Q4 2022 Turning Point Brands Inc Earnings Call
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Good morning, and welcome to the turning point, Brett turning point brands fourth quarter 2022 earnings Conference call.
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After todays presentation, there will be an opportunity to ask questions. Please.
Please note. This event is being recorded I would now like to turn the conference over to Luisa for Mena Chief Financial Officer.
Please go ahead.
Good morning, everyone. This is Louis referenced <unk> Chief Financial Officer.
Joining me are turning point brands', President and CEO Graham Purdy, Chief revenue Officer Summer free.
This morning, we issued a news release covering our fourth quarter results. This release is located in the IR section of our website.
Www Dot turning point brands dotcom.
There is also a presentation, we will be referencing on 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 cautionary statements in today's press release and the risk factors in our filings with the Securities and Exchange Commission.
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 trip in Asia.
I will now turn the call over to our CEO Graham Purdy.
Thanks, Louis Good morning, everyone and thank you for joining our call.
Last quarter was my first as CEO of turning point and are discussing my excitement about our team and our ability to build a world class CPG company for the benefit of our stakeholders employees and valued customers.
As I mentioned on our last call. My main priority is to focus on internal execution across all areas of our business to best position turning point for profitable long term growth to drive shareholder value.
Since my appointment to CEO .
The team has been focused on evaluating all aspects of our business from our distribution and channel strategies for our product portfolio and go to market plans and improving our systems and logistics capabilities to become more efficient.
There's a lot on our plate, but its all designed to help build a stronger foundation for long term growth.
The main components of our strategy art.
Number one two.
To expand our market penetration and competitive share, especially within the alternative channel by leveraging the power of our brands and differentiated product portfolio.
Number two to leverage our unique distribution and marketing platforms to deepen our customer and consumer relationships by providing value added products across channels and platforms.
Number three.
To invest in high return operational and productivity initiatives throughout the organization to drive efficiencies and better manage what's fully in our control.
Number four.
Track to train and build a world class team that is aligned and incentivize to drive shareholder value number five.
So adopt an owner's mindset throughout the organization to empower our teams to attack, our best opportunities and operating like true owners with required speed and focus.
The team is focused and energized behind the strategy and I'm excited by the compelling opportunity to build long term shareholder value.
Before leaving summer and I go into the recent quarter and guidance, let me discuss some of the progress we've made and some of our operational priorities going forward.
First as we discussed during our last call.
<unk> remains the number one rolling paper brand in North America, and we're beginning to see early fruits of our labor to further penetrate the alternative channels.
We firmly believe that brands with scale are increasingly important in our enhance portfolio across categories from traditional papers to cone's rats accessories, including clipper.
Allows us to offer our retail customers a more complete product assortment to address their needs across a variety of adjacent categories in the store.
Our portfolio is exact products continues to benefit from cannabis legalization and the underlying trends remained strong.
Flowers continues to lead the way across the country.
While revenue growth has slowed for cannabis operators.
Much of the moderation relates to significant flower price compression, which is masking continued growth in consumer demand and unit volumes, which should benefit this exact portfolio over time.
Regarding the current environment inflation and rising interest rates continues to pressure in consumer in the entire value chain.
This is causing our wholesale customers to evaluate inventory levels.
This is made projecting quarterly results more challenging, particularly at the segment and SKU level in recent quarters.
2022 was a challenging year for many CPG companies, given the inflationary pressures and economic uncertainty and we certainly want them yet.
However.
Our fourth quarter was in line with our expectations on both top and bottom line.
While inflation seems to be abating some areas for example.
Gas prices have eased since October .
Our in consumers still feeling economic pressure and our wholesale customers are carefully monitoring inventory levels in response to lower in store traffic and pressure on working capital.
This theme is consistent with what we are seeing across other CPG categories.
On a segment basis <unk> growth in the quarter. Despite the previously disclosed headwinds of a pull forward from promotional activities in Q3.
Stokers delivered another solid quarter highlighted by double digit growth in MSP as we saw strong share gains in both MST and loose leaf categories.
<unk> year over year decline moderated from previous quarters and remain profitable during the fourth quarter. Despite the continued challenging regulatory environment.
As I committed back in October we have taken a critical first step with our new Gen business by announcing the creation of creative distribution solutions, a newly formed wholly owned unrestricted TPB subsidiary that will house, our new Gen assets and certain minority investments overseen by an independent board.
We believe this reorganization best positions the business to navigate the current regulatory environment.
<unk> future marketplace changes.
And pursue further value maximizing opportunities as they arise.
All of our stakeholders will continue to participate in the asset potential upside optionality, while providing us more flexibility to maximize value as the regulatory environment and marketplace continue to evolve.
Looking ahead, we're currently projecting full year 2023, adjusted EBITDA of $88 million to $94 million, but I wanted to give you some additional context.
At the midpoint, we expect first quarter 2023, EBITDA it would be down year over year, but to show year over year stability for the balance of the year.
Here's what's going on in the first quarter.
For one thing we think the macro environment, principally inflation started impacting our consumers in earnest in the second quarter of 2022.
Last year's first quarter was generally stronger than what we saw as the year progressed.
Second as a result of the rising interest rate environment, which has increased the carrying cost of inventory.
We've seen a reduction of inventory by some of our large customers and others have communicated they plan to do the same through the first several months of the year.
Lastly, when we launch a new product like Clipper, there's typically an initial surge in sales as we load the channel.
We benefited from that situation in the second half of 2022.
That initial load and it's typically followed by a pause as that inventory gets absorbed.
This was coupled with inventory remaining for our previous distributors and retailers from the transition.
We expect to see this dynamic play out early in the year, followed by a rebound in steadier rate of growth moving forward.
Despite these temporary inventory factors impacting our expectations for the first quarter.
We've looked through these transitory drivers we are seeing encouraging trends with consumer takeaway that gives us confidence in our growth prospects.
With that let me hand, the call over to summer to walk through progress and results of some of our specific go to market initiatives.
Thank you Graham starting with our increased focus on the alternative channel, which we previously defined as direct to consumer storefronts like Amazon brick and mortar had shops, Luke shops, and dispensaries, we see continued store growth in consumer traffic as legalization spreads throughout the country not only with legal dispensary, but.
Also with head shops, and flu shots that also benefit from new state program launches.
Approximately half of the country's population now live and approved legal recreational state. This is a meaningful jump from around 20% five years ago, and we expect continued steady expansion over time.
Our e-commerce and direct BTB alternatives with respect to recapture some of this new demand and serve as a proxy to measure our alternative sales efforts grew 26% in the quarter.
For this year, we will leverage our progress to further exploit this opportunity.
A clear game plan to this market and some highlights include enhancing our in store presence accelerating product innovation and focusing our distribution efforts to ensure better sales coverage to increase penetration of new doors.
I believe this approach will best leverage our ongoing strategy to invest in zig zag to solidify the brand as a leading must carry item.
While we are still in the early innings of executing our alternative strategy I'm encouraged by these results and the progress we've made on many initiatives since we last spoke in October .
We believe that improving our presence in this faster growing channel represents a tremendous opportunity as we estimate it currently represents half of the papers and ancillary accessories market.
Meanwhile, Clipper lighters discontinuing its expansion over the first five months otherwise our salesforce sold the clipper later into approximately 25000, new retail accounts, making it one of the most successful initial launches in our company's history with.
With less than 3% share in a roughly $500 million market Clipper has plenty of runway for growth as we follow a playbook that has delivered 20% to 50% market share in other developed markets around the world.
Moving onto the Stokers segment still.
<unk> had a strong quarter and year gaining market share in points of distribution. We were also able to continue to take pricing during the year.
I really believe we're still in the middle innings of the brand evolution, driven by stokers positioning as a high quality MSG product price for the value consumer.
Stokers business is also benefiting from the secular trend of consumer trade down the inflationary backdrop has likely help to accelerate market share growth and drive new consumers to the brands what.
Once consumers experienced yogurt, we generally keep them as the brand consistently delivers on its brand promise to provide premium satisfaction with significant savings.
On the product innovation front with smoke with our recent launch in the modern oral category with our free brand is allowing us to participate in the growing $1 billion white pouch category and rapidly expanding market such as modern oral and we believe we don't need to be the biggest or the most to generate significant value for shareholders.
As we've proven with stokers MST.
We are taking a highly disciplined approach towards growth and are encouraged by early consumer feedback we are fine tuning our strategy to profitably scale into this segment.
In summary, we are hyper focused on maximizing value of our world class brands and extensive distribution capability.
Let me now turn the call back over to Louis to go through our results.
Thank you summer starting with our consolidated quarterly results.
Q4 sales were down one 8% $103 4 million impacted by new Gen, which had had an 11% year over year declines.
Our core product Zig Zag, and stokers grew <unk>, 9% to 6% respectively for one 6% combined adjust.
Adjusted gross margin was flat at 47, 9%.
Just the EBITDA was down <unk> $7 million year over year, the decrease coming from the decline in our base distribution business.
Go into segment performance.
Zig Zag sales increased <unk>, 9% year over year to $52 1 million was <unk>, 8% from volume and 1% from price and mix. Despite the negative impact of pull forward in sales into the previous quarter.
<unk> revenue was down 9% year over year as we compared against the period, when we launched natural leaf wraps zig zag hemp reps.
Our U S papers and E Commerce business was down 13% year over year, driven by a paper booklet decline partially from the pull forward into Q3 and some of the trade inventory adjustments that Graham mentioned earlier this was offset by double digit growth in E Commerce.
Canada was up 22% during the quarter with solid growth aided by the launch of Quebec.
The cigars and other smoking accessories subcategory grew dramatically off a low base due to the sales force efforts behind quicker.
Gross margins declined 180 basis points during the quarter, driven primarily by the <unk> launch and higher growth in lower margin products like paper cones.
Operating margin declined 4% to 30 basis points for the quarter due to the gross margin decline variable SG&A costs from increased 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 all channel quicker penetration provides further tailwind.
It's focused products net sales increased two 6% to $32.0 million in the quarter with a six 1% volume decline and eight 7% price mix increase.
Net sales for the MSC portfolio grew 13%.
<unk> volume was up four 3% despite category volume down eight 9%, which showed growth accelerating 80 basis points year over year to six 6% during the quarter. According to MSCI.
Share in stores selling was up 100 basis points year over year to 10, 2%, which focused now in stores, representing 64% of industry volumes, which still provides a long runway for growth.
<unk> was a marginal contributor to segment sales during the quarter.
<unk> sales declined 15% from the previous year.
Stokers Chew was the number one brand in the quarter, gaining 240 basis points of share to 29.0% share According to MSCI.
Category volume was down eight 6% during the quarter. According to MSCI driven by a larger decline in premium loosely compared discount brands with Tpb's products outperformance.
Gross margin decreased 50 basis points, primarily due to mix from free and a mix shift to discount loose leaf products.
Operating margin decreased 70 basis points due to the gross margin clients 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 11, 1% from the previous year $24 9 million.
Adjusted gross margins were up 110 basis points year over year, primarily due to the higher inventory write downs in the prior year period.
Adjusted operating income increased $2 5 million <unk> 1 million due to higher freight costs in the pack that transition in the previous year.
And reallocation of segment cost the.
The business remained profitable despite the challenging environment.
Moving to our balance sheet, we ended the quarter with $106 4 million of cash on the balance sheet and $127 8 million of available liquidity, providing flexibility in capital deployment.
I would note that we had an unusual inventory build youre close to $33 million in fiscal year 2022, driven by several factors our annual tobacco purchase for MFC was above our requirements last year and our planned purchases will decrease this excess inventory over the next several years.
We added inventory to scale, new products, including equipment in the U S and Canada to prepare for increased distribution in 2023, and also built up inventory Zig zag products protect against logistical supply chain constraints early in the year.
We expect to benefit from the overall inventory build for inventory to trend down to more normalized levels over time.
We repurchased $2 2 million of shares during the quarter and 10 million notional value of our convertible bonds for $9 million.
We continue to closely monitor the financing markets are ahead of our July 2024 convertible notes charity. We believe our current cash balance of free cash flow generation provides us with optionality to adjust that maturity.
We recorded approximately $35 million of noncash asset impairments during the quarter, mostly related to new Gen intangibles in our minority investments.
On to guidance given the expected weakness in Q1 due to the contract and trade inventory realignment of internal resources. We currently expect consolidated adjusted EBITDA of 88 to 94 million for fiscal year 'twenty three.
As Graeme mentioned based on the midpoint. We currently expect a year over year decline in Q1, EBITDA, but expect year over year stability in adjusted EBITDA for the balance of the year.
Other projections include.
Effective income tax rate of 22% to 24%.
We expect capex to be temporarily elevated this year at approximately $13 million with $9 million related to manufacturing project, we expect to complete this year.
Compared to $7 7 million in the previous year of which $4 6 million was related to the manufacturing project that offers an attractive rate of return.
We expect capex to return to more normalized levels in 2024.
We expect to spend $12 million to $15 million and capitalized software implementation costs related to our ERP and CRM implementation, which is currently on track and expected to be completed by the end of the year.
We continue to carefully evaluate potential PMT ate spend related to our modern oral products all of which have been accepted by FDA.
Now, let me turn it back to Graham.
Before I open the call to Q&A I wanted to give you some thoughts on why I'm. So excited about the long term opportunity we have in front of us.
When looking past the transitory disruption we anticipate early in the year.
Following inherent strengths will drive performance.
We have a portfolio of iconic brands that consumers love.
Zig Zag as the number one rolling paper and wraps brand in North America benefiting from secular growth trends in cannabis consumption with a compelling opportunity in front of us.
We've entered a new category in Litres with a proven global brand and clipper significantly expands the addressable market we compete in.
Stokers is the number one loosely brands stokers moist snuff remains one of the fastest growing brands in the category, where we cross 10 share in stores selling for the first time last quarter with a sizable market, we have yet to penetrate.
These brands are being sold distributed and marketed by our World class team and our entire organization is aligned towards driving organic growth and being financially disciplined to create shareholder value.
Thank you for participating in the call today and with that I'd like to open the call for questions.
Thank you if you would like to ask a question today Press Star followed by the number one on your telephone keypad.
Your first question today comes from the line of <unk>.
Vivien <unk> with Cowen Your line is now open.
Thank you good morning.
I want to start on the <unk> segment. Please obviously youre cycling multiyear tour for analysts is driven by innovation, but ultimately I think for the street and for investors. This is the hardest segment.
Track given the non tracked channel exposure. So can you just offer some commentary on the competitive landscape. Thank you.
Yes, Hi, Vivien.
I think the interesting aspect of this.
The portfolio is exact products as they are we have a wide range of.
Products for the end consumer whether it's tobacco wraps and perhaps papers cones.
Generally when we look at it as the end markets are healthy.
<unk> for our consumers and.
There's always a little bit of noise with ins and outs with launching new products and seeding the marketplace and so we.
We generally just feel really good about the end markets and.
And our share growth profile in Q4 across.
For us the exact products.
And is there anything to call out competitively.
Hi, Vivien. This is summer I think I would just add from the competitive perspective that we are monitoring that external competitive environment very closely and remain focused on continuing to grow the zig zag brand and continuing to focus on the long heritage and quality that Big Bank brings to me.
Market, while monitoring the competitive environment very closely.
Yes.
Okay fair enough.
And then just given the revised approach to guidance I've seen more than appropriate segment level revenue hopefully somebody might detailed.
Then justified for the size of that business, maybe if you could just contextualize, how you're thinking about what like endure volatile medium term with topline growth.
Double digit CAGR over the last five years reflect a lot of benefits from Covid a lot of benefits from outsized first let me take that probably needs to normalize how do you think about top line over the medium term, maybe just for the core tobacco segments. Thanks.
Yeah, so as we.
I mentioned earlier, we've got.
Adjustments that we're making in Q1 on the trade inputs that we are seeing is more encouraging trends in the sell through side. So what youll see in the back half of the year for us as we do think that that we normalize back to growth for its executives donors.
Okay.
Okay fair enough. Thank you so much.
Your next question comes from the line of Eric des <unk> with Craig Hallum. Your line is now open.
Great. Thank you for taking my questions first one for me is also on the Zig Zag competitive side.
One of your competitors. There recently received a court order to stop selling certain products based on false claims just wondering if you see this as.
A more of an opportunity to take share or if this is perhaps something that you see as more of like a marketing warning to the industry at large.
Wondering if you could comment on what you see is this.
In respect to an opportunity to take share and if theres any.
Early feedback from some of your alternative shop customers in response to that thank you.
Yeah. Thanks for that question.
As you know that have been following that activity very closely we have been engaged with both our consumers and especially our retail customers to your point because they are interested in what's going on in the market as well I think for US. We believe it's important to really stay focused on the big bag, we have a long standing reputation of bringing high quality.
<unk> products to market continuing to focus on bringing that new product innovation to market and reinforcing all of those benefits to our customers and our consumers to reinforce that brands that everyone has for its exact.
Okay. That's helpful.
Amit sort of Q1.
Inventory weakness guide.
Without hearing that correctly, that's primarily within zigzagging.
If so could you provide some commentary on that.
That might be impacting the various sub segments within zigzag.
It sounds like perhaps weaker on some of the clipper areas.
Not sure. If this is impacting rats as much as it is.
Rolling papers and Cowens, if you could just provide some commentary if you are seeing this impacting some sub segments more than others that would be helpful.
Yeah. Thanks, Eric Yes, so it is really more on the papers and wrap so kind of a.
Some of our legacy products that.
You've got to start with our trade for a while it does really well we view it as an adjustment in Q1 and kind of returned to more normalized levels beyond that.
Okay. That's helpful.
And then last one from me here. So just wondering if you can.
Provide maybe just a bit more commentary on the competitive dynamics youre seeing within MSP.
Stokers, obviously very well positioned in that value segment, obviously, continuing to benefit from consumer down trading really for.
But seemingly a few years here now wondering if youre seeing any renewed push from competitors and that value segments. I mean, obviously, you guys have kind of a.
Strong competitive advantage with that in house.
Manufacturing of those products, but just wondering if youre seeing any renewed push from competitors into that value segments and just overall commentary on some of the competitive dynamics within MST it would be great. Thanks.
Yeah, Hey, Eric.
Look I think that that category is is generally.
Stable from a competitive perspective, and no sort of amplified or different activity from from the competitors Thats beyond what you were sort of considered normal business at this point in time and.
Stokers had a strong quarter in Q4, we grew volume weaker share.
Last year, we were able to carry the pricing activity through throughout the year.
That was amplified by being able to pull the price increase forward for our tub product, which which ended up benefiting us throughout the <unk>.
Back half of the year.
The brands strong, it's performing 10 share across the 10 share line in store selling.
So we feel good about where we're positioned right now to continue growing plus we've got a lot of runway with 35% of the volume that we don't compete in so I think generally we feel like we're we're confident in the stokers MST brands.
Yes, it sounds very encouraging thank you for the questions.
As a reminder, if you would like to ask a question Press Star then the number one on your telephone keypad.
Well pause for just a moment for any final questions.
Yes.
There are no further questions at this time I would like to turn the call back over to the turning point team for any closing remarks.
Wanted to thank everybody for joining the call today and look forward to speaking again here in a couple of months.
This concludes today's conference call. Thank you for attending you may now disconnect.
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