Greetings. Welcome to the Boston Beer Company Third Quarter 2019 Earnings Call. At this time, all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded. I would now like to turn the conference over to your host Mr.

Jim Koch, Founder and Chairman of the Boston Beer Company. Thank you, sir. You may begin..

Thank you. Good afternoon and welcome. This is Jim Koch, and I am pleased to be here to kick off the 2019 third quarter earnings call for the Boston Beer Company. Joining the call from Boston Beer are Dave Burwick, our CEO; and Frank Smalla, our CFO.

I will begin my remarks this afternoon with a few introductory comments including some highlights of our results and then hand it over to Dave, who will provide an overview of the business.

Dave will then turn the call over to Frank, who will focus on the financial details for the third quarter as well as a review of our outlook for the remainder of 2019 and our initial outlook for 2020. Immediately following Frank's comments, we will open up the line for questions.

We completed our merger with Dogfish Head on July 3rd, and we're making good progress on the integration. We welcomed our Dogfish Head coworkers and we continue to learn a lot from each other as we share our passion for brewing, creativity and maintaining our strong culture.

In the first quarter as a combined company, we reported depletions growth of 30%, of which 24% is from historic Boston Beer brands and 6% is from the addition of Dogfish Head brands following the closing.

I am tremendously proud of the efforts of all our coworkers in achieving our sixth consecutive quarter of double digit growth, while maintaining a focus on quality and innovation. We believe that our depletions growth is attributable to our key innovations, our quality, our strong brands, as well as sales execution and support from our distributors.

We plan to continue to invest to improve Samuel Adams trends and remain focused on the longer-term goal of returning the brand to growth. We remain positive about the future of craft beer and are happy that the strength of our diverse brand portfolio continues to fuel double digit growth.

We're confident in our ability to innovate and build strong brands. And we're exploring new styles to launch in 2020 that would complement our current portfolio and help support our mission of long-term profitable growth. I'll now pass over to Dave for a more detailed overview of our business..

Thanks, Jim. Hello, everyone. Before I share these results, I'll start with the usual 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.

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

The company does not undertake to publicly update forward-looking statements whether as a result of new information, future events, or otherwise. Okay. Now let me provide a deeper look at our business results.

Our depletions growth in the third quarter was a result of increases in our Truly Hard Seltzer and Twisted Tea brands and the addition of Dogfish Head brands, partly offset by decreases in our Samuel Adams and Angry Orchard brands. Truly continues to generate triple-digit volume growth.

During the quarter we launched Truly Draft nationally and continued to expand package distribution across all channels. We announced a multiyear U.S.

partnership with the National Hockey League, which makes Truly Hard Seltzer the Official Hard Seltzer of the NHL and enables all of our brands including Samuel Adams and Dogfish Head to benefit from the NHL partnership.

We also announced the launch of new formulations for all of our Truly Flavors, which we've extensively tested with drinkers of Truly and competing brands, and we're confident that we now have the best-tasting hard seltzer on the market.

In early 2020, we’ll launch Truly Hard Seltzer Lemonade in four styles in both a variety 12-pack and single-serve sizes. These new Truly lemonade flavors have the same 100 calories and 1 gram of sugar as other Truly flavors but have a more robust taste.

Lastly, we have announced the addition of another new flavor, Watermelon Kiwi, available in our Truly Tropical Variety Pack and 6-packs.

We believe these significant new flavor introductions, combined with the new NHL partnership and our ad campaign for Truly featuring well known actor Keegan-Michael Key, will further help improve our position as a leader in hard seltzer and establish Truly as a meaningful and relevant brand.

Twisted Tea continues to generate consistent double-digit volume growth, even as new entrants have been introduced and competition has increased. Angry Orchard's volume has declined against the 2018 national rollout of Angry Orchard Rosé.

The cider category continues to be challenged and we are working to return Angry Orchard to growth through packaging, innovation, promotion, and brand communication initiatives.

This fall, Angry Orchard Crisp Unfiltered, a traditional American Cider with only 10 grams of sugar was launched nationally across all channels and we are encouraged by early consumer reaction.

For the remainder of 2019 and into 2020, we plan to build upon our success and work to drive our brands to their full potential, with a particular focus on our Truly brand.

We've adjusted our expectations for 2019 full-year depletions growth and our earnings guidance to reflect our trends for the first nine months and our current view for the remainder of the year, which is primarily driven by the year-to-date performance of Truly.

We are targeting high teens to low twenties top-line growth in 2020 and a significant increase in our operating income. We also continue to focus on cost savings and efficiency projects to fund investments required to grow our brands, to build our organization's ability to deliver against our goals, and to improve our profitability.

While we are generally pleased with our overall performance, our accelerated depletions growth has been challenging operationally and we have been operating at capacity for many months.

To help relieve some capacity pressures and support our projected 2020 volume growth, we are adding a new can line in our Pennsylvania Brewery that we expect will begin production by the end of this year, and we have significantly increased our available sleek can capacity at third-party breweries.

We are also accelerating other capacity and efficiency improvements at our breweries, which is reflected in our capital spend expectations for 2020. We will continue to invest to increase capacity as appropriate to meet the needs of our business and take full advantage of the fast-growing hard seltzer category.

However, the increased usage of third-party breweries and an increasing percentage of variety packs in the company's overall product mix come at a higher incremental cost. As a result, our gross margins and gross margin expectations will be negatively impacted until the volume growth stabilizes.

While we are in a very competitive business, we are optimistic for continued growth of our current brand portfolio and innovation, and we remain prepared to forsake short-term earnings as we invest to sustain long-term profitable growth, in line with the opportunities that we see.

Based on information in-hand, year-to-date depletions reported to the company through the 42-weeks ended October 19, 2019 are estimated to have increased approximately 21% from the comparable period in 2018. Excluding the Dogfish Head impact, depletions have increased 19%. Now, Frank will provide the financial details..

Thank you, Jim and Dave. Good afternoon, everyone. For the third quarter, we reported net income of $44.7 million, or $3.65 per diluted share, representing an increase of $6.7 million or $0.44 per diluted share from the same period last year.

This increase was primarily due to increased revenue, partially offset by lower gross margins, increases in advertising, promotional, and selling expenses, and the non-recurrence of a $0.38 per diluted share favorable one-time impact related to a tax accounting method change in the third quarter of the prior year.

Dogfish Head operating income of $6.9 million was partially offset by nonrecurring Dogfish Head transaction-related expenses of $5.9 million. Excluding this $1 million net positive impact, operating income for the third quarter was $58.8 million, an increase of $12.1 million or 25.9% from the third quarter of 2018.

Also during the third quarter, the company paid back all debts incurred in connection with the Dogfish Head transaction, including approximately $200,000 in related interest expense.

In the third quarter and the 39-week period ended September 28, 2019, the earnings per diluted share benefit from Dogfish Head operating income net of dilutive impact of the transaction-related share issuance was more than offset by the non-recurring transaction-related expenses, resulting in a combined unfavorable impact of $0.08 per diluted share and $0.19 per diluted share, respectively.

Shipment volume was approximately 1.6 million barrels, a 19.1% increase compared to the third quarter of 2018. Excluding the addition of the Dogfish Head brands beginning July 3, 2019, shipments increased 13.8%.

We believe distributor inventory as of September 28, 2019, averaged approximately three weeks on hand and was at an appropriate level based on supply chain capacity constraints and inventory requirements to support the forecasted growth.

We expect wholesaler inventory levels in terms of weeks on hand to remain between two and four weeks for the remainder of the year.

Our third quarter 2019 gross margin of 49.6% decreased from the 51.2% margin realized in the third quarter of last year, primarily as a result of higher processing costs due to increased production at third party breweries and higher temporary labor requirements at our company owned breweries to support increased variety pack volumes, partially offset by price increases and cost savings initiatives at our company-owned breweries.

Third quarter advertising, promotional and selling expenses increased $8.8 million compared to the third quarter of 2018, primarily due to increase investments in local marketing media and production and the additional of Dogfish Head brand related expenses beginning July 3, 2019.

General and administrative expenses increased by $8.7 million from the third quarter of 2018, primarily due to non-recurring Dogfish Head transaction related expenses of $3.6 million and the addition of Dogfish Head general and administrative expenses beginning July 3, 2019.

During the third quarter, we recorded a net income tax expense of $14.2 million, which consists of $16 million of income tax expenses, partially offset by a $1.8 million tax benefit related to stock option exercises in accordance with the accounting standard employee share-based payment accounting, also known as ASU 2016-09.

The effective tax rate for the third quarter, excluding the impact of ASU 2016-09 increased to 27.2% from 19.4% of the 13 weeks ended September 29, 2018, primarily due to the one-time favorable impact of tax accounting method changes in 2018 and the absence of a similar one time favorable impact in 2019.

Based on information of which we are currently aware we are now targeting full year 2019 earnings per diluted share of between $8.70 and $9.30 and narrowing up of the range from the previously communicated estimate of between $8.30 and $9.30. However, actual results could vary significantly from this target.

This projection excludes the impact of ASU 2016-09. Full the year 2019 depletion and shipments growth is now estimated to be between 19% and 22% and narrowing up from the previously communicated estimate of between 17% and 22%.

Excluding the addition of the Dogfish Head brands beginning July 3, 2019, full-year 2019 shipments and depletion growth is now estimated to be between 15% and 18% and narrowing up from the previously communicated estimate of between 13% and 18%.

We continue to project increases in revenue per barrel of between 1% and 3% and full year 2019 gross margins of between 50% and 61%.

We are planning increased investments in advertising, promotional and selling expenses of between $40 million and $50 million for the full year 2019, an increase from the previously communicated estimates of between $35 million and $45 million, primarily due to increased Truly brand investments.

This does not include any changes in freight costs for the shipment of products to our distributors. We estimate our full year 2019 non-GAAP effective tax rate to be approximately 27%, which excludes the impact of ASU 2016-09.

We are not able to provide forward guidance on the impact that ASU 2016-09 will have on our 2009 earnings per diluted share and fully effective tax rate as this will mainly depend upon unpredictable future events, including the timing and value realized upon exercise of stock options versus the fair value with those options were granted.

We are continuing to evaluate 2019 capital expenditures and currently estimate investments of between $100 million and $110 million, a decrease from the previously communicated estimate of $120 million to $140 million. The capital will be mostly spent on continued investment in our breweries and taprooms.

Looking forward to 2020, we are in the process of completing our 2020 plan and will provide further detailed guidance when we present our full year 2019 results. Based on information of which we are currently aware, we are targeting depletion and shipments percentage increases of high-teens to low-20s.

We project increases in revenue per barrel of between 1% and 3% Full-year 2020 gross margins are expected to be between 49% and 51%.

We plan increased investments in advertising, promotional and selling expenses of between $65 million and $75 million for the full year 2020 not including any changes in freight costs for a shipment of products to our distributors. We estimate our full year 2020 non-GAAP effective tax rate to be approximately 27%, excluding the impact of ASU 2016-09.

We are currently evaluating 2020 capital expenditures and our initial estimates are between $95 million and $115 million, which could be significantly higher and being necessary to meet future growth.

We expect that our cash balance of $27.1 million over September 28, 2019, along with future operating cash flow and our line of credit of $150 million will be sufficient to fund future cash requirement. We currently have no amount outstanding in our line of credit.

During the 39 week period ended September 28, 2019, and the period through September 29, 2019 to October 26, 2019, the company does not repurchase any shares of its Class A common stock. We have approximately $90.3 million remaining on the $931 million share buyback expenditure limit set by the Board of Directors.

We will now open up the call for questions..

Thank you. At this time we will be conducting a question-and-answer session. [Operator instructions] Our first question comes from a line of Vivien Azer with Cowen. Please proceed with your question. .

Hi, good afternoon. .

Hi, Vivien. .

So, in thinking about the 2020 outlook, clearly very robust from a topline perspective. My question is on Angry Orchard. Clearly the comps have been tough today but you've got some innovation in the works. What do you have embedded in your 2020 outlook for Angry Orchard directionally, should it be growing again? Thanks..

Vivien, this is Dave. I think for Angry Orchard we're not looking for much growth if any next year to be honest. We think it's a year to kind of rethink the brand and the opportunity the category presents. We are working on some innovation.

As I mentioned, we launched unfiltered, lower sugar content, and we're looking at other types of products that fit more in the health and wellness space for Angry Orchard. We’re also looking at different types of communication to kind of go back to that initial attitude that we have with the brand.

So, we're not trying to -- we don't want to put too much pressure on that brand next year, we want to get it right. And so, we're not expecting a lot of growth, and we don't -- to be honest, we have a lot of different pathways to growth next year. Angry Orchard does not have to be a big one for us..

So, that seems prudent. Thanks for that. And just my second question is on the competitive landscape in hard seltzer. We’ve certainly seen some competitive activity off of a legacy beer brand from one of your largest competitors.

Curious if you've seen any impact to your business or overall competitive dynamics in the category in particular knowing that there is more kind of beer adjacent innovation set to hit the market? Thanks..

This is Dave, again, I'll speak up. There's obviously a lot of activity, a lot of competition in the category. And we think we're moving ahead with our plans, which is to build a very large brand in the category that is a pure play. That's not a line extension that comes from the category of the consumers.

There’s still, as you look at the household penetrations in the category, it is still very low, it’s around 4% versus 14% for FMBs in general. So right now, we're trying to build a big broad brand. And right now, if you look at Truly, it's fairly broadly appealing. It's got -- its more diverse, it has a higher income household.

It goes beyond just young males, if you will. And we've got, as we mentioned, we've got a lot of stuff in play right now. And as far as we're concerned, 2020 already began as we started to launch our new -- the reformulation of our new flavors. We have the Lemonade platform coming out next year that we're very excited about.

We've increased our media for Q4. We haven’t planned to spend much behind the brand in Q4 and we decided to do the opposite and spend a lot. So we've got a lot coming, I think time will tell how the other brands -- how they play out. They'll probably get a lot of trials.

They have consumer bases, but we'll see as it does tell us as we head into next summer, whether they have staying power or not..

Very helpful. Thank you.

Sure..

Our next question comes from the line of Steve Powers with Deutsche Bank. Please proceed with your question. .

Yes. Hey, thanks. Good afternoon. Maybe a follow-up on Vivien's second question there, I think the guidance for 2020 implies more or less an effective of doubling of Truly.

And assuming that's about right, I mean, how much visibility do you think you have into that run rate based on what we know or don't know about plant competition? And really the -- where I'm getting at the receptivity of distributors and retailers? If we assume the consumer demand is there for the category, how confident are you that Truly will get the necessary distributor and retailer support it needs to stand out given all of that competitive activity that we're expecting in this run up to summer 2020?.

I'll take that one. We're pretty confident that we're going to get strong continued support from not only our wholesalers, but our retailers. The reality of the category is that between us and White Claw, we've had close to 80% of the category for three years now even as new entrants have come in during that period.

And it's a category where a relatively small number of SKUs make up a large percentage of the volume. There's like six SKUs that makeup over 60% of the category volume. So I think both wholesalers and retailers are going to pay most attention to – their strong SKUs, strong brands in the category, because those have been the growth vehicles.

We will see lots of line extensions coming in, whether it's patched or Natty seltzer, Bud Light, some of those will get shelved with the hard seltzer category, some of them will get shelved over with the mother brand. So, we're continuing to invest significant dollars both in capacity and in brand building activities.

We're hoping that all these new entries will get their little pieces, but we'll also hopefully drive category growth and continue to have strong triple-digit growth of the category through next year with all this energy coming in, and we believe we can increase our share in that environment..

Okay, thanks for that, Jim. Maybe as a follow up on the new Truly reformulations, you referenced extensive testing of those products prior to launch. Maybe just talk a little bit more about the process and timeline there and what your key learnings were? Thanks a lot..

Well, the process started back in late spring. We had a dedicated flavor team. We used the central location testing services that do blind and double-blind testing, because we didn't always want to taste it ourselves and say that's really good.

We wanted what we felt was scientific, statistical validation from blind testing with recruited consumers in the demo. So, we feel very, very good about the taste. I mean we have pretty scientifically validated that leads us to believe that we have the best tasting hard seltzer out there in virtually every style.

And we think that's part of our overall platform of building a brand with broad appeal, because we think the hard seltzer category is, it's broken out of its sort of young male blowy type culture demographic that really put the category on the map.

We think it's going to be a relevant category for virtually all significant demographics and we want to make sure we have properties that have broad appeal like Keegan-Michael Key, like the NHL, we're on Monday night football.

So we think that hard seltzer has very high upside we just don't know where the upside is, but we can we believe that it will continue to grow triple digits next year..

All right, thank you..

[Operator instructions] Our next question comes from line of Kevin Grundy with Jefferies. Please proceed with your question..

Thanks. Good afternoon, guys..

Hey, Kevin..

I wanted to come back into the spike seltzer. So very clear, you guys are anticipating the category doubling in next year, we'll see if that's the case or not time will tell. I know, it's really difficult at this point with these numbers.

But I want to come back Jim, I guess what we're seeing in the Nielsen data and maybe this is different than some of the data that you have. But Truly has given up quite a bit of share, we have it down to call it about 25 points of share off of at one point it was sort of in the low-30s.

So the other key piece, I think to your outlook is not only the category doubling, but you sound pretty confident maybe this is the reformulation that you're going to get back some of this share because this is just with Natty Light coming at this point which probably has about 5 points of the data that we're looking at is accurate.

So this is prior to Bud Light coming in and Corona, and there's a number of local brands that you guys are really well aware.

So what would you kind of say, I guess, to kind of push it a little bit on the company's ability to gain market share in that sort of construct?.

Yes. We believe that the resources that we're putting against Truly will help us do that. I mean, if the category doubles, and we just hold our share, we double. So -- and that's kind of the thinking that's in our -- currently in our projections for 2020. But we think that we're pushing the right buttons.

A superior tasting product, it's a strong brand in hard seltzer people know us and they know White Claw, we kind of pioneered the category together.

I think White Claw has done an amazing job of riding a sort of the brew culture, the mean culture, it's done great things for their brand and for the category and we think they've proven that hard seltzer can be a significant part of the consumption of important demographic and we think that's applicable across pretty much all the significant demographics.

We're very encouraged by where we're getting our drinkers from it’s various numbers, but you wouldn't be far off saying over half of it is coming from outside the beer category, which is very exciting for us, very exciting for the industry, very exciting for our wholesalers and our retailers. And we're showing up with a strong number two brand.

Yes, we lost share this summer, as the category just exploded in a key demographic and we believe we're well positioned to benefit from a similar explosion in broader demographic. .

Okay, thanks, Jim. One quick follow-up and then I'll pass it on. So the Sam Adams brand, which has been sort of a multiyear sort of turnaround, talk about what you -- do you anticipate the brand returning to growth some of the Nielsen trends would suggest the brand still remains under quite a bit of pressure.

So maybe talk about what's in the outlook for next year? And then for Jim and Dave talk about now you have in this rocket ship here with Truly in this category, where it seem like it makes a ton of sense to sort of lean in behind investment there.

Does that make it even that much more difficult to stem some of these weak trends that you're seeing with the Sam Adams brand in that sort of environment. So sorry for the long winded question, but it's really around investment levels and plan to turn that around and what you have in your outlook for next year? So I'm so sorry for all that. Thanks. .

Yes, I mean, it’s a long complicated question. The answer is yes. It does make it more difficult when we've got a rocket ship, like Truly, I mean, hard seltzer is really once in a generation, hasn’t been anything like this that got to scale so fast since like beer 40 years ago.

So I mean a quick answer to your question is, yes, we are probably leaning in to seltzer organizationally, investment wise, et cetera. But I would just remind everybody, it’s literally true, beer is our middle name. We are the Boston Beer Company. So no one here is thinking of anything.

But, applause as we take advantage of this amazing opportunity that we've generated in hard seltzer. And, we're quite aware that it takes up a lot of resources this year, but it generates an ongoing big amount of gross profit dollars.

And we're -- in the craft beer category, we are unique in having multiple sources of profitability among all the other independent craft brewers that enable us to sustain and fund growth in the Sam Adams brand..

And if I can add to Jim's point. I think in addition, we talked about all the things, all the buttons we’re pushing to drive the Truly business from the reformulation to -- this lemonade platform, which our wholesalers, our customers are very, very excited about. To properties like the NHL, two data campaigns, two more media.

One thing we haven't mentioned too is that with the addition of Dogfish Head we’re going to increase our sales force by about 25%. So we now are able to go out there and win more feet on the street 25% more well over 100 out there selling Truly in the on-premise much more aggressively than we've done before.

In addition, it opens up opportunities in off premise for beer and for Sam Dogfish Head we're going to have more resources, selling beer through on-premise. So we think that this combined organization, obviously, we get the multiple portfolio of brands that the company has created we get that, we get great resources, great people, great talent.

And so when we look at Truly from top to bottom from investment in capacity to brand activities, to feet on the street, we’re all in. But to Jim's point we've got -- we can utilize some of those same resources to help grow our beer business as well..

But and Dave just to be clear do you expect the Sam Adams brand to be down again in 2020, is that correct?.

Yes, we expect it to be down that's factored into the guidance we gave you. And one thing I should just add just to kind of give Sam a little bit of something here that the seasonal business they actually did pretty well this year we think there's something there with the summer our summer ALB [ph] formulations did very well.

We're going to apply some of that learning next year. So we feel pretty good about seasonal we're working on going younger with a campaign for Boston Lager the new pack signed is looking great on shelf and helping us be found much more quickly.

So there are some good things afoot but again, like I said before to Vivien we're talking about Angry Orchard, these are two brands next year, Angry Orchard and Sam Adams in particular, where we're going to retool, rethink, get creative and figure out how we come out of the gate stronger as the year progresses, but we're not putting undue pressure on these brands to do more than what they can do.

.

But they're big brands for us. So, they are very, very important to our success. So while we're leaning in to the hard seltzer opportunity, we recognize that growing these brands is important to our long-term success..

That's great. Thanks, guys. Good luck..

Our next question comes from the line of Laurent Grandet with Guggenheim. Please proceed with your question..

Hey. Good evening, everyone and congrats on the extremely strong quarter.

First, quite a technical question for you, first for Frank does the EPS guidance include the impact of the one-time Dogfish merger rated cost?.

Yes, since this is all in. The only thing that's not in the guidance is the ASU impact, but everything else is in there. .

Okay, thank you. And then, I mean, so like to come back to margin as they are repatriating I mean a lot of the manufacturing of Truly I mean in house, what was the percentage of Truly mix that was done with co-packers or third party in 2009? But as the mix look like into 2020 under the -- I mean what you are forecasting.

And I don't know if you can give us some direction at least in term of gross margin was the difference in term of product line between a co-packer Truly manufactured product and an in-house manufactured product..

So, Laurent, we don't really provide the exact breakdown between internal production and external production. What I can tell you that it has more than doubled the production externally and has significantly increased throughout the year in 2019. In the fourth quarter we’re taking a little break. So it's stabilizing.

We're putting capacity in but all of 2019 actually the volume growth was larger than what we had planned for. So we're putting capacity in, but we are growing the external capacity and the external volume faster than the internal. That will turn at a point in time it depends on what the real true growth is.

The percentage of external production will continue to increase in 2020. We will realize those savings and that's what you see in the gross margin, which is fairly stable actually year-over-year considering the significant volume growth of Truly and especially the can business in general that we have.

The margin, we don't break that out and but it's safe to say we're getting from our savings, so we're getting a couple of points. When you look at our entire gross margin for the company, there's I'd say 3 to 4 points that's related to the external manufacturing and the incremental many labor that we have for the variety packing.

So those are temporary costs and once it's stabilizing, which we don't know when this is going to be we thought it was going to be this year it’s not going to be this year. But when stabilizing those opportunities to reduce the costs and improve the gross margin again.

Our underlying savings and savings programs very much delivering and gross margin is an important KPI for us..

Thank you and then maybe a final one, maybe for you David. I saw the -- I mean the new Truly Hard Seltzer Lemonade. Looks nice and very differentiated to Truly black white can.

What's the role of it? I mean, are you trying to appeal more to a mid-consumer with a stronger flavor? I mean, what’s the role of it versus the white options of Truly?.

Sure. So as a hard seltzer category at it grows. We're always looking for ways how do we expand, how do we expand the category, how do we make it more appealing to more consumers. And we think the lemonade as a way to kind of push the boundaries a little bit to hard seltzer to provide an experience that has the same kind of the same stats on it.

100 calories, one gram of sugar, et cetera, but provides more of a robust taste. So it's a little bit -- so it's a little stronger taste profile. It still tastes like a seltzer, but it's just has more to it. And we think that part hasn't been addressed yet.

We do think probably bring in more of a male SKU, it could bring in more multicultural SKU as well. And so that's why we're doing it and we'll find out soon enough what impact it does have. But again for us it's just a way for consumers to enjoy a hard seltzer, but in a different way. And in this case a more proprietary differentiated way..

Thank you..

Thanks..

Our next question comes from line of Amit Sharma with BMO Capital Markets. Please proceed with your question..

Hi. Good afternoon, everyone. .

Hello..

Jim, a quick follow up on the lemonade, when you talk about a lot of excitement among the retailers and your wholesalers for this product.

How should they think about shelf space at the retailer as the next shelf space reset in spring?.

Well, the context of all this is as a hard shelter category is growing triple digits. So retailers -- at premium pricing.

So retailers are very excited about putting more shelf space behind us especially when they see the numbers about how hard seltzers are pulling from hard liquor and from wine because usually your beer buyer gets incentivized on how much beer they sell and if it steals share from the wine department they're okay with that.

So I think you have to think about this as retailers are going to be expanding their shelves and Truly is the number two brand in the category. It has, I think three of the top six or seven SKUs, we would hope that lemonade would fit into that pantheon of high volume festering SKUs within the category.

So we would be looking or calling on retailers, we think we have pretty strong case that they should have all four of our variety packs in there because they're all of them out pulling the majority of the seltzer SKUs that they have. So the category we believe is going to double we're not asking for twice the space.

So we're pretty optimistic that we can get three or four of our variety packs in most retailers. I think the larger format once obviously not in convenience stores..

And on convenience store Truly is somewhat under penetrated at this time relative with category, is that going to catch up as we look to next year?.

We believe so, because we just introduced about a month ago two 24 ounce cans both pineapple and wild berry are now in 24 ounce cans and as you know in C-stores that's really the power of package. So we're very optimistic that we can -- and so far wholesalers have been very supportive we're getting two cans into most of the stores.

So we're very optimistic about getting full distribution of our current 24 ounce cans with lemonade C-stores are very familiar with the success of hard lemonade and the full calorie part of the market. So we think that they will analogize from that to be open to putting in a 24 ounce can of hard seltzer lemonade that's other calories per 12 ounces..

And the last one on seasonality, Jim, now we are into fall winter season, any early reads on how seasonal hard seltzer category is?.

Here is my theory of it, which the data is though it’s early it continue to support it that this is now the little over three years since we introduced Truly, which was the first 100 calorie 5 ABB one gram of sugar, hard seltzer, so help creates the whole category and over that time, it's become less and less seasonal.

As it becomes more and more part of mainstream people drinking occasions that I've seen it many, many times years ago, Corona was a summer beer not so much anymore. Mike's hard lemonade was very summer oriented, twisted tea very summer oriented, power brands tend to become less seasonal overtime.

So would be my prediction that the same thing is going to happen with hard seltzer..

Got it, thank you so much..

Our next question comes from the line of Kaumil Gajrawala with Credit Suisse. Please proceed with your question..

Hey, guys couple of questions.

First just to clarify, did you -- was the expectations on the guide that total beer would be down next year was that just for the Sam Adams?.

We don't go -- it is hard kind of to get into the different assumptions for total beer, craft and can see [indiscernible], but overall we believe that the beer is going to be flat and craft will be growing slightly..

We can talk about -- we talk about Dogfish, I can’t even put it -- added together, but it's a freedom we have we do have a lot of ambitions for Dogfish Head next year. Three things that are happening, one, use company into the system into this large and number one ranked sales force in the business.

So we think there are definitely some distribution opportunities and we're going to round out there's actually six states in the U.S. but the depth of distribution and support this brand will get across channels will be very large. We're also going to increase the brand support by probably 7x or 8x we’ve done before.

So we're going to give some real support to these brands that in a smaller environment didn’t get the support they need. And lastly, we're going to be -- we're going to look at pricing and be really smart about how we price the portfolio by brand and by geography.

So those stay at the top end of the category, we want to be smart about how we manage price gap. So there's a lot of store for Dogfish for next year that everybody is very, very enthused about..

Got it.

And then another quick one on Dogfish Head, can you just provide a little more detail on what are some of these onetime costs associated with it? I think, of the 5.9 roughly 3.6 I think is in G&A, what's the rest of it?.

It's all transaction costs. Like bankers cost, integration costs, the legal costs, that's what it is. And, it's the guidance that we've given on the total life, I think was between $8 million and $9 million that's a rough number, regular in onetime integration costs and one time transaction costs..

Okay, got it. Thank you..

All right. .

Our next question comes from the line of Wendy Nicholson with Citi. Please proceed with your question..

Hi, good evening.

As it relates to the bringing more of the packing of the Truly in-house, is your long term plan to get 100% of that in-house? And how long does it take to get there? I know, you talked about a new facility coming online in fourth quarter, but when do we start to see the fruits of that? Is it the beginning of 2020? Or do we have to wait for longer? Thanks..

Well, if Truly doubles next year it becomes, again, a bigger part of our overall volume.

And Truly the biggest piece of it, especially for us I don't know where it is call it 80% or some of our volume is in these variety packs, which require double handling, nobody's really successfully automate it, it's not done in line and at the margin, we're making it into contract brewery and we're shipping it out to hand packing facility and bringing it back and hopefully shipping it from the contract brewery to the wholesaler, but sometimes shipping all that stuff back to Pennsylvania putting it on another truck.

So the piece of our business that is growing is the least automated piece of it. And we have done some automation. It's helped us a lot, in Pennsylvania, we haven't but we're growing our contract production that’s not nearly. So automated -- so it's kind of a mess at the margin and the margin is the part that's growing.

But eventually, we will be able to rethink the production of that do it in line get rid of all this handling. But it's really hard to do, when you're trying to double your hands capacity for truly. We're focused on building the lines, getting them in and we've got several of them that were engaged in.

So that just getting the cans produced and in the boxes and out of the door to the wholesalers has taken priority. And we'll go back and clean it up, I don't know exactly when, it's not going to be the first half of next year, because we're very focused on doubling our can capacity for Truly between now and then..

There are two basic impacts, when you look at the gross margin related to the Truly production, the comfort production. One is as I said before, we are increasing the percentage in contract production. At the same time, we're increasing also the capacity internally which is at a significantly lower cost.

So margin in itself will not fluctuate as much because in addition to the positive benefit of in store of increasing the capacity in-house we also have clear savings problems which are focused on reducing the waste that we have in the system. So this will largely balance out the incremental cost that's coming from the increase in external production.

So there shouldn't be massive swings next year. It's like -- it's just like various different factors that you will see throughout the year. And when those businesses becomes online, I'm sorry. .

No, I was going to say it looks like and again, just in trying some of the moving pieces. It looks like your fourth quarter of 2019 is not going to see quite as much gross margin pressure.

And I'm wondering if that's greater efficiencies or is that just a product mix issue or a little bit of a bunch of different things, but it looks like sequentially the gross margin pressure is relieving itself if you will a little bit as we go through the year. .

Yes, the 2019 impact, there's a number of things. One is the percentage of Truly ourselves of the one that’s outsource in general of the portfolio is decreasing in Q4. That's a little bit of seasonality. So -- and then the growth where it’s going slightly down.

So relatively speaking, there's as opposed to the other quarter, there's less external production that you have. So -- and that's one impact. And the other impact also in 2019 is that we’re adding Dogfish Head business, which we didn't have last year. So those two factors combined will have a little bit better margin impact..

Got it. And if I can have just one last one, just can you comment a little bit on the -- on tap business. I know the summer was when you started to ship that. What's the response been from some of the bars or restaurants where you're seeing it? And was that any meaningful add to the third quarter shipment numbers at all? Thanks..

This is Dave, I'll take that. I think we're most of that we’re in about 3,000 or so bars, which really on draft. I would say the impact is not material on a total business. It’s a bit of an experiment to see how we can make this thing work for our customers.

And we're finding that for the most part, we're getting good response but we're really targeting the right types of locations where you're going to have the right crowd that’s want to be interested in sort of creating their own experience on the right type of customers.

So we like it and the biggest opportunity in on-premise will continue to be cans in on-promise. But so far so good we’ll continue to expand it. We launched it I think at the beginning of summer. And -- but again the impact -- but if you look at Truly numbers it’s just very, very small compared to the total. .

Great, thank you so much..

Our next question comes from a line of Amit Sharma with BMO Capital Markets. Please proceed with your question..

Thank you so much for taking the follow up.

Just wanted to quickly make sure that I just heard it right that Truly co-packing outside is 300 to 400 basis point drag on margins today? And we're not seeing when did it go away? But you would expect that to go away next 12 to 24 months is that fair?.

Well, I would have expected it to go away end of this year, at the beginning of next year. And it really depends on how long this growth is going to continue. Because you need to find the right balance between internal production and external production. And it always takes time to add capacity. We're adding capacity.

We don't want to overextend ourselves. That's where we're using partly the external capacity. Once the stabilizes we’ll bring it in-house. We’ll improve our supply chain. So the impact that you mentioned, the drag on gross margin will eventually go away.

It really depends on when the volume is going to stabilize, quite frankly, as the mix of internal versus external production. The good news is on the entire thing. When you look at the gross profit that we're still generating with this growth that is all incremental. Again, this is -- there's upside on the margin side clearly.

And because the external production and also the inefficient production that we have in-house is clearly masking the savings impact and the savings efforts that we have underway or have had underway for now two to three years and that are delivering every single year..

Very good. Thank you for the explanation..

All right..

[Operator instructions] Since there are no further questions up in the queue, I would like to turn a call back over to Mr. Jim Koch for any closing remarks..

Thank you everyone for listening in on this call and all the good questions and we'll talk to you again in a few months, time to have a beer. Cheers..

This concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation and have a wonderful day..