Good day, ladies and gentlemen. And welcome to the Boston Beer Company Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will 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 like to introduce your host for today’s conference, Jim Koch, Founder and Chairman. Sir, you may begin.

Thank you. Good afternoon and welcome. This is Jim Koch, Founder and Chairman, and I am pleased to be here to kick off the 2018 third quarter earnings call for the Boston Beer Company. Joining the call from Boston Beer are Dave Burwick, our CEO; and Frank Smalla, our CFO. I will begin my remarks this afternoon with a few introductory comments including some highlights of our results. Then hand it over to Dave, who will provide an overview of our business. Dave will then turn the call over to Frank, who will focus on the financial details for the third quarter, as well as a review of our outlook for the remainder of 2018, and our initial outlook for 2019. Immediately following Frank’s comments, we will open up the line for questions. Our depletions growth increased to 18% in the third quarter from 12% in the second quarter and 8% in the first quarter. We believe that the acceleration in our depletions growth is attributable to our key innovations, our quality and our strong brands, as well as sales execution and support from our distributors. During the quarter, we introduced a new Samuel Adams advertising campaign and continued to work hard on our Samuel Adams brand messaging, which communicates the artisanal care in the brewing of Sam Adams Boston Lager. We plan to invest in this campaign in the coming months with the goal of improving trends and eventually returning Samuel Adams back to growth. We remain positive about the future of craft beer and are happy that our diversified brand portfolio continues to fuel double-digit growth. We are confident in our ability to innovate and build strong brands and we are planning to launch new brands in 2019 to complement our current portfolio and help support our mission of a long-term profitable growth. I will now pass over to Dave for a more detailed overview of our business.

Thanks, Jim. Good afternoon, everyone. Let me start with the usual disclaimer. As we stated in our earnings release, some of the information we discuss and that may come up on this call reflect the company’s or management’s expectations or predictions of the future. Such predictions are forward-looking statements. It’s important to note that the company’s actual results could differ materially from those projected in these 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. The company does not undertake to publicly update forward-looking statements whether as a result of new information, future events or otherwise. Okay. Now that’s out of the way, let me share a deeper look at our business results. Our depletions growth in the third quarter was a result of increases in our Truly Spiked & Sparkling, our Twisted Tea and our Angry Orchard brands that were only partially offset by decreases in our Samuel Adams brand. I’d like to note however that the Sam Adams Seasonals program has returned to growth this year. Meanwhile, Truly continues to grow beyond our expectations and is well-positioned as a leader in emerging segment of Hard Seltzer. Twisted Tea is growing both distribution and velocity, while generating consistent double-digit volume growth, as new entrants have been introduced and competition has increased. Angry Orchard’s growth is led by Angry Orchard Rosé, which was introduced in early 2018. We believe that both Truly and Angry Orchard Rosé are attracting new drinkers to their categories from wine and spirits. Our plans for 2019 include investments in our new Samuel Adams advertising campaign and the second year of our successful 2018 innovations, which include Angry Orchard Rosé, Truly Berry Variety pack, Truly Wild Berry,…

Thank you, Jim and Dave. Good afternoon, everyone. For the third quarter, we reported net income of $38 million or $3.21 per diluted share, representing an increase of $4.3 million or $0.43 per diluted share from the same period last year. This increase was primarily due to increases in net revenue and low income taxes that were partially offset by increased advertising, promotional and selling expenses, and lower gross margins. The lower income taxes related to the Tax Cuts and Jobs Act of 2017 include a favorable one-time impact of $0.38 per diluted share. Shipment volume was approximately 1.3 million barrels, a 23.5% increase compared to the third quarter of 2017. Shipments for the quarter increased at a higher rate than depletions and resulted in higher distributor inventory as of September 29, 2018, when compared to September 30, 2017. We believe distributed inventory as of September 29, 2018, was at an appropriate level based on inventory requirements to support forecast of growth of existing brands and new innovations. Inventory at distributors participating in the Freshest Beer program as of September 29, 2018, increased slightly in terms of days of inventory on-hand when compared to September 30, 2017. Approximately 77% of all volume is on the Freshest Beer program. Our third quarter 2018 gross margin of 51.2%, decreased from the 53.2% margin realized in the third quarter of last year, primarily as a result of higher processing cost due to increased production at third-party breweries, higher temporary labor at company owned breweries and higher packaging costs, partially offset by price increases, cost saving initiatives at company owned breweries and lower excise taxes. Third quarter advertising, promotional and selling expenses increased $24.1 million, compared to the third quarter of 2017, primarily due to increased plant investments and media advertising, and local marketing,…

Thank you. [Operator Instructions] And our first question comes from the line of Amit Sharma with BMO Capital Markets. Your line is now open.

Hi. Good afternoon, everyone.

Good afternoon, Amit.

Good afternoon.

Frank, can you give us an estimate for the freight inflation for this year and then how much should we expect for 2019?

So freight if you look at the cost in Q3 we include freight in the advertising promotion and selling expenses, which is $24 million. Out of that about 30% is freight and…

Okay.

… 70% is selling and year-to-date that ratio is slightly different, freight is on the year-to-date is about 26%. We project that to continue. So the increases that we have seen in this year we expect to continue and also go into the next year.

Got it. And then, the over shipment in this quarter, is there a way to quantify the impact of that on your operating profits or EPS?

No. I think, I mean, we have given you the different growth rates, I think, if you put that into your model, you are taken average rate, you can see that. But if you look at the total year, I think, it’s important to note that Q3 we have shipped more than what we have depleted. But it’s also result that the wholesaler inventories during the summer were significantly below target level. So part of there is a catch-up, part of it is also reflective of the increased distribution of our innovation. So if you look at the overall inventories that we have at wholesalers we are pretty happy with where we are and there is not much different from where we have been in the past.

Got it. And then I appreciate early look on 2019, if we look at the depletion outlook versus what year-to-date is a bit of a deceleration there. Jim, can you walk us through like where do you see some of the trends slowdown from what we have seen this year?

Sure. Well, we can start with something like truly Hard Seltzer. So the trends on that are very, very strong and if you look at IRI they are approaching a business that is close to tripling. So we don’t expect that same rate of growth as the category stately matures a little bit. There are a bunch of new competitors coming in, everybody’s throwing something at the Hard Seltzer category even though probably 75% of the volume at IRI is between the two leaders us and White Claw. We had a very successful year with Twisted Tea again. I think IRI numbers are on the order of 20% as we continue to gain distribution, while sales per pointer going up. So that continues to grow on a modest base, but we think there will be some slowdown in the rate of new distribution that we anticipate, a fair bit of new distribution. We are also looking at very, very successful innovation in Angry Orchard Rose, depending on what numbers you look at, but it’s definitely in the top like three new SKUs in the entire category and that’s widely distributed at this point. So we think there’s going to be continued growth in that. But it’s not going to be the rocket shift from nothing to on its own, it would be the number of two hard cider in the United States. So we see some slowdown in the first year innovations, some of the same story with Sam ‘76. So this was a year where we just hit home runs with new products and we don’t think we can continue to hit home runs of that magnitude in the 2019, that we would be quite happy if that happened again. Does that help?

Yes. Absolutely. Very helpful. Just one last one for me, so we did a survey of cannabis users in many states where it’s legal and one of the findings was a fairly high correlation between cannabis users and craft drinkers. Now are you -- like does your work show that correlation and if, yes, does that push you to maybe have more innovation that satisfies that users?

Well, I certainly don’t have a lot of expertise in predicting the future of cannabis consumption. I would observe that just on a observational basis the states that legalized cannabis first like Colorado, Washington State. They really doesn’t show up any real correlation with legalization and any slowdown in craft beer trends and they almost appeared independently. So not really sure what’s going on. I do know that before cannabis was legalized in Colorado, people actually could get weed there. So some of what’s happening is just a change in the distribution channel. So far I think craft brewers would say we haven’t seen a noticeable impact of legalization on craft beer consumption. We just we don’t know are they not substituting cannabis for craft beer. I don’t know when they are getting high, do they drink more craft beer. Don’t know. But the raw data doesn’t really show much of an impact at this point.

Got it. Really, really, helpful. Thanks so much.

Thank you. And our next question comes from the line of Caroline Levy with Macquarie Capital. Your line is open.

Thank you so much.

Hi, Caroline.

Hi and congratulations on a great quarter and year. Just if you could comment a little further on salaries and benefits, we appreciate you breaking out a little bit on the freight side, but what are the drivers of that and just help us out on that?

So when you are referring to G&A that is pretty much in line with what we have said at the beginning of the year. So we are in line with our original guidance that we have built into the plan. And a big chunk of that on the G&A side is and in addition to inflation is really to phasing impact related to the CEO transition, where we didn’t book variable compensation for a year essentially and that’s what this is reflecting.

So will that continue for a while, that CEO phasing?

No. I think, at the end of the day we didn’t book cost for 2017, we had a lot of cost for 2017 and 2016, and now that we have a new CEO in place, we will have the full cost again.

Okay.

It will not continue to that extent, I think. So, normally we don’t give guidance on G&A. We broke it out for that specific reason, because that couldn’t, yeah, that was difficult to predict. For next year, I think, you can assume a normal growth rate for G&A, which is going to be a combination of inflation and topline growth.

Thank you. All right. So, then, also we are seeing great pickup in Seasonals, but could you talk about beer -- the rest of the beer portfolio. I know, Dave, when you joined as CEO, you really felt that you would be able to get that beer portfolio moving. So any comments would be helpful?

Sure. I think we are just coming off the Oktoberfest and heading into [inaudible], I think, Oktoberfest was significantly beyond our expectations. We expected to be down and we are up by about 4% or 5%. I think, the Oktoberfest phenomena, I think, is, probably, because we have a great beer that we -- and we have a lot less competition during this time period. And it really is a period that we can still as a brand make an impact and get a lot of consumers and it just kind of -- it really went very well for us this year we had some good activity with some customers on premise that also helped fuel it. If you look at the whole year, which is positive as well, Caroline, I think, part of it is, perhaps, a reflection of a year ago, where we had a bit of a pileup between spring and summer, and this year was a much smoother transition Cold Snap to Summer Ale, which combined performed better than a year ago, and then, I think, Oktoberfest just taken some of that momentum with it further. And what makes me happy about that is that, I think, it’s a great on ramp for the rest of the portfolio and we know that a lot of people come in and out of Seasonals year-to-year and it’s just a way to get more consumers trying our beers, and hopefully, that would then lead to them consuming other parts of the portfolio.

Okay. That’s helpful and thank you. Frank, you said that ANM would still be up by the same amount that you’d originally forecasted, therefore it will be down quite substantially in the fourth quarter, is that right?

That is correct, yes.

Okay.

And that is really needed. I think we have highlighted that every single quarter that the phasing this year will be significantly different from last year. Last year we spent more than a third in the fourth quarter, even though it’s a relatively small quarter compared to Q2 and Q3. This year we are much more spending upfront based on beta programs as well.

Right. This is a little out my expertise, but Red Sox being in the playoffs. How are you parlaying that to try and grow your business, what are you doing with that franchise?

Yeah. We have been working with Red Sox really since opening day and really using that to help to drive the business throughout New England, of course. And we have done everything from on pack, graphics and connecting to the brand to really putting a lot of new products like New England IPA and Sam 76 through Fenway Park to get trial, and the local distributors have done a lot as well to parlay with the Red Sox. I think like always, it’s been going all year long. There’s been some different advertising, digital, social media, all the rest. We have done everything we can to take advantage of the partnership. They are a great partner of ours and it’s a great partnership with two local fans and we are --we haven’t fully accounted for what it means for the broader New England market for the year. We do want to do that to understand what impact it had. But we feel that it’s definitely created a lot of energy and excitement, locally it’s helped us connect -- reconnect with consumers as well, and I think, importantly, we get some good learning by seeing what people are buying at Fenway and understanding what the potential is for some of our, in particular some of our new products like the two I mentioned.

Thank you very much. And I have one last one which is you got a big uptick coming in CapEx and I am just wondering on the innovation side, if there’s another platform that you are exploring in the way that Truly has become a new platform?

Another platform, so…

Yeah.

As what Jim said, like, obviously, we -- I think we beat the odds significantly this year from an innovation perspective. And the reason why we are not, we are looking at maybe different growth rates is because we are going to be lapping that, but we do, we certainly have a new innovation plan as well. And probably, not ready to talk about it in detail other than to say the innovation that we will launch in 2019 is really very much around health and wellness, and which is clearly a trend that’s gripping every, every food and beverage category, alcoholic and non-alcoholic. And we are very -- we are excited about what we are going to bring to the market that will address those needs and those interests from consumers.

So just…

Did I answered the question?

Yeah. I was linking back also to the capital investment.

Oh! Capital, sorry.

The capital investments that you are seeing and the significant increase.

Yeah. Yeah.

For 2019 is really related to the innovations in general and the capacity shortfall that we had this year, which is partly reflecting the gross margin, so it’s capacity and it’s capability. So we will increase capacity, but we would also put like more automation into our breweries.

Yeah. And one thing just really happy with what innovation has really brought, is this accelerated movement toward cans in the category, as well as especially slim cans and that that’s been an area that we know that we have to -- we had to address with capital going forward.

Thanks. That’s great. Thank you so much.

Caroline…

Yes. I would be remiss in responding to your question about the Red Sox partnership. It clearly has like most good partnerships gone both ways, because since the Red Sox put that same items signed that big beautiful glowing blue Sam Adams sign up in the right deal. They have had the best season in their history. They have vanquished the Yankees with ease and they are now up to nothing over the Dodgers and the World Series. So there’s clearly some good coming out of this.

Clearly. Clearly. Thank you so much for that important insight, Jim.

Thank you. [Operator Instructions] And our next question comes from the line of Nik Modi with RBC Capital Markets. Your line is now open.

Great. Good afternoon, everyone.

Hi.

The question I wanted to explore is as you think about your kind of preliminary 2019 depletions guidance, we are just hoping you can provide a little bit of context on, what some of the components are so we think about distribution, you think about just general improvements in market share slottings within the areas you are in already whether it be cider or whether seltzer area. Any thought around that would be really helpful. Because I guess if you kind of go back over the years and clearly this round of innovation has been lights out, and obviously, seems to be a lot more sustainable than maybe some prior innovations. Mainly because it’s sourcing from wine or spirit, but really just trying to get comfort around how you are thinking about it and what kind of visibility you have into some of those numbers?

Sure. This is Dave. I will take a shot. I think there are different ways to look at it. I would say, the one, the first, here’s some components to look at. One is just the base business. What can we do to drive that core business, which would be changed in the trajectory of Boston Lager and Seasonals in particular, so that’s one area that we look at based on some of the things that work at play right now. How can we get that business to a better place? Then you look at assuming the non-Sam businesses and Truly, Angry Orchard and Twisted Tea and we look at certainly what we can we -- and obviously, each of those brands has different ways to grow. For example, Twisted Tea still has a big. It has distribution opportunity and household penetration opportunity. We know the frequency is actually very high. So we have the individual printed on each of those core businesses that take into consideration what we need to grow. For the most part really it’s a penetration strategy. Then we look at importantly like the year two innovations, right. So we are calling our software innovation which would include some of the Truly SKUs like there is particularly the Truly Variety pack SKU, Sam ‘76, New England IPA. We want to make sure that we continue to invest appropriately to get more growth and help these brands reach their potential. And just as a quick sidebar on that you know New England IPA is the highest -- after six months has the highest repeat rate of any beer or cider or FMB that was introduced this year in the marketplace and Sam ‘76 is number two. So we think there’s a lot of potential there and so part of the plans are how far we go in year two. The next component would be, okay, let’s look at new innovation that we are going to layer on top of the core and year two innovation, and that’s kind of that’s just -- that’s a tougher one to guess, but we have several things that we are looking at for next year. As I mentioned the health and wellness space, and we can kind of add that to the waterfall, if you will and that’s sort of how we start, we start to build a volume plan for next year. Does that help?

Yeah. That’s definitely help. And I am just kind of like maybe you don’t want to disclose, which is fine, but I am just trying to get a sense like you think distribution will be like half of that growth. That’s what I am trying to get at.

Yeah. It’s just not that simple because the portfolio has become much more complex, honestly. And we have four brands with more on the way through innovation, each brand has its own and it varies by geography too, but generally each brand has its own way the way to grow.

Fair. Okay. That’s helpful. Thank you very much.

Sure.

Thank you. And our next question comes from the line of Judy Hong with Goldman Sachs. Your line is now open.

Hi, guys. This is Jack on for Judy. Congrats on a great quarter. I have just a couple of quick questions. First of all, I was wondering you gave some color on the timing of phasing out third-party manufacturing. Could you give us any sense of maybe the phasing on that or maybe what benefit you might see through the balance of the year?

So, we thought, we had a handle on that to be honest.

Okay.

It very much depends on the depletions growth, and as you have seen, we have exceeded our own expectations also after the Q2 call, where we had to raise our guidance, and we had to raise it further. So we thought we are going to have like in a second -- the end of Q3 and Q4, we would have significantly less third-party manufacturing as the volume keeps up, we will keep on utilizing that, that’s our flex, capacity that we have. So it’s really hard to predict. What I can tell you in part going back to the question on the capital. We are investing in capability and capacity, and also will increase our own efficiencies within the breweries, which will lead to more in-house production. Now depending on how the volumes are going for the rest of the year and also next year, third-party production will continue to be a significant part of our sourcing.

Okay. Great. Thank you. And then, going back to maybe some kind of high level breakdown of 2019 volumes, so maybe you can give a breakdown in terms of distribution or velocity, but could you maybe talk about what you would expect the drivers to be between kind of beer versus cider versus SMB, if we just put it in those three buckets?

Go ahead.

Yeah. I mean, I don’t know if we have actually put it in those buckets, I think, we are looking, I mean, obviously, beer is a challenge, so the question for beer is, how close could we get to zero or above zero, quite honestly, and this year it significantly below zero, notwithstanding, the grade overall of volume results. I think on the other categories, I mean, as Jim mentioned, in the Hard Seltzer category it tripled this year. The category we are thinking maybe it comes close to doubling next year, which I think is still a pretty good number and we make some assumptions based on maintaining or ideally growing our market share. We want to be number one in that category and so that’s obviously going to drive that Hard Seltzer category, which will drive a good piece of growth. But I think also tea, tea is -- if you are going to build a model, tea, we just want to put them, because it’s been growing pretty consistently in the mid to high teens every single year. And as I mentioned there’s still so much upside in this brand I have mentioned before from my Pepsi days you know Twisted Tea is sort of like what Mountain Dew was in the mid-90s in terms of the growth potential. There was sort of the low penetration, but high frequency, unique product, due to some of the demographics. So we expect tea to keep growing. And cider, Angry Orchard, again as Jim mentioned Rosé was just a -- it wasn’t a home run it was like a Grand Slam this year. Realistically, we can’t expect that. Nobody knows like Rosé will always be in the summer for sure and it’s going to be around. But we have to kind of moderate that thinking next year, but then also think about other ways to grow the trademark and we are going to continue to grow we are 60 share of cider. So we feel an obligation. We are going to grow the category and we think very, very healthy. So that was really specifically to answer the question, Jack, but I think gives you a sense of how we are looking at it. We are it’s about mitigating any kind of declines in beer while really capturing all the upside potential in the other categories.

All right. Thank you. That’s actually super helpful. And then if I can just get one more question in there, so you guys mentioned the percentage of, sorry, that the percentage of total SG&A that I am afraid represents has changed a little bit. Do you think that new percentage is going to be pretty consistent going forward or do you look for that to decrease or increase over the next, say, a year?

Well, the freight number in itself is a bit of a difficult number, because it has two components, it has a volume component, as our volume goes up nearly we have a higher freight rate, because you know every case carries freight. The other piece is the rate and the rate is the normal inflationary piece that everybody is experiencing and then we have a small component where we have lower truck utilization and because we couldn’t service really throughout the summer. We couldn’t service to the to the extent that we wanted to and we had more third-party production than we had originally looked at. But if you breakdown the Q3 freight that I mentioned about $7 million, if you do the math, 40% of that is volume related, 60% of that is freight related and I think that that is a fairly good assumption going forward.

And just as a follow up to that.

But [inaudible]

As a follow up to that, do you feel more confident in truck utilization going forward or you still think you might have similar issues as you are trying to right size your supply chain?

No. I think as we improving our supply chain and we get a better handle on the volume increases, the utilization will be one area of improvement very clearly.

Okay.

That goes in line with the capacity improvement and the efficiency improvement that we have in the pipeline for next year.

All right. Great. Thank you so much for all that.

All right.

And thank you. And our next question comes from the line of Laurent Grandet with Guggenheim Partners. Your line is now open.

Hi, everyone and congrats on the quarter. I mean not that many in beer companies are growing topline, I mean, double-digit these days.

Okay.

So my first question if I can, I mean, it’s a bit different from what Caroline ask actually, according to me in terms of several Seasonals have been improving sequentially I mean to now been almost flat or slightly growing in the last 12 weeks, while Boston Lager is still oscillating between minus 15 and minus 17. So what it is working for Seasonals that is not working for Boston Lager. Is it the packaging? Is it something else in the mix? So I’d like to understand that. So what are you learning about Seasonals that you could potentially replicate in Boston Lager. And if you see that if you can give us some more color here, I mean, by when I mean are you planning to do to implement, I mean, those actions?

Sure. I think, yeah, let me tackle that. This is Dave. I will turn out to be too competitive. But, I think, first of all, for Octoberfest, it’s just a great beer. Octoberfest kind of stands alone in my mind anyway. It’s a great beer and it comes at a time of the season when people are moving toward you may be more multiyear that’s hoppy beers and certainly a different a different style of beer. And the competition the competitive set is just not what it is in the summer where every single beer known to humankind competes for attention. So I think what Octoberfest has and during its time the Boston Lager doesn’t have is fewer other legitimate choices for consumers to make. I think that’s really what helps that brand. But, again, I think on the back end, the benefit we get is we bring people into the -- we can bring people into the franchise through Oktoberfest. I think the summer theme, beyond the summer theme was more of a reflection of year ago where we really just didn’t we didn’t have a good set up and started with spring. And this year we executed much better Cold Snap to summer ale to Oktoberfest, so now to Winter Lager. So I think the execution generally was better. I think from a Boston Lager perspective we just we kicked off a new brand campaign, which back Jim on camera, again, I think we found our voice. We have only been on air for about four weeks now. We are monitoring it closely and we will see if that has an impact. That’s one of the things. That alone is not going to restore Boston Lager to growth. We have other things planned for next year. I think…

All right. Thank you. And if I may add, I mean, if Sam Adam, if Sam ‘76 story and New England IPA, I mean, to sooner or extend, I mean, adding new, I mean younger consumers to the franchise and either way, I mean, you can leverage. I mean those new, I mean the new incoming consumers into, I mean, the larger, Boston or Sam Adams, I mean, franchise?

Yes. We see, actually, I just saw data recently of Sam ‘76. Sam ‘76 is bringing in -- it is bringing in younger consumers under 35, professional, males, multicultural. It’s actually it’s been a really good complement to Boston Lager. So we are seeing that happen. I haven’t seen data on New England IPA from a demographic perspective, but we do know that given the New England IPA is -- New England IPA style is extremely popular right now amongst sort of the beer cognoscenti if you will, which are really driven by young and millennial beer drinkers. I would imagine that New England IPA is helping us go younger too. I don’t have that data.

Well, thank you Dave, and again, congrats on this quarter.

Okay. Thank you.

Thank you.

Thank you. And I am not showing any further questions at this time. I would now like to hand the call back over to management for any closing remarks.

Okay.

Thanks to everybody and we will see you again next quarter.

Thank you.

Ladies…

Thanks very much.