www.globeandmail.com

The Globe and Mail
leaftheglobeandmail

  A frothy future for Brick?

BENJ GALLANDER and BEN STADELMANN

Monday, June 28, 2010

It is a rare political event that prompts the general population to react as one. But such is the uniform retort amongst our crowd in Toronto to the G8 and G20 summits. Nobody can understand how government can spend more than a billion dollars on security — amongst other costs — and make life so difficult for the many, for a gathering of the few.

Surely, there were easier alternatives to be found than having two conferences, one three hours north of Toronto and the other smack dab in the centre of the city, effectively holding the inhabitants hostage in their own home. Simple options that shouldn't have taxed the brainpower of key decision makers include holding the two conferences together, which would have saved hundreds of millions of dollars in security and other expenses; shifting the G20 from the centre of Toronto to an outpost easier to secure; or doing this all at the United Nations, where security is already in place. Or heck, using Skype! Even these profligate spenders could do that for less than 10 million bucks.

The fascinating thing is that our cronies are not saying, &lquo;These gatherings are a bad idea, but . . .&lquo; There are not any buts being presented. The conclusion is plain: organizing these conferences this way is incredibly dim-witted.

Anyhow, this absurdity has driven Benj to drink with his buddies, and, desirous of supporting his investments, it involves one of the stocks that he owns, Brick Brewing.

This enterprise was the subject of one of our columns in 2005. It had been purchased at 67 cents and was spun out less than a year and a half later at $2.34. After that, the company fell into an alcoholic stupor that staggered the firm towards bankruptcy. Once again, Benj went to the cooler and plunked down some change to purchase shares at an average price of 25 cents.

Fortunately under the direction of president/CEO George Croft, the company picked itself out of the gutter and appears to be gaining a measure of sobriety. Today the stock trades around 80 cents and the initial sell target is the previous sale price of $2.34.

Croft, who joined the company two years ago, quickly realized that the enterprise was drowning. He felt that three chapters had to be written to turn the company around, a scenario with echoes of his previous tenure at Lakeport Brewing, which ultimately was chugged by Labatt.

The first chapter included lowering costs while improving production and product quality, all accompanied by management changes, amongst other directives.

&lquo;Beside other difficulties, a key one that was causing us problems was Laker brands,&rquo; said Croft. &lquo;Now it looks like the Laker business has turned around. The foundation of the business is now in a very good place.&rquo;

The key to chapter 2 is to get more out of the company's facilities. The operation can pump out 5.5 million cases of beer a year, while the current output is about 3 million. Strong organic growth would be the number one option to fill that excess capacity, and some is being seen with the rapid growth in volumes from the Red Baron and Waterloo labels.

Additional co-pack agreements are also being explored, but, while worthwhile, margins here are thinner. If opportunities present themselves, brand acquisition is also a possibility.

Growth is key for future success. Though this enterprise is Ontario's largest Canadian-owned and Canadian-based publicly held brewery, it is still Lilliputian in an industry of Gullivers. Competition is fierce, and being one of the smaller guys does make it difficult to achieve the economies of scale necessary to compete.

When chapter two is concluded, the goal of the third stanza will be to &lquo;optimize&rquo; operations. However, there is still some reckoning to be done in phase two before turning the page to the next episode.

The company is currently modestly profitable; the most recent quarterly bottom line was $634,000. Revenues kicked in at $7 million and gross margin stretched to 27.4 percent from 26.5 percent. Debt is higher than we would like to see, but appears to be at a manageable level. In addition, an ongoing lawsuit with the company's founder, Jim Brickman, is unsavoury and the result could be enough to knock the company into the red &mdash in any event, there are the mounting legal costs, which are never tasty.

If everything works according to plan, Croft sees in the mists a fourth chapter, in which Brick either acquires other companies or is swallowed, like Lakeport, at a significant premium. At this point, such thoughts are are as ethereal as the bubbles in the head of a pint; many bottles likely need to be quaffed before either scenario becomes a reality.

The summer season is, of course, critical to the success of breweries; a ten-week window can effectively make or break a year. While summer is just starting, the company got a head start with the World Cup and the warm spring weather.

Given Benj's holding in the company, he is rooting for a hot, sunny season, although neither of us would cry into our beer if there were lots of foul weather while the summits persist. After all, with the mega-dollars we taxpayers are paying for this gabfest, plus the inconvenience we Torontonians are living through, it would not make us gloomy to see it rain on the elites' parade.


back