Boston Beer Company, Inc.

Greetings and welcome to the Boston Beer Company first quarter 2020 earnings call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during a conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jim Cook, founder and chairman for the Boston Beer Company. Thank you. You may begin.

Thanks. Good afternoon and welcome to everybody. This is Jim Cook, founder and chairman, and I'm pleased to kick off the 2020 first quarter earnings call for the Boston Beer Company. Joining the call from Boston Beer are Dave Berwick, our CEO, and Frank Smala, our CFO. In keeping with these times of social distancing, Dave, Frank, and I are in separate locations for this call. I'll begin my remarks this afternoon with a few introductory comments, including some discussion on the COVID-19 pandemic and the highlights of our results, and then hand 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 first quarter results. Immediately following Frank's comments, we'll open up the line for your questions. As the world's grappling with the COVID-19 pandemic, our primary focus is on operating our breweries and our business safely and supporting our partners in the beer industry. We have a strong cash position and balance sheet. and feel very fortunate to be in a position where we can help others. Supporting the communities in which we live and work is one of our core values. After all, our business got its start in bars and restaurants, and we recognize the role we can play right now in giving back. We're proud to share some of the initiatives we've gotten off the ground in a very short period of time that we hope will make a difference. We've established the Samuel Adams Restaurant Strong Fund and donated over $2.1 million to support bar and restaurant workers that have been impacted by pandemic-related closures in 20 states. In addition, we're a founding partner of Restaurant Relief America, which is committed to helping the restaurant industry workers experiencing hardship in the wake of COVID-19. Both funds will distribute 100% of their proceeds through grants, to bar and restaurant workers. Also, to support our internal needs as well as local hospitals, we began production of hand sanitizer at our Dogfish Head distillery in Milton, Delaware. We're thankful for our outstanding coworkers, distributors, and retailers for their focus on our business during COVID-19 and their diligence to continue to operate and help us grow our Boston Beer Company business. The company's depletions increased 36% in the first quarter, of which 30% is from Boston Beer legacy brands, and 6% is from the addition of drug efficient brands. Our business in the first quarter was strong, though there remain some significant uncertainties due to COVID-19. These uncertainties include our continued ability to operate our breweries at a level of safety that meets our standards, the continued ability to distribute to the off-premise retail locations, the duration of the current on-premise shutdown, and how long consumer pantry loading will continue in the weeks ahead. We will continue to work hard throughout the COVID-19 pandemic and prioritize safety above everything else. I'm proud of the passion, creativity, and commitment to community that the Boston Beer Company has demonstrated during this I'm now going to pass over to Dave for a more detailed overview of our business.

Thanks, Jim. Hello, everyone. Before I review our business results, I'll start with our disclaimer, which, given the current circumstances, we've modified. As we state our earnings release, some of the information we discuss in the release, and that may come up on this call, reflect the company's or management's expectations or predictions of the future. Such predictions and the like are forward-looking statements. I would also note, as we state in our earnings release, and Frank will later discuss in more detail, the company is not in a position to accurately forecast the future risks to revenues and earnings resulting from the impact of disruptions and other effects related to COVID-19 and has withdrawn its full-year fiscal 2020 financial guidance. All that said, the company's actual results could differ materially from any results projected in such 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-K and first quarter 10-Q. You should also be advised that the company does not undertake to publicly update forward-looking statements, whether as a result of new information, future events, or otherwise. Okay, now let me share a deeper look at our business performance. Consistent with the first quarter of last year, our first quarter shipments volume was significantly higher than depletion's volume, as we took active steps to ensure that our distributor inventory levels are adequate to support drinker demand. Our depletionist growth in the first quarter was a result of increases in our Truly Hard Seltzer and Twisted Tea brands, in addition to the Dogfish Head brands that were only partially offset by decreases in our Angry Orchard and San Luis Ables brands. The growth of the Truly brand and the recently launched Truly Hard Lemonade has accelerated and continued to grow beyond our expectations. Since early January, Truly has accelerated its velocity and maintained its market share, while other national hard seltzer brands have seen its share. We'll continue to invest heavily in the Truly brand and involve our brand communications and work to improve our position in the hard seltzer category, even as more competitors enter. We're ready to launch an exciting new Truly advertising campaign, but have postponed the launch due to the uncertainty surrounding COVID-19. Twisted Tea continues to generate double-digit volume growth rates that are above full-year 2019 trends. We see significant distribution and volume growth opportunities for our Julia Twisted Tea brands and are looking to continue to expand distribution of our Dogfish Head brands. Pursuing these opportunities in 2020 remains a top priority. Sam Adams and A.B. Orchard's volumes continue to decline as they're more deeply impacted by the on-premise shutdown. We continue to work hard on returning these brands to growth but do not expect them to grow during 2020. We've reacted decisively to COVID-19 and continue to work to control what we can control, with our primary focus being the safety of our coworkers, our distributors, retailers, and our drinkers. We've worked aggressively to put in place many safety protocols at our breweries, including entrance screening and temperature checks, face mask requirements, reorganizing work to increase social distancing between and among shifts, and adding cleaning time to each shift. Additionally, we've closed all of our hospitality locations beginning on March 13th. We're working hard to rebalance our supply chain to address additional demand in can and bottle packages at off-premise retailers against very low demand for kegs given the shutdown of on-premise venues. This shift in boiling mix is likely to come at a higher incremental cost due to the increased uses of third-party breweries, which negatively impacts our gross margin. we deferred some of our new marketing campaigns as we closely assess and manage the situation. Drinker demand for our brands continues to be very strong, particularly our Truly and Twisted Tea brands. Pre-COVID, our depletionist growth through the nine-week period ended February 29th, was approximately 32% from the comparable period in 2019, and we saw a further acceleration in demand for our brands beginning in the second half of March. It's not possible for us to estimate the amount of the new demand that is a temporary reaction to COVID-19. We're in very competitive business and we're optimistic for continued growth of our current grant portfolio and we remain prepared to forsake short-term earnings as we invest to sustain long-term profitable growth in line with the opportunities that we see. Based on information at hand, year-to-date depletions reported to the company through the 15 weeks ended April 11, 2020, are estimated to have increased approximately 32% for the comparable weeks in 2019. Excluding the doctor's head impact, completions increased 27%. Now, Frank will provide the financial details. Thank you, Jim and Dave. Good afternoon, everyone. For the first quarter, we reported net income of $18.2 million, or $1.49 per diluted share. a decrease of 53 cents per diluted share from the fourth quarter of last year. Net income decreased as higher net revenue was more than offset by increases in operating expenses and lower growth margins. We began seeing the impact of the COVID-19 pandemic on our business in early March. Prior to then, we were on track to maintain our full-year fiscal 2020 financial guidance. Given the many rapidly changing variables related to the pandemic, we are currently not in a position to accurately forecast the future impact of the pandemic and are therefore withdrawing our full-year fiscal 2020 financial guidance. To date, the direct impact of the pandemic has primarily shown a significantly reduced get demand from the on-premise channel and higher labor and safety-related costs at our breweries. In the first quarter of 2020, we recorded COVID-19 pre-tax-related reductions in net revenue and increases in other costs totaling $10 million. This amount consists of a $5.8 million reduction in net revenue for estimated tech returns from distributors and retailers and $4.2 million of other COVID-19-related direct costs. of which $3.6 million are recorded in cost of goods sold and $600,000 are recorded in operating expenses. In addition to these direct financial impacts, COVID-19-related safety measures resulted in a reduction of internal capacity. This has shifted more volume to third-party breweries, resulting in increased production costs and lower gross margins. We will continue to assess and manage the situation and will provide further updates in our second quarter earnings release to the extent that the effect of the COVID-19 pandemic will then be known more clearly. Shipment volume was approximately 1.42 million barrels, a 32.2% increase in the first quarter of 2019. Excluding the addition of the doctor shed burns beginning July 3, 2019, shipments increased 27.5%. Shipment volume for the quarter was significantly higher than depreciation volume and resulted in significantly higher distributor inventory as of March 28, 2020 when compared to March 30, 2019. We believe distributor inventory as of March 28, 2020 averaged approximately six weeks on end and was at an appropriate level based on supply chain capacity constraints inventory requirements to support the forecasted growth of Trulie into the key brands over the summer. We expect wholesaler inventory levels in terms of weeks on hand to return to more normal levels of approximately four weeks on hand later in the year. Our first quarter 2020 gross margin of 44.8% decreased from the 49.5% margin realized in the first quarter of last year. The decrease was primarily the result of higher processing costs due to increased production of third-party breweries and higher processing costs on finished goods keg inventory write-offs at company-owned breweries, partially offset by price increases and pot-saving initiatives at company-owned breweries. Excluding our current assessment of the impact of COVID-19 keg returns and other related direct costs, first quarter gross margin was 46.8%. First quarter advertising, promotional, and selling expense increased by $26.2 million in the first quarter in 2019, primarily due to increased investments in media, production, and local marketing, the addition of darker-shed brand-related expenses beginning July 3, 2019, higher salaries and benefits costs, and increased trade to distributors due to higher volume. General and administrative expenses increased by $3.6 million from the first quarter in 2019, primarily due to increases in salaries and benefits brought and the addition of doctor shed general and administrative expenses beginning July 3, 2019. We drew down $100 million from our existing line of credit in March 2020 to enhance our cash position and our ability to address the impact of the COVID-19 pandemic. We expect that our March 28, 2020 cash balance of $129.5 million, together with future operating cash flows and the $15 million remaining in our line of credit, will be sufficient to fund future cash requirements. We will now open up the call for questions.

Thank you. Ladies and gentlemen, at this time, we will be conducting a question and answer session. If you'd like to ask a question, you may press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Our first question comes from the line of Bonnie Herzog with Goldman Sachs. Please proceed with your question.

All right. Thank you. Hi, everyone.

Hi, Bonnie.

Hi. I wanted to ask about your operations. You touched on this, and I'm just curious if you can give us a little more color on how fully your operations have been running. You know, I know you're certainly being careful with safety for your employees, so I'm curious, you know, have you limited the hours and the shifts? And then, you know, as such, then the output is more limited at this time, given everything? I guess I'm just trying to get a sense of how much you've had to scale back And then I think you did give us your inventory that's on hand right now, but I just want to make sure I heard that correctly.

Okay, Bonnie, thanks. This is Dave. I think because we're at all different locations, I'll sort of act as the MC to kind of funnel the questions. I think this is probably a good one for Frank to address. Okay. Yeah. So, Bonnie, clearly the capacity was impacted. I mean, when the whole thing started, We were very, very much focused on the safety of our coworkers in the breweries, but also on keeping the breweries running. That was critical to us. So what we did is we implemented significant sanitation and safety measures in the breweries to make sure that they're a very safe place to work and that we can keep on running them even if we had incidents. As a result of that, we separated shifts, for example, and put time between shifts so that the crews don't meet each other. And we've also implemented sanitation procedures so that the workstations are being sanitized before new ships start. That has reduced capacity. Now, we haven't had any significant impact on the overall output, but we have shifted more volume to third-party breweries, which, as you know, increases our cost and therefore lowers the margin. That is reflected. in the financial, the part that heads like at the end of March. It's not included in the $10 million that we've spelled out as direct costs. The $10 million that we've spelled out is literally direct costs related to tech returns and extra costs that we incurred as a company, but it doesn't include the indirect costs of the shift of capacity.

Okay, that was helpful. And so as you think about this environment... No one really knows how much longer it's going to last, but I would imagine that this overhang of pressure is going to continue. So is there a way for you to give us a sense of what percentage of your business, maybe in the quarter, was outsourced? I think it was around maybe, what, 26% or 27% of your business last year? I mean, I assume that's gone up to, no? No.

Yeah, so, I mean, clearly it has gone up, as we've indicated also in the last call, when we still provided guidance in February. Because our volume is growing so significantly, we're putting in additional capacity. We have put in a new line in Pennsylvania, which is coming on screen pretty much now. But the volume continues to outpace our old capability. So it was pretty clear that Q1 was going to be a quarter where we have significantly more external production. We don't disclose those numbers, what the percentage is, but it was a significant increase even without COVID. COVID hit, and then I think, you know, within March, when we implemented those measures, there was an increment that shifted over. There's a reason why we don't provide guidance, because we don't know exactly what's going to happen, but of course, we do our scenario planning. And, you know, we were super cautious when we put the measures in, and I think we will get better at it. That means we will definitely maintain the level of safety and sanitation, but we will, yeah, as with everything, you're getting better with things as you continuously do them and you learn. So we think we will improve the capacity internally as we move throughout the year. And, Bonnie, this is HSTAT, Stuart Frankstein. We jumped on this very early. So we're talking early March and making a lot of these changes. So we are down the learning curve a bit on these things, but we've been doing the temperature checks, face masks, everything from the very beginning. So hopefully it gets better. We just don't know how this pandemic hits because we know it's going to come in waves. But we feel like we've learned a lot and are pretty confident that we know what we're doing right now. But again, like I said, we can control what we can control.

Understood. All right. Thanks. I'll get out of the queue. Thank you.

Thanks, Bonnie. Our next question comes from the line of Vivian Ezer with Cowan & Company. Please proceed with your question.

Hi. Good evening. Thank you. I hope all three of you guys are safe and healthy as the rest of your team. Just to follow up on Bonnie's question on capacity, so you called out the capacity build-outs. in Pennsylvania and I heard Dave you say the capacity will continue to ramp over the year. Are there incremental CAPEX projects that need to happen this year or was it just the one line in Pennsylvania?

Thanks. We have a line in Memphis that will be going in in the second quarter with the city that is on schedule so we feel good about that. We've also, well we haven't decided where to put The capital we have committed, we've got board approval internally to put more lines in either in Pennsylvania or in Ohio, sometimes starting very soon. So we're continuing to move down that path as aggressively as we can. Even in this environment where we're kind of looking at sort of some capital projects that may not be strategic or critical, we're putting them on. This is one that we're going full steam ahead to build more capacity.

Okay, that's great. It's so good to hear that the construction continues, hopefully, broadly unfettered. On the impact of keg returns, do you guys have a sense of kind of, like, where you are in that process? Just trying to think about, like, the second quarter impact. Like, have you received 50% of your kegs back? Is there any way to know?

So, we've been trying to, We haven't, the process hasn't really started in earnest from an operational perspective. But what we've done is, you know, we have a longstanding policy of any returns that we get, you know, for freshness reasons that we get from our distributors, that we reimburse them for 50%. We've all attended for packages for kegs. We are not intending to change that, and we've communicated that to our distributors. And we have looked at the inventory that we have at the distributors, and we have looked at the inventory that is at the retailers, which is likely to come back to the distributors as well. And based on that, we have accrued for the cost of Q1, and that's what you see. That is part of the $10 million. So $5.8 million is a reduction in revenue because we have accounted for the CAG inventory that we expect to come back and reimburse at 50%. We believe there's a fairly good handle on that inventory, so we don't expect any significant changes to that estimate.

Okay, perfect. Thank you. That's super helpful. Last one for me, and I'll jump back in the queue. Can you just remind us what your revenue mix is for the total company portfolio on-premise versus off-premise?

Thanks. Yeah, we don't share that. I think what we do say – We talk about our keg, that's percent in total, which is 12%. So the keg sales are 12% of our next, but we don't break out on-premise versus off-premise. So obviously there's more than kegs that go into the on-premise channel.

Suffice it to say, it's de minimis for Trulie?

It is de minimis. It's fair to say it's de minimis for Trulie. It's de minimis for Twisted Tea as well.

Okay. Thank you so much.

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

Thanks. Good evening, everyone. I just would echo, I hope that you and your family and loved ones are safe and healthy. I want to start with sort of a bigger picture question for Jim and for Dave. Understanding is still a lot known at this point, but I think what sort of may be a little bit more increasingly known is there's a broader consumer shift to at-home consumption. Consumers will be working from home more frequently as well. It just seems like there will be some protracted implications from social distancing that are going to be with us for some period of time. And as a consequence, it would appear there will be a lasting negative impact on the on-premise channel. maybe agree or disagree with that. But, you know, if that is indeed the case, I'd be interested to get your perspective on the longer-term implications, not just for your portfolio, but for the industry as well and overall alcohol consumption.

Thanks, Kevin. I'll let Jim jump on that one.

Yeah. I mean, we've seen so far just, you know, complete devastation of our keg business. It's Damn near zero. It happened very quickly. So it's hard to, so that's what we know. The lockdown in the states where it's been implemented has meant that, you know, our tech business is a trickle. How much of that will come back? You know, it's anybody's guess. In a normal year, there's a decent amount of turnover in restaurants anyway. They go out of business. New ones take their place. There will be a lot that don't reopen. Some of those were probably going to close during the year anyway. It's probably beyond my capacity to predict how much you know, lower the on-premise business will be in the short term and the long term, you know, other than to say it's going to be lower and it's going to be significantly lower. And if I had to guess, you know, some of it's driven by shutdowns and a lot of it's just driven by who wants to go out and rub elbows with a lot of people until there's a vaccine or an effective treatment or therapy. So we are anticipating that, you know, the on-premise business is not going to just snap back. And it may be a matter of a year or two before it gets anywhere near what it was at the end of February. And we do feel like, as opposed to the many other craft brewers, we have developed a portfolio and a business model that is able to prosper, even in this new normal. And, you know, the strong sales results so far this year, I think, validate that business model that is built on strong brands, on successful innovation, on the support of our distributor network, and on our best-in-class So we see the results so far this year as a validation of our strengths. And because we are pretty confident in our business model and our position in the marketplace, we're willing to invest aggressively in programs and in media when and where we can drive continuing double-digit growth. And we're going to make the capital investments, as Vivian asked about, that are necessary to support that growth, primarily in-house, but also investments at our contract brewing partner. And we're also going to invest capital – to increase our gross margins from their current level. You know, they've been declining for several years, even as we scaled up, and that's not natural or even healthy. So, we think we can get a significant improvement in gross margin over the next couple of years, and they're going to invest the capital that's necessary to do that. And does that answer your question?

Yeah, yeah. Thanks for that, Tim. I appreciate it. Just an interest of time. I did want to touch on seltzers, if that's okay, as well. There's tons of questions to be asked, obviously. Understanding what, you know, we don't know necessarily with respect to the magnitude of pantry loading and then, you know, timing around how long it's going to take consumers to destock. Maybe you could talk about, I guess, kind of what we do know and maybe what you've learned over the past three months since last we spoke with respect to new customers and sort of frequency of consumption among existing customers and strength of the brand and consumer loyalty. Because as you guys rightly point out, the brand has held up, truly that is, pretty well in light of some of the new entrants. So maybe talk a little bit about some of the brand equity and what you have learned about the core consumer and even new consumers over the past three months, and I'll pass it on. Thank you guys very much.

Okay. Thanks, Kevin. Actually, I think maybe I'll jump in on the truly one. To answer that question fully would take about an hour, but I'll try to be a lot briefer. I think, first of all, I feel like what we did in the end of the fourth quarter of last year to prepare for the onslaught, as we call the White Walkers coming to add us in January, we feel very confident in that the reformulation, increased media spend in the fourth quarter to build some brand awareness, readying lemonade for launch. And where we are right now is that truly right now is the only hard sell sub-brand to grow shares sequentially since the beginning of January. So, starting at the beginning of this year, we're the only one to grow. Now, granted, look at our I-22 to 22.1. It's only a tenth of a share point, but we'll take it. And the growth rates have sustained. So, they've been over 200% the last 13 weeks. With the last 13, last four, last one, 210, 230, 218. So, it's growing. I think we also look at, we look at sales per point, really important. It's accelerating. So, over the last four months in sequence, plus 65, plus 71, plus 89, plus 99. And now, truly, lemonade is coming in at about a 5-2 share, which is significant. So, now, from a consumer perspective, what we've learned, and it's been really interesting to have other players come in, because then you can see where the share is going from which branch to which brand. And when we dig into the panel data, and generally, it's Nielsen, we're starting to work with a little bit of a numerator as well, which is kind of interesting. When you look at Nielsen, you see I'll just compare truly to White Claw. By the way, White Claw's a phenomenal brand, and that's because I respect how they built that brand, which I'm choosing as comparison. We've truly had higher-income households, younger buyers, more diverse, ethnically-buying households, more sourcing from wine and spirits, 51 to 39, higher basket ring, higher repeat rate, actually now 36 to 34. We're seeing that... The Budweiser entries has a little bit older and lower income, similar, a little bit more diverse, but similar to White Claw in many respects. And so we've carved out what we believe is a different consumer. What's most interesting to me, if you look at the last month, the weeks post-COVID, which is sort of the day we have is the first week of March to the first week of April, truly penetration doubles. in that time, between that February-March timeframe, and we peaked by 25%. So we're seeing, and you guys have all seen it, the growth rates are continuing in this category, and people are bringing it home. We're getting an opportunity to get trialed among a lot of new consumers. 41% of the consumers that tried Truly, in the last month, we're new to the brand. So, we feel pretty good. And then, last thing I'll say, because it was getting kind of long, on the household penetration has continued to grow significantly for the category. So, 7.5% over the latest 52 weeks. White Claws at 3.7%, Truly's at 2.7%. But over the last four weeks, I think it's around 7.7%. So, it's on its way. We think hard seltzer could be on its way to 8, 9, 10% of beer during that time. So, that's I appreciate all the time.

Thank you, guys, and good luck.

Thanks, Kevin. Thank you.

Our next question comes from the line of Steve Powers with Deutsche Bank. Please proceed with your question.

Hey, guys. Thanks. Thanks for the question. Maybe first real quick, back to on-premise, a technical question, I think, for Frank. Frank, in the queue, if I read it right, it talks about reimbursements to distributors on the order of about $8.2 million. I guess the question, is that inclusive of the $5.8 million that you've called out as COVID-related, or is the COVID number additive to the $8.2?

No, I'm not sure of the $8.2. The CAC return for the reduction in revenue is $5.8 million. that's the number with some other costs related to the COVID impact, which is like mainly the breweries, and that's the balance to the $10 million. There's about $50,000 in operating expenses, but outside of the $5.8 million, there's like $3.6 million also in the gross margin line, if you will, but those are direct expenses. There's no additional costs to that.

Right. Okay. So, Okay. I can follow up offline. Yeah. I guess then stepping back maybe to build on what you just said, Dave, around the seltzer category, I guess I'm thinking through, do you think the disruption that the category is facing now, the whole industry is facing now, will have lasting impacts, good, bad, or indifferent, on how the category develops, the seltzer category that is? As you said, you're getting new trial right now as folks stay home and try and pantry load. I guess as you go forward, though, the good news is you've got this new trial period. On the other hand, just social gathering in general will probably be limited for some time. I think of seltzer as a social occasion type of beverage. Maybe that's wrong. But just how do you think about, you know, the go-forward impact on this category specifically and how it was developing and how this may change how it develops over the remainder of the year into next year?

Okay. And it's obviously another hard one to predict. I would say, I mean, obviously the one benefit the category has is that really that it doesn't – it exists on on-premise, but it's not very significant. So while on-premise is shut down, and as Jim talked about coming back, as you can allude to quite very slowly, it then has much less of an impact on this category. And we have people who have stocked up a lot. Actually, we're seeing the numbers. The stock up really is replenishment buying. It's almost at the same rate of growth as the stock up. So it's come down a little bit. But we're still looking at significant growth, as you know, across the entire beer business, but certainly within seltzers as well. So I think any time you have a new product, a new category, a new brand, it's getting a lot of trial that has a lot of appeal to it. It's going to benefit. And I think we're getting, basically, I think we're getting a lot of incremental trial. We in the whole category is getting a lot of incremental trial that it would not have gotten in another situation. So to me, if I were to bet, I would bet that this subsegment of the beer category will vault ahead further and faster than it would have had this terrible situation not occurred. And in terms of the social piece, I think if we look at it, I mean, almost all beer is social occasions anyway, so it's probably canceled out. And I think if I were to pick one winner, I mean, I guess the winner hasn't changed in the category over the last couple of years. I think this is still the same, the winning part of the category.

Yeah, great. Great. Okay, I'll leave it there. Thanks so much.

Sure. Our next question comes from the line of Nick Moody with RBC Capital Markets. Please proceed with your question.

Yeah, thanks. Good afternoon, everyone. Dave, I'm just curious. When you think about the capacity situation, and obviously you guys are investing to expand lines, but just given what's going on across the competitive side, I'm just curious. Do you see any opportunities out there to either have unique partnerships to produce more truly at a lower cost than what you're, you know, potentially doing without clay packers, or even acquiring capacity outright. That's the first question. And then the second question is really coming down to, you know, what you just talked about, this amazing kind of acceleration and trial that you've seen in the category that probably we would have never seen prior to COVID-19. And how you can, through marketing, you know, whether it be digital or on television or what have you, like, how can you create stickiness with those consumers that have been trying the category and the brand over the last several weeks.

Great. Hey, thanks, Nick. I'll defer the first question to Jim, and then maybe I'll come back and answer the second question.

Oh, I was ready to answer the second one, Dave. Repeat the first question.

I'm sorry. Yeah, the first question, Jim, is really about capacity. And while you guys are, you know, investing in index to expand lines, like we see opportunities out there to buy capacity.

um you know we are uh always looking at uh opportunities um we are you know we would prefer to own our own capacity if the economics are equal but uh we have been fairly agnostic um if the economics are superior so within that framework um you know we we do anticipate there will be opportunities. They haven't yet surfaced, but I think there are craft brewers who borrowed money and expanded, and as you probably know, for craft brewers, that part of Boston Beer's business and craft brewing in general skews way more heavily on premise, sort of order of magnitude 30% versus maybe 18 for the industry. So there will be craft brewers who overextended and now don't have demand and will be under some pressure. And, you know, as those opportunities arise, we will look at it. But, you know, what's happened to our business is, you know, we have this very, very strong growth, but it's all in cans. And, you know, 12% of our business was in kegs. We've more than offset that with cans, but that means we don't need more keg capacity, and we don't really need the brewing capacity. So capacity that would be useful to us would have to be canning capacity, and that's generally not what craft brewers have. So we will look at those things if there are opportunities where the total economics purchasing and maybe building out, putting in a can line are better than doing it within one of our breweries or one of our or a city, our primary contract brewing partner, we would do that. So it may happen, probably not, but it's not out of the question.

Okay. And so, I'll jump into the second question, I think, which was about how do you build a brand to last? I think We look at the category, we started from the beginning. We really believe this category is going to be about a few mega brands. It's going to play more like soft drinks and look more like the branding from soft drinks than it does look like craft beer, per se. And we'll see if it plays out that way. It's still early to tell. But I think for us, we're looking at sort of the fundamentals. Creative brand awareness. We don't have the awareness that we need to have, but you get that through all sorts of media. Differentiation is critical, too. We believe, you know, we reformulated because we believe it's important to have the best tasting product. That's just the beginning. We have to differentiate the brand on other measures through our brand communications platform. We do have a campaign that we're very excited about that was due to launch in April. And actually, we front-loaded, you know, we plan to spend at the beginning of this year because we knew the competition was coming and we were going to wait until the summer. And we have a new campaign ready to go in April. Now, obviously, it's not the right time be launching a campaign, we need to make sure that the consumer sentiment is open to bringing something new that we have. But that's certainly another way that we plan to build a brand. I think innovation, we're seeing with lemonade, we think we're onto something here where there's a way to, you know, we're basically trying to redefine what hard seltzer can be versus just, you know, your next watermelon kiwi flavor. Is there other more substantial platforms we can build around? And I think innovation will be another way We don't want to over-invade, we don't want to under-invade either, but it will be a way to differentiate and set our brand apart. And the last thing comes down to execution. And, you know, through our Wholesaler Network, you know, as Jim referenced, we have great relationships there, so do the other guys too, and do a tremendous job executing this. So upside, if you look at our distribution across channels, particularly convenience stores, In total, in grocery, there's still opportunities for us to drive that. So it's a combination of all those things coming together. But I think importantly, we need to come forward, and hopefully people will agree whenever we do come forward with a new campaign, that we're presenting a brand with a distinct point of view that's relevant to 2135 rules. Thanks. That's my day. I appreciate it.

Thanks, Dave. As a reminder, ladies and gentlemen, it is store one to ask a question. Our next question comes from the line of Laurent Grandin with Guggenheim Partners. Please proceed with your question.

Good evening, everyone. My first question would be a photo from your previous response, Dave. There are some competitors that come with strong beer brands and develop a kind of a sensor on sub-brands. Do you think it's an advantage and why, I mean, to have a standalone brand versus, I mean, competing against, I mean, those, I mean, beer brands that are flourishing right now? So could you explain in terms of marketing why you think that's an advantage for you?

Yeah, I do think having a pure play brand in the category or in any category is more powerful because I think it's just a more singular idea of what a brand is about. And I think consumers don't want to buy Swiss Army knife. They want the best knife, the best fork, the best spoon they can get. And I think they're very concerned and very smart. They're going to go to choose brands that they believe deliver on the category benefits and positives of the category, and they don't want to be confused. That's just my point of view. And having been at PepsiCo, and I know you were too, I'm responsible for for doing the opposite of that, and I think I've learned from my mistakes that it's generally not good to do that. Now, I'm not saying that these other line extensions won't work, because these are obviously very powerful brands, but if I were to choose, I would prefer to have a brand that is not a line extension.

Okay. Thanks, Dave. The next question is, for real, clarifications with Frank, or you, Dave. It seems like your numbers in depletion are plus 36% and your shipment is plus 32%. So, in my view, based on percentage of growth, it seems like depletion growth has been higher than shipments growth. So, which was, in my view, not really your goal at the beginning of the year or I misunderstood you at the time. Where I'm getting to is what is the number of weeks of inventories? You mentioned six weeks. Is it at retailers plus wholesaler level? And how is that compared to last year? And is there a risk here based on tremendous growth from that we may risk getting some out of stock if sales continue to be as such?

Okay, Laura, this is Frank. I think I'm going to take this question on shipments versus depletion. If you recall, in February, we said that because we have capacity constraints, we will pre-build inventory for truly interested people in our campus so that we can maximize the capacity that we have. And that is very similar to what we did last year. And typically, we keep on building inventory at wholesalers to kind of the middle to like two-thirds through the second quarter. And that's where shipment typically outpaces deputation. Now, what happens with COVID is that we started building the inventory at the beginning of Q1 all the way into March. Then COVID happened, and there was significant pantry loading, as you've seen with many products in many states or so. The wholesalers were able to deplete into the retailers because we had built the premium inventory with them. So luckily they had enough inventory. But it has changed a little bit the dynamics because in the second half of the first quarter, we depleted more than we had expected. So as a result, the food bill that we had planned for didn't reach the level that we had thought. There might be a little bit of phasing in there that is going to hit Q2. We don't know. That's all through the guidance. We don't know exactly. If it continues, well, there will be less preview than we had anticipated, and we'll find it out. At this point, we believe we have enough capacity, maybe not everything internally, but if you look at internal and external to meet the demand, but it all comes down to what the final demand is. and then you have a certain buffer, but then we'll figure it out. But that's really the dynamic that happened in the first quarter. We were trying to build more inventory as a wholesaler to be prepared for the summer, but the COVID crisis increased the depletions beyond our planning, and that's why we didn't achieve the goal of the inventory build. To your question on the level, now, in terms of weeks of supply, As we've mentioned, we are at about six weeks. That's, you know, about the level where we were at last year, maybe a little, you know, maybe a few days more, but less than half a week. It is below the level that we are targeted a little bit. In absolute terms, of course, the inventory is significantly higher because the business has grown tremendously. As you know, we're you know, we're looking at doubling the ability. You can imagine that, you know, as we build the pre-build, we have to level for significantly higher than last year, but about at the same level in terms of weeks of supply when compared to last year.

Thank you very much. One other dynamic in thinking about, you know, how much inventory we're pre-building and how are we going to get through the summer, we have two new full can lines. One became operational like two weeks ago. It's come up really well. That's in Pennsylvania. So we added a full can line there and also a full can line in Memphis, which will be coming up next month. So going into the summer, we're going to have two new fully-sized and operational can lines to service the summer peak and the continued growth that we're anticipating in the back end of the year. So that's a significant expansion of our can capacity.

How much – In percentage, I mean, that's what we present, those two new lines, Jim?

Yeah, you could sort of think about in the first quarter we had kind of three can lines. I mean, this is a rough equivalency because two of them are in our facility and then we have contracts with City Brewing that are more complicated. But you could roughly think of it as you know, three can lines in the first quarter. And in the second quarter, we're going to have five. So there's your percentage. It's 67%.

Okay. Thank you. Thank you, Jim. And thank you, guys. Continue the good work. Excellent work, I should say. And I pass it on. Thank you.

Thank you.

Our next question comes from the line of Kumil Garjawala with Credit Suisse. Please receive your question.

Hey, everybody. Thanks for taking the question. Hey, Camille. Hey, Jim. A lot of back and forth on capacity. If I could try to simplify, I believe the goal towards the end of last year was to double your capacity. Are you still going to get there? Is there a delay in getting there? Is the number now the 67 you just provided? Can you just Help us try to simplify.

It was to double our capacity for sleep cans, which is what Truly is in. And we've done that. I mean, we're about to when the next one comes up in Memphis in May. So, yeah, double sleep cans. cans, and we've actually, we believe, a little more than doubled it because we've gotten more efficiency out of existing lines. So that gives us the ability to more than double our production of Trulie.

Okay, great. Thank you. That's a good segue. Are you seeing any bottlenecks in the raw material and supply side? It looks like your capacity is getting there, but the slim cans are tight. Sounds like CO2 is now getting tight. Any other bottlenecks we need to be thinking about?

We did a preliminary look at exactly that question. In other words, is there any unexpected stuff out there like CO2? I mean, who would have thought that, you know, less mileage being driven would affect the supply chain for breweries, but a fair bit of the CO2 comes from the ethanol plants in the upper Midwest. With our production system, we are fairly close to self-sufficient in CO2. We've always not wanted to vent carbon dioxide into the atmosphere, so we've spent a fair bit of money on capture systems to capture the CO2 in our breweries, scrub it, and then reintroduce it into the beer. So we're very confident about our CO2 supply. We don't need that much, and if we really had to, we could be more frugal with how we use it and probably be close to fully self-sufficient. We have looked at other items. Malt and hops are not an issue here. We keep several years worth of hops and flavors we're fine with. So, in general, we don't see issues in sort of our first tier suppliers. And we don't have a really complicated supply chain like the car company where you got to go two or three tiers. The thing that we have worked very hard on is making sure we have adequate supply of cans even to cover our upside forecast, particularly sleep cans, and we've been assured from our can suppliers that they are ready, willing, and able to supply the projections that we've given them. So we feel pretty good about that.

Okay, great. Just for a final question, if we could shift to beer. One of the things that's becoming more and more evident in the data as we're seeing pantry load is the national craft brands, such as yourself, but also, you know, Sierra Nevada and others, have really shifted the arc of their, you know, what were shared losses for a long period of time and volume declines for a long period of time. And it's really the question, is that something that you see as perhaps more permanent in a shift that probably for seven years has been going in one direction? Or do you just believe it's as simple as the fact that at the moment, the larger brands have the supply?

I wouldn't want to predict, you know, an overnight change in the seven-year trend. I do think it might bend the arc a bit, but, you know, we're very focused on, you know, trying to get Sam Adams back to growth, and we're not going to assume that some twist of fate is going to change that. We feel like we need to do it ourselves. We're certainly happy that in these difficult times, consumers pick up the Sam Adams because they know it's a reliably rewarding beer drinking experience. Possibly we'll be able to build on it, but I wouldn't want to count on everything changing just because of something that will eventually pass.

Hey, Camille, I'll jump on top of Jim's comment. Just really quick, because I do think I agree with what Jim has said. I think, again, we're digging into the numerator data. In the last month, about 42% of the buyers that came to Boston Logger were new. So that's good. So, again, Mike, I guess like all the categories, there's an opportunity to drive trial or retrial among brands. But to Jim's point, that's not enough to bend the arc necessarily. So we have been, in fact, all of our support from the time this crisis began until now has really been behind Sam Adams and the Restaurant Strong. program that Jim referenced in his opening remarks, because we feel like that's something, you know, we're doing something for restaurant workers, it's the appropriate thing for us to do, besides our history, who we are as a company and our values, and so we have been spending media dollars to support that. It's been well received, and that's an example of like, hey, here's an opportunity to do something good, and also our recognition that we have to keep doing stuff to get, to turn the brand. So that's something that's happening, that's out there. Also, you can imagine When, however, On-Premise opens, we have the largest, and we believe, the best On-Premise sales team in the industry, and we will be ready to go back in and support those same people that we're supporting through the Restaurant Strong program, and we're going to use every resource at our disposal to help them to drive the business once On-Premise comes back as well. And there are other things as well. So, again, I think it's a quirk of fate. All these brands are in a better place. I think the challenge is Now what do you do about it, you know, two months from now, three months from now, six months from now? That's useful. I appreciate it.

That's all from me. Thank you, everybody.

Thanks. Thank you.

Our next question comes from the line of Sean King with UBS. Please proceed with your question.

Thanks for the question. I know you don't disclose the total portfolio exposure to on-premise, but maybe you could share how much of your marketing and promotional spend is directed to the on-premise? Or maybe if you're unable to unpack that, maybe you could share how much of the spend makes this directed towards your over-indexing on-premise brands like Sam Adams and Angry Orchard.

Sean, this is Frank. We don't disclose any of those numbers. We mentioned the entire portfolio. We take all priorities during the year of, like, how we support the brand, and we support typically the brands. Yeah, there are certain programs that we do on-premise, but in the on-premise brands, as you can imagine, there's Tim Adams, Daniel Rocha, that's where we have more on-premise runs than the other brands. So if you look at on-premise spend, they receive more on-premise spend than others, but we don't disclose the details. The other thing that I want to say, because the question came up earlier on like, you know, what percentage is on-premise, as you can imagine, that is changing, that has changed over the years, and it's, of course, changing dramatically at the moment. You know, we're normally talking about zero, but the question is, like, what is it, you know, going to come back? So, you know, sorry, we don't disclose any more information related to that. Sean, maybe I can add one thing, as you said. I do think that, like, I imagine pretty much everyone's doing this, but they're looking To the future, as we enter this phase, we said there's maybe three goals, but the first two goals, one, manage the crisis, right? Manage the crisis consistent with our values and make sure we're making the right decisions to keep our people safe, to keep our people employed, and keep the breweries operating. I know we talked a lot about, obviously, the brewery piece, but we also, at the same time, talked about how do we plan ahead for the future, so a better future, so we come out stronger, our people are more engaged and better off, And our business is better off. And I think one of the things related to that is we're looking at all of our spend across channels, across brands for the balance of the year. And we're trying to line that up with what are the opportunities? Where's the consumer's head at? Where can we make an impact? And like as we've always done, we will, if we see the opportunities and we think we can get a good investment at the right time, know whenever whenever that is is it may is it june is it july we don't know yet but if we see the opportunities we're going to invest and we're going to we're going to we're going to invest as much as we plan to invest come into this year if however we don't think it makes sense because if we're not going to get a return or if there you know there's different things going on like investing maybe behind our premise obviously when it's not coming back then we won't do that so we will have a lot of flexibility too in terms of what we spend and what we don't spend but I think our philosophy is going to be consistent, which is if we think we can build brands for the long term and create growth, we'll do it. But because the world has changed so dramatically, we're putting a whole new lens on everything, and that's what the teams are looking at right now.

Great. Very helpful, Collin. Thanks a lot.

Thanks. Our next question comes from the line of Eric Sirota with Evercore. Please receive your question.

Good evening. I hope everyone's well. Quick question. Going into the year, you talked about a pretty big plan to expand the sales force. Just wondering if that's all on track and on schedule. How much of that has been done already? I guess how much of that is carryover from last year with the dogfish edition?

Hey, this is Dave. Yeah, we're going forward. We filled... number of roles um i'd say if i say we talked about under like 125 plus roles let's say a minority of those roles we filled already we're we're looking to fill them all now we're not going to have people come in right away until we know what's going on here but we haven't the current situation has not deterred us from doing this we see it as a big opportunity uh fortunately we have a great balance sheet as frank talked about we're in a good position to continue with these plans. So we're not, we have to put a halt to it, we could certainly, because there's more work to be done, but we're going full steam ahead on this.

Great to hear. And then we've heard a number of reports about retailers and distributors prioritizing high volume SKUs. Just wondering what you've seen in terms of impact on your business and how you expect that to evolve over the coming months, whether you think some of those skews are going to come back into the system, or whether this will kind of be the long-awaited shakeout or an acceleration of the shakeout that we've been seeing.

So, I can start and I'll let Jim finish, because I'm sure Jim has a point of view about this. But I think in the immediate and short term, there's no question that wholesalers, as far as we're obviously with retailers, then it goes to the wholesalers pretty quickly, and then to us. They're looking really for the power issues, the core brands, and actually, as you probably noticed, the large pack sizes too. So whether it be 30-pack cans, 24-pack cans, 12-pack cans, well-established brands, that's what's getting the space now because nobody wants to run out of stock, and so they've cut the long tail. It has, you know, as one of the larger credits, you know, beer companies has definitely benefited us, as someone also referenced, has benefited Sierra and developing as well. And so we're basically, we're going with the flow here, and what our customers want, we're going to deliver. And so we're seeing, you know, as you look at an IRI, we're seeing a turnaround. All those brands, including Angry Orchard, by the way, as well as Angry Orchard Crisp, which is considered a core brand. Remember, Angry Orchard, the study category is fine. It's still 55, 56 shares. So in the short term, that's where it's going. I don't know if Jim has a point of view. Jim is clairvoyant. He might have a perspective on the long term where it goes. I don't know, Jim, do you have a thought about that?

Yeah. It's very consistent with what you said. What's happened is retailers kind of like the fact that they could get more volume with fewer SKUs. And wholesalers were very happy about it as well. So the channels, I think, will kind of want to keep this going if they can. What would... yank everybody back to the status quo ante of more SKUs, lower volume per SKU, more difficult private mix to manage, to keep in stock. It's going to take the consumer requesting it. I don't think it will automatically snap back to the way it was because both retailers and wholesalers have benefited economically from this new state of affairs. So it really will depend on the consumer. Will the consumer require that same, you know, kaleidoscopic assortment of brands that you'd see on a 12-foot run of craft beers? We just don't know.

Great. Well, thanks, as always, for your perspective.

As a reminder, ladies and gentlemen, it is star one to ask your question. Our next question is a follow-up question from the line of Kevin Grundy with Jefferies. Please proceed with your question.

Hey, I appreciate you guys taking the follow-up. This one's probably for Frank. It's a little bit in the weeds. But, Frank, if my back of the napkin math is correct here, so the depletions – for the 13 weeks ended for the quarter, ex-dogfish were 30%, and then you also disclosed year-to-date for the 15 weeks was 27%, which implies that depletions were kind of in the 7, 8% range in early April. Is that right? And if so, maybe you can unpack that a little bit, understanding, you know, the big pantry load dynamic in the month of March.

So, so we, of course, we don't, we don't do that. the direct numbers uh but the uh it's less pantry low and there's a bit of an impact of pantry load that is coming back but what we're seeing in the vacations and what you don't see in iri is the on-premise business which literally came to a screeching all right from one day to the next uh we're not selling any tags anymore or anything else that typically went to the bars including bottles And I would say that that is the big impact of the slowdown from what you see when you look at quarter and above 36% and then the year-to-date above 36%. We're still trying to figure out what the pantry load impact is, but it's pretty hard to tell. So far we haven't seen a dramatic impact, but clearly we're expecting something there. But we don't know exactly what it is.

Okay. And there's also a little bit of a fact from Easter being a week later this year, and Easter's a pretty big holiday for the craft beer industry.

There are no further questions in the queue. I'd like to hand the call back to Mr. Cook for closing remarks.

Well, thanks, everybody, for being on the call with us, and you're forbearance of our being in all different places. And we look forward to talking to you again after the second quarter. Stay safe, everybody.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time. Have a wonderful day.