"It's a Crazy, Cards-Stacked-Against-You Industry"

Discussion in 'Beer News & Releases' started by JackHorzempa, Jun 19, 2019.

  1. JackHorzempa

    JackHorzempa Poo-Bah (4,041) Dec 15, 2005 Pennsylvania
    Society

    “This week, TrimTab CEO Harris Stewart published a long, impassioned blog post on the company’s website, entitled “Join the beer business they said. It’ll be fun they said.” In it, he laments the difficulties inherent in the modern beer industry that spring from the confounding system of hop contracts, which routinely require breweries to plan their exact hop needs years in advance. Obviously, this is near impossible in an industry where trends flare to life seemingly overnight, making one varietal suddenly “must have.”

    Using TrimTab’s highly sought-after The Original 006 Hazy Double IPA as an example, Stewart explains why the company is only able to both produce the beer in small quantities and exclusively sell it via their own taproom. To do it any other way would be accepting losing money on the beer. He says the following about trying to acquire enough Galaxy hops to make The Original 006 in the first place…”

    https://www.pastemagazine.com/artic...ewing-ceo-on-confounding-hop-shortages-i.html

    Cheers!

    @honkey @SierraTerence @BillManley @brianhink @SixpointMikey @RobH
     
  2. officerbill

    officerbill Aspirant (266) Feb 9, 2019 New York
    Society Trader

    From the blog (any emphasis is mine)
    Well yeah. Commercial growers need to know in advance the varieties and amounts to grow. Farmers aren't going to plant their crops "on spec". If the brewer guesses wrong about the hop demand they can change the formula or brew less; if the farmer guesses wrong he could go under.

    Maybe he should base those decisions on market analysis rather than relying on a gypsy fortune teller
    Seems like a good reason to use the secondary market he's complaining about.

    Unless you still have 4 years left at $7/lb on that suddenly hot hop that's more selling for $14/lb, then it's the farmer & wholesaler taking the hit.

    hhmm, if only he had renewed the contracts to lock in a guaranteed supply of an ingredient crucial to his most popular product.

    I don't have a business degree either, but I’m pretty sure somewhere in the curriculum it says "mage sure you have a steady, reliable source for the essential components of your product".

    I sympathize with him, but he took a gamble on the price and availability of Galaxy hops and lost. Sell off some of those "thousands of pounds of hops" on storage to offset the increased cost of the Galaxy.
     
  3. JackHorzempa

    JackHorzempa Poo-Bah (4,041) Dec 15, 2005 Pennsylvania
    Society

    “Obviously, this is near impossible in an industry where trends flare to life seemingly overnight, making one varietal suddenly “must have.”

    I suppose we could ‘debate’ about which aspect of the beer industry should shoulder the burden of the risk here. At the moment it appears to me that it is predominantly the breweries who accept the lion share of the risk as regards which will be the ‘popular’ hops this year and for the next x years. This seems to be a particularly onerous thing for small breweries.

    Perhaps there could be a better way to distribute this risk between various facets of the beer industry: breweries, hop brokers, hop farmers?

    Cheers!

    P.S. Needless to say but the fickle nature of we end consumers who are constantly seeking the next ‘shiny new thing’ are a significant part of creating this challenging business dynamic.
     
  4. Alexmc2

    Alexmc2 Zealot (532) Jul 29, 2006 Massachusetts
    Society

    Nailed it. Learn business friend, this isn't a hobby, its a business and one in an extremely competitive industry. Want to make cool beers and not have to worry about profit? Homebrew.

    The steps to being a successful business include more than the ability to simply make your product well. You must know your customer, manage your supply chain and plan. Sorry that it isn't sunshine and rainbows. Sorry if I sound super harsh about this, but I see so many dreamers and former hobbyists in this industry trying to make a go at it without knowing what the heck they're doing. You're about 10-15 years late if you're entering this industry as a "former homebrewer trying to make it big".
     
  5. MNAle

    MNAle Meyvn (1,474) Sep 6, 2011 Minnesota
    Society

    ... or, stop using the OSIO inventory management system.

    Selling on contract is not uncommon in several agricultural commodities. The farmer is not risk-free here. In addition to "selling low" that @officerbill mentioned, if he has a crop failure, he is still under the contract to supply the amount of product he agreed to.

    I'm sorry, but that whole screed reads more like "poor ol' me" whining. Man up and run your business.
     
  6. Alexmc2

    Alexmc2 Zealot (532) Jul 29, 2006 Massachusetts
    Society

    In terms of risk, without those futures contracts, the farmers have no incentive to plant the fields. In year 1 (link) the yield is zero for a given field. Year 2 its 50%, year 3 -75% with full yield only in year 4 or 5! That's a resource being tied up for 5 years! Meanwhile, the farmer could be growing ::insert cash crop here:: in the same field and have a harvest in year 1.

    Farmers can't bear that risk, breweries must as they're the buyers here. This is part of the reason you see consolidation in the industry right now. Access to the best ingredients takes buying power and planning. In my opinion, raw materials are a fraction of the COGS for beer as a product though, with the majority going to labor and energy (plus distribution and packaging of course).
     
  7. JackHorzempa

    JackHorzempa Poo-Bah (4,041) Dec 15, 2005 Pennsylvania
    Society

    I am well aware since I grow my own hops.
    And I would not suggest that solely on their own they should.
    And that is certainly how it is now (as I understand it). I was merely asking if perhaps there may be a 'better' way going forward where the risks are distributed.
    That is indeed the case for a number of beer styles. For example the AAL beer style's cost is not driven by the cost of hops. Now, for a small brewery making 'NEIPA' type beers I would disagree with you that hop costs are not a big concern. As a homebrewer I recently became aware of Galaxy hops being available via Yakima Valley Hops but I personally chose to not buy them since they were too damn expensive.

    You are a wizened beer industry person, do you have any other ideas on how this issue can be addressed? Or is is the 'answer' F@$% the small breweries?

    Cheers!
     
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  8. emannths

    emannths Aspirant (228) Sep 21, 2007 Massachusetts

    Brewers have plenty of ways to mitigate this risk. They can change recipes. They can contract for hops. They can buy hops on the spot market. If the supply chain risk is so great that it puts the brewery's profitability at risk and the brewery does nothing to mitigate that risk, that's simply bad management.

    Brewing may be something like art or science, but running a brewing company is an exercise in management and finance.
     
  9. rgordon

    rgordon Savant (939) Apr 26, 2012 North Carolina

    Your last sentence is a big story about the business for many years..
     
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  10. JackHorzempa

    JackHorzempa Poo-Bah (4,041) Dec 15, 2005 Pennsylvania
    Society

    They can indeed do this and this will 'work' as long as the customers are willing to purchase these 'changed' beers. But... the customers want 'sexy' now so...
    And if they enter a multi-year contract (which is the way it works as I understand it) and those hops are no longer considered 'sexy' by customers they are 'stuck' with thousands of dollars of 'inventory' which is not something they can readily utilize (or sell off to other breweries).
    Which can result in unprofitable beers like Harris Stewart discussed concerning Original 006 Hazy Double IPA.

    If your thought is the status quo is OK then so be it for you.

    Cheers!
     
  11. JackHorzempa

    JackHorzempa Poo-Bah (4,041) Dec 15, 2005 Pennsylvania
    Society

    But that is the case for many industries. The customer (fickle or non-fickle) demands to be served and the businesses that succeed are the ones that best serve their customers.

    Perhaps there is way to systemically improve this particular situation for the beer industry? Since you have some experience in the beer industry, do you have any ideas as to how best 'manage' the aspect of hop supply?

    Cheers!
     
    rgordon likes this.
  12. emannths

    emannths Aspirant (228) Sep 21, 2007 Massachusetts

    If you need to have the sexy hops for your business to be successful, you need to figure out a way to get them at a price that makes sense. Otherwise you have a bad business. I think that status quo is fine.
     
  13. JackHorzempa

    JackHorzempa Poo-Bah (4,041) Dec 15, 2005 Pennsylvania
    Society

    But what is considered sexy in 2019 is not what is considered sexy in 2020. And the sexy hop of 2020 is not longer sexy in 2021.

    How does this 'work' when breweries are obligated to enter into 5 year contracts?

    Cheers!
     
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  14. emannths

    emannths Aspirant (228) Sep 21, 2007 Massachusetts

    If your business is built around getting sexy hops, and you need to sign 5 year contracts, and you can't predict what the sexy hop will be 5 years out, it sounds like you have a bad business.
     
  15. JackHorzempa

    JackHorzempa Poo-Bah (4,041) Dec 15, 2005 Pennsylvania
    Society

    I suppose you could conclude that small breweries today = "bad business"?

    I personally am not prepared to reach that conclusion.

    Cheers!
     
  16. Alexmc2

    Alexmc2 Zealot (532) Jul 29, 2006 Massachusetts
    Society

    I don't think the answer is F%* 'em. However - you can't expect to compete in the new hotness of a trend with an under capitalized brewery. The answer on the brewing side is innovation. Can't buy Galaxy hops? Well, find something new and different - maybe its utilizing an older hop varietal in a unique way. Maybe its kettle sours or a novel yeast strain. If their only method of competing in the industry is copying a trend at a higher cost of production, should the company really be around?

    Again, harsh, but you have to innovate, plan and be well capitalized in this industry.
     
  17. JackHorzempa

    JackHorzempa Poo-Bah (4,041) Dec 15, 2005 Pennsylvania
    Society

    That is a potential strategy but unless you can accurately predict that Strata hops will be the next 'BIG thing' for the following 5 years and you quickly establish a hop contract...
    I have attended a number of presentations where industry folks encourage new, small breweries to 're-discover' Cascade hops but for every local small brewery that tried this there just was not enthusiastic response from their customers. The customers simply do not want that old 'Sierra Nevada' hop,
    I have seen some local small breweries try this but again just not an enthusiastic response from their customers. Their Gose beers will sell a bit during the summer but then... The beers brewed with Kveik yeast strains have been hit or miss with the customer base (mostly miss).

    What the customers want right now are 'NEIPA" beers brewed with Galaxy (or similar) hops. Will these be the high demand beers in 2020, 2021,...? Who really knows but small breweries know what their customers want now.

    It just seems to me that some distribution of risks would be of benefit to the beer industry, an overall benefit to all.

    Hopefully some other BAs will have some good ideas on this specific topic.

    Cheers!
     
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  18. emannths

    emannths Aspirant (228) Sep 21, 2007 Massachusetts

    No, I think it's a bad business to run a brewery that's only successful if it can source sexy hops and you don't have some secret sauce for getting those hops. But most breweries (including TrimTab, I expect) don't actually fit that description--they are perfectly able to make do with what they can get at reasonable prices. Heck, even TrimTab was able to make it work--they just withheld it from distro.

    Also, for every loser there's a winner. The winners here are likely other breweries that bought Galaxy futures, so it's not like the industry as a whole is really suffering.
     
  19. Jaycase

    Jaycase Meyvn (1,275) Jan 13, 2007 Illinois
    Trader

    From an IPA perspective, what's sexy now (and has been for some time) is haze. I don't think the hops are as critical to haze success as to other qualities such as mouthfeel, haze level, etc. Sure, folks love galaxy and nelson but I don't think not having these hops in a haze is putting a damper on haze sales.
     
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  20. JackHorzempa

    JackHorzempa Poo-Bah (4,041) Dec 15, 2005 Pennsylvania
    Society

    The hop varieties that are utilized to brew 'NEIPA' beers are indeed critical. Hops like Galaxy provide the quality of "juicy" as well as the polyphenols they provide lead to the permahaze of these beers.

    Cheers!
     
  21. Jaycase

    Jaycase Meyvn (1,275) Jan 13, 2007 Illinois
    Trader

    I've seen plenty of local ones not having Galaxy and they seem to sell just as fine.
     
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  22. JackHorzempa

    JackHorzempa Poo-Bah (4,041) Dec 15, 2005 Pennsylvania
    Society

    Perhaps I misunderstood your post above.

    Yes, Galaxy hops are not a requirement though they are indeed a great hop. I recently brewed an IPA featuring Galaxy and that beer is awesome.

    Other hops can be used like Citra, Mosaic,...

    Those other hops are not quite as limited as Galaxy but they are also high demand hops (i.e., more expensive than hops like Cascades).

    Hopefully this topic won't be viewed solely as a Galaxy hop thing. Hop varieties that are in high demand often require multi-year hop contracts to ensure availability for a brewery to consistently brew with them (e.g., have consistent brands in sufficient quantities to fulfill customer demands). And if those specific hop varieties 'go out of style' those small breweries that have hop contracts have a lot of unused inventory on their hands.

    Cheers!
     
  23. officerbill

    officerbill Aspirant (266) Feb 9, 2019 New York
    Society Trader

    Another alternative is for the brewery to stop chasing the customers who want the latest, sexy fad. Make a name for yourself with good, solid, well crafted beers and leave "sexy" to someone else. (I'm thinking Jack's Abbey's very good lagers, but there are many other examples)
     
  24. JackHorzempa

    JackHorzempa Poo-Bah (4,041) Dec 15, 2005 Pennsylvania
    Society

    The number 1 selling brand from Sierra Nevada is their Pale Ale but they have been having declining sales of this beer for the past few years:

    “Last year (2017), dollar sales of Sierra Nevada Pale Ale declined 8.1 percent (more than $10 million), according to IRI Worldwide, which tracks category-wide sales trends at off-premise retailers. And those trends have yet to bounce back in 2018. Through January 28, dollar sales of Pale Ale were down 5.3 percent in IRI’s multi-outlet and convenience (MULC) universe of stores (grocery, drug, club, dollar, mass-merchandiser and military).”

    And:

    “[When] you see some of our distributors switch out Pale Ale for a special beer that they think is really exciting, that only stays on tap for a month, it’s like, ‘Wow, you gave up a 20-year-old handle in an account for a feature for the month, and then we lost a 20-year-old account? How can you do that?’” he said. “I think there’s so much emphasis on new that it’s kind of gotten irrational.”

    Keep your eyes open for another new/sexy IPA to be introduced by Sierra Nevada this year in their attempt to ‘right their ship’ and have sales growth in 2019.

    Needless to say but as you termed it of “good, solid, well crafted beers” does not always yield business success; this is not ‘working’ for Sierra Nevada.

    Cheers!
     
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  25. rgordon

    rgordon Savant (939) Apr 26, 2012 North Carolina

    Jack, I have some experience in the beer business for sure. I was referring mostly to shifting habits amongst consumers. Buying ahead of time was a constant challenge as a wholesaler- just like any business, but beer nuts are a special breed. These days hops seem to be like vaunted beers, but yet beer always has a way of being well produced just about everywhere. I fear not for the future of beer. And cheers..
     
    #25 rgordon, Jun 19, 2019
    Last edited: Jun 19, 2019
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  26. JackHorzempa

    JackHorzempa Poo-Bah (4,041) Dec 15, 2005 Pennsylvania
    Society

    There is no denying this aspect.

    Cheers!
     
  27. emannths

    emannths Aspirant (228) Sep 21, 2007 Massachusetts

    Galaxy is particularly sensitive to these price spikes, however, since the production is so small (e.g., 4x more Citra was grown last year). The 2019 harvest was about 1.8M pounds (and that is almost +9% from 2018). Let's say everyone wants to make a double dry hopped IPA like TrimTab, so maybe we're talking 6lb/bbl. At that rate, you can make 300,000 bbl worldwide. If you let each brewery in the US (excluding brewpubs) get their share of production, that means just 60bbl/brewery.
     
  28. LeRose

    LeRose Meyvn (1,375) Nov 24, 2011 Massachusetts
    Society

    First, I have no idea of a "fair" solution because this is inherently unfair and unpredictable - what's hot now won't be tomorrow, risk on the brewer. While breweries still do a lot of co-operative things, it's a competitive business at the end of the day. Secondly, this is a pretty good thread so far and I like (or at least comprehend) both sides of the discussion.

    But I'll ask who created this in the first place? it wasn't the hop growers. The hop growers are taking advantage of the opportunities afforded to them by the breweries who are trend-chasing or creating these trends. Hell, maybe it would have been smart for whomever created the first NEIPA with Galaxy to contract all he/she could get for the foreseeable future and own the market. Unfair? Or "just doing business"? There's a finite supply of hops, especially the newer varietals. So I bought my Shiny New Hop Nobody's Discovered Yet on somewhat speculative contract and you didn't - it isn't my fault that you have to pay more or do without. I actually assumed more risk by taking the contract gambling the product would succeed. Yes, Galaxy is at least established as a success, but my brewery is getting its' ass kicked by those who already have Galaxy - I "need" to bet on "next".

    I don't know - not much of a business brain in my head - but basing a business relying on Unobtanium without a means to secure said Unobtanium seems folly. And if you are going to use the Unobtanium, you have to charge a higher price for your retail product to be profitable, right? You can get the trendy hops if you want to pay for them and pass that cost along, seems to me - it isn't really a supply side problem.

    It also seems like the risks might be pretty decently distributed already. The farmer risks planting and tying up acreage for five years to grow a hop that might fall out of favor the day after tomorrow. Brewer takes risk by signing long term contract to protect against price hikes, or buys at spot market prices and has to charge more for their beer. And the hop winds change regardless. Everybody loses. I'd agree it seems unsustainable, but it does seem the risk is at least somewhat distributed. You might even be able to argue that the grower is assuming a bit more of the risk assuming it takes time to establish a "full harvest" when they could be growing something else with a faster turnaround. And they might need to be looking further into that crystal ball than the brewers - they need to know what to plant for the next hot trend as much as the current one.
     
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  29. Justonemore91

    Justonemore91 Aspirant (241) Nov 24, 2018 New York
    Society Trader

    What about the quality of the hops? I've had some phenomenal ipas made from galaxy hops and some that just plain suck.. And its doesnt have to be only galaxy.. It could be any hop... How do you ensure you're getting the best quality of hops?
     
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  30. emannths

    emannths Aspirant (228) Sep 21, 2007 Massachusetts

    You missed the driving component in all this!
    So maybe the solution is to mitigate the risk by selling "beer futures" to consumers. Spot market makes the price of a DDH Galaxy IPA $40/4pk? No problem! Just do a Kickstarter and only buy the hops if it's fully funded. Distributor bitching that you're selling direct to consumers? No problem! Contractually obligate them to buy the full batch at a profitable price before buying the hops.
     
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  31. SixpointMikey

    SixpointMikey Initiate (35) Jul 8, 2014 New York

    Definitely lots of factors in here. I think the main point of the post is just to say, it's not by choice that he can't release his favorite IPA to everyone, not to complain about business realities. Maybe the way it's all couched kind of overshadows that main point.

    Anyway, hop contracts is one of the craziest things we have to do as a brewery. We have a team dedicated to it! (Not the only roles they have but we meet regularly). And very few people bet big enough on Galaxy or predicted it would become so insanely expensive. Keep in mind, this had never happened before in the beer industry. Completely uncharted territory. We're lucky... Shane loved Galaxy. Working on some awesome stuff with it right now.

    As for quality, we like to buy direct from farmers whenever possible, like we do for Idaho 7, El Dorado, Mandarina, Tettnang, Hersbrucker, and others.
     
  32. oneraindog

    oneraindog Initiate (28) Oct 6, 2003 Pennsylvania

    Hop contracts are designed for commercial breweries. I am not saying the several thousand smaller breweries who are searching for these desirable hops are not "commercial breweries," but the hop market and contracts exist in their current model since they are designed to serve larger volume breweries who make flagship beers that require a guaranteed supply.

    Imagine if Sierra Nevada could not guarantee that they have enough cascade supply to SNPA for an entire year; the same things goes for us and Perpetual IPA.

    The open market does suck and price gouging does occur, but contracts are effective for brewers who buy in volume.

    PS The beer business is not easy.
     
  33. hopfenunmaltz

    hopfenunmaltz Meyvn (1,443) Jun 8, 2005 Michigan

    OK, true for hops in most places.

    In the Yakima Valley they can get 80% or more yield in the first year. They are in the best location to grow hops. Source - I've been to "YCH Hop School" twice, and that is what they state.

    Edit: Galaxy is a property hop from Australia. There aren't many acres of hops in all of AU. The supply is short the demand is high, I don't see that changing soon, unless a new hop gets the love. Strata or Sabro are getting buzz now.
     
    #33 hopfenunmaltz, Jun 19, 2019
    Last edited: Jun 19, 2019
  34. oldbean

    oldbean Disciple (330) Jun 30, 2005 Massachusetts

    Oh please, no one even knows what hops are in (for instance) Julius or Heady Topper.

    I'm not saying the market for hops doesn't present significant challenges for breweries, but if you can't make a good, marketable IPA without featuring the sexiest hop of the month... I mean... brew better, folks.
     
    #34 oldbean, Jun 19, 2019
    Last edited: Jun 19, 2019
  35. hopfenunmaltz

    hopfenunmaltz Meyvn (1,443) Jun 8, 2005 Michigan

    Brewers travel to the hop growing areas, and select hops from the farmers or the brokers. Hop samples are presented with a lot number, and the Brewers rub and smell those, selecting the lots that they like.
     
  36. JackHorzempa

    JackHorzempa Poo-Bah (4,041) Dec 15, 2005 Pennsylvania
    Society

    Mikey, how do you purchase your Galaxy hops? Is that via a hop broker? If so, do you have any ability to specify specific Galaxy hops (e.g., lot numbers?)?

    Cheers!
     
  37. Roguer

    Roguer Poo-Bah (4,179) Mar 25, 2013 Georgia
    Moderator Society Trader

    My initial reaction to this was, simply: don't base your business model on the one-varietal hot-hop "trend."

    Before anyone jumps on me and tells me it isn't that easy, I'm pretty certain breweries can in fact survive selling modestly priced mainstays within a sustainable footprint, all without selling $20 four packs of nearly indistinguishable single hop hazy IPAs.

    If your brewery's model for success is based on hype and fads, instead of ensuring a core lineup of reliably produced, reliably sourced mainstays (a C-hop IPA, a wheat ale, a stout/porter, etc.), then I think you're missing the point. Those hyper-faddish hop trends should supplement your business, not be the core; sell those things in limited quantities for high profits, all of which addresses the issues he lays out in his complaints, but don't base your success or failure on them!

    I know we, as fickle consumers, create this problem, and I know that I can only speak to myself - but if my local brewery can only offer their Galaxy hopped DIPA once a year and for sale at the brewery only, but has a reliable core of year-round, enjoyable beers? I'm visiting that brewery, frequently, not the slightest bit upset that their "regular" IPA doesn't have Galaxy, Citra, et al.
     
  38. JackHorzempa

    JackHorzempa Poo-Bah (4,041) Dec 15, 2005 Pennsylvania
    Society

    Are you 100% certain that is the case?

    I have homebrewed my version of Heady Topper based upon a clone recipe put together by a homebrew author who toured The Alchemist and put together his recipe in coordination with John Kimmich.

    My homebrewed version tasted like Heady Topper.

    Cheers!
     
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  39. Roguer

    Roguer Poo-Bah (4,179) Mar 25, 2013 Georgia
    Moderator Society Trader

    That's the much more concise version of what I posted right after you. I guess I was trying to be more tactful than simply, "Brew better," but ... you nailed it. :slight_smile:
     
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  40. JackHorzempa

    JackHorzempa Poo-Bah (4,041) Dec 15, 2005 Pennsylvania
    Society

    I think it is a broader issue as I stated in post #22:

    "Hopefully this topic won't be viewed solely as a Galaxy hop thing. Hop varieties that are in high demand often require multi-year hop contracts to ensure availability for a brewery to consistently brew with them (e.g., have consistent brands in sufficient quantities to fulfill customer demands). And if those specific hop varieties 'go out of style' those small breweries that have hop contracts have a lot of unused inventory on their hands."

    Cheers!