C. James Koch - Founder & Chairman Martin F.

Roper - President, Chief Executive Officer & Director William F. Urich - Chief Financial Officer & Treasurer

Judy E. Hong - Goldman Sachs & Co.

Vivien Azer - Cowen & Co. LLC Anthony Bartolacci - CLSA Americas LLC

Thank you. Good afternoon and welcome.

This is Jim Koch, Founder and Chairman, and I'm pleased to be here to kick off the 2015 fourth quarter earnings call for The Boston Beer Company. Joining the call from Boston Beer are Martin Roper, our CEO; and Bill Urich, our CFO; and Frank Smalla, our Senior Vice President of Finance.

I'll 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 fourth quarter and the 2015 fiscal year, as well as the outlook for 2016.

Immediately following Bill's comments, we'll open up the line for questions. Our depletions trends softened during the year, even as the better beer and craft categories appear healthy.

We believe that we've lost share, as new craft brewers enter the market and more existing craft brewers are expanding their regional distribution, with the result that drinkers are seeing more choices, including a wave of new beers in all markets. We believe that craft beer will continue to grow and that we're well positioned to share in that growth and meet the challenge of the current environment, through the quality of our beers, our innovation capability and our sales execution strength, coupled with our strong financial position that enables us to invest in growing our brands.

We're excited by the introduction of our Samuel Adams Nitro Project in the first quarter of 2016, as well as the national roll-out of Grapefruit IPA in bottles and cans to complement the national draft release in the fourth quarter of 2015. We believe that the history, authenticity and quality of the Sam Adams brands, our unique beers, and our ability to invest, position us well for future growth and we're committed to improving our current trends.

I'll now pass over to Martin for a more detailed overview of our business.

Thank you, Jim. Good afternoon, everyone.

As we stated 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 fourth quarter, our depletions declined due to decreases in our Samuel Adams and Angry Orchard brands that were only partially offset by increases in our Coney Island, Twisted Tea, and Traveler brands.

This decline is largely due to increased competition in the craft beer category and general weakness in the cider category. We are working hard to improve the Samuel Adams brand trends, and feel good about our new media advertising message, 'Know more.

Love more,' although it is too early to know if this message will stabilize our trends. During the fourth quarter, we saw the cider category start to decline, even as new cideries continued to enter.

We are happy that Angry Orchard maintains its share and we are directing our efforts to grow the category and our share of it. We remain positive about the long-term cider category potential, but short-term growth is less certain.

We remain committed to investment in innovation, commensurate with the opportunities and the increased competitive activity that we see. Our primary focus in 2016 will be on innovating within the Samuel Adams family, integrating persuasive drinker programming across point of sale, promotions and media for all our brands, and prioritizing the core styles of Angry Orchard, Twisted Tea, Traveler and Coney Island Hard Root Beer for increased distribution and promotion.

We are increasing investments in our new beer and cider development capabilities, so we can maintain the pace of innovation and also be positioned to react quickly to any opportunities that emerge. We expect to maintain a high level of brand investment in this competitive environment, as we pursue sustainable growth.

At the same time, we are taking steps to ensure that our investment dollars are well spent. To that end, we plan to evaluate the effectiveness of all of our investments and endeavor to improve our internal processes and cost structures.

We continue to evaluate all our spending, so as to allocate it to the activities which are most likely to support growth. Our success over the last 10 years has been a team effort by all employees, but I am particularly grateful for the support provided by my leadership team.

We have previously announced the planned retirement of several members of that team: our Chief Financial Officer, Bill Urich; our Vice President, Operations, Tom Lance; our Vice President, Brand Development, Bob Pagano. As part of our succession process, we announced the promotion of Matt Murphy to Chief Accounting Officer when Bill announced his retirement plans last August.

And we have recently announced the promotion of John Geist to Chief Sales Officer, the hiring of Frank Smalla, who will succeed Bill as Chief Financial Officer on February 20, 2016, and the hiring of Quincy Troupe as Senior Vice President, Supply Chain to provide operations leadership, taking on many of Tom's responsibilities. We have also created a Brand Leadership Team, consisting of the senior members of Bob's Brand Development team.

These key leaders, who will report to me, have been challenged to drive our brand initiatives and integrate those initiatives with our Sales Team. I am excited by this opportunity to build our leadership team for the current challenges and to help lead the company on its next chapter.

Based on information in hand, year-to-date depletions reported to the company through the six weeks ending February 6, 2016 are estimated to have decreased approximately 3% from the comparable period in 2015. Now, Bill will provide the financial details.

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

We reported net income of $16.1 million or $1.21 per diluted share for the fourth quarter, representing a decrease of $3 million or $0.19 per diluted share from the same period last year. This decrease was primarily due to the decrease in net revenue and increases in advertising, promotion and selling expenses that were only partially offset by increased gross margin.

Depletions declined 3% from the comparable 13-week period in the prior year, reflecting decreases in our Samuel Adams and Angry Orchard brands, partially offset by increases in our Coney Island, Twisted Tea and Traveler brands. The core shipment volume was approximately 958,000 barrels, a 3% decrease compared to the fourth quarter of 2014.

We believe distributor inventory at December 26, 2015 was at an appropriate level. Inventory at distributors participating in the Freshest Beer Program at December 26, 2015 decreased slightly in terms of days of inventory on hand when compared to the December 27, 2014.

We have approximately 71% of our volume on the Freshest Beer Program. Our fourth quarter 2015 gross margin, at 50.6%, was higher than the 49.8% realized in the fourth quarter of the prior year, primarily due to price increases and lower ingredient costs that were partially offset by product mix effects.

Fourth quarter advertising, promotion and selling expenses increased $5.3 million compared to the fourth quarter of 2014. Increases in point of sale and media advertising were partially offset by decreases in freight to distributors due to lower volumes.

General and administrative expenses increased by $900,000 from the fourth quarter of 2014, primarily due to increases in consulting costs and facilities costs that were partially offset by lower salary costs. Our full year net income increased $7.7 million or $0.56 per diluted share to $98.4 million or $7.25 per diluted share compared to the prior year.

This was primarily due to growth in shipments, which were partially offset by increased advertising, promotion and selling expenses. Full year 2015 core shipment volume was approximately 4.2 million barrels, a 4% increase from the prior year.

Full-year 2015 gross margin increased to 52.3% from 51.5% in the prior year. The gross margin increase was primarily due to price increases and lower ingredients cost that were partially offset by product mix effects and higher brewery operating costs.

Full year advertising, promotional and selling expenses were $22.9 million higher than costs incurred in the comparable 52-week period in 2014. The increase was primarily a result of increased investments in media advertising, increased cost for sales personnel and commissions, and point-of-sale and local marketing.

Full year general and administrative expenses increased by $5.6 million from the comparable 52-week period in 2014, primarily due to increases in salary and benefit expenses, consulting and facility costs. Our income tax rate decreased to 36.5% from a rate of 37.7% in 2014.

The 2015 rate decrease was primarily a result of increased federal manufacturing deduction and lower state tax rates. Looking forward to 2016 based on the information which we are currently aware, we are targeting 2016 earnings per diluted share of between $7.60 and $8, but actual results could vary significantly from this target.

The 2016 fiscal year includes 53 weeks compared to the 2015 fiscal year, which included only 52 weeks. We're currently planning 2016 shipments and depletion percentage growth of mid single-digits.

We are targeting national price increases per barrel of between 1% and 2%. Full year 2016 gross margins are currently expected to be between 52% and 54%.

We intend to increase investments in advertising, promotional and selling expenses by between $10 million and $20 million for the full year of 2016, not including any increases in freight costs for the shipment of products to our distributors. We believe that our 2016 effective tax rate will be approximately 37%.

We are continuing to evaluate 2016 capital expenditures, and currently estimate investments of between $60 million and $80 million, which could be significantly higher depending on capital required to meet future growth. These investments relate to continued investments in our brewery in support of growth and increased complexity.

Based on current information available, we believe that our capacity requirements for 2016 could be covered by our breweries and existing contracted capacity at third-party brewers. We expect that our cash balance of $94.2 million as of December 26, 2015 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 fourth quarter and the period from December 27, 2015 through February 12, 2016, the company repurchased approximately 438,000 shares of its Class A common stock for an aggregate purchase price of approximately $87.9 million. On February 10, 2016, the Board of Directors approved an increase of $50 million to the previously approved $525 million share buyback expenditure limit for a new limit of $575 million.

We have approximately $95.9 million remaining on the $575 million share buyback expenditure limit set by the Board of Directors. As previously announced, I'm stepping down after 12 years as CFO at the Boston Beer Company effective end of business tomorrow.

I've been transitioning my responsibilities to Frank Smalla who started at the company in early January. I've enjoyed my time as CFO and the significant growth Boston Beer has experienced during that time.

I have the highest confidence in Jim, Martin, Frank and the other members of the leadership team and look forward to seeing the future success of the company. We will now open up the call for questions.

Thank you. Hi, everyone.

Hi, Judy.

Hi, Judy.

Hey, Judy.

So first just in terms of your depletion guidance for 2016, obviously, just given the fourth quarter softness and year-to-date trends and Angry Orchard lapping pretty tough comparison in the first part of the year, it seems like the mid single-digit depletion seems a little bit optimistic. So, can you talk about how much do you think the growth will come from some of the innovations, like the Nitro Project and the Rebel IPA versus the core Sam Adams and Angry Orchard stabilizing over the course of 2016?

Sure. Judy, it's Martin.

I think as we look at 2016, we knew the first part of 2016 was going to be tough because a lot of the innovation we have, like Nitro and Grapefruit on the Sam side, is just taking effect in Q1, and just launching. I think we're hopeful we can stabilize the Sam Adams trends and sort of reduce the rate of acceleration.

We have I think a lot of excitement in our sales and wholesaler organizations around the new product launches that we have going on right now. I think the effect on Q1 will be relatively small just because of that startup, but it could obviously help us more later in the year and frankly the comparables get, later in the year – get better or easier as the year goes on.

On Angry Orchard, I think we're still looking at the total cider category that is showing decreases. That, again, comparables get easier in the second half of the year.

We are intending to modify our message a little bit to support the category, and we hope – and we believe that will help and that will hopefully be on air later this quarter or early next. So it looks – for the full year, we're hoping to stabilize those trends and certainly have easier comparables in the latter half.

On our other brands, Twisted Tea remains healthy and we're projecting that health to continue as we increase distribution of the number of SKUs per store and just generally benefit from the health of the brand and we think the other brands also have upside. So, for full year, I think we're expecting Sam Adams to be a slight negative on the growth trends, Angry Orchard hopefully just a very slight negative on the growth trends, and the main source of growth will come from the other brands.

But I think we're hoping that by the end of the year, we'll have stabilized the current trends on our two big brands.

Okay. That's helpful.

And then it sounds like you're looking more actively at addressing your cost structure, so if you could just give us a little bit more color just in terms of what opportunities you're looking at, both from a cost standpoint as well as the SG&A standpoint. And I know that you've I think moderated the advertising spending guidance for 2016, so is this something that we should actively continue to look at as a source of opportunity in terms of that part of the investments coming down over time?

Yeah. Before getting to specifics, I think as a company, we have been through periods of slowing growth or flat growth.

And in those periods, we've tried to not only put all of our resources obviously against improving the growth trends, but taking those periods of time to try and improve the company internally, and those have involved process improvement, employee training, rotations, and then looking for opportunities for cost leverage and totally reassessing where we are. The last period of time it was like that was sort of the 1997 to 2003 time period.

And we obviously uncovered a lot of opportunities from the growth that had happened previous to 1996. We've just been through an eight-year period of very high growth rates, at least we feel they were very high, because we lived through them, and we know we have opportunities because we have chased the case – the next case and we've added people to do that and we spend capital to do that and we know we have opportunities to operate that capital more efficiently, to train those employees to take advantage of the tools that they have to operate again more efficiently, and that's certainly something we're trying to step up now that the pressure that the growth was causing to our own internal operating systems has diminished because there's no growth.

Now, let me be clear, I would rather have growth. And so our efforts remain unabated to understand the drinker, causes for our brand's strength or weakness and to develop programs, whether they be new product introductions or new media advertising, or in the new mediums to make sure that we are fairly competing for the share of the beverage consumption of the drinker.

So I think we're going to have the two-pronged focus in 2016, which is fix the core and drive efficiencies to increase investment in the core and make us a stronger company. When we look at the areas for potential investment, we're very reluctant to make any sort of changes or cuts to our brand support spend, but we certainly recognize that there are opportunities to redirect it to maybe more effective spends than previously have been recognized.

We certainly think we have opportunities in digital and we also have opportunities with the message to make sure the message is resonating. And so all of those things are up for debate and analysis, and we'll be looking at them hard.

I think it's fair to say that we might expect to move the money around to better uses and hopefully get more leverage from it than potentially just to pull it out away from brand support at the bottom line, but you just never know why you would have anything worth using it on. On the brewery side, we have some great teams at our breweries who have done incredible work to support the doubling and tripling of the volume over the last 10 years.

And we now have the opportunities to run that more efficiently and we see that upside. We've done a lot of work on precious beer to reduce inventories throughout our system and that has produced some complexity to the breweries on changeovers, where the breweries are now cutting edge for change over efficiencies but we still have opportunities there.

So we're going to be focusing on all of those opportunities to try and reduce our supply chain costs and we think this is a significant opportunity in that area over the next two years.

Got it. Okay.

Thank you.

Hi. Good afternoon.

Hi, Vivien.

Hi Vivien.

So I also wanted to start on depletions with a question there. As we think about your preliminary guidance that you offered in late October, mid singles to high singles relative to what you are looking for today, can you help dimensionalize where the biggest kind of pressures were in terms of you guys narrowing guidance to the lower end of the range, please?

Yeah, I think our biggest sort of change in information from when we first prepared the initial range is just the weakness in the cider category and that probably – we obviously saw the category slowing in growth, but to go negative in fourth quarter was probably something that we had not planned for as a category. And I think we're in the early stages of fully understanding that.

I think the cider category obviously exploded over four years from very small to 1% of beer. So still miniscule.

And I certainly think that we're probably losing some casual cider drinkers, who tried it and maybe are moving on or are exploring other craft sort of opportunities or hard cider opportunities. I think our basic belief is as we have a strong brand with a very strong position in the category, and the category has some fundamental appealing elements to it, both in being made from apples and all natural and also gluten-free, quite a part from tasting terrific.

And the taste profile certainly seems to be in the American drinker's sweet spot relative to the range of ciders that you might possibly offer that American drinker, who seem to be in the right place. So we're still pretty positive.

We think we may be seeing sort of the trial balloon bursting a little bit. But to be honest, we're still looking at it and there's so much going on including retailers and wholesalers changing level of execution as they have sort of looked at cider and said, okay, something else is growing faster and there's all that going on.

So we're still looking at it and trying to understand it, but our primary direction on the cider front is to help the category grow by promoting category growth.

Understood. That's helpful.

And just to follow up on that comment from a retailer execution, are you implying that cider is losing shelf space, potentially, to hard soda?

I don't think we have seen that specifically, but I do think in the fourth quarter we saw some potential loss of share of floors and ads. And so whether that was a significant driver or not, there was obviously a lot of excitement in the second half of the year behind hard sodas and I think that took some executional elements away.

I don't think we've lost distribution nor should we, given the cider category is larger than the hard soda category.

Understood, that's helpful. And then my second question on hard soda and Coney Island, I think you guys were appropriately conservative last quarter given kind of the newness of the product introduction.

Some of the syndicated data would point to some sequential declines post launch, perhaps that's a seasonality issue, but if you could comment on Coney Island, kind of where it's tracking relative to your expectations, please?

Sure. Well, it obviously depends on where your expectations were.

If you take our expectations at launch, I'd say we're very excited. If you were to say our expectations when we hit some big volume numbers in the August-September time period, then obviously we're disappointed.

I think there was a big wave of trial that might have been seasonal related. It might have been competitor out-of-stock related.

And we had some pretty big numbers in the August-September time period. But things seem to have settled down.

It seems like we have a healthy brand. And it's a little unclear, right now you're seeing AB's intro with, what, Best Damn, and I apologize for swearing on this call, and...

It's okay.

...MillerCoors with Henry's. And so right now, it's pretty muddy, but I'd say that the publicly available numbers are holding up pretty well in that environment.

And there's certainly a lot of retailer support for the category. A number of big retailers have opted to give very significant space to the category.

We have a lot of new points of distribution coming online in March-April, in time for the summer. So I think your question about expectation is so hard, because our expectations move with the weekly volume, and it's certainly fair to say that the category is doing significantly less volume than it was doing peak August-September last year.

But compared to where we were before we launched, we're pretty happy. And we think we have a brand that can survive in that space at good margins, and obviously we're going to see whether that's true or not given the competitive activity we face this quarter.

Understood. Thanks very much.

Hi, guys. This is Anthony Bartolacci filling in for Caroline.

Hey, Anthony.

Hey, Anthony.

I have a question about Boston Lager and the Seasonals. Can you talk a little bit about what actions you're taking to stabilize each franchise?

And then with respect to Seasonals, is it something where the consumer appetite has just changed because of the explosive growth of different options in the marketplace or is there something unique to the Sam Seasonals that still makes them kind of a viable product, even with so many options out there?

Sure. Well, I think their trends are somewhat linked to overall Sam Adams trends.

So I'd put that as a starting point. And certainly overall brand messaging and brand relevancy for us is key.

And so our focus is on developing the stories and the communication that will appeal to the current 23-year-old to 35-year-old craft beer drinker and making sure that that messaging is relevant. And our belief is, if the brand messaging is relevant, then the interest in the core styles of the brand, i.e.

Boston Lager and Seasonals, will remain. I think your seasonal question is a fair one.

We've certainly seen an increase in seasonal competition, and one element of the seasonal program is that newness every quarter or every season, and it's not quite on the quarters, but every season. And so now there is more new items, more new flavors than ever before.

And so I think that's eating away at it a little bit. I also think wholesalers are a little overloaded with some seasonal programs from all the other suppliers, and their focus is on trying to get all the seasonals through their warehouses.

And so if they've over-ordered or been over-shipped, that can crimp the seasonal execution. I think one of the core benefits we have on our program is the Freshest Beer Program, in that we have been able to cut over from season to season in a very timely fashion with very little inventory hang-up or obsolescence.

And I remain a firm believer that that's going to be a key to the success of these programs. If you go back to September-October and were to walk into a beer store, you'd have seen more pumpkin beers than you probably had time to try, I think.

I don't know, I heard stories of 22 pumpkin beers on display in a store. And certainly wholesalers were dealing with that and retailers were dealing with that, and it's probably too much pumpkin.

And I think yet unknown is how that plays out next year. Do the retailers order as much?

Do the wholesalers order as much? And do you come back to core styles within the category?

I think we are the leading seasonal craft beer program. We have probably the best executing one from a transition perspective and an ease-of-use perspective.

And our goal, I think from a communications perspective, is to highlight each beer a little bit more in terms of what the beer brings to the season as opposed to the season bit of it. And so our messaging going forward will be a little more beer focused.

Okay. Great.

That makes a lot of sense. And one other question on Nitro.

Can you provide a little bit of an early read on shelf spacing for Nitro? Is it cannibalizing either base beer or Rebel, or is it incremental?

And out of the three varieties, is there one that's a standout so far or one that you think might have more potential just because it appeals to a wider consumer base, or do you see all three kind of working in conjunction with each other?

Yeah. I think, to your first question on incremental, it's really hard to know because in any regular set process there's some discontinuations, and we within our own Brewmaster's Collection, for instance, get some discontinuations.

So not all of it is incremental. What I would say is we have been surprised and pleased with how many retailers have been excited by the program and opted for two or three of the styles.

And so we feel very good about the retail acceptance of the program. Many of those sets are being cut in in March and April, so we haven't yet fully seen the benefit of that.

We also were quite conservative in our supply chain planning, because we really didn't know and, because of the technology involved, we hadn't had the opportunity to fully test market it. And so I think right now there is some excitement, but we're probably supply constrained, which we're addressing.

But I would caution that the impact on Q1 is likely to be pretty – I don't want to say immaterial, but in the context of the size of our business, it's not going to be a material change in our trends. But it certainly – it's changing the excitement behind the brand.

And if those trends were to build, it might be material.

Okay. Great.

Thanks a lot, guys.

And then sorry, you asked about styles and...

Yeah, yeah. Just....

I would encourage you to try them, and so you can form your own opinion. We have the White Ale on draft that I think has been very well received.

It's a very approachable white ale, Belgian ale, and the Nitro really changes how the beer presents to the mouth in a very pleasing way. On the can side, this seems to be a little – a lot of interest in the IPA, obviously the White Ale is perhaps the easiest and most approachable.

So that seems to be doing well, but the Coffee Stout seems to have a little buzz online. And so at this point in time, I think we're successfully depleting what we're shipping, and it's hard to know because we're sort of shipping equal quantities of everything and we really have to wait for the actual pool to tell us which one is selling better.

Okay, that's great. And I have tried the White Ale and it is really good.

I'm still on the lookout for the IPA and the Stout.

Okay. If we can use you as an endorsement, we'll put that up on our website.

Okay. Sure.

Thanks.

Doesn't sound like we have any questions.

Yeah, thanks. Before everyone disconnects, if you're still on, one I'd like to thank Bill publicly for his contribution to the company over 12 years.

And just a little back of the napkin, I think this might be his 50th call. And I know you guys follow a lot of companies.

I'm guessing there aren't many companies where you've dealt with a CFO for 50 calls. So we'd like to thank you for following our company too, because Bill can be difficult to deal with unless you have a beer in front of you.

So grab a beer tonight and wish Bill good on his retirement. We're delighted to have Frank here.

He's in the room, learning how Bill does this, and we're looking forward to many more successful quarters with Bill cheering us on from the side. So Bill, thank you.

And thank you, everyone, for joining us.

Thank you, Bill.

Thank you.

Cheers.