Eastside Distilling, Inc. (NASDAQ:EAST) Q4 2022 Earnings Call Transcript

Eastside Distilling, Inc. (NASDAQ:EAST) Q4 2022 Earnings Call Transcript March 31, 2023

Operator: Good day everyone and welcome to the Eastside Distilling Fourth Quarter 2022 Earnings Conference Call. All participants will be in a listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note that this event is being recorded. I would now like to turn the conference over to Amy Brassard, Corporate Secretary. Please go ahead.

Amy Brassard: Thank you. Good afternoon, everyone. And thank you for joining us today to discuss Eastside Distilling’s financial results for the fourth quarter and year-end 2022. I’m Amy Brassard, Eastside’s Corporate Secretary, and I’ll be your moderator for today’s call. Joining us on today’s call to discuss these results are Mr. Geoffrey Gwin, the company’s Chief Executive Officer and Chief Financial Officer; Ms. Amy Lancer, Eastside’s Chief Commercial Officer; Ms. Tiffany Milton, Eastside’s Controller; and Mr. Bruce Wells, Craft’s 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 the conference call today 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 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 the 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. 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 of 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-K 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 Geoffrey Gwin, Geoffrey, please proceed.

Geoffrey Gwin: Welcome to Eastside’s fourth quarter 2020 earnings conference call. I’m Geoffrey Gwin, the Interim CEO and CFO, and appreciate your interest in our company. 2022 was a transformational year for Eastside Distilling. The business we have today is very different from that of last year or the year prior. The most obvious change is that Craft, our beverage services business. Last year, we built out and began operating a state-of-the-art digital can printing plant in Portland, Oregon. To remind everyone on the call, this is the only digital directed can decorating operation in the Pacific Northwest. This new facility allows us to create extraordinary can design for the Craft beverage segment that is 100% recyclable and doesn’t use past — plastic shrink sleeves or sticker labels.

The cans we are now producing are important marketing tools for our customers. I’ve been stating this for the past three quarters that this technology, I believe, will transform the craft beverage space. It’s a critical tool for them. And I believe we are seeing that proof now. We have converted nearly all of our existing customer base to this 100% recyclable product, and we’ve won many new customers. Moreover, we’ve watched as a number of our customers have really fully embraced the capabilities of this new technology, and they’re using it successfully at retail. Now, if you followed the Company over the past few quarters in the past year, getting this investment at Craft up and running has been a huge challenge. I mean, think about it. It’s a brand-new product; it’s new technology; it’s a new market for us.

We’ve had to build a new plant, install new team, build new processes. It’s been a huge undertaking. And initially, we had projected a faster ramp-up to full capacity, but we faced a steep learning curve that impacted our ability to get to scale through last year. Now, while printing performance has improved in 2022, the fourth quarter was particularly challenging as we had to address debottlenecking among many other issues that were inhibiting our ability to achieve that full capacity that we were looking for. Seasonal slowness in the beer category, a core part of our current customer set, in the fourth quarter gave us a chance to improve our processes and printing, but it meant not achieving that full capacity in the quarter. So that had a negative impact on the gross margin in the quarter, and you can see that in the numbers.

Each challenge we faced, though, during the year, we sorted out a solution to the credit of the team. We improved our processes and always, we always serve our customers. And we did the same thing in the fourth quarter. Now as we sit here now on the last day of the first quarter of 2023, I can say our performance this quarter will be much better. Although coming out of the year, we started January very low, we’ve seen sequential improvement in January, February and March. And in March, we printed well over 1 million cans alone this month, a record for us. In mobile, we’ve also made a number of improvements in the fourth quarter and the first part of this year, and we expect a better performance there as well. But now let me turn to our spirits business.

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Like Craft did have its own challenges, in 2022, we made a very hard decision to reposition our Azuñia Tequilas brand in retail channels where we would be able to make an adequate return on all the investment spending. Now, this meant exiting a number of distribution deals where we were effectively losing money. So each quarter of last year, we saw volumes decline, and they continued doing that in the fourth quarter. But at the same time, we are working on improving our distribution partnerships in all our focus states. Now, walking away from this volume, it’s hard to do, but it was critical for the long-term success of the Company. Now we have completed this realignment of investment in Azuñia with restructuring actions that took place in the first quarter of this year.

And this completes a big shift from an overinvestment in Azuñia to a more balanced approach allow us to leverage the opportunity in both Portland Potato Vodkas and Burnside, our other portfolio brands. In addition, we see that we’ve written down a large portion of the goodwill associated with the Azuñia acquisition. We continue to look across our brand portfolio and target the most attractive segments to invest our scarce capital. And given our high cost of capital, this is exactly the disciplined approach we have lacked in the past. And so, we’re going to stay at it. Overinvestment in Azuñia has meant an underinvestment in the Oregon brand. That underinvestment is reflected in their volume performance in the fourth quarter. But rest assured, we will be increasing our investment there in the Oregon portfolio in 2023, and we expect to see significant improvements.

Now, over the course of the year, I’ve heard to many of you, expressing a general frustration of the performance in our stock, and I too share that frustration. I bought a lot myself early last year. And I know many of you want an immediate solution that will unlock the value that we all believe is in this company for all stakeholders. In December, the Board along those lines, instructed the Company, made to consider the potential sale of spirit brands, one or all. And we put every option on the table and gone through a process that’s not complete to date. We do anticipate that we will be wrapping that process up shortly. And while I’m not in a position to answer any questions on that topic today, I can assure you that we will be updating you all once the process has been completed.

Now, Tiffany will take you through our year-end results in a moment, but I first would like to give you some rough guidance on what to expect from us this year. We have set a goal to be EBITDA positive for both craft and spirit — and the spirits business by the third quarter. Craft will likely hit that mark sooner than spirits. We expect improving trends in spirits volumes and strong growth in craft due to our digital printing investment. These goals will not be easy to achieve, but I believe we have put through a thorough plan together, and we have it in place. The Board has approved it. And if we execute it, we will achieve these goals. With that said, I’ll turn the call over to Tiffany, who will cover more details. And then we can get into some questions.

Tiffany Milton: Thank you, Geoff, and thank you all again for joining our call today. Let’s review the fourth quarter. On a consolidated basis, our gross sales were over $2 million for the fourth quarter of ’22 compared to almost $3 million for the fourth quarter of ’21. Spirit sales were $1.1 million for ’22 compared to $1.4 million for ’21, due to volume softness in Azuñia as we reduced discounting and had soft holiday sales. Craft sales were $1.2 million for ’22 and $1.4 million for ’21, reflecting our continued challenges in mobile canning. And we experienced some unexpected seasonality in can printing during the holidays. Our consolidated gross profit was negative $148,000 for Q4 ’22 compared to positive $598,000 for Q4 2021.

Our consolidated gross margins were negative 6% for ’22 and positive 23% for ’21. Spirits margins were 13% for ’22 and 38% for ’21, and craft had margins of negative 23% for ’22 and positive 10% for ’21. Craft margins are expected to continue to improve as we build volume of printed cans, as Geoff mentioned earlier. Adjusted EBITDA was negative $1.6 million for ’22 and negative $1.5 million for ’21 due to the continued softness in both businesses. In addition, we recorded an impairment loss related to our Azuñia brand of $7.5 million. Turning to the balance sheet. We raised a net of almost $2 million during the fourth quarter of 2022, ending with cash of $700,000 as we continue to pay down debt, which we fully repaid all loans at craft. These financial results were not what we expected to deliver, but we believe we are now better positioned in spirits as we’ve eliminated unprofitable volume and reestablished ourselves with our distributors.

At craft, we printed 1 million cans during March, and we are focusing only on profitable mobile customers. We are excited about the outstanding growth of the printer for the remainder of the year. As Geoff said, we are also expecting better results from the continued restructuring of both businesses, which will be more apparent in coming quarters. We will now open the floor for questions. Operator?

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Q&A Session

Operator: Our first question comes from James Watson, a Private Investor. Please go ahead.

Unidentified Analyst: I was looking at the full year’s adjusted EBITDA margin. It’s roughly negative 30%. And if I heard you correctly, we are targeting a positive EBITDA by quarter three, if I’m not wrong. So the swing will be quite a big one to be a breakeven level. What gives us the confidence that we will reach there?

Geoffrey Gwin: Sure. So, the way I think you need to look at this business, as I referenced in my remarks is it’s really a completely different business than what you’ve seen before, the Company. I mean, in the past, we’ve had a mobile canning operation, which for the people that are new on the call, that’s a business where you basically pick a small, mini canning line to a brewery and you fill cans there. And we’ve transitioned to a big plant that does high-quality, super high-end digital graphic printing. And then we can also do the mobile filling too. But the point there is that in the fourth quarter, you saw a pretty big gross margin miss by craft. And that’s a function of the fact that we didn’t get enough ramp-up of cans in the fourth quarter.

We went from not having any digital printing to having the only plant in the Pacific Northwest in less than a year, and we converted 100% of our customers in less than a year. And now beyond that, you have to ramp up and add a lot more customers who are going from buying a few million cans a year. So now we’re in a different game. We’re in the game where we’re buying 20-plus million cans a year. So, what will get us to that EBITDA positive number is three things: it’s getting the mobile — I’m sorry, the digital printing business to a point where we’re doing over 1.5 million cans a month. And just to correct the number, it was actually this month, I think we were close to 1.2 million. Now that number is kind of — is not a number that’s written in stone because it depends on what cans and the margins and how we source cans and what customer base it’s going to.

But suffice it to say, we hit that number, and we’re moving through that number and heading north of that number. We’re generating positive EBITDA at craft. And then in spirits, you’re going to see something else happen in there. You’ll see we’ve done quite a bit of restructuring in spirits. We’ve reduced the workforce significantly, really focused our sales on the core portfolio of brands. And we believe that, that business with some production restructuring is going to also turn around and generate EBITDA. And then in — we’ve shrunk our corporate headcount pretty significantly, by half. And that’s going to be the last piece. So, I have a lot of confidence we’re going to get there. This is a complicated business for the size it is since there’s multiple businesses.

But the teams are focused, the plan is in place. We have a couple of things left to do in spirits and then we’re fully locked in. But I have every confidence that we’re on our way to a much better year this year.

Unidentified Analyst: Yes. I just wanted to follow up, because if we look at the gross profit margin for Craft Canning, I think it’s been a negative gross profit margin for quarter four as well. So, when we talk about wanting to be breakeven, right, how is that going to happen? Because we are not addressing any positive gross margins at this point.

Geoffrey Gwin: That’s because you have a fixed expense. In the Oregon facility, you have large lease payment, you have a team that we didn’t have before, a printing team, the support staff, right? And we — and the losses that you saw in the year in craft are a function of putting that in place, and then it’s a scramble to get that machine up and going, right, get us to a point where you have enough customers on that mission that we’re generating enough gross margin dollars to absorb that fixed cost. So, once you sell a customer, right, and he’s taken his supply chain away from traditional labels that can decoration, he’s going to come back for more unless he goes out of business, right? Or you disappoint and he goes back to the old label.

We haven’t had any of that happen. So, we’re slowly building, adding customers, onboarding new customers of craft, this means we’re loading the volume on that machine, getting the utilization up. And as the gross margin dollars start to grow there, absorb the overhead and then you see the margin change. So looking at the margins statically in the rear window, this year is going to be way off where this is going to be going forward.

Unidentified Analyst: Got it. And also, I think it’s a great thing to know that we are achieving EBITDA positive this year. My question is, how are we going to self-finance ourselves until we get to that level? Because assuming we are losing about $1 million to $2 million a quarter, we kind of need about $3 million to $4 million perhaps to take us through until we become breakeven. So what are your thoughts around it?