Q3 2021 Boston Beer Company Inc Earnings Call

October 21, 2021

As a reminder, this conference is being recorded.

I will now turn the conference over to our host Mike Andrews Associate General Counsel and corporate Secretary. Thank you, you may begin.

Thank you, good afternoon and welcome. This is Mike Andrews Associate General Counsel and Corporate Secretary of the Boston Beer Company. I am pleased to kick off the 2021 third-quarter earnings call for the Boston Beer company. Joining the call from Boston Beer are Jim Koch, founder and Chairman, Dave Burwick, our CEO and Frank Smalla our CFO.

Your company I'm.

I am pleased to kick off the 2021 third quarter earnings call for the Boston Beer company.

Joining the call from Boston Beer are Jim Koch, founder and Chairman, Dave Burwick, our CEO and Frank smaller our CFO.

Before we discuss our business I'll start with our disclaimer as we state in our earnings release some of the information we discuss and that may come up on this call reflect the company's or management's expectations or predictions of the future. Such predictions are forward looking statements.

On this call reflect the companys or managements expectations or predictions of the future.

Such predictions are forward looking statements.

It's important to note that the company's actual results could differ materially from those projected in these forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those. And the forward looking statements is contained in the company's most recent 10-Q and 10-K.

And the forward looking statements is contained in the company's most recent 10-Q and 10-K.

The company does not undertake to public publicly update the forward looking statements, whether as a result of new information future events or otherwise.

I will now pass it over to Jim for some introductory comments. Thanks, Mike. Our intent today is to provide some additional context around our third-quarter earnings, discuss our views on trends, we see driving results at Boston Beer and in our industry and talk about how we see performance going forward. After I discuss a few highlights from the third quarter, I'll hand it over to Dave who will provide an overview of our business. Frank will then provide details of the third quarter financial results and how these results have been impacted by slower than anticipated hard Seltzer group, as well as our outlook for the remainder of 2021 and 2022, then I will share with you our longer-term view of the business.

Thanks, Mike.

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To provide some additional context around our third quarter earnings discuss our views on trends, we see driving results at Boston beer and in our industry and talk about how we see performance going forward.

After I discuss a few highlights from the third quarter I'll hand, it over to Dave who will provide an overview of our business.

Frank will then provide details of the third quarter financial results and how these results have been impacted by slower than anticipated hard Seltzer group as well as our outlook for the remainder of 2021 and 2022, then I will share with you our longer term view of the business.

Finally we will open the lineup for questions. I'll begin with some context. And measured off premise channels year to date through October 10th where our brand portfolio represents only 4.4 of the total industry volume, we've delivered more than 41% of the total industry volume growth, the highest by far of all breweries. Four of our five major brands are growing depletions and gaining share in off-premise measured channels over the last 13 weeks. We have a broad portfolio of healthy brands, which we will further build in 2022 to continue driving our growth. Our success has been recognized by our most important customers, our distributors, who recently voted us the top beer supplier in 2021 and the latest Tamron survey. This is the 10th time.

We will open the lineup for questions.

I'll begin with some context.

And measured off premise channels year to date through October 10th where our brand portfolio represents only 4.4 of the total industry volume, we've delivered more than 41%.

Of the total industry volume growth the highest by far of all breweries.

Four of our five major brands are growing depletions and gaining share in off premise measured channels over the last 13 weeks, we have a broad portfolio of healthy brands, which we will further.

<unk> in 2022 to continue driving our growth.

Our success has been recognized by our most important customers or distributors, who recently voted us the top beer supplier in 2021 and the latest Tamron survey. This is the 10th time in.

In the last 12 years that our most important customers have recognized us as the top supplier in our industry. We are thankful to our outstanding coworkers, distributors and retailers, whose continued support is helping grow our business to achieve our 14th consecutive quarter of double-digit growth.

Bill 14th consecutive quarter of double digit growth.

But despite these ongoing strengths we experienced very large unanticipated costs as a result of the sudden unexpected slowing of growth in hard seltzer. Based on our growth projections, we moved aggressively to build inventory to try to avoid the out of stocks that we experienced in 2019 and in 2020, and to secure capacity both short term and long term to be ready for growth through 2023. Dave will share our perspective on the decisions that led to these unanticipated costs and Frank will share a fuller accounting of them. I'll now pass it over to Dave for a more detailed overview of our business.

Build inventory to try to avoid the out of stocks that we experienced in 2019 and in 2020 and just secure capacity both short term and long term to be ready for growth through 2023, Dave will share our perspective on the decisions that led to these.

Our participated costs and Frank will share a fuller accounting of them I'll now pass it over to Dave for a more detailed overview of our business.

Hey. Thanks, Jim. Good afternoon, everybody, let me start by addressing where we are strategically how we're viewing the future of the hard seltzer category and how we plan to grow our portfolio going forward, even without high double-digit hard seltzer category growth.

We plan to grow our portfolio going forward, even without high double digit hard seltzer category growth.

There's no question that Hard Seltzer have generated tremendous growth for the beer category over the last five years and will remain a very important beer industry segment in the future. Hard Seltzer are 11% of total beer dollars year to date up from 9% during the same period in 2020. Consumer metrics remained favorable, social media sentiment continues to trend positively and household penetration, frequency and buy rate all are increasing over the past 13 weeks. Volume growth has slowed this year, but we continue to believe that Hard Seltzer can reach 15% to 20% of total beer dollars in the next five years.

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<unk> of total fear dollars year to date up from 9% during the same period in 2020.

Consumer metrics remained favorable social media sentiment continues to trend positively and household penetration frequency and buy rate all are increasing over the past 13 weeks.

Volume growth has slowed this year, but we continue to believe that hard seltzer can reach 15% to 20% of total beer dollars in the next five years.

We believe the ability to create alcoholic beverages from a beer base with the range and variety of flavors previously only available to <unk> strengths. Coupled with the convenience and portability of beer and beers tax and distribution levels will be a platform for long term growth for Boston Beer. We've been playing to win and we've reaped many benefits. So far this year truly has achieved the second-highest household penetration in all of beer, behind only Bud Light beer and ahead of all its other Hard Seltzer and beer industry competitors. Truly has generated 54% of all Hard Seltzer category growth so far in 2021, 2.3 times the next highest brand. We've gained 23 share points against the category leader since January 2020.

<unk> to <unk> strengths.

Coupled with the convenience and portability of beer and beers tax and distribution levels will be a platform for long term growth for Boston beer.

We've been playing to win and we've reaped many benefits. So far this year truly has achieved the second highest household.

Penetration in all of beer behind only Bud light beer and ahead of all its other hard seltzer and beer industry competitors.

Truly has generated 54% of all hard seltzer category growth. So far in 2021 to three times the next highest brand.

Please gained 23 share points against the category leader since January 2021.

We've led the category in innovation and brand building and have outgrown the category for 13 straight months. We also believe that truly is blazing its own path and not following the category like so many other entries. Thus, we believe we are well-positioned to succeed in the future when it will be much harder for new entrants to gain share. We've created a $1 billion brand in only five years and we're confident we'll continue to grow it going forward. Slowing hard sells for category growth has certainly impacted our business.

We also believe that truly is blazing its own path and not following the category like <unk>.

Other entries.

Thus, we believe we are well positioned to succeed in the future when it will be much harder for new entrants to gain share.

We've created a $1 billion brand and only five years and we're confident we'll continue to grow it going forward.

Slowing hard seltzer category growth.

So many of us certainly impacted our business.

Earlier in the year, we had expected the category to grow at over 70% and Truly to gain share. The Truly brand did gain share, but the category did not grow as we had expected. Now, we expect Truly thanks to its share gains to finish the year up between 20 and 25% in volume. Because of our higher demand projections earlier in the year and our commitment to avoid the out of stocks that we experienced during the summers of 2019 and 2020, we added significant capacity and prebuilt inventories of cans and finished goods to levels that ended up exceeding actual needs as the category slowed down.

The truly brand did gain share, but the category did not grow as we had expected now.

Now, we expect truly thanks to its share gains to finish the year up.

<unk>, 'twenty and 25% and volume.

Because of our higher demand projections earlier in the year and our commitment to avoid the out of stocks that we experienced during the summers of 2019 and 2020, we added significant capacity and prebuilt inventories of cans and finished goods to levels that ended up exceeding.

Between actual needs as the category slowed down.

As a result, we are currently faced with significant temporary costs as we adjust to the new category trends. These cost impacts are reflected in our third quarter financials. Building our capacity and inventory levels was an essential part of playing to win in. And that strategic context, we believe the risk of undersupply was bigger than that of oversupply. So we resource against the high growth scenario, securing supply-constrained materials and capacity to gain market share in a highly competitive and SaaS growing category.

These cost impacts are reflected in our third quarter financials.

Building, our capacity and inventory levels wasn't a central part.

<unk> and to win in.

And that strategic context, we believe the risk of under supply was bigger than that of oversupply.

So we resource against the high growth scenario, securing supply constrained materials, our capacity to gain market share in a highly competitive and SaaS growing category.

Having said this we've updated and evolved our own category growth model and believe the category could be flat to plus 10% growth in our most likely 2022 scenarios.

Clarity will probably not increase until we start to lap June and July 2021, when the category started to decelerate rapidly. Especially in the two year volume stack, which we look at closely.

Especially in the two year volume stack, which we look at closely.

Regardless of which scenarios prove most accurate, we fully intend to extend our streak of outgrowing the category throughout the year driven by innovation, continued brand building and superior retail execution and distributor support.

<unk>.

As Jim mentioned, we have a balanced portfolio of healthy, well-positioned brands. As we look towards 2022 and beyond our aim is to continued double-digit depletions growth on the foundation of this portfolio, especially as consumers drink more beyond beer products. We are the number two player in beyond beer with a 26% share driven by the number one F&B and twisted tea. The strong number too Hard Seltzer and Truly and the number one hard cider and angry orchard. Twisted tea has overcome this past summer supply chain issues in out of stocks and has grown 22% in the last 13 weeks and measured off premise channels. Twisted Tea is the second fastest-growing brand year to date among the top 25 in beer, while Truly remains number one in percentage and absolute volume growth.

We are.

For two player in beyond beer with a 26% share driven by the number one F&B and twisted tea.

The strong number too hard seltzer and truly and the number one hard cider and angry orchard.

Twisted tea has overcome this past summer supply chain issues in out of stocks and has grown 20.

Or the <unk> in the last 13 weeks and measured off premise channels.

Twisted tea is the second fastest growing brand year to date among the top 25 in beer, while truly remains number one in percentage and absolute volume growth.

We will have industry leading innovation again with truly starting with the Holiday Party pack next month and followed by the January 2022 launch of truly Margarita style, which has received a terrific response in initial discussions with our distributor partners and retailers. As twisted tea expanses consumer base, we're launching a new Twisted Tea Light with only 109 calories. But our innovations go beyond truly and Twisted Tea for 2022. We're introducing new brands. The bevy long drink. Sauceda, Gaba agave cocktails and hard mountain Dew.

Two per Se Party pack next month and followed by the January 2022 launch of truly Margarita style, which has received a terrific response in initial discussions with our distributor partners and retailers.

As twisted tea expanses consumer base, we're launching a new twisted tea light with only a 109 calories.

With the horlicks.

But our innovations go beyond truly and twisted tea for 2022.

We're introducing new brands.

The bevy long drink.

Sauceda, Gaba agave cocktails and hard mountain Dew.

We're also expanding our lineup of award-winning doctors heard Ken cocktails, with new vodka, and gin crush styles, and we're launching a new tropical fruit extension for Angry Orchard. In addition to adding angry orchard hardcore and 8% ABV products. Meanwhile, our Sam Adams your cousin from Boston is paying dividends. Winning the Sam Adams grew double digits in the third quarter fueled by both on-premise and off-premise gains while also gaining share of Kraft in the off-premise. Now I'll hand, it over to Frank to discuss our third quarter financials as well as our outlook for 2021 and our initial thoughts on 2022.

<unk> heard Ken cocktails, with new vodka, and gin crush styles, and we're launching a new tropical fruit extension for angry Orchard. In addition to adding angry orchard hard core and 8% ABV products.

Meanwhile, our Sam Adams your cousin from Boston campaign is paying dividends.

Winning the Sam Adams grew double digits in the third quarter fueled by both on premise and off premise gains while also gaining share of Kraft in the off premise.

Now I'll hand, it over to Frank to discuss our third quarter financials as well as our outlook for 2021 and our initial thoughts on 2000.

<unk>.

Thanks, Dave Good afternoon, everyone before I get into the financial review of our third-quarter results and financial outlook I'd like to provide more detail on the third quarter charges and other costs related to the hearts of the slowdown. As Dave explained, we strategically resource against the high side of our internal category growth and market share projections to ensure would not be constrained in our efforts to build our share position in the hyper growth hard seltzer category. Resourcing against our high side scenario included adding internal and external capacity pre building distributor and internal inventory ahead of the peak summer season, and securing tight supply materials, such as can and flavors.

As Dave explained, we strategically resource against the high side.

<unk> internal category growth and market share projections to ensure would not be constrained in our efforts to build our share position in the hyper growth hard seltzer category.

Resourcing against our high side scenario included adding internal and external capacity pre building distributor.

Of our internal inventory ahead of the peak summer season, and securing tight supply materials, such as cancer and flavors.

This strategy enabled us to gain share in 2020 in 2021 in a supply constrained environment. Following the rapid slowdown this summer, Hard seltzer category growth fell below our internal low side projections and resulted in excess capacity and higher than planned inventory levels of input materials and finished goods.

Following the rapid slowdown this summer.

Hard seltzer category growth fell below our internal low side project teams and resulted in excess capacity and higher than planned inventory levels of input materials and finished goods.

As a result, we have taken a $102.4 million third-quarter charge related to direct cost of the Hard Seltzer slowdown. Consisting of inventory obsolescence and destruction and related destruction costs of $54.3 million, contract termination costs, primarily for excess third party contract production of $35.4 million. And equipment impairment of $12.7 million. In addition, the third-quarter results include indirect costs, resulting from the slowing Hard Seltzer category growth of $30.6 million.

Chuck consisting of inventory obsolescence and destruction and related destruction costs of $54 $3 million contract termination costs, primarily for excess third party contract production of $35 4 million.

And equipment impairment of $12 7 million.

In addition.

And the third quarter results include indirect costs, resulting from the slowing hard seltzer category growth of $36 million.

These costs include negative absorption impact at company-owned breweries and downtime charges at third party breweries of $11.4 million. Increased raw material sourcing and warehousing costs of $11.8 million. And distributor return provisions for out of code or damaged product of $5.4 million and other costs of $2 million.

Increased raw material sourcing.

Slowdown warehousing costs of $11 8 million.

And distributor return provisions for out of code or damaged product, a $5 $4 million and other costs of $2 million.

The negative absorption impacts as a result of shipments lagging depletions to reduce distributor inventories to target levels. And production lagging shipments to reduce internal inventory levels. With this background from the third quarter financial impact of the slowdown in Hard Seltzer, I will now turn to our overall third-quarter results and our current outlook for full-year 2021 and 2022. For the third quarter, we reported a net loss of $58.4 million, a decrease of $139.2 million from the third quarter of 2020. Loss per diluted share was $4.76, a decrease of $11.27 per diluted share from the third quarter of 2020.

And when production lagging shipments to reduce internal inventory levels.

With this background from the third quarter financial impact of the slowdown in hard Seltzer I will now turn to our overall third quarter results and our current outlook for full year 2021 and 2022.

For the third quarter, we reported a net loss.

Loss of $58 4 million, a decrease of $139 2 million from the third quarter of 2020.

Loss per diluted share was $4 76, a decrease of $11 27 per diluted share from the third quarter of 2020.

This decrease was due to the combined direct and indirect cost related to slowing Hard Seltzer category growth of $133 million or $7.73 per diluted share net of the related tax benefit and higher operating expenses, partially offset by increased net revenue. Depletions for the quarter increased 11% from the prior year reflecting increases in our Twisted Tea and Truly Hard Seltzer, Samuel Adams, and Dogfish Head brands, partially offset by decreases in our Angry Orchard brand. Shipment volume for the quarter was approximately $2.3 million barrels and 11.2% increase from the prior year.

Related to slowing hard seltzer category growth of $133 million or $7 73 per diluted share net of the related tax benefit and higher operating expenses, partially offset by increased net revenue.

Depletions for the quarter increased 11% from the prior year.

Cause selecting increases in our twisted tea and truly hard Seltzer, Samuel Adams, and dogfish head brands, partially offset by decreases in our angry Orchard, Brian Shipman.

Shipment volume for the quarter was approximately $2 3 million barrels and 11, 2% increase from the prior year.

Reflecting increases in our Twisted Tea, Samuel Adams and Angry Orchard brands partially offset by decreases in our Truly Hard Seltzer and Dogfish Head brands. We believe distributor inventory as of September 25th, 2021, averaged approximately six weeks on hand and was at an appropriate level for each of our brands, except for Truly which has significantly higher than planned distributor inventory levels for certain started some packages.

Recently offset by decreases in our truly hard seltzer and dogfish head Brian.

We believe distributor inventory as of September 25, 2021 averaged approximately six weeks on hand and was at an appropriate level for each of our brands, except for truly which has significantly higher than planned distributor.

Poverty levels for certain started some packages.

To address the slowing demand and continued volatility of future volume projections with Truly we're working closely with our distributors to reduce Truly distributor inventory levels, we adjusted production and shipments during the third quarter and expect to continue to do so during the remainder of the year. Our third-quarter gross margin of 30.7% decreased from the 48.8% margin realized in the third quarter of 2020. Primarily due to the $84.9 million by direct and indirect volume adjustment cost as a result of slowing Hard Seltzer growth described. But above and higher materials costs, partially offset by price increases. Advertising promotional and selling expenses increased by $58.8 million or 54.4% from the third quarter of 2020. Primarily due to increased brand investments of $37.6 million, mainly driven by higher media, production and local marketing costs and increased freight to distributors of $21.2 million that was primarily due to higher rates and volumes.

Year.

Our third quarter gross margin of 37% decrease from the 48, 8% margin realized in the third quarter of 2020.

Primarily due to the $84 9 million direct and indirect volume adjustment cost as a result of slowing <unk> growth described.

But above.

Inventory materials costs, partially offset by price increases.

Advertising promotional and selling expenses increased by $58 8 million or 54, 4% from the third quarter of 2020.

Primarily due to increased brand investments of $37 6 million, mainly driven by higher media production and.

And higher marketing costs and increased freight to distributors of $21 $2 million that was primarily due to higher rates and volumes.

Based on information of which we're currently aware, we're now targeting full year 2021 earnings per diluted share between $2 and $6.

However, actual results could vary significantly from this target. This projection excludes the impact of ASU 2016, [inaudible] nine and it's highly sensitive to changes in volume projections, particularly related to the Hard Seltzer category. Full year 2021 depletions growth is now estimated to be between 18% and 22%. We project increases in revenue per barrel between 2% to 3%. Full year 2021, gross margins are expected to be between 40% and 42% the gross margin impact related to the combined fully hit direct and indirect cost of the Hard Seltzer slowdown is estimated at $132.6 million of which $95.8 million have been incurred in the first nine months and the remainder of $36.8 million estimated to be incurred in the fourth quarter.

Welcome. This projection excludes the impact of ASU 2016, <unk> nine and it's highly sensitive to changes in volume projections, particularly related to the hard seltzer category.

Full year 2021, Depletions growth is now estimated to be between 18% and 22% we project increases in revenue per barrel.

2% to 3%.

Full year 2021, gross margins are expected to be between 40% and 42% the gross margin impact related to the combined fully hit direct and indirect cost of the hard seltzer slowdown is estimated at $132 6 million of which $95 $8 million have been incurred.

<unk> in the first nine months and the remainder of $36 $8 million estimated to be incurred in the fourth quarter.

Our full year 2021 investments in advertising promotional and selling expenses are expected to increase between $80 million and $100 million. This does not include any increases in freight costs for the shipment of our products to our distributors. I will now turn to 2022. We are in the process of completing our 2022 plan and we'll provide further guidance when we present our full year 2021 results. Based on information of which we're currently aware we're using the following preliminary assumptions and targets for 2022 fiscal year.

This does not include any increases in freight costs for the shipment of.

Our products to our distributors.

I will now turn to 2022.

We are in the process of completing our 2022 plan and we'll provide further guidance when we present, our full year 2021 results.

Based on information of which we're currently aware we're using the following preliminary assumptions and targets for 2000.

Which are highly sensitive to changes in volume projections, particularly related to the Hard Seltzer category.

Targeting depletions and shipments percentage increases of between mid single digits and low double digits. We project increases in revenue per barrel of between 3% and 6%. Full year 2022 gross margins are expected to be between 45% and 48%. We plan increased investments in advertising, promotional and selling expenses of between 10 and $30 million for the full year 2022, not including any changes in freight costs for the shipment of products to our distributor.

We project increases in revenue per barrel of between three and 6%.

<unk> 2000.

2022 gross margins are expected to be between 45, and 48% we plan increased investments in advertising promotional and selling expenses of between 10% and $30 million for the full year 2022, not including any changes in freight costs for the shipment of products to our distributor <unk>.

We expect that our cash balance. $26.5 million as of September 25, 2021, along with our future operating cash flow and unused line of credit of $150 million will be sufficient to fund future cash requirements. Now I'll hand, it back to Jim for some closing remarks.

$26 $5 million as of September 25, 2021, along with future operating cash flow and unused line of credit of $150 million will be sufficient to fund future cash requirements now I'll hand, it back to Jim for some closing remarks.

Thanks, Frank before we open it up for questions I'd like to share some perspective from someone who has been at Boston Beer company since the beginning. Remind us all we have a tremendous track record of growth at Boston Beer company for the past 20 years, we've grown our revenue at over a 12% compounded annual growth rate and have increased total shareholder returns at a 20% compounded annual growth rate. That growth doesn't always come in a straight line. The numbers are a beautiful thing but the actual results, sometimes aren't pretty but it has come over 20 years compounded, because we've demonstrated the ability to consistently innovate and grow great brands in our niche the high end of the beer and beyond category.

Of ADM perspective from someone who has been at Boston Beer company since the beginning.

Remind us all we have a tremendous track record of growth at Boston Beer company for the past 20 years, we've grown our revenue at over a 12% compounded annual growth rate and have increased.

Total shareholder returns at a 20% compounded annual growth rate.

That growth doesn't always come in a straight line.

The numbers.

Our beautiful thing but.

Actual results, sometimes arent pretty but it has come over 20 years.

<unk> founded because we've demonstrated the ability to consistently innovate and grow great brands in our niche the high end of the beer and beyond category.

That brings us to where we are today. Truly is the number two hard seltzer and closing the gap this year with the current category leader. Twisted Tea is number one in hard tea and now the number one F&B and is continuing to gain share. The Sam Adams brand is gaining share for the first time in several years and the Angry Orchard is number one and hard cider and maintaining close to a 50% market share. We intend to grow these four brands and Dogfish Head as well in 2022 through brand building and executing at retail the things that we've been doing for decades. We believe we have the best Brewers, the best high-end brands with potential yet to be fully tapped. The best sales force and the best innovation again for 2022, we're fixing our capacity and supply chain issues. Our marketing is hitting its stride and we have the best distributor network behind us. That's why we've been the fastest-growing company in all of alcohol for the last few years.

Comps to tea is number one in hard tea and now the number one F&B and is continuing to gain share. The Sam Adams brand is gaining share for the first time in several years and the angry Orchard is number one and hard cider and maintaining close to a 50%.

Twitter chair, we intend to grow these four brands and dogfish head as well in 2022 through brand building and executing at retail the things that we've been doing for decades. We believe we have the best Brewers the best high end brands potential yet to be fully tapped.

Mark the best sales force and the best innovation again for 2022, we're fixing our capacity and supply chain issues. Our marketing is hitting its stride and we have the best distributor network behind Us that's why we've been the fastest growing company in all of alcohol for the last.

We have a company and culture that not only delivered double-digit growth, but also demonstrates resilience and agility when faced with challenges. As Dave mentioned, we've been playing to win in the Hard Seltzer category. We will continue to play to win to nourish our brands to exploit their untapped growth potential as we're seeing with our 20 plus year old Twisted Tea brand and to innovate with new ones in the months ahead.

Few you untapped growth potential as we're seeing with our 20 plus year old twisted tea brand and to innovate with new ones in the months ahead.

Today, we hope to put the turbulence of the Hard Seltzer category slowdown behind us and continue to prove our ability to outgrow the beer category for many years to come. Now, let's open it up for your questions. Thank you.

Grow the beer category for many years to come now.

Now, let's open it up for your questions.

Thank you.

And ladies and gentlemen, we will now conduct a question and answer session. If you would like to ask a question. Please press star followed by the number one on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star followed by the number two if you would like to remove your question from the queue, for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys. One moment, please while we poll for questions. Okay.

If you would like to ask a question. Please press star followed by the number one on your telephone keypad.

Information Tomlin.

Your line is in the question queue.

You May press Star followed by the number two if you would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.

One moment, please while we poll for questions.

Okay.

Our first question comes from Nik Modi with RBC capital markets. Please state your question. Thanks, and good evening everyone. Dave I was hoping maybe you can provide some context on your 2022 preliminary guidance that you provided. Just in terms of the bus shelf allocation, innovation kind of core category growth.

Thanks, and good evening everyone.

Dave I was hoping maybe you can provide some context on your 2022.

Preliminary guidance that you provided.

Terms of the bus.

Shelf.

Colocation innovation kind of core category growth.

The range of outcomes of the category growth is pretty wide, but maybe you could just give some context around kind of how you came to that conclusion. Okay. Hey, Nik, thanks. Thanks for the call. I think without getting into specifics about what we're thinking about each brand has a range of growth we see for each brand. We definitely expect all five of these brands to grow next year and as Jim mentioned, we are building momentum as we head into next year innovation will definitely play a role. It depends on how you count innovation is probably. It could be a third or more of the growth. But we're replacing our backs as you heard across the board both.

Okay, Hey, thanks, Thanks for the call I think.

Without getting into specifics about what.

Self pay about each brand has a range of growth we see for each brand. We definitely expect all five of these brands to grow next year and as Jim mentioned, we are building momentum as we head into next year innovation will definitely play a role.

It depends on how you count innovation is probably.

It could be a third or more of the growth.

Replacing.

We're thinking about our backs as you heard across the board both.

And just investing in our brands to sustain the growth whether it be for Twisted Tea or Sam Adams. Adding main extensions where it's appropriate for certainly for Truly Twisted Tea right as I mentioned, Sam Adams Wicked Hazy as it is on a roll. And also and also we actually have three new brands next year that we're putting into the marketplace. With beam Suntory. Sounds hard. Mountain Dew, Pepsico et cetera, so it can be a balanced approach to all of those brands, but the way we do expect Truly to grow and as I mentioned in the category, we kind of came out with a lot of folks on this came out on the category growth on Hard Seltzer, and we think that we'll get growth, which will be next year as well.

The main extensions.

Sure it's appropriate for certainly for truly twisted tea twisted tea right as I mentioned, Sam Adams Wicked hazy as it is on a roll.

And also and also we actually have three new brands next year that we're putting into the marketplace.

With beam Suntory.

Sounds hard.

Mountain Dew, Pepsico et cetera, so it can be a balanced approach to all of those brands, but the way we do expect.

Truly to grow and as I mentioned in the category, we kind of came out with a lot of folks on this.

Placing them out on the category growth on hard Seltzer, and we think that we'll get growth, which will be next year as well.

And then just a final question on Truly in the marketing now that could do a repo campaign has been out. You have some time under your belt any perspective on consumer engagement scores brand equity scores? Yes, I mean, I think the thing that we look at most actually for Truly is social media engagement and response because to be fair. We initially several years ago, we weren't that competitive in that space and we've made a lot of progress. So our share of voice in social media is about 50 index [inaudible] right now.

You have some some time under your belt any perspective on consumer engagement scores brand equity.

Okay.

Yes, I mean, I think the thing that we look at most actually for truly is is social media engagement and response because to be fair. We initially several years ago, we weren't that competitive in that space and we've made a lot of progress. So our share of voice in social media is about 50 index.

When he spoke to the leader right now.

However, of 91% of all of our all the comments are positive. So we're seeing a lot of positive momentum on social media. And for us right now that's the biggest I'd say the biggest litmus test for are we reaching the right consumer in the right way. Excellent. Thank you.

Excellent. Thank you I'll.

Two.

Thanks, Nick.

Our next question comes from Eric [inaudible] with Edcor.

Sure.

Thanks, Tim. First a clarification. In terms of the '22 preliminary look. Is there a range of scenarios that you're looking at? Does that have truly growing in excess of the category, OR gaining shelf space? Wasn't clear on that from your previous comments and then if you could talk a bit about shelf space more broadly. Clearly shelf space gains have been a major driver of both your and the Hard Seltzer category growth over the past two years with a lot of those brands not really turning. How do you see the shelf space evolving as we get into next year? And you know as your guidance built on Truly holding shelf space, losing shelf space, gaining overall shelf space any color would be appreciated.

In terms of the 22 preliminary look.

Is there a range of scenarios.

I'll pass it on I was looking at does that have truly growing in excess of the category, you're gaining shelf space wasn't clear on that from your previous comments and then if you could talk a bit about shelf space more broadly.

Clearly shelf space gains have been a major driver of both.

Both your and the hard Seltzer category growth over the past two years with a lot of those brands not really turning.

How do you see the shelf space evolving and.

As we get into next year and you know as your guidance built on truly.

Holding shelf space, losing shelf space, gaining overall shelf space any color would be appreciated.

Okay, great. Thanks, Eric.

So as it relates first to your first question as it relates to truly growth. We've put the a range right now is zero to 10% on the category and we're expecting to win.

So whatever the category it comes in it so it would be north of zero, if it's zero would be.

North of 10, if if if the categories turn so we do expect to outgrow the category as it relates to shelf space I mean, right now if you look at it sensors are about.

About 10% of total shelf space right, now, which is about a little bit.

Our south of where they should be based on the representation and we do expect as others have.

Stated that the long tail, there will be some pairing of the long tail, which should enable certainly the top two brands to gain more share of shelf right. Now we're 24% share of shelf truly is again these are.

Maybe a little kind of rough rough numbers and we do expect to grow it slightly next year, but we're not expecting our growth for truly to be contingent on growing shelf space, but we do think that the darwinian laws will apply soon certainly by next spring and we will have more shelf space, but again the growth rate that we're expecting to.

<unk>.

Beyond just just the shelf space.

Great ill pass it on and get back into queue. Thank you.

Thanks, Eric.

Okay.

Yeah.

Diego, we still we have more questions coming.

Okay.

Diego can you hear us.

Okay.

Yes.

Okay.

For those who might be and being able to hear us don't go anywhere we're trying to.

Figure out the scratch and hopefully we'll fix it quickly.

Yeah.

Okay.

Yeah.

Okay.

Awesome.

Okay.

We're still get back to you.

Yes.

Okay.

Yeah.

Apologies for the technical issue please standby.

[laughter].

Our next question comes from Laurent <unk> with Guggenheim. Please state your question.

Yes, good evening everyone.

Yes.

Firstly I mean, our photos from the re previous question. So you are saying, Dave that next year or two so is.

Is it category would be green zero to 10% so.

And we've been seeing over the last three periods that actually that the category has been declining so what.

What gives you some comfort that's not the.

The category will grow again in that that's breed data probably the question.

<unk> got the top of their mind.

You can help better bridge that gap.

Sure thing Mara let me why don't I could tell I wanted to just explain a little bit of how we got to that number and why we're confident that there will be growth, resulting from that so.

But what's happening.

What time has helped us understand better what's happening in the category our model looks at household penetration rates purchase frequency by rates repeat rates and we've looked really really at the last 13 weeks.

Versus the whole year, because obviously things have changed so we've got we've done a lot of work.

With the model, we talk to wholesalers and retailers to get their input as well. We obviously have looked at what's out there from other folks that many of them are on the call.

And the zero to 10 range seems to be consistent with what others are arriving at now theres. Other we have there's new <unk>.

Work information, that's very important that it gives us confidence that there is growth in the category actually one thing I will mention if you look at IRI and you look at the two year stack over the since since Labor day. The two year stack has been pretty consistent at about 100, 110% somewhere in that range. So we haven't seen a stabilization of that two year stack. So that's another.

Consumer of data input that's out there from a consumer perspective.

Again, let's start with numerator data and I know, we've got a number of you people look at numerator, even the latest 13 weeks you see we see household penetration continued to increase about 4% buy rate about one and one five points, we look at social media metrics, we see.

So that 8% of our comments are favorable 2017 or unfavorable at 21 point gap that gap is bigger than it was a year ago favorable to unfavorable we are just starting to get back results from our <unk>.

Consumer tests.

Consumer study, we just done with 4000 people, who drink alcohol between the age of 21 and 55.

And some of the top line things that we've seen Hart Seltzer today's hard Seltzer drinkers.

We are very eager to increase their consumption. So about a third of them want to consume more hard seltzer, which is more than what beer wine and spirits regular drinkers indicated they want to consume those categories in the future.

<unk> about three quarters of sort of non <unk> or lapsed drinkers are open to try in hard seltzer.

In the next year and then importantly, there are only about 6% of people who are truly rejecters and when we looked at this a year ago was about it was about the same so.

The consumer data and there's been other worked on out there I know Wendy.

<unk> at Citi did some stuff that also kind of pointed to this as well the consumer data on top of the quantitative models that were building all say that this category. There's still there's still deep interest in the category and I'll give you one other data point, which we just got which might explain some things and that is.

Penetration.

<unk> is increasing but when you look when you breakout new buyers versus either versus lapsed buyers or casual buyers.

There has been a there are fewer new buyers coming into the category right now.

And they're spending less on average.

Which is which has provided some of that downdraft on the other hand, we also.

There are many more.

Quote unquote heavier repeat buyers and they are buying more so you have these two so it's really a normalization of the category where some of these heavy drinkers are now.

Adding to the to the total volume so it's not a perfect science as you guys know and I know everybody.

On the phone has been trying.

See this thing out as have we.

2007, but again, we will look at it and again I'll give you one more data point.

Risk of getting too much to get to that that the high end of our growth rate the 10% growth rate. It assumes household penetration grows by about to about 2% or two points I should say and buy rate by about six.

5%. So if we can get there and household penetration in the year to date is up eight I know its been going into different direction. It seems reasonable so between the model. The consumer work, we're doing now consumer work others have done numerator data it points to a category that's got growth in it and Thats why and we do believe that there's growth in the category.

<unk>.

Thank you for that very comprehensive so I'll pass it on.

Redo to queue.

Okay. Thanks.

Thank you.

Thank you. Our next question comes from Medina Medina Sahwa with Bernstein. Please state your question.

Alright. Thank you for taking my question one for me please.

Volumes continue at this new normal that you are forecasting are you liable to incur any additional expansion.

This shortfall fees in the coming years. Thank you.

Yes. This is Frank let me take that so.

When we looked at the capacity that we have contracted with our <unk>.

External manufacturers some of that we can and that is reflected in the charts that we communicated.

With the.

Co manufacturers of the third party Brewers, though that we still are working with.

We have thresholds and if the.

We fall below those thresholds with the labor.

Shortfall fees. So the contracts that are still in place, we still have that but it.

It's going to be a much leaner network and much more integrated.

Yeah.

If I could just follow up on that.

Dan.

And explain how the contract that you have.

Existing debt or less compare to your volume forecast that you expect for 2022 is there a gap in there what kind of worst case scenario.

So we have in our entire network.

And.

It's going to be the first time in quite a while we have enough we have sufficient capacity.

And so it's not that as in previous years, we needed to have pre built inventory to go through the peak through the peak we have sufficient.

Capacity to address that if youre looking for the risk.

<unk>.

The.

<unk>.

Depending on the range and the preliminary guidance that we've given that there's clearly a margin lift that's related to thoughtful fees, but that should not exceed.

Half a percentage point point on the gross margin.

It should be below that.

Got it thank you very much.

Yeah.

Thank you. Our next question comes from Bonnie Herzog with Goldman Sachs. Please state your question.

Hi, everyone.

Goodbye.

Hi.

<unk> on your incremental spend I guess.

I'm I'm surprised your incremental investment spend remains pretty elevated this year, but then you do have plans to step it down pretty considerably next year. So could you guys talk about the strategy behind this especially in context of your strategy of playing to win and then I guess thinking about you know stepped down.

First year does this suggest your pipeline of innovation will be a lot slower.

And you know you don't think the hard seltzer category, specifically warrants additional spend and I guess finally, what's what's the risk in your mind about a pull back on an incremental spend next year could result in share losses for you in a category.

Next decelerating I guess with you know the possibility for growth to turn negative next year.

Sure.

So let me let me start off and then I'll hand, it over to Dave When you look at 2021 clearly is as you know we have communicated with you know when we looked.

Our range were clearly targeting a growth scenario, then winding up with them.

You know what has worked in 2020 and what we will be also did in 2021 was.

<unk> spending at the beginning of the year to make sure that we get in before the peak periods and maximize that clearly the volume didn't.

Play out so you could you could see we spend more yeah relative to the volume the way that we expected so we will increase or.

Our spend next year, as we said, but not to the not to the same extent, we just have to take into consideration that the growth isn't as high as we had expected.

Hum.

I think 2021.

Might not be a really good comparison because.

Everything that happened, but if you look at the Aps spend that we have.

Are they were projecting for 2021.

<unk>.

For 2022 I'm sorry.

That's going to be close to 30% above 2020.

And close to 80% above 2019, so we have invested dramatically into the category and as we said before.

We did that to make sure that we carve out our market share in a growing category.

Which is different if you have a category that stabilizing it's much harder to steal market share.

To gain market share so I think yeah.

The dynamics are changing so we have we have dramatically increased the spend that we believe we have enough that we can allocate to where we.

Believe we get the biggest return.

And finally I'll just build on what Frank said I'll just add one other point, which is we feel very confident that the quality of our creative.

Is very strong we spent we spent a lot of time and this is sort of Jim's point of his his passion. So he can jump in on this one but we spent a lot of time.

Clearly.

With their own sort of model to measure the impact the effectiveness of our creative so for twisted tea Sam Adams.

All of our brands angry Orchard and truly and we feel like we're we can get more.

With the same dollar tomorrow.

When we spend it because because of the.

The changes, we've made and because of the evolution. We've taken these campaigns I think I think the the Sam Adams campaigns are really good example, your customer from Boston.

Is really resonating and we're bringing in a lot of younger drinkers.

That we didn't have before.

And on top of that I would say there is.

A huge PR kind of angle that could that could copy can create which is which is worth a lot and so for example.

This patent we had a number of PR initiatives around the advertising investment we made this year for Sam Adams more Super Bowl and the client sale.

And.

We did sort of a COVID-19 vaccine spot. We did say it was Sam wedding vows contest. We did just recently won with inspiration for space mission and we're creating the space craft beer those all generated hundreds of millions to literally billions of impressions. So it's just one example.

Of how we can get more so it's not quite as simple to say look at total $1.

Say youre not getting.

Not being able to support a full portfolio. We think we are and the last thing I would say to that is when we see that there's there's there's positive response will spend more.

So we're not going to stop spending just because right now we gave this kind of this kind of you know this isn't guidance, it's kind of it's directional thoughts.

That's about 2022.

If we feel like Theres. Some heap there we're going to we're going to go hard so we're never going to back away from investing in our brands. If we think we can get a return.

Okay. Yeah, that's definitely helpful. Because I guess I was kind of thinking about it in the context of you know you really have been the driver.

The growth in the category and if there is any pullback then I'm just thinking about what that suggests for the outlook for the category. So that's good to hear if you did see something you'll you'll push harder and if I could just squeeze in a second quick question as it relates to you know the stronger price growth that I guess, you're you're guiding to next year.

You have 3% to 6% I guess I'm I'm also curious you know what gives you guys. The confidence that you have that kind of pricing power, especially you know given what we're talking about the deceleration of the category.

And you know maybe the eventual shake out of the category, which could happen early next year.

And then I think about that in the context.

Text of of pricing pressure as that shake out.

Happens so just any thoughts there would be helpful. Thank you.

Yeah.

I'm going to kick it off hand, it over to Dave but or pricing.

This year and also next year is very much driven by the.

Two of input costs that everybody's facing and and so what we'll try to price that.

Our confidence is relatively strong because so far.

Even with like the softening of the growth in the category.

Yeah.

It hasnt seemed to be a real decision factor in the purchase decision.

We have seen is really what makes the difference is the brand strength and the quality of them.

Of the beverage in itself.

But we have we.

We have seen like across the category pricing it tends to kind of take.

Price down to to gain share in and we haven't really seen that working across the category.

We haven't seen it.

With the own brand. So that's why we believe.

That said, it's not that it won't be a pricing game at least not at this point.

Don't have much more to add to that other than if there is a shakeout.

That does occur in hard seltzer fewer brands actually which support higher support the ability to take more price, but this entire ecosystem from retail or wholesale or brewer is impacted by all the input costs. As you know and I think everybody is in everyone's best interest to try to recoup those costs and the last thing I'd say is that we're not.

The only ones that are that have excess [laughter] raw materials that we're that we have to dispose of.

And note there is no.

Nobody's resorted to price in this category to try to to flush out product because I think they believe in the sanctity of pricing and it's an important thing, particularly in the economy that we're in right now.

Yes understood. Thank you again.

Okay.

[noise].

Okay.

This is dean.

Diego.

Our next our next question comes from Camille Gosh, Rabah with credit Suisse. Please state your question.

Hi, everybody. Thank you Diego.

Can we talk about inflation, maybe in a little bit more detail as youre thinking about next year.

Obviously, you've given us some rough guidance, but if you can give us an idea of kind of what.

Are you seeing where you're hedged if youre not hedged or at least what some of the assumptions are in some of what you've provided us so far.

And obviously not limiting to gross margins also maybe including freight if you Kenny.

Yes sure.

So the key the key.

So we're seeing that we've seen this year is clearly aluminum.

It's gone up that's reflected in the Cam pricing that's about that.

Double digit increases freight has gone up significantly that that's in the.

30% range and I think everybody is experiencing that.

We have we've seen that are really coming up it's a shortage of drivers and I think the entire economy sees that so so that is elevated everything we don't believe that's going to that's going to go down much. We believe we stay at this higher level and have like you have planned for a single digit for the single.

Cabot increase for.

Core for 2022, so so those are kind of the the key assumptions in our way of Paperboard lineup Board and also sweeteners.

That are going up so.

We see inflation depend.

Depending on the mix of the different categories going up to about five.

2% to 6% for next year for important mosquitoes and when I when I when I talk about inflation I really mean, the underlying commodity in the underlying cost.

This is before any productivity savings volume tea.

So anything else, it's just really the underlying commodities and geological.

Last question hedging, we we don't hedge.

I mean hedging is like.

You can extend that youre, gaining time, but at the end of the day, you're faced with the market realities, unless you're in a really up and down market, but major trend. So so we would be just like we go through that and we haven't any etch positions.

Yeah.

Okay got it thank you.

Thank you. Our next question comes from Sean King with UBS. Please state your question.

Hey, guys.

Thinking about it.

Gross margins and just given something like the right sizing of the production.

Patients and you see I guess a pathway on gross margins.

Getting back above 50%.

It hasn't been historically sort of excluding some of the inflationary headwinds or is there something going on with sort of the beyond the beyond beer kind of mix of the portfolio, that's going to be a structural headwind longer term.

Okay.

Yeah.

So Sean this is Frank.

We don't really see an impact from mix I mean, we have the hiccup that we have this year with the charge and the costs. We have we have adjustment costs and absorption impact, but but medium to long term the fundamentals havent really changed.

And as we've communicated.

You indicated before they are like the key drivers, where we see the margin improvement.

Happening is that yeah, we we're building a more integrated and more balanced production network like especially this year at the beginning of the week with a patchwork of like our own breweries we.

Quite a number of additional production locations Cole co manufacturers and the focus there was not really to integrate them or two to get to the lowest possible cost. The focus was really to add capacity as quickly as possible because that's what has worked in the past.

Last year's and that's what we did but we knew all along as long as it stabilizes what we'll do is we'll integrate it so.

We're building a network with four anchor breweries and most importantly, there's a there's a really big facility on the west coast or tier two I should say that will supply that so that.

We'll drive significant freight savings on two fronts. One is like outbound freight. So we don't have to ship it from the east coast anymore to the West coast with the beyond beer categories, especially Seltzer our growth has happened and is build out the west coast much more than the east coast. So that's one big bucket the second big bucket was.

Variety pack costs because.

As you know the hard Seltzer category was kind of unique with this tremendous growth, but it was also in a completely new packaging formats like slim can variety pack, which didn't exist before and to produce them at scale.

And scale economics there.

It takes some time and some scale. So we have developed that internally.

And we're getting and we've identified our external costs were extremely high. So there was one area of improvement one was to have a higher percentage internally, which we will be achieving because we are reducing our co manufacturing.

Capacity.

<unk>. The second thing is the co manufacturers that will be produced in variety pack have technology that get it get them really really close to where we are internally. So we're achieving that as well. So that was the third the second one and the third one is the ongoing impact of our supply chain transformation efforts.

What we have been integrating.

Becoming more efficient in that supporting the four anchor brewery concept, reducing waste and getting to lower inventories and that would also reduce waste because we don't we don't have to pre build.

Any more as much and Thats just like as soon as you put stuff in and out of our wells that just.

Just increases costs. So those are the three key drivers that remain in place, okay, and I mean, you've seen the margin guidance.

Improving we're getting two to margins hopefully that are in the 2020 range or even better and then we see the first we have seen the first benefits. This year quite frankly, they are masked because everything else.

So thats going on we see more benefits next year and then eventually 2023.

Alright, Thank you very much.

Alright.

Our next question comes from Kevin Grundy with Jefferies. Please state your question.

Great. Thanks, good morning, everyone.

To be labor the two questions. If you don't mind first one just a point of clarification on gross margin. The second one for Jim and Dave on the on the hard Mountain Dew deal with Pepsico. So first just is it reasonable that this should be a mid 50% gross margin business I think you made that comment.

Within the past year, so it sounded like you.

Heading that way if so what's a reasonable time to achieve it how important is that objective for the company within the context of sort of broader growth initiatives and then for Jim and Dave on the Pepsico.

Hard mountain Dew deal.

I think it would be helpful. Just to spend some time on how that agreement came about you may not.

I want to comment, but what sort of contribution are you expecting this year and how that brand mobile will play within within the broader RTD space and then Jim I'm curious to get your thoughts and sorry for being verbose here, but just on sort of that broader conversions theme I think pepsico's choice to set up a separate entity and handle the distribution is particularly noteworthy.

It would be great to kind of get your thoughts on how you see this playing out more broadly for the industry and what the implications are so thank you for all that.

Alright, Kevin let me start with gross margin gross margin clearly is a big focus area and that Hasnt changed.

And we always said like as long as we have this.

Worthy this hyper growth, especially in hard seltzer, where new categories being build growth and cutting out market shares the number one priority once the growth.

Our rates a little bit.

We'll focus more on gross margin so that that is the strategy that hasnt changed.

See margin.

About 50% I don't want to commit to a specific number here, but clearly you can see the one way and that is important to get it over 50% because as you know you get the margin up it applies to the <unk>.

To the entire volume that you have and that drives profit and EPS.

Having.

Margin.

We started the project we've seen progress this year, we will see further progress next year or so.

When we get to the final point.

It always will go but we should.

See major progress.

Latest.

End of 'twenty two 2023.

I'd say, though is it's always a function of the growth.

Something hits in the middle and new categories being built and we need to drive growth, we might flip that but margin is very clearly is very high on our agenda.

Yeah.

Okay I'll take it looks like there's one for each of.

So I'll do the second one and as it relates to the Pepsico.

Conversations I mean, I've spent 20 years their sites.

So they still talk to me and we've.

In touch over time for different things.

Yeah.

As you know with beyond beer.

Just beyond beer category that we're calling right now emerging.

Consumers desires.

Desire is changing and they are looking for different experiences, we find ourselves pretty quickly competing.

With everybody.

Not just other peer companies beer wine spirits, nonalcoholic et cetera et cetera.

And so.

There's been different conversations it's there.

He started a different.

Jane I guess has been ended up with this idea around the Horn Mountain Dew.

And.

We went down that path because we do think that we can satisfy consumers' needs with our put our lineup of brands and we can innovate as we have as Jim pointed out very successfully over time to reach those consumers, but given.

Given the different dimensions that are beyond beer is taking we might need.

To have some partners for certain things.

Inventory as well and so that's sort of it kind of ended up with.

With her mountain Dew.

Our initial our preference is to put it through our system.

Without question it always is.

And they haven't they haven't but they have a different agenda, which is right for them and so we had accomplished some sort of a compromise on that and I can from that I can.

Hand, it over to Jim and Jim can talk a little bit more about.

What this means for us.

Kevin You mentioned this.

Much larger team of convergence.

And I would add consolidation and blurring of lines.

And I see that as a long term trend, it's not going to change the world Tomorrow, but it is something that will be relevant.

And our future 10 years from now it's going to look different than 20 years.

Different still.

A lot of it is driven by just a move by the raw economics of the distribution channel I mean basically you're.

<unk> gross margin dollars.

Per.

Stop is the biggest driver of profitability and in the distribution channel and the retailers are encouraging that to them. If you were at 711.

I want to see three distributor trucks out in your parking lot one delivering.

Budd one delivery.

And Pepsi and another one maybe from a liquor distributor for your wines they prefer fewer trucks fewer salespeople, calling on them fewer invoices. So there is an underlying pressure from that and then.

Over the.

Facture level, everybody is exploring growth be beyond their traditional lanes. The consumers are very supportive of that there is a new consumer who is alcohol agnostic I mean people don't ask where does the alcohol and truly come from its just.

And at that relevant to them and that's creating this sort of overlapping category people are calling it beyond beer, but it's also beyond wine because you're getting wyman a juice box canned wine.

Wine in the form of a Margarita.

Not in things like Rancho Gloria and it's in some ways beyond spirits, it's coming in a beer can but it happens to say crown royal on the outside of it. So I guess I see those things as fundamental drivers in our business and we have moved.

But to build relationships who's a really strong players in terms of beam Suntory and Pepsi I mean, we're a 45% share of beer, yet we've been able to build relationships with super high quality companies with.

Great brands and I'm, not sure where all of that's going to go but I want to I think Boston beer should be a better position than our other players in the beer industry. If we want to win in this converged and consolidated future.

It will happen as I said slowly.

And and alcohol is different.

So I think our friends at Pepsi are interested they are putting their toe in the water do they will they like it a yet to be determined they certainly have great capabilities.

<unk>.

And make great products, but alcohol is its own different animal slotting fees. There's all these state by state laws, it's a much more complicated equation, but.

A solid capable company.

<unk> get into alcohol are they will just like beer distributors.

Exploring nano and seeing what they can do with energy brands and sports brands and a new non elk brands.

I see this convergence and consolidation not going away.

Once and we want to be well positioned.

Positioned to prosper from it.

That's great. Thank you guys for all the color I appreciate it.

Okay.

Thank you.

And once again to ask any final questions. Please press star one on your phones now.

Our next question.

Comes from Steve powers with Deutsche Bank. Please state your question.

Yeah, Hey, thank you.

Sorry, yes.

Maybe just a cleanup.

First Frank.

For you I think and then a second question kind of cleaning up.

Topic.

First one is on freight.

I just wanted to go back to what you said if I heard you correctly I think you said, you're making allowances for.

A few a few points of inflation further from here. So I guess is that or are you, saying.

That's sequential appreciation from here or are you, saying that's your call for for 'twenty, two kind of base case, a little bit of inflation for.

On a year over year in 'twenty, two because I guess I would just think that.

On a year over year basis, given the appreciation we've seen progressively through 'twenty, one that there'll be a bigger year over year impact, although maybe that's offset by some of the west coast Buildout that you mentioned on efficiencies. There. So just a little bit more clarity on what your base case of the rough rate yeah.

I think if.

If you look at our freight and we I think.

We broke freight out separately.

Freight on a rate basis is up higher than inflation, it it's roughly 40% and.

And two thirds of that is really rate inflation. This line all the way experiencing but then there is a mix impact that we're having as well.

And the mix impact is because we're shipping way more two two.

To the West coast.

So.

What I was trying to say is there like a significant 25, 30% increase that we see really in line haul rates, but we see this year.

We don't.

Don't see that going down we see incremental single digit increase increases.

Mid single digits mid to high single digits for 2022 incrementally two to 2021.

Okay, but then that's partially offset by the fact that you should have less of that long long.

Long haul dynamic in 'twenty two versus 21.

Exactly exactly that's what that's why I said before what I'm, giving you is like just pure rates in pure commodities.

There is other debt we have productivity initiatives, we have other things like the jets, a big savings for US Okay, Yes, great Great and then I just wanted to circle back on the.

Pricing conversation.

Relative to the volume conversation, we're having because they felt like they were there were two different conversations almost implying that you saw no elasticity impacts the volume basis, the volume conversation with based on sort of household penetration and what consumers are saying and then the the pricing conversation with just cost up.

Of course, you're going up we're taking pricing.

In the context of the consumer being asked to bear a lot of price next year from a lot of different categories and in the context of all the convergence that we were just talking about like.

How are you thinking about elasticity are you really thinking that I hear you correctly that sort of like elasticity is not a consideration you feel like you have that pricing power, you're relatively inelastic or is that factored into the volume outlook for '22?

Because not not a consideration you feel like you have that pricing power, you're relatively inelastic or is that factored into the volume outlook for 'twenty two.

Well I'll take that Steve.

I guess the way we're thinking about it is that are we.

We will be pricing up but we're.

Bill dollars, we will be probably going down and now we're not going to fully recover the five 5% inflate.

Inflation that we're seeing out in the broader economy, so that the consumer can probably except that.

Their earnings will go up probably in.

In <unk> income I'm going to guess will go up a little faster than a three or 4%.

But it certainly won't go.

Much slower than that and in our categories. I mean, we tend to compete.

At the high quality.

Near the end.

And everything that we do.

So people have already made the decision that they're going to pay more for our brands all of our brands are priced significantly above the average price per case in.

Quality beer category and they have not traditionally been that price sensitive I mean, if you look at.

They are truly AR and the hard Seltzer category, Yes, there is a natty light seltzer.

I believe the last time I looked at had 0.3.

3% sure, yes, it's significantly below.

The industry leaders us and white claw, but it really has not drawn a lot of consumers to it and the same thing is kind of true in the other category and we saw craft beer people, they know theyre going to pay.

More for it it's significantly above other beers and even <unk>.

Low priced craft beers from some of the big players have not gained traction cider everything is more expensive there because it's harder to make and the ingredients are more expensive and twisted tea.

You know there are lower priced tiers that have come after it and twisted tea still has you know nice.

90% to 95% market share in the heart and tea category. So I guess I'd say, our feeling is that.

Our consumers and our brands.

Our while not impervious to prices gotta be elasticities.

We don't see a volume impact from a passing on are you a portion of our costs, we're not going up as much as our cost seven we think that we will not.

Impede the volume growth that will look reasonable.

And in the context of everything else, we're gonna be going up less than the CPI.

Okay. Thank you very much.

Thank you there are no further questions at this time I will turn it back.

To Mr. Cook for some closing remarks, thank you.

Just wanted to say, thanks, everyone and we will speak next year.

Thank you. This concludes today's conference all parties may disconnect have a good day.

Q3 2021 Boston Beer Company Inc Earnings Call

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