Craft Brew Alliance Reports Strong First Quarter Results, Led by 10% Shipment Growth for Kona and a 270-Basis Point Expansion in Total Company Gross Margin

Craft Brew Alliance, Inc. ("CBA”) (Nasdaq: BREW), a leading craft brewing company, reported strong financial results for the first quarter ended March 31, 2019, including:

• Total shipments grew 1.5% over the first quarter in 2018, which includes a 10% increase in shipments for Kona and a collective 13% increase in total shipments for newly acquired brands Appalachian Mountain Brewery, Cisco Brewers, and Wynwood Brewing.
• Core beer sales increased more than 3%, driven by increased shipment volume and a 1.6% increase in revenue per barrel over the first quarter last year.
• Total company gross margin expanded 270 basis points to 34.4%, driven by increased shipment volume, pricing, and cost efficiencies. Beer gross margin expanded 250 basis points to 38.0%.
• SG&A was $25.6 million for the first quarter, which reflects our largest-ever national marketing investment to fuel Kona’s growth in 2019, as well as a one-time event that resulted in the accrual of a pre-tax expense of $4.7 million related to the settlement of the Kona class action lawsuit.
• As a result of the unanticipated $4.7 million expense referenced above, EPS was a loss of $0.38 per share on a GAAP basis. Excluding the expense, EPS was a loss of $0.19 per share on a non-GAAP adjusted basis.

With first quarter performance in line with management’s expectations and bolstered by the strong tangible results in April fueled by our largest-ever Kona marketing spend, we are reconfirming a positive outlook for the full year. We are adjusting certain ranges, including SG&A expense and capital expense, to reflect the impact of the $4.7 million settlement expense on our financials and a shift of certain costs related to the new Kona brewery into 2020.

Fueling Kona’s growth with largest-ever national marketing campaign

We launched our largest-ever marketing investment in the first quarter, with the intent to build distribution and awareness of Kona. The $4.6 million investment included a nationwide wholesaler distribution drive ahead of our first-ever national Kona TV campaign, which began airing at the end of the first quarter, on March 21 during the NCAA Basketball tournament and continued into the first two weeks of April.

Our increased spend behind Kona in the first quarter is already driving a positive trend on Kona and overall CBA depletions for the second quarter. Kona’s total depletions grew 16% in April, contributing to an 8% increase in overall CBA depletions for the month compared to the same period last year. As further indication of the campaign, Kona flagship Big Wave Golden Ale depletions grew 37% in April, compared to last year.

Leveraging A-B to drive topline growth, cost savings, and international expansion

In the first quarter we continued to leverage our enhanced commercial and brewing agreements with Anheuser-Busch ("A-B”) and made strong progress in advancing our international cooperation with Anheuser-Busch InBev ("ABI”). As part of our work to unlock Kona’s potential in Brazil, we completed multiple brewing trials as part of our cross-brewing arrangement with Ambev and continued to expand awareness with local marketing and resources deployed in Rio de Janeiro. We are on track to bring local production of Big Wave online in the second quarter and look forward to expanding Kona’s reach in more cities throughout Brazil and leveraging the experience as a model for other key ABI markets.

Improving our core health through operational efficiencies

Our first quarter gross margin expanded 270 basis points to 34.4%, which reflects a 250-basis point improvement in beer gross margin to 38.0% and pub gross margin of 10.9%. Our strong beer gross margin primarily reflects increases in revenue per barrel and shipment volume, as well as ongoing progress in leveraging our evolved brewery footprint to increase operating efficiencies. The brewpub gross margin expansion underscores continued strong results from our two Kona brewpubs, as well as solid performance from our newly acquired Appalachian Mountain Brewery and Wynwood brewpubs and further improvements in operations across our brewpub footprint.

Shaping our tomorrow with the pH Experiment

Building on CBA’s innovative test-and-learn platform and vast trove of recently uncovered consumer insights, we launched the pH Experiment as a new business unit dedicated to creating, incubating, and accelerating growth with new products and experiences that put consumers’ needs first. The pH Experiment will tap into CBA’s resources, distribution capability, and research findings to quickly develop and test new products in market. The first two products are launching in select domestic markets during the second quarter: PRE Aperitivo Spritz and Pacer, a line of low-proof, 50-calorie, zero-sugar seltzers developed based on consumers’ preference for drinks that allow them to moderate their alcohol consumption.

"What makes our first quarter results particularly remarkable is that we continued to improve the underlying fundamentals, as evidenced by robust gross margin expansion and healthy revenue per barrel increases, while also making a major investment in Kona’s future,” said CBA’s Chief Executive Officer Andy Thomas. "On the heels of the marketing investment, Kona’s 16% depletions growth in April emboldens our outlook for Q2 and beyond.”

Select financial results for the first quarter and April 2019

• Total Kona shipments increased by 10% in the first quarter, contributing to a 1.5% increase in total CBA shipments over the first quarter in 2018.
  • Domestic shipment growth of 14% for Kona and 12% for newly acquired brands contributed to a 4.5% increase in domestic CBA owned shipments over the first quarter last year.
• Total Kona depletions increased by 1.4% in the first quarter, while CBA depletions decreased by 4.5%, primarily attributed to Redhook and Widmer Brothers, as well as a timing-related decrease in international depletions.
  • Domestic Kona depletions increased by 5% and 13% for newly acquired brands, while total domestic CBA depletions decreased by 3% compared to the first quarter in 2018.
  • Fueled by our first quarter heavy-up marketing investment, Kona’s growth has continued in April, with depletions up 16%, driving a total CBA depletions increase of 8% over the same month last year.
• Our core beer sales increased 3.1% over the same quarter last year. Total net sales of $47 million, a 1% decrease from the first quarter in 2018, reflect a reduction of $1.8 million in alternating proprietorship fees that we received in 2018 but not in 2019 due to the change in ownership structure of AMB, Cisco and Wynwood.
• Total company gross margin expanded by 270 basis points to 34.4%, compared to 31.7% in the first quarter of 2018, reflecting pricing improvements and a 5% decrease in overall cost of goods sold.
  • Beer gross margin expanded by 250 basis points to 38%, compared to 35.5% in the first quarter of 2018, reflecting pricing increases and shipment growth, as well as ongoing improvements in operating efficiency and sourcing.
  • Brewpub gross margin expanded 490 basis points to 10.9%, reflecting continued strong performance from our Kona pubs in Hawaii and the addition of our newly acquired AMB and Wynwood brewpub operations.
• Selling, general and administrative expense ("SG&A”) increased by $10.8 million to $25.6 million.
  • The increase is primarily due to the planned $4.6 million investment to launch our largest national marketing campaign behind fueling Kona’s growth throughout the spring and summer selling season and the accrual of an unanticipated $4.7 million pre-tax expense related to the class action settlement.
• On a GAAP basis, we recorded a net loss of $7.4 million in the first quarter as a result of the increased SG&A expense.
  • On an adjusted non-GAAP basis and excluding the $4.7 million pre-tax expense related to the one-time event, or $3.6 million after the tax effect of $1.1 million, our first quarter net loss was $3.8 million.
• On a GAAP basis, we recorded a net loss per share of $0.38 in the first quarter as a result of the increased SG&A expense.
  • On an adjusted non-GAAP basis and excluding the $4.7 million pre-tax expense related to the one-time event, our loss per share was $0.19.

"CBA’s strong first quarter results are tangible evidence of both core business health and a clear vision for the future,” said CBA Chief Financial and Strategy Officer Christine Perich. "While we are updating our SG&A to reflect the unanticipated settlement expense, we believe the investments behind Kona and understanding today’s changing consumer landscape will drive meaningful topline growth and remain focused on sustaining CBA’s strong underlying financials.”

Reconfirming and adjusting select financial highlights for 2019:

• Maintaining 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.
• Maintaining average price increases of 1% to 2%, reflecting improved revenue management capabilities.
• Maintaining 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.
• Updating SG&A range to between $75 million and $79 million, primarily reflecting the incremental expense related to the Kona settlement.
• Updating capital expenditures range to between $13 million and $17 million, due to a timing shift of certain expenses related to our new Kona brewery, now set to go online the first quarter of 2020.
• Updating effective tax rate of 25%, reflecting the impact of the Kona class action lawsuit settlement.

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 marketing campaigns, 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

Craft Brew Alliance (CBA) is a leading 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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