Eastside Distilling, Inc.

Good day and welcome to the Eastside Distilling Report's fourth quarter 2023 financial results conference call. All participants will be in a 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 a touch-tone phone. 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 Tiffany Milton, Controller. Please go ahead.

Thank you. Good morning, everyone, and thank you for joining us today to discuss Eastside Distilling's financial results for the fourth quarter of 2023. I'm Tiffany Milton, Eastside's Controller, and joining us on today's call to discuss these results is Jeffrey Gwynn, the company's Chief Executive Officer. 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, 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 the 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 the Form 10-K for the year ended December 31st, 2023, 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.

Thanks, Tiffany. I'd like to add my welcome and thank you all for joining us for our 2023 year in conference call. Here we are already in April and well into 2024. However, I think it's important to pause. Not only look at last year, but also the last two years and reflect on the change and then look forward. This company has gone through a significant transformation. When I joined in 2020, its focus was clearly spirits with a small mobile canning operation that I picked up in an acquisition a year earlier. Today, the company is on a path to be a leading innovator in the exciting consumer beverage packaging space. Meanwhile, we've unlocked acid dyes and funded a long turnaround in the midst of COVID. We've raised capital for growth and this year completed a balance sheet restructuring. Now, I'm encouraged by what the team has accomplished over this period, but even more so about what's ahead. Now, let's review the results for last year by business segment, and let's start with the spirits business. In 2022, we substantially reduced our bulk inventory of spirits, so two years ago in 2022, primarily selling bourbon. We sold over $4.4 million of our barrel inventory. In 2022, we saw bourbon prices at very high levels and began to reduce that excess inventory, taking advantage of the market. Last year, we sold a lot less of bourbon than in the bulk form, only 800,000. And in hindsight, the timing was outstanding because we've recently seen bourbon prices, specifically bulk spirits, values drop through the fall and into 2024. Currently, we have 1,000 barrels of bulk spirits And again, it's primarily bourbon, but it ranges in age from four plus years to 17 years. So we don't have much new fill. Given these activities, sales isn't a great metric to look at our progress in spirits. A better place to consider what we've accomplished is the operating performance line and cash flows. As we said all last year, our goal was to get spirits to EBITDA positive. That was a stretch goal. And we would do it even if we had to shrink sales of unprofitable volume. For two years, we've been moving that way, moving away from unprofitable sales and investments in states where the return on investment is very low in spirits. I'm pleased to announce in the fourth quarter of last year, in 2023, we had a spirits net operating loss of only $114,000. That's a 78% improvement from the prior year's loss of $433,000. And this is before we took an impairment charge, which we call out in financials, and it relates to writing down a small portion of the value of our tequila business. And we're getting closer to breaking even on a cash basis in this beer segment. And we expect to make more progress in 2024 on this goal. Now, looking at spirits in the first quarter through February, nine-liter shipments is tracking flat to last year on an overall basis. However, our Portland-based brands are up significantly. The Portland-based brands are up as much as 15%, and they're offset, obviously, by lower tequila sales outside of Portland and Pacific Northwest. Plus, revenues are lower in the first quarter through February due to the higher proportion of lower-priced spirits compared to last year. So we're selling more vodka than we are tequila. However, I will caution you from drawing assumptions on a couple months. The longer-term trend is really what's important. As orders can slide from month to month, and also it's important to note that shipments is distinctly different from retail sell-through. Now, with that said, let's turn on and talk about the other business that Eastside and Distilling owns, which is our craft services business. Specifically, our craft digital printing business had an outstanding year in 2023, printing a total of 14.1 million cans in the year, substantially more than the 4.8 million cans that printed in the prior year. Throughout 2023, we improved our processes and won new customers. As we filled up our production schedules each month, we saw margins improve, and we expect to see a substantial operating improvement this year with craft. In fact, we are pre-announcing can volumes for the first quarter of 2024 and expect to print over 4.7 million cans in the first quarter. That's an 88% increase over the first quarter of last year. We are achieving this through improved processes higher throughput and an expanded schedule. Now the other driver here is new customers. Last year we converted most all of our existing mobile customers to digital printing and we began to make inroads winning back formal mobile customers that had moved to purchase, fill and decorate their own cans with shrink sleeves or labels. Recently, We have one much larger customers all over the West Coast. Many of these customers are launching SKUs, converting away from non-recyclable labels. And others just want the incredible flexibility and graphic digital can printing offers. Every can we print has our logo on it. And those cans are going places. Recent ones include a beer can served at the Dodger Stadium. a large consumer product company launching a new product, regional RTD brands. Now, these products cover beer, waters, and spiked seltzers, hard seltzers. Having said this, I think there are other reasons why we are seeing customers hand over a critical component of their supply chain to us that has everything to do with the consumer. The consumer has changed, and marketing has and consumer beverage is changing. Packaging has never been more important. Driven by the fact that to be successful in this rapidly changing space, you have to invest in marketing where your product faces the customer. Historically, you could get away with cheap plastic wrap cans or larger customers could get away with 19th century printing technology that only uses a couple of colors on the cans. But today, brands that are winning are doing it with creative marketing on their hands. Marketing that draws in consumers and builds brand equity quickly. Do the research yourself. Walk the bare island. Study the cold case in your local supermarket. Ask yourself, who's positioned here? Who's in there? And you will see extraordinary packaging. But most of it is unrecyclable. Digital printing is coming. We've seen customers change their product set to use digital printing to expand offerings, seasonal SKUs, special releases. The packaging and design strategies have been unleashed with digital packaging. We have seen new customers build entire marketing platforms off the package itself, a completely new business model. These changes are the paradigm shift that I've been referring to over the last year that's happening before our eyes in the craft beverage space. Digital printing is making this happen. And one last comment here is, as I think it's important for us to say, and this is what I believe, Kraft is the best at it. We are the best digital printer in North America. Kraft is winning customers that see the difference in execution, customer service, and quality. So with that said, it's easy for me to state emphatically, I think we're off to a fabulous start for 2024. Now, beyond the operational results for spirits and craft, we had a number of other changes that happened last year, including balance sheet changes. We lowered outstanding debt, and it's important to note that we're currently in discussions with key lenders to extend district payments, maturity payments, and increase liquidity. We're not there yet, but we're still working on it, and we have progress to make there. We also are working on remaining NASDAQ compliant. That has been a challenge and will continue to be a challenge Now, with that said, I'm going to save some time for questions and turn the call back over to Tiffany. Tiffany?