Craft Brew Alliance Announces Second Quarter 2015 Results

Home Market Depletion Growth of 7% and Continued Infrastructure Optimization Validate Long-Term Growth Strategy; Management Updates Guidance to Reflect Short-Term Market Challenges

PORTLAND, Ore.--(BUSINESS WIRE)-- Craft Brew Alliance, Inc. (“CBA”) (Nasdaq: BREW), a leading craft brewing company, today reported its financial results for the second quarter ended June 30, 2015. The Company reported net sales of $58.5 million, a 3% increase over the second quarter of 2014, driven by a 2% increase in shipments and higher net sales per barrel. Gross margin increased to $18.7 million, while the gross margin rate decreased by 90 basis points as a result of higher cost of goods sold per barrel compared to the same period last year, which included increased production volume in anticipation of our Memphis brewery coming online. SG&A expense increased by $1.1 million, which reflects planned investments in sales infrastructure and marketing.

Net income for the second quarter was $1.4 million, or a decrease of $0.6 million from the same period in 2014. Earnings per diluted share for the second quarter of 2015 were $0.07, or a decrease of $0.03 from the comparable period in 2014.

Second quarter 2015 financial highlights include:

• We saw strong performance in three of our core brand families, with double-digit depletion growth from Kona and Omission, which remains the #1 beer in the gluten-free beer category; and Widmer Brothers continued its steady turnaround. Depletion volume, however, was flat over the second quarter of 2014, which primarily reflects weak performance in our Redhook brand family outside of its home market of Washington state.
  • In our home markets of Hawaii, Oregon, and Washington, depletion volume grew 7% over the second quarter of 2014, which validates our strategic focus on delivering sustainable topline growth, particularly in our brands’ home states.
  • As we look to build on our home market strategy through establishing strategic partnerships with strong local brands, we are expanding our partnership with Boone, NC-based Appalachian Mountain Brewery to include an alternating proprietorship in our Portsmouth brewery.
  • Our international business continues to grow, with international shipments increasing by 60% over the second quarter of 2014, driven by the continued strength of our Kona brand family.
• Net sales and total beer shipments increased 3% and 2%, respectively, compared to the second quarter of 2014, reflecting continued progress to align shipments and depletions, while managing inventory levels in preparation for the peak summer season.
• Our beer gross margin rate decreased 70 basis points to 34.6% in the second quarter, compared to 35.3% in the second quarter last year. This decrease reflects the lapping of last year’s production build up to support bringing our Memphis brewery online. The decreased rate was also due to a planned decrease in production in the second quarter of 2015 as we continued to align production with shipments and depletions. These decreases were partially offset by lower raw material and distribution costs on a per barrel basis. Our pub gross margin rate decreased by 40 basis points to 13.4%, compared to 13.8%, due to increases in selling and employee related costs. As a result, our combined second quarter gross margin rate decreased 90 basis points to 31.9%, compared to 32.8% for the second quarter last year.
• Owned capacity utilization was 82% in the second quarter of 2015, compared to 87% in the second quarter of 2014, which primarily reflects the addition of our brewing operations in Memphis, as well as continued efforts to balance and normalize inventories.
• As a percentage of net sales, our selling, general and administrative expense (“SG&A”) increased to 28% in the second quarter of 2015, compared to 27% in the second quarter of 2014, due to lower sales and planned increases in sales infrastructure and marketing expenses.
• Diluted income per share for the second quarter of 2015 was $0.07, compared to $0.10 for the same period last year.

Year to date 2015 financial highlights include:

• Depletion volume grew 1% over the first six months of 2014.
  • In our home markets of Hawaii, Oregon, and Washington, depletion volume grew 7% over the first six months of 2014.
• Net sales were relatively flat compared to the comparable six-month period in 2014, and total beer shipments decreased by 3%, reflecting ongoing efforts to synchronize shipments and depletions.
• Our beer gross margin rate decreased slightly by 10 basis points to 32.6% in the first six months, compared to 32.7% in the first six months last year, reflecting lower capacity utilization in our owned breweries, a shift in packaging mix, as well as the intentional increased production in the second quarter of 2014 to support bringing Memphis online. The decrease was partially offset by lower distribution costs and higher pricing on a per barrel basis. Our pub gross margin rate decreased by 180 basis points to 11.7% in the first six months of 2015, compared to 13.5% in the same period of 2014, due to closures resulting from inclement weather during the first quarter of 2015 and the closure of our Koko pub for a full remodel. As a result, our combined year to date gross margin rate decreased 50 basis points to 29.8%, compared to 30.3% for the first six months last year.
• Owned capacity utilization decreased to 70% in the first six months of 2015 compared to 78% in the first six months of 2014, which primarily reflects the addition of our brewing operations in Memphis, as well as a decrease in shipment volume.
• As a percentage of net sales, our SG&A increased to 29% in the first six months of 2015 from 27% in the first six months of 2014, which was primarily due to increased investments in sales infrastructure and marketing.
• Diluted income per share for the first half of 2015 was $0.01, compared to $0.09 for the same period last year.

Trailing twelve-month financial highlights include:

• To address the wide variances in quarterly results and provide a more representative view into our financial performance, we are sharing trailing 12-month comparisons for the periods ended June 30, 2015 and June 30, 2014.
  • For those periods, our beer shipments increased 1%, depletions increased 3%, and net sales increased 3%.
  • Our beer gross margin expanded by 10 basis points to 31.7% and pub/restaurant gross margin contracted by 160 basis points to 12.5% for the same 12-month periods, for a combined gross margin contraction of 20 basis points to 29.1%, compared to 29.3%.

“While I’m disappointed in our second quarter topline growth, we continued to make solid headway in multiple areas that underscore the strength of our distinctive strategy. Strong home market growth of 7%, continued double digit growth for Kona and Omission, further proof of Widmer Brothers’ turnaround, and continued improvements in our operational efficiency were offset by unanticipated weaknesses in Redhook and California,” said Andy Thomas, chief executive officer, CBA. “Looking forward, we continue to be emboldened by the validation of our home market strategy, ongoing progress in achieving sustainable gross margin growth, and success in planting seeds in key beer geographies. Together, these will not only address our short-term challenges, but also set us up for long-term success.”

“Our relatively flat depletion growth across the first half of the year has affected our revenue and profit growth against our guidance and expectations,” said Joe Vanderstelt, chief financial officer, CBA. “At the same time, we maintain a healthy balance between depletions and overall shipments and have reduced distributor inventory days. We continue to see healthy pricing, and our margin enhancement initiatives are on target. Looking forward, we expect to see growth in our full year revenue, gross margin, and earnings as second half 2015 commercial programming is executed for our core brands.”

Components of anticipated 2015 financial results and developments

We are revising previously issued guidance regarding our anticipated full year 2015 results, with the exception of estimated average price increases, as follows:

• Owned beer shipment growth between 1% and 3%. The adjusted anticipated beer shipment growth reflects greater-than-anticipated challenges to the Redhook brand family outside of its home market.
• Average price increase of 1% to 2%. We also expect further improvements in our revenue per barrel as we experience a favorable shift in our product mix.
• Contract brewing revenue is expected to be flat compared to 2014, previously estimated to range from a decline of 10% to an increase of 10%.
• Gross margin rate of 30.5% to 31.5%, which is unchanged based on our continued efforts to optimize our brewing locations and improve our capacity utilization as we steer towards our gross margin expansion target of 35% in 2017.
• SG&A expense ranging from $58 million to $61 million. We are committed to keeping the high end of our SG&A expenses in line with topline performance, while ensuring the commercial programming is fully supported.
• Capital expenditures of approximately $16 million to $19 million, which were previously estimated at $17 million to $21 million. The decrease in our projected capital expenditures is due to the timing of certain planned projects. We continue to anticipate capital expenditures of approximately $17 million to $21 million in 2016. Our capital expenditures will support the recently announced brewery expansion projects, as well as continued investments in quality, safety, sustainability, capacity and efficiency.

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 shipments and sales growth, price increases, level of contract brewing revenue and gross margin rate improvement, the level or effect of SG&A expense and business development, anticpated capital spending, 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, 2014. 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 a leading craft brewing company, which brews, brands and markets some of the world’s most respected and best-loved American craft beers.

We are home to three of the earliest pioneers in craft beer: Redhook Ale Brewery, Washington’s largest craft brewery founded in 1981; Widmer Brothers Brewing, Oregon’s largest craft brewery founded in 1984; and Kona Brewing Company, Hawaii’s oldest and largest craft brewery founded in 1994. As part of Craft Brew Alliance, these craft brewing legends have expanded their reach across the U.S. and more than 15 international markets.

In addition to growing and nurturing distinctive brands rooted in local heritage, Craft Brew Alliance is committed to developing innovative new category leaders, such as Omission Beer, which is the #1 beer in the gluten free beer segment, and Square Mile Cider, a tribute to the early American settlers who purchased the first plots of land in the Pacific Northwest.

Publicly traded on NASDAQ under the ticker symbol BREW, Craft Brew Alliance is headquartered in Portland, OR and operates five breweries and five pub restaurants across the U.S. For more information about CBA and its brands, please visit www.craftbrew.com.

The Company 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 the Company’s management. The Company defines Adjusted EBITDA as net earnings (loss) before interest, income taxes, depreciation and amortization, stock compensation and other non-cash charges, including net gain or loss on disposal of property, plant and equipment. The Company uses 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 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 the Company’s indebtedness; and the exclusion of depreciation and amortization which represent significant and unavoidable operating costs, given the capital expenditures needed to maintain the Company’s 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 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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Craft Brew Alliance, Inc.
Media Contact:
Jenny McLean, 503-331-7248
[email protected]
or
Craft Brew Alliance, Inc.
Investor Contact:
Edwin Smith, 503-972-7884
[email protected]

Source: Craft Brew Alliance, Inc.

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