Rearrange the blocks, or sell them?
That’s the question that Craft Brew Alliance CEO Andy Thomas seemed to be working through in a rare off-cycle conference call with investors and analysts today after his company’s largest playmate, Anheuser-Busch InBev, declined its long-held option to purchase the Portland, Oregon-headquartered craft beer maker.
The call came two weeks after the August 23 deadline for A-B, which already owns 31.3% of CBA, to make an offer of $24.50 per share (about $328 million) to purchase the remainder of the company or pay a one-time fee of $20 million. A-B opted for the latter, leaving questions about the world’s largest beer manufacturer’s future interest in the smaller beer company known for brands such as Kona Brewing, Widmer Brothers, Redhook and others.
Since that time, CBA’s stock (BREW) has declined from $12.96 on August 22, the day before the deadline, to $9.28 at the end of trading today. It has sparked speculation that CBA might look to sell to another suitor or divest its brands, including fast-growing Kona. Another narrative emerged saying CBA and/or Kona were too entangled with A-B to ever be unlinked.
“I know that’s a narrative out there,” Thomas said. “And that’s not a narrative that I agree with. That’s not to say again, with everybody reading into things, ‘Oh my god, they’re going to go and sell Kona.’ All that is to say, if you look at the building blocks that we have, and if you read through the narrative carefully, we have always constructed those building blocks in a way that is going to deliver the most profitable, highest return for our shareholders, which was a qualifying offer from A-B on August 23.
“Now, with that removed, it’s on to Plan B,” he continued. “But Plan B isn’t allowing the stock price to languish at $9. It is not. I can assure you of that. And it’s not to let the Kona brand continue to be overshadowed in this marketplace. It deserves better. You guys deserve better.”
Throughout the call, Thomas stressed that CBA has the right “building blocks” at its disposal. He pointed to healthy financials, that $20 million windfall from A-B, a portfolio of brands led by Kona, an innovation pipeline through its pH Experiment division, a growing presence in international markets, a scalable footprint and a strong talent base. In addition, the company can also rely on its Master Distributor Agreement with A-B, as well as 300,000 barrels of contract brewing capacity at A-B facilities, for up to the next seven years.
But if the construction materials are there, the blueprint is changing, Thomas said.
“These building blocks provide CBA the basis for unlocking our value in the future, be that bringing them together holistically to drive faster and more profitable growth, or understanding how different combinations of these blocks can unlock more immediate value,” Thomas said.
Thomas stressed that CBA’s management team is being “exhaustive” in making sure all options are considered before choosing the correct path forward. The company’s leadership team has begun working with independent board members, bankers and external advisors to explore alternatives, “strategic and otherwise,” and the conversations with A-B have continued as CBA tries to understand what a future relationship looks like, he said.
“We’re looking at everything,” Thomas said, noting later in the call that management was willing to “put the blocks together differently.”
“Now with some of the restrictions lifted on dragging some of the blocks with us, that we would have an orientation to get rid of some of the blocks or change some of the blocks and that could take the shape of a total restructure of SG&A, it could take the shape of divestiture of some brands, it could take the shape of a lot of things,” he said. “As I said, everything’s on the table.”
Thomas said he’s confident in his team’s ability to unlock value for shareholders. However, that effort won’t be immediate.
“We wouldn’t be in the discussions that we’re in right now if we thought status quo is an acceptable outcome,” he added. “It is not.”
So what is there left to play with? The biggest block is that Kona brand, which is pushing 500,000 barrels and growing “high-single to low-double-digits,” Thomas said.
“It’s spitting out volume growth that’s the size of multiple craft brewers that are getting these ridiculous multiples,” he added, calling the gap between the valuation of Kona and the company’s stock price “confounding.”
CBA also updated its guidance for the rest of 2019, adjusting shipments and depletions downward to a range of flat to up 3%, after projecting growth between 5% and 8% during Q1. The company attributed the change to out-of-stock issues for Kona products in key markets during the second-quarter, as well as “lower-than-planned contract brewing shipments.”
“Since identifying the out-of-stock issue in early June, we’ve been actively focused on addressing the situation with positive results; however, barrels lost during that critical selling period cannot be recouped,” CBA chief financial and strategy officer Christine Perich said in a press release. “That impact, coupled with increasing pressure from the expanding hard seltzer category, led us to lower our shipments and depletions range for the full year. Looking forward, we remain buoyed by Kona’s continued momentum, our resilient gross margin, and the settlement costs of the Kona class action lawsuit being in line with the expenses we accrued in the first quarter.”
During the call, Perich said the company planned to contract brew 33,000 barrels of product for Anheuser-Busch this year, but “only half of which will materialize this year in comparison to 28,000 barrels in 2018.”
CBA maintained the rest of its guidance for the year, including:
- Average price increases of 1% to 2%;
- Gross margin rate of 34.5% to 36.5%;
- Selling, general and administrative expenses of between $75 million and $79 million, including a one-time $4.7 million expense related to the settlement of a Kona class-action lawsuit;
- Capital expenditures of between $13 million and $17 million;
- Effective tax rate of 25%.