Q2 2023 Turning Point Brands Inc Earnings Call
Good morning, and welcome to the turning point brands second quarter 2023 earnings Conference call all participants will be in listen only mode.
All lines have been placed on mute to prevent any background noise should you need assistance. Please signal conference specialist by pressing the star key followed by zero.
After today's presentation there'll be an opportunity to ask questions.
Please note that this event is being recorded I would now like to turn the conference over to Luisa for Mena Chief Financial Officer.
Please go ahead.
Thank you. Good morning, everyone. This is Louis recommended Chief Financial Officer.
Joining me are turning point brands', President and CEO Graham Purdy, Chief revenue Officer Summer cream missed.
This morning, we issued a news release covering our second quarter results.
ALLETE is located in the IR section of our website Www Dot turning point brands Dot com.
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 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.
Long with reasons why management believes that they provide useful information.
I will now turn the call over to our CEO Graham Purdy.
Thanks, Larry Good morning, everyone and thank you for joining our call our second quarter results demonstrated continued progress against our plan.
During the June quarter, we showed revenue growth of both stokers and Zig Zag as we continued to gain traction from the initiatives, we put in place and consumers are responding as demonstrated by market share gains in most of our major categories.
Given our solid start to the year, we are raising our annual EBITDA guidance to $90 million to $95 million.
Of course.
Our business like many other consumer oriented companies is not without challenges our.
Our results continue to reflect the impacts of a prolonged inflation and higher interest rates.
As we've shared previously our wholesale customers, particularly buyers of our zig Zag paper and wraps portfolio have been carefully monitoring inventory levels in response to the higher cost of financing of working capital.
While we think the bulk of our wholesale customers inventory adjustments are largely behind them. We still saw further destocking with certain customers in the second quarter.
Despite this transitory dynamic we're confident that the zig Zag brand continues to strengthen based on several factors we track.
Our sell through was better than our reported results and we are encouraged by our wholesale customers and retail customers response to our expanding portfolio, which includes clipper lighters and our recent new product introductions.
We're also encouraged by our continued penetration of the alternative channel driven by continued secular tailwind that are expanding our addressable market.
We're having success not only winning new untapped alternative customers that are new and existing alternative customers are showing more interest in taking on more complete zig zag portfolio.
This not only increases our order sizes, but also provides valuable shelf space and merchandising real estate within these stores to build brand awareness as we satisfy evolving consumer preferences.
As many of you can probably senior hometowns, the alternative channels consistently expanding by virtue of additional states green lighting medical and recreational cannabis.
In addition to more legal dispensaries.
Their alternative retail outlets and manufacturing processing facilities are drafting off this trend.
Or is the exact <unk> e-commerce business selling into that channel was up over 30% during the quarter, excluding clipper, which also contributed to our sales into the channel.
Stokers had another strong quarter with revenues up seven 3% and market share gains in both the MSP and loosely chewing tobacco categories as its value proposition continues to resonate with consumers.
MST continues to expand distribution and gain market share while turning point brands became the number one manufacturer of loosely products for the first time in its history.
On free a modern oral product, we're increasingly optimistic about our prospects and given positive consumer feedback and results in recent test markets.
We also continue to be proactive in optimizing our capital structure and Opportunistically purchase another $15 1 million notional of our convertible notes during the second quarter, bringing.
Bringing the total as of the ended the quarter to $39 million, while maintaining a strong cash balance to help address future maturities.
With that let me hand, the call over to summer to walk through some progress and results of some of our specific go to market initiatives.
Thank you Graeme.
As discussed in prior quarters, our focus on growing the Zig Zag brand is a critical element of our plan, we continue to execute against our multiyear road map to solidify zig zag as a lifestyle brand, especially in the alternative channel, which is clearly expanding across the United States.
We recognize the immense value of growing brand awareness trial and conversion and ultimately becoming a ubiquitous brand that a consumer is able to find any way.
To that end and as an important example of our progress we are proud to share that we have partnered with two of the top five largest multistate dispensary operators or msos to build dedicated in store presence for our products.
Last quarter. We also expressed value of product innovation is exact portfolio as an essential necessity to expand our on shelf presence across trade classes, along with the launch of palm roles and 70 millimeter com.
These sets of new offerings, and especially the 70 millimeter Collins has proven to resonate well with both the trade and our consumers and showed momentum in the marketplace and.
In addition to consumable product innovation. We also believe it is important to develop other accessories and products such as apparel, which is previously had great success.
As part of our strategy to both expand our product lines and sales channels. We recently launched immediately.
One of the largest brick and mortar specialty apparel stores with over 600 locations across the United States.
Expanding these partnerships serves as a large sales and marketing opportunity for these exact brand and speaks to the strength of the brand as we have received encouraging feedback and engagement thus far.
Turning to clipper as maintenance.
Scott to the brand as a well known top line or brand in international markets and we believe we have a proven track record of leveraging our sales force and marketing engine to grow brands in the U S.
We continue to increase distribution and expand product assortment across all sales channels, all building brand awareness and engagement by educating consumers on the clipper brand at retail.
In addition, we see traction on Amazon and across our social channels.
Amazon with a new channel for Clipper in the United States launching in Q1, 2023 and has proven to be an important sales avenue for consumers.
Our social channels highlight that consumers are interested in the points of difference of clipper versus competitive wider brands by way of significant and increasing engagement.
As noted in previous calls we believe this category is complementary to our existing business and are optimistic that plenty of opportunity remains roughly 500 million dollar market.
Moving to smokeless Graeme already mentioned the continued strength in stokers during the quarter on.
On the product innovation, Brian and as noted in prior calls we remain committed to profitably competing in the growing $1 billion White pouch category with a free brand.
Our progress across the channels in which we compete gives us confidence that we will carve out a competitive and distinct position in the market.
I look forward to sharing more detailed plans and remain committed to scaling in this segment over time.
In summary, we continue to focus on maximizing the value of our brand.
Executing against the plan, we've established and growing our business with both our retail and consumers we.
We are hyper focused on maximizing the value of our world class brands and extensive distribution capability let.
Let me now turn the call back over to really to go through our results.
Thank you summer.
Starting with our consolidated quarterly results.
<unk> sales were up two 6% to $105 6 million.
Adjusted gross margin was down 30 basis points to 49, 7% due to segment and product mix.
Adjusted EBITDA was $25 3 million up two 2% year over year.
Go into segment performance for Scott.
Going into the segment performance.
It's exact sales increased one 1% year over year to $46 7 million.
Our U S papers and wraps businesses were down as we saw further trade inventory right sized and during the quarter, but we continue to remain encouraged by end market demand.
Our ecommerce business, particularly <unk> alternative sales grew double digits.
Our Canadian and other smoking accessories category saw strong growth during the quarter, both aided by clipper sale.
Gross margins declined 60 basis points to 56, 6% during the quarter driven primarily by product mix.
Notwithstanding the trade inventory fluctuations, we have seen this year and demand for our paper cones products continued to be strong.
Q2, 2023 U S paper in E. Commerce sales are double the levels of the second quarter of 2019.
Which speaks to the secular growth trends and our market share gains over the last few years.
On stokers.
Focus products net sales increased seven 3% to $36 $1 million in the quarter with a 0.7% volume increase and a six 6% price mix increase.
Net sales for the MSC portfolio grew double digits.
<unk> volumes was up two 5% despite category volume down five 6% with share growing 60 basis points year over year to six 9% According to MSCI.
Its share in stores selling was up 30 basis points year over year to 10, 3% its focus now in stores, representing 67% of industry volumes.
We'll provide a long runway for growth.
<unk> sales were down mid single digit from the previous year.
<unk> was the number one brand in the quarter, leaving 280 basis points of share to 37% According to MSCI.
Overall CPB loosely volume was down two 8% versus the category, which declined eight 5%.
Category performance was driven by a larger decline in premium loosely compared discount brands with TPB volumes benefiting from consumer trade down stokers volumes grew from the previous year.
Gross margin increased 160 basis points to 55, 4%, primarily due to MST pricing.
Moving to Cvs, our wholly owned distribution subsidiary.
Sales were $22 8 million and adjusted gross margins were 26, 7%.
Moving to our balance sheet, we repurchased $15 1 million notional value of our convertible bonds during the quarter and we ended the quarter with $100 5 million of cash and $124 1 million of available liquidity, providing flexibility for further capital deployment.
We continue to closely monitor the financing markets are ahead of our July 2024 convertible note maturity.
We believe our current cash balance of free cash flow generation provide us the necessary flexibility to adjust the maturity of the remaining $133 5 million of convertible notes.
With our first half performance, we now expect consolidated adjusted EBITDA of 90% to $95 million for fiscal year 2043, compared to the previous outlook of 50% to $94 million.
Their projections include effective income tax rate of 24% to 26%.
We continue to expect capex to be temporarily elevated this year up to 13 million with $9 million related to manufacturing project, which we expect to complete late this year, although the timing of payments may slip to the first quarter of 2024.
We expect capex to return to more normalized levels in 2024.
We also expect to spend $12 million to $15 million and capitalized software implementation costs related to our ERP and CRM implementations, which are still expected to be completed by the end of the year.
We currently expect to spend approximately $2 million for the full year on ppas related to our modern oil products, which remain under review by the FDA.
Now, let me turn it back to Graeme.
Thanks Laurie.
To conclude we.
We had a solid start to the year and we remain focused on demonstrating further progress for the balance of the year.
Thank you for participating on the call today and with that I'd like to open the call 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 Q&A roster.
Your first question comes from the line of Vivian either from TD Cowen.
Hi, good morning.
Hi, Vivien.
Good morning, So I wanted to start on Zig Zag certainly.
<unk> move sequentially.
And good to hear that a lot of the inventory noise is behind you is there any way for you to quantify kind of what you think.
It might be a potential inventory headwinds in each of the third quarter or the back half and maybe just kind of more broadly holistically, how we should think about modeling.
Sequential revenues in particular in light of the new partnership with the Msos that you announced today. Thank you.
Yes, there is quite a bit.
With that I would say that.
With the inventory, we've actually seen happen you are seeing it in certain areas.
I would say that we should continue to see sequential improvement.
Q3 versus Q2, one thing that was kind of model it out.
We've got to point out that last year, we did have when you look at it year over year comparison, we did point out in Q3 of last year had $5 million of pull forward given the promos that we ran during that period last year.
Noted that's really helpful. And then as we kind of think about the gross margin progression on Zig zag.
Seemingly kind of just a better topline performance has helped narrow the rate of gross margin compression in <unk> versus <unk> is that right and are there incremental considerations inventory or otherwise maybe negative mix from the MSL partnership that we should be cognizant of as we think about the exact margins in the back half.
Yes.
I agree that we had from Q1 Q2 is that if you recall the products.
We're subject to these trade inventory reduction in Q1 work or papers or mask, which which carry higher gross margins. So obviously those rebounded in Q2 sequentially. So we had a nice lift.
Hey, guys. Good morning, Hey, going forward as we continue to grow our paper.
And quicker than some of our other than kind of a lower gross margin businesses I would expect gross margins to have that.
Not a headwind as we experienced in the past.
Super helpful. Thank you for that maybe pivoting to free the modern oral category has been.
Topical this earning season.
Your larger competitors.
Any incremental.
Incremental insights you can offer around kind of performance.
How you guys are feeling about it.
Traction, it's gaining with consumer or is the three milligram offering anything incremental on that would be great.
Yeah, Hi, Vivian this summer we continue to get really great feedback from both the trade and our consumers we have the ability to really look at what consumers are doing with our own websites and their purchase patterns. Then we remain really encouraged by what we're seeing we also feel really great about our product assortment.
As you noted our points of difference in milligrams strength sort of separate us and we are excited about what we're seeing there as well as we think about the playbook going forward, obviously, you've learned a lot about how to go to market through the success, you've had with stope areas and so borrowing from that playbook will definitely be influencing our go to market strategies in the near future.
Got it last one for me on Stokers.
Perfect segue.
We're seeing.
Changes in the competitive landscape in cigarettes, I don't think its yet.
Kind of.
It impacted the broader traditional moist smokeless tobacco category, but any kind of insights you can offer on the competitive landscape in MFC more broadly.
Yes.
Graeme.
Look I think the sort of a tale of two cities the value category I think continues.
To be successful in MSG and the premium brands or are struggling at this point in time, I think a little bit that has to do with sort of the macroeconomic environment, but also the pricing activity that they are taken.
Remain committed to this down the street plan that we've had for many years.
When more stores continue to win more chain accounts.
Turning to Opportunistically price.
And that allows us in.
Sure.
About the continued runway that we have with <unk>.
It sounds good thanks for all that guys.
Thanks Vivian.
Your next question comes from Michael Legg from the benchmark company.
Thanks, Great quarter, guys. Appreciate the studio's results in a tough environment.
I understand a little bit about the msos.
Two of the top five can you talk a little bit about whether you're displacing other products out there.
Is it additive for the Msos.
What you are looking forward to getting in that over time. Thanks.
Yeah, Hi, this is summer in terms of getting into the Msos I think for US it's about getting broader presence in this very important retail environments for us so that zig zag continues to carve out space in that environment.
We won't go into that competitive.
Nature, there in terms of what we'll be taking the shelf space of or not but for us it's really about continuing to get into the alternative space expand our footprint, there and the growth opportunities that remain.
Okay, great. Thanks, and then just on Clipper can you talk about where you see your penetration today I mean, it will be 10% into the market.
Much more runway is there for you to go.
Yes.
Yeah. So as noted in that category is pretty tremendous for us in the United States. We've been at it for almost a year now and we continue to see distribution expand.
Quarter over quarter, we're continuing to gain distributor as well both in the traditional and the alternative space, So making inroads there and continue to see growth in that space, both in store and <unk>.
We're on Amazon now as well so the growth there is encouraging as well.
Great.
The zumiez.
What type of.
Level of apparel sales are we thinking is this just a small piece to start or are there a lot of other retailers, you're talking with them, where do you see that going.
Yeah, so for us.
As much of a sales opportunity as it as a marketing opportunity.
Introducing inches you may certainly affords us the opportunity to be at the table with other partnerships as well and when we think about going into as you may as we think about creating walking billboards for our brands and that is a tremendous marketing opportunity for zig Zag and the fact that it's resonating in the early days of us.
Getting into Zumiez is very exciting for us and the opportunity of the brand has going for it.
And what type of margin potential do you think you'll have in apparel.
I don't know if we're sharing what the margin potential is quite yet with apparel, but certainly can follow up on that.
Thanks, Okay, great quarter, Thanks, guys.
Thanks, Mike.
And your final question comes from Eric Dey, Laurie from Craig Hallum Capital Group.
Great. Thank you for taking my questions.
First of all for me.
Follow up on one of <unk> questions just.
On the sort of continued strong performance of stokers, MST and just overall that sort of value segments continuing to be successful against premium.
You called out this year and 67% of the stores by volume.
Yes.
Obviously, you're leaving about a third of the market available to you guys. So strong opportunity there. It seems to me like that opportunity has kind of been out there for a while so I'm just kind of wondering.
Uh huh.
Whats the overall sort of roadmap there looks like and maybe another way of thinking about it would be just sort of what might cause you to lean into that opportunity maybe more than you have in the past. Thanks.
Yes.
Great question Eric.
Thanks.
We've made any modifications to our strategic approach around around steppers.
It really is sort of trench warfare, one sort of time to change at a time.
At the same time, we sort of maintain this mosquito is about being profitable while we do it so not going out.
Irrationally spending money to gaining distribution.
And so I think that the.
<unk> way, we're on we continue to grow that weighted distribution, we continue to when stores. We continue to win chain accounts. So I think that that long runway is something thats very exciting for us, especially with the pricing dynamics in the category and we're one of the few that's actually growing volume in the space. So obviously that leads to share growth.
We got the benefit of.
Following pricing from large competitors. So a lot of great dynamics I wouldn't anticipate any change to our current thinking about how we go to market there.
Okay.
That certainly makes sense to me obviously.
Continuing to benefit.
And one with just kind of status quo.
It makes sense to me.
Moving to Zig Zag here.
Definitely very encouraging to hear that.
To be alternative channel sales are up 30% I think it was.
That's great.
Great to hear that these sort of initiatives are.
Catching momentum here I was wondering if you could expand a bit on the.
Zig Zag innovation pipeline.
On it a bit in the prepared remarks I'm just wondering if you could expand on that.
Whether there's any difference in the sort of measured channel versus the alternative channel.
Just overall, if you could give a bit more insight into the innovation pipeline for zig zag, and how youre kind of expecting that to translate to overall sales growth.
Yeah sure. So as noted on the call. We recently put into market palm roles and 70 millimeter Collins, we have especially seen a lot of great traction across both the alternative and the traditional channel a 70 millimeter Collins just tells us that consumers are both interested in those exact brand as well.
I was interested in that particular product assortment our lineup so.
I think theres a lot of runway for us to still get into stores. There <unk> more focused on the alternative side at this point, but let's.
It seems like consumer than the dispensary owners are very interested in that assortment as well.
Yes.
The Allstate all an e-commerce platform.
Alright.
Provide kind of like the right channel.
For us to try our product and prove it out before we launch it into the C stores that we've been doing that with some of our new innovation.
Right.
As we go forward, so we sort of have palm rose and especially the 70 millimeter cones and helping to drive results.
Currently and in the recent past I'm just wondering on the roadmap I started out as we look into 2024.
Should we expect.
A significant proliferation of the number of Skus you guys are servicing is it really kind of focusing on these.
Finding one or two that really work and kind of.
Investing behind those a bit I'm, just kind of wondering how we should think about the innovation pipeline going forward just considering how much it has.
Ben.
A driver of the growth here.
Yeah. So for US two things are really important one what is the consumer wanting from US right and staying ahead of the consumer is really critical for us, especially as we think about growing the zig zag brand into the future and as we think about what these various channels are looking for.
Additionally, I would add that getting shelf space in the alternative channel is really important for us and so as Willie noted testing in the alternative channel for what products make sense.
Is the profitable way for us to think about growth in this space as well and not over investing in product innovation is an important to watch out for us. So I think it's a very balanced approach. We're trying to strike. So that we're staying ahead of the consumer but also staying relevant with the with the product innovation that we bring to market in <unk>.
Profitable way.
That makes sense.
And then the last one for me is kind of similar to the.
Stokers MST outlook here I, just wanted to circle back on the.
On the free pouches.
I'm just wondering if youre seeing any kind of green shoots of.
Any inflection in market share or if there is any.
Any sort of anticipation of.
A significant ramp in free pouch cells.
Or if this is going to be sort of that similar trench warfare I mean, obviously, it's a very hot category with many.
Big players here or is that sort of one by one trench warfare or is there anything that you guys are seeing any green shoots to kind of call out on any inflection point in growth here. Thanks.
Yeah, No. We're very encouraged by the progress thus far I think you hit the nail on the head when you refer back to stokers and very steady growth there.
I do think it's a fair point on the trench warfare piece as well so we're very mindful of that.
Profitably growing in this space is a top focus for us. So I think the stokers references was right on.
Okay, great appreciate it thank you.
No problem. Thanks, Eric.
Next question comes from Andrew Rem.
Hey, guys.
Got to say.
Really like the control music pretty sure. That's the primary reason your stock is up today so kudos.
Thanks, Andrew.
Some are just on your last comment there regarding innovative products.
When you say Tam.
First can you what is an example of testing.
Yes.
Yes, it's a great question. So what we have the opportunity to do in the <unk>.
Our channel and on our E. Commerce channels is put our product into market and sort of gain an understanding of what consumers feel about it in terms of purchase patterns getting feedback through our website getting feedback through the dispensary channel and then determining if it makes sense based on the interest to expand it out further.
It's really as simple as that if we find a product does it makes sense and is only going to be a temporary offering for example, we won't expand it out further we had.
Our product earlier this year rose wraps that we concluded just made sense for us to have as a temporary product.
We will decide later, but something we expand further but that's an example of why do we test it understood. It was great for a moment and you know.
More to come this will do something beyond but I think that that's an example of a test that we did and how we think about it.
So do you.
When you test are there specific stores or geographies.
What is the duration of.
The test.
Yes, I think it varies from product to product based on the market conditions on the products that we're testing.
Can you just start with some initial timeframe and then based on as results come back that may expand or shorten.
So it's very much like a feedback loop.
Absolutely.
Okay.
Also could you talk about I don't know exactly how to say this but.
Clipper and free.
What is the marketing roadmap.
Yes.
It's like a phase 123, but kind.
Walk through each of those products.
Clipper since its.
More recent.
But just understanding.
When you think about marketing what are the different base or is that a new product like that goes through.
For Clipper when we first introduced the product we really are broadly focused on building product awareness and that is it was done in a pretty traditional way across in store and online and.
In store point of sale advertising displays that sort of thing pretty typical of our other businesses and then in terms of online.
Using social channels, such as Instagram, our tech top tier market that brand, so a pretty traditional playbook as it pertains to clipper as it pertains to free similar story in terms of the marketing channels that we've been leveraging albeit for free starting on a smaller scale given the background that we've talked.
Before related to the category and I was wanting to learn and be very methodical about our end market approach.
So a few years.
Take talk as an example are you using influencers, you're creating your own.
How do you do that.
It certainly varies as it pertains to clipper, we have done a little bit of both.
Okay.
Yeah.
Sorry.
So on.
You are.
Okay I'm sorry.
Last part of what you said cut off.
Oh, no problem I said as it pertains to Clipper I think your question was specific to tick tock and the advertising approach we leveraged there.
It's a little bit of both.
Okay.
And then.
You bet.
On the Zumiez collaboration or partnership there.
Why assuming it's a good initial partner and then you also talked about looking at that as an opportunity to expand so I wonder if you like a hot topic as a brand.
Well with what Youre trying to accomplish there.
So could you give me a good credit because they have a broad brush.
Doors across the United States, there are specialty apparel retailer for us as we noted in a prior question I think the opportunity with partnerships like that afford us as much of a marketing opportunity as it is a sales opportunity as we think about partnerships beyond Zumiez I think we'll take it on a case by case basis, but do you mean.
Great proxy for us to think about other potential retail partnerships in the future.
Yeah.
Okay. Thanks, a lot guys I appreciate it great quarter.
Thanks, Andrew Thank you.
There are no further questions at this time, Mr. Graeme <unk> I turn the call back over to you.
Hey, Thanks, operator, I appreciate everybody's time today, and we're excited about the results in Q2 and.
Thanks, Nick.
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