Q1 2022 Turning Point Brands Inc Earnings Call
Good morning, and welcome to the turning point brands first quarter 2022 earnings conference call.
All participants will be in a listen only mode. All lines have been placed on mute to prevent any background noise.
Should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions. Please.
Please note that this event is being recorded.
I would now like to turn the conference over to Louis refer me not Chief Financial Officer. Please go ahead.
Thank you operator, good morning, everyone. This is Louis record Munich, Chief Financial Officer, joining me are turning point brands', President and CEO Jambor after Mark and Graham Purdy Chief Operating Officer. This morning, we issued a news release covering our first quarter results. This release is located in the IR section of our website at Www Dot turning point brands.
Com.
There is also a presentation, we will be referencing on the call available on the site.
That presentation, if you turn to slide two our disclaimer. During this call we will discuss our consolidated and segment operating results and provide our perspective on our progress against our strategic plan 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 in our filings with the SEC.
On the call today, we will reference certain non-GAAP financial measures. These measures and reconciliations to GAAP 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 our CEO jambor effort.
Thank you Louise good morning, everyone and thank you for joining our call. We had a strong start to the year with our first quarter results in line to slightly better than our expectation.
Zig Zag continued its strong growth trajectory with another quarter of double digit growth led by our U S papers business building on its market share gains in the measured channel.
In addition, we're showing good progress in our alternative channel efforts as we benefit from increased sales force focus aimed to the channel and the secular growth in the industry.
MSP also saw double digit growth during the quarter.
While inflation is pressuring the consumer wallet sulphurous was well positioned when its value proposition to capture share as consumers traded down during the quarter.
Meanwhile, Neogen navigated unexpected decline in sale, resulting from the pack deck and the regulatory environment, Our bank distribution business remained profitable. Despite these challenges.
Very proud of the fact that we completed the scope of both the ERP and CRM system within the quarter and did so on plan and on budget.
While this is only the first step of a long journey I am encouraged by the fact that we did all of that that needed to be done while still delivering a strong quarter when did not cut corners and had full engagement in the profit top to bottom.
I believe that says a lot about the organization and its potential.
On April 14th.
Obtained regulatory oversight of our non tobacco and nicotine product.
As a result these products are now subject to the same regulatory regime as tobacco derived products.
Pre market filings for non tobacco nicotine product must be submitted by may 14th.
Subject to a timely filing may remain on the market until July 30th unless they receive a negative action.
The July 13th these products become subject to enforcement.
With your FDA oversight is a critical component of effective regulation of the entire industry.
And while it may cause some short term disruption around upcoming deadlines. We view this as a long term positive to level, the playing field and continue to enhance our position in the industry.
With regard to our product portfolio.
We aim to file a new application for a number of non tobacco nicotine offerings, including our free nicotine pouch products.
And we are evaluating spending up to $10 million on PMT application throughout the year with a heavy focus on modern oral.
On capital allocation, we continued to buy back shares during the quarter.
After receiving increased authorization from our board we.
We continue to be committed to not growing our cash balance from here as we aim to use our cash flow to invest in our organic growth.
All remaining cash flow will be directed towards buyback the longest the shares remain priced attractively.
On the M&A front.
It did before.
That is not.
Our near term focus however to reiterate from the previous call. Our intent is to be patient and good deals that leverage our brand and distribution expertise.
And we will and will be value accretive to.
To shareholders.
Any large scale transactions with barstool will be synergistic and thats leveraging existing assets, including our distribution network to drive shareholder value.
When they also pursue smaller tuck in acquisition that deliver our capability to service our existing business that we prefer to acquire rather than build organically.
We recently announced the hiring of our new CMO, Tom O'brien, who brings extensive consumer products industry experience and we're excited about what shape and our marketing team can do to further build our brands.
In addition, we will have also brought on achieved information officer to oversee our technology systems, including our ERP implementation and a chief people officer to support our organizational infrastructure.
We have revamped our organizational structure to improve accountability and more clearly defined functional responsibilities and the reporting structure within the organization.
We have also realigned our segment reporting to better reflect the result of our base business.
Neogen in the past was a combination of a profitable base distribution business and our new product development platform.
Actively we have streamlined and integrated the non <unk> part of <unk> into the rest of the organization from an operational and financial reporting standpoint.
Neogen result, and our clean representation of 100% of our Vape organization.
If it were a standalone entity.
With that let me turn the call back to Lloyd to bolster our results.
Starting with our consolidated results on slide four.
Q1 sales were down six 3% to $100 9 million with strong zigzagging stokers growth offset by a double digit decline in new Gen, which is impacted by the regulatory environment, including the pack that.
Adjusted gross margin increased 180 basis points driven by improvement in stokers scores Martin along with a mixed benefit from increase in sales in our higher margin <unk> segment and decline in lower margin new Gen sales.
Adjusted EBITDA was down $2 7 million year over year with the decrease coming from the expected decline in our base distribution business.
Now turning to the segment performance.
<unk> five for Zig Zag product sales grew 11, 4% year over year to $45 7 million with seven 1% from volume and four 3% from price mix.
<unk> revenue was down 3% year over year due to an industry decline in HDL wraps category offset by growth in natural leaf and <unk>.
We believe the trade was building up inventory in the first half of last year in HDL reps and is now working this inventory to more normalized levels.
Partially offsetting this was a ramped up the zigzag natural leaf and <unk> during the quarter, which collectively accounted for double digits percentage of our wrap sales during the quarter.
As a reminder, in our second quarter, we will have a tough comparable with last year's second quarter benefited from $2 million of pull forward of sales into the quarter.
Our U S papers and E Commerce business was up 41% year over year, driven by growth in E Commerce, and <unk> sales as well as a planned 2 million inventory load with certain customers.
E Commerce was up two six times and now represents 21% of the sub segment with strong growth expected the rest of the year.
<unk> commerce business targeting the alternative channel led the growth and accounted for more than half of our ecommerce sales.
Sales of cones products was up 78%, including over four four times and our E Commerce channel.
And is now 45% of the sub segment.
Zig Zag remains the number one premium and overall paper brand in the MSCI measured market with 33, 3% share, which is up 30 basis points year over year.
<unk> was the number two brand in the paper cones category and MSA I imagine market with 34, 2% share.
Coincident peak, certainly a large opportunity with only one third of stores receiving paper products also receiving <unk> during the quarter in the measured market overall.
Overall, the paper category saw a slight decline in MSA.
Down three 5% during the quarter.
Canada was down 13% during the quarter. This expected decline was primarily due to the timing of orders from our third party distributor distributor last year. When we delivered the half part sales for the full year and Q1, creating a tough comp TPB.
TPB, Canada, which is the old recreation marketing business continued to perform well and grew double digits organically.
With regard to other subcategory grew 17% with growth North regards business and the addition of $2 million of Wild hemp sales previously recognized and EJ reentry.
We introduced a rough cut natural leaf cigars during the quarter and expect a steady build this year.
Gross margins for the segment declined 300 basis points during the quarter. The consolidator of TPB, Canada was the biggest driver of the decline in the lower margins from the DVD at BBW acquisition last year margins would have been down 80 basis points, excluding TBB, Canada in both period with the decline driven by higher growth in lower margin products like our paper cones.
The operating margin decline for the quarter was due to the gross margin decline.
Impact from the <unk> acquisition as part of the TPB, Canada and the reallocation of segment costs in particular personnel from New Act now dedicated to these exact marketing.
<unk> sales and marketing cost and increased shipping costs also led to the decline.
We were also excited by the continued push up our marketing team to strengthen the Zig Zag brand during the quarter. Following the launch of Zig Zag studio last year, We recently launched a partnership with luxury luxury fashion line imagery for spring 2022 collection, which is now available for purchases of stores like Zacks and Bergdorf Goodman.
Zig Zag accounted for 57% of our segment operating income in the quarter and continues to be our fastest growing segment. The fundamental long term drivers for this segment remains intact as candidates continues to gain mainstream acceptance and new states come on board and legal recreational sales, including including New Jersey last week.
Turning to slide six focus products sales increased eight 4% to $31 7 million in the quarter with 0.3% with volume and eight 1% for price mix net sales for the MSP portfolio grew 11% and represented 65% is focused revenue in the quarter up from 63% a year earlier.
Category volume was down five 6%, while we were up <unk>, 9% as our share grew 40 basis points to five 7% during the quarter. According to them it's AI.
Our share in stores selling was up 30 basis points to nine zero percent, which stokers now in stores, representing 53% of industry volumes, which still provides a long runway for our growth.
Chewing tobacco sales declined three 6% from the previous year category volume was down five 1% during the quarter. According to MSCI.
<unk> was the number one SKU and brand in the quarter, gaining 100 basis points of share to 25, 7%. According to MSCI. Despite.
Despite a softening in the industry demand within the tobacco industry in general during the quarter <unk> performed well as value proposition products that resonated well with consumers, especially in the current inflationary environment.
Segment gross margins expanded by 150 basis points to 55, 8% during the quarter driven by price and incremental margin from a higher MSP volume.
Operating margin increased 70 basis points with a higher gross margin from <unk>.
<unk> sales, partially offset by the higher sales and marketing costs were three and increased shipping costs.
Turning to slide seven new generic products.
We continue to manage through a disruptive environment with sales down 37% from the previous year to $23 5 million.
Our vape distribution business continues to be disrupted by the regulatory environment, including the implementation of the backpack late last year.
Adjusted gross margins were down 40 basis points year over year.
Adjusted operating income was down $1 $3 million due to the lower sales and higher freight costs offset by lower valuable SG&A and reallocation of shared costs in the corporate segment as mentioned earlier.
<unk> results. This quarter are now a cleaner representation of our vape business, which remain profitable despite the challenging environment encouragingly, our <unk> business had a stronger strongest revenue month of the quarter in March and.
In our DTC business continues to build its last mile distribution reach we are still awaiting progress and the FDA and our PMT applications and continue to adapt our business based on the changing dynamics in the industry. Ultimately, we still believe that all the short term challenges present, an opportunity for us in the long term given our size and our.
Ability to navigate the regulatory environment.
Moving to slide eight.
We ended the quarter with over 126 million of pass in the balance sheet of $147 million of available liquidity, providing flexibility on capital deployment, we repurchased $10 6 million of shares during the quarter.
As mentioned in the press release, we are maintaining our previous guidance as communicated in the Q4 earnings call.
In addition, as Albert mentioned, we are also projecting up to $10 million of PMT spend which includes filings and additional products, including our pre nicotine pouch <unk>.
In regards to the Capex, we are still reviewing projects that we believe will drive value for the organization, which include the ERP upgrade we do expect capex to be higher this year and hope to provide a firmer update was we have pricing on our ERP and CRM project later this year.
We are evaluating spending up to $20 million for the entire year, excluding the ERP project with the increase attributable to two 9 million from a manufacturing automation project that we started last year.
$8 million from a potential warehouse consolidation and automation projects that we're evaluating.
Thank you for participating in the call today and with that I would like to open the call for questions.
Thank you if you would like to ask a question. During this time simply press the star key followed by the number one on your telephone keypad.
We'd like to withdraw your question Press Star one once again and we'll pause for just a moment to compile the Q&A roster.
Okay.
And we will take our first question from Eric <unk> with Craig Hallum Capital Group.
Great. Thank you for taking my questions and congrats on a solid quarter here.
I was just wondering if you could just expand a bit more.
And the inflation cost that you guys are seeing a few.
Called out some higher freight costs, obviously, you guys do have.
Some sizable margins and ability to absorb that but just if you could give us a sense.
Of what Youre seeing from an inflation perspective.
And your ability to pass that on that'd be great. Thank you.
Yes, sure I mean, they're shipping.
As one of our larger variable costs, especially in our new Gen segment. So a lot of the shipping freight.
The increases for the quarter for new Gen was related to the <unk> implementation. So our shipping cost as a percentage of sales within that segment was up over 300 basis points year over year.
In what I would call our designs and products traditional channel.
Our shipping costs were up a little bit, but not to the extent that we saw in our in our <unk> segment.
And are you guys seeing any other.
Material signs of.
Of inflation at this point, whether it would be packaging our labor.
Anything like that just any other sort of signs of inflation that you may or may not be seeing would be helpful. Thank you.
Yes, we're not immune to the labor pressure that everyone also feelings that we are kind of seeing that we started seeing that already last year.
We have our normal merit increase for or replace this year.
We are seeing it like everyone else's.
Okay, Alright that makes sense and then just last from me here.
Could you just.
Kind of help us understand the impact that you expect to see from adding clipper distribution.
<unk> in the second half year.
The way I kind of see it.
Sort of.
Adding.
This penetration into the alternative channel and a bit of.
Our revenue synergies the other way around as well so maybe just kind of help us understand whether qualitatively or quantitatively sort of what you're expecting in the second half year liquid right. Thank you.
Sure Yes.
We mentioned that clipper in the U S. Canada is about it lighter market is about $500 million from a manufacturer revenue standpoint, they had about 3% share in the U S and we're taking that over in the second half of this year, there's going to be a transition period. As there are distributors that were transitioning from so we're a little bit cautious in terms of power.
Projecting it but long term it is a large opportunity for us given the size of the market and given clipper success in other markets, where they've gained number one chair.
Okay, great. Thank you very much appreciate it.
We will take our next question from Vivien <unk> with Cowen.
Hi, Thank you good morning, I was hoping to follow up first off with.
The comment that you made around.
Softening tobacco demand through the quarter any incremental color you can offer on that clearly we can see it in the scanner data higher gas prices are problematic for the category, but how is that materializing in terms of changes in consumer behavior. Thanks.
Sure. So I'll, let yes, let me take this.
One area, where we are different from most <unk> companies as our our consumer shows up immediately after visiting the gas pump.
And there was a significant price shock on the consumer.
Which we saw late in the quarter led in Q1, and we've seen the rewards.
Alright, a bit into April .
Hopefully, that's a temporary appearances and get a job.
Offset.
But the net result is you have a consumer who is now spending a lot more at the gas pump, which by definition means there is a lot less left to spend when they hit the convenience store.
And what we've seen from a behavior perspective as people shifting.
One toward the cheaper price points, which benefits us, albeit that we are the the value brand and you saw that we're gaining share we have continued to gain share throughout the quarter.
And that has continued as far as we can tell into April .
We are happy with gaining share at the same time, the consumer has less money to spend so you're seeing some trading away from from top and more towards pan because that can as obviously, a lower price point, even though its more expensive in.
On a weight basis.
I'm not sure if that's helpful, but the pressure.
At this point, it's too early to tell.
We're happy where we are we're continuing to take measures to make sure that we continue to gain share, which we've done last quarter, we're doing it today, but.
But we'll see which way the water losses.
Yeah, and I think maybe.
Sorry.
Yes, I mean, the category generally in elastic.
But it is not immune to short.
Short term temporary shocks.
Yeah.
Dovetails perfectly into the follow up which if our math is correct you guys realize very healthy at one point.
Benefit from price mix realization in the stokers segment in the quarter, obviously pricing, where you guys are not the price leader, but pricing from a category perspective, it's an incredibly healthy so all else equal not talking about future price increases, but really maybe just remind us for the price increases that have already been implemented in the marketplace like how does that.
So thrilled.
The next three quarters of the year when do we start anniversarying the last of those price increases.
That you know absent any incremental price increases when would you expect that to normalize very healthy right now.
Yes, I mean generally the industry has been taking.
In the past two and in the last few years, the three price increases a year.
Lastly, we just took one in February and the Laclede. We took last year was in June and October .
Okay.
Got it perfect. Thank you so much.
And we will take our next question from Susan Anderson with B Riley.
Hi, Good morning, Alex Wang on for Susan on Zig Zag, just looking out longer term say the next five years, what do you think presents the largest opportunity of growth for the brand.
Yes.
For <unk>, specifically have the clicker is a large opportunity for us on a brand that we think is phenomenal.
That success internationally. So that is for the segment one of the big ones that I think.
You can drive decent amount of growth over the next couple of years on top of that we are continuing to introduce new products into the market. So cigars.
Big opportunity for us.
A very consolidated market that will be easy, but we started with the introduction of our.
Rough cut natural leaf cigar product in Q1, which we are excited about and on top of that there is other new product launches natural leaf continues to ramp up and wrap with easy to ramp up we're going to launch other products like palm leaf sometime later this year into next year.
And on top of that we still feel we are underpenetrated in the alternative channel.
As I mentioned B to B E Commerce led our growth in.
Our <unk> e-commerce businesses here and a lot of that was driven by alternative channel sales effort, we're continuing to build our alternative channel sales force and we expect that to pay dividends for us over the next couple of years and just the just to reiterate that last point, we are deploying significant resources into the alternative channel both in the <unk>.
Of hiring sales personnel as well as meaningful marketing effort.
And we're seeing great traction great return so far so we'll keep doing that.
To state the obvious as legalization.
Take more and more states and makes it.
As direct becomes legal in more and more states and hopefully we'll get to a federal legalization.
Our trends were going to ride for a long time.
And in terms of the alternative channel way in the very early innings in terms of growth. So we have a long long long path of.
Hopefully consistent and strong growth. Okay. That's what we're seeing right now and I don't have any reason to believe it's got a different.
Thanks, and I guess just to follow up on that.
I feel like is really.
One of the most recognized.
Smoking related brands in the U S and you just said that partnership with <unk> thoughts on maybe licensing out the brand image.
Or even expanding your apparel and flexible collections going forward.
Look we have a fantastic team that's handling market marketing, which has brought some upfront to run it.
The reason, we're investing heavily behind the brands. We did say on Q1 that that will continue to support marketing.
I think they've done a phenomenal job.
In kind of <unk>.
Developing relationships partnerships collaborations you should expect to continue to see that.
And we will do a lot of it because it's highly effective with the fact that our competitors are complementing why we stick with them it speaks for itself.
That being said, we're highly unlikely to start licensing our brand.
That's just not not currently on display.
Yes, well I mean, if you look at our website today, we have a limited edition $1000 box a pretty hefty.
Offering that we just launched and is almost sold out already so I think what they're doing.
In terms of kind of product development and partnerships and general marketing has been beneficial for our brand.
As a reminder, if you'd like to ask a question star one on your telephone keypad and we will take our next question from Gaurav Jain with Barclays.
Hi, good morning.
So a few questions number one is.
And then the front.
We had extensive discussion last quarter on how you are thinking.
About M&A, but if you had any further thoughts and what have you looked at anything interesting and rich rich rich got take it easy you might be looking at.
So look the quarter was entirely <unk>.
And exited on the business, we have a lot on our plate and as I mentioned, both on the previous call and on this call.
You M&A is opportunistic and it's going to take time to actually file.
They're ideal.
I would reiterate what we've been saying the right deal has to get synergistic wed have to have an angle for us.
Whether thats, our distribution, which is obviously the most obvious angle or at some other asset that is unique to us that we bring to the table. The deal is going to be synergistic.
Full stop.
And again, the only other quantify out that as we made two small tuck ins to address things up with rather buy them built but those are going to be small.
Okay. Thank you and second is on the spin million BMD cost, which I do want to call. It.
Specified earlier in.
And it is a decent amount of money. So could you just help us understand where you would be.
Putting those <unk>.
I would have thought that you would be able to use the.
BMT is that two five lost time due largely to file the <unk>, so maybe youre going into some new products. So can you just help us understand.
While we have this $10 million cost.
Yes.
Sure.
Let me, but let me start by just describing what the P. And K is meant to cover the focus of the TNK filings is going to be moderate and borrow to be clear, we have very little faith in it.
And the <unk> part is going to be in partnership with others.
Initially we will be supporting somebody else's BNP.
We will have an arrangement with somebody else, where we're spending very little mining with hopefully getting the benefit of it.
The parts, where we expect the lion's share of the $10 million is our own proprietary products, which are going to be strictly a modern oral one of them is free obviously.
And we have another product, which we have not discussed.
I would like to hold off on discussing it but it is modern oral it is different.
We think it's very different than we would like to velocity, we'll see how it works.
But we're very very very excited about it.
And is that.
Thats what the TNK is meant to cover in terms of when we discussed. It now you are correct. We did not discuss discussed on the previous earnings call. We will fuel figuring out the exact timing and to be honest our preference would have been we will.
File the PMT as late in the year. After we've had more time to test the market see reactions guests' feedback and all of that got accelerated by the FDA in Congress and that's just the reality of it.
In terms of overall spend I can tell you is that we had about $9 million in the budget as it went to 10 as a result of the acceleration.
But we have been working on <unk> for quite some time and this is not something you can do in the rush.
Which is why it would be interesting to see what people file because we've been working on our P MTA for months and months.
No.
Sure.
Got it.
Yes.
No.
So is that if you're putting that much money behind.
<unk> or BMT and then could.
Could you also then share what your learnings have been from <unk>.
In terms of like how much have you sold and what is the velocity. How many places distributed I mean, I can see it online, but how many stores.
Distribute then how do you compare velocity is often three verses broker. Some some numbers if you could share that would be quite helpful for us.
Hi, Gary This is Graham here.
Consistent with our philosophy, the last year and a half or so we've taken a very measured approach to approaching the marketplace with the product.
In terms of store identification and salesforce allocation of time.
To date, we are in a roughly 15000 stores.
The success of the product in those stores is incredibly encouraging.
To go into specific numbers.
Just tell you that we're starting to cleave off some nice market share gains in the stores.
And then the one thing I would add is.
Just from a reorder perspective in comparison to other launches with them.
<unk> has the highest reorders.
That we've ever seen.
So we thought that's encouraging and just to be clear I think our product is the only one that the law will step down from a higher level to a lower level. So if youre looking to quit.
Welcome to you all the way from high to low and that makes us very unique in the market.
To accomplish the same result, where the competing product it's got to be walking around with a multiple of vouchers.
Which is not all that attractive.
Okay, well, thanks a lot.
Okay.
And there are no further questions at this time I will turn the call back over to you.
I would like to thank all of you obviously had a very very good quarter I would like to again, thank everybody for their patients.
Obviously investing into the company.
Variable to optimistic I've been here for a few months now and I can tell you that I am more optimistic now than ive been in the last few months the more I learn about this company and its people and its potential the happier I am that I am here and the more I look forward to what we can do together.
We'll look forward to the next earnings call and talking to you guys. Thank.
Thank you all.
This concludes today's conference call you may now disconnect.
Okay.
Please wait the conference will begin shortly.
Okay.
Okay.
Yes.
Okay.
Sure.
Yes.
Yes.
Okay.
[music] community.
Sure.
<unk>.
Thanks.
[music].
Sure.
Yes.
[music].