Q3 2023 Eastside Distilling Inc Earnings Call

Good afternoon, and welcome to the Eastside distilling third quarter 2023 financial results Conference call. All participants will be in listen only mode should you need assistance. Please signal our conference specialist by pressing the Sarky followed by zero. After today's presentation, there will be an opportunity to ask questions to ask a question.

And you May Press Star then one on your Touchtone phone to withdraw from the question queue. Please press Star then two please note. This event is being recorded I would now like to turn the conference over to Tiffany Melton controller. Please go ahead.

Thank you good afternoon, everyone and thank you for joining us today to discuss Eastside distilling financial results for the third quarter of 2023, and Tiffany Milton East sides controller and joining us on today's call to discuss these results are Jeffrey Gwen the company's Chief Executive Officer, and Bruce well Crafts controller.

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 27, a of the Securities Act of 1933 as amended and section 21 E 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 such matters that 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.

<unk> 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 31st 2022 filed with the Securities and Exchange Commission now with that said I'd like to turn the call over.

To drive for Gwen Jeffrey Please proceed.

Thank you Tiffany and welcome everyone to the third quarter 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 printing business and our spirits business. There are challenges we need to address.

All year long I have spoken about the collective goals I have laid out for both craft and spirits segments to generate EBITDA.

Importantly, net income, but not only allows us to invest in growth.

But also to deleverage and to offset the public company costs.

And while we've made progress towards these towards these goals, it's clear that we still have work to do.

One significant challenge for patients the growing economic headwinds in both the craft beverage and spirits categories. Unfortunately, these headwinds have intensified towards the end of the third quarter and into the fall.

The external economic environment plays a crucial role in our ability to achieve our financial objectives I understand you're in navigating these challenges will be key.

Reaching our targets.

Now on the Kraft digital printing.

Segment.

The quarter showcased positive developments with notable wins in our new digital printing customers, such as Ford Thirsty and the water category, who by the way is at the forefront of using digital printing to market to consumers.

Crafts record breaking quarter with $4 8 million digital can always demonstrates continued demand for our services.

While we face challenges in the mobile business improvements in scrap and utilization offset some of these issues.

As we approached the fourth quarter, we anticipate seasonal softness the trend observed in the same period last year.

Now moving on to spirits, we experienced a notable improvement with spirits, you've been a loss of only $73000 in the quarter, a significant reduction compared to the previous year. Despite an overall decline in the topline Portland potato vodka performed well.

And we observed softness at very spirit categories, including Tequila category, which has historically been a very strong performer.

Despite these challenges we managed to mitigate the impact by implementing successful pricing strategies in key markets, while Burnside and zhonya require more attention due to under investment our strategic focus on winning territories rightsize production and improving the supply chain is yielding positive results.

As reflected in the improved EBITDA performance.

Corporate and G&A expenses remain a challenge for a company our size.

Well, we've made progress in reducing costs.

He will provide some details on the one time loss associated with the completed debt for equity swap if you exclude those losses, our adjusted EBITDA shows meaningful progress in the quarter.

As many of the fourth quarter, 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.

<unk> for success.

We remain committed to our goals and are optimistic about the future 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.

Thank you Jeffrey and thank you all again for joining our call today, Let's review the third quarter on a consolidated basis. Our gross sales were $3 1 million for both the third quarter of 'twenty, three and 'twenty two primarily due to growth in digital Cam printing offset by lower mobile Canning and spirits failed craft sales were $2 2 million for.

<unk> 23, and $1 9 million for 'twenty two as we continue to improve our printed can production spirit sales were 850000 for 23 compared to $1 2 million for 'twenty, two primarily due to bulk spirits sales of 244000 in Q3 of 2022 our consolidated gross profit was 500000 for <unk>.

Q3, 23 compared to 200000 for Q3 of 2022 due to craft improvement from digital Cam printing, our consolidated gross margins were 17% for 'twenty, three and 6% for 2022 craft had margins of 16% for 2023 and negative 7% for 2022 spirits margins were.

21% for 23, and 29% for 2022, excluding barrel sales spirits margins were 27% for both 'twenty three and 'twenty two.

Adjusted EBITDA was negative 430000 for 'twenty, three and negative $1 4 million for 2022, primarily due to decreased operating expenses. During Q3 'twenty three we recorded a loss on the conversion of debt to equity of $1 3 million, which is excluded from adjusted EBITDA crafts printing operations have yet to.

Turning point, demonstrating its full potential until bring 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. We will now open the floor for questions operator.

We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone. Charles If you are using a speakerphone. Please pick up your handset before pressing the keys.

To withdraw from the question queue. Please press Star then two.

At this time, we will pause momentarily to assemble our roster.

Okay. If you have a question. Please press Star then one.

The first question is from Matthew Campbell of <unk>.

<unk> capital. Please go ahead.

Hey, good afternoon, Jeff.

Hey, Matthew.

The improvement in here.

Improvement on the cost side I was wondering if you could talk about you know mobile Canning business.

Being down relative to maybe what your forecast was.

You know at the same time scrap scrap digital growing and.

How you think about that business on a going forward basis.

Terms of better visibility.

Right. Thanks.

Thanks for the question.

Mobile is not an easy business I mean, if you think about it it's a logistics business.

Sure.

Moving basically <unk>.

Canning line remotely to a customer you're.

Setting it up if your customers struggling with their product. They have you know temperatures not right carbonation, drawing is your problem and you're trying to figure out how to 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 whole the whole time.

And so a critical part of that.

That story is utilization concentration utilization.

Not driving six hours spending a lot of time on that and that's something that the crop did well for a long time, we were you know in Denver, Seattle Portland Spokane.

So north west and that's.

That's not a business that we want to invest.

Time money and frankly.

That's a business that we want to develop you know improve but we want to be in the digital camera business.

Yeah, the digital camera in your 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.

I shall edition cans.

For for.

For various.

Things that they're doing that with us.

But hopefully with us at some point in the near term that's the business that we want them about that so we're going to spend less time on.

On mobile.

But having said that mobile is critical right now because last year, we converted almost all of our mobile customers the digital print customers.

Right. They were they were important for the build out of the demand curve for us so.

We're gonna stay involved in Portland, digital mobile Canning and we're going to.

Serve our customers there, but we're going to focus on printing.

Got it so when you when you.

You look at that business, how much of the the mobile business was affected.

Affected in your bids largely.

It's largely Seattle, we've we are we initially expected to invest in Seattle.

Well capture more market share.

Compete on price there and we decided that we're just going to defend and compete in Portland.

No.

Three vigorously, we're not going to give up any share there and that's where we'll be.

And so initially when he looked at the year and I was looking at the opportunity for the company.

I was expecting for the third quarter that mobile would be strong stronger in Seattle, and I frankly thought that we would.

To be able to to convert more.

Of the demand that we were building on and the early part of the year in the third quarter in digital printing and I think we got distracted at Kraft.

Focusing on mobile restructuring it exiting Seattle and and that's one reason why you weren't able to generate the EBITDA in the quarter that I thought we were going to do for for.

But I thought we were going to do for the without 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 why is that occurring and then fill.

Junior.

Why are you sure.

So let's talk about.

The three major brands and then we have a lot of brands. There are three major brands or Portland potato vodka.

And then burn side those are focused in Portland in Pacific Northwest and then we have a junior the tequila brand that we purchased a few years ago.

The.

Vodka for us is a critical space.

Space, because that's a place where we can do a lot of bonds.

And we can do a lot of volume and in our with our country footprint in Portland, we can.

Really deliberate more cases more volume leverage the fixed expense base, what <unk> seen with this company as we've been shifting investment from spirit brands to the.

The digital can printing.

A lot of people ask me why in the World are you doing.

Spirits is supposed to be a hot category.

And then in.

The truth of the matter is it is a hot category, but it's extremely difficult to do to compete in California with the three tier distribution system and the way that this structure of of that of this segment operates you have you're going to need a tremendous amount of capital or are you going to need a celebrity partner.

Where someone who can pool.

Demand through a reluctant distributor that's a fact I mean, that's a real challenge however.

Thankfully, we have a strong market position.

Trolls state in Oregon.

And that limits the the leverage the distributor has on taking gross margin from us So I'm growing the spirits business back in Oregon first and then Wilkes band, we have more leverage with our partners right.

No.

Quantitative all its critical so what we've done there is we have lowered the cost there significantly liquid costs.

The bottle packaging.

The whole manufacturing processes rebuilt we've sized that to.

Improve the margins.

So we're going to put more volume through our facility in Milwaukee, Oregon, and we're going to see those those margins improve PPV.

PPV and that's going to be the growth drivers so what you're seeing in the summer.

As we got aggressive.

With our main competitors in Portland.

And we did okay. We werent positive in units you know 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 as you know Burnside Burnside's a disappointment Burnside as though.

We're in a position to really grow burn side in fact, we have some.

Outstanding Burnside products that we're working on one of which is Ah.

The 17 year Bourbon.

For Boston, and we think that it's the outstanding.

And we believe that you know we have an opportunity to roll out some unique products in the burn sideline and get more interest in that brand and get some growth, but that's the challenge Burnside and Zenyatta Tequila brand need investment and this company has been about a restructuring.

And reducing costs and Underinvestment there has.

It has been you know 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.

Small cap market the cost of capital, where our stock is telling us that they don't all right.

We don't have the capital to invest there you know it's not it's not.

It's extremely expensive to borrow funds at this point, 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.

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 a.

And it made it and we have immediate impact because we're we're seeing customers who are who are transitioning to this.

This package so you know.

Burnside a work in progress.

Same thing with Virginia, and we'd have a little bit more capital we have a plan in place and we think we're going to be able to execute it in the near term we're going to do some unique things in burn side, we think that are going to drive awareness you know.

Volume in Portland, but right now P. P D is leading the way.

That's helpful. Jeff I mean completely appreciate.

The debit cards you've been handled.

Headed here.

I think it's smart, although all the adjustments you've made to the business.

And it's nice to see some improvement in the cost structure. So we can continue to get this business turned around so applaud Claude the work.

I realize a lot of the work is hard for us to see today, but no.

So it's worked out well.

Pay dividends in the future. So thank you.

Thanks, Matt just to be clear Youre seeing the progress now I mean, our gross margin improved.

That came down loss came down significantly.

We're within striking distance and in spirits to.

Breakeven instructed it turned the corner I thought we'd be.

Their first in craft, but yeah.

Based on this we might be that person spirits, so lets see fourth quarters, not gonna be an easy quarter.

Because I think you're going to see it across the board there's weakness everywhere.

Notwithstanding the rally in the stock market today, Theres clearly supply chain challenges people looking you know two.

Two to under invest in this environment consumers are definitely.

Got retailers scared, there's a destocking going down.

A big you know yeah blow up on that.

You know that that happens in retail people take out inventory in the system. It has a big impact on the down the supply chain. So we're going to feel that but we're in a much better position.

You know going into next year, with where we need to be prosperity and we're in a growth category in digital printing so I'm.

I'm encouraged.

Great. Thanks for the for the color.

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 Cohen for closing remarks.

Great I appreciate it and thank you all for listening couple of important important things to also note is that our annual meeting. This year is going to be on December 28th 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 that the the debt on the balance sheet and increase our equity which we.

We accomplished in the in the third quarter.

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 encourage you to vote the slate vote vote.

The increase in shares which is critical for us.

And continuing to operate as a public company.

So anyway I. Appreciate again, you guys participating in the call and if you have any questions feel free to call me at Tiffany.

Okay.

Okay.

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