Eastside Distilling, Inc.

Good afternoon and welcome to the Eastside Distilling Third Quarter 2023 Financial Results Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal 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 touch-tone phone. To withdraw from the question queue, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Tiffany Milton, Controller. Please go ahead.

Thank you. Good afternoon, everyone, and thank you for joining us today to discuss Eastside Distilling's financial results for the third quarter of 2023. I'm Tiffany Milton, Eastside's Controller, and joining us on today's call to discuss these results are Jeffrey Gwinn, the company's Chief Executive Officer, and Bruce Wells, Crafts Controller. Following our remarks, we will open the call to your questions. Now, before we begin with prepared remarks, we submit for the record the following statement. Certain matters discussed on this conference call by the management of Eastside Distilling may be forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and 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 and the company's filings with the Securities and Exchange Commission, including the financial statements and related information pertaining to the company's annual report on Form 10-K for the year ended December 31st, 2022, filed with the Securities and Exchange Commission. Now, with that said, I'd like to turn the call over to Jeffrey Gwinn. Jeffrey, please proceed.

Thank you, Tiffany, and welcome, everyone, to the third quarter earnings conference call. I appreciate the opportunity to discuss our performance and outlook with you. While we've made strides towards our goal of achieving positive operating cash flow, both in the craft digital printing business and our spirits business, there are challenges we need to address. All year long, I have spoken about the collective goals I have laid out for both craft and spirits segments to generate EBITDA and, importantly, net income that not only allows us to invest in growth, but also to deleverage and to offset the public company costs. And while we've made progress towards these goals, it's clear that we still have work to do. One significant challenge we're facing is the growing economic headwinds in both the craft beverage and spirits categories. Unfortunately, these headwinds have intensified toward the end of the third quarter and into the fall. The external economic environment plays a crucial role in our ability to achieve our financial objectives. Understanding and navigating these challenges will be key to reaching our targets. Now, in the craft digital printing segment, the quarter showcased positive developments with notable wins in our new digital printing customers, such as Ford and Thirsty in the water category, who, by the way, is at the forefront of using digital printing through market to consumers. Scrap's record-breaking quarter with 4.8 million digital can orders demonstrates continued demand for our services. While we face challenges in the mobile canning business, improvements in scrap and utilization offset some of these issues. As we approach the fourth quarter, we anticipate seasonal softness, a trend observed in the same period last year. Now moving on to spirits, we experienced a notable improvement. with spirits EBITDA loss of only $73,000 in the quarter, a significant reduction compared to the previous year. Despite an overall decline in the top line, Portland potato vodka performed well, and we observed softness in various spirit categories, including tequila category, which has historically been a very strong performer. Despite these challenges, we managed to mitigate the impact by implementing successful pricing strategies in key markets, while Burnside and Zezunia require more attention due to underinvestment, our strategic focus on winning territories, right-sizing production, and improving the supply chain is yielding positive results, as reflected in improved EBITDA performance. Corporate and G&A expenses remain a challenge for a company our size, but we've made progress in reducing costs. Tiffany will provide some details on the one-time loss associated with the completed debt-for-equity swap. But if you exclude those losses, our adjusted EBITDA shows meaningful progress in the quarter. As we enter the fourth quarter, we acknowledge the need for further improvements across all aspects of the business to achieve positive cash flow and net income. Our ongoing efforts to address challenges enhance operational efficiency and capitalize on opportunities positions for success. We remain committed to our goals and are optimistic about the future. Now I'll turn it over to Tiffany to provide additional insights into our financials and the completed debt for equity swap. Tiffany, please go ahead.

Thank you, Jeffrey, and thank you all again for joining our call today. Let's review the third quarter. On a consolidated basis, our gross sales were $3.1 million for both the third quarter of 23 and 22, primarily due to growth in digital cam printing, offset by lower mobile canning and spirit sales. Craft sales were $2.2 million for 23 and and $1.9 million for 22 as we continue to improve our printed can production. Spirit sales rate $850,000 for 23 compared to $1.2 million for 22 primarily due to bulk spirit sales of $244,000 in Q3 of 2022. Our consolidated gross profit was $500,000 for Q3 23 compared to $200,000 for Q3 of 2022 due to Kraft's improvement from digital can printing. Our consolidated gross margins were 17% for 23 and 6% for 2022. Kraft had margins of 16% for 2023 and negative 7% for 2022. Spirits margins were 21% for 23 and 29% for 2022. Excluding barrel sales, Spirits margins were 27% for both 23 and 22. Adjusted EBITDA was negative 430,000 for 23 and negative $1.4 million for 2022, primarily due to decreased operating expenses. During Q3 23, we recorded a loss on the conversion of debt to equity of $1.3 million, which is excluded from adjusted EBITDA. Crafts printing operations have yet to reach a turning point, demonstrating its full potential and delivering positive EBITDA in a quarter. However, we continue to gain momentum in the printing sector and are exploring avenues to streamline operating costs. These cost-cutting measures are set to be expanded throughout the remainder of the year. We will now open the floor for questions. Operator?

We will now begin the question-and-answer session. To ask a question, you may press star then 1 on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw from the question queue, please press star then 2. At this time, we will pause momentarily to assemble our roster.

Again, if you have a question, please press star then one.

The first question is from Matthew Campbell of Laraday Capital. Please go ahead.

Hey, good afternoon, Jeff. Good afternoon. Some improvement here. continued improvement on the cost side. I was wondering if you could talk about mobile canning business being down relative to maybe what your forecast was and at the same time craft digital growing and how you think about that business on a going forward basis in terms of better visibility.

Right. Thanks for the question. You know, mobile is not an easy business. I mean, if you think about it, it's a logistics business. You're moving basically a canning line remotely to a customer. You're, you know, setting it up. If your customer is struggling with their product to have, you know, the temperature's not right, carbonation's right, it's your problem. And you're trying to figure out how to how to basically can it, deliver a great product, and then you pack it all up and go home, and you're paying for this the whole time. And so a critical part of that story is utilization, concentration, utilization, not driving six hours, spending a lot of time on that, and that's something that Kraft did well for a long time. We were in Denver, Seattle, Portland, Spokane, dominance of Northwest, And that's not a business that we want to invest a ton of money in, frankly. That's a business that we want to develop, you know, improve. But we want to be in the digital canning business, you know, the digital can printing business. I mean, we know for a fact large consumer product companies, Coca-Cola, Budweiser, the PGA, have turned to digital printers to digitally print special edition cans for various things that they're doing. Not with us, but hopefully with us at some point in the near term. That's the business that we want to invest in. So we're going to spend less time on mobile. But having said that, mobile is critical right now because last year we converted almost all our mobile customers to digital print customers. They were important for the build out of the demand curve for us. We're going to stay involved in Portland Mobile Canyon and we're going to serve our customers there, but we're going to focus on printing.

Got it. When you look at that business, how much of the mobile business was affected? It's largely Seattle.

We've We initially expected to invest in Seattle, capture more market share, compete on price there, and we decided that we're just going to defend and compete in Portland very vigorously. We're not going to give up any share there, and that's where we'll be. Initially, when we looked at the year, and I was looking at the opportunity for the company I was expecting for the third quarter that mobile would be stronger in Seattle, and I frankly thought that we would be able to convert more of the demand that we were building on in the early part of the year in the third quarter in digital printing. I think we got distracted at Kraft, focusing on mobile, restructuring it, exiting Seattle, And that's one reason why we weren't able to generate the EBITDA in the quarter that I thought we were going to do for that segment.

Got it. That's helpful. And just a little bit more color around Portland Potato Vodka. It sounds like that's starting to bounce back for you. Why is that occurring? And then

So let's talk about the three major brands. Now, we have a lot of brands, but our three major brands are Portland Potato Vodka and Burnside. Those are focused in Portland and Pacific Northwest. And then we have Azunia, the tequila brand that we purchased a few years ago. Vodka for us is a critical product. because that's a place where we can do a lot of volume, and we can do a lot of volume with our concentrated footprint in Portland. We can really deliver more cases, more volume, leverage the fixed expense base. What you've seen with this company is we've been shifting investment from spirit brands to the digital can printings. A lot of people ask me, why in the world are you doing that? Spirits are supposed to be a hot category. The truth of the matter is it is a hot category, but it's extremely difficult to compete in California with the three-tier distribution system and the way that the structure of this segment operates. You're going to need a tremendous amount of capital or you're going to need a celebrity partner or someone who can pull through a reluctant distributor. That's a fact. I mean, that's a real challenge. However, thankfully, we have a strong market position and a control state in Oregon, and that limits the leverage the distributor has on taking gross margin from us. So I'm growing the spirits business back in Oregon first, and then we'll expand We have more leverage with our partners, right? So Portland potato bottle is critical. So what we've done there is we have lowered the cost there significantly. Liquid cost, the bottle, packaging, the whole manufacturing process has been rebuilt. We've sized that to improve the margins. And so we're going to put more volume through our facility in Milwaukee, Oregon, and we're going to see those margins improve at PPV. And that's going to be the growth driver. So what you're seeing in the summer is we got aggressive with our main competitors in Portland. And we did okay. We weren't positive in units. We were mid-single digit down. But based on what we're seeing in the economy, I'm happy with that. Now the next thing, as you mentioned, is Burnside. Burnside's a disappointment. Burnside is a And we're in a position to really grow Burnside. In fact, you know, we have some outstanding Burnside products that we're working on, one of which is a 17-year bourbon for Buckman. And we think that it's outstanding. And we believe that, you know, we have an opportunity to roll out some unique products in the Burnside line and get more interest in that brand and get some growth. But that's the challenge. Burnside and Azunia, our tequila brand, need investment. And this company has been about restructuring and reducing costs. And the underinvestment there has been one of the things that I think has slowed the turnaround in those two brands. But here, this is where the market makes the decision. Small cap market, the cost of capital, where our stock is, is telling us that they don't we don't have the capital to invest there. It's extremely expensive to borrow funds at this point. We just did the debt for equity swap. You saw that. We're having to pick our areas very carefully where we invest. We have a limited amount of capital to use and it's to retain the public company status and grow digital cam printing because that's immediate. That's a investment made and we have immediate impact because we're seeing customers who are transitioning to this package. Burnside's a work in progress and the same thing with Virginia. When we have a little bit more capital, we have a plan in place and we think we're going to be able to execute it. In the near term, we're going to do some unique things in Burnside, we think, that are going to drive awareness and volume in Portland, but right now PPP is leading the way.

That's helpful, Jeff. I mean, I completely appreciate the deck of cards you've been handed here. I think it's smart, all the adjustments you've made to the business, and it's nice to see some improvement in the cost structure. so we can, uh, you know, continue to get this, uh, business turned around. So applaud, applaud the work. And I realize a lot of the work is hard for us to see today, but you know, it's work that will, will, uh, pay dividends in the future. So thank you.

Thanks, Matt. Just to be clear, you're seeing the progress now. I mean, our gross margins improved. Even that came down, loss came down significantly. Um, we're within striking distance and, and spirits to, uh, you know, to break even and start to turn the corner. I thought we'd be there first in craft, but, you know, based on this, we might be there first in spirits. So let's see. Fourth quarter is not going to be an easy quarter because I think you're going to see it across the board. You know, there's weakness everywhere. Notwithstanding the rally in the stock market today, there's clearly supply chain challenges, people looking, you know, to underinvest in this environment. Consumers are definitely... Got retailers scared. There's a destocking going down. Diageo had a big blow up on that. That happens in retail. People take out inventory in the system. It has a big impact down the supply chain. So we're going to feel that. But we're in a much better position going into next year with where we need to be for spirits. And we're in a growth category in digital printing. So I'm encouraged.

Great. Thanks for the caller.

There are no questions at this time.

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

Great. I appreciate it. And thank you all for listening. A couple important things to also note is that our annual meeting this year is going to be on December 28th virtually. We've pushed it to the end of the year because, as you know, we have been working on this debt for equity exchange to lower the debt on the balance sheet and increase our equity, which we accomplished in the third quarter. Along with that, we are going to need shareholder approval for the increase in share count, and so we're going to have our annual meeting on the 28th, and I'll be reaching out directly to shareholders individually and encouraging you to vote the increase in shares, which is critical for us in continuing to operate as a public company. So anyway, I appreciate, again, you guys participating in the call. And if you have any questions, feel free to call me or Tiffany. Thanks.

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