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Operator
like to withdraw your question, press star 1 again. Thank you. I would now like to turn the call over to Andrew P. Please go ahead.
Andrew P. Please
Good morning, everyone. A short while ago, we issued a press release covering our Q2 results. This release is located in the IR section of our website at .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 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 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 Graham Purdy, our CEO. Thanks, Andrew.
Andrew
Good morning, everyone, and thank you for joining our call. Our consolidated first quarter results were better than expected and demonstrated continued progress against our plan. Adjusted EBITDA increased 7% to just over $27 million for the quarter. Given our solid start to the year, we are increasing our guidance for projected 2024 adjusted EBITDA to $98 million to $102 million versus our prior guidance of $95 million to $100 million. Neither of these ranges include contributions from CDS. During the June quarter, ZigZag performed well with revenue up 8% to $50.5 million, driven by high single-digit growth in our American papers and wrap businesses, and a strong showing from our cigar business, which we've leaned into more heavily in 2024. We're excited about this business going forward. We remain committed to our alternative channel strategy of becoming a one-stop shop for our alt customers. In particular, we continue to expand our SKU assortment to offer these customers a more diverse portfolio of products. The alt channel declined 3% in the quarter, but as a whole, in the first half, this business is up about 28%. The drop in sequential is attributable to the first quarter having a particularly robust trade show calendar in the timing of some large purchases in March. Nonetheless, we are having success not only winning new, untapped alternative customers, but also with existing alt customers buying a more complete ZigZag portfolio. We've seen healthy increases in average order sizes while expanding ZigZag more valuable shelf space and merchandising real estate within these stores. We continue to have a long runway in this emerging and fluid market. As you know, the alternative channel is consistently expanding as additional states embrace medical and recreational cannabis. In addition, alt retailers, including dispensaries, smoke shops, and head shops, are expanding product offerings to provide a better shopping experience for consumers. As such, we view the marketplaces for ZigZag products as converging in many ways, and we are seeing evidence of traditional C-Store distributors that we've done business with for decades increasingly target this market, which is good news for us. We are also seeing evidence of new distributors emerging to specifically address this market and that plays to our strengths considering the depth and breadth of our product lines as well as our reputation as a reliable partner. That said, although this is exciting and great news for us, it will likely make it increasingly challenging to measure alt versus traditional C-Store sales. That's just something to keep in mind going forward, especially as you do your own channel checks. Moving to Stoker's, during the year, we were pleased with the market share increases for Stokers, which continues to be a steady growth engine with a long runway for volume growth and favorable pricing dynamics. We are also pleased with the market's enthusiastic response to the national launch of Free. We launched with 9, 12, and 15 milligrams because we wanted a product on the shelves that was immediately differentiated. Based on our initial successes, we recently launched a 6-milligram product on our website, freepouch.com. Naturally, it takes some time to get a brand new product to shelves, so you can expect to start to see the 6-milligram product on retail shelves this fall. Also, we've gotten a lot of questions about the potential timing of seeing free some of the more well-known national and regional C-Store chains. As you can imagine, these chains tend to have a longer sales cycle and planned out merchandising and planogram strategies. So, our immediate successes have tended to be with independently owned stores that, by and large, can act more quickly. Suffice it to say, we have a long runway ahead of us in what's estimated to be a roughly $3 billion wholesale market in 2024 per MSAI and could be worth between $5 and $7 billion by the end of the decade, per various analyst reports. In addition to the convenience store channel, we're also seeing all channel demand for Free, even if many of these stores don't sell traditional tobacco products. It speaks volumes to the energy TPB brings to bear with our world-class sales, service, and distribution platform. We look forward to providing updates on this exciting new product in the quarters and years to come. With that, let me hand the call over to Summer to walk through some progress and results of some of our specific -to-market initiatives.
Stoker
Thank you, Graham. During Q2, we made further progress in building ZigZag's position as a lifestyle brand by executing against our multi-year roadmap. As Graham noted, ZigZag posted a strong quarter fueled by papers, wraps, and a more distinct push into the cigar category. For only the second time in ZigZag's history, the brand achieved over $50 million in revenue. We also continued to launch and promote products that resonate with evolving consumer preferences. In June, we added to our growing rose cone portfolio with the introduction of ZigZag mini rose cones. Like our prior innovative rose products, these new mini rose cones are made with all-natural organic rose petals that promise an enhanced smoking experience. Additionally, as part of our endeavor to build a lifestyle brand that goes beyond smoking accessories, and we continue to expand our brand presence in culturally relevant moments, we teamed up with Guess Genes to partner with them on their exclusive Coachella compound. The activation brought together some of the world's largest celebrities and influencers into a compound consisting of multiple homes during the largest musical festival of the year. ZigZag participated in sponsoring the compound with co-branded products, artists and celebrity gifting, rolling stations throughout the venues, as well as a post-festival after party. The tagged content from the weekend yielded a cumulative reach of 19 million individuals. We have a healthy pipeline of new product introductions across the ZigZag portfolio, and we look forward to continuing to provide updates that highlight the momentum and efforts that support ZigZag's growth. For Stokers, we continue to be pleased with the brand's performance, which grew to over $40 million in revenue for the first time in company history. We are focused on expanding distribution and continue to see the brand's great dip at a fair price messaging resonate with today's consumer. Turning to free, our sales and marketing teams are keenly focused on building a brand that will resonate with consumers for the long term. We made further progress in the quarter across both brick and mortar stores and digital marketplaces, as Graham noted with our revenue growth. I shared last quarter 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 a powerful selling proposition. We summarize the selling proposition with the phrase, power, feel, flavor. Our recent product portfolio expansion into 6 milligrams enabled us to further lean into the selling proposition and, as importantly, expand our product assortment to participate in the largest portion of the nicotine pouch category. We look forward to sharing our progress throughout the year. In summary, we continue building our brand for the long term, executing against the plan we've established and growing our business in retail and with our consumers. We will continue to focus on maximizing the value of our world-class brands and strengthening our extensive distribution capabilities. Let me now turn the call back over to Andrew to go through our results.
Andrew P. Please
Thank you, Summer. Starting with our consolidated quarterly results, Q2 sales were up .8% to 108.5 million dollars, which is up 12% on a sequential basis. Excluding CDS, overall revenue was up 13%. Gross margin was down 8 basis points to .6% due to segment and product mix. Adjusted EBITDA was up 7% to 27 million dollars, going into segment performance. Zigzag sales increased .1% year over year to 50.5 million dollars due to strength in cigars and growth in our North American papers and wraps businesses. Gross margins decreased 330 basis points to 53% during the quarter. This was driven primarily by the product mix. Stoker's net sales increased 19% to 42.7 million dollars in the quarter, with a .3% volume increase and a .2% price mix increase. Net sales for the MST portfolio grew 14.1%. Stoker's volume was up .4% despite category volume down 7.2%. With share growing 60 basis points year over year to .5% during the quarter according to MSAI. Its share of in-store selling was up 60 basis points year over year to 10.3%, with Stoker's now in stores representing approximately two-thirds of industry volumes, which still provides a long runway for growth. Chewing tobacco sales were down approximately 1% from the previous year. Stoker's Chewing Tobacco was the number one chewing brand in the quarter, gaining 160 basis points of share to .5% according to MSAI. Overall, TPB loose leaf volume was down 0.9%, meaning category volume declines of 3.7%. 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 free sales more than tripled off a low base as we continued national distribution of the product. Gross margin declined 30 basis points to 55%, primarily due to product mix, somewhat offset by MST pricing gains. Moving to CDS, sales were $15 million. Gross margin was 22.5%. Adjusted EBITDA was approximately $450,000. Next on to the balance sheet. We ended the quarter with just over $140 million cash. Post 2Q close, we retired our $118.5 million convertible note on the maturity date of July 15. We were able to do this without drawing on our ADL. On a pro forma basis after retiring the convert, our gross debt is $250 million, net debt $226.4 million. With our projected free cash flow generation this year, we are well within our previously disclosed leverage range of two to three times and are comfortable with our liquidity position. On to guidance and other line items. As Graham noted, we are increasing our guidance for forecasted 2024 adjusted EBITDA to $98 to $102 million versus our prior guidance of $95 to $100 million. Neither of these ranges include contributions from CDS. Effective income tax rate of 23 to 26%. We revised our cap ex expectation from $50 million to $11 million. 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 to Graham.
Andrew
To conclude, we're pleased with our progress at 2024's halfway point. And with that, I'll turn it over to questions.
Operator
Thank you. We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star one again. If you are called upon to ask your question and are listening by a loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. Your first question comes from the line of Michael Legge with the benchmark company. Please go ahead.
Michael Legge
Thanks. Congratulations on a great quarter, everyone. Free obviously seems like a huge opportunity for you. You decided you've had the PMTAs, the 3 milligrams and the 6 milligrams, but didn't launch them alongside the 9, 12, and 15 milligram packets. Can first, can you just talk a little about the timing on why you decided to launch the 6 milligram now?
Andrew
Yeah. Hey, Michael. It's Graham. Thanks for the question. Yeah, I think the original thesis was to provide a differentiated product for consumers as well as our customers as the shelves were being filled up with various products, sort of sub 9 milligram. And so pretty unique opportunity with both customer and consumer. I think through our direct selling apparatus, freepouch.com, we found over time is that mouthfeel has become a very strong differentiator for us, which I think gave us confidence to lean into the 6 milligram segment. As of Q2, that segment was about 52%, the 6 milligram segment for the quarter. So it really gives us a strong opportunity to participate for those consumers and really grow them into sort of the broader portfolio of products that we have.
Michael Legge
Okay. And can you talk a little bit about your manufacturing capability and how you produce it and what the capacity is there?
Andrew
Yeah. We feel, I think we feel really good about where we're at right now. We've got a strong manufacturing partner who's got an appetite to invest behind it. If we look through how we perceive the sort of balance of this year and moving into next year, we feel really confident in the partner that we have.
Michael Legge
Okay. But as far as capacity, is there any level you can disclose?
Andrew
No.
Michael Legge
Okay. And then what do you view as the
Andrew
longer
Michael Legge
term margin potential for free?
Andrew
I'm sorry, Mike, can you say that again?
Michael Legge
The longer term margin potential for free?
Andrew
Yeah. Look, I think it sort of follows our past thesis, which is growing into higher margins over time. We tend to invest in the brands in the early days, which if we recall some of the past launches, we sort of signaled that 20 to 40% was kind of our intro range for products. But we're seeing sort of favorable pricing dynamics emerge in this category as well. And so we're pretty confident that over time, as we get more leverage and the brand gets more scale in the marketplace, that we'll sort of be able to follow that same model.
Michael Legge
Okay, great. And so basically competition now is obviously building up the capacity and supply is sort of constrained in the marketplace for what I'm seeing. You guys have more P&TAs in the competition, right? They're only in the three six. You guys also have the nine, 12 and 15. Is that correct?
Andrew P. Please
Yes.
Michael Legge
Okay, great. All right. Thank you very much. Great quarter.
Andrew
Thanks, Mike.
Operator
Your next question comes from the line of Eric Deslaurius with Cray Column Capital Group. Please go ahead.
Eric Deslaurius
All right. Thank you for taking my questions and congrats on a very impressive quarter here. Thank you. I'll stick with the free questions for now. You were just recently mentioning you're investing in brands in the early days. Obviously makes sense. Considering the kind of explosive growth that we're seeing in this category, I'm just wondering sort of how you're thinking about marketing spend and trade promotion for free. What would you need to see to sort of increase spend? And how should we think about potential spend as falling between marketing investment in SG&A or trade promotion and net sales or COGS? Just wondering how you're sort of thinking about this going forward.
Andrew
Yeah, I think if you just take a step back from the 30,000 foot view, I think we're very data driven. We've got robust data for this segment and specifically our brand through MSAI as well as our online channels. I think that the data informs our decision relative to how we throttle spending. In terms of the distinction between trade promotion and marketing expense, I think that that's always a balancing act where as we read that data, we sort of make a determination on where to press in a little bit harder and maybe where to lean out of that particular spending or investment view. But at the end of the day, I think what makes us a little bit unique is that we've gone to market and we maintain profitability in the segment, which I think we're incredibly proud of.
Eric Deslaurius
Yeah, no, absolutely. That's great. I appreciate the color there. You mentioned some comments on obviously these larger C-store chains have a longer sales cycle. You've had more success with some of these independents. I'm wondering how the sort of trajectory for the second half is looking here. Do you feel that you've sort of gotten into a good number of the independents and maybe there's some inventory sort of initial load in to be aware of that maybe we could see some volatility quarter to quarter or are we just kind of too early in this robust growth trajectory that we shouldn't necessarily be thinking about kind of quarter to quarter volatility at this point? Just sort of wondering how you're viewing that more near term landscape.
Andrew
Yeah, look, it's a lot to unpack in that question. So I'll start first with the chain environment. Well, it's a long sales cycle for the large chain accounts. So we'll note out that we're in the overwhelming majority with the 50 chains in the country with some skew representation with TPB. And it's important to note that because we've got a long history of creating partnerships and creating value with our customers. So we're very confident over time in our ability to sort of get into the larger chain accounts in terms of how we think about volatility from quarter to quarter. I think it's in the early days right now. Obviously, it's still relatively small compared to the entirety of the Stoker segment. In terms of how we went to market, we certainly didn't go to market with a sort of a big load strategy, if you will. And what we're trying to do is get a view for get the product in the stores merchandise that well, make sure the consumers can see it, placing point of sale and seeing what the pull through rates are. And so we're really sort of managing not over inventorying the trade in the early days for this launch.
Eric Deslaurius
All right, so very great to hear. Overall, I mean, you know, kind of this is a, I guess another sort of 30,000 foot question or just, you know, longer term question. So, you know, with your other Stoker's products, you've sort of been, you know, attacking the value side of the category. You know, here you're kind of competing head on here. I'm wondering if you have any view on sort of potential market share, you know, goals or targets or anything kind of longer term. I mean, is this something where you still see, you know, in the single digits as being the sort of target here as you are with Stoker's MST or is there anything else that you're seeing that, you know, maybe that could be, you know, either more or less. I mean, just just wondering how you're thinking about overall market share goals, given the slightly different competitive positioning with Free versus your other Stoker's products.
Andrew
Sure. Great question. So I think that we have, you know, our aspirations are large and if you take our aspirations and you unpack them, sort of our goal is to be an everyday player on the shelf across the U.S., which would mean that, you know, being one of the few that actually sort of emerges as, you know, in that top, you know, say four or five brands in the market. I think Stoker's and the gains that we've made there throughout the year sort of informs what we think the potential could be. And certainly we're way ahead of the game in our entry into the white pouch category with a differentiated product. Whereas it took us 40 years to get to the moist snuff category and we're competing against large entrenched incumbents. You know, we're relatively early inside that cycle with Free in the modern oral category. So there's a lot of adoption. The category growth that is expected throughout the rest of this decade will largely be from new consumers coming into the category that currently aren't engaged. And so we think that there's a great opportunity for us to win new consumers as they come into the category while also competing for existing consumers that are looking for a little more satisfaction, looking for better mouth feel. And we think the launch of the six milligram sort of gives us the license to speak to those consumers and give them an opportunity to try our product and see the difference.
Eric Deslaurius
Yeah, that's great. That certainly makes sense to me. Last question from me, switching gears over to zigzag. I just wanted to kind of double click on one of the comments you made earlier in your mention how traditional C-store customers are kind of increasingly targeting the, I guess, alternative channel customer and that there's sort of a blurring of the lines between traditional C-store and the alternative channel. And I'm wondering if you could just expand on that a bit. I mean, is this just traditional C-store customers now ordering a much wider assortment of SKUs or is there something about new stores or new doors, something else blurring the lines between C-store and an alternative channel? I'm just wondering if you could expand on that.
Andrew
Yeah, so just as a point of clarification, as we launched the strategy, we were really focused specifically on a set of stores that we had defined as alternative stores, head shops, smoke shops, dispensaries, and also the growth of distributors that were emerging to service that space. Where the lines are getting blurry is that some of our traditional distributors are also going after those customers. And so as that customer base grows, it's an opportunity for them to service those stores as well. And so what we're seeing is, and again, very good news for us, we're seeing some of our legacy traditional distributors that we've done business with for decades, they're leaning into that segment. Because look, you think about it, they're driving trucks to convenience stores and they're passing these stores along the way. So it's a great opportunity for them to leverage their fixed cost in terms of taking product to those stores. And so we're just seeing a little bit of that sort of starting to occur in the channel, which is just creating, one, an opportunity for us, but also the sort of blurring where a traditional distributor and an alternative distributor, you're starting to see those lines kind of cross up a bit.
Eric Deslaurius
I see that's very helpful. I think that's where I was confused, that we were sort of talking about the distributors here and the lines are getting blurred there, which I mean, to me, that sounds like that, you know, is very sort of beneficial to Zigzag compared to some of the other rolling paper brands that you might see at some of these alternative shops. I mean, I would imagine that you guys have much stronger relationships with these more traditional distributors. Can you kind of just comment on that subject, you know, your relationship with the traditional distributors versus maybe some of your competitors that you run into in the L channel?
Andrew
Yeah, I would say the if you look at sort of from a relationship standpoint, this company's been in business since 1988. So a lot of these traditional distributors we've been doing business with since that long. And so that partnership is deep. Most of the folks that are really focused on that specific alt channel haven't been around quite as long. And that's not a negative, but at the same time, we view the relationships that we've built with the traditional distributors as incredibly strong. And we feel that the process that we bring that created those relationships and that value can be transferable as well to these alternative distributors as they grow. And so I think it really sets up nicely for us in the future, having an omnidistributor approach servicing that channel and overlaying on top of that our ability to sell direct consumer, as well as direct the store through our own website, really gives us the ability to speak to consumers wherever they want to buy the product.
Eric Deslaurius
Very
Andrew
helpful.
Eric Deslaurius
Appreciate you taking my questions and congrats again on a great quarter.
Andrew
Thanks Eric, appreciate it.
Operator
There are no further questions at this time. That concludes our Q&A session. I will now turn the conference back over to Graham Ferdi for closing remarks.
Andrew
Thanks, operator. Appreciate everybody joining the call today and we look forward to speaking again in a few months.
Operator
Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.
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