Boston Beer Company Inc (SAM) 2018 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to The Boston Beer Company third quarter earnings conference call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Jim Koch, Founder and Chairman. Sir, you may begin.

Thank you. Good afternoon, and welcome. This is Jim Koch, Founder and Chairman, and I'm pleased to be here to kick off the 2018 third quarter earnings call for The Boston Beer Company. Joining the call from Boston Beer are David Burwick, our CEO; and Frank Smalla, our CFO.

I'll begin my remarks this afternoon with a few introductory comments, including some highlights of our results, then hand it over to Dave, who will provide an overview of our business. Dave will then turn the call over to Frank, who will focus on the financial details for the third quarter as well as a review of our outlook for the remainder of 2018 and our initial outlook for 2019. Immediately following Frank's comments we'll open up the line for questions.

Our depletions growth increased to 18% in the third quarter from 12% in the second quarter and 8% in the first quarter. We believe that the acceleration in our depletions growth is attributable to our key innovations, our quality, and our strong brands, as well as sales execution and support from our distributors.

During the quarter, we introduced a new Samuel Adams advertising campaign and continued to work hard on our Samuel Adams brand messaging, which communicates the artisanal care in the brewing of Sam Adams Boston Lager. We plan to invest in this campaign in the coming months, with a goal of improving trends and eventually returning Samuel Adams back to growth.

We remain positive about the future of craft beer and are happy that our diversified brand portfolio continues to fuel double-digit growth. We're confident in our ability to innovate and build strong brands, and we're planning to launch new brands in 2019 to complement our current portfolio and help support our mission of long-term profitable growth.

I will now pass it over to Dave for a more detailed overview of our business.

Thanks, Jim. Good afternoon, everyone.

Let me start with the usual disclaimer. As we state in our earnings release, some of the information we discuss and that may come up on this call reflect the company's or management's expectations or predictions of the future. Such predictions are forward-looking statements. It's important to note that the company's actual results could differ materially from those projected in its forward-looking statements.

Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained in the company's most recent 10-K. The company does not undertake to publicly update forward-looking statements whether as a result of new information, future events, or otherwise.

Okay, now that that's out of the way, let me share a deeper look at our business results. Our depletions growth in the third quarter was a result of increases in our Truly Spiked & Sparkling, our Twisted Tea, and our Angry Orchard brands that were only partially offset by decreases in our Samuel Adams brand. I'd like to note, however, that the Sam Adams Seasonal program has returned to growth this year.

Meanwhile, Truly continues to grow beyond our expectations and is well positioned as a leader in the emerging segment of hard seltzer. Twisted Tea is growing both distribution and velocity while generating consistent double-digit volume growth as new entrants have been introduced and competition has increased. Angry Orchard's growth is led by Angry Orchard Rose, which was introduced in early 2018. We believe that both Truly and Angry Orchard Rose are attracting new drinkers to their categories from wine and spirits.

Our plans for 2019 include investments in our new Samuel Adams advertising campaign and the second year of our successful 2018 innovations, which include Angry Orchard Rose, Truly Berry Variety Pack, Truly Wild Berry, Sam '76 and Samuel Adams New England IPA. Overall, these 5 new innovations in 2018 are within the top product introductions in their combined categories.

We've adjusted our expectations for 2018 full year depletions growth and our earnings guidance to reflect our trends for the first 9 months and our current view of the remainder of the year. We've provided our preliminary view of 2019 growth rates based on our plans, but these rates are difficult to predict and subject to reassessment. We're in a very competitive business and we remain optimistic for continued long-term growth of our current brand portfolio and our innovations.

We will continue to focus on cost savings and efficiency projects to fund the investments needed to grow our brands and to build our organization's ability to deliver against our goals. During the quarter, our operating expenses increased significantly, primarily due to the timing of our planned brand investments. Brand investment will decrease as planned for the remainder of the year, as we're maintaining our annual spend guidance.

We operated at record high capacity during peak weeks and increased our usage of third-party breweries during the quarter in response to the accelerated depletions growth, especially in slim can packages and cans in general. The growth has been challenging operationally, which has resulted in higher supply chain costs. Given the growth challenges and industry-wide headwinds of higher packaging costs and transportation costs, we've reduced our expectations for 2018 gross margins.

While we're achieving the expected cost savings, the corresponding margin benefits are more than offset by the incremental costs that we're incurring to meet the significant growth in our key innovations. We expect to recoup most of the 2018 margin setback as we adjust our supply chain over the next couple of years. Hence, we're maintaining our previously stated goal of increasing our gross margins by about 1 percentage point per year, before any mix or volume impacts, but likely will not see the full benefit until 2020.

Further, we're accelerating capacity and efficiency improvements at our breweries, which is reflected in our capital spend expectations for 2019. We remain prepared to forsake short-term earnings as we invest to return to long-term profitable growth, commensurate with the opportunities that we see. Based on information in hand, year-to-date depletions reported to the company through the 42 weeks ended October 20, 2018, are estimated to have increased approximately 13% from the comparable period in 2017.

Now Frank will provide the financial details.

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

For the third quarter, we reported net income of $38 million, or $3.21 per diluted share, representing an increase of $4.3 million, or $0.43 per diluted share, from the same period last year. This increase was primarily due to increases in net revenue and lower income taxes that were partially offset by increased advertising, promotional and selling expenses and lower gross margins. The lower income taxes related to the Tax Cuts and Jobs Act of 2017 include a favorable onetime impact of $0.38 per diluted share.

Shipment volume was approximately 1.3 million barrels, a 23.5% increase compared to the third quarter of 2017. Shipments for the quarter increased at a higher rate than depletions and resulted in higher distributor inventory as of September 29, 2018, when compared to September 30, 2017. We believe distributor inventory as of September 29, 2018, was at an appropriate level based on inventory requirements to support forecasted growth of existing brands and new innovations.

Inventory at distributors participating in the Freshest Beer Program as of September 29, 2018, increased slightly in terms of days of inventory on hand when compared to September 30, 2017. Approximately 77% of our volume is on the Freshest Beer Program.

Our third quarter 2018 gross margin of 51.2% decreased from the 53.2% margin realized in the third quarter of last year, primarily as a result of higher processing costs due to increased production at third-party breweries, higher temporary labor at company-owned breweries, and higher packaging costs, partially offset by price increases, cost saving initiatives at company-owned breweries, and lower excise taxes.

Third quarter advertising, promotional and selling expenses increased $24.1 million compared to the third quarter of 2017, primarily due to increased planned investments in media advertising and local marketing, higher salaries and benefits costs, and increased freight to distributors due to higher rates and volumes, and less efficient truck utilization.

General and administrative expenses increased by $6.4 million from the third quarter of 2017, primarily due to increases in salaries and benefits and stock compensation costs.

During the third quarter, we recorded a net income tax expense of $9 million, which consists of income tax expense of $13.7 million, partially offset by a favorable $4.5 million onetime impact related to tax accounting method changes reported in the current period and a $100,000 tax benefit related to stock option exercises in accordance with the accounting standard employee share-based payment accounting, also known as ASU 2016-09. The effective tax rate for the third quarter, excluding the impact of ASU 2016-09, decreased to 19.4% from 36.1% in the third quarter of 2017, primarily due to the favorable impact of the Tax Cuts and Jobs Act of 2017, including a favorable onetime impact due to tax accounting method changes reported in the current period.

Based on information of which we are currently aware, we are now targeting full year 2018 earnings per diluted share of between $7.10 and $7.70, an increase and narrowing of the range from the previously communicated estimate of between $6.30 and $7.30. However, actual results could vary significantly from this target. This projection excludes the impact of ASU 2016-09.

Full year 2018 depletions and shipments growth is now estimated to be between 12% and 15%, an increase from the previously communicated estimate of between 7% and 12%. We now project increases in revenue per barrel of between 1% and 2%, a narrowing of the previously communicated estimate of between 0% and 2%.

Full year 2018 gross margins are expected to be between 50% and 52%, a decrease of the range from the previously communicated estimate of between 51% and 53%. This decrease is primarily due to incremental costs related to the higher production volumes at third-party breweries, higher temporary labor at company-owned breweries, and higher packaging costs.

We plan to increase investments in advertising, promotional and selling expenses of between $15 million and $25 million for the full year 2018, not including any increases in freight costs for the shipment of products to our distributors.

We plan to increase general and administrative expenses of between $10 million and $20 million for the full year of 2018.

We estimate our full year 2018 non-GAAP effective tax rate to be approximately 24%, which includes the favorable onetime impact of $0.38 per diluted share due to tax accounting method changes reported in the third quarter, but excludes the impact of ASU 2016-09.

We are not able to provide forward guidance on the impact that ASU 2016-09 will have on our 2018 earnings per diluted share 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 fair value when those options are granted.

We are continuing to evaluate 2018 capital expenditures and currently estimate investments of between $65 million and $75 million. The capital will be mostly spent on continued investments in our breweries and taprooms.

Looking forward to 2019, we are in the process of completing our 2019 plan and will provide further detailed guidance when we present our full year 2018 results. Based on information of which we are currently aware, we are targeting depletions and shipments percentage increases of high single digits to low double digits. We project increases in revenue per barrel of between 0% and 3%.

Full year 2019 gross margins are expected to be between 51% and 53%, increasing during the year due to progress on the capacity and cost initiatives.

We plan increased investments in advertising, promotional and selling expenses of between $25 million and $35 million for the full year 2019, not including any changes in freight costs for the shipment of our products to our distributors.

We estimate our full year 2019 non-GAAP effective tax rate to be approximately 27%, excluding the impact of ASU 2016-09.

We are currently evaluating 2019 capital expenditures, and our initial estimates are between $100 million and $120 million, which could be significantly higher if deemed necessary to meet future growth.

We expect that our cash balance of $68.9 million as of September 29, 2018, along with future operating cash flow and our unused line of credit of $150 million will be sufficient to fund future cash requirements.

During the 39-week period ended September 29, 2018, and the period from September 30, 2018, through October 20, 2018, the company repurchased approximately 350,000 shares of its Class A Common Stock for an aggregate purchase price of approximately $88.3 million. We have approximately $90.3 million remaining on the $931 million share buyback expenditure limit set by the Board of Directors.

We will now open up the call for questions.

(Operator Instructions)

And our first question comes from the line of Amit Sharma with BMO Capital Markets.

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

So freight, if you look at the costs in Q3, we include freight in the advertising, promotion and selling expense, which is $24 million. Out of that, about 30% is freight and 70% is selling. And year-to-date that ratio is slightly different. Freight is on the year-to-date is about 26%. We project that to continue. So the increases that we have seen in this year we expect to continue and also go into the next year.

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

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

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

Sure. Well, we can start with something like Truly Hard Seltzer. So the trends on that are very, very strong. I mean, if you look in IRI they're approaching a business that is close to tripling. So we don't expect that same rate of growth as the category matures a little bit. There are a bunch of new competitors coming in. Everybody's throwing something at the hard seltzer category, even though probably 75% of the volume in IRI is split between the 2 leaders, us and White Claw. We had a very successful year with Twisted Tea again. I think IRI numbers are on the order of 20% as we continue to gain distribution while sales per point are going up. So that continues to grow on a modest base. But we think there'll be some slowdown in the rate of new distribution, though we anticipate a fair bit of new distribution. We're also looking at very, very successful innovation in Angry Orchard Rose, depending on what numbers you look at, but it's definitely in the top like 3 new SKUs in the entire category. And that's widely distributed at this point, so we think there's going to be continued growth in that, but it's not going to be the rocket ship from nothing to on its own it would be the #2 hard cider in the United States. So we see some slowdown in the first year innovations, some of the same story with Sam '76. So this was a year where we just hit home runs with new products, and we don't think we can continue to hit home runs of that magnitude into 2019, though we would be quite happy if that happened again. Does that help?

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

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

And our next question comes from the line of Caroline Levy with Macquarie Capital.

Just if you could comment a little further on salaries and benefits. We appreciate you breaking out a little bit on the freight side, but what are the drivers of that, and just help us out on that.

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

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

No, I think at the end of the day we didn't book costs for 2017 or a lot of costs 2017 and 2016. And now that we have a new CEO in place we will have the full cost again. It will not continue to that extent, I think. We normally don't give guidance on G&A. We broke it out for that specific reason because that couldn't -- that was difficult to predict. For next year I think you can assume a normal growth rate for G&A, which is going to be a combination of inflation and top line growth.

Right. So then also we're seeing great pickup in seasonal, but could you talk about beer, the rest of the beer portfolio? I know, Dave, when you joined as CEO you really felt that you would be able to get that beer portfolio moving, so any comments would be helpful.

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

Okay, that's helpful. And then, Frank, you said that A&M would still be up by the same amount that you'd originally forecasted, therefore it'll be down quite substantially in the fourth quarter. Is that right?

That's correct, yes. And that is really related, I think this highlights it that every single quarter that the phasing this year will be significantly different from last year. Last year we spent more than a third in the fourth quarter, even though it's a relatively small quarter compared to Q2 and Q3. This year we are doing much more spending upfront based on better programs, as well.

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

Yes, we've been working with the Red Sox, really, since Opening Day, and really using that to help drive the business throughout New England, of course. And we've done everything from unpack graphics and connecting to the brand to really putting a lot of new products, like New England IPA and Sam '76 through Fenway Park to get trial. And the local distributors have done a lot, as well, to parlay the Red Sox. So I think -- it's been going all year long. There's been some different advertising, digital, social media, all the rest. We've done everything we can to take advantage of the partnership. They're a great partner, of course, and it's a great partnership with 2 local brands. And we're -- we haven't fully accounted for what it means for the broader New England market for the full year. We do want to do that to understand what impact it had. But we feel that it's definitely created a lot of energy and excitement locally. It's helped us connect, reconnect with consumers, as well. And I think, importantly, we got some good learning by seeing what people are buying at Fenway and understanding what the potential is for some of our -- particularly some of our new products like the 2 I mentioned.

I have one last one, which is you've got a big uptick coming in CapEx, and I'm just wondering on the innovation side if there's another platform that you're exploring in the way that truly has become a new platform.

Oh, another platform? So as Jim said, obviously we beat the odds significantly this year from an innovation perspective, and the reason why we're not -- we're looking at maybe different growth rates is because we're going to be lapping that, but we do -- we certainly have new innovation planned, as well. And probably not ready to talk about it in detail other than to say the innovation that we'll launch in 2019 is really very much around health and wellness, which is clearly a trend that's gripping every food and beverage category, alcoholic and nonalcoholic. And we're very -- we're excited about what we're going to bring to the market that will address those needs and those interests from consumers. Did that answer the question?

Yes, that was linking back also to the capital investment.

Oh, capital, sorry.

So capital investments that you're seeing and the significant increase for 2019 is really related to the innovations in general and the capacity shortfall that we have this year, which is partly reflected in the gross margin. So it's capacity and it's capability. So we'll increase capacity but we'll also put like more automation into our breweries.

One of the things that's really happened, what innovation has really brought is it's accelerated movement toward cans in the category, as well, and especially slim cans. And that's been an area that we had to address for capital going forward.

Caroline, I would -- I'd be remiss in responding to your question about the Red Sox partnership. It clearly has, like most good partnerships, gone both ways, because since the Red Sox put that Sam Adams sign, that big, beautiful, glowing, blue Sam Adams sign, up in right field they have had the best season in their history. They have vanquished the Yankees with ease. And they are now up 2-nothing over the Dodgers in the World Series. So there's clearly some good coming out of this.

(Operator Instructions)

And our next question comes from the line of Nik Modi with RBC Capital Markets.

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

Sure. This is Dave. I'll take a shot at that. I think there are different ways to look at it. I'd say the first -- here are some components to look at. One is just the base business. What can we do to drive that core business, which would be change to the trajectory of Boston Lager and seasonals, in particular? So that's one area that we look at based on some of the things that work and play right now. How can we get that business to a better place? Then you look at certainly the non-Sam businesses, and Truly, Angry Orchard and Twisted Tea, and we look at certainly what can we -- and obviously each of those brands has different ways to grow. For example, Twisted Tea still has a big -- has distribution opportunity and a household penetration opportunity. We know the frequency is actually very high. So we have the individual plans around each of those core businesses that take into consideration what we need to grow. For the most part, it's really -- it's a penetration strategy. Then we look at, importantly, like the year 2 innovation, right? So we're calling it our sophomore innovation, which would include some of the Truly SKUs, like particularly the Truly Variety Pack SKU, Sam '76, New England IPA. We want to make sure that we continue to invest appropriately to get more growth and to help these brands reach their potential. Just as a quick sidebar on that, New England IPA has the highest -- after 6 months has the highest repeat rate of any beer or cider or FMB that was introduced this year in the marketplace, and Sam '76 is #2. So we think there's a lot of potential there. And so part of the plans are how far can we go on year 2. The next component would be, okay, let's look at new innovation that we're going to layer on top of the core and year 2 innovation. And that's kind of -- that's just -- that's a tougher one to guess, but we have several things that we're looking at for next year, as I mentioned, in the health and wellness space, and we kind of add that to the waterfall, if you will. And that's sort of how we start to build the volume plan for next year. Does that help?

Yes, that definitely helps. I'm just trying to like -- maybe you don't want to disclose it, which is fine, but I'm just trying to get a sense like do you think distribution will be like half of that growth. That's what I'm trying to get at.

Yes, it's just, it's not that simple, because the portfolio has become -- is much more complex, honestly, and we have 4 brands, with more on the way through innovation. Each brand has its own -- and it varies by geography, too, but generally, each brand has its own way to grow.

And our next question comes from the line of Judy Hong with Goldman Sachs.

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

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

Okay, great. And then going back to maybe some kind of high-level breakdown of 2019 volumes, so maybe you can't give a breakdown in terms of distribution or velocity, but could you maybe talk about what you would expect the drivers to be between kind of beer versus cider versus FMB, if you just put it in those 3 buckets?

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

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

Well, the freight number itself is a bit of a difficult number, because it has 2 components. It has volume components. As our volume goes up clearly you have a higher freight rate, because every case carries freight. The other piece is the rate, and the rate is the normal inflationary piece that everybody is experiencing. And then we have a small component where we have lower truck utilization because we couldn't service, really, throughout the summer, we couldn't service to the extent that we wanted to and we had more third-party production than we had originally looked at. But if you break down the Q3 freight that I mentioned, the about $7 million, if you do the math, 40% of that is volume related, 60% of that is freight related. And I think that is a fairly good assumption going forward.

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

No, I think as we improve on our supply chain and we get a better handle on the volume increases the utilization will be one area of improvement, very clearly. That goes in line with the capacity improvements and the efficiency improvements that we have in the pipeline for next year.

And our next question comes from the line of Laurent Grandet with Guggenheim Partners.

I mean, not that many beer companies are growing top line, I mean, (inaudible) these days. So my first question, if I can, is a build-up from what Caroline asked, actually. I (inaudible) so Sam Adams Seasonal have been improving sequentially to now been almost flat or slightly growing in the last 12 weeks, while Boston Lager is still oscillating between -15 and -17. So what it is working for Seasonal that is not working for Boston Lager? Is it the packaging? Is it something add in the mix? I would like to understand that. So what are you learning about Seasonal that you could potentially replicate in Boston Lager? And if you see that, if you can give us some more color here. I mean, by when are you planning to implement those actions?

Sure. I think -- yes, let me talk to that. This is Dave. I'll try not to be too repetitive. But I think first of all for OctoberFest it's just a great beer. OctoberFest kind of stands alone in my mind anyway. It's a great beer, and it comes at a time of the season when people are moving toward maybe more malty or less hoppy beers, and certainly a different style of beer. And in the competition, the competitive set is just not what it is in the summer, where every single beer known to humankind competes for attention. So I think what OctoberFest has during this time period that Boston Lager doesn't have is fewer other legitimate choices for consumers to make, and I think that's really what helps that brand. But then I think on the back end the benefit we get is we bring people into the -- we can bring people into the franchise through OctoberFest. I think the summer theme, to be honest, the summer theme was more of a reflection of a year ago where we really just didn't -- we didn't have a good setup and started with spring. And this year we executed much better Cold Snap to Summer Ale to OctoberFest and now to Winter Lager. So I think the execution generally was better. I think from a Boston Lager perspective, we just -- we kicked off a new brand campaign with (inaudible) Jim on camera again, and I think we've found our voice. We've only been on air for about 4 weeks now. We're monitoring it closely, and we'll see if it has an impact. That's one of the things. That alone is not going to restore Boston Lager to growth. We have other things planned for next year. I think we've talked about packaging change. I think the brand does not show up on shelf the way it should, so we're going to address that. We think it can have a pretty big impact. But, so it's a little bit early to tell where that's going to go with lager, but we do think positioning Boston Lager a little bit differently, OctoberFest can fight the craft onslaught because it's so unique. Boston Lager, we're turning our sights toward lagers in general, or what we're referring to as large, industrial lagers. And we think we have a more compelling story to tell and a better choice, an easier choice for consumers to make. And now it's our challenge to deliver that message in a compelling and relevant way to get consumers to make that choice for Boston Lager. So stay tuned on Boston Lager. We'll see how it plays out. We got to this place very, very quickly, and we'll continue to -- if we decide that it's not working we'll continue to evolve it very quickly. But all in all, we're happy with where we landed. And I can tell you that the response we're getting from our distributors and our sales organization has been quite positive about the direction we're taking with lager right now.

And if I may add, I mean, if Sam Adam, if Sam '76, sorry, and New England IPA to a smaller extent, I mean, adding a new, younger consumer to the franchise, and either way you can leverage those new incoming consumers into the (inaudible) Boston (inaudible) franchise.

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

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

Thanks, everybody, and we'll see you again next quarter.

Thanks very much.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program, and you may all disconnect. Everyone, have a wonderful day.