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Craft Brew Alliance Inc. (NASDAQ:BREW)

Q2 2013 Earnings Conference Call

August 8, 2013; 11:30 a.m. ET

Executives

Terry Michaelson - Chief Executive Officer

Mark Moreland - Chief Financial Officer

Andy Thomas - President of Commercial Operations

Analysts

Vivien Azer - Citi

Tony Brenner - ROTH Capital Partners

Joe Munda - Sidoti & Company

Jim Cull - Lambert Securities

Operator

Good day ladies and gentlemen and welcome to the second quarter, 2013, Craft Brew Alliance Inc. earnings conference call. My name is Caroline and I’ll be your operator for today.

At this time all our participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions). As a reminder, the call is being recorded for replay purposes and I would like to turn the call over to Terry Michaelson, CEO of Craft Brew Alliance. Please go ahead.

Terry Michaelson

Thank you and good morning everybody. I’m pleased to present the Craft Brew Alliance investors conference call to discuss the results for the second quarter of 2013.

I will be addressing the general business environment. Mark Moreland, our Chief Financial Officer, will comment on the financial results; and Andy Thomas, our President of Commercial Operations will provide detailed commentary and insight into our portfolio of craft beers. We will then open up the call for questions.

Before we begin, I will ask Mark to read our Safe Harbor statement.

Mark 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 factors section and our most recent Form 10-K were some of the factors that could cause Craft Brew’s 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. Terry.

Terry Michaelson

Thanks Mark. Our strong second quarter performance is a powerful indicator that we have successfully moved beyond our foundational development phase into the strategy growth phase we’ve been communicating.

Our record growth in STRs and strong increase in net sales further underscore that our differentiated national portfolio strategy positions us to meet our 2013 guidance and deliver significant sales and profit growth over the long term.

As we consider the rapid evolution of the craft beer industry and the influx of new regional breweries, we remain confident in our strategy and continue to see strong indicators that it is working for us.

First, we are seeing incredible momentum from our high-growth brands; Kona, Redhook and Omission, which as many of you know received some extra buzz last week following the FDA ruling to standardize gluten-free levels for less than 20 parts per million, a threshold our Omission beers are significantly below.

Second, we are pleased with the continued stabilization of Widmer Brothers as a high-margin craft brand. Third, we are excited about new partnerships that extend our brand reach, and Andy will provide more color on those during his portion of the call. And finally, we are seeing the trend of strong STRs in sales continue into the third quarter.

Before Mark provides specifics on our financial results and Andy shares additional context and key highlights around our individual brands and upcoming initiatives, I want to take a moment to recognize the entire CBA team for our Q2 performance.

As I mentioned on the last earnings call, our confidence in our ability to deliver significant growth in the second quarter was not based on hope. It was grounded in our track record of continued performance improvements, key initiatives we were confident would deliver strong results, and our transition from development into a growth strategy that clearly demonstrates we are well positioned for long-term success.

I appreciate everybody’s continuing support of CBA and being available for this call. I’m now going to hand it over to Mark, who will provide some details on our financial results. Andy will then spend some time-sharing updates from our brand portfolio before we turn it over to Q&A.

Mark Moreland

Thank you Terry. As we discussed on the last call, we feel our second quarter results present a much more accurate picture of the underlying health of the business than the first quarter.

Overall for the quarter we generated total shipment growth of 8.8%, which produced revenue growth of 10.7% and drove a 40 basis point improvement in gross margin rates. EBITDA increased by 37% and EPS doubled to $0.06 per diluted share.

Focusing on our core beer business for the quarter, we saw 12% growth in depletions; driving a strong 13.5% growth in branded beer shipments and a corresponding 80 basis point improvement in gross margin rate.

The difference between our 13% growth and branded shipments and reported 9% total shipment volume reflects the termination of one of our contract brewing relationships in the third quarter of 2012.

Our total company gross margin performance for the quarter was suppressed by the closure and renovation of our Woodinville Brewery pub, which impacted both revenue and expense levels. While we are very pleased with the pub’s new look and feel and we believe the renovation will generate incremental top and bottom line growth. Our pub business posted an overall gross margin rate decline of 400 basis points for the quarter.

Moving to year-to-date results, we have grown depletions by 9%, reflecting the increase in strength of our craft beer portfolio. The financial impact of the strength and our core consumer demand was muted by supply chain adjustments that occurred in the first quarter. These supply chain adjustments impacted our shipment and revenue levels and brewery utilization. As a result, on a year-to-date basis, revenue is up 3.4%, gross margin rate is down 230 basis points, and EPS is a loss of $0.04 per share.

Looking to the full year of 2013, we confirm our current guidance, including depletion growth of 7% to 11%; average price increases of approximately 1% to 2%; contract brewing revenue of about half that generated in 2012, as a result of the termination of the Goose Island contract brewing arrangement; our gross margin rate of 28.5% to 30.5%; SG&A expense ranging from $47 million to $49 million; and lastly, capital expenditures of approximately $11 million to $13 million.

In conclusion, from a financial perspective we are pleased to see the strength in our top-line trends, and expect continued strong top and bottom line performance through the back half of the year.

And with that, I’ll turn it over to Andy for some good commentary.

Andy Thomas

Thanks Mark and good morning everyone. At the beginning of the Q1 call, I stated that we entered Q2 by far the most excited and confident about the health of our company, our portfolio, in all of our brands as we’ve ever been and given the performance in Q2, I think you can understand why.

For the first time in CBA’s history, CBA’s quarterly growth was propelled by growth in all brand families and across all CBA sales divisions. Our overall plus 12% STR growth came from a healthy blend of plus 23% growth for Kona, plus 14% growth for Redhook, and plus 1% growth for Widmer Brothers; all accompanied by the continued expansion of Omission in our international markets.

As with prior calls, I’ll jump right into the numbers and offer some color commentary along the way. As mentioned, for Q2 the total CBA depletion growth trend came in at a robust plus 12%, and given the share amount of volume in Q2, this performance buoyed our year-to-date trend from plus 5% after Q1 to plus9% year-to-date through Q2, squarely in line with our STR guidance for the year.

Kona’s plus 23% Q2 performance kept pace with Q1, translating to plus 23% growth on a year-to-date basis. Redhook’s Q2 growth of plus 14% better than doubled its Q1 trend, bringing its year-to-date performance into the double digits at plus 10%; and for Widmer Brothers, even the brand’s modest growth of plus 1% raised its year-to-date performance from minus 12% after Q1 to only minus 4% year-to-date through Q2.

To get behind the numbers, let’s start with some extended color on Widmer Brothers. It’s a consistent story. We remain deliberate in reshaping the Widmer Brothers portfolio, helping the brand regain its luster, brand value and credibility as the craft beer pioneer that it is.

Consistent with Q1, Q2 was materially impacted by the continued decline in Hefeweizen and volume attrition from Drifter Pale Ale’s discontinuation. In fact, those two factors alone accounted for nearly 80% of Q2 declines on Widmer Brothers. Unlike Q1 however, and as previewed in the Q1 call, the stabilization of Hefeweizen declines and the introduction of Alchemy Ale, the replacement for Drifter Pale Ale mid-quarter contributed to a markedly different result. Alchemy Ale, introduced late April, accounted for over 50% of the brand’s Q2 gainers.

Other bright spots for Widmer Brothers in the quarter included continued growth in Widmer Brothers’ Rotator IPA series, with concurrent offering upside down plus-10%; Brothers’ Best variety pack plus-14%; and Widmer Brothers Seasonal plus-15%.

I’d like to touch briefly on specific efforts to renew the brand value; specifically, the development of Widmer Brothers high-end and the introduction of refresh brand and packaging graphics.

The high-end continues to develop appreciably, with continued growth in the Brothers' Reserve wine and notably in Q2, the highly successful and celebrated release of a collaboration with Tampa, Florida based Cigar City brewing. That collaboration called Gentlemen’s Club, featured three craft beer interpretations of an old fashioned cocktail, aged on either New Oak Spirals, Bourbon Barrels or Rye Whiskey barrels. Released exclusively in 22 ounce bottles and draft in select cities, those 22-ounce bottles retail for $19.99 and were instantly met with both sales and critical success.

On the packaging front, materially all secondary packaging across the Widmer Brothers portfolio has successfully been updated to feature a distinct look for each beer brand, while emphasizing the signature Widmer Brothers W, a recognizable brand mark that has remained consistent since the brewery’s beginning. Initial off premise results suggest a strong trade in consumer reaction to the updated look.

To close on Widmer Brothers, I’d like to connect a few dots. We repeatedly acknowledged that the strategy of re-branding and repositioning will mean short-term volume softness, but should lead to long-term brand health and enhanced brand value, going so far as to say that we will not chase hefe volumes or play the price card. We believe that Q2s results begin to show the efficacy of this approach. While volumes were up only 1%, revenue per barrel on the brand grew over 5% in the quarter.

Let’s now turn to our fastest-growing and now largest brand family, Kona. Kona continues to roll, showing no signs of letting up, matching its robust Q1 trend. Kona again grew plus-23% in Q2, driven by a formidable one-two punch of Longboard Lager in Big Wave Golden Ale.

Longboard again grew in the double digits, up plus-11%, fueled by strength in core offerings such as draft and 12-ounce bottles, along with success on the newly introduced Hang-10 Pack of 10, 16-ounce cans.

Big Wave Golden Ale, still in its introductory year, continued to come ashore with full force. Impressively in Q2, Big Wave volumes paced at nearly 30% of those growing Longboard Lager volumes. Variety packs completed Kona’s big-three growth drivers for the quarter, up plus-20%.

Geographically, the five newly launched Midwest states continued to show strong performance, accounting for just under 20% of Kona gainers in Q2. Equally encouraging, is that whole market Hawaii contributed 15% of gainers and virtually all other Kona markets continued a strong double-digit trend.

On the branding front, Q2 was notable and that our newly developed proprietary custom 12-ounce bottle for Kona rapidly spread across the country and was met with unanimously positive response.

On to Redhook; which began sprinting in Q2, up plus-14% and more than doubling its Q1 growth trend. Notably and encouragingly, Redhook’s growth is increasingly concentrated from a brand perspective and increasingly broad-based geographically. From a brand perspective, flagship Long Hammer IPA continued its double-digit trends, up plus-13% in Q2.

Audible Ale, in only the second quarter of its launch, continued to perform strongly, selling over three times the volume of Copper Hook, the brand it replaced and continuing to pace at approximately 25% of that growing Long Hammer volume. Variety packs again completed the trio growth drivers for Redhook, up plus-30% in the quarter.

Before moving on, I’d like to spend a moment acknowledging several notable partnerships for Redhook, including the launch of Redhook Game Changer and the announcement of a collaboration with social media powerhouse The Chive.

Although Game Changer launched early in Q3, and will be the topic of more commentary during that quarter’s earnings call, in their own recent earnings call, Buffalo Wild Wings shared some exciting initial results related to their experience with our new Ale. In the first two weeks of launch, Redhook Game Changer was the fourth highest-selling draft beer in the corporate owned stores. While Game Changer is not a private label, nor is it exclusive to Buffalo Wild Wings, promotional activity continues to be focused on driving initial traffic in trial with Buffalo Wild Wings and their guests.

To say early results are encouraging is an understatement. In the case of The Chive, Redhook will partner with The Chive backed Resignation Brewery to bring KCCO Black Lager to market in Q4, 2013.

The Chive is the world’s largest photo entertainment website, and reaches an average of 3.5 million visitors per day, translating to over 22.1 million unique visits per month. KCCO, co-branded with both Resignation Brewery and Redhook will initially be available in 12-ounce bottles and limited to those select markets with the greatest concentration of Chivers. KCCO will be sold exclusively through CBA.

We are proud that Buffalo Wild Wings and The Chive joined the Dan Patrick Show on Redhook’s growing list of strong national partners. Coupled with the accelerating volume trends on Long Hammer and Audible, and the initial Game Changer success, these new initiatives provide a solid endorsement of Redhook’s strategy, to appeal to the crossover craft consumer and partner with like-minded national partners in order to activate that positioning.

Now looking at our youngest brand family Omission, Q2 brought continued expansion and success for the brand. Omission’s volumes ticked up to a full 3% of overall CBA volumes and again, grew 10% of Q2 growth. The very recent FDA ruling acknowledging the 20 parts per million definition for gluten-free provides further validation of Omission and we look forward to a TTB ruling, which would pave the way for less restrictive, clearer gluten-free messaging nationally.

Before closing, I’d like to once again summarize gainers and decliners, offer a few geographic and channel insights, and touch upon our international and innovation progress. Regarding the ratio of gainers and decliners, Q2 saw a continued improvement and gainers outpaced decliners by nearly 3 to1, by far the healthiest ratio thus far for our portfolio.

Quickly highlighting geographies, the East remained a growth engine for the company in Q2 and accelerated with growth of nearly plus-40%, up from plus-30% in Q1. The relatively more mature West posted impressive growth of better than 5% for the quarter.

On the channel front, consistent with Q1 trends, three of our four brands posted on-premise growth in Q2, with Kona, Redhook, and Omission, all showing positive trends in that channel. Off-premise growth continues to drive our performance though with strong double-digit growth for the portfolio.

Our international business continued to develop nicely in Q2, with yet another country added to our international portfolio, bringing our number of international markets to 11 and on the innovation front, Square Miles Cider was launched with 14 West Coast test wholesalers beginning late in the quarter. Initial trade and consumer response has been solid, despite an unfortunate voluntary recall.

To be clear, the recall was voluntary and initiated with an abundance of caution and with paramount priority placed upon consumer safety. As we were still early in test mode, the recall was closely contained and limited to the very first production run from our cider partner. We are confident that any remaining bottles from that pressing have been removed from the market and accordingly are continuing the test rollout according to our original plans.

In closing, as we look forward to Q3 and beyond, we anticipate continued strong performance across our brand families and broadly speaking, even more of what was clearly evident in Q2. From Redhook Audible to Widmer Brothers Alchemy to Kona Big Wave to Omission, we are confident that the success of Q2 showed significant tangible proof that our portfolio strategy is gaining traction.

Q2’s growth was not only robust, but it was also strategic; focused and concentrated in those areas where we are focusing our resources. In fact, if you look across brands, over 70% of our gainers in Q2 came from the combination of Longboard, Big Wave, Long Hammer, Audible, Alchemy and Omission.

While we were unabashedly upbeat about the quarter’s brand performance, we remain committed to delivering sustainable results, not just for one quarter, but reliably from many quarters.

In that spirit, I’ll end with a similar sentiment that I closed my remarks after Q1. While one quarter does not a year make, it is nonetheless solid empirical validation of the confidence underpinning our guidance.

And with that, I will thank you for your interest and engagement and turn it over to Q&A. Carolyn.

Questions-and-Answers Session

Operator

Thank you. (Operator Instructions). Please stand by for your first question, which comes from the line of Vivien Azer from Citi. Please go ahead.

Vivien Azer – Citi

Hi, good morning.

Terry Michaelson

Good morning.

Vivien Azer – Citi

So my first question has to do with your guidance as it relates to the back half. Clearly, second quarter was strong, very encouraging to hear that you are optimistic about a strong top and bottom-line growth. But there is some real lumpiness in your quarterly comps from the third quarter into the fourth quarter.

So I just wanted to clarify, I think in your press release you said you are looking for an accelerating trend, but the comp in the fourth quarter is very tough. Is it fair to say that you won’t see an acceleration quarter on quarter through the end of the year?

Mark Moreland

Yes Vivien, this is Mark. You are correct that we are very positive about the underlying health of the portfolio and what we can do from a COGS standpoint to generate margin and earnings.

With that said, we aren’t changing our guidance. We want to make sure we can meet our guidance and we may update you after the Q3 results on that and as far as the lumpiness of the results, you are correct from a sales standpoint and shipment standpoint. We did have lumpiness last year as we dialed into the supply chain.

If you look at the STR trends, those are more stabilized you’d expect and we do expect from a STR standpoint to have good acceleration through the back half.

All in, we feel solid about the guidance and we believe the top line will continue to accelerate as well as the bottom line and I’ll open up for Terry, if you have additional commentary.

Terry Michaelson

No, I think Mark stated it well. One of the things that we have discussed is that we are still a very young strategy and as Andy alluded to, we feel very good about the strategic development of the portfolio. But we want to be conservative in terms of the way that we are looking at adjusting our numbers and let the year play out. But we do expect our businesses to continue on the very positive track it is now and if we get to the third quarter, and at that point we are confident in where the numbers are going, we may adjust at that point.

Vivien Azer - Citi

Fair enough, that all makes sense. In terms of the competition in the craft beer category, I think there’s been some mix, commentary or expectations around the proliferation of craft and you have two new breweries opening up a day. Are you seeing any challenges in terms of acquiring shelf space at retail or tap handles. Seemingly, your second quarter results wouldn’t reflect that the competition is impeding your growth, but I am curious how you are seeing the competitive landscape overall.

Andy Thomas

This is Andy, Vivien. It’s a great question and one I can probably talk for a lot more than a few minutes about, but I think it is by far the most competitive market I’ve ever experienced. I’ve been in the beer industry since ‘95 and I sound like an old man, I love to lament with all of us old-timers, and we say we’ve never seen it this way, and it’s factual.

What you stated is fact. You can go out there. There are more breweries out there fighting for more shelf space and more tap handles than there have ever been before and you see what’s happening to the beer market as we know it, we are witnessing a transformation, so it is incredibly competitive. That competition manifests itself in a number of ways.

Yes, shelf space is increasingly difficult, but it’s where we really start to smile and say the strategy makes sense, because what we have to our advantage is not only outstanding brands that are getting healthier, which a lot of our new younger competitors have, but we also have a national sales organization that can reach national accounts, bi-coastal brewing capability, where we can start to go into channels and into outlets that a lot of the small guys can’t.

So it’s one reason why – I believe the definition of strategy is picking your battles and it’s one of the reasons we are encouraged by our on-premise growth, where you see us do things with folks like Buffalo Wild Wings.

Buffalo Wild Wings has 925 stores stretching across the U.S. A small upstart craft brewer might be able to play in one or two of them, but they won’t be able to play in all 925 like we can. So what we’ve been doing and that’s why I said, our growth has been strategic in Q2. We are looking at where we can match our brands to our system and where our competitive advantages exist and that’s where we’re pouring our resources.

So, all that to say that the market will get increasingly competitive at your local tavern and you’re local bar, your local craft beer bar. There will increasingly be competition for 30 tap handles and those tap handles will probably continue to rotate and that’s something we celebrate, because we think it adds to the vibrancy of the category, and we think it gets people more interested in beer again.

So we participate in that, specifically and more so with Widmer Brothers. But we are able to go after consumers in places where other small upstart breweries can’t. Those consumers who have become interested in craft, but find themselves in a Buffalo Wild Wings or shopping at a Safeway or shopping at a target, and that’s where we think we’ll be able to distinguish ourselves from the noise and from all of the activity in the new starts.

Vivien Azer – Citi

Fair enough. That makes a lot of sense, but my last question has to do with Cider. I recognize that it’s very, very early days, but that’s obviously a category that’s gaining a lot of interest with consumers.

One of the things some of your competition has mentioned though is the gross margin drag that they are experiencing. So if you could just comment on the kind of gross margin on your Cider products and also your ability to source apples, which has been a challenge across the industry.

Andy Thomas

I’ll start from the back, and then I’ll let Mark address some gross margins. So I think the key comes form me in answering your question, is about whether or not we think Cider is cannibalistic or not.

So we believe Cider allows us to recruit new consumers into the fold. In doing that, we don’t believe it’s cannibalistic for other craft beer that we are selling, and we are certainly not going and taking out some of our own tap handles and putting a Square Mile tap handle in its place. So we do thing Cider appeals and helps to expand the reach of our portfolio, so from that perspective, it’s additive.

Secondly, with respect to Cider apple supply, I think if I’m not mistaken, I think either you or somebody else asked that question in the first quarter. The Cider partner we are working with, one of the things that distinguishes them is that they have their own supply of apples and they are very large apple growers themselves.

So given where we are positioning Square Mile Cider, which is as a premium Cider and not as a mainstream Cider, and given their supply, which they control themselves, we are confident that we can adequately supply what we have planned for the balance of this year, and what we would be able to supply, however the test unfolds and how we start to plan out 2014 and beyond.

So no concerns about supply. With respect to margin, I would start by offering that we don’t believe that cider is cannibalistic at all to our portfolio, and I’ll toss it over to Mark maybe to offer a couple of comments on some numbers behind that.

Mark Moreland

Sure. Vivien, so we are still in tests obviously and we are still dialing in the actual production process.

We expect, over time as we have that product grow is that its margin’s dollar and rate basis would be fairly similar to what we are seeing on craft beer. So we don’t expect a drag per say on our financials as that product grows.

Vivien Azer – Citi

Terrific. Thanks very much.

Operator

Thank you. The next question we have comes from the line of Tony Brenner from ROTH Capital Partners. Please go ahead.

Tony Brenner - ROTH Capital Partners

Thank you. A couple of questions. Andy, the brand breakdown that you gave, was that your shipments or depletions?

Andy Thomas

That was our STRs; that was our depletions, Tony.

Tony Brenner - ROTH Capital Partners

I see, and could you repeat what the Hefeweizen numbers were in the quarter?

Andy Thomas

I don’t believe I shared them in the call, but I can tell you Hefe was down again, I believe it was 10% for the quarter in depletions, which was a slight up-tick from Q1, but what I mentioned in the call was that we are starting to see that stabilize. I chose that word carefully. We are not seeing it necessarily recover, but we are certainly seeing a stabilization.

Tony Brenner - ROTH Capital Partners

What does stabilization mean? Steady 10% decline or a declining decline?

Andy Thomas

No. In terms of the losses we are seeing, both in distribution and velocity. So we track very closely on a weekly basis, what’s happening with our points of distribution and what’s happening with the velocity with those accounts. And as we get more well versed with those numbers, we are able to more accurately understand what’s driving that top-line number of minus 10%.

So we feel as though the points of distribution declines have stabilized, and that velocity is starting to recover a bit and we are also seeing actually some very nice package movement in Hefeweizen, which we feel might be related to the new packaging graphics on shelf. So while Hefeweizen is still in the negative, what I’ll tell you is it’s a lot more predictable right now than it’s been.

Draft continues to be the majority of the decline and that’s again focused in Southern California and parts of central California and on the package front, we are seeing a little bit of a bright spot, but way too early to tell with packaging just rolled out in the last six weeks.

Tony Brenner - ROTH Capital Partners

Okay. For the six-month period, your shipments to wholesalers increased about 5.6%, which is significantly below what your depletions were. For the full year, should shipments be roughly in line with the increase in depletions or not?

Mark Moreland

Tony, this is Mark. They’ll be a little bit short, given our Q1 adjustment in inventory. I wouldn’t expect us to make up that full delta throughout the back part of the year. So you’ll see some difference between the depletion growth rates and the shipment growth rate. They’ll also be impacted in total with the reduction of the contract brewing.

Tony Brenner - ROTH Capital Partners

Yes, I’m interested in terms of A-B shipments. Is that what you are talking about terms of being down?

Mark Moreland

Right, yes. So you will see some difference between SCRs and shipments. I know in the past we said model though is basically flat. With the adjustment in Q1, I would adjust that downward a little bit, that relationship.

Terry Michaelson

So for the last six months we expect them to be aligned. For the last six months we expect it to be aligned. The difference would be that the first quarter was an adjustment to inventory levels.

Tony Brenner - ROTH Capital Partners

Okay. Well, aligned for the six months, not quarter-by-quarter, I think.

Mark Moreland

Correct. Yes.

Tony Brenner - ROTH Capital Partners

Will Game Changer move the draft needle enough to provide an increase in draft shipments, enough to provide some gross margin benefit in the quarter or is that still being offset by Hefeweizen?

Andy Thomas

I think, the jury is still out Tony, but I do think that’s a distinct prospect. When you take a look, as I said we are initially focusing on driving trial and traffic through Buffalo Wild Wings, but that’s 925 points of distribution for us nationally and I have to tell you, I mean the beat up folks said it and I’ll say it very clearly, we planned for this to be a success, but I don’t think any of us believed out of the box we’d be the fourth-largest draft beer in their corporate-owned stores. That’s really…

Tony Brenner - ROTH Capital Partners

Out of how many, Andy?

Andy Thomas

I couldn’t tell you how many draft beers they have on tap in their corporate stores, but I would tell you it certainly deepens the double digits. So it’s not fourth out of four. I would say it’s probably in the neighborhood of fourth out of anywhere from, I’m going to guess 15, north of 15 Tony.

I mean I can’t share too many details with you. I’ll be able to share more in the Q3 call, but we are encouraged not just because of the relativity that we are seeing, that we are forced, but we are seeing encouragement because of the absolute volume that’s associated with that.

So I can’t offer anything more definitive than that, than to say that your hypothesis is a distinct possibility. We are only three or four weeks into the launch now, and by both accounts, both Buffalo Wild Wings and Redhook, we are really encouraged by what we are seeing on Game Changer.

And I’ll just offer again, I’ll tie this back a little bit to what Vivien asked about competition. For us, and it’s important for everyone understand we just fundamentally believe this way. As we get somebody drinking Redhook Game Changer at a Buffalo Wild Wings when they are eating wings and watching sports, the likelihood and the probability that they will reach for another craft beer or another beer in our portfolio is significantly higher, because we’ve brought them into the fold in that occasion.

So we expect to see a little bit of a multiplier, which is probably unquantifiable at this stage, certainly. In terms of not only what Game Changer will mean, in terms of distinct advantages for Redhook, but we are able to parlay that into increased activity on the rest of our portfolio, not only with Buffalo Wild Wings, but with other accounts.

Terry Michaelson

Tony, this is Terry. As Andy said, I think Game Changer is certainly one bullet that we have to work against gross margin. What I want to continue to reiterate to our shareholders is that this is still a very new strategy.

We believe our portfolio has significant traction at this point, and that’s showing. We also believe we’re now at a place where we can start aligning the portfolio in a way, in terms of where and how we are focused to start impacting gross margin positively. We also think we are at a place where we understand this strategy enough, that we can start utilizing our assets, our brewing assets more effectively.

So you won’t see a dramatic reaction from our standpoint in terms of a one-quarter huge impact, but as we are looking going forward, we are very focused on moving that gross margin up and very confident that we’ll have the same kind of response with that in terms of improvement that we’ve had with the top-line growth, and that will have a significant impact on our upside potential long-term.

Tony Brenner - ROTH Capital Partners

Sure. Getting to this growing craft segment with two new breweries a day opening or whatever that number is; I’m kind of wondering, given how increasingly difficult it is to obtain tap handles or shelf space, I wonder if you are also seeing dropouts in the craft segment, even as perhaps there are new entries. I wonder if the overall segment is kind of flattening out as some drop out or decline, unable to expand.

Andy Thomas

It’s a fair question Tony. I don’t have any data to back it up, but what we know is that overall craft segment volumes continue to grow appreciably in the double digits, depending on whose definition you choose. That number is in the high single-digit to the low to mid-double digits, so we know that, so there’s more people drinking.

The question of where is that coming from? I think you can pick a lot of evidence to show that there are some small folks that just, they are content selling 400 barrels of beer around their brewery and they are content with selling it at their local pubs and they don’t want to really extend beyond that.

So I think you are onto something definitely very insightful. But it’s not necessarily drop-outs, but it’s people who are probably more content to keep their business contained, be that only to draft, only to one certain geography or only to one channel than we’ve probably seen before and I don’t think we really know how that’s going to shake out yet. But at a high level, the competition is evident in that. We are not seeing a proportional increase in shelf space or in tap handles with the number of people buying for those.

So it comes down to a question of strategy. Who is going to get those, and which ones you are going to go after? So we are seeing attrition I would say, but I don’t know how much of that is because people are just choosing to pick their battles differently versus people saying I can’t play in the game anymore.

Tony Brenner - ROTH Capital Partners

Last question. Which is the 11th country you’ve entered?

Andy Thomas

Canada, with Omission.

Tony Brenner - ROTH Capital Partners

Fair enough. Thank you.

Operator

Thank you. The next question we have comes from the line of Joe Munda from Sidoti & Company. Please go ahead.

Joe Munda - Sidoti & Company

Good afternoon guys. Thanks for taking the question. First off, congratulations on getting Omission listed as gluten-free. That’s a bigger deal than I think most people realize, and I know Terry, it’s been a personal quest for you, so congratulations.

And with that being said, I know that in the past we’ve talked about Omission. Does that open up basically other states or look house to take on that brand?

Terry Michaelson

This is Terry. The way I look at the FDA ruling is it’s a first step moving us in the right direction. The TTB still will have to rule on what that means officially for beer labeling. So although it’s certainly a step in the right direction in terms of establishing the 20 parts per million, which as you know it’s international standard and that what we’ve been utilizing for some time as kind of the threshold.

The TTB still has to rule on how they will interpret it and so we still don’t know exactly what that means for the language on the packaging. But the way that we’d look at it is that this gluten-free consumer is somebody that’s actively seeking information and we’ve been actively involved in providing scientific data.

So our excitement is, is that a year ago there wasn’t scientific validation that the tests that we used could validate, that we were under 20 parts per million. There are now scientific validations from two international organizations, one brewing and one-cereal chemists, as well as some work that we’ve done with other variations of testing.

So we believe we’re in a very strong place. We think that the customers are going to celebrate this move, but we are still working with the TTB to know what that means for exact wording on the label.

Joe Munda - Sidoti & Company

Okay, that’s helpful. And then I guess Andy, nobody’s touched on The Chive. That’s pretty interesting that you guys partnered up with them.

Andy Thomas

Are you a Chiver, Joe?

Joe Munda - Sidoti & Company

No, but I do have it on my cell phone, so.

Andy Thomas

It’s amazing. The reason I ask kind of tongue and cheek is, I didn’t know what it was, and then when you – it’s like when you buy a new car, you start to see everybody else who has this car and you start to ask folks about The Chive and all of a sudden you start seeing the T-shirts and you find out that some of the folks who cover your stock have it on their phone. It’s actually very funny.

Joe Munda - Sidoti & Company

That’s pretty good. I had no idea until a couple of months ago what it was either until somebody told me. It’s a very powerful network of people, and they have these meet-ups all over the place.

So I mean, I just wanted to get your thoughts on how that came about and how basically this partnership with Resignation is going to work and how it’s going to go through. Is it going to go through the InBev network of distributors?

Andy Thomas

Yes, so I can probably try to add a little bit of color on all those things. So it came about because they’ve had a desire to brew a beer and Resignation Brewery has been something that’s been on their radar to develop, but it’s a little bit of a virtual brewery right now. They have a name and they a have a vision for it. But they wanted to work with somebody to basically produce and to brew and to bring to market their baby, KCCO Black Lager.

So they’ve spoken to a number of folks, and as testimonial to what’s happening with Redhook, they looked through the Redhook brand and they liked the brand’s voice. They liked what the company stood for. They liked the attitude that the brand had in terms of being inclusive and not being a little bit too serious about itself, but also being authentic and a craft beer pioneer and legitimate in that sense.

So they talked to a bunch of people and kudos to our folks here. They just basically hit it off with them and decided that was a good fit for the companies; it was a good fit for the Brothers and for us, for the Resig Brothers and for us, and it was a good fit for the brands. So with that, we went in to work on what is it going to look like. They had a recipe in mind that we’ve worked, we’ve test brewed it here and the rest kind of took off from there.

So what will it look like? We’ll launch in Q4, as I said in select markets, which where there are a concentration of Chivers and where they do have more of a likelihood to be having some meet-ups.

We’ve already started getting emails from a number of accounts who are interested in carrying the beer. So there is an indication of the power of that network. I don’t know how many other people get floods of emails from people saying, I know you haven’t introduced us yet, but we are interested in carrying it when you do. And it will be produced, brewed here by CBA, by Redhook and it will be distributed exclusively through the CBA distribution network. It will be a Redhook-branded beer, as well. So it will be part of our portfolio just like anything else, any other collaboration we would do, would be.

What’s exciting for us too, is we’re able to use that to again have Redhook touch a lot of folks. So it won’t just be about KCCO Black Lager, but that will be a vehicle for us to introduce more people to the Redhook brand and for us to be able to do more programming and to do more promotion around Redhook as well.

So it’s a pretty interesting partnership. It’s in the early stages of development. I can tell you it’s been a really healthy and a really kind of rewarding series of discussions with them and just another good meeting of the minds; very similar to what came about for Redhook Game Changer or what’s happening with the Dan Patrick relationship with Redhook, is we were just able to find as I said in the script, folks who are like-minded, who would love a good beer and who basically want to bring that message to more people.

Joe Munda - Sidoti & Company

Okay, and it will be available in draft and bottle?

Andy Thomas

Bottle only initially. So again, what we're trying to do, and I'll touch on that, because a couple of you have asked about that; there hopefully is an air of focus coming through the script and it's a harbinger of days to come from us.

We want to make sure that we are spending our resources where they are getting their full force and as a result, rather than introduce three different bottle sizes in cans and four different draft packages, we're going to start out with 12-ounce bottles on KCCO Black Lager, and it doesn't mean that we're not open to expanding the portfolio, but that's what we're going to start out with; that's what we're going to focus on and we're going to drive trial and awareness through that pack size in select markets; very similarly to saying Game Changer is available in draft only right now.

Will it be in bottles someday? That's a distinct possibility, but it's not what we are doing today. So starting out in 12-ounce bottles, limited cities, very focused on concentration of Chivers where meet-ups will occur, and very much in concert with some co-programming on other Redhook brands.

Joe Munda - Sidoti & Company

Okay, and will there be marketing dollars devoted towards it? Do you have to lay out any capital for that or is that it?

Andy Thomas

No, one of the beauties of the relationship is The Chive pretty much has a nice marketing force of their own. I think their T-shirts sell out in record time and there is, I can't remember – I'm speaking for them now, which I shouldn't do, but there is an unprecedented number of counterfeit T-shirts available on things like eBay and Amazon right now, because of the marketing cloud and the power that they have as a brand for the folks who know it.

So we're not looking at wide scale media, dollars or any kind of wide scale marketing. We're letting them handle the marketing of KCCO and we’ll piggyback some Redhook marketing and some Redhook promotion through those vehicles for us as well.

Joe Munda - Sidoti & Company

Got it. That's actually very interesting. So following up on this KCCO partnership, I know you guys get hit with all the time, the possibility of acquisitions, the integration. Are we looking at this probably being the model going forward for partnerships as opposed to taking on or acquiring a brand? Is that more the mantra going forward?

Terry Michaelson

This is Terry. I think as we've said before, we are open to any partnership that’s authentic and that extends the power and the reach of our portfolio. So I think this shows what we can do, the kinds of things we can do, both the Buffalo Wild Wings and the KCCO. I think the collaboration with Cigar City is also another indication and I think in the short term, I think lots of things like that may happen.

We still are open to exploring, acquiring or merging with somebody that we believe would fit what we're looking for from our portfolio. But again, if this is really at this point, we were pleased with what the strategy is. So this is really focusing aggressively against things that we think are going to strengthen our portfolio and extend it and I congratulate Andy and his team in working on these things.

As you said, this Chive is very unique. We're going to have a beer brand connected with social media in a way that is unprecedented in this industry and that's really what we're looking at doing. We think the separates, we've been talking about how we are unique with our brand strategy and with our reach in terms of a national organization. So we can do that both with acquisition partnerships with things like this and to the point earlier of how do we deal with the competition, I think this is how we can deal with the competition.

We can deal straight on with brands like Widmer. We can do unique partnerships with the Redhook brand and with Kona. We can just kind of fuel what's turning out to be a monster or a tidal wave.

Andy Thomas

Yes, and let me just pile onto that just a bit Joe. I think, and again, there is an air of discretion on the competition and how we are dealing with it through a host of other questions. From our perspective, the market today isn't an either/or market. You can't either just make good beer or just be great marketers and I think that's something that we’re incredibly mindful of.

Let's not lose sight of the fact that it all starts out with outstanding beer and our brewers brew outstanding beer. We have a portfolio of authentic craft beer brands that I would put up against any brewer, regardless of their size or regardless of their reputation in the industry.

What we can add to that is that we can then bring those brands to life and to market in ways others can't, be it that because of our reach through the AB network, be it because of our brewing capability on both coasts or be it that we actually will go out and we don't have a problem going and working with a third party or with a partner who has the same thing in mind that we have in mind, which is to go out and give somebody a great night out or a great experience or to go and kind of affirm who they are.

So be it doing high-end collaborations with Cigar City, which are just incredibly esoteric, great beers that we bring forward or we bring to life in that way or be it just really enhancing somebody's experience when they're throwing back a beer and having some wings, watching their favorite sports team down at Buffalo Wild Wings or be it allowing people at a meet up with The Chive, who have this sense of connection with each other, to feel more connected, because not only are they there because of The Chive and that they share that, but they're sharing a beer that unites them; that to me is all what makes our approach to the category innovative.

So it's not a cliché innovation of a new product, necessarily, but we are really proud of the fact that we brew outstanding beers; we bring them to market in innovative ways and we hopefully attract consumers who can get a depth and a richness in their experience with us that they won't get somewhere else.

Joe Munda - Sidoti & Company

Okay. I just have two other quick ones and then I'll hop back in. Andy first off, are you going to be at the first meet-up?

Andy Thomas

I don't know. Is that a good thing or a bad thing if I'm there?

Joe Munda - Sidoti & Company

I'm looking forward to seeing your picture on…

Andy Thomas

Oh, man. We're publicly traded. I've got to watch out for that stuff.

Joe Munda - Sidoti & Company

The other final question is for Mark, in regards to capacity utilization, it's 77% versus 85%. Let's say last year with the contract brewing dissipating, you guys are still calling for CapEx in the $11 million to $13 million range. I'm just trying to get a sense of why that you guys are still calling for that number with contract brewing kind of dissipating. Isn't that freeing up available space in the brewery for you?

Mark Moreland

With the elimination of the one contract brewing relationship that was actually on the East Coast out of our Portsmouth plant and the East Coast as Andy mentioned is growing very rapidly right now. So in fact that's not freeing up a lot of additional space for us. The East Coast right now is working very hard to keep up with demand.

As far as the total CapEx spend, as I mentioned, we did renovate the Woodinville brewery, the pub there and so that did take more capital than we've spent in the pubs historically, so that's a chunk of the spend. And then as we look forward to the volumes that we're looking at for this year and for next year, continued investment in both production efficiencies and effectiveness is important to us and so we want to ensure we're utilizing our breweries as effectively as possible and generating beer at the lowest cost.

As I mentioned, we're optimistic about the COGS improvements; we can see both this year and going into next year. So a lot of the capital is going into not necessarily straight-out capacity improvements, but efficiency improvements at the brewery.

Joe Munda - Sidoti & Company

Okay, that's very helpful. Thanks Mark. Thank you guys.

Terry Michaelson

Sure. Thank you.

Mark Moreland

Thank you.

Operator

Thank you. The next question we have comes from the line of Jim Cull from Lambert Securities. Please go ahead.

Jim Cull - Lambert Securities

Great quarter. Congratulations guys. Terry, I know we don't want to have the other players see our playbook, but in your new product offerings, are you considering at all a light beer or a nonalcoholic beer?

Andy Thomas

In fact I can honestly say that's not something we've discussed at this point. Again, we think there's a lot of room to get that crossover drinker and as we look at the craft industry, we really look at beers more from how sessionable they are.

And with our Kona line up and with a number of the Redhook beers, we think we have a lot of beers that really fit that and we see the consumer really moving towards fuller-flavor sessionable beers and looking for still a great experience from a flavor standpoint in those. So at this point we're kind of happy with how we are developing our portfolio around those kinds of beers.

Jim Cull - Lambert Securities

When you talking about the sessionable beers, would you say that would include beers of alcohol content of less than, like 4.5%?

Terry Michaelson

Yes, yes certainly.

Andy Thomas

And Jim, I'll jump in; this is Andy. I think sessionability is a great buzz term in industry, and it hasn't really resonated with most consumers. So it's a little bit…

Jim Cull - Lambert Securities

I'm not sure I know what it means.

Andy Thomas

Exactly. Well, that's exactly and it gets thrown around. That's exactly where I was going, so thanks for being my straight man.

I think what we're finding with consumers is a lot of the beer occasions tend to be prolonged. So somebody's not just interested in sipping on something for a half-hour. They're interested in something they can enjoy through the course of a sports game or through the course of an evening when they are out with their buddies and if you're drinking a 7% beer, you're not going to necessarily be able to drink for three hours and enjoy it.

So we've coined this term sessionability to mean if you're in a three-hour session, what kind of beer, what kind of brew are you going to need to take you through that three hours in a responsible manner? And that's where you find a lot of new beers coming on the market and what we have historically said in the craft space, that tend to be certainly under 5% alcohol, which was kind of the classic mark for a lager, an American lager in the U.S. So under 5%, but even under 4.5% alcohol with a little bit of a lighter character and with not as aggressive or not as developed a flavor profile.

So in our portfolio I would point to beers, which are resonating exceedingly well. As you heard in the script with the consumer, beers like Redhook Audible, beers like Redhook Game Changer, beers like Kona Big Wave, and even to some extent our seasonal offerings on the Widmer Brothers side and the summer seasonals, those are all beers which would fall in that under 4.5% range in alcohol, but with a lot of great flavor and something somebody could enjoy over a span of time, but still be doing so responsibly and still be able to enjoy the full two or three hours and not basically have to check out early.

Jim Cull - Lambert Securities

Right, thank you. By the way, are we pursuing any contract brewing opportunities to replace Goose Island or does it appear that with our growing brands that we are going to fill that vacuum, in other words, to get us up to higher plant optimization as far as capacity?

Terry Michaelson

We believe that our brands, our own brands, are going to fill our breweries over the near future. As we look at those, there are times where we find opportunities with contract brewers to contract-brew for some smaller breweries and we've just done that with a local brewery in the Northwest recently that we are working on, but we don't see it as a major strategy driver.

Really our focus now is that we can really understand our portfolio; we've got some smaller unique brands, and we've got some larger brands. Its really making sure we're utilizing our breweries most efficiently and that's some capacity utilization, but it's also how we use them the most effectively to deliver the highest margin for each individual beer.

So long-term contract brewing isn't a major part of our strategy, but we are certainly utilizing it in the short term, where we have gaps in individual breweries and believe we can improve our margin output and help the industry.

Jim Cull - Lambert Securities

Great, thanks again.

Terry Michaelson

Thanks Jim.

Andy Thomas

Thank you.

Operator

And the next question we have comes from the line of Steve (inaudible) from RJ and Associates.

Unidentified Participant

Hey guys, thanks for taking the question.

Terry Michaelson

Good morning Steve.

Unidentified Participant

When I look at your numbers year-to-date relative to the guidance, I guess it would imply you guys are expecting a pretty big second half of the year. If you could touch on that a little bit; and then secondly, is the Buffalo Wild Wings rollout a national rollout?

Mark Moreland

Sure Steve; this is Mark. I'll hit the difference between the first and back half first. So the first half is certainly impacted by the supply chain adjustment we incurred in Q1 and so that did suppress our revenue and shipment levels. As you can see from the STRs, which is the best way we can see how well the portfolio is connecting with the consumer, we came out of the gate in Q1 at 5%. We're now year-to-date at 9%, posting a 12% depletion growth in Q2.

So that top line is drawing up well with good acceleration. So the back half, we do expect both depletions and shipments to post nice gains and we are expecting as mentioned, a solid pricing, good cost controls, and at this point we do feel still solid about our gross margin guidance and overall revenue guidance for the year.

Andy Thomas

And I'll jump in on the second part Steve, with respect to Game Changer. The answer is yes. So Game Changer is nationally available at Buffalo Wild Wings primarily, but available as I said, to other accounts also.

As you can imagine, it's been a really interesting time for us to make sure that we can reach every one of their stores. Again, I think it starts to distinguish what makes CBA? As our supply chain folks can jump through the hoops they need to, to make sure that those wholesalers, even in some historically not well-developed markets for us or for craft beer, still have access to the brew and still have access to that beer to be able to provide it to their local Buffalo Wild Wings.

So 925 is I think the official number of Buffalo Wild Wings outlets throughout the U.S. and that's where we will be present with Game Changer.

Unidentified Participant

Is Big Wave cannibalizing Longboard at all so far? I mean, can you tell?

Andy Thomas

Yes, that's a great question. It's something that we monitor. So I can tell you pretty unequivocally, no. You might see in one place or another, there might be a handle that goes one way or the other, but Longboard top line numbers I think speak for themselves.

Longboard is growing at 11% and Big Wave is pacing at about 30% of that. We do have placements where we have both on tap, and we have a very limited number of places where we've seen a swap-out from one versus the other.

What I will say about Big Wave, because we've touched on it on a couple of different areas. We're seeing a really nice traction in Big Wave Draft and I think it speaks to a couple of points that we've mentioned. We've mentioned sessionability; we've also mentioned the fact that people are looking for a beer that might have a little bit more of a distinctive character, but they can still drink for a while and Big Wave certainly delivers on that.

So Big Wave is showing no signs of letting up. It is not cannibalistic in any material way for Longboard based on our internal analysis and we're seeing really nice both on-premise and off-premise development to the brand.

Unidentified Participant

All right, lastly and thanks for taking another question, is there room for another Kona brand to go alongside that, that would that would be more of a year-round brand? I know Fire Rock is out there, but is there room for another one?

Andy Thomas

I would tongue and cheek tell you to stay tuned. I mean, I think we continue to look at the Kona brand family and we continue to get excited about it. It's now our largest brand family.

As we start to preview 2014 for you guys in the next calls and thereafter, you'll see what we have in store for Kona. But we believe Longboard and Big Wave provide a great one-two punch right now.

There is a ton of run room as I like to remind my guys. We are still only scratching the surface on Longboard and scratching it even less so with Big Wave, but long term that brand has legs. So I would not rule out that you'll see further expansion of year-round offerings on Kona. But for right now, we are really excited about Longboard and Big Wave.

Unidentified Participant

Great. Thanks guys.

Andy Thomas

Thank you.

Operator

Thank you. That’s the end of this question-and-answer session. Now ladies and gentlemen, I'd like to turn the call back over to Terry Michaelson for closing remarks.

Terry Michaelson

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

Operator

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

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