Turning Point Brands, Inc. Q2 FY2025 earnings call

Management Statement and Operational Highlights

• Financial Performance: Revenue increased 25% to $116.6 million, and adjusted EBITDA increased 15% to $30.5 million.
• Strategic Investments: Reallocated sales and marketing resources, expanded sales force, improved online presence, increased investment in chain accounts, and developed U.S. manufacturing.
• Market Feedback: Positive consumer and trade feedback for Modern Oral; Zig-Zag maintained performance with new product introductions; Stoker grew due to consumer trade down to value offerings.
• Partnerships and Marketing: Long-term partnership with PBR to boost FRE brand awareness; continued investment in brand building to support consumer loyalty.

Segment Performance

• Zig-Zag: Sales decreased 6.9% year-over-year to about $47 million for the quarter. Gross margins declined 410 basis points, primarily driven by product mix due to an accelerated exit from the CLIPPER business.
• Stoker: Net sales increased 63% year-over-year to almost $70 million. Net sales for the MST portfolio grew 4% year-over-year to $29 million. Stoker's chewing tobacco was the #1 chewing brand in the quarter, gaining 160 basis points of share to 32.7%. The segment's growth was driven by consumer trade down from premium loose leaf.
• Modern Oral: Nicotine pouch sales, including FRE and ALP, were up nearly 8x year-over-year, achieving total revenue of $30.1 million, a 35% sequential increase. Modern Oral now accounts for 26% of total revenue.

Guidance

• Increased full-year adjusted EBITDA guidance to $110 million to $114 million from $108 million to $113 million.
• Increased full-year consolidated nicotine pouch sales guidance to $100 million to $110 million from $80 million to $95 million.
• Effective income tax range is 23% to 26% going forward. Budgeted CapEx for 2025 is $4 million to $5 million, exclusive of Modern Oral projects, with $3 million to $5 million planned for Modern Oral PMTA supplementation.

Risks

• Difficult year-over-year comps in the second half due to CLIPPER business wind down and deemphasis of cigar category.
• Dynamic tariff environment, which could impact costs.

Question and Answer

Q: Congrats on a very impressive quarter here. My first question is on ALP. Graham, I think you mentioned plans for the brick-and-mortar rollout were ahead of expectations. I'm just wondering if you could expand a bit on that and just how we should be thinking about the rollout of ALP from e-commerce to brick-and-mortar.

A: Yes. Look, I think that we've been pretty excited about the online results. In our estimation, they've grown the brand into one of the largest D2C brands. And I think that's given the team a lot of confidence to move forward with starting in bricks and mortar. It's super early innings. And I think that as the bricks and mortar matriculate, obviously, they're a small sales organization right now. And so I would expect them to sort of plot along and gain stores over time as we sort of bend around the end of this year as they kind of just started the thought process of getting into it.

Q: I wanted to just get a sense about the white pouch production, tariffs that you might be facing and then potential to maybe move production out of India.

A: Ian, Andrew here. So as it relates to tariffs, as you've seen in the news, there's -- it's a dynamic environment. And what we're doing is we're focused on controlling our controllables. So we've built an inventory position around that product. So that gives us some insulation from a tariff increase -- we've also been negotiating with some of our suppliers across the board to get some reductions in our cost of goods. And also, we've been looking at taking some price increases in different product lines. So we're managing the tariff headwind as best we can. And so as it relates to India and our production capabilities there, we've got plenty of capacity. So good news is we're feeling good about that. And then in terms of the mitigation around the tariff exposure and bringing production to the U.S., we continue to invest. You'll see the CapEx was around $3.9 million for the quarter. So we continue to invest in that capability here in the United States.

Q: I wanted to just get a sense about the white pouch production, tariffs that you might be facing and then potential to maybe move production out of India.

A: Ian, Andrew here. So as it relates to tariffs, as you've seen in the news, there's -- it's a dynamic environment. And what we're doing is we're focused on controlling our controllables. So we've built an inventory position around that product. So that gives us some insulation from a tariff increase -- we've also been negotiating with some of our suppliers across the board to get some reductions in our cost of goods. And also, we've been looking at taking some price increases in different product lines. So we're managing the tariff headwind as best we can. And so as it relates to India and our production capabilities there, we've got plenty of capacity. So good news is we're feeling good about that. And then in terms of the mitigation around the tariff exposure and bringing production to the U.S., we continue to invest. You'll see the CapEx was around $3.9 million for the quarter. So we continue to invest in that capability here in the United States.

Q: I wanted to just get a sense about the white pouch production, tariffs that you might be facing and then potential to maybe move production out of India.

A: Ian, Andrew here. So as it relates to tariffs, as you've seen in the news, there's -- it's a dynamic environment. And what we're doing is we're focused on controlling our controllables. So we've built an inventory position around that product. So that gives us some insulation from a tariff increase -- we've also been negotiating with some of our suppliers across the board to get some reductions in our cost of goods. And also, we've been looking at taking some price increases in different product lines. So we're managing the tariff headwind as best we can. And so as it relates to India and our production capabilities there, we've got plenty of capacity. So good news is we're feeling good about that. And then in terms of the mitigation around the tariff exposure and bringing production to the U.S., we continue to invest. You'll see the CapEx was around $3.9 million for the quarter. So we continue to invest in that capability here in the United States.

Q: Congrats on the quarter. First question for me, I just wanted to talk about gross margins a bit, particularly Stoker's gross margin remains healthy. You called out mix kind of for the overall improvement in gross margin. Obviously, Stoker's was a highlight there. So just any color you can provide there, particularly as we think about pouches within that, that's a higher mix. Historically, you had pointed to lower margins from pouches, but maybe better than you initially had expected. There's a lot of dynamics moving between DTC and brick-and-mortar. So maybe just any color in terms of how best to think about gross margins, particularly as we move forward. And it seems like we're going to get increasing mix in terms of coming from brick-and-mortar.

A: Yes. Thanks for the question, Aaron. Look, I think that we've got our Stoker's heritage business, which is our MST and our chewing tobacco brands. The margins there remain healthy and expanding. As it relates to Modern Oral, I think you rightly pointed out, there is -- you do have a mix of D2C versus bricks and mortar. But I think in the early innings, we're pretty excited about where the margin profile of the business is. Now I think that we need to underscore that, as Andrew had mentioned in the last question, we intend to invest behind the brand. And so I think you can see a bit of lumpiness within the white pouch segment for us. But over the long haul, we have -- we're very bullish on the margin profile of the segment.

Q: I just had a question on your legacy MST business. Just understanding that you're going to prioritize Modern Oral, which obviously makes sense. Your legacy MST business has been incredibly consistent. It grew again on a very tough comp this quarter. And in the current environment, it's seemingly just very well positioned as a value offering, right? And so just looking forward, how do you think about managing growth and driving continued distribution and market share gains in Stoker's MST with growing and rolling out your Modern Oral business, which is still very early days. So any color on the balance, I think, would be helpful.

A: Yes. I think what we've seen in the early innings is that there's been relatively strong overlap between the Modern Oral stores that we've focused on gaining distribution in and our Stoker's MST portfolio, which has allowed us the opportunity to cross-sell in those environments. So I think you're seeing a function of the sort of the early day synergy that we actually are really bullish on long term as we grow out our sales force. And look, I think you rightly pointed out, Gerald, that what we've seen from the large competitors and some of their announcements over the last couple of years is that premium MST has been very susceptible to the white pouch category. And what we see within the underlying dynamics of MST is that there's still a large audience of committed dippers in the U.S. We believe we've got one of the best brands that has incredible quality around it, and we continue to provide value to those consumers. And from an MST brand standpoint, we feel great about sort of the potential opportunity that's still in front of us. There's still a lot of runway in terms of store growth that we can get into. There's still pricing opportunities in the segment. And so I think we're still bullish on our MST business on a go-forward basis and think that there's a ton of opportunity out there to harvest.