Q2 2022 Turning Point Brands Inc Earnings Call

Good morning, ladies and gentlemen, and welcome to the Turning Point Brands second quarter 2022 earnings conference call.

All participants will be in a listen-only mode, and 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 today's presentation, there will be an opportunity to ask questions, and please note that this event is being recorded.

I would now like to turn the conference over to Louis Raffermina, Chief Financial Officer. Please go ahead. I'm going to turn the conference over to Louis Raffermina. I'm going to turn the conference over to Louis Raffermina. I'm going to turn the conference over to Louis Raffermina.

Thank you operator. Good morning everyone. This is Louis Refermeda, Chief Financial Officer.

Joining me are turning point raised president and CEO Yavler Efremov, grant 30 chief operating officer, and some refrain chief marketing officer. And some refrain chief marketing officer.

This morning we issued news release covering our first quarter, a second quarter results. This release is located in the IR section of our website www.TurningPointPrayns.com.

There's also a presentation which we will be referencing in the call available on this site.

Starting over to slide to the presentation, during this call we will discuss or consolidate and segment operating results and provide a perspective on our progress against a strategic plan. As discussed, Mary, I direct your attention to the discussion of forward-looking and cautionary statements in today's press release and the risk factors and refiling with the SEC.

On the call today, we will be referencing 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 , Yavur Efremov. Thank you very much for joining us today and have a great night.

Thank you, Louis. Good morning, everyone, and thank you for joining our call. I have now been with the company for two quarters and wanted to start by sharing some thoughts on what I have seen so far and areas with AC opportunities.

In terms of immediate steps, in light of the turbulence we saw in the water, and contingent uncertainty, we have taken a number of cost control measures on the up-ex side and have risk structured our cat-backed slams to protect our cash flow for the year. We continue to reduce the company for areas where we can improve on cost or delay spending without putting future performers at material risk.

While those steps are necessary given the current environment, I'm happy to report that there are significant growth opportunities ahead of us.

We have done more work on the areas we've highlighted in prior calls, and I wanted to give you an update on what we're seeing so far.

First, we have done quite a bit of analysis to understand the alternative channel, which we define as headshots and dispensers.

We believe that the target addressable market for the old channel, relative to the current product types we engage with, is roughly the same as the measured channel.

While there are fewer dispensers and head shops than there are at c-stores, the velocity of product sales in the old channel is multiples of that in the c-store channel, and the availability of shelf space also allows for more of our products and accessories to be sold.

Importantly, we see the channel and its TAM growing strongly as a result of deregulation

MSEI does not measure sales in the old channel.

but we have utilized our own sales data along with other available marked information to triangulate the estimated size, which again, we believe is similar to the size of the measured channel today and we expect that it will grow faster in the future.

For MFAI, our share of the measured market for all this teaching is one-third between papers and calls.

Based on our estimates, we have a single digit share in the total opportunity set within the old channel, which extends beyond our traditional paper products.

That leaves a large opportunity of incremental revenue that is available for us all the time. That is available for us all the time.

penetrating the alt channel and continuing to push on the measure channel requires us to approach marketing in a different way.

We recently brought some on board to drive that effort and to leave our talented Miami and LA based teams, which have been critical to zig-zag's growth in recent years.

I'm very excited by the initiatives she has outlined so far.

While we are in the early stages, we believe that we can highlight the superior quality of our products and drive greater market share while at the same time realizing attractive returns. While at the same time realizing attractive returns.

As we increase our focus on penetration, we will continue to keep an eye on marketing costs to ensure that we realize a decent ROI.

Second, we have historically underinvested in technology.

As many other companies have shown, leveraging the right technology can drive the top line and allow us to control costs.

Specifically, we're looking to expand our CRM functionality to allow us to better track both performance and opportunities in the market and allow us to pivot quickly to respond to market dynamics.

Moving from excel-based solutions to the full power of a modern CRM could help us drive the top line in ways that are not available to us today. The CRM could help us drive the top line in ways that are not available to us today.

As discussed on our prior calls, we are replacing our four existing ERP systems with a single fully integrated ERP. Over time, we expect significant deficiencies on the cost side from the implementation of the new system, both in terms of eliminating the excess costs associated with maintaining outdated systems.

and manual processes, as well as significantly better visibility into our business functions and better controls of our processes that should lead to better performance.

Summing it up, I am even more optimistic now than when I joined. I will continue to review the opportunities set both for ways to drive revenue and to find initiatives to reduce costs so we can grow the company.

Turning to the quarter.

While we experience uneven results during the second quarter, we're pleased with the resilience of our business. Rising practices at the pump and heightened inflationary environments had an impact on consumer traffic in convenience stores.

ZXZ overall had a stable quarter against the top comparable periods in the previous year.

Continuous proliferation of the cannabinoid market combined with our new initiatives on new products e-commerce ddc targeting the out space is offsetting the impact of recent inflationary pressures on consumer demand and tail of of COVID-19 related consumption

Our US papers and e-commerce business delivered another strong quarter of double-digit growth that was offset by a decline in our REFS business, which faced a tough comparable with a pull forward of sales in the previous year.

Stalker's MSP and Loosely Business saw strong share gains during the quarter. With its value proposition, Stalker's was well positioned for the consumers looking to trade down during the quarter. The FDA has accepted our pre-PMTA filing and we look forward to continuing to supply our white-power product to our consumers.

Meanwhile, MUGEN navigated another challenging quarter but remained profitable despite a forced 5% decline in sales.

On capital allocation, we continued to buy back shares during the quarter and maintain a strong balance sheet before the capital deployment along with our priorities, which continued to be investing in the company, buybacks, and accretive M&A.

Going forward, we maintain a favorable outlook and stalker the zigzag continues to be well positioned. The zigzag continues to be well positioned.

We are, however, mindful of the uncertainty in the economic environment and consumer confidence driven by the continued inflationary environment.

With the current economic backdrop, along with the volatility we experienced during the second quarter, we have adjusted our outlook for the remainder of the year as stated in today's press release.

With that, let me turn the call back over to Louis to go through our desert. To go through our desert.

Thank you Yavwar, starting with our consolidated results on slide 4.

P1 sales were down 16.1% to 102.9 million with stable results from zigzagging stokers offset by a double-digit decline in new gen. Gross margin increased to 110 basis points driven by a mix from a decline in lower margin new gen sales.

Adjusted in that was down 5.3 million year year, but in most of that decrease coming from the decline in our faith distribution business. In our faith distribution business.

Go it over into second performance, slide five on zigzag.

Zigzag sales declined 2.1% year-over-year to 46.2 million with a 2.3% volume decline offset by 0.2% from price mix.

Raps revenue was down 22% year year due to an industry decline in the ACL Raps category, partially offset by growth in natural leaf wraps. Partially offset by growth in natural leaf wraps.

As a reminder, we did have a poll forward of sales of 2 million in the previous year's second quarter, which affected the comps. In addition, the trade was building up in Ventory in the first half of last year, but worked down in Ventory during the first half of this year as a result.

The category goal is saw double digit decline this year per MSA. I I I I I

Our U.S. papers and e-commerce business was up 10% year over year, driven by growth in e-commerce and paper cone sales.

E-commerce was up 84% and now represents 23% of the subsegment with strong growth expected for the rest of the year.

Tales of Collins products was up 59% and now 25% of subsegments

ZigZag remains the number one premium and overall paper-based MSAI measured market with 32.4% share.

Zigzag was the number two brand in the paper cones category in the MS AI measured market.

With 32% share, COINS continues to remain a large opportunity with only one third of stores receiving paper products, also receiving COINS during the quarter in the MSAI measures marked.

The PPR category saw decline in the market and MSA RM is remarked down 8.6%.

Canada was up 38% for us during the quarter due to a load in the new products and a full quarter from the DVW acquisition.

The cigars and other subcategory group 48 percent.

The growth in our cigars business and the addition of point two million of sales from Wild Hemp that was previously recognized in New Gen.

Gross margins decline 160 basis points here in the quarter, driven by higher growth in lower margin products like paper cones.

Operating margin decline for the core and that was due to a decline in the high contribution margin RAP sales growth margin decline Variable costs from increased B2C e-commerce sales and the impact from the DVW acquisition as part of TP Canada

Our marketing team continues its push to strengthen its exact brand. Its partnership with luxury, passion, line of myri.

for its spring to 2020 collection let the tens of millions of impressions and organic social media posts including from your dislike french montana and big-jager and athletes like nfls rcd lamb and fifa athlete trend Alexander Arnold and Liverpool football club

The fundamental long-term drivers for the segment remain intact as legal recreational cannabis continues to drive growth in sales at a store count in the All Channel.

Turning over to slide six.

Stokas products net sales increase 0.7% to 33.6 million in the quarter with a 6.1% volume decline offset by 6.8% from price mix.

Net sales for the MSC portfolio grew 6% and represented 65% of Stokas revenue in the quarter. That was up from 62% the year earlier.

Category volume was down 5.7%, while Stokers was up to 0.5%, and the shared group 50 basis points a year over a year, at 6.3% during the quarter.

And its share in store selling was up by 50 base points to 9.8%, which still goes now in store representing 64% of industry volumes.

still provide the long runway for growth.

To meet the backwards sales, the client 10% from the previous year.

The category was down 7.1% during the quarter.

So Stokas 2 was the number one toon brand in the quarter

Gaining 150 basis points of share to 27.5% share according to MSAI.

Despite softening industry demand in general during the quarter, Stokers performed well as its value proposition products that resonated well with consumers, especially in the current inflationary environment.

Re-contributed 0.2 million in sales during the quarter, which sales negatively impacted ahead of the PMTA submission during the quarter, but is expected to ramp again in the second half.

The gross margin decreased 60 basis points due to free inventory write-down, but increased 80 basis points excluding free, with MST price growth and incremental volume offsetting loose leaf decline.

Operating margin decreased 160 basis points.

with higher gross margin partially offset by higher sales cost, marketing costs for free and increased shipping costs.

Moving to slide seven.

Newgen continued to manage through a disrupted environment sales down 45.1% from the previous year to 23.1 billion. sales down 45.1% from the previous year to 23.1 billion.

Our vape distribution business continues to be disrupted by the regulatory environment, including the implementation of the PACS Act late last year.

Gross margins were down 340 basis points impacted by products and channel mix as well as the competitive environment.

Operating income is down 1.1 million due to lower sales and higher freight costs offset by lower variable SGA and reallocates of shared costs into the corporate segment. The reallocates of shared costs into the corporate segment.

As a reminder, New General's Law to see are now a clean and represented in the patient of our faith business, which remained profitable despite this challenging environment.

We are still awaiting progress on FDA and ourpmpaas and continue to adapt our business based on the changing dynamics and industry.

We are happy to report that our free application was accepted last week. Again, this is part of the Stoker segment, but it was a positive development in our PMTA applications. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you.

Ultimately, we still believe that all the short-term challenges present an opportunity for us in the long term, given our size and ability to navigate this regular time.

environment.

Starting now to slide 8, our balance sheet and liquidity.

We ended the quarter with over a hundred seven million of cash in the balance sheet and a hundred twenty nine million of available liquidity providing flexibility in capital deployment.

Q2 is generally our weakest recast low quarter as this is when we do our annual tobacco purchase for Embers Stevens. NSF Thought

We also front loaded purchases for zigzag products this year given transpissional transportation bottlenecks and expect that to bleed down through the second half of the year.

We repurchase 8.8 million of shares during the quarter.

Turning over to slide 9.

Due to these uncertain macro environments, we are all over the expected improvement in our new gen product segments.

We now expect the following results for the year.

Zigzag product sales of $193 to $200 million compared to previous expectations of $193 to $203 million.

I'm the Q2 weakness in our wrap sales.

Stokes Park sales of 127, 233 million.

because it's all dated just before tomorrow 9293 night.

We now expect CapEx to be roughly 10 million this year. This excludes ERP and CRM projects.

which we're in the process of selecting an implementation part.

We are still in the process of choosing an implementation part of ERP and CRM and should be able to provide more color in that in the next call.

In addition, we are also projecting approximately $6 million of PMTA spend, which includes supplemental filings for new products including our free nicotine pouch.

Thank you for participating in the call today. With that, I would like to open the call for questions.

I would like to open the call for questions.

Thank you, pardon me. At this time, I would like to remind everyone in order to ask a question, press star then the number one on your telephone keypad, and we'll pause for just a moment to compile the Q&A roster.

I would like to remind everyone in order to ask a question, press star then the number one on your telephone t-pad, and we'll pause for just a moment to compile the Q&A roster.

And we will take our first question from Vivian Azer with Cowan. Your line is open.

Hi, good morning.

Morning, Vivian.

So maybe we can just start with the Stoker's segment, generally in line with our expectations, you know, just given the transparency and the category. But I was wondering if you could provide perhaps a post-quarter update. Gas prices have been on the decline for nearly a month now. Obviously your core consumer is very sensitive. Two inflationary swings particularly at the pump. Has there been any directional change since you closed the order? Thanks.

Hi, so this is our look at kind of just from a food traffic perspective, I would say that obviously we've seen a lot less food traffic. We think the consumer got impacted quite severely. And we're seeing that, you know, the reduced food traffic, obviously translated that being said, I think stock is performed extremely well. So if you look at it on a share basis with GainShare, in a very strong way, we continue to expect that to continue the consumer trades down.

So we're very happy with how Stoker's gets performed. Again, we are positioned as the value brand and we deliver for the amount of money that we charge, we deliver great quality. I think the consumer has recognized that and we're seeing the shift benefiting us.

And has there been any change in terms of retailer receptivity to increase shelf placement for stokers given the inflationary backdrop?

Hey Vivian, this is Graham. How are you?

Hi, the look, we've continued to make store gains, you know, consistent with our historical patterns. At this point in time, receptivity by our estimation has not changed for our product, both our Tubbs and our cans are growing store accounts.

Okay, understood. Thank you. And perhaps just pivoting to Stokers where you've tempered the high end of the guidance range, recognizing there are a lot of moving pieces to that business. But maybe if we could just put a macro lens on the nature of that guidance revision and just remind us how does the exact compare to competitors in terms of price point? Do you think that this is just a consumer response to?

given rising gas prices. We're seeing that across different categories.

And just right to that Vivian, one thing that I would continue to stress is, even in the overall macro environment, the brand continues to perform very, very well. So it's not so much concern around our performance or the brand, it's more concern for the consumer overall. And what we're seeing is being a very harsh environment for our consumer.

But we do expect to continue to gain share. We do expect the brand to continue to perform very well.

Understood. Thank you very much.

And we will take our next question from Susan Anderson with Be Riley, Your Line is Life.

Anderson with V. Riley, your line is life.

Hi, Louie. Hi Yavor and Graham. It's Alec Leg on for Susan. On Stoker's

Hi. The gross margins, when you exclude the write-down of free, they continue to trend up. And I think previously you said that it's mainly been driven by taking price in that category. But in this inflationary environment, I guess how much pricing is left to take before you might start to see more pushback in that category.

Okay, so we still feel pretty good about pricing and stockers. As we've said in the past, we are price followers in that segment. And what we are seeing in the market is pretty encouraging in terms of activity on the pricing segment. Not the only ones.

to feel inflationary pressure in this environment and it seems to be holding up to be a rational category for us. in it seems to be holding up to be a rational category for us.

And just to expand a little bit on that one, what I would say is, look, we have to measure price increases again. We see the consumer under tremendous pressure. At the same time, we're gaining share. And one thing that we have noticed in the past is that given the quality of our products, once we get a customer, we tend to keep the customer. So gaining shares is something that we take very seriously. It is not a one time and then it goes back. Happy transmitting.

get our customers and then we keep them. So we're balancing the ability to increase price, which we again, we are price follow up at the risk room against the long-term benefit of keeping and increasing share.

Got it. And then switching over to NuGen, you said the PMTA application was accepted but still making a decision. I guess do you guys have a timeline of when you might hear any news? And then can you remind us again how many products you filed for? Is not on your order?

So let me start by highlighting that we filed on modern oral products. That's the kind of the heavy, heavy bulk of the application. We had very little vaping, so modern oral specifically. We have two products, one is free, which is the one that got accepted. We have another product, which we have not disturbed publicly and not going to do today. But we're very, very optimistic about it. They're both modern oral.

And in terms of timing, we don't have any more visibility than anybody else. As we get news, we obviously let you guys know. So we know that free was accepted, exactly when they're going to get to it, very difficult to tell.

But, you know, Free is doing very well. We have backlogged that we're now filling up.

So we're excited about it and even more excited about the other product that we should be bringing to market hopefully next year.

Got it very helpful. Thanks for the details and best of luck for our severe.

Thank you.

And we will take our next question from Eric Dolore with Craig Calum Capital Group. Your line is live.

Great, thank you for taking my questions.

Hey, what's the exact, as you look towards the second half, are there any other inventory trade dynamics to call out with regards to wraps or your other categories? And would you expect to see a rebound in wraps in Q3? Or should we take your commentary of sort of, you know, some of your customers getting a little more cautious for the consumer here as a sign that, you know, um...

But this Q2 tray reduction was more of a normalization and that won't necessarily see a rebound in Q3. So

Yeah, we think it's more of the latter. Certainly going into the year, there were concerns about supply chain, and they likely had more inventory than they normally carry. So we think this is more of a normalization. For ZigZag, we do expect the ramp in ZigZag for the second half is for launching Clipper. So that should benefit us as that product ramps up for us. So that's happening both in the US and Canada.

Great. I appreciate that commentary. And then just switching gears to new gen here. Can you comment just on the current volatility in that vape distribution business? Just kind of any sort of transparency on what you're seeing there with regards to whether it's turnover in third-party brands or some inventory flushing. You know, obviously we saw it, you know, relatively stable.

results quarter over quarter, is that a sign of a broader trend or you just kind of give us a bit more of a sense of what you're seeing in that business with regards to volatility. Thanks.

Right.

Sure, so let me kind of...

started the macro level for vaping then I'll double click on our own business. On a macro level obviously the federal government has taken some steps in that area. They have been primarily about.

Looking to increase regulation, we have not seen increased enforcement.

As of yet, that being said, there were quite a bit of news in the plant throughout the quarter, which made customers nervous to the extent. July 14 was a big, big day date.

and the FDA put out an announcement which is obviously publicly available in that kind of so the continued uncertainty about what the FDA is going to do and how far they want to enforce obviously impacts the customer specifically on the B2B side where they're continuing to be hesitant about how to order and what they can order because you just don't know if it's going to become illegal and have to dispose of it the next day.

which necessarily impacts how much inventory you're going to keep, how you're going to order. And that's just industry-wide. It's just kind of giving you the color. Against that, we executed, I think, quite well. I'm very proud of the fact that the management has done two things. One, number one, they have kept profitability. They continue to generate dollars for us. Number two, we have managed inventory on that by the grass-weather cells.

And we're managing inventory for the same reason. We're just kind of obviously we're going to be compliant with anything and everything the FDA requires us to do. But to be in a position where we don't have massive write downs, we have to keep inventory low, which necessarily impacts how hard we can push the top line on that business.

So as the uncertainty diminishes, hopefully, with more clarity from the FDA. And as we said on previous calls, we have very, very supportive, strong enforcement. That should hopefully settle down in the business should be doing much better.

That being said, we don't have either the clarity or the enforcement today.

for us to tell you that, you know, this is going to get better in the next quarter. The uncertainty continues. We continue to have the same approach, which is, to our mind, the vape business is a cash-low paying option.

So they generate cash for us. It's not a lot of cash, but so long as they're profitable we can wait for the vape uncertainty to get resolved and hopefully the FDA enforcing whatever the regulations end up being.

Got a very helpful caller and certainly impressive to be able to maintain profitability in this environment. Just last one from me here with regards to the ERP system. Can you just remind us your rough expected timeline of when that should be completed and maybe when you'll start to see some of the benefits of that? Thanks.

Can our current timeline is, we'll continue to do the same as we discussed earlier in the year, which is we expect to be complete by the end of next year. Hopefully we start seeing the benefits before that. But at this point, we have not yet selected an implementation partner. We expect to do that shortly. And we expect to kick off the implementation part of the project this fall.

We have stayed with the same timeline with the scout before, there's no changes to it.

the same timeline we discussed before. There's no changes to it. Excellent. Thank you.

Thank you.

And we will take our next question from Garib Jane with Barclays. Your line is life.

Hi, good morning Yavur, good morning Louis. So a few questions from me and all on free. So you know what you have told us is that you booked some revenue and you also had a write down this quarter because of the PMTA sort of deadline around synthetic nicotine. And I'm not very clear why that would happen. I mean normally we don't feed companies I don't think you asked, and we are not fullyhigh quality AMT, we have a rebound of de tampers, so just a Big H viscousazar So yeah one more thing we have year round

Pull back.

because of PMTA deadline. What exactly happened at your end?

Yeah, so we have to make a decision on which products we wanted to file. There were certain flavors that we chose not to file.

And so that was the reason for the write down on free. And we're encouraged. We actually have a strong backlog of back orders on free right now. But there was a pause during the quarter because of the uncertainty around the synthetic and the Cateen regulation from some of our customers. And you know what we're seeing now, especially with the acceptance that we've received with free and strong receptivity for the product going forward. Right. But your told us that you booked some.

Revenues this quarter but clearly volumes could be very different because we have seen massive amount of Promotions from other players in the market But you will be able to share any volume data

Yeah, we're obviously for competitive reasons. We're not going to disclose the vines. We did disclose the sale so that gives you indication of what we did during the quarter. We reported ourselves last quarter. What I would say was outside of synthetic nicotine regulation, we would have expected that a ramp and we do expect that to ramp for us in the second half of the year.

Just to be clear, on the promotional side of your comment that it's a heavily promotional category, our approach has never been to outspend our competitors on marketing, and that is not going to change. We're not looking to go toe to toe with BAT and Swedish Match to find out if we can outspend them on marketing. Our approach is differentiated products and a fantastic sales force.

Right, and you know you clearly have reduced your EBITDA guidance a bit here. Is it because of additional investments related to free? Because you know in the initial years of expanding that product you know you will lose money most likely. Or is it that e-cigarettes are trending below expectations?

Or is it that the core business is trending below expectations? Could you just disaggregate?

Yeah, no, so as Yavur mentioned, we're going to be careful about how we spend on free. We're not looking to lose money. The good thing about that end market is a large and growing end market and we don't need significant share to have an impact on our bottom line for that. So we're going to be very cautious about how we promote on free. The real reason for the guidance reduction, people, is one, to your point, our new gen business we highlighted in the press release is not ramping to the extent that we thought. We're being a little bit more cautious there.

The wraps hit for us and key to that comes at a high contribution margin because of the, because of the flow through on that product. And so those are two of the main reasons for the reduction in guidance. So also our response to kind of overseeing from in the consumer environment in terms of the headline news and everyone else is seeing out there as well. And everyone else is seeing out there as well. And everyone else is seeing out there as well.

Sure, thank you. Last question from me around your M&A philosophy. You spoke around that a few months ago now, almost six months ago. We haven't seen anything from the company yet.

So how have your thoughts evolved around M&A?

Look, I wouldn't say that they have changed, kind of what they say is MNA for us is going to be a game of patience.

and successful M&A, we're not going to do things that we don't like. What do we like? Things that are accretive, things that fit well within our business, things that we can acquire at a price that makes sense, and one thing that I've emphasized pretty much on every call, we're going to the patient.

the best M&A we could pursue this quarter was buying back our own shares and that's exactly what we've done and we'll continue to be following the same priorities invest in the company, buy back shares and be very opportunistic when it comes to M&A. It needs to make sense and it does make sense.

We'll buy back our own shares and wait for it to make sense.

Well, thanks a lot.

And there are no further questions at this time. I will now turn the call back to Yara for any additional or closing remarks.

I wanted to thank everyone who joined us on the call today and to highlight again, we have very resilient brands. We're happy with where we are and we look forward to continue to execute on the plan and deliver for you and for the company to achieve its results and goals all the time. Thank you.

And ladies and gentlemen, this concludes today's conference call. The meeting may now disconnect.

Please wait, the conference will begin shortly. The conference will begin shortly.