Q3 2023 Turning Point Brands Inc Earnings Call
Good morning, and welcome to the turning point brands third quarter 2023 earnings Conference call.
All participants will be in a listen only mode.
All lines have been placed on mute to prevent any background noise.
Should you need assistance. Please signal a conference specialist by pressing that Starkey followed by easy route.
After todays presentation, there will be an opportunity to ask questions. Please note. This event is being recorded.
I'd now like to turn the conference over to Louis where for Mena Chief Financial Officer. Please go ahead.
Thank you. Good morning, everyone. This is Louis referenced <unk> Chief Financial Officer.
Joining me are turning point brands', President and CEO Graham Purdy.
<unk> revenue after summer feed.
This morning, we issued a news release covering our third quarter results. This release 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 provide a perspective, given the operating environment and our progress against our strategic plan.
I had just customary I direct your attention to the discussion of forward looking and cautionary statements in today's press release and the risk factors in our filings with the 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, along with reasons why management believes they produce 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 third quarter results were in line with our expectations and demonstrated continued progress against our plan.
During the September quarter, we show double digit revenue growth that stokers and sequential stability in this exact segment notwithstanding the year over year comparison, as we continued to gain traction from the alternative channel initiatives, we've put in place.
Given our performance through the first nine months of the year, we are raising the bottom end of our EBITDA guidance from $90 million to $92 million with the range now, 92% to $95 million from $90 million to $95 million.
As we finish up this year and move into 2024, we're particularly excited about our national rollout of our modern oral white pouch nicotine product called free that's F. R E with.
This product will compete in a category that's already worked over $1 billion in wholesale revenue and is currently growing 40% to 50% per MSA.
Up until now we've spent most of our time over the past year shoring up our supply chain to ensure consistent product quality analyzing consumer feedback and testing online collect in store marketing and merchandising programs to ensure a successful national rollout.
Given our progress to date, we are now focusing on prudently ramping up our sales and distribution efforts to achieve steady growth over time.
Our early learnings and performance in test markets have given us more confidence to now leverage our sales and distribution expertise to profitably expand fleet profile in store count similar to what we achieved with stokers moist snuff overtime.
We look forward to providing updates on this exciting new product in the quarters and years to come.
<unk> had another strong quarter with revenue up 10, 1% an acceleration from seven 3% growth in the June quarter, reflecting overall volume and market share gains as its quality value proposition continues to resonate with consumers.
Brokers continues to be a steady growth engine with a long runway for volume growth and favorable pricing dynamics.
<unk> sales were consistent with the last quarter, but faced a tough comp from the previous year due to promotional activity.
Initial quicker loading.
Timing of Canadian paper deliveries and a discontinuation of a low margin product line in Canada.
Despite this transitory dynamic we're confident that the zig Zag brand continued to strengthen based on a number of factors we track.
Our sell through was better than our reported year over year results and we are encouraged by our wholesale customers and retail consumers response to our expanding portfolio, which includes corporate leaders and our recent new product introductions.
This is particularly true in our alternative channel, where zig zag and its growing portfolio efficiently built out our customers inventory to better satisfy the growing demand from consumers.
Both factors are expanding our addressable market.
We are having success not only winning new untapped alternative customers across the brick and mortar and alternative distributor network, where we are.
Also seeing existing all customers buying a more complete zig zag portfolio.
As a result, we've seen healthy increases in average order sizes across the alternative space, while providing the zig zag brand with more valuable shelf space and merchandising real estate within these stores to build brand awareness as we satisfy evolving in consumer preferences.
As you know the alternative channel has consistently expanding by virtue of additional states green lighting medical and recreational cannabis as.
As well as attempts to provide a better shopping experience for consumers.
In addition to more legal dispensaries in manufacturing and processing facilities.
Other retail outlets like head shops are dropping off this trend.
Our alternative <unk> business saw zig zag sales accelerate growing over 40% during the quarter.
We also continue to be proactive in optimizing our capital structure and Opportunistically purchased another 15 million notional of our convertible notes during the second quarter, bringing the total purchased as of the end of the quarter to $54 million, while maintaining a strong cash balance to help address future maturities.
Moreover, today, we announced the formation of a $75 million ABL revolving credit facility, which along with the cash on hand, and projected future free cash flow allows us to comfortably address the maturity of our convertible notes next summer.
Louis will discuss details later in the call.
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 Graham as discussed in prior quarters, our focus on growing the Zig Zag brand remains a critical element of our plan.
We continue to execute against our multiyear road map to solidify as exact as a lifestyle brand, especially in the alternative channel, which Graeme noted.
There is significant value of growing brand awareness trial and conversion and ultimately become on the banquet brand that a consumer is able to find anywhere.
As Glen mentioned, we had another strong quarter in our <unk> segment, which saw an acceleration in our core and white papers and current portfolio.
We saw a double digit increase in the number of customers and orders on our alternatives platform with a healthy increase in average order size.
We made significant progress across the business. This past quarter, we saw growth in every subcategory with the all channel, which includes head shops workshops dispensary, including Atlanta Mr.
Distributors cultivators manufacturers and processors.
Additionally, we are seeing increased engagement across our digital platforms.
Total online traffic sessions on our dedicated BDC site are up 33% in first year ago.
Our investment into organic as CEO. Since early 2020 has placed zig zag into an optimal situation across the digital atmosphere with over 10000, plus branded and non branded key terms, earning placement on page one of Google and various other search engine.
Let's focus on search engine optimization has driven and approximately 70% increase for the channel the organic search visitor ship since 2022.
We've also seen an increase in returning and repeat customer rates.
Further last quarter, we started the exciting news of Washington.
As part of our commitment to continuing to expand our sales channel.
As a reminder, unions as one of the largest brick and mortar specialty apparel stores with over 600 locations across the United States.
Due to successful progress in consumer interest and purchases. Thus far we have already had the opportunity to expand into additional stores.
We look forward to continuing to provide updates that showcase the momentum and efforts that support zig zag with growth.
Turning to Clipper, we continue to build consumer awareness through our efforts both in store and online.
<unk> and our social channels highlight that consumers are interested in the points of difference of clipper versus competitive lighter brand.
The way a significant and increasing engagement.
Throughout the quarter, we saw our social media followers growth total consumer impressions in constant interaction with growth driven in particular by showcasing the new features are quicker.
As noted in previous calls we believe this category is complementary to our existing business and we continue to see the synergies are coupling zig zag incorporate together with healthy demand for Zig Zag, Brandon Clipper later.
Moving to smokeless Graham covered the progress we continue to see for steelcase as more consumers are entering the stokers franchise because of the value proposition. We have continued to see more engagement with the brand across our digital properties.
Building. This engagement is an essential part of our strategy as we continue to see adult dippers transition is so great and remain with the brand over time.
We are also excited about our upcoming broader push on free.
The early receptivity and engagement has been encouraging thus far as our differentiated nicotine offerings are resonating with our customers and consumers.
In summary, we continue to focus on maximizing the value of our brands executing against the plan, we have established and growing our business with both our retail and consumer.
Continue to focus on maximizing the value of our world class brands and extensive distribution capabilities.
I'll now turn the call back over to Louis to go through our results.
Thank you summer.
Starting with our consolidated quarterly results.
Q3 sales were down five 6% to $101 7 million.
Gross margin was up 180 basis points to 57% due to segment and product mix.
Adjusted EBITDA was $24 4 million, which was stable from the previous year.
Going into the segment performance.
Zig Zag sales decreased 10, 2% year over year, $46 8 million, but stable sequentially.
Our U S papers and wrap the businesses were down due to promotional activities during the previous year period, but were up sequentially.
Our ecommerce business, particularly BTB alternative sales grew double digits.
Our Canadian and other smoking accessories categories saw declines during the quarter, primarily due to favorable timing of Canadian deliveries in the prior year period, and the discontinuation of our low margin third party product line, which impacted sales by $1 $8 million during the period.
Gross margins increased 330 basis points to 57, 2% during the quarter, driven primarily by product mix, including the impact of the clipper load during the prior year period, and the discontinuation of the low margin product lines.
Focused products net sales increased 10, 1% to $36 9 million in the quarter with a two.
Two 2% volume increase and seven 9% price mix increase.
Net sales for the MST portfolio grew double digits.
<unk> volume was up four 6% despite category volume down five 3%.
With share growing 70 basis points year over year to seven 8% during the quarter According to MSCI.
It is fair in store selling was up 70 basis points year over year to 10, 5% with focus now in stores, representing 67% of industry volumes, which still provides a long runway for growth.
<unk> sales were up low single digits from the previous year.
So Q2 was the number one brand in the quarter, gaining 220 basis points of share to 36% According to MSCI.
Overall ppb loosely volume was up <unk>, 4% versus the category, which declined three 1%.
Category performance was driven by a larger decline in premium loose leaf with tpb's volumes benefiting from customer trade down its focus volumes grew from the previous year.
Our free sales more than doubled off a low base as we started expansion of the product.
Gross margin increased 120 basis points to 55, 7%, primarily due to MSC pricing.
Moving to Cvs, which was restructured during the quarter to eliminate certain unprofitable businesses and focus on a narrower set of products to better position it as a standalone business.
Sales were 18.0 million.
Gross margin was 23, 8%.
Moving to our balance sheet.
We repurchased 15.01 billion notional value of our convertible bonds during the quarter.
We ended the quarter with $96 1 million of cash on the balance sheet.
We also closed on a 75 million ABL facility that provides the company with further flexibility and along with our cash on hand, and free cash flow generation ample liquidity to address the maturity of our remaining $118 $5 million convertible notes due July 2024.
We now have liquidity to allow us to reduce our net and gross leverage within a target two five to three five times range after addressing the convert.
Moving to guidance.
We now expect consolidated adjusted EBITDA of 92% to 95 million for fiscal year 2023, compared to our previous outlook of 90% to $95 million.
Other projections include effective income tax rate of 44% to 46%.
We now expect capex to be approximately $8 million compared to $30 million previously with the difference due to timing of payments related to our automation projects that are now scheduled for 2024.
We expect to spend $12 million to $15 million and capitalized software implementation costs related to our ERP and CRM implementation, which is still expected to be completed by the end of the year, although the timing of final payments may fall into 2024.
We currently expect to spend approximately $2 million for the full year on PMT as related to our modern rural products, which remain under review by the FDA.
Now, let me turn it back to Graham.
To conclude despite this year's challenges in particular navigating wholesale inventory reduction Zig Zag, Canada, and contending with some difficult comparisons related to last year's clipper load.
Feel good about the business, particularly our progress in the old channel and free.
We remain focused on demonstrating further progress for the balance of the year and into 2024.
Thank you for participating in the call today and with that I would like to open the call for your questions.
In order to ask a question press Star then the number one on your telephone keypad.
Your first question comes from the line of Vivien <unk>, Sir Your line is open.
Your line is open.
Sorry about that good morning.
Good morning Vivien.
So Glenn I wanted to follow up on your commentary on three certainly encouraging to hear given the robust trends that we're seeing from a segment level perspective, just so that we don't get over our skis in terms of the modeling how incremental do you think we should expect us to be in 2024.
Yes look I think.
Q4 is sort of the time of year, where we're we're sort of expanding out the foundation.
I think our expectation for the product is to look similar to stokers overtime as we compete against the large players in the category.
Our share gains are generally small and incremental over a period of time.
Certainly and there are some kind of geographic nuances to market share across the competitive landscape in the modern oral nicotine category. You can you speak to how you guys are thinking about targeting geographically to optimize your share opportunity.
Yes for us it's not necessarily.
Geographical focus on the product, it's really a store output focus on the products similar to some of the past practices. We've had with other categories, specifically stokers MST, we focus on the stores that have the highest volume.
Totally reasonable and maybe just pivoting to stoker. So obviously modern oral is weighing on.
The moist smokeless tobacco category broadly.
Continuing to consolidate share.
Which is great to see but can you comment at all on how you've seen the competitive pricing landscape evolve as competitors shifted their focus towards modern oral.
Yes.
Obviously, we keep a very close eye on it stokers, it's been a really nice success story for this to this company I think as of late you've seen some of the large competitors engage more strongly in the discount category.
So we're mindful of that but I think we would keep our head down which you focused on doing what we do we certainly believe in our unique proposition quality above all else.
With the value and of course, the tub is unique offering for the consumer and provides a unique value proposition.
We're mindful.
As the competitors sort of.
Sort out their go to market strategies, and we continue to focus on the things that we do well.
Yes.
Perfect I'll just squeeze one last one in on Zig Zag very nice margin expansion.
Louie some discontinued ops.
Which were helpful. But how should we think about and commented on product mix as well as the benefit but how should we think about channel mix as you continue to push towards nontraditional.
Alex Thanks.
Yeah from a gross margin perspective, obviously, we're agnostic in terms of where we're selling into but what we're seeing in the <unk> side is comparable to the gross margins that we're seeing on the core side.
Sure.
Okay. That's helpful. Thanks.
Your next question comes from the line of Michael Huang Your line is open.
Thanks, Good morning, congrats on the quarter.
Wanted to.
I think a little bit more into the Coca Cola occasion.
You think along you are with the 200 plus distribution outlets.
What type of penetration that we have so far where do we expect to get.
Yes, we haven't disclosed yet.
The stores that we are broken into Ics competitive Intel that we're keeping close guarded but I would say, though we disclosed before was that with the lighter market in the U K, there's about 500 million with about <unk>.
<unk>, having about 3% share of that market.
That level and building up as how I would think about it.
Okay.
Yeah.
Can you give us a little more detail on the fossil activity. We saw was an exact last year. Please.
I'm, sorry could you repeat it.
The promotional activity that you referred to last year that you compare zigzag sales too can you talk about what the promotional activity was and what type of.
Impact do you think that was.
Yes, so what we would we had said was last year in light of the inflationary environment.
<unk> tested some promotions.
Gauge kind of a customer's activity it ended up being stronger than we thought which led to that $5 million impact. So that was a combination of both the impact of those promotional activities as well as some timing of deliveries with one of our Canadian distributors last year. So those are the headwinds that we faced and we also mentioned.
This year.
We discontinued a.
Canadian product line and that was basically a low margin loss leader for our operators out there that was $1.8 million of impact we will have another one $4 million of that next quarters do you think about the model and then another.
In Q1.
If next year before we anniversary that comp.
This year, we didn't mentioned it earlier.
Earlier.
In our earlier commentary, but we also saw some destocking in Canada, which we think impacted sales by another one five.
$5 million during the quarter.
Okay great.
And then just on the all channel can you talk about how the penetration is occurring is it are they calling you is are you calling more.
Displacing anyone or was it just all growth.
Yes, I'm happy to take that question. This summer we continue to see exciting growth in the channel.
And I think to your question certainly goes both ways I was calling them, calling us, but I think even coming out of last night's exciting win in Ohio. If you think about that overall business opportunity when coupled with <unk> AC it means that nearly half of the United States has access to a legal rack market. So we continue to focus on getting <unk>.
More product into those customers that we saw great progress with our core paper line in the quarter. So not just growth based on innovative products and we continue to work on being more of a solutions provider for all of those customers.
Great. Thanks, guys congrats on the quarter.
Thanks, Brian.
Your next question comes from the line of Eric Dey Lawrie. Your line is open.
Great. Thanks for taking my questions.
First of all from Clipper on me.
So I understand.
To be a bit more tight lipped about exact distribution or whatnot I was wondering if you could maybe just help us understand what you are seeing with current inventory trade dynamics.
When do you expect sort of that headwind to perhaps turn into a tailwind in when youre kind of expecting.
Clipper sales too.
I guess resume some growth here.
Yes.
We've kind of said about click riskier initially or any new products. So you've got this low period, we had strong sales and then you go through this period.
Kind of a lull at the trade absorbs that inventory, we're in that low period today, and we expect kind of.
Sales kind of bounce back kind of as we enter 2024 and go through the year.
Okay.
And then.
On.
Free I'm wondering if you can just comment a bit more on the competitive positioning that you're expecting to kind of.
Rollout with that product.
You mentioned that the playbook is going to kind of follow stokers from a distribution standpoint, you know going after stores with with higher volume can you kind of.
Comment on the competitive positioning that you are planning on having with free as it relates to.
Price point is this another.
The kind of value product.
Similar to <unk>.
So while this strategy is similar to <unk> in terms of our approach and our growth expectations. We certainly are thinking about <unk> as a more of a premium offering.
We have strong belief in our point of difference, our USP, which has higher nicotine strengths options available for our consumers, which we continue to see resonate both in store and strong response online and plan to profitably compete in the segment against those big brands.
Alright Thats helpful.
Next question just on loose leaf understood it.
Smaller segment within within Stokers, because this was the first sort of returned to year over year growth that we saw in a while.
Is this something that we should kind of expect going forward do you feel that you're at sort of a.
Sort of sustainable path forward and I understand that.
The decline in category are you seeing anything to suggest that.
This year over year growth isn't just a.
Kind of one off this quarter or no real change to the overall kind of competitive dynamics within that.
I'd say, we've seen some accelerated share gains in.
In our loose leaf.
Especially with our discount loose-leaf operating out there that's seeing growth.
Wouldn't underwrite growth in this market going forward I would say, we are still expecting kind of a.
A sales perspective flattish to down.
The good news with loose leaf over time is as it has shrunk as a percentage of the overall storage business.
It was two thirds of our segment, whether you won't be IPO now, it's less than a third so it's having less.
The impact of sales with MST being the bigger driver going forward. So.
So obviously, we're happy with the growth that we saw in the quarter, but that is not our expectation for it.
Going forward.
That makes sense.
And then just last one from me.
Could you.
Perhaps expand a bit on the margin impact of the discontinued product line in Canada.
I guess, obviously there was some promotional activity over the past year or so we're now back up to that sort of 57% plus gross margin for Zig Zag is this more of a sustainable path or I guess sustainable level going forward or do you see a potential for some further margin gains now that this is.
This discontinued product line is phasing out.
Yes, I mean for the year I would say that one that 1.8 million came with single digit gross margins that has a decent impact.
So our gross margins were year over year perspective.
The thing is that as you mentioned clipper isn't a lull period now and you mentioned that was carry lower gross margins of clipper was down for us year over year perspective, as you were comping against the period, where we had that load last year. So our expectation is actually with some of the newer products that we have in this clip it takes off that that should.
That may reduce our gross margins over time, but again, our focus within the Zig Zag segment is increasing our gross profit dollars and leveraging the fixed cost you have in that segment.
So our operating income.
So we're not so focused on maintaining that gross margin levels, especially if we can get growth out of <unk>.
Flipper in some of our newer products. So we are entering the market with.
That totally makes sense thanks for the questions.
There are no further questions at this time Graham Purdy I will turn the call back over to you.
Alright, Thanks, operator, I appreciate everybody joining us for the call today, and we look forward to talking to you in about another quarter from now thank you so much.
And this concludes today's conference call you may now disconnect.
Please wait the conference will begin shortly.
Sure.
Sure.
[music].
Okay.
Yes.
[music].
Yes.
Okay.
Okay.
Thank you.
[music].