TPB - NYSE

Good morning, and welcome to Turning Point Brands First Quarter 2024 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the call over to Graham Purdy, Chief Executive Officer. Thank you. Please go ahead.

Thank you. Good morning, everyone. This is Graham Purdy, Chief Executive Officer. Joining me are Turning Point Brands' new CFO, Andrew Flynn; and Chief Revenue Officer, Summer Frein. I want to wish a special welcome to Andrew. Please understand that he didn't join the company until immediately after the March quarter concluded, so please take it easy on him.

Thank you, Graham. Good morning. It's great to be with you today. First, I want to thank the entire organization for the opportunity. I'm thrilled to join the company and lend my support given my experiences at both Connected Cannabis and Juul Labs. Second, while early in my journey here, I've been impressed by the management team and the strength of our brands. Over the past few weeks, I've been highly engaged in getting up to speed. My early conclusions are that we have a strong foundation to build on, and I am excited to capitalize on our opportunities ahead to help build stakeholder value. I look forward to sharing more in the quarters ahead. With that, let's dive into the quarter. This morning, we issued a news release covering our Q1 results. This release is located in the IR section of our website at www.turningpointbrands.com. During this call, we will discuss our consolidated and segment operating results and provide our perspective on the operating environment and our progress against our strategic plan. As 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. On the call today, we will reference certain non-GAAP financial measures. These measures and reconciliations to GAAP can be found in today's earnings release, along with reasons why management believes that they provide useful information. I will now turn the call over to our CEO, Graham Purdy.

Thanks, Andrew. With all that said, good morning, everyone, and thank you for joining our call. Our first quarter results were in line with, and in some cases, better than our expectations and demonstrated continued progress against our plan. Adjusted EBITDA increased 21.6% to $25.3 million for the quarter. During the March quarter,

Thank you, Graham. Throughout Q4, we continued to further

Thank you, Summer. Starting with our consolidated quarterly results. Q1 sales were down 3.9% to $97.1 million, which is flat on a sequential basis. Excluding CDS, overall revenue was up 10%. Gross margin was up 530 basis points to 53.5% due to favorable segment and product mix. Adjusted EBITDA was up 21.6% to $25.3 million. Going into segment performance.

To conclude, we feel like we're off to a solid start to the year with

[Operator Instructions] Our first question will come from Eric Des Lauriers from Craig-Hallum Capital Group.

Congrats on strong results. First one, just a clarifying question for me. So you highlighted B2B growth of 60% within

Yes, that's all the alternative channel.

All right. That's very impressive. Within the alternative channel, just kind of sticking with

Yes. Sure. Thanks, Eric, for your question. I think it's important to know from a year-over-year perspective, you might remember that we're benefiting from a comp perspective just to level set from some trade dynamics from last year, but still the projections for

Our next question will come from Michael Legg from The Benchmark Company.

Great quarter, guys. Can you talk a little bit about the margin impact in the

Yes. Look, Mike, the -- I think it's challenging from a year-over-year perspective given that the majority of what happened in Q1 last year was impact around our high-margin items in our traditional convenience store channel. And so this year, obviously, we didn't have that same headwind from a marginal perspective. So it's really just a catch-up on the year-over-year comp with more paper sales, more wrap sales versus year-over-year.

Okay. Great. And so do you think it's sustainable at these levels?

I think our expectation is that where the margins sit with

Okay. Great. And then I want to talk a little bit about the alt channel penetration. How much of that is in existing dispensaries alt channels versus new ones that are opening up? Where is the growth coming from?

Yes. I would highlight that the growth from the quarter is coming from a bit of both. I think the primary benefit that we saw in the quarter was really the alternative customers expanding their portfolio, getting more SKUs on shelf. But certainly, a portion of that was also driven by entering into new customer stores as well.

Okay. Great. And then I just want to -- I know you're not giving that much data on FRE. And I think I heard it tripled from a low base this quarter. But can you just talk about what you may have seen in focus groups with the product? I know your product has a higher dose that has more packs for a container. Can you just talk about what you're hearing from the consumer when you do focus groups on that?

Yes. I think that as we've pointed out earlier that our point of differentiation in entering the market was more satisfaction, if you will. I think what we're starting to hear from consumers is that they're pleased with the mouthfeel of the product as well. It's designed to touch differently than the analog products that are on the market. We continue to get great feedback from our consumers. We've got a really nice window win with our direct-to-consumer website on frepouch.com. Consumers are pretty active in terms of providing us feedback. And as you'll note, with online platforms, generally, consumers are quick to complain, but not as quick to provide positive feedback, and we're seeing a lot of positive feedback relative to the product. I think interestingly, the trade situation that we're in right now is very receptive to new products on shelf, and we're excited about the ramp in our traditional convenience stores.

Okay. Great. And then just one last question on the vape business. I saw Real Brands is buying Vapor Shark. Can you talk a little bit about where we are with the whole CDS segment and what the magnitude of that possible acquisition is or divesture, I should say?

Yes. I think we're still firmly under the plan that we've previously communicated relative to how we're treating that business. As I'll note, again, we're -- we spend no management time within the core business, talking about the CDS business. So FRE stands and runs on its own. I would anticipate us continuing to matriculate along those lines relative to how we think about the future of that particular business. Interestingly to note as well in the quarter, the business actually performed pretty well in the quarter. And to the extent that the business remains sustainable cash flowing on its own, I think we're comfortable with that asset today. But from a future perspective, I think we remain focused on what we previously communicated.

Great quarter, guys. Congrats.

Thanks, Mike.

Our next question comes from Scott Fortune from ROTH MKM.

Yes. Just one quick follow-up on the CDS side of things, it's kind of stabilized at that $14 million business. Just kind of hearing your comments as kind of sustainable here at these levels, although you've kind of indicated that it might come off, but just kind of get a sense for the CDS business as we look out the rest of the year here from a dollar standpoint.

Yes. I think on a sequential basis, we feel good about where the business has run through Q1. There's a lot of activity in the world that, that business services. And so I think it's hard to underwrite this as this level of sustainability as we move forward. I would note that we do remain committed to that business remaining profitable while it sits underneath the TPB umbrella. So our expectation is that at a minimum, that business continues to sustain itself, Scott.

A follow-up there. And then just digging in a little more color on the continued penetration into the alternative channel and providing maybe a little more metrics there around that penetration levels where you're at? I know Summer has mentioned, you guys are getting positive shelf-based gains here and product strength selling into that channel. But just kind of a little more color on the SKUs or products that are really increasing the market share in that channel, if you can provide that?

Yes. So as we previously mentioned, we believe based on our internal metrics that, that channel is growing. And I think if you look at year-over-year as well as sequential growth of 60%, I'm pretty confident to say that we feel like we're growing share. And I don't think that, that is a surprise given the fact that we have broadened the portfolio and created more product offerings to create more consumer appeal for the

Got it. And then last question for me, just kind of focusing on Stoker's a little bit. You're seeing nice continued market growth there as Modern Oral is weighing on kind of the more of the smokeless tobacco side of things and taking share there, but can you provide a little color on the competitive front? Are you seeing more competition from a pricing landscape with more focus towards the oral side of things? Just kind of a little bit color on continuing that growth going forward and the competitive movement here.

Yes. We were -- I think we are pleased with our results in the quarter for FRE as we really started down the street to gain penetration into the retail landscape. We've got a really nice online business where we speak directly to the end consumer. The category is on fire. As you sort of look out, I'm not sure that the category can sustain 73% year-over-year growth. It grew 16.5% on a sequential basis. There is competitive activity within that channel, but you would expect that with the umbrella of growth that, that category provides. We still think we're well positioned with the product offerings that we have, catering to the consumer that's looking for more satisfaction. I mentioned the mouthfeel before. We think we -- our product really stacks up well from a mouthfeel perspective. And so we're going to continue moving forward and gaining new stores and engaging more consumers into the brand.

We have no further questions in queue. I would like to turn the call back over to Graham Purdy for any closing remarks.

Thanks, operator. Thank you, everybody, for joining our call. We felt really good about Q1, and we're looking forward to speaking to you again here in a few months on our Q2 results. So thank you very much.