Greetings. Welcome to the Boston Beer Company First Quarter 2019 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded. I would now turn the conference over to Jim Koch, Founder and Chairman of The Boston Beer Company. Thank you. You may begin.

Thank you and good afternoon and welcome. This is Jim Koch, Founder and Chairman, and I am pleased to be here to kick off the 2019 first quarter earnings call for The Boston Beer Company. Joining the call from Boston Beer, are Dave Burwick, our CEO; and Frank Smalla, our CFO. I will begin my remarks this afternoon with a few introductory comments including some highlights of our results, and then hand it 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 for the first quarter, as well as our outlook for 2019. Immediately following Frank's comments, we will open the line for questions. Our total company depletions increased 11% in the first quarter, and we had our fourth consecutive quarter of double digit depletions growth. We believe this is attributable to our key innovations, the quality of our products and our strong brands, as well as successful sales execution and support from our distributors. We're still seeing challenges across the industry, including a general softening of the craft beer category and retail shelves that offer an overwhelming number of options to drinkers. We remain positive about the future of craft beer. And they're happy that our diversified brand portfolio continues to feel double digit growth. We're disappointed with our Sam Adams brand trends and continue to work hard on our brand messaging, focusing on the quality and care that goes into brewing our Sam Adams Boston Lager, along with a significant package redesign that is now hitting shelves, and the recent release of our new lighter and brighter recipes for Sam Adams Summer Ale. We plan to continue to invest in the coming months to improve trends and remain focused on the long term goal of returning Samuel Adams to grow. Well, it's too early to draw long term conclusions. We received very positive reactions from distributors, retailers and drinkers on our new Sam Adams packaging design and the new taste profile for Sam Summer Ale. We're confident in our ability to innovate and build strong brands 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.

Thanks, Jim. Good afternoon, everyone. Before we review our business results, I'll start with the usual disclaimer. As we stated in our earnings release, some of the information we discuss in the release and that may come up on this call reflect the Company's or Management's expectations or predictions of the future. Such predictions and the like are forward-looking statements. It's important to note that the company's actual results could differ materially from those projected in these forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained in the Company's most recent 10-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 results for the first quarter. We had a good start to the year and our happy with our record first quarter shipment and depletion volumes. First quarter shipments growth was significantly higher than depletion, as we took active steps to ensure that our distributor inventory levels are adequate to support drinker demand during the peak summer months. Our depletions growth in the first quarter was the result of increases in our Truly Hard Seltzer and Twisted Tea brands that were only partially offset by decreases in our Samuel Adams and Angry Orchard brands. Truly continues to grow beyond our expectations. We are expanding distribution across all channels and improving our position as a leader in Hard Seltzer as more competitors enter the category. Twisted Tea continues to generate double-digit volume growth consistent with 2018 full year growth trends. Angry Orchard's volume declined against the first quarter 2018 national roll out of Angry Orchard Rosé. We expect Angry…

Thank you, Jim and Dave. Good afternoon, everyone. For the first quarter, we reported net income of $23.7 million or $2.02 per diluted share, an increase of $1.24 per diluted share from the first quarter of last year. Net revenue increased significantly compared to the first quarter of 2018, driven by the plant acceleration in the timing of shipments during the year to support current and anticipated growth and demand. The increase in net income reflects the high ended revenue, partially offset by increases in operating expenses and lower gross margins. Shipment volume was approximately 1,076,000 barrels, a 32.5% increase compared to the first quarter of 2018. Shipments for the quarter increased at a significantly higher rate than depletions and resulted in significantly higher distributor inventory as of March 30, 2019 when compared to march 31, 2018. The Company believes distributor inventory as of March 30, 2019 averaged approximately six weeks on hand, and was at an appropriate level based on inventory requirements to support the forecast of growth of our Truly and Twisted Tea brands over the summer. The Company expects wholesale inventory levels in terms of weeks on hand to return to more normal levels of approximately three to four weeks on hand later in the year. Our first quarter 2019 gross margin decreased to 49.5% compared to 50.5% in the first quarter of 2018, primarily as a result of higher processing costs due to increased production at third party breweries, hire temporary labor at Company-owned breweries and higher packaging costs, partially offset by price increases and cost savings initiatives at Company-owned breweries. First quarter advertising, promotional and selling expenses increased $4.2 million compared to the first quarter of 2018, primarily due to increased investments in media and production, higher salaries and benefits costs and increased trade to…

[Operator Instructions] Our first question comes from the line of Caroline Levy with Macquarie Group. Please proceed with you question.

Hi, good afternoon. Thank you so much. Just trying to understand that would be super helpful if you could talk about how much of the shipments and the profitability in the first quarter will come out of the second quarter in particular, how we should think about the spacing? Like do you still expect shipments to grow in the second quarter as you can - would you continue to keep inventories high, you mentioned pulling inventories down to the three to four weeks by the end of the year? And then also you didn't have pricing much price realization, I guess none price mixed in the quarter. Why do you expect a 1% to 3% range for the full year? That's my first question.

Caroline, this is this Frank. So on the shipment piece, similar to what we said last call, we are building it up essentially Q1 beginning of Q2 for the for the peak season that we see during the summer. So we'll still be you know building a little bit and then you know the first half of Q2 then declining, so that will be a net negative a little bit and then we'll be running down the pre-build or the extra inventory in Q3. That's probably all we have stays that. We will you know based on our full year depletions guidance, we will grow every single quarter overall our depletions, but it will, as I said before, it will come out a little bit in Q2 a little bit and then Q3. The other question that you have, you know I can't can really give you a profit, we don't give profit guidance by quarter. I think the profit guidance remains unchanged. In terms of how much was really pre-built, we typically have in Q1 as we prepare for the season, shipments are typically if you go back the previous two years, typically outpaced depletions as we build for the summer. Now this year was significantly higher because we knew our constraints and the expected demand of truly. So, that was the first question. The second question I believe was related to pricing. So we see pricing coming through. What you see in the revenue line if you compare that to the shipments, that it's slightly lower, and that is literally a mix impact that you see on the revenue line that is not necessarily a mix impact on the margin line, but as we have increased the percentage of cans which have a slightly lower revenue rate, you see that that is a mix impact on the revenue line, but again not on the profit line.

Thank you so much. As a follow-up if I may on the impact on the gross margin of third party and the inventory build, is that something then that again is going to be front end loaded. So more this quarter, second quarter and then by the back end, number one, I know you've got some capacity additions, but number two, you probably won't be building purely interested inventory to the same extent. So I assume that your back half would be better for gross margin.

So the back half will definitely improve. This typically also how we look at our margin, so if you look at the quarterly margins. The final margin will very much depend on how much truly we will have to produce. And I think I said in the February earnings call, the way we project based on the volume that we have projected, we're projecting the gross margin and that was assumed with a certain percentage go to external to co-packers. Now, as we increase the volume, that portion that goes to co-packers will increase and will impact the gross margin. But it's really the higher the incremental volume that's driving the average margin. But overall throughout the year, the base margin will increase.

Thank you. Just the strategic question for Dave if I may. How do you think about the all the entries into truly space? I know White Claw is still growing very, very quickly. You're growing very quickly. But you've seen this game before and how do you see it playing out as a sort of best estimate of what happens in the marketplace on Spiked Seltzer?

I think you want to be number one and number two. And I think if you look at what's transpired, actually since the category really emerged, really if you look at White Claw and us, we've been combined about 75% to 80% of the category up until the beginning of this year, and actually as we get into this year with a lot more competition. Both brands are still kind of holding that collective shares if you will. So but for us, it's obviously it's a top priority to continue to grow that business and to invest in that business to drive distribution to build the brand and to do everything we can, particularly in the early stages as a category is shaking out. And thus far that's we're sitting number two, we're not going be happy to we're number one. But we feel like we're in a position that we can that we're building scale and continue to grow this business.

Thanks so much.

Our next question comes from the line of Amit Sharma with BMO Capital Markets. Please proceed with the question.

Hi, Dave. This is [indiscernible] on for Amit. Thanks for taking the question. I just wanted to circle back on that point you made about the increased competition. I mean, it seems like beyond even Spiked Seltzer, there's increasing competition or increasing entrance into FMBs. So just curious on where do you see that space coming from on the shelf, whether it be entrance into Spiked Seltzer, I mean is that going to impact any of the shelf space that you're planning on getting with retailers this year?

We think retailers are going to continue to increase the space for Hard Seltzer. But as Dave said, us and White Claw have held nearly 80% share and continue to even right now. So the new entries haven't gobbled up a lot of the market share at this point. We don't know what the future is. But some of them have been up, some of them have been down in terms of their market share below us and White Claw. But truly in White Claw that seemed to be holding something like 80% market share in the IRI data. So it looks like those two leading brands continue to be the favorites of the retailers and the consumers. And there's a big gap between us and number three. So far, nobody's really put a dent into the leadership positions of us and White Claw.

Thanks. And then just on Sam Adams bran, I know last quarter you mentioned that you're encouraged by some of the early trend you saw, new marketing, plan to still stick behind it, was new packaging, and you recently hired a new CMO. So you just tell us maybe how you're going to define success for that brand? And maybe any sort of difference in strategy on under the new CMO?

Yeah, I think it's going to take us doing a few things well and I think successes is changing the trajectory, we could get into positive. And we believe we can do and there's a number of things we've been working on. I mean the brand communication was one thing we talked about the packages design, bringing use to seasonal innovation in general. And I think we started with - we changing the campaign, and kind of going back to what we were in terms of talking about product quality of the heritage, the authenticity of the brand. And we looked at the numbers of Q4, we actually saw a pretty good path for that. We saw maybe four or five points of trajectory change for Sam Adams. In Q1 we saw that kind of we saw that kind of slip away from us a little bit. However, at the same time, and these things have to work together. As you mentioned, where we have the new packaging in market now. It's only been in for maybe, it's trickling in the maybe for last two or three weeks, it's obviously very early, but the response have been very, very positive when people see the market, particular as we talk about crowded shelves and how do you stand out, and see the colors and sensory experience. We think going back to blue and back to the - as the brand stands for will make us much more highly visible. So we feel really good about where we're going with the packaging. On new Summer Ale, I mean, that was a big thing. We developed, we changed out this product in 1996 I believe and we hadn't changed the flavor profile and go into this world kind of lighter and brighter profile,…

Our next question comes from line of Judy Hong with Goldman Sachs. Please proceed with your question.

Thank you. Hi, everyone. So I guess first question for me is on Angry Orchard. So Dave you talked about the brand being down in Q1, and you do expect improvement for the balance of the year. So can you just tell us a bit more color about the timing of the crisp unfiltered launch and some of the marketing plan that you have in place for this year? And is really the success of unfiltered kind of the key reasons that you see improvement or do you think that was day end and even the base Cider also improve as the year progresses?

Okay. Hey Judy. So I think first of all we're lapping with a Rosé launch. We're lapping the most successful new product introduction in the category I believe last year, for the most part and getting into perhaps. And so it's a big overlap we expected it. It happened really in the first quarter. But coming off of that now we're continue to invest lot in Rosé. So we expect Rosé grow this year when the years done. Right now, we start looking that way, but we believe it will. Unfiltered comes in different markets at different times, will be out there in June in some markets, in August in other markets. It's a great product, we feel very good about that. We also have done some things with packaging with a variety package, slim cans, in 12 pack cans and 12 pack bottles. So there's a number of things going on that we think will bring the brand to positive before the year is over. The time you think is a tough one but again we expected it. We're still 59, 60 share in a category and we still - our consumer measures are super strong. So I think that the big overlap is behind us and now we're looking toward a different trajectory as the year progresses.

Okay. And then my other question was just if I look at your year-to-date depletion trend, it looks like April actually accelerated, which seems too diverged from some of the reasons, scanner data and I know it's never really a perfect measure. But I guess I'm wondering if you can offer any insight into why there's been kind of a divergence and if there's anything in terms of retail inventory build or anything that is causing April depletion trends to actually accelerate, even as some of the scan data has been softer?

Yeah, I think, I mean, there's two different things. One is depletions, one is scan data. I think we use IRI. And I think based on what I write tells us and what we know our depletions, our growth is across our portfolio, it lines up pretty well. I think Nielsen, there seems - Nielsen doesn't seem to capture particularly Tea growth for whatever reason, across different channels, maybe the nature of the brand and where it started. I think that seems to be something that might be a miniscule compared to what it were IRI is. So we've accelerated but the trends have been pretty - I said have been pretty consistent over the quarter - over the first quarter into April.

Yeah, there just seems to be, Judy, some kind of weird and significant disconnect between IRI and Nielsen. And as you can see from our results, you know, our real depletions are closer to Nielsen. You have a correct - and closer to IRI. We do have a correct read date have accelerated in April. We don't see any unusual retailer build or anything like that, that just looks like consumer takeaway is, you know, accelerating. And, you know, a lot of what's driving our total depletions is, you know, we're getting bigger in Tea and in Hard Seltzer, which have the strongest growth rate. So, you know, Sam Adams will always be at the heart and soul of the company, but, you know, we have evolved our portfolio and our mix to a point where we can, you know, deliver nice double digit growth without Sam Adams contributing to it. It's just a fact of life at this point that our portfolio is able to grow double digits, despite some of the softer trends in craft beer.

Right, that makes sense. Okay. My last question is just going back to, I guess Truly and relating to kind of you're picking up the full year depletion guidance. So I guess I just want to confirm that that increased your depletion guidance for the full year is entirely driven by the Truly expectations going up? And then more broadly speaking, if you look at some of the other F&B categories, you look at you know, Mike dominating the whole Lemonade category towards the Tea dominating, the Tea based category in five Seltzer, it seems like both White Claw and Truly have really become, you know, two dominant brands. So what is it about kind of both of those brands that are resonating? Is there sort of a different brand proposition? And do think that that, you know, kind you do not believe in nature of this category between the two brands, can that be sustained, as both brands are actually getting bigger?

We think so. And certainly the, you know, you track the date over the last two years, and they've been, you know, new competitors coming and going, but the combined share of those two companies has been very consistent. I don't know that I want to use the word duopoly, but let's just say there's two very strong, very competitive entrants in there that are, you know, we're both competing tooth and nail with each other and that's paid off in, you know, the ability to fend off smaller competitors. Why is that? I mean, I think we - the two of us pioneered the category. So there was a big first mover advantage. We are both very, very good at making a really good clean based that doesn't have off flavors or off notes in it. So the product quality of both is very high and we're both very aggressive in that category. And you know, we're neither one of us wants to give up any share, and we haven't. So we do see that is potentially a stable, you know, long term situation of having two very strong competitors in there. And, frankly, there's not a ton of differentiation in the category. So it's still somewhat fluid. And as you see from the growth rates, there's a ton of new drinkers coming into this category. It's phenomenal if you go look at the data, the category is, you know, expanding distribution at an enormous rate and at the same time, getting really big pull per point increases. So it seems very healthy category.

And just to add to Jim's comment, we're also seeing actually more than half of the volume coming from outside of beer, quite honestly, like coming from spirits and primarily wine, which is a big win and we also see it coming out of white beer as well within the category.

Got it. Okay, thank you so much.

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

Hey, good evening, Jim, David and Frank. My question is really about the Sam Adams franchise. I mean, that seems to be challenging. So first, you said consumers already well to the new pack and the campaign. Are you talking about the current consumer or new consumers that you are targeting?

Yeah, I think so. If I go back to - I'll go back to the advertising campaigns that we started this whole thing with, like end of last September, I think what we found is that that campaign really reinforced the equities of the brand. It kind of told people reinforce what they already believed about the brand and it worked very well with our existing consumers. I think where the opportunity for this campaign is, I am just talking about the campaign is to more broadly engage younger say 21 to 35 year old consumers with a brand that they don't know as well and to give them something really exciting to try the brand. I think - so it's a worked on a level with our current consumers who are very important to us our current drinkers, probably not so much bringing new drinkers in. It's hard to say with the packaging and we tested the packaging with all consumers, we think the packaging is going to work with everybody because reality is you've got to be able to find our product to buy it. And so we feel, I personally feel really good about this. I've been through this like thousand times, probably. When you look, if you go into a store and you see, on display you see on the shelf, you immediately find Sam Adams and that's so important for all consumers. We feel really good about that. I think, on the news around Summer Ale, we've had also that's going to be probably appealing to bring a lot of people in and there you know, every year you know, we probably have 70% or so consumers come to Summer Ale are new consumer. So it turns over every year a large part of the consumer base. And we think we can attract a lot of new consumers with the call out of now, you know, now or later. We also think that existing consumers we test is very extensively with our existing consumers, because it's a bit franchise, particularly New England and the Atlantic area, and they preferred it significantly better than the old, Summer Ale. So we feel like, okay, so with the advertising, I think it's working, not as broadly as we needed to, we're going to - we're working on that and we're going to change that, but everything else in terms of packaging, innovation, it seems to be working pretty broadly, but I'll say Sam '76 you know, it's a more drinkable, a kind of refreshing modern that seems to be drawing younger consumers into the franchise as well.

Thanks, Dave. And really just to put up on the seminar, seems like I mean, Sam '76 , I mean, 26.2, or you just mentioned New England IPA or the seasons are bringing a younger consumer. Am I right on this? I mean, it was the age group that for those flankers. And how much of those which well-trained well entering to the Sam Adam's franchise, who those brands, sub-brands, are they migrating to the I mean, the best of Nigeria, because at the end of the day, I mean, you don't want to alienate the existing consumers. But I mean, you want to bring more consumers in and those sub brands could be a way to get it, but I'd like to understand is that true that I mean are attracting younger consumers first, and then how many of those are migrating then to the best of franchise?

That's the hope, we don't have the data yet. I mean 26, obviously is very early. With an IPA, it is still relatively small business, but growing rapidly. So we don't really dive in deep but the idea is there will be, it's great if they are an on ramp to Boston Lager because as people experience our brands and they want to try something different and something more flavor this year, is something we said we should be measuring overtime and maybe in subsequent calls we can share more insights about that.

And my last question is really about I mean, the more your wholesalers and retailers. I mean they've been seeing kind of the Boston Lager beer declining for quite some time now. I mean I know I mean they do have a very strong production team, you do have a lots of fits in the ground - on the ground I mean, now trying to push the product. But are they getting kind of nervous about keeping your SKU on shelf, is there a risk here or I mean with all what you're doing that you see the as we standardizing or even starting to pick up again?

Yeah, I think, I mean our wholesalers certainly have stuck with us in the brand and they know the brand has a special place for us. But as Jim mentioned earlier, it's like. It's one piece of the portfolio now, but the businesses looks different. And we're driving lot of growth. It's doing have more broad based, balanced portfolio if you will. But it is a challenge we get to get to customers, it is a challenge. And we need to keep that's why we need to keep bringing news to the brand and we're trying to do that through the things we talked about whether it be to the packages on the - communications on Lager, the news behind seasonal, other like 76 with an IPA, we're trying to bring up energy back to the brand, to ensure that we get the support from our customers. I think wholesalers are all in. Customers it varies based on where you are and what channel you are, you're looking at.

With the wholesalers, Sam Adams continues to be the lead craft beer. And we're not really losing to somebody who is going to replace Sam Adams. We're losing share to the other 7,000 craft brewers. I mean, we're in a category that grew 4% last year, but the number of brewers grew something like 13% or 14%. So it's a category that is losing to fragmentation which continues to make Sam Adams as you know the category leader with the largest volume, an important brand to them because they want to put stuff on the shelf that is going to be known the consumers are familiar with that they're pretty sure is going to sell a diminished rate versus last year but the vast majority of craft SKU is selling less than they did last year because of that fragmentation.

And with rest of our team to clean up their shelf from I mean those lower sending in SKUs, is trend you think?

We think that that is where trends are going. Wholesalers improving their portfolios and retailers are looking at doing the same thing. I think the growth of Hard Seltzer means they've got to get space from somewhere and some of that space may be coming from the lower selling craft SKUs. But I would say it's very, this is a trend happening in slow motion. It's the consolidation and craft that we're going through is going to be a slow process. But we do believe that eventually like in virtually all categories, strong, well supported brands of high quality will eventually emerge from any kind of consolidation and or shakeout. And Sam Adams is that we believe the long term beneficiary of that.

Thank you very much, guys. Thank you.

Thank you.

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

Thanks. Good evening, everyone.

Hey, Kevin.

I wanted to come back to Hard Seltzer. It's a question for Jim and Dave. So Jim, you mentioned the company is able to do double-digit growth, which to your credit is outstanding. But with respect to Seltzer in the absence of improvement the Sam Adams brand, we can agree that growth rates for Hard Seltzer at some point will come out of the stratosphere and in the absence of being able to turn around some of the challenges in the beer part of your portfolio that the growth rates are going to come down and they may come down materially depending on what this landing looks like in Seltzer. So with that as the background, how are you guys internally thinking about the potential size of the category? Like what's the sort of the right analog for us to think of where it can go either as a percentage of overall beer or total alcoholic beverages? And then what would you say, what gives you confidence about the long term staying power of this category, given some of the episodic boom bust that we've seen with innovations like Hard Soda comes to mind?

Yeah, we don't see this as following the Hard Soda path. For several reasons, one that was driven by trial and not much repeat and we had Coney Island hard root beer. So we went through that. It was a lot of trial, there wasn't much repeat. And it also kind of ran against consumer trends because it was loaded with sugar and loaded with calories. So - and when that information starting to become more prominent, the category went away. Hard Seltzer is very much riding a very strong powerful trend in alcoholic beverages, also in non-alcoholic of health and wellness, less sugar, fewer calories, more drinkable. So, we see it as very much an expression of powerful consumer trends that have come to alcoholic beverages. We're also encouraged by the fact that despite this, almost crazy growth. I mean, we're looking at categories almost tripling. So yes, the growth rates will come down. We're absolutely certain of that. But as they come down, they're coming down on a bigger volume base. So the incremental volume from the category will not drop as fast as the growth rates, which makes it again here the first part of your question. That's why it may well continue to more than offset whatever is going on with craft beer, because if it triples in volume and the growth rate goes down to 50% that's still a lot of new cases. So we see this category is having lags. We don't know how high, up is, but we were frankly a little surprised that how strong it is continued through January, February, March when we thought, it's winter, it's going to slow down. It didn't. So we have been surprised by the continued strength of the category and by the continued brand dominance of the two category, leaders who pretty much started the whole category.

Okay, that's helpful. Two quick follow-ups for me. Jim, question for you also on U.S. beer pricing in general. We've picked up some rumblings from distributors that the industry may not be taking the right tack here with respect to pricing and potentially pricing itself at a disadvantage relative to some of the other alcohol categories like spirits, particularly given the volume losses that continue in the category. Do you see it that way? Do you see any risk to pricing which has been rational in the beer category for some time?

Well, I can't predict or determine what competitors are doing. I can say that we're very comfortable with our pricing. We as it, rule has been slightly below inflation over the last 20 years. So, in real dollars, our pricing comes down. So we think that's healthy. And we do see continued trade up. So on any individual item, it can come down in real terms but real pricing overall for the business can go up due to the mix shift. And we believe that there is continuing premiumization and continuing consumer trade up as brewers like Boston Beer and others continue to come out with interesting and appealing innovations of new beers and new categories that consumers haven't seen before. So that prevents the commoditization.

Okay, that's helpful, Jim. One last one, just to come back to the Sam Adams brand. Can you speak broadly to advertising and marketing levels behind that brand overtime, just given the volume issues, has that come in? I guess just to kind of maybe push a little bit on it, is it could one make the case you're potentially sort of throwing good money after bad given the volume issues with it sort of in the absence of having some hard hitting, marketing or sort of innovation behind it. So any comments on advertising and marketing behind the Sam Adams brand? That's it for me. Thank you.

Yep. Just very, very broadly, we've very rapidly over the last four or five years kind of maintained roughly the same level of support. So it has so on a per case basis hang up my wife is calling. Sorry. All right. So on a per case basis, I guess our spending is probably gone up and our overall feeling is Sam Adams is a unique, iconic brand with very high awareness, very high respect, very high quality scores. And so iconic brands like that, that are have high level of esteem and are pretty much pure on touch brands, those are rare. And you support those through ups and downs, because there you just don't replace something like that. And as I said earlier, we're fortunate enough within the craft beer category to be one of the few players that continues to have the resources to do that. Our overall business is healthy, strong and growing. And that's a big advantage over the rest of the craft category where they've only got one bet, there are still is on one leg and ours is on four.

Okay, very good. Thank you for that. Good luck.

Our next question comes from line up Caroline Levy with Macquarie Group. Please stay with your question.

Thanks for taking an additional question. I want to look out a little further into the next few years and just try to understand the gross margin outlook as you build your own capacity, this time of year from now, how much of yours truly might be able to be making in-house and how much upside could there be to margins? Because I guess the question is, do you keep having to pay co-packers or what are the levels to gross margin that you see going forward?

That's a good question. And there's a couple of them. Frankly, we didn't anticipate the continued growth rate being as strong as it is. So we're doing more co-packing then we thought we will that will go down, then the last four months of the year. It's a seasonal product, it peaks in June, July and August. As you can guess, even with our co-packers between us, we don't have enough capacity to meet the projected demands for those months as it happens, so that's why we've got all this inventory out there that will get. We believe will get us comfortably through the peak. And we have a couple of things that are going to help the margin. The vast majority of Hard Seltzer for us is in variety pack. We are semi-hand packing that now. But in May, we're bringing on a large automated variety pack line that will take a significant piece of the direct labor out of that operation. We literally have hundreds of temps at our brewery in Pennsylvania literally hundreds of temps every day to do among other things the packing of these variety pack. So it's ugly and we are automating that. And we have purchased the big piece of the equipment for a new can line including the fillers, simmers, et cetera. So that will go in. But it will be too late to get this peak but we will have that for the peak of next year. And that will bring in or that will give us the capability of bringing in-house a lot of the production that's not in-house. Now my hope is we still - we're doing just as much contract production next year, because we've underestimated the volume again. But if the growth rate slows down, we will have another new can line. So anticipate bringing much more in-house next year.

That's super helpful. Thank you. And then just, do you think about the value of your beer brand, or brands as being higher than the value of say, a Twisted Tea or Truly because of a time, the history used to be that beer brands are more valuable than if FMBs, but do you think that still hops true or do you think we should be looking at things differently today?

Caroline, that's almost philosophical certainly very speculative question. Just all I can do is look back and it turns out that some of the beer brands have been quite enduring. You could think of Twisted Tea, Mike's Hard Lemonade, Smirnoff [even the Lima Raiders and so forth, that ups and downs. But I don't know. My gut tells me the beer brands are more stable, but it's a really good question. So I'm looking forward to your next research note on this.

I'll have it all figured out by then. Thanks so much.

Thank you.

Our next question comes from line of [indiscernible] with UBS. Please proceed with your question.

Hey, thanks for the question. I know we're kind of in uncharted territory here on Seltzer, but I guess given the large number of sort of wealthy old players entering the space, what gives you confidence that pricing in the category remains rational?

Well, it's a good question and there will potentially be some downward pressure. But I think - you know everybody's putting a lot of money behind it, so there may not be that much room for downward pricing. And I'm not sure that the consumer is that price sensitive, because they're paying up for higher quality. So at the end of the day, they're not if something doesn't taste as good because they didn't use the same quality of ingredients or their base was not as clean because they don't have the expensive equipment to do that. The consumer is not going to make the trade-off of I'll pay two bucks a case less but it doesn't taste as good. At the end of the day, flavor trumps price I believe.

And I'll add on that, say flavor was a brand that people recognize and put some price. I think the two brands because as Jim mentioned before, and because truly a White Claw and out there from the beginning, and you're certainly most visible getting tremendous execution in the market. I think for new consumer doesn't quite know the category. So the category where this is pretty low. If you go into for the first time, you're more - I think you're more likely as a consumer to try something that you've seen before you recognize where your friends have, senior friends drinking, so I think that also plays to the two brands at the top of the pyramid.

Got it. That's helpful. Thank you.

Our next question comes from a line of Judy Hong with Goldman Sachs. Please proceed with your question.

Thank you for taking my follow-up. I have two kind of housekeeping questions actually. One is, just going back to the inventory impact, so I think if you're planning to take inventory levels down from six weeks to say, three weeks, it equates to roughly 275,000 barrels that will need to come down. So, Frank, I just want to clarify your earlier comments. So it's some portion of the 275 roughly coming out a little bit in the second quarter, but more in the third quarter. And so by end of third quarter, you're pretty much at kind of that normalized, three or three and a half weeks of inventory level?

That's is correct, that is directionally correct. So the majority will come out in Q3, but it will start in Q2.

Okay. And then Frank, just on the advertising promo and selling expenses going up 4.2 million, how much was that freight versus the advertising?

So two thirds of all it is freight, one third is advertising and the freight is really related to the higher volume. There was a slight weight benefit but it's essentially all volume.

Got it. Okay. Thank you.

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

Thank you everybody for joining us this afternoon and we'll speak in another three months. Cheers.

This concludes the teleconference. You may now disconnect your lines at this time. Thank you for your participation.