Q2 2021 Boston Beer Company Inc Earnings Call
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Hi, I was trying to connect the size of our webcast line for the Boston Beer company call.
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And showcasing truly superior of variety of flavors and the colorful and of interest nature of truly drinkers based on the brand's innovation leadership and strong brand building and growing cultural relevance. We believe truly is well positioned to continue to grow share.
And we overestimated the growth of the hard Seltzer category, and the second quarter and the demand for truly which negatively impacted our volume and earnings for the quarter and our estimates for the remainder of the year.
We increased our production of truly to meet our summer peak and have had lower than anticipated demand for certain and truly branch styles, which has resulted in higher than planned inventory levels at our breweries and increased supply chain costs and complexity and at the same time, we've been experiencing out of stocks on certain of our camera products most significantly 1 of our twisted tea.
Brand family, we expect wholesaler inventories of twisted tea to remain tight for the rest of the summer.
Our outlook for the hard Seltzer category and the second half of 2021 is uncertain and we.
Planned our capacity and spending based upon several volume scenarios and we'll continue to manage our capacity requirements through a combination of internal capacity increases and higher usage of third party breweries. We continue to work hard on our comprehensive program to transform our supply chain with the goal of making our integrated supply chain more efficient reduce costs.
Increase our flexibility to better react and mix changes and allow us the scale up more efficiently.
Well, we're in a very competitive business. We're confident of the continued growth of our current brand portfolio and innovations and we remain prepared to forsake short term earnings as we invest for sustained long term profitable growth.
Based on information and hand year to date Depletions reported to the company through the 28 weeks end of July 10, 2021 of our estimates with increased approximately 32% for the comparable weeks and 2020.
And now Frank will provide the financial details.
Thank you.
And Jim and Dave Good afternoon, everyone.
For the second quarter, we reported net income of $59.2 million a decrease of point of $9 million of 1.6% from the second quarter of 2020.
Earnings per diluted share of of $4.75. The decrease of 13 cents per diluted share for the second quarter of 2020.
This decrease was primarily due to increases and operating expenses lower gross margins and the higher tax rate, partially offset by increased revenue growth driven by shipment growth.
Shipment volume was approximately $2.4 of 5 million barrels of $27.4 per cent increase from the second quarter of 2020 <unk>.
The shipment volume for the first half was significantly higher than Depletions volume and resulted in higher distributor inventory as of June 26, 2021, when compared to June 27.2020.
The company believes distributor inventory as of June 26, 2021 averaged approximately 5 weeks on hand, and it wasn't an appropriate level for each of its the brands, except for twisted tea, which has significantly lower than planned distributor inventory levels for certain solids and packages.
The second quarter of 2021 gross margin of 45, 7% decrease from the 46, 4% margin realized and the second quarter of 2020.
Primarily as a result of high of processing and other costs due to increased production of third party breweries, partially offset by price increases and cost saving initiatives at company owned breweries.
Second quarter of advertising promotional and selling expenses increased by $61.3 million from the second quarter of 2020 price.
Primarily due to increased brand investments of $41.2 million, mainly driven by higher media production and local marketing costs.
And increased freight the distributor.
And the $1 million that was primarily due to higher rates and volumes.
General and administrative expenses increased by $3.3 million for the second quarter of 2020, primarily due to increases and extra on the services and salaries and benefits costs.
Based on information of which we're currently of where we're now expecting full year 2021 and earnings per diluted share of between $18.22. A decrease from the previously communicated a range of between $22 and $26, excluding the impact of E. S.
The year 2016 desk or 9 but actual results could vary significantly from this target.
We are currently planning increases and shipments and depletions of between 25% and 40%.
The decrease from the previously communicated range of between 40 and 50%.
We're targeting national price increases per barrel of of between 1 and 3%.
Full year 2021, gross margins and currently expect it to be between 45 and 47 per cent.
We plan and increased investments and advertising promotional and selling expenses of between 80 and $100 million for the full year 2021. The decrease from the previously communicated a range of between 1 and the 30 and 1 of the $50 million.
These amounts do not include any increases and freight costs for the shipment of products to our distributors.
We estimate of full year 2021, non-GAAP effective tax rate to be approximately 26%, excluding the impact of ASU 2016 dish the or 9.
We're not able to provide forward guidance on the impact that ASU 2016. This year on line will have and our 2021 financial statements and full year effective tax rate and this will mainly depend upon unpredictable future events, including the timing and value of realized upon the exercise of stock options versus the fair value of windows.
Options for granted.
We are continuing to value of 2021 capital expenditures and currently estimate the investments of between $180 million and $230 million, a decrease and the narrowing from the previously communicated the range of between $250 million and $350 million.
The capital will be spent mostly and continued investments now of breweries and could be higher if deemed necessary to meet future growth.
We expect that all the cash balance of $103 million as of June 26, 2021 of them.
Along with our future operating cash flow and unused line of credit of $150 million will be sufficient to fund future cash requirements.
And I'll open up the call for questions.
At this time for Malibu.
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First question comes from the line of Bonnie Herzog with Goldman Sachs. You May proceed with your question.
Alright, thank you.
And I guess I I don't maybe even though where it can be done and I understand that the categories. And then flowing you know everyone is aware of US you know that said I'm truly struggling and guess pun intended with how meaningful your results and deteriorated.
And that's because even as recently as May and your tone and and comments suggested that even with the slowdown in the category you could still deliver a relatively strong growth and hit your for your guidance. So I guess for me. This begs the question. How confident are you that you're going to be able to hit your new guidance.
And you know really how much visibility do you have and your business.
Yeah.
Okay. Bonnie this is Dave let me, let me take a shot of that I think first of all of them when we spoke and our and our call in April.
Everything is therefore, we'd hurdle of the first the first big no Covid shock up period of March and April we heard of that really well and it's sort of the category and even to the moment of our call. We felt really confident and where the category was growing and where it seemed to happen and really the may June stock up overlap, we really hit the kind of hit that inflection point and.
The S curve, where things went from high double digit growth rate to 2 low double digit growth rate.
And that's that was the first signal of really as we got into May and June and we had expected to hit that second bond better now when you look at the.
You look at the brands performance, Okay, and just for perspective truly.
Truly is outgrowing the category for 11 months straight since last September truly has outgrown the category by <unk>. Since January 2 we have grown out of how can the countered by 3 acts for the last 13 weeks.
And so it's increased it's just.
The 1 brand and this increase household penetration significantly as we've grown our user base by almost 40% for.
And for truly which means and the innovation is working right. So as we mentioned earlier she is performing very well punch for fish performed very well.
So we're you know we're growing the business, we're growing and we're actually bringing in younger and more multicultural consumers, we're seeing that with the T and with punch. So.
The category I think I guess for to get back to the question of the categories took it and went down to like basically over the last 13 weeks was call. It 10% and we were growing between 20 and 30. So it did take a more severe drop and let me give you a couple of the thoughts of why that occurred yesterday. He hit the S curve you know that we can see that unfortunately, that's looking backwards and kind of hard to see it coming looking for.
And Jim had referenced for some things and his and his opening remarks.
1 of about I think just the proliferation of brands in this category of this has occurred and Theres, a herd mentality and the and this business the broadly and I think you know people would try to bring new brands and to the marketplace and as the sameness to these brands. There's a lack of originality and I think what's happened a little bit the loop is the wash for the specialists the excitement for.
For some consumers has been washed out theres 220 brands and of thousands of Skus. According to IRI and the category right now that's about 50% larger than last year, and we're seeing our retail customers are still trying to support all of them.
So there's and but that's kind of changed pretty quickly. The damage is going to break on that 1 and in the long tail will be paired up but so you have that dynamic going on also this move for my from off premise. The on premise you know 3 per cent of the mix within our within our premise is hard seltzer and so like 10 or 11% now however, you want to look at it and.
And off premise, we think it's kind of climb and actually are.
Our team feels very confident we're getting we're actually out and we've added 4000 and truly draft lines, we're getting the distribution, but it's not kind of overnight all of a sudden switched from 1 channel to another but we feel pretty confident that that's going to continue and we've always believed.
And isn't that I'd say, maybe we thought it would move more.
More of like a light switch than it has been more gradually but it's moving certainly and in that direction.
As it relates to just to finish off and I was the long answer but it was a it was an important question.
Where's the category goes how can you guys to have faith in your in your and your and your.
And your guidance now the category, so we're kind of out of the.
And we're going to forecast the category of business, that's not what we do rollout we pro brands be growth businesses. So if you, but if you look at the third party data providers that are out there and you all and you guys all of them work with them the range for for the full year of about 20% to 50%. Okay. So that that's the range of coming in and out of 20 to 50.
We believe it's just the if it's at the low end of that range. If it is we can continue to grow 2 or 3 times that rate we've been doing it for a long time now and we feel very confident and.
And so if it goes to the high end of that range, we're probably not going be growing 2 or 3 times, 50%, but we know we can grow faster than the category. So again, we think of if you look at that range low and we can grow significantly more high and we can grow more and we're going to grow share of this year. So that's sort of and we in the.
And that just sort of how we're looking at it and that's how we kind of get to this this and.
And this number so I don't know if anybody has anything else to say on that 1 I think and the rest of it but let me say 1 more thing.
And the twisted tea is growing significantly and it.
It would be of half a billion dollars business. This year. So we have a lot of confidence and that we.
We kind of we know of a footfall with some of our supply chain activities, where we were a little bit short on cans were scrambling on that and we're coming back we're kind of coming back by the end of the summer on that so we feel very confident and twisted tea and obviously on premise as you've heard it's really unleash growth for for dogfish and for Sam Adams.
I'll stop there Bonnie you can follow up if you want to do that.
No I appreciate the color its helpful and so thanks for that I'll I'll pass it on thank you.
Our next question comes from the line of Vivian.
With Cowen you May proceed with your question.
Hi, good afternoon, thanks, very much for that very fulsome answer.
And it plays to pick up.
Terms of the on premise.
Penetration can you just help dimensionalize that we like for thousands of outlines of the terrorist kit for black for your beer portfolio or is there and ACD measure we should be thinking about just to understand how incremental that could be.
Yeah, So I think.
Well I mean, there's about 2 and it can be really precise about 262000 accounts out there where it almost half of them over the at least 1 brand. So let's say, we're and 125000 accounts not a full portfolio, but at least 1 of our brands. So for thousand is pretty we think is pretty significant and again, we'll see how we'll see how it plays out we're certainly of cans.
Or could it be the predominant form of package that we deliver but there seems there seems to be a lot of interest among our customers for truly on draft and we switched if you remember of like last when we first test. This idea of right before Covid. We had of flavor of US version that was intended to be mixed by bartenders.
The feedback we got was that too much effort. So we have of WILDBERRY version, which which is which of our customers are liking a lot better. So there's no need for mixology or anything like that so.
That's a that's the extent of right now and truly and again, we've and 1 more data point of view, we more with more than we've we've more than doubled our penetration for truly and and and.
And our accounts, so it's and about 22.23 per cent of our accounts more or less at the moment and growing.
And on on.
Non promise I'm proud of them.
Thank you for that and then just on the margin.
The.
And the reduction here.
And the outlook for the full year on ships and the fleet.
The.
And there wasn't a little bit of the improvement in your gross margin outlook is that is that a function of you guys being.
Locked into contracts with third party manufacturers, how do we think about that thanks.
And this is Frank.
So yeah, we definitely have like when you look at vs. Prior yeah, yeah with the volume growth. It was pretty clear that we're gonna grow the truly variety pack more extraordinary than internally because we of full out internally and externally at this point, there's still a more expensive. So there was a margin decline because of that.
Now with the volume slowdown that we've experienced in Q2 that relationship or ratio has improved and depending on where the volume is going to go for the rest of the year will probably improve based on the revised guidance that we've given in Q2, you don't see the full benefit.
Of it because there were certain adjustments costs, we have flexible contracts, but the the slowdown of the category came pretty sudden late and so there is some adjustment costs and we recall, we adjusted the production and incurred some costs for that that's why you don't see the for.
And the extend of.
And of that but what I can tell you is that we see the benefits and our internal breweries of our cost reduction efforts and the automation efforts.
And we're putting it.
So we haven't changed the full year guidance.
Yet.
But but we see the savings coming through and expect them definitely for next year.
Yeah.
Understood. Thanks, I'll try to squeeze and 1 last 1.
You noted that you will continue to focus on innovation, but also.
Predicted that there will be of category shake out and I think you guys have been good at predicting the cluttered category as Jim talked about and the Pat with craft beer and proliferation and and that's certainly now and as you guys predicted. So how are you guys thinking about innovation on.
And in the back half of this year and into 2022, given that the category sales.
And right now.
Yep.
I think.
David and I think I mean, the the way first of all we gained about 60% more space.
Year over year.
On shelf, we think we're expecting that we could probably pick up another 25% and the fall there will be change and fall resets, we think given our performance.
But where we have the we have the highest penetration of any brand and the category now and.
So we and we I think I mean, our flavor or flavor renovation has been able to bring new consumers into the category into the brand and so on that strength. We can get we think we can get more space and the fall as it relates to the innovation and general and the.
The consumer says category [laughter], they like innovation day, and I think we figured out how to do it different and others have and will continue we'll continue to bring innovation and I think the challenge for US is how do we keep doing it in a way that makes it different of differential and the.
And incremental bolt to the category and to our brand and <unk> and thus far we've been successful in doing that but.
But we're not going to and we're certainly not kind of rest on our laurels or think that maybe it's the same formula is going to work going forward, we're going to look at other ways to do it and again, because we're big and we're very strong number 2 now we think and and we performed this year significantly outperformed others. We think we have a lot of attitude and support from our customers to do more.
Understood. Thanks, very much for the color.
Sure.
Our next question comes from the line of Eric <unk> with Evercore. You May proceed with your question.
Thank you first quick 1 for Frank your inventories were up pretty substantially something and the order of $90 million sequentially I know that I think of as Dave called out increased inventory at the at the breweries.
And how much of that sequential increase and inventories on the balance sheet was related to finished goods at the breweries and what's the risk of Inc.
Of the and inventory obsolescence costs here are.
And then a follow up for Dave and Jim Afterwards.
Yeah, so the inventory well to your point, we have internal inventory that has clearly increased the that's a function of the business.
So the 3 reasons 1 is the function of the business the growth that we have experienced in absolute terms and we're managing it really in terms of weeks of supply.
And then the second thing is and.
As we have done and the previous 2 years, we've pre build of inventory and we have and that's what you see had the wholesale of inventory, which which has gone up now theres a limit to how much wholesalers can take so we had to build a little bit more.
More internally rather than passing it to the to the wholesalers.
And the and then came the slowdown and so what we have done and typically the was the curve and the previous 2 years. We're building up until April of will be reached the peak and inventory and then we start decreasing away and inventory as the demand picks up and eclipses our production capacity.
The T that has happened is about what has happened though in may and June that that pace has slowed versus what we have predicted but from a weeks of supply for.
Looking.
The perspective at this point and we don't we don't expect any any write offs of everything is reflect itself.
The the there shouldnt be unless there is another significant slowdown, which we don't expect because of our guidance.
Has reflected inventory and increase the guidance a little bit also to the low end 2 of to account for that.
Okay, and then Jim and Dave and I.
It was a little bit surprised that and your your detailed explanation for the slow down of the Seltzer category, but you didn't explicitly call out our T DS.
And maybe that's partly what you're referring to in terms of some of the consumer confusion and although I think that was referring to heart within the hard seltzer categories. So the <unk>.
And for you is do you guys think that and <unk>.
Some of the Huntsville per slow down is it related to the explosion that we've seen and our T. DS grizzly is obviously talking quite.
Bullishly about what they're seeing on their platform for our T d's, and what sort of interaction or you're seeing and what's the plan to participate and the bigger way.
Sure Eric This is Dave.
Actually I'll be honest right now, where if you read I was referencing the hard seltzer proliferation not.
Rtd's or canned cocktails at this point, we don't see it habit and impact on the hard seltzer category or virtually and then just to put it in perspective.
You have to break it apart so high high noon actually places of hard Seltzer No question about that and high noon. If you were to put that into the hard seltzer category would be about of 2 share.
Hi, New and is also about a quarter of the entire RTD business can't character of business. So consider the can't Cocteau business of about 8% alright of of hard seltzer of which the high and you just got to of at high noon does play in that space and Theres. No question you look at the occasions and again, we're still learning because it's obviously very new it's a nascent and saying we're talking of.
The consumers and we're learning high noon does deliver on sort of secession ability better for you, but if you look at the other canned cocktails and they do not and if you look at the you know it's more special occasions, not the same occasions and hard seltzer of satisfying and if you look at the repeat data and again, it's early but if you look at the Ricci V P J, the and the buy rate data.
And can't cocktails, they're very low compared to hard seltzer. So again I would say cant cocktails is kind of like it's just jumbo of stuff right. Now we're all trying to figure out what is it where does it go but that's and they're not all of the same and honestly. The first thing you got to do is take high noon and out of that equation because it plays very differently and having said that we're going to pursue what was the.
And the pit there because we have to we have to learn and we're a ryan it but and and I think it's we think it's important that we do that and we'll do it and our ways and we talked about we talked about.
Taking showers.
And to answer the F&B format as part of our partnership of being some Tory that's 1 of the Haynesville Gonna do also of course, we of dogfish head out there now so we're going to learn and we're going to play, but I think this kind of noise. That's been created now that Oh, my gosh can't cocktails or it's gotta, it's gotta be bringing down the hard seltzer category, we don't see it and the data and we've talked for consumers.
You don't see it either with them.
Great. Thanks for your perspective, there and I'll pass it on.
Our next question comes from the line of Laurence grabbing.
And I see.
And your question.
Thanks, and good evening, everyone 2 questions for me and 1 of these.
And just sort of from from BPI My question's already year.
And then for me so.
Oh, we need to do it.
Use of help me reconcile the numbers here I mean, it looks like given the <unk>.
And as deflation for the quarter was about 24% that's pretty much.
And what we have seen in the Knicks and.
Retail is that so.
It would mean that for me.
Alright.
And that he kind of thing.
Are those numbers, so maybe you could share them for the entire company and the Bds the performance of <unk>.
For me for by brands.
And then more specifically on truly Oh, I've got some of sort of progression for.
For the on premise, but the.
Help me reconcile physically to the growth and.
For me during the quarter is that what we've seen and retail.
Yeah.
So the question once where instead of the questions for the question is what's happening with on premise of if the if our total number of it looks like retail and we're growing and on premise or were not going on premise.
Correct and I guess I can tell you what he said yeah, yeah, yeah yeah.
And I'm sorry, sorry.
Yes.
And right now were.
And we're approaching like the last several weeks we've been selling at the same levels of 2019, and obviously 2020 of them, we're not selling what we're selling in 2019. So we are growing.
Yes.
And for 1 of the primary reasons, why both Sam and dog for sure.
Back to growth as we are.
We're getting tap handles and we're growing so I'm not sure how to.
And ensure that the data that we don't normally share how we can kind of reconcile the oven and say we are growing and on premise as well and we.
And we use the IRI I'm not sure what Nielsen Hussein.
And she said it says 24, so there is.
And I'm not sure how to reconcile those 2 numbers to be honest and the <unk>.
<unk>.
You know very definitely grew faster on premise and we did off premise pretty much for every brand.
Yeah Okay.
It was difficult to understand this and the numbers. So then specifically maybe on truly.
And I'm sure.
Free spot was about 2 percentage is your percent of and you are saying, it's about 3%. So it's not the huge kind of upside versus the versus last year.
Where do you think and a brand like tree or hub of Cytosorb in Germany could the.
Could the could become in terms of size versus retail and should we think about these being kind of a 10% of of the retail sales of of the truth.
<unk> sales are.
I'm not thinking that it would go up to north of 15.
15% of like beer, but.
Should we think about truly being true.
The team at the 8% to 10% of what it is and retail.
I think thats reasonable I think I would start with the likelihood that.
Alright and sell through in general.
<unk> truly will under index on premise for the foreseeable future.
<unk> and <unk>.
Yes, the draft takes off.
As Big volume driver Inc.
And you don't play on draft you're missing.
The sizable hunk of the on premise.
Low ABV type volume. We're beer has historically played so I think your numbers are and the world.
Begging for a crystal ball here and none of us has it but.
It is on price historically, it's been between 15 and 20 per cent of the business.
Hell of a gun to my head I say Ah Yeah, it's gonna be 10 ish, maybe a little less of the seltzer business for the next year or 2.
But longer term there may be upside for them innovation.
We haven't seen yet.
Thank you that's very helpful. And then I mean, it's a it's more of a neat innovation.
So are your pie.
And you don't understand it but could you please and maybe explained the.
The nature of the theater with a b and sensory and.
And we should expect.
From for what would be the upside for you and the and the trend is kind of west Carina the bubble needs to be Frank.
Yeah. So I think so I mean, we didn't we deliberately didn't didn't put a lot of information out there because we don't want to share with our competitors, but we basically of a partnership and it's not of Tibet.
The of licensing deal, it's a partnership where we can take.
Some of their brands and to the F&B space and we do know that there are F&B drinkers, who like spirit brands and and we'd like to see those beer brands and the F&B space, So through our distribution network collab.
Collaborative R&D collaborative marketing, but through our distribution network is where we would take those brands and the return we think.
We have a couple of brands.
First 1 being truly that have a possibility and the potential to live and the spirits world, but to do or to do it the right way, we're going to go through them and their distribution and use their knowhow and expertise and helping us craft and the first case of version of the truly that could go and it can be bought and the spirit. So it's we're mutually helping each other take.
Some of our iconic brands into other worlds, where consumers will recognize them and hopefully gravitate towards them.
And I.
Add to that.
I think it is.
Our mutual beliefs of us and.
Our partner and beam Suntory the.
And that.
A spirit based product.
Uh huh.
And we'll find its best route to market through the spirits system of.
Of supplier and distributor so yeah, we believe there could be some.
Traction for a truly vodka, but not through a us and not through our.
The production and distribution system and should go through of spirits producer.
We're fortunate to have someone of the quality of beam suntory to.
And to partner with and this endeavor and similarly, a mall based product even if it has the tequila brand on it will find its most success.
Leveraging the beer system a.
Beer supplier like us and beer wholesalers.
Our our network so it kind of keeps.
Despite the brand names and it keeps the products and their most successful lanes spirits through the spirit system and.
And mall based products through the severe systems.
Okay.
Thank you very much for all of the clarification and I pass it down and thank you.
Our next question comes from the line of silicone <unk> with Morgan Stanley You May proceed with your question.
Hey, good afternoon, guys. So.
So for Quest first question Linda.
And maybe can you explain and and give him a little bit more color of your expectations for truly and the second half I know you said for the full year you expect to at least to grow at the low end of the 2 to 3 times. The low end of the 20 to 50, but just any thoughts on the second half as you cycle and more normalized comparisons.
And <unk>.
That would be helpful for us to start.
Okay, I think it's I mean, I think the best way to look at it is.
The relationship to where the category of <unk>, which we have some good historical data over the last year and how we can how we performed relative to the category and when.
And what I don't want to say, what the category is actually going to do because we've proven we're not very good at that so but we do think that again, we've been for the last searching weeks, we've been about a 3 to 1 quick versus the category. So we think whichever the way the category of goes we'll ride it and we do think look we believe this.
And our last call, but we do think that the cost of the comps ease up there and we're lapping there's some serious out of stocks that were occurring.
And this will start to take hold.
The.
The the category of of window out so the so some of the consumer confusion and retailer support and everything will start to fade and the back half of the year, So and again, we think we.
Our innovation and through our brand building, we've established ourselves.
As a brand with a lot of momentum that that should take advantage of these things that will happen and back half of the year, how that translates into the.
The exact growth, we don't know, but we are and by the way. We can go if it goes up we're ready to go there we can and we can handle the either either whatever current happens we'll be ready to.
To take advantage of that.
And so I'm, sorry that doesn't really give you a definitive answer but that's sort of the best we can do.
Got it okay.
Yeah, maybe and maybe kind of kind of to add onto that line.
We were expecting.
Slowdown and May and June because it's really hard to predict and Thats why its really hard to answer. Your question is 2020 was such a roller coaster and had the tremendous volatility and.
The tremendous stock of first by the consumers and by the retailer because they wanted to be ready and that was reflected in the depletions and and all of volume shipment volume So of course.
So we were expecting the moderation that was and I think that coincide with a few other factors that Jim and Dave has laid out. So so the slowdown was a little bit stronger than what we had expected.
No that is moderating and the in the back half, but we don't exactly know what the what the composition.
And this between the natural slowdown of the category and what happened in May June and going into early July. So so we'll have to see that what we've put out is our range is our best estimate based on what we have seen and what we believe but we are clearly prepared to go beyond that.
The upside so we're ready to move there.
And if need be.
So we're planning for more than what we have or for a broader range than what we gave you of the guidance.
Got it okay and.
And then Dave you just talked and the possible and <unk>.
Wanted to build truly as a mega brand and you've clearly done a lot of progress and the U S market.
But thinking about internationally and the potential there.
Given the U S categories, and starting to slow and why not go a little bit more aggressive on and try to expand internationally, the Saudi with Canada.
And then potentially and other markets and whether you can make some investments to do it in house or potentially partner with and other beverage company and a global basis.
Well, we do we do of a business in Canada is growing rapidly.
So we feel we feel good about the progress we're making there.
We're just now launching and the U K, we are a partner of the U K Shepherd Naeem is the oldest Peru, and the U K and our partner.
For Boston beer, there and they are launching and the UK and Ireland right now as we speak and we'll learn because we are you know we're not quite sure.
We're hard seltzer is going to play outside of North America.
We're a little bit hopeful, but we're not we're not betting the farm on it but shepherd and he was kind of go out there and and the benefit of that is we also have 2 of repo who is the U K citizen and.
And obviously well for well loved and the UK. So we are of great marketing platform to go out there to see what we can do and the U K and then we'll see from there I mean, we'll see from there the other thing or other things obviously out there but.
We're focused on.
Winning and North America, and and that's our goal and I think you can see the effort, we've made and what's happened over the last year and a much different place and we were a year ago, because we've been focused on the market the matters. The most.
Got it thanks guys.
Yeah.
Our next question comes from the line of Kevin Grundy with Jefferies. You May proceed with your question.
Hey, good evening, guys I apologize for the background noise.
Our growth here just a question for.
For days and for Jim.
I was just hoping you could unpack the I'm coming back for the Seltzer category, maybe you could just unpack the factors of little bit driving the slowdown and I hate to belabor this but I guess going back to your initial guidance to where we are now as you look at your key performance indicators and household penetration and frequency of consumption.
Well.
If you could just sort of maybe departmentalized.
Order of magnitude what you think is driving the slowdown and then out of 20000 foot level and the industry sort of moves out of <unk> for your phase and the boat.
Moving to more normalized levels of growth and I apologize, David and I, usually don't want to forecast the category anymore, but being a company that has helped pioneer of this category I think.
If you will be curious to hear your views where do you think we'd go now from here I think the bogie had been like 15% of beer does that still seem like a reasonable ambition. So your thoughts on both of those would be helpful. And then I have a follow up thank you.
Sure. Okay, I can start and the lease then Jim or Frank and jump in and I think in terms of the category. So it is kind of that S curve moment, and I think what's been which makes it even harder to recognize because of all of the weird overlaps and Covid first startup second stock up on premise opening and et cetera, but if you look at the the household penetration and so year to date.
And the penetration is still growing and the category and so as the buy rate. So we have a lot of people come in I think the year to date dependent.
Using numerator data for those who who care, but its up 7% household penetration and increase now a year ago. It was <unk> 73 per cent. Okay. So that's the that's the inflection point and so growing but it has slowed down by rates were also increasing so people who are in the category and saying and are actually buying more so and so that's good so I think.
And my sense is I mean, obviously went from like post the triple digits not to line 9 months ago or whatever it is at the high double digits now it's low double digits and we think of can we think it will stay and work. Rebecca This is kind of stay there and we think and it could go up a bit and we said that's 1 of the 50 again, that's not our forecast that's the point that that's all of the experts forecast and that seems.
Reasonable to us given all the things we've seen so I think yes, I think that's kind of what's kind of make a difference really.
To quote unquote getting normalized we'll know more obviously, you'll get through the summer, but again there are too many brands out there with not enough shelf space too much focus too much sameness and I think this is the I really believe this firmly debt and categories. Like this where there is high growth and everybody jumps in and it's not just in our industry. The more people use it more.
Company is try to create something that's different they create non essential.
Differences and and.
And benefits and the problem is everything becomes the same and it does from a consumer perspective look the same and I think of.
A lot of those brands will be gone so.
And I think retailers and we're seeing that now start happening and the fall still of the top 2 brands or 70 share of the category more or less and that will continue so I think the the smoke and start to clear and I and we're seeing what we're hearing from the other third party folks they are saying basically the CAGR of 15 to 25 over the next few years coming out of it but it might even and I didn't want to go there yeah, let's just get through the <unk>.
3 months to 6 months and see where it ends up where we think of well. We obviously have more information now that we did for even 3 months ago, a lot more and hopefully were.
We're closer.
And Kevin and I know if that answered your auto if that came close to answering your questions.
No. That's helpful. Jim did you have anything to add on this front and in particular, where you think the category goes over time.
You.
You reassess here with the slowdown.
And for your phase.
And anything to add.
And we're just at a really.
A copy.
Point.
We may be at and.
Totally honest we were surprised at.
And.
The sharpness and the sudden of.
The change in trajectory.
It happens.
We're lapping Crazy times for last year the we're.
We're past the first month of pantry loading, but when we look at May of this year versus may of last year. It was the crazy time last year.
So I don't know that all of the volume and shifted to the off.
Off premise so the numbers of really hard to read and May even June of this year versus may and June of last year.
We are I mean, we're probably as surprised as you were it shows up and the inventory numbers.
And from our point of view, and we launched truly punch, which was.
Quite successful.
But it has.
It has and add it as much to our volume as we thought.
Cannibalize it.
Some of the other packages, maybe a little more than we thought.
It would so.
It's a really really murky crystal ball its more of like looking into of bowling ball you can't see Martin.
[laughter] understood 1 quick follow up and then I'll pass it on.
And just given the slowdown.
There is a major branding and out there.
The bulk of plug on it so.
1 would think that there'll be some interest and particle.
The inventory through the system.
Understanding the forever.
Difficult commodity cost environment, how do you sort of balance or the few.
A few of those crosscurrents category slowdown for the higher input costs and.
Specifically the.
The the risk that the promotion and kind of picks up here given the magnitude of investment and then.
Great.
And the channel right.
And.
I'll give you my guess.
Generally when our brands ended up being.
The discontinued like that the there's not that much volume out there.
I think the 1 you were talking about it was maybe 7% share.
So a lot of them just windows, so theres not a lot of inventory that gets dumped and put downward pressure on the category, it's the from retailers and wholesalers and suppliers at the very attractive category.
And we've all made major investments to it so.
There is not.
Need to pay back so I'm not anticipating price wars.
And the Seltzer category.
Not that worried about it we all have.
More inventory than we would like but it's.
It's still.
The selling a lot of product. So we're not really worried about and it has a long shelf life 6 to 12 months. So we were all able to cut our production and work off of that inventory and a relatively short period of time.
Yes.
Oh, sorry go ahead.
And we'll add to the inventory last year of would've been more than happy if we have that level of inventory because we went out and.
And there's just no.
A lot of seasonality to it. So that's 1 thing the other thing is also on the pricing.
You see also and our financial and so I mean, we deliver quite of bit of pricing in the category the category So far.
Yes.
Zone that it's not really price driven category, it's not just price.
It's the quality of beverage and the strength of the brand and.
And the innovation that wins, but but but the price has been really of factor.
And we don't expect it to cash.
Okay very good I appreciate the time. Thank you good luck.
Thank you.
Okay.
Our next question comes from the line of Nathan <unk> with Bernstein. You May proceed with your question.
Hi, Yes. Thank you for taking my question I wanted to go back and touch on your comments on the.
And really taking a step back and looking at the long term. So are you seeing evidence that the early adopters category.
Out of hard Seltzer or is what we're seeing now to really just that the range of attracting new customers slowed. Thank you.
And the team and I think it is much more of the ladder. So that the early adopters are actually and.
The are there and there and as I mentioned, the buy rates of increases so they're actually buying more and they're and they're moving to the category actually they are experimenting with a lot of different things, but they were there I'd say, it's more of the more recent.
And the puzzle penetrations of background, 27% now so it's probably the more of the more recent ones to jump jump and more likely to to fallout of.
Also when you bring in and we're bringing in younger with the good news and we're bringing in younger consumers, we're bringing in.
The Chino is African Americans and the buy rates for some of those consumers come in and actually a little bit lower than the and.
And the first 1 zone, but the the.
This is more of this is still gonna be and $8 billion.
And as thereabout business this year and retail service and it's the only real category, that's growing within beer and its growing double digits and the question is how far does it go up for it.
So we've got to put that and perspective as well.
Alright, thank you.
As a reminder, if you would like to ask a question. Please.
1 of them.
Todd.
For my follow up call for questions.
Our next question comes from the line of Eric Zero Day with Evercore. You May proceed with your question.
Hi, just a quick follow up.
And you cut the capex guidance pretty significantly for this year.
And I know youre not going to give us the category forecast for for this year or next year, but.
What sort of range of additional capacity.
Do you have coming online between your own breweries and your of co Packers.
Between now and year end and now and call it summer.
2022.
Right now we.
Got a couple of the.
The big pieces of capacity coming on and the next few months.
Actually this month, we're starting to get production out of the.
The city brewery brewery and Irwindale, California.
Right outside of L, a and <unk>.
And the fourth quarter, we will get production from.
The route.
A as of basically the people who produce red Bull all over the world They have the breaking up a.
The facility.
In Arizona, specializing and slim cans so.
1 part of the.
The margin improvement that will be starting in the second half of this year is those markets. We currently supply largely from Memphis and from Pennsylvania, a little bit from a smaller facility and Arizona. So all of those freight costs.
<unk> will be reduced as we begin to supply the western half of the United States from Western breweries and then.
We we put capacity in place for us.
Back half of this year, and then the especially going into 2022 for very significant growth.
And seltzer and that is primarily contract capacity.
That was.
All of that the contract capacity coming on stream, which is very favorably located and actually well designed to make our variety packs.
Route.
It doesn't involve a great deal of capital compared to building and internally. So 1 of the things we have.
And have reduced is.
The high capital cost capacity, which is the internal capacity.
We believe we have really good contract partners with favorable terms and locations and a.
Very efficient production.
And.
2 to your question, if we started that and the last earnings call. We were able to reduce that when we've run this really extreme growth period when the.
Plenty of capital and you look at different options of putting the capital and and that basically 2 big buckets of capital that we're looking at 1 of increasing capacity and the other 1 is investments to bring down the costs.
The automation of the variety of back Thats, the main component, which will drive the cost down so when you put that and at the beginning we've learned the plants weren't all specified as we move through the year.
We've found better solutions as Jim said that.
Allow us to get to the same results with less capital. So if you look at the capital of reduction in the guidance.
And the way I would think about it as 3 quarters is really because we found better ways and.
And implementing our plans and about 1 quarter is the delay and that depends really on the capacity that we really need we have sufficient capacity for next year, but everything.
And we'll go forward that will decrease all of a variety pack and costs and that's the major cost block and that's also the major difference that you see the current P&L between external manufacturing and internal manufacturing, but those of the plans that we have and that's going to be a key driver for the margin improvement.
That's helpful color, but just coming back to the risk with all of this additional capacity that you're going to have access to could you talk about what degree of flexibility that you have with your partners and other locations and your own.
And <unk> to just make sure that you don't have that youre, not too long on capacity or supply.
And next year the category growth disappoints.
Yes.
We believe we have a very flexible contracts with our primary.
Partners.
There are of shortfall fees, but they.
And they don't kick in for a while for the.
The first piece of volume.
We have to go way below our projections before they kick in and they are reasonable and are you because.
The contract partners are very good producers there they're in demand.
And they make lots of different things we are the the.
The principal customer for most of them and and looked at as the most the.
The desirable stable sizable volume.
But if we cut some of that back.
We've been told by our contract the partners that they've got other demand for it so.
We're lucky in that that.
<unk> capacity either of the last third of it.
We basically have off on.
On that and the contracts are structured that way because we were uncertain about.
Just how high and was up so we locked in adequate capacity to cover a very ambitious of.
Upside goals.
But the.
The shortfall fees are not sizable.
Alright, well, thank you I'll pass it on.
Okay.
As a reminder, if you would like to ask the question. Please press star 1 on your telephone keypad.
And while we poll for questions.
Ladies and gentlemen, we have reached the end of today's question and answer session I would like to turn this call back over to Mr. Jim Koch for closing remarks.
Well thanks, everyone for.
Joining us for this call and we look forward to speaking to you and to another 3 months and the when we think we'll have a little more clarity.
Maybe the bowling ball will have turned a little more translucent thanks, everyone.
Thank you for joining US today. This concludes today's conference you may disconnect your lines at this time.
Okay.
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