Good day, ladies and gentlemen and welcome to the Boston Beer Company Third 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, Jim Koch, Founder and Chairman. You may begin.

Thank you. Good afternoon and welcome. I am pleased to be here to kick off the 2014 third 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 third quarter as well as a review of our outlook for the remainder of 2014 and our initial outlook for 2015. Immediately following Bill's comments, we will open the line for questions. Our depletions growth this quarter was 21% and quite strong as a result of a number of factors, including effective sales execution, support from our distributors and retailers, not to mention the quality of our beers, innovation and strong brands. During the quarter we had a smooth transition from Sam Adams Summer Ale to our fall seasonal Sam Adams Oktoberfest. Our fall seasonal program also included the limited release of seasonal flavors including Sam Adams Pumpkin Ale and a small batch double Pumpkin Ale, Sam Adams Fat Jack. In addition for the first time we released a small batch of Kosmic Mother Funk Grand Cru, which is currently on a 12-city tour after fermenting in the barrel room of our Boston brewery for about two years. So it's an exciting time for us, and we remain confident about the long-term outlook for the craft category and our Sam Adams brands. 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. In the third quarter, our depletions growth remained strong and benefited from the growth of our Samuel Adams, Twisted Tea, and Angry Orchard brands. We believe that the strength of our main brands reflects strong sales execution and our increased investments in media, local marketing and point of sale and the efforts of our increased sales force. We do not expect that the depletion growth rates we have experienced so far this year will be maintained for the remainder of the year as we face tougher comparables and the benefits in the first half from new product launches will not be replicated during the fourth quarter of 2014. Accordingly, we have not increased our estimated full year 2014 depletion growth rate. Our supply chain performance improved during the quarter, but we still have plenty of room for further improvement. We have completed a number of significant capital and efficiency projects that have further increased our capacity and capabilities. Our focus now is on taking full advantage of these increased capabilities through improved operator training and on making supply chain improvements intended to increase the freshness of our beers and enhance our customer service. We expect our capital expansion pace to slow in 2015 as we absorb and optimize our 2013 and 2014 investments. Our sales focus in 2015 will be on second year growth of some of our successful 2014 launches rather than continue our recent high pace of new brand launches. It is too early to accurately predict 2015 growth rates. We expect to maintain a high level of brand investment as we pursue sustainable growth and innovation, and we continue to be prepared to forsake 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 depletion through the 42 weeks ending October 18, 2014 are estimated to be up approximately 24% from the comparable period in 2013. Now Bill will provide the financial details.

Thank you, Jim and Marin. Good afternoon, everyone. We reported net income of $37.9 million or $2.79 per diluted share for the third quarter, representing an increase of $12.2 million or $0.90 per diluted share from the same period last year. This increase was primarily due to shipping increases and lower than expected operating cost per barrel during the third quarter due to lower employee benefit cost and the timing of certain advertising promotion and selling expenses. Poor shipment volume was approximately 1.2 million barrels, a 23% increase compared to the third quarter of 2013. We believe distributor inventory levels at September 27, 2014 were at appropriate levels. Inventory at distributors participating in the Freshest Beer Program at September 27, 2014 increased slightly in terms of days of inventory on hand when compared to September 28, 2013. We have over 65% of our volume on Freshest Beer Program and we believe participation in the program could reach 70% of our volumes by the end of 2014. Our third quarter 2014 gross margin of 53% was equal to the third quarter of 2013 primarily due to unfavorable product mix effects and increases in packaging and ingredient cost that were offset by price increases. Third quarter advertising, promotion and selling expenses were $8.9 million higher than the cost incurred in the third quarter of 2013. The increase was primarily a result of increased investments in media advertising, increased costs for additional sales personnel, point of sale and increased freight to distributors due to higher volumes. General and administrative expenses were equal to the third quarter of 2013 primarily due to increases in salary cost that were offset by lower benefit and consulting cost. Impairment of long lived assets increased $300,000 compared to the third quarter of 2013 due to the write-down in…

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

I guess, my first question is just relating to your full year guidance and there seems to be a bit of confusion just kind of looking at the fourth quarter implied guidance. So first in terms of depletion outlook, I mean you talked about the expectation for a bit of a slowdown as the comparisons get tougher. I think if I look at last year, the fourth quarter comparisons were actually a little bit easier than the third quarter. So just a little bit of color around why you think that the comparisons are getting tougher here? And then from an earnings perspective, your guidance, the full year earnings guidance implies you're going to have it down like a 30% year-over-year in terms of earnings, so just trying to understand why that would be the case.

Hey Judy, it's Martin. I think if we look at the fourth quarter, we've got a couple of things going on. I think if you look at the publicly available IRI or Nielsen data, you'll see that our growth rate as a company is slower than the year-to-date numbers and slowing. That's reflective of obviously the brand health and what is going on with our brand. I think the other thing that is affecting sort of growth year-to-date that doesn't help the first quarter is some of our brands had some seasonality to them and that seasonality, the growth rate is up much bigger numbers in the summer months. And so we benefited in the second quarter and third quarter on a depletions basis from that seasonality. As we look at Q4, we don't have the benefit of introduction of a new seasonal. The Angry Orchard brand is going up against much larger numbers from last year. Last year we were less inventory constrained at this period of time when we had really great weekly track depletions there and so that comparison is much more different. So it's just -- the net effect is our projection of Q4 is based on what we currently know, what we currently think based on the total mix of our business. And I think if you look at the publicly available IRI/Nielsen trends, you'll see that sort of showing up a little bit and slowing them. With regards to the fourth quarter earnings, we had some -- we have some inventory sort of reduction on wholesale that has to happen. Our inventories are certainly healthy by a couple of days as we indicated the Freshest Beer wholesalers. So our shipments is going to be a little weaker than depletions trends perhaps. And there are some timing of advertising, selling and promotional costs that we anticipate in Q4 that perhaps would defer from Q3 or might have occurred in Q1 last year, so we have some timing issues.

And then just if I think about then sort of your 2015 outlook and you gave some color around how you're thinking about the depletion guidance. So within that 10% to 15% projection, can you give us a little bit of color just in terms of how you're thinking about the craft beer category growth? And then in terms of your mix of growth from beer versus cider or non-beer, how are you thinking about sort of the makeup of that 10%, 15% growth as you look out 2015?

I think we're generally very positive about the craft category and the growth that's available to that category. We certainly are excited by what we see when we talk to drinkers about their propensity to drink craft and then obviously from retailers and wholesalers too. So we think the craft is likely to maintain a low double-digit growth rate next year and we would like to get a reasonable share of that. Certainly the larger craft brands perhaps have not been growing as fast as the craft category, but it would be our expectation that we could grow our craft brand portfolio in the high single digits, would be my guess. The cider category, currently we believe it's still under 1% of the beer category in the U.S. and we believe that has some upside. The category will grow as fast as it has sort of this year. There's obviously a lot of interest in the category, a lot of competitive activity and a lot of support for the category from retailers and wholesalers. So it’s certainly possible that it could maintain that momentum, but it obviously has a much bigger base, so I think that's a little unlikely. But we do think that it is running over the next five years for the cider category to double or triple maybe in a 10-year time period. So we’re pretty upbeat on that. And as we look at it this year, again if you look at the publicly available numbers, Angry Orchard maintained its share in the category. It lost a little bit of share as there were some pretty major competitive efforts going on and then we seem to be recovering that share on the last four-week, sort of eight-week basis, although slowly. So, we’re optimistic, but very difficult to tell. And based on what we hear on competitive activity, it could be a very competitive year again. And as much as we did this year, we’re committed to investing in our brands to support its leadership position. And then for tea, tea remains healthy, just chugging along slowly, steady slow growth and we would hope that we can achieve similar sort of trends next year.

So as you think about 2015 then, it sounds like maybe your focus is shifting a little bit from a lot of innovations that you’ve seen in the last couple of years to really maybe a little bit more harvesting some of the more recent innovations, which I guess could imply that maybe the margins could be a little bit better as you look out in 2015. Would that be a fair assessment of how you’re thinking about sort of 2015 and beyond now that you’ve got a lot of innovations in the marketplace that your focus is shifting a little bit more on profitability as opposed to top line?

No, I don’t think that’s a particularly fair read of what we’re trying to communicate. The margin front, there is a number of things going on in our portfolio and also with the drinker. If the drinker moves to greater interest in IPAs, the cost of producing IPAs is higher perhaps than the cost of producing lower beers, so there is some margin impact there. On the cider front with our use of very high quality apples and the apple contained in our ciders, that, I think as we previously indicated, is a little bit of a margin erosion for us against our average portfolio. So as we look at what’s going on with the drinker and what they are interested in and then also our own growth projections, our margins are at the gross margin level under pressure just from mix trends and drinker interest. As it relates to our statements on sort of focusing in 2015 on building brands, I think it’s merely indicative that we have currently no significant major new launches for Sam Adams or for Angry Orchard that might generate significant amounts of growth next year and that our focus is actually on building year two success on top of year one success on some of the things that we’re successful in 2014. Our belief is that we have to invest in those beer styles in order to ensure that they are long term successful. So we don’t want to just rush them our laurels, having thrown something out into the marketplace, but we want to continue to drive and continue to build on the distribution and visibility and drinker favorable perceptions of some of the successes this year to ensure that they are long term successful.

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

Just wondering if you can help us. It looks like your ad promotion selling expense is on track to grow a little faster than sales even this year. And is that a trend then that you expect to see continuing? Because my understanding is you already have pretty enormous sales push relative to the size of your sales base. So can you help us think about that over the next few years?

I think one, we do have a large and talented sales organization. I mean that’s part of our ability to go to market to support our wholesalers for our retailers with a very retail oriented sales force. We’re proud of that group and we’re committed to growing and adding to that group as the market wants. With the growth rates that we’ve generated over the last couple of years, we’ve had the opportunity to put people into markets that perhaps could not support a sales person before. We had the opportunity to add people into states that never had sales people before. And we’ve also with the growth and penetration of some of our brands into classes of trade, but the C-stores have developed C-store specialized teams to support that. So, we see that as a important part of how we build brands long term and we’re committed to investing and supporting that group, both with training and products and also by adding people as our growth warrants it in markets which can support it. So, as we look forward, I think we’re committed to investing behind our brands and making sure we can compete successfully. I think in 2014 we had a couple of new launches, one being Rebel, one being Cold Snap on the Sam Adams side that warranted launch type efforts that grew our marketing investment slightly higher than perhaps would otherwise have warranted and that’s what you're sort of seeing. In addition, in anticipation of the competitive activity on the cider side, we drastically increased the investment that we have for brand support on cider which included the first large scale national cider media campaign. So we would anticipate our investments in 2015 being a reaction to what is going on competitively in the marketplace. And at this point in time we’re planning on continuing the high investment levels. We see the big brewers adding sales people to try and compete with us and with others obviously, so they’re stepping up their investments too. So we will react to what we see, again focused on long-term profitable brand health and growth.

And then could you help us with where the operating efficiencies might kick in from not having such supply constraints? I assume that you’re probably going to be in better shape in 2015. So does that hit the COGS line, is that a benefit to GOGS?

We would certainly like to improve our supply chain operating performance next year and have that show up on gross margin and a little bit on freight which is in our SG&A line. We certainly believe we can make progress over the next six, 12 months with a slight slowdown in our capital expenditure efforts and we think there is a lot of upside to training our employees and using the investments that we’ve made perhaps more efficiently. We are facing some headwinds on the top side that we don’t have full visibility to yet. This year we face significant headwinds on the freight side, on the outbound freight side both in availability of transportation and also cost of transportation and that’s been a big impact to us and we suspect that’s going to continue into next year. And we’re also sort of at the early stages of trying to work out exactly what the barley situation means and that’s a little unclear right now as everyone accesses the harvest. We think the biggest impact is likely to be quality which may result in lower yields and some other impacts. But again, it’s really too early to tell and we'll have a better feel for that in February.

And then just finally, I’m wondering if you could talk a little bit about the market overall. It’s obviously very healthy, the craft market. If you have any better read on this -- I mean my sense is, it’s about 8% of volume and 16% of sales in the category. I think it’s growing double-digit, you’ve lost some share because of all the new entrants. But are there any sort of big picture commentaries you can add to and where do you think this might go? Jim, it would be really interesting to hear your thoughts on how big craft could be in your mind.

I think right now we and most of the craft brewers are very optimistic about multiple years of double-digit growth. As you point out, Caroline, it’s only 8% of the market now and I think most of us are optimistic that it could double over some reasonable period of time. So I’m seeing very good future for those of us who are already in. At some point it would be tougher for new entrants. There are probably, I'm just going to guess, maybe 700 new craft brewers who will start up this year. It’s hard to know because there are so many that even the Brewers Association is having trouble tracking them and keeping count. And along with that phenomenon is just drinkers becoming much more eclectic and drinking across categories. As you know we’ve been involved with cider for almost 20 years and that has popped in the last few years. So there is also going to be over the next five or 10 years other opportunities for all brewers, big and small, to innovate and engage drinkers in ways that aren't obvious now.

I think Dare I sneak in one just about your Concrete and your Angel City, just any updates on that would be really helpful. Is it in the marketplace, how they’re doing?

Not really that much to report. Concrete Beach has launched in package in the last few weeks. But at some point maybe it will be meaningful for our result. But right now these are -- basically it’s an incubator and quite tiny. They don’t really move the needle at this point. They’re part of our long-term perspective that things take years, sometimes even as we know with Angry Orchard, decades before they give meaningful results. So I can’t tell you that we’re going to see meaningful numbers from the next quarter.

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

Martin, I just wanted to go back to your comment about some of the timing issues in the third quarter that sounds like it's maybe getting pushed out into the fourth quarter from an expense perspective. So, I guess your guidance for advertising, promo and selling expenses, the investments around those expenses for the full year I think is still 37 million to 45 million increase. Can you tell us how much you've incurred so far through nine months?

So, in terms of the advertising, promotion and selling expense, we have transportation included in that number. And I don't have the breakout just in front of me in terms of what transportation is in that number. But, if you look at it, you could see for the first nine months of the year or first 39 weeks that it's up approximately $42 million, but that includes any increase in the transportation. I think Martin indicated that we've been challenged on transportation both from a cost perspective this year and obviously it's up because of our growth.

So just in terms of the timing of some of the expenses that is going to hit the fourth quarter, is there any quantification of how much shifted from third to fourth quarter?

No, we don't have a quantification to share with you.

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

So one quick question I want to go over with just thoughts on IPAs and I wanted to get a sense of the growth and the strength that's there and maybe get a sense of -- does it make sense for that category to be something that ends up growing as a percentage of the overall business going forward?

Well it's certainly providing a lot of energy and growth for craft beer now as it moves to becoming the largest sort of style designation within craft beer and at this moment continues to gain share. I don't know how much longer that will be. Everybody's like asking what's the next IPA and it turns out the next IPA is just more IPA. We've obviously become a player in IPA with the success of Sam Adams Rebel IPA. It has been actually the largest most successful craft beer launch in history. So it's a category that we think will continue to grow and we're going to continue to support Rebel and look at some product line extensions off of Rebel within the IPA category because it is continuing to just sort of blossom and bloom with session IPAs, with double IPAs, so there is a lot of activity around the standard IPAs as well.

And one last follow-up there and more so on the straight advertising side, I guess. Are you getting a sense that is there a change as far as the kind of bang for your advertising buck that you're getting from the television advertising and how maybe that looks compared to a year ago? Because we are certainly used to seeing your commercials, especially on sporting events and things like that, I was wondering if from a pricing standpoint that you're seeing what type of difference there may be this year versus last.

Measuring the effectiveness of advertising is incredibly hard. It's a lesser variable to pricing, to sales force activity, to retail activation. So I don't think we have a sense that the advertising effectiveness has changed year-on-year. And certainly with the noise in the measurement of effectiveness, I don't think we have any conclusion that our advertising is changing effectiveness. We continue a strategy of buying for media which has been pretty consistent since about 2005 that for us has been pretty effective as measured in total company growth. So we're pretty happy with our approach to media. And when we have media that we like and that we believe tests well, then we're willing to increase the spend.

Yeah, I'm not sure if I've ever come across anybody who has been able to actually quantify the effects of their advertising and that goes over quite some time. But as far as maybe the CPMs that you are paying now versus last year, do you see any major difference or is it sort of similar to what we've seen with the spot market and that type of thing?

We're mostly in the upfront and so whatever the reported upfront increase is...

It's pretty similar.

Is the sort of stuff we're seeing.

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

Just a follow-up on on-premise versus off-premises and what you’re seeing there in terms of the trend differences?

We’re actually very happy with both and frankly we aren't really seeing too much difference in trend. Obviously the publicly available information in the on-premise is somewhat limited there being no currently data available like IRI and Nielsen with broad coverage. But we’re pretty happy. We’re obviously, as I mentioned, strategically our sales force is focused on retail execution and we drove both seasonal handles, lager handles around our 30th anniversary and Rebel handles and Angry Orchard handles throughout the year. So we’re happy and I think we’re seeing pretty similar trends on and off-premise.

Also the big brewers, you did allude to the fact they're each very dedicated to growing across business. Have you got any sense of what the consumer knows about which brands are coming from big brewers versus not and whether they're actually competitive in what they’re up to?

My sense is they're quite competitive. This is a growing and an important part of the business and they participate in it through their domestic specialty brands that are quite successful like Blue Moon and Leinenkugel and Shock Top and Goose Island. So I guess we view them as a permanent fixture of the beer landscape and they, I think, will continue to step up their efforts, but you’d have to ask them more specifics.

I was also wondering whether lower fuel prices are of any help on the transport side which you said has been some cost pressure?

We hope so.

Yeah, we hope so. But the availability and the driver hours seems to be a much bigger inflationary factor right now.

Thank you. And I’m showing no further questions at this time. Ladies and gentleman, thank you for participating in today’s conference. This does conclude today’s program. You may all disconnect. Have a great day, everyone.

Thank you.