Beeline Holdings, Inc. Q4 FY2023 Earnings Call

Good day, and welcome to the Eastside Distilling Reports Fourth Quarter 2023 Financial Results Conference Call. 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 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.

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 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 are 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 are 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 has our logo on it. And those cans are going places. Recent wins include a beer can served at Dodger Stadium, a large consumer product company launching a new product, and regional RTD brands. Now these products cover beer, waters, and spiked 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. 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 19th-century printing technology that only used 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 in consumers and builds 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. However, 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, and 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 that I think we're also in 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.

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?

The first question today comes from Jay Huber, Private Investor.

Got a couple of questions. First, what was the average sale price of the approximately 300 units that you sold?

That's a good question. I don't have that information available right now. I'll check with Tiffany, our Controller, who is online; she can look that up. If we can't find it, I'm happy to take a call later to provide you with that number.

Sure, no worries. Second, what is your canning capacity? And basically, what percent of capacity are you running?

That's a great question. To clarify, we do canning and we provide filling services in Portland, where we also have a mobile operation. However, we've been scaling back our operations outside of Portland and mobile, focusing more on digital printing. When you mention canning, I assume you're referring to the decoration of aluminum cans via digital printing, which is becoming popular across the West. This new technology allows us to print photorealistic graphics and handle various label types with great flexibility. We can accommodate small runs as well as large ones. Currently, we have the capacity of one machine, but we are expecting to acquire a second machine this year, which would double our capacity in Portland. The output of that machine will depend on how many cans are processed, the types of graphics printed, and the number of changeovers. With the additional machine, our throughput will improve due to fewer changeovers. To give you a rough idea, one machine can produce around 25 million cans a year, while two machines would produce about 50 million cans annually, and so on.

Okay. Great. So if you're expecting to do 4.7 million cans, that leaves a huge capacity available.

Yes. What's impressive about the first quarter is that after the December quarter, where beverage production was lower, many had already fulfilled their needs for the fourth quarter, and with people on vacation, production was not at full capacity. Despite this, we produced a significant number of cans in the first quarter. Our challenge over the next two quarters will be to maintain full production capacity, and we anticipate hitting that capacity soon as we await the installation of our next machine.

Okay. And also, how about the mobile canning, what percentage capacity?

That's more of a flexible business. We have a lot of excess equipment. So mobile canning is just to describe it, actually you can credit Craft with the genesis of this business, I would say it goes way back, but the team there has perfected the art of getting mobile equipment on a mobile platform of trucks and being able to go to numerous customers all over the region and fill for them. So our flexibility there or the capacity is constrained by people, right? It's a technical job. It really requires someone who understands what our customers need, not every product goes in a can the same way. Some products need certain conditions. And so oftentimes, we are almost like a consultant; a lot of new beverages want us to help get their product in a can, but they've never put it in a can before. So it's not an easy role to fill. So we have a long training program at Craft. So that business is gated by people. So if you were to ask me today what that number is, I wouldn't be able to tell you right off the bat, but there’s a lot of capacity still left that’s untapped here given our current staffing and our equipment.

So I'm not holding you to this, but what are you running at like, 30%...

Yes, I would say that on the mobile side, we're above 50%, but there's still a lot of excess capacity. We could likely add more as we approach the peak season.

Okay. So now just kind of a thought. Why wouldn't you take your current brands such as like you don't mention your Portland Potato brand create a hard seltzer; you have access. And then...

The initial management team's vision was impressive. My involvement was one of the reasons Craft made the acquisition; they aimed to lead in the ready-to-drink market. The challenge the company has encountered over the years is the abundance of opportunities available. We have the potential to selectively expand our spirits business beyond the Pacific Northwest, tap into the improved margins in tequila, and explore ready-to-drink options. However, entering the RTD space requires significant working capital. For instance, purchasing hard seltzers at grocery stores reflects lower price points compared to traditional spirits, especially in a controlled state like Oregon. We have to be cautious about pursuing new avenues that demand more capital and add complexity. Despite this, our customers are continuously launching new products. A few years ago, when I was an investor, I was impressed by a company that adapted well through significant transformations by focusing on serving a booming market, much like during the 19th-century Gold Rush. This strategic move provided substantial benefits for them. Presently, our Craft digital printing business stands out due to its strong competitive barrier; digital prints aren’t widely available. Currently, our unique technology leads in this area. For digital printing needs, customers have specific locations to turn to, whether it's CanWorks in Texas, DigiCan in St. Louis, or us in the Pacific Northwest, which is challenging for shipping. Customers there will eventually reject non-recyclable solutions like plastic labels, which end up in landfills. Over the past year, our focus has been on scaling this business, making it a critical element of our customer supply chains. We can support others in creating excellent ready-to-drink products without having to commit to just one idea, as we have multiple opportunities to work with emerging brands. These brands will not be able to source cans from mass producers like Ball or Crown since their designs are custom and collectible, making them limited in availability.

It's not just a matter of having the Portland Potato Vodka and the can; we also need to add the seltzer. The cost price of these hard seltzers is very low.

You need to handle a significant volume because the margins are quite small. It's critical on the operations side to maintain high capacity utilization; otherwise, you won't be competitive in terms of costs. In the past, this company faced issues when we worked with a brand and ended up transporting whiskey all the way to the Pacific Northwest, bottling it, and then shipping it back to meet the pricing demands of that brand. This had a major negative impact on our balance sheet, resulting in a significant loss of value. Currently, we are fully dedicated to focusing on these operations.

Where it got too expensive because you were triple shipping and

Yes. Right. But think about this; if you were to walk into our facility today and you walk in and sit down with the team, Connor, Bill, and others, and you were to just sit there and stare at the sample cans that this team has, it covers a wall. Think about it, hundreds of brands, right? So you're asking why don't we bet on 1 or 2 brands; a week concept and we roll out? But effectively, we're betting on hundreds of brands, some of the most creative and talented people all over the West Coast, with new concepts, right, that are coming to market. Some of them have done astronomically well in the last year; watching the volumes of these new brands come to market has been an eye-opening experience for me, but to predict which one it is, which brand is going to work is really difficult. And that speaks also to the advantage of this technology. In the past, you would spend 2 years perfecting the brand and the concept and you have 1 shot with all the money that you dumped into packaging and the supply chain to get it right. Now, a brand will come to us; we'll build them the product. They'll go out, realize it's not exactly resonating, and then there's a change, and we're getting a new version. So I like this segment. I think this is 1 where we can win. We're not going to have to fight all the way down to every little penny to compete for market share. This will be a successful segment that's going to have some longevity with margin.

So over the next couple of quarters, what kind of growth do you see in the digital printing mix?

Like I said, we reported that we're substantially above what we did last year, and we’ll do it, and I think we'll have some success in the second quarter. Frankly, I mean, our biggest risk, Jay, is working capital. This company is consuming working capital, particularly cans at an ever-greater rate, right? So as we grow so dramatically and bring in cans, we have to be able to generate cash and grow that investment of working capital. And so we still have, as I said, 1,000 barrels of bourbon, right? And a lot of this bourbon is bourbon we can't actually use; it's overage for our product set. Like we don't have a product that takes a 17-year bourbon. So 1 challenge that we have is to redeploy assets where we can, raise liquidity where we can to invest in working capital. So to your question on the second quarter, the biggest risk that I see is not having the cash to keep the growth at this clip, right, being slowed down because of our inability to get the cans quickly enough.

And where do you see breakeven? How many cans a quarter do you...

That's another good question. When I consider breakeven, it depends on our can costs and our margin on the cans, which I won't elaborate on much. Another important aspect is managing scrap and the overall process. When you're operating at high volumes with cans, you need to be aware that aluminum cans are quite fragile. They can easily compress in your hands, especially when empty. We must keep our scrap levels very low. We've implemented processes to reduce scrap in the machine, and we also need to ensure that the cans coming out are perfect, as we have a high standard for quality and a low tolerance for errors. Lowering scrap is crucial to achieving breakeven. Based on our production this quarter, the company should be nearing breakeven, but we might face challenges with EBITDA and cash due to issues like scrap that could lead to negative results. However, by the summer, assuming we have enough cans to meet peak demand, the company should generate considerable cash in EBITDA. Additionally, our spirits business is also approaching breakeven. In the fourth quarter, while we often discuss EBITDA, we also account for non-cash items. That business was nearly at breakeven, with only a $75,000 EBITDA loss. Free cash flow in spirits is low because we're not repurchasing bourbon, which further impacts that number. Both businesses are on track to start generating cash, but the concern is whether we have enough cash to cover corporate costs and the interest from remaining debt after the exchange.

Okay. And for the last question, I apologize for taking up your time, but how is the Board planning to shift direction to incorporate some external expertise?

Thank you for your questions regarding how the Board is supporting the company's transition and whether additional resources are needed. We've been fortunate to have a talented group that has guided us through challenging times. The previous management member was particularly selfless in her efforts to lead the company in a positive direction, but due to time constraints, she couldn't continue. You're correct that we need to attract more skilled professionals with expertise in manufacturing and marketing to drive our agenda. We have already begun this process by adding a new CEO for Craft, who joined us in January and brings extensive experience from a major consulting firm that specializes in high-tech manufacturing in North America. He has already made a significant impact on our efficiency in the first quarter. I agree that we should bring in more resources to support our growth, especially as we consider increasing our capacity in various locations, which will require that expertise.

Just a follow-up; are you planning to fund the addition of a machine through growth, or will you need to pursue other options?

Yes, we've been working on a financing package that we think will take serious and inform an operating lease.

The next question comes from Matthew Campbell with Laridae Capital.

Geoff, I'll be brief. You all have made significant restructuring efforts, and it's clear that the business is stronger now than ever. However, when examining the income statement, the numbers present a different picture. Specifically, tequila and the spirits business have not been growing, with tequila being a significant burden due to the acquisition made two or three years ago. Have we hit a bottom in the spirits segment? I know you mentioned that Portland Potato Vodka is starting to gain traction in your key markets now. I'd like to understand that better. Regarding the loss you reported in Q4, are you beginning to approach breakeven in the spirits segment?

Thank you for the questions. Last year, I was hopeful that we might achieve EBITDA in the fourth quarter, which was my personal goal. However, our adjusted EBITDA for the fourth quarter in spirits resulted in a loss of $75,000. In terms of progress, we have seen positive movements in spirits; for instance, Portland Potato Vodka has reached a price point that allows it to sell well. We still need to reduce some overhead costs, but improving that margin will bring us closer to the EBITDA figure I mentioned since it is such a significant part of our business. The bourbon sector hasn't seen growth because we lack the funds to invest in marketing for that product at the moment. Additionally, the tequila acquisition has posed challenges since we acquired it; we haven't had the capital to effectively grow its volume and margins at optimal price points, but agave prices have decreased significantly. As a result, we raised our tequila prices substantially to adjust the business accordingly, which unfortunately alienated many distributors who noticed a decline in volume. Distributors in spirits operate differently and often lack the same motivation as we do, creating a considerable challenge for any spirits brand that isn't a major player. This has been a tough situation for us as we are committed to not selling spirits or incentivizing distribution that would lead to losses, which has not been favorably received. In some areas, distributors have reduced their efforts to promote our brand. Given the current margins and pricing for the brand, however, it is now profitable and has the potential to become one of our more lucrative offerings. Therefore, in terms of the spirits business, the focus is on remaining disciplined and ensuring that this segment does not consume excessive capital. Until investors recognize the growth opportunities within this company, we must adhere to a capital guide. Looking at our stock price, we acknowledge that we have two businesses; I believe the digital camping business is distinctive, and as more people become aware of what’s happening in the marketplace, it will be quite valuable. Similarly, I am confident that our profitable spirits business will also prove to be significantly valuable. We previously attempted to sell one or more brands over a year ago, and our current profitability perspective plays a role in that situation. We will see how things progress from here.

Okay. And then on mobile canning, is that business in your view, has that hit a low? Or is that still going to be a headwind when we look at the canning side of the business?

That has been a challenge. It seems like every part of this company has faced issues. Mobile canning has struggled since COVID, and some customers have begun to insource their own production capabilities, leading to various challenges, including labor inflation. We've already discussed challenges within the spirits sector as well. To address this, we've decided to reduce our presence in locations where we're not achieving the returns we expect, such as Seattle and Denver. However, in Portland, we have a solid customer base and it's an area where we gain valuable insights about our clients. It's an essential part of our identity at Craft and remains a profitable segment that will continue to generate cash, which is vital to who we are. In the fourth quarter of last year, we incurred some costs related to winding down parts of that business, and we still have some ongoing expenses like leases that we need to resolve. Once we address these issues and streamline our operations, I don't anticipate these to be a significant obstacle moving forward. The larger opportunity, as we've mentioned, lies in getting the second printer operational. It's crucial to understand that in digital printing, one machine has to handle all the overhead costs of the facility. Adding a second machine means that every additional dollar generated by it will leverage those fixed costs, making its profitability potentially twice that of the first machine. This is a critical step for us to demonstrate the potential profitability of that business.

And when do you think you'll get that second printer?

This is on top of the priority other than enough cans to go to the machine for working capital in Q2. So we're working on it. Everybody wants these machines now, obviously, because they're seeing it happen. I mean the PGAs printing with digital print; Budweiser has been doing it. It's kind of lining on the radar screen. But as some of these small brands start to eat other people launch, everybody seems to be sterling and trying to get into schedule.

One of these days, it will be clear, and I'll finally be able to celebrate. I appreciate everyone’s hard work.

This concludes our question-and-answer session. I would like to turn the conference back over to Geoffrey Gwin for any closing remarks.

Yes. Thank you. I appreciate it. Thank you, everyone, for the time today. I know we're again sitting here in April talking about last year, but I think the story here and the private reporters is that we're still seeing good growth in this new technology, great adoption, and get things ahead. We need to put a few more pieces in place for people to get super excited about it and see it really, frankly, on paper, and I think we're going to do that this year. So please feel free to reach out to us, myself and certainly others in the organization, and we'd be happy to keep you abreast of developments. And then if not, we don't between now and then we'll be reporting here shortly on the first quarter soon. All right. So thanks.

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