Craft Brew Alliance 2016: This is Kona Brewing's world now

Craft Brew Alliance released its 2016 earnings for the first quarter, and the results underline the continued dominance of Kona Brewing Co. as the craft beer rollup’s key driver. Depletions for Kona Brewing increased by 19 percent, reflecting steady domestic and international growth. However, CBA’s overall depletion volume showed a sad-trombone decline of 3 percent from the first quarter of 2015.

That decline though was largely impacted by the temporary closure of its largest-volume brewery in Portland so that it could be reborn as part of the CBA’s operational plan to increase brewing capacity and gross margin. In addition to the Portland brewery expansion, CBA kicked off site preparation for the new Kona brewery and the launch of a new can line in Portsmouth to support strategic partnerships with Appalachian Mountain Brewery and Cisco Brewers.

CBA expected the Portland brewery closure to result in a first quarter shipment decline of 15,000 to 20,000 bbls, along with commensurate impacts to first quarter revenue, gross margin and capacity utilization.

“With key operations enhancement projects on track and first quarter results in line with management’s expectations, we are reconfirming full-year guidance and providing insight to CBA’s anticipated performance for the balance of the year,” the company noted in its report.

Select first quarter financial highlights

Selling, general and administrative (SG&A) expense for the first quarter was $13.9 million, a 7.5 percent increase over the first quarter of 2015, primarily due to emerging business and international support, brand marketing and employee-related costs.
The anticipated decline in shipment volume resulted in a net sales decline of 6 percent in the first quarter, which was partially offset by strong revenue per barrel and improved pubs sales. The estimated negative impact of the brewery shutdown on net sales was approximately 890 basis points.
Again due to the temporary Portland brewery closure, shipments decreased by 18,100 bbls, or 10.8 percent, to 149,600 bbls, compared to the same period of 2015. The first quarter shipments decline, which conforms to a previously projected decline of 15,000 to 20,000 bbls, reflects a provisional increase to wholesaler inventories in the fourth quarter of 2015 to prep for the Portland brewery closure in early 2016.

To address the wide variances in quarterly results and provide a more representative view into CBA financial performance, the company shared trailing 12-month comparisons for the periods ended March 31, 2016 and March 31, 2015:

For those periods, beer shipments decreased 1.1 percent, depletions decreased 1 percent and net sales increased 1.9 percent.
Beer gross margin expanded by 40 basis points to 32.3 percent and brewpubs gross margin expanded by 90 basis points to 13.5 percent for the same 12-month periods, for a combined gross margin expansion of 30 basis points to 29.6 percent, compared to 29.3 percent.

“While on the surface our first quarter results reflect the disproportionate impact of the temporary Portland brewery closure, the significant accomplishments we made to fortify our foundation set us up for a strong 2016 and beyond,” said Andy Thomas, chief executive officer, CBA. “From Kona’s steady acceleration as a top 10 national craft brand, to continued strong pricing, to our ability to complete multiple strategic expansion projects while delivering the quarter we said we would, I am confident that we will achieve our full-year guidance.”

Anticipated financial results for the remaining three quarters of 2016

April through December 2016 shipment growth of 4 percent to 5 percent, reflecting increased volume growth during the peak selling season and continued acceleration of Appalachian Mountain Brewery, Cisco Brewers and contract partnerships.
Gross margin of 33 percent to 34.5 percent by leveraging the increased efficiencies related to the successful completion of operational enhancements in the first quarter, as well as improved overall volume and cost leverage, and other ongoing strategic margin improvement projects.
Full-year shipment growth between 1 and 2 percent, which reflects the planned first-quarter decrease due to the Portland brewery closure, offset by volume growth during peak selling seasons and ramp up of partner volumes, including Appalachian Mountain Brewery, Cisco Brewers and Pabst Brewing.
Average price increases of 1 to 2 percent.
Gross margin of 31 to 32.5 percent.

“The anticipated benefits from the increased capacity and efficiency in Portland, combined with continued acceleration of our Appalachian Mountain Brewery and Cisco Brewers partnerships, reinforce our confidence in delivering on the plan for the balance of the year,” said Joe Vanderstelt, chief financial officer, CBA.