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The Wall Street Transcript Interview with Terry Michaelson

TWST: Please begin with a brief overview of the history and evolution of Craft Brew Alliance, Inc.?

Mr. Michaelson: We like to view ourselves as a company that has really evolved. It's interesting because Redhook and Widmer Brothers were really part of the craft brewing revolution. They started it and were pioneers. So when Widmer Brothers started for instance, they had one draft beer which was very unique, and that was kind of creating something that was special and different for the beer consumer. And now the beer consumers are looking for a lot broader variety of styles, beer experiences to drink craft in draft, bottles, and cans. With having the Redhook, Widmer Brothers and Kona brands together, we now have a portfolio that we think is very unique and fits with where the consumer is, in terms of their need for a variety in beers and brands.

TWST: You offer your products directly to consumers via restaurants, pubs, liquor stores, supermarkets – warehouse outlets. What is that you are branding in beverage products that you feel are more appropriate and will continue to contribute to your success?

Mr. Michaelson: Well, I think it starts with authenticity. It really is the consumer who wants an interesting story. They want to know that they can trust the brand. They want to be surprised and excited by it and starting with unique stories that resonate with the consumer is important. As I said, each of our brands have a very unique position and that allows us also to deliver different styles of beers that really fit with that brand personality and that's important because at the end of the day, this is a consumer looking for beer variety based on particular drinking occasions. For instance, if you just finish mowing a lawn, you certainly have a different expectation from your beer than if you are at a white table cloth restaurant with a date or if you are at a barbecue with friends. Our brands are authentic, they are unique, they are fun and they resonate with the consumer and fit those different drinking occasions.

TWST: How would you describe the competitive landscape as you see it today and what would you say it gives you an edge over these other players?

Mr. Michaelson: Well, it is a very crowded landscape, that's for certain. There are a lot of breweries already in existence and the industry is talking about licenses for more than 900 new breweries. So there is certainly a lot of competition but we’d like to say, at this point as we look at what’s happening out there, that we have an advantaged strategy in an advantaged segment, and by that we mean when you look at the craft segment, it’s certainly been growing; it has had a growth rate of 7% over the last five years and that’s accelerating. So it’s actually been double digit over the last couple of years and more importantly, the growth in the Craft is being driven by a consumer shift in their buying habit to look for variety and to look for that kind of affordable luxury. So for us, we feel good about the fact that we're in a segment that has been growing and it looks like that growth is going to be fueled by consumer demand. From the strategy standpoint, we have some things that we think are unique to us that really fit what's happening in the market. The first is the portfolio that I've talked about: three unique, very distinct brands that hit different consumers in different ways. Redhook is much more a brand that has unique personality for people that are just discovering craft beer. Redhook is more approachable and gets a lot of crossover drinkers. Kona has that kind of mystique of the islands and quite frankly gets some drinkers that may have drank imports before but it's grounded in the craft beer style. Widmer Brothers is more of your traditional craft brewer that has been always about unique interpretations. That portfolio gives us a really unique position to reach the consumer with variety, but we are also the only craft brewer that is totally aligned with an Anheuser-Busch distribution network. In order to get to market you have to go through distributors, so that allows us to be very efficient. We’re dealing with the same systems, the same processes, which allowed us to build a national sales organization that can function at a very high level and to deal with all the channels on a national basis, which gives us a real advantage in the marketplace. The third thing is that we are the only brewer at this point that has craft breweries on both coasts. We now have actually five breweries all the way from a very small test brewery to different sizes of craft breweries on the East Coast, the West Coast, and in Hawaii. And the fourth thing that sets us apart as a craft brewing company is that we have a unique set of five brew pubs, which serves more than 1 million customers a year. This allows us to connect with the customer at a very personal level. We talk to them about what they are interested in and how their tastes are evolving, and gain insight in terms of how our brands need to evolve. So those four things really separate us out in a unique way because those are things we have that nobody else has in the market.

TWST: As we look out at the next several years at the way the markets you serve are developing, what specific trends do you see emerging that are going to help you maintain and enhance your position?

Mr. Michaelson: Again, I kind of go back to the theme that you will hear over and over and that's variety; but I think that goes beyond just style interpretations in beer at this point, I think that the consumer is looking for different kinds of packages. You're starting to see this from craft cans to more sophisticated sizes and types of bottles, different configurations and categories. We are certainly seeing cider as something that's important and happening in the industry and a lot of people are viewing that as really an extension of the Craft industry. There is another component, if you just look at styles is that within craft itself: there is that wide variety of craft beers from approachable beers like pilsners and lagers to very sophisticated Belgian sours and barrel-aged beers that create different price points and different opportunities. So I think it's really going to be driven by all the ways that the consumers are able to connect with craft beer and craft beer brands, and how suppliers are able to provide that variety.

TWST: What would you describe as the single biggest, nearterm advantage for Craft Brew to take advantage of?

Mr. Michaelson: I think our ability to have national reach at this point is really a huge advantage over the majority of craft brewers. There are certainly other craft brewers that have that ability at this point, but again, our unique distribution situation that we have assures us of the highest level of distribution in all of the markets. We have a sales organization build out and we have the ability to call on all the channels, so that's something that not very many craft brewers can do at this point, because they just simply don't have the size, scope, systems and organizational structure in place to accomplish that.

TWST: Are you confident that the balance sheet is in place to fully take advantage of some other opportunities that aren’t envisioned yet, but might come along down the road?

Mr. Michaelson: We are. We feel very good about where we are financially. We have very strong model that is generating a very strong cash flow which will continue to strengthen our position. The Goose Island sale that we made last year allowed us to strengthen the balance sheet, pay down some debt and really strengthen the company at this point. So being a public company, we also have a variety of different ways to access capital. So we think, one, we've proven that we have been creative in creating partnerships and taking advantage of opportunities that are out there and we also think we have the balance sheet and the financial ability to continue doing that.

TWST: What might constitute an attractive acquisition for you at this point?

Mr. Michaelson: Well, it really comes down to the right fit for us; would it add value to our portfolio? Does it strengthen our business? We are not interested in adding something that would cannibalize our existing brands and portfolio. So if there is something out there that presents itself as a geographic opportunity or its connection with the consumer, we may consider it. At this point it’s about figuring out how we make the portfolio stronger, how it becomes more and more meaningful in the sales channel, and to the end customer. So it really is analyzing what may be available that would make our portfolio more appealing and stronger in the marketplace.

TWST: So as you look ahead to the next few years, what do you expect as far as the rate of gain in sales and earnings?

Mr. Michaelson: Being a public company, what we’ve started to do at this point is to give some basic guidance and it really is a beginning process for us because we are still early on. All we've done is provide a forward look for 2012 and what we've talked about for 2012 is a 10% to 12% revenue percentage range rate On the EPS side, we are talking about something in the range of $0.20 to $0.25 a share.

TWST: Are there any specific risks that you see aside from the state of the general economy, the domestic economy? Are there any risks that you see that could prove to be somewhat of a hurdle for you down the road?

Mr. Michaelson: Well, I think for the whole industry it's going to be interesting to see the influx of new breweries, and how that has an impact on the market and the way the consumer sees things. This is a time of significant change. Obviously if there is a segment that is very successful, people are looking at how to be a part of that, so it's to be expected that we are going to draw more competitors. I think that's something people are going to watch, but again, we feel confident about where we are positioned. I think the other concern is raw materials. Grain prices have gone up dramatically and that's having an impact on everybody from the major brewers to the smaller craft brewers. Certainly the ongoing issue with fuel cost continues to have an impact especially as brewers distribute farther and farther away from their brewing facilities.

TWST: Are you confident with the management team currently in place?

Mr. Michaelson: I think that's the other advantage that's come from our growth process and we really have taken the road less travelled in terms of our model. There are other kinds of pure craft brewers out there that have done what we've done. The partnerships with our breweries allowed us to team up with existing management to leverage their knowledge and expertise. We've also gone out and found some really high level of talent. I think Andy Thomas, who is our president of commercial operations at this point is a great example of that, having been the President of Heineken USA. That's a very unique kind of human resource asset to have at this point in the Craft segment and we think those kinds of people begin to set us apart.

TWST: Where do you find yourself focusing most of your attention lately as CEO? What are you delegating?

Mr. Michaelson: It really has to do at this point in terms of communicating our strategy. Obviously, we feel very strongly about the things that set us apart and hard work we're doing internally. We want to make certain everybody understands that there is a passion and commitment at CBA, and really fuel the excitement that's just naturally here and generating that kind of energy and fun. We want to communicate that externally with discussions like we are having today, and we've just done an investor relations conference in Florida in January and have been telling the story also with our wholesalers and retailers because we think it's something that is compelling. The second part of it for me is really making certain that we are building the right kind of organization, having the people and the systems in place to execute our plan. As we've said, we know the market is there, and we feel our strategy is right. So we want to make sure we have the right people and systems, and we are able to execute at the level that we want.

TWST: Looking at the stock value performance over the past year, it's generally been under $10. When you look at some of the external factors that investors might be focused on, as well as internal activities and events for your company, what do you see that has a direct bearing on the price and value of the stock?

Mr. Michaelson: Because of our size we haven't historically had a very broad following. We’ve not had an analyst writing on our company. So we think a lot of it, quite frankly, is that people are discovering us, and over the last couple of years, people were, to some extent, guessing on their own what they thought was going to happen. We were purposely waiting to make certain that our strategy was in place, we knew were we were going and that we could execute on this kind new craft model before communicating to the investment community. We're really on the front end and I think as more and more people discover what we are doing, the more they see the our performance we will receive a very fair valuation from the marketplace. I think we've got good things in front of us, but some of the volatility that we've seen really has to do with us being under the radar and people just trying to figure out who we are.

TWST: Is it now your sense that folks in the investment community have a clear understanding of the steps you've been taking, and if so, is that being reflected in the stock valuation today?

Mr. Michaelson: I think we're just beginning. We now have some people starting to talk about us. When we've had the opportunities to talk to shareholders and analysts at conferences, they are excited about what we are talking about. So I think at the core of things, we need to perform and the market needs to see consistent growth. We’ve had that but I think the street is going to need to continue to see that. The message is starting to resonate. So from my standpoint, if I was an investor from the outside, I think the exciting opportunity really is that we are just beginning with this new model and we are on the front end of the growth. This is an opportunity for somebody to get into an exciting story. It’s starting to happen but we are on the very, very front end of it.

TWST: What metrics would you recommend an investor use to gauge your progress?

Mr. Michaelson: For me, looking at the fact that we are in an advantaged strategy and in an advantaged segment is a great precursor to future growth. If you are looking in this market where there is a lot of volatility, you've got to look at if somebody is positioned in a place where they can really grow, where they can really make that happen. We have that and we have the unique components to make that happen. I think that's what's going to attract investors. Investors obviously should be looking at what's happening with our revenue growth because it’s going to talk a lot about how the consumers are relating to our brands and if we're being successful in capturing our fair share of the market. At the end of the day, people are going to be looking at the profitability to see if the model works and if we are able to continue to deliver. It is important for investors to consistently look at this segment see which breweries are going to be able to deliver consistent, solid, strong growth over a long period of time. I’d recommend that investors look at what's happened over the last few years and to continue to watch that because I think that that will be a strong indicator of the fact that we think we have something unique and successful here.

TWST: In conclusion, give us your best summary statement. What will be the two or three best reasons you'll give investor to buy HOOK stock today?

Mr. Michaelson: It will sound redundant, but it's the advantaged strategy and advantaged segment. It can't get any better than that. I have a good friend who is a developer in Portland. He's done some things that I think are really unique from a marketing standpoint and his business is operating at a level that is much superior to where it was three years ago but his business is down because the REIT, real estate, just isn't a great place right now in the US and in the Northwest. So when you look at those kinds of things, when you can find a segment and then you can find a strategy where somebody can point to real differentiators that are critical and give them a unique advantage, that's the place where I would place my money.

TWST: Anything you’d like to add, anything we've missed or overlooked today?

Mr. Michaelson: No, no. I think it has been very thorough. I appreciate the fact that you've spent the time to come up with some very thoughtful questions and most importantly, I really appreciate your interest in our company. You can tell I love telling the story because it's something that we are excited about and it's something that's working. I know there are lots of people who you are going to be talking to. So I appreciate you spending time with us.

TWST: Thank you.

Mr. Michaelson: Thank you.