Turning Point Brands, Inc. (NYSE:TPB) Q4 2023 Earnings Call Transcript
Turning Point Brands, Inc. (NYSE:TPB) Q4 2023 Earnings Call Transcript February 28, 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: Ladies and gentlemen, good morning, and welcome to the Turning Point Brands' Fourth Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. All lines have been placed on mute to help prevent any background noise. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. Please note that 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 Louie Reformina, Chief Financial Officer. Joining me are Turning Point Brands, President and CEO, Graham Purdy; and Chief Revenue Officer, Summer Frein. This morning, we issued a news release covering our fourth quarter results. This release is located in the IR section of our website, 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 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 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 Louie. Good morning, everyone, and thank you for joining our call. Our fourth quarter 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 FRE, our modern oral or white pouch nicotine product. This product will compete in the category that is trending towards $2 billion in manufacturer revenue and grew volume by over 50% last year per MSAi. 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 FRE. 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 FRE's present and store count over an extended time frame similar to what we have achieved with Stoker's MST. FRE presents a significant opportunity for the company given its differentiated offering. 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 to 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 return to growth in 2024.
We were pleased that both our Zig-Zag papers in the traditional channel and 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, head shops, smoke shops, which cater to a growing accessory market.
Our alternative B2B 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 networks 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 try 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 that, 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 road map of furthering Zig-Zag's position as a lifestyle brand. Our focus on growing Zig-Zag's portfolio and the alternative channel while increasing the brand ubiquity remains a core tenet of that plan. In Q4, we continued building a product assortment that aligns with market demand. In early December, at MJBizCon, we launched our new Zig-Zag combo booklet, a convenient package combining both papers and tips available in several varieties of our paper assortment. Since its 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’s first seasonal apparel collection, the Vintage Collection, which garnered the attention of the fashion and streetwear community, with two of the largest culture publications, Complex and Hypebeast covering the launch. The Vintage Collection paid homage to Zig-Zag’s century-long influence in 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 we’ll bring to consumers and retail to celebrate this remarkable milestone. Furthermore, we continued 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 hosted Grammy events within the Afrobeat community in partnership with Roc Nation, with the famous DJ collective Soulection, 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’s 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 FRE white nicotine pouch product. We are in the midst of our initial push on FRE 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.
Let me now turn the call back over to Louie to go through our results.
Louie Reformina: Thank you, Summer. Starting with our consolidated quarterly results. Q4 sales were down 6.1% to $97.1 million. Gross margin was up 410 basis points to 52.0% due to segment and product mix. Adjusted EBITDA was up 7.5% to $24.8 million. Going into 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 U.S. papers and wraps business was stable with double digit growth in our B2B alternative sales business. Our Canadian and other smoking accessories categories saw declines during the quarter, due to the discontinuation of the low margin third-party product line. Gross margins increased 100 basis points to 56.5% during the quarter, driven primarily by product mix, including the discontinuation of a low margin product line.
Stoker’s products net sales increased 18.6% to $38.0 million in the quarter with a 14.2% volume increase and 4.4% price mix increase. MST, Chew and FRE all delivered strong growth during the quarter. Net sales for the MST portfolio grew double digits. Stoker’s 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 MSAi. MST share in-store selling was up 40 basis points year-over-year to 10.7% with Stoker’s now in stores representing 67% of industry volumes, which still provides a long runway for growth. We also had strong growth in our international export business. Chew sales were up high single digits from the previous year.
Stoker’s Chew was the number one chewing brand in the quarter, gaining 220 basis points of share with 31.0% share according to MSAi. Overall TPB loose-leaf retail shipment pounds were up despite the category being down 2.2%. Category performance was driven by a larger decline in premium loose-leaf, with TPB’s volumes benefiting from its valued positioning and continuing consumer trade down. Our FRE 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 MST pricing gains. CDS sales were $14.1 million. Gross margin was 22.4%. 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 in 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 2.5x to 3.5x after retiring our convert this year, while having the flexibility for future capital deployment. Onto guidance. At this point we expect consolidated adjusted EBITDA of $95 million to $100 million. The guidance excludes contribution from our CDS business, which contributed a little over $2 million of EBITDA in fiscal year 2023. Other 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, including $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 implementation after spending a little over $6 million last year. The first stage of the CRM is now live and we expect the 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 PMTAs related to our modern oral products, which remain under review by the FDA. Now, let me turn it back to Graham.
Graham Purdy: Overall, we saw impressive momentum for Stoker’s MST along with the progress in the alternative channel in support of Zig-Zag. We’re also very excited about FRE. Thank you for participating in the call today. And with that I’d like to open the call for questions.
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