Good morning, and welcome to Turning Point Brands First Quarter 2024 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the call over to Graham Purdy, Chief Executive Officer. Thank you. Please go ahead.

Thank you. Good morning, everyone. This is Graham Purdy, Chief Executive Officer. Joining me are Turning Point Brands' new CFO, Andrew Flynn; and Chief Revenue Officer, Summer Frein. I want to wish a special welcome to Andrew. Please understand that he didn't join the company until immediately after the March quarter concluded, so please take it easy on him.

Thank you, Graham. Good morning. It's great to be with you today. First, I want to thank the entire organization for the opportunity. I'm thrilled to join the company and lend my support given my experiences at both Connected Cannabis and Juul Labs. Second, while early in my journey here, I've been impressed by the management team and the strength of our brands. Over the past few weeks, I've been highly engaged in getting up to speed. My early conclusions are that we have a strong foundation to build on, and I am excited to capitalize on our opportunities ahead to help build stakeholder value. I look forward to sharing more in the quarters ahead. With that, let's dive into the quarter. This morning, we issued a news release covering our Q1 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 our perspective on the operating environment and our 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 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, Andrew. With all that said, good morning, everyone, and thank you for joining our call. Our first quarter results were in line with, and in some cases, better than our expectations and demonstrated continued progress against our plan. Adjusted EBITDA increased 21.6% to $25.3 million for the quarter. During the March quarter, Zig-Zag performed very well with revenue up 11.5% to $46.7 million, driven by strong double-digit growth in our Zig-Zag papers and alternative channel business. As we mentioned last quarter, we think we're past the noise associated with the trade inventory rationalizations we discussed last year, and we anticipate the backdrop is favorable for growth in 2024, and we demonstrated just that in Q1. We are encouraged by our wholesale customers and retail customers response to our expanding portfolio and some of our recent new product introductions. We remain committed to our alternative channel strategy and are efficiently filling out our customers' portfolio to better satisfy the growing and evolving demand from end consumers. Both factors are expanding our addressable market. We are having success not only winning new untapped alternative customers across the brick-and-mortar and alternative distributor network, but we are also seeing existing old customers buy a more complete Zig-Zag portfolio. As a result, we've seen healthy increases in average order sizes across the alternative space while providing the Zig-Zag brand with more valuable shelf space and merchandising real estate within these stores to build brand awareness as we satisfy evolving in consumer preferences. Considering that many of our competitors offer far fewer SKUs than Zig-Zag, we're finding that the alt channel is actively looking for partners that provide service above and beyond ordinary fulfillment, and we are one of the few companies that can truly meet the needs of the evolving end customer. In addition…

Thank you, Graham. Throughout Q4, we continued to further Zig-Zag's position as a lifestyle brand by executing against our multiyear road map. Our focus on growing Zig-Zag's portfolio and the alternative channel while increasing the brand ubiquity remains a core tenet of that plan. As Graham noted, Zig-Zag posted a strong quarter, fuel by papers and a record quarter for our alternative B2B channel. Within alternative B2B, our focus on penetrating cannabis first points of distribution from organized MSOs and dispensaries, manufacturers and the head shops and smoke shops continues to be a strong barometer for the underlying growth in the industry and as importantly, our commitment to capitalize on this secular trend. To further Zig-Zag's growth as a lifestyle brand that resonates with our ever-evolving consumer base, the brand created numerous engaging opportunities throughout the quarter. Beginning with Valentine's Day, Zig-Zag partnered with 30-plus celebrities by hand delivering custom flower bouquets, which integrated Zig-Zag's rose cones into bouquet design. Our rose cones continue to be a popular addition to the portfolio, which we are leaning into and provide the brand with meaningful opportunities such as this. The most notable event for the quarter, however, was coming together with the world's largest hip-hop and rap music festival, Rolling Loud, which celebrated its 10-year anniversary this year. Across 4 days, thousands and thousands of music lovers came together to embrace the festival's culture. Zig-Zag worked with over 90 celebrity partners by developing custom Zig-Zag in Rolling Loud merchandise and working with nearly 200 influencers to promote the partnership during the 4-day event. Among signage across all digital screens in the venue, Zig-Zag had a custom 40/40 pop-up shop that invited attendees to interact with the brand. Sample and purchase products as well, and learned more about Zig-Zag's history and future. We…

Thank you, Summer. Starting with our consolidated quarterly results. Q1 sales were down 3.9% to $97.1 million, which is flat on a sequential basis. Excluding CDS, overall revenue was up 10%. Gross margin was up 530 basis points to 53.5% due to favorable segment and product mix. Adjusted EBITDA was up 21.6% to $25.3 million. Going into segment performance. Zig-Zag sales increased 11.5% year-over-year to $46.7 million due to strength in our papers business and continued penetration of the alt channel, as mentioned. As noted, the alternative B2B channel had a strong quarter. This is critical given our aim to be everywhere our consumer is, and we couldn't be more pleased with the job the alt team is doing to expand the depth and breadth of our distribution to this important channel. Our Canadian business provided an approximate $800,000 headwind due to previously mentioned discontinuation of the low-margin third-party product line. Gross margins increased 550 basis points to 59% during the quarter. This was driven primarily by product mix, including the discontinuation of the low-margin product line. Stoker's net sales increased 8% to $36.4 million in the quarter with a 0.2% (sic) [ 0.1% ] volume increase and 7.9% price mix increase. Net sales for the MST portfolio grew 6.7%. Stoker's volume was up 1.2% despite category volume down 8.5%, with share growing 70 basis points year-over-year to 7.1% during the quarter according to MSAi. Its share in store selling was up 100 basis points year-over-year to 10.7%, with Stoker's now in stores representing approximately 2/3 of industry volumes, which still provides a long runway for growth. Chew sales were down mid-single digits from the previous year. Stoker's Chew was the #1 chewing brand in the quarter, gaining 140 basis points of share to 31.1% according to MSAi. Overall, TPB…

To conclude, we feel like we're off to a solid start to the year with Zig-Zag returning to growth, ongoing solid performance at Stoker's and encouraging early signs from our national launch of FRE. With that, I'll turn it over to questions.

[Operator Instructions] Our first question will come from Eric Des Lauriers from Craig-Hallum Capital Group.

Congrats on strong results. First one, just a clarifying question for me. So you highlighted B2B growth of 60% within Zig-Zag. And I just wanted to clarify, is that all the alternative channel? Or is there some other B2B business in the traditional channel?

Yes, that's all the alternative channel.

All right. That's very impressive. Within the alternative channel, just kind of sticking with Zig-Zag here. So it seems like you've obviously made great progress over the past few years, sort of getting into these new doors, and you've commented a bit on some of the competitive dynamics in terms of gaining shelf space. I'm just wondering if you could expand on those a bit, kind of talk about how your products or your offerings kind of stack up against the sort of evolving competitive set here? I think you mentioned you guys feel pretty well positioned in terms of number of SKUs, but just any additional color in terms of SKU counts or service levels or just the overall competitive dynamics or opportunities you see to sort of increasing share within this alternative channel?

Yes. Sure. Thanks, Eric, for your question. I think it's important to know from a year-over-year perspective, you might remember that we're benefiting from a comp perspective just to level set from some trade dynamics from last year, but still the projections for Zig-Zag are in line with our expectations, if you take that out of it. In terms of the portfolio, as you know, we continue to monitor what consumers are interested in as the category is evolving and staying ahead of those consumer expectations and really balancing that against the profitability of introducing new products into the market, so we can continue to generate new news for Zig-Zag. We introduced some products earlier this year and have a number on the horizon, but it's something we're continuing to really make sure that we're in line with the consumer and where they're going.

Our next question will come from Michael Legg from The Benchmark Company.

Great quarter, guys. Can you talk a little bit about the margin impact in the Zig-Zag segment from the CLIPPER stocking last year, where we are today? And how much of the margin improvement is from the elimination of the CLIPPER stocking versus margin improvement overall?

Yes. Look, Mike, the -- I think it's challenging from a year-over-year perspective given that the majority of what happened in Q1 last year was impact around our high-margin items in our traditional convenience store channel. And so this year, obviously, we didn't have that same headwind from a marginal perspective. So it's really just a catch-up on the year-over-year comp with more paper sales, more wrap sales versus year-over-year.

Okay. Great. And so do you think it's sustainable at these levels?

I think our expectation is that where the margins sit with Zig-Zag for our core portfolio, we feel pretty good about.

Okay. Great. And then I want to talk a little bit about the alt channel penetration. How much of that is in existing dispensaries alt channels versus new ones that are opening up? Where is the growth coming from?

Yes. I would highlight that the growth from the quarter is coming from a bit of both. I think the primary benefit that we saw in the quarter was really the alternative customers expanding their portfolio, getting more SKUs on shelf. But certainly, a portion of that was also driven by entering into new customer stores as well.

Okay. Great. And then I just want to -- I know you're not giving that much data on FRE. And I think I heard it tripled from a low base this quarter. But can you just talk about what you may have seen in focus groups with the product? I know your product has a higher dose that has more packs for a container. Can you just talk about what you're hearing from the consumer when you do focus groups on that?

Yes. I think that as we've pointed out earlier that our point of differentiation in entering the market was more satisfaction, if you will. I think what we're starting to hear from consumers is that they're pleased with the mouthfeel of the product as well. It's designed to touch differently than the analog products that are on the market. We continue to get great feedback from our consumers. We've got a really nice window win with our direct-to-consumer website on frepouch.com. Consumers are pretty active in terms of providing us feedback. And as you'll note, with online platforms, generally, consumers are quick to complain, but not as quick to provide positive feedback, and we're seeing a lot of positive feedback relative to the product. I think interestingly, the trade situation that we're in right now is very receptive to new products on shelf, and we're excited about the ramp in our traditional convenience stores.

Okay. Great. And then just one last question on the vape business. I saw Real Brands is buying Vapor Shark. Can you talk a little bit about where we are with the whole CDS segment and what the magnitude of that possible acquisition is or divesture, I should say?

Yes. I think we're still firmly under the plan that we've previously communicated relative to how we're treating that business. As I'll note, again, we're -- we spend no management time within the core business, talking about the CDS business. So FRE stands and runs on its own. I would anticipate us continuing to matriculate along those lines relative to how we think about the future of that particular business. Interestingly to note as well in the quarter, the business actually performed pretty well in the quarter. And to the extent that the business remains sustainable cash flowing on its own, I think we're comfortable with that asset today. But from a future perspective, I think we remain focused on what we previously communicated.

Great quarter, guys. Congrats.

Thanks, Mike.

Our next question comes from Scott Fortune from ROTH MKM.

Yes. Just one quick follow-up on the CDS side of things, it's kind of stabilized at that $14 million business. Just kind of hearing your comments as kind of sustainable here at these levels, although you've kind of indicated that it might come off, but just kind of get a sense for the CDS business as we look out the rest of the year here from a dollar standpoint.

Yes. I think on a sequential basis, we feel good about where the business has run through Q1. There's a lot of activity in the world that, that business services. And so I think it's hard to underwrite this as this level of sustainability as we move forward. I would note that we do remain committed to that business remaining profitable while it sits underneath the TPB umbrella. So our expectation is that at a minimum, that business continues to sustain itself, Scott.

A follow-up there. And then just digging in a little more color on the continued penetration into the alternative channel and providing maybe a little more metrics there around that penetration levels where you're at? I know Summer has mentioned, you guys are getting positive shelf-based gains here and product strength selling into that channel. But just kind of a little more color on the SKUs or products that are really increasing the market share in that channel, if you can provide that?

Yes. So as we previously mentioned, we believe based on our internal metrics that, that channel is growing. And I think if you look at year-over-year as well as sequential growth of 60%, I'm pretty confident to say that we feel like we're growing share. And I don't think that, that is a surprise given the fact that we have broadened the portfolio and created more product offerings to create more consumer appeal for the Zig-Zag brand as well as occupying more shelf space to make Zig-Zag more relevant. As it relates to metrics, I would anticipate over time that we will provide more clarity there, but we think we're still way in the early innings of our penetration in that channel. So at this point in time, our focus is to continue to find new retail stores, continue to find more distributors that service that space, continue to keep our head down, focus on the right product mix for the end consumer in those stores. And we think that things will happen if we continue on that plan.

Got it. And then last question for me, just kind of focusing on Stoker's a little bit. You're seeing nice continued market growth there as Modern Oral is weighing on kind of the more of the smokeless tobacco side of things and taking share there, but can you provide a little color on the competitive front? Are you seeing more competition from a pricing landscape with more focus towards the oral side of things? Just kind of a little bit color on continuing that growth going forward and the competitive movement here.

Yes. We were -- I think we are pleased with our results in the quarter for FRE as we really started down the street to gain penetration into the retail landscape. We've got a really nice online business where we speak directly to the end consumer. The category is on fire. As you sort of look out, I'm not sure that the category can sustain 73% year-over-year growth. It grew 16.5% on a sequential basis. There is competitive activity within that channel, but you would expect that with the umbrella of growth that, that category provides. We still think we're well positioned with the product offerings that we have, catering to the consumer that's looking for more satisfaction. I mentioned the mouthfeel before. We think we -- our product really stacks up well from a mouthfeel perspective. And so we're going to continue moving forward and gaining new stores and engaging more consumers into the brand.

We have no further questions in queue. I would like to turn the call back over to Graham Purdy for any closing remarks.

Thanks, operator. Thank you, everybody, for joining our call. We felt really good about Q1, and we're looking forward to speaking to you again here in a few months on our Q2 results. So thank you very much.

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