Craft Brew Alliance sees depletion growth of 11 percent in 2013

Craft Brew Alliance Inc., a craft brewing roll-up that includes Redhook Brewery, Widmer Brothers Brewing and Kona Brewing, announced preliminary 2013 financial results and plans for continued growth in 2014 and beyond by building on the company’s successful portfolio strategy and opportunity to capture gross margin expansion.

“For everyone who knows me, it will come as no surprise that I am candidly mixed in terms of how I feel about our financial performance last year”, said CBA Chief Executive Officer Andy Thomas. “On the one hand, I am extremely proud of the record growth in sales and brand momentum that we achieved; but on the other hand, I know we can do much better given the talent, strategy and structure we have in place. In looking ahead, I am wholly committed to seeing us apply the same resolve and discipline towards improving our bottom line that we did to achieve our strong topline growth last year. Additionally, with our plans to expand our brewing capability in the Southeast, along with CBA’s new leadership team, I look forward to seeing us continue to build on our successes and deliver both strong topline and bottom line growth for the full year. Finally, I want to take a moment to thank our former CEO, Terry Michaelson, who was critical in helping establish CBA’s advantaged strategy and growth over the past several years; I am honored to step into his shoes and grateful for his continued support this year.”

Preliminary results for the fourth quarter 2013 include:

• A strong close to 2013 highlighted by 10 percent growth in depletions over the fourth quarter of 2012, the third consecutive quarter of double-digit depletion growth.
• An increase in net sales and branded beer shipments of 5.4 percent and 6.1 percent, respectively, in the fourth quarter.
• A decrease in gross margin rate by 100 basis points to 26 percent in the fourth quarter compared to the fourth quarter last year primarily due to shifts in product mix and increased distribution-related costs.
• Diluted earnings per share (“EPS”) of $0.04 for the quarter versus 2012 EPS of $0.01 primarily as a result of an increase in gross profit and decreases in SG&A.

Preliminary results for the full-year 2013 include:

• Net sales growth of 6 percent, reflecting the continued strength of the Kona Brewing, Redhook Brewery and Omission brands, as well as continued repositioning of the Widmer Brothers brand.
• Depletion growth of 11 percent and owned brands shipment growth of nearly 8 percent.
• Contract brewing revenue reduction of 40 percent as a result of the termination of certain contract brewing contracts in late 2012.
• Gross margin rate of 28.1 percent, a reduction of 150 basis points from 2012, primarily due to product mix and distribution costs in its beer business and lower restaurant business margin related to its Woodinville pub remodel.
• Selling, general and administrative expense (SG&A) of $46.5 million, an increase of $1.6 million from 2012, reflecting continued investments in brand development and sales capabilities, partially offset by the leverage of one-time spending in prior years.
• EPS of $0.10 versus 2012 EPS of $0.13.
•  Capital expenditures of approximately $8.8 million, reflecting continued investments in capacity, pubs, efficiency and quality initiatives.

Components of anticipated 2014 results and developments are:

• Redhook will continue to build on its national partnerships, including Dan Patrick, Buffalo Wild Wings and theCHIVE. The company announced the national expansion of KCCO Black Lager, Redhook’s first collaboration with theCHIVE, earlier this year.
• CBA noted an increased focus and investment behind Omission, its fast-growing craft beer that is specially crafted to remove gluten.
• The company also noted interest in adjacent categories like cider and cross-brand packaging.
• There will be an expansion of its brewing footprint in the Southeast mid-year. This new partnership should improve gross margin by bringing brewing capability closer to growing markets while alleviating emerging capacity constraints driven by growth in the East region and internationally.

“Our full-year 2014 guidance reflects our commitment to continue to drive the top-line by pursuing focused growth plans that strengthen CBA’s overall craft portfolio as well as our commitment to expanding gross margin with focus on key initiatives such as SKU rationalization and our new brewing partnership,” said Chief Financial Officer Mark Moreland. “With regards to the annual guidance, we will continue to focus on full-year estimates with the understanding that quarter-to-quarter performance will exhibit volatility.”

Anticipated financial highlights for 2014:

• Depletion growth estimate of 7 percent to 11 percent.
• Average price increase of 1-2 percent.
• Growth in contract brewing revenue of 25 to 50 percent as a result of new partnerships.
• Gross margin rate of 28.5 to 30.5 percent and the company “continues to optimize our brewing locations and improve our capacity utilization and efficiency, we expect our gross margin rate to expand 500-700 basis points over the next five years.”
• SG&A expense ranging from $52 million to $54 million primarily reflecting reinvestment into our sales and marketing infrastructure.
• Capital expenditures of approximately $15 million to $20 million, continuing investments in capacity and efficiency improvements, quality initiatives and restaurant and retail.