Greetings, and welcome to the Boston Beer Company Second Quarter 2020 Earnings Call. At this time, all participants will be in listen-only mode. A question-and-answer session will follow the formal presentation [Operator Instructions]. Please note that this conference is being recorded. At this time, we’ll turn the conference over to Mr. Jim Koch. Mr. Koch. You may begin.

Thank you. Good afternoon, and welcome. This is Jim Koch, Founder and Chairman, and I'm pleased to kick-off the 2020 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'll begin my remarks this afternoon with a few introductory comments, including some discussion on the COVID-19 pandemic and the highlights of our result, and then hand over to Dave who will provide an overview of our business. Dave will then turn the call over to Frank, who will focus on the financial details of our second quarter results, as well as a review of our outlook for 2020. Immediately following Frank's comments, we'll open the line up for questions. As our world continues to grapple with this COVID-19 pandemic, our primary focus at Boston Beer Company continues to be on operating our breweries and our overall business safely and supporting our partners in the beer industry. Supporting the communities in which we work and live is one of our core values, and we're very happy that our Samuel Adams Restaurant Strong Fund has raised over $5.4 million so far to support bar and restaurant workers who are experiencing hardship in the wake of COVID-19. Working with the Greg Hill Foundation, this fund is committed to distributing 100% of its proceeds to grants to bar and restaurant workers across the country. While doing this, we also achieved depletions growth of 46% in the second quarter, of which 42% is from Boston Beer legacy brands and 4% is from the addition of the Dogfish Head brands. I am tremendously thankful for the effort of our coworkers in achieving our ninth consecutive quarter of double-digit growth, while maintaining a focus on quality and innovation. We are also thankful to our outstanding distributors and retailers for their focus during COVID-19. Our business in the second quarter was strong but uncertainties due to COVID-19 do remain. These uncertainties include our ability to continue to operate our breweries at a level of safety that meets our standards, the continued ability to distribute to off-premise retail locations and the timing of the re-opening of on-premise retail locations. We will continue to work hard through the COVID-19 pandemic and prioritize safety above all else. I am proud of the passion, creativity and commitment to community that our company and coworkers have demonstrated during this pandemic. We remain positive about the future growth of our brands and are happy that our diversified brand portfolio continues to fuel double-digit growth. I will now pass over to Dave for a more detailed overview of our business.

Okay. So, thanks, Jim and hello everyone. Before I review our business results, I'll start with the usual disclaimer. As we've stated in our earnings release, some of the information we discussed and that may come up on this call looks like 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 the forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those of the forward-looking statements is contained in the company's most recent 10-Q and 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 performance. Our depletions growth in the second quarter was a result of increases in our Truly Hard Seltzer and Twisted Tea brands, and the addition of the Dogfish Head brands that were only partially offset by decreases in our Samuel Adams and Angry Orchard brands. The growth of the Truly brand, led by Truly Hard Lemonade, has accelerated and continues to grow beyond our expectations. Since early January, Truly has significantly grown its velocity and has sequentially grown its market share, while many other hard seltzer brands have entered the category. Truly is the only hard seltzer, not introduced earlier this year, to grow its share during 2020. and we will continue to invest heavily in the Truly brand and further improve our position in the hard seltzer category as competition continues to increase. We're excited about our new Truly advertising campaign that showcases colors, variety, and joy to hard seltzer drinkers through four different ads. Because we delayed the premier this campaign to…

Thank you, Jim and Dave. Good afternoon, everyone. For the second quarter, we reported net income of $60.1 million, an increase of $32.3 million or 116% from the second quarter of 2019. Earnings per diluted share was $4.88, an increase of $2.52 per diluted share from the second quarter of 2019. This increase was primarily due to increased revenue, driven by shipment growth of 39.8%, partially offset by lower gross margins and higher operating expenses. We began seeing the impact of the COVID-19 pandemic on our business in early March. Today, the direct financial impact of the pandemic has primarily shown and significantly reduced spec demand from the on-premise panel and higher labor and safety related costs at our breweries. In the first half of 2020, we recorded COVID-19 pretax related reductions in net revenue and increases in other costs totaling $14.1 million, of which $10 million was recorded in the first quarter and $4.1 million was recorded in the second quarter. The total amount consists of $5.8 million reduction in net revenue for our estimated keg returns from distributor to retailers and $8.3 million of other COVID-19 related direct costs, of which $5.6 million are recorded in cost of goods sold and $2.7 million are recorded in operating expenses. In addition to these direct financial impacts, COVID-19 related safety measures resulted in a reduction of brewery productivity. This has shifted more volume to third-party breweries, which increased production costs and negatively impacted gross margins. In April 2020, we withdrew full year fiscal 2020 financial guidance due to uncertainties around COVID-19. Despite the continued uncertainties related to the COVID-19 pandemic, we've seen our business outlook has stabilized and that it is now appropriate to give full year fiscal 2020 financial guidance. We will continue to assess and manage this situation…

Thank you [Operator Instructions]. Our first question is from the line of Bonnie Herzog with Goldman Sachs.

I wanted to drill down on the impressive growth that we're seeing for this category, which is it's been unbelievable. So I kind of would like to hear a little bit more from all of you about what gives you the confidence that this can really continue, especially as you know in the future more bars and restaurants open. So kind of how do you think about that? And then may help all of us understand how you guys are thinking about the barriers to entry for the category, since it seems like the category is obviously attracting a lot of new entrants. And just kind of want to hear your thoughts on how big of a risk you see this as more and more companies and/or brands enter and especially maybe from non beer companies, thoughts on that? Thanks.

I think, I’ll start it and then I’ll let then if anyone wants to jump in after that, that’s great. And so I mean I think we are very confident and Bonnie I presume you’re talking primarily about the hard seltzer category.

Yes…

And so look I mean we’re looking at growth this year we think about 150% and it’d be like around 8% of total beer volume, a little share of beer volume. So obviously, we’ve all seen that. We think there's number of reasons why we're pretty confident in this one and is really starts with the consumer trends, which we talked about before. We look at three really important trends in the broader beer category, all of which really apply very directly to self services, the health and wellness trends of course, the desire for a variety of seeking and flavors are all different kinds and experimenting and discovering new flavors of brands and also premiumization. So you have these very solid trends. You look at the sourcing, the sourcing is still, even now it just started out more than half of the volumes coming from wine spirits now. Most recently it’s made about 50% or so still from wine and spirits, so you're sourcing from outside of the category and it’s a very assessable occasion more so than beer. We still see there's a lot of upside from a shelf space perspective. So hard seltzers are still significantly under spaced across channels. And then we even go further across channels, our convenience to gas on-premise still lots of opportunity to develop the brands in those channels. So there's a lot of different opportunities for growth here. We also think that we know that, I think this came from Nielsen. But I think 90% of people who drink hard seltzer see something separate and distinct from beer. So they don't see it as a beer, they see it as something that’s unique. And we think this is a good thing if you have a brand that's not about beer brand…

And just to clarify something that you just mentioned in terms of innovation, because obviously a lot of that has been driving the growth to a category. So should we assume more to come from you this year in terms of your pipeline of innovation, is that what's contributing to some of the conviction that you have to the category growth continuing or your business continuing?

I mean, I think if I look at, if I get to the next two or three years, we see innovation coming in a continuous stream. I mean we’ll determine how we space it out to one or more. So I think it's really important not to, when you innovate, sometimes there’s assumption that just innovating and putting a brand out there means you're building a brand but innovation and brand and strong brands are not necessarily the same thing. So we want to make sure we're building something that’s strong that can last. We think about the lemonade has been terrific for us and the repeat rates are actually very high, 50% higher than all the other new products that were launched this year. The velocity is also very high and we think it is providing a differentiated experience within the category. So whilst we’re going to keep supporting that and aggressively, but there will be we think the other ideas for innovation will come behind that, that we think also can kind of spark interest and excitement in the category.

If I can squeeze one more in. I just, I really want to talk to you guys about also the industry wide can shortages that has been going on right now. I just want to get from you how big of an issue or concern it's been and really how material it's been? And I guess it's my assumption that your main competitor I think has been more negatively impacted by the out of stock situation. So is that help to contribute to some of the recent share gains that you've been experiencing and how sustainable is that? Thanks.

Yes, Bonnie, this is Frank. I mean, it's pretty clear. It's well known in the industry that there's a real can shortage in the industry across the U.S., which is spanning basically all the beverage suppliers and manufacturers. So far, we've been working well with our suppliers. And I think we've benefited also from the fact that we had pre the can inventory. We have pre the product inventory for Truly and for Tea, as you know but we've also pre the can inventory, because we wanted to be prepared for the volume growth. We're running out of that. So going forward we believe the impact will not be that dramatic but it's hard to say because with all the COVID impact that are coming on top of the explosive growth that you see across the different categories, it’s really hard to predict. So far, we might have some tightness but we hope that with everything that we have pre that we kind of can manage through that.

And just to add there to the last part of your question, Bonnie, about the share gains. I think there's a number of things that have to that one is complete reformulization or reformulation. And you look at our velocity it’s from the timing reformulating and went from growing 30% to 40%, sales per point to over 100% for the last four months of those. So that's part of it. Lemonade certainly it’s a nice year right now. So lemonade absolutely is a part of it. And to be fair, to be honest, I think over the last couple of weeks. I think we, to Frank’s point, we've been maybe little more fortunate to have fewer out of stocks. I think that’s part of what we've also seen happen as well.

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

So, I was hoping to dive a little bit deeper into your thinking around A&P spend please. Clearly, it came down a lot in the quarter and not at the expense of your top-line. And while you’ve noted select incremental investment spending, your overall guidance seems to come down a little bit relative to your pre-COVID guidance. And so, you've also called out some timing changes delay in ad spend in June. Frank, I think you noted as well in your prepared remarks. So, I'm just trying to understand if we think about the outlook for E&P, like how much of what we saw in the second quarter was just the timing that you've alluded to specifically versus some structural changes that just really reflect the benefit of some brand mix shift in your portfolio? Thank you.

We're not really changing much of the spend always indicated when we first gave you guidance in February. What has happened the phasing is very different from last year. When we came out, we had a significant increase in the first quarter, because we wanted to start the year strong. We knew there were that new competitive entrants, and we wanted to make sure that we’re out there at the beginning. So when you look at Q1 there was quite a bit of an increase. Q2 is a combination. We were flat essentially, a slight increase but largely flat. And that is a combination of, it was partly planned but also partly reduced due to the fact what happened with COVID, the social discussion that was happening in the country. So we adjusted our spend a little bit on that. And we will definitely spend more in the second half of the quarter. Within that, you should expect the higher increase in the fourth quarter, because we also have to manage our product supply. So, if you look at the growth rate in A&P spend, the second half of the year the growth rate will be twice as high as the growth rate that we have in the first half of the year.

If I can just follow-up. So, you're clearly referencing E&P dollars and that makes a ton of sense to me, in particular given the pre commitments that you have to make around that kind of spend. But when I think about SAM historically, your A&P as a percentage of sales has been considerably higher than your peer group. And the 22% change that you recorded this quarter is the lowest that I can recall that many years I've been covering the company. So, just to put the question back to you, if you'll indulge me. Do you think that dollars is the right way to think about it now, because it seems to have been tracking as a percentage of sales? But again, because Truly is so much more important and maybe you get more halo, in particular because like lemonade and like the base business and complement each other on a spend basis. Has there been a philosophical change? Thanks for indulging that’s a lot…

There hasn't been a philosophical change. And I think when you look at that kind of revenue at the end of the day, we spend what we feel it's the right thing to spend. And when you go back, I think you see quite a variability in spend in absolute terms but also in terms of net revenue, because the way we think about it, if you have something in our hands that we really want to push it that we say that every time I think that we look for the long term. We will build the brand for the long term and we are not trying to optimize the quarter, we’re trying to optimize the year. We feel fairly comfortable as the significant increase and spend that we have this year. It has to be effective, that's important to us, we don't just want to spend to hit a certain ratio. We want to spend the money and get something back. And we feel fairly confident but we do that, that's also what we’re increasing in the back half of the year. I mean we have strong growth with not a significant increase this year. So far that was slightly planned differently, as I've explained before. But again, it's more guided by the need of the business and hitting a particular ratio.

Thank you [Operator instructions]. The next question comes from Kevin Grundy with Jefferies.

A question perhaps for David, just on the guidance. So depletions obviously outstanding in the first half of the year north of 40%, including some contribution from Dogfish Head. So the guidance implies sort of rough manner, a deceleration down to 15% to 30% in the back half of year. So, understanding the comps get tougher, understanding there’s some contribution from Dogfish in the first half of year. Can you just kind of box in for us a little bit some of the assumptions around the high end and the low end of guidance? There's like, I think I heard you say I could be mistaken, 150% sales or category growth that's kind of down the fairway. Is that what you're expecting were to finish this year, and it truly holds the line on from a market share perspective from here. So just some commentary on the guidance? And then I have a follow up. Thanks.

On 150, that's our best guess for the category and actually we'll hold growth, continue to grow share. I'll let Frank answer how we get to that range and what the assumptions were?

So I think one thing is if you look at year-to-date and you had to go clearly is obvious like, you look at the depletions plus 40% and then the guidance is lower, some of that growth. One is the high end of guidance we're not concerned about the demand, the demand is there. The constraint is around the capacity and the capacity on the, the category has grown much stronger than what we had expected. Again, it's like it outpaced the capacity that we've put in and we keep on running out of capacity. So if you don't have any capacity constraints, we will end up in the upper end of the range. It's really hard to say what's going to happen to the supply chain and when I say supply chain, the broader supply chain that we depend on. We have a pretty good handle on our own supply chain. But there's also our partner. We don't know what's going to happen there, they have different states. There’s like supply constraints potentially on our suppliers. We talked about cans before but that's pretty much true far our materials. You might not have a structural tightness but if COVID hit supply chain is just tight. So if we hit that then we’re going to get to the low end of the range. I think the other thing that I want to say and the one thing is Dogfish Head clearly contributed in the first half of the year whereas in the second half of the year we are comparing to the six months that had Dogfish Head included last year there is a certain impact. And the other one is that, as you know, we prebuilt inventory for Truly and for Twisted Tea in the first half to get through the season and normally that inventory piece at the end of May beginning of June and then it carries us throughout the high season. What happened this year, as you know, with COVID and the explosive growth that we have in the category and especially off-premise, we’ve used up the inventory, that’s prebuilt inventory little earlier. And that's what you see probably also in the year to go number. So last year with higher inventory level that was carrying us a little bit longer into third quarter, we don't have the same question anymore. We're pretty much hand to models at moment as we speak and the only other key factors that contribute to the range that we have.

I wanted to maybe for Jim and Dave on the on premise channel, maybe talk a little bit about what you've seen and then from a demand perspective, maybe how that progressed as you move through the quarter and maybe even currently what you're seeing in July? And then just to follow-up on-premise related question, Bonnie mentioned earlier, unique dynamic of course with sell through really doesn't have any presence to speak of in the on-premise channel. Is there any rethink to that? Do you see that changing? This is true for both you and for Mark Anthony brands as well, which really hasn't been a push. Is there any rethink to that as the channel recovers? And relatedly do you think you'll see some demand impact on seltzers as consumers return to that channel, just given through the lack of availability and presence, if you will, of hard seltzers at this point? Thanks for all that.

We've seen an evolution of the on-premise. In March and through April it basically just disappeared. We were probably, during that period, took back as much beer as we sold. So it was kind of zero. And it has recovered somewhat but not even half of what it used to be, and it's just faltering, as you've seen, the new shutdowns and people, even when bars are open, restaurants are open, people aren't going to them. So, the on-premise still is very weak for us and we anticipate that not changing in the next few months. After that, we'll just have to see. In terms of the second part of your question, we actually see a much bigger opportunity for hard seltzer on-premise than has been realized yet. We were expecting this summer to be a time when there would be a lot of penetration that we didn't have last summer into the on-premise, because it's a natural thing for people to consume on decks, outside, on patios and so forth. But even with the places that have opened their outdoor seating, it's still distanced and it's a fraction of what it used to be and putting new product in is not high on their list. So I think it's going to be summer of 2021 when we see a big penetration of hard seltzer. And I expect it will get to the point where you walk into a bar or a restaurant and you expect them to have some hard seltzer, probably either Truly or White Claw. So I do think there's a decent upside for seltzer on-premise, but probably not in the next six to nine months.

The next question is from the line of Eric Serotta with Evercore.

I’m oping you could delve in a little bit more into the shelf space opportunity. Our understanding is that the spring shelf resets didn't occur as would be expected due to COVID. Just wondering how you see the shelf resets playing out in the fall, or whether you think it's more of a 2021 event? And then a quick follow up for you.

I think you are right, a lot of innovation didn't get out there this spring for obvious reasons. And we certainly talk to our customers about 2021 and what we're hearing back is for the most part there that's where the shelfs that's are going to occur is in 2021. So, a whole generation of innovation may have been put on hold for that. Within the category itself, I mean there is still a lot of opportunity for hard seltzer, as you know, it's under space across channels and we expect to see with the growth rates we're having now and out of stock is pretty much across the board, we're definitely expecting to see more space being allocated to hard seltzer in 2021.

And then Jim and Dave, a follow up for you. Last year in the fourth quarter towards the end of the year, you started to communicate what was a very deliberate plan, which played out very well for you guys to manage through and that come out on top of the hard seltzer competitive onslaught that happened earlier this year. I'm wondering if there is a similar type of plan as you look to first half of '21 or even second half of this year as White Claw ramps up its capacity? Just wondering sort of how you're thinking about the next 12 months. And if there's anything you could share with us today, or if we should stay tuned for the fall or if this is more of a, we'll be talking about this, this time next year?

I think the way I look at it is we're still for your last question, Eric, but we still haven't fully realized the potential, for example, Truly Lemonade which didn't came out and cut in to our shelfs because of because of COVID. And we're seeing lot of progress there in terms of basically in Q2 versus Q1, we're seeing penetration growth actually more than double. Repeat has increased by about third, but there is still a long way to go there. Also, because we just formulated our flavors for the base Truly brand, there's still lots of opportunity there. So we think the place we're running right now a good place to run. But as I mentioned before, I think to Bonnie that, or to your question that we believe innovation will continue to play an important role in category. And so, we're looking far ahead on that. We’ve nothing to share today but maybe in our next call we'll be able to share more information on that.

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

Two questions from my end. One is just on innovation, I know the retail landscape has been changing and what they take onto the shelf has been changing. So, I just wanted to get your state of the union on what you're seeing from retailer behavior in terms of accepting new products. That's the first point. And then the second one is, I guess, the million dollar question, or I don't know, maybe it's more than a million dollars, I'm sure it's more than a million dollars, is when gross margins are going to start growing again or expanding again? I mean it's clear this category surprised everyone, but I think maybe now it's not so much of a surprise on what potential could be. So, maybe you could just give us your longer-term vision on how you think about the category growth rate, how you think about capital spending, and when maybe we can expect gross margins to start expanding again?

I'll take the first part of that and I'll hand the gross margin part over to Frank. I think looking out for the fall, very little innovation is going to get into marketplace across the board, very little. So, I think retailers are all definitely focusing on just very few new things. I think they like what they got right now, which is basically fewer SKUs being more productive. And so, if anything, we'll see what happens as we get to next year. But I think there's a lot more productivity and a lot more profitability in the system when there's fewer SKUs delivering growth. And I think it's going to be an important time to continue to strengthen core brands. One interesting things we've seen and I know we're not the only ones of course. A lot of brands has seen it, a lot of legacy brands but particularly with for example Boston Lager, and Angry Orchard Crisp Apple, we've seen those brands in Q2 grew their penetration, grew their repeat and obviously on-premise double-digit growth and people coming back to some of the brands they've tried before they have been distracted from. And so, it would be interesting to see how it plays out and how much core brands participate in growth as we enter next year versus innovation. So it is to be determined. We're obviously preparing for any alternative t there. We have lots of innovation to go into next year but we haven't determined what we're going to launch and what we're not going to launch because we want to get the right balance. I think again based on early conversations with our customers, we're hearing sort of the same thing from them. And plus I think everybody is just kind of shelve shocked at what's happened. So they're being maybe more thoughtful about the steps to take going forward. So that's the first part of the question then I'll let Frank address your gross margin, your million dollar question.

So Nik, clearly, if you look at gross margin, it's not what where wanted to be very clearly. We wanted to have it much higher. I'm not particularly happy about it, I'm not concerned because at the end, we know what the reasons are. And if you look at this year they're quite, 3 times below last year. The key reasons are, number one is we have significantly higher growth than what we had expected. And now, as we've said before, we are servicing the demand as much as we can at any cost because we want to build the brand. We want to build the category. So the incremental cases that we produce, their external production, they come at a higher cost. But we're happy to do that because one, it stabilizes what we'll get to the better cost structure. The second point is that we're impacted by COVID, too. So a big chunk of the cost that we have due to COVID is in the gross margin line, and you see again, some slight improvement already this year, if you look at what we have in Q1 as a margin, there was an improvement in Q2. And if you look at the guidance, we'll see us coming in a little above what we are right now. And the reasons are that COVID was front loaded, assuming that no major thing is happening in the second half of the year and we're adding internal capacity. When it will substantially improve really depends on when we get a better handle on the growth and we can plan it a little bit better. Plans are under way. We are making progress and the efficiencies in our own breweries, we're rethinking the supply chain, however, thinking really about like our internal production, the external production, we are thinking more of the whole construct as an integrated supply chain. And once you do that, you get to different ways of working, into different cost savings. So at this point, we're driving the growth and we don't mind that much of that come to lower gross margin, because if you look at the gross profit, if you look at the levers that we're getting throughout the rest of the P&L, you look at the overall the income margin, that is the right strategy and we're building the brand. Once that subsides we have quite a bit of a runway to improve the gross margin by improving the way we're sourcing with relatively clear plans on that. And then we also, as we mentioned last time, a separate project, supply chain transformation, which also has become operated way more efficiently than what we we're doing at the moment.

The next question is from the line of Laurent Grandet with Guggenheim. Please proceed with your questions.

Jim, even in your best dreams three or four years ago, you couldn't think of a quarter where depletion number could approach 40%. Okay, getting a bit more into the innovation. So one of the reason of Truly success this year can be attributed to the Lemonade line extension. What have you learned, Dave, from this line extension that can help you further develop the Truly franchise going forward specifically around differentiation? And what about the tests you are doing New York? I think these are truly with a higher ABV.

And so I think as it relates to Lemonade, I think Lemonade, I think what we learned, I guess from the outside looking in. So there's a certain expectation of what a hard seltzer is, we think its 100 calories or fewer more raver sugar thereabouts, 1 gram of sugar thereabouts, 2 grams of carbs, nothing artificial, right? And, obviously, it tastes really good and refreshing, and I think those are the parameters to play in the space. I also think a parameter is that, I strongly believe -- we particularly see the consumers see it as a separate segment. They don't see it as beer but I think a purified brand also can resonate more deeply. But I think what we also learned is that people are really creating variety and different ways to experience those base characteristics if you will. And sometimes you just want more flavor I mean, right? I mean, just like how many sparkling waters can you drink without craving the Pepsi let’s name or something like that. People want more flavor, they want a sweeter profile at times. And so, that's how that was helpful for us to understand, that's probably the most important things that we’ve learned thus far.

What about the test…

I would add that basically flavor dominates. And so, we just happened with the Lemonade to hit a flavor profile that people really enjoyed. I mean to be totally honest, the volume surprised us, as well, and the only thing I can attribute it to is we just hit the bull's eye of flavor for the space between seltzer and Lemonade.

And I believe, I mean, a bit of this is coming from the fact that you are unique in the Lemonade in that space. So, along that line, I mean, is the tests you are doing in New York is higher ABV kind of the way to differentiate yourself from the space or what's the goal here?

One thing I mentioned is the base is sort of 5% ABV is sort of the given number. White Claw is also testing their product Surge, ours is called Edge and we're looking at that. That's a possibility. And if I go back to what Jim said, I think the flavor experience might be more -- we'll find out, might be more powerful than necessarily than ABV, if you will. But I think everyone's looking at ways to create a differentiated experience. One thing I should point out actually is that a couple of things about Lemonade. One it's actually bigger than Mike's now. Number two, they're not our competitor. Mike's has done quite well. In fact, Truly is not really sourcing much volume. Truly Lemonade is not sourcing much volume for the that brand because it's addressing the needs of a hard seltzer drinker in that moment. And so again anything else we would share, I don't want to share much more than that but I think to Jim's point and to my point I think we have a good sense of what or an improving sense of what hard seltzer drinkers are looking for. And to the extent that we aim to continue to provide those experiences and because we're working with a brand that hasn't been extended yet is an extension of another brand I should say we have the ability to build platform if you will onto that brand.

Thanks, Dave. One more for me if I may, I mean at the beginning of the year was to have a more balanced male, female consumer base and therefore attract new men consumer into the franchise. Could you please update us on that progress and where should be the right balance for the brand?

We are making progress. I think if you look at it, we still maybe a smidge more female-skewed than, say, White Claw is but not as much we were before. We changed the pack design to be more barents. We actually have another one that's in the market pretty much right now with even more sort of low SKUs, if you will. And so, if you look at the volume though, more than 50% of the volume is consumed by men because men, they drink more than women, but we have been able to close that gap that we came out of the gate, as you know, we're very much focused. That was the opportunity of the time was we targeted women very directly. If we continue to evolve, we see the numbers and the gender break being pretty much gender neutral.

Next question is from the line of Wendy Nicholson with Citigroup.

My two questions are, number one, have you developed any more plans about potential UK launch or expanding further into Europe? It just doesn't seem, to me, why that wouldn't be a priority, although I know you're doing the best you can to meet the demands in the U.S. But it still seems like Europe could be a great opportunity down the road. And then my second question, just going back to Lemonade, have you seen a different demographic for that specifically relative to core Truly or do you think it's existing Truly consumers just switching over to the more sort of stronger flavor profile? Thanks.

Wendy, I'll do the second, maybe Jim can do the first part of that question. On the second part just on the Lemonade, we are seeing the difference and actually if you look across all the brands, the major brands in the category Lemonade is younger than any other brand and hard seltzer definitely younger than the base Truly business, younger than White Claw, younger than any other brand in hard seltzer, younger than all of them. And it's usually bringing more new drinkers into the beer category, so let's say younger, 21 to 39. So that is a difference, we weren't sure if we go there or not but it seems to be sort of like that. In terms of international, Jim's got a long-standing point of view about our global business level. I'll let Jim. We'll let Jim talk about that one.

Wendy, I would say that as a company, we are not particularly internationally focused. We are very focused on the United States. We've been a company that succeeded in many cases just by the strength of our sales force and our distributors and that's difficult to duplicate globally. And then US, we have like 500 salespeople, so we're very beat on the street, grassroots intensive and we do have an importer in the EU, a long-standing brewing relationship there but we have spent really very little time or effort on international expansion. We are very focused on the United States because that's what we know well and that's kind of what we're good at. We have had some success with Truly in Canada. We've just recently launched it there this year, and it's doing pretty well. So Canada is comfortable for us. Once you get outside that, it's not good at it, to be honest.

Well, you've got enough growth in the U.S., so that's fine by me. But if I can squeeze in one more, I remember last year, particularly last summer, part of what you were talking about vis-a-vis the gross margin pressure was the fact that so much of Seltzer was sold in variety packs, and that made a lot of sense 12, 18 months ago when people wanted to try the product and, oh, I'm not sure what flavor I want, so let me get an assortment of a bunch of different ones. But I'm just wondering, as the business grows and people become more loyal and say, I really like wine but I'm not such a fan of black cherry, are you seeing a shift in the business to more of the single-flavor packs or cases? And I'm just wondering if that's becoming anything of a meaningful shift in the business because I would think that would alleviate some of the gross margin pressure, but maybe I'm off on that. Thanks so much.

I think still we see a large majority, call it 75% or so of our business, is variety packs. Consumers still are telling us they like that. They like the experimentation among the different flavors. It doesn't mean that that won't change over time, and we're sort of looking at that, and there all these players out there that have single-flavor sort of six packs, as we do, but also 12-packs. With Hard Seltzer, we'll have, say, they have four-packs. Three were single-flavor, one was variety, and that variety pack is like 85% or 90% of their total business. So the consumers seem to be suggesting that they're not quite ready for that fully. And also the other way to think about it is there are only so many SKUs that we can get on to our shelf and get support for. So you can kind of pick wisely where it can be your highest performing configurations. Right now, we have actually been convinced that there's a better way to go, but we can certainly, at a moment's notice, we could do that if we saw the opportunity. As it relates to gross margin, that's part of it. That was part of the issue a year ago.

I think the second part of the question is like we started the whole business, variety pack was something that was relatively new to us. We had a little bit but it was small volume and it was a very manageable operation. And as the volume has grown and we progressed through it, of course, we've gotten much, much better at it, and we have now automated variety pack lines. It's 100% of the volume but we have significantly increased the volume and that is part of the margin opportunities. Well, that's actually what I said earlier. We are making progress. That is one area where we're making progress, and we still have some runway left there. And I'm pretty clear on how we're going to address that. So in the future, that margin hedge shouldn't be as significant as it is now or as it was a year ago.

Thank you. The next question is from the line of Steven Powers with Deutsche Bank.

I guess just given the challenges you've talked about of meeting existing demand as well as a potential unlock of future gross margin, could you talk a bit more about the anticipated pacing of the new capacity you referred to coming online, particularly any of your own new capacity and Truly looking out over the next, say, 12, 18 months?

Right now, we're trying to get it up and running as quickly as we can. Since the last earnings call, we have added basically 1.5 can lines. And next month or in September we'll add another half. That will help us in the back half of this year. We think that the current supply constraints and the basically the retailer out of stocks will continue through the summer. But post-Labor Day, the hand-to-mouth existence, we'll be able to rebuild wholesaler's inventories and start building again a significant pre-build for 2021. And so we're adding a second can line in Cincinnati in sort of the end of Q2, beginning of Q3 next year. And we signed up additional contract capacity. So we're kind of looking to more than double our capacity a year from now.

And I guess that alleviates any potential pressure on just your ability to introduce new flavors or pursue the on-premise opportunity next summer that you talked about. It sounds like you've got line of sight there.

We think so, though we desperately hope that we will oversell all that and we'll have another hand-to-mouth summer next year with double the volume.

And I guess just one last question, if I could. You spoke a bit to A&P plans in response to Vivien's earlier question, but if we think about the scalability maybe, this is for Frank, of selling cost and of G&A, clearly a lot of leverage this quarter. I guess, as I look forward, how do you think about the scalability of those line items into the future versus the need to ramp those costs up to support a bigger business going forward?

So, Steve, I can't give you exact numbers. But clearly if you are growing at the rate that we are growing, there's a lever in the P&L and we had it. It is eventually responsive and as we grow, we will see the leverage. As I said before, it's really hard to predict and give you milestones of where we're going to go because we are always thinking long term about how we grow the business, how we create value longer term. So we're not trying to hit a certain number at a particular given point of time. So you will clearly see leverage over time. You've seen it this quarter. I think you will definitely see it for the full year. And as we grow, they will be leveraged. The extent really depends on how much we will support the business, and we will support the business. I know it's not as specific as you might want to hear it, but that's kind of how we're managing the business.

Philosophically we've always prioritized growth over profitability, even recognizing that in the beer business, growth is expensive. So, I think we see no reason to change that philosophy. We, you know -- we believe growth is an important component of value-added, and when there's opportunities like we're having now to grow 40%, we're going to spend to maintain that the highest growth rate we can for as long as possible.

Thank you [Operator Instructions] Next question comes from the line of Kevin Grundy with Jefferies.

Frank, I just wanted to follow up, just kind of billowing on Steve's question, the shape of the P&L and then Nik's question earlier on gross margin. Can you help us think about it structurally? So, if you go back a decade, or so, ago with a 55% gross margin business skew largely to beer at that point in time. Now beer becomes much less, cider becomes, flavored malt beverages exceedingly higher. We're sort of like where should this business be if you sort of set aside some of the rapid growth and volatility that the business is seeing now. So, set aside like over the next 12 to 24 months. But on a four-to-five-year basis, should this be a 55% gross margin business? Should it be closer to some of the targets more recently in the 51%, 53% sort of range? Can you help us think about that a little bit even on a longer-term basis? I think that'd be helpful.

And again, yeah, I was here 10 years ago, but clearly, I know the gross margins and it was a very different business. It was a much simpler portfolio. And we had different balance between demand and capacity that we have. And then all the sweet spots and you know we were at 54% at that point in time, but then it was like 52 percentage points to 53 percentage points. We should definitely be in the 50%s and getting closer to the mid-50s, maybe not exactly 55%, but as we stabilize the business and as we get a better handle on the supply chain and optimize that, that's definitely the target that we have.

Thank you. At this time, I'll turn the floor back to Mr. Koch for closing remarks.

Thank you. Thanks to everybody for being on the call. It was certainly an exciting quarter. We're almost outlandish growth coupled with a lot of changes to accommodate this pandemic. And I'm grateful to a lot of people that helped us get through this with their creativity and their flexibility from our coworkers to our wholesalers to the retailers that we work with, to can suppliers and special hugs to the can suppliers for this quarter. And we're looking forward to continuing the winning streak in a few months and hopefully talk to you then. Thanks.

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