Turning Point Brands, Inc. (TPB) Earnings Call Transcript & Summary

All right, it's 11:01 Eastern Time. This meeting will come to order. Good morning. I'm Don Becker, Assistant General Counsel and Assistant Secretary of the Board of Turning Point Brands, Inc. It is my pleasure to welcome you to this Virtual Annual Meeting of Stockholders. Before we begin the business portion of this meeting, there are several individuals I'd like to acknowledge. First, I'd like to introduce the current members of our Board of Directors who are with us on the call today. David E. Glazek, Chairman of our Board, Chair of our Compensation Committee and a partner of Standard General L.P.; Lawrence S. Wexler, a Director, our CEO and President, and a highly experienced tobacco executive; Gregory H. A. Baxter, a Director and prominent financial industry executive; Ashley Davis Frushone, a Director, Chair of our Nominating and Corporate Governance Committee and Founding Partner of West Front Strategies, LLC., a government relations firm; H. C. Charles Diao, a Director, Chair of our Audit Committee and the Senior Vice President of Finance and Corporate Development of DXC Technology Company; Assia Grazioli-Venier, a Director and Founding Partner at Muse Capital; Stephen Usher, a Director and Head of Distribution at Lafayette Square; and Arnold Zimmerman, a Director and prominent marketing executive. In addition to Larry Wexler, 2 key members of the company's senior management team are also present on the call: Graham A. Purdy, Senior Vice President and Chief Operating Officer; and Louie Reformina, Senior Vice President and Chief Financial Officer. Also present today are Matt Coffland and Phil King of RSM US LLP, our independent auditors. They will be available to answer stockholder questions after the meeting. At today's meeting, we will cover the matters described in the proxy statement mailed on March 25, 2021, to stockholders of record as of the close of business on March 5, 2021. We will then have a business presentation. At the conclusion of our business presentation, we will take questions from our stockholders and guests. I have a list of stockholders entitled to notice of this meeting and proper notice has been given to such stockholders. I also have a certified list of the stockholders of record as of close of business on March 5, 2021, the record date. This list has been available for inspection by stockholders during the past 10 days and remains available for inspection during the meeting. Further, the affidavit certifying the proper notice of the meeting was given to each of these stockholders will be filed with the minutes of this meet. The company has appointed Kristen [indiscernible] and [ Mariam Harris ] to serve as inspectors of election of the meeting. As inspectors, they have been duly sworn and have taken and signed an oath to faithfully execute their duties as prescribed by Delaware law in the company's organizational documents with strict impartiality and to the best of their abilities. The oaths will be filed with the minutes of this meeting. Further, as the inspectors of election, they have presented their preliminary report to the chairman indicating the presence of a quorum. The meeting is properly constituted for the transaction of business. The matters to be acted upon at the meeting will be considered and the order set out in the proxy statement. If there are stockholders attending this virtual meeting who have not voted already by proxy, or who wish to change their previous proxy vote, please send me your vote right now to [email protected]. Please include your name, your 16-digit voting ID code and the number of shares of stock being voted by you in the e-mail. The report to the inspectors with respect to all of the votes cast will be given at the conclusion of the vote on all items. The time is now 11:04 a.m., and I will pause for a moment to allow for e-mail voting on all proposals to commence. Voting will remain open until the end of discussion of all proposals. The first order of business is the election of directors. The following individuals nominated by the Board of Directors are the only persons properly nominated to serve as members of the Board of Directors in accordance with the company's bylaws: Lawrence S. Wexler, Gregory H. A. Baxter, Ashley Davis Frushone, H. C. Charles Diao, David Glazek, Assia Grazioli-Venier, Stephen Usher, Arnold Zimmerman. The nominations are closed. I will pause for any comments via e-mail. Is there any discussion? There being no comment on the proposal, discussion is closed. [Voting]

The next item of business to be acted on is the approval of the 2021 Equity Incentive Plan. On March 22, 2021, the Board approved and adopted the plan subject to the approval of the stockholders. The matter for the vote is resolved that the company stockholders hereby approve the adoption by the company's Board of Directors of the 2021 Equity Plan. Is there any discussion? There being no comment on the proposal, discussion is closed. [Voting]

The next item of business to be acted upon is ratification of the appointment of RSM US LLP as independent auditors for the fiscal year ending December 31, 2021. The matter for the vote is resolved that the company's stockholders hereby ratify the appointment by the audit committee of the company's Board of Directors of RSM US LLP as the company's independent auditors for the fiscal year ending December 31, 2021. Is there any discussion? There being no comment on the proposal, discussion is closed. [Voting]

Phil King and Matt Coffland of RSM US LLP are present and available to answer any appropriate questions after the meeting. There being no questions, the inspectors of election have presented their report to me, which is as follows: First, all of the 8 nominees have been elected as directors. Second, the proposal to approve the adoption of the 2021 Equity Plan has been adopted. Third, the proposal to ratify the appointment of RSM US LLP as independent auditors for the company has been adopted. The report is available for inspection by stockholders and will be filed with the minutes of this meeting. At the request of our Board at this time, there being no further business, I'm adjourning the meeting at 11:07 a.m. and ask Larry Wexler, Chief Executive Officer, to present about the company's business. Thank you all for attending.

Thank you, Don. Good morning, everyone, and welcome to the Turning Point Brands Annual Meeting. This is the 5-year anniversary of the company going public. I would like to take a few minutes to review how the company has progressed over this period, and then talk about why we were so excited about the future. After I finish, I'll turn the stage over to Louie Reformina, our new CFO, to take you through an update on the business today. The company has made substantial progress since our IPO, and we're very proud of how the business has developed. Most obvious reflection of our progress is the stock price, having gone public at $10 per share, is currently trading in the high 40s. This reflects the growth of the business. And our IPO sales were $206 million, and over the last 12 months, are running at a rate of over $400 million. Our EBITDA was $52 million, and over the last 12 months, was reported close to a $100 million. This is an average growth rate of roughly 14% per year. This is a result of outperforming our competitors in virtually all our segments. Stoker's has grown from a 2.7 share in MST to 5.5 share at year end 2020. The share of Stoker's MST in stores in which it has distribution has almost doubled from 2016 to over 9 share in 2020. In Chew, our total share is now over 30% and Stoker's has gone from 17 share in 2016 to close to 25 share today. In total, our Stoker's segment has grown revenue, roughly 11% per year through 2020 to $116 million. Zig-Zag has had similar progress. For the full year 2016, our share of papers was 31%, and for the fourth quarter of 2020, we were running at 36% and sales in the U.S. are running 30% higher than they were in 2016, with growth accelerating in each of the past 2 years. Perhaps more importantly, in 2016, we had not yet entered the growing cone market. In the latest 13-week period, we were the #1 company in cones, measured by MSI, with a share of 41%. Better yet, there's enormous remaining opportunity for this product. While our share of wraps is lower today than it was in 2016, the category is larger and our revenues are up 43% or close to 9% per year. We have also entered new markets. Our vape business is now a 1/3 of our revenues compared to roughly 8% in 2016. We are now invested in cannabis, with our investments in dosist and Marley, and our international business has expanded through our partners in South America, Europe, and our investment in rec marketing in Canada. International revenue should be running at close to $20 million rate by the end of the year. We could not be more excited about our future. As Louie's presentation will highlight, we are maintaining our momentum in Stoker's MST. And with same store sales growing at close to double-digit rates, and with only 62% distribution, we have a long runway for growth. The Stoker's brand also continues to outperform the Chew category. The new product and channel initiatives we have implemented for the Zig-Zag brand have accelerated its growth. The entire team is very excited about the progress we have made. In the measured channels, our papers are now #1 brand and we sell at a premium to our competitors. We have become the leading cones marketer in just 2 years. And this segment is growing with great potential outside the measured market. In wraps, we have new products being introduced over the next few quarters that allow us to compete in the 20% of the market where we presently do not have entries. All these businesses are highly leveraged to cannabis, and we see a lot of opportunity for growth in these segments. We have begun to build out our assets in the cannabis space, and we're building a broader portfolio of brands of supplement Zig-Zag. We believe there'll be significant value in brands as this market moves away from its current undersupplied situation. In vape, we believe that we have positioned ourselves for 2 transformational events in the industry, the PMTA and the PACT Act, which gives us healthy growth options going forward. The team has submitted to the FDA what may be the broadest portfolio of products in the industry. The value of these products will emerge as the FDA starts to ramp up enforcement of the companies that cannot meet their rigorous requirements. The PACT Act will transform logistics in the vaping space and will be very disruptive. Our team has responded very quickly and rebuilt our transportation infrastructure in just a few weeks. We are being approached by a number of companies that are not confident they can continue to operate under this regime, which provides us with market share and partnership opportunities that will play out over the next few quarters. Our New Ventures Group has developed our white pouch entry Fre and has tested very well, is in the process of being rolled out. This product is positioned at the higher end of the nicotine spectrum, and that is where the consumers have been trending. We are optimistic that we will carve out our space in this growing category. And this group is just hitting their stride and there are more new products on the horizon. We see progress across the entire company. A lot of the unsung departments are also making great strides. Our manufacturing organization has efficiency and capacity programs in place that are starting to get results. We have consolidated all our fulfillment operation in Louisville, a process that will pay dividends in the future. And our salesforce is expanding, which should improve the reach and awareness of our products. It's been a privilege to be the CEO of Turning Point Brands since its IPO, and I'm gratified by the progress we have made. I could not be more excited about the future as I believe the best is yet to come. We have an outstanding team that is focused on winning in the marketplace and works hard on getting better every single day. You'll be seeing the benefits of this effort in the future. And with that, I'd like to turn the podium over to Louie.

Sorry. It looks like screen sharing has been disabled. Do we have anyone down there that can fix that for us?

Wayne, if you're listening. Can you fix that for Louie, please?

If not, I'll send you the presentation, Don, and I think you are the host.

This should be enabled now, Louie.

All right. Thank you, Larry, and thanks everyone for joining. So I'll just give a quick overview of the company and touch on our recent results. Here's our standard disclaimer page. So over the last few years we've really repositioned the company, and today we view ourselves as a branded consumer products company with an attractive growth profile. We've got 2 highly profitable and stable core brands that serve as our pillars in that Zig-Zag and Stoker's. Zig-Zag is the #1 rolling paper and cigar wraps brand, and it is benefiting from the secular growth trends with seasons and markets. Stoker’s is our other core brand. It is the #2 brand and #1 value brand in tobacco chew. But more importantly, the driver of the growth here is our Moist Snuff Tobacco product, otherwise known as MST or dip, where we are leading value brand and the fastest growing brand in the category. NewGen is our third segment. So we focus on the next generation of products here. It was built through a series of acquisitions in the vape distribution space. The big driver here, which we will touch on later, is the upside opportunity from the PMTA process, which we think is going to take a highly fragmented market and transform it into a consolidated market that will create significant barriers to entry. So in the back of our segments, we've maintained a lean asset-light and low-cost operating model where CapEx has been roughly around 1% of sales. So that allows us to generate a steady stream of free cash flows from businesses that had been proven to be recession resistant. And overall, as Larry mentioned, we've made some significant upgrades to the company since IPO in 2016. We've streamlined our cost structure. We've repositioned the company for growth, and that has led to our recent financial success. And we're finally starting to demonstrate the operating leverage that is inherent in our business. So in 2020, we saw 12% sales growth, but we delivered 34% adjusted EBITDA growth. That strong performance has continued into the first quarter of the year where we saw 19% revenue growth and 57% EBITDA growth. Going forward, our outlook remains bright. We raised our guidance in our last earnings call, and we're expecting another year of strong double-digit EBITDA growth. We've got over $150 million of cash in our balance sheet, and we expect to generate well over $100 million of EBITDA this year. Moving on to the next slide. So this slide shows that brands are important to our business and that the revenue that we generate within each segment is really driven by these 2 core brands with Zig-Zag and Stoker’s. And we use these brands to introduce a lot of either new brands that we develop internally or acquire brands that we have in our portfolio. You see there, those dosist and Marley, which are recent acquisitions -- or investments in the cannabis space. So we view the cannabis space as large and growing in market and should look for us to continue to increase our exposure in that market. So one of our strengths as a company that makes us unique is a powerful sales and distribution infrastructure. Our products reach over 210,000 retail outlets in North America. We have a very strong presence in independent convenience stores and leading chain accounts. And we also have strong e-commerce platforms for our brands and our vape distribution businesses. I'll get into more detail on our alternative channel strategy to reach headshops and dispensaries, but we are now able to reach consumers of our products where they want to shop. So this slide just shows the brands that we have within each of our segments and the revenue we generate within them, along with our strategic priorities, which I will get into later in the presentation. So you can see from this chart that we've got a very diversified portfolio of product lines that complement each other very well. Our 2 core brands, Zig-Zag and Stoker’s, make up a vast majority of the profitability of the company and of our growth. So both are recession-resistant businesses that generate stable free cash flow. And we also have a ring fence, NewGen segment that does not contribute much for profitability today, but provides a lot of optionality and potential upside from the PMTA process and the development of our new products within our Nu-X business and NewGen. So we not only benefit from our diversified product categories but also our diversified end markets. We're in cannabis accessories, smokeless tobacco and entering into other alternative actives as well, such as nontobacco nicotine, CBD and nutraceutical products. We've been continuously expanding the size of our addressable markets that we compete in and we'll continue to do that going forward. So starting off our first segment is Zig-Zag products. Well over half of our operating profits come from Zig-Zag and it is now our fastest growing segment. And it will continue to be positioned to benefit from the secular growth trends that you're seeing in cannabis consumption. So there's 2 main products in this segment that are primarily used as cannabis accessories. Zig-Zag is the #1 rolling paper brand. Rolling papers are most iconic product. That makes up about half of our revenues in this segment. So we have a perpetual license there in the U.S. and Canada, we've had since 1992. That renews every 20 years. So the next renewal date in November 2032. And the other half of the segment is the Make-Your-Own cigar wrap brand. So think about that as an outer shell of a cigar, which are primarily used as cannabis accessories. So we own the market for that cigar wraps business, which is the other half of the business. So when you look at the brands in the cannabis market today, Zig-Zag really stands out as one of the most iconic brands and the strongest brands in the space. It's a history that dates back over 120 years and with recognition that is unparalleled in the market, woven into pop culture, whether it's the Andy Warhol sketches or Dr. Dre's Chronic cover album. But until recently, the business was under-invested relative to the large opportunities we had in front of it, and part of that was because the company was distressed for a long period of time prior to our IPO. So we changed that in mid-2019 by developing strategic growth initiatives that you see on the right here to address some of the glaring holes we had both from a channel and a product perspective and repositioned the business for growth. So those included building up e-commerce platform from scratch. We mentioned our last call that e-commerce was over double digit of our U.S. papers business now, coming from a base of zero. We developed a strategy for what we call the alternative channel, which includes headshops and dispensaries, which are large parts of the market that we are seeing growth in, but where we were underrepresented. It was a channel that we weren't calling on directly. So we are also extending the brand and our offerings into large and growing product categories, I had mentioned paper cones earlier. So cones are a more convenient product for the consumer. And one cone effectively sells for 4x to 10x the price of an individual sheet of our regular rolling paper at retail. So it's a significant increase to our addressable market on a per usage basis as cone penetration continues to rise. So in addition to paper cones, we'll have even more products introduced in the market later this year, which we think will add to our growth. So as a result of the initiatives that we have put in that you see there on the right, we took a business that didn't really see much growth from 2016 to 2019 to a business that saw 22% growth in 2020 with a majority of that coming from the internal initiatives that was mentioned. Our market share in U.S. papers, which has been flat since the IPO, was up 250 basis points at 34% in the measured market and finished up as high points over 36% as Larry mentioned. So our volume growth in the measured market was almost twice that the rest of the market during the year. E-commerce, as I mentioned, was nonexistent in 2019, was double digits for U.S. papers business in the second half. Cones went from 0% of our sales in 2018 to over 10% of our sales in the U.S. papers business in the fourth quarter. And then that ramped to 19% in the first quarter of this year. We expect that to continue to ramp up forward. You know Zig-Zag has been our most profitable segment, but now it is our fastest-growing segment and report guiding through another year of double-digit growth in this segment, strong double-digit for the year. So when you think about Zig-Zag, there's really 2 parts to this story. We've got an incredibly strong secular tailwind with the increased cannabis consumption that is being driven by legalization. And more importantly, the change in public perception around cannabis and more important, there is a second piece of the growth driver, which is the self-help aspect here, where we fundamentally change the growth profile of the business through these growth initiatives. And we believe we are still in the early innings of realizing the benefits as we keep leveraging the power of the brand to keep extending our market opportunities. So unlike other names that has exposure to the cannabis space, our business generates a significant amount of free cash flow, we've used our positioning. Sometimes it's better to be selling the picks and shovels when you're in a gold rush, which is where we believe we are. So just on the cannabis legalization trends, according to the latest Gallup Poll, 7/10 Americans now support legalization nationwide from a recreational use. That's approximately double the rate of acceptance 20 years ago. At the end of 2020, 15 states and DC have legalized recreational use of cannabis. That is now up to 18 states at the beginning of this year. And we expect that to be continuing to be tailwinds for us as more states turn to legalization, and we expect further upside potential to our product offerings because of that. So this next slide kind of just shows the projected growth that you are seeing in the cannabinoid market. The legal U.S. cannabis market is expected to double from $16 billion to $34 billion in 2025. A lot of these estimates were before some of the newer states have legalized, especially in New York, which is a large market that will expand that growth going forward. We're also in the U.S. CBD market, which is expected to have a double-digit growth over the next 5 years. We think that the investments that we've made in expanding the Zig-Zag brand has an enormous potential to gain a significant share of this large potential addressable market. And it is one of the most recognized brands in the space and one of the few truly national brands with the opportunity to succeed. In addition, our recent strategic investments with Wild Hempettes, dosist and our Marley CBD brand and Marley [indiscernible] brand provide a lot of optionality to participate in these markets by alternative product categories and channel -- and categories. Currently, however, our business is not exposed directly to the cannabis flower, and therefore we're not exposed to that regulatory risk is the New York Stock Exchange listed company. So this just shows the impact of legalization in the markets that we participate in. You could see on the paper side, on the left, stronger growth in the adult rec states versus the non-rec states. This is actually -- the data here is masked by the fact that there is a shift from the measured channel to non-measured channel when a state goes legal as purchasing shifts away from convenience stores. These the headshops and dispensaries which are not in our measured channel. And so that growth would be much stronger if you add that growth that’s been seen in that market. The wraps market in right is more representative of what happens in a legal state just because of the wraps is the tobacco product. So the purchasing there tends to stay into these stores that can sell tobacco and you see double the growth over the last couple of years -- more than double the growth over the last couple of years in states that are adult legal versus those that are a nonlegal. And as I mentioned before, we saw really strong growth with Zig-Zag given the initiatives that we put in place exiting 2019 and 2020. So business that have not grown much saw 22% year-over-year growth in 2020. That momentum has carried into the first quarter of this year, where we saw over 40% growth in that segment. And moving on to Stoker’s. So there's 2 parts of the business to Stoker’s, 40% of the segment is the original tobacco chew business and 60% of the segment is our MST business. That mix was opposite when we went public and we've shifted towards that mix as MST has driven the growth over the last few years. Tobacco chew is really an annuity business for us. The real growth driver is MST, where we've seen double-digit growth over the last couple of years. We've seen a nice acceleration driven by our same-store sales gains, along with continued expansion for distribution on the back of some large wins with the -- some meaningful chain accounts over the last couple of years. In terms of the industry in MST, 85% of the volumes in this market are from our large competitors. It's a very rational category. We're priced 40% below, but we think our product is a premium product. So that is driving adoption by the consumer. And there's also a secular trend towards the value category here, which we are benefiting from. In addition, because of the rationality of our competitors in the industry, the industry tends to take 5% to 7% of pricing every year. So going forward, we expect strong trends to continue. We're still in the only roughly 61% of the volume weighted distribution of category and have less than 6% of the volume share of the market. So there's still plenty of runway here for us to grow, especially if the value segment where we play continues to gain share in that category. You see the results that we've seen. We've had nice double-digit growth over the last couple of years, and we're seeing that growth in our gross profit as well. And so our third segment is NewGen. So NewGen is our platform for our new next generation proprietary products. We built it through a series of acquisitions in the vape distribution side since our IPO. The expectation here is to drive profitability by increasing the mix of our proprietary products within NewGen. So right now that stands at 20%. We think the big catalyst for that is the PMTA, which is an FDA process to get approval to stay in the market. The market is currently -- the market we play in, which is the open tank market, is currently a highly fragmented market. And this will essentially consolidate that market and take it from hundreds of manufacturers to a handful. So the second is currently made up of mostly these lower margin, third-party products that comprise 80% of the sales. As we increase that mix, we think we can move our gross margins from this business from 30% today and over time closer to the 50% gross margins that we are seeing in our core businesses. So within this segment, we also have a Nu-X division where we have launched a number of new products. You could see them on the right of the slide, into the market, including CBD, nutraceuticals and more recently, a white nicotine pouch under the brand name, Fre. The segment overall, it's currently the smallest contributor to our profitability. We expect it to generate less than 10% of our EBITDA in the short term. But in essence, we've set the business up to generate free cash flow and be self-funded today, but positioned to be able to participate in the upside from the PMTA process, along with the growth that we can see with these new products in Nu-X. So these are just a summary of our results from last year and how we ended the year. As we mentioned, we saw a nice sales growth of 12% with adjusted EBITDA growing 34% for the full year, nice free cash flow generation increase year-over-year as well. And with that asset-light operating model, we expect to continue to generate sizable free cash flow, which we will expect to use to invest to continue to grow the business. We saw 90% -- $90 million adjusted EBITDA growth -- or $90 million of adjusted EBITDA in 2020 with only $6 million of CapEx. And so we're guiding this year to have $103 million to $108 million of adjusted EBITDA with CapEx staying at similar levels, which should lead to strong free cash flow generation again. And you see here our leverage since we went IPO. We've taken it down from 6x to 3.1x at the end of 2020. We finished Q1 with an LTM leverage ratio of 2.7x. So very well positioned from a balance sheet perspective, which gives us a lot of flexibility to invest in the business going forward. And this is just an update of the recent results. We had our earnings call last week, where we increased our guidance for the year. We saw a net sales growth of 19% year-over-year and adjusted EBITDA growth of 57% year-over-year. We've guided to sales being up this year with double digit increases in our core business and a decline in NewGen because of some of the comps that we have last year and some of the noise around -- short-term noise around the PMTA that we think it's going to be a long-term positive for us. And as I mentioned, adjusted EBITDA is expected to be $103 million to $108 million for the year, and that is up from the previous guidance of $99 million to $105 million. And really what we're seeing is a lot of the internal growth initiatives that we've put in place driving a majority of this growth with the core businesses are pacing the growth that they are seeing in their markets. With rolling papers and wraps seeing the secular trends from increased cannabis consumption and Stoker's seeing the benefits of consumers downtrading and value category continues to increase its share within the MST business. And so that led to pretty strong operating leverage in Q1. We saw 60% incremental EBITDA margins on top of the 19% sales gross which led to that 57% adjusted EBITDA growth. In addition, we also made an investment in Docklight, which added the Marley brand to our TPB portfolio. We are pretty excited about that given the combination of Zig-Zag and Marley gives 2 of some of the strongest brands in the markets that they compete in. And even with that, we've got $180 million of available liquidity, well capitalized as you saw on the balance sheet. So we are well positioned to take advantage of the market opportunities that we see going forward. So with that, I just want to turn that -- turn it back over to Larry, and thank you for taking the time to hear our story.

Thank you, Louie. So at this time, we'll open up for questions, Don. I believe the question should be e-mailed to -- you have the address?

It's [email protected].

Don, have you received any questions?

I have received no questions. I mean, alternatively, we could use the chat feature in Zoom.

Okay. So if there are no questions, then this concludes today's presentation. I appreciate everybody joining the call and look forward to seeing you again next year. Thank you very much.

Thank you, everybody.