Q2 2020 Turning Point Brands Inc Earnings Call
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Hey, Good morning, everyone. This is Louie right for me to Vice President of business development.
Joining me are pretty point brands, President and CEO, Larry Wexler ran pretty Chief operating officer, and Bobby Robson Chief Financial Officer.
This morning, we issued a news release covering our second quarter 2020 results. This release is located in the IR section of our website.
W.W. Dot turning point brands Dot com for replay of todays conference call will also be available.
This call we will discuss the consolidated and segment operating results and provide perspective on our progress against our strategic plan.
I just got spring I direct your attention to the discussion of forward looking in cautionary statement at today's press suites, and there's factors in our filings with the Securities and Exchange Commission.
Disclosure on lines various factors 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 it's provided by federal Securities laws and we undertake no obligation to publicly update or revise any forward looking statements in the call today, we will reference certain non-GAAP financial measures the majors and reconciliations to GAAP can be found in today's earnings release.
Along with reasons why management believes that they provide useful information.
I'll now turn the call over to Larry Wexler, our CEO.
Thank you Billy and good morning, everyone. Thank your for joining the call.
Our second quarter exceeding our expectations Lebron 105 million.
Our internal initiatives drove meaningful improvements within each Russia.
Building momentum for longer term growth.
In addition, the pay back from the loading or we had anticipated did not materialize. During the course I was instead, mostly to absorb why improved positioning and increased consumption of our products.
We didn't smokeless most of our growth continues to be driven by MSG same store sales with distribution wins from the past few years contributing to the moment.
Circular consumer trade down trends across the smokeless category.
David code or accelerating emission barb.
And with our offering pretty important pretty fair price a value proposition clearly connecting with the consumer.
We discuss the first quarter the impact of Cobiz on delaying normal price increases.
We took a price increase on shops, which we have the market leader in Matt.
And we took a price increase on cans in July along with the industry.
We also saw a nice growth well lose sleep true business, we entered the quarter with a target Salesforce initiative and benefited from market conditions impacted by code.
The first one is history stalkers wasn't number one briana loosely categories during the quarter.
Very proud of this accomplish accomplishment.
Well some of these gains and trained tobacco during the quarter were temporary.
Thus far during the current quarter, we're seeing strong signs of retention.
On the brand is now much better position for the future.
In smoking.
Well sort of liver growth despite dealing with a cobot related supply chain disruptions with our third party Mario cigar rep manufacturer in the Dominican Republic.
This trend was more than offset by growth in our paper business, which benefited from increased consumption of our products and market share gains from a number of initiatives introduced earlier a year.
Recently introduced products, such as paper columns and papers unbleached papers and temporary ups accounted for a vast majority of the segment's gross.
New Gen was another bright spot Liberty an extraordinary core.
We streamlined our big distribution business going into the year and consolidate our platforms under one management.
You're starting to see the improvements from more efficient organization earlier in here and that carried into the second quarter as we continue to gain market share.
The additional to these structural improvements we benefited from heightened levels are purchasing and our BDC ecommerce platforms during stay at home provisions.
Oh, the subsequently moderated as retail outlets open back up.
In addition, whenever a b to b competitors was temporarily off long during the quarter.
Longer term however, the story for this segment continues to be how we are positioning this business freight Crows PMTA world.
We made significant progress during the quarter toward submitting our applications heavily PMT deadline since every month.
Well, we expect significant disruption in the second half of the year as our consumers navigate through the market uncertainties around the P.M.K. process, we look forward to realizing the potential benefits from consolidated marketplace.
Our proprietary product mix, which has been on an upward trajectory should receive as Nick significant supplemental boost in the coming years in the post P.M. Jay Barth.
During the quarter. We also completed a 46 million dollar acquisition certain assets from different holdings leads right I'm Y O cigar reps business, our largest sub segment within smoking.
Do for was our long term partner and helped US start the business you affected we acquired a larger portion or profits any business does seem secular tailwinds from cannabis legalization and decriminalization.
The transaction eliminates the world you expenses, we were paying for all our products, which will improve margin profile starting in the third quarter as you sell through inventory from before the transaction.
In addition, we acquired the distribution rights to block routes starting early in the fourth quarter, which we view as a nice complementary product to our existing portfolio.
This product gives us access to customers, what we called the Backstreet were blocked wrap most lives were zigzag products currently have low penetration.
As previously communicated respect the transaction to EUR $5 billion, an annual revenue and $7 million of EBITDA.
Earlier this month, we also completed yes emerge.
In addition to removing the overhang controlling shareholder and the holding company structure emergent significantly improves liquidity of our stock and allowed new shareholders to invest in GP be through the related secondary offering.
We welcome ordinary shareholders and thank existing shareholders, who participate in your offering for their continued support.
With regard to Kogut remain adapted to the changing in Bard and are now beginning through the challenges presented to us.
As a results prove we are rising to the challenge meeting customer demand and made a relatively seamless transition operating in the new norm.
We are able to keep our field sales force operational using best safety practices, including early adoption of mouse self would use hand, sanitizers and extensive use of chose showing to maintain can customer engagement.
We did experience higher operational costs related to maintaining a share for work environment and higher fulfillment cost as a result of coke.
Well real offset this we tried or cost controls elsewhere in the business.
I had some additional color perspective on our quarter and the path forward, Let me turn the call over to Graham pretty Chief operating officer.
Thank you Larry.
Let me now give you a quick snapshot performance from our core tobacco business. Our results were strong in the quarter driven by robust customer demand.
Smokeless saw double digit growth from the quarter with both cans and tubs delivering equally to our growth during the quarter.
Vast majority of the growth was driven again by same store sales gains as stockers moist snuff delivered another record share up 1.2 share points compared to your go to 5.2%.
Our shared stores receiving the product is now at 8.9%.
Couple of hundred 30 basis points from the previous year.
And Stockers moist snuff is now in stores, which represent 58.4% of industry volumes.
This was a long runway of distribution growth both for potential chain and independent wins and the ramp up of stores from chains. We have recently won.
Chewing tobacco sales up mid single digit increase as ongoing category decline was more than offset by smokers to continue to expand the chair.
Doctors to registered a 25.7 shared in the quarter, which is up 5.6 share points from the previous year and 3.6 sharply sequentially.
While we did benefit from the number three player in the category being temporarily shut down there was also clear benefit from a targeted salesforce initiative to expand distribution of our value products.
This was evident after the competitor came back online as our sales remain above levels seen earlier in the air.
Smoking saw high single digit growth in the quarter led by strong double digit growth in U.S. Rolling papers.
In the U.S. Zach papers remained the leading <unk> premium paper brand, increasing its share year over year for the fourth consecutive quarter with 2.8 share points of growth to 33.1. According to M. A C <unk>.
The exact share of the paper cone category has climbed 32.5% getting 12.5 share points from the prior year. Its position zigzag is the number two cones brand.
The exact paper cones are now at approximately 42000 retail outlets. After I think roughly 10000 stores during the quarter.
Our him prep product, which was just launched earlier. This year has been welcome looks strong market reception and captured 22.7% of the category in the second quarter.
It is now at approximately 23000 retail outlets after adding 14 outlet 14000 outlets during the quarter.
Our I'm, while scar reps business on anticipate a double digit decline during the quarter as a result, this the disruption with our manufacture.
Or manufacturers now back online, but we still expect some disruption in our third quarter results given reduce manufacturing capacity from social social distancing measures.
In Canada, our partnership with Recreation marketing is starting to ramp up with recreation already placing zigzag into 280 of the 820 dispensers and Canada. After its first quarter of marketing our products.
Moving to new Gen, where we had an exceptional quarter.
On a high level or big distribution business saw improved execution, along with some temporary benefits during the quarter.
Or b to B platform paper Beast.
Grew double digits in the quarter as a gain market share from building its customer base to record record levels throughout the first after the year.
We also benefited from a competitor being temporarily offline.
Our PDC platform I B G.
Experienced 2.5 times the growth rate of vapor Beast as consumer shifted to purchasing online.
We've seen IB GE sales levels began to normalize the economy has opened up.
But trends remain well above what we saw earlier in the your pre cope.
In our new ECS business, our new products continue to build momentum we saw was posted its best quarter since its acquisition.
And our newest CBD and nutraceutical products expanding distribution in the market.
We encourage you to visit new ex dot com installs to dot com to see some of our recent introductions.
The longer term story on the agenda as the push of our proprietary products, which now stands at 20% of segment compared to 15% in the prior year.
As Larry mentioned, we expect this to increase meaningfully in the post P.M.T. a world.
Well, it's got my commentary, we're pleased with the improvements we've made as an organization into our internal processes throughout this year and are excited to see tangible benefits in our initiatives.
And with that alternative Bobby for review of our second quarter financial performance Bobby.
Thank you Graham.
Turning to the segment reviews.
Net sales increased 17.7% to 30.8 million in the quarter.
Net sales for the MSP portfolio grew 28% represented 58% of smokeless revenues in the quarter up from 53% a year earlier.
Total smokeless volume increased 13.9% with price mix advancing 3.8%.
Note that our price mix. Thus far this year has been weighed down by Comping against an under accrual of allowances in the first half of 2019.
Year over year industry volumes for MSP decreased by approximately 1% with chewing tobacco eroding by approximately 3%.
Stoker shipments to retail continued to outpace the smokeless industry in the quarter growing at a mistake I share in both chewing tobacco an entity.
Turning to smoking product.
Segment net sales in the quarter increased 8% to 27.4 million with strong double digit growth in U.S. rolling papers and growth in our Canadian papers business due to comparing against last year's inventory depletion and the ramp up of our marketing market in partnership with recreation marketing.
This was partially offset by N y O cigar wrapped disruption, which impacted the quarter by about 4 million by 400000 decline in our non focus cigars and wild type business.
Total smoking volume increased 7.5%, while price mix increased your 0.6%.
Of note, Canada will face tougher year over year comps in the third quarter, which had a period of inventory rebuild post the packaging regulation changes in the prior year.
Third quarter 2019, Canadian paper revenues were 4.6 million compared to our quarterly expectations of two to two and half million dollars.
According to an anti second quarter industry volumes for U.S. cigarette papers and White house, It got wraps increased double digits.
Moving to our new Gen segment, where experience and especially strong quarter.
Net sales increased 11.8% to 46.7 million as a result of strong market share gain in or beat distribution business. In addition to positive contributions from solace in other new ex product.
In the quarter, our B to B vaping been business benefited approximately $5 million from a competitor being down due due to code.
With volatility coming forward due to PMTA.
PMTA process and temporary Kobin related benefit you think you should not extrapolate these results in the third quarter and fourth quarter for new Gen.
For the quarter, New Gen gross profit increased 17.7% million to 15.8 million aided by increase in mix of proprietary products faster growth from our higher gross margin BT business.
Second quarter 2020 included 3.6 million, a tariff expense compared to 2 million a year ago.
Moving to the consolidated.
Adjusted EBITDA for the quarter was 22.8 million as compared to 18.3 million in the prior year.
We achieved strong and incremental margins during the quarter, reflecting the benefits from the S unit cost reductions made going into the year.
In this mornings release, we also increased our 2020 guidance. We're encouraged by our results. Thus far this year, but are also balancing our optimism for the business, but the uncertainty in the current environment and ongoing support for the consumer.
With its framework along with taking into account the temporary benefits starting the second quarter and expected near term volatility within our new Gen segment, we revised our guidance as follows.
Projecting 2020 total net sales of 370 382 million.
Adjusted EBITDA is now projected to be 78 million 83 million.
The company now expect 16 to 18 million of total <unk> expenses as compared to $12 million spent today.
Net sales for the third quarter of 2020 are expected to be 90 to 95 million an earnings from the Darfur transaction should start flowing through in mid July as we burn off pretty deal inventory.
Posted there for transaction, we still hold ample dry powder, we continue to maintain an attractive pipeline of investment opportunities.
We ended the quarter with 110 million of available liquidity, which puts us in a favorable position to manage our business through this environment and evaluate these opportunities.
With that I'll turn the call back to Larry for closing comments.
Thank you Bobby.
We had a great start in the first half of the.
We are proud about execution as an organization I want to personally thank our employees for the remarkable work during such challenging times.
We are raising our expectations internally are looking forward to continued progress in coming quarters.
Thank you for participating in the call today and with that I'd like to open up the call to questions.
Thank you and we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone, if you're using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then to at this time, we'll pause momentarily to assemble roster.
And our first question will come from Vivian those are what Cohen. Please go ahead.
Hi, Thank you good morning.
Good morning, Good morning, more good morning to me.
Good morning, everybody. So I'm just.
Let's start with brokers, so clearly very strong share momentum.
Broadly and within your own for store network. So that's certainly constructed you called out pretty even split between hubs and can Larry I was wondering if you could expand on that you know coming off the Altria earnings call. It. They projected also that the tobacco consumers broadly were high we're buying higher volume and that was.
Also contributing to higher per capita consumption.
It was more of a cigarette.
To your if you think you're saying.
And the old back thanks.
I agree that said so that is more than each cigarette comment I think with people being home more and having fewer trips in the store, we are seeing greater consumption and people grind buying in greater bigger packages I think that the tubs are are doing very.
Well as result of that new cancer benefiting from the Oh increased distribution year over year. So I think that's the coming by Altria doesn't apply to moisten pipelines to other.
Our categories as well.
That's really helpful. Thank you.
With the lithium waste category.
Hurting that you guys were able to take pricing with it with the industry in June.
Curious, though you know given kind of the volatile consumer backdrop, whether you saw any kind.
Action from either wholesalers are retailers have even more so from the consumer on that then you would have expected historically because of cobot. Thanks.
No in fact in.
Both the price increase on tubs in May and the cans.
I just recently, we have gotten almost no negative feedback on it.
I think that.
At the end consumers are our said are settling into June was new reality.
It'll be interesting as we go forward what happens with the government support I suspect the government will continue supporting the consumers and that would be benefit to everybody.
Right right, yes, I think that that government that'd be important to be sure I'm just trying to PMT process. They spent 12 million.
Good day.
16 to 18 on on the full year on is there anything that's kind of surprising you as you've gone through this obviously in the entire process just being delayed by the court certainly I think would would necessarily drive that expense upside, but just curious what you're learning through this process and whether there's any kind of.
Adam is nearly vision that are there, resulting in higher definitely.
Yeah, I I think we're just tightening the range.
We we the prices didn't go up because of the delay they went up because we wanted to add a little bit more depth to one of our core products on the open system that we feel pretty excited about.
The everything's on.
On track to get done I would say.
Three months ago, there was a lot more confidence from smaller guys on their ability to file we've seen that drop off precipitously over the past two month as they kind of were closing out in the FDA also made a lot clear or some of the gates that they were going to put up. So you can just submit a piece of paper that you actually have the summit certain.
Mutation that otherwise you'd automatically get rejected so it's the cost was just a tightening. It was is us cleaning up you know one outstanding item, we're pretty excited about but no. It's we're.
Everything's on track.
Great. Thanks, I'll squeeze in one more just as we think about the gross margin compression progression excuse me on the back half a year or are you called out some of.
The inventory accounting.
Starting from the rap deal so how should we think about.
For the third quarter. Please thanks.
Yeah. So I mean from a wraps perspective, you've got about three and a half million dollars, that's going to be moved into Cogs in second half right. So full year seven.
So that that's just straight to the bottom line. Additionally.
You know the the margin was a little bit higher in the second quarter, and we sort of expected primarily because wraps before the Darfur transaction with lower than segment margins. So you should be able to extrapolate that into sort of margin progression for the rest of the year.
Perfect. That's it for me thanks, so much.
And our next question will come from Eric That's Lucas with Craig Hallum Capital. Please go ahead.
Alright, Thank you and thanks for taking my questions guys. Congrats on a such an impressive quarter.
I'm going to I was wondering if I could Ah if I could just dig in a little bit more on the smoking side of things or I know you mentioned some progress on the your E Commerce and dispensary growth initiatives could you just give us a bit more color sort of what you guys are focusing on now and sort of how those initiatives are trending.
And so ecommerce was.
Negligible in 2019 for us on the exact side now at single digit percentages of the business.
So we're pretty excited about that Additionally, you know what we've been sort of beating our tests on for the past year is progression and cones really saw that <unk> in the quarter not now cones are in 40000, plus stores and we're really excited about cones, because the cones box comes with fixed cones versus a French orange pack comes.
32, we flip same price to the consumer but ultimately it drives five times more visits and that's.
We're seeing that in the numbers at this point, so really excited about cones really excited about E. Commerce, you know and second half is gonna be about those but it's also going to be about the wraps business. Both in that we're we're taking the throttles off on the exact wraps business, but we're also adding and want wraps, which is a new channel for us.
In the business.
Okay. That's helpful. Thank you for that and then switching gears to a new gen for a bit great to see solace had a record quarter a great to see gross margins expanding as the results of the increasing mix of proprietary products.
I appreciate that your guidance assumes no upside from PMTA, but can you help us understand what it does assume for new Gen. In the back half I understand it's a bit of a crystal ball question, but any color on how you're thinking about new Gen. PMTA in back half would be greatly appreciate it.
Yes, so so let's let's talk about the numbers for a second we 47 million in the quarter round numbers of sales in new Gen.
You know beep is a bulk of that and that those Dave numbers need to come down.
<unk> somewhere between five and $10 million just because we've got a 5 million dollar one time benefit in may when we got to competitor literally just go down for 10 days.
And that we note that we made a lot of money on and we're happy that we did that but ultimately that that's not sample. So you move that out. Additionally, we're expecting some de stocking that happened in September October.
And so as we've been very loud about deal we think that the first quarter is a lot more representative of the base business offset by the new that non beat business continues to accelerate up and that's how you should really look at I think that the second quarter is there's at least $5 million in there that.
We would we would call onetime.
Okay. That's that's very helpful. I really appreciate that congrats again, guys I'll hop back in Q.
Thanks.
And our next question will come from Susan Anderson with B. Riley. Please go ahead.
Hi, good morning, nice job in the quarter, yet [laughter]. Thank you I guess I just a follow up on the gross margin I guess for new Gen. How are you guys thinking about that over the next several years you know what level do you think the business could go to our you know start to level off that.
Yeah I did it.
Definitely higher from here that that you know we've been very clear about that we haven't given true long term guidance that we had said is we won't stop until that business has a proprietary branded margin, which we historically said, 50%, but now you're looking at you know zigzag.
Smoking segment was 57 going take a step up because the wraps you got MST, which was 54% going to continue taking art.
A quick 54% going to continue taking a step up as we get incremental margins. So we're really focused on getting the new Gen segment to 50% margins, we think that that's going to take some time.
And then you know we're obviously, if we can find something that a little bit margin, but we can fly into our supply chain, we well and so you know as long as that margin keeps creeping up you know we're pretty happy.
Great. That's helpful. And then I was curious if you had any thoughts or number he could play around you know what percent of the market will fall out as a result that PMTA process or how much of the market do you think will be up for grabs after that there isn't a quantitative numbers here to get thanks.
So here here's how we think we don't think the market is going to fall, we think the market will stay flat.
Just slightly down, but we think that somewhere around 50% of the skews will come out of the market.
And so we that's how much is for grab and we're already seeing it with solace, where there are certain liquids that aren't going through it and so people are saying, okay, well I'm going to continue beeping beeping is there's a lot of studies that are actually coming out right now that are extremely positive on this.
Station element of of Beeping, I can't say that but that's what the study site and.
Like we are we're seeing it we're seeing people go okay. I always like this liquid I always like that flavor and they're saying who's still gonna be around in the baby shops are grown whose southern around it's also one of those and so we're picking up share already and we're pretty excited about what happens as the market clears out a lot of that inventory over there.
Next few quarters and we are one of the few Guy Bluff stand there.
Great. That's very positive and then I guess lastly, just looking out at S. you need going forward, how should we think about the level of as she may I guess, maybe as a compared to this quarter to for the next couple of quarters.
Yeah.
So we keep we have shipping in S. unit. So if you back out shipping from S. Yoo Nay I would expect it to be about flat.
Okay. That's very helpful. Thanks, So much you guys. Good luck.
Again, if you have a question. Please press Star then one.
This concludes our question and answer session I will like to turn the conference back over to Larry Wexler for any closing remarks. Please go ahead Sir.
Oh, Thank you everybody for for joining the call. We look forward do talking to you again next quarter.
We hope to have.
It's some good more good results truthfully, thank you very much.
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