Eastside Distilling: New buy

I have followed Eastside Distilling for more than 4 years before I finally decided to buy a position. The company always seemed appealing but I never felt completely comfortable with it. Although in late 2021 and in 2022 there were some major changes that happened that made is extremely compelling buy. Over the last few months I’ve acquired over 1% of the company.

Eastside is two companies: craft spirits and craft canning. The spirits side of the business is some award winning craft alcohol drinks. The canning side of the business has been packaging and delivery of craft drinks. The canning side of the business recently expanded in digital can printing. So the canning side of the business can now offer a full end-to-end service: printing, packaging, delivery. It is this end-to-end solution that makes Eastside extremely compelling at current valuations.

Spirits Business

I don’t focus much on this business segment because this has been the one that has struggled for many years. It is still struggling as it tries to fix the errors of prior management. It will take time for this business to turnaround but there are some good signs that things are starting to turn around.

This business segment owns the award winning brands like Portland Potato Vodka, Azunia Tequila and Burnside Whiskey. The company has great products but prior management team made the mistake of supplying the product to locations far away markets and selling the product at huge discounts. These mistakes led to sales numbers looking good but disastrous gross margins. The new management team has brought back focused markets and price increases, the results of which are just starting to show on the financials.

The company has Janet Oak as the one in charge of the brands. She has a stellar background, having worked at Pernod Richard and Annheuser-Busch.

This is a work in progress, signs clearly showing improvements.

Craft Canning + Bottling

The canning business has been a dominant position the the Pacific Northwest area that the company serves. The business is growing and has huge growth opportunities, it has been capital restricted so far.

In late 2021 the company purchases a digital can printing machine. The company received the machine in 2022 and it is in final steps of being put into production. The can printing machine can do 2M cans per month. The machine doesn’t require much human interface.

These machines are extremely hard to get a hand on. There is over 1 year wait list for these machines and the company doesn’t sell its machines to anyone. They company’s strategic and dominant position allows them to get access to these machines. The other companies that have gotten these machines were able to build a business from scratch and were able to get to 100% capacity within months. Eastside already has over 300 customers from its canning business that it can sell its production capacity.

The company also has recently raised some expensive capital. It seems like the company has raised the capital to obtain a 2nd machine. The dynamics of having two machines are amazing to the cash flow. The first machine should cover all the canning overhead and likely most of the spirits overhead. The 2nd machine will be “printing cash”. The same facility will be used for the 1st and 2nd machine, there isn’t much human operator needs for these machines, so overhead will be minimal.

There is also lot of change in the industry where smaller ready-to-drink products are running out of options for how they can get their products into cans. The big can printing companies have put in minimum order requirements that rule out small and even mid-sized RTD players. So the demand of these digital can printing is really taking off.

I’ve taken lot of notes on the canning+bottling business, as I’ve been focused on that business segment for the value generation. The spirits side of the business is definitely no 0, but I have left it as a huge optional play. If it works out then the brands can generate amazing margins and can grow to be much bigger business. At current valuation you don’t really need anything from the spirits side, just executing on the 1st and 2nd digital can printer will make the company worth multiples of current price.

Below are my notes on the canning + bottling business:

Craft Canning

The company’s craft canning business is a gem. It is also going through a major change in its industry which will make the canning business even more valuable. 

The supply chain for a craft alcohol company is like this: manufacture alcohol -> get custom can made -> fill can with beverage -> fill it in boxes -> get boxes to all the different venues where the product will be sold. 

A craft alcohol company will start out small. They will just produce their product and maybe just sell to a handful of places. As demand increases they will need to get the product to more stores and also increase the # of cans/bottles they make. The company is at its core an alcohol company, they make the product and have a brand that they manage. The company is not a supply chain company. Also they will not want to expand to manage the supply chain as it would be expensive. So this company might use someone like Eastside to manage the supply chain. 

Canning business is a regional business. Typically the canning business has relationships with retailers or end points. The canning business will also have relationships with the craft biz that makes the alcohol. So they are able to get the regional producers to sell its products at multiple different sites. 

Eastside has been doing this for many years. They have built up a good network for craft producers and relationships and routes with the retail sites. Having these relationships and the routes setup makes it hard for new competition to get the scale to be able to compete. 

In late 2021, the game changed completely for the canning business. 

Ball Corporation is a company that is one of the biggest can printing companies. They print cans for many small and mid sized companies. In late 2021 they came out with a minimum order requirement of 1M+ cans. So any company that needs less than 1M cans can’t use Ball. So these companies were stuck without a company that can make custom cans. 

Ball Corp.’s minimum order changes are latest headache for craft breweries seeking cans

The other change that happened is machines that can do digital printing on cans started coming to the market. These machines are not expensive, $4M for a Hinterkopf machine. Hinterkopf machine is a revolutionary change in the industry. Not only does it produce printed cans at a steady speed, it doesn’t require shutting down the line or stopping the line to make changes to the printing. 

In the past you had metal plates that had the design to be printed. Then when you wanted another design, you had to stop the machine, change the plate, start the machine and print. This would create a delay in printing and would require human intervention. Then Hinterkopf machine is a fully digital machine that can change the design on the fly.

So you have 2 changes: a technology solution that allows for digital can printing and one of the biggest printing company saying they are not interested in smaller companies and their small production. Eastside canning now gets to do an additional service and more importantly the volume just goes up exponentially as customers needs someone that can do can printing. 

Hart Print is a Canadian company that was the first company to get the Germany can printing machine. They are a fully online site that does print on demand. A customer goes to their website and puts in an order for the can. Customer would upload the print design. Then Hart would print their cans and mail it to the customer. 

https://www.concordia.ca/news/stories/2021/08/24/concordia-emba-alums-pop-to-the-top-with-their-digital-can-printing-business.html

https://www.facebook.com/watch/live/?ref=watch_permalink&v=853951108680529

Hart’s goal is to get to 5 sites with 2 printers per site. Each printer does 2.5M cans per month, 30M cans per year. So in total they are looking at 300M cans per year. 

https://beerandbrewing.com/could-digital-printing-be-the-lifeline-that-craft-beer-needs/

Hart is doing $9M in revenue per year. 

https://themediaword.com/transaction-montreal-based-hart-print-acquired-by-giant-ardagh/

They are at 30M cans per year run rate. So $9 M / 30 m cans = $0.30 per can. Hart is only doing printing of cans. They print the cans and then ship the printed cans back to the customer. 

EAST does everything, printing cans, filling it up w/ drink, packaging it onto pallets, and shipping it to the retail or restaurant. If you assume 30 cents net per can for printing, at 25M per year that Geoff said, that is $7.5M in revenue.

So what happens after EAST prints these cans. Someone is going to fill up the cans with drinks and ship it to the retailer. This is the traditional EAST canning biz. So the EAST canning biz now grows just from this printing. Most likely whatever is printed by EAST, EAST will fill it up with drinks and EAST will ship it to retail. So the revenue for the traditional canning business now grows w/ the increase in printing. 

Now EAST does lot more. So if a customer gets its can printed with EAST they will not want the empty printed can sent back to the customer. The customer will ask EAST to fill it up and then ship it to the retailer. So each can printing is not $0.30 revenue for EAST, it might be $0.40 or $.50 revenue. So EAST might be doing $10M of revenue per year from this 1 printer.

This printer costs $4M. So EAST ends up w/ 2.5x the revenue, seems like a really good deal. 

Now this is not just bunch of numbers. Hart got its printer in Mar ‘21. They did 700k cans in March. In June ‘21 they were doing 2.5M cans per month. Hart was a start-up. It was founded in 2018. They had no customers. AGAIN, HART WAS A START-UP, THEY HAD NO CUSTOMERS. They took at $4M purchase and converted it into $9M of revenue within a year. 

Geoff himself said: “So you will see — what I’ll say about that margin story is applying a flat margin rate to 25 million cans is too simplistic. There’s too many revenue opportunities around that limited resource for you just pick decoration as the one thing, right, that makes it work. It’s going to be bigger than that.” 

So Geoff knows it is not the $0.30 revenue per can for EAST, it is lot more. 

Someone did a call with Eastside and asked them what the cost would be do to a full service: printing can, filling it up, distributing it to retail locations. Eastside said it would be roughly $0.60 per can for 10,000 cans. With a lead time of 2-3 weeks. 

Craft Beverages Warehouse: Milwaukee based company that is going to offer digital can printing. Also provides option for filling up cans.