Good day, ladies and gentlemen and welcome to the Boston Beer Company Second Quarter 2014 Earnings Conference Call. At this time, all participants are in listen-only mode. Later, we’ll conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this conference call is being recorded. I would now introduce your host for today’s conference, Founder and Chairman, Jim Koch. You may begin.

Thank you. Good afternoon to everyone and welcome. This is Jim Koch, Founder and Chairman and I am pleased to be here to kick off the 2014 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 will 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 2014. Immediately following Bill's comments, we will open the line for questions. We achieved depletions growth of 23%, and record total depletions in the second quarter. I am tremendously proud of the efforts of our employees in achieving this record, while also maintaining a focus on brewing quality and innovation. We believe that our depletions growth is attributable to strong sales execution and support from our distributors and retailers, as well as our quality beers and our strong brands. We were also delighted to learn that for the sixth year in a row, our distributors ranked us to number one beer supplier in the country, in the annual poll of beer distributors conducted by Cameron Consulting, a consulting firm, specializing in the alcoholic beverage distribution industry. This is a testament to the efforts of all Boston Beer employees to service and support our distributor's business, and to the relationships we have built with them. Overall, our brand portfolio is healthy, and we remain positive about the future of craft beer. I will now pass it over to Martin for a more detailed overview of our business.

Thank you, Jim. Good afternoon everyone. As we state in our earnings release, some of the information we discuss in the release and that may come up on this call, reflect the company's or management's expectations or predictions of the future. Such predictions and the like are forward-looking statements. It is important to note, that the company's actual results could differ materially from those projected in such forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements, is contained in the company's most recent 10-K. You should also be advised, that the company does not undertake to publicly update forward-looking statements, whether as a result of new information, future events, or otherwise. In the second quarter, our depletions growth benefited from the strength of our Samuel Adams, Angry Orchard and Twisted Tea brands. We believe that the growth we see in our main brands reflects a response to our increased investments in media, local marketing, and point of sale, and the efforts of our increased sales force, even as we face a more competitive environment. Accordingly, we have increased our expectations for full year depletions growth to between 20% and 24%, to reflect the most recent trends. We are planning continued increases in investments, and in advertising, promotional and selling expenses behind existing brands, in an attempt to maintain the momentum, as well as an innovation commensurate with the opportunities and the increased competition that we see. Our supply chain performance still remains below our expectations, but is improving. The high demand levels and the large number of expansion and efficiency projects ongoing during the quarter, caused us to experience higher operational costs than we had originally expected. We are also seeing pressure from our transportation suppliers, and experiencing increased freight costs to secure the performance and capacity that we need. Despite our best efforts, we had some continued product shortages and service issues during the quarter. Many of our major capital projects were completed during the last 45 days, allowing us to focus more on training, process improvement, and predictable operations. We are appreciative of the tremendous effort of our brewery and engineering teams to complete these projects successfully, while we operate at peak levels. Looking forward, we expect a continued high level of brand and capital investments, as we pursue growth and innovation. We are prepared to foresight the earnings that may be lost as a result of these investments in the short term, as we pursue long term profitable growth. Based on information in hand, year-to-date depletions through the 29 weeks ended July 19, 2014, are estimated to be up approximately 27% from the comparable period in 2013. Now Bill will provide the financial details.

Thank you, Jim and Martin. Good afternoon everyone. We reported net income of $25.4 million or $1.88 per diluted share for the second quarter, representing an increase of $5.7 million or $0.43 per diluted share from the same period last year. This increase was primarily due to shipping increases, partially offset by increased investments in advertising, promotion and selling expenses. Poor shipment volume was approximately 1.1 million barrels, a 25% increase compared to the second quarter of 2013. We believe distributor inventory levels at June 28, 2014 were at appropriate levels. Inventory at distributors participating in the Freshest Beer Program at June 28, 2014 increased slightly in terms of days of inventory on hand when compared to June 29, 2013. We have over 65% of our volume on the Freshest Beer Program and we believe participation in the Program could reach up to 70% of our volume by the end of 2014. Our second quarter 2014 gross margin decreased to 53.1% compared to the 53.6% in the second quarter of 2013. The margin decrease was a result of product mix effects and increases in packaging and ingredients costs, which will only partially offset by freight increases. We are currently maintaining our full year gross margin target of between 51% and 53%. Our second quarter advertising and promotion selling expenses were $15.7 million higher than costs incurred in the second quarter of 2013. The increase was primarily a result of increased investments in media advertising, increased costs for additional sales personnel and commissions, point of sale and local marketing, and increased freight to distributors due to higher volumes. General and administrative expenses increased $1.8 million compared to the second quarter of 2013, primarily due to increases in salary and benefit costs. Based on information which we are currently aware, we have…

Thank you. (Operator Instructions). Our first question comes from the line of Judy Hong of Goldman Sachs. Your line is now open.

Thank you. Hi everyone.

Hi Judy.

So my first question is relating to your guidance, which I am a little bit puzzled why your EPS guidance did not go up. If I look at your depletion guidance going up by four percentage points, the marketing spending, it looks like its only going up by $3 million. So it seems like there is actually a pretty meaningful increase, just based on your sales growth coming in higher. So are there any other cost increases that you're not calling out here, or anything else to kind of think about as it relates to earnings guidance?

I think there is a couple of things going on, and I don't necessarily have them in order of importance. But one; we are seeing pretty significant freight increases, primarily due to rates, but also partially due to our operational supply chain issues, where we are not filling the trucks sufficiently, so we have got sort of a double impact there, and that is one effect. The second effect would be mix and the gross margin, perhaps not being -- from a mix perspective, not being exactly where we thought it was going to be, and then the third thing I would put in there is, while we are very happy with our operations team, and the fact that we are obviously supporting the growth and maintaining momentum, there is still a lot of opportunity in our breweries and how we are fulfilling demand to improve the operating costs and efficiency to those breweries, and frankly that's probably a multi-month, maybe multiyear effort, we are just chasing the growth, but that's sort of driving that gross margin a little bit. There is some mix issues, and then there is the operating issues.

Okay. So just to clarify, the gross margin guidance didn't change, so this year really was hitting you more, just in terms of the demand coming in better than expected, there is really more the operational costs more in the SG&A line and freight costs, those types of items?

Yes.

Okay.

Bill, would you agree?

Yes absolutely. I think the transportation and freight situation has definitely increased our costs, more than we originally planned for.

Okay. And then secondly, just in terms of your sales trends, and looking really more at the recent trend. So if we look at the recent scan data, it looks like the category growth, the broader beer category growth has slowed a little bit. Your depletion growth year-to-date number would also suggest that there is a bit of a slowdown for your numbers, and I understand the comps are getting tougher for your guys. But just in terms of recent trends, anything that you are seeing, that might be a little bit different, both at the broader category level, and sort of your portfolio level?

Sure. I think we have a pretty unique portfolio, and we have different things going on. From a Sam Adams perspective, our growth for the year is likely to be weighted towards the front end of the year, due to both the introduction of Cold Snap, the launch of Rebel, and the sort of 30th anniversary celebrations, all of which took part in the first quarter really, and so while Sam Adams is still healthy and growing, the growth in the second quarter wasn't as strong as the first quarter. But then from an Angry Orchard perspective, we have obviously, some nice momentum there, it’s a little unclear what's happening in the cider category. The category's growing, but we have seen some pretty big new entrants from the major brewers, that's a little unclear as to how it's going to sort itself out. The comparisons for Angry Orchard get tougher, as we go forward. So that will be a little bit of a tailwind on our comps. And then finally Twisted Tea, predominantly its very strong seasonally, and we are benefiting a little bit in the second quarter, and maybe a little in the third quarter, we will benefit a little bit from that, from a mix perspective and a growth rate. So from a total company perspective, we got all of these sort of different portfolio issues going on. I think as Jim said, we are happy with the health of all those brands. We'd obviously like the malt to be doing better, but I am sure every supplier would. I think from a Sam Adam's perspective, we are not growing this as fast as craft category is, but there is a lot of fragmentation going on, and we are doing -- we think reasonably well, although not as well as we would like in maintaining the strength in our core SKUs. And then just generally to the total beer business, we seem to -- it’s a little hard to tell what is going on. Our business is healthy, both in the on and the off premise, may be due to our new launches, when the on-premise business, at least based on the reports we read, is generally week. Our off premise data, you sort of see in the scan data, we are maintaining momentum there relative to the category, so we are optimistic.

Okay. That's helpful. And then lastly, just in terms of the pricing environment, I think -- there has been a little bit of noise around maybe some of the major companies holding their line on the draught pricing. So just wondering what you're hearing on that front, and how does that perhaps impact your pricing strategy, particularly in the on-premise channel?

Well I think, you're hearing very early reports of what other people might be doing and until you actually get to those dates and actually work out what they are doing, its tough to know. I think from our perspective, we are seeing some increased freight costs. We have got some increased ingredient costs that we are expecting next year. We have some challenges on cider to maintain margins that allow us to invest in the brand, and support it. So we are certainly still anticipating, trying to lead price up. It’s a little early to announce what that target will be for next year, and we are still in discussion everywhere. I think from an on-premise perspective, the good news is, we are in categories where the on-premise retailer can charge a good price to the drinker, and the drinker is willing to pay that price for a high quality product. So I am not sure that we will see a huge amount of price competition affecting us in that channel, but you never know. And again, just too early to tell, what the big guys are doing.

Great. Thank you.

Thank you. Our next question comes from the line of Caroline Levy of CLSA. Your line is now open.

Thank you. Good afternoon. Just to follow-on on something you said to Judy. The brewery inefficiencies right now, it sounds like over time, there is a significant opportunity then to improve efficiency and drive margin higher, once you kind of right size. And I am wondering if that's correct, and number two, to get that opportunity, do you need to spend capital, do you need to add people, or is it just a matter of time?

Well I think you're certainly right in assuming that, as we look at our breweries, we see a lot of opportunity to run them more efficiently, and I don't think we would want to give a sense for how much right now. We are going through a period of growth, with growth rates 15%, 20%, 25%, 30%, in a very capital intensive business. We have also seen growth in our own complexity with the addition of cider, which is obviously a separate and distinct liquid stream and process, as well as fragmentation, even within our portfolio. So our operating teams have been quite -- severely challenged by growth rates that frankly were ahead of what we thought we were going to see, and then complexity that has mushroomed on the -- primarily because that's what the drinker wants, and we are trying to address that through aggressive expansion, trying to get out ahead of it, but we are still in the process of doing that. And in that environment, we have made conscious decisions to chase the volume and build the business, as opposed to sort of taking the pressure off the brewery team. So as it relates to is there an opportunity? Yes, there is. Is it a significant change in gross margin? I am not sure it’s a significant change in gross margin, but certainly we would hope to move the gross margins back to where they have been historically. And how long will it take? Well frankly, I'd love to tell you next year, but if we maintain this growth rate, its hard to make those moves with this growth rate, and the capital that we are sort of expending, going on simultaneously. So again I just would want to tip my hat to those teams, both the employees running the line, and also everyone on the capital projects, that we are holding it together, and when and if it slows down, we would hope to then see significant opportunities to actually get better, and provide better service.

Right. Thank you. And then on the CapEx itself, you are coming in -- you have pulled on the high end of your CapEx guidance, is that just because you can't get it spent in time, or because you are finding ways to avoid the high end of that number?

Well as part of the previous answer, we recognize that the very high pace of capital investment has placed significant strains on our operating teams, and we are trying consciously to look for other solutions to support the growth that aren't as disruptive to them. And I think at this point in time, we have delayed a couple of projects that we thought we were going to initiate this year, probably just pushing them off a year, and we think we have solutions to supporting that need, whether it be a innovation need or a capacity need. So what you are seeing is a little bit of deflowering, if the growth rate continues, we will come back and do those projects, but we have consciously decided to try and take -- its not going to be a pause, because we are not stopping, but basically not overload the groups.

Right. And then, can you tell us about the core? You said that there was growth, but you lost share, and I mean, that's not surprising, just given on the new entrants and so on, but when you talk about the core, you are talking straight Sam Adams or including the seasonals, if you could give us any color on that, that would be very helpful?

Yeah no, I was thinking about the total Sam Adams portfolio in terms of growth. Obviously we are happy. Its growing. Obviously Jim has been doing it for 30 years and to be growing after 30 years, given everything that's happening around, we feel good about, but I wouldn't say we feel great about; and the craft category in total is growing, mid teens I suppose, I can't remember what the craft -- that the [indiscernible] reported I think plus 18. So we are not at that level. We have other initiatives within our portfolio, with Alchemy & Science, that maybe will help us grow our beer portfolio that fast. But generally we are happy, and with Sam Adams, we don't have geographic distribution expansion opportunities, its all about penetration and driving pool. So to be drawing like we are now, we feel good about, but not great. Maybe Jim would like to just comment on top of that.

I think to be getting 23% growth 30 years in to a consumer product is something that we all feel pretty good about here. I think we also feel very good about the continued growth prospects for the entire craft beer category. There are going to be, what another 600, 700 new breweries starting this year, and the category and volume for the first half of the year was up 18%, that's a pretty strong performance, and its part of a premiumization that is beyond just beer, you see it in F&Bs, and you see it in cider and those are -- we are fortunate enough to be in three categories that are all growing, maybe even double digits. So we can grow. We don't necessarily have to grow share within our categories.

Thank you so much.

Thank you. (Operator Instructions). Our next question comes from the line of Marc Riddick of Williams Capital. Your line is now open.

Hi, good evening everyone.

Hi Marc.

I wanted to sort of question on retail and I was wondering if you had any thoughts or views as to what you're seeing there. Particularly how difficult it has been obviously to generate top line growth, and I was wondering if you're seeing any, maybe different behaviors in ordering patterns or shelf space at this point of the year, than maybe you're seeing at the beginning of the year. Or if there is any way to sort of quantify the changes that retailers may be making in order to generate growth for themselves? Then I have a couple of follow-ups.

I don't know that we have an informed opinion on the overall retail environment. We are pretty focused on our little niche, there is a lot of excitement at retail, because for us, the categories that we are in are driving growth for retailers, and overall with beer, while there has been a slight decline in beer volume, and you add cider in F&Bs, it has been an even smaller decline. There has been a very healthy increase in dollars. So that equation of selling less, but making more money, is pretty good situation for -- certainly wholesalers, the beer industry itself, and I think retailers are benefiting from it. So at least with our categories, we are growing strongly, and in an overall beer cider and F&Bs, the dollars are still performing pretty well, and better than the majority of the categories that retailers are carrying. So beer is a pretty healthy category for retailers today.

You had mentioned I think once before about your shelf space expectations, and if I remember correctly, the idea was that the warm shelf space might have a little more -- more than opportunity maybe than the coolers, just from being -- the coolers maybe a little bit more capacity constrained. And I was wondering if that was still the case of what you're seeing today?

I think that's still a fair assessment, that as retailers try to add more variety and assortment of craft beer to the beer category, they are a little reluctant to put in new doors in a C-store that's expensive or new coolers in a supermarket. So they are looking to find adjacent space, and we have even seen some retailers pushing into the wine space, with some of the higher end craft beers.

Interesting. So just sort of heading in a bit of a different direction. I know that the advertising has been there, and certainly seems to be pretty effective. I was wondering -- we seemed to be focused on maybe expanding exposure to other parts of the portfolio beyond the flagship Boston lager, and I was wondering if you got a sense or maybe it was too early to tell, how that reach was -- how effective that reach is currently?

Well the ads that we have had on for the past -- almost two months have -- for Sam Adams, focused on variety. But perhaps there has been a theme that has come and gone over the years as we have been advertising, and its really part of the whole character and complexion of craft brewing that craft brewers, like Sam Adams, tend to be innovative, and tend to like to play around in different beer styles, and I think consumers accept that fact. So I wouldn't read too much into the exact content of the ads that we have had on in the last couple of months. They really all are about supporting the core values that Sam Adams shares with other craft brewers.

Okay, excellent. And finally if I remember correctly, you had the limited release editions of some of the -- sort of that limited released seasonals. I was wondering if that's something that could be expanded going forward, as well as how you're seeing that, in addition to just the general strength of the standard seasonals? Thank you.

Well again, as a craft brewer, we are always kind of pushing into new beer styles. So for example this summer and last year, we had a beer called Porch Rocker which is a rattler. It’s a German style of beer, very popular in the summer, and it actually means bicyclist, and it’s a mixture of a Helles lager and lemon lime flavoring, that bicyclists in Bavaria for many years have used as a refreshing drink, it’s a little lower in alcohol, so you can get back on your bike and ride to the next bar.

Sounds good. I appreciate. Congratulations on a good quarter Jim.

Thanks Marc.

Thank you. (Operator Instructions). And I am showing no further questions at this time.

Yeah, I'd like to thank everybody for joining us, and hopefully, you guys will get a good beer tonight, and we look forward to talking to you for the third quarter.

Cheers.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Have a great day everyone.