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Executives

C. James Koch - Founder, Chairman of the Board and Clerk

Martin F. Roper - President, Chief Executive Officer, Director

William F. Urich - Chief Financial Officer, Treasurer

Analysts

Lindsay Mann - Goldman Sachs

James Watson – HSBC

Andrew Kieley - Deutsche Bank

The Boston Beer Company, Inc. (SAM) Q1 2010 Earnings Call May 5, 2010 5:00 PM ET

Operator

Welcome everyone to first quarter 2010 conference call. (Operator Instructions) I would now like to turn the call over to Mr. Jim Koch, Founder and Brewer. Please go ahead sir.

C. James Koch

Thank you, good afternoon everybody and welcome. This is Jim Koch Founder and Chairman and I am pleased to be here to kick off the 2010 first quarter earnings call for The Boston Beer Company. Joining the call from Boston Beer are Martin Roper, our CEO, and Bill Urich, our CFO.

I will begin my remarks this afternoon with a few introductory comments and then hand the microphone over to Martin who will provide an overview of our business. Martin will then turn the call over to Bill who will focus on the financial details for the first quarter as well as our outlook for 2010. Immediately following Bill’s comments we will open up the line for questions.

Our sales force and wholesaler execution in the first quarter propelled us to a record first quarter for depletions. The introduction of our new spring seasonal Samuel Adams Noble Pils and our 25th anniversary celebration were both successful in driving retail execution and greater trial while also allowing us to expand our promotional activity.

We achieved depletions growth of approximately 14% during the quarter which benefited from an easy comparison to the first quarter of 2009. We continue to face increased competition from expanded distribution of domestic specialty brands and regional craft brands but are very optimistic on the prospects. We are happy with our sales execution, our brand strength and our position within the craft category and remain positive about the future of craft beer.

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

Martin Roper

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 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 the company does not undertake to publicly update forward-looking statements whether as a result of new information, future events or otherwise.

Since the end of the first half of 2009 we have seen an improvement in the trends of our brands. First quarter 2010 depletions growth benefited from the weak performance in the first quarter of 2009 which was down 6% compared to the first quarter of 2008. We believe it is unlikely depletions will continue at the first quarter growth rate for the remainder of the year but we are working hard to maintain these trends by adding investment behind key programs and modifying our plans based on what we believe worked well during the first quarter.

We continue to increase our investments in media advertising and our sales force during the quarter and we remained prepared to forsake some earnings in the short-term in order to make appropriate investments in brand building activities to position us well for future growth.

Now Bill will provide the financial details.

William Ulrich

Thank you Jim and Martin. Good afternoon everyone. We reported net income of $6.3 million or $0.44 per diluted share for the first three months ended March 27, 2010 representing an increase of $4.9 million or $0.34 per diluted share from the same period last year.

The increase is primarily due to increased core shipment volume partially offset by increased advertising, promotion and selling expense. Core shipment volume for the three months ended March 27, 2010 was approximately 454,000 barrels, a 19% increase versus the same period in 2009. The increase in shipments for the quarter is due to double digit increases in Samuel Adams Seasonals, Twisted Tea and Samuel Adams Boston Lager. The company believes that wholesaler inventory levels at March 27, 2010 were at appropriate levels.

Our first quarter 2010 gross margin of 51% represented a 4 percentage point increase from the 47% gross margin realized in the first quarter of 2009. The increase was primarily due to the impact of lower margin contract production for Diageo North America in the first quarter of 2009 and pricing increases of just under 2%. First quarter margins are lower than our full-year target of 54% due to the negative impact of volume seasonality on gross margins per barrel in the first quarter.

Advertising, promotion and selling expenses increased by $3.2 million during the quarter as compared to the prior year primarily as a result of increased investments in advertising and increases in salary and benefit costs related to the addition of sales personnel. General and administrative costs decreased by $400,000 during the quarter as compared to the prior year primarily as a result of the reversal of stock compensation expense for an option that did not vest that was only partially offset by increases in salaries and benefits and legal fees.

The first quarter of 2009 included $600,000 in impairments of long lived assets at the Pennsylvania brewery resulting from the replacement of equipment that was not yet fully depreciated in order to improve the efficiencies of the brewery. The company’s effective tax rate for the first quarter of 2010 decreased to 39% from the first quarter 2009 rate of 51% as a result of higher pre-tax income but with no corresponding increases in non-deductible expenses. The company has reduced its expected full-year tax rate from 42% to 40%.

Year-to-date depletions through April 2010 are estimated by the company to be up approximately 14% from the same period in 2009. The company believes this comparison benefited from the weak depletions in the comparable 2009 period, strong wholesaler and sales force execution in the first four months of 2010 and the introduction of Samuel Adams Noble Pils in 2010. These depletion trends may not be indicative of prospects for the balance of the year where the future comparisons are more difficult and no major new product introductions are currently planned.

Shipments and orders in hand suggest that core shipments year-to-date through May 2010 will be up approximately 14% compared to the same period in 2009. Actual shipments may differ and no inferences should be drawn with respect to shipments in future periods. Based on information of which the company is currently aware the company is increasing its projected 2010 earnings per diluted share to a range of $2.65 to $2.95. The company currently projects full-year depletions growth of between 6% and 8% based on its analysis of year-to-date depletions versus 2009 and 2008.

The company continues to believe the current competitive pricing environment is very challenging and projects full-year price increases of between 1% and 2% through minor price optimizations as the competitive environment permits but there can be no assurances the company will be able to achieve these planned revenue per barrel increases. The company continues to forecast cost stability for packaging and ingredients and currently believes that full-year 2010 gross margins will be approximately 54%. The company is committed to trying to grow market share and to maintain volume and healthy pricing and is prepared to invest to accomplish this even if this causes short-term earnings decreases.

The company continues to evaluate 2010 capital expenditures and based on current information now expects them to be between $10 million and $20 million most of which relates to the continued investments in the Pennsylvania Brewery as the company pursues further efficiency initiatives and equipment upgrades. The actual amount spent may well be different from these estimates as the company continues to analyze its investment opportunities.

In addition, higher volumes than currently expected could require additional keg purchases that are not included in these estimates. The company expects that its cash balance as of March 27, 2010 of $38.7 million along with future operating cash flow and the company’s unused line of credit of $50 million will be sufficient to fund future anticipated cash requirements. The company continues to be in compliance with all of the covenants under its credit facility.

During the three months ended March 27, 2010 the company repurchased approximately 287,000 shares of its Class A common stock for a total cost of $13.5 million. On March 4, 2010 the Board of Directors approved an increase of $25 million to the previously approved $140 million share buyback expenditure limit for a new limit of $165 million.

From March 28, 2010 through April 30, 2010 the company purchased an additional 84,000 shares of its Class A common stock for a total cost of $4.5 million. Through April 30, 2010 the company has repurchased a cumulative total of approximately 9 million shares of its Class A common stock for an aggregate purchase price of $139.1 million. The company has approximately $25.9 million remaining on the $165 million share buyback expenditure limit set by the Board of Directors.

We will now open up the call for questions.

Question and Answer Session

Operator

(Operator Instructions) The first question comes from the line of Lindsay Mann - Goldman Sachs.

Lindsay Mann - Goldman Sachs

Your volume performance in the quarter is rather striking in light of every other big brewer we have heard from talking about very difficult consumption dynamics and also how tough the economy is and considering your brand is more premium I was wondering if you could kind of shed some light on what is really driving that delta?

Martin Roper

Sure we can try it. Obviously we don’t have good data to try and pinpoint exactly why our volume performance in the first quarter perhaps differed from the other brewers and they obviously have much more data and economists to draw on. I think what we see starting in the early part of the second half of last year we started to see positive brand trends after a very tough first half. We think that continued into the first quarter and I think that is a starting point of the different between us and the companies that you referred to.

We obviously benefited in the first quarter from easy comparisons to the first quarter of last year and that is why in our analysis we have also gone back to look at what our trends are versus 2008 in trying to project what full-year trends are. So basically trying to ignore what happened in 2009 and think about what our trends might be versus 2008 and that is how we are working up our guidance.

We also as we planned this year changed our spring seasonal to Noble Pils which created some excitement both in the company and also with our wholesalers and retailers and actually pulled through very cleanly for us. That is part of the delta. I think a lot of trial of Noble Pils helping us. In addition in the first quarter our first quarter promotional program was around our 25th anniversary and I think we are very proud to say Jim has been doing this for 25 years and we celebrated that with our drinkers and with our retailers with promotional effort.

That promotional effort allowed us to extend the promotional period we typically have enjoyed. Previously the promotion for the first quarter previous year was around basketball which was sort of an end of March program and our 25th anniversary allowed us to get more programming activity throughout the quarter and I think you will see that showing up in the IRI numbers as increases in ads and displays and weeks of ads and displays and that also helped too. That is partially just the sales execution, wholesaler execution and BBC team execution that we referred to.

For all those reasons I think we had an exceptional quarter and obviously we are happy with it. We are not sure some of those factors are duplicatable going forward and we don’t have the new seasonal or a major new product launch planned for Q2 or Q3 and also the sales execution comparisons of Q2 and Q3 are much tougher in that our level of sales execution in prior years probably has been much higher than it was in Q1 due to the design of that program.

Lindsay Mann - Goldman Sachs

Can you kind of dimensionalize how much of the real strong growth was a function of Noble Pils versus let’s say lager?

Martin Roper

I think one, historically we haven’t broken out growth rates by different brands and are reluctant to do so. We are acknowledging with the introduction of a new seasonal there was significant trial and perhaps more excitement than you might otherwise expect.

Lindsay Mann - Goldman Sachs

When did Noble Pils actually hit the market?

Martin Roper

It sort of varied form market to market. It was designed to sort of switch over in early January. Some markets may have seen it in late December and some not until the end of January but on average early January.

Lindsay Mann - Goldman Sachs

At the rate you are going you are just getting the new brewery together but it feels like you may need to start considering purchasing or building another one especially considering how long it took you to sort of get this one off the ground. Is that something you are thinking about or at least kind of how much time do you envision you have before you have to start making that decision?

Martin Roper

There are some capital investments we may be required to make if we see continuation of the current growth rate. I think at our expected growth rate we are very comfortable we are in good shape this year but if we were to see an acceleration there are some things we would need to do including kegs as well as potentially to the breweries. We do believe the current brewery infrastructure we have is underutilized and with modest investment the Pennsylvania brewery can be expanded to support likely or even unlikely growth over the next couple of years. I think we have not in any of our short-term planning, let’s say 1-3 years, thought about additional breweries.

Operator

The next question comes from the line of James Watson – HSBC.

James Watson – HSBC

Let’s get back to this good volume performance in the first quarter. You talked about a lot the changes to your sales force and the better performance from your sales force. I was hoping you could give just a little more detail around that and whether that is based on just increased numbers in the sales force? Is there a new structure or a new mission for them? Are they just pushing greater availability? If you could help us out with a few details there.

Martin Roper

What I think we talked about increased investments in our sales force and certainly we have added positions over the last 12 months or 24 months, adding sort of depth of experience and obviously there was some talent available due to the market conditions and also adding geographic coverage as we have enjoyed the growth we have over the last 3-4 years has allowed us to put people into markets that perhaps we had not considered capable of supporting people. As it relates to your question as to whether the structural design of the sales force has changed it really hasn’t.

I do think that part of the first quarter was the 25th anniversary promotion which allowed a broader promotion window for execution of ads, displays and features and that is obviously showing up in the IRI or the Nielsen numbers that are available to folks through increased ads and displays and pricing features. I think the momentum we had coming out of Q4 our sales group [gathered] around and drove it even harder and in celebrating the 25th anniversary it gave them something to talk to accounts about and something the accounts frankly were very receptive to.

James Watson – HSBC

Along the same lines talking about geographic expansion where did a lot of the growth come from? Was it primarily based in areas that you were under represented versus your traditional base? Also on or off-premise, where did the strength come from?

Martin Roper

Again, we haven’t historically broken out growth by geography but obviously growth in markets where we are over penetrated is much harder to get than markets where we are underpenetrated. We saw that in the first quarter. As it relates to on and off-premise I think we have commented previously that on-premise trends were surprisingly good given what the retailers themselves were reporting on their same store sales numbers. Certainly last year we believe we gained share in that channel based on what data is available to us. We saw growth in that channel in the first quarter but it wasn’t as strong as the off-premise growth. Again I will refer you to the published IRI and Nielsen which appear to be tracking faster than our depletions trend for you to get a feel for how that might have broken out.

James Watson – HSBC

On the Pennsylvania brewery in all the gross margin gains you are talking about you actually didn’t mention too much of potential savings from the improvements in the brewery this quarter. I was wondering how the improvements are coming along both in the short-term and the longer term?

Martin Roper

We are very happy with the team we have in place there and the progress they have made. We are yet to cycle up against a pure beer month versus a pure beer month in that we had production for Diageo in there this time last year. So it is hard to make good apples-to-apples comparisons but we are very happy with where it is but we still think there is opportunities for improvement and we certainly haven’t reached the point we want to be.

Operator

The next question comes from the line of Andrew Kieley - Deutsche Bank.

Andrew Kieley - Deutsche Bank

I was wondering, if I look back at the guidance you gave for shipments last quarter in March you were talking about shipments up mid 9-10%. I was wondering did something change in the last month of the quarter? Was it just a lot more of the promotions you spoke about came at the end of the quarter or was something going on with trade inventories in March?

Martin Roper

There are a couple of confused looks in the room as to what guidance you might be referring to.

Andrew Kieley - Deutsche Bank

Sorry. If I look at the last release which was given in March it said outlook in shipments and orders suggested that shipments would be up something like 9-10% in the first quarter. With this up 19 number you posted today I was just wondering what changed in the last…

Martin Roper

Again I don’t have the release in front of me, were we talking about orders through end of March or end of April?

Andrew Kieley - Deutsche Bank

I believe it was through end of March.

Martin Roper

It is not unusual in the course of a month for there to be significant add ons particularly if the volume trends are pulling away from what everyone anticipated. It is also possible at the time we gave that guidance it was very early in the order cycle. I think what I would say is point to the underlying depletions trends compared to the orders for the year as we currently see them through the end of May. They are pretty consistent in the plus 13-15% range. We got a significant amount of on [tops] we were able to fill and so that could be part of it. Other than that I just can’t comment.

Andrew Kieley - Deutsche Bank

Going back to the underlying depletions growth you did have easy comps in the quarter but is there new distribution that is coming on? Do you think that distributor focus is just shifting to you increasingly as some of the bigger competitors stumble or are some of those helping the numbers here?

C. James Koch

I think there is certainly continued support for the Steve Adams brand as well as the craft category strengthening at retail and among the wholesalers partly because craft category is really the only place they are getting volume growth and high margin profitable product. So as the category grows year after year it becomes a bigger, more visible part of their portfolio. We are kind of in a position where if they are going to get good growth from a profitable category it is going to be craft or to a lesser extent domestic specialty.

Andrew Kieley - Deutsche Bank

I was wondering your view, you have been a little bit more cautious on the pricing outlook here. What is the risk that if some of the bigger import brands and the guys struggle with volume growth that price promotion gets a lot more aggressive into the summer? Is that a risk?

C. James Koch

It is hard to have a crystal ball. Looking at the IRI numbers and the Nielsen numbers it looks like the imports have not been able to raise price at the same level of craft beers have. So imports are starting to be priced in many markets and many comparisons at or below craft from reversing the situation of 3-4 years ago. I guess again I don’t have a crystal ball but I don’t see a price war at the high end. We are all selling higher ended products and hopefully higher quality products and certainly what craft has done is shown the rest of the beer industry that if you are in the right situation you can have healthy pricing and volume growth.

Andrew Kieley - Deutsche Bank

On Noble Pils I know you said is it a normal seasonal rotation? Does that come out of the market in April or May? How does that work?

C. James Koch

Yes. As Martin mentioned we try to transition from winter lager to Noble Pils the spring seasonal during the month of January. So around the end of March and during the month of April we have transitioned to summer ale. So there is still some around but most of it has transitioned to summer ale at this point.

Andrew Kieley - Deutsche Bank

On the depletions I think in the release you said depletions growth part of it was due to Noble Pils but part of it was Boston Lager was also growing. Did Boston Lager also grow at a double digit rate? Or just positive growth?

C. James Koch

We don’t normally, we haven’t broken those out. Probably wouldn’t do that going forward. In general the whole portfolio got healthier over this quarter. Certainly over the last year and strengthened a bit even over the final quarter of 2009.

Martin Roper

In our press release we did indicate double digit increases in seasonals and Twisted Tea and high single digit growth in lager.

Operator

The next question comes from the line of Lindsay Mann - Goldman Sachs.

Lindsay Mann - Goldman Sachs

You in the past had mentioned last year some of the issues you were having in grocery store was perhaps the Bud distributors opening up to some of the newer, smaller craft brands and maybe getting some shelf space taken away from you as a result? Have you seen any of that kind of switch or shakeout among some of the smaller craft brands, less proliferation, any SKU rationalization as we kind of start to anniversary that?

C. James Koch

Very little. Very little coming through and cutting SKUs. I think there is still very strong interest in the craft category and additional brands at wholesale and retail. I don’t have any numbers to support it but my sense is that there were a few yellow flags starting to go up. The [inaudible] point on new items seems to be going down. The category people are pointing out the category is in many stores over-spaced relative to its volume. I do think retailers are trying to figure out what is the optimum amount of variety recognizing it is not limitless.

I think the retailers, particularly the chains, are asking themselves when do we have too much and when we put in all this variety not only how much but how do we space it and how do we set the shelves? How do we billboard the lead brands and make sure the consumers can shop the category effectively. My personal opinion is we are beginning to see a few yellow flags but it is very early and in general there is I think retailers and wholesalers are still adding SKUs but maybe not at the same percentage they were 6-12 months ago. I don’t have data. That is just a feeling.

Lindsay Mann - Goldman Sachs

You talk pretty consistently about taking the opportunity to invest against your brands when you need to do so even at the sake of earnings in the short-term. When you find yourselves with these pretty big gross profit upsides from very strong volume growth and healthy pricing how should we think about the degree to which over the balance of the year you are thinking about investing any of that on the advertising line? You had a pretty healthy year-over-year increase in ad spend this quarter. Is that sort of a decent run rate to consider? Are you going to be ramping up even further than this pretty high level since your gross profit has been so good?

Martin Roper

One way to think about it is to reflect on our guidance which in some ways combines our volume guidance, our pricing guidance, our gross margin guidance and earnings guidance and a number that isn’t in there is a range of what we think SG&A is. Now SG&A includes freight and freight numbers are directly proportional to volume. So as the volumes are higher or the shipments are higher the freight goes up significantly.

I think we talked about on one of our previous calls how we added radio to our advertising mix last year as a second half build. We have continued that in the first quarter and plan to continue to do so. We have seen some opportunities perhaps to increase investment in some of the activities that seem to have helped our first quarter performance. So we are reviewing requests from our sales group and our marketing group for those programs and we fund them where we think they drive incremental volume. Certainly we would like to think they pay for themselves initially but if they pay for themselves in year two or year three then that obviously works as well for us.

So it is pretty fluid. Where we see an opportunity and we think we have something working that will maintain the momentum or increase the momentum then our bias is to spend it at the expense of short-term earnings. Hopefully those programs don’t dilute earnings but sometimes they do and I think that is why we are always consistent in raising this as a possibility.

Lindsay Mann - Goldman Sachs

Do you see a need to or an opportunity to add to your sales force?

Martin Roper

Yes I think there are always things we see and we review on a regular basis. Again, as we grow in these markets the markets’ ability to provide a return on a person change. Sometimes that means an additional person. Sometimes it means a different type of person and sometimes you come to the conclusion that it doesn’t support a position. It is very fluid and we review that constantly with the growth we are having and the possibilities that exist looking forward longer term for what sort of sales organizational structure we might want. We are continually evaluating whether to add people.

Operator

The next question comes from the line of Andrew Kieley - Deutsche Bank.

Andrew Kieley - Deutsche Bank

The full-year depletions guidance you gave of up 6-8 would there be any reason that would vary much from your actual shipments?

Martin Roper

Let’s see. Yes, it might do a little bit. Last year at the end of 2008 we finished 2008 with what we believed was slightly higher wholesaler inventories than perhaps we would normally expect. In the course of 2009 those sort of went away so our 2009 shipments perhaps could be viewed as slightly understated as to what the real sort of pull through rate was which would make the shipments comparison for 2010 to 2009 a little easier. But with that exception we typically financially plan for our shipments to approximate our depletions growth.

Andrew Kieley - Deutsche Bank

Some of the data we get for C-stores the growth there for some of your brands has been pretty phenomenal. I know that is I think usually a channel you hadn’t been as well represented in. Could you talk about growth in that channel? Are you just getting more floor space there?

Martin Roper

I think if you have the data you will see a lot of that growth is coming from distribution which we are obviously very excited about. For a long time we had struggled to penetrate that channel which has historically been largely dominated by the big domestic players, particularly in how the sets are laid out. But the success of Heineken and Corona in that channel in the last 10 years plus some success Coors had with Blue Moon in that channel really opened the doors to an interest in having a craft shelf in a lot of those stores. That appears to be allowing us to drive distribution of a couple of our lead SKUs into that channel. I think that is what you are seeing.

Operator

At this time there are no further questions. Are there any closing remarks?

C. James Koch

We hope to see you all again in three months.

Martin Roper

We will be back in three months. I just had one question that Lindsey asked and she asked about brewery capacity and I was negligent in not mentioning we have contract arrangements with third parties that could allow us to support incremental growth in peak months or even on a year-around basis. That certainly helps us in thinking about when to plan for a new brewery and basically allowing us to potentially fully load our own breweries prior to doing so. That is the one build I have. We thank you for your attendance and your questions and your continued support. We look forward to talking to you in three months. Cheers.

Operator

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

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