Craft Brew Alliance confirms 2013 outlook after depletions growth in Q2 2013

Craft Brew Alliance Inc. (CBA) reported its financial results for the second quarter ended June 30, 2013. CBA’s focus on building a national portfolio strategy has positioned the company to expect strong sales and profit growth in 2013 and to take advantage of the dynamic craft beer segment to achieve long-term value for its shareholders. The results for the second quarter are in line with management’s expectations and confirms its 2013 guidance.

Significant second quarter and year-to-date financial highlights include:

Depletion volume grew 12 percent over the second quarter of 2012 and 9 percent year-to-date compared to the same period last year, reflecting the continued success of the CBA’s portfolio strategy.

“We are pleased with our depletions growth of 12 percent for the second quarter and 9 percent year to date. Our second quarter results are in line with our expectations and demonstrate the positive trend we are anticipating for the full year.” — Terry Michaelson, CBA’s chief executive officer.Net sales and branded beer shipments increased 10.7 and 13.5 percent, respectively, in the second quarter due to the continued organic growth of its portfolio and the launch of new products, including Redhook Audible Ale, Kona Big Wave Golden Ale, Omission Beer and cross-brand variety packs. Year-to-date net sales and branded beer shipments grew 3.4 percent and 5.6 percent, respectively, compared to the first half of 2012.

The CBA’s gross margin rate increased 40 basis-points to 30.5 percent in the second quarter compared to 30.1 percent for the second quarter last year as a result of supply chain optimization efforts implemented in the first quarter of the year. The company’s year-to-date gross margin rate declined to 27.9 percent, a decline of 240 basis points from the same period in 2012, due to lower capacity utilization.

As a percentage of net revenue, the CBA’s selling, general and administrative expense (SG&A) decreased to 26.4 percent in the second quarter of 2013 from 27.6 percent in the second quarter of 2012. SG&A expense of $24.7 million year-to-date includes the continued investment in its portfolio strategy.

Diluted earnings per share (EPS) for the second quarter of 2013 was $0.06 compared to $0.03 for the same period last year. 2013 year-to-date loss per share was $(0.04) compared to 2012 year-to-date EPS of $0.07.

For the first six months of 2013, the CBA reported capital additions of approximately $6.1 million for restaurant updates and continued investments in beer-related capacity, efficiency and quality initiatives.

“We are pleased with our depletions growth of 12 percent for the second quarter and 9 percent year to date. Our second quarter results are in line with our expectations and demonstrate the positive trend we are anticipating for the full year,” said Terry Michaelson, CBA’s chief executive officer. “For the second half of 2013, we remain focused on driving improved sales and profit growth by leveraging the strengths of our dynamic brand portfolio and continuing to realize benefits as a result of the investments we made in the first quarter to improve gross margin and SG&A.”

The CBA confirmed previously issued guidance regarding its anticipated full-year 2013 results, as follows:

• Depletion growth estimate of 7 percent to 11 percent, reflecting the continued strength of the Kona, Redhook and Omission brands and further stabilization of the Widmer Brothers brand.
• Average price increases of approximately 1 to 2 percent.
• Contract brewing revenue for 2013 at approximately half of the 2012 level as a result of the termination of the Goose Island contract brewing arrangement.
• Gross margin rate of 28.5 percent to 30.5 percent, primarily due to pressure from distribution and packaging component costs, partially offset by improved brewery productivity.
• SG&A expense of $47 million to $49 million, reflecting leverage from the foundation built by more aggressive spending in prior years.
• Capital expenditures of approximately $11 million to $13 million, reflecting our continued investments in capacity and efficiency improvements, quality initiatives and restaurant and retail remodeling projects.

“Our improved second quarter gross margin and earnings reflect significantly better alignment of our shipments and depletions as a result of the supply chain adjustments we made in the first quarter,” said Mark Moreland, CBA’s chief financial officer. “While the first quarter adjustment suppresses our year-to-date earnings performance, we expect to accelerate our top-line momentum building off of our strong second quarter results with commensurate expansion in our gross margin and earnings throughout the remainder of the year.”

Developments and expectations for 2013 include:

1) Confidence in the continued growth in sales of Kona, Redhook and Omission and clear positioning of Widmer Brothers offerings;

2) Expansion into new geographic markets for Kona and international expansion for all brand families;

3) Updates to packaging across all brand families, as well as introduction of unique can and bottle offerings;

4) Refined messaging on Omission beers, promoting the beer as specially crafted to remove gluten;

5) Exploration and introduction of new brands to the CBA portfolio, including the new Redhook brand Game Changer developed in collaboration with Buffalo Wild Wings;

6) The introduction of the Square Mile Cider brand; and

7) Continued development of cross-brand packages.