Craft Brew Alliance, Inc. (BREW)

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Craft Brew Alliance Inc. (BREW)

Q2 2013 Earnings Conference Call

August 8, 2013; 11:30 a.m. ET

Executives

Terry Michaelson - Chief Executive Officer

Mark Moreland - Chief Financial Officer

Andy Thomas - President of Commercial Operations

Analysts

Vivien Azer - Citi

Tony Brenner - ROTH Capital Partners

Joe Munda - Sidoti & Company

Jim Cull - Lambert Securities

Presentation

Operator

Good day ladies and gentlemen and welcome to the second quarter, 2013, Craft Brew Alliance Inc. earnings conference call. My name is Caroline and I’ll be your operator for today.

At this time all our participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions). As a reminder, the call is being recorded for replay purposes and I would like to turn the call over to Terry Michaelson, CEO of Craft Brew Alliance. Please go ahead.

Terry Michaelson

Thank you and good morning everybody. I’m pleased to present the Craft Brew Alliance investors conference call to discuss the results for the second quarter of 2013.

I will be addressing the general business environment. Mark Moreland, our Chief Financial Officer, will comment on the financial results; and Andy Thomas, our President of Commercial Operations will provide detailed commentary and insight into our portfolio of craft beers. We will then open up the call for questions.

Before we begin, I will ask Mark to read our Safe Harbor statement.

Mark Moreland

Thanks Terry and good morning everybody. As a reminder, this call may contain forward-looking statements. 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 described in any such forward-looking statements.

The risk factors section and our most recent Form 10-K were some of the factors that could cause Craft Brew’s actual results to differ materially from the forward-looking statements made on this call. Craft Brew undertakes no obligation to update publicly any forward-looking statements, except as required by law. Terry.

Terry Michaelson

Thanks Mark. Our strong second quarter performance is a powerful indicator that we have successfully moved beyond our foundational development phase into the strategy growth phase we’ve been communicating.

Our record growth in STRs and strong increase in net sales further underscore that our differentiated national portfolio strategy positions us to meet our 2013 guidance and deliver significant sales and profit growth over the long term.

As we consider the rapid evolution of the craft beer industry and the influx of new regional breweries, we remain confident in our strategy and continue to see strong indicators that it is working for us.

First, we are seeing incredible momentum from our high-growth brands; Kona, Redhook and Omission, which as many of you know received some extra buzz last week following the FDA ruling to standardize gluten-free levels for less than 20 parts per million, a threshold our Omission beers are significantly below.

Second, we are pleased with the continued stabilization of Widmer Brothers as a high-margin craft brand. Third, we are excited about new partnerships that extend our brand reach, and Andy will provide more color on those during his portion of the call. And finally, we are seeing the trend of strong STRs in sales continue into the third quarter.

Before Mark provides specifics on our financial results and Andy shares additional context and key highlights around our individual brands and upcoming initiatives, I want to take a moment to recognize the entire CBA team for our Q2 performance.

As I mentioned on the last earnings call, our confidence in our ability to deliver significant growth in the second quarter was not based on hope. It was grounded in our track record of continued performance improvements, key initiatives we were confident would deliver strong results, and our transition from development into a growth strategy that clearly demonstrates we are well positioned for long-term success.

I appreciate everybody’s continuing support of CBA and being available for this call. I’m now going to hand it over to Mark, who will provide some details on our financial results. Andy will then spend some time-sharing updates from our brand portfolio before we turn it over to Q&A.

Mark Moreland

Thank you Terry. As we discussed on the last call, we feel our second quarter results present a much more accurate picture of the underlying health of the business than the first quarter.

Overall for the quarter we generated total shipment growth of 8.8%, which produced revenue growth of 10.7% and drove a 40 basis point improvement in gross margin rates. EBITDA increased by 37% and EPS doubled to $0.06 per diluted share.

Focusing on our core beer business for the quarter, we saw 12% growth in depletions; driving a strong 13.5% growth in branded beer shipments and a corresponding 80 basis point improvement in gross margin rate.

The difference between our 13% growth and branded shipments and reported 9% total shipment volume reflects the termination of one of our contract brewing relationships in the third quarter of 2012.

Our total company gross margin performance for the quarter was suppressed by the closure and renovation of our Woodinville Brewery pub, which impacted both revenue and expense levels. While we are very pleased with the pub’s new look and feel and we believe the renovation will generate incremental top and bottom line growth. Our pub business posted an overall gross margin rate decline of 400 basis points for the quarter.

Moving to year-to-date results, we have grown depletions by 9%, reflecting the increase in strength of our craft beer portfolio. The financial impact of the strength and our core consumer demand was muted by supply chain adjustments that occurred in the first quarter. These supply chain adjustments impacted our shipment and revenue levels and brewery utilization. As a result, on a year-to-date basis, revenue is up 3.4%, gross margin rate is down 230 basis points, and EPS is a loss of $0.04 per share.

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