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Craft Brew Alliance Inc (NASDAQ:BREW)
Q2 2018 Earnings Conference Call
Aug. 9, 2018, 11:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Q2 2018 Craft Brew Alliance 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) And as a reminder, today's conference call is being recorded. I'd now like to turn the conference over to Andy Thomas, Chief Executive Officer, please go ahead.

Andrew Thomas -- Chief Executive Officer

Thank you, Candice, and good morning everyone. It's my pleasure to present the Craft Brew Alliance investor conference call to discuss our results for the second quarter of 2018. This morning I'm joined on this call by two other members of the CBA leadership team, our CMO, Ken Kunze and our COO, Scott Mennen, but before we begin, I'll ask Ed Smith, our Corporate Controller to read our Safe Harbor statement.

Edwin Smith -- Corporate Controller and Principal Accounting Officer

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?

Andrew Thomas -- Chief Executive Officer

Thanks, Ed. As I generally do, I'll begin with some high-level thoughts on our second quarter results before having the team provide a more in-depth look and some color on their respective areas of accountability. In the absence of our CFO, I'll bring the call to a close with some detailed financial numbers as well as some thoughts on both the marketplace and CBA strategy looking forward. I'll also address our plans for CFO succession.

Back at the beginning of this year, while reflecting on 2017 results during our earnings call, I remarked that CBA was a company transformed. So in setting the tone for this call, let me explicitly state that I believe Q2 2018 provides the strongest validation yet of that belief. Looking at our results holistically, Q2 2018 was simply a great quarter for CBA. Starting at the top of the P&L, it began with the Q2 acceleration of Kona, our strategic and volumetric cornerstone, which doubled its Q1 depletion growth trend and returned to high-single digit depletion growth for the quarter.

Continued strong supply chain management maintained appropriate inventory levels throughout the network and enabled that tighter linkage between shipments and depletions that we've been promising for years. Underpinned by healthy pricing and favorable product mix in our beer business, beer revenue per barrel was also solid, up mid-single digits from a year ago. Our outstanding year-to-date operational performance continued as well with beer gross margin for the quarter at never before seen levels for CBA, approaching that previously elusive 40% mark and even more remarkably representing a triple-digit basis point improvement relative to year ago.

Continued strong SG&A management ensured adequate levels of investment in the business while supporting growth in a challenging market. And on the bottom line, our net income doubled with record breaking EPS capping record results for CBA. So indeed a great quarter and even more encouragingly, another clean quarter of sustained forward progress driven by improvements in our operating performance and devoid of the noise surrounding one-time events or strange year ago comps. Before spending some time to put our performance into perspective relative to the market, I'd like to first hand over to Ken and Scott to provide some color on their respective areas. So first, on to Ken.

Kenneth Kunze -- Chief Marketing Officer

Thanks, Andy and good morning everyone. Kona once again outperformed Craft imports in total beer for the quarter and on a year-to-date basis. In Q2, Kona depletions accelerated to high-single digits relative to Q1. Kona's depletions were up plus 7% in Q2 and plus 5% year-to-date with focus brand Big Wave Golden Ale up plus 22% for both the quarter and year-to-date. Big Wave is Kona's biggest brand and is now 38% of the Kona mix. For the latest rolling 12 months, Kona is up a consistent plus 6.4%.

Hanalei Island style IPA established itself as the clear number three in the portfolio and continued positive performance year-to-date while overlapping its very successful launch in 2017. Kanaha Blonde Ale, our new 99-calorie entry launched at the start of 2018, is off to a solid start and more than doubled its volume in Q2 and through the first half of the year, Kanaha is the number seven new brand nationally as measured by Nielsen.

Despite the industry challenges in the on-premise, Kona has continued to demonstrate strong resilience with on-premise depletions up plus 8% led again by the staying power of Big Wave, up plus 35% in Q2. Big Wave continues to demonstrate consistent repeat buys in on-premise accounts. Kona's performance compares to a beer industry that was down minus 2.3%, a craft segment down minus 1.5%, and an import segment that was up plus 3.4% in Q2 versus year ago as measured by Beer Institute data. Kona's consistent performance in a weakening market has improved performance on a relative basis and speaks to the brand's strong appeal.

Rounding out the lifestyle portion of the Kona Plus portfolio, Omission continues to lead the gluten-removed segment with a 35 share and has regained positive momentum with domestic depletions up plus 11% year-to-date on the strength of Omission Ultimate Light, the 5-carb, 99-calorie, gluten-removed active healthy lifestyle brand. For Q2, CBA's total portfolio depletion performance kept pace with both total beer and craft with total CBA depletions down 2%.

On a revenue basis, net sales were up plus 2.1% for the quarter and plus 4.3% year-to-date as price increases and brand and geo mix lifted revenue performance on a slight decline in shipments in Q2 and a plus 3.5% gain in shipments year-to-date. Similar to Q1, the total CBA portfolio continued to outperform craft in all channels except supermarkets in Q2 as measured by the Beer Institute. We continue to implement strategies to better diversify our volume across other off-premise channels specifically convenience and to improve performance in key chain grocery accounts.

Kona's marketing investment ramped up at the end of Q2 tied to volume seasonality with media and partnerships like the AVP, the premier US -- Professional Volleyball Association hitting the market. As a result, Kona specifically improved Q2 performance in off-premise channels helping to fuel its accelerated growth. In California, Kona's largest state, off-premise volume performance improved with a 600 basis point swing compared to Q1 and in the focused heavy-up investment market of Florida, Kona's third largest market, off-premise depletions were up a very strong plus 23% while Kona's depletions in Florida were up overall plus 19.5% in Q2. We believe the heavy-up investment is positively fueling Kona's strong trend in Florida. And in the convenience channel, Kona was up plus 17% nationally for the first half of the year off a small distribution base.

Shifting to our regional brands that comprise the Plus portion of the portfolio, Widmer Brothers' trends in Oregon improved in Q2 versus Q1 on improving Hefe performance specifically in the on-premise. Redhook's Q2 trends in Washington were challenged relative to Q1 despite strong performance from Redhook's new brands, Big Ballard IPA, up 190% and Bicoastal IPA up 270% year-to-date. For the last nine months, both Widmer Brothers and Redhook have been on a journey to increase price to comparable levels with competitive craft brands in each market. In this process, both brands have increased revenue per barrel, but have struggled to achieve consistent suggested price-to-consumer in chain grocery that deliver appropriate value to consumers to drive volume. As a result, year-to-date depletions for Widmer Brothers were down 10% in Oregon and depletions for Redhook were down 15% in Washington.

Moving on to partner brands, our partner brands continue to play an increasingly important role. Cisco Brewers, Appalachian Mountain Brewery, and Wynwood Brewing were up a combined plus 24% year-to-date with AMB, Appalachian Mountain Brewery, moving up the ranks of craft in North Carolina and Wynwood building distribution in South Florida. Cisco's new beer, Gripah, its grapefruit IPA launched this spring is already a solid number three in the portfolio.

On the international front, total shipments were up plus 10% predominantly comprised of Kona, which is up plus 18% year-to-date. Plans to expand upon Kona's 2018 e-commerce launch in Brazil are in the works. As we move into 2019, Kona will be more broadly marketed and made available in Brazil through our partnership with ABI. With the first half of 2018 in the bank, we remain committed to our full-year revenue guidance.

In closing, given the current financial health of the business and the current competitive environment, we are actively working to define the next stage of growth for CBA as part of our strategic and three-year planning cycle. We will continue to look to invest in the back half of the year in heavy-up commercial spend opportunities to drive the top line and to further build on our understanding of the consumer. We're exploring the broadly defined territory of social lubricants to better understand what is motivating consumers and driving the trends not only today, but tomorrow to inform our focus on more top line growth. More to come, but I'm confident that more Kona investment and more Kona growth will be part of the equation. With that, I'd like to turn it over to Scott Mennen, our Chief Operating Officer.

Scott Mennen -- Chief Operating Officer

Thank you, Ken and good morning everyone. As Andy stated, Q2 was a great quarter for CBA building on the momentum over the past few quarters. I may sound somewhat like a broken record, but I think it's important to emphasize where our focus has been the past few years as we work to improve the core health of our business by reducing our cost of goods sold and expanding gross margin. In Q2, we leveraged our evolved brewery footprint of Portland, Portsmouth, Kona and Fort Collins. As a reminder, in Q2 of 2017, we started up contract brewing operations in Anheuser-Busch's Fort Collins brewery, we ceased operations in Memphis and closed our Woodinville brewery. In addition to leveraging the updated brewery footprint, our continuous improvement program world-class craft has sharpened the entire organization's focus on delivering better results by improving efficiencies, reducing losses, and refining our supply chain operation while ensuring healthy inventory and service levels.

Now, on to the results. Shipments for Q2 were 225,000 barrels, down 24% compared to Q2 of 2017. Shipments for the first half of 2018 were 392,000 barrels, a 3.5% increase over the first half of 2017. As a reminder, in Q1 of 2017, we made a conscious decision to reduce wholesaler inventories by 30% to better harmonize shipments and depletions. Year-to-date shipment increase also reflects the Goose Island contract production out of Portsmouth, which was brought online in the first half of this year.

Beer gross margin in Q2 was 39.4%, a 640 basis point improvement over Q2 of 2017. The improvement in beer gross margin is a result of improved revenue rate per barrel due to enhanced revenue management and a reduction in overall cost of goods sold. The reduction in cost of goods sold is attributed to contract production out of Fort Collins, the elimination of the cost associated with Woodinville, operational improvement gains from the world-class craft and supply chain initiatives, partially offset by increase in freight and logistics cost. Beer gross margin for the first half of the year was 37.7%, a 500 basis point improvement over the first half of 2017. Total CBA gross margin in Q2 was 35.8%, 550 basis points better than Q2 of 2017. Expansion in overall CBA gross margin was driven by improvements in beer gross margin partially offset by brewpub gross margins. I will provide more details on our evolving brewpub strategy in a few moments. Total CBA gross margin for the first half of 2018 was 34%, a 440 basis points improvement over the first half of 2017. In all, these are solid results for Q2 and the first half of the year.

Now I'd like to touch on our evolving brewpub strategy as we continue to see increasing competition from the number of new breweries and taprooms opening in the US. We believe the primary role of our brewpubs is to support the brands they represent, to providing a venue to showcase the beers, enhance the image of the brand, support the local community while delivering overall value to CBA. Our two Kona brewpubs in Hawaii [ph] did an excellent job of promoting the Kona brand with a healthy flow of guests, both local and tourists who leave with a strong impression of the brand. We are very pleased with the performance of the Kona and Koko pubs. However, we are starting to see a slowdown in tourist traffic in the Kona pub as a result of the ongoing volcanic activity on the far side of the big island. Please note, there is no risk to the operations at the Kona brewery in Hawaii.

In Q3 of last year, we opened Redhook's Brewlab in Seattle bringing Redhook back to its home and providing a platform to better showcase the brand. We are seeing an increasing flow of guests visiting to experience the taproom and sample the awesome assortment of innovative beers on tap. Consumer and media response has been extremely positive. Seattle Magazine named Brewlab a Readers' Choice Winner for best Brewlab in Seattle. The team continues to work to refine operations in Seattle and as a reminder, we closed our pub in Woodinville late last year as part of the brewery closure and property sale.

In Q1 of this year, Widmer Brothers pub was revamped to a beer pool (ph) with taproom to better showcase the beers and the brand, and additional work is under way to enhance the guest experience while improving operations. And in late June, the Redhook pub in Portsmouth was transformed to a more relevant Cisco Brewers pub to support the Cisco brand in its home market of New England. The pub was remodeled after the original Cisco pub on Nantucket. The rebranding has been a hit with guests and providing a good boost to the Cisco brand. In summary, there's a lot going on in our brewpub operations. The Kona, Hawaii operations remain healthy both in guest experience and financially and we're evolving our mainland pubs and taprooms to better support the brands while adding value to CBA. I look forward to sharing more updates on our pub strategy in the upcoming quarters.

I also want to provide an update on CBA's innovation focus. Earlier this year, we announced that CBA made a deliberate decision to establish an innovation team to learn more about the changing consumer, explore the boundaries of projects by testing new concepts, learning along the way without a fear of failure. Our innovation group is working in two primary areas to gain insights to inform our innovation plans moving forward. These areas include, first, we continue to leverage the talent of our brewers using our pilot breweries and partner breweries to develop new innovative beers that can be tested in our pubs and taprooms across the country to gauge consumer acceptance and feedback. Second, the team has kicked off a test and learn initiative we call the pH experiment. The objective of pH is to quickly test new products at a low cost while collecting insights on consumer's taste preferences and behaviors to inform innovation strategy. The name pH was purposely chosen to represent the range of products that will be litmus tested. You'll hear more about innovation in the quarters to come.

And before closing, I also wanted to share a quick update on two of our important capital projects. The new Portland can line and new Kona brewery. Work on the new can line is progressing nicely. Equipment is purchased and construction will begin later this month with the can line coming online in Q4 of this year. The Portland can line will complement the can line at Portsmouth and allow us to meet the growing demand of craft beers in cans. Site work is now in full swing for the new 100,000 barrel state-of-the-art Kona brewery in Hawaii. Construction will continue for the next couple of quarters with start-up and commissioning beginning in Q1 of next year and the brewery fully online in Q2 of 2019. We expect 2018 CapEx spending to be within our guidance of $16 million to $19 million. In closing, while we are expanding the areas we are working on to support top line growth, we will not lose the gains we have made. Our primary focus remains on improving the core health of our business by first, leveraging and expanding our brewing partnership with AB, not only with contract production out of Fort Collins, but with CBA cross-brewing Goose Island and Portsmouth and the start-up of Virtue Cider production in Portland in Q3. Second, the work we are doing through our world-class craft initiatives to continue to improve brewing and supply chain operations and drive efficiencies and reductions in cost of goods sold. Note the efforts in these areas are helping offset the impact of higher freight cost and the potential impact of aluminum prices. Third, evolving our brewpubs and taprooms to better showcase our brands, improve our consumer experience while driving improved business performance and value to CBA. I'm confident we'll be able to achieve our gross margin guidance of 32% to 35%. Now I'll turn the call back over to Andy. Andy?

Andrew Thomas -- Chief Executive Officer

Thanks, Scott. As stated at the outset, I'd like to first walk you through some key financials for the quarter and then offer some thoughts on the path ahead for CBA, but before doing so, a word about our CFO vacancy. As acknowledged at the time, Joe Vanderstelt's departure from CBA was unexpected, but in keeping with the theme of a company transformed, he left behind a remarkably solid team in finance, systems, and strategy and we have no immediate operational concerns related to his departure. That said, we are obviously in planning to commence a CFO search and are confident that we'll be able to again find the right CFO for CBA's needs, just as we did in finding Joe back in 2014. Lastly on this topic, I'd be remiss in not acknowledging that Joe had a profoundly positive impact on CBA's strategy, financial management, and ultimately on its results. All of us at CBA are appreciative of the time he spent with us as a member of the team and we wish him and his family nothing but the best.

Turning our attention to financial performance for the quarter, in addition to the commentary provided by Ken and Scott covering shipments, gross margin and COGS, I'll highlight several additional key metrics. Second quarter net sales were $61.8 million or plus 2.1% versus Q2 2017 bringing our first half net sales to $109.3 million, up plus 4.3% versus the first half of 2017. Gross profit for the second quarter increased 20.7% to $22.1 million and as Scott explained, gross margins increased 550 basis points to 35.8% raising our first half gross margin rate to 34%, an increase of 440 basis points versus the comparable year ago period.

Net income for the second quarter was $4.5 million or $0.23 per diluted share, up $2.7 million or 158% versus Q2 2017 bringing year-to-date net income to $4.6 million or $0.24 per diluted share. Leveraging our improvements in revenue management as mentioned by Ken, net beer revenue per barrel increased 4.2% versus Q2 2017 primarily due to average unit pricing and favorable partner related fees. Excluding partner related fees and lower excise taxes, net pricing increased 3.2% versus the same period last year.

SG&A costs in Q2 2018 increased $297,000 or plus 1.9% versus the same period last year. The increase in SG&A costs were primarily due to increased creative and media spend. As a percentage of net revenue, SG&A expenses in Q2 2018 were 25.6%, down slightly from 25.7% in the same period last year. On a year-to-date basis, SG&A is $30.6 million, down $424,000 or minus 1.4% versus the comparable year ago period, translating to 28% of net revenue as compared to 29.6% of net revenue in the first half of 2017. Drivers of the year-to-date change include decreased professional fees and increased creative and media spend, offset by a $0.5 million gain related to the sale of Woodinville brewing and bottling equipment. Adjusted for the gain realized on our Woodinville equipment, SG&A costs in the first half were 27.5% of net revenue.

As a result of our second quarter performance, we are reaffirming our 2018 full-year operational guidance with the following commentary for the balance of the year. We still see softness in total beer industry sales and within the craft segment as Ken mentioned earlier. That said, we're confident in the sales and marketing programs that we have in place and still expect shipments and depletions to continue converging within our volume guidance ranges.

As the industry reacts to overall volume softness, there is still potential for increased competitive discounting activity. However, as mentioned earlier, our overall pricing remains healthy. Consistent with our remarks last quarter, we still expect that SG&A expenses will increase based on planned timing of the spend and as we actively test increase spend levels in the back half of the year as Ken mentioned. I will elaborate more on SG&A in a few moments.

On the COGS front, while our operations team continues to exhibit deft management of the supply chain, increases in freight costs continue to present specific challenges and could still affect gross margins by 40 basis points to 50 basis points. And with respect to the impact of aluminum tariffs, we see limited exposure at this time and net-net as Scott remarked, we are confident in reaffirming our gross margin guidance for the year.

Finally as suggested last quarter, we now expect that CBA's effective tax rate will increase from 27% to 28% as a result of permanent changes associated with additional limitations on the deductibility of certain business meals and entertainment expenses under the new Tax Act. In summary, we continue to see solid financial performance across virtually all key dimensions of our business.

So as we spend several minutes bringing this call to a close, let's turn our attention to the marketplace around us and what possibly lies ahead. Let me be clear, as consistent as our operational improvements have been, the market has been equally consistent in presenting challenges. We firmly believe that we're still in the midst of a marketplace transformation that is unlikely to slow down or stabilize in the near-term, but you've heard all that before. In fact, you've actually heard a lot of it from us and directly from me.

So let me draw a proverbial line in the sand as we prepare to more aggressively respond to those challenges. On last quarter's earnings call, I said that "we believe we can now capitalize on CBA's improved financial health to redouble our efforts at strengthening our top line" and I suggested that we would be exploring the implications of that belief during Q2. So now, emboldened by our actual Q2 results, in addition to reaffirming our operational guidance, I can also reaffirm that we will refocus our efforts on accelerating sustainable top line growth.

To that end, I'd like to spend a few moments previewing the approach we'll take in developing our plans. To establish some context, let me again draw a distinction as to why we believe the time is right for us. Relative to three years ago, as a result of the hard work and accomplishments of the CBA team, while we are still navigating that increasingly competitive marketplace, we're now doing so from the strongest operational and strategic position in our history.

Operationally, we have a proven sustainably growing cornerstone brand in Kona, now with both scale and upside, a reshaped brand portfolio, a rationalized brewery footprint, a stable and healthy gross margin engine, a far more profitable business model, a clean balance sheet with solid cash flow and generous financing capacity and a stronger talent base operating within a more accountable change-embracing company culture.

And strategically, we have more certainty in our key relationship with ABI, irrespective of the obvious unknown surrounding the qualified offer, including the security of long-term wholesaler alignment, tighter commercial cooperation, a mutually beneficial brewing relationship across both of our brewery networks and upside for international development. So if those are the reasons that the time is right, what then is the right course of action? Given CBA's history and our leadership team's deep collective experience, we're exceedingly conscious of the risks inherent in seeking more aggressive top line growth, especially in this marketplace. Our charge is to ensure that we can sustainably accelerate our top line without surrendering our hard fought gains in gross margin accretion and without weakening our operating performance.

To do this, we will draw upon the same discipline that successfully allowed us to plan and execute the improvements in our gross margin and core health and that guided our partner strategy, our brewery rationalization strategy, and our Kona Plus strategy over the past three years. It all begins with a deliberate and methodical development of our plans, ensuring that we're mindful of our own experience and secondly that we invest the requisite time and resource to augment our experience with a deeper, more contemporary understanding of the changing marketplace in which we're operating.

Taking a look back in time before looking forward, we'll consider the double-edged sword learnings from our own recent endeavors to more aggressively grow the top line including 2013's Redhook Gamechanger, the first ever national craft partner program initiative with Buffalo Wild Wings, 2012's Widmer Brothers innovation program that commercialized a litany of among the firsts including Pitch Black IPA, Captain Shaddock grapefruit IPA, Hopside Down India Pale Lager and the Widmer Brothers Rotating IPA series, and 2014's launch of KCCO Black and Gold Lager with theCHIVE, the market's first social media beer collaboration.

Acknowledging that all of those initiatives were launched during a more bullish market, they were all highly successful in driving robust top line growth. However, they also proved to be valuable lessons in top line sustainability and in unintended operational consequences as that robust growth was accompanied by value destroying margin erosion, unsustainable skew fragmentation and operational complexity. Those learnings have subsequently guided our successful stewardship of the Kona brand and those are the learnings that we alone can now leverage as we redouble our top line efforts from a fundamentally strengthened position. And as for contemporizing our understanding of today's marketplace and consumer, we've launched a three-part program to ensure that we're not building a course of action based upon yesterday's beliefs nor built for yesterday's challenges.

Firstly, during the second half of this year, we are piloting heavy-up spending programs as Ken referenced earlier and we'll evaluate their merit for inclusion in our 2019 plans. Secondly, we are now live with the first of our new innovation teams test and learn initiatives, pH experiment, as Scott referenced during his remarks. And thirdly, I'm excited to share that we are investing in the most significant consumer research ever commissioned by CBA, bringing together two distinct yet complementary pieces of work to update our understanding of the consumer and marketplace today.

The first body of work includes a comprehensive consumer segmentation being conducted by Profit, a global growth consultancy that will broadly cover the entire social lubricant space. The second body of work centered around a partnership with the Yale School of Management's Center for Customer Insights will result in targeted learnings about alcoholic beverage consumer's behavior and motivations. Collectively, these initiatives will inform our plan development and will fuel stronger execution of our Kona Plus strategy benefiting all of our brands while informing the prospects for potential portfolio expansion, but to reiterate, these forward-looking initiatives are an investment of time and resource to responsibly embrace our tomorrow. With respect to the investment of time, we will be prudent in balancing patients with pragmatism, but to be clear, we expect these initiatives to impact 2019 top line and beyond, not the second half of 2018 and with respect to the investment of resource, as I suggested while discussing SG&A, given that all of these initiatives have kicked off in recent months, they will likely be a net impact on this year's SG&A as we invest ahead of planned development and activation.

We are excited about this evolution of our strategy and look forward to providing additional visibility and guidance in the coming quarters as this work matures. So bringing our prepared remarks to a close, Q2 and moreover the entire first half of 2018 brought strong results fueled by continued momentum in Kona on the top line and remarkable sustainable improvements to our gross margin engine. As a result, we are more confident than ever in our ability to not only deliver more value to our shareholders today, but to also make a meaningful commitment to more informed and sustainable growth in the future.

Before moving to questions, I'd like to offer a special word of thanks, as this summer marks 10 years since the historic merger of Widmer Brothers and Redhook in 2008 and thus marks the 10-year anniversary of CBA. On behalf of the entire CBA leadership team, a sincere and celebratory thank you to each of you who have 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, passionate and engaged employees and partners wherever they operate within the world of CBA. And with that, I will open it up for questions. Candice?

Questions and Answers:

Operator

Thank you. (Operator Instructions) And our first question comes from Vivien Azer of Cowen and Company. Your line is now open.

Vivien Azer -- Cowen and Company -- Analyst

Hi guys.

Andrew Thomas -- Chief Executive Officer

Hey Vivien.

Vivien Azer -- Cowen and Company -- Analyst

So congrats on a good quarter. Andy, I wanted to start with a question on kind of the broader industry landscape, please. So historically you and I have talked about kind of the interaction between a host of flavored malt beverages versus beer and if I'm recalling correctly, I think your historic view was that it's kind of a zero-sum game between like cider or hard seltzer, hard soda, hard teas. I'm wondering whether that still holds because it just seems like what we're seeing in the hard seltzer category, it does -- it looks like it has a lot of momentum. So that's part one of the question and part two is whether you think that that's presenting an incremental headwind to beer? Thanks.

Andrew Thomas -- Chief Executive Officer

Yes, great question, Vivien. So I think it's fair to say we wouldn't be launching the consumer segmentation work with Profit or the work with Yale if we had a definitive answer to that question. So let me couch it by saying I'm happy to share kind of our perspective, but one of the things we're doing to the, probably heart of your very question is validating kind of our intuition in our understanding today. I think your point on SpikedSeltzer or on seltzers in general is a really good one in kind of that overall blurring of the lines between beer and flavored malt beverages and maybe the spirit area, but I would candidly say it's too early to tell. You know the seltzer craze has been around now for probably 12 to 18 months and I think if we look historically at a lot of the trends that we say are a zero-sum game, they usually play out kind of over a period of 18 to 24 or 30 months. You almost have to get through two full seasons, if you will. You've got that kind of hey, it's the first time I've seen it, so I'm all excited and then the second year because it was so big last year and everybody was caught off guard, you've got the kids at a soccer match phenomena where everybody runs toward it, right. And so all of a sudden you see all these new entrants and retailers are stocking it and they want to give it a lot of space, but it's not really until that third year that you kind of see things stabilize. So that's my perspective on whether or not any of this momentum is real. I think it's too early to tell. I think it's -- you are hard pressed to find anything in the last three years that has lived beyond that three-year kind of, year one's excitement, year two is everybody running and joining and year three is stabilization and by year three, what was exciting in year one isn't exciting anymore because something else has happened and that's the dynamic that from my perspective creates that zero-sum game. What we don't know is that given the changing taste of consumers and kind of changing perceptions toward, call it, social lubricants whether or not there's something fundamental in intrinsic to any of those categories that has more appeal kind of on a long-term basis. Does that help?

Vivien Azer -- Cowen and Company -- Analyst

That helps a lot. Thank you very much. So my next question is on SG&A and the competitive landscape. So totally understand the incremental spend on these consumer insight activities, which makes a lot of sense, but underlying that Andy, do you feel like the cost of competition in beer is going up? Thank you.

Andrew Thomas -- Chief Executive Officer

Yes, the cost of competition is going up and you know what, it is going up in a number of ways, it's going up monetarily and it's also kind of going up in terms of talent and creativity. So I think it goes without saying that today's consumer is more discerning and discerning in different ways and I think there is both an elevation of expectation and a shift in expectation, which is something that we're all and I say all kind of within the industry broadly trying to kind of wrap our heads around. That said, let me take a couple of minutes on SG&A. If you take a look at our program, what excites me about it is, not surprisingly, I think it's pretty thoughtful in that there's three main components to it. One is, there are things we believe we know and that are proven. We have a good track record with a brand like Kona in media spend, in sponsorships and the question is, to answer your very question, in this marketplace by basically accelerating spend behind tried and true elements, can we actually continue to grow value and that's behind a lot of what Ken was alluding to, be that on heavy-up spend on Kona in places like Florida where we're seeing really good response or on Widmer Brothers and some of its markets where we're in the early stages of, but that whole bucket of work is basically, hey, these are things that traditionally we know have worked and if we actually increase our focus on it and increase the dollars behind it, can we still get the traction that we might have predicted we would get five years ago.

The second piece that kind of Scott talked about that is also kind of a recipient of some of the spend is this test and learn and that's where to Scott's point, the purpose of our innovation group is to get out there and fail famously, but fail small and fail fast and fail relatively cheap. And I think if you look at some of the inspiration that drives the marketplace today, a lot of it came from brewers and a lot of it came from trying things and doing things and then consumers kind of catching onto it. I don't know that there was a lot of strategic thought behind the launch of New England IPA and this notion of hazy and juicy and clouded being something that consumers would embrace, but that was something that was organically grown by a number of really talented brewers around the country and that's something that we're trying to tap into, that second body.

And then the third, I think will maybe satisfy a lot of us who are a little bit more traditional in kind of the burden of proof that we put out there and that's really understanding, hey, in the social lubricant space, what's going on with consumers, how is weed impacting the category in socialization. One thing that goes through my mind, Vivien, and you and I had a lot of conversations about this. In general, consumers aren't drinking more liquid. We know that from CIP data, we know that the share of alcoholic and non-alcoholic always kind of moves and we know that within our beverage, we've seen kind of a lot movement there, but there's nothing to suggest that consumers or that human beings are ingesting more liquid. So then you start to look at, does things like weed and cannabis in edible forms or in inhalable forms actually start to impact the role of liquid beverages or liquids in socialization and we don't have an answer to that and I think a lot of people run to kind of historical experience to judge that and I don't think that we can. I think today's consumer in their choices in their market is very different. So long-winded answer of basically saying, to answer your question of SG&A and is it getting more expensive to compete? The answer is yes. The question incumbent upon us to answer for all of our stakeholders, let alone our shareholders is how can we invest the most wisely in terms of our treasure in dollars and our talent in terms of our people and creativity to really get the best return for our brands on a sustainable basis.

Vivien Azer -- Cowen and Company -- Analyst

That's great. Thank you. And if I could just squeeze one last one in. Over time, we've kind of talked about the pathway to stabilization for Widmer and Redhook, so I was just wondering if you could give us an update on kind of how you see that playing out. Thanks.

Andrew Thomas -- Chief Executive Officer

Yes, as most people on this call know I'll be as self-deprecating as I can be, as candid as I can be. A gentleman who I think is on the call now is a private investor who used to cover us named Tony Brenner, always would ask me the question what inning are we in with Widmer Brothers. and the number of times I thought we were at the seventh inning stretch is almost embarrassing to me in hindsight. So I think we're in extra innings now, we're in the 11th inning on Widmer Brothers, but inherent in that, not just being kind of flip and facetious, I think the game has continued to change.

So if I look at Widmer Brothers and if I look at Hefe and then if I look at Redhook, it's almost a tale of three cities. Widmer Brothers in its home markets and Hefe are almost experiencing different trends and what you're seeing is Widmer Brothers is caught up in this darling of the month rotation nation as it tries to compete as a local craft beer in a very, very competitive local craft market. Meanwhile, you've got Hefe which is actually this power brand within the craft segment and represents probably over 70% of Widmer Brothers sales and is this real kind of stalwart within this segment up here in the Northwest. So what its taking to kind of fuel the Hefe momentum versus fuel the Widmer Brothers momentum ends up bifurcating and that candidly becomes a difficult thing for us to wrap our hands around and manage it effectively as we might like to.

In contrast with that, what we see with Redhook is since the advent of Brewlab, we're seeing this kind of rejuvenation in the brand, but not in the brand that was in terms of ESB and in Long Hammer, but in new things like Big Ballard and Bicoastal and brands like Peaches For Me or a lot of really innovative brands that were born at Brewlab and all of a sudden when Redhook goes back home and lives in Capitol Hill and lives among all of these kind of cool hipsters, Redhook actually starts to act like Redhook acted 32 years ago or 35 years ago.

So I think, as I look at it Vivien, we don't necessarily think the volume softness on Redhook and Widmer Brothers are going to go away tomorrow, next quarter. Our guidance would be different if we thought that. What we do see is, we think Widmer Brothers is a better value proposition as Ken alluded to because we're able to price more effectively and we're able to drive volume on the Hefe brand while we're trying to infuse some equity back into the brand as it fights all of these third generation and fourth generation crafts here in Oregon and with Widmer Brothers -- and with Redhook, candidly, I think it's another fascinating chapter in that brand's storied history. If you take a look at Redhook from its inception is this beer that nobody really knew what to do with in 1981 all the way through it's kind of number of lives and our work to try to make it a crossover brand when we did the Gamechanger thing, now back to being this really local craft brand. Redhook is showing signs of the kind of resilience that has kept it around for 30 some odd years. So I think the jury is still out on Redhook in terms of volume versus value. Widmer Brothers, I think you'll continue to see more emphasis on Hefe and on the volume of Hefe and on the value of the overall Widmer Brothers franchise as we move forward. Does that answer your question?

Vivien Azer -- Cowen and Company -- Analyst

It does. Thank you so much.

Operator

Thank you. And our next question comes from Amit Sharma of BMO Capital Markets. Your line is now open.

Amit Sharma -- BMO Capital Markets -- Analyst

Hi, good afternoon everyone.

Andrew Thomas -- Chief Executive Officer

Hey Amit.

Amit Sharma -- BMO Capital Markets -- Analyst

Andy, a quick question on shipments versus depletion, you talked about converging it. Can you just talk about where are we in that journey and how quickly can we expect to see a similar number for both?

Andrew Thomas -- Chief Executive Officer

Yes, I think starting in the second quarter, there was a pretty dramatic convergence relative to Q1 and that's because as Scott referenced and I think we talked about in the call, the majority of the wholesaler inventory adjustment happened in the first quarter. So here, the comps in Q1 really weird. There was some noise in Q2, but as I said in my remarks, the quarter was largely devoid of a lot of noise. So I think the convergence got closer as a result and I'd expect balance of year to see net-net a very tight linkage between STRs and shipments and so it's going to be a matter of kind of averaging that gap in the first quarter, a small gap in the second quarter and then basically real good conversions in the third and fourth quarter.

Two other thoughts to share with you, I keep harping on the supply chain stability thing, but I think for those of you who followed the journey and who even follow some of our peers, I can't underscore enough what a competitive advantage that is for us now that we did what we did and we're not dealing with inventory blow and we're not dealing with kind of ridiculous levels of inventory aging either in our four walls or within wholesaler warehouses not just because of the beer quality component of that for consumers, but because of the predictability and stability of all that. So I keep underscoring that because I think it's one of the lesser probably appreciated aspects of this kind of change program we've been on for the last three years.

So when I sit with our teams and we do kind of performance management reviews and we look at the balance of the year, I can tell you as manifested in our guidance, we're really comfortable that we're seeing the fruit of the labor of some level of conversions. The last thing I'll add though is, as we start to get more involved in cross brewing with AB, be that the Goose Island activity coming out of Portsmouth, be it Virtue coming out of Portland now and other things that could be on the horizon, that will create a little bit of a divergence between STRs and shipments and you can rest assure that in subsequent quarters, we'll be as transparent as we can in helping you to understand, hey, what are our shipments versus our STRs and what impact is contract brewing having on that overall shipment number.

Amit Sharma -- BMO Capital Markets -- Analyst

Got it and is that in any way related to the very strong on-premise performance for Kona. I mean how big is on-premise for brand Kona now?

Andrew Thomas -- Chief Executive Officer

I don't know that we've disclosed on off-premise (ph), but historically we've said that Kona is probably one of the more on-premise within our portfolio. Widmer Brothers would be the most kind of skewed to on-premise followed by Kona. So it's more than 50% off. I'll put it that way without kind of disclosing what might otherwise be somewhat competitively sensitive. The draft numbers on Kona are really good, the draft numbers on Big Wave are candidly remarkable and I think if you take a look at everything going on in the on-premise segment right now, its another one of those things that we're kind of trying to test and learn. We've got a brand that shows remarkable resilience in repeat activity in the on-premise at a time where everybody else is really struggling to get a handle to stick around for two turns. So to answer your question directly, the on-premise, off-premise split doesn't have a major impact on the convergence of shipments and STRs in that kind of synchronicity there, but we do expect to see continued good momentum behind Kona in the on-premise.

Amit Sharma -- BMO Capital Markets -- Analyst

And on Kona also a lot of your competitors are talking about taking pricing to offset inflation. How do you think about where Kona is positioned, is that an opportunity to take a little bit more pricing there as well?

Andrew Thomas -- Chief Executive Officer

Yes, I think we haven't been shy about the fact that we like pricing. I think when you can take pricing on a brand, it says a lot of good things, not only has a good financial consequence to it or good financial implication. So we continue to look as Ken mentioned with our revenue management team, we continue to look at what is an appropriate level of pricing for a brand that basically helps us to continue to drive a good value proposition for consumers, but to give good value back to the Company and to our shareholders. So without kind of getting ahead of ourselves, I'll tell you, we are always looking at pricing opportunities not just for Kona, but for other brands. I think if I go back to my remarks, our kind of net pricing impact for the quarter was over 3%. So when you couple that with 7% depletion growth on Kona and only a 2% decline in depletions overall, I got to tell you I feel outstanding about the work we're doing in balancing that value equation and making sure we're not leaving any money on the table while still giving consumers really good value to pick up the brand.

Amit Sharma -- BMO Capital Markets -- Analyst

I agree, 3% is pretty solid pricing. Last one from me Andy, I really appreciate your view on potential for acceleration of investment and growth. Can you help us quantify, maybe get our hands around in terms of like what does that look like once you put through these initiatives from a top line perspective, given all the puts and takes from some brands are growing and some are not, what could it look like whether it is 2019 or 2020.

Andrew Thomas -- Chief Executive Officer

Ken is trying to get me to commit to a number here for him to and I've got our controller here to the left telling me to be careful what you say. So candidly, we're not going to be faint of heart or of ambition, I'll say that. I think as we look on the balance of the year, we're not talking about a negligible increase otherwise it wouldn't have the share of this call or of real estate [ph] on our press release, if we were just going to say it's business as usual and I think inherent in there, I'll offer a few thoughts. I think the Kona brand basically continues to crave additional spend and unfortunately, historically, we weren't able to feed its craving. And secondly, something I referenced in the remarks I want to underscore, Kona didn't necessarily have the scale and Ken had talked about this on earlier calls, but the scale to be able to start to help us not only feed that craving, but to also get some kind of a return for it, but when you look at the Kona brand, it's 50% bigger today in some of its key markets than it was three years ago. So I can now feed the brand in key targeted geographies and have enough scale to actually get a good enough return on it and the distribution as evidenced by growth in points of distribution is broad enough now that you're not advertising to empty shelves or the distribution voids. So I think in answering your question I'll start with the fact we think we'll see significant increases in spend on Kona and those are probably, they are certainly seven digit increases on the Kona brand whether or not they are eight digit increases or not, I wouldn't hazard to say on this call but to give you an idea, we're thinking in the millions.

Amit Sharma -- BMO Capital Markets -- Analyst

And typically without pushing you too much, we'll try again but typically what's the IRR on these investments as you are thinking about?

Andrew Thomas -- Chief Executive Officer

Amit, that's a question we haven't even answered for ourselves yet, which is why we are doing the test and learn and the piloting in the markets. So I think we turned media on for Kona as I recall in 2014 and we saw this really remarkable response to media because we've never done it before and a little bit to Vivien's question the ante has been upped. So we don't know that our historic norms are necessarily predictive anymore and that's something that we're testing and learning. So in terms of what's the IRR on it, we think it does pay back. The question is how quickly does it pay back and in what way does it pay back. So that's something we're currently testing now and you can ask it as many ways as you can creatively ask and I appreciate it because I'm happy to share what we think and I'm happy to share what we're looking at and you can rest assure that when we have definitive answers for ourselves, we'll be happy to share them with you.

The other component on that I would say is I think as Ken said with a good degree of certainty, Kona will be a recipient of this kind of heavy-up, but I think we're also looking a little bit more broadly at that and without again getting ahead of ourselves, we've got outstanding learnings across our history and throughout our portfolio now and when I say we have a reshaped portfolio and when Ken talks about the role of the partner brands and we talk about what we're doing on the Plus side, we think when we're armed with a little bit more information coming out of some of the work from Profit and from Yale, we might actually be able to uncover some white spaces that we can either quickly go after with our existing brand portfolio or where some of our existing brands might be able to quickly extend.

And if there are some low hanging fruit opportunities like that, you can rest assured and that balancing of pragmatism and patience, we'll be pretty aggressive going after those as well. So I think you're looking at a big number. It's why we haven't given you the number now, if I could tell you, I would be increasing guidance, you can rest assure of that, but as we understand balance of the year based on our tests, we'll share more with you, but I want to make sure I send the right signal, we're looking to be responsible, but we're also looking to be pretty bold in terms of what we do.

Amit Sharma -- BMO Capital Markets -- Analyst

I appreciate it. Thank you so much.

Operator

Thank you. And our next question comes from Samantha Berger of Citi. Your line is now open.

Samantha Berger -- Citigroup Global Markets Inc. -- Analyst

Hi there, I'm on for Wendy today. I was hoping you touched on it a little bit before, but relative to pricing, could you please talk about the current pricing landscape in terms of what you're seeing from other craft beer players within the space, especially in the context of commodity cost inflation and freight increases?

Andrew Thomas -- Chief Executive Officer

Yes, I'll start out and here's where I might look for a little bit of back fill from Scott and Ken on this from a commodity perspective or maybe from a competitive perspective, but good to hear you on the call Samantha. So thanks for the question and thanks for sitting in for Wendy. I think if we look at the competitive environment, our business is a little bit different. So sometimes you get a little bit lucky and if I take a look at some of the commodity increases, one area we got a little bit lucky is we're underdeveloped in cans. So while that's a bit of a pain in the butt candidly for us today, it also insulates us from a little bit of the commodity pressures that others who are more can-centric would have to deal with.

Additionally, when I talk about supply chain stability, supply chain includes a lot of things other than inventory. We've been working hard at procurement now for three years before a lot of other companies even kind of talked about procurement, we've had a procurement philosophy within the company probably for three years now. So I think our hedging in our kind of futures have given us a little bit of a tailwind right now as others are scrambling because we're not.

So on the commodity front and I'll ask Scott to fill in, I feel pretty good about where we are because of the work we've done and on the competitive front, Ken might offer a couple of thoughts on this. I think the balance -- the pressure for some other companies is with these commodity pressures they've got, do they have the value equation and do they have the equity and the brand to be able to respond to it or has that become a vicious death spiral, so Scott?

Scott Mennen -- Chief Operating Officer

Yes, on the commodity side or material side, I think our procurement group has done an awesome job staying in front of where we are. So we have predictability of where we're going not only for today but for next year and we continue to leverage that, not that knowledge, plus our scale of who we are, make sure we're getting the optimal pricing. But with that, we're also continuing to sharpen what we do with those commodities when they come into brewery and that's where that world-class craft or continuous improvement comes on and we really had a focus on reducing losses and that's really adding benefit there, so it's helping us offset what we may see in price pressures, add value to it from that standpoint and as Andy said, we continue to look forward and we've got some security around where we are with bottle pricing and as we continue to grow on the can volume with the new can line here in Portland, we're also taking the right steps to ensure that we've got the right costing structure for that. So I feel really good about that. Freight is an area that's well documented, the pressures that are on with freight raise a classic supply and demand, the supply of drivers on the road is far less than it was and the hours that they're able to drive on the road has been strictly regulated and at the same time the demand has come up along that way. So we're seeing some pretty good impact of freight, but the work we've done with our brewery footprint and the work that supply chain has done to making sure that we're brewing beers in the right brewery to get them to the right wholesalers has helped I'm not going to say offset that, but it's -- it's reduced the impact of freight and we'll continue to see those pressures moving forward. I think we will see as we move through Q4 and to 2019 we'll see that mitigate a little bit, but that supply and demand pressure remains right now.

Andrew Thomas -- Chief Executive Officer

Ken, maybe some thoughts competitively?

Kenneth Kunze -- Chief Marketing Officer

I think maybe we're definitely seeing signals in the marketplace that people are looking to take kind of fall GI type pricing actions, so we expect to see some action in certain areas of the country on certain brands and whatnot, but maybe one thing just to remind everybody that in the three-tier system, we sell our beer to wholesalers, wholesalers sell the beer to retailers. On the discount structure, we share in the discounting and so ultimately, retailers set the pricing that consumers buy on and we try to manage the retail prices through the discount structures and we're seeing less kind of craft and beer activity I think among major retailers where they are shifting it into wine and spirits, so there's less activity to go for and the pricing within the retail environment is going up that way. So then in terms of trying to manage that flow and make sure everybody is taking a fair margin along the way and still pricing and volume are related trying to get to the right price points to drive volumes. It's kind of a long-winded theoretical maybe answer to what's going on and how we're trying to manage our route to market.

Samantha Berger -- Citigroup Global Markets Inc. -- Analyst

That's very helpful and if I could squeeze one more in. At a high level, how are you thinking about your international growth strategy and perhaps some more color on trends in some of the existing markets, particularly those for which you've increased focus and resources like Brazil?

Andrew Thomas -- Chief Executive Officer

Yes, we're feeling really good about it, international growth on Kona has been pretty outstanding in the sense that it continues to be at a good rate and it's sustainable. I think if you look at some of the pressures others are dealing with and there's certainly some craft brands that are dealing with this boom-splat on the international side, ours has been a, not so slow, but steady approach. So overall feeling good. Talk about maybe two cities and then I'll talk about maybe some villages within the second city. First city being CCT, the work we do with Craft Can Travel, continuing to see good investment and good uptick, Samantha, in all of those places. So more of the same I would say with CCT. If you look at markets like the UK, if you look at markets like Japan, if you look at some countries in Scandinavia, seeing really good uptick on the brand and so you'll see more of the same with CCT.

Second city, ABI and let's talk about the villages within. We've been at this now, I think we announced the new international deal with ABI just less than two years ago and so we basically took six months to kind of get off the dime and we've been kind of in this mode where we keep saying to you, hey, we're planning what we're going to do and we thought it was going to be Chile and Mexico and Brazil and then we kind of came back and said, we're going to focus on Brazil and we started with the e-commerce launch. So what I can share with you is the lack of kind of results that bubble up to this call are not indicative of the amount of work going on behind the scenes and you will hear more in the probably coming quarter, if not by the time the next earning call comes around about what Ken talked about, which is a decision to really focus on Brazil and that will include a lot of things on both the commercial side in terms of focusing in certain geographies certain levels of spend and what we think we need to do kind of from an infrastructure perspective to support that. So more to come on the ABI international development, but comfortable telling you that all of our work over the last 18 months with ABI has really made all of us comfortable that this really deep narrow and deep approach is better than this shallow wide approach. And the narrow deep approach will basically start to take root and traction in Brazil and more to come on that in the coming quarter.

Samantha Berger -- Citigroup Global Markets Inc. -- Analyst

Understood. Thanks for the questions.

Operator

Thank you. And our next question comes from Jim Cole of Lombard Securities. Your line is now open.

Unidentified Participant -- -- Analyst

Yes, Andy, and team, congratulations and many thanks, what a great quarter.

Andrew Thomas -- Chief Executive Officer

(multiple speakers).

Unidentified Participant -- -- Analyst

I had a couple of questions. Will marketing expenses as a percentage of SG&A increase substantially with all that you're talking about?

Andrew Thomas -- Chief Executive Officer

Yes, so, great question Jim. If we take a look at our overall SG&A, when we talk about cost management, there are a lot of aspects to it, it's not just in the COGS area. It's in -- hey, this is kind of a amorphous thing we call selling, general and administrative, how many of the dollars we spend there are either market facing or going into reinvesting in our people and our business. So as our SG&A in aggregate has kind of been in that 25% to 30% range bouncing around in the quarters, there's been a lot of movement within the market facing component of that or the amount that we're reinvesting back into talent and culture. So I think as we look to next year and assuming we look to the back half of the year Jim, the answer is a very strong yes. Marketing and market-facing spend as a percentage of SG&A will continue to tick upwards as it has probably for the last several quarters.

Unidentified Participant -- -- Analyst

Okay, thank you and I had another question. Where we are now, could you just discuss the cost of bottles versus cans?

Andrew Thomas -- Chief Executive Officer

Yes, it's a great question. I'm going to pass that one off to Scott.

Scott Mennen -- Chief Operating Officer

Yes. So, you look at the cost of beer and packaging is the greatest portion of that cost of goods sold that goes into beer. You think about a bottle and I'll put it in context and a bottle, you have the bottle cost, the energy cost that go into producing that bottle, you got to put a label on it, you've got to put a crown on it, you've got to put it in a box or maybe a carrier in a box, so there's lots that goes into a bottle or you've got a can, it's a much simpler process of manufacturing a can, you put a lid on it and you may or may not put it in a carton. So when you look at the cost of goods sold, cans are significantly less than bottles are. So as we continue to shift and one of the things you'll see with the new can line we have in Portland is we'll have more capabilities than we have ever have and I would say that right now, if you look at the marketplace, we are under-indexed on cans, you'll see that begin to change as we move forward with new packages and our improved capabilities. So we'll have more beer in cans as a percentage of our overall volume, which will improve our overall cost structure because cans are cheaper than bottles.

Unidentified Participant -- -- Analyst

Will that --

Scott Mennen -- Chief Operating Officer

And also the transportation side.

Unidentified Participant -- -- Analyst

Right, will that stop our flexibility, in other words, if cans were to skyrocket in price, would we be pretty much stuck with cans with the new facility?

Scott Mennen -- Chief Operating Officer

Even with what we talk about in tariffs, we're not quite seen it materialize yet, but we're watching it closely. Cans will still be less expensive than bottles in the long run.

Unidentified Participant -- -- Analyst

Okay, great and one more question. I think I know the answer to this, but with the debt levels where we are currently, do you think we're going to need any more interest rate default swaps?

Andrew Thomas -- Chief Executive Officer

That's a tough question, but maybe to comment more broadly, Jim, like we're really happy with our balance sheet right now. If you look, our debt revolver is largely untapped and we have the shells (ph) piling out there as well as if we back to all this work we are doing if there was something out there, we really wanted to invest behind, we don't necessarily wary about that anymore. The company is performing well, the cash flow is good, the debt capacity is really good and that's even factoring in the investment behind the Kona brewery, which is in process and the investments behind the can line here. So I can't answer your question specifically other than to tell you we continue to monitor and feel really good about what we're doing and don't necessarily see too much of a need to kind of change the course from anything we've done.

Unidentified Participant -- -- Analyst

Right, well thank you much and guys, keep up the good work. Really appreciate it.

Andrew Thomas -- Chief Executive Officer

Thank you.

Operator

Thank you. And our next question comes from Steve Caspo (ph) of RJ Associates. Your line is now open.

Unidentified Participant -- -- Analyst

Hey guys, thanks for taking the question.

Andrew Thomas -- Chief Executive Officer

Hey Steve.

Unidentified Participant -- -- Analyst

And congrats on the momentum of Kona, it's a great brand. So I'm not surprised its continued to do well. I have one every once in a while.

Andrew Thomas -- Chief Executive Officer

We appreciate the support.

Unidentified Participant -- -- Analyst

Okay, absolutely. Just quick if you could provide some color with kind of the uncertainty of the qualified offer and then the $25 million that would be due, if there was no offer. How do you kind of balance running the company for the short and long-term with kind of that uncertainty and obviously I understand that you can't speak for them on any of this, but just any color on that?

Andrew Thomas -- Chief Executive Officer

Thanks for the question, Steve and I think sometimes it's the elephant in the room and it's one of the reasons I kind of commented it on in my remarks. The way I run the company is -- the way we run the company is as we've always done in the best interest of all of you, in the best interest of our shareholders and we think there are things that are just good business to make CBA a valuable company and somebody once asked me, aren't you afraid you're going to be so as successful that AB is going to buy you or somebody's going to buy you and I always remark, no, I'm afraid that we're going to be so unsuccessful that nobody is going to want to buy us or that we're not going to basically be attractive. So I think with that as kind of an overarching kind of tongue in cheek tone there are some unknowns out there around the qualified offer, but in the process I don't worry about doing things that would be different if AB were to or weren't to. That's up to AB. What I worry about is trying to grow as much value as I can in our Kona Plus strategy and in our people to make sure CBA continues to be a great performing company with outstanding brands, outstanding talent and really well functioning breweries.

And along the way I think I would be remiss if I didn't comment on the fact that if you look at the work we do with AB now you know what's fascinating to me is we have an outstanding relationship right now and you could imagine that given the uncertainty, it would be awkward and there is nothing awkward about our relationship with AB be that on the commercial side in terms of how we talk about wholesalers in terms of how we talk about making sure commercially we are as aligned as we can be while respecting the fact that we're separate companies. If you take a look on the brewing side, basically the cooperation in terms of brewing some beer in our breweries and brewing some beer in their breweries and even if you look at some of the healthy debates we've had over international strategy, I think what's important to remember is we always do what makes the most sense for CBA from a value creation perspective. I've continued to feel really confident in that.

When we work with AB today, a lot of the things we do have to be value creating for both parties or both of us have to share in that value creation. So if you take a look at everything related to our contract brewing even we talked about the fact that they were mutually beneficial relationships. So one of the safeguards I always have kind of in hard terms in answer to your question is if we're doing something that's creating value for CBA and AB is participating in it tomorrow -- today that's great. If tomorrow, AB owns more of that value because they are participating in it fully, then that's good for them too, but along the way the one red thread, the one constant is as long as what we're doing creates value for CBA or for CBA shareholders, I think we're doing our jobs.

Unidentified Participant -- -- Analyst

Now that's very helpful. I appreciate it. I assume some of the closer partnership I seem to notice when I see Kona now, it has better displays either than it had before or wider distribution than it had before and I assume that's from some of the changes from that deal.

Andrew Thomas -- Chief Executive Officer

Yes, I think there's two things that go on, right. I always kind of position it as our relationship with AB opens the door for us to a wholesaler network which has remarkable scale and has remarkable capability. It's still up to us to walk through the door and I think now what's different is the door is a little bit more open than it's ever been and there is an understanding of when we want to walk through the door and what we want to do when we walk through. So while it's still our accountability to go and walk through the door, I think there's a little bit less tension or a little bit less resistance as we do that. So I would say there is an element to that, but I wouldn't discount the great efforts of our Kona brand team and our sales organization and our brewers and basically making sure that they're still owning the Kona brand and driving the development of that.

Unidentified Participant -- -- Analyst

Okay, great, thanks guys. Appreciate it. Great quarter again.

Andrew Thomas -- Chief Executive Officer

Thank you.

Operator

Thank you and our next question comes from David Cohen of Midwood Capital. Your line is now open.

David Cohen -- Midwood Capital Management -- Analyst

Hi, my questions have been addressed. Thanks.

Andrew Thomas -- Chief Executive Officer

Thanks, David. Good to hear you.

Operator

Thank you and that concludes our question-and-answer session for today. I'd like to turn the conference back over to Andy Thomas for any further remarks.

Andrew Thomas -- Chief Executive Officer

I appreciate everybody's continuing support of CBA and being available for this call. We look forward to discussing the results of the third quarter of 2018 with you soon. Thank you. Have a great day.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone have a great day.

Duration: 72 minutes

Call participants:

Andrew Thomas -- Chief Executive Officer

Edwin Smith -- Corporate Controller and Principal Accounting Officer

Kenneth Kunze -- Chief Marketing Officer

Scott Mennen -- Chief Operating Officer

Vivien Azer -- Cowen and Company -- Analyst

Amit Sharma -- BMO Capital Markets -- Analyst

Samantha Berger -- Citigroup Global Markets Inc. -- Analyst

Unidentified Participant -- -- Analyst

David Cohen -- Midwood Capital Management -- Analyst

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