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Craft Brewers Alliance, Inc. (HOOK)

Q2 2008 Earnings Call

August 19, 2008 11:30 am ET

Executives

David J. Mickelson - President, Co-Chief Executive Officer, Chief Operating Officer

Mark D. Moreland - Chief Accounting Officer

Terry E. Michaelson - Co-Chief Executive Officer

Anne Mueller - Director of SEC Reporting and Investor Relations

Analysts

[John Stabo - Flintridge Capital]

[Chris Reynolds - Newberg & Berman]

[Fred Malloy] - Private Investor

John Kohler - Oppenheimer & Close

[Steve Olson] - Private Investor

[Aram Fudt - Ferdal & Capital]

[Jim Cole - Lambert Securities]

Presentation

Operator

Welcome to the second quarter 2008 Craft Brewers Alliance, Inc. earnings conference call. (Operator Instructions) I would now like to turn the presentation over to your host for today’s call, Dave Mickelson, Co-Chief Executive Officer.

David J. Mickelson

Welcome to the Craft Brewers Alliance question and answer conference call letting us discuss our results for the quarter ended June 30, 2008. Mark Moreland our Chief Financial Officer and I will give a few brief comments and then we’ll open up the call for questions. Mark joined Widmer in the spring and has been working tirelessly in building an effective accounting department to handle the combined new company’s requirements. Terry Michaelson, the Co-Chief Executive Officer of Craft Brewers, is also on the line to help address questions as is Anne Mueller, Director of SEC Reporting and Investor Relations.

Before we begin I’ll ask Mark to read our Safe Harbor statement.

Mark D. Moreland

We’d like to start by reminding everyone that this call may contain forward-looking statements which are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict. Therefore actual results may differ materially from those expressed, implied or forecasted in any such forward-looking statements. Expressions of future goals and similar expressions reflecting something other than historical fact are intended to identify forward-looking statements. For a list of factors that could cause Craft Brewers’ actual results to differ materially from those described in the forward-looking statements, please refer to the Safe Harbor statements in our most recent filings with the SEC. Unless required by law Craft Brewers undertakes no obligation to update publicly any forward-looking statements whether as a result of new information, future events or otherwise.

A copy of Redhook’s most recent filings with the SEC are available in the Investor Relations section of our website located at www.craftbrewers.com. As it relates to today’s discussion please note the numbers we report represent only historical Redhook results unless specifically noted otherwise. While we are very much aware of your interest in the combined company results, we are prevented from disclosing pro forma combined results until later this quarter when we’re able to meet all the requirements of the SEC.

David J. Mickelson

As most of you if not all of you know, we’ve spent a tremendous amount of time and energy devoting ourselves to the closing of the Redhook and Widmer merger that went effective July 1. There has been much transition associated with merging the two companies but the tremendous amount of integration activity intensified over the last six months has really paid many dividends in allowing us to hit the ground running from an operational standpoint. Production, sales and marketing functions are integrated and operating cohesively. The biggest area of transition most recently has been in the new company’s financial and accounting department where we feel we have put together a very strong group of professionals highly dedicated and experienced to lead this functional area successfully. I can let Mark describe this activity in further detail.

As this group consolidates into one location, there are a number of prior Redhook accounting people moving on to the next stage of their professional careers and I personally want to thank them for their help and professionalism in executing the transition. I specifically want to thank Jay Caldwell, the recently departed Chief Financial Officer of Redhook, who cared deeply for his staff and for the success of the transition up to the last day of his employment. I’d also be very remiss if I didn’t personally thank [Paul Shipman] for his 27 years of leadership, motivation and friendship as founder and now-departed Chief Executive Officer of Redhook. While Paul has exited from day-to-day activities as Chairman Emeritus, he remains committed and supportive of the future success of Craft Brewers and is an invaluable resource for our leadership when needed.

The 2008 second quarter was disappointing from an operating perspective because of lower volume than anticipated with both the Redhook and Widmer brands. Also the impact of significantly higher raw material costs, the inflationary impact on many other operating costs, the impact of rising fuel costs on freight, and the ramp up of investment in sales and marketing both on infrastructure and programs on a national basis.

The revenue per barrel in the second quarter increased 3.8% due to pricing increases and a small shift in mix towards more package volume versus draft; however, excluding the effect of contract brewing volume the Redhook declined 4,100 barrels or 7.3%. While the pricing has been increased and we continue to look at each and every market to assess further increases, the impact from price increases in the second quarter was not sufficient to cover the increase in costs, very evident in seeing the decline of gross profit to 7% of net sales compared to 17.2% in last year’s second quarter. While we are forced in the current environment to take pricing increases wherever possible, we appreciate that the impact can result in lower volume and requires careful analysis.

The cost front is very challenging. We’ve experienced significant increases in raw materials in excess of 200% in some areas. We’re not prepared to alter recipes when the result is a lower quality product. We’re reviewing all purchase relationships and processing procedures including alternative vendors and programs however to see if we can be more efficient. For the most part we view these as the hard-to-control costs that are just part of doing business that must be managed as tightly as possible. We continue however to look very closely at all controllable operating expenses and have initiated a tight expense control program to extract savings throughout all functional areas of the company beginning in the third quarter.

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