Greetings and welcome to the Boston Beer Company Fourth Quarter 2019 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder this conference is being recorded.

I would now like to turn the conference over to our host Jim Koch, Founder and Chairman. Thank you. Please go ahead..

Thank you. Good afternoon and welcome. This is Jim Koch, Founder and Chairman, and I am pleased to kick off the 2019 fourth 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 few introductory comments including some highlights of our results and then hand the call 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 of our fourth quarter and 2019 fiscal year results as well as our outlook for 2020. Immediately following Frank's comments, we'll open up the line for questions.

We're happy to report 25% fourth quarter depletions growth, of which 19% is from Boston Beer legacy brands and 6% is from the addition of Dogfish Head brands. We're making good progress on the Dogfish Head integration and emerged our sales forces and our business processes and systems.

We have learned a lot from each other as we've merged our cultures, our teams, our values, and our innovation capability.

Collectively, we're thankful to our outstanding co-workers for their focus and diligence, and our distributors, retailers and drinkers, all of whom have helped the company achieve double-digit volume growth for the seventh consecutive quarter.

We believe that our depletions growth is attributable to our innovations, the quality of our products and our strong brands, as well as sales execution and support from our distributors.

We see significant distribution and volume growth opportunities in 2020 for our Dogfish Head brands, as well as our Truly, Twisted Tea and Dogfish Head brands remaining our top priority for growth in 2020.

At the same time, we're working hard to further develop our brand support and messaging for our Sam Adams brand to position it for long term sustainable growth in the face of a difficult competitive craft beer environment.

We are excited about the response to our reformulation of Samuel Adams Cold Snap seasonal our new Sam Adams Toast Someone campaign and the Samuel Adams Tap Room that opened in downtown Boston in January.

We are confident in our ability to innovate and build strong brands to complement our current portfolio and help support our mission of long-term profitable growth. I'll now pass the call over to Dave for a more detailed overview of our business..

Thanks, Jim. Hello, everyone. Before I review our business results, I'll start with a usual disclaimer. As we stated in our earnings release some of the information we discussed in the release, and they may come up on this call reflect the company's or management's expectations, or predictions of the future.

Such predictions and alike are forward-looking statements. It's important to note that the company's actual results could differ materially from those projected in such forward-looking statements.

Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained to the company's most recent 10-K.

You should also be advised that the company does not undertake to publicly update forward-looking statements, whether as a result of new information, future events or otherwise. Okay, now let me share a deeper look at our business performance.

Our depletions growth in the fourth quarter was a result of increases in our Truly Hard Seltzer and Twisted Tea brands in the addition of the Dogfish Head brands, probably offset by decreases in our Samuel Adams in a Yorkshire brands. Truly is generating triple digit volume growth and will continue to expand brand distribution across all channels.

During the fourth quarter, we launched new formulations for all of our Truly flavors, which had been very well received by drinkers. Before we rolled out the new flavors, we conducted consumer test to ensure that we had the best taste in Hard Seltzer on the market.

In fact, since the reformulations hit the market in the October November timeframe, both our volume and our velocity trends have increased significantly. We continue to launch additional flavors and recently launched Truly Hard Seltzer Lemonade.

Today the response from our distributors, retailers and drinkers on the new formulations and Truly Lemonade has been very positive, but it's too early to draw conclusions on the long-term impact.

We believe the new improved formulations and the Truly Lemonade launch, combined with our previously announced NHL partnership and our significantly increased advertising spend, will help further bolster our position as a leader in hard cider. As more competitors enter the category.

In 2020 we'll continue to build a compelling and differentiated Truly brand and involve our brand communications campaign accordingly. Our Twisted Tea brand continues to generate consistent double digit volume growth even as new entrants have been introduced and competition has increased.

Angry Orchard's volume has declined against the 2018 national rollout of Angry Orchard Rose, but Angry Orchard still maintains more than a 55% market share in hard cider. The center category is challenged and will work into return of Angry Orchard to growth to continued packaging, innovation promotion and brand communication initiatives.

During the fourth quarter as we increased our brand spend, we also made investments in our supply chain to ensure that we're prepared for increased competitive activity in the Hard Seltzer category. We've invested to increase our canned and automated variety pack capacity.

But these capacity increases keep on getting eclipsed for our depletions growth, resulting in higher than expected uses of third party breweries.

We will continue to take advantage of the fast growing Hard Seltzer category and deliver against the increased demand through this combination of internal capacity increases and higher usage of third party breweries. Meeting these higher volumes while installing new capacity has a negative impact on our gross margins.

To address this, we've started a comprehensive program to transform our supply chain with the goal of making our integrated supply chain more efficient, reducing costs, increasing our flexibility to better reacts in exchanges and allowing us to scale up more efficiently.

We expect this program to run for two to three years and begin showing margin improvement by the first half of 2021. But our gross margins and gross margin expectations will be impacted somewhat negatively until the volume growth stabilized. For 2020 we're targeting 15% to 25% volume growth and a significant increase in our operating income.

We expect first quarter shipments growth to be higher than depletions as we continue to manage our supply chain and capacity to ensure that our distributor inventory levels adequately support greater demand for our brands during the peak summer months.

Our priorities are to drive Truly, Twisted Tea and Dogfish Head brand growth and work to return Sam Adams and Angry Orchard towards long term sustainable growth.

We also will continue to focus on cost savings and efficiency projects to fund the investments required to grow our brands to build our organization's ability to deliver against our goals and to improve our profitability. While we're in a very competitive business, we're optimistic for continued growth of our current brand portfolio and innovations.

And we remain prepared 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 to the six weeks and in February 8, 2020 are estimated to have increased approximately 34% from the comparable weeks in 2019, excluding the Dogfish Head impact depletions increased 28%. Now Frank will provide the financial details..

Thank you, Jim and Dave. Good afternoon everyone. For the fourth quarter, we reported net income of $13.8 million or $1.12 per diluted share. A decrease of $0.74 per diluted share from the fourth quarter of last year.

This decrease was primarily due to increases in advertising, promotional and selling expenses and lower gross margins they were only partially offset by increased revenue. Shipment volume was approximately 1.26 million barrels a 31.7% increase from the fourth quarter in 2018.

Excluding the addition of the Dogfish Head brands beginning July 3, 2019, shipments increased 25.6%. Shipments for the quarter increased at a higher rate than depletions and resulted in higher distributor inventory as of December 28, 2019 when compared to December 29, 2018.

The company believes distributor inventory as of December 28, 2019, average approximately four weeks on hand and was at an appropriate level based on supply chain capacity constraints and inventory requirements to support the forecast as well.

Our fourth quarter 2019 gross margin of 47.4% decreased from the 51.9% margin realized in the fourth quarter of last year, primarily as a result of higher processing costs due you to increased production and third party breweries and higher temporary labor requirements at our company owned breweries, partially offset by price increases and cost saving initiatives at our company owned breweries.

Fourth quarter advertising promotional and selling expenses increased by $30.2 million from the fourth quarter in 2018, primarily due to increased investments in media, production in local marketing, the addition of Dogfish Head brands related expenses beginnings July 3, 2019 higher salaries and benefits costs and increased freight to distributors due to higher volumes.

General and administrative expenses increased by $6.3 million from the fourth quarter in 2018 primarily due to non-recurring Dogfish Head brands related expenses of $2.1 million, increases in salaries and benefits costs and the additional Dogfish Head general and administrator expenses beginning July 3, 2019.

Our full-year net income per diluted share of $9.16 increased $1.34 or 17.1% compared to the prior year. This increase was primarily due to increased revenue, partially offset by lower gross margins and increases in advertising, promotional and selling expenses.

Our full year 2019, shipment volume was approximately 5.3 million barrels a 23.8% increase from the prior year. Excluding the addition of the Dogfish Head brands beginning July 3, 2019, shipments increased 20.8%.

Our full year 2019 non-recurring Dogfish Head transaction related expenses of $10 million were partially offset by Dogfish Head operating income of $6.9 million. Excluding this $3.1 million net unfavorable impact the company's operating income for the full year 2019 was $148 million, an increase of $32.1 million or 27.7% from 2018.

In the fourth quarter and the full year 2019, the earnings per diluted share impact from Dogfish Head operating results net of the diluted 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 $0.18 per diluted share and $0.40 per diluted share respectively.

Going forward for 2020 the company will report Dogfish Head's brands impact on 2020 shipments and depletion volume growth rates, but does not plan to report the earnings per diluted share impact of Dogfish Head as it has been fully integrated into the company's operations beginning in early 2020.

Looking forward to 2020, based on information of which we're currently aware, we are targeting 2020 earnings per diluted share between $10.70 and $11.70. Our actual results could vary significantly from this target. This projection excludes the impact of ASU 2016-09.

We're currently planning increases and shipments and completions of between 15% and 25%. Excluding the addition of the Dogfish Head brands 2020 depletions, and shipment growth is estimated between 11% and 21%. We're targeting national price increases per barrel of between 1% and 3%.

Full-year 2020 gross margins are currently expected to be between 49% and 51%. We plan to increase investments in advertising, promotional and selling expenses of between $80 and $90 million for the full year 2020 not including any increases in freight costs for the shipment of products to our distributors.

We estimate our full year 2020 effective tax rate to be approximately 27% excluding the impact of ASU 2016-09.

We not able to provide forward guidance on the impact that ASU 2016-09 will have on our 2020 financial statements and fully effective tax rates as this will mainly depend upon unpredictable future events, including the timing and value realized upon exercise of stock options versus the fair value in those options were granted.

We're continuing to evaluate 2020 capital expenditures and currently estimate investments of between $135 million and $165 million. The capital will be mostly spent on continued investments in our breweries and tap rooms. We will now open up the call for questions..

Thank you. Ladies and gentlemen, at this time, we'll be conducting our question and answer session. [Operator instructions] Our first question comes from Vivien Azer, with Cowen. Please, state your question..

Hi, good afternoon. I have two questions, if you will. So the first one on the top line and not to [indiscernible]. But the preliminary guidance, which is of course, preliminary said high teens to low 20s. So it seems like you're widening that range a little bit on both ends. And I'm just curious to hear what informs that. Thanks..

Vivien, this is Frank. So on the guidance, we haven't really changed that much. I mean, that was kind of around the midpoint of 20% as you can see, that hasn't changed. If you look at our growth, I mean, the growth is primarily driven by the Hard Seltzer category and the Truly brand.

And there's a lot happening, it's really hard to predict the long-term growth. I guess it's fair to say that the last two years everybody in the industry under estimated the actual growth that has happened. And, of course, the growth and the size of the category attracts many more participants to enter the market.

And what we're seeing, especially this year is like the larger players are coming in and becoming much more aggressive. We feel very strongly about our position in the market, but we just don't know exactly what's going to happen.

And that's why we're just carefulness and give you a wider range because it really depends on how the year is going to play out, how the new competitors are going to get traction and what the entire growth of the category is going to be which again, we've underestimated as an industry for the last two years. So that's the main reason for it..

Thanks, Frank, that makes perfect sense and that seems reasonable enough. Dovetailing into that. My second question is just around the gross margin commentary. So given where you guys settled out for the year, it's a low end of your guidance range, you're just not looking for any gross margin improvement at all.

But I'm trying to reconcile that with the commentary around right sizing your supply chain and the benefits of that kicking in in 2021, but like implicit at the midpoint of your 2020 gross margin guidance is some improvement.

So help me understand that if you would? Thank?.

Sure. So on the gross margin, there are couple of things that are happening. So we came in at the low end and a little bit low in Q4 than we had originally anticipated, quite frankly. And there are two reasons for it. So let me cover the Q4 first. One is the volume clearly has outpaced our expectations.

So we had higher volume, that volume went to contract and contract as we've discussed before on previous earnings calls just comes at a higher cost and that has a negative impact on the margin.

We don't mind that at all because we are going off to every single case that we can get so that we build our position in the market and then as we've mentioned before, longer term or medium to long-term we address then the supply chain costs as the volume stabilizes.

Now the reason why the volume was higher that went to contract is one because of higher demand, but second also, we shut some lines down for a limited period of time; A, for maintenance, but B, also because we're implementing or installing new capacity. So there was some downtime there that we had to plan for and that was impacting the Q4 margin.

Two years or three years ago, we had at the Analyst Day, we gave you an estimate that we're going to improve our gross margins through reduction of waste in our supply chain.

These efforts have continued and have actually really delivered, but they haven't come through in the financials because the negative impact of the increased contract production has really messed that. So as we get better, and we install that the incremental capacity, those savings will come through and will have a positive impact.

And that is what you also see in the slight improvement in 2020. But we're not forecasting a dramatic improvement because we don't know exactly where the volume is going to fall out.

In addition to that, as we've stepped back and looked at the dramatic growth that we have had, we've also seen some additional opportunities of how to reorganize and transform our supply chain more from an end to end perspective, to as Dave said, increase the flexibility that we have and also increase our efficiencies because there's one thing is installing new lines, the other thing is getting the equipment efficiency up, but better running the lines.

And that gives you incremental capacity without really necessarily a ton of investment. And, again, the way we're operating would change. Now this very much depends on the volume development that we will see in 2020. Because our first priority remains to serve the volume.

If we have an opportunity to get to those changes sooner rather than later, we'll do that. But we have to find the right time. And it very much depends on the volume demands, it's going to hit us doing 2020. So sorry for the long answer, but they're really three components to it. And I wanted to make sure that, that I fully cover that..

No, that color was very, very helpful. Thank you so much..

All right..

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

Hey, good evening, everyone, and congratulations on a strong year. I want to come back to the topic of Seltzers.

So what would you observe or were the early learning so far and I understand it's early days, but with the Bud Light Seltzer launch, what have you seen competitively? And I totally understand it's still too early to gauge repeat purchase rates, but early observations there would be helpful.

And then for Jim and Dave, I think, it had been, we all understand that forecasting the category growth rate this year is difficult with a pretty wide range. But it had been your assumption previously that you would be able to maintain market share. Is that still your assumption? And then I have a follow up. Thanks..

Okay. Thanks. Hey, Kevin, it's Dave, as far as starting by just talking about we've been anticipating obviously this moment, for months now the Bud Light Seltzer launch and a lot of other competitive activity.

And I think we - when we spoke last time in October, there are a lot of things in place that we were putting into the market that we think has kind of combined to create the results. But I'll share with you that we act the way we see the market. And I think Jim talked about reformulating, we had 13 flavors.

At the time, we formulated all 13 flavors, five of which overlap with by quality, the number one player with the one to make sure we have better products than they did in those five. And we did. We did the work we do. We also did work on the other eight to make sure they were better than what we had existed previously. And then that one is the market.

October November started going into the market. We also, we signed the NHL, which has given us some brand awareness and also some in store presence that really help us expand our presence in store. We've launched a new ad campaign in Q4 with Keegan Michael Key.

We actually invested and he's part of the APS numbers and Frank talked about we invested a lot of dollars in Q4 to bring that thing to life and again to create some awareness behind the brand. Now we launched Lemonade on January 1.

And so, as soon as the Super Bowl hit, we advertise on seven key markets behind Lemonade again to drive awareness around the product. Now here we are six weeks after the exception above Hard Seltzer. And in the way we're looking at it, we started looking at this business really sequentially for the moment, Bud Light Seltzer entered.

what's starting to happen, like what's happening in the marketplace? And what are consumers doing? Because you're right it is shooting right now. This is all about file. This is like an artificial moment here. Like right now where it's just [indiscernible] execution by the API system and a lot of trial.

This will be how we're looking at and what we've seen over those last six weeks, is we have seen Bud Light share declined by 9.4 points since Public Seltzer was launched [indiscernible] down 0.8, Navy Light down 0.4. All other Hard Seltzers down 0.7, Truly up 0.5. Bud Light Seltzer took like a tiny share. So, the first assault has happened.

We feel like a lot of more we did before particularly on the reformulation of the advertising, great execution of our wholesalers. We are the only brand in this category we've actually have gained share since Bud Light Seltzer entered the marketplace. Now obviously it's very early so we're not sure where it's going to go.

And we'll have to see obviously with where repeat takes us. But right now we feel pretty confident that we're in a good place. So the last thing I'll say is that the Nielsen I think you guys look at the Nielsen panel data, Nielsen panel data just came out a few days ago. And we certainly look at it like who is our consumer and how is it different.

Basically, we were sourcing 51% of our volume for Truly sourcing outside of beer. So it's spirits and wine 39% for White Claw, which is sourcing more from like beer than we are. So already started seeing different consumer merge. Our households tend to be higher income. Almost half of our households are over $100,000 households.

Almost half of our volumes come from under 44 year old female head of household families. We're more diverse than any other brands ethnically in the marketplace. And our basket ring is about 10% higher than White Claws. So we're seeing - we're trying to create a brand that's very broad and that attracts a lot of different consumers.

We feel like we've put ourselves in a position to compete now that all the bigger guys are coming into the market. So those are really long answer, but I thought it was important to kind of give you a sense of how we're looking at it. I think it carries on the categories like with everybody else.

We don't, nobody knows for sure, but the general consensus seems to be a doubling of the category this year. We're planning on that and we're planning to be able to produce more than if we have to..

Great. And I appreciate the color..

We've been investing to gain share in 2020 with a lot more money in the reformulation. We probably took about 1% gross margin and to spend more money on ingredients, higher quality ingredients, more complex flavors. We think that has made a difference in the marketplace because we saw a band in our share trends with the reformulation.

And we're very committed to the category and committed to spending against it as you've seen from the fourth quarter.

And if you're tracking ad spending into this year, we're certainly taking the entrance of the largest brewer in the world in this category with the strongest brand in the beer business in the United States coming in as well as Corono [ph] also a great brand. So the elephants are getting into the bathtub.

But we feel like we've carved out a space and that backs up that so far has held our share, actually grew it a little bit..

That's great. The quick follow up if I can probably for Dave and Jim. Is just maybe a little bit more color on the Sam Adams and Angry Orchard brands? So both brands are struggling a bit at the moment. I know you're doing some work on both of them maybe some update there on the strategy and then adequacy of investment levels.

And well, I knew there's a lot of focus in the organization and rightfully so behind Seltzers. Was there any thought about taking investment levels even higher on Sam Adams and Angry Orchard in an effort to help attempt to stabilize those brands, which are, which are struggling? So thoughts there would be helpful and then I'll pass it on. Thank you..

Yeah, we're of course very committed Sam Adams and to craft beer as evidenced by the merger with Dogfish Head. Yes, the growth is a very strong and attractive in Hard Seltzer, but we are the Boston Beer company beer is our middle name and craft beer is the foundation and heritage of the company.

So we continue to invest behind Sam Adams at kind of historical levels. So we feel like we've got the appropriate level of investment there and having sacrificed anything for the incremental investment in Hard Seltzer.

We think our efforts should be directed against getting the right message that puts Sam Adams back at the forefront of the drinkers list of relevant brands. And we believe long term that we are going to see a consolidation in craft beer in shelf space shrinks at retailers..

I'll put it back up just more, a little more detail on Jim's notes. I think if you look at it on the Sam business, we've made a lot of progress in the last year on seasonal. And that's one area we feel good about. We reformulated to summary, we reformulate a cold snap, both of which are sort of lighter and brighter, easier to drink.

And they both have had performed extremely well. And we have more plans for that later in the year. So the seasonal piece, we're quite actually pleased with. I think getting back to Jim's point about we need to make this brand relevant to 30 South Plains.

And the campaign that we launched couple of years ago, what we found was that it really reinforced for Sam Adams for in the minds of our current drinkers, but not so much, not persuasive enough with non-drinkers or new drinkers to bring them in. And we've been, this is going to be a year of experimentation for Sam Adams. We don't expect it to grow.

We've going to get plenty of growth as you guys know from Truly and Dogfish and from Twisted Tea. This is an opportunity to find what's that right message that Jim talked about. We did launch a social media program in Q4 called Toast Someone, which Jim mentioned in his opening remarks. We're happy with where that's combat.

In fact, actually I was looking at the numbers our household penetration, increased in Q4 for Sam Adams for the first time for Boston lager in a long time. Now, so it doesn't mean it's just the beginning but we feel like there's something there that's powerful. We're experimenting with other ideas. We're going to be aggressive here.

But to your question, Kevin, we're going to spend behind this brand. But I think the amount of spend will be proportionate to how good the ideas are that we develop and if we really behind them, we're going to spend behind them because, as Jim said, this is a critical part of our business for us..

Okay, thank you guys. Good luck..

Thanks, Kevin..

Thank you. Our next question comes from Steve Powers with Deutsche Bank. Please state your question..

Yeah, great, thanks. To follow up on the gross margin, Frank. Were there any one time transaction costs associated with Dogfish in the quarter that might not repeat as we go forward just as we think about to bridge the next year? And then more importantly, for any of you.

I guess, can you help frame the confidence you have in the first half 2021 improvements? And what are some of the maybe the volume assumptions that inform that outlook?.

Yeah. So let me take the first one. The transaction costs the Dogfish had total yield of starting in July when we close is $10 million, $2 million of that is in Q4. There's a minor - the majority's is operating expenses. There's a minor amount and that was already in Q3, that was not in Q4 that's hitting gross margin.

So that impact on gross margin is for the half year there's a little bit but that's not the majority. That's number one. When you look at this year, I think we will see further margin decline in Q1, because we're building up and started at the end of December.

Similar to last year, we have pre burning inventory because of the limited capacity that we have. And you typically exceed your volume requirements or capacity requirements during the peak month in the summer and then during the shorter month, you have a little bit of spare capacity. We are trying to run a 100% of the capacity.

And we're building more, and we're shipping more in the first half. So there will be a relatively high component in Q1 that's going to contract at a higher cost and that will negatively impact the gross margin.

What you will see at the same time is also the shipments of outpaced depletions because we're burning this up and that will run into kind of the middle of Q2 which is when we start decreasing this inventory again. In Q2 also, we will have the extra line, extra canning line internally coming on stream.

So, that will shift then the volume a little bit from a relatively high contract percentage in Q1 to a lower percentage in Q2. And you should see - after the dip in Q1 you should see the margin improvement from Q2 onwards throughout the rest of the year based on today's volume assumptions, I should say that.

So if the extra volume comes in higher than what we are projecting at the moment, there might be a negative margin in fact. But that all depends on how much capacity we have available and internally and how much volume we get. So, I hope that answers your question.

If I can't give you hard numbers, but directionally that's kind of how the margin will flow..

Okay, that's helpful but in the release, when you talk about the confidence in first half 2021 improvement. Is that because of structural returns on the investments you're making today or is I just easy comps lapping the dynamics you just walked us through in '20? I guess that's what….

No, it's not easy comps in the way. The reason why we will be quite frankly, is we're pretty confident in the benefits that's coming through from the program. So we will increase capacity and flexibility in our supply chain within our existing equipment because we will be operating it differently. That will come through.

It's a little bit akin to the other savings that we have some waste reduction, where the savings were coming through, but they were masked by the incremental contract volumes that we have which came at a higher cost.

And, the extent to which you will see the margin improvement really literally depends on how much volume we will have and how much has to go to contract at the end of the day. If the volumes stabilize a little bit or the growth moderate, you will see those margin improvements come through. But it's not because we're lapping.

It's because we are doing, we are actively changing the way we are operating the supply chain..

We'll probably anticipating - Steve, this, Jim. I think it's fair to say that we're anticipating those improvements starting to kick in but only at the back half of Q2. And so when they show up in the queue two numbers, we don't have high certainty at this point.

But we do believe currently that the benefits of this supply chain transformation, which will be a several year project, the benefits will start to show up more clearly in the second half of 2020. And we'll continue to build through 2020, 2021 quite possibly into 2022..

Okay. And I guess just as a last clean up on that.

I guess we should assume therefore, and I'm assuming it's also somewhat volume dependent, but the elevated CapEx that you called out for 2020, just given that this is going to be a multiyear program, I guess would it be prudent on our, on our behalf to think about elevated CapEx into '21 and maybe perhaps 2022 as well?.

It's hard to guess. I would say that the sort of the lean transformation that we're involved in and committed to will mostly require changes in operating practices and procedures. Yes, there will be some CapEx but the 2021 CapEx 2020 certainly this year and next year is CapEx will also include a new packaging line.

So we're anticipating continuing to grow in 2021 significantly. And we're going to be investing to support that possibly two new canned lines in and we'll be spending most of that money in 2020..

Great. Thank you very much..

Thank you. [Operator Instructions] Our next question comes from Sean King with UBS. Please state your question..

Hi. Thanks.

Given your portfolio is increasing exposure to cans with Truly, does the guidance reflect any, I guess, tailwind or even headwind from aluminum in the 2020?.

We have aluminum. I'd say the input costs for aluminum was kept flat. We don't expect a major impact. When you look at the can market, what you have is you have a relative limited supply, quite frankly, because everybody's switching to cans. But what we've been working with our suppliers very closely on that.

So we don't expect a major cost increase coming from cans. That's, that's not those in all financials..

Great. Thank you..

Thank you. Our next question comes from Laurent Grandet with Guggenheim. Please state your question..

Yeah. Good evening everyone. I do too set of questions. So the first one on the top line, if you try to unbound on where the growth would be coming from, roughly, what would be coming from? The new innovation like from Truly Lemonade.

What would be coming from the expansion of 24 ounce can that's relatively in new and have some opportunity to look to go in distribution? I would like to understand just a bit more and also if you can confirm that the 24 ounce can or you, it's more profitable than that, but if you can help us frame that better? Thank you..

Let me take - this is Frank. Let me just take the profitability question all the way. So I think the 24 ounce can is a single can. So that has a slightly better profitability. The majority of the business in Truly is variety pack which has a slightly higher cost and lower margin.

So there should be a little bit of improvement there, but it's not going to dramatically change the gross margin picture for Truly as a franchise or the company. It's beneficial..

I mean the key this way, so it's not the economic benefit, but it's the consumer as you know, so the consumer benefits is a big one for us. I think 24 - the world's going to 24 six months ago on Truly, I don't think we had any distribution on 24 ounce by cyclic we're about 20% of the [indiscernible] now with 24 ounce of three different skews.

So we see that as a really as a way to build the business particularly obviously in convenience stores..

Yeah, and could you tell me not there is a lots of new SKU coming from you guys, as well as from competition and now we discuss about this in the past. Where the shelf space has been source right now. Is it coming from craft beer or is it come from light beer? I mean could you could you help us understand this a bit better? Thank you..

I think, what I've seen I think it varies by obviously by customer. I mean I think domestic premiums are giving up some space we're seeing. They are also coming from the longtail craft as well. You're talking about we're going to talk about where Hard Seltzer is going and where to get the space.

That is I think that sort of where it's coming from those are the places where I've seen and most coming from..

Yeah, and my last question is a bit more on the gross margin. So I understand, especially on Truly is that the more you manufacture your product and you always contract manufacturers and the less profitability.

So could we assume that right now I mean, you are manufacturing half of your volume with contract manufacturer and then the other half in house? And by adding a new line and only something that you will go to have more on that 60-40 or 70-30.

And what will be there, I mean, the costs difference between contract manufacturers and in house that would have helped us as well..

Yes. So Laurent, this is the level of detail that we don't typically reveal. What I can tell you what you will see in the 10-Ks we had like all our external volume has increased to 27% in 2019. And clearly the relative share has increased in Q4 for the reasons that I mentioned earlier on the call.

We don't expect any improvement of that ratio in 2019, given the volume growth that we have, so, in 2020, we’ll have significantly more capacity in the house, but given the volume growth, we also have to increase the volume with Coleman [ph]. So there will not be a dramatic improvement in the ratio in 2020.

What will happen and I just want to repeat that what I said before is we’ll have a higher Coleman share in Q1. And then in Q2 we’ll have the incremental capacity coming on stream. And so the phasing throughout the year will be different and will improve in our favor. But the average will not change right now versus 2019..

And just to add to that. Well Jim made the point about efficiency as well, because there's really three things that play once our board increase our capacity, but it's also our ability to operate more efficiently. And then what in the third and the countervailing variable is volume and how higher or low that goes.

So I think what Jim highlighted was, in addition to adding capacity and adding a new mine, which is going in right now, it's also our ability to operate differently and therefore produce more within our four walls. And that's something that Jim talked about starting to hit in Q2 into the second half of this year..

And the final piece of that is part of additional capital investment. We'll currently anticipate being at our contract manufacturers. Historically we've used contract manufacturing mainly for the peaks to get us through the peak. So we didn't have to build our own capacity that would run three months of the year.

And as a result we haven't really invested that much in lowering the costs for our contract manufacturers by bringing in some additional equipment that would save us money. Over the last couple of years, that contract piece of our production has shifted from being pretty much only peak coverage to being base coverage.

I mean, we're running year round at our contract partners and they're very - they are efficient, they are good. But we haven't fully invested with them to lower our costs, we will be doing that in back half of 2021.

So we believe, over the next back half of '20 and into 2021, by a year from now, maybe 15 months from now, the costs that we currently endure, the contract manufacturers will be much more in-line with our internal costs because they'll end up with the same equipment that we currently have internally, it will be duplicated on the outside.

I don't know if that makes sense but made sense to me..

Yes, let me and just my final one. Because you said the quality will be significantly improved. You have a new technology and only send either a difference in terms of quality from where you manufacture it in house outside.

And I like to make sure that we, I mean, I believe that's your number one priority to ensure that the quality of your product is the same way it is manufactured but if you can really the ....

Yes. We're very confident that - we're very confident there is no difference in quality. I mean, I can tell you personally, I still taste a sample of every batch of every product that we make regardless where it comes from. And what we make internally and what we get from our contract partner is everybody's good. I can't tell the difference.

So I'm pretty confident in that. And we have been working with City Brewing, our primary contract partner for well over a decade. So it's a very strong, very good relationship. And they've always provided high quality product, otherwise we wouldn't be there..

Well, thank you very much for all those colors. I pass it on. And was a very growing. And I bet now Jimmy will be drinking even more going forward..

I know. I'm on my third Lemonade round..

Okay. Be careful..

Thank you. [Operator Instructions] Our next question comes from Vivien Azer with Cowen. Please state your question..

Thanks for the follow-up. I'll be quick. We don't often talk about the other SG&A line but between 2017 and 2019 while was only up 50 basis points as a percentage of sales. Like I generally think about your A&P line is the one to be more leverage to sales. And it is up over 50%.

So can you just remind us what what's in that bucket and how we should think about that? Thanks..

So, we split operating expenses as we split in to APS, which is advertising promotion, I think the extra lines there is a bit of afraid in there, but that's not the majority of that. But it's all the brand support is going in that line and also the entire selling cost including the sales force that we have.

So the long-term guidance that we have communicated I think also in 2017 is we want to control the G&A cost. And by long-term not growing them by not more than half of the top line growth rate. And I think we're in pretty good shape there. We've done that.

The numbers this year a little bit distorted because we got Dogfish Head on board and we just added the Dogfish Head expenses. And on the A&P line, long-term, we are wanting to grow that in line with a top line because we believe we want to build the brand. So we believe in a strong sales force. And that's what you're seeing.

We have Truly at the moment, we want to make sure that we really win without mortgaging our other brands especially not mortgaging Sam Adams and that's what you see the percentage is going a little up in '19, and also '20. But long-term, the guidance is in line with revenue..

If I could jump in. One of the things that we didn't we didn't talk about, which is important. And that is even we committed to increasing our sales organization by about 25% to 30% this year. And we did a lot of work with the Dogfish Head merger. We took a fresh look at how we go to market who the customers were calling on, et cetera.

It typically, as the world shifts more to an off premise world and a Hard Seltzer world. And we saw lots of opportunities to change how we do things and part of this investment that you see. There is we're adding 120 or so individuals to our sales organization.

So we can be making more calls on bigger customers to drive not only Sam Adams and Dogfish, but also Truly with those customers. And we think historically, this is something Jim bet on ruling on, a great product and a great sales organization. Essentially, we're doubling down.

And our belief in our sales organization, and what they can accomplish, particularly as our portfolio gets bigger, broader, more complex. We need to go to market a little bit differently. We are fortunate we've been ranked number one nine out of the last 11 years by Tamron [ph]. We have a great organization with great leadership.

And now this is not the best. We talked about Truly brand and of course and Dogfish and Twisted Tea and Sam, et cetera. But this is another bet that's a big one for us that we think is a really smart investment that will enable us to achieve the growth objectives that we have laid out..

We have built our business with the active support of what we think is a terrific wholesaler network. So we're pretty unconflicted about adding another 120 people whose primary job is to sell more of our products for us and for our wholesaler network.

And we believe that the commitment we've gotten in return from our wholesalers is just been an important part of our success..

Very helpful. Thank you so much for the follow up..

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

Thanks for the follow-up. I guess drilling in on Twisted. It's, I guess, continued to close healthy double digit growth despite the growth of Truly and some of the other seltzers.

I guess what gives you confidence, if any, that I can continue that that clip into 2020?.

Let's say well, what I'd say one thing for sure is you look at the businesses has been growing consistently, obviously, as you mentioned mid-teens. Looking at the numbers last year, we grew our household penetration by 31% last year.

So we 31%, almost a third of the new consumers and actually the number of households only about 1.1 million 1.2 million, so there’s a lot more households in that. So this is a brand that's got very, it's got low penetration, we’re growing rapidly, very high loyalty.

And I think we've mentioned before, we're going to spend probably 50%, more on Twisted Tea this year, we're upgrading the packaging, we have a new ad campaign we have different geographic programs going on. We have a lot of investment, a lot of support.

So all those things together, we feel really confident that we can continue to grow that Twisted Tea at the same rate, if not better..

That's great. Thank you..

Sure..

Thank you. [Operator Instructions] Ladies and gentlemen, there are no further questions at this time. I'll turn it back to Mr. Jim Koch for closing remarks. Thank you..

Well, thanks, everybody for attending today and we'll talk to you again in a few months. Cheers..

Thank you. This concludes today's conference. All parties may disconnect. Have a great day..