Good morning. And welcome to the Turning Point Brands Third Quarter 2022 Earnings Conference Call. All participants will be in the listen-only mode. All lines have been placed on mute to prevent any background noise. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. Please note that this event is being recorded. I would now like to turn the conference over to Louie Reformina, Chief Financial Officer. Please go ahead.

Thank you. Good morning, everyone. This is Louie Reformina, Chief Financial Officer. Joining me are Turning Point Brands’ President and CEO, Graham Purdy and Chief Marketing Officer Summer Frein. This morning, we issued a news release covering our third quarter results. This release is located in the IR section of our website, www.turningpointbrands.com. There is also a presentation which we will be referencing on the call available on the site. During this call, we will discuss our consolidated and segment operating results and provide a perspective on the operating environment and our progress against our strategic plan. 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 can be found in today's earnings release, along with reasons why management believes that they provide useful information. I will now turn the call over to our CEO, Graham Purdy.

Thank you, Louie. Good morning, everybody, and thank you for joining our call. For those of you that don't know me, I may be new to the CEO job, but I'm not new to this industry, Turning Point Brands or its people. After spending seven years at PM U.S.A., I joined the company in 2004 as Trade Marketing Director. Throughout the years, I've had many roles, including head of Field Sales, and New Venture Divisions before taking on the CEO role in 2019. In that role, I oversaw repositioning of the company and initiatives that have led to accelerated growth. This included, growing Zig-Zag segment sales from $109 million in 2019, to approximately $190 million we're projecting this year. Over my time at the company, I've worked across numerous functional areas and developed strong relationships with talented colleagues throughout the organization. I'm excited by the opportunity to lead the team as we continue to build a world-class CPG company for the benefit of our customers, employees and shareholders. Before Louie and I go into the recent quarter, I'd like to take a step back and frame my perspective on the Turning Point story and drive home why the team and I are excited by our future. First, Zig-Zag is the number one rolling paper brand in North America. Our portfolio of Zig-Zag products continues to indirectly benefit from cannabis legalization as a leading non-plant touching way to capitalize on this long-term trend. Today, roughly 70% of states have legalized cannabis in some form, either medical or recreational, and roughly 45% of the U.S. population lives in a legal recreational market. And that number is expected to grow in the coming years. One only has to look at the stats just three or five years ago to appreciate how far we've…

Thank you, Graham. Starting with our consolidated results. Despite 17.7% growth from the Zig-Zag and Stoker's segments, overall Q3 sales were down 1.9% to $107 million, impacted by NewGen which had a 40% year-over-year decline but it's been relatively stable sequentially this year, and harsh facing less challenging concepts we exit the year. Gross Margin decreased 50 basis points to 48.9% driven by product mix in each segment. Adjusted EBITDA was down $1.8 million year-over-year, with a decrease coming from the decline in our NewGen distribution business. Both Zig-Zag and Stoker's segment profitability grew from the previous year. Going into segment performance, Zig-Zag sales increased 23.3% year-over-year to $52.1 million with 21.7% from volume and 1.6% from price mix. Wraps revenue was down 3% year-over-year due to a category decline as we adjusted a new normal of post-COVID consumer consumption. Despite the category declines, Zig-Zag continues to grow share. Our U.S. Papers and E-commerce business was up 19% year-over-year driven by the growth in E commerce and paper cones. Canada was up 30% during the quarter with solid growth aided by $1.5 million of orders pulled forward from Q4. The cigars another subcategory grew dramatically off of the low base due to the CLIPPER launch. For the overall segment, we estimate that strong promotional uptake and the timing of Canadian deliveries, pull forward approximately $5 million of sales from the fourth quarter. Gross margins declined to under 20 basis points during the quarter during primarily by the CLIPPER launch and higher growth in lower margin products like paper cones. Operating margin declined 450 basis points for the quarter, due to the gross margin decline, variable costs are increased B2C e-commerce sales, increased TPB Canada SG&A and the reallocation of segment costs. The fundamental long-term drivers for this segment remain intact…

[Operator Instructions] Your first question comes from the line of Vivien Azer from Cowen. Your line is open.

Thank you. Good morning, and congrats Graham on the new roll. I think it's really encouraging for everyone to hear your commitment to organic growth, perhaps a more tempered approach to M&A and your commitment to shareholder returns. With all of that said, I think your deep experience in tobacco is a real asset to the organization, especially now. So, I'd love to hear your thoughts on how you think about Stoker's pricing relative to the competitive environment. Thank you.

Yeah, thank you very much for the kind words, Vivian. Look, I think that we have a lot of favorability relative to pricing with our MST business. We're certainly a price follower, and we're committed to follow in the industry. I think it's important to note that we've mentioned in the past that this concept of sort of closing the gap with premium brands. In Q3, we actually took a little opportunity on our Stoker's Tubs to do just that. So we're starting to actualize what we've been talking about for many years. But I think the tailwinds around pricing are great, but at the same time we're still only in just over 60% of the addressable market. So one of the largest opportunities of the company has to continue to focus on gaining more stores where we don't compete, because it's source of brand new volume for us. And at the same time, we're committed to growing share in the existing stores around. So I think we've got three really good levers of future growth for our MST business.

Absolutely. That all seems perfectly reasonable. Louie, maybe pivoting to the model a little bit. I was hoping to unpack some of the gross margin compression in the Zig-Zag segment for instance, you out -- in sorry, I believe there's another -- the lighters, excuse me, as the gross margin, can you maybe just dimensionalize those two headwinds? Which was the bigger, anything there?

Yeah. So CLIPPER was a large headwind for us, kind of thinking about the impact. We said a lighter market before, there's about a $500 million market and CLIPPER historically, that 3% share. And we're going to ramp up that business. And what we've said before in our third-party products is it's generally 20% to 40%. Gross margins, I would say with CLIPPER, our planning right now is to become the midpoint of the lower end of that as we try to gain distribution in the short term. And, hopefully be able to scale that gross margin over time.

Understood. That's really helpful. And then perhaps just lastly, on the Stoker's segment, kind of things, you will update on free, which would do called out but didn't disclose from a revenue perspective. so if you can offer any color there, that would be great. And then just kind of the contributions to market headwinds from this kind of use these products, please. Thank you.

Yeah. So we're trying to limited disclosure for competitive reasons on it. But I would say it would free would disclose the first half revenue on it. And I would say it was consistent with first half levels. We don't really expect free to ramp for us until next year.

And on the gross margin thing?

Yeah, free is running below current segment gross margins. So right now, it's similar to kind of the range that I mentioned, the CLIPPER. And as we scale that business, and as we scale the supply chain, we expect to ramp up that gross margin over time.

Understood and sorry, I pressed the issue this is, I promised the last one, but of the 160 basis points was free the bigger headwind versus the discounted loose leaf?

Yes.

Okay. Thank you.

[Operator Instructions] Your next question comes from the line of Eric Des Lauriers from Craig-Hallum. Your line is open.

Great, thank you for taking my questions. And congrats again, Graham.

Thanks, Eric. Appreciated.

So you mentioned wraps within Zig-Zag sort of facing some, not necessarily headwinds, but just some negative growth after the COVID, sort of boom last year. As you look at the macro environment now, and maybe coupled with that sort of COVID overhang, which of these Zig-Zag sort of sub-segments, are you noticing, perhaps facing greater headwinds than others? Just wondering if you could kind of comment on the Zig-Zag sub-segments, sort of in light of the macro challenges that you guys are seeing. If there's any trends kind of popping up for one or the other? Thanks.

Sure, yeah. I think if you look at the sub-segments, with papers, we have a nice offset, because we are growing our business in the alternative channel and gaining a lot of share there. So our e-commerce and paper cones business or continue to be strong for us, during the quarter from a growth perspective, outpacing that sub-segments growth. On the wraps, we don't have as big of an offset, just because with our tobacco wraps, it's not really sold in dispensaries without tobacco licenses. So, I think there's -- we are seeing the impact, or just because that is primarily sold in the measured channel, where we've seen some inflationary pressure, especially kind of the gas stations through the year. But we think we were normalizing in terms of consumer demand patterns now post-COVID.

Okay. So maybe it's kind of safe to say that you're seeing similar, maybe macro headwinds, or dynamics for the sub-segments, but perhaps a difference in the traditional versus alternative channel, just that increase in penetration, they're helping offset some of those headwinds?

Exactly.

Yeah. Okay. Great. That's helpful. And then on NewGen. So obviously, the regulatory uncertainty remains uncertain. I was wondering if you could give us a bit more insight into the CapEx spend that you have ongoing for those PMTA applications? And perhaps any sort of indication on timing there. When you expect to to have that wrapped up, versus when you might expect to hear back from the FDA? Obviously, that's a bit more uncertain there?

Yeah. So we continue to monitor the situation with FDA and specifically as it relates to capital deployment on PMTAs. I think it's sort of important to note that, at this point in time we've submitted multiple fulsome applications. And we're in a position where we will continue to supplement on an as needed basis and supplement where we believe that future value can come from.

Okay, great. All right. That's it for me. Thanks, guys.

Thanks, Eric.

There are no further questions at this time. Mr. Graham Purdy, Chief Executive Officer, I turn the call back over to you.

Yeah. Thank you so much, operator. Really appreciate everybody joining the call today. We're really excited about the future here at TPB. And we'll talk to you all next quarter.

This concludes today's conference call. You may now disconnect.