Q3 2019 Earnings Call
Ladies and gentlemen, today's conference is scheduled to begin shortly please continue to standby. Thank you for your patience.
To ask a question. During this session you want me to press Star one on your telephone. Please be advised that today's conference is being recorded if you acquire any further assistance. Please press star Zero I would now like to hand, the conference your speaker today, Andy Thomas CEO . Please go ahead Sir.
Thank you, Joe well and good morning, everyone.
It's my pleasure to present, the craft reliance Investor conference call to discuss our results for the third quarter 2019.
This morning, I'm joined on this call by three other members of the CB a leadership team our CFO Christine pairing our CMO can quinsey in our COO Scott men.
Before we begin Alaskan Smith, our corporate controller to read our Safe Harbor statements. Thank you Andy as a reminder, this call may contain forward looking statements forward looking statements are not guarantees of future performance and are subject to risks uncertainties and assumptions that are difficult to predict therefore actual results may.
Serially from those described in any such forward looking statements the risk factor section in our most recent 10-K list.
Some of the factors that could cause craft brewers actual results to differ materially from the forward looking statements made on this call.
Craft through undertakes no obligation to update publicly any forward looking statements except as required by law. In addition, if we reference certain non-GAAP measures on this call. It reconciliation of those measures to GAAP measures may be found on our Investor Relations website Andy.
Thanks, Ed.
Given our joint announcement with Anheuser Busch earlier. This week. This is obviously an exciting but not a routine time for the company or for any of our share stakeholders.
Accordingly in that context, this will not be a routine earnings call.
So I'd like to start first by offering some thoughts whatever announced agreement with a b before pivoting into our Q3 in year to date performance, including some observations on the industry.
Ill, then hand off to the team to provide some color on the business and before moving into Q and a I'll spend a few moments previewing management's perspective, as we look to the future.
Also given the possibility of technical questions. Please note that markets read our general Counsel is also present in available if necessary in the acuity.
Let's start with the agreement as announced on Monday.
In Stark contrast to the disappointment that I expressed on a public conference call with many of you on September 5th.
On behalf of management I can enthusiastically say that we are nothing but excited about our announced transaction with Anheuser Busch.
We strongly believe that our merger agreement as summarized in our 8-K filed with the FCC yesterday represents a solid win for our stakeholders from numerous perspectives.
And I'd like to begin by spending a few moments elaborating on those thoughts.
The first an overarching win is for our shareholders, who upon closing would receive $16 in 50 cents per share, creating real in certain value from their shareholding.
And in that regard I'd like to explicitly point out that on a 12 month trailing EBITDA base. The 16 50 per share represents better than a 30 times EBITDA multiple placing this transaction in the very top tier of craft transactions from an EBITDA multiple perspective.
The next win is for the legacy about founders and for the proud stable of our brands. Most obviously Kona site in fact for our entire portfolio.
As announced our brands will join forces with an already outstanding craft portfolio within Anheuser Busch is Brewers collective.
Complementing the existing Brewers collected brands and benefiting from the opportunity for greater Resourcing increased support an additional focus.
Importantly, this is a win for consumers as the promotion of our brands within the Anheuser Busch network will increase our brands reach thereby affording more consumers more choices dequincy thirst.
And even though our brands are already distributed by the end Hydro Bush wholesaler network. This is also a win for our wholesalers as they will have greater clarity and coordination across their already strong portfolio of brands.
Given the like mindedness of CBVA in a b with respect to community engagement. This is also a win for the communities in which we live in which we operate.
As access to Abies resources will not only sustain but will enhance CBS established community involvement in numerous markets ranging from Hawaii to Oregon, and Washington, and from Florida to North Carolina to Massachusetts to New Hampshire.
And lastly, but certainly not least this new win for our hard working talented and engaged employee base as they can look forward to the prospect of greater opportunities within a global organization with him established deep commitment to developing talent.
Clearly we are excited about what lies ahead.
And with respect to next steps will be working through our regulatory filings in the next few weeks with the preliminary proxy filed in the coming for weeks in a shareholder vote expected for early next year.
But as exciting as our tomorrow, we'll be let's pivot back to today are more accurately to last quarter.
As you will hear Q3, 2019 was candidly a mixed bag.
As depletion performance again highlighted by Kona continued to improve bringing our total portfolio to its most positive depletions performance in years.
But the solid gains in Depletions were countered by the hangover from our out of stock issue at the end of Q2, which created an unfortunate negative domino effect on our results.
Simply laid out out of stocks at the end of Q2 in the beginning of Q3 led to higher than desirable wholesaler inventories as beer shipped in Q2 never made it to fill those empty shelves.
As a consequence to safeguard quality in the work that we've done to right size wholesaler inventories.
Q3 shipments were subsequently suppressed leading to the negative one two punch of lower revenue and volume deleveraging in the breweries in supply chain.
The silver lining to this cloud is that the extent of the shipments slowdown and the corresponding financial consequence was largely as we expected when we adjusted guidance during the September call.
Further as expected on a year to date basis results, our harmonizing with Depletions in shipments converging with and I'll be on the lower end of our updated guidance ranges as Christine will discuss.
Lastly, before handing off to the rest of the team one other observation about Q3.
In Q3, we believe that we began to witness the real impact of industry headwinds and shifting consumer dynamics in the less obvious area that has historically not received a great deal of airtime on our calls that areas channel dynamics.
Data suggest that the industry level for both traditional beer and Selzer's that we're seeing the most tangible signs yet have a market shift away from the on premise towards off premise and more specifically towards off premise chain.
We believe the potential consequences of this a profound in a number of areas.
Firstly in creating challenges for development of long term brand health as consumers reach for more non beer offerings and the on premise long the bastion of brand building and the alcoholic beverage industry.
Secondly in terms of potential spikes related to short term price support and promotional expense given the promotional sensitivity and off premise chain in the increasing leverage of SDLP everyday lower price retailers.
Thirdly in the prospect for more aggressive competitive pricing as off premise chain becomes a battleground representing the key growth channel in the industry.
And lastly, and the importance of feet on the street as old fashion merchandising nuts, and bolts retailer servicing becomes more important with every incremental case and off premise chain, having disproportional impact on overall growth.
So with that as a backdrop, let's shift to the team for some specifics Ken.
Thanks, Andy and good morning, everyone.
As I've highlighted for the past 23 quarters CBS flagship Kona Brewing company again led the way for CBS portfolio behind our kind of plus strategy. Despite a shrinking beer category and other category headwinds reported elsewhere cone as domestic STR as were up a very solid plus 8% in the quarter and plus seven.
Year to date again significantly outpacing the craft segment and the beer category by 1100 900 basis points respectively.
Year to date craft is down 4% and beer is down 2% despite being bullied by sensors inclusion.
Kaunas flagship brand Big wave Golden now continued to demonstrate resilience and incredibly strong consumer acceptance as domestic STR as were up plus 17% in the quarter and plus 20% year to date.
While Andy highlighted the struggles Baron Crafter currently having in the on premise Big wave is an exception further demonstrating the power of the big way brand with both off and on premise STR is up significantly plus 20% plus 21% respectively.
Ed dimension big waves on premise performance, a plus 21% compares to an overall crafts segment that was down 6.6% in the on premise.
Cone as domestic us tiers continued to benefit from our flagship focus and our heavy up investment in Q2, which supported our first national distribution drive awareness driving media and strong retail programming.
Depletion trends accelerated each quarter from plus 5% in Q1 to plus 7% in Q2 to plus 8% in Q3.
One goal for the quarter was the soften the seasonality curve coming out of the summer and we approved trend versus year ago by almost 300 basis points going.
Got a strong performance was achieved despite gaps and execution so shelf inventory highlighted in Q2.
Significant upside remains for Kona and with Monday's announcement and full ownership by AB the probability of the carnival achieve its true potential increases dramatically next the emission portfolio continues to evolve from a pure craft beer gluten removed play to a healthier active lifestyle focus behind ultimately in the.
Launch of a mission Seltzer is an October omission smelters received the national authorization from whole foods for October and another from total line for January omission Ultimate late STR as were up plus 9% to 9.2% in Q3, and plus 14.5% year to date.
Well mission ultimately now represents over 25% of the mix up 10 point since the end of 2017.
The emission brand family gained 1.5 share points to over 48 share of the gluten claims settlement well that segment declined 9% in Q3, adding emphasis to why we are evolving and broadening the omission brand positioning.
Moving on to Lubi, Glendale plans to broaden libya's positioning beyond the narrow practitioner definition also moved forward in Q3.
He will be up when introduced into new markets as being marketed as a standalone brand for Caribbean Hispanics in October Libya was launched in the Barrios of New York City in Connecticut, and the Miami its original market as part of the Wynnewood portfolio Rubio Blondell moved up the ranks to become a top 10 craft brand.
Jumping 20 places and posted the highest growth of any craft brand in the top 50.
Overall, Lubi was up 31.9% in Q3, and 30 point, 39.5% year to date.
Cisco Brewers Appalachian Mountains.
When Woodbury are up a combined plus 2% for the quarter and plus 3% year to date.
Wynnewood continues to run up mid double digits on the strength of the Rubio.
Well, a and B is up mid single digits, driven by off premise gains and Cisco is down mid single.
Women Brothers Brewing volume is now 92% within the northwest business unit with Oregons STR down 8% for the quarter, an underperforming in a tough market.
Red Oak's volume is now 70% within the northwest business unit in Washington, STR as were plus 12.7% for the quarter positive for the second consecutive quarter.
The net result, this quarter's performance once again drove total CBS tiers in Q3 up plus 2.3% outpacing both the beer category and craft segment in Q3, CB outpaced the craft segment by 460 basis points and year to date by 370 basis points picking up share for both the quarter and year.
To date.
For those of you have been on the journey with us I'd like to personally. Thank you for your support.
As the consumer the market evolves, so as CBVA, but one constant has been cone been Kona brands performance and potential with Monday's announcement long lived the Kona brand here in the U.S. and around the world brought to life with the equity based on the essence values and lifestyle or the people Hawaii.
With that I'd like to turn it over to Scott mentioned, our Chief operating officer.
Thank you Ken and good morning, everyone before getting into the results I would like to Echo Andy's comments around the excitement for the C.D.A.B. agreement announced on the 11, combining with 80 gives CB employees the prospect of expanded opportunities for advancement and development. In addition, the agreement awhile for increased investment in the breweries, while taking advantage of.
Expanded bring footprint to optimize production across all brands.
Now to the results Q3 was a challenging quarter PCBA is we rebalanced shipments for the full year to better align shipments and with Depletions total shipments for the second quarter were 185400 barrels down 5.3% from Q3, 2018, CB eight own shipments, which exclude contract brain decreased 2% year to.
Day total shipments were 585400 barrels down 0.3% CB eight own shipments increased by 2% from the three quarters of 2018.
Your gross margin for Q3 was 30, 830.8% 400 basis points behind Q3 of 2018.
Reduction in beer gross margin for the quarter is the result of lower revenue per barrel as a result of increased promotional pricing, which was partially offset by improvement in overall beer cost of goods sold bare cogs per barrel was $153.53 for the quarter, an improvement of approximately $2 versus a year ago. The improvement as the result of.
Elimination, the all product costs and our continued focus on optimizing our brief footprint, creating efficiencies through our supply chain. These improvements were partially offset by de leverage created through lower shipments versus Q3 2018.
Year to date your gross margin was 37.3% 50 basis points better than the first half of 2018 the year to date performance is a better gauge of our overall operational improvements.
Pub gross margin for Q3 was 10.2%, it's 310 basis points improvement over Q3 of 2018, and 10.4% year to date, a 500 basis point improvement over the first nine months of 2018, the improved pub gross margin, which is squarely in line with our target is due to improved performance within.
Reshape pub footprint, including the addition of the RMB pub, and Boeing and the Wynnewood pub and Miami.
Beer and pub gross margin drove CBS overall Q3 gross margin to 28.2% 340 basis points behind Q3 of last year, while year to date gross margin of 34.1 90 basis point improvements over the same period last year.
Shifting to innovation the ph experiment continues to lead our efforts in this area by listening deeply to drinkers and tapping into consumer insights about everything from design preferences to changes in alcohol Consumptions. These learnings are helping shape, the new products and experiences. The ph team is testing the market looking beyond current trends.
To better understand what is next.
I would like to also update everyone on the progress we are making to produce Kona beers locally in Brazil local production for Big wave has been approved with the first commercial distribution beginning in Q4.
Before closing I would like to update everyone on the construction status of our new state of the arc 500000 barrel Kona brewery in Hawaii construction is in full swing in the new brewery will come online in Q1 of 2020, the new brewery is on track to be one of the most sustainable breweries in the world with the investments we've made in resource recovery high efficiency bring says.
And solar power Theres, a lot of excitement around the future of the kind of brewery for both the CB eight and ABTS for more color on the results I'll turn the call over to Christine.
Thank you Scott and good morning, everyone as can share at the beer industry continues to face headwinds through the new entrants and changing consumer preferences.
Like many longstanding verghese, we have a portfolio mix that create certain challenges as well, while we saw great results from our clinical growth strategy in the first nine months of there they have been mostly offset by declines in our legacy brands.
We did plan for declines in those brands, but the out of stocks, we faced Ancona mid summer impeded our ability to grow beyond those decline.
As a result for the quarter shipments were down 5.3%, but depletions were up 2.3% as compared to a year ago impart the discrepancy on shipments and Depletions is reflective of the rebalancing of inventory.
And the out of stock situation as evidenced by the year to date Kona number.
Kind of shipments for the full year are up 7% and Depletions are up 6%.
With that as a backdrop, let me walk you through our financial results.
Top level net sales for the third quarter were 47.2 million or a decrease of 10.8% versus Q3 of 2018.
As a reminder, we received alternating proprietorship fees from Amby, Wynnewood and Cisco and 2018 that are not present in 2019 those brands on our part of our consolidated results.
So impact for the quarter is 1.6 million and on a year to date basis 5.7 million.
Excluding that changed our 2019 net sales comparison would be minus eight for the quarter and minus 1.2 for the here.
Year to date core beer net revenue per barrel, what's the 0.7% lower than last year as Andy discussed we are seeing a significant shift away from the on premise towards the off premise specifically in chain and that third quarter. We grew up premise chain by 5.8% of note. This channel is the most sensitive to price promotion and.
Consequently represents 90% of our promotional spend your today.
Gross profit for the third quarter decreased by 20% to 13.3 million and gross margins decreased 336 basis points to 28.2%.
Your gross margin was 30.8% for the quarter and 37.3% for the year margins are impacted by lower revenue per barrel and lower total production creating de leverage.
As you know with 16.5 million for the third quarter slightly lower than that third quarter of last year year to date as Cheney increased by 14.1 million to 61.4 million, primarily attributed to the national marketing investment to fuel Conus growth and a 4.7 million pre tax expense related to the clinic class action.
Lasting settlement accrued as a onetime expense and the first quarter.
The claims period ended October seven and the total cost of litigation is not expected to materially exceed the $4.7 million accrual.
As a result of our lower shipment and depletion guidance in early September we proactively manage our S unit cost in that their quarter, but with the news of our transaction with a b, we anticipate incurring some unplanned cost before year end.
Net loss for the quarter with 1.2 million or minus six cents per diluted share down 1.3 million from the third quarter of 2018.
Decrease is primarily primarily due to lower sales volume and the impact that drove through the piano.
Our net loss for the quarter also included the benefit of Federal research and development tax credits worth approximately 1.6 million or eight cents per share that were realized on recent operational investments.
On a year to date basis, we recorded a net loss per share at 31 cents.
A few comments on our guidance for the remainder every year.
We believe it will be on the low end of guidance for shipments Depletions and gross margin momentum last at the end of this summer selling season, coupled with overall, increasing industry pressure will make it difficult to increase our volume rates prior to year end.
As mentioned previously we are confident and are seeing a guidance on an operational level, but we believe we may incur some additional costs related to the AB transaction.
As we look towards 2020, we continue to hone our strategy, while we navigate the challenges we collectively faced as an industry.
While we continue to nurture the growth of our 100 brand family along with an increased focus on expanding live Ruby out beyond Florida, creating a better for you seltzer through our mission brand and pushing the envelope and on innovation with the insight coming from our ph experiment team.
My combining with Avi our ability to leverage our strong brands will be even greater and we are collectively very excited about that prospect with that I'll turn it over to add.
Thanks Christine.
So as we wind down the call and look ahead to the balance of the year and beyond I want to begin by acknowledging the as we progress with the close process in our transaction with a b. We're mindful of our obligations to continue making the best decisions to drive stakeholder value for CB eight.
And that spirit I want to share some preliminary thoughts about what's next operationally as we continue to navigate this evolving marketplace.
In the September acuity I suggested that we were contemplating some significant changes to our SGN a base.
In the Bee transaction, notwithstanding I want to be clear that we will progress with our plans to reshape our rest DNA base, making it more reflective of our revolving portfolio needs more responsive to the contemporary demands of our marketplace and more efficient in totality.
Without giving specific guidance, we believe this reshaping will manifest in several significant in notable ways.
Firstly in a reduction in our overall as Jamie.
Secondly, in a reallocation of brand spend across both known brand priorities that we believe the best growth engines for tomorrow and across emerging opportunities that have the highest potential to anticipate shifting consumer demands.
And thirdly, a restructuring of our market facing resources to better respond to the shifting channel demands of today's marketplace.
Well some of our learnings in Q3 came with unfortunate financial consequences, we believe that still within mokoena plus context, we can be nimble and implementing some learnings to sharpen the topline focus within our brand portfolio, while improving the allocation inefficiency of our resources.
In closing during the September 15 call I use the term building blocks to provide a metaphor for the way management was thinking about the future in the way management was building scenarios to unlock shareholder value.
I believe then in more than ever I believe now that we have the right blocks.
Beginning with our cornerstone building block Kona and no, culminating with the motor to bring it all together our anticipated merger with Anheuser Busch.
It's a remarkably exciting time for CB and for all of our stakeholders.
And on behalf of the entire leadership team at CBVA I want to reinforce our commitment to continue working to drive certainty of value both in our day to day operations and that our work driving towards the close of already be agreement.
So while this was not a routine call during a routine time I'd like to end with our routine insincere. Thank you.
Each of you who have played a role on the journey so far to our investors to those analysts who cover us to our interested parties and importantly to all of our hardworking passionate and engaged employees and partners wherever they operate within the world of CBVA.
And with that I'll open it up for questions Joel.
Thank you as a reminder to ask a question you only tapas style one on your telephone.
I will try a question pressed upon key please stand by we compiled acumen they roster.
Our first question comes from Amit Sharma with BMO capital. Your line is now open.
Good morning, this is true and on for a minute.
Hey, there first of all congratulations on until.
I mean, obviously you guys.
I just want to know as far as.
From from your view can you talk a little bit more about the regulatory review process. We've seen some other deals got held up recently in seemingly even more fragmented industries. Our categories. So just a little bit more do you target and on on a timely.
Line and any sort of.
Risks that you perceive to the deal closing.
Sure. So all I'll start out through and then.
Mark as you have anything to add in you're welcome to or if he wants to leave across the table and say something that I shouldn't say I'm, saying something I should say I apologize for the sound that you'll hear.
So I think in general when it comes to thinking about anything deal related or anything related to the future with a b in my mind drew I kind of break things into two categories. One is what do I think and secondly is what do I know so.
What do I think is broadly kind of how over to respond to this and from our perspective, we've got a very long standing relationship with a b dates predate CB eight days back to read hook in women brothers 25 years ago.
Maybe already distributes virtually all of our beer they brought a good amount of our beer they've got to seats on our board they have certain rights and involvement in the company. So from our standpoint again from a regulatory perspective. This is a very natural progression in the relationship and so.
No anticipate as a result of that the fact that somebody would find the shocking or would find it to be a material change in kind of what's happening.
That said, we have to go through the normal process as I said, our regulatory filings will begin in the next couple of year in the next couple of weeks and will progress from there with the shareholder vote.
In concert with some of the regulatory work and you know with respect to the fragmentation of the industry. The lack of fragmentation of the industry.
Well this is a bigger than a bread box deal you know this will go through HSR review, we know that it's over the thresholds.
That will all be standard.
Isn't terribly huge.
I think it's one of the challenges CB and its stake holders have always had we are bigger than a bread box, but we're not much bigger than a bread box so from that perspective.
There's nothing that I can signal to you that we think is egregious or anything that would be kind of a disproportionate concern for us as we enter into the transaction.
Mark has anything to add nothing that okay.
And so just on on the timeline I mean is there is there any sort of help you could give us on.
On one in 2020, it could potentially close I mean are we thinking like.
We bought ended the second quarter.
Yes, Marcus this as Marcus.
We can't really comment on the timeline at this point as Andy said, we have to go through the HSR process, which can have some pretty heavily varying timelines like Andy said, we'll be making our initial filings under HSR in the next couple of weeks and then we'll just be going through the regular process.
Okay, Thanks, and secondly.
Just high level.
Any thoughts on kind of what what changed.
From from August to now.
Hello over the discussions.
You know at either at that time or early enough to theirs.
Was there was there any sort of thought around and offer below 20 450 at that time or did this just develop kind of.
Thank you.
It's a it's a good question drew you know I think I said to everybody on this call in September .
We were actually who actively engaged in circling back with baby to understand what there with their intent was and how they were viewing the future and we were were contemplating a lot of different passed we had a lot of scenarios Bill building block analogy with apt and when we were we were sitting here looking at different potential combinations of things and.
A lot of whiteboard work, but the first step was always hayward's avian this and I think as you can.
As is evidenced by their public statements at the time, maybe was very supportive about future GBA in very supportive of the partnership that existed and when we circle back what we quickly found.
Was that we still believe that the best path to value creation for our shareholders was a path that included a b and we felt that it was the right thing for shareholders first and foremost in we felt that the reason it was the right thing for shareholders was it was right for everything else. It was right for our brands that was right for our people it was right for.
Improvement in our in our operating so without a lot of time spent at dwelling on the past, which I would suggest to you would have not necessarily been constructive it could have been cathartic.
Might have been enjoyable that might have been a lot of those things are job was to be relatively.
Emotional.
In the sense of being objective, we focused on how we're going to unlock some certainty of value for our shareholders and it was with that mindset drew we sat down and really good faced with a b and I will say pretty quickly.
Started its kind of re cast the future and draw it out.
With respect to where we landed in terms of.
The the offer price, we feel really good about 16 50.
I know it's no other numbers that were floated around but I think all of US know the market has evolved pretty significantly.
In the environment has changed pretty materially.
We work very closely with some really talented external advisors in the process and we feel like shareholders can feel outstandingly good.
The way, we landed with Abbvie and we feel it's a it's a great deal for our stakeholders across the board starting with our shareholders.
All right I really appreciate congratulations again and good luck.
Sure.
Thank you as a reminder to ask a question you wanted to press star one on your telephone.
Our next question comes from Jim Call Lumbar Securities. Your line is now open.
Yes, thanks for taking my question.
Why won't you been talking about unlocking shareholder values why won't stakeholders be given an option between.
Taking cash.
And.
Taking shares of of but.
Is it something they could do to mitigate tax liabilities.
I really don't have a great answer for that Jim.
I think as we went into this our intent was to have a cash transaction because we felt that was the most flexible for all shareholders. Because then they could do what they chose to do.
With the proceeds that they would have as a result of the transaction and I I really can't elaborate on you know how much we thought about or whether we thought about any tax strategies related to being able to convert into.
Hi shares.
Okay, because that's I mean I've seen I.
I know a lot of mergers and acquisitions over the years provide the option for either taking the buying company shares or taking cash.
Yes, I think you know.
A little bit in vein of what drew talked about we wanted to make sure. We structured transaction that was relatively straight forward also and I think when we started to look at alternatives transactions. They started to get more complex in the more complex you get I think we were.
Always had a pension or we always had a priority for the best way to with certainty unlock value for the shareholders and introduce complexities into that so we can probably take more that offline, Jim but I really don't have much more that I can actually comment about credibly.
On the call. Okay. No. Thank you much I appreciate it.
Thank you.
Thank you.
Im not showing any further questions at this time and I'd like to turn the call back over to Andy Thomas for any further remarks. Thank.
Thanks Joel.
I appreciate everybody is continuing support of CB and being available for this call. We look forward to discussing the results for the fourth quarter and full year 2019 with you soon.
Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
Right.