has established mental availability; when you think of hard tea, you think of Twisted Tea. The business is certainly competitive, and with success comes a wave of new competitors. Our investment will increase, and we have strong support from our wholesalers since Twisted Tea is now a significant aspect of their business. They will work to expand our shelf space, but we can't prevent others from trying to succeed. Nonetheless, we've dominated this category for 20 years, and it has stabilized. An appropriate comparison would be Mike's Hard Lemonade, which has also faced numerous competitors and has held a 90 percent market share for over 20 years. So, it's not unusual for Twisted Tea to sustain its 90 percent share in this business.

Got it. That's very helpful. And maybe just a clarifying point. I didn't mean why you wouldn't provide fiscal 2023 guidance today. I simply meant that some companies might choose to delay providing guidance at the next results due to the uncertainty surrounding hard seltzer or the macro environment. But you have committed to providing guidance. So I guess that's what I was asking.

Okay. Yes. At this point, we haven't made any decision to not provide guidance, we just provided in with our Q4 results. Yes.

Understood. Thank you very much. I’ll pass it over.

Okay. Thanks.

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

Hi, good evening, everyone. I hope you're doing well. So maybe going back to that last point on guidance and recognizing that you're choosing not to provide it today. I was just hoping to get your view on whether you have visibility on kind of the gross margin trajectory. And I guess, specifically, how should we really think about the pace and magnitude of margin recovery as you look out to 2023, kind of lapping some one-time issues that hopefully shouldn't repeat here? And I guess, kind of the root of the question is, I'm really just trying to understand, based on what you know today, how quickly can you return to that long-term gross margin goal of kind of north of 50%? Thanks.

Yes, that’s a fair question. I'll do my best to address it without providing any guidance indirectly. As I have mentioned previously, we are confident in the gross margin for the building block store. What we experienced this quarter hasn’t altered that perspective. We understand what is necessary to return to a 50% margin. During our last earnings call, we indicated it would take time, and we want to see more evidence of progress as we move forward. We believe we are on that path. For next year, we anticipate progress across various streams. We are mindful of the one-time events we discussed, such as obsolescence charges, which were significant in the first half of this year following 2021. We will take all of this into account when providing guidance. Fundamentally, regarding gross margin, our position remains unchanged from what we communicated during the July earnings call.

Thanks. I appreciate it. Best of luck.

Thank you.

At this time, there are no further questions. And I would like to turn the floor back over to Jim for any closing remarks.

Thank you, everybody, and we look forward to speaking again in February.

Thank you, everyone. This does conclude today's conference call. You may disconnect your lines at this time. Thank you for your participation, and have a great day.