Eastside Distilling, Inc.
Q3 2020 Earnings Call Transcript

Published: 13 Nov 2020

[Operator:]

Good afternoon, and welcome to the Eastside Distilling Reports Second (sic) Quarter Fiscal Year 2020 Financial Results Conference Call . Please also note today's event is being recorded. At this time, I'd like to turn the conference call over to Ms. Amy Brassard, Corporate Affairs Director. Ma'am, please go ahead.

[Amy Brassard:]

All right. Thank you so much. Good afternoon, everyone, and thank you for joining us today to discuss Eastside Distilling Financial Results for the Third Quarter 2020 ended September 30, 2020. I'm Amy Brassard with Eastside Distilling, and I'll be your moderator for today's call. Earlier, Eastside issued third quarter 2020 financial results in our press release. Joining us on today's call to discuss these results are Mr. Paul Block, the company's Chairman and Chief Executive Officer and Mr. Geoffrey Gwin, Eastside's Chief Financial Officer.

[Geoffrey Gwin:]

Thank you, Amy. I'm pleased to report we have made meaningful progress over the last quarter on multiple fronts. First, on October 27, we signed a nonbinding term sheet to end our relationship with Redneck Riviera. We will be entering into a termination agreement of a license as well as the sale of barrel stock, raw materials and finished goods. The LOI contemplates total consideration to Eastside of approximately $8 million. That number will be subjected to certain adjustments upon closing, which we expect to take place in the current quarter. The company will use the proceeds to pay down debt and fund its growth plan, which Paul will discuss shortly.

[Paul Block:]

Thank you, Geoff. We certainly appreciate you joining us today for the Q3 earnings report. As Geoff previously mentioned, Redneck Riviera Whiskey license termination will offer Eastside $8.1 million in value and will significantly change the balance sheet dynamics. The company will have the opportunity to reduce absolute barrel inventory by 45%, reduce the -- the value of that barrel inventory by 38% and retain approximately 50% of the $8.1 million in cash. This event and the impact it will have on the balance sheet will better position the company for further capital structure improvement and will better support our goal of accelerated and sustainable growth.

[Operator:]

Our first question today comes from David Bain from ROTH Capital.

[David Bain:]

I guess, first, I didn't see the typical detail as it relates to some of the product line volume growth. Is that something that could be in the queue? Or could we briefly go through Burnside, Azuñia and Redneck, maybe 3Q, and the trends so far in 4Q?

[Geoffrey Gwin:]

David, it's Geoffrey here. I can talk to that. Yes, we didn't give out the numbers this quarter for the volumes. We're going to -- I can talk generally about the direction of the Spirits business and then we can take it off-line later, if this is something you need more numbers on. So Redneck and Azuñia, both, as we said in the second quarter, were impacted by the the pandemic. And coming into the third quarter, each month sequentially got better, and we had a strong finish to the quarter with both Azuñia and Redneck. Having said that, there were some marketing-related expenses on Redneck that didn't let us benefit as much as we had hoped in September on a gross contribution basis. But those two brands are doing well. Now we have to keep our eyes on the fourth quarter here as we head towards this continued increase in the pandemic, but we remain optimistic on those two brands. And as we finish our stewardship of of Redneck, Burnside and the Portland Potato Vodka brands are doing extremely well. Portland Potato Vodka is doing very well and it's been now launched in California and has had a lot of initial success. So we're having year-over-year gains in that brand as well as we're seeing slight gains in Burnside. So we're pleased with the spirits, but clearly, in this quarter, the Craft Canning business looks phenomenal. They're up another 20% or so and really driving our growth and cash flow for the company.

[David Bain:]

And congratulations on kind of being unshackled as it relates to the balance sheet soon and margins as well. After you divest Redneck, which gives you, I guess, the instant sales margin pickup, I assume there's other margin augmentation opportunities that come in as well. If we extract the Redneck costs and look at the new revenue mix, do we need a significant amount of growth from here to be EBITDA positive? I'm speaking to EBITDA, not necessarily the cash burn that you were speaking to.

[Geoffrey Gwin:]

I'll start with that, and Paul, maybe you can jump in. Those numbers that Paul is referring to in his section of the script adds back interest expense. So just to make you aware of that when I speak to EBITDA, I'm not obviously including interest expense. But I have to tell you, I think from what I've seen, two things -- let me sit back for a second, just say, generally speaking, one of the challenges that East has had is they have premium Craft products and they take the price down. Right, then we moved down at retail. Again, Paul is much better at explaining this than I am. In the case of Redneck, that whole market, that whole business went down market for us. So I think our goal here with Azuñia and Burnside and also with Portland Potato Vodka -- and I'll again refer you back to some of Paul's comments on some of the changes made there. You're going to see us be able to capture more margin in those products. And that's going to go a long way to improving the cash flow operating performance of the company in the income statement. Having said that, there's also a mix shift going on. We've never really been able to capture the Black opportunity in Azuñia. We're selling a lot of Blanco, the lowest margin product we have. And the reason why we haven't captured it is because the minute we got our act together at the beginning of the year, all the on-premise locations went dark. It was very hard to get people focused on Black. That's changing for the holiday period, and we're getting that out finally. And that will have a margin change. But Paul also alluded to something else in his script that I'd point people to, is some new products that are going to be really high-margin products. The company sits on some aged whiskey that is incredible and has an opportunity to take some products out to market that I think are going to be -- have a big impact in the company and it's going to be reflected in growth and profitability. Paul, did you want to add to that?

[Paul Block:]

Yes. What I'd like to do is just give a specific example. I'll take Portland Potato Vodka. We're looking at simultaneously creating less complexity in production and bringing products to market that are more Craft, more premium and more quality. You've heard us continually talk about that. The other thing we've talked about is not just pushing it in, but ensuring that we pull it through. So we have just taken the Portland Potato Vodka and assimilated in -- created a mockup in the Burnside bottle, which is a called the fourth-day bottle, presented it to consumers. And our top-box purchase intent, we went out and did a quantitative study, which is, I don't think Eastside has done at all for any of its products, and we've measured purchase intent. And like I said, we're going to look more at how consumers pull it through than just jam it in and hoping it moves through. And the top-box purchase intent on the new PPV bottle went from 15% to 25%. So those would be people, 15% said I'm extremely likely to buy it and when we showed them the new bottle, it went up to 25%. And on the top 3 box, which is extremely very and somewhat likely to purchase, it went from 79% to 86%. Now we'll also have a corresponding price increase and try and bring the price back up again, because we've been pushing that price down. So we'll take some of the iconography from the bottle and the label and what's very attractive to consumers in driving purchase intent. And we'll put it into point-of-sale and into merchandising. So that's one specific example. Also, I don't want to bore you to death, but we're looking at attributes and derived attributes. And I promised our shareholders, it would be more quantitative. We focus on more pull. We give you examples of how we're going to grow these brands. And the Potato Vodka scored higher on premium, quality, Craft and new and different, and those are all attribute ratings. Combined together, it's called derived attribute ratings and those specifically drive the purchase intent. So we know when we put this bottle in the market, we can go out to distributors, and we could show them the research, we can show retailers the research. We can explain why we should take our price up and we get a higher margin, and we can tell them how we're going to drive more velocity at the point of purchase. And just one more thing, not to take too much time. But the Eastside brand, the Eastside brand is scored through the roof. We've just tested just one mockup and the top three box score on talking purchase intent was 96%. So 96% of the target that we interviewed said they were extremely likely or very or somewhat likely to purchase. So we're out there measuring the impact of the packaging, and we're also measuring the underlying attribute fundamentals that move us to more premium, more Craft and higher quality, which allows us to charge more in the marketplace. So we're really excited about all this. We're ready to get out and start to see it in action in some of the markets and to support it with some promotion and some online support.

[David Bain:]

And I promise last one. I know it's my third. But just on Craft, a lot of beverage companies even one today have noted that the can supply tightening. They've been speaking, though, also to supply relief kind of at the end of next year after some factory build-outs and I'm just wondering how that impacts sort of the longer-term for Craft or just Craft like the mobile, does that fill a different type of niche or void that general supply factories can't? And also, would that be flexible enough to sort of ramp down as a business over time as spirits become much more pronounced and maybe supply does creep back into the market? Or how should we look at this as a longer-term opportunity for Eastside?

[Paul Block:]

I can speak to that strategically. I think to answer your one question, is it different than fixed operations as a mobile canning operation? And the answer is yes. It's very different because we're actually putting three or four components on a truck along with the bright cans and going right to the point of production. And so different production facilities may have certain changeovers. They have some downtime. They may have optimized their capacity utilization. So they need something that is fast, is incremental and is on site. And that's very different. Because when you produce in a fixed operation, then you're either producing the liquid on-site or you're trucking it in. So you should think of it as a very unique opportunity offered to the marketplace, and one that I think is sustainable. In terms of the cans and the overall interest in the can market as a consumer demand, yes, you could envision there being a little bit less intensity after COVID as on-premise comes back, as draft beer comes back, but I don't think cans are going away as a preferred package or as a consumer consumption set. I think I've seen a lot of beverage trends, fads over the years. And this one looks fairly consistent. I'm not saying it won't back off. And then on the last point on the actual can supply, there is a lot of pressure on can supply. But I've been very impressed with the capability of our purchasing team and their innovative ways to get out into the market and find can availability and to even find some at pretty good cost. So it is a challenge. It's something that's on our mind. But from what I've seen, the team has been managing it well, and we haven't really run out of stock to date.

[Operator:]

Our next question comes from Peter Merkel from Magis.

[Peter Merkel:]

A couple of quick questions, hopefully. The inventory aspect on the whiskey, when you're talking about new products, is that just the burn through that inventory, are these potentially permanent new products?

[Paul Block:]

I think the primary impetus of developing the Eastside brand, there's other reasons, but primarily is to really burn through these barrels. Now if we find something that's on fire and that people love, we can even turn into a permanent product offering, it's possible. Or it could be a repetitive limited offering during different times of the year. So primarily, we're looking to work through the barrels. Secondarily, we're always open to opportunities as it emerges in the market.

[Peter Merkel:]

And could you give an update on how the Hue-Hue Rum rollout is going? And then my final question is, are you seeing any good traction on the Azuñia on-premise when it comes to your trying -- I think last time we talked, we were talking about creating partnerships with signature drinks at the restaurants and on-premise, and if that's occurring?

[Paul Block:]

So in terms of Hue-Hue. Hue-Hue is I mean it's doing maybe 100,000 cases this year. And it's a very limited usage occasion. I mean, I used to work on Kahlúa, coffee liqueur. And Hue-Hue is a coffee rum. And it's a very finite and a very small usage occasion. So we're really going after where we see the fastest growth and the best return. Given that we're a small company. We're a bit cash constrained. We want to use our resources judiciously. I would have to say the biggest opportunity the team sees on Hue-Hue is in a ready-to-drink. And we're now developing different prototypes for Hue-Hue RTD. And we're also thinking about the fact that Hue-Hue could be more than just a coffee rum. Maybe it's a coffee vodka. So Hue-Hue could just be this great coffee infused spirit that you have in a ready-to-drink offering. So we're not backing off of Hue-Hue. We are going to optimize the packaging. It's cost a fortune right now. So we're going to improve that. And we'll move forward opportunistically. But I would say, in 2021, it's not going to be our biggest push. It will be Azuñia, Burnside, Portland Potato Vodka, and then we'll offer the Limited Edition Eastside. And of course, we'll make Hue-Hue available, but we only have so much dollars to go around.

[Geoffrey Gwin:]

And just to clarify, it's under 1,000 cases this year of Hue-Hue.

[Peter Merkel:]

How about Azuñia? Are you seeing traction in…

[Geoffrey Gwin:]

We've had some success with placing Azuñia in on-premise. In fact, I think there's a well-known chain. I don't think we've made it public yet, Paul. I'm not sure about that, but…

[Paul Block:]

No, no, we're in. We're on the menu at cafe, lots.

[Geoffrey Gwin:]

And they think they're going to have other opportunities there. And yes, Azuñia lends itself well for this kind of placement. Remember, though, a bottle of Black is at retail over $100, right? So on-premise, then you're in a much higher dollar price point. But this is a situation where you start to go through the expressions of this tequila. You kind of end up wanting to go after the Black and have an opportunity to try it, extraordinary tequila. And so we are making progress there, and the sales team had some success in the past quarter. We should see more of that in the next quarter and into next year.

[Operator:]

And we do have a question from Matt Campbell from .

[Unidentified Analyst:]

Nice to see some progress at the company. Geoff, you made a comment about the debts with Live Oak and your notes available. Wondering if you could expand upon that because you said you felt confident being able to push that out?

[Geoffrey Gwin:]

So yes, we're in process with -- we have two banks actually. Live Oak is the bank that we have used to finance the barrel inventory and then we have First Interstate, who's been extremely supportive with Craft and growing Craft. And we just have learned that we've renewed the First Interstate line for end of the year. In fact, it could be going up in size and shortly about that to help finance the growth. And Live Oak has also told us that they are excited to continue the relationship. And so we're in the process of having that rollover for another year. And we're in discussions with them about how much cash we'll capture, obviously, as we close the Redneck deal and how much we'll have left on the balance sheet. The rest of the debt is our notes payable. It's around $2 million and change, and those are old friends and family notes, some of them are convertible, busted like converts in the sense that they're low coupons and they mature over the next -- into the spring, late spring. And we've talked to people about helping us take care of that if we decide not to use our cash. And so we've got some interest there. And then the last item that I'll call out just because it's there, is the earn-out, as I mentioned, it's moved into a current liability because we have it coming up here in the first quarter. But a portion of that has already been crystallized in what we'll pay out in the stock. And we can issue more stock, issue cash, we can issue the rest of the note -- the notes, a three year note with a 6% coupon. But suffice it to say, right now, we want to look at all our opportunities. And as Paul said, the Kilkennys have been extremely supportive of this company over the last year. And they want to see the company be successful, not just the Azuñia product that they brought to the family, but the entire platform. And so we're in discussions with them about how we can create a win-win for them, extend the earn-out and give the company a clean balance sheet for next year, plenty liquidity growth.

[Unidentified Analyst:]

And I'm traveling, so forgive me, I haven't been able to see the press release. But the PPP money, was that forgiven? Or what's the status of that?

[Geoffrey Gwin:]

We are applying for full forgiveness. The application is in process, and we will know in 60 days or so, that's about $1.4 million.

[Operator:]

Ladies and gentlemen, I'm showing no additional questions. I'd like to pass the floor back to management for any closing remarks.

[Paul Block:]

Yes. Well, we'd just like to thank everybody for their participation and continued support. Really appreciate it, and we look forward to any one-on-one conversations, you'd like to have with Geoff and I, if you'd like some more detail. Other than that, thank you very much, and have a nice evening.

[Operator:]

And ladies and gentlemen, with that, we'll conclude today's conference call. We do thank you for attending. You may now disconnect your lines.