This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk07: Greetings and welcome to the Boston Beer Company second quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn this conference over to your host, Mr. Jim Cook, founder and chairman. Thank you, sir. You may begin.
spk00: Thank you. Good afternoon and welcome to everyone. This is Jim Cook, founder and chairman, and I'm pleased to be here to kick off the 2021 second 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.
spk02: Dave will then turn the call over to Frank, who will focus on the financial details of our second quarter and showcasing Trulie's superior variety of flavors and the colorful and adventurous nature of Trulie drinkers. Based on the brand's innovation leadership, strong brand building, and growing cultural relevance, we believe Trulie is well-positioned to continue to grow share. We overestimated the growth of the hard seltzer category in the second quarter and the demand for Trulie, which negatively impacted our volume and earnings for the quarter and our estimates for the remainder of the year. We increased our production of Thule to meet our summer peak and have had lower than anticipated demand for certain Thule brand styles, which has resulted in higher than planned inventory levels at our breweries and increased supply chain costs and complexity. At the same time, we've been experiencing out of stocks on certain of our canned products, most significantly on our Twisted Tea brand family. We expect wholesaler inventories of Twisted Tea to remain tight for the rest of the summer. Our outlook for the hard seltzer category in the second half of 2021 is uncertain, and we planned our capacity and spending based upon several volume scenarios. We'll continue to manage our capacity requirements through a combination of internal capacity increases and higher usage of third-party breweries. We continue to work hard on our comprehensive program to transform our supply chain with the goal of making our integrated supply chain more efficient, reduce costs, increase our flexibility to better react to mixed changes, and allow us to scale up more efficiently. While we're in a very competitive business, we're confident in the 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. Based on information in hand, year-to-date depletions reported to the company through the 28 weeks and to July 10, 2021, Our estimate would increase to approximately 32% for the comparable weeks in 2020. Now, Frank will provide the financial details. Thank you.
spk11: Thank you, Jim and Dave. Good afternoon, everyone. For the second quarter, we reported net income of $59.2 million, a decrease of $.9 million, or 1.6% from the second quarter of 2020. Earnings per diluted share were $4.75, a decrease of 13 cents per diluted share from the second quarter of 2020. This decrease was primarily due to increases in operating expenses, lower gross margins, and higher tax rate, partially offset by increased revenue driven by shipment growth. Shipment volume was approximately 2.45 million barrels. a 27.4% increase from the second quarter of 2020. Shipment volume for the first half was significantly higher than depletions volume and resulted in higher distributor inventory as of June 26, 2021, when compared to June 27, 2020. The company believes distributor inventory as of June 26, 2021 averaged approximately five weeks on hand and was at an appropriate level for each of its brands except for Twisted Tea, which has significantly lower than planned distributor inventory levels for certain styles and packages. Our second quarter 2021 gross margin of 45.7% decreased from the 46.4% margin realized in the second quarter of 2020, primarily as a result of higher processing and other costs due to increased production at third-party breweries, partially offset by price increases and cost-saving initiatives at company-owned breweries. Second quarter advertising, promotional, and selling expenses increased by $61.3 million from the second quarter of 2020, primarily due to increased brand investments of $41.2 million, mainly driven by higher media, production, and local marketing costs, and increased freight to distributors of $21 million that was primarily due to higher rates and volumes. General and administrative expenses increased by $3.3 million from the second quarter of 2020, primarily due to increases in external services and salaries and benefits costs. Based on information of which we are currently aware, we are now expecting full year 2021 earnings per diluted share of between $18 and $22, a decrease from the previously communicated range of between $22 and $26, excluding the impact of ASU 2016-09, but actual results got very significantly from this target. We are currently planning increases in shipments and depletions of between 25 and 40%, a decrease from the previously communicated range of between 40 and 50%. We're targeting national price increases per barrel of between 1 and 3 percent. Full year 2021 gross margins are currently expected to be between 45 and 47 percent. We plan increased investments in advertising, promotional, and selling expenses of between $80 and $100 million for the full year 2021, a decrease from the previously communicated range of between $130 and $150 million. These amounts do not include any increases in freight costs for the shipment of products to our distributors. We estimate our full year 2021 non-GAAP effective tax rate to be approximately 26%, excluding the impact of ASU 2016-09. We're not able to provide forward guidance on the impact that ASU 2016-09 will have on our 2021 financial statements and full year effective tax rate. as this will mainly depend upon unpredictable future events, including the timing and value realized upon the exercise of stock options versus the fair value when those options were granted. We are continuing to evaluate 2021 capital expenditures and currently estimate investments of between $180 million and $230 million. a decrease and a narrowing from the previously communicated range of between $250 million and $350 million. The capital will be spent mostly on continued investments in our breweries and could be higher if deemed necessary to meet future growth. We expect that our cash balance of $103 million as of June 26, 2021, 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.
spk07: At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation film will indicate your line is in the question queue. You may press star 2 to remove your question from the queue. For participants using speaker equipment, it may be necessary for you to pick up your handset before pressing the start keys. One moment while we poll for questions. Our first question comes from the line of Bonnie Herzong with Goldman Sachs. You may proceed with your question.
spk08: All right. Thank you. I guess I don't maybe even know where to begin. I understand that the category has been flowing. is aware of this. You know, that said, I'm truly struggling and yes, pun intended, with how meaningfully your results have deteriorated. You know, I guess I'm saying this because even as recently as May, your tone and comments suggested that even, you know, with a slowdown in the category, you could still deliver relatively strong growth and hit your full year guidance. So I guess for me, this begs the question, You know, how confident are you that you're going to be able to hit your new guidance and, you know, really how much visibility do you have in your business?
spk02: Okay, Bonnie, this is Dave. Let me take a shot at that. I think first of all, when we spoke in our call in April, everything at that point, we'd hurdled the first, that first big, you know, COVID stock up period in March and April, we hurdled it really well. And so did the category. And even to the moment of our call, we felt really confident in where the category was going. And what seemed to happen really the May, June stock up overlap, we really hit, you know, we kind of hit that inflection point in the S curve where things went from high double digit growth rate to low double digit growth rate. And that was the first signal really as we got into May and June. And we had expected to hit that second bump better. Now, when you look at, if you look at the brand's performance, okay, just for perspective, Truly has outgrown the category for 11 months straight since last September. Truly has outgrown the category by 2x since January. Truly has outgrown the category by 3x in the last 13 weeks. It's the one brand that's increased household penetration significantly. So we've grown our user base by almost 40% for Truly, which means the innovation is working. So as we mentioned just earlier, Tea's performance is very well. Punch has performed very well. So we're growing the business. We're actually bringing in younger and more multicultural consumers. We're seeing that with tea and with punch. So the category, I think, I guess to get back to the question, the category went down to basically over the last 13 weeks was call it 10%. And we were going between 20 and 30. So it did take a more severe drop. And let me give you a couple of the thoughts of why that occurred. Yeah, so you hit the S-curve, you know that we can see that. Unfortunately, that's looking backwards. It's kind of hard to see it coming looking forwards. Jim had referenced some things in his opening remarks. One about, I think, just the proliferation of brands in this category that has occurred. There's a herd-like mentality in this business, broadly, and I think people try to bring new brands into the marketplace, and there's a sameness to these brands. There's a lack of originality, and I think what's happened a little bit, a little bit of the luster of the specialist, the excitement for some consumers has been lost. Now, there's 220 brands and 1,000 SKUs, according to IRI, in the category right now. That's about 50% larger than last year. And we're seeing our retail customers are still trying to support all of them. But that's going to change pretty quickly. The dam is going to break on that one, and the long tail will be paired up. So you have that dynamic going on. Also, this move from off-premise to on-premise, 3% of the mix within on-premise is hard seltzer. It's like 10% or 11% now, however you want to look at it. And off-premise, we think it's going to climb. And actually, our team feels very confident. We've added 4,000 truly draft lines. We're getting the distribution, but it's not going to overnight all of a sudden switch from one channel to another. But we feel pretty confident that that's going to continue, and we've always believed we have confidence in that. I'd say maybe we thought it would move more like a light switch than it has been more gradually, but it's moving certainly in that direction. As it relates to, just to finish off, I know it's a long answer, but it was an important question. Where's the category goes? How can you guys have faith in your guidance now? The category, so we're kind of out of the, we're going to forecast the category business. That's not what we do well at. We grow brands, we grow businesses. So if you look at the third-party data providers, though, that are out there, and you guys all work with them, the range for the full year is about 20% to 50%. Okay, so that's the range you're coming in at, at 20% to 50%. We believe, if it's at the low end of that range, if it is, we can continue to grow two or three times that rate. We've been doing it. for a long time now, we feel very confident. If it goes to the high end of that range, we'll probably not be growing two or three times 50%, but we know we can grow faster than the category. So again, we think if you look at that range, low end we can grow significantly more, high end we can grow more, and we're going to grow share this year. So that's sort of how we're looking at it, and that's how we kind of get to this number. So I don't know if anybody has anything else to say on that one. I mean, the rest of it, but let me say one more thing. I mean, Twisted Tea is growing significantly. And it will be a half a billion dollar business this year. So we have a lot of confidence in that. We know a footfall with some of our supply chain activities where we're a little bit short on cans. We're scrambling on that and we're coming back by the end of the summer on that. So we feel very confident in Twisted Tea. And obviously on-premise, as you heard, is really unleashed growth for Dogfish and for Sam Adams. I'll stop there, Bonnie. You can follow up if you want to do that.
spk08: No, I appreciate the color. It's helpful. So thanks for all that. I'll pass it on. Thank you.
spk07: Our next question comes from the line of Vivian Aver with Cowan. You may proceed with your question.
spk09: Hi. Good afternoon. Thanks very much for that very fulcrum answer. That's a great place to pick up. In terms of the on-premise penetration, can you just help dimensionalize that, please? Like, 4,000 draft lines, if it really compares to what for your beer portfolio? Or is there an ACV measure we should be thinking about, just to understand how incremental that could be?
spk02: Yeah, so I think, well, I mean, there's about, to be really precise, there's about 262,000 accounts out there. We're almost half of them, with at least one brand. So let's say we're in 125,000 accounts, not a full portfolio, but at least one of our brands. So 4,000 we think is pretty significant. And again, we'll see how it plays out. Certainly cans are going to be the predominant form of package that we deliver, but there seems to be a lot of interest among our customers for Julie on draft. And we switched, if you remember when we first tested this idea right before COVID, We had a flavorless version that was intended to be mixed by bartenders. The feedback we got was that's too much effort, so we have a wild berry version, which our customers are liking a lot better. So there's no need for mixology or anything like that. So that's the extent right now. And, again, one more data point for you. We've more than doubled our penetration for Trulia in our account. So it's in about 22% to 23% of our accounts, more or less. at the moment and growing. On premise. On premise. On premise. That's really awesome.
spk09: Thank you for that. And then just on the margin side, given the reduction to your volume outlook for the full year on chips and depletes, I'm surprised that maybe there wasn't a little bit of improvement in your gross margin outlook. Is that a function of you guys being locked into contract with third-party manufacturers? How do we think about that? Thanks.
spk11: It is, Frank. So, yeah, we definitely have, like when you look at versus prior year, you know, with the volume growth, it was pretty clear that we're going to grow the truly variety pack more externally than internally because we're full out internally and externally at this point is still more expensive. So, there was a margin decline because of that. Now, with the volume slowdown that we've experienced in Q2, relationship or ratio has improved, and depending on where the volume is going to go for the rest of the year, will probably improve based on the revised guidance that we have given. In Q2, you don't see the full benefit of it because there were certain adjustment costs. We have flexible contracts, but the slowdown of the category came pretty suddenly. So there are some adjustment costs and we call, we adjusted the production and incurred some costs for that. That's why you don't see the full extent of that. But what I can tell you is that we see the benefits in our internal breweries of our cost reduction efforts and the automation efforts that we're putting in. So we haven't changed the full year guidance yet. But we see the savings coming through and expect them definitely for next year.
spk09: Understood. Thanks. I'll try to squeeze in one last one. You noted that you'll continue to focus on innovation, but also, you know, predicted that there will be a category shakeout. I think you guys have been good at predicting cluttered categories Jim's talked about in the past with, you know, craft beer proliferation, and that's certainly as you guys predicted. So how are you guys thinking about innovation in the back half of this year and into 2022, given that the category does look very crowded right now?
spk02: I think, Dave, again, I think, I mean, first of all, we've gained about 60% more space, you know, year over year, you know, on shelf. We think we're expecting that we could probably pick up another 25% in the fall. There will be some change in fall resets. We think given our performance, by the way, we have the highest penetration of any brand in the category now. And so I think our flavor innovation has been able to bring new consumers into the category, into the brand. So on that strength, we think we can get more space in the fall. As it relates to innovation in general, consumers in this category, they like innovation. And I think we've figured out how to do it different than others have. And we'll continue to bring innovation. And I think the challenge for us is how do we keep doing it in a way that makes it differential and incremental both to the category and to our brand. And thus far, we've been successful in doing that. But we're certainly not going to rest on our laurels or think that maybe the same formula is going to work going forward. We're going to look at other ways to do it. And again, because know we're you know we're we're a very strong number two now we think and we performed this year significantly outperformed others we think we have a lot of latitude and support from our customers to do more understood thanks very much for the color sure our next question comes from the line of eric sirota with evercore you may proceed with your question
spk04: Thank you. First, a quick one for Frank. Your inventories were up pretty substantially, something in the order of $90 million. Sequentially, I know that I think it was Dave called out increased inventory at the breweries. How much of that sequential increase in inventories on the balance sheet was related to finished goods at the breweries? And what's the risk of of inventory obsolescence costs here. And then a follow-up for Dave and Jim afterwards.
spk11: Yeah, so the inventory, well, to your point, we have internal inventory that has clearly increased that's a function of the business. So three reasons. One is the function of the business growth that we have experienced in absolute terms. And we're managing it really in terms of weeks of supply. And then the second thing is, as we have done in the previous two years, we've pre-built inventory. And that's what you see at wholesaler inventory, which has gone up. Now, there's a limit to how much wholesalers can take, so we had to build a little bit more internally rather than passing it to the wholesalers. And then came the slowdown. So what we have done and typically that was the curve in the previous two years, we're building up until April where we reach the peak in inventory and then we start decreasing our inventory as the demand picks up and eclipses our production capacity. That has happened as well. What has happened though in May and June that that pace has slowed versus what we have predicted. But from a weeks of supply forward-looking perspective, at this point, we don't expect any write-offs. Everything is reflected. So there shouldn't be, unless there's another significant slowdown, which we don't expect because our guidance has reflected and that's why we increased the guidance a little bit also to the lower end to account for that.
spk04: Okay, and then Jim and Dave, I was a little bit surprised that in your detailed explanation for the slowdown of the seltzer category that you didn't explicitly call out RTDs. Maybe that's partly what you're referring to in terms of some of the consumer confusion, although I think that was referring to within the hard seltzer categories. The question for you is, do you guys think that some of the hard seltzer slowdown is related to the explosion that we've seen in RTDs? Drizzly is obviously talking quite bullishly about what they're seeing on their platform for RTDs, and what sort of interaction are you seeing, and what's the plan to participate in a bigger way? Sure.
spk02: Hey, Eric. This is Dave. Actually, I'll be honest. Right now, I was referencing hard seltzer proliferation, not RTDs or canned cocktails. At this point, we don't see it having an impact on the hard seltzer category or truly. And then just to put it in perspective, you have to break it apart. So High Noon actually plays as a hard seltzer. No question about that. And High Noon, if you were to put that into the hard seltzer category, would be about a two share. High Noon is also about a quarter of the entire RTD business, canned cocktail business. So consider the canned cocktail business about 8% of Hard Seltzer, of which High Noon's got two of it. High Noon does play in that space, and there's no question. You look at the occasions, and again, we're still learning because it's obviously very new. It's a nascent thing, but we're talking to consumers and we're learning. High Noon does deliver on sort of sessionability better for you, but if you look at the other canned cocktails, they do not. And if you look at the, you know, it's more special occasions, not the same occasions that hard seltzer are satisfying. And if you look at the repeat data, again, it's early, but if you look at the repeat data and the buy rate data on canned cocktails, they are very low compared to hard seltzer. So, again, I would say canned cocktails is kind of like it's just jumble of stuff right now. We're all trying to figure out, you know, what is it, where does it go? But they're not all the same. And honestly, the first thing you got to do is take high noon out of that equation because it plays very differently. Now, having said that, we're going to participate there because we have to. We have to learn and we're eyeing it. And I think it's important that we do that. And we'll do it in our ways. We talked about taking Sousa into an FMB format as part of our partnership with Bean Suntory. That's one of the things we're going to do. Also, of course, we have Dogfish Head out there now. So we're going to learn. and we're going to play, but I think this kind of noise is being created now that, oh, my gosh, canned cocktails, it's got to be bringing down the hard seltzer category. We don't see it in the data. And when you talk to consumers, we don't see it either with them.
spk04: Great. Thanks for your perspective, and I'll pass it on.
spk07: Our next question comes from the line of Lawrence Gravins. I'd like to speak to your question.
spk05: thanks and uh good evening everyone um two questions for me and one is uh is a photo from uh from viviana uh questions earlier on on on for me so i i would need to to you to help me reconcile the numbers here i mean it looks like i mean as depletion in the quarter was about 24 that's pretty much uh what we are seeing in the nilton retail business so it would mean that actually on-premise didn't deliver any upside, you know, if you look at those numbers. So maybe you could share, I mean, for the entire company, maybe the performance in on-premise for by brand. And then more specifically on Trulia, I've got some follow-up questions for the on-premise. But let me reconcile basically the growth of on-premise during the quarter with what we're seeing in retail.
spk02: So the question is, what's happening with on-premise? If our total number looks like retail, are we growing it on-premise or we're not growing it on-premise? Correct. I can tell you. Yeah.
spk03: Yeah.
spk02: Go ahead.
spk03: Yeah.
spk02: I'm sorry. No, sorry. Yeah, I mean, right now we're, you know, we're approaching like the last several weeks we've been selling at the same levels as 2019. And obviously 2020, we were not selling what we were selling in 2019. So we are growing on-premise. You know, one of the primary reasons why both, you know, SAM and Dogfish are back to growth is we are, you know, we're getting tap handles and we're growing. So I'm not sure how to, other than sharing the data that we don't normally share, how I can kind of reconcile that, other than say we are growing it on-premise as well. And, you know, we use IRI. I'm not sure what Nielsen is saying. Like she said, it says 24. So I'm not sure how to reconcile those two numbers, to be honest.
spk00: And in the quarter, we, you know, very definitely grew faster on-premise than we did off-premise, pretty much for every brand.
spk05: Yeah. Okay. Well, it's difficult to understand this in the numbers. So then specifically maybe on Trulie, you know, last year, I mean, on Trulie was about 2%, 2% to 3%, and you're saying it's about 3%. So it's not a huge kind of upside versus last year. Where do you think a brand like Trulio or Heart Seltzer in general could become in terms of size versus retail? And should we think about these being kind of 8%, 10% of the retail sales of Trulio or Heart Seltzer? I'm not thinking that it would go up to 15% like in beer. Should we think about Trulie being ultimately 8% to 10% of what it is in retail?
spk00: I think that's reasonable. I think I would start with the likelihood that hard seltzer in general, including Trulie, will under-index on-premise for the foreseeable future unless the draft takes off as a big volume driver. If you don't play on draft, you're missing, you know, a sizable hunk of the on-premise, you know, low ABV type volume where beer is historically played. So I think your numbers are, we're all, you know, begging for a crystal ball here and none of us has it. But if on-premise historically it's been between 15% and 20% of the business, you know, if you held a gun to my head, I'd say it's going to be 10-ish, maybe a little less of the seltzer business for the next year or two. But longer term, there may be upside from innovation that we haven't seen yet.
spk05: Thank you. That's very helpful. And then, Amina, it's more on innovation. Sorry if I didn't understand it, but could you please maybe explain the nature of the deal with BeamSensory and what we should expect, Amina, from what would be the upside for you? And I'm not sure I understand what's truly in the bubble is, to be frank.
spk02: Yes, so I think so. I mean, we didn't. We deliberately didn't put a lot of information out there because we don't want to share with our competitors. But basically, we have a partnership, and it's not a licensing deal. It's a partnership where we can take some of their brands into the F&B space. And we do know that there are F&B drinkers who like spirit brands and would like to see those spirit brands in the F&B space. So through our distribution network, collaborative R&D, collaborative marketing, but through our distribution network is where we would take those brands. And in return, we think we have a couple brands, the first one being Trulie, that have a possibility and a potential to live in the spirits world. But to do it the right way, we're going to go through them and their distribution and use their know-how and expertise in helping us craft, in the first case, a version of Trulie that could be a bottle of spirit. So we're mutually helping each other take some of our iconic brands into other worlds where consumers will recognize them and hopefully gravitate toward them.
spk00: And I add to that, I think it is our mutual beliefs, us and our partner at Beam Centauri, that a spirits-based product will find its best route to market through the spirits system of supplier and distributor. So we believe there could be some traction for a Truly Vodka, but not through us, not through our production and distribution system. It should go through a spirits producer We're fortunate to have someone of the quality of Beam Centauri to partner with in this endeavor. And similarly, a malt-based product, even if it has a tequila brand on it, will find its most success leveraging the beer system. A beer supplier like us and beer wholesalers. like our network. So it kind of keeps, despite the brand names, it keeps the products in their most successful lanes, spirits through the spirit system and malt-based products through the beer system.
spk05: Thank you. Thank you very much for the clarification. I pass it down. Thank you.
spk07: Our next question comes from the line of Philippo Salorni. with Morgan Stanley. You may proceed with your question.
spk10: Hey, good afternoon, guys. So first question, maybe can you explain and give a little bit more color on your expectations for truly in the second half? I know you said for the full year you expect to at least to grow at the low end, two to three times the low end of the 20 to 50. But just any thoughts on the second half as you cycle more normalized comparisons? that would be helpful first to start.
spk02: Okay. I think it's, I mean, I think the best way to look at it is as a relationship to where the category is going, because at least we have some good historical data over the last year on how we perform relative to the category. What I don't want to do is say what the category is actually going to do, because we've proven we're not very good at that. So, but we do think that, you know, again, we've been, for the last 13 weeks, we've been about a three-to-one clip versus the category. We think whichever the way the category goes, we'll ride it. We do think, look, we believe this, you know, in our last call, but we do think that, you know, obviously comp sees up. There's, you know, we're lapping, you know, there's some serious out-of-stocks that were occurring. On-premise, you know, we'll start to, you know, to take hold. You know, the category will winnow out. So some of this consumer confusion and, you know, retailers supporting everything will start to fade the back half of the year. So, and again, we think we've just, through our innovation and through our brand building, we've established ourselves as a brand with a lot of momentum that should take advantage of these things that will happen back after the year. How that translates into the exact growth, we don't know, but we're, and by the way, we can go, if it goes up, we're ready to go there. We can handle either, whatever occurrence happens, we'll be ready to take advantage of that. So I'm sorry, that doesn't really give you a definitive answer, but that's sort of the best we can do.
spk11: Yeah, maybe kind of to add on to that, like we were expecting a slowdown in May and June because it's really hard to predict and that's why it's really hard to answer your question. 2020 was such a roller coaster and had a tremendous volatility. And if you recall, May and June was a tremendous stock up. first by the consumer then by the retailer because they wanted to be ready and that that was reflected in in the depletions and in our volumes shipment volumes of course um so we were expecting moderation that was and i think that coincided with a few other factors that jim and dave have laid out so so the slowdown was a little bit stronger than what we had expected um now that is moderating in the back half but we don't exactly know what the, you know, what the composition is between the natural slowdown of the category and what happened in May, June and going into early July. So we'll have to see that. What we put out is our range is our best estimate based on what we have seen and what we believe. But we are clearly prepared to go beyond that on the upside. So we are ready to move there.
spk10: uh if need be um so we're planning for more than what we have or for a broader range than what we gave you as a guidance got it okay and then um you know dave you just talked in the past about um wanted to build truly as a mega brand and you've clearly done a lot of progress in the u.s market but thinking about internationally and the potential there particularly given the u.s categories starting to slow why not go a little bit more aggressive on try to expand internationally, starting with Canada and then potentially in other markets and whether you can make some investments to do in-house or potentially partner with another beverage company on a global basis.
spk02: Well, we do have a business in Canada that's growing rapidly. So we feel good about the progress we're making there. We are just now launching in the UK. We have a partner in the UK, Chevronim, is the oldest brewery in the UK, and our partner for Boston Beer there. And they are launching in the UK and Ireland right now as we speak. And we'll learn, because we're not quite sure where hard seltzer is going to play outside of North America. We're a little bit hopeful, but we're not betting the farm on it. But Chevronim is going to go out there. And the benefit of that is we also have Dua Lipa, who is a UK citizen. obviously well loved in the UK. So we have a great marketing platform to go out there to see what we can do in the UK. And then we'll see from there. I mean, we'll see from there. There are other things obviously out there, but we're focused on winning in North America. And that's our goal. And I think you can see the effort we've made and what's happened over the last year. We're in a much different place than we were a year ago because we've been really focused on the market that matters the most. Got it. Thanks.
spk07: Our next question comes from the line of Kevin Grundy with Jefferies. You may proceed with your question.
spk01: Hey, good evening, guys. I apologize for the background noise. I'm on the road here. This is a question for Dave and for Jim. I was just hoping you could unpack the – I'm coming back to the seltzer category. Maybe you could just unpack the factors a little bit. driving the slowdown. And I hate to belabor this, but I guess going back to your initial guidance to where we are now, as you look at your key performance indicators and household penetration, frequency of consumption, if you could just sort of maybe departmentalize this and some, some order of magnitude, what you think is driving the slowdown and then at a 20,000 foot level, you know, as the industry sort of moves out of this euphoria phase and we move, move into more normalized level to growth, And I apologize, Dave, I know you said you don't want to forecast a category anymore, but being a company that's helped pioneer this category, I think the industry will be curious to hear your views. Where do you think we go now from here? I think the bogey had been like 15% of beer. Does that still seem like a reasonable ambition? So your thoughts on both of those would be helpful, and then I have a follow-up. Thank you. Sure.
spk02: Okay. I can start, and then Jim or Frank can jump in. I think in terms of the category, so it is kind of that S-curve moment. And I think what makes it even harder to recognize is because of all the weird overlaps with COVID, first stock up, second stock up, on-premise opening, et cetera. But if you look at the household penetration, so year-to-date, the penetration is still growing in the category, and so is the buy rate. So you have a lot of people who come in. I think year-to-date, I'm using numerator data for those who care, but it's up 7% household penetration increase. Now, a year ago, it was 73%. Okay, so that's the inflection point. It's still growing, but it's slowed down. Buy rates are also increasing. So, people who are in the category and staying in are actually buying more. So, that's good. So, I think my sense is, I mean, we obviously went from like close to triple digits, not too long, you know, nine months ago or whatever, to high double digits. Now, it's low double digits. And we think it can, we think it will stay, and we're begging it's going to stay there. We think it could go up a bit. We said that 20 to 50, again, that's not our forecast. That's all the experts forecast, and that seems reasonable to us given all the things we've seen. So I think, yeah, I think what's going to make a difference really to quote unquote getting normalized, we'll know more obviously as we get through the summer. But again, there are too many brands out there with not enough shelf space, too much focus, too much sameness. I really believe this firmly that in categories like this where there's high growth and everybody jumps in, it's not just in our industry. the more companies try to create something that's different, they create non-essential differences and benefits. And the problem is everything becomes the same. And it does, from a consumer perspective, look the same. And I think a lot of those brands will be gone. So I think retailers are seeing that now it's going to start happening in the fall. Still, the top two brands are 70 shares of the category, more or less. That will continue. So I think that the smoke will start to clear. And what we're hearing from the other third-party folks, they're saying basically CAGR 15 to 25 over the next few years coming out of it. But I didn't want to go there yet. Let's just get through the next three to six months and see if it ends up where we think it will. We obviously have more information now than we did even three months ago, a lot more, and hopefully we're closer. And Kevin, I don't know if that came close to answering your question.
spk01: Now, that's helpful. Jim, did you have anything to add on this run and particularly where you think the category goes over time now that you kind of – you reassessed here with the slowdown, we moved out of this euphoria phase? Anything to add?
spk00: You know, we're just at a really choppy point. We may be at – and To be totally honest, we're surprised at the sharpness and the suddenness of the change in trajectory. It happens, you know, as we're, you know, lapping crazy times from last year. We're past the first month of pantry loading, but when we look at May this year versus May of last year, it was a crazy time last year. So, and all the volume had shifted to the off-premise. So, the numbers are really hard to read, you know, May, even June of this year versus May and June of last year. So, we are, I mean, we're probably as surprised as you were. It shows up in the inventory numbers. And from our point of view, you know, we launched Truly Punch, which was, you know, quite successful. But it hasn't added as much to our volume as we thought. Cannibalized it, some of the other packages, maybe a little more than we thought it would. So it's, it's, A really, really murky crystal ball. It's more like looking into a bowling ball. You can't see much.
spk01: Understood. One quick follow-up and then I'll pass it on. Just given the slowdown, there is a major brand out there. They decided to pull the plug on it. So one would think that there'll be some interest in the car to hold that inventory through the system. understanding that we're in a difficult commodity cost environment, how do you sort of balance or view those cross-current categories and specifically the risk that the promotion kind of picks up here, given the magnitude of investment and the channel, right? I'll give you my guess.
spk00: You know, generally when brands end up being, you know, discontinued like that, there's not that much volume out there. I think, you know, the one you were talking about, it was maybe .7 percent share. So a lot of them just dwindle. So there's not a lot of inventory that gets dumped and puts downward pressure on the category. retailers and wholesalers and suppliers, it's a very attractive category. And we've all made major investments to it. So there's not that we, you know, need to pay back. So I'm not anticipating, you know, price wars in the seltzer category. So I'm not that worried about it. We all have more inventory than we would like, but it's it's still, you know, selling a lot of product. So we're not really worried about, and it has long shelf life, six to 12 months. So we're all able to cut our production and work off that inventory in a relatively short period of time.
spk11: Yeah, I would add to the inventory, you know, last year would have been, more than happy if we had that level of inventory because we ran out. And there's just a lot of seasonality to it. So that's one thing. The other thing is also on the pricing. You see also in our financials, I mean, we deliver quite a bit of pricing in the category. The category so far has shown that it's not really a price-driven category. It's not price. It's the quality of beverage and the strength of the brand and the innovation that wins. But price has been really a factor. We don't expect that to change. Okay. Very good. I appreciate the time. Thank you.
spk01: Good luck. Thank you.
spk07: Our next question comes from the line of Nadine Sarwatt with Bernstein. You may proceed with your question.
spk06: Hi, thank you for taking my question. I want to go back and touch on your comments on the F-Curve and really taking a step back and looking at the long-term. So, are you seeing any evidence that the early adopters of the category are switching out of hard seltzer? Or is what we're seeing now, you see, too, really just at the rate of attracting new customers, this load? Thank you.
spk02: And, Nadine, I think it's much more of the latter. So, the early adopters are actually, they're there, and as I mentioned, the buy rates are increasing. So, they're actually buying more, and they're moving to a new category. Actually, they're experimenting with a lot of different things, but they're there. I'd say it's more the more recent, you know, the postal penetration is like around 27% now. It's probably the more recent ones to jump in are more likely to fall out. Also, when you bring in, we're bringing in younger, the good news is we're bringing in younger consumers. We're bringing in Latinos, African Americans. The buy rates for some of those consumers coming in are actually a little bit lower than the first ones in. But this is still going to be an $8 billion, they're about business this year in retail, so it's the only real category that's growing within beer. And it's growing double digits. And the question is, how far does it go up, hopefully? So, again, just to put that in perspective as well.
spk06: All right. Thank you.
spk07: As a reminder, if you would like to ask a question, please press star 1 on your phone or iPad. One moment while we pull for questions. Our next question comes from the line of Eric Sirota with Evercore. You may proceed with your question.
spk04: Hi, just a quick follow-up. You cut the CapEx guidance pretty significantly for this year. I know you're not going to give us a category forecast for this year or next year, but what sort of range of additional capacity do you have coming online between your own breweries and your co-packers, you know, between now and year-end? now and call it summer of 2022.
spk00: Right now we've got a couple of big pieces of capacity coming on in the next few months. Actually this month we're starting to get production out of the City Brewery in Irwindale, California right outside of L.A., and in the fourth quarter, we will get production from Ralph, basically the people who produce Red Bull all over the world. They're bringing up a greenfield facility in Arizona specializing in slim cans. So one part of the margin improvement that will be starting in the second half of this year is those markets we currently supply largely from Memphis and from Pennsylvania, a little bit from a smaller facility in Arizona. So all of those freight costs will be reduced as we begin to supply the western half of the United States from western breweries and then we put capacity in place for the back half of this year and then especially going into 2022 for very significant growth in seltzer. And that is primarily contract capacity. So that was all that contract capacity coming on stream, which is very favorably located and actually well designed to make variety packs at Rauk doesn't involve a great deal of capital compared to building it internally. So one of the things we have reduced is high capital cost capacity, which is the internal capacity because we believe we have really good contract partners with favorable terms and locations and very efficient production.
spk11: Yeah, and Eric, to your question, like we started that in the last earnings call where we had to reduce that. When we were in this really extreme growth period, when you plan your capital, you look at different options of putting the capital in, and they're basically two, big buckets of you know capital that we're looking at one is increasing capacity and the other one is investments to bring down the cost yeah that's the automation of the variety pack that's the main component which will drive the cost down so you know when you put that in at the beginning we weren't you know the plans weren't all specified as we move through the year we found better solutions as jim said that allowed to get to the same result with less capital. So if you look at the capital reduction in the guidance, the way I would think about it is three quarters is really because we found better ways in implementing our plans, and about one quarter is a delay, and that depends really on the capacity that we really need. We have sufficient capacity for next year, but everything uh will go forward that will decrease our variety packing cost and and that's the major cost block and that's also the major difference that you see in the current pnl between external manufacturing and internal manufacturing but those are the plans that we have and that's going to be a key driver for the margin improvement that's a helpful color but just coming back to the risk with
spk04: all of this additional capacity that you're going to have access to. Could you talk about what degree of flexibility that you have with your partners in other locations and your own breweries to just make sure that you don't have, that you're not too long on capacity or supply next year if the category growth disappoints?
spk00: Yeah, we believe we have very flexible contracts with our primary partners. There are shortfall fees, but they don't kick in for, you know, the first piece of volume. We have to go way below our projections before they kick in and they are reasonable. Because our contract partners are very good producers. They're in demand. They make lots of different things. We are the principal customer for most of them. looked at as the most desirable, stable, sizable volume. But if we cut some of that back, we've been told by our contract partners that they've got other demand for it. So we're lucky in that that, you know, flex capacity, the last third of it, we basically have options on that. And the contracts were structured that way because, you know, we were uncertain about just how high was up. So we locked in adequate capacity to cover very ambitious upside goals. But the shortfall fees are not sizable.
spk04: Great. Well, thank you. I'll pass it on.
spk07: As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad for a moment while we poll for questions. Ladies and gentlemen, we have reached the end of today's question and answer session. I would like to turn this call back over to Mr. Jim Cook for closing remarks.
spk00: Thanks everyone for joining us for this call, and we look forward to speaking to you in another three months when we think we'll have a little more clarity. Maybe the bowling ball will have turned a little more translucent. Thanks, everyone.
spk07: Thank you for joining us today. This concludes today's conference. You may disconnect your lines at this time.
Disclaimer