Turning Point Brands, Inc.

Good morning and welcome to the Turning Point brand's third quarter 2025 earnings conference call. All participants will be in 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 star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star followed by the number one on your telephone keypad. To withdraw your question, you may press star followed by the number one again. Please note that this event is being recorded. I would now like to turn the conference over to Graham Purdy. Please go ahead.

Thank you, operator. Good morning, everybody, and I really appreciate you all joining the call. A little bit of a somber morning here for us in town here. Before we walk you through our Q3 results, I'd like to say a few words about the tragedy that hit our community yesterday with the UPS flight crash. As I'm sure you're aware, we're a Louisville-based company. Aside from being a business partner of ours, UPS is really woven into the fabric of the Louisville community. In many ways, Louisville is a very small town, and the community is very tight-knit. And while we're fortunate that none of our employees were directly impacted or affected by the tragedy yesterday, it's likely that we have friends and loved ones that know somebody that was. Our heart goes out to the families of those that were directly impacted by the tragedy and then to the UPS family as they deal with this heartbreaking situation. And so with that, I'd like to turn the call back to the operator to get started.

Thanks, Graham. Now, I would now like to turn the conference over to Andrew Flynn, Chief Financial Officer. Please go ahead.

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 some 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 of 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. Revenue increased 31% to $119 million for the quarter, including $36.7 million in net modern oral revenue, which includes $1.5 million of slotting fees that are accounted for as contra revenue. Adjusted EBITDA increased 17% to $31.3 million for the quarter. We are increasing adjusted EBITDA guidance to a range of 115 to 120 million, up from 110 to 114 million. We are increasing full-year consolidated nicotine pouch sales guidance to a range of 125 to 130 million, up from 100 to 110 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. During the quarter, white pouch sales increased 628% year over year and 22% sequentially. Some of you may have noticed that ALP, already one of the top D2C pouch brands in America, has started to appear on bricks and mortar shelves in select retailer tests. Recall that we initially expected ALP to be exclusive D2C for all of 2025. Suffice it to say, we are pleased ALPA is running ahead of schedule. 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 believe it will approach, if not exceed, $10 billion in manufacturers' revenue by the end of the decade. Our Q3 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 multibillion-dollar opportunity, we have made and will continue to make significant investments in the business and refine our route-to-market strategy to prioritize free and out, while continuing to generate strong cash flow from our heritage brands. During the quarter, we raised $100 million of gross proceeds under our previously announced at-the-market offering program at an average share price of $98.59. We expect to opportunistically deploy this capital across a variety of high return opportunities to accelerate the growth of our modern oral business. Consistent with our policy of maintaining active buyback and sales authorizations to maximize capital markets flexibility, we plan to update our ATM perspective supplement and buyback authorizations to provide for 200 million of capacity under each program. We have no current plans to transact under the updated authorizations. 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, expanding to international markets, and building out U.S. manufacturing to improve white-patch profitability and mitigate supply chain and tariff risk. We are pleased with our progress on the manufacturing front and expect to qualify the first production lines in the first half of 2026. We've been particularly encouraged by our ability to identify and onboard new sales talent. We are ahead of schedule in our goal of doubling the size of our sales force by the end of 2026. The rest of the Stoker segment portfolio also performed better than expected in the quarter. Overall Stoker's revenue increased 81% to about 74.8 million, reflecting a 4% increase in loose leaf, a 6% increase in MST, and the aforementioned 628% increase in modern oil revenue. During the third quarter, zigzag revenue was down 11% to $44.2 million and down 6% sequentially. While this decline was anticipated and performance was ahead of our expectations, we continue to think it reflects some opportunity costs related to our focus on modern oral. With that, I'll hand the call over to Summer to walk through the progress of our key go-to-market initiatives.

Thank you, Graham. As he noted, we continue to make significant investments to support our go-to-market strategies to prioritize free, while also continuing to generate strong cash flow from our legacy brands. Throughout the quarter, we continue to expand our efforts and our initiatives to support the growth of free focused on sales and marketing. Our key initiatives to support free include, first, optimizing our approach to expand distribution, improve brand merchandising, and minimize out-of-stocks. To support our growing sales organization and increased store footprint, we have developed new sales and merchandising tools to secure the ideal assortment, establish shelf space, and execute a premium look and feel at retail. Throughout the quarter, we also continued our expansion efforts not only into new stores within large-scale chains, but also expanded our SKU offerings. Toward the end of the quarter, we launched free watermelon. Fruit flavors represent about a quarter of all OSD sales. when excluding mint and wintergreen flavors. Watermelon is not merely a flavor extension, it is the fastest growing fruit flavor in the nicotine pouch category, and free is uniquely positioned as a first mover with a complete strength offering. Second, continuing to invest in and expand strategic marketing campaigns to accelerate brand awareness and consumer loyalty. We have been encouraged by engagement and early returns from our partnership with Professional Bull Riding, and are exploring other brand partnerships and collaborations that align with Free's Own Your Edge tagline and brand ethos. With regards to ZigZag, we continue to execute marketing and sales initiatives that build upon our 145-year legacy and solidify our premium position across the segment. To build upon this legacy and reward our most loyal consumers while creating an opportunity for viral buzz, we launched a promotion called ZigZag for Life, This campaign offers an opportunity to win a lifetime supply of ZigZag cones to anyone who has or gets a ZigZag tattoo. We also relaunched ZigZag Studio, a collaboration with creators and musicians to build upon the brand's strong association with pop culture. These campaigns magnify ZigZag's identity as an iconic brand and consumer interest has been encouraging. Of note, in the quarter, we also laid the groundwork for the launch of a new ZigZag product, natural leaf flat wraps to better compete in the ever-growing natural leaf segment of the wraps category. Lastly, turning briefly to Stoker's, we continue to see strong performance despite category pressure. In the quarter, we launched both a new product offering, Stoker's Fine Cut Wintergreen Cans, and Stoker's first ever D2C site. Stoker's continues to be a steady heritage business with a very active and engaged consumer base. In closing, we continue to build our brands for the long term, execute against our omnichannel plan, and win new consumers. Our focus is 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 were up 31% year-over-year to $119 million for the quarter. For the quarter, gross margin was 59.2%, which was up 360 basis points year-over-year and 210 basis points sequentially. The change in margin is mixed-driven, primarily related to our outsized growth in modern oral. Reported SG&A was $44.5 million for the quarter, which was up $4.2 million sequentially. This increase was primarily driven by modern oral-related sales and marketing investments, as well as increased outbound freight charges to support our growing business. Adjusted EBITDA was up 17% year-over-year to $31.3 million for the quarter, at a 26.3% margin. Going into segment performance, zigzag sales decreased 11% year-over-year to $44.2 million for the quarter, but was ahead of our expectations. Gross margins increased 210 basis points to 57.5%, driven by mixed shift, and improved COGS pricing in certain zigzag product categories. Stoker's net sales increased 81% year-over-year to almost $75 million for the quarter. MST sales increased 6% year-over-year to $27 million for the quarter. Share in-store selling was up 130 basis points year-over-year to 12.1%. Loose leaf sales increased 4% year-over-year to $11 million. Our modern oral nicotine pouch sales, free and out, were up 628% year-over-year, achieving total revenue of $36.7 million. White Pouch now accounts for 31% of our business, up from 26% in the second quarter and 6% a year ago. Moving to the balance sheet. We ended the quarter with just over $201 million of cash. Pre-cash flow for the third quarter was negative $1 million, including the first coupon payment on our 7.625% high yield bond issued in February of 2025. As Graham mentioned during the quarter, we raised $100 million of gross proceeds and $97.5 million of net proceeds, an average price of $98.59 per share under a previously announced ATM program to support our white pouch growth initiatives. CapEx for the quarter was $3.8 million. On to guidance and other items. As previously noted, we are increasing our full year 2025 adjusted EBITDA guidance to $115 to $120 million. from $110 to $114 million, and also increasing our anticipated total modern oral sales range to $125 to $130 million from the previous range of $100 to $110 million. This guidance reflects increased investment in our go-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 third quarter results, and I'll now turn it over to questions.

At this time, I would like to remind everyone in order to ask a question. Press star, then the number one on your telephone keypad. We ask that you limit your questions to one and one follow-up. We will pause for just a moment to compile the Q&A roster. The first question comes from Eric Deslaures from Craig Hallam. Your line is open.

Thank you for taking my questions, and congrats on yet another fantastic quarter here. First question for me, just on the onshoring, nice to see. How should we think about this from a capacity standpoint? And how are you thinking about sort of COGS per unit for nicotine pouches produced onshore versus via your co-manufacturing partner right now? Thanks.

Good morning, Eric. Thanks for the question. So the way we're thinking about the unit economics for our white pouch is with onshoring, we'll have sort of immediate savings in terms of inbound Trey, as well as avoidance around tariff. So we should have favorability on those two items at the gates once we actually qualify the lines, which we're expecting in the first half of 2026. And then on an ongoing basis, as we get volume on those lines, we expect the unit economics to improve from there.

Okay, great. That's very encouraging. And then just any commentary on that capacity standpoint? How would you think about this?

Yeah, look, I think that as we've disclosed in the past, we feel good about the capacity that we've got with our third-party manufacturer. And the capacity that we get in the U.S. will be additive to that. So we believe that we're in a very good position, both from an inventory perspective that we have on hand today, as well as capacity on a go-forward basis.

All right, that's encouraging. And then just as a kind of follow-up here, could you comment on what you're seeing from an in-store market share perspective for your modern oral category here? I know it's still very early and you're still rolling out, but any comments on early kind of in-store market share would be helpful. Thank you.

Eric J Krattmann, yeah look it's we certainly haven't disclosed that publicly but it's really sort of bifurcated at this point, obviously, you have sort of the national perspective on on where market share sits from a national standpoint. Eric J Krattmann, For as we grow our distribution base we're really focused on sharing store selling and i'll tell you we're highly encouraged by those results.

Eric J Krattmann, Great to hear, thank you for taking my questions and congrats again.

Eric J Krattmann, Thanks Eric.

The next question comes from Ian Zavino from Oppenheimer. Your line is open.

Thank you very much. Really good quarter. You know, the question would be, you know, can you maybe talk about the MST and loose leaf growth there? You know, what was driving that as far as price, volume, and kind of market share, if you could talk about that? Thanks.

Yeah, I would say that it's a combination of a couple of those things. We grew share sequentially in the quarter, as well as there's some favorability around pricing. I would note that we anticipate that there's going to be a north of 900 million cans sold in that category. We still have less than 10 share, although it's high single-digit share. I think there's tremendous opportunity for further gains within MST, so we remain excited about the opportunity.

Okay, thanks. And then on Modern Oral, can you just maybe help us understand the drivers there, free versus out? Maybe you could talk about each one and what you're seeing there. And then as you kind of continue to push into larger chains, What kind of cadence should we expect as those start to hit and as your discussions have been ongoing? Thanks.

Sure. I'll take the first part of that question. You know, to this point, we haven't disclosed the differentiation between free and out, given the sensitivity around the partnership. What I can say is we saw healthy growth from both properties during the quarter, so we were excited about that. Our out business continues to dominate from a B2C standpoint, but they're also making some inroads into some bricks and mortar accounts. We're highly encouraged by the results of some of those early tests in there. Free had a very nice quarter, both online as well as in bricks and mortar. Pass it over to Summer to answer the second part of the question there for you, Ian.

Hey there. We continue to make progress in both new chains and expanding our SKU assortment and existing chains. So we remain really excited and encouraged about our progress there. And in particular with some of the partners we've had for a while, both sides continue to be happy with the partnership and we're excited to see how it evolves in coming quarters. And as we look toward progressing in upcoming quarters, major chains are in the process of evaluating their planograms for next year. And we're, you know, in those conversations, same as our competitors. So we look forward to how the next few quarters roll out.

Okay. Thanks. And then if I could just ask one more here, um, as far as in modern oral world, uh, the promotions, you know, how did you handle, um, you know, the promotions that, that we saw a couple of months ago, Um, you know, and, and, and how do you kind of navigate the landscape given that, or what's kind of, I guess, your overall view of how the category is going to kind of play out over the competitive landscape is going to play out over the next call it quarter or two quarters or so. Thanks.

Sure. You know, look, I, I. I remain bullish on the category and one of those sort of foundational components about that bullishness is around the balance sheets that the large manufacturers have to deploy against converting consumers into the category. We believe we have a winning format as well as two winning brands to give us an opportunity to really chase after consumers. Obviously, Q3 was a brutal promotional quarter, but not for us. We sort of maintained the integrity of our pricing at retail. We continue to focus on the things that we know win for our brands, which is getting more shelf space, getting broader presence in the store. So we really didn't participate within the quarter as we saw the major competitors sort of deploy their promotional resources to the market. Now, look, we think long term. There's going to be strategic opportunities for us to invest in opening up the funnel for the consumer, but we're taking a really measured approach and really reading our data and listening to what consumers are telling us within our online platforms, which gives us somewhat of a distinct advantage when we have that really direct touch point with our consumer. So we'll be opportunistic in terms of the way that we think about deploying our promotional dollars from a retail standpoint. But more importantly, we're really focused on getting our platform right in the store because we see when we do that that we have a really great opportunity to win consumers.

Okay. Thank you very much. Great quarter.

The next question comes from Aaron Gray from Alliance Global Partners. Your line is open.

Hi, this is John on for Aaron Gray. Thanks for the question and congrats on the strong quarter. So I know in the prepared remarks, you touched on the go-to-market strategy progress, but in terms of distribution, do you still see meaningful white space opportunities for free, you know, more so near term? And for ALP, when should we expect to see meaningful brick and mortar distribution? Were some of the initial brick and mortar channel pilots to see how ALP improved Alpenfree performed just any more color on what you think may be the right approach to promote the brands alongside each other would be helpful.

Yeah, look, we're excited about the continued gains that we make. We've mentioned in past quarters, as well as on this call, that we continue to invest in our sales infrastructure to further our distribution gains in the market. Summer just noted a second ago, we're pleased with our progress against chain accounts. Both large and small chains. We do have an account that shares both platforms, both free and out. We've been excited about the results of sort of that shared platform inside the store. There's a tremendous amount of white space for both brands. I'll beat a little bit more for out at this point in time, given the fact that we've been focused on bricks and mortar distribution out the gate and Alba has been focused on direct to consumer. So I think there's a really great marriage there, you know, as we move forward with tremendous opportunities for both brands to, you know, effectuate a broad-based distribution and really, you know, scream to multiple consumer audiences to give us the greatest upside to capture consumers into either one of the franchises.

Great. Thank you. And second, how would it be best to think about the approach to balancing profitability and growth, you know, 4Q embeds a little bit of EBITDA margin pressure, and the company has been able to achieve sizable growth while maintaining a healthy EBITDA margin of 26% year-to-date in 2025. Do you expect you'll be able to maintain that, or could there be some EBITDA margin pressure even beyond 4Q as you invest in the promotional pouch environment?

Yeah, look, we're not certainly in a comment on our on our investment strategy specifically for competitive reasons. I would say that, you know, at this point in time, we've struck a sort of a healthy balance between growth and profitability. And so I think that will be measured in the future in terms of how we deploy our resources around high return projects.

Great, thanks. I'll come back to you.

Thanks, John.

The next question comes from Nick Anderson from Ross Capital Partners. Your line is open.

Yeah, good morning. Thanks for taking the questions and congrats on the quarter. First one for me, just on modern oral, given the growth in the category, have you seen any noticeable changes in shelf space allocation by retailers? I know Summer mentioned the planogram phase going on now, but How do you expect that allocation of space to trend kind of going forward? And if modern oral products are gaining allocation, which products are losing allocation? Thank you.

Yeah, I'll take that question and Graham can chime in as well. What we're hearing from retail is that they're really taking a methodical approach to how they do allocate space across their shelf and their back bar area because they see the category dynamic shifting more to OST. And so they're being really diligent and deliberate about how they're allocating that space across the segments and the nicotine space, and then being really thoughtful about which brands they're putting on shelf as well based on performance. And so we're happy to be part of those conversations.

Yeah, look, I think we anticipate that the allocation of space for Modern Oral will grow given the underlying growth of the category. And I think it's too difficult a question to answer specifically on which products will be displaced on the shelf because there's a lot of regional preferences around different types of products that sell nationally. So I think it's a little hard to say what could be displaced in that process. But from our standpoint, we think opening up more shelf space is a big tailwind for our business.

Great. I appreciate that caller. Second for me, just on the loyalty initiatives, you have ALP and free rewards programs online. Just wanted to get some color on how those are trending in terms of program growth and engagement, and if there's any noticeable difference in spend from these consumers in those loyalty ecosystems. Thank you.

Yeah, look, I think having rewards programs on any DTC site is a smart strategy for a DTC brand because you're able to engage with those consumers that are loyal and coming back to purchase and engage with your brands. And those are really the customers that we highly value. And so as we continue to grow that program, We'll continue to evolve and engage with those consumers, and they're certainly the most valuable to us. And that first-party data and being able to understand their preferences is something that we're really focused on.

Yeah, look, I'd like to add to that as well. Both free and out, I think where we're particularly excited is the engagement with our subscription signups on both platforms. Well, we haven't specifically pointed out what that growth is. We're very encouraged with the consumer adoption around our subscription service.

Great. That's it for me. Congrats on the quarter again. I'll jump back in the queue.

Thanks, Nick.

The last question comes from Gerald Bascarelli from ETAM. Your line is open.

Great Thank you very much for taking the questions just on modern oral obviously it's another very strong quarter another very strong guidance raise here. But the guidance does imply that the trends that that the revenue will slow, I think, to like mid single digit growth sequentially if you use the midpoint of the updated guidance here. So if you could maybe just talk about some of the dynamics. Was there a potential pull forward in revenue in 3Q? Or, you know, is it fair to assume that there may be a certain degree of conservatism embedded in New Outlook just given some of the category dynamics? So any color there would be helpful. Thanks.

Yeah, Gerald, great question. Thank you. Thank you for asking. Look, I think the, while we're excited about sort of the guidance increase, I think the area that we would point out is as we go out and we get on shelf and we negotiate those deals to get on shelf, that comes at the expense of contra revenue. And so I think in the out quarters, what you could expect from us is really to talk a little bit of the differential between our gross sales and net sales because of that dynamic of contra revenue. But that's really the area that speaks to your question. Got it. Thank you.

My next one's on gross margin for Stokers specifically. Historically, a segment with gross margin that ranged in the high 50s or in the mid 50s to the high 50s. And over the past two quarters now, you're above 60, which comes seemingly with negative mix shifts from higher revenue growth in your modern oral portfolio. So if you could just help us bridge what's driving this really strong margin, have to have to have the margin profiles on both free and out come up, maybe relative to their to where they were a few months ago, as you, you know, continue to scale the brand. And I guess just like a long way event, like asking, like, what's driving the 60% plus margin stokers?

Yeah, thanks for the question. So what's driving the the higher margins in the segment is really mixed. And what we're seeing is that we have a higher D to C in the modern oral part of that business. And I think the thing that's important to keep in mind is that our freight expense is actually in SG&A and not in cost of goods. And so when you look at it, when you include the SG&A portion of that freight that's attributable, you will see some some compression on the margins at the EBITDA line. But that's part of the driver. The other part of the driver is tariffs on a go-forward basis. We would expect to have more of an impact on tariffs. So as I think about the short term over the next couple of quarters, I would expect to see those margins come down just a bit due to margins. But also, we'll still have a higher mix of D to C, which should elevate. But I'd expect net-net for those margins to come down just a bit.

Perfect. Thank you. And then if I could just squeeze one more in, just going back to some of the promo commentary, Graham, if you could just maybe provide I don't know, your near-term outlook on the category, what you expect from the promotional environment, and whether or not you expect it to maybe become a little more rational in 2026 than it is currently. We just love your thoughts there. Thank you.

Yeah, well, I appreciate the question. Look, you've got three... well run, well financed companies with with incredibly strong balance sheets. And they really this category sort of is an area that they have to win in. Right. And so I think that with that as the backdrop, you know, as they you know, as they all fight for for the consumer, I would anticipate that the promotional environment would be would remain healthy, you know, driven by driven by the large competitors in the category. And from our standpoint, Tad Piper- You know we're really focused in on on building brand building the connection with the consumer, both with our free and out properties. Tad Piper- and being really mindful of how we spend against the funnel and opening up for consumers, we certainly. Tad Piper- You know, don't have the same types of resources that that the large companies do, but we believe that we're our balance sheet for our sizes, it puts us in a really good position. to sort of strike in the areas that make sense for our brands. And so we're excited about the promotional activity from the standpoint of the growth of the category. This is the way the category gets to 10 billion or north by the end of the decade, is by the conversion of cigarette consumers into modern oral. And there's no better companies to do that than the folks that own those cigarette brands. So I remain bullish on the category. particularly bullish on the large manufacturers converting consumers into modern oral. And I'm particularly excited about our brands and the properties of our brands relative to the variety of nicotine strengths, the flavors, as well as the mouthfeel. I think that when we have a consumer that tries our product, we have a really good shot at converting that consumer. And so I don't anticipate that the landscape will will lighten up anytime soon from a promotional standpoint. It's been going on for over a year now. There has been some large company in the space that has been on promotion at some point in time for well over a year now. And so I don't think it's gonna change anytime soon from that standpoint, but we're just bullish and excited about our opportunity to win consumers because of our brand as well as the features and benefits of the product.

And that concludes our Q&A session. I will now turn the call over to Graham Purdy for a closing remark.

Thank you so much, everybody, for joining the call this quarter. Certainly really excited about our Q3 results and really excited to talk to you, you know, as we bend around to 2026. So thank you so much for taking the time, and we'll talk to you all in a few months.

Ladies and gentlemen, That concludes today's call. Thank you all for joining and you may now disconnect.