Greetings. Welcome to the Boston Beer Company second quarter 2019 earnings call. At this time, all participants are in listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions]. Please note that this conference is being recorded. At this time, I will turn the conference over to Jim Koch, Founder and Chairman. Mr. Koch, you may begin.

Thank you. Good afternoon and welcome. This is Jim Koch, Founder and Chairman and I am pleased to be here to kick off the 2019 second quarter earnings call for The Boston Beer Company. Joining the call from Boston Beer are Dave Burwick, our CEO and Frank Smalla, our CFO. I will begin my remarks this afternoon with a few introductory comments including some highlights of our results and then hand it over to Dave, who will provide an overview of our business. Dave will then turn the call over to Frank, who will focus on the financial details for the second quarter as well as a preview of our outlook for 2019. Immediately following Frank's comments, we will open up the lines for questions. I am tremendously proud of the efforts of our coworkers in achieving our fifth consecutive quarter of double digit growth while maintaining our focus on quality and innovation. We are also delighted to learn that for the night year out of the last 11, beer distributors ranked Boston Beer Company as the number one beer supplier in the industry in the annual poll of beer distributors conducted by Tamarron Consulting, a consulting firm specializing in the alcoholic beverage distribution industry. This is a result of our efforts of all of our coworkers at Boston Beer Company to service and support our distributors' businesses and they are our primary customers enter the strong relationships we have built with our distributors. Turning to our business. We achieved depletions growth of 17% in the second quarter, an increase from depletions growth of 11% in the first quarter. We are still seeing challenges across the industry, including a general softening of the part of the craft beer industry that goes through the three-tier distribution system and onto retail shelves…

Thanks Jim. Good afternoon everyone. Before I review our business results, I will 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 share a deeper look at our business results. Based on information in hand, year-to-date depletions reported to the company through the 28 weeks ended July 13, 2019, excluding Dogfish Head brewery, depletions are estimated to have increased approximately 17% from the comparable period in 2018. First half shipments growth was higher than depletions as we took active steps to ensure adequate distributor inventory levels to support drinker demand during the peak summer months. Our depletions growth in the second quarter was a result of increases in our Truly Hard Seltzer and Twisted Tea brands that were only partially offset by decreases in our Samuel Adams and Angry Orchard brands. Truly continues to grow beyond our expectations. We are launching Truly draft nationally this quarter, while we continue to expand distribution across all channels. In addition, we are launching a new high profile ad campaign for Truly featuring noted comedian Keegan-Michael Key as we believe we can further improve our position as a leader in hard seltzer by building a meaningful and relevant brand. Twisted Tea…

Thank you Jim and Dave. Good afternoon everyone. For the second quarter, we reported net income of $27.9 million or $2.36 per diluted share, representing an increase of $4.3 million or $0.38 per diluted share from the same period last year. This increase was primarily due to increased revenue, partially offset by lower gross margin and increases in advertising, promotional and selling expenses. Shipment volume was approximately 1.4 million barrels, a 17% increase compared to the second quarter of 2018. We believe distributor inventory as of June 29, 2019 averaged approximately three weeks on hand and was at an appropriate level based on the supply chain capacity constraint and inventory requirements to support the forecasted growth of Truly and Twisted Tea brands over the summer. The company expects wholesale inventory levels in terms of weeks on hand to remain between two and four weeks for the remainder of the year. Our second quarter 2019 gross margin of 49.9% decreased from the 52% margin realized in the second quarter of last year, primarily as a result of higher processing cost due to increased production at third-party breweries and higher temporary labor requirements at company-owned breweries to support increased variety pack volumes, partially offset by price increases and cost saving initiatives at company-owned breweries. Second quarter advertising, promotional and selling expenses increased $7.6 million compared to the second quarter of 2018, primarily due to increased investments in local marketing, media and production, higher salaries and benefits costs and increased freight to distributors due to higher volumes. General and administrative expenses increased by $2.9 million from the second quarter of 2018, primarily due to Dogfish Head transaction related fees of $1.5 million and increases in salaries and benefits costs. During the second quarter, we recorded a net income tax expense of $10.3 million,…

[Operator Instructions]. Thank you. Our first question comes from the line of Caroline Levy with Macquarie Group. Please proceed with you question.

Good afternoon everybody and congratulations.

Hi Caroline.

Hi Jim. It's really fun to see a great growth category underway. It's very exciting in consumer goods to have that and also great to see Twisted Tea continuing. I just wanted to clarify a couple of things. When is the Crisp Angry Orchard launch and when is the advertising launch behind Truly?

Okay. Hi Caroline. This is Dave.

Hi Dave.

Good afternoon. The on premise launch has happened over the last couple of weeks. We are starting to get draft lines out there over the last two, three weeks. And then the off premise launch happens pretty much now. We are shipping product now, just started to. So as the month of August rolls in, you will see unfiltered out there across multiple channels. As it relates to Truly, most likely next week we will be on air with this new campaign.

And could you tell us, thanks Dave, why you picked this particular person and what the image is that you are hoping to go for who your target market is?

Yes. Sure thing. I mean Keegan-Michael Key, he is a well known popular comedian. We think, look, it's a fun category. We look at this category, it's more akin to soft drinks than it is to sort of craft beer. And we want to have somebody who is popular, who is well known and well regarded, basically talking about our brand in a way that consumers will be very likely to engage and accept that. So we like him a lot. He is fun. He is humorous. He is an impromptu comedian. So he will bring a little bit of personality to it and he is going to help us shape that personality.

Great. And then if we just turn to beer, if you could talk about whether you really see, well, I mean I know you are going to have to say you have hope for basic craft beer, but what do you have to do to move the dial? And do you have things underway that could make that possible on your existing beers next year?

I will take that one. Craft beer is clearly a different category than it was even two or three years ago. It's become a more mature, more stable category that continues to see a thousand new entrants a year. So it's a category where it's really difficult to grow if you are fully distributed and a brand that's been around a long time because right now it's driven by new, small, local, more than anything else. But we view it as a category that is permanent and enduring and can continue to grow a little bit. We obviously feel that it has a solid potential because the Dogfish Head merger is doubling down on craft beer and I think you know we will slowly see over the next, say, years. This is not all going to happened in a year or two but over the next three to five years, retailers are going to be more selective about what they put on the shelves and what they put on draft. Distributors will cut their portfolios back because they are not grabbing everything the way they were a few years ago. So fundamentally, we think strong, well supported high quality brands will emerge from that long winnowing process strong and successful.

That's super helpful. Thank you Jim. And then just lastly, if you could talk about what you have done so far towards the merger? Or what do you think the process will be before you really start to have an integrated operating system there?

Yes. A quick answer is, 2019 is business as usual. This is our first merger. We have never done this before. So we are, I think, proceeding prudently in a way that will not mess up anything. So we told our teams, in most ways it will be business as usual. Obviously, we are going to, we are immediately beginning the financial integration because we are going to need to report on a combined basis in three months and we are beginning all the other forms of integration, both the people, production and so forth. For the next six months, there will be a lot of attention on consolidating our wholesaler network which are majority of it is a volume overlap, but there is a lot of work to do. We have 400 wholesalers. They have 300 wholesalers or close to that, maybe 200. So I think for the next six months, the most visible thing is going to be merging the distributor networks. And then beginning in 2020, that's the point where we will really start the rest of the integration of production and people and sales and operations.

Okay. Fantastic. Thank you so much.

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

Yes. Good afternoon everyone. I had a question on Truly. I mean clearly this spiked up the category. It's going to be a legit category longer term when you think about the opportunity. And so I just wanted to get a sense of how you are thinking about longer term profitability? Is the fact that variety packs being such a big piece of the product mix, is that just going to put this at a margin disadvantage for a long time? Or are there ways to kind of get the profitability up as you scale that business?

Yes. There are. What you are seeing now is our response to volume that we didn't fully anticipate. So we made provision for that contingency. We added capacity. We have committed capacity at our contract producer. We added two automated variety pack lines that are starting to get up and running. But at the margin, it's kind of ugly. Because at the margin, we are buying cans from Arizona, shipping them to Pennsylvania or to a contract packer, who then sends them to a variety packer and then they come back into our Pennsylvania warehouse where we have as many as 300 temps packing stuff. So you know at the margin, it's really ugly because we didn't put all the capital in there to do that efficiently and the lead times to do can be up to a year. So long term, yes. All of this can be brought in-house or automated and done very efficiently. So I feel good long term. When we know what the volume is, we know what the capital investment needs to be and we know how we need to operate to make a product line which can be 75% to 80% of it is variety pack. It's very unusual for a consumer category. I can't think of any of them that has that kind of volume in variety pack. But eventually, we could integrate the canning line with a variety pack line, blah, blah, blah. So yes we can take the vast majority of those incremental costs out.

And Jim and maybe Dave you want to comment on this, I mean when you think about the opportunity and I don't know how much, you know this is such a new category, but it looks like it's sourcing from so many different brands within the beer category but also outside of the beer category when you think about wine and spirits and even some on-premise occasions like vodka and club soda. So I just was hoping you had some clarity, some thoughts, some analytics, maybe giving us a little bit more context around where the category or where the brands are sourcing their share from?

Yes. This is Dave. I will answer that. And Nik, I know you have been trying to figure it out along with everybody else. Well, I can share some data from, we did some work with the IRI panel and it's actually quite interesting. About 37% of the volume that hard sparkling water is sourcing from the spirits, about another 20% is wine. So you get 57% from outside the category. And it's funny, because when you look at where the beer category is going, when you look at the growth rate year-to-date in total beer, total, total, I think year-to-date it's like 0.9% on IRI but the last four weeks, it's more like 2.5%. You see progression of growth naturally because some of these lost occasions are being sucked or been pulled back into the beer category and about another 10%, by the way, is light beers. So between spirits, wine and light beer, that's about two-thirds of volume. Some other things that are interesting. You know, the awareness levels are still very low in the categories. We like that. The loyalty is also very low. Some work we have done is probably about, only about 10% or 15% of consumers are loyal at the moment. So the battle for brand loyalty has just begun, we think. And last thing I would say is, we have also looked at on, we tried to some work to understand lapsed drinkers and we can't find any. So people, it looks like the people have so far, again it's very early but people that come into the category are staying in the category. The last thing I would say, we all know this. I mean, you look at two critical trends with consumers now. One is health and wellness, the other is variety seeking. And this is an example where this category is a beautiful overlap of both of those things. So it's coming from outside of beer. We like that. It's coming. It's got a lot of tailwinds from a consumer perspective and it's just getting started. And to Jim's point, we are investing, we are going to play this game to win. We have got the tiger by the tail. We are not going to let go. And we are also looking at it, we are looking at building brands maybe a little bit different here than we do within beer.

Super helpful. Thanks so much.

Sure.

The next question is from the line of Vivien Azer with Cowen. Please proceed with your question.

Hi. This is Gerald Pascarelli, on for Vivien. Thanks very much for taking the questions.

Hi Gerald.

Thanks. My first question is on A&P. So the step up in guidance, I get that's going to primarily to Dogfish Head but of the previously communicated $20 million to $30 million for the core business, can you just provide color on how you are thinking of allocating or perhaps reallocating based on where you may have been previously? Thanks.

So to your point, the increase is really primarily driven by the inclusion of Dogfish Head. There was a slight increase that we are having. We are investing a little bit more into Truly. We don't really give a breakdown by category, but naturally as you can see you look at all categories, so where the opportunity fist we definitely reallocate our A&P spend between the categories where we believe we have the biggest opportunity. And I think, Dave at the beginning laid out a little bit how we think about the new advertising when it's going to come on-stream. So that's what you are seeing. There is a bit of a reallocation, a slight increase in the base spend which is already pretty significant and then the rest is Dogfish Head.

Got it. Thank you. Jim, this one is for you. I guess just given your commentary around Samuel Adams that we are halfway through the year, maybe just some color on where the brand might have missed relative to your expectations heading into the year? And just any kind of thoughts you can provide on what's driving us some of the pressure on the brand? Thank you.

Yes. It's pretty much in the ballpark of expectations. We are seeing the seasonal category where we have a very strong position. That is consolidating. We are gaining share in seasonals. And so we are beginning to see that winnowing out, maybe first in seasonals where a lot of people over expanded and Sam Adams is by far the leading seasonal brand out there with cold snap and summer ale, Oktoberfest and winter lager. So that looks pretty good to us. I think within our product line in Sam Adams, we missed generating a successful IPA. And IPAs are a third, maybe even 40%, depending how you define it, of craft beer volume. And one of the things we are looking forward to is working with our new coworkers at Dogfish Head because they are much stronger in IPAs with 60 Minutes and 90 minutes. So that gives us a strong brand to go in and sell into that big chunk of the craft beer category that we didn't have even a month ago. And we both view the portfolio as quite complementary. We are strong in lager and seasonals, they are strong in IPA and sours. So we are expecting that our combined craft portfolio will be much healthier together.

Super helpful. Thank you very much.

Thank you. Our next question is from line of Judy Hong with Goldman Sachs. Please proceed with your question.

Thank you.

Hi Judy.

Hi. So I guess I wanted to start with your guidance because I just wanted to clarify a few things. First, the change or the increase to your guidance, if I just take the Dogfish Head impact, it looks like it's adding about $5 million in the back half including all of the one-time cost. So that in and of itself is about $0.30 increase to your earning, which means the core isn't really going up even with the increase to depletion guidance. So can you just clarify kind of why your full year guidance is not going up more than kind of that $0.30?

Yes. Judy, this is Frank. We have got a couple of things here. So when you look at the numbers, what we gave for Dogfish, they are ranges. And I think, it's better to go with what we have said that it's going to be slightly accretive. So there is a bit of a range. It might not be the number that you just called out. The other thing is that we have all the integration cost that we have in here. And I think, as we said, nothing has really changed below the gross profit line, but the incremental volume that we are getting is primarily Truly. And that comes, as Jim has just said, at the margin. The margin is lower and that's what's driving primarily the lower gross margins versus prior year. And we expect the growth in Truly to continue. So that's why we have also narrowed down the gross profit line, but it's at the margin, that's what it is. We believe we can achieve that. We have, I think, seen the peak in the outsourcing, but if you look at the Dogfish Head range, there is a range and it's some of it going to be slightly accretive.

Yes. I guess I am just taking the midpoint as the $50 million to $60 million. So you are adding sales of $55 million, gross margins of 50% gets you to about $28 million of gross profit. You take the operating expenses out and you are getting to even like $5 million, including all the transaction costs. And then I think your comment that it's slightly neutral, excluding transaction cost, it actually also doesn't necessarily reconcile with the fact that's adding like $0.85 to your earnings, if I do the math. So I know it's half a year and this year is maybe there is additional transaction cost but I guess more broadly if you think about 2020 impact, is it fair to take just the assumption that you have given or the financial that you have given on Dogfish and then just take out the transaction cost as one-time and then build that out as we are thinking about the 2020 impact?

I think the 2020 impact will be slightly different. Now we are going to give guidance in October but it's definitely fair to take out the one-time costs and the nonrecurring cost which is slightly above $8 million. But then of course, we are building the portfolio differently and there will be different impacts. But that's the starting point, yes.

Okay. And then the other question I had regarding guidance is just in terms of your comment about shipments for the back half the year. So I know your shipments are up 23% year-to-date, depletion up 17% but it sounded like you are not expecting a big changed to the inventory level. So for the back half, should we be expecting shipment growth to be essentially in line with depletion growth?

Yes. It will be a little. So as we discussed, we pre-build in the first quarter. As you have seen, we started increasing our depletion over shipment in the second quarter and that's going to continue in the third quarter. Now what happened is, we still have about a similar breakdown between the reduction of the pre-build between Q2 and Q3, but it's happening at a higher level. And so we had higher depletions but we also had higher shipment as we added capacity. And it all depends literally on the depletions and our production capacity is going to play out.

Got it. Okay. And then I guess I wanted to go back to Truly and I know, Dave, your initial forecast for this year was essentially doubling and obviously tripling for the year. So can you just comment on you know if now it's your expectations that this sort of trend line continues and you are expecting to triple this year on the Truly side? And some of the distribution opportunities that you cited, where are really the gap outside of the on-premise which obviously you are going in with the draft, but when you kind of look at the off-premise opportunity from a distribution standpoint, how much runway is there and where are the gaps that you can fill for the next six to 12 months?

Yes. Sure thing. If you can tell me how fast, how much we are going to year, I would love to know. But I think on this year, yes, you look at that right. We are hovering around tripling the business. Maybe not totally that much across all channels, but yes. And we are preparing next year for triple digit growth as well, per some of Jim and Frank's comments. In terms of the upside, yes, for sure on-premise, for sure. As you mentioned, we are launching draft. We are not sure how big that's going to be but we think it's an interesting idea. We are also certainly cans in off-premise is still a big, big opportunity. And C-store is a huge opportunity for us. If you look at the share gap we have with our primary competitor, it's really driven, a lot of it is driven in C-stores. They were very smart to get into C-stores early to drive trial and build the brand and that's something that we have been later in the game to do and we see a lot of opportunity in C-stores. But then if you look beyond on-premise and convenience stores, if you look at our distribution relative to White Claw, there is opportunity pretty much everywhere, quite honestly. I think going forward in the game, the rules will change a little bit but I think it's going to be, the winner or the one who is going to grow the most shares is going to be those who have maximized and exploits the distribution opportunities that we are talking about, those who found ways to innovate in the category and try to expand what this category can mean and then the third thing which I think we are kicking off next week, which we believe in, is how do you build a brand. How do you build a brand that matters in this category and consumers are really there? We see that they are attracted to number one, products that great taste in this category and number two, brands that their friends and family are drinking. And that mean popular brands.

Got it. Okay. Thank you.

Sure.

The next question is from the line of Kevin Grundy with Jefferies. Please proceed with your question.

Thanks. Good evening guys.

Good evening.

I wanted to start, this for Jim and Dave probably, with your views on the growth trajectory for Dogfish Head. So I think the 300,000 barrels now currently, this year I think the expectation was for high single digit volume growth. As we look at the Nielsen data, it looks like there is some distribution opportunity for the brand relative to Sam Adams. Jim, you mentioned before, the company will be working through merging distribution network here in the near term over the next several months. I was hoping maybe you could speak to your growth outlook for that brand over the next three to five years?

It's a good guess for anybody. We do believe that it's a very strong brand. It is untarnished in the consumer's eyes. It continues to stay relevant and fresh. Sam and Mariah have done a great job keeping the image of the brand pristine. So we think it's under distributed and we think they have right now three strong assets, one of them being the flagship 60 and 90 minute IPAs. The other is, they have the number one sour beer in SeaQuench. And then we think Slightly Mighty, which is a 96 calorie, low-carb, basically an IPA, is unique product. So we view significant distribution opportunities off-premise for SeaQuench and especially Slightly Mighty. And we think there is significant run room for 60 minute IPA on-premise. So that's where we are going to focusing on. This is all within the context of just a hypercompetitive category that has something like 8,000 craft breweries with 1,000 a year opening up in a category that's growing low single digits. So there is no miracles but we do see run room and upside for those three products in their portfolio because they all have unique positions.

Thanks Jim. So you would rather not put a number on what you expect the growth rate to be for the portfolio, either in total or for looking at the Nielsen data what distribution can look like relative to the Sam Adams Boston lager?

Kevin, to be honest, I don't have a number. I have a plan and the plan will produce a number. But I don't know what that number is. Maybe Dave has a better idea.

Yes. I am not going to pull a number out of the air either. But I think just from the on-premise distribution perspective, we know that the average ACV distribution for 60 minutes were around 12% ACV and Sam Adams is like low-30s. So just to give you a sense of the difference between the two. And we think there is an opportunity obviously to bring it up, to bring it in line with Sam.

Okay. That's helpful. Thanks Dave. Another for me. So now Angry Orchard and cider, of course there is dichotomy in growth rates in your portfolios. I am telling you a thing you don't know, very interesting. So Angry Orchard has softened here quite a bit, doesn't seem necessarily be so on trend. As we look at the Nielsen data now down double digits, maybe talk a little bit about the positioning of that brand and your outlook for it going forward?

Sure. So I think first of all, remember, we are lapping a huge success for Rosé launch last year. We believe, I think when we last spoke, that we would maybe overcome that better than we have. And I think when you look at and first of all, Crisp Original is actually doing a little bit better. So the trends are proving our Crisp Original, probably because there is not as much focus maybe on Rosé. We are hopeful about Unfiltered, both draft in bottle and can, but what we are seeing and you look across the category, you have seen it everywhere, the growth of hard seltzer is casting a very long shadow over the entire business. So we are seeing maybe some consumption going in that direction. But we still look at the brand is still a dominant number one in the category and we will continue to do some things to see if we can rekindle growth there. By the way and just into the Unfiltered which we talked about, we are testing an Angry Orchard Spritz product in a number of markets right now which is a lighter drinking 120 calorie of spritz type product and we think that might potentially play maybe closer to where hard seltzer is playing. So for Angry Orchard, like we don't, given our plans or given the opportunities across the portfolio, we now are managing a large portfolio. We don't need Angry Orchard to outperform and be a superstar. We want Angry Orchard to maintain share and we want to find a way to grow it and we think we think we have got enough news to do it. And we are going to face a little bit of headwinds as we go and we will see where it all nets out. But the second half here will be challenging because we will get learning on the spritz test and we will also get learning and insight on what happens with Unfiltered.

Okay. Thanks. And if I can just squeeze in one more. I had sort of a longer term questions, getting back to hard seltzers. Just given the lack of product differentiation among the leading brands, do you see a risk to private label will play a role in this category at some point?

Yes. I mean it could. It could play a role. I think there is the differentiation. This is my point of view which you know, I don't know, maybe right, it might be wrong. I think White Claw and Truly have superior products. I think the process that they use which it sort of a black box to us, the process we use, which is a black box to them, does a great job of purifying the product and distilling the alcohol based down to something that's very clean. And I just notice it when I try other brands. So it's not that easy to replicate the product while it might on the surface seem somewhat commodity like. I think those two brands in particular, which is probably why they are 80% of the category. I think there is a difference. So private label will come in and may play a role play. But this product is a little bit, it is harder to make than it appears.

Okay. Fair enough. Thank you guys. Good luck.

Thank you.

The next question is from the line of Amit Sharma with BMO. Please proceed you are your question.

Hi. Good afternoon everyone.

Hello.

Dave, just continuing that last question from Kevin, the competition, I am not just thinking about private label, but especially in the context of your earlier comment about really there is not that much brand loyalty yet. Does that also open up room to other larger competitors who may be better positioned to be able to create a better tasting product?

Well, it's not that easy and it's not that quick to develop a beautiful bright fruit forward flavor on an immaculately clean base. So I would not underestimate the difficulties of doing that. And I think that most of the other big beer suppliers have an entry. Diageo has one with Smirnoff. They are doing okay. Miller has one with Henry's. They are doing okay. Obviously ABI has one with Bonneville which are doing okay. But if you look at the last 12 to 15 months, 18 months even going back maybe a little further, Truly and White Claw have maintained about 80% market share. So it's hard to know what the future is going to be but I think we are committed to maintain or growing our market share. I am pretty sure Mark Anthony is as well. So we will have to see what happens. I think that if the category gets bigger, it will fragment, differentiate. We do see from ABI a low-price higher alcohol extension of Natty Light coming into the seltzer category. It will obviously drop, it will downward pressure on margins and pricing. I am not sure how thrilled retailers are going to be about downward pressure on a fast-growing very profitable category for them. So we will have to see how it all plays out.

That's really helpful Jim. And another one on the hard seltzer. Can you talk about the seasonality, especially as we go past the peak summer season and then think about it as you launch the on-premise as well, from a seltzer perspective?

Well, I will give you, I don't have a crystal ball, so I can only look backwards. But I can tell you that a lot of strong products now began as very seasonal and then as their adoption and penetration increased, they became less seasonal. And in that category, in our experience Twisted Tea was much more seasonal and then as it grew, it grew faster in the shoulders. Same thing with Angry Orchard. It was summer and fall and then it became as the brand and the category developed, it became less seasonal. Looking even further back, Corona when it went through it's big growth spurt, it used to be a summer beer, a beach beer and now they have done a great job developing the consumer base and building their brands and it has much less seasonality than it used to have. So I am going to guess, over time it becomes less seasonal. And in the U.S. today, you know something like 55% of the U.S. population today lives in geographies that don't have winter. So the whole country is becoming less seasonal.

Got it. One final one for me on the margin side of it. Certainly higher CapEx spending this year to like the variety pack issue. Is that level of spending going to continue for the next couple of years at least in order for you to get to where you want to be to be more efficient to address a different type of product?

I will just start with, a lot of it is just adding more capacity. We are adding two more can lines or at least we are projecting that and they are expensive. The are really expensive with the supporting infrastructure. So depending, you can talk anywhere from $20 million to $50 million times two for just to be able to make more can product because not only is Truly driving can, but so is Twisted Tea and even within Angry Orchard, we are seeing that migrating away from bottles into cans. So some of it's variety pack, a lot of it's just building our base capabilities. And Frank has a much more better understanding of all of this.

Yes. At the beginning, at the moment, we are just building the capacity, as Jim said. And we always have a certain amount of volume that we keep external with our co-manufacturer. So once the volume moderates a little bit, I think we will scale that back. The capital that we are putting in for the incremental volume is clearly paying back and it's the can lines but it is also the black box that we have talked about that creates the base. So there are a number of things and the variety pack. So there are a number of things that we are investing in. But they of course have very high returns based on the margin that we are excluding. Once it's flattening out, that will reduce and then there is going to be some investments to optimize the processes prophecies within the breweries. And that's where we get the margin back. So if you look at the margin which has suffered quite a bit from adding this quickly, there are two key drivers. One is that we bring relatively speaking more volume in-house. So that will lead into the margin. The second one will be that we are going to run it much more efficiently. And those two things will improve the margin and take the waste out.

Got it. Thank you so much.

Also the second part of the investment will have a higher return.

Got it. Thank you again.

The next question is from [indiscernible] with Credit Suisse. Please proceed with your question.

Hi everybody. Digging in to Truly just a bit more. How much of the growth is coming from distribution and how much is coming from velocity?

I would say, it was a mix of both and we are growing both. At this stage, everything was growing, both the distribution and the velocity. I don't have the numbers off the top of my head but it's pretty balanced.

If we think about the seltzer category competitively, obviously the growth has brought in a lot of competition. Is it at the moment a series of regional strongholds? Or is it a more hand-to-hand combat more evenly around the country?

I think if you look at the last year, the number of brands have more than doubled, I think from 15 to 32 this year, last I looked. I think again, my point of view, I look at this, I think this is a game between PepsiCo and Dr Pepper. There is going to be three big players at most in this category. If you look across FMB and sort of how it plays out, I don't think that the regional appeal that obviously the craft beers have will play in this category at all. I think it's which brand is the highest quality products. We talked about getting a clean alcohol base and how difficult that is. We don't really talk about it because it is very sexy but it's a real advantage. I mean it's a hard thing to do. So I think developing the products, but also building a brand that people perceive as popular and that they are in, particularly in a new category where people are definitely with a category and they want some assurance before they go and try something when they see their friends drinking it, they are more likely to drink it. So I think that the tactics and the brand building is going to play out, like it does obviously like in a category like soft drinks where you have two or three players that are big national players.

Got it. And then just very quickly, given the growth in Truly and the addition of Dogfish Head, would you mind just providing us with what your portfolio breakdown looks like? How much, you could use volume or revenue, whichever you like, to get an idea, how much comes from where?

Yes. So typically we don't break down our portfolio. I think the best bet that you have is looking at the IRI and Nielsen data. That's typically what we refer people to than provide a break down.

I am happy to. Is there any, just to make sure, there is nothing in there that would lead to us being materially wrong if we use this, that inflation?

No. I think you know our business. What you see in IRI and Nielsen is typically the chain business that you have and in addition there is Indy that's not well recorded and there is the on-premise and they have slightly different dynamics. But the biggest part of our business is the on-premise chain. So it's a relatively good proxy.

Okay. Great. Thank you.

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

Hi. Actually I though I exited the queue because my questions have been answered. But I have actually one here. I guess the total brand or category level have seen pricing come down in hard seltzer. Is that more of an impact of just increasing pack sizes? Or is there any element of discounting that you are seeing?

Pack sizes.

Yes. Got it. Thank you.

Sure

At this time, we have reached the end of our question-and-answer session and I will turn the call back over to Jim Koch for closing remarks.

Thank you everybody and look forward to speaking in three months. Now we back to work.

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