Good morning and welcome to the Turning Point Brands Second Quarter 2021 Earnings Conference Call. All participants will be in listen only mode. All lines have been placed on mute. If you need assistance, Please signal a conference specialist by pressing the star key followed by 0. After today's presentation, there will be opportunity to ask questions.
Please note this event is being recorded. I would now like to turn the conference over to your speaker, Louis Reformina, Chief Financial Officer, please go ahead.
Thank you. Good morning, everyone. This is Louis Raffromino, our Chief Financial Officer. Joining me are Turning Point Brands' President and CEO, Larry website, www.turningpointbrand.com, where a replay of today's conference call will also be available. In this call, we will discuss our consolidated 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 Looking statements and projections are not guarantees of future performance and should not place undue reliance upon them except as provided by federal securities laws. 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 Rexler, our CEO.
Thank you, Louis, and good morning, everyone. Thank you for joining the call. We are pleased to report a quarter that once again outperformed our expectations. In the second quarter, revenue was up 17% to 123 Above our prior guidance range. And adjusted EBITDA was up 32% to $30,000,000 Revenue growth was led by Zig Zag, which had an exceptional quarter with over 70% growth.
We are harvesting the fruits of our strategic growth initiatives and are continuing to outperform the market. We were also aided by a favorable comparison against COVID disruptions in our RAS business That negatively impacted the prior year period and the consolidation of Recreation Marketing's results. There was progress throughout our product lines. Paper cones and e commerce continue to provide a big boost to sales, while our wraps business benefited from sales force execution against favorable market And benefit from the trade inventory load, in total, wrap sales doubled in the quarter. Stoker's performed in line with our expectations and was up 8%, led by double digit growth in MST, which continues to be well positioned for the secular shift into the Our Chewy Tobacco business gained share but had a modest sales decline as it comped against a competitor going offline in last year's quarter.
NuGen faced a tough year over year comp and into new regulatory hurdle outperformed our expectations during the quarter. The vape distribution team responded well to the implementation of the PAC Act, which made the logistics of delivering vape products Customers and consumers were challenging. While we still expect volatility in NuGen, we are seeing progress in both the FDA's efforts around the PMTA process Increased enforcement against unauthorized products still in the market. During the Q2, The FDA issued 52 warning letters to manufacturers that did not submit a PMTA to bring the total to the end of the quarter to 131 warning letters sent out since January in an effort to bolster its enforcement against illegal products in the market. Importantly, on May 20, The FDA posted its continued compliance list, which provides a directory of those deemed new tobacco products for which a PMTA was timely submitted.
We believe this list will provide retailers and trade customers more clarity on which products they can carry. This includes Our submissions for our deemed products, all of which have now received acceptance letters, a number of the products are now in scientific review. We are confident that we have submitted robust filings and anticipate working successfully with the FDA through the process. We believe that both the PACT Act and the PMTA process are creating barriers to entry in our business that will position us well in the long term These factors forced a consolidation in the industry. We've also been very active in our capital deployment With share repurchases and investments.
In April, our subsidiary, Recreation Marketing, Acquired DBW, a distributor with strong presence in British Columbia and with major national chains. While DBW adds marginal profitability at the onset, it serves as a great platform to expand distribution of our more profitable proprietary products In the area where we previously had limited reach. Last week, we announced a $8,000,000 investment in OPAL, One of the most recognized brands in the cannabis space with product offerings in 7 states. Opal has a nimble, Asset Light, non planned touching business model has allowed it to scale across multiple states and a team that's been adept at managing the ever changing The cannabis market. Opal fits well within our strategy of building a house of scalable, well known brands In the cannabis industry, joining previous investments in Doc Lite, which holds the rights to the Marlin brand for cannabinoids and doses.
What caught our attention with OPAL is their experienced management team and the awareness they have been able to build with the brand, even in states in which they do not currently operate. Our investment will allow them to accelerate their growth while also providing a prime opportunity to increase our own product sales presence In dispensaries. Yesterday, we also announced the acquisition of certain cigar assets of Uniti Cigores are very important multibillion dollar category where industry observers have highlighted that growth is being driven by cannabis consumption. Cigars are a perfect complement complementary product to our MYO Cigar business, but one where we were lacking the necessary IP to compete effectively in the space. Unit to back assets come with a portfolio of grandfathered products and other FDA premarket filings, providing us with a broader A more cost effective platform to compete in the market.
Our plan is to expand distribution for Unitabax brands while leveraging the IP To introduce line extensions in the Zig Zag Cigar portfolio. With approximately $180,000,000 of liquidity on our balance To end the Q2, along with strong free cash flow generation, we remain very active on the acquisition With another solid quarter of performance, we are able to raise our guidance once again and look forward to continuing our momentum. To add some additional color and perspective on our quarter and the path forward, let me turn the call over to Graham Purdy, Chief Operating Officer.
Thank you, Larry. Let
me now give
you a quick snapshot of the performance from the segment level. Zig Zag products saw double digit growth in the quarter, led by a doubling of sales In both our MYO cigar wraps and Canadian businesses and strong double digit growth in U. S. Rolling papers led by e commerce and paper cones. Our MYO cigar wrap business compared favorably against the previous year period that experienced a COVID related disruption when our 3rd party manufacturer went offline.
Retail sales accelerating, we were able to leverage a more efficient supply chain post the DIRTFORD acquisition to To fill the backlog that was built up heading into the current quarter and further benefited from an inventory trade load in as our customers built buffer inventory, which pulled roughly 2,000,000 Sales into the quarter. In the U. S, Zig Zag Paper's position as the leading premium and overall paper brand strength, increasing its share market by 2.4 points year over year to 35.1 percent according to MSAI. After not growing share for the 1st 3 years since our IPO, this was the 8th consecutive quarter of Zig Zag has realized year over year share growth, Reflecting the portfolio and channel efforts put in place to revitalize the business where we are still in the early stages of this process, Our new products and our expanding e commerce platform again provided a boost. During the quarter, our paper cones had 33 point 3% share of the segment in the major channel according to MSAI, up 10.5 points from the previous year as our volumes more than doubled.
We continue to lead the growth and penetration of the product in convenience stores and are expanding our presence in the non alternative channel where Zig Zag is still underrepresented. In Canada, we had a strong quarter of growth with our business more than doubling As recreation marketing, which is now being consolidated, continues to ramp and is now being bolstered by DBW, E commerce was again a big driver of growth. Our e commerce business, which is now double digits of our U. S. Paper sales, is still only a year and a half old and continues to make strides, up over 3.5 times last year's levels and up 50% from the previous quarter.
Stoker's products saw high single digit growth in the quarter with double digit growth from moist snuff again being the driver. Stoker's market share was up to 5.8%, a little over 50 basis points compared to a year ago according to MSAI. Stoker's moist snuff is now in stores representing 62.2 percent of industry volumes, 3.8 points Above last year's level, which still leaves a long runway for further growth. Tumi tobacco sales saw low single digit decline during the quarter After comping against a quarter that saw 6% growth when a competitor experienced COVID related disruptions in the prior year period. Despite the tough comp, Stoker's Chew gained 20 basis points with a 26% share in the 2nd quarter according to MSAI to as a leading value brand.
The Tuning Tobacco business is well placed to provide us with a stable annuity stream of cash flow going forward. Moving to NewGen, where we once again had a resilient quarter in a very disruptive environment. Our vape distribution business saw double digit declines against A tough comp during the prior year when we benefited from a COVID related disruption at a B2B competitor and a strong B2C orders during state home provisions. The business did benefit from advanced buying in April ahead of the stricter shipping regulations around vaping as a result The implementation of the PACT Act. We believe this boosted sales by 2,000,000 during the quarter as customers adjusted to the longer lead times by building inventory.
The PAC Act had a meaningful impact on costs. Our outbound freight expense in big business, which we recognized in SGA, was up over 300 basis as a percentage of its sales from the previous quarter and this increase was only partially passed on to the customer. We believe that the additional cost and complexities around logistics of delivering vape products to customers caused by the PAC Act is consolidating industry further and This positions us well to take share. Outside vape, wild chem contributed to our growth, and we are encouraged by the early reception of our free Short term volatility in the vape distribution business. We like our positioning from a long term competitive standpoint and are excited by some of our new product launches, including 3 at Nu X.
And with that, I'll turn it to Louis for a review of our 4th quarter financial performance. Louie? Thank you, Graham. Our performance in
the 2nd quarter was ahead of plan once again. Turning to segment reviews. Zig Zag Products net sales in the quarter increased 72.3 percent to $47,200,000 with a doubling in our MYO cigar wrap Canadian businesses and strong double digit growth in U. S. Rolling papers.
Total Zig Zag segment volume increased 64.6% while price mix increased 7 point 7 percent. According to MSAI, 1st quarter industry volumes for U. S. Rolling papers increased mid single digits in the measured channel. During the quarter, our volumes grew at 2.8 times the rate of the overall market, and Zig Zag contributed over 90% The industry's growth, with our paper cones being the major driver.
This growth excludes the incremental volume growth we are seeing from the alternative and e commerce channels. NYO Cigar App Industry volumes were up strong double digits in the quarter. During the quarter, we saw the segment's gross margin expand by 160 basis points to 58 point 8%. This was the result of the financial benefit of eliminating Royalty Kims to Derkard, resulting in higher margins for MYO cigar Zig Zag accounted for 58% of our segment operating income in the 2nd quarter and continues to be our fastest growing segment. Stoker's product net sales increased 8.3 percent to $33,400,000 in the quarter.
Net sales for the MST portfolio grew 16.1% and represented 62% of Stoker's revenues in the quarter, up from 58% a year earlier. Total Stoker's volume increased point 4 percent with price mix advancing 5.9%. Segment gross margins expanded by 80 basis points to 54.4% during the quarter, Driven by price across the segment and fixed cost leverage in our MSD business. Year over year industry volumes for MSD were flattish with chewing tobacco declining by approximately 3%. Stokke's branded shipments to retail continued to outpace the industry in the quarter, growing its MSAI share in both chewing tobacco and MSC.
Moving to our NewGen segment. Net sales decreased 10.0 percent to $42,100,000 driven by tough comps in the base It was up 13% sequentially, which was above our expectations. We continue to expect near term volatility due to the PMTA process in 2020 along with the impact of the PAC Act. For the quarter, Neogen gross profit contracted 20 basis points to 33.5%. Now moving to the consolidated Adjusted EBITDA for the quarter was up 32% to $30,000,000 We achieved 41% incremental margins during the quarter, reflecting the strong performance in our core segments as we leverage our fixed cost structure.
In this morning's release, we updated our 2021 guidance as follows: Net sales of $447,000,000 to $462,000,000 this is up from previous guidance of $422,000,000 to 440,000,000 It includes $109,000,000 to $114,000,000 in the 3rd quarter. Adjusted EBITDA for the full year is now expected to be $108,000,000 to $113,000,000 up from previous guidance of $103,000,000 to $108,000,000 For Zig Zag, we expect strong double digit sales growth. As Guy mentioned, MYO Cigar App benefited from roughly $2,000,000 of orders from a trade inventory load that pulled forward sales from the 3rd quarter. As a reminder, in 2020, our cigar wraps business benefited from $5,000,000 in backlog build in the 4th quarter as we recovered disruptions early in the year. This will affect year over year comps during that Q4.
Going forward, we expect Zig Zag gross margins to moderate Slightly from 2nd quarter levels. Due to mix, as recreation marketing ramps up and adds to the contribution of lower gross margins from For Stoker's, we expect high single digit sales growth. In chewing tobacco, we faced another tough comp in the 3rd quarter when we grew 10% year over year last year as a competitor was temporarily out of the market. For NewGen, we now expect flat growth, up This is up from previous guidance of single digit decline, offset by growth in Nu X. We believe vaping sales in the quarter benefited by 2,000,000 this customer's increased inventory levels as they adjusted to the longer delivery times due to the logistical challenges of the PAC Act.
Moving to our balance sheet, we ended the quarter with $157,000,000 of cash on the balance sheet and $179,000,000 of available liquidity. This puts us in a strong position to execute on an active pipeline of opportunities we are currently evaluating to grow our business. With that, I'll turn the call back to Larry for closing comments.
We had a strong first half to the year. Our core businesses continued to perform, Led by Zig Zag's performance, we're benefiting from solid execution in a favorable environment driven by the secular growth in cannabis consumption. Stoker's continues to drive share gains and NewGen has performed well amidst the disruption of the PMTA process And the PAC Act, which are likely to be transformational events for the industry. A strong performance would not be possible the continued efforts of our employees, I want to personally thank them once again for their commitment and contribution to our success. Thank you for participating in the call today.
And with that, I'd like to open the call to questions.
We have our first question from Erik Desselors from Craig Hallum Capital. Sir, your line is open.
All right, great. Thanks for taking my question and congrats on a really impressive quarter here. So first for me And Nugen, nice job weathering the volatility from both PMTA and the pack back here. Understanding the dust has not fully settled yet, but could you give us an update on the competitive landscape there Lead to ultimately increased mix of proprietary products?
As we've been talking about, there's a lot of volatility in the business. We've Seeing a number of smaller competitors go out of business. We've also seen some of the 1 of the larger competitors grow
a bit.
Looking forward, We expect to see accelerated activity by the FDA as it gets close to their Previously announced date for completing the PMTA process was in September. I don't think they're going to hit that. Given every indication, they're not going to complete The process by then, but I think that they're going to want to put some news out in terms of where they are along that Along that process, so we continue to see volatility. The USPS is currently Still shipping some B2B products. So we haven't seen the complete implementation of the PACT Act.
That'll be another disruptive event in the going forward.
Okay, great. It seems like you guys are Well positioned to handle all that, so good to see. Next one for me on the M and A front, so you guys have really made some nice investments Hi, and GOCES, Docklight, now Old Pal, clearly building up an impressive brand portfolio, kind of Attaching yourself to that high growth cannabis segment. With Oldtell, you guys called out the fact that they are non plant touching. Would you guys look to consolidate any of these non plant touching cannabis brands in the near future here?
Or should we think of Really all of these as sort of remaining minority investments until we get some sort of federal reform?
Yes. I mean, so they are minority investments at the moment, as you mentioned. I think our objective is that these are standalone companies right now. We have the option to deploy more capital. So I think that the strategy here is to build a house of brands, diversify our portfolio And be able to kind of double down as these businesses get the risk and switch closer to federal legalization to bring them on house.
How we do that We'll be kind of determined in the future as the market kind of develops.
Okay. That makes sense. And then last one for me, Garrett, just within the Zig Zag business, I'm not sure if I missed it, but could you guys quantify to the best of your ability the inventory pull through in the quarter? And then maybe just give us an update on The competitive landscape in that non measured channel and your efforts to increase share there? Thanks.
Yes. So Eric, this is Graham. Yes, we estimate it's about $2,000,000 that was pulled in the quarter.
Yes. So what happened was going into the quarter, we filled our backlog. And post the quarter, our trade Into the quarter. Okay. That makes sense.
And then just an Update in that non Nasdaq channel and the competitive landscapes, your ability to penetrate there, just any kind of color there would be helpful. Thanks.
We We continue to make progress. We actually had tested, we're assigning some people to that area. We like the results Yes, Tess. We're now in the process of hiring more people to address the non measured channels, if you will. You're starting to see some penetration by Zig Zag additional penetration by Zig Zag in dispensaries and as well as in head shops and other The non traditional areas.
Long runway, we still have lots of upside there. We're not totally satisfied We are. We're making progress.
Yes. I would say the Old Pal investment outside of the investment itself being attractive It's a great strategic complement to our strategy there. As you know, Old Pal sells a
decent mix of flower, it's a percent
of sales, which goes along well with our
Your next question comes from the line of Gaurav Jain from Barclays. Sir, your line is open.
Hi, good morning, Tim, thanks a lot for taking my questions. So three questions. One is on this acquisition of You need to back. Can you help us just dimensionalize like how could this opportunity pan out over the next few years? And Zig Zag has been growing quite fast over the last 12 months, but I guess after 6 months, it will run into difficult comps.
So could this kind of growth rate that we are seeing at Zig Zag right now, like 30%, 40%, can it sustain now For the next few years, if you can scale up the cigar business?
Yes, I don't think we're going to underwrite 40% growth forever. So What I will say is the markets that we compete in now with rolling papers and wraps is less than $500,000,000 from a wholesale From a cashier revenue standpoint, the cigars market, which is a perfect complement to our MYO Cigar This product is a $2,500,000,000 plus market and growing pretty nicely. And so this provides us A great platform to be able to enter that reenter that market more efficiently and more cost effectively. So that's a big market opportunity for us to be able to get back into with this acquisition.
Okay. That's very helpful. Secondly, on all these acquisitions that we have done, while LEMS, they are now almost, I would say a year old. So what are your learnings been and have those acquisitions met the targets that you had set out When you amended initial investments?
Yes. I think we while we have our expectations For a gradual ramp, I think that is taking place now. It is a relatively new category in smokable hemp CBD. That is one that we We feel it has growth potential as some nicotine cigarette smokers want an alternative form of smoking So it's been as we expected. And those just we are kind of pleased with some of the transformation it's doing in terms of expanding the brand into other categories Like gummies and other form factors as well as entering the CBD line, but it's early in the progress, Bill, in terms of kind of the introduction of these lines.
Sure. And lastly, just a housekeeping item. What was the benefit of the consolidation of recreation Marketing, which I think has happened into the Zizya line, if you could just separate it out for us and if there was already the benefit of this acquisition that Recreation did, The DBW acquisition in this quarter?
Yes, it's about $2,500,000 for the quarter and BBW had about a little over a month of benefit into that quarter. Okay. Yes, 2 months of benefit during the quarter.
Sure. Thanks a lot.
Your next question comes from the line of Susan Anderson from B. Riley FBR, your line is open.
It's Alec Lague on for Susan. Just a question on zigzag sales to the ecom Channel, have you ever disclosed what percentage of sales are through e com? And then just longer term, what percent of Penetration would you aim to reach? And then what's the margin delta between selling through your e comm channel versus Your partners.
Sure. It's about right now as a percent of our U. S. Paper sales in the teens percentage Of our U. S.
Paper sales, so our goal is to continue to ramp that. The one part of the business that We think has more significant opportunity to ramp is our B2B business. So that is kind of dovetails with our alternative strategy to getting more of our Product anticipatories and head shops. So part of the strategy last year in terms of attacking that was using this platform In going to trade shows to sign up more consumers and customers onto it. And obviously, that did not happen to the We thought last year given that there weren't any trade shows.
So that's still a big piece of the strategy that we are still kind of rolling out. So we continue to That double that e commerce business to continue to ramp for us.
And then I guess just the margin difference between selling through that channel?
It's comparable at the moment. It can fluctuate depending on the product mix.
Okay. And then I guess another follow-up on Zig Zag, just utilizing that brand awareness. I think you've mentioned previously on expanding into apparel and The alternative channel, I guess how is that progressing? And then what do you think the longer term opportunity for that would be?
It's going well. It's still a small piece of the business, but growing nicely. And this also Dovetails well into our head shops and alternative strategy in e commerce. These are products, when we focus just on convenience stores, it wasn't really a home for them in convenience stores just because Limited shelf space that you have, but they are perfect products to get into head shops that want to embrace more of the lifestyle around the brand. And we're seeing some success around that as well as selling through our e commerce channel.
So it's still early as well on accessories, but we're seeing nice growth on it.
Perfect. Thank you so
much.
Your next question comes from the line of Greg Pendy from Sidoti and Company. Please go ahead.
Hey guys, thanks for taking my questions. Just shifting gears to Stoker's, can you just kind of walk us through in light of The 8% growth there. Did you take pricing typically in the May June period? And I think earlier you mentioned the trade down. Where do you think we are in terms of consumers trading down?
Is it more intense than normal? Or is it just kind of On par with what you saw last year.
Okay. So the trade down is a secular Trend over many years. We did see some acceleration last year during the lockdown period of COVID Moving in, I think it's returning more towards traditional long term secular rates.
Okay, great. And then just in pricing, did you take some pricing on tubs and then cans like you did in the prior year?
Yes.
Okay. And then just also just moving on in terms of the buyback, you bought back a little bit more stock than you typically have, It looks like just how are you thinking about the buyback in terms are there any metrics that we should be thinking about that's Accelerating accelerated the buyback during the period?
It's meant our buyback is meant to be opportunistic In situations where there's a lot of non fundamental kind of drivers to our stock, we take those opportunities to be more aggressive on the buyback.
And then just one final one. Just in the premiumization that you're seeing, I guess, from papers to cones, Where do you think we are in terms of that? Kind of like what percentage? And then how much legs does that have to it? Or is it just kind of A trend that has several years to go, you think?
So we think so we are driving there's separate channels, but there's the measured channel and the non measured channel. So let's take the measured channel first. So in the measured channel, we are driving the growth and penetration Of kind of a Cohen's in there. So it's still relatively new in the C store channel. Of our Within the industry of stores that order papers, only 30% ordered paper cones.
So There's still a decent opportunity there in terms of penetration. Within our papers business, In the measured channel, it was teens percentage of our volume. So we're still kind of hurtling that penetration. In the non measured channel, we believe Cohen is a bigger Percentage of the market and we are also much more heavily underrepresented there. So we see bigger upside in the non measured channel in terms Kind of our opportunity set there.
Okay, great. That's very helpful. Thanks a lot.
Your next question comes from the line of Vivien Azer from Cowen and Company.
This is Mayla Quach on for Vivien. Thanks very much for taking my questions. My first question is on Big Bag. Can you please offer more color on the growth that you saw by channel? Last quarter, we That's your distribution opportunities in alternative channels.
How big of a contributor was that channel and more specifically distribution gains in that channel? Thank you.
Sure. I would say that we saw strong growth across The channels, right, because in the measured market, we're gaining share. Cohen is a big driver of our ability to gain share In that channel, in the non measured channel, a lot of it is incremental, right? So e commerce is a big driver of that. I mentioned it was Teams as a percentage of our U.
S. Paper sales, and that was just starting to ramp really in Q2 of last year, so a decent contributor to growth. And you're seeing in our mix a bigger percentage of our volumes that are going into These non measured channels, which means that the alternative strategy is ramping up. So we're seeing healthy growth in each of the channels In the metachannel driven by our market share gains in the non metachannel, kind of increasing our penetration in terms of the stores that we are in.
Understood. Thank you. And my next question is turning to Stoker's. Despite a tough comps, the business continues to do well.
Can you comment at all on the
growth by form factor, specifically tubs versus cans? Thank you.
So with Stoker's, we were introduced the concept of tubs into the market, which Established the Stoker's tubs as the leading brand. It remains the leading product in the market, and it is a driver of the growth. It is Excellent value buy for the consumer. If you look at it on a per can basis, it sells at a discount to our cans. And got the convenience factor of only going to the store once a week or so.
And so tubs are the driver. In fact, what we see when we put tubs into can stores that you do see a migration from cans to tubs. The cans are actually a great introductory product for the tubs. It leads consumers to the tubs. They're a great combination.
Makes sense. Understood. Thank you. And last question, as it relates to your recent investment in Opal, can you elaborate on the being able to make that investment?
Thanks. Sure. Yes. I mean, Opel is structured as a non plant touching cannabis company. So they licensed out the brand to their partners.
And so we were able to invest directly into we have a convertible note at the moment, but that is convertible into Kind of a series of common shares as well.
Thank you.
There are no further questions at this time. Sir, please continue.
Well, thank you everybody for joining the call. We look