Eastside Distilling, Inc.

Good afternoon, everyone, and welcome to the Eastside Distilling Report's second quarter 2023 financial results conference call. All participants will be in a listen-only mode. Should you need assistance, please say no to 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 and then one on your touch-tone telephones. To withdraw your questions, you may press star and two Please also note today's event is being recorded. At this time, I'd like to turn the floor over to Tiffany Milton, Controller. Ma'am, 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 of 2023. I'm Tiffany Milton, Eastside's Controller, and joining us on today's call to discuss these results are Jeffrey Gwynn, the company's chief executive officer, and Bruce Wells, crafts controller. Following their remarks, we will open the call to your questions. Now, before we begin with prepared remarks, we submit for the record the following statement. Certain matters discussed on this conference call by the management of Eastside Distilling may be forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended, Section 21E of the Securities Exchange Act of 1934 as amended, And such forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The forward-looking statements describe future expectations, plans, results, or strategies and are generally preceded by words such as may, future, plan or planned, will or should, expected, anticipates, draft, eventually, or projected. Listeners are cautioned that such statements are subject to a multitude of risks and uncertainties that could cause future circumstances, events, or results to differ materially from those projected in the forward-looking statements. Such matters involve risks and uncertainties that may cause actual results to differ materially include, but are not limited to, the company's acceptance and the company's products in the market, success in obtaining new customers, success in product development, ability to execute the business model and strategic plans, success in integrating acquired entities and assets, ability to obtain capital, ability to continue its going concern, and all the risks and related information described from time to time in the company's filings with the Securities and Exchange Commission, including the financial statements and related information pertaining to the company's annual report on Form 10-K for the year ended December 31, 2022, filed with the Securities and Exchange Commission. Now, with that said, I'd like to turn the call over to Jeffrey Gwinn. Jeffrey, please proceed.

Okay, great. Thank you, Tiffany, and welcome to our second quarter 2023 conference call. We have a lot to discuss this quarter, and I'd like to encourage you to follow along with me as I reference a few slides about the business and our progress this quarter. As Tiffany said, you can download these slides from our website under the Investor Relations tab. Now, if you're new to the company, we operate two distinctly unique businesses, including a craft beverage services business, which we refer to as Craft Canning and Printing. And we also have a spirits business, which sells a number of great brands, including Burnside Whiskeys, Portland Potato Vodka, and Azunia Tequila. But I want to start today with a little background on craft, because in my opinion, it's probably the one segment of our business that is not widely appreciated, nor do people understand that really the potential here. Now, Kraft is poised to carve out a unique position in a fast-growing segment of the Kraft beverage packaging segment. It is in a lead position to be the preeminent provider of digitally printed aluminum cans for Kraft beverage companies in the Pacific Northwest. And so I want to start our conversation on Kraft by turning to slide three. And we want to talk about that opportunity. So digital can printing is revolutionary. That's a bold statement. But after watching this opportunity develop, I'm confident in that statement. The craft beverage category, and I'm including in this the beyond beer category, is one of the most dynamic and competitive spaces there is. And you've seen brands come out of literally nowhere and dislodge legacy brands. a feat that few would have predicted. Brands that don't connect and evolve immediately lose distribution. Now, here on the slide on the left, you can see there are a number of benefits of digital can printing. But probably the most important is what is listed below here, and that is it's a technology that helps brands win and win big. It allows marketers to elevate their marketing. It's a critical tool and allows you to win in the marketplace. Now, let's look at this in a bit more detail in the next slide. This is slide four. First, this technology allows for design work that is extraordinary. Take a look at the pictures on the left. The ability that this machine has to print is perfect for storytelling. It also allows for new packaging elements crossing into sensory elements that you just don't have in aluminum cans with texture printing. And if you've ever held a can that has texture printing on it, it's pretty impactful. But the two elements that are right are the critical ones that I want to focus on for a minute. And that's the ability to use digital printing to shorten new product introductions. Now, a concept you've got to get your head around is historically brands were developed with huge investments very long lead times with consumer research and testing. You had one shot to get it right, and you needed a large pile of money. Now, with digital packaging investment that's low like ours, you're allowed to approach it with a different strategy, more of a point-and-shoot, redirect approach. This adjust and repeatability allows you to be a brand creator, that improves their chances of success. Lastly, I want you to consider the statement, and I'm going to quote here the onion, which probably no one should ever quote, but I think it proves my point. When many years ago they said, everything in the entire world is collectible. Yes, that's been proven to be true. Think on it. We've moved from not just trading cards to clothing to shoes to And yes, even beverage cans, artwork, can be elevated by limited quantities, high differentiation, and become collectible. Digital can printing facilitates that. So the design proliferation we are seeing at Kraft is just stunning. And we are seeing winners emerge using our technology. Now let's turn to slide five and let's address the question, are consumers adopting this technology? And the simple answer to that is yes. We've printed over 12 million cans since we started this operation, and the chart here shows the ramp up by month. And we're just getting started here. And we still have a long way to go on volume, but we are getting better daily. Now, it's important to remember, when we win a customer, we are winning their supply chain. It's a huge commitment and a show of trust to give us that supply chain. As you can see in Q4 of last year, we realized that we needed to make some incremental investments in our printing plant. We made those to ensure we could meet our obligations to customers, and we had volumes decline as we prepared for this year. Now, we're at the much higher utilization levels. Now, this next slide shows the magnitude of the EBITDA improvement on top of Kraft's 43% increase in sales, but we expect to see even more improvement in the third quarter. CRAFT is on its way to generating cash, and we plan to grow it through the year and into next year. Now let's turn for a minute and talk about SPIRITS on the next slide. This is slide seven. And I like to start my comments by saying this turnaround has been a challenge, but the rewards for getting this right are significant. In this quarter, we made progress. Backing up for a minute, for those that haven't enjoyed this long, painful turn, I'd say in summary, the company has had a poor history of investment in large-scale branding, sales, and distribution. But to summarize it in a slide, when I first joined the company, we lacked focus, we lacked financial resources, and a tested vision to win in a very competitive business. We were a national company. very little cash to support that size business. When I became a CEO, I pulled out an unpopular play from the playbook, and that is to shrink the money losing activities and focus investment in areas where we can win at our scale. So you have seen volumes decline there, but you've seen performance improve. So let's turn to the next slide and talk about that improvement. So on this slide, you can see the EBITDA improvement on lower volume over last year. And I'm happy to go into this in more detail in the question and answer section. But I believe we can see even more progress in the back half of this year. So here are my three goals for SPIRITS. I want to invest in marketing that has been tested and works. I want to improve our cost position. We've gone a long way to doing that already. And I want to drive this thing to become EBITDA positive. And from this level, achieving these goals, we can start to grow again, but we're going to grow wisely with adequate marketing, sales, and distribution. Okay, so my last slide before I turn it over to Tiffany is to summarize our consolidated results. So on top of craft and spirits, we have a small corporate company segment, which we call out so you can see really the profitability of the two NLM businesses. And when we consolidate all three entities together, we report those results, and we've had significant progress in that as well this quarter. If you take out the bulk inventory sales we did last year, the same period in first spirits, those comparable numbers look much better. and we did grow, and we did see meaningful improvements in EBITDA year-over-year, again, ex-bulk sales, by over $1.2 million. G&A cash expenses have sequentially declined each quarter since I was elevated to this role. That's 18 months of declines. This quarter and in July, we also improved liquidity, raising a total of $1.3 million in equity through the ATM facilities that we have, and we continue to work on our debt for equity swap. We've made good progress, but we are not at the finish line yet. So the way I would characterize it is we're halfway through a big year for the company, and I have high expectations for our team and the results for the back half of the year. I'm happy to take more questions on any of this material, and for now I'm going to turn it over to Tiffany. Tiffany? Okay.