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

Good day and welcome to Eastside Distilling Business Update Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Ms. Tiffany Milton. Please go ahead.

Thank you. Good afternoon, everyone, and thank you for joining us today to discuss Eastside Distilling's Business Update. I'm Tiffany Milton with Eastside Distilling, and I'll be your moderator for today's call. Joining us on today's call to discuss updates to the business are Mr. Geoffrey Gwin, the company's Interim Chief Executive Officer and Chief Financial Officer; and Ms. Amy Lancer, the company's Chief Commercial Officer of Spirits. Following their remarks, we will 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. 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, 2020, 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.

Thank you, Tiffany. And let me add my welcome to Eastside Distilling's Update Call. I am Geoffrey Gwin, the CEO, and I'd like to share some thoughts on recent news and then have Amy Lancer update you on Spirits volume results for the fourth quarter and the year. Amy joined us last year from Heineken and has had a number of roles with spirits companies over the years, including Diageo and Bacardi, and we are fortunate to have a seasoned executive like her on the team. I'm excited for you to know Amy over the coming quarters. Now let's discuss some of the recent Eastside news. As you all are aware, Paul Block resigned from his position as the CEO and Chairman at the end in January. Paul had a significant impact on Eastside and was instrumental in building our 3-year plan. We thank Paul for his efforts and his leadership. It's important for you to know that we are not deviating from the strategy we communicated last year. Eastside is unusual in that we have two extraordinary businesses in dynamic and fast-growing industries. Last summer, we laid out a multiyear plan for both businesses, Spirits and Craft Canning, that if successfully executed, would drive long-term profitable growth. To launch this strategy, we had to first repair the balance sheet. And on that score, we made a lot of progress. Now I won't go into all the elements of the financing strategy as I spoke about them at length on the last conference call for the third quarter. Now I have to say that in other areas, we did fall short and executed poorly in 2021. And our launch of the Eastside rare and hard to get limited edition products did not meet our expectations. We also executed poorly at Craft Canning with poor performance in both sales and margins. And finally, we did not fully realized objectives for improving key Spirit margins, and we spoke about some of these challenges in the third quarter. And we'll detail more about the performance when we deliver our annual results in March. But I would like to call out some successes that I feel are critical to understand. Despite the performance in 2021, we have succeeded in repositioning Craft to dramatically benefit what I would call a paradigm shift in marketing and merchandising in Craft beverage. Now how this fits into a larger Eastside with its Spirits division will become more clear in the future. But for now, I'd like to point out the Craft's business model is dramatically changing over the next few months. Last week, we made 2 very important announcements. First, we announced we are entering in digital can printing landscape and have partnered with Hinterkopf and Canadian Canning to deliver nearly a $25 million run rate of decorated cans by the year-end, and this will come out of our recently built out Portland Argyle facility. This brand new 50,000-square foot facility will be fully operational by the beginning of next quarter. We will serve all our existing mobile canning customers as well as new digital printing customers from this facility. Now to date, we have largely just served the micro beer space, but this investment drives us much wider into other categories. And it also drives us deeper vertically with our customer. Now critical to the success of this strategy is can supply, a challenge that you've heard us talk about all year. And last week, we announced we have entered into a supply agreement with Canadian Canning. Some of the terms of that partnership, we won't discuss, but suffice it to say that this relationship will be an important competitive advantage for Craft Canning. Now on the Spirits side, we announced the sale yesterday of 798 barrels of Rye Whiskey, and this sale represents excess barrels that are not in our 5-year product and leaves us with more than 2,400 barrels of whiskey that we own. A few years ago, we bought large quantities of high-quality bourbon and laid up these barrels, and they significantly increased in value. Eastside continues to own a very viable difficult-to-replace assets. I have said in the past, we are committed to monetize this asset by building out same products such as the Burnside Bourbon, and finding new committed [ fans ] for those products. However, we simply do not have the ability to fully utilize all the raw material we own. The barrel sale transaction resulted in $1.5 million in cash, of which was $856,000 was used to repay a portion of the Live Oak fund. And as of today, the outstanding balance of that loan is only $1.9 million. That's nearly a $5 million reduction from the same time last year. Now our near-term challenge is to execute our sales plans in Spirits. I believe we have everything we need to make this business grow profitably and unlock shareholder value. We need to invest in our brands. We need to invest in our distribution partners, and we need to make wise capital allocation choices. I believe Amy will do an excellent job working with our sales team to drive results. And you'll hear more about the Spirit strategy on the coming calls this year. But for now, I'd like to introduce you to Amy Lancer and have her take us through results, after which we will take some of your questions.

Thank you, Geoffrey. I am excited about the opportunity ahead for Eastside. I'd like to start by saying, in the many years I have been involved in spirits, I have never seen so much opportunity to bring best practices to sales, including gross margin management, using data to target opportunities and investment discipline. Now let's talk about volume performance. Sales in Q4 were 8,400 cases, down 10% versus the prior year. The majority of the shortfall was in California, where we cycled a 1,000 case load-in of Portland Potato Vodka as well as continued softness of Azunia, which skews very heavily on-premise and was disproportionately impacted by the pandemic. Oregon was also down on both PPV and Burnside where we were outspent by the competition. Looking at full year 2021 in Oregon, Eastside was down 10%, while the market was plus 1% versus the prior year. Keep in mind, U.S. craft spirits are growing faster than non-craft spirits. Whiskey is more than 1/3 of the category and blended whiskeys are expected to hold the greatest growth potential. We have clearly underperformed and this is not satisfactory. Therefore, our #1 priority for 2022 is growing the Burnside brand family in Oregon. We've recently announced an exciting sponsorship with the Portland Trail Blazers, which will allow us to gain new distribution, drive consumer trial and increase brand awareness. Our second priority is growing Portland Potato Vodka in Oregon. While we have solid retail distribution, we have poor distribution in the on-premise. We've hired an on-premise sales manager in Portland to more effectively go to market. Additionally, we've recently announced that we are sponsoring the 40th Annual Hood To Coast relay, including a significant investment behind sampling. Our third priority is to accelerate Azunia sales on our top 5 markets. Our focus will be to grow retail distribution because, as I mentioned before, Azunia skews very heavily on-premise. We plan to invest in strategic pricing and promotions and we continue to work on our supply chain on tequila. I want to leave you with this thought. While I was at Bacardi, we faced similar performance with a popular brand you may know, Grey Goose. We focus on the basics, much of what I have described above and saw a rapid transformation of that brand. At Eastside, we are in some of the fastest-growing categories in craft spirits, with strong brands, with significant brand equity. While not as large as Grey Goose, we do have concentrated brand equity in Portland. We have assembled a great team and have a solid plan to reignite growth, and I believe that we will in 2022.

Thank you, Amy. And with that, let's take some questions. Operator?

[Operator Instructions] Our first question will come from Bjorn Ng with 10x Capital.

So I have 2 questions on my end. Apart from [indiscernible] may we know what is your current shareholdings, including shares under your affiliate? How are you incentivized to keep this site going?

Right. Great. Bjorn, thanks for the question. So I own shares through myself, and then I also own shares through the Group G Capital Partners entities. And I think we keep the Form 4 filings pretty well updated, and I'm a significant shareholder. I don't know the exact number of shares off the top of my head, but it's in the hundreds of thousands of shares. And I'll say that I'm committed to continue to support the company. I think the valuation that we have in the company is low. And if there's one thing that I know, I mean, I've looked at a lot of small companies and a lot of situations, and I believe that the market doesn't understand the value here. And I'm not talking about just on one side of the business in Spirits, which is the natural place where you're thinking, "Oh, my gosh, this is all this brand value and the value of the raw materials." But I'm also thinking in terms of craft and the canning and printing side of the business. I don't think people understand how significant of an opportunity we have there as well as in the Spirits business. But I think you should expect to see me continue to support the company, and if anything, get more involved as an equity owner.

Great. Are you intending to buy a second printer after selling the barrels?

That's a good question. I mean you've -- number of people have heard us talk about this. The first, we have purchased and fully paid for, the first digital can printer from Hinterkopf. We've made that announcement. But just to set this up a little bit. I think people have to understand what's going on in the marketplace. We are one of the few people in North America with a Hinterkopf digital can printer, and it's on a boat, it will be arriving in our facility in mid-March. It will be operational by the end of March. There's a company called Hart that was one of the early guys up in Canada to get a digital printer. There is a company in Austin, and there's also a company in St. Louis called DigiCan. And those are the only people that have this technology in North America. We will dominate the digital printing landscape in the Pacific Northwest. And we're going to add more capabilities in our brand-new Argyle facility. And if you look at the math, the white space of this opportunity, these digital can printers are showing up in craft markets, Hart's serving the Vermont, New England market. The -- Canworks is serving Austin, Texas market. We are going to serve the Pacific Northwest, which is one of the hottest craft brewing market, and it covers a broader slate of opportunities than just microbreweries that covers all kinds of craft beverage opportunities. And as I said in my prepared remarks, Bjorn, I mean, we have focused just in serving beer. Why? Because it's easy for us to attack that market. Microbreweries don't move beer. They can't move beer without affecting the quality. So the mobile canning operation going in there is a key reason why we focused that we've attempted to move that business to wine and to alternative beverages. But this investment in digital printing will push us to a much broader set of customers. So yes, we're going to add more printing capabilities. We haven't determined exactly when that will be and at what point we'll bring it in, but we're committed to work with Hinterkopf and all the digital opportunities that are out there and be a leader in this space.

Great. So I just got one last question on my end. With the digital printer coming in, how should we think about the profitability and the margins of Craft Canning in the long term? Has it changed?

No. If anything, it gets bigger. One of the early things that I remember when I was an early analyst studying companies is the importance of thinking about the scope of the wallet, right? I remember hearing this concept of the wallet, how much of the wallet are you getting? And if you think with me about what's happening in that space right now, we go in, we fill, right? And we leave. And historically, the companies had a lot of success actually going, filling and adding disposables and selling disposables. And that's one of the reasons why we had a lot of success during the pandemic, people got caught without the ability to -- no cans. And so they came to us with cans and need for cans and [ PakTechs ], the things that connect to cans. But we lost that this last year. We weren't able to buy cans at a price that was even close to economical about turnaround and reselling to our customer. And that's what you saw in the third quarter when we spoke to that. Well, Bjorn, this is completely changing the game. We're going from low single-digit can sales to a machine that's going to be able to pump out close to 30 million cans in a year. And when we sell those cans, we're selling those cans with an end and we're selling those cans with the connecting component, [ PakTechs ] and you're also selling a lot of other disposals that go with it. And so the scope of what we're providing for our customer is going to be growing and the margins there grow. And it's all coming through a 4-wall space, right? So I look at this as a huge opportunity to improve margins, expand revenue dollars, raise prices in areas where we're adding value and not getting paid for that and doing it with really efficient working capital investment. And this is a complete relook at Craft Canning. It's going to make the company more stable, more predictable, fast-growing and definitely a lot more valuable.

That's all the questions I have. I appreciate you taking the helm as the CEO and I have confidence in you and the team, [indiscernible] Amy, and Tiffany. So thank you and your team for your hard work and you have my fullest support here.

Thanks, Bjorn. Appreciate that.

The next question will come from Sean McGowan with ROTH Capital Partners.

Firstly, I just wanted to clarify a comment from your opening remarks. Was the digital printer is 25 million cans or $25 million?

25 million cans is the volume. Yes, they're rated at different speeds, depending on what you're printing. Just for the group, for people that might be new to this. If I could just take a minute and reexplain what we're talking about. Normally, a can is printed through a screen printing process, right? I mean it's a very basic concept. Digital printing is different because we don't use plates like offset printing. Instead, we deliver basically tiny little drops of ink on the surface of rotating can. The way I'd best describe it is 15 years ago or 20 years ago, when my kids were going to the Little League, you go and you have to buy the jersey and you buy 1,000 of them because it's so expensive to screen print them all, right? And literally, a couple months ago for my son's birthday, I went online and ordered a custom jersey and basketball jersey with customized logo and I ordered one single jersey. It came within 15 days and apparently, the company is doing it profitably. Imagine that on the scale of digital printing on cans. The challenge with cans and the reason why it's taken so long to get here is because the speed of the cans have to move through this machine is really a challenge. You've got to have a high volume moving through the machine. The ink has gotten in here, right? It's got to be able to do the volume, but you can't be -- imagine a digital laser printer that's taking you a minute per page. That won't work here. So we're late. This technology seems late to the game, but it's instrumental. And I point you to one concept to think through and that is, if you go back and recall, in 2014, Coca-Cola, came out with a campaign, and that campaign was share a Coke, I don't know if you guys remember this, but I remember this.

I remember that. Yes, I remember that.

You showed up and you went, and you said, "Holy c***. They got my name on the Coke, or they got my friend's name or my brother's name." And you're scrambling to buy as many of those things you can. That was the first time in a decade that Coke had positive organic growth. Now let me throw this concept to you. That was done with 240 different cans. Imagine with me, I just got back from Portland. I'm standing in this facility, the printer's preparing to be installed, and there's a pallet what we call full high pallet of cans, that's 8,169 cans stacked almost 10 feet tall. And those cans are going to drop into this machine and come out. And every single one of those cans could be printed with a different label and it won't slow down. Now that's going to be specifically unique to our machine for one reason because we have some updated software and technology that early machines don't have, but that is powerful. That's an incredible new merchandising tool, and it's going to empower the craft market to take more share in the center of the grocery store aisle. It's going to be incredibly powerful. It's going to be local, hyperlocal and it's going to be transformational as far as merchandising and so on. And if there's any category where merchandising -- and it has been taken by storm by creative, very thought-forward, talented people, it's in the craft beer section. Hinterkopf wants to work with us because we dominate the Pacific Northwest, and we touch all these small, extremely valuable customers already. So that's the opportunity we're talking about. It's a paradigm shift on how this stuff is going to be marketed, right? A lot of people ask me, it sounds like a great machine. It does a lot of amazing things. But why is this important? You're going to have to dream a little bit and think about the merchandising here, but it's going to be transformational.

I have a couple of other questions, if I can. So on the comments that Amy gave us earlier on the case count, how can we translate that for January at this point into what kind of the net sales figures look like for the fourth quarter?

Yes. We'll update you on that. The good news here is that we did have success raising price points across the Spirits category. That was a key priority of the company last year. Moving away from selling Redneck Riviera, inexpensive at a low price point, is not the game that we can play at our scale. We have outstanding spirits products. Our whiskey is outstanding. In fact, if anything, we put too valuable a whiskey into our Burnside because we've overaged it, right? I mean the quality of our product is something that should be competing with Jefferson and higher-quality bourbons. And the same thing with tequila. Our tequila is outstanding tequila. The challenge is that we have been selling at a lower price point. So what you'll see in the fourth quarter is while the volume was not as great, I think the revenue won't be as bad as the volume suggests. And you should continue to see us improve on revenue performance versus historically where we've been on a volume basis range. So I think that's something that you can keep in mind. We want to give you insight to how the business is finished, and we're going to be reporting our fourth quarter numbers on time and we're going to have a conference call here just shortly in the next few weeks on the fourth quarter. So we'll update you on all the numbers, revenue numbers and craft numbers. And at that point, I think we can really hit that topic well.

Okay. Look, a question about the sale of the Rye, and you and I have talked about this a bit, but 2 questions. One, what's the accounting on that sale? Like how much profit do you book on that? Or are there other costs against that? And more definitely, can we apply that value? Or should we apply a greater value to the remaining inventory?

That's a great question. So the value of bulk whiskey aged has gone up significantly. And the prices that you see people talk about are not indicative of really where I think the price will be. And I know that by the fact that when we went to check this on this product, it was a scramble. It felt to me like a scramble of people trying to get there and specifically on stuff that's over 6 and 7 years. So when you think about the remaining portfolio, a lot of the stuff that's left is going to feed our premier stuff, Buckman, outstanding. If you haven't tried it, that's the best bourbon we make, and it's outstanding. And then we blend with some of the other Burnside products. So I think the balance of what we own is a nicer portfolio as far as age. But I'll tell you, Sean, we have a problem. And the problem is when they bought all this bourbon, we weren't thinking that we were going to be at this case volume, right? We were thinking we're going to be in a much higher case volume. So we have all these bourbon, whiskey that's aging, and it should be going into a super high price point product. And so one of the mistakes we made last year is we said, we can make a super high price point product. So when you take a super high price point product like the $1.99-barrel select product and you bring in Oregon, it's not going to sell well despite the fact it's outstanding. I mean you can take it to some key craft markets, and they'll literally take a bottle and put it under the shelf and give it to the best customers. But in Oregon, and where we really have great distribution and great distribution partners, there's not going to be a lot of people that are going to lift it off the shelf at that price point. So we have to manage through a lot of value that's left in these 2,400 barrels and make sure we have the right product going into the right specific queues. So we're not basically delivering $100 opportunity and only getting paid for $45 or something like that. So the accounting on this...

Yes, that's my concern is that we're sitting on all this value and to try to raise some capital for whatever totally legitimate reasons, are we underselling these assets that we have for or are we you selling it out slow enough to really capture that extra value?

Yes. So I've said this before, and we've talked about this and some of the other people on the call probably heard me say this, is that absolutely, we want to take these barrels through our income statement, right? We want to basically bring them into pots, take them out, sell them and monetize because we can get multiples more than we can if we just sell the barrel outright, right? That's -- we understand that. The hard reality that you have to also accept though is that we have to really improve our distribution partner and our relationships, right? We have to improve our relationship with distribution. So we get buy-in when we want to bring things into new markets. I mean how long has this company been telling you guys that we're going to bring Burnside into California, right? And we haven't made a lot of progress there because we thought we could just do it on our own. And that's the biggest mistake that people are making on the other side of the phone here is the company has to figure out how to empower, inspire our distribution partners to invest in our business. And I'm going to tell you the way we're going to do it, Sean, we're going to do it because we're the only public spirits company, right? And when this starts growing, and it will grow and we will get credit for it belong, we will have the capability to grow spirits in our key markets, these 5 key states that we talked about, and support them and grow them in a way that small private spirit companies will not be able to do that thing. It's just it's not going to happen. The only other people that are able to grow aggressively are the people that link up and basically give the brand away to a celebrity. And we're not going to go that route. We're going to go the route of building something that's sustainable. It's highly valuable, has a tremendous amount of brand equity. And the results that you've seen historically this year in spirits is a sheer, clear indication that we didn't invest in distributor relationships as much as we should have. And we failed to support the brands in key markets, right?

Okay. Okay. I mean just to return to the core of that question, are we booking a big profit on this sale?

Yes, there will be a profit. Tiffany can -- I don't know, Tiffany, if you're ready to talk about the gain. Just the way that's worked...

Sorry, Geoff. It's actually recorded to revenue. The net proceeds were reported to revenue.

Okay.

No, I'm sorry. The gross revenue would be to -- the gross proceeds rather would be to revenue.

[indiscernible] profitable, right?

And the way we -- yes, that's right. So we lay up the barrels at historically what we pay for them and they incrementally increase in value for insurance and storage costs. And we've sold them significantly above where we -- where our costs are. So you'll see in the first quarter a gain on sale from the barrels, and we'll tell you that number when we report the first quarter -- and yes.

Yes. And then last question. What can you say at this point about the financing on the printer? How does that work? And how does that -- how does the financing affect the P&L?

Right. So we raised a lot of capital last year, and a lot of people -- we did a lot, right? We sought out key and strategic investors. I think Bigger and District 2 were two of them. Crater Lake and Slingshot and some others were critical partners in this. And we basically paid for a $4 million printer. So we've got that 100% paid for. It's not financing. We're expecting, however, to possibly do a sale-leaseback transaction on that asset, which will raise more liquidity. And then as we've talked about, we were in the 11th hour of refinancing Live Oak last November, early December, and then decided, based on our cash position and a number of situations, we've decided the partner that we had picked wasn't going to be the partner that we want longer term for the development of the business and where the business was and the scope of what we need going forward. So we've changed our plan there, and we're working with a new group that would set us up to refinance. Live Oak, provide incremental liquidity for the incremental can volume that we're going to be doing and funding the company going forward that way. The second printer, we have not determined how we'll fund that or whether we'll take a private group to help us fund that. But I'm pretty confident that we have a path forward to navigate our next couple of quarters here and the dramatic change is happening in our working capital with the investment in cans.