In a time when the largest “craft beer” companies in the country seem to be showing slowed growth (at best) results, the Craft Brew Alliance portfolio delivered its second consecutive quarter of positive growth. The big storylines coming out of this third quarter are the continued results of its Kona Plus strategy and the renewed vows between it and its sugar daddy, Anheuser-Busch.
Third quarter depletion growth of just under 1 percent was fueled by robust 18 percent depletions growth for Kona Brewing Co. The CBA says this “Kona Plus” strategy combines the strength of Kona as a leading national brand family supported by a stable of distinctive local craft brands, including strategic partners Appalachian Mountain Brewery and Cisco Brewers, and craft pioneers Widmer Brothers and Redhook Brewery.
Enhanced relationship with Anheuser-Busch
In the third quarter, CBA announced a series of substantive agreements with Anheuser-Busch that built on its original master distribution agreement. The third quarter earnings report explained this enhanced relationship as such:
1. Master Distributor Agreement
CBA and A-B extended the current fee structure of their existing Master Distributor Agreement for 10 additional years, through 2028, securing CBA’s brands in the industry’s strongest wholesaler network and enabling continued investment in its brands and strategic partnerships, such as Appalachian Mountain Brewery and Cisco Brewers.
2. Contract Brewing Agreement
Under the new agreement, CBA and A-B will work together to transition up to 300,000 barrels of volume into A-B’s state-of-the-art breweries, providing direct support for CBA’s ongoing brewery footprint optimization and significant operational cost savings.
3. International Distribution Agreement
A-B will support the expansion of CBA’s portfolio of brands globally through a new international distribution agreement, which creates opportunities to accelerate the growth of CBA’s craft portfolio in additional international markets.
Optimizing its cost base
Here’s how the Craft Brew Alliance explained its allocation of resources:
“In exploring these new opportunities and assessing the challenges of our market, we have reexamined our business strategies and are already taking steps to ensure the right level of investment against high-priority initiatives. These actions include the reallocation of existing resources and development of a new company-wide plan to reduce our cost base by $5 million to $7 million while still supporting sustainable investment against our brands and improved overall business performance. More details of our cost management efforts will be provided as part of our preliminary 2016 full-year results and 2017 annual guidance.”
Third quarter financial highlights
• Third quarter depletions for Kona increased by 18 percent, compared to the third quarter in 2015, driving positive overall depletion growth of just under 1 percent across the entire portfolio.
• Shipment volume for Kona increased 12.7 percent in the third quarter, while overall shipment volume decreased by 11,600 barrels, or 5.3 percent, to 208,400 barrels, compared to the third quarter of 2015. Distributor inventory pressures and lower-than-anticipated contract brewing volume in the third quarter directly impacted the company’s overall shipment volume.
• Net sales grew 0.9 percent in the third quarter to $55.2 million, while gross profit increased 0.7 percent to $17 million compared to the same period last year. The growth was driven primarily by an increase in net revenue per barrel, fees earned associated with the CBA’s international distribution agreement with A-B, and partnership agreements with Appalachian Mountain Brewery and Cisco Brewers, as well as pub sales. The net sales increase was partially offset by a decrease in shipment volume, compared to the third quarter in 2015.
• Net income for the third quarter was $552,000, a decrease of $180,000 or 25 percent compared to the third quarter of 2015.
Refined financial forecast for the full year 2016
Strengthened by the benefits of CBA’s enhanced A-B agreements and planned cost savings initiatives, while continuing to acknowledge the ongoing challenges in the market, CBA is refining its full-year guidance as follows:
• Depletions ranging between an increase of 1 percent and decrease of 1 percent, reflecting the growth potential of the Kona Plus strategy, as well as the significant competition and headwinds in the craft beer segment.
• Full-year shipment decline between 3 and 5 percent, as a result of significantly lower-than-anticipated contract brewing volumes in the fourth quarter of this year.
• CBA’s forecast of average price increases of 1 to 2 percent remains unchanged, while beer-related revenue per barrel is expected to increase 4 to 6 percent, as a result of net pricing, new A-B international incentive payments, receipt of contract brewing penalty fees, lower A-B fees and alternating proprietorship revenues.
• Gross margin of 31 to 32.5 percent remains unchanged, and CBA expects to be at the low end of the range. Looking at the balance of the year, the company expects to see incremental gross margin improvement as a result of strategic cost reduction initiatives, including the recent right-sizing of its Woodinville brewery operations to align with anticipated contract brewing volumes. Additionally, CBA expects to realize additional benefits through the Portland brewery bottling line modernization and beer loss centrifuge, as well as its Portsmouth canning line.
• SG&A ranging from $59 million to $61 million, an increase from previously issued guidance, as a result of legal and professional fees related to emerging business and the A-B agreements, employee related and severance costs and a Kona media test.
• Capital expenditures between $17 million and $19 million, a decrease from previously issued range, primarily due to a change in timing of certain planned strategic investments.