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

Thank you. Good morning and welcome to the Turning Point Brands' second quarter 2026 earnings conference call. All participants will be in listen-only mode. All lines have been placed on mute to prevent any background noise. If you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. 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.

Good morning, everyone. Earlier today, we issued a press release covering our second quarter results, available in our investor relations section of our website at www.turningpointbrands.com. 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, disclosure, and risk factors in our press release and SCC 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, Grant Purdy.

Thanks, Andrew. Good morning, everybody, and thank you for joining our call. we delivered another quarter of strong execution in Modern Oral, with gross and net sales up 149% and 128% year over year, and 26% and 32% sequentially. Growth was driven by our continued focus on expanding retail distribution for both free and ALP and our direct-to-consumer platforms. Our performance versus the market proves that both brands are resonating with adult nicotine consumers. Our investments continue to strengthen our competitive position and drive market share gains. In the quarter, Modern Oral accounted for 48% of our total revenue, up from 26% in Q2 of 2025. We were pleased by Stoker's tobacco results and early customer response to the launch of our new Stoker's Proud MST product earlier this year. We believe Stokers will continue to gain share as the segment's only truly premium product for value-oriented consumers. Performance across Zigzag was in line with our expectations. We are sharpening our new product pipeline to better reflect evolving consumer preferences and leveraging our growing sales force to expand distribution. These initiatives have helped stabilize our heritage businesses and position them for long-term growth. In the near term, these businesses continue to contribute strong cash flow, which we are investing to accelerate growth in modern oral. Last quarter, we discussed the generational opportunity Marlboro Oil represents as nicotine consumption shifts away from cigarettes. Our priorities for 2026 remain centered on the initiatives we believe will have the greatest impact on building scaled, profitable nicotine pouch businesses. These strategic actions, despite near-term zoning pressure, are critical to capturing meaningful share in this evolving high barrier category. First is accelerating customer traction. We are seeing positive results across both free and out. Summer will expand on wins, supporting both awareness of our products, and customer acquisition. Second is growing distribution. As previously mentioned, we expect our chain store count to increase 70% year-over-year by the end of 2026 as a result of our strong chain store conversations. Working alongside these retailers, we have established distribution plans for these new placements. As is typical with national chain accounts, shelf resets can have long lead times, meaning our products will be added to stores incrementally over the next several quarters. Notably, shelf resets have begun with numerous new large retail accounts across the country. which we expect to largely fulfill through the balance of the year. Third is building and scaling our infrastructure. As we've scaled the distribution of our brands, 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 are on pace to increase our sales force by approximately 50% this year, making strong progress towards building the right sales force that can best capture the nicotine pouch growth opportunity and maximize performance at Zigzag and Stokers. After this initial build-out, we'll be able to further scale without comparable increases in SG&A. Subject to regulatory approval, we are on track to launch U.S. manufacturing by the end of the year. which we expect to significantly reduce COGS over time. Once fully scaled, we believe we can achieve gross margins of approximately 70%. Our results continue to reinforce our disciplined capital allocation strategy. We are directing capital and commercial resources towards the brands and categories with the greatest long-term value creation potential, particularly modern oral. The investments we've made over the past several quarters in free and ELB are already contributing meaningful to our top-line performance and should accelerate earnings growth over time. These foundational investments position us to capture meaningful market share and create sustainable shareholder value as the category continues to develop. With that, I will hand the call over to Summer to walk through the progress of our key go-to-market initiatives.

Thank you, Graham, and good morning, everyone. Our growth strategy has been consistent. Invest for the long term, build durable brands, and scale alongside consumer demand. We are encouraged that our investments are translating into tangible results. Each new retail win expands consumer reach and first-time brand trial, while stronger demand supports additional distribution and greater scale. Together, these advantages will reinforce one another and create a growth platform we believe will compound over time. I'd like to begin with our commercial momentum. As we highlighted last quarter, our sales organization is now selling both out and free. Holding on the success of ALP's direct-to-consumer performance, we're seeing positive retail response and evidence of pent-up consumer demand for ALP. Additionally, we've taken early steps to grow internationally through a phase expansion into select European markets. as with any new market, will remain disciplined in our approach while continuing to evaluate the opportunity thoughtfully. We believe these efforts further strengthen our long-term growth platform. Moving to brand building initiatives, our partnership with TKO has driven success across several early indicators of brand awareness and consumer engagement. To extend that momentum into retail, we've begun introducing UFC co-branding in stores, helping to bring the partnership directly to consumers at the point of purchase. Across our portfolio, our investments remain intentional and focused on strengthening long-term brand value. In ZigZag, we're deepening engagement with existing consumers while expanding brand awareness in under-indexed markets. Our recent Life's Fast, Burns Slow campaign reflects our ability to connect with today's consumers while remaining true to the heritage that has defined the brand for generations. These efforts contributed to our strongest 420 weekend in ZigZag's history, demonstrating that thoughtful and strategic brand investment can drive increased engagement. Overall, we're encouraged by the progress we're seeing across both retail expansion and brand building initiatives. While we're still early in our journey, initial results reinforce our confidence that nicotine pouches can become a significant long-term growth driver for Turning Point. we now turn the call over to Andrew to go through our financial results. Thank you, Summer.

Starting with consolidated results, sales were up 23% year-over-year to $143 million for the quarter. Growth was driven primarily by modern oral. In the quarter, we received a tariff refund that had a positive impact on gross profit. As reported, gross profit was 94 million. Adjusting for the out-of-period COGS related to tariff refund, gross profit was 81 million, which is an increase of 22% versus a year ago. The increase in gross profit dollars was driven primarily by modern oral. Adjusted gross profit as a percent of sales was 57%. Report SG&A was 77 million for the quarter, which was up 21 million sequentially. 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, yet highly flexible. This flexibility gives us confidence to invest where we see momentum and incremental opportunity. As our retail footprint expands and sales continue to grow, we expect our costs to be leveraged over a larger revenue base. Adjusted EBITDA was down 50% year-over-year to $15 million for the quarter at 11% margin The decline was attributed to our strategy to increase sales and marketing investment and softness in ZigZag, partially offset by accelerated growth in Modern Oral. Stoker's segment net sales increased 55% year-over-year to $108 million for the quarter. The Stoker's segment now accounts for 75% of consolidated net sales. The growth was driven by modern oral nicotine pouch net sales, which increased 128% year over year, achieving net revenue of $68 million. Gross revenue was 87 million, up 149% year-over-year. This performance was driven by both growth in e-commerce and brick and mortar sales. For the quarter, Modern Oral accounted for 48 percent of consolidated net sales, up from 26% a year ago. Heritage Stoker's Brands net revenue decreased 1% year-over-year to $39 million for the quarter, driven by continued share growth in MST that was partially offset by anticipated declines in loose leaf. Stoker's as reported gross profit was 71 million. On an adjusted basis, Stoker's gross profit increased 41% to 61 million year over year, with gross margin down 600 basis points to 57% due to higher chain penetration. Zigzag segment net sales were down 4% sequentially to $35 million for the quarter. Zigzag gross profit was $23 million. adjusted gross profit was 20 million, which is 57% of net sales, which is flat on a sequential basis. Second quarter free cash flow was $26 million and we ended the quarter with $268 million Pre-cash flow was positively impacted by a tariff refund of $18 million. In the quarter, we raised $60 million of equity to support long-term strategic objectives within Modern Oral. We are raising our full year 2026 modern oral growth sales guidance to 330 to 350 million from 280 to 300 million and raising net sales guidance to 260 to 270 million from 210 to 225 million. We are maintaining our full-year EBITDA guidance of $70 to $90 million, inclusive of increased nicotine pouch investments. Budgeted 2026 CapEx remains $4 to $5 million, excluding projects related to Modern Oral. Our pending PMP application is progressing well and remain in process with the FDA. Although the process can be resource-intensive and timing can be uncertain, we have the expertise to succeed in dynamic regulatory environments. In support of our PMP applications, we expect to spend an additional $3 to $5 million in 2026.

Now let me turn it over to Graham. Thanks, Andrew. We continue to believe we are in the early innings of a generational shift in nicotine consumption And each quarter reinforces our confidence and our ability to compete and win in this evolving category. And with that, I'll now turn it over to questions. We will now begin the question and answer session.

limit yourself to one question and one follow-up. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star 1 again. We ask that you pick up your handset when asking a question to allow for optimal sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Eric Delorier from Craig Hallam Capital Group. Your line is now open. Please go ahead.

Great. Thank you for taking my questions. Congrats on another very impressive quarter here, especially on the top line for nicotine pouches. I mean, certainly clear that these growth investments are paying off. My first question here, just wondering how the conversations with C-Store chains are progressing, obviously, you know, several significant winds evidence in Q2. Just wondering how conversations with other chains are going. Do you see potential for additional winds in the second half of this year, or should we be more looking to, you know, kind of the spring times for shelf resets and additional for additional.

additional expansion games. Hey, Eric, thanks for the question. So as we've shared, we had some really great progress. in the spring with many, many of the large chains in our network. As you can imagine, and as the category is growing, those conversations with other chains that maybe didn't come on board in the spring will continue into the fall, which is typically when these reset seasons sort of pick up again. So I anticipate that we'll continue continue to have strong conversations in the fall and bring out into those conversations at that time as well. All right, that's great. And then my follow-up.

Could you just kind of touch on the timing or outlook for potential domestic manufacturing? Do you still see this as... you know, kind of tied to PMTA or needing to wait to hear from the FDA first, just any.

kind of commentary on how you're looking at domestic manufacturing would be helpful. Thank you. Yes, look, there's a couple of pieces to this equation. First and foremost, as we've mentioned on last calls, it was laying down the infrastructure in the U.S. You know, to be able to tap domestic manufacturing when the timing was right. You know, we've also mentioned, Eric, in the past that, you know, that there is a regulatory aspect to qualifying your U.S. manufacturing. And so we're just being mindful of the process and, you know, dedicating ourselves to to the PMTA sort of first and foremost in preparing the company, you know, to a place where, you know, as we get some positive of outlook there we're able to move quickly on domestic production.

Awesome. That's helpful, Kohler. Well, congrats again on all the progress, guys, and good luck going forward.

Thank you. Thanks, Eric. Thanks, Eric. Your next call comes from the line of Ian Zafino from Oppenheimer. Your line is now open. Please go ahead.

Hi, Greg. Thank you very much. Just trying to understand some of the puts and takes in the guidance. Obviously sales of Modern Oral is doing much better than expected, but then when I look at the EBITDA, roughly flat. maybe help us understand what the driver of that is. Is that just increased slotting fees? Because it seems like maybe things are going better than expected and you're having to pay higher slotting fees initially. Is that TKO, Salesforce? Maybe help us understand that. And then how do you then feel about leverage of a lot of those expenses going into the second half of the year as revenues ramp up. Thanks.

Thanks, Ian. So we are investing in durable brands, as we've mentioned in the script and as we've mentioned previously, and that is going to depress our earnings temporarily as we have these high costs. related to sales and marketing. We're confident in the EBITDA guidance that we've given. And as you've noted, over time, we anticipate EBITDA will grow as we mature in marketing and these sales investments.

Okay, thank you. And then, you know, when we think about domestic production, in the changing kind of tariff environment, where are we now as far as the savings? You'd realize onshoring the production versus kind of keeping your manufacturing production.

as it is now. Thanks. Yes, so as as we've discussed previously, We are in the midst of the PMCA and we have made progress here. and we're in good shape in terms of being able to ramp up as we progress through the PMTA process. Okay, and then one more. Yes. Yes. And then over the long term, our long term gross profit potential with US manufacturing, we are anticipating 70% gross profit margins.

Okay, perfect. Then I'm just squeezing in one more. The international kind of piqued my interest here. Maybe help us understand your go-to-market strategy there. I'd imagine you're not going to do a Folsom Salesforce there, maybe use more influencers, but,.

maybe give some color on the go-to-market strategy. Thanks. Yes, you're spot on with that. Um, you know, we view the international opportunity. I think, uh, the market saw the press release from ALP as they move into the EU. Much different than the US footprint in terms of how we We find partners internationally to take sort of the regulatory burden as well as the sales burden off of our shoulders. So there are no plans to ramp up a sales force in any country outside of the United States at this point in time.

Your next call comes from the line of Aaron Gray at Alliance Global Partners. Your line is now open. Please go ahead.