The Boston Beer Company, Inc. (SAM) Q4 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to The Boston Beer Company Q4 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Mr. Jim Koch, Founder and Chairman. Sir, you may begin.

Thank you. Good afternoon and welcome. This is Jim Koch, Founder and Chairman. And I'm pleased to be here to kick off the 2016 fourth quarter earnings call for The Boston Beer Company. Joining the call from Boston Beer are Martin Roper, our CEO, and Frank Smalla, our CFO. At the top, I need to comment on the news we've recently announced. Martin Roper, who has been our President and CEO for more than 17 years, plans to retire in 2018. Martin has been a true partner to me as we grew the company over the last two decades. I'm pleased that Martin will remain fully engaged and committed to leading the business as CEO until a successor is found and a seamless transition is completed. Our board of directors has created a search committee and retained Korn Ferry to assist in identifying and evaluating the best candidates to succeed Martin as CEO. We're appreciative that his continued commitment to Boston Beer affords us the time to conduct a comprehensive search for his successor, while continuing to make progress against our 2017 business objectives. I'll continue my remarks this afternoon with a few introductory comments including some highlights of our results and then hand over the microphone to Martin, who'll provide an overview of our business. Martin will then turn the call over to Frank who will focus on the financial details for the fourth quarter and 2016 fiscal year, as well as our outlook for 2017. Immediately following Frank's comments, we'll open the line up for questions. We are disappointed with our depletion trends in 2016, which have remained weak so far in 2017. These trends are affected by the general softening of the craft beer category and cider category, and a more challenging retail environment with a lot of new options for our drinkers. New craft brewers continue to enter the market, and existing craft brewers are expanding their distribution and tap rooms, with the result the drinkers are seeing more choices, including a wave of new beers in all markets. We were particularly disappointed with the performance of the first of our new spring seasonal beers, Samuel Adams Hopscape. We are introducing later this month our second spring seasonal, Samuel Adams Fresh as Helles, a bright Helles lager with orange blossoms and also releasing a refreshed Samuel Adams Rebel IPA, featuring a new packaging design and a new recipe with experimental hops that create a more tropical and piney IPA. We are also executing the national rollout of Rebel Juiced IPA in bottles and cans for the first quarter of 2017 to complement the national draft release in the fourth quarter of 2016. We believe that the history, authenticity and quality of the Samuel Adams brand, our unique beers, and our willingness and ability to continue to invest behind our brands position us well for future growth, and we are committed to improving our current trends. I will now pass over to Martin for a more detailed overview of our business.

Thank you, Jim. Good afternoon, everyone. As we state in our earnings release, some of the information we discuss in the release and that may come up on this call reflect the company's or management's expectations or predictions of the future. Such predictions and the like are forward-looking statements. It is 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. 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. Fourth quarter depletion trends were driven by a decline in Samuel Adams, largely due to increased competition in the craft beer category and by declines in Angry Orchard, mainly due to general weakness in the cider category. Partially offsetting these declines were the growth of Twisted Tea, which continues to grow distribution and pull and the impact of the launch of Truly Spiked & Sparkling, which established itself as a leader in the emerging segment of hard sparkling water. During the quarter, we also saw some early benefits of our cost saving initiatives. Thus far in 2017, we are seeing particular weakness in our Samuel Adams seasonal depletion trends due to the slow pull of our new seasonal beer, Samuel Adams Hopscape, which we believe is primarily due to executional misses, with the additional impact of the greater number of new options available to our drinkers at retail and general weakness in the seasonal sub-category. We are taking our learnings from Hopscape and applying them to our planned seasonal transitions to Fresh as Helles and then to Summer Ale in the second quarter. We like our new Samuel Adams packaging and our media advertising message, Pursue Better, and our plans for the summer. Angry Orchard and cider trends year-to-date are similar to the declines we saw in 2016. We are prioritizing returning the cider category and Angry Orchard to growth with a new media campaign and the first quarter national launch of Angry Orchard Easy Apple, an unfiltered refreshing hard cider that was well received in limited test markets last fall. Our number one priority in 2017 is returning both Samuel Adams and Angry Orchard to growth through continued packaging, innovation, promotion and brand communication initiatives. Our brand and sales teams are conducting a comprehensive review of our core brand strategies and activation plans to ensure that all our investments are effective and efficient in building long-term brand equities. We will continue testing strategies and validating effectiveness, so that we can focus our investment on activities that turn around our trends. Our second priority is a focus on cost savings and efficiency projects to fund the investments needed to grow our brands. We have adjusted our organization to the new volume environment, including resizing short-term brewing capacity, and have implemented changes to our spending policies and behaviors. We are working to simplify and optimize our processes and to improve ingredient and material yields across all our brands. Based on these efforts, we are maintaining our previously stated goal of increasing our gross margins by about one percentage point per year over the next three years, ignoring mix or volume impacts, while preserving our quality and improving our service levels. Our third priority is long-term innovation, where our current focus is ensuring that Truly Spiked & Sparkling maintains its leadership position in its segment and reaches its full potential. Over the last 12 months, we have rebuilt our leadership team and realigned the organization. We have reoriented our brand and sales team to better align with our opportunities and to provide brand leadership, and have improved our digital marketing and experiential promotion capabilities to support all our brands. I am very excited by the team's progress on insights into our challenges and the urgency with which they have developed potential solutions and significant cost improvements to fund our planned investments. We believe we have strong brands in attractive categories, and the best long-term value creation is continued investment to return our brands to growth. With that perspective, we intend to maintain our planned brand investment levels, even as we have adjusted our volume guidance down to reflect the volume declines we have seen thus far in 2017. Our larger than usual guidance range reflects the uncertain volume outlook. Projecting full year depletions volumes and profitability will remain very difficult until we have better visibility into the success of our key initiatives after the second quarter. We are optimistic for future craft beer and cider category growth, and we are taking steps to ensure that we are well positioned to benefit from that growth. We are committed to investing in reaction to the opportunity that we see with all our brands and remain prepared to forsake short-term earnings as we invest to return to long-term profitable growth. Based on information in hand, year-to-date depletions reported to the company through the six weeks ended February 11, 2017 are estimated to have decreased approximately 15% from the comparable weeks in 2016. Now, Frank will provide the financial details.

Thank you, Jim and Martin. Good afternoon, everyone. For the 14-week fiscal fourth quarter, we reported net income of $22.2 million or $1.75 per diluted share, an increase of $0.54 per diluted share from the 13-week fiscal fourth quarter last year. This increase was primarily due to an increase in net revenue and decreases in operating expenses, partially offset by reduced gross margin. Shipment volume was approximately 974,000 barrels, a 2% increase compared to the fourth quarter of 2015. We believe distributor inventory as of December 31, 2016 was at an appropriate level. Inventory at distributors participating in the Freshest Beer Program as of December 31, 2016 decreased in terms of days of inventory on hand when compared to December 26, 2015. We have approximately 77% of our volume on the Freshest Beer Program. Our fourth quarter 2016 gross margin decreased to 49.1%, compared to 50.6% in the fourth quarter of 2015, primarily due to package and product mix effects and increased returns, which were partially offset by price increases and cost-saving initiatives in our breweries. Fourth quarter advertising, promotional and selling expenses decreased $5.9 million, compared to the fourth quarter of 2015, primarily due to decreases in point-of-sale costs, lower freight rates to distributors and lower media advertising costs, all supported by our initiatives to reduce inefficient and ineffective spend. General and administrative expenses decreased by $2.9 million from the fourth quarter of 2015, primarily due to a favorable impact of $3.6 million in stock compensation related to the planned retirement of our CEO in 2018, partially offset by increases in salary and benefits costs. Our full-year net income decreased $11.1 million or $0.46 per diluted share to $87.3 million or $6.79 per diluted share compared to the prior year. The decrease was primarily due to lower shipments and lower gross margins, which were partially offset by lower advertising, promotional and selling expenses. Full year 2016 shipment volume was approximately 4 million barrels, a 6% decrease from the prior year. Full year 2016 gross margins decreased to 50.7% compared to 52.3% in the prior year. The margin decrease was primarily due to package and product mix effects, unfavorable absorption impacts due to lower volumes in our breweries and increased returns, which were partially offset by price increases and cost saving initiatives in our breweries. Full year advertising, promotional and selling expenses decreased $29.4 million compared to the prior year, primarily due to decreases in freight to distributors a result of lower volumes and rates, and lower media advertising and point-of-sale spending. Full year general and administrative expenses increased by $6.5 million versus 2015, primarily due to increases in salary and benefits and facilities costs. Looking forward to 2017, based on information of which we're currently aware and reflecting the uncertain volume outlook, we're targeting 2017 earnings per diluted share of between $4.20 and $6.20, but actual results could vary significantly from this target. The 2017 fiscal year includes 52 weeks compared to the 2016 fiscal year, which included 53 weeks. We're currently planning of change in 2017 shipments and depletions versus 2016 of between minus 7% and plus 1%, a decrease from the previously communicated estimate of a change between minus low single digits and plus low single digits. We're targeting national prices increases per barrel of between 1% and 2%. Full year 2017 gross margins are currently expected to be between 51% and 52%, which we expect to increase during the year due to progress on our cost saving initiatives. We plan increased investments in advertising, promotional and selling expenses of between $20 million and $30 million for the full year 2017, not including any increases in freight costs for the shipment of products to our distributors. We estimate our full year 2017 effective tax rate to be approximately 37%, excluding the impact of a new Accounting Standard, Employee Share-Based Payment Accounting, also known as ASU 2016-09, which is effective on January 1, 2017. We're currently not planning to provide forward guidance on the impact that ASU 2016-09 will have on our 2017 financial statements, 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're continuing to evaluate 2017 capital expenditures, and currently estimate investments of between $40 million and $60 million, primarily for continued investment in the company's breweries to drive efficiencies and cost reductions, support product innovation innovations and further growth. We expect that our cash balance of $91 million as of December 31, 2016, along with future operating cash flows and our unused line of credit of $150 million, will be sufficient to fund future cash requirements. During the fourth quarter and the period from December 31, 2016 through February 17, 2017, the company repurchased approximately 275,000 shares of its Class A Common Stock for an aggregate purchase price of approximately $45.1 million. We have approximately $154.7 million remaining on the $781 million share buyback expenditure limit set by the board of directors. We will now open up the call for questions.

And our first question comes from Laurent Grandet from Credit Suisse. Your line is now open. Laurent Grandet - Credit Suisse Securities (USA) LLC (Broker): Yes. Good afternoon, everyone. We are now a bit more than just four months into the new packaging change on Sam Adams. Could you give us a bit more of qualitative (17:05) from consumer reaction and how sales have been impacted by this packaging change, right? I know that I mean you didn't put much marketing behind it, but I would like to have a bit more details about this relaunch?

Sure. I think as we look back over the last four months, we were actually pretty pleased with how the new packaging was received both by retailers, wholesalers and drinkers, particularly in the first six weeks of that sort of process. And frankly through the middle of December, we were very happy with the Sam Adams trend improvement that was sort of coming through. And then since the middle of December, we've seen sort of just weakness across the whole brand, that I think it's hard to separate as to effects of packaging versus the effect of the seasonal stumble with Hopscape. So overall, I think – we talk to our brand team and we do the research. We're happy with both the packaging direction we took, the bold leadership look of Boston lager and the other packaging changes indeed (18:13) out early, and so we were basically thrilled and also through the impact of what we believe our Sam Adams media campaign, Pursue Better, is also helping. We think the last eight weeks is incredibly cloudy because we launched Hopscape in. We got great retailer and wholesaler execution. There's a lot of Hopscape reached the retail floor and frankly reached drinkers and we just haven't seen the repeat and the pull. And we're trying to ease that apart right now and take the learnings to Fresh as Helles, which is coming in a week, but it basically blocked our system up and has affected the total Sam Adams brand trends quite significantly. Laurent Grandet - Credit Suisse Securities (USA) LLC (Broker): Thank you. Thank you very much.

And our next question comes from Judy Hong from Goldman Sachs. Your line is now open. Judy E. Hong - Goldman Sachs & Co.: Hey, guys. How are you?

Hey, Judy. And how are you doing? Judy E. Hong - Goldman Sachs & Co.: I mean clearly, I know that you're disappointed by the depletions decline year-to-date. I'm just surprised by the execution missed up that you talked about. I think the seasonals have kind of been a tough place to be for a while and sort of your decision to kind of launch the new seasonals was a little bit surprising. So, can you maybe just talk about – a little bit more color just in terms of what exactly happened. And given year-to-date trends, isn't your full-year depletion guidance still too optimistic? And what's the rationale for continuing to increase investment spending when there is so much volume uncertainty for your business? Maybe sort of taking a step back and kind of assess the situation, could that be more of a rationale strategy?

Yeah. Thank you, Judy. Let me take those, and then I'll allow Jim to comment over the top. On the seasonal side I think, obviously, we're doing planning 9 to 12 months in advance, and we determined that, one, we have the executional capability on the Freshest Beer Program to execute five seasonals instead of four. We thought there was an opportunity in the first quarter to do that. It's our lowest volume quarter for seasonals generally, and there was an opportunity to try it and see. Historically, when we've launched new spring seasonals into that quarter, we've seen 10% to 20% growth of the spring seasonal. And so we thought it was worth trying and the competitive set was moving to three seasonals from four. So we thought it was worth that effort. And going into it, we actually launched a little early, because as I said, Winter Lager performed well. What we've seen is that it is not generating the pull or the repeat and we're still diagnosing that. There is a range of potential reasons for it, maybe the beer is to hoppy, maybe it's the name of the beer, maybe the packaging doesn't call out seasonals enough, maybe people are looking for the old seasonal, which is still available in the form of Cold Snap in many markets, because we produced it as what we call a seasonal overlay for the time period, and that has actually done very well relative to the comparable SKU last year. But our Hopscape hasn't compared to Cold Snap in any way at all and obviously, that's showing up in the IRI data. So we are still not completely clear on all the causes, but there seems to be a combination of things that how the beer is presented and sold to drinkers, more so than a lack of retail execution. I think sales organization and our wholesalers delivered great retail execution on. And one of the reasons for our caution on the first quarter and second quarter is it may well be the – Fresh as Helles will be a repeat, we just don't know. We're certainly cautious about it. We think we've been able to fix some things on point-of-sale and in digital advertising and in awareness, but we just don't know. And until we get to Summer Ale, we're not sure we will have a full sense for what the underlying sort of seasonal trends are. You're certainly right in your question to note that seasonals were weak last year, it was down in the mid-teens. I think our own seasonals probably did relatively well relative to that. Seasonals are competing on the shelf with all the variety from all the brewers out there and all the limited releases as opposed to the continuous seasonal program that we offer and it's obviously highly competitive. So we're going to stay the course for our seasonal trends for the year, but we're certainly thinking about what to do next year. And certainly in those options is what we did this year, or we'll go back to four or go to three and all of that tougher (22:58) options. But we do recognize that in the way the drinkers have reacted to repeat purchase of what they've seen on the shelf that some of these things perhaps we did to ourselves. And therefore, we're also looking at our sort of consumer research, drinker research protocols that led to this package design (23:15) and trying to fully understand how we are in the position that we're in. As it relates to full year, I think what we would say is there's a lot of uncertainty. This first quarter is one of smallest volume, the one where Sam Adams is the largest part of our business due to seasonality of Twisted Tea and Angry Orchard. It's also got some other knock-on effects from last year, we launched Grapefruit Rebel and the Sam Adams Nitro series, as some of those launch volumes were happening in this period of time. So we've – one of the questions we said to Frank was, okay, Frank, you're a neat CFO, how many volume adjustments we want to do, let's try and put out a range that we're comfortable with, that we're not going to have to adjust, right? And this is the range that we came up with based on all the modeling, based on everything we know. Could we change it, Judy? Of course. But it's the best guess we have right now on the assumption that this hiccup in the seasonals is sort of self-inflicted and not a permanent change in brand trend. So we are comfortable with the full year number. We think we have some wildcards. We think Truly is a wildcard. We think Angry Orchard is a little bit of a wildcard. We're not prepared to say that ciders declines are slowing yet. But there have been some signs that it's not quite as bad as it was, but we're not prepared to declare any sort of turn, but we have a new Angry Orchard media campaign that we're very happy with. We believe Easy Apple will add some incremental volume to Angry Orchard business. And so we have some wildcards that could offset, obviously, if Sam Adams continues to be as weak as it has been in the last six weeks. It's very hard to make all the numbers work. But we think we have some possibility to get to the high end of the range. We think the low end of the range is conservative. But we've been wrong before and we could be wrong again. And then as it relates to the rationale for investing, we are determined to continue to invest to try and turn the trends. And if the investments don't turn the trends, to stop the investment and then try something else. And so in an environment where if we don't turn the trends and we fail, we basically have a pipeline of activities and we're challenging the brand teams to have a series of solutions. As you know, our new CMO joined the company in August. He launched a total brand review. We're sort of two-thirds of the way through with Sam Adams, and we certainly want to have some powder to invest behind the output of that. And we're maybe a third of the way through with Angry Orchard, and obviously, we have upside to invest more in Tea and Truly. So, we're basically (25:58) I think that we think we have great brands, we think we should continue to invest and test to see what works. It is certainly the oddest competitive environment that I've seen in my 22 years. We're going to continue to execute and try things and we want to preserve the right to do so because ultimately our business reacts to volume, volume flows through to the bottom line, and our earnings are incredibly sensitive to volume. And if we can turn that, that's where the major value creation is. So, that's how we're thinking about it. And we didn't want to blow up the plan so early in the year just based on the stumble. And I'll just pause in case anyone wants to add. Judy E. Hong - Goldman Sachs & Co.: I mean I guess maybe just following up to Jim maybe, just I think we're finally starting to see a bit of a craft shakedown in the industry and I think your prior comments would have suggested that once we get into this sort of a shakedown that supposed to benefit larger brands like the Sam Adams, but right now, it seems to be quite the opposite. So, what's sort of your perspective and how long would this kind of transition take? And with Martin retiring, what is sort of the board and kind of what are you looking for in terms of the next CEO that can turn around the brands like Sam Adams?

Yeah. Let me answer those. Don't really know how long the shakeout is going to take. It certainly will be more likely to be measured in quarters or years rather than months. There continues to be a flood of new entrants into the craft space, the same sort of 1,000 plus new breweries. That pace hasn't slowed yet though, I think the last quarter or two in craft has begun to change the attitudes of people in the industry, that slowdown has come faster than pretty much anybody expected. But the shakeout is going to take a couple of years. And we intend to continue appropriate levels of support for Sam Adams, so that we emerge from this transition period with the strongest or one of the strongest brands in the craft industry. So we basically fundamentally believe that the categories we're in, craft beer, cider, FMBs are growth categories. And we have strong brands within those growth categories. So our best strategy is to continue to support strong brands and growth categories to generate the most shareholder value in the long run. And we're seeing some signs that the strategy is right where we're seeing improving trends on Boston Lager. If you look at IRI trends, you'll see four-week better than 13-week and 13-week better than year-to-date trends. On Boston Lager, since the new packaging and the new advertising, you'll see similar kind of movement with Angry Orchard cider of improving trends, particularly on the flagship, Angry Orchard Crisp in the IRI trends. To your second question, what are we looking for in a CEO, we're just beginning that definition process. Obviously, Martin's track record and his accomplishments would be very difficult to top. So we're looking for somebody who can meet that kind of standard of performance and proactivity and high energy and integrity and patient. And we're very fortunate to have the rest of this year, because it's going to be hard to replace someone like Martin, but we're optimistic. Judy E. Hong - Goldman Sachs & Co.: Got it. Okay. Thank you.

And our next question comes from Vivien Azer from Cowen and Company. Your line is now open. Vivien Azer - Cowen & Co. LLC: Hi. Good afternoon.

Hey, Vivien.

Hi, Vivien.

Hi, Vivien. Vivien Azer - Cowen & Co. LLC: So as we think about the guidance and I totally appreciate how disappointing this is for you guys, that if we think about that and new product launches and the challenges that we're seeing for the category, are you hearing any pushback from retailers in terms of taking new product? There's seemingly these new product launches throughout the rest of the year that they need to work. And I just wonder whether the combination of execution missed up on Hopscape coupled with softer underlying brand trends for Sam Adams that kind of persisted over the course of 2016, whether it all that puts at risk your distribution plans for new products. That's my first question.

Sure. A lot of the distribution is obviously chain decisions. Many of those chain decisions are already made for the March, April set process. So we think we're in good shape as it relates to the key new items that we're launching. And so, we don't think so. Obviously, if trends persist long term, then obviously that has long-term implications. But most of the retailers are on annual set processes, and will be presenting again in the August, September, October timeframe for next year. I do think we're seeing retailers sort of simplify their shelves a little bit, particularly some of the larger ones. And I'll let Jim maybe provide a little bit more color. But you're seeing some simplification of the craft category, some cut of the tail. And ultimately, we think that will be good for us long term, because certainly the fragmentation on the shelf has affected our brands.

Yeah. I would put a little – some additional color to, what I'm seeing from retailers with regard to new items. First, they got burned, last year on hard sodas, which didn't perform anywhere near as well as they had expected, so they have become more gun-shy. And overall within craft beer, the percentage of growth coming from new items has been declining for the last three years. And actually 2016 was first year in a long time where there was more craft growth that came from existing SKUs and from new SKUs. And then you lay on top of that the retailer situation where their cold boxes aren't getting any bigger. And they're kind of maxed out on craft beer and may even be seeing the effects of what is sometimes called the paradox of choice where if you have too much variety, it actually depresses consumer purchases in that category so that – I've heard speculation from a couple of retailers that perhaps the fact that there were too many choices has in fact turned consumers away from craft with its extraordinary variety and category clutter and confusion and pushed them to something simple. When they can't figure out what craft beer to have, they just say, I'll have a Corona, I'd get that one. So, I think your point is well taken that there is much higher level of reluctance on the part of retailers to put new stuff on the shelves much higher than it was two years ago. Vivien Azer - Cowen & Co. LLC: That's helpful. If I could follow up on that, it's a great segue actually to my second question which is about Truly. If I recall correctly, I believe when you guys were offering preliminary guidance last quarter, you had said that you kind of needed Truly to have a better kind of prime season, if you will, in 2017 that we even saw in 2016. But if I look at the Nielsen data – and maybe this is a seasonal issue – it looks like absolute dollars in Nielsen. The Truly's revenues really peaked in kind of August, September and have been falling sequentially thereafter. So can you just comment on like what is embedded in your full year guidance from Truly specifically?

Yes, of course. I think Truly sort of launched late summer and what we saw was a nice August, September sort of peak, which made us quite excited for 2017. And then we saw pretty significant fall-off, which we believe it's seasonality. I think it's fair to say that a lot of our beliefs in the category are based on research rather than full year experience and some anecdotes about the competitive products that existed before we entered last summer. So I think what we're looking for is the distribution from the set process in the March, April time period, which we expect to be significant, because it was launched out of cycle and obviously, we didn't get distribution in lot of the chains. We're looking for increased awareness among drinkers about the category and the rather unique benefits of the category. And we're looking to compete favorably like we did in the August, September time period from our market share perspective to basically hold a number one position in the category like we were able to do in August, September. We have taken steps to improve our product offering and packaging and all on point-of-sale and media. And we will be as that national distribution gets locked in the set process in March, April, we're anticipating media investment that we didn't have last summer. The whole categories sort of started in New England two, three years ago and has been growing somewhat geographically from there. We look at it as a category that needs some explanation to drinkers as to what it is, but we also see it as a category that seems to fit with some of the hotter trends in beer right now, i.e., the low calorie sort of fitness health, sort of consciousness that you saw in sort of some leading growth brands that are out there. And so we think this is a fit. We think there's some education. We want to own the category if it exists. and if it's going to be large, obviously we'll be happy. If it's going to be small and long-term growth, then we have some experience in managing brands like that like (37:58) experience and sometimes those categories are more attractive. As Jim said, retailers are perhaps a little gun-shy about the next quote, unquote, phase or fad or trend or new item, and we think we're just well positioned as an early leader with the distribution that we've secured to participate in that category. And we just don't know what that seasonal volume might look like. We do know drinkers like the product concept and the beverage itself and think have some use of it as being seasonal although there are obviously no fundamental reasons why you wouldn't drink it year-round. And we're waiting to see how that plays out. And then as that relates to our planned investment, we will plan investment on the front end of the summer. And if the volume comes, we will ramp it up, and if the volume doesn't come, we will consider how to approach that. But long term, I think we'd be happy with the number one position in either a small category that has long-term potential or a large category that's just burst onto the scene (39:00). And we're going to do everything we can to try and establish and maintain our current number one position. Vivien Azer - Cowen & Co. LLC: That's very helpful. Thanks very much.

And our next question comes from Caroline Levy from CLSA. Your line is now open.

Thank you. Hi, everybody. A couple of quick...

Hi. How are you?

All right. Thanks. Your CMO, is the packaging or marketing, innovation, any of that we are seeing right now related to his findings or is that yet to come?

Yeah. So, he arrived in August and a lot of both the beer innovation and the five seasonals and even the brand names and the beer styles and the names were already sort of in place and even some of the packaging was in place. So, I think it's fair to say that he didn't have full control, and he certainly was able to tweak, but he wasn't in full control of what we went to market within Q1. I think that sort of corrects itself a little bit in Q2, Q3, but obviously, a lot of these plans we'll put in place again in August, September, when we're presenting to major retailers. So, his full year impact I think will be seen when we present to retailers again in August and September. He has focused on short-term fixes to the extent that they are available while doing a pretty through deep dive to develop long-term plan and strategy. And as I indicated earlier on the call, the long-term planning you said of two-thirds of the way through, and so that is still in process. And I think that's – if he was here, he would say that's where he would have confidence that he can change the direction.

Got it. Okay. Brewpubs, we hear that one in 11 beers now is sold in a brewpub. And so, it's – so part of my question is what mistakes do you think you've made in the last three to four years or two to three years that have led you to be in this position? And what role have brewpubs played? And are you – do you have any plans to be in the brewpub business?

Yeah. I think as you look back over the last two, three years, I think the key sort of miss probably was in our brand messaging and communication around Sam Adams. And it sort of flip-flopped a little bit over that period of time through a number of campaigns and even packaging cycles with no great consistency. I think if you think about it longer term, we probably should have been selling beer at our brewery in Boston earlier. It's a great resource for consumer research, for testing what people are actually willing to pay for versus what they're willing to accept in a free sampling, and that's probably was a miss. We've always been a little reluctant because of our belief that it's going to affect rest of our business. The brewpub business is a local business, and it certainly is a nice sort of contribution source for dollars for it to support these small brewers that are mostly subscale, and to support them in their local markets. We're not convinced that a multiple state beer hold type business makes sense, but it's something we're looking at much more closely now given how these local trends have gone on. And we certainly think a miss was not having them for the consumer research. We're benefiting from that in Angel City in LA with the A&S brewery there as well as the other two A&S breweries. But even in those environments, it takes a while for them to seed and become hit (42:52) places to be. And so we're taking that learning and trying to decide how to apply it to Sam Adams, particularly in Boston.

Thank you. Then my last question if I might, and probably to Jim I guess, is you haven't discussed at all any strategic options. Are you still loving being in the brew business and don't ever want to sell? Have you thought about any acquisitions that could leverage your sales force? Just how do you think about strategically over the next five to 10 years?

Good question. Obviously, five to 10 years takes a pretty good crystal ball, which I don't have. But I still have a lot of faith and confidence in the future and the strength of our brands and the attractiveness of the categories we're in. I'm very energized by the new management team that has come into Boston Beer Company since the beginning of last year, including Frank and Jon Potter, our CMO who we've been talking, plus Quincy Troupe, who is our Chief in Supply Chain and is doing some fantastic things at our brewery in terms of yield improvement, cost improvement and efficiencies. So, I remain optimistic about the long-term possibilities for Boston Beer Company, and the opportunities that we have. In terms of acquisitions, we have looked at them. The people who follow the industry know, there has been kind of a Tsunami of potential brewers for sale, and book circulating and so forth. But our kind of overall feeling is that the prices have been quite high. And there have been aggressive buyers, who in our mind, have been willing to overpay. So, we've tried to be very disciplined about not going out and paying the prices that have been happening. I would not rule it out, should EBITDA multiples become reasonable. But when we looked at what's out there, we've said the best place to spend their money in terms of – craft acquisition is in our own stock. So, that's where we've spent our money, because we think that's the best value.

Thank you. Thanks so much.

And our next question comes from Pablo Zuanic from SIG. Your line is now open.

Yeah. Thank you. Just two very simple factual questions and then have a follow-up. So, for example on that 15% decline in depletions for the first six weeks, can you roughly determine how much is velocity and how much is loss of space? (46:18) of that, right? We're talking about the simplification of the craft category at some retailer, but can you be more precise in terms of are you losing space or not, and can you triangulate that to the 15% decline in depletions, velocity and how much is our loss of space? And the second question again, a very factual, simple question. What percentage of your sales in the year comes from seasonal? Thanks.

Sure. So, let me take a hack at the first one. Obviously it's a difficult thing to accurately measure the only real place we have, the data with IRI. And I would say that from that measure, the weakness is almost purely on a pull per point basis on our seasonal business pulling the whole Sam Adams family down. And here I'm just talking about the craft beer business and ignoring Tea and Angry Orchard. On Angry Orchard basis, we've held distribution and the category has been weak. We've gained share of the category on the marginal basis and the reported data. And I would say that there has been a little bit of distribution cut because – but the majority of the decline I think has also been pull. And on the Tea side, we're building distribution and gaining, and certainly the velocity seems very healthy. So breaking the down, 15% down, most of the hit is on the Sam Adams side, it's on the seasonal side, and I would say it's a pull based on the stores I've been in. We've got the distribution where you'd want it, we've got products, the beer on the floor, and it doesn't seem to be pulling. And again, I think it's due to execution on misses in communication as to what Hopscape is. With regards to percentage of volume to seasonal, that's not a number, we've ever sort of given out on the internal side of the business. If you look at – and it somewhat depends on how you define seasonals. Do you include the seasonal overlays or just the big seasonals like Winter Lager or October 1 Cold Snap, Summer Ale? And how do you think about variety packs, which we also treat a little bit as a seasonal play? But if you look at the IRI data, pure only just the seasonals of the four, five beers we have at seasonals. It's on an IRI basis around 33%. If you add in variety packs and think about that as a seasonal and add in the seasonal overlays, you get to a much higher number closer to 50%, 55%, 60%. So I would just direct you to that and to think from there. But the other issue is, it varies during the course of the year and again that's pretty apparent from the IRI data.

Okay. That's very useful. And then just a bigger picture question maybe for Jim. If I try to think about your distribution model and your sales which were there at the speech (49:12) that you have on the distribution side compared to other brewers and you have according to (49:20) you're supposed to be in a very good place in that regard. So then I look at a company, Constellation Brands, right? (49:29-49:36) 20% and I can't believe that you're just growing because of that, because of expanding (49:41) some demographics. So it's only had a 20% pace for quite a few quarters and here we have – so what I want to compare is I have (49:50) versus Samuel Adams, right, a very patriotic brand, a very iconic brand, the brand that would be on trend right now. So I'm just trying to – I'm asking (49:59) in terms of why this brand is not doing well, while the other brand is doing well, you have these distribution (50:07) that's supposed to be Boston Beer Company (50:09). I have to guess that your ACVs or your distribution versus the brand like (50:14) has to be less. So when we're seeing the distributor opportunity for Boston Beer – for Samuel Adams to grow, and I'm just talking about the Samuel Adams, I'm just talking about the Boston Lager, that seems to be the basic brand. So (50:27) we have a company like Constellation that is trying to develop a $15 six-pack segment with Ballast Point and here you're just struggling with what you have and I (50:38) understanding that. Can you tell me I don't know if you want to answer a very broad question, (50:43) I'm not saying beer is beer, but how can a brand be doing so much better than another one (50:52) apparently are similar. I'm obviously missing something here, but if you can help me with that.

Well, I think you raised a very good question. And I'm an American, I'm struggling with it too. I do believe as you point out that there is a long-term opportunity for Sam Adams. It's a 33-year-old brand that has grown almost all of those years. I think what we have seen in craft in the last, call it, two or three years is a momentum shift, which may well be a passing phase towards new, small and local, and Sam Adams has not been new for a long time. It's not local in most of the country, and it's not small. So craft swung towards new, small and local, as a lot of people sort of plodded into the category. I believe that in the long run, the brands that are well supported, that maintained consistent quality that stand for important societal values. They ultimately prevail and so that's – and we plan on maintaining our distribution strengths, particularly our sales force, both on-premise and off and our supportive retailers and our wholesalers with the belief that in the long run, Sam Adams will return to growth. And you do see these cycles in the industry. The Corona, great brand. 2016 will be the first year that they got back to their 2008 volume. So they had an eight-year cycle, where they hadn't return to their peak volume. But they did a good job of maintaining their brand equity, staying the course, and having the confidence that they had a strong brand in an attractive category, and it's finally paid off for them.

And just one quick follow-up and the last one. I know you said, your CMO, I think he's two-thirds of the way through reviewing the Boston Lager brand equity. I'm just trying to think of – when people are drinking (53:45) Sam Adams, Boston Lager, (53:48) drinking a craft beer? And it sounds to me like it's more of a – like you said it's a national brand, it's more mainstream to some extent. The consumer is not necessarily drinking a craft beer there, I would assume and maybe it's a more established brand (54:04) So, why – I'm thinking that the consumer is thinking I'm (54:09) having a craft beer here. So you have a (54:13) and you're competing more with more mainstream, more established brands. And maybe their mindset has to change also in the way that the brand is positioned and promoted – (54:25) and marketed. Am I missing something there?

I'm not sure. The Sam Adams was for a lot of people the first craft beer. It's certainly, when we do research maintains a lot of craft equities, particularly, when you compare it to the mass domestic brands. It occupies a unique space. It's not a mass domestic brand, it's not a Bud, it's not a Miller, it's not a Coors, so people know, it's not a mass brand. They know it's not an import. And those are kind of the three categories out there, imports, craft and mass domestic. And when people need to put it in one of those categories, that tends to be the place that it goes into craft. But craft itself is becoming more complicated, more fragmented. The median craft breweries today is something like a thousand barrels. And I believe 75% of craft breweries today are under 2,000 barrels. So yet most of the volume is in the top 10% of craft beer. So it's a much more complex picture. And within craft, you have some very different things, the local taproom versus Sam Adams. But they're all kind of under the same umbrella.

And do you feel like your consumer (56:01) a bit older than (56:03)

Probably a little bit.

Okay. Thank you.

And at this time, I'm showing no further questions.

Great, Bruce. Thank you for moderating the call. Everyone thank you for joining us. We look forward to talking to you, I think, at the end of April. We'll have an update and to answering your questions then. And we wish everyone a good evening and go drink some beer. Cheers.

Cheers.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone have a great day.