Gage Roads Brewing Co told the ASX this morning that 2020 will be a year of ‘changing gears’ as the company looks to expand further on the east coast and broaden its reach in the wider drinks market.

For the first half of its financial year, it reported that revenues rose 10 per cent to $19.3 million. It increased the production of brands under its Good Drinks banner (including Matso’s, Atomic Beer, Hello Sunshine and Alby) to 4.2 million litres.

Despite a strong set of results, Gage Roads said it had a “softer” first half, citing ambitious growth targets the company set itself.

The 15 year-old company, whose aim is to become the “number one independent supplier to the national beer, cider and RTD markets” said that the team would be refocusing its efforts this year as part of growth plans.

“We feel that the Good Drinks strategy is building a firm foundation for future growth of earnings, including the expansion into the east coast and that the business is on track to achieve the strategy’s longer term targets,” it said in a report to the ASX.

Managing director John Hoedemaker explained that the company was investing “ahead of the curve” to drive future growth.

“The transition from a contractual relationship to a traditional supplier with our largest national chain customer has been completed, but in this period led to a temporary loss of sales that will have an impact on our short term earnings and will mean that our target of 25-30% EBITDA growth is unlikely to be met for FY20,” he told the exchange.

“The investment in our packaging lines, growing our sales capabilities and broadening our brand portfolio as well as the execution of our venue strategy are all key strategic pillars designed to secure the long term success of our business

“Sales at store level continue to grow strongly and accordingly, I believe that the strategy and the targets we have set for ourselves are sound and achievable beyond FY20.”

Positioning for growth

Part of the WA brewer’s plans involve establishing a network of venues to cement a bricks and mortar presence on the east coast.

The first of these in Redfern was given the green light by the council in November 2019, and Gage expects the Atomic Beer Project-branded venue to open to the public in the last quarter of 2020, at a total cost of $4.5 million.

It was funded via existing operating cash flows and credit facilities, and Gage said it would be the “first of a number of venues in key markets across Australia”.

During the period, Gage moved into a larger, 5,000-square-metre warehouse which Gage says will be an “important piece of strategic infrastructure” to support growth plans over the next five years.

Additionally, the company has invested in a cold store facility, “significantly” increasing its inventory capacity which is says will deliver “market-leading quality” for its brands.

A multi-million dollar packaging line expansion will see a bottle filler online by the end of February, and a canning line commissioned in March.

Gage said it was an important investment, providing a new can format capability for the business, and claiming it will lead to lower operating costs and therefore improved earnings in the long run.

Financials

With a relatively strong balance sheet, Gage had $5.7 million in the bank on 31st December.

During the first six months, Gage spent $4.2 million towards its packaging line expansion and its Redfern venue’s preliminary planning, and it expects to spend an additional $3.2 million to finalise the Redfern venue in the second half of the year.

It also suffered from $400,000 in one-off costs relating to obsolete stock and old packaging from the Matso’s acquisition, but was bullish about its east coast expansion.

“As higher volumes to the east coast deliver logistical efficiencies, we expect to achieve cost savings in distribution and warehousing and are targeting a gross contribution percentage similar to the prior year,” it told the market.

It said that the shortfall of sales and continued investment impacted its half year earnings, resulting in $300,000 (unaudited) EBITDA for the first half of the year, which fell below expectations.

However its share price has not correlated with its steady growth, closing on 7.8 cents yesterday and showing no signs of improvement, dropping to 6.7 cents at the time of writing.

Gage’s share price has seen a slow decline over the past six months from a high of 10 cents in September 2019. Previously, investment managers have called the company ‘undervalued’ in terms of pricing.

Sales figures

Total sales volume growth for the period rose 5 per cent to 6.1 million litres across all its channels.

However Gage played down this growth, saying that its half-year performance will affect its 20-25 per cent annual volume growth target for its Good Drinks brands. Despite this, Gage said it was merely a “temporary shortfall” to strategy.

Plans to diversify its channel mix have delivered strong growth, it said, with less dependence on national chains – the supply for which has decreased by 25 per cent to 1 million litres, compared to the same period last year.

Similarly, a focus away from contract-brewed brands saw a decrease of 14 per cent to 1.9 million litres in that category for the most recent six month period.

These decreases were offset by significant gains in independent retail stores (up 47 per cent to 1.5 million litres supplied) as well as draught and its “brand-in-hand” initiative, which has seen it sign up with sports venues and teams across the county.

These include partnerships with the ACT Brumbies at GIO Stadium in Canberra, and with Sydney Kings, Western Sydney Waratahs and Melbourne’s Laneway Music Festival.

Distributions to the east coast also contributed, reportedly growing 62.4 per cent, with its accounts team signing on more than 400 bottle shops through banner groups.

During the half year, it also “deleted” some non-performing brands, hoping that strong new product development program would compensate.

However not all the new proposed new products were accepted by national chains, said Gage, which impacted an estimated 400,000 litres of sales in the short term.

Listen to Gage Roads’ Chief Strategy Officer, Aaron Heary, discuss their upcoming plans.