Boston Beer's cfo Bill Urich shared a few thoughts with Goldman Sachs analyst Judy Hong in follow up to last week's conference call. Bill reiterated that better than expected sales growth last yr pressured capacity, resulting in higher guidance for cap ex this yr. (Boosted from $140-$180 mil range to $160-$220 mil, recall.) Boston mgt opts to "build as we need it, as it makes sense," said Bill, rather than anticipating demand that may not happen. That's clearly a different tactic than some much smaller, regional competitors are taking. Then again, Boston already has national footprint, and very big, expandable brewery. Bill also echoed ceo Martin Roper by saying increased capex an example of taking advantage of "craft surge," even if it pressures P&L.  

Craft Brew Alliance picked up "momentum" in 2d, 3d and 4th qtrs in 2013 after "relatively weak Q1," ceo Andy Thomas reminded on earnings call this morning, but the co still reported "slower than expected progress" in righting financial ship. CBA grew revs by $10 mil to $179 mil, +6% for full yr 2014, posting 8% shipments growth. Recall this week's full announcement fills out preliminary financial results shared by CBA earlier this year (see Jan 28 issue), indicating continued difficulty growing bottom-line results amid solid volume trends. Full-yr depletions +11%, still ahead of shipments, with rev/bbl up just 1% in 2013, including brewpub revs +3% and big decrease in contract biz as expected.

Leading shipments charge, Kona volume grew 16.7% in 2013 to 256,800 bbls. But as with all CBA brands, shipments continued to lag depletions, +23%. "Continued mainland expansion" of Kona will drive its 2014 growth, per new cmo Ken Kunze: Kona will enter 4 new states to 40 total by yr-end. Kona depletions were up 22% in Q4, led by Longboard Lager and Big Wave Golden Ale, "very profitable brews that now represent 70% of the Kona portfolio," Ken said. Kona will also receive "a significant chunk" of increased spending, particularly in media investment, currently testing in 2 mkts. CBA will launch new Castaway IPA for Kona too, replacing seasonal Aloha Series (new brand, same sku) and becoming 3d priority for Kona.

CBA continued work "resetting" Widmer brand, shipments -4.4% to 252,600 last yr, a steeper decline than in 2012. Omission volume included in these shipments and growing fast in IRI data, according to Ken. Redhook shipments jumped 13.6% to nearly 217K bbls, just behind depletions growth of +15%. Longhammer IPA posted +13% growth for the yr, Ken shared on call. Total sales remain "heavily weighted to the west," Ken said, tho over half of incremental volume growth from opposite side of the country. CBA reported continued trend of decreases in draft biz (attributed to losses in Widmer Hefe) now down to less than 30% of CBA shipments; packaged shipments +13% to over 520K bbls in 2013.

CBA shipped over 30K bbls of contract brewed brands in 2013, down from near 50K bbls in previous years due to end of contract with Fulton Street Brewery. Recall CBA has signed up some "new partnerships" for its contract biz (just as it will begin working with Blue City Brewery to produce some of its own beers mid-yr); so contract revs could be up 25-50% in 2014. Capacity of all 4 of CBA's breweries at over a million bbls, with room to add another 145K bbls of capacity to over 1.2 mil (not including partnership with Blues City, about 100K bbls). CBA's capacity utilization dipped down to 70% for full-yr 2014, tho recall that's a blended number including "emerging capacity constraints" at NH brewery.

CBA's financials remain clouded as "gross margin continued to be relatively unresponsive," Andy said. Recall gross margin -1.5 to 28.1 in 2013, after cost of sales up 8.1%, ahead of net sales. Selling, general and admin expenses up 3.5% too last yr. So, tho operating income up solidly in 4th qtr, it dipped over 26% back below $4 mil for full-yr. Earnings per share down to a dime, from 13 cents in 2012. Similarly, EBITDA up to $3.4 mil in Q4, but down over 3% to under $12.7 mil for full-yr. CBA execs repeatedly reminded of expectation to grow gross margins by 500-700 basis points in 5 yrs; it hopes to finish 2014 with gross margin between 28.5-30.5%. The co guided analysts to 7-11% depletions growth with avg price increase of 1-2%. CBA plans to spend more too, with sg&a expected in $52-54 mil range and capex of $15-20 mil.  

Brewers Assn revs reached $17.6 mil in 2013, up $4.2 mil, 31%, BA reported this morn in just released Stewardship Report. In past 5 yrs, BA revs up over $10.5 mil, and grew more than 150%. That's far faster than craft segment, which grew 7 mil bbls, 80% during same period. Events remain almost half of BA revs. BA took in $8.3 mil from events in 2013, up $2.1 mil, 34%. But even faster growth recorded for advtg and sponsorship revs, which jumped $840K, 39%. BA has 1977 operating brewery members, which represent 73% of all US craft brewers.  

Cigar City will turn 5 this Saturday at the end of Tampa Bay Beer Week, celebrating with its yearly extravaganza called Hunahpu Day. And what a crazy ride it's been. Emerging almost out of nowhere in what was then a barely existing Florida craft scene, Cigar City has pretty much doubled each yr of its existence, hitting regional status at 17,000 bbls in 2012, grew "only" around 60% to 27,000 bbls in 2013 and it expects to nearly double again to between 50-60,000 bbls in 2014. That's right, Cigar City will be 700-850,000 cases from nothing in 5 yrs. Tho it now sells in at least parts of 6 states, 90% or more of its sales are still in Florida, where its 2 largest distribs are JJ Taylor and Brown Distributing. So this yr it will have about 0.4 share in the nation's 3d largest state. Not bad. Later this yr, Cigar City expects to enter South Carolina.

Cigar City's brewery has a max capacity of 50,000 bbls and it is absolutely "busting at the seams," acknowledged veep Justin Clark, when we visited earlier this week. That's why Cigar City contracted with Brew Hub, the "partnership brewing" facility slated to open in a couple of mos right up the road. (It's a big gleaming facility right by the side of a major highway that you can't miss.) Cigar City has contracted to make at least 10,000 bbls with Brew Hub this yr, but can make up to 20,000 bbls. But that just solves for this yr. Cigar City has some decisions to make, even for next year, including possibly more brewing with Brew Hub, adding to existing facility (tho that will be difficult) or building a new facility.

Cigar City started out with 6,000 sq ft and now it takes up 28,000 sq ft in a building owned by founder Joey Redner's father, a successful entrepreneur in his own right and "one of Tampa's most infamous individuals," according to Cigar City mag profile of Joey in 2012. Joe Redner's businesses include the world famous strip club Mons Venus, which is literally around the corner. Also around the corner, a Total Wine store, which had a big Cigar City display, front and center when you walk in the store. It is Cigar City's #1 account.

Cigar City has quickly moved to capitalize on its success with several other branded establishments, including its popular tasting room, a separate brewpub featuring Tampa Cuban/gastropub cuisine and its own 3 bbl brewing system, a 1.5 bbl system in the airport and now an upcoming cidery and meadery. With so many retail establishments, Cigar City sometimes at odds with Fla distribs on legislation, but Justin sez Cigar City is very much pro-3 tier, but also seeks to make legislative advances that are good for craft beer.

Hunahpu Day is a sensation somewhat akin to Three Floyd's Dark Lord Day. Last yr, it drew a crowd of 9000, much more than the space could reasonably accommodate. This yr, the city of Tampa restricted the number of people that could attend. So Cigar City sold tickets, 3500 of 'em at $50 apiece. And it is all sold out. That does entitle you to as much beer as you can drink. Besides Cigar City's own beers, there will be some 200 guest taps. But to get the beer of the occasion, the once yearly Hunahpu Imperial Stout, you gotta pay an additional $20 per bottle with limit of 3 per person. So Cigar City should gross several hundred thousand $$ in 1 day. From zero to all this in 5 yrs. Makes you wonder how much further Cigar City can go and how fast.  

Large southeastern distrib seeks president.  Send resumes in confidence. 

Consultant Mike Mazzoni presented a primer on distributorship and brand valuation for group of attys and beer execs at CLE Intl Alc and Bev Law symposium in Cinci recently.  Acknowledged that distributorship valuations now 20-30% higher than as recently as 2010, given craft/high end growth, favorable credit mkt, higher margins as result of ABI/MC duopoly and simple “supply and demand” of bizzes.  Distributorship EBITDA multiples “should be” in the 7-10X range, up from 4-6X “not so many years ago,” in Mike’s view, given current economic conditions.  But deals over last few years have been in 10X range for standalone bizzes, to over 12X for vertical deals, primarily because of “cheap money” and high end growth.  Mike reminded that distributorship values based on cash flow over time while individual brand values  based more on gross profits, so their valuations are distinct.  He likened valuing distributorship to “a bucket of stocks” that you can be reasonably sure will generate cash into the future vs valuing a brand, which, given life cycles “doesn’t grow in perpetuity,” more like a single stock.  Key drivers of brand value: “net dollar contribution and growth potential.”  And while gross profit multiple not a legit means to value entire distributorship (since it’s controlled by supplier) it is “operative valuation tool” for a brand.  And deciding on proper GP multiple has become “frequent issue of dispute” in recent years. 

Since operating expenses per unit “virtually the same” for all brands, the higher the GP, the higher the net contribution to earnings and subsequent value, but also “the longer the payback.”  Recent brand transactions, Mike pointed out, trade in ranges of 3-3.5X GP for premium domestics, 2-2.5X for subpremiums, 3.5-6X for imports, 5-6X for crafts.  Current “euphoria” surrounding craft segment has created “tendency to overvalue” those brands, in Mike’s view.  Beyond contribution to earnings, other factors create range of value, which goes into negotiation: strength of supplier, legislative environment, category development, mkt share, brand life cycle and growth potential. That last is most important in driving value, payback and return on investment. Keys to doing brand deals: 1) decisions to buy brands should be made “based on the calculable projected net dollar contribution” to determine rate of return; 2) in current mkt, most big brands have low/negative growth, so valuation multiples “should reflect that reality”; 3) terminal value shouldn’t be used in deriving brand value because life cycles of brands are uncertain. 

Mike Takes on “Myths and Realities” of “Golden Cases”  Tho Mike at first dismissed much-discussed “golden case” theory, that smaller, high-end brands demand very high multiples since they’re just “added to the truck” for virtually no extra cost, as “bull%&*#,” he allowed that it’s “part myth and part reality.”  Myth part is when: 1) sellers attribute no operating costs to these brands and assume that they contribute 100% of GP to operating income; 2) sellers assume beer brands have infinite growth and significant terminal value.  This ends up with non-willing sellers believing they are entitled to a “huge premium,” which Mike calls “punitive damages,” over fair mkt value or the investment value of a brand.  It could also mean that sky-high multiples paid for single brands may never be fully recovered by the buyer, for example if the biz is subsequently sold within payback time.  The reality part is that buying “relatively low incremental volume” does create higher contribution to profits and therefore “potentially higher investment value.”  All brands have “real and opportunity costs,” Mike insists, and so-called “golden cases” should be “fully burdened” with same avg cost of distribution as any others and buyers should know “all beer brands have a finite life cycle.” 

Summing Up  Mike listed some broader “realities.”  First, US beer biz no longer enjoys “certainty of volume and margin growth,” so “historic benchmarks have limited relevance.”  Second, distributorship prices right now are “too high and there will be downward pressure” on value in “near term.”  But brand values not likely to change much.  Third, value distributorships based on discounted cash flow analysis, but value brands based on GP multiples.  Lastly any valuation – whether a distributorship or a band – “should be based on investment value determined by at least a reasonable return on investment.”

MillerCoors ceo Tom Long sent memo to employees this morn saying that as result of “increased speculation” he’s providing update on former MC chain sales employees David Colletti and Paul Edwards.  “Based on an extensive internal and external investigation, MillerCoors believes Colletti embezzled several million dollars from the company over several years and that Edwards was involved to a lesser extent in the scheme,” wrote Tom. “MillerCoors has referred Colletti and Edwards to federal authorities for criminal prosecution,” he added.

MC “is seeking to recover the stolen funds from a combination of insurance and restitution in the criminal process,” according to Tom. “Both the internal and external investigations are ongoing and we encourage employees to come forward with any additional information on this scheme.” Alleged scheme “involved the participation of certain former vendors who assisted in the theft of company funds.”  MC “will cooperate with federal authorities to assure that all those who were complicit in this crime are identified and prosecuted. This crime exploited some gaps in our vendor approval process that have since been addressed.” Reportedly, the scheme involved falsifying vendor invoices and Mr. Colletti has turned himself in to federal authorities. 

Constellation still hasn’t reported fiscal 2014 results yet, but financial analysts are looking further into the future.  And they like what they see.  In wake of Nik Modi’s (RBC) call that Constellation beer can grow 10% annually for next 3 yrs (see Mar 31 Express) comes Stifel’s Mark Swartzberg with expectation that Constellation will “announce incremental capacity” at Nava brewery to “20 mil HL (17 mil bbls) before calendar 2016 and expansion to 30 mil HL (25.6 mil bbls) is a high-return proposition.”  How high?  If Constellation spends another $500-600 mil for additional capacity, at 90% utilization rate it “implies room for $525-593 mil in additional operating income,” sez Mark.  Indeed, he calls adding that capacity “a layup in return potential,” given expected margins after Constellation no longer has to buy beer from AB InBev.  Mark not quite as optimistic as Nik about Constellation’s US beer volume.  He’s modeling 8% growth this yr, 5% for following 2 yrs.  Constellation could also build or buy capacity elsewhere, Mark points out, but he thinks Nava is more likely “since it is state-of-the-art, expandable and, we suspect, insurable against disruption risk.”  Distribs and others have also been talking behind scenes about possibility of bigger build out of Nava brewery.        

Another positive data point. C-store beer volume up 1% for 4 wks thru Mar 15, according to Nielsen data reported by Goldman Sachs.  Dollar sales up 3.8%.  That’s quite a turnaround from approx 3% volume decline, modest $$ dropoff for previous 8 wks.  AB volume flat for 4 wks, $$ up 1.1%.  MC volume down 1.2% but $$ up 2.6%, getting (much) more price/mix than AB.  For 12 wks, AB volume -2.8% in c-stores, MC down 3.3%.  Still, “premium category volume growth of 0.9%” for 4 wks “is the first positive figure in this metric since Sept ’12,” Goldman wrote.  But big winners remain Constellation – volume jumped 23% – and Boston +31%, excluding tea and cider.    

Get all the craft data and analysis you need in one handy volume with Craft Brew Guide, available next week.  This easy-to-use reference guide gives you a 10-yr review of craft shipments and share trends, a 10-yr review of each of the top 30 craft players, key on-premise and off-premise craft trends for top brewers and brands, with new in-depth cuts of the data in several major metro mkts.  CBG also includes profiles of top craft brewers, key financial data of publicly available craft brewers, exclusive numbers on big brewers efforts at selling in craft space, as well as an intriguing essay on the Long Tail (with more exclusive new numbers), and an analysis of craft M&A so far.  Available digitally or in a portable 6”x9” volume, Craft Brew Guide gives you the best data and analysis on craft that you can find.  It’s published by Beer Marketer’s INSIGHTS, the leading source for beer industry info and publisher of Craft Brew News.  Click here for more information and to order this one-of-a-kind book.

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