Q3 2022 Turning Point Brands Inc Earnings Call
Good morning, and welcome to the turning point brands third 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.
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After todays presentation, there will be an opportunity to ask question. Please.
Please note this event is being recorded.
I would now like to turn the conference over to buoy Repr Mena Chief Financial Officer. Please go ahead.
Thank you good morning.
Everyone. This is Louis Referenda, Chief Financial Officer.
Joining me is turning point brands', President and CEO Graham Purdy, Chief marketing officers some are free.
This morning, we issued a news release covering our third quarter results. This release is located in the IR section of our website at Www Dot turning point brands Dot com.
So in your presentation, we will be referencing in the call available on the site.
During this call we will discuss our consolidated and segment operating results and provide our perspective on the operating environment and our progress against our strategic plan.
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 Securities and Exchange Commission on.
On the call today, we will reference certain non-GAAP financial measures.
And we can see the agents the GAAP can be found in today's earnings release, along with reasons why management believes that they provide useful information.
Thank you Laurie good morning, everybody and thank you for joining our call.
For those of you that don't know me I may be new to the CEO job, but I am not new to this industry turning point brands or its people.
After spending seven years at PM USA I joined the company in 2004 as trade marketing director.
Throughout the years I've had many roles, including head of field sales and new venture divisions before taking on the CLO roll in 2019.
In that role I oversaw a repositioning of the company and initiatives that have led to accelerated growth.
This included gross exact segment sales from $109 million in 2019 to approximately $190 million, we're projecting this year.
Over my time at the company I've worked across numerous functional areas and developed strong relationships with talented colleagues throughout the organization.
I am excited by the opportunity to lead the team as we continue to build a world class CPG company for the benefit of our customers.
Employees.
And shareholders.
Before Louis and I go into the recent quarter I'd like to take a step back and frame my perspective on the turning point story and drive home why the team and I are excited by our future.
First zig zag as the number one rolling paper brand in North America.
Our portfolio of Zig Zag products continues to indirectly benefit from cannabis legalization as a leading non plant touching way to capitalize on this long term trend.
Today, roughly 70% of states have legalized cannabis in some form either medical or recreational and roughly 45% of the U S population lives in a legal recreational market and that number is expected to grow in the coming years.
One only has to look at these stats just three or five years ago to appreciate how far we've come.
I believe we have reached a critical tipping point, where zig zag is a must carry item given its brand strength and product innovation, which.
Which is further enhanced by our deep industry relationships.
These secular tailwind along with all our growth initiatives and new product and multichannel strategies have helped drive our projected sales this year to be more than 70% higher than they were in 2019.
Despite this growth we are not resting on our laurels in recent years. Our team has worked hard to reenergize that thinks AG brand by introducing new products such as cones in 2019 naturally perhaps at the end of 2021 and rough cut cigars in 2022.
Penetrating new alternative distribution channels, such as e-commerce, dispensaries, and bringing on new exclusive products like Clipper lighters.
We are embracing our brand's iconic 150 year history, with new marketing initiatives to reinforce direct consumer connections as the industry evolves.
You should expect us to lean into that strategy with a particular focus on one serving the alternative channel, which we define as direct to consumer head shops smoke shops, dispensaries, and direct bolt paper cones sales to operators and to.
Driving exclusive products like clipper through both the alternatives and traditional retail where we already have a strong presence.
On clipper.
Important to note. This brand is relatively underdeveloped in the U S. Yet has a much larger share in Europe , where it originated.
While it's still early in our brand stewardship of Clipper, we see an immense white space in the U S to close that gap and a $500 million category.
Coming back to to date all of you are aware that the overall economy has softened as we progressed through the year.
Inflation has put pressure on consumer wallets, and we have returned to more normalized buying patterns post COVID-19.
Today's environment is particularly challenging given we haven't witnessed this inflationary environment in many decades.
As a result projecting zigzag segment results has been more challenging in 2022 than in the past.
This is reflected in the revised guidance, we gave last week.
Notwithstanding these headwinds we still expect 7% annual growth for the zigzag segment at the midpoint of the revised guidance.
That said I'm confident in the strength of our brand the effectiveness of our team and our core strategic initiatives that will drive profitable future growth.
Next stokers.
Stoker segment is strong and continues to grow.
I firmly believe we are still in the middle innings of the strategy I helped to put in place many years ago to increase distributions grow market share and position the brand to be a leading MST player focused on the value consumer.
I was also overseeing the sales operation when we introduced cans, which allowed us to penetrate large chains leading to significant growth.
I believe we still have meaningful runway to grow stores.
And we are uniquely positioned in an industry with favorable pricing dynamics.
On the loose leaf side. Many of you who have followed us or the industry are aware that this category has been seeing volume declines for over 30 years. Despite.
Despite that the business remains highly profitable and has generated stable free cash flow for market share gains and pricing, which we are deploying in part to support new initiatives such as the recent free launch in the modern oral category.
This should allow <unk> to participate in the growing 1 billion white pouch category that leverages our existing infrastructure.
And rapidly expanding markets such as modern oral <unk> we.
We don't need to be the biggest or spend the most to generate significant value for shareholders.
We proved this with our rollout of Stokers MST.
But let me be clear.
We are still in the very early innings with free and our other growth initiatives.
Every launch let's walk before it runs.
And I will be highly judicious about deploying capital and internal resources to ensure we're focused on the right opportunities to create the most value.
Next new Gen.
While we continue to monitor the regulatory backdrop.
Most of it is out of our control.
Despite the regulatory disruption in this segment as we navigate the process, we have maintained profitability and continue to explore ways to maximize the value of the strategic distribution asset we have built.
I'm optimistic, we'll eventually get resolution that should benefit TPB.
We are committed to finding a solution that reduces the volatility we have experienced in recent years.
Last let me address some of the technology investments such as our ongoing ERP and CRM implementations.
We are on track and on budget to position <unk> for the future, which I believe should drive substantial efficiencies.
We are scheduled to complete the design phase of our ERP implementation next month, and we will give further details on cost when that is completed.
From what we know today I am pleased that the projects are tracking within our initial expectations.
As we focus on our core business I wanted to address some of the questions. We've received over the past year regarding our M&A strategy.
It's not lost on anyone that tighter financial market conditions, coupled with an uncertain economic environment has made it more difficult to execute accretive transactions.
The way I see it every dollar we spend will be highly scrutinized versus our internal hurdle rate.
The bar for synergistic M&A will be high.
Especially in context of alternative uses like returning capital to our stakeholders.
In summary, we are hyper focused on our existing businesses led by World class brands and extensive distribution capabilities, coupled with a dedicated team committed to our success.
I am confident that <unk> will continue to generate attractive durable free cash flow that we will deploy to increase shareholder value.
As you May know I personally am a large shareholder with a disproportionate amount of my assets tied to the success of this company.
Highly aligned and incentivize with all of you to make this happen.
Thank you to the TPP team for this opportunity and I look forward to future updates to give more color on our progress.
Turning now to the specifics of the quarter.
We were satisfied with the resilience of our businesses during the quarter, but as mentioned the consumer economy is clearly becoming more strained as the year progresses with ongoing pressure from inflation, which is impacting consumer traffic and spending in our channels.
Zig Zag posted a record quarter with paper cones, and alternative channel sales, including ecommerce.
To be key drivers of growth.
Also had a strong uptake from promotions implemented at the end of the quarter to respond to the current consumer environment.
Adding to growth for the quarter were the initial sales from the launch of Clipper Litres, which so far has been very successful.
Our sales force that started rolling out distribution of clipper lighters into independent convenience stores in late July and we are physically been placing clipper into an average of 1000, new stores per week, ending the quarter with over 8000, new retail points of distribution. In addition to selling into new wholesale distribution customers to support the rollout.
Clipper as the world's number one reasonable lighter and is the lighter of choice for environmentally conscious consumers wholesalers and retail customers we.
And we will continue to grow this business and are excited about the initial reception from our trade partners.
Stokers delivered another solid quarter highlighted by strong double digit growth in MSP as we continued to gain share in both MST and loose leaf categories.
New Gen navigated another challenging quarter, but remained profitable despite a 40% decline in sales year over year.
Notably sales were down just 4% sequentially over Q2.
As disclosed last week, we did revise our guidance for the year, despite strong outperformance relative to the market in the third quarter. We believe it is prudent to adjust our outlook in light of the current macro environment and sales that we believe we're shifting from Q4 to Q3.
Going forward I remain bullish on our growth prospects and I'm very excited to lead our team to focus on driving organic growth and creating shareholder value.
With that let me turn the call back over to Louis to go through our results.
Thank you Graham starting with our consolidated results.
Despite 17, 7% growth from the Zig Zag Stoker segments. Overall Q3 sales were down one 9% to $107 8 million impacted by new Gen, which had a 40% year over year decline, but it's been relatively stable sequentially. This year and SAR spacing less challenging comps as we exit the year.
Gross margin decreased 50 basis points to 48, 9% driven by product mix in each segment.
Adjusted EBITDA was down $1 $8 million year over year with the decrease coming from the decline in our new Gen distribution business.
Zig Zagging Stoker segment profitability grew from the previous year.
<unk> segment performance.
Zig Zag sales increased 23, 3% year over year to $52 1 million with 21, 7% from volume and one 6% from price mix.
<unk> revenue was down 3% year over year due to a category decline as we adjusted our new normal post COVID-19 consumer consumption.
Despite the category declines exact continues to grow share.
Our U S paper some e-commerce business was up 19% year over year, driven by the growth in E Commerce and paper cones.
Canada was up 30% during the quarter with solid growth aided by $1 5 million of orders pulled forward from Q4.
The cigars and other subcategory grew dramatically off of a low base do you think the clipper launch.
So the overall segment, we estimate that the strong promotional uptake and the timing of Canadian deliveries pulled forward approximately $5 million of sales from the fourth quarter.
Margins declined 220 basis points during the quarter, driven primarily by the clipper launch and higher growth in lower margin products like paper cones.
Operating margin declined 450 basis points for the quarter due to the gross margin decline variable costs from increased B to C. E Commerce sales increased TPB, Canada, SG&A and the reallocation of segment costs.
The fundamental long term drivers for this segment remain intact as cannabis legalization continues to drive growth in the <unk> channel and Clipper penetration provides further tailwind.
Moving to <unk>.
Focus products net sales increased 10.0% to $33 5 million in the quarter with two 4% volume growth and seven 6% price mix increase.
Net sales for the MST and pre portfolio grew 18%.
<unk> volume was up three 1% as its share grew despite category volume down five 7% with a chair increasing 50 basis points year over year to six 2% during the quarter. According to MSCI.
Its share in stores selling was up 60 basis points year over year to nine 7%, which stokers now in stores, representing 64% of industry volumes, which still provides a long runway for growth.
Free with a marginal contributor to the segment's sales during the quarter.
Tobacco sales declined 4% from the previous year.
So Chris Chew was the number one <unk> brand in the quarter and gaining 270 basis points of share to 28, 4% share according to MSCI.
Category volume was down seven 6% during the quarter According to MSCI with Tbb's products performing better.
With the heightened inflationary environment stokers performed well as value proposition products resonated well with consumers.
Gross margin decreased 160 basis points, primarily due to mix from free and stronger growth in discount loose leaf products.
Operating margin decreased 300 basis points due to the gross margin decline higher sales and marketing costs and increased shipping costs.
Moving to new Gen, where we continued to manage through a disruptive environment with sales down 43% from the previous year to $22 2 million.
Our third party distribution business continues to be disrupted by the regulatory environment as previously mentioned.
Margins were down 740 basis points year over year impacted by product and channel mix. In addition to the competitive environment.
Operating income was down $1 9 million due to lower sales offset by lower valuable SG&A and reallocation of shared costs into the corporate segment.
The business remained profitable despite the challenging environment.
Moving to our balance sheet, we ended the quarter with $105 7 million of cash.
And $127 million of available liquidity, providing flexibility on capital deployment.
Repurchased $7 6 million of shares during the quarter.
On to guidance as discussed in last week's press release, we now expect the following results for the year.
Zig zag product sales of $186 million to $191 million compared with previous outlook of $193 million to $200 million.
Which represents 7% year over year growth at the midpoint.
Stoker product sales of $128 million to $132 million compared to previous outlook up $127 $233 million, which represents 5% year over year growth at the midpoint.
Consolidated adjusted EBITDA of $96 million to $99 million compared to previous outlook of $97 million to $103 million.
We continue to expect capex to be up to $10 million. This year. This excludes ERP and CRM projects and PMT a spend on supplemental filings for new products, including our free nicotine patch to be up to $6 million.
Thank you for participating in the call today and with that I would like to open the call up for questions.
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.
We'll pause for just a moment to compile the question and answer roster.
Your first question comes from the line of Vivien <unk> from Cowen Your line is open.
Thank you good morning, and congrats Graham.
On the new role I think it is really encouraging for everyone to hear your commitment to organic growth, perhaps add more tempered approach.
M&A and your commitment to shareholder return.
With all of that said I think you are experiencing and tobacco is a real asset to the organization, especially now so I'd love to hear your thoughts on how you think about pricing relative to the competitive environment. Thank you.
Yes. Thank you very much for the kind words Vivian.
Look I think that.
We have a lot of favorability relative to pricing with our MSP business.
We're certainly a price follower and we're committed to following the industry.
I think it is important to note that we have.
Mentioned in the past that this concept of sort of closing the gap with premium brands.
In Q3, we actually took a little opportunity on our stoker tubs.
To do just that so.
We are starting to actualize, what we've been talking about for many years, but I think the the tailwind is around pricing are great, but at the same time.
We're still only in just over 60% of the addressable market. So one of the largest opportunities in the company has to continue to focus on gaining more stores, where we don't compete because its source of brand new volume for us and.
And at the same time, we are committed to growing share in the existing stores are and so I think we've got three really good levers of future growth for our MSP business.
Absolutely that all opinions perfectly reasonable.
Maybe pivoting to the model a little bit I was hoping.
Act some of the gross margin compression.
<unk>.
Zang segments for instance.
Okay.
Alright.
The.
The libraries excuse me.
Gross.
And can you maybe just dimensionalize.
Those two headwinds, which was the bigger anything you can share.
Sorry, yes, so let me quickly clipper was a large headwind for us kind of think about the impact we said a lighter market before there's about a $500 million marketing Clipper currently is at 3% share.
It's all going to ramp up that business.
What we've said before in our third party products as its generally 20% to 40% gross margins I would say with clipper. Our planning right now is to be kind of in the midpoint or lower end of that as we try to gain distribution in the short term.
It would be able to scale that gross margin over time.
Understood that's really helpful.
And then perhaps just lastly on the Stoker segment kind of thing. Thank you will.
An update on three.
You called out but did you disclose from a revenue perspective, if you can offer any color there that would be great and then just kind of the contribution.
The margin headwind.
Great products. Please thank you.
Yes, so were trying to link to disclosure for competitive reasons on it but I would say it would free you would disclose the first half revenue on it and I would say it was consistent with first half levels, we don't really expect free to.
<unk> for us until next year.
And on the gross margin please.
Yes, <unk> is running below current segment gross margins.
So right now it's similar to kind of the range that I mentioned clipper any as we scale that business as we scale the surplus supply chain, we expect to ramp up that gross margin over time.
Understood and sorry prestige.
I promise last one, but I was 160 basis points with free the bigger headwind versus.
The discount it briefly.
Yes.
Okay. Thank you.
Thank you I would like to ask a question Press Star then the number one on your telephone keypad. Your next question comes from the line of Eric <unk> from Craig Hallum. Your line is open.
Great. Thank you for taking my questions and congrats again Graham.
Got it.
So you mentioned.
Reps within Zig zag sort of.
Thanks.
Not necessarily headwinds, but just some.
Negative growth after the COVID-19 sort of boom last year.
As you look at the macro environment now than maybe coupled with that sort of COVID-19 overhang.
Which of these zig zag sort of sub segments are you noticing perhaps facing greater headwinds than others. Just wondering if you could kind of comment on the zig zag sub segments.
In light of the macro challenges that you guys are seeing if there's any trends.
Popping up or one or the other thanks.
Sure, Yes, I think.
If you look at the sub segments.
With papers, we have a nice offset because we are growing our business in the alternative channel and gaining a lot of share there. So our e-commerce and <unk> business continued to be strong for us.
During the quarter from a growth perspective, outpacing that sub segments growth on the reps we.
We don't have as big of an offset just because.
With our tobacco wraps, it's not really sold in dispensaries for that.
Tobacco licenses.
So I think there is we are seeing the impact just because that is primarily sold in the measured channel, where we've seen some inflationary pressures, especially kind of the gas station through the year, but we think we're normalizing in terms of consumer demand patterns now post COVID-19.
Okay. Okay. So maybe it's kind of safe to say that you are seeing similar maybe macro headwinds or dynamics for the sub segments, but.
The difference in the.
And the traditional versus the alternative channel it just.
That increasing penetration there, helping offset some of those headwinds.
<unk>.
Okay, Great that's helpful.
And then.
On new Gen. So obviously.
Regulatory uncertainty that remains uncertain and I was wondering if you could give us a bit more insight into the capex spend that you have ongoing for those PMT applications, and perhaps any sort of indication on.
Timing there when you expect it to have that wrapped up versus when you might expect to hear back from the FDA obviously that's.
Okay more uncertain there yes.
Yes, so we.
We continue to monitor the situation.
With FDA and specifically as it relates to capital deployment on PMT.
Yes, I think it's sort of important to note that at this point in time, we've submitted.
Multiple fulsome applications and were in a position, where we will continue to supplement on an as needed basis.
And supplement where we believe that future value can come from.
Okay, Great Alright, that's it from me thanks, guys.
Thanks, Eric.
Okay.
There are no further questions at this time, Mr. Grant Purdy, Chief Executive Officer, I turn the call back over to you.
Thank you so much operator really appreciate everybody joining the call today were really excited about.
Here at TPB and.
We'll talk to you all next quarter.
This concludes today's conference call you may now disconnect.
Please wait the conference will begin shortly.
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