Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

Martin F. Roper - Chief Exec. Officer, Pres

Jim Koch- Founder and Chairman

Bill Urich - Chief Financial Officer, Principal Accounting Officer and Treasurer

Analysts

Bryan Spillane - Banc Of America Securities

Andrew Kieley - Deutsche Bank Securities

Andrew Sawyer - Goldman Sachs

Mark Cowen - Merrill Lynch

Boston Beer Co. Inc. (SAM) Q3 2007 Earnings Call November 6, 2007 4:00 PM ET

Operator

Good day, ladies and gentlemen and welcome to the Third Quarter 2007 Boston Beer Company Earnings Conference Call.

I would now like to turn the presentation over to your host for the day, Mr. Jim Koch, Chairman and Founder, please proceed.

Jim Koch

Good afternoon and welcome. This is Jim Koch and I am pleased to be here to kick off the 2007 Third 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 comments on where we stand competitively and then pass the microphone on to Martin who will provide an overview of our business. Martin will then turn the call over to Bill who will provide financial details for the quarter, our outlook for 2007 as well as our initial outlook for 2008. And immediately following Bill’s comments, we will open the line up for questions.

We feel very positive about our third quarter depletions growth of 16% and the continuing strength of the Craft beer category. This was our seventh consecutive quarter of double-digit increases. We believe these results are driven by drinkers trading up to our full-flavored Craft beers, the strength of our Samuel Adams brand and our brand support and increasing retailer and wholesaler support for the Craft category and Samuel Adams.

While the Craft category continues to get more competitive, I believe that the variety and quality of the distinct beers that Samuel Adams brews positions us well to compete in this challenging market and the addition of the Lehigh Pennsylvania Brewery should provide us with the capacity and capability to meet this demand.

As previously reported, we entered into a contract of sale for the LehighValley Brewery in Pennsylvania just outside of Philadelphia. We have completed our due diligence process and will proceed with the purchase of this historic, award-winning brewery where we brewed some of our beers from 1994 to 2001. We are excited to begin making the necessary improvements to upgrade the brewery and hope to begin brewing and bottling our brands during the summer of 2008.

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

Martin Roper

Thank you, Jim. Good afternoon, everyone. As Jim noted, we are encouraged by the depletion’s growth achieved in the third quarter. Our third quarter depletion’s growth reflected double digit growth in the Samuel Adams brand family and low single-digit growth in the Twisted Tea brand family. Our Samuel Adams brand continues to benefit from increased drinker interest, increased retail and support and the hard work of our wholesalers supporting our retail initiatives.

We believe that our Samuel Adams brand health is being helped by our significant investments in media, our sales force point of sales materials and promotions. We intend to continue this investment level in order to maintain our leading position.

As noted, the Twisted Tea brand family achieved low single digit growth in the quarter. We expect the alcoholic tea category to remain very competitive, but we are encouraged by Twisted Tea’s resiliency and we plan to continue to invest in the Twisted Tea brand to improve our position.

The Samuel Adams’ depletions growth achieved in the third quarter of 2007 reflected growth of all of our major beer stuff. We believe that our brand health has been positively impacted by the strength of the Craft category, which continues to experience growth from increased drinker interest in better beer, more flavorful beers and in variety.

The strength of the Samuel Adams brand family trends during the quarter suggests that Samuel Adams continues to maintain strong brand equity with drinkers. We believe that maintaining strong brand equity in the Samuel Adams brand is vital to the continued health of our business. We remain committed to investing behind it as the number one priority to ensure long terms success.

We continue to test and evaluate our initiatives to determine their effectiveness and to identify the optimum investment required to generate sustainable volume growth.

During the third quarter, the Federal Alcohol and Tobacco Tax and Trade Bureau (TTB) performed a routine audit of our Cincinnati brewery. While we have not been formally notified of the TTB's findings, the TTB has shared some initial analysis that leads us to anticipate that the TTB will dispute our regulatory and tax treatment of certain of our 2006 and 2007 Twisted Tea shipments.

We believe that the TTB could assert that these shipments were not classified consistent with TTB regulations that took effect January 1, 2006. Based on our analysis to date, we believes that most of our Twisted Tea shipments were in compliance with the applicable regulations. We expect to enter into discussions with the TTB regarding the differences in the methodologies used to ascertain regulatory compliance. It is not possible to determine the ultimate outcome of this issue at this time, but based on information available to us, we currently estimate that the likely range of potential expense at this time is between $3.9 million and $9.3 million after considering amounts we have previously paid.

Due to the early stage of this analysis, the ultimate outcome could materially differ from our estimate. As a result of information collected to date and our assessment of likely outcomes, we have recorded a provision of $3.9 million in our September 29, 2007 financial statements as a contingent liability for this matter.

During the third quarter, we modified its processes to ensure that Twisted Tea will satisfy both approaches to determining compliance with the regulations going forward. Twisted Tea shipments were only minimally interrupted during the quarter.

Excluding the impact, the provision for excise taxes related to the TTB audit, net revenue per barrel of the core products for the quarter increased by 4.8% primarily due to price increased maintained from the first quarter and lower returns as compared to the same period of 2006. Offset by a shift in package mix from cases to kegs.

During the third quarter of 2007, we saw a continuation of significant cost pressures predominantly unfavorable ingredients and packaging material costs, as well as unfavorable freight costs. Despite these cost pressures, we were able to increase our investments in advertising, selling and promotional support behind the brand and continue to invest in our organizational infrastructure.

During the quarter, we continue to maintain a strong balance sheet with adequate cash positions to support our business strategy.

As previously reported, the Company entered into a Contract of Sale to purchase from Diageo North America, a brewery located in Lehigh Valley, Pennsylvania for $55 million. We have completed our due diligence process with respect to the Lehigh Valley, Pennsylvania Brewery and have now paid into escrow a total deposit of $10 million. We expect the closing of the purchase as scheduled in June 2008 barring any unforeseen circumstances.

Between now and the closing, we expect to make certain capital improvements necessary to restart the brew house and to upgrade other portions of the facility and we hope to have the brewery partially operational for our brands during the summer of 2008.

Based on our due diligence and continued growth, we have increased our total capital plan for this brewery over the next few years to current estimates of between $60 million to $110 million in addition to the previously announced purchase price of $55 million.

When such investment has been completed, we should be able to brew and package over 1.4 million barrels of beer per year with potential for additional expansion.

We experienced some issues at our Cincinnati brewery during the summer, due at least in part to the extensive demand on this facility created by our growth. During the third quarter, we shut the brewery down for preventative maintenance and process improvements incurring some unplanned costs.

We anticipate making further investments in the Cincinnati brewery over the next three years to ensure more reliable efficient operation. Our shipments and orders enhanced to just the core shipments of the year ending December 29, 2007, only 15% when compared to the same period in 2006. Actual shipments may differ however and no inferences should be drawn with respect to shipments in future periods.

October year-to-date completions are estimated to be up approximately 17% over 2006. We believe this sets us up well to make our 2007 growth targets. While disappointed at our price increases in the first nine months have not fully covered our increased costs, we are pleased that our depletions have maintained their momentum post price changes and believe that we are on track to implement net price increases of approximately 3% during 2007.

As a result of reporting the provision for excise taxes, we have revised the range of our expected 2007 earnings. Our currently expected earnings range is $1.40 to $1.65 per diluted share which takes into account the write off of the capitalized free time brewery cost we took in the second quarter and the provision for excise taxes, but does not include any potential additional negative impacts that might result from a TTB order.

Looking forward to 2008, we are facing significant cost pressures due to barley and hop markets tightening, which could impact cost of goods in 2008. We are attempting to mitigate these increases, but, given our craft brewing roots and commitment to the highest quality traditional ingredients, we are likely to experience higher cost increases than the larger brewers with whom we compete. This, coupled with continued increases in glass, freight and utilities costs, and the costs of executing the Lehigh Valley, Pennsylvania brewery acquisition, will likely create some further gross margin erosion in 2008 from the underlying levels of this year.

Fortunately, we are experiencing a healthy price environment and have set targets for 2008 for the 5% net price improvement to partially cover these cost increases and to allow for continued brand investments. Of course, there is no guarantee that we will be able to achieve these increases.

The exact impact of all these factors on our 2008 earnings is difficult to estimate, but recognize that earnings growth could be challenging in 2008 given the cost pressures, Lehigh startup costs and our commitment to continue to invest behind our brand at higher levels.

We expect to be able to make a better projection of the cost and earnings impact to all of these factors as we now our full 2007 yearend results. Now, Bill will provide th financial details.

Bill Urich

Thank you, Jim and Mart. Good afternoon, everyone. The Boston Beer Company realized earnings of $0.21 per fully diluted share in the third quarter of 2007, a decrease of $02.20 per fully diluted share over the third quarter of 2006. This decrease is after taking into account the $3.9 million or $0.18 net of tax per diluted share provision for excise taxes related to the TTB audit. The decrease in earnings is primarily a result of the provision for excise taxes, increases in cost of goods sold, selling and advertising expenses, and general and administrative expenses partially offset by an increase in net revenue and a decrease in income taxes.

For the third quarter of 2007, the Boston Beer recorded net revenue of $84.1 million, a 10.9% increase over the same period in 2006. This increase is primarily a result of the 11.2% increase in core, brand and shipment buy-in. The increase in shipment buy-in can be attributed primarily to increases in Samuel Adams Seasonals, Samuel Adams Brew Masters Collection and Sam Adams Light. We believe that the wholesaler inventory levels at September 29, 2007 were at appropriate levels.

Our gross margin for the third quarter of 2007 decreased to 51.2% from 57.3% in the third quarter last year due primarily to the provision for excise taxes, higher packaging material and ingredients cost and the cost of the temporary shut down of our Cincinnati brewery for maintenance during the third quarter. These costs were only partially offset by price increases, lower returns as compared to the same period of 2006 and a favorable shift in package mix.

Most of the cost structures on the packaging materials and ingredients are expected to continue during the remainder of the year. Excluding the impact of the provision for excise taxes and the Cincinnati temporary shut down, gross margin for the quarter was essentially in line with the first half reported gross margin results. Advertising, promotional and selling expenses increased by $3 million during the quarter as compared to the prior year primarily due to increases in freight expenses to wholesalers and advertising and promotional cost. General and administrative costs increased by $1.2 million during the quarter as compared to the prior year, driven by salary and benefit costs. The effective tax rate for the quarter decreased to 35.4% from the 2006 rate of 36.7%. This was primarily due to a true-up of state income taxes based upon a settlement of a state income tax audit.

During the months ended September 29, 2007, the company did not repurchase any of its class A common stock. As Martin mentioned, we now expect 2007 earnings per diluted share to be between $1.40 and $1.65 after accounting for the asset write off in the second quarter, the provision for excise taxes related to the TTB audit and including expenses related to the purchase of the Lehigh Valley, Pennsylvania brewery, but absent any significant changes in current planned levels of brand support and not including any additional provisions related to the TTB audit. Our ability to achieve this type of earnings growth in 2007 is dependent on our ability to achieve challenging targets for volume, pricing and costs.

In a revision to our previous estimates, we now estimate total capital expenditures in 2007 to be between $35 million and $48 million, primarily driven by the purchase and capital requirements of the LehighValley Pennsylvania brewery and the need to purchase additional kegs to support our draft business. Keg purchases are higher than planned due to faster volume growth rates, higher cooperage costs, and potentially higher keg losses. This revised estimate also includes the purchase of the land in Freetown, Massachusetts completed in August. Additionally, required investments in the Cincinnati Brewery and an investment of between $3 million and $5 million in the Latrobe brewery to support the restarting of this historic brew house and modifications to accommodate our beers.

Moving on to our initial outlook for 2008, we will be facing overall production cost increases of between 10% and 14% over the full year of 2007. As previously mentioned by Martin, these increases will be driven primarily by barley and hops increases, freight cost, glass cost increases and the cost of executing the startup of the Lehigh ValleyPennsylvania brewery. These cost increases will be somewhat offset by price increases, but we anticipate that the 2008 gross margin could be down two to four percentage points below full year 2007. We continues to pursue cost savings initiatives and pricing opportunities and hope to preserve our economics to allow for continued support of our brands with appropriate investment in order to grow volumes and earnings.

We currently estimate total capital expenditures for 2008 to be between $90 million and $130 million, most of which relates to investments in the Lehigh Valley, Pennsylvania brewery and includes the $45 million in purchase price due under the related Contract of Sale in 2008. The wide range is indicative of the multi-year plan for that brewery and some uncertainty that we will complete all the anticipated projects in 2008, this amount is exclusive of any other major investments that result from the evaluation of long term production strategies. Our investment would be significantly higher if other major brewery investment projects were initiated.

We will now open up the call for questions.

Question-and-Answer Session

Operator

Your first question comes from the line of Andrew Sawyer with Goldman Sachs.

Andrew Sawyer - Goldman Sachs

I was wondering if you could put some context around the brewery decision, and in particular with the cog increase next year of 10% to 14%, how much of that is tied to startup cost versus underlying increases and taking a broader step back as we think about this $150 million plus investment that you are going to put into this brewery and the cost increases we are seeing coming out of it. I guess, how should we think about the returns on investment on that as we get into the out years and what sort of cost savings could ultimately come out of handling your own production?

Martin Roper

I will ask Bill to sort of talk to the extent we can on answering your questions about cost of goods, but let me start off by saying, I think you know we have spent a number of years evaluating what we perceive the right long term brewery strategy to be, and this is a combination of that having evaluated ongoing cost constructing refill or purchasing an existing brewery, and I think this decision is indicative that we have concluded that this is the best one for the company, the one that provides the best return to the company, the ability to brew great beer, service our customers and also the financial returns, and that we are obviously going to experience in this transition year some cost that we, perhaps would not expect to be ongoing such as start up cost, but I think, Bill alluded to in his comments.

So we are very excited about this move. We look forward to brewing at the brewery and mix some of what we brewed. As Jim mentioned for many years, in the ‘90s and brewed award-winning beer and anticipate launching on a multi-year capital plan to basically operate the facility and adapt it to our beers, and I mean, to direct I think the first part of your question, I am going to just pass it over to Bill on the cost of goods questions, so that I may have a comment on as well.

Bill Urich

Yes, the cost of goods, a part of your question was Lehigh and the efficiencies coming out of Lehigh. I think, Andrew, we took three months to do due-diligence. I have put together a capital plan. We are in the process of analyzing that and determining which projects have appropriate returns and understanding better what the dynamics of that means on our cost of situation in terms of efficiencies coming out of Lehigh, so we are really not at this point, I would say, in a position to comment further on that since we are still in the investigation stage.

In terms of our cost of goods, malt-wise, barley and hop-wise, I think that you have seen the articles in the Wall Street Journal and the other trade press, there has been tremendous pressure put on malt and barley relative to corn, maize and ethanol. And I cannot tell you when that pressure is going to come off in the future years, but I think that we have properly indicated what our cost looks like for next year, and we would hope that that gets in balance in future years.

Andrew Sawyer - Goldman Sachs

Is it fair then to say that the bulk of the 10% to 14% increases coming from underlying raw materials rather than start up costs?

Martin Roper

I think that there is a piece that we have assumed as start up cost there. But there is a larger piece that is coming from malt and hops.

Andrew Sawyer - Goldman Sachs

Okay, and then just one final thing to wrap this up. I was wondering, in light of how much capital and acquisition you are spending, are you guys going to have to go into the debt markets to finance some of these?

Martin Roper

I think we have indicated before that if we required finance that we believe that we have available finance sourcing and we feel confident that we can get that sourcing if we feel we need it.

Operator

Your next question comes from the line of Andrew Kieley with Deutsche Bank, please proceed.

Andrew Kieley - Deutsche Bank Securities

I guess first question, maybe for him and for Martin. Jim you have been talking more about competitive pressure that you are seeing in Craft category and increases in competitive, I guess, entry by bigger brewers, but given very continued strong volume growth, can you maybe talk about where you have seen any impact from the bigger domestic brewers so far in the Craft category?

Jim Koch

Yes, we have not really seen it in our volume numbers, so if you look at it simplistically, I think it appears that the whole slew of new and expanded competition has not really slowed down our growth. It appears to have contributed to overall category expansion and help bring new drinkers into craft beer and it is not just the larger brewers putting entrance into the category but you see new craft brewers coming in plus previously local or regional Craft brewers showing up in more markets. So far, that has been accommodated by retailers basically expanding their shelves because they recognize a hot category, so as these new entrance have come in, we have actually been able to expand our distribution points particularly for Brew Masters Collection and Seasonal substantially, so we have expanded our space along with the category expansion. We have not really seen an impact from all of this new competition.

Andrew Kieley - Deutsche Bank Securities

Okay, and then secondly, I just wanted to ask any insights you might have on potential impact of the Miller Coors JV next year, I guess both in terms of the competitive setting and maybe on your own distribution given you guys do a fair amount of distribution through Miller Coors houses?

Jim Koch

Yes, and I have to be honest, I have thought about it a lot and I really do not know yet. There are some pluses in that they will go into wholesaler who is maybe a Miller Coors house and today they have got the two Masters to serve, if the joint venture goes through, they will only have one, so the distributor, will it be, I think in some ways better able to focus on their kind of winning entrance in each category or niche rather than trying to get one from Miller and one from Coors in there, on the other hand, it will, I think expand the clout of the joint venture within the house and at this point, I really do not know. Maybe at the end of the day, it will not change much.

Andrew Kieley - Deutsche Bank Securities

Okay, and then just from Martin or Bill, on the EPS guidance for this year, I just wanted to make sure, it looks like the changes are basically just removing the excise tax impact from this quarter of about $0.18.

Martin Roper

I think that we have considered a variety of different variables, and cost movements and top line bottom line estimations and that is how we have come up with our new range.

Andrew Kieley - Deutsche Bank Securities

And then, also on the tax audit, I mean at the end of the day, when that process is finished, would that just be a question of making whole payments on the tax, or would there be any other penalties or possible penalties associated with that?

Bill Ulrich

Hi Andrew. I think it is fair to say that we are at the very early stages of the audit and these discussions and therefore, it is quite difficult to protect what the actual outcome would be. We attempted to provide a range based on current known information of what the outcomes could be, but that is just a range and we chose to book a number within that range that we thought was appropriate based on the accounting guidelines.

Andrew Kieley - Deutsche Bank Securities

Okay. And then just final question on the initial capex guidance you gave for 2008, so you have about 90 to 130, I guess that includes the remaining $45 million for the brewery purchase.

Martin Roper

Yes, it does.

Andrew Kieley - Deutsche Bank Securities

Okay, so I guess the remainder of that that would leave about $45 million to say $80 million of capex which, I guess you would be targeting for the upgrades on the Pennsylvania Brewery?

Martin Roper

That is correct. On our Cincinnati brewery, we still have kegs that we purchased and we have other capital investments.

Andrew Kieley - Deutsche Bank Securities

Okay, so beyond 2008 it would leave a fairly small amount related to the new brewery upgrade about only $20 million or so to get to after 2008?

Bill Ulrich

I am not really sure exactly what numbers you are looking at, but I would point you to a disclosure on this year’s capital that our capital is up significantly for kegs and Cincinnati investments. Obviously, the kegs were needed to support our growth, we over skew on draft beer relative to most brewers and kegs are pretty expensive right now, so it would not be unreasonable from that to concludes that additional keg investments would be needed to support our growth.

Andrew Kieley - Deutsche Bank Securities

Okay, thanks. That is all I have.

Operator

Your next question comes from the line of Bryan Spillane with Banc of America. Please proceed.

Bryan Spillane - Banc of America Securities

A couple of questions, one, just in terms of understanding next year, Bill, I heard you right two to four percentage points of gross margin risk, is that right?

Bill Ulrich

That is correct.

Bryan Spillane - Banc of America Securities

All right, and then when we are looking at your advertising expense next year or your selling and advertising and promotional expenses, do you think you ought to get a little bit of leverage? You should not grow as fast as your volumes or your sales. Is that right?

Martin Roper

I think if you look at our numbers this year, we started to see some of that. I do think that we think that we are at a pretty exciting time in the Craft beer category right now. There is opportunity and we certainly would like to make the investments we think are prudent to maintain share or even grow share if we could. So, we are pretty excited. We think now is the time to be investing to maximize that. I think we are seeing some of the effects you saw this year with the sort of early stages of planning for next year and so I do not think we can comment on that. We would expect to have good guidance for you when we do our full year release in February or March.

Bryan Spillane - Banc of America Securities

Okay and then just more on a follow up to that, are the places as you have seen, Bud has certainly shifted some of its spending around a bit. So they are spending money in different areas relative to where they have done it in the past and Coors has done a similar thing. Have you seen any change in some of the areas where you may need to spend and I guess where I am driving at is, is if there is more money being spent on better beer in general, does that force you in some way to have to spend in areas where you necessarily did not have to spend before whether it is maintaining tap handles or merchandising on trade or areas such as that?

Martin Roper

I think it is only fair to say as we are see increased competitive activity, one result of that could be increased cost to compete and maintain share of shelve space or taps as you said but I think, Jim’s point is that I think he mentioned a little earlier was that there is enough enthusiasm on growth from the category that retailers are allocating more handles or linear footage to the category so at this point in time, I think everyone is benefiting from that.

Bryan Spillane - Banc of America Securities

Okay and then on brewing material, the part of the issue at this point is supply-demand as far as I understand it with malt and barley. Are there any constraints on your end as you look at into ’08 that you feel you are confident that you will have enough brewing materials to meet your demand expectations?

Martin Roper

It is a great question. I think there has been a fair amount of chatter on the Web of other smaller brewers who are struggling with that issue right now. If you look at our 10-K you will see that we have forged a purchase commitment to Pop’s and carry Pop’s significant hop inventories that actually puts us in pretty good shape and some of the cost impacts there are more to do with currency movements and just quality of the hop or maybe having to use a little bit more hops to achieve the flavor we need and I think I have said in my comments that we do use a disproportionably large amount of natural ingredients in our beer to achieve the flavors that we achieve.

Therefore, this impacts both on the hops and on more on the barley side are pretty significant for us relative to the larger breweries.

On the barley side, we have not traditionally entered into contracts directly with farmers or intermediaries that lock-in and protect us from price movements. I am not sure exactly what the barley indexes show but I know the corn indexes show, corn doubling in the last 12 or 18 months and again for a significant user of grain such as ourselves that is a very significant cost impact.

We believe based on conversations with the malting suppliers that we will be in a position to obtain malted barley. It is just that the price will not be one on that we enjoyed in the previous years.

Bryan Spillane - Banc of America Securities

Okay great. Just one final question, in terms of the expansion and the build out of Lehigh, just in general, as your production model kind of shift, what are you doing to make sure that you ensure the same level of quality that you have today, as your production gets larger, are there extra steps that you are taking to make sure that the quality of what you are producing does not really change. It gets more complex, I guess as the business gets bigger.

Jim Koch

Bryan, but that is something that certainly we have faced for 23 years now and it is something that we have a pretty good track record of handling. One of the things that makes me feel very confident about the Lehigh Valley Brewery is we know that brewery. We brewed there for seven years and won awards and made really great beer there. So, as opposed to just about anywhere else, we have seven years of very successful history at that brewery with exactly that equipment. We are now under a scenario where we can do everything that we ever wanted to get the quality to exactly where we want it.

So I am very confident that we are not going to run into any insurmountable quality issues here. It may take us a little time, there are always little bumps so it is never totally smooth, but it is a brewery where we have brewed before so at the end of the day, we are very confident that we are going to be able to get the same quality or better out of that brewery that we did in the seven years that we brewed there.

Bryan Spillane - Banc of America Securities

Okay and I promise, this is my last, last question. If you could quantify in some way just how much the temporary shut down in Cincinnati would cost in the quarter?

Martin Roper

Bryan, I think that is not something we can disclose, I think what we probably can say is that if it was really significant, we probably would disclose it.

Bryan Spillane - Banc of America Securities

Okay, alright great, thanks guys.

Operator

Our next question comes from the line of Mark Cowen with Merrill Lynch, please proceed.

Mark Cowen - Merrill Lynch

Hi guys. Jus two questions, one is to follow up on and just sort of expand about Bryan just asked, Jim, you know the model is changing so the competencies that brought you here need to be complemented with production and distribution, logistics, and all that. Can you talk about what you see you have to do in the Lehigh Valley plant to execute that well?

Jim Koch

Well, there are a couple of things, one of them is managing the capital expenditure process well and then the other is the ongoing start up in operations of it and we have been adding people recently so we added Greg Tanner who is a very experienced supply chain logistics person to our board, he has done construction projects and so forth so we have expertise at the board level. Early this year, we added Tom Lance as VP of Operations and then, below that level, we have added a number of people including two senior people at the Lehigh Valley brewery who were there for many years when it was operated by Stroh and when we were brewing there so we have been beefing up our staffing and we will continue to do that as we need to.

Martin Roper

I just want to add on top of what Jim said that when we recognize that these are the capabilities that we need to develop into, one of the benefits of the facility is that it comes with people. It is currently being operated by the Diageo and so we are looking forward to working with the employee group there and they are going to bring a lot of knowledge about the facility and also the running of packaging operations to our organization.

Mark Cowen - Merrill Lynch

Okay, I see. It seems that with material cost going up as much as they are, you have some renaissance to price and I am just wondering if you could put some context around what you were thinking there relative to the Coronas and Heinekens. I guess Corona did move up quite a bit this year. You might have some flexibility to do that although that did stall up their brand growth. So, Jim, could you give some context to that thought process.

Jim Koch

Well, I think the best is still out there. It has not settled yet on what the appropriate pricing levels are going to be for next year. It is too early to tell. I think our colleagues in the Craft brewing industry are particularly subject as we are to the malt and hop increases. We use significantly more hops than the large domestic brewers in every barrel and even more than the imports, so the same thing is generally true with the malt, so we are seeing cost increases that differentially affect the Craft category more so than imports and the regular domestic beers, and I think we have been talking about pretty significant price increases and we are going to try to find the opportunities for doing those across the board and we really would not know for a few more months what other people do and what flexibility we are going to have because I think a lot of other brewers are in something of a state of shock and are trying to figure out where they need to settle out.

Mark Cowen - Merrill Lynch

Right. So, when you talk about, I think you said 3%. There maybe some flex around that when you see how things settle down.

Bill Ulrich

If I could just jump in, I think what we said was we have enjoyed double-digit growth this year and achieved 3% this year.

Mark Cowen - Merrill Lynch

That was next year’s number, I am sorry.

Bill Ulrich

And next year’s target number that we were currently thinking about, and obviously, as Jim said, we are still early in this process, is targeting that, and so I would add to what Jim said is that I think this year we have been very pleasantly surprised that even with the pricing that we took early in the year, the volume has held very firm and certainly as we look to next year, our goal is to try and cover as much of the cost increases as we can through price increases. Our current target is right, but obviously that is subject to change based on what the market will bear and I believe that the category will continue to grow even at their pricing.

Mark Cowen - Merrill Lynch

Okay. Thank you so much.

Operator

There are no further questions in the queue. I would now like to turn the presentation back over to Mr. Jim Koch.

Jim Koch

Thank you everybody for your attention and we will meet again for the next quarter. Take care.

Operator

Thank you for your participation in today’s conference. This concludes your presentation. You may now disconnect and have a good day!

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Boston Beer Co. Inc. Q3 2007 Earnings Call Transcript
This Transcript
All Transcripts