Craft Brew Alliance Inc. (BREW) CEO Andy Thomas on Q4 2018 Results - Earnings Call Transcript

About: Craft Brew Alliance, Inc. (BREW)
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Earning Call Audio

Craft Brew Alliance Inc. (NASDAQ:BREW) Q4 2018 Earnings Conference Call March 7, 2019 11:30 AM ET

Company Participants

Andy Thomas - CEO

Ken Kunze - CMO

Scott Mennen - COO

Ed Smith - Corporate Controller

Conference Call Participants

Drew Levine - BMO Capital Markets

Gerald Pascarelli - Cowen

Alexander Scharf - Maxim Group

David Cohen - Midwood Capital

Jim Coll - Lombard Securities

Steve Caswell - RJ & Associates


Good day, ladies and gentlemen, and thank you for your patience. Welcome to the Q4 2018 of Craft Brew Alliance Incorporated Earnings Conference Call. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this conference may be recorded.

I would now like to turn the conference over to your host Mr. Andy Thomas CEO. Sir you may begin.

Andy Thomas

Thank you, Lateef. 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 full year of 2018. This morning, I am happy to greet with aloha as this call is once again coming to you from the beautiful island of Hawaii home of Kona Brewing Company, where many of us of gathered for the annual Kona Brewers Festival.

On this call I'm again joined by the two other members of the CBA leadership team, our CMO, Ken Kunze; and our COO, Scott Mennen. So in keeping with our standard agenda before we begin, I'll ask Ed Smith our Corporate Controller to read our Safe Harbor statement.

Ed 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?

Andy Thomas

Thanks, Ed. As we jump into some reflections on Q4 and full year 2018, allow me to begin with a word about Kona Hawaii, the physical backdrop for this call and moreover the home and spiritual center of the Kona brand.

Many of you know the significance of Kona to CBA and can appreciate the symbolism of our earnings call being transmitted once annually from this beautiful island in the Pacific. But what you may not realize is the year 2019 significance to Kona Brewing.

Just three weeks ago, Kona Brewing marked its 25th anniversary of operations, making 2019 a milestone year for the brand. As you'll hear later in the call, we have planned a year-long celebration for our brand just 25 years young with the prime of its life still ahead.

So I'll begin with a sincere congratulations to those members of the CBA family that made Kona a reality 25 years ago, particularly founders Cameron Healy and his sons Spoon Khalsa.

Turning to the business at hand. Over the years of speaking with many of you, I have learned that Q& A opportunities aside, the reason you participate on this call is really twofold, one you're interested on hearing our take, some would say our spin on the results, to hear about what you could already see.

And secondly, you're listening for some insights into what's behind the results and what you can read between the lines about all that you can't see. So as we architect and next 30 minutes or so of prepared remarks, we'll evolve the format a bit.

My teammates Scott and Ken will do the heavy lifting on point one, our results, our take on them and the commentary on what you can see. And for my part, acknowledging the significance of the year ahead to CBA and to our shareholders, driven by the share scale of change in the beer market and driven by the known unknown regarding ABI's qualified offer deadline of August 23 2019. I'll take some time not just providing context to the results, but offering additional insights to our actions and to our plans for the future, endeavouring to provide a glimpse into our thinking and into what you can't see from the results at least not yet.

Lastly, as I set up the agenda, a quick word on the absence of a CFO voice on this call. I'm happy to share that we are in the final stages of negotiations with an outstanding candidate and anticipate announcing our new CFO in the coming weeks, with that individual in place by the Q1 call.

So let me begin with just a few thoughts on what we see as we look back at 2018. Cutting through the chase, it was a good year for CBA. We read the market, as well as we ever have. We were armed with a better understanding of our own internal capabilities and as a result we had a better command of our results as we stayed more squarely focus on our plan than ever before.

We successfully achieved strategic milestones from the acquisition of our partner breweries, AMB, Cisco and Wynwood, to the advancement of our cross growing relationship with ABI, to the work towards local production and commercialization of Kona in Brazil, to inching ever closer to physical construction of the new Kona Brewery in Kona.

We achieved record operational performance from beer gross margins that approached 40% within the year to healthy revenue per barrel development to improved operating margins to continued improvements in the engagement and accountability of our workforce, as evidenced by the strongest ever scores in our internal employee surveys.

And what's especially notable on this litany of operational bests. In 2018 our performance was as pure as it's ever been and devoid of non-core onetime benefits such as the Pabst shortfall payments in 2017.

Our results met most ranges of our original market guidance provided by this time last year, perhaps most strikingly in our ability to clean up our supply chain and deliver on the promised conversions of STRs and shipments, all while lowering days of inventory across our network.

And importantly for all of you on this call where we needed to update guidance and was in expected areas and we did so quickly, explaining the why behind our actions, taking accountability for our new realities and delivering on those updated ranges across the board.

So first on to Ken and Scott for a deeper dive into what you could see in Q4 and when looking back across all of 2018. Ken?

Ken Kunze

Mahalo, Andy. As Andy just highlighted, 2018 was another record year for CBA on many measures, as we again made progress against our Kona Plus strategy. Our performance was accomplished with a backdrop of a Craft segment slowing dramatically for the third consecutive year and accentuated by the slow drift of consumers away from beer. The Craft segment was flat overall in 2018, with off-premise volumes up only 1.5% and the on-premise down 3.1% as measured by the Beer Institute.

With that as a backdrop, Kona's performance in 2018 was resilient, accelerating each quarter ending the year with Q4 STR's up 11% and full year growth up 8%, outpacing the Craft segment by 800 basis points.

The focus of CBA's top line strategy for the past five years has been on strengthening our top line results, with strengthening defined as sustainable, profitable volume achieved by optimizing brand mix, geo mix and enhanced revenue management. In that light, for the year, CBA's STR's declined 2%, while beer revenue per barrel increased to healthy 260 basis points leading to record beer revenues.

With CBA's improved operating performance and strengthened financial position, our topline strategy will shift in 2019 to accelerate growth. This shift will be driven by investing in and fueling the momentum behind the Kona brand and our newly acquired breweries.

Kona will see a significant ramp-up in investment in commercial spend bringing spend levels to competitive benchmarks for the first time. Other firsts, include our first national distribution drive in the February through April timeframe focused against Kona's flagship Big Wave Golden Ale and Longboard Island Lager.

A-B wholesaler alignment and commitment is in the all-time high behind this program, 100% of our top A and B wholesalers are fully participating, another first. These wholesalers represent 96% of volume.

Participation was solidified with CBA and Kona's participation in A-B sales and marketing convention in January. We expect to accelerate the pace of distribution gains historically achieved.

This will be followed by our second national wholesaler incentive over the summer to drive velocity across the Kona portfolio. We anticipate strong participation again this summer.

To add momentum to these efforts, Kona will run its first-ever national media, bringing Kona's Dear Mainland campaign to everyone across the US. A campaign featuring our beloved Kona Brothers and a reminder to connect with what really matters.

The media buys focused on the Marquee Media event of this spring, the March Madness Basketball Tournament. It includes a national TV presence heavy regional buys and a strong national digital presence on live streaming of the games on CBS and The Bleacher Report, spending to support these efforts will be up over 50%. The timing of the spend in Q1 relative to the volume build in Q2 through Q4 will distort quarterly financials. Commercial spending vocations are assumed in our full year guidance.

We're starting 2019 with strong momentum. Kona's flagship Big Wave Golden Ale continues to grow with a healthy mix of both on and off-premise volume performance.

Q4 Big Wave STR's increased dramatically up 36% in the on-premise and plus 30% overall. For the full year, STR's were up plus 37% in the on-premise and plus 26% overall.

As the launch of our new Kanaha Blonde Ale, a flavorful 99-calorie beer somewhat quietly became a seventh largest new item in Craft out of literally thousands of new items that were launched in 2018. Kona ended the year as the number 10 national Craft brand and only one of three in the top 10 to grow per Nielsen.

On the international front Kona grew plus 29% in Q4 and plus 20% for the full year through a more focused approach in key markets with our partner Craft Can Travel. We also expanded Kona in Brazil with ABI.

ABI staffed the local marketing team who are seeding the brand by engaging local influencers in establishing the [indiscernible] ibars in and around the beaches of Rio. ABI reports that the rate of sale and the entree is the highest of any ZX innovation launch in Rio with velocity outpacing other important American craft brands.

Kona's strong performance was supported by positive performance from our newly acquired brands in Omission will offset by negative performance of Widmer Brothers and Redhook.

Omission made progress transitioning to a brand targeting a broader audience of active healthy lifestyle consumers versus previous narrow gluten avoiders. Omission Ultimate Light our 99-calorie 5-carb gluten removed entry grew 83% for the year after launching in late 2017 and drove positive growth for Omission overall up 3% domestically.

We continue to believe Omission can be a platform for better for you offerings and we'll further innovate in the space. Omission maintained its leading share of the gluten removed segment with a 33 share.

Wynwood Brewing out of Miami is led by its flagship La Rubia Blond Ale and focused on building distribution in South Florida. As measured by Nielsen Miami Food, Wynwood grew 116% and craft the top 25 of craft to number 18 on the strength of distribution growth, up 39 points to 50% of ACB - ACV. We're also exploring the potential of La Rubia to resonate with Latino and Hispanic consumers more broadly beyond just the craft play and beyond just Florida.

Appalachian Mountain Brewery out of Boone, North Carolina moved up to number 15 and jumped to the number four local brewery in North Carolina per Nielsen. Flagship longleaf IPA became the number two local IPA and North Carolina was up 22%.

As we recruit new drinkers, the plan to be sustainability and community embedded in the brand's DNA along with award-winning creative beers are resonating with consumers.

Of the three new brands, Cisco is the most established. But we believe its equity, rooted in Nantucket has run room to resonate with more consumers in New England and to build distribution on both the geo and a channel basis. 75% of Cisco's volume today is within the state of Massachusetts and largely seasonal to summer.

In 2018, Cisco Brewers received a boost with a successful launch of Gripah, its grapefruit IPA bringing momentum to its on-premise volume along with Shark Tracker Light Lager attiring with OCEARCH, a non-profit dedicated to healthy oceans.

This year, Cisco undergoes its first packaging and refresh in its 25 year history and flagship brand Whale Tale, Gripah, Shark Tracker lead and capitalize on Cisco's opportunity.

In 2019, Wynwood, AMB and Cisco will each receive ramped up investment to competitive levels to build these brands. Combined these brands were up plus 17% in 2018.

Moving to the Pacific Northwest. 2018 was a challenging and quite frankly disappointing year for both Widmer Brothers and Redhook in their home markets and overall.

New items that receive the change distribution originally planned as incremental retail space was more difficult to secure. Concerted efforts behind flagships came too little and late.

Price elasticity studies indicated price appreciation in these markets is outpacing the value consumers are willing to pay. A bright spot for Widmer Brothers is Q4 tactical efforts behind flagship, Hefe on its home market of Oregon began to impact the off-premise trend, as trend improved by over 1000 basis points over Q3 moving closer to positive territory. Hefe remains the largest craft brand in Oregon over 1.5 times bigger than the next largest competitor as measured in Nielsen.

For Redhook in Washington, Big Ballard Imperial IPA continues to gain traction after being the number one - named the number one new craft title in 2017. Redhook's Brewlab, Brewpub are on capitals of Seattle and the new beers developed there continue to receive positive reviews and are slowly helping to reshape perceptions of the Redhook brand.

These positive developments were not enough to overcome weak performance in the rest of the Widmer Brothers and Redhook portfolios in markets outside the Pacific Northwest. More work is needed here, but guidance assumes realistic performance in 2019.

In closing, as the consumer continues to evolve, CBA will evolve with the consumer through insights and innovation defined both what it means to be a craft brewer in the future and how the plus portion of the portfolio will be defined moving forward.

Kona remains the clear focus and number one priority. By all indication, AB remains committed to seeing Kona achieve its full potential and maximize its value.

With stronger alignment within the AB wholesaler network, with CBA's strong financial position and with Kona's achieving more critical mass both within our portfolio waiting and in the market, CBA will pivot our topline strategy in 2019 to drive more growth, fueled through increased investment and improved execution. With increased resourcing and A-B commitment, CBA's internal teams are excited and focused to build on Kona/s momentum in 2019.

With that, I'll turn it over to Scott Mennen, our Chief Operating Officer.

Scott Mennen

Mahalo, Ken and aloha, everyone. 2018 was another good year for CBA as we continue to work to strengthen the core health of our business by improving our cost of goods sold and expanding gross margin.

Let's jump right into the results. Q4 total shipments were 160,200 barrels or 1.1% behind Q4 of 2017. Full year shipments were 747,600 barrels relatively flat with 2017. Shipments for the quarter and full year were closely aligned with depletions underscoring the great work done by the supply chain team.

And note our inventory position exiting 2018 was well balanced putting us in a solid position us to support CBA's effort to drive topline growth in 2019.

Our world class craft operations excellence programs continues to help improve our brewery operations, driving improved operating efficiencies and reductions in losses. In addition the benefit of our supply chain redesign and reshape brewery footprint have helped generate improved results.

Q4 beer gross margin was 36.7% 90 basis points behind Q4 of 2017. As a reminder, our Q4 2017 beer gross margin benefited from the Pabst contract brewing shortfall penalty, which was recorded in revenue.

Q4 pub gross margin was 6.6%, a 610 basis point improvement over Q4 of 2017. Overall, CBA's gross margin was 32.8%, 40 basis points better than Q4 of 2017. Full year beer gross margin was 36.8%, 150 basis points better than 2017. This gross margin improvement is attributed to improved revenue rates and a reduction in beer cost of goods sold.

Beer COGS improvement reflects better balance of production across our brewery footprint with more beer produced in Fort Collins and improved operating performance in our breweries and supply chain.

Full year pub gross margin was 5.7%, 100 basis points behind 2017. Our Hawaii pubs continued strong performance in 2018 was offset by the sale of our Woodinville pub and softness in our Portland and Seattle pubs. I will address our pub improvement focus in a few minutes.

Full year CBA gross margin was 33.1%, a 160 basis points improvement over full year 2017 and within our updated guidance.

Looking forward to 2019, we will not lose sight of our primary objective to continue improving the core health of our business by reducing cost of goods sold and expanding gross margin.

In 2019 we'll build on the success in brewery operations by first, continuing unlock the full value of Anheuser-Busch brewing relationship, while balancing production across our own breweries. And in 2019, we anticipate maxing out our contractual limit in Fort Collins at 300,000 barrels approximately 15% more than was shipped in 2018.

In addition, we will continue cross-brewing of 80 brands in our breweries under the recently renewed cross-brewing contract agreement with A-B outlined in the 8-K released in February 26.

This part of this renewed agreement, we will continue to produce A-B's Virtue Cider in Portland and explore additional cross-brewing opportunities leverage the scale and capabilities of CBA Brewers.

Second, we will build on the success of our redesigned supply chain and our World Class Craft continuous improvement program to drive efficiencies in logistics and brewing operations.

Third, the transition of our newly acquired brands AMB, Cisco and Wynwood from an ultimate proprietorship, production relationship will enable cost improvements and margin expansion.

And fourth, we will maintain focus on revenue management to ensure pricing is in line with the market to support top line growth.

And in 2019, we are laser focused on improving the profitability of our pub operations and returning the segment to double-digit gross margin by the end of year, while not losing sight of the importance of the pubs taprooms in supporting our brands, much more to come on this in the next quarters.

Next, I'd like to update everyone on our evolving focus on innovation. In early 2018, we dedicated resources to innovation to unlock potential opportunities, both in the beer space and beer adjacencies.

This group launched our test and learn initiative we call pH where we tested several products including the Pickle Juice Gose, botanical ciders, hard teas brewed with wine yeast, IP variant - IPA variants with terpenes, and hot seltzer. In 2019, we are taking innovation to the next level.

Earlier this week, we announced a creation of new division within CBA, the pH Experiment. The pH Experiment will expand on the innovations teams test and learn platform, tapping into CBA's resources, distribution capabilities, and consumer research insights to quickly develop and test a range of new products in select markets across US. The first of these new products will launch in early spring with additional launches planned this year.

CBA will add additional resources to support the pH Experiment. The new General Manager, Karmen Olson will build on our test and learn philosophy looking for new solutions to drinker's needs. We recognize that there will be some misses - that some misses are expected, but this is how we learn and keep ahead of trends. We have set a long-term goal for the pH Experiment targeting $25 million in revenue by 2025.

As Ken mentioned, we are expanding Kona in Brazil. To support this key market, CBA has been collaborating with the Ambev team in Rio to bring on local production in the first half of 2019 with the initial test brewers now complete. While the plans are to start relatively small in 2019, the opportunity is huge, much more to come in the upcoming quarters.

Let me wrap up my comments with an update on our key capital projects. The new Portland can line was brought online in Q4 of 2018 and is operating as planned. And I'd like to acknowledge the great work our engineering team did starting the new can line up on time and on budget. And I have exciting news concerning the new state-of-the-art 100,000 barrel brewery here in Hawaii.

Earlier this week, we received word the building permits have been approved. The team is working to update the construction schedule and we should have the brewery online later this year.

Summarizing our 2018 full year results discussed today and outlined in yesterday's release, depletions were down 2%, shipments were down 0.1% relatively flat to 2017, net revenue was down 0.6%, gross profits were up 4.7%, gross margin was up 160 basis points, selling, general, and administrative expenses, SG&A, increased by $2.1 million to $62.6 million, resulting in a full year net income of $4.1 million or $0.21 per diluted share, and capital expenditures were $12.8 million compared to $18.3 million in 2017, which reflects the timing of certain progress payments related to the construction of the new Kona Brewery that shifted into 2019. The stage is set for another great year in 2019.

I'll now turn the call back over to Andy for additional color. Andy?

Andy Thomas

Thanks, Scott. As we look squarely ahead to 2019 and beyond, let's spend a few moments discussing where we're headed and what's behind our thinking.

Specifically, I want to address four topics head on. One, what consumer needs and market beliefs are driving our actions. Two, where we see opportunity. Three, how we're going after those opportunity, and four, what results you can expect to see.

Let's start with our beliefs. As a result of our actions last year, from the work with Yale and Prophet, to the end market test and learn experiences in Florida with the pH Experiment in elsewhere, we have an updated understanding of the marketplace and a more contemporized understanding of the consumer.

That understanding informs some foundational beliefs for us. Specifically, number one, we believe beer is still a vibrant category and we believe consumers still love beer. But our reality is that we now live in a world of seemingly infinite drink choices. As a result, beer is simply no longer the unchanged choice that once was.

Number two, consumer choices in life, not just beer are driving fragmentation in their patterns of behavior and socialization. It follows logically then that one brand, one style, one size will no longer satisfy all consumers all the time or even nearly as much of the time as it once did.

And number three, contrary to many others, we believe cannabis is indeed impacting our category in our brands. Not necessarily in the immediate linear one to one way that so many are quick to dismiss, but more profoundly and the impact it's having on drinking occasions, need states, drink preferences and attitudes.

And our research further validates the advantage impact of these influences in key beer states such as California, Oregon and Washington that were all earlier to legalized recreational use.

So those are the somewhat sobering beliefs. Where in all this seeming doom and gloom do we see opportunity? Specifically our work suggests that there are two unimportant parts for the category and for us at CBA.

Firstly, when looking across consumer segments, across occasions and across need states, a very bright light emerges. As importantly, some beers and some brands and specifically a number of our beers and our brands still satisfy a set of those consumers better than anything else.

Secondly, further looking through that same lens of consumer segments, occasions and need states, our research suggests that given our unique capabilities there are indeed new commercial opportunities for us to intercept consumers that are being seduced outside the beer category.

To summarize the opportunities, we believe that consumers are not walking away from beer, beer has been walking away from consumers. And for our part, we believe we have the portfolio, the capabilities and now the learning's to better meet consumers on their terms and their locations in tandem closer to our brands.

Continuing from beliefs and opportunities to actions, let's move on to how we intend to go after those opportunities.

Without giving up any proprietary insights, we unequivocally believe there is a world of upside for CBA and we'll pursue that upside in the following ways.

Number one, more than ever, we believe in Kona, in the brand, in its positioning, in its resonance with consumers and in our ability to brew beers and activate promotional platforms that bring the brand to life.

As such, we will firstly and with priority continue to drive the more universal lifestyle of a feel of the Kona brand both domestically and increasingly in global markets.

Secondly, we will double down on more targeted growth opportunities for our Plus brands with an emphasis on local and regional growth, firstly for the newly acquired Cisco, AMB and Wynwood, but also for legacy Widmer Brothers and Redhook.

Thirdly, we will actively explore less geographic base and more consumer segment based opportunities for Omission, Wynwood's La Rubia and for Widmer, Hefe.

Fourth, we will use the recently announced pH Experiment as a vehicle to expand our thinking beyond the existing portfolio of brands and beyond our existing definition of beer.

To be specific about what you can expect, armed with treasure trove of insights to guide our actions on both the existing portfolio and the portfolio to be, we will more boldly pursue opportunities, both as a leader in doing things others aren't and as a fast follower, bringing our proprietary insights and capabilities to fledgling categories, where we believe we can differentiate from the masses. pH will not be about piling on, but will be about pulling away.

And lastly, looking at how this all comes together financially, we believe that with the fundamental improvements in the core health of our business achieved over the past two years, we can pursue these opportunities with the requisite levels of investment and not erode our bottom line.

More specifically, as we pivot to growth, we expect to maintain healthy pricing, while still appropriately funding promotional and discounting needs, and we anticipate continued accretion in gross margin, as our breweries benefit from volume leverage.

So bringing it all together, let's look at how this comes to life in our market guidance for 2019. Specifically, as detailed in our release, we expect depletions and shipments growth each ranging between an increase of plus 5% to an increase of plus 8%.

We still see average price increases of plus 1% to plus 2%. We expect the total company gross margin rate of 34.5% to 36.5%. We will invest commensurate with the topline opportunities and as a result, SG&A expense will range from $70 million to $74 million. Our capital expenditures will be approximately $15 million to $19 million, and lastly, we expect an effective tax rate of 27%.

And while we do not provide specific quarterly guidance, I do want to offer some direction. Given the nature of the heavy up spend and expected impact on topline, we anticipate Q1 will bear the burden of some increased SG&A due to initiatives such as the March Madness Media that Ken detailed without significant up-ticks in volume and topline until Q2 and Q3, as initial spend on awareness and distribution building activities in Q1 should returns in subsequent months, given the volume dynamics and the seasonality. Clearly, we are bullish on the future for our brands, our beers, our innovations and our business.

Before I wrap up, a few words about our biggest known, unknown. That will they or won't they question with respect to ABI and qualified offer deadline. Let me begin by unequivocally stating that our relationship with ABI continues to be healthy, productive and mutually beneficial.

When I hosted a call with many of you 2.5 years ago to share details of all of our new enhanced agreements with ABI, I characterized the relationship between ABI and CBA as collaborative independence, and I believe that still holds today. From our work together in bringing the Kona brand and the rest of our strengthening and expanding portfolio to retailers through the shared ABI wholesaler network.

To the cross brewing benefits for us in Fort Collins and for ABI enforcement in Portland, to the work and planning for more global expansion most concretely evidenced by the recent actions towards local production in Brazil.

And with that healthy, well-functioning relationship as a backdrop, I'll remind our shareholders of our protection in the absence of a qualified offer from ABI. If ABI has not made a qualifying offer for CBA then CBA would be entitled to $20 million international incentive payment after the 2019 deadline and ABI could not force the termination of any of these new agreements.

Further, again if ABI has not made a qualifying offer, CBA could continue to operate independently or could then undergo a change in control and ABI would still be required to respect the terms of all agreements, including payment of the $20 million international incentive, continuation of the master distribution agreement at $0.25 a case, continuation of the international distribution agreement and fulfillment of the contract brewing agreement.

So, as explicitly as I have ever said it before, I believe the future is bright for CBA, regardless of whether that future leads to a qualified offer from ABI or if that future leads to continued collaborative independents.

In either case, our shareholders can look forward to the security of the existing ABI agreements an accelerated topline, a healthier portfolio anchored by Kona that 25 year young brand with lots of room to run and emerging stronger Plus portfolio flanking brands and continued progress in the financial performance and financial health of the company.

Before moving to questions, on behalf of the entire leadership team at CBA, a sincere thank you to each of you who played a role on the journey so far, to our investors, to those analysts who cover us, to our interested parties and importantly to all of our hardworking and passionate and engaged employees and partners wherever they operate within the world of CBA.

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

Question-and-Answer Session


Yes, sir. [Operator Instructions] Our first question comes from the line of Amit Sharma of BMO Capital Markets. Your line is open.

Drew Levine

Hi, everyone. This is Drew Levine on for Amit. Thanks for taking the questions.

Andy Thomas

Hi, Drew.

Drew Levine

Hi. So I just wanted to start on the SG&A step up this year. Sounds like most of it is going to Kona, and we've seen the success of heavy-up in some the measured channel data.

So I'm wondering if you could just expand a little bit on what the expansion plans are for the heavy-up and how you feel comfortable that - and you're getting good repeat rates on that spend?

Andy Thomas

Thanks for the question Drew. I'll tag team this with Ken. So just to underscore something you said in the front. A lot of our actions in '19 were definitely guided by some test-and-learn in '18, I want to underscore that.

It was a decision we made last year that if we were going to go big we needed to have some level of confidence and kind of what was going to happen.

And the second point, you're dead right, a lot of the increase in spend is going to Kona, because we really believe there is a window of opportunity open for the Kona brand right now and it's incumbent upon us to kind of jump through that window right now and hopefully orchestrate an elegant landing when we do so.

I think, one of the things that's clear to state to is the research as I said in my portion of the prepared remarks. You almost couldn't designer brand better than Kona and the beauty is that it's not designed, it's real, it's authentic.

So for us, when we look at what we did in Florida last year namely, it gave us a lot of confidence that we knew the tool kit and we knew kind of what levers to pull on the Kona brand and a lot of what you will see orchestrated on more the national stage and also with heavy-ups in certain geographies is a page out of that Florida playbook, which as you said, you could even see pop in the measured media, measured sources and what you couldn't even see in the measured sources with some of the on-premise growth.

I think the question we get often asked is why are Kona trends so much better than you might suggest in Nielsen. And one of the reasons is we're playing the entire field, we're not just playing Nielsen channels.

As I said, we have a lot of great insight about where consumers are going after beer and where beer walking away from them, and we happen to believe that the on-premise certainly for big wave draft, and long board draft is a huge opportunity for us, as other people basically kind of run away from that area and turn their attention elsewhere.

So that a little bit of a backdrop, I'll kind of hand over to Ken, maybe to fill in the blanks on. What we expect to be doing and why we feel confident in what we'll see as a result. Ken?

Ken Kunze

So 2019, I think we'll definitely be an expansion of the learning and what we've been doing in terms of how we have gone to market last year and a little bit, the year before. So, it's - I think working in the three tier system, it's also about really getting strong alignment from the wholesaler, the retailer as well as the consumer, and so the ramp up of investment will be targeting each of those, a little bit separately.

The bulk of the investments will go toward the consumer to really activate that, and - but that strong alignment throughout the three tiers is really part of what we're trying to do and Florida was a great example of really working with the wholesalers, the key retail players in Florida and then the consumer to bring it all together to drive momentum.

We are putting a big investment in March. The timing of that and the viewer-ship of that is just a good property for us to launch behind and the spend will be weighted - somewhat the volume, but also enough to create a national presence to kind of fuel a broader footprint than what we've been able to do previously.

So as the marketing guy, having more resources to invest behind the business is exciting and we've gone back and validated the creative, so we know the creative is strong, the message resonates, people like the brand and what not and just matter continuing to build distribution and get more awareness, more consumer activation out there. So we feel really good about where we are for '19.

Drew Levine

Thanks. And then on the FMB side, with the pH experiment and launching the new product in the second quarter, it sounds like - can you just talk about what type of reception you're getting from distributors and retailers and if you've secured incremental shelf space for that product at this point?

Andy Thomas

I think the question is - the answer is, watch the space through and that's not fictitious. We're getting really good reception. But I think we are mindful of the fact that there's a lot going on there and there's a lot of competition for wholesalers hearts and minds and certainly for their bank accounts too.

So one of the reasons we - again very consciously and thoughtfully kind of decided to launch pH as a separate arm, is to let pH basically go where pH thinks it can be more successful.

So rather than have a one-size-fits-all approach and trying to force fit square peg into a round hole on a broad geography or across a broad class of trade, what we've done is basically, say, hey we look - we have these consumer insights and it is all rooted in the consumer. We have these consumer insights and we think these markets in particular, these channels might be the best way to go after it.

So we're kind of going at a more targeted wholesaler base on a case-by-case basis, no pun intended, where we are looking to basically get them excited about what we can tell them about their market and about their consumers, and as such, we've been really encouraged by the reaction we've got and because we're not taking some great learning's from - theoretically from a conference room, that we build in Oregon or we build in Miami or we build in Boone and then trying to shut them down, to throw to somebody in a different market.

We're really organically taking learning's - our consumer research was extensive. I think a lot of you know my background, I'm a researcher by trade, and I can tell you this is among probably the best pieces of research I've ever had the fortunate being a part of.

And it gives us the ability to look geographically, some differences on a state by state basis as well as really drawdowns to consumer basis. So, little bit of a long winded answer, but I wanted to give some color.

We're not just getting a reaction from consumers that are excited, we're doing something. We're getting really targeted reaction from the right consumers, because we're bringing them something that we think is differentiated from what anybody else is doing.

We're not trying to go big everywhere, we're trying to go big and deep in their markets in a very targeted way and we think that is going to differentiate what pH is doing from what a lot of others are doing in the drink space.

Drew Levine

Thanks for that. And then final one from me on Widmer and Redhook. You said that you're beginning realistic assumptions for this year, obviously you're still seeing pretty sustained weakness.

So just thinking about 2019 versus 2018, for those brands, I mean if you give us any sort of help on what you consider realistic expectations, is that stabilizing? Is that improving? Or just any additional color there would be great? Thanks.

Andy Thomas

Yes, it's a great question Drew. So just a couple of things to take the opportunity to say. You almost couldn't have picked a worse set of circumstances converging for Widmer and Redhook, especially not only given the legacy, the age of the brands, not only kind of given the kind of momentum in the trends on the brands, but given the kind of the market conditions. Again, I don't want to share too much from what we've learned, but Washington and Oregon in the Northwest are different.

One of the biggest kind of - as we get out of the consumer research was - it at least kind of made us feel a little bit better, it was kind of a victory in that we like - well, maybe it isn't just us. There really is something different going on here.

So we feel we're smarter about what's going on than we've ever been, and as a result, that's why we feel, we can say with some confidence, we're being more realistic.

You're not going to see a positive number in front of those brands. I can say that unequivocally. You shouldn't see a more accelerated negative number. So for us, without giving any market guidance at the brand level. We expect to see at least a stabilization in the decline, if not, an improvement in the trend, but still not all the way to zero or positive on either one of them.

With that said, something I said in the prepared remarks, and it was intentional. We think the learning also suggest to us that a brand like Widmer Hefe, might be more about the Hefe that it is about the Widmer. And it might be more about where there are markets, where there is an opportunity for an outstanding beer that helped launch a category, American Hefeweizen, I'm outside of the geographies of the Pacific Northwest, then we would have thought before and that is an evolution in our thinking there.

So Widmer Brothers and Redhook, tough markets, Northwest is different. We're armed with a lot more understanding of that than we've ever had. Is the sobering understanding and we're being realistic about it, but we don't expect things to get worse. We expect them to get better, but we don't expect the tide to turn totally into the positive territory in '19 year.


Thank you. Our next question comes from the line of Vivien Azer of Cowen. Your line is open.

Gerald Pascarelli

This is Gerald Pascarelli on for Vivien. Thanks very much for taking the questions.

Andy Thomas

Hi, Gerald.

Gerald Pascarelli

How is it going?

Andy Thomas


Gerald Pascarelli

So based on your comment - your commentary on kind of outlook for Widmer and Redhook, your guide for plus five to eight in terms of volumes and depletes, obviously implies a fairly meaningful acceleration in trend for Kona. I get the investing in particular March Madness and higher investment spend over the course of the year.

But how do you think about the white space opportunity for Kona, in its current state? Is it going to come from further distribution gains? Is it going to come from velocity for both? Any kind of color you can give on the drivers behind the acceleration, I think would be helpful? Thanks.

Andy Thomas

Hey, Gerald, I'll start here and Ken will hopefully jump in and keep me from saying something I shouldn't for misstating. So the interesting thing about the Kona brand is, it depends on where you're looking. So if you're in a market like we are here in Hawaii, we've got broad distribution and really good velocity.

If you're in a market like California, depending on which market there, your distribution opportunities and more about spreading out, not gaining initial distribution, but gaining more packages and gaining deeper distribution.

And then, if you're in a market kind of like the one of the central region markets or even up in the Northeast, your real opportunities are distribution, and then on top of all that, you want to accelerate some velocity, right? So those are just some good theoretical kind of truth about any consumer packaged goods, certainly about the beer business.

So if I dial that down specifically to Kona, in markets where we already have good ACV coverage, we're looking to go deeper with additional packages, and not necessarily additional packages with all additional brands, but maybe different platforms.

So where we've got distribution on six packs for Big Wave bottles, and even for 12 packs, you'll start to see 18 pack cans, you'll start to see us expand kind of our case business in those markets.

Whereas in other markets, we're looking to just get on the shelf for the first time and then spread out from there, and then velocity helps all, right? Velocity raises all ships.

So I think for us, as we look at a pretty healthy acceleration, on Kona specifically, and I do want to talk about was tipping point kind of concept too, because both of your question and Drew's kind of have distinct kind of tweaking in the back of my mind to make sure I say on the call about kind of where we are from a portfolio perspective that we've never been, but sticking with Kona first.

I think when we look at the acceleration, we expect to see a high double-digit number on Kona, probably get another digit to it, again without giving guidance. And we believe that will come from a pretty healthy expansion and distribution, both in Q1 and Q2, as Ken talked about distribution drives, and off that better distribution base. We expect to see velocity increases, as we get through the peak summer selling season in the summer. It's not an activity that we do in March.

There happens to be a great marquee property for us to get out of their behind with March Madness, but by getting the distribution drive going in March and April, it allows us to get Kona on the shelf in time to really hit the peak selling season, and to really try to hit chain resets as effectively as we can. So that's a little bit behind the logic on the acceleration Kona.

The other point I want to make, if you look at the 5 to 8 guide, you can get there in a lot of different ways, but one of the important things to note, Widmer Brothers and Redhook, despite the kind of hurt that's been putting on the company, that now represents 20% plus or minus of our volume base,

So they've kind of contracted to a point where while they're still sizable between the two of them, they're not going to have the disproportionate impact on kind of use surfing growth or negating growth that they once had.

So while independently, any one of them might have been small, the three acquired breweries, so AMB, Cisco, and Wynwood with the growth opportunities they have, coupled with Kona, which was already better than 60% of our portfolio, coupled with Omission, we believe gives us a much stronger force of brands moving forward. In the face of that, the 20% that isn't moving forward, won't have a disproportionate impact on our overall result is part - as it did.

And the last piece which I want to underscore a lot, Big Wave, Longboard, our partner brands, all of that growth for us is margin accretive and that puts us in a very different position than a lot of our peers right now. It isn't fragmented for us, as we grow more Big Wave, but isn't fragmenting for us, as we grow more of the Rubia, we're already doing that.

It actually is margin accretive because that create volume leverage in our own breweries. So that's a little bit of context behind why do we feel good about Kona, and why do we feel good overall the 5 to 8 guide, without saying that's going to disproportionately hurt the financials.

Ken Kunze

Sorry three points maybe, I would just build on that. I think you can't underestimate the importance of having share of mind with the wholesalers to get distribution, and really with A-B's endorsement and we have a really strong program, set up for that. So we feel confident in terms of our ability to drive more distribution than we have historically.

So in terms of distribution, will definitely be a big part of the play. I think the other thing I would just comment on is that we did quite a bit of pricing and price elasticity work, as well on that, and we're in and around where we need to be, but we can be sharper in terms of exactly where we are in the frequency of what price points we get in the ads, which will also contribute to velocity.

And then, finally, the increase in more consumer facing thing is somewhat gravy on top of kind of the fundamental blocking and tackling things that are going to make it happen.

Gerald Pascarelli

Very good. Thank you very much, that's super helpful. Sticking with Kona, like in terms of the brand family, you're obviously seeing robust growth, but for the two big brands, so Big Wave Golden Ale and Longboard Lager.

Can you just give some color on how you view the competitive dynamics between both of those brands? I know that they play kind of in different categories within beer. So your thoughts between how each of those brands performed against one another and in terms of competition, I think would be helpful?

Ken Kunze

So I think for me, given that Longboard is a lager and Big Wave Golden Ale, the lager Morgans Lager, right? So I forget exactly what the percentage us, but the vast majority of all beer is Lager. So that put Longboard more, kind of within the lager space, and Big Wave Golden Ale, plays more differentiated in more within kind of the craft spaces.

The simplest way I would articulate it, we're extremely bullish on Big Wave and what that liquid, what that beer in the brand itself represents. And so we feel that's probably just a little bit more differentiated in the marketplace, and really has the most long-term upside.

Gerald Pascarelli

Great, thanks very much. Last one from me, this is on the international front. Can you just provide us with an update on Brazil, maybe your future plans for expanding within that market? What you're seeing in early results, in terms of penetration rates, velocity that kind of thing, I think that would be helpful? Thank you.

Andy Thomas

Thanks Gerald. So, on Brazil expect a slow burn, but with hopefully a big bang at the end. And the reason I say that is we're really relying a lot on our partners Ambev down there who know how the kind of approach that market.

And so starting out in a market like Rio and on the beaches with influencers and starting to grow the brand that way is something that we think will give it deeper roots as we start to expand more broadly beyond half the country.

So, initially I think as Ken said we're thrilled with kind of what we're seeing there and both in terms of kind of the reaction to the brand, the residents to the brand with Brazilian as a huge surfing culture, and a huge water culture in Rio that we're able to tap into. And we're seeing really good velocity and really good repeat on a small basis.

So, armed with that and with a healthy balancing of opportunity and discipline we'll look to continue to stay at that and make sure we see the brand effectively and then expand beyond there.

Local production is going to be a part of that though Gerald. I think I've talked about on this call pretty openly similar barriers to entry and some of the most interesting global markets for us, Brazil being one of them. As we're able to produce locally there and overcome some of the important tariff issues and tax tariff issues, it will create more money in the value chain for everybody that kind of feel the fire a little bit more.

So, for now we're being disciplined to make sure the brand grows well and given kind of the financial realities of basically still working on imported basis. And as we move towards local production, we'll have the benefit of the learning's from that initial seating period as well as a little bit of a healthier value chain for us to tap into.

Gerald Pascarelli

Super helpful. Thanks very much guys.


Thank you. Our next question comes from the line of Alexander Scharf our Maxim Group. Your line is open.

Alexander Scharf

Thank you. When you talk about on gross margin improvement in 2019, what are some the key drivers of the beer side of that? And do you also think we could see a rebound in the pub side as well?

Andy Thomas

Thanks Alexander. So, I'll pass that one over to Scott.

Scott Mennen

So, on the beer side of gross margin expansion, we're going to continue doing a lot of what we're doing. First and foremost, we'll continue to unlock the value with Anheuser-Busch relationship maxing out Fort Collins which gives us a benefit of $10 per barrel, so you'll see us get to the 300,000 barrels shipped from Fort Collins this year, that's our plan.

We'll continue to leverage the work we've done in our supply chain in World Class Craft in our brewery operations to improve efficiencies, reduce losses both logistics and freight, as well as in the breweries.

Another benefit we have is moving from the alternate proprietorship relationship with our new partner brands to owned gives us some opportunities to unlock some cost improvements there and drive margin expansion.

So, those are really the three key drivers of margin expansion. And then on top of it, don't lose sight of what we're doing with revenue management to making sure that your pricing or products to move properly and that's still what you'll see in our price guidance.

So, having healthy revenue management and continued drive improvements in our breweries and unlocking the full value of A-B without the 300,000 out of Fort Collins is going to get us there.

On the pub, the answer that is yes. Our goal is to get back to a double-digit gross margin this year. How we're able to do that? It's continuing to really enhance what's working. As I mentioned, our star performers are really our Hawaii pubs both here on the big island with the Kona pub and over on Oahu with our Koko Marina pub.

Earlier this year in January, we had to make the tough decision but it was the right decision for both the brand and financially to close the Portland pub. While it was a great space, it wasn't in a great proper location to really support the brand, we couldn't attract people to make profitable, so that's part of it and then also with the acquisition of our new partners AMB so the boom taproom and with Dana, Miami with Wynwood.

The Wynwood taproom while they're relatively small they're good performers. So add all that altogether continue work on enhance what's working lack of better term lop off some of the pain points, work on what we need to be working on such as BrewLab in Seattle great space but opportunities to drive improved performance in the addition of Wynwood and AMB is taproom will help us get that double-digit gross margin. Well, it's going to take a lot of work, but as I said, we're laser focused on it.

Alexander Scharf

Great. And then over the last couple of years, there seemed to have been a steady shift from focusing on external partnerships or external acquisitions through internal innovation and that's really solidified I think by the pH experiment business unit. Can you talk about why that's the right strategy for the company at this point in time?

Andy Thomas

It is pretty insightful question, I was interrupted, I probably talked for long time about it. But, I think it goes back to kind of combination of where was the company, where was the market and kind of where we competitors, and the intersection of those three things, you find your answer, and it's an answer that will evolve.

So, I'll explicitly say that. If I go back three or four years ago, the company didn't have the money to go after some hot target M&A, that was out there, because they were expecting much different multiples.

We didn't have the multiples to spend in our bank accounts. And as a result, necessity being the mother of all invention, we had to kind of look internally at what we could do and kind of grow in our own way through kind of what we called the planning C strategy and partners.

As we fast forward now three years, we're looking at '19, I'd say we're the healthiest we've ever been. We feel really good. We've got great experience and what it takes to kind of grow a small partner or another brand to move forward.

And I think you're seeing the fortunes for a lot of those small brands that were operating independently, who decided they were going to try to scale, seeing their fortunes turn, and while we never hope to prosper because of the misfortune of others.

We are not apologetic about being able to snoop in and take some opportunity there and help everybody out. So, we find ourselves now where there may be more external opportunities for us out there, but in pursuing any of the external opportunities, we'd be doing it from a stronger place.

They'd be doing it with a different perspective. And meanwhile, we have the benefit of all that internal learning and the pH experiment can be a great vehicle for us, not only organically growing new concepts, but it could be a vehicle for us to take a look at external development for some concepts that we don't currently have within CBA fold right now.

So it's evolving, but for us, three years ago, dead right answer. For us today, is still the right answer, but I think we can be a little bit broader in terms of how we look at external development, from an opportunistic perspective.

Alexander Scharf

Great. Thank you very much for taking the question.


Thank you. [Operator Instructions] Our next question comes from the line of David Cohen of Midwood Capital. Your line is open.

David Cohen

Hi. I may have missed this, but did you share investment in the pH Experiment for 2019?

Andy Thomas

So, in terms of absolute level investment now, we didn't disclose that. I can give you some broad parameters on that David. We're looking to almost be kind of self-funding revenue neutral, if you will on pH. So if you look within our SG&A, $70 million is a big number guys, I recognize that.

Believe me when I say, it isn't something that we're doing lightly. But if you look at what we're trying to do on that $70 million - with that $70 million, there's a lot of factors in there.

We're trying to fully fund Kona and to do some things on the brand, we've never done before. We're trying to fully fund acquired brands and we're trying to make sure that we can feed and give pH experiment and Karmen enough money to go out and do what they need to. And if it hits, it hits.

Then - the business case starts to develop kind of organically and independently of everything else, and in order to get all of that done, you are seeing us try to tighten our belts on the G&A side a little bit to make it all still come together, because if you just continue to add to all that, the math just works and we're mindful of that.

So, on pH, I would say I characterize it as appropriate, but kind of a meaningful and appropriate, but self-funding for now. And then on the of every business opportunity as it develops we'll build a business case. And as we have things to share with you guys we'll be more than delighted to share them.

David Cohen

Okay. As it relates to Brazil, as that, as you evolve towards local production there would be royalty fee structure of the international agreement start to apply?

Andy Thomas


David Cohen

And so presumably they will be fairly high, would that be a fairly high margin revenue stream albeit not necessarily on large volume front, but that's still relevant, right?

Andy Thomas

That's still relevant, it's exactly right.

David Cohen

Okay. And then I think last question of a bigger picture question. And you just said $70 million a large - is a big number and Craft Brew has not necessarily had the scale and margin structure historically to invest that aggressively and you do have sort of slow played the development of the Kona brand portfolio. What in particular is giving you the confidence that now is the time to an open the playbook on investing behind Kona for this kind of magnitude?

Andy Thomas

Research and scale, really unequivocally. When we look at where the opportunities are and where kind of the white space is and the run room exists, if we are going to go after it, everything we will go after where it is embodied in the Kona brand and that comes right out of kind of research, be that geographically, consumer segment wise and whatnot.

And scale is important. We've been on this March, many of you on the call with us for four years now and we're finally at a point now where we think we can compete in the way we want to.

So if, Ken wanted to spend $8 million on March madness three years ago, it sounded great, we had great creative, but we didn't have enough volume concentration in key markets in order to make that kind of payback. But today with the concentration, we've got in certain markets, the scale we have in certain markets, we believe that we can heavy up there and get an appropriate level of return, not just on a percentage basis, but on an absolute basis in terms of kind of volume return.

That actually starts to make it pencil out. So one-two punch, the research suggests to us, we've got the right vehicle, the right brand, the right liquids, with the right kind of understanding of how to go after it. And secondly, we've got the scale to be able to make the financials pencil.

So one, two punch, the research suggest to us we've got the right vehicle, the right brand, the right liquids with the right kind of understanding of how to go after it. And secondly, we've got the scale to be able to make the financials pencil.

David Cohen

All right. Best of luck, guys.

Andy Thomas

Thanks very much.


Thank you. Our next question comes from the line of Jim Coll of Lombard Securities. Your line is open.

Jim Coll

Thanks much guys for the good insight. My question was on the balance sheet. Where do you expect long-term debt to be two to three years out, barring any major acquisition or increase in CapEx?

Andy Thomas

Yeah. It's a great question, Jim. It's always good to hear you on the call too.

Jim Coll

Thank you.

Andy Thomas

Jim's one of our longest kind of individual supporters here, so you're with us for a while Jim. And as such, you, kind of, can probably appreciate what about to say. We expect our long-term debt position to actually not only normalize relative to historical levels, but to probably be really, really strong.

So if you take a look at couple of things on the horizon, right? The elephant in the room question of the qualified offer, with the advent of August we'll have a $20 million infusion, I mean if we're on this call, this point last year, next year, we'll have basically take that $20 million to buy down kind of debt level, so that's one thing.

Secondly, right now, our CapEx, we expect to start to normalize after 2019. And when I say normalize, if you take a look in 2019 we're still basically doing two major things - we have three major capital projects kind of on the horizon.

We're finishing up the Kona brewery which we started. We're later in getting that done, because of building permits. Secondly, we will do a pretty significant remodel of the campus here in Kona, once the new brewers is built, continuing to make sure that we invest in the pub and continuing - we make - invest in the consumer experience here at the heart and as I call it, the spiritual center of the brand.

And thirdly, we have some upgrades to ERP systems that we need to get done. We're not launching SAP, so I don't want anybody go crazy on the phone, but we have some maintenance to do there. Those are three kind of significant projects on the horizon for 2019.

And then, candidly, I can tell you without giving any long-term guidance, after the calendar turns and those projects are completed, you'll see our CapEx levels drop down to levels that you have never seen. And that coupled with the fact that we'll have that $20 million cash infusion, kind of puts us on a balance sheet perspective in a really, really good debt position, as we look forward to 2020 and 2021 and beyond.

That said, kind of, back to the answer I gave to Gerald or back to the answer I gave Alexander, we will continue to pursue explore opportunities that come our way. And we think we have really adequate funding, we got a great relationship with BofA in terms of financing our activities. And so I think if you look at our balance sheet, it will basically be another thing that finally gets in line as we comes to '20 and '21.

Jim Coll

And how about depreciation and amortization expense? Gradually increased, nothing significant?

Andy Thomas

Yeah. We'll see a spike in that a little bit this year, Jim, just because of how much new stuff we've got. You got the Kona brewery, you've got Brewlab, you've got some hard assets that were starting to appreciate, because it follows that after you spend at a level we've spent on the CapEx lines the last couple of years, you're going to see the knock-on effect of that in your depreciation for a couple of years. But that's all factored into our guidance and into our financial planning. And we're feeling pretty good about it. So nothing abnormal, I would say, there other than would you expect given historical levels.

Jim Coll

And that new opportunity if I think it sort of tie-in type aperitif, can you give me a bit of an idea what that - what about that? And besides what I've read?

Andy Thomas

Sure. Scott, do you want to take - tackle that?

Scott Mennen

Yes. It's actually a cider-based but we've done some work with the botanicals to kind of go after the Aperol type of Spritz which is an Italian type of drink. It's really based in bitterness, it's refreshing, it's a little bit bubbly.

And so we're trying to go after that drinker and consumer out there that's looking at something different than beer that kind of fits that segment is more refreshing, it could be poured over ice and that's what I think you'll see most of them then that way. But it's refreshing and it's really knock-off on the app or all type of spritz. It's very refreshing.

Jim Coll

So, it's like spritzer?

Andy Thomas

It's like spritzer. I think couple of interesting things Jim. I mean, I could talk about this for a while our innovation group is innovative, right. So we we're looking at everybody's is kind of running in certain directions and we started playing around or they started playing around with cider as a base, which we thought was brilliant.

First and foremost, we don't know a lot of other folks who are doing that. It's easy to do. It's scalable for us. We can do within our existing capabilities. So that kind of is differentiating for us first and foremost. And then armed with a lot and insights we get out of the research and some of the nuts and bolts insights we got out of Yale.

If you see the packaging even the fact that is in clear bottles that's intentional. And it's not just with a clear as cool, there's a consumer insight behind putting that beverage in a clear bottle. And not only, how it allows the product to shine through literally through the clear, but that statement it makes about the liquid inside to the target consumer.

So again, really good insights driving some really good actions and opportunities and we'll get out there and test it. And now that we've kind of gotten out there and talked about it, you can rest assured we'll let you know how that develops over the coming months and quarters.

Jim Coll

Thanks much guys.

Andy Thomas

Thanks, Jim.


Thank you. Our next question comes from Steve Caswell with RJ & Associates. Your line is open.

Steve Caswell

Hey, guys. Thanks for taking the question.

Andy Thomas

Hey Steve.

Steve Caswell

Another long-term shareholders. I guess we got to go back to back?

Andy Thomas

Absolutely, I love it.

Steve Caswell

You guys touched on this a little bit earlier, but just could you kind of, I guess, talk about where Kona is in its life cycle. I guess if it's a baseball game, what inning we're in? And then also on the research - is it kind of viewed as like a craft Corona or how the people view the brand?

Andy Thomas

Yes, that's a great question, Steve. I think, if you take a look at it - I think what we've learned is not all brands have the same life cycle. So if I'm going to look at a brand like Kona, I would basically look at a reference brand like you just mentioned in Corona.

And so if you look at, where was the Corona brand after 25 years relative to its growth trajectory and where is the Kona brand, I think you'll find some validity for what about to say, because, I think we're in early innings. The reason I say that is, I think you've got a brand that's rooted in a locale that's has less universal appeal, that has products are more polarizing and might not have universal appeal.

You will see an acceleration in the life cycle, we're living that with Redhook, right. A brand that was all about the Northwest, it was early on, its flagship was ESB, all of those things had a life cycle, but they were probably more finite. If I adjust the position that with Kona, we're blessed with the fact that the Kona brand is rooted here where many of us are today in Hawaii, which has universal appeal.

The concept of kind of that liquid sunshine that liquid aloha we call it, kind of in the bottle is something that is resonant with a lot of consumers and as such, we think the brand has a longer trajectory, a longer arc of growth, than a lot of other brands will, because, it's rooted in something that has a pretty long arc in terms of a lifecycle.

Secondly, if you take a look at the brands, as Ken said, you know Longboard Island Lager and Big Wave Golden Ale being the flagships, they're both really accessible, relatively easy drinking brands that deliver on that kind of promise. So the liquids in the bottle, I would say from a functional standpoint, have a longer arc and a trajectory as a life cycle, coupled with a brand that we think has a longer arc.

So if I were going to tell you what innings we're, I would say we're in early innings. I don't know if we're in the third inning or the fourth inning, but we're probably in, somewhere around there.

And I think there's a lot of run room for us in - and I would say, take a look out of the Corona playbook, I remind people when I joined the beer industry back in - I hesitate to say in 1995, the Heineken brand was bigger than Corona. That was a long time ago, I get it.

But if you think about what Corona [ph] has done in the decade since then, and how it's distanced itself is something that I think is relevant when we take a look at the life cycle question on the Kona brand.

Steve Caswell

Okay, great. That's very helpful. Thank you.

Andy Thomas

Thank you.


Thank you. At this time, I'd like to turn the call back over to our CEO, Andy Thomas for any closing remarks. Sir?

Andy Thomas

Thanks, Lateef. I appreciate everybody's continuing supportive of CBA and being available for this call. We look forward to discussing the results of the first quarter of 2019 with you soon. Thank you and have a great day.


Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may disconnect your lines at this time.