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Boston Beer Inc (NYSE:SAM)
Q3 2019 Earnings Call
Oct 29, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings. Welcome to the Boston Beer Company Third 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]

I would now like to turn the conference over to your host, Mr. Jim Koch, Founder and Chairman of The Boston Beer Company. Thank you, sir. You may begin. Thank you. Good afternoon, and welcome

C. James Koch -- Founder and Chairman

This is Jim Koch and I'm pleased to be here to kick off the 2019 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 and then I'll hand it over to Dave, who will provide an overview of the business. Dave will then turn the call over to Frank who will focus on the financial details for the third quarter as well as a review of our outlook for the remainder of 2019 and our initial outlook for 2020. Immediately following Frank's comments, we'll open up the line for questions.

We completed our merger with Dogfish Head on July 3rd and we're making good progress on the integration. We've welcomed our Dogfish Head coworkers and we continue to learn a lot from each other as we share our passion for brewing, creativity and maintaining our strong culture. In the first quarter, as a combined company, we reported depletions growth of 30%, of which 24% is from historic Boston Beer brands and 6% is from the addition of Dogfish Head brands following the closing.

I'm tremendously proud of the efforts of all of our coworkers in achieving our sixth consecutive quarter of double-digit growth while maintaining a focus on quality and innovation. We believe that our depletions growth is attributable to our key innovations, our quality, our strong brands as well as sales execution and support from our distributors. We plan to continue to invest to improve Samuel Adams trends and remain focused on the longer term goal of returning the brand to growth. We remain positive about the future of craft beer and are happy that the strength of our diverse brand portfolio continues to fuel double-digit growth. We are confident in our ability to innovate and build strong brands and we are exploring new styles to launch in 2020 that would complement our current portfolio and help support our mission of long-term profitable growth.

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

David A. Burwick -- President and Chief Executive Officer

Thanks Jim. Hello everyone. Before I share this results, I'll start with the usual disclaimer. As we stated 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 let me provide a deeper look at our business results. Our depletions growth in the third quarter was the result of increases in our Truly Hard Seltzer and Twisted Tea brands and the addition of the Dogfish Head brands, partly offset by decreases in our Samuel Adams and Angry Orchard brands. Truly continues to generate triple-digit volume growth. During the quarter, we launched Truly Draft nationally and continued to expand packaged distribution across all channels.

We announced a multiyear U.S. partnership with the National Hockey League, which makes Truly Hard Seltzer the official hard seltzer of the NHL and enables all of our brands, including Samuel Adams and Dogfish Head to benefit from the NHL partnership. We also announced the launch of new formulations for all of our Truly flavors, which we have extensively tested with drinkers of Truly and competing brands and we are confident that we now have the best-tasting hard seltzer on the market.

In early 2020, we will launch Truly Hard Seltzer Lemonade in four styles in both a variety 12-pack and single-serve sizes. These new Truly Lemonade flavors have the same 100 calories and 1 gram of sugar as other Truly flavors, but have a more robust taste. Lastly, we've announced the addition of another new flavor, Watermelon Kiwi, available in our Truly Tropical Variety Pack and six packs. We believe these significant new flavor introductions combined with the new NHL partnership and our ad campaign for Truly featuring well known actor Keegan-Michael Key will further help improve our position as a leader in hard seltzer and establish Truly as a meaningful and relevant brand.

Twisted Tea continues to generate consistent double-digit volume growth, even as new entrants have been introduced and competition has increased. Angry Orchard's volume has declined against the 2018 national roll out of Angry Orchard Rose. The cider category continues to be challenged and we are working to return Angry Orchard to growth through packaging, innovation, promotion and brand communication initiatives.

This fall, Angry Orchard Crisp Unfiltered, a traditional American Cider with only 10 grams of sugar was launched nationally across all channels and we are encouraged by early consumer reaction. For the remainder of 2019 and into 2020, we plan to build upon our success and work to drive our brands to their full potential, with a particular focus on our Truly brand. We've adjusted our expectations for 2019 full year depletions growth and our earnings guidance to reflect our trends for the first nine months and our current view of the remainder of the year, which is primarily driven by the year-to-date performance of Truly. We are targeting high-teens to low-20s top-line growth in 2020 and a significant increase in our operating income.

We also continue to focus on cost savings and efficiency projects to fund the investments required to grow our brands, to build our organization's ability to deliver against our goals and to improve our profitability. While we are generally pleased with our overall performance, our accelerated depletions growth has been challenging operationally and we've been operating at capacity for many months. To help relieve some capacity pressures and support our projected 2020 volume growth, we are adding a new can line in our Pennsylvania Brewery that we expect will begin production by the end of this year and we have significantly increased our available sleek can capacity at third-party breweries.

We are also accelerating other capacity and efficiency improvements at our breweries, which is reflected in our capital spend expectations for 2020. We will continue to invest to increase capacity as appropriate to meet the needs of our business and take full advantage of the fast-growing hard seltzer category. However, the increased usage of third-party breweries and an increasing percentage of variety packs in the company's overall product mix come at a higher incremental cost. As a result, our gross margins and gross margin expectations will be negatively impacted until the volume growth stabilizes.

While we are in a very competitive business, we are optimistic for continued growth of our current brand portfolio and innovations and we remain prepared to forsake short-term earnings as we invest to sustain long-term profitable growth in line with the opportunities that we see. Based on information in hand, year-to-date depletions reported to the company through the 42 weeks ended October 19, 2019 are estimated to have increased approximately 21% from the comparable period in 2018. Excluding the Dogfish Head impact, depletions has increased 19%.

Now Frank will provide the financial details.

Frank H. Smalla -- Chief Financial Officer

Thank you, Jim and Dave. Good afternoon, everyone. For the third quarter, we reported net income of $44.7 million or $3.65 per diluted share, representing an increase of $6.7 million or $0.44 per diluted share from the same period last year. This increase was primarily due to increased revenue, partially offset by lower gross margins, increases in advertising, promotional and selling expenses and the non-recurrence of the $0.38 diluted share favorable one-time impacts related to a tax accounting method change in the third quarter of the prior year.

Dogfish Head operating income of $6.9 million was partially offset by non-recurring Dogfish Head transaction-related expenses of $5.9 million. Excluding this $1 million net positive impact, operating income for the third quarter was $58.8 million, an increase of $12.1 million or 25.9% from the third quarter of 2018. Also during the third quarter, the company paid back all debt incurred in connection with the Dogfish Head transaction including approximately $200,000 in related interest expense.

In the third quarter and the 39-week period ended September 28, 2019, the earnings per diluted share benefit from Dogfish Head operating income net of the dilutive impact of the transaction-related share issuance was more than offset by the non-recurring transaction-related expenses, resulting in a combined unfavorable impact of $0.08 per diluted share and $0.19 per diluted share respectively.

Shipment volume was approximately 1.6 million barrels, a 19.1% increase compared to the third quarter of 2018. Excluding the addition of the Dogfish Head brands beginning July 3, 2019, shipments increased 13.8%. We believe distributor inventory as of September 28, 2019 averaged approximately three weeks on hand and was at an appropriate level based on supply chain capacity constraints and inventory requirements to support the forecasted growth. We expect wholesaler inventory levels in terms of weeks on hand to remain between two and four weeks for the remainder of the year.

Our third quarter 2019 gross margin of 49.6% decreased from the 51.2% 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 and higher temporary labor requirements at our company-owned breweries to support increased variety pack volumes, partially offset by price increases and cost saving initiatives at our company-owned breweries.

Third quarter advertising, promotional and selling expenses increased $8.8 million compared to the third quarter of 2018, primarily due to increased investments in local marketing, media and production and the addition of Dogfish Head brand-related expenses beginning July 3, 2019. General and administrative expenses increased by $8.7 million from the third quarter of 2018, primarily due to non-recurring Dogfish Head transaction-related expenses of $3.6 million and the addition of Dogfish Head general and administrative expenses beginning July 3, 2019.

During the third quarter, we recorded a net income tax expense of $14.2 million, which consists of $60 million of income tax expenses, partially offset by a $1.8 million 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 increased to 27.2% from 19.4% for the 13 weeks ended September 29, 2018, primarily due to the one-time favorable impact of tax accounting method changes in 2018 and the absence of a similar one-time favorable impact in 2019.

Based on information of which we're currently aware, we're now targeting full year 2019 earnings per diluted share of between $8.70 and $9.30 and narrowing up of the range from the previously communicated estimate of between $8.30 and $9.30. However, actual results could vary significantly from this target. This projection excludes the impact of ASU 2016-09.

Full year 2019 depletions and shipments growth is now estimated to be between 19% and 22% and narrowing up from the previously communicated estimate of between 17% and 22%. Excluding the addition of the Dogfish Head brands beginning July 3, 2019, full year 2019 shipments and depletions growth is now estimated to be between 15% and 18% and narrowing up from the previously communicated estimate of between 13% and 18%.

We continue to project increases in revenue per barrel of between 1% and 3% and full year 2019 gross margins of between 50% and 51%. We are planning increased investments in advertising, promotional and selling expenses of between $40 million and $50 million for the full year 2019, an increase from the previously communicated estimate of between $35 million and $45 million, primarily due to increased Truly brand investments. This does not include any changes in freight costs for the shipment of products or distributors.

We estimate our full year 2019 non-GAAP effective tax rate to be approximately 27%, which excludes the impact of ASU 2016-09. We are not able to provide forward guidance on the impact that ASU 2016-09 will have on our 2009 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 2019 capital expenditures and currently estimate investments of between $100 million and $110 million, a decrease from the previously communicated estimate of $120 million to $140 million. The capital will be mostly spent on continued investments in our breweries and taprooms.

Looking forward to 2020, we're in the process of completing our 2020 plan and will provide further deeper guidance when we present our full year 2019 results. Based on information of which we are currently aware, we are targeting depletions and shipments percentage increases of high-teens to low-20s. We project increases in revenue per barrel of between 1% and 3%. Full year 2020 gross margins are expected to be between 49% and 51%. We plan to increased the investments in advertising, promotional and selling expenses of between $65 million and $75 million for the full year 2020 not including any changes in freight costs for the shipment of products or distributors.

We estimate our full year 2020 non-GAAP effective tax rate to be approximately 27% excluding the impact of ASU 2016-09. We are currently evaluating 2020 capital expenditures on our initial estimate of between $95 million and $115 million, which could be significantly higher if deemed necessary to meet future growth. We expect that our cash balance of $27.1 million as of September 28, 2019 along with future operating cash flow and our line of credit of $150 million will be sufficient to fund future cash requirements. We currently have no amounts outstanding on our line of credit.

During the 39-week period ended September 28, 2019 and the period through September 29, 2019 through October 26, 2019, the company did not repurchase any shares of its Class A common stock. 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. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Vivien Azer with Cowen. Please proceed with your question.

Vivien Azer -- Cowen -- Analyst

Hi, good afternoon.

C. James Koch -- Founder and Chairman

Hi, Vivien.

Vivien Azer -- Cowen -- Analyst

So in thinking about the 2020 outlook, clearly very robust from a top-line perspective. My question is on Angry Orchard, clearly the comps have been tough per se, but you've got some innovation in the works. What do you have embedded in your 2020 outlook for Angry Orchard directionally, should it be growing again? Thanks.

David A. Burwick -- President and Chief Executive Officer

Yeah. This is Dave, Vivien. I think for Angry Orchard we're not looking for much growth if any next year to be honest, we think it's a year of kind rethink the brand and the opportunities the category presents. We're working on some innovation, as I mentioned, we launched unfiltered, which low sugar content and we're looking at other types of products that fit more in the health and wellness space frameworks. We're also looking at different types of communication to kind of go back to initial attitude that we have with the brand. So, but we don't have -- we don't want to put too much pressure on that brand, actually we want to get it right. And so, we're not expecting a lot of growth. And we don't -- to be honest, we have a lot of different pathways to growth next year. Angry Orchard does not have to be a big one for us.

Vivien Azer -- Cowen -- Analyst

That seems prudent. Thanks for that. And just my second question is on the competitive landscape in hard seltzer, we've certainly seen some competitive activity off of legacy beer brand from one of your largest competitors. Curious if you've seen any impact to your business or overall competitive dynamics in the category, in particular knowing that there is more kind of Beer adjacent innovation set to hit the market? Thanks.

David A. Burwick -- President and Chief Executive Officer

This is Dave again. I'll speak up. I mean there's obviously a lot of activity, a lot of competition in the category. And we think we're moving ahead with our plans, which is to build a very large brand in the category that is -- that's a pure play, that's not a line extension that comes from the category in the consumers. But still, as you look at the household penetrations in the category is still very low, it's around 4% versus say 14% for FMBs in general. So right now we're trying to build the big broad brand.

And right now, if you look at our -- if you look at Truly, it's fairly broadly appealing. It's got -- it's more diverse, it has a higher income household, it goes beyond just young males if you will and we've got, as we mentioned, we've got a lot of stuff in the play right now. And as far as we're concerned, 2020 already began as we start to launch our new -- the reformulation of our new flavors.

We have a Lemonade platform coming out next year that we're very excited about. We've increased our media for Q4. We haven't spent much behind the brand in Q4 and we just -- we decided to do the opposite and spend a lot. So we've got a lot of coming. I think time will tell how the other brands, how they play out, but probably get a lot of trial to stay in large consumer basis, but we'll see as dust settles, as we head into next summer whether they have staying power or not.

Vivien Azer -- Cowen -- Analyst

Very helpful. Thank you.

David A. Burwick -- President and Chief Executive Officer

Sure.

Operator

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

Steve Powers -- Deutsche Bank -- Analyst

Yeah. Hey, thanks. Good afternoon. Maybe a follow-up on Vivien's second question there. I think the guidance for 2020 implies more or less an effective doubling of Truly. And assuming that's about right, I mean how much visibility do you think you have into that run rate based on what we know or don't know about plan competition. And really, what I'm getting as the receptivity of distributors and retailers. If we assume the consumer demand is there for the category, how confident are you that Truly will get the necessary distributor and retailer support it needs to stand out given all of that competitive activity that we're expecting in this run-up to Summer 2020?

C. James Koch -- Founder and Chairman

Well, I'll take that one. We're pretty confident that we're going to get strong continued support from not only our wholesalers, but our retailers. The reality of the category is that between us and White Claw, we've had close to 80% of the category for three years now, even as new entrants have come in during that period. And it's a category where a relatively small number of SKUs make up a large percentage of the volume. There is like six SKUs that make up over 60% of the category volume.

So I think both wholesalers and retailers are going to pay most attention to their strong SKUs, strong brands in the category because those have been the growth vehicles. And we will see lots of line extensions coming in whether it's Pabst or Natty Seltzer, Bud Light, some of those will get shelved with the hard seltzer category, some of them will get shelved over with the mother brand.

So we're continuing to invest significant dollars both in capacity and in brand building activities. We are hoping that all these new entries will get a little pieces, but will also hopefully drive category growth and continue to have strong triple-digit growth in the category through next year with all this energy coming in. And we believe we can increase our share in that environment.

Steve Powers -- Deutsche Bank -- Analyst

Okay. Thanks for that, Jim. Maybe as a follow-up on the new Truly reformulations you referenced, extensive testing and all of those products prior to launch, maybe if you could just talk a little bit more about the process and timeline there and what your key learnings were? Thanks a lot.

C. James Koch -- Founder and Chairman

Well, the process started back the late spring. We had a dedicated flavor team. We used the central location testing services that do blind and double-blind testing because we didn't want to taste it ourselves and say oh that's really good. We wanted -- what we felt was a scientific, statistical validation from blind testing with recruited consumers in the demo.

So we feel very, very, very good about the taste. I mean we have pretty scientifically validated that leads us to believe that we have the best tasting hard seltzer out there in virtually every style. And we think that's part of our overall platform of building a brand with broad appeal because we think the hard seltzer category is, it's broken out of its sort of young male brewery[Phonetic] type culture demographic that really puts the category on the map. We think it's going to be a relevant category for virtually all significant demographics and we want to make sure we have properties that have broad appeal like Keegan-Michael Key, like the NHL, we're on Monday night football. So we think that hard seltzer has very high upside, we just don't know where the upside is, but we can -- we believe it will continue to grow triple-digits next year.

Steve Powers -- Deutsche Bank -- Analyst

All right. Thank you.

Operator

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

Kevin Grundy -- Jefferies -- Analyst

Thanks. Good afternoon, guys.

C. James Koch -- Founder and Chairman

Hey Kevin.

Kevin Grundy -- Jefferies -- Analyst

I wanted to come back, Jim, to spiked seltzer, so very clear, you guys are anticipating the category doubling again next year, we'll see if that's the case or not. Time will tell, I know it's really difficult at this point with these numbers. But I want to come back, Jim, I guess what we're seeing in the Nielsen data, maybe this is different than some of the data that you have, but Truly has given up quite a bit of share. We have it down to call it about 25 points a share off of at 1 point, it was sort of in the low-30s. So the other key piece I think to your outlook is not only the category doubling, but you sound pretty confident. Maybe this is the reformulation that you're going to get back some of this share because this is just with Natty Light coming at this point, which probably has about five points if the data that we're looking at is accurate. So this is prior to Bud Light coming in and Corona and there's a number of local brands, as you guys are really well aware. So what would you kind of say, I guess to kind of push a little bit on the company's ability to gain market share in that sort of construct?

C. James Koch -- Founder and Chairman

Yeah. We believe that the resources that we're putting against Truly will help us do that. I mean if the category doubles, we just hold our share, we double. So -- and that's kind of the thinking that's in our -- currently in our projections for 2020, but we think that we're pushing the right buttons. A superior tasting product, it's a strong brand in hard seltzer, people know us and they know White Claw, we kind of pioneered the category together we done an amazing job of riding a sort of the brew culture, the mean culture. It's done great things for their brand and for the category. And we think they've proven that hard seltzer can be a significant part of the consumption of an important demographic and we think that's applicable across pretty much all the significant demographics. We're very encouraged by where we're getting our drinkers from. It's various numbers, but you wouldn't be far off saying over half of it is coming from outside of the beer category, which is very exciting for us, very exciting for the industry, very exciting for our wholesalers and our retailers and we're showing up with a strong number two brand. Yeah, we lost share this summer as the category just exploded in the key demographic and we believe we're well positioned to benefit from a similar explosion in broader demographic.

Kevin Grundy -- Jefferies -- Analyst

Okay. Thanks, Jim. One quick follow-up and then I'll pass it on. So the Sam Adams brand which has been sort of a multi-year sort of turnaround, talk about what you -- do you -- do you anticipate the brand returning to growth. Some of the Nielsen trends, it suggest the brand still remains under quite a bit of pressure. So maybe talk about what's in the outlook for next year?

And then for Jim and Dave, talk about now you have this in this rocket ship here with Truly and this category where it seem like it makes a ton of sense to sort of lean in behind investment there. Does that make it even that much more difficult to stem some of these weak trends that you're seeing with the Sam Adams brand in that sort of environment. So I'm sorry for the long-winded question, but it's really around investment levels and plan to turn that around and what you have in your outlook for next year? So sorry for all that. Thanks.

C. James Koch -- Founder and Chairman

Yeah. I mean it's, it was a long complicated question. The answer is yes. It does make it more difficult when we've got a rocket ship like Truly, I mean hard seltzer and is really once in a generation, there hasn't been anything like this that's got to scale so fast since light beer 40 years ago. So I mean a quick answer to your question is yes. We are probably leaning into self-serve organizationally investment wise, etc. I mean I would just remind everybody it's literally true, Beer is our middle name, we are The Boston Beer Company.

So no one here is thinking of anything but applause as we take advantage of this amazing opportunity that we've generated in hard seltzer. And we are quite aware that that sucks up a lot of resources this year, but it generates an ongoing big amount of gross profit dollars. And we are in the craft beer category, we are unique in having multiple sources of profitability among all the other independent craft brewers that enables us to sustain and fund the growth in the Sam Adams brand.

David A. Burwick -- President and Chief Executive Officer

And if I could just add to Jim's point, I think in addition, we talked about all the things, all the buttons we're pushing to drive the Truly business from the reformulation to this Lemonade platform which our wholesalers and customers are very, very excited about to properties like the NHL, to the ad campaigns, to more media. One thing we haven't mentioned to is that with the addition of Dogfish Head, we are going to increase our sales force by about 25%.

So we now are able to go out there and win a more feet on the street, 25% more, well over 100 out there selling Truly in the on-premise, much more aggressively than we've done before. In addition, it opens up opportunities in on-premise for beer. And for SAM and for Dogfish Head, we're going to have more resources selling beer to on-premise.

So we think that this combined organization, obviously we get the multiple portfolio of brands that the SAM -- the company has created. We get that. We get great resources, great people, great talent. And so, when we look at Truly from top to bottom, from investment and capacity to brand activities to feet on the street, we're all in. But to Jim's point, we've got -- we can utilize some of the same resources now to grow our beer business as well.

Kevin Grundy -- Jefferies -- Analyst

And Dave, just to be clear, do you expect the Sam Adams brand to be down again in 2020, is that correct?

David A. Burwick -- President and Chief Executive Officer

Yeah. We expect it to be down. That's factored into the guidance we gave you. And one thing I should just add, just to kind of give SAM a little bit of something here that the seasonal business actually did pretty well this year. We think there's something there with the summer. Our Summer Ale reformulations did very well, we're going to apply some of that learning next year. So we feel pretty good about seasonal.

We're working on going younger with the campaign for Boston Lager. The new pack design is looking on shelf and helping us be found much more quickly. So there are some good things afoot, but again, like I said before to Vivien when we're talking about Angry Orchard, these are two brands next year. Sam Adams in particular where we're going to retool, rethink, get creative and figure out how we come out of the gate stronger as the year progresses, but we're not putting undue pressure on these brands to do more than what they can do.

C. James Koch -- Founder and Chairman

But they are big brands for us. So they are very, very important to our success. So while we're leading into the hard seltzer opportunity, we recognize that growing these brands is important to our long-term success.

Kevin Grundy -- Jefferies -- Analyst

That's great. Thanks guys. Good luck.

Operator

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

Laurent Grandet -- Guggenheim -- Analyst

Hey, good evening, everyone, and congrats on the extremely strong quarter. First, quite a technical question for you -- first for Frank. Does the EPS guidance include the impact of the one-time Dogfish merger related cost?

Frank H. Smalla -- Chief Financial Officer

Yeah, this is all in. The only thing that's not in the guidance is the ASU impact, but everything else is in there.

Laurent Grandet -- Guggenheim -- Analyst

Okay. Thank you. And then I mean, so like to come back to margin as they are repatriating, I mean a lot of the manufacture of Truly I mean in-house. What was the percentage of Truly mix that was done with co-packers or third party in 2009. What does that mix look like into -- in 2020 under the -- I mean what's you are forecasting? And I don't know if you can give us some direction at least in terms of gross margin, what's the difference in term of gross margin between co-packer, Truly manufactured product and in-house manufactured product?

Frank H. Smalla -- Chief Financial Officer

So Laurent, we don't really provide the exact breakout between internal production and external production. What I can tell you that it has more than doubled the production externally and it has significantly increased throughout the year in 2019. In the fourth quarter we are taking a little break, so it's stabilizing. We're putting capacity in, but all of 2019 actually the volume growth was larger than what we had planned for. So we're putting capacity in, but we are growing the external capacity and the external volume faster than the internal.

That will turn at a point in time, it depends on what the real true growth is. The percentage of external production will continue to increase in 2020. We will realize those savings and that's what you see in the gross margin, which is fairly stable actually year-over-year considering the significant volume growth of Truly and especially the can business in general that the margin, we don't break that out, but it's safe to say we're getting from our savings, we're getting a couple of points. When you look at our entire gross margin for the company, there's I'd say 3 to 4 points that's related to the external manufacturing and the incremental many labor that we have for the variety packing. So those are temporary costs. And once it's stabilizing, which we don't know when this is going to be, we thought it was going to be this year, it's not going to be this year, but once stabilizing those opportunities to reduce the cost and then put the gross margin again. Our underlying savings and savings programs are very much delivering and gross margin is an important KPI for us.

Laurent Grandet -- Guggenheim -- Analyst

Thank you. And then maybe a final one maybe for you Dave. I saw the -- I mean the new, I mean Truly Hard Seltzer Lemonade looks nice and very differentiated too as to Truly white can. What's the role of it, I mean are you trying to appeal more to a mid-consumer with stronger flavor? I mean what's the role of it versus the white [Indecipherable] of Truly?

David A. Burwick -- President and Chief Executive Officer

Sure. So as a hard seltzer category as it grows, we're always looking for ways how do we expand the category, how do we make it more appealing to more consumers. And we think of Lemonade as a way to kind of push the boundaries a little bit to hard seltzer to provide an experience that has the same kind of the same stats on it, the 100 calories, 1 gram of sugar, etc. But provides more of a robust taste. So it's a little bit, so it's a little stronger taste profile. It still taste like a seltzer, but you just have more to it and we think that part hasn't been addressed yet.

We do think it will bring, it will probably bring in more [Indecipherable] SKU, it can bring in more multicultural SKU as well. And so, that's why we're doing it and we'll find out soon enough what impact it does have. But again, for us, it's just a way for our consumers to enjoy a hard seltzer but in a different way and in this case a more proprietary differentiated way.

Laurent Grandet -- Guggenheim -- Analyst

Thank you. I'll pass it on. Thank you.

David A. Burwick -- President and Chief Executive Officer

Thanks.

Operator

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

Amit Sharma -- BMO Capital Markets -- Analyst

Hi, good afternoon, everyone.

C. James Koch -- Founder and Chairman

Hey Amit.

Frank H. Smalla -- Chief Financial Officer

Hey there.

David A. Burwick -- President and Chief Executive Officer

Hello.

Amit Sharma -- BMO Capital Markets -- Analyst

Jim, a quick follow-up on the Lemonade. When you talk about a lot of excitement among the retailers and your wholesalers for this product, how should we think about shelf space at the retailer as of the next shelf space reset in spring?

C. James Koch -- Founder and Chairman

Well, the context of all of this is the hard seltzer category is growing triple-digits. So retailer -- at premium pricing. So retailers are very excited about putting more shelf space behind us, especially when they see the numbers about how hard seltzer is pulling from hard liquor and from wine because usually your beer buyer gets incentivized on how much beer they sell and if it steal, share from the wine department, they are OK with that. So I think you have to think about this as retailers are going to be expanding their shelves and Truly is the number two brand in the category. it has I think three of the top six or seven SKUs. We would hope that Lemonade would fit into that pantheon of high volume fast turning SKUs within the category.

So we would be looking and we're calling on retailers, we think we had pretty strong case that they should have all four of our variety packs in there because they're all of them out pulling the majority of the seltzer SKUs that they have. So we -- the category we believe is going to double, we're not asking for twice the space. So we're pretty optimistic that we can get three or four of our variety packs in most retailers, at least in four [Indecipherable]obviously not in convenience stores.

Amit Sharma -- BMO Capital Markets -- Analyst

On convenience store, Truly is somewhat under penetrated at this time relative with category, is that going to catch up as we look to next year?

C. James Koch -- Founder and Chairman

We believe so because we just introduced about a month ago two 24-ounce cans, both Pineapple and Wild Berry are now in 24-ounce cans. And as you know in C stores, that's really the power of package. So we're very optimistic that we can -- so far, wholesalers have been very supportive, we're getting two cans into most of the stores. So we're very optimistic about getting full distribution of our current 24-ounce cans with Lemonade C stores are very familiar with the successive of Hard Lemonade in the full calorie part of the market. So we think that the -- they will analogize from that to be open to putting a 24-ounce can of Hard Seltzer Lemonade that's 100 calories per 12 ounces.

Amit Sharma -- BMO Capital Markets -- Analyst

Definitely. And the last one on seasonality, Jim. Now we are into falls, into season, any early reads on how seasonal hard seltzer category is?

C. James Koch -- Founder and Chairman

Here's my theory of it which the data is though it's early, but it continue to support it that this was now a little over three years since we introduced Truly, which was the first 100 calorie 5 ABV, 1 gram of sugar hard seltzer. So it helped create the whole category and over that time has become less and less seasonal. As it becomes more and more part of mainstream, people's drinking occasions, I mean I've seen many, many times. Years ago, Corona was the summer beer, not so much anymore. Mike's Hard Lemonade was very Summer oriented, Twisted Tea very summer oriented. Power brands tend to become less seasonal over time. So it will be my prediction that the same thing is going to happen with hard seltzer.

Amit Sharma -- BMO Capital Markets -- Analyst

Got it. Thank you so much.

Operator

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

Kaumil Gajrawala -- Credit Suisse -- Analyst

Hey, guys. Couple of questions. First, just to clarify, did you -- was the expectations on the guide that total beer would be down next year or was that just for the Sam Adams brand?

Frank H. Smalla -- Chief Financial Officer

We don't go -- it's hard kind of to get into the different assumptions for beer be a craft and and [Indecipherable], but overall, we believe that beer is going to be flat and cost will be growing slightly.

David A. Burwick -- President and Chief Executive Officer

We can kind of talk about -- we talked about Dogfish, I mean I can't -- we're not going to add it together, but let's say if we have, we do have a lot of ambition for Dogfish Head next year. Three things that are happening. One, it is coming into the system, into this large and number one rating sales force in the business. So we think there are definitely some distribution opportunities, I mean we're going to round out not just six states in the U.S., but the depth of distribution and support this brand will get across channels will be very large.

We're also going to increase the brand support by probably 7x or 8x, we have been before. So it will give some real support to these brands that given the smaller environment didn't get the support they need. And lastly, we're going to be, we're going to look at price going to really smart about how we priced the portfolio by brand and by geography. So we're going to stay at the top end of the category. We want to be smart about how we manage price gap. So there's a lot of store for Dogfish for next year that everybody is just very, very enthused about.

Kaumil Gajrawala -- Credit Suisse -- Analyst

Got it. And then another quick one on Dogfish Head. Can you just provide a little more detail on what are some of these one-time costs associated with it. I think you know of the 5.9, roughly 3.6 I think is in G&A, what's the rest of it?

Frank H. Smalla -- Chief Financial Officer

All right. It's all transaction costs like bankers cost, integration cost, legal costs, that's what it is. And yeah, this is the guidance that we've given on the total. I think it was between $8 million and $9 million that's about the number regulated in one-time integration costs and one-time transaction costs.

Kaumil Gajrawala -- Credit Suisse -- Analyst

Okay. Got it. Thank you.

Frank H. Smalla -- Chief Financial Officer

All right.

Operator

Our next question comes from the line of Wendy Nicholson with Citi. Please proceed with your question.

Wendy Nicholson -- Citi -- Analyst

Hi, good evening. As it relates to the bringing more of the packing of the Truly in-house, is your long-term plan to get a 100% of that in-house and how long does it take to get there? I know you talked about a new facility coming online in fourth quarter, but when do we start to see the fruits of that. Is it the beginning of 2020 or do we have to wait for longer? Thanks.

C. James Koch -- Founder and Chairman

Well, if Truly doubles next year, it becomes again a bigger part of our overall volume. And Truly, the biggest piece of it, especially for us, I don't know what it is call it 80% or so of our volume, is in these variety packs, which require double handling, nobody has really successfully automated it, it's not done in line and the margin, we're making it in a contract brewery and we're shipping it out to end packing facility and bringing it back and hopefully shipping it from the contract brewery to the wholesaler, but sometimes shipping all that stuff back to Pennsylvania, putting it on another truck. So the piece of the -- of our business that is growing is the least automated piece of it. And we have done some automation, it helped us a lot. In Pennsylvania, we haven't, but we're growing our contract production. It's not nearly so automated.

So it's kind of a mess at the margin and the margin is the part that's growing. But eventually, we will be able to rethink the production of that, do it in line, get rid of all this handling, but it's really hard to do when you're trying to double your hand capacity for Truly. We're focused on building the lines, getting them in and we've got several of them that were engaged in. So that just getting the cans produced and in the boxes and out the door to the wholesalers has taken priority. And we'll go back and clean it up, I don't know exactly when, not going to be the first half of next year, because we're very focused on doubling our can capacity for Truly between now and then.

David A. Burwick -- President and Chief Executive Officer

There are two basic impacts when you look I at the gross margin related to the Truly production, the contract production, one is as I said before, we are increasing the percentage in contract production, at the same time we're increasing also the capacity internally, which is at a significantly lower cost. So margin in itself will not fluctuate as much because in addition to the positive benefit of increasing the capacity in-house, we also have clear savings programs, which are focused on reducing the waste that we have in the system. So this will largely balance out the incremental cost that's coming from the call -- from the increase in extra hour production.So there shouldn't be massive swings next year, it's like -- it's just like various different factors that you will see throughout the year and when those [Speech Overlap]comes on line, I'm sorry.

Wendy Nicholson -- Citi -- Analyst

No, because I was going to say, it looks like and again just in trying some of the moving pieces, it looks like fourth quarter of 2019 is not going to see quite as much gross margin pressure. And I'm wondering if that's greater efficiencies or is that just a product mix issue or a little bit of a whole bunch of different things, but it looks like sequentially the gross margin pressure is relieving itself, if you will, a little bit as we go through the year?

David A. Burwick -- President and Chief Executive Officer

Yes. Was the 2019 impact, there is a number of things. One is the percentage of Truly are ourselves and the one that's outsourced in general of the portfolio is decreasing in Q4. That's a little bit the seasonality. So -- and then the growth rate is going slightly down. So relatively speaking, is opposed to the other quarters, there is less external production that we have. Okay.

So -- and that's one impact. And the other impact also in 2019 is that we are adding Dogfish Head business, which we didn't have last year. So those two factors combined

Frank H. Smalla -- Chief Financial Officer

Yeah, have a little bit better margin impact.

Wendy Nicholson -- Citi -- Analyst

Got it. Got it. And if I can ask just one last one, just can you comment a little bit on the tap business, I know the summer was when you started to ship that. What's the response been from some of the bars and restaurants where you're seeing it? And was that any meaningful add to the third quarter shipment numbers at all? Thanks.

David A. Burwick -- President and Chief Executive Officer

This is Dave. I think most of that were at about 3,000 or so bars which really under out. I would say the impact is not material on the total business and it's a bit of an experiment to see how we can make this thing work for our our customers and we're finding that. For the most part, we're getting good response, but we're really targeting the right types of locations where you're going to have the right crowd who is going to be interested in sort of creating their own experience, the right type of customers. So we like it, it is the biggest opportunity and our premises, will continue to be cans and on-premise. But so far so good, we'll continue to expand it. We launched it I think at beginning of the. And I think again, the impact, like if you look at the Truly numbers, it's very, very small compared to the total.

Wendy Nicholson -- Citi -- Analyst

Great. Thank you so much.

Operator

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

Amit Sharma -- BMO Capital Markets -- Analyst

Thank you so much for taking the follow-up. Just wanted to make sure that [Indecipherable] that Truly co-packing outside is 300 to 400 basis point drag on margins today? And I'm asking when will it go away, but you would expect that to go away and that's the next 12 to 24 months. Is that fair?

C. James Koch -- Founder and Chairman

Well, I would have expected it to go away end of this, maybe in next year. It really depends on how long this growth is going to continue because you need to find the right balance between internal production and external production and it always takes time to add capacity. We are adding capacity. We don't want to over extend ourselves that's why we're using partly the external capacity once that stabilizes, we'll bring that in-house, will improve our supply chain.

So the impact that you mentioned, the drag on gross margin will eventually go away, it really depends on when the volume is going to stabilize quite frankly, and the mix of internal versus external production. The good news is on the entire thing, when you look at the gross profit that we're still generating [Indecipherable] then that is all incremental. Again, this is -- there is upside on the margin side, clearly. And because the external production and also the inefficient production that we have in-house is clearly masking the savings impact and the savings efforts that we have under way or have had under way for now two to three years and that are delivering every single year.

Amit Sharma -- BMO Capital Markets -- Analyst

Thank you for the explanation.

Operator

[Operator Instructions] Since there are no further questions up in the queue, I would like to turn the call back over to Mr. Jim Koch for any closing remarks.

C. James Koch -- Founder and Chairman

Well, thank you everyone for listening in on this call and all the good questions and we'll talk to you again in a few months. Time to have a beer, cheers.

Operator

[Operator Closing Remarks]

Duration: 55 minutes

Call participants:

C. James Koch -- Founder and Chairman

David A. Burwick -- President and Chief Executive Officer

Frank H. Smalla -- Chief Financial Officer

Vivien Azer -- Cowen -- Analyst

Steve Powers -- Deutsche Bank -- Analyst

Kevin Grundy -- Jefferies -- Analyst

Laurent Grandet -- Guggenheim -- Analyst

Amit Sharma -- BMO Capital Markets -- Analyst

Kaumil Gajrawala -- Credit Suisse -- Analyst

Wendy Nicholson -- Citi -- Analyst

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