Eastside Distilling Q3 2023 Earnings Call Transcript

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November 14, 2023

There are 2 speakers on the call.

Operator

Good afternoon and welcome to the Eastside Distilling Third Quarter 2023 Financial Results Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to for questions. Please note this event is being recorded. I would now like to turn the conference over to Tiffany Milton, Controller.

Operator

Please go ahead. Thank you. Good afternoon, everyone, and thank you for joining us today to discuss Eastside Distilling's financial results for the Q3 of 2023. I'm Tiffany Milton, Eastside's Controller. And joining us on today's call to discuss these results are Jeffrey Glynn, the company's Chief Executive Officer and Bruce Wells, Craft Controller.

Operator

Following our remarks, we will open the call to your questions. Now before we begin with prepared remarks, we submit for the record the following statement. Certain matters discussed on this conference call by the management of Eastside Distilling may be forward looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended and such Forward looking statements are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. The forward looking statements describe future expectations, plans, results or strategies and are generally preceded by words such as may, Future, plan or planned, will or should, expected, anticipates, draft, eventually or projected. Listeners are cautioned that such statements are subject to a multitude of risks and uncertainties that could cause future circumstances, events or results to differ materially from those projected in the forward looking statements.

Operator

Such matters involve risks and uncertainties that may cause actual results To differ materially include, but are not limited to, the company's acceptance and the company's products in the market, success in obtaining new customers, Success in product development ability to execute the business model and strategic plans success in integrating acquired entities and Assets, ability to obtain capital, ability to continue its going concern and all the risks and related information described from time to time In the company's filings with the Securities and Exchange Commission, including the financial statements and related information pertaining to the company's annual report on Form 10 ks for the year ended December 31, 2022, filed with the Securities and Exchange Commission. Now with that said, I'd like to turn the call over to Jeffrey Gwynn. Jeffrey, please proceed.

Speaker 1

Thank you, Tiffany, and welcome everyone to the Q3 earnings conference call. I appreciate the opportunity to discuss our performance and outlook with you. While we've made strides towards our goal of achieving positive operating cash flow both In the Craft Digital Painting Business and our Spirits business, there are challenges we need to address. All year long, I have Talking about the collective goals I have laid out for both Craft and Spirit segments to generate EBITDA and importantly net income that not only allows us to invest in growth, but also to deleverage and to offset the public company costs. Now while we've made progress towards these goals, it's clear that we still have work to do.

Speaker 1

One significant challenge we're facing is the growing economic headwinds in both The craft beverage and spirits categories. Unfortunately, these headwinds have intensified toward the end of Q3 and into the fall. The external economic environment plays a crucial role in our ability to achieve our financial objectives. Understanding and navigating Challenges will be key to reaching our targets. Now in the Craft Digital Printing The quarter showcased positive developments with notable wins in our new digital printing customers such as bored and thirsty in the water category, who by the way is at the forefront of using digital printing to market to consumers.

Speaker 1

Craft's record breaking quarter with 4,800,000 digital can orders demonstrates continued demand for our services. While we face challenges in the mobile gaming business, improvements in scrap and utilization offset some of these issues. As we approach the Q4, we anticipate seasonal softness, a trend observed in the same period last year. Now moving on to spirits, We experienced a notable improvement with Spirit's EBITDA loss of only $73,000 in the quarter, a significant reduction compared to the Despite an overall decline in the top line, Portland Potato Boxer performed well and we observed softness in various spirit categories, including tequila category, which has historically been a very strong performer. Despite these challenges, we managed Mitigate the impact by implementing successful pricing strategies in key markets.

Speaker 1

While Burnside and Zazunia require more attention to the underinvestment, Our strategic focus on winning territories, rightsizing production and improving the supply chain is yielding positive results as reflected in the previous EBITDA performance. Corporate and G and A expenses remain a challenge for a company our size, But we've made progress in reducing costs. Tiffany will provide some details on the one time loss associated with the computed debt for equity swap. If you exclude those losses, our adjusted EBITDA shows meaningful progress in the quarter. As we entered the Q4, we acknowledged the need for Further improvements across all aspects of the business to achieve positive cash flow and net income, our ongoing efforts to address Challenges enhance operational efficiency and capitalize on opportunities to position us for success.

Speaker 1

We remain committed to our goals and are optimistic Now I'll turn it over to Tiffany to provide additional insights into our financials and the completed debt for equity swap. Stephanie, please go ahead.

Operator

Thank you, Jeffrey, and thank you all again for joining our call today. Let's review the Q3. On a consolidated basis, our gross sales were $3,100,000 for both the Q3 of 2023 2022, primarily due to growth in digital can printing, offset by lower mobile canning and spirit sales. Craft sales were $2,200,000 for $23,000,000 $1,900,000 for 20 22 as we continue to improve our printed can production. Spirit sales were $850,000 for 2023 compared to $1,200,000 for 20 22, primarily due to bulk spirit sales of $244,000 in Q3 of 2022.

Operator

Our consolidated gross profit was $500,000 for Q3 2023 compared to $200,000 for Q3 of 2022 due to Craft's improvement from digital cam printing. Our consolidated gross margins were 17% for 2023 and 6% for 2022. Craft had margins of 16% for 2023 and negative 7% for 2022. Spirits margins were 21% for 20 23% and 29% for 2022. Excluding barrel sales, Spirit's margins were 27% for both 2023 and 20 22.

Operator

Adjusted EBITDA was negative $430,000 for 2023 negative $1,400,000 for 2022, primarily due to decreased operating expenses. During Q3 2023, we recorded a loss on the conversion of debt to equity of $1,300,000 which is excluded from adjusted EBITDA. Craft printing operations have yet to reach a turning point, demonstrating its full potential and delivering positive EBITDA in the quarter. However, we continue to gain momentum in the printing sector and are exploring avenues to streamline operating costs. These cost cutting measures are set to be expanded throughout the remainder of the year.

Operator

We will now open the floor for questions. Operator? We will now begin the question and answer session. The first question is from Matthew Campbell of Larry Day Capital. Please go ahead.

Speaker 1

Hey, good afternoon, Jeff. Good afternoon. You're going to see some improvement here, continued improvement on the cost side. I was wondering if you could talk about mobile canning business being down relative to maybe what the forecast was and At the same time, Craft Digital growing and how you think about that business On a growth floor basis in terms of better visibility. Right.

Speaker 1

Thanks for the question. Mobile is not an easy business. I mean, if you think about it, it's a logistics business. You're moving basically Carrying line remotely to a customer, you're setting it up. If your customer is struggling with their product to have The temperature is not right.

Speaker 1

Carbonation is right now against your problem. And you're trying to figure out how to basically can it deliver a great product And then you pack it all up and go home and you're paying for this the whole time. And so a critical part of that story is utilization, concentration, Station utilization, not driving 6 hours, spending a lot of time on that. And that's something that Craft Did well for a long time. We were in Denver, Seattle, Portland, Spokane, Domayne Sigma West.

Speaker 1

And that's not a business that we want to invest a ton of money in Frankly, that's a business that we want to develop, improve, but we want to be in the digital canning business, The digital can't produce business. I mean, we know for a fact large consumer product companies Coca Cola, Budweiser, the PGA have turned to digital printers to digitally print Special edition cans for various things that they're doing. Not with us, but hopefully with us at some point in the near term. That's the business that we want to invest in. So we're going to spend less time on mobile.

Speaker 1

But Having said that, mobile is critical right now because last year we converted almost all our mobile customers to digital print customers, Right. They're important for the build out of the demand curve for us. So we're going to stay involved in important digital Mobile, Canyon and we're going to serve our customers there, but we're going to focus on premium. Got it. So when you look at that business, how much of the mobile business was like affected And your it's largely yes, it's largely Seattle.

Speaker 1

We initially expected to Invest in Seattle, capture more market share, compete on price there and we We're just going to defend and compete in Portland very vigorously. We're not going to give up any share there And that's where we'll be. And so initially when we looked at the year and I was looking at the opportunity for the company, I was expecting for the Q3 that mobile would be stronger in Seattle and I certainly thought that we would be able to convert more of the demand that we are building on in the early part of the year in the Q3 in digital printing. I think we got distracted at Kraft, focusing on mobile, restructuring it, exiting Seattle. And that's one reason why we weren't able to generate the EBITDA in the quarter that I thought we were going to do for No, no, no.

Speaker 1

That's what we're going to do for that segment. Got it. That's helpful. And just a little bit more color around Portland Potato Vodka, it sounds like that's starting to bounce back for you. Why is that occurring?

Speaker 1

And then Absolutely. Hold on, Junior, while you're here. So let's talk about the 3 major brands. Now we have a lot of brands. Our 3 major brands are Portland Potato Vodka and Burnside.

Speaker 1

Those are focused in Portland Pacific Northwest. And then we have Azimiya, the tequila brand that we purchased a few years ago. The Vodaf for us is a critical space because that's a place where we can do a lot of volume And we can do a lot of volume and with our concentrated footprint in Portland, we can Really deliver more cases, more volume, leverage the fixed expense base. What you've seen with this company is we've been shifting investment From Spirit Brands to digital can printing. And a lot of people ask me why in the world are you doing that?

Speaker 1

And spirits are supposed to be a Hot category. And the truth of the matter is, it is a hot category, but it's extremely difficult to do to compete In California with the 3 tier distribution system and the way that the structure of that of this segment operates. You're going to need a tremendous amount of capital or you're going to need a celebrity partner or someone who can pull demand through a reluctant distributor. That's a fact. I mean that's a real challenge.

Speaker 1

However, thankfully, we have a Strong market position in a control state in Oregon. And that limits The leverage the distributor has on taking gross margin from us. So I'm growing the spirits business back And Oregon first. And then we'll expand we have more leverage with our partners, right? So Plunitive, I was critical.

Speaker 1

So what we've done there is we have lowered the cost there significantly. Liquid cost, The bottle packaging, whole manufacturing process has been rebuilt. We've sized that to improve the margins. And so we're going to put more volume to our facility in Milwaukee, Oregon and we're going to See those margins improve at PPV and that's going to be the growth driver. So what you're seeing in this summer We got aggressive with our main competitors in Portland.

Speaker 1

We did okay. We were positive in units. We were mid single digit down. But based on what we're seeing in the economy, I'm happy with that. Now the next thing as you mentioned is Burnside.

Speaker 1

Burnside is a disappointment. Burnside is a I mean, we're in a position to really grow Burnside. In fact, We have some outstanding Burnside products that we're working on, one of which is a 17 year bourbon For Buffman and we think that it's outstanding. And we believe that we have an opportunity to roll out some unique products in the Burnside line and get more interest in that brand and get some growth. But that's the challenge.

Speaker 1

Burnside and ZYN, the ASEQUIA brand need investment. And this company has been about restructuring and reducing costs and underinvestment there Has been one of the things that I think that slowed the turnaround in those two brands. But here, this is where the market makes a decision. In a small cap market, the cost of capital where our stock is, it's telling us that they don't we don't have the capital to invest there. It's not it's extremely expensive to borrow funds at this point.

Speaker 1

We just did the debt for equity swap you saw that. We're having to pick our areas very carefully where we invest and we have a limited amount of capital to use and it's to retain the public company Status and grow digital campaign because it's that's immediate. That's an investment made and we have immediate impact because we're Seeing customers who are transitioning to this package. So Burnside is a work in progress and the same thing with Resideo. When we have a little bit more capital, we have a plan in place and we think we're going to be able to In the near term, we're going to do some unique things in Burnside we think that are going to drive awareness and volume in Portland.

Speaker 1

But right now PPP is leading the That's helpful, Jeff. I mean, completely appreciate the deck of cards you've been handed here. I think it's smart, all the adjustments you've made to the business. And it's nice to see some improvement in the cost So we can continue to get this business turned around. So applaud the work and I realize a lot of the work is hard for us to see today, but it's worth that one.

Speaker 1

We will pay dividends in the future. Thank you. Thanks, Matt. Just to be clear, you're seeing the progress now. I mean, our gross margin improved, EBITDA came down lost down significantly.

Speaker 1

We're within striking distance and spirits To breakeven and start to turn the corner, I thought you'd be there first in craft. But based on this, we might be there first in spirit. So let's see. 4th quarter is not going to be an easy quarter, because I think you're going to see it across the board. There's weakness everywhere.

Speaker 1

Notwithstanding the rest in the sky market today, there's clearly supply chain challenges, people looking To underinvest in this environment, consumers are definitely got Taylor's scared. There's a destocking going down. Diageo had a big blow up on That happens in retail. People take out inventory in the system. It has a big impact down the supply chain.

Speaker 1

So we're going to feel that. But we're in a much better position going into next year with where we need to be for spirits and we're in a growth category in digital So I'm encouraged. Great. Thanks for the color.

Operator

There are no questions at this time. This concludes our question and answer session. I would like to turn the conference back over to Jeffrey Glynn for closing remarks.

Speaker 1

Great. I appreciate it. And thank you all for listening. A couple of important things to also note is that our annual meeting this year is going to be on December 28 virtually. We pushed it to the end of the year because as you know we've been working on this debt for equity exchange to lower the debt on the balance sheet and increase our equity, which we accomplished in the Q3.

Speaker 1

Along with that, we are going to need shareholder approval for the increase in share count. And so we're going to have our annual meeting on the 28th and I'll be reaching out directly to Shareholders individually and encouraging you to vote to slate both the increase in shares, which is critical For us in continuing to operate as a public company. So anyway, I appreciate again you guys

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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Earnings Conference Call
Eastside Distilling Q3 2023
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