[SAM stock] Boston Beer Company Q4 2020 Earnings Call (2/17/21)

Good afternoon everyone and welcome. This is Jim Koch, founder and chairman, and I'm pleased to kick off the 2020 fourth quarter earnings call for the Boston Beer Company. Joining the call from Boston Beer are Dave Berwick, our CEO, and Frank Small, our CFO. I'll 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 your questions.

As the 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 co-workers for their focus and diligence, and our distributors, retailers, and drinkers, all of whom helped the company achieve double-digit volume growth for the 11th consecutive quarter. We achieved depletions growth of 26 percent in the fourth quarter and 37 percent 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 brands. 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're 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're confident in our ability to innovate 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'll start with the usual disclaimer. As we state in our earnings release, some of the information we discuss in the release and that may come up on this call reflects 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 a 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 packaged, 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 still in the early stages, we're encouraged by the support our wholesalers are providing, the trial we're generating as a result of the brand's established equity, and the social media response from consumers. We'll 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're expecting all of our brands to grow in 2021 and for the growth rate of our operating expenses to be below our top-line 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're prepared for increased competitive activity in the hard seltzer category. We've invested to increase our can and automated variety pack capacity, but these capacity increases keep on getting eclipsed by our depletion growth, resulting in higher than expected usage of third-party breweries. We'll 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 use of third-party breweries has a negative impact on our gross margins, we've begun a comprehensive program to transform our supply chain with a goal of making our integrated supply chain more efficient, reducing costs, increasing our flexibility to better react to mix changes, and allowing 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're in a very competitive business, we're 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 reported to the company through the six weeks ended February 6, 2021, are estimated to increase approximately 53 percent from the comparable weeks in 2020. Now Frank will provide the financial details.

Thank you, 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, or 136 percent, 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, a 54 percent 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 forecast of growth. Our fourth quarter 2020 gross margin of 46.9 percent decreased from the 47.4 percent 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 our 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 percent, 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 million barrels, a 38.8 percent increase from 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 percent. We're targeting national price increases per barrel of between one and two percent. Full year 2021 gross margins are currently expected to be between 45 and 47 percent, a decrease from the previously communicated estimate of between 46 and 48 percent. We plan increased investments in advertising, promotional, and selling expenses of between $120 and $140 million for the full year 2021, a decrease from the previously communicated estimate of between $130 and $150 million, not including any increases in freight costs for the shipment of product to distributors. We estimate our full year 2021 effective tax rate to be approximately 26.5 percent, 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 that ASU 2016-09 will have on our 2021 financial statements and full year effective tax rate, as this will mainly depend upon unpredictable future events, including the timing and value realized upon exercise of stock options versus the fair value when those options were granted. We're continuing to evaluate 2021 capital expenditures and currently estimate investments of between $300 million and $400 million. The capital will be mostly spent on continued investments in 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 emcee on our side and coordinate the answers when needed, since we are in different locations.

At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please for questions.

Our first question comes from the line of Bonnie Herzog with Goldman Sachs. Please see what's your question.

All right, thank you. Hi everyone. I guess I wanted to, 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 time frame for when your gross margins will be back above 50 percent? Is it possibly two 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 or three years, but I guess I'm wondering if there's an opportunity to accelerate this transformation. If so, is it simply a function of greater investment, or is there something else? Thanks.

Yeah, Bonnie, this is Frank. I'm going to take the question on gross margin. So you're right, it has come down a little bit, and the key reasons are 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 is 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'm going to answer that in a minute: higher investment in our supply chain transformation program, precisely to accelerate those benefits and get to higher capacity, 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. 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 our brands in particular. So it's good news, bad news. 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 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 where we had really long-term capacity. The 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 will 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 on gross margin, is that the gross margin is not impacted by soft pricing or anything like that. We're really 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. 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 the investments you're making behind your supply chain, or will it simply take the two to three years?

There is 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. 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. 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. 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 percentage Truly is in variety packs, but it's somewhere between 80 and 90 percent. So that Truly growth, the vast majority of it, requires this extra complicated handling step, which is not automated very well and adds significant costs. Now, we have 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 do 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 and depletion guidance intact, are we to infer then that there's been kind of an underlying change to your expected growth in the hard seltzer? And if that's true, what's that come at the 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, and that's part of it. So we don't see a dramatic change there, and we held our depletions guidance or our volume guidance. We are about constant, but 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 a return of the on-premise play in you actually achieving that aspiration to grow beer this year?

I'll take that one. So I think, yeah, so for sure, we're looking at Truly and Twisted Tea going to drive a lot of growth as we discussed, but for the other brands, there is a benefit from on-premise coming back on, and we have assumptions about that. It very gradually comes back over the course of the year, more fully by the fourth quarter. But in addition, we've got, first of all, here in the off-premise, the core brands, all the programs for Sam Adams, Dogfish Head, and Angry Orchard, we've seen growth since COVID. So there is some momentum that we've had, also some penetration increases across all those brands. So we see a better momentum. Without on-premise also, the innovation we expect to play a good role. We have a number of things out there, including Wicked Hazy's out there now, Wicked Easy on the Sam Adams line, Dogfish Head just launched Slightly Mighty, and Dogfish Head has canned cocktails. Angry Orchard has two different fruit ciders: peach mango, strawberry. So between the momentum that we've generated over the last nine months in the off-premise with the 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 on-premise coming back over the course of the year, we think that in our plans that adds up to positive growth for each of those three brands.

Understood. Thanks so much.

Our next question comes from the line of Eric Sora with Evercore ISI. Please see with the question.

Thank you. First, a quick housekeeping question. The year-to-date depletions up 53 percent, 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.

Here we go. I'll take the first question on the inventory. We have, 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 two years. We started building the inventory in December, not exactly to the extent that we had originally planned, but it was higher than what 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 were careful in taking that in. Whereas the Truly Iced Tea launch, there was a lot of good will from the wholesalers, the retailers, and the consumers, so we knew the 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've done in the previous years.

I'll take on the shelf space question. If we look, we're expecting probably about 50 percent, maybe more, increase in shelf space. Obviously it's going to vary by channel, by customer, but on average, last year if you look at large format stores, grocery stores, on average 7 percent, we have maybe 7 percent of the cubic feet for hard seltzer for the category. We see that going up to 11, 12, 13 this year, so I'd say 50 plus in terms of space.

Great. And then just to follow up, 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, obviously, 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 really a lot of different things. We looked at actually a lot of folks on this call did conduct their own analyses to look at that category, 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 Bob Williams of the world. And then of course we then dug into our own data. So we spent a lot of time looking at our 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 Iced Tea. And we came to the conclusion that the category is going to grow significantly again this year. We think it's going to be up, you know, we think it's going to be up significantly. We're not going to give a specific number, but we think it's going to be up significantly. And we think Truly is going to be a big part of that growth.

Tea and other things. We looked at some of the loss cases last year because supply chain couldn't deliver the cases. We also dug into Numerator data, which I know some of you guys look at, and also IRI data. In the end, we came out of that exercise with a range of about 70 to 100 percent. So I think last time we may have said 80 to 100. We're pretty confident the category will go, 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 15-plus share of total beer within the IRI or Nielsen universe.

Terrific. I'll pass it on. Thank you. Okay. Our next question comes from the line of Kevin Grundy with Jefferies. Please go ahead with your questions.

Hey, great. Thanks. Good evening, guys, and congratulations on the strong year. Dave, we could just start, I guess, where you left off in the last one, just sort of building on the category growth. Because the category, while still at 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 the bogey that you guys are setting is it's going to grow 70 to 100 percent, and the comparisons are going to be difficult, how do you see this playing out? Is this additional capacity coming on to help Mark Anthony Brands among others? Is this new product innovation? How do you see this playing out that we go from this deceleration here in the 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 thing. I think you kind of have some of the answer in there. We think the innovation will continue to drive interest in the category. We don't think there are going to be the supply challenges, at least for the top players, that there were a year ago. I think also, as you know, they did slow down at the end of the year. When you look at the whole beer industry, there were issues: COVID shutdowns, uncertainty about the political environment, COVID relief, etc. We see a change. If you look at it, it depends on what you're looking at, that's the problem with this category. Some of you guys look at Nielsen, some of you look at IRI, but generally the category is growing like 90 percent right now and it's a soft shoulder. We just think that as innovation gets going, and I'll use Truly Tea as the example. The non-alcoholic tea business is about a $10 billion business at retail, so that kind of dwarfs what I'm sure Truly Lemonade is, probably not $100 million. So this is a significant category. We think innovation like that, and there are others of course, 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 toward the overlapping comps from last year. Again, you look at the trends, the growth in household penetration, the growth in frequency, compare it to light beer where it's 50 percent less household penetration than light beer. We think it can get there, and we put a range on it. It maybe won't be 100, but we think it'll be at least 70. And whatever that number ends up being, our intent is to grow faster than that number.

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 reflective of what we've seen in the Nielsen data recently?

Yeah, our expectation is we're going to gain share. If you look at it, that's our goal, and we won't be happy unless we do. Go back to September in IRI, Truly's been outgrowing the category since then by about 40 or 50 points. And that was before the innovation started to kick in. So we feel good about where we are now. 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, if things play out the way we expect, we'll outgrow the category and we will gain share.

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

Jim, why don't you want to jump? Yeah, 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, because in alcoholic beverages, certainly in FMBs, lemonade is bigger than tea. So the gap is closing. But on the other hand, as Dave pointed out, there are basically more iced tea drinkers out there than there are lemonade drinkers by a factor of two or three or four. So I'd 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. Truly Lemonade was basically the biggest thing to come into the hard seltzer category. Their expectations were quite high. We got tremendous support from retailers, we got tremendous support from our distributors. But it's still only the middle of February, and we have not yet seen the innovations hitting the market fully from Anheuser-Busch with their Bud Light Lemonade Seltzer and their Bud Light 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, and just to quickly build on that, I think what we can say definitively is that there has been very, very high trial. And the repeat, Kevin, your point on the last question, the repeat, it just takes a while to really know. So it's important that on the next call we'll have a better handle on what repeat looks like. We'll have proxies we can look at versus lemonade, versus other new brands in the category, and we'll have a better handle on what the trajectory would be for tea.

That's great. Thanks for the time, guys. Good luck.

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

Hi. My question has to do with on-premise, really for seltzer specifically. I assume in 2020, because of COVID and all the shutdowns, on-premise was a 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 start to open back up? How quickly do you think that can ramp, and what's the receptivity of the on-premise locations been to Truly so far?

Hey Jim, you want to take that one? Sure. On-premise has lagged the off-premise with hard seltzer, there's no question about that. And that was true even before COVID. It is still lagging because you have to go in and sell it in, and the on-premise operators are not that receptive to lots of sales calls in these times. It's not a product that has had a lot of traction on draft, though we've tried to generate it. So if I had to guess, hard seltzer will be a smaller percent of its volume on-premise than the rest of the beer industry category, which tends to be maybe 18 percent on-premise. I would guess seltzer would be a lower number than that for the next year or two anyway.

That's great. I just want to make sure you weren't forecasting too much of a headwind 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 for thinking about another beer acquisition? Dogfish has worked out fine, but are there any more craft beer brands you'd like to expand? It seems like anything you'd buy would actually be dilutive to your growth, so I don't know that that makes sense, but you are stockpiling cash, so just curious how you think about that.

So I can take the cash question, then I'll let Jim talk to acquisitions. The key point is we have a highly cash-generative business, which is very beautiful if you're a CFO. But we're also investing into the business and the growth of the business. You saw the capital we're projecting of $300 to $400 million. We want to maintain the flexibility. Those projections are based on the growth we have. 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 close to it and build the capacity that we need. And as I mentioned before, when it plays out, we're going to create the supply chain network that gets to significantly lower costs. For that, we want to have the flexibility. So that's the number one priority, and it follows our long-term strategy: the business comes first, and then we'll see what we're going to do with the rest of the cash. But the business is clearly supporting the growth at this point. Jim, I don't know if you want to talk to 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. We view Sam and Mariah as unique assets. There was a very common culture and a very strong working relationship that I've had with both of them over the years. They had a unique brand with a unique and very strong positioning, as well as the same creative and innovative juices that we have. Those were sort of soft assets. The synergies worked out. We've now merged our distributors for about 85 percent of our volume going through common distributors. So the numbers worked out in terms of being creative, but the big driver there was not just the numbers but the relationship and the culture and the soft energies of innovation and creativity.

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

And once again, as a reminder, if you would like to ask a question, please press star one on your telephone keypad. Once again, if you would like to ask questions, please press star one on your telephone keypad. Our next question comes from the line of Laurent Grandet with Guggenheim. Please go ahead with your question.

Hey, good evening, guys, and congrats for getting Truly Lemonade the most incremental new product in the entire beer industry. That's telling. And Jim, just a comment: I'm more British than you on Truly Tea now. According to our math, the tea category in FMB was twice as big as lemonade before Truly Lemonade was launched. So anyway. Two questions. The first is about the marketing spend. You significantly spent more in the fourth quarter than you said you would after the third quarter earnings. You said you would spend $55 to $65 million, you ended up spending $90 to $92 million, so that's $30 million more. What's the rationale there? And also you reduced by $10 million your guidance marketing spend for this year. So did you spend in the fourth quarter? I'd like to understand the rationale of why spending more in the first quarter, what you plan, and planning for a bit less this year. Thanks.

Yeah, Laurent, on the marketing spend and brand spend, Q4 was a big Q4 for us. We spent like 50 percent more than in the previous year, whereas for the average year it was 26 percent. That had to do a little bit with phasing. We were going into 2020 and had really strong plans for the first half, and that was impacted by COVID. We didn't execute or couldn't execute everything as we had planned. We also evolved our marketing plans. As I mentioned in previous calls, we have marketing plans but we're also pretty adaptable and flexible, seeing what's working and what's not working. When our confidence increases, we spend more. When we don't have the level of confidence that's needed, we reduce our spend. So I think Q4 is an expression of two things: one is a little bit of phasing, and the second is we felt much more confident in our programs and that's what we invested. We also wanted to have a strong start going into 2021 across our brands. Primarily it was Truly, but it was also Sam Adams. There was a little bit of phasing as well on production. We got some production done a little earlier, so that happened as well in Q4. As to the initial numbers we gave you in October, quite a few things are in flux. You get a better handle on your plans and the effectiveness of the plans, and that's just the firming up of the plan. It's not a dramatic change in direction or strategy at all.

Okay, thanks. My second question is about packaging expansion. You said in your prepared remarks you plan to expand packaging. You said you will have much greater shelf space in grocery. I want to understand that in convenience stores specifically. What's the number of average SKUs you've got right now, and how much are you planning to have in 2021? And will the growth be coming from single-serve, which are more profitable, or will it be coming from Truly Extra, which are also single-serve? I'd like to understand. Thank you.

Okay, I'll take that. I think it really depends on the channel you're talking about, but I think we're looking to expand space actually everywhere. In large format, it's really getting Truly Tea into a variety pack. That'll be our fourth variety pack after 11 days. So the goal is to have all five variety packs in every large format store. For grocery, it's mostly a variety pack game, that's what we're playing. In convenience stores, we think there's a lot of opportunity on single-serve and on variety packs. Right now, typically we have maybe one or two variety packs per convenience store. We want to have two or three. We're also adding single-serve across the board. Again, it's not just Truly, but there's lots of opportunity for Truly Tea in particular to get more packages in that channel as well.

Yeah, okay. Well, thanks, guys. Hopefully next year we'll see Truly Tea as the most incremental product in the beer industry. Okay, I wish you good luck.

Our next question comes from the line of Nik Modi with RBC. Please go ahead 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. I just wanted to clarify: did you mean internationally, or just in the U.S.? Can you provide some context around that? And I wanted to ask about category stabilization for hard seltzer. I'm curious where you see that going. You talked about a 15 percent number. I wasn't clear if that was like next year, next two years, or kind of longer term. We think the category can get somewhere between 17 and 20 percent of overall beer based on our math. So I'm just curious what you think about those numbers. Thank you.

Sure thing, Nick. Thanks. First, on the geographic expansion, we were talking U.S. There's still about a six-point gap in HDP super 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. We're very close in share perspective from a grocery, but we're much too distant in convenience. So we're talking U.S. on that one. And the second question was where the category goes. We didn't want to forecast beyond this year, quite honestly. When I said 15, we're thinking maybe 15-plus percent share of beer this year in 2021, and that being the opportunity in the IRI or Nielsen universe. I've seen your analysis going forward, and some of those assumptions seem positive, they seem pretty reasonable to me. But we didn't want to come out here and start talking about anything beyond 2021 because we just don't know. We'll leave that to you. But we do think we see continued growth, and your percent of mix makes sense. That's sort of why we're like, beer is right, so it's not a crazy guy. Right now we've been more focused just on what's going to happen this year.

Great. And I just have one more on RTDs. Obviously not core for Boston Beer, but Dogfish Head does have a small business there. I'm curious, 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, Dogfish Head canned cocktails, three SKUs. The product is amazing, we're very excited about it. Right now that's our first foray into that space, and we'll see how it goes. I think it sort of plays at the premium, at the high end of hard seltzer if you will. The price point is much higher. 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, the distribution for us isn't like snap your fingers on Truly Tea. Not all of our distributors can carry it necessarily, so we have to broaden the distribution as we go. We'll see what happens, but we like it. I think it makes sense. Consumers are blurring between wine, spirits, and beer. This is one of the outgrowths of that blurring, and we do think it's something that certainly is worth pursuing, which we are pursuing right now with Dogfish. We'll see how that goes and go from there.

Great. Thanks so much for the perspective.

Our next question comes from the line of Steve Powers with Georgia Bay. Please go ahead with your question.

Yes, hey, thanks. Good evening. Two questions for me. The first one is another geographic-based question, this one specific to Truly Tea. As you're thinking about that offering, do you think it will ultimately have a relatively even national appeal as it scales up, commensurate with the rest of the 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 ramp up?

I'll take that. 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. The regionality has not been what you would have expected. You would have expected in places like the South, where there's 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 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 tea drinking places like the South. We think it won't have the slow rollout that Twisted Tea did, and therefore will more closely follow whatever regional pattern, which is fairly weak, that you see with hard seltzer.

That's perfect. That's perfect. Thank you. And then a follow-up. You talked a little bit about higher inbound freight costs as related to COGS earlier. I'm just curious if you can put some parameters around what you're expecting for your own outbound freight cost to distributors, maybe on a volume-neutral basis, just to give us a base understanding. And if I could just, as we're talking about supply chain dynamics, I noticed some supply disruption in glass that impacted you in the fourth quarter. Is that behind us now, or does that have carryover implications for early 2021? Thank you.

Yeah, Steve, let me talk to the freight. When you look at 2020, for the full year we didn't really have a significant rate increase. Of course we had a freight increase 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 fun in the beginning and then a significant increase in Q4, the freight market tightened quite a bit across the U.S. in Q4, and we saw significant increases there. We see that rolling into 2021. The increase is pretty much the same that we see for inbound freight and outbound freight. It's really availability of trucks. The market is tight to the extent that in many markets you have seven loads for one truck, and that normally is below five. So we have seen that, and we expect increases that could reach from a rate perspective 20 percent.

Okay, that's perfect. Is there any color on the glass supply issue that I read about?

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. Appreciate it.

All right. And once again, as a final reminder, if you would like to ask questions, please press star one on your telephone keypad. One moment please. There seem to be no further questions in the queue, and I would like to turn the call back over to Mr. Jim Koch for closing remarks.

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