DLocal Q1 2023 Earnings Call Transcript

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May 15, 2023

There are 5 speakers on the call.

Operator

Good day, and welcome to the Eastside Distilling First Quarter 2023 Financial Results Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Amy Lancer, Chief Commercial Officer.

Operator

Please go ahead.

Speaker 1

Thank you. Good afternoon, everyone, and thank you for joining us today to discuss Eastside Distilling's financial results for the Q1 2023. I'm Amy Lancer, Eastside's Chief Commercial Officer. Joining us on today's call to discuss these results are Mr. Jeffrey Glynn, The company's Chief Executive Officer and Chief Financial Officer Ms.

Speaker 1

Tiffany Melton, Eastside's Controller and Mr. Bruce Wells, Craft Controller. Following their remarks, we will open the call to your questions. Now before we begin with prepared remarks, We submit for the record the following statements. 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.

Speaker 1

The forward looking statements Future, plan or plan, 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 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 ks for the year ended December 31, 2022, filed with the Securities and Exchange Commission. Now with that said, I'd like to turn the call over to Jeffrey Gwin. Jeffrey, please proceed.

Speaker 2

Thank you all for joining the Q1 call today. I'm pleased to announce we made great progress during the Q1. Let's talk about our 2 businesses, individual performances and then look at the consolidated results and finally review the guidance we gave just a few weeks ago on the year end call. As you will see from our 10 Q, we are now breaking out segment information on Craft, Spirits and corporate results in the MD and A section of the 10 Q. So if you have the queue in front of you, turn with me to the segment information section and then we can get started.

Speaker 2

Craft, which is our digital printing and mobile canning businesses, reported strong growth in the quarter. That business saw revenue up more than 35% year over year as digital printing sales have increased significantly. However, what's encouraging beyond the strong top line is that we achieved these results despite the slow start after the holidays. We had strong sequential growth each month of the quarter. In fact, March's printing sales were twice that of January.

Speaker 2

As we discussed on the call a few weeks ago, we have undergone some restructuring actions across all businesses, including Craft, and those weighed on results in mobile. Now Crafts gross profit performance reported for the quarter does not reflect where we expect to be in the current quarter, Q2. In March, we saw Strong improvements in gross margins driven by higher utilization and lower scrap rates. In summary, Our digital can printing business has significantly improved its rate of production and efficiency. We expect strong sales growth throughout the year.

Speaker 2

For Q2, we are maintaining our guidance that Crafts will look forward to positive EBITDA. Now let's talk about the spirits business. Spirit sales were $1,300,000 lower year over year, but largely because we sold over 500 barrels More of inventory last year than we did in the Q1 of this year. The gross margins were abnormally high this quarter due to the bulk barrel sales And this reflects the value of our barrel inventory, which we've talked about quite a bit over the last number of quarters. And we generated net income spirits because of these bulk Volumes are lower year over year in the wholesale cases that we sold, but we've kept Gross margins flat year over year.

Speaker 2

Now it's important to remember and we've said this over the last number of calls that we have taken price increases across the entire portfolio of brands. And we've also exited unprofitable distribution channels. Those are significant headwinds and they affected us all last year, but we've made progress. During the quarter, we took restructuring actions to lower our production and sales costs and expect to make incremental improvements there throughout the year. So for Q2 for Spirit, this will be an important quarter as we're moving into our promotional calendar and we expect to see volume improvements And we'll have more to report on that for our Q2 call.

Speaker 2

Lastly, we made progress cutting our corporate Operating expenses by a third over last year. So in summary, we are improving our cost position across the board. Craft, spirits, The corporate overhead of the public company, all improving. These cost improvements helped us set a foundation for growth, which will lead us eventually to consolidate performance where we can generate positive EBITDA. That's a milestone for the company long We've all been long waiting for and I expect that this will happen later in the year.

Speaker 2

So Q2 is off to a good start, although it's early and we're fighting against a weaker economic environment, but I am optimistic. Tiffany will take you through the company's performance in some more detail, but I'd like to leave you with a few more thoughts. The Board has determined that it is critical for us to remain a NASDAQ listed company in our 10 ks. We've highlighted a number of risks associated with this and this is one specific risk we called out. We are out of compliance with 2 specific issues with NASDAQ, Share price and tangible net worth.

Speaker 2

Last week, we announced that the Board had approved a reverse stock split that will allow us to take care of the first issue. We are actively working on addressing the second issue of tangible net worth prior to the NASDAQ I'll be happy to answer your questions after Tiffany gives us more details on the quarter. But now let's turn it over to Tiffany and get some specifics. Tiffany?

Speaker 1

Thank you, Jeff, and thank you all again for joining our call today. Let's review the Q1. On a consolidated basis, our gross sales were $2,900,000 for the Q1 of 'twenty three compared to $3,800,000 for the Q1 of 'twenty two, Primarily due to barrel sales, which totaled $600,023 versus $1,600,000 in 'twenty two, Craft sales were $1,500,000 for $23,000,000 $1,100,000 for $22,000,000 as we are finally seeing traction in digital can printing as continues to gain capacity. Spirit sales excluding bulk were $700,000 for 2023 compared to $1,100,000 for 20 22 due to initial orders from multiple distributor changes last year. Our consolidated gross profit was $600,000 for Q1 'twenty three Compared to $900,000 for Q1 2022, our consolidated gross margins were 22% for 2023 and 25% for 2022.

Speaker 1

Craft had margins of negative 7% for 2023 and negative 3% for 2022. Craft margins on a consolidated basis sequentially improved through Q1 as we continue to build volume of printed cans. Spirit margins were 54% for 2023 and 37% for 2022. Excluding barrel sales, Spirit margins were 32% for 2023 and 33% for 2022. Adjusted EBITDA was negative $700,000 for 2023 and negative $1,000,000 for 22, primarily due to decreased operating expenses.

Speaker 1

Our results have sequentially improved on a quarterly basis since Q1 of 2022 as we have significantly reduced operating expenses and are beginning to see the strength of the digital cam printer, We are excited to see its continued growth for the remainder of the year. We are also beginning to see better results for our Q1 2023 restructuring of both businesses And this will become more apparent in the coming quarters. We will now open the floor for questions. Operator?

Operator

Thank you. We will now begin the question and answer session. Our first question today will come from Sean McGowan of ROTH MKM. Please go ahead.

Speaker 3

Thank you.

Speaker 2

Hey, Sean.

Speaker 3

Good day. A couple of questions. Are we going to it's great to see that breakout that shows corporate, but are we going to be able to get Comparable figures for prior periods so that we can have a full set of comparable numbers?

Speaker 2

Yes. So we this is something that we've been working on for a while, Sean. I mean, one of the questions that everybody Wants to understand better is how profitable each business is. And just to be clear, so people understand this, if you go into our 10 Q, You owned the MD and A section. Now we segment report with a third section, that's corporate.

Speaker 2

Last year, we had started breaking out Spirits and Crafts, you could really see those 2 businesses, very different businesses. Corporate this year, we added because I wanted to highlight What I think is the real cost of a public company and that includes myself, Tiffany, Public company costs, D and O, things like that. So, we can go back and try to give you some guidance. There's a lot of information that we've Kind of consolidated here put together with this is something that Tiffany and I can work on with you and see if we can get you something that you can follow it.

Speaker 3

That's helpful. Now on the Craft, it's great to see that volume increase and I've been listening to all the calls and talking to you about Absorption and what we can expect to see in terms of gross margin improvement. I guess, maybe getting out of myself a little bit, but How high could that be at scale? What is sort of the upper limit of what gross profit could be as a percentage of sales If it's really humming and everything's going great, not assuming that we have the second machine, but just on the existing machine, what's sort of the upper bound of where gross margins could be.

Speaker 2

Great question. And an honest answer to that is, I don't know. I mean, and the part that's hard is It depends on really what happens to our core customers and the mix there. Right now, we're seeing our customers, All our mobile customers take up digital printing. I mean that's not been hard to get that to happen.

Speaker 2

We've I had a number of new customers take up printing only and that's been a big part. So When you start to mix in the other services that we offer and you see margin change, but at the end of the day, it really is by SKU and by type of can, Right. Some end markets need digital can printing because it's imperative And you can see that today and what's happening with the sleek business, all the Specialty craft beverages are going into sleek cans are having to compete in that market and you can't get away with crappy Labeling. So I'm not trying to void the question, but I would tell you this, you alluded to this. If we are able to execute on our growth plan and get the 2nd machine into our single facility, Then this is a business that changes dramatically its profitability because of the high degree of Cost in that single facility with 1 machine humming along and with the second machine and you can do high volume And then high gross margin type of strategy between the 2 machines and you're absorbing all the fixed costs, the value of the first machine goes up dramatically The value of the second machine goes up with breakevens going lower.

Speaker 2

So, we think our Pacific Northwest market Easily can use 2 machines. Portland is a leader and Seattle is a leader In the craft beverage space, and I think we're starting to see in our market, this digital printing tool be critical at retail for our customers. I think there's a lot to see, but I'll circle back and just put a final point on this. We should know by the end of This next couple of quarters, what a real high throughput and gross margin picture looks like. Because if we're able to keep the cans flowing through the machine, keep the supply chain going at the rate that we need and we can keep With these sales, then we're going to see really how margins start to pan out as we get the volume through it.

Speaker 2

So and that will be a good proxy For one machine footprint. So the Q2, Q3 is what I'd say.

Speaker 3

Okay. All right. Thanks. And one point of clarification that Reverse split is supposed to be May 20, is that right?

Speaker 2

That It's a good question. I see it trading today as a but we'll have to get back to you on that exactly What the timing was on that? Okay. I'll remember May 20 or so.

Speaker 3

Thanks,

Operator

Our next question will come from Matt Campbell with Florida Capital. Please go ahead.

Speaker 4

Yes. Good afternoon. How are you, Jeff? So if yes, the stock split today, by the way, for Sean. It's Now trading 21, one for 20.

Speaker 4

So when we look at excluding barrel sales, Do you think what we're going to start to see spirits accelerate year over year? Yes. If you peel out the stocking orders that were made into those distributors by your previous CEO, if we Take all that out. Are we starting to see the core Spirit business start to grow?

Speaker 2

Right. So Let's talk about spirits in 2 segments. Let's talk about Azunia, which is really our portfolio, our tequila business Outside of Oregon, and then we can talk about Oregon products. Now we've over the last number of years tried to move Oregon products into California and into other markets. Portland Potato Box is not going to sell outside of Portland.

Speaker 2

We've realized that, right? I mean, we've seen what it takes get it into different markets and it doesn't move without a lot of price help. So, we'll talk about the 2 different markets. Starting with Portland, We have reset largely across the entire set of SKUs our price points for Burnside, Portland Potato Vodka, we've made a number of adjustments in the market. And in the Q1, We didn't do any surprise work.

Speaker 2

In other words, we didn't we were out of the promotional calendar. And in the past, the company has been promoting, promoting, promoting constantly and not pursuing a strategy where we're on price and then off And helping a distributor really drive opportunity and sales at retail. So this is a year where we last year Tested, TPRs, tested pricing, some different strategies. And this year we have a calendar we think that's going to work well for us. And based on what we're seeing in the Q2, we're optimistic.

Speaker 2

I think we're halfway through that through May. And I'm encouraged. Our promotional activity started at the beginning of May. And so we'll see How we end the quarter, but right now I would tell you that I'm encouraged. I think we're going to have good results for the Q2 in Oregon Spirits.

Speaker 2

Now Zuni is a different situation. Zuni is a place where agave spirits, particularly importing agave, We had to really move price points up across the portfolio. I mean, if you just walk down the aisle and you pick out A bottle of tequila, you can see the price points there are meaningfully higher than some of the other spirits category, right? And that's a function of really What's happening south of the border in Mexico. Now we still produce a traditional tequila that isn't Put through a diffuser, not cooked with hydrochloric acid, that's an outstanding product.

Speaker 2

So we have taken upon ourselves to take the price points up And at the same time, walk away from distribution. We talked about this all last year, Matt. I know you suffered through it with everybody. But we're not going to sell it Alongside the crappy other mass markets tegillus. And so we lost volume there last year.

Speaker 2

And so that's what You're seeing year over year the comparisons, but we're working on Azumia and we think we're going to have a solution for it where we really start to see Some reinvestment there and we see some improvement. We've won some distribution. Just a couple of weeks ago, I was down in Texas and we're selling black and other high end products in University of Texas Stadium, we're selling it Baylor Stadium and some other places. So I'm encouraged, Matt. I think that you're going to start to see some improvements.

Speaker 2

But I think you need to look into the individual SKUs and talk about The story by market and then you're going to see the traction picking up. And if we get a couple of big things converted here, Then it's a whole another story. So let's stay tuned and see what we can get accomplished in the Q2. But I'm encouraged, particularly Just

Speaker 4

one follow-up, if I may. The gross margin characteristics of the spirits business, where do you see Gross margins on a going forward basis, is there an opportunity for you to take some cost out of that process?

Speaker 2

Yes. One of the key strategies for us is in Portland, we need to take cost out of our footprint. As you come down in volume, obviously, that was something that we need to do. We had built this business. We being the former management teams in the past I've built this business on a much larger set of volume.

Speaker 2

I mean, think about how much volume we left with And it's not as easy for you to just size down your production facility And you'll be working on lower volume, right, and keep your unit cost the same. So that's been a big challenge of the company. And I think that's one reason why last quarter, I said we're going to see EBITDA, adjusted EBITDA breakevens in Craft before spirits Because it's going to take us a little while to get a line on volume on our spirits side, on the production side. But I think contribution margins It can be healthy in that space and there's some more work to be done. He's done a great job attacking everywhere we can.

Speaker 2

But I think we'll see some better results now. Having said that, I mean, if you look at the margins, And I've said this a couple of other times in other quarterly calls, you're seeing the impact of value of wholesale spirits And on the secondary market, the fact that we can take bulk spirits and sell them at the prices that we have been and have to show you how much The market's moved up for aged product. And this is a business where nobody wants to take new fill And take the age it, right? They don't want to have the capital tied up, particularly in this higher interest rate environment. So I think this is going to be a market for where we're going to see Valuations stay high for aged product.

Speaker 2

I'm not talking about just whiskey, I'm also talking about aged tequilas. So I'm excited about that. I think that we're in a good position. Obviously, we have to invest in Nate's tequila just like everybody else, but I think It's an important point that people have to keep in mind.

Speaker 4

Great. Thanks very much and appreciate The work that you guys have done through this turnaround, it seems like you're starting to see a little bit more visibility, especially in the craft business In the spirits business, then you can reinvest in that and hopefully grow that in good time.

Speaker 2

Thanks, Matt.

Operator

Showing no further questions at this time. We will I'd like to turn the conference back over to Jeffrey Gwin for any closing remarks.

Speaker 2

Great. Well, I really appreciate everybody's interest in the company. And as I said on our recent Q4 call, This isn't a really important year for the company. This is a year where we've taken a number of restructuring activities, actions in the Q1 of this year, Also at the end of last year, we've had a number of changes in the business to make it more profitable. I'm really encouraged by the team.

Speaker 2

I think there's times where you look down the long road to Getting to a point where you're making money and it feels like it's just really, really challenging at every turn, but the team has come together Both on the craft side and the spirit side. And so I'm really pleased with my teammates and watching them go at it every day. So, I think we're going to have A great first half of the year. Stay tuned for the rest of the second quarter. And we hope that you'll take some time and reengage and get to know the company because I think This company is going to outperform this year and surprise a lot of people.

Speaker 2

So again, thank you for the time today.

Operator

The conference has now concluded. We thank you for attending today's presentation. You may now disconnect your lines.

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