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

Eastside Distilling, Inc. (NASDAQ:EAST) Q4 2023 Earnings Call Transcript April 2, 2024

Eastside Distilling, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, and welcome to the Eastside Distilling Reports Fourth Quarter 2023 Financial Results Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Tiffany Milton, Controller. Please go ahead.

Tiffany Milton: Thank you. Good morning, everyone, and thank you for joining us today to discuss Eastside Distilling’s financial results for the fourth quarter of 2023. I’m Tiffany Milton, Eastside’s Controller. And joining us on today’s call to discuss these results is Geoffrey Gwin, the company’s Chief Executive Officer. 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, 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 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 the Form 10-K for the year ended December 31, 2023, 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.

View of a distillery floor with various processes of grain neutral spirits production.

Geoffrey Gwin: Thanks, Tiffany. I’d like to add my welcome, and thank you all for joining us for our 2023 year-end conference call. Here we are already in April and well into 2024. However, I think it’s important to pause, not only look at last year but also last 2 years and reflect on the change and then look forward. This company has gone through a significant transformation. When I joined in 2020, its focus was clearly spirits with a small mobile canning operation and it picked up in an acquisition a year earlier. Today, the company is on a path to be a leading innovator in the exciting consumer beverage packaging space. Meanwhile, we’ve unlocked the asset value and funded a long turnaround in the midst of COVID, we’ve raised capital for growth and this year completed a balance sheet restructuring.

And I’m encouraged by what the team has accomplished over this period, but even more excited about what’s ahead. Now let’s review the results for last year about business segment. I’m going to start with the spirits business. In 2022, we substantially reduced our bulk inventory spirits, so 2 years ago in 2022, primarily selling bourbon, we sold over $4.4 million of our barrel inventory. In 2022, we saw bourbon prices at very high levels and began to reduce that active inventory, take advantage of the market. Last year, we sold a lot less of bourbon in bulk form, only $800,000, and in hindsight, the timing was outstanding because we’ve recently seen bourbon prices specifically bulk spirits values dropped through the fall and into 2024. Now currently, we have 1,000 barrels of bulk spirits and again, it’s primarily bourbon, but it ranges in age from 4-plus years to 17 years.

So we don’t have much new fill. Given these activities, sales is in a great metric to look at our progress in spirits, a better place to consider what we’ve accomplished is the operating performance line and cash flow. As we said all last year, our goal was to get spirits to EBITDA positive. That was a stretch goal. And we would do it even if we had to shrink sales of unprofitable volume. For 2 years, we’ve been moving that way, moving away from unprofitable sales and investments in states where the return on investment is very low in spirits. Now I’m pleased to announce in the fourth quarter of last year, in 2023, we had of spirit’s net operating loss of only $114,000. That’s a 78% improvement from the prior year’s loss of $433,000. And this is before we took an impairment charge, which we call out in financials, and it relates to running down a small portion of the value of our tequila business.

And we’re getting closer to breaking even on a cash basis in the spirits segment and we expect to make more progress in 2024 on this goal. Now looking at spirit in the first quarter through February, 9-liter shipments is tracking flat to last year on an overall basis. However, our Portland-based brands are up significantly. The Portland-based brands are up as much as 15% and they are offset obviously by lower tequila sales outside of Portland and Pacific Northwest. Gross revenues are lower in the first quarter through February due to the higher proportion of lower-priced spirits compared to last year. So we’re selling more vodka than we are tequila. However, I will caution you from drawing assumptions on a couple of months. The longer-term trend is really what’s important.

As orders can slide from month to month, and also, it’s important to note that shipments is distinctly different from retail sell-through. Now with that said, let’s turn and talk about the other business of Eastside Distilling, which is our Craft services business. Specifically, our Craft is a printing business had an outstanding year in 2023, printing a total of 14.1 million cans in the year, substantially more than the 4.8 million cans that printed in the prior year. Throughout 2023, we improved our processes and won new customers. As we filled up the production schedules, each month, we saw margins improve, and we expect to see a substantial operating improvement this year with Craft. In fact, we are preannouncing can volumes for the first quarter of 2024 and expect to print over 4.7 million cans in the first quarter.

That’s an 88% increase over the first quarter of last year. We are achieving this through improved processes, higher throughput and an expanded schedule. Now the other driver here is new customers. Last year, we converted most all of our existing mobile customers to digital printing. And we began to make inroads winning back former mobile customers that have moved to purchase, fill and decorate their own cans, which shrink sleeves for labels. And recently, we have won much larger customers all over the West Coast. Many of these customers are launching new SKUs, converting away from nonrecyclable labels and others just want the incredible flexibility and graphics, digital can printing offers. Every can we print have our logo on it. And those cans are going places.

Recent wins include a beer can served at the Dodger Stadium. A large consumer product company launching a new product, regional RTD brands. Now these products cover beer, waters and SpikedSeltzers. Having said this, I think there are other reasons why we are seeing customers hand over a critical component of their supply chain to us. So it has everything to do with the consumer. The consumer has changed and marketing in consumer beverage is changing. Packaging has never been more important. Driven by the fact that to be successful in this rapidly changing space, you have to invest in marketing for your products facing the customer. Historically, you could get away with cheap plastic wrap cans or larger customers could get away with 90th Century printing technology that only use a couple of colors on the cans.

But today, brands that are winning, are doing it with creative marketing on their cans, marketing that draws end consumers and build brand equity quickly. And do the research yourself and walk the beer island study the cold case in your local supermarket. Ask yourself who’s positioned here? Who’s in there, and you will see extraordinary packaging. But most of it is unrecyclable. Digital printing is coming. We’ve seen customers change their product set to use digital printing to expand offering seasonal SKUs, special releases, the packaging and design strategies have been unleashed with digital packaging. We have seen new customers build entire marketing platforms off the package itself, a completely new business model. These changes are the paradigm shift that I’ve been referring to over the last year that’s happening before I was in the craft beverage space.

Digital printing is making this happen. And one last comment here as I think it’s important for us to say, and this is what I believe, Craft is the best at it. We are the best digital printer in North America. Craft is winning customers that see the difference in execution, customer service and quality. So with that said, it’s easy for me to state emphatically, I think we’re also a fabulous start for 2024. Now beyond the operational results for spirits and Craft, we had a number of other changes that happened last year, including balance sheet changes. We lowered outstanding debt. And it’s important to note that we are currently in discussions with key lenders to extend this year’s payments, maturity payments and increased liquidity. We’re not there yet, we’re still working on it, and we have progress to make there.

We also are working on remaining NASDAQ compliant. That has been a challenge and will continue to be a challenge. Now with that said, I’m going to save some time for questions and turn the call back over to Tiffany. Tiffany.

Tiffany Milton: Thank you, Geoffrey, and thank you all again for joining our call today. Let’s review the fourth quarter. On a consolidated basis, our gross sales were $2.1 million for the fourth quarter of ’23, and $2.4 million for Q4 ’22, primarily due to seasonality in printing, lower mobile canning and spirit sales. Craft sales were $1.2 million for both ’23 and ’22, even though we continued to improve our printed can production. Spirit sales were $900,000 for ’23 and $1.1 million for ’22. Our consolidated gross profit was flat at negative $100,000 for both Q4 ’23 and 2022. Our consolidated gross margins were negative 6% for both ’23 and ’22. Craft margins — had margins of negative 26% for 2023 and negative 23% for 2022.

Spirits margins were 21% for ’23 and 13% for 2022. Adjusted EBITDA was negative $1.3 million for ’23 and negative $1.6 million for 2022 primarily due to decreased operating expenses. In addition, we recorded an impairment loss related to our Azunia brand of $400,000 for 2023 and $7.5 million for 2022. Craft printing operations continue to improve and are expected to deliver positive EBITDA in the upcoming quarters. We continue to gain momentum in the printing sales and increasing capacity and exploring avenues to streamline operating costs, we expect continual improvement throughout the year. We will now open the floor for questions. Operator?

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Q&A Session

Operator: [Operator Instructions] The first question today comes from Jay Huber, Private Investor.

Unidentified Analyst: Got a couple of questions. First on — at the money, what was the average sale price of the 300-ish that you sold.

Geoffrey Gwin: That’s a good question. I don’t know if I have that here in front of me. I’ll ask Tiffany, our Controller is online, she can look that up. If not, we can — I’m happy to take a call later, and we can give you that number.

Unidentified Analyst: Sure, no worries. Second, what is your canning capacity? And basically, what percent of capacity are you running.

Geoffrey Gwin: Right. That’s a great question. So just to be clear, we do canning, right? We do fill for people in Portland. We still have a mobile operation there. Although that’s 1 of the things that affected the fourth quarter as we’ve been reducing our exposure beyond Portland and mobile. Our focus is in digital printing. So when you refer to canning I’m assuming you’re referring to digital printing, that’s the decoration of aluminum cans that are going all over the west now. And just to clarify, that’s the new technology that I’m referring to, where we digitally print, we can do photo, realistic graphics to crazy different label types. We can do one, we can do one million, we can do a lot of flexibility there. And that capacity — right now this is capacity of 1 machine.

So we have one hinder cost due to Cody, and we do expect that we’re going to get a second machine this year. And that would double our installed capacity in Portland. And the capacity of that machine depends on how many cans you run through it, how — what kind of graphics you’re printing, how many changeovers you have. So with the second machine, our throughput will simply increase because of fewer changeovers and will grow. So I would suggest that you just think in your head that one machine is 25 million cans a year, 2 machines is 50 million cans a year, so on and so forth.

Unidentified Analyst: Okay. Great. So if you’re running — if you’re expecting to do 4.7 million cans, that leaves a huge —

Geoffrey Gwin: Yes. We’re not in a — what’s impressive Jay, about the first quarter is coming out of your December quarter where there’s just not as much production in beverage, right? A lot of people have already kind of produced what they need for the fourth quarter. People are all on vacations and out of the office. So the production side, the filling side is not at the full steam yet. And so we’re coming out of the fourth quarter. And in the first quarter, we’ve printed a tremendous number of cans. So our challenge over the next 2 quarters is going to be printing full, and we will hit capacity at some point here in the next 2 quarters. And managing that until we can get our next machine online.

Unidentified Analyst: Okay. And also, how about the mobile canning, what percentage capacity.

Geoffrey Gwin: That’s more of a flexible business. We have a lot of excess equipment. So mobile canning is just to describe it, actually you can credit crop with the genesis of this business, I would say it goes way back, but the team there has perfected the art of getting mobile equipment on a mobile platform of trucks and being able to go to numerous customers all over the [indiscernible] and fill for them. So our flexibility there or the capacity is constrained by people, right? It’s a technical job. It really requires someone who understand what our customers need, not every product goes in a can the same way. Some product need certain conditions. And so oftentimes, we are almost like a consultant lot of new beverages want us to help get their product in can, but they’ve never put in the can before.

So you — it’s not an easy role to fill. So we have a long training program at Craft. So that business is gated by people. So if you were to ask me today what that number is, I wouldn’t be able to tell you right off the bat, but it — there’s a lot of capacity still left that’s untapped here given our current staffing and our equipment.

Unidentified Analyst: So I’m not holding you to this, but what are you running at like, 30%…

Geoffrey Gwin: Yes, I would say we’re — now we’re of that on the mobile side, we’re north of 50%, but there’s plenty of excess capacity. We could probably add some as we get into the peak season.

Unidentified Analyst: Okay. So now just kind of a thought, why wouldn’t you take your current brands such as like you don’t mention your Portland Potato brand create a hard sells you have access. And then…

Geoffrey Gwin: That was the genius of the initial management team. I was 1 of the reasons why Craft acquired was they were going to beer forerunner in the RTD space. And the challenge, Jay, I think, is the — is what the company has faced for the last number of years, which is there’s just so many opportunities, right? There’s opportunities for us to grow our spirits business selectively outside of the Pacific Northwest, there’s opportunities now in tequila because tequila margins have improved, there’s opportunities for us, as you said, to go into RTD, right, to feed all these opportunities. Now RTD is a high working capital space. So just think about that concept for a second. When you go into the grocery store and you buy a hard seltzer, the price points there are lower than they historically — you would capture in the spirits bottle experience, right, particularly in the case of Oregon, which is a control state.

So we really have to be careful about pulling the company in new directions that just consume more capital, more working capital, more complexity. Now having said that, we have customers that are launching products constantly. And so the concept that I would just go back to and point you to is a number of years ago when I was on your side of the table doing investing. One of the company that amazed me just through history is [indiscernible] today has gone through a lot of transformation, but it’s a legacy and the discipline staying focused on just serving a booming market, which was [indiscernible] at in the 19th century when people all in sort of the Hills in San Francisco for gold turned out to be such a strategic important move, and it was the legacy that the company was built on.

So I would argue that right now, if you were to look across our landscape, we have a business in Craft digital printing. So it’s got a huge moat. I mean it’s huge competitive barriers to entry. You can’t go and find a can that’s digitally printed just anywhere. I mean there’s a handful of people that do it. Basically, now we only have one technology that can do it, right, which is the hinder cost technology, and those have been kind of sold into different markets. So if you want to have digital print, you’re going to can works down in Texas, if you want to do it on the East Coast, you’re going to hard if you want to do it in St. Louis and it’s DigiCan. If you want to do it in the Pacific Northwest, hardest place to get product up into given the shipping lines, you’re going to have to work with us.

Otherwise, you’re going to use plastic heated labels around a can and eventually, particularly the people in the Pacific Northwest, they’re not going to put up with the fact that they’re nonrecyclable and they’re basically going to landfills. So I think that business — this business, it’s clear you can probably see it over the last year or so has been the focus of the company to get this to scale and become such a critical component of our customer supply chain, we can let others build great RTVs and we’re going to be the guys that are that are efficiently supporting them and helping them build their product line. In fact, I think we’re seeing some outstanding new brands, and we’re not the one who has to bet on one concept where basically have multiple opportunities to see them explore.

And they won’t be able to go to ball a crown to have their cans made because they’re made bespokely or uniquely, they’re collectible. There’s a handful of them and they’re gone, right?

Unidentified Analyst: Okay. So it’s not as simple as, oh, we have the Portland Potato Vodka, we have the can. What we have to do is add the seltzer. You’re saying that the cost price of these hard seltzers are so low that —

Geoffrey Gwin: You do a tremendous amount of volume. Yes, you have to do a tremendous amount of volume and it would be really small margins. And 1 of the things on the operations side that’s critical, and we learned this in spirit as you have to be focused and your first question speaks to this. You can’t run plants with low-capacity utilization. You’re just not cost competitive, right? This company did that years ago when we were working with [indiscernible] that brand, we basically bought whiskey all the way to the Pacific Northwest. We bottled it and we ship it back [indiscernible] for where the price point was for that brand. So you look at our balance sheet, you can see the impact that had on the company. It does a tremendous whole of lost value. So right now, we’re laser-focused on into we’re laser focused on —

Unidentified Analyst: Where it got too expensive because you were triple shipping and —

Geoffrey Gwin: Yes. Right. But think about this, if you were to walk into our facility today and you walk in and sit down with the team, Connor, Bill, [indiscernible] and others Jay who’s involved with art and you were to just sit there and stare at the sample cans that this team has, it covers a wall. Think about it, hundreds of brands, right? So you’re asking why don’t we bet on 1 or 2 brands a week concept and we roll out. But effectively, we’re betting on hundreds of brands, some of the most creative and talented people all over the West Coast, with new concepts, right, that are coming to market. Some of them have done astronomically well in the last year, watching the volumes of these new brands come to market has been an eye-opening experience for me, but to predict which 1 it is, which brand is going to work is really difficult.

And that speaks also to the advantage of this technology. In the past, you would spend 2 years perfecting the brand and the concept and you have 1 shot with all the money that you dumped into packaging and the supply chain to get it right. Now, a brand will come to us. We’ll build them the product. They’ll go out realize it’s not exactly resonating, and then there’s a change, and we’re getting new version, right? So I like this segment. I think this is 1 where we can win. We’re not going to have to fight all the way down to every little penny to compete to end market share. This will be a successful segment that’s going to have some longevity with margin.

Unidentified Analyst: So over the next couple of quarters, what kind of growth do you see in the digital printing mix.

Geoffrey Gwin: Like I said, we reported that we’re substantially above what we did last year, and we’ll do it, and I think we’ll have some success in the second quarter. Frankly, I mean, our biggest risk Jay is working capital. This company is consuming working capital, particularly cans at an ever-greater rate, right? So as we grow so dramatically, and bring in cans, we have to be able to generate cash and grow that investment of working capital. And so we still have, as I said, 1,000 barrels of bourbon, right, and a lot of this bourbon is bourbon we don’t — we can’t actually use it’s overage for our product set. Like we don’t have a product that takes a 17-year bourbon. So 1 challenge that we have is to redeploy assets where we can, raise liquidity where we can to invest in working capital.

So to your question on the second quarter, the biggest risk that I see is not having the cash to keep the growth at this clip, right, being slowed down because of our inability to get the cans quickly enough.

Unidentified Analyst: And where do you see breakeven? How many cans a quarter do you…

Geoffrey Gwin: That’s another good questions. Yes. So when I think about breakeven, it’s a function of what our can costs are, what are the margin is on the cans, which I’m not going to go into much on can margin. But the other aspect of it is scrapped and managing the process. So if you think about it, when you’re doing 1 of the concepts that you have to think about as you move a lot of cans through this machine, you can hold aluminum can, and they’re very fragile. You can feel in kind of squish in your hands if you just — particularly when they’re empty. And so we have to manage our scrap down to a very low level. We have put in place processes. The team has done a great job last year in putting processes to minimize the scrap into the machine, then we have to minimize the scrap out, which is making sure the cans that come out are perfect.

We have a really high threshold for perfection there, low tolerance for any mistakes on the cans. So we manage that process lower and this scrap comes down. So when I think about breakeven, we — based on the production that we had this quarter, in the first quarter, the company should be close to breakeven. But on EBITDA, if not generating cash, might be more issues like scrap and stuff that pull us negative. But by the time we get into the middle of the summer at the volumes that we’re expecting, assuming we have the cans to get through that peak capacity. This company has generated a lot of cash in the form of EBITDA. And I should also mention the other operating business, spirits is really close. I mean, in the fourth quarter, it generated I mean we talk about the EBITDA, but sometimes our EBITDA calculation is going to add back all the noncash items in the income statement.

And that business also was close to breakeven. I mentioned the operating number, but if you were to look at the EBITDA number in the fourth quarter, spirits only lost $75,000 EBITDA. And the free cash flow in Spirit is a lower number because we’re not rebuying bourbon. So that number is even lower if you add back the fact that we’re not repurchasing bourbon. So — the 2 businesses are on course to get to that point where they’re generating cash. And then the question is, do we have enough cash to support corporate the cost of being a public company and the interest cost of what’s left after the debt exchange.

Unidentified Analyst: Okay. And last question, I’ve taken a lot of your time, I’m sorry, but — so now you shift the direction of the company. How is the Board — should you shift to get some outside knowledge as somebody —

Geoffrey Gwin: Right, right. So we’ve had — yes. I got a little bit of a question broken up there. Your question is how’s the Board supporting this transition of the company and the Board need more resources to kind of help us in the direction that we’re heading. Those are great questions. And I’ll say that — I have to say that we’ve been blessed with a really talented group of people that have shepherd this company through a really difficult period. I mean, [indiscernible] is an example of someone who came in selflessly really gave to help us push the company in a good direction. And then just because of the amount of time it took in the constraints that she has on our time wasn’t able to continue with to determine. But I think you’re right.

I think we need to continue to bring in some talented people who understand manufacturing, understanding marketing and marketing platforms like this that we’re looking at who can really drive the company. And we’ve already actually done that, Jay, inside the company. We added a CEO of Craft. He started in January. And the gentleman by He comes to us with extensive background in manufacturing, having a lot of a very large consulting firm that make the consults with some of the largest manufacturers, high-tech manufacturers in North America. And just in the first quarter, he’s had a tremendous impact on the efficiency of the company. So I think you’re right, we need to bring more resources in to support this kind of growth. And as I said, if we double capacity with more machines than maybe even in other locations, eventually, we’ll need that expertise.