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Boston Beer Inc  (NYSE:SAM)
Q3 2018 Earnings Conference Call
Oct. 25, 2018, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to The Boston Beer Company Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time.

(Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Jim Koch Founder and Chairman. Sir you may begin.

C. James Koch -- Founder & Chairman

Thank you. Good afternoon and welcome. This is Jim Koch, Founder and Chairman and I'm pleased to be here to kick off the 2018 Third 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'll begin my remarks this afternoon with a few introductory comments, including some highlights of our results; then hand it over to Dave who'll provide an overview of our business. Dave will then turn the call over to Frank who'll focus on the financial details for the third quarter as well as a review of our outlook for the remainder of 2018 and our initial outlook for 2019. Immediately following Frank's comments, we'll open up the line for questions.

Our depletions growth increased to 18% in the third quarter from 12% in the second quarter and 8% in the first quarter. We believe that the acceleration in our depletions growth is attributable to our key innovations, our quality, and our strong brands, as well as sales execution and support from our distributors.

During the quarter, we introduced a new Samuel Adams advertising campaign and continued to work hard on our Samuel Adams brand messaging which communicates the artisanal care in the brewing of Sam Adams Boston Lager. We plan to invest in this campaign in the coming months with the goal of improving trends and eventually returning Samuel Adams back to growth.

We remain positive about the future of craft beer and are happy that our diversified brand portfolio continues to fuel double-digit growth. We're confident in our ability to innovate and build strong brands and we're planning to launch new brands in 2019 to complement our current portfolio and help support our mission of a long term profitable growth.

I will now pass over to Dave for a more detailed overview of our business.

David A. Burwick -- President and Chief Executive Officer

Thanks Jim. Good afternoon, everyone. Let me start with the usual disclaimer. As we state in our earnings release, some of the information we discuss and that may come up on this call reflect the company's or management's expectations or predictions of the future. Such predictions are forward-looking statements. It's important to note that the company's actual results could differ materially from those projected in these forward-looking statements.

Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained in the company's most recent 10-K. The company does not undertake to publicly update forward-looking statements whether as a result of new information, future events or otherwise.

Okay, now that that's out of the way, let me share a deeper look at our business results. Our depletions growth in the third quarter was a result of increases in our Truly Spiked & Sparkling, our Twisted Tea, and our Angry Orchard brands that were only partially offset by decreases in our Samuel Adams brand. I like to note, however, that the Sam Adams seasonal program has returned to growth this year.

Meanwhile, Truly continues to grow beyond our expectations and is well positioned as a leader in the emerging segment of hard seltzer. Twisted Tea is growing both distribution and velocity while generating consistent double-digit volume growth as new entrants have been introduced and competition has increased. Angry Orchard's growth is led by Angry Orchard Rose which was introduced in early 2018. We believe that both Truly and Angry Orchard Rose are attracting new drinkers to their categories from wine and spirits.

Our plans for 2019 include investments in our new Samuel Adams advertising campaign, and the second year of our successful 2018 innovations which include Angry Orchard Rose Truly Berry variety pack, Truly Wild Berry, Sam '76 and Samuel Adams New England IPA. Overall, these five new innovations in 2018 are within the top product introductions in their combined categories.

We've adjusted our expectations for 2018 full year depletions growth in our earnings guidance to reflect our trends for the first nine months and our current view of the remainder of the year. We've provided our preliminary view of 2019 growth rates based on our plans, but these rates are difficult to predict and subject to reassessment.

We're in a very competitive business and we remain optimistic for continued long-term growth of our current brand portfolio and our innovations. We'll continue to focus on cost savings and efficiency projects to fund the investments needed to grow our brands and to build our organization's ability to deliver against our goals.

During the quarter, our operating expenses increased significantly, primarily due to the timing of our planned brand investments. Brand investment will decrease, as planned, for the remainder of the year as we're maintaining our annual spend guidance. We operated at record high capacity during peak weeks and increased our uses of third party breweries during the quarter in response to the accelerated depletions growth, especially in slim can packages and cans in general.

The growth has been challenging operationally, which has resulted in higher supply chain costs. Given the growth challenges and industrywide headwinds of higher packaging costs and transportation costs, we've reduced our expectations for 2018 gross margins. While we're achieving the expected cost savings, the corresponding margin benefits are more than offset by the incremental costs that we're incurring to meet the significant growth in our key innovations.

We expect to recoup most of the 2018 margin setback as we adjust our supply chain over the next couple of years. Hence, we're maintaining our previously stated goal of increasing our gross margins by about one percentage point per year before any mix or volume impacts, but likely we'll not see the full benefit until 2020.

Further, we're accelerating capacity and efficiency improvements at our breweries, which is reflected in our capital spend expectations for 2019. We remain prepared to forsake short-term earnings as we invest to return to long term profitable growth, commensurate with the opportunities that we see. Based on information in hand, year-to-date depletions reported to the company through the 42-weeks ended October 20th, 2018 are estimated to have increased approximately 13% from the comparable period in 2017.

Now, Frank will provide the financial details.

Frank H. Smalla -- Chief Financial Officer and Treasurer

Thank you, Jim and Dave. Good afternoon everyone. For the third quarter, we reported net income of $38 million or $3.21 per diluted share, representing an increase of $4.3 million or $0.43 per diluted share from the same period last year. This increase was primarily due to increases in net revenue and low income taxes that were partially offset by increased advertising, promotional and selling expenses and lower gross margins.

The lower income taxes related to the Tax Cuts and Jobs Act of 2017 include a favorable one-time impact of $0.38 per diluted share. Shipment volume was approximately 1.3 million barrels, a 23.5% increase compared to the third quarter of 2017. Shipments for the quarter increased at a higher rate than depletions and resulted in higher distributor inventory as of September 29th, 2018 when compared to September 30th, 2017.

We believe distributor inventory as of September 29th, 2018 was at an appropriate level based on inventory requirements to support forecasts of growth of existing brands and new innovations. Inventory at distributors participating in the Freshest Beer Program as of September 29th, 2018 increased slightly in terms of days of inventory on hand when compared to September 30th 2017. Approximately 77% of all volume is on the Freshest Beer Program.

Our third quarter 2018 gross margin of 51.2% decreased from the 53.2% margin realized in the third quarter of last year, primarily as a result of higher processing costs due to increased production at third-party breweries, higher temporary labor at company-owned breweries, and higher packaging costs; partially offset by price increases, cost saving initiatives at company-owned breweries and lower excise taxes.

Third quarter advertising, promotional and selling expenses increased $24.1 million compared to the third quarter of 2017 primarily due to increased planned investments in media advertising and local marketing, higher salaries and benefits costs, and increased freight to distributors due to higher rates and volumes, and less efficient truck utilization.

General and administrative expenses increased by $6.4 million from the third quarter of 2017 primarily due to increases in salaries and benefits and stock compensation costs.

During the third quarter, we recorded a net income tax expense of $9 million, which consists of income tax expense of $13.7 million, partially offset by a favorable $4.5 million one-time impact related to tax accounting method changes reported in the current period and the $100,000 tax benefit related to stock option exercises in accordance with the accounting standard Employee Share-Based Payment Accounting, also known as ASU 2016-09.

The effective tax rate for the third quarter excluding the impact of ASU 2016-09 decreased to 19.4% from 36.1% in the third quarter of 2017, primarily due to the favorable impact of the Tax Cuts and Jobs Act of 2017, including a favorable one-time impact due to tax accounting method changes reported in the current period. Based on information of which we are currently aware, we are now targeting full year 2018 earnings per diluted share of between $7.10 and $7.70; an increase and narrowing of the range from the previously communicated estimate of between $6.30 and $7.30. However, actual results could vary significantly from this target. This projection excludes the impact of ASU 2016-09.

Full year 2018 depletions and shipments growth is now estimated to be between 12% and 15%, an increase from the previously communicated estimate of between 7% and 12%. We now project increases in revenue per barrel of between 1% and 2% and narrowing of the previously communicated estimate of between 0% and 2%.

Full year 2018 gross margins are expected to be between 50% and 52%, a decrease of the range from the previously communicated estimate of between 51% and 53%. This decrease is primarily due to incremental costs related to the higher production volumes at third-party breweries, higher temporary labor at company-owned breweries and higher packaging cost.

We plan to increase investments in advertising, promotional and selling expenses of between $15 million and $25 million for the full year 2018, not including any increases in freight costs for the shipment of products to our distributors. We plan to increase general and administrative expenses of between $10 million and $20 million for the full year of 2018.

We estimate our full year 2018 non-GAAP effective tax rate to be approximately 24%, which includes the favorable one-time impact of $0.38 per diluted share due to tax accounting method changes reported in the third quarter, but excludes the impact of ASU 2016-09. We're not able to provide forward guidance on the impact of ASU 2016-09 will have on our 2018 earnings per diluted share 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 are continuing to evaluate 2018 capital expenditures and currently estimate investments of between $65 million and $75 million. The capital will be mostly spent on continued investments in our breweries and taprooms.

Looking forward to 2019, we're in the process of completing our 2019 plan and we'll provide further detailed guidance when we present our full year 2018 results. Based on information of which we are currently aware, we are targeting depletions and shipments percentage increase of high single-digits to low double-digits. We project increases in revenue per barrel of between 0% and 3%. Full year 2019 gross margins are expected to be between 51% and 53%, increasing during the year due to progress on the capacity and cost initiatives.

We plan increased investments in advertising, promotional and selling expenses of between $25 million and $35 million for the full year 2019, not including any changes in freight cost for the shipment of our products to our distributors. We estimate our full year 2019 non-GAAP effective tax rate to be approximately 27%, excluding the impact of ASU 2016-09.

We are currently evaluating 2019 capital expenditures and our initial estimates are between $100 million and $120 million, which could be significantly higher if deemed necessary to meet future growth. We expect that our cash balance of $68.9 million as of September 29th, 2018, along with future operating cash flow and our unused line of credit of $150 million will be sufficient to fund future cash requirements.

During the 39-week period ended September 29th, 2018 and the period from September 30th, 2018 through October 20th, 2018 the company repurchased approximately 350,000 shares of its class A common stock for an aggregate purchase price of approximately $88.3 million. We have approximately $90.3 million remaining on the $931 million share buyback expenditure limit set by the Board of Directors.

We will now open up the call for questions.

Questions and Answers:

Operator

Thank you. (Operator Instruction) And our first question comes from the line of Amit Sharma with BMO Capital Markets. Your line is now open.

Amit Sharma -- BMO Capital Markets -- Analyst

Hi good afternoon everyone.

C. James Koch -- Founder & Chairman

Good afternoon.

Amit Sharma -- BMO Capital Markets -- Analyst

Frank, can you give us an estimate for the freight inflation for this year and then how much should we expect for 2019?

Frank H. Smalla -- Chief Financial Officer and Treasurer

So, freight, if you look at the cost in Q3, we include freight in the advertising, promotion and selling expense, which is $24 million. Out of that about 30% is freight and 70% is selling. And year-to-date, that ratio is slightly different. Freight is -- on the year-to-date is about 26%. We project that to continue. So the increases that we have seen in this year we expect to continue and also go into the next year.

Amit Sharma -- BMO Capital Markets -- Analyst

Got it. And then the over shipment in this quarter, is there a way to quantify the impact of that on your operating profits or EPS?

Frank H. Smalla -- Chief Financial Officer and Treasurer

No, I think -- I mean we have given you the different growth rates. I think if you put that into your model, you take an average rate, you can see that. But if you -- if you look at the total year, I think it's important to note that Q3, we have shipped more than what we have depleted. But it's also a result that the wholesaler inventories during the summer were significantly below target level. So part of it is a catch-up, part of it is also reflective of the increased distribution of our innovations. So, if you look at the overall inventory that we have at wholesale, we are pretty happy with where we are and that is not much different from where we've been in the past.

Amit Sharma -- BMO Capital Markets -- Analyst

Got it. And then, appreciate the early look on 2019, if we look at the depletion outlook versus what year-to-date is, bit of a deceleration there. Jim, can you walk us through like where do you see some of the trends slowdown from what we have seen this year?

C. James Koch -- Founder & Chairman

Sure. Well, we can start with something like Truly Hard Seltzer. So the trends on that are very, very strong. I mean if you look in IRI, they're approaching a business that is close to tripling. So we don't expect that same rate of growth as the category matures a little bit. There are a bunch of new competitors coming in. Everybody is throwing something at the hard seltzer category even though probably 75% of the volume and IRI is split between the two leaders, us and White Claw.

We had a very successful year with Twisted Tea. Again, and I think IRI numbers are on the order of 20% as we continue to gain distribution while sales per point are going up. So that continues to grow on a modest base. But we think there will be some slowdown in the rate of new distribution through we anticipate fair bit of new distribution. We're also looking at very, very successful innovation in Angry Orchard Rose.

Depending on what numbers you look at, but it's definitely in the top like three new SKUs in the entire category and that's widely distributed at this point. So we think there is going to be continued growth in that, but it's not going to be the rocket ship from nothing to -- on its on it would be the number two hard cider in the United States.

So we see some slowdown in the first year innovations. Some of the same story was Sam '76. So this was a year where we just hit homeruns with new products and we don't think we can continue to hit homeruns of that magnitude into 2019 though we would be quite happy if that happened again. Does that help?

Amit Sharma -- BMO Capital Markets -- Analyst

Yes absolutely, very helpful. Just one last one for me. So, we did a survey of cannabis users in many states where it's legal and one of the findings was a fairly high correlation between cannabis users and craft drinkers. Now are you -- like, does your work show that correlation? And if yes, does that push you to maybe have more innovation that satisfies that users?

David A. Burwick -- President and Chief Executive Officer

Well, I certainly don't have a lot of expertise in predicting the future of cannabis consumption. I would observe that -- just on an observational basis, the states that legalized cannabis first like Colorado, Washington State, there really doesn't show up any real correlation with legalization and any slowdown in craft beer trends. They almost appeared independently. So, not really sure what's going on, I do know that before cannabis was legalized in Colorado, people actually could get weed there. So, some of what's happening is just a change in the distribution channel.

So, so far I think craft brewers would say, no we haven't seen a noticeable impact of legalization on craft beer consumption. We just -- we don't know, are they not substituting cannabis for craft beer or I don't know, when they're getting high, do they drink more craft beer, don't know. But the raw data doesn't really show much of an impact at this point.

Amit Sharma -- BMO Capital Markets -- Analyst

Got it. Really, really helpful. Thank you so much.

Operator

Thank you. And our next question comes from the line of Caroline Levy with Macquarie Capital. Your line is now open.

Caroline Levy -- Macquarie Capital -- Analyst

Thank you so much.

C. James Koch -- Founder & Chairman

Hey, Caroline.

Caroline Levy -- Macquarie Capital -- Analyst

Hi, and congratulations on a great quarter and year. Just, if you could comment a little further on salaries and benefits, we appreciate you breaking out a little bit on the freight side. But what are the drivers of that and, you know, just help us out on that?

Frank H. Smalla -- Chief Financial Officer and Treasurer

So, when you're referring to G&A that is pretty much in line with what we have said at the beginning of the year. So it's in line with our original guidance that we had built into the plan. And a big chunk of that in the G&A side is, in addition to inflation, is really to phasing impacts related to the CEO transition, where we didn't book variable compensation for a year essentially and that's what this is reflecting.

Caroline Levy -- Macquarie Capital -- Analyst

So, will that continue for a while, that CEO phasing?

Frank H. Smalla -- Chief Financial Officer and Treasurer

No, I think at the end of the day we didn't book cost for 2017 or a lot of cost for 2017 and 2016 and now that we have a new CEO in place, we'll have the full cost again. It will not continue to that extent, I think. So -- and normally we don't give guidance on G&A. We broke it out for that specific reason because that couldn't -- that was difficult to predict. For next year, I think, you can assume a normal growth rate for G&A which is going to be a combination of inflation and top line growth.

Caroline Levy -- Macquarie Capital -- Analyst

Thank you, right. So then, also we're seeing great pick up in seasonal, but could you talk about beer, the rest of the beer portfolio, I know Dave, when you joined as CEO you really felt that you would be able to get that beer portfolio moving. So any comments would be helpful?

David A. Burwick -- President and Chief Executive Officer

Sure. I think we're just coming off of the Oktoberfest and heading into Winter Lager. I think Oktoberfest was, to us, significantly beyond our expectations. We expected to be down and we're up by about 4% or 5%. I think the Oktoberfest phenomenon, I think, is probably because we have a great beer that we -- and we have a lot less competition during this time period. And it really is a period that we can still, as a brand, make an impact and get a lot of consumers in.

And it just kind of -- it really went very well for us this year. We had some good activity with some customers on premise that also help fuel it. If you look at the whole year which is positive as well, Caroline, I think part of it is -- part of it is a reflection of a year ago where we had a bit of a pile-up between spring and summer, and this year was a much smoother transition Cold Snap to Summer Ale, which combined performed better than a year ago; and then, I think Oktoberfest has just taken some of that momentum with it further.

And what makes me happy about that is that, I think it's a great on ramp for the rest of the portfolio and we know that a lot of people come in and out of seasonals year to year and it's just a way to get more consumers trying our beers, and hopefully that will then lead to them consuming other parts of the portfolio.

Caroline Levy -- Macquarie Capital -- Analyst

Okay, that's helpful. And then -- thank you. Frank you said that A&M would still be up by the same amount that you'd originally forecasted; therefore it'll be down quite substantially in the fourth quarter. Is that right?

Frank H. Smalla -- Chief Financial Officer and Treasurer

That is correct, yes. And that has really aided -- I think we've highlighted that every single quarter that the phasing this year will be significantly different from last year. Last year, we spent more than a third in the fourth quarter, even though it's a relatively small quarter compared to Q2 and Q3. This year, we had much more spending upfront based on better programs as well.

Caroline Levy -- Macquarie Capital -- Analyst

Right. This is a little out of my expertise, but Red Sox being in the playoffs. How are you parlaying that to try and grow your business? What are you doing with that franchise?

David A. Burwick -- President and Chief Executive Officer

Yeah, we've been -- we've been working with Red Sox really since opening day and really using that to help drive the business throughout New England of course. And we've done everything from unpack graphics and connecting to the brand to really put in a lot of new products like New England IPA and Sam '76 through Fenway Park to get trial and the local distributors have done a lot as well to parlay the Red Sox.

So I think like always -- it's been going all year long. There has been some different advertising, digital, social media, all the rest. We've done everything we can to take advantage of the partnership. They're a great partner of course and it's a great partnership with two of the brands and we're -- you know we haven't fully accounted for what it means for the broader New England market for the full year.

We do want to do that to understand what impact it had. But we feel -- we feel that it's definitely created a lot of energy and excitement locally. It's helped us connect -- reconnect with consumers as well and I think importantly, we've got some good learning by seeing what people are buying at Fenway and understanding what the potential is for some of our -- and particularly some of our new products, like the two I mentioned.

Caroline Levy -- Macquarie Capital -- Analyst

Thank you very much. I have one last one which is, you've got a big uptick coming in CapEx and I'm just wondering on the innovation part, if there is another platform that you're exploring in the way that truly has become a new platform?

David A. Burwick -- President and Chief Executive Officer

Or another platform? So -- yes, and so as Jim said, you know like obviously we -- I think we beat the odds significantly this year from an innovation perspective. And you know the reason why we're not -- we're looking at maybe different growth rates is because we're going to be lapping that, but we do -- we certainly have new innovation planned as well and probably not ready to talk about in detail other than to say the innovation that we'll launch in 2019 is really very much around health and wellness and which is clearly a trend that that's gripping every food and beverage category, alcoholic and non-alcoholic. And we're very -- you know we're excited about what we're going to bring to the market that will address those needs and those interests from consumers. So, did I answered the question?

Frank H. Smalla -- Chief Financial Officer and Treasurer

Yeah, I was linking back also the capital investment.

David A. Burwick -- President and Chief Executive Officer

Oh, capital, sorry.

Frank H. Smalla -- Chief Financial Officer and Treasurer

The capital investments that you're seeing and the significant increase for 2019 is really related to the innovations, in general, and the capacity shortfall that we have this year which is partly reflected in the gross margin. So, it's capacity and it's capability.

So we'll increase capacity but we will also put like more automation into our breweries. And one of the things just really happened with -- what innovation has really brought is, it's accelerated movement toward cans in our -- in the category as well as -- and especially slim cans and that's been an area that we -- that we had to -- we had to address with capital going forward.

Caroline Levy -- Macquarie Capital -- Analyst

Thanks, that's great. Thank you so much.

C. James Koch -- Founder & Chairman

Caroline, I'd be remiss in responding to your question about the Red Sox partnership. You know it clearly has, like most good partnerships gone both ways, because since the Red Sox put that Sam Adams sign; that big, beautiful glowing, blue Sam Adams sign up in the right field, they have had the best season in their history. They have vanquished the Yankees with ease and they're now up 2-0 over the Dodgers in the World Series. So there's clearly some good coming out of us.

Caroline Levy -- Macquarie Capital -- Analyst

Clearly. Cleary, thank you so much for important insight, Jim.

Operator

Thank you. (Operator Instructions) And our next question comes from the line of Nik Modi with RBC Capital Markets. Your line is now open.

Nik Modi -- RBC Capital Markets -- Analyst

Great, good afternoon everyone. The question I wanted to explore is, as you think about your kind of preliminary 2019 depletions guidance, was just hoping you can provide a little bit of context on you know what some of the components are? So you think about distribution and you think about just general improvements in market share, slotting within the areas you're in already, whether it'd be cider or the seltzer area.

Any thought around that would be really helpful, because I guess if you kind of go back over the years, and clearly this round of innovation has been lights out and obviously it seems to be a lot more sustainable than maybe some prior innovations, mainly because it's sourcing from wine and spirits. But really just trying to get comfort around how you're thinking about it and what kind of visibility you have into some of those numbers?

David A. Burwick -- President and Chief Executive Officer

Sure. This is Dave. I'll take a shot at that. I think there are different ways to look at it. I'd say the one -- the first -- here are some components to look at. One is just the base business. What can we do to drive that core business which would be you know changing the trajectory of Boston lager and seasonals in particular. So that's one area that we look at. Based on some of the things at work -- at play right now, how can we get that business to a better place?

Then, you look at the -- certainly the non-Sam businesses in Truly, Angry Orchard and Twisted Tea and we look at certainly what can we -- and obviously, each of those brands has different ways to grow. For example Twisted Tea still has a big -- has distribution opportunity and household penetration opportunity. We know the frequency is actually very high. So, we have individual branches (ph) on each of those core businesses that take into consideration what we need to grow. For the most part, it's really a -- you know it's a penetration strategy.

Then we look at, importantly, like the year-two innovation, right. So we're calling that our sophomore innovation, which would include some of the Truly SKUs like this -- particularly the Truly variety pack SKU, Sam '76, New England IPA. We want to make sure that we continue to invest appropriately to get more growth and help these brands reach their potential. And just as a quick sidebar on that, you know New England IPA is the highest -- after six months has the highest repeat rate of any beer or cider or FMB that was introduced this year in the marketplace and Sam '76 is number two.

So we think there's a lot of potential there in support of the plans of how far can we go on year two. The next component will be OK, let's look at new innovation that we're going to layer on top of the core and year two innovation and that's kind of the -- that's just -- that's a tougher one to guess but we have several things that we're looking at for next year, as I mentioned in the health and wellness space and we kind of add that to the waterfall, if you will, and that's sort of how we start to fill the volume plan for next year, does that -- does that help

Nik Modi -- RBC Capital Markets -- Analyst

Yes, that definitely helps. I'm just trying to like -- maybe you don't want to disclose it, which is fine, but I'm just trying to get a sense like you think distribution will be like half of that growth? You know that's what I'm trying to get at.

David A. Burwick -- President and Chief Executive Officer

Yeah. It's not that simple because the portfolio has become -- it is much more complex, honestly, and we have four brands with more on the way through innovation. Each brand has its own -- and it varies by geography too, but generally each brand has its own way to grow.

Nik Modi -- RBC Capital Markets -- Analyst

Yes, OK. That's helpful. Thank you very much.

Operator

Thank you. And our next question comes from the line of Judy Hong with Goldman Sachs. The line is now open.

Jack -- Goldman Sachs -- Analyst

Hi guys. This is Jack on for Judy. Congrats on a great quarter. I have just a couple of quick questions. First of all, I was wondering, you gave some color on the timing of phasing out third party manufacturing. Could you give us any sense of maybe the phasing on that or maybe what benefit you might see through the balance of the year?

David A. Burwick -- President and Chief Executive Officer

So, we thought we had a handle on that, to be honest. It very much depends on the depletions growth. And as you've seen, we have exceeded our own expectations also after Q2 call where we had raised our guidance and we had to raise it further. So we thought we have like in the second -- the end of Q3 and Q4, we would have significantly less third-party manufacturing. As the volume keeps up, we'll keep on utilizing that. That's our flex capacity that we have.

So it's really hard to predict. What I can tell you and that's in part going back to the question on capital, we are investing in capability and capacity and also will increase our own efficiencies within the breweries which will lead to more in-house production. Now, depending on how the volumes are going for the rest of the year and also next year, third party production will continue to be a significant part of our sourcing.

Jack -- Goldman Sachs -- Analyst

Okay, great, thank you. And then, going back to maybe some kind of high-level breakdown of 2019 volume, so maybe you can give a break down in terms of distribution or velocity. But, could you may be talk about what you would expect the drivers to be between, kind of beer versus cider versus FMB, if we just put it in those three buckets?

David A. Burwick -- President and Chief Executive Officer

Yes. I mean I don't think we've actually put it in those buckets. I think we're looking, I mean obviously beer is a challenge. So the question for beer is, how close can we get to zero or above zero, quite honestly? And this year it's significantly below zero, notwithstanding the great overall volume results.

I think, on the other categories, I mean as Jim mentioned, in the hard seltzer category, it tripled this year. The category we're thinking you know maybe it comes closer to doubling next year, which I think is still a pretty good number and we make some assumptions based on maintaining or ideally growing our market share. We want to be number one in that category. And so that's obviously going to drive -- that hard seltzer category will drive a good piece of growth.

But I think also, you know Tea, Tea is -- if you're going to build a model, Tea is probably the easiest one to put in because it's been growing pretty consistently in the mid-to-high teens every single year. And as I mentioned, there's still so much upside in this brand. I've mentioned before from my Pepsi days, Twisted Tea is sort of like what Mountain Dew was in the mid-90s in terms of the growth potential, you know sort of the low penetration but high frequency unique product, due to some of the demographics. So you expect Tea to keep growing.

In cider, you know Angry Orchard, again as you mentioned, Rose was just a -- well it wasn't a home run, it was like a Grand Slam this year. Realistically, we can't expect that. Nobody knows -- like Rose will always be in in the summer for sure and it's going to be around. But we have to kind of moderate that thinking next year, but then also think about other ways to grow the trademark and we're going to continue to grow, we are 60 share of cider. So we feel an obligation we're going to grow the category and we think very, very healthy.

So that doesn't really specifically answer the question Jack, but I think gives you a sense of how we're looking at it. We're -- it's about mitigating any kind of declines in beer while really capturing all the upside potential in the other categories.

Jack -- Goldman Sachs -- Analyst

All right, thank you. That's actually super helpful. And then, if I can just get one more question in there. So you guys mentioned the percentage of -- sorry, the percentage of total SG&A that freight represented has changed a little bit. Do you think that new percentage is going to be pretty consistent going forward or do you look for that to decrease or increase over the next say a year?

Frank H. Smalla -- Chief Financial Officer and Treasurer

Well, the freight number in itself is a bit of a difficult number because it has two components. It has a volume component, so as our volume goes up, clearly you have a higher freight rate because you know every case carries freight. The other piece is the rate and the rate is the normal inflationary piece that everybody is experiencing and then we've a smaller component where we have lower truck utilization. And because we couldn't service really throughout the summer, we couldn't service to the extent that we wanted to and we had more third-party production than we had originally looked at.

But if you break down the Q3 freight that I mentioned, the about $7 million, if you did the math, 40% of that is volume related 60% of that is freight related. And I think that is a fairly good assumption going forward.

Jack -- Goldman Sachs -- Analyst

And just as a follow up to that, do you feel more confident in truck utilization going forward or you still think you might have similar issues as you're trying to right-size your supply chain?

Frank H. Smalla -- Chief Financial Officer and Treasurer

No I think as we improve our supply chain and we get a better handle on the volume increase so that the utilization will be one area of improvement very clearly. That goes in line with the capacity improvements and the efficiency improvements that we have in the pipeline for next year.

Jack -- Goldman Sachs -- Analyst

All right, great, thank you so much for all that.

Operator

Thank you. And our next question comes from the line of Laurent Grandet with Guggenheim Partners. Your line is now open.

Laurent Grandet -- Guggenheim Partners -- Analyst

Hi everyone and congrats on the quarter. I mean not that many big companies are growing topline, I mean double-digit these days. So, my first question is a buildup from what Caroline asked actually. According to (inaudible) Sam Adam Seasonal have been improving sequentially to now being almost flat or slightly growing in the last 12 weeks, while Boston Lager is still oscillating between minus 15 and minus 17. So what it is working for Seasonal that is not working for Boston Lager. Is it the packaging? Is it something in the mix? So like to understand that. So what are you learning about Seasonal that you could potentially replicate in Boston Lager? And if you see that if you can give us some more color here I mean by when I mean are you planning to implement, I mean, those actions?

David A. Burwick -- President and Chief Executive Officer

Sure. I think -- let me tackle that. This is Dave. I'll try not to be too repetitive. But I think, first of all for Oktoberfest, it's just a great beer. Oktoberfest kind of stands alone in my mind anyway. It's a great beer and it comes at a time of the season when people are moving toward may be more maltier or less hoppy beers and certainly a different -- a different style of beer and in the competition -- the competitive set is just not what it is in the summer, where every single beer known to humankind competes for attention.

So I think what Oktoberfest has and during this time period that Boston Lager doesn't have is fewer other legitimate choices for consumers to make. I think that's really what helps that brand. But again, I think on the back-end the benefit we get is, we bring people into the -- we can bring people into the franchise throughout Oktoberfest.

I think the summer theme, I'll be honest, the summer theme was more of a reflection of a year ago where we really just didn't have a good setup and it started with spring. And this year, we executed much better Cold Snap to Summer Ale to Oktoberfest so -- now to Winter Lager. So I think the execution generally was better. I think from a Boston lager perspective, you know we just -- we kicked off a new -- a new brand campaign which back Jim on camera again and I think we've found our voice. We've only been on air for about four weeks now.

We're monitoring it closely and we'll see if that has an impact. That's one of the things. That alone is not going to restore Boston Lager to growth. We have other things planned for next year. I think we've talked about packaging change that I think the brand does not show up on shelf the way it should and we're going to address that. I think we think it can have a pretty big impact.

But so it's a little bit early to tell where that's going to go with lager but we do think positioning Boston Lager a bit differently. Oktoberfest can fight the craft onslaught because it's so unique. Boston Lager, we were turning our sights toward lagers in general, what we're referring to as large industrial lagers and we think we have a more compelling story to tell and a better choice and easier choice for consumers to make.

And now it's our challenge to deliver that message in a compelling and relevant way to make -- to get consumers to make that choice for Boston Lager. So stay tuned on Boston Lager, we'll see how it plays out. We got to this place very, very quickly and we'll continue to evolve. If we decide that it's not working, we'll continue to evolve it very quickly. But all-in-all we're happy with where we've landed and I can tell you that the response we're getting from our distributors and our sales organization has been quite positive about the direction we're taking with lager right now.

Laurent Grandet -- Guggenheim Partners -- Analyst

Thank you. And if I may add, I mean, if some of them -- if Sam '76 sorry and New England IPA, I mean that to a smaller extent I mean adding a new, younger consumer to the franchise and either way you can leverage those new incoming consumers into the larger Boston or Sam Adams franchise?

David A. Burwick -- President and Chief Executive Officer

Yes we're seeing it. Actually I just saw a data recently on '76. '76 is bringing in -- it is bringing in younger consumers under 35 professional males multi-cultural. It's actually -- it's been a really good complement to Boston Lager. So we are seeing that happen. I haven't seen data on New England IPA from a demographic perspective but we do know that given the New England IPA is -- the New England IPA style is extremely popular right now among sort of you know the beer cognoscenti, if you will, which are really driven by young and millennial beer drinkers. I would imagine that New England IPA is helping us go younger too although I don't have that data.

Judy Hong -- Goldman Sachs -- Analyst

Well, thank you Dave, and again, congrats on this quarter.

Operator

Thank you. And I'm not showing any further questions at this time. I would now like to hand the call back over to management for any closing remarks.

C. James Koch -- Founder & Chairman

Okay. Thanks to everybody and we'll see you again next quarter.

David A. Burwick -- President and Chief Executive Officer

Thank you. Thanks very much. Good bye.

Operator

Thank you. Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program and you may all disconnect. Everyone have a wonderful day.

Duration: 47t minutes

Call participants:

C. James Koch -- Founder & Chairman

David A. Burwick -- President and Chief Executive Officer

Frank H. Smalla -- Chief Financial Officer and Treasurer

Amit Sharma -- BMO Capital Markets -- Analyst

Caroline Levy -- Macquarie Capital -- Analyst

Nik Modi -- RBC Capital Markets -- Analyst

Jack -- Goldman Sachs -- Analyst

Laurent Grandet -- Guggenheim Partners -- Analyst

Judy Hong -- Goldman Sachs -- Analyst

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