Greetings, and welcome to the Boston Beer Company Fourth Quarter 2022 Earnings Call. [Operator Instructions]. 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..

Thank you. Good afternoon, and welcome. This is Mike Andrews, Associate General Counsel and Corporate Secretary of the Boston Beer Company. I'm pleased to kick off our 2022 fourth quarter earnings call. Joining the call from Boston Beer are Jim Koch, Founder and Chairman; Dave Burwick, our CEO; and Frank Smalla, our CFO.

Before we discuss our business, I'll start with our disclaimer. As we state in our earnings release, some of the information we discuss and that may come up on this call reflects the company's or management's expectations or predictions of the future. Such predictions are forward-looking statements.

It's important to note that the company's actual results could differ materially from those projected in these forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained in the company's most recent 10-Q and 10-K.

The company does not undertake to publicly update forward-looking statements, whether as a result of new information, future events or otherwise. I will now pass over to Jim for some introductory comments..

Thanks, Mike. I'll begin my remarks with a few introductory comments and then hand over to Dave, who will provide an overview of our business and our 2023 plans. Dave will then turn the call over to Frank who will focus on the financial details of our fourth quarter results as well as our outlook for 2023.

Immediately following Frank's comments, we'll open the line for questions. Over the last few years, our company has experienced rapid growth, ending 2022 with a revenue base of $2.1 billion, which is almost double the $1.2 billion in revenue generated in 2019.

A large portion of this increase is attributable to the outsized growth of the Hard Seltzer category. As we mentioned on previous calls, the Hard Seltzer category dynamics have been challenging as the economy reopened and it's been difficult to predict where consumer demand will ultimately fall.

We had expected early trends to improve in the second half of 2022 against easier prior year comparisons. Truly performance has not yet turned around, and Dave will take you through additional plans we have for Truly we expect to help improve the brand performance in the second half of this year.

Looking back on 2022, our projections for Truly and some of our new brands were too high, and we produced and sourced materials at the upper end of our projections to avoid out of stocks.

We've also had an expansion of product offerings that has introduced more complexity into our supply chain, and we planned our cost structure at higher levels of volume. This has resulted in financial performance that is below our expectations.

In 2023, we are working to simplify our business to reduce complexity and improve margins as well as adjusting our cost structure in line with our current volume expectations.

We believe the actions we are taking will benefit the company over the long term and that the Beyond Beer category, where we have an advantaged position will grow over the next several years.

We expect the operational and supply chain changes we are making this year, combined with our history of innovation, strong brands and our top-ranked sales force will lead us to long-term success. A strong balance sheet enables us to continue to invest in our brands. And today, we announced that we repurchased $8.9 million in stock thus far in 2023.

We released our first-ever environmental, social and governance report, which established a baseline of data that we will work to improve over the long term. We now have a more standardized approach for understanding our energy use and our water use.

The ESG report also allowed us to highlight our focus and continued progress against our efforts to cultivate a culture of inclusion through awareness, engagement and accountability across the company.

As shared in this report, our coworkers gave Boston Beer high scores on questions related to pride in working with the company, belief in our values, our concern for their safety and well-being and their confidence in the future of Boston Beer.

To close out my remarks, I would like to thank our outstanding coworkers, distributors and retailers who continue to support our business. And now I'll pass the call to Dave for a more detailed overview of our business..

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 2 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 #3 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 Light has proven to bring in new drinkers and prior brand rejectors. We've received an encouraging early response to our new Twisted Tea light 110-calorie product that we launched in high developed markets last year.

It only has 9% ACV distribution as we start 2023. Twisted Tea Light is bringing new drinkers into the brand family who are looking for lower calories but big flavor. Fourth, there's much opportunity to increase brand awareness and availability in Twisted Tea's under developed 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 1 year became our largest volume state, accounted for 10% of total Twisted Tea volume while growing 50%. Lastly, we also have underdeveloped consumer demographics, such as Latinos and African Americans, who represent an opportunity to grow the brand.

Only 24% of Twisted Tea households are multicultural, but they're growing 18%. We have plans to continue to grow Twisted Tea with a diverse audience through investment in awareness driving media and increased product availability.

As Jim mentioned in his remarks, we're disappointed that the reformulation of Truly has yet to improve trends and are planning a major refresh of the Truly brand in the second quarter of 2023 that includes new easy-to-navigate packaging, more motive versus product-centric brand communication elevated media spend across all channels, especially digital and social media and aggressive marketplace execution to improve product availability and visibility, especially with our lightly flavored variety packs.

We've learned a lot and are putting that learning into action this year. For example, we realized in last year's second quarter after launching Truly Margarita that adding further bold flavor variety pack innovation was not going to be as successful as we had experienced with prior innovations as consumers were clearly overwhelm category news.

Further, despite Truly Margarita's very good performance, it was the #1 new brand launch in beer in 2022, it was not as incremental to the Truly trademark as prior launches. It also became clear that consumers in their confusion were going back to the category basics and seeking more lightly flavored Hard Seltzers.

And we have put too much executional attention towards our Boulder flavor lineup to the detriment of our variety packs.

The reformulated CHO products that we launched in the fourth quarter have been well received by those consumers who know about the change, but we did not do a good enough job communicating those improvements on our packaging and then our advertisers so that more people will learn about the change.

Our upcoming package redesign will present a cleaner, easy-to-shop look and forcefully communicate that we have a now more refreshing taste that includes real fruit juice. Our internal consumer testing work validated that we made big product improvements. Now we need to better communicate it to consumers to trigger trial and win back lapsed drinkers.

We sharpened our advertising communication in January to reinforce that point, and the new packaging and more motive ad campaign will hit the market at the start of the second quarter.

Based on this new work and stepped up brand investment, we're expecting to gain share this year, although the first quarter will be more challenging as we lap last year's Truly Margarita launch.

We deliberately did not add new permanent flavor innovation in the first quarter of 2023, so we can focus on the reformulated lightly flavored core lineup and build the brand more sustainably without adding new permanent product offerings.

Lastly, we launched Truly Vodka Seltzer in the fall ahead of 2023 to gain consumer learning and our experience with that launch has informed our approach with 2 new variety packs and updated packaging design and branding that will also hit the market in the second quarter.

Without questions, 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 we'll continue to broaden their shoulders and build them out.

Sam Adams started the year with another buzzword of Super Bowl spot announcing our remastered Boston Lager that utilizes the same Cook family recipe, but through enhanced brewery techniques provides a smoother finish.

We also are investing more behind our seasonals portfolio, which is the only national seasonal [indiscernible] beer and showcases summer rail on October feast. Lastly, we've added a new nonoutbeer called Gold Rush to go with Sam Adams' Just The Hays recently named the #1 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 can cocktails, the launch of Jim Beam, Kentucky Coors, FMB and the continued rollout of Hard Mountain Dew, but expect these to be smaller volume contributors in 2023 as they ramp distribution and find their audience. Turning to our supply chain.

As we previously discussed, we're in the process of modernizing our supply chain through investments in equipment capacity and improved systems and processes. Our product portfolio has expanded over the last several years. This expansion and the volatility of the hard seltzer category 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 is 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 nonworking to working dollars and increasing the effectiveness of our spend through greater investment in digital and social versus traditional media.

Despite near-term headwinds, we continue to believe that our business has significant margin improvement potential.

In summary, we believe the investments we're making this year in enhancing our marketing plans and packaging for Truly continuing to fuel Twisted Tea's momentum, reducing supply chain complexity and lowering our cost base should drive operational effectiveness and improve top line growth market share and margin performance over the next few years.

Now I'll hand it over to Frank to discuss fourth quarter financials as well as our detailed outlook for 2023..

Right. Thank you, Dave. Good afternoon, everyone. The fourth quarter continued to show sequential shipment and revenue improvement. However, as mentioned earlier, our gross margin was lower than expected primarily due to higher-than-expected inventory obsolescence and lower internal brewery volume.

Shipment volume for the quarter was approximately 1.71 million barrels, a 16.7% increase from the prior year, partly due to an additional week in 2022 compared to 2021, reflecting increases in our Truly Hard Seltzer, Twisted Tea, Hard Mountain Dew, Angry Orchard and Dogfish Head brands, partially offset by decreases in the Samuel Adams brand.

We believe distributor inventory as of December 31, 2022 average approximately 5 weeks on hand and was at an appropriate level for each of our brands.

Our fourth quarter 2022 gross margin of 37% increased from the 28.7% margin realized in the fourth quarter of 2021, primarily due to lapping prior year costs related to the 2021 Hard Seltzer slowdown, partially offset by higher brewery processing and inventory obsolescence costs.

The higher obsolescence cost were primarily related to our adjusted volume projections for Truly shipments and the Truly brand transition to real fruit. Inflationary cost increases primarily due to increased packaging, ingredient and energy costs were offset by increased pricing with a net neutral impact on gross margin.

Our fourth quarter advertising, promotional and selling expenses increased $1.5 million or 1.1% from the fourth quarter of 2021, primarily due to higher media spend and higher salaries and benefits costs partially offset by lower local marketing investments. Freight to distributors was flat as higher volumes were offset by lower rates.

General and administrative expenses increased by $5 million or 13.5% from the fourth quarter of 2021, primarily due to increased salaries and benefits costs. For the fourth quarter, we reported a net loss of $11.4 million or $0.93 per diluted share compared to a net loss of $51.8 million or $4.20 per diluted share in the fourth quarter of 2021. The.

This decrease in the net loss of $40.4 million or $3.29 per diluted share was due to lapping the 2021 combined direct and indirect costs related to the 2021 slowdown in Hard Seltzer category growth as well as higher net revenue in the current quarter, which were partially offset by increased supply chain costs and slightly higher operating expenses.

Turning to guidance. Our depletions for the first 6 weeks of 2023 have declined 4% from the comparable periods in 2022. Our 2023 fiscal year includes 52 weeks compared to the 2022 fiscal year, which included 53 weeks.

We are currently planning 2023 depletions and shipments to decline 2% to 8%, inclusive of an approximately 1 percentage point negative impact from the comparison against the 53rd week in 2022. We expect price increases of between 1% and 3%. Full year 2023 gross margins are expected to be between 41% and 43%.

We continue to expect to cover inflationary cost increases to pricing. Our full year 2023 investments in advertising, promotion and selling expenses are expected to change between a decrease of $5 million and an increase of $15 million. This does not include any increases in freight costs or the shipment of products to our distributors.

In 2023, we expect non-brand savings to be largely offset by an increase in incentive compensation, which did not fully pay out in 2022. We estimate our full year 2023 effective tax rate to be approximately 28%, up approximately 160 basis points versus 2022.

We are currently targeting full year 2020 fully earnings per diluted share of between $6 and $10. This projection is highly sensitive to changes in volume projections, particularly related to the Hard Seltzer category, supply chain performance and inflationary impact on consumer spending.

Finally, as we 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 Truly Margarita that mostly impacted the first quarter of last year. And we also expect Hard Seltzer trends to remain challenging.

Margin improvement will be weighted to the second half of the year based on volume trends, the expected 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 million to $140 million.

These investments will be primarily related to our [indiscernible] to build 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 3, 2023 through February 10, 2023, the company purchased 25,000 shares at a cost of $8.9 million.

As of February 10, 2023, we had approximately $81.5 million remaining on the $931 million share repurchase authorization. We will now open up the call for questions..

[Operator Instructions]. And our first question comes from the line of Nik Modi with RBC..

Dave, maybe you could just kind of [indiscernible], I mean, I'm sure you could appreciate skepticism around forecast since it's been pretty tough the last 1.5 years.

What really gives you the confidence in what you're predicting right now in terms of the budget and also on the market share gains, why do you have the confidence that you think you can gain share after 2022 were pretty much share -- a year of share losses for Truly and in terms of the market share gains, where do you think it's going to come from?.

I think look, we've learned a lot over the last 3 to 6 months, I'd say, with the category. I think remember, last year, we had significant innovation overlaps with tea and [indiscernible]. 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 growth through innovation and go to a more balanced approach to growing our brands. So it will be innovation. It's going to be -- we're replacing tea with sort of a rotator of 3 trimester seasonals that come in and then they go out.

What 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 #2 position, but we did that, to some extent, neglecting, reinforcing the refreshment characteristics of the little flavored portfolio.

And when we didn't make the change last year, I think you noted it actually in 1 of your notes, consumers who noticed a change actually reacted very favorably. We didn't do a very good job explaining that to consumers. So again, we're going to be communicating that much more vigorously and aggressively on our new packaging and in our advertising.

In addition, I think we're seeing some of the volume move to the convenience channel where honestly, we're much less advantaged than we are in other channels, and we're making a lot more activity and a lot more moves to grow our share in single serve and inconvenience was also is another way to get there.

So I'd say, it's kind of a long answer, but I would say we've relied a lot on innovation, particularly with permanent SKUs. We're kind of weaning off of that. We're going to spend more on our base business, we're going to look much better in store. We're going to deliver that message very strongly.

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 a group that's really stuck behind Hard Seltzer. We still have the highest household penetration there among all beer brands.

So we still have a big audience that's there awaiting awaited us 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 first quarter. It's going to build over say the second and third quarter, we'll start to see, hopefully, see share growth for Truly.

By the way, it's not -- that's 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 -- that we announce say that were put in place in the market to get there..

And if I can just quickly follow up at from a market share standpoint, I mean, is this a function of you getting quality from retailers that they're cutting off the tail, the Hard Seltzer categories.

So maybe you'll benefit somewhat there? Or are you expecting to close a gap of White Cloud? And can you just give any context on where you think those share gains would be sourced from..

Yes. I think the share gains will come -- first of all, there's a long tail for perspective in Truly is the #2 brand, the next 46 brands equal the share that Truly has, including Bobbitt 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 see -- you're going to steal share from the #1 player as well. So we expect to source from any -- from all consumers who are interested in the Seltzer category and are buying any other brand within that space..

And our next question comes from the line of Nadine Sarwat with Bernstein..

Two questions for me. So the first one on your 2023 shipment and depletion guidance of a decline of 2% to 8%. Can you run us through your volume growth assumptions that are baked into that for each of your major brand families? And then my second question, your announcement earlier today demonstrates how you're leaning into the spirit RTD space.

This continues to grow strongly as a segment, although it's already dominated by a few brands.

So what makes you confident that Truly Vodka Seltzer has what it takes to win in that space?.

Okay. Nadine, this is Frank. Let me take the first 1 on the guidance. And maybe to preface the assumptions, we've taken I'd say a somewhat conservative approach because of the uncertainty that we see around the consumer and the entire consumer environment and the Hard Seltzer category in particular.

We believe it will stabilize at a point in time, but we have seen significant declines. So we've taken that into consideration. And the guidance of $0.02 to $0.08 decline is really on a reported basis. And as we've mentioned, we have 1 fewer week in '23 compared to '22. So the comparable range is actually minus 7% to minus 1%.

At the low end, we have for Truly, we've not modeled an improvement in the trends that we have seen in 2022. So this is just what we believe, okay? If we don't see anything. This is where it lands. And for Twisted Tea, which had a stellar year in 2022, we moderated last year's growth rate.

Well, we believe we're going to have strong growth rates in 2023, we think they will moderate probably during the middle of the year when we had really high growth rates last year. So that's kind of what we have on the low end.

On the high end, at the minus 2, we keep Twisted Tea moderated and don't -- didn't model really significant improvement in there. So growth rates below last year. And for Truly, we still don't model share gains, but we have modeled that the relaunch that we announced today and that Dave mentioned is successful.

And those 2 brands are really the main drivers. They will make or break the volume number that we're going to see in 2023..

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 into the Vodka Seltzer or Vodka soda space. And when you look at the category, if you look at RTDs, it's about $1.6 share of total beer. Half of it is the Vodka Seltzer space.

So that will be high noon and neutral to be the top to top 2 brands. It is clear overlap in the high end of Hard Seltzer and the other brands. We have a large consumer base. They want us to go. We develop great product.

And actually, it is -- it's 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. Hard Seltzer goes through a liquor class of trade, which is a little bit different. A lot of it is 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 didn't -- we don't expect it to be an overnight success, but it's something that other brands have 5 or 6 years has started us so we're going. And if you look at the numbers, it's way early, but fairly high newness that is number one.

neutral is just a smidge above us as #2, and we're #3 in the box of 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 we're in with 1 variety pack right now.

There are 1,100 SKUs in RGDs right now. That's more than Hard Seltzer has. So RTDs are 1/5 the size of heart cells, so they have more SKUs, they have more brands. You cannot stand out with 1 variety pack, which is why we announced today that we're going to have 2 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 and less as we get into the second quarter..

And the next question comes from the line of Vivien Azer with Cowen..

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, Ken cocktails and the fill spirits entirely..

refreshment, session ability and variety and whether you take that in a traditional like super space, Hard Seltzer market is Truly Hard Seltzer or within the Vodka space or 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 -- that the spirits consumers tend to be a little more a little older, more a little more wealthy than the Hard Seltzer for 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 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..

That's super helpful. And then just my follow-up for Frank. 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 2-year stack.

It seems like you've reverted back to that methodology.

Can you just comment on whether that's accurate or not?.

Yes. Yes. Certainly, for Truly, as Dave has 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 assume that there is no change to that. So we've reverted back a little bit to that.

We've looked at trends that we have achieved, what did we really realize and then use that as a basis and build it up. Now we believe we have really strong plans in place for 2023. One 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 we have been carefully modeling that..

And the next question comes from the line of Kevin Grundy with Jefferies..

A few for me. Let me pick 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 multi seltzer category. You're not talking seltzers broadly.

Is that fair?.

Yes, that's right. I think the rule of thumb that we're using, Kevin, is add -- if you throw in the spirit-based seltzers, you're probably going to add about 3 points of growth to that -- minus 7 to 12, yes..

Got it. Okay. I wanted to step back, maybe ask you a little bit differently to Nik's question, just around the systems and the processes around FP&A and then extensively your guidance we can appreciate the volatility of the environment. It has not been easy cost.

And then in your case, of course, sympathetic to the fact that we're still trying to find a bottom here with sell-through. But that said, I mean, forecasting even in the near term, particularly around gross margins. 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?.

Yes. Kev, let me take that. I think there are multiple reasons where 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 in the declined and given the limited reactivity that we're 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 and well underway.

The 3 main components, I would say, is a warehouse management system, which is SAP, then we have a planning system, which is complete planning suite that not only covers demand planning, but it's demand planning, supply planning, production planning, inventory planning. And the third major component is order management within SAP.

So we have started the implementations. We have implemented the warehouse management system in one facility in Ohio. The 2 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 well during the middle of the year, we'll implement the supply planning, module as well. And kind of in parallel, we will also do the order management. And then there are some site modules that we're also working on like MRP.

So this is going, and we should be in -- when it comes to systems and visibility much -- in a much better place by the end of the year. Just I want to caution one is implementing the systems. And the second thing is there's a huge change management effort that comes with it because we need to be able to run those systems.

And when we did the wealth management system in Ohio, we're actually pretty happy with it because that's a massive change. And you might have heard that with other companies. the main focus was to keep on being able to keep on receiving materials to ship so that there's no disruption in the supply chain.

We have accomplished that and now we start leveraging all the benefits. This is underway. And I think the other thing is, and that's partly what we have the gross margin is, I'd say, because of the scrap is 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 what we can react on short term is only with the internal breweries. Externally, you have to give lead down. 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 co-mans.

And what you can only do is adjust the volume, if the volume doesn't come through adjusted internally. And what that results in is that you have a lower fixed cost absorption and results in higher cost per case, and that's really impacting directly the margin. And then the other piece is, of course, the scrap.

But a 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..

No, of course. We can appreciate that challenge. One last one, just because it's important in sort of the bull case, I'd say, is sort of largely pegged to it to some degree, 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?.

Yes. I think the way I would answer that is that the target has not changed because the building blocks are 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 the network of anchor breweries is in place.

But with the current volume that we have in 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 optimum. We need a little bit more volume to get there.

On the brewery efficiencies, and we've talked about that in the last 2 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 are 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 will 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 but we get additional 30% to 40% more volume 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 onetime, 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 timelines are extended and it will take a couple of years to get there. And the last thing that I would mention to that is also we have invested in our coal manufacturers.

And that -- 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 go largely go away in 2025, and that will also be a significant improvement in gross margin. So that's what we believe the target has not changed, but the timeline has extended..

And the next question comes from the line of Rob Ottenstein with Evercore ISI..

Great. I think most of my questions actually were picked off so far, but I still have a couple left. So I guess the question is around shelf space. And obviously, Twisted Tea deserves more shelf space. It's doing phenomenally well and obviously has a long run rate.

But I guess my concern is whether you can maintain or gain shelf space on Truly given the outlook that you have for Hard Seltzers category being down 10% to 15%.

And then given the fact that based on what some well-known consultants have told us that there's just going to be this tsunami of spirit-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 do you think you will be able to gain or at least maintain shelf space for Truly in the new shelf set changes that are going to be coming in, in the next couple of months?.

I'll talk to both of these. First of all, the easy one, Twisted Tea. We think we'll get 25% to 30% more shelf space on Twist this year. Remember, the shelf resets start they started March 1, generally, they ended around mid-May, but obviously, before World Day weekend.

So Twisted Tea locked and loaded, it will still be under space, by the way, relative to its share of FMBs, but we'll take it. We'll take that space. 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 come 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 5 brands deliver on like 98.5% of all the needs that consumers have. There will be a lot of brands that are -- that go away.

So while the Hard Seltzer category will have space will shrink, Truly space within Hard Seltzer, based on our -- what we know now, would increase slightly. And then Truly -- therefore, Truly's total space of beer is going to be about the same, like to be really precise, like 2.7%.

So we think the category loses Truly wins a little bit because it's a number -- it's strong #2. And again, -- as I said before, the number 3 is whatever, it's like -- 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 build the core business enough. And so that's really the focus this year. The last I want to say because Rob you brought up the whole thing of RTDs.

And what's interesting is that -- the number of brands that have increased -- there's like 70 or so more brands than our Hard Seltzer brands. There's 150 more SKUs and 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's numerator, but 8% of Hard Seltzer volume drifted to RTDs last year. So it's not -- it's maybe of a 15 points of loss, maybe 2 of those points went to RTDs. It over-indexed with RTs because they're so small, it is having a bit of an effect on the Hard Seltzer category.

But the RTD wave, I think personally, I think it's 3/4 driven by retailers jumping on it and pushing it in 1 quarter by consumers saying this is what it should be. So we'll see where it nets out this year. Obviously, it is going there. We'll see where it nets out.

But I think we're going to compete very aggressively there with Dogfish Head, can cocktails with Truly Vodka Soda. We talked about that. But it's -- this is this wave could come crashing down a lot faster than Hard Seltzer, in my opinion, because I think it's been 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 extremely they're going to have to pay the rent. We'll see what happens..

Great. No, no, that makes a tremendous amount of sense. And then just a question for -- maybe for Jim or you. There appears to be a little bit of a trend perhaps for the wine and spirits, particularly spirits and there's 1 big 1 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 spirits and beer just there's more maybe a more philosophical question or a long-term question, but I'd love to get Jim's thoughts on that..

Yes. It's an interesting phenomenon. Obviously, the movement of SASAC was unprecedented.

I think what you're seeing is a recognition that beer distributors are better at building brands in this beyond beer fourth category because those products and that includes the tsunami of RTD canned cocktails, those products kind of look more like beer than spirits. They're in cans, you want them in the cold box.

The dollar margins per case are relatively low relative to Spirit. They're kind of mass produced levels that you're not bottling liquor. In fact, most of them are made in breweries like city and similar places.

So they have a lot of the characteristics of beer, and the beer system is just better at building brands there, gaining distribution, merchandising, all those activities. So you've got some of the Spirits people wanting the advantages of beer distributors.

And because of that, and I think most of the the liquor brands are going to end up in liquor distributors. You're not -- you Sazerac thing is not going to be opening of floodgates to all these liquor brands moving over to beer distributors, their primary volumes are still outside of the cold box.

And 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 the liquor system of the route to market is disadvantaged in this fourth category..

And the next question comes from the line of Stephen Powers with Deutsche Bank..

I guess maybe, Frank, you mentioned scrap and obsolescence a couple of times. Can you -- 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. I'm trying to get at sort of underlying gross margin ex that obsolescence.

And then related to that, obviously, you're going to start off the year with a lighter gross margin, presumably finished a lot stronger. Just relative to the full year average? Like how far -- is there 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..

Okay. So let me start with the first question. And just -- I'm not intending to give you quarterly guidance, but I try to address your question. So on the first one, so scrap and obsolescence, 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 high end of our margin guidance. Yes. So that's kind of the impact. It was a sizable impact. And the 2 drivers that we have 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 for volume that you want to sell in the fourth quarter. That has changed, okay? And we need to adjust the volume. We took it out of the internal brewery. So there's a fixed cost absorption impact. There was one thing.

And the second thing, which was actually the bigger one was the scrap that we ran out of shelf life on 2 things because it was a little bit amplified by the fact that we also transitioned to the new Focus formula in truly that we had cans and other ingredients that we have to write off. So that's why this was a relatively big number.

What you will see in the K is that total obsolescence was getting close to $40 million, and we are planning a substantial reduction in 2023. So no incremental obsolescence because almost half of that number was really incurred in '24 and was related to some things that I would classify as onetime in nature..

Okay. Yes. Got it. Good.

Any help on '23?.

'23, I mean, it will follow our normal marginal because we have like we have the majority of our volume just in Q2 and Q3, that's where you should see the highest volume. There's a range, I would say that is over the year is like 4 points roughly, and the lowest quarter will be Q1 because of the phasing of the savings initiatives.

And then the middle of the year has the higher ones and then in line with history, Q4 will be lower..

Yes. Okay. Okay. That's helpful. And then on Twisted, I guess 2 questions. You may have said this, and if so, I missed it, and the transcript isn't updating for me.

So I don't know if you gave a growth rate for '22 on Twisted or if there was -- if you were -- if you did size the expected growth in '23, but if you could go back to that, that would be great. My real question on is just is on repeat rates. And I'm just curious on newly acquired customers.

Are you seeing similar repeat rates to historical? Any differences? Or is it too early to tell?.

Yes. 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 use that as a base like the trends that we have seen. And we have -- for Twisted Tea, we have moderated the rate.

So we didn't take what we -- the growth rate that we achieved in 2022 and we've moderated that and we're more in the mid-teens there. So mid to high teens. That's broadly what we have 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, 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 a very strongly for this brand..

The next question comes from the line of Eric Serotta with Morgan Stanley..

Great. Quick one for Frank and then one for Dave. For Frank, should the Truly not reformulations but repackaging for 2023, all the initiatives that Dave spoke about earlier result in any scrap or obsolescence charges.

I know that was pretty substantial in the third quarter related to the changeover and you mentioned continued strategy in the fourth quarter..

Yes. So what we have, there might -- I will not say there won't be any scrap whenever you have a change of that nature and that might be -- there will be scrap and obsolescence. We have broadly modeled that and bearing any really change in plans in terms of timing and the type of transition that we will do.

But so there is scrap and there's some models in the guidance..

Okay. Great. And then, Dave, hoping you could talk a little bit about Twisted velocities. It looks like overall velocity has held up remarkably well last year, even when you added so much distribution.

What do you see sort of at the individual account level as you start to add second and third 12 packs, are you seeing kind of diminishing returns or diminishing velocities? Or once you establish a certain level of scale and visibility within the account? Is it actually a halo on the overall brand?.

Actually, the more -- in fact, the more 12 pack SKUs we have in account that, the higher the velocity is. I would say, generally, last year, we grew points of distribution pretty significantly. Our sales per point was up slightly. So the sales per point -- actually, the sales per point is the highest in FMB. It's the second highest in all Beyond Beer.

It is one of the brand that has a higher one. So it's holding up well, but you would expect it. I mean if it declined slightly, we -- actually, we would expect this to decline slightly this year just because we're spreading a lot of distribution. As you know, those new points of distribution are as efficient as the ones and where it started.

But everything we're seeing points to very healthy brand with high repeat, high sales per point. And we have done the account level work where one 12-pack versus 2 versus 3, you see sales per point actually increase when you have for a lot of that to just purely with visibility in the account.

So we think like on this brand, I know there's a lot of question how long can it go? We don't know. But I mean it's gone double digits from the beginning of time. But it creates going off a bigger, bigger base, but importantly, it's been built the right way.

It's been built focusing on both the elements of driving physical availability and the metal availability, all the brand building piece but not -- hasn't been overheated. It's growing at a real good pace.

And we think we really understand who the consumer is, where they shop, I think being a brand that when you think about the #3 single-serve SKU or single-serve brand and convenience after like Bubba 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 with. 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 just -- we're enhancing it, but we're not changing it..

Great. That's really helpful. And then just to follow up with Frank, sorry to 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..

That's for you all in..

And the next question comes from the line of Kaumil Gajrawala with Credit Suisse..

Guys Frank, just to clarify, I think you said depletions were down 4% for the first 6 weeks of the year, but they'll be down close to the I guess, the lowest end of your guidance, which is a down 8% or down 7%.

So is something meant to happen, I guess, in the second half of the quarter? Or just can you maybe just help us square that for me?.

Yes. So 2 factors. The main factor is last year, we launched the Margarita pack and Truly and there was significant load-in and demand for that in Q1. And a big chunk of that was in February. So after the period that we have. We have some Margarita, we're lapping some Margarita in the year-to-date number. but there's more to come in the quarter to go.

So that is 1 thing and then it's a little bit of comparability of events where you have the Super Bowl phasing that's in there as well. That's all just like wanted to give you that you don't overread the minus 4..

Okay. Got it. And then you provided a pretty detailed answer on some of the work you're doing to be able to better forecast and predict SAP all the mix of other things.

Is that complete? Or are the expenses that flow through for building all of that infrastructure still pending as we go through '23?.

No. I mean there are 2 elements to it. There's a capital portion, which is the largest portion and as systems go live, that's when the depreciation starts and you would see that. And we have started that. So -- and then there's an expense portion that's expensed as we go along. And that's happening. I think we are in the middle of it..

And the next question is from the line of Bonnie Herzog with Goldman Sachs..

All right. I guess I have a question on your guidance. So if your shipment volume comes in at the low end of your guidance or, I guess, down 8%. I guess I'm still trying to understand how you're going to be able to hit your gross margin guidance this year.

I mean, not only we have the deleverage, but I assume there's an increased cost of adding the fruit juice for Truly.

And then I guess I wanted to understand the volume targets with your contract manufacturers, were you able to lower those targets this year? Or are you still locked in at higher levels, so there could be risk there? I guess I'm just hoping to better understand all the puts and takes..

Yes. So we feel on the gross margin, I mean, we have 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 significant amount of scrap that we had. It was number one. And then also with the suboptimal volume allocation that we have between internal and external breweries. So 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 use that as the adjustment for lower volume. So yes, there was some progress made.

It's just not 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 on 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 making the underlying positive impact that we have on gross margin. So that was your first question on margin, what's the second..

The co-packers..

The co-packers, yes. So we are discussing clearly with our co-packers because, I mean, it's pretty obvious. We have our 2 main core-packers. We have significant volume commitments with them. which are much higher than what we need at the moment, okay? It will cover us over the years to come.

But the flip side also is that the co-packers have to make sure that they have the capacity available to us. So we are discussing with them ways to better balance like their needs and our needs in terms of they would like probably to use their capacity.

So we are discussing with them defining a bit of balance in the short term and with hopefully a positive outcome for everybody..

But you -- and just to clarify on that point, Frank, you've considered an outcome where you can't essentially renegotiate in terms of your gross margin guidance that's factored in..

Not everything is factored in. Like we are discussing, but there are no benefits baked in that we haven't achieved..

Okay. And then maybe just like a final second question for me, if I could switch gears. I might have missed your comments, but it sat on Hard Mountain do and how the brand is performing. And maybe just remind us of your distribution plans for the brand this year.

in terms of number of states you expect to add? And I don't know if you still have plans to have the brand be available nationwide..

Right now, it's finished the year in 11 states. We expect it to be maybe 25 to 30 this year. And that's being driven by Blue Cloud is 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 two on single serve.

You look at 12 pack. The sales per point is in those states for the 12-packs is #1 in F&B. I had a twisted to head of Mic's Head of everything. So it's turning. The repeat rates are about as high as anything we've seen in beyond beer launches in the last couple of years. So we feel like the consumer is there, the product isn't everywhere. We know that.

So it's generally 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 that the brand is performing well. And honestly, we're just -- it's going to go where it goes this year.

We're not -- 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, 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 -- we're going to go from 11 to 15 states in the next couple of months. So we know we used to be in 15 and pretty soon and hope to be 25 to 30 before the end of the year..

And the next question comes from the line of Brett Cooper with Consumer Edge..

Just a question. You pushed Truly in the bottle spirits into vodka and you talked about going to tequila.

Just if you step back and think about the long term, is that a model that you think is applicable for other parts of Beyond Beer or the fourth category to grow household penetration and consumer acceptance?.

Brett, so you mean taking other brands into a spirits place like maybe non-Hard Seltzer brands into spirits..

Yes..

Yes. I mean, I think it's TBD. I mean, for us goes in there now, I'm not sure how that's doing. I think people will try because clearly, there's interest in this space. You could put -- you can fix vodka and pretty much anything. So there very well could be. I think at the end, I mean, [indiscernible] this moment, what seems to have the most promise.

It's really vodka-based, not even tequila. I mean, Vodka's like 80% or 90% of that space. So any kind of very clean, simple, vodka-based beverage that delivers [indiscernible] taste and variety of flavor could be successful. So I would -- 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 Truly, I think for Truly, we really think Truly can, as a brand -- and we're building the brand that way with that thought in mind, not just trying to bolt it on just to a new idea, but we think it can play in the intersection of refreshment, sessionability and variety.

And that works for [indiscernible] space versus vodka versus tequila. So we feel -- we feel that's a good fit. Other -- there might be other good fits, too, but left, 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..

And the next question comes from the line of Peter Grom with UBS..

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 confidence. But just maybe I would love to get some views on the reasoning.

And I guess building on that, like if the relaunch goes as you plan internally, what would that really look like from a growth perspective for Truly.

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, how do you think about the future of the brand? Or what can you really do differently down the road?.

Okay. Thanks, Peter. I mean I think, again, we learned a lot. We learned -- 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 innovate and innovate and 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. But Margarita was a 5 share at this point exactly a year ago.

It was a 5 share. So it's a lot of -- still a lot of overlap. And we're -- 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 we meet 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. So 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 of debt. So if we do great, and we're -- we might be beyond the high end of the range if we grow share. And if we don't, 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 peel.

We're not going to be happy if we lose share. But for perspective, it's still 23%, 25% share of the Capa category and the #3 is a 6. So it's still -- we'll keep at. And if we don't grow share this year, we'll find another way to do it next year. But we do feel like we don't want to create too much change either with this brand.

We don't want to confuse consumers as 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 put the brand in the right place to grow. 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. That's really helpful. And then maybe just 1 last one, following up on Brad and Bonnie's question. Just any thoughts on kind of Monster's new product it seems like it would compete directly with kind of Hard Mountain Dew. So just any thoughts on the competitive trend of that new category entrants..

Yes. I mean it's -- they're a great company. We've built a great brand. And I think the big question that's looming out there is what non-out brands can play in out successfully. And right now, the answer is 0 at this point. But a year from now, there might be 1 or 2 that emerge. I think it's too -- it's totally to be determined.

I think we'll see what -- how the consumer feels about it. It's very -- I think, honestly, I think if I think Hard Mountain Dew do has a really good chance to be successful, knowing the brand in the cooling 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..

And the next question comes from the line of Bill Kirk with ROTH..

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 they 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?.

So I can answer the first question. The idea is that we have -- that we use our own internal brewers to full capacity. -- and we use then our external 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. If we can get them up the 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 extra.

Now within external, we're also lowering the cost we have we have a partner on the West Coast that has very competitive prices. There's improved variety packing capability that we will have in city that will lower the cost as well if the volume grows and we put more volume through the facility.

So again, the strategy is to use our own grows and then use the external breweries, but lower the cost in the external brewers. That's the high-level strategy.

The second question, I didn't fully understand, to be honest, because the -- so there's -- it was related to the open capacity that we had in our internal but but didn't use because of volume, planning.

I don't want to specify that I think I told you on the Q4, we would have been middle of the -- to high end of the gross margin range without those issues..

To clarify, the idea is, 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..

No, I'm sorry. Thanks for clarification. No. The -- internally, that's the best incremental cost that we can get is in our internal facilities..

[Operator Instructions]. The next question comes from the line of Gerald Pascarelli with Wedbush Securities..

Mine is on the pricing outlook of plus 1 to 3 points.

Just maybe if you could provide some more color on your decision to not take more pricing, in particular, given the continued margin headwinds and the increases that you were able to successfully pass through in -- I guess like I know this is initial guidance, but as we look at it, just trying to understand if there's upside to the pricing as we look out over the course of the year..

Yes. So on the pricing guidance, we have had with pricing in 2022. And as we said in previous calls, the -- 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 carryover pricing that we implemented in 2022. At this point, we want to be careful -- we're planning to cover in 2023 any additional commodity increases. But we see, if you look at the total cost that we are exposed to, we see that environment moderating a little bit.

I mean there are products 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 costs. If that changes, we will revisit. But given also the competitive nature and like the consumer environment, we don't want to overextend that..

And at this time, there are no further questions. I would like to turn the floor back over to Jim Koch for closing comments..

Thank you, everybody, and we'll speak in a few months..

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