Canada, AB: Big Rock Brewery Inc. announces Q2 and H1 2018 results

Big Rock Brewery Inc. on August 2 announced its financial results for the three and six months ended June 30, 2018.

"In the second quarter Big Rock made progress on several fronts to improve our current and future success," said CEO Wayne Arsenault. "Despite growing competition in the craft beer market, we reported a quarterly operating profit of C$473 thousand, compared to C$246 thousand in the prior year quarter, and net income of C$240 thousand compared to $207 thousand in the second quarter of 2017. Improvements in profitability were driven mainly by price increases that were introduced in late 2017 and early 2018, we also benefitted from operating cost efficiencies. In order to improve the production capacity and utilization of our British Columbia brewery, we announced a joint venture arrangement with another independently owned craft brewery in BC on April 19, 2018. Subsequently, on July 23, 2018 we have revised the arrangement into an offer to acquire certain brewing assets and inventory of the other brewery for a gross purchase price of approximately $940 thousand, less amounts owing to Big Rock. The agreement will also give Big Rock exclusive rights to use the seller's trademarks and other intellectual property and provides Big Rock with the right to purchase the intellectual property. We will also enter into contract manufacturing agreements with the seller which, for a fee, permit Big Rock to exclusively manufacture and sell the seller's branded products. This revised arrangement, which is expected to close in August 2018, is anticipated to contribute to the Big Rock's profitability in the second half of 2018."


Financial Highlights

For the quarter ended June 30, 2018, compared to the second quarter of 2017, Big Rock:

• improved its operating profit by C$227 thousand to C$473 thousand from C$246 thousand;
• increased its net income by C$33 thousand to C$240 thousand, from C$207 thousand;
• reported earnings before interest, tax and depreciation ("EBITDA") of C$1,245 thousand compared to C$1,118 thousand;
• reported net revenue of C$13,527 thousand, compared to C$13,496 thousand, on sales volumes of 60,350 hl, compared to 61,703 hl; and
• provided cash from operating activities of C$1,692 thousand, compared to C$633 thousand.

For the six months ended June 30, 2018 compared to the first half of 2017, Big Rock:

• reported operating loss of C$32 thousand compared to an operating loss of C$911 thousand;
• reduced its net loss by C$553 thousand to C$147 thousand, from C$700 thousand;
• EBITDA of 1,512 thousand compared to 705 thousand;
• reported net revenue of C$22,993 thousand, compared to C$23,085 thousand, on sales volumes of 101,494 hl compared to 105,180 hl; and
• provided cash from operating activities of C$479 thousand, compared to cash used in operating activities of C$595 thousand.
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Operating Highlights

Due to the regulatory nature of the beer industry, net revenues are highly sensitive to pricing adjustments, as well as regulatory changes to mark-up rates and excise tax rates. Big Rock's 2017 results were negatively impacted in Alberta by changes to the Alberta government's mark-up structure in late 2016. The mark-up was increased to a flat rate of C$1.25 per litre and a grant program was introduced for Alberta-based breweries, available under the Alberta Small Brewers Development Grant ("ASBD") program. Under this program, an annual sales level of 150,000 hectolitres (hl) in Alberta results in the maximum grant available for Alberta-based producers. Big Rock's annual Alberta sales volumes exceed this threshold, which resulted in higher net costs per hl during 2017. The Corporation took steps to improve the grant rate in 2017, which included optimizing its Alberta sales volumes and profit margins by focusing its sales efforts on higher margin core brands, discontinuing two lower margin products, reducing the number of limited-time offer price discounts, and implementing price increases on value-priced and private label products in Alberta in the fourth quarter of 2017 and first quarter of 2018

In June 2018, an Alberta Trade Review panel ordered that the ASBD grant program be repealed or revised within six months, as it was found to place beer producers from other provinces at a competitive disadvantage in the Alberta market. Big Rock continues to work with the Alberta Government with the objective of drafting policy changes that will effectively stimulate the craft beer industry in the province. The impact of this impending regulatory change cannot currently be estimated, and future policy changes may negatively impact Big Rock's mark-up rate in Alberta in the coming months.

Despite growing competitive pressures, Big Rock's reported results for the quarter and six months ended June 30, 2018 improved over the comparative periods in 2017. The Corporation reported net income of C$240 thousand and a net loss of C$147 thousand for the three and six months ended June 30, 2018 compared to net income of C$207 thousand and a net loss of C$700 thousand for the same periods in 2017. Volumes decreased in the quarter and six months ended June 30, 2018 to 60,350 hl and 101,494 hl, compared to 61,703 hl and 105,180 hl reported in the prior comparative periods, a 2% and 4% decrease, respectively. Despite volume decreases, Big Rock reported net revenue increases of C$5.42 per hl (2.5%) to C$224.14 per hl for the second quarter of 2018 and an increase of C$7.06 per hl (3%) to C$226.55 per hl for the six months ended June 30, 2018. Gross profit margin improved in the second quarter and the six months ended June 30, 2018 to 44% and 43% compared to 43% and 41% reported in the second quarter and six months ended June 30, 2017. These improvements reflect the impact of pricing adjustments that were introduced in Alberta in late 2017 and in other regions during the first quarter of 2018 as well as improved Alberta net mark-up rates on cider and improved operational cost efficiencies.

The Corporation continues to search for initiatives that will improve its asset utilization at its BC and Ontario breweries. In April 2018, Big Rock announced it had entered into a contractual joint venture arrangement with an independent craft brewer (the "Seller"), to operate and manage the Vancouver brewery. However, certain closing conditions of the arrangement could not be satisfied and as a result, Big Rock announced on July 23, 2018 that it had entered into a binding offer to acquire certain brewing assets and inventory of the Seller for a gross purchase price of approximately $940 thousand, less amounts owing to Big Rock. As a condition to closing, the parties will enter into a license agreement which grants Big Rock exclusive rights to use the Seller's trademarks and other intellectual property. This agreement also grants Big Rock a right to purchase the Seller's intellectual property. In addition, the parties will enter into contract manufacturing agreements which, for a fee, permit the Corporation to exclusively manufacture the Seller's branded products in BC and Alberta for subsequent sale in Canada. This revised arrangement, which is expected to close in August 2018, will result in an increase of the Vancouver brewery's production capacity and utilization and is expected to contribute to the Corporation's profitability in the second half of 2018.

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