Turning Point Brands, Inc. (NYSE:TPB) Q1 2024 Earnings Call Transcript May 4, 2024
Turning Point Brands, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning, and welcome to Turning Point Brands First Quarter 2024 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the call over to Graham Purdy, Chief Executive Officer. Thank you. Please go ahead.
Graham 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.
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 Labs. Second, while early in my journey here, I’ve been impressed by the management team and the strength of our brands. 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 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. This morning, we issued a news release covering our Q1 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. 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. I will now turn the call over to our CEO, Graham Purdy.
Graham Purdy: Thanks, Andrew. 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, Zig-Zag 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. 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 customers’ portfolio to better satisfy the growing and evolving demand from end consumers. Both factors are expanding our addressable market. We are having success not only winning new untapped alternative customers across the brick-and-mortar and alternative distributor network, but we are also seeing existing old customers buy a more complete Zig-Zag portfolio. As a result, we’ve seen healthy increases in average order sizes across the alternative space while providing the Zig-Zag brand with more valuable shelf space and merchandising real estate within these stores to build brand awareness as we satisfy evolving in consumer preferences.
Considering that many of our competitors offer far fewer SKUs than Zig-Zag, we’re finding that the alt channel is actively looking for partners that provide service above and beyond ordinary fulfillment, and we are 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 from 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 channel. 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 Stoker’s. During the quarter, Stoker’s revenue increased 8% to $36.4 million, reflecting a 4.6% decline in loose leaf 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’s revenue. We continue to be 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 pleased with the market’s enthusiastic response to the beginning of our national launch of FRE, 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 FRE. However, we are seeing positive momentum, and we are excited about the opportunity to make FRE a material contributor to revenue and profit growth in the Stoker’s segment, buoyed by a category that’s already worth over $2 billion in annual wholesale revenue and grew over 50% last year for 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 FRE’s profile and store count similar to what we’ve achieved with Stoker’s MST over time.
In addition to our traditional channel, we are also seeing alt channel demand for our FRE Modern Oral nicotine product, even if many of these stores don’t sell traditional tobacco products. I mentioned this because the dynamic may not be intuitive for some of you, but it speaks volume to the synergies that TPB brings to bear with our world-class sales, service and distribution platform. 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 million to $100 million. Of note, our guidance range contemplated no contribution from CDS, 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 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. 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 continued to further Zig-Zag’s position as a lifestyle brand by executing against our multiyear road map. Our focus on growing Zig-Zag’s portfolio and the alternative channel while increasing the brand ubiquity remains a core tenet of that plan. As Graham noted, Zig-Zag posted a strong quarter, fuel by 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 and dispensaries, manufacturers and the 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.
To further Zig-Zag’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, Zig-Zag partnered with 30-plus celebrities by hand delivering custom flower bouquets, which integrated Zig-Zag’s rose cones into bouquet design. Our rose cones continue to be a popular addition to the portfolio, which we are leaning into and provide 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 4 days, thousands and thousands of music lovers came together to embrace the festival’s culture.
Zig-Zag worked with over 90 celebrity partners by developing custom Zig-Zag in Rolling Loud merchandise and working with nearly 200 influencers to promote the partnership during the 4-day event. Among signage across all digital screens in the venue, Zig-Zag had a custom 40/40 pop-up shop that invited attendees to interact with the brand. Sample and purchase products as well, and learned more about Zig-Zag’s history and future. We look forward to continuing to provide updates that highlight the momentum and efforts that support Zig-Zag’s growth. Turning to Stoker’s. 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 FRE, 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 website. 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. 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 with consumers continues to reinforce that our product quality, moisture content, pouch size and differentiated nicotine offerings are a powerful selling proposition.
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 consumers. We will continue to focus on maximizing the value of our world-class brands and strengthening our extensive distribution capabilities. 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 mix. Adjusted EBITDA was up 21.6% to $25.3 million. Going into segment performance. Zig-Zag 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, 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.
Our Canadian business provided an approximate $800,000 headwind due to previously mentioned discontinuation of the low-margin third-party product line. 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 line. Stoker’s net sales increased 8% to $36.4 million in the quarter with a 0.1% volume increase and 7.9% price mix increase. Net sales for the MST portfolio grew 6.7%. Stoker’s volume was up 1.2% despite category volume 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%, with Stoker’s now in stores representing approximately 2/3 of industry volumes, which still provides a long runway for growth.
Chew sales were down mid-single digits from the previous year. Stoker’s Chew was the #1 chewing brand in the quarter, gaining 140 basis points of share to 31.1% according to MSAi. 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 TPB’s volume benefiting from consumer trade down as Stoker’s volumes grew from the previous year. Our FRE 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 MST pricing gains. Moving to CDS. Sales were $14 million. Gross margin was 25.4%. 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 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 million to $100 million. Other projections include effective income tax rate of 23% to 26%. We expect CapEx to be approximately $15 million this year. 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.
Graham Purdy: To conclude, we feel like we’re off to a solid start to the year with Zig-Zag returning to growth, ongoing solid performance at Stoker’s and encouraging early signs from our national launch of FRE. With that, I’ll turn it over to questions.
Operator: [Operator Instructions] Our first question will come from Eric Des Lauriers from Craig-Hallum Capital Group.
See also 30 Most Profitable Companies with Highest Margins in the World and 15 Most Common Counterfeit Foods in the US.
To continue reading the Q&A session, please click here.