Turning Point Brands Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 1, 2024

There are 6 speakers on the call.

Operator

Thank you for standing by. My name is Sully, and I will be your conference operator today. At this time, I would like to welcome everyone to the Turning Point Brands Second Quarter 2024 Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker remarks, there will be a question and answer session.

Operator

Session. Thank you. I would now like to turn the call over to Andrew Phee. Please go ahead.

Speaker 1

Good morning, everyone. A short while ago, we issued a press release covering our Q2 results. This release is located in the IR 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.

Speaker 1

On the call today, we will reference certain non GAAP financial measures. These measures and reconciliations to GAAP are in today's earnings release, along with reasons why management believes they provide useful information. I will now turn the call over to Graham Purdy, our CEO.

Speaker 2

Thanks, Andrew. Good morning, everyone, and thank you for joining our call. Our consolidated Q1 results were better than expected and demonstrated continued progress against our plan. Adjusted EBITDA increased 7% to just over $27,000,000 for the quarter. Given our solid start to the year, we are increasing our guidance for projected 2024 adjusted EBITDA to $98,000,000 to $102,000,000 versus our prior guidance of $95,000,000 to $100,000,000 Neither of these ranges include contributions from CDS.

Speaker 2

During the June quarter, Zig Zag performed well with revenue up 8% to $50,500,000 driven by high single digit growth in our North American papers and wrap businesses and a strong showing from our cigar business, which we've leaned into more heavily in 2024. We are excited about this business going forward. We remain committed to our alternative channel strategy of becoming a one stop shop for our Alt customers. In particular, we continue to expand our SKU assortment to offer these customers a more diverse portfolio of products. The all channel declined 3% in the quarter, but as a whole in the first half, this business is up about 28%.

Speaker 2

The drop in sequential is attributable to the Q1 having a particularly robust trade show calendar and the timing of some large purchases in March. Nonetheless, we are having success not only winning new untapped alternative customers, but also with existing customers buying a more complete Zig Zag portfolio. We've seen healthy increases in average order sizes, while expanding Zig Zag with more valuable shelf space and merchandising real estate within these stores. We continue to have a long runway in this emerging and fluid market. As you know, the alternative channel is consistently expanding as additional states embrace medical and recreational cannabis.

Speaker 2

In addition, all retailers including dispensaries, smoke shops and head shops are expanding product offerings to provide a better shopping experience for consumers. As such, we view the marketplaces for Zig Zag products as converging in many ways and we are seeing evidence of traditional C store distributors that we've done business with for decades increasingly target this market which is good news for us. We are also seeing evidence of new distributors emerging to specifically address this market and that plays to our strengths considering the depth and breadth of our product lines as well as our reputation as a reliable partner. That said, although this is exciting and great news for us, it will likely make it increasingly challenging to measure alt versus traditional C store sales. That's just something to keep in mind going forward, especially as you do your own channel checks.

Speaker 2

Moving to Stoker's. During the quarter, Stoker's revenue increased 19% to $42,700,000 reflecting a 1% decline in loose leaf and a 14% increase in moist snuff. Free sales were approximately $4,000,000 for the quarter, up 76% sequentially and more than 500% versus the prior year. We are pleased with the market share increases for Stoker's, which continues to be a steady growth engine with a long runway for volume growth and favorable pricing dynamics. We are also pleased with the market's enthusiastic response to the national launch of free.

Speaker 2

We launched with 9, 12 and 15 milligrams because we wanted a product on the shelves that was immediately differentiated. Based on our initial successes, we recently launched a 6 milligram product on our website, freepouch.com. Naturally, it takes some time to get a brand new product to shelves. So you can expect to start to see the 6 milligram product on retail shelves this fall. Also, we've gotten a lot of questions about potential timing of seeing free at some of the more well known national and regional C store chains.

Speaker 2

As you can imagine, these chains tend to have a longer sales cycle in planned out merchandising and Planogram strategies. So our immediate successes have tended to be with independently owned stores that by and large can act more quickly. Suffice it to say, we have a long runway ahead of us in what's estimated to be a roughly $3,000,000,000 wholesale market in 2024 per MSAI and could be worth between $5,000,000,000 $7,000,000,000 by the end of the decade per various analyst reports. In addition to the convenience store channel, we're also seeing all channel demand for free, even if many of these stores don't sell traditional tobacco products. It speaks volumes to the synergies TPB brings to bear with our world class sales, service and distribution platform.

Speaker 2

We look forward to providing updates on this exciting new product in the quarters years to come. 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.

Speaker 3

Thank you, Graham. During Q2, we made further progress in building Zig Zag's position as a lifestyle brand by executing against our multiyear roadmap. As Graham noted, Zig Zag posted a strong quarter fueled by papers, wraps and a more distinct push into the cigar category. For only the 2nd time in Zig Zag's history, the brand achieved over $50,000,000 in revenue. We also continue to launch and promote products that resonate with evolving consumer preferences.

Speaker 3

In June, we added to our growing all natural organic rose petals that promise an enhanced smoking experience. Additionally, as part of our endeavor to build a lifestyle brand that goes beyond smoking accessories and we continue to expand our brand presence in culturally relevant moments, we teamed up with Guess' Jeans to partner with them on their exclusive Coachella compound. The activation brought together some of the world's largest celebrities and influencers into a compound consisting of multiple homes during the largest musical festival of the year. Zig Zag participated in sponsoring the compound of co branded products, artists and celebrity gifting, rolling stations throughout the venues as well as the post festival after party. The tagged content from we look forward to continuing to provide updates that highlight the momentum and efforts that support Zig Zag's growth.

Speaker 3

For Stoker's, we continue to be pleased with the brand's performance, which grew to over $40,000,000 in revenue for the first time in company history. We are focused on expanding distribution and continue to see the brand's great dip at a fair price messaging resonate with today's consumer. Turning to free, our sales and marketing teams are keenly focused on building a brand that will resonate with consumers for the long term. We made further progress in the quarter across both brick and mortar stores and digital marketplaces, as Graham noted, with our revenue growth. As shared last quarter, the receptivity and engagement from our trade partners and with consumers continue to reinforce that our product quality, moisture content, pouch size and differentiated nicotine offerings are a powerful selling proposition.

Speaker 3

We summarize this selling proposition with the phrase power, feel, flavor. Our recent product portfolio expansion into 6 milligrams enabled us to further lean into the selling proposition and as importantly expand our product assortment to participate in the largest portion of the nicotine pouch category. We look forward to sharing our progress throughout the year. In summary, we continue building our brand for the long term, executing against the plan we've established and growing our business in 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.

Speaker 3

Let me now turn the call back over to Andrew to go through our results.

Speaker 1

Thank you, Summer. Starting with our consolidated quarterly results. Q2 sales were up 2.8% to $108,500,000 which is up 12% on a sequential basis. Excluding CVS, overall revenue was up 13%. Gross margin was down 8 basis points to 49.6% due to segment and product mix.

Speaker 1

Adjusted EBITDA was up 7% to $27,000,000 Going into segment performance, Zig Zag sales increased 8.1% year over year to $50,500,000 due to strength in cigars and growth in our North American papers and wraps businesses. Gross margins decreased 3 30 basis points to 53% during the quarter. This was driven primarily by product mix. Stoker's net sales increased 19% to $42,700,000 in the quarter with a 5.3% volume increase and a 13.2% pricemix increase. Net sales for the MST portfolio grew 14.1%.

Speaker 1

Stoker's volume was up 0.4% despite category volume down 7.2% with share growing 60 basis points year over year to 7.5% during the quarter according to MSAI. Its share of in store selling was up 60 basis points year over year to 10.3% with Stoker's now in stores representing approximately 2 thirds of industry volumes, which still provides a long runway for growth. Chewing tobacco sales were down approximately 1% from the previous year. Stoker's Chewing Tobacco was the number one chewing brand in the quarter, gaining 160 basis points of share to 32.5 percent according to MSAI. Overall, TPB loose leaf volume was down 0.9%, meaning category volume declines of 3.7%.

Speaker 1

Category performance was driven by a larger decline in premium loose leaf with TPB's volumes benefiting from consumer trade down as Stoker's volumes grew from previous year. Our free sales more than tripled off a low base as we continued national distribution of the product. Gross margin declined 30 basis points to 55 percent primarily due to product mix, somewhat offset by MST pricing gains. Moving to CDS, sales were $15,000,000 gross margin was 22.5%. Adjusted EBITDA was approximately $450,000 Next on to the balance sheet.

Speaker 1

We ended the quarter with just over $140,000,000 of cash. Post 2Q close, we retired our 118 point $5,000,000 convertible note on maturity date of July 15. We were able to do this without drawing on our ABL. On a pro form a basis after retiring the convert, our gross debt is $250,000,000 net debt $226,400,000 With our projected free cash flow generation this year, we are well within our previously disclosed leverage range of 2 to 3 times and are comfortable with our liquidity position. On to guidance and other line items.

Speaker 1

As Graham noted, we are increasing our guidance for forecasted 2024 adjusted EBITDA to $98,000,000 to $102,000,000 versus our prior guidance of $95,000,000 to $100,000,000 Neither of these ranges include contributions from CVS. Effective income tax rate of 23% to 26%. We revised our CapEx expectation from $15,000,000 to $11,000,000 Our investment plans have not changed and reductions are timing driven. We expect to spend approximately $4,000,000 for the full year to supplement our PMTAs that are related to our modern oral products, which remain under review by the FDA. Now let me turn it back to Graham.

Speaker 2

To conclude, we're pleased with our progress at 2024's halfway point. And with that, I'll turn it over to questions.

Operator

Thank you. We will now begin the question and answer session. Your first question comes from the line of Michael Legg with The Benchmark Company. Please go ahead.

Speaker 4

Thanks and congratulations on a great quarter for everyone. Free obviously seems like a huge opportunity for you. You decided you've had the PMTAs for the 3 milligrams and the 6 milligrams, but didn't launch on alongside the 9, 12 and 15 milligram packets. Can first, can you just talk a little bit about the timing on why you decided to launch the 6,000,000 of Sequium now?

Speaker 2

Yes. Hey, Michael, it's Graham. Thanks for the odd question. Yes, I think the original thesis was to provide a differentiated product for consumers as well as our customers as the shelves were being filled up with various products sort of sub 9 milligram. And so pretty unique opportunity with both customer and consumer.

Speaker 2

I think through our direct selling apparatus, freepouch.com, what we found over time is that mouthfeel has become a very strong differentiator for us, which I think gave us confidence to lean into the 6 milligram segment. As of Q2, that segment was about 52%, the 6 milligram segment for the quarter. So it really gives us a strong opportunity to participate for those consumers and really grow them into sort of the broader portfolio of products that we have.

Speaker 4

Okay. And can you talk a little bit about your manufacturing capability that how you produce it and what the capacity is there?

Speaker 2

Yes. We look, we feel I think we feel really good about where we're at right now. We've got a strong manufacturing partner who's got an appetite to invest behind it. If we look through how we perceive the sort of balance of this year and moving into next year, We feel really confident in the partner that we have.

Speaker 4

Okay. But as far as capacity, is there any level you could disclose?

Speaker 2

No. Okay.

Speaker 4

And then what do you view as Yes. The longer term margin for free?

Speaker 2

I'm sorry, Mike, can you say that again?

Speaker 4

The longer term margin potential for free?

Speaker 2

Yes. Look, I think it sort of follows our past thesis, which is growing into higher margins over time. We tend to invest in the brands in the early days, which if we recall some of the past launches, we sort of signaled that 20% to 40% was kind of our intro range for products. But we're seeing sort of favorable pricing dynamics emerge in this category as well. And so we're pretty confident that over time, as we get more leverage and the brand gets more scale in the marketplace that we'll sort of be able to follow that same model.

Speaker 4

Okay, great. And then so basically competition now is obviously building out their capacity and supplies are looking strange in the marketplace from what I'm seeing. You guys have more PMTA than the combination. They're only in the 3 and 6. You guys also have the 9, 12 and 15.

Speaker 4

Is that correct? Yes. Okay, great. All right. Thank you very much.

Speaker 4

Great quarter.

Speaker 2

Thanks, Mike.

Operator

Your next question comes from the line of Erik Desjardins with Craig Hallum Capital Group. Please go ahead.

Speaker 5

Great. Thank you for taking my questions and congrats on a very impressive quarter here.

Speaker 4

Thank you.

Speaker 5

I'll stick with the 3 questions for now. You were just recently mentioning you're investing in brands in the early days, obviously makes sense. Considering the kind of explosive growth that we're seeing in this category, I'm just wondering sort of how you're thinking about marketing spend and trade promotion for free. What would you need to see to sort of increase spends? And how should we think about potential spend as falling between marketing investment in SG and A or trade promotion and net sales or COGS?

Speaker 5

Just wondering how you're sort of thinking about this going forward?

Speaker 4

Yes. I think if you just take

Speaker 2

a step back from a 30,000 foot view, I think we're very data driven. We've got robust data for this segment and specifically our brand through MSAI as well as our online channels. And I think that the data informs our decision relative to how we throttle spending. In terms of the distinction between trade promotion press in a little harder and maybe where to press in a little harder and maybe where to lean out of that particular spending or investment view. But at the end of the day, I think what makes us a little bit unique is that we've gone to market and we maintain profitability in the segment, which I think we're incredibly proud of.

Speaker 5

Yes. No, absolutely, that's great. And appreciate the color there. You mentioned some comments on obviously these larger C store chains have a longer sales cycle. You've had more success with some of these independents.

Speaker 5

I'm wondering how the sort of trajectory for the second half is looking here. Do you feel that you've sort of gotten into a good number of the independents and maybe there's some inventory sort of initial load in to be aware of that maybe we could see some volatility quarter to quarter? Or are we just kind of too early in this robust growth trajectory that we shouldn't necessarily be thinking about kind of quarter to quarter volatility at this point? Just sort of wondering how you're viewing that more near term landscape.

Speaker 2

Yes. Look, it's a lot to unpack in that question. So I'll start first with the chain environment. While it's a long sales cycle for the large chain accounts, I we'll note out that we're in the overwhelming majority with the top 50 chains in the country with some SKU representation with TPB and it's important to note that because we've got a long history of creating partnerships and creating value with our customers. So we're very confident over time in our ability to sort of get into the larger chain accounts.

Speaker 2

In terms of how we think about volatility from quarter to quarter, I think it's in the early days right now. Obviously, it's still relatively small comparative to the entirety of the Stoker segment. In terms of how we went to market, we certainly didn't go to market with a sort of a big load strategy, if you will. And what we're trying to do is get a view for get the product into stores, merchandise it well, make sure the consumers can see it, placing point of sale and seeing what the pull through rates are. And so we're really sort of managing not over inventorying the trade in the early days for this launch.

Speaker 5

All right. It's all very great to hear. Overall, I mean, kind of this is a, I guess, another sort of 30,000 foot question or just longer term question. So with your other Stoker's products, you've sort of been attacking the value side of the category. Here you're kind of competing head on here.

Speaker 5

I'm wondering if you have any view on sort of potential market share goals or targets or anything kind of longer term? I mean, is this something where you still see in the single digits as being the sort of target here as you are with Stoker's MST? Or is there anything else that you're seeing that maybe that could be either more or less? I mean, just wondering how you're thinking about overall market share goals given the slightly different competitive positioning with free versus your other Stoker's products?

Speaker 2

Sure. Great question. So I think that we have our aspirations are large. And if you take our aspirations and you unpack them, sort of our goal is to be an everyday player on the shelf across the U. S, which would mean that being one of the few that actually sort of emerges as in that top say 4 or 5 brands in the market.

Speaker 2

I think Stoker's and the gains that we've made there throughout the year sort of informs what we think the potential could be. And certainly, we're way ahead of the game in our entry into the white pouch category with a differentiated product, whereas it took us 40 years to get to the moist snuff category and we're competing against large entrenched incumbents, we're relatively early inside that cycle with free in the modern oral category. So there's a lot of adoption. The category growth that is expected throughout the rest of this decade will largely be from new consumers coming into the category that currently aren't engaged. And so we think that there's a great opportunity for us to win new consumers as they come into the category, while also competing for existing consumers that are looking for a little more satisfaction, looking for better mouthfeel.

Speaker 2

And we think the launch of the 6 milligram sort of gives us the license to speak to those consumers and give an opportunity to try our product and see the difference.

Speaker 5

Yes, that's great. That certainly makes sense to me. Last question from me, switching gears over to Zig Zag. I just wanted to kind of double click on one of the comments you made earlier in your prepared remarks, Graham. You mentioned how traditional C store customers are kind of increasingly targeting the, I guess, alternative channel customer.

Speaker 5

And that there's sort of a blurring of the lines between traditional C store and the alternative channel. And I'm wondering if

Speaker 4

you could just expand on

Speaker 5

that a bit. I mean, is this just traditional C store customers now ordering a much wider assortment of SKUs? Or is there something about new stores or new doors, something else blurring the lines between C store and alternative channels? Just wondering if you could expand on that.

Speaker 2

Yes. So just as a point of clarification, as we launched strategy, we're really focused specifically on a set of stores that we've defined as alternative stores, head shops, smoke shops, dispensaries and also the growth of distributors that were emerging to service that space. Where the lines are getting blurry is that some of our traditional distributors are also going after those customers. And so as that customer base grows, it's opportunity for them to service those stores as well. And so what we're seeing is and again, very good news for us, we're seeing some of our legacy traditional distributors that we've done business with for decades.

Speaker 2

They're leaning into that segment because look, if you think about it, they're driving trucks to convenience stores and they're passing these stores along the way. So it's a great opportunity for them to leverage their fixed cost in terms of taking product to those stores. And so we're just seeing a little bit of that sort of starting to occur in the channel, which is just creating 1, an opportunity for us, but also the sort of blurring where a traditional distributor and an alternative distributor, you're starting to see those lines kind of cross up a bit.

Speaker 5

I see. That's very helpful. I think that's where I was confused that we were sort of talking about the distributors here and the lines are getting blurred there, which I mean to me that sounds like that is very sort of beneficial to Zig Zag compared to some of the other rolling paper brands that you might see at some of these alternative shops. I mean, I would imagine that you guys have much stronger relationships with these more traditional distributors. Can you kind of just comment on any on that subject, sort of your relationship with the traditional distributors versus maybe some of the some of your competitors that you run into in the all channel?

Speaker 2

Yes, I would say the if you look at sort of from a relationship standpoint, this company has been in business since 1988. So a lot of these traditional distributors we've been doing business with since that long. And so that partnership is deep. Most of the folks that are really focused on that specific alt channel haven't been around quite as long, and that's not a negative, but at the same time we view the relationships that we've built with traditional distributors as incredibly strong and we feel that the process that we bring that created those relationships and that value can be transferable as well to these alternative distributors as they grow. And so I think it really sets up nicely for us in the future having an omni distributor approach servicing that channel and overlaying on top of that our ability to sell direct to consumer as well as direct to store through our own website really gives us the ability to speak to consumers wherever they want to buy the product.

Speaker 5

That's very helpful.

Operator

There are no further questions at this time. That concludes our Q and A session. I will now turn the conference back over to Graham Ferdie for closing remarks.

Speaker 2

Thanks, operator. I appreciate everybody joining the call today and we look forward to speaking again in a few months.

Operator

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.

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Key Takeaways

  • Turning Point delivered a strong Q2 with Adjusted EBITDA up 7% to $27 M and raised its FY24 guidance to $98 M–102 M, excluding CDS contributions.
  • Zig Zag segment sales increased 8% to $50.5 M, driven by North American papers, wraps and cigars, while the company expands its alternative channel strategy amid convergence with traditional C-store distributors.
  • Stoker’s revenue grew 19% to $42.7 M (moist snuff +14%, loose leaf –1%) and saw the new Free nicotine pouch achieve ~$4 M in sales (+76% sequentially) ahead of its 6 mg retail launch this fall.
  • The balance sheet remains healthy with $140 M in cash, retirement of a $118.5 M convertible note, net debt of $226 M (within 2–3× leverage) and reduced full-year capex guidance to $11 M while funding FDA PMTAs.
  • Management emphasizes ongoing brand-building, SKU expansion and distribution capabilities to sustain long-term growth across both traditional and emerging retail channels.
A.I. generated. May contain errors.
Earnings Conference Call
Turning Point Brands Q2 2024
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