Q1 2021 Turning Point Brands Inc Earnings Call
Yeah.
Good morning, and weapons to the turning point brands first quarter 2021 earnings conference call.
All participants will be in listen only mode.
All lines have been placed on mute to prevent any background noise.
And you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After todays presentation and will be an opportunity to ask questions.
Please note this event is being recorded.
I would now like to turn the conference over to Louis with a maintenance the incoming Chief Financial Officer. Please go ahead.
Thank you. Good morning, everyone. This is Louis Refered minority incoming CFO joining me are turning point brands, President and CEO, Larry Wexler, Graham Purdy, Chief operating officer, and Bobby Lavan, our outgoing CFO. This morning, we issued a news release covering our first quarter results. This release is located and the IR section of our website.
Www Dot turning point brands Dot Com, where a replay of today's conference call will also be available and this call. We will discuss our consolidated and segment operating results and provide our perspective on our progress against our strategic plan and.
And as is customary I direct your attention to the discussion of forward looking and cautionary statements in today's press release, and the risk factors and our filings with the Securities Exchange Commission.
The disclosure outlines various factors that could cause actual results to differ materially from projections or forward looking statements that may be cited in today's discussion.
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 statements in the call today, we will reference certain non-GAAP financial measures these measures and reconciliations to GAAP.
And can be found in today's earnings release, along with reasons why management believes that they provide useful information I will now turn the call over to Larry Wexler our CEO.
Thank you Louis and good morning, everyone. Thank.
Thank you for joining the call.
You started the year with another strong quarter.
And the first quarter revenue was up 19% to $108 million above our prior guidance range and adjusted EBITDA was up 57 per cent to $28 million.
Revenue growth was led by a court zig zag and snooker segments, which were up a combined 27% despite challenging comps from last year's lockdown related inventory better.
A number of favorable trends assorted and 2020 have continued.
Even as the.
Our country has begun to open up.
Ah zigzag product segment saw another quarter of tremendous growth as we continued to outperform a healthy market with our execution.
New product Skus and e-commerce were strong contributors to growth and we ramped up distribution of bone grafts during the quarter.
We acquired the rights to this brand and the darker transaction last year.
Canada also outperformed recreation marketing results now consolidated within the sector.
And stokers MST drove our games, our same store sales growth continued its strong trend.
Stokers remains the fastest growing brands and MST According to NSA RT.
And continues to be well positioned for the secular shift to the value category.
New Gen saw a solid growth during the quarter. Despite continued disruption, resulting from industry reactions and PMT a process.
Encouragingly the FDA has stepped up its enforcement efforts issuing warning letters, there's 31 manufacturers and March after issuing 29 letters and February 19 and January.
We expect continued volatility per new Gen at the PMT process and port.
And so it continues.
In addition, late in the quarter, maybe benefited from volatility as the industry responded to the looming implementation date of the path Act and the second quarter.
Customers bought forward late in March and competitors experienced some disruption the.
And the Pacte Act is creating further barriers to entry and the base distribution business as has increased both the cost and logistical complexities of shipping day products to customers.
As a result, we're expecting more of our competitors to exit the market and the short term, which will create additional volatility will provide optionality for more long term upside for our business.
We were also very excited about our recent investment and dark light brands, which has the global rights to the Bob Marley brands for candidates and ladies boots.
Bob Marley is one of the most iconic brands and Canada space and is a perfect complement to zigzag.
And fits well with our strategy of building one of the best brand houses and Kennedy space.
And we'll be rolling out the current line of Marley CBD topical products through our distribution infrastructure and later this year and.
And the emphasis on the BDC online opportunity and the early stages.
With over $180 million and liquidity and our balance sheet, we remain well capitalized to pursue further investments and acquisitions and value to our company and enhance our growth profile.
Overall, our performance to start the year enabled us to raise our guidance, we look forward to continuing our momentum.
With that and to add some additional color and perspective on our quarter and the path forward, Let me turn the call over to Graham Purdy Chief operating officer.
And thank you Larry.
Now I'll give you a quick snapshot of the performance from segment level.
Zig Zag products saw double digit growth and the quarter led by strong double digit growth in both U S Rolling papers and <unk>.
In the U S. Zig zag papers position as the leading premium and overall paper brand strength and increasing its market share in the measured universe by 3.5 points year over year to 33.3% According to MSCI.
This was the seventh consecutive quarter zigzag is realized year over year share growth.
All our major product lines contributed to this growth supplemented by our new products and our expanding e-commerce platform.
And paper cones, and we were the number one brands in the MSA I measure channel with 41.4% market share and the first quarter up 21, 4%.
<unk> from the previous year.
Our cone sales more than quadrupled year over year.
It was over 19% of our U S paper sales and the first quarter and.
And we'd expect it to continue to ramp through the year.
We continue to lead the growth and penetration of product and convenience stores and are expanding our presence and the non major alternative channel, including head shops, and dispensaries, where most of that market currently exists and where zig zag is still under represented.
As a reminder, cones are highly accretive to our business.
Cones are a more convenient product for the adult consumer and one co and effectively sells for four to 10 times the price of and individual sheet of a regular rolling paper at retail.
A significant increase to our addressable market on a per usage basis.
And Canada, we had a strong quarter of growth recreation market marketing.
Which is now being consolidated contributed low single digit to our segment sales as their business continues to accelerate.
Zig Zag is now and dispensaries and a cup of roughly 75 per cent of the Canadian market and is gaining share within that channel.
E Commerce, which was nonexistent last year was a big driver of growth once again accounting for double digits of our U S paper sales during the quarter.
Stokers product saw double digit growth and the quarter.
A majority of the growth was again driven by moist snuff same store sales gains.
Stokers market share it was up to five 3% a little over 50 basis points compared to a year ago. According to MSCI.
Stokers moist is now represented.
And stores, representing 61.2% of industry volumes.
Four five points above last year's level, which still leaves a long runway for further growth.
Total company chewing tobacco sales saw low single digit growth during the quarter.
Stokers Chew gained an impressive 2.6 share points with 24.7 share and the first quarter. According to MSCI.
Stokers has continued to gain share every year, we have owned the business.
With the continued secular shift into the value category.
And stokers positioning as a leading value brands.
Chewing tobacco business is well placed to provide us with a stable annuity stream of cash flow going forward.
Moving to new Gen, where we once again had a resilient quarter and a disruptive environment.
And our vape distribution business, we saw strong growth and healthy gross margin improvement and the quarter. Despite continued competitive pressure and the market related to the Pea MTA process.
The segment also benefited benefited from advanced buying in anticipation of strict stricter shipping regulations around vaping as a result of the implementation of the path Act and the second quarter.
With the new ex.
Our white nicotine pouch product free and wild hemp hemp, that's contributed to our growth.
While we continue to expect short term volatility and the vape distribution business. We are optimistic about the optionality and the segment as the market begins to consolidate.
The Pac doctors and other catalysts as it will create challenges for our competitors by increasing logistical requirements to service state customers.
While this increased while this will increase costs and create short term disruption as the industry adjusts and the new law. We believe this will accelerate the consolidation and the industry and position larger players like us well going forward.
And with that I'll turn it to Louis for a review of our first quarter financial performance Louie.
Achy Grant our performance and the first quarter was once again ahead of our plan.
Turning to the segment reviews, the exact product net sales and the quarter increased 41, 8% to $41 million with strong double digit growth and U S Rolling papers and.
And why else cigar wraps and Canadian papers, which benefited from roughly $2 million to $3 million of deliveries pushed into the first quarter of 2021.
Total zigzag segment volume increased 36, 9% while price mix increased.
Four 9% according to MSA I first quarter industry volumes for U S. Rolling papers increased double digits with over half the growth driven by cones. Our volumes grew at two times the rate of the overall market.
If you strip it out we do three and a half times the rate of our competitors.
This excludes the incremental volume growth, we are seeing from the alternative and ecommerce channels and why and what's cigar wrap industry volumes were up strong double digits and the quarter.
During the quarter. We saw this segment's gross margin expand significantly by 490 basis points to 67%. This was the result of the financial benefits of the limiting royalty payments and darker resulting in higher margins for NYLD cigar wrap product and accretive contribution from our ecommerce business, which is currently trending above the <unk>.
<unk> average.
Zig Zag accounted for 58 per cent of our segment operating income and the first quarter and continues to be our fastest growing segment.
Stokers products net sales increased 10, four percentage $29.3 million and the quarter net sales for the MST portfolio grew 17% and represented 63% of stokers revenues and the quarter up from 59% a year earlier.
Total stokers volume increased five 1% with price mix advancing five 3%.
Year over year industry volumes for MST declined by approximately 2% with chewing tobacco and declining by approximately 4%.
<unk> shipments to retail continues to outpace the industry and the quarter growing its MSA and high share in both chewing tobacco and MST.
Moving to our new Gen segment net sales increased six percentage 37 4 million.
We continue to expect near term volatility due to the PPP MTA process in 2021, along with the impact of the path Act for the quarter and new Gen. Gross profit increased nine 2% to $12 5 million.
Segment gross margin expanded 100 basis points to 33.4%.
Moving to the consolidated business adjusted EBITDA for the quarter was up 57% to $28 million as compared to the prior year, we achieved 60% incremental margins during the quarter, reflecting the strong performance and our core segments as we leveraged our fixed cost infrastructure.
And this morning's release, we also updated our 2021 guidance as follows net sales of $422 million to $440 million. This is up from previous guidance of 412 432 million.
This includes net sales of $103 million to $109 million and the second quarter.
Adjusted EBITDA for the full year is now expected to be $103 million to $108 million up from previous guidance of $99 million to $105 million.
For Zig Zag, and we now expect strong double digit sales growth up from double digits previously as a reminder, in 2020, our cigar wraps the business was impacted by $5 million for manufacturing related disruptions and the second quarter of last year, which we made up for in the fourth quarter. So the manufacturing impact was a wash for the year, but we will have.
And impacting comparisons this upcoming quarter.
We estimate that the net benefit from COVID-19 on the overall Zig Zag and segment last year was $7 million.
Stokers, we expect high single digit sales growth.
We saw some benefit from our competitor being temporarily out of the market and the middle of the year and our loose leaf chewing business. So we will have a tough comp for loose leaf business and the upcoming quarters.
We estimate that the net benefit from COVID-19 in 2020 per stope worse, it was around $3 million spread out from Q2 to Q4.
For <unk>, we now expect a mid to low single digit decline in revenue. This is up from previous guidance of mid single digit sales decline.
This includes single digit declines for distribution up from previous guidance of double digit declines offset by growth and new works.
We expect the second quarter to be a challenging quarter. So we take a pragmatic view of the market and front of significantly increased logistical cost and the market impact around the pack that implementation.
And we will also be comping against a quarter with COVID-19 tailwind and <unk>.
COVID-19, we previously called out a benefit of $5 million and Q2.
Last year from our competitor being off line. We also benefited from an increase and our BDC E Commerce business as more people stayed at home, especially in Q2, we estimate that the overall impact and the agenda have been $15 million from COVID-19, and 2020 with $10 million of that and Q2.
Moving to our balance sheet, we ended the quarter with 167 million of cash and $189 million of available liquidity. This puts us in an incredibly strong position to execute and active pipeline of opportunities. We are currently evaluating to grow our business.
With that I'll turn the call back to Larry for closing comments.
Thanks Louie.
And we had a strong start to the year.
Our core businesses, especially zig zag continue to perform exceptionally and we're optimistic about the longer term prospects of our new Gen business. As we believe that we have a competitive advantage and navigating the P. M. T. A process and the Pac Act, which are likely to be transformational events for the industry.
With our business momentum and our balance sheet and remain well positioned as a company.
Performance would not be possible without the continued efforts and our employees and I want to personally thank them once again for their commitment and contribution to our success.
And I also want to take this time to thank Bobby lab and for his contributions to the company over the last three years.
Bobby has been instrumental and reshaping our balance sheet and repositioning our company for growth.
We wish Bob all the best and his next opportunity.
Thank you for participating in the call today and with that I'd like to open up the call to questions.
Ladies and gentlemen, and as a reminder, if you would like to ask a question. Please press Star then the number one on your telephone keypad.
Again, ladies and gentlemen debt is still one for question and we'll pause for just a moment to compile the Q&A roster.
Again, ladies and gentlemen that is star one to ask a question.
And so we have no questions at this time.
Okay.
And Sir.
And we do have a question from the line of Vivien <unk> with Cowen.
Yeah.
Hi, Thank you and good morning.
Hi, Vivien.
So let's start off with.
Segment.
And tremendous growth far better than and we were looking for the share momentum certainly is encouraging and it seems like you guys had incremental distribution opportunities.
And from here I was wondering if you can just help us think about framing.
Yeah.
Per cent distribution, and it's easier to track and in measured channels, but it's it's a little bit more nebulous and when you guys start expanding and kit to non measured channel. So how should we think about that thanks.
Yeah, So I guess and Youre right. It is harder to attract and the non measured channel. So our early estimates of the alternate channel. It's about 40% with the market. We may we may have underestimated that we still think that we are in the high single digits low double digit share in that alternative channel. So we're still plenty of.
Runway for us to grow there, especially kind of with the 30 share that we have.
And the measured channel.
So I think we're still just getting started in terms of our efforts and the alternative channel.
Understood. Thanks for that and just on the revenue accretion that youre seeing from Cowen and <unk>.
Certainly that's showing up and in gross margin, which is which is great and see.
But when you said your debt cones can go from anywhere from four to 10 ex premium that strikes me as a very wide range relative to a single sheet, so and so what drives the variability and in that.
Yes.
Yeah, So it's really kind of the depending on the product and you're switching from <unk>.
So if you look kind of on our on our website.
And if you look at the a booklet of French Orange papers debt.
$2 50 for a booklet of up <unk> 32, and so that drives kind about sport times increase on the retail price for that product, but if you look at our unbleached Rolling papers, which comes in and pack of 50, that's a 10 times increase to the price of the unbleached paper.
Oh perfect. Okay. Thanks for that context last one.
Keeping item on the Zig Zag segment can you quantify the magnitude of the revenue shifts.
And I believe it was from Canada and <unk> into <unk>.
Yeah. So that was just a delayed shipment from Canada, and so that's about $2 million to $3 million that we expand and shifting over from Q4 of last year to Q1 of this year.
Perfect, Okay moving on to the.
And the Stokers segment I was hoping to get your perspective on some of the commentary coming out of Capitol Hill around tobacco tax organization. Please.
Is that zone is that a tax question.
She broke that's right and the task question.
Well as you know you've been and that you've been following this business a long time and there's always there's always conversations about taxes and taxes go up and down.
State level all the time.
The experience that we've had that we've seen is that there is fairly low and elasticities.
And in our markets and we.
Do see some shifting to value after significant tax increases and states.
And as.
And as you know the Durbin Bill is the first proposal.
It's a very extreme.
We expect to come in.
Other than that and even if it did were very well positioned we did to us and back of the envelope analysis that says that.
After the Durbin implementation and service and build a pack of cigarettes would be $8 and change and it came of stokers would be five and change and I think we're still very well positioned even if that tax logo sir.
Yeah.
Makes sense from a cross elasticity of demand perspective for sure Larry and then if you could just.
Expand on that thought and just speak to the implications for our federal tax on beef.
Well, there's as many implications from that.
One is debt.
And once you once the federal government taxes, and your product it tends to become right now.
And a partner, but it certainly didn't legitimized and.
Maybe leave some for some of the pressure.
We believe that debt.
Consumers, even in states and put on state excise taxes and stayed with the product.
Consumers tend to have incorporated their products into their daily lives and ultimately.
Unfortunately, the consumers will pay the tax most of them almost all goodbye and taxes go through.
To the consumer and the consumers will pay the tax.
Understood. Thanks, very much for the color.
And your next question question is from the line of Susan Anthony with B Riley financial.
Nice job and the quarter, it's good to see that accelerate growth continue into the first quarter and.
And I was wondering if maybe you could talk a little bit about the longer term operating margin opportunity for the stokers and Zig Zag summit segments, I guess, how much opportunity is there to continue to expand the margin Sir.
Yeah. So we'll start out with the with the Zig Zag and we're not as focused on expanding the gross margins of the.
And the Zig Zag segment, you know part of that is going to be driven by the product mix and for example, we mentioned paper cones, which is a highly accretive.
Product for Us for me and addressable market perspective, but it may come at a lower and gross margin and then what we have for our traditional papers product.
Which is fine because it expands the gross profit dollar opportunity. So we're really focused on with zig zag and leveraging the gross profit dollars odd and the fixed costs SG&A for that segment.
So don't look for too much gross margin expansion on the zigzag segment from here on the stokers Thats a different story because MSP is a product that is.
And we manufacture in house, so we should still keep driving incremental margins as we grow the volumes of that business.
Okay, Great. That's really helpful. And then maybe if you could talk a little bit about the new ex brands and the response, you're seeing from the consumer it seems like with the better guidance, there and then each and category it looks like it's doing a bit better than expected.
Yes, so part of that is being driven by the.
<unk> implementation that we mentioned earlier, so we did see some pull forward in.
And sales as our customers kind of a pre bought in advance of the higher shipping costs. As a result of the fact that there is going to be some short term volatility, but we are seeing a big opportunity for us as the market consolidates.
There are competitors going away. So I think that's that's part of what Youre seeing and the strength on on the new Gen side of the business.
Okay, Great and then I guess just last one really quick if maybe you can give us an update on what you're seeing on the acquisition front, where you're seeing and the most opportunity.
In terms and by segment and kind of where you're really focused on.
Sure. So we just did this investment and adopt light, which we are very excited about the the focus there and it's really we want to build a house of brands and the cannabis space of that complements our our investment and doses, we're looking to do.
A few more of these not too many and we kind of view these as a <unk>.
Way up dipping our toes and the water and eventually acquiring these brands.
And in two part of the consolidated company.
We have mentioned that we are active in the cigar space. It is a.
$2 5 billion dollar market opportunity for us So we are evaluating opportunities.
From an acquisition perspective, there so look for us to do something there and the short to medium term.
We are also focused on expanding our product offerings.
So we are touching 210000 retail outlets in North America.
There's a lot of other products that go into the stores, which are mostly C stores that we can drive through the same sales infrastructure that we're currently.
Using so we are.
Looking at what we would call it fourth leg to the stool.
So there's various opportunities that we are pursuing.
Okay, Great I guess, just one follow up I guess for the investments such as Doc line. How are you guys thinking in terms of the timeframe there and.
And eventually making a full and that's man and the company.
And so dark line comes with an option of.
And that's the.
Sluggish into the business.
<unk>.
The way we're approaching the cannabis segment is.
We think that the market today and for me is significantly different than the market five years from now so making investments in small investments and companies like doses and adopt light with an opportunity to invest in other chunk and eventually fold them into our cash.
Company is the approach that we're taking there.
Great. Okay. Thanks, so much good luck the rest of the year.
Yeah.
And your next question is from the line of Eric <unk> with Craig Hallum.
Alright, great. Thanks for the question and congrats on another really strong quarter here.
Focusing on the on the Zig Zag business, obviously really strong growth there as well and I'm just trying to parse through that measured versus our alternative channel opportunity.
How should we think about that opportunity in terms of papers versus wraps any major difference and either current distribution or sort of market share potential that you guys see for papers versus wraps and that alternative channel.
And so the alternative channel is really mostly a papers opportunity. So part of that is you need a tobacco license to sell our <unk> product and so that sits mostly in our and our measured channel still and so really the opportunity in terms of expanding our presence dream channel to more of a papers.
And that's true for both the U S and Canada.
Okay and then.
I'm, assuming that it's sort of a higher mix of cones and the alternative channel then and then and the measured channel, but any sort of ability to kind of quantify the opportunity for cones versus.
Booklet and that alternative channel.
Yeah. So it is it is.
A heavier mix of cones and the alternative channel versus versus papers, we think that the cones market is as large as the paper booklets market.
And it is and more represented and the alternative channel today than it is and the convenience store channel really were driving the growth and the convenience store channel right now.
Okay, great Yeah, that's very encouraging for the upside the gross profit there.
I guess switching gears, just a little bit here focusing on on M&A.
So you've talked about M&A and the past in terms of sort of filling gaps and not only your product portfolio, but the infrastructure as well.
As it relates to the cannabis M&A opportunity.
It seems like you guys are doing a really good job filling and the product side with doses wild HAMP and dock right.
But could you touch on any of the infrastructure side and of those acquisitions and you know maybe help us understand.
And what product or infrastructure gaps you might still be targeting for M&A and the cannabis sector.
Yes, so we kind of view ourselves as a branded consumer products company right. So and cannabis is a large and growing market.
We are looking to extend our exposure and obviously with dose is one of the strongest brands and the on the vape side and now and the gummy side, and California, and Bob Marley, which is one of the most iconic brands and the cannabis space and we have added to our a R.
Our portfolio of brands that complement zig zag, well. So we are looking to extend our exposure there further and our focus is on brands, but we're also looking across the supply chain to see if there are opportunities out there.
And to help extend the reach of our brands further.
Okay, Great that's helpful.
Thanks, again, and congrats again on a strong quarter.
Your next question is from the line of Hayley Holden.
Thanks for taking the call and I just had two for you.
Following up on the M&A theme I was wondering if and if.
And if there had been any changes with some of either the tax noise out of Washington, and the regulatory and area in front of the FDA and in terms of.
And your ability to underwrite potential M&A transactions or.
And sellers are coming out of the woodwork.
And I haven't really seen much change this yet I mean and you obviously.
And there's still a lot of uncertainty and sense of what's happening on the tax rate and so I don't think we've really seen much in terms of any.
Any activity change the results to potential changes on the tax.
Tax code.
Okay and.
And then.
And my second question was I think you mentioned in the script the potential for higher freight costs and the second quarter and I was wondering if you could just give us a little more color on that.
Yes, so a lot of that is.
Is being driven by the pass back the implementation. So we're forecasting a decent increase in terms of kind of our ability to.
Fulfill orders so some of that is going to be passed on to the consumer but there is also a big opportunity for us from a market share perspective.
Some of our competitors are going away this upcoming quarter.
So we're looking to invest and grow our our market share.
Nice quarter for this coming quarter.
Great. Thank you very much.
And your next question is from the line of Greg <unk> with Sidoti.
Hey, guys. Thanks for taking my questions just real quick on the FDA warning letters are those predominantly open tank players or is that just a mix of both.
Type of type of players.
The bulk of them are the open tank players lobbing for mostly liquids.
Okay, Great and then how should we be thinking about.
Yes.
This year I believe you took price increases and.
And stokers and May and July if I'm not mistaken is it.
And expectations for some price increases coming through this year around those times.
The price increases and invoice come at a fairly regular.
Flip so you would expect to schedule would be somewhat similar to last years.
Okay, Great and then just one final question can you just kind of just in general.
Should we be thinking about and zig.
Exactly the E Commerce channel, how big is that right now or is it just too small too.
Kind of quantify at this point.
So within our U S papers business, it's double digits of our sales. So we expect that to continue to ramp for us through the year.
Okay, great. Thanks.
And Sir there are no further questions Mr. With all and May not do you have any final remarks.
I will turn the call over to Larry.
Well. Thank you everybody for joining the call. We look forward to seeing you at the end of next quarter and a <unk>.
Day sales and.
And in July.
Sure.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
And.
[music].
Okay.
[music].
Yes.
[music].
And.
[music].
And.
[music].
And.
And.
[music].
Total revenue.
[music].
Yes.
And.
Yes.
Yeah.
Yeah.
Yes.
Yeah.
Yes.
Uh huh.
Okay.
[music].
Yeah.
Okay.
Yeah.
Yeah.
And then.
[music].
Yes.
[music].
Yes.
[music].
Okay.
Okay.
And.
And one day.
[music].
And then.
[music].
And.
[music].