Turning Point Brands, Inc. Q4 FY2025 Earnings Call

Good morning, and welcome to the Turning Point Brands Fourth Quarter 2025 Earnings Conference Call. 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 fourth quarter results, available in the 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 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, Graham Purdy.

Thanks, Andrew. Good morning, everyone, and thank you for joining our call. We are pleased with how the year wrapped up and the momentum we built for 2026. Revenue increased 29% to $121 million for the fourth quarter, including $41.3 million in Modern Oral net revenue. Adjusted EBITDA increased 14% to $30 million for the quarter. We are initiating 2026 Modern Oral gross revenue guidance at a range of $220 million to $240 million and Modern Oral net revenue at a range of $180 million to $190 million. As we've stated in the past, we are ready, willing and able to increase our investment behind our white pouch brands and expect a portion of that investment to be accounted for as contra revenue under GAAP. Accordingly, we think it's valuable for us to provide transparency into the difference between gross and net to evaluate our progress over time. Our focus is on building lasting consumer relationships that require front-loaded investment. Once consumers enter the franchise, we tend to see consistent repeat purchasing that supports revenue over many years. While this category is still in the early stages, we believe the average consumer's lifetime value could last decades. In addition, we expect first quarter 2026 consolidated adjusted EBITDA to be between $24 million and $27 million. We are currently working on several significant and exciting sales and marketing initiatives and investments for white pouch, which make it difficult to accurately project EBITDA beyond Q1. Obviously, when looking back at 2025, we are most pleased with the growth of our white nicotine pouch brands. Their long-lasting vibrant flavor options, comfortable mouth feel and flexible nicotine levels continue to resonate with consumers. Both FRE and ALP have cultivated strong brand identities that resonate with their respective consumer bases. During the quarter, net white pouch sales increased by 266% year-over-year, and gross sales increased 337%. We continue to make progress expanding freeze distribution to large regional and national c-store chains. ALP, already one of the top direct-to-consumer pouch brands in America, has started to appear on brick-and-mortar shelves in select retailer tests. Recall that we initially expected ALP to be exclusively direct-to-consumer for all of 2025. Suffice it to say, we are pleased ALP is running ahead of schedule, and we expect to expand brick-and-mortar distribution significantly during Q2. We believe the nicotine pouch space, like most other nicotine businesses, will ultimately feature five to six widely distributed brands that command most of the market. Analysts' expectations for the size of the category differ, but the most believable approach could exceed $10 billion in manufacturers' revenue by the end of the decade. Our Q4 performance and sales growth trajectory support our long-term target of double-digit market share in the category. To best position the company to capitalize on this multibillion-dollar opportunity, we have made and will continue to make significant investments in the business and refine our route-to-market strategy to prioritize FRE and ALP while continuing to generate strong cash flow from our legacy brands. Key investment initiatives include reallocating sales and marketing resources, increasing the headcount of our sales force, improving our online presence, ramping up investment in chain accounts, pursuing brand-enhancing partnerships, expanding to international markets, and building out U.S. manufacturing for our white pouch brands. We are pleased with our progress on the manufacturing front and expect to qualify the first production lines at our new factory over the next several months. We've been particularly encouraged by our ability to identify and onboard new sales talent. We are ahead of schedule in our goal of doubling the size of our sales force. The rest of the Stoker's segment portfolio also performed better than expected in the quarter. Overall, Stoker's net revenue increased 70% to $81 million, reflecting a 9% increase in our legacy brands and the aforementioned 266% increase in Modern Oral revenue. During the fourth quarter, Zig-Zag revenue was down 13% to $40 million and 9% sequentially. This decline was as anticipated and in line with expected opportunity costs with our laser focus on Modern Oral. With that, I'll hand the call over to Summer to walk through the progress of our key go-to-market initiatives.

Thank you, Graham. As he noted, we continue to make significant investments to support our go-to-market strategies, prioritizing FRE while also maximizing the cash flow from our legacy brands. Throughout the quarter, we continued to expand our efforts and initiatives to support the growth of FRE, focusing on sales and marketing. We remain committed to optimizing our approach to expand distribution, improve brand merchandising, and ensure adequate inventory conditions. We are seeing the early benefits of the new sales and merchandising tools referenced in prior quarters, which enable our sales team to secure the ideal assortment, establish shelf space, and execute a premium look and feel at retail. We finished 2025 strong with our continued progress in large-scale chains and look forward to sharing further progress throughout 2026. We were grateful to have recently spent time with some of you at the sold-out Professional Bull Riding event in Madison Square Garden. These events are high-octane and nationally televised, providing a unique opportunity to engage with our consumer base and build brand awareness. We look forward to sharing other opportunities that we're exploring, which align with FRE's 'Own Your Edge' tagline and brand ethos. Regarding Zig-Zag, we continued executing product, retail, and cultural initiatives that build upon our 145-year legacy and strengthen our premium position across the segment. During the quarter, we advanced the rollout of natural leaf flat wraps, expanding distribution and awareness in this fast-growing tobacco segment. We also supported the trial of our legacy paper products through targeted regional programs and sampling tied to major sporting weekends in key markets. We continue to advance the brand's evolution into a lifestyle platform with new apparel lines and culturally relevant brand activations that embody Zig-Zag's 'life fast, burn slow' ethos. In the quarter, we also had some exciting news from Stoker's with the launch of a new flanker brand, Stoker's Proud. Stoker's Proud offers traditional long cut while delivering the same 100% American-made quality dip that Stoker's is known for. It's designed to attract value-seeking consumers while insulating the broader brand from category pricing pressure. We'll share more about this expansion in coming quarters. In closing, we continue to build our brands for the long term, execute and deliver against our omnichannel plan, and win consumers. Our focus is to prioritize strategic investments that maximize the value of our world-class brands and further strengthen and leverage our distribution capabilities. Let me now turn the call back over to Andrew to go through our financial results.

Thank you, Summer. Sales were up 29% year-over-year to $121 million for the quarter. Growth was driven primarily by Modern Oral, while we continue to invest in sales and marketing to support that expansion. For the quarter, gross margin was 55.9%, which is flat versus last year. Reported SG&A was $47.7 million for the quarter, which was up $3.1 million sequentially. The increase is driven by our planned commitment to invest in Modern Oral-related sales and marketing as well as increased outbound freight charges. Adjusted EBITDA was up 14% year-over-year to $30 million for the quarter, at a 24.8% margin. Now on to segment performance. Zig-Zag segment net sales were down 13% year-over-year to $40 million for the quarter, which was in line with our expectations. For the quarter, Zig-Zag gross margin was 54.6%, which was up 40 basis points versus last year. Stoker's segment net sales increased 70% year-over-year to $81 million for the quarter. The Stoker's segment now accounts for 67% of consolidated net sales. Legacy Stoker's brands increased by 9% year-over-year to $39.7 million for the quarter, driven by continued share growth in the moist snuff tobacco category, partially offset by anticipated declines in loose leaf. Modern Oral nicotine pouch net sales for FRE and ALP were up 266% year-over-year, achieving total revenue of $41.3 million. For the quarter, white pouch now accounts for 34% of consolidated net sales, up from 12% a year ago. We ended the quarter with $222.8 million of cash. Free cash flow for the fourth quarter was $19.2 million. CapEx for the quarter was $3.3 million. On to guidance and other items, as previously noted, we are initiating full year 2026 Modern Oral gross sales guidance of $220 million to $240 million and net sales guidance of $180 million to $190 million. We expect first quarter 2026 EBITDA of $24 million to $27 million, inclusive of increased white pouch sales and marketing investments. For modeling purposes, the effective income tax range is 23% to 26% on a go-forward basis. Budgeted CapEx for 2026 is $4 million to $5 million, exclusive of projects related to our Modern Oral business. We expect to spend between $3 million to $5 million for the full year to supplement our Modern Oral PMTAs. Now let me turn it back to Graham.

To conclude, we are pleased with our year-end results and excited about our prospects for 2026. I'll now turn it over to questions.

Our first question comes from Eric Des Lauriers with Craig-Hallum Capital Group.

Congrats on another very impressive quarter here. First one for me on the investment opportunity. So you mentioned you're already willing and able to invest in nicotine pouch growth this year. It sounds like you have some investments picking up in Q1 with that EBITDA guide. Just wondering if you could provide a bit more color on the sales and marketing sort of opportunities that you see in front of you right now? And just how we should be thinking about that for this year?

Eric, Andrew here, thank you for the question. Yes, the way we're thinking about the EBITDA guide is that we are investing in sales and marketing. And we're also preparing ourselves for the launch of ALP in brick-and-mortar in Q2, so we'll need to invest dollars upfront in order to have a successful launch in the second quarter.

All right. That's helpful. And then on domestic production, it's nice to hear the progress there. I think you said the initial lines to be qualified in the coming months. Could you just expand on the domestic production outlook for the year? Whether that's how many lines you expect to bring online? Or how do you think about the mix of domestic versus international production and how that should evolve throughout the year?

Yes. So we expect to qualify the lines in the next couple of months. Really, what we've done is we spent CapEx dollars investing in infrastructure of the building in 2025. These are things like HVAC systems, electrical, plumbing, etc. We've got those lines, and those lines are becoming more efficient week by week, so we're encouraged with the progress that they've made. We will continue to use our Indian partner because both brands are growing. So the U.S. will supplement the growth. We believe that between the two locations, we’ll have no supply chain constraints. In terms of margin enhancements, it will take a while to get the inventory out of the U.S. and through our P&L, so we expect to see some green shoots in margin enhancements toward the end of the year. One thing I will say is what we're doing to help with the margin profile is we are very much focused on freight, specifically our inbound freight, as there are some opportunities for us to optimize there, and we've taken advantage of that.

Our next question will come from the line of Ian Zaffino with Oppenheimer.

As far as the investment and the ramp of Modern Oral, what should we expect as far as timing of all this investment? And maybe the better way to ask it is what does that investment look like exiting '26? So how much will it come down? And maybe what are your views on kind of a sustainable rate?

Yes. I think the way we're thinking about it is that the investment will be somewhat lumpy throughout the year. As we see opportunities to invest that we think are high ROI projects, we will do that. So to give you an exact figure regarding investment ratio, I think it's going to modulate quarterly.

Okay. And then would you be able to give us kind of a sense of what to expect as far as the store count ramp for ALP? Should it be similar to what we've seen in FRE recently? Just maybe use that as a benchmark.

Yes. Thanks, Ian. Look, I think that we're, number one, incredibly excited about the ALP launch in Q2. We've laid some groundwork here as of late, and we think we're going to come out of the gate very strong there. As we think about it, we're entering 2026 with a lot of enthusiasm and excitement around both potential for FRE and ALP and really rallying some investment dollars behind that to achieve strong growth. That said, we believe that the store count growth will probably resemble the early days of the FRE launch. As we focus and hone in on areas where we've received free distribution currently, we can round up the portfolio inside of those particular retail stores. We have a specific focus around FRE this year with chain wins, so we're genuinely excited about the opportunities relative to both FRE and ALP.

Our next question comes from the line of Aaron Grey with Alliance Global Partners.

First question for me, just want to piggyback off the last one here and maybe focus more on that free distribution, which you just alluded to there, Graham. So I appreciate the color that you provided on ALP distribution, but for FRE, which has been kind of the main horse for brick-and-mortar distribution. It seems like you still see some opportunities for wins in white space in 2026. So maybe more color in terms of expectations there. And you mentioned some chains, so I know that can be sometimes a big step change, with uncertainty in terms of the timing. So any insights you could share?

Yes. Look, I think there is still a tremendous amount of opportunity in store distribution across both the chain environment and our independent customers. We're seeing green shoots relative to the level of distribution that we have in stores and specifically our share of shelf. What we observe internally shows us what that yields. So it’s not necessarily about raw store count adds; it’s about the maturity of each store that we distribute in and ensuring we are winning inside those specific stores. However, we do expect continued store growth this year. It may be a bit lumpy relative to when chains come online, but we continue to expect an upward trajectory.

I appreciate the detail there. Second question for me, I just wanted to get some clarity on how you’re thinking about innovation in the category—the need to stay ahead on that front as other large players aim to introduce new products, particularly given the FDA's new fast-track PMTA program. I know we've talked about flavors a lot, but it seems like that's a big initiative for some of the larger players. So how are you thinking about innovation in the category? Any insights there would be helpful.

Yes. Look, my first focus is winning with the existing products that we have. We think we have a tremendous edge with our flavor profiles and satisfaction levels within our product. The majority of the category today is sold in the menthol and mint environment. We feel very confident that we adequately cover where the largest portion of the market is. In terms of long-term innovation, as we continue to grow our store count and business, we certainly see opportunities down the road to invest behind additional flavor options. But at this moment, we believe we have a portfolio with both FRE and ALP that we can win with.

Our next question comes from the line of Nick Anderson with ROTH Capital Partners.

First one for me, just on nicotine pouch consumption, it looks like U.S. consumers are using more on a per-day basis than they were a year ago. However, that's still well below some of the more developed international regions. Just curious how you see growth evolving in this industry in the near term? Will it be more from existing consumers using more or new users entering the category? Any insights there would be helpful.

I think the great news is both. As you pointed out, the consumption patterns of existing consumers continue to grow as Modern Oral becomes a more significant share of their nicotine requirements. Additionally, we're seeing consumer uptake from other tobacco products, specifically cigarettes and even vapes. So I think there are tremendous growth vectors for the category.

I appreciate that. Second one for me on the tax landscape within Modern Oral. We're seeing several states considering tax hikes on nicotine pouches. Just wondering if you could provide some insight on the potential for these increases this year and how that might impact the pricing and promotional environment going forward.

Yes. Taxes are something that tobacco companies have dealt with for decades now. The good news on the tax front is that, if you consider taxation at the state level, it impacts every product in that state uniformly. So there's no disadvantage for any manufacturer relative to the tax landscape. We would anticipate that state taxes will continue to grow and resemble existing tobacco products, but for us, the absolute opportunity of winning in states where taxes are not at this point in time does not concern us, as the playing field is level, and we believe we have a winning product.

Our final question will come from the line of Gerald Pascarelli with Needham & Company.

Great. I know you don't provide a breakout by brand, understandable, but I was hoping you could broadly unpack for us the revenue performance between FRE and ALP this quarter. Just wondering specifically if you saw a slowdown in ALP's direct-to-consumer growth or if you had better-than-expected performance in FRE, which we know is lower gross margin? The basis of the question is just trying to reconcile some of the drivers behind the negative mix that you cited in terms of the Stoker's segment-level gross margin in the quarter. So any details there would be great.

Yes. For internal reasons, we haven't split out specific performance for ALP and FRE. However, I can confirm that both brands performed within our expectations in the quarter.

Okay. And then for Graham, just a high-level question. Now that we're through year one of the white pouch rollout, can you discuss any learnings you've had and where you view the biggest white space opportunities from a distribution perspective? How do you balance entering larger national chains, which are seemingly more expensive, versus maybe doubling back to retail locations where you're currently present and where you've historically done well to gain more shelf space and more facings? Any details would be great.

Sure. As I referenced before, there are green shoots all over for us. When you consider leaning into ALP and retail distribution, there’s a ton of white space. It's virtually all white space for ALP out there. FRE still presents tremendous store-level distribution opportunities. There are ongoing prospects to expand the portfolio within existing stores. We're focused on maximizing all opportunities because we believe there is so much potential. We've made significant investments in our sales force to solidify our capacity to tackle that opportunity. You can see how we’re thinking about this coming year while ramping up our investments, identifying opportunities to invest in trade programs, and forming strategic partnerships to enhance our brand profiles. In the long run, we think the brands will win in this space. For us, one of the leading brand properties in this space, given the connection there, is ALP, thanks to a large direct-to-consumer footprint. FRE has also done a great job regarding its associations, and we believe there are other opportunities that excite us to invest behind. We continue to aim for more stores, more facings, and more products for both FRE and ALP. We believe as we cultivate the brand profiles, we have a winning combination, and ultimately, our goal is to be a strong challenger brand in the market. We believe that the combination of these two brands could position us for a number four spot in the space, with potential upside.

I want to circle back to your first question about the gross margin performance in Stoker's. One thing to keep in mind is that we had an elevated tariff rate in the fourth quarter. This impacted Stoker's margins because of the white pouch. We had an adjustment in EBITDA, but that's separate from the gross margins.

This concludes our question-and-answer session, and I will now hand the call back over to Graham for any closing comments.

Thank you, operator. We really appreciate everyone getting on the call. We feel great about how we finished 2025. I can assure you of our enthusiasm and excitement about the opportunities ahead in 2026. We look forward to talking to you in a few months here, and we will talk to you then.

This concludes today's call. Thank you all for joining. You may now disconnect.