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spk05: Good afternoon, and welcome to the Eastside Distilling Third Quarter 2021 Financial Results Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Amy Broussard, Corporate Secretary. Please go ahead.
spk01: Thank you. Good afternoon, everyone, and thank you for joining us today to discuss Eastside Distilling's financial results for the third quarter 2021. I'm Amy Broussard with Eastside Distilling, and I'll be your moderator for today's call. Earlier, Eastside issued third quarter 2021 financial results in a press release. Joining us on today's call to discuss these results are Mr. Paul Block, the company's chairman and chief executive officer, and Mr. Jeffrey Gwynn, Eastside's chief financial officer. Following their remarks, we will open the call to your questions. Before we begin with prepared remarks, we submit for the record the following statements. Certain matters discussed on this conference call by the management of Eastside Distillery 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 that are generally preceded by words such as may, future, plan or planned, will or should, expected, anticipate, 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 with going concern, and all the risks and related information described from time to time in the company's filing 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, 2020, filed with the Securities and Exchange Commission. Now, with that said, I'd like to turn the call over to Paul Block. Paul, please proceed.
spk07: Thank you, Amy. And I'd like to thank all of our participants. for joining the Q3 earnings call today. Certainly appreciate your continued interest in Eastside Distilling and your support as we strive to fix, build, and grow the company. Now, despite all the obstacles of the marketplace and this turnaround, we continue to make significant progress, especially on the balance sheet. I must say, for the first time in over a year, it's nice to have adequate cash and liquidity to run the operations of the company for today tomorrow, and throughout the year. We can now fund changes in working capital to grow our can inventory for craft. We can fund investment capital needed to build new revenue streams like digital can printing. And we can increase much needed discretionary spend for spirits to fuel sales and marketing. As you know, the company is broadly underinvested in its spirits brands for years and has significantly curtailed many growth initiatives due to balance sheet and cash burn issues. In addition to liquidity, we've made significant progress in the debt stack and structure. The company continues to extinguish maturing notes and loans, substituting them with much improved loan terms and strategic partners. As good stewards of your capital, we continue to work diligently to accelerate value. Jeff Gwynn, our CFO, We'll give more detail on the balance sheet in his overview. So what I'd like to do now is move on to the operational progress and performance for Q3. We remain on track to deliver the three-year strategic growth outlined in our plan. Unfortunately, the Q3 2021 consolidated revenue was a bit softer than we forecasted, down 23%, primarily due to our craft canning and bottling projects. vision. We did believe in the short term we could ride on the coattails of COVID a bit longer as we serviced craft beer filling and craft beer raw material purchases. Q3 2020 was the peak of the COVID lift for craft as the pandemic was just emerging and summer was driving seasonal production demand. Therefore, we're experiencing a bigger year-on-year decrease for craft in Q3 2021, down 32%. Despite the near-term softness in the mobile revenue stream, we have accelerated our fixed facility initiative, and the first facility with pasteurization capability will be up and running in two weeks from today, and a second similar fixed facility will be operational by Q2 2022. In addition to the fixed facilities, we're in the final stages of closing a can purchase agreement with G3. G3 is a supply chain subsidiary of Gallo with significant scale. If you recall, aluminum can shortages also caused many issues for us at Kraft throughout this year. We now have guaranteed adequate supply of cans at an agreed upon price throughout 2022. This is an absolutely critical component as we receive our digital cram printer in Q1 and bring it operational in Q2. We also have a new 50,000 square foot facility that we will secure for craft as of December 1st, 2021, with rent abated until April 1st, 2022. This facility will house the first printer, the small fixed line or another small fixed line and the Portland craft operation. The facility has the ability to accommodate a second printer that we plan to purchase and receive later in 2022. Now, for those of you who recall the mix of growth in the craft three-year plan, the mobile business unit growth was relatively flat with fixed facilities and digital printing leading the charge. As mentioned, to offset the short-term softness in the mobile business unit, we're accelerating the startup of the fixed facility business unit. As planned, we will be using the printer and can supply to attract customers to mobile and to drive the overall craft revenue forward. In an effort to accommodate the shift in market demand, we'll further boost mobile revenue for craft by adding two small mobile lines that will serve new small customers and current customers wanting smaller runs. One of the larger lines, mobile lines, will be used for the new Spokane market, and the second line will be moved to the fixed facility in Milwaukee. We continue to be agile and respond to market conditions. with the need for speed of execution to build a reoccurring stream of revenue that meets our strategic operational objectives. To fuel the new printer, the new lines, and the new market for mobile, we plan to add 22 additional full-time employees for craft by Q1 of 2022. Now turning to the spirits division, the opportunity for growth has not changed. just the headwinds and speed of execution. For those that remember, that reviewed the Q3 results, the Spirit's 9-liter EQ case volume is down 7%. However, when normalized for discontinued products and the 2020 one-time sell-in with no sell-out of Portland Potato Vodka in California, volume is actually up 8%. for the third quarter of 2021 year-on-year. Now, of course, our goal is to achieve a much higher rate of growth than 8%, and the Q3 spirits volume would have been even more robust if not for the issues on the Azunia supply chain and the slower conversion of our wholesale distributors in priority states. For Azunia, we unfortunately experienced lingering periods of out-of-stock due to limited company liquidity throughout the year. In addition to our out of stocks, our Mexican bottle supplier informed us in the summer of 2021 that our bottle was no longer available due to the high demand of big players and COVID-19 issues. We're currently finalizing a five-year agreement with OI Packaging Solutions, a leading supplier of glass bottles, to supply the full portfolio of Eastside. And we now have a short and long-term bottle solution for Azunia. We continue to work with our distiller in Mexico to optimize production, increase supply, and reduce costs. And we'll have more information on our discussion and success going forward relative to our Mexican supply. In terms of our wholesale distributors, Our goal has been to convert our large mega distributors, where we are small fish, to craft-focused distributors, where we are big fish. We've made the change in Texas from R&DC to Greenlight, as I mentioned before, and we just recently made the change in Colorado from R&DC to Classic, which will be effective January 1st. Our focus now has shifted to Azunia. I'm sorry, to Arizona. which is targeted to change in February 2022, and then to California, which is targeted to change in April of 2022. Although I've reported the new Texas distributor change in the last conference call, the additional products from Eastside Portfolio are just now hitting the streets with Burnside Bourbon and Portland Potato Vodka. We've continued to focus on point of purchase, micro event sponsorship, and targeted digital marketing. To this end, we just announced our sponsorship of the Portland Trailblazers, which will give us tremendous brand visibility and product sampling, product sales opportunity in our larger market. In addition, we anticipate these product sales at the Moda Center for both basketball games and music concerts. Our spirits brand strategy continues to connect with consumers directly on an experiential level with local events that correlate with the target consumer's lifestyle. Equally important is the opportunity for consumers to simultaneously sample products and enjoy the distinct features of handcrafted Eastside spirits. And most important of all is the opportunity we have to reconnect with these consumers at the point of purchase with point of sale. We are pursuing and securing other event sponsorships tied to the sales promotion and retail merchandising like Heal the Bay, Beach Cleanup in California, Hood to Coast, Run in Oregon, and Cinco de Mayo across all priority markets. We will continue to announce our biggest sponsorships and events as they come to fruition. While our plan is to stay focused on Azunia, Burnside and Portland Potato Spirits brands. We're now finalizing Burnside ready-to-drink cocktails like bourbon and cola and honey and lemonade, both with a very distinct product attribute of 12% alcohol by volume. We will also be launching the Eastside Cherry and the Eastside Cranberry Whiskey in Q1 2022. and we continue to develop our Azunia Organica Margarita ready to drink cocktail. With all of these accomplishments in place for spirits, we're turning our focus and increasing our focus to a more methodical approach of concentrating on three primary brands in our top six priority states. We are targeting markets, setting objectives for physical and effective distribution, measuring lift from our promotions, and accelerating velocity per point of distribution. Again, the most critical element of success for eSight overall is adequate liquidity. With liquidity now in place and our strategy established, it's now time to thrive and kick in executions. With a balance sheet that now fully supports the operating plan, we can move forward in a more deliberate manner to purchase product, build programs, and execute plans. Now, before we open the line for questions, let's first hear from Jeff Gwynn, our CFO, who will review the quarter and specific performance year to date.
spk06: Thank you, Paul. And let me add my welcome to our third quarter call. You have heard us repeat all year, fix, build, and grow. And I'd like to take the liberty to start my discussion of our results with the balance sheet and address how we have fixed it and prepared for growth. When we finished our 2020 fiscal year end, our cash balances were depleted. Moreover, if you recall in our 10K reported current liabilities of $30 million with cash of less than $1 million to address those liabilities. With a business that was still consuming cash, we had little time to deploy our business plans. Among these current liabilities, we faced an imminent maturity of our ABL facility, as well as upcoming unsecured notes maturing in the second quarter. So in the first quarter, we engaged a broad range of stakeholders, and we began working through an initial financing plan. One critical component was completed with the R&R deal. which included a sale of unproductive inventory and closing that money losing business. The successful completion of that deal injected much needed liquidity into the company, giving us cash to pay down debt and address the upcoming note maturities. That hard work in the first quarter led to a successful private placement of convertible notes, which we reported in the second quarter. So I'm happy to report that in the third quarter, we continued to achieve more milestones, probably the most significant of which was the finalization and board approval of the three-year strategic plan, an exhausted effort to blueprint the growth that we have been referring to since we started last year. In August, shareholders embraced that plan and voted to increase the share count. That's a huge vote of confidence in management, which Paul and I appreciate. Since then, we have seen a number of strategic large investors recognize the plan and invest in the company. And I'd like to take a moment to thank these stakeholders for their confidence in the team and the strategy. Those partnerships have allowed us to immediately go to work on improving the company's balance sheet, liquidity, and begin investing in the future. So I'll summarize some of the third quarter successes, starting with the fact that early in the quarter, we seized an opportunity to accelerate our business transformation plan at Kraft, with the purchase of a key can printing equipment that Paul referred to from a partner, Hinterkopf. This is the single largest investment we have made since the Redneck Riviera deal. The Hinterkopf investment was funded by $2.4 million in equity warrant proceeds we pulled forward. Second, rather than do a dilutive and likely disruptive equity placement, we engaged B. Riley and launched an ATM. The ATM had immediate success. We placed two significant blocks of stock with institutional investors via reverse inquiry and continued the ATM through the quarter. This program allows us to raise equity at very low transactional costs, limiting dilution. In total, we've raised over $3 million in equity from the ATM. In addition, we successfully placed another $2.5 million in a private Series B preferred transaction with another important new stakeholder. In total, in Q3 and subsequent to the close of the quarter, we have raised nearly $8 million in equity and preferred. I consider this a huge success, given where we started with the $1 million in cash and maturing debt. We have carefully managed the increases in our share count, and just like many of you who are focused on keeping share issuance to a minimum, and as of today, I can report that our shares outstanding total 15.5 million. Now, we have reduced short-term debt, by $23.7 million, either refinancing it out longer or paying it down since we started the year. Looking out next year, we see even more progress there. And today, we announce more news as we're in the final stages of closing a senior loan with Siena Lending Group, which is a $9.6 million ABL facility backed by our assets, including our valuable whiskey. That line, along with cash on hand, will finish off the repayment of LIBOC and add to liquidity and provide more growth capital. We are through due diligence there and in documentation expect the loan to close late November, but probably more likely early December. Now, where does all this activity leave the company today? As of today, we have $3.5 million or more in cash and largely paid for our first digital printer. Once the Siena ABL line is closed, our liquidity will expand to over $13 million, assuming the full use of the ABL line. For those that like ratios, our current ratio at December was, as I mentioned, 0.42. That's 12.8 million of current assets over $30 million of liabilities. That's a distant memory, and we now stand at 1.8. Net current debt, that's debt due in less than a year, less cash on hand, is 1.1 million, a significant improvement. And assuming our stock stays around this price or higher and the Sienna ABL is closed, our next meaningful maturity, which the company would have to repay in cash, is out over two years. So in summary, the balance sheet has been fixed and rebuilt. And most importantly, it's been loaded for investment growth. Now, let's turn to the income statement and cash flow. The third quarter sales were down to $3.3 million compared to $4.3 million in the prior year, and as Paul said, the majority of that decline is from our craft canning division due to its lower demand for filling services, and cans that was recycled to hide the pandemic last year. Spirit net sales were $1.4 million flat to the prior year. Remember, net sales of Spirits includes commissions, discounts, and excise taxes. If you adjust for the PPV sell-in last year, as Paul stated, we'd be positive. We reported the quarter volumes in the press release. However, I'd like to point your attention to our brand performance, particularly on a gross margin basis. Now, we don't normally go into specifics here on margins by brand, but I want to make a very important point and share a new milestone. Burnside's gross profit margin was better year over year, despite the lower case sales due to price increases and our focus on higher margin skews like Burnside Black and Buckman Reserved. In the category, premium spirit brands have all faced out-of-stock and supply shortages, and we are in an enviable position with over 3,000 barrels of brown spirits, raw material stock that we pull from to build our products. And in Azunia, we saw the reverse, an increase in volume and lower profitability. The lower profitability was due to a shift in selling more lower-priced agave syrup and the one-liter SKUs, due to the fact that we were out of stock for much of the quarter and the 750 higher value skews. Again, as a reminder, Azunia is imported and we have less control over that supply chain, but we're working on that. So on a consolidated basis, even though we had a reduction in gross revenues, we largely made up for the craft gross margin shortfall in Spirits with a reduction in discounts, improved positioning. So here's the milestone. I will venture to say Spirits is successfully being repositioned At higher gross margin levels, we just need to sell more. Now, moving down the income statement, we had better performance in OPEX with meaningful expense improvements in SG&A. A loss from operations was $1.5 million, better than last year's $1.6 million. An adjusted EBITDA was a loss of $611,000, a 16% improvement over the prior year. We have provided a reconciliation of EBITDA and an adjusted EBITDA in the press release, so please refer to that for more details. Our net loss per share was 32 cents versus 17 cents last year. And I want to call out the fact that the gap treatment of the warrant pull forward that occurred in the court required we treat the exercise as a deemed dividend and was recorded as a loss attributable to common shareholders pushing up EPS losses for the quarter. You can refer to the income statement for the details on that. On balance, Looking across our financial report this quarter, we've made substantial progress. While we'd like to see more volume growth in spirits and the immediate impact of our pivot in craft canning, we are on track with our fixed build growth thesis and believe we will see more tangible progress in the quarters ahead. Now, with all that said, let's turn this over to you for questions. Operator?
spk05: We will now begin the question and answer session. To ask a question, you may press star, then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. At this time, we will pause momentarily to assemble our roster. Our first question comes from Kelvin Seco with Slingshot Capital. Please go ahead.
spk03: Hi, good evening, Paul, Joffrey, and Amy. It's fantastic to hear both of you again. This site got a lot of deliverables done, great execution. I think your earnings call is always informative and educational. It's something I appreciate, and I think it differentiates the quality of your team. So I'll start off by asking, which stage of our turnaround are we at currently?
spk07: Yeah, hey, Kelvin. How are you doing this, Paul? Yeah, I think we're at the... As I said in the last call, we're towards the back end. It's just been a year of mitigating risks and taking care of all the skeletons in the closet. I would say, you know, there's one or two other issues that are on our list of things to do. But other than that, we pretty much have most of it behind us. I mean, the biggest part of the turnaround has been the balance sheet, honestly. And to get in a position now where we just have some cash and also due to you and your team and your investment, it's been great. So I'd say we're back 25%. We've got 80% to 90% of it complete now.
spk03: All right. Also, given where we are right now, we have fixed the balance sheet, and our branding officer, Janet Oak, I think, signed an incredible deal with the Portland Trailblazers. But kudos to Janet Oak and her team. There are two parts to my question. Number one, it seems that we are more willing to spend on marketing dollars right now. Is that the right way to think about it? And second, would you elaborate more on this deal? For example, what are some potential outcomes we are seeking from it? Are we going to bring this excitement to the social media as well?
spk07: Yes, okay. Well, I think marketing is the right spend in the markets where we have distribution. Now, that's why you see us thinking about Oregon. You know, we have over 280 points of distribution in Oregon, which is is great, but we probably can double it. I mean, even though Oregon's our top market, there's a lot of room for growth. And I think by spending in a market where we have a lot of visibility, a distribution base, and we can build on that is the right way to go. The trailblazers will give us tremendous awareness, hopefully more unaided awareness, and the cost per point of of contact is very cost effective and we'll be able to sample and engage our consumers. So I think marketing spend is the right way to go in the markets and in the neighborhoods where we have a distribution base and where we have a strong consumer demand already engaged. So that's how we're thinking about it in the other markets. We're trying to get distribution first. And so we want to get distribution first, get margins in mind, get pricing, and then start to overlay programming. I think the outcomes that we're looking for in the markets where we spend against marketing is going to be a real lift over the run rate. So you and I and the company should expect a lift over the run rate in Oregon for all our brands based on this investment. We should also look for a lift in other markets where we invest in marketing. And the way we'll begin to convert this to social media is by extending the experiential connection with consumers. So Janet's job is really to take all the good things we do at the Moda Center with the trailblazers and with all the connectivity and sampling and further extend it to repeat the impression because it takes multiple contacts and multiple interactions with consumers to really start to create brand loyalty. So we're trying to, as I've maybe heard me use the word before, impact stack or stack all of our elements around specific timeframes, around specific events so that we can get multiple impressions. So we'll use social media to create multiple impressions around our events and around times where we, you know, target point of purchase material at the point of sale.
spk03: All right, thanks a lot because I've seen how TikTok, Instagram have changed the landscape of how marketing is done. For example, SoFi is a fintech app that spends roughly $75,000 but has generated over 8 billion views. It's this thing called the hashtag SoFi Money Moves. So I do agree with you. I think social media is an incredible multiplier for brands to gain consumer recognition quickly. So I'm imagining it's very possible for inside distilling as well. So lastly, there's one thing I wish to value add as a shareholder. I think back in the days, I look at Monster Fabrics. I went, wow, this company was formerly known as Hanson's Metro. They did ICT, but because of some mismatchment, they almost went bankrupt. Then it pivoted to RTD's energy drink. They met with some failures, but they persisted. Today, Monster Fabrics is up more than, I think, 50 times. Then there's Rockstar and a new emerging kit called Celsius Holdings. So similarly, I think Celsius was nearly bankrupt and existing shareholders had to pour capital inside. But again, you know, Celsius persisted and decided to go like wildfire once again. So I think despite the differences between energy drinks and craft spirits, I see a lot of parallels between the stories of Monster Beverage, Celsius Holdings, and Inside Distilling. All three companies operate in massive addressable markets of beverages. So I spoke to Michael Bigger, who's the largest, I think, single shareholder of Eastside Distilling. So we will support the company in every way. Of course, I'm not setting up any expectations. I think things do take time. I think there's a lot of literature about Monster Beverage and Celsius, the mistakes they have made and how they have created their own successes too. So I think the management of Eastside might want to have a deep dive. And, you know, I think we should be able to replicate and create our own successes too. or even meet up with Mr. John Thiele, the CEO of Telsys, for a good exchange. So with that, thanks so much for the great work. I look forward to the next quarter's results.
spk07: Thank you, and I appreciate that insight.
spk05: The next question is from Bjorn Ng with 10X Capital. Please go ahead.
spk04: Hey, Paul, Geoffrey, and Amy. Nice to speak to you guys again, and I hope that all of you are well. So I just got two questions here. The return to on-premise sales has reduced the demand for mobile canning, and with the digital can printing and pressurizer coming in together with the partnership with G3, could you share with us how this would help to generate more sales and capture more margin for craft canning?
spk07: Well, first of all, when you think of mobile, the mobile canning, throughout the United States, has been focused on craft beer only. And I think as Kelvin just said, there's an enormous beverage market that's growing. You know, kombucha, energy drinks, coffee, teas, RTDs, alcoholic beverages. So mobile has only served one small segment of beverage. that's been the craft beer segment. And the craft beer segment overall, forget about the pandemic, has really been giving up share of stomach to craft spirits and to wine. And so just by its very nature, it had a great heyday and it's rescinded. What the pandemic did is kind of just dial it up a little bit more in the near term. What we're doing now is we're pivoting quickly from just craft beer with the mobile business unit operation to being able to service the entire beverage business. Now, we're not going to service the big guys, like Anheuser-Busch or Monster or some of the others, but we're going to service the smaller players. And when you have pasteurization, you can do a lot more And when you have different type of fillers, we can certainly serve as higher carbonated pasteurized beverages like kombuchas. We can do cold filling and cold storage so we can start to look at coffee and tea. And we can move beyond other types of just malt beverages and even into RTDs. So there... in the fixed facility with pasteurization opens up a different marketplace and a marketplace that is growing significantly and some of it is underserved. Now, when you overlay the printing, the digital printing, it really creates a technological innovation because a lot of these smaller beverages are not using silk screening to print their cans. they're using either plastic sleeves or paper wraps. In the case of plastic sleeves, they're not biodegradable. They go into landfill. And with many paper wraps, depending on the ink they use, those too are not biodegradable. So, when you overlay an opportunity to target an expanded market with digital printing, You now have, you know, the idea to move into something that's user-friendly, environmentally friendly, still the same cost, and now serve as a bigger market. For the mobile market, the digital printing will also be an innovation. It will allow our can lines to move faster because we won't be putting labels and applying paper labels on the line. They'll have already been printed. And so the efficiency will increase in the mobile line and the cost will come down for users that want to use the mobile lines. It will also give us a competitive advantage against other mobile purveyors in the market because they won't have digital printing. So in the near term, it will be a tremendous competitive advantage. So again, while we're not ecstatic about our short-term softness, our focus is clearly on exponential and accelerated growth and leaning into markets that are growing, that are underserved, and we know we can have a point of difference. So hopefully that answers your question, not too long-winded.
spk06: It'd be wonderful to throw in one, one other, one other, just a tagline on the end of this is, you know, Kelvin was at mentioning, uh, Hanson's and the evolution into a monster beverage. And one of the things about that story and that the history of that company that always that I'm reminded of is how underappreciated they were when they made their pivot. And when they were focusing on a category that was, you know, not appreciated, uh, uh, you know, the energy drink market was in infancy. And one part that, you know, we're still trying to understand, you know, how significant is the marketing advantage of working with a digital printing machine for cans as opposed to the long supply chain for the other forms of packaging that the current craft market uses. I mean, this is a market with the, you know, consumer product in the marketing attack points and, you know, at point of sale are tremendous. I mean, they're basically creating new forms of advertising you know, by season with what they put on cans. It's unlike anything else in the grocery store, I would argue. And this is a machine that's going to allow us to let them do something that is even more fantastic. So what does that mean for us? I think it's really hard to quantify, but I think it's the tip of a spear. And craft is going to look completely different next year than this year.
spk04: Got it. Thanks, Paul. Thanks, Geoffrey. And I think what you both described sounds exciting, opening up new markets. So I just got one last question. For the customers that Graph Canning is currently serving, could you share with us some feedback that you have gotten on the ground, like how are they navigating and adapting to this shift? And also to squeeze in another thought that I have, what are their thoughts on the digital printing and pressurizer value add that Ease can provide to them?
spk07: Well, I can take a shot at that, Jeff, and chime in if you'd like. But I think what's been interesting, one of the things that has been an unintended consequence in the mobile market space with these small craft brewers has been these PPV loans. So the government has given out a lot of loans to small purveyors, and a lot of them have used those loans to buy their own equipment. So that's something that was an unintended consequence that nobody really could foresee. So a lot of them have shifted over to their, not a lot, but a significant amount, have really just invested in their own equipment. Secondly, certainly, with the on-premise opening up, they can go back to keg business and forego their can business. So what's happened across the United States is a lot of the small brewers are running shorter runs, smaller runs, which obviously are less efficient. And the third thing I think that's really shifted has been their ability to purchase raw material. When COVID first started, there were no can availability. There were no corrugated cans. No pack tech for the holders that go on top. And so everybody just bought from us because we had a supply. And actually, we really didn't have a supply because it was touch and go on the cans and corrugated and pack tech. So they just looked to us for all their supply. Now they're buying a lot more on their own. as the supply loosens up a bit. And as I said, we now have all our cans locked and loaded for 2022, both quantity and price. Same with our bottles. That's very different. So I think, you know, a lot has changed over the years. And I think they're shifting more towards buying their own material. They're shifting more towards using their own equipment. and they're shifting more towards servicing a different type of package now that on-premises open up. So those are all trends that have changed. Our pivot is timely. I mean, we put it in place four or five months ago when we did the three-year plan. It's just that, you know, the market has... The trends that we're going against have been a little bit different. Q3 trend... was significantly accelerated last year. If you look at our Q3, we've been pretty flat ever since Q2. You'll look at our trend, if you trend out craft, it's had a small increase over the summer and it's pretty flat now in Q3 and will be flat in Q4. So really the biggest variation has been the lift that's occurred. And I think that's the same for all mobile canners throughout the country. The shift will occur in that brewers will take on more of the responsibility through kegs, through raw material purchase, and through their own equipment. And I think craft, those that pivot the quickest, will be the winners.
spk04: Got it. Thanks, Paul. I think that's all I have. I think following how Eastside has fixed and built the business from where it is, is amazing and exciting and I'm looking forward to the growth plan ahead. Thanks a lot.
spk07: Well, hey, thank you. And, you know, sometimes internally, I know we are doing some good things. Like Jeff said, you know, margins up 50% on spirits, operating expenses down 27%. We're getting quality distribution, not quantity. But, you know, sometimes inside it's just relentless, you know, knocking out the issues one after another. And I think we've got eight out of ten of the
spk05: issues behind us one or two more so we appreciate the external view and your encouragement so thank you again if you have a question please press star then one the next question is from kelvin so with jim and partners please go ahead hey guys i'm happy to hear from you guys again um first of all i'd like to say that i'm happy to see that you know our company has
spk02: sort of stabilize itself. I think the turnaround is more or less done. And, you know, kudos to, you know, Paul and Geoffrey. And, you know, it's a testament to show that the effort that you guys have put in terms of stabilizing our gross margins, even though the revenues have came down, you know, a little bit, but our gross profits remain strong and the operating losses did not actually widen. So I think we are on a very good shape now to really, you know, pursue the growth verticals that we want to go after. I have two questions on my end First of all, even though we have kept our losses tight this quarter, it seems that our spirits business is affected badly by our distribution strategy. So could you give us more colours on what happened to the distributors? Whether is this a one-time event so that we can understand and make an accurate assessment about the spirits trajectory going forward?
spk07: Yeah, well, it's just been a little bit slower in terms of engaging our bigger distributors or transitioning from our bigger distributors. So I would say that as a one-time event, it's basically a one-time pivot, so to speak, in terms of our strategic focus. And I was talking to the board about this the other day, that when we were pricing our products lower and targeting national on and off-premise chain accounts to just get distribution, large distributors made a lot of sense because we were out getting the distribution mostly through lower price, which as we talked about in prior calls, we believe that's unsustainable. because that's a race to the bottom. And actually, over time, I think, even our past board realized that we're getting a lot of distribution, but we weren't getting a lot of velocity. So we've completely changed our strategy to be more special, to be more premium, and to be more craft-oriented. And what that means is shifting our focus from large chains on and off-premise large distributors going up and down the street, being focused and engaging not only our retailers but our consumers. And that means that sometimes the bigger distributors, or most of the time, really aren't the right distributors because they're really good at taking orders, but they're not really good at working out in the market. And let me just give one example. I was talking to our salesperson in Texas where we changed our distributors. And he told me that his sales, just on his union, because the distributor hadn't brought in Burnside or PPV yet, that month on month, from September to October, his sales were up 20%. Because that distributor was working with him in the street, They were targeting accounts. The distributor was more open to his engagement, and the engagement was more frequent. So the way you should think about this is by Q2 of next year, we'll have either engaged our big distributors or converted our big distributors to marry our operating strategy for spirits. Now, it's, you know, these things always... take longer or have unintended consequences. And when we talked about Portland potato vodka, selling in and not selling through, one of our old team members had put a thousand cases of Portland potato vodka into one of our very large distributors in California. And I always joke, that it was like the Raiders of the Lost Ark. It went into the distributor, and until there was a personnel change, we didn't even know it was there until we started to try and sell more Portland potato vodka in based on new promotions in California. So the smaller distributors are going to be more nimble, they're going to be more agile, and they're going to work with us much more closely. So the way to think about this is a comprehensive strategic pivot from on-premise low price, low margin, to really being a special craft oriented company. And I'll give one more short anecdotal story. I was interviewing an on-premise person for Oregon the other day. And she said, I said, why do you want to work at Eastside? I said, what really attracts you to Eastside? But, you know, you could work anywhere. You know, you're working for some big folks now. You could work for another big supplier. She goes, I want to work for a company that makes special products and has pride in their products and just doesn't want to sell quantity but wants to sell quality. And I said, perfect. You know, this is the right place. So, That's where we want to go. And bringing our distribution network is going to take a couple more months. And by Q2, I feel like we'll be well on our way.
spk02: Right. That's awesome to hear. It seems that opportunity ahead is really tremendous because we are making this one-time shift to distributors that are more aligned with us and are more incentivized to grow more into our three-year plan together with us. So that's great hearing from you, Paul. My last question would be regarding the following that we have done. We have actually announced a partnership with Frito-Lays. And in the recent years, we've seen companies like Coca-Cola and PepsiCo entering the alcoholic space. And Frito-Lays has a revenue run rate of over $18 billion and its parent company, PepsiCo is worth more than $200 billion. So its potato chips are really well-known and sold all across the world. And earlier this year, PepsiCo announced a partnership with Boston Beer Company to create an offering. So are we doing a similar model here? And I was just wondering, how do we land this partnership with Frito-Lay? What makes them decide to work with us, a $50 million market cap craft distiller company? What did they see in us for us to have this working partnership with them?
spk07: Well, I think it comes down to one word that I would use, which is craftsmanship. That's the first word I would use. And the other word I think, and again, you'd have to ask them, this is just my interpretation, is our micro-marketing ability. And those two things are what they're focused on. is they want to build a very unique product that has a very special flavor profile and is handcrafted, and they want to do it in a very kind of discovery, targeted, micro-marketing manner. And I think in that regard, the two of us share those two kind of strategies and capabilities and are working together. In regard to what's possible, well, I think it's a tremendous compliment that they would want to work with us. And I think it says something about who we are and why they would choose us. And, you know, it makes me feel like maybe we are special. You know, I know you guys keep saying we're very special and we really appreciate that, but it's always nice to have somebody like Frito-Lay to come to us and choose us. And we're going to deliver for them on every measure, with the product, And with the micro-marketing approach, now they're spending a little bit of their money on that. And as to what's next and what's possible, you know, that's the next chapter. But we need to do this and we need to execute it well, work close with them, and then perhaps we can look at other possibilities.
spk02: Wow, it looks like, you know, the future for our company is really getting more and more exciting when we have such a large partner that has this alignment of values and you can actually pursue the market and grow together with them. So yeah, I'll be excited to look forward to the next earnings call. Thank you, guys. Thank you.
spk07: Thank you.
spk05: This concludes our question and answer session. I would like to turn the conference back over to Paul Block for any closing remarks.
spk07: Well, thank you all very much. We appreciate your time, your interest, and most importantly, you know, your support as shareholders. And Jeff and I will continue to work diligently to be good stewards of your capital. I think one of the things that was said, really stood out, is that, and I appreciate you seeing that, is that we're really trying to curtail the operating loss. If we can drive revenue over time and maintain a reasonable operating loss, I think we do have an exciting business model. We'll have much more to report to you during the next annual earnings call, so have a great holiday season, and we look forward to talking with you then. Thank you.
spk05: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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