Turning Point Brands Inc (TPB) 2021 Q1 法說會逐字稿

Good morning, and welcome to the Turning Point Brands' First Quarter 2021 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to Louie Reformina, the incoming Chief Financial Officer. Please go ahead.

Thank you. Good morning, everyone. This is Louie Reformina, our incoming CFO. Joining me are Turning Point Brands' President and CEO, Larry Wexler; Graham Purdy, Chief Operating Officer; and Bobby Lavan, our outgoing CFO. This morning, we issued a news release covering our first quarter results. This release is located in the IR section of our website, www.turningpointbrands.com, where a replay of today's conference call will also be available. In this call, we will discuss our consolidated and segment operating results and provide our perspective on our progress against our strategic plan.

As discussed, may 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. The disclosure outlines various factors that could cause actual results to differ materially from projections or forward-looking statements that may be cited in today's discussion. These forward-looking statements and projections are not guarantees of future performance, and you should not place undue reliance upon them except as provided by federal securities laws. And we undertake no obligation to publicly update or revise any forward-looking statements.

In 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. I will now turn the call over to Larry Wexler, our CEO.

Thank you, Louie, and good morning, everyone. Thank you for joining the call. We started the year with another strong quarter. In the first quarter, revenue was up 19% to $108 million, above our prior guidance range, and adjusted EBITDA was up 57% to $28 million. Revenue growth was led by our core Zig-Zag and Stoker's segments, which were up a combined 27% despite challenging comps from last year's lockdown-related inventory [burn].

A number of favorable trends that started in 2020 have continued even as the country has begun to open up. Our Zig-Zag products segment saw another quarter of tremendous growth as we continued to outperform a healthy market with our execution. New product SKUs and e-commerce were strong contributors to growth, and we ramped up distribution of Blunt Wraps during the quarter. We acquired the rights to this brand in the Durfort transaction last year.

Canada also outperformed, with ReCreation Marketing results now consolidated within this segment. In Stoker's, MST drove our gains as same-store sales growth continued its strong trend. Stoker's remains the fastest-growing brand in MST, according to MSAi, and continues to be well positioned for the secular shift to the value category. NewGen saw a solid growth during the quarter despite continued disruption resulting from industry reactions to the PMTA process.

Encouragingly, the FDA has stepped up its enforcement efforts, issuing warning letters to 31 manufacturers in March after issuing 29 letters in February and 19 in January. We expect continued volatility for NewGen as the PMTA process continues. In addition, late in the quarter, vaping benefited from volatility as the industry responded to the looming implementation date of the PACT Act in the second quarter. Customers bought forward late in March and competitors experienced some disruption.

The PACT Act is creating further barriers to entry in the vape distribution business as it has increased both the cost and logistical complexities of shipping vape products to customers. As a result, we're expecting more of our competitors to exit the market in the short term, which will create additional volatility but provide optionality for more long-term upside for our business.

We are also very excited about our recent investment in Docklight Brands, which has the global rights to the Bob Marley brand for cannabis and related use. Bob Marley is one of the most iconic brands in the cannabis space and is a perfect complement to Zig-Zag. It fits well with our strategy of building one of the best brand houses in the cannabis space. We'll be rolling out the current line of Marley CBD topical products through our distribution infrastructure later this year, with an emphasis on the B2C online opportunity in early stages.

With over $180 million of liquidity in our balance sheet, we remain well capitalized to pursue further investments in acquisitions, add value to our company and enhance our growth profile. Overall, our performance to start the year enabled us to raise our guidance and we look forward to continuing our momentum. With that and to add some additional color and perspective on our quarter and the path forward, let me turn the call over to Graham Purdy, Chief Operating Officer.

Thank you, Larry. Let me now give you a quick snapshot of the performance from segment level. Zig-Zag products saw double-digit growth in the quarter, led by strong double-digit growth in both U.S. rolling papers and MYO cigar wraps. In the U.S., Zig-Zag paper is positioned as the leading premium and the overall paper brand strengthened, increasing its market share in the measured universe by 3.5 points year-over-year to 33.3% according to MSAi. This was the seventh consecutive quarter Zig-Zag has realized year-over-year share growth.

All our major product lines contributed to this growth, supplemented by our new products and our expanding e-commerce platform. In paper cones, we were the #1 brand in the MSAi measured channel with 41.4% market share in the first quarter, up 21.4 points from the previous year. Our cone sales more than quadrupled year-over-year. It was over 19% of our U.S. paper sales in the first quarter, and we expect it to continue to ramp through the year.

We continue to lead the growth and penetration of product in convenience stores and are expanding our presence in the nonmeasured alternative channel, including head shops and dispensaries, where most of that market currently exists and where Zig-Zag is still underrepresented. As a reminder, cones are highly accretive to our business. Cones are a more convenient product for the adult consumer, and one cone effectively sells for 4 to 10x the price of an individual sheet of our regular rolling paper at retail, a significant increase to our addressable market on a per usage basis.

In Canada, we had a strong quarter of growth. ReCreation Marketing, which is now being consolidated, contributed low single digit to our segment sales as their business continues to accelerate. Zig-Zag is now in dispensaries that cover roughly 75% of the Canadian market and is gaining share within that channel. E-commerce, which was nonexistent last year, was a big driver of growth, once again accounting for double digits of our U.S. paper sales during the quarter.

Stoker's products saw double-digit growth in the quarter. A majority of the growth was again driven by moist snuff same-store sales gains. Stoker's market share was up to 5.3%, a little over 50 basis points compared to a year ago according to MSAi. Stoker's Moist is now represented in stores representing 61.2% of industry volumes, 4.5 points above last year's level, which still leaves a long runway for further growth.

Total company chewing tobacco sales saw low single-digit growth during the quarter. Stoker's Chew gained an impressive 2.6 share points, with 24.7% share in the first quarter according to MSAi. Stoker's has continued to gain share every year we have owned the business. With the continued secular shift into the value category and Stoker's positioning as a leading value brand, the chewing tobacco business is well placed to provide us with a stable annuity stream of cash flow going forward.

Moving to NewGen, where we once again had a resilient quarter in a disruptive environment. In our vape distribution business, we saw strong growth and healthy gross margin improvement in the quarter despite continued competitive pressure in the market related to the PMTA process. The segment also benefited from advanced buying in anticipation of stricter shipping regulations around vaping as a result of the implementation of the PACT Act in the second quarter.

Within Nu-X, our white nicotine pouch product, FRE, and WildHemp Hempettes contributed to our growth. While we continue to expect short-term volatility in the vape distribution business, we are optimistic about the optionality in the segment as the market begins to consolidate. The PACT Act is another catalyst as it will create challenges for our competitors by increasing logistical requirements to service state customers. While this increased -- while this will increase costs and create short-term disruption as the industry adjusts to the new law, we believe this will accelerate the consolidation in the industry and position larger players like us well going forward.

And with that, I'll turn it to Louie for a review of our first quarter financial performance. Louie?

Thank you, Graham. Our performance in the first quarter was once again ahead of our plan. Turning to the segment reviews. Zig-Zag product net sales in the quarter increased 41.8% to $41 million, with a strong double-digit growth in U.S. rolling papers, MYO cigar wraps and Canadian papers, which benefited from roughly $2 million to $3 million of deliveries pushed into the first quarter of 2021. Total Zig-Zag segment volume increased 36.9% while price/mix increased 4.9%.

According to MSAi, first quarter industry volumes for U.S. rolling papers increased double digits, with over half the growth driven by cones. Our volumes grew at 2x the rate of the overall market. And if you strip this out, we grew at 3.5x the rate of our competitors. This excludes the incremental volume growth we are seeing from the alternative and e-commerce channels.

MYO cigar wrap industry volumes were up strong double digits in the quarter. During the quarter, we saw the segment's gross margin expand significantly by 490 basis points to 60.7%. This was the result of the financial benefits of eliminating royalty payments in Durfort, resulting in higher margins for our MYO cigar wrap product and accretive contribution from our e-commerce business, which is currently trending above the segment average. Zig-Zag accounted for 58% of our segment operating income in the first quarter and continues to be our fastest-growing segment.

Stoker's products net sales increased 10.4% to $29.3 million in the quarter. Net sales for the MST portfolio grew 17% and represented 63% of Stoker's revenues in the quarter, up from 59% a year earlier. Total Stoker's volume increased 5.1% with price/mix advancing 5.3%. Year-over-year industry volumes for MST declined by approximately 2%, with chewing tobacco declining by approximately 4%. Stoker's shipments to retail continued to outpace the industry in the quarter, growing its MSAi share in both chewing tobacco and MST.

Moving to our NewGen segment. Net sales increased 6% to $37.4 million. We continue to expect near-term volatility due to the PMTA process in 2021 along with the impact of the PACT Act. For the quarter, NewGen gross profit increased 9.2% to $12.5 million. Segment gross margin expanded 100 basis points to 33.4%.

Moving to the consolidated business. Adjusted EBITDA for the quarter was up 57% to $28 million as compared to the prior year. We achieved 60% incremental margins during the quarter, reflecting the strong performance in our core segments as we leverage our fixed cost infrastructure.

In this morning's release, we also updated our 2021 guidance as follows: net sales of $422 million to $440 million. This is up from previous guidance of $412 million to $432 million. This includes net sales of $103 million to $109 million in the second quarter. Adjusted EBITDA for the full year is now expected to be $103 million to $108 million, up from previous guidance of $99 million to $105 million.

For Zig-Zag, we now expect strong double-digit sales growth, up from double digits previously. As a reminder, in 2020, our cigar wraps business was impacted by $5 million from manufacturing-related disruptions in the second quarter of last year, which we made up for in the fourth quarter. So the manufacturing impact was a wash for the year but we will have an impact in comparisons in this upcoming quarter. We estimate that the net benefit from COVID on the overall Zig-Zag segment last year was $7 million.

For Stoker's, we expect high single-digit sales growth. We saw some benefit from our competitor being temporarily out of the market in the middle of the year in our loose leaf chewing business, so we will have a tough comp for our loose leaf business in the upcoming quarters. We estimate that the net benefit from COVID in 2020 for Stoker's was around $3 million, spread out from Q2 to Q4.

For NewGen, we now expect a mid- to low single-digit decline in revenue. This is up from previous guidance of mid-single-digit sales decline. This includes single-digit declines for vape distribution, up from previous guidance of double-digit declines, offset by growth in Nu-X. We expect the second quarter to be a challenging quarter so we take a pragmatic view of the market in front of significantly increased logistical costs and the market impact around the PACT Act implementation. And we will also be comping against a quarter with COVID tailwinds.

On COVID, we previously called out a benefit of $5 million in Q2 of last year from our competitor being offline. We also benefited from an increase in our B2C e-commerce business as more people stayed at home, especially in Q2. We estimate that the overall impact in NewGen to have been $15 million from COVID in 2020 with $10 million of that in Q2.

Moving to our balance sheet. We ended the quarter with $167 million of cash and $189 million of available liquidity. This puts us in an incredibly strong position to execute on an active pipeline of opportunities we are currently evaluating to grow our business. With that, I'll turn the call back to Larry for closing comments.

Thanks, Louie. We had a strong start to the year. Our core businesses, especially Zig-Zag, continued to perform exceptionally, and we are optimistic about the longer-term prospects of our NewGen business as we believe that we have a competitive advantage in navigating the PMTA process and the PACT Act, which are likely to be transformational events for the industry.

With our business momentum and our balance sheet, we remain well positioned as a company. Our performance would not be possible without the continued efforts of our employees. I want to personally thank them once again for their commitment and contribution to our success.

I also want to take this time to thank Bobby Lavan for his contributions to the company over the last 3 years. Bobby has been instrumental in reshaping our balance sheet and repositioning our company for growth. We wish Bobby all the best in his next opportunity.

Thank you for participating in the call today. And with that, I'd like to open up the call to questions.

(Operator Instructions)

And we do have a question from the line of Vivien Azer with Cowen.

So let me start off with the Zig-Zag segment. Really tremendous growth, far better than we were looking for. The share momentum certainly is encouraging, and it seems like you guys have incremental distribution opportunities even from here. I was wondering if you can just help us think about framing ATV or percent distribution. It's easier to track in measured channels but it's a little bit more nebulous when you guys start expanding into nonmeasured channels. So how should we think about that?

Yes. So I guess in -- so you're right, it is harder to track in the nonmeasured channels, so our early estimates of the alternative channel is about 40% of the market. We may have underestimated that. We still think that we are in the high single-digit, low double-digit share in that alternative channel, so we're still plenty of runway for us to grow there, especially kind of with the 30% share that we have in the measured channel. So I think we're still just getting started in terms of our efforts in the alternative channel.

Understood. And just on the revenue accretion that you're seeing from cones, certainly, that's showing up in gross margin, which is great to see. But when you said that cones can go from anywhere from a 4 to 10x premium, that strikes me as a very wide range relative to a single sheet. So what drives the variability in that premium cone segment?

Yes. So it's really kind of the -- depending on the product that you're switching from. So if you look kind of on our website, if you look at a booklet of French orange papers, that's $2.50 for a booklet of 32. And so that drives kind of a 4x increase on the retail price for that product. But if you look at our unbleached rolling papers, which comes in a pack of 50, that's a 10x increase to the price of the unbleached paper.

Perfect, okay. Last one housekeeping item on the Zig-Zag segment. Can you quantify the magnitude of the revenue shift? I believe it was from Canada out of 4Q into 1Q.

Yes. So that was just a delayed shipment from Canada, so that's about $2 million to $3 million that we experienced shifting over from Q4 of last year to Q1 of this year.

Perfect, okay. Moving on to the Stoker's segment. Was hoping to get your perspective on some of the commentary coming out of Capitol Hill around tobacco tax organization please?

Is that a tax question? I didn't hear you. You broke...

That's right, it's a tax question.

So as you know, you've been following this business a long time. There's always conversations about taxes, and taxes go up at the state level all the time. The experience that we've had, that we've seen, is that there's fairly low elasticities in our markets. We do see some shifting to value after significant tax increases in states. And as you know, the Durbin bill is the first proposal. It's a very extreme -- you expect it to come in better than that.

And even if it did, we're very well positioned. We did some back-of-the-envelope analysis that says that after Durbin -- implementation of Durbin bill, a pack of cigarettes would be $8-and-change, and a can of Stoker's would be $5-and-change. So I think we're still very well positioned even if that tax bill goes through.

Yes. That makes sense from a cross elasticity of demand perspective for sure, Larry. And then if you could just expand on that thought and just speak to the implications for a federal tax on vape.

Well, there's many implications from that. One is that once the federal government taxes a product, it tends to become not a partner but certainly legitimizes it and maybe relieve some of the pressure. We believe that the vape consumers, even in states that have put on state excise taxes, stayed with the product. Consumers tend to have incorporated their products into their daily lives. And ultimately, unfortunately, the consumers will pay the tax. Most of -- almost all of the taxes go through to the consumer and the consumers will pay the tax.

And your next question is from the line of Susan Anthony (sic) [Anderson] with B. Riley Financial.

Nice job in the quarter. It's good to see the accelerated growth continue into the first quarter. I was wondering if maybe you could talk a little bit about the longer-term operating margin opportunity for the Stoker's and Zig-Zag segments. I guess, how much opportunity is there to continue to expand the margins there?

Yes. So we'll start out with the Zig-Zag segment. We're not as focused on expanding the gross margins of the Zig-Zag segment. Part of that is going to be driven by the product mix. For example, we mentioned paper cones, which is a highly accretive product for us from an addressable market perspective, but it may come at a lower gross margin than what we have for our traditional papers product, which is fine because it expands the gross profit dollar opportunity. So what we're really focused on with Zig-Zag is leveraging the gross profit dollars on the fixed cost SG&A for that segment. So don't look for too much gross margin expansion on the Zig-Zag segment from here.

On the Stoker's, that's a different story because MST is a product that we manufacture in-house. So we should still keep driving the incremental margins as we grow the volumes of that business.

Okay, great. That's really helpful. And then maybe if you could talk a little bit about the Nu-X brands and the response you're seeing from the consumer. It seems like with the better guidance there in the NewGen category, it looks like it's doing a bit better than expected.

Yes. So part of that is being driven by the PACT Act implementation that we mentioned earlier. So we did see some pull forward in sales as our customers kind of pre-bought in advance of the higher shipping costs as a result of the PACT Act. There is going to be some short-term volatility but we are seeing a big opportunity for us as the market consolidates with our competitors going away. So I think that's part of the -- what you're seeing in the strength on the NewGen side of the business.

Okay, great. And then I guess just last one really quick, if maybe you can give us an update on what you're seeing on the acquisition front, where you're seeing the most opportunity in terms of by segment and kind of where you're really focused on.

Sure. So we just did this investment in Docklight, which we are very excited about. The focus there is really we want to build a house of brands in the cannabis space, so that complements our investment in dosist. We're looking to do a few more of these, not too many. And we would kind of view these as a way of dipping our toes in the water and eventually acquiring these brands into part of the consolidated company.

We have mentioned that we are active in the cigar space. It is a $2.5 billion market opportunity for us, so we are evaluating opportunities from an acquisition perspective there. So look for us to do something there in the short to medium term.

We are also focused on expanding our product offerings. So we are touching 210,000 retail outlets in North America. There's a lot of other products that go into these stores, which are mostly c-stores that we can drive through the same sales infrastructure that we're currently using. So we are looking at what we would call a torch light to the stool. So there's various opportunities that we are pursuing.

Okay, great. I guess just one follow-up, I guess, for the investments such as Docklight. How are you guys thinking in terms of the time frame there, eventually making a full investment in the company?

So Docklight comes with an option of investing another slug into the business. Eventually, the way we're approaching the cannabis segment is, we think that the market today is going to be significantly different than the market 5 years from now. So making investments in -- small investments in companies like dosist and Docklight with an opportunity to invest another chunk and eventually fold them into our company is the approach that we're taking there.

And your next question is from the line of Eric Des Lauriers with Craig-Hallum.

Congrats on another really strong quarter here. Focusing on the Zig-Zag business, obviously really strong growth there as well. And just trying to parse through that measured versus the alternative channel opportunity. How should we think about that opportunity in terms of papers versus wraps? Any major difference in either current distribution or sort of market share potential that you guys see for papers versus wraps in that alternative channel?

Yes. So the alternative channel is really mostly a papers opportunity. So part of that is you need a tobacco license to sell our wraps product, and so that sits mostly in our measured channel still. So really the opportunity in terms of expanding our presence in the alternative channel is more of a papers business. And that's true for both the U.S. and Canada.

Okay. And then I'm assuming that it's sort of a higher mix of cones in the alternative channel than in the measured channel. But any sort of ability to kind of quantify the opportunity for cones versus booklets in that alternative channel?

Yes. So it is a heavier mix of cones in the alternative channel versus papers. And we think that the cones market is as large as the paper booklets market, and it is more represented in the alternative channel today than it is in the community store channel. Really, we're driving the growth in the convenience store channel right now.

Okay, great. That's very encouraging for the upside, the gross profit there. I guess switching gears just a little bit here, focusing on M&A. So you've talked about M&A in the past in terms of sort of filling gaps in not only your product portfolio but the infrastructure as well. As it relates to the cannabis M&A opportunity, it seems like you guys are doing a really good job filling in the product side with dosist, WildHemp and Docklight. But could you touch on any of the infrastructure side of those acquisitions? And maybe help us understand what product or infrastructure gaps you might still be targeting for M&A in the cannabis sector?

Yes. So we kind of view ourselves as a branded consumer products company, right? So cannabis is a large and growing market that really we are looking to extend our exposure in, obviously, with dosist as one of the strongest brands on the vape side and now on the gummy side in California, and Bob Marley, which is one of the most iconic brands in the cannabis space, and we have added to our portfolio of brands that complement Zig-Zag well. So we are looking to extend our exposure there further. And our focus is on brand but we're also looking across the supply chain to see if there are opportunities out there to help extend the reach of our brands further.

Congrats again on a strong quarter.

Your next question is from the line of Hale Holden.

I just had 2 for you. Following up on the M&A theme, I was wondering if there have been any changes with some of either the tax noise out of Washington or the regulatory noise out of the FDA in terms of your ability to underwrite potential M&A transactions or sellers coming out of the woodwork.

I haven't really seen much changes yet. I mean, obviously, there's still a lot of uncertainty in terms of what's happening on the tax rate. So I don't think we have really seen much in terms of any activity that results to potential changes on the tax code.

Okay. And then my second question was, I think you mentioned in the script the potential for higher freight costs in the second quarter. And I was wondering if you could just give a little more color on that.

Yes. So a lot of that is being driven by the PACT Act implementation, so we're forecasting a decent increase in terms of kind of our ability to fulfill orders. So some of that is going to be passed on to the consumer. But there's also a big opportunity for us from a market share perspective as some of our competitors are going away this upcoming quarter. So we're looking to invest to grow our market share next quarter -- or this coming quarter.

And your next question is from the line of Greg Pendy with Sidoti.

Just real quick on the FDA warning letters. Are those predominantly open tank players or is that just a mix of both type of players?

The bulk of them are the open tank players, a lot of mostly liquids.

Okay, great. And then how should we be thinking about, I guess, this year, I believe you took price increases in Stoker's in May and July, if I'm not mistaken. Is it -- is there an expectation for some price increases coming through this year around those times?

The price increases in moist come in at a fairly regular clip. So yes, we do expect the schedule to be somewhat similar to last year's.

Okay, great. And then just one final question. Can you just kind of -- just in general, how should we be thinking about, in Zig-Zag, the e-commerce channel? How big is that right now? Or is it just too small to kind of quantify at this point?

So within our U.S. papers business, it's double digits of our sales, so we expect that to continue to ramp for us through the year.

And sir, there are no further questions. Mr. Reformina, do you have any final remarks?

We'll turn the call over to Larry.

Well, thank you, everybody, for joining the call. We look forward to seeing you at the end of next quarter. And stay safe and see you in July. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.