Deep dive into Craft Brew Alliance Q4 and Full Year 2012 Results: Brand by Brand

kona koko brown ale pic

[Kona Koko Brown Ale via nwbeerguide on Flickr]

(Portland, OR) – Craft Brew Alliance reported Q4 and full-year 2012 results this past week. CBA, the parent company of Widmer Brothers, Kona Brewing and Redhook Brewery just had its fifth anniversary of the original Widmer-Redhook merger and two-year anniversary of the Kona acquisition. With the 2011 ‘national portfolio strategy’ now in full swing, how did the company fare at the end of 2012? And with a new re-branding for Widmer Brothers in 2013, how is this year shaping up? More below…

BACKGROUND CHECK

It has been a while since we did a deep dive into CBA so let’s recap. After acquiring Kona in late 2010, the company created the ‘national portfolio strategy’ toward the beginning of 2011. According to a November 2012 investors presentation, the company is positioning the three (now four with Omission) brands to the following consumer groups:

–          Widmer Brothers: traditional crafts

–          Kona: lighter imports and lighter super premiums

–          Redhook: more “mass” crafts, mainstream and super premiums

–          Omission: across the spectrum and not just gluten-free drinkers

The biggest challenge for CBA is Widmer Brothers Hefe. The top competitors for Hefe are two other wheat beers you may have heard of in Blue Moon Belgian White and Shock Top Belgian White, both of which can outcompete with Hefe on price. And trying to match them on price is exactly the opposite what CBA is trying to do with the Widmer Brothers brand. So while Hefe sales continue to decline, an increase in innovative high-end offerings should at least offset revenue declines. Hefe declines should level out over time and we can expect to see consistent quarterly growth at that point but we don’t know when that will be. Widmer Brothers brand is a tricky one to analyze each quarter.

Kona and Redhook are more straightforward. More marketing power is going behind Redhook, a mature brand, so we should expect to see growth. CBA is adding new markets for Kona, a less mature brand, so we should also expect to see growth.

Omission Beer debuted early last year.

CBA contract brews for BJ’s Brewhouse and Restaurant. CBA had brewed for Goose Island but the two companies agreed to end their contract last fall.

With all of that out of the way, below are some highlights from the earnings report, conference call (in quotes), and a few tidbits on what is in store for 2013.

OVERALL 2012 PERFORMANCE

CEO, Terry Michaelson, noted that CBA was disappointed not to deliver strong bottom line growth for the year, due to increasing investments made on SG&A and margin sides of the business.

Gross margin dipped back below 30% and EPS was down to $0.13 though the underlying trends seem positive. President of Commercial Operations, Andy Thomas, described 2012 as “rocky” but noted that Q4 closed with the “highest STR (sales-to-retailers) growth in company history.” Depletions grew 10% in the quarter.

Shipments totaled 675k barrels across the CBA portfolio with another 50k in contract production. The contract number will obviously be impacted without the Goose production in 2013.

2013 OUTLOOK

For 2013, CBA projections depletions growth of 7-11% with relatively weak shipments against tough Q1 2012 comps.

The company continues to up both SG&A and capital expenditures to historic levels with a projected $11-13 million and $47-49 million respectively, in 2013. SG&A is now nearly double what it was five years ago.

CBA has progressed from the strategic portfolio development phase that kicked off in 2011 to a phase of portfolio growth that now firmly takes hold in 2013. This year will tell us a lot about the company’s future.

WIDMER BROTHERS

Shipments on the year declined 2.5% from 271k barrels (bbls) to 264k, the brand’s third consecutive year of low single-digit decline. On the bright side, Q4 was the biggest quarter for the brand in three years with shipments up mid-single digits. Depletions on the year were down 5%.

50% of double-digit volume declines are concentrated in Hefe draft sales in California. As a result of shift away from draft, bottle/draft skew is closer to 60/40 from 50/50. That, in turn, helped increase revenue-per-barrel increased by 6% overall and increase in both draft and bottles.

CBA just got federal label approval for Hefe 24 oz. cans and is also testing variants for Hefe on draft.

Label approvals we’ve seen for those variants include: Hefe X, Hefe Dark, Smoked Hefe Dark , Lemon Hefeweizen and Hefe 1986. Those are being tested market-by-market. “So maybe a lemon-flavored Hefe, I said maybe, a lemon-flavored Hefe would be appropriate for Southern California. But that doesn’t mean we need to do it in Southern Florida or in Chicago.”

Other highlights:

–          “continued growth of our Rotator IPA Series, up 12+%; revitalization of our seasonals, up 28+%; and continued evolution towards the higher-end offerings, which grew by 12+%, driven by a nearly doubling of the volumes from our Brothers’ reserve line.”

In 2013: This spring will see the “launch of a new year-round offering, Alchemy Ale.” Look for a new packaging design for each seasonal/rotational beer throughout the year.

KONA BREWING

Shipments on the year grew 27% to 220k barrels and STR (depletions) grew 23%. Lifted by expansion into new markets, shipments on the quarter grew 49% to 55,000 bbls, making it the biggest-ever fourth-quarter for the brewery in both volume and growth.

–          “gains in flagship Longboard Lager, up 16+%; growth in variety packs, up 37+%; increases in Aloha Series, up 22%; and the mainland introduction of Big Wave Golden Ale.”

–          “(Big Wave is) Longboard’s #2 by pacing at over 20% of Longboard Lager sales, while showing minimal signs of cannibalization.”

–          “Home market STRs for Kona kept pace with remaining markets, growing 18% in 2012, Kona’s third consecutive year of double-digit home market growth.”

–          “expansion into 5 Midwest states is the most significant expansion of new markets for Kona in 5 years”

In 2013: Kona has since received federal label approval for Nine Stings Honey Ale. No word yet on how this will be packaged.

REDHOOK BREWERY

Shipments on the year grew 6.5% to 191k bbls with Q4 gains with a nearly 13% gain in Q4 shipments, the biggest quarter for the brewery in recent memory. and STR (depletions) grew 23%.

–          “Flagship Long Hammer IPA continued to pour it on, up 17+% for the calendar year, driven by an especially impressive growth of 23+% in SIG track to off-premise channels. Variety packs also grew, both in absolute terms and relative to last year, posting STR gains of 28+% and reaching 11% of total franchise volume.”

–          “despite continued evolution into its crossover craft positioning, net revenue per barrel for Redhook increased a solid 3% versus 2011.”

–          Within the next couple weeks, “Redhook will leverage the greatest national exposure ever in the brand’s history with the launch of Audible Ale, an exciting collaboration with Dan Patrick to bring the crossover craft drinker the most crushable craft beer ever.”

In 2013: The success (or failure) of Redhook Audible Ale may be the biggest thing to watch for CBA. Redhook has received federal label approval for a number of new offerings: Wise Cracker Wit, ESB (Throwback label), Cross Czech Pils, Black Lobstah Lager and Out of Your Gourd Pumpkin Porter.

OMISSION

–          “Despite limited but growing national availability and restricted gluten-free messaging, the combined Omission brand family contributed nearly a full point of growth to CBA in 2012.”

–          “ Just since the national launch in summer, Omission Pale Ale and Omission Lager are already the #2 and #3 gluten-free beer SKUs nationally as reported by SIG.”

In 2013: Omission has received federal label approval for an IPA.

CBA CROSS-BRAND VARIETY PACK

–          “our cross-brand winter variety pack, offering the consumer an opportunity to purchase a mixed pack of 3 great craft seasonals, Kona Pipeline Porter, Redhook Winterhook and Widmer Brothers Brrr, was a resounding success in Q4. Winter variety was greeted with strong success from off-premise retailers and consumers alike and contributed nearly 1 full point of growth for the year in just the 10 weeks that it was available in market.”

–          “when you combine the volume from winter variety pack with the volume from each of our discrete winter seasonals themselves, consumers in 2012 drank in an impressive 45% more CBA winter seasonals than they did in 2011.”

–          CBA will introduce another cross-brand variety pack this summer

REGIONS

–          East was up “for the year to plus 19% versus 2011. The mature West, which still comprises nearly 80% of our business, grew by just over 3%.”

–          Beginning to export now to “U.K., Norway, Sweden, Denmark, Ireland, China, Hong Kong, South Korea and Japan.” The real growth from this program probably won’t come until 3-5 years out.

REORGANIZATION

–          “In January, we announced a major reorganization of our commercial organization, aimed squarely in improving the performance of our core business by improving the effectiveness and efficiency of our resources. Highlighted by the appointment of regional general managers, this new structure will provide greater focus and integration of our local resources, along with greater flexibility to adapt to regional consumer, market and channel SKUs. A new innovation team also created in the reorganization will begin to explore new opportunities for CBA […]”

CAPACITY

CBA added 175,000 barrels of capacity in Portland and can now brew over 1,000,000 barrels between the three primary facilities. “The largest single chunk of (capital expenditures) next year is targeted towards Portsmouth and finishing the build out of that brewery. So as Andy alluded to, we’re seeing very good growth on the East Coast, and we need to make sure our capacity is there to meet that growth.”

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