USA: Craft Brew Alliance reports Q3 2017 results
Craft Brew Alliance, Inc. ("CBA), a leading craft brewing company, announced on November 8 its financial results for the third quarter ended September 30, 2017.
Third quarter results include continued robust depletion growth for Kona, as well as strong EPS performance driven by improving fundamentals, including revenue per barrel growth, gross margin expansion, and ongoing tighter management of Selling, General & Administrative (SG&A) expenses.
According to the companys press-release, against a backdrop of intensifying market pressure and competition, Kona continued to outperform all segments of the beer market, growing depletions by 9% in the third quarter and 10% year to date. As the cornerstone of CBAs "Kona Plus portfolio strategy, Konas strong brand identity and distinctive island-inspired beers resonate with consumers from its home market of Hawaii, where Kona has grown 8% year to date, to around the world as evidenced by Konas continued double-digit international shipment growth. Kona flagship Big Wave Golden Ale delivered 15% depletions growth in the third quarter, driving a 25% increase in depletions year to date, and Hanalei Island IPA, Konas latest national beer launched earlier this year, remains a top seller in its category and a top 10 new craft brand nationally.
The company said its progress strengthening CBAs business fundamentals accelerated in the third quarter. Net sales grew 3% compared to the same period last year, driven by stronger revenue management as reflected in improved revenue per barrel. Gross profit increased by 14%, and gross margin expanded by 350 basis points to 34.2% over the same period last year, as a result of higher revenue per barrel and brewery optimization efforts, including the shutdown of its Woodinville brewery, expansion of production in Fort Collins, and operational efficiencies in its largest-volume brewery in Portland. With ongoing cost control management, CBA continued to invest in the Kona brand, contributing to an increase of 30 basis points in SG&A expense.
CBA said it continued to leverage its recent agreements with Anheuser-Busch ("AB). Building on the successful launch of their contract brewing partnership earlier this year, the company expanded CBA brewing volumes in ABs Fort Collins brewery. Additionally, as previously discussed, it continued working with AB on a deliberate and strategic approach to grow Kona internationally, which included the pilot distribution of Kona beers in key global beer markets. In 2018, CBA anticipates enhanced performance as a result of inclusion of its brands in ABs wholesaler planning process.
Based on the third quarter and year-to-date results, the company is revising and tightening certain aspects of its 2017 guidance to provide more clarity around its expectations for the full year. CBA expects to deliver full-year revenue growth of 3.5% to 5%, underpinned by healthy increases in pricing and changes in mix, as well as previously disclosed recurring AB international distribution payments and a one-time contract brewing shortfall fee. The company is revising its estimates for depletions, which it expects will range between flat and a decrease of 2%, as well as for shipments, which it estimates will range between a decrease of 2% and a decrease of 4%. Additionally, CBA expects gross margin to come in at the mid to high end of guidance and SG&A to be at the low end of the range. Further, the company has narrowed the range for capital expenditures.
Third quarter and year-to-date 2017 financial highlights:
Overall depletions decreased 2% for the quarter and 1% year to date, compared to the same periods last year, while depletions for Kona maintained strong growth, increasing 9% in the third quarter and 10% year to date.
Shipments were relatively flat in the third quarter and down 3% year to date, compared to the same periods last year.
Net sales increased 3% to $56.6 million in the third quarter and 3% to $161.5 million year to date over the comparable periods in 2016, primarily attributed to increases in average unit pricing and brand mix, alternating proprietorship sales, and, in the nine-month period, the benefit of international distribution fees earned from AB. The increases were partially offset by decreases in CBAs brewpub sales and, in the nine-month period, a decrease in its shipment volumes as a result of previously discussed efforts to reduce inventory levels.
Third quarter gross profit increased by 14%, to $19.4 million, over the third quarter in 2016. Year-to-date gross profit increased by 9%, to $50.4 million, compared to the same period last year, driven by pricing and brand mix, the AB international distribution payment, a one-time contract brewing shortfall fee, and overall improvements in cost of goods sold.
Third quarter gross margin increased by 350 basis points to 34.2% compared to the third quarter of 2016, driven by a 460-basis point expansion in beer gross margin through improved cost of goods sold and healthy pricing, offset by lower pub gross margin.
Year-to-date gross margin increased by 170 basis points to 31.2% compared to the same period in 2016, reflecting favorability in recurring non-operational benefits, including the AB international distribution payment, and one-time contract brewing shortfall fee, partially offset by lower cost absorption and a decrease in pub foot traffic.
SG&A for the third quarter was $16.3 million, a 3% increase over the third quarter of 2016, and $47.4 million year to date, a 2% increase over the same period last year.
The third quarter increase primarily reflects increased in-market promotional costs, as well as costs related to the reorganization of CBAs IT resources, partially offset by a decrease in general and administrative costs.
The increase in year-to-date SG&A expense is primarily due to increases in employee benefit-related costs, professional fees, and the reorganization of CBAs IT resources, partially offset by the timing of creative and media spend.
Diluted net income per share was $0.09 for the third quarter, an increase of $0.06 over the third quarter in 2016. For the year-to-date period, diluted net income per share was $0.09, an increase of $0.11 over the same period last year.
"We feel really good about our third quarter results across a number of dimensions be that in terms of our performance in the context of a fiercely competitive market, our absolute performance relative to last year, and our performance relative to our peers, said Andy Thomas, chief executive officer, CBA. "Kona continues to distinguish itself with bright prospects for the future, our business fundamentals continue to improve, and our relationship with AB is providing ever greater value to our stakeholders.
Updated financial guidance for full-year 2017:
Average price increases of 1% to 2% are unchanged and do not reflect the recurring AB international distribution payments or the one-time contract brewing shortfall fee that will be recognized in the fourth quarter, CBA said.
Depletions are now expected to range between a decrease of 2% and flat compared to last year.
Shipments are now expected to range between a decrease of 4% and a decrease of 2%, primarily reflecting CBAs decision to focus the remainder of the year on maximizing its owned brand portfolio, led by Kona, alongside its existing partner portfolio, including Appalachian Mountain Brewery, Cisco Brewers, and Wynwood Brewing Co., and to not bring on additional partners at this time.
Total gross margin remains in the range of 30.5% to 32.5%, and CBA expects to be at the mid to higher end of the range.
SG&A ranging from $61 million to $63 million, reflecting an increase in marketing spend and SG&A cost optimization. As the company leverages investments made in prior years and seeks to improve efficiencies, it expects to be at the lower end of the range.
CBAs capital expenditure range has been narrowed and is expected to be approximately $18 million to $20 million, reflecting continued work on previously disclosed projects, including the new Kona brewery and the Redhook brewpub in Seattle.
"CBAs third quarter revenue growth, improved cost management, and operational efficiencies have contributed to our solid year-to-date results. Despite adjusting guidance ranges in some areas to reflect the dynamic market in which we operate, we remain confident in delivering EPS performance well ahead of last year, said Joe Vanderstelt, chief financial officer, CBA.
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