Craft Brew Alliance's (BREW) CEO Andrew Thomas on Q4 2017 Results - Earnings Call Transcript

Craft Brew Alliance, Inc. (NASDAQ:BREW) Q4 2017 Earnings Conference Call March 8, 2018 11:30 AM ET

Executives

Andrew Thomas - CEO

Edwin Smith - Principal Accounting Officer and Corporate Controller

Kenneth Kunze - CMO and VP

Scott Mennen - COO and VP

Joseph Vanderstelt - CFO, EVP and Treasurer

Analysts

Francesco Pellegrino - Sidoti & Company

Amit Sharma - BMO Capital Markets

Operator

Good day, ladies and gentlemen, and welcome to the Q4 2017 Craft Brew Alliance Earnings Conference Call. [Operator Instructions]. And as a reminder, today's conference call is being recorded.

And now I'd like to turn the conference over to Andy Thomas, Chief Executive Officer. Please go ahead.

Andrew Thomas

Thank you, Candace, and good morning, everyone. It's my pleasure to present the Craft Brew Alliance Investor Conference Call to discuss our results for the fourth quarter and the full year of 2017. This morning, I'll add an aloha to our customary good morning, as this call is coming here from the beautiful island of Hawaii, home of Kona Brewing Company, where once again, we gather to celebrate the spirit of Aloha, the importance of our local communities and the vibrancy of our industry at the annual Kona Brewers Festival. Here in Kona, I am again joined by 3 members of the CBA leadership team. Our CMO, Ken Kunze; our COO, Scott Mennen; and our CFO, Joe Vanderstelt.

But before we begin, I'll again ask Ed Smith, our Corporate Controller to read our safe harbor statement.

Edwin Smith

Thank you, Andy. As a reminder, this call may contain forward-looking statements. Forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, actual results may differ materially from those described in any such forward-looking statements. The Risk Factors section and our most recent 10-K lists 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. Andy?

Andrew Thomas

Thanks, Ed. Before getting into some reflections on Q4 and full year 2017, I want to first acknowledge the significance of being here in Kona. Not only is Kona the birthplace and home of CBA's Kona stone Kona Brewing Co, Kona is also the place where this current leadership team first held its conference call with many of you some four years ago. A lot has changed in our marketplace, for our industry and indeed for our company in the last four years. And at the end of this call, I'll offer some thoughts in that regards. But first, let me share some perspective on the year that just closed. When the current turned of 2018, just 10 short weeks ago, they are brought to a close what was arguably CBA's most transformational year since its founding nearly 10 years ago. While the marketplace industry and moreover the world around us continue to spiral, similarly teetering on the chaotic at times, CBA paradoxically hit a stride in 2017.

And by deliberately executing against our consistent strategies, in 2017, CBA successfully advanced several key strategic initiatives, while simultaneously posting progressive record results and a host of key operational areas. But before turning to the mirror on ourselves, some quick observations regarding the market around us. As chaotic is the 52 weeks of 2017 seemed at the time, the first 10 weeks of 2018 have somehow managed to amplify that chaos. And with continued challenging trends for beer, we are now witnessing the most concrete consequences yet for Brewers large and small alike. From announced closers to workforce cutbacks and layoffs, to bankruptcy options, not just for select assets but for entire companies. So against that's very backdrop. I'm especially proud to offer my perspective on our venture year for CBA's strategic and operational progress. On a strategic front, firstly, CBA accomplished a key objectives set out several years ago. The physical rationalization of our brewery footprint, right about by 3 critical actions. Successfully winding down our brewing relationship with the past brewing company; the successful closure in divestiture of are Woodinville Washington Brewery, and the addition of the true low-cost brewing partner to our brewery mix with the start up of Brewery Operations at AB Collins brewery, following the wind down of our operations at city brewing in Memphis.

As for the second major strategic accomplishment, CBA began to realize the most tangible benefits to date from what I've long described in one of our key competitive advantages, our partnership with AB. Leveraging the first full calendar year, following the announcement of our enhanced agreements in late 2016, including feather alignment of our commercial resources through our shared wholesaler network, improved brewing capabilities and cost benefits with the advent of cross brewing, most significantly with our brewing in AB Fort Collins' brewery, but also the high-ends brewing in CBA's Portsmouth Brewery. And foundational work and planning for in seeding international markets as we began to realize the global potential of the Kona brand.

And lastly, rounding out the major strategic advantages in 2017. CBS brand portfolio in support of our Kona Plus strategy advanced its transmission, with the addition of Florida Wynwood brewing, another step towards fulfilling our vision to complement our broader, multimarket focus on Kona, with targeted support from emerging lifestyle brand omission and strong local brands in key geographies. But perhaps the most remarkable thing about 2017 was that, in addition to these key strategic accomplishments, arguably, for the first time on an earnings call, I can probably point to strategic wins accompanied by record operational results. On the top line, revenues grew plus 2% with underlying drivers showing even more signs of progress than the overall result. Firstly, on a volumetric basis, while overall shipments were down, Kona again grew double digits.

In additionally, with the exception of Redhook in Washington, all brand families including Kona grew either absolute volumes or grew share in their respective home or focus markets. Secondly, pricing was healthy, evidencing our strategic believe that a more focused brand strategy would afford greater strength and pricing. And thirdly, our overall plus 2% revenue growth was after observing the impact of reduced shipments, related to the lowering of our wholesalers inventory levels by 10 days. Looking at gross margin, we gross margin expanded robust 320 basis points, crossing the previously elusive milestone of 35%. In weaving the strategic with the operational, bear in mind that beer gross margin expansion occurred while a winding down contract volumes from past, exiting the Wynwood Brewery, ceasing production in Memphis, transferring a 150,000 barrels of production to Fort Collins and stabilizing the supply chain. On the spend side, while we continue to invest behind of our brands, we were successful in trimming our G&A cost base and better managing our overall spend levels. And looking beyond the P&L, while we funded key strategic initiatives, such as Redhook BrewLab and the new Kona Brewery in Hawaii, our debt levels and balance sheet are the healthiest they've ever been.

And so without further delay, onto the team for some color on that transformational 2017 and for some detail on those strategic and operational advances, beginning with Ken.

Kenneth Kunze

Hello, Andy, and good morning, everyone. 2017 was a record year for CBA, marking another year of continued progress against our Kona Plus strategy, all within the backdrop of a dramatic slowing of the cross segment in 2017 and an ongoing competitive landscape within craft and beer in general. With the focus of our strategy on strengthening are top-line results, CBA achieved an all-time revenue high-mark with revenue at $208 million on growth of plus 2% in 2017. And Kona reach another record volume year, but depletions up plus 10%. This is a robust result from the context of current operating environment and competitor performance. The strength in top line was achieved through a combination of pricing, volume growth and mixed shifts led by the positive impact of Kona and new business partners, while offset by the rebalancing of our legacy brand portfolio. I reviewed today, we give an overview of how the strategy progressed in 2017 from a brand and geography perspective.

To remind everyone, Kona plus is our portfolio strategy, focused on; one, leading with Kona as a unique lifestyle brand with the biggest and best opportunity to play across the most occasions, new states and geographies; and two, the plus, the rest of the brands in the portfolio, each locally relevant with more regional potential, focused in key strategic geographies. Given the strategy, I'll focus my review against Hawaii, California, Florida, North Carolina, Massachusetts, Washington and Oregon as representing both home markets for our brands and significant volume and profit contributors to the overall business. Each market characteristics and development are somewhat different from each other, which I'll attempt to highlight.

As we go through the market and brand numbers, a quick reminder that the vast majority of the data I'll reference today, comes from Nielsen xAOC or all outlets combined for the 52 weeks, ending 12/30/2017, unless otherwise noted. Moving specifically to depletion performance, Kona at the end led the way with depletion growth up plus 10% for full year 2017. Big Wave Golden Ale, up plus 23%, drove Kona's performance and improvements across velocity and distribution. Big Way was supported with a strong national launch behind our new Hanalei Island style IPA, a very fashionable passionfruit orange and guava IPA, in the spring of 2017. Hanalei was the #4 new craft item nationally in 2017 with significant distribution run room yet to come, as measured by Nielsen. In Kona's home market of Hawaii, Kona achieved 39 share of craft, gaining 150 basis points of share on 5% dollar growth. In the beer category that was down 1.4% and on a craft segment that grew less than 1%.

The high end, which is defined here as craft and imports combined represents 61% of the beer market, with craft at a 22 share of beer. We estimate Kona has approximately 12 share of total beer in Hawaii. Kona's performance is supported by 2 robust brewpubs in terms of both traffic and profitability ability. One on the Big Island of Hawaii and the other in Awahoo, both of which attract tourists and locals to the brand. In Kona's Mainland home market in California and U.S. is biggest beer state, Kona is the number five craft brand with a five] share. In 2017, Kona had 2 new items in the top 10, finally came in as the number new -- as the #3 new item in California. And Kona's Liquid Aloha variety pack, which includes Hanalei Island, IPA, Wailua Wheat and magic sans mango, Cézanne came in at #8. As mentioned throughout the year, California has been challenging, not only for CBA but for the industry as a whole. For the full year, total beer was down 3.2% and total craft was down 3.4% in California as measured by Nielsen.

In this market, Kona slightly underperformed the segment for the full year, losing 10 basis points of share on $1 volume basis down 4.5%. But we saw improving performance in Q4 with Kona outperforming the market, gaining 10 basis points of share on flat volume, again, as measured by Nielsen. Our internal measured depletions were flexed stronger performance and independent and non-Nielsen measured channels, with Kona depletions flat in California for the full year, but up 8.5% in Q4. This improving trend is continued into the first 2 months of 2018, and we believe our Nielsen-measured chain business will be stronger in 2018.

In California, the high-end of beer now accounts for almost 60% of beer in dollars, with craft at a 21 share of beer. CBA's portfolio has about 6.5 share of craft California. Next step is Florida. A key focused state Kona, the third-largest beer state and home market for our new partner brand, Wynwood Brewing out of Miami. The Florida market was healthier with beer up 3.3% and craft brewing plus 5.3%. In Florida, the high-end accounts for just 40% of beer, with craft at 10 share of beer. In Florida, Kona grew plus 26% and picked up 60 basis points of share to a four share market and top line correct brand as measured by Nielsen. Wynwood, which we began selling and earnest in the back half of 2017 and is still available primarily only in the broader Miami market, picked up 29% distribution, grew plus 260% and gained 70 basis points of share two a one share of craft in the fourth quarter, again as measured by -- this time measured by Nielsen Miami food for the 13 weeks ending 12/30/17. In the North Carolina, the 8th biggest state -- beer state, Appalachian Mountain Brewery home state, beer grew 1% and craft was up plus 5.9%.

The high-end is less developed to the 35 share of beer and craft has a 19 share. Appalachian Mountain Brewery demonstrated strong growth, up plus 51%, gaining plus 30 basis points of share. Kona meanwhile was up plus 31% and gained 20 basis points of share. CBA's portfolio now represents a seven share of craft and picked up 80 basis points of share all as measured by Nielsen. Massachusetts is the 7th largest craft market that is home Cisco Brewers out of Nantucket. Craft has a 31 share of beer, growing 5%, while total beer was flat. In Cisco's home market of Massachusetts, Cisco grew plus 146% and gained 230 basis points of share to become the fourth largest craft brand as measured by Nielsen Boston Liquor. And in New England food, Cisco grew plus 28%, slightly outpacing Kona's growth of plus 24.9%, with both brands gaining 10 basis points of share.

In Washington, Reddick's home market and the 7th largest craft land, the craft segment, which has a 31 share of total beer was down 3.4% on a volume basis and lost 90 basis points with the market exhibiting some trading down with below premium brands growing 4.4% and picking up plus 90 basis points of share. In the fourth quarter, craft performance worsened to down 5.4%. In Washington, CBA has 3 brands of the top 15 with 14 share of craft. In Washington, Kona grew plus 8.7%, picking up 20 basis points of share, Widmer Brothers on flat growth picked 10 basis points of share, and omission up plus 13.6% picked up 10 basis points of share. Offsetting this was Redhook's decline with minus 80 basis points share loss. The Redhook's trends improved significantly in the fourth quarter, more than having the rate of decline of minus 5.5%, on the basis of new beers and better grocery performance.

New innovation beers from our new BrewLab picked up 40 basis points of share, offsetting ESPN long hammer laws, share declines of 40 basis points. Big Ballard Imperial IPA was the number one new item in Washington for 2017. Redhook's turnaround to supported with a new innovation brewpub, BrewLab, which opened in the Capitol Hill, neighborhood of Seattle in August. Guest counts are growing, now over 8,000 monthly, with upward momentum and strong consumer reviews. While moreover is to be done, progress is being made. In Oregon, Widmer Brothers home market, there craft's second -- segment is one of the most developed with a market share of 37. The craft 7 in Oregon was down 1% and lost 60 basis points of shares of total beer for the full year. With performance worsening in Q4 with craft declining 3.5% and losing 50 basis points of shares. And the total category was down 2% and that environment CBA's portfolio outperformed the market gaining 40 basis points share.

With Widmer Brothers picking up 20 basis point of share on flat growth and Kona picking up another 20 basis point of share on 17.8% growth. Widmer Brothers original American Hefeweizen. Hefe remains beer [indiscernible] or Oregan's favorite craft beer. 2017 saw the first Hefe line extensions with innovative Hefe for seasonal fruit variance, achieving top five new items status is Oregon. CBA's portfolio as a 14 share craft and a five share total beer in Oregon. In 2017, Widmer Brothers continue to leverage its new Portland Innovation Brewery, which opened in 2016. And in December, the brand remodel its pub into a tasting room, which we believe will squarely put the focus on beer and improve profitability. 2017 also saw Widmer Brothers removed completely from 3 of our 5 regions. We believe all these efforts will make the brand stronger and more profitable moving forward.

And now, word on omission. Our repositioning of the brand to target a healthy active lifestyle consumer versus just a celiac or glutin avoider appears to be gaining traction. With the launch of a new and more impactful graphics at midyear and the launch of omission ultimate way, a 5 carb, 99 calorie glutin removed with real beer. Omissions depletions showed significant improvement in every geography over the course of the year and Q4 depletions were up over 10%. We see a similar story and scanned data, revealing full year Nielsen for a total U.S. food shows that omission turned a full trend of down -- minus -- full year trend down of minus 4.5% to a positive Q4 trend of plus 3.1%, driven by increasing velocity of growing at plus 8.5%. Omission, ultimately was a tap 20 new craft item nationally, as the #1 new gluten-free item last year. Omission remains the share leader of the gluten removed segment with a 37 share. We believe that ultimate, the broadened consumer target and improved graphics will sustain positive momentum on the brand. As we managed Kona as a global brand, momentum outside the U.S. continued in 2017 with international shipments, up plus 45%. Key focus markets like the U.K, South Korea, Australia and Japan, all service over partner craft and travel, all grew double digits.

In closing, 2017 proved to be a challenging year for the craft segment, but a record revenue year for CBA in Kona. Within the dramatically slowing segment and a declining beer category, CBA was able to maintain share while refocusing legacy brands, ramping up new partner brands and driving Kona globally with our Kona-Plus strategy.

With that, I'd like to turn it over to Scott Mennen, our Chief Operations Officer.

Scott Mennen

Thank you, Ken, and loud hi, everyone. 2017 was an outstanding year for CBA and before getting into the numbers, I would like to highlight the significant accomplishments, the operation team delivered over the past 12 months. The most significant of these accomplishments was the transformation of our brewery footprint. First, we launched our contract brewing operations with Anheuser-Busch, which is now fully operational. In 2017, we shipped just over 150,000 barrels out of Fort Collins with the cost savings of $10 a barrel. Second, with the move to Fort Collins, we cease production in Memphis; third, we shut down the Woodinville and completed the sale of the property, which closed January of this year. And with these moves, we were able to rebalance production between our own breweries to drive additional efficiency and better align our cost base with our production needs. To underscore the significance of this effort, think about this. At the beginning of 2017, we were bringing brewing beers in five locations, Porton, Portsmouth, Woodinville, Kona and Memphis.

At the end of 2017, our footprint had transformed to Portland, Portsmouth, Kona and Fort Collins. And on top of these changes in our brewery footprint, the team installed our new continuous improvement standard, operating methodology World Class Craft. WCC has sharpened the entire organization's focus on operating improvements to deliver improved results. In 2017, the team was able to greatly improved packaging line efficiencies and deliver impressive results in reducing beer loss. Also in 2017, the supply chain team completely redesigned our planning and S&P process. This work allowed us to reduce wholesale inventories by 10 days, one improving customer service levels, reducing age beer losses and providing fresher beer in the marketplace. And to highlight the CapEx, work accomplished in 2017. We upgraded in the Portsmouth can line filler to improve liability and throughput, allowing us to support the increased volumes of our partner brands and beat Cisco and Wynwood.

We completed the Portland Brewery upgrade, allowing for increased capacity while expanding the capability and flexibility of the brewery, to handle smaller volume brands more efficiently. Third, we continue making solid strides on building the new 100,000 barrel brewery in Hawaii. The team has been actively working behind the scenes to complete the engineering and procure equipment. Construction mobilization is planned for late Q2 of this year, with the brewery fully online the first half of 2019. And fourth, we started up our new state-of-the-art 10 hectoliter small batch brain system in Redhook's BrewLab in Seattle. And all the while, our brain team remains busy, developing new and innovative beer, including 2000 barrels of smallbatch beers. In 2017, the following innovative beers were commercialized, Kona Hanalei Island IPA assessable Island inspired IPA brewed with pot juice, passion fruit orange and guava. Omission Ultimate Light, a five-carb, 99-calorie gluten removed golden ale that we are testing in Kansas.

Widmer Brothers Russel Street IPA, a modern West Coast IPA that began as a pub put on draft, launched and baggage in late 2017. At CBA, we've always believed in transparency. And in 2017, we took steps to ensure our customers would better informed about the CBA beers they enjoyed. We can find key nutritional information on our brand website, including calories and carbohydrates. Before moving to results, I would like to highlight an accomplishment that I'm proud of. The work the team has done to improve safety. In 2017, CBA makes huge strides in creating the exit and free workplace, the recordable rate was reduced by 50% in 2017 and it is improved by over 500% since 2014.

Now onto the results, where you will see how the work the team accomplished in 2017 has translated in this solid results and set us up for continued success in 2018. Capacity utilization for Q4 was 53% compared to 61% in Q4 of 2016. The reduction capacity utilization reflects the changes in brewery footprint with more beer produced in Fort Collins, in the Wynwood Brewery out of the mix. Full year 2017 capacity utilization was 60% compared to 67% in 2016. Coming off a record, beer gross margin of 38% in Q3, CBA's Q4 beer gross margin was 37.6%, 540 basis points ahead of Q4 2016. The improved gross margin result -- is the result of improvements in verbal cost of goods sold through efficiencies in our breweries and logistics operations, reduction of losses, production at Fort Collins and addition the work done in the balance production of our own breweries and wipe size of our cost base helped us to offset the impact of lower capacity utilization.

Overall, CBA's gross margin for the fourth quarter was 32.4%, 310 basis points better than Q4 of 2016. 2017 full year gross margin was 35.3%, 320 basis points ahead of last year, reflecting improvements in brewery and logistic costs, Fort Collins projection, partially offset by lower capacity utilization and lower fixed cost absorption. 2017 represents a fundamental improvement in our brewery cost base. Full year 2017 CBA gross margin was 31.5%, 210 basis points better than 2016. 2017 was an outstanding year for CBA, and I would like to thank the entire operations team for their great work in 2017.

Now looking forward into 2018, the team will continue to build momentum gained in 2017 by; first continuing to leverage the transformed brewery footprint, including a full year's of production, order Fort Collins anticipate shipping closed to the contractual 300,000 barrel limit this year; then that second benefited from a full year without the Wynwood Brewery; and third, building on a relationship with Anheuser-Busch, as we start up our first contract brewing relationship in Portland where CBA will be rebrewing approximately 10,000 barrels of Goose Island beers in 2018. This contract brewing relationship has a couple of benefits, improving capacity utilization, now improving incremental profitability, we are continuing to collaborate with AB to see how our combined brewery footprint can provide benefit both parties with additional AB production and CBA breweries; and forth, we are going to continue to leverage the success of World Class craft and our supply chain redesigned to deliver continuing improvements in our operating efficiencies and loss reduction and bringing the new 100,000-barrel Kona brewery in Hawaii to life. In 2018, the operations group will continue to partner with our commercial team to better understand and address market changes. An example of this later this year, will be adding a cane line to the Portland Brewery to enable CBA to meet the increasing trend for beers package and canes to access more drinking occasions.

And before closing, I'd like to discuss a growing focus for CBA innovation. I feel we do a solid job leveraging our brewers' talent and small brewery capabilities to innovate new beers within our brand, such as Kona's Kanaha Ale, a 99-calorie great tasting blonde ale, launched on the Mainland in Q1. In 2018, we are doubling down on innovation with a new group that will focus on expanding the scope of innovation, looking outside the traditional definition of beer, this new group will be tasked with exploring new frontiers and leveraging the break small batch brewing capabilities across our network, and understand how CBA can better meet the ever-changing demands of our customer base. A lot more to come on this topic in upcoming quarters.

Looking forward into 2018, we will continue to build on the great work done in 2017 to deliver even better results. I'm confident that we'll be able to achieve our 2018 gross margin guidance of 32% to 35% as we bed and bring to life the Kona Brewery here in Hawaii.

Now onto Joe for more insights into our results.

Joseph Vanderstelt

Thank you, Scott, and good morning, everyone. During our remarks, I will share our Q4 and full year 2017 financial results, provide an update on cost reduction initiatives, reconfirm our 2018 full year guidance and provide some insight to potential risk areas for the balance of the year. You'll see that execution of strategy pay tangible dividends of 2017, and we expect to drive further gains in 2018. During the fourth quarter, net sales were $46 million or flat versus the same time last year. Gross profit for the quarter increased 11% to $14.9 million versus Q4 2016, while mobile gross margin increased 310 basis points to 32.4%.

Net income for the quarter was $7.8 million or $0.40 per diluted share compared to zero earnings per share in Q4 2016. The increased net income and EPS is primarily due to a favorable one-time tax adjustment related to the Tax Cuts and Jobs Act for 2017, higher revenue per barrel and lower cost per barrel, partially offset by lower shipment volumes, lower pub gross profits and increased SG&A costs. Q4 2017 net revenue was slightly favorable versus the same period last year, primarily due to AB international setups, partnership fees, geomix and falls price increases, offset by lower shipment volumes for Redhook and Widmer Brothers. Net sales per barrel increased 5.4% versus same time last year. Net sales on brewpub declined 2% significant disruptions in the quarter, which I'll cover in greater detail momentarily.

Shipments for the quarter were down 5.6% versus Q4 2016 due to declines from Redhook, Widmer Brothers and contract brewing, partially offset by shipments from Kona, omission, Wynwood Brewing and Appalachian Mountain Brewery. Fourth quarter cost of goods sold per barrel decreased 1.5% versus the same period last year, primarily as a result of lower cost for AB Fort Collins Brewery, exists from the Woodinville and Memphis Brewery and overall brewery optimization efforts. As stated earlier, fourth quarter gross margin increased 310 basis points to 32.4%, which is favorably impacted by higher net revenue per barrel and lower costs per barrel. Their gross margin for the quarter was 37.6% or 540 basis points higher versus the same period last year. These gains were partially offset by a substantial reduction in pub gross margins during the quarter.

As I said during our last earnings call, restaurants in the on-premise channel, in general, has seen a challenging business environment in 2017 and our pubs were no exception. We've seen lower for traffic, higher labor cost and the short-term impact of executing our strategy. On the other hand, we opened our new Seattle gluten in August. We are going to close and eventually sold our Woodinville brewery and pub operations, and we initiated the strategic makeover of our Portland pub in December. We now turn to attention to Portsmouth, New Hampshire location and will provide additional information in the coming months. We are committed to our pubs as we believe there is an important embodiment of our brands. But that comes to a commitment to course track quickly, and we are using manage your performance. Fourth quarter SG&A cost increased 2% versus Q4 2016, primarily due to end market promotional expenses, higher bonus payouts, professional fees related to legal and SEC compliance and impairment charges related to the sale of our Woodinville brewery. This increases were mostly offset by favorable past termination fees not reflected in revenue as low as lower salary and benefit cost. As a percentage of net sales, SG&A cost for 28.5% compared to 28.1% during the same period last year. Putting it all together on a full year basis, 2017 depletions were minus 1%, shipments were minus 4%, including removal of 10 days of wholesaler inventory, net revenue was up 2%, gross profits plus 9%, gross margin plus 210 basis points, and EPS plus $0.51. Excluding the impact of U.S. tax reform benefits, EPS increased $0.16 per diluted share compared to full year 2016. Before moving on to 2018 guidance, I would like to provide an update on our cost savings initiatives announced in November 2016, where we targeted $5 million to $7 million in cost savings.

As of the end of 2017, we've achieved $5.8 million of savings, including $4.3 million in non-populated workforce reductions and $1.5 million in savings related to the Woodinville brewery closure in July. In 2018, we'll see an additional $1.5 million in operational cost savings from the sale of the Woodinville brewery in January of 2018, bringing the total savings achieved to $7.3 million, exceeding the high end of the range. Excluding funds held in escrow, CBA received $23.5 million net proceeds from the sale of our Woodinville brewery. These proceeds were applied to our revolver reducing the balance to 0. CBA's remaining long-term debt as of January 31, 2018, equals $11 million or less than 1x 2017 EBITDA.

Now I'd like to turn the 2018 material full year guidance, which is unchanged from the preliminary guidance share last month. Depletions and shipments are expected to range between a decline of 2% and an increase of 3%. Initial cross brewing for AB is included in our shipment guidance, although in material to our overall results as we get started. To the first 8 weeks of 2018, Kona depletions were up 10%. Average price increases of plus 1% to plus 3% are expected, reflecting improved revenue management capabilities and lower federal excise taxes. Please note that the benefit of lower federal excise taxes contributes approximately 50 basis to our expected revenue per barrel growth. Gross margin rate is estimated at 32% to 35%, reflecting increases in net revenue per barrel continued improvements in brewery operations, lower fixed overhead and ongoing efforts to stabilize over pub operations. We are focused on bringing brewpub margins closer to historical levels.

SG&A expenses are estimated at $59 million to $61 million, primarily reflecting reinvestment of cost savings into our sales and marketing infrastructure as well as expanded consumer and trade programs. As a percentage of net revenue, we expect to maintain a 28% to 29% spent rate with 2018 savings initiatives being reinvested against their brands, particularly Kona. Capital expenditures with expected to range between $16 million to $19 million, including our new Kona brewery in addition of the new Kanaha at Portsmouth brewery to address consumer demand. And finally, an effective tax rate of 27%. In terms of balance of the year risk, I'd like to note the following, first is potential for increased discounting activity due to slower craft grew and excess brewery capacity of limited risk at the moment. Second, the proposed U.S. import carriers on aluminum creates some risk to cost of goods sold, although relatively low as 12% of total depletions. And finally, over operations team is evaluating brewery sourcing and logistics opportunities to minimize increases in freight cost, which could affect gross margins by 40 to 50 basis points. In summary, the execution of our strategy paid tangible dividends of 2017, and we are committed to drive further gains in 2018.

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

Andrew Thomas

Thanks, Joe. And bringing this call to a close, our endeavor to put a fine point 2017 results. But in doing so, let's first go back to where I began 30 minutes ago. The memory of this call in this place almost exactly four years ago. While today, the world of politics seems to be the least likely place to look for an inspiration, I believe it's actually an altimeter for here. Since much like the full year of a presidential administration term as measured by opposing the question, are you better off today than you were four years ago, I think it's fair to ask the same question to us, and CBA better off today than it was four years ago? In this period of consistency, I'll answer that question within the context of the 3 objectives that this team is consistently committed to delivering upon, strengthening the top line, improving the core health of our business model and actualizing the future.

As for the top line, not only is revenue 16% greater than it was four years ago, our top line is decidedly stronger as well, anchored by double digit growing Kona, a supporting cast of smaller, healthier local brands and more defendable concentrated volume with clearer growth prospects within the U.S. and globally. As for the core health of our business model, not only as beer gross margin nearly 500 basis points higher than it was just four years ago, but total gross profit is nearly a third larger than it was four years ago, creating an engine for continued profitable growth, while providing healthy investment behind other brands. And as for actualizing the future, relative to four years ago, we have a fundamentally reshaped brand portfolio, significantly rationalize brewery footprint, a reimagined mutually beneficial relationship with ABI, and importantly, a stronger talent base and healthier work culture.

So as a possible back before quickly turning our attention forward once again, on behalf of this team, I'm humbled and proud to say that across all those dimensions, 2017 was decisively a win for CBA. And as the company prepares to celebrate its tenth anniversary later this summer, despite the challenges the scapegoats and the alibis of the transforming marketplace, CBA and its stakeholders are indeed better off today than they have ever been in the company's history. Before moving to questions, I'd like to end these prepared remarks, by again saying thank you, to all of you, to our investors and shareholders, to those analyst who covers, to other interested parties and importantly, to our hard-working compassionate and accountable employees and partners come up with home locations and New Hampshire or again, Washington, California and Hawaii and our partners in North Carolina, Massachusetts and Florida all working remotely somewhere between.

And with that, I will open it up for questions. Candace?

Question-and-Answer Session

Operator

[Operator Instructions]. And our first question comes from Vivien Azer with Cowen and Company.

Unidentified Analyst

This is Brian on behalf of Vivian. I have a couple of questions for you guys. So first of on your depletion guidance, midpoints plus 50 bips. So what do you guys expect for 2018 total industry volumes?

Andrew Thomas

So out on the radar. We expect kind of more what we saw at the end of last year. So we expect industry total beer depending on how you define it, to continued it, going to be down. We expect craft growth to continue to probably be up in the very low to single digits around kind of flat plus or minus range. So I would say more of what we saw last year, is kind of what we're anticipating. And to that point, as Joe referenced, we're pretty happy about that you're seeing over the first 8 weeks of the year. So nothing makes a change what we guided to or what we are kind of expecting for the year.

Unidentified Analyst

Great, really helpful. And on your guidance for one plus one to plus three on pricing. So given the aggressive industry pricing we've been seeing particularly in the economy segment. How do you guys think about your price cap relative to the rest of the industry?

Kenneth Kunze

Toss, I'll hand it over to Joe as it is one of the areas where we've been spending a lot of time looking at Brian. Joe?

Joseph Vanderstelt

We see a lot of opportunity for CBA. Last year, we converted, I'll say, our pricing team to more of a revenue management team. And as part of that, we really drove clarity around other brand strategy and ultimately where we wanted to be for our pricing perspective. And we started developing local pricing architecture, if you will, to kind of help as the guide the strategies in local markets, we definitely identified some gaps versus our brand strategy, areas where we saw opportunity. So initially, we pursued really the low-hanging fruit in the fall -- last fall 2017 and the spring general price increases, to kind of close those gaps. And there are that exist currently that will close over time. That's kind of the current outlook in terms of where we see things and what we've done to close those gaps.

Andrew Thomas

Brian, this is Andy and may be to just to add a little bit more color to kind of Joe's remarks. I referenced in my script, we won't believe that healthy brands are -- have a lot more flexibility and there are better in a host of ways in pricing, power, pricing. Leverage is one of those areas. So as we move fundamentally kind of complete the transformation and kind of pull out some regions, as Ken referenced, Widmer Brothers pulled completely out of 3 of the 5 regions. So while a lot of other folks are claiming to volume and more remote places, where price becomes a bigger tool and making the brand relevant to consumers, we think strategically, the moves we made over the last few years have made price more part of the mix instead of the mix for us in terms of driving consumer relevance. So it's probably why you hear us be decidedly more bullish on our pricing outlook than a lot of others are. I think it speaks to the fact that we've done different things and others have in terms of having to defend profit pools and make the variance grow.

Unidentified Analyst

Great. That's super helpful.

Kenneth Kunze

I just want to say from a consumer perspective, I think we continue to see consumer is willing to trade out. So I think the dynamic of -- it's almost the middle section of the beer. There's a little bit of a trading down as people do things with sub-premium pricing, but there's also consumers continue to trade up, and that's given where we play sort of the relationship between import and craft. We still believe there is trade up opportunity for craft within the overall segment.

Operator

And your next question comes from Francesco Pellegrino of Sidoti.

Francesco Pellegrino

So I appreciate hearing the how Kona's performing to the first 8 weeks of 2018 because I don't want to put too much emphasis into what was happening in the fourth quarter. Could you just help me sort of take a step back and understand may be the full year performance of Kona? You have a new really successful SKU coming out for Kona? You have the ongoing new distribution for Kona. And then you have industry category headwind, you also have the reduction in inventory, in wholesaler inventory volumes. So I'm just sort of maybe wondering, what percentage of Kona growth was attributable to the new SKU? What percent was attributable to new distribution? And then how much data wholesaler inventory days of reduction in the you guys are implementing, contribute to maybe that below 10% rate for the full year that is something that I would be accustomed to be really looking for.

Andrew Thomas

So like -- your question sort of looking for like a really quantitative answer. And I think, qualitatively, I would say, the answer is going to very a little bit again by geography. Clearly, big wave was largely velocity and distribution. Hanalei is a new item, it is completely distribution, but with velocity coming along. So I think the further west you are, the more its velocity driven, purely. And the further east year, the most distribution it is. And so I thought if you go back and run different numbers relative to working in the shipment part of it to give you a really quantitative answer.

Joseph Vanderstelt

Yes, I think just -- Francesco, I think on depending your question, the spirit of kind of what pop into my mind. I think Kona got run room, big waves -- I won't call it a juggernaut, but we're probably in year three of big wave kind of going in the healthiest to all possible ways, both distribution and velocity. And we haven't even completed kind of filling out pack mixer kind of depth of distribution where we would be in terms of '60s and 12s and cans and bottles. And so I think if I were going to say where's Kona growth going to come from, big way will do a lot of heavy lifting again. That said what's been nice about the launch of Hanalei last year, was the kind of joined the battle. And with pretty good success, kind of following the big waves footsteps. And then this year, we have added Kanaha the mix. So again you'll hear more about that over the course of the year, but we are really happy with what we're seeing with Kanaha right out of the box in the first couple of months of the year. And there's a red threat to that.

If you kind of listen closely to the lot of the numbers which in the script, if you take a look at the session ability of the Kona portfolio and if you take a look at big wave, being under 5% alcohol and pretty fashionable. And if you look at Hanalei being under 5% and pretty fashionable, and now you look at being under 5% and 99-calories, we really think all of these things not only reinforce a kind of place where consumer need, right now in the marketplace, but fit the brand beautifully and help to deliver more. So I think there's a lot of balance in the way we're building that Kona brand portfolio out and to Ken's point different markets will respond to that differently depending on their stages of maturity and development.

Francesco Pellegrino

Okay. So it's only a better way to look at is more from how each brand or each SKU is probably performing instead of just sort of consolidating each of the metrics up into distribution, new product line initiatives and overall headwind that I was sort of looking for?

Andrew Thomas

Okay, make sense.

Edwin Smith

The headwinds that you guys had mentioned within food service, is it fair to say the majority of the food service has been under happening in the draft product line?

Andrew Thomas

That's a great question. I think, we are spending a lot of time looking at kind of channels and kind of what's going on in just overall channels. So lumping the on-premise together, Francesco, I would say it's not just draft. It's basically all liquid. And I think what we're seeing happening there is, if you take a look at the impact of Brewery Taprooms. I think its a Bird Association that estimates that one in 10 draft beers in the U.S. are now sold through Brewery Taprooms. So if you think about the fact that its kind of zero some game out there. People aren't drinking more of the liquid overall, and you're taking those people out of the market and out of the on-premise. I think that's grading sum of overall headwinds for the overall on-premise and that's target is specifically at beer. So if somebody is satisfying their kind of beer occasion in the on-premise in the brewery taproom, that person isn't sitting in a kind of an on-premise account, where they have the opportunity to buy beer, be that draft or package.

So I think that's one dynamic. I think secondly, with the continued expansion of the number of breweries and rotation nation and rotating cap handles, we haven't seen any let up, hadn't subsided at all kind of the competition there. So you're actually starting to see a little bit of shift now in the battle to the package, because people have stopped trying to go after that same tap handle, knowing that if they get it it's going to go away in a few months. They are looking for the bottle of the can placement. So that's created kind of increased competition there. So I would tell you, I think the on-premise channel is -- I won't say under siege, there's probably a little bit dramatic, but it's probably value of the beast right now in terms of some of the channel shifts we're seeing and in terms of some of the challenges we're seeing out there. But more specifically, to answer your question, it's not just draft.

Francesco Pellegrino

Okay. Then that leads me to my next question on the topic that you guys had touched on previous earnings calls. In regards to the pub business model, you aware that there was assessments, that's a happening in the background in regards to your pub model, which is heavily based upon draft leading to a package -- leading a consumer to making up package purchase as retail. Any additional insight, and any color from the last time you provided us some commentary on that topic?

Andrew Thomas

No, it's a good summary Francesco. I think if you take a look at what we did last year, I think in a lot of ways, you started to see us behaving away, you'll hopefully see more of in the future. And as we got more of the kind of strategic rocks out of the way and what I mean by that, we kind of good traction on that. We could turn our attention to making some of the operational decisions we needed to. And with the closure of Woodinville, with the divestiture of that location, with the opening of BrewLab, with turning Portsmouth into a taproom, and as Joe said, turning out attention to Portsmouth, you are hopefully seeing a pretty consistent expression and a pretty consistent manifestation of that strategy, which is basically saying hey, the taproom is there to support but in the brand and they're not there to basically be glorified, food service enlargements end of their own. And I think that's a little bit of a shift for us. We'll serve the same process Francesco. So hopefully more are the same, and you'll be hearing hopefully more about Portsmouth by the time of the second quarter or the first quarter earnings call goes on.

Francesco Pellegrino

Okay. And just a last question for me. In regards to your guidance for 32% to 35% gross margin for 2018, is it just a shipment and depletion than in regards to hitting the low end of that range at minus 2% that gets you to the lower end of the 32% gross margin? And if you hit the upper end of the 35%, it's because you're on operating at the 3% of your shipment end-up [indiscernible] guidance range? Or is there other cost item in the manufacturing process that would play a bigger role than I'm sort of anticipating or thinking about in regards to very gross margin could eventually be at the end of the year?

Joseph Vanderstelt

There's a lot there Francesco. But I think -- obviously first of all, I think we are more cautious about the guidance we are providing on gross margins. It's kind of under promise and over delivered hopefully. And so when you look at our guidance, I mean, there's a combination of factors occurring there. One is, if we do see more of the higher end of the volume range that obviously really helps us from a fixed cost absorption perspective, which hurt us in 2017, pricing has some variability there, right between 1% to 3%. And then we've got the continue kind of World Class Craft initiatives that are going on add discipline to our operations. And then kind of overarching all of that. We've got Woodinville the high-end, so those savings start to kick in. So we've got some pretty good reasons to feel good about we are hitting the gross margin, but we also don't want to overcommit it this time.

Andrew Thomas

The only thing I'd like to what Joe talked about. So I think he hit the trilogy pretty well. Volumes of the lifeblood of the brewery, right? So the more volume we get through the better off we all are kind of continuing through the mix. The only thing I'd add is, we are seeing a lot of logistics pressures with rate and that's not just happening in beer. It's happening across the board. So that something else that kind of factors into that 300 basis point range is, as Joe referenced, Scott and his team are working pretty actively and looking at the sourcing decisions relative, not only to brewery capacity and fixed cost utilization, but also to kind of logistics costs. So a lot more than that there, the one thing I'd add Joe's logistics competent.

Operator

And of a next question comes from Amit Sharma of BMO Capital markets.

Amit Sharma

Just a couple of quick questions for me. Can we just talk about -- you touched on that a little bit, maybe deeper discrepancy between depletion and use some data, especially for Kona. Is it all related to the discussion on pub? Or are we seeing something else? And do you expect that to narrow as it goes through 2018?

Andrew Thomas

Yes, Amit, this is Andy. So thanks for the question. I think, in general, looking at Nielsen data or any kind of national data is we're not going to have its challenges too, especially for brands that are developed differently in different channels and different geographies. So I don't know how much of the Nielsen data discrepancy versus depletion data is structural versus how much of it is just going to kind of right size itself if you will a kind of normalize over the course of the year. But what I tell you is, for brands that are -- have more decisively recent SKUs to some geographies that Nielsen isn't as dominant coverage source. So if you take a look at Hawaii, for example. Nielsen Avaho food is kind of Nielsen's entry into kind of what they would extrapolate into a national number for Nielsen. It's a pretty small part of the Huawei business.

As you take a look at this market, it's decisively more influenced by a lot of other non-Nielsen track channels, including things like resorts and including things like hotels, and stuff like that. So that's I think is a good example. Of what you'll see continually across the country is being a challenge when you just try to look at Nielsen data and try to wonder why the Nielsen data in the depletion data, don't harmonize as nice as we like them to. So I think that just in structural stuff there. And to the extent, you have any specific questions, we can probably take them off line and Joe, or Ken or I can probably help you view through, hey, you probably going to see this continue in that regard. You're not going to see that continuing in that regard.

Amit Sharma

That's very helpful. And then Andy, if I can just ask a question on the overall craft category, look one of your logic competitors talked about may be a more difficult pricing environment. And that is coming when inflation is probably rising across all board, especially across the wade. Can you talk about that like and how do you dive that with your guidance for gross margins for 2018?

Andrew Thomas

It's a good question and I really do proof of reporting will be in the eating [ph] as they say. But I really do believe that the decisions we made put us in a better pricing position than some of our larger competitors. We haven’t clung to volumes that were kind of nebulous or kind of tenuous in nature to start out with. So as a result, we believe our volume pools are more dependable, and we believe that where our brands have concentrated pockets of volume be that geographically or with a certain retailer or certain trade factor, we have to believe the brands are healthier. And near cans point, consumers not willing to pay for healthy brands or they are not willing to pay when there's relevance there. They're basically saying hey, I've got a more relevant choice that I can get for a cheaper price, then I'll are go for that. It's kind of a good old-fashioned economics and demand kind of slowing down.

So I think for us, why we are more bullish, as if you look at the concentration of our volume in those seven states that can talked about, the health of our brands in those seven states, predominantly, in the role that I would translate then subsequently in kind of the trade factors in those places, give us more hope and a little bit more basis to believe that we'll have more pricing opportunities there than somebody who's trying to protect some volume for field in a geography where the only thing they got going for is them is a margin providing to a wholesaler or retailer or is she prices that providing to the consumer. So I think prices are you got to play with, I'd worry. I can tell you, there's nobody on the call right now believes -- that believes our number one card right now in terms of brand relevance, is that we are cheap.

Amit Sharma

Got it, good to know. And just sort of last one for me, the Goose Island 10000-barrel co-pack volume. How should we think about this or maybe perhaps a little bit longer-term, how high can call back volume go back for you?

Andrew Thomas

Yes, it's a tough question. We are getting into as Scott referenced, the relationship with ABI is very healthy, and I think we've done a really nice job trying to figure out what make sense for both parties. So in the same way, that Fort Collins we started out and said, hey, we're going move this volume over there and that makes sense for all things. We are still in the infancy, really early days of saying, hey, given Portsmouth brewery, what brands might fit in there nicely for the high-end and Island had a likely candidate there, which we have started with. So I think it's too early to tell where it could go. And I think that's going to be dependent not only on the brand's trajectory, which is more of a question for the ABI folks and that's is for us. But secondly, on where can we find a really good marriage of brewery capability and size with brand need. So more to come on that, I guess. So not trying to be -- not trying to -- not to be transparent about it, but it is very early. And all we know right now is the first one out of the box within ten thousand is a good, and we will continue to guide and be transparent as we get more information going forward.

Operator

And our next question comes from Steve Szabo with [indiscernible].

Unidentified Analyst

I apologize if you've already covered this. But could you provide some color on how the international rollout is going within Anheuser-Busch?

Andrew Thomas

Yes, sure. You know, I think it's a question we get a lot, Steve. So I'll try to be as clear as I can. International markets are kind of life switchers and dimmers, and I probably use those exact terms before. And I think with some of the countries that CCT operates in crafting travel, the path to get into -- going in the market spent a little clearer, which is why we've been working with CCT. The markets we're looking to commercialize with ABI tend to be a little bit bigger and more complex and have some more new answers, which respect to the distribution systems there. So if you think of places like Mexico or Chile or Brazil in the role of the major brewers there and the way the distribution is structured, if there is a lot of measured twice cut once involve there, and it might seem slow to everybody. It's kind of like to proverbial duck, flapping like hell underneath the water, but you don't really see much on the surface.

So I feel good about the direction we're going, and we've been really careful, both with ABI and on this call to temper or to kind of manage expectations, because we think there's going to be good growth there in the long term. But we think if we're too greedy of going after in the wrong way too quickly that we basically will not do it the right way, and it will hurt in the long run. So all of that is some color to say, we are comfortable with the progress we are making, working with ABI in terms of the launch of some of those larger markets, it will be a slow burn, which is why structured the relationship the way we are. But we are still very bullish on what we think the growth prospects will be.

Unidentified Analyst

Is that kind of a five-year time frame before it really notices shorter than that, just kind of trying to get an idea of the time frame?

Andrew Thomas

I'd say, it's 3 to 5 year is a really good time frame, Steve. I think for a lot of the folks on the call, I spent 13 years with Heineken organization and five of those were overseas working on a lot of international markets. And I think even a company that was as well-oiled and machine as Heineken had basically ingrained, takeout medium to long-term view in this. And that's kind of the way we've approached to a lot of the international markets. So if you think about markets like again, I'll go back to that trilogy of Brazil, and Chile and Mexico and talking about getting involved with a large local brewer there like working through the embed organization in Brazil, the scale of those organizations and the complexity of their planning systems and making sure that you're getting introduced in the right way. If you don't catch the business cycle right, you kind of lose a year. So if I try to a kind of explain everybody what's been going on, we announced the ABI agreements, I think in August of '16.

So forget the business cycle of '17 for all intents and purposes. So '17 was spent in a lot of ways, doing a lot of the planning to make sure that it became part of the plan so the next kind of calendar year, which would be '18. And we saw that throughout -- I will say, the kind of suite of ABI agreements. So in the case of Scott and the works you did with the ABI brewers and getting Fort Collins moving, we were able to get that move so that we basically have a full year ahead of us now in '18. But we had to bring that online in '17. We talked about on a prior calls, even dramatically, at the end of the '16, we didn't catch a full year better integrated wholesaler planning with ABI in '17, but as we've been really forthright about and really excited about, we think we cut that in '18 domestically.

Likewise, you have the same kind of dynamic going on internationally, where '17 was spent kind of getting integrating into some of the business planning for some of those larger markets. And I think in '18, you'll finally start to see the tangible fruit of some of that labor and '18 kind of being year 2.5, you should start to see acceleration as we get into year three and beyond.

Operator

And that concludes our question-and-answer session for today. I'd like to turn the conference back over to Andy Thomas for any closing remarks.

Andrew Thomas

Thanks, Candace. I appreciate everybody's continuing support of CBA and being available for this call. We look forward to discussing the results of the first quarter 2018 with you soon. Thank you, and have a great day.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does concludes the program, and you may now disconnect. Everyone, have a great day.