Craft Brewers Alliance Reports Third Quarter 2011 Results

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Craft Brewers reports net sales increase of 10 percent for the third quarter of 2011; Significant net income growth of $0.9 million to $1.2 million
Craft Brewers Alliance, Inc. (“CBA”) (Nasdaq: HOOK – News), an independent craft brewing company, reported net sales of $40.5 million and net income of $1.2 million for the third quarter ended September 30, 2011 as compared with net sales of $36.7 million and net income of $376,000 for the same quarter a year ago. We reported $0.07 earnings per share on a fully diluted basis for the third quarter of 2011 as compared with $0.02 per share for the same quarter one year ago.

Significant financial highlights for the quarter ended September 30, 2011 include:

•Net sales increased $3.8 million, or 10 percent, to $40.5 million compared with the third quarter of 2010
•Depletion growth for the third quarter of 2011 was nine percent
•Gross profit percentage increased 790 basis points
•Sales and marketing expense increased $2.3 million versus last year reflecting investments towards critical growth initiatives.
•Capital expenditures were $2.9 million as we continued to make strategic investments in systems and infrastructure
“Our primary focus remains on being true to our customers, by delivering the most diverse portfolio of high quality beers and brands in the industry, that provide unique beer experiences for all occasions,” said Terry Michaelson, CBA’s CEO. “Revenue, depletion and profit growth remain strong and demonstrate the continued success of our strategic marketing and sales initiatives. While we are pleased with the year-to-date growth, we believe there are further underlying strengths in our brands and strategy that have yet to be realized. In this ever-evolving market of craft beers, we have positioned ourselves well to generate ongoing sales and profit growth over the long term.”

Operating Results

Net sales for the third quarter ended September 30, 2011 were $40.5 million, an increase of $3.8 million, or 10 percent, from net sales of $36.7 million for the same quarter in 2010. The increase resulted from a combination of factors, including increased shipments to wholesalers, price increases for our beers sold to wholesalers, a decrease in master distributor fees and an increase in revenues earned from our restaurants and pubs following the merger with Kona Brewing Co., Inc. (“KBC Merger”).

Total shipments for the third quarter ended September 30, 2011 were 181,500 barrels, an increase of 16,100 barrels, or 10 percent, from 165,400 barrels for the same quarter of 2010, primarily reflecting the increase in shipments to wholesalers and growth in our contract brewing business.

Cost of sales as a percentage of net sales improved 790 basis points in the third quarter of 2011, reflecting the elimination of costs related to the Kona Brewing alternating proprietorship, improved quality and capacity utilization and an increased selling price for our beers. These favorable factors were partially offset by increased shipping costs due to higher fuel prices in the third quarter of 2011 as compared with the same quarter a year ago.

Selling, general and administrative (“SG&A”) of $10.5 million for the third quarter ended September 30, 2011 increased $2.8 million, or 37 percent, from $7.7 million for the corresponding quarter a year ago. This increase reflects our investment in critical new selling and marketing initiatives that have led to sales and profit growth. The overall SG&A increase was also driven by costs related to the operations acquired in the KBC Merger. We expect that the rate of increase in SG&A spending for the remainder of the year will not be as significant as that seen during the first three quarters.

“Compared to the third quarter of 2010, this quarter’s results benefited from improved quality and efficiency, the ongoing trend of increased volumes and the favorable impact of amending our distribution agreement, in spite of higher transportation costs,” said Mark Moreland, CBA’s CFO. “Based on the positive brand health and profitability impacts we’ve seen from our sales and marketing investments, we expect to continue to invest in sales and marketing initiatives at per barrel rates similar to those in 2011.”

Cash Flow and Liquidity

Cash provided by operating activities decreased $3.8 million to $5.0 million for the nine-month period ended September 30, 2011 compared with $8.8 million for the same period in 2010 primarily caused by a one-time working capital fluctuation related to our sale of our investment in Fulton Street Brewery in May 2011. Capital expenditures for the nine-month periods ended September 30, 2011 and 2010 were $6.6 million and $1.6 million, respectively. The capital expenditures for 2011 include projects designed to enhance and target the core brand offerings and package variety produced in our breweries, and improve our quality assurance and information technology systems, including continuing investments towards a company-wide demand planning and order management system. For the full year 2011, we anticipate capital expenditures of approximately $8.0 million to $8.5 million for these projects.

Financial Outlook

We remain confident that our targeted investments into our brands, marketing and sales resources, in conjunction with our innovative, high-quality craft brewing capabilities, will support continued volume and revenue growth while generating improved bottom line results.

We project the following results for the full year 2011:

•Depletion growth of 5.5% to 6.0%. We expect some moderation in depletion growth in the fourth quarter as a result of pricing actions in key markets.
•Sales growth in the range of 11% to 12%.
•Gross margin rate ranging from 30% to 31%.
•SG&A of $39 to $40 million as a result of our concerted sales and marketing investment initiatives.
•Earnings per share ranging from $0.49 to $0.51, which includes the $0.34 earnings per share from our gain on sale of Fulton Street Brewery, LLC.
•Capital expenditures of approximately $8.0 to $8.5 million reflective of investments in capacity, efficiency, quality and cooperage projects to support 2012 growth.
Our initial views of 2012 financial performance reflect the following:

•Depletion growth in the high single digit percentage to low double digit range reflecting both continued strength of our brands and continued growth of the craft category.
•Sales growth of approximately 10% to 12%.
•Gross margin rate approximately 100 basis points lower than 2011, reflecting pressure from grain prices and assuming fuel prices remain relatively consistent with recent levels.
•SG&A ranging from $42 to $44 million, reflecting continued investment into sales and marketing initiatives.
•Earnings per share in the range of $0.20 to $0.25.
•Capital expenditures of approximately $8.5 to $9.5 million, continuing our investments in capacity and efficiency, and quality initiatives.
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 the level or effect of increased SG&A expense, the amount of capital spending and the benefits or improvements to be realized from those capital projects, and the increase in sales revenues resulting from reduced distribution fees payable to A-B, 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, 2010. Copies of these documents may be found on the Company’s website,, or obtained by contacting the Company or the SEC.

About Craft Brewers Alliance

CBA is an independent, publicly traded craft brewing company that was formed with the merger of leading Pacific Northwest craft brewers – Widmer Brothers Brewing and Redhook Ale Brewery – in 2008. With an eye toward preserving one-of-a-kind beers and brands by giving them an opportunity to shine and grow, CBA was joined by Kona Brewing Company in 2010. When Kurt & Rob Widmer founded Widmer Brothers Brewing in 1984, they didn’t confine their brewing exploration to strict style guidelines. To this day, Widmer Brothers continues to create craft beers with a unique and unconventional twist on traditional styles that are award winning and please a wide range of craft beer lovers. Redhook began in a Seattle transmission shop in 1981, and those colorful roots are reflected in the brand’s personality to this day. The eminently drinkable beers consistently win awards and please crowds across the United States. Kona Brewing was founded in 1994 by the father and son team of Cameron Healy and Spoon Khalsa, who dreamed of crafting fresh, local island brews with spirit, passion and quality. As the largest craft brewery in Hawaii, Kona personifies the laid-back, passionate lifestyle and environmental respect of the Hawaiian people and culture.