Eastside Distilling, Inc. (NASDAQ:EAST) Q4 2023 Earnings Call Transcript

Eastside Distilling, Inc. (NASDAQ:EAST) Q4 2023 Earnings Call Transcript April 2, 2024

Eastside Distilling, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, and welcome to the Eastside Distilling Reports Fourth Quarter 2023 Financial Results Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Tiffany Milton, Controller. Please go ahead.

Tiffany Milton: 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 Geoffrey Gwin, 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 31, 2023, filed with the Securities and Exchange Commission.

Now with that said, I'd like to turn the call over to Geoffrey Gwin. Geoffrey, please proceed.

View of a distillery floor with various processes of grain neutral spirits production.

Geoffrey Gwin: Thanks, Tiffany. I'd like to add my welcome, and thank you all for joining us for our 2023 year-end 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 last 2 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 and it 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 the asset value and funded a long turnaround in the midst of COVID, we've raised capital for growth and this year completed a balance sheet restructuring.

And I'm encouraged by what the team has accomplished over this period, but even more excited about what's ahead. Now let's review the results for last year about business segment. I'm going to start with the spirits business. In 2022, we substantially reduced our bulk inventory spirits, so 2 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 active inventory, take advantage of the market. Last year, we sold a lot less of bourbon in bulk form, only $800,000, and in hindsight, the timing was outstanding because we've recently seen bourbon prices specifically bulk spirits values dropped through the fall and into 2024. Now currently, we have 1,000 barrels of bulk spirits and again, it's primarily bourbon, but it ranges in age from 4-plus years to 17 years.

So we don't have much new fill. Given these activities, sales is in 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 flow. 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 2 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. Now I'm pleased to announce in the fourth quarter of last year, in 2023, we had of spirit's 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 running down a small portion of the value of our tequila business.

And we're getting closer to breaking even on a cash basis in the spirits segment and we expect to make more progress in 2024 on this goal. Now looking at spirit in the first quarter through February, 9-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 are offset obviously by lower tequila sales outside of Portland and Pacific Northwest. Gross 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 of 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 and talk about the other business of Eastside Distilling, which is our Craft services business. Specifically, our Craft is a 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 the 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 preannouncing 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 former mobile customers that have moved to purchase, fill and decorate their own cans, which shrink sleeves for labels. And recently, we have won much larger customers all over the West Coast. Many of these customers are launching new SKUs, converting away from nonrecyclable labels and others just want the incredible flexibility and graphics, digital can printing offers. Every can we print have our logo on it. And those cans are going places.

Recent wins 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 SpikedSeltzers. 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. So it has everything to do with the consumer. The consumer has changed and marketing in 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 for your products facing the customer. Historically, you could get away with cheap plastic wrap cans or larger customers could get away with 90th Century printing technology that only use a couple of colors on the cans.

But today, brands that are winning, are doing it with creative marketing on their cans, marketing that draws end consumers and build brand equity quickly. And do the research yourself and walk the beer 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 offering 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 I was in the craft beverage space.

Digital printing is making this happen. And one last comment here as I think it's important for us to say, and this is what I believe, Craft is the best at it. We are the best digital printer in North America. Craft 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 also 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 are currently in discussions with key lenders to extend this year's payments, maturity payments and increased liquidity. We're not there yet, 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.

Tiffany Milton: Thank you, Geoffrey, and thank you all again for joining our call today. Let's review the fourth quarter. On a consolidated basis, our gross sales were $2.1 million for the fourth quarter of '23, and $2.4 million for Q4 '22, primarily due to seasonality in printing, lower mobile canning and spirit sales. Craft sales were $1.2 million for both '23 and '22, even though we continued to improve our printed can production. Spirit sales were $900,000 for '23 and $1.1 million for '22. Our consolidated gross profit was flat at negative $100,000 for both Q4 '23 and 2022. Our consolidated gross margins were negative 6% for both '23 and '22. Craft margins -- had margins of negative 26% for 2023 and negative 23% for 2022.

Spirits margins were 21% for '23 and 13% for 2022. Adjusted EBITDA was negative $1.3 million for '23 and negative $1.6 million for 2022 primarily due to decreased operating expenses. In addition, we recorded an impairment loss related to our Azunia brand of $400,000 for 2023 and $7.5 million for 2022. Craft printing operations continue to improve and are expected to deliver positive EBITDA in the upcoming quarters. We continue to gain momentum in the printing sales and increasing capacity and exploring avenues to streamline operating costs, we expect continual improvement throughout the year. We will now open the floor for questions. Operator?

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