Greetings and welcome to The Boston Beer Company’s Fourth Quarter 2021 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn this conference over to Mr. Mike Andrews, Associate General Counsel and Corporate Secretary. Thank you, sir. You may begin.

Thank you. Good afternoon and welcome. This is Mike Andrews, Associate General Counsel and Corporate Secretary of The Boston Beer Company. I’m pleased to kick off the 2021 fourth quarter earnings call for The Boston Beer Company. Joining the call from Boston Beer are Jim Koch, Founder and Chairman; Dave Burwick, our I; and Frank Smalla, our I. Before we discuss our business, I’ll start with our disclaimer. As we state in our earnings release, some of the information we discuss and that may come up on this call reflect the company’s or management’s expectations or predictions of the future. Such predictions are forward-looking statements. It’s important to note that the company’s actual results could differ materially from those projected in these forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained in the company’s most recent 10-Q and 10-K. The company does not undertake to publicly update the forward-looking statements, whether as a result of new information, future events or otherwise. I will now pass it over to Jim for some introductory comments.

Thanks Mike. I'll begin my remarks this afternoon with a few introductory comments 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 the fourth quarter results as well as the outlook for 2022. And immediately after Frank's comments we'll open up the line for questions. Our fourth quarter depletions growth was 15% and full year depletions growth was 22%. Despite these strong depletion results we experienced a decline in shipments in the fourth quarter, as we continue to work through challenges with our supply chain and the impacts of the slowdown in Hard Seltzer. Fourth quarter shipments declined 24.5% compared to last year's fourth quarter as a result of more aggressive wholesaler inventory reduction than expected around Truly. And then beginning in early 2022, our service levels to wholesalers declined due to supply chain constraints. This led to increased out of stocks for certain brands and packages with our wholesalers. Additionally, the beer industry is off to a slow start in 2022, likely as a result of the large outbreak of Omicron, the continued broad scale supply chain issues and commodity inflation that is affecting consumer purchases. As a result, thus far in 2022 lower shipment trends have continued till now, our depletions are also declining compared to last year's comparable period, mostly attributable to the significant shipments from truly inventory, prebuild and sell through one year ago. And partly as a result of out of stocks. We are focused on resolving our supply chain issues as quickly as possible, but believe they will continue to negatively impact our business until the inventory levels have recovered, which we expect will happen by the end of the first quarter. In measured off premise channels through December 26, 2021, where our brand portfolio represents only 4.3 of the total beer industry volume, we delivered 43% of the total industry volume growth, the highest by far of all brewers. In addition, we're pleased that all five of our brands grew depletions during the fourth quarter, a good sign of the inherent demand for our products. We have a broad portfolio of healthy brands, and we expect that our business will recover and grow volume between 4% and 10% for the full year in 2022. We are thankful to our outstanding coworkers, distributors and retailers, whose continued support helped grow our business during 2021. I will now pass it over to Dave for a more detailed overview of our business.

Okay, hey, thanks Jim. I'd like to start my comments with some reflections on 2021, as a little distance can provide a lot of perspective. We've been chasing growth aggressively in the past several years and still believe this was the right decision. In particular, the Nason Hard Seltzer category presented a rare game-changing opportunity. And we did change the game. Our three-year depletions CAGR has been 27%. We transformed our company by growing net revenue from $863 million in 2017 to $2.1 billion in 2021. In hindsight perhaps as innovation leaders in the Hard Seltzer category, we needed to have a better feel for category trajectory. We were squarely in line with everyone else, but maybe we needed to be more prescient, even amidst the unprecedented environment over the last two years. There is clearly much to be proud of and to look forward to. We transform Truly into a very strong number two player and a billion-dollar brand amidst an unprecedented floury of competitive activity and innovation for many well-resourced competitors. Hard seltzers have generated tremendous growth for the beer industry over the last five years. And we believe they remain a very important beer industry category in the future. Hard seltzers were 10.4% of total beer dollars for the full year 2021, up from 8.9% during the same period in 2020. And much like the energy drink category, we believe that the top two players will continue to represent about 70% of total share of the segment as they have from the begin, despite significant attempts from hundreds of brands enter the category. Consumer metrics remain favorable and truly social media sentiment continues to trend positively. The categories’ household penetration frequency and buy rates, all increased during 2021. Truly generated 57% of all hard seltzer category growth…

Okay. Thanks, Dave. Good afternoon, everyone. Before I get into the financial review of our fourth quarter results and financial outlook, I'd like to provide more detail on the fourth quarter and full year charges and other costs related to the Hard Seltzer slowdown. As Dave explained, we strategically resource against the high side of our 2021 internal category growth and market share projections to ensure we would not be constrained in our efforts to build our share position in the hypergrowth Hard Seltzer category. Following last summer's rapid slowdown, actual Hard Seltzer category growth fell below our internal low-side projections and resulted in excess capacity and higher-than-planned inventory levels of input materials and finished goods. As a result, in the third quarter, we reported direct and indirect volume adjustment cost of $143.9 million before tax, and we estimated we would have an additional $36.8 million of indirect volume adjustment costs in the fourth quarter, primarily due to unfavorable absorption impacts at our company-owned breweries. In the fourth quarter, due to slower-than-anticipated truly Hard Seltzer shipment growth and higher provisions for out-of-code or damaged products, we recorded total fourth quarter indirect volume adjustment cost of $52 million before the related tax benefit, which exceeded our previous estimate of $36.8 million. This $52 million cost impact includes unfavorable absorption impact at company-owned breweries and downtime charges at third-party breweries of $30.7 million, provisions for out of code or damaged products of $13.8 million, increased material sourcing and warehousing costs of $5.7 million and other costs of $1.8 million. These total indirect costs of $52 million have been recorded in the fourth quarter financial statements as a $9.2 million reduction in net revenue and a $42.8 million increase in cost of goods sold. With this background on the third quarter and fourth…

[Operator Instructions] Our first question comes from the line of Filippo Falorni with RBC Capital Markets. You may proceed with your question.

Hey good afternoon, guys. So first on your innovation for 2022, can you comment on the level of incrementality that you're expecting from the innovation and your contribution to top line? And specifically for the Truly line extensions, we are seeing that for Truly Margarita, early results are really strong, but it seems like the cannibalization has been a little bit higher than historically? So, I'd love to get your comments on that.

Sure, Filippo. This is Dave. I'll answer that. I think as it relates to Margarita, it's really hard to make a comment right now about how incremental it will be. We believe it will be because it's really a hybrid. It's a Hard Seltzer, but it's also a place in the can cocktail space, and it provides margarita drink, which is as you know the most popular spirit, at a much-reduced calorie count versus a traditional margarita. So, we're optimistic about that, but I'd say it's too early to tell. As it relates to the broader Truly family, it depends upon what you want to look at. You can look at Nielsen panel; you got a numerator data, et cetera. And everybody has a different number for incrementality. As we looked at it last year, even I looked at Punch, which started very strong, but then it did fade a bit in the fall. It had at least a 50% incrementality. So, it's really hard to truly measure what is incrementality. But obviously, our goal when we innovate is to bring – find a way to deliver something different to the marketplace that will drive new consumers in. It's either into the category or away from other categories or from other brands. And so doing we're hopefully optimizing the incrementality. But if anybody tells you that they know an exact number what the incrementality is, I'd like to meet them because it's really, really hard to do that.

Got it. That makes a lot of sense. And then on the Hard Seltzer category broadly for 2022, Jim, you mentioned the entire beer industry has started 2022, a little bit slower than expected in January, but you're still thinking the category can be flat to up 10% for 2022. I guess what gives you the comfort that we're going to see a rebound as we get past January or maybe the winter season as we got through 2022?

The confidence really comes from the consumer, and I think it's becoming increasingly clear that the growth in all alcoholic beverages is going to come from this, it's being called beyond beer space, but it's also beyond wine, it's beyond the liquor. It's sort of a fourth category that is built on flavor and convenience and consumers that are the alcohol agnostic. So, I see that continuing to grow. I see consumers gravitating towards primarily Hard Seltzer and sort of beer-based items in there because they offer better value. The spirit-based products, because of – we've always had different tax regimes for beer, wine and liquor. They've always been differentiated since the beginning of Republic in 1791 when the first broad-based tax came out, it was on whiskey, and not on beer or spirit. So as a result, it basically boils it down, if you want a spirit-based product, you get four cans for $10 and if you want a beer based when you get six cans for $10. And you also have significantly better distribution opportunities. So, all of this is playing into where consumers are moving. And the RTD products will certainly get their share, and they're growing last year triple digits. So, I think they've got another year or two of growth. But at the end of the day, the beer-based products offer better value to the consumer and wider distribution. And I just – I think Hard Seltzer, it's moved beyond just sort of LeCroy with alcohol is self-sterilizing other categories like lemonade, like tea and now margarita is the most popular cocktail in the country.

Got it. Thanks for the color, guys. I will pass it on.

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

Good afternoon. Hoping you could give some color on your confidence in being able to outgrow the Hard Seltzer category for the year. Certainly, starting the year it looks like you're seeing some market share kind of on both the sequential and year-on-year basis. I realize that comps are very different for you and the largest competitor and the number four player is expanding distribution nationally. But I guess what gives you the confidence in being able to hold or grow market share for Truly for the year? And then a separate question on pricing. It looks like you took down your expectation for pricing at the top end slightly. Just wondering what the reason was that the 6% always seemed a little aggressive, but wondering if that's related to any particular brands or regions?

Thanks, Eric. I think Frank and I will tag team your two questions. I'll take the first one regarding our confidence and Truly able to gain share. I mean, I would start with – to me, the most important thing is that we have – we've built a brand that has the second largest penetration of beer about 13.4%. So, Bud Light beer is Number 1 and Truly is Number 2. So, we have a very large base to play to. We have a base of consumers who are going to be interested in innovation, interested in news that we're going to have their attention. And I think that's really important as we innovate. So Truly Margarita is the first one we talked about just today Truly Poolside. There are others that we're not – we can't talk about yet. So, there'll be continued innovation. And the key is to – it's hard not to, but you can't look at the category one-week at a time or even three or four weeks. You got to look at it over a longer period of time, and that's how we're doing it. And yes, we have huge overlaps right now. We grew and Truly grew in January last year, 135% in IRI, and I think the category will be around 80%, 85% in IRI a year ago. So, we have to look beyond these overlaps and just focus on, we built an important brand that has a large consumer following. We have really strong social media sentiment it continues to grow. Our aided awareness levels are still below the Number 1 player. So, there's definitely opportunity to improve that. We have the highest repeat rate and we have the highest buy rate. So, we're starting from a position of strength. But it's really – it's up to us though to find the right ways to innovate and also to build the core business as well, the base business and market that business. And we have; in fact, we have a new added campaign that kicked-off today that started with Truly Margarita. So, there's a multiplicity of things we need to do. But we feel like we've got – we understand the brand, we understand the consumer and we know what people are looking for. And so, we feel like we're in a good place and we've now though, we're going to print our heads down and we drive the business, and we'll see three, four months from now where we are. So that's sort of my – that's my response to the confidence level and gaining share. And now I'm going to hand to Frank, who can talk a little bit more about the pricing piece here.

Yes, Eric, I mean, we slightly narrowed the range from 3% to 6% to 3% to 5% as you noted. And it's just like we've learned a little bit more. There was not a singular event. When we gave the last guidance, it was in October. Since then, we have executed quite a bit of pricing as we go into – as we came into 2022, there's – naturally there's a lot of carryover pricing, which is defining a big part. And pricing is a very local affair. We give you a national average for our company, but it's a very local affair. And as we see what makes sense for our product and also as we look at the inflation that we have in our cost base, we feel that 3% to 5% is more realistic and it's more unlikely to get to 6% on an average. There will be markets that have a little bit more. There are variances between markets, but on average we feel that's the better range based on what we've learned and the pricing that we've implemented. But no big differences between brands or anything or no one major event, it was just like when we came out in October, you just don't know a lot and we felt this was kind of the range of 3% range where we would land at the end of the day.

Great. Thanks, I will pass the line.

Our next question comes from the line of Kaumil Gajrawala with Credit Suisse. You may proceed with your question.

Thanks for the question. If I could ask maybe for some more details, it's quite a kind of notable change in the beginning of January versus where you were trending before. As you dug into it, is there anything additionally you can add into what's behind – obviously not from a shipment’s perspective, but from a depletion’s perspective. Just what you're seeing in the sort of short period of time because it's quite a big change versus where you were in the fourth quarter?

Yes. Kaumil, let me take that. You've seen the shipments. I think the shipment is pretty clear year-to-date with 29%. The drivers are somewhat similar. I mean you have – we're lapping the pre-build for the shipment one. The pre-build is also that the we had last year is impacting a lot is depletions as well because if you recall, we were growing shipments in Q1, 60% depletions were up 48%. If you – everybody was building up the inventory, not only in wholesale but also at retailer level. So, this in a flatter category as we are now or slightly growing that has reversed, very clearly. So, this is one thing. The second thing I'd say, as we indicated because we had more damaged products and we suddenly had a bit of a gap in our inventory. So, inventory that we thought we were going to have, we didn't have. And it took us a while to pivot our supply chain and replenish that inventory internally and at wholesaler. So, we didn't have the production that we needed to get to the shipments that we needed, so that hasn't impacted as well. And then I think the third one is in general to be a category. But I'd say our internal problems account, I would say probably for two-thirds of the depletions decline that you see in the year-to-date numbers that we gave you, the 9%.

Okay. Great. Thank you. And can I ask about your outlook for can costs over the course of this year? And maybe can cost and availability?

So, availability, we have – we feel confident that we have the available cans. I mean, clearly, the dynamics have shifted quite a bit. As in the past, there was like up until, I'd say the middle of 2021. the shortage was clearly in slim cans, which was all the cells and then with the slowdown, slim can capacity became more available and standard cans became more scarce, which is mainly where our Twisted Tea is and our other products and Truly is about slim cans. But we feel confident we have secured the volume for all the cans. And then on the pricing in itself, we don't expect major changes. The only thing that we will see is like what is the pass-through is the commodity cost, which is the aluminum and general inflation, and that is going up and that's reflected basically in the cost that we have taken as a basis for our pricing that I covered earlier.

Okay. Thank you.

Alright.

Our next question comes from the line of Laurent Grandet with Guggenheim. You may proceed with your question.

Yes. Good afternoon, everyone. So, my – I do have two questions. The first one is really a follow-up from an earlier question. It seems like on Truly share, a bit of softness at the beginning of the year, there's been discussed already. But when you dig into the numbers, it seems like the share loss is coming more from the, what we call, the mild favor, the white can, not the bold flavors where you pivoted, I mean two years ago. So, it is a declining subsegment is still the largest one where you are losing share. Is there anything you would do about that piece of the segment that I know it's not growing, but it's still about 60-plus percent of the category? That would be great because that is impacting your market share right now?

Hey Laurent, this is Dave. I'll take that. And maybe Jim wants to layer on top of this. But I think, yes, I mean, we what you see is correct, and we are focused on that because we can't. The challenge with this category is that people want – they want consumers who want news and innovation. And the further you go out on the innovation limb, the more you have to support where you started the base. In this case, the white cans, we call them the DOGs, if you will. So, there's definitely – there will be news that we will be sharing later in the year when we can about what we're going to do to support DOG certainly is a new campaign. But we have to look at everything to focus on that part of the business because it's important. And to your point, it's sizable and it hasn't been growing. So, it's a point well taken, and that's something that we are focused on.

Thanks. Because ultimately you don't want, I mean, especially in convenience store having retailers choosing, I mean, to have white flow to represent that segment and you focusing on model flavors, okay. Second question is really about margin, trying to figure out the puts and takes here. You mentioned about the aluminum cost already. But on the other hand, on the positive side, I mean, to get to probably a better level of comfort on the gross margin guidance. There are probably some elements of mix benefit between selling less Truly and more Truly city, there is probably a bit of upside coming from the new contract manufacturing setting setup who is focusing on fewer but probably more profitable contract manufacturers. And probably also a bit of shipment benefits as you've got two facilities now operating on the west part of the U.S., in California and Arizona. So, could you help us kind of figure out basically the put and takes? And how you get to your gross margin that you indicated and probably give us a bit more on the positives?

Yes, Laurent, this is Frank. I'm going to cover that. I think on the dynamics and on the building blocks to get the gross margin back to target ultimately to over 50%, those building blocks have not changed. And you mentioned that partly one is the network. We have like four anchor breweries that we have that we'll be able to produce the key products that we have that will give you benefits internally on the efficiencies and lower internal freight, which is showing up in gross margin. And then in addition to you get outbound freight benefit, which technically is not part of gross margin, but that's part of the savings. The other one is the lower variety back costs. That's really where we had the highest cost as we grew Truly, nobody really had it back costs that were affordable. It was like when you went outside that was significantly higher than what we had inside. And we were like planning to bring a lot of that volume in-house. We're still doing that. We're a little bit delayed on that because we had the start-up, took a little longer. The focus on the cleanup that we had to do end of the year took a little bit of time. So, we are getting some of the benefits in 2022, but not as much as we had originally projected that's coming a little later and a big chunk of that will come in 2023. There's also – so we get a bit of mix between internal and external, and we also lower overall the cost of variety packing internally and externally. And then we're working on higher internal throughput. We put the lines in relatively quickly as we improve the running of those lines, we will create more capacity. And then, as we've mentioned before, there's the supply chain transformation efforts that are underway will give us significant efficiencies. So those are clear changes that we have, like the structural changes that we're pursuing. Those have not changed based on the slow start at the beginning of the year. And the slower start-up costs versus what we had originally projected. They are a little bit delayed, but the drivers haven't changed and the absolute target hasn't changed.

Thanks, Frank. Maybe you can specify what was the percentage of in-house manufacturing now for Truly where you are right now?

So, the in-house – we don't give it by package, to be honest, Laurent. We were at 50-50, and it has come down overall because the in-house has increased, I'm sorry, the outside has decreased. The in-house has increased as the volume has come down and I believe that for total, that has gone up by about 10 percentage points. But again, that depends – we are running our internal breweries to 100% of the capacity that is available and only the balance goes externally. So, as we create more capacity during the year, that mix shift should improve over time.

Thank you. I pass it on. Thank you very much.

All right.

Thanks.

Our next question comes from the line of Nadine Sarwat with Bernstein. You may proceed with your question.

Hi, everybody. Thank you for taking my question. This is Nadine. Two for me. First, so in the past, you've had EBIT margins in the high teens. Is there any reason why you wouldn't be able to get back to that over the next couple of years? I know we've touched on the gross margin, but taking that down to the EBIT margin would be helpful? And my second question, you've discussed an airing of your shipping guidance towards the more bottom end of what you had said in January. Could you give us color on what exactly has changed in your expectations over the last month? Thank you.

Yes, Nadine, let me talk to the EBIT margin. So, your assumption is correct. There's the drop from where we were before in the mid- to high-teens is essentially due to the reduction in gross margin. And as you know, there were a number of reasons. We wanted to take advantage of the volume in the Hard Seltzer category. So, we're focused on getting incremental capacity rather than focusing on costs. I just went through; we have the building blocks to improve the gross margin that should fall through. We have clearly increased our operating expenses over the last few years, but below the top line growth, okay? So, we got some leverage. We didn't get a ton of leverage where we get some leverage and we expect more over the years to come. So operating income margin should clearly increase as the gross margin increases.

Got it. Thank you. And on the second on the change in expectations?

The change in expectations, so again, the main shift happened literally late in December where – and I want to bring – there are two things. One is that the wholesalers reduced inventory a little bit more than what we had expected. And then the other reason, which is kind of related, is there was more damaged product. We had like quite a bit of damaged product that we had discovered internally, but also at wholesalers, and that came back. So, with that amount of inventory that we thought we had available for depletions that kind of left the supply chain and we needed to replenish that. We have enough capacity in the system, but we couldn't react quickly enough to replenish that. Part of the reason was that were delayed in the start-up of our internal lines and then also the external capacity, there's a little bit of time notice that you need to give to bring the volume on stream. So, we're getting this volume in February, but clearly, January was impacted by that. So those are the main reasons.

Perfect. Thank you. I will pass it on.

Our next question comes from the line of Bonnie Herzog with Goldman Sachs. You may proceed with your question.

Alright. Thank you. Hi, everyone.

Hey Bonnie.

Hi. I just had a little bit of a follow-up question first on sort of what you were just talking about or just gross margins and cost. I guess what I wanted to make sure to understand is that your guidance, which is a pretty wide range for gross margins. What does that assume in terms of further inventory reductions? Any other fees, you guys incurred a fair amount in Q3 and Q4. So just trying to understand is that behind you? Or should we assume a lot of – or some of that continues into at least the first half of this year?

So, in terms of write-offs, if we get to the volumes that we have given you as a guidance, in terms of write-offs, that is essentially behind us. The shipment decline that you're seeing is literally largely driven by the fact that we're lapping last year's inventory build. And as you know, we're expecting a significant summer, as I mentioned before, shipments were up 60% in Q1 and then 48% in terms of depletions. So it is, we feel relatively good. The question on the gross margin is like what is the actual split at the end of the day between internal manufactured volume and external manufactured volume. And how quickly can we get the benefits from supply chain transformation. But yes, if there are no significant changes in volume versus our assumptions, we should have that behind us, and that should be in the results.

Okay. That's helpful. And Frank, just to clarify in terms of any of the contracts you have with some of these third-parties for this year? I mean, I guess it will depend on your top line and what you buy or need. And I'm just kind of trying to think through, could there also be some fees if you don't need that much volume this year depending on how the category evolves.

Yes, that is correct. So, the way, as you know, those third-party contracts are structured, you have shortfall fees if you fall below a certain threshold. Now I think we've done a fairly good job in like limiting our external contracts to what we really need. So, we have essentially two external partners where we had quite a few more last year. And so, we have listed the shortfall fees in the K that you will see, but we don't expect, like if the shortfall fees come that should be less than half a percentage point in gross margin. And that's what we have also reflected in the guidance that we gave you.

Thanks. That's really helpful. And then if I may just ask a different question more on your top line, just thinking about your shipment and depletion guidance, I really do appreciate that you guys are taking a step back on everything, but just kind of thinking about it and wondering if your guide is conservative enough right now, and I guess, what really needs to happen for you to hit the high end? And then, what happens or needs to happen for you to hit the low end of your guide? And you mentioned that Truly doesn't need to grow this year. So, I guess I assume that would put you at the low-end of your guide, but then how much share would Truly have to take, I guess, to put you at the high-end. Thanks.

Hey, Bonnie it’s Dave, I'll try to take a shot at that. I think as we look at this year, I mean, as I mentioned in the prepared remarks, we have a lot of activity around the base business and a lot of innovation. And we look at it – there is many different ways it could come out at the end. So, there is different scenarios where we end up at four different where we end up at 10. As I mentioned to hit that in the range, Truly doesn't have to grow. We want to grow and that's the intent, which would put us toward the higher end of the range. But we have a lot of momentum behind Twisted Tea. We have some really nice momentum behind Sam Adams. Angry Orchard has been hurt a little bit by these out of stocks that we talked about, but it shows some good momentum in Q4. Dogfish, we have canned cocktails coming that we're hopeful about. So basically, we're placing a lot of bets this year, and again, there's a lot of different permutations in terms of how it could come out. But between just based investment behind Sam Adams and Twisted Tea, Truly innovation, and the other innovation we talked about around Hard Dew, and, Sauza, et cetera, again, we feel like that range – it is a little more cautious than I think maybe what we talked about at the end of last year, right so. We'd rather be in the future more cautious in how we guide. But we think there is a lot of ways to get there. And it's really hard to say right now how we're going to get there. And I think I understand that now there's a lot of noise right now, obviously the first seven weeks they don't look great. And I think Frank talked to some of the reasons why, in terms of the industry, the out of stocks, the overlaps, et cetera, we have to get through this moment and let's see how things evolve. We will have covered the out of stocks as we mentioned, as we get into by the end of March. And we're often running in Q2. And that's when we'll have a better sense of where it all ends up. But we feel like this, four to ten range, has got a lot of different ways to hit it, it's not just one way. And again, like a year ago, a lot of it was based on Truly hitting some big numbers. And this year again we don't have to be successful with any one initiative we just need to be successful with enough to get there. Does that make sense?

It does. So, I really appreciate that. Thank you.

Our next question comes from the line of Kevin Grundy with Jefferies. You may proceed with your question.

Great, thanks. Good evening, everyone. Two for me if I could. The first one, a follow-up for Frank gross margin, the second for Jim on the Treasury Department's report. So, first Frank, not to belabor this, but just longer term on the gross margin, I think, you mentioned a number of times the potential to get back to the low- to mid-50. Can you box in a timeframe for that in a sort of steady state? What is the internal planning for that, for the company be talking, is it two years, three years as supply chain pressure sort of ease and commodity costs ease to some degree? And how would you characterize the importance of this metric to the company? Because, I think, historically there is a lot of focus on depletions and operating income as sort of the key performance indicators and key metrics for management comp. Is there sort of a willingness to sort of heighten the importance of this as a big value driver for shareholders? So, I'd appreciate your thoughts. Then I have a follow-up for Jim. Thanks.

Yes. So let me start with the second question with the end first. It is clearly a key value driver that we see. And our target is absolutely to get it back to over 50%. It's not an absolute though, I have to be honest and that's what you're seen during the Hard Seltzer. If we hit like a product that's growing tremendously, we will always prioritize getting the product to the consumer and build market share. As then we flatten out, we were very clearly focused on the growth margin. So, model is typically service level first, like service the customer, and then we go to the cost, but it is a very important initiative that we have. And yes, I laid out the building blocks and if you look at the timing, the network we're implementing, we've started implementing it and that's what we're seeing this year. So, we are going to get some benefits from the network. The variety pay costs, that's a little delayed, as I mentioned, so we don't get – we have some higher cost variety pack productions still out there that we will be able to bring in. The effectiveness, say in the supply chain transformation savings, this is a combination of systems and processes and will drive waste reduction, handling cost reduction, warehouse cost reduction, we have significant warehouse cost, waste product that's coming back. So once that gets in place that comes to a stage you will see the benefit, we've given it in the gross margin guidance for 2022, there will be a significant chunk coming in 2023, but it won't be a hundred percent of all the building blocks that will come after 2023. Maybe probably in 2024. But there's a big chunk that's going to come in 2023.

Okay. So, it sounds like you get most of the way there by 2024. Okay. Thank you. That was helpful. Just a quick follow-up the call is going to drag in on here a little bit. But Jim, it would be great to get you thoughts on the Treasury Department's report. You touched on competition in the U.S. alcohol industry. I think a number of different pretty conflicting fines, but I think competition certainly sort of stands out. It would be great to kind of get your take on the report, what you think the implications are going to be for the beer industry if anything? And then I'll pass it on. Thank you.

Did we do this Jim?

Jim is in a different location hopefully he is still with us. Jim are you there?

I am.

Okay, good.

I heard everything. So, Kevin my take on [indiscernible] report is they noticed and stated the obvious, which is this is a fairly concentrated industry. You've got two big players who are losing share, but still have maybe 70% of the volume in the industry and you've got one big one that the Anheuser-bush probably has, I think, they average 94% of the volume on their wholesalers’ trucks. So, that channel to market is dominated by a big brewer and it sort of forecloses it to independent producers. I think the Treasury Department was biased maybe as they should be to protecting the small independent brewers. I also noticed that on a local basis, the wholesale tier is very consolidated often there is only really two viable players who give you a comprehensive route to market. And they probably did not give to me appropriate weight to the beneficial effects of a three-tier system that has in between brewers and retailers, this unique tier of independent, often family-owned wholesalers. And frankly, without that if we have the system, we have in many, many other countries where the brewer owns the wholesaler and sometimes even the retailer, they probably would not have been craft beer. I mean craft beer emerged in the United States eight in part because of the independent wholesaler tier. I was heartened, I guess, that the Treasury Department questioned previous decisions that have allowed the two big players to grow by acquisition. It always struck me a little weird if you've got two guys who have 70% even 80%, it's beginning of the last decade of the market that they're allowed to grow by buying up their competition. Standard Oil I don't think they had, had that big a share when they put the antitrust laws in place. But I would – the big question is kind of so what I think, clearly the Treasury Department came out on the side of small brewers, small producers, but many of the tweaks of one might want to make to the Three Tier system, like limiting the reach of franchise laws that give the permanent monopolies to wholesalers, those are state issues. The fed is really – it's not an appropriate place for them to go. And while they might like to have more options for small producers to move wholesalers, it's probably not really going to happen. So, that's a long-winded answer. But I thought they made a lot of good points. I'm just not sure what any major levers, I doubt it, they do have some small levers, like better enforcement of the tide-house laws that grew things like category management, and tying up venues, big brewers are able to preclude smaller brewers from a lot of venues and maybe getting their shelves.

Did the call end?

Yes, that's it.

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

Hi, thanks very much. I know it's been a long call so I'll try to be quick about it. With the reduction in terms of the incremental A&P spend I'm contrasting that with some of the commentary around focused innovation, clearly, Truly a focus, clearly some of your partner brands a focus. I was a little bit surprised not to hear about Bevy because that's kind of unique and organic innovation. So, as we kind of think about what your priorities are for 2022 is it fair to assume that that it's a little bit more concentrated in terms of where your priorities are going to lie to achieve the full year guidance? Thank you.

Hey, Vivien it’s Steve, I'll take it. I think I would say – I say we're going broader this year than we were, I mean, a year ago, there was a lot of huge investment and focus behind Truly, there is still going be that support. But we see – we're fueling the fire onto Twisted Tea and it's working. It is with Sam Adams as well. We've got a lot of innovation including Bevy, which we're excited about. And we're going to support all of that. I think some will play bigger regionally, some will play bigger nationally, but our intent is to support. And I think if you look back over year-to-year between, last year was an anomaly for many reasons. If you look back just a couple years, to 2019, 2020, our APNS is up by 50%. And Frank, correct me if I'm wrong, but it's up significantly. So, we feel like we have the resources to a broader portfolio. We're focused really very much on the brand positioning who we're targeting, how to reach them. We've also done a lot of work in the last couple years to really improve the quality of our creative that we put out there. And we have a highly analytical approach to measuring the impact of creative. And we feel like gets working harder for us. I think Sam Adams is a good example, honestly, because we're not spending crazy dollars on Sam and it's having an impact on the business. So anyway, let me – I'll hand over to Frank if he wants to build on top of that.

Yes. On the overall spend, I think, looking at the variations versus a last year is a little bit misleading because of the spend that we had, we're clearly planning to grow Truly significantly more than what we ended up. And as such was the spend. We ended the year like really spending against the category. And until we realized that the growth wasn't going to come through, majority of the money was spent, that we scaled it back a little bit, but you don't have too much flexibility. 2020 as you know, was COVID related. So, a lot of stuff happened there. So, what we did is if you take 2019 as a base year and just like, look at the high-level numbers, our topline growth was 70% to 80% between shipments and depletions like versus 2019, we have grown the top line over 70%. Our APNS spend in the same timeframe has grown 60%. So, that's 10 points below that shows you leverage, I would argue, with such a growth rate, you should see more leverage that you are going get. So, we kept the spending high because we were going after share. But that also means we have sizeable spending in our P&L that we can allocate to the brand. So, while it looks like we are not increasing much reverses last year we feel the overall spent is quite healthy.

Absolutely.

And I would add…

Okay, please, Jim.

I know it's been a long call, but I like to talk about this stuff. So, I'm here as long as anybody has questions and I think Dave and Frank are too. What I would say is, I think, what happened with Truly was once in a lifetime, it's not going to happen again. And in the last 50 years have been like two huge really disruptive beer innovations, one was light beer. And that took at least ten years to get to 10% share and the second was hard seltzer and that got there in 4.5 years. The hard seltzer phenomenon was exactly that, a phenomenon. So at least as I am thinking about our innovation going forward, we're innovating into a fairly fragmented category. Consumers, you know, are getting more and more nichey as they choose beverages by occasion, and by cost, and who they are drinking with and what time of day, the innovations may take longer to develop, and they are not going to turn into 10% of the beer category. So, something like Bevy we think it's got a lot of promise, but it's not going to be like Truly was. It's just not going to take off that way. And it may take some years to develop. And of course, the best example is Twisted Tea, which is now a major brand, big part of our business, big driver of our growth in 2022. And that brand has grown double digits for over 20 years, but it never grew triple digits. And Seltzer, Truly, I guess, grew triple digits the first four years, Tea never did. But it has the same kind of potential to be as big as Truly at some point it'll just take it 25 years instead of 20. So, we are kind of – with we Truly, we hit a grand slam home run. We've never done that before. We'll probably never do it again. Our business has historically been built on retail execution, the blocking and tackling, high quality products that slowly find their place in the marketplace. And we score runs by singles, occasional doubles, maybe a bunch or a sacrifice fly. And I think that's more going to characterize the future than pulling another a rabbit out of the hat like we did with Truly.

Thank you, Jim. I really appreciate that perspective. And since you gave me the opportunity, I'm going to ask the follow-up and it is for you. I think your comment during the prepared remarks around some of the near-term softness really stood out to me because you did call out consumers kind of response to inflationary pressures. When I try to pair that with some of the commentary that Frank offered in terms of the narrowing of your pricing outlook at the high-end of the range, I'm just curious if there is any kind of incremental detail you can offer in terms of what you are seeing in terms of the health of the consumer, because I feel like most of your larger CPG peers, are just really leaning into pricing and they assume the consumer can absorb all of it. It seems like perhaps you're a little bit more cautious on that. Thank you.

Yes, I mean, it's a competitive industry. So, pricing maybe a little more restrained than a lot of other CPG categories, because it is – we all want to grow share, we're all very mindful of volume and it's just, competitive in some ways. And I think we're also and so our – and our revenue per barrel is maybe not – might not grow as much as other people’s because we don't have trade up opportunities. Pretty much all the big players they can get their revenue per barrel up by dumping the low end of their brand portfolio and trying to replace it, maybe not fully replacing it at the high end, but their revenue per barrel goes up more than ours because we don't have a high end to migrate and we don't have a low end to dump. And I guess the last thing is just frankly, I think, we've been surprised by this softness in the first six weeks of the year. And I think the whole industry had. Depending on your data source volume is down kind of 6% to 10%. For no obvious, apparent reason you can explain a little bit of it by some timing changes, notably the Super Bowl being a week later this year. So, we're looking at an IRI data set that last year had the Super Bowl and this year didn't a little bit of noise around, I think, New Year's Day was on a Monday that made it's better if it's in the middle of the week, a little bit of noise like that, but frankly it doesn't explain [indiscernible]. And honestly, I don't know.

I really appreciate the perspective. Thank you.

[Operator Instructions] Our next question comes from the line of Wendy Nicholson with Citi. You may proceed with your question.

Hi guys. My question is kind of a follow-up to a lot of the things we've talked about. And I guess it's more a question of how you approach managing the business kind of given the lack of ability on anyone's part to really forecast the business. And I say that in the context of just the increasing SKU complexity in your business and the fact that Lemonade was a hit, but Punch was not, looks like Margarita is going to be a hit, but might cannibalize something else. So, you said a couple of times, hey, our focus is to make sure we have enough product on the shelves but the reality is your margins were a lot stronger when you head out of stock. And so, I'm sort of wondering, should we be bracing for more write-downs this year because the odds that you are able to forecast exactly which SKUs sell how well seems very low. And again, that's not a statement about you. That's just a statement about how quickly the industry is changing. So curious about your priority of making sure you've got the inventory out there even if it cost you on the margins or even if there is a risk of another write-down?

Yes, I can go first. So, Wendy, I think the situation last year was very, very different. We had like, as we said at the beginning of the year, we're thinking that the hard seltzer category was going to double. We wanted to be really prepared. We saw Truly gaining share. So that was a massive increase versus the prior year, and we had incurred out of stocks in 2020 and in 2019. So, we did line everything up to have the capacity, to have the cans available and to have the flavors. Those were the three bottlenecks. So, we committed to everything at the beginning of the year for peak season. When it slowed down, we had everything, there was no way to react because we didn't have the capacity. That picture has changed dramatically. So, at the end of the year, we ended up with too much capacity to the point that we have to cancel external manufacturing contracts. We still have a lot of capacity. We don't prebuild anymore. So, our reactivity and firepower has greatly improved. Now we need to execute between the external and the internal because we want to run our internal breweries 100%, but we are not really producing a ton of inventory. In fact, our ultimate objective is to go to a replenishment model, which will significantly reduce inventories. Now that's hard to execute at the moment because we don't have the systems and the processes, and we talked about supply chain transformation, which will enable that. But we should not see a repeat of what happened in 2021 just because of the sheer size of the increase and the growth that we experienced and we are forecasting in 2021. That's not the case in 2022.

Fair enough. But for example, I know you've called out a couple of times the damaged goods in the fourth quarter, and I think it was $14 million, the charge that you took for that. Again, it's not a big number, it's kind of a rounding air. But at the same time, damage goods are something we don't hear about all the time. So, I'm wondering in this shifting supply chain, in this increasingly complex supply chain, what led to the damaged goods? Was that on your part? Was it because you used a new or a third-party supplier who wasn't as good as the ones you've used historically? Again, I just want to make sure that some of the supply chain stuff that you got stuck with over the last couple of quarters really is truly behind us.

So, when it comes to damaged goods, there was a certain part that was unique, and there was the aftermath of the tremendous stock build. You built normally you have like – you have two to four weeks in inventory at the wholesaler. It rotates through your visibility of the product. What happened is that we were building up to significantly higher weeks of supply that then suddenly doubled because the demand didn't come through. So, the product stayed a very long time in inventory, and it wasn't really visible. It didn't turn. So, when we had certain damage and the product was leaking, the damage was growing and it was invisible. So, it was a bit of a result of like that we have that much inventory. And as we have more manageable inventory, that part should not really repeat to the same extent. Having said that, we need to execute on our supply chain. I don't want to take that away. There's work to be done as we improve. But the big-ticket items that led to the major write-offs, those big-ticket items should be behind us if the volume doesn't change dramatically versus our forecast.

Fair enough. Thank you. Thank you very much.

Ladies and gentlemen, we have reached the end of today's question-and-answer session. I would like to turn this call back over to Mr. Jim Koch for closing remarks.

Well, thank you for your endurance and we'll talk again in a couple of months. Bye now.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation. Enjoy the rest of your day.