Participants

Andrew Flynn; Chief Financial Officer; Turning Point Brands Inc

Graham Purdy; President, Chief Executive Officer, Director; Turning Point Brands Inc

Summer Frein; Chief Revenue Officer; Turning Point Brands Inc

Eric Des Lauriers; Analyst; Craig-Hallum Capital Group

Ian Zaffino; Analyst; Oppenheimer & Co. Inc.

Nicholas Anderson; Analyst; ROTH Capital Partners

Aaron Grey; Analyst; Alliance Global Partners

Presentation

Operator

Thank you for standing by. My name is Kathleen, and I will be your conference operator today. At this time, I would like to welcome everyone to the Turning Point Brands fourth-quarter and fiscal-year 2024 conference call. (Operator Instructions)
And now I would like to turn the call over to Andrew Flynn, CFO, Turning Point Brands. Please go ahead.

Andrew Flynn

Good morning, everyone. A short while ago, we issued a press release covering our Q4 results. This release is located in the IR section of our website at www.turningpointbrands.com. As you're aware, this release followed an 8-K issued February 10 that included some preliminary financial metrics.
During this call, we will discuss our consolidated and segment operating results and provide some perspective on the operating environment and progress against our strategic plan. As a brief reminder, we deconsolidated our CDS segment and is now classified as discontinued ops. This change is reflected in our financials and the consolidated results that we will be discussing today.
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 our CEO, Graham Purdy.

Graham Purdy

Thanks, Andrew. Good morning, everyone, and thank you for joining our call. Our consolidated fourth-quarter results were better than expected and demonstrated continued progress against our plan. Revenue increased 13% to $93.7 million for the quarter. Adjusted EBITDA increased 5% to $26.2 million for the quarter.
Recall that in early January, we announced the divestiture of our CDS business. These results are now classified as discontinued and excluded from our consolidated financials and any guidance going forward. We think the transaction best positions management to focus on the exciting growth opportunities in our core business.
Adjusted EBITDA for the full year increased 12% to $104.5 million, at the high end of the preliminary range of $103.5 million to $104.5 million provided on February 10, and above our prior increased range of $101 million to $103 million provided with third-quarter results. We are pleased with our results for both Q4 and full year 2024, and we are excited about the momentum we are seeing across the organization.
We are initiating 2025 adjusted EBITDA guidance of $108 million to $113 million. This reflects continued growth of our Zig-Zag and Stoker's businesses as well as significant acceleration of growth of our modern oil brands FRE and ALP, which we expect to generate $60 million to $80 million of combined revenue in 2025. Our EBITDA guidance includes meaningful sales and marketing investments to support our ambitious growth plans.
Going forward, we will discuss our modern oral business on a combined basis for financial reporting and guidance purposes. Our adjusted EBITDA guidance reflects our pro rata 50% share of ALP's economics. We expect both brands to play key roles in achieving our long-term goal of 10% market share of the modern oral category.
During the fourth quarter, Zig-Zag revenue was up 2%. Excluding Clipper, it was up 4%. We have a promising lineup of Zig-Zag growth initiatives for 2025, that should help deliver another year of solid segment growth. We remain bullish on the convergence of distribution channels for smoking accessories, which provides an opportunity for us to leverage our diverse SKU portfolio to offer customers a one-stop shop for all their needs.
It's also worth reiterating the valuable cross-selling opportunities across our ecosystem as customers onboard modern oral products alongside the Zig-Zag portfolio. Nearly 75% of all Americans now live in a legal regulated medical cannabis or adult-use state. And over the past year, we've seen another green wave emerge with the adoption of Farm Bill compliant hemp, which has significantly expanded the TAM.
As an illustration, there are estimated to be 7,000 retail outlets in Texas that now sell hemp-derived products in a state without a regulated cannabis marketplace. This secular tailwind should continue to benefit picks and shovels businesses with must-carry brands like Zig-Zag.
And as mentioned, many of these stores don't sell traditional tobacco products like combustible cigarettes or MST, but they do carry modern oral nicotine pouches. This dynamic should give us a valuable cross-selling advantage in modern oral over time as we continue to build our Zig-Zag distribution and vice versa.
Moving to Stoker's. During the quarter, Stoker's revenue increased 26% to $47.8 million, reflecting flat loose leaf, a 1% decline in MST and $11.2 million in modern oral revenue. Our modern oral business included a 419% increase in free sales off of a low base to approximately $6.3 million for the quarter, which represented both sequential and year-over-year acceleration in sales growth. The balance of the modern oral revenue was from the very successful launch of ALP.
A quick note on MST. As we called out previously, Stoker's MST had very strong quarters in Q4 2023 and Q2 2024. So we anticipated a flat quarter as we lapped a tough comparable of roughly 20% in Q4 last year. Summer will talk more about our modern oral brand shortly, but I will offer the following high-level commentary.
We are very pleased with the launch of ALP Supply Company, our joint venture with the Tucker Carlson Network. There has been significant excitement around the brand and strong reason for optimism. We are somewhat limited in what we can disclose due to our confidentiality obligations.
FRE sales increased 26% sequentially for the quarter. This progress provides further evidence that FRE is winning in the marketplace. Positive consumer feedback has consistently reinforced the brand's positioning, pouch size, flavor, mouth feel and a range of nicotine strengths.
This feedback and strong sales growth, along with initial retail acceptance and reorders have given us increased confidence to further invest in expanding our chain store footprint. This will likely involve investment to secure competitive placement, execute our desired in-store look and feel and participate in loyalty and promotional programs. In Q3, we launched 6-milligram FRE on our website to complement our 9, 12 and 15-milligram offerings. In Q4, we began to expand 6-milligram distribution to retail stores.
With that, let me hand the call over to Summer to walk through the progress of some of our go-to-market initiatives.

Summer Frein

Thank you, Graham. As he mentioned, we made exciting progress in the modern oral category throughout 2024 and during Q4 in particular. Pertaining to FRE, continued positive consumer feedback, strong trade receptivity from prominent chains of which we have long-standing and broad-reaching retail partnerships and increasing reorder and repeat purchase rates at wholesale and online give us confidence to invest behind the brand.
During Q4, we accelerated our investment with chain partners, like our regional introduction to 7-Eleven and began testing expanded sales and marketing initiatives in key markets. As previously discussed, we also expanded our SKU assortment to broaden retail distribution of 6-milligram. We look forward to sharing the ongoing progress throughout this year and beyond.
Turning to Stoker's. We continue to broaden our distribution across the MSG segment and see opportunities to expand the brand and grow with the consumer base looking for a great value. Stoker's continues to benefit from the value offering of a great dip at a fair price, along with our initiatives to drive consumer awareness and loyalty.
With regards to Zig-Zag, we continue to build upon Zig-Zag's 145-year history and celebrated with the launch of our vintage paper booklets line this past quarter. We are continuing to partner with influencers that resonate with our existing and new Gen Z consumers. Further, we will continue to win in the back street with nontraditional customers who are looking to build their Zig-Zag portfolio while also leveraging the opportunity to further ALP's growth, as Graham mentioned.
We continue to see healthy increases in average order sizes while expanding valuable shelf space and merchandising within these stores. In summary, for Zig-Zag, we have a long runway in this channel as cannabis and related products become more mainstream, and we continue to solidify our position as a trusted high-value partner.
Lastly, all of our brands will benefit from our evolving sales organization, which we are scaling to enable enhanced geographical coverage and to support growth for the modern oral category.
In closing, we continue building our brands for the long term, executing against the omnichannel plan we've established, and winning new consumers to add to our growing customer base. We will continue to maximize the value of our world-class brands and strengthen our extensive distribution capabilities.
Let me now turn the call back over to Andrew to go through our financial results.

Andrew Flynn

Thank you, Summer. Sales were up 11% to $360.7 million for the year. For the quarter, revenue was up 13% to $93.7 million. On a full year basis, gross margin was down 39 basis points year-over-year to 55.9%. For the quarter, margin was 56% and down 108 basis points year-over-year. The change in margin is mix driven. As reported, SG&A was $122.4 million for the year and $34.5 million for the fourth quarter, including adjusted items.
For the year, there was an incremental $11.5 million of SG&A-related adjustments. In quarter, these adjustments were $4.4 million. The detail of these adjustments can be found in our press release and the net income to adjusted EBITDA reconciliation. Adjusted EBITDA was up 12% year-over-year to $104.5 million for the year. For the quarter, adjusted EBITDA was up 5% to $26.2 million.
Going into segment performance. Zig-Zag sales increased 7% year-over-year to $192.4 million and up 2% to $45.9 million for the fourth quarter despite pressure from the unwind of the Clipper relationship and timing and FX-related issues in our Canadian business. Gross margins decreased 60 basis points year-over-year to 55.4% for the year and down 240 basis points year-over-year to 54.1% for the fourth quarter. This was driven primarily by product mix.
Stoker's net sales increased 16% year-over-year to $168.3 million in the year, and increased 26% year-over-year to $47.8 million for the fourth quarter. Net sales for the MST portfolio grew 6% year-over-year to $103.3 million in the year, and declined 1% year-over-year to $25.9 million for the fourth quarter. Stoker's MST volume was up 10 basis points despite category volume down 6.4%, with share growing by 50 basis points year-over-year to 7.6% during the year according to MSAi.
Share of in-store selling was up 50 basis points year-over-year to 11.2%, with Stoker's now in stores representing approximately two-thirds of industry volumes, which still provides a long runway for growth.
Stoker's Chewing tobacco was the number-one chewing brand in the quarter, gaining 180 basis points of share to 32.9% according to MSAi. Overall, TPD loose leaf volume was down 1.8%, [beating] category volume declines of 4.4%. Category performance was driven by a larger decline in premium loose leaf with TPD's volumes benefiting from consumer trade down as Stoker's volumes grew from the previous year.
Our FRE sales more than quadrupled year-over-year as we continue our national rollout. Gross margin decreased 20 basis points year-over-year to 56.4% for the year and increased 9 basis points year-over-year to 57.7% for the fourth quarter. This was driven primarily by product mix.
Moving on to the balance sheet. We ended the quarter with just over $46 million of cash. Free cash flow for the year was $56.3 million. Last month, we issued $300 million of seven-year senior secured notes due in 2032, and we called $250 million of notes maturing 2026 with no prepayment penalty. We are well within our previously disclosed net leverage range of 2 to 3 times. In the quarter, we repurchased $880,000 worth of shares as part of our previously announced share repurchase program.
On to guidance and other line items. As we previously noted, we are guiding to full-year 2025 adjusted EBITDA of $108 million to $113 million. We anticipate total modern oral sales of $60 million to $80 million. Our projections anticipate mid-single-digit growth, excluding our modern oral business despite headwinds from Clipper and Canadian exchange rates. Our total adjusted EBITDA range reflects increased sales and marketing investments that will somewhat constrain the rate of EBITDA growth in 2025.
For modeling purposes, the effective income tax range is 23% to 26%. CapEx for full year '24 was $4.6 million. Budgeted CapEx for full year 2025 is $4 million to $5 million, exclusive of any potential projects related to our modern oral business. We expect to spend $3 million to $6 million for the full year depending on the regulatory environment to supplement our modern oral PMTAs, which remain under review by the FDA.
Now let me turn it back over to Graham.

Graham Purdy

To conclude, we are pleased with our 2024 performance, and I'll turn it over to questions now.

Question and Answer Session

Operator

(Operator Instructions) Eric Des Lauriers, Craig-Hallum Capital Group.

Eric Des Lauriers

Congrats on the very strong results. In terms of modern oral, could you just talk about the outlook for getting into national C-store chains this year, maybe expectation of number of C-store chains or timing?

Summer Frein

Eric, this is Summer. As you know, about 70% or so of the category is sold through chain convenience. And that's where the majority of the business is done. And as you know, that particular set of stores moves a bit slower in terms of their scheduled planogram cycles and that thing. So we are currently in discussions with many of those partners have long-standing relationships with them.
And as you heard in the call, we recently rolled out a regional partnership with 7-Eleven. We're encouraged by those early results and plan to continue that progress throughout the year and are making great traction there.

Eric Des Lauriers

All right. Great. That's helpful. And then just a follow-up for me. In terms of Stoker's MST, the one-third of stores by volume that remain for you guys, is there an opportunity to expedite the growth in distribution now that you have such a strong modern oral product here? And can you just talk about what overlap there might be in terms of that one-third of stores that you're not in and the stores that you're either targeting with modern oral or already in with Zig-Zag? Thank you.

Graham Purdy

Yeah. So the -- we think that the portfolio of our oral nicotine products is going to be highly synergistic between MST as well as modern oral. And as Summer just mentioned, the chain accounts are really the thrust behind the modern oral category in the early days. I think that, that presents a great opportunity for us. And from a cross-selling standpoint as we hit the chains with modern oral to really backstop that with a discussion around MST.

Eric Des Lauriers

Congrats again on the strong results.

Operator

Ian Zaffino, Oppenheimer.

Ian Zaffino

Great visibility and guidance on the modern oral. So thank you for that. Maybe help us understand what's driving that guidance? How do we think about, let's just say, FRE versus ALP's? How do we think about 3s and 6s versus your higher nicotine level pouches? Maybe more of a general discussion on what's driving that?

Graham Purdy

Yeah. Look, I think the -- our guide is informed by two specific areas. We expect continued growth around FRE. And based on early reorder rates with our customer and the visibility that we have through our online B2B or B2C businesses. So I think we've taken the experience that we've learned from FRE, and we're thinking through ALP in terms of their route to market.
And it's just early innings at this point in time. Obviously, we launched -- ALP launched in late Q4. And so it's really early to project exactly where we think that can be. But at the same time, we think the two products are highly synergistic for us and really speak to the entire market from a consumer standpoint. And so we're very bullish on our outlook to cast a wide net and gain consumers.

Ian Zaffino

Okay. Great. And then can you maybe talk about the contribution margin on that revenues? And maybe what would be the components to get there? And what I mean by that is are there slotting fees that you're going to pay? I know there's obviously scale as the business starts scaling up, the contribution margin gets higher. But how do we think about that in general?
And then when we think about your manufacturing footprint, is there a reason to maybe onshore some of the production? Does it make sense to keep it out of the country, just given that the political environment? Thanks.

Andrew Flynn

Hi Ian, Andrew here. So first off, as it relates to modern oral, what we're seeing is gross profit margins in the mid-30s. And our plan is to reinvest some of those profits back into the business to help support the sales and marketing team to broaden our reach, not only for the benefit of modern oral, but also for the other products that we carry.
In terms of slotting fees and getting into some of these chain convenience, that is something that we are attuned to, and we're looking at multiple different opportunities around that. And so that's the story on modern oral.
And as it relates to US manufacturing, we're considering all options in terms of how we grow this business, which includes enhancing our supply chain and also considering US manufacturing.

Operator

Nick Anderson, ROTH Capital Partners.

Nicholas Anderson

First one for me, just on the FDA and the potential rule capping nicotine levels for combustion products. It seems like the regulators are focused on the harm reduction initiative more and more here. How do you view that playing out? And what do you think this means in general, just for the future in terms of regulatory landscape around nicotine-based products? Thank you.

Graham Purdy

Yeah. Look, I think the only certainty that we have at this moment in time is that the agency has taken a stance on a product in the category. We see that as a very bullish sign, frankly, with ZYN receiving the marketing authorization. I think it's very interesting to point out that it was a full range of products that were approved to include flavored products. So I think that we're excited about the way that the agency appears to be viewing this particular category.
We don't have any perspective right now on the nicotine strengths. We maintain that we've done our work with our filings. We continue to be invested behind the wide range of nicotine strengths. So at this point in time, we're -- that's not a particular concern of ours.

Nicholas Anderson

Okay. I appreciate that color. Second one for me. I just wanted to follow up on modern oral. Wondering if you could provide your sense just for the direct-to-consumer opportunity within the nicotine patch category? Just from an overall market standpoint, given the strength within the millennial demographic and just their tendency to shop online, how do you view the brick-and-mortar mix versus online playing out as the category grows here?

Graham Purdy

Yeah. To me, that's a great question. I think that there's a level of dependency on route to market relative to our two brand properties. As you can imagine, the core of Turning Point Brands is bricks and mortar and our ability to get into convenience stores throughout the country. That's -- we've certainly been on that product line with FRE throughout 2024.
As it relates to the ALP opportunity, for confidentiality purposes, we can't speak too specifically about their route to market. But as you can imagine, given the audience size and the demographic that you had mentioned that we feel very strongly that there may be an outsized opportunity from an online perspective based on some of the underlying dynamics with that brand and how it's being marketed.

Nicholas Anderson

Great. Congrats on the quarter.

Operator

Aaron Grey, Alliance Global Partners.

Aaron Grey

Congrats on the quarter, guys. First question for me, just wanted to -- of course, I just want to double back on modern oral. Instead on distribution, more so on the marketing between the two brands, FRE and ALP. Just any color you could provide in terms of how you're looking to market between the two? You just referenced now between maybe more of a focus for online for ALP, maybe implying more brick-and-mortar for FRE. So how exactly you're planning for the marketing that coincides with that and the investments you're planning to make? Thank you.

Graham Purdy

Yeah. Let me just double back really quickly on a point you just made. Look, I think that there's going to be a wide opportunity in bricks and mortar across all of our brand properties. I was really referencing the early innings launches of -- between the two properties where the strengths of the organization may lie. From our standpoint, ultimately, we see multiple brands underneath our portfolio of products as an opportunity to cast the widest net possible to speak to all consumers across modern oral.
And if you think aboutthe projected category growth over time, there will be more new consumers entering the category over the long haul than exist today. And we think having those multiple properties give us the best possible option to reach those consumers.

Aaron Grey

Okay. Great. Thanks for that commentary. Second question for me, just on Zig-Zag, right? So you talked about some of the drag that you had there from Clippers that shifted away. But as we think about the gross margin profile, it was down a little bit in the quarter. You called out mix. I just want to dive a little bit deeper into that in terms of how you're thinking about Zig-Zag for 2025, both in terms of sales?
You alluded to growth for the brand despite the drag Clippers. And then also how we should think about the gross margin profile there?

Graham Purdy

Yeah, sure thing. So in terms of growth, our thinking hasn't really changed. It's mid-single-digit growth. And like we said, we will be investing in the sales team to broaden our reach across all stores. In terms of the margin profile, what we've seen is a mix shift into some lower margin product categories. And I would anticipate that, that would continue as we -- and we will also be leveraging our fixed cost basis. So from an op income percent basis, we'll see somewhat moderated growth or margin impact in the next year.

Operator

And that concludes our Q&A session. I will now turn the conference back over to Graham Purdy for closing remarks.

Graham Purdy

Thanks, operator. I appreciate everybody joining the call today. It's exciting 2024 for us, and we look forward to speaking to you all on the Q1 results here in the next couple of months.

Operator

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