The Boston Beer Company, Inc. (SAM) Q3 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Boston Beer Company Third Quarter 2017 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference call is being recorded. I would now like to turn the conference over to Jim Koch, founder and brewer. 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 2017 third 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 third quarter as well as a review of our outlook for the remainder of 2017 and our initial outlook for 2018. Immediately following Frank's comments, we'll open the line for questions. Our total company depletion trends showed continued improvement during the last quarter while still remaining slightly negative. We remain challenged by the general softening of the craft beer and cider categories and the competitive retail environment with a lot of options for our drinkers. Our leadership team continues to make strides to challenge - to address these challenges. During the quarter, we have had better focus and execution at retail around our fall seasonal program, which appears to help our Samuel Adams Oktoberfest trends. We're excited by the introduction of new media campaigns for both our Samuel Adams and the Angry Orchard brands and by the early reception to our key innovations that we are planning to launch nationally in the first quarter of 2018. These innovations include Sam Adams' Sam '76, a uniquely refreshing, different and flavorfully crafted union of lager and ale. The Sam '76 launch will be supported by new media launch events and other marketing programs to drive awareness of this revolutionary beer. Other innovations that we are planning to launch nationally in the first quarter of 2018 include Samuel Adams New England IPA and the Angry Orchard Rosé. In our search to find a successor to Martin, who announced plans to retire in 2018, our board continues its process to identify and recruit an exceptional leader who will be able to harness and accelerate the positive steps that we are taking while building and leveraging our unique craft culture. Consistent with his commitment when he announced his proposed retirement, Martin will continue to lead the team as CEO until his successor has formally joined the company and will assist in the new CEO onboarding process. We believe that we're well positioned to meet the longer-term challenges because of the quality of our employees, our beer, our innovation capability and our sales execution strength, coupled with our strong financial position that enables us to invest in growing our brands and creating new growth opportunities. 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 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. Our reported third quarter depletions decline was primarily due to decreases in our Samuel Adams and Angry Orchard brands and a slight headwind from the timing of our fiscal quarter in relation to the 4th of July holiday. These decreases were only partially offset by increases in our Truly Spiked & Sparkling and Twisted Tea brands. We are encouraged by the improving total company depletions trends since the first quarter, but the on-premise channel remains challenging. Truly Spiked & Sparkling has developed as one of the leaders in the emerging hard sparkling water segment, and Twisted Tea continues to grow this distribution and pull. Most of our volume declines in the quarter resulted from the continued underperformance of our Samuel Adams brand. However, we have seen sequential improvements relative to first and second quarter performance. Our plans to improve our Samuel Adams trends include the introduction of a new campaign this quarter with integrated messaging across media, digital and point-of-sale along with a more focused sales executions on our core initiatives. Our plans also include the national launch of Sam '76, planned for early 2018, and the return of Sam Adams Cold Snap as our first quarter seasonal. In the third quarter, we also saw continued declines in the cider category and in our Angry Orchard brand. As the leader in the cider category, we are determined to turn these category trends around and will introduce a new media campaign designed to better educate drinkers on hard cider and the occasions to drink it while explaining the quality and uniqueness of Angry Orchard. We are excited by our planned national launch of Angry Orchard Rosé cider as we hope to attract new drinkers to the category. This launch will be integrated into our new campaign reinforcing occasions, innovation and quality. We have adjusted our expectations for 2017 full year depletions growth and our earnings guidance to reflect our trends for the first 9 months and our current view of the remainder of the year, which includes continued investment in our brands and our new media campaigns. While our full year depletions trends are below our expectations, we are pleased that our efficiency and cost initiatives are delivering ahead of targets and have provided us the flexibility to invest more in our brands. We remain prepared to forsake short-term earnings as we invest to return to long-term profitable growth, commensurate with the opportunities and the increased competition that we see. We have provided our preliminary view of 2018 growth rates based on our plans, but these rates are difficult to predict and subject to reassessment. With increased competition and retailer programming decisions remaining unclear, it is not possible to be more definitive in our outlook. But we remain optimistic for continued long-term growth of the cider and high-end beer segments. Our priorities for the remainder of 2017 and 2018 remain unchanged. Our #1 priority is returning both Samuel Adams and Angry Orchard to growth through continued packaging, innovation, promotion and brand communication initiatives while maintaining Twisted Tea's momentum. 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 while preserving the capability to innovate and return to growth. We believe that the results of these initiatives show in our reported gross margin improvements and in our operating expenses. Based on the success of these efforts, we are maintaining our previously-stated goal of increasing our gross margins by about 1 percentage point per year through 2019, before any 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 on ensuring that Truly Spiked & Sparkling reaches its full potential, and our long-term intent is to generate a consistent cadence of interesting brand innovations. Based on information in hand, year-to-date depletions through the 42-week period ending October 21, 2017 are estimated to have decreased approximately 6% from the comparable period in 2016. Now Frank will provide the financial details.

Thank you, Jim and Martin. Good afternoon, everyone. For the third quarter, we reported net income of $33.7 million or $2.78 per diluted share, an increase of $0.30 per diluted share from the third quarter of 2016. This increase in net income was primarily due to a decrease in general and administrative expenses, an increase in gross margin and the lower tax rate that were partially offset by a decrease in net revenue due to lower volumes. We recorded a tax benefit of $0.04 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 ASU 2016-09 related tax benefit, third quarter earnings per diluted share would have been $2.34, an increase of $0.26 from the same period last year. Shipment volume was approximately 1.1 million barrels, a decrease of 4% from the third quarter of 2016. We believe distributor inventory as of September 30, 2017, was at an appropriate level. Inventory at distributors participating in the Freshest Beer Program as of September 30, 2017, decreased in terms of days of inventory on hand when compared to September 24, 2016. Approximately 79% of our volume is on the Freshest Beer Program. Our third quarter 2017 gross margin of 53.2% increased from the 52.7% margin realized in the third quarter of last year. The increase resulted primarily from increases in revenue per barrel due to pricing and package mix and lower brewery processing costs driven by waste reduction and efficiency gains, partially offset by unfavorable fixed cost absorption due to lower production volumes. Third quarter advertising, promotional and selling expenses were flat to the comparable 13-week period in 2016, primarily due to slightly higher media spending that was offset by decreases in freight to distributors as a result of lower volume and lower rates. General and administrative expenses decreased by $3.1 million from the comparable 13-week period in 2016, primarily due to decreases in stock compensation related to the planned retirement of the company's Chief Executive Officer in 2018, salary and benefit costs, consulting and legal costs. Based on information of which we are currently aware, we are now targeting non-GAAP earnings per diluted share of between $5.60 and $6.20, a narrowing up of the range from the previously communicated estimate of between $5 and $6.20. However, actual results could vary significantly from this target. This projection excludes the impact of ASU 2016-09. In the third quarter and the 39-week period ended September 30, 2017, we recorded a tax benefit of $0.04 per diluted share and $0.35 per diluted share, respectively, resulting from the adoption of ASU 2016-09. The 2017 fiscal year includes 52 weeks compared to the 2016 fiscal year, which included 53 weeks. We now estimate the change in full year 2017 shipments and depletions of between minus 7% and minus 4%, a decrease and narrowing of the range from the previously communicated estimate of between minus 7% and plus 1%. We continue to project increases in revenue per barrel of between 1% and 2%. Full year 2017 gross margins are expected to be between 51% and 52%. We plan increased investments in advertising, promotional and selling expenses of between $10 million and $20 million for the full year 2017, not including any changes in freight costs for the shipment of products to our distributors. This estimate is subject to timing of brand investments currently planned for the fourth quarter of 2017, which could move into 2018. We estimate our full year 2017 non-GAAP effective tax rate to be approximately 37%, which excludes the impact of ASU 2016-09. We are not able to provide forward guidance on the impact of - that ASU 2016-09 will have on our 2017 or 2018 earnings per diluted share and full year effective tax rate as this will mainly depend upon unpredictable future events, including the timing and value realized upon exercise of stock options versus the fair value when those options are granted. We currently estimate 2017 capital expenditures of between $35 million and $45 million. The capital will be mostly spent on continued investments in our breweries. Looking forward to 2018, we're in the process of completing our 2018 planning process, and we'll provide further detailed guidance when we present our full year 2017 results. Based on information of which we are currently aware, we are targeting depletions and shipments percentage increases of low single digits. We project increases in revenue per barrel of between 1% and 2%. Full year 2018 gross margins are expected to be between 52% and 53%. We plan increased investments in advertising, promotional and selling expenses of between $15 million and $25 million in full year 2018, not including any changes in freight costs for the shipment of products to our distributors. This estimate is subject to timing of brand investments currently planned for the fourth quarter of 2017, which could move into 2018. We estimate our full year 2018 non-GAAP effective tax rate to be approximately 37% excluding the impact of ASU 2016-09. We are currently evaluating 2018 capital expenditures, and our initial estimates of between $55 million and $65 million, which could be significantly higher if deemed necessary to meet future growth. We expect that our cash balance of $70 million as of September 30, 2017, along with future operating cash flow and our unused line of credit of $150 million, will be sufficient to fund future cash requirements. During the 39-week period ended September 30, 2017, and the period from October 1, 2017 to October 20, 2017, we repurchased approximately 884,000 shares of our Class A common stock for an aggregate purchase price of approximately $130.5 million. As of October 20, 2017, we had approximately $192.8 million remaining on the $931 million share buyback expenditure limit set by our Board of Directors. We will now open up the call for questions.

[Operator Instructions]. Our first question comes from Caroline Levy with Macquarie.

Just a couple of things. I'm looking at your media spending going up $15 million to $25 million this year. What is the base of the media spend?

Caroline, we don't report that. If you were to subscribe to sort of the media services that track it, I'm saying - and this - I'm sort of guessing here, but the order of magnitude of that trackable number is, for all brands - I'm looking at Frank, I was going to say $50 million, $60 million.

Yes, yes.

Yes, $50 million. It would be what the reported gross number would be from the tracking services. And obviously that doesn't capture everything, right, because it only tracks some stuff. For some of the digital, it doesn't track that well, but that will be the number that we'll refer you to that's publicly available.

Because I'm looking at your AP&S growth, which you were flat in the second quarter - I mean, sorry, in the third quarter, and it just looks like even though your media spending is going up, as long as volumes are going down, the selling expenses are going down, and that's by far, the bigger driver. So that line item, as long as your volumes are down, it's going to be down even if media goes up. Am I right in thinking it that way?

So overall, yes, it will go down but there are certain one-time impact also if you look versus prior year where we had some items last year where you will see some distortions. But we will significantly increase our media spend in the fourth quarter.

And did you increase it in the third quarter, media, year-over-year?

So, media - it was only a slight increase versus prior year.

Okay. I mean, all of this is just going to say that...

It was not significant.

Okay. I'm just having a hard time, given your guidance on margins and spending. Even with volumes at the low end of your expectations, getting to a number that's not above your earnings range just because the savings efforts are so good right now. Am I really missing something? I mean, if your selling expenses go down - when your volumes go down, it just seems to me you're being very conservative on your EPS guidance.

Well, I think, what we are seeing, what we have said before is we will - the spending, especially the media spending, we will not so much tie it to the volumes. What we have said in the past is if we have the right programs, we will invest into media because the objective is to drive the top line growth. And we feel that we have the programs in the fourth quarter and we will increase or we're planning to increase spending versus prior year in the fourth quarter, much more significantly than what you have seen in the year to date.

And Caroline, let me comment from the marketing perspective, if you have been watching our advertising, we just literally last weekend launched new Angry Orchard work, actually in the ALF's game 7, and we're excited about that as it relates to our efforts to grow the cider category and improve Angry Orchard's position in that. And we had some, I think, deferred media from Q3 to Q4 while we finished that campaign. I think on a similar basis, there was some deferred media from Q3 to Q4 on Sam Adams, where we're hoping to be on air within the next 2 weeks. I can't give you an exact date but again, we have work that we like, and we have certainly plans to launch that at reasonable weights. So, there's a number of things that are timing-based in Q4 that we are trying to execute around those launches to make sure that those efforts are integrated across multiple platforms and it reached the drinker in multiple ways. There's certainly some uncertainty as to whether we can pull all of that off, which is why there's still quite a range and as always, not everything always goes to plan. But I think one way to reconcile what you're looking at is to understand that we're upping the ante in Q4, behind both those initiatives against our #1 priority brands.

And then I wouldn't mind, if Jim could just talk a little bit about Sam '76 and what it is and what makes it special, and maybe on the IPA as well, the New England IPA.

Yes. Sam '76 is whitespace, I think, within craft beer. The hallmarks would be - it's got big, almost IPA-like hop aroma, a lot of hop character, but low hop bitterness. And it has a very clean, crisp finish to it that doesn't involve lingering bitterness. So, you kind of have the flavor and aroma of an ale, and then you have a very clean lager finish. And it's unusual, perhaps unique, in that it uses both ale and lager yeast together in this sort of tag team symbiosis that leverages the capabilities of both of those yeasts. So, you can think of it as just very easy to drink but flavorful beer.

It sounds great. And the IPA and then I'll stop.

Oh, and New England IPA, again, is a very different beer than anything that's widely available. What everybody drinks today is basically West Coast IPA, including Sam Adams Rebel, that's a West Coast IPA. So, they're a little thinner, a little dryer, the happiness is more piney, resiny, grapefruit. New England IPA is quite different. It's visually different because it's hazy. It has a big, almost juicy hop character taste and aroma instead of the kind of dry bitter taste that a West Coast IPA brings to the party. So, it's a very different kind of IPA that has been limited to a handful of very small breweries because there've been shelf-life issues and physical stability issues. We've been selling it in the Boston market for a couple of months on a very, very limited basis, and I've had very good feedback on it, and similar results from retailers that we brought it to because it's kind of the hot craft beer style right now, but you really can't get it. It's almost like a unicorn. You hear about it, but you can't find it, and I think Sam Adams - there will be other craft brewers bringing out New England IPAs. We are excited by this unique set of flavor characteristics that, again, involve some very unusual and - well, just very novel and unusual brewing practices that give you this hazy, juicy character, instead of those sort of clear, piney, resiny-type character that characterizes the West Coast IPAs that everybody's drinking now.

Our next question comes from the line of Laurent Grandet of Credit Suisse.

Wow, clearly, Jim, I can't wait to taste Sam '76 and New England IPA, the way you described it. I really have two questions. One is about the fuel surge, and the other one is about A&M spend. So, A&M spend, just to follow up on Caroline. Difficult to follow you, guys. I mean it was $10 million to $20 million at the beginning of the year, then you moved to $20 million to $30 million, then now back to $10 million to $20 million with next year between $15 million and $25 million. Could you explain the rationale for all those changes? And how do you think about going next year? I mean how you split the investment behind what would be Sam Adams, what would be Truly Spiked & Sparkling and Twisted Tea? And then, on the CEO search. I mean, why is it taking that long? Is it because you are too picky? Is it because candidates you see I mean can't see how to turn the business around, I mean, with the current structure of the company or the investments you are willing to invest behind the brands? Or is it because I mean they could prefer - they would prefer to have more freedom to run the business? Or is it because - I mean some think I mean the company will be sold anyway in a few months? So, could you please explain why it has been almost 9 months since you announced you were starting search?

Thanks, Laurent. Let me take sort of how we sort out time about the guidance, and then I'll let Frank come in, in case I miss anything. I think it was start of the year where we hoped to deliver some cost savings that would allow us to increase our brand investments, so we set out we intend to do that. We actually, as the year progressed, realized [indiscernible] about our excitement that we had more savings opportunities. And actually, we're better at it than we had anticipated, and we actually increased our targets internally and drove that. And so that led us to increasing our planned capability, to spend on the marketing side. As we headed through the summer, we weren't completely happy with where we were and what we could spend it on, so we held off. I think we've always said we're only going to spend it if we really like what we have. And we believe it has a good chance of moving brand trends for us. So, there was a period of time there in - during the end of the second quarter, beginning of the third quarter, where we weren't sure, but we had the vehicles to invest in that would provide the return we wanted. But as we come to the fourth quarter, we're feeling good about both the Sam Adams work and the Angry Orchard work, and we're anxious to launch with investment to get them bedded and then continue that investment into next year. And before passing to Frank, in case he has anything to build on this, let me just answer your question as it relates to next year. We will definitely invest at a high level behind Sam Adams and Angry Orchard, particularly, if we see traction on the new work. And so that leads us to quite a wide range of potential outcomes. And if we don't see traction on the new work, then obviously, we'll go back and rework our options there. As we look at our other brands, both Twisted Tea and Truly continue to show positive upside, and we anticipate increasing our investment in those brands year-over-year, both as we sort of look to secure that place in the marketplace and expand the drinker base. And I'll pass to Frank, in case he has any observational build on my characterization as to what happened.

I just wanted to be very clear because it's very similar to Caroline's question as well. So, the decline or when we took the increase, which was originally a $20 million to $30 million, down to $10 million to $20 million, so a decrease of $10 million, this is not a straight reduction in spend on media. That is really a combination of higher savings and a slight reduction in media. So, we will continue to deliver on the savings line, but we will increase that spending so the net number that you see will be an increase of $10 million to $20 million. And most of the increase, it will come in the fourth quarter.

And about the CEO search, sorry?

Yes, Laurent. Let me respond to that question because it's a very good question. I think the timeframe that you've seen so far is a result of a number of things. I mean, it just starts with the simple fact that we have the luxury of time because Martin has committed to staying here and performing as a CEO until we find a great candidate. So as opposed to most CEO searches, we have no time pressure that says, "We have to take the best candidate even if they don't meet our standards." Second, I would say, and I've been told that we have very high standards and that we are looking for nearly the ideal person. And with the luxury of time, it's my feeling that we should not settle for anything less than the ideal person. And certainly, Martin has set a very high standard for Boston Beer Company, and we are not willing to compromise that, nor do we need to. And the company has a very strong and unique culture that is very entrepreneurial, that places a high value on its people and their talents and that is sometimes fanatically focused on product quality and product innovation and also expects really good results from marketing. So that's a hard skill set to find. So, I think - and then there is, as you mentioned, the chemistry issue with me and with the current leadership team that I think very highly of. So, we're only going to bring in people who can have the right chemistry with me as a founder and with a very strong and capable leadership team. So, all of those things mean that we are not in a rush to go out and find somebody that doesn't meet what are probably exceptionally high standards.

Our next question comes from Judy Hong of Goldman Sachs.

So first, I wanted to just start with a question on Truly, because obviously, the last few months, it's been a very strong contributor to the growth. I think we talked about sort of the seasonality of this business before. So, my first question is as you kind of got into the fall season, what have you seen just from a seasonality perspective? And then, obviously, with a successful product like Truly, lapping the growth the following year is always - sometimes a tough challenge. So, what do you have planned for next year to really get this Truly momentum continuing into '18?

Yes. Well, let me sort of talk to seasonality. It's somewhat hard to tell because distribution and discovery was happening throughout the summer, and we saw obviously peaks around the July 4 and Labor Day holidays. I think on the back end of the Labor Day holidays, we actually had pretty good floor displays and penetration, so again a little hard to tell. I think when we talked about it before, we said that the IRI data suggested that peak week to winter week might be a 50% decline, 60% decline. And I think that's sort of what you're seeing in the IRI data. But there's still distribution to be had, and there's still distribution pockets to be gained. So, we're trying to counter that. It's also a little hard to tell because one of our competitors was rumored to have some supply issues. So maybe we benefit a little bit from that and so some of the downside might be a little bit related to sort of that comparison. But I think as we look forward, we're pretty optimistic. We're optimistic both because of the slow, steady build and interest that we're getting at retail and from drinkers. I think we're optimistic because the brand offers a truly great - and pardon the pun, truly great beverage option, if you're looking for a beverage at 5% alcohol, 1 gram of sugar with a great taste. And it fits in the health and wellness space that certainly, [indiscernible] is benefiting from. And it doesn't feel, at this point in time, and obviously, we could be proven wrong, as sort of boom-splat as some of the previous sort of hot categories. In fact, it's sort of growing slower, partially because retailers have been a little slower to adopt and even wholesalers, too. But it seems to be pretty healthy. So, as we look at next year, we're looking to cycle our numbers pretty well. Obviously, early in the year, we're going to have distribution gains over last year, so the comparisons will be easier. I think the true test will be what it does in the summer, over this summer. As we think about our plans, we want to maintain our leadership status in the category. It's likely to be a 2 or 3 horse race. And so, we are the largest brand in the category that isn't probably canned, so we're going to make that change, we're going to go to cans. And we're going to increase our flavor profile as we don't compete in some - we don't have the flavor profiles that other leading competitors seem to be doing well in. So, we have both a format and a flavor approach to next year, plus increased investment behind the brand which we - on the messaging that we had this summer, which we think was resonating and was helping us gain share and close the gap with the other leaders.

Got it, okay. And then on the Sam Adams core brand. So, you guys have talked a little bit about the better execution at retail, certainly around the OctoberFest. So perhaps, a little bit more color just in terms of what you did differently and some of the improvement that you made to improve that execution capability.

Yes. I think a couple of things. As you look at our Sam Adams trends through the year, and we talked about this in the first 2 quarters, we were - we thought we had a brilliant idea of 5 seasonals and 2 seasonals in the first quarter, and it ended up being pretty much a - I won't say disaster, because there's much worse disasters in life, but it was a complete mess. And so, as we came out of that, towards the end of the second quarter, we saw sort of just overall total brand improvement, partially because of that. And if you look the sequential ROI on this, you've seen that's continued through to the last 13 weeks. We did have a good, solid OctoberFest performance relative to sort of last 52 week seasonal trends. One other thing we think is going on is we simplified our portfolio a little bit around what we put around OctoberFest, and we focused our displays on OctoberFest in lager and variety pack. And then at retail, we saw - or we think we saw slightly less clutter on all the seasonal brands. You've certainly read anecdotally that a number of pumpkin beers is down and a number of other things. And that's certainly, I think, is helping us benefit as the big brand in the seasonal category as some of that clutter comes out. Now whether that continues into the winter season or not is yet to be seen, but I think those are some of the things that you saw.

Okay. And then my last question, just a quick clarification. So, I think you said quarter-to-date or maybe it was a 42-ish number, but the depletions were down 6%. So first, was that a quarter-to-date comment? If so, it seems to suggest actually a deceleration even though some of the scanned data, and then I think your commentary would suggest a sequential improvement. So, I guess I just wanted to clarify that number. And then some of your peers have called out the hurricane impact. So, I know you don't have a big exposure to those markets, but any color just in terms of what happened in terms of the impact from the hurricane.

Yes. So, for any numbers that we said on our sort of scripted piece, that pulled from the press release. So, the press release is right, and so if we misread them, we apologize. I think year-to-date depletions for the 42-week period ending October 21 are estimated by the company to have decreased approximately 6%. Now that's obviously the same - roughly the same percentage because we round as we reported for the 9 months and also, I think for the 6 months - I'm looking at Frank, corroborate.

Yes.

And certainly, one of the impacts on the 6 months versus the 9 months is the 6 months had July 4 this year, we didn't have July 4 last year. So obviously, that trend was perhaps slightly more positive, and it should have been. And so, I think an inference is a continuing improvement in trend. And because we don't go to decimal places, the rounding, I think you just need to infer from what you see. I certainly would say that the IRI trends are more positive than our overall trends. And again, that's pretty obvious from the publicly available information, with the on-premise continuing to be very challenging. And then in the IRI data, where you have like Twisted Tea and Truly, representing some of the growth, they don't have sort of on-premise businesses, per se, of any significance, so it doesn't directly translate to what our on-premise business looks like. With regard to the hurricane, we have made no effort at all to estimate the impact of the hurricanes - of both of them, and don't really have anything to comment other than our general belief is that over a whole year, these things are somewhat immaterial, but - and it's bad weather every year. And so, we prefer not to talk about weather when we're talking about our trends.

Our next question comes from the line of Kevin Grundy of Jefferies.

Two questions for me, if you wouldn't mind. I wanted to pick up on Truly just because it's become so material to the company's growth, but not so much next year, although next year of course matters. But really, 3 to 5 years and beyond. And you have mentioned reaching the full potential is - of this brand is a key priority. So how are you guys thinking about the total addressable market for this product, where do you - based on where you think you're taking occasions from? And what sort of gives you the confidence that this will not be sort of a boom-splat scenario, that this really does have staying power and brand loyalty? So, any comment you could - commentary there around the total addressable market, the long-term opportunity and sort of your comfort relative to downside risk this does not bottom out at some point would be helpful.

Yes. I'll refer you a little bit to what I said previously is we think the category is benefiting from some interest in health and wellness in terms of low carbs, low calories and in an alcoholic beverage. And certainly, when we think about that at the price points we're talking about, we think a little bit about [indiscernible], and we look at what they're doing, and obviously they had a terrific run around the low-carb, healthy lifestyles in the beer occasions. I think, the sparkling water, our hard sparkling water occasions are a little different. There's some evidence that it's pulling a little bit from spirits. It's a controlled alcohol level in a 12-ounce serving. Obviously, in spirits mixed drinks, you don't have that, so that has some appeal to some drinkers, who might look for a mixed drink to get a controlled 12-ounce with 5% alcohol fill and, obviously, the same on calories and carbs. And you're seeing it show up in beer occasions where someone might historically have had a beer, a light beer. So, you're seeing it show up there, and you're seeing it show up across a pretty broad demographic. It certainly skews a little younger, in terms of folks in their 20s. But I've certainly had a couple of very memorable afternoons with a whole bunch of guys in their 50s drinking a whole bunch of Truly, and no one's had any complaint. So, I think our underlying premise is this appeals to some health and wellness. It's got a great taste for the carb and calorie content and alcohol content. It has potential for broad appeal, we need to unlock that. We're obviously not there yet. It's starting off small and slow. And while it certainly helped this year, it's not real material to our business but we would certainly like it to be, and we would like to maintain a leading position in it. And so, as we look forward, the things we can control is how we position it, what flavors we offer, what formats we offer, how we communicate and promote it, and we'll focus on trying to ensure that we maintain the momentum from this year.

Okay, that's helpful. And then one question, if I may, related to the guidance for next year. So, the depletions and shipments are expected to increase low single digits, and you guys have been very consistent the reasons about returning the Sam Adams brand and Angry Orchard to grow. Implicit in your guidance for next year to achieve this low single digits, did those brands need to return to growth? Or is it possible that under the high end of the range, if you do materially better with Truly and with Twisted Tea, you don't necessarily need those brands to grow in order to deliver the low single-digit growth?

Yes. Obviously, again, managing 4 brands and having somewhat unpredictable trends across the board, it's pretty difficult to follow. But certainly, in some of the models, I've looked at it, we don't need both Sam Adams and Angry Orchard to grow to deliver our guidance, right? There's obviously a range of potential outcomes. We look at it and we try and provide the best guidance we think about. We're obviously trying to turn Angry Orchard and Sam Adams and brands around that have had some negative trends for at least a year. Some of those negative trends perhaps were self-inflicted by our own seasonal efforts in the Q1, and so we have some optimism for Q1 performance. But again, we have to prove that we understand what happened and that we can fix it. But certainly, from our priorities, and when we think about our priorities, getting Sam Adams and Angry Orchard to grow is a key for a healthy long-term growth.

Our next question comes from the line of Nick Modi of RBC Capital Markets.

So just a few quick questions. Maybe you can give us a little bit more context around some of the channel dynamics. I'm just thinking about on-premise. Is it getting worse? Is it stabilizing? Can you just give some context on that? And also on the convenience store channel, do you have any thoughts there? We've been hearing kind of broad-based commentary that things have been slowing down, so just curious what you guys are seeing. And then, Jim, I guess, the question on the CEO search - and I appreciate the bar is high. What exactly are you looking for in terms of - is this some kind of core competency you're looking for in the new leader of this company, whether it be someone with a more cost-focus or technology competency? I'm just trying to get a sense of kind of what kind of skills and leadership qualities you're looking for to replace Martin, which is obviously a big shoe to fill?

So, let me take the class of trade sort of question first. And I'll take the C store one first because [indiscernible] because I can direct it to the publicly available information, where you'll see that our C store trends have been healthy, growing and even accelerating in the last 4 - 13 weeks relative to year-to-date. So, I would just refer you to that. And I don't think we are seeing with our brands, a C store slowdown. I couldn't comment on what other brands are seeing or if indeed C stores themselves are seeing a business slowdown. But we certainly seem to be doing better there and obviously happy to do so and continue the program to do so. With regards to the on-premise, I think a lot of our on-premise weakness again is driven by our seasonal trends and then our Boston lager and Angry Orchard crisp trends. So, it has been tough with the better performance of OctoberFest, we have seen some improvement in our on-premise trends, but not to the point where I'm ready to call it an ongoing trend.

And Nick, I'll address your CEO search question. In terms of what are we looking for, we're basically looking for omni-competence, somebody who is good at all the things that have driven the success of Boston Beer Company. So certainly, sales and marketing is very important, but we're also looking for things like dedication to product quality and to customer service, and not in a kind of a lip service way but genuinely there, and to a cultural fit. So, I - if we have to make a trade-off, I mean, somebody who can drive the top line is more important than operations. But we're really looking for somebody who is good at all of those things.

[Operator Instructions]. Our next question comes from the line of Vivien Azer of Cowen & Company.

So, I was hoping to talk a little bit more about the Sam Adams franchise. Clearly, much better results from OctoberFest, which I'm sure is a huge relief, and it's certainly pleasing to see. I am curious though about your thoughts on kind of interaction that was in the brand family because I was a little bit surprised that you didn't get a halo on lager. So, if you could just comment on that, that would be great.

Yes. So, I think the whole brand - if the brand is healthy, all the sub styles move, right? And if the brand has some challenges, then you tend to see weakness across-the-board. And I think we still understand that we have a brand that is challenged that we need to build on and to reintroduce the drinkers and to communicate to drinkers the reasons to drink it. We think that's a challenge for us. I do think there is cannibalization between OctoberFest and lager. Certainly, if seasonal, historically, has done well, then maybe there's been some slowdown on lager. You'd see it, if you've got a strong seasonal followed by a weak seasonal, lager would bounce back. In fact, lager, from memory, and maybe you shouldn't quote me, did a little better in Q1 when we were having our seasonal fiasco, right? So, there is some inter-reaction. I'm not sure it's a halo. But halo is certainly the total brand health and excitement behind the brand. And I don't think it's logical then that if OctoberFest is doing well, that lager would also pick up because there is a fair amount of cannibalization across styles for the brands. And I'm hoping that answers your question.

Yes, that was very helpful. In terms of some of the media assets or the copy that you were not fully pleased with come late summer, I was just wondering if you could offer any more detail. The only reason I asked this is just - that we have - many of us had the benefit of coming to visit you in May. We saw a lot of that copy. So, I'm curious what changed.

Well, I think whenever we have copy, and we put it on there, we like it, right? So, when we saw you on May, we liked it. When it didn't move the volume numbers, you have to conclude that it may not be operating as effectively as it could, right? So, we liked it. It didn't move the volume numbers. Obviously, there's lots of moving pieces to what affects the volume numbers, both in terms of distribution, pull, competitive activity and everything else. We do tracking of the media and sort of recall and whether people like the spots or not. But if you're not feeling it, you don't amp the investment up, and I think that's what I would - I'd say we weren't feeling it. I think we're a little more positive right now about what we're about to put on air. But again, with full disclosure, until it goes on air, until 20 million people stop to react to it, you really don't know. So, our goal is to put the best we can on air, try and read the tea leaves and the emotional reactions that we hear on the spots as to whether it is moving people in the right direction, even if marginally, and then decide how much incremental investment to put behind it. And that's an ongoing process that involves looking at a fair amount of data, some judgment calls. And I think we just concluded, as we went through the summer, that we weren't there yet, which is why we upped - reupped our work to have something for now.

Totally reasonable. Last one for me, on the 2017 depletion guidance, obviously, entering the year with a wide range, just given you have the variability and a number of initiatives that were underway at the company, totally reasonable. But now as you take down the high end of that guidance, as we enter year end, I was curious if you could offer any color on what fails to kind of meet expectations that could have gotten you to the high end, was it not a strong enough recovery in seasonals, was it a lack of incrementality in Truly, any incremental data would be great.

Sure. Well, I think as we said, we're disappointed with where we are. I think when we started the year, we were hopeful that we could get the cider category to flat. And we're certainly hopeful that the Sam Adams trends would be better based on our own initiatives in the year. If I look at the year in total, I'd say that Twisted Tea has performed as we expected or maybe a little better than we expected in some markets, that Truly probably performed better than we expected if you were asking us in March. But if you were asking us in July, we might have expected it to do even better. So - and that's a sort of a little bit of a rollercoaster of how you're feeling at different times of the year, but obviously, it helped. But fundamentally, underlying why we're at the low end of the range is our disappointment in that we have not stabilized the Angry Orchard and Sam Adams trends. And then just while we're talking about it, and this is obvious to you, I would note that we do have this 53-week to 52-week comparison. So, in our current range, we're comparing 52 weeks this year to 53 weeks last year and so if you would make that sort of adjustment, I think you would conclude that we expect our trends to continue to improve in Q4. That's implicit in our guidance. And even that's uncertain, right, so lots of uncertainty.

[Operator Instructions]. Our next question comes from the line of Pablo Zuanic of SIG.

Just two quick questions. So, the first question is you said in the case of Twisted Tea and Truly, they have very little presence on-premise. If you can explain, is that something structural, or is that a big opportunity? I'm just trying to understand why they would lag so much, especially Twisted Tea given the good demand [indiscernible] retail. That's the first question. The second question in terms of lessons from hard soda, it seems to me at the beginning, there's 1 or 2 brands that do very well and then their category gets very crowded, especially as the bigger guys come in. And maybe that one would think would shelf the category, there's more people involved, that maybe it just creates confusion with the consumer. I'm afraid that may be happening with the hard soda, so if you can comment on that. And then the third and last one, 1 I mean, hearing Jim describe Sam '76 and New England IPA, it sounds very appealing. But I remember hearing him also talk about Nitro back in the day and Traveler and Rebel IPA. And I'm just thinking, what's really different? I mean, all those beers before sounded very appealing and something failed, right? So just why would it be different this time?

Yes. Well, let me take some of that, and I'll let Jim or Frank come in [indiscernible]. I think Twisted Tea has - sort of never really had an on-premise presence even in its early core markets. It's always existed as a take-home brand and remains such. It behaves a little bit more like a mass domestic beer brand as a percentage on-premise versus off premise as opposed to our craft brand. And I think you have to remember, one tends to look at us as a craft brand with a very high draft percentage, cider behaved that way. Obviously, Sam Adams behaves that way. But Twisted Tea behaves much more like a mass domestic light beer from a class of trade occasionality mix perspective. I think Truly, it's just too early to tell. It was a lot easier to drive Truly into off-premise class of trade distribution, do sampling there then get it on menus and stuff over the summer. So, it's too early to tell. We had some success on roof decks and poolside-type, hotel-type entertainment places, but it's way too early to tell how that plays out. And if it is a little bit of a flavor-driven category, that's a little hard for that to plan the on-premise, given all the variety you have to carry. So that would be the context for that, but it's really too early to tell. Lessons from hard soda, I think the starting part on hard soda will be - it was over 300 calories to get what the sugar was, and Jim might have it off the top of this head - how many grams of sugar?

No, 50? 50?

50? So, it was a dessert in a bottle. And I think it had a lot of interesting appeal in the short term, everyone wanted to try it. We had the trial, but the repeat wasn't there and obviously it didn't have what I would call sessionability, ability to drink two in a sitting or three. And so I think this is a little different now. As it relates to how the industry is playing out, we have all of the major players are currently playing in it. It's still very small, I don't quite know how to guess the total number of cases. I think one of our competitors put out a number on the 4 million cases for their piece of it. So, if that was right, this is about a 10 million case category this year, which represents soda at its peak. But this is year 2, and so it's building in a different way. So, my guide is this is building in a different way, and it has a better rationale for being, and all the big players are now in it, and it's still pretty small. And it's not going to be material to most of our competitors' portfolios. It's about 0.4% of the beer business right now. And for a lot of the competitors, that's just not that meaningful as they deal with what they're dealing with on that trend. So, our hope is that it continues to evolve in a very healthy way. We obviously control that through investment and through great brand communication and positioning, that this is a high-end product area, beverage that's for people who want to consume alcohol in a controlled way that has appropriate calories and carb benefits. And then on the Sam '76 and New England IPA, I think it's a great question. I'm going to let Jim answer it. But from my observation, sort of - and I'm not really the brewer in this thing. I'm the English drinking cider guy. This is the most interesting beer development we've had, probably since Rebel, but maybe even before that. And that's just my observation on the sidelines of some of the magic that the brewers, in conjunction with Jim, have been able to put on the table. Jim?

Yes. And I guess I'd say, thank you for bringing up some of our previous innovations because it's totally fair. I think as a company we are not paralyzed by the possibility of failure as we innovate, and we've built the company with being able to innovate, starting with Boston Lager, going into our seasonals, things like Twisted Tea, Angry Orchard. They're all significant franchises, but there's a whole lot of failures along the way. And I can probably list them, but it would take a while. I'll give you what I see as what is promising about both Sam Adams and New England IPA. Sam '76 meets a drinker need, a retailer need and a wholesaler need. For craft beer drinkers, the average craft beer drinker drinks only 25% of his or her volume from craft, and 75% comes from imports and mass domestics. So, Sam '76, because it is more refreshing, it has - when you compare it to a lot of craft, it has lower bitterness, it has less fillingness, it has slightly lower alcohol level, all of which means that it's easier to drink. So, it can take craft beer into additional occasions where you're watching the game and you're going to have 3 or 4 beers instead of 2 or 3. So there's a drinker need for something that has craft flavor but more drinkability. There's a retailer need to increase the volume from their craft beer consumers. And again, because of the higher sort of drinkability without compromising flavor, that's a promising place to go and, of course, wholesalers love both the high margins of craft beer and the potential for additional volume. So, it lines up with all of the participants here. And there isn't anything like it currently. They're using ale and lager yeasts to do a sort of - a tag team symbiosis is new. With New England IPA, IPA is 33% roughly of craft and still growing. So that's about a 7 million-barrel opportunity. So, taking a - even a mid-single digit piece of that is a meaningful piece of volume for a smaller company like Boston Beer Company and doing that by presenting an entirely new flavor profile within IPA gives us a meaningful point of difference. But as you point out, we love it, but we got to put it in front of consumers. And we won't know until that happens.

And we have a follow-up question from the line of Laurent Grandet of Credit Suisse.

I was looking on the net on Sam '76, and it seems like the pictures that I can see are in cans and not bottles. Would that be the leading kind of SKU that you would be launching? Or is it just - I mean because it's...

Very good observation, Laurent. And the answer is yes, that will be the leading package. And as you can see, from IRI numbers, craft in cans is growing faster than craft in bottles. And the can is now pretty well accepted among craft beer drinkers. And this is a beer that has more of the easy drinking characteristics maybe that you associate with something in cans.

And I'm showing no further questions in queue at this time. I would like to turn the conference back over to management for any further remarks.

Well thank you, everybody. We very much appreciate the questions, the quality of the questions, the opportunities to describe our beer to you. And we're going to go drink a few. So, we appreciate it, and we look forward to talking to you in February.

Cheers.

Cheers.

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