Eastside Distilling, Inc.

Good afternoon, and welcome to the Eastside Distilling Third Quarter 2022 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 Heather White with Eastside Distilling. Please go ahead.

Thank you. Good afternoon, everyone, and thank you for joining us today to discuss Eastside Distilling's financial results for the second quarter 2022. I'm Heather White with Eastside Distilling, and I'll be your moderator for today's call. Joining us on today's call to discuss these results are Mr. Jeffrey Gwynn, the company's interim chief executive officer and chief financial officer, Ms. Tiffany Milton, Eastside's controller, and Mr. Bruce Wells, Kraft's controller. Following their remarks, we will open the call to your questions. Now, before we begin with the prepared remarks, we submit for the record the following statements. 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 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 statement. 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, 2021, filed with the Securities and Exchange Commission. Now, with that said, I'd like to turn the call over to Jeffrey Gwynn. Jeffrey, please proceed.

Thank you, Heather, and let me welcome you all to our second quarter conference call. You should have had an opportunity to review our earnings press release, and Tiffany Milton will take you through the performance of the company in a few minutes. I'd like to update you on our performance as well and some of our progress to date in the transformation of our businesses as we implement our three-year strategic plan. Our spirits business had a good quarter. We executed some key strategic wholesale agreements and realized some gains on the sale of excess brown spirits that are not currently in our operational plan. Spirits gross margins in the quarter was 53%, which I think is a record for the company, and is up from the 21% in the prior year. Now, breaking that down, year-to-date, we've achieved 32% gross margins in our spirits wholesale business branded retail businesses, and 53% in bulk spirit sales. And this margin improvement underscores some comments I think I've made in prior calls that we sit on very valuable aged whiskey inventory. This inventory is in very short supply and has increased in value over the course of the pandemic. Now, it's critical for us to capture these expanded gross margins in our traditional branded spirits business. As we've said in the past, we will no longer sell the spirits at a loss, so retailers and distributors can enjoy disproportionate profits. Let's take a look at the second quarter branded spirits results in volume, price, and mix. Volume was a headwind, but most of our decline there was a result of lower sales of Azunia through channels where we were losing money. Now, adjusting for one-time sales of about 175 cases of Burnside to Taster's Club last year, volumes of Burnside would have been down 6% year-over-year for the quarter versus the 20 we reported. We have begun to see improvements as we have moved price points up for the key SKUs. Our mix has been somewhat affected negatively by the fact that we're selling less Azunia, which has a much higher gross revenue rate than the rest of the portfolio. But that's been offset by some savings and a lack of discount in our part. As we head into the third quarter, we need to make more progress on improving volumes, but you should expect to see us continue to lap the discontinued Azunia sales through the discount channels and that impact on year-over-year comparisons. The sales team had a number of key wins and spirits in the quarter. For example, we were invited by Club Corp, the largest owner-operator of golf clubs and country clubs in the U.S., to test our Zunia tequila in their Texas market. We were authorized in 50 QFC stores at the Division of Kroger in Washington, starting in Q3, and also one placement in another 17 Pinky stores in Texas. So the sales team has done a good job in laying the groundwork for profitable sales growth, and we hope to have more wins here to report in the coming months. We've made progress in spirits. We believe with more investment dollars, we could probably accelerate this growth. Now, for the balance of the year, we face a number of opportunities and challenges. We need to continue to implement the shift where we're taking strategic price increases, where we are reducing input costs and investing in local marketing. This is not going to be easy in a market where distributors are destocking And inventory is running at very low levels. With consumers facing higher prices and less disposable dollars, they are shifting to lower price points. This kind of environment favors large spirits distributors, but we have outstanding products and in some markets, strong brand equity. So now let's turn for a minute and let's talk about Kraft Canning and Printing. Kraft had a very important quarter. At the end of April, we turned on our new digital can printer and began the long-awaited next phase of growth in that business. As many of you know, digital can printing is transforming the craft beverage space. We are taking share of can decoration from additional craft label and shrink sleeve providers. The business proposition here is very simple. Most traditional craft labels found on aluminum cans are technologies where that effectively make the cans unable to be recycled, and they have to go into landfills. However, digital can printing cans, they are 100% recyclable. Now, in a key market like Portland, where craft beverage is driven by environmentally conscious consumers, this is a powerful differentiator. But that's not all the benefits of digital can printing. We also provide unparalleled decorating capabilities, photorealistic graphics, and the ability to make label changes at the last minute. These capabilities are game changers in space. As a reminder, the space I'm referring to is not just beer, but all types of craft beverage. It's a space that's growing dramatically, encompassing every imaginable beverage variety. It's important to keep in mind this new technology will take time to reach its full potential. So in the quarter, we began introducing our customers to our digital can printing capabilities. And through the end of July, over 60 customers had switched to digital can printed cans. And we had printed over 1.4 million cans. Our strategy has been to introduce can printing to key customers, believing that once they see the benefits they will never return to traditional labels. Given that focus and the methodical ramp-up in utilization, we still have a ways to go to show you all the profitability of our new digital printing business. However, I believe we are on the way in seeing printing utilization improve weekly as we continue to build a printing backlog of customers. We have added a second printing shift and we will be in a position to improve printer utilization in the current quarter. Now, Kraft's mobile canning business saw volume decline versus last year. As many of our Kraft customers shifted to on-premise sales, we were also impacted by stiffer competition and fewer sales of consumables. As I've shared in prior calls, our investment in digital can printing will strengthen our performance in mobile canning and open the door to new opportunities. As an example, We made an announcement this quarter about a new relationship with Approach Beverage. This is a direct opportunity that came from digital can printing. We bring this key new customer, digital can printing capabilities, and have acquired its production assets in Portland. This will be our first co-packing facility to attack the underserved micro craft beverage space. So we're excited about all the changes at Craft. and we believe we have made good progress positioning the company to grow. Now let's talk about some other important developments. So we continue to make progress working on our balance sheet. In the quarter, we terminated our relationship and paid back Live Oak and extended our bank line for a short period with First Interstate. We are planning on replacing that line with an asset-based facility in the current quarter. The balance of the year, we faced two critical challenges. We have to drive earnings improvement despite an uncertain consumer environment while pushing forward on our transformation plans with both craft and spirits. We do need to identify sources of capital to help us drive incremental investment in both businesses. And I believe we have the team, the strategy, and the opportunity to do so. But before I hand it over to Tiffany for some more numbers, I'd like to introduce you to a new member of the team, Bruce Wells, who has joined Kraft as our controller there, and he will be glad to help answer your questions on Kraft's performance. Now, Tiffany, can you take us through some of the details of the quarter?

Thank you, Jeff, and thank you all for joining our call today. Let's review the second quarter. On a consolidated basis, our growth sales were over $5 million for the second quarter of 22, compared to $3.6 million for the second quarter of 21. Spirit sales were over 3.7 million for 22 compared to 1.5 million for 21 due to bulk Spirit sales. Kraft sales were 1.4 million for 22 and 2.1 million for 21, reflecting our continued offering of bundled packages at discounted prices due to competition, which suppressed sales in 2022. Kraft also faced challenges with insourcing and the continued effects of COVID in 2021. In addition, the ramp-up of the printing business at Kraft was slower than expected, but July almost outpaced both May and June combined. We are still offering bundled services with a slight increase in price, but are now including our printed cans as part of that package. This was rolled out at the end of June. Our consolidated gross profit increased to $1.5 million for Q2-22, compared to $900,000 for Q2-21, again driven by the bulk spirit sales, but partially offset by Kraft. Our consolidated growth margins for 31% for 22 and 26% for 2021 spirits margins were 53% for 22 and 21% for 2021 due to the bulk spirit sales and craft had margins of negative 28% for 2022 and 30% for 2021 not the way we wanted it to go. The craft margins reflect the package rates that we're offering to our customers. That in Q1 and Q2 didn't include a price increase despite an increase in our costs, and they reflect the intangible cost of getting the printer into full operation. Our OpEx increased primarily at craft due to increased rent on our new Argyle and Spokane warehouses and the loss we had to recognize on the quote-unquote disposal of our trucks as we entered into a lease management agreement with Enterprises. And in accordance with GAAP, we had to record a loss on those trucks when we turned the titles over to Enterprise to manage and maintain our fleet, but we moved them to right-of-use assets and lease liabilities on our balance sheet. Spirits OpEx was flat. Adjusted EBITDA was negative $350,000 for 2022 and negative $700,000 for 2021, representing our bulk spirits sales and continued efforts to drive success to the bottom line by reducing overhead and eliminating unnecessary costs. This is almost a $350,000 improvement from 2021. Turning to the balance sheet, we raised $1 million during the quarter, ending with cash of $1 million as we invested in significant can inventory for our digital cam printer. We also fully paid off our secured facility to Live Oak of $1.9 million with proceeds from our bulk spirit sales. We reduced our debt by $800,000 in the first half of 2022 and will continue to do so throughout the remainder of the year. Our prepaids decreased over $2 million as the digital cam printer became operational and moved to PP&E, which increased over $4 million. Our AP increased slightly to $300,000 as we continued to invest in inventory. I would like to wrap up the financial results with this thought. We can improve results, but we are on a rather steep learning curve. We experienced the craziness of the economy and supply chain issues with costs and shipping as well as hiring, but we are still executing on our three-year plan to increase sales while being conscious of overhead spending in both businesses. We are excited about the growth potential of the printer for the remainder of the year, as well as our SPIRITS results and successes in Q2, and are eager to see where the business is headed. 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 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 two. At this time, we will pause momentarily to assemble our roster.

Our first question is from Kelvin Seto with Crater Lake.

Please go ahead.

Hi, Geoffrey. Thanks for your opening remarks. I just want to talk about the craft canning business. So I'm doing a sequential comparison here. So I think in this quarter, we are doing 1.4 million of revenue compared to 1.1, which was last quarter. So that's a good thing, right? But actually, when we look at a gross profit, the losses actually widen quite a bit, right? So I think usually companies do have positive cross-profit margin, but for ours it's negative. So can you talk a little bit more about this since we are banking on craft canning to deliver a turnaround?

Sure, sure, Kelvin. I'm happy to do that. So one of the things that you have to keep in mind about this quarter is this is a transition quarter for the printing business craft. as you know, moved into a very large digital printing operation and we had no revenue, you know, to speak of to start with, you know, when we turned on the printer. Remember, when you're operating, you have to hire people, you know, put everything in place. So the first month or so of the quarter, You know, we were really just starting the process of moving digital printing, you know, getting it up and going. And so you're going to see sequential improvement, and you're going to see it basically, if you look at it monthly, each month we're improving on the printing results. So, you know, April was a slower start probably than we had hoped, and then May was – a better opportunity for us to start to get the printer operating and introduce it to more customers. And then June was the same sequential improvement. I can just tell you now, I mean, July is much better than June, and our goal is to continue to see improvements each month as we go through the balance of the year. And as you see the printer ramp up to what we think it's capable of doing, you will see the margins steadily improve. Now, that was the printing side of business. We also had the mobile business that started to shift into its, you know, its busier season. And we had a lot of work to do there. One of the challenges that we're facing in craft is hiring people. I mean, like everybody else, you know, Portland's a super tight market for hiring people. And we've, you know, faced the challenges of, of getting the right people in the right job and keeping turnover low. It's improved from last year, but we still came into the quarter with substantially fewer operators in mobile than we had the year before.

Yeah, got it. Thanks. Another question I have, I'm looking at our adjusted EBITDA numbers, right? I think having a 1256K of losses. So I think there's a huge improvement from the last quarter, which is quarter one. If I do add back the interest expense, I think we should be losing roughly 1.1 million of cash required to stay afoot for another quarter. So I'm looking at our cash in the bank and some loans coming. It seems like we're in a fragile situation. How should investors think about our current balance sheet situation?

Right. I mean, every day the company manages the business to improve liquidity. And this is no different this quarter and the next quarter. But I think what we've shown in two quarters now is that we are able to monetize assets and raise liquidity to the extent that we need to. So the example this quarter is we're able to to monetize some of the brown spirits that was not currently in our growth plan. Last year, the company went through an exercise where we identified exactly what we needed and put together a cost reduction plan for the Burnside business and then identified a large number of the barrels that we didn't think that we were going to need immediately, or that we'd rather swap out and get a different age, you know, set up in our product plan. So the first quarter, we did some sales. As you saw here in the second quarter, we did some sales. I'll tell you, we've done a small amount in the third quarter. So, you to get us to a point where the craft side of the business is ramped up, is throwing off EBITDA. That's been the plan all along. I think we've talked about that for over a year now, is that we see line of sight to a business that craft is generating cash. And we see a line of sight to a company, a business on the spirit side that will consume less cash initially. And obviously, if we had more capital, we could grow it faster. and then you're going to have a healthier business going forward. So that's the game plan. When it comes to the balance sheet, you know, we have, as you know, a number of constituents that have invested in the company. You know, I think they believe in the growth story here, and I believe there's an opportunity for us to continue to, you know, walk people through the growth opportunity that's ahead with both craft and spirits. And, you know, the team's going to do the best we can to, push out some of these maturities and get people focused on the longer term. I think that's a key part. We had the same challenges last year and the prior year. Now, obviously, the capital markets are different this year than we've had last and the prior year, but I still see a lot of value here and growth opportunity in the company. Our goal is to get people to focus on that and continue to make improvements quarterly in the balance sheet.

Thanks for the details. So I think just a follow up on that, right? So previously, we have an existing loan with TQLA and a few days back was increased by half a million. So how should investors think about this amount in terms of its purpose, right? Because it's not big and not small as well. Is this like the kind of like final amount that you need to have to write through before we can hit break even. Because from my point of view, it's like we can't be overloading our P&L with interest expenses. It's coming close to a million and we can't increase our share count perpetually.

Yeah, that's a good point.

We are facing higher cost of capital. this quarter, and you can see it in the interest expense. I mean, it's more significant than the prior year quarter. And it's an issue that I think we have to focus on. I mean, when you look at the balance sheet today, I think we can see crafts get to a point where it's generating positive EBITDA at a faster rate than spirits is. And basically, that balance sheet right there is unencumbered other than what we have right now with FID. first interstate bank. And so all the debts at Eastside, you know, then there's, you know, our subsidiary down there will be probably have a higher debt capacity. So, you know, one of the challenges to see if we can use the capacity there to, you know, ship and balance the debt load at Eastside. But in the long run, in the long run, you know, companies don't thrive when investors throw, you know, when investors basically apply a super high cost of capital. I mean, that's a challenge that everybody's facing, I think, right now, and I'm expecting it to be somewhat transitory. I mean, we're not going to see long periods of time where our cost of capital is going to be this high. If we deliver the plan, Kelvin, that we've talked about repeatedly at Kraft, and you see the growth there, and you see the improvements in SPIRITS, I believe that we're going to have opportunities to finance and grow the company going forward. Clearly TQLA has been an important component of a constituent for the company. I mean, when we purchased the Zunia, you know, shortly after that purchase TQLA helped us with financing for working capital and they've done it, you know, periodically through the last couple of years. I think that's a testament to their interest in the, and the company and the, and their willingness to partner with us and, and see the company be successful. And, um, you know, so I'm, I'm, I'm, you know, hopeful that we, that will continue and we'll find other partners that, that see the opportunity and, and the company, both spirits and crack. And, um, and we see, you know, a chance to really continue to invest and grow the company faster.

Yep. Got it. Um, just one final last question from me. Um, The way I look at it is that Eastside Distilling has been incredibly blessed, right, to have shareholders like Michael Beagle, the Q Cannings, like you mentioned about, great staff as well, Tiffany, the Amy's, Bruce as well, yourself. So I really do hope that we can turn this company around sooner, right, so that we can consolidate the market and start clocking in some big wins. I was referencing, I was looking at some earnings scores of companies like MGM. Many CEOs have been openly talking about how they are companies should be valued and why they are buying back shares aggressively because they see a huge disconnect between what the company is worth to them and the public market value right now. So for us, I get that we are investing in growth and then paying down on that eventually. But could you walk with us, hypothetically speaking, in your mind, why should Eastside Deceiling be worth substantially higher than what it is being traded right now?

Well, I mean, this is a question that all, I think, investors have to think about and go through the process of making a determination of what the company's worth. I mean, every day, as you know, Kelvin, the market determines and places the theoretical value on the company. And I would argue that that value can change pretty substantially from time to time just based on perceptions. I mean, look at the view of the market today. In today's lens, looking down towards a potential recession versus what we were seeing last year. So it changes, right? What I can tell you is that this company is unique. This is a public company, but it has two distinctly different businesses in very unique and attractive areas. And they all benefit from one thing, right? which is the development of craft beverages. It's happening everywhere. We talked about it on a number of conference calls. You see it as you walk through the grocery aisle. I talked about that at times. You see it when you move into craft markets, when you go into liquor stores, and you just see an incredible number of new brands that are developing. This is a place that we're attacking different ways. I mean, we've got the spirits brands on one hand that we build and produce and sell, And then on the other hand, we have a business that offers craft services to beverage manufacturers in the Pacific Northwest and in Colorado. So I think this is a unique business. And you've got to keep in mind, last quarter, in the first quarter, we operated on the craft side one type of business, a mobile filling business. This quarter, the second quarter, we launched two businesses, printing and a co-packing business. I think those two businesses are going to be dwarf the other business that we had, you know, in the first quarter. So the change in the space that we're in is dramatic. The change inside the company is significant. So things are changing very rapidly at the company. Now, putting a price on that is almost impossible at this point, right? You can calculate the market cap, add debt, subtract, you You know, we can go through that exercise and you can come over to the enterprise and you can multiply it by a number in the industry. You can multiply it per perceived board, you know, cash flow. All those are ways we can do it. But at the end of the day, we have businesses that are developing very rapidly. And I think the answer to that question is going to be down the road and it will be a tangible, easier to identify question. And you're right. some companies identify themselves as being underfunded and they try to buy back stock and adjust the price and redeploy capital that way. This is not a company that's going to do that because we need too much cash right now just to grow. We are a public company, so we are always faced with the possibility of having people apply different valuations on the company. So we'll have to see how that develops in the marketplace. But for now, I'll tell you that I do think that we have outstanding opportunities in the spaces that we're operating. We have great opportunities within the company and the changes that we're making. And I think we're going to be in a position to prove to the market that this is a valuable company. It's probably undervalued today.

Great answer, Jovi. Thanks so much.

Thanks, Calvin.

The next question is from Kevin So with Slingshot Capital. Please go ahead.

Hey, Geoffrey. Did you hear me? Yeah, great. I was thinking about the gross margins on the spirits side. For the remainder of the year, assuming if we did not sell any excess barrels, what will our gross margins be? And secondly, could you expand a little bit more on the distribution agreements we currently have?

Yeah. Yeah. So, I mean, that gross marginal spirits really speaks to both the opportunity and the challenge of the company. So I want to answer the question a couple ways. The first way is, as we said in the conference call, I mean, when you look at the spirits margins this quarter versus the prior quarter last year, I mean, we're talking about 52% versus 21%, right? Huge, huge difference. Now, bulk spirits are around 62%, right, in our – and our existing businesses are much lower. If we don't do bulk sales, which I just already told you that we did some in the third quarter, we'd be much lower than the 52%. But what I will tell you is that in every product line that we're in, we've worked to improve gross profit dollars and gross profit margin. We've done it by raising price. We've done it by lowering costs. And we've done it by trying to improve velocity. Now, I talked about a volume price mix on my comments. And we struggle with some volume. And you see it in the year-over-year comps on the brands and the details that we've given. But I think it's important for people to understand that when you have a business that seemingly was burning cash and just, you know, we were just racing for growth under prior management, and we're trying to transition to a profitable growth, we had to back out of unprofitable sales and spirits. I mean, we don't have the money to invest in, you know, something where we buy a dollar of tequila and we end up getting 80 cents back. I mean, that's just not going to work for a company like ours anymore. So we have changed the game plan, and we're going for big opportunities. I mean, we said it on the call. We've announced that we're in a test with Club Corp, and we've had other significant opportunities. If we land some of these things, if we continue to drive the volume price mix in the third and fourth quarter, you're going to see margins continue to improve in spirits, and I think we're going to be in a better place year over year. Now... I'm sure Amy's on the phone. She probably can respond as well. We've got a lot of work to do in the back half of the year to get ourselves to a point, um, where we're achieving our plan. And that's, you know, a function of a weaker consumer than we had the first half of the year. So, um, we will be taking temporary price reductions here and there strategically when we think there's an opportunity to, uh, to take some share and improve our market position in some of our brands in some markets. But our goal is to see spirit sales outside of bulk improving through the back half of the year.

Right. Can you talk a little bit more about the current distribution agreements we have or we have won in the quarter? Right, right, right, right.

So... Club Corp is a test, as I talked about. These are new customers. We've got some opportunities with Kroger in Washington. There are a number of things. The company's changed its strategy, as we talked about, in partnering with larger distributors like RNDC. We've spent some time working with other resource groups in Southern California to help us reignite and grow sales in Azunia. I think these have been all good investments. We're going to have to see how they develop from here. I mean, one of the things in spirit that you have to remember is you can open a door, right? And we've seen this in the past. You can be highly successful opening the door to a point of distribution and you can get your product on the shelf. But what you have to do is you have to get customers taste it, to try it, to connect with it, and come back and buy more, right? And that's one of the things that is the holy grail, I think, in spirits go-to-market is what we call velocity. And the best part about the story that you cite is our products are better than the others on the shelf. I mean, let's just go through it. Our tequila is outstanding. The black tastes more like a bourbon to me. It is outstanding tequila. It, you know, is, I would argue, one of the best two-year on IAOs you can find. And at the price point, it's a bargain. Our vodka is, you know, outstanding as well. It's not crappy GNS. It's made into something you can drink. This is true potato vodka. Portland-based vodka that I think is super in the marketplace and it's priced competitively. The Burnside product line is outstanding as well. I've said this repeatedly, the Buckman line is a better bourbon than I've tasted anywhere else in the United States. And I personally can't get enough of it. Whenever I'm in market and buying stuff, I'm looking to get as much of it as I can take off the shelf first and get in my bag and get it home. I think we have outstanding products, and I think at the end of the day, those are going to be the things that drive the bigger opportunities. When people like Club Corp and others start to taste it, when they start to realize, hey, we can deliver an outstanding product at a better price point, a true craft spirit, then you're going to start to see more of these types of wins, right? And I'm hopeful we'll see some more in the year.

Great, great. Sounds like we're expanding to many places. Do we have the team in place to ensure that we can deliver the goods and not face supply shortages? I know previously we didn't have enough glass. So could you execute and expand production to meet the potential sales?

Yeah. The supply chain is a challenge that we all face. I mean, every company faces this. We face it on the spirit side. We face it on the craft side. It is clearly the biggest issue. Now, I think with gas prices coming back down here, we're going to have some relief on the diesel logistics front. But, you know, I'm pretty confident we're in a position where we can continue to prove and drive our COGS lower relative to the revenue moves. And so I think our gross margins will expand over time. As I said, the more important thing is to drive velocity, repeat sales in the quarter, and turn over working capital. So, you know, I think we have... what we need there. But as I cited, as I stated earlier at the beginning of the question, answer the biggest issue that we have to deal with near term is people. Um, I don't think the broader public understands the challenges of what's ahead of us. Um, and I'm not just talking about our company. I'm talking about other markets, other industries. When you have full unemployment, full employment, right. And, uh, and you're still dealing with stimulus that's lingering and, you know, the challenges of how that starts to manifest itself and having to pay ever higher labor rates to, you know, to fill gaps in your business. We find that as a problem, you know, and we're seeing it on both sides of the business. And I don't think this is going to resolve itself in a quarter or so. So that's the biggest challenge. on the supply chain is just handling our labor costs.

Right. Thanks Joao for the detailed answers. I want to ask a little bit more questions on our digital printer business. Could you share with us what's the current utilization rate? Are we able to raise prices along with inflation and has the wait time increased for our services?

So we, we are, you can't, it's not a linear thing. I don't, I mean, every day is a different, you know, utilization rate, right? I mean, some days it's higher, some days lower, but the sequence, you know, the trend is improving over the course of, of each week and month. We track this thing daily. We track cans printed, cans sold, cash received. I mean, this is a, It's that important for us to monitor it and to develop it. We have the capability to print all types of things. We can do 12 ounces, 16 ounces, 12 ounce weeks. And so we can change the mix. And as we change the mix, we can improve margins based on what the opportunities are. So the utilization might not necessarily always be going directly up week after week. If we're shifting to a higher mix product opportunity, then you could see yourself actually print less but make more money, generate more revenue. And then we also have the challenges of changeovers and issues around that if we're moving through skis. We have one printer. We talked about the fact that we want to have two printers and grow the business and scale the company. So, but, you know, I'm pleased with how we're doing. I mean, you're talking about, uh, we were, I think we were number five, had either even number four, uh, machine or number five in the North America. So we've learned. a lot in the last couple months. Our partners have been very helpful and have worked with us to help us improve utilization. And we think there's going to be more improvement, as we go through the quarter here. But I can't give you a number. but I think we have plenty of room to improve. If you want to, you know, I put us in the, you know, below 40% utilization at this point where we are today. We're probably somewhere in the 30s.

Right, right. All right, that's good. Last question for me. If we were to back out the craft canning business separate from the printing business, is craft canning actually having a positive gross profit margin right now?

Craft canning, the mobile business, has changed pretty significantly year over year. So the margins in that business, I want to caution. You can make direct comparisons and you can say, hey, are we doing positive margins, which we are, but the business has changed. So let's think about this for a second. If we are canning for our customer, And in the prior year we were canning for our customer and buying cans and selling them to them, but we didn't decorate the can. This year we're canning for our customer, but we are also looking to replace ourselves as just buying and selling the can. And now we're printing the can for them. Now that's a big differentiator. So we might've been in a position last year where we are buying a can, selling it to them, but we didn't take care of the decoration this year. We're doing the same thing, but we're adding the decoration. In some cases, we didn't buy the can from last year, and we're looking to buy the can for them. So the business profile has changed a craft. And as we move into digital can printing, our customer base changes as well. We talked about this. I mean, we're no longer just supporting the craft beverage space. We're starting to see a broader array of customers. We talked about this deal that we did in the quarter where we took over assets from Approach Beverage. I mean, this is a CBD water company that's bringing a large amount of their Portland-based business to us, and that's completely different than beer. I mean, that's going to have a different demand profile than we have in the beer space, which has a seasonal peak usually in the summer. So there's a lot happening at Kraft. The margins aren't where we want them to be. We have a lot of areas that we have to improve. on the mobile canning side. But I think what's going to happen is when you look at this business in the future, the co-packing opportunity that we launched through the approach acquisition of their facility and the digital can printing is going to make mobile look tiny in comparison. It's going to be a smaller part of a bigger organization.

Right. Thank you, Josh. I hope to speak to you next quarter.

Yeah, great.

This concludes our question and answer session. I would like to turn the conference back over to Jeffrey Gwynn for any closing remarks.

Yeah, I just want to thank everybody for joining the call. I'm really excited about the transitions that we're seeing. It's not easy. I mean, I think you can see it in our craft numbers how hard it is. And we have a lot of work to do in spirits as well, as I said, based on the consumer and what we're facing in the back half of the year. But the exciting part, and we didn't spend enough time on it, but I'll just mention it now, is that our teams, is also improving. We have added Bruce Wells, as I mentioned. He's our controller now at Kraft. Tiffany has joined us from last year, and we're talking about really a pretty significant transformational change that we've seen in spirits. Amy Lancer stepped up and done a fabulous job in building out the go-to-market strategy there. And we have more investments to make. on both sides of business and approach, the assets that we purchased from approach, our new facility there, and also on the spirit side. So I'm excited about the opportunity, and I'm really getting excited about the team. And I think as we go into the third quarter, we're going to see more improvement and looking forward to report that improvement to you as we get into the fall. So with that, I'll end the call, and I thank you again for the time today.

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