Boston Beer Company, Inc.

and welcome. This is Jim Cook, founder and chairman, and I'm pleased to kick off the 2020 third quarter earnings call for the Boston Beer Company. Joining the call from Boston Beer are Dave Berwick, our CEO, and Frank Smala, our CFO. I'll begin my remarks this afternoon with a few introductory comments, including some 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 third quarter results, as well as a review of our outlook for the remainder of 2020 and our initial outlook for 2021. Immediately following Frank's comments, we'll open up the line for questions. We achieved depletions growth of 36% in the third quarter. We believe that our depletions growth is attributable to our key innovations, quality, and strong brands, as well as sales execution and support from our distributors. As the COVID-19 pandemic continues, our primary focus continues to be on operating our breweries and our business safely and working hard to meet customer demand. I'm very proud of the passion, creativity, and commitment to community that our company has demonstrated during this pandemic. We remain positive about our future growth of our brand's and are happy that our diversified brand portfolio continues to fuel double-digit growth for the 10th consecutive quarter. We planned some major innovations to be introduced in 2021 for our brands. These include Twisted Ice Tea Hard Seltzer, Samuel Adams Just the Haze, our first non-alcoholic beer, Dogfish Head Scratch-Made Canned Cocktails, and Angry Orchard Fruit Cider. We're confident in our ability to continue to innovate and build strong brands to help support our mission of long-term profitable growth. I will now pass over to Dave for a more detailed overview of our business.

Thanks, Dan. Hello, everyone. Before I review our business results, I'll start with the usual disclaimer. As we state in our earnings release, some of the information we discuss may come up on the call with other companies, or management's expectations or predictions of the future. Self-predictions are forward-looking statements. It's important to note that the company's actual results could differ materially from what is 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 10Q and 10K. The company does not undertake to publicly update forward-looking statements, whether as a result of more information, future events, or otherwise. Okay, now let me share a deeper look at our business performance. Our decreasing growth in the third quarter was a result of increases in our Truly Hard Seltzer and Twisted Tea brands, partly offset by decreases in our Sam Adams, Angry Orchard, and Dogfish Head brands. The growth of the Truly brand, led by the Truly Lemonade Hard Seltzer, continues to be very strong, and we expect the Truly brand to continue to lead the growth of the business into 2021. In early 2021, we'll launch Truly Iced Tea Hard Seltzer, Truly Extra, a higher-end media version of Truly, and other new Truly flavors of package sizes as we continue to lead innovation in the hard seltzer category. We believe that Truly Iced Tea Hard Seltzer, which combines the refreshment of hard seltzer with room-brew tea and fruit flavor at only 100 calories of well-ground sugar, will further strengthen our position in the category. Since early in 2020, Truly has grown its velocity and its market share sequentially despite other national, regional, and local hard seltzer brands entering the category. Truly is the only national hard seltzer not introduced earlier this year to grow its share during 2020. We'll continue to invest heavily in the Truly brand and work to improve our position in the hard seltzer category as competition continues to increase. We'll also invest even more heavily in our Look Truly advertising campaign that showcases variety, colors, and joy to hard seltzer drinkers. Twisted Tea has benefited greatly from increased at-home consumption and continues to generate consistent double-digit volume growth, even as new entrants have been introduced and competition has increased. Our Samuel Adams and Richard and Blackfish Head brands have been most negatively impacted by COVID-19 and their random on-premise closures, but we're pleased that they all finished the month of September with strong, Our office month of September was strong growth in the measure of off-premise channels compared to last September. For the remainder of 2020 and into 2021, we plan to build upon our success and work to grab our brands to their full potential, with a particular focus on our Trulia brand. We've adjusted our expectations for 2020 full-year depreciation growth in our earnings guidance to reflect our trends for the first nine months in our current view of the remainder of the year, which is primarily driven by the year-to-date performance of Trulia. We're expecting all of our brands to grow in 2021, and we're targeting overall volume growth rates to be between 35% and 45%. We've closely managed our operating costs through the COVID-19 pandemic and achieved our planned cost synergies from the Dogfish Head merger. In 2021, based on our current spending and volume assumptions, we're planning for the growth rate of our operating expenses to be below our top-line growth rate, delivering leverage to our operating income. We've been operating our breweries at full capacity for many months, and like our competitors, we've had out-of-stocks during the quarter. We expect wholesaler inventories to return to normal levels in the fourth quarter as we recover from our summer seasonal peak. Improvement in our supply chain performance continues to be our top priority, and we're in the process of doubling our internal and third-party brewery can packaging capacity for 2021. Our new can line at our Cincinnati brewery began production late in the third quarter, and we recently added additional third-party breweries to the canned capacity. As reflected in our 2020 and 2021 capital spending guidance, we'll continue to invest heavily to increase capacity as appropriate to meet the needs of our business and take full advantage of the fast-growing hard saucer category. However, the increased usage of third-party breweries and an increasing percentage of variety packs in the company's overall product mix come at a higher incremental cost. As a result, our gross margins and gross margin expectations will be negatively impacted until the borrowing growth stabilizes. We began a multi-year supply chain transformation project in 2020 to automate and change internal processes to increase efficiency and reduce costs. The timing of the benefits of this program will depend on the timing and amount of our future borrowing growth. We'll continue to prioritize borrowing delivery over margin optimization in this high-growth environment. While we're in a very competitive business, we're optimistic for continued growth of our current brand portfolio and innovations, 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 in hand, year-to-date depreciations reported to the company through the 42 weeks ended October 17, 2020, are estimated to have increased approximately 39% from the comparable weeks in 2019. Now, Frank will provide the financial details. Thank you, Jim and Dave. Good afternoon, everyone.

For the third quarter, we reported net income of $80.8 million, an increase of $36 million, or 80.6% from the third quarter of 2019.

Earnings per diluted share were $6.51. an increase of $2.86 per the rooted share from the third quarter of 2019.

This increase was primarily due to increased revenue driven by higher shipments, partially offset by lower gross margins and higher operating expenses.

Shipment volume was approximately 2.1 million barrels, a 13.5% increase from the third quarter of 2019. We believe distributor inventory out of September 26, 2020, averaged approximately two weeks on hand and was lower than prior year levels due to depletion, outpacing supply constraint shipments. We expect wholesaler inventory levels in terms of weeks on hand to remain between one and four weeks for the remainder of the year. Our third quarter 2020 gross margin of 48.8% decreased from the 49.6% margin realized in the third quarter of 2019 primarily as a result of higher processing costs due to increased production at third-party breweries, partially offset by cost-saving initiatives at company-owned breweries and price increases. Third-quarter advertising, promotional, and selling expenses increased by $11.5 million from the third quarter of 2019, primarily due to increased investments in media and production, increased salaries and benefits costs, and increased freight to distributors because of higher volumes. General and administrative expenses decreased by $1.1 million from the third quarter of 2019, primarily due to non-recurring dogfish head transaction-related expenses of $3.6 million incurred in the comparable 13-week period in 2019, partially offset by increases in salaries and benefits costs. Based on information of which we are currently aware, we are now targeting full-year 2020 earnings per diluted share of between $14 and $15, an increase of the previously communicated estimate of between $11.70 and $12.70. However, actual results could vary significantly from this target. This projection excludes the impact of ASU 2016-09. Third-year 2020 depletion scores is now estimated to be between 37% and 42%, an increase in narrowing of the range from the previously communicated estimate of between 27% and 35%. We project increases in revenue per barrel of between 1% and 2%. Third-year 2020 gross margins are expected to be between 46% and 47%. a narrowing down of the previously communicated estimate of between 46% and 48%. We're going to increase investment in advertising and promotional and selling expenses of between $55 million and $65 million for the full year 2020, a change from the previously communicated estimate of between $70 million and $80 million, primarily due to lower selling expenses. This does not include any increases in freight costs for the shipment of product store distributors. We estimate our full-year 2020 non-GAAP effective tax rate to be approximately 26%, which excludes the impact of ASU 2016-09. We are continuing to evaluate 2020 capital expenditures and currently estimate investments of between 160 million and 190 million dollars. a change from the previously communicated estimate of between $180 million and $200 million, most of which relates to continued investments in the company's breweries. Moving forward to 2021, we're in the process of completing our 2021 plan and will provide further detailed guidance when we present our full year 2020 results. Based on information of which we are currently aware, we are targeting depletions and shipments percentage increase We project increases in revenue per barrel of between 1% and 2%. From the end of 2021, gross margins are expected to be between 46% and 48%. We plan increased investments in advertising, promotional, and selling expenses of between $130 and $150 million for the full year 2021, not including any changes in freight cuts for the shipment of products to our distributors. We estimate our full-year 2021 loan gap effective tax rate to be approximately 26%, excluding the impact of KSU 2016-09. We are currently evaluating 2021 capital expenditures, and our initial estimates are between $300 and $400 million, which could be significantly higher if deemed necessary to meet future growth. We expect that our cash balance of $157.1 million as of September 26, 2020, along with our future operating cash flow and unused line of credit of $150 million will be sufficient to fund future cash requirements.

We will now open up the call for questions. Since we are in different locations, there will be DMC on our side, similar to last time, and coordinate the answers.

Our first question is from the line of Vivian Asar with Cowan. Please proceed with your question.

Hi, good evening.

Hello.

So my first question has to do with your 2021 guide. You know, certainly that's been historically consistent and unique for you guys relative to the broader CPG peer group where you do do that. But given the uncertainty around COVID-19, and, you know, the potential for more closures, I think it would be helpful to understand what's driving that conviction and any underlying detail you could offer. Dave, I think I heard you say that you think all brands are going to grow. And certainly the Nielsen data from Tuesday would suggest that beer is in a better place, at least in the four weeks. But just any underlying detail I think would be helpful because that's well ahead of consensus in my estimates.

Let me take the first one on the 2021 guidance. You're right, there's a lot of uncertainty in the market, but when we look at the growth and what's driving the growth of the company, it's clearly hot sales and truly an awful twist of tea, which are the biggest components of our portfolio. Based on what we know today and how we see the market development developing in the current growth rate,

and we look at how we've grown distribution, and we project that into 2021, we feel that the range, there's a range that we're shooting for, actually we're shooting higher, but something that we can accomplish, based on the structure of our portfolio, and the growth rates of the categories that we're projecting. I mean, nobody has a crystal ball, nobody knows exactly where the hot cells are gonna go, But if you look at the different scenarios and, you know, we take a risk-adjusted approach, this is kind of what we have.

Yeah. Yeah, actually, just to build on what Frank said, I think when you look at, for instance, those two brands are driving, obviously, a lot of the growth. And if you look at some recent developments in Seltzer, I know it's slowed a little bit, but I think there's a lot of noise with that and with with canned shortages and other, you know, capacity issues that are still being cleared up. But if you dig into some of the data on Seltzer, you see some information rather that we're looking at the depth of repeat increasing pretty significantly most recently. So people who purchased the product three times or more are now like 31% of all the buyers versus 25% a year ago. So we're seeing people adopt it. we looked at some new data, category rejectors are declining from about 28% last year to 12% this year. So we're seeing people embrace hard sell to make it part of the repertoire. Another thing, too, that I think is a big one is that this year, as you know, because of COVID, many customers were not doing resets. In fact, very few did in the spring, for sure, and even in the fall. And there's a lot of space that was going to be allocated, probably 10 to 20% of space, next year will be allocated to the categories. We think there's still a lot of tailwinds in this category, and the question we'll probably come up with is to answer it. We think, I mean, this year, we talked about this before, the category will end up growing probably 180 to 200%. Next year, we're thinking, in our minds, it's going to be 80 to 100%. So it will decelerate by maybe half, but still you're looking at 80 to 100% growth there. I'll also say on the Twisted Tea front, Twisted Tea has really benefited significantly from people consuming more at home. And we've seen it, and pretty much every way you look at the brand, not just the measure channel growth rates, but the velocity, the household penetration, the repeat rates. And we feel very confident that in that brand, and that it's still a very small penetrated brand, a very lightly penetrated brand, as it gets more household penetration. in what consumers, we can see our way, pre-contour rates to very, very good growth, which was T next year, and then we can talk, I'm not going to bore you with the other brands, but there's a lot of innovation that we talked about, that we see across the board, for orchard, for St. Adels, for dogfish, that all, I think the difference next year, to me, is I feel like we're going to be rolling across the entire portfolio, and we'll continue some very significant growth in hard sell, but we're going to have contributors coming from every direction next year.

That's really helpful. Thank you. And in particular, Dave, I commend you for doubling down on those unique consumer insights, because You know, you offered them in February of 2020 on the demos around Truly, and you guys were absolutely right on that. So good job on continuing to stay close to the consumer. If I could pivot to my second and last question, it's a little bit more philosophical in nature. I was looking at these results and reflecting back on your May – 5th Cinco de Mayo 2017 Analyst Day. And, Jim, one of the things that you asserted, you showed us a very long-term stock chart, and you said this company knows how to manage through innovation cycles. And I think the proof is in the pudding here. And so what I'm curious about is, like, whether there is an evolution in your KPIs for the team as you work your way through those cycles. Thanks.

Yeah. Thanks, Vivian. And I do remember that stock day down at the brewery. And I'm glad you recall the assurances from that day because I think what I was talking about is Boston Beer Company for now 36 years has been built for growth. We have a very simple mission, long-term profitable growth. And that has... built into the company. It's not just KPIs because people are not primarily coin-operated like that. It is just part of our culture and part of what we wake up to do every morning is to find new, unmet consumer needs or new brands, new products and to drive growth in the existing products that we have because For us, not to be growing significantly is an unusual and very uncomfortable state. Does that help?

Very much so. Thank you.

The next question comes from the line of Bonnie Herzog with Goldman Sachs. Please proceed with your questions.

All right. Thank you. Hello, everyone. My first question has... Hi. My first question has to do with your FY20 guidance. So your full-year shipment and depletion guidance, it's really a pretty big step up, which implies, I think, quite a big increase in your shipment growth in Q4. So just would love to hear a little bit more color from you in terms of what you're seeing already in October and that gives you the confidence in this. And then, you know, I think about this also in the context that you're lapping a pretty tough Q4 last year with the sell-in from Truly Lemonade. So how confident are you in, you know, Truly Iced Tea Hard, you know, maybe the sell-in already? And then the last question on this is just anticipate, or are you anticipating that your depletions will outpace your shipments for the full year? You know, I'm thinking about that as, you know, out-of-stock pressures, potentially linger still in Q4?

I'll take the first one with guidance. What you see, we've taken it up because the increase that we're seeing will come through in Q4. And what has happened in Q3 is our definitions have really outpaced our shipments. And if you look at the results, it's It's about a five-point gap. And that has driven the wholesaler inventories to a bare minimum. It's like they basically, whatever we deliver, they ship it out. So the hard sales, the depletions, which is, in our minds, is the real sale, that has happened already. So we need to catch up and we couldn't produce everything that we could have sold. We couldn't produce everything that we depleted. So what will happen, and it has started happening actually in Q4 already, is that we started to catch up and replenish the inventory. So the shipments that we're projecting are to a large extent a catch-up of the depletions that have happened already. So that's kind of what's driving the guidance. to one extent. The other thing is that based on the market data, we see the, you know, it's a very seasonal business, as you know. We don't see that much of a decline as we have originally projected when we were sitting in the middle of the year, quite frankly. So there's additional volume coming. It's coming towards the end of the fourth quarter. What that means is, you know, everything that we're producing is going to replenishment. It's going into higher sales. But the flip side is that we will have less pre-bird than what we had projected originally. So the confidence level, that's where we raise the guidance, is relatively high.

The range, the difference between the lower end and the upper end, really depends on how much we basically can produce. Do we have all the materials and do we have the capacity? That's what it comes down to.

Okay, that's helpful.

And Brian, do you want to talk about, I mean, just a quick one on Truly Tea. We feel that this product is tested very, very well. We're very similarly to lemonade. And you think, what lemonade is unique and is distinct in the category? And it's going to provide something that's a very different kind of variety than what's out there in the category right now. So it's sort of delivering on what some drinkers are looking for, but also just, you know, for what it's worth as a read, I mean, our customers, large format, small format customers, they're all in on this thing. So we've got a lot of support already with our customers and with our wholesalers, and, you know, we feel confident that we're going to get off to a really good start with this new product.

You know, that's helpful, and that's consistent with what I'm hearing. And then that kind of brings me to my next question was, You know, as I think about your FY21 guidance, which, again, it's great that you have the visibility and confidence in your business. So just on the truly point, just want to confirm that that guidance for next year does imply that you expect truly to double again. That's just a quick question or verification. Then I would love to get a little bit more color or understanding on your guidance for the incremental spend in 21, which is a pretty big step up. So just trying to understand the magnitude of that and if that might end up proving to be too large of a step up. And I'm saying that or asking that especially given what I see as probably efficiencies in and scale you're likely getting as your company really is getting so much bigger and truly, you know, it's becoming such a large part of your portfolio.

Yes. So, I'm sorry. I'm sorry. So, for the first question, you know, we're at the midpoint. We're at 35 to 45 percent. What we're Projecting is that the hot salsa category can double.

That's not fully reflected in the guidance, as you can imagine. As I said before, everybody has different projections.

We're looking at different scenarios, and we're looking at what are the different growth scenarios that we have, how much can we produce. We're definitely resourcing against the upper end of the range,

but the guidance doesn't fully reflect yet a doubling of truly. That's number one.

The second one related to the APS spend, you're looking at the growth that we're having, and I tend to mention that in the earnings calls. We don't want to really spend our APS based on the formula, based on dollar per case or percent of net revenue. We're looking at what do we need to invest to drive the business. We frequently adjust during the year depending on what is working, what is not working. This year we started the year. We clearly wanted to spend more. COVID happened. We had the impact on the on-premise, so we didn't spend as much as we said at the beginning of the year. we are prepared to spend against the world because we believe now is the time as we're building, as the category is being built, to capture the market share, to capture our place in the category, and then we will optimize later on. We clearly believe we're going to get leverage out of the growth that we're having. We don't know exactly what the leverage is. We're not targeting a specific leverage. We're targeting leverage the long-term growth of all brands that invest in what is needed, but even at the high end, we believe we're getting leverage within the P&L.

How that exactly looks like, we'll see as the year unfolds.

Okay, so even in FY21, you expect there could be leverage on the bottom line? Yes. Okay. Thank you so much.

Next question. I'm sure in the line of Eric Serrata with HyperCore. Pleasure to see you. It's your question.

Good afternoon. Hi. First I want to see if you could give some perspective in terms of how you're looking at Lemonade for year two. Obviously some new heavy-hitting competitors coming on with some big lofty ambitions behind it. If you could give some perspective as to how you're thinking about how that performs in year two, that would be helpful. And also what your consumer testing is showing in terms of interaction between lemonade and truly hard iced tea seltzer. Are you seeing any interaction there? And what degree of incrementality do you expect from the iced tea variant? Thank you.

Okay, Eric. So let me I think, first of all, as it relates to Lemonade, we've invested a lot in building that brand to a 10th share as far, and we will continue. In fact, we'll be investing more in that brand next year. So when we enter the year, at a 10 share, you know, the largest penetration base and repeat base of any of the products that were launched this year. And they're good tasting products. We enjoy it in a very good place. I think what we like about this is that it's really, it's going after, here's an interesting point, it doesn't really interact with Mike's Heart Lemonade. It's a very light interaction with Mike's because they have to be consumers looking for When we learn we're looking for something that's both different drinking experience and different occasions, it's going after, it's really attracting such a consumer. So, we took our time, we were a consumer, we just ran, and there's a reason why, you know, it's under truly, and for the same reason why we wouldn't do a twisted tea hard seltzer, which we just don't think is the right consumer, but the right direction to go. truly being the hard seltzer brand that provides ultimate refreshment and seltzerizes different flavor experiences. Men in the bowl, you know, flavor, but only 100 pounds of organic sugar. And the tea plays there, lemonade plays there very well. And so, you know, we'll continue to build this brand because it's obviously a big part of the portfolio. I mean, theoretically, the cannibalization rates across the brand, we're not that concerned about them. really because it's a truly brand. It's one brand. What the mix looks like a year from now, personally, I don't care as long as we're going to share. That's all I care about. We're going to go share. But having said that, we did, you know, we have looked at some of the data, and there's a couple sources. So, for example, just to understand lemonade this year, how incremental is lemonade to the truly brand, which I think you're asking, is if you look at Different sources, we looked at our numerator, having that, this could be pretty precise, and it's not this precise, but they had it at 71% incremental. Nielsen had it at 95% incremental. I don't believe either of those numbers, but from a pure consumer perspective, it's called between 70 and 95% incremental. What you've got to remember, too, is that there's cannibalization that happens when you have to go through an wholesaler, and you have to get your wholesaler to be supportive. this cannibalization, we have to go through the customer. So that's similar to 95 is probably, you know, understated, but it's certainly at a point where we're happy with it, and if anyone's going to cannibalize us, it might as well be us. So I think, you know, as it relates to tea, we don't know yet, truly tea, until we put it out there. My guess is it might be similar in that range, only because it's very distinct from the base truly product flavor experience as well as to eliminate flavor experience.

Great. That's real helpful. And I'm hoping for a little bit of perspective on what you alluded to in terms of the noise or in terms of the slowdown. in the hard seltzer category recently, obviously continued slim can shortages and overall out of stocks. But any additional color that you're seeing in the marketplace? Are there any signs of consumer demand weakening? Are you looking at this as purely a supply issue? You guys are clearly outperforming the category, but any perspective as to where the category is going in the short term? would be very helpful.

I think that would be an easier question to answer like in a month or two from now, but I think, and this is my personal opinion, maybe in general, it depends on different points of view, but I do think there's still cancer in Q4. There's no question about it. I think it's affected everybody. There's still, you know, there's still capacity issues out there. But when I look at the Trulie, actually when I look at the category, I mean, you know, Trulie and Micah are both growing, you know, penetration, repeat rates are going up. Trulie's velocity has been a triple, growth has been a triple digit for six months, and it's not slowing down. So I don't see any fundamental issue. But ultimately, if it's growing, if we're growing 200% now in the category or close to that, it clearly can't sustain. And so this is the beginning of a metering down to 100%. I don't know more. I put probably that in more than a few months. But there's nothing else I've seen. As I mentioned, I didn't see if I was answering Vivian's question. When we look at the consumer data, there's nothing in the consumer data that would suggest anything more changing. When you look at the market data, yes, there's something might be afoot. But, again, I think it's too early to draw any conclusions on that. Great. Thanks so much. I'll pass it on.

Thank you. As a reminder, to ask a question today, you may press star 1 from your telephone keypad. The next question comes from the line of Kevin Grundy with Jefferies. Please proceed with your questions.

Hey, great. Good evening, guys, and congrats on the strong results. First one for Dave and Jim, just perhaps a little bit more color on your on-premise trends, specifically how that part of your business performed in the quarter and what you have contemplated in your initial outlook for 2021, of course, with that channel being in that part of your business more relevant for your beer and cider brand. And then I have a follow-up on Hart Seltzer's. Thanks.

Okay. I would say in terms of on-premise trends this year, you know, since we're facing the back half of the year, think of it as probably down 50% within the bus, is probably the way to think about it, across, pretty consistent across all grants. I think, now again, when we look at 2021, I'm not sure if we're gonna talk in detail about channel, so, but I agree with you, so we don't, I just got, you know, I got that sense, but we don't think it's gonna come back really quickly. It just doesn't seem that way. It's until, you know, until there's a turn one way or the other, people are not gonna be going back to bars and restaurants the way they had before. Jim, I don't know if you have any other thoughts because you've been talking to a lot of folks lately about that world.

Yeah, I'm pretty much in agreement. Our business was just sort of devastated because not only were we more heavily on-premise, but our on-premise is heavily draft. And even within the on-premise segment, as people opened up, they didn't fill all their draft lines. They emphasized package because package is easier to sell to go. So the on-premise has just been really tough, and we've pulled our sales force in and just had them start to go out tentatively a few weeks ago. So it's been probably even disproportionately hurt. And we're just looking at the same murky crystal ball that everybody else is, and we're projecting that consumers just can be hesitant to go out to a bar and to drink for a while. Maybe this time next year things will be looking like whatever the normal is, but behavioral patterns will have changed, bars will have closed, restaurants will have closed. So I don't see it fully recovering even next year.

Got it. Jim, just to stick with that for a moment, given that dynamic and the fact that you guys are cautious on that front, What's the level of visibility? I appreciate that it's difficult. I know it's a tough question, but you guys are planning for all of your brands to grow next year. It sounds like the expectation is the on-prem is going to be challenged. Outside of the fact that you'll be cycling some easy year-over-year comparisons and there's some hope on the innovation front, what gives you confidence then that Dogfish Head and Sam Adams and Angry Orchard can indeed return to growth next year?

Well, you hit the two biggest. One is recycling really crappy numbers, and the other is some innovations. I think I would, on top of that, put the tendency that arose during these pandemic times on the part of retailers as well as wholesalers to focus on their bigger brands, on their better-known brands, the strong brand pulls. There's certainly a decline in consumers wanting to spend a lot of time In the grocery store, shopping in front of the beer cooler, people want to get in and get out. We believe that as on-premise does come back, it'll focus more on strong brands and similarly, uh, the trends at off premise retailers and wholesalers have been to clear out some of the clutter and devote more space to, you know, the, the brands that are leaders in their category. And Sam Adams, uh, And Twisted Tea and Angry Orchard are number one and Trulia is a very strong number two in its category. So we think that strong brands will benefit disproportionately even throughout next year.

Got it. Thanks, Jim. One quick follow-up and then I'll pass it on. Just a broader question on what you're contemplating in your guidance next year with respect to competitive intensity. And I think the context is here, broadly within the industry, you saw a big pullback in investment spending given the negative implications from the pandemic. I think that's widely expected to change, both around advertising and marketing, perhaps trade support, et cetera. We touched earlier in the call the discussion around Marc Anthony Brands, and that innovation is clearly aimed at your portfolio and the success you've had with the Lemonade product. Coors now just sort of leaning in. Topo Chico, you know, at least they will be early next year. They just launched Coors and Vizzy, et cetera. I mean, we could spend the rest of the call kind of going through the litany of products that would be entering the category. What are you contemplating in your guidance with respect to competitive intensity? How do you expect this to evolve? I mean, I can't recall a product category kind of like this where there's just been so much interest, so much innovation, so much investment. Companies previously only operating in non-alcohol space, moving into the alcohol space. It's very, very unique. So how are you guys thinking about that, and how has that been contemplated in your initial 21 outlook? And I'll pass it on. Thanks, guys.

Okay, that's good. I'll start that one. I think everything you mentioned, we contemplated. Obviously, we're very aware of everything that's happening. And in fact, nothing that's been announced has really been a surprise to us. I think if you go back, interestingly, if you go back like two years ago, two or more probably about 75% of the category. And I think there were like 12 brands or something like that in the category. This year, there's something like 120 or 130 brands in the category. And Cure and LaCroix are still 75% of the category. So we think it's going to have that, and then we're investing on our walls, or assuming it's going to happen by itself, we're going to fight until the end to make sure that we're very strong with Cure, ideally with LaCroix. And we're investing aggressively in building a brand, which we think has come a long way in the last couple of years in terms of brand awareness, in terms of penetration, repeat rates, all the rest. And, you know, we can't stop what Ernest is going to do. And it's going to be another food fight in 2021. But we feel, you know, we feel like we're ready for that. And we have plans, as Frank had mentioned before, we're going to spend whatever it takes. So, yes, we're going to operate a leverage next year. That's what we plan to do. But guess what? If things, you know, things change competitively, we're going to, you know, we'll tell you on Ernest's call what we're going to do. And it's going to be to continue to invest. This category is way too valuable. to not fight to win, and that's what we're going to do. And I would also say with some innovation, you know, I think being first looking, and Mark and other brands have done an amazing job with their brands. Obviously, Mike's is a great brand, but we're going to have a 15-month head start and a 10-share brand. That gives us an advantage. We're going to do everything we can to save every ounce of that share. And guess what? We're launching a tea brand, which, by the way, we know how to do tea. I think we've proven, you know, over the years, or I think we're learning once, that we understand how to do tea well. And it's tea and fruit. It's a tremendous product. And it's going to give people something else to go to. And we also know in this category, people, consumers are looking for what's new. They're looking for what they want with whatever's next. And honestly, the number names, it's only half. We'll continue to make it half. But what's next, next year, in our mind, is going to be tea. and maybe some other things too. But honestly, this is what makes it fun. Because if we can find a way by ourselves, so we've contemplated everything, nothing has shocked us, no announcements, and we're ready to go.

Got it. I appreciate all the time. Good luck, guys.

Thanks.

The next question comes from the line of Stephen Powers with X Bank. Please proceed with your question.

Yeah, hey, thanks. Good evening. Just a few more clarifying questions on the 21 outlook. I guess, first, you talked about Truly Tea relative to base Truly, but how do you expect Truly Tea to interact with Twisted Tea, if at all, with any meeting? And then, appreciating that you don't really care, I get it, what leg of the Truly offering leads growth so long as the overall trademark is growing? Can you talk at all, I guess, whether... You expect lemonade to ultimately be bigger than base truly by the time we get to the end of 21. It feels like that's the trajectory we're on. I just want to clarify your thinking on lemonade versus the base often.

Okay. Okay, Steve, I think that's right. We don't know how much truly tea is going to cannibalize Twisted Tea, but what we can do is look at what the interaction between Truly Lemonade and Mike's Hard Lemonade, which I think is a fair proxy. And as I mentioned before, I think only about 10 to 15% of Truly Lemonade's revenue comes from Mike's Hard Lemonade. And it's actually never, that was not our goal, to steal consumers from there, because we think it's just a very different, it's a different occasion, different consumer. And so if you apply that to the truly tea versus twisted tea, so say 10 to 15% are interactive. So we don't think it's huge. And again, the drinking experiences are very different, and the consumers are very different. In fact, if you look at the truly consumer, the truly consumer is younger, more educated, more upscale, and more diverse than the twisted tea drinker. So we think in terms of managing cannibalization as much as you can. I think we've got to manage. Whenever it happens, it happens. We feel pretty good about that. As it relates to rent-me-through, how do they become, I don't know, we're not planning on that. I mean, as far as probably very unlikely, we think that we will continue to actually have more news on the things true to business next year that we're excited about. I think You know, it's very unlikely the lemonade would be bigger than that. But again, at the end of the day, all that matters is that we grow share in total, and that's how we're going to measure success next year. It's great to gain share through the Trulio trademark. And the last thing I'll say is that one reason I can say this is because we have a pure plate brand called Trulio that stands for hard sell, sir. And so we're not, if we're easier to innovate than we did in that platform, then we would come from another place.

Yeah, thank you. That makes a lot of sense, and I appreciate the color. I guess if I could also ask about it, kind of splicing it to my channel, you talked about 10% to 20% of off-premise space being allocated to Seltzer next year. I guess how does that compare to what you estimate the category was allocated or has been allocated in 2020? What's really your true visibility to that number? And I'm assuming you do, but do you expect to lose relative share of shelf or of cooler space to sustain itself in 21 against that backdrop? And then a little bit on the on-premise side, Jim, you had talked about this, I think it was the last call, just about... maybe some untapped upside in Seltzer and truly on-premise. And I guess I just would love a little bit of insight as to how much that thinking has factored into your 21 outlet. Do you think that on-premise demand can be material to truly in 21, or is it really just a story of continued off-premise strength? Thanks.

Okay. And so, Steve, I think the first part, and then I'll hand it over to Jim for the second part. I think in terms of space, It obviously varies by customer and by geography. Today, when it's out there, it's probably around 10%. In some places, it could be very, very high. It could be as high as 20% in certain places now. But on average, we're thinking right now, it's probably about 10%. And based on what our customers have been telling us this fall, is that they expect the category to be 15% to 20% a total year. And they're going to give it its fair share of space. We could be going from 10 to 15 to 20. And, again, I think this year was kind of everything was sort of aborted because of the pandemic. So it's hard to really understand where we're starting from or where we're at. But I think because we didn't have that chance to do recess this year, next year could be that much more impactful. And I think what we're constantly looking to do, it's going to be more cold space. It's going to be more end caps. It's going to be more freestanding displays. I don't know what to find to put inventory anywhere they can. you know, to help, you know, to support, to represent the size and the growth rate of the category. So with that, I think I'm going to jumpstart there on premise.

Yeah. My guess is to, you know, how HeartSeltzers fared on premise this year was, you know, not as well as one would have expected given, you know, number of hard seltzer drinkers who are going to on-premise places and carrying their drinking patterns with them. But during these COVID times, the on-premise operators were not looking for new items. They weren't looking to add stuff. They weren't often even taking sales calls. from distributor salespeople or supplier salespeople. So there were very limited opportunities to pitch new items and retailers were not especially focused on that. They had their hands full with everything else they were trying to do. Um, and I think, you know, I still believe that the seltzer category is underdeveloped on premise. Uh, Now, on-premise, when it reopens, I think we'll all be thrilled if it ends up at 15% of overall consumption. So that tells you the slice that we're aiming at when on-premise does start to come back. So I think it will be basically Seltzer on-premise will be a slow growth that won't explode as much as it did off-premise, where people are talking about it being 15% or 16% of the beer category within a year or two.

Thank you very much to both of you for your commentary. Appreciate it. Thank you. Thanks, Gene.

Thank you. As a reminder, you may press star 1 to ask a question at this time. The next question is from the line of La Rondette with Guggenheim. Please proceed with your question.

Hello, Gene. Great print. Well, congrats on one of our two weeks of . First question is really just a check because I may not have heard you well. Are you saying that you would be shipping Trudy Hansen's OT at the end of this year or just starting next year? No.

So I can answer that one right away. We will ship next week. Trudy will not be shipped at the end. Okay. That's definitely next year.

Thank you. Thank you. There's one for you and then there's one for Jim. That's I understand very well the purpose and the potential, I think, of Trulia. We've heard about this in the last few weeks. We wanted to understand a bit better about the role and potential of Trulia Extra. We've been testing it in some places in New York and some other places. So we need to attract a younger, more male consumer into the franchise. What's the role for Trulia Extra? And what's the potential? We are believed a bit more limited now.

I believe it is focused on convenience stores. That is a channel. where truly is less developed than in food and multi-outlet stores. And it does bring in a different customer that is maybe a little less calorie-conscious, health and wellness-conscious. in a sense because your base hard seltzer tends to be 100 calories, 5 ABV, you know, maybe 1 gram of sugar. And all of that changes in a C-store because it's 8% ABV and it's in a 16-ounce can. So you're going to end up with, you know, 220, 230 calories in it. So the consumer is approaching... something like Truly Extra with a different mentality. They want something refreshing, easy to drink. They're a hard seltzer drinker, and they're in a C-store, and they're pinging up a single serve. So really it's a different occasion for hard seltzer than we've seen so far. And how big is it? We don't really know. The tests were – It did well, but again, it was crazy times, and it was New York, and it's maybe a little different market than the bulk of the C-Store. This is the bodega and the small store. It's a little different than a C-Store in Arizona.

And, Barry, I'm truly excited. I mean, I really like what you've been doing in marketing and that, but is that more potentially confusing for the consumer, the true consumer, that the media truly needs more carriers and that typically not respond to the, I would say, to the central playbook. So could you explain this to me, please? I'm sorry, do you repeat what you said? I missed the end of that. I missed the question. Can you repeat that again? Sure. I really like everything you've been doing on Trulia and Vidica for the last few years. But I really like to understand and be truly excited about adding some more, maybe some confusion for the true consumer having much more calories. So is that kind of a risk to the franchise? And how do you see that? And why are you taking that potentially? Okay, I got it, I got it. So I think Jim sort of answered that question. I think it's a different, you know, we see that it's a different consumer, it's a C-suite consumer, it's more younger male who might be buying a lot of traditional FMVs, who might be looking to branch out and try something different. So we're sort of appealing to somebody in that who isn't necessarily looking for the 100 calories diet, per se, and because it's, because, you know, we're sort of, you know, we put it into convenience stores, it's not going to be broadly, at least not our intent right now, to make it broadly available in large format stores or Nike bags, but we think we can, you know, we're narrow casting to that, you know, to that consumer, and, you know, we don't, we think it will be successful, but we're not, you know, we're not banking a year on it, necessarily, but as Jim said, it was, it was overseen from New York City, New York City was unnecessarily whether it's, you know, if you're in the store, you're out of the circle of Canada, Arizona, or California, but we think the brand, because it's sub-branded, we sub-brand it extra, and the sub-branding is actually very large, and it's actually, I think, better than Truly. So it clearly says to the consumer something is, it's from Truly, but it's something different. And we're trying to thread the needle there. We think we can, but we'll find out, we'll find out next year. Mm-hmm. Yes. Question on the capacity for truly new trees and significantly for this coming year. I mean, planning for doubling, actually, coming next year. Is there something to rebalance between contract manufacturing and your in-house manufacturing? I was talking a bit next year or having an ultra percentage of your Could you give some color here to understand a bit more of the dispute between HMALS and contract manufacturing from next year? Yes, Laura, this is Frank. The long-term goal is to rebalance between internal and external. But the number one priority, quite frankly, at the moment is to get the capacity to be able to support the doubling of the category. That's the base premise, and naturally, it's a little faster to add it externally, because you can talk to different parties, and that's what's happening. So our share of internal manufacturer versus external manufacturer will continue to shift towards external manufacturing in the short term, within 2021. Community, we're also looking, we're building capacity internally and externally, but it's a little faster externally, and that's what's shifting the balance.

Longer term, community, we're looking at bringing more in-hours and thereby also bringing the cost down and getting the margin out.

Thanks, Frank. My last, I promise, my very last question for you, Gene. For the lower, like you, Romina, What does it mean to launch a zero icon webinar beer? And why are you doing this? And what's the potential and taste in that you're expecting from that beer and the reception from consumers? Jim, are you there now?

Oops, sorry, I was on mute. That's a good question, Lauren. And, you know, I'll start out with a confession because after I finished my introduction, I poured myself a Sam Adams Just the Haze non-alcoholic IPA, and I'm almost at the bottom of the glass. So there are – it's my way of illustrating that something like Sam Adams Just the Haze is a product that has really never existed before. You know, there have been plenty of non-alcoholic beers, but they were always compromises. You know, you knew you were drinking an inferior product, and it didn't have that much appeal other than, you know, odd occasions or people who used up their quota and couldn't drink alcohol anymore. And the word... We don't have, you know, big volume projection numbers for it. We know it's going to be, again, a long-term build. But it is something that what I'm excited about is it is as good as an alcoholic IPA. And we've tested it in consumer testing and had it rated – and blind, double-blind testing with consumers had it rated at or above the leading alcoholic IPAs out there. So bottom line, we think that by introducing a new product that's never existed before, it will find, just by virtue of its product characteristics, it will find new drinkers and new occasions for drinkers. And how big and how quick, we really don't know, but it's always been our experience, is if you give some consumers something that they've never had before, that really is an improvement in terms of taste and quality and character, over any of the other options out there. You're going to have a market. How big? Depends.

Thank you.

It's fun having a beer while I do this.

Our next question is from the line of Sean King with UBS. Please receive your questions.

Thanks for the question. I guess with respect to variety packs and gross margins, I recognize that variety packs are becoming a bigger part of the portfolio, which is really a function of Trulie's weight in the portfolio. But I guess within Trulie itself, are you starting to see consumers start to settle into preferred flavors and moving away from variety packs?

Yeah, this is David Johnson. Can I do it?

Well, I was just going to say that's basically no. We wondered when it was going to happen. It hasn't happened yet. Okay. All right. Understood. Thank you. You know, go stand next to a big, you know, display of LaCroix and watch people shop it. Almost nobody buys, like, three 12-packs of the same flavor. They don't have variety packs, but consumers will typically buy at least two different flavors when they shop. So I don't know, but it just hasn't happened, and we've been thinking it would, but we haven't seen it. Very helpful. Thank you.

The next question is from the line of Bill Kirk with MKM Partners. Please proceed with your question. Hey, thanks for taking the question. So mine's on loyalty within seltzer. Do you have any research that shows how many brands are in the seltzer drinker's proverbial fridge and maybe how that would compare to how many brands are in, say, a craft beer drinker's fridge?

Yeah. The last time I looked at it, and this was probably six months ago, it was small. It was a small repertoire, like two or three. There's probably a good thing for us to look at now, but again, I think if you just look at the share distribution and the category being the top 2.75%, by definition, I think that's going to tell you it's going to be a smaller repertoire than the craft, for sure. But don't have the exact number to share with you.

And from the research, it's not... really quantitative, but focus groups and qualitative and sort of anthropological type research. General truth would be that I think White Claw and Truly are substitutable. You know, you have people who drink one, but they'll drink the other. The substitution for the smaller brands, the beer brandeds, seltzers is less. So you've kind of got two leaders that share preferences, and we didn't find lots of people who are only drinking one of the smaller brands.

Got it. That's super helpful and all for me. Thank you.

Thank you. At this time, we've reached the end of our question and answer session. I'm going to turn the call over to Mr. Jim Cook for closing remarks.

Great. Well, thanks, everybody. Thank you for your patience going through all of this, and we will speak again in a few months. Cheers. And I did finish my Just the Haze, so.