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Edited Transcript of BREW earnings conference call or presentation 9-May-19 3:30pm GMT

Q1 2019 Craft Brew Alliance Inc Earnings Call

PORTLAND May 27, 2019 (Thomson StreetEvents) -- Edited Transcript of Craft Brew Alliance Inc earnings conference call or presentation Thursday, May 9, 2019 at 3:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Andrew J. Thomas

Craft Brew Alliance, Inc. - CEO

* Christine Nicol Perich

Craft Brew Alliance, Inc. - Chief Financial & Strategy Officer

* Edwin A. Smith

Craft Brew Alliance, Inc. - Corporate Controller & Principal Accounting Officer

* J. Scott Mennen

Craft Brew Alliance, Inc. - COO & VP

* Kenneth C. Kunze

Craft Brew Alliance, Inc. - CMO & VP

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Conference Call Participants

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* David E. Cohen

Midwood Capital Management, LLC - Co-Founder, Managing Member & Portfolio Manager

* Drew Nolan Levine

BMO Capital Markets Equity Research - Senior Associate

* Gerald John Pascarelli MR

Cowen and Company, LLC, Research Division - Associate

* James Coll

Lombard Securities, Inc. - Financial Advisor

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Q1 2019 Craft Brew Alliance Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to introduce your host for today's call, Mr. Andy Thomas, Chief Executive Officer. Sir, you may now begin.

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Andrew J. Thomas, Craft Brew Alliance, Inc. - CEO [2]

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Thank you, Sherrie. And good morning, everyone. It's my pleasure to present the Craft Brew Alliance investor conference call to discuss our results for the first quarter of 2019. This morning, the team on this call returns to full strength as I'm joined by 3 other members of the CBA leadership team, our CMO, Ken Kunze; our COO, Scott Mennen; and our new Chief Financial and Strategy Officer, Christine Perich.

So in keeping with our standard agenda, before we begin, I'll ask Ed Smith, our Corporate Controller, to read our safe harbor statement.

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Edwin A. Smith, Craft Brew Alliance, Inc. - Corporate Controller & Principal Accounting Officer [3]

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Thank you, Andy. As a reminder, this call may contain forward-looking statements. Forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, actual results may differ materially from those described in any such forward-looking statements. The Risk Factors section in our most recent 10-K lists some of the factors that could cause Craft Brew's actual results to differ materially from the forward-looking statements made on this call. Craft Brew undertakes no obligation to update publicly any forward-looking statements, except as required by law.

Andy?

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Andrew J. Thomas, Craft Brew Alliance, Inc. - CEO [4]

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Thanks, Ed. As we map out the next 20 minutes, I will again begin with some high-level reflection on the quarter. Ken, our Chief Marketing Officer, will provide commentary and perspective on our commercial results. Scott, our Chief Operating Officer, will provide insight into our brewery and supply chain operations, and given Christine's relatively short tenure, Scott will also weave into his remarks, some pertinent details of our financial performance and some commentary on our agreement in principle to settle the Kona class action lawsuit. Lastly, Christine will take a couple of minutes to address this group before turning back to me for some closing thoughts.

At the beginning of every call, I generally try to offer a metaphor to frame my remarks, not just to make the call more interesting, but to create a shared image in our minds that helps better deliver the color commentary implicitly promised in this call. In the past, that metaphor has ranged from sports to weather to pop culture, but as I reflect on Q1 2019 and look ahead to the balance of this year, the image in my mind is that of something emerging from the ground, not necessarily the image of a budding flower of springtime, and not as brash as suggesting the image of a phoenix rising from the ashes, but perhaps influenced by the number of construction cranes dotting the landscape of many cities today, is the image of a proud, well-constructed, well-architected building beginning to emerge atop an equally well-constructed, well-conceived foundation. Consider that metaphor for a moment. While foundations aren't always glamorous or headline grabbing, they're critical to enabling the creativity of the structure they support and essential to ensuring the stability of the weight they will bear. And once completed, while the foundation must be maintained and renewed, the emphasis shifts to the structure visible above the ground, to its size and shape, to its functionality, to its structural integrity in weathering the elements, and to the timelessness of its design. With that metaphor seeded in our minds, as we endeavor to share management's reflections on CBA's performance in Q1 and outlook for the year, I firmly believe that Q1 witnessed the indisputable existence of a remarkably strong foundation for CBA, evidenced by notable strength in business fundamentals, such as core beer revenue per barrel growth and gross margin expansion at both the segment and total company levels. And at the same time, Q1 also witnessed the most tangible signs yet of a striking, sustainable structure emerging atop that strong foundation. Most visible in the continued growth and development of the Kona brand and the volume and margin contributions of AMB, Wynwood and Cisco and the early signals of promise from Omission Ultimate Light and the first offerings coming from our innovation unit, the pH Experiment and in the emerging prospects for developments of Wynwood's La Rubia Blonde Ale. And strategically, the progress in building this foundation and the structure atop is all true to the plans architected years ago, plans that envisioned to reshape top line, driven by a more diverse portfolio, a more efficient supply chain infrastructure, a more effective brewery network, stronger and more sustainable performance in business fundamentals in a more progressive and accountable company culture, all the handiwork of an ever strengthening team bringing together skilled architects, engineers and craftsmen. And speaking of that ever strengthening team, Q1 also brought our CFO search to a successful conclusion, with Christine Perich joining us in the role of Chief Financial and Strategy Officer. You'll have an opportunity to hear from Christine later on this call. But in the context of my construction metaphor, I'm pleased to publicly welcome her to the team as a gifted strategy architect, creative business engineer and astute financial craftsman. With Christine's addition to our leadership team, we make an already strong team a step function better. Not only because of the rich experience that Christine brings to the table, but importantly, also because of the strong character and values that she brings to our company culture.

So without further ado, first, on to Ken for some color on the top line.

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Kenneth C. Kunze, Craft Brew Alliance, Inc. - CMO & VP [5]

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Thanks, Andy, and good morning, everyone. In Q1, Kona Brewing Company continued to outpace both the U.S. craft and beer category as we ramped up investment in fundamentals late in the quarter to accelerate Kona's growth for the balance of the year. Kona's domestic STRs were up plus 5% versus a Craft segment that was down 2.6% and the beer category, which was down 3.1%. The significant increase of investment in Q1 behind Kona was focused on building distribution and awareness. The investment included Kona's first ever national media buy behind the March Madness basketball tournament and Kona's largest ever national distribution drive with the Anheuser-Busch wholesaler network.

As a reminder, the media buy was tied to the NCAA tournament and aired the last 2 weeks of March through the first 2 weeks of April. 100% of our priority wholesalers, which account for 96% of our volume, are participating in the distribution drive. The distribution drive kicked off in February and will run into June for some wholesalers who got a late start. The media buy was an investment to help secure higher levels of share of mind for Kona with wholesalers and retailers as well as consumers. Across all 3 audience segments, reaction to the new Kona creative and the messaging has been incredibly strong with Kona punching far above its market share weight class. Quantitative copy testing results plays Kona's creative significantly above beer norms with the Kona creative execution tied for strongest beer creative in the first quarter and among the top 5 spots for the past year as measured by the independent research firm, Ace Metrix.

The media buy behind March Madness and Kona's new creative has had a positive impact on brand health measures. Social listening and analytics indicated immediate and positive reaction to the creative and the media investment with a significant increase in followers and engagement levels in the 3x to 8x range across channels. Traffic via organic search to Kona's website quadrupled during the basketball tournament with consumers seeking information on the beers and where to buy them.

In consumer tracking research, by an outside firm, conducted pre- and post the [MediaRing,] awareness, brand health measures and purchase consideration, all increased significantly. The focus of the national distribution drive has accelerated the pace of distribution gains relative to prior years. Kona's effective points of distribution for flagship Big Wave Golden Ale and Longboard Island Lager collectively grew 25% at the end of April. And most importantly, Kona's STR exhibited a significant lift behind the investment. For the month of April, which is the first full month results reflect the impact of the media given the late March, early April airing, the year-over-year growth rate more than quadrupled the prior year-to-date run rate, with domestic growth accelerating into the mid-20%. To be clear, while we do not attribute all the increase to only the media as there are other additional programming contributions that supported the acceleration, the media has had a significantly positive impact as both an enabler and a driver of the increase. And while we do not expect April's rate of growth to continue for the balance of the year, the teams are actively focused on sustaining the momentum into the key summer selling season by driving more incremental distribution and increasing velocity of existing distribution.

To close my discussion on Kona, domestic Q1 STRs were up plus 5% with flagship Big Wave Golden Ale STRs up plus 19% domestically. In Q1, total beer craft import trends weakened, relative to Q4 and full year 2018. Q1 saw selling day adjustment down 1 day versus 2018, which is estimated to represent a negative 150 basis point hit. Also pressure in Q1 was Easter timing, which was in Q2 compared to Q1 in 2018. As I mentioned earlier, for the industry in Q1, the total U.S. beer category was down 3.1% and the Craft segment was down 2.6%. With that, as the backdrop, CBA's Q1 domestic STRs were down 2.8% for the entire portfolio, in line with the craft segment and slightly better than total U.S. beer.

CBA's total STRs were down 4.5% in Q1, which reflects lower international shipments. Q1 international shipments suffered from a series of timing issues related to both Q4 '18 and Q2 '19 that inhibited Q1 realization. While international remains an important and growing opportunity, it remains less than 10% of our business and we expect shipments to return to trend for the balance of the year. Shifting to a revenue perspective, CBA's core beer sales on a net revenue basis increased plus 3.1% driven by shipment growth and healthy increases in revenue per barrel.

The brands fully acquired last October, Appalachian Mountain Brewery, Cisco Brewers and Wynwood breweries, combined STRs were up a collective plus 13% in Q1. Wynwood and Appalachian Mountain Brewery continued to move up the ranks with strong share gains behind flagship's La Rubia Blonde Ale of plus 54% and Long Leaf IPA which was up plus 38%, while Cisco's Gripah IPA was up plus 19% in Q1. And as a specific follow-up regarding the broader potential for Wynwood's La Rubia Blonde Ale, called out on the Q4 call, I wanted to provide a quick update. We use Q1 to: one, validate the broader Hispanic opportunity for the brand beyond a Florida Craft play; and two, to identify and optimize positioning against this target. This proposition resonates very strongly with this consumer and we're even more excited about the potential for La Rubia brand. We're in the final stages of launching La Rubia in Puerto Rico and are concurrently developing our expansion strategy.

Omission's reorientation from a gluten-free brand to a more broadly defined healthy lifestyle brand continued behind Omission Ultimate Light, which grew plus 17% in Q1. While the overall portfolio was down 10% driven by distribution losses on other SKUs on the quarter, we're continuing to transition to a better-for-you portfolio with a launch of Omission seltzers later this year. The lineup will include 4 flavors containing 0 grams of carbs, 99 calories, 4% alcohol by volume and naturally gluten-free.

Redhook's performance in Washington improved significantly following the focus on Big Ballard Imperial IPA, which grew STRs by plus 64% in Washington combined with stronger overall retail execution. As a result, Q1 trend improved by 1,300 basis points in its home market of Washington state with STRs down 3.5% versus a decline of 16.5% in 2018. Unfortunately, almost 40% of Redhook's volume remains in small pockets outside the Pacific Northwest driving all -- overall STRs down 23%. And while Widmer Brothers' volume is now largely concentrated in the Pacific Northwest, we were not able to align retail execution to make similar progress against Widmer Brothers in Q1, as STRs declined 12% in Oregon and 17% overall.

It's clear the market continues to get tougher and retail space more difficult to secure and maintain than ever, even in a brewery's home market. In this environment, we continue to believe Kona is a unique differentiated offering and have begun to invest in 2019 at competitive levels to bring -- to fully bring the brand to life for consumers. Kona's accelerated rate of distribution gains in Q1 confirmed both wholesalers and retailers also believe in Kona's opportunity. With Kona approaching 65% of the portfolio mix, we're focused on driving Kona's momentum for the balance of the year with the plus portion of the portfolio playing a supporting role.

With that, I'd like to turn it over to Scott Mennen, our Chief Operating Officer.

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J. Scott Mennen, Craft Brew Alliance, Inc. - COO & VP [6]

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Thank you, Ken, and good morning, everyone. Q1 was another solid quarter for CBA, setting the stage for another good year as we build on our momentum from the past few quarters, sharpening our focus on improving the core health of our business and expanding our gross margin.

Let's jump right into the results. Shipments for Q1 were 169,500 barrels, are 1.5% higher than Q1 in 2018. As expected, Q1 shipments outpaced depletions, which was planned to ensure proper wholesaler inventories prior to the launch of Kona's national media campaign during March Madness. Beer gross margins for Q1 were 38%, 250 basis points better than Q1 of 2018. The improved gross margin is a result of continued strong revenue management, increased shipments from the Fort Collins brewery, the realization of the full value of AMB, Cisco and Wynwood, as we transition from an alternate proprietorship relationship to own brands in the improved logistics operations, which was partially offset by increased fixed cost.

Pub gross margin for Q1 was 10.9%, a 490 basis point improvement over Q1 of 2018. The improved pub gross margin is due to the continued strong performance of our 2 Kona pubs in Hawaii, the solid results from the Wynwood and AMB pubs, the team's effort to improve operations across our pub footprint. And as a reminder, we closed the Portland Widmer Brothers' pub in January and have transitioned the Portsmouth Cisco pub to a leased operation with the Cisco Nantucket team now overseeing the day-to-day operation and consumer experience. The improved beer and pub gross margin drove CBA's overall Q1 gross margin to 34.4%, which was a 270 basis points better than Q1 of 2018.

I'm encouraged with our results in Q1 as we build on the momentum from the past few years to continue to unlock value for CBA. Our focus continues to be on, first, to recognize the full value of the Anheuser-Busch brewing relationship while balancing production across our own breweries. In 2019, we anticipate maxing out our contractual limit in Fort Collins at 300,000 barrels, which is approximate 15% more than we shipped in 2018. In addition, we will continue to look for opportunities to cross-brew AB brands and CBA's breweries. Second, is building on the success of our redesigned supply chain and World Class Craft continuous improvement programs to drive efficiencies through our logistics and brewing operations. Third, to leverage AMB, Cisco and Wynwood as fully-owned brands. Fourth, to maintain focus on revenue management ensuring pricing is in line with the market to support top line growth. Fifth, to continue our focus on improving the profitability of our pubs, operations and returning this segment to double-digit growth margins, while not losing sight of the [roles] in the pubs and taproom play and supporting our brands in their home markets.

I would also like to update everyone on our innovation efforts. In Q1, we announced the creation of a new division within CBA, the pH Experiment. pH will expand upon the innovations team test-and-learn platform, tapping into CBA's resources, distribution capabilities, consumer research insights to quickly develop and test a range of new products in select markets. The first of these new products is launching this month with Pre Aperitivo Spritz. This response to the growing Aperol Spritz trend. Later in Q2, the pH Experiment will launch a Low Proof Seltzer designed to give drinkers more options to moderate. At 2% alcohol, with only 50 calories and 0 sugar, Pacer Low Proof Seltzer test a unique solution to drinkers desire to reduce their alcohol consumption. More updates to come in the next quarters as the pH Experiment continues to test and innovate.

I would also like to update everyone on the progress we are making to produce Kona beers locally in Rio de Janeiro. The brewing team has completed several trials of Big Wave in our partner brewery and we are pleased with the progress to achieve our taste and quality standards as we get ready to start up local production for Big Wave in Q2. While we are starting small, the upside is tremendous as we look to expand the Kona in Brazil working closely with the local Ambev team. Keeping with the Kona expansion theme, I'd like to provide an update on the new state-of-the-art 100,000 barrel Kona brewery in Hawaii. We have reset the construction schedule to accommodate the delays in getting the building permit approvals. And I'm happy to report that construction is in full swing. The equipment is being delivered in Q3 and start-up and commissioning beginning in Q4, with the brewery fully online in Q1 of 2020. With this updated schedule, we are adjusting our capital expenditures for 2019 down to $13 million to $17 million from $15 million to $19 million.

Before wrapping up my remarks, I would like to discuss the agreement in principle to settle the Kona class action lawsuit announced in our 8-K filing on April 25. The lawsuit alleges that Kona consumers were misled into believing that all Kona beers are brewed in Hawaii despite that every bottle and can of Kona beer includes a list of locations, where Kona beers are brewed. From day 1 of this case, we have remained resolute in our dispense and proud of our consistent level of transparency. CBA has agreed to settle this lawsuit to avoid prolonged legal battles and the associated legal cost. The terms of the settlement and principle include: first, we are not admitting any wrongdoing or liability; second, in addition to continue to list our brewing locations on Kona's bottles and cans, which we've already done, the settlement will require us to include brewing locations on the secondary Kona packaging, something that is already in progress; and third, the settlement includes payment for certain settlement-related expenses, including class action counsel fees, class representative fees, administrative costs and claims payment, which are paid on a claims-made basis. As a result of this settlement, we have booked $4.7 million against Q1 results based on our current estimates. The actual cost may be more or less depending on the number of claims filed.

To summarize our Q1 results. CBA shipments were up 1.5% driven by a 10% increase in Kona shipments and a 13% increase of our newly acquired brand. Overall, CBA depletions were down 4.6% with Kona domestic depletions up 5%. Net revenue was down 1% reflecting the change in ownership structure with AMB, Cisco and Wynwood. Gross profits were up 7.4%, gross margin up 270 basis point, SG&A increased by $10.8 million primarily due to the $4.6 million in heavy-up Kona marketing spend and $4.7 million Kona class action settlement accrual. These expense contributed a Q1 net loss of $7.4 million or $0.38 per diluted share on a GAAP basis. Excluding the impact of the unanticipated Kona settlement, expense net income would have been a loss of $3.8 million, or $0.19 per diluted share on an adjusted basis.

Building on the strong Q1 results, we are confirming a positive outlook for the full year with guidance as follows: we are maintaining depletion and shipments each ranging between 5% to 8%, and we recognize that we need to deliver a minimum of 7% depletion growth for the remainder of year; we're maintaining an average price increase of 1% to 2%; maintaining gross margin rate at 34.5% to 36.5%; updating SG&A range to between $75 million and $79 million reflecting the expense related to the Kona settlement; we're updating our capital expenditure range from $13 million to $17 million as already discussed; and we're updating our effective tax rate of 25%, reflecting the impact of the Kona class action lawsuit settlement.

With that, I'm please to hand the call over to our new Chief Financial and Strategy Officer to introduce herself and share a few thoughts. Christine?

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Christine Nicol Perich, Craft Brew Alliance, Inc. - Chief Financial & Strategy Officer [7]

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Thank you, Scott, and good morning, everyone. I'd like to start by saying that I'm really excited to be here and having a great time making my way across the company and meeting all the teams and partners. I look forward to meeting more of you over the coming weeks as well. But in the meantime, I thought it would help if I shared a little bit about myself. I started my beer career in 2000 when I joined New Belgium Brewing Company. Over my 16-plus years there, I held the role of CFO, COO, and finally, President and CEO as well as being a member of the Board of Directors for 8 of those years. I've spent the past 2.5 years advising leaders across the beverage space and expanding my knowledge and understanding beyond beer. I have to say though, it's great to be back in beer.

Now turning back to the past few weeks. I've been incredibly impressed by the depth and breadth of the talent and passion across this company. In fact, it's the energy that goes into not just brewing the beers, but into building the business and investing in the future. All the work that CBA has done to understand today's changing consumer landscape and to anticipating and fulfilling drinkers' needs, that work sets us up to take a leadership position in the next evolution of beverage, and I'm really excited to bring my experience to the cause.

With that, I'll hand it back to you, Andy.

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Andrew J. Thomas, Craft Brew Alliance, Inc. - CEO [8]

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Thanks, Christine. So as I bring this call to a close, let me return to my construction metaphor to summarize management's reflections on the quarter and offer some final thoughts. In Q1 2019, CBA's foundation proved its metal, firstly, with core beer revenue per barrel, which grew over $3.50 per barrel or nearly 2%. And secondly, a notable gross margin expansion, with beer gross margin growing a strong 250 basis points to 38% and brewpub gross margins nearly doubling to 10.9%, all bringing total company gross margin to a Q1 record of 34.4%, an expansion of 270 basis points versus year ago.

Turning our attention from the foundation to the ground above. The emergence of CBA's visible structure began revealing itself in Q1. Firstly, through the resilience of solid plus 5% domestic depletion performance for Kona, despite a market shift in spending and programming until later in the quarter, a move which is already showing signs of significant payback and the tripling of that growth trend in April, and encouragingly -- and encouraging qualitative consumer indicators in a significantly larger distribution base to build upon for the summer months to come. Secondly, through the immediate impact of newly acquired AMB, Cisco and Wynwood, which collectively showed plus 13% growth. And thirdly, through the tangible, albeit fledgling results for Omission Ultimate Light and the pH Experiment as well as the promise of La Rubia. And lastly, the capability of our talent base again revealed itself, by not only architecting, but also by executing plans that simultaneously strengthened our foundation, while also significantly built upon it. To make that point more directly, April results in evidence, one of the more profound qualities of our Kona heavy-up spend plans and moreover of our overall top line acceleration strategy is that margins are continuing to improve alongside volume acceleration. As promised in earlier calls, while there is an SG&A cost associated with growth in today's competitive markets, in our case, that growth isn't coming with the dilution of gross margin. Rather it's enabling an expansion of our gross margin. And also germane to the point, our spend has been thoughtfully architected for both effectiveness and efficiency, holistically addressing consumer awareness, trial repeat and velocity, while at the same time, during tried and true work to fundamentally build sustainable wholesaler and retailer distribution. As a result, we anticipate our spend will ultimately prove to be an investment in the true sense of the word, spend today that will payback for multiple periods to come. So as we bring the call to a close and look ahead, on behalf of management, I can offer strong endorsement of our first quarter results and a refreshed positive outlook for the remainder of the year. Given the strength in our foundation, the thoughtfulness and execution and construction of the structure atop that foundation and the ever-growing strength of our skilled team, we are confident that CBA can embrace the uncertainty of today's marketplace, regardless of whether that uncertainty is related to the inevitable uncertainty of a fast-changing consumer, the unpleasant uncertainty of class action lawsuits or the will they or won't they uncertainty regarding ABI's qualified offer.

And as a final point, I'd be remiss in not once again assuring our shareholders that while our relationship with ABI remains strong with progress across a host of collaborative value-creating initiatives, both domestically and internationally, we are mindful of the less than 110 days remaining until the August 23 qualified offer date. As I reminded this call before, in the event of an absence in a qualified offer from ABI, CBA shareholders can be assured that CBA is well protected and well positioned. With the security that existing ABI agreements would continue at CBA's unilateral election for up to another 7 years, while then enabling CBA to embrace a host of strategic alternatives, all from a fundamentally stronger and improving operating position.

Before moving to questions, on behalf of the entire leadership team at CBA, a sincere thank you to each of you who played a role on the journey so far, to our investors, to those analysts who cover us, to our interested parties and, importantly, to all of our hard-working, passionate and engaged employees and partners wherever they operate within the world of CBA.

And with that, I will open it up for questions. Sherrie?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Vivien Azer from Cowen.

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Gerald John Pascarelli MR, Cowen and Company, LLC, Research Division - Associate [2]

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This is Gerald Pascarelli on for Vivien. So, Andy, with total company depletions down 4.5% in 1Q and taking into account the 1 day selling adjustment in the Easter shift as well as the strong performance in April, can you just provide some more color and speak to your confidence in being able to achieve your full-year guide of plus 5% to 8%? And I ask that in the context of what is still a weak industry backdrop?

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Andrew J. Thomas, Craft Brew Alliance, Inc. - CEO [3]

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Yes. Thanks, Gerald. So I'll let Ken offer some color maybe kind of at the end with some of the math, but for us, as Scott mentioned, when he was reiterating guidance, we know that means a run rate of 7% for the balance of the year. So as we look at it, despite the industry backdrop, Gerald, we feel really positive about the results we're seeing from the distribution drive on Kona and from the velocity in the rate of sale for those new points of distribution as well as the existing ones. So it all starts with Kona, and I think first and foremost, we feel anything but emboldened by what we've seen as a result of the heavy-up spend in March and April for the balance of the year. So starts there. And I will comment it is irrespective of the industry backdrop a bit, which I think makes it even that much more remarkable. Keep in mind, we're doing the heavy lifting in the growth on Kona as one of the fastest growing brands in the category right now with a Golden Ale and a Lager. So it's kind of an interesting juxtaposition to what you might hear from a lot of the talk in hedge right now elsewhere. Once you go beyond there and you take a look at what we did at the end of the year last year, AMB, Cisco and Wynwood play an important role. We're investing behind them as fully owned brands, in them actually adding 13% incremental growth instead of being a sucking sounds makes a very big difference as we look at the outlook for the year 2. So you start with Kona, feel really good about where we are, you add AMB, Cisco and Wynwood to the charge and then you take a look at Redhook and Widmer Brothers. And as Ken said, we saw a real bending of the trend on Redhook in the first quarter, certainly in the home state of Washington. And on Widmer Brothers, while we didn't see an acceleration, we didn't see a deceleration either. And I think it's the first time on this call, I can say that we don't sit here in Q1 saying, "wow, it fooled us again." It performed pretty much the way we thought it would. And then last but not least, I'd add to it, some of the unknowns and some of the gambles. So with pH, we're not banking on a lot, but we feel really good about the ideas that we're going to be very methodical and disciplined in how we test both Pacer in Aperitivo Spritz as well as other initiatives to come. We feel really good about where we're headed with Omission, even though Ultimate Light has some work to do to balance reshaping of the rest of the Omission portfolio. That said, I will remind everybody if there's a group that knows about reshaping portfolios and that I would bank on, it's the team that we've assembled here at CBA. So I think with Omission Ultimate Light joined in battle by the seltzers, we're feeling really good about where the Omission franchise can go and then, candidly, La Rubia is really a wild card for us. We feel outstanding, not only about Wynwood is part of the company now, because of Florida, but also if you look at Luis and Pops, the founders, and if you look at the Puerto Rican roots that they bring to the company and the authenticity they bring to the Caribbean Hispanic segment, I'd argue is peerless right now in the U.S. beer market and that something that makes us really excited to capitalize upon.

Then last but not least, international. It was a tough Q1. I don't think I've ever been on the call when we've had international shipments down in the first quarter. But I can blame everything from weather to Brexit to politics, to you name it. But it was a tough first quarter. We have every reason to believe, it's going to rightsize itself in the remainder of the year, and that also emboldens our kind of belief that we can get back to 7 in total on depletions and for those of you tumbling the math to get to guidance for the balance of the year, we have to be at 6 on shipments. So numbers we're well aware of. Okay?

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Kenneth C. Kunze, Craft Brew Alliance, Inc. - CMO & VP [4]

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I think, just to build on Andy's comments, I would start that, one, when we get together to talk about guidance, we were pretty unanimously and easily aligned to maintain guidance based on strategy, plans and tactics. I think the [color] on Redhook and Widmer Brothers is a good one too relative to how we have those planned within our plan to get there. There's probably upside honestly on both of those brands and if we can maintain on Redhook what we saw and I think while Q1 was disappointing, we have some things in market that are happening right now on Widmer Brothers that I think they come in as promised. We'll see a much better Q2 on Widmer Brothers. Then on Kona, I think one of the things that's really exciting from that perspective is, we're talking about a significant amount of incremental distribution, which will continue to pay out through the remainder of the year as we move into the key summer selling season. And Kona remains a little bit more seasonal over the summers, so that's built into how we think about it. And then from a velocity standpoint, even though we gained all that distribution, normally, you would see a fall-off in velocity and we have not seen that at all. So we're really encouraged by that. And the last thing is we don't really -- media has a half life. Given we haven't done that much media investment, we don't really know what the half life's going to be. So for me, that becomes maybe a little bit of the wild card within it. And then we still have an opportunity though to potentially come back and re-up it before the year is over as well. So...

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Gerald John Pascarelli MR, Cowen and Company, LLC, Research Division - Associate [5]

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That's super helpful. My next question is on SG&A spend. Obviously, elevated in 1Q, as expected. And I know you don't guide quarter-by-quarter, but can you provide a broad cadence on how we should think about the heavy-up spend throughout the remainder of the year, what's left of it?

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Andrew J. Thomas, Craft Brew Alliance, Inc. - CEO [6]

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Sure, Gerald. I think if you look at it, so taking the class action accrual aside because that is kind of a unknown and just to touch on that for everybody on the call, the next milestone on that is we have a preliminary hearing with a judge on June 13, and once we know whether or not the judge will approve the agreement in principle, it will help us get a little bit clearer on it. But that we kind of put to the side as being an extraordinary event. So that said when we take a look at the kind of operational SG&A, the majority of the spend, Gerald, was in the first 2 quarters, the majority of the incremental spend. So if you look at our past cadence, without getting into guidance, I can tell you the major delta was spread across Qs 1 and 2, and Q1 bore anywhere from 2/3 to 3/4 of that uptick and Q2 will bear the remainder 1/4 to 1/3 of that without giving too specific guidance. After that, you can expect operationally SG&A to return to kind of a more traditional cadence.

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Gerald John Pascarelli MR, Cowen and Company, LLC, Research Division - Associate [7]

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Last question from me. Can you provide some color on the pH Experiment and the 2 brands that your testing? How many markets you're going into? Or maybe like from a geographical perspective, if there's going to be any difference in where you're going to be testing for each of the brands?

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Andrew J. Thomas, Craft Brew Alliance, Inc. - CEO [8]

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Yes. It's fantastic and I'll ask Scott to jump in here in a moment. We -- so on Pre and on Pacer, different sets of markets. And I think one thing it starts to demonstrate is we're trying to be true to our word on pH, which is get out there and test what makes sense in markets, where it makes sense targeted to consumers who it makes sense for. And that might sound remarkably intuitive, but I can assure you, a lot of times we come up with a great idea and then we try to peanut butter it all over the place and we try to kind of have a one-size-fits-all approach. So if you think about it, what we're trying to do with Pre -- with the Aperitivo Spritz is to go after the Aperol Spritz market. And so that takes us to -- I'd rather not share exactly what geographies and wholesalers we're going to for competitive reasons, but that takes us to 4 or 5 wholesalers that we've approached, who think there's a huge opportunity in their market and who are working with us to launch that brand this month in May in select markets, so about 5 different wholesalers involved in that. When we get to Pacer, I think Pacer is probably one of the most innovative things out there right now. Totally rooted and I think it's important for all of our stakeholders to understand how quickly we're able to respond to some of the learnings we had last year from the consumer research. We heard a lot about moderation, and we heard a lot about experimentation. And if we look at Pacer, what's different about Pacer as everybody jumps into the Seltzer market, I mean, it's remarkable, the herd mentality at play right now, everybody's piling atop each other in these 5% seltzers and hoping that the color of their graphics or the flavor profile or the strength of their wholesale or distribution is going to differentiate them. We're trying to take a little bit of a different path. I think you guys know this from [the call,] we like white space. We like going where others haven't gone where the odds and the probability of success are a little bit higher. So a 2% ABV, 50 calorie, 0 sugar, Seltzer aimed at somebody who's looking to moderate but still looking to have a little bit of alcohol. And you can imagine what types of markets that takes you to, Gerald, in terms of geography. We've found 5 wholesalers who are really excited about the prospect for Pacer and who're going to work with us and we'll be launching that in early July. In both cases, we'll learn a lot, we'll find out whether or not there is an opportunity to kind of jump in on a market-by-market basis and one thing we've done as part of the development cycle and maybe Scott can elaborate on this. We're ready to pounce on scalability of brands. So we don't need them to scale to get out there and test them, but we're prepared to scale them quickly and given the thoughtfulness that goes into the market selection and the criteria that drives that selection. We already know where we would go next and Scott's team already knows how they would be able to basically provide that. So I'd say, we've done a lot of pre-work, no pun intended for Pre as we start to launch a little bit. But, Scott, maybe some more color...

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J. Scott Mennen, Craft Brew Alliance, Inc. - COO & VP [9]

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Just a little bit more color. Well said, pH is really designed to be quick and nimble and learn fast and take those learnings and either move on or to accelerate the growth. And so that's a lot of work that Karmen Olson and Thomas Bleigh are doing to enable pH. The other thing we're doing is also using our pub network to test all of these products because we're able to get them in front of a lot of consumers quickly and get that feedback. So that's one of the values we have with our pub network. But we also use the consumer insights to pick help -- help us pick the markets where we want to test. But again, pH is quick and nimble. We want to learn quickly and if we learn that things are going to go some place, we're in a position to accelerate that. If it doesn't look like, it's going to go -- we'll quickly move on. So we have other things in the pipeline that we continue to work with and are ready to go to product 3, 4, 5 and 6 here throughout the balance of this year and into 2020.

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Operator [10]

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Our next question comes from Amit Sharma with BMO Capital Markets.

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Drew Nolan Levine, BMO Capital Markets Equity Research - Senior Associate [11]

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This is Drew Levine on for Amit. I wanted to double-click on Andy something you said and Scott something you said with feeling emboldened about the Kona performance in April and Scott you mentioned in the wild card being maybe the media half life. So as we think about as -- as you go through the year, what are the kind of the decision points on if you're going to kind of double down on that media and how much flex do you have on that in the current plan?

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Andrew J. Thomas, Craft Brew Alliance, Inc. - CEO [12]

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Yes. I'll pass that one off to Ken. One of the things I underscore is, for everybody's kind of trying to tie numbers together, take a look at things, the ranges we've maintained, we moved to the range on SG&A to reflect the accrual for the class action settlement, but we left a range there and the range isn't just because we don't know what we're going to do, but we want to make sure that we've provided for some flexibility to do some things, Drew. So I just want to make sure everybody understands when we went into the year, we were mindful that this was going to be a question that we would have and that we would learn more about as we go through the year. So we wanted to put ourselves in a position to be able to act upon it if we needed to. That said, I'm going to hand it over to Ken to maybe offer some thoughts on our decision process in terms of what we might be able to do and when we would learn enough to be able to pull the plans or pull the trigger there.

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Kenneth C. Kunze, Craft Brew Alliance, Inc. - CMO & VP [13]

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So I think the answer for me is, in addition to what we did in Q1 behind what we call [bond] patrol, which was both the distribution drive and the media investment, we have another program over the summer, which is really focused on driving velocity. So I think as we continue to progress our plan, I personally would want to see May and June come in and some of the progress with the other initiatives that we have in place and then based on that, I think determine whether or not coming back more in the fall, whether it would make sense to re-up and do it again and recreate a similar kind of program. And I do think it's important, while the media is a big part of it. It's not the only component of it. So in terms of being able to align the wholesalers and the retailers to be able to get the biggest bang for our buck would be trying to bring that together, but I think making sure that we're seeing kind of the continuation of what we've seen in April onwards, so that we have a confidence that it would be a good spend.

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Drew Nolan Levine, BMO Capital Markets Equity Research - Senior Associate [14]

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Great. And apologies, Ken, on mixing up the names. I just wanted to then follow up on 2 things: one, you're still looking for 1% to 2% pricing and also mentioned that the craft space is getting increasingly softer perhaps. So what gives you confidence that you're going to be able to kind of maintain that range? And how much mix benefit are you getting from the recently acquired partner brands?

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Andrew J. Thomas, Craft Brew Alliance, Inc. - CEO [15]

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Great question. So I think something that differentiates us again is, I think, a lot of the pressure is when you've got 14 IPAs fighting for shelf space and for the same consumer. The pricing dynamics in that share battle are different than they are when we're trying to basically get out there and promote Big Wave or promote Longboard in a different space. So I think one of the things that makes us a little different, Drew, is that while we compete in the craft space, head in the freezer, feet in the oven, on average are at 98.6, right? So we're a craft brand, I get it. We're competing in craft, but we're not necessarily competing in craft the way a lot of our competitors are competing in craft. We're picking different segments, we're picking different flavor profiles, different styles and different channels to really target. So we think that gives us a little bit more buoyancy in our pricing because the share battle doesn't impact us quite as much, still impact us, I don't want to overstate it. But we think we're being smarter about where we're choosing to play. So it gives us a little bit more pricing buoyancy, I think, in general for the Kona brand. Secondly, to Ken's point, we're building new points of distribution. So we have an opportunity to kind of introduce ourselves in that point of distribution at the right price point that we think delivers the right consumer value equation without having to necessarily cycle kind of what our consumers come to think from the year before. So all of those, I would say, are some pricing factors on Kona. Ken is chomping a the bit to get in here so I'll let him in a second. And secondly, on the newly acquired brands, I think we see nothing but upside potential as we start to grow all of the brands and start to bring them to consumers with a good value proposition. We're not afraid to price. I think we've demonstrated that as a team over the last few years. I think if price is all you got going for you, it's a little bit like when somebody asked me what it was like when I lost my hair. And I'm like really, if my hair is the only thing that's going from me, I'm a pretty sorry individual. And I kind of think about that with brands. If price is all you got, man, it is not going to be a pretty future for you. So I think we feel really good that our brands can command appropriate prices because we feel really good about our brands. So...

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Kenneth C. Kunze, Craft Brew Alliance, Inc. - CMO & VP [16]

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I think my add would be that the category continues to demonstrate an ability to consistently take price and so we're going to continue to move with the category as it moves. I do think though as it relates to gross margin, we find ourselves in a really interesting place in terms of how we use price versus how we use volume leverage to improve gross -- overall gross margin and I think that's one of maybe the unique things about our business model right now that a little bit of volume can go a long way in terms of really driving gross margin. So we're going to be smart in terms of how we use price.

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Andrew J. Thomas, Craft Brew Alliance, Inc. - CEO [17]

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That's a great point, yes.

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Drew Nolan Levine, BMO Capital Markets Equity Research - Senior Associate [18]

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Great. And then just last one for me. Capacity utilization is at 47%. You mentioned maybe doing more cross-brewing and I think even Carlos on the ABI call mentioned that they are looking to kind of expand capacity in craft beer. So just anything on the works there to maybe take up capacity utilization or is it more of a kind of a seasonal thing going on right now?

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J. Scott Mennen, Craft Brew Alliance, Inc. - COO & VP [19]

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Yes, so a couple of things. Capacity utilization does flex with season as the beer business is larger in the summertime. So naturally, your capacity utilization is better utilized during the busy season. We've also done a lot of work around how we run our breweries and structure our breweries from the shifts, how we staff it, what the capabilities of the brewery. So capacity utilization is just one number. But over the past couple of years, we really shaped our operations to make sure we're as efficient as we possibly can be with the volumes we have. On the Anheuser-Busch or the cross-brewing or the contract brewing, we continue to work very closely with the folks in Anheuser-Busch's Brewers Collective to look for opportunities. We've done a lot of work with several different brewers out there with Anheuser-Busch. Some of it's come to fruition, some of it just hasn't quite matured yet, but we're going to continue to look that -- we've done some work with Goose Island. We are brewing in Portsmouth, we had some volume there, we've done a lot of work with Virtue Cider and we continue to look for others. We'll add to it as it makes sense for us and it makes sense for them. It's not the business we want, we really -- go back to Ken's point, we really want to grow our own business. But if we have opportunities to work with partners and it makes sense for us, we'll continue to do it, but I kind of end it with it. I feel really good about how our brewery infrastructures put together right now, how we're running it. And as we get volume from Kona, as we get volume from our newly acquired brands, we're in a position to brew it and we'll just do nothing but, make us more efficient.

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Andrew J. Thomas, Craft Brew Alliance, Inc. - CEO [20]

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One thing, Drew, maybe to just comment on and something we can discuss more in the future either on this call or kind of in one-on-ones. Capacity is a really blunt -- capacity utilization is a really blunt term. And I would argue it is an anachronism in our industry right now to just talk about blunt brewing capacity. For us, the challenges aren't necessarily in what we can brew, it's, can we package seasonally in the right package form for what the market is calling for. So Scott and I spend more time and now Christine joins in the battle there debating whether or not we've got the right packaging efficiencies and whether or not we're getting the right throughput on packaging lines, in bottling lines and where the bottleneck is in our breweries. It is rarely in brewing, it tends to be more in packaging. And if you take a look, it is also something that has informed, we've been very thoughtful about this as we look at where our growth engines are coming -- our growth drivers are coming from. So when you think of a brand like Big Wave, which is posting remarkable numbers, it's posting them not only in bottle, which is where a lot of historically, your capacity utilization would be aimed at, it was your bottle line, we're growing in draft and we're growing in cans. So draft is a little bit of an easier capacity story. But when you get down to can capacity, there's a reason we installed the can line here in Portland last year. There's a reason that we continue to make improvements in the can line in Portsmouth. And you asked about our partner brands or the brands we just acquired. There's a strong can focus there too. So without belaboring the point, I would just kind of guide you guys to -- as you look at capacity utilization, there is a second question that is probably more helpful for all of us, especially for you guys, as you model out the impact on the company and that's not just what can you brew, but what can you package seasonally and how does that relate to what the development plans look for -- look like for your top line.

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Operator [21]

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Our next question comes from David Cohen with Midwood Capital.

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David E. Cohen, Midwood Capital Management, LLC - Co-Founder, Managing Member & Portfolio Manager [22]

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My first question's related to international, and I know that you said that the business was down 10%. Just given the -- like you broke out domestic, which is a sort of metric that you [haven't] necessarily done in the past and the impact of the down portion of -- international being down just seems outsized relative to the size of that business. And I don't have the statistics in front of me, but like for Kona domestic, depletions versus total depletion, total Kona depletions, it is a significant difference, the same for the company-wise. So I'm just trying to understand that sort of -- the weight of the international on the quarter and also encourage you to over time give more insight in terms of data on the international volumes, whether it can [lead] to that weighting.

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Andrew J. Thomas, Craft Brew Alliance, Inc. - CEO [23]

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Absolutely. So I can start to go there. We haven't disclosed international versus domestic up till now, because it's been relatively small. But over the course of the last 2 years, very quietly it got big and so I think we're mindful of the fact that the SEC requires us to start breaking out businesses that crest 10% mark. And we're getting close to there with international now, David. So you will start to get more visibility in international as a result. International is up about 4,000 barrels. I'll throw the number out there and you can kind of tumble it from there versus a year ago for the first quarter. And so when you take a look at that number and the kind of the impact that has on the business, it's pretty significant because international was, as I said, in the high single digits of our business. There's a lot of factors on it. The volume softness in international is concentrated in the U.K. and in Australia. There are a number of factors that contributed to it. There's just a lot going on politically in terms of what's happening in those markets over there and as a result how that's impacting their trade, trade's kind of a hot topic today too and I don't want to get into it too broadly overstate the point. But international is a significant component of the business and it's something that you will hear us talk more and more about, not only on these calls but in general. And the interesting point, we can now talk about as we've started to break out international more. Everybody's has been really fixated on the ABI component of international, which we believe is all upside, but the majority of the heavy lifting that's been done on the international development over the course of the last 3 to 4 years, has been done [internationally with our acting] travel partner. So I think as a result of it, we take a look at the future and we take a look at how can Brazil play in that and how can other countries through ABI play a role? There really is a lot of upside, which is why we've been methodical about not trying to play the short game there, but we've been trying to play the long game and making sure that we did the right things today for a sustainable growth trajectory there. So it's important, you'll start to get more of it. It was significant enough in the quarter that it bent the trends. You can see that now and continue to be increasingly forthright about kind of some of the headwinds we've gotten in some international markets as well as some of the plans we've got to deal with those headwinds and to develop it.

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David E. Cohen, Midwood Capital Management, LLC - Co-Founder, Managing Member & Portfolio Manager [24]

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Okay, and one more question on international just related to plans and milestones you mentioned. Local brewing, having gone through a test phase in local brewing in Brazil, are there any clear milestones on that come after that in terms of, I don't know, like how broadly in Brazil your distribution's going to be? Or something else related to Brazil and then any other new ABI led international markets and when those might be rolled out?

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Andrew J. Thomas, Craft Brew Alliance, Inc. - CEO [25]

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Yes. We're taking a city-by-city approach in Brazil. So the target really is Rio right now and then it will expand probably into major metros. We've got run room, David, in terms of the brewery that we're looking to brew in down there. So I think it gives us some optionality, I'll call it, as we move forward from there. I think, quickly though, once we have a better handle on brewing in Brazil, we will pivot to whether or not there's an opportunity for us to expand that kind of local brewing model. And just to remind everybody, why is that important? Some of the most attractive international markets are also some of the most well-protected international markets. So for us, importing, the trade barriers or the import tariffs associated with importing, basically make the value chain unworkable for the parties and make the consumer price point so ridiculously high. But increasingly we're seeing local sourcing as a key component of our international development strategy, and we've got a great partner to work with right now with ABI to help us tackle kind of that dilemma. So you will hear more about that in coming weeks.

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Operator [26]

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Our next question comes from Jim Coll with Lombard Securities.

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James Coll, Lombard Securities, Inc. - Financial Advisor [27]

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Congratulations team, on good results. Maybe -- given there are so many moving parts, will there be full availability of the 3 new breweries nationally?

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Andrew J. Thomas, Craft Brew Alliance, Inc. - CEO [28]

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So, no. There won't be. So it's not because we can't do it, it's because we don't think it's the right thing to do. We believe right now and when we pivot from this or revolve from this, we'll be sure to let you guys know. And it's not a matter of having too many balls in the air, it's a matter of making sure that we're playing the battles, where to play and how to win, kind of classic strategy of thinking. We believe the long -- the best prospects for Cisco are in the Northeast. And we want to make sure we fully dedicate our resources to realizing the potential, where we think the potential is greatest and where we think we have the highest probability of success. And that's in the Northeast. We could distribute in Texas, we could distribute in California, they've done that before. It just didn't make a lot of sense in terms of diffusion of resource and in terms of basically kind of focus for us in terms of what our portfolio looks like. So Cisco will broadly remain in the Northeast for the planning horizon at least. Appalachian Mountain brewing will remain in the Carolinas and Tennessee kind of in the high country, as they call it. And then with Wynwood, I'll put a little asterisk there because we believe Wynwood as a local Craft brand rooted in Miami, Florida's first Craft brewery or Miami's first craft brewery, will predominantly stay close to home in Florida and certainly in Southern Florida, but the asterisk is La Rubia Blonde Ale. We believe La Rubia has the opportunity to expand outside of Florida based on the Caribbean Hispanic target, with a broader kind of Latin target as opposed to certain geographies. So as we continue to kind of walk the talk of being consumer centric, you'll see us looking more and more where are consumer segments and where there are pockets of consumers, that would be good markets for us to try to commercialize La Rubia. It's why we're launching in Puerto Rico and it's why you'll be hearing more on these calls about where does La Rubia go next. That won't be limited to Florida.

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James Coll, Lombard Securities, Inc. - Financial Advisor [29]

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That's very helpful. Could you give a little more color on the availability of Kona in the states?

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Andrew J. Thomas, Craft Brew Alliance, Inc. - CEO [30]

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Yes. So we're distributing in all 50 states now, Jim.

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James Coll, Lombard Securities, Inc. - Financial Advisor [31]

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I read that, yes.

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Andrew J. Thomas, Craft Brew Alliance, Inc. - CEO [32]

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Yes. So we're fully available in the U.S. Our priority wholesalers right now, as Ken alluded to, represent 96% of our volume and they're the ones that are really driving distributions. So I think it's pretty safe to say, regardless of where you're find yourself in the U.S., you should start to see Kona a little bit more available. If you're already in a market that had broad distribution, or where availability was a little bit easier to come by. You'll probably see -- become a lot more readily available. But in general, we're being really focused on Big Wave and Longboard, so again back to a little bit of the same philosophy that inform the answer to the question on the newly acquired breweries. We're not going out there and saying, "Hey, any Kona brand works in the distribution drive." We're trying to make sure we focus our resources on Big Wave and Longboard first and foremost. And then once we've got a really good foothold with those brands, we start to expand beyond there. So broadly speaking, we're being relatively agnostic to geography in terms of distribution growth. But just given the nature of it, you'll find geographies that already had Kona. You'll see even more in geographies where Kona was absent, you will start to see a little bit more available.

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Operator [33]

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Ladies and gentlemen, I am showing no further questions in the queue at this time. I would now like to turn the call back over to management for any closing remarks.

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Andrew J. Thomas, Craft Brew Alliance, Inc. - CEO [34]

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Thanks, Sherrie. I appreciate everybody's continuing support of CBA and being available for this call. We look forward to discussing the results of the second quarter of 2019 with you soon. Thank you, and have a great day.

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Operator [35]

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Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all disconnect, and have a wonderful day.