C. James Koch - Chairman & Founder Martin F. Roper - President, Chief Executive Officer Frank H. Smalla - Chief Financial Officer & Treasurer.

Vivien Azer - Cowen & Co. LLC Judy Hong - Goldman Sachs Kevin Grundy - Jefferies Brian Doyle - CLSA Americas.

Good day, ladies and gentlemen, and welcome to the The Boston Beer Company's Third Quarter 2016 Earnings Conference Call. At this time, all participants' lines are in a listen-only mode to reduce background noise. Later, we will be holding a question-and-answer session after prepared remarks and instructions will follow at that time.

[Operator Instructions] As a reminder, today's conference call is being recorded. I would now like to introduce your first speaker for today, Jim Koch. You have the floor sir..

Hi this is Jim Koch, Founder and Chairman and I'm pleased to be here to kick off the 2016 third quarter earnings call for the Boston Beer Company. Joining the call from Boston Beer are Martin Roper, our CEO, and Frank Smalla, our CFO.

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 Frank who will focus on the financial details for the third quarter as well as a review of our outlook for the remainder of 2016 and our initial outlook for 2017. Immediately following Frank's comments, we'll open the line for questions.

Our total company depletions trends declined in the third quarter at slightly faster rate as we lapped new bear launches from last year and we saw 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 communications.

We continue to believe that we are well positioned to meet the challenges of this competitive environment, because of the quality of our people, 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 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 brands. I will 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.

Our third quarter depletion 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 out trends for the first nine months and our current view of the remainder of the year.

We remain prepared for 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 programming are all unclear.

Long term we remain optimistic for future Craft and cider category growth. 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 at 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 had 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 Sam 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 the 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 organizations while preserving our quality and service levels with the 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.

Based on information in hand, year-to-date depletions through the 41-week period ending October 8, 2016 are estimated to have decreased approximately 6% from the comparable period in 2015. Now Frank will provide the financial details..

Thank you Jim and Martin, good afternoon everyone. For the third quarter we reported net income of $31.5 million or $2.48 per diluted share a decrease of $0.37 per diluted share from the third quarter of 2015.

This decrease was primarily due to decreases in net revenue and a decrease in gross margins partially offset by decreased advertising, promotional and selling expenses. Shipment volume was approximately 1.1 million barrels a 12% decrease compared to the third quarter of 2015.

We believe distributor inventory as of September 24, 2016 was at an appropriate level. Inventory at distributors participating in the Freshest Beer Program as of September 24, 2016 decreased slightly in terms of days of inventory on hand when compared to September 26, 2015. Approximately 77% of all volume is on the Freshest Beer Program.

Our third quarter 2016 gross margin decreased to 52.7% compared to 53.6% in the third quarter of last year primarily due to product mix effects and unfavorable fixed cost absorption, partially offset by cost-saving initiatives and the love truly and price increases.

Third quarter advertising, promotional and selling expenses decreased $14.4 million compared to the third quarter of 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 $1.8 million from the third quarter of 2015 primarily due to increases in stock compensation and increases in salary and benefit costs.

Based on information of which we are currently aware full year 2016 earnings per diluted share are now estimated at between $6.30 and $6.70 a decrease and narrowing in the range from the previously communicated estimate of between $6.40 and $7. However, 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 are currently forecasting a change in full year 2016 shipments and depletions versus 2015 of between minus 6% and minus 2% a decrease in the range from the previously communicated estimate of between minus 4% and zero.

We continue to predict price increases per barrel of between 1% and 2%. Full year 2016 gross margins are expected to be between 50% and 52%.

Investments in advertising, promotional and selling expenses are forecasted between a decrease of $10 million and flat, the decrease in the range from the previously communicated estimate of between a decrease of $5 million and an increase of $5 million.

This estimate does not include any increases or decreases in freight costs for the shipment of products to our distributors. Our 2016 effective text rate is projected at approximately 36%.

We are continuing to evaluate 2016 capital expenditures and currently estimate investments of between $55 million and $65 million, a $5 million decrease of the range from the previously communicated estimate of between $60 million and $70 million.

Looking forward to 2017 we are in the process of completing our 2017 plan which represents the 52-week fiscal year compared to the 53-week fiscal year in 2016 and we will provide further detailed guidance when we present our full year 2016 results.

Based on the information of which we're currently aware we are targeting depletions and shipments percentage change in a range of between minus low single-digit and plus low single-digit.

We planned increased investment in advertising, promotional and selling expenses of between $10 million and $20 million for the full year 2017 not including any increases in freight costs for the shipment of products to our distributors. We estimate our full year 2017 effective tax rate to be approximately 36%.

Excluding the impact of the new accounting standard, employee share based payment accounting, also known as ASU 2016-09 which is effective on January 1, 2017.

We are currently not planning to provide forward guidance on the impact that ASU 2016-09 will have on our 2017 financial statement and also the effective tax rate as this will mainly depend upon unpredictable future events including the timing and value realized upon exercise of stock options versus the fair value when those options were granted.

We are currently evaluating 2017 capital expenditures and our initial estimates are between $40 million and $60 million. The capital will be mostly spent in our breweries to support future growth and product innovation and to drive efficiencies and cost reductions.

We expect that our cash balance of $77.3 million as of September 24, 2016 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 39-week period ended September 24, 2016 and the period from September 25, 2016 to October 14, 2016 we repurchased approximately 807,000 shares of our Class A common stock for an aggregate purchase price of approximately $138.4 million.

As of October 14, 2016 we had approximately $196.5 million remaining on the $781 million share buyback expenditure limits set by our Board of Directors. We will now open up the call for questions..

[Operator Instructions] Our first question comes from the line of Vivien Azer from Cowen. Your line is open..

Hi, good afternoon..

Hey, good afternoon..

So, I guess I would like to start off with fourth quarter implied guidance please. You know, I recognize it's incredibly challenging to really hone in on where do you think things are going to fall out for the year given how dynamic things look to be across your portfolio and coupled with some slowdown in Craft beer.

But if I look at the implied shipment guidance I recognize you are benefiting from the extra week, but at the high end of the range it is almost 18% shipment growth.

So two questions; number one, how much do you think the extra weeks is going to benefit your fourth quarter shipments? And secondly, what's going to be the key driver of such a material improvement even on an underlying basis? Thank you..

So Vivien, let me, this is Frank, let me quickly take the impact or the extra week is giving you about 2% benefit that this essentially what you get versus prior year on the full year I should say. Let me just talk about what we see going on.

You know, I think from a projection perspective there's lot of timing issues relative to shipments you see in Q3 that shipments were down versus also the depletion from the standard shipments were down more and so the sort of wholesaler inventory issues sort of going on related to the root beer launch last year where we shipped a lot of root beer in Q3 as the market was very receptive to root beer and indeed some of the competitors were actually having out of stock.

And so there were huge opportunities and that sort of correctly itself in Q4 last year, but so the comparisons are really hard, to sort of layout and I'd think I'd rather just talk about what we see going on in the industry.

I think you're right to say that it looks like based on the publicly data that Craft is slowing in slowing in IRI and Nielsen data and it has happed, that's slowing down of the growth rate has been pretty quick. I think at the same time there's some improvement on the Sam Adams trends in the last 10 weeks.

When we last spoke to you in July, we actually had some positive trends going on which were encouraging to us and those then went negative again and now we see the negative trends starting to slow down a little bit which again is positive, but we just really don't how to read it.

And so there is a lot of uncertainty on the Craft beer side I think as we talk to retailers and the wholesalers and drinkers there seems to be some drinker confusion at retail.

There are some retailers who are choosing to focus on core items and basically carry inventory of that fast moving items and reduce the long tail and then there are also some suggestions of beer getting old at wholesaler or at retailer and therefore everything is sort of seems to be slowing.

I think we remain positive about the long-term future of Craft but we're certainly in a transitional phase.

We have some belief that it will return to a brand driven business as opposed to maybe a variety seeking business, but obviously that's an assumption and a belief based on what we see, but it may not be true and all of that makes it very hard to sort of lay out the forecast.

As it relates to our other brands, Twisted Tea remained strong, Truly is doing nicely and a very small category that may be has a pretty big seasonal piece to it and we're still trying to work it out.

Obviously, it is very early in that category development and then Angry Orchard in the cider category we expected to see some improved trends in the cider category in Q3 that did not occur as big as we thought they would and I think we are concluding that we're being hurt a little bit by the retail environment and we need to focus on retail activation and displays and the features to make sure that the cider is available and visible to drinkers.

So we think we have some opportunities there. But again to your point, it's very hard to forecast the difference in shipping and depletions numbers strengths that you are pointing to is more a function of the quarter to quarter effects and wholesaler inventory effects. And we are just doing the best we can to forecast what our full year looks like..

That's very helpful and totally fair. Thanks for that. As I think about the refresh on the same brand I was hoping you could offer a little bit of color on some of the consumer work that you did ahead of the relaunch and then what you've learnt from that and then how that informed some of the changes that you are making? Thanks..

Sure, you know, I think when we do drink a work on Sam Adams we get very consistent feedback as to how mobbed the brand is, that it is a respected part of drinkers portfolios and that the brand has very strong brand imagery associated with respected part of drinkers portfolios and that the brand has very strong brand imagery associated with Samuel Adams the patriot with Boston Beer and Jim Koch and with our set of pioneering role in the development of the Craft beer category, so all very positive.

And I think what you conclude is that we were lacking on some retail disruption visibility at the point of purchase to remind the drinker of all of those things. So the new packaging is brighter, cleaner, simpler.

It is broader on shelf and it clearly portrays Sam Adams in a sort of more modern creative way that we are very pleased with and we receive very good drinker feedback on and the overall design is designed to attract the eye on the shelf and remind people what Sam Adams stands for as part of our purchase considerations..

That's great and just my last one to followup on the work that you're doing on Sam. Given the slowdown that we're seeing in Craft beer, how are you thinking about retailer receptivity to an even further expanded SKU set for that brand? Thanks..

Yes, you know I think the retailers are receptive to sort of brand offerings that are supported and invested in on a basis like we do with all of our offerings and there is certainly a lot of support for the core Craft domestic specialty brands that make up 40% to 50% of the volume.

And when retailers are thinking about the space they are thinking about the beer that are basically pulling and churning their tail. They've been churning the tail for a while and they are thinking about allocating some of that tail to stock out of core items.

I think - we think that the hard soda category is going to - is probably over SKU-ed right now and I'm sure there are other categories too and those spaces being, I think at least with couple of the major retailers is being pushed to back out. So when we are presenting new items I think we're hearing from retailers support for the packaging design.

We're hearing support for the new innovations around some of our priorities. We have announced we're going to five seasonals next year and that seems to have good retail and wholesaler support based on our ability to execute seasonal programs due to the Freshest Beer approach and inventory management capabilities.

And so we're actually feeling pretty good about what we're hearing, but obviously the proof is in what the retailers ultimately give us and we have to wait for few months to actually see..

Terrific, that's very helpful. Good luck guys..

Thank you. Our next question comes from the line of Judy Hong from Goldman Sachs. Your line is open..

Thank you, hi everyone..

Hey, Judy.

Hey Judy..

Hey Judy..

So first, I'm following up on the earlier question about [indiscernible] so just to be clear for 2017 you'll be lapping the 53rd week so down I think a slow single to up low single does seem like you do respect underlying chicken crews.

So maybe just a little bit of color on is it really hinging on the lager and the angry Orchard getting better or do you feel that the innovation pipeline is strong enough that they can actually carry some of the innovation or the acceleration and how do you think about lapping the hard root beer launch because I think in the near term does not seem to be presenting pretty tough comp here..

Yep. So I think the hard root would be a sort of launch phenomenon. It is pretty much a trial way before sort of August, September, October last year and so our current comparables are very high. And by the time you got through Q1 when you saw the introduction of the competitive soda brand that was absolutely Q1 late Q1.

The comparisons get much easier when you get that.

So we're just assuming on the root beer side that we're going to see a continuation of what our sort of business looks like although again I think we're expecting some rationalization of [indiscernible] because the category has not turned out to be as large as half the people thought and potentially does not, even large enough to support four, five, six rounds and 20 SKUs whatever the total number of SKUs category is.

As we sort of look at next year and have laid out the plan, the range about that is for a 52-week comparing to 53-week. So you are absolutely right that we're getting on an adjusted basis for the weeks that we can grow the company slightly.

And the things you have to believe to do that are you need to believe that Twisted Tea maintains its health and continues to grow distribution and penetration and share.

You have to believe that Truly continues on its trajectory based on the sort of eight weeks of summer that we saw this last quarter and we can duplicate that next summer and obviously through the winter.

And you also need to believe that you can return Angry Orchard and Sam Adams to sort of very low declines or flat instead of the range or what you have to believe. And so we think that's reasonable. We think that's doable.

That's what we're going to plan around and we have some innovation in the Sam Adams family and in the Angry Orchard family that will help that, but obviously again as I laid out Vivien, it is a highly fluid time.

And given that we don't yet have full visibility to all the competitive activities that may come at us in Q1 nor to exactly how the retailers react to everything we're presenting to them now, we really don’t have good data as to how that's going to impact our bases.

So this is our best guess and obviously we'll have a better feel for it when we talk in February..

Okay and then just on the new Sam Adams packaging, so I've seen some clips on your twitter and it does seem very simple versus your prior packaging.

So, I guess, first of all what is sort of the more the communications, the media plan that you have for the new packaging and is the spending level going up in the near term to kind of support the new packaging in some of brand investment standpoint? And that is the plan to roll out the sort of the new look to all of your Seasonals and all the Sam Adams trademark because it does look very different than sort of the rest of your portfolio?.

Yes, let me address the packaging timing first and then come back to sort of the medial support and promotional support.

On the packaging side a new look and feel that is consistent with the look and feel of the lager package at least from a design conception perspective will start to appear with our winter larger and sort of limited release holiday seasonal beers which should be hitting retail shelves probably early November plus or minus a week based on our Oktoberfest conversion timing.

And they will then be followed in the planning process by our rebel family of beers including our new rebel fused that will have a new look and feel for a rebel family that will from a timing perspective be targeting January 1st and then the other beers in our lineup what we will call our Brewmaster's collection are sort of scheduled to be completed by late Q1, early Q2 and will be feathered in based on news ups and design.

So we're also prioritizing our higher volume items, but the whole line will have been completely redesigned by the time we get to middle of Q2. So that's the approach to packaging and it's both mother packaging like six packs and 12 packs, it's also the cans and bottle labels. So we're doing everything.

And that's in process and we feel pretty good about that timing. And we also think the collective look is terrific when we put it on shelf.

With regards to media, we are currently editing work that is designed to support the Sam Adams Boston Lager packaging with communication around Sam Adams and his role in sort of American history and our role in peer history and that's still being finalized.

But he latest I have from my brand team is early November, but knowing the credit process obviously that could move a little bit..

Okay, and then finally may be you know for Jim, just if you look at the Craft beer industry, you see a lot of moving parts and the slowdown in the category is kind of forcing some of your peers to cut more [indiscernible] headcount reductions which we haven’t seen in a while.

So what is sort of the implications for you guys as you seal these changes and in terms of the competitive landscape do you think that over the next 12 to 18 months this could actually be a positive for Sam Adams and to the extent that you are continuing to admit do you feel that you would see some of the competitive advantage coming back to your brands? And then do you see any slowdown in terms of the pace of the new Craft brands coming into the market?.

Let me answer all those questions in the sequence you asked them. I think everybody is seeing the same thing which is that it starts with retailers. They are by and large not expanding perhaps space. They've kind of put up the yellow light and because they rule believe that they haven't a variety.

They have enough assortment and adding more Craft space first won't increase their total sales and secondly may increase them by creating a more difficult consumer choice and a more confused category. So we are seeing the off premise and to some extent on premise retailers actually cutting SKUs. Walmart is cutting their SKUs.

We're seeing some of the same thing happening at [indiscernible] rationalize the categories and make it more shopable. So and that backs up into the wholesalers. Wholesales are being much more selective. Many of them are dropping SKUs and even dropping suppliers. So it is kind of an end to a long phase of constantly increasing shelf space.

And as a result, there is a high likelihood that we will benefit as will other leading Craft brands, the stronger brands are going to benefit from removing some of the confusion from the category.

Does that answer your questions?.

Yes, I guess until again I think it seems like it's been going on maybe for the last six to nine months some of the slowdowns. So far it hasn’t necessarily helped you saying that and lager is a seasonal. So at what point do you feel like you would actually start to see some of that shop space is coming back or the consumer is coming back.

I know it's kind of hard to predict, but do you have any sense of whether you are starting to see that already or does it take some time for that to kind of play out?.

I think it takes a little bit of time to play out because while the growth trends have slowed significantly really over the last 12 months. We are just now seeing in spring resets retailers acknowledging that and changing their space allocation.

In general what they're doing is, giving more space to the strong brands to allow pack out and prevent out of stocks at the expense of you know the big hunk of shelf space that has been devoted to variety an assortment. So I think we're just starting to see those resets a little bit in the fall tweeks but bigger in the major reset in the spring.

And similarly on premise we're seeing a real slowdown in adding caps. Some of the big on premise change or even increasing the number of mandated brands which tend to be the stronger brands rather than allowing discretion at each units to pick whatever the long tail of Craft they want.

So we are seeing the beginning of this process, but it will take a while to work its way through the retailer shelf space allocation and tap handle..

Got it, okay, thank you..

Thank you. Our next question comes from the line of Pablo Zuanic from SIG. Your line is open..

Good afternoon. This is [indiscernible] on behalf of Pablo. We have two questions please and then maybe a followup. So first, price mix is down 1.8% which is oversold from recent trends.

Why in this still pricing weaker, are you having to promote more to recover share and how much was mix and how much was price? And second question, we want to understand better how you plan to recover share, whether it is more innovation or less pricing, more ad spend, we just want to understand the strategy to regroup share better? Thank you..

Sure on the pricing it is a mix issue related to the root beer shipment sales revenue of Q3 of last year. So we don't think the underlying pricing on our total businesses is the change in the quarter approach to it hasn’t changed the symptoms mix issue driven by the root beer shipments as a proportion of our business in Q3 last year.

As it relates to the plan to recover, I think, we think we have opportunities in our brand communication, in our packaging there are obviously we are fixating as we speak and in how we promote and help drinkers experience our brand.

We have asked Jon Potter, the CMO to start with a blank sheet of paper and totally question everything that we do and we think we have opportunities to both improve the messaging, but also the efficiency with which we deliver that messaging whether that be through media promotions or all point of sales.

And we think that gives us a good stead given our investment levels of being able to change the drinkers' perception of the brand and then to move the brand forward. So that's what we're launching out ourselves onto now that Jon is onboard..

Got it and just regarding the gross margin expansion goal of 1% per year for the next three years, what would be the EBIT margin target or how much of the gross margin improvement will be accretive to EBIT? Thank you..

Sure, so we don’t provide EBIT outlook. What I would say is if we believe that we can take that savings and invest it in brand activities to drive topline growth, then we will do that and the topline growth will drive the EBITDA. So, EBITDA for us obviously is a huge function of growth. We would like to grow.

We would like to have the option of having brand investments that we think will generate growth and if we have them then that would be our prioritization for that money..

Got it, okay thank you..

Thank you. Our next question comes from the line of Kevin Grundy from Jefferies. Your line is open..

Hey, good evening guys..

Hey Kevin..

Hey Kevin..

Hey Kevin, good evening..

Jim, first question for you if I may, can you speak broadly to the potential impact from one aspect of the recent ABI settlement with DoJ and specifically the settlement prohibits ABI from continuing programs and limit the ability of independent beer distributors to sell and promoter beers of ABIs rivals including crafts and imports.

So can you touch on that a bit and how you think that may impact the industry and your business?.

Yes, with respect to our business, we don’t have a lot of our volume through ABI Distributors and frankly the ones that we do have are and have demonstrated a great deal of independence. Otherwise they wouldn’t have Sam Adams because they've had it through years when there have been lot of pressure on them. So for us I don’t see it as a big issue.

It's around the edges and does impact us a little, but we have an unusually low percentage within Craft beer of ABI Distributors. So it impacts us some, and anything that diminishes competitiveness in the industry is bad for our brand. But I think it's probably a bigger issue with many other brands and the jury is still out.

You know the DoJ has put those restrictions out, but there are probably a lot of ways around them. So what really remains to be seen is whether they will be vigorously enforced and effectively enforced or whether they will go by the wayside and it's too early to tell..

Okay, thank you for that. And then Martin, just a followup briefly on the gross margin commentary there on the cost savings specifically, I guess a couple different questions. You didn’t talk about SG&A.

Is that also a focus, if so what's the potential opportunity there?.

Yes, we're looking at everything. I think as a result of the growth that sort of came to a stop sort of this time last year, we had built our capabilities and infrastructure both operationally and SG&A wise. So we're looking at everything.

We're looking at salesforce alignment to make sure that in the current environment our salesforce structure is sort of aligned against what drives the biggest value to our wholesalers and our retailers and so we're making some moves there that actually might result in a slight increase in sales investment next year.

But we're basically looking at it from a blank piece of paper and going by what we do today based on where we are and that's where we come up and I think that applies to all of the SG&A spend, both all the brand spend as I sort of said starting taking a look at everything and identifying what is driving value, what isn’t driving value, can we do better, particularly with the new set of brand direction that will be coming out.

So, you know, what works and what doesn’t work. And on the G&A side same sorts of things, both looking at trying to put in systems and processes to improve flow in decision making and information and drive some saving there. So we're looking at everything. We haven’t sort of set or defined targets yet.

I think previously we've talked about 30 to 50 million and obviously we put the 1% gross margin target out there over the next three years which sort of rings true to that sort of target.

So it's that sort of level that we're comfortable talking about, but we're still in the process of actually identifying specifics and timing that we wish to approach it. So at this point in time I'm not willing to comment further..

Just one more if I may, are you comfortable with advertising and marketing levels as they are now or is it possible when you sort of get through the brand work that you're looking to do sensibly that that may indeed have to move higher.

You may have to increase your share of voice, you may have to be increasing investments, is that certainly possible?.

Yes, I know it is certainly possible. What I would say is if we have something that we like that demonstratably moved the brand then we would move to invest behind it because the big, as we see it the big long term value driver for the businesses is topline growth..

Sure, okay, very good, thank you. Good luck..

Thank you..

[Operator Instructions] Our next question comes from the line of Caroline Levy from CLSA. Your line is open..

Hi this is Brian Doyle. I'm filling in for Caroline.

I'll just ask one with a followup a little bit on the mix component of gross margin which was, you said a drag in this quarter, but as far as the outlook for an improvement of 100 basis points a year kind of worth, when do you expect that to sort of moderate as per and what would be the biggest drivers of that improvement, because you are not sort of assuming much volume leverage in 2017, so if you could just sort of help us with the mix piece of it? Thanks..

Sure, so just coming back to Q3 mix impact I think my comment was around on the pricing. That would be a benefit in pricing in Q3 of last year and not actually a comment on the gross margin that we just reported.

If I was to think about Q3 gross margin just reported, I would say volume was down so we had fixed cost absorption issues, but those were somewhat offset early signs of the savings projects that we kicked off when we last spoke to you.

As we look forward on we deliver gross margin sort of 1% a year for three years that we talked about today we're going to try and do that sort of net of mix effects, so before mix effects.

Obviously in our business we have opportunities to introduce new brands with better profitability, higher price points or different economics against different opportunities.

But in our projection what we would like our gross margin to be and how it would improve over the next three years, we have chosen to ignore sort of mix effects so that projection is solely from cost initiatives on the supply chain side.

And we believe those opportunities are there based on, again we built a supply chain to deal with the five years or six years of growth that we experienced 2009 through 2015. It was incredibly hectic. We expanded and we had a capacity and we really believe we have opportunities to operate better.

We also believe that we sort of built up capacity a little higher than we needed to with the sort of trends over the last 12 months that came up, were pretty unexpected when we were making those capacity decisions including for the staffing or decisions on shift patterns and we're going to walk out of those in a manner consistent with our values, but we believe that opportunity is there and we're going off grid with a vengeance..

Okay, so just to clarify, when you said in the release the gross margin declined primarily due to product mix effects, that was related to the may be your pricing and thus the pricing impact on margin?.

No Brain, it's a number of factors. One was clearly the pricing impact and the mix impact that came from hard root beer which was two bucks a case higher than the rest of the lines. So this was number one.

The second thing is, if you look at our volume decline versus prior year, we have significant fixed course absorption impact and that's what you see as well And if you just take, if you compared to prior quarters, if you just take the volume impact on the fixed source or on the margin, we should have seen a lower margin, but it was already partly offset because we see the first signs of the initiatives that we have put in place and breweries to drive the cost savings.

So that's what you see. And if you look at the margin decline versus prior year it's actually better than what we have seen in the previous quarters.

So that's the dynamic there, a little bit of margin mix from the product mix in there, then the negative impact of fixed cost absorption partly offset then by the cost saving initiatives, but the early signs that we're seeing from the initiatives that we have put in the breweries..

Okay, thanks very much..

Thank you. [Operator Instructions].

Andrew, it sounds like it's pretty quiet out there. So we'll dray the call to a close. We thank you for listening and participating. We look forward to talking to you again in February with a full year and hopefully I want to now go find a beer. Cheers..

Bye now..

All right..

Ladies and gentlemen, thank you again for your participation in today's conference call. This now concludes the program and you may all disconnect at this time. Everyone have a great day..