Boston Beer Company Inc (SAM) 2019 Q4 法說會逐字稿

Greetings, and welcome to the Boston Beer Company Fourth Quarter 2019 Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Jim Koch, Founder and Chairman. Thank you. Please go ahead.

Thank you. Good afternoon, and welcome. This is Jim Koch, Founder and Chairman, and I'm pleased to kick off the 2019 fourth 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 the call over to Dave, who will provide an overview of the business. Dave will then turn the call over to Frank, who will focus on the financial details of our fourth quarter and 2019 fiscal year results as well as our outlook for 2020. Immediately following Frank's comments, we'll open up the line for questions.

We're happy to report 25% fourth quarter depletions growth, of which 19% is from Boston Beer legacy brands and 6% is from the addition of Dogfish Head brands. We're making good progress on the Dogfish Head integration and merged our sales forces and our business processes and systems. We've learned a lot from each other as we've merged our cultures, our teams, our values and our innovation capability. Collectively, we're thankful to our outstanding coworkers for their focus and diligence and our distributors, retailers and drinkers, all of whom have helped the company achieve double-digit volume growth for the seventh consecutive quarter. We believe that our depletions growth is attributable to our innovations, the quality of our products and our strong brands as well as sales execution and support from our distributors.

We see significant distribution and volume growth opportunities in 2020 for our Dogfish Head brands as well as our Truly, Twisted Tea, Dogfish Head brands remaining our top priority for growth in 2020.

At the same time, we're working hard to further develop our brand support and messaging for our Sam Adams brand to position it for long-term sustainable growth in the face of a difficult competitive craft beer environment.

We are excited about the response to our reformulation of Samuel Adams Cold Snap, Seasonal, our new Sam Adams Toast Someone Campaign and the Samuel Adams Taproom that opened in downtown Boston in January. We are confident in our ability to innovate and build strong brands to complement our current portfolio and help support our mission of long-term profitable growth. I'll now pass the call over to Dave for a more detailed overview of our business.

Thanks, Jim. Hello, everyone. Before I review our business results, I'll start with the usual disclaimer. As we state in our earnings release, some of the information we discussed in the release and they may come up on this call reflect the company's or management's expectations or predictions of the future. Such predictions and the like are forward-looking statements. It's important to note that the company's actual results could differ materially from those projected in such forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained in the company's most recent 10-K. You should also be advised that the company does not undertake to publicly update forward-looking statements, whether as a result of new information, future events or otherwise.

Okay. Now let me share a deeper look at our business performance. Our depletions growth in the fourth quarter was a result of increases in our Truly Hard Seltzer and Twisted Tea brands and the addition of the Dogfish Head brands, partly offset by decreases in our Samuel Adams and Angry Orchard brands. Truly is generating triple-digit volume growth, and we're continuing to expand brand distribution across all channels. During the fourth quarter, we launched new formulations for all of our Truly flavors, which have been very well received by drinkers. Before we rolled out the new flavors, we conducted consumer tests to ensure that we have the best tasting Hard Seltzer on the market. In fact, since the reformulations hit the market in the October, November time frame, both our volume and our velocity trends have increased significantly. We continue to launch additional flavors and recently launched Truly Hard Seltzer Lemonade. To date, the response from our distributors, retailers and drinkers on the new formulations and Truly Lemonade has been very positive, but it's too early to draw conclusions on the long-term impact.

We believe the new improved formulations and the Truly Lemonade launch, combined with our previously announced NHL partnership and our significantly increased advertising spend will help further bolster our position as a leader in Hard Seltzer as more competitors enter the category.

In 2020, we'll continue to build a compelling and differentiated Truly brand and evolve our brand communications campaign accordingly. Our Twisted Tea brand continues to generate consistent double-digit volume growth, even as new entrants have been introduced and competition has increased. Angry Orchard's volume has declined against the 2018 national rollout of Angry Orchard Rose, but Angry Orchard Rosé still maintains more than 55% market share in hard cider. The cider category is challenged, and we're working to return Angry Orchard to growth through continued packaging, innovation, promotion and brand communication initiatives.

During the fourth quarter, as we increased our brand spend, we also made investments in our supply chain to ensure that we're prepared for increased competitive activity in the Hard Seltzer category. We've invested to increase our can and automated variety pack capacity, but these capacity increases keep on getting eclipsed by our depletions growth, resulting in higher-than-expected uses of third-party breweries. We'll continue to take advantage of the fast-growing Hard Seltzer category and deliver against the increased demand through this combination of internal capacity increases and higher usage of third-party breweries. Meeting these higher volumes while installing new capacity has a negative impact on our gross margins. To address this, we've started a comprehensive program to transform our supply chain with the goal of making our integrated supply chain more efficient reducing costs, increasing our flexibility to better react to mix changes and allowing us to scale up more efficiently. We expect this program to run for 2 to 3 years and begin showing margin improvement by the first half of 2021, but our gross margins and gross margin expectations will be impacted somewhat negatively until the volume growth stabilizes.

For 2020, we're targeting 15% to 25% volume growth and a significant increase in our operating income. We expect first quarter shipments growth to be higher than depletions as we continue to manage our supply chain and capacity to ensure that our distributor inventory levels adequately support greater demand for our brands during the peak summer months. Our priorities are to drive Truly, Twisted Tea and Dogfish Head brand growth and work to return Sam Adams and Angry Orchard towards long-term sustainable growth. We also will continue to focus on cost savings and efficiency projects to fund the investments required to grow our brands, to build our organization's ability to deliver it is our goals and to improve our profitability. While we're in a very competitive business, we're optimistic for continued growth of our current brand portfolio 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 6 weeks ended February 8, 2020, are estimated to have increased approximately 34% from the comparable weeks in 2019, excluding the Dogfish Head impact depletions increased 28%. Now Frank will provide the financial details.

Thank you, Jim and Dave. Good afternoon, everyone. For the fourth quarter, we reported net income of $13.8 million or $1.12 per diluted share, a decrease of $0.74 per diluted share from the fourth quarter of last year. This decrease was primarily due to increases in advertising, promotional and selling expenses and lower gross margins that were only partially offset by increased revenue. Shipment volume was approximately 1.26 million barrels, a 31.7% increase from the fourth quarter in 2018. Excluding the addition of the Dogfish Head brands beginning July 3, 2019, shipments increased 25.6%.

Shipments for the quarter increased at a higher rate than depletions and resulted in higher distributor inventory as of December 28, 2019, when compared to December 29, 2018. The company believes distributor inventory as of December 28, 2019, averaged approximately 4 weeks on hand and was at an appropriate level based on supply chain capacity constraints and inventory requirements to support the forecasted flow.

Our fourth quarter 2019 gross margin of 47.4% decreased from the 51.9% margin realized in the fourth quarter of last year primarily as a result of higher processing costs due to increased production at third-party breweries and higher temporary labor requirements at our company-owned breweries, partially offset by price increases and cost-saving initiatives at our company-owned breweries.

Fourth quarter advertising, promotional and selling expenses increased by $30.2 million from the fourth quarter in 2018 primarily due to increased investments in media, production and local marketing, the addition of Dogfish Head brand-related expenses beginning July 3, 2019, higher salaries and benefits costs and increased freight to distributors due to higher volumes.

General and administrative expenses increased by $6.3 million from the fourth quarter in 2018, primarily due to nonrecurring Dogfish Head transaction-related expenses of $2.1 million, increases in salaries and benefits costs and the addition of Dogfish Head general and administrative expenses beginning July 3, 2019.

Our full year net income per diluted share of $9.16 increased $1.34 or 17.1% compared to the prior year. This increase was primarily due to increased revenue, partially offset by lower gross margins and increases in advertising, promotional and selling expenses. Our full year 2019 shipment volume was approximately 5.3 million barrels, a 23.8% increase from the prior year. Excluding the addition of the Dogfish Head brands beginning July 3, 2019, shipments increased 20.8%. Our full year 2019 nonrecurring Dogfish Head transaction-related expenses of $10 million were partially offset by Dogfish Head operating income of $6.9 million.

Excluding this $3.1 million net unfavorable impact, company's operating income for the full year 2019 was $148 million, an increase of $32.1 million or 27.7% from 2018.

In the fourth quarter and the full year 2019, the earnings per diluted share impact from Dogfish Head's operating results, net of the dilutive impact of the transaction-related share issuance was more than offset by the nonrecurring transaction-related expenses, resulting in a combined unfavorable impact of $0.18 per diluted share and $0.40 per diluted share, respectively.

Going forward, for 2020, the company will report Dogfish Head's impact on 2020 shipments and depletion volume growth rates, but does not plan to report the earnings per diluted share impact of Dogfish Head, as it has been fully integrated into the company's operations beginning in early 2020. Looking forward to 2020, based on information of which we are currently aware, we are targeting 2020 earnings per diluted share of between $10.70 and $11.70. But actual results could vary significantly from this target.

This projection excludes the impact of ASU 2016-09. We are currently planning increases in shipments and depletions of between 15% and 25%. Excluding the addition of the Dogfish Head brands, 2020 depletions and shipment growth is estimated between 11% and 21%. We're targeting national price increases per barrel of between 1% and 3%.

Full year 2020 gross margins are currently expected to be between 49% and 51%. We plan increased investments in advertising, promotional and selling expenses of between $80 million and $90 million for the full year 2020, not including any increases in freight costs for the shipment of products or distributors. We estimate our full year 2020 effective tax rate to be approximately 27%, 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 2020 financial statements and full year effective tax rate as this will mainly depend upon unpredictable future events, including the timing and value realized upon exercise of stock options versus the fair value and those options were granted.

We are continuing to evaluate 2020 capital expenditures and currently estimate investments of between $135 million and $155 million. The capital will be mostly spent on continued investments in our breweries and taprooms. We will now open up the call for questions.

(Operator Instructions) Our first question comes from Vivien Azer with Cowen.

I have 2 questions, if you will. So the (inaudible) [topline and not do it] (inaudible) to Jim and Dave. But the preliminary guidance, which is, of course, preliminary said high teens to low 20s. So it seems like you're widening that range a little bit on both ends. And I'm just curious to hear what informs that?

Vivien, this is Frank. So on the guidance, we haven't really changed it that much. I mean, that was kind of around the midpoint of 20%, as you can see, that hasn't changed. If you look at our growth, I mean, the growth is primarily driven by the Hard Seltzer category and the Truly brand. And there's a lot happening. It's really hard to predict the long-term growth. I guess, it's fair to say that the last 2 years, everybody in the industry underestimated the actual growth that has happened. And of course, the growth and the size of the category attracts many more participants to enter the market. And what we're seeing, especially this year is like the larger players are coming in and becoming much more aggressive.

We feel very strongly about our position in the market, but we just don't know exactly what's going to happen, and that's all. We are just careful and give you a wider range because it really depends on how the year is going to play out, how the new competitors are going to get traction and what the entire growth of the category is going to be, which, again, we've underestimated as an industry for the last 2 years. So that's the main reason for it.

That makes perfect sense. And that seems reasonable enough. Dovetailing into that. My second question is just around the gross margin commentary. So given when you guys settled out for the year. At the low end of your guidance range, you're just not looking for any gross margin improvement at all. But I'm trying to reconcile that with the commentary around rightsizing your supply chain and the benefits of that kicking in, in 2021. But like implicit, it's the midpoint of your 2020 gross margin guidance is some improvement. So help me understand that, if you would?

Sure. So on the gross margin, there are a couple of things that are happening. So we came in at the low end and then a little bit lower in Q4 than we had originally anticipated, quite frankly. And there are 2 reasons for it. So let me cover the Q4 first. One is the volume clearly has outpaced our expectations. So we had higher volume, that volume went to contract and contract, as we've discussed before in previous earnings calls, just comes at a higher cost and that has a negative impact on the margin. We don't mind that at all because we are going after every single case that we can get, so that we build our position in the market. And then as we've mentioned before, longer term, we -- or medium to long term, we address then the supply chain costs as the volume stabilizes. Now the reason why the volume was higher than when the contract is, one, because of higher demand. But second also, we shut some lines down for a limited period of time, a, for maintenance, but, b, also because we are implementing or installing new capacity. So there was some downtime there that we had to plan for, and that was impacting the Q4 margin. 2 years or 3 years ago, we had -- at the Analyst Day, we gave you an estimate that we're going to improve our gross margins through reduction of waste in our supply chain. These efforts have continued and have actually really delivered, but they haven't come through in the financials because the negative impact of the increased contract production has really masked that. So as we get better and we install the incremental capacity, those savings will come through and will have a positive impact. And that is what you also see in the slight improvement in 2020. But we are not forecasting a dramatic improvement because we don't know exactly where the volume is going to fall out. In addition to that, as we've stepped back and looked at the dramatic growth that we have had, we've also seen some additional opportunities of how to reorganize and transform our supply chain more from an end-to-end perspective to, as Dave said, increase our flexibility that we have and also increase our efficiencies because there's -- one is installing new lines, the other thing is getting the equipment efficiency up, but better running the lines, and that gives you incremental capacity without really necessarily a ton of investment. And again that the way we're operating will change. Now this very much depends on the volume development that we will see in 2020. Because our first priority that remains to serve the volume, if we have an opportunity to get to those changes sooner rather than later, we'll do that. But we have to find the right time, and that very much depends on the volume demand that's going to hit us during 2020. So sorry for the long answer, but there are really 3 components to it and I wanted to make sure that I fully cover that.

Our next question comes from Kevin Grundy with Jefferies.

Congratulations on a strong year. I wanted to come back to the topic of Seltzers. So what would you observe, or what are the early learnings so far? And I understand it's early days, but with the Bud Light Seltzer launch, what have you seen competitively, and I totally understand it's still too early to gauge repeat purchase rates, but early observations there would be helpful. And then for Jim and Dave, I think it had been -- we all understand that forecasting the category growth rate this year is difficult with a pretty wide range. But it had been your assumption previously that you would be able to maintain market share. Is that still your assumption? And then I have a follow-up.

Okay. Kevin, it's Dave. As far as (inaudible) talking about, we've been anticipating, obviously, this moment for launch now the -- Bud Light Seltzer launch and a lot of other competitive activity. And I think when we spoke last time in October, there are a lot of things at play that we were putting into the market that we think has kind of combined to create the results that I'll share with you the way we see the market. And I think Jim talked about reformulating at 13 flavors. At the time we formulated all 13 flavors, 5 of which overlap with White Cloud to be the #1 player, but we wanted to make sure we had better products than they did on those five, and we did. We did the work and we do. We also did work on the other [8] to make sure they were better than what we had existed previously. And then that went into the market, October-November started go into the market. We also -- we signed the NHL, which has given us some brand awards and also some in-store presence that has really helped us expand our presence in store. We've launched a new ad campaign in Q4. (inaudible) actually invested. And as part of the AP&S numbers as Frank talked about, we invested a lot of dollars in Q4 to bring that thing to life, and again, to create some awareness behind the brand. Then we launched Lemonade on January 1. And so as the Super Bowl hit, we advertised on -- in 7 key markets behind Lemonade, again, to drive awareness around the new product.

Now here we are 6 weeks after the introduction of Bud Light Seltzer and the way we're looking at it, we started to look at this business really sequentially. For the moment Bud Light Seltzer entered, what started to happen. Like what's happening in the marketplace, what are consumers doing? Because you're right, it's so... Right now, this is all about trial. This is an artificial moment there that, right now, we're -- it's just tremendous execution by the ABI system and a lot of trial. (inaudible) this is how we're looking at it. What we've seen over those last 6 weeks is we've seen White Claw's share decline by 9.4 points since Bud Light Seltzer launched. Bon & Viv down 0.8%. [Natty Light] down 0.4. All other Hard Seltzers down 0.7%, Truly up 0.5. Well White Claw -- I'm sorry, while Bud Light Seltzer itself took like a [10:8] share. So the first assault has happened, we feel like about the work that we did before, particularly on the reformulation of the advertising, great execution from our wholesalers, we are the only brand in the category, we've actually have gained share since Bud Light Seltzer entered the marketplace. Now obviously, it's very early. So we're not sure where it's going to go, and we'll have to see, obviously, with where repeat takes us. But right now, we feel pretty confident that we're in a good place. The last thing I'll say is that the Nielsen, I think you guys look at Nielsen panel data, Nielsen panel data just came out a few days ago, and we're certainly looking at, like, who is our consumer? And how is it different? Basically, we were sourcing 51% of our volume for Truly sourcing outside of beer. So it's beers and wine, 39% for White Claw, who are sourcing more from light beer than we are. So already start to see a different consumer emerge. We -- our households tend to be higher income. Almost half of our households are over $100,000 households. But almost half of our volumes come from under a 44- old female head of household families. We're more diverse than any other brand, ethnically, in the marketplace. And our basket ring is about 10% higher than the White Claw. So we're seeing -- we're trying to create a brand that's very broad, and that brings -- attracts a lot of different consumers. We feel like we put ourselves in a position to compete now that all the bigger guys are coming into the market. So that was a really long answer. I thought it was important to kind of give you a sense of how we're looking at it. I think in terms of the category, we're like with everybody else. We don't -- nobody knows for sure. But the general consensus seems to be a doubling of the category this year. We're planning to -- we're planning on that, and we're planning to be able to produce more than that if we have to.

We've been investing to gain share in 2020. With -- there's a lot more money in the reformulation, we probably took about 1% gross margin here to spend more money on the ingredients, higher quality ingredients, more complex flavors. We think that has made a difference in the marketplace because we saw a bend in our share trends with the reformulation, and we're very committed to the category. And committed to spending against it, as you've seen from the fourth quarter, and if you're tracking ad spending into this year, we're certainly taking the entrance of the largest brewer in the world in this category with the strongest brand in the [beer]business in the United States coming in as well as Corona, also a great brand. So the elephants are getting into the bathtub, but we feel like we've carved out a space in that bathtub that so far has held our share actually grew it a little bit. That's great.

A quick follow-up, if I can, probably for Dave and Jim, is just maybe a little bit more color on the Sam Adams and Angry Orchard brands. So both brands struggling a bit at the moment. I know you're doing some work on both of them. Maybe some update there on the strategy? And then adequacy of investment levels and was -- well, I know there's a lot of focus in the organization, and rightfully so, behind Seltzers. Was there any thought about taking investment levels even higher on Sam Adams and Angry Orchard in an effort to help attempt to stabilize those brands, which are struggling. So thoughts there would be helpful.

Yes. We're, of course, very committed to Sam Adams and to craft beer, as evidenced by the merger with the Dogfish Head. Yes, the growth is very strong and attractive in Hard Seltzer, but we are the Boston Beer Company, and beer is our middle name. And craft beer is the foundation and heritage of the company. So we continue to invest behind Sam Adams at kind of historical levels. So we feel like we've got the appropriate level of investment there and haven't sacrificed anything for the incremental investment in Hard Seltzer. We think our efforts should be directed against getting the right message that put Sam Adams back at the forefront of the drinkers list of relevant brands. And we believe, long term, that we are going to see a consolidation in craft beer as shelf space shrinks at retailers.

And just to -- I'll put it back just a little more detail on Jim's notes. I think if you look at on the Sam business, we made a lot of progress last year on seasonal. So that's 1 area we feel good about. We reformulated Summer Ale, we reformulated Cold Snap, both of them, which are sort of lighter becoming lighter, brighter, easier to drink. And they both have performed extremely well, and we have more plans for that later in the year. So the signal piece we're quite -- we're actually pleased with, I think -- getting back to Jim's point about, we need to make this brand relevant to pretty soft pace. And campaign that we launched a couple of years ago, we found that it really reinforced what Sam stands for in the minds of our current drinkers, but not so much not raising it up with non drinkers or new drinkers to bring them in. And we've been -- this is going to be a year of experimentation for Sam Adams. We don't expect it to grow because we're going to get plenty of growth, as you guys know, from Truly and from Dogfish Head [and Twisted Tea]. This is an opportunity to go find what's that right message that Jim talked about. We did a -- we did launch a social new program in Q4 called Toast Someone, which Jim mentioned in his opening remarks. We're happy with where that's come at. In fact, actually, I was looking at the numbers, our household penetration increasing in Q4 for Sam Adams for the first time for Boston Lager in a long time. So it doesn't mean -- it's just the beginning, but we feel like there's something there that's powerful. We're experimenting with other ideas. We're going to be aggressive to your question, Kevin, we're going to spend behind this brand. But I think the amount of spend will be proportionate to how good the ideas are that we develop. And if we [work] behind them, we're going to spend behind them because, as Jim said, this is a critical -- it's a critical part of our business for us.

Our next question comes from Steve Powers with Deutsche Bank.

Yes. Great. To follow up on the gross margin, Frank, were there any onetime transaction costs associated with Dogfish in the quarter that might not repeat as we go forward, just as we think about the bridge to next year? And then more importantly, for any of you. I guess, can you help frame the comps you have in the first half ['21] improvements? And what are some of the maybe the volume assumptions that inform that outlook?

Yes. So let me take the first one. The transaction cost for Dogfish Head, total yield starting in July when we closed, is $10 million. $2 million of that is in Q4. There is a minor -- the majority is in operating expenses. There is a minor amount, and it was already in Q3, that was not in Q4, that's hitting gross margin. So that impact in gross margin is for the half year, there's a little bit, but that's not the majority. That's number one. When you look at this year, I think we will see further margin decline in Q1 because we're building up and then start at the end of December, similar to last year, we are prebuilding inventory because of the limited capacity that we have. And you typically exceed your capacity -- your volume requirements or capacity requirements during the peak months in the summer, and then during the shorter month, you have a little bit of spare capacity. We are trying to run 100% of the capacity, and we're building more and we're shipping more in the first half. So there will be a relatively high component in Q1 that's going to contract at a higher cost, and that will negatively impact the gross margin. What you will see at the same time is also that shipments will outpace depletions because we're building this up, and that will run into kind of the middle of Q2. Which is when we start decreasing this inventory again. In Q2, also we will have the extra line -- extra canning line internally coming on stream. So that will shift then the volume a little bit from a relatively high contract percentage in Q1 to a lower percentage in Q2. And you should see after the dip in Q1, you should see the margin improvement from Q2 onwards throughout the rest of the year based on today's volume assumptions. I should say that. So if the volume -- if the volume actual volume comes in higher than what we are projecting at the moment, there might be a negative margin impact. But we'll -- it all depends on how much capacity we have available and internally and how much volume we get. So I hope that answers your question. I can't give you hard numbers, but that's directionally -- that's kind of how the margin will flow.

Okay, that's helpful. But in the release, when you talk about the confidence in first half '21 -- 2021 improvement, is that is that -- because of structural returns on the investments you're making today, is that just easy comps, lapping the dynamics you just walked us through in '20. I guess, that's what I'm...

No, it's not -- no, it's not easy comps and the way -- the reason why we will be, quite frankly, is we're pretty confident in the benefit that's coming through from the program. So we will increase capacity and flexibility in our supply chain within our existing equipment because we will be operating it differently. That will come through. It's a little bit akin to the other savings that we had some waste reduction, where the savings were coming through, but they were masked by the incremental contract volumes that we have, which came at a higher cost. And the extent to which you will see the margin improvement really literally depends on how much volume we will have and how much has to go to contract at the end of the day. If the volumes stabilize a little bit, or the growth moderates, you will see those margin improvements come through. But it's not because we are lapping, it's because we're doing -- we're actively changing the way we're operating the supply chain.

We're probably anticipating, and Steve, this is Jim. I think it's fair to say that we're anticipating those improvements starting to kick in, but only at the back half of Q2. And so when they show up in the Q2 numbers, we don't have high certainty at this point. But we do believe currently that the benefits of this supply chain transformation, which will be a several year project. The benefits will start to show up more clearly in the second half of 2020. And we'll continue to build through 2020, 2021, quite possibly into 2022.

Okay. And I guess, just as a last cleanup on that. I guess, we should assume, therefore, and I'm assuming it's also somewhat volume dependent, but the elevated CapEx that you called out for 2020, just given that this is going to be a multiyear program. I guess, it's -- would it be prudent on our behalf to think about elevated CapEx into '21 and maybe perhaps 2022 as well?

It's hard to guess. I would say that the sort of the lean transformation that we're involved in and committed to will mostly require changes in operating practices and procedures. Yes, there will be some CapEx but the 2021 CapEx in 2020? Well, certainly, next year's -- this year, next year's CapEx will also include new packaging lines. So we're anticipating continuing to grow in 2021, significantly, and we're going to be investing to support that, possibly 2 new can lines, and we'll be spending most of that money in 2020.

(Operator Instructions) Our next question comes from Sean King with UBS.

given portfolio [Audio GA&P]

Because everybody is switching to cans. But what we have been working with our suppliers very closely on that. So we don't expect a major cost increase coming from cans. That's not built in our financials.

Our next question comes from Laurent Grandet with Guggenheim.

Yes, I do have 2 sets of questions. So the first one on the top line. So -- and on Truly, if you try to unbound on where the growth will be coming from, roughly, I mean, what would be coming from the new innovation [like in] Truly Hard Seltzer Lemonade, what would be coming from the expansion of the 24 ounce can that's relatively new and have some opportunity to grow in distribution. I'd like to understand this a bit more, and also if you can confirm that the 24 ounce can or so it's more profitable than the variety pack? I assume that, but if you can help us frame that better?

Laurent, let me take this, Frank. Let me just take the profitability question all the way. So I think the 24 ounce can is a single can so that has a slightly better profitability. The majority of the business in Truly's variety pack, which has a slightly higher cost and lower margin. So there should be a little bit of improvement there, but it's not going to dramatically change the gross margin picture for Truly as a franchise or the company. It's beneficial.

Yes. I mean, the key -- that's right. So it's not the economic benefit, but it's the consumer, as you know. So the consumer benefit is a big one for us. And I think 24, the world's going to 24, 6 months ago, I'm sure we haven't -- we had any distribution on 24 ounce. Last outlook, we were about 20% of the ACV now with 24-ounce or 3 different SKUs. So we see that as really as a way to build the business, particularly, obviously, at convenience stores.

Yes. And could you tell me, there is a lot of new SKU coming from you guys? As well as from competition. I mean, we discussed about this in the past, where the shelf space has been sourced right now? Is it coming from craft beer? Or is it coming from light beer. I mean, could you help us understand this a bit better.

And I think from what I've seen, I think it varies by -- obviously, by customer. I mean, I think domestic premiums, they're giving up some space. We're seeing the alternate from the long tail craft as well. And you're talking about (inaudible) talk about where Hard Seltzer is going and where to get the space. So that is -- I think that's sort of where it's coming from. Those are the places where I've seen it most coming from.

Yes. And my last question is a bit more on the gross margin. So I understand, especially, I'm sure, that the more you manufacture your product. I mean, with contract managers and the less profitability. So could we assume that right now, I mean, you are manufacturing half of your volume with contract manufacturer. And then the other half in-house and by adding a new line and only (inaudible) you'll go towards more 60-40 or 70-30? And what will be the -- I mean, the cost difference between contract manufacturers and in-house that will help us as well.

Yes. So Laurent, this is a level of detail that we don't typically view. What I can tell you and what you will see in the 10-Ks, we had like our external volume has increased to 27% in 2019. And clearly, the relative share has increased in Q4 for the reasons that I mentioned earlier on the call. We don't expect any improvement of that ratio in 2019, given the volume growth that we have. So in 2020, we'll have significantly more capacity in-house, but given the volume growth, we also have to increase the volume with [Coleman]. So there will not be a dramatic improvement in the ratio in 2020. What will happen, and I just want to repeat that, what I said before is we'll have a higher common share in Q1, okay? And then in Q2, we have the incremental capacity coming on stream. And so the phasing throughout the year will be different and will improve in our favor but the average will not change very much versus 2019.

And [just to that] where Jim made a point about efficiency as well because there's really 3 things in play. One is our ability to increase our capacity, but it's also our ability to operate more efficiently. And then on one and the third the countervailing variable is the volume and how high or low that goes. So I think what Jim highlighted was, in addition to adding capacity and adding a new line, which is going in right now, it's also our ability to operate differently and therefore, produce more within our 4 walls. And that's something that Jim talked about starting to hit in Q2 into the second half of this year.

And the final piece of that is part of additional capital investment we'll, currently, anticipated being at our contract manufacturers. We historically, we've used contract manufacturing, mainly for the peaks to get us through the peak, so we didn't have to build our own capacity that would run 3 months of the year. And as a result, we haven't really invested that much in lowering the cost for our contract manufacturers by bringing in some additional equipment that would save us money. Over the last couple of years, that contract piece of our production has shifted from being pretty much only peak coverage to being base coverage. I mean, we're running year-round at our contract partners. And they're very -- they're efficient, they're good, but we haven't fully invested with them to lower our costs. We will be doing that in back of half 2021. So we believe, over the next -- well, back half of '20 and into 2021, by a year from now, maybe 15-months from now, the costs that we currently endure at the contract manufacturers will be much more in line with our internal cost because they'll end up with the same equipment that we currently have, internally. It will be duplicated on the outside. I don't know if that makes sense, but it made sense to me.

Yes. I mean -- and just my final one, because of -- you say the quality has significantly improved. You have a new technology and all this (inaudible). Is there any difference in terms of quality from where you manufacture, if it's in-house, outside, and I'd like to make sure that we, I mean, I believe that's your #1 priority to ensure that the quality of your product is the same way where it's manufactured, but if you can really (inaudible).

Yes. We're very confident that we're very confident there is no difference in quality. I mean, I can tell you personally, I still taste a sample of every batch of every product that we make, regardless of where it comes from. And what we make internally and what we get from our contract partner is everybody is good. I can't tell the difference. So I don't -- I'm pretty confident in that. And we have been working with City Brewing, our primary contract partner for well over a decade. So it's a very strong, very good relationship. And they've always provided high-quality product. Otherwise, we wouldn't be there.

(Operator Instructions) Our next question comes from Vivien Azer with Cowen.

We don't often talk about the other SG&A line, but between 2017 and 2019, while it's only up 50 basis points as a percentage of sales, like I generally think about your A&P line as the 1 to be more leveraged to sales, and it is up over 50%. So can you just remind us of what's in that bucket? And how should we think about that?

So the -- so we split our operating expenses, as I said, we split it into APS, which is advertising, promotion. There is in the actual line, there is a little bit of freight in there, but that's not the majority of that. But it's brand support is going in that line and also the entire selling cost, including the sales force that we have. So the long-term guidance that we have communicated, I think, also in 2017 as we want to control the G&A cost. And by long term, not growing them -- growing them, but not more than half the top line growth rate. And I think we're in pretty good shape there. We have done that. The numbers this year, a little bit distorted because we got Dogfish Head onboard, and we just added the Dogfish Head expenses, and on the A&P line, long term, we want to grow that in line with the top line because we believe we want to build the brand. So we believe in a strong sales force, and that's what you're seeing. We have Truly at the moment. We want to make sure that we really win without mortgaging our other brands, especially not mortgaging Sam Adams, and that's why you see the percentages going a little up in '19 and also '20, but long term, the guidance is in line with the revenue.

Actually, if I could jump in, Vivien, there is one of the things that we did that we didn't talk about, which is important, and that is we committed to increasing our sales organization by about 25% to 30% this year, and we did a lot of work with the Dogfish Head merger, we took a fresh look at how we go to market, who the customers were calling on, et cetera, particularly as the world shifts more to an off-premise world and Hard Seltzer world, and we saw lots of opportunities to change how we do things. It's important this investment that you see in there is we're adding 120-or-so individuals to our sales organization. So we can be making more calls on bigger customers to drive not only Sam Adams and Dogfish Head but also Truly with those customers. And we think, historically, this is something Jim bet on (inaudible) , a great product and a great sales organization. We're -- essentially, we're doubling down and our belief in our sales organization and what they can accomplish, particularly as our portfolio gets bigger, broader, more complex. We need to go-to-market a little bit differently. We have -- we're fortunate. We've been ranked #1 9 out of the last 11 years by Tamarron. We have a great organization with great leadership. And now this is another bet. We talk about -- we talked about Truly bet and of course, and Dogfish and Twisted Tea and Sam et cetera, but this is another bet, that's a big 1 for us that we think is a really smart investment that will enable us to achieve the growth objectives that we've laid out.

We've built our business with the active support of what we think is a terrific wholesaler network. So we're pretty unconflicted about adding another 120 people whose primary job is to sell more of our products for us and for our wholesaler network. And we believe that the commitment we've gotten in return from our wholesalers has been an important part of our success.

Our next question comes from Sean King with UBS.

Yes, I guess, drilling in on Twisted, it's, I guess, continue to post healthy double-digit growth despite the growth of Truly and some of the other seltzers. I guess, what gives you confidence, if any, that it can continue that clip into 2020.

I'd say, well, I'd say 1 thing for sure, as you look at the business has been growing consistently, obviously, as you've mentioned, mid-teens. Looking at the numbers last year, we grew our household penetration by 31% last year. So we -- 31%, almost 1/3 of new consumers. And actually, the number of households only about $1.1 million, $1.2 million. So there's a lot more households than that. So this is a brand that's got very -- it's got low penetration. We're growing it rapidly, very high loyalty. We're -- I think we've mentioned this before, we're going to spend probably 50% more Twisted Tea this year, we're upgrading the packaging, we have a new ad campaign, we have different geographic programs going on, we've got a lot of investment, a lot of support. So all of those things together, we feel really confident that we can continue to grow. We continue to grow Twisted Tea at the same rate, if not better.

(Operator Instructions) Ladies and gentlemen, there are no further questions at this time. I'll turn it back to Mr. Jim Koch for closing remarks.

Well, thanks, everybody, for attending today, and we'll talk to you again in a few months, cheers.

Thank you. This concludes today's conference. All parties may disconnect. Have a great day.