Title

Presentation

Turning Point Brands, Inc. beats earnings expectations. Reported EPS is $0.91, expectations were $0.75.

Operator: Good morning, and welcome to the Turning Point Brands Q1 2025 Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Andrew Flynn, Turning Point’s CFO.

Andrew Flynn: Good morning, everyone. A short while ago, we issued a press release covering our Q1 results. This release is located in the IR section of our website, www.turningpointbrands.com. During this call, we will discuss our consolidated and segment operating results and provide some perspective on operating environment and progress against our strategic plan. As is customary, I direct your attention to the discussion of forward-looking and cautionary statements in today’s press release and the risk factors in our filings with the Securities and Exchange Commission. On the call today, we will reference certain non-GAAP financial measures. These measures and the 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.

Graham Purdy: Thanks, 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. Revenue increased 28% to $106.4 million for the quarter, including $22.3 million in modern oral revenue. Adjusted EBITDA increased 12% to $27.7 million for the quarter. We reaffirm our previously announced 2025 adjusted EBITDA guidance of $108 million to $113 million. We are increasing full year consolidated nicotine pouch sales guidance to a range of $80 million to $95 million from $60 million to $80 million. This includes both FRE and ALP. We are particularly pleased with the growth of our white nicotine pouch brands.

Their long-lasting, vibrant flavor options, comfortable mouth feel and flexible nicotine levels have resonated with consumers. During the quarter, white pouch sales increased by nearly 10x year-over-year and 2x sequentially following the launch of our ALP supply company JV with TCN in Q4 2024. We believe the white nicotine pouch space will ultimately feature 4 to 5 widely distributed brands that command most of the market. Analyst expectations for the size of the category differ, but most believe it will exceed $5 billion in manufacturers revenue by the end of the decade. Our Q1 performance supports our long-term target of double-digit market share in that space. In order to best position the company to capitalize on this multibillion-dollar opportunity, we are making significant investments in the business in refining our route-to-market strategy to prioritize FRE and ALP while continuing to generate strong cash flow from our heritage brands.

Key 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 exploring U.S. manufacturing to improve white pouch profitability and mitigate supply chain risk. The rest of the Stoker segment portfolio also performed well in the quarter. Overall, Stoker’s revenue increased 63% to $59.2 million, reflecting a 4% increase in loose leaf, a 10% increase in MST and $22.3 million in modern oral revenue. During the first quarter, Zig-Zag revenue was up 1%. Excluding CLIPPER, it was up 3%. For modeling purposes, people should recall that in Q2, we will face difficult year-over-year comps due to significant Zig-Zag segment load-in associated with our reentry into the cigar category, and very strong 18.5% Stoker segment growth in Q2 2024.

With that, I will hand the call over to Summer to walk through the progress of our key go-to-market initiatives.

Summer Frein: Thank you, Graham. As you mentioned, we’ve made exciting progress in the modern oral category so far in 2025. We continue to receive favorable consumer feedback, strong trade receptivity, including from prominent chains and increasing reorder and repeat purchase rates in wholesale and online. This strong performance gives us confidence to invest behind the brands. Key initiatives in this space include, first, 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 out of stocks at retail. Second, strategic marketing campaigns to accelerate brand awareness and consumer loyalty. For example, we have begun billboard placement along Interstate 95, and we recently started a trial with 7-Eleven, along with initiatives with other large nationally recognized chains.

With regards to Zig-Zag, we have had some exciting recent initiatives. Most notably, we participated in Rolling Loud and the takeover of Times Square in New York City over the weekend of 420 to celebrate our heritage and promote the launch of our new hemp cones. Within the Zig-Zag segment, we anticipate headwinds from cigars going into Q2 as our expansion plans in this category included investments behind some lower-margin cigar products, which we are deemphasizing in like a potential tariff impact and our reallocation of time and resources to our nicotine pouch initiative. In closing, we continue building our brands for the long term, executing against our omnichannel plan and winning new consumers. We will continue to make strategic investments to maximize the value of our world-class brands and further strengthen our extensive distribution capabilities.

Let me now turn the call back over to Andrew to go through our financial results.

Andrew Flynn: Thank you, Summer. Sales were up 28% to $106.4 million for the quarter. For the quarter, gross margin was 56%, which was down 220 basis points year-over-year, but essentially flat sequentially. The change in margin is mix driven. Reported SG&A was $36.4 million for the quarter and up $1.8 million sequentially. The increase on a sequential basis is driven by the full quarter impact of ALP as well as higher outbound freight charges. These costs were partially offset by lower severance costs. Adjusted EBITDA was up 12% year-over-year to $27.7 million for the quarter at a 26% margin. Going into segment performance. Zig-Zag sales increased 1% year-over-year to $47.3 million for the quarter, despite pressure from the unwind of the CLIPPER relationship.

Gross profit for the quarter decreased 7.2% versus the prior year but increased 2.9% from Q4. Comping a multiyear high point from last year, margin decreased 490 basis points to 54.1% for the quarter and was essentially flat sequentially. Stoker’s net sales increased 63% year-over-year to $59.2 million for the quarter. Net sales for the MST portfolio grew 10% year-over-year to $26.3 million in the quarter. Share of in-store selling was up 50 basis points year-over-year to 11.2%. Stoker’s chewing tobacco was the #1 chewing brand in the quarter, gaining 160 basis points of share to 32.7% according to MSAi. 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 modern oral nicotine pouch sales, FRE and ALP, were up almost 10x year-over-year. Modern oral revenue for the quarter was $22.3 million. We ended the quarter with $99.6 million of cash. Recall that we typically take delivery of tobacco leaf purchases in the first quarter, but do not pay until the second quarter. Free cash flow for the quarter was $12.4 million, and CapEx was $2.2 million. On to guidance and other items. As previously noted, we are reaffirming our full year 2025 adjusted EBITDA of $108 million to $113 million. We are increasing our anticipated total modern oral sales range to $80 million to $95 million from the previous range of $60 million to $80 million. This guidance reflects increased investment in our white pouch business as well as $5 million to $7 million tariff impact on our purchases of imported products, assuming a 10% tariff rate and FX headwinds in the Zig-Zag segment from a stronger euro.

For modeling purposes, the effective income tax range is 23% to 26% on a go-forward basis. Budgeted CapEx for 2025 is $4 million to $5 million, exclusive of projects related to our modern oral business. We expect to spend between $3 million to $5 million for the full year to supplement our modern oral PMTAs. Now let me turn it back over to Graham.

Graham Purdy: To conclude, we’re pleased with our start to 2025. And now I’ll turn it over to questions.

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

Eric Des Lauriers: Congrats on the very strong results here. I was wondering if you could comment on the distribution gains in modern oral in the quarter. Any kind of color on store counts or online distribution gains would be helpful. And then just as a kind of related question there. Do you have an execution for when you expect to roll out ALP to brick-and-mortar stores?

Summer Frein: Eric, this is Summer. I’ll take the first part of the question and turn it over to Graham for the second part. Look, we continue to make great [indiscernible] with retailers, including with high-profile retail 7-Eleven on the call, and we’re in active conversations with other top nationally recognized chains. We have some rollouts and enhancements planned for later this year, nothing that we’re quite comfortable sharing publicly yet, but some exciting stuff on the come here.

Graham Purdy: Eric, thank you for the kind words there to open the call. The ALP plan is somewhat different than the FRE plan as we think about early days of the ALP distribution, principally online direct-to-consumer and sort of leveraging the marketing apparatus they have, but I’d anticipate as we’ve been around the year that you’ll start seeing some of that.

Eric Des Lauriers: Okay. Great. And then could you comment on what ability or capacity you have to produce nicotine pouches at your current domestic MST production facility? And then just any kind of broader comments on onshoring production of nicotine pouches would be helpful.

Andrew Flynn: Yes, Eric. Right now, we believe that our supply is adequate. We’re doing a really good job of producing. So really no issues from a supply chain standpoint. In terms of onshoring, we continue to explore that option, and we’ve – we’re heading down that path.

Operator: Your next question comes from the line of Aaron Grey with Alliance Global Partners.

Aaron Grey: Congrats on the nice quarter here. Would like to pick off a bit with kind of the question that Eric asked. Just wanted to clarify here, was there a big maybe timing impact in the quarter, particularly for pouches from shipments of timing, maybe filling the pipe for a new retailer? And then just on pouches, there’s a lot of early indicators showing that there’s good brand awareness for ALP relative to its pretty minimal market share. So any additional color on how you’re looking to capitalize on that opportunity? If there’s existing awareness for ALP, how are you looking to maybe increase the marketing, get distribution ALP faster than maybe you might have anticipated 6 months ago before the launch?

Graham Purdy: Yes, Eric, I think you’ve noticed ALP is — I’m sorry, Aaron, ALP is sent out a number of press releases. And you guys you can imagine, we’re 4 months in as of this quarter with the ALP launch. The ALP team is doing independent marketing relative to their product. They’ve certainly got a route to market that is a little bit unique compared to the FRE brand. So look, I think that the ALP sort of rollout nationwide is really sort of an online-focused apparatus and really tapping into the marketing that support that the brand gets relative to its connection to TCM. So it’s just the model is a touch different point in time. And certainly, at TPB, we’re focused squarely on knocking down brick-and-mortar distribution for FRE. And quite frankly, we’re very excited about sort of the results thus far. So our head down — heads down and focused on sort of attaining that double-digit market share that we talked about in the long haul.

Aaron Grey: Okay. Appreciate that color. Second question for me, just on the Stoker segment gross margin. It now remained elevated for the past 2 quarters despite higher sales mix of pouches, which was expected to have a lower margin profile. So curious if you could give some color on if pouch margins continue to be higher than expected. Back of envelope math kind of implies it’s not too far off from some of the legacy Stoker’s margins unless there was a notable uptick there. So just any additional color you can provide on the margin profile, that would be helpful.

Andrew Flynn: Yes. Sure thing, Aaron. So I think you’re thinking about it right in terms of the margin profile of that segment. And from white pouch, we’re in – we’re well within the range of what we’ve previously discussed in terms of the margin profile for that particular product set.

Operator: Next question comes from the line of Ian Zaffino with Oppenheimer.

Ian Zaffino: Very good quarter. Trying to understand now, and I know you kind of commented a little bit on the growth rates of FRE versus ALP, but can you give us a little bit more color on what did better this quarter? And then as far as the guidance raise, is that pretty much even? And maybe your broader discussion, if it is even, why is it even given the go-to-market strategies are very different here? And maybe any other color there.

Graham Purdy: Ian, thanks for the question. The — look, I think that we’re such — in such early innings for the out launch, there’s a lot of moving parts relative to both the ALP brand and how the route market is somewhat different than the route to market for FRE. So you have things like different online apparatuses that we sell through with the ALP brand, the different chains that may be coming on board for the FRE brand. So there’s really just a lot of sort of — kind of differences between those 2 products. We haven’t specifically split out the difference between FRE and ALP and that’s really the constraints that we have with our agreement with TCM in terms of what we can disclose relative to ALP. . In terms of the long-term prospects, look, from our standpoint, we’re in the early innings, we’re somewhat agnostic to what’s on the can as we march towards that double-digit market share and really capitalize on what we think is a massive opportunity for the company.

Ian Zaffino: Okay. And then I’m just trying to bridge the guidance. I know you included the $5 million to $7 million tariff. But how much is the increase in investment in white pouches to support more growth?

Andrew Flynn: Yes. Thanks, Ian, it’s Andrew. So yes, we disclosed the tariff, and there’s also some FX headwinds that we’re keeping an eye on. So in terms of the increased investment, we included that in our previous guidance. And as that segment grows in white pouch, we will make incremental investments to support the growth.

Operator: Your next question comes from the line of Nick Anderson with ROTH Capital.

Nick Anderson: Congrats on the quarter. First one for me, just on modern oral and the advertising opportunity there. With harm reduction being kind of an initiative, wondering if you’re seeing maybe more relaxed advertising regulations for nicotine pouches versus other products? And just how you’re potentially looking to market your offering in this environment?

Summer Frein: Thanks for the question. I would say while we observe there is a bit more flexibility than the historical tobacco industry as it pertains to advertising, there are still certainly restrictions, and we want to be really mindful of marketing in a responsible and thoughtful way, but we certainly have flexibility in terms of how we think about marketing and advertising across digital platforms and out-of-home as you saw with our advertisements along I-95 to connect with the 7-Eleven launch.

Nick Anderson: Got it. I appreciate that color. Second for me on the PMTA applications. Just with the FDA headcount reductions we’re seeing, does that change any expectations around timing of getting these applications through? Just your sense of how the time line may or may not shift off the back of kind of what’s happening with the FDA?

Andrew Flynn: Yes. I think with the FDA and the PMTA process, I think in terms of timing, it is really difficult to say given all the change in government. We continue to sort of monitor and assess, and we hear from our regulatory folks over at the FDA from time to time. But look, there’s really no change in terms of any clarity around timing at this point.

Operator: I will now turn the call back over to Graham Purdy, Turning Point’s CEO, for closing remarks. Please go ahead.

Graham Purdy: Thanks, operator. I really appreciate everybody joining the call today, and we look forward to speaking with you in a few months.

Operator: Ladies and gentlemen, that concludes today’s call. Thank you all for joining. You may now disconnect.