Good morning, and welcome to the Turning Point Brands' Third Quarter 2023 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I will now turn the call over to Louie Reformina Chief Financial Officer. Please go ahead.

Thank you. Good morning, everyone. This is Louie Reformina, Chief Financial Officer. Joining me are Turning Point Brands' President and CEO, Graham Purdy and Chief Revenue Officer, Summer Frein. This morning, we issued the news release covering our third quarter 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 a perspective on the operating environment and our progress against our strategic plan. As discussed, may 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 SEC. On the call today, we will reference certain non-GAAP financial measures. These measures and reconciliations to GAAP can be found in today's earnings release, along with reasons why management believes that they provide useful information. I will now turn the call over to our CEO, Graham Purdy.

Thanks, Louie. Good morning, everyone, and thank you for joining our call. Our third quarter results were in line with our expectations and demonstrated continued progress against our plan. During the September quarter, we showed double-digit revenue growth at Stoker's and sequential stability in the Zig-Zag segment, notwithstanding the year-over-year comparison as we continue to gain traction from the alternative channel initiatives we have put in place. Given our performance through the first 9 months of the year, we are raising the bottom end of our EBITDA guidance from $90 million to $92 million, with the range now $92 million to $95 million from $90 million to $95 million. As we finish up this year and move into 2024, we are particularly excited about our national rollout of our modern oral white pouch nicotine product called FRE, that's F-R-E. This product will compete in a category that's already worth over $1 billion in wholesale revenue and is currently growing 40% to 50% per MSAi. Up until now, we've spent most of our time over the past year shoring up our supply chain to ensure consistent product quality, analyzing consumer feedback and testing online select in-store marketing and merchandising programs to ensure a successful national rollout. Given our progress to date, we are now focusing on prudently ramping up our sales and distribution efforts to achieve steady growth over time. Our early learnings and performance in test markets have given us more confidence to now leverage our sales and distribution expertise to profitably expand FRE's profile in store count similar to what we achieved with Stoker's Moist Snuff over time. We look forward to providing updates on this exciting new product in the quarters and years to come. Stoker's had another strong quarter with revenue up 10.1%, an acceleration from 7.3%…

Thank you, Graham. As discussed in prior quarters, our focus on growing the Zig-Zag brand remains a critical element of our plan. We continue to execute against our multiyear roadmap to solidify Zig-Zag as a lifestyle brand, especially in the alternative channel, which Graham noted. There is significant value of growing brand awareness, trial and conversion and ultimately becoming a ubiquitous brand that a consumer is able to find anywhere. As Graham mentioned, we had another strong quarter in our B2B alt segment, which saw an acceleration in our core Zig-Zag papers and cones portfolio. We saw a double-digit increase in the number of customers and orders on our alternative platform with a healthy increase in average order size. We made significant progress across the business this past quarter as we saw growth in every subcategory with the alt channel which includes head shops, smoke shops, dispensaries, including MSO-owned, distributors, cultivators and manufacturers and processors. Additionally, we are seeing increased engagement across our digital platforms. Total online traffic sessions on our dedicated B2C site are up 33% versus a year ago. Our investment into organic SEO since early 2020 has placed Zig-Zag into an optimal situation across the digital atmosphere with over 10,000-plus branded and nonbranded key terms earning placement on Page 1 of Google and various other search engines. This focus on search engine optimization has driven an approximately 70% increase for the channel's organic search visitorship since 2022. We've also seen an increase in returning and repeat customer rates. Further, last quarter, we shared the exciting news of launching in Zumiez as part of our commitment to continuing to expand our sales channels. As a reminder, Zumiez is one of the largest brick-and-mortar specialty apparel stores with over 600 locations across the United States. Due to successful progress…

Thank you, Summer. Starting with our consolidated quarterly results. Q3 sales were down 5.6% to $101.7 million. Gross margin was up 180 basis points to 50.7% due to segment and product mix. Adjusted EBITDA was $24.4 million, which was stable from the previous year. Going into segment performance. Zig-Zag sales decreased 10.2% year-over-year to $46.8 million, but stable sequentially. Our U.S. papers and wraps businesses were down due to promotional activities during the previous year period, but were up sequentially. Our e-commerce business, particularly B2B alternative sales grew double digits. Our Canadian and other smoking accessories categories saw declines during the quarter, primarily due to favorable timing of Canadian deliveries in the prior year period and a discontinuation of a low-margin third-party product line, which impacted sales by $1.8 million during the period. Gross margins increased 330 basis points to 57.2% during the quarter, driven primarily by product mix, including the impact of the CLIPPER load during the prior-year period and the discontinuation of the low-margin product line. Focus products net sales increased 10.1% to $36.9 million in the quarter with a 2.2% volume increase and 7.9% price mix increase. Net sales for the MST portfolio grew double digits. Focus volume was up 4.6% despite category volume down 5.3%, with share growing 70 basis points year-over-year to 7.0% during the quarter according to MSAi. Its share in store selling was up 70 basis points year-over-year to 10.5% and with Stoker's now in stores representing 67% of industry volumes, which still provides a long runway for growth. Chew sales were up low single digits from the previous year. Stoker's Chew was the number one chewing brand in the quarter, gaining 220 basis points of share to 30.6% according to MSAi. Overall, TPB loose leaf volume was up 0.4% versus the category,…

To conclude, despite this year's challenges, in particular, navigating wholesale inventory reductions at Zig-Zag, Canada, and continuing with some difficult comparisons related to last year's CLIPPER load, we feel good about the business, particularly our progress in the alt channel and FRE. We remain focused on demonstrating further progress for the balance of the year and into 2024. Thank you for participating in the call today. And with that, I would like to open the call for questions.

[Operator Instructions] Your first question comes from the line of Vivien Azer.

So Graham, I wanted to follow up on your commentary on FRE, certainly encouraging to hear given the robust trends that we're seeing from a segment level perspective. Just so that we don't get over our skis in terms of the modeling, how incremental do you think we should expect this to be in 2024?

Yes. Look, I think Q4 is sort of the time of the year where we're sort of expanding out the foundation. I think our expectation for the product is to look similar to Stoker's over time as we compete against the large players in the category. Our share gains are generally small and incremental over a period of time.

Certainly. And there are some kind of geographic nuances to market share across the competitive landscape in the modern oral nicotine category. Can you speak to how you guys are thinking about targeting geographically to optimize your share opportunity?

Yes. For us, it's not necessarily a geographical focus on the product. It's really a store output focus on the product, similar to some of the past practices we've had with other categories, specifically Stoker's MST. We focus on the stores that have the highest volume.

Totally reasonable. And maybe just pivoting to Stoker's. So obviously, modern oral is weighing on the moist smokeless tobacco category broadly, Stoker's is uniquely continuing to consolidate share, which is great to see. But can you comment at all on how you've seen the competitive pricing landscape evolve as competitors shift their focus towards modern oral?

Yes. Obviously, we keep a very close eye on it. Stoker's has been a really nice success story for this company. I think as of late, you've seen some of the large competitors engage more strongly in the discount category. And so, we're mindful of that, but I think we keep our head down, we keep focused on doing what we do. We certainly believe in our unique proposition, quality above all else, certainly with the value and of course, the tub is a unique offering for the consumer and provides a unique value proposition. So I think we're mindful as the competitors sort out their go-to-market strategies, and we continue to focus on the things that we do well.

Perfect. I'll just squeeze one last one in on Zig-Zag. Very nice margin expansion. You noted, Louie, some discontinued ops which were helpful. But how should we think about -- and you commented on product mix as well as a benefit, but how should we think about channel mix as you continue to push towards nontraditional outlets?

Yes. From a gross margin perspective, obviously, we're agnostic in terms of where we're selling into. But what we're seeing in the B2B side is comparable to the gross margins that we're seeing on the core side.

Your next question comes from the line of Michael Legg.

Congrats on the quarter. Wanted to dig a little bit more into the CLIPPER penetration. How do you think [indiscernible] across distribution outlets? How -- what type of penetration do we have so far? And where do we expect to get?

Yes, we haven't disclosed the stores that we are broken into, obviously, that's comparative [indiscernible] over keeping close guarded. But I would say, as what we disclosed before was that the lighter market in the U.S. and Canada is about $500 million, with CLIPPER having about 3% share of that market. So we're around that level and building up is how we think about it.

Okay. Can you give us a little more detail on the promotional activities with Zig-Zag last year?

I'm sorry, can you repeat that?

The promotional activity that you referred to last year that you compared Zig-Zag sales to. Can you talk about what the promotional activity was and what type of impact do you think that was?

Yes. So what we had said was last year in light of the inflationary environment, we tested some promotions to gauge kind of customer's activity, it ended up being stronger than we thought, which led to that $5 million impact. So that was a combination of both the impact of those promotional activities as well as some timing of deliveries with one of our Canadian distributors last year. So those are headwinds that we faced. And we also mentioned this year, we discontinued a Canadian product line that was basically a low-margin loss leader for our operations out there. That was $1.8 million of impact. We'll have another $1.4 million of that next quarter as you think about the model and then another $1 million in Q1 of next year before we anniversary that comp. This year, we didn't mention it in our earlier commentary, but we also saw some destocking in Canada, which we think impacted sales by another $1.5 million during the quarter.

Okay. Great. And then just on the alternative, can you talk about how the penetration is occurring? Is it -- are they calling you? Are you calling them? Are you displacing them or is it just low growth?

Yes, I'm happy to take that question. This is Summer. We continue to see exciting growth in the alt channel. And I think to your question, it certainly goes both ways, us calling them, them calling us. But I think even coming out of last night's exciting win in Ohio, if you think about that overall business opportunity, when coupled with DC, it means that nearly half of the United States has access to a legal rec market. So we continue to focus on getting more product into those customers. We saw great progress with our core paper line in the quarter. So not just growth based on innovative products, and we continue to work on being more of a solutions provider for all of those customers.

Congrats on the quarter.

Your next question comes from the line of Eric Des Lauriers.

First one from CLIPPER on me to understand -- you kind of want to be a bit more tight lift about exact distribution or whatnot. I was wondering if you could maybe just help us understand what you're seeing with current inventory trade dynamics, when do you expect sort of that headwind to perhaps turn into a tailwind? And when you're kind of expecting CLIPPER sales to, I guess, resume some growth here?

Yes. So we've kind of said about CLIPPER, initially or any new products, when you see got this lull period where we have strong sales and then you go through this period of, what I would call, kind of a lull and the trade absorbs that inventory, we are in that lull period today, and we expect sales kind of bounce back kind of as we enter 2024 and go through the year.

Okay. And then on FRE, I'm wondering if you can just comment a bit more on the competitive positioning that you're expecting to kind of roll out with that product? You mentioned that the sort of playbook is going to kind of follow Stoker's from a distribution standpoint going after stores with higher volume. Can you kind of comment on the competitive positioning that you're planning on having with FRE as it relates to price points? Is this another kind of value product similar to Stoker's?

So while the strategy is similar to Stoker's in terms of our approach and our growth expectations, we certainly are thinking about FRE as more of a premium offering. We have strong belief in our point of difference, our USP, which is higher nicotine strengths options available for our consumers, which we continue to see resonate both in-store and strong response online and plan to profitably compete in the segment against those big brands.

All right. That's helpful. Next question just on loose leaf. I understood it's a smaller segment within Stoker's. I think this was the first sort of return to year-over-year growth that we saw in a while. Is this something that we should kind of expect going forward? Do you feel that you're at sort of sustainable path forward? I understand it's a declining category. Are you seeing anything to suggest that this year-over-year growth isn't just a kind of one-off this quarter or no real change to the overall kind of competitive dynamics within that?

I would say, we've seen some accelerated share gains in our loose leaf product, especially with our discount loose leaf offering out there that's seeing growth. I wouldn't underwrite growth in this market going forward. I would say, we're still expecting kind of a -- from a sales perspective, flattish to down. The good news with loose leaf over time is it has shrunk as a percentage of the overall Stoker's business. So it was 2/3 of our segment when it will be IPO, now it's less than 1/3. So it's having less an impact of sales with MST being the bigger driver going forward. So obviously, we're happy with the growth that we saw in the quarter, but that is not our expectation for loose leaf going forward.

That makes sense. And then just last one from me. Could you perhaps expand a bit on the margin impact of the discontinued product line in Canada? I guess, obviously, there was some promotional activity over the past year or so. We're now back up to that sort of 57% plus gross margin for Zig-Zag. Is this more of a sustainable path or, I guess, a sustainable level going forward? Or do you see a potential for some further margin gains now that this discontinued product line is phasing out?

Yes. I mean, from here, I would say that -- the $1.8 million came with single-digit gross margin. So that has a decent impact to our gross margins from a year-over-year perspective. The other thing is that, as we mentioned, CLIPPER is in a lull period now, and you mentioned those carry lower gross margin. So CLIPPER was down from year-over-year perspective as you were comping against a period where we had that load last year. So our expectation is actually, with some of the newer products that we have and if CLIPPER takes off that, that should -- that may reduce our gross margins over time. But again, our focus within the Zig-Zag segment is increasing our gross profit dollars and leveraging the fixed cost as we have in that segment to grow our operating income. So we're not so focused on maintaining that gross margin levels, especially if we can get growth out of CLIPPER and some of our newer products that we're entering into the market with.

There are no further questions at this time. Graham Purdy, I will turn the call back over to you.

Thanks, operator. I appreciate everybody joining us for the call today, and we look forward to talking to you about another quarter from now. Thank you so much.

And this concludes today's conference call. You may now disconnect.