Boston Beer Reports Third Quarter 2014 Results

BOSTON, Oct. 30, 2014 -- The Boston Beer Company, Inc. (NYSE: SAM) reported third quarter 2014 net revenue of$269.7 million, an increase of $53.3 million or 25% over the same period last year, mainly due to core shipment growth of 23%. Net income for the third quarter was $37.9 million, or $2.79 per diluted share, an increase of $12.2 million or $0.90 per diluted share from the third quarter of 2013. This increase was primarily due to shipment increases and lower than expected operating costs per barrel during the third quarter due to lower employee benefit costs and the timing of certain advertising promotional and selling expenses.

Earnings per diluted share for the 39-week period ended September 27, 2014 were $5.29, an increase of $1.44 from the comparable 39-week period in 2013. Net revenue for the 39-week period ended September 27, 2014 was $685.2 million, an increase of $151.5 million, or 28%, from the comparable 39-week period in 2013.

Highlights of this release include:

Depletions grew 21% and 25% from the comparable 13 and 39 week periods in the prior year.
Third quarter gross margin is 53% and year-to-date gross margin is 52%; the Company maintains its full-year gross margin target of between 51% and 53%.
Advertising, promotional and selling expense increased by $8.9 million or 16% in the quarter, primarily due to increased investments behind the Company's brands.
Full-year 2014 estimated depletion growth remain unchanged at between 20% and 24%.
Full-year 2014 estimated earnings per diluted share remain unchanged at $6.00 to $6.40. The third quarter benefit of lower operating costs per barrel is expected to be offset by slightly lower than previously planned volumes in the fourth quarter.
Full-year 2014 capital spending is now estimated to be between $150 million and $160 million, a decrease of the range from the previously communicated estimate of $160 million to $185 million.
Full-year 2015 capital spending is now estimated to be between $80 million and $100 million.

Jim Koch, Chairman and Founder of the Company, commented, "Our depletions growth this quarter was strong and a result of a number of factors, including effective sales execution, support from our distributors and retailers, not to mention the quality of our beers, innovation and strong brands. During the quarter, we had a smooth transition from Samuel Adams Summer Ale to our fall seasonal, Samuel Adams OctoberFest. Our fall seasonal program also included the limited release of seasonal favorites including Samuel Adams Harvest Pumpkin and a small batch double pumpkin ale, Samuel Adams Fat Jack. In addition, for the first time, we released a small batch of Kosmic Mother Funk Grand Cru, which is currently on a twelve-city tour after fermenting in the Barrel Room of our Boston Brewery for about two years. It's an exciting time for us, and 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, "In the third quarter, our depletions growth remained strong and benefited from the growth of our Samuel Adams, Twisted Tea, and Angry Orchard brands. We believe that the strength of our main brands reflects strong sales execution and our increased investments in media, local marketing and point of sale, and the efforts of our increased sales force. We do not expect that the depletions growth rates we have experienced so far this year will be maintained for the remainder of the year, as we face tougher comparables and the benefit in the first half from new product launches will not be replicated during the fourth quarter of 2014. Accordingly, we have not increased our estimated full year 2014 depletion growth rate."

Mr. Roper went on to say, "Our supply chain performance improved during the quarter but we still have plenty of room for further improvement. We have completed a number of significant capital and efficiency projects that have further increased our capacity and capabilities. Our focus now is on taking full advantage of these increased capabilities through improved operator training and on making supply chain improvements intended to increase the freshness of our beers and enhance our customer service. We expect our capital expansion pace to slow in 2015, as we absorb and optimize our 2013 and 2014 investments. Our sales focus in 2015 will be on second year growth of some of our successful 2014 launches, rather than continue our recent high pace of new brand launches. It is too early to accurately predict 2015 growth rates. We expect to maintain a high level of brand investment as we pursue sustainable growth and innovation, and we continue to be prepared to forsake the earnings that may be lost as a result of these investments in the short term, as we pursue long term profitable growth."

3rd Quarter 2014 Summary of Results

Depletions grew 21% from the comparable 13-week period in the prior year, primarily due to increases in the Angry Orchard^®, Samuel Adams^®, and Twisted Tea^® brands.

Core shipment volume was approximately 1.2 million barrels, a 23% increase over the third quarter of 2013.

The Company believes distributor inventory levels at September 27, 2014 were at appropriate levels. Inventory at distributors participating in the Freshest Beer Program at September 27, 2014 increased slightly in terms of days of inventory on hand when compared to September 28, 2013. The Company has over 65% of its volume on the Freshest Beer Program and it believes participation in the Program could reach 70% of its volume by the end of 2014.

Gross margin at 53% was equal to the third quarter of 2013, primarily due to unfavorable product mix effects and increases in packaging and ingredient costs that were offset by price increases.

Advertising, promotional and selling expenses were $8.9 million higher than costs incurred in the third quarter of 2013. The increase was primarily a result of increased investments in media advertising, increased costs for additional sales personnel, point of sale, and increased freight to distributors due to higher volumes.

General and administrative expenses were equal to the third quarter of 2013, primarily due to increases in salary costs that were offset by lower benefit and consulting costs.

Impairment of long lived assets was $300,000 higher than the third quarter of 2013 due to the write-down in 2014 of Pennsylvania Brewery assets of $1.6 million compared to a write-down in 2013 of land owned by the Company in Freetown, Massachusetts of $1.3 million.

Year to Date 2014 Summary of Results

Depletions grew by 25% from the comparable 39-week period in 2013, primarily due to increases in the Angry Orchard, Samuel Adams, and Twisted Tea brands.

Core shipment volume was approximately 3.1 million barrels, a 26% increase from the comparable 39-week period in 2013.

Advertising, promotional and selling expenses were $42.5 million higher than costs incurred in the comparable 39-week period in 2013. The increase was primarily a result of increased investments in media advertising, increased costs for additional sales personnel and commissions, point of sale and local marketing, and increased freight to distributors due to higher volumes.

General and administrative expenses increased by $3.0 million from the comparable 39-week period in 2013, primarily due to increases in salary costs.

The Company expects that its cash balance of $57.2 million as of September 27, 2014, along with future operating cash flow and the Company's unused line of credit of $150.0 million, will be sufficient to fund future cash requirements.

During the third quarter and the period from September 28, 2014 through October 24, 2014, the Company did not repurchase any shares of its Class A Common Stock. On October 9, 2014, the Board of Directors approved an increase of $25 million to the previously approved $325.0 million share buyback expenditure limit, for a new limit of $350.0 million. As of October 24, 2014 the Company had approximately $50.5 million remaining on the $350.0 million share buyback expenditure limit set by the Board of Directors.

Depletion estimates

Year-to-date depletions through the 42 weeks ended October 18, 2014 are estimated by the Company to be up approximately 24% from the comparable period in 2013.

2014 Outlook

The Company has left unchanged its projected 2014 earnings per diluted share of between $6.00 and $6.40. The Company's actual 2014 earnings per share could vary significantly from the current projection. Underlying the Company's current projection are the following estimates and targets:

Depletions and shipments growth of between 20% and 24%.
National price increases of approximately 2%.
Gross margins of between 51% and 53%.
Increased investment in advertising, promotional and selling expenses of between $37 million and $45 million. This does not include any increases in freight costs for the shipment of products to the Company's distributors.
Increased expenditures of between $3 million and $5 million for continued brand investments in existing Alchemy & Science brands, which are included in our full-year estimated increases in advertising, promotional and selling expenses
Effective tax rate of approximately 37.5% based upon current tax laws and underlying regulations.
Capital spending of between $150 million and $160 million. These investments relate to continued investments in our breweries and additional keg purchases in support of growth and increased complexity. These estimates include capital investments for existing Alchemy & Science projects of between $7 million and $9 million.

2015 Outlook

The Company is completing its 2015 planning process and will provide further detailed guidance when the Company presents its full-year 2014 results. The Company is currently using the following preliminary assumptions and targets for 2015:

Depletions and shipments percentage growth of between 10% and 15%.
National price increases of between 1% and 2%.
Full-year 2015 gross margins of between 51% and 53%.
Increased investment in advertising, promotional and selling expenses of between $25 million and $35 million for the full year 2015. This does not include any increases in freight costs for the shipment of products to the Company's distributors.
Increased expenditures of between $6 million to $12 million for continued investment in Alchemy & Science brands, which are included in our full-year estimated increases in advertising, promotional and selling expenses. These estimates could change significantly and 2015 volume from these brands is unlikely to cover these and other expenditures related to these projects that could be incurred.
Full-year effective tax rate of approximately 38% based upon current tax laws and underlying regulations.
Estimated full-year 2015 capital spending of between $80 million and $100 million, which could be significantly higher, dependent on capital required to meet future growth. These estimates include capital investments for existing Alchemy & Science projects of between $5 million and $7 million.

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