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

The meeting will come to order. Good morning. I am Brittani Cushman, General Counsel and Secretary of the Board of Turning Point Brands, Inc. It is my pleasure to welcome you to this virtual Annual Meeting of Shareholders. Before we begin the business portion of this meeting, there are several individuals I would like to acknowledge. First, I would 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; Yavor Efremov, our President and CEO and a Director; Gregory H. A. Baxter, a Director and prominent financial industry executive; H.C. Charles Diao, a Director, Chair of our Audit Committee and highly experienced 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; Assia Grazioli-Venier, a Director and founding partner of Muse Capital; Stephen Usher, a Managing Director and head of distribution at Lafayette Square; Lawrence S. Wexler, a Director, our Former CEO and a highly experienced tobacco executive; Arnold Zimmerman, a Director and prominent marketing executive. In addition to Yavor Efremov, 2 key members of the company's senior management team are also present on the call: Graham Purdy, Senior Vice President and Chief Operating Officer; and Louie Reformina, Senior Vice President and Chief Financial Officer. Also present today are Steve Corns 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 15, 2022, to stockholders of record as of the close of business on March 4, 2022. 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 the meeting, and proper notice has been given to such stockholders. I also have a certified list of the stockholders of record as of the close of business on March 4, 2022, 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 that proper notice of the meeting was given to each of these stockholders will be filed with the minutes of this meeting. The company has appointed Kristin Fryrear and Caitlin Maloff 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 and the company's organizational documents, with strict impartiality and to the best of their ability. 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 in 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 Annual Meeting 2022 at tpbi.com. 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 of the inspectors will respect -- with respect to all of the votes cast will be given at the conclusion of the vote on all items. The time is now exactly 11:03 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: David Glazek, Yavor Efremov, Gregory Baxter, H.C. Charles Diao, Ashley Davis Frushone, Assia Grazioli-Venier, Stephen Usher, Lawrence Wexler, Arnold Zimmerman. The nominations are closed. I will pause for any comments via e-mail. Is there any discussion? [Voting]

Discussion is closed. The next item of business to be acted upon is the ratification of the appointment of RSM US LLP as independent auditors for the fiscal year ending December 31, 2022. 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, 2022. Is there any discussion? [Voting]

Discussion is closed. The next item of business to be acted upon is the frequency of executive officer compensation. The matter for the vote is: resolved, that the shareholders determine on an advisory basis whether the preferred frequency of an advisory vote to approve the compensation of the company's named executive officers as disclosed in the company's 2021 proxy statement should be every year, 2 years or 3 years. Is there any discussion? [Voting]

The discussion is closed. The next item of business to be acted upon is the executive officer compensation. The matter for the vote is: resolved, that the compensation paid to the company's named executive officers as disclosed pursuant to Item 402 of Regulation S-K in the company's proxy statement, including the compensation, discussion and analysis, compensation tables and narrative discussion contained therein is hereby approved. Is there any discussion? [Voting]

Discussion is closed. Steve Corns and Phil King of RSM US LLP are present and available to answer any appropriate questions after the meeting. The inspectors of election have presented their report to me, which is as follows. First, all 9 of the nominees have been elected as Directors. Second, the proposal to ratify the appointment of RSM US LLP as independent auditors for the company has been adopted. Third, the proposal to approve on an advisory basis of the frequency of advisory votes to approve named executive officer compensation has been adopted. Fourth, the proposal to approve named executive officer compensation 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 will adjourn the meeting at exactly 11:06 a.m. and ask Yavor Efremov, Chief Executive Officer, to present about the company's business. Thank you all for your attendance.

Good morning, and welcome to the Turning Point Brands Annual Meeting. I am Yavor Efremov, CEO of Turning Point Brands. Let me take a few minutes to give some high-level views on the company, before I turn it over to our CFO, Louie Reformina, to take you through the update on the business. I joined the Board in July of 2021, and subsequently got to know the company very well last year through working in different parts of the organization in a frontline capacity either as a temp or a trainee, including in our MST plant in Dresden, on the production and fulfillment side in Louisville and as a sales rep in Florida and Denver. I also spent considerable time getting to know our operations and our employees in Louisville, Miami and Los Angeles. Throughout that time, I witnessed a business that was already performing well and also had significant potential, which is why I took the job as CEO. My first priority as CEO is to execute on the plan for our existing business. We have great brands that provide us with a strong moat, solid balance sheet and impressive cash flow. Zig-Zag is favorably positioned in the industry with a strong secular growth trend. You will see us invest more in the business to realize the full potential of the brand. Stoker's is well positioned as a leading value brand and continues to gain market share as we aim to expand distribution further to MST. NewGen is navigating a challenging environment, but maintains significant upside potential as we build a differentiated distribution infrastructure for a post-PMTA environment, where we can benefit from FDA enforcement. Secondly, you will see us invest in our organizational infrastructure and upgrade it for future growth. We are in the process of upgrading our ERP and CRM systems to modern levels that should drive substantial efficiencies. We have also brought on new talent to the organization. We recently announced the hiring of Summer Frein as our new Chief Marketing Officer to help strengthen our brands and have also hired a Chief Information Officer to oversee our technology systems, including our ERP implementation and a Chief People Officer to support our organizational infrastructure. In addition, we are investing in our sales organization, including adding more salespeople to capitalize on a burgeoning opportunity in head shops and dispensaries for our Zig-Zag products. Lastly, we will utilize our strong balance sheet and free cash flow through share repurchases and acquisitions that will leverage our infrastructure and create value for our shareholders. In terms of timing, sometimes the right deal appears quickly and sometimes it takes time to find it. When I hunted for deals at Liberty, I learned to be patient. I would like to assure you that we will be cautious with your capital and we will only undertake transactions we find compelling from a shareholder value perspective. Putting it all together, I believe our organization and infrastructure provides a strong platform to invest further to deliver both organic and inorganic growth. With that, let me turn it over to Louie for an update on our business.

Thank you, Yavor. I'll give a quick overview of the company and touch on our results. There is a presentation available on the annual meeting page of our website, which is in the IR section and Events section of the site. So turning over to Slide 1 of that presentation. Please take a moment to look at our disclaimer, which addresses our forward-looking and cautionary statements. So turning over to Slide 2. We really view Turning Point Brands today as a branded consumer products company with an attractive growth profile. We have 2 highly profitable and stable brands that serve as our pillars, and that's Zig-Zag and Stoker's. Zig-Zag is the #1 rolling paper and cigar warps brand and is benefiting from the secular growth trends in its end markets. Stoker's is the #1 overall and value brand in the loose leaf tobacco chew market. But more importantly, the driver of growth here is our moist snuff tobacco product, otherwise known as MST or dip, where we are a leading value brand and the fastest-growing brand in the category. NewGen is our third segment, which focuses on the distribution of our own and third-party vape products. It was built through a series of acquisitions. While it is navigating a transitory period as the FDA regulates the industry today, the big driver here is the upside opportunity from the PMTA process, which will be a transformational event that will consolidate a highly fragmented market and create significant barriers to entry. And we'll touch a little bit more into that a bit later. So on the back of our segments, we maintain a lean asset-light and low-cost operating model. So CapEx has been around 1% of our sales over the last few years, and that's allowed us to generate a steady free cash flow for the business, and our businesses are generally recession-resistant. So over the last few years, if you look at our company, we've really transformed into a growth business from our IPO. In 2020, we saw a 12% sales growth and delivered 34% adjusted EBITDA growth. We followed that last year with 10% sales growth and 20% adjusted EBITDA growth. We're expecting solid growth again in our Zig-Zag and Stoker's business this year, while we manage our NewGen business through a challenging transitory period as the FDA regulates the vape industry, which we believe ultimately presents significant upside opportunity for that segment. On top of that, we've got approximately $150 million of liquidity, including over $120 million of cash on our balance sheet. And we generate healthy free cash flow. So we aim to use that on accretive capital deployment. Turning to the next page. Brands are very important in our markets, and they can provide long annuities through our loyal customers. We have a great combination of iconic staple brands in Zig-Zag and Stoker's that we can leverage those products to expand distribution for both our newer internally developed brands like Free, which is our entry into the nicotine pouch category, and acquired brands like Solace in our vape business. CLIPPER Lighters is our newest brand that we are very excited about given its significant potential. We'll get into more detail on it later, but it is our distribution infrastructure that allowed us to enter into an exclusive distribution agreement for that product. That's a good segue over to the next slide. One of our strengths as a company that makes us unique is a powerful sales and distribution infrastructure. Our products touch over 215,000 retail outlets in North America. We have strong presence in independent T stores and leading chain accounts, and we also have a strong e-commerce platform for our proprietary brands and vape distribution business. While there are alternative channel strategies to increase our presence in head shops and dispensaries for Zig-Zag, we're now able to reach our consumers of our products where they want to shop. So this is just an overview of the different business segments that we have, along with our strategic priorities, which we will get into later in the presentation. Overall, we have got a diversified portfolio of product lines that complement each other very well. Zig-Zag and Stoker's currently contribute a vast majority of our profitability and growth, both are recession-resistant businesses that generate stable free cash flow. And we have our NewGen segment, which represents our vape business. Doesn't contribute much of our profitability today, but it is cash flow positive and provides an optionality, a potential upside from the PMTA. So we not only benefit from diversified product categories, but also diversified end markets. The cannabis accessories, smokeless tobacco, other alternative actives such as vape and nontobacco nicotine, we've been continuously expanding the size of our addressable markets that we compete in and most recently by entering the cigars and lighters markets and we'll continue to do that going forward. Now turning to our different business segments. On Slide 7 is Zig-Zag. So well over half of our operating profit comes from Zig-Zag, which is our fastest-growing segment. And it's positioned to benefit from the secular growth trends 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. We have 34% share in the market last year in what we call the measured market. That consist mostly of convenience stores and smoke shops. Rolling paper is really our most iconic product. We've got a perpetual license for the product in the U.S. and Canada, which renews every 20 years with the next renewal date being in November 2032. So that piece of the segment makes up about half of the revenue in the segment. The other half comes from our make-your-own-cigar wraps, where we own the Zig-Zag trademark for tobacco products and where we have the #1 share with the majority of the market for tobacco cigar wraps. You can think of it as the outer shell of a cigar, which is primarily used as wraps for cannabis. So when you look at the brands in the market today, Zig-Zag really stands out as one of the most iconic and strongest brands in this space. It's got a history dating back over 140 years. Recognition that is unparalleled in the market and woven into pop culture, including Dr. Dre's The Chronic album cover and Andy Warhol sketches. But for a good period of time, the brand was really underinvested relative to the large market opportunities that was in front of it. Part of that was because of the leverage we had in the business before we had our IPO. So we changed that towards the end of 2019 by developing strategic growth initiatives to address some glaring holes we had both from a channel and a product perspective and reposition the company for growth. That included building an e-commerce platform from scratch. We also developed a strategy what we call the alternative channel, which includes head shops and dispensaries, which are large parts of the market that were seeing higher growth, but where we were underrepresented. To support that strategy, we ramped up our sales and marketing efforts, including the launch of Zig-Zag Studio last year with an exciting set of videos, limited edition of apparel and collaborations with partners that reenergized the brand. On top of that, we extended the brand and our offerings into large and growing product categories like paper cones. Cones are a more convenient product for the consumer and 1 cone effectively sells for 4 to 10x the price of an individual sheet of our regular rolling paper at retail. That's a significant increase to our addressable market on a per usage basis. Recently, we also introduced our Zig-Zag hemp wraps and natural leaf wraps for market, and we will even have even more products introduced to the market later this year. So cigars is another category where we have recently reentered, that is benefiting from increased cannabis consumption. The acquisition of Unitabac's portfolio last year gives us IP and a manufacturing relationship that will allow us to enter this market with a better cost structure. The market for our paper and wraps products today in the U.S. is roughly around $500 million, but the cigar market is a $2.5 billion market opportunity. It's complementing our cigar wraps product. Our goal in the long term is to be able to leverage the Zig-Zag brand in this large and growing category. And we started the introduction of Zig-Zag rough cut natural leaf cigars in the first quarter of this year. CLIPPER is another product that we're excited about. Lighters is another end market where we're excited to enter as it's the perfect complement to our current product offering. Earlier this year, we announced the partnership with Flamagas for exclusive distribution of the CLIPPER Lighters in the U.S. and Canada. CLIPPER is the #1 reusable lighter and #2 overall lighter in the world, including #1 share in several developed and large markets in Europe. It's currently a small player in the U.S. with less than 3% share, but has had success and a proven playbook, growing their presence in other markets by partnering with the right rolling paper company with strong distribution. It's a large opportunity for us and another example of our expansion into large markets with a lighter market that is roughly $1 billion in retail and $500 million in wholesale revenue in the U.S. and Canada, roughly equal to the size of the market for our papers and wraps today. So we're starting distribution of Clipper Lighters in the second half of the year. And overall, with these products -- one of the drivers for our growth is cannabis consumption. Fueled by the legalization trend, the legal cannabis market is expected to grow at a 14% CAGR over the next 5 years to reach $46 billion in 2026, assuming just the states that have approved legalization today. With our product portfolio, we're well positioned to benefit from the trends in the market with one of the most recognized brands associated with this space and one of the futurely national brands. We believe that the current growth can accelerate further with further legalization. According to recent Gallup poll, about 7 out of 10 Americans now support legal cannabis nationwide, which is approximately double the rate of acceptance 20 years ago. As of the end of 2021, 18 U.S. states and D.C. had legalized recreational use of cannabis for adults, and a majority of states now allow for comprehensive public medical cannabis programs. With this momentum, we expect additional states to follow the trend, leading to further upside potential to our product offerings. So this chart shows that last year 30% of the U.S. population lived in states where adult-use recreational cannabis was legal. That number is expected to grow by almost 50% over the next 3 years to 44% based on states that are currently scheduled to launch their adult-use recreational programs. So the importance of this for our end markets is demonstrated on the next slide. So these charts show that within the measured channel, states that have mature legal adult-use recreational programs for cannabis saw faster growth over the last 3 years than states that did not. The growth for papers, on the left, would be even higher in the rec states if you add sales in the non-measured channel, which is driven by dispensaries and head shops, where sales tend to shift with legalization and those sales are not captured in that data. So the impact you can see more evident in the wraps market, where sales of tobacco wraps generally stay in the measured market since stores needed tobacco license to sell the product. The growth in those states that are recreation legal were more than double the rate of states that are not. So putting all together, as a result of the changes that we've made to the segment, we are now better positioned to capitalize on the secular growth trends in the industry. After not seeing much growth for the first few years after our IPO, Zig-Zag delivered over 22% growth in 2020 and 33% growth in 2021, with that growth being driven by internal initiatives that are continuing to bear fruit. So our market share in U.S. papers, which had been flat, has expanded over 250 basis points over the last 2 years. E-commerce, which was nonexistent for us in 2019, is now over 20% of our U.S. paper sales today. Similarly, cones, which we didn't offer until 2019, is now 1/4 of our sales in our U.S. papers business in our most recent first quarter. So Zig-Zag has always been our most profitable segment, but now we've turned it into our fastest-growing segment over the last few years. And for 2022, we are guiding to another year of double-digit growth in this segment. So there's really 2 parts of the Zig-Zag story. One, we've got this incredibly strong secular tailwind with the increased cannabis consumption, which is driven by legalization, and more importantly, a change in public perception in the industry with one of the best brands in this space. And two, more importantly, there's a self-help aspect here, where we have fundamentally changed the growth profile of the business through our own internal initiatives, and we're still realizing the benefits as we keep leveraging the power of the brand and extend into new products in new addressable markets. So one important thing to note in our business that we generate substantial free cash flow, which -- unlike other companies with exposure to the cannabis end market. So sometimes, we feel it's better to be selling the picks and shovels in the gold rush. Moving on to our other larger brand, which is Stoker's. So there's really 2 parts of this business. The first is our loose leaf tobacco chew, which is comprised -- which comprised 37% of the segment sales last year. And the other is -- 63% is coming from moist snuff tobacco or MST or dip. So those percentages were roughly the opposite when we went public. Tobacco chew is really an annuity business, where industry declines have been offset by market share gains and pricing, with the real growth driver for the segment being MST, where we've seen double-digit growth over the last couple of years. We've seen a nice acceleration there driven by our same-store sales gains, along with continued expansion of our distribution on the back of wins with large chain accounts. 80% of the volumes in this market are from our 2 large competitors. We are priced at a 40% discount below their main brands. And we view our product really as a premium product priced at value, which is why we're gaining traction. So there's a secular trend here towards the value categories, which we're benefiting from. And given how consolidated the industry is, it's a pretty rational category that takes 5% to 7% of price every year, which we generally follow. So going forward, we expect the strong trends to continue. We have steadily expanded distribution, but we're still only in roughly 63% of the volume weighted distribution of the category, and we have only less than 6% of the volume share of the market. So we've delivered steady growth in the segment and we believe there's still plenty of runway here for us to grow, especially as we build our distribution and as the value segment we play continues to gain share in the category. Our third segment is NewGen, which is the platform for our vape business. We've built that through a series of acquisitions since our IPO. Expectation here is we want to drive profitability by increasing the mix of our proprietary products. We think the PMTA, which is an FDA process to get approval to stay in the market, is a potential catalyst for this. We believe this process, which is ongoing now, will essentially consolidate the open tank market from hundreds of manufacturers to a handful. The segment is certainly made up of mostly lower-margin third-party products, which comprises the vast majority of the sales. The long-term strategy is to increase the mix of our proprietary products, which will carry gross margins from 30% today and grow it higher over time as our mix improves. So with our NewGen business, the short-term strategy is really to navigate this current challenging environment as we wait for the FDA to conclude the PMTA process, including the review of our proprietary products that we have submitted applications for. In the meantime we've been at that, we have been and continue to adapt our product offerings and operations to changing consumer preferences and adjusting to the impact of regulatory developments. We are also building a differentiated distribution infrastructure for regulatory products and maintain optionality for upside for a post PMTA environment that can significantly consolidate the market while continuing to operate a profitable cash flow generating business. So we'll conclude with a high-level review of our operations since last year's annual meeting. We finished 2021 with 10% sales growth, 20% adjusted EBITDA growth and our EBITDA margins expanding by 200 basis points. Zig-Zag had 33% growth in 2021 with over 20% organic growth, while Stoker's had 7% growth, including 15% in our MST business. Both businesses are expected to see strong growth this year, with our first quarter results delivering results on track with our plans. NewGen last year saw sales decline by 7%, driven by a challenging second half of the year as the regulatory environment caused disruptions to the business, but it still remains profitable as it maintains optionality for a post-PMTA world. We were active on capital deployment with $33 million of investments, including the acquisition of Unitabac assets, investments in Docklight and Old Pal, 2 companies with strong brands in the cannabis market. We also increased our majority stake in TPB Canada -- so that was the old recreation marketing -- which acquired a Western Canada distributor, DBW, early last year. On top of that, we returned cash to our shareholders through the repurchase of nearly 900,000 shares from nearly 5% of our shares outstanding for $39 million and returned $4 million in the form of dividends. Overall, we've continued the transformation of the company that at our IPO 6 years ago had $50 million of adjusted EBITDA with 6x leverage and limited growth. Last year, we finished with $108 million of EBITDA on the back of 2 consecutive years of double-digit top line growth with a healthy balance sheet at less than 3x net leverage and $150 million of liquidity that we aim to use towards accretive capital deployment. With that, I'd like to open the meeting up now for questions. Okay. Now we'd like to thank everyone for participating on the call, and we'll see you on the next meeting.