Turning Point Brands, Inc.

customer's response to our expanding and more complete portfolio fueled by many new products launched over the past few years. In Q4, we launched combo books as well as our first seasonal vintage apparel line. As you may have noticed, we leaned into our direct relationships with our consumers using several social media tactics to engage our growing audience. As mentioned, we continue to see strong demand from consumers in the alternative channel as legalization And further normalization of cannabis is expanding the alternative store footprint, dispensaries, head shops, smoke shops, which cater to a growing accessory market. Our alternative B2B business saw continued momentum with zigzag sales growing by over 30% during the quarter, driven by an acceleration in premium paper sales in the second half of 2023. Our strategy in the alternative channel is to be a valued partner to the growing distributor, retailer, and manufacturing network serving this ecosystem. In addition to growing traffic, alternative stores are attractive because they offer the zigzag portfolio more valuable shelf space and merchandising real estate than traditional C-stores. We try to be a solution provider to various customers throughout the ecosystem, and in doing so, we're able to build brand awareness and consumer trial to ensure we satisfy this growing consumer base. As discussed in the past, our growth in the alternative market has been driven by two drivers. One, gaining new customers across the retail, distributor, and manufacturing landscape, and two, increasing order sizes to both existing and new customers as we expand our portfolio. Cross-selling Clipper Lighters is an example of that. Both drivers continue to be healthy. Lastly, in 2023, we were pleased to close on our ABL facility, which, along with the cash we have on hand, gives us ample liquidity to address our convertible debt maturity later this year. With that, let me hand the call over to Summer to walk through progress and the results of several of our specific go-to-market initiatives.

Thank you, Graham. Throughout Q4, we continued to make progress against our roadmap of furthering ZigZag's position as a lifestyle brand. Our focus on growing ZigZag's portfolio and the alternative channel while increasing the brand's ubiquity remains a core tenant of that plan. In Q4, we continued building a product assortment that aligns with market demand. In early December at MJBizCon, we launched our new ZigZag combo booklet, a convenient package combining both papers and tips available in several varieties of our paper assortment. Since its launch, our team is ahead of plan and gaining valuable shelf space. In 2024 and beyond, you should expect us to continue to launch new products that cater to this rapidly evolving consumer. We also launched ZigZag's first seasonal apparel collection, the Vintage Collection, which garnered the attention of the fashion and streetwear community with two of the largest culture publications, Complex and Hypebeast, covering the launch. The Vintage Collection paid homage to ZigZag's century-long influence in the smoking world by blending style, heritage, and culture. 2024 marks the 145th anniversary of the brand, and launching the vintage collection is just the first of many moments we'll bring to consumers and retail to celebrate this remarkable milestone. Furthermore, we continue to develop our event and partnership strategy to integrate ZigZag into music, entertainment, and other creative communities, including recent collaborations with major record labels. Leading into 2024, we hosted Grammy events within the Afrobeat community in partnership with Roc Nation, with the famous DJ collective, Selection, and five-time Grammy award-winning producer, D-Mile, who added another Grammy at the ceremony for Producer of the Year. Throughout Q4, we continued increasing store penetration for Clipper lighters and capitalizing on the synergies between Clipper and Zig Zags. We look forward to continuing to provide updates that showcase the momentum and efforts that support Zig Zags growth. Moving to Stokers, Graham noted the success we had for the segment. The strength was driven by another strong quarter of share gain for both Stoker's MST and Loose Leaf. With its product quality and value proposition continuing to resonate with consumers, we expect that trend to continue. While a small contributor during the quarter, we are excited about the broader rollout of our free white nicotine pouch product. We are in the midst of our initial push on free in both brick-and-mortar stores and digital marketplaces, both our own and other parties' websites. The receptivity and engagement from our trade partners and with consumers continue to reinforce that our product quality, moisture content, pouch size, and differentiated nicotine offerings are leading to positive consumer sentiment. In summary, we continue building our brands for the long term, executing against the plan we've established, and growing our business in retail and with our consumers. Our efforts are focusing on maximizing the value of our world-class brands and strengthening our extensive distribution capabilities. Let me now turn the call back over to Louie to go through our results.

Thank you, Summer. Starting with our consolidated quarterly results. Q4 sales were down 6.1% to $97.1 million. Gross margin was up 410 basis points to 52.0% due to segment and product mix. Adjusted EBITDA was up 7.5% to $24.8 million. Going into segment performance. Zigzag sales decreased 2.9% year-over-year to $45.1 million due to discontinuation of an unprofitable product line in Canada that impacted sales by $1.4 million. Our U.S. paper and RAS business was stable with double-digit growth in our B2B alternative sales business. Our Canadian and other smoking accessories categories saw declines during the quarter, leading to a discontinuation of the low-margin third-party product line. This margin increased 100 basis points to 56.5% during the quarter, driven primarily by product mix, including the discontinuation of the low-margin product line. Focus products net sales increased 18.6% to $38.0 million in the quarter, with a 14.2% volume increase and a 4.4% price mix increase. MST, SHU, and FREE all delivered strong growth during the quarter. Net sales from the MST portfolio grew double-digit. Sophos retail shipment pounds were up despite the category being down 5.6%, with share growing 50 basis points year-over-year to 7.1% during the second quarter, according to MSAI. MST share in-store selling was up 40 basis points year-over-year, To 10.7%, with Stokers now in stores representing 67% of industry bodies, which still provides a long runway for growth. We also had strong growth in our international export business. Chew sales were up high single-digits from the previous year. Stokers Chew was the number one chewing brand in the quarter, gaining 220 basis points of share with 31.0% share, according to MSAI. overall tcb loose wheat retail shipping pounds were up despite the category being down 2.2 percent category performance was driven by a larger decline in premium loosely with tpv's volume benefiting from its values positioning and continuing consumer trade-offs our free sales more than doubled off a low base as we start a broader expansion of the product in 2024. Gross margin increased 380 basis points to 57.6%, primarily due to MSP pricing. PDS sales were 14.1 million. Gross margin was 22.4%. Moving to our balance sheet. After generating $61 million of free cash flow during the year, we ended the quarter with $117.9 million of cash on the balance sheet. And as of today, we have sufficient cash to address the maturity of our remaining 118.5 million convertible notes due July 2024. With our projected free cash flow generation this year, we will be able to stay within our net and gross leverage target range of 2.5 to 3.5 times after retiring our converts this year, while having the flexibility for future capital deployment. On to guidance. At this point, we expect consolidated adjusted EBITDA of 95 to 100 million, The guidance excludes contributions from our CDS business, which contributed a little over $2 million of EBITDA in fiscal year 2023. Other projections include effective income tax rate of 24 to 26%. We expect CapEx to be approximately $9 to $11 million this year, compared to $5.7 million the previous year, including $6.5 million of payments related to an automation project that was pushed out from 2023 to 2024. We also expect to spend six to nine million in capitalized software implementation costs related to the ERP and CRM implementation after spending a little over six million last year. The first stage of the CRM is now live, and we expect the ERP to go live in the first half of 2024. We currently expect to spend approximately four million for the four years to supplement our PMTAs related to our modern oral products, which remain under review by the FDA. and we turned it back to Graham.

Overall, we saw impressive momentum for Stoker's MST, along with the progress in the alternative channel and supported Zigzag. We're also very excited about free. Thank you for participating in the call today. And with that, I'd like to open the call for questions.

And thank you. If you'd like to ask a question at this time, press star and then the number one on your telephone keypad. If you would like to withdraw your question, press star 1 a second time. And we will pause for just a moment to compile the Q&A roster. And we will take our first question from Scott Fortune with Roth MKM. Your line is open.

Yeah, good morning and thank you for the question. Congratulations on the continued penetration into that alternative Smoke Shop channel. and the progress continues there. Are you, if we look at the channel, are you displacing competitors or look at it as continued kind of gradual market penetration within that channel? And then is there a promotional activity you have to do to kind of initially entry that channel to gain that share? If I'm really just talking about kind of the promotional activity in that channel too, as you continue to build that out.

Hey, sure. This is Summer. Thanks for the question. I heard you first ask about are we displacing competitors and then ask about our promotional strategy as we're growing in the alt channel. Look, our penetration into the alternative channel is something we continue to be encouraged by. primarily we're focused on expanding distribution and gaining shelf space so naturally that comes at the expense of taking space of some competitors but for us we're really focused on just gaining shelf space and continuing to grow in that channel given the the TAM that we see in the opportunity ahead of us unfortunately because of the strong brand equity that zigzag has we are not over promotional izing in that space and are quite encouraged by our pricing strategy thus far.

I appreciate the color. And then kind of following up on that, on free, and obviously you have differentiated size pouch and nicotine kind of offering from there. That continues to expand as you put more sales and support there, but What are you seeing? Are you seeing anything from the competitive side moving up kind of into the free offering nicotine-wise? Or how do you see that kind of playing out as we look out in 2024 and driving that growth going forward here?

Yeah, sure. So as you noted, one of the things that makes free so fantastic is its differentiated nicotine positioning in the market. And because of the loaded dynamic of the nicotine space, We aren't seeing a ton of competitive activity, although I don't think that's necessarily a forever situation because of where consumers are gravitating. Certainly, competitors will see that, but we're excited to get into the market and continue to expand and capitalize on our point of differentiation at this point.

Perfect. And the last one, follow up for there. Obviously, you're ramping the free product and the strong trends there, kind of similar opportunity as you saw in Stokers over time as you ramped up that product. Just kind of step us through kind of the steady incremental growth. gains you're seeing and kind of when, kind of timing of the cadence and when this becomes more meaningful throughout the 24 and looking 25 and beyond here for free. Kind of just step us through that cadence and the size opportunity as it grows here.

Yeah, so as I think were noted in the opening remarks, we continue to see that category grow significantly over the past several years. And as we anticipate over the years to come, we see it as over $2 billion industry now. And so very similar to our Stoker strategy, even a high single digit share in that growing market is really significant to our business. And so we're focused on prudent, steady growth, quarter over quarter. And as we've sort of rolled out this quarter, that's what we're on track to do is continue to see that steady growth. And that was our success story for Stokers, as you noted. So following that same playbook, I think will go really well for us.

Thanks. That's helpful. I appreciate the detail. I'll jump back in the queue.

Thanks for the questions. And we will take our next question from Michael Legg with Benchmark. Your line is open.

Thanks. Good morning. Great quarter. Wanted to dig down a little on the free. What's your pricing strategy there first?

Sure. Our pricing strategy is pretty straightforward in the sense that we are focused on maintaining a profitable business and not over-promotionalizing that space.

Okay, but is it similar to like Stoker's where there's premium product and then you have the more cost-effective product, or are you going to compete with Zinn at a premium price point?

We will be and are competing at a premium price point. So a different approach than Stoker's given our brand positioning.

Okay, and then you mentioned high single-digit market share opportunity, $2 billion market, so we're costing $100-plus million there. Can you talk what your long-term market share goal is and what your store ramp-up expectations are to get this distributed?

Hey, Mike. It's Graham. Thanks for the question. Appreciate it. Look, I think, number one, we're bullish on the category. Number two, we're incredibly bullish on our product, given the points of differentiation that someone had articulated. I think we're bullish on our success rate that we had with Stokers and following that plan, which has been a very methodical grind up over the last 10 years or so. I think our expectation would be that free would probably follow a similar path to that over time.

Okay, great. And then you didn't mention Clipper. Can we talk about what you're seeing with Clipper and how that's going?

Yeah, we're very encouraged by the results. We're on plan relative to the store games that we're making in the market. Summer's team has done a nice job of expanding out our social footprint and building some really nice marketing campaigns around the Clipper lighters. We're seeing a lot of energy in the alternative channel with the carry with ZigZag and Clipper in the alternative channel. So, I'd say generally we're excited about the results thus far, and it's a consumer product that competes against a very large and well-organized and well-capitalized player in the market. But again, similar to the free story, we feel like over the long term we can be very successful with the product.

Okay, great. And then just the $4 million legal settlement, what was that?

We had a shareholding settlement that was disclosed in the Q&A. There's a further disclosure on it in our table, which we'll follow up today. Okay, let's take a look then.

And then the automation project, what is that for?

Yeah, so we had disclosed this project before. What we decided to do is do it in stages where we're taking the first line and optimizing it so we're able to defer some of the payments for the future lines for later this year.

Okay, thanks. Just one last question on the debt. Do you plan on paying that off, or do you plan on refinancing debt and continuing with the same leverage? Yeah, at this point, we've got enough cash to be able to retire that in July, so that is our current plan. Okay, thanks. Great quarter. Congrats.

Thanks, Mike.

And we will take our next question from Eric Delorier with Craig Hallam Capital Group. Your line is open.

great thank you for taking my questions and also my congrats on the quarter as well um so it's great to see uh momentum at both uh the alternative channel for zigzag and um uh and with the new free products uh really kind of gaining momentum here um within the zigzag alternative channel you mentioned uh you know you're sort of able to do a bit more um brand building uh through that channel versus traditional c store could you just expand on that um and maybe just give us some examples of sort of uh you know some of the ways that you are able to um to drive brands uh you know recognition brand equity is this more shelf space is this sort of being also being able to sell apparel um just kind of expand on that would be great thank you yeah hey eric thanks for the question

in terms of the the difference in brand building in the alternative space versus the traditional c-store channel it really is so much more wide open if you think about walking into the variety of stores that are in the alternative channel there's a lot more receptivity to the sorts of things that you can hang and position and store and certainly you touched on apparel you know, these sorts of retailers are also open to selling different sorts of merchandise. And so it really opens the bag and the type of product expansion that we can capitalize on in those stores in a very different way than what is, you know, a more traditional C-store space that has that more limited shelf space and opportunity to have those sorts of varieties of products.

Okay, that's helpful. And um just in terms of the the growth that you you have been experiencing within the alternative channel um you know obviously you guys have been um going after this for for some time here um is there anything specific to call out um uh to this sort of this growth that's been building you know over the past couple quarters here um you know you mentioned new products like you know is there has it been uh a matter of sort of finding products that that this channel is is looking for and that's sort of been able you know that's helped you increase your your share within that channel is it kind of all of the above with uh with with apparel and these other things as well just wondering if there's anything to sort of call out um as the driver uh to sort of you know increasing this penetration within this channel

I mean, no special call-out, and as you mentioned, we've had pretty strong success in this market for a while, and so we expect to continue the same thing. A lot of it is just increasing our penetration, as Summer mentioned, within that channel. And, you know, our product offering, our continued push, and just kind of the momentum that we're getting is leading to this type of growth that we're seeing. And so I think there's a lot of further opportunity for us to attack that market.

Okay, great. And just a couple more kind of quick ones from me. On Clipper, I know that we've sort of been working through some heightened inventory levels at retail. Can you kind of just give us an update on what you're seeing there?

Yeah, look, I think this sort of goes across our business. We feel like the inventory overhang from last year are largely behind us at this point in time. That would include Clipper.

Okay, great. um and then last one for me uh so understood this automation product excuse me project um you've been uh optimizing this first line here so a bit of a push out in some of the um uh capex you know dollar expectations here um could you just help us uh with cadence i think uh maybe sounds like some of this might be pushed to maybe q2 maybe second half just um any kind of commentary on cadence would be helpful thank you

We expect to be through the majority of the first half of the year and continue to rank the production through the rest of the year on this project.

Okay, awesome. Thanks so much, guys. Thanks, Eric.

And there are no further questions at this time. I will now turn the call back to Mr. Graham Purdy for closing remarks.

Thanks, operator. Appreciate everybody's time today. We're excited about the quarter and we're excited to communicate with you here in a few months on results today. So thank you so much.

And ladies and gentlemen, this concludes today's call. We thank you for your participation. You may now disconnect.