Turning Point Brands, Inc.

Good morning and welcome to the Turning Point Brands second quarter 2025 earnings conference call. All participants are in a listen only mode. All lines have been placed on mute to prevent any background noise. Should you need assistance, please signal a conference specialist by pressing the star and the number zero. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. It is now my pleasure to turn the conference call over to Andrew Flynn, Chief Financial Officer. Please go ahead.

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 some perspective on the operating environment and 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 that are finalized 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 Pardee.

Thanks, Andrew. Good morning, everyone, and thank you for joining our call. Our consolidated second quarter results were better than expected and demonstrated continued progress against our plan. Revenue increased 25% to $116.6 million for the quarter, including $30.1 million in modern oral revenue. Modern oral now accounts for 26% of our total revenue. Adjusted EBITDAI increased 15% to $30.5 million for the quarter. We are increasing our adjusted EBITDAI guidance to a range of $110 million to $114 million, up from $108 million to $113 million. Inclusive of significant sales and marketing investments. We are increasing full year consolidated nicotine pouch sales guidance to a range of $100 million to $110 million, up from $80 million to $95 million. This includes both free and out. We are particularly pleased with the growth of our white nicotine pouch brands. Their long lasting, vibrant flavor options, comfortable mouthfeel, and flexible nicotine levels have resonated with consumers, and we continue building free presence in bricks and mortar. During the quarter, white pouch sales increased by nearly eight times year over year and was up 35% sequentially. We believe out is now one of the top DTC pouch brands in America and is poised to expand into retail sooner than initially expected. We believe the nicotine pouch space, like most other nicotine businesses, will ultimately feature five to six widely distributed brands that command most of the market. Analysts' expectations for the size of the category differ, but most now believe it will approach $10 billion in manufacturers revenue by the end of the decade. Our Q2 performance supports our long term target of double digit market share in the category. In order to best position the company to capitalize on this multi-billion dollar opportunity, we have made and will continue to make significant investments in the business in refining our route to market strategy to prioritize white pouch while continuing to generate strong cash flow from our Heritage brands. As we mentioned last quarter, key investment initiatives include reallocating sales and marketing resources, increasing the headcount of our sales force, improving our online presence, ramping up investment in chain accounts, and developing US manufacturing. We have been particularly encouraged by our ability to identify and onboard new sales talent. Our goal is to approximately double the size of our 2024 sales force by the end of 2026. So far, we are ahead of schedule and pleased with initial results. The rest of the Stoker segment portfolio also performed better than expected in the quarter. Overall, Stoker's revenue increased 63% to about $70 million, reflecting a 3% decline in loose leaf, a 4% increase in MST, and as Afer mentioned, our modern oil revenue increased by nearly eight times. During the first quarter, zigzag revenue was down .9% to 47 million, but essentially flat sequentially, despite our focus on the white pouch category during the quarter. For modeling purposes, people should recall that in the second half of the year, we will continue to face difficult year over year comps due to the wind down of our Clipper business and the de-emphasis of the cigar category. With that, I'll hand the call over to Summer to walk through the progress of our key -to-market initiatives.

Thank you, Graham. As you shared, we've made exciting progress in the modern oil category so far in 2025. Throughout the quarter, we continued to receive favorable consumer and trade feedback, reinforcing our portfolio's meaningful points of difference in strength, moisture, and flavor. We also continue to see increasing order and repeat purchase rates online and in wholesale. This strong performance continues to give us confidence in our brand investments, particularly in sales and marketing. Key initiatives in this space include, first, we will continue growing the size of our sales force to increase the frequency of store visits with a focus on expanding distribution, improving brand merchandising, and minimizing -of-stocks at retail. As a result, we expanded our distribution and product assortment with notable chain partners throughout the quarter. Second, strategic marketing campaigns to accelerate brand awareness and consumer loyalty. For example, in the quarter, we announced a long-term partnership with professional bull riders, or PBR. Few sports deliver quite like PBR, and we believe this opportunity will enable free to connect with consumers who appreciate authenticity, seizing the moment, and pushing boundaries. Core tenants align with free brand ethos. We marked our debut with this partnership at the PBR World Finals Championship at AT&T Stadium in May, where the free brand was woven into fan experiences and the competition itself. We are looking forward to the PBR season officially kicking off this fall and integrating this partnership into 360 marketing campaigns. We believe in the importance of building our brand for the long term and will continue to invest to support growing consumer loyalty. With regards to ZigZag, we continue to execute marketing and sales initiatives that build upon our 145-year legacy and solidify our premium position in papers, cones, and wraps. Recent new product introductions include the launch of hemp cones and pop tubes, which are singular cones available in our unbleached variety and sold in a reusable premium tube. We have solid traction during this introductory period with more brand news to follow in upcoming quarters. As we shared last quarter, we anticipate second half headwinds within the ZigZag segment from cigars and clipper lighters. Our expansion plans in these categories included investments behind some lower margin products, which we de-emphasize in light of tariff impacts and a reallocation of time and resources to our nicotine pouch initiative. In closing, we continue building our brand for the long term, executing against our omni-channel plan, and winning new consumers. We will continue to prioritize strategic investments to maximize the value of our world-class brands and further strengthen our distribution capabilities. Let me now turn the call back over to Andrew to go through our financial results.

Thank you, Summer. Sales are up 25% -over-year to $116.6 million for the quarter. For the quarter, gross margin was 57.1%, which was up 310 basis points -over-year and 110 basis points sequentially. The change in margin is mix-driven. Reported SG&A was $40.3 million for the quarter and up $3.9 million sequentially. The increase on a sequential basis is driven by continued investments in sales and marketing, as well as temporarily elevated outbound freight charges. Adjusted EBITDA was up 15% -over-year to $30.5 million for the quarter and a .1% margin. Going into segment performance, Zigzag sales decreased .9% -over-year to about $47 million for the quarter and is in line with recent quarterly performance. Gross margins declined 410 basis points, driven primarily by product mix due to an accelerated exit from our Clipper business. Stoker's net sales increased 63% -over-year to almost $70 million for the second quarter. Net sales for the MST portfolio grew 4% -over-year to $29 million in the quarter. Share in-store selling was up 60 basis points -over-year to 11.8%. Stoker's Chewing Tobacco was the number one chewing brand in the quarter, gaining 160 basis points or share to 32.7%, according to MSAI. Category performance is driven by larger decline in premium loose leaf, with Stoker's benefiting from consumer trade-down. Our modern oral nicotine pouch sales, free and out, were up nearly 8x -over-year, achieving total revenue of $30.1 million, at 35% sequential increase. As Graham mentioned, white pouch accounts for 26% of our total revenue mix. Moving on to the balance sheet. We ended the quarter with $109.1 million cash and free cash flow for the second quarter was $11.2 million. CapEx for the quarter was $3.9 million. During Q3, we'll have our first coupon payment on the $300 million .625% bond that we issued in February of 2025. On to guidance and other items. As previously noted, we are increasing our full year 2025 adjusted EBITDA guidance to $110 to $114 million from $108 to $113 million. And also increasing our anticipated total modern oral sales range to $100 to $110 million from the previous range of $80 to $95 million. This guidance reflects increased investment in our -to-market plan, as well as tariff and currency-related impacts. For modeling purposes, the effective income tax range is 23 to 26% on a go-forward basis. Budgeted CapEx for 2025 is $4 to $5 million, exclusive of projects related to our modern oral business. We expect to spend between $3 to $5 million for the full year to supplement our modern oral PMTAs. Now let me turn it back over to Graham.

To conclude, we are pleased with our second quarter results. And I'll now turn the call over to questions.

Thank you. The floor is now open for questions. If you have dialed in and would like to ask a question, please press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again, simply press star and the number one. We do request for today's session that you please limit to one question and one follow up. Again, press star followed by the number one on the keypad. We'll pause for just a moment to compile the Q&A roster. Your first call comes from the line of Eric DeLorez. Your line is now open.

Great. Thank you for taking my questions and congrats on a very impressive quarter here. My first question is on ALP. Graham, I think you mentioned plans for the brick and mortar rollout or ahead of expectations. I'm just wondering if you could expand a bit on that and just how we should be thinking about the rollout of ALP from e-commerce to brick and mortar. Thanks. Yeah,

look, I think that we've been pretty excited about the online results. You know, in our estimation, they've grown the brand into one of the largest D2C brands, and I think that's given the team a lot of confidence to move forward with, you know, starting bricks and mortar. It's super early innings and they think that, you know, as the bricks and mortar matriculate, obviously they're a small sales organization right now. And so, you know, I would expect them to, you know, to sort of plod along and, you know, gain stores over time as we sort of bend around the end of this year as they kind of just started the thought process of getting into it.

Got it. And should we think of the rollout for ALP as kind of following in the stores where free already is? Is it a bit of a different team or, you know, go to market strategy there? And then just kind of related to all that, just wondering how conversations with national chains are progressing. Thanks.

Yeah, I'll take the first part of that question. Look, I think that inevitably, you know, our goal with free is to be ubiquitously distributed across the United States. So, you know, eventually there should be total overlap of those two brands. I think in the early innings, you know, given the different sizes of the organizations, you know, it'll be a little bit hit and miss in terms of where that overlap may or may not exist.

And then with regards to expanding free and other national chain accounts and throughout the United States, we continue to see progress with the chains that we've spoken about in prior quarters and throughout Q2 began to make significant progress with other nationally large recognized chains. And are in the process of expanding in their geographies across the United States. So we're excited about the momentum that we have and more to come in short order.

Great. Your next question comes from the line of Ian Zasino with Oppenheimer. Your line is now open.

Hi, great. Thank you very much. Why don't you just get a sense about, you know, the white balance production, tariffs that you might be facing and then potential to maybe move production out of India. Thanks.

Yeah, hi, Ian. Andrew here. So as it relates to tariffs, as you've seen in the news, there's a dynamic environment. And what we're doing is we're focused on controlling our controllables. So we built an inventory position around that product that gives us some insulation for, you know, from a tariff increase. We've also been negotiating with some of our suppliers across the board to get some reductions in our cost of goods. And also we've been looking at taking some price increases in different product lines. So we're managing the tariff headwind as best we can. And so as it relates to India and our production capabilities there, we've got plenty of capacity. So good news is we're feeling good about that. And then in terms of the mitigation around the tariff exposure and bringing production to the US, we continue to invest. You'll see the capex was around 3.9 million for the quarter. So we continue to invest in that capability here in the United States.

Okay, thank you. And then as a follow up, would you be able to give us a breakout between Alpen Free and then also, you know, what type of sliding fees are you facing now? Or did you pay last quarter? And how do we think about that going forward as far as cost to roll out and to expand distribution?

Thanks. Sure thing. So as much as I would love to disclose the Alpen and Free split, we've got a joint venture relationship with ALP and it's just something that we're not able to provide in terms of that split. In terms of slotting fees, look, this is a very exciting segment of the market and it's competitive. And so we've got to pay fees to get into chains and all kinds of other retailers. And so that is something that we have invested in. And it's something that we will continue to invest in. And it's reflected in our range that we disclosed this morning.

Great, thank you. Again, if you would like to ask a question, please press star one to enter the queue. Your next question comes from the line of Aaron Gray with Alliance. Your line is now open.

Hi, thanks for the questions and congrats on the quarter. First question for me, I just wanted to talk about gross margins a bit, particularly Stoker's gross margin remains healthy. You called out mixed kind of for the overall improvement in gross margin. Obviously, Stoker's was a highlight there. So there's any color you can provide there, particularly as we think about pouches within that. That's a higher mix. So if you had pointed to lower margins from pouches, but maybe better than you initially had expected. There's a lot of dynamics moving between and brick and mortar. So maybe just any color in terms of how best to think about gross margins, particularly as we move forward. And it seems like we're going to get increasing mix in terms of coming from brick and mortar. Thank you.

Yeah, thanks for the question, Aaron. Look, I think that we've got our Stoker's Heritage business, which is our MST and our chewing tobacco brands. The margins there remain healthy and expanding. As it relates to modern general, I think you rightly pointed out there is, you do have a mix of D to C versus bricks and mortar. But I think in the early innings, we're pretty excited about where the margin profile of the business is. Now, I think that we need to underscore that, as Andrew had mentioned in the last question, we intend to invest behind the brand. And so I think you can see a bit of lumpiness within the white pouch segment for us. But over the long haul, we're very bullish on the margin profile of the segment.

Thank you. I appreciate that color there. Second question for me, just as we think about pouches in the second half of the year, so guidance implies it'll be roughly flat versus first half. I know there's some volatility in terms of new distribution and replenishing. So I wonder if you could provide some color in terms of new distribution you're expecting in the back half and what's embedded within that. And then maybe also some color in terms of how you're incentivizing the sales team that you're looking to double there. So any color you can come up on in terms of how you're incentivizing because this is a kind of different category in terms of growth you're seeing than some of the Lacey categories you've seen, maybe where you're sourcing some of that sales force from. Thank you.

Sure. So look, I think as long as it seems like it's been around, ALP has only been in the market for a few quarters now. And I think that a little bit of guidance range is reflective of some of the unknown relative to the bricks and mortar launch. And then ultimately what the growth profile of both the brand properties will be on the DDC platforms. In terms of how we go out and gain stores, obviously that's a function of the amount of feet that you have on the street. We have continued to expand our sales force. I think we noted in the call that our plan is to double the 2024 sales force by the end of 2026. And obviously that expanded sales footprint, we would expect increased rates of distribution from our historical averages. So I think we're pretty excited about the way that we've resourced the brand at this point in time. We're in a trench warfare format here and I think that we feel like we're moving our staffing in a direction that gives us the effective capability to compete against the broader market.

Thank you. And your next question comes from the line of Nick Anderson with Ross. Your line is now open.

Yeah, good morning and thanks for taking the questions. First one for me, just on the modern oral promotional environment, we saw some aggressive marketing activity in the first half of the year. Your growth margin suggests you haven't been participating in this discounting. Just what are you seeing out there in terms of the pricing environment and how are you planning positioning your products? I guess maybe a more aggressive promotional backdrop. Thank you.

Yeah, look, I think that since the category became competitive, meaning once it became a category that was beyond just the market leader, we've seen consistent promotions from one manufacturer to the next quarter to quarter. I think what's interesting for us is we're incredibly excited about the promotional environment from the standpoint of building awareness around the current estimates, now sort of cresting the 10 billion by the end of the decade. This is actually how it happens as the large companies spend a ton of money speaking to adult vapers, adult cigarette consumers. And so we're actually very excited about that opportunity. As you've seen with the results the first two quarters of this year, we've had high promotional environments from a large competitor entering the market. You've seen our results. And I think we remain sort of optimistic, number one, around the benefits that our product, we think brings the end consumer relative to mouth feel and the satisfaction levels that we provide. That's not to say that from time to time we won't partner with the chain or what have you to increase sort of in-store foot traffic around our brand. But at the same time, we think that we're sort of uniquely positioned in the long haul to be a premium brand in this category. And so that really excites us.

That's great. I appreciate that, Coller. Second from me, just on the MRTP applications and the opportunity there, is this a path you would consider going down? And if these applications are passed, how would it change the way you could kind of go about marketing your modern oral offering? Thank you.

Yeah, no plans at this point in time. And we remain committed to the current PMTA process.

Thank you. Your next question comes from, actually this is the last question coming from the line of Gerald Pascarelli with Needham. Your line is now open.

Great. Thanks very much. Good morning, everyone. I just had a question on your legacy MST business. Just understanding that you're going to prioritize modern oral, which obviously makes sense. Your legacy MST business has been incredibly consistent. It grew again on a very tough comp this quarter. And in the current environment, it's seemingly just very well positioned as a value offering. And so just looking forward, how do you think about managing growth and driving continued distribution and market share gains in Stoker's MST with growing and rolling out your modern oral business, which is still very early days? So any color on the balance, I think would

be helpful. Thank you. Yeah, I think what we've seen in the early innings is that there's been relatively strong overlap between the modern oral stores that we've focused gaining distribution in and our Stoker's MST portfolio, which has allowed us the opportunity to cross sell in those environments. I think you're seeing a function of the sort of the early days synergy that we actually are really bullish on long term as we grow out our sales force. And look, I think you rightly pointed out Gerald that, you know, what we've seen from the large competitors and some of their announcements over the last couple of years is that premium MST has been very susceptible to the white pouch category. And what we see within the underlying dynamics of MST is that there's still a large audience of committed dippers in the US. We believe we've got one of the best brands that has incredible quality around it. And we continue to provide value to those consumers and you know, from a from an MST brand standpoint, we feel great about sort of the potential opportunity that's still in front of us. There's still a lot of runway in terms of store growth that we can get into. There's still pricing opportunities in the segment. And so I think we're still bullish on on our MST business on a go forward basis and think that there's a ton of opportunity out there to harvest.

Got it. Super helpful. Thank you. Just last one for me, I know it's early, obviously, but if you could share any learnings that you may have had over the past two quarters with with with both of these brands just in terms of the consumer reception, or any feedback that you've had. If you've had any that would that would be helpful. Thanks.

Yeah, sure. We continue to hear incredibly positive feedback from both consumers and retailers, as Graham has talked about the power of the brand and the unique differences between our relative to competition, including our variety of nicotine strengths, mouse feel, and moist pouch. So we continue to see increased reorder rates, increased trade receptivity, and are very excited about the opportunities as they proceed. We also, as I mentioned on the call recently, participated in the PBR event in Dallas in May, we had a variety of consumers that we were able to engage with why we were very active in that event. And the consumer reception while we were there was really tremendous.

Thank you. At this time, there are no further questions. I'd like to turn it back over to Mr. Purdy.

Thanks, operator. Appreciate everybody joining the call today. We're pretty excited about our key to results and we look forward to talking to you in about 90 days or so about Q3.

Thank you. This concludes today's conference call. You may now disconnect.