Q2 2023 22nd Century Group Inc Earnings Call
Speaker 1: our new facilities until our new facilities are restored.
Speaker 1: Both extraction and distillation capabilities are not both online, which will enhance gross margin in the second half of 2023. And we are also contracting biomass cultivation to further increase margins later in the year. And on slide 18, you'll see a few key highlights from our balance sheet. Chlorine cash balance was approximate 12 million, which does not reflect the benefit of almost 15 million in gross proceeds from July 2023, July 2023 equity raises, as well as cash weeks back to be recouped for our business interruption claim. And it should be noted that we still have not received business interruption proceeds due from our insurance provider. Five second centuries cash requirements are anticipated, decreased, reflecting improved gross margin profile, as well as our cost reduction initiatives. And with that, I will turn it back to John for closing comments and Q&A. On slide 19, as you've heard today, we continue to advance on our role to increase the value of our brands. Despite the timing issues on the VLN role, we have doubled its availability in just the last few months. We believe we will be able to demonstrate that the VLN brand will plan an important role with consumer system open by demonstrating that value. We will be able to better capitalize on the potential of VLN furthermore, we are delighted to be back online with GBB manufacturing, which brings us significantly higher production capacity and improved economics. Our GBB business may be underappreciated by some of the investment opportunities, but not by us, the growth is dynamic and the market opportunity is large. That combined with demonstrating the potential of VLN and our focus on cost reduction enables us to continue endeavor to build the value of our proprietary technologies in the near term.
Speaker 2: Last, I'd like to thank all those at the company for their contributions and continued dedication in this quarter. With that, I'd like to ask the operator to open the call for Q&A from our institutional research analyst. Thank you, sir. Ladies and gentlemen, we will not begin the question and answer session. Should you have a question, please, press star followed by the number one on your touchstone phone. Again, that star followed by the number one. If you would like to withdraw your request, please press star followed by the number two. Your first question comes from the line of Vivian Ever from TD Callen. Please go ahead. Hi, good morning. Thank you. The DPRR ties, filter scar business. Thank you.
Speaker 1: I'll bid you an interview. Thank you, sir. Thanks, sir. Yep, sure, absolutely. Thank you for the question. We're not providing detailed guidance right now, according to product line with the tobacco revenue. We typically haven't done the past, so right now we're just not in a position as we're rolling out continue to keep rolling out and getting more density in the market so that it provides that level of greater detail. See you with another Viewer.
Speaker 2: Okay, that's fine, maybe I'll try it a different way because if our map is right, we're showing that your tobacco carton sold declined 46% year over year, your price per carton was up 49% year over year. So I'm just wondering whether...
Speaker 2: We're just seeing that you guys have taken pricing because competition has taken pricing, has there been underlying mixtures that has driven that price for carton growth? Can you offer any incremental detail on that? Sure.
Speaker 1: Yeah, definitely. It's not so much a price of market share issues, it is just an overall decline.
Speaker 1: across the board industry wide for the filter cigar business. So it's something that we began to see in Q1, it's been sustained throughout the year. Typically what's happened in the past is, the first half of the year, filter cigar unit volume demand is sluggish, crystallizing probably, accelerate purchasing in the fourth quarter.
Speaker 1: And then what you'll normally see is starting in late Q2, going in Q3, you know, significant pickup in orders. But we haven't seen that so far. So we're being pretty conservative about the forecast going forward from the guidance just because, you know, until we start to see that type of unit demand pickup again, we want to be relatively conservative and going forward.
Speaker 2: Okay, I appreciate your comment on conservative, and I'll squeeze one last one in before I turn it back over, because it does seem like that was the real deficiency, right, in establishing guidance and now the painful revision. While I appreciate, you know, the...
Speaker 2: the timing of retail rollouts, you know, certainly can kind of move, you know, from quarter to quarter based on, you know, something like fourth of July , which you called out. But it seems to me that perhaps there was an excessive amount of optimism around the rollout of DLN. And it's, you know, if you're a larger company and you're launching a new beer brand, say, you know, you can get 95.
Speaker 2: in your relative size and the new list of the product. Or is there something else? Thanks.
Speaker 1: Yes, I'll take that. Vivian, to your point, if you're a large beer company or Altria, you can absolutely get distribution quicker. I will tell you that we've really started moving into the three-tier system.
Speaker 1: the beginning of the year and you know to be able to achieve distribution in Coremark, McLean, EB Brown, which are three of the four biggest distributors Certainly expand certainly expand through Circle K getting into the number one C-Store chain in the United States number one drugstore chain I know that seems like it was kind of slow to ramp.
Speaker 1: But quite honestly, the progress we've made I think has been actually pretty good. It just does take time. I mean when you're a brand new company going into a category, there are just things that you have to overcome. Now, once you're past those hurdles, especially on the distribution side, you have to be able to overcome those hurdles.
Speaker 1: end with the major accounts, you don't have to go through those hurdles again. And those hurdles aren't consumer acceptance, those could be insurance, you know, those could be some other logistical issue that a chain has. So we're past that. It did take a little bit longer, there's no doubt. But not necessarily on our side.
Speaker 1: But those are things that I've talked about in my opening comments about they're not R-controllables. And quite honestly, when you talk to the retailers,
Speaker 1: They're pretty impressed with what we've been able to do relatively short amount of time.
Speaker 2: Yeah, but it's outside of your control then it's incumbent upon you guys to hand a cap what you're stirring from the retailer. So how do you guys adjust your approach to handicapping what you're hearing versus what you think actually might materialize? You
Speaker 1: No, we totally understand that. I mean, you know, and we understand the different hurdles we have to go through. We know, you know, we can only do what, you know, it's promised to us by the chains. And, you know,
Speaker 1: Again, there's hurdles there. You overcome there's things that happen internally in some of these organizations that you have merger's acquisitions. You have multiple variables of impact.
Speaker 1: distribution. And again, I will say that, you know, to get into, we're gonna be in 16 states by the end of September , over 4,000 stores and growing, with a clear definition and path forward.
Speaker 1: You know, we feel it's pretty solid, and we're getting there, and we continue to have more and more interest.
Speaker 3: Okay, thanks so much.
Speaker 4: Thank you.
Speaker 2: Ladies and gentlemen, just a reminder, should you have a question? Please press star followed by the number one on your touch-don't-found. Bye.
Speaker 2: Your next question comes from the line of Jim McElrain from Dalson James. Please go ahead.
Speaker 1: Thank you, good morning. If I can just follow up a little bit on Vivian's line of questioning, you answered her question by saying that you face distribution issues and your past those now. And my question is.
Speaker 1: Are you past those issues for the current retailers at the current locations? But you will continue to face those issues or similar issues for new retailers or existing retailers at new locations?
Speaker 1: Good morning, Jim. You know, again, as we continue down this page and the distribution and...
Speaker 1: and talking to the key retailers and
Speaker 1: You know, understanding their goals for the category, understanding, you know, what's happening within their framework of their stores. We continue to keep learning.
Speaker 1: our success continues to be based on, you know.
Speaker 1: being persistent moving forward with these accounts, we feel very comfortable in where we are and how we're getting there.
Speaker 1: So it's a challenging environment and everyone knows that. We just continue to keep getting our story out about BLM, about what makes it unique the attributes of the product.
Speaker 1: People are very interested in these marketing programs are doing very interesting how we're targeting the consumer.
Speaker 1: So all of those things are driving the interest.
Speaker 1: And we're going to continue to keep building distribution.
Speaker 1: I don't have to answer your question, Jim, but it's very fluid and we keep going.
Speaker 1: All right, well, thank you for that. Is it fair to say that the
Speaker 1: Cainton the revenue expectation is mostly attributable to VLN.
Speaker 1: Yeah, Jim, this is here, yes. That's correct. It's mostly terrible to the...
Speaker 1: You're to delay the ramp and deal and that's trying to scrub.
Speaker 1: Okay, and can you talk a little bit about the cost-cutting program when you think we'll be able to see the effects of that? Is that something we're going to see a little bit of in Q3 and the full affecting Q4 or is it?
Speaker 1: more extended or shorter than that.
Speaker 1: Now it's going to be shorter than that. You'll see a meaningful impact in Q3. You'll see the full effect of it in Q4. We initiate all those cuts.
Speaker 1: Basically, we can have two weeks ago, so that's my start of the cuts. So starting in the beginning of August is when you'll start to see the impact of it. So you'll see a fairly meaningful impact in Q3 and you'll have the full effect in Q4 going forward.
Speaker 1: Okay, thank you. And then just back on the LN for a little bit. I'm trying to understand a little bit of the relative impact of what you're talking about in terms of the rollout.
Speaker 5: that
Speaker 6: is coming from...
Speaker 6: I guess John , what you've been described as you've described as the challenging environment versus the cost cutting program.
Speaker 6: If you can just try to help me understand has the bigger impact on the change in the revenue outlook.
Speaker 1: Well, I think Jim, we were talking about the open line. Oh, you're sorry? Yeah. Not good. No, go ahead. Go ahead, John .
Speaker 1: Okay, I was going to say in the opening comments Jim, you know, we talked about the footprint and we've been able to establish those 16-18 states.
Speaker 1: We know what the path is to the consumer, with awareness education, trial repeat, purchase, advocacy.
Speaker 1: Once we've been able to establish the product now in these markets, especially the key markets like Florida, Texas, and California, those three states are significant. They're the top three states in the country for cigarette volume.
Speaker 1: So as we continue to establish our footprint there.
Speaker 1: moving out to the other states, proving our brand, and what we've learned over the last nine months of commercialization. You know, all of this is playing into our discussions and pivots on what we need to do, you know, understanding the consumer's behavior, understanding, if you see our, if you saw in our marketing campaign about the optimism and how it's so much different.
Speaker 1: than the other anti-smoking campaigns. All of that is now playing and being laid into our
Speaker 1: are marketing plans.
Speaker 1: We also know that we can do this in an efficient manner that some of the things we initially thought we might have to spend on, we don't have to spend on. And there's continual learning around these that allows the drive efficiencies and get the message out in a much more effective way. I do know that.
Speaker 7: get inferiority farce
Speaker 1: I just really like that as well. I think it's just been making more target concerns, target efforts.
Speaker 1: And I think it's just, you know,
Speaker 1: Just the natural sort of delay in the...
Speaker 1: when you're trying to get penetration with some of the retail clients.
Speaker 6: Okay, yeah, that's it from me. Thanks a lot, guys.
Speaker 2: Thank you. Your next question comes from the line of Aaron Gray from Alliance Global Partners. Please go ahead.
Speaker 8: Hi, good morning. This is Remi and Samantha on for Air and Gray. My first question is for gross margins. So they've continued to worsen, and while we understand there's someone else from the fire, and it, gross margin would have been roughly break even, x to the 2.4 million dollar impact.
Speaker 8: We're now seeing negative gross margins in the tobacco business. So I know in the opening March you made out some initiatives to help improve gross margins. What if you could provide some specifics on where, as you expect gross margins to trend in the next few quarters and which of the initiatives will be the primary drivers of that gross margin expansion. seniors, think about a
Speaker 1: Thank you. Thank you for the question. I really good. The main issue with tobacco is that the lower volume and the filter to go around the neighborhood, basically, you know, the fixed overhead and need to be deployed in order to cover expenses and, you know, as volume decreases, there's just an embedded expense.
Speaker 1: large and profile that business is going forward. That will be a big, big driver and improving, you know, margin and handshake for that business unit. And then again for...
Speaker 1: To have cannabis business units really just restoration as each sequential production capability. So we have extraction fully online right now. We have this was fully online right now.
Speaker 1: We expect our eyes to look at those people online and Q1, 2020, for facing to meet that timeline. And that's a really big driver. The cumulative effect of that is not to mention our biomass cultivation after it is significant. So we're not buying detailed guidance going forward, but there's gross margin enhancement.
Speaker 1: of at least, you know, called, you know, going from break even for hemp cannabis with the adjustment to, you know, you should be at the, you know, called, you know, high single digits, you know, low teens, you know, towards the end of the year, and then moving, you know, doubling that, you know, going through to 1024, as you were showing your isolation.
Speaker 1: Tobacco is a more moving target just as we continue to change the product mix and reallocate resources to higher margin products, but we expect that margin to improve going forward as well.
Speaker 8: Great, thank you. And then my second question in regards to sell through for VLN, does it provide any additional color on any retention rates or market share in some of your legacy markets? I know you previously spoke to kind of the 1% share in some of your original markets, so any commentary on those trends in existing states would be appreciated.
Speaker 1: Yeah, we're still tracking those things. Those are the metrics now that we're really starting to look at in terms of as we initiate these marketing campaigns. If you look at the process of getting into a store.
Speaker 1: You have to get your distribution set up and you get your introductions. Once we've gotten stored density, which we do have now at specific markets.
Speaker 1: Then you can start launching the bigger marketing campaign.
Speaker 1: We knew one of our biggest issues to pull through and volume was awareness and education.
Speaker 1: truly educating consumers about what this product is.
Speaker 1: some of the better data habits on what's happening in the digital marketing side, you know, click-through rates, impressions.
Speaker 1: Connecting with consumers. Our volume has been obviously stable.
Speaker 1: All of our initial retailers continue to.
Speaker 1: carry the product. But now we're starting to see that the marketing ramping is what we're going to have to be
Speaker 1: So that's where we are. I don't have really any more information to share on that.
Speaker 1: You know these programs are now starting and we're starting to see the pull through more and more
Speaker 8: Great, thank you. All back in the queue.
Speaker 2: Thank you. Again, ladies and gentlemen, should you have a question, please press star followed by the number one on your touch down phone.
Speaker 2: There seems to be no further questions at this time. I'd now like to turn the call back over to Mr. John Miller for any closing remarks.
Speaker 1: Well, thank you everyone for joining us today for the call. We appreciate the continued support and please continue to look for more updates as we continue to move both of these businesses forward.
Speaker 7: Thank you and have a good day.
Speaker 2: Thank you, sir. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a lovely day.
Speaker 9: .
Speaker 9: gonna