Q1 2020 Earnings Call
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Good day and welcome to the Turning Point Brands first quarter 2020 earnings conference call and webcast. All participants will be in listen-only mode. Should you need assistance, please signal Comfort specialist by pressing the star key followed by zero.
After today's presentation, there will be an opportunity to ask questions to ask a question. You may press * then 1 on a touch-tone phone to a charger question, please press star. Please note. This event is being recorded our now like to turn the conference over to mister Lewis Reformation vice president of Business Development Mister Keana the floors dresser Bank you good morning everyone. This is Louis referee meaning of Vice President of Business Development, Jordan Mia Turning Point Branch President CEO, Larry wexler-grant Chief Operating Officer and Bobby live in Chief Financial Officer of this morning. We issued a news release covering our first quarter 2020 results. This release is located in the IR section of our website www.ty.com with a replay of today's conference call will also be available in this call. We will discuss or consolidate and segment operating results and provide a perspective on our progress against our strategic plan.
I just customer I direct your attention to the discussion of forward-looking and cautionary statements and today's press release and the risk factors in our filings with the Securities and Exchange Commission disclosure outlines various factors, that could act that could cause actual results to differ materially from projections or forward-looking statements that may be cited in today's discussion these forward-looking statements and projections are not guarantees of future performance and you should not Place undue Reliance upon them except as provided by federal Securities laws, and we undertake no obligation to publicly update or revise any forward-looking statement in the call today. We will reference there non-gaap Financial measures wages and Reconciliation for Gap can be found in today's earnings reports along with reasons, why manager believes that they provide useful information. I will now turn the call over to Larry Chrysler or CEO.
Thank you Louis and good morning everyone. I want to thank you for joining the call during this trying time and hope you and your family are staying safe.
Our first quarter was strong particularly considering the disruption of all businesses across the country at the end of the quarter. We are performed our expectations across all our major business lines the back those smokeless and smoking exceeded expectations, even after discounting for our estimates of sales pulled forward due to the current environment.
We're especially encouraged by the results of our reorganization debate business or sit with sales growing more than 10% sequentially each month of the quarter.
The other side are focused on the safety and well-being of our colleagues and the communities and customers we serve.
I would like to thank our employees for the job. They have done to ensure a safe working environment for each other and our communities and express how truly proud and inspired. I am of the resiliency. They have shown their commitment to serve our customers needs.
Is your organization we've implemented several changes to enhance safety and mitigate risk in our work environment for our warehouse and Manufacturing operations. These include split shifts where appropriate temperature scans contact list hand sanitizing stations protective equipment social distancing guidelines and increase cleaning and sanitation.
You cancel it all unnecessary travel implement the telecommunicating where possible like many companies. We have changed the way we communicate to increase use of video conferencing and have implemented telling the initiatives throughout the sales force.
Some of these changes are proving to be rewarding the efficient and are likely to remain in place even after this crisis and lead to ongoing cost savings.
We have deferred annual compensation increases for corporate employees other than those contractually required. We have also put on hold new spending commitments as we cautiously manager this environment.
Meanwhile consumer demand for our products and brands has remained consistently strong. Our products are important part of our consumers daily lives. The dedication of our Workforce is served as demand has been remarkable. We have hire additional employees are Louisville facility and implemented wage increases for our hourly employees to take care of their families in these turbulent times.
We have also added capacity to manufacture hand sanitizers in three of our four facilities and then donated over 100,000 bottles the hospitals nursing homes and First Responders in our local communities.
We do expect covid-19 to impact results in the second quarter are third-party cigarette manufacturer in the Dominican Republic temporary closed for three weeks. And it's slowly ramping back in person selling has been dramatically dampened which was slow new product launches select budget annual price increases will be delayed. These temporary issues are expecting somewhat offset by our growing b2c platforms.
A few notable trends at the end of the quarter which we believe was result of the stay-at-home restrictions in response to the pandemic.
We Believe trade in Loudoun benefited our sales by approximately 2 million during the quarter split evenly between smokeless and the smoking segments
During the last two weeks of the quarter our case orders were stokis. MST cans were up over 40% from the trends earlier in the court Stoker's MST tub. So it was a 60% lived during the same period as consumers shift It's a larger volume quantities during the pandemic. Some of this is undoubtedly trade loading. But so far we have seen less of a give back on Tubbs that we expected which is a sign that consumers are trading down and volume purchasing Trends in the category, maybe Excel accelerating due to the economic environment.
Siri this one benefit was our b2c e-commerce businesses. We saw a meaningful increase at the end of March not only in RV platforms, but also on our branded products websites would have continued through April as consumers shipped to the ease of purchasing online. We're pleased to bring new customers to our sites and look forward to serving them going forward.
Nope.
Turn to the PMT a process the district court judge from Maryland agreed to the fda's request to extend the deadline for filing from May 12th to September 9th. As we said before you believe the PMT a process would be a major shift in the industry are scientific and Regulatory expertise would be a major competitive advantage to help get our our higher-margin proprietary bath products through the process.
We continue to be excited about the longer-term potential for these products and it much less cluttered Market.
Overall, we are pleased with our performance in the quarter more importantly we came together as an organization the tackle the challenges presented to us by this current epidemic will continue to be vigilant about the safety issue being of our employees and we tend to make the necessary adjustments to our businesses to adapt to the changing environment.
Add some more color in perspective on our quarter and the path forward. Let me turn the call over to Grant Purdy Chief Operating Officer.
Thank you. Larry. Let me now give you a quick snapshot of the performance from our court. Tobacco business. Our results were strong in the quarter driven by robust customer demand smokeless wage digit growth in the quarter is Stoker's moist snuff delivered another record share up one full share point compared to your go-to 4.8 with our share in stores receiving the product now at 8.5%
Stoker's moist snuff is now in stores which represent 56.6% of Industry volumes both cans and tubs delivered significant gains during the quarter with most of the growth driven by same-store sales games as Larry mentioned. We saw particular strength in our Soaker tub shipments at the end of the quarter chewing tobacco sales held flat as ongoing category decline was offset by stoker chew continuing and its share still registered a 20 to share in the quarter remaining the second largest brand in the category while closing the Gap with the market later.
Smoking side double-digit growth in the quarter led by strong double-digit growth and rolling papers in high single-digit growth and cigar wraps in the zig-zag papers Remain the leading premium paper brand new age thing. It's share year-over-year for the third consecutive quarter.
Growth was driven by strength in our core products along with contributions from our new products where we continue to leverage zigzags iconic positioning zig zag organic hemp papers are now in approximately 39,000 retail outlets while paper cones and unbleached papers are now in approximately $31,000 and $21,000 retail outlets, respectively.
Zig-zag paper cone category has declined from 5% to 27% over the last year to position zigzags and number two cones brand while zig-zag papers. The number one him paper bag with 28 share. We were especially excited about the first quarter launch of our hemp twine where initial trade demand is exceeded our expectations going forward our recent focus on the positive in e-commerce channels should lead to lead to positive contributions for the remainder of the year in Canada will be driving the brand further this quarter with our new recreation marketing part partnership, which will facilitate our entry into the large and growing Universe of dispensaries.
overall
Our court tobacco business was especially strong in the quarters, but smokeless and smoking saw double-digit growth Stoker's MST expansion and zigzag Advance has remained the engines behind continued company gains with total. Tobacco gross profits up 17% in the quarter.
Moving to Newton where we completed the consolidation and streamlining of our date business under one management team. Last quarter are Vape business has performed better than expected during the quarter showing a strong balance from the previous quarter. We benefited from better focus and coordination from a unified management team and Superior in stock positions. That key products are China sourcing team play a key role positioning us at the front of the queue is factories came back online and chat him which allowed both our B2B and b2c platforms to satisfy a surgeon customer growth during the quarter.
We're excited about the future Prospect businesses. We welcome these new customers onto our platform in our b2c business. We saw particularly strong rebound at the end of the quarter is customer shifted to purchasing online.
On a high level for a big business. We have successfully navigated through the disruption the market last year and believe the trough is now behind us with the segment returning to profitability. We are now looking forward to completing the PMT a month after which there's significant potential for our proprietary brands in our new X business are full lineup of new CBD on-the-go products, including gummies tinctures and shots continue to expand retail presence are now over 6,600 retail stores. Additionally. We added caffeine to be twelve pins along the Solace nicotine too in the first quarter with a growing pipeline of product bought a new XS Prime to be a strong engine for future growth.
We talked about winning on last quarter's call. We coupled a robust planning and communication process with a series of strategies and tactical initiatives to ensure we do just that in the marketplace. We believe we were just trying to see the fruits of those efforts and we remain driven to deliver results through these challenging circumstances. And with that I'll turn it to Bobby for a review of our first quarter financial performance Lobby Lounge. Thank you Graham. Tell me results in the first quarter. We're stronger than the expected with every segment coming in ahead of plan benefited from accelerated demand trade loaded and strong execution out for a review the segment validated performance for the quarter of let me first summarize some recent development PMT a has been moved out for months to September 9th. This does not impact their full-year plans and we can you expect to spend a total fifteen to eighteen million on the process.
On April 8th. He began staring Diversified SDI. Now it's definitive agreement for a tax-free merger and transaction expected to be completed by the summer FDI shareholders will receive 0.97 shares a p p common shares for each common share of TV held by FDI at the close of the transaction. We are pleased to have come to an agreement on this transaction will effectively retire with 1.5% of our shares outstanding and eliminate the overhang of a holding company structure turning out to segment reviews in smokeless. The stokers brand continues to deliver sustained growth momentum smokeless net sales increased 17.5% year-over-year in quarter net sales for the MSP portfolio boost 33% and represented 59% a smokeless racks in the quarter up from 52% a year earlier.
total smokeless volume
Increase 16.7% with price mix advancing 0.8% We Believe trade load in impacted our sales by approximately 1 million in the quarter year-over-year industry should be increased by approximately 2% with chewing tobacco eroding by approximately 4% Stoker's shipment to retail continue to outpace the smokeless industry in the quarter growing. It's off during tobacco MST turning the smoking product segment net sales in the quarter increased 13% with double-digit growth in in u.s. Rolling Papers partially offset wage year-over-year decline with five hundred thousand in non focused cigar and pipe we discontinued our pipe products which generated 1 million of sales in 2019 off at the end of the quarter.
Cigar rap net sales were up high single-digits. All Canadian Rolling Papers mid-single-digit total smoking volume increase 10.9% or Price mix increased 2.4% off trade load an impact your sales by approximately 1 million in the quarter. According to Ms. A I first quarter industry volumes for USAA papers increased mid single-digits while Mi cigar wraps shipment to retain attracted by low single-digits moving to our new jet segment where we saw stronger-than-expected results during the quarter net sales decreased 19% year-over-year from the lingering impact of date mom destruction and the discontinuing of the V2 business partially offset by positive contributions from CBD Solace and other new Xbox the segment did see 28% sales growth support.
For the quarter using gross profit decreased 3.5 million to 11.4 million as the results of its kind of net sales first quarter 2020 included two point eight million of tariff expense compared to two point five million a year ago moving to the Consolidated business adjusted ebitda for the quarter was 17.8 million as compared to sixteen Point 1 million in the prior-year, encouragingly The New Age return to positive contribution for the quarter and sales advances and the new Consolidated in streamlined structuring. We are pleased that our first results quarter's results were above our expectations month. We are also encouraged by government measures to sport consumers in the economy in light of the uncertainties around covid-19. We feel it's pretty maintained our revenue and even dead seriously guidance until we get more clarity in the duration impact the response to the virus.
Projected 2020 total of $338 353 million and adjusted ebitda a 6.75 million. We are also guiding the second quarter to $81 off a million a little bit wider due to the uncertainty m&a discussions continue as we evaluate potential partners and targets while the coronavirus has like legal aid the timing of completing transactions. We have seen an increased pipeline of attractive opportunity with that. I'll turn the call back to Larry for closing comment.
Thank you, Bobby.
While we continue to deal with a challenging environment the company executed well during the quarter and shown its resilience and its ability to meet consumers needs. We remain committed to our goals of growing tobacco business creating operating leverage and finding new market opportunities company has implemented a number of new initiatives over the timing and the impact of their implementation may be impacted by the correct because you can see our numbers while I remain optimistic based on what we saw before the economic disruption.
A company remains solid and resilient and our people remain committed to the journey. Thank you for participating in the call today without it like to open the call for questions.
Thank you, sir. We will now begin the question-and-answer session to ask a question. You may press * then 1 and a touch-tone phone. If he is in your speaker phone, please pick up your package before pressing the keys if any time a question has been addressed. Do I do draw your question, please press * then two I get it as star then one to ask you a question at 6, We'll just pause momentarily to Assam our roster.
And the first question we have will come from Vivian of Colin, please go ahead.
Thanks. Good morning. Appreciate the question. Hope everyone is safe and healthy. Just wanted to start with the supply chain disruption that you called out from one of your suppliers, and I can Republic seems like they're back online just remind us how big a piece of the business that impacts and and and how you're thinking about um kind of bringing our inventory and product back online. If in fact you were short on supplies, I think yeah, so so wraps is about 15% of our sales. It is a lower-margin product. Um, we're assuming right now about a five million hit the quarter from the ramps business now, you know it down three weeks. So we think that that five million probably conservative, but that's where we're at at this point.
It is at supplier back online or know they are got it. Perfect. Thanks on the smokeless side of the business clearly very strong faith even pre covid-19. I was intrigued by your comment that you think that there might not be as much Pantry destocking as we've seen from other CPT categories. Um, certainly that would be some of the the Nielsen data that we saw today just in terms of what you're hearing from your retail customers from any issues with you know foot traffic, like certainly we're hearing it for the beverages guys the gas certainly your data would suggest it, but just curious any incremental insights you're hearing from your Retail Partners around foot traffic impacting consumer demand.
Okay. So what we've been hearing from the field what I've seen in driving around is that you're seeing fewer people in the stores, but they're buying more. I was in a I saw him walk out of the C store with a with a a whole Pocketful a whole bag full of product. We're we're usually would go and just buy one one can or one one pack of cigarettes at a time. What we've seen in our shipments is that remained pretty consistent. We spoke about the lift that we have at the at the end of that the end of the quarter. We have not seen the payback that we thought we might took on voicemails. I think well, you know, one of the one of the aspects of our products particularly the tub is that is it's very convenient than these times where um, the consumer consider buying a handful of cans can go in and buy the tub that can last about a week and as we've talked about in the past the cans have been a a good feeder into into the tubs. I think that's wrong.
Has been accelerated by the current conditions where people can't get out of their houses as much.
Yeah, that makes good sense. Are you hearing anything and I want to come back to the the health of the the stokers bring specifically but just to follow up on my original question or you hearing any commentary around a consumer demand shifts around either the paycheck cycle or you know some of the stimulus checks that I think went out on 12 or 13 days ago on April 15th. Thanks God. We haven't really seen that. It's still you know, this is only been going on for a month and change and so, you know, we get very focused on on selling the drug stores, you know, obviously sell out as needed, but at this point, you know, we haven't seen it sort of other than sort of bulk-buying you haven't seen sort of a dramatic shift in in our consumers. I would also say that, you know, our smokeless segment is definitely less City driven. And so, you know, we're in places that people aren't as locked down. Um, you know on the smoking side job.
Our product is very associated with people, you know with people on a recreational basis. So people are staying at home and they're just using our products. And so we feel a little bit sheltered to those issues.
Yes, that seems reasonable is the comment on pricing in in the press release and potential pricing delays. Can you just expand on that? I mean, it seems appropriate given kind of the page heard from Philip Morris International last week about their expectations for pricing in the back half an international market. But you know in in the US you're obviously not the price leader. So just wanted to to get some more color on that comment. Thank God. Yeah, so so the big guys took an MST price increase at beginning of the year. We did not follow and the expectation would be that like, they took a price increase wage here in April 30th. We expected that as well on M St. That seems like it's going to be delayed that being said we feel that we can't take price increases on cans but we can't change the price increases on Cubs. So be a slight modification to our plan, but we don't think it's significant relative to the full year plan.
Perfect. That's all really helpful. I'll turn it back into the key of things.
Again, as a reminder, if you'd like to participate in today's Q&A, please press * then 1 and a touch-tone phone, but you're not a star then one. The next question will come from Susan Anderson off of the rally fer.
Hi, good morning. Nice job on the quarter is curious. I mean is this but for the MST growth? How much do you think was that trade down versus stocking up? Did you guys kind of parcel out? You know where you think kind of like the growth came from the outside growth? Yeah. I mean the outsides growth came from tubs, which is a a trade down. But I think at the end of the day off the business was growing significantly up until you know, the last few weeks of March and then it just shut up. So it's you know, the business continues to be double digits range with or without sort of these tracks.
Got it, okay.
And and then do you think any of that is stocking up that maybe we'll hit later quarters or are you seeing that it was kind of strange rope? Yeah. Yeah. We're we're zooming a two million get back in the in the second quarter.
Okay. Yeah. The one thing I can say is we we haven't seen it in April which we think is you know goes to the strength of Stoker's brand. So we're pretty excited about wage but we have been assuming the two million get back in the Marine Corps and then I guess with the newgen segment now being reset for the business. How should we think about the margins there? I kind of look out over the next couple of years. What are you guys expecting in terms of expansion at all? Or you know, how should we think about that now with the reset? Yeah. I mean, I don't think we're going to change our long-term guidance on New Gen anytime. I mean, you know 30% gross profit has been something that that business has sat at for the past few years, but as we discussed Thursday, we expect gross margin increases in new that's what we've been working towards with our proprietary brand. I tell you we we did put out a new investor presentation on our website that sort of quantify dead.
A little bit with a long long term Target being 50% but that's something that you know is going to take a while to get there.
Yeah, okay got it. And then can you talk about just what you're seeing on the acquisition front? It sounds like you're seeing maybe an increase in potential opportunity out there, you know the categories. Are you seeing these opportunities and or you seeing prices maybe become more attractive?
Yeah, I mean we're seeing a ton of opportunity in in the Cannabis and in the smoking space. So I mean you should expect us to get stuff done there. We think that you know, we raise this Capital last summer under the assumption that we were going to get more exposure to the Cannabis space into the smoking space. Um, you know, when we're seeing that play out, I would tell you the Carnage that we expected in the Cannabis space is playing out is worse than we thought which sometimes makes steel making impossible. Just that digs are you know, I bought there in one of our competitors posted that they had to take a massive bad debt expense in the quarter because you know, people aren't paying their bills. Um, so it makes it you know, no one's going to do deals when they came so it's it's it's complicated but this is what we you know, we're set up for we didn't think it was going to play out exactly this way, but this is what we are prepared for.
Got it. That's helpful. And then lastly just modeling question, I guess so the actions you're taking for kovats which is like the increased wages more employees. Like should we think about that? I am acting sg&a materially or how should we think about that and kind of out the next quarter? Yeah, I would say actually it's going to go the other way. I would say the they're the expenses that were paying whether it's more overtime or hourly wage increases those are more than offset by sort of decreases in business where we've cut back on non-essential spend tme has been pulled back a family. So I we're not expecting any sort of sg&a group at all.
Great, that's helpful. Thanks so much. I'll jump back in. Good luck next quarter.
Again, as if I'm a reminder, if you'd like to participate just Q&A, please press * then 1 and it has some fun again as a star then one next Thursday at 1.
Elements of your phone might be music ma'am.
It sure was thank you very much for the prompt operator. Thank you for the follow-up. Just wanted to follow up on the the PMP just obviously accommodative ruling from the judge in Maryland off all the disruption from from covid-19. Are you guys planning on using the full length of that extension? Um is there value in getting your submission in we saw that Imperial Branch life today just filed on my blue. Is there a benefit to getting to the kind of front of the queue if you will, thanks, there's no benefit.
I mean, the only benefit is on flavored pods, which is not you know, a significant part of our p.m. Ta right cuz you remember are you know, the pmk's were filing are open systems. The open systems are still allowed on the market?
Okay, but just in terms of you know, getting like feedback earlier from from the FDA no value in that at all cuz they're just going to work through everything all at once. Yeah, I mean we're we're having dialogue with the FDA. Um, so it's it's we're getting feedback already so that so submitting the PMT a early really doesn't get shoe much off early on the lower interest category, which is the open systems. And so, you know will file a little bit early, but we're not in like rush to do it.
Got it, and then just from a cost perspective, you know, obviously you're just having your team work remotely, but I'm curious just in terms of utilizing, you know, third-party resources to the extension you are or whether any delays or going to drive some inflation in the cost if the work is taking longer.
It's it's a little bit of whack-a-mole. But I you know, I I don't expect any significant creep, you know, there's some there's some Consultants we have on retainer that they'll stay open a extra few months. And so that's an extra 25,000 year 25000 there but the the bulk of the extent was going into the lab capacity. And so that lasted that so you could not be increased because of all the time.
Understood. Thanks for the follow-up. I appreciate it.
At the sound was showing them for the questions will go ahead and conclude the question answer session. Oh, no, it's going to come back over to the management team for any customer much gentlemen.
Thank you everybody for joining the call. See you next quarter.
Hey, thank you, sir. Answer the rest of the team for your time. Also today the conference calls now concluded at this time. You may disconnect your lines everyone. Take care and have a wonderful day.