Boston Beer Company Inc (SAM) 2007 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2007 Boston Beer Company earnings conference call.

My name is Stacy, and I will be your moderator for today. At this time, all participants are in a listen-only mode. (OPERATOR INSTRUCTIONS)

I would now like to turn the presentation over to your host for today, Mr. Jim Koch, Chairman and Founder. Please proceed.

Thank you, good afternoon, and welcome.

This is Jim Koch, and I'm pleased to be here to kick off the 2007 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'll begin my remarks this afternoon with a few comments on where we stand competitively, and then pass the microphone on to Martin who will provide an overview of our business. Martin will then turn the call over to Bill, who will provide financial details for the quarter, our outlook for 2007, as well as our initial outlook for 2008, and immediately following Bill's comments, we'll open the line up for questions.

We feel very positive about our third quarter depletions growth of 16% and the continuing strength of the craft beer category. This was our seventh consecutive quarter of double-digit increases. We believe these results are driven by drinkers trading up to our full-flavored craft beers, the strength of our Samuel Adams brand and our brand support, and increasing retailer and wholesaler support for the craft category and Samuel Adams. While the craft category continues to get more competitive, I believe that the variety and quality of the distinct beers that Samuel Adams brews positions us well to compete in this challenging market and the addition of the Lehigh, Pennsylvania brewery should provide us with the capacity and capability to meet this demand.

As previously reported, we entered into a contract of sale for the Lehigh Valley Brewery in Pennsylvania just outside of Philadelphia. We've completed our due diligence process and will proceed with the purchase of this historic award-winning brewery, where we brewed some of our beers from 1994 to 2001. We're excited to begin making the necessary improvements to upgrade the brewery and hope to begin brewing and bottling our brands during the summer of 2008.

I will now pass over to Martin for a more detailed overview of our results.

Thank you, Jim. Good afternoon, everyone.

As Jim noted, we are encouraged by the depletions growth achieved in the third quarter. Our third quarter depletions growth reflected double-digit growth in the Samuel Adams brand family and low single digit growth in the Twisted Tea brand family. Our Samuel Adams brand continued to benefit from increased drinker interest, increased retailer support, and the hard work of our wholesalers supporting our retail initiatives.

We believe that our Samuel Adams brand health is being helped by our significant investments in media, our sales force, point of sales materials, and promotions. We intend to continue this investment level in order to maintain our leading position.

As noted, the Twisted Tea brand family achieved low single-digit growth in the quarter. We expect the alcoholic tea category to remain very competitive, but we are encouraged by Twisted Tea's resiliency and we plan to continue to invest in the Twisted Tea brand to improve our position. The Samuel Adams depletions growth achieved in the third quarter of 2007 reflected growth of all of our major beer stops. We believe that our brand health has been positively impacted by the strength of the craft category, which continues to experience growth from increased drinker interest in better beer, more flavorful beers, and in variety.

The strength of the Samuel Adams brand family trends during the quarter suggest that Samuel Adams continues to maintain strong brand equity with drinkers. We believe that maintaining strong brand equity in the Samuel Adams' brand is vital to the continued health of our business, and we remained committed to investing behind it as the number one priority to ensure long-term success. We continue to test and evaluate our initiatives to determine their effectiveness and to identify the optimum level required to--the optimum investment required to generate sustainable volume growth.

During the third quarter, the Federal Alcohol and Tobacco Tax and Trade Bureau, TTB, performed a routine audit of our Cincinnati brewery. While we have not formally notified of the TTB's findings, the TTB has shared some initial analysis that leads us to anticipate that the TTB will dispute our regulatory and tax treatment of certain of our 2006 and 2007 Twisted Tea shipments. We believe that the TTB could assert that these shipments were not classified consistent with TTB regulations that took effect January 1, 2006. Based on our analysis to date, we believe that most of our Twisted Tea shipments were in compliance with the applicable regulations.

We expect to enter into discussions with the TTB regarding the differences and the methodologies used to ascertain regulatory compliance. It is not possible to determine the ultimate outcome of this issue at this time, but based on information available to us, we currently estimate that the likely range of potential expense at this time is between $3.9 million and $9.3 million, after considering amounts we have previously paid. Due to the early stage of this analysis, the ultimate outcome could materially differ from our estimate, as a result of information collected to date, and our assessment of likely outcomes, we have recorded a provision of $3.9 million in our September 29, 2007 financial statements, as a contingent liability for this matter.

During the third quarter, we modified our processes to ensure that Twisted Tea will satisfy both approaches to determining compliance with the regulations going forward. Twisted Tea shipments were only minimally interrupted during the quarter. Excluding the impact of the provision for excise taxes related to the TTB audit, net revenue per barrel for core products in the quarter increased by 4.8%, primarily due to price increases maintained from the first quarter and lower returns as compared to the same period of 2006, offset by a shift in package mix from cases to kegs.

During the third quarter of 2007, we saw a continuation of significant cost pressures predominantly unfavorable ingredients and packaging material costs, as well as unfavorable freight costs. Despite these cost pressures, we were able to increase our investment in advertising, selling and promotional support behind the brand and continue to invest in our organizational infrastructure. During the quarter, we continued to maintain a strong balance sheet, with adequate cash positions to support our business strategy.

As previously reported, the Company entered into a contract of sale to purchase from Diageo North America a brewery located in Lehigh Valley, Pennsylvania for $55 million. We have completed our due diligence process with respect to the Lehigh Valley, Pennsylvania brewery and have now paid into escrow a total deposit of $10 million. We expect to close on the purchase as scheduled in June 2008 barring any unforeseen circumstances.

Between now and the closing, we expect to make certain capital improvements necessary to restart the brew house and to upgrade other portions of the facility and we hope to have the brewery partially operational for our brands during the summer 2008. Based on our due diligence and continued growth we have increased our total capital plan for this brewery over the next few years. The current estimates are between $60 million and $110 million, in addition to the previously announced purchase price of $55 million. When such investment has been completed, we should be able to brew and package over 1.4 million barrels of beer per year, with potential for additional expansion.

We experienced some issues at our Cincinnati brewery during the summer due at least in part to the extensive demand of this facility created by our growth. During the third quarter, we shut the brewery down for preventative maintenance and process improvements, incurring some unplanned costs. We anticipate making further investments in Cincinnati brewery over the next three years to ensure a more reliable, efficient operation. Our shipments and orders in hand suggest that core shipments for the year ending December 29, 2007 could be up approximately 15% when compared to the same period in 2006. Actual shipments may differ, however, and no inferences should be drawn with respect to shipments in future periods.

October year to date depletions are estimated to be up approximately 17% over 2006. We believe this sets us up well to make our 2007 growth targets. While disappointed that our price increases in the first nine months have not fully covered our increased costs, we are pleased that our depletions have maintained their momentum post-price changes and believe that we are on track to implement net price increases of approximately 3% during 2007.

As a result of recording the provision for excise taxes, we have revised the range of our expected 2007 earnings. Our currently expected earnings range is $1.40 to $1.65 per diluted share, which takes into account the write-off of the capitalized Freetown brewery costs we took in the second quarter and the provision for excise taxes, but does not include any potential additional negative impacts that might result from the TTB order. Looking forward to 2008, we are facing significant cost pressures due to barley and hop markets taming which could impact cost of goods in 2008.

We're attempting to mitigate these increases, but given our crop ring roots and commitment to the highest quality traditional ingredients, we are likely to experience higher cost increases than the larger brewers with whom we compete. This coupled with continued increases in glass, freight and utilities costs and the cost of executing the Lehigh Valley, Pennsylvania brewery position will likely create some further gross margin erosion in 2008 from the underlying levels of this year.

Fortunately, we're experiencing a healthy price environment and have set targets for 2008 for the 5% net price improvement to partially cover these cost increases and to allow for continued brand investments. Of course, there is no guarantee that we'll be able to achieve these increases. The exact impact of all these factors on our 2008 earnings is difficult to estimate, but we recognize that earnings growth could be challenging in 2008 given the cost pressures, Lehigh startup costs and our commitment to continue to invest behind our brand at high levels. We expect to be able to make a better projection of the cost in earnings impact of all these factors when we announce our full 2007 year end results.

Now, Bill will provide the financial details.

Thank you, Jim, and Mark. Good afternoon, everyone.

The Boston Beer Company realized earnings of $0.21 per fully diluted share in the third quarter of 2007, a decrease of $0.20 per fully diluted share over the third quarter of 2006. This decrease is after taking into account the $3.9 million, or $0.18 net of tax per diluted share provision for excise taxes related to the TTB audit. The decrease in earnings is primarily a result of the provision for excise taxes, increases in cost of goods sold, selling and advertising expenses and general and administrative expenses, partially offset by an increase in net revenue and a decrease in income taxes.

For the third quarter of 2007, the Boston Beer recorded net revenue of $84.1 million, a 10.9% increase over the same period in 2006. This increase is primarily a result of the 11.2% increase in core brand shipment volume. The increase in shipment volume can be attributed primarily to increases in Samuel Adams Seasonals, Sam Adams Brew Masters Collection and Sam Adams Light. We believe that wholesale inventory levels at September 29, 2007 were at appropriate levels.

Our gross margin for the third quarter 2007 decreased to 51.2% from 57.3% in the third quarter last year, due primarily to the provision for excise taxes, higher packaging material and ingredients costs and the cost of the temporary shutdown of our Cincinnati brewery for maintenance during the third quarter. These costs were only partially offset by price increases, lower returns as compared to the same period of 2006, and a favorable shift in package mix. Most of the cost pressures on the package materials and ingredients are expected to continue during the remainder of the year.

Excluding the impact of the provision for excise taxes and the Cincinnati temporary shutdown, gross margin for the quarter was essentially in line with the first half reported gross margin results. Advertising, promotional and selling expenses increased by $3 million during the quarter as compared to the prior year, primarily due to increases in freight expenses, through wholesalers and advertising and promotional costs.

General and administrative costs increased by $1.2 million during the quarter as compared to the prior year, driven by salary and benefit cost. The effective tax rate for the third quarter decreased to 35.4% from the 2006 rate of 36.7%. This was primarily due to a true-up of state income taxes based upon a settlement of a state income tax audit.

During the three months ended September 29, 2007, the Company did not repurchase any of its Class A common stock. As Martin mentioned, we now expect 2007 earnings per diluted share to be between $1.40 and $1.65 after accounting for the asset write-off in the second quarter, the provision for excise taxes related to the TTB audit, and including expenses related to the purchase of the Lehigh Valley, Pennsylvania brewery, but absent any significant changes in current plan levels of brand support and not including any additional provisions related to the TTB audit.

Our ability to achieve this type of earnings growth in 2007 is dependent on our ability to achieve challenging targets for volume pricing and cost. In a revision to our previous estimate, we now estimate total capital expenditures in 2007 to be between $35 million and $48 million, primarily driven by the purchase and capital requirements of the Lehigh Valley, Pennsylvania brewery and the need to purchase additional kegs to support our draft business. Keg purchases are higher than planned due to faster volume growth rates, higher [cooperage] costs and the potentially higher keg losses.

This revised estimate also includes the purchase of the land in Freetown, Massachusetts completed in August. Additionally, required investments in the Cincinnati Brewery and investment of between $3 million and $5 million in the Latrobe Brewery to support the restarting of this historic brew house and the modifications to accommodate our beers.

Moving on to our initial outlook for 2008, we will be facing overall production cost increases of between 10% and 14% over the full year 2007. As previously mentioned by Martin, these increases will be driven primarily by barley and hops increases, freight cost, glass cost increases and the cost of executing the startup of the Lehigh Valley, Pennsylvania brewery. These cost increases will be somewhat offset by price increases, but we anticipate that the 2008 gross margin could be down 2 to 4 percentage points below full year 2007.

We continue to pursue cost saving initiatives and pricing opportunities and hope to preserve our economics to allow for continued support of our brands with appropriate investment in order to grow volumes and earnings. We currently estimate total capital expenditures for 2008 to be between $90 million and $130 million, most of which relates to investments in the Lehigh Valley, Pennsylvania brewery and includes the $45 million purchase price due under the related contract of sale in 2008. The wide range is indicative of the multi-year plan for the brewery and some uncertainty that we will complete all the anticipated projects in 2008. This amount is exclusive of any other major investment that result from the evaluation of long-term production strategies. Our investment would be significantly higher if other major brewing investment projects were initiated.

We'll now open up the call for questions.

(OPERATOR INSTRUCTIONS)

Your first question comes from the line of Andrew Sawyer with Goldman Sachs. Please proceed.

Hey, guys. I wonder if you could put some context around the brewery decision, and in particular, with the cogs increase next year of 10% to 14%, how much of that is tied to startup costs versus underlying increases, and taking a broader step back, as we think about this 150 million to--plus investment that you're going to put into this brewery and the cost increases we're seeing coming out of it, I guess how should we think about the returns on investment on that as we get into the out years and what sort of cost savings could ultimately come out of handling your own production?

Hey, Andrew, it's Martin.

I'm going to ask Bill to sort of talk to the extent we can on answering your questions about cost of goods, but let me start off by saying I think you know we've spent a number of years evaluating what the right--what we perceive the right long-term brewery strategy to be, and this is a combination of that, having evaluated ongoing contract relationships, constructing greenfield or purchasing an existing brewery, and I think this decision is indicative that we have concluded that this is the best one for the Company, the one that provides the best return to the Company from an ability to brew great beer, service our customers and also see financial returns, and we're obviously going to experience in this transition year, some costs that we perhaps wouldn't expect to be ongoing, such as startup costs that I think Bill alluded to in his comments.

So we're very excited about this move, we look forward to brewing at the brewery next summer, where where we brewed, as Jim mentioned for many years, in the '90s and brewed award winning beer, and anticipate launching on a multi-year capital plan to basically operate the facility and adapt it to our beers, and having addressed I think the first part of your question, I'm going to just pass over to Bill on the cost of goods questions that I maybe will have a comment on as well.

Yes, the cost of goods, a part of your question was Lehigh, and the efficiencies coming out of Lehigh. I think, Andrew, we took three months to do due diligence, have put together a capital plan. We're in the process of analyzing that and determining which projects have appropriate returns, and understanding better what the dynamics of that means on our cost situation in terms of efficiencies coming out of Lehigh. So we're really not at this point I would say in a position to comment further on that, since we're still in the investigation stage.

In terms of our cost of goods, malt-wise, barley and hop-wise, I think that you've seen the articles in the Wall Street Journal and the other trade press. There's been tremendous pressure put on malt and barley relative to corn, maize and ethanol, and I can't tell you when that pressure's going to come off in the future years, but I think that we have properly indicated what our cost looks like for next year and we would hope that that gets in balance in future years.

Is it fair, then, to say that the bulk of the 10% to 14% increase is coming from underlying raw materials rather than startup costs?

I think that there is some--there is a piece that we've assumed as startup costs there, but there is a larger piece that is coming from malt and hops.

Okay, and then one final thing to wrap this up, I was wondering, in light of how much capital and acquisitions you're spending, are you guys going to have to go into the debt markets to finance some of this?

I think we've indicated before that if we required finance that we believe that we have available finance sourcing and we feel confident that we can get that sourcing if we feel we need it.

Thank you very much.

Your next question comes from the line of Andrew Kieley with Deutsche Bank. Please proceed.

Hi, good afternoon.

Good afternoon.

Hi. I guess first question, maybe for Jim and for Martin, Jim, you've been talking more about competitive pressure that you're seeing in the craft category and increases in competitive, I guess entry by bigger brewers, but given very continued strong volume growth, can you maybe talk about where you've seen any impact from the bigger domestic brewers so far in the craft category?

Yes, we haven't really seen it in our volume numbers, so if you look at it simplistically, I think it appears that the whole slew of new and expanded competition hasn't really slowed down our growth. It appears to have contributed to overall category expansion and helped bring new drinkers into craft beer, and it's not just the larger brewers putting entrance into the category, but you see new craft brewers coming in plus previously local or regional craft brewers showing up in more markets. So far that's been accommodated by retailers basically expanding their shelf spaces because they recognize a hot category.

So as these new entrants have come in, we've actually been able to expand our distribution points, particularly for Brew Masters Collection and Seasonal, substantially. So we've expanded our space, along with the category expansion, and we haven't really seen an impact from all this new competition.

Okay, and then secondly, just wanted to ask, any insights you might have on the potential impact of the Miller-Coors JV next year, I guess both in terms of the competitive setting and maybe on your own distribution, given you guys do a fair amount of distribution through Miller and Coors houses.

Yes, I'd have to be honest, I've thought about it a lot and I really don't know yet. There's some pluses in that we'll go into a wholesaler who is maybe a Miller Coors house and today they have got two master's to serve, if the joint venture goes through they will only have one. So the distributor will it be--I think in some ways better able to focus on their kind of winning entrants in each category or niche rather than try to get one for Miller and one from Coors in there. On the other hand, it will, I think expand the cloud of the joint venture within the house and at this point, I really don't know. Maybe at the end of the day, it won't change much.

Okay, and then just for Martin or Bill, on the EPS guidance for this year, I just wanted to make sure, it looks like you're just basically--the change you're basically removing the excise tax impact from this quarter of about $0.18?

I think that we've considered a variety of different variables, and cost movements and top line, bottom line estimations and that's how we've come up with our new range.

Okay, and then on the--also on the tax audit, I mean at the end of the day when that process is finished, would that just be a question of--make whole payments on the tax, or is there--would there be any other penalties or possible penalties associated with that?

Hi, Andrew. I think it's fair to say that we're at the very early stages of the audit and these discussions and therefore it's quite difficult to predict what the actual outcome would be. We attempted to provide a range based on current known information of what the outcomes could be, but that is just a range and we chose to book a number within that range that we thought was appropriate based on the accounting guidelines.

Okay, and then just final question. On the initial CapEx guidance you gave for 2008 of--so you have about 90 to 130. I guess that includes the remaining $45 million for the brewery purchase?

Yes, it does.

Okay. So that would--I guess the remainder of that, that would leave about 45 to, say, $80 million of CapEx, which I guess would--you would be targeting for the upgrades on the Pennsylvania brewery?

That's correct. Most of--which we still have our Cincinnati brewery. We still have kegs that we purchased.

Okay.

And we have other capital investments.

Okay, but I mean, so beyond 2008, it would leave a fairly small amount related to the new brewery upgrades, about like $20 million or something to get to, after 2008?

Andrew, I'm not totally sure exactly what numbers you're looking at, but I would point you to our disclosure on this year's capital--that our capital was up significantly for kegs and Cincinnati investments. Obviously the kegs are needed to support our growth, we over skew on draft beer relative to most brewers and kegs are pretty expensive right now. So it would not be unreasonable from that to conclude that additional keg investments would be needed to support our growth.

Okay. Thanks. That's all I had.

Your next question comes from the line of Bryan Spillane with Banc of America. Please proceed.

Hey, good afternoon, guys.

Hi, Brian Spillman.

Hey, yes, I'm going anonymous today.

That's right, Spillman.

Couple of questions, one, just in terms of understanding next year, Bill, I heard you right, 2 to 4 percentage points of gross margin risk, is that right?

That's correct.

All right, and then when we're looking at your advertising expense next year or your selling and advertising--advertising and promotional expenses, do you think you ought to get a little bit of leverage? You shouldn't grow faster--as fast as your volumes or your sales, is that right?

Hey, Brian, it's Martin.

Yes.

I think if you look at our numbers this year, we started to see some of that.

Yes.

I do think that we think that we're in a pretty exciting time in the craft beer category right now. There is opportunity and we certainly would like to make the investments we think are prudent to maintain share or even grow share if we could. So we're pretty excited, we think now is the time to be investing to maximize that. I think we've seen some of the effects you saw this year, we're still in the early stages of planning for next year and so I don't think we can comment on that. We would expect to have good guidance for you when we do our full year release in February or March.

Okay, and then just, Martin, on a follow-up to that, are the places, as you've seen Bud has certainly shifted some of the--some of its spending around a bit, so they are spending money in different areas relative to where they have done it in the past and Coors has done a similar thing. Have you seen any change in some of the areas where you may need to spend, and I guess what I'm driving at is, if there's more money being spent on better beer in general, does that force you in some way to have to spend in areas where you necessarily didn't have to spend before, whether it's maintaining tap handles or merchandising on trade or areas such as that?

Well, I think it's only fair to say is we see increased competitive activity. One result of that could be increased costs to compete and maintain share of shelf space or taps as you said, but I think Jim's point--that I think he mentioned a little earlier was that there is enough enthusiasm and growth in the category that retailers are allocating more handles or linear footage to the category. So at this point in time, I think everyone's best benefiting from that.

Okay, and then on brewing materials, I mean part of this--the part of the issue at this point is supply and demand, especially as far as--at least as far as I understand it, with malt and barley. Are there any constraints on your end as you look out into '08 that you--do you feel confident that you'll have enough brewing materials to meet your demand expectations?

Great question. I think there's been a fair amount of chatter on the web of other smaller brewers who are struggling with that issue right now. I think if you look at our 10-K, you'll see we have forward purchase commitments of hops that actually--and carry significant hop inventories that actually puts us in pretty good shape and some of the cost impacts there are more to do with currency movements and just quality of the hop--maybe having to use a little bit more hops to achieve the flavor we need, and I think I said in my comments--prepared comments that we are--we do use a disproportionately large amount of natural ingredients in our beer to achieve the flavors that we achieve and therefore these impacts both on the hops and on the malted barley side are pretty significant for us relative to the larger brewers.

On the barley side, we have not traditionally entered into contracts with--directly with farmers or with intermediaries that lock in and protect us from price movements and I'm not sure exactly what the barley indexes show, but I know the corn indexes show corn doubling in the last 12, 18 months, and again, for a significant user of grain such as ourselves, that's a very significant cost impact. We believe, based on our conversations with the malting suppliers that we will be in a position to obtain malted barley, it's just that the price will not be one that we enjoyed in previous years.

Okay, great. And then just one final question, in terms of the--I guess the expansion and the buildout of Lehigh, and just in general as your production model kind of shifts, what are you doing to make sure that you ensure the same level of quality that you have today? I guess as your production gets larger are there extra steps that you're taking to make sure that the quality of what you're producing doesn't really change? It gets more complex, I guess, as the business gets bigger.

Well, it does, Brian, but that's something certainly we've faced for 23 years now, and it's something that we have pretty good track record of handling. One of the things that makes me feel very confident about the Lehigh Valley Brewery is we know that brewery, we've brewed there for seven years and won awards and made really great beer there. So as opposed to just about anywhere else, we have seven years of very successful history at that brewery, with exactly that equipment, and we're now under a scenario where we can do everything that we ever wanted to get the quality to exactly where we want it.

So I'm very confident that we're not going to run into any insurmountable quality issues there. It may take us a little time, there's always little bumps, so it's never totally smooth, but it is a brewery where we have brewed before. So at the end of the day, we're--we're very confident that we're going to be able to get the same quality or better out of that brewery that we did in the seven years that we brewed there.

Okay, and then I promise, this is my last, last question.

That's okay.

If you could quantify in some way just how much the temporary shutdown in Cincinnati cost, what it cost in the quarter?

Brian, it's Martin.

I think that's not something we can disclose. I think what we probably can say is if it was really significant, we probably would disclose it.

Okay, all right, great. Thanks, guys.

(OPERATOR INSTRUCTIONS)

Your next question comes from the line of Mark Cowen with Merrill Lynch. Please proceed.

Hello?

Hi, Mark.

Hi, guys.

Just two questions. One is to follow-up on and just sort of expand on what Brian just asked. Jim, the model's changing, the competencies that brought you here need to be complimented with production and distribution, logistics and all that. Can you talk about kind of what you see you have to do in--in Lehigh--in the Lehigh Valley plant to execute that that well?

Well, there are a couple of things. One of them is managing the capital expenditure process well and then the other is the ongoing startup and operations of it, and we have been adding people, you recently saw we added Greg Tanner, who is very a experienced supply chain logistics person to our board. He's done construction projects and so forth, so we've added expertise at the board level. Early this year, we added Tom Lance as VP of Operations and then below that level, we've added a number of people, including two senior people at the Lehigh Valley Brewery, who were there for many years, when it was operated by Stroh, and when we were brewing there. So we have been beefing up our staffing and we'll continue to do that as we need to.

Okay.

Mark, this is Martin. I just wanted to add on top of what Jim said, that, one, we recognize that this is the capabilities--the capabilities that we need to develop, and two, one of the benefits of the facility is it comes with people. It is currently being operated by Diageo and so we're looking forward to working with the employee group there and they are going bring a lot of knowledge about the facility and also the running of the packaging operations to our organization.

Okay, okay. I see. Okay, and it seems that with material costs going up as much as they are, you have some reticent to price, and I'm just wondering if you could put some context around kind of what's--what you're thinking there relative to the Corona's and Heineken's. I guess Corona did move up quite a bit this year, so you might have some flexibility to do that, although that did stall out their brand growth. So Jim, could you give some context to that thought process?

Well, I think the dust is still out there. It hasn't settled yet on what the appropriate pricing levels are going to be for next year. So it's--it's too early to tell, I think our colleagues in the craft brewing industry are particularly subject, as we are to the malt and hop increases. We use significantly more hops than the large domestic brewers in every barrel and even more than the imports, and the same thing is generally true with the malt.

So we're seeing cost increases that differentially affect the craft category, more so than imports and the regular domestic beers and I think we've been talking about pretty significant price increases and we're going to try to find the opportunities for doing those across the board, and we really won't know for a few more months what other people do and what flexibility we're going to have, because I think a lot of other brewers are in something of a state of shock and are trying to figure out where they need to settle out.

Right. So when you talk about three--I think you said 3%, you really--there may be some flex around that when you see how things settle down?

Mark, if I could just jump in, I think what we said was that we've enjoyed double-digit growth this year and achieved 3% this year.

Oh, that wasn't next year's number, I'm sorry.

Right.

And next year's target number that we're currently thinking about, and obviously as Jim said, was still early in this process, is targeting 5%.

Oh, I see, okay.

And so I would to add what Jim said, is that I think this year we've been very pleasantly surprised that even with our pricing that we took early in the year, the volume has held very firm and certainly as we look to next year, our goal is to try and cover as much of the cost increases as we can through price increases, our current target's 5%, but obviously that's subject to change based on what the market will bear and our belief is that the category will continue to grow even at that pricing.

Okay. Thank you so much.

(OPERATOR INSTRUCTIONS)

There are no further questions in the queue. I would now like to turn the presentation back over to Mr. Jim Koch.

Thank you, everybody, for your attention and we will meet again for the next quarter. Take care.

Thank you.

Thank you. Take care.

Thank you for your participation in today's conference. This concludes your presentation. You may now disconnect, and have a good day.