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Craft Brew Alliance Reports Strong Second Quarter Results Led by Robust Acceleration for Kona and Record Beer Gross Margin

PORTLAND, Ore.--(BUSINESS WIRE)--

National media investment fuels 8% depletions growth for Kona, driving overall depletions growth for CBA portfolio

Craft Brew Alliance, Inc. (“CBA”) (BREW), a leading craft brewing company, today reported financial results for the second quarter and year to date ended June 30, 2019. Financial and operational highlights for the second quarter include:

  • Kona depletions grew 8%, driving a total CBA depletions increase of more than 1% over the second quarter in 2018.
  • An 11% increase in Kona shipments contributed to an overall 4.4% increase in owned beer shipments.
  • Core beer sales increased 2.7% over the second quarter in 2018.
  • Beer gross margin expanded 220 basis points to a record 41.6% in the second quarter.
  • Brewpub gross margin expanded 710 basis points over the second quarter last year.
  • Net income was $2.6 million, or $0.13 per share.

CBA Chief Executive Officer Andy Thomas said, “CBA’s second quarter results reflect a tangible return on the strategic investments we’ve made to fuel Kona’s momentum, realize the full value of our newly acquired brands, and unlock our future potential. In a down market, we accelerated Kona to 8% depletions growth, returned our total portfolio to net positive, and delivered record gross margin — all while doubling down on our future growth prospects to drive shareholder value.”

Christine Perich, CBA Chief Financial and Strategy Officer, added, “While we are pleased with our first half performance, which continues to underscore the strength of CBA’s portfolio and overall foundation, we are also cognizant of the sweeping changes taking place across the beverage category and the fact that our upcoming anniversary with AB is a significant one on multiple levels. Regardless of these external challenges and unknowns, I am confident that the strategic work we are actively doing — not just in beer but in beverage overall — will drive shareholder value.”

Performance highlights for the second quarter and year-to-date

Fueling Kona’s momentum in an unprecedented market

Kona’s momentum accelerated in the second quarter, with 8% depletions growth far outpacing the beer category and the craft segment, which were both down compared to second quarter a year ago. Fueled by the national marketing investment that kicked off in the first quarter and continued into the second quarter, Kona’s year-to-date depletions were 6% higher than the same period in 2018, with especially strong performance in the on-premise channel. Kona flagship Big Wave Golden Ale, which featured prominently in the media campaign, delivered a 25% increase in domestic depletions in the quarter and a 22% increase year to date. During the quarter, we continued to work closely with our international distribution partners, driving a 21% increase in international Kona shipments over the second quarter last year. We also continued to make progress ramping up local production of Kona in Brazil, working closely with Ambev.

Achieving record gross margin

Second quarter gross margin expanded 270 basis points to 38.5%, which reflects a 220-basis point improvement in beer gross margin to 41.6% and pub gross margin expansion of 710 basis points to 10.1%. Our beer gross margin improvement reflects the positive impact of transitioning Appalachian Mountain Brewery, Cisco Brewers, and Wynwood Brewing from an alternating proprietorship to owned brands, as well as the continued benefit of our rationalized footprint, which includes leveraging our brewing partnership with Anheuser-Busch. Our pub gross margin expansion is attributed to our reshaped brewpub footprint, which includes the addition of our newly acquired brewpubs in Boone, North Carolina and Miami, Florida. Our record margin expansion was achieved while taking on greater complexity and innovating to address today’s dynamic and rapidly changing consumer trends.

Broadening our portfolio for the future

CBA’s investments in future growth — including comprehensive research initiatives with the Yale Center for Consumer Insights and Prophet, as well as the launch of The pH Experiment business unit — are already driving portfolio expansion, both within and outside of traditional beer. Rooted in our learnings and strong understanding of the ever-shifting consumer landscape, we’re broadening our portfolio to capitalize on emerging trends. During the second quarter, we accelerated work on our approach to the seltzer market and began work to expand distribution of Wynwood’s La Rubia Blonde Ale. Additionally, The pH Experiment continued its focus on incubating and accelerating future growth with the launch of PRE Aperitivo Spritz, an Italian-inspired, cider-based botanical cocktail, and Pacer Low Proof Seltzer, a line of 2% ABV, 50-calorie, zero-sugar seltzers, in the second quarter. Building on a series of successful tests with Amazon Go stores, The pH Experiment will be expanding distribution of multiple products through Amazon Fresh and Amazon Prime.

Summary of financial results for the second quarter and year-to-date 2019

  • Core beer sales increased 2.7% in the second quarter and 2.9% year to date.
    • Total net sales were $60.6 million for the quarter, a decrease of 2.0% from the second quarter in 2018, and $107.6 million year to date, a decrease of 1.6% from the same period a year ago. Our net sales decrease compared to 2018 is attributed to the change in ownership structure of Appalachian Mountain Brewery, Cisco, and Wynwood. Excluding the impact of the alternating proprietorship fees, our second quarter and year-to-date total net sales would have been up 1.7% and 2.2%, respectively.
  • Kona shipments increased 11% in the second quarter and 10% year to date, contributing to a 2.6% increase in total CBA shipments for the second quarter and a 2.1% increase in total CBA shipments year to date, compared to the same periods last year.
  • Kona depletions increased by 8% in the second quarter and 5% year-to-date, driven by strong consumer response to the national media campaign. Kona’s strong performance contributed to a 1.1% increase in total CBA depletions for the quarter, which improved CBA’s year-to-date depletion trend to a decrease of 1.4% from the same period a year ago.
    • Post-campaign analysis indicates that demand actually outpaced in-store inventory leading to significant retail out-of-stock issues across key media markets. Estimates suggest that these issues may have suppressed Kona’s depletion growth by approximately 200 basis points in the second quarter.
  • Total company gross margin expanded by 270 basis points to 38.5%, compared to 35.8% in the second quarter of 2018, and year-to-date gross margin expanded 270 basis points to 36.7% compared to the same period last year.
    • Beer gross margin expanded by 220 basis points to 41.6% in the second quarter, and year-to-date beer gross margin expanded 240 basis points to 40.1%. Our beer gross margin expansion reflects the impact of transitioning our partner brands to owned brands, as well as continued leverage of our evolving brewery footprint, strong revenue management, and a reduction in beer loss.
    • Brewpub gross margin expanded 710 basis points to 10.1% in the second quarter, primarily reflecting improvements with our reshaped and expanded pub footprint. Our year-to-date brewpub gross margin expanded 600 basis points over the same period last year, to 10.5%.
  • Selling, general and administrative expense (“SG&A”) increased by $3.5 million to $19.4 million over the second quarter last year, which reflects additional investments to amplify our national Kona marketing campaign, as well as employee-related costs.
    • Year-to-date SG&A increased by $14.3 million, to $44.9 million. The increases in year-to-date SG&A over the same period in 2018 primarily reflect our national marketing investment to fuel Kona’s growth and a $4.7 million pre-tax expense related to the Kona class action lawsuit settlement, which was accrued as a one-time expense in the first quarter. Based on initial claims being in line with our expectations, we anticipate our accrual will cover our total costs for the settlement.
  • Net income was $2.6 million in the second quarter.
    • Year to date, we recorded a net loss of $4.8 million primarily due to the Kona class action accrual. On an adjusted non-GAAP basis excluding the $3.6 million after-tax impact of the accrual, our year-to-date net loss was $1.2 million.
  • Earnings per share were $0.13 in the second quarter, a decrease of $0.10 from the second quarter of 2018, which reflects the planned increase in SG&A to amplify the Kona marketing investment.
    • Year to date, we recorded a net loss per share of $0.24. On an adjusted non-GAAP basis excluding the $3.6 million after-tax expense accrual, our net loss per share was $0.06.

2019 Outlook

Acknowledging our year-to-date results and given the broad implications related to the August 23, 2019 milestone with Anheuser-Busch, we are deferring an update of our full-year outlook until early September. Details will be communicated shortly.

Forward-Looking Statements

Statements made in this press release that state the Company’s or management’s intentions, hopes, beliefs, expectations or predictions of the future, including depletions and shipments, gross margin rate improvement, the level and effect of SG&A expense and business development, the effect of the class action settlement, effective tax rate, and the benefits or improvements to be realized from marketing campaigns, portfolio expansion and other strategic initiatives, and capital projects, are forward-looking statements. It is important to note that the Company’s actual results may 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, 2018. 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

Craft Brew Alliance (CBA) is a leading 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.

Craft Brew Alliance, Inc.
Condensed Consolidated Statements of Operations
(Dollars and shares in thousands, except per share amounts)
(Unaudited)
 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

2019

 

 

 

2018

 

 

 

2019

 

 

 

2018

 

 
Sales

$

63,815

 

$

65,253

 

$

113,583

 

$

115,338

 

Less excise taxes

 

3,256

 

 

3,430

 

 

6,032

 

 

6,028

 

Net sales

 

60,559

 

 

61,823

 

 

107,551

 

 

109,310

 

Cost of sales

 

37,272

 

 

39,696

 

 

68,081

 

 

72,112

 

Gross profit

 

23,287

 

 

22,127

 

 

39,470

 

 

37,198

 

As percentage of net sales

 

38.5

%

 

35.8

%

 

36.7

%

 

34.0

%

Selling, general and administrative expenses

 

19,381

 

 

15,857

 

 

44,946

 

 

30,605

 

Operating income (loss)

 

3,906

 

 

6,270

 

 

(5,476

)

 

6,593

 

Interest expense

 

(504

)

 

(107

)

 

(812

)

 

(241

)

Other income, net

 

33

 

 

21

 

 

33

 

 

55

 

Income (loss) before income taxes

 

3,435

 

 

6,184

 

 

(6,255

)

 

6,407

 

Income tax provision (benefit)

 

825

 

 

1,732

 

 

(1,501

)

 

1,794

 

Net income (loss)

$

2,610

 

$

4,452

 

$

(4,754

)

$

4,613

 

 
Basic and diluted net income (loss) per share:

$

0.13

 

$

0.23

 

$

(0.24

)

$

0.24

 

 
Weighted average shares outstanding:
Basic

 

19,443

 

 

19,334

 

 

19,416

 

 

19,322

 

Diluted

 

19,593

 

 

19,517

 

 

19,416

 

 

19,502

 

 
Total shipments (in barrels):
Core Brands

 

228,300

 

 

218,700

 

 

392,700

 

 

379,300

 

Contract Brewing

 

2,200

 

 

5,900

 

 

7,300

 

 

12,300

 

Total shipments

 

230,500

 

 

224,600

 

 

400,000

 

 

391,600

 

 
Change in depletions (1)

 

1

%

 

-2

%

 

-1

%

 

-3

%

(1) Change in depletions reflects the period-over-period change in barrel volume sales of beer by wholesalers to retailers.
Craft Brew Alliance, Inc.
Condensed Consolidated Balance Sheets
(In thousands)
(Unaudited)
 

June 30,

 

2019

 

 

2018

 
Current assets:
Cash, cash equivalents and restricted cash

$

970

$

5,778

Accounts receivable, net

 

30,223

 

36,999

Inventory, net

 

20,579

 

14,522

Other current assets

 

3,591

 

1,874

Total current assets

 

55,363

 

59,173

Property, equipment and leasehold improvements, net

 

111,634

 

104,982

Operating lease right-of-use assets

 

19,002

 

-

Goodwill

 

21,935

 

12,917

Trademarks

 

44,245

 

14,415

Intangible and other assets, net

 

5,710

 

6,054

Total assets

$

257,889

$

197,541

 
Current liabilities:
Accounts payable

$

19,489

$

20,042

Accrued salaries, wages and payroll taxes

 

4,920

 

4,673

Refundable deposits

 

3,685

 

4,282

Deferred revenue

 

4,364

 

4,685

Other accrued expenses

 

8,101

 

3,163

Current portion of long-term debt and finance lease obligations

 

1,483

 

807

Total current liabilities

 

42,042

 

37,652

Long-term debt and finance lease obligations, net of current portion

 

51,675

 

9,946

Other long-term liabilities

 

31,699

 

13,995

Total common shareholders' equity

 

132,473

 

135,948

Total liabilities and common shareholders' equity

$

257,889

$

197,541

Craft Brew Alliance, Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
 

Six Months Ended
June 30,

 

2019

 

 

 

2018

 

 

Cash Flows From operating activities:
Net income (loss)

$

(4,754

)

$

4,613

 

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization

 

5,386

 

 

5,387

 

(Gain) loss on sale or disposal of Property, equipment and leasehold improvements

 

22

 

 

(494

)

Deferred income taxes

 

(1,536

)

 

(629

)

Other, including stock-based compensation

 

1,506

 

 

875

 

Changes in operating assets and liabilities:
Accounts receivable, net

 

75

 

 

(9,215

)

Inventories

 

(3,349

)

 

(285

)

Other current assets

 

(687

)

 

1,761

 

Accounts payable, deferred revenue and other accrued expenses

 

8,068

 

 

7,889

 

Accrued salaries, wages and payroll taxes

 

(715

)

 

(1,204

)

Refundable deposits

 

104

 

 

(241

)

Net cash provided by operating activities

 

4,120

 

 

8,457

 

Cash Flows from investing activities:
Expenditures for Property, equipment and leasehold improvements

 

(9,440

)

 

(4,284

)

Proceeds from sale of Property, equipment and leasehold improvements

 

22

 

 

22,936

 

Restricted cash from sale of Property, equipment and leasehold improvements

 

-

 

 

515

 

Business combinations and asset acquisitions

 

(274

)

 

-

 

Net cash provided by (used in) investing activities

 

(9,692

)

 

19,167

 

Cash Flows from financing activities:
Proceeds from issuance of long-term debt

 

5,192

 

 

-

 

Principal payments on debt and capital lease obligations

 

(455

)

 

(348

)

Net borrowings (repayments) under revolving line of credit

 

930

 

 

(22,199

)

Proceeds from issuances of common stock

 

-

 

 

206

 

Tax payments related to stock-based awards

 

(325

)

 

(84

)

Net cash provided by (used in) financing activities

 

5,342

 

 

(22,425

)

Increase (decrease) in Cash, cash equivalents and restricted cash

 

(230

)

 

5,199

 

Cash, cash equivalents and restricted cash, beginning of period

 

1,200

 

 

579

 

Cash, cash equivalents and restricted cash, end of period

$

970

 

$

5,778

 

Craft Brew Alliance, Inc.
Select Financial Information on a Trailing Twelve Month Basis
(Dollars in thousands, except per share amounts)
(Unaudited)
 
Twelve Months Ended
June 30,

 

2019

 

 

 

2018

 

 

Change

 

% Change

 
Net sales

$

204,427

 

$

211,914

 

$

(7,487

)

(3.5

)%

 
Gross profit

$

70,595

 

$

71,458

 

$

(863

)

(1.2

)%

As percentage of net sales

 

34.5

%

 

33.7

%

80 bps

 
Selling, general and administrative expenses

 

76,913

 

 

60,039

 

 

16,874

 

28.1

%

Operating income (loss)

$

(6,318

)

$

11,419

 

$

(17,737

)

(155.3

)%

 
Net income (loss)

$

(5,225

)

$

14,199

 

$

(19,424

)

(136.8

)%

 
Income (loss) per share:
Basic

$

(0.27

)

$

0.74

 

$

(1.01

)

(136.5

)%

Diluted

$

(0.27

)

$

0.73

 

$

(1.00

)

(137.0

)%

 
Total shipments (in barrels):
Core Brands

 

732,800

 

 

742,500

 

 

(9,700

)

(1.3

)%

Contract Brewing

 

23,200

 

 

19,000

 

 

4,200

 

22.1

%

Total shipments

 

756,000

 

 

761,500

 

 

(5,500

)

(0.7

)%

 
Change in depletions (1)

 

-1

%

 

-2

%

(1) Change in depletions reflects the period-over-period change in barrel volume sales of beer by wholesalers to retailers.
Supplemental Disclosures Regarding Non-GAAP Financial Information
 
Craft Brew Alliance, Inc.
Reconciliation of Adjusted EBITDA to Net Income (loss)
(In thousands)
(Unaudited)
 
 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

2019

 

 

2018

 

 

2019

 

 

 

2018

 

 
 
Net income (loss)

$

2,610

$

4,452

$

(4,754

)

$

4,613

 

Interest expense

 

504

 

107

 

812

 

 

241

 

Income tax provision (benefit)

 

825

 

1,732

 

(1,501

)

 

1,794

 

Depreciation expense

 

2,540

 

2,608

 

5,141

 

 

5,301

 

Amortization expense

 

120

 

43

 

245

 

 

86

 

Stock-based compensation

 

835

 

202

 

1,253

 

 

687

 

(Gain) loss on disposal of assets

 

14

 

22

 

22

 

 

(494

)

Kona class action expenses

 

62

 

-

 

4,902

 

 

-

 

Adjusted EBITDA

$

7,510

$

9,166

$

6,120

 

$

12,228

 

CBA has presented Adjusted Earnings before Interest, Taxes, Depreciation and Amortization (“Adjusted EBITDA”) in these tables to provide investors with additional information to evaluate our operating performance on an ongoing basis using criteria that are used by management. We define Adjusted EBITDA as net income (loss) before interest, income taxes, depreciation and amortization, stock-based compensation and other non-cash charges, including loss on impairment of assets and net gain or loss on disposal of property, equipment and leasehold improvements. We use Adjusted EBITDA, among other measures, to evaluate operating performance, to plan and forecast future periods’ operating performance, and as an incentive compensation target for certain management personnel.

As Adjusted EBITDA is not a measure of operating performance or liquidity calculated in accordance with generally accepted accounting principles in the United States of America (“GAAP”), this measure should not be considered in isolation of, or as a substitute for, net income (loss) as an indicator of operating performance, or net cash provided by (used in) operating activities as an indicator of liquidity. The use of Adjusted EBITDA instead of net income (loss) has limitations as an analytical tool, including the inability to determine profitability; the exclusion of interest expense and associated cash requirements, given the level of our indebtedness; and the exclusion of depreciation and amortization which represent significant and unavoidable operating costs, given the capital expenditures needed to maintain our operations. We compensate for these limitations by relying on GAAP results. Our computation of Adjusted EBITDA may differ from similarly titled measures used by other companies. As Adjusted EBITDA excludes certain financial information compared with net income (loss) and net cash provided by (used in) operating activities, the most directly comparable GAAP financial measures, users of this financial information should consider the types of events and transactions which are excluded. The table above shows a reconciliation of Adjusted EBITDA to net income (loss).

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