Q4 2019 Earnings Call
Greetings and welcome to the Boston Beer Company fourth quarter 2019 earnings call.
At this time all participants are in listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad as a reminder, this conference is being recorded.
I would now like to turn the conference over to our host Jim Koch founder and Chairman. Thank you. Please go ahead.
Thank you. Good afternoon. 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 or Dave Berwick, her CEO and Frank Smalla our CFO.
I'll begin my remarks. This afternoon with few introductory comments, including some highlights of our result, and then hand the call over to Dave will provide an overview of the business. Dave will then turn the call over to praying well focus on the financial details of our fourth quarter and 2019 fiscal year results as well as our outlook for 2012.
Any immediately following Frank's comments, well open up the line for questions.
[noise], we're happy to report, 25% fourth quarter, Depletions growth, which 19 percentage from Boston Beer legacy brands and 6% is from the addition of go fishing brands, we're making good progress on the dog fish and integration and emerged our sales forces and our business processes.
As in systems, we've learned a lot from each other as we merged our cultures. Our teams are values and our innovation capability collectively we're thankful to our outstanding coworkers for their focus and diligence and our distributors retailers in drinkers, all of whom have helped the company.
Achieved double digit volume growth for the seventh consecutive quarter.
We believe that our Depletions growth is attributable to our innovation is 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 Ferrari.
Dog fish had brands as well as are truly twisted tea or.
Doug Fish had 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 Sam Adams brand position. It for long term sustainable growth in the face of a difficult competitive craft beer environment.
We were excited about the response to our re formulation of Samuel Adams Cold snap seasonal our new Sam Adams tow someone campaign and the Samuel Adams Taproom that opened in downtown Boston in January we're confident in our ability to innovate and build strong brand.
And the complement our current portfolio and help support our mission of long term profitable growth.
Ill now pass the call over to Dave for 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've seen the earnings release some of the information we discussed in the release and the May come up on this call reflect the companies are management's expectations or predictions of the future such predictions and alike are forward looking statements. It's important to note that the company's actual results could differ materially from those.
Jackson in such forward looking statements additional information concerning factors that could cause actual results to differ materially from those in the forward looking statements contained in the Companys. 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 art Depletions growth in the fourth quarter was a result of increases in are truly hard seltzer and twisted tea brands and the addition of the dog fish at brands, partly offset by decreases in our Samuel Adams and angry Orchard brass.
Truly is generating triple digit volume growth and we're continuing to expand brand distribution across all channels. During the fourth quarter, we've launched new formulations for all of our truly flavors, which had been very well received by drinkers before we rolled out the new flavors, we conducted consumer test to ensure that we had the best tasting hard seltzer on the market.
In fact since the Reformulations hit the market in the October November timeframe, both our volume and our velocity trends have increased significantly.
We continue to launch additional flavors and recently launched truly hard sell certain 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 improve formulations and the choose lemonade launch.
Combined with our previously announced NHL partnership and are significantly increased advertising spend will help further bolster our position as a leader in hard seltzer as more kept competitors enter the category in 2020 will 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 volume has declined against 2018 national rollout of angry Orchard per se, but angry orchard still maintains more than 55% market share hard cider. The center categories challenged and we're working to return angry orchard to growth to continue 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 they were prepare for increased competitive activity in the hard seltzer category, we've invested to increase our candid automated Friday pack capacity, but these capacity increases keep on getting eclipsed by our depletions growth, resulting in high.
Higher than expected uses a third party breweries, we'll continue to take advantage of the fast growing hard seltzer category and deliver against 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 margin.
To address this we started the comprehensive program to transform our supply chain with a goal, 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.
Sectors program to run for two to three years and begin showing margin improvement by the first half of 2021, but our gross margins in gross margin expectations will be impacted somewhat negatively until the volume growth Steve wise.
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 tanker demand for our brands during the peak summer months.
Our priorities are to drive truly twisted tea and dark fish have brand growth and work to return Sam Adams and angry orchard toward 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 organizations ability to deliver against 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 and innovations and we remain prepared for sake short term earnings as we invest to sustain long term profitable growth in mind to the opportunities that we see.
Based on information and had year to date Depletions reportage the company through the six weeks ended February eight two.
2020 are estimated to have increased approximately 34% for the comparable weeks in 2019, excluding the doctors had impact depletions increased 28%.
Now Frank will provide financial details.
Thank you, Jim and Dave Good afternoon, everyone for the fourth quarter reported net income of $13.8 million $1.12 cents per diluted share a decrease of 74 cents per diluted share from the fourth quarter last year.
This decrease was primarily due to increases in advertising promotional and selling expenses and lower gross margins. There were only partially offset by increased revenue.
Shipment volume was approximately 1.26 million barrels as 31.7% increase from the fourth quarter in 2018.
Excluding the addition of the Doctor said Brian's beginning July 3rd 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 four weeks on hand and was at an appropriate level based on supply chain capacity constraints that inventory requirements to support the forecast at fault.
Our fourth quarter 2019, gross margin of 47.4% decrease from the 51.9% margin realized in the fourth quarter last year.
Primarily as a result, a fire processing costs due to increased production at third party breweries and higher temperature labor requirements at our company owned breweries.
Roughly offset by price increases in cost saving initiatives at our company owned royalties.
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 in local marketing. The addition of dark we said Brian related expenses beginning July 32019.
Hi, a salaries and benefits costs and increased freight to distribute us due to higher volumes.
General and administrative expenses increased by $6.3 million from the fourth quarter in 2018.
Merely due to nonrecurring darkest veterans extra related expenses of $2.1 million increases in salaries and benefits costs and the addition of dark which had general and administrative expenses beginning July 3rd 2019.
Our full year net income per diluted share of $9 in 16 cents increased $1.34 cents 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 emphasizing promotional and selling expenses.
Our full year 2019 shipment volume was approximately 5.3 million barrels at 23.8% increase from the prior year.
Excluding the addition of the Doctor said brands beginning July 3rd 2019 shipments increased 20.8%.
Our full year 2019, nonrecurring Darfur set transaction related expenses of $10 million were partially offset by Dr. said operating income of $6.9 million.
Excluding the $3.1 million net unfavorable impact the 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 darkly sets operating results net of the dilutive impact of the transactional related share issuance was more than offset by the nonrecurring transaction related expenses, resulting in a combined unfavorable impact of 18 cents per diluted share and 40 cents, but.
Share respectively.
Going forward for 2020, the company will report darkness impact on 2020 shipments and Depletions volume growth rates, but does not plan to report the earnings per diluted share impact of darkly said as it has been fully integrated into the company's operations beginning in early 2020.
Looking forward to 2020 based on information, which we are currently aware we are targeting 2020 earnings but in the shelf between $10.70 and $11.70, but actual results can vary significantly from this target.
This projection excludes the impact of pay as you 2016 Thats your line.
We are currently planning increases and shipments and Depletions up between 15 and 25%.
Excluding the addition of the Doctor said, Brian 2020, Depletions and shipment growth is estimated between 11% and 21%.
We're targeting national price increases per barrel up between one and 3%.
Full year 2020 gross margins are currently expected to be between 49 and 51%.
We plan to increase investments in advertising promotional and selling expenses up between 18 and $19 million for the full year 2020, nothing including any increases in freight costs for the shipment of product so distributors.
We estimate our full year 2020 effective tax rate to be approximately 27% excluding the impact of his view 2016 to share in line.
We're not able to provide forward guidance on the impact that pays you 2016. This airline will happen over 2020 financial statements and fully effective tax rate and that as this will mainly depend upon unpredictable future events, including the timing and value realized upon exercise of stock options versus the fair value in those options for granted.
We are continuing to evaluate 20, twond capital expenditures and currently estimate investments of between $135 million one on the $55 million the capital will be mostly spend and continued investments in on breweries and taprooms.
We'll now open up the call for questions.
Thank you.
Ladies and gentlemen at this time will be conducting our question and answer session.
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Our first question comes from Vivian Abrams with Cowen. Please state your question.
Hi, good afternoon.
If you will hi.
I would.
Not right.
But.
Of course coronary Isilon Hello, 20, so it looks like your widening that a range a little bit on both and I'm just curious.
Right.
[music].
Okay.
Hey, this is Frank so.
On the guidance, we haven't really changed that much I mean, there what kind of.
Ron 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 had hazza category and the truly brand and there's a lot happening is really hard to predict the long term growth.
Yes, it's fair to say that the last two years everybody in the industry under estimated the extra growth.
That has happened and.
Of course, the growth in the size of the of the category at Trex many more.
Participants to enter the market and what we're seeing especially this year is like the larger players that 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 Thats. All we have just careful and give you a wider range because it really depends on how the other years going to play all told the new competitors are going to get traction and what the entire growth of the category is going to be which again weve.
On the estimate of as an industry for the last two years. So thats. The main reason for it.
Thanks, Frank that make perfect sense is that reasonable not dovetailing into that my second question just around the gross margin commentary. So given where are you guys settled out.
For the error.
The low end of your guidance screens are just not looking for 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's taking on 2020, why but like him clip at the midpoint of your 2020 I'm very smart.
Guidance is some increased so help me understand that if you it. Thanks.
Sure. So on the gross margin that couple of things that are happening. So we came in at the low end and little bit low in Q4 than we had originally anticipated quite frankly.
And then two reasons for it so let me let me cover the Q4 for us.
One is the the volume clearly has outpaced our expectations. So we had higher volume that volume went to contract and contract as as we've discussed before on previous earnings calls just comes at a higher cost and that as a negative impact on the margin.
We don't mind that at all because we're going after every single case that we can get so that we built 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 high in the winter contract is one because of higher.
Demand, but second also.
We shut some long lines down for a limited fair enough time.
April maintenance, but be also because we are implementing.
Installing new capacity. So there was some downtime there.
To that we have to plan for and there was impacting the Q4 margin.
Two years or three years ago, we at the Analyst day, We gave you an estimate there 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 mass that so as we get better and we install the the incremental capacity.
Those savings will come through and we'll have a positive impact and that is what you also see in the slight improvement in 2020.
We're not forecasting a dramatic improvement because we don't know exactly with the volume is going to fall off.
In addition to that as we've stepped back and looked at the dramatic growth that we've had we've also seen some additional opportunities don't of how to reorganize and transform our supply chain more from an end to end perspective.
Two as dates that increase on flexibility that we have.
And also increased efficiencies because there is one thing is installing new lines. The other thing is getting the equipment deficiency up but a bit are running the line. So that gives you incremental capacity without really necessarily a tough investment.
And.
Again, 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 remains that remains to serve the volume. If you have an opportunity to get to those changes sooner rather than later, we'll do that but we have to find the right time into very much depends on the volume demand thats going to hit us during 2020, so sorry for that.
Long answer, but they're really three components to it and I wanted to make sure that did not fully cover that.
No that color very very helpful. Thank you so much.
All right.
Our next question comes from Kevin Grundy with Jefferies. Please state your question.
Hey, good evening, everyone enough congratulations on a strong year I wanted to thank you come back to the.
So the topic of Seltzer <unk>.
What would you observe or what are the early learning so far and I understand it's early days, but with the Bud light sell through launch.
What have you seen competitively.
So we 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 you know what had been we all understand that did forecasting the category growth rate. This year is difficult with a pretty wide range, but it had been your assumption previously that you did you would be able.
To maintain market share.
Is that still your assumption and then I've a follow up thanks.
Okay, Thanks, Hey, Kevin stake.
As far I started my just talking about we've been anticipating obviously at this moment.
For months now that coupled by Celso launch in a lot of other competitive activity and I think we when we spoke last time in October there a lot of things at play that we're putting in some markets that we think has has kind of combined to create the results.
I'll share with you that we have to where we see the market and I think Jim talked about Reformulating at 13 flavors at the time Reformulate, all 13 flavors of five of which overlap with white Hot season over one player. We wanted to make sure we had better product and they did in those five and we did we tend to work when we do we also did work on the other eight to make sure there were better than what we had existed previous.
Easily and then that went into the market.
October November started going into the market.
We also you know we signed the NHL, which has given us some brand awareness and also some seven store presence. It really helped us expand our presence in store, we launched a new AD campaign Q4 would keeping Michael key we actually invested and as part of the vpns numbers that Frank talked about we invested a lot of $1 in Q4 to bring I think to like it again.
Some some awareness.
And the brand then we launched lemonade on January one and so.
As we should the Super Bowl hit we we advertise on seven key markets behind lemonade centric to get to drive awareness around the new product now here. We are six months six weeks after the introduction of Bud Light's Elster and in the way we're looking at it we started looking at this business really sequentially for the moment by by itself.
Our Andrew what started to happen what's happened in the marketplace I wonder consumers coming because you're right. It's shoot right now, but it's all about trial. This is like an artificial moment at right now where it's just it's just create tremendous execution by the B. I system in a lot of trial. This what we just from the how we're looking at and what we've seen over those last six weeks is we've seen white cost.
Share declined by 9.4 points since provide cells from launch.
Part of it down 0.8, nothing write downs or point for all other.
[noise] parts sales are down 0.7 truly up 0.5.
Well, we call I'm, sorry, while fall by Telstra, if I could teneight share so.
The first to solve this happened we feel we feel like a lot of the work we did before picking on the reformulations the advertising great execution from our wholesalers. We are the only brand in this category. We've actually have gained share since spotlight seltzer enter the marketplace. Now obviously, it's very early so we're not sure works on a go and we'll have to see obviously, what we are.
Repeat takes us, but right now we feel pretty confident.
That word a good place lastly, I will say is that the Nielsen I think you guys look at Nielsen panel data. They also candidate it just came out a few days ago and we're starting to look at what who is our consumer and how is it different.
Basically we were sourcing 51% of of our volume for truly sourcing outside of appear so as far as fearsome why 39% for why costs, which are sourcing more from light beer than we are so already start to see different consumer merge we are households tend to be higher income almost half our households are over 100000 dollar.
Sure.
Households, about almost half of our volumes come from under 44 year old female head of household families were more diverse and any other brand ethnically in the marketplace and our basket ring is about 10% higher than that then and why cost. So we're seeing.
Where we're trying to create a brand is very broad and neck and neck different tracks a lot of different consumers, we feel like we put ourselves in a position too.
To compete now that that all that all the big bigger guys are coming into the market. So those are really long answer, but it's also important to kind of give you a sense of how we're looking at it I think in terms of the categories were 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 were planned to be able to produce more.
In that.
If we have to it.
That's great and I appreciate basically thing.
We've been investing to to gain share and 2020.
Yeah with the there's a lot more money in the re formulation, we probably took about 1% gross margin hit to spend more money.
On.
The greedy and higher quality ingredients more complex flavors, we think.
That has made a difference in the marketplace because we saw.
A band in our share trends.
With the re formulation.
We're very committed as a category.
And are 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 for in the world in this category with the strongest brand in the beer business in the United States coming in as well as a.
Corona all show a great brand so the elephants, you're getting into the back of.
But we feel like we've carved out a space and that back up that so far has held or share actually grew at a little bit.
That's great. The quick follow up if I can probably for for David Jim.
It's 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 focusing the organization right. Please go behind Seltzer.
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 which are struggling so thoughts there would be would be helpful. When they'll pass it on thank you.
Yeah, we're up of course, very committed to Sam Adams and to craft beer as evidenced by a merger with Doug Fischer head.
Yes, the growth is a very strong unattractive in hard sell sure, but we are the Boston beer company in a beer is our middle name and craft beer is.
The foundation inherited a company. So we continue to invest behind Sam Adams at kind of historical levels. So we feel like a we've got the appropriate level of investment there and haven't sacrificed anything for these incremental.
Estimate and our itself there we think our you know 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 are and we believe long term.
That Oh, we are going to see a consolidation and craft beer at shelf space shrinks at retailers.
And just to pick up production of just more of a little more detail on Jim's notes I think if you look at on the sand business. We've made a lot of progress in last year on seasonal so thats one here and we feel good about we reformulated summary, I would reformulated cold snap both of which are sort of lighter corn lighter brighter easier to drink and they both have to have kept performed extremely.
Well and we have more clients for that later in the year. So the seasonal piece, we're quite were actually pleased with I think.
Getting back to Jim's point about we need to make this brand relevant to chips or 30 sites in the campaign that we launched a couple of years ago. We found is that it really reinforce what Sam stands for the mines of of our current drinkers, but not so much.
Persuasive enough with with Nondrinkers or new directors to bring them in and we've been Ics. This is going to Europe experimentation for Sam Adams, We don't expect it to grow we're going to get plenty growth as you guys know from truly once and for doctors interested to see this is an opportunity to find what's that right messes that Jim talked about we did what we did want to social media program in Q4 call to us.
On one which Jim mentioned in his opening remarks, we're happy with where Thats comment in fact actually I was looking into numbers our household penetration increasing in Q4 for Sam Adams for the first time for Boston Lager and long time.
So it doesn't mean, it's just the beginning but we feel like there's something there. This powerful were experiments with other ideas, we're going to be aggressive tier but to your question, Kevin we're going to we're going to spend behind this brand.
But I think the amount of spend will be proportionate you. How good the ideas are complete we develop and if we really behind them, we're going to spend behind that because as Jim said. This is a critical it's a critical part of our business for us.
Okay. Thank you guys. Good luck.
Thanks.
Thank you. Our next question comes from Steve Powers with Deutsche Bank. Please state your question.
Yeah, great. Thanks, Pete to follow up on the gross margin Frank were there any onetime transaction cost associated with dogs. This in the quarter that that might not repeat as we go forward just as we think about the bridge the next year and more importantly.
For for any any view I.
I guess can you help frame the confidence you have in the first half a 21 improvements and what are some of that maybe the volume assumptions that informed that outlook.
Yes, So let me take the first of on the transaction cost so dark fish head.
Yes.
Starting in July when we close.
$10 million.
2 million of that is in in Q4.
There is there's a minus the majority is an operating expenses as a mine Oman and that was already in Q threes that was not in Q4.
Thats sitting gross margin.
So that impacted the impact on 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'll see further.
Margin declined in Q1.
Because we're building up and denniston at the end of December similar to last year, we are pre building inventory because of the limited capacity that we happen.
You typically exceed your capacity your volume requirements of capacity requirements. During the peak month in the summer and then during the shoulder month, you have a little bit of spare capacity. We are trying to run 100% the 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 costs that will negatively impact to gross margin.
You will see at the same time is also that shipments of will outpace depletions because we're building this up and that will that one 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 scanning line internally coming on stream. So that will shift then the volume a little bit from relatively high contract percentage in Q1, two lower percentage in Q2, and you should see after the dip in Q1, you should see than margin improvement.
From Q2 onwards throughout the rest of the based on today's volume assumptions I should say that so if if the volume assumption is the volume extra volume comes in higher than what we are projecting at the moment.
There might be a negative margin impact, but will it all depends on how much capacity, we have available and internally and how much volume.
Volume, we get so I hope that answers. Your question if I can give you a hard numbers, but but thats directionally, that's kind of how the margin will flow.
Okay. That's helpful, but in the in the release when you talk about the competence in first half 21, 2021 improvement as that is that because of structural returns on the investments you're making today is that just easy comps lapping. The dynamics you just you just walked us through in 20.
I guess, that's what I know it's not.
No it's not easy comps in the way. The reason why we will abate quite frankly is we're pretty confident in the benefits coming through from the program. So we will increase capacity and flexibility in our supply chain within our existing equipment, because we'll be operating it differently that will come through.
It's a little bit akin to the to the other savings that we had from waste reduction where the savings were coming through but there were masked by the incremental contract volume that we have which came at a higher costs.
And.
Yes, the extent to which you will see the margin improvement really live it really depends on how much volume. We will we will have and how much has to go to contract at the end of the date, if the volumes stabilize a little bit okay.
The growth moderate you will see those margin improvements come through it but it's not because we have we're lapping gets because we're doing we're actively changing the way we operating the supply chain.
Okay, that's probably in Beijing.
And.
Steve. This is Jim were I think it's fair to say that we're anticipating those improvements.
Turning 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 are the benefits of.
This supply chain transformation, which will be at 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 2028 2021.
Quite possibly and to 2022.
Okay, and I guess just over the last cleanup on that.
I guess, we should assume there for another 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 would it be prudent on our on our behalf to.
Think about elevated capex into 20 wanted maybe perhaps 2022 as well.
It's hard to guess I would say sad that.
So to the lean transformation that.
We're involved in and committed to will mostly required changes and operating practices and procedures.
Yes, there will be some.
Capex, but the 2020.
One capex in 2020, well certainly next year's this year next year's Capex will also include a new packaging line. So we're anticipating continuing to grow.
In 2021, a significantly and we're going to be investing to support that.
Possibly a two new can lines and we'll be spending most of that money in 2020.
Great. Thank you very much.
Thank you.
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Our next question comes from Sean King with you'd be yes. Please state your question.
Hi, Thanks, given your portfolios the increasing exposure to cans with truly does the guidance reflect any I guess tailwind or headwind from aluminum into 2020.
No we have aluminum we have.
I'd say the input cost for aluminum we've kept flat.
We don't expect a major impact when you look at the can market.
What do you have as you have relative limited supply quite frankly, because everybody switching to cans.
But what we've been working with our suppliers very closely on that so we don't expect a major cost increase coming from cats that that's not though that and also naturals.
Great. Thank you.
Alright.
Thank you.
Our next question comes from.
Laurent Grandet with.
Moving Heim please state your question.
Yes, good good evening, everyone I do too I do have two sets of question sort of first one on.
On the topline.
So I don't.
And bone on where the growth coming from.
Roughly I mean, a wet what would be coming from new innovation that could not 40 out since their lemonade what would be coming from.
Expansion.
The 24 arms can that's relatively even though you and how by some of 42 Gordon distribution I turn to some distribute more into them.
So if you can confirmed that the 24 cap on scanner suite, so it's more profitable than than divided by consumers that but if you cannot.
The sudden frame that Ben thank you.
Yes.
Let me let me take this Frank let me just take the profitability question all the way.
So I think.
The 20 falling scan is a single can so that has a slightly better profitability.
The majority of the business intruders variety pack, which has a slightly higher cost and mix and lower margin. So there should be a little bit of improvement there, but it's not going to dramatically change to gross margin picture for truly is a franchise or the company.
It's beneficial I mean, the key that's right. So it's not the economic benefit, but it's the consumer as you know set the consumer benefits is a big one for US I think 24, the world's going to 24 six months ago onshore. We haven't had we had any distribution on 24 ounce last time, but for about 20% of HCV now.
24 hours on three different skew. So we see that is a really as a way to build the business, particularly obviously and convenience stores.
Yeah.
And could you could you tell me Im not there is a lots of fun U.S.K. you cut me from you guys I swear to us from competition them that we discuss about this in the past where the shelf space has been Oh, it's been source right now he's it's coming from a craft beer or is it coming from a.
From light beer I mean that could you could you help us on a Sunday, so it'd be better. Thank you.
And I think it will work for I've seen I think it varies by pipe capacity by customer I mean, I think domestic premiums are giving up some some space. We're seeing they also coming from the long tail craft as well and you're talking about right in talking about were hard smelters going where where they get the space that is I got that sort of where it's coming from those.
The place where I've seen in most.
Hi, Rob.
Yeah.
And my last question, it's a bit more on the gross margin so I understand especially on threed outside the more you manufacture your productivity now you with contract manufacturers, none the less profitability. So could we have trimmed up right now I mean, not you are manufacturing half of your volume was contract manufacturer and the other half in house.
And by having a new line and only some you know you would go towards more.
60, 40, or 70 city and the west we'd be there.
I mean do cause difference between a contract manufacturers I'm on the in house that would have helped us as well.
Yes, Hello, Ron this is the level of detail that we don't typically review of what I can tell you. What you will see independent case, we had like Oh external volume has increased to 27% in in 2019 and.
Clearly the relative share has increased in Q4 for the reasons that I mentioned early on the call.
There, we don't expect any improvement of that ratio in 2019, given the volume growth that we have so in 2020 will have significantly more capacity in house, but given the volume growth. We also have to increase the volume with Coleman. So.
In addition, 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 as well have a higher Coleman share in Q1, Okay. And then in Q2 will have the incremental capacity coming on stream and so the phasing throughout the year will be different.
And we'll improve in our favor, but the average it will not change were out for US. This funny 90, and just a bad because what you made the point about efficiency as well because there's really three things at play once our go to increase our capacity, but it's also our ability to operate more more efficiently and then what in the third in the countervailing variable is volume and how.
So low that goes I think what Jim highlighted was in addition to adding capacity and adding a new mine, which is going and right now.
It's also our ability to operate differently.
And therefore.
It is more within within our four walls and that's something that Jim talked about starting to hit by Q2 into second half of this year and the final piece of that.
As a part of additional capital investment.
Well currently anticipating being at our content and contract manufacturers, we historically, we use contract manufacturing mainly.
For the peaks to get issue. The peak. So we didn't have to build their own capacity that would run three months of the year and as a result, we haven't.
Really invested that much in lowering the costs for our contract manufacturers by bringing in some additional equipment that will save us money.
Over the last couple of years that contract piece of our production has shifted from being a pretty much only peak coverage to being based coverage I mean, we're running year round at our contract partners and they're very.
You know there efficient they're good, but we havent fully invested with them until lower.
Our cost we will be doing that.
In the back half of 2021. So we believe are over the next we'll back half a 20 and ended 2021.
By a year from now maybe 15 months from now the costs that we currently.
And do or 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'll be duplicated on the outside I don't know if that makes sense, but made sense to me.
Yes, I mean, I I just might sign on one because of.
You said the quality of the decrease.
The improved hi, you have a new technology and only sometime.
Is there any difference in term of quality from where you manufacture or if it's in house outside them not I'd like to make sure that three I mean, I believe that's number one priority to ensure that the quality of your production is the same wherever its manufacture Betsy if you cannot.
I'm really yes.
And my we're very confident that.
We're very confident there is no different sand quality I mean, I can tell you personally I still taste a sample of every batch of every product that we make regardless, where it comes from and go with it so what we make internally and what we get from our contract partner or.
Is everybody is good I can't tell their friends, so I don't I'm.
Im pretty confident in that then we have been working a with a city brewing our primary contract partner for well over a decade. So.
So it's a very strong very good relationship.
And they've always provided high quality product otherwise we wouldn't be there.
Well. Thank you. Thank you very much for all those quarters I proceeds on that.
Because the volume growing them and that's not gimi would be drinking even more agreeing form.
I know I'm on my third lever on [laughter] be careful.
[laughter].
Thank you and just another minor to ask a question press star one on your telephone keypad.
Our next question comes from Vivia neighbor with Cowen. Please state your question.
Thanks for the follow up I'll be quick well, we don't have often talk about the other SC an airline that between 2017 in 2019, well, it's only up 50 basis points as a percentage of the yellow like I generally think about your am p. minus the wanting to be more leverage on to sales and if it up over 50%, but can you just sort of.
That's what what's in that bucket and how we should think about that.
So the eight so so we split the operating expenses as we said we split into Hps, which is advertising promotion that's in the EXL Landa Liberal freight in there, but thats not the majority of that but it's all the brand support is going in that line and also the entire selling cost, including the salesforce that we have so.
The long term guidance that we have commuted communicated I think also in 2017 as.
We want to control the DNA cost and by long term I'm not going them, a growing them by not more than half the topline growth rate and I think where I'm pretty good shape. There we haven't done that.
The numbers this year, a little bit distorted because we got dr. shed on onboard and we just added the Doctor said expenses.
And on the on the MP line long term, we want to grow that in line with a top line because we believe we want to one of both the brand. So we believe and a strong sales force and that's that's what you're seeing.
We have truly at the moment, we want to make sure that we really when without.
Mortgaging or other brands, especially not mortgaging, some adams and Thats, where you see the percentage is going.
A little up in and.
19 also 20.
But long term guidance is in line with revenue and actually if I could jump in dividend is one of the thing too we get that we didn't talk about which is important and that is we committed to it to increasing our sales organization by about 25% to 30%. This year and we did a lot of work with the with the doctors had merger we took that we took a free.
Absolutely how we go to market with the customers were calling on et cetera, it, particularly as the rest of world shifts more to an off premise world and a hard pills or world then and we saw lots of opportunities to change how we do things in part of this investment that you see in areas, where we're adding.
120, or so individuals to our sales organization. So we can be making more calls on bigger customers to drive technology, not only Sam Adams Dr shape. It also truly with those customers and we think the shortly the stumpage embed on where we aren't great great product sales organization, we're essentially we're doubling down on.
And our belief in our sales organization and what they can accomplish particularly as our portfolio gets you know gets bigger broader more complex, we need to go to market a little bit differently. We have we're fortunate we've been ranked number one nine over the last 11 years by Tim Ron We have a great organization with great leadership and now this is another bets we talk about we talk about truly bad and enforced.
And doctors and twisted tea, and and Sam et cetera, but this is another that that's a big one for us that we think isn't really smart investments that will enable us to achieve the growth objectives that we played out.
Filter business with a very 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 wholesale or network and we believe that the commitment weve gotten in return from our wholesalers has been an important part of our success.
Very helpful. Thank you for national outlet.
Thank you. Our next question comes from Sean can with yes. Please your question.
Hi, Thanks to the follow up Yeah, I guess I guess drilling in on twisted. Its I guess continued to post healthy double digit growth. Despite the growth of truly and some of the other smelters I guess, what gives you confidence if any that I can continue data that clip into 2020.
I'd say well, what I'd say one thing for sure as you look at the business has been growing consistently obviously as you mentioned mid teens look into numbers last year. We grew our household penetration by 31% last year. So we 31% almost a third of new consumers and actually the number households within about 1.1 1.2 million. So there's a lot more households of that.
So this is a brand that's got very it's got low penetration for growing rapidly very high loyalty were I think we've mentioned before we're going to spend probably 50% more interested to see this year. We're we're up to upgrade the packaging we have a new AD campaign, we have.
Gee different geographic programs going on we've got a lot of investment a lot of support so.
All those things together, we feel really confident that we can continue to grow that we can continue to grow efficiency at the same at the same rate if not better.
That's great. Thank you.
Sure.
Thank you asked a question at this time press Star one on your telephone keypad.
That's a starkey followed by the one key on your telephone keypad, we'll pause for a moment see if there any questions.
Ladies and gentlemen, there are no further questions at this time I'll turn it back to Mr., Jim Cook for closing remarks. Thank you.
Well, thanks, everybody for attending today and I will talk to you again in a few months cheers.
Thank you. This concludes todays conference all parties may disconnect have a great that.