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Turning Point Brands, Inc. (NYSE:TPB)
Q1 2020 Earnings Call
Apr 28, 2020, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Turning Point Brands' First Quarter 2020 Earnings Conference Call and Webcast. [Operator Instructions]

After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded.

I would now like to turn the conference over to Mr. Louie Reformina, Vice President of Business Development. Mr. Reformina, the floor is yours, sir.

Louie Reformina -- Vice President of Business Development

Thank you. Good morning, everyone. This is Louie Reformina, Vice President of Business Development. Joining me are Turning Point Brands' President and CEO, Larry Wexler; Graham Purdy, Chief Operating Officer; and Bobby Lavan, 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 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.

Lawrence S. Wexler -- President and Chief Executive Officer

Thank you, Louie, 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. 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 and their commitment to serve our customers' needs.

As an organization, we have 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, implemented telecommunicating where possible. Like many companies, we have changed the way we communicate through increased use of video conferencing and have implemented tele-selling 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 through 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. 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've also added capacity to manufacture hand sanitizers in three of our four facilities, having donated over 100,000 bottles to the 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 temporary closed for three weeks and slowly ramping back up. In-person selling has been dramatically dampened, which will slow new product launches. Select budgeted annual price increases will be delayed. These temporary issues are expected to be somewhat offset by our growing B2C platforms. There were 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 trading load-in 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 were Stoker's MST cans were up over 40% than the trends earlier in the quarter.

Stoker's MST 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 load-in. But so far, we have seen less of a giveback on tubs than we expected, which is a sign that consumers are trading down and volume purchasing trends in the category maybe accelerating due to the economic environment.

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 website. 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 said before, we believe the PMTA process will be a major shift in the industry. Our scientific and regulatory expertise will be a major competitive advantage and help get our higher margin proprietary vape products through the process. We continue to be excited about the longer term potential for these products in a much less cluttered margin.

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. We 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 in perspective on our quarter and the path forward, let me turn the call over to Graham Purdy, Chief Operating Officer.

Graham A. Purdy -- Chief Operating Officer

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. 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 tubs 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.

Smoking saw double-digit growth in the quarter led by strong double-digit growth in US rolling papers and high single-digit growth in cigar wraps. In the US, Zig-Zag 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 Zig-Zag's iconic positioning. Zig-Zag 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.

Zig-Zag share paper cones category has climbed from 5% to 27% over the last year to position Zig-Zag as the number two cones brand, while Zig-Zag hemp papers, the number one hemp paper brand with a 28% share. 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 in 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 quarter as both Smokeless and Smoking saw double-digit growth. Stoker's MST expansion and Zig-Zag advances remain the engines behind continued company gains with total tobacco gross profits up 17% in the quarter.

Moving to NewGen, where we completed the consolidation and streamlining of our vape business under one management team last quarter. Our vape business has 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 surging customer growth during the quarter. We're excited about the future prospect of the 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 vape 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.

We are now looking forward to completing the PMTA process, after which there is significant potential for our proprietary brands. In our Nu-X 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 the Solace Nicotine Chew in the first quarter. With a growing pipeline of products under development, Nu-X is prime 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.

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

Robert M. Lavan -- Senior Vice President and Chief Financial Officer

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.

PMTA has been moved out four months to September 9th. This does not impact our full-year plan and we continue to expect to spend a total of $15 million to $18 million on the process. On April 8th, TPB and Standard Diversified, SDI, announced definitive agreement for a tax-free merger and transaction that is likely completed by the summer.

SDI shareholders will receive 0.97 shares of TPB common shares for each common share of TPB held by SDI at the close of the transaction. We are pleased to have come to an agreement on this. 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 MST increased by approximately 2% with chewing tobacco eroding by approximately 4%. Stoker's shipments to retail continue to outpace the Smokeless industry in the quarter, growing its MSAi share in both chewing tobacco and MST.

Turning to Smoking products. Segment net sales in the quarter increased 13% with double-digit growth in US rolling papers partially offset a year-over-year decline of 500,000 in non-focus cigar and MYO/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 US cigarette papers increased mid-single digits, while MYO cigar wrap shipments to retail contracted by low single-digits.

Moving to our NewGen segment, where we saw stronger than expected results during the quarter. Net sales decreased 19% year-over-year from the lingering impact of vape market disruption and the discontinuing of the V2 business, partially offset by positive contributions from CBD, Solace and other Nu-X products.

The segment did see 28% sales growth sequentially. For the quarter, NewGen 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 NewGen segment returned to positive contribution for the quarter on sales advances and the new consolidated and streamlined structuring. We are pleased that our first quarter's results were above our expectations. We are also encouraged by government measures to support consumers in 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 and the duration impact of response to the virus. Projected 2020 total net sales of $338 million to $353 million and adjusted EBITDA of $69 million to $75 million.

We are also guiding the second quarter to $81 million 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.

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

Lawrence S. Wexler -- President and Chief Executive Officer

Thank you, Bobby. While we continue to deal with the challenging environment, the Company executed well during the quarter and showing 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.

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, while 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 for questions.

Questions and Answers:

Operator

Thank you, sir. We will now begin the question-and-answer session. [Operator Instructions] And the first question we have will come from Vivien Azer of Cowen. Please go ahead.

Vivien Azer -- Cowen -- Analyst

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

Lawrence S. Wexler -- President and Chief Executive Officer

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 the quarter from the wraps business now. It's been down three weeks, so we think that that's $5 million. Probably conservative, but that's where we're at this point.

Vivien Azer -- Cowen -- Analyst

And is that supplier back online or no?

Lawrence S. Wexler -- President and Chief Executive Officer

They are.

Vivien Azer -- Cowen -- Analyst

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, any issues with foot traffic, like certainly we're hearing it from the beverage guys, C-gas, certainly, your data would suggest that. But just curious, any incremental insights you're hearing from your retail partners around foot traffic impacted consumer demand?

Graham A. Purdy -- Chief Operating Officer

Okay. So, what we've been hearing from the field and what I've seen in driving around is that you're seeing fewer people in the stores, but they're buying more. I was in a -- I saw someone walk out of the C-store with are a pocket full off -- a bag full of product, where 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 remain 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, is that 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.

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

Vivien Azer -- Cowen -- Analyst

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 on 12 or 13 days ago, on April 15th? Thanks.

Lawrence S. Wexler -- President and Chief Executive Officer

We haven't really seen that. It's still -- this has only been going on for a month in change. And so, we get very focused on selling to the stores and obviously, sell out is needed, but at this point, we haven't seen sort of -- other than sort of bulk buying, we haven't seen sort of a dramatic shift in our consumers.

I would also say that our Smokeless segment is definitely less city-driven. And so, we're in places that people aren't as locked down. On the Smoking side, our product is very associated with people on a recreational basis. So, people are staying at home and just using our products. So, we feel a little bit sheltered to those issues.

Vivien Azer -- Cowen -- Analyst

Yeah, that seems reasonable. In 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 we've heard from Philip Morris International last week about their expectations for pricing in the back half in international markets. But in the US, you're obviously not the price leader. So, just wanted to get some more color on that comment. Thanks.

Lawrence S. Wexler -- President and Chief Executive Officer

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

Vivien Azer -- Cowen -- Analyst

Perfect. That's all, really helpful. I'll turn it back into the queue. Thanks.

Operator

[Operator Instructions] The next question will come from Susan Anderson of B. Riley FBR.

Susan Anderson -- B. Riley FBR -- Analyst

Hi, good morning. Nice job on the quarter. Just curious, I mean, is this -- for the MST growth, how much do you think was that trade down versus stocking at? Did you guys kind of parcel out? Where you think kind of like the growth came from, the outsized growth?

Lawrence S. Wexler -- President and Chief Executive Officer

Yeah. I mean, the outsized growth came from tubs, which is a trade down, but I think at the end of the day, the business was growing significantly up until the last few weeks of March and then it just shot up. So, it's -- the business continues to be double-digit strength with or without sort of these trade downs.

Susan Anderson -- B. Riley FBR -- Analyst

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

Lawrence S. Wexler -- President and Chief Executive Officer

Yeah. We're assuming a $2 million get back in the second quarter.

Susan Anderson -- B. Riley FBR -- Analyst

Okay.

Lawrence S. Wexler -- President and Chief Executive Officer

Now, the one thing that I'd say is we haven't seen it in April, which we think is -- goes to the strength of the Stoker's brand. So, we're pretty excited about that, but we have been assuming a $2 million get back in the second quarter.

Susan Anderson -- B. Riley FBR -- Analyst

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

Lawrence S. Wexler -- President and Chief Executive Officer

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

Susan Anderson -- B. Riley FBR -- Analyst

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?

Lawrence S. Wexler -- President and Chief Executive Officer

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.

Susan Anderson -- B. Riley FBR -- Analyst

Great.

Lawrence S. Wexler -- President and Chief Executive Officer

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 deal making impossible.

Just that things are one of our competitors posted that they had to take a massive bad debt expense in the quarter, because people aren't paying their bills. So. it makes it -- No one is going to do deals when they can't pay the bill. So, it's complicated, but this is what were set up for. We didn't think it was going to play out exactly this way, but this is what we are prepared for.

Susan Anderson -- B. Riley FBR -- Analyst

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 how -- should we think about that impacting SG&A materially or how should we think about that and kind of out the next quarter?

Lawrence S. Wexler -- President and Chief Executive Officer

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 over time or hourly wage increases, those are more than offset by sort of decreases in business where we've cut back on non-essential spend, T&E has been pulled back significantly. So, we're not expecting any sort of SG&A group at all.

Susan Anderson -- B. Riley FBR -- Analyst

Great. That's helpful. Thanks so much. I'll jump back in. Good luck next quarter.

Operator

[Operator Instructions] Next, we have a follow-up from Vivien Azer of Cowen. Hello, Mrs Vivien. Your phone line might be muted, ma'am.

Vivien Azer -- Cowen -- Analyst

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 myblu. Is there a benefit to getting to the kind of front of the queue, if you will? Thanks.

Lawrence S. Wexler -- President and Chief Executive Officer

There is no benefit. I mean, the only benefit is on flavored pods, which is not a significant part of our PMTA, right because you remember our -- the PMTAs we're filing are in open-systems. The open-systems are still out on the market.

Vivien Azer -- Cowen -- Analyst

Okay. But just in terms of getting like a feedback earlier from the FDA, no value in that at all? Because they're just going to work through everything all at once.

Lawrence S. Wexler -- President and Chief Executive Officer

Yeah. I mean, we're having dialog with the FDA. So, it's -- we're getting feedback already. So, that's -- so, submitting the PMTA early really doesn't get you much, particularly on the lower interest category, which is the open-systems. And so, we will file a little bit early, but we're not in like some rush to do it.

Vivien Azer -- Cowen -- Analyst

Got it. And then just from a cost perspective. Obviously, you're just having teams 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 costs, as the work is taking longer?

Lawrence S. Wexler -- President and Chief Executive Officer

It's pretty fair. It's a little bit of lack of mall, but I don't expect any significant increase. There are some consultants we have on retainer that will stay on an extra few months. And so, that's an extra 25,000 here, 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.

Vivien Azer -- Cowen -- Analyst

Understood. Thanks for the follow-up. I appreciate it.

Operator

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?

Louie Reformina -- Vice President of Business Development

Thank you everybody for joining the call. See you next quarter.

Operator

[Operator Closing Remarks]

Duration: 30 minutes

Call participants:

Louie Reformina -- Vice President of Business Development

Lawrence S. Wexler -- President and Chief Executive Officer

Graham A. Purdy -- Chief Operating Officer

Robert M. Lavan -- Senior Vice President and Chief Financial Officer

Vivien Azer -- Cowen -- Analyst

Susan Anderson -- B. Riley FBR -- Analyst

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