Boston Beer Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 26, 2023

There are 14 speakers on the call.

Operator

Greetings, and welcome to the Boston Beer Company Third Quarter 2023 Earnings Conference 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.

Operator

Thank you, Mike. You may begin.

Speaker 1

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 Q3 earnings call. The call from Boston Beer are Jim Koch, Founder and Chairman Dave Berwick, our CEO and Diego Reynoso, our CFO.

Speaker 1

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 ks. The company does not undertake to publicly update forward looking statements whether as a result of new information, future events or otherwise.

Speaker 1

I will now pass it over to Jim for some introductory comments.

Speaker 2

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 Diego, who will focus on the financial details Our Q3 results as well as our outlook for the remainder of 2023. Immediately following Diego's comments, We will open the line for questions. Our 3rd quarter depletion decrease of 6% on a fiscal calendar basis and 3% On a comparable weeks basis was in line with our expectations and improved from a decrease of 7% on a comparable week basis In the Q2, we saw strong performance in our largest brand Twisted Tea and we expect its continued success to have a continued impact on our overall growth rates for the remainder of the year.

Speaker 2

In measured off premise channels, Twisted Tea Continued its strong dollar growth, up 34%, which was offset primarily by continued We continue to make progress on operational plans to enhance our margin and have delivered gross margin improvement for the last two quarters. Our multi year initiatives Several years, we plan to continue to invest behind Twisted Tea and Truly brands, while also developing innovation across Beyond Beer categories to drive long term growth. The operational changes we made this year Will help us continue to drive improvement in our margins, but the pace of that improvement will depend on how the consumer environment plays out and how fast we are able to grow into our capacity. We continue to have a highly cash Generative business with a strong balance sheet, which has enabled us to fund incremental investments in our brands and repurchased over $69,000,000 in stock thus far in 2023. Finally, we are thankful to our outstanding coworkers, distributors and retailers who continue to support our business.

Speaker 2

I will now pass it over to Dave for a more detailed overview of our business.

Speaker 3

Thanks, Jim, and good afternoon, everyone. As Jim mentioned, our Q3 volumes were in line with our expectations. For the Q2 in a row, we had a gross margin of over 45%. We also generated approximately $250,000,000 in operating cash flow over the last two quarters combined. Diego will discuss the financial results in his remarks, I'll focus my commentary on our overall performance.

Speaker 3

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 sales force. I'll now provide some color on our brands. Twisted Tea in the 3rd quarter had 34 percent dollar sales growth, while adding $3.2 share points and expanded its overall share to 29% of total FNB dollar sales in measured on premise channels. This robust demand is a result of balanced efforts Growing both fiscal availability via improved geographic channel and package distribution and mental availability We have a highly effective brand building campaign, increased media investment and expanded college football tailgating platform and optimized packaging design that highlights Twisted Tea Party Pack is now the 3rd largest and the fastest growing SKU among all FMBs and our wholesaler service levels are in a good position to support further growth.

Speaker 3

We remain confident that Twisted Tea will sustain a strong double digit growth for the remainder 2023 for many reasons. First, there's upside in growing brand awareness and household penetration and our ad campaign is working. 2nd, the brand is underdeveloped with Black and Hispanic and Latino consumers, and we're seeing increased household penetration in these demographics as a result of our marketing efforts. 3rd, there's still ample room to expand distribution through shelf space gains and new channels. As I mentioned on our last call, Prisca 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 into 2024.

Speaker 3

In the on premise channel, Twisted Tea is underpenetrated for other FMB competitors. It has a 60 share and has driven 96% of the volume growth in Beyond beer year to date. 4th, there's opportunity to widen the brand's presence in underdeveloped markets and we're making great progress in places like Texas and California. 5th, we're still in the early stage of Twisted Tea Light's national launch and the sales per point is accelerating and exceeding our expectations. It's now approximately 85% incremental to the Twisted Tea portfolio.

Speaker 3

Lastly, in the Q3, we began testing a higher ABV version of Twisted Tea in several markets. Called Twisted Tea Extreme, it has 8% ABV and as part of our efforts to find future pathways to growth by increasing occasions and adding new drinkers. Now on to Truly. We remain confident in the changes we made Brand proposition starting late in the Q2 and have seen gradual improvements in our results in a challenging segment. In light of Twisted Tea's strong growth, Truly continues to become a smaller part of our portfolio mix with Twisted Tea now 1.7 times larger than Truly and measured channels in the 3rd quarter.

Speaker 3

This impact is evident in our total company volume share, which when compared to the prior year quarter was flat at 4.5% in the 3rd quarter In the Q3, Truly's dollar sales declined 26% and a loss $3 share points versus a 31% in dollar sales and a loss of $3.8 share points in the 2nd quarter. Underlying this improved trend is much better performance Q3. Our new packaging refresh, merchandising focus on light flavors, push behind single serve in the convenience channel, New ad campaign and higher media spend, all have contributed to share growth in a slightly flavored part of the portfolio. We recently shared some innovations for the Truly brand launching in early 2024 that include a new 8% ABV Truly Unruly Variety Pack, which will replace our Truly Margarita Pack and a new Truly Party Pack, which will replace our Truly Tropical Pack. In addition, we'll improve the recipe of both truly lemonade and fruit punch to create a lighter, more refreshing finish, addressing a key issue with lapsed drinkers.

Speaker 3

We believe these innovations, along with the national launch of Truly Tequila Soda, Ahead of the peak summer season, we'll better position the Truly brand offering and set it up well for improved trends in 2024 and beyond. While we're not satisfied with Truly's pace of improvement, we're confident we made the right changes to position the brand for success. We remain encouraged that in the 3rd quarter truly maintained the 2nd highest sales per point in Hard Seltzer, 52% more productive than the PumaPizza brand and the 3rd highest sales per point in all of the year, so there remains a strong consumer base to build upon. The moderating overlap of Margarita launch and Truly Tea's discontinuation, which have contributed 75% of the brand's share loss to date, Should lead to continued improved share trends through the balance of the year. As evidenced, our measured off premise channels truly lost 2 volume share points 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 we'll continue to support and build out our smaller brands.

Speaker 3

Sam Adams' total share across all channels was slightly up in the 3rd quarter in a difficult craft beer category and we'll continue to invest behind our new remastered Boston Lager campaign and our seasonals in addition to our non out portfolio, including Just the Hays and Gold Rush Pilsner, which grew 95% of dollars in the 3rd quarter and measured op preface channels. While currently a small part of our portfolio, we see incremental opportunities at spirits based RTDs. Chile baca soda has strong VP and continues to gain distribution and Truly Tequila soda will launch nationally in 2024 ahead of the peak selling season, building on the success in test markets this year. Meanwhile, Dogfish Head's award winning canned cocktails have gained solid foothold in the traditional canned cocktail segment. Turning to our supply chain.

Speaker 3

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 3 categories we focused on to drive improved margins. The first is procurement savings. We targeted savings initiatives across multiple areas, including raw materials and packaging that have achieved some benefit during the 2nd and third quarters. We continue to review our contracts with our raw pack suppliers with the aim of adjusting these to be more reactive to changing demand.

Speaker 3

The second area 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 and efficiencies as well as adjusting contracts with our co manufacturers as we adapt to changes in our volumes and product mix. 3rd is waste and network optimization. We have initiatives to attack waste and optimize our logistics which will reduce freight and warehousing costs over time.

Speaker 3

These efforts helped us realize lower inventory obsolescence costs in the Q3, which benefited our gross market. We're currently implementing systems to improve our forecast and inventory management, which we expect to further reduce waste. We have multi year savings plans across each of these categories, which we expect will generate significant long term gross margin expansion. While we'll take time to realize the full benefit, we began to see some benefit in the second and third quarters, primarily related to We're also closely managing our operating expenses. We expect to use the cost savings that these efforts generate to nurture new innovation and 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.

Speaker 3

In summary, we're optimistic about the long term outlook for our diversified beverage portfolio. Our company has exceptional innovation and brand building capabilities, Now I'd like to welcome Diego Reynoso, our new CFO. Diego has significant financial and operational experience in the consumer industry, particularly in the alcoholic beverage category. I've worked closely with him since he started in early September, and I'm confident he brings requisite leadership and financial expertise to help us attack our most important business challenges. I'll now hand it over to Diego to discuss Q3 financials and our full year guidance.

Speaker 4

Thank you, Dave. Good afternoon, everyone. I'm very excited to be part of the Boston Beer Company and have learned a lot in my 1st 2 months. It's exciting to return to the beer business, particularly as the category has expanded to provide more consumer choices with Beyond Beer and non alcoholic offerings. Although it's early in my tenure, I'm very encouraged by our innovation and distribution expertise and the strength of our team and our unique culture.

Speaker 4

I'm looking forward to partnering across the company, particularly with our supply chain function to drive long term financial performance. Turning to our Q3 results. Fiscal calendar depletions for the quarter Decreased 6% for the prior year reflecting decreases mainly in Howard seltzers, partially offset by increases in Twisted Tea, Truly Vodka Soda and some of our innovation. Shipment volume for the quarter was approximately 2,300,000 barrels, a 2.5% decrease from the prior year. We believe distributor inventory as part of as of September 30, 2023, Averaged approximately 5 weeks on hand and was at an appropriate level for each of our brands.

Speaker 4

Our 3rd quarter gross margin of 45.7 percent increased 250 basis points from the 43.2% margin realized in the Q3 of 2022. This was primarily due to strong price realization and lower obsolescence and procurement savings, which more than offset inflationary costs. Advertising, promotional and selling expenses for the Q3 of 2023 decreased $1,100,000 or 0.7% from the Q3 of 2022, primarily due to decreased freights to distributors, partially offset by increased brand investment and higher selling costs. General and administrative expenses increased by $4,900,000 or 13.2 percent from the Q3 of 2022, primarily due to higher salaries and benefit costs and increased consulting costs. In the 3rd quarter, we recorded 16 point $4,000,000 non cash impairment charge, primarily for the Dogfish Head brand as a result of the company's and annual impairment analysis.

Speaker 4

The impairment determination was primarily based on the latest forecast of brand performance, which were below our earlier projections. For the Q3, we reported net income of $45,300,000 or $3.70 per diluted share. The impairment I discussed earlier negatively impacted diluted earnings per share by $0.96 Year over year earnings growth was driven by revenue growth and higher gross margins as well as lower impairment charges versus the prior year. Turning to guidance. Our depletion trends for the 1st 42 weeks of 2023 have declined 5% from 2022 on both a fiscal and comparable week basis.

Speaker 4

Based on our year to date performance and current projections for the Q4, We are narrowing our full year 2023 guidance range. As a reminder, the 2023 fiscal year includes 52 weeks compared to the 2022 fiscal year, which includes 53 weeks. As you are updating your models, please note that the impact of this one less selling week will be reflected entirely in our upcoming 4th quarter results. We now Full year 2023 depletions and shipments to be down 5% to 7% versus our previous guidance of down 2% to 8%. This is inclusive of a 1 percentage point negative impact from the loss of the 53rd week.

Speaker 4

We project increases in revenue per barrel of between 2% 3% versus our previous guidance between 1% and 3%. Full year 2023 gross margins are expected to be between 42% 43%, versus our previous guidance of between 41% 43%. Our full year investment in brand spend Within advertising, promotional and selling expenses are expected to increase between $25,000,000 $35,000,000 which is an hour range from our previous guidance range of $20,000,000 to $40,000,000 This guidance does not include any changes in freight costs for the shipment products to our distributors. We have experienced lower than expected freight costs year to date, which in addition to gross margin performance allows us to support our brands further. We continue to estimate our full year effective tax rate to be approximately 28%.

Speaker 4

Our updated non GAAP earnings per share guidance of $7 to $9 exclude the impact of the non cash impairment charge of $16,400,000 or $0.96 per diluted share. This projection is highly sensitive to changes in volume projections and supply chain performance. As you model out your projections, please keep in mind these factors. The 53rd week overlap It's expected to negatively impact 4th quarter volume trends by approximately 6 percentage points. In the 4th quarter, We expect price realization to be positive, but at a lower level to include 3rd quarter price increases compared to the prior year.

Speaker 4

In the Q4, which has seasonally lower volumes, gross margin is typically lower on an absolute basis relative to earlier quarters. We expect lower year over year gross margin improvements in the 4th quarter due to higher shortfall fees at our 3rd party breweries and the volume impact of lapping the 33rd week. Finally, as we have been disclosing in our 10 Q for some time, we do expect to incur short fall fees in the coming years, as we continue to work with our 3rd party breweries and grow into our capacity. Turning up to capital allocation. We ended the quarter with a cash balance of $311,000,000 and an unused credit line of $150,000,000 which provides us with the flexibility to continue to invest in our base business, fund our future growth initiatives and retain cash to our shareholders through our share buyback.

Speaker 4

For the full year, we expect capital expenditures of between $60,000,000 $90,000,000 a decrease from our previous guidance of between $100,000,000 $140,000,000 primarily due to changes in the timing of capital projects. These investments will be primarily related to our own breweries to build capabilities and improve efficiencies. During the period from January 3, 2023 Through October 20, 2023, the company repurchased 208,000 shares at a cost of $69,000,000 As of October 20, 2023, we had approximately $290,000,000 remaining on the $1,200,000,000 share repurchase authorization. This concludes our prepared remarks.

Speaker 5

I look forward to meeting many

Speaker 4

of you in the quarter ahead. And now, we'll open the line for questions.

Operator

Thank you. We will now be conducting a question and answer session. A confirmation tone will indicate your line is in the question Our first question is from Vivien Azer with TD Cowen. Please proceed with your question.

Speaker 6

Hi, good evening. Thank you. I wanted to start on the innovation pipeline and kind of the swapping of SKUs. It seems like there's a lot of activity planned Between the party packs on Truly and then also on Truly and Tequila, I you guys noted last quarter that kind of visibility on spring resets would be more robust following Labor Day. So I was just wondering what is Kind of the level of retail dialogue around all this new innovation and your confidence on gaining incremental shelf

Speaker 7

Hey, Vivian. This is Dave. I'll take first shot at that. I think what we're trying to do is report we're trying to replace Both those SKUs Margarita and Tropical will they may still exist in some markets if there's demand, but generally they're going to disappear in most places. We're going to replace them with 2 new SKUs that we think are more productive, both the high ABV truly unruly as well as what we're calling the party pack, which we think is sort of like an all So our assortment of flavors.

Speaker 7

So in a way, what we're doing is we're maintaining our shelf space by swapping one SKU in most cases for another, but we're doing it importantly, we believe with SKUs are going to be more productive and they're going to turn better. So that's the thinking behind that.

Speaker 8

And again, I think one of

Speaker 7

the things we've learned with Truly is that we got in this innovation cycle where we were adding a lot of new variety pack SKUs. And at some point, you got to you just have to walk away from that and you have to find a way to do more with fewer and that's part of the plan for next year.

Speaker 6

Yes, for sure. And I probably could have done a better job of phrasing my question, absolutely understood on the replacement cycles on those quarterly SKUs. But like what about or the Twisted Extreme, those new and incremental to the franchises, right?

Speaker 7

Oh Yes, I'm sorry. I mean the other ones we've talked about, you said you're talking about Twisted Tea Extreme? Yes.

Speaker 9

But I think you talked about Twisted Tea.

Speaker 6

I'm sorry.

Speaker 7

Yes. So there's a I may have confused. So I was referring Truly, Unruly is for Truly, is a high ABV for Truly, which we're launching early in the Q1. We are testing right now truly I'm sorry, Twisted Tea Extreme, which is another 8% ABV version of Twisted Tea that's in convenience stores in about 5 states right now that we're testing. And if it performs the way we hope it will, then we could likely expand that next year.

Speaker 7

But that would be in addition to The innovation on Twisted actually is kind of light because we have so much to grow, so many opportunities to grow the core business that We're being very careful when we add new on Twisted, but Twisted Tea Extreme has a potential for broader distribution. We haven't decided though. Does that answer your question, Vivian?

Speaker 6

It does. Thank you. Sorry about that. So many teams and so many higher ABVs. So if we could Yes.

Speaker 6

To gross margin, obviously, a very nice second quarter of gross margin expansion, heard loud and clear on I come at the seasonality of margin. But I'm just curious, were margins in the Q3 in line with your expectations? Or did they exceed? And if so, like what were the key drivers there? Thanks.

Speaker 5

Hi, Vivien. This is Diego. I think margins Are in line with our expectations, I think we laid out 3 key buckets that we wanted to go for efficiencies to improve our gross margins And we're proceeding in all three of them the way we expected. The biggest drivers we have in the quarter is the reduction of waste in our in their work optimization bucket. And the other piece that we also have is some of the procurement savings that we're advancing upon.

Speaker 5

So those were the 2 buckets that we thought would give us the faster benefits and will continue in our program for the next few quarters.

Speaker 6

Thanks, Diego, and congratulations on the new role. We look forward to working with you. I'll get back in the queue. Thanks.

Speaker 5

Thank you.

Operator

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

Speaker 10

Great. Thank you and congratulations, Diego. Two questions. Let me start with the first one. And that is just love to understand how you're looking at the current Business environment and demand for beer, this is usually the season where you get a new round of pricing.

Speaker 10

Seems like it may be a little weaker than certainly the last couple of years, but maybe even weaker than Pre COVID, is that your sense? So love to get a sense of your feelings about demand and pricing and how you're Dealing with that situation, then I have a follow-up.

Speaker 5

Well, let me start with the pricing. So If you look at our pricing guidance, we're doing a little bit better than our previous guidance for 2023. But as we go into the Q4, We are expecting it to be a little lighter because in Q3 price increases were lower than they were the previous year. So right now, we are currently planning our 2024 view and we look forward to sharing it in the next call, but we're being very prudent given what we're seeing in the current environment.

Speaker 10

Would kind of 1% to 2% Be about right for incremental pricing that you're putting in now?

Speaker 5

We're currently making sure that we understand dynamics and we'll come back in the next call and be a lot clearer on what we expect for next year.

Speaker 10

Okay, great. And then and I know I'd love it if you could help us think through this. And that is the split between the 3rd party manufacturing and what you have inside. Can you give us Any kind of round numbers or percentages, of how much is 3rd party, how much You do internal. Is it the same for Twisted Tea?

Speaker 10

Is it the same for Truly? How fungible are those brands? And what percentage of the gross margin gap between where you are now and 50% Is bridged by getting that split right?

Speaker 5

Yes. So we always tried to maximize our internal capacity. I think we've said before, we try to keep it around 90% to 100%. We are actually increasing from 65% internal to about 70% internal from last year to this year. So we continue to move down that path so that we maximize our assets.

Speaker 5

And as we look forward, we're part of the optimization is Geography, so it's not just about the assets, but also where they're located. So we will always have a split that helps us maximize our profitability. So as we look forward, we're trying to one of the buckets we mentioned is network optimization that has a lot to do with where we have our different third party manufacturers And optimizing the financial performance of that.

Speaker 10

And let's say, I mean, do you need to get to that 90% To get back to the 50% margin and that will be one of the biggest buckets to do that?

Speaker 5

No, no. Again, because they are located in Very different geographical areas, that is not something we have to do to be able to achieve our gross margin roadmap.

Speaker 10

Great. Thank you very much.

Operator

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

Speaker 11

All right. Thank you. Hi, everyone. I had a question on your new FY 'twenty three guidance. You narrowed your ranges, but lowered them.

Speaker 11

And I guess it now implies Q4 shipments and depletions, I think will be down maybe 11 point percent on shipments and down 9% at the midpoint. And I know you've highlighted the negative impact from lapping 53rd week. But I just wanted to understand why you're expecting things to be so weak in the quarter and maybe what's changed? And then also I did want to understand if the impairment charges you reported in the quarter were always factored into your guidance for the year?

Speaker 7

Yes, I think so hey, Bonnie, it's Dave.

Speaker 9

So I

Speaker 7

think first of all, we went we actually went to the higher We actually rounded up on gross margin, slightly down On depletions more because we're just we're being cautious and prudent given the current economic environment. We're not quite sure. So we're just being cautious, but we don't see Any change in trajectory than we had anticipated before actually. So pricing, we went a little bit to the higher end, gross margin a little bit to the higher end and depletions and shipments a little bit just a smidge toward the lower end. So it's not I'm not sure where you're seeing That's go down on all of those.

Speaker 11

Okay. So I guess I was just asking primarily on shipments And depletion like

Speaker 7

you

Speaker 11

Okay. You're expecting shipments and depletion to be down 5% to 7%, correct? So minus 6% at the midpoint?

Speaker 7

That's right. That's right. Yes. Again, I was

Speaker 5

So this is Diego. This is Diego. I think just we have one more quarter of results. So what we did is we reduced the range. So last time we said minus 2 to minus 8.

Speaker 5

We have now come back and said, well, given we have one more quarter of results, we're going to make that range a little smaller. So we went 2, minus 7 to minus 5, but it's simply just because we have one more quarter information. We really haven't changed our perspectives on the year. So that would be the first part. On the second part, The impairment was not factored into our guidance that

Speaker 4

we gave last quarter.

Speaker 5

This is our regular time of the year when we're looking at our impairments Through a regular process, so that was not included in our Q2 guidance.

Speaker 11

Okay. No, that's helpful. And I think it just As you think about you've got some visibility, there's only 2 months left in the year. So I get it. That's great.

Speaker 11

You've narrowed the ranges and maybe there's some level of conservatism. But just also thinking about the comments that you added and you discussed that, that you're now expecting lower fixed cost absorption in the quarter based on what you're producing in house. So that's a function of lower expectations On shipments in the quarter, I imagine. And then just trying to think about it in the context of your gross margin And what it implies for Q4, you're also sounding pretty conservative on your gross margin in Q4 And what that new full year guidance implies, correct?

Speaker 5

Yes. So two points. This is Diego. First one is, yes, Although the midpoint is slightly lower, we are increasing our gross margin and holding EPS. So there's a piece there.

Speaker 5

The second piece Is the impact of that week in the quarter? It's about 6 points. So when you adjust the quarter for those 6 points, The trends are relatively holding when you look at the Q3 and Q3, Q4 numbers. So for me, that means that we're not significantly seeing a significant change in the performance of the business.

Speaker 11

Okay. That's helpful. I'm just trying to reconcile because I feel like we've known about the extra You're lapping next week, but it sounds like you're feeling pretty good and the improvements as you round out the year. Okay. Yes.

Speaker 5

And I agree with you because we've always known, I think we've narrowed the guidance, but we haven't significantly changed it.

Speaker 11

All right. Thanks so much. I'll get back in queue. Appreciate it.

Operator

Thank you. Our next question is from Brett Cooper with Consumer Edge Research. Please proceed with your question. Hi. Boston has always had success

Speaker 2

in our restaurants, has always had success in creating new brands. So I was hoping to ask on the innovation program and specifically outside of your big brands. I think you changed the approach to how you innovate and I

Speaker 4

was just hoping to get

Speaker 2

an update on what you're seeing innovation portfolio, how the new approach is working, expectations from innovation outside of your big brands and whether innovation program can get enough Thanks.

Speaker 7

Hey, Brett. Thanks. I'm going to let I'll let Jim jump in on that one on innovation.

Speaker 12

Thanks. We have, I think, evolved Our innovation program, we're probably making the same or a larger number of bets, but not rolling them out nationally. So what you're seeing from us is Fairly consistent flow of new products, couple of years, new brands. And but doing them in test markets and scaling them more cautiously and more Slowly and discontinuing things when they don't work. So that's the change that we've made.

Speaker 12

That's on the new brand side. Dave talked about lots of new innovation within existing brands, which continue to have shoulders that we can build out like with Twisted Tea. Last year, we brought out Twisted Tea Light. Did you wear In test markets with Twisted Tea Extreme and the same thing with Truly Unruly. So We're approaching line extensions, if you will, with a little more comfort in rolling them out quicker And bigger, and then, we want a pipeline of innovations that are new brands and we're going to do that more slowly and build on success.

Speaker 12

I think our model is Twisted Tea, which

Operator

Thank you. Our next question is from Stephen Powers with Deutsche Bank. Please proceed with your question.

Speaker 13

All right. Hey, thank you. And congrats and welcome from me as well, Diego. I got two questions, 1 on Twisted and 1 on Truly. Maybe we'll start with Twisted.

Speaker 13

I guess, Dave, you called out some success In building out those more underdeveloped markets, I think you called out California and Texas, we talked about Florida as well in the past. Maybe just give a little bit of an update there, A little bit more detail on what you are seeing in terms of that progress and any learnings that you've accrued, best practices or any differences either across those markets Or nuances versus where the brands are more established for longer.

Speaker 7

Okay, Steve. I think both if you look at actually take those 2 states of Texas there are 2 fastest growing states right now for the brand. So we kind of went from low developed markets to like to upper mid developed markets pretty much in a year. And really it was basic execution. It was driving all the things that the litany I went through in the opening remarks, it was just driving distribution.

Speaker 7

Initially, we've like starting small format in convenience stores, where the consumer goes and then building that to large format, building out our 12 pack distribution, building out our 24 ounce distribution. So a lot of it is really execution in the marketplace. On top of that, we did add, some media by targeting Latino consumers in both markets as well, because that's obviously an important part of both of those markets. And it just and it's moving. So it's not like It's not something very complicated.

Speaker 7

It's just it's basically executing the fundamentals of the business and that's what's been able to get Growth there and yet there are still obviously 2 large populated states, of course, but there are other geographies that were deploying the same tactics and it's obviously working because the brand has been growing pretty consistently double digits.

Speaker 13

Yes, that's perfect. I just wanted to validate that there was more Yes. Execution and commonality of strategy as opposed to something more nuanced. And then flipping over to Truly, as you called out, The lighter flavors have performed better relative to the total portfolio, which I think is evident. I guess, those brands are still trending down, at least in track days, we see it down low teens.

Speaker 13

So they're better, but they're still got a ways to go. I guess any thoughts on how you can kind of bend the trend in those light flavors specifically? And Whether you think there's an element of more media investment there or more kind of promotional sampling strategies, just anything You can articulate around how you improve that the trajectory in those light flavors specifically.

Speaker 7

Yes, Sure. I mean, I think it's just doing more of the same what we've been doing. So we've been doing it since May or June. And you're right, I mean, on the 3 core The white flavor variety packs, they are declining, but they're declining less than the rate of the category. So gaining share is step 1, growing and that Outright to step 2, on a single serve basis, so 24 ounce cans actually we're growing.

Speaker 7

We're actually growing volume. If you look at those numbers And of course, we're gaining share as well and doing that. It's really been a focus of everything we've been doing over the last whatever 4 or 5 months, which is Focusing on our execution and making sure we have more white flavored variety packs on display. So we went from maybe call it 20%, 25% of the display being light flavors, so now 40% to 50% of our typical display has been light flavors. It's been Fixing the mix and convenience and making sure that we have single serves of white flavors available, it's a new ad campaign.

Speaker 7

We put a lot more weight behind it as we talked about in the last call. It's actually Spending more money in social and digital, much more than we had done before in lieu of TV and just keep on running the play. The other thing I would say is that One other thing we changed, an acknowledgment that the category is still 70% plus lightly flavored was to change our LTO platform. So we have 3 LTOs per year. We're getting much better at executing those and they're all light flavor.

Speaker 7

So For example, last summer, we had Red, White and True in the marketplace, which was lightly flavored. It lapped a year ago what we call poolside, which was a bold flavor. We had 2x the repeat rate on Red, White and True last summer. So for a 20% repeat rate versus 10%. So this is an Giving consumers what they want, giving them more lighter flavors and we think so the momentum has begun and we have to keep going because we're obviously As I mentioned before, we're not happy unless we're growing.

Speaker 7

We're happy to want to gain share and at least we are in that part of the business. So there's nothing really, I'd say, up our sleeve that we haven't done that we feel that has to be unleashed in order to get there. I think The last thing I'll add on top of that is obviously both it's about half of our portfolio. We have the both flavors that we have to improve. There's no question because we're not going to get total growth Until we get Lemonade or Fruit Punch on a better trajectory, we have I mean, we did talk about it at NACS.

Speaker 7

I think we talked about in My remarks were reformulating both of those. We're taking Stevia out and we have a much better tasting product. We believe that leads to more repeatability, sessionability. So that's a play for us to kind of to buoy that part of the business as we head into next year.

Speaker 13

Okay, great. Thank you very much.

Operator

Our next question is from Eric Saroda with Morgan Stanley. Please proceed with your question.

Speaker 9

Good afternoon, everyone, and welcome, Diego. I realize You guys aren't going to give 2024 guidance until February, which I think is a wise decision. But Jim has spoken lately about An approaching inflection point or tipping point where your overall volumes and revenue What's your degree of confidence in terms of reaching that tipping point in 2024? And what are some of the puts and takes from a big picture standpoint for getting there?

Speaker 5

Thank you for the question this day, and Although we to your point, we're not giving guidance right now for 2024, what we can say is that We've seen constant improvements and sequential improvements in Sarcana. So if you look at the numbers we've seen so far, I mean, we've gone from Looking at a reduction of 5% 6% sorry, 5% and improving all the way to the last numbers that we can see That you're looking at 2% reduction. So you're seeing sequential improvement in each one of the periods when you look at 52, 13 4 weeks, And we expect that to continue. What trajectory that will take, we will share a little bit more in the next conversation, but we're really happy with

Speaker 7

And this is Dave. I'll just jump on top of that. I think what we're seeing is, obviously Twisted Tea becoming as we mentioned becoming bigger, growing, having a bigger impact on the total results. And again, actually look at our depletions that we talked about Q2 minuteus 7 on a calendar basis, Q3 minuteus 3 on a calendar basis. So that's pointing us in the right direction.

Speaker 7

And we'll talk again, we'll talk to your point, Eric will talk more about it in February. But I mean next year, I mean the goal is to get growth from more than one place. So we have a great portfolio of brands And we need to get growth in multiple places and we think we're on the pathway to do that. So for example, non out beer is growing, Donfeche can cocktails are growing, The momentum is there. We need to keep hitting it hard and we need to move continue to grow, twist it, continue to find a way to get truly back to where it needs to be at least gaining share and then ultimately growing.

Speaker 7

And then we have the rest of this portfolio that we think there's a lot of opportunities to get the growth from the other elements of it as well.

Speaker 9

Great. And then just a quick follow-up in terms of Twisted. Party Pack, at least in scanner data, has And a huge incremental contributor beyond the overall portfolio, which is doing extremely well. Could you talk about how you're looking at further runway for Party Pack? Would you do additional variety packs for Twisted?

Speaker 9

Or is it more keeping it close to the core there?

Speaker 7

Sure. I think on Twist it, we're being very Deliberate, very disciplined in how we roll things out and we don't want to over innovate. I think we look at Party Pack has been terrific for us. It still only has about 52% ACV distribution, originals like around 58% or 59%. So we still have a lot of runway just By driving distribution on Party Pack, we are announcing or we have announced a Twisted Tea Light Variety Pack year that will be out there as well.

Speaker 7

So that's really for the more developed market. So again, like when we go out when we go to market, we go to market and we think about it on a BDI basis on a brand development basis by market does not one size fits all, but we're focused on original 12 pack first. If you get that right, then you move on to half and half. If you get that right, you move on to Party Pack. If you get that right, you move on to Twisted Tea Light, then Twisted Tea Light Variety Pack, etcetera.

Speaker 7

And I think By doing it that way, we're maximizing the growth from each SKU that we add And it's not just a free for all, which the category, the total beer category as you know has become. So I think there's a disciplined a approach that we've deployed for many years that we're continuing to hold the line on. So that's why we feel pretty confident there's a lot of growth without adding a lot of new Innovation other than just driving distribution what we got. And again, I think the party pack, last I'll say about the party pack is just an example of what consumers are looking for today and that's Flavor variety is number 1. It trumps everything else out there.

Speaker 7

And so if that's what consumers want, we're going to make sure we give it to them and we'll find ways to do it, but we'll do it in a way that's very orderly and smart.

Speaker 9

Great. Thanks. I'll pass it on.

Operator

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

Speaker 8

So in terms of understanding how much of the shelf space

Operator

of the growth of FMC

Speaker 8

and SOVs is coming

Speaker 7

Hey, Filippo, we're losing I think we lost We have a bad connection. We can't quite understand your question. If you want to try again or maybe move a few feet to either side. Can you hear me now? I think

Speaker 3

we may have one. Okay.

Speaker 4

Let's try it again.

Speaker 7

Yes. Try it again, Freebo. Give me another shot. Yes. Yes.

Speaker 8

I was just thinking, have you guys done any studies in terms of understanding how much of the shelf space In F and B, this is coming from our cell service. Thank you.

Speaker 7

Okay. Got you. Okay. Yes, I think I mean, if you look at the spring resets and the fall resets, I mean, the hard seltzers are the net contributor to shelf space pretty much across the board. I think if you look at it now, like where we are in the fall, there have been resets in the fall, about 70% of customers that do resets in the fall in addition to the spring.

Speaker 7

And things are kind of Settling out pretty much right at what you would expect from a space to sales perspective. So right now, I think in the last year, for example, hard sell Point, so they're gaining some of that and FMBs have also gained a bit as well. So I think it seems to be a rational market Place where retailers are essentially assigning space based on where the growth is, if not immediately, With some sort of a lag. So I'd say that's in terms of exactly where it came from, I think FMBs is probably coming from mostly from Hard Seltzer maybe Kraft as well.

Operator

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

Speaker 12

Thanks everybody for joining us and we will be talking to you in February on the Q4

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Earnings Conference Call
Boston Beer Q3 2023
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