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

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CBA is reaffirming full-year operating guidance following strong
acceleration of Kona, combined with continued success driving core
business health

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 10th 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.

 
Craft Brew Alliance, Inc.
Condensed Consolidated Statements of Operations
(Dollars and shares in thousands, except per share amounts)
(Unaudited)
     

Three Months Ended
June 30,

Six Months Ended
June 30,

  2018     2017     2018     2017  
 
Sales $ 65,253 $ 64,204 $ 115,338 $ 110,970
Less excise taxes   3,430     3,654     6,028     6,118  
Net sales 61,823 60,550 109,310 104,852
Cost of sales   39,696     42,221     72,112     73,854  
Gross profit 22,127 18,329 37,198 30,998
As percentage of net sales 35.8 % 30.3 % 34.0 % 29.6 %
Selling, general and administrative expenses   15,857     15,560     30,605     31,029  
Operating income (loss) 6,270 2,769 6,593 (31 )
Interest expense (107 ) (173 ) (241 ) (354 )
Other income, net   21     10     55     13  
Income (loss) before income taxes 6,184 2,606 6,407 (372 )
Income tax provision (benefit)   1,732     882     1,794     (309 )
Net income (loss) $ 4,452   $ 1,724   $ 4,613   $ (63 )
 
Basic and diluted net income (loss) per share: $ 0.23   $ 0.09   $ 0.24   $  
 
Weighted average shares outstanding:
Basic   19,334     19,278     19,322     19,270  
Diluted   19,517     19,389     19,502     19,270  
 
Total shipments (in barrels):
Core Brands 218,700 219,200 379,300 367,400
Contract Brewing   5,900     6,400     12,300     11,000  
Total shipments   224,600     225,600     391,600     378,400  
 
Change in depletions (1)   -2 %   -2 %   -3 %   0 %
 

(1) Change in depletions reflects the period-over-period change in
barrel volume sales of beer by wholesalers to retailers.

 
Craft Brew Alliance, Inc.
Condensed Consolidated Balance Sheets
(In thousands)
(Unaudited)
   
June 30,
  2018   2017
 
Current assets:
Cash, cash equivalents and restricted cash $ 5,778 $ 2,034
Accounts receivable, net 36,999 27,342
Inventory, net 14,522 15,493
Assets held for sale - 23,622
Other current assets   1,874   3,588
Total current assets 59,173 72,079
Property, equipment and leasehold improvements, net 104,982 105,134
Goodwill 12,917 12,917
Intangible, equity method investment and other assets, net   20,469   19,061
Total assets $ 197,541 $ 209,191
 
Current liabilities:
Accounts payable $ 20,042 $ 26,600
Accrued salaries, wages and payroll taxes 4,673 4,918
Refundable deposits 4,282 6,690
Deferred revenue 4,685 2,585
Other accrued expenses 3,163 4,959
Current portion of long-term debt and capital lease obligations   807   1,599
Total current liabilities 37,652 47,351
Long-term debt and capital lease obligations, net of current portion 9,946 21,826
Other long-term liabilities 13,995 19,727
Total common shareholders' equity   135,948   120,287
Total liabilities and common shareholders' equity $ 197,541 $ 209,191
 
Craft Brew Alliance, Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
   

Six Months Ended
June 30,

  2018     2017  
 
Cash Flows from operating activities:
Net income (loss) $ 4,613 $ (63 )
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization 5,387 5,468
(Gain) loss on sale or disposal of Property, equipment and leasehold
improvements
(494 ) 146
Deferred income taxes (629 ) (378 )
Other, including stock-based compensation 875 1,429
Changes in operating assets and liabilities:
Accounts receivable, net (9,215 ) (3,334 )
Inventories (285 ) 3,323
Other current assets 1,761 (1,093 )
Accounts payable and other accrued expenses 7,889 7,299
Accrued salaries, wages and payroll taxes (1,204 ) (49 )
Refundable deposits   (241 )   (397 )
Net cash provided by operating activities 8,457 12,351
Cash Flows from investing activities:
Expenditures for Property, equipment and leasehold improvements (4,284 ) (4,920 )
Proceeds from sale of Property, equipment and leasehold improvements 22,936 91
Restricted cash from sale of Property, equipment and leasehold
improvements
  515     -  
Net cash provided by (used in) investing activities 19,167 (4,829 )
Cash Flows from financing activities:
Principal payments on debt and capital lease obligations (348 ) (261 )
Net repayments under revolving line of credit (22,199 ) (5,756 )
Proceeds from issuances of common stock 206 87
Tax payments related to stock-based awards   (84 )   -  
Net cash used in financing activities   (22,425 )   (5,930 )
Increase in Cash, cash equivalents and restricted cash 5,199 1,592
Cash, cash equivalents and restricted cash, beginning of period   579     442  
Cash, cash equivalents and restricted cash, end of period $ 5,778   $ 2,034  
 

Craft Brew Alliance, Inc.

Select Financial Information on a Trailing Twelve Month Basis

(Dollars in thousands, except per share amounts)
(Unaudited)
       

Twelve Months Ended
June 30,

  2018     2017   Change % Change
 
Net sales $ 211,914 $ 205,859 $ 6,055 2.9 %
 
Gross profit $ 71,458 $ 61,382 $ 10,076 16.4 %
As percentage of net sales 33.7 % 29.8 %

390 bps

 

 
Selling, general and administrative expenses   60,039     59,781     258   0.4 %
Operating income $ 11,419   $ 1,601   $ 9,818   613.2 %
 
Net income $ 14,199   $ 565   $ 13,634   2,413.1 %
 
Income per share:
Basic $ 0.74   $ 0.03   $ 0.71   2,366.7 %
Diluted $ 0.73   $ 0.03   $ 0.70   2,333.3 %
 
Total shipments (in barrels):
Core Brands 742,500 734,900 7,600 1.0 %
Contract Brewing   19,000     23,500     (4,500 ) (19.1 )%
Total shipments   761,500     758,400     3,100   0.4 %
 
Change in depletions (1)   -2 %   -1 %
 
(1) Change in depletions reflects the period-over-period change in
barrel volume sales of beer by wholesalers to retailers.
 

Supplemental Disclosures Regarding
Non-GAAP Financial Information

       
Craft Brew Alliance, Inc.
Reconciliation of Adjusted EBITDA to Net Income (Loss)
(In thousands)
(Unaudited)
 
 

Three Months Ended
June 30,

Six Months Ended
June 30,

  2018   2017   2018     2017  
 
 
Net income (loss) $ 4,452 $ 1,724 $ 4,613 $ (63 )
Interest expense 107 173 241 354
Income tax provision (benefit) 1,732 882 1,794 (309 )
Depreciation expense 2,608 2,508 5,301 5,338
Amortization expense 43 65 86 130
Stock-based compensation 202 197 687 554
(Gain) loss on disposal of assets   22   143   (494 )   146  
Adjusted EBITDA $ 9,166 $ 5,692 $ 12,228   $ 6,150  

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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