Q1 2021 Boston Beer Company Inc Earnings Call
If anyone should require operator <expletive>istance 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 your host Mr. Jim Koch founder and Chairman. Please go ahead.
Thank you good afternoon and welcome the.
This is Jim Koch founder and chairman and I'm pleased to kick off the 2021 first quarter earnings call for the Boston Beer company, joining the call from Boston Beer of Dave Burwick, our CEO and Frank smaller our CFO.
I'll begin my remarks, this afternoon with a few introductory comments, including some of the highlights of our results and then hand over to Dave who will provide an overview of our business. Dave will then turn the call over to Frank who will focus on the financial details of our first quarter results as well as our outlook for 2021.
The following Frank's comments, we'll open the lineup for questions.
As the world slowly reopens in the Covid pandemic winds down our primary focus continues to be on operating our breweries and our business safely and working hard to continue to innovate and meet customer demand before I turn to our key first quarter operationally.
She mentioned one of note that working with the Greg Hill Foundation, our Sam Adams. The restaurant strong fund has raised over seven and a half million dollars. Thus far the sports bar and restaurant workers, who were experiencing hardships and weight COVID-19, and its committed too.
Continued history to distribute 100% of its proceeds through grants the bars and restaurant workers across the country.
We are thankful to our outstanding coworkers distributors and retailers for their continued focus and diligence in operating and helping us grow our business the <unk>.
Company is depletions increased 48% in the first quarter and we achieved double digit volume growth for the 12th consecutive quarter. This just would not have been possible without the outstanding coworkers in our breweries and our sales force and the frontline workers at our.
<unk> and retailers. So thanks go to all of them.
Early in 2021, we launched truly iced tea hard seltzer and during the second quarter, we plan to launch truly punch hard seltzer.
<unk>.
Buying refreshing hard seltzer and bold flavors and we believe these new launches continue to demonstrate our innovation leadership within the hard Seltzer category.
We are also making steady progress in improving our brand support and messaging for of beer and cider brands to position them for long term sustainable growth in the face of the difficult on premise environment, we're optimistic that our on premise business will significantly improve in 2021.
As restrictions are lifted we're excited about the response to the introduction in early 2021 of several new Sam Adams beers, including Sam Adams, Wicked hazy cement with it easy and Samuel Adams, just the Hayes, our first non alcoholic beer.
Here as well as the positive reaction to our Samuel Adams for your cousin from Boston Advertising campaign, we are confident in our ability to innovate and build strong brands. The complement our current portfolio and help support our mission of long term profitable growth.
I will now p<expletive> over to Dave for a more detailed overview of our business.
Thanks, Jim and Hello, everybody.
For the review of our business results I'll start with our disclaimer with risk.
Moving the earnings release some of the information we discuss the movies for the income off of this call of a flip the company's or management's expectations or predictions of future.
Predictions of the length of forward looking statements.
I want to note that the company's actual results could differ materially from those suggested in such forward looking statements.
Additional information concerning factors that could cause actual results to differ materially from those of the forward looking statements is contained in the company's most recent 10-K.
First quarter of 10-Q.
Also the advised of the company does not undertake to publicly update floor income statements.
As a result of new information future events or otherwise.
Now, let me share of a deeper look at our business performance.
We are happy with our strong start for the year and a record first quarter shipment and depletion volume.
The first quarter shipments growth was significantly higher than depletions growth.
The active steps to ensure that our distributor inventory levels for adequate support drinker demand during the peak summer months for.
The depletions growth of the first quarter was the result of increases in our truly hard seltzer and twisted tea brands, partially offset by decreases in the same.
The items EBIT Orchard, the dogfish head brands the.
The recently launched truly ICT hartsville, Sir for the.
Celebrated true premium growth, which has more than doubled since the last year.
In the first quarter and measured off premise channels, the truly brand outgrew the hard seltzer category for nearly two times for 50 percentage points, resulting in the share increase of six five percentage points for.
Truly brings has now reached the market share of over 28% accounting for approximately 40% of all growth cases in the hard seltzer category year to date.
Which is two times greater for the next largest largest growth brands.
Truly ICT hard Seltzer has achieved a four three percentage point market share in Missouri and off premise channels well ahead of all of the New records for beer.
Category.
We expect the launch of truly punishment filter through the second quarter to continue this positive momentum.
We will invest heavily in the launch of two punch Hartzell true.
In the to rebrand the bulk of our brand communications and further improve our position in the hard seltzer category as more competitors enter.
Truly team continues to generate double digit volume growth rates that are significantly above full year of 2020 trends in the first quarter. The measure of off premise channels can you just growth and twisted tea brands products with almost three times higher than the closest competitor.
We believe twisted tea as honest way to becoming the number one flavored malt beverage per year of that.
We see significant distribution of volume growth opportunities for our truly and twisted tea brands in the.
Looking to continue to expand distribution of results the share plan for us.
Two of these opportunities for 2021 remains of top priority.
Our suite of Adams angry Orchard, the dogfish head brands were hit the most from co.
The 19, and where we've gone from these closures we continue to work harder of returning grants the growth.
Optimistic they will return to growth in 2021.
Overall, given the trends for the first three months.
Current view of the remainder of the year, we've adjusted our expectations for higher 2021 full year volume of earnings growth, which was primarily driven by the strong performance of our truly and twisted tea brands.
During the quarter, we've taken various steps to ensure we have capacity to support this accelerated growth. We continue to work hard on a comprehensive program to transform our supply chain with the goal of making our integrated supply chain more efficient reduce costs.
Increase our flexibility of the better react the mix changes and allow us the scale up more efficiently.
We expect to complete the transformation over the next two three years, we will continue to invest of capacity, we will take advantage of the SaaS growth enhance sell through category and deliver against the increased demand from the combination of internal capacity increases and higher usage of third party breweries of of meeting the higher volumes the increased usage of third.
Breweries.
The negative impact on our gross margins, while we anticipate delivering growth margin improvements in 2021 of gross margins. The gross margin expectations will continue to be impacted negatively the tour volume growth stabilizes.
The very competitive business, we're optimistic for continued growth of our current brand portfolio and innovations and the unique prepared to percentage of short term earnings as we invest for sustained long term profitable growth among all of the opportunities that we see.
Based on information in hand year to date Depletions reported the company through the 15 reached the end of April 10, 2021 for estimates of net profits.
For the 9% from the comparable weeks in 2020.
Now Frank is going to provide the financial details.
Thank you Kim and David Good afternoon, everyone for the first quarter, we reported net income of $65 6 million.
From $5 26 per diluted share an increase of $3 77 per day.
The share from the first quarter of last year.
This increase was primarily due to increased net revenue, partially offset by higher operating expenses.
For the first quarter of 2000, 22020, we reported pretax COVID-19 related reduction in net revenue and increases in costs. The total of $10 million of 60 cents per diluted share.
In 2021 and going forward, we have chosen not to read the fourth COVID-19 related direct costs separately as they are viewed to be a normal part of operations.
For the first quarter of 2021 shipment volume for the approximately $2 3 million barrels the 61% increase from the first quarter of 2020.
Shipment volume for the quarter was significantly higher than Depletions volume and resulted in significantly higher distributor inventory as of March 27, 2021, when compared to March 28 2020.
The remove distributor inventory as of March 27, 2021 average of approximately seven weeks on hand from both of the appropriate number based on the supply chain capacity constraints and inventory requirements to support the forecast of growth of our truly from.
The brands over the summer.
We expect wholesaler inventory levels in terms of weeks on hand to be between three and seven weeks for the remainder of the year.
Our first quarter of 2021 gross margin of 45, 8% increase from the 44, 8% margin we realized from the first quarter of last year.
The increase was primarily a result with price increase of the absence of the COVID-19 related direct costs. The card for the first quarter of 2020 and cost saving initiatives at the company owned breweries, partially offset for higher processing costs due to increased production of third party breweries.
First quarter advertising promotional and selling expenses increased by $43 million from the first quarter of 2020, primarily due to increased brand investments of $21 million.
Mainly driven by higher media and production costs.
Salaries and benefits costs and increased freight the distributors of $21 $9 million due to higher volume in the range.
General and administrative expenses increased by $4 9 million from the first quarter of 2020, primarily due to increases in salaries and benefits growth.
During the first quarter, we reported an income tax expense of $11 million, which consists of income tax expenses of $19 6 million.
Partially offset by an $8 6 million on the fixed benefit related to some of our preferred.
The stock option exercises in accordance with ASU 2016, this share on right.
The effective tax rate for the first quarter, excluding the impact of ASU 2016 bps share of nine increased the 25, 6% from the 23, 6% from the first quarter of 2020.
Based on the information of which we're currently of where we're targeting 2021 earnings per diluted share of between $22 and $26 at.
The increase from the previously communicated range of between $20 and $24. Excluding the impact of PSC in 2016 disregard of nine but actual results could vary significantly from what the target.
We are currently planning increases in shipments and depletions of between 40% of 50% an increase from the previously communicated the range of between 35% 45%.
We're targeting national price increases per barrel of between one and 3% an increase from the previously communicated range of between one 2%.
Full year 2021 gross margins are currently expected to be between 45 and 47%.
We plan increased investments in advertising promotion or in some of the expenses of between one of the $30 $150 million for the full year 2021, an increase from the previously communicated range of between 120 $140 million.
These amounts do not include any increases in freight costs for the shipment of product for our distributors.
We estimate of full year 2021 effective tax rate to be approximately 26, 5%, excluding the impact of ASU 2016 debt share online, we're not able to provide forward guidance of the impact of ASU 2016 debt, they're online with half of it for 2021 financial statements and fully yet.
Effective tax rate as this will mainly depend upon unpredictable of future events, including the timing and value of realized upon the exercise of stock options for us.
The fair value when those options for granted.
We're continuing to evaluate 2020 on capital expenditures and currently estimate of investment of between $250 million from 350 million of.
Decrease in our previously communicated the range of between $300 million informed.
The capital will be mostly spent on continued investments in capacity from supply chain efficiency improvement.
We expect that of our March 27, 2021 cash balance of $144 7 million.
Net over the future operating cash flow from the $150 million remaining on our line of credit will be sufficient to fund future cash requirements.
We will now open up the call for questions.
Before we go there is similar for the last couple of calls Batesville, the BMC on our side and coordinate the answers of needed since we are in different locations.
Thank you at this time will be conducted.
And the answer session.
I'd like to ask a question. Please press star one on your telephone keypad.
The confirmation tone will indicate your line is in the question queue. You May Press Star two if you would like to remove your question from the queue for participants using speaker equipment of may be necessary to pick up of your handset before pressing the star keys, one moment. Please while we poll for questions.
Okay.
Your first question comes from the line of Vivien <unk> with Cowen and company. Please proceed with your question.
Alright, great.
The business has the device on for Vivien. Thanks, so much for taking the question.
So with 13 weeks of patients haven't come in only three points ahead of the the top end of your previous guidance.
With the growth of the hard Seltzer category, having decelerated, notably since March and you can you all offer an updated view on full year growth for the hard Seltzer category.
Just considering how tough the accounts will continue to be thank you so much.
Sure the comparisons of the data.
Net.
So I think in the last year, we've talked about a range of about 7% for the category and we've done some work since then the more data.
Some of that.
We kind of went back through the through demand with the growth before the end.
Looking at the looking mostly of the household penetration growth volume growth of the category.
The leaders of boost growth.
They're in the category of the incremental innovation.
Summing up the members of the one of the least demand into 2020, and importantly, the lot of shelf space and things that are happening.
It truly is about 45% more shelf space now for two in the last month or zone in the management accounted worthy of the Zap.
Recently the deployments so when you look at that continuously.
Obviously with macro models.
Some of the categories in the grow significantly in the ticket price 60.
The 60% to 90%.
The system is a 100, but we think we could see.
For the 19th dependent of Hackett corner looking against some of the tail risks yes.
Yes.
Of the model of if you will in that range of 60 to 92 of them.
Plus first of all the consumer trends are still the right. So.
That is the health and wellness, Brian the CPE.
In our premium innovation, there is still business for evidence the shelf space thing of the good work with respect to categories that are growing.
As a percent of shelf space, which as we have and that was really helpful. Thank you.
Joe There's also new channels and the impact of movie with the away from the premise, which is starting to open up.
Sandy with the household penetration is much smaller than it is of grocery we see continue.
Continued growth there.
<unk> continues to gas also of the pathogens are new innovation coming into the.
The amount of investing from a lot of players and we think that will create a lot of excitement during the summer.
Our net neutral of opting out of stocks for the last year and lots of net debt.
Our sales force.
Really the need to speak for simple occasions.
The people gathered together, whether it be purchasing the beach parties of the leasing based on what we've seen from some of the markets that are opening up all kind of <expletive>umed the Sofia <unk>.
Strong off premise business. So we think again one of the reasons why we will need for the category less announcements of the accelerating.
And that's part of our calculation.
Thanks, So much of Super helpful I'll jump back in the queue.
Your next question comes from the line of Bonnie Herzog with Goldman Sachs. Please proceed with your question.
Alright, Thank you hi, everyone.
Hey, guys congrats on a.
Great quarter, I guess I wanted to ask a follow up on something I. Thank you for your just discussing David It's a little hard for sure you bet.
Just thinking about <unk>.
Bars, and restaurants opening up I guess there is a.
A bit of a view that this could negatively pressure the hard seltzer category. So I'd love to hear maybe a little more thoughts on this and what you see is the real opportunity for south <unk> on premise I mean do you.
You guys think of this as a headwind or quite possibly of tailwind for the category.
And then any visibility so far with things opening up are you seeing maybe greater interest for hard Seltzer is now on premise and ultimately what's your strategy for Chile, there I think that would help and frame everything in and possibly that's contributing to our increased guidance on the please.
Alicia.
Thanks for that.
Mr voluntary I'm going to try to speak of lending to the speaker for you guys can hear me I think.
As of the consumer as mentioned before of lost some of it was intended to do the summary of our sell through and our premise that has never materialized for.
For the reasons.
We're seeing a lot of growth right now.
This new set up and part of calls out there for the hard Seltzer brands and are all kind of the team has been out actively selling and a lot of progress of driving distribution within the channel. So we feel very optimistic that we're going to have a lot of true.
In the category in general as we go through that channel also.
I'll speak to something that I saw as the.
Moving had done something with you later this week with numerator guys looked at the state of Florida.
With the openness of off premise and luxury of Evercore has really opened it up pretty aggressively.
Early on in the off premise growth in Florida as an example.
The accelerating so as I think we see two things here, one where we really believe that people who are the asking for tooling and other hard seltzer brands in our premise.
Right now, but we also see people continue to do things at home and having parties and other social occasions with the flow through to law to the category. So I think obviously time will tell the next call. We hope we'll have more data for right now.
You know that the company is opening up.
Pretty gradually but when we see it.
The scoop for the category.
Alright, Thanks, and then just on the the increased guidance for the patients is that one of the drivers for you in terms of feeling comfortable the range youre outlook for Depletions This year.
I think of two things, it's the business the growth of truly moving through the talked about and I think the early success.
We have the team and.
We decided to force punched pretty much right now is just a lot of confidence also in the twisted tea continues to perform very very well to be honest the under expectation. So when the combined the two together.
That's definitely driving that guidance.
Alright, thank you so much.
Sure thing.
Your next question comes from the line of Kevin Grundy with Jefferies. Please proceed with your question.
Hey, good evening guys.
Not to belabor, the seltzer topic, but I did want to come back to it so.
I guess, Dave for you just in terms of visibility on market share. When you guys are building the model because I guess, what's noteworthy is that your outlook for the category has come in right and I think where you guys were before.
Everyone is sort of sympathetic theres a wide range of outcomes here and sort of a high cl<expletive> problem for the industry, but the 70% to 100% growth with high relative to what other folks are saying so the midpoint previously was 85% now at 70%. So the category outlook comes in so sort of implicitly youre feeling increasingly optimistic about your market share within the <unk>.
Non text of reportedly what's a really strong start for <unk>, we see that in the data total chico's off the blazing start in Texas constellations, just leaning in hearing kind of playing catch up. So I guess the question is what's the visibility on the market share and <unk>.
Really I guess, the reason to sort of increase the guidance at this juncture just given the flood of competition and the amount of investment that's coming into the space. So a lot there, but comments really specifically on market share visibility. Thank you.
So we see for the midpoint of call it 75% for two points and it's pretty precise we think we can outgrow that number.
Again first of all when you look at other brands that just launched Q3 weeks ago, you can't you can't draw conclusions right. So the particularly the brand is well known as kind of get a lot of trials brand of the Hawaiian extension of the flow through brands is coming of a lot of trials. So it's really too early to call. It honestly through the call it for community as well when we adopt.
And the per quarter, we launched the first week of January and the flow through sheer brute force.
So we were very moving a lot of consumer work and healthier with punch, which is coming soon.
And the tested quite a bit of anything that we've developed thus far so we feel like plants will bring a bunch of big one in the Netherlands to keep pace with the right. There's a lot of activity, let's think of there's a lot of activity in the marketplace. It will all sort itself out over the coming months, but I think between the trajectory we see for team.
The other ones the velocity of just for perspective.
The velocity for true we achieved two ex all of the brands, we just mentioned okay.
The velocity.
For the truly lemonade, which facilities seven share year to date.
Number three in the category so for the noticed the number three brand of the category.
For SKU, it's the number three brand in terms of the velocity. It is two ex right now.
And you can look of velocity of three months in this <unk> the velocity of the other two competing hard seltzer of limited brands with peripheral marketplace. So we look at all of that and yet nothing maybe for Dennis.
For us long I'll now mobile we're going to we're going to play the entire year to grow share. So it's one thing.
Again, the category growth of 60 to 90 honestly whenever it is moving to grow faster.
Moving with what's happening is the category growth 50 liter of 70 brief the growth might be either of 110, but we believe with innovation, we have lined up and by the way.
The brand for the brand investments, which which is significant.
Moving to come is still the Tom on the brand we feel like we've got everything lined up to.
With Stan.
The competition is good as they are the.
Hopefully the excellent company and they're all taken a shot at Amazon if nothing else of mixes work order mix for US we think is a better EBITDA.
The year.
Thanks for all the color I'll p<expletive> it up I'm sure. There's a number of other questions. Thank you.
Sure thing.
Your next question comes from the line of Eric <unk> with Evercore. Please proceed with your question.
Great. Thanks, a lot guidance than that Dave your voices of little better, but still a little muffled not sure. If you could do anything further about that.
A couple of questions first in terms of the pricing environment.
Saw that you raised the guidance from the 1% to 2% range to the 1% to 3% range.
Is that increase driven on the seltzer side on the beer side.
Debt towards the T side.
Constellation recently called out some increased price competition within the <unk> is that something you are seeing.
And then the next question was really around how youre thinking about the longer term innovation pipeline.
The Devil's advocate some of your a lot of your recent success has come from the Seltzer rising.
Other NAA our alcoholic categories.
Dominate our key.
How are you thinking about future.
Innovation do run into a wall of attractive categories or styles. The seltzer is.
And I'll stop there.
Okay Eric.
Frank Let me take the first question on pricing. So we increased our pricing range slightly at the scene in the midpoint the pricing is.
And across the board at the R&D it's.
It's not like the we take for National price increase its delivery.
By region.
But overall three of the Costco for us.
Is the biggest part of our portfolio without that you don't get to the to the price increase.
We don't see really any negative price pressure because.
At the end of the day I think we are competing on quality.
And on brand and we have.
The.
Debt pricing that we've put into the market ex fee starting last year, what you'll see is pricing that we put in the fifth carrying oil for a plus the new pricing and we feel fairly confident about that across the entire portfolio.
Yes.
I'll take the second.
I'll take the second question about.
He's the innovation, hoping that within the okay.
So I think you have of.
A lot of ideas for us of that group.
Purchase of next.
We hope many of Mds.
And some of our worried about that and obviously the difference in the different policy, particularly the category Inc.
I hope the way I think the benefit of being a pure play I think I said it before the development of being a pure play itself. The brand of things just the result of the enables us to navigate and redefined the category.
And we can be successful in most of the can come in.
As the beer brands trying to play itself. So I think you think theyre more average there we have many of us.
And probably if not the innovations of this doesn't have to just the <unk> flavor profile for the other things as well so we're pretty confident.
The north of the consumers want.
The appointment of the category. They are looking for new things, if you've noticed from kind of setup on the admission cycle. We can do we can move the real quickly. We think it's the core competency of ours, and we think maintenance type revenue per 1000 miles and most of what we're doing.
We need to do that until.
And with lots of propane.
Plenty of ideas in the line.
Once you could sort of above that.
Terrific well congratulations I'll p<expletive> it on thank you.
Thanks.
Your next question comes from the line of Laurent Grand debt with Guggenheim. Please proceed with your question.
Thanks for your guys.
Good evening, guys and congrats on the on an exceptional quarter.
Quarter. So those would be I mean, I've got two follow up questions first I mean the.
Of shelf resets in March from you.
Said you gained share.
The voice was not from the coming across very well so could you tell us how much shelf space.
Gain.
And did you increase your Youll, let me share for Sanmina for.
On page share.
Sure I mean, the address you saw.
Competition.
Sure I'll answer the first it was 45% self states.
Thus far.
45 from <unk>.
The gain until the presentation versus last year.
Yes, so we gained 45% more more shelf space across the board in off premise Bruce is in Europe.
Okay. Thanks.
Then in terms of.
I'd like to understand the truly to Ritchie.
The M&A.
So now you've got the three.
Three four months of Treaty for you.
Can you tell us what was the repeat such as of Treaty.
Now if you forget that.
If the Ricky per share for truly eliminated as being impacted by the launch of <unk>.
The other is eliminated.
Yes sure. Thank you true it again.
I would argue that debt is still early to the throughout the conclusions on the rupee as of now but with the repeat rates are right now.
At the high teens the true.
We're positioned for this time period three of three months of flow of data is actually quite good when we look at that compared to what the role of south of where eliminating work last year eliminated.
Ed.
In terms of debt.
As a vast majority of the 2020 cl<expletive> of new products of the highest the highest trial in the highest repeat rates.
<unk> T is coming a little bit south of that which we sort of expected it to be from still very strong. So but I'll also say it's still early so we will see particularly in the face of all of the other innovation coming in we'll see how the holds up as it relates to truly eliminate it still.
So doing quite well as I mentioned before it's number three SKU in the category the velocity in two ex where all of the new entrants are even more of the selection of all of the new entrants in the category. Thus far is set for except for <unk>, which is which is much closer to it but so it's the sort of tissue holding up quite well honestly.
<unk>.
And the way, we're sort of we're kind of agnostic as to how the mix plays out.
Consumers will decide what it looks like the one im not sure consumers are trading out of low lemonade for another illuminated once you for another SKU I think just looking for agree price.
Seltzer experience and they're looking for a brand of the Charleston, the delight.
So we'll see how it plays out during the year and health of the mix of flavors.
The forms for eliminate is holding up quite well.
And if in fact some of the weaknesses are again. This is the early data for the seems to be almost very very little of interaction with Mike's hard lemonade seltzer and truly level.
Thus far since the global again early but we don't see it at all.
Yes. Thanks, My last question is about the capacity and what's the driver behind them.
Where do you see kind of of the Capex for this year.
The largest frank the draw.
Five of the Capex and we came out of and we had a fairly wide range.
When you were looking at different options to both capacity.
And what has happened between when we came out of the Norway's that we found a better way.
And the more effective way to both the capacities of the scope has not changed we just have found a solution.
Whereas the net capital than what we had envisioned at the beginning of the year. So we're becoming more effective in our capex spend of the scope.
Has not changed at the exact the same as before.
Got it thank you Frank and of course, it on congrats again guys.
Thank you.
Yes.
Your next question comes from the line of Sean King with UBS. Please proceed with your question.
Alright, thanks for the question.
Yes, I'm curious about.
Last quarter, you took down the guide for for.
For the increase in the A&P spending, but then you took it back up whats really changed as the <expletive>embly just a function of the increased sales outlook or have you found sort of a more favorable ROI of some of the investments to date.
Yes.
Sure, let me take that the.
Got it.
Clearly the way the startup the year, we're pretty happy with the first quarter in terms of shipments and depletion outlook.
Also very happy with.
The program, so that's coming in terms of innovation and.
And the media and the entire programming along with our brands and we'll look at that and as I've said before we defined our spending not necessarily based based on the metric as a percentage of net revenue. We continue to look at it but thats not the target of what defines our spending is the opportunities that we see but we see the <unk>.
Out of our program and have a wonderful for our business and based on the business of thought about the innovation of what's going to come and how we feel about our programs.
It's the right thing to increase our our AP net spend.
Moving forward and for the full year.
Great. Thank you for the color.
Alright.
Your next question comes from the line of Wendy Nicholson with Citi. Please proceed with your question.
Hi, a couple of questions if I can.
When I go into the grocery store it seems like the hard seltzer space.
<unk> has expanded a lot and.
And you've clearly benefited from that but a lot of the newer brands and particularly a lot of the Abi brands are more on end cap displays are the showing up at other places in the store and I just wondered.
Cause to kind of peak in terms of promotional dollars.
It's great that you are getting more distributions, but can you talk about kind of your outlook for your expectation, particularly as we go into the summer months pre July 4th is the cost to maintain that shelf space or to get that end cap significantly higher than it was a year ago.
I'll take that one.
Wendy.
The cost hasn't really gone up the main this is alcoholic beverages right. So you cannot pay for shelf space you cannot pay per end caps.
Those are actually sort of earned by <unk>.
Your relationship with.
The retailer and.
Maybe even more so by your distributors relationship with the retailer.
I think what youre seeing and I've seen the same thing is.
There are so many new entries in many cases, the retailers youre not cutting them into the shelves right away.
So they have to put them on the floor and I think.
And as your Bush guys are very very good as our wholesalers are.
Talking of store into an end cap or an out of department of display and Thats, what <unk> seen but that.
It does not involve promotional dollars typically.
Got it fair enough, but on that same front and this is kind of leading to my second question, which is the margin expansion that you've seen over the last couple of years has been tremendous given sort of lots of favorable operating leverage and all of that.
But.
And maybe this is for you Jim is as you look out over the next couple of years.
Is there any reason the operating margin can continue to expand from the let's call. It 16% level I mean back to the peak of 2017 or even above that as we go out you've gotten past a lot of the capacity issues, you're running a lot more efficiently than you were is margin expansion going to be of steady climb.
Upwards from here or is there any reason that wouldn't occur.
I would expect it to occur.
Steady we don't know.
We don't have a goal of margin expansion of margin expansion is going to be a.
The result of <unk>.
<unk> more efficiently and as volume increases hopefully the.
The advertising and selling expenses scale up as well, we do believe that.
There are significant pockets of savings within our supply chain frankly, what we have right now.
As been cobbled together pretty quickly.
From available capacity in the.
The long term partnership with Citi.
We are focused on just getting more.
Sleek cans produced in the.
And put into a variety packs rather than.
The efficiencies on them, because we've had out of stocks.
Those cost 10 Bucks, a case or whatever the loss of gross margin happened to be on that skus. So the 50 <unk>.
Of the case higher costs.
The doesn't look very big when Youre looking at out of the steps we believe we have.
The set up our supply chain.
For not just 2021, but 2022, we have options in place for more capacity for 2023, So we will be increasingly turning.
Our attention and our capital investments on cost savings investments debt would rationalize where we ship it where we make it there are significant.
Savings from automating the process of doing variety packs.
For a rough idea.
Internally, we can do them for about a quarter of what it cost to get them done externally because of capital investments operating techniques et cetera, So things like that we can roll out.
To the co Packers.
I would see significant.
Opportunity in gross margin and operating margin expansion.
The next two years as we continue the supply chain transformation and are able to the shift from expanding capacity to rationalizing.
And making more efficient the capacity that we just put in place.
Fantastic. Thank you very much.
Your next question comes from the line of Filippo for learning with Morgan Stanley. Please proceed with your question.
Hey, guys. Good afternoon, congrats on the strong results.
I wanted to talk more about the.
Twisted tea brand.
Which probably doesn't get the attention it deserves from the investment community day relative to the strong growth. So.
Maybe first you can talk about the growth drivers of the brand in Q1.
And then longer term what are your plans for the brand in terms of innovation and also in terms of the opportunity to expand the distribution relative to other F&B brands in the category, particularly given you have much higher velocity is at least the tia relative to other brands.
Yes.
Okay.
Hey, This is David I think I'll take the size of that one I think the way to think about twisted tea is that it is the brand that has.
<unk> had very low penetration, but very high frequency during the high loyalty and what's happened over the past year kind of think it benefited from from.
From Covid, we grew the the penetration of base by about 35% in the past year in fact.
I think the hard seltzer brands of the only brands that can be penetration more shall we part of amount of new consumers in and by the way. It was also very much focused in income in the convenience channel. So a big percentage of the business. The single has been single serve what's happened over the last year, we brought more consumers in.
Increased our distribution pretty significantly and larger format stores. We've also taken the brand from a more rural.
Venue, Tim Tim with two more two more urban venues as well and we've actually grown points of distribution.
Pretty significantly in the.
In the end of last year, as well as well as Washington pick a point our points of distribution of an up actually year to date, 25% and velocity by 31% so bringing the two into the cities more multicultural consumers participating increasing distributions of 12 packs in grocery stores and three we have.
We have p<expletive>ed the half when we have a party pack.
The big growth, there and really driving a lot of home a lot of consumption in that channel. We've also from a brand perspective.
Bruce.
Our work online in fact from increased our Twitter following by three times, our engagement levels of social media are quite are quite high we done we sponsored the 100 <unk> <unk> platform for gaming team and we're also get involved the SEC proposal and when we do the SEC football, we sort of broaden the shoulders of that brand and we've been spending more.
<unk> across 12 months of the year to support versus just turn the ex the key selling season. So a lot of things you don't I think part of the most important weighted that Jim recognize or spent any time on that brand and what the xpress deal with it that's probably why it's done so well, but but theres a lot.
It's a brand that's got a lot of potential as it starting to play out now.
And we're going to keep adding we'll keep adding fuel to the fire.
Great. Thanks.
Your next question comes from the line of Stephen Powers with Deutsche Bank. Please proceed with your question.
Hey, Thanks, good evening.
Maybe just to clarify real quick going back to the 60% to 90% category growth. You mentioned, Dave is that is that on your part of the wholesale growth rate call or is it of retail call and if it is the wholesale number what portion of it comes from the greater shelf space allocations for the you mentioned for the category versus actual increases.
And.
Consumer offtake, if there's any material impact there.
Yes, sorry about the second half.
It's really from the because we have the model of volume looks at debt from a consumer perspective kind of more than anything so again, but we're just looking at category penetration rates of growth and penetration growth in buy rate, which is a function of the frequency and how much people spend for each occasion.
The innovation.
Based on our best guess at how all of the innovation from all of the players will play out in the category as well as we can quantify of lost demand from from from last year, and then shelf space. So I think the shelf space arguably in sort of more of a push element. If you will put the rest of it is really driven by what we think the consumer demand is kind of.
For the for the category.
Yes, okay that makes sense.
And if I could.
If you could talk a little bit about just the.
The incremental <unk> of these innovations that you layered on obviously eliminate.
We're very incremental and the M T is proving to be.
Yes, very incremental as well I guess, how are you thinking that that plays out as you layer on.
Some of the new innovations.
You've got wind up including.
Including punch the summer.
And if I could Frank if you have any just a way to frame for US just how you see freight costs coming in over the balance of the year just relative to.
Last year or whatever just some sense of how the dimension that that'd be great as well. Thank you bill.
Sure thing so Steven I think I'll take the first part I think it's really hard it's really hard to measure instrumentality because theres. So many factors of play and I think a lot of folks like to give very.
<unk> added the numbers of what it is and it's always 90% for some reason, it's not 90%, but I think what we're trying to do do we do believe debt, adding just another likely flavored seltzer is not going to be as incremental of something thats pulled in different so eliminate prove that you think TT is looking pretty good but we don't.
Too early even though how much of it is incremental.
And it's more than half incremental to our brand we believe and we think it is incremental to the category.
And we think contribute the same way of so by trying to find flee.
Flavor profiles and approaches that of that are vastly different from what exists and for example, as.
As far as I know the original National Punch hard Seltzer, we think it helps it helps certainly helps optimize the.
<unk> so.
And sort of how we look at it in Nigeria, and we're again.
And with all of the cross sales will have a sense of what it is.
It's just it's kind of a food fight out there I think people are trying everything we can see it and see all of these new brands the commit including the T came in there's a lot of trial and you see brand Spike up and then you see from start to come down. The question is wondering whether they settle all of that is because everybody wants to try everything so in the end. It's we're just trying to create great tasting products.
And buildup of it and build the brand.
I think one of the things we've been able to two of a truly now is the number of five penetrate.
Penetrate the brand in the category actually has a larger consumer base Corona extra.
For the bigger you build the base the more I think the more incremental it can become when you bring new things to the base.
Didn't want to give a definitive answer Steven but it's <unk>.
It's Martin of incremental but how much we don't we don't know yet okay.
And frankly anything on the distribution.
Yes.
The freight.
Clearly this is the factor.
Protium <unk> debt on other calls in the industry.
The shortage of drivers.
And of trucks.
For the ratio between available truck load.
Has significantly worse in the vessel, we see in the rate for the.
The point that we've broken it out in the earnings release.
Currently because the the impact is significant.
It really depends.
The contracted rates, but then you don't get the trucks and the ethical compliant.
We see the impact.
On multiple levels.
The input costs.
Going up because of the phase.
The coming into our cost of materials that the ingredients of the packaging materials. So of received there we see it.
The product.
Between the locations and cleaning of the distribution side.
<unk> seen increases between 30 and 50%.
The feedback that's going to net out.
Q1 seems high but we have both free trade.
The major cost increase for the year.
Okay. Thank you very much.
Your next question comes from the line of Nik Modi with RBC capital markets. Please proceed with your question.
Thank you good afternoon, everyone.
So I got a few questions first day.
Is there any.
Any metrics you can provide on how.
Truly punch tested relative lemonade or ice two just curious if you have any specific metrics to give us some some frame of reference.
And then one chance of that and then I'll go into the next my next question.
And the cadence.
We don't get into too much specifics I think from a product testing perspective of timken manufacturing of farmer.
Very involved in this but each quarters as high if not higher.
All of the other flavors that we built for.
For one minute of use that distributors are.
Baseline.
So.
The geometry of anything else to add to that I wonder if debt.
And just confirm that.
Was.
The liking scores on the formula of that develop we were very very happy with they were as high or higher than both eliminate.
The key.
It is now.
That does.
I mean the concept.
Itself was higher but the actual liquid debt.
<unk> developed.
Got outstanding ratings from drinkers across a pretty wide spectrum and they were it was a surprising.
Over to them.
But one that was.
Familiar and rated it as delicious, so I think debt.
Feed some of our optimism.
Got it and then.
Then.
Maybe this is for you Jim just when you think about strategically over the next few years and obviously, we're seeing the RTD cocktail spirit space and also wind based.
<unk> is doing really well and how do you think about those segments of the marketplace. I mean is that an area you would ever explore in a more meaningful way outside of what you already have with dogfish head.
The answer is probably yes, if it was an opportunity where we thought we could bring something to the consumer that they werent, otherwise getting and where we had of.
Convinced of the competitive advantage in terms of.
Costs and effectiveness in getting it to the market.
It is for me, it's in that sort of what I've described as of fourth category that is not beer wine or liquor.
And as kind of an intersection of them that brings new elements of of.
Of convenience and flavor profiles and Nutritionals.
Things that consumers really put of high value on so we would not foreclose.
Any of it.
The Doug Fischer canned cocktails as is the start we do think debt.
RTD cocktails.
We will have a <unk>.
Role here it is.
However, my belief that.
The Brewers and their wholesaler networks, our competitive advantage when you get to.
The things I can cocktails, which look.
They are in the 12 ounce can we know how to put things in 12 ounce cans at extremely high efficiency there in the cold box, we of wholesalers, who work the cold box.
Often there every day.
Certainly there at a much greater frequency than wine and spirits distributors or the.
These are kind of tonnage products debt.
The require efficiencies all the way through the.
The manufacturing and.
The delivery.
And they kind of smaller margins than the the.
Of the products that.
The various companies make that or.
Really expensive big sales of big.
Commission for the salesman that doesn't have a piece of it.
My belief is that.
This is a significant and growing category and that.
Brewers and the entire beer industry.
As competitively advantage there.
The there are also.
Laws.
The greater access for our beer and wine and hard liquor and there are different tax rates. So.
We have traditionally.
For what 80 years had these three lanes and alcoholic beverages.
And the beer Lane I think.
As a pathway to growth that we haven't seen for many years and I do think there'll be in over the next couple of years.
Contests.
Over who is going to get that terrain is it kind of go to beer companies or.
Are the of spirits company is going to be able to change some of the the rules and kind of tilt the current playing field in their direction in terms of <unk>.
<unk> the rules of access for the tax rates, but unless theyre able to do that I think the beer can win.
They can change the rules.
All bets are off.
Helpful and then sorry for the three questions.
The little for everyone. Frank maybe you can just kind of close out.
Martin.
What is a normalized volume growth rate, which will allow this company to actually see operating leverage of our margin levers like what is what do you cl<expletive>ify that as you know because obviously that's been exceeding of growth rates, we've been using more third party.
Co Packers how.
How should we think about what a normalized number would be for you to get operating leverage.
Yes.
Cost of loose the duty of number because of that.
Yes.
We believe we have enough capacity to fund our growth.
At the quarter of.
In our favor per quarter.
And it keeps on growing itself.
We need to get control of <expletive>embling the recent growth maybe became the grow over the relatively higher weighted zoom laid out earlier.
We're getting much closer to a point where.
We'll be getting.
Much better.
One of integrated supply chain that have internal.
And the external locations have the well integrated debt will provide.
For the double cohort for the <unk>.
Obviously, the biggest one bill mentioned the court ruling to get the cost of variety packs and for which we have done internally and thats. The benefits that we're seeing in front of the day they don't.
For me show off of the P&L, because we are growing debt type of volume at a higher rate of extraordinary because of the growth rate, but no debt.
Getting the dose of processes also with our co pack of Zelle.
<unk> growth.
The benefits over growth of the benefit from that product as well so even if the market in the high growth rate.
We'll see the benefits of then the third one is our supply chain transformation project.
Profit.
The growth enabled us to pull that off.
Integrate the much better in London and the.
The better much smoother way so.
I'm, sorry, I can't give you a growth rate number but.
Getting our heads of all of the growth rate that will allow us to show the margin improvement ex.
Yes.
Super helpful. Thanks, Thanks, Scott I appreciate it.
Alright.
As a reminder, if you'd like to ask the question. Please press star one on your telephone keypad one moment. Please while we poll for more questions.
Your next question comes from the line of Kevin Grundy with Jefferies. Please proceed with your question.
Great. Thanks, so much for the follow up guys I do appreciate it Jim you actually began to touched on what I wanted to follow up with and Thats the topic of industry taxation, So as you're very well aware theres been the discrepancy at the federal level between beer malt beverages and wine and spirits for.
For decades.
And.
From where such that malt beverages, and beer have advantageous tax treatment of <unk> relative to other alcohol categories and I wanted to could you comment Jim on how you view the magnitude of the threat, particularly in an environment, where politicians will be looking for sources of revenues, so taxes likely to move higher not lower I think that's probably.
Very little disagreement on that how you handicap the risk for the beer industry and frankly, whether you think the industry is on steady ground in terms of continuing the argument that there should be this discrepancy that's existed for a long time. So your thoughts there Jim would be appreciate it. Thank you very much for follow up.
Yes.
No problem of Kevin.
Yes.
The tax difference between beer versus wind versus hard liquor.
Has been in place.
Since the Civil War.
Since the very inception of excise taxes on alcohol. So.
And it's.
Certainly.
The sort of the industry well.
And.
Evan.
Everybody has their own lane and spirits.
As you know has been growing at the.
The expense of fear over the last 20 years so.
By handicapping on it would be that.
It will be of very hard argument for the spirit the companies too.
May.
To reduce their taxes to the beer level.
And that is the the effort that's underway it's called equivalency.
It's been on the agenda of the spirits companies.
For certainly the entire 37 years that I've been in.
The beer business and.
It really hasnt gone anywhere.
Clearly because of it.
Just the hard argument if you are.
The big especially foreign owned company.
Say that you want to heavier taxes reduced so that you can be even more profitable than you currently are.
It's gotten pretty much zero traction at the federal level, but there have been some.
Uh huh.
Some small traction at the state level usually.
The very quietly stuck into an omnibus bill.
And.
And frankly, the beer industry was not.
The really awakened.
It.
And so the spirit.
People had some.
The past successes.
And getting their state taxes reduced because nobody was really.
Wake.
<unk>.
It's a hard argument to make it for your liquid company, you're going to the state legislator, and saying Gee I Havent profit products out there that arent profitable enough for me so.
Please reduce my taxes on these liquid products that are lower ABV.
To reduce my current taxes, which of course superior state legislator and half to of a balanced budget. It means you have to take either take.
The raise the taxes on your constituents the compensate or.
So that you can make it more profitable for a big foreign owned liquor company to sell their products in your state.
I see that as a very difficult argument to make and I see the the.
For the small shoots of.
The state had I think maybe the Nebraska might be the only example, but.
Yes.
Keep track of all 50 states.
I know that the beer industry is awake for this.
Okay.
In the United and I do believe that for industry has.
Exceptional trade <expletive>ociations.
The British Association Beer Institute and the net there'll be of Wholesalers Association are all led by.
Some of the top three sort of the.
The top 50 trade Association.
The leaders in Washington, So I.
I am very optimistic that now.
The parity.
Our arguments will prevail.
I appreciate all the thoughts Jim. Thank you very much of a good evening.
Okay. Thank you.
As one final reminder, if you'd like to ask the question. Please press star one on your total pad now.
Thank you.
Ladies and gentlemen, we have reached the end of the question and answer session and I would like to turn the call back to Mr. Jim Koch for closing remarks.
Yes.
Thanks for everybody.
We really enjoyed celebrating the quarter with you and.
Look forward to talking to you in three months take care.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.
Okay.
Yes.
Yes.
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