Boston Beer Company Inc (SAM) 2012 Q2 法說會逐字稿

Good afternoon. My name is Hope and I will be your conference operator today. At this time, I would like to welcome everyone to this second-quarter 2012 earnings conference 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)

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 am pleased to be here to kick off the 2012 second-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 second quarter, as well as a review our outlook for 2012. Immediately following Bill's comment, we will open up the lines for questions. I am pleased with our overall depletions growth of 7% for the quarter and 9% for the first half of the year. We believe that craft beer will continue to grow and that we are well-positioned to share in that growth through the quality of our beers, our innovation capability, our sales execution, and coupled with our strong financial position that gives us the ability to invest in our brand.

For the fourth year in a row, our wholesalers ranked us the number one beer supplier in the industry in the annual poll of beer wholesalers conducted by Tamarron Consulting, a consulting firm specializing in the alcoholic beverage distribution industry. Our wholesalers ranked us first in all but two of the more than 12 categories that Tamarron uses to evaluate performance. This is an important testament to all the efforts by all of The Boston Beer Company employees who service and support our Wholesalers business and to the relationships we have built with our wholesalers.

I am proud that we continue to be a leader in the craft industry in both innovation and variety, as well. During the quarter, we introduced several exciting new beers, including Porch Rocker, Small Batch Brews, Samuel Adams Verloren, and Samuel Adams Norse Legend, and our Hopology, a unique 12-pack of six distinctively different IPA styles. As we enter the third quarter, we are updating the packaging for all Sam Adams styles and have introduced the next evolution of our brand communication, which builds on our previous messaging. We remain confident about the long-term prospect for the craft category and our Samuel Adams brand. I will pass over to Martin for a more 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.

In the second quarter, our depletions growth benefited from strength in our Samuel Adams Seasonal, Twisted Tea, and Angry Orchard Brands, offset by some slight decline in some of our other Samuel Adams brand styles. Highlights in the quarter include the continued success of our Samuel Adams Seasonal program and increased volume and distribution due to completing the national rollouts of our Twisted Tea and Angry Orchard brands. Based on the strength of these rollouts, we have increased investments in our sales force and our Samuel Adams brand, and have built a stronger Boston Beer brand portfolio for our wholesalers, retailers, and drinkers.

Based on what we are seeing we are increasing our projection for full-year depletions growth. As we look forward, it is likely will increase investments in advertising, promotional, and selling expense in existing brands and in innovation 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 the increasing complexity effectively and expand the capacity and capabilities of our breweries. We plan on adding over 30 sales positions and making other investments to address specific needs in the market.

We are prepared to forsake some earnings in the short-term as we make appropriate investments in brand-building activities and capital improvements in our brewing and packaging capabilities to position us well for long-term growth and continued efficiency gains.

Alchemy & Science, our craft beer incubator, is in the early stages of two exciting projects. Its House of Shandy brand successfully launched its Curious Traveler Shandy in draft package in 13 markets this year and will be adding a new style as well as bottles in the third quarter. Angel City Brewery brewed and packaged its first kegs and re-launched in the Los Angeles market. These projects have had minimal sales to date. Our 2012 financial projections include estimated expenses net of gross profit contribution attributable to Alchemy & Science projects of between $3 million and $5 million. But this estimate could change significantly based on volumes or if new projects are added.

We will continue to look for complementary opportunities to leverage our capabilities provided that they do not distract us from our primary focus on our Samuel Adams brand. We believe that as a result of our Freshest Beer Program, we are delivering better, fresher Samuel Adams to our drinkers and also lowering wholesaler inventories, reducing costs, and improving efficiency throughout the supply chain. We currently have 60 wholesalers signed up and at various stages of inventory reduction. We have over 50% of our volume on the Freshest Beer Program and believe this could reach 75% by the end of 2012. We continue to evaluate whether we can reduce these inventory levels further. Year-to-date depletions through the 29 weeks ended July 21, 2012 are estimated to be up approximately 10% from the comparable period in 2011.

Now Bill will provide the financial details

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

We reported met income of $14.4 million dollars or $1.06 per diluted share for the second quarter, representing a decrease of $13.7 million or $0.95 per diluted share from the same period last year. This decrease was primarily due to the impact of the glass recall settlement in 2011 of $0.92 per diluted share. Excluding the 2011 impact of the recall settlement and the estimated 2012 negative impact of the Freshest Beer Program on shipment volume, earnings per diluted share were $1.19 for the second quarter, an increase of $0.10 or 9%, and earnings per diluted share were $1.83 for the first six months, an increase of $0.47 or 35%.

Core shipment volume for the second quarter was approximately 690,000 barrels, a 7% increase over the second quarter of 2011. The increase in shipments is primarily due to increases in Angry Orchard, Twisted Tea, and Samuel Adams Seasonal that were partially offset by declines in some other Samuel Adams styles and the timing of the July 4 holiday.

We believe that inventory levels at wholesalers at the end of the second quarter are similar to previous years, except for those wholesalers participating in the Freshest Beer Program whose inventories were lower. Inventory of wholesalers participating in the Freshest Beer Program was lower by an estimated 619,000 case equivalent, compared to the end of the second quarter in 2011, which reduced our shipment volume and reported earnings per diluted share by an estimated $0.13 for the second quarter and $0.22 year-to-date.

Our second quarter 2012 gross margin decreased to 54.5% from 57% in the second quarter of 2011. Cost increases in barley and other ingredients, unfavorable product and package mix, and some quarter-specific operational costs were partially offset by price increases. We are increasing our full-year gross margin target to be between 54% and 56% from the previously communicated range of 53% to 55%, primarily due to increased volume estimates. We intend to focus on cost-saving initiatives at our breweries and are pleased with the improvements we have made to date.

Second quarter advertising, promotion, and selling expenses were $3.6 million higher than those incurred in the prior year, primarily as a result of increased investments in advertising, costs for additional sales personnel, and freight-to-wholesalers due to higher volumes. General and administrative expenses increased $1.7 million compared to the second quarter of 2011, primarily due to increases in salary and benefit cost and Alchemy & Science start-up costs. Our effective tax rate for the second quarter of 2012 was 39%.

Based on information 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 should benefit from currently lower fuel prices, and may see slightly higher depletions than previously expected, these benefits are likely to be offset by other cost pressures and planned increases in investments in our brands. Our actual 2012 earnings per diluted share could vary significantly from the current projection.

We now project that 2012 depletion growth will be between 8% and 12%, an increase from the previously communicated estimate of 6% to 9%. We continue to target revenue per barrel increases of approximately 3%. We now estimate that increases to advertising, promotion, and selling expenses, not including any increase in freight cost for shipment of products to our wholesalers, to be between $11 million and $15 million from the previously communicated estimate of $8 million to $12 million. We also continue to estimate start-up cost of $3 million to $5 million for new brands developed by Alchemy & Science, our wholly-owned subsidiary, of which $1 million to $3 million are included in our full-year estimated increases in advertising, promotional, and selling expenses.

We believe that our 2012 effective tax rate will be approximately 38%. We continue to evaluate 2012 capital expenditures and have increased our estimated range to $55 million to $75 million from the previously communicated estimate 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 well different from these estimates.

Based on information currently available, we believe that our capacity requirements for 2012 can be covered by our breweries and existing contracted capacity at third-party brewers. We continue to maintain a strong cash position with $41.2 million in cash as of June 30, 2012. During the first half of 2012, we repurchased approximately 74,000 shares of our Class A common stock for a total cost of $7.6 million. From July 1, 2012 through July 27, 2012, we did not repurchase any additional shares of Class A common stock. Through July 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 $259.5 million, and had approximately $15.5 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.

(Operator Instructions)

Kaumil Gajrawala, UBS.

First question on Lager and Seasonal, and I apologize if I missed this, did you give what each of those grew in the quarter?

Hello. It is Martin. No we don't disclose the breakout of subcategories and don't intend to.

Okay no problem. And then maybe if I can just to understand the guidance, particularly, there's a few moving parts. The $0.13 we pull out of the second quarter as a one-time, but in your guidance, you are including it from freshness, so do you want in our guidance or is there something unique about freshness this go-around that you singled out the impact? Because in the past it has always been something that we had been including, as it appears to be normal course of business?

Well, we singled it out because year-on-year we have a much more significant number of wholesalers on Freshest Beer and therefore, the case decrease is actually a very significant impact to shipments and earnings. The full-year effect is probably not as significant because the inventory levels at wholesalers at the end of the year, historically, have been lower. So that is why we singled it out.

Okay, got it. So the guidance that you have given us, as you state in there, it includes freshness but there's nothing that you -- you are not suggesting that we should be making adjustments.

I think the guidance that we have given is what we expect our reported number to lie between at this point in time based on current information.

Okay, got it. And then if I could just ask a little bit about the category. I know you don't want to break out what Lager did or anything. But as we look across the scan data in the category, not just for yourselves but for a variety of the largest craft brewers, it seems that many of the flagships have been struggling. Could you try to give us some context on how we should be thinking about what that means for the category or maybe what that means about the consumer within the category?

Sure. Well, first of all, the publicly available reported data from those channels does not reflect the full channels that we operate in and therefore, you can obviously draw some conclusions from it but I would note that it doesn't necessarily match with what trends we are looking at on a total business basis. As it relates to those measured channels, what you are seeing, is that retailers are embracing the craft category, adding space to the category, and bringing in a much greater variety into that space and at least while that happens, the traditional brands that have had strong positions in that space -- don't give up share of space -- not necessarily giving up shelf space, but give up share of space to a wide range of new entrants, and therefore the impact at retail of those brands is perhaps diminished within the cross section, even while the cross-section may be doubles in space or triples in space depending on the retailer.

So that is the current environment that we are living through, it is certainly changing pretty rapidly. And within that, there are different levels of lead style health that are being displayed. We tend to think about it as total brand health and total brand volume and we are delighted -- one, we are disappointed with where our growth year-to-date has been but we certainly think it can be improved upon, on the Sam Adams brand. And it is obviously the number one priority for us as a Company, given that the craft category is growing faster than the Sam Adams is growing. So that is what we're focused on. Within that brand family, there is lots of different dynamics going on. Even within the brand family, our number of SKUs has drastically increased, so there's some cannibalization going on there but what we look for is are we holding draft lines, are we in good shape on premise, and while again, I don't think the growth of the Sam Adams brand meets our expectations, it is not necessarily reflective of what the numbers you're looking at.

Oh, got it and if I could just ask a quick clarification one and I will get into the queue if I have anything. Is, specifically on the scanner data, there were some confusion on Angry Orchard potentially showing up as hard core cider. Would you be able to clarify what actually might be going on there?

I am not fully briefed on this issue. We subscribe to one of the services and we don't subscribe to the service that was reported as potentially having the issue so I really could not comment.

Okay. No worries. Thank you.

Judy Hong, Goldman Sachs.

So just going back to the Sam Adams brand, and Martin and Jim, you guys have talked about being disappointed about year-to-date trend and lag in the category. So I just wanted to get your perspective on how you are assessing really the brand health at this point and a lot of the investments you are making behind the trademark, whether it's capital investments, or marketing investments, or people investments, or the Freshest Beer investments. How are you getting comfort that those are maybe enough to really drive acceleration in terms of the brand performance going forward?

Yes. Well, I think with the easiest way for us to monitor brand health is to look at on-premise brands, where the environment isn't perhaps changing quite as fast as it is changing in the off-premise channel that you're looking at the measured data, and there we can see the strength of the tap handle, same store sales, and those sorts of measures give us comfort. As a think about our reaction to what's going on in the off-premise class of trade and in some of the segments of the on-premise parts of trade, we formally believe that feet on the street is an important tool that we have and we can afford and versus this time last year we probably increased or plan to increase our sales organization by over 20%, and that, we think, comes back to us in cases in the subsequent years. That is one of the areas for investment.

We've obviously -- we are in the process of completing a complete packaging redesign, which given the number of SKUs we have, is a major investment in rollout. Plus, as Jim mentioned in his prepared comments, we've just rolled out new creative that we are spending bucks behind. So from a brand perspective we feel good that we have great beers, that we have great brand position, that some of what we are seeing is the dynamics of the put-out-to-market right now and that with the appropriate investments and continued efforts of our wholesalers and our people, that we can grow the brand and that is where we are directing our efforts.

With regards to your question around capital, we're obviously growing as a total business and we have capital investment to support that growth. Our growth this year is the size of a small brewery so we are adding that to our existing infrastructure and are doing that at marginal capital costs on an incremental capacity basis. We are also adding some capabilities around our ability to support the innovation in packages in the beer and space and also, with our tea and cider brands. So there's some packaging capabilities that will be planned, added in time for 2013 and some other cost-savings initiatives that we have implemented involving investments that has returns on it, that will show up in the latter half of '12 and in '13. So the capital number is supporting that wide range of activity, some of it which is driven by the complexity, but a lot of it which is driven by the growth and just, as we reach certain growth levels, we can make some investments to improve our operating costs.

Okay. On then Angry Orchard, could you give us some -- how the rollout went versus your expectation -- when you look at your shipment or your sales, I think you have given some projections as to what Angry Orchard could be as a percent of total cider category. How is that trending versus that expectation and then maybe some color as to what channel that brand is doing well, whether it's food store or convenience stores?

Sure. We have been pleasantly surprised by the reception from the drinker and the retailer and the wholesale for Angry Orchard. The cider category, I should start off and state, is quite small -- published numbers in the US range from 6 million cases to 8 million cases, maybe, last year. So it is not a particularly big category and I think we talked about this last call. And certainly, I think when we talked, we hoped for a reasonable share of that over time. We have been a little surprised by the warm reception that we have received and maybe how fast we have been able to gain share in that category. Obviously, we are still the number two or number three player in the category, and certainly have aspirations for more, but we have been pleasantly surprised. As such, it has stretched our ability to support those shipments from an operational perspective and so that again explains some of the capital increases that you are seeing and we are still chasing that but yes, we have been very pleasantly surprised.

And is there a difference in terms of the penetration by channel? So if I look at the measured channel data again, just given that we do get that data, it looks like the brand is a pretty big percent of your business already, and I'm just wondering, does that apply to the broader channel or is this brand much bigger in food store channel right now?

I'd say, that we probably -- if you think about distribution and penetration, and obviously this is an evolving -- if you look at the data you have, I'm trying to remember the last data I saw on distribution in the classes of trades that you are referring to, was I think still mid-20%s or maybe high 20%s or low 30%s, so there it is still a lot of distribution gain. So we still have a lot of upside in those channels from growing that category and while we've rolled nationally, there is distribution to be gained. But in other channels that are unmeasured, I think our distribution penetration is probably significantly lower than that. I think that's been the easier channel to penetrate. Our penetration of the on-premise has not been quite as aggressive as that, so I suppose that is a long way of saying, one -- no, you should not necessarily conclude the size of our business based on that data, and we apologize for that. That is the data you have, we understand. Two -- even with that data, there is still distribution upside, and based on what I'm saying, we still have distribution upside across our business.

Okay. Okay. And then just my last question is, so on the Freshest Beer -- the impact from the Freshest Beer Program, it seems like the impact on shipments is actually much bigger than what you had called out previously, although the percent of your volume that is going to go through the Freshest Beer Program hasn't really changed, so it's 75% by year-end. So is it that the level of inventory is really coming down a lot more than what you had talked about at those wholesalers that are participating? So the percent of volume is not that different, but the actual inventory reduction at those wholesalers are bigger than what you had anticipated?

I think we had always anticipated that the bringing the wholesalers on would be somewhat back-ended. That relates to some staffing that we do. One of the investments behind Freshest Beer is bringing the order planning part of this more in-house, and we needed to staff up from that. We took off a pretty big bite fourth quarter last year and we'd spent most of the first quarter digesting that and getting that up and running smoothly, so that explains why we are where we are in terms of the percentage of our Business.

As it relates to the projection, I'm not sure we had provided a quarterly projection and I apologize if this is a little difficult to deal with. The wholesale inventories typically are much higher at the end of the second quarter than they are at the end of the full year. So the full-year impact, if we were to half wholesale inventories, for instance, would be a much lower number at the end of the year than it happens to be for the end of the second quarter and the reason we're putting this number out there is because it is so significant.

With regards to how we finished June from our wholesale inventory perspective, for our non-Freshest Beer wholesalers, they were typically pretty much where they were supposed to be. For our Freshest Beer wholesalers, they were perhaps a day lower than we perhaps had thought, but again that is not that material, related to this number that we put out, we are in the -- somewhere between four days and nine days across the Freshest Beer wholesaler system so that is obviously pretty tight.

Okay, thank you.

James Watson, HSBC.

A lot of big investments, so I wanted to talk about, just a little bit more on the CapEx overall, just that 10% or 11% of sales it looks like, your estimate for the year, it's a huge number. In terms of the timing, is this the case where all of the opportunities came at once or is this a rate that is -- should go back to normal next year, or are we going to see this going forward?

I think it is a combination of a couple of things. And one of them is that as our business grows within our existing breweries, we have a requirement to add tanks, so we are starting to see that. That is certainly a piece of this number. There are some other pieces of the number that relates to the growth of some of our brands, and being able to put duplicate to these capabilities into two breweries instead of just having it at one, and those have some ROI estimates -- ROI returns to those types of investments. If I was to categorize the total capital amount, I would say that probably 40%, 50% is driven by ROI-type efficient things that should show up in future years, that have what we would regard as attractive returns to them.

Then some of it is related to just what is going on in the range of businesses that we have, as it relates to complexity and capability, so whether it be investments to complete our wood [ton cellar] in Cincinnati to being able to do in the future, a wider range of bottle shapes and sizes and finishes or package configurations in the future. Some of this we haven't yet seen the benefit of and certainly we struggle a little bit giving guidance on capital as to the timing of the completion of the capital. We try and do it more for cash flow forecasting than anything else. But some of this will show up as benefits later in the year, or in 2013.

Great, and to dive in a little further with the packaging, you guys talked about the updated brand packaging. I just wanted to know more about it, in terms of what drove that, we've heard a lot from the bigger brewers in the US about putting a lot of money and innovation behind packaging. So is it a competitive thing? Is it maintenance, that it's just time again to cycle into new packaging? And what is the timeframe on rolling that out and maybe on even seeing a return?

Yes. It relates to packages that historically we have used third parties for and as that volume has grown, there becomes a potential for bringing that inside. So I don't think it is necessarily a shift that one is going to see externally, but more basically building our internal capabilities to control our own capacity and be able to respond and support our business appropriately.

So this is something we're just going to see hopefully falling to the bottom line eventually, but not in the marketplace?

Yes, I think that is probably fair based on what we currently see. It is probably more security of supply and bottom line initiated, but it also gives us perhaps greater flexibility on innovation, on different package sizes, but at this point in time, I can't comment on specifics.

Okay. And just one last one. You upped the volume and gross margin guidance. Is this really a case where you are looking at reinvesting all of that as you kept the EPS the same?

I think that is what we currently see. We've -- I mentioned some of the investments we have made, we've also got some increases of complexity and some element of just managing that capital number also has some G&A costs to it.

Great. Thank you, guys.

Mark Riddick, Williams Capital.

A couple of quick questions. I know a lot of these things have already been covered. So you can move on to some of the other areas. You had mentioned, as far as the adding of sales personnel and I was wondering if this, looking to add I think it was 30 sales people that was in the press release, if you were looking at it in a similar fashion as to the additional sales people that had been brought on at the beginning of last year, I believe it was, from the standpoint of do you foresee this being something that you are looking to do relatively quickly to take advantage of opportunities you see in the marketplace or if that is something that we will expect to see more spread out than what took place last time?

We basically said with our senior sales leadership, and look at how we structure the sales organization and how we allocate their activities against class of trades and market. We look at that twice a year and so coming out of that tends to be decisions as to what markets and/or class of trades and/or customers can support and need the appropriate resources in the way of people. So certainly, we tend to be a little lumpy in our decision-making because it flows from that process. But obviously, we can't just snap our fingers and add that number of people in a week. That is a hiring process that takes a while and so the actual number will be spread out a little bit, but it does come in a bit of a lump.

Okay, and then one of the other things that I thought was interesting as far as the gross margin expectations for full year, especially in light of how many other commodities have been increasing as much as they have over the last few weeks. I was wondering if you just spend a moment and touch on some of the commodities that you're seeing that -- I can understand, obviously, that you're having greater depletion growth than what we were expecting before, hence the increase. But I was wondering if that's more a function of how far bought out you had been on your commodity expectations for the year, hence the ability to increase the gross margin expectations for the full year, and if any of that flows into next year, as far as being hedged out?

Yes, well I think some of the gross margin for the full-year benefits for some increased volume because obviously we are operating breweries with some fixed cost. From a commodity perspective, in a random order, I think fuel and freight are looking lower than they did when we last spoke to you, and so that is in our estimate. Corn and barley and wheat are obviously higher now. On barley, we were majority covered but not fully. We certainly are in better shape than we thought we were going to be last October, November when we provided full-year guidance to you, but it is not as good as when we last spoke to you.

And although, again, a lot of this is uncertain, some of the growing areas -- or the growing areas that I understand are mostly affected are US and how that impacts Canadian barley, we will have to see. On the other commodities, I am not aware of any major moves and some of what the gross margin moves that we have, are beyond that, relate to mix-type issues, just between beer, cider, and tea, and so it is a little bit more complicated.

Okay. And one last thing, you had mentioned as far as the need to secure additional tanks as part of your relationships with your partners there, and I was curious as to whether or not that becomes something that has been more difficult given the growth of craft beer overall, as far as from a timing standpoint, availability. Is it harder to bring in new tanks or does it take longer to get a hold of as many as you think you're going to need, relative to maybe where it was a year or two ago, given the expansion of the category?

We haven't actually put tanks in for, I want to say, quite a while, prior to the last nine months, so we don't really have a -- any information as to what it was like before. I think it is fair to say that we increased our capital estimate. I want to say it was December last year, which is when we committed to the tank investments and if you were to drive past our Pennsylvania brewery, you would see them standing today. So from my perspective, hats off to all our employees, the engineering team, and all the employees in Pennsylvania for getting that done.

Excellent. Thank you very much.

Oh, and actually, if you drove past Cincinnati, you would see the same thing. So apologies to my colleagues in Cincinnati, we had the same time frame there, too.

And I have got a lot of driving to do.

You do.

Caroline Levy, CLSA.

Good afternoon, this Michael Lavery in for Caroline. On the depletions, I know you raised the guidance there, it looks like the first half is roughly at the low end of that range already so what would be the drivers of an acceleration that you think is probably likely to come in the back half?

Well I think, there's a couple of things. First of all when you think about the first half number, you have to think about timing of July 4, which certainly depressed the first half numbers, which for us ran through the Friday or Saturday before July 4. So July 4 seemed to provide, I'm not sure whether total beer sales increased over that period but it certainly got spread out over that period, and for us, therefore, depletions fell into June and July, as opposed to into June, last year. I think looking forward, we obviously expect a benefit from having rolled Angry Orchard in April and we missed that in the first quarter and so that's certainly a factor for thinking that we will have a slightly stronger second half than first half, but again that is somewhat -- that's not a big contributor in the scheme of things, given where that brand is right now. And then I think we also believe that we're getting a pretty clean cut over to Octoberfest right now and we expect some lift from that based on our Freshest Beer wholesalers are converting as we speak, and our belief is, is that will lift the numbers

And back to the gross margin, I want to make sure I just caught it correctly. You were talking about some of the mix as a driver of the improved outlook, right? So does that mean that Angry Orchard is gross margin accretive?

Again, somewhat complicated, it has a lower tax and pricing -- the revenue per barrel is probably a little lower than beer but it depends on mix. The net revenue per barrel is maybe a little higher than beer and the cost of goods is a little higher than beer. So we are still exploring that one. I just would not want to pretend that there weren't some mix effects in our range there.

But is mix overall a positive driver or is it just depend -- is it too close to call?

I think right now we think it is even but it will depend on how the different brands grow in the second half of the year.

Okay. Fair enough. And on the freshness initiative, I know the $0.13 in the quarter is a decent amount, and I understand you're saying that the pacing skews more heavily to Q2, but sorry if I missed this, what is the full-year impact? I think you had been saying around $0.20 to $0.25. Is that still the outlook on the complete full-year?

Yes. If we previously disclosed it, we are not changing it. Again, just when we get the full-year impact, if we didn't add any wholesalers to Freshest Beer, then we get the full impact, the full-year impact would not be what the first half impact would be because some of it reverses, some of those shipments will happen in the second half of the year, because at the -- year-on-year, the depletions will get back to -- sorry, the inventories at wholesalers will return closer to where they were at the start of the year.

Okay.

So it is a timing issue.

Okay, that makes sense. And on the packaging redesign and communication, could you give more color there, what is some of the timing around that and how different is that going to be?

Well from a packaging perspective, I would like to think that if you walk into retail shelves, I'm going to say, three weeks from now, you will see a different look and feel for the Sam Adams packaging. On the brand, there's still the very recognizable iconography, but I think you will see that we have updated it and created a nice billboard. I was out in market over the last two weeks and was starting to see our lead styles show up with it. It will take a little longer for the associated styles but I would guess by the end of August, that is what you will see it at retail, certainly in Freshest Beer markets.

From a communication point of view, we started it the last week of June, to run an updated campaign that builds off our previous work and I think we're -- it is available if you want to find it on our YouTube channel or other online sources. We have updated executions for our Octoberfest and those will be published in a couple of weeks to support our big push in September, October. And we are just very happy with it, they received good responses from people who comment on these things online whether to us or other people, and obviously too early to tell any impact other than the anecdotal.

That is great. Thank you.

Andrew Kieley, Deutsche Bank.

Thanks for taking the question. So I just wanted to go back to the bogey that you put out there for the depletions in the second half, and aside from cider, is that also assuming some lift from tea, new distribution on tea, because I think you were adding California and Texas and just when those markets take hold?

Well, I think it's fair to say that for our full year we are projecting growth on all our brands. So, yes.

Okay. And that includes beer, so just beer as a segment for you overall, that is a component of that acceleration in the second half?

Yes. That's primarily around Octoberfest, which is such a big seasonal for us, and if it was to do what we think -- we hope it would do, that obviously lifts that boat a little bit more than it was floating in the first half.

Is Octoberfest -- is that going to roll out earlier than it did last year? Octoberfest?

It is running maybe a week earlier, frankly, our Summer Ale dried up a little earlier than we anticipated and so it has been seen at retail already, which is perhaps a week earlier than we would have thought it would be reported. But in the scheme of things, that sort of noise, if that does -- executed through the system, then that might provide a little bit of lift.

And then, I'm not sure if you already mentioned this, but can you just talk about where cider is in terms of the geographic rollout, where it was in the second quarter and where you think it gets to by the end of this year, say?

Yes, well, we are national -- the geographic, if you think about this, we launched in New England and a couple of other markets, last September. In January, we replaced Hardcore, in some markets where Hardcore was still going strong and we did that January, February, and then we rolled the rest of the country in April with different degrees of punctuality, whether it will be April or May, but we're basically a national now. That doesn't mean to say we have equal distribution nationally. We've have some great support from some chains that recognized the opportunity and I think have been very happy with how it's performed, but again based on the published number for the reported classes of trade, there's still distribution opportunity to increase distribution if we were to get Angry Orchard into every reported store where cider is sold. So we are working hard at that and I hope we would see some lift of that, frankly, this year and going into next year, because it will take us a while to close those distribution gaps.

Okay. And then Martin, I just wanted to ask, I know, I think Anheuser-Busch has this -- I don't know what they're called, but like a retailer-focused program, or however they're calling it, looking at shelf space allocations between domestic lights and crafts. Is that -- are you seeing any impact from that in the marketplace or shelf space that's is changing because of that? Or just any input on that program?

I think to date, we haven't anything, but most of the shelf sets, the big wave of shelf set changes will happen September and October, so I think when those changes get announced, we'll get a sense for the impact of those discussions and we will also get a sense for how retailers are thinking about the category -- the beer category, generally -- have they swung too far or not far enough. My sense is you are still seeing retailers move more towards craft space. But again, when the big chains do their resets, we will get a feel for how the more sophisticated retailers are thinking about how to use beer within their stores to drive traffic.

Okay, and then just last question, just a technical question on the interplay between the shipments and the depletions. It looks like they've been aligned more closely here year-to-date, and I'm just trying to think about how that lines up in the second half. Specifically, because you have a big -- a very heavy volume lap in the fourth quarter. So will that drive your full-year shipments significantly below where the depletions come out? Or how we should think about that?

Andrew, it is Bill. If you remember last year, we were on a 53-week shipment year and this year, we are on a 52-week shipment year, so that one week will make a difference.

In the fourth quarter?

Yes, in the fourth quarter.

Okay, thank you.

(Operator Instructions)

Judy Hong, Goldman Sachs.

Thanks for taking a follow-up question. I just wanted to maybe get your perspective on the pricing environment both within the craft category and maybe the broader beer industry as a whole. Again, if I just look at the scan data, maybe some of your bigger craft competitors have been lagging in terms of price growth versus your brand. So I am wondering is this what you are seeing, is this a concern, and how are you thinking about the broader pricing environment for the market?

Sure, Judy. As we said before, we don't really follow what the big guys are doing so we tend to think more about what is going on with imports and domestics, especially craft beer. We obviously executed some pricing in the first quarter, which has flown through, we believe on net revenue per barrel basis to us, although it did not fully cover our cost increases related to barley and other cost drivers this year. I think it is fair to say we did not see the imports move and we did not see all the craft move. Some moved and it's obviously market-specific, so it is a little difficult to generalize but as you look at the recorded numbers, our price realization in those is not as -- we have gone up and other guys haven't moved so much, particularly on 12-packs and that is certainly, we think, contributing to some of the weakness in the reported numbers, and we're looking at that and deciding how to address from a feature ad display perspective.

So yes, I think it is fair to say that not everybody followed or perhaps retailers are featuring other brands perhaps more than they have in the past. As we look forward, obviously we are concerned by exactly where the agricultural crops come out. I don't think we see too much pressure on the hop side but obviously the weather in the US could put a significant support on barley and therefore on malting barley, which sits above that, and it is driven by the corn prices. We think it is a little early to tell exactly how this plays out, as it relates to next year but is something we are monitoring closely and our intent is always to try and maintain a healthy pricing within the category but if the category develops to a point that we need to take action in order to make sure we get our share of ads and displays, then obviously we will take that action.

Okay. And, Bill, I apologize about this question again, about the Freshest Beer Program impact, but I think you had originally said the impact on shipments were going to be 100,000 to 300,000 cases and year-to-date, it is obviously a lot larger so when you said the phasing moderates in the back half, do you still end the year with between 100,000 to 300,000 cases impact? So in the second half, you actually see a positive swing in that inventory number?

Yes, Judy, it really depends on the number of distributors, what their levels of inventory are, and when we bring them on, and how aggressive we are with the program with those distributors so it is really hard to say what the exact amount is. But we have estimated that it would be, as Martin indicated, lower than our first half, because the first inventories are so much higher at the end of the second quarter than they typically are at the end of the year.

So Judy to be specific, some of those 600,000 cases we didn't ship will get shipped in the third quarter or the fourth quarter.

We are going to deplete them so we have to ship them.

So there has been some movement of shipment. The full-year guidance on the inventory, neither Bill or I have that number in front of us right now, we're just going to say that we are not changing that guidance at this point in time and the reason that guidance would be so much lower than the 600,000 is to Bill's point, the year-end inventory at our wholesalers is a much smaller number and therefore, even if we half it, it is not as big of a number as it is at the end of the second quarter.

Okay, so there is a catch-up probably in the third quarter, essentially, in terms of shipments.

Yes, and I don't want to commit to the third quarter but certainly in the second half of the year, there is a catch-up because we fully anticipate cases being depleted and we have to get them to the wholesaler.

Right. Okay, thank you.

There are no further questions at this time.

All right. Thank you all for joining us and we look forward to talking to you in a few months.

Cheers. Thank you.

This concludes today's conference call. You may now disconnect.