Q2 2023 22nd Century Group Inc Earnings Call
Speaker 2: Good morning ladies and gentlemen and welcome to the 22nd Century Group 2nd Quarter 2020 results conference call. At this time online, we are in a listen only mode. During the presentation, we will conduct a question and answer session.
Speaker 2: If at any time during this call you require immediate assistance, please press star 0 for the operator. I would now like to turn the conference over to Mr. Matt Krebs. Please go ahead sir.
Speaker 3: Thanks, Lara. Good morning and welcome to 22nd Century's second quarter results conference call. Joining me today are John Miller, interim CEO , and Hugh Kinsman, CFO . Earlier today we issued a press release announcing our results for the second quarter of 2023. The release, presentation, and 10Q are available in the investor section of our website at XXIIcentury.com. We'll start today's call with prepared remarks from John and Hugh before moving into Q&A. The Q&A will be in session with our analysts and today's call will focus on key updates to the commercial activity in our BLM tobacco and GBV hemp cannabis business units. We will not be able to cover every aspect of the business in the time allotted for this call.
Speaker 3: If you have questions about our business not addressing this call, you are welcome to email investor relations using the contact information provided in today's press release. On slide 2, a few reminders for today's call. Some of the statements made today are forward-looking. Forward-looking statements are subject to risks, uncertainties, and other factors that may cause actual results to differ materially from those contemplated by these statements. Additional information regarding these factors can be found in our annual, quarterly, and other
Speaker 3: to our press release issued earlier today. And with that, I'll turn it over to beginning from slide three. For progress we made this past quarter and our company's path forward. I was appointed interim CEO of 22nd Century in late July , and I am grateful for this opportunity at such an important time in our history. I believe 22nd Century possesses unique assets in both the tobacco and hemp cannabis business to create meaningful value for the company.
As our capacity comes back online, we expect our margins will return to positive territory and even increase through internal optimization efforts already in motion.
This is an important point to reiterate as it provides true gross profit dollars to offset operating costs, where we have not been able to do so for the past nine months.
On Slide 13, we're also moving into the implementation phase of our license and distribution agreements with cookies in old town. These exclusive agreements cover branded hemp derived cannabinoid consumer products and accessories uniquely in the industry 20, <unk> century can provide a single source of integrated supply production say.
<unk> and distribution leveraging our industry, leading formulation ingredients in manufacturing infrastructure, plus a comprehensive sales and distribution platform.
With 20, <unk> century, providing these functions that brand can fully focus their resources on product and market development, helping to grow a new market characterized by high margin high velocity products that fit perfectly into the existing C store and specialty channels that already served the targeted consumer.
To summarize.
Our <unk> business remains strong and we are now well positioned to drive improved operating performance to generate cash flows to better offset our operating costs and improve total corporate performance for our stockholders.
Now I'll turn the call over to you for a detailed review of our financial results on slide 14.
Thanks, John starting on Slide 15 second quarter financial results net sales increased by 61, 8% year over year to $23 4 million.
Reflecting the addition of <unk> revenue and increased unit sales of our <unk> candidates bulk ingredients.
This is partially offset by lower tobacco revenue as we reallocated production resources away from lower margin filtered cigars and towards higher margin via land and conventional cigarette products.
It should be noted we had approximately $600000 of shipments intended to be recognized in the second quarter that will instead be recognized in the third quarter due to shipment timing around the fourth of July holiday.
And as John referenced we have updated our full year revenue outlook to a range of $80 million to $90 million.
To address changes in our <unk> launch timing and retail rollout strategy.
Gross profit decreased to a loss of $2 3 million, reflecting lower filtration got revenue as we shift production mix at our <unk> facility, along with the impact of reselling bulk ingredients for hemp cannabis products until production facilities are fully restored.
Gross profit is expected to improve going forward with higher margin product mix for tobacco and completion of hemp cannabis extraction and distillation facilities in Q3 2023.
Moving to slide 16.
<unk> revenue for the second quarter decreased to $8 1 million from $10 million as we shifted production mix away from low margin filtered cigars and towards higher margin CMO store brand unveiling products.
Gross profit margin on tobacco sales decrease reflecting this transition, which we expect to improve going forward.
Moving to slide 17.
Hemp canvas unit sales for the second quarter grew almost three times year over year to $15 4 million in revenue, reflecting continued strong customer demand for the company's pulp ingredient products.
Gross margin was impacted by reselling activity required under our new facilities until our newer facilities are restored.
But the extraction distillation capabilities are not both online which will enhance gross margin in the second half of 2023, and we are also contracted biomass compensation to further increase margins later in the year.
And on Slide 18, you'll see a few key highlights from our balance sheet.
Quarter end cash balance was approximately $12 million, which does not reflect the benefit of almost $15 million in gross proceeds.
From our July 2023.
2023 equity raises as well as cash we expect to be recouped through our business interruption claim.
And it should be noted we still have not received business interruption proceeds from our insurance provider.
My second century as cash requirements are anticipated decrease reflecting improved gross margin profile as well as our cost reduction initiatives.
And with that I'll turn it back to John for closing comments and Q&A.
Thank you on slide 19, as you've heard today, we continued advancing on our goal to increase the value of our brands.
Despite the timing issues on the <unk> rollout, we have doubled its availability and just the last few months.
We believe we will be able to demonstrate that the wieland brand will play an important role with consumers through smoking by.
By demonstrating that value, we will be able to better capitalize on the potential of <unk>.
Furthermore, we are delighted to be back online with TBB manufacturing, which brings us significantly higher production capacity and improved economics.
Our <unk> business may be underappreciated by some of the investment community, but not by US the growth is dynamic and the market opportunity is large and that combined with demonstrating the potential of deal and our focus on cost reductions enables us to continuing to build the value of our proprietary technologies in the near term.
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 analysts.
Thank you, Sir ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press star followed by the number one on your Touchstone fun again, Thats Star followed by the number one if you would like to withdraw your request. Please press star followed by the number Tim.
Your first question comes from the line of Vivien <unk> from TD Cowen. Please go ahead.
Hi, Good morning. Thank you that's going to start with the tobacco business. Please.
As we think about your revised outlook from a revenue perspective can you help dimensionalize. What you think the mix is going to be between <unk> pinnacle and the de prioritize filter scar.
Yes.
Thanks.
Thanks, Sir.
Yes sure absolutely. Thank you for the question.
Sure.
We're not providing detailed guidance right now according to product line within tobacco revenue, we typically havent done in the past.
Right now we're just not in a position that we're rolling out continue to keep them going out and getting more density in the markets that can provide that level of granular detail.
Okay, that's fine maybe I'll try it a different way because if our math is right. We're showing that your tobacco cartons sold declined 46% year over year your price per carton was up 49% year over year. So I'm just wondering whether.
We're just seeing that you guys have taken pricing competition is taking pricing has never been underlying mix shift. It has driven that price per carton growth can you offer any incremental detail on that sure yeah definitely.
There were its not so much a price a market share issue as it is just an overall decline in <unk>.
Across the board industry wide for the filtered cigar business.
No.
Something that we began to see in Q1, it's been sustained throughout the year typically whats happened in the past.
As you know in the first half of the year.
With regard unit volume demand sluggish refill I think probably.
Accelerated purchasing in the fourth quarter.
And then what you would normally see starting in late Q2 going into Q3.
Significant pick up in <unk>.
And orders.
We haven't seen that so far so we're being pretty conservative about the forecast going forward in terms of the guidance just because.
Until we start to see that type of unit demand pick up again, we want to be relatively conservative going forward.
Okay. I appreciate your comment on conservatism I'll squeeze one last one before I turn it back over because it does seem like that was the.
The real efficiency right.
<unk> guidance and now that Paul.
Revision, while I appreciate that.
The timing of retail rollout certainly can move from quarter to quarter based on 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 <unk>.
If you're a larger company and you're launching a new beer brand and say well you can get 95% ACB in six weeks. So is this just a function of you guys overestimating. The the negotiating leverage that you guys have as retailers given your relative size and the newness of the product or was there something else. Thanks.
Yes, I'll take that.
To your point, if youre a large beer company are all trio there you can absolutely get distribution quicker I would tell you that we've really started moving into the three tier system.
At the beginning of the year.
And to be able to achieve distribution and core Mark Mcclain, Eby Brown, which are three of the four biggest distributors.
Expand certainly expand through circle K getting into the number one C store chain in the United States nimble and drugstore chain.
I know that seems like it was kind of slow to ramp.
But quite honestly the progress we've made.
I think it's been actually pretty good.
It just does take time, even when you are a brand new company going into a category.
There are just things that you have to overcome now.
Once you pass those hurdles, especially on the distribution side and with the major accounts you don't have to go through those hurdles again, those and those hurdles arent consumer acceptance of this could be insurance claim that it could be some other logistical issue that chain has.
So we're past that.
It did take a little bit longer there is no doubt not necessarily on our side, but.
But those are things that I've talked about in my opening comments about they're not our controllable.
And quite honestly when you talk to the retailers there.
They are pretty impressed with what we've been able to do in relatively short amount of time.
Yeah, but if it's outside of your control then it's incumbent upon you guys to handicap, what youre hearing from the retailer. So how have you guys. Adjusted your approach to handicapping, what youre hearing versus what you think actually might materialize.
No.
Totally understand that and we understand the different hurdles we have to go through.
Totally understand that and we understand the different hurdles we have to go through.
We can we can only do what.
We can we can only do what.
Its promise to us by the changed and.
Again, theres hurdles there Hugh you overcome theres things that happened internally and some of these organizations that.
You have mergers acquisitions, you have multiple variables that impact.
Distribution and again I will say that to get into we're going to be in 16.
But at the end of September over 4000 stores and growing.
With a clear definition and path forward.
We feel it's pretty solid and were getting there and we continue to have more and more interest.
Okay. Thanks, so much.
Thank you. Thank you.
Ladies and gentlemen.
Just a reminder, so do you have a question. Please press star followed by the number one on your Touchtone phone.
Your next question comes from the line of Jim Mckelvey from Dawson James. Please go ahead.
Thank you good morning.
I can just follow up a little bit on <unk> line of questioning she was.
You answered a question by saying that you face distribution issues.
And your past those now and my question is.
Are you past those issues for the current retailers at the current locations.
You will continue to face those issues or similar issues for new retailers or existing retailers at new locations.
Hey, good morning, Jim.
Again.
As we continue down this patch in the distribution.
Talking to these key retailers.
Understanding their goals for the category understanding you know what.
What's happening within their framework of their stores, we continue to keep learning.
Our success continues to be based on.
Being persistent moving forward with these accounts.
We feel very comfortable in where we are and how we're getting there.
So, it's a challenging environment and everyone knows that.
We just continue to keep getting our store yet about <unk> about what makes it unique attributes of the product.
We're very interested in these marketing programs are doing the very interesting how we're targeting the consumer.
So all of those things are driving the interest.
And we're going to continue to keep building distribution.
I don't know if that answers your question Jim but.
It's very fluid and we keep going.
Alright, Thank you for that and is it fair to say that the change in the revenue expectation is mostly attributable to BLM.
Yes, Jim this year, yes.
That's correct, it's mostly attributable to the.
Yes to the delay in the ramp in B L.
As John described.
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 effect in Q4 or is it.
More extended or are shorter than that.
No, 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 initiated all of those cuts.
Basically we can have two weeks ago. So that's when I started the cuts so.
Starting in the beginning of August is when you'll start to see the impact of it so you'll see it.
Fairly meaningful impact in Q3, and you'll have a full effect in Q4 going forward.
Okay. Thank you and then just back on <unk> for a little bit.
I'm trying to understand a little bit of.
The relative impact of <unk>.
What youre talking about in terms of the rollout.
That.
It's coming from.
I guess, John but <unk> been described as you've described is the challenging environment versus the cost cutting program.
If you can just try to.
No.
So help me understand Chad.
Bigger impact on that.
The change in the revenue outlook.
Okay.
Well I think Jim when you were talking about the opioid use.
I'll start with that.
Yeah.
No go ahead go ahead John .
Yes, I was going to say in the opening comments, Jim you know we've talked about the footprint, we've been able to establish the 16 to 18 states.
We know what the path is to the consumer with awareness education trial repeat purchase and advocacy.
Once we've had been able to establish the product now in these markets, especially the key markets like Florida, Texas, and California, right. Those three states are significant but the top three states in the country for cigarettes.
Cigarette volume.
So as we continue to establish our footprint there.
Moving out to the other states proving our brand and what we've learned over the last nine months of commercialization.
All of this is playing into our discussions and pivots on what we need to do understanding the consumers' behavior understanding if you see if you saw in our marketing campaign about the optimism and how it's so much different than the other anti smoking campaigns. All of that is now playing in being laid into our.
Our marketing plans.
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 one.
And there is continual learning around me that allow us to drive efficiencies and get the message out.
Much more effective way.
If you have any follow ups.
I would just reiterate that as well I think it's just making more target considering targeting effort.
And I think it's just you know.
Just the natural sort of delay in yeah.
When you're when you're trying to get penetration with some of the.
Some of the retail clients.
Okay.
Yes, that's it from me Thanks, a lot guys.
Okay.
Thank you.
Our next question comes from the line of Aaron Grey from Alliance Global Partners. Please go ahead.
Hi, Good morning. This is Samantha on for Aaron Grey.
My first question is for the gross margins. So they've continued to worsen and while we understand there is some one offs in the fire.
And of course, once you would've been roughly breakeven.
$2 4 million impact we are now seeing negative gross margins.
Tobacco business. So I know in opening remarks, you made some initiatives to help improve gross margins, but if you could provide some specifics on where 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.
Yes.
Thank you for your question.
Okay.
Really the main issue with tobacco is the lower volume and the Belgian cigar revenue basically.
Fixed overhead you need throughput in order to cover expenses and.
Volume decreases there's just been yeah.
Embedded expense incurred.
And that's why we're shifting our product mix to where we're going to have more throughput and better margins.
The overall margin profile of that business going forward.
A big a.
A big driver in improving.
Margin enhancement for that business unit.
And then again for the.
That had canvas business here and it's really just restoration each sequential.
Production.
<unk> ability to maybe have extraction fully online right now we have fully online right now and.
We expect our eyes capabilities takes all airlines in Q1 2024.
We'll make that timeline.
But really the big driver there.
The cumulative effect of that not to mention that our biomass cultivation effort is significant so we're not providing detailed guidance going forward, but you know there's there's.
Gross margin enhancement.
At least.
Call it going from breakeven for hemp candidates with the adjustment to you know you should be too.
You know call it.
High single digits low teens towards the end of the year than.
Doubling that.
2024 hours you restore your isolation.
Tobacco is more of a moving target just as we continue to change in product mix and reallocated.
We reallocated resources to higher margin products, but.
We expect that margin to improve going forward as well.
Great. Thank you and then my second question in regards to sell through for <unk>.
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 market. So any commentary on those trends in existing states would be I appreciate it.
Yes, we're still tracking those things.
And 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.
I'll have to get your distribution set up and you get your introductions once we've gotten store density, which we do have now in specific markets.
And then you can start launching that Baker marketing campaign, we knew one of our biggest issues to pull through in.
Volume was awareness and education.
Truly educating consumers about what this product is.
Some of the better data habits on what's happening in the digital marketing side, you know with click through rates improve.
Impressions.
Connecting with consumers our volume has remained obviously stable.
Considering all of our initial retailers continue to <unk>.
Carry the product.
But now we're starting to see that the marketing ramping is where we're going to have with me.
Yeah.
So that's where we are I don't have really any more information to share on that team.
These programs are now starting and we're starting to see the pull through more important.
Great. Thank you I'll hop back in the queue.
Okay.
Thank you.
Ladies and gentlemen should you have a question. Please press star followed by the number one on your Touchtone phone.
So it 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.
Well. Thank you everyone for joining us today for the call and we appreciate the continued support and please continue to look for more updates as we continue to move both of these businesses forward.
Thank you and have a good day.
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 thing.
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Okay.
Okay.
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