Earnings call transcript: Turning Point Brands Q4 2024 beats EPS forecasts

Turning Point Brands Inc. (TPB) reported its fourth-quarter 2024 earnings, revealing a notable earnings per share (EPS) of $0.98 against a forecast of $0.70, marking a 40% beat. The company’s revenue of $93.7 million fell short of the anticipated $102.28 million. Following the earnings release, TPB’s stock price experienced a 2.16% drop, closing at $67.02. According to InvestingPro analysis, the stock appears slightly overvalued at current levels, despite achieving an impressive 150% return over the past year.

Key Takeaways

• EPS exceeded expectations by 40%, highlighting strong profitability.
• Revenue fell short of forecasts, raising concerns about sales growth.
• The stock price declined by 2.16% following the earnings release.
• The company initiated a 2025 adjusted EBITDA guidance of $108-113 million.
• Strong performance in the modern oral and Stoker’s product segments.

Company Performance

Turning Point Brands demonstrated growth in several areas, with annual sales reaching $360.7 million, an 11% increase year-over-year. The fourth quarter saw a revenue rise of 13%, despite missing forecasts. The company’s adjusted EBITDA for the year rose by 12% to $104.5 million, underscoring its operational efficiency. InvestingPro data reveals the company maintains a perfect Piotroski Score of 9, indicating exceptional financial strength, with liquid assets significantly exceeding short-term obligations (Current ratio: 4.21).

Financial Highlights

• Revenue: $93.7 million, up 13% year-over-year.
• Earnings per share: $0.98, beating the forecast by 40%.
• Gross margin: 55.9% annually, 56% in Q4.
• Free cash flow: $56.3 million.

Earnings vs. Forecast

Turning Point Brands reported an EPS of $0.98, surpassing the forecast of $0.70 by 40%. The revenue, however, was $93.7 million, missing the forecasted $102.28 million. This mixed performance reflects strong cost management but potential challenges in achieving revenue targets.

Market Reaction

Despite the earnings beat, TPB’s stock fell by 2.16% to $67.02. The decline suggests investor caution, possibly due to the revenue miss and broader market conditions. The stock trades near its 52-week high of $72.54, with a market capitalization of $1.19 billion and a P/E ratio of 25.51. For deeper insights into TPB’s valuation and growth potential, investors can access comprehensive analysis through InvestingPro, which offers exclusive financial metrics and 12 additional ProTips for this stock.

Outlook & Guidance

The company has set its 2025 adjusted EBITDA guidance between $108 million and $113 million, reflecting confidence in continued profitability. Efforts to expand in the modern oral category and increase market share are expected to drive future growth. This outlook aligns with TPB’s strong financial health score of GOOD from InvestingPro, supported by moderate debt levels and consistent dividend growth over the past 8 years.

Executive Commentary

CEO Graham Purdy emphasized the company’s strategic focus, stating, "We see multiple brands underneath our portfolio of products as an opportunity to cast the widest net possible." He also highlighted the growth potential in the modern oral segment, saying, "We expect continued growth around free and based on early reorder rates."

Risks and Challenges

• Revenue misses may signal challenges in market penetration or competition.
• Dependence on the modern oral category for growth could pose risks if market dynamics shift.
• Broader economic conditions and regulatory changes in the tobacco industry could impact performance.

Q&A

During the earnings call, analysts inquired about the distribution strategy for modern oral products and potential partnerships with convenience store chains. The management’s focus on cross-selling opportunities and positive regulatory signals were key points of discussion.

Full transcript - Turning Point Brands Inc (TPB) Q4 2024:

Kathleen, Conference Operator: Thank you for standing by. My name is Kathleen and I will be your conference operator today. At this time, I would like to welcome everyone to the Turning Point brand Fourth Quarter and Fiscal Year twenty twenty four Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question and answer session.

And now I would like to turn the call over to Andrew Key, CFO, Turning Point Brands. Please go ahead.

Andrew Key, CFO, Turning Point Brands: Good morning, everyone. A short while ago, we issued a press release covering our Q4 results. This release is located in the IR section of our website at www.turningpointbrands.com. As you’re aware, this release followed an eight K issued February 10 that included some preliminary financial metrics. During this call, we will discuss our consolidated and segment operating results and provide some perspective in the operating environment and progress against our strategic plan.

As a brief reminder, we deconsolid our CDS segment and is now classified as discontinued ops. This change is reflected in our financials and the consolidated results that we will be discussing today. 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 are in today’s earnings release along with reasons why management believes they provide useful information.

I will now turn the call over to our CEO, Graham Purdy.

Graham Purdy, CEO, Turning Point Brands: Thanks, Andrew. Good morning, everyone, and thank you for joining our call. Our consolidated fourth quarter results were better than expected and demonstrated continued progress against our plan. Revenue increased 13% to $93,700,000 for the quarter. Adjusted EBITDA increased 5% to $26,200,000 for the quarter.

Recall that in early January, we announced the divestiture of our CDS business. These results are now classified as discontinued and excluded from our consolidated financials and any guidance going forward. We think the transaction best positions management to focus on the exciting growth opportunities in our core business. Adjusted EBITDA for the full year increased 12% to $104,500,000 at the high end of the preliminary range of $103,500,000 to $104,500,000 provided on February 10 and above our prior increased range of $101,000,000 to $103,000,000 provided with third quarter results. We are pleased with our results for both Q4 and full year 2024, and we are excited about the momentum we are seeing across the organization.

We are initiating 2025 adjusted EBITDA guidance of $108,000,000 to $113,000,000 This reflects continued growth of our Zig Zag and Stoker businesses as well as significant acceleration of growth of our modern oil brands free and out, which we expect to generate $60,000,000 to $80,000,000 of combined revenue in 2025. Our EBITDA guidance includes meaningful sales and marketing investments to support our ambitious growth plans. Going forward, we will discuss our Modern Oral business on a combined basis for financial reporting and guidance purposes. Our adjusted EBITDA guidance reflects our pro rata 50% share of ALTS economics. We expect both brands to play key roles in achieving our long term goal of 10% market share of the modern oral category.

During the fourth quarter, Zig Zag revenue was up 2%. Excluding Clipper, it was up 4%. We have a promising lineup of Zig Zag growth initiatives for 2025 that should help deliver another year of solid segment growth. We remain bullish on the convergence of distribution channels for smoking accessories, which provides an opportunity for us to leverage our diverse SKU portfolio to offer customers a one stop shop for all their needs. It’s also worth reiterating the valuable cross selling opportunities across our ecosystem as customers onboard modern oral products alongside the Zig Zag portfolio.

Nearly seventy five percent of all Americans now live in a legal regulated medical cannabis or adult use state. And over the past year, we’ve seen another green wave emerge with the adoption of Farm Bill compliant hemp, which has significantly expanded the TAM. As an illustration, there are estimated to be 7,000 retail outlets in Texas that now sell hemp derived products in a state without a regulated cannabis marketplace. This secular tailwind should continue to benefit picks and shovels businesses with must carry brands like Zig Zag. And as mentioned, many of these stores don’t sell traditional tobacco products like combustible cigarettes or MST, but they do carry modern oral nicotine pouches.

This dynamic should give us a valuable cross selling advantage in modern oral over time as we continue to build our zigzag distribution and vice versa. Moving to Stoker’s. During the quarter, Stoker’s revenue increased 26% to $47,800,000 reflecting flat loosely a 1% decline in MST and $11,200,000 in modern oral revenue. Our modern oral business included a 419% increase in free sales off of a low base to approximately $6,300,000 for the quarter, which represented both sequential and year over year acceleration in sales growth. The balance of the modern oral revenue was from the very successful launch of ALLETE.

A quick note on MST. As we called out previously, Stoker’s MST had very strong quarters in Q4 twenty twenty three and Q2 twenty twenty four. So we anticipated a flat quarter as we lapped a tough comparable of roughly 20% in Q4 last year. Summer will talk more about our Modern Oral brand shortly, but I will offer the following high level commentary. We are very pleased with the launch of Alp Supply Company, our joint venture with the Tucker Carlson Network.

There has been significant excitement around the brand and strong reason for optimism. We are somewhat limited in what we can disclose due to our confidentiality obligations. Free sales increased 26% sequentially for the quarter. This progress provides further evidence that Free is winning in the marketplace. Positive consumer feedback has consistently reinforced the brand’s positioning, pouch size, flavor, mouthfeel and a range of nicotine strengths.

This feedback and strong sales growth, along with initial retail acceptance and reorders, have given us increased confidence to further invest in expanding our chain store footprint. This will likely involve investment to secure competitive placement, execute our desired in store look and feel and participate in loyalty and promotional programs. In Q3, we launched six milligram free on our website to complement our nine, twelve and fifteen milligram offerings. In Q4, we began to expand six milligram distribution to retail stores. With that, let me hand the call over to Summer to walk through the progress of some of our go to market initiatives.

Summer, Executive, Turning Point Brands: Thank you, Graham. As he mentioned, we made exciting progress in the modern oral category throughout 2024 and during Q4 in particular. Pertaining to free continued positive consumer feedback, strong trade receptivity from prominent chain of which we have long standing and broad reaching retail partnerships and increasing reorder and repeat purchase rates at wholesale and online give us confidence to invest behind the brand. During Q4, we accelerated our investment with chain partners like our regional introduction to seven Eleven and began testing expanded sales and marketing initiatives in key markets. As previously discussed, we also expanded our SKU assortment to broaden retail distribution of six milligrams.

We look forward to sharing the ongoing progress throughout this year and beyond. Turning to Stoker’s, we continue to broaden our distribution across the MST segment and see opportunities to expand the brand and grow with a consumer base looking for a great value. Stoker’s continues to benefit from the value offering of a great dip at a fair price along with our initiatives to drive consumer awareness and loyalty. With regards to Zig Zag, we continue to build upon Zig Zag’s one hundred and forty five year history and celebrated with the launch for Vintage Paper Booklets line this past quarter. We are continuing to partner with influencers that resonate with our existing and new Gen Z consumers.

Further, we will continue to win in the backstreet with non traditional customers who are looking to build their Zig Zag portfolio, while also leveraging the opportunity to further OST growth as Graham mentioned. We continue to see healthy increases in average order sizes while expanding valuable shelf space and merchandising within these stores. In summary, for Zig Zag, we have a long runway in this channel as cannabis and related products become more mainstream and we continue to solidify our position as a trusted high value partner. Lastly, all of our brands will benefit from our evolving sales organization, which we are scaling to enable enhanced geographical coverage and to support growth for the modern oral category. In closing, we continue building our brands for the long term, executing against the omni channel plan we’ve established and winning new consumers to add to our growing customer base.

We will continue to maximize the value of our world class brands and strengthen our extensive distribution capabilities. Let me now turn the call back over to Andrew to go through our financial results.

Andrew Key, CFO, Turning Point Brands: Thank you, Summer. Sales were up 11% to $360,700,000 for the year. For the quarter, revenue was up 13% to $93,700,000 On a full year basis, gross margin was down 39 basis points year over year to 55.9%. For the quarter, margin was 56% and down 108 basis points year over year. The change in margin is mix driven.

As reported, SG and A was $122,400,000 for the year and $34,500,000 for the fourth quarter, including adjusted items. For the year, there was an incremental $11,500,000 of SG and A related adjustments. In quarter, these adjustments were $4,400,000 The detail of these adjustments can be found on our press release in the net income to adjusted EBITDA reconciliation. Adjusted EBITDA was up 12% year $26,200,000 Going into segment performance. Zigzag sales increased 7% year over year to $192,400,000 and up 2% to $45,900,000 for the fourth quarter despite pressure from the unwind of the Clipper relationship and timing and FX related issues in our Canadian business.

Gross margins decreased 60 basis points year over year to 55.4% for the year and down two forty basis points year over year to 54.1% for the fourth quarter. This was driven primarily by product mix. Stoker’s net sales increased 16% year over year to 168,300,000 in the year and increased 26% year over year to $47,800,000 for the fourth quarter. Net sales for the MST portfolio grew 6% year over year to $103,300,000 in the year and declined 1% year over year to $25,900,000 for the fourth quarter. Stoker’s MST volume was up 10 basis points despite category volume down 6.4% with share growing by 50 basis points year over year to 7.6 during the year according to MSAI.

Share of in store selling was up 50 basis points year over year to 11.2% with Stoker’s now in stores representing approximately two thirds of industry volumes, which still provides a long runway for growth. Stoker’s Chewing Tobacco was the number one chewing brand in the quarter gaining 180 basis points per share to 32.9%

Graham Purdy, CEO, Turning Point Brands: according to MSAI.

Andrew Key, CFO, Turning Point Brands: Overall, TPD loose leaf volume was down 1.8%, beating category volume declines of 4.4%. Category performance was driven by a larger decline in premium loose leaf with TPDs volumes benefiting from consumer trade down as Stoker’s volumes grew from the previous year. Our free sales more than quadrupled year over year as we continue our national rollout. Gross margin decreased 20 basis points year over year to 56.4% for the year and increased nine basis points year over year to 57.7% for the fourth quarter. This was driven primarily by product mix.

Moving on to the balance sheet. We ended the quarter with just over $46,000,000 of cash. Free cash flow for the year was $56,300,000 Last month, we issued $300,000,000 of seven year senior secured notes due in 02/1932 and we called $250,000,000 of notes maturing 2026 with no prepayment penalty. We are well within our previously disclosed net leverage range of two to three times. In the quarter, we repurchased $880,000 worth of shares as part of our previously announced share repurchase program.

Onto guidance and other line items. As we previously noted, we are guiding to full year 2025 adjusted EBITDA of $108,000,000 to $113,000,000 We anticipate total modern oral sales of $60,000,000 to $80,000,000 Our projections anticipate mid single digit growth excluding our modern oral business despite headwinds from Clipper and Canadian exchange rates. Our total adjusted EBITDA range reflects increased sales and marketing investments that will somewhat constrain the rate of EBITDA growth in 2025. For modeling purposes, the effective income tax range is 23% to 26%. CapEx for full year 2024 was $4,600,000 budgeted CapEx for full year 2025 is $4,000,000 to $5,000,000 exclusive of any potential projects related to our modern oral business.

We expect to spend $3,000,000 to $6,000,000 for the full year depending on the regulatory environment to supplement our modern oral PMTAs, which remain under review by the FDA. Now, let me turn it back over to Graham.

Graham Purdy, CEO, Turning Point Brands: To conclude, we are pleased with our 2024 performance and I’ll turn it over to questions now.

Kathleen, Conference Operator: Thank you. We will now begin the question and answer session. Your first question comes from the line of Eric Dell’Oyers of Craig Hallum Capital Group. Your line is now open.

Eric Dell’Oyers, Analyst, Craig Hallum Capital Group: Great. Thank you for taking my questions and congrats on the very strong results. In terms of modern oral, could you just talk about the outlook for getting into national C store chains this year, maybe expectation of number of C store chains or timing?

Summer, Executive, Turning Point Brands: Hey, Eric. This is Summer. How are you?

Eric Dell’Oyers, Analyst, Craig Hallum Capital Group: Great. So

Summer, Executive, Turning Point Brands: I’m good. As you know, about 70% or so of the category is sold through chain convenience. And that’s where the majority of the business is done. And as you know, that particular set of stores moves a bit slower in terms of their scheduled planogram cycles and that sort of thing. So we are currently in discussions with many of those partners, have long standing relationships with them.

As you heard in the call, we recently rolled out a regional partnership with seven Eleven. We’re encouraged by those early results and plan to continue that progress throughout the year and are making great traction there.

Eric Dell’Oyers, Analyst, Craig Hallum Capital Group: All right, great. That’s helpful. And then just a follow-up for me. In terms of Stoker’s MSP, the one third of stores by volume that sort of remain for you guys, Is there an opportunity to sort of expedite the growth in distribution now that you have such a strong modern oral product here? And can you just kind of talk about what kind of overlap there might be in terms of that one third of stores that you’re not in and the stores that you’re either targeting with modern oral or already in with Zig Zag?

Thank you.

Graham Purdy, CEO, Turning Point Brands: Yes. So the we think that the portfolio of our oral nicotine products is going to be highly synergistic between MST as well as modern oral. And as Summer just mentioned, the chain accounts are really the thrust behind the modern oral category in the early days. I think that presents a great opportunity for us and from a cross selling standpoint as we hit the chains with modern oral to really sort of backstop that with a discussion around MST.

Eric Dell’Oyers, Analyst, Craig Hallum Capital Group: Great. Thanks for taking my questions and congrats again on the strong results.

Graham Purdy, CEO, Turning Point Brands: Thanks, Eric.

Kathleen, Conference Operator: Your next question comes from the line of Gideon Zafeira of Oppenheimer. Your line is now open.

Gideon Zafeira, Analyst, Oppenheimer: Hi, great. Thank you very much. Great visibility and guidance on the modern oral, so thank you for that. Maybe help us understand what’s driving that guidance. How do we think about, let’s just say, free versus Alps?

How do we think about threes and sixes versus kind of like your higher nicotine level couches? Maybe more of a kind of a general discussion on what’s driving that? Thanks.

Eric Dell’Oyers, Analyst, Craig Hallum Capital Group: Yes. Look, I think

Graham Purdy, CEO, Turning Point Brands: the our guide is informed by two specific areas. We expect continued growth around free and based on early reorder rates with our customer and the visibility that we have through our online B2B or B2C businesses. So I think we’ve taken the experience that we’ve learned from free and we’re thinking throughout in terms of their route to market. And it’s just early innings at this point in time. Obviously, we launched out launched in sort of late Q4.

And so it’s really early to sort of project exactly where we think that can be. But at the same time, we think the two products are highly synergistic for us and really speak to the entire market from a consumer standpoint. And so we’re very bullish on sort of our outlook to cast a wide net and gain consumers.

Gideon Zafeira, Analyst, Oppenheimer: Okay, great. And then can you maybe talk about the contribution margin on that revenues and maybe what would be the components to kind of get there? And what I mean by that is, are there slotting fees that you’re going to pay? I know there’s obviously scale as the business starts scaling up, the contribution margin gets higher, but how do we think about that in general? And then when we think about your manufacturing footprint, is there a reason to maybe onshore some of the production?

Does it make sense if you keep it out of the country? Just given that kind of environment. Thanks.

Andrew Key, CFO, Turning Point Brands: Yes. Hi, Ian. Andrew here. So first off, as it relates to modern oral, what we’re seeing is gross profit margins in the mid-30s and our plan is to reinvest some of those profits back into the business to help support the sales and marketing team to broaden our reach not only for the benefit of modern oral, but also for the other products that we carry. In terms of slotting fees and getting into some of these chain convenience that is something that we are tuned to and we’re looking at multiple different opportunities around that.

And so that’s

Gideon Zafeira, Analyst, Oppenheimer: kind of

Andrew Key, CFO, Turning Point Brands: the story on modern oral. And as it relates to U. S. Manufacturing, we’re considering all options in terms of how we grow this business, which includes enhancing our supply chain and also considering U. S.

Manufacturing.

Gideon Zafeira, Analyst, Oppenheimer: Okay. Thank you very much. Good quarter and nice outlook. Thanks a lot.

Graham Purdy, CEO, Turning Point Brands: Thanks, Egan.

Kathleen, Conference Operator: Your next question comes from the line of Nick Anderson of Roth Capital Partners. Please go ahead.

Nick Anderson, Analyst, Roth Capital Partners: Yes. Good morning. Thanks for taking the questions. First one for me, just on the FDA and the potential rule capping nicotine levels for combustion products, it seems like the regulators are focused on the harm reduction initiative more and more here. How do you view that playing out?

And what do you think this means in general just for the future in terms of regulatory landscape around nicotine based products? Thank you.

Graham Purdy, CEO, Turning Point Brands: Yes. Look, I think the only certainty that we have at this moment in time is that the agency has taken a stance on a product in the category. We see that as a very bullish sign frankly with ZYN receiving the marketing authorization. I think it’s very interesting to point out that it was a full range of products that were approved to include flavored products. So I think that we’re excited about the way that the agency appears to be doing this particular category.

We don’t have any perspective right now on the nicotine strengths. We maintain that we’ve done our work with our filings. We continue to be invested behind the wide range of nicotine strengths. So at this point in time, we’re that’s not a particular concern of ours.

Nick Anderson, Analyst, Roth Capital Partners: Okay. I appreciate that color. Second one for me, just wanted to follow-up on Modern Oral. Wondering if you could provide your sense just for the direct to consumer opportunity within the nicotine pouch category. Just from an overall market standpoint, given the strength within the millennial demographic and just their tendency to shop online, how do you view the brick and mortar mix versus online kind of playing out as the category grows here?

Eric Dell’Oyers, Analyst, Craig Hallum Capital Group: Yes, to me that’s a

Graham Purdy, CEO, Turning Point Brands: great question. I think that there’s a level of dependency on route to market relative to our two brand properties. As you can imagine, the core of Turning Point brands is bricks and mortar and our ability to get into convenience stores throughout the country. We’ve certainly been on that part line with free throughout 2024. As it relates to the ALPA opportunity, for confidentiality purposes, we can’t speak too specifically about their route to market.

But as you can imagine, given the audience size and the demographic that you had mentioned that we feel very strongly that there may be an outsized opportunity from an online perspective based on sort of some of the underlying dynamics with that brand and how it’s being marketed.

Nick Anderson, Analyst, Roth Capital Partners: Great. That’s it for me. Congrats on the quarter.

Graham Purdy, CEO, Turning Point Brands: Thank you.

Kathleen, Conference Operator: Your next question comes from the line of Aaron Grey of Alliance Global Partners. Please go ahead.

Aaron Grey, Analyst, Alliance Global Partners: Hi, thanks for the question and congrats on the quarter there guys. First question for me. Just wanted to of course, just want to double back on Modern Oral, instead on distribution, more so on the marketing between the two brands, Free and ALK. Just any color you could provide in terms of how you’re looking to market between the two. You just kind of referenced now between maybe more of a focus for online for ALP, maybe implying more brick and mortar for free.

So how exactly you’re planning for the marketing that coincides with that and the investments you’re planning to make? Thank you.

Graham Purdy, CEO, Turning Point Brands: Yes. Let me just double back really quickly on a point you just made. Look, I think that there’s going to be a wide opportunity in bricks and mortar brand properties. I was really referencing sort of the early innings, launches of between the two properties where the strengths of the organization may lie. From our standpoint, ultimately, we see multiple brands underneath our portfolio of products as an opportunity to cast the widest net possible to speak to all consumers across modern oil.

And if you think about sort of the projected category growth over time, there will be more new consumers entering the category over the long haul than exist today and we think having those multiple properties give us the best possible option to reach those consumers.

Aaron Grey, Analyst, Alliance Global Partners: Okay, great. Thanks for that commentary. Second question for me just on zigzag, right? So you talked about some of the drag that you had there from Clipperidge shipped away. But as we think about the gross margin profile, it was down a little bit in the quarter, you called out mix.

I want to dive a little bit deeper into that in terms of how you think about Zig Zag for 2025, both in terms of sales, you alluded to growth for the brand despite the drag flippers. And then also how should you think about the gross margin profile there? Thank you.

Andrew Key, CFO, Turning Point Brands: Yes, sure thing. So in terms of growth, our thinking hasn’t really changed. It’s mid single digits growth. And like we said, we will be investing in the sales team to broaden kind of our reach across all stores. In terms of the margin profile, what we’ve seen is a mix shift into some lower margin product categories.

And I would anticipate that that would continue as we and we will also be leveraging our fixed costs basis. So from an op income percent basis, we’ll see somewhat moderated growth or margin impact in the next year.

Aaron Grey, Analyst, Alliance Global Partners: Okay, great. Thanks. I’ll jump back into the queue.

Graham Purdy, CEO, Turning Point Brands: Thanks, Aaron.

Kathleen, Conference Operator: And that concludes our Q and A session. I will now turn the conference back over to Graham Burdie for closing remarks.

Graham Purdy, CEO, Turning Point Brands: Thanks, operator. I appreciate everybody joining the call today. Exciting 2024 for us and we look forward to speaking to you all on Q1 results here in the next couple of months.

Kathleen, Conference Operator: Ladies and gentlemen, that concludes today’s call. Thank you all for joining. You may now disconnect.

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