Good day, and welcome to the Turning Point Brands Third Quarter 2024 Conference Call. [Operator Instructions] And finally, I would like to advise all participants that this call is being recorded. Thank you. I'd now like to welcome Andrew Flynn, CFO, to begin the conference. Andrew, over to you..

Good morning, everyone. A short while ago, we issued a press release covering our Q3 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 perspective on the operating environment and 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 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..

Thanks, Andrew. Good morning, everyone, and thank you for joining our call. Our consolidated third quarter results were better than expected and demonstrated continued progress against our plan. Adjusted EBITDA increased 11% to $27.2 million for the quarter. Ex CDS, EBITDA increased 12% to $26.9 million.

Given strong performance across our business lines, we are increasing our guidance for full year 2024 adjusted EBITDA to $101 million to $103 million versus our prior guidance of $98 million to $102 million. Neither of these ranges include contributions from CDS.

During the September quarter, Zig-Zag performed well with revenue up 6% to $49.3 million, driven by growth in all our subsegments except for one, and we experienced another strong showing from our cigar business, which we've leaned into more heavily in 2024. We continue to be excited about this business going forward.

The loan segment that declined was the lighter category. Due to weaker-than-expected performance, we are assessing the go-forward strategy for this product line.

We saw growth in Zig-Zag across our distribution channels, including a solid quarter within alternative channel, which experienced low double-digit growth both sequentially and year-to-date versus a year ago.

We remain bullish on the continued emergence of this channel, which provides us an opportunity for us to leverage our diverse SKU portfolio to offer these customers a one-stop shop for all their accessory needs.

As the category continues to grow and gain mainstream acceptance, we expect to see continued convergence of distribution channels as traditional C-store distributors that we've done business with for decades increasingly target the alt market.

At the same time, we've successfully onboarded new distributors and manufacturers who have emerged to specifically serve this market. They want to work with us because our deep diversified portfolio, strong brands and reputation as a reliable partner. Nearly 75% of all Americans now live in a legal medical or adult-use state.

This secular tailwind should continue to benefit picks and shovels businesses like TPB with must-carry brands like Zig-Zag. Moving to Stoker's.

During the quarter, Stoker's revenue increased 12% to $41.4 million, reflecting a 3% decline in loose leaf, a 3% increase in MST and a 342% increase in FRE sales off a low base to approximately $5 million for the quarter.

FRE sales increased 26% sequentially, which is more than double the industry's 11% growth per MSAI and even greater growth in sell-through to our end consumers. Through our disciplined test-and-learn approach, we believe that we have a strong product market fit.

Positive consumer feedback has consistently reinforced features in the brand's positioning, pouch size, flavor, mouth feel and range of nicotine strengths.

This consumer feedback and growth in purchases, along with initial retail acceptance and reorders have convinced us to invest in expanding our chain footprint, which requires investment to secure competitive placement, execute our desired in-store look and feel and participate in loyalty and promotional programs.

We are particularly pleased with FRE's performance given many distributors and retailers allocated capital to restocking the market leader, which experienced widespread out of stocks in the second quarter.

It is also worth noting that we initially launched FRE at 9 milligrams, 12 milligram and 15-milligram strength in order to offer a unique selling proposition.

Due to overwhelmingly positive consumer feedback about the mouthfeel and flavor profile, we are expanding into 3-milligram and 6-milligram as well, which currently represents over 70% of the category volumes.

We started with 6-milligram online in two of our four flavor styles and have just recently started selling limited quantities in select retailers. We will be accelerating distribution of 6 milligram during Q4 and expect to launch 3 milligram in Q1 2025.

As we've noted in previous quarters, this continues to be a large and rapidly growing category with a long runway for growth. Looking forward to 2025 planning, we are also working to enhance our commercial system and go-to-market strategy to maximize our success in this category.

With that, let me hand the call over to Summer to walk through some progress and results of some of our specific go-to-market initiatives..

Thank you, Graham. Throughout Q3, we continued to build upon Zig-Zag's iconic history while continuing our push toward ubiquity across all sales channels. As Graham noted, we are not only having success winning new untapped alternative customers but also increasing share with existing alt customers who are buying more of the Zig-Zag portfolio.

We've seen healthy increases in average order sizes while expanding valuable shelf space and merchandising within these stores. In the quarter, we expanded our successful hemp wrap portfolio across all sales channels with four new offerings, which have been well received in the market.

We also are in process of rolling out a new vibrant look of the Zig-Zag papers cartons. These vibrant orange cartons will create a consistent high-impact look that will increase visibility, thus making it easier to identify Zig-Zag rolling paper cartons on store shelves.

For Q4 and beyond, we expect to continue introducing new products that build on this legacy while tapping into new innovation for today's evolving consumer. We continue to 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.

For example, in legal dispensaries, now over 10,000 stores in 38 states, cannabis accessories currently represent a tiny fraction of sales, yet offer meaningful opportunities for both retailers and Zig-Zag. For Stoker's, we continue to be pleased with the brand's performance, which again posted over $40 million in revenue like we saw last quarter.

We are focused on expanding distribution, especially with our tubs product and continue to see the brand's great fit at a fair price messaging resonate with today's consumer. Turning to FRE.

After successfully expanding into the 6-milligram nicotine strength last quarter across D2C and select retail channels, we are encouraged by the initial incremental results. As these initiatives took place during the quarter, we didn't enjoy a full quarter's benefit.

That being said, our D2C site continues to show consistent revenue increases, strong engagement and solid repeat customer orders. We launched both rewards and subscription programs on our D2C site in the quarter. Since these introductions, while early, growth, engagement and number of repeat customers have increased further.

We look forward to sharing additional progress as we accelerate go-to-market strategies in 2025. In summary, we continue building our brands for the long term, executing against the plan we've established, growing our omnichannel business 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..

Thank you, Summer. Starting with our consolidated quarterly results. Q3 sales were up 3.8% to $105.6 million. Excluding CDS, overall revenue was up 8.4% year-over-year. Gross margin was up 10 basis points year-over-year to 50.8%. As reported, SG&A for the quarter was $33.2 million, which includes nonrecurring items.

PMTA expense was up $900,000 year-over-year and transaction-related costs were up $800,000 year-over-year. Adjusted EBITDA was up 11.3% year-over-year to $27.2 million. Going into segment performance.

Zig-Zag sales increased 5.5% year-over-year to $49.3 million due to the strength in all of our categories, with the exception of the lighters category, as mentioned. Gross margins decreased 180 basis points year-over-year to 55.4% during the quarter. This was driven primarily by product mix.

Stoker's net sales increased 12.1% year-over-year to $41.4 million in the quarter with a 2.9% volume increase and a 9.2% price/mix increase. Net sales for the MST portfolio grew 3% year-over-year.

Stoker's MST volume was down 3% despite category volume down 8%, with share growing 40 basis points year-over-year to 7.3% during the quarter according to MSAI.

Share of in-store selling was up 90 basis points year-over-year to 11.3%, with Stoker's now in stores representing approximately 2/3 of industry volumes, which still provides a long runway for growth. Chewing tobacco sales were down approximately 40 basis points from the previous year.

Stoker's chewing tobacco was the number one chewing brand in the quarter, gaining 230 basis points of share to 32.9% according to MSAI. Overall, TPB loose leaf volume was down 0.4%, beating category volume declines of 7.1%.

Category performance was driven by a larger decline in premium loose leaf with TPB's volumes benefiting from consumer trade down as Stoker's volumes grew from the previous year. Our FRE sales more than quadrupled year-over-year as we continue our national rollout. Gross margin was flat versus a year ago at 55.8%. Moving to CDS.

Sales were $15 million, gross margin was 22.1%. Adjusted EBITDA was approximately $270,000. Moving on to the balance sheet. We ended the quarter with just over $33 million of cash. Free cash flow for the quarter was $12.6 million. Year-to-date free cash flow is $45.8 million. On July 15, we retired our $118.5 million convertible note with cash on hand.

With our projected free cash flow generation this year, we are well within our previously disclosed leverage range of 2x to 3x and are comfortable with our liquidity position. In the quarter, we repurchased $1.1 million worth of shares. In addition, the Board has authorized a share repurchase program that has a capacity of $100 million.

On to guidance and other line items. As previously noted, we are increasing our guidance for full year 2024 adjusted EBITDA to $101 million to $103 million versus our prior guidance of $98 million to $102 million. Neither of these ranges include contributions from CDS. For modeling purposes, the effective income tax range is 23% to 26%.

We revised our CapEx expectation from $11 million to under $10 million for the year. Our investment plans have not changed and reductions are timing driven. We expect to spend approximately $4 million for the full year to supplement our PMTAs that are related to our modern oral products, which remain under review by the FDA.

Now let me turn it back over to Graham..

To conclude, we're pleased with our progress nine months into 2024. Now I'll turn it over to questions..

[Operator Instructions] And your first question comes from the line of Eric Des Lauriers from Craig-Hallum Capital Group..

Great. And thank you for taking my questions. And congrats on a very nice quarter here. First question for me, just on the growth outlook for FRE. It sounds like you have some increased marketing initiatives underway.

I'm wondering if you could just kind of help us understand the growth outlook for sort of expanded velocity or perhaps SKU counts in existing doors versus kind of the growth coming from new door penetration? And if you can sort of help us break that out between kind of near-term and longer-term opportunity, that would be helpful..

Eric, this is Summer. Thanks for the question. So as you know, we launched with a focus on national distribution this year and continue to scale and add new independent retailers.

As you also know, getting into chains is a little bit more of a longer runway and chains are the predominant place where OST is sold, about 67%, 70% of the category is sold through chain convenience stores. And larger chain stores take a little bit more time to get into.

But as you know, we have relationships and long-standing relationships where our products are currently sold with those chain stores. And so we are in active conversations and expanding distribution.

And with the expansion of our 6-milligram products and 3 milligram to come in Q1, we're really excited about continuing to expand the portfolio across that chain universe..

All right. That's helpful. And then just for my follow-up, so this kind of new Alp brand, the Tucker Carlson affiliated brand has been reported by Wall Street Journal. Patents have been filed. Obviously, we haven't seen an official announcements from turning Point Brands just yet.

But just wondering if you can kind of comment high level on your thoughts for the Alp brand for this partnership. Just kind of any color you may be able to provide would certainly be very helpful for us..

Eric, it's Graham. I hope you're doing well. Look, at this point in time, we're not going to talk about Alp today, but we will have some updates in the near future..

And your next question comes from the line of Michael Legg of Benchmark..

Thanks. Good morning.

When you look at the FRE sales going forward with the introduction of the 3 and 6 milligram, what percent of your sales do you think will come from the new 3, 6 milligram versus the larger milligram down the road?.

Mike, so as you know, the majority of the volume in the category is taken up by 3- and 6-milligram products, nearly 70% of the category. And so the fact that we've been as successful as we have been with 9, 12 and 15 has been very encouraging for us. We continue to hear consumers talk about our product differentiation, including mouth feel and flavor.

And so as we get into where the majority of the category is, we're quite encouraged about the early comments that we've heard from consumers and getting into that 6- and 3-milligram category.

And the early sales that we have for 6 milligram have also been very encouraging, incremental to our business, and we're continuing to get that really great consumer feedback. Reorders on our D2C site, for example, have been quite encouraging..

Okay. And then just a follow-up on that.

When you look at your supply chain for FRE and then the obviously growing demand within the retail space, can you talk about what may be the limiting factor? Is it getting new accounts to take the product? Or is it having enough product to get into the doors?.

Mike, look, I think it's -- we've talked about this in the past, getting into chains is somewhat of a transactional event because of the process and no two chains are alike in terms of their planograms and the cycle times that it takes to get in there. We feel great about our manufacturing capacity at this point in time.

And I think one of the other areas that we're looking at right now is given the results of the past election, exploring U.S. manufacturing options may be of interest depending on what potential tariff environment looks like..

Okay. And then just one last question.

When we look at the alt channel versus your traditional distribution, does an all channel unit offer larger revenue opportunity than a traditional convenience store? Or are they similar? How do you view the opportunities for sell-through in the alt channel per unit?.

That's a great question. Categorically, we believe the TAM for the alt space is as large, if not larger in some cases than the convenience store channel. And given the runway for growth, given that we're under-indexed in the alternative channel, the profit is quite significant for us as we think about that.

That being said, the two channels are converging quite a bit. So we are definitely mindful of how those channels are playing together and making sure that we're tackling every opportunity that comes our way in a profitable manner..

Your next question is from the line of Nick Anderson of ROTH MKM..

Yes, good morning. And thanks for taking our questions and congrats on the quarter here. The first question for me, just on the FRE and the pricing strategy side. You've taken share within Stoker's as you've kind of priced that product competitively.

Are you following a similar blueprint for FRE? Just your sense of the pricing strategy and how you're looking to capture share as you enter new stores there..

Yes, sure. Thanks for the question, Nick. As we think about the FRE brand, it is a premium brand that we believe can compete at a premium pricing level with the other major competitors in the marketplace, and our pricing strategy will reflect that..

Okay. I appreciate that color. And then second one for me, just on Zig-Zag and the cigar opportunity. That's the second quarter in a row where you've seen kind of solid cigar growth.

Curious how much additional white space you're seeing there and just kind of what the expectation is for that segment going forward?.

Nick, Graham, welcome. The cigar category is a massive opportunity for this company. There's a lot of correlation with consumers in that channel with the rest of the Zig-Zag portfolio. We think about that opportunity, the runway there is a couple of billion dollars in manufacturer revenue. Obviously, we're in the extreme early innings of this process.

But a couple of things that we think we really have going for us is we've got an incredible foundational brand in Zig-Zag to leverage against that space. And we've also got products that we purchased a number of years ago through one of our smaller acquisitions that give us runway vis-a-vis the regulatory environment.

So it's a wonderful opportunity for us. Again, early innings, but we think that the size of that opportunity could be fairly substantial over the long run for the company..

And due to the constraints of time, we do need to conclude our Q&A session there. I would like to hand back over to Graham Purdy for closing remarks..

Thanks, operator. I appreciate everybody joining the call today. We're excited about the results coming out of Q3, and we look forward to talking to you in a few months..

This does conclude today's conference call. Enjoy the rest of your day. You may now disconnect..