Thank you. Good afternoon, and welcome. This is Jim Koch, Founder and Chairman, and I'm pleased to kick off the 2021 first 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'll begin my remarks this afternoon with a few introductory comments, including some 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 as well as our outlook for 2021.

Immediately following Frank's comments, we'll open the line up for questions. As the world slowly reopens and the COVID pandemic winds down, our primary focus continues to be on operating our breweries and our business safely and working hard to continue to innovate and meet customer demand.

Before I turn to our key first quarter operational achievements, I want to note that working with the Greg Hill Foundation, our Samuel Adams Restaurant Strong Fund has raised over $7.5 million thus far for foreign restaurant workers who are experiencing hardships in the wake of COVID-19, and it's committed to continue to distribute 100% of its proceeds through grants to bars and restaurant workers across the country.

We are thankful to our outstanding coworkers, distributors and retailers for their continued focus and diligence in operating and helping us grow our business. The company's depletions increased 48% in the first quarter and we achieved double-digit volume growth for the 12th consecutive quarter.

This just would not have been possible without the outstanding coworkers in our breweries and our sales force, and the frontline workers at our distributors and retailers. So thanks go to all of them. Early in 2021, we launched Truly Iced Tea Hard Seltzer. And during the second quarter, we plan to launch Truly Punch Hard Seltzer.

Both combine refreshing hard seltzer and bold flavors, and we believe these new launches continue to demonstrate our innovation leadership within the hard seltzer category.

We are also making steady progress in improving our brand support and messaging for our beer and cider brands to position them for long-term sustainable growth in the face of the difficult on-premise environment. We're optimistic that our on-premise business will significantly improve in 2021 as restrictions are lifted.

We're excited about the response to the introduction in early 2021 of several new Sam Adams beers, including Sam Adams Wicked Hazy, Sam Adams Wicked Easy and Samuel Adams Just the Haze, our first nonalcoholic beer. As well as the positive reaction to our Samuel Adams Your Cousin from Boston advertising campaign.

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

Thanks, Jim. Hello, everybody. Before I review our business results, I'll start with our disclaimer. As we state in our earnings release, some of the information we discuss in the release 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. 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 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. We are happy with our strong start to the year and our record first quarter shipment and depletion volumes.

First quarter shipments growth was significantly higher than depletions growth as we took active steps to ensure that our distributor inventory levels are adequate to support drinker demand during the peak summer months.

Our depletions growth in the first quarter was a result of increases in our Truly Hard Seltzer and Twisted Tea brands, partly offset by decreases in our Sam Adams Angry Orchard and Dogfish Head brands. The recently launched Truly Iced Tea Hard Seltzer has accelerated Truly brand growth, which has more than doubled since last year.

In the first quarter in measured off-premise channels, the Truly brand outgrew the hard seltzer category by nearly 2x or 50 percentage points, resulting in a share increase of 6.5 percentage points.

The Truly brand has now reached a market share of over 28%, accounting for approximately 40% of all growth cases in the hard seltzer category year-to-date, which is 2x greater than the next largest growth brand.

Truly Iced Tea Hard Seltzer has achieved a 4.3 percentage point market share in measured off-premise channels, well ahead of all other new entrants in the entire beer category. We expect the launch of Truly Punch Hard Seltzer during the second quarter to continue this positive momentum.

We will invest heavily in the launch of Truly Punch Hard Seltzer and the Truly brand, evolve our brand communications and further improve our position in the hard seltzer category as more competitors enter. Truly Tea continues to generate double-digit volume growth rates that are significantly above full year 2020 trends.

In the first quarter in measured off-premise channels, case growth in Twisted Tea brand products was almost 3x higher than its closest competitor, and we believe Twisted Tea is on its way to become the number one flavored malt beverage by year's end.

We see significant distribution and volume growth opportunities for our Truly and Twisted Tea brands and are looking to continue to expand distribution of our Dogfish Head brand. Pursuing these opportunities in 2021 remains a top priority.

Our Sam Adams, Angry Orchard and Dogfish Head brands were hit the most by COVID-19 and related on-premise closures. We continue to work hard on returning these brands to growth and are optimistic that they will return to growth in 2021.

Overall, given the trends for the first 3 months and our current view of the remainder of the year, we've adjusted our expectations for higher 2021 full year volume and earnings growth, which is primarily driven by the strong performance of our Truly and Twisted Tea brands.

During the quarter, we've taken various steps to ensure we have capacity to support this accelerated growth.

We continue to work hard on our comprehensive program to transform our supply chain with the goal of making our integrated supply chain more efficient, reduce costs, increase our flexibility to better react to mix changes and allow us to scale up more efficiently. We expect to complete this transformation over the next 2 to 3 years.

We'll continue to invest in capacity to take advantage of the fast-growing hard seltzer category and deliver against the increased demand through a combination of internal capacity increases and higher usage of third-party breweries, although meeting these higher volumes to increase usage of third-party breweries has a negative impact on our gross margins.

While we anticipate delivering gross margin improvements in 2021, our gross margins and gross margin expectations will continue to be impacted negatively until our volume growth stabilizes.

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 protect short-term earnings as we invest to sustain long-term profitable growth in line with the opportunities that we see.

Based on information in hand, year-to-date depletions reported to the company through the 15 weeks ended April 10, 2021, are estimated to have increased approximately 49% from the comparable weeks in 2020. Right now, Frank is going to provide the financial details..

Thank you, Jim and Dave. Good afternoon, everyone. For the first quarter, we reported net income of $65.6 million or $5.26 per diluted share, an increase of $3.77 per diluted share from the first quarter of last year. This increase was primarily due to increased net revenue, partially offset by higher operating expenses.

In the first quarter of 2020, we recorded pretax COVID-19-related reductions in net revenue and increases in costs that totaled $10 million or $0.60 per diluted share. In 2021 and going forward, we have chosen not to report COVID-19-related direct costs separately as they are viewed to be a normal part of operations.

For the first quarter of 2021, shipment volumes were approximately 2.3 million barrels, a 60.1% increase from the first quarter of 2020. Shipment volumes for the quarter were significantly higher than depletions volume and resulted in significantly higher distributor inventory as of March 27, 2021, when compared to March 28, 2020.

We believe distributor inventory as of March 27, 2021, averaged approximately 7 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 our Truly and Twisted Tea brands over the summer.

We expect wholesaler inventory levels in terms of weeks on hand to be between 3 and 7 weeks for the remainder of the year. Our first quarter 2021 gross margin of 45.8% increased from the 44.8% margin realized in the first quarter of last year.

The increase was primarily a result of price increases, the absence of the COVID-19-related direct costs incurred in the first quarter of 2020 and cost-saving initiatives at company-owned breweries, partially offset by higher processing costs due to increased production at third-party breweries.

First quarter advertising, promotional and selling expenses increased by $43 million from the first quarter of 2020, primarily due to increased brand investments of $21 million, mainly driven by higher media and production costs, higher salaries and benefits costs and increased freight to distributors of $21.9 million due to higher volumes and rates.

General and administrative expenses increased by $4.9 million from the first quarter of 2020, primarily due to increases in salaries and benefits costs.

During the first quarter, we recorded an income tax expense of $11 million, which consists of income tax expenses of $19.6 million, partially offset by an $8.6 million tax benefit related to stock option exercises in accordance with ASU 2016-09.

The effective tax rate for the first quarter, excluding the impact of ASU 2016-09, increased to 25.6% from the 23.6% for the first quarter of 2020.

Based on information of which we are currently aware, we are targeting 2021 earnings per diluted share of between $22 and $26, an increase from the previously communicated range of between $20 and $24, excluding the impact of ASU 2016-09. But actual results could vary significantly from that target.

We are currently planning increases in shipments and depletions of between 40% and 50%, an increase in the previously communicated range of between 35% and 45%. We are targeting national price increases per barrel of between 1% and 3%, an increase from the previously communicated range of between 1% and 2%.

Full year 2021 gross margins are currently expected to be between 45% and 47%. We plan increased investments in advertising, promotional and selling expenses of between $130 million and $150 million for the full year 2021, an increase from the previously communicated range of between $120 million and $140 million.

These amounts do not include any increases in freight costs for the shipment of products to our distributors. We estimate our full year 2021 effective tax rate to be approximately 26.5%, excluding the impact of ASU 2016-09.

We're not able to provide forward guidance on the impact of ASU 2016-09 will have on our 2021 financial statements and full year effective tax rate as this will mainly depend upon unpredictable future events, including the timing and value realized upon the exercise of stock options versus the fair value when those options were granted.

We're continuing to evaluate 2021 capital expenditures and currently estimate investments of between $250 million and $350 million, a decrease in our previously communicated range of between $300 million and $400 million. The capital will be mostly spent on continued investments in capacity and supply chain efficiency improvement.

We expect that our March 27, 2021, cash balance of $144.7 million, together with the future operating cash flows and the $150 million remaining on our line of credit, will be sufficient to fund future cash requirements. We will now open up the call for questions.

Before we go there, similar to the last couple of calls, Chase will be the emcee on our side and coordinate the answers as needed since we're in different locations..

[Operator Instructions] Your first question comes from the line of Vivien Azer with Cowen and Company..

This is Harrison Vivas on for Vivien.

So with 13-week depletions having come in only 3 points ahead of the top end of your previous guidance and with the growth in the hard seltzer category having decelerated notably since March, can you all offer an updated view on full year growth for the hard seltzer category just considering how tough the comps will continue to be?.

Sure thing. Harrison, this is Dave. I'll answer that. So I think over last year, we talked about a range of about 70% to 100% for the category. We've done some work since then. We've more data and just brought up some of that.

And when we kind of factor that through the model that we have built before, we're looking mostly at the household penetration growth driving growth to the category, we believe there's a base growth and really there in the category, the incremental innovation that's coming. Remember, there's a lot of loose demand in 2020.

And importantly, a lot of shelf space schemes that are happening. The fact -- at Truly, we think about 35% more shelf space now for Truly in the last month or so. And if you manage the category, we don't have the exact rate, but it will be growing. So when you look at that, you basically look back to our model.

We came up -- we still think the category is going to grow significantly. And we think it's probably 60% to 90% versus, say, 70% to 100%. But it could exceed the 90% depending on how it's going to grow. And we look at -- again, some of the tailwinds that we validate the model with to grow in that range of 60% to 90% even plus.

First of all, the consumer trends are still there, right? So you drive for health and wellness, for [IDCP], premiumization, they're still there, they're still evident. The shelf space thing is a big one, and we expect the category is going to gain probably 30-plus-percent shelf space, which you didn't have and never really happened a year ago.

There's also new channels that we have been having a year ago like on-premise, which is starting to open up. CMG, with the household penetration of CMG is much smaller than it is in grocery. We see continued growth there, convenience to gas, also new packages.

The innovation is coming, right? The innovation, there's a lot of investment from a lot of players, and we think that will create a lot of excitement during the summer. I mentioned that we're lapping out of stocks from last year.

And the last thing I'd say is that hard seltzer's really -- the occasion speaks to simple occasions with people gathered together, whether it be barbecues, the beach, parties, events. So we think based on what we've seen at some of the markets that are opening up kind of soon, we still see a very strong off-premise business.

So we think, again, there's a lot of reasons why we believe that category will actually now start to reaccelerate, and that's part of our calculation..

Your next question comes from the line of Bonnie Herzog with Goldman Sachs..

Congrats on a great quarter. I guess I wanted to ask a follow-up on something that I think you were just discussing, Dave. It's a little hard to hear you, but just thinking about bars and restaurants opening up, I guess there's a bit of a view that this could negatively pressure the hard seltzer category.

So I'd love to hear maybe a little more thought on this and what you see as the real opportunity for seltzers on-premise? I mean do you guys think of this as a headwind or quite possibly a tailwind for the category? And then any visibility so far with things opening? Are you seeing maybe greater interest for hard seltzers now on-premise? And ultimately, what's your strategy for Truly there? I think that would help and frame everything and possibly that's contributing to your increased guidance on depletions..

Sure. Sure, Bonnie. Sorry, I'm going to try to speak right into the speakers so you guys can hear me. I think -- as I think as Jim had mentioned before, last summer was intended to be the summer of hard seltzer in on-premise and has never kind of materialized for good reasons.

We're seeing a lot of growth right now, definitely bar calls out there for the hard seltzer brands. And our on-premise team has been out actively selling and making a lot of progress on driving distribution within that channel. So we feel very optimistic that we're going to have a lot of Truly in the category in general.

We're going through that channel. Also, I'll speak to something I saw as the -- Nik Modi had done something with Numerator this week. When the Numerator guys looked at the state of Florida, which opened its off-premise, I'm not sure it ever closed, but it really opened up pretty aggressively early on.

And the off-premise growth in Florida, as an example, is accelerating.

So I think we see two things here, one where we really believe that people are going to be asking for Truly and other hard seltzer brands in on-premise right now, but we also see people continue to do things out at home and having parties and other social occasions which gives way to the category. So I think obviously, time will tell.

The next call, we'll have more data. But right now, as you know, the country is opening up pretty gradually. But what we see is it looks good for the category..

All right.

And just on the increased guidance for depletions, is that one of the drivers for you in terms of feeling comfortable to raise your outlook for depletions this year?.

I think it's two things. It's the growth of Truly that we just talked about. And I think the early success we've had with tea, and excited to launch Punch pretty much right now gives us a lot of confidence. Also, the Twisted Tea continues to perform very, very well. And to be honest, beyond our expectations.

So when you combine those 2 together, that's what is driving that guidance..

Your next question comes from the line of Kevin Grundy with Jefferies..

Not to belabor the seltzer topic, but I did want to come back to it. So I guess, Dave, for you.

Just in terms of visibility on market share when you guys are building the model, because I guess what's noteworthy is that your outlook for the category has come in, right? And I think where you guys were before, and everyone is sort of sympathetic, there's a wide range of outcomes here. It's sort of a high-class problem for the industry.

But the 70% to 100% growth was high relative to what other folks were saying. So the midpoint previously was 85%. Now it's 70%. So the category outlook comes in. So sort of implicitly, you're feeling increasingly optimistic about your market share within the context of reportedly, what's a really strong start for Cacti. We see that in the data.

Topo Chico is off to a blazing start in Texas. Constellation is just leaning in here and kind of playing catch up.

So I guess the question is, what's the visibility on the market share? And really, I guess, the reason to sort of increase the guidance at this juncture, just given the flood of competition and the amount of investment that's coming into space. So a lot there, but comments really specific on market share visibility..

Sure thing. So we see, so the midpoint, call it 75%, but to your point, it is pretty precise. We think we can outgrow that number. And I think, again, first of all, when you look at other brands that just launched 2, 3 weeks ago, we can't draw conclusions, right? So and particularly a brand that's well-known, it's going to get a lot of trial.

A brand that's a wide extension of a large beer brand is going to get a lot of trials. So it's early -- it's too early to call it. Now honestly, it's early to call it for Truly Tea as well. We like where we ended up in the first quarter. We launched the first week of January, and the forecast here year to date looks good.

But we're very -- we've done a lot of consumer work and testing with Punch, which is coming soon, and it has tested probably better than anything that we've developed thus far. So we feel like Punch will bring a punch, a big one, and enable us to keep pace.

But you're right, there's a lot of activity, let's say, there's a lot of activity in the marketplace, it will all sort itself out over the coming months.

But I think between the trajectory we see for tea, the -- by the way, the velocity, just for perspective, the velocity for Truly Tea is 2x all of the brands we just mentioned, okay? The velocity for Truly Lemonade, which is still in its set year year-to-date, it's number three in this category.

So it's holding up as the number three brand in the category or SKU. It's the number three brand in terms of velocity. It is 2x right now. And you can look at velocity 2, 3, months in, it's 2x the velocity of the other 2 competing hard seltzer lemonade brands with -- in the marketplace. So we look at all of that.

And yes, I mean it's -- we're not taking anything for granted, so don't get -- take this wrong. On that move, we are going to -- we're going to plate the entire year to grow share. So it's one thing to -- again, the category grows 60 to 90. Honestly, whatever it is, we're going to grow faster.

That's what's happening and as the category grows 50 and we grow 70; [indiscernible] grows 90, we grow 110 going forward.

But we believe, with the innovation we have lined up, and by the way, the brand investments, which is significant -- and a lot used to come -- still to come on the brand, we feel like we've been lit and lined up to withstand the competition as good as they are, as good as -- these companies are excellent companies, and they're all taking a shot at it.

And if nothing else, it makes us work harder, it makes us rethink even better at what we do..

Your next question comes from the line of Eric Serotta with Evercore..

Great. And Dave, your voice is a little better, but still a little muffled. Not sure if you could anything further about that. A couple of questions. First, in terms of the pricing environment, saw that you raised the guidance from the 1% to 2% range to the 1% to 3% range.

Is that increase driven on the seltzer side, on the beer side, the Twisted Tea side? Constellation recently called out some increased price competition within seltzers. Is that something you're seeing? And then the next question was really around how you're thinking about the longer-term innovation pipeline.

To play devil's advocate, some of your -- a lot of your recent success has come from seltzerizing other NA or alcoholic categories, be it lemonade or tea. How are you thinking about future innovation? Do you run into a wall of attractive categories or styles to seltzerize? And I'll stop there..

Okay, Eric, this is Frank. Let me take the first question on pricing. So we increased our pricing range slightly as you have seen in the midpoint. The pricing is across the board. It's not like that we take 1 national price increase. It's deliveries, it's by region. But overall, Truly's Hard Seltzers is the biggest product of our portfolio.

Without that, you don't get to do the price increase. We don't see really any negative price pressure because at the end of the day, I think we're competing on quality and on brand.

And we have seen that pricing that we put into the market actually starting last year, what you're seeing is pricing that we put in that's carrying over plus new pricing, and we feel fairly confident about that across the entire portfolio..

David here. I'll take the second -- I'll take the second part of the question about future innovation. Hopefully, you guys are hearing me okay. So I think we have a lot of ideas. I say that as we purchased our next, we have many ideas and so I'm not worried about that. And actually, there's different paths we can take to the category.

I think -- I will say, I think the benefit of being a pure play, I think I said it before, the developing to be a pure-play seltzer brand is kind of just for seltzer enables us to navigate and redefine the category in ways that we think we can be successful in, versus if we come in as a beer brand trying to play in seltzer.

So I think we think there are more avenues there. We have many ideas. And by the way, it's not -- innovation just doesn't have to just be the one pulling -- profile can do good things as well. So we're pretty confident. We also know what consumers want. They want new things. In particular in this category, they're looking for new things.

If you've noticed, we've kind of sped up our innovation cycle. We can innovate ideas quickly. We think it's a core competency of ours. And we think, like with -- we'll probably start running 5 million miles. And that's what we're doing, and we'll continue to do that until everybody blocks off.

But again, we have plenty of ideas and we're not too concerned about that..

Terrific. Well, congratulations..

Thanks..

Your next question comes from the line of Laurent Grandet with Guggenheim..

Congrats on an exceptional quarter. So those would be -- I mean, I've got 2 follow-up questions first. I mean in terms of shelf reset in March, I mean, you said you gained share -- the voice was not coming across very well.

So could you tell us how much shelf space you gain? And did you increase your, I mean, share of terminal percentage share versus competition?.

Sure. I'll answer that. So it's as good as 45% shelf space thus far..

45%.

And from -- and your gain in terms of percentage versus last year?.

Yes. So we gained 45% more shelf space across the board in on-premise versus a year ago..

Okay. Then in terms of -- I'd like to understand, I mean, the Truly Tea and Lemonade, I mean, repeat purchase. So now you've gotten 3, 4 months of Truly Tea.

I mean could you tell us what was the repeat purchase of Truly Tea? And now if you forget that and if the repeat purchase of Truly Lemonade has been impacted by the launch of the other's lemonade?.

Yes. Sure thing. So Truly, again, now, I would argue that it's still early to draw big conclusions on the repeat even now. But the repeat rates are right mid- to high teens for Truly. But for this time period, 3 months or so, the data is actually quite good. And if we look at that compared to -- it's a little south of where Lemonade was last year.

Lemonade had -- is sort of the -- it was kind of the valedictorian of the 2020 class. Lemonade products had the highest trial and the highest repeat rates. Truly Tea is coming a little bit south of that, which we sort of expected it to be, but it's still very strong. So -- but I'd also say it's still early.

So we'll see, particularly in the face of all the other innovation coming in, we'll see how that holds up. As it relates to Truly Lemonade, it's still doing quite well. As I mentioned before, it's the number three SKU in the category. The velocity is 2x where all the new entrants are.

Even more than 2x of all the new entrants in the category thus far, except for Truly Tea, which is much closer to it. But so then -- it seems to be holding up quite well honestly. And in a way, we're sort of -- we're kind of agnostic as to how the mix plays out. We're going -- consumers will decide what it looks like in the end.

And I'm not sure if consumers are trading now one lemonade for another lemonade on one tea for another tea. I think they're just looking for a great hard seltzer experience, and they're looking for a brand that they constantly like. And so we'll see how it plays out during the year and how good mix of flavors form.

But lemonade is holding up quite well. And in fact, some of these -- again, these are early data, but there seems to be almost very, very little interaction with Mike's Hard Lemonade seltzer and Truly's Lemonade thus far. It seems very -- again early, but you don't see it at all..

Yes. My last question is about capacity.

And what's the driver behind reducing kind of the CapEx for this year?.

Laurent, this is Frank. The driver of the CapEx, and we came up with a fairly wide range. We knew we're looking at different options to build capacity. And what has happened between when we came out and now is that we've fallen a bit away and a more effective way to build the capacity. So the scope has not changed.

We just have found a solution that requires less capital than what we had envisioned at the beginning of the year. So we're becoming more effective in our CapEx spend, but the scope has not changed. It's exactly the same as before..

I pass it on. Congrats again, guys..

Thank you..

Thanks so much..

Your next question comes from the line of Sean King with UBS..

Yes. Just curious about how last quarter, you took down the guide for the increase in A&P spending. But then you took it back up.

What's really changed? Is this simply just a function of the increased sales outlook? Or have you found sort of a more favorable ROI on some of the investments to date?.

Yes. This is Frank. Sean, let me take that. The -- clearly, the way that we started the year, we're pretty happy with the first quarter in terms of shipments and depletions and our outlook. We're also very happy with the programs that's coming in terms of innovation and the media and the entire programming amongst our brands.

And when we look at that, and as I said before, we define our spending not necessarily based on a metric as a percent of net revenue. We can even look at it, but that's not the target. What defines our spending is the opportunities that we see, how we feel about our programs and how we want to support our business.

And based on how the business has started out, the innovation that's going to come and how we feel about our programs, we felt it's the right thing to increase our AP&S spend going forward and for the full year..

Your next question comes from the line of Wendy Nicholson with Citi..

A couple of questions, if I can. First, when I go into the grocery store, it seems like the hard seltzer space on shelf has expanded a lot. And you've clearly benefited from that. But a lot of the newer brands, and particularly a lot of the ABI brands, are more on end cap displays or they're showing up at other places in the store.

And I just wondered cost to compete in terms of promotional dollars.

It's great that you're getting more distribution, but can you talk about kind of your outlook or your expectation, particularly as we go into the summer months, pre July 4? Is the cost to maintain that shelf space or to get that end cap significantly higher than it was a year ago?.

I'll take that one, Wendy. The cost hasn't really gone up. I mean, this is alcoholic beverages, right? So you cannot pay for shelf space, you cannot pay for end caps. Those are actually sort of earned by your relationship with the retailer and maybe even more so by your distributor's relationship with the retailer.

And I think what you're seeing, and I've seen the same thing, is there's so many new entries. In many cases, the retailers are not cutting them into the shelves right away. So they have to put them on the floor.

And I think the Anheuser-Busch guys are very, very good as our wholesalers are at talking a store into an end cap or an out-of-department display, and that's what you've seen. But that does not involve promotional dollars typically..

Got it. Fair enough. But on that same front, and this is kind of leading to my second question, which is the margin expansion that you've seen over the last couple of years has been tremendous, given sort of lots of favorable operating leverage and all of that. But -- and maybe this is for you, Jim.

As you look out over the next couple of years, is there any reason the operating margin can't continue to expand from the, let's call it, 16% level, I mean, back to the peak of '17 or even above that as we go out? You've gotten past a lot of the capacity issues. You're running a lot more efficiently than you were.

Is margin expansion going to be a steady climb upwards from here? Or is there any reason that wouldn't occur?.

I would expect it to occur. Steady. We don't know. We don't have a goal of margin expansion. The margin expansion is going to be a result of running more efficiently. And as volume increases, hopefully, the advertising and selling expenses scale up as well. We do believe that there are significant pockets of savings within our supply chain.

Frankly, what we have right now has been cobbled together pretty quickly from available capacity and the long-term partnership with Citi. We have focused on just getting more sleek cans produced and put into variety packs rather than the efficiencies on them because we've had out of stocks.

And those cost $10 a case or whatever the lost gross margin happened to be on that SKU. So $0.50 a case higher cost doesn't look very big when you're looking at out of stocks. We believe we have set up our supply chain for not just 2021, but 2022. We have options in place for more capacity for 2023.

So we will be increasingly turning our attention and our capital investments on cost savings investments that would rationalize where we ship it, where we make it. There are significant savings from automating the process of doing variety packs.

For a rough idea, internally, we can do them for about 1/4 of what it costs to get them done externally because of capital investments, operating techniques, et cetera. So things like that we can roll out to the co-packers, right.

I would see significant opportunity in gross margin and operating margin expansion over the next 2 years as we continue this supply chain transformation and are able to shift from expanding capacity to rationalizing and making more efficient the capacity that we've just put in place..

Your next question comes from the line of Filippo Falorni with Morgan Stanley..

Congrats on the strong results. I wanted to talk bit more about the Twisted Tea brand, which probably doesn't get the attention it deserves from the investment community, relatively strong growth. So maybe first, you can talk about the growth drivers of the brand in Q1.

And then longer term, what are your plans for the brand in terms of innovation and also in terms of the opportunity to expand the distribution relative to other FMB brands in the category, particularly given you have much higher velocities at Twisted Tea relative to other brands?.

Great. This is Dave. I think I'll take a shot at that one. I think the way to think about Twisted Tea is that it's the brand that has -- historically, it's had very low penetration, but very high frequency, very high loyalty.

And what's happened over the past year, and I think it benefited from COVID, we grew the penetration base by about 35% in the past year. In fact -- and I think the hard seltzer brands is the only brands that grew penetration more. So we brought a lot of new consumers in.

And by the way, it was also very much focused in the convenience channel, right? So a big percentage of the business is single -- has been single-serve. What's happened over the last year, we brought more consumers in. We've increased our distribution pretty significantly in larger format stores.

We've also taken the brand from a more rural venue to more urban venues as well. And we've actually grown points of distribution pretty significantly in the last year as well as velocity. I think our points of distribution have been up actually year-to-date, 25%, and velocity by 31%.

So bringing it to into the cities, more multicultural consumers participating, increasing distribution of 12 packs in grocery stores, we have 3 -- we have [indiscernible] we have half and half, and we have a party pack, big growth there, and really driving a lot of consumption in that channel.

We've also, from a brand perspective, we've improved our work online. In fact, we've increased our Twitter following by 3x. Our engagement levels in social media are quite high. We've done -- we sponsored the 100 Thieves gaming platform or gaming team. And we're also getting involved in SEC football.

So -- and when we did SEC football, we sort of broadened the shoulders of that brand, and we've been spending more money across 12 months of the year to support it versus just during the key selling season. So a lot of things are going on.

I think probably most importantly is that Jim, Frank and I don't spend any time on that brand and look to experts deal with it. That's probably why it's doing so well. But -- but there's a lot -- but it's a brand that's got a lot of potential. It's starting to play out now. And we're going to keep adding -- we'll keep adding fuel to the fire..

Your next question comes from the line of Stephen Powers with Deutsche Bank..

Maybe just to clarify real quick.

Going back to the 60% to 90% category growth you mentioned, Dave, is that on your part of wholesale growth rate call? Or is it a retail call? And if it's a wholesale number, what portion of it comes from the greater shelf space allocations that you mentioned for the category versus actual increases in consumer offtake, if there's any material impact there?.

Yes. So I think it is really from -- because we have -- the model really looks at from a consumer perspective, more than anything. So again, but we've spoken of category penetration rates and growth in penetration, growth in buy rate, which is a function of frequency and how much people spend for each occasion.

Innovation, which -- based on our best guess is how all of the innovation from all the players will play out in the category as well as we can quantify lost demand from last year. And then shelf space. So I think the shelf space, arguably, is sort of more of a push element, if you will.

But the rest of it's really driven by what we think the consumer demand is going to be for the category..

Yes. Okay. That makes sense. And if I could, if you could talk a little bit about just the incrementality of these innovations that you layered on. Obviously, lemonade was very incremental in the end. Tea is proving to be very incremental as well.

I guess, how are you thinking that, that plays out as you layer on some of the new innovations that you've got lined up, including Punch this summer? And if I could, Frank, if you have any -- just a way to frame for us just how you see freight costs coming in over the balance of the year, just relative to last year or whatever? Just some sense of how to dimension that, that would be great as well..

Yes. Sure thing, So Stephen, I think I'll separate the first part. I think, look, it's really hard to measure incrementality because there are so many factors at play and I think, a lot -- some folks like to give very adamant numbers of what it is, and it's always 90% for some reason. It's not 90%.

But I think what we're trying to do, we do believe that adding just another lightly flavored seltzer is not going to be as incremental as something that's bold and different. So lemonade proved that. We think tea -- tea is looking pretty good. But we don't -- it's too early to even know how much of it is incremental.

We believe it's more than half incremental to our brand, we believe. And we think it is incremental to the category. And we think Punch will be the same way. So I kind of find flavor profiles and approaches that are vastly different from what exists. And for example, the -- as far as I know, there is no national punch hard seltzer. We think it helps.

It helps -- certainly helps optimize the incrementality. So that's sort of how we look at it. And again, we're -- in the end, when all of the dust settles, we'll have a sense of what it is. But it's just -- it's kind of the food fight out there, right? People are trying everything. You can see it.

And you see all these new brands that come in, including when tea came in. There's a lot of trial, and you see brands spike up and then you see them start to come down. The question is where do I sell all that. It's because everybody wants to try everything. So in the end, it's -- we're just trying to create great-tasting products and build the brand.

And I think one of the things we've been able to do, I mean, Truly now is the #5 penetrated brand in the category. It actually has a larger consumer base than Corona Extra. So the bigger you build the base, the more -- I think the more incremental it can become when you bring new things to the base.

So I didn't really give a definitive answer, Stephen, but it's -- we think it's largely incremental. But how much, we don't know..

Yes. Okay.

And Frank, anything on the distribution?.

Yes. On the freight, clearly, this is -- there's a factor that you probably have heard that on other calls in the industry. There's a real shortage of drivers and of trucks. So the ratio between available trucks and loads have significantly worsened. And that's what we see in the rate.

To the point that we've broken it out really in the earnings release separately because the impact is significant. And it really depends, right? We have contracted rates, but then you don't get the truck and you have to go deeper into it. So we see the impact on multiple levels.

One is the input costs are going up because the states it's coming into are our cost and materials and that's ingredients, the packaging materials. So we see it there. We see it when we move products between our locations. And clearly, on the distribution side, we have seen increases between 30% and 50%. And we have to see where that's going to net out.

Q1 seems high, but we will see freight as a major cost increase for the year..

Your next question comes from the line of Nik Modi with RBC Capital Markets..

So I got a few questions. First, Dave, is there any metrics you can provide on how Truly Punch tested relative to lemonade or iced tea? Just curious if you have any specific metrics, just to give us some frame of reference. And then once you answer that, and then I'll go my next question..

Yes, Nik. Nik, without getting into too much specifics, I think from a product testing perspective, as Jim commented, it's not actually a problem, because he's very involved in this. But it scored as high, if not higher, than all of the other flavors that we built for lemonade, and we use that as our baseline.

So -- and Jim, I don't know if you have anything else to add to that one or you think that..

No, I'd just confirm that. It was -- the lighting scores on the formula that we developed, we were very, very happy with. They were as high or higher than both lemonade and tea.

It is -- that doesn't mean the concept itself was higher, but the actual liquid that we developed got outstanding ratings from drinkers across a pretty wide spectrum, and they were -- it was a surprising flavor to them but one that was familiar, and they just rated it as delicious. So I think that feeds some of our optimism..

Got it. And then maybe this is for you, Jim.

Just when you think about strategically over the next few years and obviously, we're seeing the RTD cocktail spirits-based and also wine-based RTD is doing really well, how do you think about those segments of the marketplace? I mean, is that an area you would ever explore in a more meaningful way outside of what you already have with Dogfish Head?.

The answer is probably yes. If it was an opportunity where we thought we could bring something to the consumer that they weren't otherwise getting and where we had a competitive advantage in terms of costs and effectiveness in getting it to the market.

It is, for me, it's in that sort of what I've described as a fourth category that is not beer, wine or liquor and is kind of an intersection of them that brings new elements of convenience and flavor profiles and nutritionals, things that consumers really put a high value on. So we would not foreclose any of it.

And the Dogfish Head canned cocktails is a start. We do think that RTD cocktails will have a role here. It is, however, my belief that brewers and their wholesaler networks are competitive advantage.

When you get to things like canned cocktails, which look -- well, they're in a 12-ounce can, we know how to put things in 12-ounce cans at extremely high efficiency. They're in the cold box. We have wholesalers who work the cold box who are often there every day. They're certainly there at much greater frequency than wine and spirits distributors are.

These are kind of tonnage products that require efficiencies all the way through the manufacturing and the delivery, and they have smaller margins than the products that spirit companies make that are really expensive. Big sales, big commission for the salesmen that doesn't happen to these.

So my belief is that this is a significant growing category, and that brewers and the entire beer industry is competitively advantaged there. There are also laws that -- greater access for beer and wine and hard liquor and there are different tax rates. So we have traditionally for, what, 80 years had these 3 lanes in alcoholic beverages.

And the beer lane, I think, has a pathway to growth that we haven't seen for many years. And I do think there'll be, in -- over the next couple of years, some contests over who's going to get that terrain.

Is it going to go to beer companies? Or are the spirits companies going to be able to change some of the rules and kind of tilt the current playing field in their direction in terms of changing the rules of access or the tax rates? But unless they're able to do that, I think, beer can win. They can change the rules, all bets are off..

Helpful. And then sorry for the 3 questions, but a little for everyone. Frank, maybe you can just kind of close out on March.

What is a normalized volume growth rate which will allow this company to actually see operating leverage or margin leverage? Like what is -- what do you classify that as? Because obviously, you guys have been exceeding your growth rates. You've been using more third-party co-packers.

How should we think about what a normalized number would be for you to get operating leverage?.

Yes. Nik, it's hard for me to give you a number because any time we believe we have enough capacity, we kind of keep on outgrowing. You see if you look back at the quarter, so I think most of it has been in first quarter and it keeps on growing. So we need to get control of this number, they shouldn't grow.

I think we can grow at a relatively high rate and just made it out earlier. We have -- we're getting much closer to a point where we can put a much better and vertically integrated supply chain that have internal breweries and external locations, have them well integrated, that will provide savings and levels of [indiscernible] improvement.

The biggest one mentioned before is really to get the cost of variety packs down and which we have done internally, and thus, the benefits that we're seeing internally. They don't fully show up in the P&L because we are growing that type of volume at a higher rate externally because of the growth rate.

But now that we are getting those processes also with our co-pack as we would have stressed out, was -- we should see benefits. I mean, we'll see benefit from that part as well. So even if we maintain the highest growth rates, we will see those benefits.

And then the third one is our supply chain transformation project, which will enable us to pull that off and to integrate it much better and one is in a much better, much smoother way.

So I'm sorry, I cannot give you a growth rate number, but we are getting our hands through all the growth rates that will allow us to show the margin improvement starting next year..

[Operator Instructions] The next question comes from the line of Kevin Grundy with Jefferies..

Right. I do appreciate it. Jim, you actually began to touch on what I wanted to follow-up with, and that's the topic of industry taxation. So as you're very well aware, there's been a discrepancy at the federal level between beer, malt beverages and wine and spirits for decades.

And where such that malt beverages and beer have advantageous tax treatment relative to other alcohol categories. And I'm wondering, could you comment, Jim, on how you view the magnitude of this threat, particularly in an environment where politicians will be looking for sources of revenues? So tax is likely to move higher, not lower.

I think there's probably very little disagreement on that. How you handicap the risk for the beer industry, and frankly, whether you think the industry is on sturdy ground in terms of continuing the argument that there should be this discrepancy that's existed for a long time. So your thoughts there, Jim, would be appreciated..

Yes. No problem, Kevin. This tax difference between beer versus wine versus hard liquor has been in place since the Civil War, since the very inception of excise taxes on alcohol. So -- and it's certainly served the industry well.

And given everybody has their own lane and spirits, of course, as you know, has been growing at the expense of beer over the last 40 years. So my handicapping on it would be that it will be a very hard argument for the spirits companies to make -- to reduce their taxes to the beer level. And that is the effort that's underway. It's called equivalency.

It's been on the agenda of the spirits companies for certainly the entire 37 years that I've been in the beer business. And it really hasn't gone anywhere, particularly.

It's just a hard argument if you're big, especially foreign-owned company, to say that you want to have your taxes reduced so that you can be even more profitable than you currently are. It's gotten Pretty much 0 traction at the federal level. But there have been some small traction at the state level.

Usually, very quietly stuck into an Omnibus bill, and frankly, the beer industry was not really awakened to it. And so the spirits people had some small successes in getting their state taxes reduced because nobody was really awake. And it's a hard argument to make.

If you're a liquor company, you're going to a state legislator and saying, gee, I have these products out there that aren't profitable enough for me.

So please reduce my taxes on these liquor products that are lower ADB to reduce my current taxes, which, of course, if you're a state legislator and have to have a balanced budget, it means you have to take -- either take -- raise the taxes on your constituents to compensate or -- so that you can make it more profitable for a big foreign-owned liquor company to sell their products in your state.

So I am -- I see that as a very difficult argument to make. And I see the small shoots of -- that they had. I think maybe Nebraska might be the only example, but I don't keep track of all 50 states.

I -- now that the beer industry is awake to this and united, and I do believe that beer industry has exceptional trade associations, the Brewers Association, Beer Institute and the National Beer Wholesalers Association are all led by some of the top 3 -- some of the top 50 trades association leaders in Washington.

So I am very optimistic that now -- that apparently that our arguments will prevail..

[Operator Instructions] Ladies and gentlemen, we have reached the end of the question-and-answer session, and I would like to turn the call back to Mr. Jim Koch for closing remarks..

Thanks, everybody, and we really enjoyed celebrating the quarter with you and we look forward to talking to you in 3 months. Take care..

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation..