Earnings Call Transcript - SAM Q2 2023

Operator, Operator

Greetings, and welcome to The Boston Beer Company Second Quarter 2023 Earnings Call. At this time, all participants are in a listen only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Mike Andrews, Associate General Counsel and Corporate Secretary. Thank you, Mike. You may begin.

Mike Andrews, 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 2023 second quarter earnings call. Joining the call from Boston Beer are Jim Koch, Founder and Chairman; Dave Burwick, our CEO; and Matt Murphy, our Chief Accounting Officer and Interim CFO. Before we discuss our business, I'll start with our disclaimer. As we state in our earnings release, some of the information we discuss and that may come up on this call reflects the company's or management's expectations or predictions of the future. Such predictions are forward-looking statements. It's important to note that the company's actual results could differ materially from those projected in these forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained in the company's most recent 10-Q and 10-K. The company does not undertake to publicly update forward-looking statements whether as a result of new information, future events, or otherwise. I will now pass it over to Jim for some introductory comments.

Jim Koch, Founder and Chairman

Thanks, Mike. I'll begin my remarks this afternoon with a few introductory comments, and then hand over to Dave, who will provide an overview of our business. Dave will then turn the call over to Matt, who will focus on the financial details of our second quarter results, as well as our outlook for the remainder of 2023. Immediately following Matt's comments, we'll open the line for questions. Our second quarter depletions decrease of 3% on a fiscal calendar basis and 7% on a comparable week's basis was in line with our expectations. We saw strong performance in our largest brand Twisted Tea, and we expect its continued success to have an even larger impact on our overall growth rates in the second-half. In measured off-premise channels, Twisted Tea continued its strong dollar growth, up 38%, which was offset primarily by continued declines in Truly Hard Seltzer. We are making progress on operational plans to enhance our margins and began to see some benefits this quarter. Our multiyear initiatives to simplify our operations by mastering the complexity of our business and to align our cost structure more closely to volume expectations are progressing well. We are focused on keeping the strong momentum behind Twisted Tea and improving our Truly trends while continuing to invest broadly across our entire portfolio and new innovations with the goal of returning our company to long-term sustainable growth. Based on our second quarter financial results, we've established plans to invest incrementally in media behind our Twisted Tea and Truly brands starting immediately. We are thankful to our outstanding coworkers, distributors, and retailers, who continue to support our business. We are proud to have just been named the number one beer industry supplier in the Tamarron survey, the annual poll of beer distributors conducted by Tamarron Consulting, a consulting firm specializing in the alcoholic beverage distribution industry. It is our sixth number one ranking in a row and 13th in the last 15 years. This is a result of the efforts of all Boston Beer coworkers to service and support our distributors' businesses and to the strong relationships we've built with them over many years. We continue to believe that we have the best group of distributors in the beer business. We believe that the Beyond Beer category, where we have an advantaged portfolio, will grow faster than the traditional beer market over the next several years. We expect the operational changes we are making this year combined with our history of innovation, strong brands, and our top ranked salesforce will help lead us to long-term success. Our strong balance sheet enables us to continue to invest in our brands and has allowed us to repurchase over $50 million in stock thus far in 2023. I will now pass it over to Dave for a more detailed overview of our business.

Dave Burwick, CEO

Thanks, Jim, and good afternoon, everybody. As Jim mentioned, our second quarter volumes were in line with our expectations. Our fiscal calendar quarter depletions decreased 3% or our comparable weeks depletions decreased 7%. This is due to the timing of the July 4th holiday relative to our 2023 and 2022 fiscal calendars. We improved our overall financial performance during the quarter and achieved gross margins of over 45%, while generating approximately $120 million in operating cash flow. Matt will discuss the financial results in his remarks, while I'll focus my commentary on our operating performance. Our strategic priorities remain unchanged. We're focusing our resources on sustaining Twisted Tea's industry-leading growth and turning Truly's volume trends while improving our supply chain performance to enhance our gross margin and provide more funds to invest in our brands and our top-ranked industry salesforce. As Jim also mentioned, we're encouraged by our second quarter financial performance. We're investing in incremental media to further fuel Twisted Tea's growth and moderate Truly's declines. We're doing so immediately to create an impact over the next several months. I'll now provide some color on our brands. Twisted Tea accelerated its growth trajectory in the second quarter with 38% dollar sales growth, while adding 3.3 share points and expanding its overall share leadership to 27% of total FMB dollar sales in measured off-premise channels. The robust demand is a result of balanced efforts at growing both physical availability, the improved geographic, channel, and package distribution, and mental availability via a highly effective brand building campaign, increased media investment, and optimized packaging design that highlights the brand's distinctive assets. While we struggle to keep up with demand for the Twisted Tea Party pack that is now the second largest and the fastest-growing SKU among all FMBs, we've improved our overall service levels versus the first half of last year and can support further growth acceleration. We remain confident that Twisted Tea will sustain a strong double-digit growth for the remainder of 2023 for many reasons. First, there's upside in growing brand awareness and household penetration, and we know our ad campaign is working. Second, the brand is underdeveloped with Black, Hispanic, and Latino consumers, but we're now seeing large household penetration increases as a result of our marketing efforts. Third, there's still ample room to expand distribution across channels and packages where other FMB competitors have far more presence. This includes on-premise where Twisted Tea is close to a 60 share of FMBs and has driven the fifth most incremental cases year-to-date of any brand family across total beer. Additionally, Twisted Tea finished the spring space reset season with a 49% increase in shelf space and those benefits will continue to fuel the business during the balance of the year and into 2024. Fourth, there's opportunity to widen the brand's presence in underdeveloped markets from Florida to Texas to California. Fifth, we're still in the early stages of Twisted Tea's White national launch and the sales for points are accelerating and exceeding our expectations, then it's proven to be about 85% incremental to the Twisted Tea portfolio. We've also expanded our light portfolio offerings with a new variety pack available in select highly developed markets, and we're seeing some early success. Lastly, we recently announced we're testing the higher ABV version of Twisted Tea in select markets this summer called Twisted Tea Extreme which is 8% ABV as part of our efforts to find future pathways to growth for all our brands by increasing occasions and adding new drinkers. Now on to Truly. We launched a major Truly refresh late in the second quarter, including brighter, easier-to-shop packaging that calls out our product improvement with real fruit juice. A new more emotive and high scoring ad campaign called Lightly Fantastic increased media spend with a focus on digital and social and new wholesaler execution priorities that focus on our Lightly flavored lineup. We now have full distribution of the new Truly Hard Seltzer packaging, and our ad campaign has been running for six weeks. Our two new Truly Vodka Soda SKUs and package design hit the market starting in late June and will continue its rollout into early August. Additionally, during the second quarter, we launched the red, white, and true lightly flavored variety pack, a limited-time offering in support of our partnership as the first-ever official Hard Seltzer of U.S. soccer and have received strong in-store wholesaler and retailer support. While the brand remains down about 3.3 volume share points year-to-date, we're seeing green shoots that we expect will have an accumulated impact in the balance of summer and into the fourth quarter. For example, our Lightly Flavored lineup of variety packs has gained both volume and dollar share of Hard Seltzer in the past four and 13-week time frames while 24-ounce single-serve gained 0.6 share points in the second quarter driven by our lead style, Wild Berry, which grew 16% in the last four weeks. Lemonade and Fruit Punch share losses stabilized during the second quarter, while the Margarita overlap and the Ice Tea discontinuation from 2022 are still weighing on total brand share and have accounted for about 75% of the brand's share losses year-to-date. These overlaps will continue to moderate through the summer and drop off in the fourth quarter. While we're disappointed that we've not yet stemmed Truly share losses, we believe we've made the necessary changes to set the brand up for success and now need to keep our focus on the execution we know our wholesalers are capable of achieving. As evidence of our confidence in our direction, we're increasing our media spend for the balance of the year and will ensure that Truly is on air every single week. We're only eight weeks into the refresh, so we need to keep pushing hard with the initiatives we've put in place. We're encouraged that Truly maintains the second highest sales per point in Hard Seltzer, 52% more productive than the number three brand, and the third highest sales per point in all of Beyond Beer. So there remains a strong consumer base to build upon. Of note, Truly's share position has improved by 1 point from March to June, so we're trending in the right direction. We recently announced we're testing a new Truly Tequila product in several markets this summer as part of our efforts to grow the brand in all occasions where refreshment, sessionability, and variety intersect. While maintaining Twisted Tea's double-digit growth and improving Truly's trajectory are our top priorities for the year, we have a broad portfolio and will continue to support and build out our smaller brands. Sam Adams is holding its own in a difficult craft beer category and will continue to invest behind our new Remaster Boston Lager campaign and our seasonals, in addition to our non-alc portfolio, including Just the Haze and the newly released Gold Rush pilsner, which grew 94% in dollars in the second quarter in measured on-premise channels. Our Sam Adams Boston Lager Remaster program has improved Boston Lager volume trends by 6 points, and the total brand gained 0.3 share points of craft in the second quarter based on Beer Institute numbers. While Truly makes a play in vodka and tequila-based seltzers, Dogfish Head is gaining a foothold in the traditional can cocktail segment and grew volume approximately 81% in the second quarter across all channels. Turning to our supply chain. We continue to modernize our supply chain through investments in equipment, capacity, and improved systems and processes. I'd like to broadly discuss the status of the three categories we focused on to drive improved margins. The first category is procurement savings. We've targeted savings initiatives across multiple areas, including raw materials and packaging, and achieved some benefit during the second quarter. We continue to review our contracts with our raw pack suppliers with the aim of adjusting these to be more reactive to changing demand. The next category is brewery performance. While we expect to always have a mix of internal and external production, we're focused on moving volume back to our internal breweries where possible, given our production cost advantage. We're evaluating our mix in a disciplined manner and focusing on improving our internal line stability and efficiencies as well as adjusting contracts with our co-manufacturers as we adapt to changes in our volumes and product mix. The final category is ways to network optimization. We have initiatives to optimize our logistics, which reduce freight and warehousing costs over time. Also, as we discussed on our last call, we're currently implementing systems to improve our forecasting and inventory management, which we expect to reduce inventory obsolescence over the balance of the year. We have multiyear savings plans across each of these categories, which we expect to generate significant long-term gross margin expansion. While it will take time to realize the full benefit, we began to see some benefit in the second quarter, primarily related to procurement savings and expect to see further benefits in the remainder of the year. We're also closely managing our operating expenses. We expect to use the cost savings that these efforts will generate to support increased brand spend, and within brand spend, both converting non-working to working dollars and shifting our mix from traditional to digital and social media. Now turning to guidance. Our fiscal week depletions trends for the first 29 weeks of 2023 have declined 6% from 2022. We're reiterating our shipments and depletions expectation of down 2% to down 8% for the full-year 2023. Where we'll land within that range is dependent on a variety of factors, including the overall economic environment and consumer demand balance of the year. Now I'll hand it over to Matt to discuss second quarter financials and our full year guidance.

Matt Murphy, Chief Accounting Officer and Interim CFO

Thank you, Dave, and good afternoon, everyone. As Jim and Dave mentioned, second quarter volumes were in line with our expectations, and we are in the process of implementing our strategies to invest behind Twisted Tea while enhancing the Truly brand proposition and improving our supply chain. Fiscal calendar depletions for the quarter decreased 3% from the prior year, reflecting decreases in our Truly, Angry Orchard, Hard Mountain Dew, and Samuel Adams brands, partially offset by increases in our Twisted Tea and Dogfish Head brands. Shipment volume for the quarter was approximately 2.3 million barrels, a 4.5% decrease from the prior year. We believe distributor inventory as of July 1, 2023, averaged approximately three weeks on hand and was at an appropriate level for each of our brands, except for certain Twisted Tea brand packages that were below targeted levels due to higher-than-forecasted consumer demand. Our second quarter gross margin of 45.4% increased 230 basis points from the 43.1% margin realized in the second quarter of 2022. This was primarily due to price increases and procurement savings, which more than offset inflationary costs. Advertising, promotional and selling expenses for the second quarter decreased $5.5 million or 3.6% from the second quarter of 2022, primarily due to decreased freight to distributors, partially offset by an increase in brand and selling costs. General and administrative expenses increased by $6.1 million or 15.6% from the second quarter of 2022, primarily due to increased consulting and legal costs and higher salary and benefits costs. For the second quarter, we reported a net income of $58 million or $4.72 per diluted share, compared to prior year net income of $53.3 million or $4.31 per diluted share. This increase between periods was primarily driven by higher gross margins and lower operating expenses, partially offset by lower net revenue and a higher tax rate. Turning to guidance. Based on information of which we are currently aware, we are reiterating our full-year 2023 guidance range of shipments and depletions down 2% to 8% and earnings per diluted share of $6 to $10. This projection is highly sensitive to changes in volume, particularly related to the Hard Seltzer category, supply chain performance, and inflationary and recessionary impacts on consumer spending. We project increases in revenue per barrel of between 1% and 3%. Full-year 2023 gross margins are expected to be between 41% and 43%. Our full-year investments in brand spend within advertising, promotional and selling expenses are expected to increase between $20 million and $40 million, which is an increase from our previous guidance range of a decrease of $5 million to an increase of $15 million. This guidance does not include any changes in freight costs for the shipment of products to our distributors. We've experienced lower-than-expected freight costs year-to-date, which, in addition to gross margin performance, allows us to further support our brand. We continue to estimate our full-year effective tax rate to be approximately 28%. As you model out the remainder of the year, please keep in mind these factors. First, our guidance on depletions and shipments includes the estimated negative impact of approximately 1 percentage point due to the fact that fiscal 2022 had 53 weeks and fiscal 2023 will have 52 weeks. On a 52-week comparable basis, we expect depletions and shipments to decrease between 1% and 7%. Second, the 53rd week overlap is expected to negatively impact fourth quarter volume trends by approximately 6 percentage points. Also, as we had anticipated, we finished the first half at the lower end of our shipment guidance range on a comparable weeks' basis. We estimate that second half shipments will benefit from the expected continued growth of Twisted Tea, which is our largest brand; the lapping of last year's Truly Margarita launch; and additional investments in advertising spend in the second half of the year. And finally, our guidance incorporates an expectation of shortfall fees, which primarily impact the fourth quarter. Therefore, we expect year-over-year gross margin improvement to be lower in the fourth quarter relative to earlier quarters. Turning to capital allocation. We ended the quarter with a cash balance of $208 million and an unused credit line of $150 million, which allows us to invest in our base business, fund future growth initiatives and return cash to shareholders through our share buyback. For the full year, we expect capital expenditures of between $100 million and $140 million. These investments will be primarily related to our own breweries to build capabilities and improve efficiencies. During the period from January 3, 2023, through July 21, 2023, the company repurchased 161,000 shares at a cost of $52.5 million. As of July 21, 2023, we had approximately $307 million remaining on the $1.2 billion share repurchase authorization. I will now pass the call back to Dave for some closing remarks.

Dave Burwick, CEO

Thanks, Matt. As you may have seen from our announcement a few days ago, we're very excited that Diego Reynoso will be joining us as our new Chief Financial Officer effective September 5. Diego has significant financial and operational experience in the consumer industry, particularly the alcoholic beverage category. I'm confident he'll bring valuable perspective to Boston Beer and look forward to introducing him to you on our third quarter call. I'd like to take this opportunity to thank Matt for his leadership of the finance team and his strong partnership with me during the transition period. We're very fortunate to have Matt as a senior finance leader, and we look forward to him playing a significant role in our future success. And now we'll open the line up for questions.

Operator, Operator

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

Nik Modi, Analyst

Yes, thanks. Good afternoon, everyone. I was hoping you can just comment on, obviously, in the process of reset discussions with retailers, and there just seems to be a lot of volatility in the industry with what's going on with Bud Light and potential opportunities for perhaps some shelf space gains. And so I just want to kind of get your state of the union on how those discussions are going with retailers, particularly as it relates to Truly and kind of what's going to go on with the Hard Seltzer category. If you can just provide any updates there? Thanks.

Dave Burwick, CEO

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

Nik Modi, Analyst

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

Dave Burwick, CEO

Yes, it's a bit early to talk about spring, and I believe we won't get the retailer data needed to make decisions until after Labor Day. Regarding this fall, there will be some changes, but currently, we haven't heard from retailers indicating any significant differences. For us, we finished with a 49% increase in Twisted Tea space, which should benefit us throughout the year. We need to ensure compliance to make this work. As for Truly and Hard Seltzer, we don't expect any major changes this fall based on our current discussions with retailers.

Nik Modi, Analyst

Great. And then just as it relates to the consumer and seltzer obviously, it tends to be higher priced relative to beer. Some of the work we've done with there was some shifting of consumption, especially with older consumers out of seltzer and into beer. I'm just promotions seem to be ramping, at least from what I'm hearing in the industry. I just wanted to get your state of the union on kind of how you think about the promotional environment right now?

Dave Burwick, CEO

I believe that the Circana data indicates limited promotional activity. There is a digital coupon and some other initiatives to provide value, but it hasn't changed significantly compared to previous years. You're correct, Nik. When examining the pricing for Hard Seltzer, the difference compared to imports and premium light beer has steadily increased over the last couple of years, while the gap with RTD cocktails has decreased. Ideally, we don't want that gap to expand much further. However, we haven't observed widespread mass promotional activities; any promotions that do occur are generally restricted to specific markets.

Nik Modi, Analyst

Great, thanks. I’ll pass it on.

Operator, Operator

Thank you. Our next question is from Vivien Azer with TD Cowen. Please proceed with your question.

Vivien Azer, Analyst

Hi, good evening. Thank you for the question. So I'm just trying to reconcile the unchanged guidance on the top and bottom line relative to the $20 million in incremental A&P at the midpoint of the range. So recognizing the top line was expected to improve in 2023, and that was always part of the plan. I'm interested to better understand your confidence in holding the EPS range, given that if my simple math is correct, $20 million incremental A&P, just at the midpoint is $1.50 headwind to EPS. And certainly, it would be more than that if you took the extremes of old and new guidance. So any incremental color there would be helpful. Thank you.

Matt Murphy, Chief Accounting Officer and Interim CFO

Sure. Hi, Vivien, it's Matt. We feel confident about our overall guidance, particularly regarding the top line, which ranges from 2% to 8%. There's no special formula to achieve the midpoint of that range; if we look at the trends from Twisted, showing just under 30% growth, and Truly, with a decline of a bit over 30%, we can project that as Twisted becomes a larger part of our business, the overall company decline will be about 2% for the second half of the year. This likely positions us at the midpoint of our range, and we feel good about that. We could have narrowed the range slightly, but since these two brands are trending in opposite directions and we still have a couple of months until peak season, we believe this range remains suitable. Regarding margins, we achieved a little over 42% in the first half of the year and are expecting similar performance in the second half. An important point on operating expenses is that we're seeing significant savings in freight. To put it simply, the freight savings from the first half of the year amount to approximately $28 million compared to last year, and we are considering that alongside other operating expenses for the second half, intending to invest in the brand. This is why we exclude the freight component when providing guidance on advertising and promotion expenses; the freight savings should help address that difference. Does that clarify things?

Vivien Azer, Analyst

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

Matt Murphy, Chief Accounting Officer and Interim CFO

I'm sorry, which part? I'm not sure I caught that question. Which priorities are you referring to?

Vivien Azer, Analyst

Sorry. Yes. So you've laid out kind of on the three key initiatives to drive gross margin improvement over the medium to long term. And I'm just wondering whether any of those are hitting a little bit sooner than expected relative to initial guidance.

Matt Murphy, Chief Accounting Officer and Interim CFO

Sure, Vivien. I'll take it. It's Matt again. The three key items—procurement savings, brewery performance, and network optimization—are all opportunities that we expect will help us improve from the low 40s to the upper 40s over the next three to five years. We’ve already seen some benefits from procurement savings, as evidenced by our Q2 results. That was our first area where we anticipated seeing a positive impact. As for brewery performance, we have stabilized and are not facing the same one-off issues that previously kept our margins in the high 30s. Achieving 45 gives us confidence that things are more stable. We’re making good progress on procurement savings, and while brewery performance and network optimization will take longer, we’re pleased to see they aren't negatively affecting margins at this time.

Vivien Azer, Analyst

Absolutely. That’s really helpful. Thank you.

Operator, Operator

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

Rob Ottenstein, Analyst

Thank you very much, and congratulations to you and your team on another strong result in the Tamarron Survey. First, regarding the hard seltzer category as a whole, are you surprised that it hasn't seemed to benefit at all from the Bud Light controversy? For my second question, if you exclude the shortfall fees, how would the second-half margins compare to the first-half margins? Thank you.

Dave Burwick, CEO

I could take one, I guess the first one, and then...

Jim Koch, Founder and Chairman

I'll take the second.

Dave Burwick, CEO

Matt and Jim might have some insights on Bud Light. We're not particularly surprised because when you examine the demographics and areas where Bud Light is facing challenges, those are primarily dedicated light beer consumers. Therefore, it's not unexpected that the trend is shifting back towards light beer. Additionally, there's another element affecting the hard seltzer market, specifically ready-to-drink beverages. According to Circana, hard seltzer has experienced a 23% volume decline year-to-date, and including RTDs could potentially add around 6 points to that volume. There are many factors at play, so we're not really taken aback by the volume not returning solely to hard seltzer. Jim, do you have any additional thoughts on this? If not, we can let Matt move on to the next question.

Jim Koch, Founder and Chairman

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

Matt Murphy, Chief Accounting Officer and Interim CFO

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

Rob Ottenstein, Analyst

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

Matt Murphy, Chief Accounting Officer and Interim CFO

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

Rob Ottenstein, Analyst

Terrific. Thank you very much.

Operator, Operator

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

Nadine Sarwat, Analyst

Hi, good afternoon, everybody. Two questions from me. One, could you comment on where your capacity utilization is today? Are you still underutilizing both your internal and external capacity? And then curious, I know you called out a number of changes you made to the Truly brand family and attempts to drive improved performance, although it does look like the brand is still struggling. When we look at tracked channels, so it would be helpful to provide some color behind your conviction that Truly can see improved performance over the remainder of the year. Thank you.

Matt Murphy, Chief Accounting Officer and Interim CFO

Hi, Nadine. It's Matt. I'll address the first question, and then Dave will respond to the second. Regarding our internal and external capacity, our approach is to utilize our internal breweries effectively. Although we're not operating at full capacity, we strive to maintain them at over 90%. This is our standard practice. The surplus production is directed towards external capacity. Considering our historical volume levels and our future growth expectations, we have ample external capacity available if we return to growth, which is our goal. It’s challenging to specify a precise figure for our available external capacity, but we do have a significant amount. We view this as a solid backup plan for when the company resumes growth since that capacity will be ready for use without needing to secure new contracts or pursue additional capacity agreements.

Dave Burwick, CEO

Nadine, this is Dave. I will answer your second question. The purpose of the Truly Refresh Program was to reduce the rapid innovation of the brand and simplify its messaging. We've made various improvements, including a package redesign to enhance shopping ease and visibility of refreshment cues, as well as an increased advertising investment. We plan to further boost our advertising for the remainder of the year, concentrating on the core offerings. Our bolder flavors, which account for more than half of the brand, have been a focus. Over the last eight to ten weeks, we have concentrated on our three core 12 packs – berry, tropical, and citrus – along with our single-serve options. The latest data shows that these three 12 packs are gaining market share over the past four and thirteen weeks, which is significant in a declining market. Additionally, our Twisted 24-ounce single-serve product has also gained market share since April. We've adjusted the product mix in convenience stores to better reflect consumer preferences. While we are still down 3.3 share points year-to-date, we have gained about a share point since April. There remains a notable gap of 18 share points from the third-place competitor, similar to where we stood last year. The loss of share due to the Margarita overlap and the discontinuation of tea accounts for approximately 75% of our loss this year; however, we expect this trend to stabilize, especially as we approach the fall. For these reasons, we believe we will continue to make progress with the brand, and while we may not achieve share growth by year-end, we hope to be close to it by the fourth quarter, thanks to our initiatives.

Nadine Sarwat, Analyst

Understood. Thank you very much.

Operator, Operator

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

Bonnie Herzog, Analyst

Alright, thank you. Hi, everyone. I had a quick clarification question on your guidance. I just wanted to clarify, if you're reinvesting 100% of the lower-than-expected freight costs and improve gross margin performance that you've mentioned, back into your business in the form of incremental media spend? Or do you plan to let some of those benefits flow to the bottom line?

Matt Murphy, Chief Accounting Officer and Interim CFO

Bonnie, it's Matt. I would say the majority of the freight savings are going to be invested in media, but those are decisions that we'll make over the second half of the year. Certainly, we want to make sure that we're confident in the investments and the plans that we have. So we currently have those dollars allocated for that, but we'll see what we spend and what we bring to the bottom line should that come about.

Dave Burwick, CEO

Hey Bonnie, this is Dave. Before you ask your next question, I want to express how positive we feel about this investment. Firstly, Twisted Tea has numerous reasons for further investment as it has significant momentum and a strong message. There is still substantial potential for growth in household penetration and brand awareness. We are also very optimistic about Truly, as everything is now aligned as it should be. Our focus now is on effectively communicating our message and increasing awareness of our changes. We have a campaign that has undergone thorough testing and has performed well. We are being deliberate in our investment strategy, analyzing it by geography and consumer segments to ensure we maximize our return. We truly believe that now is the ideal time to proceed with this investment, and that’s why we are moving ahead swiftly.

Bonnie Herzog, Analyst

No, that's helpful. And definitely, I understand the confidence. And so in the context that, yes, I did have another question, if I may. It's just trying to get a sense of sort of Truly's declines in the quarter, and have those declines moderated versus Q1. So I know you've talked about some of the green shoots, but just maybe in total. And then definitely wanted to clarify something, as you've talked about this before about your guidance and what it implies for Truly this year, could you maybe update us on that? And if that's changed at all? And then in your press release, you've called out that your guidance is pretty sensitive to any potential changes for the Hard Seltzer category. So maybe help frame that for us as well in terms of your latest expectations for the category.

Dave Burwick, CEO

Okay. The first part of your question is about how Truly has changed from a share perspective. As I mentioned earlier, the core business of the lighter flavors is improving its share position, and single-serve is also gaining ground. The share loss for bolder flavors is moderating. We're currently focused on the Margarita trend, which will decrease over time. In terms of total volume change, looking at Sarcone and Nielsen, it hasn't changed much between Q2 and Q1. For the remainder of the year, based on our guidance, we don't expect significant changes either. We don’t have high expectations for the second half compared to the first half, but we hope to exceed those. Overall, the category is expected to experience a volume decline of about 20 to 25 percent; currently, it's at minus 23 percent, which seems like a reasonable midpoint for the year. We won’t reach the category growth rate because there’s a lot of ground to cover, but we aim to be as close as possible. In the second half, our goal is to at least maintain share in the fourth quarter, which might be an ambitious target depending on the numbers, but we don’t anticipate significant changes in Truly depletions for the second half.

Bonnie Herzog, Analyst

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

Dave Burwick, CEO

Well, it is. Think of it as an insurance policy and a way to help push things forward. It gives us more confidence that we'll reach the finish line we are aiming for.

Operator, Operator

Thank you. Our next question is from Eric Serotta with Morgan Stanley. Please proceed with your question.

Eric Serotta, Analyst

Good afternoon, everyone. I have a couple of questions. To start, I want to follow up on Bonnie's remarks regarding your initial expectations. If I recall correctly, the expectation was that Twisted's growth would slow somewhat in the second half as you compare to last year's distribution gains. Considering the strong growth you've experienced year-to-date and the increased media efforts, how have your expectations for Twisted in the second half changed? Are you still anticipating a significant slowdown, or do you believe it can maintain this momentum into the second half?

Dave Burwick, CEO

For the first half of the year, I would say that Twisted Tea has exceeded our growth expectations. We do not anticipate maintaining the same growth rate for the remainder of the year. While we do not expect a significant slowdown, we do see a slight deceleration. If we look at last year, the brand did slow down in the fourth quarter. However, the overlap is manageable, and we plan to continue our current strategy and see how things develop. We would not be surprised if growth slows down a bit, as sustaining a 30% growth rate on a larger base is unlikely.

Eric Serotta, Analyst

Yes, that's helpful. And then I want to come back to the gross margin question. Your first half was a little over 42. Your guidance for the full year is 41 to 43, which is a pretty large range considering the year's half done and you're above the midpoint to the first half. So I guess maybe can you talk about areas where you have visibility and where you maybe don't as it pertains to the short-term margin picture? And then somebody has got to ask about the confidence in the longer term getting back to the high 40s, low 50s in gross margins. So figures, I'm not turning to ask that. So does your progress to date with respect to the supply chain savings, the procurement savings increase your confidence in getting there? Or I guess what do you see as the key swing factors?

Matt Murphy, Chief Accounting Officer and Interim CFO

Thanks, Matt. Overall, we've achieved our best margin in two years at 45, which required a lot of effort. We've had more quarters in the high 30s over the last eight quarters, indicating that our plans are effective. Following Q1, we made it clear that while we have strong plans, we need to prove their success. This is a positive step forward, especially seeing procurement savings, which have offset inflationary impacts in Q2 and allowed us to maintain pricing. We're gaining confidence, but we acknowledge that this is just one quarter. We believe we can maintain the 42 we showed in the first half throughout the second half of the year. However, we've faced numerous surprises in the last eight months, so we're being cautious and focusing on steadily demonstrating progress in this area.

Eric Serotta, Analyst

Great. Thanks, I’ll pass it on.

Operator, Operator

Thank you. Our next question is from Brett Cooper with Consumer Edge. Please proceed with your question.

Brett Cooper, Analyst

Good evening. Just a question on Truly and how you guys think about or frame how extendable the brand is, whether that be in flavors or alcohol levels. And then I guess, do you take lessons or learnings from what you did on Truly in your phasing or your pace of that extension? Thanks.

Matt Murphy, Chief Accounting Officer and Interim CFO

Thank you, Brent. We believe Truly has the potential to excel in areas where sessionability, refreshment, and variety come together. That's why we're exploring vodka and testing tequila, as we see the brand performing well in those markets. The hard seltzer category has rapidly expanded, leading to a surge in the number of SKUs and flavors, which may not have benefited many brands. We're cautious about not overextending Truly and will carry those lessons over to Twisted Tea. There’s still ample opportunity for Twisted Tea, and we’re carefully testing a high-alcohol version without a fixed plan in mind. The simplicity of Twisted Tea is one of its strengths, and there's always the possibility of overextending. We've gained valuable insights from the hard seltzer experience, which we're applying daily as we aim to realign Truly and strategize for Twisted Tea. Jim, do you want to share your thoughts on this given your experience?

Jim Koch, Founder and Chairman

One of the unique aspects of Hard Seltzer that is quite rare in consumer products is that the main SKUs are all variety packs. This is particularly unusual for beer. With Truly, we believe it can support more varieties, as a significant part of its appeal lies in the variety. This will likely remain a constant with Truly. While it’s not growing explosively anymore, we don’t feel the need to introduce a new flavor every year, but we do expect that seasonal variety packs will become a permanent fixture of the brand. Conversely, Twisted Tea has always been centered around Twisted Tea Original. After 23 years, we are just starting to explore a different alcohol level and have introduced some other flavors, but fewer than we did within the first three years of Truly. There are lessons from each brand that I believe apply differently to them. Both are FMB type brands, but the consumer preferences for Twisted Tea are more specific.

Brett Cooper, Analyst

Great. Thank you.

Operator, Operator

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

Brian Adams, Analyst

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

Matt Murphy, Chief Accounting Officer and Interim CFO

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

Brian Adams, Analyst

Okay. Awesome. And then one more, just longer term, thinking about that march back to 50% gross margin, obviously, looking at just the complexion of the business. The bucket in terms of the size of Truly versus the size of Twisted Tea have changed pretty meaningfully here over the last couple of years. So it's a bit of a Boston Beer one-on-one question. But is there a demonstrably different gross margin you see in those products? Or are they pretty comparable? Thanks.

Matt Murphy, Chief Accounting Officer and Interim CFO

Yes, thank you. They have different factors for Truly, with more variety packs for Twisted Tea and an increase in 24-ounce options. Overall, they are quite similar. The differences largely depend on the mix of the various packages. However, we manage our business so that all our products generally fall within the same margin range. Therefore, I would consider them to have similar margins.

Brian Adams, Analyst

Awesome. Thanks, guys.

Operator, Operator

Our next question is from Filippo Falorni with Citi. Please proceed with your question.

Filippo Falorni, Analyst

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

Matt Murphy, Chief Accounting Officer and Interim CFO

Yes, as I mentioned, we're making significant progress this year. Even with a 49% increase, our space relative to sales is still not fully represented. We could certainly make a case for even more space. I believe our competition extends beyond just the key brands; it's really within the flavored malt beverage segment. If we maintain our current growth rate, we will have a compelling story to present to our retailers next year to secure more shelf space.

Filippo Falorni, Analyst

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

Matt Murphy, Chief Accounting Officer and Interim CFO

Yes. If you look at our vodka, it currently holds about a 3% share of vodka-based spirits. The number four brand operates in a different channel, specifically liquor stores, which represents a new opportunity for us. We're making strides, although we haven't completely achieved breakthrough success yet. However, we're receiving great feedback on our new products, including the two variety packs we recently introduced. We are confident in the product and the rebranding effort, and now we need to focus on driving distribution. So far, consumer responses have been positive, but we recognize that this process will take time. We’re committed, as this segment draws from traditional Hard Seltzer occasions, and our presence is essential. We recently began testing tequila in a few markets, including Rhode Island, Delaware, Minnesota, L.A., and San Diego. We believe this brand can thrive in areas focused on refreshment, sessionability, and variety. We truly love this product, and we've learned valuable lessons over the past couple of years about not launching too many products too quickly and conducting more testing to refine them before going national. We'll evaluate the results from these key markets to guide our strategy for next year. We're optimistic, and we view the spirits segment as a distinct challenge for us. We are committed to it and are pleased with how Dogfish Head is performing. It will be a tough battle, but we're ready for it. Jim, do you have any other thoughts on this area?

Jim Koch, Founder and Chairman

No. It's clearly a crowded and confusing market with a lot happening. I believe it's attracting more attention because it's new and uncertain about its direction, rather than actual sales volume. High Noon has performed exceptionally well, but beyond that, the sales volumes are relatively small. With the influx of new brands, even from well-known spirit companies, their sales won't be sufficient to maintain a presence in the cold box. Consequently, many of these brands will end up on a warm shelf, which won't generate significant sales. In some respects, that could lead to their downfall. I anticipate a substantial shakeout in the market next year.

Filippo Falorni, Analyst

Thanks, guys.

Operator, Operator

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

Jim Koch, Founder and Chairman

Thank you. We look forward to the next few months with hopefully some improvement in a bunch of different things. I hope we can continue, and we'll see you in three months.

Operator, Operator

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