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Craft Brew Alliance (NASDAQ:BREW)

Q3 2013 Earnings Call

November 07, 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

Vivien Azer - Citigroup Inc, Research Division

Robert Sanders

Operator

Good day, ladies and gentlemen, and welcome to the Third Quarter 2013 Craft Brew Alliance Inc. Earnings Conference Call. My name is Chantelle, and I will be your facilitator for today's call. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Terry Michaelson, CEO. Please proceed, sir.

Terry E. Michaelson

Thank you, and good morning, everybody. I'm pleased to present the Craft Brew Alliance investors conference call to discuss our results for the third quarter of 2013. In our prepared remarks, 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 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 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 Factors section and our most recent Form 10-K list 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 E. Michaelson

Thanks, Mark. We are pleased with our strong third quarter performance and continued positive growth, which we believe are attributable to having an advantaged strategy and an advantaged segment. Earlier this year, Mark, Andy and I communicated our plans to continue fueling our growth and deliver very strong year-over-year performance. And while there are a couple of months remaining, it is clear that the plans and focus are working. On that note, I want to thank the entire CBA family, including our extended family of wholesalers and retail partners for their hard work, passion and contributions, which resulted in a record quarter.

We believe that the improvements in progress we achieved to date in 2013 are due to our success establishing a strong business foundation, which enables us to now focus on critical growth initiatives. As many of you have heard me say, I believe we are only scratching the surface of what we can accomplish as a uniquely positioned high-growth craft beer company. As we move forward, we will be very aggressive in targeting focus areas that will have the greatest impact on our business.

To that end, we have identified the improvements to our gross margin performance as our #1 objective. Mark and Andy will share some more specifics on this topic in their section. I appreciate everyone's ongoing support of CBA and being available for this call.

With that, I'd like to turn the call over to Mark, who will provide more details on our financial results before handing it off to Andy for additional details and updates on our brand portfolio. After Andy, we will open up the call for Q&A. Thank you. Mark?

Mark D. Moreland

Thanks, Terry. For the third quarter, we generated strong top and bottom line financial results, with revenue up 11%, and a doubling of net income to $0.10 per diluted share. While these results show significant progress, we also experienced some unexpected cost headwinds that caused a reduction in our overall gross margin rate. On the top line, Andy will provide deeper insights to the fundamentals that drove our 14% depletion growth for the quarter, and which resulted in a branded beer shipment increase of 13%. The difference between our 13% growth in branded shipments and the reported 9% total shipment volume, reflects the termination of one of our contract brewing relationships in the third quarter of 2012.

Moving on to gross profit. We experienced a 50-basis-point reduction in our gross margin rate for the quarter, driven by essentially flat beer margins and lower margins from our restaurant division, as the result of the continuing post-renovation ramp-up of our Woodinville Brewery Pub. While we anticipated expanded beer margins entering the quarter, the record level of shipments placed an unexpected burden on our supply chain, predominantly in warehousing and shipping operations area, which drove up our cost structure.

We expect that on an annual basis, we will deliver expanding margins as we grow, and are actively addressing brewery and supply-chain cost opportunities to ensure we can deliver high-quality craft beer to market.

On the restaurant side of the equation, we expect the gap on margin versus last year to narrow in the fourth quarter as Woodinville Pub continues to improve performance post-renovation.

Sales, general and administrative costs were down 3% for the quarter, predominantly driven by quarterly differences in programming spend.

Addressing our top line year-to-date results, we have grown depletions by 11%, demonstrating the increasing strength of our craft beer portfolio, while revenue growth clocked in about 1/2 that rate at 6%, reflecting both soft Q1 shipments and a reduction on our contract brewing revenue. Our gross margin rate of 28.7% is 170 basis points lower than last year, driven by product mix and distribution costs in our beer business and lower restaurant business margin as a result of our Woodinville Pub remodel.

On the bottom line, we've generated year-to-date EPS of $0.06 per share as compared to $0.12 last year.

Looking to the full year 2013, we confirm our current guidance, including depletion growth of 7% to 11%; average price increases of approximately 1% to 2%; contract brewing revenue about 1/2 that generated in 2012 as a result of the termination of the Goose Island contract brewing arrangement; 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.

Regarding 2014 performance, we will be issuing our communication on full year 2014 guidance early next year, along with our full year 2013 results.

In summary, we believe our ongoing investments in our brands and our sales and marketing capabilities will ensure our long-term health of our brand portfolio. And when combined with the increasing focus on our brewery and supply-chain opportunities, we expect continued gross margin as we grow.

And with that, I'll turn it over to Andy.

Andrew J. Thomas

Thanks, Mark, and good morning, everyone. It was a very good quarter across brands, geographies, channels and initiatives. Q3 picked up right where Q2 left off and then some. Our STR growth was again widespread across all CBA sales divisions, and again, well distributed across brand families. So let's jump right into the numbers with the usual smattering of color commentary along the way.

CBA's Q3 growth in STRs was plus 14% versus Q3 2012, yet another record quarter, both in terms of absolute volume and trend. That plus 14% STR growth came from a healthy blend of plus 25% growth for Kona, plus 21% growth for Redhook and a flat performance on Widmer Brothers, all again accompanied by the continued expansion of Omission and our international markets.

Our quarterly performance brings CBA's year-to-date 2013 STR growth to plus 11%, consistent with the high-end of our guidance. Kona's plus 25% Q3 performance increased slightly from the prior quarter, translating to plus 24% growth on a year-to-date basis. Redhook's Q3 growth accelerated appreciably versus the prior quarter in top 20%, a magnitude not seen on a positive trend for Redhook since the 90s, bringing Redhook year-to-date performance to plus 14%. And for Widmer brothers, another quarter without a negative sign in front of the trend helped improve the year-to-date numbers to minus 2%.

To get behind the numbers, let's again start with some extended color on Widmer Brothers. It's been said that trust can be built with consistency. And in that spirit, you can trust that the Widmer Brothers brand continues its methodical turnaround, shedding hard to hold competitive volume in Hefe, while rebuilding both volume and brand image in a manner that's more sustainable and more true to its legacy. Just like Q2 and consistent with Q1 before that, over 3/4 of the volume losses on Widmer Brothers were attributable to the continued decline in Hefeweizen and volume attrition from Drifter Pale Ale's discontinuation. But let's double-click a bit, and let some detailed numbers due the talking.

Regarding the shredding of that hard to hold volume, the drain on Hefe continues to be largely draft-related and largely California-related. Specifically, draft losses accounted for over 75% of Hefe loses in the quarter. And geographically, the State of California alone accounted for nearly 75% of losses on Hefe overall. To draw a contrast, Hefe was up mid-single digits in home state Oregon. And when you take California out of the mix, Hefe package is up in the low-single digits nationally. As for the rebuilding of volume, Alchemy Pale Ale continues to be a bright spot for Widmer Brothers, accounting for over 50% of brand gainers, alongside notable growth on variety packs, small batched areas and through local market collaborations, such as our Green & Gold Kölsch, brewing collaboration with a major league soccer, Portland Timbers fan club. To close on Widmer Brothers, Q3 continued to show the financial progress of the Widmer Brothers turnaround, with revenue per barrel up plus 4% in the quarter.

Next, let's turn to Kona, a brand not only showing remarkable growth, but remarkable consistency as well. In Q3, Kona accelerated to plus 25%, propelled by both flagship Longboard Lager, again up plus 11%, and the continued explosive growth of Big Wave Golden Ale. Big Wave's growth in Q3 was so robust that it leapfrogged both Fire Rock and Kona variety packs to become a solid #2 in the Kona brand family, now pacing at better than 1/3 of Longboard Lager.

And to further dimension those volume dynamics, Kona variety packs, despite becoming the third largest contributor to the brand family in the quarter, continued to show explosive growth, up better than 60%, driven by both the Island Hopper Bottle Variety Pack and the New Wave Rider Pack, a mix of both Big Wave and Longboard 12-ounce cans.

Geographically, the 5 newly launched Midwest states continue to show strong and steady performance, accounting for just under 20% of Kona gainers in Q3. Equally encouraging is that home market Hawaii again posted a double-digit contribution to gainers. Quickly connecting a few dots on Kona, the highly successful Midwest expansion is accounting for just over 5 points of Kona's 2013 year-to-date growth, meaning that even without its geographic expansion, Kona would still be up nearly 20% year-to-date. Remarkable.

If Redhook began sprinting in Q2, it's fair to say that it hit its stride in Q3, posting a first ever for, this millennium, STR growth of over plus 20% in the quarter. There are several highlights for Redhook in Q3, but let's begin with one that's garnered much of the spotlight, the launch and resounding success of Redhook Game Changer, our beer developed in collaboration with Buffalo Wild Wings. As shared in the Q2 call, Game Changer exceeded all expectations, and accounted for nearly 25% of Redhook gains in Q3. But it is important to note that even with all that success, Game Changer still only accounted for just over 6% of Redhook volumes in the quarter. Flagship Long Hammer IPA and Audible Ale, our collaboration brew with sports personality, Dan Patrick, contributed a combined 60% of gains for Redhook in the quarter. Long Hammer posted broad-based STR increases of plus 9%, and Audible grew to just under 10% of total Redhook volume. Completing the good news for Redhook in Q3 were variety packs that again posted STR increases of better than plus 10%. Geographically, all sales divisions posted impressive results for Redhook, and importantly, from a CBA perspective, absolute Redhook growth in the quarter was evenly distributed between the East and the West, a critical and positive indicator as we activate the national footprint of our alliance wholesaling network of Anheuser-Busch wholesalers, and increasingly look towards national account activation of the Redhook brand.

In closing on Redhook, a few words on Redhook's upcoming collaboration with The Chive's Resignation Brewery. KCCO Black Lager made its debut in a very select number of accounts during Q3, and was met with overwhelming support, providing a heavily encouraging indicator for future success. KCCO Black Lager, formally launched across 10 select cities beginning October 3, with a national expansion slated for Q1 2014. More on KCCO in the Q4 call.

Looking at our youngest brand family, Omission, Q3 brought further expansion and success for the brand. Omission volumes built sharply, and accounted for just over 4% of total CBA volumes in Q3. And again, as an indicator of CBA's success and beginning to activate nationally, Omission gains in Q3 were almost perfectly divided between the east region and the west region.

Lastly from a brand perspective, I'd like to share a few words about Square Mile Cider Company, CBA's foray into the burgeoning cider market. Encouraged by success in our test markets, CBA announced a Q4 west coast expansion of Square Mile Cider, including the package expansion into six-pack, 12-ounce bottles. We will share more on Square Mile development after the west coast launch, but we're encouraged by the prospects for the targeted and methodical addition of Square Mile to our portfolio.

Before looking ahead, let's take our now customary tour through gainers and decliners, geographies and channels, as well as provide some miscellaneous updates. Regarding the ratio of gainers and decliners, Q3 saw continued help in this metric with gainers outpacing decliners by nearly 3:1. Quickly highlighting geographies, the East remained a growth engine for the company in Q3, with accelerated growth of nearly plus 45%, up from plus 40% in Q2, while the relatively more mature West, again posted impressive growth of better than 5% for the quarter, in line with Q2.

On the channel front, consistent with Q2 trends, 3 of our 4 brands posted on-premise growth in Q3, with Kona, Redhook and Omission all showing positive trends in that channel, driving CBA on-premise growth to over plus 5% for the quarter, despite all those earlier mentioned Hefe draft losses in California. Off-premise growth continues to drive our performance though, with strong double-digit growth for the portfolio. In September, we announced our first ever awards for CBA retailers of the year, with a recognition for on-premise retailer of the year going to Buffalo Wild Wings and off-premise retailer of the year going to Safeway.

And our off-premise chain execution has continued to improve, with notably strong execution and performance during the 2 key summer selling periods of July 4th and Labor Day. During both of those periods, CBA's execution and corresponding sales results placed us amongst our strongest performing peer competitors.

Our International business continues to develop in line with our internal expectations. Q3 saw the first containers begin flowing to the Caribbean, with the expansion into Puerto Rico. And we continue to look for pricing opportunities in this competitive market, and announced a price increase in the low-single digits for our large home markets in the Pacific Northwest. Pricing actions commenced in October and will continue on a targeted basis through year end.

As we look ahead to Q4 and into 2014, we are confident of continued strong performance across our brand families. As Mark mentioned, although we will not be sharing 2014 guidance at this time, I'd like to briefly highlight a few major strategic initiatives that we announced to our wholesalers in early October. We firmly believe that not only is our portfolio of strategy resonating, but our individual brands are increasingly coming to life in their respective roles within that portfolio. To that end, we will be further refining our brand families and enhancing our efforts to ensure that we're not just competing by copying, but rather that we're leading, thoughtfully finding white space and capitalizing on emerging opportunities.

Some highlights. For Widmer Brothers, 2014 will be centered around the celebration of the 30th anniversary of the brand and the brewery. Highlights will include the introduction of a new year-round IPA called Upheaval. Brewed with 6 different hop varieties and 3 different grains, including wheat, Upheaval will be a fitting tribute, not only to the bold Northwest-style IPA, but to Kurt and Rob Widmer's unapologetic attitude in legacy of innovation. Additionally, 6 anniversary collaborations, all with Oregon Brewers, will be introduced throughout the course of the year. For Redhook, 2014 will be anchored by national activation of Redhook's exclusive partnership roster, including Dan Patrick, Buffalo Wild Wings and The Chive, with emphasis on the one-two punch of Long Hammer IPA and Audible Ale. For Kona, 2014 will simply be bigger. Bigger in terms of investment, with an acceleration in marketing and advertising spend, accompanied by a new agency of record, Duncan Shannon out of San Francisco. Bigger in terms of geographies by bringing Kona's Liquid Aloha to 4 more states: Wisconsin, Michigan, Kentucky and Mississippi. Bigger in terms of variety by bringing castaway IPA to the mainland, and by introducing it into the successful Aloha Series, and bigger in terms of discipline, with a laser focus on the one-two punch of Longboard Lager and Big Wave Golden Ale.

On Omission, we will stay the course with redoubled efforts to build distribution in bringing the great taste of Omission to gluten-intolerant consumers across the U.S.. And lastly, our industry-first cross-brand variety pack will get a new look in 2014, moving away from a seasonally-based cross-brand variety pack. We will introduce the craft beer Explorer pack, containing exclusive Explorer pack only offerings from Kona, Widmer brothers and Redhook.

In concert with these brand plans for 2014, we will also be further enhancing our talent base, pruning and shaping our brand families, and eliminating some clutter. With respect to talent base, as announced last week, we're happy to welcome Ken Kunze to the to the team as Chief Marketing Officer. As a seasoned beer marketing talent, Ken will bring a new level of experience to the team, both from his time as CMO at Heineken U.S.A and his tenure at Sabra foods, and help us to unleash the power of our brands in new ways. With respect to pruning and eliminating clutter, we will be rationalizing our offerings next year in eliminating over 25% of our SKUs. This is a dramatic reduction, and will allow us to focus our resources on what's working, and ensure we're still offering the right variety to retailers and consumers, while helping reduce complexity across our entire system, from our breweries to our sales and marketing resources to our wholesalers, to our retailers.

Once that resource dividend from the focus becomes available, we can then reinvest it, literally and figuratively, in a number of areas that will facilitate long-term, sustainable growth in top line and in gross margin.

I'll end as I began. Q3 was a good quarter. And with our plans in place for closing out 2013 and welcoming the new year, we're confident that this is just the beginning of more good things to come for our consumers, retailers, wholesalers, employees and shareholders. I've said before that CBA has the body of a big brewer and the soul of a craft brewer. Our continued balancing of these 2 attributes will help us deal with increased competition, not by trying to play by their rules, but simply by doing things, going places and appealing to consumers in ways that only our portfolio, our brands, our wholesaler network and our sales resources can. And with that, I will thank you for your interest and engagement, and turn it over to Q&A. Chantelle?

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Tony Brenner of Roth Capital Partners.

Anton Brenner - Roth Capital Partners, LLC, Research Division

A couple of -- I got a couple of questions. Each quarter so far this year, I believe, your depletions have exceeded your brand shipments, which partly reflects the inventory situation at the beginning of the year, I guess. And I'm wondering if you could talk a little about brewing what that balance is now, days inventory at the wholesaler level at the end of the third quarter, compared to what it was last year, and what that implies for shipments in the fourth quarter?

Mark D. Moreland

Sure, Tony. This is Mark. I'll start off, and I think Andy will probably add some comments also. We are pretty clear in our commentary that we do see gross margin as a primary focus of ours, and that would include the supply chain. And so we would normally expect shipments in STRs, we said historically to be fairly in concert with each other over annual period, and you'd see normal growth to both the -- our owned inventory and inventory in the wholesalers. We currently are working to optimize how we get our beer to the wholesalers, and are trying to identify improvements in that process, making sure we have the right beers and the right quantities, at the right time, to right wholesalers. And so we are seeing, as you noticed in the financials, a little increase in our owned inventory. We feel good about our owned inventory levels, and then making sure we get the right inventory out to the wholesalers. So we'll continue to refine that process throughout this year, and into next year. It's not an easy solution, but you'll see -- should see comparable growth in STRs and shipments this year on an owned basis, excluding the contract brewing. And to next year, I would expect that to be a more normal cadence quarter-by-quarter.

Terry E. Michaelson

Tony, I'll jump in. Just add a couple of comments to what Mark said. I think it's important to understand we've been working with a lot of shifting kind of underlying dynamics of what the wholesaler inventory was. So if you kind of go through, and I'll connect a few dots, with Long Hammer and Audible and Game Changer taking up a lot more of the charge for Redhook, there was some inventories on things like seasonals and ESB and Copperhook that had to kind of come down. And that creates a little bit of a challenge in terms of making sure that you're having adequate supply of the brands you need, while you're winding down the supply of the brands you don't. And the same goes for trying to keep up with some explosive growth, which creates another challenge on brands like Big Wave. You can imagine that growth on Big Wave in Q3, we all were confident what's going to happen, but kind of was explosive in the true sense of the word in terms of when it happened and where it happened. So the net of all that is, we struggled at times, candidly, to have our supply chain keep pace with what was happening with the shifting dynamics in the marketplace. But as Mark said, I think you'll continue to see that cadence start to synchronize, as it were, with our demand out to the marketplace. But I would expect a little bit more turbulence in the coming quarter before it starts to stabilize into 2014. And one last dot I'll connect. The SKU reduction for next year is something that we're actively working on, understanding the impact on our inventories and shipments to make sure that we manage that in as smooth a manner as possible.

Andrew J. Thomas

And I want to make sure as we're kind of concluding this, that everyone understands that at this point, we're not concerned that kind of the secondary brands like seasonals and all of those are going to be a problem for inventory. They're simply working through at the rates that they would. So we're at the right levels there. Very simply, what we just want to do is to get more inventory in the wholesalers of the brands that are growing aggressively, and that's where we're focused, and that's only going to lead to better success. And that's really where the issue is at this point, it's getting enough of the fast-growing brands into the wholesaler.

Anton Brenner - Roth Capital Partners, LLC, Research Division

Okay. A couple of questions regarding your guidance, and particularly, the range on your guidance. Your depletions for the year, for the 9 months, are ahead 11%. And you're holding out a range to the year of 7% to 11%, which means potentially no upside to that range for the fourth quarter. And I guess they would have to stop selling at this point right now to hit that 7%. I mean, is that a -- maybe you could narrow that range a little. What's a reasonable depletion range?

Terry E. Michaelson

This is Terry, and I'll kind of address it. We actually had a lengthy discussion internally as a management group on how to handle guidance going forward. And as you know, we're still a young company and new with this, and want to make sure that as we go forward, we don't change guidance up or down in a way that may confuse analysts. You're right, as you look at some of the areas like STR growth, keeping the low end of the guidance doesn't make a lot of sense at this point. So what I can tell you is, there's absolutely no concern at all that we'll get anywhere near the low end. But we decided to take kind of a very conservative approach and leave the guidance we had in place. We expect STRs to be strong in the fourth quarter, but we do expect some headwinds due to the pricing that Andy talked about, which is going to be positive for our growth of our brands and the revenue overall long-term, but probably it's going to take a little wind out of the sails in terms of overall STR growth. So I -- as we look at this, I think what we would hope is that you would look at the STR growth rates and expect us to continue to perform at the high-end of that range. There's no concern about the lower end. And the lack of change in guidance really had to do with just us taking a conservative approach that felt like the range still appropriately captured where our performance would come in.

Anton Brenner - Roth Capital Partners, LLC, Research Division

Okay. My last question. Could you break out what the international volume was in the shipments in the quarter?

Mark D. Moreland

For international?

Anton Brenner - Roth Capital Partners, LLC, Research Division

Yes.

Mark D. Moreland

Do we give that externally?

Terry E. Michaelson

We haven't.

Mark D. Moreland

We really haven't done it externally, Tony, just yet. Let me see if I can see that quickly. It's not going to be here.

Terry E. Michaelson

Tony, I can give you some rough numbers, but we haven't disclosed this in the filing. That's still small. So we did upwards of 20,000 case equivalents internationally in the quarter. The International business, as a lot of folks know, is a little bit of a slow burn. You've got a container that comes one-way, and continues to shift, and then you've got a repeat order, and there's a long lag time associated with all that. But we're in the range of about 20,000 CEs for the quarter, give or take, and again, in line with our internal expectations and really encouraging with respect with what we see going forward based on the repeat nature of those orders. Only new market in the quarter was Puerto Rico.

Operator

Your next question comes from the Joe Munda of Sidoti.

Joseph P. Munda - Sidoti & Company, LLC

So let me start off, obviously, Andy, Game Changer has been, I guess gangbusters for Redhook growth as well as Audible. I was just wondering, as far as other opportunities, you did make note of Chive's, but can you give us some type of semblance or some type of idea of what other opportunities can we see another type of partnership or co-development agreement with another casual fast dining establishment? Or do you think you're happy with what you have with Buffalo Wild Wings? Any commentary would be great.

Andrew J. Thomas

Sure. I think the answer is yes. The answer is yes, we're happy with the relationships we've got in the partners that we have. We think it's a pretty impressive trio, those kind of national partners. I mentioned: Dan Patrick, The Chive and Buffalo Wild Wings, but it's foundational to the Redhook brand how we're bringing it to life to do things like that. So I wouldn't eliminate the possibility that we will look to do that with somebody else. Nothing to share on that point or else we'd be telling you. I do think we won't only look to find new partners, although we look to get deeper with the existing partners that we have. So you'll see a lot more Dan Patrick with Audible throughout the course of the year, next year, built into our retail programming even and into some of the events that we'll be hosting across the country next year with Redhook. Additionally, with Buffalo Wild Wings, Game Changer is the first step, but nothing can preclude us from doing even more with Buffalo Wild Wings now that we have that relationship in a place that's as productive as it is for both parties, and that we have those systems down for us. As you guys know, we talked about supply chain. You can appreciate again, body of a big brewer, soul of a craft brewer. There aren't a lot of competitors out there in the craft space who would have been able to execute against 925 Buffalo Wild Wings across the country the way we could. And our ability to do that sets us up in a way to do even more with Buffalo Wild Wings. So not only to look for new partnerships, Joe, but to also say, "Hey, it's not just about the new, shiny toys. It's also about some sustainable growth in building on the foundation that you've already successfully built." So possibly, more partnerships. The Chive we haven't even started to activate yet. So I think look for some really exciting things there with Chive meet-ups, not only in our pubs but potentially at places like Buffalo Wild Wings as we start to mix all of the partners together and try to get some synergies that way, too.

Joseph P. Munda - Sidoti & Company, LLC

Okay. And Andy, remind me when does the exclusively on Game Changer with Buffalo Wild Wings kind of terminate?

Andrew J. Thomas

So there never was exclusivity. It's a great question, Joe. And something I'm happy share. So Game Changer was developed with Buffalo Wild Wings, but was never a private label and was never exclusive to them. We always said they would get the focus during the launch period for obvious reasons. Right now as I said, there's about 900 BWWs nationally pouring Game Changer. So that's pretty much the entire roster of Buffalo Wild Wings, both the company-owned and franchisee. We have about 10% additional points of distribution on Game Changer nationally already. So if you just play the numbers out, there's probably 1,000 points of distribution out there for Game Changer right now. 900 of those being Buffalo Wild Wings, and about 100 being other accounts, either independents or other accounts. So you can find Game Changer at other places than Buffalo Wild Wings right now.

Joseph P. Munda - Sidoti & Company, LLC

Okay, that's helpful. And I guess, Mark, in regards to gross margin, it looks like you're projecting 2% to 3% price increases. Gross margin was flat in the quarter. I understand Woodinville, you guys are doing the renovations there, as well as building out the brewery. I'm just trying to get a handle on the supply chain issues you guys had in the quarter, and was it due to just way too much demand and not enough supply?

Mark D. Moreland

So Joe, just to confirm on the guidance, we're guiding to 1% to 2% pricing, and that is this kind of -- that's the flat pricing number. As far as the overall margins, what we're -- on the cost side of the equation in the quarter, we did see our -- average distance shipping also is going up. So we're seeing some cost friction because of the distance of shipping. We also do have, as we saw the increase in volumes, some friction in our supply chain, predominantly our warehousing and distribution costs. And so there was additional cost in getting that product to market to your point, trying to chase the demand. It did cost us a little bit of margin in the quarter.

Terry E. Michaelson

And to kind of add on to that, as I discussed, we still are a pretty young company and a young strategy. And just to kind of give you some perspective on how we kind of built this business model, we really, over the last few years, have primarily been focusing on getting the right -- the brands right and getting them activated in the market the right way. And to that end, on the brewery side, we've really been focused on getting the new brands brewed, getting the right quality, really making sure that we were building the brands the right way. As we've talked about over last year, we've really started to look at how now we make that more efficient and more effective, and it is a lot -- there's a lot of complexity to that. So we haven't made all the progress we'd like on that in terms of showing results, but we've made all the progress we'd like in terms of really understanding where the issues are, and how we attack that. And what I can say is we are going to turn the corner on that. We would like that to be earlier, but the combination of the distribution, the warehousing, the inventory control and utilization of the brewery, that complexity really has taken us longer than we would have liked. But we really believe we have the insights, and that we're starting to put the things in place to turn the corner.

Joseph P. Munda - Sidoti & Company, LLC

Okay, that's very helpful. As far as the reduction in SKUs, is that going to come from a particular brand family or is that going to just be a mix of all 3?

Andrew J. Thomas

It's a -- in fact, it's a mix from all 3. The majority of it all will come from Redhook, followed by a little bit on Widmer Brothers, followed by just some tweaking on Kona. So, for example -- I think what we are trying to do, Joe, and not to give away too much of our competitive strategy here, but we're trying to make sure that we're focusing and we're not treating all markets as one-size-fits-all. So in our more developed markets on Redhook, you'll see, for example, in the Seattle area, you'll continue to see a pretty robust, diverse portfolio of brands, but elsewhere, you'll pretty much see Audible and Long Hammer and Game Changer. So Redhook's Seasonals, for example, won't be as prevalent outside of the home market of Seattle as they will be there, as they have been. That will clean up a ton of complexity, and help us to focus our efforts on what we need to do. On the Widmer Brothers brand, we're really going to be focusing on Alchemy Pale Ale and on Upheaval IPA on that introduction, as well as the collaborations next year. And in order to do that, we won't be putting as much emphasis on things like the W-Series on some brands that are out there right now. So I don't want to give away everything competitively. But predominantly, Redhook followed by Widmer Brothers, as coach, if you will of Kona, and that will lead to about a 25% reduction overall. And not to pile on the gross margin piece, I think it's important for everyone to know there is a method to the madness here of saying we do have really distinct brand families. And as a result, one size doesn't fit all for them, because if it did, then they wouldn't be able to come to life for different consumers in different occasions, and they wouldn't be complementary. So if you follow that through the work we've done this year to really get the brand families tighter, allows us to then cut out the SKUs for next year, which allows us to really fundamentally reshape our supply chain, and actually start to generate some gross margin accretion, because we're not trying to do everything anymore, we're just trying to do the right things going forward.

Joseph P. Munda - Sidoti & Company, LLC

Okay. And then I just had one final question. Just give me 1 second here. You guys, in the filing in the Q, you guys talked about lower promotional activity as the reason why SG&A was down. Is that marketing and advertising, or is that offers to -- I'm a little confused.

Andrew J. Thomas

It's basically a shift in what we call programming, Joe. So a lot of it is timing, more than the fact that we're pulling back. One of the things about the range of guidance is because as we shift again the programs, and as we shift the brands and evolve them, something that we did in the third quarter, we might be doing in the fourth quarter this year, because of timing or we might have done something in the third quarter last year that didn't work, and as we learn about how to optimize the spend, we may have shifted that to the second quarter or the fourth quarter this year. So that's more about the programs that we do and the initiatives, not the discounting on our brands.

Operator

Your next question comes from the line of Vivien Azer of Citi.

Vivien Azer - Citigroup Inc, Research Division

So my first question has to do with the pricing that you took in October. I'm curious, was it specific to the Pacific Northwest? And were those geographies where you saw ABI actually take their pricing? Because they said last week there were certain markets where they've delayed their price increases from September to November. So I'm wondering whether you guys are actually leading pricing Pacific Northwest, or you opted to focus there because that's where ABI was taking pricing?

Andrew J. Thomas

Yes, we're a price follower. I'd love for us to be a price leader, I've said that before. We are price friendly, but we're not in a position to lead right now, Vivien. So we have followed, and it's not just ABI, but it would be our competitive market set, as we define it. So the actions we initiated in October were on package. They weren't on draft, I'll share that, and they were in Oregon initially where our initial price actions took place in October.

Vivien Azer - Citigroup Inc, Research Division

Okay. Got it. And did you guys see a benefit to your shipments as you saw a wholesaler buying ahead of the price increase?

Andrew J. Thomas

There's always some sort of forward buy. Because of the way we staggered it in, it wasn't necessarily notable in one month. It was kind of spread out across so it probably normalized itself.

Vivien Azer - Citigroup Inc, Research Division

Fair enough. As we went through or -- going through earning season for the beer industry, it sounds to me anyway that the potentially competitive landscape is intensifying as we go into 2014. Now I know you guys aren't offering your guidance, I know you don't want to tip your hand from a competitive standpoint, but I was wondering if you could just kind of comment on the evolution of the competitive landscape within U.S. beer.

Andrew J. Thomas

Sure. I mean, it's -- you're right. It is getting competitive. There's a little bit of physics at play here. There's more and more breweries selling more and more brands, fighting for a finite amount of space and for handles. So by definition, yes, it's getting more competitive. I think it comes down to something that I touched on in the script, Vivien, which is, we really look for white space, and we don't try to compete where necessarily everybody else is, but we try to do what we can that they can't. And again, I'll just -- I'll try to tick through a little bit of the logic that we follow and that's, in Kona, we can do things and appeal to consumers with Longboard Lager and with Big Wave Golden Ale that other craft brewers maybe can, but probably aren't focusing on, and certainly nobody can bring the authenticity of Liquid Aloha, and that really great taste to the islands to consumers the way Kona can. So we think Kona has carved out some kind of unique space in craft. It's a little importy, it's also a little crafty. And as a result, we think we can do things with that brand others can't. We know the crossover consumer, we think, better than anybody. And I think the evidence of Redhook, we joke tongue-in-cheek about 20% growth on Redhook. But again, I'll remind everybody, this brand was dead 4 years ago. And as we brought Redhook back to life for a whole new generation of consumers, we understand that crossover drinker. We are not hung up on being too cool for school, as it were in looking down at consumers, but we love partnering with folks who have those consumers in their stores, be that Buffalo Wild Wings or the work we do with folks ranging from Walmart to Kroger to Safeway and to Publix. So again, we're going after the crossover drinker with Redhook, maybe that import crossover drinker with Kona. And then I would say the brand that is positioned ironically enough in the most competitive space is Widmer Brothers. And that's why we're doing what we're doing on that brand, which is getting back to basics on it, getting back to its roots and to its DNA, and cranking out really great, crafty, unapologetic beers again, reclaiming our home market of Oregon in making that brand healthy to compete in the most competitive space right now in the beer market, which would be the heart of craft.

Terry E. Michaelson

Yes, and to add on to what kind Andy shared in terms of the specifics, I wanted to go back to again talking about what we've been talking about over the last few years in building the strategy. And it's kind of interesting, because if you look 3 years ago, you'd look at CBA and say, it doesn't look like it's performing as well as some of the other competitors. It doesn't look like them, which at that time was accurate. And what we've been doing is really building the strategy that we think has some advantages to compete in this environment because truth is, that is increasing. So what I can tell you is, is that we really like where we're positioned at this point, and we really see this -- this is our time now. So we believe we're really positioned to compete in this. It's not going to be easy, and you're right that the headwinds are going to be stronger than maybe we prefer. But because of our portfolio, because of our alignment with the AB wholesalers, our brewery structure, all the things that we've talked about, we feel really good about our ability to compete very successfully in this, and look at '14 that they continue -- continuing not only the brand growth, but profit growth.

Andrew J. Thomas

And again, to pile on just one last notion. If you look at our actions, I think actions speak louder than words. We continue to believe that not only is it the quality of our beers that will help us win. Our beers are outstanding, our brewers are fantastic, they're innovative. There's a lot of great brewers out there. What we can add to that is the sophistication of a national network, the strength of the Anheuser-Busch Affiliated Network of Wholesalers nationally, a national sales organization, a sales organization that can call on national retailers, and a marketing department, that we continue to muscle buildup with the addition, as we said, of Ken recently to basically say, we can compete in all of those areas that others can't. So it's not just about great beers. We have great beers, but it's not just about that. It's not just about great brands, we have great brands, but it's not just about that. It's not just about great organization, we have that. It's about the intersection of all those things, allowing us to do things that a lot of these newer, smaller craft brewers don't want to, candidly. So the battle will intensify, you're right. Draft handles become increasingly difficult to secure, and once they're secured, they become increasingly difficult to retain. But if you take a look at what we have done over this year, I think it really demonstrates where our mind is, and where our resources are, and that's where we're placing our bets.

Operator

Your next question comes from the line of Robert Sanders of Equity Partners.

Robert Sanders

Two quick questions. One, could you just talk about capacity utilization with the easing of the contract brewery agreement in the quarter, kind of where you are on capacity utilization overall and any need for additional resources there as some of the Kona brands ramp? And then, I have one other question, kind of regarding the marketing strategy. Congratulations on the new hire of Ken, retaining a new agency. Could you just maybe get into a little bit of details, there? Are we looking at a national advertising TV, print, digital? What are your thoughts around the strategy for marketing?

Mark D. Moreland

Sure, Robert. This is Mark. I'll jump in with the capacity question first. For the quarter, the math in the Q shows about 77% capacity utilization. That is lower than last year, but driven a lot by the capacity we put into place during the last 12 months. We continue to feel good about the overall footprint. What we are seeing nationally is that our east coast business is rocketing as Andy mentioned, and we'll find solutions to delivering that product efficiently to market. There will be interesting ongoing discussion during 2013 and '14, but overall capacity we're still on the west coast where most of our volume is, has -- we have a lot of additional capacity on the west coast, and we'll continue to continue to, as I mentioned earlier, to grow, finding ways to operate more efficiently and generate more margin out of that capacity.

Andrew J. Thomas

Great. On the marketing strategy, Robert, this is Andy. I think it won't be a one-size-fits-all approach. Again, we're really -- we believe in the portfolio of strategy, we believe they're different, and they'll get activated differently. So the agency we appointed on Kona, you will start to see things on Kona that are different. We've teased the fact that you're likely to see some television advertising in select markets on Kona next year. You're likely to see us bring the message of Liquid Aloha to more consumers, not in an inauthentic way, but basically bringing Kona to more consumers in ways that speak to them. And that was the reason for going out and getting the agency authentic. The reason for going out and getting Ken was -- Ken will be able to help us make sure that we're not taking a broad-based, one-size-fits-all approach to our brands, but making sure that we are probably more organic in the approach with Widmer Brothers, a bit more grassroots, a lot more localness in the Widmer Brothers brand as a true craft brand going into its 30th anniversary celebrating being one of the craft beer pioneers, celebrating the role that Portland has played in the craft beer market expansion, and celebrating the role that Kurt and Rob Widmer played in that whole movement. That will be a very different approach, and there are different vehicles that will be appropriate to that, then starting to bring the message of Liquid Aloha to consumers. And then thirdly, we've been very clear that we have kind of a partnership mentality about ways to activate the Redhook brand nationally, and that requires different tactics as well. So one thing you see about our SG&A over the course of the last few years, we've been very clear and tried to be as transparent as we can. We had some foundational spend. We had to build out our sales organization in certain markets before we can introduce brands. So the 5 markets on Kona last year and the 4 next year, we didn't want to introduce before we were ready for it. Now, you see us being able to shift a little bit from building out potentially our sales organization to starting to bring our brands to life, and just connecting the dot back to Vivien's question, we believe that as our beers continue to be of the outstanding quality, variety and taste that they are, and as our system continues to be able to reach more corners of the country and more retailers in ways others can't, the thing that will really set us over the top relative to competitors, is that they will fall in love with our brands, and they'll fall in love with our brands in whatever manner is appropriate for them, and that's where bringing in a talent like Ken will help us to refine what's going to kindle that love affair and what's going to keep it alive.

Operator

Your next question comes from the line of Steve Cappel [ph] of RJ and Associates.

Unknown Analyst

Can you talk a little bit about the reduction in SKUs? I assume some part of that is to try to aid in getting gross margin up. And then -- because kind of my assumption has been, obviously, as we're growing the top line, that's going to help fill the breweries and get capacity utilization open, which will aid gross margins. So if you could just touch on that a little bit.

Andrew J. Thomas

I'll start off there, Steve, and I'm sure Mark and Terry will keep me from saying something I shouldn't, or they'll try to retract something that I said. I think as you look over the course of the last 3 years, let's take a little bit of a look in the rear view mirror. As we've grown our brands, we have historically done that by adding new things. So if we got to 100, there were 10 things that contributed to that 100. That gets you to your top line number, but it doesn't necessarily get you to a great bottom line number, and a great gross margin. What we've been working at is figuring out, of those 10 things, what are the ones that will help maintain that 100 in total, but also propel us beyond that, and that's what we've been working at, and that's where I talked about the one-two punch of Redhook with Long Hammer and Audible, or the one-two punch on Kona of Longboard and Big Wave. As we start to gain clarity on that, we could eliminate some of the clutter along the way, because instead of needing 10 things to get us to that 100, we can get there with 6. And when we do that, we're able to gain a lot of efficiencies throughout the system. We are able to gain a lot of focus at retail because we're not trying to sell 10 things, we're only trying to sell the sell the 6 that we think are complementary in that matter. So that's the strategy behind it. And again, connecting the dot, that's the importance of improving our brand health, in getting our brands moving, because as we continue to grow our brand like Longboard Lager in the double digits, it becomes less incumbent upon us to introduce flankers around that. But if Longboard Lager were only growing at 2%, we would need to be introducing things around it in order to get to the same place. So the SKU the rationalization is, I would argue, a milestone along the way. It is not necessarily a change of course for us. It's just saying, "hey, we've grown up." Three years ago, we had a lot of brands, that we're doing a lot of things. We understand what those brands want to be when they grow up. We understand what the 1, 2 or 3 things that are going to be critical to that are. And now, we're going to start working diligently to focus all of our efforts against those things, and stop doing the things that are basically distracting or start pruning away that sucker growth.

Terry E. Michaelson

And to the -- kind of the impact on gross margin, certainly, capacity utilization is a very significant driver of that. And we're going to continue with -- as Andy said, be focused on -- the idea is not to prune back and have our sales slowdown or go backwards, but actually to accelerate. So we're looking to continue to up the capacity utilization, but equally as important, especially with a strategy like ours, if the efficiency of using those breweries and the efficiency of the supply chain, how we're shipping, we're warehousing, we're dealing with all the different packages and the inventory in the marketplace, so we're very clear this isn't just about raw capacity utilization, but it's about how effective we manage all the way through that supply chain channel, our supply chain group, and that that's what we've been working on, and that's where we believe there's going to be a significant improvement that you're going to see over the next couple of years.

Andrew J. Thomas

Steve, again in the spirit of actions speaking louder than words, just an interesting fact. I've talked in prior calls about the fact that Audible is selling 3x the beer it replaced, which was Copperhook. So that sounds great. As it's doing that, it allows us to do things like not worry about pilsner anymore. And in fact, year-to-date, Audible is selling more by itself than Copperhook, pilsner and wit combined. So when you can do with one thing what you were doing with 3, and you can start to divert your resources against that 1, there's just a lot of benefits that accrue over time. Now that's not a light switch. It's a dimmer, but that's the strategy.

Unknown Analyst

That has to help the complexity at the brewery if you can just cut it down where you just have to brew 1 instead of 3 or 4.

Terry E. Michaelson

That's the bet. You're absolutely right. It's dramatic. And again, we continue to harp on this, because I'm so excited about it firstly, and our group is, in terms of where our strategy is, is that, that's why as we talked about the -- where we are and what our upside is, we're just starting to scratch the surface because we really are a business model that now has a strong foundation and the insight and the talent, and we're just starting to really get the advantage of executing all the things that we have in front of us. So we recognized the opportunity we have in margin as we activate these and the opportunity we have in the brands as we strengthen our ability to activate. So it's -- we really believe the next couple of years are going to be a really exciting time for this company.

Unknown Analyst

That's great. I just have one last thing. If you look at the recent buyout of Boulevard, it looks like a pretty rich price, especially relative to where -- even your stock is trading. Does that make it more difficult for you guys to do deals if you wanted to, given that -- that looked like a pretty rich price or you just exercise patience?

Terry E. Michaelson

Yes, it is more difficult. Obviously, those prices -- and I think the people that are looking at those are looking at what that means for their business strategically and how that will benefit their overall business. So they obviously are coming to an analysis that tells them they can get the return on that. So it does make it more difficult. We continue to look for opportunities, whether they're just partnerships on the branding side with how we work with Buffalo Wild Wings and The Chive. If we find something that we believe fits our business and strengthens our portfolio and gets us the kind of return, we still feel like we can do we can do a deal in this environment. It just obviously, has to be the right one. But certainly, that level of pricing makes it difficult to look at a broad base of opportunity.

Unknown Analyst

I guess the big positive about that is it makes your stock look cheap. So that's good.

Terry E. Michaelson

That's true, that's true.

Operator

Your final question comes from the line of Troy Alejandro, [ph] independent investor.

Unknown Shareholder

So my question -- I have 3 of them here. I saw that the Hefe draft continues to decline. But in the previous calls I thought that, that was a pretty profitable package. And then I heard on the call today that variety pack growth continues to exceed expectations. So my question is -- also in there you mentioned that packaging cost pressures were part of the reason for the margin hit. How do I, as an independent investor, reconcile the commitment back to margin when I see those 2 mix issues facing you?

Andrew J. Thomas

I think, Troy, the Hefe draft is a profitable package for us. But I think it's also important to understand where that Hefe draft is being sold. So Hefe draft sold in Southern California is inherently a profitable package. That has to travel a long distance, which bears the burden of some freight and some transportation cost that might not make it as profitable as everybody thinks it is. If you look at the concentration of Hefe in the Portland orbit, out of a Portland brewery here in Oregon into the different class of profitability than anything we would sell in Southern California. So the first point I would make is, it's not just what we're selling, but it's where we're selling it, and where that's being sourced from. With respect to what's going on with variety packs and packaging costs, that's something that we're looking at, trying to make sure that we optimize as best we can. If consumers are interested in variety, it's incumbent upon us to be able to find profitable ways to bring them variety, so that we can make sure that we're balancing the top line needs of the business, if that's what consumers want with the bottom line needs of our business in the interest of our shareholders. So what you said, they're factual statements. Variety packs are expensive to make, packaging costs are expensive, Hefe is profitable. Those are all factual statements. We are cognizant of all of those, and what we try to do is balance those in a way that's best for the growth of the top line, but also for accretions in the bottom line.

Terry E. Michaelson

And I think it's also -- just add on to that before Mark jumps into kind of the specifics on some of the numbers is, what I can also tell you about the Widmer is, Andy also talked about our small batch program, and that's all draft. And what I can tell you is that our small batch, which tend to be more esoteric high-end brands, is higher margin of the end Hefe. So the things that we're replacing draft with actually are taking us in the right direction. And obviously, on a volume basis, it's not there. But that's why from a strategy standpoint, the balance of what's happening with Widmer is going in the right direction. And then to the Kona, we certainly -- Andy certainly did talk about the variety packs, which is more expensive, but we also talked about explosive growth of Kona Big Wave, which is one of our higher-margin, in fact, at the top end of our margins for products. So again, as you look at this, we focus on it, we've got a kind of a balance of where the portfolio is going in the right direction.

Mark D. Moreland

I was going to jump in, and say, for further reconciliation, because you've got a lot of components bring in the mix of the products. We aren't idly standing by and watching that mix occur and that's the point that we're making the gross margin focus as our #1 priority. There are lots of things we can do to help manage our brewery cost and production freight cost that we can continue to improve our current structure. So that's what we are committed to. We are going to continue to aggressively deliver what that consumer demands in the market, and be competitive there, while also managing our cost very effectively. So that's where we do expect gross margin expansion over the coming years.

Unknown Analyst

Okay. The other question I have -- actually a recommendation with formerly Widmer brothers now Brew, kind of pioneers in the industry. When you look at international companies, they have constant currency to kind of normalize for the currency exchange. Is this something you guys will be interested in pioneering on the wholesale to normalize shipments? Because I feel like every time we're on the call, we're trying figure out whether you're building or burning off inventory at the wholesalers. I'd really like to challenge you guys to be the leaders in this, and come up with a normalized view of shipments which reconcile against the inventory, because we all tried to do those calculations, and I think you could help the entire industry if you'd just find that effort.

Andrew J. Thomas

It's fair to say that you'll hear more about our supply chain in subsequent calls, and I don't think I would preview exactly what we'll be doing there, but all ideas are welcome. We appreciate your thoughts on it, and we'll be looking at ways to normalize or stabilize our supply chain going forward and I wouldn't hazard to say what that will or won't look like yet, but you can rest assured that we're on it.

Terry E. Michaelson

Yes, we appreciate that insight. Obviously, we wanted to continue to make our business as transparent and as clear as possible for the shareholders and analysts, keeping in mind obviously reasonable governance and not sharing things that from a competitive standpoint put us in a negative position. But appreciate your insights to that, and that's something that we can evaluate as we're going forward here.

Unknown Analyst

I do want to thank you guys. I mean over 100% growth in the last 12 months, that's something we haven't seen since the merger, so I thank you for that and Terry, I want to kind of tease you a little bit. On the one hand, you keep saying that you're a young company, and then the other hand you are celebrating a 30 year anniversary so [indiscernible].

Terry E. Michaelson

We certainly have brands with a lot of history, but the company and strategy, it's new, and it's one of those things that I think continue to make us unique. But you're right. We're kind of a strange connection of old and new.

Operator

At this time, there are no additional questions in the queue. And I would like to turn the call back over to management for closing. Please proceed.

Terry E. Michaelson

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

Operator

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

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