Craft Brew Alliance Reports 7% Depletions Growth for Kona and Continued Robust Gross Margin Expansion in Second Quarter 2018

Craft Brew Alliance, Inc. ("CBA”) (Nasdaq: BREW), a leading craft brewing company, today announced financial results for the second quarter and year to date ended June 30, 2018. Our second quarter results include accelerated growth for Kona Brewing Co., as well as a 2% increase in overall net sales and a robust 550-basis-point expansion in gross margin over the second quarter last year. These results were supported by sustained strong operational performance in the quarter, reflecting ongoing excellence in brewery operations, disciplined cost management, and healthy revenue per barrel increases, all of which came together to deliver record quarterly net income and earnings per share.

As a result of our solid year-to-date performance and continued confidence in delivering against our 2018 operating plan, we are reaffirming guidance for the full year and expect to tighten ranges in the coming quarter.

Accelerating Kona’s Growth

Kona’s growth accelerated in the second quarter, with total depletions up 7% over the second quarter in 2017. Kona’s momentum was again fueled by flagship Big Wave Golden Ale, which grew 22% in the second quarter, and supported by Kona’s new 99-calorie Kanaha Blonde Ale that launched nationally this year to address increasing consumer demand for lower-calorie craft beers. Kona’s growth in the U.S. continued to outperform the craft segment, underscored by strong on-premise performance led by Big Wave, which increased on-premise sales by 35% over the second quarter of 2017. Kona also continued to gain traction in key markets as a result of ongoing investments to support growth leading into the peak summer selling season.

Building on our AB Partnership

We continued to unlock value through our successful partnership with Anheuser-Busch ("AB”) in the second quarter, with a strong focus on leveraging the enhanced commercial and contract brewing agreements to support topline growth and core business health. As part of our extended commercial agreements, CBA’s brands continued to be included in key wholesaler incentive programs and planning calendars. We expanded on our brewing agreement, increasing brewing volumes in AB’s Fort Collins, Colorado brewery, while also initiating brewing of select AB craft beers in our Portland brewery as part of a cross-brewing arrangement with AB launched earlier this year in our Portsmouth brewery. We also made progress in developing a deliberate international growth strategy for CBA, exploring opportunities to increase focus and resources in key markets; we anticipate sharing evolved plans in the coming months.

Expanding Our Gross Margin

As compared to the second quarter in 2017, we expanded our beer gross margin by 640 basis points to 39.4%, driven by increased operating efficiencies, healthy pricing, and continued strong cost management. Total CBA gross profit improved by 21%, reflecting gross margin expansion of 550 basis points to 35.8% compared to the second quarter last year. These results underscore the achievements we’ve made in reshaping our portfolio mix, evolving our brewing footprint, stabilizing our supply chain, and driving efficiencies throughout the business.

Exploring Topline Growth Opportunities

As a result of our success in reshaping CBA’s brand portfolio and strengthening our core financial health, we are poised to increase our focus on topline expansion. In addition to continuing work to realize the full benefits of our existing partnerships and their increasing role within the Kona Plus strategy, we began actively exploring opportunities to invest in our future topline across three broad areas: Firstly, we started testing heavy-up spending programs for Kona and other CBA brands in select markets. Secondly, our newly created Innovation Team launched one of its first test-and-learn initiatives, a consumer focus group experiment called pH that will help identify evolving consumer taste preferences. Thirdly, as part of ongoing work to increase our understanding of today’s changing social lubricant landscape, we initiated two complementary research projects with the Yale School of Management’s Center for Consumer Insights and Prophet, a global growth consultancy. Each of these efforts will contribute to our plans for 2019 and beyond, and we will continue to share updates on our progress in the coming quarters.

Second quarter and year-to-date 2018 financial highlights:

• Total CBA net sales increased by 2% to $61.8 million over the second quarter in 2017, led by shipment growth for Kona and increases in average unit pricing. Total CBA net sales year-to-date increased 4% to $109.3 million, compared to the same period in 2017. Increases in net sales for both periods were partially offset by declines in brewpub sales.
• CBA’s total depletions decreased by 2% in the second quarter, improving the year-to-date trend to a decrease of 3% over the same period last year.
  • Depletions for portfolio cornerstone Kona grew 7% over the second quarter of 2017, which positively impacted Kona year-to-date depletion trend to an increase of 5% over the same period in 2017.
• Total shipments decreased slightly, by 0.4%, in the second quarter and increased by 3.5% year-to-date.
  • Our slight second quarter shipment decrease primarily reflects declines in Redhook and Widmer Brothers, partially offset by growth in domestic and international shipments for Kona and Omission.
  • For the quarter and year-to-date, we also successfully maintained optimum wholesaler inventory levels, building on the strong supply chain stability achievements made over the past year.
• Second quarter gross profit increased by 21% to $22.1 million, and year-to-date gross profit increased by 20% to $37.2 million, over the comparable periods a year ago.
  • Beer gross margin expanded by 640 basis points to 39.4% in the second quarter, primarily reflecting increases in average unit pricing and cost savings related to our optimized brewery footprint, partially offset by increases in freight and logistics costs. Beer gross margin year-to-date expanded by 500 basis points to 37.7%.
  • Overall gross margin increased by 550 basis points to 35.8% in the second quarter and by 440 basis points to 34% year-to-date, which reflects decreases in brewpub gross profit for the quarter and year-to-date. Brewpub gross margins were pressured by increased net costs associated with the new brewpub in Seattle, partially offset by increased sales at both of our pubs in Hawaii.
• Selling, general and administrative expense ("SG&A”) for the second quarter was $15.9 million, a 1.9% increase over the second quarter of 2017, primarily due to increased creative and media spend. Year-to-date SG&A was $30.6 million, a 1.4% decrease from the comparable period in 2017, which reflects a $0.5 million gain in the first quarter of 2018 related to the sale of brewing and bottling equipment from our former Woodinville, WA facility, partially offset by increases in creative and media.
• Diluted earnings per share was $0.23 for the second quarter, an increase of $0.14 over second quarter earnings per share of $0.09 in 2017. Year-to-date diluted earnings per share was $0.24, a $0.24 increase compared to a diluted net loss per share of $0.00 in the same six-month period in 2017. Our earnings per share for the quarter and year to date reflects an effective tax rate of 28%.

"It’s fitting that as CBA marks its 10^th anniversary this summer, we also just delivered the best quarterly performance in our company’s history across all key dimensions,” said Andy Thomas, chief executive officer, CBA. "As we look to continue navigating the fast-changing social lubricant landscape, we are emboldened by our team’s track record of tangible strategic and operational results and bullish on a future rooted in our Kona Plus strategy and guided by our learnings.”

Anticipated financial highlights for 2018:

We are maintaining CBA’s operating guidance for the full year 2018 and updating our effective tax rate guidance as follows:

• Total CBA depletion change ranging between a decline of 2% and an increase of 3%.
• Shipments ranging between a decrease of 2% and increase of 3%, which reflects ongoing progress to align our supply chain.
• Average price increases of 1% to 3%, reflecting improvements in revenue management and lower federal excise taxes.
• Total gross margin rate of 32.0% to 35.0%, reflecting increases in net revenue per barrel, continued improvements in brewery operations, lower fixed overhead, and ongoing efforts to stabilize pub operations.
• SG&A expense ranging from $59 million to $61 million, as we continue to reinvest cost savings into our brands and expand our consumer and trade marketing programming.
• Capital expenditures of approximately $16 million to $19 million, which reflects continued work on the new Kona brewery and the addition of a new canning line in our Portland brewery.
• Effective tax rate of 28%, an increase of 100 basis points over the previously communicated tax rate guidance.

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, shipments and sales growth, price increases, and gross margin rate improvement, the level and effect of SG&A expense and business development, anticipated capital spending, our 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 could 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, 2017. 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

Craft Brew Alliance (CBA) is an idependent 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, 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 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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