Good day, ladies and gentlemen, and welcome to The Boston Beer Company Q1 2017 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 be given at that time. As a reminder, this conference call is being recorded. I would now like to turn the conference over to Jim Koch. You may begin.

Thank you. Good afternoon and welcome everyone. This is Jim Koch, Founder and Chairman, and I'm pleased to be here to kick off the 2017 first quarter earnings call for The Boston Beer Company. Joining the call from Boston Beer are Martin Roper, 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 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 quarter, as well as a review of our outlook for 2017. Immediately following Frank's comments, we'll open the lines for questions. Our total company depletions continued to decline in the first quarter. These declines were mostly caused by weaknesses in the Sam Adams brand, especially our seasonal beers, and a general softening of the craft beer category that continues to be very competitive. New craft brewers continue to enter the market and existing craft brewers are expanding their distribution and their tap rooms, with the result that drinkers are seeing more choices. During the quarter, we introduced several new beers, including our second spring seasonal, Samuel Adams Fresh as Helles, Samuel Adams Rebel Juiced IPA and a refreshed Samuel Adams Rebel IPA. We're currently rolling out our summer seasonal, Samuel Adams Summer Ale, which is now in its 22 year and is still the leading summer seasonal beer in the craft category. We continue to believe that we're well positioned to meet the longer-term challenges of this competitive environment, through the quality of our beers, our innovation capabilities and our sales execution strength, coupled with our strong financial position that enables us to invest in growing our brands. Our leadership team is making strides to address these challenges and, in our search to find a successor to Martin, who has announced plans to retire in 2018, our board is focusing on identifying someone to lead this team who'll be able to harness and accelerate the positive steps that we're taking. I'm excited by the opportunities ahead of us and continue to be optimistic about our future. I will now pass over to Martin for a more detailed overview of our business.

Thank you, Jim. Good afternoon, everyone. As we stated in our earnings release, some of the information we discussed 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. Our depletions decline in the first quarter was primarily due to decreases in our Samuel Adams and Angry Orchard brands that were only partially offset by increases in our Twisted Tea and Truly Spiked & Sparkling brands. We are excited that Twisted Tea continues to grow distribution and pull, and that Truly Spiked & Sparkling is well positioned as a leader in the emerging segment of hard sparkling water. Most of our volume declines for the quarter resulted from the underperformance of our 2017 spring seasonals, Samuel Adams Hopscape and Samuel Adams Fresh as Helles, compared to Samuel Adams Cold Snap last year. The weakness in our two new spring seasonals seems to have resulted from a combination of drinker confusion at retail, acceptability of these seasonal beer styles and the timing of our seasonal transitions compared to last year. We took our learnings from Hopscape and applied them to Fresh as Helles and saw improved pull, but still significantly lower volumes than our seasonal volumes during those same weeks last year. The Angry Orchard and cider category…

Thank you, Jim and Martin. Good afternoon, everyone. For the first quarter, we reported net income of $5.7 million or $0.45 per diluted share, representing a decrease of $1.3 million or $0.08 per diluted share from the same period last year. This decrease was primarily due to decreases in net revenue and a decrease in gross margin that were only partially offset by decreases in operating expenses and a tax benefit of $0.28 per diluted share resulting from the adoption of the new accounting standard Employee Share-Based Payment Accounting, also known as ASU 2016-09, which was effective for the company on January 1, 2017. Excluding the tax benefit related to ASU 2016-09, first quarter EPS would have been $0.17 per diluted share. Shipment volume was approximately 707,000 barrels, a 15% decrease compared to the first quarter of 2016. We believe distributor inventory as of April 1, 2017 was at an appropriate level. Inventory at distributors participating in the Freshest Beer Program as of April 1, 2017 decreased slightly in terms of days of inventory on hand when compared to March 26, 2016. We have approximately 78% of our volume in the Freshest Beer Program. Our first quarter 2017 gross margin of 47.2% decreased from the 48.5% margin realized in the first quarter of last year, mainly due to unfavorable fixed cost absorption and product mix effects, partially offset by cost saving initiatives in the breweries and price increases. First quarter advertising, promotional and selling expenses decreased $5.5 million compared to the first quarter of 2016, primarily due to lower point-of-sale costs and freight to distributors. General and administrative expenses decreased by $2.5 million from the first quarter of 2016, primarily due to decreases in stock compensation, salaries and benefits and consulting costs. During the first quarter, we recorded a net…

And our first question comes from Laurent Grandet with Credit Suisse. Your line is open. Laurent Grandet - Credit Suisse Securities (USA) LLC: Yes, hello. Good evening, everyone. So in the last earnings, I mean, you mentioned that your new CMO, Jonathan Potter, was about to finalize each Sam Adams brand review. I believe you will reveal a bit more during the upcoming Investor Day, but could you please tell us a bit more about key points of this review and how you plan to, I mean, to revitalize the Sam Adam brand, please?

Yeah, sure. Obviously, he has instigated a total review of the brand, starting with the drinker insights and their research work and visiting all the markets that has been in parallel paths with initiatives and efforts to improve the brand trends short-term. On the short-term side, we are currently rolling Summer Ale surrounded with a 360 support TV, radio, digital, point-of-sale promotion and in a completely new way, and that is currently rolling now. And that we think by just another two, three months prior to having to have something to support the Sam Adams brand. So what is currently going on is he has briefed the agency with a strategic direction. The agency is working on creative against that, which – working to validate that over the next 13, 14 weeks. And our hope would be to have output from that, either broadly on air and on point-of-sale in Q3 or depending on our – what we have developed for Oktoberfest, which is also in process immediately after the Oktoberfest schedule. Laurent Grandet - Credit Suisse Securities (USA) LLC: Okay. Thanks. So meaning that, I mean, there is – there would be no, I would say, strong marketing plan before Q3, so how you feel – I mean, you said, I mean, the depletion was minus 14% for Q1, but then, I mean, you were planning for the year at minus 7% to minus 1% (sic) [plus 1%]. How – could you give us some more comfort on how these trends will turn around without any strong, I mean, marketing plan in place?

Yeah, I don't want to give the impression that we don't have significant investment and programming in the second quarter. As noted in our release, we have a significant investment behind Sam Adams Summer Ale. We have new Angry Orchard creative and an increased investment behind that. And we have the Truly campaign, which rolled this week with significant investment behind that relative to the current size of the category. And on the Twisted Tea front, we have NASCAR, and we're still planning country music activation, but we haven't completely locked that in yet. So for us, we think Q2 is a pretty important quarter for us. When we look back on Q1, there are number of factors that we talked about at the – in the last earnings call that made it difficult for us, particularly since our spring seasonal efforts, our efforts to rejuvenate the spring seasonal business basically did not succeed. And that dragged our Sam Adams business down very significantly. That's visible from the IRI numbers. And due to the seasonality of a number parts of our business, that was a huge hit in Q1. So as we look at Q2, we believe we've got a good chance of stabilizing and frankly returning our seasonal business to the levels that it was last year in the Q2 time period with the Summer Ale activation, the media which starts next Monday, and the – we're getting, as far as we can tell, a very clean cut over from Fresh as Helles to Summer Ale, so we should be in a great position to benefit from that. On the Angry Orchard side, the new media tested really well. We've put it on air. We've added weight to it. As you look at the trends for cider, they're certainly…

Well, I think you can see it from the public sort of records, it's still a pretty small category. If we had to guess, the category last year was orders of magnitude 2 million to 4 million cases and maybe on an annualized basis, 4 million cases. And this year, we just don't know. And I think it's fair to say that retailers are being a little bit more cautious, I mean, and wholesalers are being a little more cautious than they were perhaps with the soda category. So it doesn't look like it's going to blow up like the soda category did, but it could do because obviously it's drinker driven. And we continue to see good signs that drinkers are interested in beverages that have this – these sorts of properties. Obviously, when you think about beverages with low carbs and sort of a smooth alcohol delivery, there's quite a bit of growth going on there Michelob Ultra very strong. Obviously, the Truly – the Sparkling Water Spiked categories are all bubbling away, but on from very small base. And I think the best answer I can say is we're optimistic, but we don't know how big is big and we don't know whether it will act like sodas and boom bust or whether it has a long going traction. But what we have said is we want to play and we want to spend money to compete, and we're going to make sure we have availability, visibility, education and the right pricing. And based on our prior experience in soda, I think we've concluded you've got to be very competitive in the first 18 months to emerge in the top two, three in a category. And if the category turns out to be big, then we wish to be a player; and if it didn't, we would not regret having placed those bets. Laurent Grandet - Credit Suisse Securities (USA) LLC: Well, many thanks for this detailed explanation. I mean, I look forward to seeing you next week.

Okay, great.

And our next question comes from Vivien Azer with Cowen. Your line is open. Vivien Azer - Cowen & Co. LLC: Hi, good afternoon.

Hey, Vivien.

Hi, Vivien. Vivien Azer - Cowen & Co. LLC: So just in term of Fresh as Helles, I think you guys were pretty transparent on the first quarter call that there was risk, taking kind of the Hopscape learnings that there might be some execution issues. But could you be a little bit more specific about kind of what you did differently? What worked? What did you need to do better?

Yes. Well, sure. I think when Hopscape sort of hit the wall, which it hit like the last week of December and it sat there, it was too late to change a number of things about Fresh as Helles that may have helped. So we basically executed the Fresh as Helles plan we had. We added digital and social and more education about what it was, but we also operationally sort of adjusted our supply numbers and made sure we ran out. And the whole Hopscape backed us up. It backed us up at retail, it backed us up at wholesale and we basically approached Fresh as Helles with more pull investment, but also much more conscientious of we want to run out of this on time. So on the plus side, we think the beer was very well received. We do think there's executional elements around the packaging and the communication about the beer that we can improve. We haven't made decisions as to what we're going to do about spring seasonals next year. But I'm pretty confident that we won't mess it up as much as we messed it up this year. But we haven't made those calls yet. We're obviously doing the analysis of what worked, what didn't work. We think that a lot of the misses were executional on our part and the result of drinkers rejecting the beer at retail and backing everything up. Vivien Azer - Cowen & Co. LLC: Understood. That's clear. Thank you so much for that. On the tactical pricing, can you – I don't know, it's very competitively sensitive, but just could you give us a sense of how you think about price gaps and what do appropriate price gaps look like? And how has that changed as the craft beer category has gotten increasingly competitive? Thanks.

Yeah, I think on pricing, craft pricing has been pretty healthy and you're seeing different layers of pricing emerge, people above us, people below us, obviously, tactical pricing at key holidays. From our perspective, we just want to make sure that if there's an ad or a feature in a major retailer that we're on it and if that means that we're potentially half a price point off that we adjust. We're not talking about national adjustments or deep discounting in any way at all. We just looked at, frankly, at our Christmas, Thanksgiving performance, and we were feeling pretty good entering Thanksgiving on our total business and particularly on our Sam business. And then as we look to what happened in December, we concluded that we were not sharing in the ad featured activity that was going on. And so as we head to the next two critical holidays, we're trying to, in the right markets, make sure that we are participating and we don't miss something because of not supporting a tactical adjustment for that holiday. Obviously, we're only making tactical adjustments that make sense. Vivien Azer - Cowen & Co. LLC: Got it. Thank you very much.

And our next question comes from Judy Hong with Goldman Sachs. Your line is open. Judy E. Hong - Goldman Sachs & Co.: Thank you. Hi, everyone.

Hey, Judy.

Hi, Judy. Judy E. Hong - Goldman Sachs & Co.: So, Jim, I actually wanted to ask you a question about the recent op-ed piece that you wrote for The New York Times. And just kind of you painted a pretty sobering picture of some of the challenges that the small independent craft beer companies are facing. And I know that in the past you certainly talked about the longer-term opportunities for some of the national craft beer brands to come out a winner. So just give us some perspective on sort of the thinking behind the piece you wrote and how do you sort of envision the industry kind of evolving over time? And how does that kind of impact your strategic decisions on how you think about taking the company forward?

Well, I apologize for doing anything sobering, Judy. That's not in our business plan. Basically, the motivation for the op-ed in The New York Times was a fair level of frustration, I guess, that is shared, and in many ways, I was speaking not just for Sam Adams, but for the Brewers Association as well as the wholesalers, as well as the NBWA. So that was done as trying to have a voice for multiple parties that had major concerns with the settlement that the DOJ did and some frustration that their view of doing their job and that includes allowing somebody with over 50% market share to add to that market share by buying up competition as happened in Texas post the settlement. So there was some frustration on all of our parts that we didn't see that there was even enforcement in the terms of the consent decree, much less – a broader effectiveness of simple antitrust enforcement. So that was the motivation for it. And the issue that it raised is just the increasing consolidation of the craft beer part of the business and the extension of the control of big brewers who have market power and who views that to raise beer prices. So that was – the motivation was to call attention to what I felt was relatively ineffective enforcement of the antitrust laws. And there's some sort of structural bureaucratic procedural reasons why we have that bad situation that we can talk about next time we're together. But it was really a call for the DOJ to do their job and it wasn't just me that was asking for that. There's a (30:18) from the NBWA, from the Brewers Association, from the American Antitrust Institute, some consumer watchdog industries, just it looked like a bad decision. Judy E. Hong - Goldman Sachs & Co.: Okay. So is there any change in your view? I think in the past you said, once this sort of shakeout takes place, you're going to have still a number of small independent craft beer...

Yes. Yes, that – I think that's not going to go away. The independent craft brewers have certainly established brand equities and brand positions in the consumers' minds. So what you do begin to see is the two big brewers that make 90% of the beer in the United States able to use their market power with their wholesaler and their clout with the retailers to perhaps push off the tap and off shelves some of the independent craft brewers that may not have the resources of the more successful ones, and that's probably to the detriment of consumer choice. The Brewers Association's position is that both on the shelves and on the taps should be the result of consumer choice rather than brewer and wholesaler ability to control those taps. Judy E. Hong - Goldman Sachs & Co.: Got it. Okay. Thank you. I'll see you next week.

Yep.

And our next question comes from Kevin Grundy with Jefferies. Your line is open.

Thanks. Good evening, guys.

Hi, Kevin.

Hi, Kevin.

Jim, I also want to kind of follow-up to kind of get your sort of State of the Union, but in a little bit different area. So specifically, can you talk a little bit about the current promotional environment? So more sort of near-term. But then, longer-term, should volumes continue to slow here and it looks like we feel a little bit of a speed bump, what do you kind of see as the risk to pricing degradation longer-term should volumes continued to decelerate? And then, again, in that sort of environment, sort of slower growth or even declining volumes in craft, do you think the environment becomes more conducive to private label or store brands?

Okay. Couple of parts to that question, Kevin. I don't see major pressures in the future downward on craft beer pricing, partly because a lot of craft brewers aren't that profitable and don't have very big EBITDA margins that can support a lot of downward pricing. I think – and particularly the smaller ones that have a place on the shelf now. So I don't see price wars erupting or anything like that. I think the primary downward pressure on pricing at this point is the advent of 15-packs into craft beer and when you start to look at Nielsen numbers and look at where our – the prices there, on a per case basis there frequently in 15-packs. And the consumer may or may not look at that as price degradation because they may be looking at the cans and thinking, well, that's kind of equivalent to a 12-pack bottles, except them getting three free beers. So I don't see an industry cost structure and cost curve that would support a lot of downward pricing without taking out a big piece of the back end of this supply curve. In terms of private label, I think what we're seeing in private label is some small success, though private label alcohol, while there've been a few pops, has never really been a big deal certainly in beer and in spirits. A little bit in wine, but not that much there. So I think what's supporting the modest success we're seeing in private label is just category clutter and confusion and consumers not knowing where the beer comes from and not being able to figure that out from the labels. And therefore, sometimes buying something that they think comes from a real craft brewer and eventually finding out that it's actually owned by a big global brewer or a retailer. So I think we'll have private label as long as consumers are a bit confused and are promiscuously shopping among brands. But I would guess that it is going to stay closer to the norm that we've seen in beer, which is consumers want branded beers. And the price premiums, I mean, beer is relatively inexpensive, so there's not that much money for the private label.

Okay. Thanks, Jim. Just one follow-up from me, Martin, for you, on gross margin, maybe you could talk a little bit about some of the key drivers in the quarter. The gross margin performance I suspect was not what you'd hoped, down like 125 basis points. And I know some of this was fixed cost absorption with the weak top line, but can you sort of get us from the disappointing first quarter to your ambition of improving the company's margins by about 100 basis points per annum over the next few years? So two parts to it, maybe talk about some of the key drivers in addition to the volume deleverage and then sort of help us understand how that gets better and you're able to improve the company's margins by about 100 basis points per annum over the next few years? Thanks.

Yeah, I'm going to ask Frank to talk Q1 and I'll come and talk about future.

Yeah. So Kevin, what you see, I mean, clearly, it's below prior year and we're still holding our forecast on the gross margin. The real impact, and you hinted at it, is fixed cost absorption. So we're – in terms of volume, we are 15% down, there is a significant impact in the fixed cost absorption. It's partly offset by improvements that we're making in the breweries. As we've said before, we're focusing on efficiencies. We are making good progress on eliminating waste. The reason why you see that decline as big as a percentage point really is that Q1 is a small quarter. It's like – it's less than 20% of our volume, and then you have those kind of impacts. It's kind of – it's showing bigger than what it really is. So as we progress through the year, we get the volume back, you will see, I think, the progress we're making on the cost side.

Yeah, and looking forward, I would echo what Frank has said. We have been working very hard since Q3 last year on both adjusting our capacity to the volume that we thought we would be doing this year. And just looking back, we had this explosive growth from 2008 through 2015, and we built capacity in anticipation of that continuing. And we hired people and we had an adjustment. And we've been working through that in the last 12 months. And so that has helped enormously on the cost side. And as it relates to – when we made the comment, obviously, we were looking at 2016 levels, we're pretty comfortable we can deliver the 1% this year. And as we do our long-term planning, we see pause to 1% a year for the next two to three. And the sort of things, one, the sort of adjustment of the capacity and the cost structure versus the 2015 peak and the over expansion of that capacity, there's also been very significant, excellent work done by our brewing, operating and packaging teams just on the straight efficiencies of how the processes run on the elimination of waste in yield, in basically looking at every part of the process and optimizing it for material yield and total economics. And they're making great progress. We are comfortable with the progress made to date that we can maintain the investment levels we've talked about on the brands. And the internal – obviously, our internal goal is to generate savings, to invest in the brands and grow the business and return the business to growth. Our goals are to preserve the ability to grow and so not to reduce our overall capacity and flexibility, but to continue to optimize and eliminate waste. And that's going well. That's – frankly, when we laid our three priorities out six months ago, that one has moved ahead probably faster than we would have anticipated and more successfully than we would have anticipated. And so that gives us some confidence that those projections are still right.

Okay. Thank you very much for your time. Good luck, guys.

Thanks Kevin.

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

Thanks guys. Good afternoon, everyone.

Good afternoon.

Just a numerical question. Martin, can you try to quantify what depletions would have been in the March quarter ex seasonals? And the second question related to that, and again, I don't know if you can share, but what's the weight of seasonals throughout the year? Are they a bigger weight in the first quarter, second? If you can just give us a sense of that, that would be helpful. And then a follow-up maybe for Jim. Is there – from a strategic point of view, is there an idea to rely less on seasonals in the future or that's still very much part of the strategy? Thanks.

Yeah, Pablo, obviously, seasonals includes our pure seasonal and seasonal overlay, and we put a variety of packs into that category. And if you were to do that based on the publicly available sort of information, you're at sort of about a 30% number over the last 13 weeks on IRI. That – the first quarter is a lower quarter for us for seasonals. So seasonals are sort of less representative. And so if we can turn that around, that has a much bigger impact for us on the rest of the year. As we look at the first quarter and the seasonal sort of weakness, as you have seen that some of our IRI trends were down 50%. And that's – on that sort of piece of the business, that's – a lot of that in the reported class of trades and obviously, that doesn't necessarily flow to all class of trades. But it was a pretty big impact. And that is – as we look at it, that gives us some confidence that if we can stabilize that and get it back to flat or close to flat, it's a very significant impact on our year. So as we talk about Q2, we're very focused on Summer Ale and making it the best Summer Ale year we've had for a while. And we're going to be 100% in our media investment and support behind summer, and that should give you a sense for how important it is to us in the quarter.

And to answer your second question about do we have a strategy relying less on seasonals? The answer is no. We have always been the leading seasonal brewer. And our feeling is that we have developed something that very few other craft brewers have developed, which is seasonals that are real brands in and of themselves. People know, they recognize Sam Adams Summer Ale. They call it Sam Summer. They wait for it. So it is a real brand beyond just the category of a seasonal beer. Similarly, Oktoberfest, again, has its own strong recognition and following, as does Winter Lager. And historically, the season that we've struggled with has been spring. We have not developed, nor has anybody else, a consistently strong year-after-year spring seasonal style. So we have rotated in and out with many different spring seasonals. I would guess we've probably had 10 different ones. We often have them for the first year. We get a bump if we've done it right and then a sophomore slump and then we're often looking at do we need a new spring seasonal next year. So we clearly didn't solve the problem this year, but we took some risk to have two spring seasonals. When one was weak, we – that was probably not good in Hopscape, we missed on the packaging, we missed on the name. The beer was well-liked, but it might have been too hoppy for our seasonal drinkers. It's certainly hoppiest seasonal beer we've ever made. So there were multiple misses there. But we remain committed to our seasonal program as the – one of the strong pillars of the Sam Adams brand.

Right. And just one last one. So within craft, obviously, some segments declining, flat, others still growing. I understand that IPA as a segment is still very strong. Some without you and maybe you would have been late to the party of IPAs with Rebel IPA, but do you need to strengthen that platform or just what you have is enough and you'll go after the seasonals and the more niche type of products that you have?

We are, again, committed to stay in the IPA category. It's close to something like 30% of craft beers. So it's not something that we want to ignore. And we redesigned the packaging for the Rebel line. We actually went back and took another look at the recipe because there is hops that are available today that weren't available years ago when we brought out Sam Adams Rebel and including a proprietary hop that Boston Beer Company develops. We took advantage of some of the newer hop choices that didn't exist when we brought out Sam Adams. And that's – we're not the only one to have done that. Several other craft brewers have updated their IPA recipes to take advantage of the new flavors that are out there. So we remain committed to the Rebel platform as part of Sam Adams.

I want to use your patience here and ask one last one, Martin, I don't know, again, I don't know if you can disclose this. But what – how was the summer seasonal last year for your Summer Ale?

I'm sorry, what, can you repeat the question?

Last summer, if I think about your 2Q and 3Q, can you describe Summer Ale in particular, did you have a good season? How was it? Are we looking at easy comps, tough comps, normal comps?

If you look at – we don't...

We have IRI. I mean, we have the detail.

Yeah, but if you look at the IRI data, you'll see that the seasonal category last year was down, I want to say, 10%, 11% sort of thing and I think we held our share in the category on Summer Ale. So we saw – you can again see from those numbers that we probably track the category. And as we look at it, different seasonals of us did better than the category and we gained share, and we lost share. And we think a lot of that's around execution and how we support it. And so as we look today, we said if we up our bets on Summer Ale, we have an opportunity to regain some of that volume that perhaps we've lost because of the seasonal category weakness. So that's what our goal is for the quarter.

All right. Thank you.

And we have redesigned the packaging dramatically for Sam Summer this year. So we are placing a bet on new packaging, even a new concept, which has led us to the colors of summer. So there's three different body labels, each with different color, summer one, the yellow, traditional yellow of a summer day, and another one with sunset colors in it, and a third with blue with water, which, of course, is a big association with summer. So we're taking some risks, the feedbacks so far has been very good, but we're only a couple of weeks into it.

And we'll get to try those next week, I suppose?

I hope so.

We'll make sure we have one of each for you.

All right. Thanks.

And I'm not showing any further questions. Ladies and gentlemen, thank you for participating in today's conference. This concludes the program, and you may all disconnect. Everyone, have a great day.

Yeah, everybody, thank you. We'll see some of you next week. We look forward to seeing you in Boston, but we appreciate you attending the call and have a great summer.

And a Summer Ale.

Cheers.