The Boston Beer Company, Inc. (SAM) Q2 2012 Earnings Report, Transcript and Summary

Good afternoon. My name is Hope and I will be your conference operator today. At this time I would like to welcome everyone to the second quarter 2012 earnings conference call. (Operator instructions) Thank you. Mr. Jim Koch, Founder and Chairman, you may begin your conference.

Thank you. Good afternoon and welcome, this is Jim Koch, founder and chairman and I am pleased to be here to kick off the 2012 second-quarter earnings call for The Boston Beer Company. Joining the call from Boston Beer are Martin Roper, our CEO, and Bill Urich, 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 will provide an overview of our business. Martin will then turn the call over to Bill, who will focus on the financial details for the second quarter as well as a review of our outlook for 2012. Immediately following Bill’s comments, we’ll open up the lines for questions. I am pleased with our overall depletions growth of 7% for the quarter and 9% for the first half of the year. We believe that craft beer will continue to grow and that we are well positioned to share in that growth through the quality of our beers, our innovation capability, our sales execution, and coupled with our strong financial position that gives us the ability to invest in our brand. For the fourth year in a row, our wholesalers ranked us the number one beer supplier in the industry, in the annual poll of beer wholesalers conducted by Tamarron Consulting, a consulting firm specializing in the alcoholic beverage distribution industry. Our wholesalers ranked us first in all but two of more than a dozen categories that Tamarron uses to evaluate performance. This is an important testament to all the efforts by all The Boston Beer Company employees who service and support our wholesalers' business and to the relationships we have built with our wholesalers. I am proud that we continue to be a leader in the craft industry in both innovation and variety as well. During the quarter, we introduced several exciting new beers including Porch Rocker, small batch brews Samuel Adams Verloren and Samuel Adams Norse Legend, and our Hopology, a unique twelve pack of six distinctly different IPA styles. As we enter the third quarter, we are updating the packaging for all Sam Adams styles and have introduced the next evolution of our brand communication which builds on our previous messaging. We remain confident about the long term prospect for the craft category and our Samuel Adams brand. 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 the forward looking statements, whether as a result of new information, future events, or otherwise. In the second quarter our depletions growth benefited from strength in our Samuel Adams Seasonal, Twisted Tea and Angry Orchard brands, offset by some slight decline in some of our other Samuel Adams brand styles. Highlights in the quarter include the continued success of our Samuel Adams Seasonal program and increased volume and distribution due to completing the national rollouts of our Twisted Tea and Angry Orchard brands. Based on the strength of these rollouts, we have increased investments in our sales force and our Samuel Adams brand, and have built a stronger Boston Beer brand portfolio for our wholesalers, retailers and drinkers. Based on what we are seeing, we are increasing our projection for full year depletions growth. As we look forward, it is likely we will increase investments in advertising, promotional and selling expenses in existing brands and in innovation, commensurate with the opportunities and the increased competition that we see. Specifically, we are investing in systems and capital equipment to enable us to manage the increasing complexity effectively and expand the capacity and capabilities of our breweries. We plan on adding over 30 sales positions and making other investments to address specific needs in the market. We are prepared to forsake some earnings in the short-term as we make appropriate investments in brand-building activities and capital improvements in our brewing and packaging capabilities to position us well for long-term growth and continued efficiency gains. Alchemy & Science, our craft brew incubator, is in the early stages of two exciting projects. Its House of Shandy brand successfully launched its Curious Traveler Shandy in draft package in 13 markets this year and will be adding a new style as well as bottles in the third quarter. Angel City Brewery brewed and packaged its first kegs and re-launched in the Los Angeles market. These projects have had minimal sales to date. Our 2012 financial projection includes estimated expenses net of gross profit contribution attributable to Alchemy & Science projects of between $3 million and $5 million, but this estimate could change significantly based on volumes or if new projects are added. We will continue to look for complementary opportunities to leverage our capabilities, provided that they do not distract us from our primary focus on our Samuel Adams brand. We believe that as a result of our Freshest Beer Program we are delivering better, fresher Samuel Adams beer to our drinkers and also lowering wholesaler inventories, reducing costs and improving efficiency throughout the supply chain. We currently have 60 wholesalers signed up and at various stages of inventory reduction. We have over 50% of our volume on the Freshest Beer Program and believe this could reach 75% by the end of 2012. We continue to evaluate whether we can reduce these inventory levels further. Year-to-date depletions through the 29 weeks ended July 21, 2012 are estimated to be up approximately 10% from the comparable period in 2011. Now Bill will provide the financial details.

Thank you Jim and Martin. Good afternoon everyone. We reported net income of $14.4 million or $1.06 per diluted share for the second quarter, representing a decrease of $13.7 million or $0.95 per diluted share from the same period last year. This decrease was primarily due to the impact of the glass recall settlement in 2011 of $0.92 per diluted share. Excluding the 2011 impact of the recall settlement and the estimated 2012 negative impact of the Freshest Beer program on shipment volume, earnings per diluted share were $1.19 for the second quarter, an increase of $0.10 or 9%, and earnings per diluted share were $1.83 for the first six months of the year, an increase of $0.47 or 35%. Core shipment volume for the second quarter was approximately 690,000 barrels, a 7% increase over the second quarter of 2011. The increase in shipments is primarily due to increases in Angry Orchard, Twisted Tea and Samuel Adams Seasonal that were partially offset by declines in some other Samuel Adams styles and the timing of the July 4 holiday. We believe that inventory level at wholesalers at the end of the second quarter are similar to previous years except for those wholesalers participating in the Freshest Beer program whose inventories were lower. Inventory at of wholesalers participating in the Freshest Beer program was lower by an estimated 619,000 case equivalents compared to the end of the second-quarter in 2011 which reduced our shipment volume and reported earnings per diluted share by an estimate $0.13 for the second-quarter and $0.22 year-to-date. Our second-quarter 2012 gross margin decreased to 54.5% from 57% in the second-quarter of 2011. Cost increases in borrowing and other ingredients on favorable product and package mix and some quarter specific operational costs were partially offset by pricing increases. We are increasing our full-year gross margin target to between 54% and 56% from the previously communicated range of 53% to 55% primarily due to increased volume estimates. We intend to continue to focus on cost-saving initiatives at our breweries and are pleased with the improvements we have made to date. Second-quarter advertising, promotion and selling expenses were $3.6 million higher than those incurred in the prior year, primarily as a result of increased investments in advertising, costs for additional sales personnel and freight to wholesalers due to higher volumes. General and administrative expenses increased $1.7 million compared to the second-quarter of 2011 primarily due to increases in salary and benefit costs and Alchemy & Science start-up costs. Our effective tax rate for the second quarter of 2012 was 39%. Based on information which we are currently aware we have left unchanged our projection of 2012 earnings per diluted share of between $3.80 and $4.20. While we should benefit from currently lower fuel prices and may see slightly higher depletions than previously expected, these benefits are likely to be offset by other cost pressures and planned increases in investments in our brands. Our actual 2012 earnings per diluted share could vary significantly from the current projection. We now project that 2012 depletion growth will be between 8% and 12%, an increase from the previously communicated estimate of 6% to 9%. We continue to target revenue per barrel increases of approximately 3%. We now estimate that increase is through advertising promotion and selling expenses, not including an increase in freight cost for shipment of products to our wholesalers to be between $11 million and $15 million from the previously communicated estimate of $8 million to $12 million. We also continue to estimate start-up costs of $3 million to $5 million for new brands developed by Alchemy & Science, our wholly-owned subsidiary of which $1 million to $3 million are included in our full year estimated increases in advertising, promotional and selling expenses. We believe that our 2012 effective tax rate will be approximately 38%. We continue to evaluate 2012 capital expenditures and have increased our estimated range to $55 million to $75 million from the previously communicated estimate of $40 million to $60 million most of which relates to continued investment in breweries and additional keg purchases in support of growth, the freshest beer program and increased complexity. However the actual amount spent may be well different from these estimates. Based on information currently available, we believe that our capacity requirements for 2012 can be covered by our breweries and existing contracted capacity at third party breweries. We continue to maintain a strong cash position with $41.2 million in cash as of June 30, 2012. During the first half of 2012 we repurchased approximately 74,000 shares of our Class A common stock for a total cost of $7.6 million. From July 1, 2012 through July 27, 2012 we did not repurchase any additional shares of Class A common stock. Through July 27, 2012 we have repurchased a cumulative total of approximately 10.6 million shares of Class A common stock for an aggregate purchase price of $259.5 million and had approximately $15.5 million remaining under $275 million share buyback expenditure limit set by our board of directors. We will now open up the call for questions.

(Operator Instructions) Your first question comes from the line of Kaumil Gajrawala, UBS. Kaumil Gajrawala – UBS: I guess first question on Lager and Seasonal, I apologize if I missed this. Did you give what would each of those grew in the quarter?

Hi, it’s Martin. No, we don't disclose the breakout of sub-categories, and I don't intend to. Kaumil Gajrawala – UBS: And then maybe if I can just understand the guidance, particularly there is a few moving parts. The $0.13 we pulled out of the second-quarter as a one-time but in your guidance you are including it from freshener. So do you want on our guidance -- or are you – is it something unique about freshener just go-round that, you singled out the impact, but in the past it’s always been something that we had been including it as it appears in the normal course of business.

We singled it out because year on year we’d do have a much more significant number of our wholesalers on Freshest Beer and therefore the case decrease has actually a very significant impact to shipments and earnings. The full year effect is probably not as significant because the inventory levels at wholesalers at the end of the year historically have been lower. So that's why we singled it out. Kaumil Gajrawala – UBS: So the guidance you have given us, as you state it includes fresheners but there is nothing that you – you are not suggesting that we should be making adjustments.

I think the guidance that we've given is what we’d expect our reported number to lie between at this point in time based on current information. Kaumil Gajrawala – UBS: And then if I could just ask a little bit about category, I know you don’t want to break out what’s like – what Lager did or anything. But as we look across to scan data in the category, not just for yourselves but for a variety of the largest craft brewers, it seems that many of the flagships have been struggling. Could you try to give us some context on how we should be thinking about what that means for the category or maybe what that means about the consumer within the category?

Sure. Well first of all, I think the publicly available reported data from those channels does not reflect the full channels that we operate in and therefore you can obviously draw some conclusions from it. But I would note that it doesn’t necessarily match with what trends we are looking at on a total business basis. As it relates to those major channels what you’re seeing I think is that retailers are embracing the craft category, adding space to the category and bringing in a much greater variety into that space and at least -- while that happens the traditional brands that have had strong positions in that space sort of – don’t give up shares of space, not necessarily giving the shelf space but give up share of space to a wide range of new entrants. And therefore the impact at retail of those brands is perhaps diminished within the cross-section even while the cross-section maybe doubles in space, or triples in the space depending on the retailer. So that’s the current environment that I think that we are living through it. It’s certainly changing pretty rapidly and within that I think there is different levels of set of lead style health that are being displayed. We tend to think about it as total brand health and total brand volume, and I think we’re delighted – the one we are disappointed with where our sort of growth year to date has been but we certainly think it can be improved upon on the Sam Adams brand and it's obviously the number one priority for us as a company given that the craft category is growing faster than the Sam Adams is growing. So that’s what we are focused on. Within that brand family, there is lots of different dynamics going on. I think even within the brand family, our number of SKUs has drastically increased. So there is some cannibalization going on there but what we look for is are we holding draw lines, are we in good shape on premise? And well again I don't think the growth of Sam Adams brand meets our expectations, it's not necessarily reflective of what the numbers you're looking at. Kaumil Gajrawala – UBS: If I could just ask a quick clarification one and then I will get into the queue. Specifically on the scanner data, there were some confusion on Angry Orchard potentially showing up as hard-core cider, would you be able to clarify what actually might be going on there?

I'm not fully briefed on this issue, we subscribe to one of those services and we don't subscribe to the service that was reported as potentially having the issues. So I really couldn’t comment.

Your next question comes from the line of Judy Hong, Goldman Sachs.

So just going back to the Sam Adams brand and Martin and Jim, you guys have talked about being disappointed about year-to-date sort of trend and lag in the category. So I just wanted to get your perspective on how you're assessing really the brand health at this point and a lot of the investments you are making behind the trademark, whether it’s capital investments or marketing investments or people investment or the freshest beer investments, how are you getting conferred that those are kind of maybe enough to really drive acceleration in terms of the brand performance going forward?

What I think – the easiest way for us to sort of monitor brand health is to look at on premise brands, where the environment isn’t perhaps changing quite as fast as it is changing in the off-premise channel that you’re looking at the major data and there we can see the strength of tap handle same store sales and those sorts of measures give us comfort. As we think about our reaction to what's going on in the off-premise class of trade and in some of the segments of the on-premise class of trade, I think we firmly believe that feet on the street is an important tool that we have and we can afford and versus this time last year we probably increased – or planned to increase our sales organization by over 20% and that we think comes back to us in cases in the subsequent years. So that's one of the areas for investment. We are in the process of completing a complete packaging redesign, which given the number of SKUs we have is a major investment in rollout plus as Jim mentioned in his prepared comments, we’ve just rolled out new creative that we are standing behind. So I think from a brand perspective, we feel good that we have great beers, that we have great brand position that some of what we're seeing is the dynamics of the route to market right now. And that with appropriate investments and continued efforts of our wholesalers and our people that we can grow the brand and that’s sort of where we are directing our efforts. With regards to your question around capital, we are obviously growing as a total business, and we have capital investments to support that growth. Our growth this year is the size of a small brewery, so we are adding that to our existing infrastructure and in doing that up sort of marginal capital costs on an incremental capacity basis. We are adding some capabilities around our ability to support the innovation in packages in the beer and space and also with our key cider brands, so there is impacts in capabilities that will be planned to add in time for 2013 and some other cost savings initiatives that we have implemented involving investment that has returns on it that will show up in the latter half of ‘12 and in ’13. So the capital numbers supporting that wide range of activities, some of it which is driven by complexity but a lot of which is driven by the growth in just as we reach certain growth levels we can make some investments to improve our operating costs.

And then Angry Orchard, could you just give us some kind of how the rollout sort of went versus your expectation? When you look at your shipments or your sales I think you’ve given some projections as to what Angry Orchard could be as a percent of total cider category. So how is that trending versus that expectation and then maybe some color as to what channel the brand is doing well, whether it's food store or convenience stores?

Sure. I think yeah we've been pleasantly surprised by the reception from the drinker and retailer and wholesaler for Angry Orchard. The cider category, and I should start off and state it’s quite small. Published numbers in the U.S. range from 6 million cases to 8 million cases maybe last year. So it’s not a particularly big category and I think we talked about this on last call and certainly I think when we talk we hope for a reasonable share of that over time. I think we've been a little surprised by the warm reception that we received and maybe how fast we've been able to gain share in that category. Obviously we’re still the number two or number three player in the category and certainly have aspirations for more. But we've been pleasantly surprised as such it stretched our ability to pull off those shipments from an operational perspective. And so that again explains some of the capital increases that you are seeing and we are still chasing that. But yeah, we've been very pleasantly surprised.

And is there a difference in terms of the channels, the penetration by channels? If I look at the major channel data again just given that we do get that data, it looks like the brands a pretty big percent of your business already and I am just wondering does that kind of apply to the broader channel or is this brand much bigger in food store channel right now?

I’d say that we probably -- if you think about distribution and penetration, and obviously this is evolving, if you look at the data you have, I kind of am trying to remember the last data I saw, our distribution in the classes of trade that you are referring to was I think still in the mid 20s or maybe high 20s but below 30s. So there is still lot of distribution gain. So we still have a lot of upside in those channels from growing that category and what we’ve rolled nationally there’s still distribution to be gained. But in other channels that are unmeasured, I think our distribution penetration is probably significantly lower than that. I think that's been the easier channel to penetrate. Our penetration of the on-premise hasn't been quite as aggressive as that. So I suppose that’s a long way of saying one, no, you should not necessarily conclude the size of our business based on that data. And we apologize for that, that’s the data you have, we understand. Two, even with that data there is still distribution upside and based on what I am saying we still have distribution upside across our business.

And then just my last question is, so on the freshest beer, the impact from the freshest beer program, it seems like the impact on shipments is actually much bigger than what you'd called out previously although sort of the percent of your volume that’s going to go through the freshest beer program hasn’t really changed, it’s kind of 75% by year end. So is it that the level of inventory is really coming down a lot more than what you had talked about at those wholesalers that are participating for the volumes, not that – the percent of volumes got that different but the actual inventory reduction at those wholesalers are bigger than what you had anticipated?

I think we’d always anticipated to bring the wholesalers on would be somewhat back ended, that relates to some staffing that we do. One of the investments behind freshest beer is bringing to sort of order planning a part of this sort of more in-house. And we needed to staff up from that. We took up a pretty very bite fourth quarter last year and we spent most of the first quarter digesting that and getting that up and running smoothly. So that sort of explains why we are – where we are in terms of the percentage of our business. As it relates to the projection I think I'm not sure we have provided a quarterly projection and I apologize if this is a little difficult to deal with. The wholesaler inventory is typically a much higher at the end of the second quarter than they are at the end of the full year. So the full year impact -- if we were to half wholesaler inventories for instance, it would be a much lower number at the end of the year than it happens to be for the – end of the second quarter. And the reason we are putting these numbers out there is because it is so significant. With regards to how we finished June from a wholesaler inventory perspective, I think for a non-Freshest bear wholesalers that would typically pretty much where they were supposed to be. For our freshest bear wholesalers they were perhaps a day lower than we perhaps had thought but again that’s not that material related to this number that we put out. We are sort of in the – somewhere between four days and nine days across the freshest bear wholesaler system and that’s obviously pretty tight.

Your next question comes from the line of James Watson, HSBC.

Lot of big investments, so I want to talk about -- a little bit more on the CapEx overall, just I mean that kind of 10% or 11% of sales, it looks like your estimate for the year is a huge number. In terms of the timing, is this the case where all the opportunities came at once or is this a rate that is – should kind of go back to normal next year or are we going to see this going forward?

I think it’s a combination of a couple of things. And one of them is that as a business grows within our existing breweries, we have a requirement to add tanks. So we are starting to see that, that’s certainly a piece of this number. There are some other pieces of a number that relates to the growth of some of our brands and being able to duplicate to these capabilities into two breweries instead of just having it at one. And those have some ROI estimates, ROI returns to those types of investments. If I was to categorize the total capital amount, I would say that probably 40%, 50% of it is being driven by ROI type efficiency things that should show up in future years that have what we would regard as attractive returns to them. And then some of it is related to just what's going on in the range of businesses that we have as it relates to complexity and capabilities. So whether it be investments to complete wood ton seller (ph) in Cincinnati to being able to do in the future a wider range of bottle shapes and sizes and finishes or package configurations in the future. Some of this we haven’t yet seen the benefit of and certainly we struggle little bit giving guidance on capital as to the timing of the completion of the capital. We try and do it more for cash flow forecasting than anything else but some of this will show up as benefits later in the year or in 2013.

And to dive in a little further with the packaging, you guys talked about the data brand packaging, I just wanted to know more about it in terms of what drove that – I mean we’ve heard a lot from the bigger brewers in the U.S. about putting a lot of money in innovation behind packaging. So was it the competitive thing, is it maintenance that it's just that time again to cycle into new packaging and what’s the kind of timeframe on rolling that out and maybe on even seeing a return?

Yeah, it sort of relates to packages that historically we've used third party for and as that volume has grown it becomes a potential for bringing that inside. So I don’t think it’s necessarily a shift that one’s going to see externally but more basically building our internal capabilities to control our own capacity and be able to respond and put our business appropriately.

So that this is something we’re just going to see kind of hopefully flowing through the bottom line eventually but not in the marketplace.

Yeah I think that’s probably fair. Based on what we currently see it, it’s probably more security of supply and bottom line initiative. But it also gives us perhaps greater flexibility on innovation on different package sizes but at this point in time I can’t comment on specifics.

Just one last one, you updated volume and gross margin guidance, is it really the case where you are looking at reinvesting all of that as you kept the EPS percent?

I think that’s what we currently see. I think I mentioned some of the investments we have made, we’ve also got some increases of complexity and then some element of just managing that sort of the capital number also has some G&A cost to us.

Your next question comes from the line of Mark Fredick, Williams Capital.

A couple of the questions, I know a lot of these things have already been covered. So I can sort of move on to some of the other areas. You’d mentioned as far as the adding of sales personnel, and I was wondering if this – looking to add I think it was 30 sales people that’s in the press release, if you were looking at it in a similar fashion as to the additional sales people that had been brought on at the beginning of last year, I believe it was from the standpoint, do you foresee this as being something you are looking to do relatively quickly to take advantage of opportunities that you see in the marketplace or is that something that we would expect to see more spread out than what took place last time?

I think we basically set up our senior sales leadership and look at how we structure the sales organization and how we sort of allocate that activities that class of trade in the market. We sort of look at that twice a year and so coming out of that tends to be decisions as to what markets and/or class of trade and/or customers can support and need the appropriate resources in the way of people. So certainly, I think we tend to be a little lumpy in our decision-making that flows from that process. But obviously we can’t just snap off fingers and add that number of people in a week. There is a hiring process that take a while and so the actual number will be spread out a little bit but it does come in a bit of a lump.

And then one of the other things, that was interesting as far as the gross margin expectations for the full year, especially in light of how many other commodities have been increasing as much as they have over the last few weeks. I just wanted if you could spend a moment and touch on some of the commodities that you are seeing that. I can understand obviously that you are having greater depletions growth than what we are expecting before the hefty increase. But I was wondering if that’s a more a function of how far bought out you had been on your commodity expectations for the year and the ability to increase the gross margin expectations for the full year and if any of that flows into next year as far as being hedged out?

Well, I think some of the gross margins for the full year benefits was an increased volume because obviously we are operating brewery systems fixed cost from a commodity perspective, sort of -- in random order I think fuel and freight are looking lower than they did when we last spoke to. And that sort of is in our estimate. Corn, barley and wheat are obviously higher now. On barley, we were sort of majority covered but not fully. We certainly are in better shape than we thought we were going to be last October-November when we provided full year guidance to but it isn't as good as when we last spoke to you. And although again a lot of this is uncertain, some of the growing areas or the growing areas, that I understand are mostly affected in US and how that impacts Canadian barley we will have to see. On the other commodities I am not aware of any sort of major moves and some of the gross margin moves that we have beyond that relate to mix type issues, just between beer cider and tea and so it’s a little bit more complicated.

And one last thing you'd mentioned as far as the need to secure additional tanks and as part of your relationships with your partners, and I was curious as to whether or not that becomes somewhat more difficult given the growth of craft beer overall, I mean as far as from the timing standpoint availability. Is it harder to bring in new tanks or does it take longer to get a whole bunch of thing (ph) that you think you are going to need relative to maybe where it was a year or two above given the expansion of the category?

We haven’t actually put tanks in for I want to say quite a while prior to the last nine months. So we don’t really have any information as to what it was like before. I think it’s fair to say that we increased our capital estimate. I want to say it was December last year which is when he committed to the tank investment and if you were to drive cost up into any brewery, you would see them standing today. So from my perspective hats off to all our employees, the engineering team and the all the employees in Pennsylvania for getting that done. And actually if you drove the cost to Cincinnati, you’d see the same thing. So apologies to my colleagues in Cincinnati, we had the same timeframe too.

Your next question comes from the line of Caroline Levy, CLSA.

Good afternoon, this is Michael Lavery in for Caroline. On the depletions, I know you raised the guidance there, it looks like the first half is roughly at the low end of that range already. So what would be the drivers of an acceleration that you think is probably likely to come in the back half?

Well, I think there is a couple of things. First of all, when you think about the first half number you have to think about timing of July 4 which certainly depressed the first half numbers, which for us ran through the Friday or Saturday the 4th – July 4, so July 4 seemed to provide – I am not sure whether it’s total beer sales increase of that period but it’s certainly got spread out over that period and for us therefore depletions fell in June and July as opposed to into June last year. I think looking forward we obviously expect to benefit from having rolled Angry Orchard in April and we missed that in the first quarter. And so that's certainly a factor for us thinking that we will have a slightly stronger second half than first half. But again, that's somewhat – that’s not a big contributor to the scheme of things given where that brand is right now and then I think we also believe that we are getting a pretty clean cut over to Oktoberfest right now and we expect some lift from that based on our freshest beer wholesalers are sort of converting as we speak. And our belief is that, that will lift the numbers.

And back to the gross margin, I want to make sure I just called it correctly, you were talking about some of the mix as a driver of the improved outlook. So is it – that Angry Orchard is gross margin accretive?

Again somewhat complicated that it has a lower tax and pricing, the revenue, the barrel is little lower than beer but to the extent on mix, the net revenue per barrel is going to be a little higher than beer and the cost of goods is a little higher than beer. So we are still exploring that one. I just wouldn’t want to pretend that there was some mix effect in our range there.

But is mix overall a positive diver or is it just sort of two plus –

I think right now, we think it’s even but it will depend on how the different brands grow in the second half of the year.

And on the freshest imitative, I know the $0.13 in the quarter is a decent amount, and I understand you are saying that the pacing skews more heavily to 2Q but sorry if I missed this. What’s the full year impact? I think you have been saying around $0.20 to $.25. Is that still outlook on the complete full year?

Yeah as we previously disclosed it, we are not changing it. And again when we get the full year impact -- if we didn't add any wholesalers to freshest beer and we get the full impact, full year impact wouldn’t be what the first half impact would be because some of it reverses. Some of those shipments will happen in the second half of the year, because at the year on year depletions will get back to sort of – sorry, inventories of wholesalers will return closer to where they were at the start of the year. So it was a timing issue.

And then on the packaging redesign and communication, could you give a little more color there, with some of the timing around that and what the – how different is it going to be?

From a packaging perspective, I would like to think that if you walk into retail shelves, I am going to say three weeks from now you’d see a different look and feel for the Sam Adams packaging brands. They are still the very recognizable iconography. But you will see that we've updated it and created a nice billboard. I was out in markets over the last two weeks and starting to see our lead styles to show up with it. It will take a little longer for the associated styles but I would guess by the end of August that's what you will see it at retail, certainly impress the beer markets. From a communication point of view, we started it in the last week of June to run an updated campaign that builds up our previous work, and I think it’s available if you want to find it on our YouTube channel or other sort of online sources. We have updated executions for our Oktoberfest and those will be published in a couple weeks to support a big push in September-October, and I think we are just very happy with it. They received good responses from people who comment on these things online whether to ask our other people and obviously too early to tell any impact other than it’s anecdotal.

Your next question comes from the line of Andrew Kieley, Deutsche Bank.

I wonder if you go back to the bogey that you put out there for depletions in the second half and I guess aside from cider, is that also assuming some lift from tea – new distribution on tea that I think you are adding California, Texas and just when those markets sort of take hold?

So I think it’s fair to say that for our full year we’re projecting growth on all our brands, so yes.

And that includes beer, so just beer as a segment for you overall, as a component of acceleration in the second half?

Yes, that’s primarily around Oktoberfest which is – it’s a big seasonal for us and if that was to do what we think – we hope it will do that, obviously lift that boat a little bit more than it was floating in the first half.

Is Oktoberfest, is that going to roll out earlier than it did last year?

It’s running maybe a week earlier. Frankly summer rail (ph) dried up a little earlier than we anticipated, and so it has been seen at retail already which is perhaps a week earlier than we would have thought it would be reported. But in the scheme of things that sort of noise, if that does execute it through the system, then that might provide a little bit less.

I am not sure if you’ve already mentioned this but can you just talk about where cider is in terms of the geographic rollout where it was in the second quarter and where you think it gets to by the end of this year?

We’re national, the geographic if you think about this, we launched in New England and a couple of other markets last September. In January we could replace Hako, in the markets where Hako was still going strong when we sort of did that January, February and we rolled the rest of the country in April with different degrees of punctuality whether it be April May but we are basically a national now. That doesn’t mean to say we have equal distribution nationally. We've had some great support from some chains that recognized the opportunity and I think have been very happy with how it’s performed. But again based on the published numbers for the reported classes of trade, there is still distribution opportunity to increase distribution if we were to get Angry Orchard into every reported store where cider is sold. So we are working hard at that and I hope we would see some lift of that frankly this year and going into next year because it will take us a while to close those distribution gaps.

And one more, I just wanted to ask, I know and I think there was a push as this, I don’t know what they call it like a retailer focused program or however they are calling it, looking at shelf space allocation between domestic light and sort of craft, are you seeing any impacts from that in the marketplace or shelf space that’s sort of changing because of that or any input on that program?

I think to date we haven’t seen anything but most of this that have shelf set in the big way, the shelf the changes will happen September October, so I think when those changes get announced, we will get a sense for the impact of those discussions. And we will also get a sense for how retailers are thinking about the category – the beer category generally have they swung too far or not far enough? My sense is you are still seeing retailers move more towards craft space but again when the big change (indiscernible) going to feel for how the more sophisticated retailers are thinking about, how to use via within the stores to drive traffic.

And then just last question, just the sort of a technical question on it, the interplay between the shipments and the depletions, it looks like they have been aligned more closely here year-to-date and I am just trying to think about how that winds up in the second half, I guess specifically because you have a big – a very heavy volume lap in the fourth quarter. So would that drive your full year shipments significantly below where the depletions are coming off? How should we think about that?

Andrew, it’s Bill, hi. If you remember last year we were on 53 week shipment year and this year we are on a 52 week shipment year. So that one week will make a difference – in the fourth quarter.

Your next question comes from the line of Judy Hong, Goldman Sachs.

I just wanted to maybe get your perspective on the pricing environment both within the craft category and maybe the broader beer industry as a whole. Again if I just kind of look at the scan data, maybe some of your bigger craft competitors have been lagging in terms of price growth versus your brand. So I am wondering if this is kind of what you're seeing, is this a concern and how are you thinking about the broader pricing environment for those markets?

Sure Judy. I think as we said before, we don’t really follow what the big guys are doing. So we tend to think more about what's going on with imports and especially craft there. We obviously executed some pricing in the first quarter, which has flown through onto we believe on net revenue per barrel basis to us although it didn’t fully cover cost increases related to the barley and off the cost drivers this year. I think it’s fair to say we didn't see the imports move and we didn't see all the craft moves. Some moved, and it’s sort of obviously market specific. So it is little difficult to generalize but as you look at the reported numbers, our price realization in those is not as we've gone up and other guys haven’t moved so much particularly on 12 packs. And that’s certainly we think contributing to some of the weakness in the reported numbers and we’re looking at that and deciding how to address from a feature ad display perspective. So I think it’s fair to say that not everybody followed or perhaps retailers are featuring other brands perhaps more than they have in the past. As we look forward obviously we are concerned by exactly where the agricultural crops come out. I don’t think we see too much pressure on the hub site, but obviously the weather in the U.S. could put a significant support on barley and therefore a molding barley which sits above that and is driven by the corn prices. We think it’s a little early to tell exactly how this plays out as it relates to next year, but it’s something we’re monitoring closely. And I think our intent is always to try and maintain a healthy pricing within the category but if the category develops to the point that we need to take action in order to make sure we get out share of ads and displays, then obviously we will take that action.

And Bill, I apologize about this question – again about the freshest beer program impact but I think you had originally said the impact on the shipments were going to be 100,000 to 300,000 cases that and year-to-date it’s obviously a lot larger. So when you said the phasing kind of moderate in the back half, do you still end the year with between 100,000 to 300,000 cases impact, so in the second half you actually see a positive swing in that inventory number?

Judy, it really depends on the number of distributors what their levels of inventory are and when we bring them on and how aggressive we are with the program with those distributors. So it’s really hard to say, what the exact amount it is. But we've estimated that it would be as Martin indicated lower than our first half because the inventories are so much higher at the end of the second quarter than they typically are at the end of the year.

So Judy, to be specific, some of those 600,000 cases we didn't ship will get shipped in the third quarter or fourth quarter. We are going to deplete them. So we have to ship them. So there has been some movement of shipments. The full year guidance on the inventory neither Bill or I have that number in front of us right now. We’re just going to say that we are not changing that guidance at this point in time. And the reason that guidance would be so much lower than the 600,000 is to Bill’s point the year end inventory at our wholesalers is a much smaller number and therefore even if we harp it, it’s not as bigger number as it is at the end of the second-quarter.

Okay there is a catchup probably in the third quarter essentially in terms of shipments?

Yeah and I don’t want to commit to the third quarter but certainly in the second half of the year, there is a catch up, because we fully anticipate cases being depleted and we have to get into the wholesale.

There are no further questions at this time.

All right. Thank you all for joining us and we look forward to talking to you in a few months.