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Edited Transcript of SAM earnings conference call or presentation 29-Oct-19 9:00pm GMT

Q3 2019 Boston Beer Company Inc Earnings Call

BOSTON Nov 1, 2019 (Thomson StreetEvents) -- Edited Transcript of Boston Beer Company Inc earnings conference call or presentation Tuesday, October 29, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* C. James Koch

The Boston Beer Company, Inc. - Founder & Chairman

* David A. Burwick

The Boston Beer Company, Inc. - President, CEO & Director

* Frank H. Smalla

The Boston Beer Company, Inc. - CFO & Treasurer

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Conference Call Participants

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* Amit Sharma

BMO Capital Markets Equity Research - Analyst

* Kaumil S. Gajrawala

Crédit Suisse AG, Research Division - MD & Research Analyst

* Kevin Michael Grundy

Jefferies LLC, Research Division - Senior VP & Equity Analyst

* Laurent Daniel Grandet

Guggenheim Securities, LLC, Research Division - Senior Analyst and MD of the Consumer & Retail Team

* Stephen Robert R. Powers

Deutsche Bank AG, Research Division - Research Analyst

* Vivien Nicole Azer

Cowen and Company, LLC, Research Division - MD & Senior Research Analyst

* Wendy Caroline Nicholson

Citigroup Inc, Research Division - MD and Head of Global Consumer Staples Research

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Presentation

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Operator [1]

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Greetings. Welcome to The Boston Beer Company Third Quarter 2019 Earnings Call. (Operator Instructions) Please note this conference is being recorded.

I would now like to turn the conference over to your host, Mr. Jim Koch, Founder and Chairman of The Boston Beer Company. Thank you, sir. You may begin.

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C. James Koch, The Boston Beer Company, Inc. - Founder & Chairman [2]

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Thank you. Good afternoon, and welcome. This is Jim Koch, and I'm pleased to be here to kick off the 2019 third quarter earnings call for The Boston Beer Company. Joining our 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 I'll hand it over to Dave, who will provide an overview of the business. Dave will then turn the call over to Frank, who will focus on the financial details for the third quarter as well as a review of our outlook for the remainder of 2019 and our initial outlook for 2020. Immediately following Frank's comments, we'll open up the line for questions.

We completed our merger with Dogfish Head on July 3, and we're making good progress on the integration. We've welcomed our Dogfish Head coworkers and we continue to learn a lot from each other, as we share our passion for brewing, creativity and maintaining our strong culture. In the first quarter as a combined company, we reported depletions growth of 30%, of which 24% is from historic Boston Beer brands and 6% is from the addition of Dogfish Head brands following the closing.

I'm tremendously proud of the efforts of all our coworkers in achieving our sixth consecutive quarter of double-digit growth, while maintaining a focus on quality and innovation. We believe that our depletions growth is attributable to our key innovations, our quality, our strong brands as well as sales execution and support from our distributors. We plan to continue to invest to improve Samuel Adams trends and we remain focused on the longer-term goal of returning the brand to growth. We remain positive about the future of craft beer and are happy that the strength of our diverse brand portfolio continues to fuel double-digit growth. We're confident in our ability to innovate and build strong brands, and we're exploring new styles to launch in 2020 that would complement our current portfolio and help support our mission of long-term profitable growth.

I'll now pass it over to Dave for a more detailed overview of our business.

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David A. Burwick, The Boston Beer Company, Inc. - President, CEO & Director [3]

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Thanks, Jim. Hello, everyone. Before I share our business results, I'll start with the usual disclaimer. As we state in our earnings release, some of the information we discuss and that may come up on this call reflect the company's or management's expectations or predictions of the future. Such predictions are forward-looking statements. It's important to note that the company's actual results could differ materially from those projected in these forward-looking statements.

Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained in the company's most recent 10-K. The company does not undertake to publicly update forward-looking statements whether as a result of new information, future events or otherwise.

Okay. Now let me provide a deeper look at our business results. Our depletions growth in the third quarter was a result of increases in our Truly Hard Seltzer and Twisted Tea brands and the addition of the Dogfish Head brands, partly offset by decreases in our Samuel Adams and Angry Orchard brands. Truly continues to generate triple-digit volume growth. During the quarter, we launched Truly Draft nationally and continued to expand package distribution across all channels.

We announced a multiyear U.S. partnership with the National Hockey League, which makes Truly Hard Seltzer the official hard seltzer of the NHL and enables all of our brands, including Samuel Adams and Dogfish Head, to benefit from the NHL partnership. We also announced the launch of new formulations for all of our Truly flavors, which we'd extensively tested with drinkers of Truly and competing brands, and we're confident that we'll now have the best-tasting hard seltzer on the market.

In early 2020, we'll launch Truly Hard Seltzer Lemonade in 4 styles in both a variety 12-pack and single-serve sizes. These new Truly lemonade flavors have the same 100 calories and 1 gram of sugar as other Truly flavors, but have a more robust taste.

Lastly, we've announced the addition of another new flavor, Watermelon Kiwi, available in our Truly Tropical Variety Pack and 6-packs. We believe these significant new flavor introductions, combined with the new NHL partnership and our ad campaign for Truly featuring well-known actor Keegan-Michael Key, will further help improve our position as a leader in hard seltzer and establish Truly as a meaningful and relevant brand.

Twisted Tea continues to generate consistent double-digit volume growth, even as new entrants have been introduced and competition has increased. Angry Orchard's volume has declined against the 2018 national rollout of Angry Orchard Rosé. The cider category continues to be challenged and we're working to return Angry Orchard to growth through packaging, innovation, promotion and brand communication initiatives.

This fall, Angry Orchard Crisp Unfiltered, a traditional American cider with only 10 grams of sugar, was launched nationally across all channels, and we're encouraged by early consumer reaction. For the remainder of 2019 and into 2020, we plan to build upon our success and work to drive our brands to their full potential, with a particular focus on our Truly brand. We've adjusted our expectations for 2019 full year depletions growth and our earnings guidance reflect our trends for the first 9 months and our current view for the remainder of the year, which is primarily driven by the year-to-date performance of Truly. We're targeting high teens to low 20s top line growth in 2020 and a significant increase in our operating income. We also continued to focus on cost savings and efficiency projects to fund the investments required to grow our brands, to build our organization's ability to deliver against our goals, and to improve our profitability.

While we're generally pleased with our overall performance, our accelerated depletions growth has been challenging operationally and we've been operating at capacity for many months. To help relieve some capacity pressures and support our projected 2020 volume growth, we're adding a new can line in our Pennsylvania Brewery that we expect will begin production by the end of this year and we have significantly increased our available sleek can capacity at third-party breweries.

We're also accelerating other capacity and efficiency improvements at our breweries, which is reflected in our capital spend expectations for 2020. We'll continue to invest to increase capacity as appropriate to meet the needs of our business and take full advantage of the fast-growing hard seltzer category. However, the increased usage of third-party breweries and the increasing percentage of variety packs in the company's overall product mix come at a higher incremental cost. As a result, our gross margins and gross margin expectations will be negatively impacted until the volume growth stabilizes.

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

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

Now Frank will provide the financial details.

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Frank H. Smalla, The Boston Beer Company, Inc. - CFO & Treasurer [4]

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Thank you, Jim and Dave. Good afternoon, everyone. For the third quarter, we reported net income of $44.7 million or $3.65 per diluted share, representing an increase of $6.7 million or $0.44 per diluted share from the same period last year. This increase was primarily due to increased revenue, partially offset by lower gross margins, increases in advertising, promotional and selling expenses, and the nonrecurrence of the $0.38 per diluted share favorable onetime impact related to a tax accounting method change in the third quarter of the prior year.

Dogfish Head operating income of $6.9 million was partially offset by nonrecurring Dogfish Head transaction-related expenses of $5.9 million. Excluding this $1.0 million net positive impact, operating income for the third quarter was $58.8 million, an increase of $12.1 million or 25.9% from the third quarter of 2018. Also, during the third quarter, the company paid back all debts incurred in connection with the Dogfish Head transaction, including approximately $200,000 in related interest expense.

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

Shipment volume was approximately 1.6 million barrels, a 19.1% increase compared to the third quarter of 2018. Excluding the addition of the Dogfish Head brands beginning July 3, 2019, shipments increased 13.8%. We believe distributor inventory as of September 28, 2019, averaged approximately 3 weeks on hand and was at an appropriate level based on supply chain capacity constraints and inventory requirements to support the forecasted growth. We expect wholesaler inventory levels in terms of weeks on hand to remain between 2 and 4 weeks for the remainder of the year.

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

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

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

In the third quarter, we reported a net income tax expense of $14.2 million, which consists of $16 million of income tax expenses, partially offset by a $1.8 million tax benefit related to stock option exercises in accordance with the accounting standard employee share-based payment accounting, also known as ASU 2016-09. The effective tax rate for the third quarter, excluding the impact of ASU 2016-09, increased to 27.2% from 19.4% for the 13 weeks ended September 29, 2018, primarily due to the onetime favorable impact of tax accounting method changes in 2018 in the absence of a similar onetime favorable impact in 2019.

Based on information of which we're currently aware, we are now targeting full year 2019 earnings per diluted share of between $8.70 and $9.30, a narrowing up of the range from the previously communicated estimate of between $8.30 and $9.30.

However, actual results could vary significantly from this target. This projection excludes the impact of ASU 2016-09. Full year 2019 depletions and shipments growth is now estimated to be between 19% and 22%, a narrowing up from the previously communicated estimate of between 17% and 22%. Excluding the addition of the Dogfish Head brands beginning July 3, 2019, full year 2019 shipments and depletions growth is now estimated to be between 15% and 18%, a narrowing up from the previously communicated estimate of between 13% and 18%.

We continue to project increases in revenue per barrel of between 1% and 3% and full year 2019 gross margins of between 50% and 51%. We are planning increased investments in advertising, promotional and selling expenses of between $40 million and $50 million for the full year 2019, an increase from the previously communicated estimate of between $35 million to $45 million, primarily due to increased Truly brand investments. This does not include any changes in freight costs for the shipment of products to our distributors.

We estimate our full year 2019 non-GAAP effective tax rate to be approximately 27%, which excludes the impact of ASU 2016-09. We're not able to provide further guidance on the impact of ASU 2016-09 will have on our 2019 earnings per diluted share and full year effective tax rate, as this will mainly depend upon unpredictable future events, including the timing and value of realized upon exercise of stock options versus the fair value of those options when granted.

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

Looking forward to 2020, we are in the process of completing our 2020 plan and we'll provide further detailed guidance when we present our full year 2019 results. Based on information of which we are currently aware, we are targeting depletions and shipments percentage increases of high teens to low 20s. We project increases in revenue per barrel of between 1% and 3%. Full year 2020 gross margins are expected to be between 49% and 51%. We planned increased investments in advertising, promotional and selling expenses of between $65 million and $75 million for the full year 2020, not including any changes in freight costs for the shipment of products to our distributors.

We estimate our full year 2020 non-GAAP effective tax rate to be approximately 27%, excluding the impact of ASU 2016-09. We are currently evaluating 2020 capital expenditure and our initial estimate are between $95 million and $115 million, which could be significantly higher if deemed necessary to meet future growth. We expect that our cash balance of $27.1 million over September 28, 2019, along with future operating cash flow and our line of credit of $150 million will be sufficient to fund future cash requirements. We currently have no amount outstanding in our line of credit.

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

We will now open up the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Vivien Azer with Cowen.

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Vivien Nicole Azer, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [2]

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

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David A. Burwick, The Boston Beer Company, Inc. - President, CEO & Director [3]

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This is Dave, Vivien. I think for Angry Orchard, we're not -- again, we're not looking for much growth, if any, next year, to be honest. We think it's a yearly kind of rethink the brands and the opportunities the category presents. We're working on some innovation. As I mentioned, we launched unfiltered, which -- lower sugar content. We're looking at other types of products that fit more in the health and wellness space framework. And we're also looking at different types of communication that kind of go back to the initial attitude that we have with the brand. So -- but we're not kind of -- we don't want to put too much pressure on that brand next year. We want to get it right. And so we're not expecting a lot of growth. And we don't -- to be honest, we have a lot of different pathways to growth next year. Angry Orchard's just not have to be a big one for us.

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Vivien Nicole Azer, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [4]

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So that seems prudent. And just my second question is on the competitive landscape in hard seltzer. We've certainly seen some competitive activity off of a legacy beer brand from one of your largest competitors. Curious if you've seen any impact to your business or overall competitive dynamics in the category, in particular, knowing that there is more kind of beer adjacent innovation to hit the market.

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David A. Burwick, The Boston Beer Company, Inc. - President, CEO & Director [5]

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This is Dave again. I'll speak up. I mean there's obviously a lot of activity, a lot of competition in the category. And we think we're moving ahead with our plans, which is to build a very large brand in the category that is -- it's a pure-play. That's not a line extensions that comes from the category of the consumers. There's still -- if you look at -- the household penetrations in the category is still very low, it's around 4% versus, say, 14% for FMBs in general. So right now, we're trying to build a big broad brand. And right now, if you look at our -- if you look at Truly, it's fairly broadly appealing. It's got -- it's more diverse, it has a higher income household. It goes beyond just young males, if you will. And we've got, as we mentioned, we got a lot of stuff in play right now. And as far as we're concerned, 2020 already began as we start to launch our new -- the reformulation of our new flavors. We have a lemonade platform coming out next year that we're very excited about. We've increased our media for Q4. We haven't planned to spend much behind the brand in Q4 and we decided to do the opposite and spend a lot. So we've got a lot coming. I think time will tell how the other brands, how they play out. They'll probably get a lot of trials [stating it warrants] consumer basis. But we'll see, as the top styles as we head into next summer, whether they have staying power or not.

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Operator [6]

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

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Stephen Robert R. Powers, Deutsche Bank AG, Research Division - Research Analyst [7]

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

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C. James Koch, The Boston Beer Company, Inc. - Founder & Chairman [8]

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Well, I'll take that one. We're pretty confident that we're going to get strong continued support from not only our wholesalers but our retailers. The reality of the category is that between us and White Claw, we've had close to 80% of the category for 3 years now, even as new entrants have come in during that period. And it's a category where a relatively small number of SKUs make up a large percentage of the volume. There's like 6 SKUs that make up over 60% of the category volume. So I think both wholesalers and retailers are going to pay most attention to their strong SKUs, strong brands in the category because those have been the growth vehicles. And we will see lots of line extensions coming in, whether it's patched or [Natty] seltzer, Bud Light, some of those will get shelved with the hard seltzer category. Some of it will get shelved over with the mother brand. So we're continuing to invest significant dollars, both in capacity and in brand-building activities. We're hoping that all these new entries will get the little pieces, but will also hopefully drive category growth and continue to have strong triple-digit growth of the category through next year with all this energy coming in. And we believe we can increase our share in that environment.

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Stephen Robert R. Powers, Deutsche Bank AG, Research Division - Research Analyst [9]

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Okay. Maybe as a follow-up on the new Truly reformulations you referenced, extensive testing and those products prior to launch. Maybe just talk a little bit more about the process and time line there and what your key learnings were.

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C. James Koch, The Boston Beer Company, Inc. - Founder & Chairman [10]

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Well, the process started back the late spring. We had a dedicated flavor team. We used the central location testing services that do blind and double-blind testing because we didn't always want to taste it ourselves and say, oh, that's really good. We wanted what we felt was a scientific statistical validation from blind testing with recruited consumers in the demo. So we feel very, very good about the taste. I mean we have scientifically validated -- that leads us to believe that we have the best tasting hard seltzer out there in virtually every style. And we think that's part of our overall platform of building a brand with broad appeal because we think the hard seltzer category is broken out of its sort of young, male, [blowy] type culture demographic that really puts the category on the map. We think it's going to be a relevant category for virtually all significant demographics, and we want to make sure we have properties that have broad appeal like Keegan-Michael Key, like the NHL. We're on Monday Night Football. So we think that hard seltzer has a very high upside. We just don't know where the upside is. But we can -- we believe that it will continue to grow triple digits next year.

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Operator [11]

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(Operator Instructions) Our next question comes from the line of Kevin Grundy with Jefferies.

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Kevin Michael Grundy, Jefferies LLC, Research Division - Senior VP & Equity Analyst [12]

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I wanted to come back, Jim, to the spiked seltzer. So very clear, you guys are anticipating the category doubling again next year, and we'll see if that's the case or not. Time will tell. I know it's really difficult at this point with these numbers. But I want to come back, Jim, I guess, what we're seeing in the Nielsen data and maybe this is different than some of the data that you have, but Truly, you've given up quite a bit of share. We have it down to, call it, about 25 points a share off of 1 point. It was sort of in, in the low 30s. So the other key piece, I think, to your outlook is not only the category doubling but you sound pretty confident. Maybe this is the reformulation that you're going to get back some of the share. Because this is just with [Natty Light] coming at this point, which probably has about 5 points of the data that we're looking at is accurate. So this is prior to Bud Light coming in and Corona. And there's a number of local brands that you guys are really well aware. So what would you kind of say, I guess, to kind of push you a little bit on the company's ability to gain market share in that sort of construct?

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C. James Koch, The Boston Beer Company, Inc. - Founder & Chairman [13]

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Yes. We believe that the resources that we're putting against Truly will help us do that. I mean if the category doubles, we just hold our share, we double. So -- and that's kind of the thinking that's in our -- currently in our projections for 2020. But we think that we're pushing the right buttons. A superior tasting product is a strong brand, and hard seltzer, people know us and they know White Claw. We kind of pioneered the category because I think White Claw has done an amazing job of riding a sort of the bro culture, the meme culture. It's done great things for the brand and for the category. And we think they've proven that hard seltzer can be a significant part of the consumption of an important demographic, and we think that's applicable across pretty much all the significant demographics. We're very encouraged by where we're getting our drinkers from. It's various numbers, but it wouldn't be far off saying over half of it is coming from outside the beer category, which is very exciting for us, very exciting for the industry, very exciting for our wholesalers and our retailers. And we're showing up with a strong #2 brand. We lost share this summer as the category just exploded in a key demographic. And we believe we are well positioned to benefit from a similar explosion in broader demographic.

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Kevin Michael Grundy, Jefferies LLC, Research Division - Senior VP & Equity Analyst [14]

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Okay. One quick follow-up and then I'll pass it on. So the Sam Adams brand, which has been sort of a multiyear sort of turnaround, just talk about what you view -- or do you anticipate the brand returning to growth? Some of the Nielsen trends would suggest the brand still remains under quite a bit of pressure. So maybe talk about what's in the outlook for next year. And then for Jim and Dave, talk about now you have this in this rocket ship here with Truly in this category, where it seemed like it makes a ton of sense to sort of lean in behind investment there. Does that make it even that much more difficult to stem some of these weak trends that you're seeing with the Sam Adams brand in that sort of environment? Sorry for the long-winded question, but it's really around investment levels and plan to turn that around and what you have in your outlook for next year. So sorry, for all that.

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C. James Koch, The Boston Beer Company, Inc. - Founder & Chairman [15]

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Yes. I mean it's a long-complicated question. The answer is yes. It does make it more difficult when we've got a rocket ship like Truly. I mean hard seltzer is really once in a generation. There hasn't been anything like this that got to scale so fast since light beer 40 years ago. So I mean the quick answer to your question is yes. We are probably leaning into seltzer organizationally, investment-wise, et cetera. But I mean I would just remind everybody of -- it's literally true, beer is our middle name. We are The Boston Beer Company. So no one here is thinking of anything but a pause as we take advantage of this amazing opportunity that we've generated in hard seltzer. And we're quite aware that it takes up a lot of resources this year, but it generates an ongoing big amount of gross profit dollars. And we're in the craft beer category. We are unique in having multiple sources of profitability among all the other independent craft brewers that enable us to sustain and fund growth in the Sam Adams brand.

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David A. Burwick, The Boston Beer Company, Inc. - President, CEO & Director [16]

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And can I just add to -- I'd like to add to Jim's point. I think in addition, we talked about all the things, all the buttons we're pushing to drive the Truly business from the reformulation to the -- with this lemonade platform, which our wholesalers and customers are very, very excited about to properties like the NHL, to the ad campaigns, to more media. One thing we haven't mentioned too is that, with the addition of Dogfish Head, we're going to increase our sales force by about 25%. So we now are able to go out there and win more feet on the street, 25% more, well over 100, to -- out there selling Truly in the off-premise, much more aggressively than we've done before. In addition, it opens up opportunities in on-premise for beer. And for Sam and for Dogfish Head, we're going to have more resources selling beer through on-premise. So we think that this combined organization obviously we've got the -- some wonderful portfolio of brands that Sam and the company have created. We got that -- we've got great resources, great people and great talent. And so when we look at Truly from top to bottom, from investment to capacity, to brand activities to feet on the street, we're all in. But to Jim's point, we've got -- we can utilize some of those same resources to help grow -- to grow our beer business as well.

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Kevin Michael Grundy, Jefferies LLC, Research Division - Senior VP & Equity Analyst [17]

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But -- and Dave, just to be clear, do you expect the Sam Adams brand to be down again in '20? Is that correct?

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David A. Burwick, The Boston Beer Company, Inc. - President, CEO & Director [18]

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Yes. We expect it to be down. That's factored into the guidance we gave you. And one thing I'll just add just to kind of give Sam a little bit of something here. The seasonal business actually did pretty well this year. We think there's something there with the summer. Our Summer Ale reformulations did very well. We're going to apply some of that learning next year, so we feel pretty good about seasonal working on, going younger with a campaign filed through -- for Boston Lager. The new cask sign is looking great on shelf. It's helping us be found much more quickly. So there is some good things afoot. But again, like I said before to Vivien when we're talking about Angry Orchard. These are 2 brands next year. Angry Orchard and Sam Adams, in particular, where we're going to retool, rethink, get creative and figure out how to come out of the gate stronger as the year progresses. But we're not putting undue pressure on these brands to do more than what they can do.

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C. James Koch, The Boston Beer Company, Inc. - Founder & Chairman [19]

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

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Operator [20]

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

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Laurent Daniel Grandet, Guggenheim Securities, LLC, Research Division - Senior Analyst and MD of the Consumer & Retail Team [21]

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Congrats on the extremely strong quarter. First, a technical question for -- first of all, for Frank. Does the EPS guidance include the impact of the onetime Dogfish merger weighted cost?

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Frank H. Smalla, The Boston Beer Company, Inc. - CFO & Treasurer [22]

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

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Laurent Daniel Grandet, Guggenheim Securities, LLC, Research Division - Senior Analyst and MD of the Consumer & Retail Team [23]

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Okay. And then, I mean, so I like to come back to margin as they are repatriating. I mean a lot of the manufacture of Truly, I mean, in-house. What was the percentage of Truly mix that was done with copackers or third-party in 2019? But as the -- that mix look like in 2020 under the -- I mean what's your forecasting? And I don't know if you can give us some direction, at least in terms of gross margin, what's the difference in terms of gross margin between a copacker Truly manufactured product and in-house manufactured product?

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C. James Koch, The Boston Beer Company, Inc. - Founder & Chairman [24]

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So Laurent, the -- we don't really provide the exact breakout between internal production and external production. What I can tell you that it has more than doubled the production externally and it has significantly increased throughout the year in 2019. In the fourth quarter, we're taking a little break so it's stabilizing. We're putting capacity in, but all of 2019 actually, the volume growth was larger than what we had planned for. So we're putting capacity in, but we are growing the external capacity and the external volume faster than the internal. That will turn at a point in time. It depends on what the real true growth is. The percentage of external production will continue to increase also in 2020. We will realize those savings, and that's what you see in the gross margin, which is then stable actually year-over-year, considering the significant volume growth of Truly and especially the can business in general that we have.

The margin, we don't break that out, but it's safe to say we're getting from our savings -- we're getting a couple of points. The -- when you look at our entire gross margin for the company, there's, I'd say, 3 to 4 points that's related to the external manufacturing and the incremental manual labor that we have for the variety packing. So those are temporary costs and once it's stabilizing, which we don't know when this is going to be, we thought it was going to be this year. So it's not going to be this year. But when stabilizing, those opportunities will reduce the cost and improve the gross margin again. Our underlying savings programs are very much delivering and gross margin is an important KPI for us.

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Laurent Daniel Grandet, Guggenheim Securities, LLC, Research Division - Senior Analyst and MD of the Consumer & Retail Team [25]

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And then maybe a final one maybe for you, Dave. I saw the, I mean, the new, I mean, Truly Hard Seltzer Lemonade. Looks nice and very differentiated to Truly black can -- white can. What's the role of it? Are you trying to appeal more to a mid-consumer with a stronger flavor? I mean what's the role of it versus the white [offset] the Truly?

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David A. Burwick, The Boston Beer Company, Inc. - President, CEO & Director [26]

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Sure. So as the hard seltzer category as it grows, we're always looking for ways how to expand the category, how do we make it more appealing to more consumers. And we think just -- we think of lemonade as a way to kind of push the boundaries a little bit to hard seltzer to provide the experience that has the same kind of -- the same stats on it, the 100 calories, 1 gram of sugar, et cetera, but provides more of a robust taste. So it's a little bit -- it's a little stronger taste profile. It still tastes like a seltzer but it just has more to it. We think that part hasn't been addressed yet. We do think it will probably bring in more of a male SKU. It could bring in more the multicultural SKU as well. And so that's why we're doing it and we'll find out soon enough what impact it does have. But again for us, it's just a way for our consumers to enjoy a hard seltzer but in a different way. And in this case, a more proprietary differentiated way.

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Operator [27]

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Our next question comes from the line of Amit Sharma with BMO Capital Markets.

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Amit Sharma, BMO Capital Markets Equity Research - Analyst [28]

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Jim, a quick follow-up on the lemonade. When you talk about a lot of excitement among the retailers and your wholesalers for this product, how should we think about shelf space at the retailer at the next shelf space reset this spring?

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C. James Koch, The Boston Beer Company, Inc. - Founder & Chairman [29]

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Well, the context of all of this is the hard seltzer category is growing triple digits so retailer add premium pricing. So retailers are very excited about putting more shelf space behind us, especially when they see the numbers about how hard seltzers are pulling from hard liquor and from wine because usually, your beer buyer gets incentivized on how much beer they sell and if it steals share from the wine department, they're okay with that. So we -- I think you have to think about this as retailers are going to be expanding their shelves. And Truly is the #2 brand in the category. It has, I think, 3 of the top 6 or 7 SKUs. We would hope that lemonade would fit into that pantheon of high-volume fast-turning SKUs within the category. So we would be looking -- we're calling on retailers. We think we have pretty strong case that they should have all 4 of our variety packs in there because they're -- all of them out pulling the majority of the seltzer SKUs that they have. So the category, we believe, is going to double. We're not asking for twice the space. So we're pretty optimistic that we can get 3 or 4 of our variety packs in most retailers, at least the larger format ones, obviously not in convenience stores.

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Amit Sharma, BMO Capital Markets Equity Research - Analyst [30]

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

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C. James Koch, The Boston Beer Company, Inc. - Founder & Chairman [31]

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We believe so because we just introduced about a month ago 2 24-ounce cans. Both pineapple and wild berry are now in 24-ounce cans and, as you know, in C stores, that's really the power package. So we're very optimistic that we can -- so far, wholesalers have been very supportive. We're getting 2 cans into most of the stores, so we're very optimistic about getting full distribution of our current 24-ounce cans with lemonade. C stores are very familiar with the success of hard lemonade in the full calorie part of the market. So we think that the -- they will analogize from that to be open to putting in 24-ounce can of hard seltzer lemonade that's 100 calories per 12 ounces.

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Amit Sharma, BMO Capital Markets Equity Research - Analyst [32]

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

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C. James Koch, The Boston Beer Company, Inc. - Founder & Chairman [33]

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Here is my theory of it, which the data has, though internally, continues to support it, that this is now a little over 3 years since we introduced Truly, which was the first 100-calorie 5 ABV, 1 gram of sugar hard seltzer. So it will help create the whole category and over that time, it's become less and less seasonal. As it becomes more and more part of mainstream, people drinking occasions. I mean I've seen it many, many times. Years ago, Corona was the summer beer, not so much anymore. Mike's Hard Lemonade was very summer oriented. Twisted Tea, very summer oriented. Power brands tend to become less seasonal over time. So it would be my prediction that the same thing is going happen with hard seltzer.

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Operator [34]

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

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Kaumil S. Gajrawala, Crédit Suisse AG, Research Division - MD & Research Analyst [35]

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A couple of questions. First, just to clarify. Did you -- was the expectations on the guide that total beer would be down next year, was that just for the Sam Adams brand?

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Frank H. Smalla, The Boston Beer Company, Inc. - CFO & Treasurer [36]

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We don't go -- we -- I think it's hard kind of to get into the different assumptions for beer at all, be it craft and [CLTs]. But overall, we believe that the beer is going to be flat and craft will be growing slightly.

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David A. Burwick, The Boston Beer Company, Inc. - President, CEO & Director [37]

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We can kind of talk about -- when we talk about Dogfish, I mean I can't -- but we're not going to add it together. But I'll tell you, we have -- we do have a lot of ambition for Dogfish Head next year. Three things that are happening. One, I mean, it's coming into the system into this just large and #1 ranked sales force in the business. And we think there's definitely some distribution opportunities and we're going to round out these next [six] states of the U.S. But the depth of distribution and support of this brand we got across channels will be very large. We're also going to increase the brand support by probably 7 or 8x where it had been before. So we're going to give some real support to these brands that in a smaller environment, it didn't get the support they need. And lastly, we're going to be -- we're going to look at pricing to be really smart about how we price the portfolio by brand and by geography. Still going to stay at the top end of the category. We want to be smart on how we manage price gaps. So there's a lot of store for Dogfish next -- for next year that everybody is just very, very enthused about.

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Kaumil S. Gajrawala, Crédit Suisse AG, Research Division - MD & Research Analyst [38]

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

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Frank H. Smalla, The Boston Beer Company, Inc. - CFO & Treasurer [39]

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It's all transaction costs like banker's cost, integration costs, legal costs, that's what it is. And yes, this is the guidance that we have given on the total like that. I think it was between $8 million and $9 million. That's about the number. Onetime integration costs and onetime transaction costs.

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Operator [40]

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

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Wendy Caroline Nicholson, Citigroup Inc, Research Division - MD and Head of Global Consumer Staples Research [41]

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

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C. James Koch, The Boston Beer Company, Inc. - Founder & Chairman [42]

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Well, if Truly doubles next year and becomes, again, a bigger part of our overall volume, and Truly, the biggest piece of it especially for us, I don't know what it is, probably 80% or so of our volume is in these variety packs, which require double handling, nobody's really successfully automated it. It's not done in line. And at the margin, we're making it a contract brewery and we're shipping it out to a hand-packing facility and bringing it back and hopefully shipping it from the contract brewery to the wholesaler, but sometimes shipping all that stuff back to Pennsylvania, putting it on another truck. So the piece of the -- of our business that is growing is the least automated piece of it. And we have done some automation that's helped us a lot in Pennsylvania. We haven't -- but we're growing our contract production that's not nearly so automated. So it's kind of a mess at the margin. And the margin is the part that's growing. But eventually, we will be able to rethink the production of that, do it in line, get rid of all this handling. But it's really hard to do when you're trying to double your hand capacity for Truly. We're focused on building the lines, getting them in, and we've got several of them that we're engaged in. So that just getting the cans produced and into boxes and out the door to the wholesalers has taken priority. And we'll go back and clean it up. I don't know exactly when. It's not going to be the first half of next year because we're very focused on doubling our can capacity for Truly between now and then.

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Frank H. Smalla, The Boston Beer Company, Inc. - CFO & Treasurer [43]

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There are 2 basic insights on it when I look at the gross margin related to the Truly production and the contract production. One is, as I said before, we are increasing the percentage in contract production, at the same time, we're increasing also the capacity internally, which is at a significantly lower cost. So margin in itself, does not fluctuate as much because in addition to the positive benefit of in-store -- of increasing the capacity in-house, we also have clear savings programs which are focused on reducing the waste that we have in the system. So this will largely balance out the incremental cost that's coming from the core -- or from the increase in the external production. So there shouldn't be massive swings next year. It's like -- it's just like various different factors that you will see throughout the year. And then when those (inaudible) it comes online. I'm sorry.

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Wendy Caroline Nicholson, Citigroup Inc, Research Division - MD and Head of Global Consumer Staples Research [44]

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No, because I was going to say it looks like -- again, just inferring some of the moving pieces, it looks like your fourth quarter of '19 is not going to see quite as much gross margin pressure. And I'm wondering if that's greater efficiency or is that just a product mix issue or a little bit of a whole bunch of different things. But it looks like sequentially, the gross margin pressure is relieving itself, if you will, a little bit as we go through the year.

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Frank H. Smalla, The Boston Beer Company, Inc. - CFO & Treasurer [45]

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Yes. Well, the 2019 impact, there's a number of things. One is the percentage of Truly or hard seltzer or the one that's outsourced, in general, of the portfolio is decreasing in Q4. That's a little bit the seasonality. So -- and then the growth rate is going slightly down. So relatively speaking, there's, as opposed to the other quarters, there's less external production that you have, okay? So -- and that's one impact. And the other impact also in 2019 is that we're adding the Dogfish Head business, which we didn't have last year. So those 2 factors combined will have a little bit better margin impact.

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Wendy Caroline Nicholson, Citigroup Inc, Research Division - MD and Head of Global Consumer Staples Research [46]

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

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David A. Burwick, The Boston Beer Company, Inc. - President, CEO & Director [47]

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This is Dave. I'll take that. I think we're, last time I looked, we're about 3,000 or so bars with Truly on draft. I would say the impact is not material on the total business. It's a bit of an experiment to see how we can make this thing work for our customers. And we're finding that, for the most part, we're getting good response. But we're really targeting the right types of locations, where you're going to have the right crowd that's going to want to -- to be interested in sort of creating their own experience and the right type of customers. So we like it. The biggest opportunity in on-premise will continue to be cans in on-premise. But so far, so good. We'll continue to expand it. We launched it, I think, at the beginning of the summer and -- but again, the impact -- like if you look at the Truly numbers, it's very, very small compared to the total.

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Operator [48]

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Our next question comes from the line of Amit Sharma with BMO Capital Markets.

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Amit Sharma, BMO Capital Markets Equity Research - Analyst [49]

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

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Frank H. Smalla, The Boston Beer Company, Inc. - CFO & Treasurer [50]

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Well, I would have expected it to go away if -- end of this would be next year. It really depends on how long this growth is going to continue because we need to find the right balance between internal production and external production. And it always takes time to add capacity. We are adding capacity. We don't want to overextend ourselves. That's why we're using partly the external capacity. Once that stabilizes, we'll bring that in-house. We'll improve our supply chain, so the impact, as you mentioned, the drag on gross margin will eventually go away. It really depends on when the volumes going to stabilize, quite frankly, and the mix of internal versus external production.

The good news is on the entire thing, when you look at the gross profit that we are still generating with this growth, that is all incremental. Again, this is -- there's upside on the margin side, clearly. And because the external production and also the inefficient production that we have in-house is clearly masking the savings impact and the savings efforts that we have underway and or has had underway for now 2 to 3 years and that are delivering every single year.

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Operator [51]

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

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C. James Koch, The Boston Beer Company, Inc. - Founder & Chairman [52]

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Well, thank you, everyone, for listening in on this call and all the good questions. And we'll talk to you again in a few months. Trying to have a beer. Cheers. Thanks.

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Operator [53]

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