The Boston Beer Company, Inc. (SAM) Q2 2022 Earnings Report, Transcript and Summary

Greetings and welcome to The Boston Beer Company Second Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn this conference over to Mr. Mike Andrews, Associate General Counsel and Corporate Secretary. Thank you, sir. 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 second 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 stated in our earnings release, some of the information we discuss and that may come up on this call reflects the Company’s or management’s expectations or predictions of the future. Such predictions are forward-looking statements. It’s important to note that the Company’s actual results could differ materially from those projected in these forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained in the Company’s most recent 10-Q and 10-K. The Company does not undertake to publicly update forward-looking statements whether as a result of new information, future events or otherwise. I will now pass it over to Jim for some introductory comments.

Thanks Mike. I’ll begin my remarks with a few introductory comments and then hand it over to Dave, who will provide an overview of our business. Dave will then turn the call over to Frank, who will focus on the financial details of our second quarter results as well as our outlook for the remainder of 2022. Immediately following Frank’s comments, we’ll open up the line for questions. Given Truly Hard Seltzer’s growth last year, we knew we will be facing tough volume comparisons this year, the continuing decline of the hard seltzer segment, which was down 17% in volume and 13% in dollars and off-premise channels in Q2 is deeper than previously expected, which impacted our second quarter results, and is expected to continue to impact Truly’s performance for the balance of 2022. Our 2022 second quarter revenue grew slightly over the second quarter last year, driven by pricing gains. Our second quarter depletions declined 7% and our shipments declined 1% against prior year comparisons of 24% depletions growth and 27% shipment growth. We made progress, improving our second quarter gross margin despite negative impacts from lower than expected volume. As Frank will discuss in more detail later in the call, we also returned to profitability and generated more than $100 million in operating cash flow. Based on our first half performance, our view of the remainder of the year and the current economic environment including uncertain consumer demand and broader supply chain challenges, we’ve reduced our volume and earnings guidance for the remainder of 2022. In the second half, we will focus our efforts on Twisted Tea, Truly and Hard Mountain Dew which we believe have the most potential to positively impact our business. Our multi-brand strategy plus our long history of innovation have supported our growth over the long-term, and we will work hard to capitalize on these strengths going forward. We’re also thankful to our outstanding coworkers, distributors and retailers who continue to support our business. We’re proud to have just been named the number one beer industry supplier in the Tamarron Survey, the annual poll of beer distributors conducted by Tamarron Consulting, a consulting firm specializing in the alcoholic beverage distribution industry. It is our fifth number one ranking in a row and 11th in the last 13 years. This is a result of the efforts of all Boston Beer coworkers to service and support our distributors business and to the strong relationships we built with them over many years. We continue to believe that we have the best group of distributors in the beer business. I’ll now pass it over to Dave for a more detailed overview of our business.

Okay. Hey. Thanks, Jim. Hello, everyone. Our second order depletion declines were primarily driven by declines and Truly Hard Seltzer and were partially offset by growth in our Twisted Tea and Hard Mountain Dew brands. Excluding the declines in Truly, our depletion volumes for the remainder of our business increased 14% in the second quarter and 11% in the first half. Our strategy is to become the number one player in the fast-growing Beyond Beer segment by creating a broad relevant brand portfolio that enables many pathways to growth. This portfolio is led by the number one FMB and Twisted Tea, number two Hard Seltzer and Truly, the number one hard cider in Angry Orchard and the newly launched Hard Mountain Dew, which is the number one FMB in the seven states where it’s currently distributed. Towards that end, we improved our number two position in Beyond Beer in the second quarter, with a 27% volume share of one half share point versus the second quarter of 2021. Meanwhile, we’ll continue to experiment and plant new seeds in our search to cultivate the next big contributor to our future growth. For the remainder of the year, we’re focused on fueling Twisted Tea and Hard Mountain Dew’s growth and remaking Truly’s core original flavors with improved formulations, a new ad campaign to communicate those changes and superior distributor support and retail execution. We’re also targeting margin improvements as we continue to enhance our supply chain performance and inventory management and offset commodity cost pressures. Hard seltzer dollar sales declined by 13% in the second quarter of 2022 in measured off-premise channels. We believe there are two primary drivers to the continued deceleration of the segment. First, Hard seltzer’s lost its novelty as consumers have been distracted by many new Beyond Beer products entering a hyper crowded marketplace. Second, and tied to the macroeconomic environment, we are seeing a volume shift from hard seltzers back to premium light beers with their lower pricing, particularly among 35 to 44 year olds. Whether this continues into the future or reverts back is still to be determined. The Truly brand has not yet overcome these headwinds of 2022, as Truly dollar sales declined in the second quarter by 17% and a lost 1.3 share points. Despite losing share, Truly’s week-to-week sequential share has held steady since early January at around 27 percentage points and has been at 28 for the past four weeks, maintaining our continued strong number two position. Our Truly innovation has been well received by consumers as Margarita is the number one innovation year-to-date in all of beer with a 4.2 dollar share and our Poolside limited time offer also has performed very well. However, our core light flavored Truly business has suffered and not performed as we’d expected as consumers eagerly adopt what’s new and interesting. Despite this challenge, Truly’s year-to-date household penetration remains strong across all age groups and is number one in all of beer among 21 to 34 year olds. Our go-forward plan is to activate this large base of drinkers by bringing new excitement to our core original flavors to better complement our innovation. Despite the recent trends, we believe hard seltzers will remain an important beer industry segment in the future, but its trajectory remains unclear. Hard seltzers still command a large consumer base with 29% household penetration over the latest 52 weeks, but the first half of 2022 penetration declined 12% from the first half of 2021. While the hard seltzer segment was 10% of total beer dollars in the second quarter of 2022, it’s down from 11.4% in the second quarter of 2021. Consequently, as we look at our forecast for hard seltzer category growth for the year, we have adjusted down our category volume growth from between flat to plus 10% to down between 15% and 20%. Regardless of where the category growth settles in 2022, our longer-term goal is to outgrow the category and improve our Truly brand trends, driven by renewed focus on building our core business, smart brand innovation and strong distributor support and retail execution. With respect to innovation, there is significant wholesaler and retailer excitement around our upcoming Truly Vodka Seltzer launch this fall. Our Truly flavored bottle Vodka, which has been sold by Beam Suntory since late in the first quarter has been well received by consumers and we believe this bodes well for the Truly Vodka Seltzer launch. Important to improving Truly’s trends is the performance of its core flavors. So today, we are announcing a reformulation and improvement of our core Truly flavors that includes adding real fruit juice for an even smoother, easy-to-drink and refreshing taste profile. A similar exercise in the fall of 2019 led to retrial and share gains, and we believe we can do the same again. A reformulated citrus variety pack is in the market now and the other Truly variety packs will transition in August and will be supported by a new ad campaign, focus on the flavor improvement, a significant investment in shopper marketing activity and other promotional programs should drive volume in core flavors. Twisted Tea expanded its position as the number one FMB in the second quarter by 5 share points and grew double-digits, primarily by improved distribution of 12 packs and a unique product and brand proposition that resonates with more and more consumers. We improved our service levels and reduced out of stocks during the second quarter, compared to the first quarter, which helps support this growth. In measured off-premise channels, its volume growth has accelerated from 21% year-to-date to 27% in the latest 13 weeks to 39% in the latest 4 weeks. Twisted Tea has been the fastest-growing brand among the top 20 in all beer for the past 10 months, and in the second quarter became the 11th largest brand in all of beer. It also has the highest sales per point of any Beyond Beer brand. Twisted Tea single-serve 24-ounce can is the fourth largest single serve beer of any kind nationally, underscoring its resonance with convenience store shoppers. This is despite many competitive offerings entering the market and is a testament to the brand’s growing following and the potential upside that remains as we close distribution gaps across the country. Retailers are excited about Twisted Tea. And in the recently finished spring resets, Twisted Tea space grew 28% and now has 13.4% of FMB space. Because of its growing 12-pack distribution, the brand is receiving unprecedented retailer support, including expanded promotional and display activity. Additionally, to support pull, we’re advertising the brand year round to increase brand awareness, and we’ve received strong response from consumers to our current tea-drop advertising campaign. We’ll work to maintain momentum from the summer into the fall with a large college football themed initiative significantly building on our college activities from 2021. In the seven states where it’s been launched, Hard Mountain Dew is showing good promise with an 18 share of FMBs in measured off-premise channels where it’s distributed in those markets. We’ll continue to roll the brand out and expect it to be launched in up to five additional states in 2022. The brand rollout has been delayed in certain states due to a slower-than-expected regulatory process. While this will result in fewer depletions in 2022 than originally envisioned, we’re in this for the long term, and we’re very encouraged from the early consumer response has been so positive. In the first half, our Samuel Adams brand depletions were down low single digits. The brand had growth in seasonals and the draft business and health share in a difficult craft beer market. Meanwhile, Angry Orchard remains the number one brand in hard cider with a 48 share of the segment in measured off-premise channels. Angry Orchard brand depletions were down consistent with low-double-digit declines in cider category trends. Total Dogfish Head brand depletions in the second quarter also declined against the difficult craft beer market. However, our expanded lineup of award-winning Dogfish Head can cocktails, including the new 8-pack bar carat variety pack, grew depletions significantly in the second quarter off a relatively small base. Bar cart is now the largest variety pack in ready-to-drink cocktails in measured off-premise channels. So far in 2022, we continued to experience out of stocks on certain brands and packages, primarily with Truly, as our supply chain is still struggling to react to changes in demand. We also have had issues with availability of some of our ingredients and packaging materials. We believe we’re managing these issues and have the capacity, ingredients and packaging in place to improve service levels and reduce our out-of-stocks during the second half. In summary, we’re optimistic about the long-term outlook for our diversified beverage portfolio. We benefited from the unprecedented growth in hard seltzer during the pandemic and are now experiencing change in consumer demand as the environment becomes more normalized. This resulted in the revision to our 2022 guidance. Our company has proven innovation and brand-building capabilities to the top selling organization in beer and an excellent balance sheet to support long-term growth, even as we navigate some challenges in the near term. Now, I’m going to hand it over to Frank to discuss our second quarter financials as well as our outlook for the remainder of 2022.

All right. Thank you, Dave. Good afternoon, everyone. For the second quarter, we reported net income of $53.3 million or $4.31 per diluted share compared to a net income of $59. 2 million or $4.75 per diluted share in the second quarter of 2021. This decrease between periods was primarily driven by lower gross margins, partially offset by increased revenue and lower operating expenses. The second quarter results showed sequential shipment, gross margin and profit improvements and generated over $100 million in operating cash flow. During the quarter, we continued to work through the 2021 Truly inventory overhang as we lapped the back end of the 2021 peak season inventory build. While margins have improved from the first quarter, the lower-than-expected volumes and higher returns on scrap for Truly and Bevy brands have negatively impacted our margins and offset some of the margin improvement programs we have achieved in our brewery network. In addition, our supply chain challenges have not improved to the level we expected. Twisted Tea service levels and out of stocks have improved, but Truly service levels and out of stocks continue to be below our internal targets. Shipment volume for the quarter was approximately 2.4 million barrels, a 1.1% decrease from the prior year, reflecting decreases in all brands other than our Twisted Tea and Hard Mountain Drew brands. We believe distributor inventory as of June 25, 2022, average approximately 4 weeks on hand and was an appropriate level for each of our brands, except for low inventory levels for certain Truly brand packages. We expect distributors will keep inventory levels for the remainder of the year below 2021 levels in terms of weeks on hand. Our second quarter 2022 gross margin of 43.1% decreased from the 45.7% margin realized in the second quarter of 2021, primarily due to higher material costs and higher returns in scrap, only partially offset by price increases. Our second quarter operating expenses decreased $1.2 million or 0.6% from the second quarter of 2021. This net decrease was due to a decrease in brand investments of $11.3 million, mainly driven by lower media costs, partially offset by increased general and administrative expenses of $5.9 million, mainly driven by increased salary and benefits costs and increased freight to distributors of $4.6 million. Our depletions and shipments for the first 29 weeks of 2022 have declined 7% and 11%, respectively, from the comparable periods in 2021. Based on information of which we are currently aware, we are decreasing our full year 2022 earnings guidance per diluted share to between $6 and $11 from between $11 and $16. However, actual results could vary significantly from this target. This projection excludes the impact of ASU 2016-09 and is highly sensitive to changes in volume projections, particularly related to the hard seltzer category and supply chain performance as well as inflationary impacts. The 2022 fiscal year includes 53 weeks compared to the 2021 fiscal year, which included only 52 weeks. Full year 2022 changes in depletions and shipments are now estimated to be between a decrease of 8% and a decrease of 2%, a change from our previous estimate of an increase of between 4% and 10%. As we discussed earlier, the revision is driven by a change in expectations in our Truly Hard Seltzer business and the launch timing of Hard Mountain Dew in certain states moving from 2022 into 2023. We estimate the 53rd week will have positive impact of between 1 and 1.5 percentage points on our full year depletions and shipments growth rates and between 4 and 6 percentage points on our fourth quarter depletions and shipments growth rates. We continue to expect increases in revenue per barrel of between 3% and 5%. Full year 2022 gross margins are expected to be between 43% and 45%, a decrease from our previous estimate of 45% and 48% due to the impact of lower volume expectations and continuing supply chain impacts. We continue to expect to cover higher commodity costs through pricing. Our full year 2022 investments in advertising, promotion and selling expenses are expected to decrease between $30 million and $50 million, a change from our previous estimate of a decrease between zero and $20 million, reflecting our reduced volume expectations. This does not include any increases in freight costs for the shipment of products to distributors. We estimate our full year 2022 non-GAAP effective tax rate to be between 26% and 27%, excluding the impact of ASU 2016-09, a change from our previous estimate of approximately 26%. We are continuing to evaluate 2022 capital expenditures and currently estimate investments of between $110 million and $140 million, a change from our previous estimate of between $140 million and $190 million. The capital will be spent mostly on continued investments in our breweries to further build our capabilities and improve our efficiencies. We expect that our cash balance of $137.8 million as of June 25, 2022, along with our future operating cash flow and unused line of credit of $150 million, will be sufficient to fund our base business and future growth initiatives. We will now open up the call for questions.

[Operator Instructions] Our first question comes from the line of Kaumil Gajrawala with Credit Suisse.

Couple of questions, I guess, starting with Truly and maybe how it’s been trending, particularly with around 4th of July, as it looked like it’s stabilized, or is 4th of July kind of the end of the period of where comps are particularly difficult? Just any read you have on where we think it could go would be helpful.

Hey Kaumil, this is Dave. I’ll answer that. I think, I mean, you’re right, the big overlaps really started to decline right after July 4th of last year. I can tell you that we had -- we’ve got great execution on July 4th weekend and we have more ads than any other hard seltzer brand in the marketplace. We’re being very prudent about interpreting anything right now because it’s been so hard to do that. So, I wouldn’t look at one week, it was okay. But I’m not sure it’s necessarily a trend breaker for us. And I think we’re going to be looking actually up each week subsequent to here to see what’s happening. I can tell you what’s good to summarize what’s happened that’s going well. I mean, the innovation is doing quite well, particularly Margarita and Poolside are pulling the velocity. Everything looks great. The issue, as I mentioned in my prepared remarks, is the core flavors, the lightly flavored packages, the variety packs like Tropical and Berry and Citrus have really not -- have really disappointed us in their performance, and that’s why we’re really focusing our efforts to them. Because consumers really in the end hard seltzer, they like flavors, they like bolder flavors, but they also -- they like the light refresh and easy-to-drink nature of the core flavors. So as I mentioned, we just announced that we’re -- we’ve already reformulated, it’s going into the market now. So I think we just want to see how that plays out. The new flavors of support behind it, and we have Truly Vodka Seltzer coming in behind that, which really is the high end of hard seltzer. And we’ll see where it goes. But there was no epiphany that happened on July 4th weekend.

Okay. Got it. And then just on margins, one of the -- the success of Truly has also been a drag on margins as the growth in third-party manufacturing, distribution, all those sort of things. Truly is obviously coming off now, but it sounds like the conversation has shifted from the inefficiency of Truly versus the rest of the portfolio to volume deleverage and use of the brewery. So, can you just help me -- maybe Frank, can you just help square how we think about margins in the context of what has been happening to margins in the years prior with Truly’s success?

Yes. Sure. And as you know, margins have declined during the growth period of Truly because we added a lot of external production. And that came at a higher cost than what we had internally. And we said, okay, as we increase our internal volume, we should gradually see an improvement in the margins. I think what has happened here, especially when it comes to the first quarter, and I talked about it in the first quarter as well, we had an overhang from the inventory that we had in 2021, that clearly impacted margin in the first quarter. In the second quarter, what we have seen, two things. One is that we had -- because of the lower volume, we had higher product returns on scrap, and that was weighing on the margin. And hopefully, that’s going to normalize as we go forward. The second thing is that if you look at our supply chain, we had made certain assumptions on bringing capacity -- internal variety pack capacity up to speed. We implemented two -- or we installed two integrated variety pack lines in our own facilities in PA and -- in Pennsylvania and in Ohio. And the startup is taking longer than what we had expected. So as such, we don’t have as much internal capacity as we had projected. We’re getting there. We can see that in Pennsylvania, we’re making really good progress. Ohio is slightly behind. So, we will ultimately get there, but we don’t have the capacity that we had projected for this year originally. So, those are the two things. It’s literally the volume-based returns on scrap and a delay in the supply in the internal capacity of variety pack.

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

Great. Thank you very much. I guess, when you kind of stand back and reflect on the year-to-date, obviously, some negative surprises. Does -- I mean, when you kind of think about that, do you think it’s something that -- kind of relatively minor tweaks like putting some more fruit in Truly is enough to address, or do you think something maybe more fundamental needs to be done, either in terms of your approach to the hard seltzer category or execution or just kind of very big picture strategy? Just trying to get a sense of kind of the big picture takeaways that you have and how that may impact how you look at the business over the next few years? Thank you.

Hey. Thanks, Rob. This is Dave. I would say, in the short term, the reformulation is bigger than you might think. And it’s more than just putting a little bit of fruit into Truly. It’s actually reformulating, optimizing all the flavors that we have. So it is meaningful. But if I take a step back from that and just kind of look forward, there’s a number of things that we have to do. I mean, others in the category have to help. But clearly, we have to do in order to really drive sustainable growth again for Truly. And the first is, we really need to reengage consumers back into the hard seltzer category. Remember, the category is really -- the category that is the most refreshing, easy-to-drink, alternative to any kind of alcoholic beverage. And I think we’ve kind of lost track of talking about the easy-to-drink refreshment, the variety in the flavors. We happen to have, as I mentioned actually in my script, we actually have the largest household penetration of 21 to 34 year olds across all of the beer. So of all brands within the beer world -- the broad beer world, we have a big base. So what we have to do is activate that base, right? And we have to bring them something new and different to get them to reengage in the category. So, what are we going to do? So one thing is, it’s clear the category has become very complicated, right? We thought by now, the long tail would be gone potentially, and there would be less of this kind of sameness that exists out there, but that’s not there yet. I think it’s complicated for consumers. And if they have to think too hard, they’re going to go find something else. So, we have to simplify the choices for the consumer. And part of that is really talking about light flavors, hint of flavor versus bolder flavors and helping them make choices more easily. You have to shelf or on display. It also includes eliminating SKUs that aren’t performing. I’d say also is creating news without SKUs, which really in this case is this reformulation that I just referenced around the core flavors, but also tweaking our bolder flavors as well and constantly improving them. And we’ve proven before that consumers are very willing to retry something when they believe it’s been approved. Another thing I’d say is, we use -- LTOs have been successful. For us, they are cannibalistic, there’s no question. And successive innovations are more cannibalistic than ones that came before. But with LTOs, we can be smarter and more strategic in how we do them. And so, you’ll see more of that next year and how we do that. So I think -- and lastly, I’d say, is just delivering the message and not wavering from a message that Truly is the most authentic refreshing form alternative to beer, right? And really think about how can Truly deliver that across multiple segments, not -- maybe not just hard seltzer. So, we’re venturing out into the vodka seltzer, the RTD vodka seltzer soon. And there might be other ways for us to play down the road. So, there’s a number of things that have to be done to change the trajectory of the brand and the category. We think we have a pretty clear road map of what we need to do. And right now -- right here, right now, this summer, we think making this formulation change. And really, it’s about the best tasting flavors ever that happen to have real fruit in them. It’s not just about real fruit. It’s about the taste because that’s what people care about. And we think that can make a difference. And the last thing I’ll say is we’ve had amazing support. So, our wholesalers have been -- have stuck with us some of our retailers. And so, we have the executional support we need. We need to just deliver simpler, fewer, better ideas to get them charged up.

And then, just one follow-up on all that. You did mention in the starting narrative that you had seen a certain amount of consumers go back to light beers or premium light beers. And you mentioned that maybe that was -- I think you said maybe that was because they were lower priced. Is there an affordability issue because that’s -- is that what you were trying to suggest? Or I’m just trying to better understand what you’re seeing in terms of going back to premium light beers and what your analytics say is actually happening.

Yes. I think when we -- we’re looking -- Rob, we’re looking at the numerator data. And we’re seeing particularly really in that 35 to 44 age break. We’re seeing like most of the shifting out of hard seltzer significant proportion went to back to light beer. I think it’s partially affordability, but it’s also partially the fact that light beer offers a lot of the same benefits that hard seltzers provides. So it’s like I’m getting some of those same benefits. In fact, we think a lot of these folks had -- obviously were light beer drinkers before and they came to hard seltzer. Now, they might be shifting back out. There’s about a 7% price gap on average right now between hard seltzer and premium light beer. So that could be part of it. But you definitely see it in the data. And if you want -- in fact, that’s the majority of the volume that shifts out of hard seltzer has gone back to light beer. Again, whether it’s transitory or not, we’ll see. But I think, again, it also speaks to the need to reinforce and remind people why hard seltzer has been successful in the first place and why is the 10 share beer is because it has some unique attributes and benefits that people like.

Does that suggest that you may need to somehow either lower price or come out with a lower-priced variant and economy Truly, or I’m just trying to get a sense of how to address that issue.

Yes. I think it’s -- I don’t think it’s not going to be through price. We’re sticking to that approach. I think again, it goes back to -- we need to do a better job, I believe, communicating the benefits of hard seltzer because they are -- they do provide a unique benefit that even light beer cannot provide. And for example, one is flavor variety, right? And that’s really important. You see it across all these different segments in beer right now. Hard seltzer can deliver the variety unlike any other segment within beer. So, it comes back to the leaders in the category to deliver that message and to do it in a compelling way, but not -- it’s not about reducing price or to be more price competitive to light beers.

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

Two questions for me. So first, can you please walk us through the various assumptions behind your updated shipment guidance? And what gives you confidence that you can hit this guidance? And then secondly, what was Hard Mountain Dew’s contribution to your Q2 shipments? And what do you expect its contribution to be for the full year? Thanks.

Okay. Nadine, this is Frank. Let me take you through the assumptions. So as you know, we had our original guidance was, to a large extent, based on the overlaps that we had versus last year. And last year started, as you know, extremely strongly. We had 48% growth in Q1, and that moderated in Q2. So, we were expecting like an improvement in our trends this year when we hit those lower growth months from last year. And we’re expecting that at the end of May, beginning of June. And when that didn’t come through and we looked at the depletions, it was pretty clear that they were saying they’re pretty stable. And you see that in the results that we have been reporting. It’s 7% down on depletions essentially. So, we instead of really relying too much on the overlaps and expecting a trend change based on the overlaps, we just project out the growth rates that we have seen broadly year-to-date and more recently. And then we get a benefit in the second half. We’ll clearly get a benefit from the 53rd week that we have put out. So that gets you kind of to the midpoint of the guidance that we have projected. Now, shipments is a slightly different story because shipments were faced very differently last year because we didn’t have enough capacity for the volume that we had planned for in 2021. And as such, we built significant inventory at wholesalers and internally, which peaked essentially at the middle of the year, which is when the volumes really -- or the volume growth came to a halt. And we didn’t sell through the inventory that we had built. And two things happened. We needed -- we really reduced significantly our production and our shipments to wholesalers because the wholesalers, they were selling through what they had in the warehouses. So there’s a significant imbalance between the first half of the year and the second half of the year where we had significant growth in the first half and shipments declined in the second half of the year. But if we align that -- and if we meet our depletions target that I explained just before, the shipments that we need to satisfy that will get us to the range that we have. And that gets you broadly to the midpoint. And then, we looked at, okay, what’s the risk profile around that number? And can it go lower? And what we did is instead of just projecting out the trends, we looked at the different brands. And what you’ve seen probably in IRI as well that Truly was getting worse, the declines intensified a little bit. And then you look at Twisted Tea, that performance accelerated. So in the last 4 weeks, in the last 13 weeks, the performance is significantly better than on the year-to-date. But we projected out and assumed that Twisted Tea would stay on the year-to-date rate, and we assumed the worst declines of the first half to be projected out for the remainder of the year. And that kind of gets us to the low end of the range. So, those are kind of the broad assumptions for the depletions and shipment guidance. And then, the second question on the Hard Mountain Dew, so I mean, we don’t break out the numbers, but the majority of the Hard Mountain Dew volume is coming in the year to go as opposed to what you have seen in the first two quarters.

Our next question comes from the line of Bonnie Herzog with Goldman Sachs.

I just wanted to maybe ask a little bit of a follow-up just on some of the things you talked about regarding guidance. I just wanted to maybe specifically understand what your new shipment guidance assumes in terms of declines for Truly. I guess, when I did the math and just thinking about the midpoint, I think based on our model implies that Truly shipment volume could decline more than 20% for the full year. Just wanted to get a sense of that is in line with your expectations? And then if that’s right, just trying to think about that in the context of your guidance or outlook for the category being down 15% to 20%. So just wondering if you think you can still take share. And then, I also had a question about the second half for Truly declines, just given sharp declines we’ve seen so far this year, I think it does imply that the declines moderate a bit in the second half. So just kind of wanted to check on those items.

Yes. So Bonnie, we don’t give specific guidance for brands, but I think your assumption is right that you mentioned. I mean we didn’t take an optimistic view on Truly. And as I said before, if you look at IRI, I think IRI is pretty representative for the trends. That’s kind of what we projected out, which is in the more negative than 20% for the rest of the year to get to the guidance. In terms of share, yes, again, we haven’t taken an optimistic approach because we haven’t really gained share so far. But, I’ll let Dave talk to that and also to the future volumes. We haven’t assumed an improvement for the remainder of the year versus the year-to-date.

And yes, as it relates to shares, so 15 to 20, we came up with that just by looking again similarly, which is the last 4 weeks in the category, which I think were down like 19%. So we said, let’s assume it doesn’t get any better. That’s kind of -- that’s a low point. That’s your minus 20. And then -- we’ve looked at the latest -- I’m sorry, of the latest 4 weeks we looked year-to-date, which is minus 14%. So we think it will be somewhere in the middle. We think as it relates to share for Truly, we’ve lost like 1.5 share points or so this year, I think I said 1.3 in the quarter. But the way I look at it is, obviously that is our goal. Our goal is to grow share. And I think balance of the year, we’re looking at it as a balance of the year with reformulation of the core business, investment behind that, the launch of Truly Vodka Seltzer, which we will count. If you look at it from a consumer perspective, that is a hard seltzer business. Our goal is to grow share of balance of the year. Where it’s going out at the end of the year? We don’t know. But that’s the intent is -- as we turn on right now, we want a different performance in the second half and we’re aiming for it. But as Frank said, our guidance is very prudent. It’s not expecting that. We’re not anticipating share growth to our guidance.

Okay. That’s helpful. And then I just had a second quick question maybe on your A&M guidance cut. On one hand, I guess, I get the cut given the slowdown in the hard seltzer category. But on the other hand, I question how you’re going to get consumers interested in the category again without incremental spending? Just hoping to hear a little bit more color on how you’re balancing this, especially in the context of the reformulation that you’re mentioning. Thanks.

Yes. So, to the A&M cut, I mean, honestly, it’s really reflecting the volume declines that we have. And it’s still very healthy spending that we have in general. And if you look historically at our AT&S spending, we’re like in the ‘17, ‘18 period, we’re like at 25%, and that came down with a tremendous volume growth that we had, in 2021 went to slightly below 20%. And then, we went up in 2021 because we were spending front-loaded in anticipation of higher volumes, the volumes didn’t come through. So, we had to adjust the spending. We feel we have really healthy spending behind Truly, especially, but also the other brands and don’t feel -- because you look in the bigger context, what we have supported it historically that we don’t have enough spend.

And Bonnie, I would just say that we can see -- you’re looking at the gross number, but we can -- and we do, we move funds between brands where the opportunity is. So, we have plenty of ability to do that. And so, for Truly, that’s one of the ways we’re spending this August, September into the -- with Vodka Seltzer launch from the new flavors to vodka seltzer where -- we have dollars we can reallocate. So, it’s important. I think as I said, we have to get people to start thinking about the categories of where they did a couple of years ago. And it also gives them new ways to think about it. So, that’s -- you can’t do that unless you invest.

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

Dave, you called out the switching particularly among male cohort, I think you said 35 to 44 back to premium lights. I’m wondering if you have any perspective as to whether you’re seeing some leakage from the hard seltzer category to the broader RTD, particularly spirits-based RTD, as well as full flavored FMBs?

Okay. Eric, yes, let me answer that. So I think -- and I’ll use the data, comes from numerator. So I know there’s been a lot of talk about the RTD shifting. Well, first, I’ll tell you what the numbers look like. Again -- so where is it going? Where is the hard seltzer shifting going to? Bottled spirits are picking up about 1/3 of it. So people back to bottle spirits. Light beer, 26%; wine 14%, and then you get to ready-to-drink cocktails, which is about 9%. So it’s not -- there’s a lot of noise in the RTD cocktail space, right? It’s a 1.4 dollar share of beer. But then if you split that in two, a little more than half to, call it, 0.8 of the 1.4 is actually vodka seltzers, like High Noon and others of that ilk. We consider those -- those are really hard - those are -- we can talk about that separately. Those are hard seltzers. And so really, you’re talking about 0.8% of dollar sales or really rational RTD cocktails, which are different occasions, different APVs, different consumers, lower repeat rate, lower buy rate, et cetera. They are having an impact. I think the interesting thing I just looked at the other day in RTDs is that they have about the same number of brands and SKUs, like call it, 250 brands and over 1,000 SKUs as hard seltzers do right now in the market, but there are 7% of Beyond Beer and hard seltzers are 48% of Beyond Beer. So clearly, there’s a lot of noise and excitement. I would say the noise is larger than the volume right now in that space. So it is taking -- I mean, it is taking some from hard seltzer, particularly if you look at the vodka seltzer part of it. But I -- but the other part of RTD cocktail is really not a factor here. I think what you have in the marketplace, though, which is interesting to watch is that everybody goes direction really hard. And in some cases, we saw with hard seltzer, it can become self-fulfilling. In others, they might hit a dead end and it doesn’t play out the way they think and they’ll go somewhere else. So right now, I’d say there’s more support and execution and focus on RTD cocktails that maybe is warranted by what the consumer is saying. And all of that has had a bit of an impact. But again, it comes back to the other -- the big segments like light beer bottles -- wine. So maybe reclaiming some of those consumers that hard seltzer has stolen over the last few years.

Great. Really helpful. Another question. I know it’s still very early in the context of things, but what are you guys seeing in terms of Hard Mountain Dew repeat rates? You’re talking about a category -- Mountain Dew obviously has tremendous brand equity, but you’re talking about a category that’s kind of notorious for flavor churn and people chasing the new, new thing. So I guess, what are you seeing in terms of repeat rates? And what are you -- how are you positioning for next year to have some continued growth there other than the distribution tailwinds from expanding to more states?

Sure thing. I’d say right now, it’s a little early to make a call on repeat rates because it’s a strange launch. It’s in seven markets, right? It’s gone in different times. It’s been focused on great execution on large format stores, right, large grocery stores. It’s not up and down the street. There’s only one take-home package, and I think, four single-serve packages that have basically been so warm because it’s a large format. So, it’s hard to give a firm number on that. Now having said that, if you look at all those markets where it’s distributed, as I mentioned in my remarks, it’s an 18 share right now. The last time we spoke, it was higher. It was in the 20s. But the amount of trial that was delivered off of this is extraordinary. I never say anything like it, quite honestly. There’s a novelty around Mountain Dew that drove huge trial rates. Now having said that, it’s come down to an 18 share, but that 18 share makes it the number 1 FMB in every single one of those markets. Its velocity is 2 to 5x to what the number 2 FMB is in those markets. So if you just look at the share and the velocity right now, we like what we see, but we just want to -- we need to get into -- and we were in 7 states now. I think, as I said, we’ll get to probably 10 by the end of the summer is locked 3 more and then a couple by the end of the year. But then ideally next year, we want to go all out. And I think -- so there’s an opportunity here to read it as we go, as we get more distribution. And importantly, like deeper distribution within these markets, then we’ll get a real sense of repeat because repeat, you can’t have -- you can’t really repeat if you can only go to one chain in a market to find that product, you need broader distribution. So again, I would just say we’re trying to be tempered about this. But what we see so far is very positive. And we need to keep running the game plan. And the beauty is we keep adding as we go, and we’ll learn as we go. And next year, we expect it to be a big contributor, but it’s -- it’s too early to talk too many details about that.

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

You talked earlier about the need to simplify the hard seltzer category to make it easier for the consumer. And I think I heard within that a need -- perceived need in your part to simplify the Truly portfolio as well. I guess, question one is, did I hear that correctly? And question two is, if I did, I guess, I’m curious as to what portion of the Truly portfolio you would, at this point, consider relative noise that you’d ideally like to simplify to optimize versus the core that’s higher performing? I’m just trying to assess how big a tail you think it is -- you need to cut before getting down to that higher performing base that you can grow off of from here?

Thanks, Stephen. That’s a good question. I think you did hear me correctly. I think we definitely need to make those decisions. We’re not really ready to talk about what part of it. But if you just look at least the underperforming -- generally the underperforming SKUs. I think also, we probably -- we went after the bolder flavor thing, and we did -- we own the bold flavor segment, if you will, with lemonade and fruit punch and margarita. But as I mentioned before, I think we neglected a bit the light flavored segments, which, again, is like our tropical and our berry and our citrus. So I think one thing we need to do is shore up that core lightly flavored because consumers really do like that and they want that. And so, we’re also going to improve the profile across the whole portfolio. As it relates to, okay, what hits the chopping block? It’s probably -- I can’t tell you before we’re talking to our wholesalers. So, it’s a little premature to share that information. But we do agree that -- and it’s not just fewer SKUs. I mean fewer SKUs is important. I think also making it easier when the consumer shops to see something to know exactly what it is and what they’re going to get out of it, what the flavor profile will be, what the taste experience is going to be. We need to start with -- put ourselves back into consumer shoes and look back from there to the shelf and make sure we’re delivering what they’re looking for. So I’m sorry, I didn’t really fully answer the second part of the question, but we’re not quite ready to go there now.

Okay. Fair enough. If I could also just follow up on the advertising piece. I guess, it was more -- I’m just curious on mechanics. At the midpoint of the guidance, cut on advertising promotion and selling costs, it’s like a $3 cut in EPS terms, $50 million. So, how much of that is mechanical, like it’s variable with volume as volume goes down, selling costs go down versus how much of that is actually you guys electing to cut $50 million out of the budget at the midpoint?

Yes. Steve, we don’t really do mechanical very well. If you look at AP&S. And I think I’ve talked about that also in the previous earnings calls. When we -- the approach that we take to AP&S is we look at where can we make a difference. And if we see an opportunity and we feel good about our advertising, we invest. And we don’t really focus too much on the quarter, too much on the year. What you get is our best estimate. Long term, we’re getting leverage out of our AP&S spend. And that’s what you see over the years. And we have reduced that on a percent basis, percent of net revenue basis, that’s the leverage that we get by growing the company. But we go after opportunities as we see them. We feel actually with what we have. I mean, clearly, we’re looking at the P&L, but we’re looking at where can we cut where we don’t really get a lot of mileage out of our spending and where do we put the money where we get the biggest return. That’s kind of how we think about it. And the reduction that we have, as I said, it is in response to the volume, but it’s more driven by what we believe we get the biggest return on our investments. And we feel fairly comfortable with the level of spending that we’re putting behind our brands.

Okay. So just as you see -- as you’re calling the year now from a demand perspective, you feel the advertising spend is now appropriate. It’s not like you guarantee a big catch up next year based on the revenue line?

No. I mean, as I said, like short term, we always -- when we see an opportunity, we will spend. But it’s not -- while we keep the P&L in mind, it’s not that we mechanically reduce automatically the AP&S spend, just to hit a certain number. I want to be relatively clear about it. It’s the top line growth is that we feel is really important and that’s driving the long-term value creation. So, you see variations quarter-to-quarter or year-to-year. But long term, you’re going to get to the leverage.

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

Two for me as well. First on gross margin and then a broader question for Jim and Dave, perhaps. The gross margin question, just comment on how big of a priority is to restore gross margins at the company? And then longer term, understanding with Truly there’s a wider range of possibilities here with some of the uncertainty that exists with consequences on your fixed cost absorption. But based on your current projections internally, how quickly can you return to low to 50% gross margin for the business? And then I have a follow-up.

Yes. So, Kevin, the gross margin is really important. If you -- typically, when we talk about our business, we talk about the top line, we talk about the gross margin with the priority that growth from gross margin because we know, over time, we’ll get the Company to the right place. The importance -- so we’ve talked about the supply chain transformation. We’re investing -- we’re making significant investments into our transformation, get to our concept of four anchor breweries that we have a more distributed network between the East Coast and the West Coast, bringing costs down. We are focusing on getting Truly portfolio like to a network that can significantly reduce the cost of variety pack cost, which is our highest cost. We’re optimizing the supply chain, and we are doing that over time. We are very much focused also on improving our service levels, which is very much related to the supply chain and to the entire value chain, if you look across the Company. It’s not only the narrow focus on the breweries. It’s really on the broader supply chain across the entire company, which starts with wholesaler inventory and ends with wholesaler inventories, if you will. That is a significant focus for us, and we want to get it right. We will see -- I mean, the guidance for this year, we will see improvements over the years to come. The target that I’ve communicated previously has not changed. The drivers haven’t changed, but we are a little delayed, as I mentioned earlier, on the implementation on creating the internal capacity. We definitely have the right equipment. It just takes us a little longer, and that’s just one piece to get it up to speed, but it is a significant priority.

Okay, understood. And then, Jim, and perhaps Dave, just comment from a macro perspective, expectations broadly for the beer category, Jim, perhaps even total beverage alcohol, given the inflationary pressures that the consumer is under. And then maybe just also comment, it would be great to get your thoughts on the industry’s pricing posture, which has been to take less price than we’ve seen in most other consumer staples categories, frankly. And I’ll pass it on. Thank you, guys.

Yes. Let me jump in on it. Basically, per capita consumption of alcohol in the U.S. has been extremely stable over decades. So, you’re kind of getting an LDA population that’s growing 1%, 1.5% a year, something like that. That’s probably going to be the growth rate of alcohol consumption in terms of amount of ethanol. And then, you can parse that out between wines, spirits and beer. And beer has been losing share of ethanol to spirits, a little bit to wine. But the growth of what I’d call the fourth category, things like hard seltzer, FMBs that draw consumers in not just from beer but from wine and spirit occasions has helped beer grow over the last few years. I think from like 2008 to 2018, beer declined most years. And since then, it’s actually grown and hard seltzer and FMBs have been a big part of that. But you’re not talking about huge numbers. A terrible year in the beer business is when you’re down 1% and a great year is when you’re -- you break out the Sam Adams because you’re up 1%. So, it’s not a big band in there, but you do have traditional beer declining, and the growth being driven by fourth category type products, also called Beyond Beer, where Boston Beer is very strongly positioned and has been a leader in innovation for decades. So, in a macro sense, I guess, that’s what I see in total alcohol beverages and it’s having a probably a bigger impact on beer than wine and maybe spirits, it’s largely the growth of this fourth category. And beer getting the vast majority of that, maybe 70%, 80% of it has changed the beer growth rate by maybe as much as 2% over the last three years. And the last point is, it’s my belief that beer is currently quite advantaged in what it takes to be successful in this fourth category. They are products that basically look like beer. They’re largely in 12-ounce servings and cans, in the cold box because one of their advantages is convenience, portability, ease of consumption. They tend to sell for beer type price points. So, you need the efficiencies of the beer distribution system and the reach of a beer distribution system and you need producers that have high-speed can lines and economies of scale and so forth. And then, there is, of course, the big tax differential that basically says spirits-based product gives you 4 cans for $10 and a "malt-based," which can be sugar-based, gives you those -- for $10, you get 6 cans. So, there’s a 50% price premium when you go to a spirits space. All of those things tell me, I guess, fundamentally, in alcoholic beverages, the fourth category is going to drive the growth and beer is advantaged in that category. Does that help?

Yes. Very good. Thanks. And Dave, did you want to add anything with respect to the macro, how you expect the category to hold up and whether the industry is taking the right path here from a pricing perspective, i.e., less than other staples categories?

There’s not much I could say that would add to what Jim has to say. I mean, the pricing, I would say on the pricing piece, I mean -- 4%, 5% pricing is in this category, and Jim could talk to this better than as a lot. And I think also it’s a category where people can choose to drink less in that moment, maybe over time, Jim is certainly right. But I think we’re not leading with price we’re following, but we agree with the levels. And we think they’re reasonable. I mean, you can look -- you can see what the volume is. The volume is less than -- it’s worse than minus 1% right now. The dollars are a lot better, but the volume is. So -- and Jim, I don’t know if you have a point of view about the rate of pricing that’s happening in the marketplace or not.

I don’t know that I have any great insights. I guess, what gives me some comfort about where we are at the 4% to 5% level. That kind of tracks people’s wage and salary growth. I know headline inflation is 8% or 9%, but people’s wage and salary growth is 4% or 5%. So, in terms of the dollars available, beer is not going up in -- as a percent of people’s income. And so that, I think, supports minimizing the volume hit from inflation.

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

So, I was kind of hoping to shift gears away from Truly for a second and kind of just talk about the strong performance of Twisted Tea. Can you maybe unpack the drivers there? And I apologize if I missed this in an earlier response to a question. But what is your expectation for the brand as we think about the guidance for the back half of the year? And then, maybe more importantly, bigger picture, how do you think about the long-term growth potential Twisted Tea beyond this year, particularly as the brand grows, comps get more difficult, et cetera? Thanks.

Sure thing, Peter. I’ll answer that part and then maybe hand it over to Frank for a little bit there. So in terms of Twisted Tea, I think what’s happening right now is we have -- it’s like the perfect combination of push and pull happen in a concert with each other at the right moment. And the thing -- as you know, this brand has been around for over 20 years, has been growing steadily on average, low double digits for all those years. But it’s really been still arguably like a regional brand. And I think what happened over the last year, if you look at -- just look at our 12-pack distribution, it’s something like 58% of the ACV right now. And a year ago, I think it was about half of that. And I think that was sort of the tipping point. Once we get distribution of 12 packs, we have 3 of them, then that’s when everything started to come into play with our wholesalers and with our retailers. So, what’s happening now is that all the major retailers now can promote this and support this brand on a national basis. So, that’s, in turn, driving a lot of trial. And our household penetration is up 10% or 12%. So you’ve got -- the 12-pack thing really started it. At the same time, you’ve got this brand that was built very slowly the right way. So, it started with a narrow demographic target, which are blue collar guys driving pickup trucks and made some -- who had a decent income who went to the convenience store to buy it. And the narrow geography, tend to be Northern New England and Montana or Michigan, don’t ask why, but it just was. And then it found its base. And what we’ve been able to do is very carefully grow that base, grow the demographic to broaden the demographic appeal, grow the geographic distribution to broaden that geographic reach. And the brand has got a unique combination of sort of product attributes and brand sort of emotional benefits. And it’s kind of creating -- it’s created a little bit of a moat around the brand and that it’s very hard to sort of replicate exactly what Twisted Tea provides as a product and as a brand. So, it’s a really good example of building the brand the right way over a long period of time and working in concert to get the push and pull. So, you see the brand’s accelerated its growth over the course of the year -- I think I said in the last 4 weeks up high-30s. So we’ve got a lot of activity all through the summer into the fall. And we’re going to keep investing there. We also -- by way of an ad campaign that’s scored in the top quintile is an incredible campaign has resonated as well. That certainly helps. And we’re spending behind it. And it’s coming together. But I’ve learned over the last year or so never to predict anything at all other than like we’re taking it one step at a time. We feel we’ve got something here that is really finding its level, and we’re going to keep supporting it. And again, the last thing I’ll say is that still despite its success, the household penetration, the distribution, the brand awareness far lower than its primary competitors in the space. So, there’s still a lot of upside to grow the brand. I think the other question...

Yes. And I think, Peter, you were asking about the guidance. And as I said before, we took a relatively simple approach and looked at the growth rates that we’ve demonstrated over the last 13 weeks, basically, okay, and projected that out. And when it comes to depletions, that’s essentially what we all have year-to-date. Now within that, you have a mix impact. And as I said before, Truly has decelerated. So the last 13 weeks are worse than what you see on a year-to-date basis, if you look at IRI data. And Twisted Tea is better and has a higher growth rate in the last 13 than the year-to-date. We have not taken the latest four where Twisted Tea has grown even stronger. And the growth rate for Twisted Tea in the last four is basically double what you have on the year-to-date, we have not taken that. We have taken a relatively straightforward approach over the last 13 weeks. And then when you go to the low end of the range, we have just assumed for Twisted Tea the year-to-date rate and have projected it out for the rest of the year. So, that’s kind of the approach that we have taken for the guidance. And then just as a reminder, our guidance -- our full year guidance also includes the benefit of the 53rd week, which is, of course, not reflected in the year-to-date growth rates, but will be reflected in the year-to-go. It’s not reflected in the year-to-date and will be reflected in the year-to-go, right?

[Operator Instructions] Our next question comes from the line of Vivien Azer with Cowen.

I wanted to follow up on Twisted Tea. Dave, last quarter, you articulated some very specific targets in terms of gains, both in terms of shelf space as well as points of distribution. Can you just update on how you’re tracking against those goals, please?

Sure, Vivien. I mean, the shelf space, I can’t remember if I mentioned in the opening remarks, but Twisted Tea grew shelf space by 28%. So, it’s getting the support now. And I think, again, a lot of that is 12-pack distribution, but it’s also a 24-ounce in convenience stores. And so, it’s tracking really well. And household penetration is up about 13%. So that’s also really good. But I think the big thing, again, like I said, before the tipping point is getting 12-pack out there where retailers can now promote it and support it on a national basis. So, that’s really been the big driver. The other thing I would suggest, again, a sign of strength of the brand to believe in it is that -- it’s -- from a single-serve perspective, it’s by far and away, the number 1 FMBs 24 ounce, it’s number 4 in all beer of all -- like so there’s three beer brands that come ahead of it, maybe guess where they might be, and then it’s Twisted Tea. So it really -- and that channel is so special and important because consumers are going in and they’re picking the brand they want. They’re not being swayed by promotion pricing generally or displays. They walk into -- it’s like the most egalitarian place for a brand to present itself, and Twisted Tea has got -- is getting the attention, and we’re also adding -- we’re adding some flavors in 24-ounce as well to broaden that yellow band that you see in convenience stores. And the last thing I’ll say is we have a national promotion with Doritos right now, which is a big one for us, too, that plays across all off-premise channels that, again, we could tap into that the connection between those two brand groups or those two consumer groups, and again, keep driving household penetration.

Got it. That’s interesting on the Pepsi partnership on Doritos. A quick follow-up for me. I know it’s a very small piece of business in very early days, but any update on TeaPot in Canada.

Yes. I mean, so TeaPot is -- I can tell you it’s a great taste of product. It’s a great name. We’re very excited about it is launching. And where else would you launch a product like TeaPot first, but Saskatchewan. So, it’s going to Saskatchewan, actually I think this week. And then, it moves to Manitoba. So we’re conquering the biggest provinces of Canada first. And then eventually to Ontario, which obviously is most populous province in Canada sometime in the fall. So, it’s just getting going, 5 milligrams of THC, great tasting tea, leveraging, obviously, our experience in making great tea products. And we’re looking forward to seeing what we it can do.

Ladies and gentlemen, we have reached the end of today’s question-and-answer session. I would like to turn this call back over to Mr. Jim Koch for closing comments.

My apologies, I was on mute. I just want to thank everybody for sitting in on this. And we’ll talk again in three months. Cheers.

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