Boston Beer Company Inc (SAM) 2012 Q1 法說會逐字稿

Good afternoon. My name is Tiffany, and I will be your conference operator today. At this time, I would like to welcome everyone to the first quarter 2012 earnings call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions) Thank you. Mr. Jim Koch, Founder and Chairman, you may begin your conference.

Thank you. Good afternoon, and welcome. This is Jim Koch, Founder and Chairman, and I'm pleased to be here to kickoff the 2012 first 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 first quarter as well as a review of our outlook for 2012. Immediately following Bill's comments, we will open the line for questions.

I am pleased that we continue to lead the craft industry in both innovation and variety. In the first quarter, we introduced our new spring seasonal Samuel Adams Alpine Spring, an unfiltered lager that showcases Tettnang Noble hops. We have been brewing with Tettnang Noble hops for more than 28 years, and I am particularly pleased with how well Alpine Spring was received by drinkers, retailers and wholesalers. Late in the first quarter, we had a smooth transition from Alpine Spring to our summer seasonal, Samuel Adams Summer Ale, now in its 17th year and still one of my favorites. We have also been introducing some exciting new small batch brews, most recently Samuel Adams Dark Depths and Samuel Adams Cinder Bock, which you quickly found their niche among craft aficionados. We are still seeing expanded distribution of domestic specialty brands and craft brands but even so, we grew the Samuel Adams brand during the quarter. We are happy with the health of our brand portfolio and remain positive about the future of craft beer. I will now pass it over to Martin for more a detailed overview of our business.

Thank you, Jim. Good afternoon, everyone. As we state in our earnings release, some of the information we discuss in the release and that may come up on this call reflect the Company's or Management's expectations or predictions of the future. Such predictions and the like are forward-looking statements. It is important to note that the Company's actual results could differ materially from those projected in such forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained in the Company's most recent 10-K. You should also be advised that the Company does not undertake to publicly update forward-looking statements whether as a result of new information, future events or otherwise.

We are pleased with the start of the year and the growth of our business and in particular, the smooth transition from our spring to our summer seasonal. This occurred in mid- March this year which was earlier than our 2011 transition, but consistent with prior year's timing, and it sets us up well for the second quarter. We continue to invest in our brands and in new opportunities, and we will likely increase investments in advertising, promotional and selling expenses commensurate with the opportunities and the increased competition that we see. Specifically, we are investing in systems and capital equipment to enable us to manage increasing complexity effectively and expand the capacity and capabilities of our breweries. We are prepared to forsake some earnings in the short-term as we make appropriate investments in brand building activities in brewing and our brewing and packaging capabilities to position us well for long-term growth.

We remain confident about the long-term prospects for the craft category and our Samuel Adams brand. In the first quarter, our most recent growth benefited from the positive acceptance of our Samuel Adams Alpine Spring seasonal and increased distribution due to the national rollouts of our Twisted Tea and Angry Orchard brands late in the quarter. These rollouts are currently in progress and thus far have been well supported by wholesalers, retailers and drinkers. These brands have helped us increase our investment in our sales force and our Samuel Adams brand and has built a stronger Boston Beer brand portfolio for our wholesalers and retailers.

Alchemy & Science, our craft beer incubator, is in the early stages of two exciting projects. It's House of Shandy brand was launched in certain markets early in the second quarter, and its Angel City brewery has conducted it's first brews and expects to relaunch in the Los Angeles market during the second quarter. Our 2012 financial projection includes estimated expenses attributable to Alchemy & Science projects but does not include any gross profit contribution since it is still too early to estimate. We will continue to look for complementary opportunities to leverage our capabilities provided they do not distract us from our primary focus on our Samuel Adams brand.

We are beginning the second year of our Freshest Beer program, and we are pleased with the results so far. We believe we are delivering better, fresher Samuel Adams beer to our drinkers while lowering wholesaler inventories, reducing costs and improving efficiency throughout the supply chain. We currently have 58 wholesalers signed up and at various stages of inventory reduction. We have over 50% of our volume on Freshest Beer program and believe this could reach 75% by the end of 2012. We continue to evaluate if we can reduce these inventory levels further. Year-to-date completions through the 16 weeks ended April 21, 2012 are estimated to be up approximately 10% from the comparable period in 2011. This year we changed from reporting depletions on a calendar month and quarter basis to reporting current year depletions against comparable weeks in the prior year. We believe this method better reflects the depletions trends of the business, we do expect to report full year depletions on both a fiscal year and calendar year basis. Now, Bill will provide the financial details.

Thank you, Jim and Martin. Good afternoon, everyone. We reported net income of $7.5 million, or $0.56 per diluted share for the first quarter, representing an increase of $3.5 million, or $0.28 per diluted share from the same period last year. This increase was primarily due to net revenue increases offset by increased investments in advertising, promotional and selling expenses. Core shipment volume for the first quarter was approximately 536,000 barrels, an 8% increase over the first quarter of 2011. The increase in shipments is due primarily through increases in Samuel Adams seasonals, Angry Orchard and Twisted Tea, offset by declines in some other Samuel Adams styles.

We believe that inventory levels at wholesalers at the end of the first quarter are similar to previous years except for those wholesalers participating in the Freshest Beer program whose inventories were lower. Inventory at wholesalers participating in that Freshest Beer program was lower by an estimated 259,000 case equivalents compared to the end of the first quarter in 2011. Our first quarter 2012 gross margin increased to 55% from 51% in the first quarter of 2011. Price increases, lower brewery processing costs and favorable package mix were partially offset by cost increases in barley and other ingredients. We are maintaining our full year gross margin target of between 53% and 55% primarily due to the continued negative impact of barley and other ingredients' cost. We intend to continue to focus on cost saving initiatives at our breweries and are pleased with the improvements we have made to date. First quarter advertising, promotion and selling expenses were $2.9 million higher than those incurred in the prior year primarily as a result of increased cost for additional sales personnel, investments a point of sale material and freight to wholesalers due to higher volumes and the price of fuel.

General and administrative expenses increased $1.2 million compared to the first quarter of 2011 primarily due to Alchemy & Science startup costs and increases in salary and benefit cost. Our effective tax rate for the first quarter of 2012 was 37%. Based on our -- based on information of which we are currently aware, we have left unchanged our projection of 2012 earnings per diluted share of between $3.80 and $4.20. While we are concerned about significant cost pressure from fuel price increases and their impact on freight cost, package material and brewery operating cost, we believe that it is too early in the year to assess the extent to which fuel -- full year increased fuel cost may be offset by operating efficiencies, pricing or volume growth or the possibility that these pressures may subside.

Our actual 2012 earnings per diluted share could vary significantly from the current projection. Our 2012 projection includes estimated expenses attributable to Alchemy & Science, but does not include any gross profit contribution from Alchemy & Science. We continue to project that 2012 depletions growth will be between 6% and 9%. We will continue to focus on efficiencies at our breweries, but we are also projecting significant increases in cost of packaging and ingredients for 2012. These increases are currently due to barley cost pressures.

Full year 2012 gross margin are currently expected to be between 53% and 55% due to price increases not fully covering cost pressures and some product mix changes. We intend to increase investments in advertising, promotional and selling expenses by between $8 million and $12 million for the full year 2012, not including any increases in freight costs for the shipment of products to our wholesalers. We estimate startup costs of $3 million to $5 million for new brands develop by Alchemy & Science, our wholly-owned subsidiary, of which $2 million to $3 million are included in our full year estimated increases in advertising, promotion and selling expenses. We believe that our 2012 effective tax rate will be approximately 38%.

We continue to evaluate 2012 capital expenditures and estimate a range of $40 million to $60 million, most of which relates to continued investments in our breweries and additional keg purchases in support of growth, the Freshest Beer program and increased complexity. However, the actual amount spent may be different from these estimates. Based on current information available, we believe that our capacity requirement for 2012 can be covered by our breweries and existing contracted capacity at third-party brewers. Continue to maintain a strong cash position with $38.2 million in cash as of March 31, 2012. During the three months ended March 31, 2012, we repurchased approximately 37,000 shares of Class A common stock for a total cost of $3.7 million. From April 1, 2012 through April 27, 2012, we repurchased an additional 6,000 shares of Class A common stock for a total cost of $600,000. Through April 27, 2012, we have repurchased a cumulative total of approximately 10.6 million shares of Class A common stock for an aggregate purchase price of $256.2 million and had approximately $18.8 million remaining on the $275 million share buyback expenditure limit set by our board of directors. We will now open up the call for questions. Tiffany?

(Operator Instructions) Your first question comes from the line of Judy Hong with Goldman Sachs.

Thanks. Hi, everyone.

Hi, Judy.

First, just in terms of your depletion growth, so you had a very strong first quarter, your full year guidance still remains 6% to 9%, so I'm wondering why you think there may be a bit of a slow down in the back half. And then in Q1, do you think depletion growth benefited to some extent from the early timing of the summer seasonal this year?

Hey Judy, it's Martin. I think we are certainly happy with our first quarter trends, which were obviously an improvement over how we finished the year and last year's trends and also slightly ahead of expectations. There are some structural issues related to the timing of the seasonal conversions and how effectively we did it compared to the first quarter last year where our timing was not as tight and we were not as effective. So certainly, we believe that we benefited from that in the first quarter, exactly how much is very hard to estimate.

As it relates to looking out at full year, we're just looking, and there's so much unknown. How well with these brand trends continue into the second quarter where we would also expect to get some slight structural benefit versus last year because of the timing of the summer ale rollout. What the full impact of Angry Orchard and Twisted Tea national rollouts will be, it's still way to early to tell. And I think given all those factors, the structural impacts in the first quarter were sort of anticipated and we are still sort of looking like we are on plan and we just are not willing to change the current range yet.

Okay, and then Jim or Martin, maybe update us on the competitive environment, the expanded distribution that you are seeing with domestic specialty and craft brands? Are you seeing any signs that things are starting to slow down? Any commentary that you are hearing either from wholesalers or retailers that gives you comfort that things are starting to plateau?

Sure, why don't I take a stab at that and then Jim can comment on top of my comments. Based on what I see and what I hear, the competition continues to intensify. At one end, you have the big brewers sort of investing more heavily in their own brands that compete with us from craft domestic specialty to small niche import, and they appear to be showing no active interest in the high end. And then as it relates to craft and local craft, they are still opening, they are still innovating, they are still introducing new SKUs, retailers are providing distribution, wholesalers are still saying, come on in, welcome. So, it still is continuing to remain quite challenging and at this point in time, it does not appear to be slowing down.

Now within that, there is obviously only so much retail space available for everybody. You are seeing some signs of some sort of churn of some of the styles or SKUs or brands that came in two years ago into a market maybe further away from home than usual, are maybe sort of winding down, but there's someone to replace them. I would say you are seeing some sign of some sort of brand turnover over staff turnover on the smaller SKU end, but in total, it's still very competitive for shelf space, for tap handles, and there's probably more competing brands and competing SKUs today than there were last year. So, from that perspective, it continues, and I'll let Jim perhaps comment.

Yes, I would concur with what Martin has said. There are now approximately 1,000 breweries in planning in the United States. It is an extraordinary number, it's not quite a doubling of the number of shipping breweries, but it's close to it. If they all come to fruition, retailers are continuing to open up space for craft beer, partly by cutting space for the mass domestic brands and even beginning to push out the beer section to accommodate craft specifically, even though the beer category is not showing there much growth. Southern California actually now -- and was at a very sophisticated retailer this morning who was cutting some of the wine space to accommodate more craft beer. So right now, I don't see craft beer hitting a wall, I don't even see craft beer envisioning hitting a wall. Obviously, it won't go on forever and probably when it does hit the wall, it will be a rude shock. But right now, it just does not seem to be happening. Craft beer is really the darling of the alcoholic beverage industry at this moment.

Okay. That's helpful. And then finally on the -- Bill, on the gross margin and on the cost side, so Q1 seems like, at least on a year-over-year basis, gross margin came in more favorably and costs per barrel was down actually year-over-year. So, is there anything just in terms of timing-wise where barley or other cost inflation actually hit the coming quarters much more than Q1? And then, is your commentary on some of the freight costs and the packaging cost and everything else, the commentary and cost, are they a little bit worse than what you've talked about in the last couple of calls?

Let me take it in a couple pieces, Judy. First is the first quarter gross margin, the increase in gross margin percent this year is mainly driven by lower brewery operating costs than we had last year at this time. So, that has helped our gross margin percent. The -- in terms of package material and barley cost, there is some turnover from the beginning of the year from last year so there is some barley that comes into this year and there is some package material that comes in before all the price increases are realized. So, some of that does help in the first quarter, and it's not fully realized in the first quarter.

Yes, and just building on what Bill said, I think from a first quarter comparison basis, the first quarter of last year we had some operational events that I think we commented on at the time that were not probably recurring, and I'm delighted to say they did not recur. We are very pleased with our brewery operational performance in the first quarter and as we look forward, I don't think the size of improvement that you might look at on the gross margin will flow through in the following quarters. It was more a specific quarter-to-quarter comparison.

Okay. Thank you.

Your next question comes from the line of Caroline Levy with CLSA.

Good afternoon. Thank you. My questions relate to Twisted Tea because there's been a lot of conversation about this. I'm wondering if you could share with us how much national distribution it has? What percentage ACV, what the growth was in the quarter in Twisted Tea and what percent of your volume it is, because there's some view that it is about 10% nationally and in some views it's 20%, which is a huge spread, so if you could help us with that. Then just finally, if you grow faster in Twisted than in your other brands, is that negative for net revenue per barrel and margin or positive or neutral?

Sure, Caroline, it's Martin. Let's see, Twisted Tea, as you know, has been for us a 10, 11 year sort of learning experience, starting with our launch of BoDean's back in the early 2000s and frankly failing. And since then, it's sort of evolved and has grown into a nice part of our business, generating nice gross margin contribution to allow us to grow our sales organization and to invest behind our Samuel Adams brand. This year, we will hopefully compete -- complete our full national distribution.

The -- there are still a number of states that we are rolling out and certainly in those states, our distribution penetration is still quite low. And even in states that we rolled two years ago and three years ago, our penetration is quite low. We don't sort of disclose distribution penetration numbers. But if you were to sort of look at percentage ACV on the publicly available numbers, you would see that Twisted Tea is at 40%, 45% ACV relative to 77%, 80% on a total US food basis. That gives you an idea -- 80% for other flavored malt beverages. We still have a lot of distribution upside on Twisted Tea. Obviously, it varies enormously by market, and Twisted Tea sort of took hold in some markets that were perhaps more independent stores so were perhaps less developed than supermarkets -- type markets than we were before.

To sort of answer your second question, pricing varies by market based on where we are ii our sort of launch and growth phase. There is some initial pricing for trial. The new volume in new markets is probably less than Sam Adams on the revenue per barrel basis. But the -- ultimately it becomes much closer. It depends on where the growth is coming from, and I think as we've commented, we are actually happy to still be growing in markets we've been in for 10 years. There's still growth happening in markets that we've had a presence in for a long time. And from a gross margin point of view, the gross margins of Twisted Tea are not as favorable as Sam Adams, but they are close, so there's a little bit of a factor there, but not to much.

Thank you. How much was it up this quarter?

Caroline, I think as you know, that is a question that we have chosen not to disclose as we don't break out business, and I would just refer you to the publicly available information that is the best available information.

Okay, just lastly, I wondered if you could talk about Twisted Tea. I sometimes get asked about whether it's similar to some of the flavored alcoholic beverages and yet you are talking about the fact it's 11 years old. How do you address those questions from investors when they say, how do we know it's not going to fall off a cliff in a year or two? It's just a fad?

I think if you look at that category, there is a couple of brands, and would I put Mike's in that and to some extent, Smirnoff Ice, that has been around for 15 years and very successfully. And obviously from Mike's perspective, built a nice US-based business. So, I would say that there are brands in that category that have built themselves in sensible ways over sensible periods of time and appear to have ongoing traction. And then like with any category, there are brands that come and go that have great couple of years and then disappear for many reasons. And so I would just point to Twisted Tea's longevity and the fact that in some of its core markets, we have had 10 years of successive growth on not unreasonable volumes and maybe small markets. But we have shown we can do it, and we would like to show we can do it on a national basis.

And the fact that it's got tea in it, does it stir up any more regulatory examination? Do you feel that that's any kind of risk?

Well, obviously there are risks in the business we are in as it relates to regulation and control of ingredients. Our tea is naturally occurring tea that we use in Twisted Tea that we use in the brews. And I would compare that to some extent to someone brewing a coffee stout where they are using coffee and stout or other sources of additions to beer. I think we are exposed like much of craft is exposed to those sorts of things. Certainly, flavored malt beverages have attracted a fair amount of inquiry as it relates to high alcohol and large single serves, and that's not what Twisted Tea is in any shape or form. We are 5% alcohol and in some ways, something completely different. So, could we get caught up in that inquiry, sure. But that's just the business risk I think we all face.

I have one last housekeeping, thank you very much, and that is was there a 2-point drag from the freshness program as expected or not?

And when you say 2-point drag count, what are you referring to?

Shipment volume. You expected freshness date -- freshness program to reduce shipments versus demand by a certain amount, is that what actually happened? Do you think that's the disconnect between your depletions and your shipments?

Yes, the -- as we disclosed, the wholesalers participating in the Freshest Beer program were lower by about 260,000 cases. And so that, I'm just going to do the numbers in my head, is what, 18,000 barrels, so that's 3 percentage points.

Thank you so much. Thanks.

Your next question comes from the line of Marc Riddick with Williams Capital

Hi, good afternoon, everyone. A couple of questions. One of the things I noticed with the press release, you mentioned the smooth transition of the seasonal and sort of marrying that with the rollout of Angry Orchid and Twisted Tea. I'm wondering if you could spend a little time talking about the benefits that those who have been through the Freshest Beer program have seen in that transition versus those who have not gone through that process as of yet, and then I have a follow-up after that.

Sure. I think our goal on seasonal transitions is to align with our sales force and the wholesaler brand managers as to a target transition date that is appropriate for each market. And it does vary by market, but there is --there are some groups and pockets of consistency. And then to -- through inventory planning and order replenishment to try and get the inventory levels down to de minimus levels on that date to allow a clean cut over in market. Now, the clean cut over may involve retailers running out their own retail stocks and then cutting over, but from a wholesalers' perspective to try and have the wholesalers down to de minimus inventory on that period so they can at least do a cut over on shipments if they so choose.

By our observations, the Freshest Beer wholesalers appear to be having that conversion almost unilaterally where Boston Beer and the wholesalers have been working closely on inventory levels on a plus or minus one week basis, which is much, much tighter than was happening previously where the wholesalers were solely responsible for planning and forecasting orders and were running with three to four weeks of inventory. And obviously, with three or four weeks worth of inventory, at the end of the season there is some slowdown, and it's very hard to predict. And you may be sitting there thinking I'm in good shape, but the following week you go, oh, it's slowing down so fast now, I've got six weeks worth of inventory instead of three. I do think that the Freshest Beer wholesalers have seen an enormous benefit on that relative to our non-Freshest Beer wholesalers. Obviously, we are actively encouraging wholesalers to join the program. There is some requirements that not everyone is ready for yet, but we are trying to sell the program.

I haven't looked at the data recently, but I believe that we saw on total seasonal sales a benefit of a couple of points. And that's coming because one inclination of a wholesaler that's doing its own ordering is to not order enough and therefore, do early cut overs and then be out of sync. And the other thing that happens is wholesalers order too much and when it backs up, then you get a back up at retail and you have some lost sales. And that sort of happened to us last year with the Noble Pils to Summer Ale conversion, which is one of the reasons for the timing benefits this year. So, real benefit to total business, real benefit to inventory costs, real benefit to predictability, and I think most of our wholesalers are delighted to have that as a real benefit. And certainly, as you look at what is on shelf from some competing brewers, you still see some spring and even winter out there, so you know we are doing something right.

That's excellent. And one other thing I was curious about is sort of comparing the strength of the craft beer market this time versus last time and maybe some of the behaviors you are seeing. Is it -- I don't know how to put this perfectly, but is it fair to say that you are seeing the locals saying a little closer to home this time, either by the choice of their own brewing capacity or by the choice of those who are controlling the shelves?

And Marc, when you say this time, are you referring to back in the '90s or what are you -- what is your comparison?

The strength of the craft beer market that you are seeing now vis-a -vis the last time craft beer did very well. One of the things that I recall from the last time was that you had some local brands that maybe reached outside of there area, if you well, and then struggled when they got outside of that area where they were well known. And so this time it seems as though, and I'm just asking if this is actually the case, but it seems as though there might be, outside of just -- not just you guys, but outside of you guys, there seems to possibly be maybe a little more discipline on that type of thing. And maybe that's part of the turnover of those brands that Jim was speaking about earlier and I'm trying to figure out that may be the case.

Yes, I'm going to maybe ask Jim to comment because he lived through the first wave. Jim, could you comment?

Sure. I think you are basically right, that locals are staying a little closer to home this time. And I think also, wholesalers and retailers have so many choices this time that they are not mindlessly grabbing anything from anywhere. And retailers can fill a lot of their shelves with local brands and when they bring something in from outside of, let's say their region, it might not be the city or even the state, but certainly the region. And then they are looking for a brand that has some consumer pull, some consumer awareness, some buzz, and they are not just grabbing anything from anywhere. I do see this cycle of craft beer growth as being healthier, more prudent, and it's also not growing the way it did in the '90s. When it slowed down in 1996 it went from 30% growth to zero in a matter of a month or two. We are not at 30% anymore. We are at 10% to 15%.

Okay, that's excellent. That's very helpful. Thank you very much.

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

Hi, good afternoon.

Hey, Andrew.

Martin, I wanted to just try to get a sense for how much of the depletions growth was due to the spring seasonal, the new spring seasonal. I know you won't say exactly, but if you could just give us a sense. And then number two on the depletions, if the earlier shipment of summer ale was in those numbers or was it just in your shipments if Summer Ale was widely available on the actual shelf during Q1?

Yes. Well, as you indicate, we don't disclose that sort of break out, but I think from our comments that we have said, one, we obviously had Alpine Spring out at wholesale ready to go in early January, and we talked a little bit about that at our call for last year because it provided some shipment boost in the quarter, and I think that transition went very smoothly. And then we were delighted with how the Alpine flowed through and if it had not have flowed through correctly, we would not have had an on-time Summer Ale transition. So, you can draw conclusions from that.

As it relates to the second question, the transition date that we were targeting, at least at wholesale or inventory levels was mid-March. So obviously, we had the benefit of Summer Ale load into wholesale because they would've been ready to go around that time frame, depending whether they were Freshest Beer or not. And then depending on whether the wholesalers released Summer Ale to the retail trade or allowed Alpine Spring to run down a little bit, there would have been some potential benefit for Summer Ale in March from the depletion perspective.

Okay. Thanks. And then I just -- just looking at the Boston Lager, sometimes -- we look at the grocery channel data sort of as a proxy, and I know it's not perfect, but you see some softness in the actual Boston Lager SKU. And I was wondering if you could talk about that. Is that a concern, or do you just look at it and say, I'm getting growth out of all the seasonals and other SKUs and they sort of offset?

I certainly think was some effect in cross trading of drinkers between the two, but we would obviously be happier if lager was stronger. So, that does get a fair amount of management attention and thought as to what may be going on as it relates to any weakness in how to fix. And certainly, our preference would be to have both growing so yes, it would be a concern. I think if you relate to the publicly available data on what's going through the supermarket class of trade, obviously that's down. We've obviously got some nice growth in convenience stores for our total business. And we look at that and we look at what's going on and we try to work out ways to grow lager and our seasonals. While our seasonals are obviously experiencing some growth off a pretty large base and certainly, some of that is cannibalizing it.

Okay, and then I just had one on tea, if you can talk maybe on if there's any measure of same-store sales or are repeats that you see on that product, and then also how you think about competing products because we've seen a bunch of announcements about other products coming into the category.

Yes, so repeat, I would refer you back to my answer to Caroline which is the brand has been available in some markets since 2002, 2003. It has been a slow build. It seems to be a very unique, sort of liquid offering, and it's been hard to duplicate from a competitive point of view, and we just had nice, slow, steady growth. And so where we are able to seed it we are able to get repeat. And it grows slowly and steadily, but it's also quite small and the total scheme of beer things. I think if we attracted some competitive, I don't want to say copies, but people who are positioning products in the same space. And they sort of come in waves, and we have seen two waves, and we may be about to see a third and certainly, of the brand that has survived, was the growth affected by such efforts? Sure. But it's still grown. And so we're pretty positive. It s still a small category, but we are happy that we have the number one tea.

Okay, and then I just had one last one for Bill. Just looking at the guidance for the gross margin pressure for the balance of the year, you mentioned some of the favorable comparables in the first quarter, is it just for the rest of the year that the barley inflation starts to kick in more? Can you get any help on packaging costs as the year goes on? Just trying to think about other items on the gross margin.

I think I tried to answer this question for Judy. We have some package material and some raw materials that carry over from the prior year, 2010 barley per example. You don't have that in the remainder of the year, so you have the full impact in the remainder of the year of any of those cost increases that we will see.

Okay. Thank you.

Your next question comes from the line of James Watson with HSBC

Good afternoon, everyone.

Hey, James.

I'm just going to follow up quickly on cogs. I noticed you had a much -- saw a decline I think in cogs per barrel. I was curious, you mentioned operational brewery efficiency. If you could give us a sense, is that natural gas prices coming down, is that efficiencies such as leverage on higher volumes in the quarter?

Yes. I think the big impact on the first quarter we'd talked about this time last year was we had some events at the breweries and related to the Noble Pils Summer Ale transition in some extent where we took hits on our brewery operating costs that were perhaps -- well, hopefully nonrecurring through better planning and operations, right? And so that's a lot of the effect you see now. I would not want to disrespect to breweries, because we are operating more efficiently and effectively than we were this time last year in terms of kilowatt hours per barrel and therms per barrel and water per barrel and all the metrics that you'd like to see. Obviously, that natural gas benefit to the breweries from what is going on with natural gas is part of it, but we are pleased with our brewery performance on those sorts of metrics, and we continue to be challenged on other metrics that we still think we have upside on.

Okay, and moving over to pricing, it looks like you guys got 3% and it's stuck in the marketplace. I was just -- if you could give a little more color as to when you took that, if you got any pushback from retailers and whether or not you saw other craft or the big domestic guys following that price increase?

Sure. We executed pricing mostly around February 1, but some March 1 and some in the fourth quarter that looks like it will meet our revenue goals of 3% for the year. And we are still -- we are 2.5 months in. Some of the competitive set has reacted to similar cost pressures that we faced, particularly on the barley side, you're now starting to see much more talk about and has gone up and some of the competitive set has not. And it varies like you might expect by market. If there is a local who doesn't or if the big importers haven't, there are different competitive issues depending on our strength of brand and also how the retailer in that market likes to operate. At this point in time, I would say we are happy the way it was executed. It's unclear whether everything will stick, but it looks like most will stick. And the right time to ask us this question will be sort of on the next earnings call, which is what stuck through the summer. And obviously, it's unclear whether all of this will stick through the summer.

We will sure be sure to ask you that on the next call then (laughter). All right, give us hints, that's fine. You mentioned favorable package mix as well, was that some of the smaller brands, or was that switched to channel? I was wondering what drove that in the quarter.

Yes. We don't typically get into sort of different cost by brand or package, but it was just driven by favorability of that mix, and that's probably likely to continue because there's underlying business reasons for that to continue.

Fantastic. Thank you very much.

(Operator Instructions) There are no further questions at this time. I'm sorry, we have a follow-up question from Caroline Levy with CLSA.

Thank you so much. I was actually just wondering with the Yuengling launch in Ohio, my understanding was there was some impact on Sam Adams, which in a way is surprising. Can you talk about the interactions between a brand like Yuengling and your core brand?

Sure, Caroline. I think, again, if you look at the publicly available data for Ohio, you will see that Yuengling made -- had a terrific launch, there was a lot of interest. And the sort of size of volume share they had, they had to be taking drinkers from everybody. And I think we experienced that, obviously the big guys experienced it, and it affected our growth rates in that marketplace. I think longer term, we would expect that to settle down a little bit and that our brand can return to growth. But when something like that happens and there's pent-up demand and a well-executed launch, then obviously you see some impact. It's such a big event that affects all brands.

Are there other states where they would be -- there'd be as much buzz because they neighbor them where they're not their already? Are you --?

I think as they grow geographically they are going to keep hitting in those states that are reasonably significant in volume and we might expect that to continue. I don't know who wouldn't deem to predict how far the brand can travel. Nor what deem to predict what their plans are, but they certainly have a nice business model and are executing it well.

And I thought I read something about a tax on nonlocal craft beer in the New York market. Am I right? Are there situations where taxes are going up in any sitch -- for beer, for your beer?

I think there are situations where states are looking at that and there certainly are some states who tax small brewers different than large brewers and local brewers different than nonlocal brewers. And I do believe, and maybe I'll look for Jim for confirmation that New York may have something waiting for the governor's signature but not yet approved as it relates to that.

Would you characterize this as normal course of business, or is something heating up here?

I would think it's just the normal course of business, states look for revenue. What's happened in New York is they had for many years a significantly lower tax rate for in-state New York brewers. And the New York State courts, I believe it was, threw that out, that tax break for local brewers as a violation of commerce clause. It did not affect our tax rate in New York state because we are not brewing there. There were some craft brewers in New York that saw a significant increase in their taxes. But not us. That was a one-off, it was a court that looked at what had been in place for many years and said, wait a minute, this is a violation of the commerce clause of the Constitution. You can't discriminate against in-state and out-of-state breweries.

That's helpful. Last thing is, you mentioned wine is may be losing a bit of space in, I don't know if it was one retailer in California or more, but do you see any other glimmers of hope that that may -- you may be but able to gain space, floor space?

It is -- I would say it is a glimmer of hope. It was one retailer that I was calling on today and I was quite surprised because for a dozen years or more, it has been going the other way. But clearly, there is an excitement level at retail and consumer around craft beer. There is an explosion of variety. You have to have space, and they're probably squeezed the mass domestics almost as much as they can, and they are looking for more space for craft beer from nonalcoholics and even for wine. So, I guess my point is it says something about the strength of the craft beer movement today.

Good luck with that. Thank you so much.

Thank you.

(Operator Instructions) There are no further questions at this time.

Well, on behalf of Jim, Bill and myself, I would like to thank you all for joining us, and we look forward to joining you at the end of the second call, and we are going to go grab a beer. Cheers.

Cheers.

Cheers.

This concludes today's conference call, you may now disconnect.