Good morning, and welcome to the Turning Point Brands First Quarter 2023 Earnings Conference Call. All participants will be in a listen-only mode and 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 and please note 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 at Turning Point Brands President and CEO, Graham Purdy; and Chief Revenue Officer, Summer Frein. This morning, we issued a news release covering our first quarter results. This release is located in the IR section of our website, www.turningpointbrands.com. 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 the reasons why management believes that they produce useful information. I will now turn the call over to our CEO, Graham Purdy.

Thanks, Louie. Good morning, everyone, and thank you for joining our call. Our first quarter results were in line with our expectations and we are generally pleased with our start to 2023, as we are beginning to see traction from the initiatives we have put in place and consumers are responding as demonstrated by market share gains in all of our major categories. As we mentioned on our last call, we anticipated a tough comparison to Q1 of last year. Recall the macro environment, principally inflation started materially impacting our customers in the second quarter of 2022. Our results reflect an uncertain consumer environment where many of our end consumers continue to feel the impacts of prolonged inflation and higher interest rates. Moreover, as also discussed on our last call and reflected in today's numbers, our wholesale customers, particularly buyers of Zig-Zag U.S. paper and wraps portfolio have been carefully monitoring inventory levels in response to the higher cost of financing their working capital. That said, we now think our customers' inventory adjustments are largely behind them. In fact, we expect the Zig-Zag segment to demonstrate growth for the balance of the year, driven by new product introductions, further penetration of the non-traditional channel and normalization of U.S. paper and wrap order patterns. We still see continued strength in the end markets given the secular tailwinds we are experiencing and we're making progress penetrating the alternative space to better satisfy this growing consumer base. Stoker's had another solid quarter with strong market share gains in both the MST and loose leaf chewing tobacco categories as its value proposition continues to resonate with consumers. Moreover, as an organization, we've taken this opportunity to refocus our internal execution across all areas of our business to best position Turning Point for profitable, long-term…

Thank you, Graham. As discussed in prior quarters, we continue to focus heavily on growing the Zig-Zag brand and have built a multiyear road map to continue to solidify Zig-Zag's positioning as a lifestyle brand for this emerging generation and broadening its addressable market by accelerating growth in the alternative channel. As previously shared, while Zig-Zag is relatively ubiquitous across what we call the traditional channel, we continue to push hard to capture our fair share and more in the alternative channel. This is especially important given the secular trends, which are growing our addressable market. To that end, we continue to expand our product innovation that we believe resonates with consumers in both the traditional and alternative channels. Expanding our product portfolio allows us to increase our on-shelf presence in key trade classes with an alternative such as dispensaries and head shops, and allows us to continue to learn from these early adopters that we can leverage in the traditional channel. In addition, selling to manufacturers and cultivators is another opportunity we have to harness the brand's power to meet our end consumer with Zig-Zag quality and branding. So far this year, we have expanded the Zig-Zag product portfolio with two innovative offerings, Palm rolled and 70-millimeter cone (ph). Palm is a new substrate for Zig-Zag wraps, taking learnings from our Canadian partners and the 70s are a smaller version of our powerful cone franchise designed to meet consumers on the go. Both sets of new offerings have been received positively by the trade and end consumers and further reinforces Zig-Zag's ability to satisfy ever-evolving consumer preferences. In addition to our pipeline of new products and increased sales efforts to penetrate the alternative channel, we continue to build on past learnings with brands and partnerships, like, our recent collaboration…

Thank you, Summer. Starting with our consolidated quarterly results. Q1 sales were up 0.1% to $101.0 million. Adjusted gross margin was down 310 basis points to 48.2% due to segment and product mix. Adjusted EBITDA was $20.8 million, down $4.5 million year-over-year due to the decline in Zig-Zag gross profit. Going into segment performance. Zig-Zag sales decreased 8.3% to $41.9 million with volume down 8.6% and price/mix up 0.3%. Our U.S. papers and wraps businesses were down double-digits due to the anticipated reduction in traded inventory during the quarter, which we've previously discussed. But if you look through our shipments to retail, our sell-through is outperforming the market in the traditional channel. Our e-commerce business, particularly B2B alternative sales grew double-digit. Our Canadian and other smoking accessories categories also grew double-digits during the quarter, both aided by CLIPPER sales. Gross margin declined 420 basis points to 53.5% during the quarter, driven primarily by product mix, principally the trade inventory adjustment of higher margin U.S. rolling paper and wraps products and further impacted by the contribution of CLIPPER lighters, which operates at lower gross profit and margins. We expect higher gross margins sequentially as U.S. paper and wrap sales normalize. Moving to Stoker's. Stoker's products net sales increased 6.2% to $33.7 million in the quarter, with a 0.3% volume increase and a 5.9% price mix increase. Net sales for the MST portfolio grew high-single digits. Stoker's volume was up 5.0% despite category volume down 4.9%, with share growing 60 basis points year-over-year to 6.4% during the quarter according to MSAi. Its share in-store selling was up 50 basis points year-over-year to 9.7%, which Stoker's now in-stores representing 66% of industry volumes, which still provides a long runway for growth. Chew sales were up low-single digits from the previous year. Stoker's Chew…

Before I open the call to Q&A, I wanted to give you some thoughts on why I'm excited about the long-term opportunity we have in front of us and why we have confidence in the balance of the year now that we believe the inventory reset is largely in the rearview mirror. We have a portfolio of iconic brands that consumers love. Zig-Zag is the number one rolling paper and wraps brand in North America that is benefiting from secular growth trends in cannabis consumption, new product introductions and a compelling channel opportunity. We've entered a new category in liters with a proven global brand in CLIPPER that significantly expands the addressable market we compete in. For those of you that don't know, let me remind you that among mass-market lighters, CLIPPER is differentiated by being one of the few that are refillable, providing an environmental benefit that's attractive to many of our customers. Stoker's is the number one loose-leaf brand and Stoker's moist snuff remains one of the fastest-growing brands in the category with a sizable share of market we have yet to penetrate. These brands are being sold, distributed and marketed by a world class team and our entire organization is aligned towards creating shareholder value by driving organic growth combined with acting financially disciplined. Thank you for participating in the call today. And with that, I'd like to open the call for questions.

Thank you. [Operator Instructions] We'll take our first question from Vivien Azer with TD Cowen.

Hi. This is Viktor Meier on for Vivien Azer and thank you very much for the questions. I have a few. A key competitor in the U.S. tobacco space recently revised down their expectation for price elasticities in the U.S. cigarette market. While you don't play in that segment, can you comment on how are your views of price elasticities and MST have evolved?

Yeah. I don't think there's any evolution in our thinking. We're generally a price follower in the industry. And so our plan is to continue to go and get more weighted distribution and continue to follow what the industry does. We've got a nice value proposition with our MST and I think we're well positioned in the current economic environment.

Got it. Thank you. And then so high-single digit growth in Stoker's would suggest that down-trading is continuing in the MST space. Can you comment on how that's evolved and whether you expect downtrading to persist or accelerate from here?

Yeah. I can't prognosticate whether it's going to accelerate in the future. It's been fairly consistent over the last few years. And so at this point in time, we're keeping our head down focused on our existing plan and taking what the market will give us.

Got it. Thank you. And then on free up, can you please expand on the rationale for expanding all the way down to a 3-milligram offering a bulk of the category volume sits at the 6-milligram offering and the strategic rationale for the original free positioning was to go above that. So what's the risk of that with an expanded range of nicotine offerings that the differentiation around free gets diluted.

Hi. Yeah. Thanks for that question. I think for free, it's important for us as consumers are transitioning into that category to have a wide offering available for them. Does it mean that we'll keep all nicotine offerings on the market in perpetuity. But as we're learning about that consumer, we feel it's important for us to offer that variety for them up to this point.

Understood. Thank you. And then just last question. So Zig-Zag margins were under pressure, but they were better than what we expected with the understanding that CLIPPER will continue to be headwind next quarter. Is it reasonable to expect margin stabilization and recovery in the second half, given the headwinds to the space in the U.S.?

Yeah. We actually expect sequential increase just because the inventory trade reduction, most of those came from our higher gross margin products. So sequentially you should see an uplift. But then after that, you'll have CLIPPER continue to grow. And so that will be a headwind to gross margins going forward.

Understood. Thank you so much for the color. That’s it from me.

Thank you. We'll take our next question from Eric Des Lauriers with Craig Hallum.

Great. Thank you for taking my questions. First, I was hoping you could just expand on or perhaps just reiterate some of the dynamics that you're seeing at Zig-Zag retail so far year-to-date? I think I just missed some of those comments. You obviously have some of your customers working through inventory, but some significant strength, it seems like at the retail side. I was hoping you could just expand on that a bit first. Thanks.

Yeah, Eric. Thanks for the question. We talked about this last quarter. There's really two dynamics of shipping to our wholesale customers and then what our wholesale customers shift to retail and then ultimately what moves to the consumer. We grew share in all four of our major categories in the quarter. And so we feel good about what the consumer is pulling off the shelf. It was really just what we consider a disruption in trade inventories and the balance that occurred in 2022. So in markets, we feel good about the plan that we're on to continue to execute and win those consumers. It's just, again, a blip in time here for Q1 on the trade inventories.

Okay. Great. And then on the Zig-Zag innovation side, could you just give us some more color on perhaps some of the innovation plans within kind of papers themselves? When you look at some of the competitive offerings in the alternative channel, especially there seems to be much more skewed than you would see at C-stores, for example. Do you have plans to sort of expand the number of SKUs for Zig-Zag paper specifically? And just kind of any additional commentary around Zig-Zag would be great.

Hey. That's a great question and one that we spend a lot of time talking about. As you noted, consumers, particularly in the non-traditional space, are continuously looking for product innovation. And so it's something we're hyper focused on. As you may have heard on the call, we recently launched two products, Palm rolled as well as 70-millimeter cone, and those were driven by some consumer insights that we have because we do spend a lot of time thinking about consumers, what they're looking for in the market and talking to our sales teams about what they're seeing in the market. So we certainly have a pipeline of products that are underway, and we're excited to bring to market.

All right. I appreciate that color. And then last one for me here. The question I asked on the last call as well, but just wondering if you're seeing any changes to the competitive dynamics in the alternative channel specifically following the court order against one of your main rolling paper competitors. Any sort of increased opportunity to take share pr just any additional comments you have there would be great? Thanks.

Yeah. Sure. As to your point on the last call, we did talk about that initial chatter coming out of that court order that you referenced and we certainly navigated through that with our customers and our consumers. Candidly, it's been a bit quiet, and we continue to focus on maintaining our plan with Zig-Zag with both our customers and consumers and are excited to keep plowing through the year with it.

All right. Thank you.

We'll take our next question from Hale Holden with Barclays.

Hey. Good morning. I just have two on the [indiscernible] there on the innovation questions. But on the Palm wraps on the 70-millimeter cones, are those additional shelf space allocation in those places or are they substitutions for something else you might have on shelf?

Great question. We're excited that in most cases, they allow us to expand our shelf space. It's really important to us, particularly in the alternative channel to capture our fair share in that market. And so this is an opportunity that affords us the additional shelf space.

Great. The last time you guys launched new cone products, definitely, it was noticeable in results. Are these you think incremental or big drivers? Just hard for me to know.

Yeah. It's in the early days of the launch. Our plan is for the product to be incremental for the end consumer. Ultimately, what we're trying to do is provide a wide range of options, different sizes for different consumer needs. So we view it as an incremental opportunity for the company.

Great. Thank you so much. I appreciate it.

Thank you.

And that does conclude the question-and-answer session. I'd like to turn the call back over to our presenters for any additional or closing remarks.

Thank you, operator. Appreciate everybody's time today, and we look forward to speaking to you next quarter. Thank you.

Thank you. That does conclude today's presentation. Thank you for your participation. You may now disconnect.