Q4 2023 Turning Point Brands Inc Earnings Call
Participants
Louie Reformina; CFO; Turning Point Brands Inc
Graham Purdy; President & CEO; Turning Point Brands Inc
Summer Frein; Chief Revenue Officer; Turning Point Brands Inc
Scott Fortune; Analyst; ROTH MKM
Michael Legg; Anal;yst; Benchmark Company
Eric Des Lauriers; Analyst; Craig-Hallum
Presentation
Operator
(Operator Instructions) This event is being recorded.
I would now like to turn the conference over to Louie Reformina, Chief Financial Officer. Please go ahead.
Louie Reformina
Thank you. Good morning, everyone. This is Louis revenue, Chief Financial Officer. Joining me are Turning Point Brands, President and CEO, Graham Purdy, Chief Revenue Officer, summer freeze. This morning, we issued a news release covering our fourth quarter results, and this release is located in the IR section of our website, w. w. w. dot Turning Point Brands.com. During this call, we will discuss the 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 SEC.
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, Laurie. Morning, everyone, and thank you for joining our call our Q4 results were at the high end of our expectations and demonstrated continued progress against our plan. Adjusted EBITDA increased 7.5% to $24.8 million for the quarter, and we finished 2023 having generated $61.2 million of free cash flow during Q4.
Stoker's finished the year on a high note, posting extraordinary 18.6% revenue growth for the quarter. Zig-zag was down [2.9] for the quarter due to the previously discussed discontinuation of an unprofitable product line in Canada. 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. That said, to be clear, while Stoker's continues to gain momentum, we do not believe 19% organic revenue growth for our legacy Stoker's products is sustainable over the long term.
However, we do believe these and greater levels of growth are achievable for free, our Modern Oral white pouch nicotine product. This product will compete in the category that is trending towards $2 billion in manufacture revenue and grew volume by over 50% last year per MSA.
Up until recently, we are focused on optimizing our supply chain to ensure consistent product quality, analyzing consumer feedback and testing online and in-store marketing and merchandising programs to best position us for a successful rollout of free. We are now focusing on prudently ramping up our sales and distribution efforts with the goal of achieving sustainable, consistent growth.
Our strategy for this exciting category focuses on leveraging our sales and distribution expertise to profitably expand, frees present and store count over an extended timeframe, similar to what we have achieved with Stoker's MST free presents a significant opportunity for the Company given its differentiated offerings like Stoker's MST, we don't need outsized share in the market to have a significant impact on our overall bottom line. We look forward to providing updates on this exciting new product in quarters to come.
Moving on Zig-Zag, while we faced a headwind from previously discussed inventory destocking throughout much of the year. We believe the reduction in trade inventory is behind us, setting the backdrop for a return to growth in 2024. We were pleased that both our Zig-Zag papers in the traditional channel, an alternative channel business posted double-digit growth. We are encouraged by our wholesale customers and in consumers' response to our expanding and more complete portfolio, fueled by many new products launched over the past few years.
In Q4, we launched combo books as well as our first seasonal vintage apparel line. As you may have noticed, we leaned into our direct relationships with our consumers using several social media tactics to engage our growing audience. As mentioned, we continue to see strong demand from consumers in the alternative channel as legalization and further normalization of cannabis is expanding.
The alternative store footprint dispensaries had shops smoke shops, which cater to a growing accessory market our alternative B to B business saw continued momentum with Zig-Zag sales growing by over 30% during the quarter, driven by an acceleration in premium paper sales in the second half of 2023. Our strategy in the alternative channel is to be a valued partner to the growing distributor retailer and manufacturing network serving this ecosystem.
In addition to growing traffic alternative stores are attractive because they offer the Zig-Zag portfolio, more valuable shelf space and merchandising real estate than traditional C-stores. We tried to be a solution provider to various customers throughout the ecosystem. And in doing so, we're able to build brand awareness and consumer trial to ensure we satisfy this growing consumer base.
As discussed in the past, our growth in the alternative market has been driven by two drivers, one, gaining new customers across the retail distributor and manufacturing landscape, and two, increasing order sizes to both existing and new customers. As we expand our portfolio cross selling Clipper. Lighters is an example of that. Both drivers continue to be healthy.
Lastly, in 2023, we were pleased to close on our ABL facility which, along with the cash we have on hand, gives us ample liquidity to address our convertible debt maturity later this year with and let me hand the call over to summer to walk through progress and the results of several of our specific go-to-market initiatives.
Summer Frein
Thank you, Graham. Throughout Q4, we continue to make progress against our roadmap of furthering Zig-Zag position as a lifestyle brand. Our focus on growing Zig-Zag portfolio and the alternative channel while increasing the brand ubiquity remains a core tenant of that plan.
In Q4, we continued building a product assortment that aligns with market demands in early December.
At MJ bids con, we launched our new Zig-Zag combo booklet, a convenient package, combining both papers and tips available in several varieties of our paper assortment, Kansas launch, our team is ahead of plan and gaining valuable shelf space in 2024 and beyond. You should expect us to continue to launch new products that cater to this rapidly evolving consumer. We also launched Zig-Zag first seasonal apparel collection vintage collection, which garnered the attention of the fashion and street wear community with two of the largest culture publication complex and high fees covering the launch.
The vintage collection paid homage to zigzag Century long influence and the smoking world by blending style, heritage and culture, 2024 marks. The 145th anniversary of the brand and launching the vintage collection is just the first of many moments will bring to consumers and retail to celebrate this remarkable milestone. Furthermore, we continue to develop our event and partnership strategy to integrate Zig-Zag into music, entertainment and other creative communities, including recent collaborations with major record labels, leading into 2024.
We have been granting events within the F&B community and partnership with Roc Nation with a famous DJ collective selection and five time Grammy award-winning producer D mile who added another Grammy at the ceremony for Producer of the Year. Throughout Q4, we continued increasing store penetration for Clipper lighters and capitalizing on the synergies between Clipper and Zig-Zag. We look forward to continuing to provide updates that showcase the momentum and efforts that support Zig-Zag growth.
Moving to Stoker's, Graham noted the success we had for this segment. The strength was driven by another strong quarter of share gains for both Stoker's MST and loose-leaf with its product quality and value proposition continuing to resonate with consumers.
We expect that trend to continue while a small contributor during the quarter, we are excited about the broader rollout of our three white nicotine pouch products. We are in the midst of our initial push on free in both brick-and-mortar stores and digital marketplaces, both our own and other parties' websites, 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 leading to positive consumer sentiment.
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. Our efforts are focusing on maximizing the value of our world-class brands and strengthening our extensive distribution capabilities.
Louie Reformina
Let me now turn the call back over to Louis to go through our results through December 30 local solid quarterly results. Q4 sales were down 6.1% to $97.1 million. Gross margin was up 410 basis points, 52.0% due to segment and product mix. Adjusted EBITDA was up 7.5% to $24.8 million.
Looking at the segment performance, Zig-Zag sales decreased 2.9% year over year to $45.1 million due to the discontinuation of an unprofitable product line in Canada that impacted sales by $1.4 million. Our US papers and wraps business was stable with double digit growth in our B2B alternative sales business for Canadian other smoking accessories categories saw declines during the quarter. We did a discontinuation of low margin third party products. Gross margin increased 100 basis points to 56.5% during the quarter, driven primarily by product mix, including the discontinuation of low margin product lines.
Stoker's products net sales increased 18.6% to $38.0 million in the quarter, the 14.2% volume increase and 4.4% price mix, MSC two or all3 delivered strong growth during the quarter. Net sales for the MST portfolio grew double digits. So for us, retail shipment pounds were up despite the category being down 5.6% with share growing 50 basis points year over year to 7.1% during the second quarter according to MSI. And the C share and store selling was up 40 basis points year over year. The 10.7% Stoker's now in stores, representing 67% of industry volumes still provides a long runway for growth.
We also had strong growth in our international one. Again, Q2 sales were up high single digits from the previous year, focused to the number one selling brand in the quarter in 200, 200 basis points of share, the 31.0% share according to MSAI. overall TCV. Loosely retail shipment counts were up despite the category being down 3.3%. Category performance was driven by a larger decline in pretty loosely with TPV. line, benefiting from its value positioning and continuing consumer feedback, our free sales more than doubled off a low base as we start a broader expansion of the product in 2024, gross margin increased 380 basis points to 57.6%, primarily due to MAC pricing. Cvs sales were $14.1 million gross margin was 23.4%.
Moving to our balance sheet, after generating $61 million of free cash flow during the year, we ended the quarter with $117.9 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 will be able to stay within our net and gross leverage target range of 2.5 to 3.5 times after retiring our convert this year, while having the flexibility for future capital deployment front, the guidance at this point, we expect consolidated adjusted EBITDA of $95 million to $100 million.
The guidance excludes contribution from our CBS business, which contributed a little over $2 million of EBITDA in fiscal year 2023. Further projections include effective income tax rate of 24% to 26%. We expect CapEx to be approximately $9 million to $11 million this year compared to $5.7 million. The previous year included $6.5 million of payments related to an automation project that was pushed out from 2023 to 2024.
We also expect to spend $6 million to $9 million in capitalized software implementation costs related to the ERP and CRM implementations after spending a little over $6 million last year. The first stage of the CRM is now live, and we expect that ERP to go live in the first half of 2024. We currently expect to spend approximately $4 million for the full year to supplement our PMTA.'s related to our modern oral products remain under review by the FDA.
Now let me turn it back to Graham's.
Graham Purdy
Overall, we saw impressive momentum for Stoker's MST, along with the progress in the alternative channel and supported Zig-Zag. We're also very excited about trade. Thank you for participating in the call today. And with them, I'd like to open the call for questions and thank you.
Question and Answer Session
Operator
(Operator Instructions) Scott Fortune, Roth MKM.
Scott Fortune
Yes, good morning and thank you for the question and congratulations on continued penetration into the alternative smoke Shop Channel and the progress continues there? And are you if we look at that generally displacing competitors or look at it as continuing gradual market penetration within that channel? And then is there is there promotional activity you have to do to kind of initially into that channel to gain share internationally? Just talk about kind of the promotional activity in that channel, too, as you continue dosing patients this summer.
Summer Frein
Thanks for the question. I heard you first ask about are we displacing competitors and then ask about our promotional strategy as we're growing in the all channel and look, our part, our penetration into the alternative channel is something we continue to be encouraged by primarily we're focused on expanding distribution and gaining shelf space. So naturally that comes at the expense of taking space of some competitors.
But for us, we're really focused on just gaining shelf space and continuing to grow in that channel, given the the TAM that we see and the opportunity ahead of us. Unfortunately, because of the strong brand equity that Zig-Zag has, we are not over promotional pricing in that space and are quite encouraged by our pricing strategy thus far, but appreciate the color.
Scott Fortune
And then kind of following up on that on three. And obviously, you have differentiated size, pouch and nicotine kind of offering from there and that continues to expand as you put more sales and support there. But what are you seeing are you seeing from the competitive side moving up kind of into into the freeze the offering nicotine wise? Or how do you see that kind of playing out as we look out 24 in driving that growth going forward here?
Summer Frein
Yes, sure. So as you noted, one of the things that makes free so fantastic is its differentiated nicotine positioning in the market. And because of the loaded dynamic of the nicotine space, we aren't seeing a ton of competitive activity, although I don't think that's a necessarily a forever situation because of where consumers are gravitating, certainly on competitors, we'll see that. But we're excited to get into the market and continue to expand and capitalize on our point of differentiation at this point.
Scott Fortune
Perfect. And last one follow-up for there. Obviously, you're ramping the free product in the strong trends, Eric, and similar opportunity, as you saw on Stoker's over time as you ramp up that product and just kind of step us through kind of steady incremental and gains you're seeing and kind of when you kind of timing of the cadence and when this becomes more meaningful on throughout the 24 looking 25 and beyond here, for free kind of just step us through that cadence and the size opportunity as it grows here?
Summer Frein
Yes. So as I I think, were noted in the opening remarks, we continue to see as that category grows significantly over the past several years. And as we anticipate over the years to come, we see it as over $2 billion industry now and so very similar to our Stoker's strategy. Even a, you know, high single digit share in that growing market is really significant to our business. And so we're focused on prudent, steady growth and quarter over quarter. And as we've sort of rolled out this quarter, that's what we're on track to do is continue to see that, that steady growth and that was our success story for Stoker's, as you noted. So following that same playbook, I think will go really well for us.
Operator
Michael Legg, Benchmark.
Michael Legg
Good morning, guys. Great quarter. I wanted to dig down a little on the three. What's your pricing strategy there?
First, sure.
Summer Frein
Our pricing strategy is pretty straightforward in the sense that we are focused on maintaining a profitable business and not over promotional using that space.
Michael Legg
Okay. But is it similar like Stoker's where you feel there's premium product when you have a more cost effective product?
Summer Frein
Or are you going to compete with Zen at the premium price points, we will be and are competing at a premium price point. So a different approach than Stoker's and given our brand positioning.
Michael Legg
Okay. And you mentioned your high single digit market share opportunity. We believe our market share, we are $100 million plus there. Can you talk what your long-term market share goal is and what your store ramp-up expectations are to get this distributed?
Louie Reformina
Hey, Mike, it's great and thanks for the question. Appreciate it. And look at Q3 number one, we're bullish on the category Number two, we're incredibly bullish on our product given the points of differentiation that somebody had articulated. And I think we're bullish on our success rate that we had with Stoker's and following that plan, which has been a very methodical grind up over the last 10 years or so. I think our expectation would be that free would probably follow a similar path to that over time.
Michael Legg
Okay, great. And then you mentioned Clipper, can we talk about what you're seeing with Clipper and how that's going?
Louie Reformina
Yes. We're very encouraged by the results. We're on plan relative to the store gains that we're making in the market. Consumers team has done a nice job of expanding on our social footprint and building some really nice marketing campaigns around the cloud providers. We're seeing a lot of energy in the alternative channel with the carry with Zig-Zag and Clipper, the alternative channel. And so I would say generally, we're excited about the results thus far. And it's a consumer product that competes against a very large and well organized and well capitalized player in the market on. But again, similar to the three story we feel like over the long term, we can be we can be very successful with the product.
Michael Legg
Okay, great. And then just the $4 million legal settlement, what was that we had a share $0.01 level to sort of the key resources further disclosure on in their game to a bottler day-to-day.
Louie Reformina
Okay. We'll take a look at and then the automation project, what is that for? Yes, we focus, as I said before and what we decided to do, we said we'd do it in stages. I would say in the first line of Massimo mutual Regal to defer some of the themes for the future lines for later this year.
Michael Legg
Okay, thanks. And just one last question on the debt. Do you plan on paying that off? Or do you plan on refinancing debt and have been continuing with the same leverage?
Louie Reformina
It was actually able to tie that in July, so that is our current plan.
Operator
Eric Des Lauriers, Craig-Hallum Capital Group.
Eric Des Lauriers
Great. Thank you for taking my questions and offer my congrats on the quarter as well. So it's great to see momentum at both the alternative channel for Zig-Zag and and with the new free products are really kind of gaining momentum here from within the Zig-Zag alternative channel. You mentioned you're sort of able to do a bit more on brand building through that channel versus traditional C-store.
Could you just expand on that? And maybe just give us some examples of sort of some of the ways that you are able to drive brand recognition brand equity, it is more shelf space as they sort of speak, I think also being able to sell apparel and just kind of expand on that CompuCredit.
Summer Frein
Thank you. Yes, hey, Eric, thanks for the question. In terms of the difference in brand building in the alternative space versus the traditional c-store channel, it really is so much more wide-open. If you think about walking into the variety of stores that are in the alternative channel. There's a lot more receptivity to the sorts of things that you can do staying in position and store and certainly touched on apparel.
And these sorts of retailers are also open to selling different sorts of merchandise. And so it really opens a bag and the type of product expansion that we can capitalize on in those stores in a very different way than what is a more traditional C-store space that has that more limited shelf space and opportunity to have those sorts of varieties of products.
Eric Des Lauriers
Okay, that's helpful. Just in terms of the growth that you have been experiencing within alternative channel, you know, obviously you guys have been going after this for for some time here. Is there anything specific to call out to the sort of this growth that's been building over the past couple of quarters here? You mentioned new products is there has it been a matter of sort of finding products that that this channel is looking for and that's sort of variable that's helped you increase your share within that channel.
Is that kind of all of the above with with apparel and other things as well? Just wondering if there's anything to sort of call out as the driver to sort of increasing its penetration within this channel, we would essentially call us and I think we've had pretty strong success in this market for a while.
Louie Reformina
And so we expect that the team has taken. A lot of it is just increasing our penetration in summer mentioned within that channel and in our product offering, our continued push in just kind of the momentum that we're getting is leading to this type of the receipts and felt like this one is on the further opportunity for us to add on to that end market.
Eric Des Lauriers
Okay, great. And just a couple of more kind of quick ones from me on Clipper. I know that we've sort of been working through some high inventory levels at retail. Can you kind of just give us an update on what you're seeing there?
Louie Reformina
Yes. Look, I think the this sort of goes across our business. We feel like the inventory overhang from last year are largely behind us at this point in time, that would include Clippard.
Eric Des Lauriers
Okay, great. And then last one for me. So I understood this automation product skews and projects on you've been optimizing this first line here. So a bit of a pushout in some of the CapEx dollar expectations here. Could you just help us with cadence? I think it maybe sounds like from this not be pushed to Q2, maybe second half? Just any kind of commentary on cadence would be helpful. Thank you.
Louie Reformina
And the second, the majority of that in the first half of the year and continuing to ramp up production through the rest of the year on this project.
Operator
And there are no further questions at this time. I will now turn the call back to Mr. Graham Purdy for closing remarks.
Graham Purdy
Yes. Thanks, operator. I appreciate everybody's time today, and we're excited about the quarter, and we're excited to communicate with you here in a few months on results today. So thank you so much.
Operator
And ladies and gentlemen, this concludes today's call. We thank you for your participation. You may now disconnect.
