Greetings, and welcome to the Boston Beer Company First Quarter 2020 Earnings Call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Jim Koch, Founder and Chairman for the Boston Beer Company. Thank you. You may begin..

Thanks. Good afternoon, and welcome to everybody. This is Jim Koch, Founder and Chairman, and I'm pleased to kick off the 2020 first quarter earnings call for the Boston Beer Company. Joining the call from Boston Beer are David Burwick, our CEO; and Frank Smalla, our CFO.

And keeping with these times of social distancing, Dave, Frank and I are in separate locations for this call. I'll begin my remarks remarks this afternoon with a few introductory comments, including some discussion on the COVID-19 pandemic and the highlights of our results, and then hand over to Dave, who will provide an overview of our business.

Dave will then turn the call over to Frank, who will focus on the financial details of our first quarter results. Immediately following Frank's comments, we'll open up the line for your questions.

As the world's grappling with COVID-19 pandemic, our primary focus is on operating our breweries and our business safely and supporting our partners in the beer industry.

We have a strong cash position and balance sheet and feel very fortunate to be in a position where we can help others, supporting the communities in which we live and work is one of our core values. After all, our business got its start in bars and restaurants, and we recognize the role we can play right now in giving back.

We're proud to share some of the initiatives we've gotten off the ground in a very short period of time that we hope will make a difference. We've established the Samuel Adams restaurant strong fund and donated over $2.1 million to support bar and restaurant workers that have been impacted by pandemic related closures, in 20 states.

In addition, we were a founding partner of the restaurant Relief America, which is committed to helping the restaurant industry workers experiencing hardship in the wake of COVID-19.

Both funds will distribute 100% of their proceeds through grants, to bar and restaurant workers, also to support our internal needs as well as local hospitals, we begun production of hand sanitizer at our Dogfish Head distillery in Milton, Delaware.

We're thankful for our outstanding coworkers, distributors and retailers for their focus on our business during COVID-19 and their diligence to continue to operate and help us grow our Boston Beer Company business.

The Company's depletions increased 36% in the first quarter, of which 30% is from Boston Beer legacy brands and 6% is from the addition of Dogfish Head brands. Our business in the first quarter was strong so there remain some significant uncertainties due to COVID-19.

These uncertainties include our continued ability to operate our breweries and a level of safety that beats our standards, the continued ability to distribute to the off-premise retail locations, the duration of the current on-premise shutdown and how long consumer pantry loading will continue in the weeks ahead.

We will continue to work hard throughout the COVID-19 pandemic and prioritize safety above everything else. I'm proud of the passion, creativity and commitment to community that the Boston Beer Company has demonstrated during this pandemic. I'm now going to pass 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 our disclaimer, which, given the current circumstances, we modified.

As we state in our earnings release, some of the information we discuss in the release and that may come up on this call, reflect the Company's or management's expectations or predictions of the future. Such predictions and the like are forward-looking statements.

I would also note, as we stated in our earnings release, and Frank will later discuss is in more detail, the Company is not in a position to accurately forecast the future risk to revenues and earnings resulting from the impact of disruptions and other effects related to COVID-19 and has withdrawn its full year fiscal 2020 financial guidance.

All that said, the Company's actual results could differ materially from any results 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 in the Company's most recent 10-K and first quarter 10-Q.

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.

Consistent with the first quarter of last year, our first quarter shipments volume was significantly higher than depletions volume as we took active steps to ensure that our distributor inventory levels are adequate to support drinker demand.

Our depletions growth in the first quarter was a result of increases in our Truly Hard Seltzer and Twisted Tea brands in the addition of the Dogfish Head brands that were only partially offset by decreases in our Angry Orchard and Samuel Adams brands.

The growth of the Truly brand, and the recently launched Truly Hard Lemonade, has accelerated and continued to grow beyond our expectations. Since early January, Truly has accelerated its velocity and maintained its market share while other national hard seltzer brands have ceded share.

We'll continue to invest heavily in the Truly brand and evolve our brand communications and work to improve our position in the hard seltzer category as more competitors enter. We're ready to launch an exciting new Truly advertise a campaign, but have postponed the launch due to the uncertainty surrounding COVID-19.

Twisted Tea continues to generate double-digit volume growth rates that are above full year 2019 trends. We see significant distribution and volume growth opportunities for our Truly and Twisted Tea and are looking to continue to expand distribution of our Dogfish Head brands. Pursuing these opportunities in 2020 remains a top priority.

Sam Adams and Angry Orchard's volumes continue to decline as they're more deeply impacted by the on-premise shutdown. We continue to work hard on returning these brands to growth, but do not expect them to grow during 2020.

We've reacted decisively to COVID-19 and continue to work to control what we can control with our primary focus being the safety of our coworkers, our distributors, retailers and our drinkers.

We worked aggressively to put in place many safety protocols at our breweries including entrance screening and temperature checks, face mask requirements, reorganizing work to increase social distancing between and among shifts and adding cleaning time to each shift. Additionally, we've closed all our hospitality locations beginning on March 13.

We're working hard to rebalance our supply chain to address additional demand and can involve packages at off-premise retailers against very low demand for kegs given the shutdown of on-premise venues.

The shift in volume mix is likely to come at a higher incremental cost due to the increased usage of third-party breweries which negatively impacts our gross margin. We've deferred some of our new marketing campaigns as we closely assess and manage the situation.

Drinker demand for our brands continues to be very strong, particularly our Truly and Twisted Tea brands. Pre-COVID, our depletions growth through the 9 week period ended February 29, was approximately 32% from the comparable period in 2019. And we saw a further acceleration in demand for our brands beginning in the second half of March.

It's not possible for us to estimate the amount of the new demand, that is a temporary reaction to COVID-19. We're in a very competitive business, and we're optimistic for continued growth of our current brand portfolio.

And we remain prepared to forsake short-term earnings as we best 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 15 weeks ended April 11, 2020 are estimated to increase to approximately 32% for the comparable weeks in 2019.

Excluding the Dogfish Head impact, depletions increased 27%. Now Frank will provide the financial details..

Thank you, Jim and Dave. Good afternoon, everyone. For the first quarter, we reported net income of $18.2 million or $1.49 per diluted share. A decrease of $0.53 per diluted share in the fourth quarter of last year. Net income decreased as higher net revenue was more than offset by increases in operating expenses and lower gross margins.

We began seeing the impact of the COVID-19 pandemic on our business in early March. Prior to then, we were on track to maintain our full year fiscal 2020 financial guidance.

Given the many rapidly changing variables related to the pandemic, we are currently not in a position to accurately forecast the future impacts of the pandemic and are therefore, withdrawing our full year fiscal 2020 financial guidance.

To date, the direct impact of the pandemic has primarily shown significantly reduced keg demand from the on-premise channel and higher labor and safety-related costs with our breweries. In the first quarter of 2020, we recorded COVID-19 pretax-related reductions in net revenue and increases in other costs totaling $10 million.

This amount consists of a $5.8 million reduction in net revenue for estimated keg returns with distributers and retailers and $4.2 million of other COVID-19 related direct costs of which $3.6 million are recorded in cost of goods sold and $600,000 are recorded in operating expenses.

In addition to these direct financial impacts, COVID-19 related safety measures resulted in a reduction of internal capacity. This has shifted more volume to third-party breweries, resulting in increased production costs and lower gross margins.

We will continue to assess and manage the situation and we'll provide further updates in our second quarter earnings release to the extent that the effect of the COVID-19 pandemic will then be known more clearly. Shipment volume was approximately 1.42 million barrels, a 32.2% increase in the first quarter 2019.

Excluding the addition of the Dogfish Head brands beginning July 3, 2019, shipments increased 27.5%. Shipments volume for the quarter was significantly higher than depletions volume and resulted in significantly higher distributor inventory as of March 28, 2020, when compared to March 30, 2019.

We believe distributor inventory as of March 28, 2020, averaged approximately 6 weeks on hand and was at an appropriate level based on the supply chain capacity constraints and inventory requirements to support the forecasted growth of Truly and Twisted Tea brands over the summer.

We expect wholesaler inventory levels, in terms of weeks on hand, to return to more normal levels of approximately 4 weeks in hand later in the year. Our first quarter 2020 gross margin of 44.8% decreased from 49.5% margin realized in the first quarter of last year.

The decrease was primarily the result of higher processing costs due to increased production at third-party breweries and higher processing cost on finished goods, keg inventory write-offs, the Company-owned breweries partially offset by price increases and cost-saving initiatives at company-owned breweries.

Excluding our current assessment of the impact of COVID-19 keg returns and other related direct costs, first quarter gross margin was 46.8%.

First quarter advertising, promotional and selling expense increased by $26.2 million in the first quarter in 2019, primarily due to increased investment in media, production and local marketing, the addition of Dogfish Head brand related expenses beginning July 30, 2019, higher salaries and benefits costs and increased freight to distributors due to higher volumes.

General and administrative expenses increased by $3.6 million in the first quarter in 2019, primarily due to increases in salaries and benefits costs and the addition of Dogfish Head general and administrative expenses beginning July 3, 2019.

We drew down $100 million from our existing line of credit in March 2020 to enhance our cash position and our ability to address the impacts of the COVID-19 pandemic.

We expect that our March 28, 2020, cash balance of $129.5 million, together with future operating cash flows and the $50 million remaining on our line of credit, will be sufficient to fund future cash requirements. We will now open up the call for questions..

[Operator Instructions] Our first question comes from the line of Bonnie Herzog with Goldman Sachs. Please proceed with your question..

I wanted to ask about your operations. You touched on this, and I'm just curious if you can give us a little more color on how fully your operations have been running? I know you're certainly being careful with safety for our employees.

So I'm curious, have you limited the hours in the shifts? And then as such, then the output is more limited at this time, given everything? I guess I'm just trying to get a sense of how much you've had to scale back. And then I think you did give us the inventory that's on hand right now, but I just want to make sure I heard that correctly..

Okay, Bonnie, thanks. This is Dave. I think because we're in all different locations, I'll sort of act as the MC today to kind of funnel the questions. I think this is probably a good one for Frank to address..

Yes. So Bonnie, clearly, the capacity was impacted. When the whole thing started, we were very, very much focused on the safety of our coworkers in the breweries, but also on keeping the breweries running. That was critical to us.

So what we did is we implemented significant sanitation and safety measures in the breweries to make sure that they are a very safe place to work and that we can keep on running them even if we had incidents. As a result of that, we've separated shifts, for example, and put time between shifts so that the crews don't meet each other.

And we've also implemented sanitation procedures so that the workstations are being sanitized before the new shift starts. That has reduced capacity. Now we haven't had any significant impact on the overall output, but we have shifted more volume to third-party breweries, which, as you know, increases our cost and therefore, lowers the margin.

That is reflected in the financials, the part that hit like at the end of March, it's not included in the $10 million that we've spelled out as direct cost.

The $10 million that we've spelled out is literally direct costs related to keg returns and extra costs that we incurred at the Company, but it doesn't include the indirect cost of the shift of capacity..

Okay. That was helpful. And so as you think about this environment, no one really knows how much longer it's going to last, but I would imagine that this overhang of pressure is going to continue.

So is there a way for you to give us a sense of what percentage of your business, maybe in the quarter, was outsourced? I think it was around maybe, what, 26% or 27% of your business last year? I mean I assume that's gone up too, no?.

Yes. So clearly, it has gone up as we've indicated also in the last call, we will provide -- we still provided guidance in February. Because our volume is growing so significantly, we are putting in additional capacity. We have, yes, put in a new line in Pennsylvania which is coming on stream pretty much now.

But the volume continues to outpace our capability. So it was pretty clear that Q1 was going to be a quarter where we have significantly more external production. We don't disclose those numbers what the percentage is, but it was a significant increase even without COVID.

COVID hit and then I think within March, when we implemented those measures, there was an incremental that shifted over. There's a reason why we don't provide guidance because we don't know exactly what's going to happen. But of course, we do our scenario planning. And we were super cautious when we put the measures in.

And I think we will get better at it. I mean, we will definitely maintain the level of safety and sanitation, but we will -- as with everything, you're getting better with things as you continuously do them as you learn. So we think we will improve the capacity internally as we move throughout the year..

And Bonnie, this is Dave. Just to add to what Frank said. We jumped on this very early. So we're talking early March in making a lot of these changes. So we are down the one curve a bit. Obvious things that we've been doing are temperature checks, facemask, everything from the very beginning.

So hopefully, it gets better, and we just don't know how this endemic hits because we know it's going to come in waves. But we feel like we learned a lot, and I'm pretty confident that we know what we're doing right now. But again, we are -- as I said we can control what we can control..

Our next question comes from the line of Vivien Azer with Cowen & Company. Please proceed with your question..

I hope all 3 of you guys are safe and healthy as the rest of your team. But just a follow-up on Bonnie's question on capacity. So you called out the capacity build-out in Pennsylvania. And I heard Dave you say the capacity will continue to ramp over the year.

Are there incremental CapEx projects that need to happen this year? Or was it just a one line in Pennsylvania?.

First, we've got -- I'll answer. This is Dave. We have a line in Memphis that will be going in, in the second quarter with Citi, that is on schedule. So we feel good about that.

We've also -- though we haven't decided where to put the capital, we have committed, we got Board approval internally to put more lines in either in Pennsylvania or in Ohio, sometime starting very soon. So we're continuing to move down that path as aggressively as we can.

Even in this environment where we're kind of looking at sort of consuming capital projects that may not be strategic or critical, we're putting them off. This is one that we're going full steam ahead to build more capacity..

Okay. That's great. It's so good to hear that the construction continues. Hopefully broadly unfettered.

On the impact of keg returns, do you guys have a sense of kind of like where you are in that process? Just trying to think about like the second quarter impact, like have you received 50% of your kegs back? Is there any like way to know?.

So Vivien, this is Frank. We have -- the process hasn't really started from an operational perspective. But what we have done is, we have a long-standing policy of any returns that we get -- for freshness reasons, that we get from our distributors that we reimburse them for 50%. We've always had it for packages for cans.

We are not intending to change that, and we've communicated that to our distributors. And we've looked at the inventory that we have with the distributors, and we have looked at the inventories at the retailers, which is likely to come back to the distributors as well. And based on that, we have accrued for the cost in Q1.

That's what you see that is part of the $10 million. So $5.8 million is a reduction in revenue because we have accounted for the keg inventory that we expect to come back and reimburse at 50%. We believe we have a fairly good handle on that inventory. So we don't expect any significant changes to that estimate..

Okay. Perfect. That's super helpful. Last one for me, and I'll jump back in the queue.

Can you just remind us what your revenue mix is for the total company portfolio on-premise versus off premise?.

Yes, we don't share that. I think what we said we do say somewhere -- we talk about our keg, 20% in total, which is 12%. So the keg sales are 12% of our mix, but we don't break out on-premise versus off. So obviously, there's more than kegs that go into the on-premise channel..

Suffice it to say it's de minimis for Truly?.

It is de minimis. It's fair to say it's de minimis for Truly. It's de minimis for Twisted Tea as well..

Our next question comes from the line of Kevin Grundy with Jefferies. Please proceed with your question..

Thanks. I just would echo, I hope that you and your family, loved ones are safe and healthy. I want to start with sort of a bigger picture question for Jim and for Dave. Understand there's still a lot unknown at this point. But I think what's sort of maybe a little bit more increasingly known is there's a broader consumer shift to at home consumption.

Consumers will be working from home more frequently as well. It just seems like there will be some protracted implications from social distancing that are going to be with us for some period of time. And as a consequence, it would appear there will be a lasting negative impact on the on-premise channel. Maybe you agree or disagree with that.

But if that is indeed the case, I'd be interested to get your perspective on the longer term implications, not just for your portfolio, but for the industry as well in overall alcohol consumption..

Thanks, Kevin. I'll let Jim -- I'll let Jim jump on that one..

Yes. I mean we've seen, so far, just the complete devastation of our keg business. It's dam near 0. And it happened in -- the lockdown in the states where it's been implemented has meant that our keg business is a trickle. How much of that will come back? It's anybody's guess.

I mean in a normal year, there's a decent amount of turnover in restaurants anyway. They go out of business, new ones take their place. So there will be a lot that don't reopen. Some of those were probably going to close during the year anyway.

And it's probably beyond my capacity to predict how much lower the on-premise business will be in the short-term and the long term, other than to say it's going to be lower and it's going to be significantly lower.

And if I had to guess, it's -- some of it's driven by shutdown, but a lot of it's driven by who wants to go out and rub elbows with a lot of people until there's a vaccine or an effective treatment or therapy. So we are anticipating that the on-premise business is not going to just snap back.

And it may be a matter of a year or two before it gets anywhere near what it was at the end of February. And we do feel like as opposed to many other craft brewers, we have developed a portfolio and a business model that is able to prosper even in this new normal.

We -- and the strong sales results so far this year, I think, validate that business model that is built on strong brands, on successful innovation, on the support of our distributor network and on our best-in-class sales force. So we see the results so far this year as a validation of our strengths.

And because we are pretty confident in our business model and our position in the marketplace, we're willing to invest aggressively in programs and in media, when and where we can drive continuing double-digit growth, and we're going to make the capital investments, as Vivien asked about, that are necessary to support that growth primarily in-house, but also investments at our contract brewing partner, and we're also going to invest capital to increase our gross margins from their current level.

They've been declining for several years even as we scaled up, and that's just not natural or even healthy. So we think we can get a significant improvement in gross margin over the next couple of years, and we're going to invest the capital that's necessary to do that.

And does that answer your question?.

Yes. I appreciate it. Just in interest of time, I do want to touch on Seltzer, if that's okay? As well the tons of questions to be asked, obviously. Understanding what -- we don't know necessarily with respect to the magnitude of pantry loading and then timing around how long it's going to take consumers to destock.

Maybe you could talk about, I guess, kind of what we do know and maybe what you've learned over the past 3 months since last we spoke with respect to new customers and sort of frequency of consumption among existing customers and strength of the brand and consumer loyalty because as you guys rightly point out, the brand has held up, Truly, that is, pretty well in light of some of the new entrants.

So maybe talk a little bit about some of the brand's equity and what you have learned about the core consumer and even new consumers over the past 3 months, and I'll pass it on..

Okay. Thanks, Kevin. Actually, I think I'll -- maybe I'll jump in on the Truly one. To answer that question fully will take about an hour. I'll try to be a lot [free]. I think first of all, I feel like what we did in the end of the fourth quarter of last year to prepare for the onslaughts, we call the White Walkers, is come in to add us in January.

We feel very confident in that the reformulation increased media spend in the fourth quarter to build some brand awareness, readying Lemonade for launch. And what -- where we are right now is that Truly right now is the only Hard Seltzer branch to grow share sequentially since the beginning of January.

So starting at the beginning the year, we're the only one to grow. Now granted, if you look at our 22 to 22.1, it's only 10th of a share point, but we'll take it. And the growth rates have sustained. So they've been over 200% in the last 13 weeks, with the last 13 [rest over the last one, 2.10, 2.13, 2.18], so it's growing.

I think we also look at -- we look at sales per point and really important, it's accelerating. So over the last 4 months in sequence, plus 65, plus 71, plus 89, plus 99. And now Truly Lemonade's coming in at about 5.2 share, which is significant.

So now from a consumer perspective, what we've learned, and it's been really interesting to have other players come in because then you can see -- you see where the share is going from which brand to which brand.

And when we dig into the panel data, in and generally, it's Nielsen, we're starting to work with a little bit of numerator as well, which is kind of interesting. But if you look at Nielsen, you see us compare Truly to White Claw. By the way, White Claw is a phenomenal brand. I have nothing but respect for what -- how they built that brand.

But just use that as comparison. We -- Truly has higher income households, younger buyers, more diverse ethnically buying households, more sourcing from wine and spirits, 51 to 39, higher basket ring, higher repeat rate, actually now 36 to 34.

We're seeing that the bundle seltzer entries tend to skew a little bit older and lower income similar, but a little bit more diverse. But similar to White Claw in many respects. And so we carved out what we believe is a different consumer.

What's most interesting to me, if you look at the last month, post COVID -- the weeks post COVID, which is sort of the data they have is like first week of March, the first week in April, Truly penetration doubled in that time between the -- between that February, March time frame. And repeat grew by 25%.

So we're seeing -- and you guys have all seen it, the growth rates are continuing in this category. And people bringing it home. We're getting an opportunity to get trialed among a lot of new consumers, 41% of the consumers that tried Truly in the last month were new to the brand. So we feel pretty good.

And then last thing I'll say is that it's getting along. And the household penetration has continued to grow significantly for the category. So 7.5% over the latest 52 weeks. White Claw is a 3.7, Truly was a 2.7. But over the last 4 weeks, I think it's around 7.7. So it's on this way.

We think Hard Seltzer could be on its way to 8%, 9%, 10% of beer during that time. So that's those in the headlines, and I'll leave it at that..

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

So maybe first, real quick, back to on premise, a technical question, I think, for Frank. Frank, in the queue, if I read it right, it talks about reimbursements to distributors on the order of about $8.2 million.

I guess the question is, is that inclusive of the $5.8 million that you've called out as COVID related? Or is the COVID number additive to the $8.2 million?.

No, like -- I'm not sure of the $8.2 million. The keg return cost -- or the reduction in revenue is $5.8 million. That's the number.

We have some other costs related to the COVID impact, which is like mainly the breweries and that's the balance to the $10 million, there's about $600,000 in operating expenses, but outside of the $5.8 million, there's like $3.6 million also in the gross margin line, if you will, but those are direct expenses. There is no additional cost to that..

Right. Okay. So -- okay. I can follow-up offline. I guess then stepping back maybe to build on what you just said, Dave, around the Seltzer category.

As you -- I guess I'm thinking through is, do you think the disruption of the category is facing now -- that the whole industry is face now, we'll have lasting impacts, good, better and different on how the category develops, the Seltzer category that is? As you said, you're getting new trial right now as folks stay home and try and pantry load, I guess, as you go forward, though, the good news is you've got this new trial period.

On the other hand, just social gathering in general will probably be limited for some time. I think of Seltzer as a social occasion type of beverage, maybe that's wrong.

But just how do you think about the go-forward impact on this category specifically and how it was developing and how this may change how it develops over the next -- over the remainder of the year into next year?.

Okay, As Frank said, it's another hard one to predict. I would say, I mean, obviously, the one benefit the category houses that really -- that it doesn't -- it exists in on premise, but it's not very significant. So while on-premise is shut down and as Jim talked about coming back, Kevin, alluded to -- on very slowly.

It has much less of an impact on this category. You have people who have stocked up a lot. Actually, we're seeing the numbers, the stock up really, there's replenishment buying that's almost at the same rate of growth as a stock up. So it's come down a little bit.

But we're still looking at significant growth, as you know, across the entire beer business, but certainly within Seltzers as well. So I think anytime you have a new product, a new category, a new brand that's getting a lot of trial that has a lot of appeal to it, it's going to benefit.

And I think we're getting -- basically, I think we're getting a lot of incremental trial, we mean the whole category is getting a lot of incremental trial that it would not have gotten in another situation.

So to me, if I were to bet, I would bet that this subsegment of the beer category will evolve to have further and faster than it would have had this this terrible situation not occurred. And in terms of the social piece, I think we look at it -- I mean almost beer is social occasions anyway, so it's probably canceled out.

And I think if I look at one winner, I mean I guess the winner hasn't changed in the category for the last couple of years. I think this is still the same, the winning part of the category..

Our next question comes from the line of Nik Modi with RBC Capital Markets. Please proceed with your question..

Dave, I'm just curious like when you think about the capacity situation and obviously, you guys are investing to expand lines, but just given what's going on across the competitive set, I'm just curious, like, do you see any opportunities out there to either have unique partnerships to produce more Truly at a lower cost than what you're potentially doing with co-packers or even acquiring capacity outright? That's the first question.

And then the second question is really coming down to what you just talked about.

This amazing kind of acceleration in trial that you've seen in the category that probably you would've never seen prior to COVID-19, and how you can -- through marketing, whether it be digital or on television or what have you, like, how can you create stickiness with those consumers that have been trying the category and the brand over the last several weeks?.

Great. Thanks, Nik. I'll defer the first question to Jim, and then maybe I'll come back and answer the second question..

I was ready to answer the second one, Dave.

Nik, could -- repeat the first question?.

I'm sorry. The first question, Jim, is really about capacity.

And while you guys are investing CapEx to expand lines, like do you see opportunities out there to buy capacity?.

We are always looking at opportunities. We are -- we would prefer to own our own capacity. If the economics are equal, but we have been fairly agnostic if the economics are superior. So within that framework, we do anticipate there will be opportunities. They haven't yet surfaced, but I think there are craft brewers who borrowed money and expanded.

And as you probably know, for craft brewers, we -- that part of Boston Beer's business and crafting, in general, skewed way more heavily on-premise, sort of order of magnitude, 30% versus maybe 18% for the industry. So there will be craft brewers who overextended and now don't have demand and will be under some pressure.

And as those opportunities arise, we will look at it. But what's happened to our business is we have this very, very strong growth, but it's all in cans. And 12% of our business was in kegs. We've more than offset that with cans. But that means we don't need more keg capacity, and we don't really need the brewing capacity.

So capacity that would be useful to us would have to be canning capacity.

And that's generally not what craft breweries have so we will look at those things if there are opportunities where the total economics of purchasing and maybe building out, putting in a can line are better than doing it within one of our breweries or one of our -- or at city, our primary contract luring partner, we would do that.

So it may happen, probably not, but it's not out of the question..

Okay.

And so as Nick, I'll jump into the second question, I think, which was about how do you build the brand to last? I think when we look at the category, we said it from the beginning, we really believe this category is going to be about a few mega brands it's going to play more like soft drinks and look more like the branding from soft drinks and it does look like craft beer, per se.

And we'll see if it plays out that way, it's still early to tell. But I think for us, we're looking at is -- really like, I think of 4 things, the sort of the fundamentals, creating brand awareness, right? And we don't have the words that we need to have, but you get that through all sorts of media. Differentiation is critical, too.

We reformulate it because we believe it's important to have the best-tasting product. That's just the beginning. We have to differentiate the brand on other measures through our brand communications front and we do have a campaign that we're very excited about that was due to launch in April.

And actually, we front-loaded, we know as much -- we spent -- we planned to spend at the beginning of this year because we knew the competition was coming, we were going to wait until the summer. We have a new campaign ready to go in April. Now obviously, it's not the right time to be launching a campaign.

We need to make sure that the consumer sentiment is open to bringing something new that we have. But that's certainly another way that we plan to build the brand.

I think innovation, we're seeing with Lemonade, we think we're on to something here where there's a way to -- we're basically trying to redefine what Hard Seltzer can be versus just the next water mill kiwi flavor, is there some -- are other more substantial platforms we can build around? And I think innovation will be another way.

We don't want to over innovate, we don't want to under innovate either, but it will be a way to differentiate and set our brand apart. And the last thing comes down to execution. And through our wholesaler network. Jim referenced, we have great relationships there. So do the other guys, too, and do a tremendous job executing.

There's still upside, if you look at our distribution across channels, particularly in convenience stores, in total, in grocery, there's still opportunities for us to drive that. So it's a combination of all those things coming together.

But I think importantly, we need to come forward and hopefully, people will agree when they never do come forward with a new campaign that we're presenting a brand with a distinct point of view that's relevant to 21 to 35 year olds..

[Operator Instructions] Our next question comes from the line of Laurent Grandet with Guggenheim Partners. Please proceed with your question..

Actually, my first question would be a follow-up from your previous response, Dave. I mean there are some competitors that come with strong beer brands and develop a kind of a Seltzer and sub-brand.

Do you think it's an advantage and why, to have a stand-alone brand versus -- competing against those beer brands that are flourishing right now? So could you explain in terms of marketing, why you think that's an advantage for you?.

Yes. I do think having a pure-play brand in the category, with any category is more powerful because I think it's just a mix of more singular idea of what a brand is about. And I think consumers -- the consumers don't want to buy Swiss army knife.

They want the best knife, the best fork, the best spoon they can get, and they're going to -- and I think they're very discerning and very smart. They're going to go to choose brands that they believe deliver on the category benefits and positives of the category. And they don't want to be confused. That's just my point of view.

I've been at Pepsico, and I know you were too. I've been responsible for doing the opposite of that. And I think I've learned from my mistakes that it's generally not good to do that. Now I must say that these other line extensions won't work because these are obviously very powerful brands.

But if I were to choose, I would prefer to have a brand that is not a wide expansion..

Okay. The next question, I mean, it's probably a clarification with Frank or you, Dave. But it seems like your numbers in deflation are plus 36%, and your shipment is plus 32%. So in my view, based on percentage of growth seems like deflation growth has been higher than shipments growth.

So which was, in my view, not really, I mean, your goal at the beginning of the year? Or I misunderstood you at the time.

But what's -- where I'm getting to is, what is the -- I mean the number of weeks of inventories? You mentioned 6 weeks, is that retailers plus wholesaler level? Is it -- and how did that compare to last year? And is there a risk here based on tremendous growth from Truly that we may risk coming out of -- some out of stock if sales continue to be as such?.

Okay. Laurent, it's Frank. I am going to take this question on shipments versus depletion. If you recall, in February, we said that because we have capacity constraint, we will prebuild inventory for Truly and Twisted Tea. So in our can business so we maximize the capacity that we have. And that is very similar to what we did last year.

And typically, we keep on building inventory at wholesalers to kind of the middle to like 2/3 through the second quarter. And that's where our shipments typically outpace depletions. Now what happens with COVID is that we've started building the inventory at the beginning of Q1 all the way into March.

Then COVID happens and there was significant pantry loading, as you've seen with many products, with many staples. So the wholesalers are able to deplete into the retailers because we have built the premium inventory with them. So luckily, they had enough inventory.

But it has changed a little bit the dynamics because in the second half of the first quarter, we depleted more than we had expected. So as a result, the pre bills that we had planned for, this moves the levels that we had thought. Now there might be a little bit of phasing in there, that is going to in Q2. We don't know.

That's why we do the guidance, we don't know them exactly. If it continues, while there will be less prebuild than we had anticipated, and we'll find it out. At this point, we believe we have enough capacity, maybe not everything internally. But if we look at internal next to meet it in that, but it all comes down, what the final demand will be.

I mean, you plan for a number and then you have a certain buffer. But they will figure out. But that's really the dynamic that happened in the first quarter. We were trying to build more inventory as the wholesaler to be prepared for the summer.

But the COVID crisis increased the depletions beyond our planning and that's why we didn't achieve the goal of the inventory build. To your question on the level, now, in terms of weeks of supply, as we've mentioned, we are at about 6 weeks.

That's about the level of where we were at last year, maybe it's a little -- maybe a few days more, but less than half a week. It is below the level that we had targeted a little bit. In absolute terms, of course, the inventory is significantly higher because the business has grown tremendously. As you know, we're looking at doubling the business.

You can imagine that as we built the prebuild, the absolute levels are significantly higher than last year, but about at the same level in terms of weeks of supply when compared to last year..

Yes. Let me add one other dynamic in thinking about how much inventory we -- prebuilding and how are we going to get through the summer. We have 2 new full can lines. One became operational like 2 weeks ago. It's come up really well. That's in Pennsylvania.

So we've added a full can line there and a -- also a full can line in Memphis, which will be coming up next month. So going into this summer, we're going to have 2 new fully sized and operational can lines to service the summer peak and the continued growth that we're anticipating in the back end of the year.

So that's a significant expansion of our can capacity..

How much in percentage, that would represent? Those 2 new lines, Jim?.

Yes. You could sort of think about in the first quarter, we had kind of 3 can lines. I mean this is a rough equivalency because two of them in our facility, and then we have contracts with city brewing that are more complicated. But you can roughly think of it as 3 can lines in the first quarter. And in the second quarter, we're going to have 5.

So there's your percentage of 67%..

Yes. Okay, Jim, guys, appreciate the good work. Excellent quarter, I should say. And I'll pass it on..

Thank you..

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

Everybody, Jim, a lot of back and forth on capacity. If I could try to simplify, I believe the goal towards the end of last year was to double your capacity.

Are we -- are you still going to get there? Is there a delay in getting there? Is the number now the 67%, you just provided? Can you just help us try to simplify where you intend to get to?.

It was to double our capacity of -- for sleek cans, which is what Truly is in. And we've done that. I mean we're about to when the next one comes up in Memphis in May. So yes, double sleek cans. And we've actually, we believe, a little more than doubled it because we've gotten more efficiency out of existing lines.

So that gives us the ability to more than double our production of Truly..

Okay. Okay. Great. That's a good segue. Are you seeing any bottlenecks in the raw material and supply side? It looks like your capacity is getting there, but the slim cans are tight. It sounds like CO2 is now getting tight.

Any other bottlenecks we need to be thinking about?.

We did a preliminary look at exactly that question. Was there any unexpected stuff out there, like CO2, I mean who would have thought that less mileage being driven would affect the supply chain for breweries, but a fair bit of the CO2 comes from the ethanol plants in the upper Midwest.

With our production system, we are fairly close to self-sufficient in CO2. And we've always not wanted to vent carbon dioxide into the atmosphere. So we've spent a fair bit of money on capture systems to capture the CO2 in our breweries, scrub it and then reintroduce it into the beer. So we're very confident about our CO2 supply.

We don't need that much. And if we really had to, we can be more frugal with how we use it and probably be close to fully self-sufficient. We have looked at other items, malt and hops are not an issue. We keep several years' worth of hops and flavors we're fine with. So in general, we don't see issues in sort of our first tier suppliers.

And we don't have a really complicated supply chain like the car company where you got to go 2 or 3 tiers.

The thing that we have worked very hard on is making sure we have adequate supply of cans even to cover our upside forecast, particularly sleek cans, and we've been assured from our can suppliers that they are ready, willing and able to supply the projections that we've given them. So we feel pretty good about that..

Okay. Great. And just my final question, if we could shift to beer.

One of the things that's become becoming more and more evident in the data as we're seeing pantry load is the national craft brands such as yourself, but also Sierra Nevada and others, have really shifted the arc of their over share losses for a long period of time and volume declines for a long period of time.

And it's the -- really the question is, is that something that you see as perhaps more permanent in a shift that probably for 7 years has been going in one direction? Or do you just believe it's just as simple as the fact that at the moment, the larger brands have the supply?.

I wouldn't want to predict a overnight change in a 7-year trend. I do think it might bend the arc a bit, but we're very focused on trying to get Sam Adams back to growth, and we're not going to assume that some twist of fate is going to change that. We feel like we need to do it ourselves.

We're certainly happy that in these difficult times, consumers pick up the Sam Adams because they know it's a reliably rewarding beer drinking experience. So possibly, we'll be able to build on it, but I wouldn't want to count on everything changing just because of something that will eventually pass..

Kaumil, I'll jump on top of Jim's comment. Just really quick because I do think -- I agree with what Jim has said. I think, again, we're just digging to the numerator data. And in the last month, about 42% of the buyers that came to Boston Lager were new. So that's good.

So again, like -- but as like all the categories, there's an opportunity to drive trial or retrial among brands. But to Jim's point, that's not enough to bend that -- to bend the arc necessarily.

So we have been -- in fact, all our support from the time this crisis began, until now, it's really been behind Sam Adams and the restaurant's strong program that Jim referenced in his opening remarks, because we feel like that's something -- we're doing something for restaurant workers. It's the appropriate thing for us to do.

It ties to our history, who we are as a company and our values. And so we have been spending media dollars to support that. It's been well received. And that's an example of like, "hey, here's an opportunity to do that, do something good". And also our recognition that we have to keep doing stuff to get to turn the brand.

So that's something that's happening that's out there. Also, you can imagine when, however, on-premise opens.

We have the largest and we believe the best on-premise sales team in the industry, and we will be ready to go back in and support those same people that we're supporting to the restaurant's strong program that we're going to use every resource at our disposal to help them and to drive the business once on-premise comes back as well.

And there are other things as well. So again, I think it's a corporate fate where all these brands are in a better place.

I think the challenge is now what do you do about it 2 months from now, 3 months from now, 6 months from now?.

Our next question comes from the line of Sean King with UBS. Please proceed with your question..

I know you don't disclose the total portfolio exposure to on premise, but maybe you could share how much of your marketing and promotional spend is directed to the on premise? Or maybe if you're unable to unpack that, maybe you could share how much of the spend mix is directed towards your over-indexing on-premise brand like Sam Adams and Angry Orchard?.

Sean, this is Frank. We don't disclose any of those numbers. We manage the entire portfolio. We take our priorities throughout the year of, like, how we support the brand, and we support [each of] the brand evenly.

Yes, there are certain programs that we do on-premise, but in the on-premise brands, as you can imagine, Sam Adams, Angry Orchard, that's what we have more on-premise that runs in the other brands. So if you look at on-premise spend, there we see more on-premise spend than others, but we don't disclose the details.

The other thing that I want to say because the question came up earlier, unlike what percentage is on-premise? As you can imagine, that is changing and has changed over the years. And it's, of course, changing dramatically at the moment. And right now, we're talking about zero.

But the question is, like, when is it going to come back? So sorry, we don't disclose any more information related to that..

And Sean, maybe I can add one thing as it relates to that, I do think that like I imagine too much everyone is doing this, but they're looking to the future. As we enter the space, we said it's like 2 big -- maybe 3 goals. But the first 2 goals, one, manage the crisis, right? Manage the crisis is consistent with our values.

And make sure we're making the right decisions to keep our people safe, to keep our people employed and keep the breweries operating. I know we talked a lot about it but, obviously, the brewery pieces is the linchpin. But we've also, at the same time, talked about how we plan ahead for the future so -- a better future. So we come out stronger.

Our people are more engaged and better off, and our business is better off.

And I think one of the things related to that is we're looking at all of our spend across channels, across brands, for the balance of the year, and we're trying to line that up with what are the opportunities? Where is the consumer's head at? Where can we make an impact? And like, as we've always done, we will -- if we see the opportunities, and we think we get a good investment at the right time, whenever that is, is it May, is it June, is it July, we don't know yet.

But if we see the opportunities, we're going to invest, and we're going to invest as much as we plan to invest coming into this year.

If however, we don't think it makes sense because we're not going to get a return or there are different things going on, like investing maybe behind on-premise, obviously, when it's not coming back, then we won't do that. So we will have a lot of flexibility, too, in terms of what we spend and what we don't spend.

But I think our philosophy is going to be consistent, which is if we think we can build brands for the long-term and create growth, we'll do it. But we -- but because the world has changed so dramatically, we're putting a whole new lens on everything. And that's what the teams are thinking or looking at right now..

Our next question comes from the line of Eric Serotta with Evercore. Please proceed with your question..

I hope everyone is well. A quick question. Going into the year, you talked about a pretty big plan to expand the sales force.

Just wondering if that's all on track and on schedule, how much of that has been done already? I guess how much of that is carryover from last year with the Dogfish edition?.

Eric, this is Dave. Yes, we're doing -- and we're going forward. We've filled a number of roles. I'd say if I say -- we talked about, I don't know, like 125 plus roles, let's say, a minority of those roles we feel are ready. We're looking to fill them all. Now we're not going to have people come in right away until we know what's going on here.

But it hasn't -- the current situation has not deterred us from doing this. We see there's a big opportunity. Fortunately, we have a great balance sheet. As Frank talked about, we're in a good position. To continue with these plans.

So we're not -- we had to put a halt to it, we could, certainly, because there's more work to be done, but we're going to see ahead on this..

Great to hear. And then we've heard a number of reports about retailers and distributors, prioritizing high-volume SKUS.

Just wondering what you've seen in terms of impact on your business and how you expect that to evolve over the coming months, whether you think some of those SKUs are going to come back into the system or whether this will kind of be the long-awaited shakeout or an acceleration of the shakeout that we've been seeing?.

So I guess I'll start off and let Jim finish this. I'm sure Jim has a point of view about this. But I think in the media and the short term, there's no question that our wholesalers starts obviously with retailers, then it goes to the wholesalers pretty quickly then to us. They're looking really for the power SKUS, the core brands.

And actually, as you probably noticed, the large pack sizes, too. So whether it be 30 pack cans, 24 pack cans, 12 pack cans, well-established brands, that's what's getting the space now because nobody wants to run out of stock, and so they cut this the long tail. It has -- it's been as 1 of the larger crops.

Peer companies has definitely -- has benefited us as someone also references benefit of Sierra [in Belgium] as well. And so we're basically -- we're going with the flow here and what our customers want, we're going to deliver.

And so we're seeing -- as you look at IRI, we're seeing a turnaround on all those brands including Angry Orchard, by the way, as well as to being Orchard Crisp, which is considered a core brand. Remember, Angry Orchard, the category client is still 55, 56 shares. So in the short term, that's where it's going. I don't know if Jim has point of view.

Jim, is this -- [his clear buoyance]. He might have a perspective for the long-term where it goes.

I don't know if you can give a thought about that?.

It's very consistent with what you said. What's happened is retailers kind of like the fact that they could get more volume with fewer SKUS. And wholesalers were very happy about it as well. So the channels, I think, will kind of want us to keep this going if they can.

What would yank everybody back to the status quo ante of more SKUS, lower volume per SKU, more difficult product mix to manage to keep in stock. It's going to take the consumer requesting it. I don't think it will automatically snap back.

To the way it was because both retailers and wholesalers have benefited economically from this new state of affairs. So it really will depend on the consumer. Will the consumer require that same kaleidoscopic assortment of brands that you'd see on a 12- foot run of craft beers? We just don't know..

[Operator Instructions] Our next question is a follow-up question from the line of Kevin Grundy with Jefferies. Please proceed with your question..

I appreciate you guys taking the follow-up. This one is probably for Frank. It's a little bit in the weeds. But Frank, if my back of the napkin math is correct here.

So the depletions for the 13 weeks ended for the quarter x Dogfish were 30% and then you also disclosed year-to-date for the 15 weeks was 27%, which implies that depletions were kind of in the 7%, 8% range in early April.

Is that right? And if so, maybe you can unpack that a little bit, understanding the big pantry load dynamic in the month of March?.

So, of course, we don't give you the direct number. But the -- it's just less pantry and there's a bit of an impact of pantry load that is coming back. But what we're seeing in the depletions and what you don't see in IRI is the on premise business, which literally came to a screeching halt, like, from one day to the next.

We're not selling any kegs anymore or anything else that typically went to the bars, including bottles. And I would say that, that is the bigger impact of the slowdown from what you see when you look at the quarter end number of 36% and then the year-to-date number of 32%.

The -- we're still trying to figure out what the pantry load impact is, but it's really hard to tell. So far, we haven't seen a dramatic impact. But clearly, we're expecting something there, but we don't know exactly what it is..

There's also a little bit of affect from Easter being a week later this year. And Easter is a pretty big holiday for the craft beer industry..

There are no further questions in the queue. I'd like to hand the call back to Mr. Koch for closing remarks..

Great. Well, thanks, everybody, for being on the call with us and your forbearance of our being in all different places. And we look forward to talking to you again after the second quarter. Stay safe, everybody..

Thank you. Stay healthy..

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time. Have a wonderful day..