Greetings, and welcome to the Boston Beer Company First Quarter 2020 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jim Koch, Founder and Chairman for the Boston Beer Company. Thank you. You may begin.

Thanks. Good afternoon, and welcome to everybody. This is Jim Koch, Founder and Chairman, and I'm pleased to kick off the 2020 first quarter earnings call for the Boston Beer Company. Joining the call from Boston Beer are David Burwick, our CEO; and Frank Smalla, our CFO. And keeping with these times of social distancing, Dave, Frank, and I are in separate locations for this call. I'll begin my remarks this afternoon with a few introductory comments, including some discussion on the COVID-19 pandemic and the highlights of our 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 first quarter results. Immediately following Frank's comments, we'll open up the line for your questions. As the world is grappling with the COVID-19 pandemic, our primary focus is on operating our breweries and our business safely and supporting our partners in the beer industry. We have a strong cash position and balance sheet and feel very fortunate to be in a position where we can help others. Supporting the communities in which we live and work is one of our core values. After all, our business got its start in bars and restaurants, and we recognize the role we can play right now in giving back. We're proud to share some of the initiatives we've started in a very short period of time that we hope will make a difference. We've established the Samuel Adams Restaurant Strong Fund and donated over $2.1 million to support bar and restaurant workers that have been impacted by pandemic-related closures in 20 states. In addition, we were a founding partner of the Restaurant Relief America, which is committed to helping the restaurant industry workers experiencing hardship in the wake of COVID-19. Both funds will distribute 100% of their proceeds through grants to bar and restaurant workers. Also to support our internal needs, as well as local hospitals, we began production of hand sanitizer at our Dogfish Head distillery in Milton, Delaware. We're thankful for our outstanding coworkers, distributors, and retailers for their focus on our business during COVID-19 and their diligence to continue to operate and help us grow our Boston Beer Company business. The Company's depletions increased 36% in the first quarter, of which 30% is from Boston Beer legacy brands and 6% is from the addition of Dogfish Head brands. Our business in the first quarter was strong, so there remain some significant uncertainties due to COVID-19. These uncertainties include our continued ability to operate our breweries at a level of safety that meets our standards, the continued ability to distribute to off-premise retail locations, the duration of the current on-premise shutdown, and how long consumer pantry loading will continue in the weeks ahead. We will continue to work hard throughout the COVID-19 pandemic and prioritize safety above everything else. I'm proud of the passion, creativity, and commitment to community that the Boston Beer Company has demonstrated during this pandemic. I'm now going to pass the call over to Dave for a more detailed overview of our business.

Thanks, Jim. Hello, everyone. Before I review our business results, I'll start with our disclaimer, which, given the current circumstances, we modified. As we state in our earnings release, some of the information we discuss in the release and that may come up on this call reflect the Company's or management's expectations or predictions of the future. Such predictions and the like are forward-looking statements. I would also note, as we stated in our earnings release, and Frank will later discuss in more detail, the Company is not in a position to accurately forecast the future risks to revenues and earnings resulting from the impact of disruptions and other effects related to COVID-19 and has withdrawn its full year fiscal 2020 financial guidance. All that said, the Company's actual results could differ materially from any results 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 and first quarter 10-Q. 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. Consistent with the first quarter of last year, our first quarter shipments volume was significantly higher than depletions volume as we took active steps to ensure that our distributor inventory levels are adequate to support drinker demand. Our depletions growth in the first quarter was a result of increases in our Truly Hard Seltzer and Twisted Tea brands and the addition of the Dogfish Head brands that were only partially offset by decreases in our Angry Orchard and Samuel Adams brands. The growth of the Truly brand, and the recently launched Truly Hard Lemonade, has accelerated and continued to grow beyond our expectations. Since early January, Truly has accelerated its velocity and maintained its market share while other national hard seltzer brands have ceded share. We'll continue to invest heavily in the Truly brand and evolve our brand communications and work to improve our position in the hard seltzer category as more competitors enter. We're ready to launch an exciting new Truly advertising campaign, but have postponed the launch due to the uncertainty surrounding COVID-19. Twisted Tea continues to generate double-digit volume growth rates that are above full year 2019 trends. We see significant distribution and volume growth opportunities for our Truly and Twisted Tea brands and are looking to continue to expand distribution of our Dogfish Head brands. Pursuing these opportunities in 2020 remains a top priority. Sam Adams and Angry Orchard's volumes continue to decline as they're more deeply impacted by the on-premise shutdown. We continue to work hard on returning these brands to growth, but do not expect them to grow during 2020. We've reacted decisively to COVID-19 and continue to work to control what we can control with our primary focus being the safety of our coworkers, our distributors, retailers, and our drinkers. We worked aggressively to put in place many safety protocols at our breweries, including entrance screening, temperature checks, face mask requirements, reorganizing work to increase social distancing between and among shifts and adding cleaning time to each shift. Additionally, we've closed all our hospitality locations beginning on March 13. We're working hard to rebalance our supply chain to address additional demand and can involve packages at off-premise retailers against very low demand for kegs given the shutdown of on-premise venues. The shift in volume mix is likely to come at a higher incremental cost due to the increased usage of third-party breweries, which negatively impacts our gross margin. We've deferred some of our new marketing campaigns as we closely assess and manage the situation. Drinker demand for our brands continues to be very strong, particularly our Truly and Twisted Tea brands. Pre-COVID, our depletions growth through the nine-week period ended February 29 was approximately 32% from the comparable period in 2019. And we saw a further acceleration in demand for our brands beginning in the second half of March. It's not possible for us to estimate the amount of the new demand that is a temporary reaction to COVID-19. We're in a very competitive business, and we're optimistic for continued growth of our current brand portfolio. And we remain prepared to forsake short-term earnings as we best 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 15 weeks ended April 11, 2020 are estimated to increase to approximately 32% for the comparable weeks in 2019. Excluding the Dogfish Head impact, depletions increased 27%. Now Frank will provide the financial details.

Thank you, Jim and Dave. Good afternoon, everyone. For the first quarter, we reported net income of $18.2 million or $1.49 per diluted share, a decrease of $0.53 per diluted share in the fourth quarter of last year. Net income decreased as higher net revenue was more than offset by increases in operating expenses and lower gross margins. We began seeing the impact of the COVID-19 pandemic on our business in early March. Prior to then, we were on track to maintain our full year fiscal 2020 financial guidance. Given the many rapidly changing variables related to the pandemic, we are currently not in a position to accurately forecast the future impacts of the pandemic and are therefore, withdrawing our full year fiscal 2020 financial guidance. To date, the direct impact of the pandemic has primarily shown significantly reduced keg demand from the on-premise channel and higher labor and safety-related costs with our breweries. In the first quarter of 2020, we recorded COVID-19 pretax-related reductions in net revenue and increases in other costs totaling $10 million. This amount consists of a $5.8 million reduction in net revenue for estimated keg returns with distributors and retailers and $4.2 million of other COVID-19 related direct costs of which $3.6 million are recorded in cost of goods sold and $600,000 are recorded in operating expenses. In addition to these direct financial impacts, COVID-19 related safety measures resulted in a reduction of internal capacity. This has shifted more volume to third-party breweries, resulting in increased production costs and lower gross margins. We will continue to assess and manage the situation and we'll provide further updates in our second quarter earnings release to the extent that the effect of the COVID-19 pandemic will then be known more clearly. Shipment volume was approximately 1.42 million barrels, a 32.2% increase in the first quarter 2019. Excluding the addition of the Dogfish Head brands beginning July 3, 2019, shipments increased 27.5%. Shipment volume for the quarter was significantly higher than depletions volume and resulted in significantly higher distributor inventory as of March 28, 2020, when compared to March 30, 2019. We believe distributor inventory as of March 28, 2020, averaged approximately 6 weeks on hand and was at an appropriate level based on the supply chain capacity constraints and inventory requirements to support the forecasted growth of Truly and Twisted Tea brands over the summer. We expect wholesaler inventory levels, in terms of weeks on hand, to return to more normal levels of approximately 4 weeks in hand later in the year. Our first quarter 2020 gross margin of 44.8% decreased from 49.5% margin realized in the first quarter of last year. The decrease was primarily the result of higher processing costs due to increased production at third-party breweries and higher processing cost on finished goods, keg inventory write-offs, at the company-owned breweries partially offset by price increases and cost-saving initiatives at company-owned breweries. Excluding our current assessment of the impact of COVID-19 keg returns and other related direct costs, first quarter gross margin was 46.8%. First quarter advertising, promotional and selling expense increased by $26.2 million in the first quarter in 2019, primarily due to increased investment in media, production, local marketing, the addition of Dogfish Head brand related expenses beginning July 30, 2019, higher salaries and benefits costs, and increased freight to distributors due to higher volumes. General and administrative expenses increased by $3.6 million in the first quarter in 2019, primarily due to increases in salaries and benefits costs and the addition of Dogfish Head general and administrative expenses beginning July 3, 2019. We drew down $100 million from our existing line of credit in March 2020 to enhance our cash position and our ability to address the impacts of the COVID-19 pandemic. We expect that our March 28, 2020, cash balance of $129.5 million, together with future operating cash flows and the $50 million remaining on our line of credit, will be sufficient to fund future cash requirements. We will now open up the call for questions.

Our first question comes from Bonnie Herzog with Goldman Sachs. Please go ahead with your question.

I wanted to ask about your operations. You touched on this, and I'm just curious if you can give us a little more color on how fully your operations have been running? I know you're certainly being careful with safety for our employees. So I'm curious, have you limited the hours in the shifts? And then as such, then the output is more limited at this time, given everything? I guess I'm just trying to get a sense of how much you've had to scale back. And then I think you did give us the inventory that's on hand right now, but I just want to make sure I heard that correctly.

Okay, Bonnie, thanks. This is Dave. I think because we're in all different locations, I'll sort of act as the MC today to kind of funnel the questions. I think this is probably a good one for Frank to address.

Yes. So Bonnie, clearly, the capacity was impacted. When the whole thing started, we were very, very much focused on the safety of our coworkers in the breweries, but also on keeping the breweries running. That was critical to us. So what we did is we implemented significant sanitation and safety measures in the breweries to make sure that they are a very safe place to work and that we can keep on running them even if we had incidents. As a result of that, we've separated shifts, for example, and put time between shifts so that the crews don't meet each other. And we've also implemented sanitation procedures so that the workstations are being sanitized before the new shift starts. That has reduced capacity. Now we haven't had any significant impact on the overall output, but we have shifted more volume to third-party breweries, which, as you know, increases our cost and therefore, lowers the margin. That is reflected in the financials, the part that hit like at the end of March, it's not included in the $10 million that we've spelled out as direct cost. The $10 million that we've spelled out is literally direct costs related to keg returns and extra costs that we incurred at the Company, but it doesn't include the indirect cost of the shift of capacity.

Okay. That was helpful. And so as you think about this environment, no one really knows how much longer it's going to last, but I would imagine that this overhang of pressure is going to continue. So is there a way for you to give us a sense of what percentage of your business, maybe in the quarter, was outsourced? I think it was around maybe, what, 26% or 27% of your business last year? I mean I assume that's gone up too, no?

Yes, it has increased as we mentioned in the last call. We still provided guidance in February. Our volume is growing significantly, leading us to add more capacity. We just launched a new line in Pennsylvania, which is coming online now, but the volume is still outpacing our ability to meet it. It was clear that Q1 would be a period with a notable increase in external production. While we don’t disclose specific percentages, there has been a significant rise even aside from COVID. Once COVID impacted us in March and we implemented related measures, there was an additional shift. We don’t provide guidance because it's hard to predict future outcomes, but we do engage in scenario planning. We were very cautious when putting these measures in place, and we believe we will improve in this area. We'll certainly maintain our commitment to safety and sanitation, and as we continue to refine our processes, we expect to enhance our internal capacity as the year progresses.

And Bonnie, this is Dave. To add to what Frank mentioned, we started implementing many of these changes in early March. We've been proactive in our approach, including temperature checks and facemasks from the beginning. While we hope for improvements ahead, the impact of this endemic is unpredictable as we expect it to come in waves. However, we have gained valuable insights, and I feel confident in our current strategies. As I mentioned, we will focus on what we can control.

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

I hope all three of you guys are safe and healthy as the rest of your team. But just a follow-up on Bonnie's question on capacity. So you called out the capacity build-out in Pennsylvania. And I heard Dave you say the capacity will continue to ramp over the year. Are there incremental CapEx projects that need to happen this year? Or was it just a one line in Pennsylvania?

This is Dave. We have a line in Memphis that is scheduled to be operational in the second quarter, and we are pleased with our progress. Additionally, while we have not finalized the location for our additional capital investment, we have received Board approval for more lines in either Pennsylvania or Ohio, and we expect to start that very soon. We are committed to moving forward with this initiative, despite the current environment where we are deferring non-strategic capital projects. This capacity expansion is a priority for us.

Okay. That's great. It's so good to hear that the construction continues. Hopefully broadly unfettered. On the impact of keg returns, do you guys have a sense of kind of like where you are in that process? Just trying to think about like the second quarter impact, like have you received 50% of your kegs back? Is there any like way to know?

So Vivien, this is Frank. The process hasn't really started from an operational perspective. However, we have a long-standing policy of reimbursing our distributors 50% for any returns we receive for freshness reasons. We have always applied this to packages and cans, and we do not plan to change that; we have communicated this to our distributors. We have assessed the inventory with our distributors as well as the inventories at the retailers, which are likely to come back to the distributors. Based on that assessment, we have accrued for the cost in Q1, which is reflected in the $10 million figure. Of that, $5.8 million is a reduction in revenue because we've accounted for the keg inventory that we expect to come back and reimburse at 50%. We believe we have a solid understanding of that inventory and do not anticipate any significant changes to that estimate.

Okay. Perfect. That's super helpful. Last one for me, and I'll jump back in the queue. Can you just remind us what your revenue mix is for the total company portfolio on-premise versus off-premise?

Yes, we don't disclose that information. What we do mention is that keg sales represent 12% of our overall mix, totaling 20%. However, we don't differentiate between on-premise and off-premise sales. Clearly, kegs are not the only products contributing to the on-premise channel.

Suffice it to say it's de minimis for Truly?

It is de minimis. It's fair to say it's de minimis for Truly. It's de minimis for Twisted Tea as well.

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

Thanks. I just would echo, I hope that you and your family, and loved ones are safe and healthy. I want to start with sort of a bigger picture question for Jim and for Dave. Understand there's still a lot unknown at this point. But I think what's sort of maybe a little bit more increasingly known is there's a broader consumer shift to at-home consumption. Consumers will be working from home more frequently as well. It just seems like there will be some protracted implications from social distancing that are going to be with us for some period of time. And as a consequence, it would appear there will be a lasting negative impact on the on-premise channel. Maybe you agree or disagree with that. But if that is indeed the case, I'd be interested to get your perspective on the longer-term implications, not just for your portfolio, but for the industry as well in overall alcohol consumption.

Thanks, Kevin. I'll let Jim address that.

Yes, we've seen our keg business almost entirely collapse; it's nearly at zero. The lockdowns in various states have caused this significant decline, and our keg business is now just a trickle. It's hard to predict how much of that will recover. Typically, there's a lot of turnover in restaurants, with some closing down and new ones opening. Many of the establishments that don't reopen were probably going to close down anyway. I can't accurately forecast how much the on-premise business will decrease in the short and long term, except to say that it will be significantly lower. Some of this decline is due to shutdowns, but a lot is also because people are hesitant to gather until there is a vaccine or effective treatment. We expect that the on-premise business won't simply bounce back, and it might take a year or two to return to where it was at the end of February. On a positive note, unlike many other craft brewers, we've built a diverse portfolio and business model that can thrive in this new environment. The strong sales results we've had this year support our business model, which emphasizes strong brands, successful innovation, collaboration with our distributor network, and a top-notch sales team. We see the year-to-date results as a testament to our strengths. Because we are confident in our business model and market position, we are prepared to invest significantly in programs and media that can help us achieve ongoing double-digit growth. We will also make the necessary capital investments, primarily in-house but also with our contract brewing partners, to support this growth and to improve our gross margins, which have been decreasing over the past few years. We believe we can achieve substantial improvements in gross margin over the next couple of years, and we are committed to investing the needed capital to make that happen. Does that address your question?

Yes, thank you. If it's alright, I would like to discuss Seltzer. There are many questions to consider, particularly around the extent of pantry loading and the timeline for consumers to destock. Could you share what you know and any insights you've gained over the past three months since our last conversation? Specifically, I'm interested in information regarding new customers, the frequency of consumption among existing customers, brand strength, and consumer loyalty. As you've noted, Truly has maintained its standing well despite new competition. It would be great to hear more about the brand's equity and what you've learned about both core and new consumers in the last three months. I will pass it on from there.

Thanks, Kevin. I’ll address the Truly situation. To fully answer that could take a while, but I’ll be brief. At the end of the fourth quarter last year, we prepared for the challenges we anticipated, which we referred to as the White Walkers, and we took steps in January. We are confident that our reformulation and increased media spending in the fourth quarter helped build brand awareness ahead of the Lemonade launch. Currently, Truly is the only Hard Seltzer brand that has gained market share since January. Although we only grew by a tenth of a share point, we'll take it, and our growth rates have remained strong, exceeding 200% over the last 13 weeks, particularly in the most recent weeks. Sales per point have been strong as well, showing consistent increases over the last four months: plus 65, plus 71, plus 89, plus 99. Truly Lemonade is now around a 5.2 share, which is considerable. From a consumer perspective, it’s been insightful to observe how shares shift among brands as new players enter the market. Analyzing the panel data, particularly Nielsen, allows us to compare Truly to White Claw—an impressive brand that we respect. In comparison, Truly appeals to higher-income households, younger buyers, and more ethnically diverse demographics. We see greater sourcing from wine and spirits and a higher average basket size and repeat purchase rate. Meanwhile, bundle seltzer entries are typically older, lower-income, but still somewhat diverse consumers. It appears we attract a distinct consumer segment. Interestingly, in the weeks following COVID, Truly's penetration doubled from February to March, with repeat purchases increasing by 25%. The category continues to grow, and we’re welcoming many new consumers—41% of those who tried Truly recently are new to the brand. Additionally, household penetration in the category has significantly increased, climbing to 7.5% over the last 52 weeks. White Claw stands at 3.7% and Truly at 2.7%, but in the last four weeks, we've seen this rise to around 7.7%. We believe that Hard Seltzer may reach 8%, 9%, or even 10% of the beer market. Those are the key points.

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

So maybe first, real quick, back to on-premise, a technical question, I think, for Frank. Frank, in the queue, if I read it right, it talks about reimbursements to distributors on the order of about $8.2 million. I guess the question is, is that inclusive of the $5.8 million that you've called out as COVID related? Or is the COVID number additive to the $8.2 million?

I'm not certain about the $8.2 million. The keg return cost or the reduction in revenue is $5.8 million. That's the figure. We have some additional costs associated with the impact of COVID, primarily related to the breweries, which accounts for the remaining amount to reach $10 million. There's about $600,000 in operating expenses, but aside from the $5.8 million, there is also about $3.6 million in the gross margin line, which consists of direct expenses. There are no further costs beyond that.

I can follow up offline. To build on what you just said, Dave, regarding the Seltzer category, do you think the current disruptions will have lasting effects, both positive and negative, on its development? As you mentioned, there is new trial occurring now since people are staying home and stocking up. However, moving forward, social gatherings will likely remain limited for a while. I see Seltzer as a beverage typically associated with social occasions, but perhaps that's not entirely accurate. How do you view the future impact on this category and its evolution for the remainder of the year and into next year?

It's difficult to make accurate predictions. However, one thing is clear: while the on-premise aspect is limited, it doesn't significantly impact this category. Although on-premise venues are reopening slowly, the effects on this category are minimal. Many consumers have stocked up, and we are observing that replenishment purchases are growing almost at the same pace as the initial stock-up. While stock-up has decreased somewhat, we still anticipate significant growth in the overall beer market and particularly within Seltzers. The introduction of new products and categories that attract a lot of attention will undoubtedly benefit. We are witnessing an increase in trial for this entire category, which wouldn't have happened under normal circumstances. Personally, I believe this subsegment of the beer category will develop more rapidly as a result of the current situation. Regarding social aspects, beer is often associated with social gatherings, so the impact may balance out. When considering the winners in this category, it seems the leaders have remained consistent over the past few years.

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

Dave, I'm curious about the capacity situation. You're investing to expand production lines, but with the competitive landscape, do you see opportunities for unique partnerships to produce more Truly at a lower cost than what you're currently doing with co-packers, or even acquiring capacity outright? That's my first question. The second question relates to the significant acceleration in trial that you've observed in the category, something that likely wouldn't have happened before COVID-19. How can you create loyalty among those consumers who have been trying the category and the brand recently through your marketing efforts, whether digital, television, or other methods?

Great. Thanks, Nik. I'll defer the first question to Jim, and then maybe I'll come back and answer the second question.

We are continuously exploring opportunities, and we prefer to own our own capacity. While we are generally indifferent if the economics are equal, we have been open to more attractive economics. In this context, we expect opportunities to arise, although they have not yet emerged. I believe there are craft brewers who borrowed money for expansion and may now face challenges due to decreased demand. In Boston Beer’s craft segment, on-premise sales are significantly higher, approximately 30%, compared to about 18% for the industry. As some craft brewers overreach and struggle with demand, we will evaluate potential opportunities. Our business has experienced strong growth, primarily in cans, with keg sales representing just 12% of our business. We have compensated for the reduction in kegs with our can growth, which means we do not need more keg capacity or brewing capacity. Any useful capacity would need to be canning capacity, which craft breweries typically do not have. Therefore, if we find opportunities where the economics of purchasing or building a can line are more favorable than utilizing our own breweries or our primary contract brewing partner, we will consider them. While this scenario is uncertain, it is possible.

Alright, moving on to the second question about building a lasting brand. From the start, we've believed that this category will ultimately be defined by a few major brands that will resemble soft drinks in branding rather than craft beer. It's still too early to determine if that will happen. For us, there are four key fundamentals to consider: First is brand awareness, which we’re working on through various media, even if we don't have all the precise words just yet. Differentiation is also crucial. We reformulated our product because we want it to be the best-tasting option available. This is just the starting point; we also need to differentiate our brand through effective communication, and we have an exciting campaign set to launch in April. We've decided to invest significantly at the beginning of this year because we anticipated increased competition and chose not to delay until summer. Although launching the campaign now may not be ideal given current consumer sentiment, it's a strategy we believe in for brand building. Next is innovation. With our Lemonade product, we see an opportunity to redefine Hard Seltzer beyond just another basic flavor. We aim to explore more substantial concepts without overdoing it or underdoing it, as innovation will help distinguish our brand. Finally, execution is vital. We have strong relationships within our wholesaler network, which aids in execution, and while others do well too, there’s still potential for growth, especially in convenience and grocery stores. All these elements need to synergize, and importantly, we want to present a brand that has a distinct perspective relevant to consumers aged 21 to 35.

Our next question comes from Laurent Grandet with Guggenheim Partners. Please proceed with your question.

Actually, my first question would be a follow-up from your previous response, Dave. I mean there are some competitors that come with strong beer brands and develop a kind of a Seltzer and sub-brand. Do you think it's an advantage and why, to have a stand-alone brand versus competing against those beer brands that are flourishing right now? So could you explain in terms of marketing, why you think that's an advantage for you?

Yes, I believe that having a brand that focuses exclusively on one category is more impactful. It creates a clearer understanding of what the brand represents. Consumers prefer not to buy a product that tries to be everything; they want the best in each category, such as the best knife or fork. They are discerning and intelligent, seeking brands that can genuinely deliver the benefits associated with their specific category without causing confusion. I've learned from my experiences in previous roles that attempting to broaden a brand too much is generally not beneficial. While I acknowledge that other line extensions can succeed because they are strong brands, if given the choice, I would favor a brand that maintains a more focused approach.

The next question is likely a clarification for either Frank or Dave. Your depletion numbers show a growth of 36%, while shipments show a growth of 32%. This suggests that depletion growth is outpacing shipment growth, which may not align with your initial goals for the year, unless I misunderstood. I'm curious about the number of weeks of inventory you mentioned—6 weeks—is that at the retailer or wholesaler level? How does that compare to last year? Given the strong growth from Truly, is there a risk of running out of stock if sales continue at this pace?

Okay. Laurent, it's Frank. I'm going to address the question about shipments versus depletion. In February, we mentioned that due to capacity constraints, we would prebuild inventory for Truly and Twisted Tea to maximize our available capacity. This approach is similar to what we implemented last year. Typically, we continue to build inventory at wholesalers up to around the middle of the second quarter, which is when our shipments generally exceed depletions. However, with COVID, we began building inventory at the start of Q1 and continued into March. Following the onset of COVID, there was significant pantry loading. As a result, wholesalers were able to deplete into retailers thanks to the premium inventory we had established with them. Fortunately, they had sufficient inventory, but it did alter our dynamics somewhat since we experienced higher depletion than we anticipated in the latter half of the first quarter. This affected our planned pre-bills, leading to adjustments to our expected levels. There might be some phasing into Q2, but we cannot predict it precisely, which is why we provide guidance. If the trends continue, there may be less prebuild than we initially thought. Currently, we believe we have adequate capacity, though not everything may be internal. Ultimately, it depends on final demand. We plan for certain numbers with a buffer, but adjustments will be made based on the situation. In terms of inventory weeks, we are currently at about 6 weeks, which is roughly in line with last year, possibly a few days more or less. Although we are slightly below our targeted levels for weeks of supply, the absolute inventory amount is significantly higher due to our tremendous business growth. As you know, we aim to double the business. Consequently, while our prebuild levels are substantially higher than last year, the weeks of supply remain about the same when compared to last year.

Yes. Let me add one other dynamic in thinking about how much inventory we prebuilt and how we're going to get through the summer. We have 2 new full can lines. One became operational like 2 weeks ago. It's come up really well. That's in Pennsylvania. So we've added a full can line there and a also a full can line in Memphis, which will be coming up next month. So going into this summer, we're going to have 2 new fully sized and operational can lines to service the summer peak and the continued growth that we're anticipating in the back end of the year. So that's a significant expansion of our can capacity.

How much in percentage, would that represent? Those two new lines, Jim?

Yes. You could sort of think about in the first quarter, we had kind of 3 can lines. I mean this is a rough equivalency because two of them are in our facility, and then we have contracts with city brewing that are more complicated. But you can roughly think of it as 3 can lines in the first quarter. And in the second quarter, we're going to have 5. So there's your percentage of 67%.

Yes. Okay, Jim, guys, appreciate the good work. Excellent quarter, I should say. And I'll pass it on.

Thank you.

Our next question comes from the line of Kaumil Gajrawala with Crédit Suisse. Please proceed with your question.

Everybody, Jim, there has been a lot of discussion about capacity. To simplify, I believe the goal at the end of last year was to double your capacity. Are you still on track to achieve that? Is there a delay? Is the current figure 67%? Can you clarify where you intend to reach?

It was to double our capacity of for sleek cans, which is what Truly is in. And we've done that. I mean we're about to when the next one comes up in Memphis in May. So yes, double sleek cans. And we've actually, we believe, a little more than doubled it because we've gotten more efficiency out of existing lines. So that gives us the ability to more than double our production of Truly.

Okay. Okay. Great. That's a good segue. Are you seeing any bottlenecks in the raw material and supply side? It looks like your capacity is getting there, but the slim cans are tight. It sounds like CO2 is now getting tight. Any other bottlenecks we need to be thinking about?

We did a preliminary look at exactly that question. Was there any unexpected stuff out there, like CO2, I mean who would have thought that less mileage being driven would affect the supply chain for breweries, but a fair bit of the CO2 comes from the ethanol plants in the upper Midwest. With our production system, we are fairly close to self-sufficient in CO2. And we've always not wanted to vent carbon dioxide into the atmosphere. So we've spent a fair bit of money on capture systems to capture the CO2 in our breweries, scrub it and then reintroduce it into the beer. So we're very confident about our CO2 supply. We don't need that much. And if we really had to, we can be more frugal with how we use it and probably be close to fully self-sufficient. We have looked at other items, malt and hops are not an issue. We keep several years' worth of hops and flavors we're fine with. So in general, we don't see issues in sort of our first-tier suppliers. And we don't have a really complicated supply chain like the car company where you got to go 2 or 3 tiers. The thing that we have worked very hard on is making sure we have adequate supply of cans even to cover our upside forecast, particularly sleek cans, and we've been assured from our can suppliers that they are ready, willing and able to supply the projections that we've given them. So we feel pretty good about that.

Okay. Great. And for my final question, can we discuss beer? One thing that is becoming increasingly clear in the data, as we look at pantry loading, is that national craft brands like yours, along with Sierra Nevada and others, have significantly altered their trend of market share losses and volume declines, which have persisted for quite some time. The real question is whether you believe this change might be more lasting, given the trends that have been ongoing for about seven years, or do you think it's simply a matter of larger brands currently having the supply?

I wouldn't want to predict an overnight change in a 7-year trend. I do think it might bend the arc a bit, but we're very focused on trying to get Sam Adams back to growth and we're not going to assume that some twist of fate is going to change that. We feel like we need to do it ourselves. We're certainly happy that in these difficult times, consumers pick up the Sam Adams because they know it's a reliably rewarding beer drinking experience. So possibly, we'll be able to build on it, but I wouldn't want to count on everything changing just because of something that will eventually pass.

Kaumil, I want to add to Jim's comments briefly. I agree with what Jim said. Over the past month, 42% of the buyers of Boston Lager were new, which is promising. However, like all categories, there's an opportunity to encourage both trial and repeat purchases among brands. But as Jim pointed out, it's not enough to change the trajectory. Since the beginning of this crisis, we have focused our support on Sam Adams and the strong program for restaurants that Jim mentioned, as we believe it's important to support restaurant workers. This aligns with our company history and values. We have been allocating media dollars to promote this initiative, and it has been well received. It's an opportunity to do something positive and acknowledges that we must continue efforts to rejuvenate the brand. Additionally, we are ready to support our industry-leading on-premise sales team when on-premise operations resume. We will utilize all available resources to assist them and drive business once that happens. There are other initiatives as well. In summary, I believe all our brands are positioned for improvement. The key challenge now is determining our actions in the next two, three, or six months.

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

I know you don't disclose the total portfolio exposure to on-premise, but maybe you could share how much of your marketing and promotional spend is directed to the on-premise? Or maybe if you're unable to unpack that, maybe you could share how much of the spend mix is directed towards your over-indexing on-premise brand like Sam Adams and Angry Orchard?

Sean, this is Frank. We don't disclose any of those numbers. We manage the entire portfolio. We take our priorities throughout the year of how we support the brand, and we support each of the brand evenly. Yes, there are certain programs that we do on-premise, but in the on-premise brands, as you can imagine, Sam Adams, Angry Orchard, that's what we have more on-premise that runs in the other brands. So if you look at on-premise spend, there we see more on-premise spend than others, but we don't disclose the details. The other thing that I want to say because the question came up earlier, unlike what percentage is on-premise? As you can imagine, that is changing and has changed over the years. And it's, of course, changing dramatically at the moment. And right now, we're talking about zero. But the question is, like, when is it going to come back? So sorry, we don't disclose any more information related to that.

Sean, I can add that I believe everyone is focused on the future as we enter this space. We have two primary goals: first, managing the crisis, which aligns with our values of ensuring the safety and employment of our people and keeping the breweries operational. While we've discussed this before, the brewery aspect is crucial. At the same time, we are considering how to plan for a better future, aiming to emerge stronger, with more engaged employees and an improved business. We are evaluating our spending across channels and brands for the rest of the year, identifying opportunities based on consumer sentiment and potential impact. As always, if we recognize good investment opportunities at the right time, whether in May, June, or July, we will invest as planned. However, if we believe an investment won't yield returns or faces challenges, we will hold back. We will maintain flexibility in our spending decisions. Our guiding philosophy remains that if we see potential for long-term brand growth, we will pursue it. Given the significant changes in the world, we are reassessing everything with a fresh perspective, which is the focus of our teams right now.

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

I hope everyone is well. A quick question. Going into the year, you talked about a pretty big plan to expand the sales force. Just wondering if that's all on track and on schedule, how much of that has been done already? I guess how much of that is carryover from last year with the Dogfish edition?

Eric, this is Dave. Yes, we are moving forward. We've filled a number of roles, and I would estimate that we have discussed filling over 125 roles, with only a few of those ready to go. We are working on filling all of them, but we won’t bring anyone on board until we have clarity on the situation. However, the current circumstances haven't stopped us from pursuing this. We see a significant opportunity ahead, and fortunately, we have a strong balance sheet. As Frank mentioned, we are in a good position to continue with our plans. While we could potentially pause if necessary due to the workload, we plan to move forward.

Great to hear. And then we've heard a number of reports about retailers and distributors prioritizing high-volume SKUs. Just wondering what you've seen in terms of impact on your business and how you expect that to evolve over the coming months, whether you think some of those SKUs are going to come back into the system or whether this will kind of be the long-awaited shakeout or an acceleration of the shakeout that we've been seeing?

I'll start off and let Jim finish this. I'm sure Jim has his thoughts on this topic. In the media and in the short term, it's clear that our wholesalers begin with retailers, then move to the wholesalers quickly and then to us. They are primarily focused on the leading SKUs and core brands, and they are also interested in larger pack sizes. Whether it’s 30 pack cans, 24 pack cans, or 12 pack cans, well-established brands are currently taking up shelf space because there's a strong desire to avoid stock shortages, which has led to the reduction of lesser-known products. This year's crop has been substantial, and our peer companies, including Sierra Nevada, have definitely seen positive impacts. We are aligning ourselves with customer demands and are ready to deliver. Looking at the IRI data, we are witnessing a positive shift in all these brands, including Angry Orchard and Orchard Crisp, which is a core brand as well. It's important to note that Angry Orchard holds a significant market share. In the short term, this is the direction we're heading. Jim might have thoughts on the long-term outlook; perhaps he can share his perspective on that.

It's very consistent with what you said. What's happened is retailers kind of like the fact that they could get more volume with fewer SKUs. And wholesalers were very happy about it as well. So the channels, I think, will kind of want us to keep this going if they can. What would yank everybody back to the status quo ante of more SKUs, lower volume per SKU, and a more difficult product mix to manage to keep in stock. It's going to take the consumer requesting it. I don't think it will automatically snap back. To the way it was because both retailers and wholesalers have benefited economically from this new state of affairs. So it really will depend on the consumer. Will the consumer require that same kaleidoscopic assortment of brands that you'd see on a 12-foot run of craft beers? We just don't know.

Our next question is from Kevin Grundy with Jefferies. Please go ahead with your question.

I appreciate you guys taking the follow-up. This one is probably for Frank. It's a little bit in the weeds. But Frank, if my back of the napkin math is correct here. So the depletions for the 13 weeks ended for the quarter x Dogfish were 30% and then you also disclosed year-to-date for the 15 weeks was 27%, which implies that depletions were kind of in the 7%, 8% range in early April. Is that right? And if so, maybe you can unpack that a little bit, understanding the big pantry load dynamic in the month of March?

We don't provide the exact number, but there has been a decrease in pantry inventory and a slight return of pantry loads. However, what we're observing in the sales figures, which isn’t captured by IRI data, relates to the on-premise business that abruptly stopped, impacting keg sales and other items typically sold to bars, including bottles. This has significantly contributed to the decline reflected in the quarter-end figure of 36% and the year-to-date figure of 32%. We are still assessing the impact of pantry loads, but it's challenging to determine. So far, we haven't noticed a significant effect, but we anticipate some changes, although we aren't sure what those will be.

There's also a little bit of effect from Easter being a week later this year. And Easter is a pretty big holiday for the craft beer industry.

There are no further questions in the queue. I'd like to hand the call back to Mr. Koch for closing remarks.

Great. Well, thanks, everybody, for being on the call with us and your forbearance of our being in all different places. And we look forward to talking to you again after the second quarter. Stay safe, everybody.

Thank you. Stay healthy.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time. Have a wonderful day.