Eastside Distilling Q2 2023 Earnings Call Transcript

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Provided by Quartr
August 14, 2023

Key Takeaways

  • The Craft beverage services segment is positioned to be the preeminent provider of digitally printed aluminum cans in the Pacific Northwest, having produced over 12 million cans and steadily ramping up volume and machine utilization.
  • Digital can printing drove margin improvements at Craft, with the segment achieving positive EBITDA in June and planned cost‐reduction initiatives set to further boost profitability in Q3.
  • The Spirits business is in turnaround mode: management has refocused on core home‐market brands like Portland Potato Vodka (now posting double‐digit volume growth) while repositioning Burnside Whiskeys and Zunya Tequila for stronger margin performance.
  • Consolidated Q2 results showed an adjusted EBITDA improvement of $600,000 versus the prior year (excluding bulk spirit sales), alongside enhanced gross profits and a $1.3 million equity raise to strengthen liquidity.
  • Management expects continued momentum and profitability gains in the back half of 2023, underpinned by strategic investments in marketing, supply‐chain integration, and expanded digital printing capacity.
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Earnings Conference Call
Eastside Distilling Q2 2023
00:00 / 00:00

There are 4 speakers on the call.

Operator

Afternoon, everyone, and welcome to the Eastside Distilling Reports Second Quarter 2023 Financial Results Conference Call. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask Please also note today's event is being recorded. At this time, I'd like to turn the floor over to Tiffany Milton, Controller. Ma'am, please go ahead.

Speaker 1

Thank you. Good afternoon, everyone, and thank you for joining us today to discuss Eastside Distilling's financial results For the Q2 of 2023, I'm Tiffany Milton, Eastside's Controller and joining us on today's call to discuss these results Are Jeffrey Gwynn, the company's Chief Executive Officer and Bruce Wells, Crafts Controller. Following their 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, Section 21E of the Securities Exchange Act of 1934 is amended and such forward looking statements are made pursuant to the Safe Harbor provisions of the Private or strategies and are generally preceded by words such as may, future, plan or planned, will or should, expected, anticipates, Draft, eventually or projected.

Speaker 1

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. 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 and 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 Gwen. Jeffrey, please proceed.

Speaker 2

Okay, great. Thank you, Tiffany, and welcome to our Q2 2020 3 conference call. We have a lot to discuss this quarter, and I'd like to encourage you to follow along with me as I reference a few slides about the business and our progress this quarter. As Tiffany said, you can download these slides from our website under the Investor Relations tab. Now if you're new to the company, we operate 2 distinctly unique businesses, including a craft beverage services business, which we refer to as craft canning and printing.

Speaker 2

And we also have a spirits business, which sells a number of great brands, including Burnside Whiskeys, Portland Potato Vodka And Zunya Tequila. But I want to start today with a little background on craft, because in my opinion, it's probably the one segment of our Business that is not widely appreciated nor do people understand that really the potential here. Now Craft is Poised to carve out a unique position in a fast growing segment of the craft beverage packaging segment. It is in a lead position to be the preeminent provider of digitally printed aluminum cans for cap beverage companies in the Pacific Northwest. And so I want to start our conversation on Craft by turning to Slide 3, and we want to talk about that opportunity.

Speaker 2

Digital can printing is revolutionary. That's a bold statement. But after watching this opportunity develop, I'm confident in that statement. The craft beverage category and I'm including in this the beyond beer category is one of the most dynamic and competitive spaces there is. And you've seen brands come out of literally nowhere and dislodge legacy brands, a feat that few would have predicted.

Speaker 2

Brands that don't connect and evolve immediately lose distribution. Now here on the slide on the left, you can see there are a number of benefits of digital can printing. But probably the most important is what is listed below here. And that is technology it's a technology that helps brands win and win big. It allows marketers to elevate their marketing.

Speaker 2

It's a critical tool and allows you to win in the marketplace. Now let's look at this in a bit more detail on the next slide. This is Slide 4. First, this technology allows for design work that is extraordinary. Take a look at The picture is on the left.

Speaker 2

The ability that this machine has to print is perfect for storytelling. It also allows for new packaging elements processing into sensory elements that you just don't have in aluminum cans with textured printing. And if you've ever held a can that has textured printing on it, it's pretty impactful. But the two elements that are right are the critical ones that I want to focus on for a minute. Matt, the ability to use digital printing to shorten new product introductions.

Speaker 2

Now a concept you've got to get your head around is historically brands were developed with huge investments, very long lead times with consumer research and testing. You had one shot to get it right and you needed a large pile of money. Now with digital packaging investment that's low like ours, you're allowed to Approach it with a different strategy, more of a point and shoot redirect approach. This adjust and repeatability allows you to Lastly, I want you to consider the statement, and I'm going to quote here The Onion, which probably no one should ever quote, but I think it proves my point. When many years ago they said everything in the entire world is collectible.

Speaker 2

Yes, that's been proven to be true. Think on it. We've moved from duchess trading cards to clothing to shoes and yes, even beverage cans, artwork can be elevated by limited quantities, High differentiation and become collectible. Digital can printing facilitates that. So the design proliferation we are seeing at Craft is just stunning and we are seeing winners emerge using our technology.

Speaker 2

Now let's turn to Slide 5 and let's address the question, are consumers adopting this technology? And the simple answer to that is yes. We've printed over 12,000,000 cans since we started this operation and the chart here shows the ramp up by month And we're just getting started here. And we still have a long way to go on volume, but we are getting better daily. Now it's important to remember when we win a customer, We are winning their supply chain.

Speaker 2

It's a huge commitment and a show of trust to give us that supply chain. As you can see in Q4 of last year, we realized that we needed to make some incremental investments in our printing plant. We made those to ensure we can meet our obligations to customers and we had volumes decline as we prepared for this year. Now we're at the much higher Utilization levels. Now this next slide shows the magnitude of the EBITDA improvement on top of Craft's 43% increase in the sales, but we expect to see even more improvement in the Q3.

Speaker 2

Craft is on its way to generating cash and we plan to grow it through the year and into next year. Now let's turn for a minute and talk about spirits on the next slide. This is Slide 7. And I'd like to start my comments This turnaround has been a challenge, but the rewards for getting this right are significant. And this quarter, we made progress.

Speaker 2

Backing up for a minute for those that haven't enjoyed this long painful turn, I'd say in summary, the company has had a poor history of Investment in Large Scale Branding, Sales and Distribution. But to summarize it in a slide, when I first joined the company, we lacked focus, We lacked financial resources and a test vision to win in a very competitive business. We were a national company and we had very little cash to support that size business. When I became a CEO, I pulled out an unpopular And that is to shrink the money losing activities and focus investment in areas where we can win at our scale. So you have seen volumes decline there, but you've seen performance improve.

Speaker 2

So let's turn to the next slide and talk about that improvement. So on this slide, you can see the EBITDA improvement on lower volume Over last year and I'm happy to go into this in more detail in the question and answer section, but I believe we can See even more progress in the back half of this year. So here are my three goals for Spirit's. I want to invest in marketing that has been Tested and works. We want to improve our cost position.

Speaker 2

We've gone a long way to doing that already. And I want to drive this thing to become EBITDA positive. And from this level, Achieving these goals, we can start to grow again, but we're going to grow wisely with adequate marketing, sales and distribution. Okay. So my last slide before I turn it over to Tiffany is to summarize our consolidated results.

Speaker 2

So On top of Craft and Spirits, we have a small corporate segment, which we use So we call out so you can see really the profitability of the 2 NLM businesses. And when we consolidate all three entities together, We report those results and we've had significant progress in that as well this quarter. You take out the bulk inventory sales we did last year at the same period for spirits, Those comparable numbers look much better. And we did grow and we did see meaningful improvements in EBITDA have sequentially declined each quarter since I was elevated to this role. That's 18 months of declines.

Speaker 2

This quarter and in July, we also improved liquidity, raising a total of $1,300,000 in equity through the ATM And we continue to work on our debt for equity swap. We've made good progress, but we are not at the finish line yet. So the way I would characterize it is we're halfway through a big year for the company and I have high expectations for our team and the results for the back half of the year. Happy to take more questions on any of this material. And for now, I'm going to turn it over to Tiffany.

Speaker 2

Tiffany?

Speaker 1

Thank you, Jeffrey, and thank you all again for joining our call today. Let's review the Q2. On a consolidated basis, Our gross sales were $2,800,000 for the Q2 of 'twenty 3 compared to $5,100,000 for the Q2 of 'twenty 2, primarily due to barrel sales of $2,600,000 in Q2 of 'twenty two. Excluding bulk spirit sales, gross sales increased 2 Excluding bulk were $800,000 for 2023 compared to $1,100,000 for 20 22 due to lower distributors sales. Our consolidated gross profit was $26,000 for Q2 2023 compared to $1,500,000 for Q2 2022.

Speaker 1

Excluding Bulk Spirit sales, gross profit increased $200,000 from the prior year quarter. Our consolidated gross margins were 1% for 2023 and 30% for 2022. Craft had margins of negative 3% for 2023 and negative 28% for 2022. Kraft margins on a monthly basis sequentially improved through Q2 as we continue to build volume of printed cans. Spirit's margins were 12% for 2023 52% for 2022.

Speaker 1

Excluding barrel sales, Spirit's margins were 12% for 2023 percent and 23% for 2022. Adjusted EBITDA was negative $1,000,000 for 2023 and negative of $1,600,000 for Q2 2022, adjusted EBITDA improved $1,000,000 from the prior year quarter. Printing at Craft is finally reaching its potential in driving results, achieving positive EBITDA in June. We continue to build momentum in printing look for ways to reduce operating costs, which will be further implemented during Q3 and become more apparent in the last half of the year.

Operator

And our first question today comes from Matthew Campbell from Laherty Capital.

Speaker 3

Yes. Hi, good afternoon. Good to see a lot of progress here. Specifically on the kraft side of the business, How many ships are you currently operating today and where can you get to with this one pincer?

Speaker 2

Hey, Matt. Thanks for the question. So right now, Craft is not operating on a 20 fourseven schedule. Through the week, we operate pretty much Around the clock, but we're moving towards having the capability to do a 20 fourseven schedule around the clock. But it's not just the number of shifts we're running, it's also the utilization of the printer.

Speaker 2

So we have one machine currently as we've talked about in the past and we have the capability to get utilization up Significantly, we know there's a number of people that have operated this machine actually worldwide. And based on our Partners, we think that we can get to a point where we're doing double what we're doing today, Possibly a little bit less than that, but really utilizing the printer a lot more than where we are today. So, we have a lot of room to improve here.

Speaker 3

Got it. That's helpful. And then when we look at the spirits business, clearly you've been calling Some distributors that were not profitable for you. Where are you in this process and when do you think you'll start seeing growth On the spirits business again?

Speaker 2

So we are actually seeing growth in our biggest volume Brand. So the 3 brands we should think about are Portland Potato Vodka, Burnside And the tequila business. Historically, we've had to redirect investment from the tequila business, which is a broader distribution footprint. We have the least ability to impact the supply chain there. And the other That is we have probably the least amount of brand equity and market presence in those various markets.

Speaker 2

Relative to the distributor, we're probably in a weaker position. Portland and our home market, We're extremely strong. I mean Portland Potato Vodka is the hometown vodka. Eastside Bourbons are the same hometown bourbons And we have a lot more room. It's also a control state.

Speaker 2

So we have much more visibility into where and how the product is placed. So when we look at those three brands, we started the year making investments immediately as we got into to the kind of the consumption side of the season in Portland potato vodka and we've seen those volumes grow and those have sequentially improved and picked up And gotten to a point where we're seeing strong double digit volume increases. The tequila business on the other hand has not grown, it shrunk and that's offset the performance of the Portland potato vodka wins. Now I'd say the focus here is to win Oregon first, reset The Zinnia tequila business and then grow from there. So we're working on that.

Speaker 2

So each of the 3 brands this year, we're hoping is going to have a meaningful change in the brand positioning. Zinnia probably is going to be the last one, but certainly you'll see some stuff for Burnside here shortly. And then it'll start catching up with Portland Potato Vodka As far as the turnaround in the volume. So that's our expectations for the back half of the year. Stronger results in PPV, picking up volumes With some things that we'll be announcing here shortly on Burnside and tequila is still something that we're working on that we'll come out with some more details on that In the back half of the year, hopefully.

Speaker 2

So you should expect to see improvements as we go through the year.

Speaker 3

Thank you. That's helpful, Jeff. Great work. I know this has been a long turnaround, but really appreciate all the hard work and The vision that you've had to make some hard decisions here, and it's gratifying to see Canex start to turn the corner to help drive cash flow so that you can make those investments in the spirits business. Appreciate the work.

Speaker 2

Thanks, Matt. Appreciate it.

Operator

No additional questions, I'd like to turn the floor back over to Jeffrey for any closing remarks.

Speaker 2

Great. Thank you, Jamie. I appreciate the time. And thank you to all of you that

Operator

And ladies and gentlemen, at this time, we'll be concluding today's conference call and presentation. We thank you for joining today's conference. You may now disconnect.

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