Good day, ladies and gentlemen, and welcome to the Boston Beer Company's third quarter 2015 earnings conference call. [Operator Instructions] I would now like to introduce your host for today's conference, Founder and Brewer, Mr. Jim Koch. Please go ahead, sir.

Thank you, good afternoon and welcome. This is Jim Koch, Founder and Chairman, and I'm pleased to be here to kick off the 2015 third quarter earnings call for the Boston Beer Company. Joining on 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 third quarter as well as a review of our outlook for the remainder of 2015, and our initial outlook for 2016. Immediately following Bill's comments, we'll open up the line for questions. Our total company depletions trend of 6% in the third quarter of 2015 matched our year-to-date trends, but represents a slowing from our expectations, primarily as a result of weakness in our Sam Adams brand, due to increased competition, and a slowing in the Cider category. While our total growth is testament to our strategy of a diversified brand portfolio, our Sam Adams trends appear to represent a very competitive craft beer category, where drinkers are seeing greatly increased choices and established brands are impacted. We believe that quality, freshness, innovation and variety will be the basic requirements for success in this environment. During the fourth quarter, we expect to introduce new styles to the Samuel Adams Rebel IPA family, including the National Draft launch of Rebel Grapefruit, a grapefruit IPA featuring Mosaic hops; and the introduction of Rebel Raw, an unfiltered double IPA that will be available on a very limited basis, at only in 16-ounce cans with a 35-day freshness coding. We're energized by the challenges and excited by the planned introduction of our Samuel Adams nitro series in the first quarter of 2016. We remain confident about the long-term outlook for the craft category at our Samuel Adams brands. I will now pass over to Martin, who will sound a little different because he's calling from somewhere in LaGuardia, for a more detailed overview of our business.

Thank you, Jim. Greetings from New York. 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 alike 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 benefited from strength in our Coney Island, Twisted Tea, Traveler and Angry Orchard brands, that offset a decline in some of our Samuel Adams styles. This decline, particularly in our Samuel Adams seasonal beers and Boston Lager is due to increased competition, most notably in off premise sales, where the drinker sees more choices, and we believe our share of displays and features has been impacted. We are working hard to improve the Samuel Adams brand trends and have plans to introduce new beers and a new advertising message supporting beer education. During the third quarter, we completed our national rollout of our Coney Island Hard Root Beer, which was well-supported by distributors, retailers and drinkers. The Hard Root Beer category is early in its development and it is unclear how it will develop long term, as innovation and new competitors emerge. During the third quarter, we also saw a slowing of the cider category, but believe Angry Orchard maintain its share even as competitors continue to enter…

Thank you, Jim and Martin. Good afternoon, everyone. We reported net income of $38.6 million or $2.85 per diluted share for the third quarter, representing an increase of $0.06 per diluted share from the same period last year. This increase was primarily due to increased net revenue, increased gross margin and a lower income tax rate, partially offset by increases in advertising, promotion and selling expenses. Net revenue for the third quarter was $293.1 million, a 9% increase compared to the same period last year, mainly due to core shipment growth and increased revenue per barrel due to product mix. Core shipment volume was approximately1.3 million barrels, a 4% increase compared to the third quarter of 2014. Our third quarter 2015 gross margin increased to 53.6% compared to 53% in the third quarter of 2014. This is primarily due to price increases and lower ingredient costs that were partially offset by product mix effects. Third quarter advertising, promotion and selling expenses were $13.2 million higher than costs incurred in the third quarter of 2014. The increase was primarily a result of increased investment in media advertising, increased salary and benefit expenses, increased local marketing and point of sale, and increased freight to distributors due to higher volumes. General and administrative costs were $2 million higher than cost incurred in the third quarter of 2014, primarily due to increases in salary and benefit expenses and facilities and consulting cost. Our income tax rate decreased to 36% from 37.1% in the third quarter of 2014. The 2015 rate decrease was primarily the result of an increased Federal manufacturing deduction and lower state tax rates. Impairment of assets was $1.4 million lower than was incurred in the third quarter of 2014, primarily due to the write-down in 2014 of certain Pennsylvania Brewery assets.…

Our first question comes from the line of Vivien Azer with Cowen and Company.

So I am struggling a little bit with the depletion outlook for 2015. Just given that we're nine months through the year, I am having a very hard time understanding how we get to the 3% to 6% for the full year, in particular as you're cycling a fairly easy comparison from the fourth quarter of 2014. So any help you can offer there would be great?

Vivien, as we look at the outlook, we are looking at sort of most recent trends and projecting that out over the next eight to 10 weeks. I think we've seen, and I think you've probably seen too, on the public IRI Nielsen data, the weakening in the cider category. And while we think it's sort of structural issues related to share of ads, displays, features and sort of focus from everybody, given other things that have exploded into the space, including root beer, and then a whole bunch of sort of full seasonal beers, we're looking at that and going how do we project that forward. I think the third quarter benefited as we've indicated from our launch of Coney Island Hard Root Beer, that category certainly also exploded onto the scene over the summer, and we were in a position to take advantage of that, which was obviously helpful to our numbers. But it's a little unclear, the seasonality of that and exactly how that's going to behave in the fourth quarter. So I think you're seeing combinations of those two things causing us to be a little cautious as we look at Q4.

Can you quantify how much of a lift the shipments of Coney Island were to your shipments in the third quarter?

I think as according to our historical practice, we're uncomfortable breaking out shipments by brand, and the best place to look is at the publicly available IRI Nielsen numbers to sort of try and assess that.

But then if I think about the fourth quarter, if you shipped all of this Coney Island, I guess the initial features in retail would be an outside lift, but I would think that you're going to replenish some of that stock in the fourth quarter, and given how meaningful of a contribution it was in the syndicated data, I guess I'm a still little bit surprised by the guidance?

Sure. I think one of the things that happened on the root beer side was there was an under appreciation for drink in demand for what they were willing to pour, and therefore there were across the category from the two suppliers, ourselves, and Not Your Father's out of stocks in July and August, I think everyone reacted to that and loaded up, and I think you do have some inventory build that's happened both at retail and at wholesale. I also think if you look at the actual sort of IRI Nielsen numbers, just the weekly sales rate has fallen significantly from its peak period in August and September, and so that's you'll draw a conclusion maybe there is some seasonality, maybe there has been some trial, maybe there has been some stock-up in people's home refrigerators, and at this point in time while the demand is steady, it's not at the level it was in August, and in reaction to the August peaks, or early September peaks, wholesalers and retailers sort of loaded up. So there is some correction there. I don't think our shipments and depletions are that far out of line. I think my answer to you on the depletions guidance is more a function of us looking at the depletions rate, which is closer to the IRI rate than anything else, and thinking that hard root beer maybe had either a strong summer seasonal impact or a strong launch early of adoption trial impact, so everyone else is settling down to maybe more sustainable numbers.

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

With respect to the guidance, and everyone can appreciate the difficult environment now at this point, but I guess, was there any thought to hold off on providing your initial outlook for fiscal 2016, some of the shortfalls this year, and again understanding it's been a difficult environment, but three guide downs in four quarters. So I guess that being number one, just sort of visibility on the business, and thoughts around the guidance? Then number two, sort of related to that, it sounds like you have some good innovation coming out. What sort of visibility on the contribution from that, particularly with respect to the Rebel family?

Sure. I think we felt it important to sort of stick with our regular cadence to give you our best sense of the business, and as with any guidance, it' sour best sense of the business at the time that it's given. I think as we look at next year and based on what we experienced this summer, we think we have some opportunity for volume lift from the Coney Island family, and also our other A&S brands, and also from Twisted Tea, I think on Sam Adams and Angry Orchard it is a little less clear. We certainly think we can sort of stabilize the Sam Adams trends with the innovation plan that we have for Q1, and we're putting a lot of effort right now into communicating that to wholesaler and retailers and are receiving positive responses to those initiatives. The cider trends sort of for next year are obviously much harder to predict, and it's probably, a guess at this point in time. I think we just decided that it was appropriate to provide some guidance. We also have the extra week next year, and that's our best guess right now on what we'll probably do financial, or frankly, are doing financial planning around, but obviously as trends develop, and as we talk to you again in February, we'll have a much better feel for it. And I do think there seems to be an industry that's got some, I don't know, whether transitions or flux, or just some curve balls going around, pointing to the slowdown in cider for instance, or slowdown in fall beers, like our October fest. There's just some undercurrent there that we don't fully have a grasp on, and therefore are hard to predict. So I would say the guidance number is…

Just to be clear, I'm not sure if you can comment on this or not, but the depletion outlook for fiscal '16, does that include total Samuel Adams family flat depletion growth?

Yes, I don't think I should comment on that, other than that we would be disappointed if that wasn't accomplished.

And one last one from me, and then I'll pass it on. The share buyback, I guess, encouraging to see you guys out in the market and buying back at a pace accelerated to what you've done historically. Can you comment on uses of cash used on the stock at this level, and whether we should anticipate similar levels of buyback in Q4 and the next year?

I think what I would say is that historically we have chosen to buy back when we felt that it was a better use of our cash, and we're sort of cycling on our capital plans, and our comments on capacity that we don't expect capacity to be a major use of cash in the next 12 months, and obviously we have a healthy cash balance and a healthy cash generation capability. And I think I would then point you to our past practice, but when that's been the case, we have used it to buyback, without committing to what might happen in the future, of course.

Our next question is from the line of Judy Hong with Goldman Sachs.

I wanted to ask a little bit more about the Cider category, and obviously we've seen the slowdown in the category, and that now the Angry Orchard itself is slowing down as well. It sounds like you're talking more about some of the short-term disruptions, and you still seem to be positive about the long-term category potential. So what gives you the confidence that the long term trajectory is actually pretty constructive from a cider category perspective, and we don't continue to see sort of this multiyear decline for the category itself, and then Angry Orchard continuing to be pressured?

Sure. When we do drink research, we get very positive feedback on the aggregates of cider. The refreshment of the sort of all natural element of it, the gluten-free element of it, and sort of associations with the farm or orchard that cider brings, so the cider as a category has these very positive associations, which frankly seem to link pretty well to some of the other things going on in people's consumption patterns about natural, gluten-free, and things like that. I think as we look forward, one, I would note that cider is probably 1% of the beer business in the U.S. right now, and either depending on the data you look like other very developed cider markets are anywhere from 5% of beer to10% of beer, so those are markets perhaps that have had a longer history of cider, but that would suggest that there's a good pathway there in the U.S. at least to get beyond 1% of beer. I think, two, the category has been through this incredible explosion, and maybe we're just seeing a little bit of the trial rejecter sort of walking away, and we don't really have a good data on that to suggest that that's true, but that's certainly possible. And then the other thing would seem to be that ciders are a sweet, the U.S. palate is sweeter than perhaps some of the international palates. And certainly the other things that exploded this summer in the root beer space are also very sweet, so we think that there's something to play there, but again it's hard to tell, and we haven't got firm data from shopper studies or anything like that, to say that's real, but those seem to be us to be reasonable causes. So we think with the number one brand, and the market share that we have, we have a responsibility to educate people on cider. There's certainly some drinker confusion as to cider versus, for instance, Redd's Apple Ale. And we think there's opportunities there to educate people what is gluten-free and what actually has fermented apples. So if you were to think about all of the apple flavored alcoholic beer-like drinks that are out there, then you would actually get to a category that's already at 1.5% of beer, and I think it's up to us as grand stewards and communicators, to make sure that our drinkers have the opportunity to drink fermented apples, rather than apple flavored malt beverages.

Judy, I might also add that our long-term confidence in the continued growth of the cider category is consistent with what we see from drinkers who are continuing to look for variety. They are continuing to broaden their preferences and the products that are in their consideration set. Generally, they are looking for things that have authenticity, that are natural, that might each have elements of something wholesome like an orchard, and also are refreshing to drink. So when you roll all of those things up, we continue to have confidence that long-term the cider category will be bigger than it is today.

If I can just follow-up, so when you kind of look at the interactions, and kind of what consumers are drinking, is there direct correlation between cider is slowing down and that the explosive growth in root beer? And then if you think about then a lot more innovations coming into that space from you guys and from others in the marketplace, how are you able to even maintain the shelf space on Angry Orchard?

Well, a couple of things. What you're seeing is this continued drinker journey for more and more different alcoholic beverages, much the same way that you've seen in the last 20 years, in how they drink non-alcoholic beverages with new categories emerging and growing. And second, Angry Orchard has in our NIR data has almost 60% of the volume in the cider category, but it doesn't have 60% of the space on the shelf. Our belief is as if there is contraction in the category, it is probably more likely to come from some of the weaker brands that have gotten shelf space as cider exploded, and that eventually retailers will kind of set their shelves with a space to sales ratio.

I guess my last question is just in terms of pricing and gross margins. So if I look at some of the recent data, it does seem like your newer innovations, like the root beer and the Rebel lines are higher priced than the core beer product. So just maybe a little bit more color, in terms of as you think about the innovation for next year, are you looking to actually see some mix improvement on those innovations, and how does that kind of impact your gross margin outlook for 2016?

Yes, great question. I think we're trying to enhance our margins in the innovation front, obviously the sort of hard soda line, there's a higher price point than established, and we're hopeful it stays, but the competitive activity might move it. Our plan is to try and stay in that higher price point, higher quality, sort of image perspective position. And from that perspective, I think our gross margins have improved a little bit, but the dollars per case have improved slightly more. And as we look at the other stuff that we're doing on the Nitro and the Rebel front, again we have a higher price point per ounce, and some slight margin improvement on a percentage basis, but we think based on what we think our costs are going to be, and obviously we're not in full scale production yet, we think our dollar per case might improve.

Our next question is from the line of Caroline Levy with CLSA.

Just on your pricing guidance of this year of 1% to 2%, you're running well above that. Does that imply you think you won't get that sort of 1% to 2% in the fourth quarter?

Bill, can you handle that?

No, I think we are running close to the 1% to 2% right now, and we have through the year, and we're expecting that to be the rate through the remainder of the year, Caroline.

And then on Sam Adams, this is really a question I think for Jim and for all of you, but I thought you were doing some new packaging. How do you think you can break through? Nitro is obviously a start, but there is no denying that there seems to be more and more beer companies opening up every year, it just doesn't seem to be getting any better, so is there anything that would give you confidence that you really can stem the declines next year?

What we're looking at is a category that is very driven by at this point, new, interesting; drinkers are exploring it. They are quite promiscuous. So what we think is the right response to that is to continue to bring meaningful innovation to the category. Things like Sam Adams, Nitro, which will be in widget can. It is a very different flavor experience. We're basically replacing carbonation with nitrogenation. As we saw last year with Rebel, that cast a halo over the rest of the Sam Adams brand. So I think for us, part of what enables us to breakthrough is to continue to bring innovation that actually has something new that is not duplicative of what is already out there.

And so Nitro itself, you think will be more of a niche product, and then it's more around the halo, and it will be more on premise, or will you sell it in large format as well?

It will primarily be off-premise with multiple styles of beer that are presented, nitrogenated rather than carbonated, and then we will probably have one lead style, which will be on draft, and our principle push for on-premise distribution.

I think I heard you say that off-premise competition was more intense than on-premise last quarter, is that true?

That's right. Particularly competition for ads, display space, shelf space, but both of them are quite competitive. Just the number of craft brands available on draft continues to grow, probably double digits every year. Similarly, the number of craft brands that show up in our IRI numbers, and show up on retailers shelves is also growing double digits. So when you actually look at the numbers, you basically find that even though craft is growing in a quite, almost explosive manner, the average craft brewer is getting smaller, and the average sales per draft line or per SKU on the shelf are going down, because the number of draft lines out there keep going up, and the number of SKUs on the shelf keeps going up.

The data we have seen suggests that your actual sales trends were worse on-premise than off-premise, is that wrong?

We don't have really great on premise data. It is getting better, but at least what we have available to us, and I think to the industry is still developing, and is not nearly as stable and mature as you get from IRI and Nielsen. It's a much smaller universe, and it's getting better rapidly, but it's not at the level of accuracy that the off-premise data is.

I have a couple of quick ones, and thank you very much for the guidance, because while it may be imperfect, I definitely appreciate that you give us your best effort on 2016, so I hope you will continue to do that. Does the extra week affect depletions or just shipments in terms of your guidance? And finally, what gives you margin confidence in some improvement next year?

Bill.

The extra week, the way we look at our depletions, we look at it on a comparable 52-week basis right now, so next year we'll be looking at 53 versus 52 for both shipments and depletions, I think. And I say, I think, because I want to check with our Chief Accounting Officer in terms of how we are exactly going to handle that. But shipments for sure will be 53 versus 52.

I think the numbers we've provided are 53 week over 52 week guidance. On the gross margin side, I think we remain positive about pricing in the category. I think craft drinkers are showing willingness to pay more for our alcohol or flavor. And some of our innovation -- and certainly on the Sam Adams side is going after that and we're hopeful that will maintain the margins, even given the competitive pressures.

Thank you. That concludes our Q&A session for today. I'd like to turn the call back over to the presenters for any closing remarks. End of Q&A

Thank you everybody. And we'll see you at full-year. Thank you.

Yes, thank you, everyone.