Eastside Distilling, Inc. (EAST) Earnings Call Transcript & Summary

Good Day, and welcome to the Eastside Distilling business update conference call. [Operator Instruction] Please note, this event is being recorded. I would now like to turn the conference over to Robert Blum with Lytham Partners. Please go ahead.

Thank you so much, and good afternoon, everyone, and thank you for joining us today to discuss Eastside Distilling's business update. I'm Robert Blum with Lytham Partners, and I will be your moderator for today's call. Earlier, Eastside issued its preliminary year-end and fourth quarter 2019 results in a press release and provided a corporate update. Joining us on today's call is Lawrence Firestone, the company's Chief Executive Officer; and Robert Manfredonia, Eastside's President. Following their remarks, we'll open the call to your questions. 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. 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 as a result of various factors and other risks identified in the company's 10-K for the year ended December 31, 2018, filed with the Securities and Exchange Commission on March 28, 2019. With that said, I'd like to turn the call over to Lawrence Firestone, CEO of Eastside Distilling. Larry, please proceed.

Thank you, Robert, and thank you, everyone, for joining us today. As you can hopefully imagine, we've been running hard to reshape the company since I joined in mid-November. Robert and I felt it is important to take a time-out and report on the progress we've been making at Eastside Distilling and give an update on the business at this point of the quarter versus waiting until the mid- to late-March time frame, when we officially announce our Q4 results and file our 10-K. Since joining the company in mid-November, we have focused on reshaping the company to continue the transformation of Eastside from a small regional craft distillery with a majority of our business in Portland, Oregon to our vision of becoming a well-oiled public house of brands that acquires, develops, markets and sells branded spirits on a national level and then sells those brands when they are proven and ready to be acquired by larger players in the industry. As such, to strengthen our foundation for growth, we have focused on the following: working capital; leveraging our business model; growth in the national platform; and the integration of the acquisition of Azuñia Tequila brand into our company and positioning it for penetration in the off-premise national platform; and shaping the internal structure of the company and driving to EBITDA breakeven. I'll start with working capital. As I mentioned on the earnings call in November, our objective at the time was to secure working capital financing, utilizing the assets of the company, including accounts receivable and inventory to allow us to fund our business and continued growth without turning to the equity markets near term. In December 2019, we closed an accounts receivable factoring agreement with ENGS Commercial Capital with a total capacity of up to $2 million. The agreement allows us to borrow up to 85% of the eligible accounts receivable subject to various terms and conditions outlined in the agreement. Also in December, we signed a short-term $2 million bridge loan agreement with TQLA to fund the purchase of Azuñia Tequila and other general purposes. This was a bridge to the larger inventory facility that we closed in mid-January. Then earlier this month, we closed a new credit facility of up to $8 million with Live Oak Bank backed by the company's raw spirits inventory. This funded the payoff and replaced the 2 existing inventory facilities with KFK and the short-term TQLA facility totaling $5 million in capacity. In addition to the increased availability of up to $3 million, the new credit facility offers some advantages to Eastside, including a reduction in interest rate. These working capital facilities were major achievements for Eastside as we will continue to look to leverage our asset base to help fund the growth in our operations as opposed to turning to the cap table as the first stop for financing. As you saw in the press release issued today, we have recalibrated our focus from a pure case count growth at a very high cost through the national platform to a more balanced approach, looking for leverage in our growth strategy by combing through our numbers and rationalizing our marketing expenses and sales incentive spending and looking for opportunities within the business to reduce costs and optimize our operations. Thus creating the much-needed leverage in our model to balance the business. This is a significant change from the past 2 years of pure case count growth. And with the help of John Rich of Redneck Riviera Whiskey, that allowed Redneck Riviera Whiskey to become a national brand and Eastside to open up the national distribution platform. John Rich's efforts were above and beyond and the linkage with Eastside's sales team produced outstanding results. Based on our current line of sight, including our growth plans and with our reshaped spending plans, we believe we can create leverage, while we continue to penetrate national accounts and increased sell through, which will allow us to manage our working capital and drive to EBITDA breakeven this year. In the national platform, we are focused on the expansion and growth of our Redneck Riviera Whiskey lineup, leveraging the introduction of our Azuñia Tequila brands in the off-premise trade and the introduction of our Burnside lineup and our Hue-Hue Coffee Rum product. I'll have Robert Manfredonia run through specifics on each of our brands in terms of approximate cases sold, points of distribution, sales and marketing plans, et cetera, for the fourth quarter of 2019 and the first quarter of 2020. I'm extremely pleased with the entire Eastside team's efforts as we focused on the common goal of growing the business, leveraging our platform and driving to and beyond EBITDA breakeven. Now for an update on the customer-facing side of the business, let me now turn the call over to Robert Manfredonia, our President. Robert?

Thanks, Larry. As mentioned, we've come through quite a transition from a primary focus on Redneck Riviera through the national platform in 2018 and 2019 to now widening our national platform to include not only Redneck Riviera brands, but Azuñia Tequila, Burnside Bourbon and Hue-Hue Coffee Rum. I will provide an updated range and approximations based on the early look on top line results for quarter 4 2019 in total and a range of projected quarter 1 expectations. I will also provide details on brand expansion, channel penetration and new market information relevant to expanding the Eastside national platform. Results include the following starting with Redneck Riviera brands. Fourth quarter 2018 versus 2019, case growth of approximately 909 liter cases, roughly 14% growth versus quarter 4 2018. 2018 versus 2019, total case growth of almost 12,809 liter cases and roughly 85% growth versus 2018. Revenue increase of approximately $1.9 million and roughly 100% growth versus 2018. We are having a very good start for Redneck Riviera brands for quarter 1, and that includes the following: quarter 1 2020 outlook versus quarter 1 2019, we expect total case growth of approximately 4,500 9-liter cases that will total in excess of 10,000 cases for quarter 1, which will be about 79% growth over 2019 and approximately 89% year-over-year revenue growth for Redneck Riviera brands. New authorizations and programs. In December, we added chain-wide distribution for Publix, Florida. February, we're starting a Costco, Louisiana program. And as of January 28, we are now mandated to be in 740 Rite Aid stores for Redneck Riviera Whiskey. We will start shipping in early Q2, and expect all stores to be reset and selling by June 1. The significance to this placement, this represents the first entry into the drug class of trade. Usually the drug class of trade takes in excess of 5 years for brand entrants. Redneck Riviera Whiskey enters a major drug outlet in less than 2 years. Redneck Riviera is nationally mandated or is participating with in and out programs in all classes of trade. Finally, there's a growing market and wholesaler excitement for Howdy Dew, the Redneck Riviera brand RTD. Howdy Dew is a wine-based brand that allows entrance into the mass convenience store sector. The wine base also provides a tax benefit, wine versus spirits. That enables Howdy Dew to be a highly competitive brand from a price position standpoint. Now shifting to Azuñia Tequila. Note, we introduced a 10% price increase across all Azuñia brands apart from Azuñia Black. Quarter 4 2018 versus 2019, total case growth of almost 800 9-liter cases and roughly 30% case growth versus quarter 4 2018, however, revenue comparably grew at almost 40% or 10% over case growth. Total revenue in 2019 versus 2018 increased by approximately $600,000 and roughly 24%. Quarter 1 outlook 2020 versus 2019, we have a planned total case growth of almost 1,500 cases for a total case amount of 5,400 cases for the quarter, an increase of roughly 40% projected revenue increase and almost 60% over quarter 1 2019. Azuñia is now being introduced to national retail corporate accounts, tied to a review cycle, April for the Fall and the Fall for Spring 2020. We're also presenting to all other noncycle retailers in the next 90-days. Our approach will include targeted, mandated distribution and in and out programs, inclusive of Reposado and Añejo instead of exclusive alignment to Blanco. We will continue to aggressively work towards on and off-premise trade balance, along with prioritizing higher revenue SKU development. Note, wholesaler transitions will conclude by the end of the first quarter in the Midwest and the East. Also, we just received the sign-off for RNDC Florida to represent all of the Azuñia Tequila marks. This will bring all Eastside brands into one wholesaler within the state of Florida. The Oregon business unit, 2019 case growth of almost 7,300 cases and almost 42% growth. As stated with our last call, we've adjusted down Oregon personnel by 2/3 in the second half of 2019. So the adjusted Oregon team did extremely well with performance execution. Also, we exited 2019 by reducing our SKU count by 1/3. The Oregon business unit has been repositioned to be a self-sustainable, bottom line profitable business. We will continue to utilize Oregon for brand development and tactics review to support national platform implementation. We're also focused on a tiered, prioritized portfolio within the Eastside national platform. Lastly, Burnside and Hue-Hue are both entering select national markets, inclusive of California, Washington, Texas, Florida, Arizona, Tennessee and Illinois by the end of the first quarter. With that, let me turn the call back over to Larry for a continuation on the shape of the business. Larry?

Thanks, Robert. Let me walk through a few more of the permanent structural changes. Let's start with our Oregon infrastructure. After careful evaluation of our Oregon-based tasting room and retail operations, we will be closing the 4 tasting rooms that we operate in and around the Greater Portland area by March 31, 2020. Although these tasting rooms allow for customer sampling and have predominantly been looked at as a marketing expense, we will rely on continued growth in our Oregon on-premise business with the local brands, and wider than Oregon for the national brands to provide the same tasting room experience. The tasting room operations have been seasonal and the revenues appreciated a boost in Q4 every year for the holiday season. However, the boost is not enough to allow the stores to breakeven for the year. While the closing of the tasting rooms will lower our 2020 retail revenue, it will positively impact our bottom line and cash flow. Once the retail operations are closed, the results will be reported in our numbers as discontinued operations throughout the year in our 2020 quarterly financial reporting. As many of you are aware, Eastside has built itself through acquisitions of different brands over the years. And while the company remained focused on acquiring brands and businesses, however, the integration of acquisitions became a secondary priority, and consequently, integration did not occur. The acquisition and nonintegration of the Big Bottom distillery is a prime example of that, leaving Eastside with 2 distilleries in the Portland area, one in Hillsborough and one in Milwaukee, Oregon. As of March 31, we will be closing our Hillsborough operations and consolidating all production operations into our facility in Milwaukee, which will not only reduce our overhead, but will cost reduce our Big Bottom products significantly. The Big Bottom gin and whiskey products produced in Hillsborough principally supply the Oregon market. So the closure of this facility will not impact our growth expectations in the national channel. And we expect these products to continue to grow in the Oregon market and eventually be ready for prime time on a national level. The combination of the tasting rooms and the Hillsborough production facility comprised the closing of 5 of our 8 locations in Oregon. We are considering additional consolidations to optimize our operations and our workflow, but we have not advanced those plans to the point of execution yet. We feel it's in our best interest to digest the closure of these 5 locations first, before we proceed with further consolidations. Next, we spent significant time evaluating our sales and marketing spend to become more targeted and focused, ensuring that marketing and selling dollars that we spend are being allocated as efficiently as possible to drive both additional penetration and continued growth and sell-through in the national platform. This was a major overhaul by our sales and marketing team, and they worked extremely hard on this. Finally, like all the other areas of the business and the P&L, we have been tightening up our spending and trimming our G&A expenses. Going forward, to help investors understand the true cash G&A versus noncash expenses such as amortization of intangibles and depreciation, we will break out, in our financial reports, the cash and noncash G&A expenses in our financials in order to orient the cash spending versus other noncash expenses. The net effect of all these items is a financial model that if we execute to our plans, projects us achieving an adjusted EBITDA profitability in the fourth quarter of 2020. Please note however, we are still very focused on growth for all of our brands and leveraging the national platform, and we are, by no means, complete in our evaluation of how to run the business in a more efficient manner. We are still working through the business and anticipate further optimizations, but we anticipate that once we get the business in balance, we will seek to use some of the cash flow provided by the improvements to fund marketing and sales expenses in the future to drive revenue. Now let me turn the call over for any questions. Operator?

[Operator Instruction] Our first question today will come from David Bain with Roth Capital.

Great. Just to run through the numbers again, Robert, on Redneck, did you say 12,800 for the quarter, fourth quarter cases?

Yes, we said 12,800 cases for the year, meaning that was the difference between '18 and '19.

Right. Okay. So I guess, I'm just trying to look at my fourth quarter numbers and reconcile a little bit with -- can you give us a sense as to the canning revenue number?

Larry, do you have the canning number information to provide?

I actually -- Yes, I don't have that number rolled up at this point. It's not one that we've finalized yet.

No problem. Okay. I'll follow-up, maybe off-line or something. But -- and then the one area in 1Q, the segment that we didn't get visibility, I think, for kind of case volume expectations was Burnside. Do you have anything there?

With the expectations for 2020, David?

Yes. I think you had given some 1Q Azuñia and 1Q Redneck expectations. I was wondering if you had Burnside as well.

No, we don't because Burnside and Hue-Hue will be entering into the market, in all probability, late February, early March. The states that I outlined that we'll be going into, most of the programming and the distribution build-outs are going to be in April and May. So we're finishing up, not to get too far into weeds, but we're finishing up our annual business plans now over the next 2 weeks. And then with that, we'll start laying out to the market, sort of, all the beginning seeding for both of those brands?

Right. Okay. And then, you had mentioned, I mean, monetization is part of the overall strategy. Maybe if you can provide us a little bit more color as to what that could look like? Would that be less core brands, so to speak? Would it be in the Oregon portfolio at this point in time? Do you believe that there's buyer appetite for items that are -- how do you...

For monetizing and selling brands on our portfolio?

Correct. Yes I think I mean...

Yes. Go ahead.

I was just wondering if that was a 2020 potential event. And your strategy behind something like that?

Yes. So here's the way we're looking at it, and I would say this is early in the characterization of the strategy, but as we've looked at it, we think we're -- we play in incubating brands from the 0 to 100,000 case a year level, and then from 100,000 cases north of, if it makes sense that, that's one of the big players would pick it up and take it forward. So on the local level in the Oregon market, I don't think I've got a marker yet for the top end before it would trade into somebody else's hands -- somebody else on a local levels' hands for a Portland brand. And I think we're really more -- Robert and I are more thinking that we can mature some of these brands, like a Burnside and a Hue-Hue, and then eventually some of the gin products and whatnot into the national platform. I guess, that's sort of the funnel that we're looking for.

Okay. David, I can get a little bit more on that, and I'll take it from a different perspective. So what we've tried to do is, with Redneck, we aligned the brand first with the market appetite, right? So if the transactional data, retailers, wholesalers are saying, categorically, this is where we want to go, this is where the push will be, retailers are providing the same intel. That's how we want to navigate our business. So Redneck Riviera is an above-premium position brand. Check, that's where it should be within the whiskey -- American whiskey space. Azuñia is in a above-premium luxury position, right? Check, that's where the data, say, is the highest growth is. Craft whiskey with Burnside, and then -- same thing applies. And then with Hue-Hue, we see luxury position Rum is the one segment, one price segment, that is growing exponentially within rum. All the other ones are in decline. So we're just following the data, so to speak, and making sure that we're in complete alignment, so we're not going against it, which is a lot more costly and takes a lot more time to convince people to go. So we're just kind of following the trend lines.

No, that makes complete sense. I probably wasn't clear. I think -- I'm traveling. Sorry, but from a divestiture standpoint potential, is that something that can be looked at in the Burnside category? Or...

Yes, per -- at the same levels that I described. We see ourselves playing in that arena.

Okay. And then just -- sorry, last one. I guess, if I look at Redneck, Robert, 9,000 to 10,000 points of distribution, if I look at the silos of those distribution points, is there kind of like a read-through or a back-of-the-envelope case number that we can look to, if you don't get anything else this year, you can expect at this point?

On total cases, if we don't have incremental growth of X, Larry, can we provide that an approximation. I mean, we can or we can hold that for a different time. What's best?

Yes, I think I'd rather see us vet that number a little bit. But I see where you're going, David, and I think that's a good -- that's probably a real efficient way for us to communicate the growth in our market to the investors. But Robert, let's take that off-line and then figure out how -- maybe, we can introduce that in the March call.

Yes. David, one thing I mentioned with our notes previously is that we're starting now to have a continuation of, as an example, Costco. We're running a program in Louisiana at all their buildings. Their first order's 9 pallets. We're excited about that. That happens by them reading the data on what they're seeing across the country and then previous programs at Costco. Rite Aid is another great win for the brand, where it's the first entry into the drug sector, which is a very advanced class of trade. So we're happy with the development. I think the thing that we want to focus on is, rate of sale, rate of sale, rate of sale and then continue to be very careful and selective with the distribution growth that we have, that's incremental, right? Work on the organic business and focus on that. So that's part of the marching orders.

Awesome. Okay. Thanks, again, for the transparency. And I know investors will be happy with the profitability projection that you gave today. So appreciate it.

Thank you, David.

[Operator Instruction] Our next question comes from Ian Gilson with Zacks Investment Research.

First question, with all of the adjustments, changes and reduction in staff, are there any charges to be taken in the fourth or first quarter?

Yes, we will be taking some charges against the P&L in the fourth quarter related to the shutdowns. We don't have those fully baked yet, but you'll see -- and we'll carve those out in the March call and also on the -- in the press release, so people can identify with them. And then in the first quarter, I think it will be pretty marginal and mainly noncash.

Okay. And on Burnside, burnside is quite heavily weighted towards the brown spirits market, and you haven't discussed or spoken about the vodka side of that business. How is that going? Is that going to be expanded? Continued? Going national? Or kept local?

Robert, I'll let you take that. Yes.

Good question, Ian. Yes. Yes, the Portland Potato Vodka business, all sizes, and it's primarily 750s and half gallons, 1.75. In Oregon, it's a very healthy, somewhat scalable business in that given market, growing very nicely without a lot of deep discounting. So it's effective just on brand, but we don't see that being something, at least at this point in time, that we want to break through to the national market. Vodka, as you probably know, above premium, where that brand is positioned at, is heavily discounted, very costly, and it's in a slight decline when you take Tito's out of the mix. So for us to breakthrough would be very difficult to do. So we're consistently looking at the transactional data and seeing if there's a place for it. But really, the big 4, that Tier 1, will be the brands that we mentioned, Azuñia, Redneck Riviera, Burnside and Hue-Hue. And then we'll have a Tier 2, and we're looking at opportunities. And if they present themselves, then we'll do our due diligence and move it in or not based upon the market conditions.

Yes, when you look at Burnside, you've got, what, 1, 2, 3, 4, 5, 5-or-so different entries in that business, not counting Hue-Hue.

Yes.