Boston Beer Reports Third Quarter 2016 Results

Earnings per diluted share for the 39-week period ended September 24, 2016 were $5.05, a decrease of $0.97 from the comparable 39-week period in 2015.  Net revenue for the 39-week period ended September 24, 2016 was $687.1 million, a decrease of $57.7 million, or 8%, from the comparable 39-week period in 2015.

Highlights of this release include:

Jim Koch, Chairman and Founder of the Company, commented, "Our total company depletion trends declined in the third quarter at a slightly faster rate as we lapped new beer launches from last year, and we saw a further slowdown in growth across the Craft brewing industry.  I am energized by our team’s plans to return Samuel Adams to growth, that include investments in new packaging, new beers, a fifth seasonal and enhanced drinker communication. We continue to believe that we are well positioned to meet the challenges of this competitive environment, because of the quality of our employees, our beers, our innovation capability and our sales execution strength.  Our strong financial position enables us to invest in growing our brands and creating new growth opportunities. A major packaging update for Samuel Adams Boston Lager has already shipped, to be followed by new Seasonal and Rebel packaging by the end of the fourth quarter, and we also expect to complete the national draft launch of Samuel Adams Rebel Juiced, a tropical IPA featuring citrusy hops in late October.  In the early part of 2017, we are reimagining our seasonal program by adding two new beers; Samuel Adams Hopscape, a 30 IBU wheat ale with four types of West Coast hops for January and February 2017, and Samuel Adams Fresh as Helles, a helles lager with orange blossom petals for February and March 2017. We remain confident about the long-term outlook for the craft category and our Samuel Adams brand."

Martin Roper, the Company’s President and CEO stated, "Our third quarter depletions volume continued to be below our expectations, primarily due to decreases in our Samuel Adams, Angry Orchard, Coney Island and Traveler brands that were only partially offset by increases in our Twisted Tea and Truly Spiked & Sparkling brands.  The comparative decline in the third quarter of 2016 for shipments and depletions was significantly impacted by the third quarter 2015 national launch of Coney Island Hard Root Beer and the loss of share due to new entrants in hard soda since the launch.  We are happy with our Truly Spiked & Sparkling category leadership position, and are investing to grow this emerging category.  However, we were disappointed during the quarter by cider category trends, and believe we have opportunities to increase visibility and disruption at retail for our cider packages.  We have adjusted our expectations for 2016 full-year depletions growth and our earnings guidance to reflect our trends for the first nine months and our current view of the remainder of the year.  We remain prepared to forsake short term earnings, as we invest to return to long-term profitable growth, commensurate with the opportunities and the increased competition that we see.  We have provided our preliminary view of 2017 growth rates but these rates are difficult to predict and subject to reassessment, as current industry trends suggest slowing of category growth rates and the impact of increased competition, new introductions and retailer programing are all unclear. Long term, we remain optimistic for future craft and cider category growth."

Mr. Roper went on to say, "I am pleased that during the quarter, Jonathan Potter joined our leadership team as CMO, bringing many years of relevant alcohol experience to Boston Beer. He has already moved to add leadership and experience to our digital efforts as part of our desire to build a world class brand team.  He joins Frank Smalla our CFO, and Quincy Troupe our Senior Vice President Supply Chain, both hired earlier this year as we form a restructured leadership team to address the current challenges and deliver against our three strategic priorities.  Our number one priority remains returning Samuel Adams and Angry Orchard to growth through our packaging, innovation, promotion and brand communication initiatives.  We are conducting a comprehensive review of our brand strategies and activation plans to ensure that our investments are effective and efficient in building long-term brand equities.  Our second priority is a stepped up focus on cost savings and efficiency projects with a view to investing these savings into growing our brands.  We have identified and are executing on cost savings projects throughout the organization while preserving our quality and service levels with a goal of increasing our gross margins by 1% a year over the next three years, ignoring mix or volume impacts. Our third priority is long term innovation, where our current focus is ensuring that Truly Spiked & Sparkling maintains its leadership position and reaches its full potential.  I am very excited by the capabilities of our leadership team, and the energy of our organization as we address these priorities."

3rd Quarter 2016 Summary of Results

Depletions decreased 8% from the comparable 13-week period in 2015.

The Company believes distributor inventory levels at September 24, 2016 were appropriate. Inventory at distributors participating in the Freshest Beer Program at September 24, 2016 decreased slightly in terms of days of inventory on hand when compared toSeptember 25, 2015. The Company has approximately 77% of its volume on the Freshest Beer Program.

Gross margin at 52.7% represented a decrease from the 53.6% margin realized in the third quarter of 2015, primarily due to product mix effects and unfavorable fixed cost absorption, partially offset by cost saving initiatives in the Company breweries and price increases.

Advertising, promotional and selling expenses decreased $14.4 million from the comparable 13-week period in 2015, primarily due to lower media spending and decreases in freight to distributors, as a result of lower volume and lower freight rates.

General and administrative expenses increased by $1.7 million from the comparable 13-week period in 2015, primarily due to increases in stock compensation and increases in salary and benefit costs.

Year to Date 2016 Summary of Results

Depletions decreased 6% from the comparable 39-week period in 2016, reflecting decreases in the Company’s Samuel Adams, Angry Orchard and Traveler brands, partially offset by increases in its Twisted Tea, Truly Spiked & Sparkling and Coney Island brands.

Shipment volume was approximately 3.0 million barrels, an 8% decrease from the comparable 39-week period in 2015.

Advertising, promotional and selling expenses decreased $23.5 million from the comparable 39-week period in 2015, primarily due to decreases in freight to distributors, as a result of lower volume and lower freight rates and lower media spending.

General and administrative expenses increased $9.4 million from the comparable 39-week period in 2015, primarily due to increases in stock compensation, salaries and benefits and facilities costs.

The Company expects that its September 24, 2016 cash balance of $77.3 million, together with its future operating cash flows and its$150.0 million line of credit, will be sufficient to fund future cash requirements.

During the 39-week period ended September 24, 2016 and the period from September 25, 2016 through October 14, 2016, the Company repurchased approximately 807,000 shares of its Class A Common Stock for an aggregate purchase price of approximately$138.4 million.  As of October 14, 2016 the Company had approximately $196.5 million remaining on the $781.0 million share buyback expenditure limit set by the Board of Directors.

Depletion estimates

Year-to-date depletions through the 41-week period ended October 8, 2016 are estimated by the Company to have decreased approximately 6% from the comparable period in 2015.

2016 Outlook

The Company currently projects full year 2016 earnings per diluted share of between $6.30 and $6.70.  The Company’s actual 2016 earnings per share could vary significantly from the current projection.  The 2016 fiscal year includes 53 weeks compared to the 2015 fiscal year, which included only 52 weeks.  Underlying the Company’s current 2016 projection are the following 53 week full-year estimates and targets:

2017 Outlook

The Company is completing its 2017 planning process and will provide further detailed guidance when the Company presents its full-year 2016 results.  The Company is currently using the following preliminary assumptions and targets for its 2017 fiscal year, which represents a 52-week fiscal year compared to the 53-week fiscal year in 2016: