Turning Point Brands (NYSE:TPB) Q1 2020 Earnings Call

0:00 Good day and welcome to the Turning Point Brands first quarter 2020 earnings conference call and webcast. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the start key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on a touch-tone phone. To withdraw your question, please press star, then two. Please note, this event has been recorded. I would now like to turn the conference over to Mr. Luis Reformina, Vice President of Business Development. Mr. Reformina, the floor is yours, sir.

0:41 Thank you. Good morning, everyone. This is Luis Reformina, Vice President of Business Development. Joining me are Turning Point Brands President and CEO, Larry Wexler, Graham Purdy, Chief Operating Officer, and Bobby Levin, Chief Financial Officer. This morning, we issued a news release covering our first quarter 2020 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 a perspective on 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 filing to 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.

1:41 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 rules, along with reasons why Mandra believes that they provide useful information. I will now turn the call over to Larry Reifler, our CEO.

2:01 Thank you, Louis, and good morning, everyone. I want to thank you for joining the call during this trying time and hope you and your family are staying safe. Our first quarter was strong, particularly considering the disruption of all businesses across the country at the end of the quarter. We outperformed our expectations across all our major business lines. Tobacco, both smokeless and smoking, exceeded expectations. even after discounting for our estimates of sales pulled forward due to the current environment. We are especially encouraged by the results of our reorganization of the vape business, with sales growing more than 10% sequentially each month of the quarter. That aside, our focus is on the safety and well-being of our colleagues and the communities and customers we serve.

2:50 I would like to thank our employees for the job they have done to ensure a safe working environment for each other and our communities and express how truly proud and inspired I am of the resiliency they have shown in their commitment to serve our customers' needs. As an organization, we've implemented several changes to enhance safety and mitigate risk in our work environment. For our warehouse and manufacturing operations, these include split shifts where appropriate, temperature scans, contactless hand sanitizing stations, protective equipment, social distancing guidelines and increased cleaning and sanitation. We canceled all unnecessary travel and implemented telecommunicating where possible.

3:35 Like many companies, we have changed the way we communicate through increased use of video conferencing and have implemented teleselling initiatives throughout the sales force. Some of these changes are proving to be rewardingly efficient and are likely to remain in place even after this crisis and lead to ongoing cost savings. We have deferred annual compensation increases for corporate employees other than those contractually required. We have also put on hold new spending commitments as we cautiously manage this environment. Meanwhile, consumer demand for our products and brands has remained consistently strong. Our products are an important part of our consumers' daily lives. The dedication of our workforce to serve this demand has been remarkable.

4:21 We have hired additional employees at our Louisville facility and implemented wage increases for our hourly employees to take care of their families in these turbulent times. We have also added capacity to manufacture hand sanitizers in three of our four facilities and have donated over 100,000 bottles to hospitals, nursing homes, and first responders in our local communities. We do expect COVID-19 to impact results in the second quarter. Our third-party cigar wrap manufacturer in the Dominican Republic temporarily closed for three weeks and is slowly ramping back up. In-person selling has been dramatically dampened, which will slow new product launches. Select budget annual price increases will be delayed.

5:08 These temporary issues are expected to be somewhat offset by our growing B2C platforms. There are a few notable trends at the end of the quarter which we believe was a result of the stay-at-home restrictions in response to the pandemic. We believe trade-in loading benefited our sales by approximately 2 million during the quarter, split evenly between smokeless and the smoking segments. During the last two weeks of the quarter, our case orders for Stokers MSD cans were up over 40% from the trends earlier in the quarter. Stokers MSD tubs saw almost a 60% lift during the same period. as consumers shifted to larger volume quantities during the pandemic. Some of this is undoubtedly trade loading, but so far we have seen less of a give back on tubs than we expected, which is a sign that consumers are trading down and volume purchasing trends in the category may be accelerating due to the economic environment.

6:07 Another area that saw a benefit was our B2C e-commerce businesses. We saw a meaningful increase at the end of March not only in our vape platforms but also in our branded products websites. These trends have continued through April as consumers shift to the ease of purchasing online. We are pleased to bring new customers to our sites and look forward to serving them going forward. Turning to the PMTA process, the District Court Judge for Maryland agreed to the FDA's request to extend the deadline for filing from May 12th to September 9th. As we've said before, We continue to be excited about the longer-term potential for these products in a much less cluttered market. Overall, we are pleased with our performance in the quarter. More importantly, we came together as an organization to tackle the challenges presented to us by this current epidemic.

7:13 will continue to be vigilant about the safety and well-being of our employees and will continue to make the necessary adjustments to our businesses to adapt to the changing environment. To add some more color and perspective on our quarter and the path forward, let me turn the call over to Graham Purdy, Chief Operating Officer.

7:31 Thank you, Larry. Let me now give you a quick snapshot of the performance from our core tobacco business. Our results were strong in the quarter, driven by robust customer demand. Smokeless saw double-digit growth in the quarter as Stoker's Moist Snuff delivered another record share, up one full share point compared to a year ago to 4.8, with our share in stores receiving the product now at 8.5%. Stoker's Moist Snuff is now in stores which represent 56.6% of industry volumes. Both cans and tubs delivered significant gains during the quarter, with most of the growth driven by same-store sales gains. As Larry mentioned, we saw particular strength in our Stoker tub shipments at the end of the quarter. Chewing tobacco sales held flat as ongoing category decline was offset by Stoker Chew continuing to expand its share. Stoker Chew registered a 22 share in the quarter, remaining the second largest brand in the category while closing the gap with the market leader.

8:30 Smoking saw double-digit growth in the quarter led by strong double-digit growth in U.S. rolling papers and high single-digit growth in cigar wraps. In the U.S., Zigzag Papers remain the leading premium paper brand, increasing its share year-over-year for the third consecutive quarter. Growth was driven by strength in our core products, along with contributions from our new products, where we continue to leverage Zigzag's iconic positioning. Zigzag Organic Hemp Papers are now in approximately 39,000 retail outlets, while Paper Cones and Unbleached Papers are now in approximately 31,000 and 21,000 retail outlets, respectively. Zigzag's share of paper cone category has climbed from 5% to 27% over the last year to position Zigzag as the number two cones brand, while Zigzag Hemp Paper is the number one hemp paper brand with a 28 share.

9:19 We are especially excited about the first quarter launch of our hemp wrap line, where initial trade demand has exceeded our expectations. Going forward, our recent focus on the alternative and e-commerce channels should lead to positive contributions for the remainder of the year. In Canada, we will be driving the brand further this quarter with our new recreation marketing partnership, which will facilitate our entry into the large and growing universe of dispensaries. Overall, our core tobacco business was especially strong in the quarters. Both smokeless and smoking saw double-digit growth. Stoker's MST expansion and zigzag advances remain the engines behind continued company gains, with total tobacco gross profits up 17% in the quarter. Moving to new gen, where we completed the consolidation and streamlining of our vape business under one management team last quarter.

10:10 Our vape businesses performed better than expected during the quarter, showing a strong bounce from the previous quarter as we benefited from better focus and coordination from a unified management team and superior in-stock positions of key products. Our China sourcing team played a key role positioning us at the front of the queue as factories came back online in China. which allowed both our B2B and B2C platforms to satisfy a surge in customer growth during the quarter. We're excited about the future prospect of business as we welcome these new customers onto our platform. In our B2C business, we saw a particularly strong rebound at the end of the quarter as customers shifted to purchasing online. On a high level for our big business, we have successfully navigated through the disruption in the market last year and believe the trough is now behind us with the segment returning to profitability.

10:58 We are now looking forward to completing the PMTA process, after which there's significant potential for our proprietary brands. In our NUX business, our full lineup of new CBD on-the-go products, including gummies, tinctures, and shots, continuing to expand retail presence, are now over 6,600 retail stores. Additionally, we added caffeine to B12 pens, along with solace nicotine chew in the first quarter. With a growing pipeline of products under development, NUX is primed to be a strong engine for future growth. We talked about winning on last quarter's call. We coupled a robust planning and communication process with a series of strategies and tactical initiatives to ensure we do just that in the marketplace. We believe we are just beginning to see the fruits of those efforts, and we remain driven to deliver results through these challenging circumstances.

11:48 And with that, I'll turn it to Bobby for a review of our first quarter financial performance.

11:52 Bobby? Thank you, Graham. Company results in the first quarter were stronger than we expected, with every segment coming in ahead of plan. We benefited from accelerated demand, trade load-in, and strong execution. Before I review the segment and consolidated performance for the quarter, let me first summarize some recent developments. The PMTA has been moved out four months to September 9th. This does not impact our full-year plans, and we continue to expect to spend a total of $15 to $18 million on the process. On April 8th, TPP and Standard Diversified announced a definitive agreement for a tax-free merger and transaction expected to be completed by the summer. SDI shareholders will receive 0.97 shares of TPP common shares for each common share of TPP held by SDI at the close of the transaction. We are pleased to have come to an agreement on this.

12:45 The transaction will effectively retire 1.5% of our shares outstanding and eliminate the overhang of a holding company structure. Turning now to segment reviews. In smokeless, the Stoker's brand continues to deliver sustained growth momentum. Smokeless net sales increased 17.5% year-over-year in the quarter. Net sales for the MST portfolio grew 33% and represented 59% of smokeless revenues in the quarter, up from 52% a year earlier. Total smokeless volumes increased 16.7%, with price mix advancing 0.8%. We believe trade load-in impacted our sales by approximately $1 million in the quarter. Year-over-year industry volumes for MSD increased by approximately 2%, with chewing tobacco eroding by approximately 4%. Stoker shipments to retail continue to outpace the smokeless industry in the quarter, growing its MSAI share in both chewing tobacco and MSD.

13:43 Turning to smoking products, segment net sales in the quarter increased 13%, with double-digit growth in U.S. rolling papers partially offset a year-over-year decline of $500,000 in non-focused cigar and MOI pipe products. We discontinued our pipe products, which generated 1 million of sales in 2019 at the end of the quarter. Cigar wrap net sales were up high single-digit, while Canadian rolling papers were up mid-single-digit. Total smoking volume increased 10.9%, while price mix increased 2.4%. We believe trade load-in impacted our sales by approximately $1 million in the quarter. According to MSAI, first quarter industry volumes for U.S. cigarette papers increased mid-single digits, while MYO cigar wrap shipments to retail contracted by low single digits. Moving to our new gen segment, where we saw stronger than expected results during the quarter. Net sales decreased 19% year-over-year from the lingering impact of bait market disruption and the discontinuing of the V2 business, partially offset by positive contributions from CBD, Solace, and other new extracts.

14:50 The segment did see 28% sales growth sequentially. For the quarter, new-gen gross profit decreased $3.5 million to $11.4 million as the result of the decline in net sales. First quarter 2020 included $2.8 million of tariff expense, compared to $2.0 million a year ago. Moving to the consolidated business. Adjusted EBITDA for the quarter was $17.8 million as compared to $16.1 million in the prior year. Encouragingly, the new gen segment returned a positive contribution for the quarter on sales advances and the new consolidated and streamlined structuring.

15:25 We are pleased that our first results were above our expectations.

15:30 We are also encouraged by government measures to support consumers and the economy. In light of the uncertainty around COVID-19, we feel it's prudent to maintain our revenue and EBITDA guidance previously guided until we get more clarity in the duration and impact of the response to the virus. Projected 2020 total net sales of $338 to $353 million and adjusted EBITDA of $69 to $75 million. We are also guiding the second quarter to $81 to $87 million, a little bit wider due to the uncertainty. M&A discussions continue as we evaluate potential partners and targets. While the coronavirus has likely delayed the timing of completing such transactions, we have seen an increased pipeline of attractive opportunities.

16:16 With that, I'll turn the call back to Larry for closing comments.

16:20 Thank you, Bobby. While we continue to deal with a challenging environment, the company executed well during the quarter and shown its resilience and its ability to meet consumers' needs. We remain committed to our goals of growing our tobacco business, creating operating leverage, and finding new market opportunities. The company has implemented a number of new initiatives, however the timing and the impact of their implementation may be impacted by the current environment. As you can see in our numbers, why we remain optimistic based on what we saw before the economic disruption. Our company remains solid and resilient, and our people remain committed to the journey. Thank you for participating in the call today. With that, I'd like to open the call to questions. Thank you, sir. We will now begin the question and answer session.

17:08 To ask a question, you may press star, then one on your touchtone phone. If you're using a speakerphone, please pick up your answer before pressing the keys. If any time a question has been addressed and you'd like to withdraw your question, please press star, then two. I get it as star, then one to ask a question. At this time, we'll just pause momentarily to assume our roster. The first question we have will come from Vivian Azar of Cowan. Please go ahead.

17:40 Thanks. Good morning. I appreciate the question. Hope everyone is safe and healthy. Just wanted to start with the supply chain disruption that you called out from one of your suppliers in the Dominican Republic. Seems like they're back online. Just remind us how big a piece of the business that impacts and how you're thinking about kind of bringing inventory and product back online if, in fact, you were short on supply. Thanks.

18:09 Yeah, so Wraps is about 15% of our sales. It is a lower margin product. We're assuming right now about a $5 million hit a quarter. from the wraps business. Now, you know, it's been down three weeks, so we think that that's 5 million, probably conservative, but that's where we're at at this point.

18:29 And is that supplier back online or no?

18:31 They are.

18:32 Okay, got it. Perfect. Thanks. On the smokeless side of the business, clearly very strong share momentum even pre-COVID. Larry, I was intrigued by your comment that you think that there might not be as much pantry destocking as we've seen from other CPG categories. Certainly that was evident in some of the Nielsen data that we saw today. Just in terms of what you're hearing from your retail customers today, Any issues with foot traffic? Certainly, we're hearing it from the beverage guys, sea gas. Certainly, your data wouldn't suggest it, but just curious, any incremental insights you're hearing from your retail partners around foot traffic impacting consumer demand?

19:17 Okay, so what we've been hearing from the field, what I've seen in driving around is that you're seeing fewer people in the stores, but they're buying more. I saw someone walk out of a C-store with a A whole bag full of product where I usually would go and just buy one can or one pack of cigarettes at a time. What we've seen in our shipments is that it's remained pretty consistent. We spoke about the lift that we had at the end of the quarter. We have not seen the payback that we thought we might, particularly on moist snuff. I think one of the aspects of our products, particularly the tub, It's very convenient in these times where a consumer, instead of buying a handful of cans, can go in and buy the tub that can last about a week.

20:08 And as we've talked about in the past, the cans have been a good feeder into the tubs. I think that just has been accelerated by the current conditions where people can't get out of their houses as much.

20:22 Yeah, that makes good sense. Are you hearing anything – and I want to come back to the health of the Stoker's brand specifically, but just to follow up on my original question, are you hearing any commentary around consumer demand shifts around either the paycheck cycle or some of the stimulus checks that I think went out 12 or 13 days ago on April 15th? Thanks.

20:47 We haven't really seen that. It's still, you know, this has only been going on for a month and change. We get very focused on selling to the stores. Obviously, sellout is needed. But at this point, other than bulk buying, we haven't seen a dramatic shift in our consumers. I would also say that our smokeless segment is definitely less city-driven. We're in places that people aren't as locked down. You know, on the smoking side, our product is very associated with people, you know, with people on a recreational basis. So people are staying at home and they're just using our products more. So we feel a little bit sheltered to those issues.

21:34 Yes, that seems reasonable. The comment on pricing in the press release and potential pricing delays, can you just expand on that? I mean, it seems appropriate given kind of the commentary that we heard from Philip Morris International today. last week about their expectations for pricing in the back half in international markets. But, you know, in the U.S., you're obviously not the price leader. So just wanted to get some more color on that comment. Thanks.

21:59 Yeah, so the big guys took an MST price increase at the beginning of the year. We did not follow. And the expectation would be that like they took a price increase last year on April 30th, we expected that as well on an MST. That seems like it's going to be delayed. That being said, we feel that we can't take price increases on cans, but we can take price increases on tubs. So it will be a slight modification to our plan, but we don't think it's significant relative to the full year plan.

22:32 Perfect. That's all really helpful. I'll turn it back into the queue. Thanks. Again, as a reminder, if you'd like to participate in today's Q&A, please press star, then 1 on the touchstone phone. Again, that is star, then 1. The next question will come from Susan Anderson of B-Rally FBR.

22:55 Hi, good morning. Nice job on the quarter. I was curious, I may miss this, but for the MST growth, how much do you think was that trade down versus stocking up? Did you guys kind of parcel out? You know, where you think kind of like the growth came from, the outsized growth.

23:11 Yeah, I mean, the outsized growth came from Tubbs, which is a trade down. But I think at the end of the day, you know, the business was growing significantly up until, you know, the last few weeks of March and then it just shut up. So, you know, the business continues to be double digit strength with or without sort of these trade downs.

23:32 Got it. Okay. And then do you think any of that is stocking up that maybe will hit later quarters, or are you seeing that as just kind of straight growth?

23:44 Yeah, we're assuming a $2 million giveback in the second quarter.

23:49 Okay.

23:50 Now, the one thing I would say is we haven't seen it in April, which we think goes to the strength of Stoker's brand, so we're pretty excited about that, but we have been assuming a $2 million giveback in the second quarter.

24:06 Okay. And then I guess with the new gen segment now being reset for the business, how should we think about the margins there as we kind of look out over the next couple years? What are you guys expecting in terms of expansion at all? Or, you know, how should we think about that now with the reset?

24:23 Yeah, I mean, I don't think we're going to change our long-term guidance on new gen anytime. I mean, you know, 30% gross profit has been something that that business has sat at for the past few years. But as we've discussed, we expect gross margin increases in new gen. That's what we've been working towards with our proprietary brand. I'll tell you, we did put out a new investor presentation on our website that sort of quantifies this a little bit with the long, long-term target being 50%. But that's something that, you know, is going to take a while to get there.

24:57 Yeah. Okay, got it. and then can you talk about just what you're seeing on the acquisition front? It sounds like you're seeing maybe an increase in potential opportunity out there. What categories are you seeing these opportunities and are you seeing prices maybe become more attractive?

25:16 Yeah, I mean, we're seeing a ton of opportunities in the cannabis and in the smoking space. So, I mean, you should expect us to get stuff done there. We think that we raised this capital last summer under the assumption that we were going to get more exposure to the cannabis space and to the smoking space. And we're seeing that play out. I would tell you the carnage that we expected in the cannabis space is playing out. It is worse than we thought, which sometimes makes dealmaking impossible. Just that things are, you know, one of our competitors posted that they had to take a massive bad debt expense in a quarter because, you know, people aren't paying their bills. So it makes it, you know, no one's going to do deals when they can't even pay their bills.

26:03 So it's complicated, but this is what we've, you know, we're set up for. We didn't think it was going to play out exactly this way, but this is what we are prepared for.

26:13 Got it. That's helpful. And then lastly, just modeling question, I guess. So the actions you're taking for COVID, such as like the increased wages, more employees, like should we think about that impacting employees? SG&A materially, or how should we think about that in kind of the next quarter?

26:30 Yeah, I would say actually it's going to go the other way. I would say the expenses that we're paying, whether it's more overtime or hourly wage increases, those are more than offset by sort of decreases in business where we've cut back on nonessential spend. T&E has been pulled back significantly. So we're not expecting any sort of SG&A creep at all.

26:53 Great, that's helpful. Thanks so much. I'll jump back in. Good luck next quarter. Again, as a final reminder, if you'd like to participate in today's Q&A, please press star, then one, and then touch some fun. Again, that is star, then one. Next, we have a follow-up from Vivian Ezra of Cowan. Hello, Ms. Ezra. Your phone might be muted, ma'am.

27:24 It sure was. Thank you very much for the prompt, operator. Thank you for the follow-up. Just wanted to follow up on the PMTA. Just obviously accommodative ruling from the judge in Maryland, given all the disruption from COVID-19. Are you guys planning on using the full length of that extension? Is there value in getting your submission in? We saw that Imperial Brands, for instance, today just filed on MyBlue. Is there a benefit to getting to the kind of front of the queue, if you will. Thanks.

27:55 There's no benefit. I mean, the only benefit is on flavored pods, which is not, you know, a significant part of our PMTA, right? Because you remember our, you know, the PMTAs we're filing are on open systems. The open systems are still allowed on the market.

28:13 Okay. But just in terms of, you know, getting, like, feedback earlier from the FDA, no value in that at all because they're just going to work through everything all at once?

28:23 We're having dialogue with the FDA, so we're getting feedback already. Submitting the PMTA early really doesn't get you much, particularly on the lower interest category, which is the open systems. We'll file a little bit early, but we're not in some rush to do it.

28:46 Got it. And then just from a cost perspective, obviously you're just having your team work remotely, but I'm curious just in terms of utilizing third-party resources to the extent that you are, whether any delays are going to drive some inflation in the cost if the work is taking longer?

29:05 To be fair, it's a little bit of whack-a-mole. But I don't expect any significant creep. There's some consultants we have on retainer that they'll stay on an extra few months. And so that's an extra 25,000 a year, 25,000 there. But the bulk of the expense was going into lab capacity. And so that lab capacity does not increase because of extended time.

29:33 Understood. Thanks for the follow-up. I appreciate it. At this time, we're showing no further questions. We will go ahead and conclude the question and answer session. I would now like to turn the conference call back over to the management team for any closing remarks. Gentlemen?

29:50 Thank you, everybody, for joining the call. See you next quarter. Thank you, sir, and to the rest of the team for your time also today. The conference call is now concluded. At this time, you may disconnect your lines, everyone. Take care and have a wonderful day.