Q2 2019 Earnings Call
Incorporated earnings Conference call.
At this time, all participants Arnie listen only mode.
Later, we will conduct a question and answer session and instructions will be given at that time should you require any additional assistance during the call. Please press Star then zero on your Touchtone telephone as a reminder, this conference maybe recorded.
I would now like to turn the call over to you.
CEO , Andy Thomas Sir you may begin.
Thank you, Steve and good morning, everyone. It's my pleasure to present, the crop reliance Investor conference call to discuss our results for the second quarter and year to date 2019.
This morning, I'm joined by three other members of the CB eight liter.
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 differ materially from those described in any such forward looking statements. The risk factor section in our most recent 10-K lists some of the factors that could cause craft brews actual results to differ materially from the forward looking statements made on this call craft brew undertakes no obligation to update publicly any forward looking statements, except as required by law Andy Thanks, Ed.
For our time together this morning, I will begin with my customary high level reflection on the quarter, Ken will provide commentary on our commercial results Scott will provide insight into our operations and Christine will offer her remarks on our financial performance.
Before closing I will also spend a few moments addressing the upcoming AB qualifying offer date of August 20 Threerd.
Given the amount of territory to cover. Please note that our prepared remarks, we'll go slightly longer than normal, but still leaving time for Q in at the end.
To frame my remarks for this call I'll stick with the construction metaphor introduced during our Q1 call three months ago.
As it continues to appropriately represent our progress as a company both literally in areas like the construction of the Kona brewery in Hawaii, and metaphorically and the continued emergence of an entity building in shaping itself before our very eyes.
Indeed, Q2 shows the positive results of sticking to a disciplined schedule in maintaining strict standards, while not turning a blind died a real time learnings or changes necessitated by our consumer and trade environment.
As is often the case it begins with the strength of our foundation in Q2, 2019 picked up where Q1 left off and strengthen the fundamental dynamics of our business continued to show.
Despite a harshly changing market that could easily induce excessive price discounting or force margin dilutive operational complexity.
GBA stuck to his blueprint.
A portfolio of relevant brands rooted in consumer insights to allow for pricing power and value creation.
Brought to market through an end to end supply chain capable of achieving operational efficiency to allow for gross margin expansion.
Indeed, that's our simple formula gross margin accretive growth and as a team will detail the foundational numbers this quarter again speak for themselves.
Core beer revenue per barrel remained healthy beer gross margins grew to record levels for the quarter and year to date.
In pulp performance improved markedly with gross margins back in the double digits.
These results are not operations.
Through the proof of a well architected well engineered in well built foundation that can sustainably generate the necessary investment in our brands people in future.
And speaking of our brands Q2, Bill on those early signs of progress teased in Q1 with our Reengineered portfolio proving itself through accelerated growth in our corporate flagship Kona sustained growth in our newly acquired brands a more managed contraction of our legacy portfolio in exciting new prospects for the future both in more traditional beer offerings like Libya.
And then more innovative offerings coming out of our ph experiment.
There's a lot of good to talk about in the quarter. So without further Ado first onto Ken and then turn the rest of the team for some color before coming back to address the future.
Both in terms of our weeks away unknown of Navy qualifying offer and in terms of our real time learnings in the implications for the future Ken.
Thanks, Andy Good morning, everyone in Q2 kind of Depletions again strongly outpaced the beer category in the craft segment.
Bonus trend accelerated in Q2 versus Q1 behind the ramp up of investment in the last week of March and the beginning of Q2.
As soon as Q2, Depletions were up plus 8% versus plus 1% in Q1 and finished plus 5% for the first half.
Continuing to lead the way flagship Big wave Golden now domestic Depletions were up plus 25% in Q2, and plus 22% year to date.
Big way the CBS number one priority and represented almost 50% of cone as mix in Q2 and on the Nash International front Kona rebounded in Q2 closer to its longer term trend with Depletions plus 24%.
In Q2, Kona represented almost 70% of CBS depletion mix driving total CV depletions positive to plus 1%.
CBVA and Conus quarterly performance compared to a beer category and a craft segment.
That were both down 3% as measured by the Beer Institute.
CBVA and Kona, both outperformed craft by approximately 411 100 basis points respectively.
As the decline of both beer and craft indicate growth in traditional beer continues to be more difficult and it will be more expensive to achieve as reported elsewhere. The end of June leading into the fourth of July holiday was particularly difficult for the category.
July 4th holiday once dominated by beer was won by spirits in the rapidly emerging hard Seltzer segment.
With slowing craft segment growth and off premise retailers no longer increasing space for alcohol broadly defined pressure to hurdle profit per linear square foot thresholds will grow in importance and become the difference maker between strong and weak brands.
Our strategy of focusing against Kona flagships in home markets positioned our portfolio to make the most out of the craft beer opportunity and protect our route to market.
But with our consumer learning in house, and the dynamically changing consumer preferences CB as Brian its mission to serve consumers beyond just American craft beers.
We are rapidly bringing to market products to take the portfolio in new directions, and capitalize on consumer trends, we believe seltzer is or not another FNB boom splat, but the start of a longer term rates for significant share of throat and market fueled by several macro consumer trends are moving aggressively to capitalize on the opportunity.
Relative to traditional beer wine and spirits selzer's deliver against better for you refreshing less filling low calorie low carb and convenient while dovetailing trends in non ALC.
By the fall timeframe CB, we'll have three sell certain products in market each uniquely positioned to take advantage of the aggressive growth. The first pacer from the ph experiment was launched in Q2.
And as the name implies this targeted the consumers are trying to moderate or pace their consumption of alcohol with only 2% HPV.
Next omission seltzer builds on emissions equity as a better for you offering with its clean label only for all natural ingredients and as gluten removed authenticity and third Kona will test a Hawaiian inspired flavor lineup locally only in Hawaii to capitalize on its market, leading position and blunt entrance of other mainland competitors. All three of these new items will be the three of the fastest to market and Cvs history.
And plans to broaden lubi of land sales opportunity beyond the narrow craft definition is rapidly moving forward.
Well rubia remarketed to Caribbean Hispanics as a standalone brand and will be launched into key eastern seaboard Caribbean. Hispanic markets by fall. Hispanic consumers continue to prefer beer over other forms of alcohol has the highest beer per caps and a significantly driven the growth of Mexican imports will rubia, which means the blonde one in Spanish will be uniquely positioned with the authenticity of our Puerto Rican founder story and with a very late sessional the differentiated blonde Dale.
Eluvia launched in Puerto Rico in Q2 and is off to a strong start there as the first leg of an international opportunity.
Movie was plus 48% in Q2.
Moving to our mission, which continues to build on its healthy active lifestyle positioning omission ultimate light Depletions were up plus 18% in Q2 and year to date.
While progress is being made here, we're not satisfied with the pace of transition, but believe the addition of sell throughs and continued prioritization of ultimate light are on trend omission will also add a light IP by year end to further position the product line up to more fully more fully against a healthy active lifestyle.
For the remainder of the plus portion of the portfolio flagship and core brand focus in home markets continues to drive a number of strong positive individual results, although not at a level that fully offsets our own internal longtail and legacy brands in an ever more crowded retail shelf.
Moving back to Kona for further review of Q2 performance relative to increased levels of investment. We're excited by the results and optimistic better execution can drive even more upside.
As a reminder, the increase Kona spend was largely invested behind our March Mone Man This program.
And it was geared to one drive share of mind in the AB wholesaler network with the objective to increase distribution.
To invest to build awareness and brand equity with consumers and three accelerate volume as a 700 basis point improvement in trend demonstrated.
On the push side, both wholesalers and retailers bought into the program at unprecedented levels and increased support for Kona.
Wholesalers increased distribution by more than 25% more than doubling the pace of historical distribution gains and points of distribution were up by almost 20000 points and retailers supported tunnel with more feature adds with AD counts up 8% and D wave distribution was up 24% or five and a half points as measured by Nielsen.
On the pole side consumers responded volume lift off feature adds increased 230 basis points to a very healthy 248%.
In cases sold off feature increased 124% during the program as measured by Nielsen longer term brand building investment saw awareness brand funnel metrics and brand health measures increased significantly across the board as measured by a pre post media tracking study.
Validating the Ace Master copy testing results that Kona has some of the strongest creative in the beer category today.
Conus proposition continues to resonate with consumers and tremendous growth potential remains given current awareness and household penetration levels. We continue to believe that with time and ongoing investment cone is lifestyle positioning can play against a much larger volume pool than just craft.
While this performance is all favorable as we dig into the results. It appears wholesaler execution against display opportunities lagged significantly relative to feature adds and it appears demand outpaced in store inventory as out of stock situations across markets were dramatic.
Some of this the systemic to the current market structure of beer and some of this is reflective of shelf inventory and stocking not keeping pace with accelerating demand.
Early estimates point to a potential loss of 2% of total CB eight depletions from just the media markets alone in the quarter.
The team is already testing enhancements to improve execution against demand.
We remain positive the Kona brands responsiveness to investment both from a volume driving in an equity building perspective.
In closing.
Kona again posted strong performance in Q2 in the first half of 2019 and it was accomplished against the beer market in the first half that history may reflect on as a pivot and proved to be a significant shift in consumer preference to the health and wellness of refreshing less filling low calorie alcoholics ulcers.
The shifting consumers reflected in and supported by our research we are broadening consumer targets and product offerings beyond traditional craft as rapidly as possible to better satisfy shifting consumer needs and growth opportunities, especially in light of craft segment slowdown.
Even in these times Kona continues to resonate and drive CV performance and in Q2, even without the new items mentioned above cone is ongoing strong consumer acceptance drove CBS total depletions for we it's rebalanced portfolio into positive territory.
With that I'd like to turn it over to Scott mentioned, our Chief operating officer.
Thank you Ken and good morning, everyone Q2 was another solid quarter with CDH work, we've done over the past few years is paying dividends in the form of improved results prior to getting into the numbers I would like to take a moment and highlight CBS excellent work around sustainability.
Earlier this summer we released our sixth annual sustainability report.
Which we highlighted the following.
We supported multiple carbon reduction projects that offset 600 metric tons of greenhouse gases equivalent to 10% of our total carbon emission.
We decreased all in electricity and gas usage across our locations generating 16% our energy from renewable energy credits and on site solar and bio power.
Our water usage remain well below benchmark, reflecting operational innovations such as the industry's first waterless vacuum pump installed on the Portland can't bottom line.
Our wastewater reduction efforts, which led to a 75% decrease in wastewater solids earned us. The 2018, most valuable Prevention award from the EPA and we supported over 500 nonprofits last years in the communities, where we live and work through in kind donations sponsorships charity events and employee volunteer efforts. We are very proud of the work we are doing to support our communities, while operating more efficiently and responsibly.
Now for some color on our operational performance total shipments for the second quarter 230000 barrels up 2.6 from Q2 of 2018 core shipments, we which exclude contract Bryant increased 4.4%.
Primarily driven by an 11% increase in kind of shipments year to date total shipments were 400000 barrels up 2% and core shipments increased by 3.5% from the first half of 2018 beer gross margin for Q2 was 41.6% 220 basis points better than Q2 of 2018 year to date year gross margin was 40% 240 basis points better than the first half of 2018.
The improvement is the result of continued strong revenue management increased shipments from the Fort Collins brewery the realization of the full value of AMBI Cisco on Wynnewood, which are now fully owned brands reduction in losses, which was partially offset by increases in logistics and fixed cost pub gross margin for the quarter was 10% at 710 basis point improvement over Q2 of 2018.
And 10.5% year to date, a 600 basis point improvement over the first half of 2018.
The improved gross margin, which is squarely in line with our target is due to improved performance within our reshape pub footprint, including the addition of the RMB pub in bone and Wynnewood part in Miami.
The improved beer and pub gross margin drove CBS overall Q2 gross margin, 38.5% with year to date gross margin at 36.7%, both representing a 270 basis point improvement over the same time periods last year.
As you can see CBS operating business fundamentals are solid.
Next I'd like to update you on our innovation efforts and share a few of the newest beers being developed by our awesome team.
In the Sysco brand family, we reached recently launched frantically I Cranberry brute rosy EPA the Brewers at AMC had been busy developing beers like crane, a doughnut infuse nitrile milk styles and launching their lager AIG the gold medal winner in cans and earlier this month, the Wynnewood team announced a partnership with Richard Branson's Burgeoned voyages to serve a signature English pale ale on boarded Scarlett Lady cruise ship.
While our brokers have been debate developing amazing beers across all of our brand families. Our beverage innovators have also been hard at work developing a line of sensors for the emission family, which will hit the markets. Later in Q3. The sell throughs are made with organic cane sugar sugar rubric natural flavors and will be 4% alcohol 90 calories with just one gram of carbs. The team is also hard working developing seltzer styles for the tone in Hawaii.
The most exciting area of our innovation effort is coming from CBS innovation business unit. The ph experiment leveraging the learned any learnings from Gail Gail study and profit work, we've launched two end market test across the us earlier in Q2.
Pre aperitif of spreads and intent Italian inspired botanical cocktail and pace or a low proves seltzer align a 2% alcohol 50 calories zero sugar selzer's. Additionally.
Ph continues to gain momentum in test with Amazon go stores, and we'll see distribution on multiple ph experiment SK use with Amazonfresh and Amazon Prime and Q3.
The ph team will continue to fuel more innovations in pursuit of their $25 million in revenue by 2025 goal.
I would also like to update everyone on the progress we are making to produce kind of beers locally and rate Rio de Janeiro.
While slightly behind schedule, we are committed to achieving a perfect beer profile match in a confident we're getting closer and our partner brewery as a result, we have reset our plan and we'll be ready for local production of Big wave later in Q3.
And before closing I'm excited to share the latest update on the construction of our new state of the art 100000 barrel brewery in Hawaii.
Construction is in full swing with concrete slabs, we import equipment being delivered in Q3 and startup and commissioning beginning in late Q4 with a brewery fully online in Q1 of 2020.
The brewery is on track to be one of the most sustainable breweries in the world with with the investments we have made and resource recovery high energy brain system and solar power.
Now I'd like to turn call over to Christine Christine.
Thank you Scott and good morning, everyone as you've seen in our filing and heard on the call. We had a strong second quarter and our core business is very healthy.
During my remarks, I will share our second quarter and year to date 2019 financial result, and insights on how we are viewing the remainder of the year.
You will see that our financial results reflect positive momentum from our continued focus on operational excellence marketing investment to support our growing brand and our overall pivot to growth strategy.
Top level net sales for the quarter were $16.6 million or minus 2% versus second quarter 2018. However, it is important to put this into context as we received alternating proprietorship E and the Wynnewood and Cisco and 2018 that are not present in 2019.
Those brands are now part of our consolidated results with the change in ownership.
The impact for 2018 with 1.89 received in Q1.
And 2.3 million it received in Q2.
Excluding that change our 2019 net sales comparison would be plus 1.7% for the quarter and plus 2.2 for the year.
Second quarter shipment volumes grew 2.6% with Kona up 11% for the quarter and 10% for the year.
I shared last quarter contract barrel volumes are much less than we anticipated this year, which have caused at 3700 barrel decline over the second quarter of last year.
Owns shipment without contract spring were up over 4% for the quarter and 3.5% for the year.
A strong focus on operational excellence and moving our three partner brands from alternating proprietorship into the CBS family resulted in an 8.2% reduction in our cost.
Cost of goods sold per barrel, which drove your gross margin for the quarter to 41.6% for 220 basis points higher than the same period last year.
We also saw strong improvement in our profit margin, which grew to 10% to 710 basis point gain over the second quarter a year ago.
Gross profit for the second quarter increased 5% to 23 million by gross margins increased 270 basis points to 38.5% beer gross margin expanded to 41.6% for the quarter and 40% for the year.
As unit costs were up 6.4% as a percentage of net revenue primarily due to the increased end market, depending on the kind of brand as well as increased employee related costs.
Net income for the quarter with $2.6 million or 13 cents per diluted share down $1.8 million or 41% from the second quarter of 2018.
The decrease in income and earnings per share primarily due to the planned coding media investment and create an increased spend across our brand.
As a follow up to our kind of class action lawsuit. The judge accepted our settlement agreement in June and the first few weeks of claims have been in line with our expectations.
We believe our accrual insufficient and that matter should be close by early October of this year.
Taking a step back or perhaps a step forward, let's move from results till looking strategically at the future.
I must start with the potential impact of an avionic qualifying offer as well as now offer any uncertainty that that brain.
Rest assured we are actively working on how we will continue to approach the business, regardless of our capital structure as a leader and not just there but in total beverage we are continuing our work with yell on consumer insight and putting those learnings to work as a part of that work. We're also ensuring that we have the right team and the right position to help us be successful moving forward under any scenario, we will create the right business model for the future of CBS .
Acknowledging our year to date results and giving the impending decision on the qualifying offer and a broad implications that may bring we will not be addressing guidance at that time following clarity on the apiay qualifying offer we will update guidance.
In summary, we are pleased with our operational performance for the second quarter and the year. While we are confident in our ability to continue driving results and sustaining the core health of our business. We also recognize the current pressure on the industry and the risk that poses for all unfair.
Understanding the consumer meeting them, where they are and offering a diverse portfolio will be key other industry evolves.
With the launch of our three distinct style to our offerings. This fall along with a broad range of offerings within our beer portfolio led by Corona. We believe we are set up for success with that I will turn it over to Andy.
Thanks Christine.
To summarize as the team collectively detailed today CBVA and its shareholders stand atop a strong foundation witnessing the emergence of a beautiful structure above and evidenced by some of the strongest numbers in our history and in our ever changing industry.
As I head toward some remarks on the unknown of Abbey qualifying offer let me first summarize where management believes we are as a company.
Relative to where we were at this time in 2016.
That timeframe being an apt comparison since the very prospect of that qualifying offer was born three years ago. This month on August 20, Threerd of 2016.
The SBA of today is highlighted by 40% plus beer gross margins, an increase of more than 900 basis points compared to three years ago.
Core revenue per barrel over $265, an increase of nearly 10% versus three years ago.
Gross profit of more than $70 million on a trailing 12 month basis, an increase of 15% versus three years ago.
Kona brand with still untapped potential domestically and globally that is already approaching a half million barrels of volume on a 12 month rolling basis, and that has grown nearly 100000 barrels or 25% in the last three years.
A complementary plus portfolio with legitimately strong local and regional brands that has finally turned positive on a quarterly volume trend basis for the first time in the last three years.
Newly emerging the white space growth opportunities represented both by the more innovatively targeted traditional beer offerings, such as the rubia and ultimate light.
As well as by more progressive Unicorn offerings, such as pace or low prove selzer in pre apparent tivo spirits.
The latter born from our home grown innovation unit to ph experiment and none of which were part of the CBVA of three years ago.
And importantly, an already strong and increasingly progressive talent base throughout the organization.
And while those results are outstanding let's spend some time on the ever anticipated question on everyone's minds, what about AB.
Are they or aren't they going to make an offer.
Let me begin by saying this clearly.
Hi in the entire executive leadership team at CBVA readily acknowledges the strong value creation for our shareholders than a be qualifying offer would bring.
Indeed, if we as management didn't believe in that prospect for value creation, we wouldn't have entered into the agreements three years ago.
Further as is publicly known I'll remind all stakeholders through our shareholder indoors compensation packages management themselves are sizable shareholders with tightly align shareholder interests.
That said, we are ever mindful that CBS value and value creation is cultivated by always doing the right thing for all shareholders. Those things that made SBA attractive to ABB is a minority partner over a decade ago.
Those things that brought us to a table to reimagine our relationship three years ago, and those things that make CBVA worth $24.50 a share the doorway to a future with baby.
As a full not minority owner.
All that to say management is well aware of and not indifferent to enable us to offer but management is also confident of its work to date and creating value through the transformation of this company.
And while the uncertainty remains today, even with less than 15 days to go before August 20, Threerd management has been due to full and responsibly preparing for a future with or without a navy I offer.
So let me close by doing three things.
First staying focused on the business at hand, and returning to those learnings and subsequent course corrections that I referenced at the very beginning of the call.
Those things that we are working on regardless of what is known by August 20 Threerd.
Secondly, reminding this call of the protection for CBVA and its stakeholders in the absence of a qualifying offer using the exact words that I have used in the past.
And thirdly, previewing, our anticipated communication actions as it's related to the qualifying offer.
First as to the course corrections as you've heard in this call Q2, not only brought solid results, but it also brought lost and incremental opportunities.
In that regard regardless of what is known by August 20, Threerd management is actively engaged in assessing issues surrounding retail out of stocks and retailer and wholesaler execution. Both in terms of working better with our existing infrastructure and in terms of shaping that infrastructure for tomorrow.
And as our learnings and consumer insights growth management is developing plans for an accelerated movement to a more progressive portfolio beyond traditional beer.
In both regards plans are in development for a more focused organization better matching talent and resource levels to key growth drivers brand wise geography was in channel wise.
With specific emphasis on a more effective organization built for the consumer wholesaler and retailer demands of shifting market.
Secondly, as I reminded this call before in the event of the absence in a qualifying offer for maybe within the next 15 days CBS shareholders can be assured that CBVA is well protected.
Both through the receipt of a 20 million dollar international incentive payment from maybe I.
And through the security that the existing Abby I agreements the master distribution agreement the contract Brewing agreement and the International distribution agreement would continue at CBS selection for up to another seven years, while then enabling CB eight to embrace a host of strategic alternatives.
Paul from a fundamentally stronger and improving operating position.
And thirdly as for the communication regarding your qualifying offer and some shareholder insight into management actions should it not materialize.
Absolutely subject to its 13D obligations will promptly informed investors have any developments. Additionally, CBVA will endeavor to continue our tradition of proactive investor engagement and shareholder transparency.
Sure the qualifying offer not materialize management will host a special off cycle conference call, where we will share our initial reactions and perspectives along with additional detail on the more immediate plans in place to both safeguard and accelerate the continued progress of our company on both the top and bottom lines, while addressing initial thoughts regarding matters of our longer term business in corporate strategies.
As Christine alluded to in that call. We would also provide an update on market guidance for the remainder of the year, including preliminary thoughts on the uses of the $20 million cash injection.
So in closing there you have it.
Remarkably strong operational performance throughout the company.
And remarkably exciting prospects for tomorrow.
All within the context of remarkably awkward circumstances for the coming weeks.
And through it all appropriately enough. This team maintains remarkably in unabashedly confident in our future.
On behalf of the entire leadership team at Seabee, a sincere. Thank you to each of you who have followed and played a role in this construction project for the past several years.
To our investors for those analysts who cover US two are interested parties and importantly to all of our hard working passionate and engaged employees and partners wherever they operate within the world of CB eight.
Watch this space.
And with that I will open it up for questions Latif.
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Our first question comes from the line Vivien Azer of Cowen and company.
Your line is open.
Hi, good afternoon.
Hey, Dan.
So Andy in his prepared remarks, he talked about the Kona opportunity not just in the last bit internationally.
And given the uncertainty around AB it might be helpful. Just to address the Kona ambev relationship and any potential implications for that just started thank you.
Yes, I think for Kona, it's been to the international piece has been a pretty methodical and deliberate strategy over the course of the last three years and I know a lot of folks thought it was going to be a lot quicker out of the box but.
As I reflect on where we are I feel really good about it and I feel really good about the fact that we were a little bit.
Mindful and thoughtful along the way.
So to address the question directly the relationship with Ambev is really good and we are seeing awesome things in Brazil, both in seating the brand in Rio and already preparing for expansion outside of Rio Oliver Unleased from a value chain perspective by the contract brewing relationship with the local brewing relationship down there.
So if you isolate Rio I think there is a lot of skin in the game on both sides and there's a lot of opportunity for the brand and with the presence of local production, we have a lot of safeguards in place.
For cultivation of the Brazil market Arnaud local sourcing basis with Ambev.
We always said we would use the relationship in Brazil in a couple of the other test we've done to inform future expansion with abbey through the international distribution agreement. So I think thats one of those unknowns.
That candidly management's built a couple of scenarios for depending on the future.
If you look at our international business to date.
Still better than 95% of that is going through craft and travel and I think thats.
Kind of a double edged sword for us to be candid one on one hand, it is well protected because it's not impacted a lot from the abbey.
Offer, yes, or no and on the other hand, it demonstrates how much upside there is that's probably been frustrating for a lot of the investors on the call that we haven't taken advantage over the last couple of years, but again holistically.
It's in a good place I think Brazil in particular, we're seeing outstanding things. The advent of local production will unleash the money, we need to be able to invest when I say, we I mean us in our distribution partner down there ambev.
And I think thats pretty well protected Vivian I think international in general though.
Continues to be something that.
Develops before our very eyes in terms of the opportunity not just for the Kona brand, but as Ken alluded to as we look at the prospects for brands likely rubia and candidly, even some of the ph experiment offerings that we've got.
We.
A lot changing in the market, but I think one of the things that isn't changing is the way that we see trends moving both domestically across the us and from the us globally. So.
There is a lot there so long winded answer feel good about where we are internationally feel well protected given the share of business between CCT in ABB.
And on the BDI front field the investments, we've made are pretty well protected and well positioned to return some value for everybody in the coming months in years.
That's very helpful. Thank you.
And then just turning to your other brand portfolio now that you've rolled up.
Hi, Glenn Cisco and Am B.
Clearly some clear benefit.
<unk> <unk> <unk> <unk> <unk> <unk>.
In the prepaid segment.
And if I look at kind of first half year over year.
It looks like the segment's current about 4.8%, which is slightly better than the 4% year to date growth that we're seeing in craft. So as you think about potential opportunities for those three complementary assets.
How are you thinking about distribution going from here. Thank you.
Yes.
Great question Vivien in it.
It's interesting for us who kind of take a long term view of what we've done what we haven't done. So this is a team that is everybody knows.
It's probably first to contract distribution into pullout of states several years ago, So now I'm going to.
Go to 180 degrees to the other direction, because I think candidly for those three brands or distribution opportunities in growing and the reason I say that is.
There's a lot of strength in the local markets for brands like Wynnewood and for Sysco and for Am B and part of going deeper and getting bigger isn't just increased skew penetration increased distribution in their home markets, but it's thoughtful expansion into adjacent geographies. So I think were.
We're distribution expansion minded.
For those to rebrand families on a very calculated basis because of what we're seeing in the home markets I think health in their brew pub operations is a really good leading indicator of health in their businesses and their brands and I think as we get shore footed and as the company has more to invest and we can be more thoughtful in the deployment of those resources you will see a benefit especially for those three brands in one asterisk on that.
Increasingly we love all of our new children, they're all we love everybody in the family, but increasingly of all of those brands. We continue to see low rubia have potential almost as a standalone brand as Ken alluded to.
And so why we see expansion opportunities geographically for Wynnewood am be in for Cisco, we see much broader expansion opportunities for the rubia, because we'd be targeting more demographic demographics and psychographics as opposed to kind of old school geography is on the Rubia brand and we think there is a lot of white space and run room for us there.
Perfect very helpful. Thank you so much.
Thank you. Our next question comes from Amit Sharma of ammo.
Your question please.
Hi, there this is drew on for Matt.
Hi, Tom.
Hey, doing well thanks.
So a couple from me.
Want to talk about the performance of Kona during the quarter.
And the sort of.
Execution issues from from the wholesalers.
Just given that.
Yes.
Shipments are still trying to in like 500, Bips above Depletions can you just talk about.
What those sort of execution issues were specifically, how you plan to get those corrected and.
Do you think.
That's something that we need to read into if there's potential for no deal sort of what the.
Distributor support will be for the brand.
Yes, it's really a thoughtful question drew.
So there's a lot there let me try to unpack it and then maybe can if you have anything to jump into if I, if I Miss speaker phone if I'm not.
Comprehensive enough. So I think it's important to say I don't think any wholesalers didnt try to execute so I want to make sure we don't caused us as being the wholesalers drop the ball.
What we're seeing is and I think as Ken said in his prepared remarks, there is a systemic aspect to it.
Where we're just not getting enough retail pack out for a fast moving brands in beer.
Relative to the rest of the beer category. So if you think about it if you've got 40 from beer is also the same number of facings in one's turning it three times faster than the other three on shelf, it's really hard for them to service that shelf in an efficient way for all of those brands in either something is going to get too much attention, which is not likely the case or some things not going to get enough attention. So as we build distribution for Kona and as we saw a really dramatic increase in consumer pull through in especially in media markets. We simply ran out of stock on shelf in those shelves, we're not being replenished at the rate necessary for the cone of pull through but probably at a rate that was fine for most of the other brands on shelf given what happened in the overall market.
Thats 0.1, 0.2 is very astute observation on the 5% shipment gap I think that shows that retail our consumers our wholesalers were actually expecting the pull through to be greater in the pack out at retail to be stronger because they actually stopped their barnes and we're ready to deploy inventory in.
In satisfaction of that higher consumer demand so in a very ironic way the gap between shipments and Depletions validates. The fact that we're seeing this retail out of stock is not a wholesaler out of stock issue, it's a retail out of stock issue.
So then you get to the third thing about what do you read into it and what are we doing about it and what are the long term implications be.
The answer is yes, there would be long term implications I think there are long term implications for the entire industry, though in without being too dramatic about it if you take a look at what's happening with consumers today and what's happening with retailers what it takes to service consumerism to insert service consumer demand at retail is evolving pretty rapidly before our very eyes in the old School model of you know pellet drops at your off premise accounts in merchandising that shelf a couple of times a week.
Is probably a little bit.
David These days and needs to be Contemporized.
Does that mean that we need more merchandisers, probably does that mean that we need to pay for the merchandisers or wholesalers have pay for the merchandisers or we need to expected different servicing level from kind of key accounts that remains to be seen drew but if I stitch. All of this together. We think there was a governor on the growth of Kona because consumers were pulling in at a rate that they were incapable of satisfying so.
We saw a really sharp increases in awareness in demand in affinity for the brand and the media markets. We saw wholesalers get really excited about it because they felt that too we saw retailers. When it was on display those numbers can quoted are are phenomenal. So when I think one thing to double click on to give you guys a little bit more color.
When we got adequate display execution, there was by default adequate inventory to satisfy consumer demand so without getting too much into some competitively sensitive information. If you look at markets like Florida, where we had outstanding execution on display in outstanding programming. It places like Publix, we experienced a lower out of stock level than we would have in southern California, both of where we saw great increases in consumer demand, but we didn't have commensurate or comparable levels of retail execution in those markets.
So I know that's pretty detailed but I think it gives you guys a call a little bit of color on why were high five in each other over how the media work high five in each other over the excitement on new points of distribution built in the wholesaler network, but sitting here kind of shrug our shoulders. Okay. Now what what is that going to take so hopefully that gives you a little bit of color on what we think is happening and as far as what's next they will be implications as I said organizationally in terms of how do we course correct for that because our job isn't to play down to the level of our competition being the churn rate of the rest of the beer category. Our job is to distinguish ourselves in separate our trends from the rest of the category and if on locking that or solving that kind of issue in that dilemma of retail servicing is part of the equation will solve it I can say that emphatically how I don't have enough color right now to share with you guys what that might look like.
Thanks for the color on that is really helpful.
And then my next question.
Kind of dovetails off I'm, sorry, you said about.
Having four phase sands and one is turning much faster I mean is there any thought about maybe sort of simplifying the assortment at retail to really drive more on on big wave and then separately. If you could just maybe comment on and I'll spend a few months and.
Since the advertising campaign.
Hey.
Sort of color on what the repeat rates you've seen have been thanks.
Yeah, I think I'll, let Ken address kind of the decay, so to speak of advertising and what we're seeing and feeling good about it so well ill, let ken elaborate on that it's more his wheelhouse.
In terms of thoughts on paring down the portfolio I feel great about the fact that we focused all of our efforts on big wave along board already and I think it might have been subtle and some people may have noticed that we went so far as to even feature just big wave along board in the media campaign in one AD focused exclusively on big waves. So I think we agree with where you are going in terms of your observation drew we think focusing on a a fewer things that can move faster are better for us and you're also seeing that benefit in our gross margin because we're not just fragmenting the portfolio were consolidating the portfolio and growing faster. It's a balancing act, but I think we believe keeping the brand's fresh and staying innovative in the eyes of the consumer is important but by the same token we need to make sure that we are doing a pretty responsible ways. So.
I would say you'll continue to hear us talk about consolidation and I think again for those of you who followed us you'll remember four years ago, we whacked, 35% of our skews.
We have a lot of SKU management on a regular basis, but it's something that we're pretty mindful of on the decay issues all toss it over to Ken.
Just I think on the retail shelf before on the K the them.
Yes, I would say, we're already trying to do that with our flagship in core brand focus in terms of.
Trying to get additional facings of the key brands core brands, the flagship brands and whatnot.
The reality is we don't control the shelf per se, though we have to work with the retailer and the wholesale to be able to make that happen given the number of players that are out there it becomes a pretty complicated process to control the shelf, but.
So we're already trying to do that that will be ongoing effort I think the.
In terms of the the media the K for US right now it looks like it was probably in that 12 to 14 week range, where we really saw pretty consistent.
Response to it and so we're still kind of let it run out so to speak given where we are in the year and we'll continue to.
Track and monitor what what you know.
What what the what the long term effect of it really is.
One thing ill add to that drew is I think.
It's fair for us to say, we see very high levels of repeat on big wave.
Even distinguished Big way relative to long board. So overall, we feel really good about repeat levels, but from what our tracking can.
Can teach us.
We see are amongst the highest levels of repeat on a brand like big wave that I've, probably seen on any consumer package goods brand in the beverage space once people taste it and they know about it they really do repeat on it so it's an encouraging sign for us.
Great. Thanks, so much I'll pass along.
Thank you. Our next question comes from Anthony Vendetti of Maxim Group.
Your question please.
Thank you Andy Thanks, so much for the color on the on the potential.
Bye bye.
And I, just pushing that I was just wondering.
In addition to the $20 million payment is there anything that changes with the master distribution agreement the contract brewing or the international agreement and if not can you just go over on.
The details of those agreements how much.
Brewing they do for you how many barrels how that how that relationship.
Looks like now and if it changes how it changes.
Yes, great question Anthony Thanks.
So effectively the answer to your question is no nothing changes.
So without being flip I could say to everybody on this call with confidence if caveat. It doesnt make an offer nothing changes except for the fact that we have $20 million to pursue our long term direction that were already headed in and feeling really good about where we are and where we've come over the last three years. It gives us a sense of confidence in that regard.
Mhm again, notwithstanding the comments I made we recognized that 20 450 is great for all shareholders. So I do want to continue to say that because I think sometimes people think that we're blind to that and we're not.
But that said nothing changes in terms of their veto rights or their ability to cancel the contract or our ability to do it we continue to work together by letter of the contract.
In the same way, we work together now with the infusion of $20 million.
The detail behind that did master distribution agreement continues for another seven years.
At the same rate per case as it does today, which is 25 cents a case.
We have the right to brew.
Up to 300000 barrels in Fort Collins at a savings of $10 per barrel.
So candidly and transparently the nuance there is we'd probably update our marketing as we go through Fort Collins.
To make sure we're still saving $10 a barrel in that school mutually beneficial and on the international front. They still have the right to a number of markets.
You know that we have been slow to realize and thats, where the $20 million payment really comes in because the fact that.
I won't have made an offer if we get the $20 million is meant to.
Compensate us for the fact that we haven't made the progress internationally that we might have made otherwise, but the long term prospect for that remains Anthony So all three agreements stay in place for another seven years, we have a $20 million in our pocket.
And that's the letter of the contract.
The reality of it is yes, the world will change and I think Thats why very transparently and candidly, we said hey until we really know what's going to go on until we really know.
Whether or not we're going to be looking at the back half of this year or 2020 and beyond as an independent company with a VI as a partner or if we're going to be looking at ourselves as part of a b that would impact how do we unleash growth and how do we.
Create value in the future. We can do both I want to be clear about that we believe the future has value creation for everybody. We think the color of that value creation in the pace of that value creation in the context of that value creation differs depending on whether or not we're operating as part of baby.
Partners with Abbey.
Well potentially independent from Libya.
That's very helpful and just real quick on the follow up I know you mentioned that you're going to have.
Ill call based on this.
Decision.
August 23rd as of Friday.
Are you expecting to have a call that day is it possible to let you know.
The day before or based on the fact that it's a Friday and they have I don't know if they have until midnight on on Friday. The 23rd are you intending to have a call on Monday, what's that what's the plan at this point.
Are you bugging our conference rooms isn't it.
Okay.
No I think there's a there's a lot of there's a lot of EFS in that so what I can tell you is our thinking is that we would disclose as quickly as we could because of the materiality of the event. If baby makes a qualifying offer the obligation is on them as a 13D filer to amend their 13D into quickly notify everybody and we trust maybe I would do that.
For us if we find ourselves waking up on the 20 Threerd without qualifying offer we would quickly disclose that we hadn't received a qualifying offer.
Probably in written form and then it would probably take a week to 10 days to organize the conference call for everybody. The reason, we would wait a little bit of time is we would want to make sure that we didnt just going on the phone and say to you guys won't get an offer.
We can tell you that we will disclose the occurrence immediately.
As far as giving us a chance to understand the conditions surrounding our non offer from maybe there were some questions we'd have for AB and there were some answers we'd need to have to not be negligent as we represent to all of you what the future might hold so we'll disclose as quickly as we can.
And we will get a conference call on the calendar quickly, but I think a week to 10 days as a reasonable amount of time to make sure people could schedule it and that we could be responsible in what we have to tell you about what the rest of the year looks like what the $20 million might look like and some initial thoughts on hey, why did they are why didn't they and how would that impact the answer I. Just gave you Anthony about the other agreements.
Perfect makes a lot of sense, thanks, Andy for all the color.
Thank you. Our next question comes from Genco of Lumbar Securities. Your line is open.
Hello, Andy.
Absent a qualifying offer do you expect in a continue to be in the $18 million to $20 million range quarterly or can you not comment on that.
I wouldn't comment specifically on it Jim, but I would be out of character for me to offer some thoughts on it.
So I think if we look at the future the 18% to 20% of our quarters, probably on the high side.
So I think there is a seasonality to spend but I think if we take a look at it we wouldn't necessarily want to under invest in the future in the absence of a qualifying offer.
Because in this might sound like bravado on behalf of the team, but I think it bears saying for us to have been able to grow Kona.
By what we grew Kona in this marketplace to me demonstrates just how peerless that brand is within the traditional beer space right now.
And I think we need to feed the Beast. So does that mean that there would be a.
Rationalization of spend or not I don't know, but I think conan need spend.
Secondly, I think we'll have Ruby opportunity is huge it's real.
White space, So I think that requires spend.
And then thirdly, if you take a look at some of what I call. The unicorn offerings coming out of the the Mad scientist and kind of the brilliant market tiers in our ph experiment.
I think we want to make sure that we've got the the treasure trove of offerings supported appropriately.
In the marketplace.
All of that takes money so is that 18% to 20% I don't know, but I can tell you. We don't think we would be slashing and burning in the absence of a qualifying offer we think we would be pretty thoughtfully investing in the future. Because we think one of the things that distinguishes CBVA from a lot of our peers right now we're not only operating well today with some assets that are known we have some pretty nice gems that we can Polish in the future and that we can bring to market and we would be investment minded behind them and all those things are our topic.
You can all trust, we would have a bit more refined perspective on a bit more of a a tight answer too.
Once we get past the 20 threerd.
Sure. Thank you and then.
My comment is 20 450 is the minimum offer.
The qualifying offer.
I Love you Jim.
Yes that is that is.
That is right. The language is right in that it has to be a minimum offer 20, fourfifty right right and just one question about Kona, where is that where does that stand geographically now in South America.
So right now in South America, we are pretty much only in the of anything of any significance in Rio.
We've done some tests in other markets, we did one container to Chile every so often we did have a couple of other things, but really in South America, Jim right. Now it is a lot of white space with a dot growing in Rio and that probably to expand over to San Paulo, once we get into local production.
Right. Thank you so much for the color.
Thanks, Jim.
Thank you. Our next question comes from David Cohen of Midwood Capital. Your question. Please.
Hi, everybody.
So a couple of questions one on international you called out specifically Kona shipment volume up 21% and we attempted to back into international shipment volume in total and it looked like that year over year growth was actually if if logic holds through the math holds was actually greater than 21%.
That.
Reasonable conclusion, and if so what what are the drivers of the whole international portfolio, possibly being greater than even the kona growth which was substantial.
Yes, I think there's a couple of things that are going on in there and it might be it might be a little bit a numbers issue. The majority of our shipments are kona. So the vast majority 90, some odd percent.
The other thing is that we started to that will start to bleed on their love Rubia to Puerto Rico is a big opportunity, but that is an export mentioned international market for us Puerto Rico, given that production has done on the mainland for those brands and then there is a lot of dribs and drabs on David but theres not a lot. There I think we can follow up offline on kind of the math you are doing pretty much kona.
And then some of the Rubia, Puerto Rico in everything else is negligible right now.
Okay, and just logistically what when is your next board meeting.
Our next board meeting so our governance cycles, well known so we just got through the second quarter Board meeting.
And last week.
With our board so our next board meeting would be October Thirtyth.
Okay, and that's our normal governance cycle on that said, if there's something behind the question I'll read into a little bit David.
The board is also.
On top of their responsibilities, we have a special committee of independent directors.
Who meet on a regular basis and who also convened.
The day of our board meeting and who are pretty active.
And monitoring the situation as it pertains to a qualifying offer or not.
Okay, and then I'm sure you're aware as probably a lot of people on the call are of.
Versus recent transaction involving platform brewing.
Im curious not did I expect you to know the ins and outs of platform, but from an outsider's perspective, how would you compare sort of the asset there to some of the assets that.
That craft Brew Alliance now owns and I'm thinking in particular, the three partner breweries that you recently acquired.
Man, there's a speculative question Vathree David.
So I'll buy I think platform the grid. So I don't want to ask you about it you know water conservation sorry.
There is a I think the platform acquisitions, a nice one for maybe I think it makes a lot of sense, Ohio is a really appealing market for the craft space. It was white space within the entire network on both within the SBA portfolio in within the BDI portfolio, It's a nice brand great founders and really nice beers.
So if I can I think it makes a lot of sense. So if I contrast that with our other us as I say it looks a lot like.
It looks like it would check a lot of the same criteria that our acquisitions chips, I'm really strong brand and its home market.
Really authentic in strong founders with a good beer portfolio.
With a really strong local relevance and with some room to run so I would say that the criteria Avi I probably used in their acquisition of platform looks a lot like the criteria. We used in our acquisition of NBC is going we would.
Okay and then my last comment is the comment other question I had I appreciate the.
Genuine efforts on the part of the management team and the board to.
Sure what's in the best interest of shareholders.
And.
As I said.
As we.
Mentioned in the letter sent to the board a couple of months ago. We are of the mine that that that is achieved through a sale of the company as that as Youve. It part suggested today and we strongly believe that there are other buyers some with some seemingly some significant war chest that should have an interest in a in a set of assets like craft brew has so we would strongly encourage the company and the absence of a qualifying offer too so.
Put up a big signing for sales side and maximize the value of the company.
Thats all right. Thanks, a lot guys.
Thanks, David.
Thank you. Our next question comes from the line of Steve cast of RJ and Associates. Your line is open.
Hi, guys. Thanks for taking my question there is good.
And the absence of an offer just to understand that a little bit better. If another buyer were to make a bid all the agreements are enforceable correct that is correct.
Okay.
I understand David there, Steve sorry, there's a there's a there's a rabbit hole nuance there and we can kind of take it offline if you're interested in it but I'd be negligent and not Abby I still has a position on our board and they have a minority position on the board and a change in control would have to pass the board. So you end up with a little bit of a circular reference to.
Could you undergo a change in control and if you were undergoing a change of control with the agreement stay in place and the answer is yes. It would be a party to those discussions, though in one way shape or form as a result of their existing.
Presence on the board, Okay got you.
How does that affect I guess conus growth, one way or the other I know you addressed that earlier, a little bit, but I guess the commitment on their core part to Kona based on how it goes.
You know I think we spend a lot of time thinking about that Steve in.
I can represent to all of you with a very clear conscience cone is growing because of SBA not because the abbey.
And I don't mean that in any just respectful way to our partners, but we are responsible for growth on the Corona brand, we work through our partners at the.
Distribution network and through our brewing partnership and we pay for that we paid 25 cents a case for access to the distribution network through the master distribution agreement, but we maintain a salesforce of wholesale our managers and of retail folks. So in a sense nothing changes because you shouldn't see.
Them start to take resources away from the Corona brand because they are not necessarily deploying resources to the Corona brand today. So our fee is largely in our hands and Thats why when I go back to questions, even like drew teas.
On merchandisers, that's our obligation to figure out.
It is our responsibility not anybody else's, so I don't worry about whether or not maybe I will try to kill the brand or a baby I would divert attention from the brand and the absence of a qualifying offer the Kona brands are beautiful brand consumers love it retailers want to stock it wholesalers like to make margin off a bit it's up to us to unleash the value for all of those entities and ultimately for all of you in the process.
Okay, Great and I just wanted to say as well you guys have always done the right thing for shareholders and I have confidence that you always will so I appreciate everything you've done.
Thanks, Steve that means a lot I appreciate it.
Thank you at this time I'd like to turn the call back over to CEO and Thomas for closing remarks, Sir.
I appreciate everybodys, continuing support of CBVA and being available for this call. We look forward to discussing the results of the third quarter of 2019 with you soon thank you and have a great day.
Thank you, Sir ladies and gentlemen. This concludes today's conference. Thank you for your participation and have a wonderful day you may disconnect. Your lines at this time.
Oh.