Q3 2019 Earnings Call
<unk> and welcome to the Attorney. Please brain start put her 2019 car Chase conference is being recorded after two days presentation there'll be an opportunity to ask a question to ask a question <unk>.
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Morning, everyone <unk> CFO turning point brand.
Wanting me today are turning point <unk>, Larry Wexler, <unk>, who has a new x. subsidiary and Jim Marie Senior Vice President of business planning.
It's morning, we issued a news release covering our third quarter 2019 results. It's release is located in Investor Relations section of our website.
Where a replay of today's conference call will be available.
In this call you will discuss or consolidated in segment operating results provide our perspective on our progress.
As is customary I direct your attention to discussion afford looking cautionary statement today's press release and risk factors in our filings with the Securities Exchange Commission disclosure outline various factors that could cause actual results a different materially from projections of forward looking statements that may be cited in today's discussion.
These forward looking statements and projections are not guaranteed the future performance and you should not place undo reliance upon them, except as provided by federal Securities laws. We undertake no obligation to publicly update revised any forward looking statements.
In a call today wheel reference certain non-GAAP financial measures. These measures and reconciliation gap can we found in today's earnings release, along with reasons why management believe that they provide useful information.
Well now trying to call over to Larry Wexler <unk>. Thank you Bobby and good morning, everyone. Thank you for joining the call.
News this quarter relating to the company's broad portfolio of products was dominated by the controversy surrounding vaping caused by an outbreak of illness among vaping consumers.
Impact on the beeping industry with substantial and has the potential to overshadow the stronger compelling results in other parts of the company.
<unk> continues to produce accelerated growth.
Smoking has begun his recovery from the Canadian inventory draw down.
A new X. continues its growth trajectory, even in his challenging environment vaping headlines.
News on beeping illness is dramatically disrupted our third party distribution business starting in mid August .
The current environment misinformed headlines and consumer confusion has impacted the behavior both consumers in store owners.
As a result, we are taking immediate action district costs, when the T.P.B. injure infrastructure to write size or organization.
Specifically the company intends to accelerate cost reduction plans, which are expected to live or $8 million to $10 million annual I savings.
These cuts will come from warehouse in business consolidation plans in various vaping properties and other related corporate activities.
The goal is to reduce costs, while preserving e. commerce capabilities to support our growing assortment repository, new x. products and to means sufficient strength and nicotine vaping to participate in any potential recovery.
This week, we implemented a 10% headcount reduction.
Pains me to lose valuable employees.
<unk> to write size the business in light of the changing environments.
And finally, given the uncertainty and confuse consumer base in the third party vaping distribution business.
Directors or simultaneously exploring strategic alternatives for some of these businesses.
It can be no assurance that this process will result in the approval or completion of any particular strategic alternative were transaction in the future.
Moving to the quarter and our performance metrics remain particularly pleased with the strength or a court tobacco products in both smokeless in smoking and with a strong momentum at new X.
Stalkers M.S.T. delivered yet another record share in the quarter propelling segments sales growth upper by 20%.
M.S.T. same store sales velocity and strengthened by 33% versus a year ago, demonstrating genuine product satisfaction.
Muggy sales increased by 7% on solid per store the loss of these <unk>.
Zigzag cones and nice volume advances in cigar wraps were zigzag command is greater than 75 share.
Despite the paper headlines impact on the Riptide launch total new X. sales increase when 4.3 million and second quarter, 6.3 mean and the third quarter.
The new X. product pipeline.
Supported by our team at soloists is robust it on track to bring forward additional lines in the fourth quarter. They will take the company and new x. into entirely new spaces.
What I called white spaces, where they're genuine voyage that represent meaningful potential sales opportunities.
We are fortunate to have a strong foundation of <unk> smokeless and zigzagging smoking, which collectively delivered 82% of your date either.
He's brands are thriving and we continue to position new x. to enter attractive growing markets.
<unk> business has been disrupted by the current controversy, but we have plans already in motion to reduce our financial exposure to third party aspects of these because.
Businesses.
At the same time TPP remains heavily committed to capitalizing on our core competencies in branding.
Distribution.
Development and regulatory affairs to create market, leading adult activist products.
It includes investing in the F.D.A.P.M.T.A. process, where T.P.B. is proprietary brands as well as growing the C.B.D. and other activists businesses.
Over the last few years, we've made investments acquiring powerful e. commerce platforms for both be to B. and b. to see environments.
Fully intend to leverage these capabilities to repel Arab proprietary product portfolio products.
He's investments are not going to waste on the contrary, we have millions of data points on consumer purchases behavior and preferences that we can leverage to emerge out of the F.D.A.P.M.P.A. process as one of the few marketers open systems.
I've seen may major shifting tobacco business over my 36 years in the industry.
M.T.A. is one of those moments and we are confident that we'll be able to be on the right side of that process.
We had some additional color on years date and upcoming new X. activities, Let me turn the call over to <unk> President of New X., you think you Larry.
Third quarter, New X. sales 6.3 million <unk> from 4.3 million and Q. too, while 45% advances a nice step on word in our journey towards accelerated growth I'm not satisfied.
We're not satisfied.
As we discussed before there's a swelling demand for alternative products, most notably hemp derive C.B.D. products.
And the third quarter, we introduce new X.C.B. depends across the T.P.B. platform.
These to soak disposable CBD pens positions favorably in the traditional retail with the first mover advantage.
There are five products in the line each carrying a particular mood positioning like relax focus are happy.
Retail price point of 1999, each has been very well received by both the trading consumers alike.
Please report that initial results are in fact, very encouraging and we sold out. This month further retail expansion is in the queue for the fourth quarter.
While exploring potential product development concepts with premiere retailers, we covered a compelling narrative that gives us and especially high levels enthusiasm for the new x. portfolio of novel alternative products.
Leading retailers are actively engaged in trying to assemble a sweet equality C.D. products, but only from trusted partners in suppliers.
Enter T.P.B.
We have a long track record of not only bringing winning high velocity products and brands to our partners, but also an industry leading reputation for reputation for standing behind our products.
When we discuss our new products with them.
The enthusiasm is palpable.
They're eager to work with us to chart their path forward with alternative products.
In the fourth quarter will be broadening the sweet a new X.C.B.D. products to meet the demands and desires of our retail partners and consumers.
Q for product selection flows out of learnings and understandings for E. commerce and retail experience.
A few of those queue for introductions include.
New X.C.B.D. liquid shots. These two ounce bottles with 30 milligrams ASCVD in energy and stress relieving flavor profiles or new and unique formats that are sure to create speedy interest to try on sales.
Shots are scheduled for late November shipment to the trade.
Also in November new X.C.D. tinctures in 15 milk bottle with 250 milligrams, a C.D. will be available and four flavors.
Product will be well positioned in it as an entry point for new consumers and in December new like CBD Gummies NGL capsules.
<unk> almost 40% of C.D. consumers purchasing <unk> these product formats have emerged as especially especially integral.
The products are available.
In a wide range of flavors and confused with C.B.D., rather than being sprayed on a better solution for the consumers.
In the coming months will be focused on introducing the C.D. portfolio within traditional retail.
The discussions they indicate a great deal of trade enthusiasm for products supported by a company, who can be trusted on product quality and merchandising support.
We appreciate dealing with one company, who delivers quality products across the format. The cover 70% of sales in the category.
See this is unique opportunity to build on the early success of the new X. pens established the brand and propel us to the forefront of this growing category.
Looking forward to Q1, 2020, and beyond our new product pipeline remains, especially robust with highly innovative products uniquely positioned to meet specific consumer needs and desires.
Well, we are certainly focus on attaining a market leadership position in the rapidly growing CVD market, new x. means much more than just cbds no x. is all about bringing forth innovation a wide variety of new alternative products as we move into 20 2020.
You will begin to see the creativity in depth of our innovation development team.
Living to retire in the quarter, we expanded U.S. retail footprint by approximately $7000, including two large leading convenience store chains.
Attraction has been good, albeit a bit muted by the big headlines.
And looking at same store sales to evaluate early consumer satisfaction, we're observing a steady increase in velocity rates in the associated share gains.
At the present time, we were doing a deep dive research project to fully understand progress during intensive targeted store revisit program.
In the 3000 stores that we have revisited already a rip tight shares now up to 6%.
Based upon preliminary findings in Lake Q3, we have already implemented a number of packaging and product improvements, which will hit retail later this quarter.
Importantly, we're finalizing the Canadian retail introduction with our partners that recreation marketing recreation placed their opening P.O. and plenary feedback from large account presentations is highly encouraging with major players in the queue for riptide distribution.
Riptide was well presented at the <unk> the largest based show in the U.K. last week.
All of Us a T.P.B.R., especially excited with not only our new Lex progress to date, but more so with the building momentum enthusiasm for our trade partners.
Results to date are encouraging, but only shadow what's to come.
With that alternative Bobby for review of our third quarter financial performance Bobby. Thank you Graham copying results in the third quarter, we're a bit of a mix as we move swiftly to address the paper disruption performance in our smokeless and smoking businesses were positive inconsistent with our long term growing plan total company net sales were.
16.1% with gross profit advancing 18.2% and gross margins expanding in each of our three reportable segments.
Before I dive into the segment consolidate performance in the quarter, Let me update on our recreation, marking investment in Canada.
As we now from last first call in July we made it through <unk> in recreation marketing in Canada.
Recreation is a specialty marketing and distribution from it targets up to 30000 retail outlets, including convenience stores newly established candidates dispensary.
We also writing other alternative products for recreation team to introduce in Canada, and 2020 and I'm personally excited about this ventures impact on our future financials.
And smokeless, there's still course brand continues to generate great momentum.
<unk> net sales increased 20.4% to 26.2 million in the quarter net sales for the moist portfolio, representing 58% smokeless revenues in the quarter up from 48% a year earlier trend, we continue to expect to accelerate.
Smokeless volume increased 15.1% with price mix advancing 5.3%, notably T.V.B. follow the October industry price increase <unk>, the third price increase in 2019.
Year over year industry volumes for chewing tobacco and moist declined by approximately 6% and to pretend it in a quarter respectively.
<unk> shipments to retail outpaces smokeless industry in the corner growing its share in both chewing tobacco and moist.
Smokeless gross profit increase 23.3% to 13.6 million.
Jokers moist robots volume gains are now overtaken the scale of or chewing tobacco business and we're beginning to see that favorable impact of operational leverage our capital expenditure project to this year will will reap incremental benefit next year.
Turning to smoking products segment net sales increase 7.6% to 30.2 million I'm, particularly strong promotional results on big back to Colorado.
Cigar wraps trade inventories increase on strong promotional participation participation rate.
<unk> Rolling paper inventory depleted essentially offsetting each other.
Non focus cigar in N.Y.O. pipe products declined half a million dollars.
And volume increased 3.6% in price next increased four point out present.
<unk> U.S. paper share increase the quench late and versus year ago, a new products momentum and remained the number one premium rolling paper brand.
Zagged expansion into the Canadian alternative channels is scheduled to begin early next year.
U.S. rolling consumers continue to migrate to super convenient products like paper cone.
I think that cones introduction continues restore account standing at 16000 at quarter and well we have much more distribution gain preliminary results are encouraging we think that capturing 20 per cent <unk> category volumes in the end it they measured universe.
According to the N.S.A. third quarter industry volumes for U.S. cigarette paper is an N.Y.U. a cigar wraps decreased by low single digits and mid single digits respectively.
Moving to our new Gen segment, or vaping product sales, where did sharpton on significant media headlines in the quarter told new J. segment sales grew 20.5% to 40.4 million importantly, total new Gen sales in September where approximately 30% below August .
Not knowing the duration or the trajectory of the current disruption or the specific nature of any regulatory changes Unflavored basin products, we are moving swiftly to write sites to business.
House in business consolidation plant will be completed in fourth quarter.
New X., which has been our primary focus a new Jen generated a 45% increase in sales from the prior quarter to 6.3 million.
Spread of gross sales to net sales on Red tide, hey, almost 30% due to heavier than expected introductory <unk> promotion.
Continue the games share with riptide, but not at all costs.
Your date, new X. net sales or 11.4 million, we expected trajectory to continue.
Late fourth quarter initiatives includes significant new park introduction into growing and novel spaces to to recap the quarter third quarter, New Jen gross profit increased 21.5% to 12.69 in the quarter. There were 2.6 million of tariff expensive moving it a consolidated business.
Consolidated EXINI accents in the quarter. It was 29.8 million new asked specific atsina expenses in the court totalled 2.5 million.
Adjusted even die for the quarter was 18.8 million as compared to 16.5 million in a prior year, we continue to balance growing even die investing in the business.
Net debt to adjust to eat out was 3.3 times inside are targeted range of two and half to three and a half times.
In this morning's release, we also updated or 2019 guidance, which includes the following <unk>.
Projected 2019 total net sales of 360 367 nine comprise a based business net sales 343 to 347 million and new I've failed to 18 to 20 million.
The reduction from prior guidance due to the A. for mentioned beeping disruption.
Importantly, we still intend to it fully invest new x. gross profits to maximise sales and marketing achievements.
The company expect certain asking expenses, and 2019, including 2 million and restructuring and warehouse organization costs, which includes 600000 in severance that will be expense in the fourth quarter.
1.6 million and transaction expenses, resulting from the South acquisition, an Ivy G.R. out payments.
5 million to support new X. infrastructure, which is primarily red tide lunch costs.
We expect to spend three to 5 million in preparation for the F.D.A.P.M.P.A. pathway. During 2019, we expect a final regulation for P.M.T.A.'s in coming months.
Dot complication and non cash incentive expense and 2019 projected to be 4.5 million, which is increase due to accounting requirements to expand the performance based restrict its documents that were part of the south acquisition.
We project 2019, adjusted even <unk> 60 972 million.
Expect the 2019 effective income tax rate that come in at the low end of the range of 21%.
Capital expenditures are expected to be approximately 4 million, including certain investment in our N.X.T. operations, where we will reap the benefits and operational leverage next year and finally net sales for the fourth quarter of 2019 are expected to be 70 985 million.
Emanate discussions continue.
As we evaluate potential partners and target very excited about this potential part of the business should expect us to do deals.
In the next year.
The third quarter proved to be challenging on the day per side and rewarding on smokeless smoking in U.S., which remained the company's priorities fourth quarter oviatt implementing our costs savings and integration initiated while delivering compelling new products to consumer.
With that I'll turn to call back to Larry for closing comments. Thank you Bobby.
As you heard this morning, the vapor challenge is a disruption to an otherwise exceptionally strong quarter for the company I'm confident in our cost savings in process integration initiatives will produce revitalize engine that can drive forward and deliver compelling growth for the company.
Confidence is supported by simple math.
First smokeless in smoking products represent 82% of your to date adjusted EBITDA, both categories before well and the third quarter.
Second our cost savings initiatives at eight to 10 million annually are likely to establish a positive operating foundation, which doing whether the current environment.
Third.
Leveraging our distribution capabilities to aggressively enter the C.B.D. category within traditional retail category with great potential another building blocks for the new X. brand.
Looking forward, we will continue to execute extra teacher planned by driving focused brand growth.
Any through acquisitions and innovation is strengthening our corporate infrastructure, while simultaneously delivering the designated cost savings and synergies accompany remains solid resilient and people will remain committed to the journey.
Thank you for participating in the call today and would that I'd like to open the call to questions.
Thank you.
I'll be getting a question.
<unk> question you may pressed stars.
On your telephone so if you're using a speaker phone piece. They kept your handset that's more pressing the keys to like you try your question Peace Prize started to.
This time real positive materially <unk>.
Oh.
First question comes from Vivian user with Cowen and company.
Hi, good morning.
Good morning Vivian.
So Larry I was intrigued by your comment on the consumer insights that youve gathered from it and millions of data points I'm sure. There's a lot a still to analyze but can you.
Give us I'm, a little teaser on some of the the high level takeaways that youve discerned from all that consumer data. Thank you.
Yes, as you know we ever I've never very deep BDC.
Database, where we communicate and have each profiles and flavor preferences from those consumers. When you look at era at our product the products we.
Sell on B to C. It has a fairly.
All the older profile, which takes us away from the whole youth issue and we also have a very good.
Understanding of the age distributions among among different flavors I think this can be very important in the PMTA process. When you look at it on this on the side.
You have the science, but you also have all the behavioral we're on top of the behavioral and we know we know what our products are doing and what were the consumers are by and who which consumers are buying them. So we think this gives us a huge advantage in that process.
Is it possible at all to offer any kind of high level commentary on.
Mix across different flavors in particular, given that your consumer base does skew a little bit older on I'm kind of I think about these flavors in three buckets. So you've got traditional tobacco, you've got mint slashed menthol and then you've got everything else and do you have any insight you can offer there. Thanks.
Yes, everything else is the dominant has a dominant profile among consumers. It is heiresses submission and understanding is that when people move away from combustion they want to move away from tobacco and mental type flavors.
The other thing it's interesting is that you see some of these.
Is that have.
Names that on the surface may appear to appeal to.
To younger audiences.
We don't sell to anybody under 21 currently.
But if you look at these age profile as you'd be surprised at how old some of the age profiles on some of these.
I guess.
Yes or at least.
Flavor names that seem to draw a lot of attention is sort of interesting look at the data Vivian and we'll try to give you a little more inside sometime in the future.
Tobacco and menthol on the open systems about 10% to 15% of flavor sales of our sales the rest being.
Other flavors, which is a hodgepodge of.
130 different kind of combination.
So I mean it it.
Adult use certain flavors and we think that that.
We have the data to prove that.
Wow, that's a far lower.
Then I than I would've guessed for tobacco menthol in mid that's very helpful. Thank you for that Graham.
On the.
CBDV keeps very encouraging that you guys sold out this moms can you quantify at all what retail distribution looks like now and then maybe expand on your commentary around expanded retail distribution.
In addition, going forward. Thank you.
Yes.
Yes.
Right now Vince Tim as a couple of thousand stores. We started late we ran out of stock.
Great.
Qualitative takeaway from retail in terms of velocity rates.
Take rates et cetera, very very encouraged we have supply coming in right now, but we're early in the process couple of thousand stores at present time.
That's really helpful. And then given your commentary around the disconnect between gross and net sales on riptide I'm curious whether theres any.
Promotional spending on happening on the CBDV as well thank you.
There's nothing on CVD frankly at this point CVD margins are.
Dramatically stronger than than the segment margins.
I think the the promotional spending on riptide.
It is fairly unique and from our perspective can't last.
And so it's no but that is what's going on the market you, but you won't see that same sort of spread between gross and net on on that date on the CBD side.
Very helpful.
And then just last one for me.
And given the out of stocks on CBD in your your aspirations to expand distribution are their capacity bottlenecks that you have to work through and how are you gonna addresses the so thank you.
There is no capacity bottlenecks, it's just we're selling out faster than we thought.
Frankly, we feel our CBD.
Japan is unique we feel the four or five products that are coming over the next month are extremely unique where we're we're using our data this sort of ramp up there is a massive market that still has been on touch on the CBD side in national chains that we were pretty excited about.
Yes, Vivien. This is this is graham here we.
You know as the we launched this our Penn item, it's the sort of the firestorm that that hit vape common. So we had sort of throttled down our expectations from a retail distribution perspective, I could take rate perspective and that proved.
To be.
To not actually play out so it was very encouraging from that perspective.
That's terrific. Thank you very much.
And our next question comes from Susan Anderson of B. Riley SBR.
Hi, good morning, Thanks for all that.
Details this morning very helpful.
I was wondering I guess with the pressure on vape I was curious what you're seeing it looks like your other more traditional categories saw some pretty good strength. This quarter are you seeing consumers now switch back maybe if there's any color you can give on that if it's benefiting your other more traditional categories. Thanks.
On the margin that may be that may be happening.
But.
I think the strength of our strength of the core tobacco business is the strength of the brands.
Stoke has been on a role for a while predated that rolled predated the vaping controversy and zigzag.
Smoking, you're seeing a little bit bounce back that we told you about there was coming from the Canadian restocking.
Think these brands are thriving I think there's strong independent of any of the controversy, but again on the margin I think it probably is helping it certainly is not hurting those brands.
Great. That's helpful and then I guess looking out to next year.
How should we think about kind of where the base business settles out in terms of revenue our EBITDA. If theres any color you can provide just from a modeling perspective.
It's still early days, so let so let's let's talk about EBIT, let's talk about sale from an EBIT.
We're committed to growing EBITDA right, we're not we're not in the business of losing money. So that's that's a key dynamic on that on the beep side from a sales perspective.
We believe that there is still a business in selling open systems. They.
We are committed to going through the PMTA. So we will derive numbers through proprietary products. So I think that kind of from a modeling perspective, you should sort of look at the trend lines today in that that's Directionally correct, but then there's stuff to put on top of that which is our proprietary products our proprietary open systems.
Through the PMT.
Okay, Great. That's really helpful. And then I guess, maybe just shifting to stoker is.
Very nice growth there I guess, how should we think about that trajectory. How many additional doors can you expand into how are you guys thinking about that growth over the next year.
Yes. So we're in we're in about 50% of the weighted market share at this point. So there is.
There are 200000 doors that sell moist but we really are focused on the extra 50000 that will close that 50% gap and so that there is multiple years of growth trajectory. So here.
We're not only are we focused on growing store count, but we are focused on same store sales growth, which is becoming a very important performance metric for the management team and so it's a dual prong approach and so there is years of growth in that business.
Great and then I guess just.
One last one on Red tide, you talked about.
Selling in Canada, and UK I guess, what's the opportunity there how should we think about that opportunity versus the us as we look out over the next couple of years.
Yes, I think the way to think about it is you know from a modeling perspective is you've.
Got it you've got the U.S. vape market, which is 4 billion 5 billion at the manufacturer level you've got.
The candidate and the UK have a higher propensity of of vaping.
But you have smaller populations.
Right and so that you can sort of play with that math. We gave you what are our market share in the independents that we're focused on is 6% I mean thats its.
Do you guys work on those assumptions, but that's that's what we're sort of underwriting too.
Great. That's helpful. Thanks, So much you guys.
Again, if you have a question. Please press Star then one.
At this time, we have no further questions in queue. This concludes our question and answer session I would like to turn the conference back over to the presenters for any closing remarks.
Thank you everybody look forward to talking to and.
Next quarter.
Yeah.
Thank you ladies and gentlemen, this concludes today's teleconference.
Lets you may now disconnect.