PORTLAND, OR - Craft Brew Alliance, Inc. (“CBA”) (Nasdaq: BREW), a leading craft brewing company, today announced financial results for the third quarter and year-to-date ended September 30, 2018. Third quarter results include 9% depletions growth for Kona, as well as continued progress leveraging our improved business fundamentals to develop a strong portfolio for tomorrow as evidenced by the recently announced acquisitions of our three regional partner brands, Appalachian Mountain Brewery, Cisco Brewers, and Wynwood Brewing Co.
As a result of strong year-to-date financial performance in line with management’s expectations, including accelerated depletions growth for Kona, a 200-basis-point expansion in gross margin, and a $0.15 increase in EPS, we are tightening full-year guidance and updating our selling, general & administrative (SG&A) expense and income tax rate. We now anticipate higher SG&A spend to reflect incremental marketing programs to fuel Kona’s momentum and ongoing innovation initiatives, as well as costs related to our partner acquisitions.
Accelerating Kona’s Growth in the Third Quarter
Kona delivered robust 9% depletions growth in the third quarter, after growing 7% in the second quarter and 3% in the first quarter, improving the year-to-date trend to a 7% increase in depletions. Kona’s momentum was driven by flagship Big Wave Golden Ale, which grew total depletions by 30% in the third quarter, and is particularly remarkable amidst increased headwinds in today’s fast-changing market. Successful testing of incremental marketing programming in key mainland markets, including Florida, also drove Kona’s accelerated performance in the third quarter.
Reshaping our Portfolio for Tomorrow
As part of our Kona Plus strategy to support Kona with strong regional brands in key markets, we took steps to round out our portfolio, culminating with the October 10, 2018 announcement that we are acquiring our three partner brands, Appalachian Mountain Brewery, Cisco Brewers, and Wynwood Brewing Co. Year-to-date, these brands have achieved a combined 18% increase in depletions over the same period last year. Looking forward, we plan to increase investment behind these brands to further bolster their contribution and overall value to CBA.
Unlocking Kona’s Potential in Brazil with Local Production and Marketing
Building on a successful 18-month ecommerce pilot with Ambev in Brazil, we committed to a comprehensive business plan to grow Kona in the world’s third largest beer market with an initial focus in Rio de Janeiro. The plan includes dedicated local commercial resources and increased marketing, as well as local production of Kona to ensure reliability of supply, freshness of beer, and improved sustainability throughout the value chain. With this plan, Rio will become the lead market in Brazil, serving as a template for future international markets.
Investing in the Future through Innovation
In the third quarter, we continued to invest in exploring new opportunities for future topline growth through our ongoing consumer research projects with the Yale Center for Consumer Insights and global consultancy Prophet, as well as our test-and-learn beverage initiative called the pH Experiment. While the research projects are ongoing, our initial learnings continue to broaden our view of today’s changing consumer landscape and inform potential evolution of our business model and portfolio in 2019 and beyond.
Third quarter and year-to-date 2018 financial highlights:
- Third quarter net sales decreased by 6.6% to $52.9 million, primarily driven by lower shipment volume compared to the third quarter in 2017.
- Year-to-date net sales increased slightly to $162.2 million due to improvements in pricing, alternating proprietorship fees, and lower excise tax rates. The increase was partially offset by lower mainland brewpub sales and the absence of a one-time $1.7 million contract brewing shortfall fee that occurred in the first part of 2017.
- Third quarter total CBA depletions decreased by 1%, improving the year-to-date trend to a decrease of 2% compared to the same period a year ago. The decrease in total depletions for the third quarter and year-to-date primarily reflects declines in Widmer Brothers and Redhook, offset by continued accelerated growth for Kona.
- Third quarter depletions for portfolio cornerstone Kona grew 9% compared to the third quarter in 2017, driving an improved 7% depletions increase year-to-date, over the same period a year ago.
- Third quarter shipments decreased by 5.8% and increased slightly by 0.2% year-to-date.
- The evolution in year-to-date shipments was anticipated and reflects our supply chain team’s continued work to better align shipments with depletions while maintaining optimal inventory levels.
- Third quarter gross profit decreased by 14% to $16.7 million, while year-to-date gross profit increased by 7%, to $53.9 million, over the comparable periods last year. The year-to-date increase was primarily driven by improved revenue rates and cost of goods sold per barrel, partially offset by decreases in brewpub performance.
- Beer gross margin was 34.8% in the third quarter, a decrease of 330 basis points compared to the third quarter in 2017, primarily due to lower fixed cost absorption as a result of lower shipment volumes. Gross margin for the quarter was also negatively impacted by a change in mix of shipments from more profitable owned brands to less profitable alternating proprietorship and contract brewing volume. These factors were partially offset by a reduction in beer loss and the removal of fixed costs associated with the closure of our Woodinville facility.
- Year-to-date beer gross margin was 36.8%, an expansion of 220 basis points over the comparable 2017 period, primarily reflecting an increase in net sales and a reduction in cost of goods sold due to increased shipments out of Fort Collins and improved brewery operations, including the elimination of Woodinville as a fixed cost, partially off-set by an increase in contract shipments and higher fuel costs.
- Total CBA gross margin was 31.6% in the third quarter, a decrease of 260 basis points, compared to the third quarter in 2017. The third quarter gross margin decrease reflects higher cost of goods sold due to lower fixed cost absorption from lower shipment volumes, and lower brewpub gross margins as a result of lower sales in our mainland brewpubs.
- Year-to-date gross margin was 33.2%, an increase of 200 basis points over the comparable nine-month period in 2017, reflecting improved beer gross margins, offset by lower brewpub gross margins.
- Beer gross margin was 34.8% in the third quarter, a decrease of 330 basis points compared to the third quarter in 2017, primarily due to lower fixed cost absorption as a result of lower shipment volumes. Gross margin for the quarter was also negatively impacted by a change in mix of shipments from more profitable owned brands to less profitable alternating proprietorship and contract brewing volume. These factors were partially offset by a reduction in beer loss and the removal of fixed costs associated with the closure of our Woodinville facility.
- Third quarter SG&A was $16.7 million, a slight increase over the third quarter of 2017, primarily reflecting increased creative and media investments and initial legal and transaction costs related to our partner acquisitions, partially offset by a decrease in administrative costs.
- Year-to-date SG&A was $47.3 million, essentially flat compared to the same period last year, as we actively reallocated funds away from general and administrative towards market-facing initiatives.
- Diluted net income per share was $0.00 for the third quarter, a decrease of $0.09 compared to the third quarter in 2017.
- Year to date, diluted net income per share was $0.24, an increase of $0.15 over the same period last year.
“We accomplished a lot in the third quarter – from continuing to accelerate Kona, to bringing our partner acquisitions to the finish line, to maintaining close control of our operations – and I’m proud of our team for their continued focus on achieving these milestones,” said Andy Thomas, chief executive officer, CBA. “While our third quarter results were largely in line with our expectations, they nevertheless reflect the increasing costs and challenges of competing in today’s crowded market.”
Tightened Year-End Financial Guidance
Based on our solid year-to-date performance, we are updating and tightening our guidance as follows:
- Total depletions and shipments ranging between a decline of 1% and an increase of 1%, reflecting continued progress in harmonizing our supply chain.
- Average price increases of 2% to 3%, reflecting improvements in revenue management and lower federal excise taxes.
- Total gross margin rate of 33.0% to 34.0%, reflecting increases in net revenue per barrel, continued improvements in brewery operations, lower fixed overhead, and ongoing efforts to stabilize pub operations.
- SG&A expense ranging from $62 million to $63 million, as we continue to reinvest cost savings into our brands and expand our consumer and trade marketing programming.
- Capital expenditures of $16 million to $17 million. Due to variability in the timing of certain significant progress payments related to construction of the new 100,000-barrel Kona brewery, there could be a shift of up to $6 million from this year into 2019.
- Effective tax rate of 25.5%, a decrease of 250 basis points from the previously communicated tax rate guidance, primarily as a result of the IRS’s clarification that certain business expenses continue to qualify for a 50% deduction for income tax purposes.
Forward-Looking Statements
Statements made in this press release that state the Company’s or management’s intentions, hopes, beliefs, expectations or predictions for the future, including depletions, shipments and sales growth, price increases, and gross margin rate improvement, the level and effect of SG&A expense and business development, anticipated capital spending, our effective income tax rate, and the benefits or improvements to be realized from strategic initiatives and capital projects, 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 from time to time in the Company’s SEC filings, including, but not limited to, the Company’s report on Form 10-K for the year ended December 31, 2017. Copies of these documents may be found on the Company’s website, www.craftbrew.com, or obtained by contacting the Company or the SEC.
About Craft Brew Alliance
CBA is an independent craft brewing company that brews, brands, and brings to market world-class American craft beers.
Our distinctive portfolio combines the power of Kona Brewing Company, a dynamic, fast-growing national craft beer brand, with strong regional breweries and innovative lifestyle brands Appalachian Mountain Brewery, Cisco Brewers, Omission Brewing Co., Redhook Brewery, Square Mile Cider Co., Widmer Brothers Brewing, and Wynwood Brewing Co. CBA nurtures the growth and development of its brands in today’s increasingly competitive beer market through our state-of-the-art brewing and distribution capability, integrated sales and marketing infrastructure, and strong focus on partnerships, local community and sustainability.
Formed in 2008, CBA is headquartered in Portland, Oregon and operates breweries and brewpubs across the U.S. CBA beers are available in all 50 U.S. states and 30 different countries around the world. For more information about CBA and our brands, please visit www.craftbrew.com.
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