Boston Beer Company Inc (SAM) 2020 Q3 法說會逐字稿

Greetings. Welcome to the Boston Beer Company Third Quarter 2020 Earnings Call. (Operator Instructions) Please note, this conference is being recorded.

At this time, I'll turn the conference over to Mr. Jim Koch, Founder and Chairman. Mr. Koch, you may now begin.

Thank you. Good afternoon, and welcome. This is Jim Koch, 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 Burwick, our CEO; and Frank Smalla, 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 brands and are happy that our diversified brand portfolio continues to fuel double-digit growth for the tenth consecutive quarter.

We planned some major innovations to be introduced in 2021 for our brands. These include Twisted Iced Tea hard seltzer; Samuel Adams Just the Haze, our first nonalcoholic 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 a long-term profitable growth.

I will now pass over to Dave for a more detailed overview of our business.

Okay. Thanks, Jim, 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 and that may come up on the call reflect the company's or management's expectations or predictions of the future. Such predictions are forward-looking statements. It's important to note that the company's actual results could differ materially from those projected in these forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained in the company's most recent 10-Q and 10-K. The company does not undertake to publicly update forward-looking statements, whether as a result of new information, future events or otherwise.

Okay. Now let me share a deeper look at our business performance. Our depletions 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 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 ABV version of Truly; and other new Truly flavors and package sizes as we continue to lead the innovation in the hard seltzer category. We believe that Truly Iced Tea Hard Seltzer, which combines the refreshment of hard seltzer with real brewed tea and fruit flavor at only 100 calories and 1 gram of 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 Live 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, the competition has increased. Our Samuel Adams, Angry Orchard and Dogfish Head brands have been most negatively impacted by COVID-19 and the related on-premise closures, but we're pleased that they all finished the month of September with strong growth in the measured 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 drive our brands to their full potential, with a particular focus on our Truly brand. We've adjusted our expectations for 2020 full year depletions growth and our earnings guidance to reflect our trends for the first 9 months and our current view of the remainder of the year, which is primarily driven by the year-to-date performance of Truly. We're expecting all of our brands to grow in 2021 and are 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.

Improving 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 in our Cincinnati Brewery began production late in the third quarter, and we've recently added additional third-party brewery sleek can 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 seltzer 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 volume growth stabilizes.

We began a multiyear 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 volume growth. We'll continue to prioritize volume 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 depletions 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 diluted 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 30.5% increase from the third quarter of 2019. We believe distributor inventory as of September 26, 2020, averaged approximately 2 weeks on hand and was lower than prior year levels due to depletions outpacing supply-constrained shipments. We expect wholesaler inventory levels in terms of weeks on hand to remain between 1 and 4 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 trade to distributors because of higher volumes.

General and administrative expenses decreased by $1.1 million from the third quarter of 2019, primarily due to nonrecurring 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 to $12.70. However, actual results could vary significantly from this target. This projection excludes the impact of ASU 2016-09.

Full year 2020 depletions growth 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%.

Full year 2020 gross margins are expected to be between 46% and 47% and narrowing down of the previously communicated estimate of between 46% and 48%. We plan to increase investments in advertising, 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 products to our 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, 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.

Looking forward to 2021, we're in the process of completing our 2021 plan, and we'll 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 increases of between 35% and 45%. We project increases in revenue per barrel of between 1% and 2%.

Full year 2021 gross margins are expected to be between 46% and 48%. We plan increased investments in advertising, promotional and selling expenses of between $130 million and $150 million for the full year 2021, not including any changes 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 are currently evaluating 2021 capital expenditures and our initial estimates are between $300 million 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, Dave will be the emcee on our side, similar to last time, and coordinate the answers.

(Operator Instructions) Our first question is from the line of Vivien Azer with Cowen.

So my first question has to do with your 2021 guide. 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,and 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, like, beer is in a better place, at least in the 4 weeks. But just any underlying detail, I think, would be helpful because that's well ahead of consensus in my estimate.

Vivien, this is Frank. Let me take the first one on the 2021 guidance. I mean 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 hard seltzer and Truly and also Twisted 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 rates, and we look at how we have grown distribution and we'll project that into 2021, we fear that the range -- this is definitely the range that we're shooting for. Actually, we're shooting higher, but that's something that we can accomplish based on the structure of our portfolio and the growth rates of the categories that we are projecting.

I mean nobody has a crystal ball. Nobody knows exactly where hard seltzers are going to go. But if you look at the different scenarios -- and we take a risk adjusted approach, this is kind of what we have.

Yes. And actually, just to build on that, Frank. So I think when you look at -- those 2 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 with, with the can shortages and other capacity issues that are still being cleared up.

But if you dig into some of the data on seltzers, you see some new information. One is that we're looking at the depth of repeat increasing pretty significantly, most recently. So people who purchased the product 3x or more are now like 31% of all the buyers versus 25% a year ago. So we're seeing people adopt it. Also (inaudible) data, category rejectors are declining from about 28% last year to 12% this year. So we're seeing people embrace hard seltzer, making it part of the repertoire.

There are -- 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 is going to be allocated by 10% to 20% of space next year will be allocated to the categories. So we think there's still a lot of tailwinds in this category. And the question will probably come up, so here's the answer. We think that 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, just maybe 80% to 100%. So it will decelerate by maybe half, but still, you're looking at 80% to 100% growth there.

I would also say on the Twisted Tea front, Twisted Tea has really benefited significantly from people consuming more at home. And we've seen it in pretty much every way you look at the brand, not just the measured 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 very small penetrated brand, a very lightly penetrated brand. As it gets more household penetration and more consumers, we can see our way pretty confidently to very, very good growth with Twisted Tea next year.

And then we can talk -- I'm not going to worry about the other brands, but there's a lot of innovation that we talked about that we see across the board, Angry Orchard or Sam Adams or Dogfish that all -- the [ad hoc] -- I think the difference next year to me is I feel like we're going to be growing across the entire portfolio. And we'll continue some very significant growth in hard seltzer, but we're going to have contributors coming from every direction next year.

That's really helpful. And in particular, Dave, I commend you for doubling down on those unique consumer insights because 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 5, 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.

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, Vivien, and I do remember that stock day down at the brewery. And 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 we've never -- I mean, for us, not to be growing significantly is an unusual and very uncomfortable state. Does that help?

Very much so.

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

My first question has to do with your FY '20 guidance. So your full year shipment and completion 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 that gives you the confidence in this.

And then 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 Truly Iced Tea Hard maybe to 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? I'm thinking about that as out-of-stock pressures potentially linger still in Q4.

Bonnie, this is Frank. I'll take the first one on the guidance. The -- what you see, we've taken it up because the increase that we're seeing will come through in Q4. Now what has happened in Q3 is our depletions have really outpaced our shipments. And you look at the results, it's about a little bit -- it's about a 5-point gap. And that has driven the wholesaler inventories to a bare minimum. It's like, they basically -- whatever we deliver, they shifted out.

So the hard sales, the depletions, which is, in our mind, 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, and we couldn't produce everything that we depleted. So what will happen and has started happening actually in Q4 already is that we started to catch up as we replenish the inventory. So the shipments that we are 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 -- it's a very seasonal business, as you know. We don't see that much of a decline as we had originally projected when we are sitting in the middle of the year, quite frankly. So there is additional volume coming. It's coming towards the end of the fourth quarter. What that means is 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 build than what we have projected originally.

So the confidence level, that's why we raised the guidance, is relatively high. The range, the difference between the low end and the upper end really depends on how much we basically can produce. Do we have all the materials and we have the capacity, that's what it comes down to.

Okay. That's helpful.

And Bonnie, if you want, I can talk about -- I mean, just a quick one on Truly Tea. We feel that this product has tested very, very well, very similarly to Lemonade. And we think like Lemonade, it's unique and distinct in the category, and it's going to provide something that's a very different form of variety to what's out there in the category right now. So sort of delivering on what seltzer drinkers are looking for.

And also just -- it fits for what it's worth as a read, I mean, our customers on large format, small format customers are all -- I mean, they're all in on this [spec.] So we've got a lot of support already with our customers and with our wholesalers. And we feel confident that we're going to get out to -- we're going to start with this new product.

No, that's helpful. And that's consistent with what I'm hearing. And then that kind of brings me to my next question was, as I think about your FY '21 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.

And 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 and scale you're likely getting as your company really is getting so much bigger and Truly is becoming such a large part of your portfolio.

Yes. So -- what was the -- I'm sorry...

The guidance presume (inaudible)

Yes, yes. I'm sorry. So for the first question, the -- we have the midpoint, we have 35% to 45%. What we're projecting is that the hard seltzer category can double. That's not fully reflected in the guidance as you can imagine. It's, as I said before, this is like -- everybody has different projections. We are looking at different scenarios. And we look at like, 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 yes, I tend to mention that in the earnings call. We don't want to really meant -- spend our APS based on a formula, based on (inaudible) a case or what 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's not working. This year, we started the year, we clearly want to spend more. COVID happened. We have the impact on the on-remise, so we didn't spend as much as we said at the beginning of the year. We are prepared to spend against the growth because we believe, now is the time as we're building, as the categories 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 the long-term growth of our brands and invest 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 falls.

Okay. So even in FY '21, you expect there could be leverage on the bottom line?

Yes.

Next question comes from the line of Eric Serotta with Evercore.

First, I want to see if you could give some perspective in terms of how you're looking at Lemonade for year 2. 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 2, that would be helpful.

And also the -- 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?

Great. Okay, Eric. So let me take a shot at that. I think first of all, as it relates to Lemonade, we invested a lot in that -- in building that brand to a [10 share], thus 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,] the largest penetration base and repeat rates of any of the new products that we'll launch this year and a great tasting products. We enter in a really 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 Hard Lemonade. It's very light interaction with Mike's because as the FMB consumers are looking -- what we've learned, they're looking for something that's bode different drinking experience in different occasions. It's going after -- it's really attracting seltzer consumer.

So we think we're targeting the right consumer with this brand. And there's a reason why it's under Truly. And then for the same reason why we wouldn't do a Twisted Tea Hard Seltzer is we just don't think it's the same for the right consumer or the right direction to go. We like Truly being the hard seltzer brand that provides ultimate refreshment and seltzerizes different flavor experiences. Mainly the bold flavor but only 100 calories, 1 gram of sugar. And tea plays there. Lemonade plays here really well.

And so 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 it mainly 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 growing share. So it's all I care about. We're going to grow share.

And -- but we have -- having said that, we did -- we have looked at some of the data, and there's different couple of sources. So for example, just to understand Lemonade this year, how incremental was Lemonade to the Truly brand, which I think you -- that's what you're asking. If you look at different sources, we've looked at our numerator, had it at -- it's going to be pretty precise and it's not as precise, but they had a 71% incremental. Nielsen had it 95% incremental. I don't believe either of those numbers. But from a pure consumer perspective, it was calling between 70% and 95% incremental.

But you got to remember, too, is that if there's cannibalization that happens, when you -- because you have to go through a wholesaler, and you have to get your wholesaler to be supportive. This cannibalization that comes, we have to go through the customer. So that 71% to 95% is probably understated, but it's certainly at a point where we're happy with it. And if anyone is going to cannibalize it, it might as well be us.

So I think as it relates to tea, we don't know yet. Again, Truly Tea, until we play, 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 flavor experience as well as the Truly Lemonade flavor experience.

Great. That's real helpful. And 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? Or 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 really helpful.

I think it would be easy -- that would be an easier question to answer like in a month or 2 from now. But I think -- this is my personal opinion. Maybe in time, we'll have different points of view. But I do think it's -- there's still can shortage in Q4. There's no question about it. I think it's affected everybody. There's still, as you know, there's still capacity issues out there.

But when I look at our -- look at the Truly -- actually, look at the category, I mean, Truly and White Claw both growing penetration, repeat rates are going up. Truly's velocity has been -- and triple -- growth has been in triple digits for 6 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's not -- it clearly can't sustain. And whether this is the beginning of the metering down, call it to 100%, we'll know more, like probably add into more in a few months.

But there's nothing else I've seen, where I think I mentioned when I was answering Vivien's question. When we look at the consumer data, there's nothing in the consumer data that would suggest us anything really changing. When you look at the market data, yes, there's something might be a foot. But it's -- again, I think it's too early to make -- to draw any conclusions on that.

(Operator Instructions) The next question comes from the line of Kevin Grundy with Jefferies.

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 -- and that part of your business more relevant for your beer and cider brands. And then I have a follow-up on hard seltzer.

Okay. I might say in terms of on-premise trends this year, as we face the back half of the year, I think it was probably down 50% or thereabouts is probably the way to think about it across -- pretty consistent across all brands. I think -- now again, when we look at 2021, I'm not sure if we really talk in detail by channel. So -- but we -- so we don't (inaudible) I kind of get that sense, but we don't think it's going to come back really quickly. It just doesn't seem that way. It's until there's herd immunity one way or the other, people are not going to be going back to bars and restaurants the way they had before.

I don't know, Jim, I don't know if you have any other thoughts because you have been talking to a lot of folks lately about that world.

Yes. 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 sold emphasized package because package is easier to sell to go. So it's -- the on-premise has just been really tough, and we pulled our sales force in and just start to go out tentatively a few weeks ago. So it's been probably even disproportionately hurt.

And we -- 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. It's -- maybe this time next year, things will be looking like whatever the new normal is. But behavioral patterns will have changed. Bars will have closed. Restaurants will have closed. So it's -- 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? And I appreciate that it's difficult, so I know it's a tough question. But you guys are planning for all of your brands to grow next year. And it sounds like the expectation is the on-prem is going to be challenged. So outside of the fact, 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 the Dogfish Head and Sam Adams and Angry Orchard can indeed return to growth next year?

Well, you've hit the 2 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. So we believe that as on-premise does come back, it will focus more on strong brands. And similarly, the trends at off-premise retailers and wholesalers have been to clear out some of the clutter and devote more space to the brands that are leaders in their category. And Sam Adams and Twisted Tea and Angry Orchard are #1, and Truly is a very strong #2 in its category. So we think that strong brands will benefit disproportionately even throughout next year.

Got it. 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 Mark Anthony brands, and that innovation industry is clearly aimed at your portfolio and the success you've had with the Lemonade product. Coors now is just sort of leaning in Topo Chico, and we say will be early next year. They just launched Coors and [VZ] et cetera. I mean, we can spend the rest of the call kind of going through the litany of products that will 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 nonalcohol space moving into the alcohol space, it's very, very unique. So how are you guys thinking about that? And how has that been contemplating in your initial '21 outlook? And I'll pass it on.

Thanks, Kevin, maybe I'll start that one. I think everything you mentioned, we've contemplated. Obviously, we're 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 2 years ago, Truly and White Claw were 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 [30] brands in the category. And Truly and White Claw are still 75% of the category.

So we think it's going to -- we're not in any way resting on our laurels or assuming it's going to happen by itself. We're going to fight like until the end to make sure that we're very strong of a cure, ideally #1. And we're investing aggressively in building the brand as a Truly brand, which we think has come a long way in the last couple of years in terms of brand awareness, in terms of, kind of household penetration, repeat rates, all the rest. And we know we can't stop what anyone else is going to do, and it's going to be another food fight in 2021.

But we feel like we're ready for that. And we have plans, and as Frank had mentioned before, we're going to spend whatever it takes. So yes, we're going to operating leverage next year as we plan to. But guess what, things change competitively. We're going to -- we'll tell you on the earnings call what we're going to do is going to be to continue to invest. Because 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 that the innovation, I think, being first to look at -- and market that brands has done an amazing job with your brands. And obviously, Mike's is a great brand. But we've been in the same -- we'll have a 15-month headstart in the [10 share] brand. That gives us an advantage. We're going to do everything. We can't just save every ounce of that share.

And that's why we're launching the tea brand, which -- by the way, we know how to do tea. I think we've proven over the years. I think we're the only ones that will understand how tea well. It's tea and fruit, it's a tremendous product, and it's going to give people something else to go to.

But we also know in this category, people, consumers are looking for what's new. They're looking for variety. They want whatever is next. And obviously, Lemonade, it's already happening. We'll continue to make it happen. But what's next, next year, in our mind, is going to be tea and maybe some other drinks, too.

So -- but it is -- but honestly, this is what makes it fun because it wouldn't be funded with it by ourselves. So -- but we contemplate everything. We had nothing to shock us, no announcements and we're ready to go.

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

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 meaning?

And then I appreciate that you don't really care, I get it, what leg of the Truly offering leads growth so long as the overall trade market 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 just kind of clarify your thinking on Lemonade versus the base Truly, the base offering.

Okay. Okay. Steve, I'll take that. So I think when it comes -- so 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 is going to come from Mike's Hard Lemonade. There was actually never -- that was not our goal, to steal consumers from there because we think it's just a very different. It's different occasions, different consumer. And so if you apply that to the Truly Tea versus Twisted Tea, so say, 10% to 15% interaction. So we don't think it's huge.

And again, these 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 got to manage. And whatever happens, happens. We feel pretty good about that.

As it relates to Lemonade, will Lemonade become -- I don't know. We don't have a -- we're not planning on that. I mean it's quite very unlikely. We think we'll continue to obviously help (inaudible) getting on the base Truly business next year that we're excited about. I think it's very unlikely that 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 where we're going to -- that's how we're going to measure success next year is gaining share through the Truly trademark.

And last thing I'll say is that the reason -- one of the reasons I like to say this is because we have a pure-play brand called Truly that stands for hard seltzer. And so we're not -- it's much easier to innovate within that platform than it is if we were coming from another place.

Yes. that makes a lot of sense, and I appreciate that color. I guess if I could also ask about it, kind of slicing it by channel. You talked about 10% to 20% of off-premise space being allocated to seltzers 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 next -- 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 some -- maybe some untapped upside in seltzer and Truly on-premise. And I guess I'm just -- would love a little bit of insight as to how much that thinking has factored into your '21 outlook. Do you think that on-premise demand can be material to Truly in '21? Or is that -- is it really just a story of continued off-premise strength?

Okay. Steve, I'll take the first part, then I'll hand it over to Jim for the second part. I think in terms of space, it obviously varies by customers, by geography today where it's at, but it's probably about 10%. In some place, it could be very well be higher. That could be as high 20% in certain places now. But on average, we're thinking right now, it's probably about 10%. And we think based on what our customers have been telling us this fall, is that they expect the category to be 15% to 20% of the total year. And they're going to give it its fair share of space. So we could be on 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 would have been. But I think because we didn't have that chance to do resets this year, next year could be that much more impactful.

And I think what customers are looking to do, there's going to be more closed space. It's going to be more end caps, it's going to be more freestanding displays. They're going to look to find to put inventory anywhere they can to help to help -- to support -- to represent the size and the growth rate of the category. So with that, I'll hand over to Jim to talk more on-premise.

Yes. My guess is to how hard seltzers fared on-premise this year was not as well as one would have expected, given falling number of hard seltzer drinkers who are going 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.

And I think -- I still believe that the seltzer category is underdeveloped on-premise. 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 on-premise -- I mean, I'm sorry, off-premise, where people are talking about it being 15% or 16% of the beers category within a year or two.

(Operator Instructions) The next question is from the line of Laurent Grandet with Guggenheim.

Jim, Dave, Frank, well, congrats on another truly exceptional quarter. First question is really just a check, I mean, because I may not have heard you well. Are you saying that you would be shipping Truly on seltzer tea at the end of this year or just starting next year?

So I can answer that one right away. We will ship next week, Truly tea will not be shifted here. That's definitely next year. And...

Dave, one for you, and then I've got one for Jim. But I understand very well, I mean, the purpose and the potential, I think, of Truly and Twisted Tea. We've [heard] about this in the last few weeks. I wanted to understand a bit better about the role and potential of Truly Extra? We've been testing it in some places in New York, in some other places. So we need to attract, I mean, a younger, more male consumer into the franchise. What's the role for Truly Extra? And what's the potential? We believe it's a bit more limited.

Yes, I'm...

So I think -- sorry, Jim. Jim, you go.

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 base hard seltzer tend to be 100 calories, 5 ABV, 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 a 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 in the C store, and they're bringing up a single serve. So it's -- 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 -- did well, but again, it was crazy times, and it was New York and it's maybe a little different market than the big bulk of the C store. This is the bodega and the small store. So it's a little different than a C store in Arizona.

And Dave, really, just digging on Truly Extra. I mean I really like what we've been doing in marketing in building that brand over the last few years. But is that not potentially confusing for the consumer, the Truly consumer that there will be a Truly with more calories? And I mean, that definitely not respond to the -- I would say to the central playbook. So could you explain this a little bit?

I'm sorry, Laurent, can you repeat the (inaudible) I guess I missed the question. Can you repeat that again?

Sure. I really like everything you've been doing on Truly and (inaudible) brand over the last 2 years. But I really like to understand, I mean, the Truly Extra is not a little more, and maybe some confusion for the Truly consumer having much more calories. So is that kind of a risk to the franchise? And how do you see that? And why you're taking that potential risk?

That's right. Okay. I got it. I got it. So I think Jim sort of answered that question by saying that I think it's a different group. Where we see it as it's a different consumer. It's C store consumer, it's more younger male who might be buying at traditional FMBs, who might be looking to branch out and try something different. So we're sort of appealing to somebody with that who isn't necessarily looking for the 100 calories per se. And because it's -- because we're sort of -- we put it into convenience stores, it's not going to be broadly -- it was not our intent right now to make it broadly feel more -- in large-format stores or multi packs. What we think we can do, we're now casting to that consumer. And we don't -- we think we'll be successful, but we're not banking the year on it necessarily. But as Jim said, it's well received in New York City. New York City is not necessarily your average convenience store -- your average Circle K in Arizona and California. But we think the brand -- because of the sub-brand, and we sub-branded Extra, but the -- and the sub branding is actually very large. And really -- it's actually, I think, bigger than Truly. So it clearly says to the consumer something -- 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 -- I think we'll find out next year.

A question on the capacity for Truly. You increased significantly CapEx for this coming year, and planning for doubling actually probably next year. Are you starting to rebalance between contract manufacturing, your in-house manufacturing as starting a bit next year or having a larger percentage of your manufactured in-house? Could you maybe give some color here to understand a bit more the split between in-house and contract manufacturing for next year?

Yes, Laurent, this is Frank. Clearly, the long-term goal is to rebalance between internal and external. But the #1 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.

Clearly, 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, clearly, we are looking at bringing more in-house and thereby also bringing the costs down and getting the margin up.

My last question -- my very last question for you, Jim. For a beer lover like you, I mean, what does it mean to launch zero alcohol beer? And why are you doing this? I mean what's potential and pace in that you're expecting from that beyond a reception from consumers?

Jim, do you (inaudible)

Sorry, I was on mute. Good question, Laurent. And I'll start out with a confession because after I finished my introduction, I poured myself Sam Adams Just the Haze, nonalcoholic IPA, and I'm almost at the bottom of the glass. So there are -- it's by way of illustrating that something like Sam Adams Just the Haze is a product that has really never existed before. There have been plenty of nonalcoholic beers, but they were always compromises. You knew you were drinking an inferior product, and it didn't have that much appeal other than odd occasions or people who used up their quota and couldn't drink alcohol anymore.

And so we're -- we don't have 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 done -- and we've tested it in consumer testing and had it rated in 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 experiences. 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? It depends.

Next question is from the line of Sean King with UBS.

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 Truly but weight in the portfolio. But I guess within Truly itself, are you starting to see consumers start to settle in to preferred flavors and moving away from variety pack?

Yes, I can take it. Sean, it's Dave. Okay, Jim, [do you want to go?]

Well, I was just going to say, that's basically, no. We kind of wondered when it's going to happen. Hasn't happened yet. Go stand next to a big display of LECROY and watch people shop it. Almost nobody buys like 3, 12 packs of the same flavor. They don't have variety packs, but consumers will typically buy at least 2 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.

The next question is from the line of Bill Kirk with MKM Partners.

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?

Yes. I mean, the last time I looked at it, it was -- and this might be dated, this was probably 6 months ago. It was small. It was a small repertoire, like 2 or 3 at most. It's probably a good thing for us to look at now. But again, I think -- I mean, I think if you just look at the share -- seltzer share distribution in the category being the top 2 at 75%, by definition, I think that's going to tell you it's going to be a small repertoire than crafts for sure, but don't have the exact number to share with you.

Yes. From the research, that is not really quantitative, but focused groups and qualitative and sort of anthropological-type research. General truth would be that I think White Claw and Truly are substitutable. 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 2 leaders that share preferences. And we didn't find lots of people who are only drinking one of the smaller brands.

Thank you. At this time, we've reached the end of our question-and-answer session. I'll now turn the call over to Mr. Jim Koch 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 thank you for joining me for beer.

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