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spk05: Greetings and welcome to the Boston Beer Company fourth quarter 2022 earnings call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. And as a reminder, this conference is being recorded. It is now my pleasure to introduce to you Mike Andrews, Associate General Counsel and Corporate Secretary. Thank you, Mike. You may begin.
spk09: 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 Cook, Founder and Chairman, Dave Berwick, our CEO, and Frank Smola, 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.
spk18: 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'd 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're 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 advantage 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 8.9Million dollars 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 for 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.
spk06: Hey, 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 outsized 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 emphasis on getting truly back to share growth. We operate in attractive categories as a Beyond Beer category grew 4% in dollars over the last 52 weeks and had a CAGR of over 25% over the last five years. Our plans include reducing the complexity in our supply chain while allowing us to better focus our resources on our top two priorities, sustaining Twisted Tea's industry-leading growth and gaining share with TrueWin. 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 a hard seltzer category likely will decline between 10% and 15%. We also believe we have opportunities to be more focused on our product offerings. 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. TwistaTea was the number one growth brand in olive beer in 2022 and increased its lead as the number one FMB by more than eight volume share points, gaining 3.4 share points in 2022 in off-premise measure 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 T's 2023 year-to-day 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 is lower than its competitors, its brand consideration and purchase intent remain the highest in the category. Household penetration grew by 20% in 2022, and the buy rate was up 7%. We'll continue to invest in our top quintile ad campaign to drive awareness and expect increased trial and adoption to follow. Second, there's still room to grow through increased distribution. While we've achieved 50% ACV distribution on our original 12-pack, we have two other 12-packs, half and half and party pack, with much distribution upside. 24-ounce single-serve offerings that are sold primarily in convenience stores have made Twisted Tea the number three selling single-serve brand in all of beer. But we also see the opportunity for increased distribution across all of our single-serve flavors. Third, Twisted Tea Lite is proven to bring in new drinkers and prior brand rejecters. We've received an encouraging early response to our new Twisted Tea Lite 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 one year, it became our largest volume state, accounting for 10% of total Twista 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 Twista Tea households are multicultural, but they're growing 18%. We have plans to continue to grow TwistaTea 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 Trulie has yet to improve trends and are planning a major refresh of the Trulie brand in the second quarter of 2023 that includes new, easier to navigate packaging, more emotive 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 the launch of Cooley 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 with category news. Further, despite Cooley Margarita's very good performance, it was the number one new brand launched in beer in 2022, it was not as incremental to the Cooley 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 bolder flavor lineup to the detriment of our lightly flavored variety packs. The reformulated chewy 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 in our advertising so that more people will learn about the change. Our upcoming package redesign will present a cleaner, easier-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've 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 emotive 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 could 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 two new variety packs and updated packaging design and branding that will also hit the market in the second quarter. Without question, sustaining Twisted Tea's double-digit growth and truly trajectory are our top priorities for the year, and will have our full attention and significant investment. Having said that, We have an excellent portfolio of brands and will continue to broaden their shoulders and build them out. Sam Adams started the year with another buzzword at the Super Bowl spot, announcing our remastered Boston lager that utilizes the same Cook family recipe, but through enhanced brewing techniques, provides a smoother finish. We also are investing more behind our seasonals portfolio, which is the only national seasonal craft beer and showcases Summer Ale and Oktoberfest. Lastly, we've added a new non-alcoholic beer called Gold Rush to go with Sam Adams' Just the Haze, recently named the number one on-out beer in the country at the Great American Beer Festival. We'll continue to support other innovations, including the expansion of Dogfish Head canned cocktails, the launch of Jim Beam Kentucky Coolers 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 has 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 initiatives 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 Trulie, continuing to fuel Twisted T'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. Now I'll hand it over to Frank to discuss fourth quarter financials, as well as our detailed outlook for 2023.
spk07: All right. Thank you, Dave. Good afternoon, everyone. The fourth quarter continued to show sequential shipment and revenue improvements. 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 Hot Salsa, Twisted Tea, Hot Mountain Dew, Angry Orchard, and Dogfish Head brands, partially offset by decreases in the Samuel Adams brand. We believe distributor inventories of December 31st, 2022 averaged approximately five 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 hot sales slowdown, partially upset by higher brewery processing and inventory obsolescence costs. The high obsolescence costs were primarily related to our adjusted volume projections for Trulie shipments and the Trulie 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. Trade 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 on 93 cents 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 sales and 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 six 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, promotional, and selling expenses are expected to change between a decrease of $5 million and an increase of $15 million. This does not include any 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're 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 hot sales category, supply chain performance, and inflationary impact on consumer spending. Finally, as we model out the year, please keep in mind a couple of factors. We currently expect first quarter shipments to be at the low end of our full year guidance range as we lap the launch of Trulia Margarita that mostly impacted the first quarter of last year. And we also expect hard sales and trends to remain challenging. Margin improvement will be weighted to the second half of the year based on volume trends. We expect the timing of our cost reduction efforts and the phasing of obsolescence expense in the prior year. As a result, we're expecting a net loss in the first quarter. Turning to capital allocation, we ended the year with a cash balance of $182 million and an unused credit line of $150 million, which allows us to invest in our base business, fund future growth initiatives, and return cash to shareholders. In 2023, we expect capital expenditures of $100 to $140 million. These investments will be primarily related to our capabilities and improve efficiencies. During the 2022 fiscal year, we did not repurchase any shares of our Class A common stock. During the period from January 3rd, 2023 through February 10th, 2023, the company purchased 25,000 shares at a cost of $8.9 million. As of February 10th, 2023, we had approximately $81.5 million remaining on the $931 million share repurchase authorization. We will now open up the call for questions.
spk05: Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. And our first question comes from the line of Nick Mody with RBC. Please proceed with your question.
spk12: Great. Thanks. Good evening, everyone. Dave, maybe you could just kind of opine. I mean, I'm sure you could appreciate skepticism around forecasts since it's been pretty tough the last year and a half. what really gives you the confidence in what you're predicting right now in terms of the budgets? And also on the market share gains, why do you have the confidence that you think you can gain share after 2022, where it was pretty much a year of share losses for Trulia? And in terms of the market share gains, where do you think it's going to come from? Thanks. Thanks.
spk06: Hey, thanks, Nick. I think, look, we've learned a lot over the last, you know, three to six months, I say, with the category. I think remember last year, we had significant innovation overlaps with tea and fruit punch. And now we're facing the same thing with margarita. In fact, margarita in the first quarter is about 60% of our losses is margarita. So we're trying to work through this. this growth through innovation and go to a more balanced approach to growing our brand. So it will be innovation. It's going to be we're replacing tea with sort of a rotator of three trimester seasonals that come in and then they go out. But we're really focusing, as we announced today, a lot of it is on our lightly flavored SKUs. So really, we learned that, look, we built the business through building this bold flavor portfolio, and it did very well, put us in a very strong number two position. But we did that to some extent, neglecting, reinforcing the refreshment characteristics of the Lightly Flavored portfolio. And when we did make the change last year, I think you noted it actually in one of your notes, consumers who noticed the 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, you know, a lot more activity and a lot more moves to grow our share in single serve. And convenience was 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 waning 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. And the last thing I'll say is if you look at the, again, look at, I know you're a numerator fan. If you look at numerator, we're still within the 21 to 34-year-old age group, which is the group that's really stuck behind Hart Seltzer. We still have the highest household penetration there among all beer brands. So we still have a big audience that's there awaiting attention. Awaiting us to to deliver some news and excitement to them. So we feel through all of those, we can get there. And again, it's not going to happen in the 1st quarter. It's going to build over the 2nd, 3rd, 4th, we'll start to see, hopefully see shared. By the way, it's not that's in the guidance that Frank mentioned. We're not expecting truly to grow share as part of that guidance. So this is. call it maybe a little bit more aspirational, but we exist to grow share. That's our intent. That's our goal. And we think all the things that we put in, that we now say that we'll put into place in the marketplace, get there.
spk12: And if I could just quickly follow up on that, Dave, from a market share standpoint, I mean, is this a function of you getting clarity from retailers that they're cutting off the tail of the hard center category? So maybe you'll benefit somewhat there, or are you expecting to close the gap with White Claw? I mean, can you just give any context on on where you think those share gains would be sourced from?
spk06: Yeah, I think the share gains will come. First of all, there's a long tail. For perspective, I mean, Trulia is the number two brand. The next 46 brands equal the share that Trulia has, including Bud Light Seltzer. So there's a lot of brands to steal share from, and a number of them will be going away. And, of course, you're going to want to steal share from the number one player as well. So we expect to source – you know, from all consumers who are interested in the Seltzer category and are buying any other brand within that space.
spk12: Great. Thanks a lot. I'll pass it on.
spk05: Sure. And our next question comes from the line of Nadine Sarwat with Bernstein. Please proceed with your question.
spk11: Hi, everybody. Two questions for me. So the first one on your 2023 shipment and depletion guidance, a decline of two 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 spirits RTD space, you know, this continues to grow. Strongly as a segment, although is already dominated by a few brands. So what makes you confident that truly vodka soda has what it takes to win in that space?
spk07: Thank you. Okay. Let me take the first one, 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 hot salsa category in particular. We believe it'll stabilize at a point in time, but we have seen significant decline, so we've taken that into consideration. And the guidance of 2% to 8% decline is really on a reported basis. And as we've mentioned, we have one one few a week in in 23 compared to 22 so the comparable range is actually uh minus seven to minus one um at the low end uh we have for truly we have uh we've not uh modeled an improvement in the trends that we have seen in 2022 so this is just you know what we believe okay if you don't see anything this is where it lands And for Twicity, which had a stellar year in 2022, we moderated last year's growth rates. 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. So that's kind of what we have on the low end. On the high end, at the minus 2, We keep, you know, Twisted Tee moderated and didn't model really significant improvement in there. So growth rates below last year. And for Trulie, we still don't model share gains, but we have models at the relaunch that we announced today and that Dave mentioned. Um, it's successful and those 2 brands are really the main drivers. They will make or break the volume number that we're gonna that we're gonna see in 2023.
spk06: 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 would be High Noon and Neutral would be the top two brands. There's 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. And actually, it is a different approach because if you look at the channel distribution, it's really driven by the liquor class of trade. That's about 45% or so of the total. It also goes to the liquor class of trade, which is a little bit different. A lot of it's mostly independent. 90% are independents. It's very cluttered. Sales per point is lower. Prices are higher. It's a different approach. So we're going there. We don't expect it to be an overnight success, but it's something that You know, other brands have five or six years head start on us, and we're going. And if you look at the numbers, it's way early, but clearly High Noon is number one. Neutral is just a smidge above us as number two, and we're number three in the vodka and seltzer space. So in just a few months, and we really haven't even brought what we're going to bring to the table yet. So we think we can 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, you know, 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 one-fifth the size of hard seltzer. 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 two more variety packs. And because you have to create presence on the shelf in order to compete in this space. So we've learned over the last several months what we need to do to compete well. And we're going to start to implement that more aggressively as we get into the second quarter.
spk11: That's very helpful. Thank you.
spk05: And the next question comes from the line of Vivian Azar with Cowan. Please proceed with your question.
spk01: Hi, thank you so much and good evening. 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 distilled spirits entirely? Thank you.
spk06: Yeah, I think it can, because we look at again, we split that category into two. The cut water version of that category, the RTDs and dogfish head canned cocktails, higher ABV, fewer occasions, lower buy rate, just lower frequency of consumption. When you look at the other side, there's a lot, obviously, it looks and acts just like a hard seltzer. It's all about, really, it's about refreshment. It's about sessionability. It's about variety. And we think we're building a brand that could stand for those three things, refreshment, sessionability, and variety. And whether you take that in a traditional, like, sucrose-based hard seltzer, market as a truly hard seltzer, or within the vodka space, or, you know, we've already talked about getting into tequila as well, which to us, they're all kind of the same occasions. It's largely the same consumer. Some of the consumers, the spirits consumers tend to be a little more, a little older, you know, more mature. you know, a little more wealthy than the hard sell. So consumers, but it's essentially, it's the same pool that we're playing in. 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, you know, 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.
spk01: That's super helpful. Thank you so much. And then just my follow-up for Frank, you know, you guys before this like toward growth in hard seltzer had a pretty clear formula for offering guidance. If I recall correctly, you were really extrapolating off of trailing 12-week trends. If I look at what we're seeing in the hard seltzer category today, in particular on the two-year stack, it seems like you've reverted back to that methodology. Can you just comment on whether that's accurate or not? Thank you.
spk07: Yeah, certainly for Trulia, as Geza said, like on the low end, the minus 8 or minus 7 on a like-for-like basis. We've just looked at the trends that we've achieved in 2023 and in 2022 and assumed that there's no change to that, so we've reverted back a little bit to that. We've looked at trends that we have achieved, you know, what did we really realize, and then used that as a basis and build it up. We believe we have really strong plans in place for 2023. 1 component is what we announced today is the relaunch of truly, but we want to see how much traction we in actuality we're going to get. So so we have been carefully modeling that.
spk01: That's helpful. Thank you so much.
spk05: And the next question comes from the line of Kevin Grundy with Jefferies. Please proceed with your question.
spk13: Hey, great. Good evening, guys. Boy, a few for me. Let me peck through these quickly. Dave, just the down 10% to 15% for the seltzer category that you're expecting, just in the interest of clarity, that's the malt-based seltzer category. You're not talking seltzers broadly. Is that fair?
spk06: Yeah, that's right. I think the rule of thumb that we're using, Kevin, is if you throw in the spirits-based seltzers, you're probably going to add about three points of growth to that.
spk13: Okay. All right. That's helpful.
spk06: Minus 7 to 12. Yep.
spk13: Got it. Okay. Thank you for that, Dave. I wanted to step back, maybe ask you a little bit differently to Nick's question, just around the systems and the processes around FP&A and then, you know, ostensibly your guidance We can appreciate the volatility of the environment. It has not been easy cost. And then in your case, of course, you're sympathetic to the fact that we're still trying to find a bottom here with shelters. But that said, I mean, forecasting, even in the near term, particularly around gross margins. It's been it's been really difficult. Where are we with the investments around your systems to improve clarity around KPI and processes? How would you characterize where we are? How would you characterize your visibility? How would you characterize your conservatism around your outlook?
spk07: Yeah, Kevin, let me take that. I think there are multiple reasons why we are with the gross margins where we are. Part of it is visibility. Part of it is also the relatively low volume level that we have reached and the declines. and given the limited reactivity that we have in the supply chain. But I'll get there in a second. Let me first cover the systems implementation. So the systems implementation, which is really a process change, it's implementing an end-to-end process supported by the systems. We're well underway. The three main components I would say is a warehouse management system, which is SAP. Then we have a planning system, which is a complete planning suite that not only covers demand planning, but it's demand planning, supply planning, production planning, inventory planning. And then the third major component is oil. management within SAP. So we have started the implementations. We have implemented the warehouse management system in one facility in Ohio. The two other ones in Delaware and in Pennsylvania will follow later this year. The planning system, we have started with a demand planning module that has gone live, and we will, during the middle of the year, we'll implement the supply planning module as well. Kind of in parallel, we'll also do the, the auto management and then there's some site modules that we're also working on, uh, like, so this is going, uh, and, you know, we should be in in when it comes to systems and visibility much better. in a much better place by the end of the year. I want to caution that one is implementing the systems and the second thing is there's a huge change management effort that comes with it because you need to be able to run those systems. When we did the warehouse management system in Ohio, we're actually pretty happy with it because That's a massive change. You might have heard that, you know, with other companies. The main focus was to keep on being able to keep on receiving materials into ship so that there's no disruption of the supply chain. We've accomplished that. And now we start leveraging all the benefits. Okay.
spk13: Thanks, Frank. Go ahead.
spk07: Yeah, this is underway. And I think the other thing is, and that's partly why we have the, you know, the gross margin miss, I'd say, because of the scrappers. We have our supply chain at the moment with the volumes that we're taking. We have declining volumes, and the reactivity is not relatively high, to be honest, because where we can react on short-term is only with the internal breweries. Externally, you have to give lead time. It's a 60-day notice period. You have to commit to certain volumes. If you have a volume change or a mix change, it's really hard to change that with our external comads. and what you can only do is adjust the volume if the volume doesn't come through adjust it internally and what that yeah results in is that you have you know lower fixed cost absorption results in higher uh cost per case and that's really impacting directly the margin and then the other piece is is of course the uh the scrap but you know the combination of better systems Better processes, better integrating of the supply chain should address those issues. But I will tell you that relatively the declining volume environment is makes it a little bit more challenging to navigate that as opposed to a growth environment where you will sell through things quicker.
spk13: Of course, we can appreciate that challenge. One last one, just because it's important and sort of the bull case, I'd say, is sort of largely pegged to it to some degree. that the elusive low to mid 50s gross margin target, I know it's sort of difficult to call and you're kind of drinking out of a fire hose at the moment, but where would you reasonably peg the market in terms of when you think you can achieve that?
spk07: Yeah, I think what, the way I would answer that is the target has not changed because the building blocks are, you know, exactly the same building blocks. We are behind from a timeline perspective. And there are a couple of factors where we are behind. One is the volume has impacted us clearly. So we have the network of anchor breweries is in place. But with the current volume that we have and the declining volume, we can't allocate it in an optimal way. So we would have liked to have a little bit more volume in the West Coast. We don't have that. So that's not – we're not getting to optimal. We need a little bit more volume to get there. On the brewery efficiencies, and we've talked about that in the last two earnings calls – we have this variety packing line that takes a little longer to get to the target efficiencies. We are seeing progress, and we're putting, we believe, the right measures in place, but it will take a little longer to get to the target efficiencies, and that will have a significant impact on the cost structure. One is that you get a much better fixed cost absorption, and part of that we'll see this year because Ohio Was only online last year for part of the year. So there's going to be a carrier over impact. That's what we get additional 30 to 40% more volume out of out of that facility. So we'll get that benefit and then we're increasing the line benefits or the efficiency of the line benefits. So all these items and the waste reduction, especially the scrap that we would consider one time, especially in the fourth quarter, we're working to, of course, not repeat that and not have that result in a string of one-timers. So they are very clear, defined action plans that will get us to the target margin. But the timeline is extended and will take a couple of years to get there. And the last thing that I will mention to that is also we have invested in our co-manufacturers. And, you know, those investments amortize, but they're amortizing now over a small amount of volume, and that's driving the cost per case up as well. Those costs will largely go away in 2025, and that will also be a significant improvement in the gross margin. So that's why we believe, you know, the target has not changed, but the timeline is extended.
spk13: Okay. Thanks for all the time, guys. I do appreciate it. Good luck.
spk05: Thank you. And the next question comes from the line of Rob Ottenstein with Evercore ISI. Please proceed with your question.
spk15: 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 is, deserves more shelf space. It's, it's, it's doing phenomenally well and obviously has a long run rate. But I guess my, my concern is whether you can maintain or gain shelf space on truly given, you know, the outlook that you have for, for hard seltzers, you know, the category being down 10 to 15 and then given, you know, the fact that, you know, based on what some well-known consultants have told us, that there's just going to be this tsunami of spirits-based RTDs hitting the shelves this year and gaining something like 20% shelf space in total beverage alcohol, granted, so not just here, but in total beverage alcohol. So with those sorts of drivers going on, how... you know, do you think you will be able to gain or at least maintain shelf space for Trulie in the new shelf set changes that are going to be coming in the next couple of months?
spk06: Yeah. Hey, Robert, Steve, I'll talk to both of them. First of all, the easy one, Twisted Tea, We think we'll get 25% to 30% more shelves based on Twisted Tea this year. And remember, the shelves reset start. They start March 1. Generally, they end around mid-May, but obviously before Memorial Day weekend. So Twisted Tea locked and loaded. It would still be under space, by the way, relative to its share of F&Bs, but we'll take it. We'll take that space. On hard seltzer, what's happening is the category is being cut back, and this is based on what our sales team is seeing. at the end of last year called like 11% of total space went to hard seltzer. It's going to cut back to like maybe 9 to 10%. So it's going to lose some of the space. But then within that space, really the top five brands deliver on like 98.5% of all the needs that consumers have. There'll be a lot of brands that go away. So while the hard seltzer category will have where space will shrink, Truly's space within Hart Seltzer, based on what we know now, would increase slightly, and therefore, Truly's total space of beer was going to be about the same, to be really precise, like 2.7%. So we think the category loser, Truly, wins a little bit because it's a strong number two, and again, As I said before, the number three is whatever. It's like 20, you know, we're 15 share points behind. So we think we'll be able to do that. We honestly do. We think not adding permanent SKUs is probably a good thing as well. And we just have to, we've innovated arguably a little bit too much and not built the core business enough. And so that's really the focus this year. The last thing I just want to say, because Rob, you brought up the whole thing, RTDs, and what's interesting is that The number of brands have increased. There's like 70 or so more brands than there are hard seltzer brands. There's 150 more SKUs than there are hard seltzer SKUs right now. And when you look at the consumer overlap, there is some consumer overlap. So about 8% of hard seltzer, this is a numerator, but 8% of hard seltzer volume drifted to RTDs last year. So, it's not, it's, it's, you know, maybe of the 15 points of loss, maybe 2 of those points were went to it over index with because they're so small. It is having a bit of an effect. On the heart cells for category, but. The, the, the wave. i think personally i think it's three quarters driven by retailers jumping on it and pushing it and one quarter by consumers saying this is where what it should be so we'll see where it nets out this year it's obviously it is going there we'll see where it nets out would be i think you know we're going to compete very aggressively there with dogfish head canned cocktails with truly vodka soda we talked about that but it's this is this wave could come crashing down a lot faster than a hard seltzer in my opinion because i think it's being propped up by wishful thinking To a large extent, some consumer trends, no question, that would require RTDs to get more, but what they're getting seems extreme. They're going to have to pay the rent. We'll see what happens.
spk15: Great. No, no, that makes a tremendous amount of sense. And then just a question for maybe for Jim or you, you know, there appears to be a little bit of a trend perhaps for the wine and spirits, particularly spirits, and there's one big one certainly going over to beer distributors. If that trend continues, does that have any effect on you at all in your sense? What does that trend mean to you? What does that say about the industry, maybe convergence between
spk18: Spirits and beer just you know, there's more maybe a more Philosophical question or long-term question, but love that love to get Jim's thoughts on that Yeah, it's an interesting phenomenon obviously the movement of Sazerac was You know unprecedented I think what you're seeing is a recognition that beer distributors are better and at building brands in this beyond beer slash 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 spirits. They're kind of mass produced and at levels that you're not bottling liquor. In fact, most of them are made in breweries like 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. So you've got some of the spirits of people wanting the advantages of beer distributors. And because of that, I think most of the liquor brands are going to end up in liquor distributors. The Sazerac thing is not going to be opening floodgates to all these liquor brands moving over to beer distributors. Their primary volumes are still outside of the cold box. To me, and I think to us, we're always going to be at a much higher level of priorities at our beer distributors. So I think it's just a recognition that the liquor system of the route to market is disadvantaged in this fourth category.
spk15: That's great. Thank you very much.
spk05: And the next question comes from the line, Steven Powers with Deutsche Bank. Proceed with your question.
spk14: Great. Good evening, everybody. Thank you. I guess maybe, Frank, you've mentioned scrap and obsolescence a couple times. Is there a way you can quantify what that was in the fourth quarter? Maybe also quantify what you've embedded, if any, incremental obsolescence in 23 and I'm trying to get at sort of underlying gross margin ex-set obsolescence. And then related to that, obviously you're going to start off the year with a lighter gross margin, presumably finish a lot stronger. Just relative to the full year average, is there a way you can frame how far below we are when we start the year and how far above we expect to be when we end?
spk07: Okay, so let me start with the 1st question and just I'm not intending to give you quarterly guidance, but I, but I try to to address your question. So, on the 1st, 1, so scrapping off the lesson, I'd say the easiest way to answer that. we would have come in without the scrap and obsolescence in Q4 would have come in middle to higher end of our margin guidance. So that's kind of the impact. It was a sizable impact. And the two drivers that we had really were, as I said before, we resourced against higher volumes internally and for a different mix. You have to make a call early on, basically in the third quarter, If, you know, for volume that you want to sell in the fourth quarter. That has changed. Okay. And we need to adjust the ball. We took it out of the internal brewery. So there's a fixed absorption impact. There was one thing and the second thing, which was actually the bigger one was the scrap that that we ran out of shelf life. On on 2 things, because it was, it was a little bit amplified by the fact that we also transition to the new, uh, food juice, uh, uh, formula in in in truly that we had. Cans and, uh, and other ingredients that we have to write off. So that's why this was a relatively big number. Um, the, uh, what you will see in the case that, you know, total obsolescence, uh, was getting close to, uh, to 40Million and we're planning a substantial reduction in 2023. so no incremental obsolescence because. Yeah, almost half of that number was really incurred in 24 and was related to something that I would classify as one time in nature.
spk14: Okay. Yep. Got it. Any help on 23?
spk07: Twenty three, I mean, it, it will follow our normal, uh, margin guide because we have, like, we have the majority of our volume sits just in Q2 and Q3. that's where you should see the highest. There's a range, I would say, that is over the year is like four 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.
spk14: Yeah.
spk07: Okay.
spk14: Okay. That's helpful. And then on... twist uh yeah on twisted um i guess two two questions you may have said this and i if if so i i missed it and the transcript isn't updating for me so i don't know if you if you if you um gave a growth rate for 22 on twisted or if there was if you were if you if you did size the expected growth in 23 but uh you could humor me and go back to that that'd be great my real question is just is on repeat rates um and i'm just curious on newly acquired customers are you know Are you seeing similar repeat rates to the historical? Any differences, or is it too early to tell?
spk07: Yeah, maybe. Let me take the first one quickly because I covered that partly earlier. So, what we did on the guidance, we went back to 2022 and used that as a base, like the trends that we have seen. And we have for Twista T we have moderated the the rate so we didn't take what we the growth rate that we achieved in 2022 uh and we've moderated that and and we're more in the in the mid teens there so uh mid to high teens that's that's broadly where we will be out there the range actually i do have a repeat rate i mean an idea for you on that i think last year our repeat rate was in the low 30s
spk06: which was about the same as it was the prior year, but that's pretty significant given that we added like 20% more households. So we think, I mean, the repeat is holding up very strongly for this brand.
spk14: Yeah, that's what, okay, that's what I was getting at. Okay, thank you very much.
spk05: Yep. And the next question comes from the line of Eric Serrata with Morgan Stanley. Please proceed with your question.
spk04: Great, thanks. 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 there was pretty substantial in the third quarter. related to the changeover, and you mentioned continued scrappage in the fourth quarter.
spk07: Yeah, so what we have, I will not say there won't be any scrap whenever you have a change of that nature and that magnitude. There will be scrap and obsolescence. We have broadly modeled that in, bearing any really change in plans in terms of timing and the type of transition that we will do. So there's scrap and there's some models in the client.
spk04: Okay, great. And then, Dave, I'm hoping you could talk a little bit about twisted velocities. You know, it looks like overall velocities held up, you know, remarkably well last year, even when you added so much distribution. What do you see, you know, sort of at the individual account levels, as you start to add second and third 12-packs? Are you seeing kind of diminishing returns or diminishing velocities? Or, you know, once you establish a certain level of scale and visibility within the account, is it actually a halo on the overall brand?
spk06: Actually, it is. In fact, the more 12-pack SKUs we have in an account, the higher the velocity is. I would say generally, Last year, we grew points of distribution pretty, pretty significantly. Our sales per point was was up slightly. So the sales per point, actually, the sales per point is the highest in FMB. It's the second highest all beyond beer. There's only one other brand that has a higher that has a higher one. So it's holding up well, but you would expect it. I mean, if it declines slightly. Actually, we would expect this to decline slightly this year just because we're adding a lot of distribution. As you know, those new points of distribution are as efficient as the ones from where it started. But everything we're seeing points to very healthy brand with high repeat, high sales per point, and And we have done the account level work where, you know, one 12-pack versus two versus three, you see sales per point actually increase when you have – a lot of it has to do just purely with visibility in the account. So we think – like on this brand, I know there's a lot of question, how long can it go? We don't know. I mean, it's gone double digits from the beginning of time. But it's going off a bigger, bigger base. But importantly, it's been built the right way. It's been built, you know – focusing on both, you know, the elements of driving physical availability and the mental availability, all the brand building piece, but not, hasn't been overheated. It's growing at a real, at a real good pace. And we think we really understand who the consumer is, where they shop. I think being, you know, a brand that when you think about the number three single serve SKU or single serve brand in convenience after like, you know, Budweiser and Budweiser, To me, that's a source of strength for this brand. We have a consumer that goes into a channel that is not being swayed by price or visibility necessarily, but just purely they go in, they already know what they're going to buy, and they're buying this brand. So we're just trying to be very careful to make sure we understand what's making it successful, and we're enhancing it, but we're not changing it.
spk04: Great. That's really helpful. And then just to follow up with Frank, sorry to interrupt, switch back and forth, but just to clarify, the $40 million in scrap and obsolete, was the $40 million that you quoted earlier, was that scrap and obsolescence together, and was that for the full year? I seem to remember, like, an $8 million number for the third quarter. Yeah. Any?
spk07: That was fully, that's fully all in.
spk04: Okay, great. That's helpful. Thank you so much. I'll pass it on.
spk05: Thanks very much. Thanks. And the next question comes from the line of Camille Gargiola with Credit Suisse. Please proceed with your question.
spk03: Hey, guys. Good evening. Thanks for, I guess, squeezing me in. Frank, just to clarify, I think you said depletions were down 4% for the first six weeks of the year, but they'll be down close to the, I guess the lowest end of your guidance, which is a down eight or a down seven. So is something meant to happen, I guess, in the second half of the quarter, or just can you maybe just help square that for me?
spk07: Yeah, so two factors. The main factor is last year we launched the Margarita Pack and Trulie, 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 in the quarter to go. So that is 1 thing. And then then it's a little bit of comparability.
spk03: of events where you have the super bowl phasing uh that's in there as well that that's all we have we're just like wanted to give you that you don't over read the minus four okay got it and then um you provided a pretty detailed answer on on some of the work you're doing to be able to better forecast and predict sap all the mix of other things um is that complete or are the expenses that flow through for building all of that infrastructure Um, still still pending as we, as we go through 23.
spk07: No, I mean, there are 2 elements to it. There's a, there's a capital portion, which is the largest portion. And as as systems go live, that's when the depreciation starts and you'll see that and we've started that. So, and then there's an expense portion that's expense as we, as we go along. And that's happening. I think we have. We're in the middle of it.
spk03: Okay. Got it. Thank you. All right. Thanks.
spk05: And the next question is from the line of Bonnie Herzog with Goldman Sachs. Please proceed with your question.
spk00: All right. Thanks. Hi, everyone. 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, you know, not only will you have the deleverage, but I assume there's an increased cost of adding, you know, the fruit juice for Truly. And then I guess I wanted to understand the volume targets with your contract manufacturers. You know, were you able to lower those targets this year, or are you still locked in at, you know, higher levels so there could be risk there? I guess I'm just hoping to better understand all the puts and takes. Thanks.
spk07: Yeah, so we feel, you know, on the gross margin, I mean, the food juice, that is all reflected that we have. So, with the 8%, we have reflected that in the lower margin, as I said, that's going to come in below the average. And we have, so when you look at the gross margin, the underlying, projects that we have to improve the gross margin. They're ongoing and we've made progress also last year a big chunk you don't see because of the the significant amount of scrap that we had it was number one and then also with the sub-optimal volume allocation that we had between internal and external breweries where we couldn't run so first of all we had less volume available in our internal brewers because we didn't get to the efficiencies and then what we had we didn't fully use because we needed to to use that as the adjustment for lower volume. So, yeah, there was some progress made. It's just not, you know, shown in the, or you don't see it in the numbers because it's masked by other impacts. And we have very clear programs, the building blocks that I spoke about earlier. They are in place. People are working against it, and we are expecting real 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 masking the underlying positive impact that we have on gross margin. So, that was your first question on margin. What's the second? Okay. The co-packers, yes. So we are discussing clearly with our co-packers because, I mean, it's pretty obvious. We have our two main co-packers. We have significant volume commitments with them, which are much higher than what we need at the moment. 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're discussing with them ways to better balance like their needs and our needs in terms of they would like probably to use that capacity. So we're discussing with them to finding a better balance in the short term and with hopefully a positive outcome for everybody.
spk00: But you, and just to clarify on that point, Frank, you've considered you know, an outcome where you can't essentially renegotiate in terms of your, you know, gross margin guidance. That's factored in?
spk07: Not everything is factored in. Like, we're discussing, but there are no benefits baked in that we haven't achieved.
spk00: Okay. And then maybe just like a final second question for me, if I can switch gears. I might have missed your comments, but on hard Mountain Dew and how the brand is performing and, you know, maybe just remind us of your distribution plans for the brand this year in terms of number of states you expect to add. And, you know, I don't know if you still have plans to have the brand be available nationwide. Thank you.
spk06: Yep. Right now it's finished here in 11 states. We expect it to be maybe 25 to 30 this year. And that's being driven by Blue Cloud. It's based on the approvals they get and how quickly they can get it to those states. But that's sort of the plan. In terms of how it's performing in those 11 states, it's essentially in 12-pack. There's some 24-ounce singles. If we look at 12-pack, the sales per point in those states for the 12-pack is number one in FMB, ahead of Twisted Tea, ahead of Mike's, ahead of everything. So it's turning. The repeat rates are about as high as anything we've seen and beyond beer launches in the last couple years. So we feel like the consumer is there. The product isn't everywhere. We know that. So it's generally in large format stores, right? And it's not up and down the street. The distribution is still being built out. So on a kind of a below average distribution footprint, the brand is performing well. And honestly, we're just, it's going to go where it goes this year. We're not you know, there could be upside there, but we're not planning for any of it. We're going to, it has to get distribution through Blue Cloud. And as it does, you know, we, you know, we do our thing and we do the marketing and we get good response on that. So it's, as you know, there's been a lot of resistance to that. And as it works through, we'll see where it ends up at the end of the year. But again, there will be four, you know, we're going to go for 11 to 15 states in the next couple of months. So we know we'll at least be in 15 and
spk17: um pretty soon and hope to be 25 to 30 before the end of the year okay thank you and the next question comes from the line of brett cooper with consumer edge please proceed with your question thanks good evening uh just a question you push truly into bottled spirits and into vodka and you talked about going to tequila Just if you step back and think about the long term, is that a model you think is applicable for other parts of Beyond Beer, the fourth category, to grow household penetration and consumer acceptance? Thanks.
spk06: Hey, Brett, so you mean taking other brands into a spirits place, like maybe non-hard seltzer brands into spirits? Yes. Yeah, I mean, I think it's TBD. I mean, Fresca's in there now. I'm not sure how that's doing. I think people will try because clearly there's interest in the space. You can mix vodka in pretty much anything. So there very well could be. I think at the end, I mean, right at least at this moment, what seems to have the most promise is it's really vodka-based, not even tequila. I mean, vodka is like 80% or 90% of that space. So any kind of very clean, simple, vodka-based, beverage that delivers crisp taste and 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. And to go back on the Trulie thing, I think for Trulie, we really think Trulie can as a brand, and we're building the brand that way with that thought in mind, not just trying to bolt it on to a new idea, but we think it can play in the intersection of refreshment, sessionability, and variety. And that works for, you know, for sucrose-based, it works for vodka, it works for tequila. So we feel that's a good fit. There might be other good fits, too, but... I guess we'll be seeing, I'm sure we'll be seeing everything this year. We'll get a sense of what might work.
spk05: Great. Thank you.
spk06: Okay.
spk05: And the next question comes from the line of Peter Grom with UBS. Please proceed with your question.
spk02: Thanks, Operator. Good evening, everyone. 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 invent 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 competence. But just, you know, maybe I would love to get some views on the reasoning. And I guess, you know, building on that, like, if the relaunch goes as you plan internally, what would that really look like from a growth perspective for Trulie, and then maybe on the flip side of it, I mean, if it doesn't go as well as you think and share losses kind of continue, you know, how do you think about the future of the brand or what can you really do differently, you know, down the road? Thanks.
spk06: Okay. Thanks, Peter. Well, I think, I mean, I think, again, so we learned a lot. We learned, you know, we paid a lot of attention. We internalized and we acted. And I think the changes that we talked about today we think are the right exact right changes to get the brand back on track. And again, remember, this brand grew share every year until last year when we kind of this whole idea of innovating, innovating, having to lap the innovation finally kind of collapsed on us, if you will. So right now we're taking a step back. We're not innovating now behind Margarita. By the way, Margarita was a five share at this point exactly a year ago. It was a five share. So it's a lot to overlap. And so we don't expect to be gaining share in the first quarter. And we think, hopefully, by the end of the second quarter, it's going to be looking better, and then that will carry on. I think if it meets our expectations, we will grow. It's not in the high end because we're being cautious. I think we've also learned in the last couple of years to be a little more cautious in how we predict the category and the brand. But if it's successful, we think we can grow share again. We've been growing it up until last year. We think we're putting the brand on the right pathway to grow share again. So if we do great and we're, you know, we might be beyond the high end of the range if we grow share. And if we don't, you know, maybe we hold share. And if we do worse, we'll lose a little share. But remember, it's still, for perspective, and we won't be, we're not going to be happy if we lose share. But for perspective, it's still good. you know, 23, 25 share of the category and the number three is a six. So it's still, we'll keep at it. If we don't grow share this year, we'll find another way to do it next year. But we do feel like, you know, we don't want to create too much change either with this brand. We don't want to confuse consumers. That's a risk if we do too much change. But we feel like we're doing the right things in the right amount of change at the right time to get to put the brand in the, you know, in the right place to grow.
spk02: and that's so that's our intent but again we're being we're not letting any exuberance about our plans affect how we how we guide this year honestly we're not okay so that's really helpful and then maybe just one last one following up on on brett and bonnie's question just um you know any thoughts on on kind of monsters um new product um unleash the beast you know it seems like it would compete directly with kind of you know hard mountain dew so just Any thoughts on the competitive threat of that new category entry? Thanks.
spk06: Yeah, I mean, they're a great company. They've built a great brand. And I think the big question that's looming out there is what non-ALC brands can play in ALC successfully. And right now, the answer is zero at this point. But a year from now, there might be one or two that emerge. I think it's totally to be determined. I think we'll see how the consumer feels about it. It's very, you know, I think, honestly, I think if, I think Hard Mountain Dew has a really good chance to be successful knowing the brand and the cult following and how it plays. I mean, Monster has a chance too, but I think it's, we haven't even really, the product hasn't appeared on the shelf yet. We haven't tried it yet. So we're not quite sure where it's going to go, but it's going to be interesting to see. I'll say that.
spk02: Thank you so much.
spk05: And the next question comes from the line of Bill Kirk with Roth. Please proceed with your question.
spk16: Hey, everybody. I'll be quick. It builds on some of the third-party conversations. Longer term, how much of your needs do you want to do in-house? I think that was the reason for getting to 50% over time is basically not paying someone else for some of the things I do today. And related, how much excess capacity do you have now that you would be using if not for extra fees on the volume commitments?
spk07: So, I can answer the first question. The idea is that we have, that we use our own internal breweries to full capacity. and we use then our external uh our comments for everything else that goes beyond that now the internal capacity if you recall will increase over time that's part of the gross margin improvement we put a number of new lines and they're running at low efficiencies um if we can get them up there's a there's a sizable capacity increase that will happen internally in our breweries But with that, even with that, we intend to run them at full capacity and everything else goes external. Now within external, uh we're also lowering the cost we have uh in a while we have a partner on the west coast that has very competitive prices there's uh improved variety packing capability uh that we will have in city that will uh lower the cost as well if the volume grows and we put more volume uh through the facility so um again the the strategies use our own breweries And then use the external breweries, but lower the cost in the external breweries. That's the high level, the high level strategy. The 2nd question, I don't. I didn't fully understand to be honest, because, you know, the, the, if it was related to the open capacity, but that we had no internal breweries, but didn't use because of volume. I don't want to specify that I think I told you on the Q4 would have been, you know, middle of the, you know, to high end of the gross margin range without, you know, those issues.
spk16: To clarify, the idea is, you know, would you be doing more in-house if not for the third-party commitment, meaning would you bring some volume from those partners, but the fees, if you did that, are just too high and not worth it?
spk07: No, I'm sorry, but thanks for clarification. No, internally, that's the best incremental cost that we can get is in our internal facilities.
spk10: Okay, thank you. Thank you.
spk05: And as a reminder, if you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the queue. The next question comes from the line of Gerald Pasquarelli with Wedbush Securities. Please proceed with your question.
spk08: Hi, thanks very much for the question. Mine is on the pricing outlook of plus one to three points. Just maybe if you could provide some more color on your decision to not take more pricing, in particular, you know, given the continued margin headwinds and the increases that you were able to successfully pass through in 2022. I guess, like, I know this is initial guidance, but as we look at it, just trying to understand if there's upside, you know, to the pricing as we look out over the course of the year. Thank you.
spk07: Yeah, so on the pricing guidance, we have had rid of the pricing in 2022. And as we said in previous calls, we try to cover the commodities, the increased commodities, the inflation, which we did successfully. So we're happy with the pricing. There is the additional pricing that you see is to the largest extent is really carry over pricing that we implemented in 2022 at this point. We want to be careful when we're planning to cover in 2023. any additional commodity increases, but we see. If you look at the total cost that we're exposed to, we see that environment moderating a little bit. I mean, there are parts that are going up, but there are other parts that are moderating. And at this point, we believe with the guidance that we have, we'll be able to cover the incremental commodity cost. If that changes, we will revisit. But given also the competitive nature and like the consumer environment, we don't want to overextend that.
spk08: Got it. Thanks very much. Appreciate it.
spk05: All right. And at this time, there are no further questions. I would like to turn the floor back over to Jim Cook for closing comments.
spk18: Thank you, everybody, and we'll speak in a few months.
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