Boston Beer Company Inc (SAM) 2016 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Boston Beer Company Q4 2016 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Mr. Jim Koch, Founder and Chairman. Sir, you may begin.

Thank you, good afternoon, and welcome. This is Jim Koch, Founder and Chairman, and I'm pleased to be here to kick off the 2016 fourth-quarter earnings call for the Boston Beer Company. Joining the call from Boston Beer are Martin Roper, our CEO, and Frank Smalla, our CFO.

At the top, I need to comment on the news we have recently announced. Martin Roper, who has been our President and CEO for more than 17 years, plans to retire in 2018. Martin has been a true partner to me, as we grew the Company over the last two decades. I am pleased that Martin will remain fully engaged and committed to leading the business as CEO until a successor is found, and a seamless transition is completed.

Our Board of Directors has created a search committee and retained Korn Ferry to assist in identifying and evaluating the best candidates to succeed Martin as CEO. We are appreciative that his continued commitment to Boston Beer affords us the time to conduct a comprehensive search for his successor, while continuing to make progress against our 2017 business objectives.

I'll continue 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 Frank, who will focus on the financial details for the fourth quarter and FY16, as well as our outlook for 2017. Immediately following Frank's comments, we will open the line up for questions.

We are disappointed with our depletion trends in 2016, which have remained weak so far in 2017. These trends are affected by the general softening of the craft beer category, and cider category, and a more challenging retail environment with a lot of new options for our drinkers. New craft brewers continue to enter the market, and existing craft brewers are expanding their distribution and tap rooms, with the result, the drinkers are seeing more choices, including a wave of new beers in all markets.

We were particularly disappointed with the performance of the first of our new spring seasonal beers, Samuel Adams Hopscape. We are introducing later this month our second spring seasonal, Samuel Adams Fresh as Helles, a bright helles lager with orange blossoms, and also releasing a refreshed Samuel Adams Rebel IPA, featuring a new packaging design and a new recipe with experimental hops that create a more tropical and piney IPA. We are also executing the national rollout of Rebel Juiced IPA in bottles and cans for the first quarter of 2017 to complement the national draft release in the fourth quarter of 2016.

We believe that the history, authenticity and quality of the Samuel Adams brand, our unique beers, and our willingness and ability to continue to invest behind our brands position us well for future growth, and we are committed to improving our current trends. I will now 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.

Fourth quarter depletion trends were driven by a decline in Samuel Adams, largely due to increased competition in the craft beer category, and by declines in Angry Orchard, mainly due to general weakness in the cider category. Partially offsetting these declines were the growth of Twisted Tea, which continues to grow distribution and pull, and the impact of the launch of Truly Spiked & Sparkling, which established itself as a leader in the emerging segment of hard sparkling water. During the quarter, we also saw some early benefits of our cost-saving initiatives.

Thus far in 2017, we are seeing particular weakness in our Samuel Adams seasonal depletion trends, due to the slow pull of our new seasonal beer, Samuel Adams Hopscape, which we believe is primarily due to executional misses, with the additional impact of the greater number of new options available to our drinkers at retail, and general weakness in the seasonal subcategory. We are taking our learnings from Hopscape, and applying them to our planned seasonal transitions to Fresh as Helles and then to Summer Ale in the second quarter. We like our new Sam Adams packaging and our media advertising message, Pursue Better, and our plans for the summer.

Angry Orchard and cider trends year-to-date are similar to the declines we saw in 2016. We are prioritizing returning the cider category and Angry Orchard to growth, with a new media campaign and the first quarter national launch of Angry Orchard Easy Apple, an unfiltered, refreshing hard cider that was well received in limited test markets last fall.

Our number one priority in 2017 is returning both Samuel Adams and Angry Orchard to growth through continued packaging, innovation, promotion and brand communication initiatives. Our brand and sales teams are conducting a comprehensive review of our core brand strategies and activation plans to ensure that all our investments are effective and efficient in building long-term brand equities. We will continue testing strategies and validating effectiveness, so that we can focus our investment on activities that turnaround our trends.

Our second priority is a focus on cost savings and efficiency projects to fund the investments needed to grow our brands. We have adjusted our organization to the new volume environment, including resizing short-term brewing capacity, and have implanted changes to our spending policies and behaviors.

We are working to simplify and optimize our processes, and to improve ingredient and material yields across all our brands. Based on these efforts, we are maintaining our previously stated goal of increasing our gross margins by about 1 percentage point per year over the next three years, ignoring mix or volume impacts, while preserving our quality and improving our service levels. Our third priority is long-term innovation, where our current focus is ensuring that Truly Spiked & Sparkling maintains its leadership position in its segment and reaches its full potential.

Over the last 12 months, we have rebuilt our leadership team and realigned the organization. We have reoriented our brand and sales team to better align with our opportunities and to provide brand leadership, and have improved our digital marketing and experiential promotional capabilities to support all of our brands. I am very excited by the team's progress on insights into our challenges, and the urgency with which they have developed potential solutions and significant cost improvements to fund our planned investments.

We believe we have strong brands in attractive categories, and that the best long-term value creation is continued investment to return our brands to growth. With that perspective, we intend to maintain our planned brand investment levels, even as we have adjusted our volume guidance down to reflect the volume declines we have seen thus far in 2017.

Our larger than usual guidance range reflects the uncertain volume outlook. Projecting full-year depletions, volumes and profitability will remain very difficult, until we have better visibility into the success of our key initiatives after the second quarter. We are optimistic for future craft beer and cider category growth, and we are taking steps to ensure that we are well-positioned to benefit from that growth. We are committed to investing in reaction to the opportunity that we see with all our brands, and remain prepared to forsake short-term earnings as we invest to return to long-term profitable growth.

Based on information in hand, year-to-date depletions reported to the Company through the six weeks ended February 11, 2017, our estimated to have decreased approximately 15% from the comparable weeks in 2016. Now, Frank will provide the financial details.

Thank you, Jim and Martin. Good afternoon, everyone. For the 1- week fiscal fourth quarter, we reported net income of $22.2 million or $1.75 per diluted share, an increase of $0.54 per diluted share from the 13-weeks fiscal fourth quarter last year. This increase was primarily due to an increase in net revenue and decreases in operating expenses, partially offset by a reduced gross margin. Shipment volume was approximately 974,000 barrels, a 2% increase compared to the fourth quarter of 2015.

We believe distributor inventory as of December 31, 2016 was at an appropriate level. Inventory at distributors participating in the Freshest Beer Program as of December 31, 2016, decreased in terms of days of inventory on hand when compared to December 26, 2015. We have approximately 77% of our volume in the Freshest Beer Program.

Our fourth-quarter 2016 gross margin decreased to 49.1% compared to 50.6% in the fourth quarter of 2015, primarily due to package and product mix effects, and increased returns, which were partially offset by price increases and cost saving initiatives in our breweries. Fourth quarter advertising, promotional and selling expenses decreased $5.9 million compared to the fourth quarter of 2015, primarily due to decreases in point-of-sale costs, lower freight rates to distributors and lower media advertising costs, all supported by our initiatives to reduce inefficient and ineffective spend. General and administrative expenses decreased by $2.9 million from the fourth quarter of 2015, primarily due to a favorable impact of $3.6 million in stock compensation related to the planned retirement of our CEO in 2018, partially offset by increases in salary and benefits costs.

Our full-year net income decreased $11.1 million or $0.46 per diluted share to $87.3 million or $6.79 per diluted share compared to the prior year. The decrease was primarily due to lower shipments and lower gross margins, which were partially offset by lower advertising, promotional and selling expenses.

Full-year 2016 shipment volume was approximately 4 million barrels, a 6% decrease from the prior year. Full-year 2016 gross margin decreased to 50.7% compared to 52.3% in the prior year. The margin decrease was primarily due to package and product mix effects, unfavorable absorption impact due to lower volumes in our breweries, and increased returns, which were partially offset by price increases and cost saving initiatives in our breweries.

Full-year advertising, promotional, and selling expenses decreased $29.4 million compared to the prior-year, primarily due to decreases in freight to distributor as a result of lower volumes and rates, and lower media advertising and point-of-sale spending. Full-year general and administrative expenses increased by $6.5 million versus 2015, primarily due to increases in salary and benefits and facilities costs.

Looking forward to 2017, based on information of which we are currently aware, and reflecting the uncertain volume outlook, we are targeting 2017 earnings per diluted share of between $4.20 and $6.20, but actual results could vary significantly from this target. FY17 includes 52 weeks, compared to FY16, which included 53 weeks.

We are currently planning a change in 2017 shipments and depletions versus 2016 of between minus 7% and plus 1%, a decrease from the previously communicated estimate of a change between minus low single digits and plus low single digits. We are targeting national price increases per barrel of between 1% and 2%. Full-year 2017 gross margins are currently expected to be between 51% and 52%, which we expect to increase during the year due to progress on our cost saving initiatives.

We plan increased investments in advertising, promotional and selling expenses of between $20 million and $30 million for the full-year 2017, not including any increases in freight costs for the shipment of products to our distributors. We estimate our full-year 2017 effective tax rate to be approximately 37%, excluding the impact of the new accounting standard, employee share-based payment accounting, also known as ASU 2016-09, which is effective on January 1, 2017.

We are currently not planning to provide forward guidance on the impact that ASU 2016-09 will have on our 2017 financial statements and full-year effective tax rate, as this will mainly depend upon unpredictable future events, including the timing and value realized upon exercise of stock options, versus the sale value when those options were granted.

We are continuing to evaluate 2017 capital expenditures, and currently estimate investments of between $40 million and $60 million, primarily for continued investment in the Company's breweries to drive efficiencies and cost reductions, support product innovations, and further growth. We expect that our cash balance of $91 million as of December 31, 2016, along with future operating cash flows, and our unused line of credit of $150 million, will be sufficient to fund future cash requirements.

During the fourth quarter and the period from December 31, 2016 to February 17, 2017, the company repurchased approximately 275,000 shares of its Class A common stock, for an aggregate purchase price of approximately $45.1 million. We have approximately $154.7 million remaining on the $781 million share buy-back expenditure limit set by the Board of Directors. We will now open up the call for questions.

(Operator Instructions)

Laurent Grandet, Credit Suisse.

Good afternoon, everyone. We are now a bit more than just four months into the new packaging change on Sam Adams. Could you give us a bit more of [quality results] from consumer reaction and how sales have been impacted by this packaging change? I know that you didn't put much marketing behind it, but I would like to have a bit more details about this re-launch.

Sure. I think as we look back over the last four months, we were actually pretty pleased with how the new packaging was received both by retailers, wholesalers and drinkers, particularly in the first six weeks of that sort of process. And frankly, through the middle of December, we were very happy with the Sam Adams trend improvement that was coming through. And since the middle of December, we have seen just weakness across the whole brand. But I think its hard to separate as to effects of packaging versus the effect of the seasonal stumble with Hopscape.

So overall, I think when we talk to our brand team and we do the research, we are happy with both the packaging direction we took, the bold leadership look of Boston Lager and the other packaging changes, indeed our Winter Lager ran out early, so we were basically thrilled. And, also through the impacts of what we believe our Sam Adams media campaign [pursue] better is also helping.

We think the last eight weeks is incredibly cloudy because we launched Hopscape in, we got great retailer and wholesaler execution. There is a lot of -- Hopscape reached the retail floor and, frankly, reached drinkers, and we just haven't seen the repeat in the fourth. And we are trying to [tease] that apart right now and take the learnings to Fresh As Helles, which is coming in a week. But it basically blocked our system up and has affected the total Sam Adams brand trends quite significantly.

Thank you. Thank you very much.

Judy Hong, Goldman Sachs.

Hey, guys. How are you?

Hi, Judy.

Clearly, I know that you were disappointed by the [depletion] decline year-to-date. I am just surprised by the execution mix up that you talked about. I think the seasonals have kind of been a tough place to be for a while and your decision to launch the new seasonals was a little bit surprising.

Can you maybe talk about a little bit more color in terms of what exactly happened and given year-to-date trends, isn't your full-year depletion guidance still too optimistic? And what is the rational for continuing to increase investment spending when there is so much volume uncertainty for your business, maybe taking a step back and assess the situation. Could that be more of a rational strategy?

Thank you, Judy. Let me take those and then I will allow Jim to comment over the top. On the seasonal side, I think obviously we are doing planning 9 to 12 months in advance. And we determined that one, we had the executional capability on the Freshest Beer Program to execute five seasonals instead of four.

We thought there was an opportunity in the first quarter to do that, its our lowest volume quarter for seasonals and generally, and there was an opportunity to try it and see. Historically, when we have launched new spring seasonals into that quarter, we have seen 10% to 20% growth of the spring seasonal. And so we thought it was worth trying and the competitive set was moving to three seasonals from four, so we thought it was worth that effort.

And going into it, we actually launched a little early because, as I said, the Winter Lager performed well. What we have seen is that it is not generating the pull of the repeat and we are still diagnosing that. There's a range of potential reasons for it, maybe the beer is too hoppy, maybe it is the name of the beer. Maybe the packaging doesn't call out seasonals enough. Maybe people are looking for the old seasonal, which is still available in the form of Cold Snap in many markets, because we have produced it, as what we call, a seasonal overlay for the time period. And that is actually done very well relative to the comparable SKU last year.

But our Hopscape has not compared to Cold Snap in any way or pull and obviously that is showing up in the IRI data. So we are still not completely clear on all the causes, but there seems to be a combination of things in how the beer is presented and sold to drinkers, more so than a lack of retail execution. I think our sales organization and our wholesalers delivered great retail execution.

And one of the reasons for our caution on the first quarter and second-quarter is it may well be that the Fresh as Helles will be a repeat. We just don't know. We are certainly cautious about it. We have been able to fix some things on point-of-sale and digital advertising and awareness, but we just don't know. And until we get to Summer Ale, we are not sure we will have a full sense for what the underlying seasonal trends are.

You're certainly you're right in your question to note that seasonals were week last year. It was down in the mid-teens. I think our own seasonals probably did relatively well relative to that. Seasonals are competing on the shelf with all the variety from all the brewers out there and all the limited releases, as supposed to be continuous seasonal program that we offer, and it is obviously highly competitive.

So we are going to stay the course for our seasonal plans for the year but we are certainly thinking about what to do next year and certainly in those options is do what we did this year or go back to four or go to three. And all of that is up for options, but we do recognize that in the way the drinkers have reacted to repeat purchase of what they have seen on the shelf, that some of these things perhaps we did to ourselves. Therefore, we are also looking at our consumer research, drinker research protocols that led to this package design, this name, this beer and trying to fully understand how we are in the position that we are in.

As it relates to full year, I think what we would say is there is a lot of uncertainty. This first quarter is one of our smallest volumes. It's the one were Sam Adams is the largest part of our business due to seasonality of Twisted Tea and Angry Orchard. It's also got some other knock on effects from last year. We launched Grapefruit Rebel and the Sam Adams Nitro series, so some of those launch volumes are happening in this period of time.

One of the questions we said to Frank was, okay Frank, you are our new CFO. How many volume adjustments to we want to do? Let's try to put out a range that we're comfortable with that we're not going to have to adjust. And this is the range that we came up with based on all of the modeling, based on everything we know.

Could we change it? Judy, of course. But the best guess we have right now on the assumption that this hiccup in the seasonals is sort of self-inflicted and not a permanent change in brand trend.

So we are comfortable with the full-year number. We think we have some wild cards. We think Truly is a wild card, we think Angry Orchard is a little bit of a wild card. We are not prepared to say that Cider declines are slowing yet, but there have been some signs that it is not quite as bad as it was, but we are not prepared to declare any sort of turn.

But we have a new Angry Orchard media campaign we are very happy with. We believe Easy Apple will add some incremental volume to our Angry Orchard business, so we have some wild cards there that could offset.

Obviously, if Sam Adams continues to be as weak as it has been the last six weeks, it is very hard to make all the numbers work. But we think we have some possibility to get to the high end of the range. We think the low end of the range is conservative but we have been wrong before and we could be wrong again.

And then as it relates to the rationale for investing, we are determined to continue to invest to try to turn the trends. And if the investments don't turn the trends, to stop the investments and then try something else. So in an environment where if we don't turn the trends and we fail, we basically have a pipeline of activities and we are challenging the brand teams to have a series of solutions.

As you know, our new CMO joined the company in August. He launched a total brand review. We are two-thirds of the way through it with Sam Adams and we certainly want to have some powder to invest behind the output of that. We may be a third of the way through with Angry Orchard and obviously we have upside to invest more in Tea and Truly.

So we are basically signaling that we think we have great brands. We think we should continue to invest and test to see what works. It is certainly the hardest competitive environment that I have seen in my 22 years. But we are going to continue to execute and try things and we want to preserve the right to do so, because ultimately, our business reacts to volume. Volume flows through to the bottom line and our earnings are incredibly sensitive to volume. And if we can turn that, that is where the major value creation is. So that is how we are thinking about it and we did not want to blow up the plans so early in the year just based on this stumble. I'll will pause in case anyone wants to add.

I guess, maybe just following up to Jim, I think we are finally starting to see a bit of a craft shakedown in the industry. I think your prior comment would have suggested that once we get into this sort of a shakedown, that is supposed to benefit larger brands like the Sam Adams. But right now, it seems to be quite the opposite. So what's your perspective on how long would this kind of transition take. And with Martin retiring, what does the board and what are you looking for in terms of the next CEO that can turn around a brand like Sam Adams?

Let me answer those. I don't really know how long the shakeout is going to take. It certainly will be more likely to be measured in quarters or years rather than months. There continues to be a flood of new entrants into the craft space, the same sort of thousand plus new breweries. That pace has not slowed yet, though I think the last quarter or two in craft has begun to change the attitude of people in the industry.

The slowdown has come faster than anybody expected. But the shakeout is going to take a couple of years. And we intend to continue appropriate levels of support for Sam Adams so that we emerge from this transition period with the strongest or one of the strongest brands in the craft industry.

We basically, fundamentally believe, that the categories we are in, craft beer, cider, FMBs, are growth categories and we have strong brands within those growth categories. Our best strategy is to continue to support strong brands in growth categories to generate the most shareholder value in the long run.

And we are seeing some signs that the strategy is right. We are seeing improving trends on Boston Lager. If you look at IRI trends, you will see 4 week better than 13 week, and 13 week better than year-to-date trends on Boston lager since the new packaging and the new advertising. You will see similar movement with Angry Orchard Cider of improving trends, particularly on the flagship Angry Orchard Crisp in the IRI trends.

To your second question, what are we looking for in a CEO, we are just beginning that definition process. Obviously, Martin's track record and his accomplishments would be very difficult to top, so we are looking for somebody who can meet that kind of standard of performance and proactivity and high energy and integrity and passion. And we are very fortunate to have the rest of this year, because it's going to be hard to replace someone like Martin, but we are optimistic.

Got it. Okay. Thank you.

Vivien Azer, Cowen and Company.

Hi, good afternoon.

Hey, Vivien.

So if we think about the guidance, and I totally appreciate how disappointing this is for you guys. But if we think about that and new product launches and the challenges we are seeing for the category, are you hearing any pushback from retailers in terms of taking new product? Seemingly these new product launches throughout the rest of the year, they need to work. I just wonder whether it's a combination of execution misstep on Hopscape coupled with softer, underlying brand trends for Sam Adams that persisted over the course of 2016. Whether at all that puts at risk your distribution plans for new products? That is my first question.

Sure. A lot of the distribution has obviously chain decisions. Many of those chain decisions are already made for the March, April set process. So we think we are in good shape as it relates to the key new items that we are launching. And so, we don't think so. Obviously, if trends persist long-term, then obviously, that has long-term implications, but most of the retailers are on annual set processes and will be presenting again in the August, September, October timeframe for next year.

I do think we are seeing retailers simplify their shelves a little bit, particularly some of the larger ones, and I will let Jim provide a little more color. But you are seeing some simplification of the craft category, some cut of tail and ultimately, we think that will be good for us long-term, because certainly the fragmentation on the shelf has affected our brands.

Yes, I would put some additional color to what I am seeing from retailers with regard to new items. First, they got burned last year on hard sodas which did not perform anywhere near as well as they had expected, so they have become more gun shy. And overall within craft beer, the percentage of growth coming from new items has been declining for the last three years. And actually 2016 was the first year in a long time where there was more craft growth that came from existing SKUs than from new SKUs.

Then, you lay on top of that the retailers' situation, where their cold boxes are not getting any bigger. And they are kind of maxed out on craft beer and may even be seeing the effects of what is sometimes called the paradox of choice, where if you have too much variety, it actually depresses consumer purchases in that category. I have heard speculation from a couple of retailers that perhaps the fact that there are too many choices has, in fact, turned consumers away from craft with its extraordinary variety and category clutter and confusion and pushed them to something simple when they can't figure out craft beer to have.

They just say, well, I will have a Corona. I get that one. So I think your point is well taken that there is a much higher level of reluctance on the part of retailers to put new stuff on the shelves, much higher than it was two years ago.

That is helpful. If I could follow-up on that. It's a great segue to my second question which is about Truly. If I recall correctly, I believe when you guys were offering preliminary guidance last quarter, you had said that you needed Truly to have a better prime season, if you will, in 2017 than it even saw in 2016.

But if I look at the Nielsen data and maybe this is a seasonal issue, it looks like an absolute dollar in Nielsen. Truly's revenues really peaked in August, September and have been falling sequentially thereafter. Can you comment on what is embedded in your full-year guidance from Truly, specifically?

Yes. Of course. I think Truly launched late summer and what we saw was a nice August, September peak, which made us quite excited for 2017 and then we saw pretty significant falloff, which we believe is seasonality. I think it is fair to say that a lot of our beliefs in the category are based on research rather than full-year experience and some anecdotes about the competitive products that existed before we entered last summer.

So I think what we are looking for is the distribution from the set process and the March, April time period, which we expect to be significant because it was launched out of cycle and obviously, we did not get distribution in a lot of the chains. We are looking for increased awareness among drinkers about the category and the rather unique benefits of the category. And we are looking to compete favorably like we did in the August, September time period from our market share perspective to basically hold our number one position in the category, like we were able to do in August, September.

We have taken steps to improve our product offering and packaging and point-of-sale and media and we will be -- as that national distribution gets locked in the set process in March, April, we are anticipating meatier investment that we didn't have last summer. The whole category started in New England two or three years ago and has been growing somewhat geographically from there.

We look at it as a category that needs some explanation to drinkers as to what it is. But we also see it as a category that seems to fit with some of the hotter trends in beer right now, i.e., the low calorie fitness, health consciousness that you saw in some leading growth brands that are out there.

So we think there is a fit. We think there is some education. We wanted to own the category if it exists and if it's going to be large, obviously we will be happy. If it's going to be small and long-term growth, then we have some experience in managing brands like that, like our Twisted Tea experience. And sometimes those categories are more attractive.

As Jim said, retailers are perhaps a little gun shy about the next, quote unquote, phase or fad or trend or new items. And we think we are well-positioned as an early leader with the distribution that we have secured to participate in that category and we just don't know what that seasonal volume might look like. We do know drinkers like the product concept and the beverage itself and have some views of it of being seasonal, although there is are obviously no fundamental reasons why you would not drink it year round. And we are waiting to see how that plays out.

And then as that relates to our planned investment, we will plan investment on the front end of the summer and if the volume comes, we will ramp it up. And if the volume does not come, we will consider how to approach that. But long-term, I think we would be happy with a number one position in either a small category that has long-term potential for a large category that is just a burst on the scene. And we're going to do everything we can to try and establish and maintain our current number one position.

That is very helpful. Thanks very much.

(Operator Instructions)

Caroline Levy, CLSA.

Thank you. Hi, everybody, a couple of questions. (multiple speakers) Thanks. Your CMO, is the packaging or marketing or innovation, any of that, that we are seeing right now related to his findings? Or is that yet to come?

So he arrived in August and a lot of the -- both the beer innovation and the five seasonals and even the brand names and the beer styles and the names were already in place. And even some of the packaging was in place. So I think it is fair to say that he did not have full control and he certainly was able to tweak, but he was not in full control of what we went to market with in Q1. I think that corrected itself a little bit in Q2, Q3, but obviously a lot of these plans were put in place again, in August, September when we were presenting to major retailers.

So his full-year impact I think will be seen when we present to retailers again in August and September. He has focused on short-term fixes to the extent that they are available while doing a pretty thorough deep dive to develop long-term plan and strategy. And as I indicated earlier on the call, the long-term planning is two thirds of the way through. That is still in process. I think if he was here, he would say that is where he would have confidence that he can change the direction.

Got it. Okay. Brew pubs. We hear 1 in 11 beers now is sold in a brew pub. And so part of my question is, what makes you think you have made in the last three to four years or two to three years that have led you to be in this position and what role have brew pubs played? Do you have any plans to be in the brew pub business?

Yes. I think as you look back over the last two or three years, the key miss probably within our brand messaging and communication around Sam Adams and it sort of flip flopped a little bit over that brief period of time through number of campaigns and even packaging cycles with no great consistency. I think if you think about it longer term, we probably should have been selling beer at our brewery in Boston earlier. It is a great resource for consumer research for testing what people are actually willing to pay for versus what they are willing to accept in a free sampling. That probably was missed.

We have always been a little reluctant because of our belief that it's going to affect the rest of our business. The brew pub business is a local business. It certainly is a nice contribution source for dollars to support the small brewers that are mostly subscale and to support them in their local markets.

We are not convinced that a multiple state beer hall type business makes sense, but it is something we are looking at much more closely now, given how these local trends have gone on. And we certainly think a miss as not having them for the consumer research. We are benefiting from that in Angel City in LA with the A&S brewery there, as well as the other two A&S breweries. Even in those environments, it takes a while for them to seed and become hip places to be. And so we are taking that learning and trying to decide how to apply it to Sam Adams, particularly in Boston.

Thank you. My last question if I might, and probably to Jim, is you haven't discussed at all any strategic options. Are you still loving being in the brew business and don't ever want to sell? Have you thought about any acquisitions that could leverage your sales force? How do you think about strategically over the next 5 to 10 years?

Good question. Obviously, 5 to 10 years takes a pretty good crystal ball which I don't have, but I still have a lot of faith and confidence in the future and the strength of our brands and the attractiveness of the categories we are in. I am very energized by the new management team that has come into Boston Beer Company since the beginning of last year and including Frank and Jon Potter, our CMO, who we've been talking about. Plus Quincy Troupe, who is our chief of supply chain, and is doing some fantastic things at our brewery in terms of yield improvement, cost improvement, efficiencies.

So, I remain optimistic about the long-term possibilities for Boston Beer Company and the opportunities that we have. In terms of acquisitions, we have looked at them. The people who follow the industry know there have been a tsunami of potential breweries for sale and books circulating and so forth.

But our overall feeling is that the prices have been quite high. And there have been aggressive buyers who, in our mind, have been willing to over pay, so we have tried to be very disciplined about not going out and paying the prices that have been happening. I would not rule it out should EBITDA multiples become reasonable. But when we looked at what is out there, we said, the best place to spend our money in terms of craft acquisition is in our own stock. So that is where we have spent our money because we think that is the best value.

Thank you. Thanks so much.

(Operator Instructions)

Pablo Zuanic, SIG.

Thank you. Two very simple, factual questions and then I have a follow-up. For example, in that 15% [adrenaline depletions] for the first six weeks, can you roughly determine how much is velocity and how much is loss of space? You might have mentioned, so I can get an idea of that. We are [talking about the simplification] of the craft category at some retailers, but can you be more precise in terms of are you losing space or not, and can you triangulate that to the 15% [time] depletions? Velocity and how much is on loss of space?

And the second question again, very factual and simple question. What percentage of your sales in the year come from seasonal? Thanks.

Sure. Let me take a hack at the first one. Obviously it is a difficult thing to accurately measure. The only real place we have good data is IRI and I would say that from that measure, the weakness is almost purely on a pole for point basis on our seasonal basis, pulling the whole Sam Adams family down. Here I am just talking about the craft beer business and ignoring Tea and Angry Orchard.

On an Angry Orchard basis we have held distribution and the category has been week, we have gained share of the category in our marginal basis and the reported data. And I would say that there has been a little bit of distribution cut, but the majority of the decline I think has also been pull. On the Tea side, we are building distribution and certainly the velocity seems very healthy.

Breaking the 15 down, most of the hit is on the Sam Adams side. It is on the seasonal side and I say it is pull based on the stores I have been in. We have the distribution where you'd want it. We have the product, beer on the floor, and it does not seem to be [culling]. And again, I think it is due to executional misses and communication as to what Hopscape is.

With regard to percentage of volume to seasonal, that is not a number we have ever given out on the internal outside of the business. And it somewhat depends on how you define seasonals. Do you include the seasonal overlays or just the big seasonals like Winter Lager or Oktoberfest, or Cold Snap, Summer Ale, and how do you think about variety packs, which we also treat a little bit as seasonal play. But if you look at the IRA data, only just seasonals -- of the four or five beers we have as seasonals, on an IRI basis, it is around 33%.

If you add in variety packs and think about that as a seasonal and add in the seasonal overlays, you get to a much higher number, closer to 55%, 60%. So I would direct you to that and to think from there. The other issue is it varies during the course of the year and again, that is pretty apparent from the IRI data.

Okay. That's very helpful. Another bigger picture question maybe for Jim, but if I try to think about your distribution model and your sales forces there, the [reach] that you have on the distribution side compared to other brewers, and according to most of the theories that we looked at, you are supposed to be a very good place in that regard. Then I look at a [constellation brand] and people say beer is beer. The other brands may have more or less equity, but you have [barely more especial, have no seasonals], but you only have 20%. And I can't believe [you're just going] because of Hispanics [and the demographic]. So if I had a 20% base with (inaudible) support this and here we have, -- what I want to compare is I have [Moritz especial with Samuel Adams], right? A very [opportunistic] brand, a very iconic brand, a brand that could be on trend right now. I am asking myself [as reporting there] in terms of why this brand is not doing well while the other one is doing well. You have these distribution [muscles] that supposedly both beer companies have. I have to guess that your ACV's or your distribution business (inaudible) has to be less. So what would seem as a similar opportunity for Boston Beer or Samuel Adams to grow. I am (inaudible) thinking about the Boston Lager is the basis brand. Help me understand that. We have a company that [constellations] and it's trying to develop a $15 six-pack segment in [vallas point]. And here you are describing what you have. And I had a hard time understanding, can you tell me-- I know I asked a very broad question, but to me, I am not saying beer is beer, but how can a brand be doing so much better than another one when you have distribution capabilities that apparently are similar? I am obviously missing something here, but you could just help me with that.

Well, I think you raised a very good question. I am an American, I am struggling with it too. I do believe that as you point out, there is a long-term opportunity for Sam Adams. It is a 33-year-old brand that has grown almost all of those years.

I think what we have seen in craft in the last, call it, two or three years is a momentum shift, which may well be a passing phase towards new, small, and local. And Sam Adams has not been new for a long time, it is not local in most of the country and it is not small. So craft swung towards new, small, and local as a lot of people flooded in to the category. I believe that in the long run, the brands that are well supported, that maintain consistent quality, that stand for important societal values, that they ultimately prevail.

We plan on maintaining our distribution strengths, particularly our sales force both on premise and off, and our supportive retailers, and our wholesalers with the belief that in the long run, Sam Adams will return to growth. You do see these cycles in the industry. Corona, great brand; 2016 will be the first year that they got back to their 2008 volume. They had an eight-year cycle where they hadn't returned to their peak volume. But they did a good job of maintaining their brand equity, staying the course and having the confidence that they had a strong brand and an attractive category and it has finally paid off for them.

One quick follow-up, my last one. I know your CMO, I think is two-thirds of the way through reviewing the Boston Lager brand equity. I am just trying to think, when people are drinking Sam Adams Boston Lager, are they thinking, I'm drinking a craft beer? It seems to me like it's more of, like you say, it's a national brand, it's more mainstream percentage. The consumer is not necessarily drinking a craft beer, I would assume. Maybe it's a more established brand than the others. I have a hard time thinking that the consumer is thinking, I am having a craft beer, here. So you have that equity, and you are competing more with more mainstream or established brands? Maybe the mindset has to change of where the brand is positioned and promote and market it. Am I missing something there?

I am not sure. Sam Adams was, for a lot of people, the first craft beer. It certainly, when we do research, maintains a lot of craft equities, particularly when you compare it to the mass domestic brand.

It occupies a unique space. It is not a mass domestic brand. It is not a Bud, it is not a Miller, it is not a Coors, so people know it is not a mass brand. They know it is not an import, and those are kind of the three categories out there. Imports, craft, and mass domestic. And when people need to put it in one of those categories, that tends to be the place that it goes, is into craft.

But craft itself is becoming more complicated, more fragmented. The median craft brewery today is something like 1000 barrels. I believe 75% of craft breweries today are under 2000 barrels. Yet, most of the volume is in the top 10% of craft beers, so its a much more complex picture. Within craft, you have some very different things, a local taproom versus Sam Adams. But they're all kind of under the same umbrella.

Do you feel that your consumer [being craft SKU] should be older than the typical consumer of craft beer?

Probably a little bit.

Okay. Thank you.

At this time I am showing no further questions.

Great, Bruce. Thank you for moderating the call. Everyone, thank you for joining us. We look forward to talking to you, I think, at the end of April, where we will have an update and to answering your questions then. We wish everyone a good evening and go drink some beer. Cheers.

Cheers.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. You may now all disconnect. Everyone have a great day.