Q1 2024 Turning Point Brands Inc Earnings Call
Operator: Good morning, and welcome to Turning Point Brands' first quarter 2024 earnings conference call. All participants are in a listen-only mode. After the speaker's presentation, we will conduct a question and answer session. To ask a question, you'll need to press the star followed by the number one on your telephone keypad. As a reminder, this conference call is being recorded. I would now like to turn the call over to Graham Purdy, Chief Executive Officer.
Good morning, and welcome to turning brand turning point brands first quarter 'twenty 'twenty four earnings conference call.
Graham A. Purdy: All participants are in a listen only mode. After the speaker's presentation, we will conduct a question answer session.
Operator: To ask a question you will need to press star followed by the number one on your telephone keypad.
Graham A. Purdy: As a reminder, this conference call.
Graham A. Purdy: Part of it.
Graham A. Purdy: Thank you. Good morning, everyone. This is Graham Purdy, Chief Executive Officer. Joining me are Turning Point Brands' new CFO Andrew Flynn and Chief Revenue Officer Summer Frein. I want to wish a special welcome to Andrew. Please understand that he didn't join the company until immediately after the March quarter concluded, so please take it easy on him.
Operator: I would now like to turn the call over to Graham Purdy Chief Executive Officer. Thank you. Please go ahead.
Andrew Flynn: Thank you good morning.
Graham A. Purdy: Everyone. This is Graham Purdy Chief Executive Officer.
Graham A. Purdy: Joining me are turning point brands', new CFO, Andrew Flynn, and Chief revenue Officer Summer frame.
Graham A. Purdy: I want to wish a special welcome Andrew.
Graham A. Purdy: Please understand that he didn't joined the company until immediately after the March quarter concluded. So please take it easy on him.
Andrew Flynn: Thank you, Graham. Good morning. It's great to be with you today. First, I want to thank the entire organization for the opportunity. I'm thrilled to join the company and lend my support, given my experiences at both Connected Cannabis and Juul Lab. Second, although it's early in my journey here, I've been impressed by the management team and the strength of our brand. Over the past few weeks, I've been highly engaged in getting up. My early conclusions are that we have a strong foundation to build on, and I am excited to capitalize on our opportunities ahead to help build stakeholder value. I look forward to sharing more in the coming quarters.
Andrew Flynn: Thank you Graham good morning, it's great to be with you today.
Andrew Flynn: First I want to thank the entire organization pretty opportunities I'm thrilled to join the company and lend my support given my experiences at both connected cannabis in Juul labs.
Andrew Flynn: Second while early in my journey here I've been impressed by the management team and the strength of our brands.
Andrew Flynn: Over the past few weeks I've been highly engaged in getting up to speed. My early conclusions are that we have a strong foundation to build on and I am excited.
Andrew Flynn: To capitalize on our opportunities ahead to help build stakeholder value I look forward to sharing more in the quarters ahead with that let's dive into the quarter.
Summer Frein: With that, let's dive into the quarter. This morning, we issued a news release covering our Q1 results. This release is located in the Investor Relations section of our website at www.turningpointbrands.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 and cautionary statements in today's press release and the risk factors in our filings with the Securities and Exchange Commission. On the call today, we will reference certain non-GAAP financial measures.
Andrew Flynn: These measures, and Reconciliations to Gas, can be found in today's earnings release, along with reasons why management believes that they provide useful information. I will now turn the call over to our CEO, Graham Purdy. Thanks, Andrew.
Summer Frein: This morning, we issued a news release covering our Q1 results. This release is located in the IR section of our website at Www Dot turning point brands Dot com.
Andrew Flynn: 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.
Andrew Flynn: As is 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 Securities and Exchange Commission.
Andrew Flynn: On the call today, we will reference certain non-GAAP financial measures. These measures and reconciliations to GAAP can be found in today's earnings release, along with reasons why management believes that they provide useful information.
Andrew Flynn: I will now turn the call over to our CEO Graham Purdy.
Graham A. Purdy: Thanks, Andrew.
Graham A. Purdy: With all that said, good morning, everyone, and thank you for joining our call. Our first quarter results were in line with, and in some cases better than, our expectations and demonstrated continued progress against our plan. Adjusted EBITDA increased 21.6% to $25.3 million for the quarter. During the March quarter, ZigZag performed very well, with revenue up 11.5% to $46.7 million, driven by strong double-digit growth in our ZigZag papers and alternative channel business.
Graham A. Purdy: With all that said good morning, everyone and thank you for joining our call.
Graham A. Purdy: Our first quarter results were in line with and in some cases better than our expectations and demonstrated continued progress against our plan.
Graham A. Purdy: Adjusted EBITDA increased 21, 6% to $25 3 million for the quarter.
Graham A. Purdy: During the March quarter, Zigzag performed very well with revenue up 11, 5% to $46 7 million driven by strong double digit growth in our zig Zag papers and alternative channel business.
Graham A. Purdy: As we mentioned last quarter, we think we're past the noise associated with the trade inventory rationalizations we discussed last year, and we anticipate the backdrop is favorable for growth in 2024, and we demonstrated just that in Q1. We are encouraged by our wholesale customers and retail customers' response to our expanding portfolio and some of our recent new product introductions. We remain committed to our alternative channel strategy and are efficiently filling out our customer's portfolio to better satisfy the growing and evolving demand from end consumers.
Graham A. Purdy: As we mentioned last quarter, we think we're past the noise associated with the trade inventory rationalizations, we discussed last year.
Graham A. Purdy: Dissipate the backdrop is favorable for growth in 2024, and we demonstrated just that in Q1.
Graham A. Purdy: We are encouraged by our wholesale customers and retail customers response to our expanding portfolio and some of our recent new product introductions.
Graham A. Purdy: We remain committed to our alternative channel strategy, and our efficiently filling out our customers' portfolio to better satisfy the growing and evolving demand for many consumers.
Graham A. Purdy: 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. But we are also seeing existing alt customers buying a more complete ZigZag portfolio. As a result, we've seen healthy increases in average order sizes across the alternative space while providing the ZigZag brand with more valuable shelf space and merchandising real estate within these stores to build brand awareness as we satisfy evolving consumer preferences.
Graham A. Purdy: Those factors are expanding our addressable market.
Graham A. Purdy: We're having success not only winning new untapped alternative customers across the brick and mortar and alternative distributor network.
Graham A. Purdy: We're also seeing existing old customers buying a more complete zig zag portfolio.
Graham A. Purdy: 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 consumer preferences.
Graham A. Purdy: Considering that many of our competitors offer far fewer SKUs than ZigZag, we're finding that the Alt Channel is actively looking for partners that provide service above and beyond ordinary fulfillment. And we're one of the few companies that can truly meet the needs of the evolving end customer. In addition to our full suite of product offerings from a well-known brand like Zig Zag, including papers, cones, accessories, and apparel, there is a growing appetite to sell our wraps, cigars, and modern oral nicotine in stores and distributors that cater to this growing market.
Graham A. Purdy: Considering that many of our competitors offer far fewer skus and Zig Zag, we're finding that the old channel is actively looking for partners that provide service above and beyond ordinary fulfillment and we were one of the few companies that can truly meet the needs of the evolving in customer.
Graham A. Purdy: In addition to our full suite of product offerings from a well known brand like zigzag from papers combs accessories and apparel.
Graham A. Purdy: There is a growing appetite to sell our wraps cigars and modern oral nicotine in stores and distributors that cater to this growing channel.
Graham A. Purdy: As you know, the alternative channel is consistently expanding by virtue of additional states greenlighting medical and recreational cannabis, as well as attempts to provide a better shopping experience for consumers, in addition to more legal dispensaries and manufacturing and processing facilities. Other retail outlets like head shops are drafting off this trend; our alternative B2B business saw continued momentum in Q1, accelerating from the growth we saw throughout 2023, growing over 60% in the quarter. Moving to Stokers
Graham A. Purdy: As you know the alternative channel has consistently expanding by virtue of additional states green lighting medical and recreational cannabis as well as attempts to provide a better shopping experience for consumers.
Graham A. Purdy: In addition to more legal dispensaries in manufacturing and processing facilities.
Graham A. Purdy: Other retail outlets like head shops are drafting off this trend.
Graham A. Purdy: Our alternative <unk> business saw continued momentum in Q1 accelerating from the growth we saw throughout 2023 growing over 60% in the quarter.
Graham A. Purdy: During the quarter, Stokers revenue increased 8% to $36.4 million, reflecting a 4.6% decline in loose late and a 6.7% increase in MST. Please recall that for the fourth quarter of 2023, we called out a likely unsustainable 18.6% increase in total Stoker revenue. We continue to be pleased with the market share increases for Stokers, which continues to be a steady growth engine with a long runway for volume growth and favorable pricing dynamics.
Graham A. Purdy: Moving to stokers during the quarter Stokers revenue increased 8% to $36 4 million, reflecting a four 6% decline in loosely.
Graham A. Purdy: And a six 7% increase in MST.
Graham A. Purdy: Please recall that for the fourth quarter of 2023, we called out a likely unsustainable 18, 6% increase in total stokers revenue.
Graham A. Purdy: We continue to be pleased with the market share increases for stokers, which continues to be a steady growth engine with a long runway for volume growth and favorable pricing dynamics.
Graham A. Purdy: We're pleased with the market's enthusiastic response to the beginning of our national launch of free, our modern oral, so-called white pouch product. As you can appreciate, given that we are in the early innings of growing our presence in this category, we will limit specific operating metrics around free. However, we are seeing positive momentum, and we are excited about the opportunity to make free a material contributor to revenue and profit growth in the Stoker segment.
Graham A. Purdy: We are pleased with the market's enthusiastic response to the beginning of our national launch of free our modern oral so called white pouch products.
Graham A. Purdy: As you can appreciate given that we are in the early innings of growing our presence in this category, we will limit specific operating metrics around free.
Graham A. Purdy: We are seeing positive momentum and we're excited about the opportunity to make free a material contributor to revenue and profit growth in the <unk> segment.
Graham A. Purdy: We're buoyed by a category that's already worth over $2 billion in annual wholesale revenue and grew over 50% last year, per MSAI. We are currently focusing on prudently ramping up our sales and distribution efforts to achieve steady growth over time. We are leveraging our sales and distribution expertise to profitably expand Free's profile and store count similar to what we have achieved with Stoker's MST over time. In addition to our traditional channel, we're also seeing demand for our free modern oil nicotine products in alternative channels, even if many of these stores don't sell traditional tobacco products.
Graham A. Purdy: Buoyed by a category that's already worth over $2 billion in annual wholesale revenue and grew over 50% last year for MSCI.
Graham A. Purdy: We're currently focusing on prudently ramping up our sales and distribution efforts to achieve steady growth over time.
Graham A. Purdy: We are leveraging our sales and distribution expertise to profitably expand <unk> profile on store count similar to what we achieved with stokers MST overtime.
Graham A. Purdy: In addition to our traditional channel.
Graham A. Purdy: We're also seeing all channel demand for our free modern oral nicotine products.
Graham A. Purdy: Even if many of these stores don't sell traditional tobacco products.
Graham A. Purdy: I mention this because the dynamic may not be intuitive for some of you, but it speaks volumes to the synergies that TPB brings to bear with our world-class sales, service, and distribution platforms. We look forward to providing updates on this exciting new product in the quarters and years to come, given our solid start to the year. We are reaffirming our guidance for projected 2024 adjusted EBITDA in the range of 95 to 100 million.
Graham A. Purdy: I mentioned this because of the dynamic may not be intuitive for some of you, but it speaks volume to the synergies the TPB brings to bear with our World class sales service and distribution platform.
Graham A. Purdy: We look forward to providing updates on this exciting new product in the quarters and years to come.
Graham A. Purdy: Given our solid start to the year.
Graham A. Purdy: We are reaffirming our guidance for projected 2024, adjusted EBITDA in the range of <unk> $95 million to $100 million.
Graham A. Purdy: Of note, our guidance range contemplated no contribution from CVS, which generated approximately 600,000 of adjusted EBITDA during the first quarter and about 2 million full-year EBITDA in 2023. A reminder that last year we closed on our ADL facility, which, with cash on hand and free cash flow generation, gives us ample liquidity to address our convert maturity this summer while providing flexibility for capital deployment. With that, I will hand the call over to Summer to walk through some progress and results on some of our specific go-to-market initiatives.
Graham A. Purdy: Of note our guidance range contemplated no contribution from Cvs, which generated approximately 600000 of adjusted EBITDA during the first quarter and about $2 million full year EBITDA in 2023.
Summer Frein: A reminder, that last year, we closed on our ABL facility, which with cash on hand, and free cash flow generation gives us ample liquidity to address our convert maturity this summer, while providing flexibility for capital deployment.
Graham A. Purdy: 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.
Summer Frein: Thank you, Graham. Throughout Q4, we continue to further zigzag position as a lifestyle brand by executing against our multi-year roadmap. Our focus on growing ZigZag's portfolio and the alternative channel while increasing the brand's ubiquity remains a core tenant of that plan. As Graham noted, ZigZag posted a strong quarter fueled by our papers and a record quarter for our alternative B2B channel. Within Alternative B2B, our focus on penetrating cannabis-first points of distribution from organized MSOs into dispensaries, manufacturers, and head shops and smoke shops continues to be a strong barometer for the underlying growth in the industry and, as importantly, our commitment to capitalize on this secular trend.
Summer Frein: Thank you Graham throughout Q4, we continued to further his exact position as a lifestyle brand by executing against our multiyear road map.
Summer Frein: Our focus on growing the bank portfolio in the alternative channel, while increasingly brand ubiquity remain a core tenant of that plan.
Summer Frein: As Graeme noted the exact posted a strong quarter fueled by our papers and a record quarter for our alternative beta being channel.
Summer Frein: We then alternative beta B, our focus on penetrating candidates first points of distribution from organized msos into century manufacturers at the head shops, and small shops continues to be a strong barometer for the underlying growth in the industry and as importantly, our commitment to capitalize on the secular trend.
Summer Frein: To further Zigzag's growth as a lifestyle brand that resonates with our ever-evolving consumer base, the brand created numerous engaging opportunities throughout the quarter. Beginning with Valentine's Day, ZigZag partnered with 30-plus celebrities by hand-delivering custom flower bouquets that integrated ZigZag's rose cones into a bouquet design. Our rose cones continue to be a popular addition to the portfolio, which we are leaning into and providing the brand with meaningful opportunities such as this. The most notable event for the quarter, however, was coming together with the world's largest hip-hop and rap music festival, Rolling Loud, which celebrated its 10-year anniversary this year. Across four days, thousands and thousands of music lovers came together to embrace the festival's culture.
Summer Frein: To further <unk> growth as a lifestyle brand that resonates with our ever evolving consumer base the brand created numerous engaging opportunities throughout the quarter.
Summer Frein: Beginning with Valentine's day, and the exact partnered with 30, plus celebrities by hand, delivering custom flower bouquet, which integrated the exact growth NCI potatoes items are.
Summer Frein: Our roads.
Summer Frein: To be a popular additions to the portfolio, but we are leaning into and provide the brand with meaningful opportunities such as that.
Summer Frein: The most notable event for the quarter, However was coming together with the world's largest hip hop and rock Music Festival, Rolling loud, which celebrated its 10 year anniversary this year.
Summer Frein: Across four days, thousands and thousands of music library came together to embrace the festival called charter.
Summer Frein: Zigzag worked with over 90 celebrity partners by developing custom Zigzag and Rolling Loud merchandise and working with nearly 200 influencers to promote the partnership during the four-day event. Alongside signage across all digital screens in the venue, ZigZag had a custom 40x40 pop-up shop that invited attendees to interact with the brand. Sample and purchase products as well as learn more about ZigZag's history and future. We look forward to continuing to provide updates that highlight the momentum and efforts that support ZigZag's growth.
Summer Frein: I've worked with over 90 celebrity partners by developing custom Zig Zag, and rolling loud merchandise and working with nearly 200 influencers to promote the partnership during the four day event.
Summer Frein: Among signage across all digital screens in the venue Zig Zag had accustomed 40 by 40 pop up shop that invited attendees to interact with the brand sample and purchase products as well as learn more about the exact history and future.
Summer Frein: We look forward to continuing to provide updates that highlight the momentum in efforts that support zick demographics.
Summer Frein: Turning to Stokers, we are pleased with the results, especially coming off of a strong Q4. We are focused on continuing to expand distribution for the brand and continue to see the brand resonate with consumers, particularly given the evolving macroeconomic backdrop. For free, our sales and marketing organizations are keenly focused on building a brand that will resonate with consumers for the long term. We made progress in the quarter across both brick-and-mortar stores and digital marketplaces, both our own B2C and other parties' websites.
Summer Frein: Turning to <unk>, we are pleased with the results, especially coming off of a strong Q4, we are focused on continuing to expand distribution for the brand and continue to see the brand resonate with consumers, particularly given the evolving macroeconomic backdrop.
Summer Frein: For free or sales and marketing organizations are keenly focused on building a brand that will resonate with consumers for the long term.
Summer Frein: We made progress in the quarter across both brick and mortar stores and digital marketplaces, both our own D to C and other parties website.
Summer Frein: In addition to the traditional brick and mortar channel, which we know well, we've been building our e-commerce business for an extended period of time, enabling us to be closer to the end consumer. We continue to see month-over-month revenue increases and impressive returning consumer metrics on our B2C site. The receptivity and engagement from our trade partners and from consumers continues to reinforce that our product quality, moisture content, pouch size, and differentiated nicotine offerings are a powerful selling proposition.
Summer Frein: In addition to the traditional brick and mortar channel, which we know well we have been building our e-commerce business for an extended period of time, enabling us to be closer to the end consumer.
Summer Frein: We continue to see month over month revenue increases and impressive returning consumer metrics on our beta site.
Summer Frein: The receptivity and engagement from our trade partners and with consumers continues to reinforce our product quality moisture content pouch size and differentiated nicotine offering are a powerful selling proposition.
Summer Frein: In summary, we continue building our brands for the long term, executing against the plan we've established, and growing our business at retail and with our consumers. We will continue to focus on maximizing the value of our world-class brands and strengthening our extensive distribution capabilities. I will now turn the call back over to Andrew to go through our results.
Summer Frein: In summary, we continue building our brands for the long term executing against the plan, we've established and growing our business in retail and with our consumer.
Andrew Flynn: We will continue to focus on maximizing the value of our world class brands and strengthening our extensive distribution capabilities.
Summer Frein: Let me now turn the call back over to Andrew to go through our results.
Andrew Flynn: Thank you, Summer. Starting with our consolidated quarterly results. Q1 sales were down 3.9% to $97.1 million, which is flat on a sequential basis. Excluding CDS, overall revenue was up 10%. Gross margin was up 530 basis points to 53.5% due to favorable segment and product performance. Adjusted EBITDA was up 21.6% to $25.3 million, going into segment performance. Zigzag sales increased 11.5% year-over-year to $46.7 million due to strength in our papers business and continued penetration of the alt channel, as mentioned. As noted, the alternative B2B channel had a strong quarter. This is critical, given our aim to be everywhere our consumer is.
Andrew Flynn: Thank you summer starting with our consolidated quarterly results.
Andrew Flynn: Q1 sales were down three 9% to $97 1 million, which is flat on a sequential basis.
Andrew Flynn: Excluding CFS overall revenue was up 10%.
Andrew Flynn: Gross margin was up 530 basis points to 53, 5% due to favorable segment and product mix.
Andrew Flynn: Adjusted EBITDA was up 21, 6% to $25 3 million.
Andrew Flynn: Going into the segment performance.
Andrew Flynn: <unk> sales increased 11, 5% year over year to $46 $7 million due to strength in our papers business and continued penetration of the <unk> channel as mentioned.
Andrew Flynn: As noted the alternative <unk> channel had a strong quarter. This.
Andrew Flynn: This is critical given our aim to be everywhere, our consumers and we couldnt be more pleased with the job. The team is doing to expand the depth and breadth of our distribution to this important channel.
Andrew Flynn: And we couldn't be more pleased with the job the Alt team is doing to expand the depth and breadth of our distribution to this important channel. However, our community and business provide an approximate $800,000 headwind due to the previously mentioned discontinuation of a low-margin, third-party product. Gross margins increased 550 basis points to 59% during the quarter. This was driven primarily by product mix, including the discontinuation of the low-margin product mix. Stoker's net sales increased 8% to $36.4 million in the quarter, with a 0.2% volume increase and 7.9% price-mix increase.
Andrew Flynn: Our Canadian business provide an approximate $800000 headwind Q.
Andrew Flynn: Due to previously mentioned discontinuation of low margin third party product line.
Andrew Flynn: Gross margins increased 550 basis points to 59% during the quarter. This was driven primarily by product mix, including the discontinuation of low margin product lines.
Andrew Flynn: Stokers net sales increased 8% to $36 $4 million in the quarter with a 2% volume increase and seven 9% price mix increase.
Andrew Flynn: Net sales for the MST portfolio grew 6.7%, and Stoker's volume was up 1.2% despite category volume being down 8.5%, with share growing 70 basis points year-over-year to 7.1% during the quarter, according to MSAI. Its share in store selling was up 100 basis points year over year to 10.7%. The Stoker is now in stores representing approximately two-thirds of industry volumes, which still provides a long runway for growth. Although sales were down mid-single digits from the previous year, Sokers Chew was the number one chewing brand in the quarter, gaining 140 basis points of share to 31.1%, according to MSAI.
Andrew Flynn: Net sales for the MST portfolio grew six 7%.
Andrew Flynn: Stokers volume was up one 2% despite category volume down eight 5% with.
Andrew Flynn: With share growing 70 basis points year over year to seven 1% during the quarter. According to <unk> AI.
Andrew Flynn: Its share in stores selling was up 100 basis points year over year to 10, 7%.
Andrew Flynn: The stokers now in stores, representing approximately two thirds of industry volumes, which still provides a long runway for growth.
Andrew Flynn: <unk> sales were down mid single digits from the previous year.
Andrew Flynn: <unk> was the number one chewing brand in the quarter, gaining 140 basis points of share to 31, 1% According to MSCI.
Andrew Flynn: Overall, TPB loose leaf volume was down 5.2%, still beating category volume declines of 6.9%. Category performance was driven by a larger decline in premium loose leaf, with TPBs volume benefiting from consumer trade down as stokers volumes grew from the previous year. Our free sales more than tripled off a low base as we continue national distribution of the product. Gross margin declined 60 basis points to 57.2%, primarily due to product mix, somewhat offset by MSD pricing gains. Moving the CD out.
Andrew Flynn: Overall, PPD loose leaf volume was down five 2% there'll be in category volume declines of six 9% cap.
Andrew Flynn: Category performance was driven by a larger decline in premium loose leaf with Tpb's volume benefiting from consumer trade down as stokers volumes grew from the previous year.
Andrew Flynn: Our free sales more than tripled off a low base as we continue national distribution of the product.
Andrew Flynn: Gross margin declined 60 basis points to 57, 2%.
Andrew Flynn: Primarily due to product mix somewhat offset by MSC pricing gains.
Andrew Flynn: Moving to Cvs.
Andrew Flynn: Sales were $14 million, gross margin was 25.4%, and adjusted EBITDA was approximately $600,000. Now on to the balance sheet. We ended the quarter with just over $130 million of cash on the balance sheet, and as of today, we have sufficient cash to address the maturity of our remaining $118.5 million of convertible notes due July 2024. With our projected free cash flow generation this year, we are well within our previously discussed historical leverage range and are comfortable with our liquidity to enable shareholder value. On to guidance. This morning, we are reaffirming our expectation of consolidated adjusted EBITDA of $95 to $100 million. Other projections include an effective income tax rate of 23 to 26 percent.
Andrew Flynn: Those were $14 million gross margin was 25, 4%.
Andrew Flynn: Adjusted EBITDA was approximately $600000.
Andrew Flynn: Now onto the balance sheet.
Andrew Flynn: We ended the quarter with just over $130 million of cash on the balance sheet and as of today, we have sufficient cash to address the maturity of our remaining $118 $5 million.
Andrew Flynn: Convertible notes due July 2024.
Andrew Flynn: With our projected free cash flow generation. This year, we are well within our previously discussed historical leverage range and are comfortable with our liquidity to enable shareholder value.
Andrew Flynn: On to guidance. This morning, we are reaffirming our expectation of consolidated adjusted EBITDA of $95 million to $100 million.
Andrew Flynn: Other projections include effective income tax rate of 23% to 26% we.
Andrew Flynn: We expect capex to be approximately $15 million this year.
Graham A. Purdy: We expect CapEx to be approximately $15 million. We currently expect to spend approximately $4 million for the full year to supplement our PMTAs related to our modern oral products, which remain under review by the FDA. Now, let me turn it back over to Graham, to conclude. We feel like we're off to a solid start to the year, with ZigZag Returning to Growth. Our ongoing solid performance at Stoker and encouraging early signs from our national launch of free. With that, I'll turn it over to questions.
Andrew Flynn: We currently expect to spend approximately $4 million for the full year to supplement our PMT as related to our modern oral products, which remain under review by the FDA.
Graham A. Purdy: Now, let me turn it back over to Graham.
Graham: To conclude we.
Graham A. Purdy: We feel like we're off to a solid start to the year.
Graham A. Purdy: With zigzag returning to growth.
Graham A. Purdy: Ongoing solid performance at stokers.
Graham A. Purdy: And encouraging early signs from our national launch of free.
Graham A. Purdy: With that.
Graham: I'll turn it over to questions.
Operator: If you would like to ask a question, please press star followed by the number one on your telephone keypad. Our first question will come from Eric DeLaurier from Craig Hallam Capital Group. Please go ahead; your line is open.
Speaker Change: If you would like to ask a question. Please press star followed by the number one on your telephone keypad.
Eric Des Lauriers: Our first question will come from Erik <unk> from Craig Hallum Capital Group. Please go ahead. Your line is open.
Eric Des Lauriers: Great, thank you for taking my questions and congratulations on the strong results here. The first one's just a clarifying question from me. So you highlighted B2B growth of 60% within ZigZag, and I just wanted to clarify, is that all the alternative channel, or is there some other B2B business in the traditional channel?
Eric Des Lauriers: Great. Thanks for taking my questions and congrats on the strong results here.
Eric Des Lauriers: So first one first one just a clarifying question for me.
Eric Des Lauriers: So you highlighted a b to b growth of 60% within Zig Zag and I just wanted to clarify is that all the alternative channel or is there some other <unk> business in the traditional channel.
Graham A. Purdy: Yeah, that's all the alternative channels.
Speaker Change: Yes, that's all the alternative channel.
Graham A. Purdy: That's very impressive. Within the Alternative Channel, just kind of sticking with ZigZag here, so it seems like, you know, you've obviously made great progress over the past few years, sort of getting into these new doors, and you've commented a bit on some of the competitive dynamics in terms of gaining shelf space, and I'm just wondering if you could expand on those a bit, kind of talk about, you know, how your products or your offerings kind of stack up against the sort of evolving competitive set here.
Graham A. Purdy: Very impressive.
Graham A. Purdy: Within the alternative channel just kind of sticking with Zig zag here. So it seems like <unk>.
Graham A. Purdy: You've obviously made great progress over the past few years.
Graham A. Purdy: Sort of getting into these new doors.
Graham A. Purdy: And you've commented a bit on some of the competitive dynamics in terms of gaining shelf space I'm. Just wondering if you could expand on those a bit kind of talk about.
Graham A. Purdy: How your products.
Graham A. Purdy: Are your offerings kind of stack up against the.
Graham A. Purdy: I think you mentioned you guys feel pretty well positioned in terms of the number of SKUs, but any additional color in terms of SKU counts or service levels or just the overall competitive dynamics or opportunities you see to sort of increase and share within this Alternative Channel thing? Yeah, sure. Thanks, Eric, for your question. I think it's important.
Graham A. Purdy: <unk> sort of evolving.
Graham A. Purdy: <unk> sat here I think you mentioned you guys feel pretty well positioned in terms of number of Skus, but just.
Speaker Change: Any additional color in terms of.
Speaker Change: SKU counts or service levels or just the overall competitive dynamics or opportunities you see to sort of increasing share within this alternative channel. Thanks.
Graham A. Purdy: I think it's important to note from a year-over-year perspective. You might remember that, from a comp perspective, we're benefiting from a level set from some trade dynamics from last year, but still, the projections for zigzag are in line with our expectations if you take that out of it. In terms of the portfolio, as you know, we continue to monitor what consumers are interested in as the category evolves and stay ahead of those consumer expectations and really balance that against the profitability of introducing new products into the market so we can continue to generate new news for zigzag. We introduced, you know, some products earlier this year and have a number on the horizon, but it's something we're continuing to really make sure that we're in line with the consumer and where they're going.
Graham A. Purdy: Yeah, sure. Thanks, Eric, for your question.
Speaker Change: Yeah sure. Thanks, Eric for your question I think it's important to know from a year over year perspective, you might remember that.
Graham A. Purdy: Benefits from a comp perspective, just to level set pharmacy trade dynamics from last year, but still the projections for zig zag or in line with our expectation if you take that out of it in terms of the portfolio. As you know we continue to monitor what consumers are interested in as the cat.
Graham A. Purdy: Ori is evolving and staying ahead of those consumer expectation and really balancing that against the profitability of introducing new products into the market. So we can continue to generate new news for Zig Zag.
Graham A. Purdy: We introduced some products earlier this year and have a number on the horizon, but it's something we're continuing to.
Graham A. Purdy: We only make sure that were in line with the consumer and where Theyre going.
Michael Frederick Legg: Our next question will come from Michael Legg from The Benchmark Company. Please go ahead; your line is open.
Graham A. Purdy: Our next question will come from Michael Legg from the Benchmark Company. Please go ahead. Your line is open.
Michael Frederick Legg: Thanks. Good morning. Great quarter, guys. [inaudible] Can you talk a little bit about the margin impact and the zigzag segment from, you know, the clipper stocking last year, where we are today, and how much of the margin improvement is from the elimination of the clipper stocking versus margin improvement overall?
Michael Frederick Legg: Thanks, Hey, good morning, great quarter guys.
Michael Frederick Legg: Okay.
Michael Frederick Legg: Michael.
Michael Frederick Legg: Can you talk a little bit about the margin impact.
Michael Frederick Legg: <unk> segment.
Michael Frederick Legg: The clipper stocking last year, where we are today, how much of the margin improvement is from the elimination of the clipper stocking versus <unk>.
Michael Frederick Legg: Margin improvement overall.
Graham A. Purdy: Yeah, look, Mike, I think it's challenging from a year over year perspective, given that, you know, the majority of what happened in Q1 last year was impact around our high-margin items in our traditional convenience store channel. And so this year, obviously, we didn't have that same headwind from a marginal perspective. So it's really just the catch up on, you know, the year-over-year comp with, you know, more paper sales, and more wrap sales versus year-over-year.
Speaker Change: Yes look Mike I think.
Michael Frederick Legg: It's challenging from a year over year perspective, given that.
Graham A. Purdy: The majority of what happened in Q1 last year was.
Graham A. Purdy: His impact around our high margin items, and our traditional convenience store channel.
Graham A. Purdy: So this year, obviously, we didn't have that same headwind from a marginal perspective. So it was really just the catch up on.
Graham A. Purdy: No.
Graham A. Purdy: The year over year comp with more paper sales more more wrap sales versus year over year.
Graham A. Purdy: Okay, good. So do you think it's sustainable at these levels?
Speaker Change: Okay great.
Graham A. Purdy: Or do you think its sustainable at these levels.
Graham A. Purdy: I think our expectation is that, you know, where the margins sit with Zig Zag, you know, for our core portfolio, we feel pretty good about it.
Speaker Change: I think our expectation is that.
Graham A. Purdy: The margins set with with exact guidance for our core portfolio, we feel pretty good about.
Graham A. Purdy: And then I want to talk a little bit about all-channel penetration. How much of that is in existing dispensaries, all-channel, versus new ones that are opening up? Where's the growth coming from?
Speaker Change: Okay, Great and then I wanted to talk a little about the all channel penetration how much of that is an existing dispensaries all channels versus new ones that are opening up where's the growth coming from.
Graham A. Purdy: Yeah.
Graham A. Purdy: Yeah, I would highlight that the growth from the quarter is coming from a bit of both. I think the primary benefit that we saw in the quarter was really these alternative customers expanding their portfolio and getting more skews on the shelf. But certainly, a portion of that was also driven by entering into new customer stores as well.
Speaker Change: Yes, I would highlight that the growth from the quarter is coming from a bit of both I think the primary benefit that we saw in the quarter was really these.
Graham A. Purdy: Alternative customers expanding their portfolio getting more skus on shelf, but certainly a portion of that was also driven by entering into new customer storage and cloud.
Graham A. Purdy: I know you're not giving out much data on free, and I think I heard it tripled from the low base this quarter, but can you just talk about what you may have seen in focus groups with the product? I know your product has a higher dose, and it has more packs per container. Can you just talk about what you're hearing from the consumer when you do focus groups on that?
Speaker Change: Okay, Great just wanted to I know, you're not getting that much that I'm afraid.
Graham A. Purdy: I think I heard it tripled from a low base in this quarter, but can you just talk about what you might have seen in focus groups with the product I know your product has a higher dose it has more packs.
Graham A. Purdy: For container you just talk about what you're hearing from the consumer when they do focus groups on that.
Graham A. Purdy: Yeah, I think that, you know, as we pointed out earlier, that our point of differentiation entering the market was, you know, more satisfaction, if you will. I think what we're starting to hear from consumers is that they're pleased with the mouthfeel of the product as well. It's designed to touch differently than the analog products that are on the market.
Speaker Change: Yes, I think that.
Graham A. Purdy: As we pointed out earlier to that.
Graham A. Purdy: Our point of differentiation and are entering the market was.
Graham A. Purdy: More satisfaction, if you will I think what we're starting to hear from consumers is that they.
Graham A. Purdy: We're pleased with the mouth feel of the product as well, it's designed to touch differently than than the analog products that are on the market.
Graham A. Purdy: We continue to get great feedback from our consumers and we've got a really nice window in with our direct to consumer website on free pouch Dot com.
Graham A. Purdy: And we continue to get great feedback from our consumers. We've got a really nice window with our direct-to-consumer website on freepouch.com, you know, where consumers are pretty active in terms of providing us feedback. And as you'll note, with online platforms, generally, you know, consumers are quick to complain but not as quick to provide positive feedback. And we're seeing a lot of positive feedback relative to this product. I think, interestingly, the trade situation that we're in right now is very receptive to new products on the shelf, and we're excited about the ramp in our traditional convenience stores.
Graham A. Purdy: Consumers are pretty active in terms of providing us feedback.
Graham A. Purdy: As you'll note with online platforms generally consumers.
Graham A. Purdy: Our quick to complain, but not as quick to provide positive feedback and we're seeing a lot of positive feedback relative to the product I think interestingly the.
Graham A. Purdy: Trade situation that we're in right now is very receptive to new products on shelf and we're excited about the ramp.
Graham A. Purdy: Traditional convenience stores.
Graham A. Purdy: Okay, great. And then just one last question on the vape business. I saw Real Brands is buying Vaporshark. Can you talk a little bit about where we are with the whole CDS segment and what the magnitude of that possible acquisition is, or divestiture, I should say?
Speaker Change: Okay, Great and then just one last question on the on the base business I saw real brands is buying vapor shark could you talk a little bit about where we are with <unk>.
Graham A. Purdy: <unk> segment.
Graham A. Purdy: What the magnitude of that possible acquisition is.
Graham A. Purdy: The divestiture I should say.
Graham A. Purdy: Yeah, I think we're still firmly under the plan that we've previously communicated relative to, you know, how we're treating that business. You know, as I'll note again, we spend no management time, you know, within the core business, talking about the CDS business, so it freestands and runs on its own. You know, I would anticipate us continuing to matriculate along those lines relative to, you know, how we think about the future of that particular business.
Graham A. Purdy: Yeah, I think we're still firmly.
Graham A. Purdy: Under the plan that we've previously communicated relative to how we're treating that business.
Graham A. Purdy: Again were we.
Graham A. Purdy: Spent no management time.
Graham A. Purdy: Within the core core business talking about the Cvs.
Graham A. Purdy: The Cts business so.
Graham A. Purdy: The three stands and runs on its own.
Graham A. Purdy: I would anticipate us.
Graham A. Purdy: Continuing to matriculate, along those lines relative to how we think about the future of that particular business.
Graham A. Purdy: Interestingly to note as well in the quarter the business actually performed pretty well in the quarter.
Graham A. Purdy: You know, interestingly to note as well, in the quarter, the business actually performed pretty well. And, you know, to the extent that the business remains sustainable, cash flowing on its own, I think we're comfortable with that asset today, but from a future perspective, I think we remain focused on what we previously communicated.
Graham A. Purdy: <unk>.
Graham A. Purdy: To the extent that the business remains sustainable cash flowing on its own I think we're we're comfortable with that asset today, but from a future perspective, I think we remain focused on what we previously communicated.
Michael Frederick Legg: Thanks. Great quarter, guys. Congratulations.
Speaker Change: Hey, Thanks, great quarter guys congrats.
Speaker Change: Thanks, Mike.
Scott Fortune: Our next question comes from Scott Fortune from Roth MKM. Please go ahead; your line is open.
Michael Frederick Legg: Our next question comes from Scott Fortune from Roth and Kam. Please go ahead. Your line is open.
Scott Fortune: Yeah, thank you for the questions here this morning. I just want a quick follow-up on the CDS side of things. It's kind of stabilized at that $14 million business. Just kind of hearing your comments as kind of sustainable here at these levels, although you guys have kind of indicated that it might come off, but just kind of get a sense for the CDS business as we look out the rest of the year here from a dollar standpoint.
Scott Thomas Fortune: Yes. Thank you for the questions here. This morning, just want a quick follow up on the CBS side of things is kind of stabilized at that $40 million business, just kind of hearing your comments as kind of a sustainable here at these levels. Although you guys as you've kind of indicated that it might come off but just kind of get a sense for the CBS business as we look out the rest of the year.
Scott Fortune: <unk> here from a from a dollar standpoint.
Graham A. Purdy: Yeah, I think on a sequential basis, we feel good about where the business is, you know, has run through Q1. You know, there's a lot of activity in the world that that business services.
Scott Fortune: Yes, I think on a sequential basis, we feel good about where.
Graham A. Purdy: Where the business is.
Graham A. Purdy: Run through Q1.
Graham A. Purdy: There's a lot of there's a lot of activity in.
Graham A. Purdy: The world that that business services, and so I think it's it's hard to underwrite this.
Graham A. Purdy: As this level of sustainability as we move forward I.
Graham A. Purdy: And so I think it's hard to underwrite this, you know, as the level of sustainability as we move forward. I would note that we do remain committed to that business remaining profitable, you know, while it sits underneath the TPB umbrella. So, you know, our expectation is that, at a minimum, that business continues to continue to sustain itself.
Graham A. Purdy: I would note that we do remain committed to that business remaining profitable.
Graham A. Purdy: While it sits sits underneath the TPB umbrella so.
Graham A. Purdy: Our expectation is that at a minimum that that business continues to continues to sustain itself Scott.
Graham A. Purdy: Thanks for that follow-up there, and then just digging in a little more on the continued penetration into the alternative channel and providing maybe a little more metrics there around the penetration levels where you're at. I know Summer, as mentioned, you guys are getting positive shelf space gains here and product strength selling into that channel, but just kind of a little more color on the SKUs or products that are really increasing market share in that channel, if you can provide that.
Speaker Change: Thanks for the follow up there and then just digging in a little more color on the continued penetration into the alternative channel.
Graham A. Purdy: Providing maybe a little more metrics around that percent penetration levels, where you're at.
Graham A. Purdy: I know summer as mentioned you guys are getting a positive shelf space gains here and products.
Graham A. Purdy: <unk> selling into that channel, but just kind of a little more color on the skus or product sets are really increasing the market share in that channel. If you can provide them.
Graham A. Purdy: Yeah, so as we previously mentioned, based on our internal metrics, we believe that that channel is growing. And I think if you look at year over year, as well as sequential growth of 60%, I'm pretty confident to say that we feel like we're growing market share. And I don't think that that is, you know, a surprise, given the fact that we have broadened the portfolio and created more product offerings to create more consumer appeal for the ZigZag brand, as well as occupying more shelf space to make ZigZag more relevant.
Speaker Change: Yes, so as we previously.
Graham A. Purdy: Mentioned, we believe based on our internal metrics that that channel is growing.
Graham A. Purdy: And I think if you look at year over year as well as sequential growth of 60% I'm pretty confident to say that we feel like we are growing share.
Graham A. Purdy: I don't think that that is.
Graham A. Purdy: A surprise given the fact that we have broadened the portfolio and created more product offerings to create more consumer appeal for the Zig Zag brand as well as occupying more shelf space to make <unk> more relevant as it relates to metrics I would anticipate over time that will provide more clarity there, but we think we're still way in the early.
Graham A. Purdy: As it relates to metrics, I would anticipate that over time, we'll provide more clarity there, but we think we're still very early in the innings of our penetration of that channel. So at this point in time, you know, our focus is to continue to find new retail stores, continue to find more distributors that service that space, continue to keep our heads down, and focus on the right product mix for the end consumer in those stores. And we think good things will happen if we continue on that plan.
Graham A. Purdy: Innings of of our our our penetration of that channel. So at this point in time, our focus is to continue to find new retail stores continue to find more distributors that service that space continue to keep our head down focus on the right product mix for the end consumer in those stores and we think good things will happen. If we continue on that plan.
Graham A. Purdy: Got it. And then last question for me, just kind of focusing on Stoker's a little bit, you're seeing nice continued market growth there as modern oral is weighing in on the more smokeless tobacco side of things and taking share there, but can you provide a little color on the competitive front? Are you seeing more competition from a pricing landscape with more focus on the oral side of things? Just kind of a little bit of color on continuing that growth going forward and the competitive movement here.
Speaker Change: Got it and then last question for me just kind of focusing on <unk> a little bit you are seeing nice continued market growth there as modern oral.
Graham A. Purdy: Weighing on kind of the more of the smokeless tobacco side of things and taking share there, but can you provide.
Graham A. Purdy: A little color on the competitive front are you seeing more competition from a pricing landscape with.
Graham A. Purdy: With more focused towards the oral.
Graham A. Purdy: The side of things just kind of.
Graham A. Purdy: Color on continuing that growth going forward and the competitive bid.
Graham A. Purdy: Move in here.
Graham A. Purdy: Yeah, we were I think we were pleased with our results in the quarter for free as we really started down the street to gain, you know, penetration into the retail landscape. We've got a really nice online business, where we speak directly to the end consumer.
Graham A. Purdy: Yes, we were I think we were.
Graham A. Purdy: We're pleased with our results in the quarter for free as we really started down the street to gain penetration into into the retail landscape, we've got a really nice.
Graham A. Purdy: The category is on fire. As you sort of look out, I'm not sure that the category can sustain 73% year-over-year growth. It grew 16.5% on a sequential basis.
Graham A. Purdy: Online business, where we speak directly to the end consumer the.
Graham A. Purdy: Category is on fire.
Graham A. Purdy: You sort of look out.
Graham A. Purdy: I'm not sure that the category can sustain 73% year over year growth.
Graham A. Purdy: Grew 16, 5% on a sequential basis there is.
Graham A. Purdy: There is competitive activity within that channel, but you would suspect that with the umbrella of growth that that category provides. We still think we're well positioned with the product offerings that we have, catering to the consumer that's looking for more satisfaction. I mentioned Mouthfeel before. We think our product really stacks up well from a Mouthfeel perspective. And so we're going to continue moving forward and gaining new stores and engaging more consumers with the brand.
Graham A. Purdy: Competitive activity within that channel, but you would suspect that with with the umbrella of growth of that category provides we still think we are well positioned with the product offerings that we have catering to the consumer that's looking for more satisfaction I mentioned mouthfeel before we think our product really stacks up well from a mouthfeel perspective.
Graham A. Purdy: And so we're going to continue moving forward in gaining new stores.
Graham A. Purdy: Engaging more consumers into the brand.
Scott Fortune: Thanks, I appreciate the color detail. That's helpful. Thanks, Scott.
Speaker Change: Thanks, I appreciate the color detail.
Scott Fortune: That's helpful. Thanks, Scott.
Operator: We have no further questions in queue. I would like to turn the call back over to Graham Purdy for any closing remarks.
Scott Fortune: We have no further questions in queue I would like to turn the call back over to Graham Purdy for any closing remarks.
Graham A. Purdy: Thanks, Operator. Thank you, everybody, for joining our call. We felt really good about Q1, and we're looking forward to speaking to you here in a few months about our Q2 results. So thank you very much.
Graham A. Purdy: Thanks, operator, thank you everybody for joining our call. We felt really good about Q1 in <unk> looking forward to speaking deal here in a few months on our Q2 results. So thank you very much.
Operator: This concludes today's conference call. Thank you for your participation. You may now disconnect.
Speaker Change: This concludes today's conference call. Thank you for your participation you may now disconnect.
Operator: Yeah.
Graham A. Purdy: I am looking forward to speaking to you here in a few months during our Q&A.
Operator: We are looking forward to speaking to you here in a few months.
Graham A. Purdy: Yeah.