Earnings Call Transcript
Boston Beer Co Inc (SAM)
Earnings Call Transcript - SAM Q4 2022
Michael Andrews, Associate General Counsel and Corporate Secretary
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 fourth 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 over to Jim for some introductory comments.
James Koch, Founder and Chairman
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 and our 2023 plans. Dave will then turn the call over to Frank who will focus on the financial details of our fourth quarter results as well as our outlook for 2023. Immediately following Frank's comments, we'll open the line for questions. Over the last few years, our company has experienced rapid growth, ending 2022 with a revenue base of $2.1 billion, which is almost double the $1.2 billion in revenue generated in 2019. A large portion of this increase is attributable to the outsized growth of the Hard Seltzer category. As we mentioned on previous calls, the Hard Seltzer category dynamics have been challenging as the economy reopened and it's been difficult to predict where consumer demand will ultimately fall. We had expected early trends to improve in the second half of 2022 against easier prior year comparisons. Truly performance has not yet turned around, and Dave will take you through additional plans we have for Truly we expect to help improve the brand performance in the second half of this year. Looking back on 2022, our projections for Truly and some of our new brands were too high, and we produced and sourced materials at the upper end of our projections to avoid out of stocks. We've also had an expansion of product offerings that has introduced more complexity into our supply chain, and we planned our cost structure at higher levels of volume. This has resulted in financial performance that is below our expectations. In 2023, we are working to simplify our business to reduce complexity and improve margins as well as adjusting our cost structure in line with our current volume expectations. We believe the actions we are taking will benefit the company over the long term and that the Beyond Beer category, where we have an advantaged position will grow over the next several years. We expect the operational and supply chain changes we are making this year, combined with our history of innovation, strong brands and our top-ranked sales force will lead us to long-term success. A strong balance sheet enables us to continue to invest in our brands. And today, we announced that we repurchased $8.9 million in stock thus far in 2023. We released our first-ever environmental, social and governance report, which established a baseline of data that we will work to improve over the long term. We now have a more standardized approach for understanding our energy use and our water use. The ESG report also allowed us to highlight our focus and continued progress against our efforts to cultivate a culture of inclusion through awareness, engagement and accountability across the company. As shared in this report, our coworkers gave Boston Beer high scores on questions related to pride in working with the company, belief in our values, our concern for their safety and well-being and their confidence in the future of Boston Beer. To close out my remarks, I would like to thank our outstanding coworkers, distributors and retailers who continue to support our business. And now I'll pass the call to Dave for a more detailed overview of our business.
David Burwick, CEO
Thanks, Jim. Hello, everyone. Our 2022 full-year volumes and revenue came in at the higher end of our financial guidance. However, the mix of volume came in differently than planned, and we also produced and sourced to ensure we would not have out of stocks or retail. This resulted in supply chain inefficiencies, particularly outside scrap on Truly, which impacted our margins and earnings. For the 2022 full year, we generated very strong operating cash flow of about $200 million, which gives us financial flexibility to invest in our brands for the long term. Importantly, we've learned much in the past year, understand where opportunities exist and have new plans in place to improve overall performance with an emphasis on getting Truly back to share growth. We operate in attractive categories as the Beyond Beer category grew 4% in dollars over the last 52 weeks and had a CAGR of over 25% over the last 5 years. Our plans include reducing the complexity in our supply chain, while allowing us to better focus our resources on our top 2 priorities, sustaining Twisted Tea's industry-leading growth and gaining share in Truly. We've also evaluated all our operating expenses to ensure we spend in a more disciplined manner while continuing to invest in advertising and other initiatives to support our brands. In 2023, we expect overall volumes to decline with strong growth in Twisted Tea, offset by our expectation for continued negative Truly volume growth as the Hard Seltzer category likely will decline between 10% and 15%. We also believe we have opportunities to be more focused on our product offering. We expect this to strengthen the underlying health of our business and contribute to future margin improvement. Additionally, we're lapping against the 53-week fiscal year 2022, which will lead to a headwind of approximately 100 basis points on our volume and top line growth performance in 2023. I’ll now provide some color on our brands. Twisted Tea was the #1 growth brand in all of beer in 2022 and increased its lead as the #1 FMB by more than 8 volume share points, gaining 3.4 share points in 2022 in off-premise measured channels. As evidence of its durability, the brand's fourth quarter dollar sales growth in off-premise measured channels accelerated to 33% versus the full year's 31% and Twisted Tea's 2023 year-to-date growth rate has further accelerated to 36%. This is a result of an effective brand-building campaign, our growing annual college football Tailgate program to extend the season, improved distribution of 12 packs and improved service levels. In 2023, we'll continue to increase our brand spend to advance Twisted Tea's position within Beyond Beer. We remain confident that Twisted Tea will sustain a strong double-digit growth in 2023 for a number of reasons: First, we see a significant upside to introducing Twisted Tea to a much wider audience and growing the base of Twisted Tea drinkers. While household penetration and brand awareness are lower than competitors, brand consideration and purchase intent remain the highest in the category. Household penetration grew by 20% in 2022, and the buy rate increased by 7%. We will continue to invest in our top ad campaign to drive awareness, expecting that increased trial and adoption will follow. Additionally, there is still room for growth through increased distribution. We have achieved 50% ACV distribution on our original 12-pack, and the half-and-half and Party pack also have significant distribution potential. The 24-ounce single-serve offerings, primarily sold in convenience stores, have made Twisted Tea the third best-selling single-serve brand in the beer category, and we see opportunities for increased distribution across all of our single-serve flavors. Furthermore, Twisted Tea Light has successfully attracted new drinkers and former brand rejectors. We've received an encouraging early response to our new Twisted Tea light 110-calorie product that we launched in high developed markets last year. It only has 9% ACV distribution as we start 2023. Twisted Tea Light is bringing new drinkers into the brand family who are looking for lower calories but big flavor. Fourth, there's much opportunity to increase brand awareness and availability in Twisted Tea's underdeveloped markets. We still have many historically underdeveloped geographies such as Texas and California where the brand's awareness is 10 points lower than the national average and is just now starting to catch fire. For example, in 2022, we increased investment in Texas and in 1 year became our largest volume state, accounting for 10% of total Twisted Tea volume while growing 50%. Lastly, we also have underdeveloped consumer demographics, such as Latinos and African Americans, who represent an opportunity to grow the brand. Only 24% of Twisted Tea households are multicultural, but they're growing 18%. We have plans to continue to grow Twisted Tea with a diverse audience through investment in awareness driving media and increased product availability. As Jim mentioned in his remarks, we're disappointed that the reformulation of Truly has yet to improve trends and are planning a major refresh of the Truly brand in the second quarter of 2023 that includes new easy-to-navigate packaging, more motive versus product-centric brand communication elevated media spend across all channels, especially digital and social media and aggressive marketplace execution to improve product availability and visibility, especially with our lightly flavored variety packs. We've learned a lot and are putting that learning into action this year. For example, we realized in last year's second quarter after launching Truly Margarita that adding further bold flavor variety pack innovation was not going to be as successful as we had experienced with prior innovations as consumers were clearly overwhelmed by category news. Further, despite Truly Margarita's very good performance, it was the #1 new brand launch in beer in 2022, it was not as incremental to the Truly trademark as prior launches. It also became clear that consumers in their confusion were going back to the category basics and seeking more lightly flavored Hard Seltzers. And we have put too much executional attention towards our Boulder flavor lineup to the detriment of our variety packs. The reformulated CHO products that we launched in the fourth quarter have been well received by those consumers who know about the change, but we did not do a good enough job communicating those improvements on our packaging and then our advertisements so that more people will learn about the change. Our upcoming package redesign will present a cleaner, easy-to-shop look and forcefully communicate that we have a now more refreshing taste that includes real fruit juice. Our internal consumer testing work validated that we made big product improvements. Now we need to better communicate it to consumers to trigger trial and win back lapsed drinkers. We sharpened our advertising communication in January to reinforce that point, and the new packaging and more motive ad campaign will hit the market at the start of the second quarter. Based on this new work and stepped up brand investment, we're expecting to gain share this year, although the first quarter will be more challenging as we lap last year's Truly Margarita launch. We deliberately did not add new permanent flavor innovation in the first quarter of 2023, so we can focus on the reformulated lightly flavored core lineup and build the brand more sustainably without adding new permanent product offerings. Lastly, we launched Truly Vodka Seltzer in the fall ahead of 2023 to gain consumer learning and our experience with that launch has informed our approach with 2 new variety packs and updated packaging design and branding that will also hit the market in the second quarter. Sustaining the double-digit growth of Twisted Tea and the trajectory of Truly are our main priorities for the year, and we will dedicate significant attention and investment to them. At the same time, we have a strong portfolio of brands that we will continue to develop. Sam Adams kicked off the year with a notable Super Bowl spot announcing our remastered Boston Lager, which maintains the original Cook family recipe but offers a smoother finish thanks to improved brewing techniques. We are also increasing our investment in our seasonal portfolio, which is the only national seasonal beer and features summer rail during October feast. Additionally, we introduced a new non-alcoholic beer called Gold Rush to complement Sam Adams' Just The Hays, which was recently recognized as the top non-alcoholic beer in the country at the Great American Beer Festival. We'll continue to support other innovations, including the expansion of Dogfish Head can cocktails, the launch of Jim Beam, Kentucky Coors, FMB and the continued rollout of Hard Mountain Dew, but expect these to be smaller volume contributors in 2023 as they ramp distribution and find their audience. Turning to our supply chain. As we previously discussed, we're in the process of modernizing our supply chain through investments in equipment capacity and improved systems and processes. Our product portfolio has expanded over the last several years. This expansion and the volatility of the hard seltzer category have increased complexity. We're working hard on our supply chain transformation initiatives to improve line efficiencies in our internal breweries and better manage our inventory. The disciplined portfolio management I mentioned earlier as well as our new supply chain systems and processes should lead to better operational performance over time. It will take time for these changes to take hold. And as we previously disclosed, we expect to pay some shortfall fees to contract manufacturers in 2023 because of the lower Truly volumes. Given our expectation for lower volumes, we're closely reviewing and adjusting our operating expenses while continuing to invest in our brands. We expect to use these cost savings to support increased brand spend. And within brand spend, we're both converting non-working to working dollars and increasing the effectiveness of our spend through greater investment in digital and social versus traditional media. Despite near-term headwinds, we continue to believe that our business has significant margin improvement potential. In summary, we believe the investments we're making this year in enhancing our marketing plans and packaging for Truly, continuing to fuel Twisted Tea's momentum, reducing supply chain complexity and lowering our cost base should drive operational effectiveness and improve top line growth, market share and margin performance over the next few years.
Frank Smalla, CFO
Right. Thank you, Dave. Good afternoon, everyone. The fourth quarter continued to show sequential shipment and revenue improvement. However, as mentioned earlier, our gross margin was lower than expected primarily due to higher-than-expected inventory obsolescence and lower internal brewery volume. Shipment volume for the quarter was approximately 1.71 million barrels, a 16.7% increase from the prior year, partly due to an additional week in 2022 compared to 2021, reflecting increases in our Truly Hard Seltzer, Twisted Tea, Hard Mountain Dew, Angry Orchard and Dogfish Head brands, partially offset by decreases in the Samuel Adams brand. We believe distributor inventory as of December 31, 2022 average approximately 5 weeks on hand and was at an appropriate level for each of our brands. Our fourth quarter 2022 gross margin of 37% increased from the 28.7% margin realized in the fourth quarter of 2021, primarily due to lapping prior year costs related to the 2021 Hard Seltzer slowdown, partially offset by higher brewery processing and inventory obsolescence costs. The higher obsolescence costs were primarily related to our adjusted volume projections for Truly shipments and the Truly brand transition to real fruit. Inflationary cost increases primarily due to increased packaging, ingredient and energy costs were offset by increased pricing with a net neutral impact on gross margin. Our fourth quarter advertising, promotional and selling expenses increased $1.5 million or 1.1% from the fourth quarter of 2021, primarily due to higher media spend and higher salaries and benefits costs partially offset by lower local marketing investments. Freight to distributors was flat as higher volumes were offset by lower rates. General and administrative expenses increased by $5 million or 13.5% from the fourth quarter of 2021, primarily due to increased salaries and benefits costs. For the fourth quarter, we reported a net loss of $11.4 million or $0.93 per diluted share compared to a net loss of $51.8 million or $4.20 per diluted share in the fourth quarter of 2021. This decrease in the net loss of $40.4 million or $3.29 per diluted share was due to lapping the 2021 combined direct and indirect costs related to the 2021 slowdown in Hard Seltzer category growth as well as higher net revenue in the current quarter, which were partially offset by increased supply chain costs and slightly higher operating expenses. Turning to guidance. Our depletions for the first 6 weeks of 2023 have declined 4% from the comparable periods in 2022. Our 2023 fiscal year includes 52 weeks compared to the 2022 fiscal year, which included 53 weeks. We are currently planning 2023 depletions and shipments to decline 2% to 8%, inclusive of an approximately 1 percentage point negative impact from the comparison against the 53rd week in 2022. We expect price increases of between 1% and 3%. Full year 2023 gross margins are expected to be between 41% and 43%. We continue to expect to cover inflationary cost increases through pricing. Our full year 2023 investments in advertising, promotion and selling expenses are expected to change between a decrease of $5 million and an increase of $15 million. This does not include any increases in freight costs or the shipment of products to our distributors. In 2023, we expect non-brand savings to be largely offset by an increase in incentive compensation, which did not fully pay out in 2022. We estimate our full year 2023 effective tax rate to be approximately 28%, up approximately 160 basis points versus 2022. We are currently targeting full year 2023 earnings per diluted share of between $6 and $10. This projection is highly sensitive to changes in volume projections, particularly related to the Hard Seltzer category, supply chain performance and inflationary impact on consumer spending. Finally, as we plan for the year, please consider a few factors. We expect first quarter shipments to be at the lower end of our full year guidance since we are comparing against the launch of Truly Margarita, which had a significant impact on the first quarter last year. Additionally, we anticipate that Hard Seltzer trends will continue to be difficult. Margin improvement is expected to be more pronounced in the second half of the year, driven by volume trends, the anticipated timing of our cost reduction efforts, and the phasing of obsolescence expenses from the previous year. Consequently, we are expecting a net loss in the first quarter. Regarding capital allocation, we finished the year with a cash balance of $182 million and an unused credit line of $150 million, enabling us to invest in our core business, fund future growth initiatives, and return cash to shareholders. In 2023, we project capital expenditures between $100 million and $140 million. These investments will mainly focus on building capabilities and enhancing efficiencies. During the 2022 fiscal year, we did not repurchase any shares of our Class A common stock. During the period from January 3, 2023 through February 10, 2023, the company purchased 25,000 shares at a cost of $8.9 million. As of February 10, 2023, we had approximately $81.5 million remaining on the $931 million share repurchase authorization. We will now open up the call for questions.
Operator, Operator
Our first question comes from Nik Modi with RBC.
Sunil Modi, Analyst
Dave, could you elaborate on your forecasts? I understand there is skepticism surrounding them, especially considering the challenges we've faced over the past year and a half. What gives you confidence in your current predictions regarding the budget and market share gains? What leads you to believe that you can increase market share after 2022, a year during which Truly experienced share losses, and where do you anticipate these market share gains will come from?
David Burwick, CEO
We've learned a lot over the past three to six months regarding the category. Last year, we experienced significant innovation overlaps with tea and now we are facing similar challenges with Margarita. In fact, Margarita accounted for about 60% of our losses in the first quarter. We are actively working on addressing this growth through innovation and adopting a more balanced approach to developing our brands. Innovation will be a key focus. We're replacing tea with a rotation of three seasonal offerings that will come and go. As we announced today, our main focus is on our lightly flavored SKUs. We've realized that while we built our business around a bold flavor portfolio that performed very well and positioned us strongly as the second in the market, we somewhat overlooked the importance of reinforcing the refreshing qualities of our lightly flavored portfolio. And when we didn't make the change last year, I think you noted it actually in one of your notes, consumers who noticed a change actually reacted very favorably. We didn't do a very good job explaining that to consumers. So again, we're going to be communicating that much more vigorously and aggressively on our new packaging and in our advertising. In addition, I think we're seeing some of the volume move to the convenience channel where honestly, we're much less advantaged than we are in other channels, and we're making a lot more activity and a lot more moves to grow our share in single serve and convenience is also another way to get there. So I'd say, it's kind of a long answer, but I would say we've relied a lot on innovation, particularly with permanent SKUs. We're kind of weaning off of that. We're going to spend more on our base business, we're going to look much better in store. We're going to deliver that message very strongly. If you examine the numerator data, you'll see that we remain focused on the 21 to 34-year-old demographic, a group that has largely fallen behind Hard Seltzer. We continue to hold the highest household penetration in this segment compared to all other beer brands. This indicates that we have a significant audience eager for updates and exciting news from us. We are confident that we can reach this audience, although it won't happen in the first quarter. We anticipate that growth will build during the second and third quarters, and we hope to see an increase in market share for Truly during that time.
Sunil Modi, Analyst
And if I can just quickly follow up at from a market share standpoint, I mean, is this a function of you getting quality from retailers that they're cutting off the tail, the Hard Seltzer categories? So maybe you'll benefit somewhat there? Or are you expecting to close a gap of White Cloud? And can you just give any context on where you think those share gains would be sourced from?
David Burwick, CEO
Yes. I believe the share gains will come primarily because Truly is the second-largest brand, while the next 46 brands collectively hold the same market share as Truly, including Bobbitt Seltzer. This means there are many brands from which to gain share, and several of them are likely to exit the market. Additionally, we anticipate gaining share from the leading player as well. We expect to attract consumers who are interested in the Seltzer category and currently purchasing from other brands in that space.
Operator, Operator
And our next question comes from the line of Nadine Sarwat with Bernstein.
Nadine Sarwat, Analyst
Two questions for me. So the first one on your 2023 shipment and depletion guidance of a decline of 2% to 8%. Can you run us through your volume growth assumptions that are baked into that for each of your major brand families? And then my second question, your announcement earlier today demonstrates how you're leaning into the spirit RTD space. This continues to grow strongly as a segment, although it's already dominated by a few brands. So what makes you confident that Truly Vodka Seltzer has what it takes to win in that space?
Frank Smalla, CFO
Okay. Nadine, this is Frank. Let me take the first one on the guidance. And maybe to preface the assumptions, we've taken I'd say a somewhat conservative approach because of the uncertainty that we see around the consumer and the entire consumer environment and the Hard Seltzer category in particular. We believe it will stabilize at a point in time, but we have seen significant declines. So we've taken that into consideration. And the guidance of $0.02 to $0.08 decline is really on a reported basis. And as we've mentioned, we have 1 fewer week in '23 compared to '22. So the comparable range is actually minus 7% to minus 1%. At the low end, we have for Truly, we've not modeled an improvement in the trends that we have seen in 2022. So this is just what we believe, okay? If we don't see anything. This is where it lands. And for Twisted Tea, which had a stellar year in 2022, we moderated last year's growth rate. Well, we believe we're going to have strong growth rates in 2023, we think they will moderate probably during the middle of the year when we had really high growth rates last year.
David Burwick, CEO
Okay, Nadine. I'll take up the second question about how can Truly succeed in that space. I'd say first of all, our consumers have asked us for a long time to get into the Vodka Seltzer or Vodka soda space. And when you look at the category, if you look at RTDs, it's about $1.6 share of total beer. Half of it is the Vodka Seltzer space. So that will be high noon and neutral to be the top 2 brands. It is clear overlap in the high end of Hard Seltzer and the other brands. We have a large consumer base. They want us to go. We develop great product. It's a different approach since the channel distribution is primarily driven by the liquor class of trade, which accounts for about 45% of the total. Hard Seltzer also goes through this class, which is somewhat different, with about 90% of it being independent. The market is quite cluttered, sales per point are lower, and prices are higher. We are entering this space understanding that we don't expect immediate success, as other brands have taken five or six years to establish themselves. The data indicates that it's still early, but we have a fairly strong new presence, ranking third in the seltzer category after neutral, which is slightly above us. This is just within a few months, and we haven't fully introduced what we plan to bring yet. We believe we have the potential to compete. And again, we're not expecting it to be something that's going to be hugely material right away, but it's an area where our consumers want us to go where consumers are sourcing their occasions from Hard Seltzer anyway, and we need to be there. And the last thing I would say about this is that we're in with one variety pack right now. There are 1,100 SKUs in RTDs right now. That's more than Hard Seltzer has. So RTDs are 1/5 the size of Hard Seltzer, so they have more SKUs, they have more brands. You cannot stand out with one variety pack, which is why we announced today that we're going to have 2 more variety packs.
Operator, Operator
And the next question comes from the line of Vivien Azer with Cowen.
Vivien Azer, Analyst
I was hoping just to pick up on the thought that you just offered in terms of what consumers are telling you about how far Truly can reach. And if you could just touch on Truly Vodka versus Truly Vodka soda. How much confidence do you have that the Truly brand can straddle so many different categories, Hard Seltzer, canned cocktails and spirits entirely?
David Burwick, CEO
Yes, Vivien, I believe it can. When we separate that category into two, the cut water version, which includes RTDs and Dogfish cocktails, has a higher alcohol by volume and is consumed less frequently with lower purchase rates. On the other hand, the alternative resembles Hard Seltzer closely. It's really focused on refreshment, sessionability, and variety. We believe we are developing a brand that embodies refreshment, sessionability, and variety. This applies whether we are focused on the traditional Hard Seltzer market with Truly Hard Seltzer, the Vodka space, or our plans to enter the Tequila market. To us, these all cater to similar occasions and appeal to largely the same consumer base. While some spirits customers may typically be older and slightly more affluent than Hard Seltzer consumers, we are ultimately engaging the same demographic. And we think the way the brand has been built, it can play in those spaces, and consumers, we've done a lot of consumer work. So we're not just kind of making it up as we go. Consumers have given us permission to go there. Now we're going there. We'll see how it goes and we'll evolve accordingly.
Operator, Operator
And the next question comes from the line of Peter Grom with UBS.
Peter Grom, Analyst
So I guess I just wanted to ask about what's included in the outlook from a Truly share perspective. And I know you're trying to exhibit some degree of conservatism, which is certainly fair. But I guess I'm just kind of confused as to why the high end of the guidance would really only embed kind of performance in line with category growth, just given the relaunch, the marketing push. I would imagine it's not a reflection of your confidence. But just maybe I would love to get some views on the reasoning.
David Burwick, CEO
Thank you, Peter. I believe we've gained valuable insights. We focused intently on the feedback received, and we have acted upon it. The changes we've discussed today are, in our opinion, the right steps to realign the brand. It's important to note that this brand consistently gained market share until last year when our continuous push for innovation started to backfire. Currently, we're taking a pause on innovation for Margarita. At this time last year, Margarita held a 5 share. There's still a significant overlap, so we don't anticipate gaining market share in the first quarter. However, we hope that by the end of the second quarter, the situation will improve and continue to do so. If we meet our expectations, we will see growth, but we're being cautious, so it's not expected to be at the high end. We've learned to be more careful in predicting the category and the brand over the last couple of years. If our efforts prove successful, we believe we can regain some market share. We were able to grow it until last year, and we think we're putting the brand on the right track to grow share once again.
Operator, Operator
And the next question comes from the line of Rob Ottenstein with Evercore ISI.
Robert Ottenstein, Analyst
Great. I think most of my questions actually were picked off so far, but I still have a couple left. So I guess the question is around shelf space. And obviously, Twisted Tea deserves more shelf space. It's doing phenomenally well and obviously has a long run rate. But I guess my concern is whether you can maintain or gain shelf space on Truly given the outlook that you have for Hard Seltzers categories being down 10% to 15%.
David Burwick, CEO
I'll talk to both of these. First of all, the easy one, Twisted Tea. We think we'll get 25% to 30% more shelf space on Twist this year. Remember, the shelf resets start they started March 1, generally, they ended around mid-May, but obviously, before World Day weekend. So Twisted Tea locked and loaded, it will still be under space, by the way, relative to its share of FMBs, but we'll take it. We'll take that space. In the hard seltzer category, we are observing a reduction in shelf space. Historically, our sales team noted that about 11% of total shelf space was allocated to hard seltzer, which is expected to decrease to around 9% to 10%. This means some brands will likely exit the market. However, the top five brands currently account for approximately 98.5% of consumer demand. While overall hard seltzer space will diminish, Truly's share within the category is projected to increase slightly based on our current knowledge. Truly's total share of the beer market will be approximately 2.7%. We believe that while the overall category may decrease, Truly will gain some ground as a strong second place. As previously mentioned, we are currently 15 share points behind the third place competitor, but we are confident in our ability to close that gap. We believe that not adding permanent SKUs is beneficial, and we recognize that we may have innovated too much without sufficiently strengthening our core business. That really is our focus this year. Regarding RTDs, it's interesting to note that there are about 70 more brands than our Hard Seltzer brands and 150 more SKUs compared to Hard Seltzer SKUs right now. There is some overlap in consumer interest, with roughly 8% of Hard Seltzer's volume shifting to RTDs last year.
James Koch, Founder and Chairman
It's an interesting phenomenon. Obviously, the movement of SASAC was unprecedented. I think what you're seeing is a recognition that beer distributors are better at building brands in this beyond beer fourth category because those products and that includes the tsunami of RTD canned cocktails. Those products kind of look more like beer than spirits. They're in cans, you want them in the cold box. The dollar margins per case are relatively low relative to Spirit. They're kind of mass-produced levels that you're not bottling liquor. In fact, most of them are made in breweries like city and similar places. So they have a lot of the characteristics of beer, and the beer system is just better at building brands there, gaining distribution, merchandising, all those activities. Some of the Spirits teams are looking for the benefits that beer distributors offer. However, most liquor brands will remain with liquor distributors. The introduction of the Sazerac initiative will not lead to a mass transition of liquor brands to beer distributors, as their main sales volume is still outside of the cold storage area. In my view, and I believe in the view of our team, our beer distributors will always be prioritized at a much higher level. This situation highlights the challenges that the liquor distribution system faces in this particular category.
Operator, Operator
And the next question comes from the line of Stephen Powers with Deutsche Bank.
Stephen Powers, Analyst
I believe you mentioned scrap and obsolescence a couple of times, Frank. Can you quantify what that was in the fourth quarter? Additionally, could you quantify any incremental obsolescence you've included for 2023? I'm trying to understand the underlying gross margin without that obsolescence. Also, regarding the start of the year, it seems like you'll begin with a lower gross margin but finish stronger. Can you provide some context on how far below average we are at the start of the year and how much above average you expect to be by the end?
Frank Smalla, CFO
Let me begin with the first question. While I’m not providing quarterly guidance, I will do my best to address your inquiry. Regarding scrap and obsolescence, the easiest way to say it is that without those factors in Q4, we would have been at the middle to high end of our margin guidance. It had a significant impact. The two main factors were that we adjusted our resources for higher internal volumes and a different mix. We had to make decisions in the third quarter about the volume we intended to sell in the fourth quarter, which has since changed, requiring us to adjust the volume. We took it out of the internal brewery. So there's a fixed cost absorption impact. There was one thing. And the second thing, which was actually the bigger one was the scrap that we ran out of shelf life on 2 things because it was a little bit amplified by the fact that we also transitioned to the new Focus formula in Truly that we had cans and other ingredients that we have to write off. So that's why this was a relatively big number. What you will see in the K is that total obsolescence was getting close to $40 million, and we are planning a substantial reduction in 2023. So no incremental obsolescence because almost half of that number was really incurred in '24 and was related to some things that I would classify as onetime in nature. '23, I mean, it will follow our normal pattern because the majority of our volume is just in Q2 and Q3, that's where you should see the highest volume. There's a range, I would say that is over the year is like 4 points roughly, and the lowest quarter will be Q1 because of the phasing of the savings initiatives. And then the middle of the year has the higher ones and then in line with history, Q4 will be lower. Yes, that's helpful. Regarding Twisted, I have two questions. You may have already mentioned this, and I might have missed it, as the transcript isn't updating for me. Did you provide a growth rate for 2022 regarding Twisted, or could you share the expected growth for 2023? That would be great. My primary focus is on repeat customer rates. Are you observing similar repeat rates with newly acquired customers compared to historical rates? Are there any differences, or is it too soon to determine? Yes. I'll address the first question quickly since I touched on it earlier. For our guidance, we went back to 2022 and used that as a baseline, considering the trends we've observed. Specifically for Twisted Tea, we have adjusted the growth rate. Instead of maintaining the growth rate we saw in 2022, we've moderated our expectations and are now projecting growth in the mid to high teens. That's the range we are looking at.
David Burwick, CEO
I do have an idea for you regarding our repeat rate. Last year, our repeat rate was in the low 30s, which was consistent with the previous year. This is quite significant considering we added about 20% more households. We believe the repeat rate is holding up very strongly for this brand.
Operator, Operator
The next question comes from the line of Eric Serotta with Morgan Stanley.
Eric Serotta, Analyst
Great. Quick one for Frank and then one for Dave. For Frank, should the Truly not reformulations but repackaging for 2023, all the initiatives that Dave spoke about earlier result in any scrap or obsolescence charges. I know that was pretty substantial in the third quarter related to the changeover and you mentioned continued strategy in the fourth quarter.
Frank Smalla, CFO
Yes. There may be scrap due to the nature of this change, and there will be some obsolescence as well. We have factored this into our overall modeling, barring any significant changes in plans regarding timing and the type of transition. So, there will be scrap included in our guidance.
David Burwick, CEO
Yes, and hoping you could talk a little bit about Twisted velocities. It looks like overall velocity has held up remarkably well last year, even when you added so much distribution. What do you see sort of at the individual account level as you start to add second and third 12 packs, are you seeing kind of diminishing returns or diminishing velocities? Or once you establish a certain level of scale and visibility within the account? Is it actually a halo on the overall brand? The more 12 pack SKUs we have in an account, the higher the velocity tends to be. Last year, we saw significant growth in points of distribution. Our sales per point increased slightly, and it is currently the highest in the FMB category and the second highest in all Beyond Beer. The brand is performing well, which is to be expected. We anticipate a slight decline in sales per point this year due to expanding our distribution. As you know, those new points of distribution are not as efficient as the one to where it started. But everything we're seeing points to a very healthy brand with high repeat, high sales per point. And we have done the account level work where one 12-pack versus 2 versus 3, you see sales per point actually increase when you have for a lot of that to just purely with visibility in the account. We believe there are many questions about the longevity of this brand, and while we don't have a definitive answer, it has consistently performed well since its inception, showing double-digit growth. This growth is based on a larger foundation, and importantly, it has been developed correctly. We have focused on both physical and mental availability while building the brand, ensuring it hasn’t been overstretched. Overall, it is experiencing healthy growth. We believe we have a solid understanding of the consumer and their shopping habits. Being recognized as the third-largest single-serve SKU and brand in convenience, following Bubba and Budweiser, is a significant strength for us. Our consumers tend to enter the store with a clear intention to purchase our brand, and they are not easily influenced by price or visibility. Therefore, we are being meticulous in understanding the factors contributing to our success. Our goal is to enhance what is already working without making drastic changes.
Eric Serotta, Analyst
Great. That's really helpful. And then just to follow up with Frank, sorry to switch back and forth. But just to clarify, was the $40 million in scrap and obsolescence that you quoted earlier the total for both categories? And was that for the full year? I seem to remember an $8 million figure for the third quarter.
Frank Smalla, CFO
That's for you all in.
Operator, Operator
The next question comes from the line of Kaumil Gajrawala with Credit Suisse.
Kaumil Gajrawala, Analyst
Guys Frank, just to clarify, I think you said depletions were down 4% for the first 6 weeks of the year, but they'll be down close to the, I guess, the lowest end of your guidance, which is a down 8% or down 7%. So is something meant to happen, I guess, in the second half of the quarter? Or just can you maybe just help us square that for me?
Frank Smalla, CFO
Yes. So 2 factors. The main factor is last year, we launched the Margarita pack and Truly and there was significant load-in and demand for that in Q1. And a big chunk of that was in February. So after the period that we have. We have some Margarita, we're lapping some Margarita in the year-to-date number. But there's more to come in the quarter to go. So that is 1 thing and then it's a little bit of comparability of events where you have the Super Bowl phasing that's in there as well. That's all just like wanted to give you that you don't overread the minus 4. Yes, there are two components to consider. The first is the capital portion, which is the largest part, and depreciation begins once the systems are operational. We have initiated that process. The second component is the expense portion, which is accounted for as we progress. This is currently underway, and I believe we are in the midst of it.
Operator, Operator
And the next question is from the line of Bonnie Herzog with Goldman Sachs.
Bonnie Herzog, Analyst
All right. I guess I have a question on your guidance. So if your shipment volume comes in at the low end of your guidance or, I guess, down 8%. I guess I'm still trying to understand how you're going to be able to hit your gross margin guidance this year. I mean, not only we have the deleverage, but I assume there's an increased cost of adding the fruit juice for Truly. And then I guess I wanted to understand the volume targets with your contract manufacturers, were you able to lower those targets this year? Or are you still locked in at higher levels, so there could be risk there? I guess I'm just hoping to better understand all the puts and takes.
Frank Smalla, CFO
Yes. We are aware that our gross margin is impacted by the inclusion of fruit juice, resulting in an 8% margin that is below the average. We are actively working on projects to enhance our gross margin, and we made significant progress last year, although a large part of that was obscured by a considerable amount of scrap. Additionally, we faced challenges with how we allocated volume between our internal and external breweries, which limited our production capabilities. We had less available volume in our internal breweries due to not achieving expected efficiencies. We also didn't fully utilize what we had because it was necessary to adjust for the lower volume. While some progress has been made, it isn’t evident in the numbers due to other impacts. We have clear programs in place, and our team is actively working on them. We anticipate significant progress in 2023. Again, the guidance that we have of minus 2 to minus 8, the lower the volume, the higher the cost basically of the incremental decline that you have. So that's what's making the underlying positive impact that we have on gross margin. So that was your first question on margin, what's the second.
David Burwick, CEO
The co-packers.
Frank Smalla, CFO
The co-packers, yes. So we are discussing clearly with our co-packers because, I mean, it's pretty obvious. We have our 2 main core-packers. We have significant volume commitments with them which are much higher than what we need at the moment, okay? It will cover us over the years to come. But the flip side also is that the co-packers have to make sure that they have the capacity available to us. So we are discussing with them ways to better balance their needs and our needs in terms of they would like probably to use their capacity. So we are discussing with them defining a bit of balance in the short term and with hopefully a positive outcome for everybody.
Bonnie Herzog, Analyst
But just to clarify on that point, Frank, you've considered a scenario where you might not be able to renegotiate regarding your gross margin guidance that has been taken into account.
Frank Smalla, CFO
Not everything is factored in. Like we are discussing, but there are no benefits baked in that we haven't achieved.
Operator, Operator
The next question comes from the line of Brett Cooper with Consumer Edge.
Brett Cooper, Analyst
Just a question. You pushed Truly in the bottle spirits into vodka and you talked about going to tequila. Just if you step back and think about the long term, is that a model that you think is applicable for other parts of Beyond Beer or the fourth category to grow household penetration and consumer acceptance?
David Burwick, CEO
Brett, so you mean taking other brands into a spirits place like maybe non-Hard Seltzer brands into spirits?
Brett Cooper, Analyst
Yes.
David Burwick, CEO
Yes, I think it’s still to be determined. I'm not sure how it's currently performing, but there is definitely interest in this area. Vodka can be mixed with just about anything, so there is a lot of potential. I believe what has the most potential at this moment is vodka-based rather than tequila. Vodka accounts for about 80% or 90% of that market. Therefore, any clean and simple vodka-based beverage that offers a good taste and a variety of flavors could be successful. So given the way things are converging now, nothing would surprise me. The question is ultimately what's going to be successful? I think for Truly, we really believe that as a brand, we are building Truly with that thought in mind, not just trying to add it to a new idea, but we think it can thrive at the intersection of refreshment, sessionability, and variety.
Operator, Operator
And at this time, there are no further questions. I would like to turn the floor back over to Jim Koch for closing comments.
James Koch, Founder and Chairman
Thank you, everybody, and we'll speak in a few months.
Operator, Operator
This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.