Q1 2020 Earnings Call

Come to the east side.

First quarter 2020 financial results conference call.

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I would now let's turn the conference over to Robert Blum with let them partners.

Go ahead.

Thanks, So much operator, good afternoon, everyone and thank you for joining us today to discuss you probably don't want its financial results for the first quarter 2020 ended March 31 2020.

Robert limit what them partners I will be your moderator for today's call.

Earlier Eastside issued their first quarter 2020 result in a press release.

Joining us on today's call to Dystrophies results are Lawrence Firestone, the company's Chief Executive Officer, Robert Manfredonia, you start President and Stuart Schreiner, the Companys interim Chief Financial Officer.

Following their remarks, well open the call to your question.

Before beginning with prepared remarks, we submitted to the record the following statements.

Certain matters discussed on this conference call by the management of Eastside distilling, maybe forward looking statements within the meaning of section 27, Hey of the Securities Act of 1933 as amended section 21, Yeah. The Securities Exchange Act 1934 as amended in such forward looking statements are made pursuant to the safe.

Barbie provisions of the private Securities Litigation Reform Act of 1995.

Forward looking statements describe future expectations plans results or strategies and our generally preceded by words, such as may yet future plan or planned wheel or should expect did anticipate drop eventually or projected.

Let's start there caution 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 statement.

That's matters involve risks and uncertainties that may cause actual results to differ materially include but are not limited to the company's acceptance in the company's products in the markets.

Success in obtaining new customers success in product development ability to execute its business model and strategic plans.

That's and integrating acquired entities and assets.

Let me to obtain capital.

Really need to continue as a going concern all the very all the rest and related information described from time to time, the company's filings with Securities Exchange Commission, including the financial statements related information pertaining to the company data reports on form 10-K for the year ended December 31 2019.

While the Securities Exchange Commission.

Now I'd like to turn the call over to Lawrence Firestone Larry. Please proceed.

Thank you Robert.

Thank you everyone for joining us this afternoon.

Well, there's only been six weeks since we last spoke there's a lot going on as we continue to drive beside forward.

To reshape us into a high growth company with adequate liquidity.

These markets are certainly challenging and while having said that it is a rare opportunity when we get to reevaluate every part of the business, it's such a short period of time.

Our teams are these side distilling had been resilient through these times and have adapted well to working from home.

Well the craft Canning team continues to deploy.

To support our customers growing packaging needs of their plants in Portland, Seattle and Denver.

I'll give an overview of the business and then turn it over to Robert in Stew, and then open it up for questions.

As you have seen from the press release results for the first quarter came in line with expectations. We provided to you in March.

But the revenue of 3.7 million.

As we discussed on that call. This was a significant change from the expectations. We had at the beginning of January when we were anticipating record shipments of Redneck Revera whiskey and.

And lodging zinnia way way and the Burnside lined up for brands and just selected regions of our national platform.

I won't go into the same level of detail, but I did during that call at the end of March but the primary drivers from the market that impacted the quarter were as follows.

The on premise business, such as bars and restaurants have been closed.

And those that are open include carry out only and our selling very little if any of our spirits.

There was a significant shift in the off premise business. That's consumers focused on the major bellwether brands and pulled the larger 1.75 liter bottles off the shelf.

Instead of the smaller seven fifties, where we play in the market.

The exception here is our poor them to date, a bought deal, which we do sell in a 1.75 leader in the Oregon market.

Our in store tastings at the major change coupled with the new insertions that we had planned.

Were shut down has reached three pillars cancel these opportunities to taste our brands.

Launch new products, which include the targeted commencement of Burnside whiskey and way way coffee ROM then the national launch.

Consumer shifted the online purchases for spirits, where we did not have a strong presence.

These negative impacts however were offset as crap Kenny experienced strong demand from the craft beer and wine industry.

As the Brewers have batches.

But they have produced with the need to get their products into cans.

Overall, we believe covert 19 materially impacted the first quarter of 2020.

And if we were to estimate across our brand portfolio.

We believe the impact of the shut down on premise the restrictions in the off premise trade and the consumer shift to establish brands in the 1.75 leader.

Most likely in the range of $1 million of lost topline revenue for the first quarter.

None of the stopped us from pushing ahead with the strategies and midcourse corrections to mitigate the immediate impact through our business.

Let me cover the various initiatives, we discussed last quarter.

First we <unk>, we enacted a series of initiatives to improve the rate a sale, which includes offering promotional discounts on redneck Riviera whiskey, Xunlei Tequila, which Robert will cover.

Second Young's market, the key distributor of ours across California.

Took in our Burnside way way in Portland, potato vodka lined up to enable us to offer those brands online.

And now can be source to trend line shopping through our web page through high times liquor and also through Instacart and Drizzly.

We continue working on ramping up our online presence with all five of our major brands.

Third we reallocated the sales resources that were predominantly focused on premise.

To support the efforts of our off premise independent stores and wholesalers by creating several programs aimed to energize the local marketplace.

Fourth we continue to lower our cost structure as we implemented our previously planned initiative to shut down or unprofitable retail operations by the end of March.

Which is now complete and will positively impact our second quarter.

You will notice that the retail operations have been moved to discontinued operations on the balance sheet and income statement.

We also realized our production operation by Furloughing.

And then reducing the size of the production staff in March.

Once we complete the outsourcing a redneck revera production.

We will significantly shrink the square footage of our production facility and lower our fixed costs.

Yep.

We talked last month about targeting other areas, where we can deliver efficiencies and lower cost of goods.

Specifically, we want to capture what I call money in the bottle.

Which is to say, we need to drive our cost of goods sold down to the lowest level possible.

The deliver industry standard margins, which are closer to 50% or even greater.

This opportunity to improve gross margins were lower a break even point and produce the dollars that we can re purpose to spend.

The marketing dollars that we need to support the growth of our brands long term.

To further at this point, we've talked about are outsourcing strategy for Redneck Riviera whiskey.

We are making progress on this initiative as we now have quotes in hand.

And we'll look to make a decision in Q2 to set up the next run for Redneck as the pilot run for outsource provider, that's where I understand today.

This will launch in two phases. The first phase will be where each side will provide the bottles and packaging material at our provider will run.

Our materials through their lie and ship finished cases to our fulfillment locations.

The second phase will be a turnkey solution sands whiskey.

Whereby we will leverage the buying power of our supplier.

In the cost of bottles corks labels neck pegs et cetera.

In all cases, we will save on the expensive shipping costs of transporting the base whiskey from M.G.P.I. in Indiana.

The east side in Portland, and then back across America.

I'm proud of how do you cited team has come together to look at all aspects of our business to drive operational efficiencies and growth in this unprecedented environment.

The cobot 19 virus has given us a rare opportunity to see the areas needing immediate improvement and in some cases to hit the reset button.

It is a true testament to the flexibility and work ethic of every one of these side as our team has stepped up to the challenge.

I couldn't be more pleased with the team and the progress being made.

With all that said and while we're at half time in the second quarter.

Robert will provide some insights into what we see on the ground in the trade.

Before we shipped a Robert I'd like to cover what's happening in aircraft scanning business.

Well Q1 was solid on a relative basis, given the demand from the craft beer and wine industry.

We have seen a nice surge of business in Q2 is the breweries, they're not putting their beer in kegs.

Instead, they're carrying their beer and have turned to craft kidding to augment their canning capacity or in some cases, we can be their sole canning production line.

We have 12 mobile canning lines in our operations some important Lynn Simon Seattle and some in Denver.

Graph Canning as a healthy business and Todd <unk>, who runs craft scanning for us it's putting together expansion plans as we believe we will see a continuation of this trend in the future.

The second quarter.

This is a great business within these side and is surely on a profitable in cash positive growth path.

So when we looked at our business in total even though the market is still in flux and deciding how to wake up or turned back on.

We believe we will see growth in revenue over Q1.

Which will be which when coupled with the operational improvements in manufacturing and the spending controls that we have put in place will lead to an improved EBITDA performance over Q1.

We continue to focus on all aspects of the business with nothing off the table as I've said in the past.

And we'll look at our brands as a source of capital as we continue to have knobs to turn on the piano to improve our financial performance.

So before I turn it over to Robert Manfredonia for his insights, let me reiterate a point that I made on our last call.

We remain committed to our stated objective to become the leading mid tier craft spirits company that requires develops markets and cells. These premium branded spirits.

Well the regional focus through the national platform.

Then once they become proven and sustaining brands, we will look to sell them to larger tier one spirits houses in the industry.

We have not sold the brand yet we believe that there's tremendous value.

Quality in the brands that we have in house and are developing.

And as we stated in the past and you can hear from the comments.

We have begun the process of validating that I'm looking at all options.

Including those that would unlock the value from our portfolio brands and allow us to step up investment in key areas to accelerate growth.

We believe we're making tremendous progress transforming east side into a financially healthy faster growing company that has the ability to derive.

Significant value for shareholders.

And with that said, let me turn the call over to Robert to add some additional color.

Robert.

Thank you Larry and good afternoon, everyone.

Usually go through.

Prior year shipment data points almost exclusively.

However, with the market conditions uniquely different I will provide additional data points, including quarter, one results in quarter, two projections and direction.

The cold in 19 environment has affected each spirits wine beer brand differently based on the maturity and the on and off premise penetration.

Starting with the Zunil.

Grants distribution end volumes are predominantly sourced from the on premise classes of trade.

With that quarter, one on premise business was heavily affected by the cold that 19 account closures, resulting in poor results with Depletions and shipments.

We had immediately adjusted or near near term planning.

You off premise focus for both independent and corporate retail. This is inclusive of the sales team in financial resources against off premise brand development. We will support distribution were tactical initiatives inclusive of all these onea text the when program.

Our trip to the distillery any $4 instant rebate with messaging targeted to our database and social media platforms inclusive of Instagram Facebook and Twitter.

Any blacks has a separate marketing program aligned to social media platforms with a higher value instant rebate coupon.

The month of May has already seen aggressive distribution growth in key markets inclusive of California, and Florida. It is worth noting we will continue to review the state of the on premise environment and we will decide on adjustments based on market opportunities thereafter.

Lastly regarding its union business. The team has spent a considerable amount of time I'll focus on that transition on the wholesaler network in the east and the central regions.

The adjustments are focused on 15 wholesalers the large state transitions include.

Florida, Michigan, Georgia, Wisconsin, Illinois note, the Georgia opening purchase order is three times higher thing then the entire 2019 shipments also we've started to receive aggressive purchase orders for off premise package inventory.

Aligned to new business, and new directional planning and targeting.

Regarding legacy brands, specifically way way coffee, Ron and Burnside Whisking, we're still focused on distribution expansion in California.

Washington, Texas, Florida, Arizona, Tennessee, and Illinois by the end of the second quarter, even know we're disappointed in the delays caused by the environment. We're extremely excited for brand launches in the new seven states.

The other favorable news all wholesalers are excited about representing the brands worth noting wholesalers are very selective with inbound new brand representation and most brands are declined with the initial presentation.

All legacy brands had been accepted and wholesalers have agreed to invest in tactical brand support.

Regarding redneck Riviera, we're very pleased by the quarter, one depletion results of 54% growth over quarter one 2019.

Broke depletion performance is slightly above quarter 120, 20 results as well however, the challenge shipments did not parallel depletions in the cold in 19 environment.

Wholesalers worked thin on inventory levels with early stage brands and heavy inventory with well developed brand specifically focusing on large skew sizes. However shipments for inventory requirements will rely too depletions in the very near term.

In closing for Redneck Riviera Whiskey, we will be adding new distribution within the drug channel in California, Michigan, and Florida and the next 90 days with 780 mandated distribution points in Walgreens and Rite aid. This is a great.

She meant for brand in the market you're less than three years, usually the entrance into the drug channel takes a minimum of five years plus with substantial financial support.

Overall environment adjustments of the past 90 days East side is quickly adapt it to the new market conditions and opportunities and it's also important to note that we're continuing to focus on execution initiatives that will drive high growth across our national platform.

The short term shifts include on premise personnel redeployed to the off premise to support new distribution, specifically for a zillion Burnside and way way coffee Ron.

For the long term, we're selectively presenting new distribution placements within the grocery classic trade, specifically through junior episodic and black and select retail presentations for way way coffee from.

In closing.

While the current environment, it's certainly challenging to our business. We're very excited about the business scalability in the off premise classes of trade and we're also extremely encouraged by Redneck Riviera whiskey, Depletions and Portland potatoes off the one seven slide milliliter performance in the first quarter.

Note Cortland potato block 170 fives in Oregon.

Really 59% over quarter, one 2019 and March was the highest volume up in the brands history.

Overall, we're prepared for the normalization of the business and ready to excel and we're very optimistic on the opportunity ahead.

With that let me turn it over to Sue for a financial update Sue.

Thank you Robert I'm going to cover a high level summary for the first quarter of 2020.

And the statement of operations gross sales grew 8% to 3.7 million in the first quarter from the same period last year.

Gross margins for the quarter were 26% compared to 34% in Q1 2018.

[noise]. This drop in gross margin was caused by a shift in sales mix trial higher.

Concentration of lower margin Xenia, tequila product as well as Portland potato FICA.

The gross margin in Q1 was impacted by a 200000 dollar negative book physical adjustment for inventory and 100000 dollar Unabsorbed part production overhead without these two adjustment our gross margin would've been 35% in Q1.

Then.

[noise] cash sales and marketing expenses Rose 309002, 1.5 million compared to the prior year relating to the absorption of the is unique.

Sales team and expenses.

Cash DNA expenses dropped 801000 from the same period in the prior year as a reduced spending and salaries professional fees churns insurance and facility costs.

EBITDA loss in Q1 improved by $267000 to a loss of 1.865 million from an EBITDA loss in Q1 2019 of two main 130 to $132000.

195000 dollar loss from our retail operations in Q1 2020.

Has been reported as a discontinued operation and compares with a loss in Q1 2018 of 122000.

On the balance sheet.

On the balance sheet of March 31st 2020, we closed the quarter with 1.3 main in cash compared to 342000 at December 31st 2019.

This was due to the closing of the live oak inventory in line of credit that yield the 2.6 million in cash after paying off KF Kay and TQ L.A. lines that were collateralized by inventory.

Accounts receivable was 1.2 million compared to 1.3 million at December 31st 2019.

This reduction was due to our collection efforts as well as factoring activity in Q1.

Inventories dropped 1.3 million during the corner as we controlled our inventory purchases during the corner and reduced our cash spend.

Accounts payable dropped 670000, as we purchased less during the quarter and pay down or suppliers. This was mainly due to lower inventory purchases and lower cash DNA expenses.

[noise] now not look for Q2, we expect on premise business to remain shut down for the quarter and therefore very little revenues from those customers.

We expect insertions other redneck Riviera at Rite aid to drive revenues from new channels and the coupon program that we're running in.

The off premises for Redneck Riviera and has unique to continue to drive revenue.

We see the momentum continuing for Portland potato survived through the quarter.

Has and we expect craft scanning business to remained strong throughout the quarter as we are now sliding and booking purchase orders from our customers six weeks out which is right now through the end of the corner.

This will deliver growth for the corner.

We are continuing to work on improving our cost of goods and manufacturing overhead to increase gross margins.

We're continuing to manage our expenses in SDMA and expect that our controls will deliver similar below the line result expenses.

Q2.

This combined with the revenue growth should deliver a lower EBITDA loss for Q2.

We will continue to focus on burning inventory as a means to generate cash as well as managing our expenses to our cash flow.

Now, let me turn it back over to Larry.

[laughter].

It's too.

As you can tell there's a lot going on at these side distilling.

Before I open it up for your questions.

Let me take a minute to think Paul showing for his service on our board and as chairman.

Paul did an excellent job of leading the board in the first phase of besides transformation.

And we thank him for his hard work and leadership.

I also want to welcome Paul block as our newest board member.

Paul let's take it on the chairman role.

And Paul has deep consumer products background.

With substantial marketing and branding experience in the spirits industry as an executive for several companies and has also turned several businesses around.

Paul has jumped in rolled up at sleeves and is already allowed us to leverage has experience.

I'm looking forward to our future with Paul at the helm of our board as we build eastside distilling for the future.

I'll now open up the call for questions operator.

I will now begin the question and answer session to ask a question you May Press Star then one year on year Touchtone phone, if you're using speakerphone. Please pick up your handset before pressing the keys.

Withdraw your question you can press Star then too.

Our first question comes from David Bain with Roth capital.

Great. Thank you everyone.

I guess first if I could follow up with a your outsourcing comments can you give us a sense as to how meaningful that could be to margins or any kind of tangible data points in terms of per bottle or per case cost as you look at phase one phase two and then as a follow up is there a potential for a phase three where you could actually look too.

Recap the company with with sales of say whiskey till partner.

My first question.

Yeah, you bet, it's hard [laughter], yeah, [laughter]. Thanks, David.

Yeah, I'm I'm not ready to to let the a then let the cat out of the bag on margin improvement phase one is is.

Is a packaging or I'd say, a manufacturing overhead improvement, it's a it's pretty material.

To the case and ER and then also we eliminate the freight from Indiana to Portland back.

Like I said across the U.S.. So I'll have more granularity on that once we final negotiate a terms and are in a contract but.

Well, we're pretty excited about the you know the first phase movement a phase two as you mentioned is really leveraging you know the our suppliers.

Ah Ah, but well the leverage that they have an industry as you know their purchasing power that we don't have a you know we purchased for each of our individual products each of each of our brands is a is designed to little bit differently. So.

In a brand family you'll have the same bottle similar packaging characteristics, whether it be soak screener label or hang tags are you know what kind of deckers things like that.

But you know someone like the company's we're talking to our gonna have a lot more leverage in that world because they do a you know their purchasing power as like greater so I think the a bigger piece is going to come in phase two.

Phase three we haven't gotten there yet with a on the selling the liquid and certainly we have that in our line of sight a with the products that we're looking at but were you know we're going to we're going to kind of walk before we run here and go into phase one.

Got it okay. Thank you and then as we potentially come out the other side of Calvin will.

Yeah, and and I think Robert you May have touched on this will we be de emphasizing on premise for the immediate or intermediate term just due to margins or any other reasons are we going to look to ramp those accounts backup aggressively by deploying sales back the on premise.

Hey, David Good afternoon, I think.

It's going to be predicated upon the marketing opening up and then we're going to react accordingly.

So so knowing you know what's in front of US we have pivoted Oliver folks from.

On premise that had exclusive on premise responsibility to the off trade.

As the on premise starts to open up we will selectively start to reengage. The on premise, but I think it's gonna be based upon market conditions, and then will you know we'll adjust accordingly, so I think one it was always our plan with with his do need to have more of a balanced upscale business direction, which.

She is what we're doing anyway, we're just kind of let's call it accelerating that process to the off trade, but we're not going to forget about the on trade, where we have you know sound foundational business that is profitable. So I think it's I look at this is really an opportunity to kind of fast forward, what we were already planning on doing and.

Then making sure that we protect the on premise business once it opens up.

Got it Okay, and then final one sorry to go one over but sure there in the past you you've given a kind of a a redneck case volume target and I believe east has a prior to coming in as well. It's there's some sort of range you can have pine on for 2020, and then Robert you know we've been hearing about some reset.

It's going to be pushed out a little bit is that what you're hearing or or or resets I'm being mentioned as timely.

Like about manager.

I'll I'll take the first part of that Larry Yeah go ahead Robert.

Everything that we have scheduled and I mentioned in the call that we are our next.

Insertions are gonna be a in Florida with Walgreens and than we have rite aid in Michigan, and we have rite aid in our state of California.

All that stuff is on schedule.

Back to Rite aid in California will be set on the shelf starts a the weaker the 18th next week and everything will be on the shelf by Memorial day. The other ones are are directly into Q from a timing standpoint, and we won't Miss any of the time and will pick up those incremental cases right away.

And regarding the next large period I'll review it is still schedule with all the major entities to to start in September for spring 21. So everything is on schedule from a corporate retail standpoint. So that's that's a good thing because that is where we have some stay.

Annual business than we have access for new brands and we think we'll be able to capitalize then with the next big decision period, which is September.

Okay great.

Hey, David could you repeat the front end of the other question I guess, just you know if there's some sort of case volume target with redneck, some sort of range for 2020, I don't know if you've ever really.

Done it consistently historically, but you have from time to time offered certain.

Kinda feelers on what we can expect of.

If we can get that that yeah. I mean, we yeah. We haven't given we haven't given a case total case range of especially in the in the covert environment I think I think we'll probably back away from that for now and.

And find their way through Q2 Q ones on the books will find their way through Q2 and see.

You know just how the how the world opens back up and I think that's gonna give us a a good feel for how the second half of the year will close enough and you know.

Given where we are we maybe we may be comfortable at that point in time, given a given an outlook on that.

Understandable alright, thank you both.

Thanks, David Thanks, Dave.

This concludes our question and answer session I would like to hand, the call back over to Larry Firestone for any closing remarks.

Thank you operator, and thanks again to everyone for joining us on this call today.

I look forward to speaking with you all our earnings call in August if not before and in the meantime, please stay safe and healthy and have a good night. Thank you.

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