Good morning. And welcome to the Turning Point Brands' Fourth Quarter 2022 Earnings Conference Call. All participants will be in a 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 Revenue Officer, Summer Frein. This morning, we issued a news release covering our fourth 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.

Thanks, Louie. Good morning, everybody, and thank you for joining our call. Last quarter was my first as the CEO of Turning Point, and I discussed my excitement about our team and our ability to build a world-class CPG company for the benefit of our stakeholders, employees and value customers. As I mentioned on our last call, my main priority is to focus on internal execution across all areas of our business to best position, Turning Point for profitable long term growth to drive shareholder value. Since my appointment to CEO, the team has been focused on evaluating all aspects of our business from our distribution and channel strategies, for our product portfolio and go-to-market plans and improving our systems and logistics capabilities to become more efficient. There's a lot on our plate, but it is all designed to help build a stronger foundation for long-term growth. The main components of our strategy are; number one, to expand our market penetration and competitive share, especially within the alternative panel being the power of our brands and differentiated product portfolio. Number two, to leverage our unique distribution and marketing want to our customer and consumer relationships by providing value-added products across channels and platforms. Number three, invest in high-return, operational and productivity initiatives throughout the organization to drive efficiencies and better manage what's fully in our control. And number four, to attract, train and build a world-class team that is aligned and incentivized to drive shareholder value. Number five, to adopt an owner's mindset throughout the organization to empower our team to attract our best opportunities and operating like true owners with required speed and focus. We've been focused and energized behind the strategy, and I'm excited by the compelling opportunity to build long-term shareholder value. Before moving, Summer and I…

Thank you, Graham. Starting with our increased focus on the alternative channel, which we've previously defined as direct-to-consumer storefronts like Amazon, brick and mortar head shops and the sensory. We see continued store growth and consumer traffic as legalization spreads throughout the country, not only with legal dispensaries, but also with head shops and smoke shops that also benefit from new state program launches. Approximately, half of the country's population now live in approved legal recreational state. This is a meaningful jump from around 20% five years ago, and we expect continued state expansion over time. Our eCommerce and direct B2B alternative business, which effectively captures some of this new demand and serve as a proxy to measure our alternative sales efforts, grew 26% in the quarter. For this year, we will leverage our progress to further exploit this opportunity. We have a clear game plan for this market, and some highlights include, enhancing our in-store presence, accelerating product innovation and focusing our distribution efforts to ensure better sales coverage to increase penetration of new doors. I believe this approach will best leverage our ongoing strategy to invest in Zig-Zag to solidify the brand as a leading must carry item. While we're still in the early innings of executing our alternative strategy, I'm encouraged by these results and the progress we've made on many initiatives since we last spoke in October. We believe that improving our presence in this faster growing channel represents a tremendous opportunity as we estimate it currently represents half of the papers and ancillary accessories market. Meanwhile, CLIPPER lighters is continuing its expansion. Over the first five months of the launch, our sales force sold CLIPPER lighters into approximately 25,000 new retail accounts, making it one of the most successful initial launches in our company's history.…

Thank you, Summer, Starting with our consolidated quarterly results, Q4 sales were down 1.8%, $103.4 million, impacted by NewGen, which had an 11% year-over-year decline. Our core product Zig-Zag and Stoker's grew 0.9%, 2.6% respectively or 1.6% combined. Adjusted gross margin was flat at 47.9%, adjusted EBITDA was down $0.7 million year-over-year, the decrease coming from the decline in our bake distribution business. Going into segment of performance, Zig-Zag sales increased 0.9% year-over-year to $52.1 million with 0.8% from volume and 0.1% from price and mix despite the negative impact, but pull forward in sales into the previous quarter. Wraps revenue was now 9% year-over-year as we compared against the period when we launched natural leaf wraps and Zig-Zag hemp wraps. Our US papers and e-commerce business was down 13% year-over-year, driven by a paper booklet decline, partially from the pull forward into Q3 and some of the trade inventory adjustments that Graham mentioned earlier. This was offset by double-digit growth in eCommerce. Canada was up 22% during the quarter with solid growth aided by the launch of CLIPPER. The cigars and other smoking accessories subcategory grew dramatically off a low base due to the sales force efforts behind CLIPPER. Gross margins declined 180 basis points during the quarter, driven primarily by the CLIPPER launch and higher growth in lower margin products like paper cones. Operating margin declined 430 basis points for the quarter, due to the gross margin decline, variable SG&A costs from increased eCommerce sales, increased TPB Canada SG&A, and the reallocation of segment costs. The fundamental long-term drivers for the segment remain in intact as cannabis legalization continues to drive growth in the all channel and CLIPPER penetration provides further tailwinds. Stoker's products and net sales increased 2.6% to $32.0 million in the quarter, the 6.1% volume…

Before I open the call to Q&A, I wanted to give you some thoughts on why I'm so excited about the long-term opportunity we have in front of us. When looking past the transitory disruption we anticipate early in the year, the following inherent strengths will drive performance. We have a portfolio of iconic brands that consumers love. Zig-Zag is the #1 rolling paper in Ras brand in North America that's benefiting from secular growth trends in cannabis consumption with a compelling opportunity in front of us. We've entered a new category in Lighters with a proven global brand in Clipper that significantly expands the addressable market we compete in. Stoker's is the #1 brand and Stoker's Moist Snuff remains one of the fastest-growing brands in the category where we crossed 10 stores selling for the first time last quarter with a sizable market we have yet to penetrate. These brands are being sold, distributed and marketed by our world-class team and our entire organization is aligned towards driving organic growth and being financially disciplined to create shareholder value. Thank you for participating in the call today. And with that, I'd like to open the call for questions.

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

I wanted to start on the Zig-Zag segment, please. Obviously, you're cycling multiyear toward growth driven by innovation, but ultimately, I think, for the Street and for investors, this is a hard segment to kind of track given the nontracked channel exposure. So can you just offer some commentary on the competitive landscape, please?

Yes. Vivien, look, I think the interesting aspect of the portfolio of the Zig-Zag products is there -- we have a wide range of products for the end consumer, whether it's tobacco wraps, hemp reps, papers, cones. Generally, the way we look at it is the end markets are healthy for our consumers. And there's always a little bit of noise with ins and outs, with launching new products and seeding the marketplace. And so we generally just feel really good about the end markets and our share growth profile in Q4 across a number of our Zig-Zag products.

And is there anything to call out competitively?

Vivien, this is summer. I think I would just add from the competitive perspective, we are monitoring that external competitive environment very closely and remain focused on continuing to grow the Zig-Zag brand and continuing to focus on the long heritage and quality that Zig-Zag brings to market while monitoring the competitive environment very closely.

Okay. Fair enough. And then given the revised approach to guidance which gives more than appropriate segment level revenue ranges was probably more detailed it's been justified for the size of the business. Maybe if you could just kind of contextualize how you're thinking about what like durable medium-term top line growth is because double-digit over the last five years reflects a lot of benefits from COVID, a lot of benefits turn on outsized growth from Zig-Zag, which probably needs to normalize. So how do you think about top line over the medium term? Maybe just for the core tobacco segment.

Yes. So as we mentioned earlier, we've got some adjustments that we're making in Q1 on the trade in source that. What we are seeing is more encouraging trends in the seller side. So what you'll see in the back half of the year for us is we do think that we normalize back the growth of our Zig-Zag and Stroker's.

Your next question comes from the line of Eric Des Lauriers with Craig-Hallum.

First one for me is also on the Zig-Zag competitive side. One of your competitors there recently received a court order to stop selling certain products based on false claims. Just wondering if you see this as more of an opportunity to take share? Or if this is perhaps something you just see as more of like a marketing warning to the industry at large. So just wondering if you can comment on what you see as this -- in respect to an opportunity to take share. And if there's any early feedback from some of your alternative shop customers in response to that?

Yes. Thanks for that question. We, as you noted, have been following that activity very closely. We have been engaged with both our consumers and especially our retail customers, to your point, because they're interested in what's going on in the market as well. I think for us, we believe it's important to really they focused on Zig-Zag. We have a long-standing reputation of bringing high-quality products to market, continuing to focus on bringing that new product innovation to market and reinforcing all those benefits to our customers and our consumers to reinforce that brand will that everyone has for.

Okay. That's helpful. On the sort of Q1 inventory weakness guide. Was I hearing that correctly, if that's primarily within Zig-Zag? And I suppose if so, could you provide some commentary on how that might be impacting the various subsegments within Zig-Zag? It sounds like perhaps weaker on some of the Clipper areas. Not sure if this is impacting wraps as much as it is rolling papers and cones. If you could just provide some commentary that you're seeing that's impacting some subsegments more than others, that would be helpful.

Yes. Thanks, Eric. Yes. So it's really more on the papers and wraps. So kind of a some of our legacy products that we've kind of stopped with our trade for a while. It is really what we view it as an adjustment in Q1 to kind of return to more normalized levels beyond that.

Okay. That's helpful. And then last one for me here. So just wondering if you can provide maybe just a bit more commentary on the competitive dynamics you're seeing within MST. Stoker is obviously very well positioned in that value segment, obviously continuing to benefit from consumer down trading really for assumingly a few years here now; wondering if you're seeing any renewed push from competitors in that value segment. Obviously, you guys have kind of a strong competitive advantage with that in-house manufacturing of those products. But just wondering if you're seeing any renewed push from competitors into that value segment and just overall commentary on some of the competitive dynamics within MST would be great.

Yes. Eric, this is Graham. Look, I think that, that category is generally stable from a competitive perspective and no sort of amplified or different activity from the competitors that's beyond what you sort of consider normal business at this point in time. Stoker's had a strong quarter in Q4. We grew volume, we grew share. Last year, we were able to carry the pricing activity through throughout the year. That was amplified by being able to pull a price increase forward for our Tub product, which ended up benefiting us throughout the back half of the year. The brand is strong. It's performing 10 share across the 10 chair line in store selling. So we feel good about where we're positioned right now to continue growing, plus we've got a lot of runway with 35% of the volume that we don't compete in. So I think generally, we feel like we're confident in the Stoker's MST brand.

[Operator Instructions] There are no further questions at this time. I would like to turn the call back over to the Turning Point team for any closing remarks.

I wanted to thank everybody for joining the call today. I look forward to speaking to you again here in a couple of months.

This concludes today's conference call. Thank you for attending. You may now disconnect.