Beeline Holdings, Inc. (BLNE) Q1 2023 Earnings Report, Transcript and Summary

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

Thank you. Good afternoon, everyone, and thank you for joining us today to discuss Eastside Distilling's financial results for the first quarter of 2023. I'm Amy Lancer, Eastside's Chief Commercial Officer. Joining us on today's call to discuss these results are Mr. Geoffrey Gwin, the Company's Chief Executive Officer and Chief Financial Officer; Ms. Tiffany Milton, Eastside’s Controller; and Mr. Bruce Wells, Craft’s 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. The forward-looking statements describe future expectations, plans, results or strategies and are generally preceded by words such as may, future, plan or plans, 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, 2022, 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 all for joining the first quarter call today. I'm pleased to announce we made great progress during the first quarter. Let's talk about our two 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&A section of the 10-Q. So if you have the Q in front of you, turn with me to the segment information section and then we can get started. 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. 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 craft’s gross profit performance reported for the quarter does not reflect where we expect to be in the current quarter, quarter two. 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. Now for Q2, we are maintaining our guidance that craft will report positive EBITDA. Now let's talk about the spirits business. Spirits sales were $1.3 million lower year-over-year, but largely because we sold over 500 barrels more of inventory last year than we did in the first quarter 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 in spirits because of these bulk sales. Volumes are lower year-over-year in the wholesale cases that we sold, but we kept gross margins flat year-over-year. Now, it's important to remember, and we've said this over the last number of calls, we have taken price increases across the entire portfolio of brands and we've also exited unprofitable distribution channels. Now, 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 spirits, 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 report on that for our second quarter call. Lastly, we made progress cutting our corporate operating expenses by a third 3 over last year. So in summary, we are improving our cost position across the board. Craft, spirits, the corporate overhead of a 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 we've all been long waiting for. And I expect that this will happen later in the year. 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. Now, 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. With the improvement in the statement of operations, we have a real opportunity to invest and accelerate growth. The Board has determined that it is critical for us to remain a NASDAQ-listed company. In our 10-K, we've highlighted a number of risks associated with this, and this is one specific risk we called out. We are out of compliance for two specific issues with that: share price and tangible net worth. 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 deadline. 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?

Thank you, Jeff, and thank you all again for joining our call today. Let's review the first quarter. On a consolidated basis, our gross sales were $2.9 million for the first quarter of ‘23 compared to $3.8 million for the first quarter of ‘22, primarily due to barrel sales, which totaled $600,000 in '23 versus $1.6 million in '22. Craft sales were $1.5 million for '23 and $1.1 million for '22 as we are finally seeing traction in digital can printing as it continues to gain capacity. Spirits sales, excluding bulk were $700,000 for '23 compared to $1.1 million for '22 due to initial orders from multiple distributor changes last year. Our consolidated gross profit was $600,000 for Q1 '23 compared to $900,000 for Q1 2022. Our consolidated gross margins were 22% for '23 and 25% for 2022. 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 continued to build volume of printed cans. Spirits margins were 54% for '23 and 37% for '22. Excluding barrel sales, spirits margins were 32% for '23 and 33% for 2022. Adjusted EBITDA was negative $700,000 for '23 and negative $1 million for 2022, primarily due to decreased operating expenses. 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 can printer, which we are excited to see as 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 Instructions] Our first question today will come from Sean McGowan of Roth MKM. Please go ahead.

Thank you. 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?

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 go into the MD&A section, now we segment report with a third section, that's corporate. Last year, we had started breaking out spirits and craft, so you could really see those two businesses very different businesses. Corporate this year, we added because I wanted to highlight the -- what I think is the real cost of a public company, and that includes the -- myself, Tiffany, public company costs, D&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 that -- this is something that Tiffany and I work on with you and see if we can get you something that, so you can follow it.

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 ahead 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 is going great and 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?

Right. Great question. And an honest answer to that is I don't know. I mean, in 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. We've 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've seen margins 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 that 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 avoid 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 second machine into our single facility, then this is a business that changes dramatically as profitability because there's a high degree of fixed cost in that single facility with one machine humming along. And with the second machine and you can do high volume on a high gross margin type of strategy between the two machines and you're absorbing all the fixed cost, the value of the first machine goes up dramatically and the value of the second machine goes up with breakeven going lower. 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. So, 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 going into the machine, keep the supply chain going at the rate that we need and we can keep up with these sales, then we're going to see really how margins start to pan out as we get the volume through it, so. And that will be a good proxy for one machine footprint. So Q2, Q3 is what I'd say.

Okay. All right. Thanks. And one point of clarification that a reverse split is supposed to be May 20th. Is that right?

That is 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.

Yes.

[Operator Instructions] Our next question will come from Matt Campbell with Lourde Capital. [Ph] Please go ahead.

So if -- yes, the stock split today, by the way, for Sean, it's now trading -- 1 for 20. So, when we look at excluding barrel sales, do you think 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 of that out, are we starting to see the core spirit business start to grow?

Right. So, let's talk about spirits in 2 segments. Let's talk about Azuñia, which is really our portfolio of our tequila business outside of Oregon. And then, we can talk about the Oregon products. Now we've, over the last number of years, tried to move Oregon products into California and to other markets. Portland Potato Vodkas is not going to sell outside of Portland. We've realized that, right? I mean, we've seen what it takes to get it into different markets, and it doesn't move without a lot of price help. So, we'll talk about the two 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 first quarter, we didn't do any surprise work. In other words, we didn't -- we were at 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 price 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 second quarter, we're optimistic. 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 in the quarter. But right now, I would tell you that I'm encouraged, I think we're going to have good results for the second quarter in Oregon spirits. Now Azuñia a different situation. Azuñia is a place where agave spirits, particularly importing gave, 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're going to 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, it's an outstanding product. 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. We're not going to sell it alongside the crappy other mass markets tequilas. And so, we lost volume there last year. And so, that's what you're seeing year-over-year in the comparisons. But, we're working on Azuñia 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 in Baylor Stadium and some other places. So I'm encouraged, Matt, I think that you're going to start to see some improvements. 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, than it's a whole another story. So, let's stay tuned and see what we can get accomplished in the second quarter. But I'm encouraged, particularly in the Oregon.

Just 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?

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 needed to do. We have built this business. We've been -- the former management teams in the past have built this business on a much larger set of volume. I mean, think about how much volume we left with Redneck Riviera. And it's not as easy for you to just size down your production facility and be working on lower volume, right, and keep your unit cost the same. So, that's been a big challenge to the Company. And I think that's one reason why last quarter, I said we're going to see EBITDA -- adjusted EBITDA breakevens in for 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 can be healthy in that space. And there's some more work to be done. Team's done a great job attacking everywhere we can. 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 the value of wholesale spirits on the secondary market. The fact that we can take bulk spirits and sell at the prices that we have been -- have, just 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 -- and 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. 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 aged tequila, just like everybody else, but I think it's an important point that people have to keep in mind.

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

Thanks, Matt.

Showing no further questions at this time, we will conclude our question-and-answer session. I'd like to turn the conference back over to Geoffrey Gwin for any closing remarks.

Great. Well, I really appreciate everybody's interest in the Company. And as I said, our recent fourth quarter call, this is a really important year for the Company. This is a year where we've taken a number of restructuring activities -- actions in the first quarter 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. 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 term, but the team has come together, both on the craft side and the spirits 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. So, again, thank you for the time today.

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