Turning Point Brands, Inc. (TPB) Earnings Call Transcript

Good morning, and welcome to the Turning Point Brands Third Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Andrew Flynn, Chief Financial Officer. Please go ahead.

During this call, we'll discuss consolidated and segment operating results, the operating environment and our progress against our strategic plan. Before we begin, please refer to the forward-looking statements and risk factors in our press release and SEC filings. We'll also reference certain non-GAAP financial measures. Reconciliations and explanations are included in today's earnings release. With that, I'll turn the call over to our CEO, David Glazek.

Thanks, Andrew, and good morning, everyone. Before discussing the results for the quarter, I'd first just like to say how excited I am to serve as the CEO of Turning Point Brand. As some of you know, I've been involved with the company for nearly 14 years, including the past 4 years as Executive Chairman, we work closely with our leadership team on a daily basis. Over that time, I've had the pleasure of seeing firsthand the strength of our brands, the capabilities of our team and our ability to adapt and capitalize on emerging opportunities. I'm incredibly proud of what we've accomplished to date and see tremendous potential in what lies ahead. Our strategy remains unchanged, investing cash flow from our heritage businesses to build leading brands in modern oral. Our investments in brands, people and capabilities will continue to be focused on maximizing the value of this transformational opportunity. Now turning to the third quarter results. We delivered another strong quarter led by Modern Oral. Consistent with our expectations, modern oral gross sales were up 114% year-over-year and 8% sequentially, while net sales were up 103% year-over-year and 9% sequentially. We're encouraged by the performance of both of our Modern Oral brands, Free and L. We remain focused on continuing to build convenience store distribution, especially in chain accounts where the majority of the category volume now reside. These chain placements are critical to establishing durable brands, expanding our consumer reach and positioning free and out among the long-term leaders in the nicotine pouch category we expect our investments in distribution to differentiate free and L from smaller competitors and help create durable long-term annuity streams. In the quarter, modern oil accounted for 49% of our total revenue. Nets up from 31% in Q3 2025. Our Heritage businesses also performed well. Zig-Zag sales improved sequentially and the Stoker's MST business continues to outperform the category. Now turning to our strategy. As we've communicated before, modern oral remains our primary growth driver. We're committed to making the investments necessary to build a leading position in the category. Our strategy is centered on 3 key priorities: gaining consumer traction, expanding distribution and building the infrastructure that's necessary to scale. Importantly, we're seeing meaningful progress across each of these 3 priorities as we enter our next phase of growth. First, we've demonstrated that our brands resonate with consumers. The success of free and out, particularly in the direct-to-consumer and independent retail channels has validated our product quality and brand positioning. We are now seeing that traction translate into encouraging results in chain accounts, which further reinforces our confidence in the long-term potential of these brands. Secondly, we're expanding into the channels that matter most. We're making progress bringing free into larger regional and national chains, while help expansion into brick-and-mortar continues to gain momentum. We are on track to increase our chain store count by more than 70% during 2026. This reflects, in large part, the strength of our long-term retail partnerships. China placements provide access to a significantly larger consumer base and establish a durable distribution footprint that's necessary to become 1 of the ubiquitously distributed brands in the category. Third, we're putting the infrastructure in place to support that growth. Our investments in sales force expansion, retail execution and domestic manufacturing are designed to support our expanding distribution footprint and improve operating efficiency over time. As we've scaled the distribution, we've continued investing in our sales force to service these new accounts. Our sales organization is critical to executing successfully at retail by ensuring product availability merchandising execution, shelf placement and ongoing customer support. We believe this growth is critical to growing share in the nicotine pouch category and should also benefit Zig Zag and Stoker's going forward. Onshoring the supply chain remains an important driver of long-term profitability and a core strategic priority. As we've mentioned before, we currently expect U.S. manufacturing to commence in 2027. The progress we're making across these priorities reinforces my confidence in our strategy and highlights our ability to execute on the opportunities ahead. As we continue to scale, we're focused on leveraging our expanded distribution footprint and growing brand momentum into sustainable revenue growth and profitability. I'll now turn the call over to Summer to discuss the commercial progress.

Thank you, David, and good morning, everyone. We are encouraged by the progress we are making across our commercial initiatives as we expand the reach of free and out. Our approach is centered on creating a reinforcing cycle of growth, broader distribution increases, consumer access and trial, growing demand drugs repeat purchases and stronger in-store performance and that success creates opportunities for further distribution expansion. We are beginning to see this dynamic take shape across both brands, reinforcing our confidence in our go-to-market strategy. Starting with commercial momentum. Free continues to expand its presence across national retail chains. While also securing broader product assortment within existing accounts. As David said, we are on track to increase our chain store count by more than 70% during 2026. Importantly, we are encouraged by the early performance of free and newly added locations, supported by our expanded sales coverage, merchandising and shelf visibility. For ALP, we're making progress expanding distribution across independent retailers and regional chains with discussions among larger national chains beginning to take shape. Stepping back, we believe the strength of our 2 brand portfolio is an important competitive advantage. Free and out provide multiple avenues to reach consumers, expand distribution and strengthen our overall position in the modern oral category. As we continue building both brands, we believe it's important to evaluate their combined momentum alongside their individual performance. Turning to marketing and brand building. We continue to leverage strategic partnerships product innovation and targeted campaigns to strengthen consumer awareness and engagement across our brands. For free, we are building on our existing TKO partnership to deepen consumer engagement and strengthen the brand's presence at retail. We are now beginning to incorporate partnership branding into our in-store merchandising, creating a more direct connection between our marketing initiatives and the point of purchase. As our brands scale, we are also becoming more selective in how we allocate marketing resources. Programs that were valuable and early awareness may offer less relative impact today as larger opportunities emerge. We are applying those learnings to redirect investment toward initiatives with the greatest expected returns. Across both brands, we're taking a more customer-centric approach to innovation. Through free labs, we're introducing limited edition flavors and gathering direct feedback from adult consumers to help inform future product offerings. Similarly, ALP's new frontier collection introduced 3 of the brand's most requested flavors, supporting a broader marketing campaign. These initiatives reflect our focus on the individual consumer and brand engagement and ultimately our response to evolving preferences. In Zig-Zag, we remain focused on strengthening our core rolling papers business. Accelerating growth in cones and reps and expanding brand relevance and priority markets. Building on the momentum of our Life fast burn slow platform, we're evolving our brand strategy beyond traditional advertising to drive cultural relevance and retail activation through strategic partnerships, targeted media investments and consumer engagement. Our focus is on translating these investments into stronger in-store visibility, expanded distribution and sustainable growth across the portfolio. Let me now turn the call over to Andrew to go through our financial results.

Thank you, Summer. Starting with consolidated results. Net sales were up 27% year-over-year to $151 million for the quarter. Growth was driven primarily by modern oral. Gross profit of $85 million increased 21%, driven by Modern Oral. Gross margin was 56%, which was down slightly versus the second quarter when normalizing for the positive impact of the tariff refund. Reported SG&A was $75 million for the quarter, which was down almost $2 million sequentially. As discussed previously, our SG&A investments are designed to create long-term brand value. As we grow leading consumer brands, investments in our commercial team, marketing, sponsorships and in-store merchandising are critical and flexible. We took advantage of this flexibility in Q3 and scaled back in areas where we thought the returns were inadequate. We will continue to assess the effectiveness of these initiatives and allocate capital towards the highest return opportunities. Conversely, we can scale back spending and redeploy those resources towards the highest return. This flexibility gives us confidence to invest where we see met while maintaining disciplined capital deployment. Adjusted EBITDA was down 41% year-over-year to $18 million for the quarter. The decline was attributed to our strategy to increase sales and marketing investment. Adjusted EBITDA was up sequentially by $3 million or 21% and due to higher gross profit and reduced SG&A. Moving to segment performance, beginning with Stoker's. Stoker's segment net sales increased 52% year-over-year to $114 million for the quarter. The stoker segment accounts for 75% of consolidated net sales. The growth was driven by modern oral nicotine pouch net sales, which increased 103% year-over-year, achieving net revenue of $74 million. Modern oral gross revenue was $94 million, up 114% year-over-year. Performance was driven by continued brick-and-mortar expansion in ALP as well as momentum in large chains for free. For the quarter, modern oral accounted for 49% of consolidated net sales, up from 31% a year ago. Heritage Stoker's Brands net revenue increased 3% year-over-year to $39 million for the quarter driven by continued share growth in MST that was partially offset by anticipated declines in Luseleave. Stoker's gross profit increased 42% to $64 million. Gross margin decreased 416 basis points to 56%. The Zig Zag segment net sales were down 15% year-over-year to $37 million for the quarter. Zig Zag gross profit decreased 16% to $21 million and gross margin was 57%, which was essentially unchanged from last year. On to liquidity and capital allocation. Third quarter free cash flow was $3.5 million and we ended the quarter with $251 million of cash. In the quarter, we repurchased $10 million of stock and continue to take a measured approach to our capital allocation. Now to our guidance. We remain confident in achieving our full year outlook provided on September 21, 2026. Modern oral gross sales guidance is $330 million to $350 million, and our net sales guidance is $260 million to $270 million. We are also maintaining our full year adjusted EBITDA guidance of $70 million to $80 million. We continue to expect an effective income tax rate between 23% to 26% on a go-forward basis. Fourth quarter CapEx is in line with previous annual estimate of $1 million to $2 million in the fourth quarter, excluding projects related to Modern Oral. In support of our PMTA, we expect to spend roughly $3.5 million in the fourth quarter. 2026 has been the year of building a platform and gaining customer traction. We are encouraged by the results. Many of the investments we've made have been focused on accelerating distribution and gaining customer trial. As our retail footprint expands and sales continue to grow, we expect our cost to be leveraged through a larger revenue base. With that, I'll turn it over the operator to begin questions.

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

Yes. I appreciate the time here, another solid quarter. So my first question, just on the net revenue guidance for modern oral implies sequential growth into Q4 could range from a slight decrease to a slight increase from Q3 levels. So just a couple of questions there. Just hoping if you can help us kind of unpack that what sort of is implied in that range? What are the dynamics you're seeing across your channels? And then for the brick-and-mortar distribution rollout for free and out, what inning are we in for both of those brands? .

Sure. So I would say, take it a step back. Nothing is changing in what we're seeing with the modern oral business. We continue to see strong consumer adoption, I think, across the different data that we track our sales to wholesale, wholesale sales to retail and then consumer pull from retail, we continue to see strength. So nothing has really changed in the trajectory. We updated the guidance, as you know, on September 21. And so we don't have a lot of additional transparency since then, I think as you know, the cadence of the revenue throughout the quarter tend to be somewhat back-end loaded. So I think we are optimistic, but just don't have a lot of additional data since September 21.

On the brick-and-mortar side, Eric, I would just add, Eric, on the brick-and-mortar side in terms of the innings that we're in, I think we're in early innings for both brands. As you heard David and I both mentioned recent retail wins are looking really positive. And we sort of see that continued confidence toward increasing more than 70% in terms of our chain store count by the end of the year. So pipeline remains strong, but I think we're in early innings for both brands, obviously, a little bit further on free in terms of retail distribution, but still plenty of room to go.

All right. Great. It's all very encouraging to hear. Momentum is continuing here. And then domestic manufacturing. So we've seen some manufacturing start-up costs added back to EBITDA each quarter this year. David, you mentioned that you're looking to start in 2027. Just wondering if you have any more color that you can add to some of the investments that you've been making and if there's any sort of sharpening in that potential time frame of when you guys could start ramping? .

Yes. Great question. Obviously, we're eager to get going because we do think this is an initiative that has a resumption to drive a lot of profitability and improve the margins. What I would say, and I think we've communicated this before, is we are somewhat dependent on the FDA and the timing of the PMTA approval for when we can add a new manufacturing facility. One thing to note, though, is we are not sort of sitting on our hands during this interlude. We're continuing to upgrade the facility. In fact, recently, we've taken an initiative to add some equipment that should lead to even greater efficiencies going forward. So while we want to get going as quickly as possible, and we don't have great line of sight into sort of an exact date when that will be possible. We are not sitting on our hands in the interim. I think we're continuing to put ourselves in an even better position from when we are able to flip the switch.

Your next question comes from the line of Aaron Grey with AGP, Alliance Global Partners. .

Good morning. Thank you very much for the questions. First question for me. I just wanted to talk a bit more about potential key wins and distribution gains as we look to 2027 and how that might differ for free versus out at free, you what you might be more so focused on national for incremental wins and out more so on independents and regional. So just if you could frame out just given the differences in terms of the channels that you're focusing on for incremental distribution games. How should we think about the timing of when those wins might come in, whether or not 1 more dependent on spring shelf resets or 1 is just like kind of ongoing? Any color there would be helpful.

Sure. Thanks, Aaron. So I think the way to think about this is that help launched online, free launched in brick-and-mortar. So free is ahead of out in terms of the cadence of its brick-and-mortar rollout and therefore, it's also ahead of help in terms of the cadence of its chain negotiation. So what we're seeing for free right now is really it's starting to deploy into the chains that it's won over the course of the last year. And 1 of the things that I think is sometimes frustrating to investors and frustrating to us as well as even when you win a chain, they don't they don't really tell you exactly when they're going to put your product on shelf, right? We kind of talk about the spring reset, that's really when the deals are negotiated when they're actually rolling you out to how many of their stores, they're rolling you out, there's still some squishiness in that. So -- but what you see right now with free is free starting to be deployed in those chain accounts that it won earlier this year. ALP is really attacking the independent brick-and-mortar ecosystem right now sort of equivalent to what free may have done earlier last year. And ALP is now starting to have those chain conversations. So it can try to win chain placement in that spring reset. And I would say the early indications from those conversations are positive. So I think if you roll the tape forward, hopefully, next year, we're sitting here, freeze got pretty wide distribution in all of these chain accounts that we won this year. Alp's got a bunch of wins and starts to be deployed into those accounts that it negotiates deals for in the spring. That make sense?

No, that was great color. I appreciate that. Second question for me. Great to see the continued momentum on distribution gains. I wanted to also just maybe talk about velocity trends in current and legacy stores. Any color you can provide in terms of repurchase rates and kind of sell-through at existing or longer-term orders and how that might differ between free and Alp I understand your alp is a little bit newer in terms of brick i-motar stores.

Yes. Look, I think we're pretty encouraged by the velocity that we're seeing in both, right? It's a little bit of a complicated metric, right, because you don't have the same number of SKUs, the same number of flavors and so forth in every store. And so when we look at the velocity metrics, we're really looking at it on a store basis, but then you have to drill 1 level deeper and say, well, which exact SKUs do we have in that store right? So I think what we're seeing, not surprisingly, is in the stores where we have more SKUs, the overall velocity is better. That's true for both free and ALP I think, again, encouraging for both brands, I would say, the early the early indications and data that we have with the ALP brick-and-mortar rollout, again, predominantly into independents is, I would say, is meeting or exceeding our expectations. Do you want to add anything to that summer?

I think that was great color. As David mentioned, when we have more SKUs, I think we see better velocity for both brands and encouragingly in many of the chain accounts that we started in where we had less of an assortment, our progress and momentum from both a velocity and share performance perspective has afforded us the opportunity to increase our assortment over time. And I believe we'll continue to see that as we head into 2027.

Your next question comes from the line of Ian Zaffino with Oppenheimer.

I just wanted to go back to the guide on modern oral for the fourth quarter. Is there any seasonality or anything we need to take into account for? I mean this business has been growing sequentially for a long time? And then I guess the guide really does assume a whole lot, especially on the net side at the high end. So is there like a seasonality going on? Do you have some large chains where you have incremental slotting fees? And I get that you gave guidance in September, but I would imagine you have had data, we got ourselves since then, so I'm just curious in why we're sticking with this guidance? Is there something that you're seeing out there that worries you? Or is this just naturally being conservative? I mean you guys have been conservative assistant. So I'm kind of leaning towards that, but wanted to hear kind of your thoughts.