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Craft Brew Alliance (NASDAQ:BREW)

Q4 2012 Earnings Call

March 13, 2013 11:30 am ET

Executives

Terry E. Michaelson - Chief Executive Officer

Mark D. Moreland - Chief Financial Officer and Treasurer

Andrew J. Thomas - President of Commercial Operations

Analysts

Anton Brenner - Roth Capital Partners, LLC, Research Division

Joseph P. Munda - Sidoti & Company, LLC

Operator

Good day, ladies and gentlemen, and welcome to the Q4 2012 Craft Brew Alliance Earnings Conference Call. My name is Andrew, and I will be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would like to turn the call over to Mr. Terry Michaelson, Chief Executive Officer. Please proceed, sir.

Terry E. Michaelson

Thank you, and good morning, everybody. I'm pleased to present the Craft Brew Alliance investor conference call to discuss our results for 2012. I will be addressing the general business environment; Andy Thomas, our President of Commercial Operations, will provide detailed commentary and insight into the industry; Mark Moreland, our Chief Financial Officer, will comment on the financial results. We will then open up the call for questions. Before we begin, I will ask Mark to read our Safe Harbor statement.

Mark D. Moreland

Thanks, Terry, and good morning, everybody. As a reminder, this call may contain forward-looking statements. Forward-looking statements are not guarantees of future performance and are subject to certain 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 Form 10-K lists some of the factors that could cause Craft Brew’s actual results to differ materially from those forward-looking statements made on this call. Craft Brew undertakes no obligation to update publicly any forward-looking statements except as required by law. Terry?

Terry E. Michaelson

Thanks, Mark. 2012 was an extremely important year in moving our national portfolio strategy forward and positioning CBA for long-term success. We introduced our national portfolio strategy in 2011, and after the second year of execution, we feel even stronger about us having an advantaged strategy in an advantaged segment.

The primary focus for CBA during these initial years of implementation of the national portfolio strategy has been on developing top line growth while strengthening each brand family's performance.

In 2012, we delivered 13.5% revenue growth, driven by the continued dynamic growth trend of the Kona brand, a positive improvement in the sales growth trend of Redhook and a continued repositioning of Widmer Brothers to higher revenue and higher profit brands. We also introduced some very strong new initiatives that will enhance our performance long term, including the Omission brand family, which is our gluten-free beer with real craft beer taste, and beginning our export program.

Although we accomplished our top priority of strong revenue growth and strengthened our portfolio of brands in 2012, we were disappointed to not deliver strong bottom line growth. We made some very aggressive investment decisions, both on the SG&A and margin sides of our business that we believe will pay off in 2013 and long term but had a negative impact on our earnings growth in 2012.

Our EBITDA performance of $13.1 million still allowed us to fund all capital expenditures out of cash flow and continued to put us in a strong position to grow our business in 2013. I want our shareholders to understand that we believe that the last 2 years of aggressive investments in brands, region development, new systems and building our organization has been critical in developing our strategy foundation, and we are now confident that we are positioned well to move from our strategy development phase to our strategy growth phase and deliver significant sales and profit growth for years to come.

In 2013, we look for sales and profit growth to be driven by continued growth from our core brands, introduction of exciting new Kona, Redhook and Widmer brands, regional expansion, further rollout of Omission and a full year of execution of our export strategy. We plan on all these initiatives contributing to strong 2013 financial performance, and more importantly, long-term value growth.

We know 2013 will be a very competitive year in the craft beer industry, with a new brewery opening every day, large regional craft breweries expanding and large national brewers continue to expand their presence in craft beer. We are confident that we have established a strategy that positions us well to compete in this environment and strengthen our position in the craft market. Our unique performance drivers of a diverse portfolio of authentic craft brands, aligned A-B national distribution network, a national sales organization and bicoastal breweries and pubs provide us with competitive advantages that separate us from our competition.

I want to thank our talented and committed team at CBA for their outstanding work in building our national portfolio strategy, and I look forward to a year of record-breaking sales and operating profits for CBA in 2013. Andy?

Andrew J. Thomas

Thanks, Terry, and good morning, everyone. As you read in our release, CBA finished a rocky 2012 by posting its strongest quarter of STR growth in company history. And even more encouraging than the overall numbers are the underlying drivers of performance, including continued strong STR growth on Kona, continued acceleration of Redhook, continued expansion and growth for Omission, a successful launch of our first cross-brand offering, the winter variety pack, and revenue strength on Widmer Brothers that belies the overall weakness of volumes.

As I said at the end of Q3, "essential reason for our being, our complementary portfolio of authentic craft brands continues to strengthen and provide a strong foundation for future growth." And excitingly, that foundation is now showing tangible signs of success in both volume and revenue performance.

Keeping with the structure of prior calls, I'll begin with a walk-through of the hard numbers, and then provide a bit more color on what's behind the figures.

First, a walk-through of the portfolio. For Q4, the total CBA depletion growth trend again increased sharply versus the prior quarter, coming in at plus 10% for Q4 2012 and raising 2012 total STR to plus 6%, in line with the guidance we provided in Q3.

For the full year, Kona posted STR growth of plus 23% versus 2011; Redhook growth was plus 6%, marking the second consecutive year of growth on Redhook's turnaround journey. Widmer Brothers' volumes slipped back minus 5% for the full year. And both Omission and our cross-brand winter variety pack, each contributed strongly to CBA's 2012 volume performance.

Before taking a quick look at each brand family, let's start with a not-so-quick look into the most complex brand in our portfolio, Widmer Brothers. While the minus 5% decline in STR is hardly what anyone will consider remarkable performance, it's important to put that number in the context of the long-term strategy for Widmer Brothers and in the context of Widmer Brothers' role in CBA's portfolio.

Specifically, I'd like to recall 2 things that I've said before: Firstly, for Widmer Brothers, the old adage, volume is vanity and profit is sanity, is critical; And secondly, volume declines are concentrated in Hefeweizen in the West.

In 2012, our goal was to continue deliberately rebuilding the value of the Widmer Brothers franchise with healthy pricing and enhanced profitability, enabled through stronger branding and more interesting craft-centric beers.

The strongest evidence to date that our approach is getting traction is the following. Despite that minus 5% decline in volumes, Widmer Brothers' revenues were flat, translating to a very healthy increase in revenue per barrel of over plus 6%. That increase was driven by shifts in our product mix towards newer, high-end offerings as well as the pricing and promotional discipline, not just squander resources on chasing Hefeweizen volumes by playing the price card through more aggressive discounting.

To be clear, the Widmer Brothers' path to long-term health is a balanced one, supporting the brand value and vitality through newer, high-end offerings while managing the rightsizing of our legacy volumes for Hefeweizen, particularly in the on-premise draft segments in California. Several reasons to believe that this strategy is working include: increases in net revenue per barrel across both draft and package; the continued growth of our Rotator IPA Series, up plus 12%; revitalization of our seasonals, up plus 28%; and continued evolution towards the higher-end offerings, which grew by plus 12%, driven by a nearly doubling of the volumes from our Brothers' reserve line.

To be clear, the challenge remains that the scale of our legacy Hefeweizen is so large that double-digit losses in Hefe will continue to volume-metrically erase volume gains at all of the other Widmer Brothers' growth areas. While this will continue to result in volume declines in the short term, the long-term effect will be a healthier, more valuable brand.

Moving on to Kona. For the full year 2012, Kona posted STR gains of plus 23%, driven by a diverse and healthy arsenal of successes, including gains in flagship Longboard Lager, up plus 16%; growth in variety packs, up plus 37%; increases in Aloha Series, up 22%; and the mainland introduction of Big Wave Golden Ale.

With respect to Big Wave, continuing on the trends that I referenced in Q3, Big Wave made a significant splash, staking its claim as Longboard's #2 by pacing at over 20% of Longboard Lager sales, while showing minimal signs of cannibalization.

Also, it's important to note that Kona's 2012 performance was not driven by geographic expansion. Rather, it was driven by making existing markets, including its home market of Hawaii, even more successful. Home market STRs for Kona kept pace with remaining markets, growing 18% in 2012, Kona's third consecutive year of double-digit home market growth.

Looking briefly at revenue trends for the Kona brand. Kona net revenue per barrel continued to grow appreciably, up plus 5% on a combination of mixed improvements and healthy pricing.

Redhook had a solid year in 2012, showing no signs of a sophomore slump in year 2 of its turnaround. While overall STR growth of plus 6% was modest, it was driven by the strategic levers that are critical for Redhook's long-term position in the portfolio.

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

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

Lastly, I'd like to highlight 2 exciting successes of 2012. The first being our newest brand family, Omission; and the second being our industry-first cross-brand seasonal variety pack. Despite limited but growing national availability and restricted gluten-free messaging, the combined Omission brand family contributed nearly a full point of growth to CBA in 2012.

And the end market success is evident across SIG track markets. Just since the national launch in summer, Omission Pale Ale and Omission Lager are already the #2 and #3 gluten-free beer SKUs nationally as reported by SIG.

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

Even more impressively, when you combine the volume from winter variety pack with the volume from each of our discrete winter seasonals themselves, consumers in 2012 drank in an impressive 45% more CBA winter seasonals than they did in 2011. There is no stronger proof of the power of our portfolio than the success of this initiative.

Bringing this all together, as in prior calls, I'd like to summarize gainers and decliners, offer a few geographic insights, and touch on our restaurant and retail division results before closing with some thoughts on 2013.

In Q4, gainers and decliners behaved consistently with prior quarters. As a result, for the full year 2012, gainers outplaced decliners by a ratio of about 2:1. While all 4 brand families contributed to the national gainers column in 2012, Widmer Brothers, driven by Hefe, monopolized the decliners column with over 2/3 of declines coming on Widmer Brothers. In contrast, Kona had no decliners at the national level.

Quickly highlighting geographies in 2012, the East remained the growth engine for the company. And like Redhook, the East resisted a sophomore slump by accelerating its growth for the year to plus 19% versus 2011. The mature West, which still comprises nearly 80% of our business, grew by just over 3%.

Finally, the results of our restaurant and retail division provide further proof that our brands are resonating and attracting more consumers than ever. Guest counts across our 5 publications increased to nearly 1.5 million guests, with overall revenue for the R&R unit growing by plus 8%.

All locations, both on the mainland and in Hawaii, saw increased traffic and increased revenue growth for both beer and food, with prime margin also improving versus 2011.

In closing, let's look forward for a few moments. As our guidance suggests, we are bullish about 2013, and while we expect the continued ups and downs characteristic of a company undergoing a metamorphosis like ours, we are embolden by our close to 2012 and by our ongoing efforts to focus our collective resources on job #1, improving the health and performance of our existing portfolio of brands while exploring and capitalizing on new sources of revenue.

Some specifics. In January, we announced a major reorganization of our commercial organization, aimed squarely in improving the performance of our core business by improving the effectiveness and efficiency of our resources. Highlighted by the appointment of regional general managers, this new structure will provide greater focus and integration of our local resources, along with greater flexibility to adapt to regional consumer, market and channel SKUs. A new innovation team also created in the reorganization will begin to explore new opportunities for CBA to leverage our unique strengths without distracting our organization from focusing on its core task: driving our portfolio strategy in focused markets and channels.

The seeds of export development have been planted and are taking root in a host of international markets, including the U.K., Norway, Sweden, Denmark, Ireland, China, Hong Kong, South Korea and Japan.

Our exclusive agreement with Craft Can Travel! to develop this piece of our business brings us world-class expertise without distracting our focus on the key tasks at hand, driving our portfolio strategy in focused markets and channels domestically.

And speaking about our portfolio, Kona is significantly fueling its success with Phase 2 of the Big Wave rollout; expansion into 5 Midwest states, the most significant expansion of new markets for Kona in 5 years; and a host of exciting new packaging developments, including the launch of a custom bottle and proprietary channel-focused can packages.

Redhook is taking off. Driven by the partnerships with The Dan Patrick Show, Redhook will leverage the greatest national exposure ever in the brand's history with the launch of Audible Ale, an exciting collaboration with Dan Patrick to bring the crossover craft drinker the most crushable craft beer ever.

Widmer Brothers will build on the launch of a new year-round offering, Alchemy Ale, to continue its rigorous training regimen, getting in shape and shedding legacy volume in exchange for profitable volume, driven by craft-centric beers, appropriately matched with revamped branding and packaging where they have the Widmer Brothers legacy. Omission will continue to bring the taste of real craft beer to gluten-sensitive consumers across the country as we build distribution and intensify our efforts to communicate that Omission is truly the only nationally available beer that is crafted to remove gluten. As we close the books on 2012, we look confidently to 2013, staffed with a stronger commercial organization, armed with stronger brands and energized by a laser-focus on driving profitable results for our portfolio. On to Mark.

Mark D. Moreland

Thank you, Andy. I'll start by recapping our 2012 financial performance, and then address our 2013 guidance.

Our financials for 2012 reflect the themes Terry and Andy have discussed, including solid top line growth, driven by investments in our brand and sales capabilities with disappointing flow through to the bottom line. While bottom line performance is lower than we anticipated for the full year, the investments we made during 2012 continue to lay a strong foundation for future growth, as evidenced by a 10% depletion growth in the fourth quarter.

For the full year, we generated $0.13 earnings per diluted share, generated from strong top line growth, offset by year-over-year margin pressure and increased spending on SG&A. Revenue grew above our original expectations and met revised guidance at 13.5%, driven by an 8% increase in shipments and a 4% increase in revenue per barrel in conjunction with 16% growth in contract brewing and 8% growth from our pubs.

Gross profit grew 11% with an approximate 70 basis point reduction in rate, reflecting higher brewery variable cost on a per barrel basis, partially offset by improved fixed cost coverage and a shift in mix to our higher-end beers. SG&A was flat to last year on a rate basis and was up $5 million in absolute terms, reflecting incremental investments in brand developments and sales capabilities.

Lastly, for 2012, our capital expenditures were $9 million, including significant capacity investments in both our Portsmouth and Portland breweries.

Turning my comments to 2013. We project the following for the full year results: depletion growth of 7% to 11%, reflecting continued strength of the Kona, Redhook and Omission brands and further stabilization of the Widmer Brothers brand; average price increases of approximately 1% to 2%, reflecting the competitive pricing environment; contract brewing revenue about half that generated in 2012 as a result of the termination of the contract brewing arrangement with Goose Island; gross margin rate of 28.5% to 30.5%, reflecting higher brewery variable cost on a per barrel basis, partially offset with better fixed cost coverage; SG&A expense ranging from $47 million to $49 million, reflecting leverage from the foundation built by more aggressive spending in prior years; capital expenditures of approximately $11 million to $13 million, continuing our investments in capacity, efficiency improvements, quality initiatives and pubs.

I'll take a moment to highlight a point contained in our press release that we anticipate significant changes in our quarterly performance versus 2012. This is predominantly as a result of both normal changes to programs and new product timing, as well as uneven 2012 quarterly performance as a result of the implementation of new supply chain processes and systems that we expect will drive improved supply chain control during 2013. Specifically, during the first quarter, we expect relatively weak shipments as compared to those that drove last year's 19% revenue growth in the first quarter of 2012.

Overall, for 2013, we expect our quarterly shipment cadence will be closer to historical norms. During 2013, we are engaging a significant work to improve the gross margin flow through of our sales growth and new product initiatives. We are confident these efforts will generate materially improved per barrel brewing operating costs and gross margins over the coming years. In summary, while we are not satisfied with our 2012 profitability, we are confident that our foundation of strong brands and national sales capabilities in concert with margin rate improvement will continue to lead to robust profit growth.

And with that, I'd like to open up the call for questions. Andrew?

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Tony Brenner, Roth Capital Partners.

Anton Brenner - Roth Capital Partners, LLC, Research Division

I have 2 questions. The first relates to Widmer. I wonder if you could talk about just on the West Coast, what proportion of Widmer sales now are draft and how that proportion has changed over the last 1 or 2 years.

Andrew J. Thomas

Sure, Tony, this is Andy. So Widmer Brothers, what I can tell you is the concentration of the losses is draft Hefeweizen in California. And that is driving, and has been, about 50% of the losses of the Widmer Brothers brand. I know that's a large number, but that's about what we've been tracking at on a rolling basis. The brand in total on the West Coast is starting to skew a little bit more towards package, about 60/40. But historically, on the Hefeweizen brand, that's been closer to a 50/50 with draft and package.

Anton Brenner - Roth Capital Partners, LLC, Research Division

Okay, that's helpful. So there's -- I mean, draft is still, in absolute terms, declining at roughly the same rate that it has been?

Andrew J. Thomas

Yes. Draft has been declining, package has stabilized somewhat on the West Coast for Hefeweizen. Depending on what time period you look at and the way you slice the Widmer Brothers brands, we've actually seen some buoyancy in the package business. But draft continues to be the focus for us in terms of stabilizing the declines.

Anton Brenner - Roth Capital Partners, LLC, Research Division

Okay. And certainly, I wonder if you could talk about the outlook for glass costs in 2013.

Mark D. Moreland

Sure, Tony. This is Mark Moreland. We are seeing right now glass cost being close to CPI. There's not a dramatic change either way on glass, but it's going to cost -- it's going to be at or a little above the pricing level we're seeing for 2013.

Anton Brenner - Roth Capital Partners, LLC, Research Division

Okay. And your grain costs should be down pretty significantly, right?

Mark D. Moreland

Grain costs year-to-year are fairly flat to 2012. And again, we do put in the forwards, so we locked in 2012 rates back in 2011, same thing with '13. So we didn't see some of the spike that some of the industry saw, as much of the spike last year, but it's pretty comparable going into 2013.

Anton Brenner - Roth Capital Partners, LLC, Research Division

One other quick point. What was the reason for the spike in the tax rate in the fourth quarter?

Mark D. Moreland

Sure, Tony. This is Mark, again. It predominantly has to do with the state of California's change in their estate tax apportionment methods. I won't go into it -- if you want to, you can give me a call. But suffice it to say, there's a onetime true up that's going to -- that did occur during Q4 for that change in their -- the way the state of California is taxing corporations.

Operator

And your next question comes from the line of Joe Munda, Fidelity.

Joseph P. Munda - Sidoti & Company, LLC

It's Sidoti.

Terry E. Michaelson

I thought you made a move on us there, Joe.

Joseph P. Munda - Sidoti & Company, LLC

Not yet. Real quick, I guess, first question for Andy. Andy, with the success that you guys saw on the winter variety, I mean, any plans for future releases, like a summer, summer ale or spring ale? Any -- if you could give us some color there, that would be great.

Andrew J. Thomas

Yes, we will -- so explicitly, we are doing a summer variety pack, which we've already started the sell-in on the success of winter variety. So the cross-brand variety, as I said, really, we thought we were onto something there. And as I said, I personally don't think there's any better example of how our portfolio can kind of bring value both to retailers and consumers than that. So we are coming back with summer. And beyond that, we've got some things up our sleeve which I can't share yet, but I'll tell you that we will continue to learn and evolve how we let the brands play together at retail when, again, it's consumer relevant.

Joseph P. Munda - Sidoti & Company, LLC

Okay. And yes, Andy, on a side note, the Winterhook was great. I had a variety pack about a month ago, it was awesome.

Andrew J. Thomas

That's great. Appreciate that.

Joseph P. Munda - Sidoti & Company, LLC

And as far as the export program, can you give some color there? I may have missed it in your comments. Can you guys talk a little bit about that, what countries, and, I mean, headway you're making there?

Andrew J. Thomas

Yes, sure. I'll go back. I did run you through a list of countries, I'd probably did it quickly, so I'll go back and just do that quickly. Countries we're actively exporting to now include the U.K., Norway, Sweden, Denmark, Ireland, China, Hong Kong, South Korea and Japan. And across those markets, each brand family is represented, not necessarily all 3 brands in every market, but our export partner, Maarten Kruijtzer at Craft Can Travel! has been working with a number of importers in each of those countries to assess which brand family is most appropriate to the market and which importer in those countries is most appropriate for our strategy and brand family.

So all of those countries are active now. And when I say active, we received initial orders which have been fulfilled and have received repeat orders already. Most of that started flowing towards the end of Q4. So we're just in the repeat order cycle right now in January and February. So too early to really give any guidance on volumes there, but I'll tell you, we're encouraged by what we're seeing with those countries. We're encouraged with the repeat business that we're starting to see generated there, and we'll continue to expand to other countries that makes sense to us on the same methodical basis. And I want to underscore, the agreement we have with Craft Can Travel!, really, I think, helps us to, as I said, tap into some great world-class expertise without necessarily having to orchestrate everything from Portland. So that allows us to be a little bit bolder and, at the same time, a little bit more selective in where we go.

Terry E. Michaelson

And I want to add on briefly to that, this is Terry. With that strategy, we very explicitly looked at this as something that's going to -- we think can deliver some significant long-term value. So this process will be a very slow seeding process. So we don't expect to see significant contributions in the first year. We're encouraged by what we've seen, but it really is learning the market and growing to make sure that we have a healthy, long-term contribution. So the real significance of this is going to be 3 to 5 years out.

Joseph P. Munda - Sidoti & Company, LLC

Okay. And I mean, Terry, following up with that, I'm curious about the brand positioning. I mean, are you positioning it as an American beer or as a craft offering? And the reason I'm asking is, I know there's a lot of small, regional brewers in some of these countries, and it might be tough for the consumer in those countries to really understand or differentiate between the offerings. So I'm just curious there.

Andrew J. Thomas

Yes, I'll take that, Joe. This is Andy, again. We're -- there's actually a nice little burgeoning American craft beer market happening across Europe, as there's kind of ironically a beer renaissance of sorts happening in markets that's being driven by American beers. So I think American and craft in all of those terms have a little bit of a different connotation depending on what country you're in. But what's driving consistently the interest across markets is a growing segment of international populations that are looking for more interesting beer varieties. And the American craft beer scene has a bit of romance around it, driven not only by what we're doing but there's a number of others who have been getting more active in Europe and in Asia. So without explicitly saying if it's American beer or craft beer, I think the 2 of them are kind of inextricably linked when you look at the trends that are driving the interest up, particularly in Europe. In Japan and in Asia, I'll tell you a lot more of that is probably tourism-related and badge-related. There is a status associated with drinking an imported beer in general, as well as some of the links we've got, there's a natural affinity for the Kona for example in some Japanese segments because of the tourism and the international trade between Hawaii and Asia. So all of those factors kind of come together.

Joseph P. Munda - Sidoti & Company, LLC

Okay. And I've got 2 more here. As far -- I guess, for Mark. Capacity utilization at 73% for 2012, yet you guys are going to spend anywhere between $11 million to $13 million this year. Can you give us some color as to what that capital is going to be used for? I know you mentioned a little bit in the press release, but I was hoping for a little bit more detail.

Mark D. Moreland

Sure. The largest single chunk of money next year is targeted towards Portsmouth and finishing the build out of that brewery. So as Andy alluded to, we're seeing very good growth on the East Coast, and we need to make sure our capacity is there to meet that growth. So that's the single largest chunk of capital. We have a lot of projects next year, but we are trying to stay in front of the growth curve we're seeing. Again, the way we're presenting the capacity is if we could use all the capacity all year, which as we've described in the past is impossible, so really call it 85% level is what I would be considering full capacity, given our product is perishable. So we're wanting to stay with some excess capacity as we move towards that 85% level and just trying to stay ahead of the curve.

Joseph P. Munda - Sidoti & Company, LLC

Okay. And then, Terry, I guess, big picture. I was wondering if you could give us some commentary on your thoughts on the BUD-Modelo situation and if that kind of turns a spotlight on craft based on the fact that it seems like the bigger conglomerates in the space, in the beer space itself, can't or are inhibited by making these large acquisitions. Just some thoughts on that.

Terry E. Michaelson

It was -- it continues to be a very interesting process. Obviously, there are still negotiations going on, and we're not privy to where that's going to end up. But what is very clear is that the government certainly wants this to be a competitive industry and has made that statement, I think, strongly in terms of what's happened with ABI and Modelo. I think what is clear is, and I mentioned that earlier on, this is an unprecedented competitive period for this segment at this point. As I mentioned, there's of brewery a week opening at this point -- a brewery a day opening. There is a lot of expansion with regionals. From our standpoint, what's clear is at this point, that you better have a definitive advantages in your strategy. And we clearly stated, and I could tell you, it's been a long and it's sometimes difficult but rewarding process getting to where we are today, taking assets. Some of those which were in a state that was somewhat tired with the Widmer and Redhook brands and Kona not being fully integrated. Building through an integration and foundation stage to just coming through a development of our strategy stage to a growth place. So where we see ourselves at this point is because of our portfolio and because of our unique advantages being able to compete. And every craft brewer at this point is going to have to recognize that they're going to be competing against the ABIs and the MillerCoors as well as the other craft brewers. So you better have a purpose for being relative to the wholesalers and some advantages in dealing with them as well as the retailer. And you better be compelling to the consumer because I think that even with the message sent from the government in terms of the Modelo, that doesn't eliminate ABI and MillerCoors creating their own brands and being aggressive.

Joseph P. Munda - Sidoti & Company, LLC

So Terry, does that open you guys up, since your comments with the explosion of craft brewers, to really taking a hard look at acquisitions? And if so, do you guys have enough capacity to run it through your plans for next year?

Terry E. Michaelson

Well, we certainly, as we've said, we certainly continue to look at ways to enhance our portfolio. And as we look at those potential partnerships, potential opportunities to work with other brewers, we're going to be looking at how that enhances our overall strategy. So we do think that there will be opportunities, and those maybe regional opportunities. And with those regional opportunities, there may be a brewing capacity that comes with that, or we may end up bringing that through and leveraging our resources. What I can tell you is that we continue to work on a long-term capacity strategy that will increase our gross margin. We don't believe in any way that the margin rate that we're at now is the one that is the most productive and will deliver the most value long term. So we'll look both regionally and look at what niches within the portfolio could be filled, and we may utilize our breweries for some of those partnerships. But we may also bring on capacity if -- from those relationships if it looks like it will be helpful. But we do believe there'll be opportunities, we're going to be very selective in that process. And I think what you'll see is us also partnering in different ways going forward with them, and it may not be direct or acquisitions, but it may be partnerships in bringing brands to market.

Operator

[Operator Instructions] Your next question comes from Steve Caspel [ph], RJ Associates.

Unknown Analyst

Can you talk a little bit about the innovation for Widmer's Hefe? You see Shock Top, with all the different flavors and all that. Have you guys considered doing kind of broadening that out to maybe help the brand a little bit?

Andrew J. Thomas

Yes. So Steve, this is Andy, I can give you some color on that. In a word, yes. It's something that we're looking at. I want everybody to understand, it's not as if we're not paying any attention to Hefe but we're trying to be disciplined, as I said, in not chasing it either. And one thing that's kind of consistent with both of those items, not ignoring Hefe but also not chasing it, is to look into ways that we can develop more valuable Hefe offerings that are more interesting, more craft-centric, more valuable to retailers and more compelling to consumers. And varieties of Hefe could be an option there, so they'll be coming out of the innovation group. There are a number of tests that we'll be running on a very limited basis, it's nothing that I would announce even in terms of rollout. But we are playing with different variants on Hefe, taking a look at what might work there. And those could be related to whether or not they're dark wheat or smoked wheat or whether they are fruit flavored or whether there are some other things going on. So nothing to concretely share with you other than just say that the innovation group is actively involved in taking a look at whether or not there are more craft-centric offerings of Hefe that would be more valuable. And again, not getting into starting to bifurcate the brand so much that it gets fragmented and means a million different things, but looking at whether or not we can add some value there in a more profitable way and maintain the pricing integrity and the positioning of the brand.

Unknown Analyst

Okay. Like a lemon, for instance, would seem like a logical.

Andrew J. Thomas

Right. Yes, yes. Steve, one thing I'll point to, again, to add some color. If you take a look, and we've looked at the data, and you look at the Shock Top variance you brought up, their really -- their success is very regional. And one thing that we're trying to balance is we're a small company with a national footprint. And as I like to say, we're the bones of a big brewer and the soul of a craft brewer. So what we need to do is make sure, and this is in concert with some of the changes we made in the commercial organization, that we're not taking a one-size-fits-all approach. So maybe a lemon-flavored Hefe, I said maybe, a lemon-flavored Hefe would be appropriate for Southern California. But that doesn't mean we need to do it in Southern Florida or in Chicago, and that's kind of the approach that we're taking more so is making sure that we're matching our best foot forward with the market with what we can deliver to that market at the same time.

Unknown Analyst

Okay, that makes sense. You guys talked about this a little bit a second ago, on the kind of gross margins and operating leverage over time. Does it hurt a little bit not to have, let's say, just a particular one beer that you could mass-produce to try to get the margins up, when you're doing small batches of things, I assume it's harder to get higher margins doing it that way, is that fair?

Andrew J. Thomas

That's certainly fair. And I think what you'll see from us -- no, I shouldn't say I think. I know what you'll see from us this year is a lot more focused programming nationally on a smaller set of brands, which will help to drive not only efficiencies on the production side and in the supply chain but will also drive efficiency and focus in our sales and marketing resources in the market. So specifically, to give you some color there, if you're talking about Kona, you will hear first out of everybody's mouth the words Longboard and Big Wave. And then secondly, you'll hear things about Aloha Series and variety pack and Fire Rock. On Redhook, you'll first and foremost hear things like Audible Ale and Long Hammer, and then you'll start to hear more things about maybe regionally ESP up in the Northwest or variety packs or seasonal. In our Widmer Brothers, you'll be hearing a lot about Alchemy Ale. So I can tell you very specifically that we're taking a step back, as I said, not trying to take a one-size-fits-all approach, but saying, "Hey, what are the lead horses here that can carry the heavy lifting or do the heavy lifting for us in a number of markets. And then where can we build on top of those with some regional sensitivity or with some regional insights that allow us to act a little bit more locally." So you'll explicitly see that coming out of us this year. The reorganization in January, the appointment of the regional GMs, the integration of all the local resources under those GMs was a very concrete step in that direction.

Terry E. Michaelson

And that -- to add on to what Andy said and kind of connect again to this theme that I've been talking about, that this is -- CBA is a very new company, and Widmer and Redhook have been around for a long time and Kona certainly for midterm. But putting the strategy together, a national strategy with those portfolio of brands really is 2 years old. So as we look at this, and that's the exciting thing for us, is the awareness of what brands work in what regions and how we can maximize that portfolio, not only what's relevant to the consumer, but what's the best profitability model and the way that works and how we utilize our breweries, how we utilize our resources, and that really is important for analysts and our shareholders to understand that this is a significant inflection point for us going into 2013 because we have a level of insight and actual operating experience now with this strategy that allows us to start delivering growth in sales and profits in a way that we weren't really capable of doing in that development space. So this is a significant and exciting inflection point for us.

Unknown Analyst

I like to hear that. I mean, that's obviously the big pay off, is when you guys finally get the leverage on that. I mean, you're doing a great job growing the top line.

Terry E. Michaelson

And we certainly understand that. Believe me, we're frustrated that there weren't profits faster, but it was -- what I want to make clear, it was a very tangible specific decision on our part to build the strategy the right way to deliver long-term value to our shareholders. And we certainly could have taken some shortcuts, we certainly were capable of managing expenses to a lower level, doing some of those things that would have made short-term earnings look a little better. But our belief is, is that it wouldn't have delivered the long-term value we're looking at. So '13 is very exciting because I think everybody will start being able to see the tangible results of this investment, and it's exciting to us.

Andrew J. Thomas

Steve, if I may pile onto that a minute and talk about Audible Ale in Redhook as an example of -- a real tangible example of where we think we are reaching scale, about where there was an investment period and a threshold that we had across. So a year ago, the call on Redhook was very different, and we're talking about what was going to come on Redhook and repositioning that brand and starting to do things with The Dan Patrick Show. A year on, we've got a year of national exposure with Dan Patrick under our belt, we've got the collaboration with The Dan Patrick Show to launch Audible Ale, we launched it at the Super Bowl, we're getting national exposure from that through Dan Patrick. And all of a sudden, as we prepare for the package rollout, which is coming at the end of March, you actually start to see activity in national publications like MAXIM or Playboy or a host of other places. All of that was a journey to get there, but the scale investment, the scale we've gotten to now will start to reap rewards because we can start a program around Audible with flexibility unlike we've ever had. But we had to take the journey of, first, investing in Dan Patrick, first, investing in that relationship, building the national exposure, so that now we can start to leverage those investments and not have to basically do things market by market on that brand. That's one example of some of the benefits we're hoping to see this year from some scale, some investments that we made in 2011 and '12, which we feel have reached scale in 2013.

Unknown Analyst

Okay, that's great. I appreciate that. The last thing I have was on Big Wave. I've actually had it, I think it's fantastic, I think it's a great product. I'm sure that will do well. Can you talk a little bit about, well do you think that will slow the momentum of Longboard? Or do you think it can kind of just add to the overall brand family?

Andrew J. Thomas

So I can -- I'm looking at Ed and Mark here because they are saying they're going to have to issue a K after I shared some details here. We're tracking the Big Wave launch really closely, Steve. So I can talk pretty much in depth and factual about what we're seeing in the last 6 months. So we've seen no evidence of it cannibalizing at any significant rate. So very, very minimal cannibalization, as I said, and that's empirical. We've got 6 months of data to back that up now. We're not seeing it slow down in momentum. In fact, we're actually seeing it potentially have a bit of a Halo effect in some markets as we have a better one-two punch, Longboard and Big Wave, than we might have had with Longboard in and of itself. We'll be testing the waters on Big Wave, no pun intended there, with some can package introductions this year on a limited test basis to see whether or not that makes sense as a follow-up alongside of Longboard. But what we know is that Longboard and Big Wave both appeal to consumers. But our instinct and our insights so far, that they're appealing in a complementary way to each other. And to answer your question explicitly, we're not seeing any signs of slow down or cannibalization as a result of Big Wave. We're actually seeing that as another scale play for us to become a little bit more relevant.

Operator

There are no further questions. I would now like to turn the call over to Terry for closing remarks.

Terry E. Michaelson

Thank you. I appreciate everybody's continuing support of CBA and being available for this call. We look forward to discussing the results of the first quarter of 2013 with you next time.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and have a good day.

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