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E-Malt.com News article: 3584

USA, Seattle: Redhook Ale Brewery, Incorporated reported on November 2 net income of $312,000, or $0.04 per share (basic and diluted), for the 2004 third quarter, compared to a net loss of $211,000, or $0.04 loss per share, for the 2003 third quarter. The Company benefited in the third quarter of 2004 from its investment in Craft Brands Alliance LLC ("Craft Brands"), a joint venture which the Company and Widmer Brothers Brewing Company ("Widmer") recently formed to advertise, market, sell and distribute their products in the western United States. The Company's third quarter 2004 net income includes a $658,000 return on the profits of Craft Brands.

Shipments in the third quarter of 2004 totaled 57,100 barrels, declining 2.7% as compared to 2003 third quarter shipments of 58,700 barrels. The 1,600 barrel decline was driven by an 8.9% decline in shipments to west coast states. Shipments and sales in the midwest and eastern United States increased as compared to the third quarter of 2003.

Sales for the three months ended September 30, 2004 totaled $8,790,000, down 20.9% as compared to the sales of $11,111,000 for the same period in 2003. The decline in total sales was offset somewhat by an increase in sales in the midwest and eastern United States, driven by higher volume and a modest improvement in average wholesale revenue per barrel. Significantly impacting the comparability of the current quarter's sales are the sales of Redhook product to Craft Brands in the third quarter of 2004. Redhook manufactures and sells its product to Craft Brands at a price substantially below historical wholesale pricing levels; Craft Brands, in turn, advertises, markets, sells and distributes the product to wholesale outlets in the western United States through a distribution agreement between Craft Brands and Anheuser-Busch. Redhook shares in the profits of Craft Brands with Widmer. Also impacting comparability of the current quarter's sales is an increase in fees that the Company paid to Anheuser-Busch ("A-B") on sales in the midwest and eastern United States pursuant to the July 1, 2004 distribution agreement with A-B. Redhook continues to sell its product at wholesale pricing levels in the Midwest and eastern United States through sales to A-B. Sales in the Company's retail operations were nearly flat at $1,508,000 for the three months ended September 30, 2004.

Comparing the 2004 third quarter to the 2003 third quarter, cost of sales decreased 3.2%, or $228,000, and on a per barrel basis. The decline is largely attributable to lower freight costs, offset by an increase in some direct materials and indirect costs. Freight costs declined by more than half as the cost of shipping Redhook product in the western United States is now borne by Craft Brands, and the Company's effort at streamlining its shipping relationships in the midwest and eastern United States has yielded some savings. Improvement in the Company's malted barley cost in 2004 was offset by increases in other direct and indirect costs, including utilities, depreciation and production wages. Depreciation and production wages increased following the 2003 expansion of brewing capacity in the Company's New Hampshire brewery.

"With one quarter under our belt, the sales and marketing effort in the west with Craft Brands Alliance has initially delivered the synergies anticipated in joining forces with our friends at Widmer Brothers Brewing Company," commented Paul Shipman, President and CEO. "We are participating in planning for new marketing activities with good potential for 2005. We are pleased that our bold efforts delivered improved financial performance for the quarter, however, we understand that one quarter is only a start and that we still have many challenges ahead."

Results for the nine months ended September 30, 2004 were also significantly impacted by the transition to Craft Brands made during the third quarter. Sales for the nine months of 2004 decreased 7.8% and volume decreased 2.9% to $29,624,000 and 169,200 barrels, respectively. Year-to-date 2004 gross profit of $6,018,000 decreased $2,137,000 from the year-to-date 2003 gross profit of $8,155,000. Sales of Redhook product to Craft Brands in the third quarter of 2004, at prices substantially below historical wholesale pricing levels, significantly impacted the comparability of both year-to-date sales and gross profit. Cost of sales decreased $285,000 in 2004 but increased on a per barrel basis. A significant decrease in freight in the third quarter of 2004 and an improvement in some of the Company's direct costs were offset by increases in some indirect costs, including depreciation and production wages, following the 2003 expansion of brewing capacity in the Company's New Hampshire brewery. Selling, general and administrative expenses decreased $2,621,000 to
$6,385,000 from $9,006,000 for the first nine months of 2004 and 2003, respectively. In conjunction with the formation of Craft Brands, both the Company and Widmer incurred certain start-up expenses, including severance expenses and legal fees. The Company's year-to-date 2004 operating loss reflects $535,000 attributable to the Company's share of these formation expenses. Additionally, while the companies sought the regulatory approval required for Craft Brands to become fully operational, the Company and Widmer agreed to share certain sales-related costs, primarily salaries and overhead. The Company's share of these costs during the first and second quarter of 2004 totaled $554,000 and are reflected in the Company's statement of operations as selling, general and administrative expenses.

Redhook is one of the leading independent brewers of craft beers in the United States and is the leading craft brewer in Washington State. The Company produces seven styles of beer marketed under distinct brand names: Redhook ESB, Redhook India Pale Ale (IPA), Redhook Blonde Ale, Blackhook Porter, and its seasonal offerings, Sunrye Ale, Winterhook and Nut Brown Ale. Redhook brews its specialty bottled and draft products exclusively in its two Company-owned breweries, one in the Seattle suburb of Woodinville, Washington and the other in Portsmouth, New Hampshire. The Company distributes its
products through Craft Brands Alliance LLC, a network of wholesale distributors, and a distribution alliance with Anheuser-Busch, Incorporated. Redhook beer is available in 48 states. Please visit the Company's website at www.redhook.com to learn more about Redhook and its products.

03 November, 2004

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