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Boston Beer Inc (NYSE:SAM)
Q1 2021 Earnings Call
Apr 22, 2021, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to the Boston Beer Company's First Quarter 2021 Earnings Call. [Operator Instructions] 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. Please go ahead.

C. James Koch -- Founder and Chairman

Thank you. Good afternoon and welcome. This is Jim Koch, Founder and Chairman and I'm pleased to kick off the 2021 first quarter earnings call for the Boston Beer Company. Joining the call from Boston Beer are Dave Burwick, our CEO; and Frank Smalla, our CFO.

I'll begin my remarks this afternoon with a few introductory comments, including some highlights of our results and then hand over to Dave, who will provide an overview of our business. Dave will then turn the call over to Frank, who will focus on the financial details of our first quarter results as well as our outlook for 2021. Immediately following Frank's comments, we'll open the line up for questions.

As the world slowly reopens and the COVID pandemic winds down, our primary focus continues to be on operating our breweries and our business safely and working hard to continue to innovate and meet customer demand. Before I turn to our key first quarter operational achievements, I want to note that working with the Greg Hill Foundation, our Sam Adams Restaurant Strong Fund has raised over $7.5 million dollars thus far to support bar and restaurant workers who were experiencing hardships in wake over COVID-19 and it committed to continue to distribute 100% of its proceeds through grants to bars and restaurant workers across the country.

We are thankful to our outstanding coworkers, distributors and retailers for their continued focus and diligence in operating and helping us grow our business. The company's depletions increased 48% in the first quarter and we achieved double-digit volume growth for the 12th consecutive quarter. This just would not have been possible without the outstanding coworkers in our breweries and our sales force and the frontline workers and our distributors and retailers. So thanks go to all of them.

Early in 2021, we launched Truly ice tea Hard Seltzer and during the second quarter, we plan to launch Truly Punch hard seltzer, both buying refreshing hard seltzer and bold flavors, and we believe these new launches continue to demonstrate our innovation leadership within the hard seltzer category. We are also making steady progress in improving our brand support and messaging for a beer and cider brands to position them for long-term sustainable growth in the face of the difficult on-premise environment. We're optimistic that our on-premise business will significantly improve in 2021 as restrictions are lifted. We're excited about the response, the introduction in early '21 of several new Sam Adams beer including Sam Adams Wicked Hazy, Sam Adams Wicked Easy and Samuel Adams Just The Haze, our first non-alcoholic beer as well as the positive reaction to our Samuel Adams Your Cousin from Boston advertising campaign. We are confident in our ability to innovate and build strong brands that complement our current portfolio and help support our mission of long-term profitable growth.

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

David A. Burwick -- President and Chief Executive Officer

Hey, thanks, Jim. Hello, everybody. Before I review our business results, I'll start with our disclaimer. As we stated in our earnings release, some of the information we discussed in the release and they may come up on this call reflect the company's or management's expectations or predictions of the future. Such predictions and the like, are forward-looking statements. It's important to note that the company's actual results could differ materially from those projected in such forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained in the company's most recent 10-K and the first quarte 10-Q. You should also be advised that the company does not undertake to publicly update forward-looking statements, whether as a result of new information, future events or otherwise

Okay, now let me share a deeper look at our business performance. We are happy with our strong start to the year and our record first quarter shipment and depletion volumes. First quarter shipments growth was significantly higher than depletions growth as we took active steps to ensure that our distributor inventory levels are adequate to support drinker demand during the peak summer

Months. Our depletions growth in the first quarter was the result of increases in our Truly Hard Seltzer and Twisted Tea brands, partly offset by decreases in our Samuel Adams, Angry Orchard and Dogfish Head brands. The recently launched Truly Iced Tea Hard Seltzer has accelerated Truly brand growth, which has more than doubled since last year.

In the first quarter in measured off-premise channels, the Truly brand outgrew the hard seltzer category by nearly 2 times or 50 percentage points, resulting in a share increase of 6.5 percentage points. The Truly brand has now reached a market share of over 28%, accounting for approximately 40% of all growth cases in the hard seltzer category year-to-date, which is two times greater than the next largest growth brand. Truly Iced Tea Hard Seltzer has achieved a 4.3 percentage point market share in measured off-premise channels, well ahead of all other new entrants to the entire beer category. We expect the launch of Truly Punch Hard Seltzer during the second quarter to continue this positive momentum. We will invest heavily in the launch of Truly Punch Hard Seltzer and the Truly

Brand, evolve our brand communications, and further improve our position in the hard seltzer category as more competitors enter. Truly Tea continues to generate double-digit volume growth rates that is significantly above full year 2020 trends.

In the first quarter in measured off-premise channels, case growth in Twisted Tea brand products was almost three times higher than its closest competitor and we believe, Twisted Tea is on its way to becoming the number one flavored malt beverage by year's end. We see significant distribution and volume growth opportunities for our Truly and Twisted Tea brands and are looking to continue to expand distribution of our Dogfish Head brand. Pursuing these opportunities in 2021 remains a top priority. Our Samuel Adams, Angry Orchard and Dogfish Head brands were hit the most by COVID-19 and the related on-premise closures. We continue to work hard on returning these brands to growth and are optimistic that they will return to growth in 2021.

Overall, given the trends for the first three months and our current view of the remainder of the year, we've adjusted our expectations for higher 2021 full year volume and earnings growth, which is primarily driven by the strong performance of our Truly and Twisted Tea brands.

During the quarter, we have taken various steps to ensure we have capacity to support this accelerating growth. We continue to work hard on our comprehensive program to transform our supply chain with the goal of making our integrated supply chain more efficient, reduce costs, increase our flexibility to better react to mix changes, and allow us to scale up more efficiently. We expect to complete this transformation over the next two to three years.

We will continue to invest in capacity to take advantage of the fast-growing hard seltzer category and deliver against the increased demand through a combination of internal capacity increases and higher usage of third-party breweries, although meeting these higher volumes through increased usage of third-party breweries has a negative impact on our gross margins. While we anticipate delivering

Margin improvements in 2021, our gross margins and gross margin expectations will continue to be impacted negatively until our 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 in the company through the 15 weeks ended April 10, 2021, our estimated depletion is approximately 49% from the comparable weeks in 2020.

Now Frank's going to provide the financial details.

Frank H. Smalla -- Treasurer and Chief Financial Officer

Thank you, Jim and Dave. Good afternoon, everyone. For the first quarter, we reported net income of $65.6 million or $5.26 per diluted share, an increase of $3.77 per diluted share in the first quarter of last year. This increase was primarily due to increased net revenue, partially offset by higher operating expenses. In the first quarter of 2020, we recorded pre-tax COVID-19-related reduction in net revenue and increases in costs, that total $10 million or $0.60 per diluted share.

In 2021 going forward, we've chosen not to report COVID-19-related direct costs separately as they have used to be a normal part of operation. For the first quarter of 2021, shipment volume was approximately 2.3 million barrels, a 60.1% increase from the first quarter of 2020. Shipment volume for the quarter was significantly higher than depletions volume and resulted in significantly higher distributor inventory as of March 27, 2021 when compared to March, 28 2020.

We believe distributor inventory as of March 27, 2021 average approximately seven weeks on-hand, and was an appropriate level based on the supply chain capacity constraints and inventory requirements to support the forecasted growth of our Truly and Twisted brands over the summer. We expect wholesaler inventory levels in terms of weeks on-hand to be between three and seven weeks for the remainder of the year.

Our first quarter 2021 gross margin of 45.8% increase in the 44.8% margin realized in the first quarter of last year. The increase was primarily a result of price increases, the absence of the COVID-19-related direct cost incurred in the first quarter of 2020 and cost saving initiatives company-owned breweries, partially offset by higher processing costs due to increased production at third-party breweries.

First quarter advertising, promotional and selling expenses increased by $43 million in the first quarter of 2020, primarily due to increased brand investment of $21 million, mainly driven by higher media and production costs. Higher salaries and benefits costs and increased freight to distributors of $21.9 million due to a higher volume and rate.

General and administrative expenses increased by $4.9 million from the first quarter of 2020, primarily due to increases in salaries and benefits costs. During the first quarter, we recorded an income tax expense of $11 million, which consists of income tax expenses of $19.6 million partially offset by $8.6 million fixed benefit related to stock option exercises in accordance with ASU 2016-09. The effective tax rate for the first quarter, excluding the impact of ASU 2016-09 increased to 25.6% and was 23.6% in the first quarter of 2020.

Based on information of which we are currently aware, we are targeting 2021 earnings per diluted share of between $22 and $26, an increase from the previously communicated range of between $20 and $24, excluding the impact of ASU 2016-09, but actual results could vary significantly from our target. We are currently planning increases in shipments and depletions of between 40% and 50%, an increase from the previously communicated range of between 35% and 45%. We're targeting national price increases per barrel of between 1% and 3%, an increase from the previously communicated range of between 1% and 2%.

Full year 2021 gross margins are currently expected to be between 45% and 47%. We plan increased investments in advertising, promotional and selling expenses of between $130 million to $150 million for the full year 2021, an increase from the previously communicated range of between $120 million and $130 million. These amounts do not include any increases in freight costs for the shipment of products to our distributors. We estimate our full year 2021 effective tax rate to be approximately 26.5% excluding the impact of a ASU 2016-09. We're not able to provide forward guidance on the impact of ASU 2016-09 [Indecipherable] 2021 financial statements and full year effective tax rate as this will mainly depend upon unpredictable future events, including the timing and value realized upon the exercise of stock options versus the fair value with those options were granted.

We're continuing to evaluate 2021capital expenditures and currently estimate investments of between $250 million and $350 million, a decrease in our previously communicated range of between $300 million and $400 million. The capital will be mostly spent on continued investments in capacity to supply chain efficiency improvement. We expect that our March 27, 2021 cash balance of $144.7 million together with the future operating cash flows and the $150 million remaining under the line of credit, will be sufficient to fund future cash requirements.

We will now open up the call for questions. Before we go there, similar to the last couple of calls, Dave will be the MC on our side and coordinate the answers when needed since we are in different locations.

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from the line of Vivien Azer with Cowen and Company. Please proceed with your question.

C. James Koch -- Founder and Chairman

Hi, Vivien.

Stanley Harrison Vivas -- Cowen Inc. -- Analyst

Hi, this is Stanley Harrison Vivas on for Vivien. Thanks so much for taking the question. So with 13-week depletions having come in only 3 points ahead of the top-end of your previous guidance and with the growth in the hard seltzer category having decelerated notably since March. Can you all offer an updated view on full year growth for the hard seltzer category, just considering how tough the comps will continue to be? Thank you so much.

David A. Burwick -- President and Chief Executive Officer

Sure thing. Harry, this is Dave, I'll answer that. So I think last year, we talked about it on the [Indecipherable] for the category. We've done some work since then. [Indecipherable] we're looking mostly household penetration growth, finally through to the category [Indecipherable] there in the category, [Indecipherable] that's coming [Indecipherable] demand. The importance of life shelf space [Indecipherable] that are happening, the fact Truly, we gained about 45% more shelf space now for Truly glass [Indecipherable] In the international category, we have to [Indecipherable] exactly for the economics. So when we look at that, we basically look at from our -- we cannot -- we certainly the category of the grow significantly [Indecipherable] is probably 60% to 90% versus a 70% to a 100%, but if we see the [Indecipherable] in that region of 60% to 90% even plus. First of all, consumer trend is still there, right, so [Indecipherable] premiumization is still there and it is still evident. The shelf space thing is a big one and we expect the categories that again will be probably 30 plus percent shelf space, which as we have and that would really happen [Indecipherable]

With also new channels [Indecipherable] with the household penetration is much smaller than it is [Indecipherable] continue there. [Indecipherable] also in packages, innovation is color, right, innovation is a long investment from a lot of players, and we think that will create a lot of excitement through the summer and [Indecipherable] I mentioned earlier, [Indecipherable] on the stocks for the last year and last year, I stated that hard seltzers really [Indecipherable] So we think based on what we've seen, there is some of the work that are opening up on-premise soon. We still see a very, very strong on-premise business, so we think again, and is a lot of reasons why we believe that category [Indecipherable] start to accelerating and that's part of our calculation.

Stanley Harrison Vivas -- Cowen Inc. -- Analyst

Thanks so much, that's super helpful. I'll jump back in the queue.

Operator

Your next question comes from the line of Bonnie Herzog with Goldman Sachs. Please proceed with your question.

Bonnie Herzog -- The Goldman Sachs Group, Inc. -- Analyst

All right, thank you. Hi, everyone.

C. James Koch -- Founder and Chairman

Hey, Bonnie.

Bonnie Herzog -- The Goldman Sachs Group, Inc. -- Analyst

Congrats on a great quarter. I guess I wanted to ask a follow-up on something that I think you were just discussing. Dave, it's a little hard to hear you, but just thinking about bars and restaurants opening up, I guess there is a bit of a view that this could negatively pressure the hard seltzer category. So, I'd love to hear maybe a little more thoughts on this and what you see is the real opportunity for seltzers on-premise? I mean, do you guys think of this as a headwind or quite possibly a tailwind for the category?

And then any visibility so far with things opening? Are you seeing may be greater interest for hard seltzers now on-premise? And ultimately, what's your strategy for Truly there? I think that would help and frame everything and possibly that's contributing to your increased guidance on depletion. Thanks.

David A. Burwick -- President and Chief Executive Officer

Sure. Sure, Bonnie. So I'm going to try to speak, mainly through the speakers, so you guys can hear me. I think, like I said as [Indecipherable] mentioned before, last summer was dependent to be the summer of hard seltzer and I guess it will never materialize for the basic. We're seeing a lot of growth right now. [Indecipherable] if there were the half hard seltzer brands in [Indecipherable] the team has been out actively summary and making a lot of progress is driving distribution in a nutshell. So we feel very optimistic that we're going to have a one Truly and [Indecipherable] category [Indecipherable] be going through that channel.

Also I'll speak to something that's a -- actually [Indecipherable] guys looked at the State of Florida, which is what -- which opened its on-premise [Indecipherable] but it was opened up pretty aggressively early on. In the off-premise growth in Florida as example of this is accelerating. So I think we see two things here, one were, we do not want the [Indecipherable] people will be asking for drilling and other hard seltzer brands in off-premise [Indecipherable] right now, but we also see people continue to do things out -- at home and having parties and other social occasions [Indecipherable] to the category. So I think obviously, time will tell. The next call we'll have those data. But right now, as you know the company is opening up and pretty [Indecipherable] see this for the category.

Bonnie Herzog -- The Goldman Sachs Group, Inc. -- Analyst

All right, thanks. And just on the increased guidance for depletions, is that one of the drivers for you in terms of feeling comfortable to raise your outlook for depletions this year?

David A. Burwick -- President and Chief Executive Officer

I think there is two things, the first is, [Indecipherable] Truly [Indecipherable] talked about it, I think the early success which I would see is [Indecipherable] work pretty much right now, because there is a lot of confidence. Also [Indecipherable] continues to perform very, very well. To be honest beyond our expectations. So, we combine those two together. That's definitely driving that guidance.

Bonnie Herzog -- The Goldman Sachs Group, Inc. -- Analyst

All right, thank you so much.

David A. Burwick -- President and Chief Executive Officer

Sure thing.

Operator

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

Kevin Grundy -- Jefferies Group LLC -- Analyst

Hey, good evening guys. Not to belabor the seltzer topic, but I did want to come back to it. So I guess, Dave for you, just in terms of visibility on market share, when you guys are building the model because I guess what's noteworthy is that your outlook for the category has come in, right. And I think where you guys were before and I -- everyone sort of sympathetic, there's a wide range of outcomes here, it sort of a high-class problem for the industry, but the 70% to 100% growth was high, relative to what other folks were saying. So the midpoint previously was 85% now it's 70%, so the category outlook comes in. So sort of implicitly you're feeling increasingly optimistic about your market share within the context of reportedly what's a really strong start for [Indecipherable] we see that in the data, Topo Chico is off to a blazing start in Texas, Constellations just leaning in here and kind of playing catch up. So I guess the question is, what's the visibility on the market share and I -- and really, I guess the reason to sort of increase the guidance at this juncture, just given the flood of competition and the amount of investment that's coming in the space. So a lot there but comments really specific on market share visibility. Thank you.

David A. Burwick -- President and Chief Executive Officer

Sure thing. So we see for the midpoint call it 75% but you point is, it is precise. We think we can outgrow that number. And I think again, first of all, when we look at other brands that just launched two, three weeks ago, we can't [Indecipherable] right. So the particular brand is well-known, it's going to get a lot of trial, brand that's a wide extension of the both new brands, it's going to get a lot of trial. So it's really -- it's just still over the call or I'm pretty sure where they call it facility as well. We went where we have not in the first quarter, we went in first week of January, and that [Indecipherable] So very -- we've done a lot of consumer work and healthy punch, which is coming soon, and it is tested by better than anything that we developed thus far. So we feel like punch -- we'll bring a punch, a big one and the utilized to keep the pace. But you're right, there's a lot of activities, I think, there is a lot of activity in the marketplace [Indecipherable] also itself out over the coming months. But I think between the trajectory we see for tea, the [Indecipherable] the velocity just for a perspective, the velocity of Truly is 2x [Indecipherable] Okay. The velocity for Truly Lemonade which is still [Indecipherable] is number 3 in the category, so all the numbers, it's number 3 brand in the category [Indecipherable], it's a number 3 brand in terms of velocity, it is 2x right now and in that -- and if you look at the velocity [Indecipherable] it's 2x the velocity of the other two competing hard seltzer to eliminate put the marketplace.

So we look at all of that and yeah, I mean it's [Indecipherable] this time of the year [Indecipherable]. So it's one thing to get a category grew 60% to 90% honestly, whatever it is, we're going to grow faster. That's what [Indecipherable] happy [Indecipherable] 50%, it will be grow 70% and then it will grow 90% and then it will be 100 times. But we believe that the innovation [Indecipherable] and by the way, the brand investments which is significant [Indecipherable] used to come, still to come on the brand, we feel like the benefit [Indecipherable] the competition as good as they are and their companies are excellent companies and all taking a shot at it and [Indecipherable] if nothing [Indecipherable]

Kevin Grundy -- Jefferies Group LLC -- Analyst

Thanks for the color, Dave. I'll pass it on. I'm sure there's a number of other questions.

David A. Burwick -- President and Chief Executive Officer

Sure thing.

Operator

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

Eric Serotta -- Evercore Inc. -- Analyst

Great, thanks a lot guys. And Dave, your voice is a little better, but still a little muffled, I'm not sure if you could do anything further about that. Couple of questions. First, in terms of the pricing environment, saw that you raise the guidance from the 1% to 2% range to the 1% to 3% range. Is that increase driven on the seltzer side, on the beer side, the Twisted Tea side? Constellation recently called out some increased price competition within seltzers. Is that something you're seeing?

And then the next question was really around how you're thinking about the longer-term innovation pipeline,, to play devil's advocate some of your -- a lot of your recent success has come from seltzer rising other NA or alcoholic categories, be it eliminator key. How are you thinking about future innovation? Do you run into a wall of attractive categories or styles to seltzer rise? And I'll stop there.

Frank H. Smalla -- Treasurer and Chief Financial Officer

Hey Eric, this is Frank. Let me take the first question on pricing. So I mean we increased our pricing range slightly year you have seen in the midpoint. The pricing is across the board again, it's not like that we take more national price increases, it's by region. But overall, clearly hard seltzers is base part of our portfolio, without that, you don't get to the price increase. We don't see really any negative price pressure because at the end of the day, I think we are competing on quality and on brand and we have you seen debt pricing that we put into the market actually starting last year. What you're seeing this pricing that we put in, that's carrying over plus new pricing, and we feel fairly confident about that across the entire portfolio.

David A. Burwick -- President and Chief Executive Officer

And I think I will take the second question about key transition, hoping that it's really OK. So I think, yeah, we have a lot of ideas, that's how [Indecipherable] next We have many ideas and [Indecipherable] not holding up. And actually different [Indecipherable] category. I think -- and also I think the benefit of being a pure play, I think I've said it before, the development a pure play seltzer brand is just a result of [Indecipherable] to navigate and redefine the category in [Indecipherable] we can be successful and most f you come in as a beer brands [Indecipherable] seltzers.

So I think -- we think there is more avenues there, we have many ideas. [Indecipherable] other things as well. So we were pretty confident. We also [Indecipherable] category, they're looking for new things, if you know, we kind of sped up on the cycle, we feel [Indecipherable] core competency of ours and think that [Indecipherable] and that's why [Indecipherable]

Eric Serotta -- Evercore Inc. -- Analyst

Terrific. Well, congratulations. I'll pass it on. Thank you.

David A. Burwick -- President and Chief Executive Officer

Thanks.

Operator

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

Laurent Grandet -- Guggenheim Partners -- Analyst

Thank you and good evening guys, and congrats on the next section on quarter. So those would be -- I mean, I've got to put up questions. First, I mean in term of shelf reset in March, I mean, you said you gained shelf set a bit -- the voice was not coming across very well. So could you tell us how much shelf space you gain? And did you increase your -- I mean your shelf time in percentage share versus competition?

David A. Burwick -- President and Chief Executive Officer

Sure. Now seltzer is 45% shelf space.

Laurent Grandet -- Guggenheim Partners -- Analyst

45%. And from -- and your gain in term of percentage versus last year?

David A. Burwick -- President and Chief Executive Officer

Yeah, so we gained 45% more shelf space across the board in on-premise versus in [Indecipherable]

Laurent Grandet -- Guggenheim Partners -- Analyst

Okay. Thanks. Then in term of -- I'd like to understand, I mean Truly Tea and lemonade and repeat purchase. So now you've got three, four months of Truly Tea. I mean could you tell us what's the repeat purchase of Truly Tea? Now if you get that, and if the repeat purchase of Truly Lemonade has been impacted by the launch of the others lemonade?

David A. Burwick -- President and Chief Executive Officer

Yeah, sure thing. So Truly [Indecipherable] even now, but with the repeat rates are rising mid to high teens for Truly. So positioned in this time period, we have three months or so, this is actually quite good. If you look at that compared to -- it's a little south toward Lemonade was last year. Lemonade had [Indecipherable] 2020 class and this product has the highest trial and the highest repeat rates. Truly Tea is kind of a [Indecipherable] which we sort of expected to be very strong. So, but I'll also say it's still early. So we'll see particularly in the face of all the other innovation coming in, we'll see how that holds up.

As it relates to Truly Lemonade, it's still certainly quite well. As I mentioned before, it's number 3 in the category. The velocity is 2x and all the new entrants are more than 2x but all the new entrants in the category, that's for except for Truly Tea, which is much closer to it, but, so [Indecipherable] holding up point pretty well honestly, and in a way we're sort of agnostic as to how the mix plays out. Consumers will decide what it looks like in the end, I'm not sure consumers are trading our low lemonade for another lemonade or once you put another two, I think it's looking for a great hard seltzer experience and they are looking for a brand that they trust and they like and so we'll see how it plays out during the year and how the mix of flavors forms but Lemonade is moving up quite well. And in fact, this is -- again, this is early data for the [Indecipherable] to be almost very, very little interaction which makes Hard Lemonade seltzer and Truly Lemonade. Thus far, Truly [Indecipherable] early but we don't see it at all.

Laurent Grandet -- Guggenheim Partners -- Analyst

Yeah, thanks. My last question is about capacity and what's the driver behind, I mean reducing kind of the capex for this year?

Frank H. Smalla -- Treasurer and Chief Financial Officer

Laurent, this is Frank. The drive of the capex and we came out and made a fairly wide range. We knew were looking at different options to build capacity and what has happened between when we came out and now is that, we found a better way and a more effective way to build the capacity. So, the scope has not changed, we just have following a solution that requires less capital than what we had envisioned at the beginning of the year. So, we are becoming more effective in our capex spend but the has not changed, it's exactly the same as before.

Laurent Grandet -- Guggenheim Partners -- Analyst

Thank you, Frank. I pass it on. Congrats again, guys.

C. James Koch -- Founder and Chairman

Thank you.

David A. Burwick -- President and Chief Executive Officer

Thanks Laurent.

Operator

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

Sean King -- UBS -- Analyst

Hi, thanks for the question. Yeah, curious about how -- last quarter you took down the guide for the increase in A&P spending, but then you took it back up, what's really changed? Is that simply just a function of the increased sales outlook or have you found sort of a more favorable ROI on some of investments to take?

Frank H. Smalla -- Treasurer and Chief Financial Officer

Yeah, this is Frank, Sean, I'll be taking that. The -- clearly, the way that we've started the year, we're pretty happy with the first quarter in terms of shipments and depletions and our outlook. We are also very happy with the programs that's coming in terms of innovation and and the media and the entire programing promote our brands. And when we look at that, and as I've said before, we define our spending not necessarily based on a metric as a percent of net revenue, we clearly look at it, but that's not the target. What defines our spending is the opportunities that we see, what we see about our programs and how we want to support our business. And based on how the business has started out, the innovation that's going to come and how we feel about our programs, we feel it's the right thing to increase our spend going forward and for the full year.

Sean King -- UBS -- Analyst

Great, thank you for the color.

C. James Koch -- Founder and Chairman

Right.

Operator

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

Wendy Nicholson -- Citi -- Analyst

Hi, a couple of questions, if I can. First, when I go into the grocery store, it seems like the hard seltzer space on shelf has expanded a lot, and you've clearly benefited from that. But a lot of the newer brands and particularly a lot of the ABI brands are more on end cap displays or they're showing up at other places in the store. And I just wondered cost to compete in terms of promotional dollars, it's great that you're getting more distribution, but can you talk about kind of your outlook or your expectation, particularly as we go into the summer months, pre-July 4th? Is the cost to maintain that shelf space or to get that end cap significantly higher than it was a year ago?

C. James Koch -- Founder and Chairman

I'll take that, Wendy. The cost hasn't really gone up. I mean this is alcoholic beverages, right, so you cannot pay for shelf space, you cannot pay for end caps. Those are actually sort of earned by your relationship with the retailer and maybe even more so, by your distributors' relationship with the retailer. And I think what you're seeing, and I've seen the same thing is, there's so many new entries, in many cases the retailers are not cutting them into the shelves right away, so they have to put them on the floor. And I think today -- and as you bush guys are very, very good as our wholesalers are at trucking the store into an end cap or an out of department display and that's what you've seen, but that does not involve promotional dollars typically.

Wendy Nicholson -- Citi -- Analyst

Got it. Fair enough. But on that same front and this is kind of leading to my second question, which is the margin expansion that you've seen over the last couple of years have been tremendous, given sort of lots of favorable operating leverage and all of that. But -- and maybe this is for you, Jim, as you look out over the next couple of years, is there any reason the operating margin can't continue to expand from the, let's call it, 16% level, I mean, back to the peak of 17% or even above that as we go out? You've gotten past a lot of the capacity issues, you're running a lot more efficiently than you were. Is margin expansion going to be a steady climb upwards from here or is there any reason that wouldn't occur?

C. James Koch -- Founder and Chairman

I would expect it to occur steady, we don't know. We don't have a goal of margin expansion. Margin expansion is going to be a result of running more efficiently and is volume increases hopefully be in year advertising and selling expenses scale up as well. We do believe that there are significant pockets of savings within our supply chain, frankly, what we have right now has been cobbled together pretty quickly from available capacity and the long-term partnership with Citi, we have focused on just getting more sleek cans produced in and put into a variety packs, rather than the efficiencies on them, because we've had out of stocks, and those cost 10 bucks a case, or whatever the loss gross margin happen to be on that skews. So $0.50 a case higher, cost doesn't look very big when you're looking at out of stocks.

We believe we have set up our supply chain for not just 2021, but 2022. We have options in place for more capacity for 2023. So we will be increasingly turning our attention and our capital investments on cost savings investments, that would rationalize where we ship it, where we make it. There are significant savings from automating the process of doing variety packs, but rough idea, internally, we can do them for about a quarter of what it cost to get them done externally, because of capital investments, operating techniques etc. So things like that, we can roll out to the co-packers. So I would see significant opportunity in gross margin and operating margin expansion over the next two years, as we continue this supply chain transformation and are able to shift from expanding capacity to rationalizing and making more efficient, the capacity that we've just put in place.

Wendy Nicholson -- Citi -- Analyst

Fantastic. Thank you very much.

Operator

Your next question comes from the line of Filippo Falorni with Morgan Stanley. Please proceed with your question.

Filippo Falorni -- Morgan Stanley -- Analyst

Hey guys, good afternoon and congrats on the strong results. I wanted to talk a bit more...

C. James Koch -- Founder and Chairman

Thank you.

Filippo Falorni -- Morgan Stanley -- Analyst

About the Twisted Tea brand, which probably doesn't get the attention it deserves from the investment community, relative to strong growth. So, maybe first you can talk about the growth drivers of the brand in Q1. And then longer-term, what are your plans for the brand in terms of innovation and also in terms of the opportunity to expand our distribution relative to other SMB brands in the category, particularly given you have much higher velocity with that Twisted Tea relative to other brands? Thank you.

David A. Burwick -- President and Chief Executive Officer

Okay. Filippo, this is Dave, I think I'll take a short on that one. I think -- as we think about Twisted Tea is that, it's a brand that has great -- historically has had very low penetration, but very high frequency, very high loyalty. And what's happened over the past year, I think it benefited from COVID. We grew the penetration base by about 35% in the past year, in fact, and I think the hard seltzer brand is the only brand, the brands that grew penetration more, so we brought a lot of new consumers in. And by the way, it was also very much focused in the convenience channel, right. So a big percentage of the business is single -- has been single-serve. What's happened over the last year, we brought more consumers in. We've increased our distribution pretty significantly in larger format stores. We've also taken the brand from a more rural venue to much more and more urban venues as well, and we've actually grown points of distribution pretty significantly in the last year as well as -- you think I'll point out -- our point distribution was not -- actually year-to-date 25% and velocity by 31%. So bringing it into the cities, where more and more people will consumer it, participating increase in distribution of 12 packs at grocery store in three, we have [Indecipherable], we have half and half and we have a party pack. Big growth there and really driving a lot of consumption in that channel.

We've also from a brand perspective, we've improved our work online. In fact, we've increased our Twitter followed by 3 times. Our engagement levels and social media are quite high. We've done -- we sponsored more 100 teams premium platform [Indecipherable] and we're also get involved SEC football. And when we did SEC football, we sort of provide the shoulders of that brand and we were spending more money across 12 months of the year, to support versus just turn that the key selling season. So a lot of things going to. I think probably the most important is that, Jim, Frank and I don't spend any time on that brand, we let the experts deal with it. That's point one itself is so well, but there is a lot -- but it's a brand that's got a lot of potential, it's starting to play out now and we're going to keep adding-we will keep adding fuel to the fire.

Filippo Falorni -- Morgan Stanley -- Analyst

Great, thanks.

Operator

Your next question comes from the line of Stephen Powers with Deutsche Bank. Please proceed with your question.

Stephen Powers -- Deutsche Bank AG -- Analyst

Hey, thanks. Good evening. Maybe just to clarify real quick, going back to the 60% to 90% category growth you mentioned, Dave. Is that on your part of wholesale growth rate call or is it a retail call? And if it's a wholesale number, what portion of it comes from the greater shelf space allocations? You mentioned for the category versus actual increases in consumer offtake, if there is any material impact there.

David A. Burwick -- President and Chief Executive Officer

Yeah, so I'm trying to think that it has truly -- we have the model who looks at that from a consumer perspective and more than anything. So again, but we're just looking at category penetration rates and growth in penetration, growth in buy rate, which is a function of frequency and how much people spend [Indecipherable]

Based on our best guess and how, all the innovation from all the players will play out in the category as well as we can quantify the last demand from from last year and then shelf space. So I think the shelf space arguably is sort of more of a push element, if you will, but the rest =it's really driven by what we think the consumer demand is going to be for the category.

Stephen Powers -- Deutsche Bank AG -- Analyst

Yeah. Okay that makes sense. And if I could -- if you could talk a little bit about just the incrementality of these innovations that you layered on, obviously lemonade was very incremental in the end, tea is proving to be very incremental as well. I guess how are you thinking that that plays out as you layer on some of the new innovations that you've got lined up including punch this summer?

And if I could, Frank, if you have any -- just a way to frame for us just how you see freight costs coming in over the balance of the year just relative to last year or whatever. Just some sense of how to dimension that, that'd be great as well. Thank you all.

David A. Burwick -- President and Chief Executive Officer

Sure thing. So Stephen, I'll take the first part. I think -- look, it's really hard to measure incrementality because there are so many factors at play and I think a lot, you know some folks like to get very very adamant numbers of what it is, and it's always 90% for some reason, it's not 90%. But I think what we're trying to do you -- we do believe that adding just another likely flavored seltzer is not going to be as incrementals, something that's bold and indifferent. So Lemonade improve that if the GT is looking pretty good, but we don't -- it's too early even know how much of it's incremental, we believe it's more than half incremental to our brand, we believe, and we think it is incremental to the category, and we think punch should be the same ways. So to both trying to find flavor profiles and approaches that are vastly different from what exists. And for example, punch as far as I know there is no national punch seltzer, we think it helps. It helps -- certainly helps optimize the incrementality, so that's sort of how we look at it.

[Indecipherable] have a sense of what it is. But it's just how the food fight out there, right. People are trying everything you can see it and see all these new brands that come in, including with tea came in, there's a lot of trial and you see brand spike up and then you see it start to come down. The question is when do -- where do -- [Indecipherable] a lot of that is because, everybody wants to try everything. So in the end it's -- we're just trying to create great tasting products and build the brand, and I think one of the things we've been able to do, I mean Truly now is a number 5 [Indecipherable] the brand new category actually has a larger consumer base then Corona Extra. So the the bigger you build the base, the more, I think the more incremental it can become when you bring new phase to the base.

So I didn't want you a definitive answer, Stephen, but it's -- we think it's marginally incremental, but how much we don't know.

Stephen Powers -- Deutsche Bank AG -- Analyst

Yeah. Okay. And Frank, anything on the distribution?

Frank H. Smalla -- Treasurer and Chief Financial Officer

Yeah. On the freight, clearly this is the factor. You probably have [Indecipherable] another calls in the industry. There is a real shortage of drivers and of trucks. So the ratio between available tractor is low has significantly been worse and that's what we see in the right to the point that we've broken it out really in the earnings release separately because the deals like the significant and it really depends. As I see, we have contracted rates, but then you don't get the truck, you have to go complain to them. So we see the impact on multiple levels. One is, the input costs are going up because the phase is still coming into our cost of materials and ingredients and packaging materials. So we see there. We see it when we move product between our locations, including on the distribution side.

We have seen increases between 30% and 50% and we have to see where that's going to net out. In Q1 [Indecipherable] but we have both the freight as a major cost increase for the year.

Stephen Powers -- Deutsche Bank AG -- Analyst

Okay, thank you very much.

Operator

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

Nik Modi -- RBC Capital Markets -- Analyst

Thank you. Good afternoon, everyone. So I got a few questions. First, Dave, is there any metrics you can provide on how Truly Punch tested relative Lemonade or Ice Tea, just curious if you have any specific metrics to give us some frame of reference? And then once you answer that, and then I'll go to my next my next question.

David A. Burwick -- President and Chief Executive Officer

Yeah, Nik it's David. We're are not getting into too much specifics, I think from a product healthy perspective [Indecipherable] which is very evolve this but each quarter as high, if not higher than all the other flavors that we go for lemonade as we use that as our base one. So, [Indecipherable] Jim, [Indecipherable] do you have anything else to add? [Indecipherable]

C. James Koch -- Founder and Chairman

No I just confirmed that. It was -- the liking scores on the formula that we develop. We were very, very happy with, they were as high or higher than both lemonade and tea. It is -- that doesn't mean the concept itself was higher, but the actual liquid that we developed got outstanding ratings from drinkers across a pretty wide spectrum. And they were -- it was a surprising flavor to them, but one that was familiar and they just rated it as delicious. So I think that feeds some of our optimism.

Nik Modi -- RBC Capital Markets -- Analyst

Got it. And then maybe this is for you, Jim, just when you think about strategically over the next few years and we're obviously we're seeing the RTD cocktail spirits based and also win based, RTP is doing really well. How do you think about those segments of the marketplace? I mean, is that an area you would ever explore in a more meaningful way outside of what you already have with [Indecipherable]?

C. James Koch -- Founder and Chairman

The answer is probably yes, if it was an opportunity where we thought we could bring something to the consumer that they weren't otherwise getting and where we had a competitive advantage in terms of cost and effectiveness in getting it to the market. It is, for me, it's in that sort of, what I've described as a fourth category that is not beer wine or liquor and is kind of an intersection of them that brings new elements of convenience and flavor profiles and nutritionals, things that consumers really put a high value on. So we would not foreclose any of it and the Dogfish Head cocktails is a start. We do think that RTD cocktails will have a role here. It is however my belief that that brewers and their wholesaler networks are competitive advantage, when you get to things [Indecipherable] cocktails which look it where they are in the 12-ounce can we know how to put things in 12-ounce cans at extremely high efficiency. They are in the cold box, we have wholesalers who work the cold box who are up in there everyday, and certainly there at much greater frequency than wine and spirits distributors are. These are and a tonnage products that require efficiencies all the way through the manufacturing and the delivery, and they have smaller margins than the products that spirits companies make that are really expensive, big sales, big commission for the sales man that doesn't happen here.

So, is my belief is that this is a significant and growing category and that brewers and the entire beer industry is competitively advantage there. There are also laws, the greater access for beer and wine and hard liquor and there are different tax rates. So we have traditionally for what, 80 years had these three lanes in alcoholic beverages, and the beer lane I think as a pathway to growth that we haven't seen for many years. And I do think there'll be in over the next couple of years, some contests over who is going to get that terrain. Is it going to go to beer companies or are the spirits company is going to be able to change some of the rules and kind of tilt the current playing field in their direction in terms of changing the rules of access or the tax rates. But unless they are able to do that I think beer can win, if they can change the rules all bets are off.

Nik Modi -- RBC Capital Markets -- Analyst

Helpful. And then, sorry for the three questions, but a little for everyone. Frank, maybe you can just close out on mark. What is a normalized volume growth rate which will allow this company to actually see operating leverage or margin? Like what is -- what do you classify that as? Because obviously if that's exceeding growth rates, we've been using more third-party co-packers, how should we think about what a normalized number would be for you to get operating leverage?

Frank H. Smalla -- Treasurer and Chief Financial Officer

It's hard to give you a number. Every time, we believe we have enough capacity [Indecipherable] if you look back at the quarter, I think this has been the best operating quarter, [Indecipherable] to get control [Indecipherable] I think we can grow with a relatively high rate and Jim laid out earlier, [Indecipherable] when we can do a much better and a well integrated supply chain that have internal [Indecipherable] and external location [Indecipherable] well integrator that will provide [Indecipherable] for an improvement.

Here the biggest one, Jim mentioned before, it is really to get the year [Indecipherable] which we have done internally and that's the benefit that we're seeing internally. They don't fully show up in the P&L because we are growing that type of volume at a higher rate extraordinary because of the low rate. But now that we are getting those [Indecipherable] co-packers [Indecipherable] we should see benefits [Indecipherable] from that part as well.

So even if you be in the high growth rate, we will see those benefits. And then the third one is our supply chain transformation project, which would enable us to pull that off and I think we're much better [Indecipherable] in a much better in a much smoother way. So I'm sorry, I can't give be a growth rate number, but we are getting our hands with all the growth rate that will allow us to show the margin improvement by next year.

Nik Modi -- RBC Capital Markets -- Analyst

Super helpful, Frank. Thanks guys. Appreciate it.

Frank H. Smalla -- Treasurer and Chief Financial Officer

Right.

Operator

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

Kevin Grundy -- Jefferies Group LLC -- Analyst

Great. Thanks so much for the follow-up guys. I do appreciate it. Jim, you actually began to touch on what I wanted to follow-up with and that's the topic of industry taxation. So, as you're very well aware there has been the discrepancy at the federal level between beer malt beverages and wine and spirits for decades, and we're so such that malt beverages and beer have advantageous tax treatment relative to other alcohol categories. And I want -- could you comment, Jim, on how you view the magnitude of this threat particularly in an environment where politicians will be looking for sources of revenues? So tax is likely to move higher not lower, I think it's probably very little disagreement on that. How you handicap the risk for the beer industry? And frankly, whether do you think the industry is on sturdy ground in terms of continuing the argument that there should be this discrepancy that's existed for a long time. So your thoughts there, Jim would be appreciated. Thank you very much for the follow-up.

C. James Koch -- Founder and Chairman

Yeah, no problems, Kevin. This tax difference between beer versus wine versus hard liquor has been in place since the Civil War, since the very inception of excise taxes on alcohol. So -- and it's certainly served the industry well and given everybody has their own lane and and spirits as you know has been growing at the expense beer over the last 20 years. So my handicapping on it, would be that the -- it will be a very hard argument for the spirits companies to make -- to reduce their taxes to the beer level and that is the efforts that's under way. It's called equivalency. It's been on the agenda with the spirits companies for certainly the entire 37 years that I've been in the beer business, and it really hasn't gone anywhere, particularly, because it's just a hard argument.

If you're big especially foreign-owned company to say that you want to have your taxes reduced so that you can be even more profitable than you currently are. It's gotten pretty much zero traction at the federal level. But there have been some some small traction at the state level usually very quietly stuck into a bit an omnibus bill and frankly the beer industry was not really awakened to it. And so, the spirits -- people had some small successes and getting their state taxes reduced because nobody was really awake and it's a hard argument to make. If you're liquor companies you're going to a state legislator and saying, hey, have these products out there that aren't profitable enough for me, so please reduce my taxes on these liquor products that are lower ABB, to reduce my current taxes, which of course if you're a state legislator and have to have a balanced budget, it means you have to take -- either take, raise the taxes on your to compensate or -- so that you so that you can make it more profitable for a big liquor foreign-owned company to sell their products in your state.

So I am -- I see that as a very difficult argument to make. And I see that the small suits that they've had I think may have been a Nebraska might be the only example, but I don't keep track of all 50 states. I know that the beer industry is awake to this and United and I do believe that industry has exceptional trade associations. The Brewers Association Beer Institute and the National Beer Wholesalers Association are all led by some of the top 3, I think some of the top 50 trade association and leaders in Washington. So I am very optimistic that now that the [Indecipherable] our arguments will prevail.

Kevin Grundy -- Jefferies Group LLC -- Analyst

I appreciate all thoughts. Jim. Thank you very much. Have a good evening.

C. James Koch -- Founder and Chairman

Thank you.

Operator

[Operator Instructions] Ladies and gentlemen, we have reached the end of the question-and-answer session, and I would like to turn the call back to Mr. Jim Koch for closing remarks.

C. James Koch -- Founder and Chairman

Thanks everybody. And we really enjoyed celebrating the quarter with you and look forward to talking to you in three months. Take care.

Operator

[Operator Closing Remarks]

Duration: 65 minutes

Call participants:

C. James Koch -- Founder and Chairman

David A. Burwick -- President and Chief Executive Officer

Frank H. Smalla -- Treasurer and Chief Financial Officer

Stanley Harrison Vivas -- Cowen Inc. -- Analyst

Bonnie Herzog -- The Goldman Sachs Group, Inc. -- Analyst

Kevin Grundy -- Jefferies Group LLC -- Analyst

Eric Serotta -- Evercore Inc. -- Analyst

Laurent Grandet -- Guggenheim Partners -- Analyst

Sean King -- UBS -- Analyst

Wendy Nicholson -- Citi -- Analyst

Filippo Falorni -- Morgan Stanley -- Analyst

Stephen Powers -- Deutsche Bank AG -- Analyst

Nik Modi -- RBC Capital Markets -- Analyst

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