Craft Brew Alliance Announces 2018 Results with Record Beer Performance Led by 11% Depletion Growth for Kona in Q4

Craft Brew Alliance, Inc. ("CBA”) (Nasdaq: BREW), a leading craft brewing company, reported strong financial results for the fourth quarter and year ended December 31, 2018. We continued to accelerate Kona’s momentum in 2018, which grew depletions by 11% in the fourth quarter to drive an 8% increase – representing approximately 30,000 incremental barrels – in full-year depletions. We also delivered our highest-ever total company gross margin, which expanded 160 basis points to 33.1%, and beer gross margin, which reached a record high of 36.8% for the year. These achievements reflect our continued improvements in brewery performance and footprint optimization, as well as strong pricing discipline, which drove another record with our highest company beer revenue per barrel.

2018 results were in line with tightened guidance, including shipment volumes, gross margin, and SG&A expense. Capital expenditures were below our guidance range due to a shift in costs related to construction of the new Kona brewery to 2019.

In 2019, we will look to increase topline growth, continuing to accelerate Kona’s momentum and unlock the full potential of our newly acquired brands, while building on our strong foundation. We will also leverage CBA’s new pH Experiment business unit to anticipate market trends and quickly bring innovative new products to market, as announced March 5, 2019.

Accelerating Kona’s Growth by 11% in Q4

As one of the largest craft beer brands in the U.S. and a leading American craft beer export, Kona continued to accelerate in 2018, delivering 11% depletions growth in the fourth quarter that drove an 8% increase for the full year. Kona’s 2018 volume growth alone is more than the total volume of 80% of today’s U.S. craft brewers, and combined with 2016 and 2017 growth, the brand has added over 125,000 incremental barrels in the last three years alone. Kona’s increasing popularity as a global lifestyle brand is led by its award-winning flagship, Big Wave Golden Ale, which posted a 30% increase in fourth quarter depletions, driving a 26% increase in depletions for the full year. Kona also expanded its national portfolio of island-inspired craft beers during the year with the launch of Kanaha Blonde Ale, a refreshing 99-calorie ale that was the seventh largest new craft brand as measured by Nielsen.

Leveraging A-B Partnership to Drive Distribution, Cost Savings and Kona’s Global Expansion

We continued to drive value through our enhanced agreements with Anheuser-Busch ("A-B”) in 2018. As part of our brewing agreement, through which we leverage A-B’s Fort Collins, Colorado brewery to brew up to 300,000 barrels a year at a savings of $10 per barrel, we came closer to fully unlocking the estimated $3 million in annual cost savings in 2018. Additionally, we expanded on our contract brewing arrangement, producing Goose Island and Virtue Cider in our Portsmouth and Portland breweries. As part of our enhanced commercial agreement, Kona was included in key wholesaler incentive programs and planning calendars. In 2019, we will look to build on this success and increase participation with additional wholesalers throughout the U.S. Through our international agreement, we expanded on a successful test pilot with Kona in Brazil, launching a significant commercial investment and cross-brewing arrangement to support Kona’s growth in the world’s third largest beer market.

Achieving Record Financial and Operational Results

2018 was a record year for CBA both financially and operationally, with beer revenue, total company gross margin, and beer gross margins each reaching historic levels. Through strong revenue and cost management, we delivered a 2.6% increase in total revenue per barrel, which led to a 5.6% improvement in beer gross profit and record full-year beer gross margin of 36.8%. Our strong 150-basis point expansion in beer gross margin drove a 160-basis point increase in total company gross margin, which reached an all-time high of 33.1% for the year. These achievements, which reflect our progress in driving cost reductions, improving supply chain execution, and stabilizing our inventory levels, are even more impressive when compared to 2017. As a reminder, our 2017 financial results included $4.4 million in Pabst brewing shortfall and contract termination fees, which benefitted various sections of our income statement.

Building our Portfolio for Tomorrow

2018 was another transformational year for CBA, where we expanded our brand family, our footprint, and our understanding of the changing consumer landscape. On October 10, 2018, we announced the acquisition of our three partner brands, Appalachian Mountain Brewery, Cisco Brewers, and Wynwood Brewing Co., fundamentally reshaping our Kona Plus portfolio and adding new home markets and innovation breweries to our footprint.

We also initiated two complementary research projects with the Yale Center for Consumer Insights and global consultancy Prophet to broaden our view of the consumer market. Additionally, we launched our own test-and-learn beverage initiative called the pH Experiment. Earlier this week, we cemented our commitment to being at the forefront of anticipating and meeting consumer needs with the launch of the pH Experiment as a separate growth unit. Collectively, these efforts and changes make us stronger, nimbler, and better equipped to capitalize on potential growth opportunities.

"2018 was a banner year for CBA across many dimensions,” said Andy Thomas, CEO of CBA. "Strategically, we accelerated Kona’s growth and continued our portfolio transformation by taking the next step and acquiring our craft partners. Operationally, we delivered record financial performance, despite absorbing partner acquisition costs and lapping $4.4 million in 2017 Pabst contract brewing fees. We are now in our strongest position ever to explore new frontiers of growth.”

Select results for the full year 2018:

• As planned, our 2018 shipments and depletions trends continued to converge throughout the year, and total shipments were in line with updated guidance, reflecting continued progress in harmonizing our supply chain and supporting optimum wholesaler inventory levels.
  • Kona shipments increased by 7.5% for the full year, and depletions grew by 8%.
  • Total shipments were relatively flat, and depletions decreased by 2%, compared to 2017.
• Beer net sales were $182.2 million, a 1.3% increase over 2017, primarily due to pricing.
  • Total net sales were $206.2 million, a 1% decrease from last year, which primarily represents $3.4 million in contract brewing shortfall fees received from Pabst in 2017 that did not recur in 2018. Our total net sales decrease also reflects lower 2018 pub sales, mainly attributable to the absence of our Woodinville pub, which closed at the end of 2017 as part of our brewery footprint optimization.
• Beer gross margin expanded by 150 basis points to a record 36.8%, from 35.3% in 2017.
  • Total company gross margin expanded 160 basis points to 33.1%, compared to 31.5% in 2017, which was in line with tightened guidance.
  • Our pub gross margin decreased 100 basis points to 5.7%, primarily reflecting the gross profit impact of the closure of our Woodinville brewpub at the end of 2017 as noted above.
• Selling, general and administrative expense ("SG&A”) increased by $2.1 million to $62.6 million, or 30.3% of net sales, in line with updated guidance. The increase reflects additional investments to expand consumer and trade marketing programming and drive topline growth, as well as professional fees related to the partner acquisitions and consumer research initiatives.
• EPS was $0.21, compared to $0.49 last year, primarily reflecting the effect of federal tax legislation on 2017 results.
  • Due to the change in federal tax law, we adjusted our deferred tax liabilities in 2017, resulting in a favorable non-cash income tax adjustment of $6.9 million, or $0.35 per share.
  • As a result, CBA’s adjusted EPS for 2017 was $0.14.
• Capital expenditures were approximately $12.8 million, compared to $18.3 million in 2017. The decrease from planned expenditures was due to a shift in timing of certain progress payments related to construction of the new Kona brewery that will now be paid in 2019.

Select results for the fourth quarter 2018:

• Kona depletions increased by 11% in the fourth quarter, and total CBA depletions decreased 1% from the same period a year ago.
• Kona shipments increased by 8% in the fourth quarter, and total CBA shipments decreased 1% compared to the same period last year.
• Beer net sales were $38.2 million, a decrease of $1.2 million from beer net sales in the fourth quarter of 2017, primarily due to the $1.7 million Pabst contract brewing shortfall fee received in the fourth quarter of 2017 that did not recur in the fourth quarter of 2018.
  • Total company net sales were approximately $44.0 million, a 4% decrease compared to the fourth quarter in 2017.
• Beer gross margin for the fourth quarter was 36.7%, a 90-basis point decline from 37.6% beer gross margin in the fourth quarter of 2017. Our fourth quarter 2017 beer gross margin included a 260-basis point benefit related to the Pabst contract brewing shortfall fees.
  • Total company gross margin increased by 40 basis points to 32.8% over the fourth quarter last year.
• SG&A increased by $2.1 million to $15.3 million, or 34.7% of net sales. The fourth quarter increase reflects investments behind our brands, as well as a $1.0 million credit for Pabst termination fees received in the fourth quarter of 2017 that did not recur in the fourth quarter of 2018.
• We reported a loss per share for the quarter of ($0.03), compared to $0.40 earnings per share in the fourth quarter of 2017, reflecting the impact of federal tax legislation in 2017.
  • Due to the change in federal tax law, we adjusted our deferred tax liabilities in the fourth quarter of 2017, resulting in a favorable non-cash income tax adjustment of $6.9 million, or $0.35 per share.
  • As a result, CBA’s adjusted EPS for the fourth quarter of 2017 was $0.05.

Anticipated financial highlights for 2019:

• Depletions and shipments each ranging between an increase of 5% to an increase of 8%, reflecting a significant increase in commercial investments and insights from our consumer research.
• Average price increases of 1% to 2%, reflecting improved revenue management capabilities.
• Gross margin rate of 34.5% to 36.5%, reflecting increases in net revenue per barrel, continued improvements in brewery operations, lower fixed overhead, and ongoing efforts to stabilize our pub operations.
• SG&A ranging from $70 million to $74 million, primarily reflecting reinvestment of cost savings into our sales and marketing infrastructure, as well as expanded consumer and trade programming.
• Capital expenditures of approximately $15 million to $19 million, including expenses related our new Kona brewery going online in 2019.
• Effective tax rate of 27%.

Forward-Looking Statements

Statements made in this press release that state the Company’s or management’s intentions, hopes, beliefs, expectations or predictions of the future, including depletions and shipments, price increases, and gross margin rate improvement, the level and effect of SG&A expense and business development, anticipated capital spending, effective tax rate, and the benefits or improvements to be realized from strategic initiatives and capital projects, are forward-looking statements. It is important to note that the Company’s actual results may differ materially from those projected in such forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained from time to time in the Company’s SEC filings, including, but not limited to, the Company’s report on Form 10-K for the year ended December 31, 2018. Copies of these documents may be found on the Company’s website, www.craftbrew.com, or obtained by contacting the Company or the SEC.

About Craft Brew Alliance

CBA is an independent craft brewing company that brews, brands, and brings to market world-class American craft beers.

Our distinctive portfolio combines the power of Kona Brewing Company, a dynamic, fast-growing national craft beer brand, with strong regional breweries and innovative lifestyle brands Appalachian Mountain Brewery, Cisco Brewers, Omission Brewing Co., Redhook Brewery, Square Mile Cider Co., Widmer Brothers Brewing, and Wynwood Brewing Co. CBA nurtures the growth and development of its brands in today’s increasingly competitive beer market through our state-of-the-art brewing and distribution capability, integrated sales and marketing infrastructure, and strong focus on partnerships, local community and sustainability.

Formed in 2008, CBA is headquartered in Portland, Oregon and operates breweries and brewpubs across the U.S. CBA beers are available in all 50 U.S. states and 30 different countries around the world. For more information about CBA and our brands, please visit www.craftbrew.com.

CBA has presented Adjusted Earnings before Interest, Taxes, Depreciation and Amortization ("Adjusted EBITDA”) in these tables to provide investors with additional information to evaluate our operating performance on an ongoing basis using criteria that are used by management. We define Adjusted EBITDA as net income (loss) before interest, income taxes, depreciation and amortization, stock-based compensation and other non-cash charges, including loss on impairment of assets and net gain or loss on disposal of property, equipment and leasehold improvements. We use Adjusted EBITDA, among other measures, to evaluate operating performance, to plan and forecast future periods’ operating performance, and as an incentive compensation target for certain management personnel.

As Adjusted EBITDA is not a measure of operating performance or liquidity calculated in accordance with generally accepted accounting principles in the United States of America ("GAAP”), this measure should not be considered in isolation of, or as a substitute for, net income (loss) as an indicator of operating performance, or net cash provided by (used in) operating activities as an indicator of liquidity. The use of Adjusted EBITDA instead of net income (loss) has limitations as an analytical tool, including the inability to determine profitability; the exclusion of interest expense and associated cash requirements, given the level of our indebtedness; and the exclusion of depreciation and amortization which represent significant and unavoidable operating costs, given the capital expenditures needed to maintain our operations. We compensate for these limitations by relying on GAAP results. Our computation of Adjusted EBITDA may differ from similarly titled measures used by other companies. As Adjusted EBITDA excludes certain financial information compared with net income (loss) and net cash provided by (used in) operating activities, the most directly comparable GAAP financial measures, users of this financial information should consider the types of events and transactions which are excluded. The table above shows a reconciliation of Adjusted EBITDA to net income (loss).

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