Canada: Brick Brewing reports strong annual increases in beer volumes and revenues

Ontario's largest Canadian-owned and Canadian-based publicly held brewery, released its financial results for the fourth quarter and year ended January 31, 2007, Canadian News Wire reported April 24.

"Our primary goal in fiscal 2007 was to position Brick for long-term profitability," said Jim Brickman, Executive Chairman and Founder. "To accomplish this objective, we defended our market share in the value beer segment, improved operational efficiencies and moved toward consolidating operations in Kitchener and Formosa. In an important transitional year, we made excellent progress toward those goals."

Doug Berchtold, President and CEO added: "As a result of our strategic initiatives, Brick is now better positioned to maximize future earnings by capitalizing on additional opportunities to gain market share with an efficient manufacturing and delivery operation. With our Laker brand, we have a major position in the value beer segment. This business is complemented by our refocused niche premium brand portfolio and by our plans to grow our businesses both as a sales agent and as a co-packer.

In fiscal 2007, Brick relocated substantially all beer packaging to Kitchener, seeking to reduce annual variable manufacturing costs and duplicate overhead costs. Daily output from one shift at the Kitchener facility reached levels 20% greater than one-shift production from the Formosa facility by year end - an important productivity benchmark for the Company. "As necessary as initiatives like relocating all beer packaging have been for long-term success, they resulted in disappointing fiscal 2007 financial results, particularly in the second half of the year," added Mr. Berchtold.

Fourth Quarter Financial Highlights

During the fourth quarter ended January 31, 2007, net revenues rose 19% to $7.5 million compared to $6.4 million in the same period last year and beer volumes increased by 5% over the same period last year. The reason the volume growth rate was 5% while net revenues increased by 19%, was primarily due to a successful price promotion for the Red Cap brand in the fourth quarter of fiscal 2006 that was not executed in the fourth quarter this year.

In the fourth quarter, when beer consumption is seasonally lower due to colder weather, EBITDA(*) registered a loss of $557 thousand, compared to a loss of $152 thousand in the fourth quarter of fiscal 2006. There was a $1.0 million net earnings loss compared with $1.7 million in net earnings for the same period last year, due to certain fourth quarter events, which follow:

- Future income tax recovery was $263 thousand in the quarter compared to a one-time $2.1 million recovery in the same quarter last year;

- Brick invested in additional customer service and delivery capabilities to deliver products directly to LCBO stores late in the fourth quarter. Due to this management-initiated commitment, Brick anticipates better availability of product and improved customer service in this important retail channel;

- The company continued to incur various transitional costs pertaining to the completion of the transfer of production to the new Kitchener packaging facility. As a result of a management philosophy focused on a careful start-up with an emphasis on continuity of supply, additional duplicate overheads of approximately $486 thousand were incurred in the quarter. By mid February, Kitchener was producing substantially all packaged product;

- Selling and marketing activities increased by $444 thousand as a result of additional advertising support for the Laker brands.

Annual Financial Highlights

Net revenue for the year grew by 16.5% to $34.8 million from $29.9 million. Gross margin was $10.5 million, same as in fiscal 2006. However, gross margin as a percentage of net revenue decreased by 5.5%. For the year ended January 31, 2007, net earnings were $0.1 million compared to $4.8 million for the previous year due to, among other things, the various increased expenditures and an income tax recovery in fiscal 2006. Earnings per share were $0.01 compared with $0.24 in the same period last year.

EBITDA in fiscal 2007 declined by 36%, primarily reflecting a marketing-driven $1.4 million increase in sales, general and administration (SG&A) expenses. These costs included increased advertising spending and one-time launch expenditures to market the new J.R. Brickman Founder's Series premium brands. As a percentage of sales, SG&A was at 22.6 per cent versus 21.7 per cent last year.

In the year ended January 31, 2007, the Company's overall beer volumes increased by 18% over the previous year, with mainstream and licensed brands rising by 22%, due largely to continued growth of the PC brands. Cost of goods sold were $24.5 million for the year ended, up from $19.4 million last year. Reflecting the Company's restructuring initiatives, the per unit cost of producing and distributing beer increased by 9%, or $1.9 million in the aggregate, in fiscal 2007 compared to the previous year.

Other fiscal 2007 highlights included:

- Launching the J.R. Brickman Founder's Series premium brands. Brick is seeking to substantially increase the size of its premium brand portfolio over the next three years, while exploring various options to represent selected complementary imported brands;

- Receiving permits to distribute beer in Quebec and distribute directly to retailers, avoiding reliance on a third-party distributor. This transition provides the Company with improved distribution capabilities for its own and partner brands in Quebec, while providing increased sales and improved customer service benefits;

- Achieving an 18% growth in the Laker brand volumes, including strong growth in canned beer sales. Cans currently account for approximately 17% of Laker volumes in the year compared to 6% a year ago. The Company launched a variety of Laker can formats as it continues to compete in this underdeveloped and growing value priced sub-category.

Ironically, due to Brick's success in growing its business, the Company will no longer benefit from the Ontario small brewer tax reduction in fiscal 2008, which reduced the Company's provincial beer taxes payable by $2.6 million in fiscal 2007. Brick will now be taxed at the same provincial tax rates as much larger competitors. "Looking ahead, we anticipate slowing growth in net revenues in fiscal 2008 as the Ontario value beer category begins to mature," added Mr. Berchtold.

"We however remain optimistic that we can modestly grow our market share within the category," he added. "With much of our restructuring costs behind us, our manufacturing process is expected to become more cost-efficient as we have succeeded in eliminating a substantial portion of our multi-plant and structural cost disadvantages. These improvements will eventually help us to achieve our goal of reducing our per unit manufacturing costs. With the critical mass of a midsize brewer established, we will seek to move forward incrementally with additional beer and co-pack volume continuously expanding from this solid base."

Industry consolidation has also provided Brick with an unexpected but exciting marketing opportunity. The sale of Lakeport to Belgian-owned Labatt, announced in February and completed in late March, means that Brick is now Ontario's largest Canadian-owned and Canadian-based publicly held brewery. "We are capitalizing on our independent status by aggressively positioning our Laker brand as the sole remaining Canadian-owned BUCK A BEER in the Ontario market, beer made with Formosa spring water," Berchtold said. "We know our dedication to preserving both the value and the craft-brewed segments resonates with consumers and believe that increased awareness of this unique positioning affords significant market share upside for our brands."

About Brick Brewing

Brick Brewing Co. Limited is Ontario's largest Canadian-owned and Canadian-based publicly held brewery. The Company is a regional brewer of award winning premium quality beers and is also a leading player in the fast-growing value beer segment. The Company, founded by Jim Brickman in 1984, was the first craft brewery to start up in Ontario, and is credited with pioneering the present day craft brewing renaissance in Canada. Brick has complemented its J. R. Brickman Founder's Series and Waterloo Dark premium craft beers with other popular brands such as Laker, Red Cap and Formosa Springs Draft. Brick trades on the TSX under the symbol BRB.

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