Thank you for standing by. My name is Sully, and I will be your conference operator today. At this time, I would like to welcome everyone to the Turning Point Brands Second Quarter 2024 Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I would now like to turn the call over to Andrew Flynn. 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 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 are in today's earnings release, along with reasons why management believes they provide useful information. I will now turn the call over to Graham Purdy, our CEO.

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. Adjusted EBITDA increased 7% to just over $27 million for the quarter. Given our solid start to the year, we are increasing our guidance for projected 2024 adjusted EBITDA to $98 million to $102 million versus our prior guidance of $95 million to $100 million. Neither of these ranges include contributions from CDS. During the June quarter, Zig-Zag performed well with revenue up 8% to $50.5 million, driven by high single-digit growth in our North American papers and wrap businesses and a strong showing from our cigar business, which we've leaned into more heavily in 2024. We are excited about this business going forward. We remain committed to our alternative channel strategy of becoming a one-stop shop for our old customers. In particular, we continue to expand our SKU assortment to offer these customers a more diverse portfolio of products. The alt channel declined 3% in the quarter. But as a whole, in the first half, this business is up about 28%. The drop in sequential is attributable to the first quarter having a particularly robust trade show calendar and the timing of some large purchases in March. Nonetheless, we are having success not only winning new untapped alternative customers, but also with existing alt customers buying a more complete Zig-Zag portfolio. We've seen healthy increases in average order sizes while expanding Zig-Zag with more valuable shelf space and merchandising real estate within these stores. We continue to have a long runway in this emerging and fluid market. As you know, the alternative channel is consistently expanding as additional states embrace medical and recreational cannabis. In addition, all retailers, including dispensaries, smoke…

Thank you, Graham. During Q2, we made further progress in building Zig-Zag position as a lifestyle brand by executing against our multiyear road map. As Graham noted, Zig-Zag posted a strong quarter fueled by papers, wraps and a more distinct push into the cigar category. For only the second time in Zig-Zag's history, the brand achieved over $50 million in revenue. We also continue to launch and promote products that resonate with evolving consumer preferences. In June, we added to our growing rose cone portfolio with the introduction of Zig-Zag Mini Rose Cones. Like our prior innovative rose products, these new Mini Rose Cones are made with all natural organic growth pedals that promise an enhanced smoking experience. Additionally, as part of our endeavor to build a lifestyle brand that goes beyond smoking accessories, and we continue to expand our brand presence in culturally relevant moments we teamed up with Guess Jeans to partner with them on their exclusive Coachella compound. The activation brought together some of the world's largest celebrities and influencers into a compound consisting of multiple homes during the largest musical festival of the year. Zig-Zag participated in sponsoring the compound with co-branded products, artists and celebrity gifting, rolling stations throughout the venues as well as the post festival after-party. The tag content from weekend yielded a cumulative reach of 19 million individuals. We have a healthy pipeline of new product introductions across the Zig-Zag portfolio. And we look forward to continuing to provide updates that highlight the momentum and efforts that support Zig-Zag's growth. For Stoker's, we continue to be pleased with the brand's performance, which grew to over $40 million in revenue for the first time in company history. We are focused on expanding distribution and continue to see the brand great fit at a…

Thank you, Summer. Starting with our consolidated quarterly results. Q2 sales were up 2.8% to $108.5 million, which is up 12% on a sequential basis. Excluding CDS, overall revenue was up 13%. Gross margin was down 8 basis points to 49.6% due to segment and product mix. Adjusted EBITDA was up 7% to $27 million. Going into segment performance. Zig-Zag sales increased 8.1% year-over-year to $50.5 million due to strength in cigars and growth in our North American papers and wraps businesses. Gross margins decreased 330 basis points to 53% during the quarter. This was driven primarily by product mix. Stoker's net sales increased 19% to $42.7 million in the quarter, with a 5.3% volume increase and a 13.2% price mix increase. Net sales for the MST portfolio grew 14.1%. Stoker's volume was up 0.4% despite category volume down 7.2% with share growing 60 basis points year-over-year to 7.5% during the quarter according to MSAi. Share of in-store selling was up 60 basis points year-over-year to 10.3% with Stoker's now in stores representing approximately two thirds of industry volumes, which still provides a long runway for growth. Chewing tobacco sales were down approximately 1% from the previous year. Stoker's chewing tobacco was the number one chewing brand in the quarter, gaining 160 basis points of share to 32.5% according to MSAi. Overall, TPB loose-leaf volume was down 0.9%, beating category volume declines of 3.7%. 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 FRE sales more than tripled off a low base as we continue national distribution of the product. Gross margin declined 30 basis points to 55%, primarily due to product mix, somewhat offset by MST pricing gains. Moving to…

To conclude, we're pleased with our progress at 2024s halfway point. And with that, I'll turn it over to questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Your first question comes from the line of Michael Legg with The Benchmark Company. Please go ahead.

Thank you. Congratulations on a great quarter, everyone. FRE obviously seems like a huge opportunity for you. You had the PMTAs for the 3 milligrams and 6 milligrams which didn't launch on the long side, the 9, 12 and 15-milligram packets. First, can you just talk a little bit about the timing on why you decided to launch the 6 milligram now?

Yeah, Michael, it's Graham. Thanks for the question. Yeah, I think the original thesis was to provide a differentiated product for consumers as well as our customers as the shelves were being filled up with various products, sort of sub 9-milligram. And so pretty unique opportunity with both customer and consumer. I think through our direct selling apparatus, frepouch.com, what we found over time is that mouthfeel has become a very strong differentiator for us. So then gave us confidence to lean into the 6-milligram segment as of Q2, that segment was about 52%, the 6-milligram segment for the quarter. So it really gives us a strong opportunity to participate for those consumers and really grow them into sort of the broader portfolio of products that we have.

Okay. And can you talk a little bit about your manufacturing capability and how you produce it and what the capacity is there?

Yeah. Look, we feel really good about where we're at right now. We've got a strong manufacturing partner who's got a appetite to invest behind it. If we look through how we perceive the sort of balance of this year and moving into next year, we feel really confident in the partner that we have.

Okay. But as far as capacity, is there any level you could disclose?

No.

Okay. And then when did you actually?

Yeah.

The longer-term margin potential for FRE.

I'm sorry, Mike, can you say that again?

The longer-term margin potential for FRE.

Yeah. Look, I think it sort of follows our past thesis, which is growing into higher margins over time. We tend to invest in the brands in the early days, which I recall some of the past launches, we sort of signaled that 20% to 40% was kind of our intro range for products, but we're seeing sort of favorable pricing dynamics emerge in this category as well. And so we're pretty confident that over time, as we get more leverage and the brand gets more scale in the marketplace, that we'll sort of be able to follow that same model.

Okay. Great. And then so basically, competition now is obviously building out their capacity and supplies on the constraints in the marketplace we get on to. You guys have more PMTAs in the competition, right? They're only in the 3 and 6, you guys also have the 9, 12 and 15. Is that correct?

Yes.

Okay. Great. All right, thank you very much. Great quarter.

Thanks, Mike.

Your next question comes from the line of Eric Des Lauriers with Craig-Hallum Capital Group. Please go ahead.

Thank you for taking my questions. Congrats on a very impressive quarter here. I'll stick with the three questions for now. You were just recently mentioning you're investing in brands in the early days, obviously makes sense. Considering the kind of explosive growth that we're seeing in this category, I'm just wondering sort of how you're thinking about marketing spend and trade promotion for FRE. What would you need to see to sort of increase spend? And how should we think about potential spend as falling between marketing investment and SG&A or trade promotion and net sales or COGS? Just wondering how you're sort of thinking about this going forward?

Yeah. I think if you just take a step back from a 30,000-foot view, I think we're very data-driven. We've got robust data for this segment and specifically our brand through MSAi as well as our online channels. And I think the data informs our decision relative to how we throttle spending. In terms of the distinction between trade promotion and marketing expense, I think that, that's always a balancing act where as we read that data, we sort of make a determination on where to press in a little harder and maybe where to lean out of that particular spending or investment view. But at the end of the day, I think what makes us a little bit unique is that we've gone to market and we maintained profitability in the segment, which I think we're incredibly proud of.

That's great. And I appreciate the color there. You mentioned some comments on, obviously, these larger C-store chains have a longer sales cycle. You've had more success with some of these independents. I'm wondering how the sort of trajectory for the second half is looking here? Do you feel that you've sort of gotten into a good number of the independents and maybe there's some inventory sort of initial load-in to be aware of that maybe we could see some volatility quarter-to-quarter? Or are we just kind of too early in this robust growth trajectory that we shouldn't necessarily be thinking about kind of quarter-to-quarter volatility at this point? Just sort of wondering how you're viewing that more near-term landscape.

Yeah. Look, it's a lot to unpack in that question. So I'll start first with the chain environment. While it's a long sales cycle for the large chain accounts, so we'll note out that we're in the overwhelming majority with the top 50 chains in the country with some SKU representation with TPB. And it's important to note that because we've got a long history of creating partnerships and creating value with our customers. So we're very confident over time in our ability to sort of get into the larger chain accounts. In terms of how we think about volatility from quarter-to-quarter, I think it's in the early days right now. Obviously, it's still relatively small comparative to the entirety of the Stoker's segment. In terms of how we went to market, we certainly didn't go to market with a sort of a big load strategy, if you will. And what we're trying to do is get a view for get the product into stores, merchandise it well, make sure that consumers can see it, placing point of sale and seeing what the pull through rates are. And so we're really sort of managing not over-inventorying the trade in the early days for this launch.

All right. Very great to hear. Overall, I mean, kind of -- this is, I guess, another sort of 30,000-foot question or just a longer-term question. So -- with your other Stoker's products, you've sort of been attacking the value side of the category. Here you're kind of competing head on here. I'm wondering if you have any view on sort of potential market share goals or targets or anything kind of longer term? I mean, is this something where you still see in the single digits as being the sort of target here as you are with Stoker's MST? Or is there anything else that you're seeing that maybe that could be either more or less. I mean just wondering how you're thinking about overall market share goals given the slightly different competitive positioning with FRE versus your other Stoker's products?

Sure. Great question. So I think that we have -- our aspirations are large. And if you take our aspirations and you unpack them, sort of our goal is to be an everyday player on the shelf across the U.S., which would mean that being one of the few that actually sort of emerges as in that top, say, four or five brands in the market. I think Stoker's and the gains that we've made there throughout the year sort of informs what we think the potential could be. And certainly, we're way ahead of the game in our entry into the white pouch category with a differentiated product, whereas it took us 40 years to get to the moist snuff category, and we're competing against large entrenched incumbents. We're relatively early inside that cycle with FRE in the Modern Oral category. So there's a lot of adoption. The category growth that is expected throughout the rest of this decade will largely be from new consumers coming into the category that currently aren't engaged. And so we think that there's a great opportunity for us to win new consumers as they come into the category while also competing for existing consumers that are looking for a little more satisfaction, looking for better mouth feel. And we think the launch of the 6-milligram sort of gives us license to speak to those consumers and give them an opportunity to try our product and see the difference.

Yeah. That's great. That certainly makes sense to me. Last question for me, switching gears over to Zig-Zag. I just wanted to kind of double-click on one of the comments you made earlier in your prepared remarks, Graham. You mentioned how traditional C-store customers are kind of increasingly targeting the I guess, alternative channel customer. And that there's sort of a blurring of the lines between traditional C-store and the alternative channel. And I'm wondering if you could just expand on that a bit. I mean is this just traditional C-store customers now ordering a much wider assortment of SKUs? Or is there something about like new stores or new doors, something else blurring the lines between C-store and an alternative channel, I was wondering if you could expand on that.

Yeah. So just as a point of clarification, as we launched the strategy, we are really focused specifically on a set of stores that we have defined as alternative stores, head shops, smoke shops, dispensaries and also the growth of distributors that were emerging to service that space. Where the lines are getting blurry is that some of our traditional distributors are also going after those customers. And so as that customer base grows, it's opportunity for them to service those stores as well. And so what we're seeing is -- and again, very good news for us, we're seeing some of our legacy traditional distributors that we've done business with for decades. They're leaning into that segment because, look, if you think about it, they're driving trucks to convenience stores, and they're passing these stores along the way. So it's a great opportunity for them to leverage their fixed cost in terms of taking product to those stores. And so we're just seeing a little bit of that sort of starting to occur in the channel, which is just creating one, an opportunity for us, but also the sort of blurring where a traditional distributor and an alternative distributor, you're starting to see those lines kind of cross up a bit.

I see. That's very helpful. I think that's where I was confused that we were sort of talking about the distributors here and the lines are getting blurred there, which -- I mean, to me, that sounds like that was very sort of beneficial to Zig-Zag compared to some of the other rolling paper brands that you might see at some of these alternative shops. I mean, I would imagine that you guys have much stronger relationships with these more traditional distributors. Can you kind of just comment on any -- on that subject, sort of your relationship with the traditional distributors versus maybe some of the -- some of your competitors that you run into in the old channel?

Yeah. I would say the -- if you look at sort of from a relationship standpoint, this company has been in business since 1988. So a lot of these traditional distributors, we've been doing business with since that long. And so that partnership is deep. Most of the folks that are really focused on that specific alt channel haven't been around quite as long, and that's not a negative at the same time, we view the relationships that we've built with the traditional distributors as incredibly strong. And we feel that the process that we bring that created those relationships and that value can be transferable as well to these alternative distributors as they grow. And so I think it really sets up nicely for us in the future, having an omni distributor approach servicing that channel and overlaying on top of that our ability to sell direct-to-consumer as well as direct-to-store through our own website, really gives us the ability to speak to consumers wherever they want to buy the product.

There are no further questions at this time. That concludes our Q&A session. I will now turn the conference back over to Graham Purdy for closing remarks.

Thanks, operator. I appreciate everybody joining the call today, and we look forward to speaking to you again in a few months.

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