The Boston Beer Company, Inc. (SAM) Q4 2020 Earnings Report, Transcript and Summary

Greetings. And welcome to The Boston Beer Company’s Fourth Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [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. Thank you. You may begin.

Thank you. Good afternoon, everyone, and welcome. This is Jim Koch, Founder and Chairman and I am pleased to kick off the 2020 fourth 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 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 fourth quarter and 2020 fiscal year results, as well as our outlook for 2021. Immediately following Frank’s comments, we will open the line for questions. As a ‘20 -- as a COVID-19 panic slowly winds down, our primary focus continues to be on operating our breweries and our business safely and working hard to meet consumer demand. I’m very proud of the passion, creativity and commitment to community that our company has demonstrated during this pandemic. We’re thankful to our outstanding coworkers for their focus and diligence and our distributors, retailers and drinkers, all of whom help the company achieve double-digit volume growth for the 11th consecutive quarter. We achieved depletions growth of 26% in the fourth quarter and 37% for the full year. We remain positive about the future growth of our diversified brand portfolio and we believe that our depletions growth is attributable to our key innovations, the quality of our products and our strong brand. We see significant distribution and volume growth opportunities in 2021 for our Truly, Twisted Tea and Dogfish Head brands which remain our top priorities for 2021. Early in 2021, we launched Truly Iced Tea Hard Seltzer, which combines refreshing hard seltzer with real brewed tea and fruit flavor. The launch has been well received by distributors, retailers and drinkers, but it’s too early to tell if it will be successful. We’re working hard to further develop our brand support and messages for our Samuel Adams and Angry Orchard brands to position them for long-term sustainable growth in the face of the difficult on-premise environment. We are excited about the response to the introduction in early 2021 of several new beers, Samuel Adams Wicked Hazy, Samuel Adams Wicked Easy and Samuel Adams Just the Haze, our first non-alcoholic beer, as well as the positive reaction to our Samuel Adams ‘Your Cousin from Boston’ advertising campaign. We are confident in our ability to innovate and bring and build strong brands that complement our current portfolio and help support our mission of long-term profitable growth. I will now pass over to Dave for a more detailed overview of our business.

Okay. Hey. Thanks, Jim. Hello, everyone. Before I review our business results, I will start with the usual disclaimer. As we stated in our earnings release, some of the information we discuss in the release and that may come up on this call reflect the company’s or management’s expectations or predictions of the future. Such predictions and the like are forward-looking statements. It’s important to note that the company’s actual results could differ materially from those projected in such forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained in the company’s most recent 10-K. You should also be advised that the company does not undertake to publicly update forward-looking statements, whether as a result of new information, future events or otherwise. Okay. Now, let me share a deeper look at our business performance. Our depletions growth in the fourth quarter was the result of increases in our Truly Hard Seltzer and Twisted Tea brands, partly offset by decreases in our Samuel Adams, Angry Orchard and Dogfish Head brands. The growth of the Truly brand, led by Truly Lemonade Hard Seltzer, continues to be very strong and well ahead of hard seltzer category growth. Truly Lemonade was the most incremental new product in the entire beer industry in measured off-premise channels in 2020. The Truly brand overall generated triple-digit volume growth in 2020 and grew its velocity and its market share sequentially despite other national, regional and local hard seltzer brands entering the category. In 2020, Truly increased its market share in measured off-premise channels from 22 points to 26 points and was the only national hard seltzer, not introduced in 2020, to grow share. There remain many opportunities to expand package, channel and geographic distribution and we expect the Truly brand to continue to lead the growth of the business as it has come to stand for a great-tasting, refreshing, pure-play hard seltzer brand. In early 2021, we launched Truly Iced Tea Hard Seltzer and while it’s still in the early stages, we’re encouraged by the support our wholesalers have provided, the trial we are generating as a result of the brand’s established equity and the social media response from consumers. We will continue to invest heavily in the broader Truly brand and work to improve our position in the hard seltzer category, as competition continues to increase. Our Twisted Tea brand has benefited greatly from increased at-home consumption and continues to generate accelerating double-digit volume growth, even as new entrants have been introduced and competition has increased. Our Samuel Adams, Angry Orchard and Dogfish Head brands have been most negatively impacted by COVID-19 and the related on-premise closures. For 2021, we plan to build upon our success and work to drive our brands to their full potential, with a particular focus on our Truly and Twisted Tea brands. We are expecting all of our brands to grow in 2021 and for the growth rate of our operating expenses to be below our topline growth rate, delivering leverage to our operating income. During the fourth quarter, as we increased our brand spend, we also made investments in our supply chain to ensure we are prepared for increased competitive activity in the hard seltzer category. We have invested to increase our can and automated variety pack capacity, but these capacity increases keep on getting eclipsed by our depletions growth, resulting in higher than expected usage of third-party breweries. We will continue to take advantage of the fast-growing hard seltzer category and deliver against the increased demand through this combination of internal capacity increases and higher usage of third-party breweries, although meeting these higher volumes through increased usage of third-party breweries has a negative impact on our gross margins. We have begun a comprehensive program to transform our supply chain with the goal of making our integrated supply chain more efficient, reduce costs, increase our flexibility to better react to mix changes and allow us to scale up more efficiently. We expect to complete this transformation over the next two to three years. While we anticipate the program to start delivering margin improvements in 2021, our gross margins and gross margin expectations will continue to be impacted negatively until the volume growth stabilizes. While we are in a very competitive business, we are optimistic for continued growth of our current brand portfolio and innovations, 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 in hand, year-to-date depletions report to the company through the six weeks ended February 6, 2021, are estimated to increase approximately 53% from the comparable weeks in 2020. Now, Frank will provide the financial details.

Thank you, Jim and Dave. Good afternoon, everyone. For the fourth quarter, we reported net income of $32.8 million or $2.64 per diluted share, an increase of $1.52 per diluted share for 136% from the fourth quarter of last year. This increase was primarily due to increased net revenue, partially offset by lower gross margins and higher operating expenses. Shipment volume was approximately 1.94 million barrels, the 54% increase from the fourth quarter of 2019. Shipments for the quarter increased at a higher rate than depletions and resulted in higher distributor inventory as of December 26, 2020, when compared to December 28, 2019. The company believes distributor inventory as of December 26, 2020 averaged approximately five weeks on hand and was at an appropriate level, based on supply chain capacity constraints and inventory requirements to support the forecasted growth. Our fourth quarter ‘20 -- 2020 gross margin of 46.9% decreased from the 47.4% margin realized in the fourth quarter of last year, primarily as a result of higher processing costs due to increased production at third-party breweries, partially offset by cost saving initiatives at company-owned breweries and price increases. Fourth quarter advertising, promotional and selling expenses increased by $48.1 million from the fourth quarter of 2019, primarily due to increased investments in media and production, increased salaries and benefits costs and increased freight to distributors because of higher volumes. General and administrative expenses were flat from the fourth quarter of 2019, primarily due to non-recurring Dogfish Head transaction-related expenses of $2.1 million incurred in the comparable 13-week period of 2019, partially offset by increases in salaries and benefits costs. Our full year net income per diluted share of $15.53 increased $6.37 or 70% compared to the prior year. This increase was primarily due to increased revenue, partially offset by lower gross margins and increases in advertising, promotional and selling expenses. Our full year 2020 shipment volume was approximately 7.37 billion barrels, a 38.8% increase in the prior year. Looking forward to 2021, based on information of which we are currently aware, we are targeting 2021 earnings per diluted share of between $20 and $24. But actual results could vary significantly from this target. This projection excludes the impact of ASU 2016-09. We are currently planning increases in shipments and depletions of between 35% and 45%. We’re targeting national price increases per barrel of between 1% and 2%. Full year 2021 gross margins are currently expected to be between 45% and 47%, a decrease from the previously communicated estimate of between 46% and 48%. We plan increased investment in advertising, promotional and selling expenses of between $120 million and $140 million for the full year 2021, a decrease from the previously communicated estimate of between $130 million and $150 million, not including any increases in freight costs for the shipment of products to our distributors. We estimate our full year 2021 effective tax rate to be approximately 26.5% excluding the impact of ASU 2016-09. This effective tax rate also excludes any potential future changes to current federal income tax rates and regulations. We are not able to provide forward guidance on the impact of ASU 2016-09 will have in our 2021 financial statements and fully effective tax rate, as this will mainly depend upon unpredictable future events, including the timing and value realized upon exercise of stock options versus fair value when those options were granted. We’re continuing to evaluate the 2021 capital expenditures and currently estimate investments of between $300 million and $400 million. The capital will be mostly spent on continued investments and capacity and efficiency improvements at our breweries. We will now open up the call for questions. Similar to the last couple of calls, Dave will be the MC on our side and coordinates the answers when needed, since we are in different locations.

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

All right. Thank you. Hi, everyone. I guess I wanted to…

Hi, Bonnie.

I was hoping you guys actually could talk a little bit further on your expectations for gross margin pressures. I mean, you touched on this, but it certainly sounds like, it’s now expected to be a bit longer. So maybe you could share with us what is a realistic timeframe for when your gross margins will be back above 50%? Is it possibly two years to three years when you’re finished with the transformation of your supply chain that you mentioned? And then also in terms of this transformation, you did say it’s going to maybe take two years or three years, but I guess, I’m wondering if there’s an opportunity to accelerate this transformation, if so, it’s simply a function of greater investment or is there something else? Thanks.

Yeah. Bonnie, this is Frank. I got to take the question on gross margin. So, you’re right, it has come down a little bit and the key reasons are actually that we have a higher percentage than we had originally planned going externally. The second thing is that we’re seeing freight increases in the market and that it’s partly impacting the materials and the ingredients that are being shipped to our location. And the third one is actually touching on your second question, I am going to answer that in a minute, a higher investments in our supply chain transformation program, precisely to accelerate those benefits and get to a higher capacity and better integration and lower costs. The perspective on gross margins overall. The main reason why they’re going down is literally, because we’re adding external capacity at a really high pace and it’s bad news for margins in the short-term. But it’s good news because we see the tremendous growth in the category and in four brands in particular. So it’s good news, bad news. And the strategy that we’re following is that our number one priority is to grow share, because as long as the category is growing, it’s relatively easier to impact the share out and to carve out our part of the category. Once the category stabilizes, this is going to be harder. But if you have a larger share that will pay dividends for the long-term, whereas the negative impact on the margins is relatively short-term until the category stabilizes. When it stabilizes, we will relatively quickly get to a better margin structure. As we improve our supply chain, we know when we add really long-term capacity and there are a number of drivers. One is that we will increase our share of internal production. We will better integrate. We’ll continue with our co-manufacturing partners, of course, but we’ll better integrate that in our system and that will be enabled by supply chain transformation. And then we will see significant benefits on the gross margin side. I think the important thing and that’s the last thing to do the gross margin. I think the important thing is that the gross margin is not impacted by softer pricing or anything like that, we’re really -- we’re building a strong brand here. It’s literally to get the product to the market and meet the customer demand and the consumer demand.

Okay. That was helpful and it definitely makes sense. And so, maybe just to clarify really quick and then I’ll pass it on. Is there a potential opportunity to accelerate then the investments you’re making behind your supply chain or will it simply take the two years to three years?

They have potential to accelerate. We’re working through that. It’s really hard to give you. We know we’re going to see benefits this year from the supply chain transformation.

Okay.

The difficult part is, we don’t know exactly where we’re going to end up in the ratio between the internal production and the external production. We are adding significant capacity internally and externally. And naturally, we are prioritizing the internal capacity. That’s what we’re going to run flat out basically for the year. And again, good news, bad news, the stronger the growth, the higher the percentage of external production and while this has a negative impact on the margin, it will definitely have a positive impact on the profit and as we see leverage throughout the entire P&L also on operating income margin.

Okay. Thank you again. Appreciate it.

Bonnie, let me throw one more piece that may help, but one of the dynamics driving our gross margin down is that most of our growth is coming in variety packs. And breweries aren’t set up to make variety packs very efficiently, including ours. So all of the variety packs and you can look at the IRI numbers for what percent, Truly is in variety packs, but it’s somewhere between 80% and 90%, right? So that Truly grows, the vast majority of it requires this extra complicated handling step, which is not automated very well and adds significant costs. Now, we are -- we’ve begun to automate that and we’ve implemented that in our Pennsylvania brewery and we think we’ve been successful, and that has actually helped that gross margin number from dropping as much as you might have predicted, had we not done that. And so we believe over the next couple of years, we’re going to be able to take the technology and the practices that we have developed and continue to develop internally take that to our co-packers none of whom yet have that cost reduction capability. So I think we believe that in the next two years we will have almost all of our co-packers being able to do variety packs without anything like the current upcharges required.

Okay. Very helpful. Thanks again.

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

Hi. Thanks very much. Given your comment that your new gross margin outlook indicates a greater proportion of third-party manufacturing on hard seltzer, yet you’ve held your shipment in deplete -- depletion guidance intact. Are we to infer then that there has been kind of an underlying change to your expected growth in the hard seltzer, and if that’s true, what that’s going to be expense of?

Yeah. So, Vivien, I don’t think, I mean, there are a number of drivers, as I mentioned, one is also the freight. So there’s a little bit of a change, because we’re building capacity as we speak and the timing varies a little bit. The real change wasn’t actually the full point that we reflect and we’re giving you the full point ranges. But we had a slight change in the phasing of how the different capacities are coming on stream that’s part of it. So we don’t see a dramatic change there. And we held our depletions guidance or our volume guidance at constant. But we’re -- we keep the margin pretty stable within that range.

Okay. Understood. Thank you for that clarification. And then just one follow-up for me then please, just wanted to dive into your comment around expectations for growth across your whole portfolio. And just as I think about, beer specifically, you clearly have a lot of innovation in place, but how big of a role does return of the on-premise play in, you actually achieving that aspiration to grow beer this year?

Hi, Vivien. This is Dave. I take that one. So, I think, yeah, so for sure, we’re looking Truly and Twisted Tea to drive a lot of growth, as we discussed. But the other brands, there’s a benefit from on-premise coming back on and we have assumptions about that is, it vary greatly over the course of the year that comes back on more fully by the fourth quarter? But in addition, we’ve got, first of all, here in the off-premise is the core brands, all core brands, Samuel Adams, Dogfish Head, Angry Orchard Crisp we’ve seen growth since COVID. So there is some momentum and have some household penetration increases across all these brands. So we see, I’d say, a better momentum with off-premise. Also the innovation we expect to play a big role, we do. If we have a number of things out there, like, Wicked Hazy is out there now. Wicked Hazy, Wicked Easy, Sam Adams, Live Dogfish Head just launched Hazy-O! and Dogfish Canned Cocktails, Angry Orchard has fruit -- two different fruit ciders Peach Mango Strawberry. So the momentum that we’ve generated over the last, call it, nine months in the off-premise with a core brands. On top of that the innovation that we’re hopeful about this year across all three of those brands and then on top of that our on-premise coming back over the course of the year, we think that in our plans adds up to positive growth for each of those three brands.

Understood. Thanks so much.

Sure.

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

Thank you. First a quick housekeeping question. The year-to-date depletions up 53%, do you have any ballpark as to how much retail inventory building was in there for Truly Iced Tea and some of the new products? And then bigger picture, could you talk a bit about your visibility into shelf space and distribution growth across the portfolio for 2021, particularly for Truly, any early read on the spring shelf set resets, which were delayed for a year? And I’ll pause there. Thank you.

Eric, I’ll take the first question on the inventory. We have -- I mean, clearly, we are building inventory. We started building inventory because we know we don’t have the capacity for peak and that’s pretty much in line with what we have done in the previous three years. We started building the inventory in December, not exactly to the extent that we had originally planned, but it was higher than we had in the previous year and the key driver behind that was the Truly Iced Tea launch, which compared to Lemonade, when we launched Lemonade, there was a pretty new idea, pretty new product. So people want to -- were careful in taking that in. Whereas the Truly Iced Tea launch, there was a lot of goodwill from the wholesalers to retailers and the consumer. So we knew this launch was going to be bigger, so we had to build a little bit more and that’s what you saw at year end we had about a week more in wholesaler inventory than what we had the prior year. Since then we haven’t really built much, to be honest, because we continue to build and we will build pretty much into March, April, but it’s gradual and it’s broadly in line with what we have done in the previous years.

Eric, I will take on the shelf space question. If you look, we’re expecting probably about 50%, maybe more increase in shelf space. It obviously is going to vary by channel, by customer, but on average last year, if you look at large format, stores -- grocery stores, on average 7 -- 87% -- 87% of the cubic feet for hard seltzer for the category, we see that going up to 11%, 12%, 13% this year. So I think, I’d say, 50% plus in terms of space.

Great. And then just to following up the -- and Jim, last quarter you guys expressed some confidence that the overall hard seltzer category could double again this year, sort of tied into your last comments on the shelf space increase. Are you still looking for the category doubling again this year? I know your guidance doesn’t count on Truly doubling. But just wondering how you’re thinking of overall category growth?

Yeah. This is Dave. I’ll take that one. I think we spent a lot of time thinking about this over the last -- since we last spoke, a lot of changes out there. We looked at like really a lot of different things. We looked at actually a lot of folks on this call did conducted their own analyses to look at that category, make their own -- and make their own predictions. We talked to a number of industry experts to get their assessment of where they thought the category was going the proper realms of the world. And then, of course, then we dug into our own data. So we spent a lot of time looking at points of distribution, growth, potential velocity, potential household penetration, where it is, where it’s going, the buy rate. We looked at our innovation like Truly Tea and other things. We looked at some maybe some of the loss cases last year, because supply chain couldn’t deliver the cases. We also dug into the numerator data, which some of you guys look at and also IRI data. In the end, we came out at the end of the -- of that exercise were the range about 70% or 100%. So I think last time we may say, 80% to 100%, we’re pretty confident the category will grow based on all the work we did and based on the work that a lot of you have done somewhere in that 70% to 100% range. And that would translate into maybe for -- maybe 15% plus share of total beer within the IRI or Nielsen universe.

Terrific. I will pass it on. Thank you.

Okay.

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

Hey. Great. Thanks. Good evening, guys, and congratulations on the strong year. Dave may we could just start, I guess, with where you left off in the last one, just sort of building to the category growth. Because it’s -- the category while still really strong levels, it’s decelerated here in January and February. So how do you see the cadence of this playing out for the category, if sort of the bogey that you guys are setting, is it’s going to grow, 70% to 100%? What -- and the comp year-over-year comparisons are going to be difficult? How do you see this playing out? Is this additional capacity coming on to help Marc Anthony brands and among others? Is this new product innovation? How do you see this playing out that we go from the deceleration here in early part of the year and we accelerate to get to the high end of the range? And then I have a follow up?

Yeah. Sure. Thanks. I think -- well I think you kind of have some of the answer in there. I think, I mean, we think the innovation will continue to drive interest in the category. We don’t think they’re going to be the supply challenges at least for the top players as it was a year ago. I think also as things did slow down at the end of the year, when you look at it in the whole beer industry, we look at -- there was issues, COVID shutdowns, uncertainty about the political environment, COVID relief, et cetera, et cetera. And that’s -- we see a change in the dual capacity, it depends on what you’re looking at. That’s the problem with this category. So when you guys look at Nielsen, so you guys look at IRI, but generally the category is growing like 90% right now and it’s a soft shoulder. I mean we think that this innovation gets going and how you use Truly Tea, as an example. I mean, if you look at the non-alcoholic tea business it’s about a $10 billion business of retail. So that kind of dwarf what I’m not sure with Lemonade is $100 million. It’s probably not. So this is a significant category and we think innovation like that in all this reports, I’m not just trying to talk about our innovation, but you use as an example. Innovation like tea, if we think it’s going to bring more people into the category. So we think things will start to accelerate, again even as we get towards the summer to when we get, the overlap with COVID last year. So, again, you look at the trends, you look at the growth in household penetration, you look at the trends of growth and frequency. You compare it to like light beer where it’s 50% less household penetration of light beer. We think it can get there and we put a range on it. So it’s not, maybe it won’t be 100%, but we think it will be at least 70 and whatever it is our intent is to grow faster than whatever that number ends up being.

All right. And just to be clear on that, the expectation is that, you’re going to maintain market share in the category. Is that what you’re planning or is the expectation that Truly is going to gain share, which is reflected what we’ve seen in the Nielsen data recently?

Yeah. Yeah. Our expectations were going to gain share.

Yeah.

I mean, if you look at it, I think, that’s our goal and that’s -- we’ll be happy of us with you. If you look at, go back to September maybe Nielsen would be look like IRI. Let’s go back to September and IRI Truly has been outgrowing the category since then by about 40 points to 50 points, since that time. And that was before the innovation started to kick in. So we feel good about where we are now and obviously it’s early and there’s a lot more chapters to happen this year, but we feel like we’re in a position where get things to play out the way we expect we will grow -- we will outgrow the category if we get share.

Yeah. Makes sense. Thanks for that. Just a quick follow-up, could -- and Jim, maybe it would be good to get your thoughts here as well. Just comment, it seems like the ice product is off to a strong start, understanding it’s still really early. How is it performed relative to your expectations? Where do you think, I know again, it’s early, any read on repeat purchase rates at this point and then I can pass it on. Thank you.

Jim, do you want to jump in or I will give…

Yeah. Sure. Sure. We didn’t really know how big tea was going to be. So my expectations were that it would be a little bit less than Lemonade as in alcoholic beverages. Certainly, in FMB Lemonade is bigger than tea. So the gap is closing. But on the other hand, as Dave pointed out, there’s basically more -- I see drinkers out there then there are Lemonade drinkers by a factor of two or three or four. So I guess, I would say, I’ve been pleasantly surprised by the strength of tea, but it’s just way too early. I think retailers were very supportive of it, because they saw the success of Lemonade last year. I mean Truly Lemonade was basically the biggest thing to come into the hard seltzer category and their expectations are quite high. We got tremendous support from retailers. We got tremendous support from our distributors. But it’s still only in the middle of February and we have not yet seen the innovations hitting the market fully from and how’s your Bush with there with light lemonade seltzer and their but like hard tea seltzer and similarly from White Claw. So, I think, we’ll have a pretty good handle on it at the next earnings call. But so far to answer your question, it’s actually done better than I thought.

Yeah. Just to really quickly build on that. I think what we can say definitively is that there has been very, very high trial and the repeat, Kevin, you point the last question is the repeat as you know it just takes a while to really truly know. So as Jim pointed out next earnings call we will have a better handle on what repeat looks like and we’ll have proxies we can look at. We can look versus lemonade, we can look at versus other new brands in the category and we’ll have a better handle on what the trajectory will be for tea.

That’s great. Thanks for the time guys. Good luck.

Thanks.

Our next question comes from the line of Wendy Nicholson with Citigroup. Please proceed with your question.

Hi. My question has to do with premise, really for seltzer specifically, I assume in 2020, because of COVID and all the shutdown on-premise was a teeny, teeny, tiny, low single-digit percentage of the overall Truly franchise. But how big do you think it will be in 2021? Are you gaining a lot of distribution as restaurants and bars starts to open back up and how quickly you think that can ramp and what’s the receptivity of the on-premise location spend to Truly so far?

Hey. Jim, do you want to take that one?

Sure. Sure. On-premise has lags the off-premise with hard seltzer. There was no question about that and that was true even before COVID. It’s still lagging, because you got to go in and sell it in. And the on-premise operators are not that receptive to lots of sales calls in these times. So -- and again, it’s not a product that has had a lot of traction on drafts that we’ve tried to generate it. So if I had to guess it, seltzer will be a smaller percent of its volume will be on-premise than the rest of the beer insider category, which it tends to be maybe 18% on-premise. I would guess seltzer would be a lower numbers on that for the next year or two anyway, because that’s…

Got it. Very much so. Very much so. That’s great. I just want to make sure you weren’t forecasting too much of a hockey stick there. And then my second question just has to do with all the cash on the balance sheet. I know you’ve got CapEx planned to build out your capacity, but you’re still generating a ton of cash. So what are you going to do with that cash? What’s your appetite about thinking about another beer acquisition? A Dogfish has worked out fine, but are there any more craft beer brands like to expand? It seems like anything you’d buy would actually be diluted to your growth. So I don’t know that that makes sense that you are stockpiling cash, so just curious how you think about that?

So I can take the cash questions and I’ll let Jim talk to acquisitions. I guess, the -- to your point, I mean, we have a highly cash generative business, which is very beautiful, if you’re CFO, but we also investing into the business and the growth of the business. You saw the capital that we’re projecting of $300 million to $400 million. We want to maintain the flexibility and those projections are based on the growth that we have given. And as we’ve said before, so far we have been surprised by the category growth. And we just want to make sure that we stay really, really close that we built the capacity that we need. And then, as I mentioned before, when it flattens out then we’re going to create the network -- the supply chain network that gets to significantly lower costs and for that we want to have the flexibility. So that’s the number one priority. And it follows our long-term strategy that the business comes first and then we’ll see what we’re going to do with the rest of the cash. But -- and the business is clearly supporting the growth at this point. And Jim, I don’t know if you want to talk to put any acquisition thoughts?

Sure. I don’t think at this point we have any plans or appetite for another craft beer acquisition. Obviously, it depends on what company and what the situation is. I would say, the Dogfish Head acquisition was somewhat unique, because of the synergies with the founders. I mean, we view Sam and Mariah as a unique asset. There was a very common culture and a very strong working relationship that I’ve had with both of them over the years and they had a unique brand with a unique and very strong positioning, as well as kind of the same creative and innovative juices that we have and those were sort of soft assets. The synergies worked out. We’re now merged our distributors. For about 85% of our volume is going through common distributors. So the numbers worked out in terms of being accretive, but the big driver there was not just the numbers, but the relationship and the culture and the sort of soft energies of innovation and creativity.

Got it. That’s helpful. Thank you very much.

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

Hey. Good evening guys and congrats for getting Truly Lemonade, the most incremental new product in entire beer industry that’s wondering [ph].

Thank you.

And Jim just to comment, I’m more pleased than you on Truly Tea and now for -- according to your math, I mean, actually the tea category and F&B was twice as big as Lemonade before Truly Lemonade was launched. So anyway, two questions actually, the first, just history about the marketing spent. You significantly spend more in the fourth quarter that guided. You said either after the third quarter earnings that you would spend $55 million to $65 million, you ended up on spending $90 million to $92 million more. So that’s $30 million more. So what’s the rational there? And also you reduced by $10 million, I mean, your guidance marketing spend for these years. So did you spend it in the fourth quarter? I mean, I like to understand directional of why spending more in the fourth quarter. What’s your plan and planning for less this year? Thanks.

Yeah. Laurent on the marketing spend or brand spend APS, Q4 was a big Q4 for us. I mean what we spent like 50% -- more than 50% more than in the previous year, whereas for the average year was 26%. And that had to do a little bit of a phasing. We were going into 2020 and then really strong plans for the first half, and that was impacted by COVID. COVID happened and we didn’t execute -- couldn’t execute everything as we had planned for. We also evolved on our marketing plans, and as I mentioned in previous calls, we have marketing plans, but we are also pretty adaptable and flexible and see what’s working and what’s not working. And when our confidence increases, we’re just spending more and when we don’t have the level of confidence that’s needed then we’re reducing our spend. So I think Q4 is an expression of two things. One is the number of phasing and the second thing is we feel much more confident in our programs and that’s what we invested and we also wanted to have the strong start going into 2021 across all brands. I mean, primarily it was Truly, but it was also Tea and it was also Sam Adams. And then there was a little of phasing as well on the production. We get some productions done a little earlier. So that happened as well in Q4. As to 2021, there was a little bit of phasing, but also when we gave you the initial numbers, in October quite a few things on flexing to get a better handle on your plans and the effectiveness of the plans and that’s just firm of the plan, it’s not the change in -- a dramatic change in direction or strategy at all.

Okay. Thanks. My second question is about packaging expansions. I mean you said in your prepared remarks that you are planning to expense packaging. So you said in, you would have, I mean, much greater, I mean, shelf space in grocery. I want to understand on that and put stores specifically, what’s the number of on averages to you, you’ve got right now and how much are you planning to have in ‘21. And is the gross will be coming from single serve primarily, which are more profitable or will be coming from Truly Extra, which also single serve, so I like to understand a bit. Thank you.

Hey. Laurent, I’ll take that. I think it depends -- it really depends on the channel that you talk about, but I think, we’re looking to expand space actually everywhere. I think in large format, it’s really getting Truly Tea to a variety pack in there, so that will be our variety pack or if you had set variety pack after Lemonade. So the goal is to have all five variety packs in every large format store. So for grocery, it’s again, it’s mostly, as Jim said, it’s like variety packing that’s where we’re playing. We’re thinking convenience stores we have, there’s a lot of opportunity on single serve and on variety pack. So right now, typically we have maybe one or two variety packs per convenience stores. We want to have two to three. We’re also having single serve across the board. So again, it’s not just that we’re talking Truly now, but it’s not just Truly, it’s -- lots of opportunity for the Twisted Tea in particular to get more packages in that channel as well.

Yeah. Okay. Well, thanks guys and hopefully next year, we’ll see Truly Tea as the most incremental product in the beer industry. Okay. Wish you a good luck for this year.

Thanks.

Thank you, Laurent.

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

Yeah. Good evening, everyone. Just a few questions, in the release, you talked a little bit about geographic expansion for the Truly brand and I just wanted to clarify. Did you mean internationally, did you mean just in the U.S., can you just provide some context around that? And then I wanted to just ask about, when you talk about category stabilization for hard seltzer and I’m curious where you see that going. You talked about a 15% number, I didn’t -- I wasn’t clear if that was like next year or next two years or kind of longer term? But we think the category can get somewhere between 17% and 20% of overall beer based on our math. So I’m just curious what you think about those numbers? Thank you.

Yeah. Sure. Nik, thanks. I think first on the geographic expansion, we were talking U.S. So there’s still about a 6-point gap in ACV distribution between White Claw and Truly, so we think there are definitely pockets in the U.S., different chains, also convenience store is a big opportunity for us that we’re very close and share perspective from in grocery, but we’re much too distant in convenience. So it’s we’re talking about U.S. on that one. And the second part was royalty was sort of where the category goes. I think we’re not -- we don’t want to forecast beyond this year quite honestly. I think when I said 15%, we’re thinking maybe 15% plus share this year in 2021 and that would be obviously, the IRI or Nielsen universe. I’ve seen your analysis going forward and so those assumptions and they seem positive, seem kind of the facing pretty reasonable to me what you did. But we didn’t want to come out here and start talking about anything beyond 2021, because we just don’t know. I guess, we’ll leave that to you. But we do think we see continued growth and the percent of mix makes sense and that’s certainly why would like beer, right? So it’s not a crazy thought. Right now we can more focus just on what’s going to happen this year.

Great. And if I can just slip one more in on RTDs, obviously, not core for Boston Beer, but Dogfish Head does have a small business there. So I’m curious just given how much retailers are expanding space in that particular area of the beverage alcohol market, if you’re thinking about perhaps making a bigger play into that segment organically or through M&A? Thanks.

Yeah. So, I think, yes, we’re launching in March, we’re launching Dogfish Head Canned Cocktails three SKUs and we ended the process amazing. We’re very excited about it. I think right now, that’s our -- it’s our first foray into that space and we’ll see how it goes. I mean we think it’s obviously, I think it sort of plays into premium and a high-end of hard seltzer if you will, I mean, the price points are obviously much higher and it could potentially be a high-end to the hard seltzer category in a way. We believe in the product, we believe in the brand. We’ll see how it goes and then we’ll decide from there. As you know, we still -- distribution process, it’s not like snap your fingers on Truly Tea and all our distributors and carry it necessarily. So we have to get the block in the distribution, as we go and we’ll see what happens. But we like -- I think it make sense, right, the consumers are, I think, there’s a blurring rate between wine, spirits and beer, this is one of the outgrowths of that blurring and we do think it’s something that sort of worth pursuing, which is why we’re pursuing it right now and of course we will see, right, kind of see how that goes and go from there.

Thanks so much for the perspective.

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

Yes. Hey. Thanks. Good evening. May -- two questions from me, the first one is another geographic base question, this one specific for Truly Tea. As you’re thinking about that offering, do you think it will ultimately have sort of relatively even national appeal as it scales up to commensurate with the rest of franchise or do you see it resonating more regionally ultimately? And if so, is that influencing how you’re targeting your investment spending as it does wrap up?

I’ll take that.

Okay. Go ahead. Go ahead, Jim.

Yeah. Our experience with Twisted Tea has been that it is somewhat regional, though it’s definitely becoming less so. It’s been a 20-year process of rolling out Twisted Tea and the regionality has not been what you would have expected. Yeah, you would have expected like in places like the south, where there is a lot of Tea consumption, Twisted Tea would have had its strongest demand and it turned out that it was more northern states from Maine, all the way across to rest of New England, Michigan, Montana, places like that. So we think that Hard Tea is now more widely accepted everywhere. We don’t see it being particularly focused in places that are big drinking places like the south and we think it won’t have the slow rollout that Twisted Tea did and therefore we will more closely follow whatever regional pattern, which is fairly weak that you see with hard seltzer. Does that answer your question?

Yeah. That’s perfect. That’s perfect. Thank you. And then, in fall, you mentioned, you talked a little bit about higher inbound freight costs as it relates to COGS earlier, I guess, just curious if you could put some maybe some parameters around what you’re expecting for your own outbound freight cost to distributors, but maybe on a volume mutual basis. Just to give us a base understanding. And if I could just, as we’re talking about supply chain dynamics, in the K, I noticed some supply disruptions impacted you in the fourth quarter, is that behind us now or is that have carryover implications early ‘21? Thank you.

Yeah. Steve, let me talk of the freight. So when you look at 2020, 2020 for the full year, we didn’t really have significant rate increase. Of course we had freight increased due to volume, but not very significant due to rate if you look at the full year. But what happened is that with a slight decline in the beginning and significant increase in Q4 and the freight market tightened quite a bit across the U.S. in Q4 and we saw significant increases there and we see that rolling into 2021. And the increase is pretty much the same that we see for inbound freight and outbound freight and it’s really availability of trucks, the market has tightened to an extent that in many markets, you have several loads for one truck and that normally is below five. So we have seen that and we expect increases that would reach from a rate perspective 20%.

Okay. That’s perfect. Any color on the glass supply issue that I read about in K?

The glass supply issue should be behind us. There was a bit of tightness, the glass industry was adjusting -- we were adjusting to certain plans that we had, but that is behind us.

Thank you very much. I appreciate it.

All right.

[Operator Instructions] There seems to be no further questions left in the queue and I would like to turn the call back over to Mr. Jim Koch for any closing remarks.

Thank you everybody for joining us this evening and we’ll talk to you again in a couple of months. Cheers.

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