Bobby Lavan – Chief Financial Officer Larry Wexler – President and Chief Executive Officer.

Susan Anderson – B. Riley FBR Vivien Azer – Cowen and Company.

Good morning, and welcome to the Turning Point Brands Third Quarter 2018 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded.

I would now like to turn the conference over to Bobby Lavan, Chief Financial Officer. Please go ahead..

Thank you, operator. Good morning, everyone. I’m Bobby Lavan, CFO of Turning Point Brands. Joining me today are Turning Point Brands President and CEO, Larry Wexler; and Jim Murray, Senior Vice President of Business Planning. This morning, we issued a news release covering our third quarter 2018 results.

This release is located in the Investor Relations Section of our website, www.turningpointbrands.com where a replay of today’s conference call will be available. In this call, we will discuss our consolidated and segment operating results and provide our perspective on our progress.

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.

The disclosure outlines various factors that could cause actual results to differ materially from projections or forward-looking statements that may be cited in today’s discussion.

These forward-looking statements and projections are not guarantees of future performance, and you should not place undue reliance upon them, except as provided by federal securities laws. And we undertake no obligation to publicly update or revise any forward-looking statements.

In the call today, we will reference certain non-GAAP financial measures. These measures and reconciliation to GAAP can be found in today’s earnings release, along with reasons why management believes they will provide useful information. I will now turn the call over to Larry Wexler, our CEO..

Thank you, Bobby, and good morning, everyone. Thank you for joining the call. I am pleased to have this opportunity to share with you this quarter’s progress against our long-term plan. The third quarter had a number of important milestones as we continue to see the tangible benefits of our programs.

We advanced our company in each of the three legs of our plan. First, driving the growth of our focus brands. In the third quarter, Stoker’s Moist Snuff had another share record in the quarter on double-digit volume gains, and they continue to expand retail availability with a notable addition of Murphy Oil’s 1,400 stores. Zig-Zag remains U.S.

market share leader in both premium rolling papers and MYO Cigar Wraps, with excellent net sales advances in the quarter on a successful hemp paper introduction and market-specific line extensions in cigar wraps. And VaporBeast delivered record quarterly net sales.

This acceleration in sales reflects the benefit of our China purchasing operation, getting in front of trends and improved analytical tools that have identified a number of market opportunities. We also continue to execute against our acquisition strategy.

On September 1, TPB acquired International Vapor Group for $24 million in consideration, plus $4.5 million in contingent earn-outs. Prior to the acquisition, IVG had revenue of approximately $47.7 million and EBITDA of $4.9 million.

With the acquisition of IVG, we now have a leading B2C web platform and a strong management team, particularly in online marketing.

We believe that this was the missing piece in our NewGen infrastructure, as we now can reach consumers wherever they shop, third-party vape shops through our various wholesale platforms, through our company stores and now online through IVG capabilities. These are all additive to our abilities in traditional retail.

We also continue to build upon our corporate infrastructure strengths. The scale provided by the combination of IVG and TPB family of vapor businesses will provide significant synergies in logistics, marketing and sourcing. We have made great progress in this quarter.

This infrastructure became even more important as we roll out proprietary products into this space. I’m especially pleased with our recent strategically important new hire Sarah Evans – Dr. Sarah Evans as Director of FDA Science. Dr. Evans has over 20 years of experience working in the field of nicotine and tobacco.

She spent seven years working for the U.S. Food and Drug Administration’s Center for Tobacco Products as a behavioral pharmacologist. In her new role at TPB, Dr. Evans will apply her expertise and regulatory compliance in the field of nicotine and tobacco research to strengthen the cross-functional team working on TPB’s FDA filings.

Third quarter results reflect the strength of our strategy, where sales increased across each of our three product segments and collectively delivered record net sales and gross profit for the company. Before I go to more detail on our solid segment achievements, let me summarize a recent development with regards to our V2 e-cigarette business.

On Tuesday, October 2, VMR, the supplier of V2 e-cigarettes to TPB under a long-term exclusive arrangement for retail bricks-and-mortar distribution and sales, was purchased by Juul Labs for reported $75 million.

Our contract anticipated such an event and affords an acquirer of VMR the right to terminate our exclusive rights, subject to certain terms and conditions, including product buyback, requirements and payment obligations.

On Friday, November 2, we observed the communication on V2 website as they were shutting down the company and seizing sales to all customers effective immediately.

Yesterday, November 6, we received a letter from Juul Labs affirming the website statement and letting us know that they would no longer accept orders, and they were permitted to continue to sell through our V2 products inventory. In the meantime, we will continue to sell our V2 inventory, which is projected to last through the first quarter of 2019.

TPB sales of V2 products over the last 12 months were $7.8 million, and we were prepared to offset these sales with scheduled new initiatives in 2019. Now turning back to our third quarter.

In Smokeless, Stoker’s robust volume and revenue and share advances in the quarter delivered $21.7 million of segment net sales, up of from $21.3 million a year ago. Stoker’s MST strong performance in the quarter were somewhat offset by net sales declines in Chew.

This was driven by an acceleration of the long-term mix shift to lower-priced products and a timing impact of a promotion. Nevertheless, Stoker’s Chew increased its year-over-year retail share in the quarter. We are very pleased with the performance of MST.

Stoker’s was able to retain its 3.3 record share position, that last quarter was aided by the pipeline to support the Dollar General rollout in 15,000 stores. Additionally, in the third quarter, we completed the chain-wide rollout to Murphy Oil stores. Both of these chains are delivering strong share gains on a weekly basis.

Stoker’s MST is now the sixth largest brand in the industry and commands a 7% share in stores where we have achieved retail distribution.

We intend to continue to deliver revenue gains through additional chain store placements and greater sales force coverage against higher-volume opportunity outlets, where their merchandising abilities provide a competitive advantage. Historically, our branch share increases as we direct additional frequency to these highly competitive outlets.

Due to the sustained growing consumer demand for Stoker’s MST, we are in the process of upgrading the can manufacturing line for higher throughput and capacity. We expect the new line to be fully operational by year-end. And as we continue to grow volumes, we anticipate improved margin contribution.

As a management team, we set ambition – ambitious internal goals for Stoker’s MST. We remain committed to making a leading brand for the widespread retail availability. It will take time to realize the full potential of the Stoker brand, but marketplace and consumer feedback suggest we are on the right path.

In the Smoking segment, Zig-Zag continues to produce encouraging results. Zig-Zag’s iconic equities provide the footing for continued growth in both U.S. and a promising and evolving Canadian marketplace, where recreational cannabis use become legal in October. Zig-Zag brand delivered strong net sales advances in U.S.

papers, Canadian papers and MYO Cigar Wraps, driving segment sales up by 4.5% in the quarter to $28.1 million. These strong gains were more than sufficient to offset the $700,000 cigar category decline as a result of our strategic decision to deemphasize the low-margin category.

In Canada, Zig-Zag is well positioned with an expanding portfolio to meet varying consumer preferences as the legal use of recreational cannabis commenced in late October. Our Canadian portfolio now includes a number of novel new products, including organic hemp papers and Zig-Zag paper cones, which first shipped in October.

Importantly, our Canadian progress will be temporarily disrupted due to proposed new packaging guidelines that would require changes across the full product line.

As a result, we reduced shipments of the product with the current packaging in the fourth quarter and anticipate the slowdown continuing through the first quarter of 2019, as we adjust our packaging to the new regulations and our partner works through inventories prior to the yet-to-be-determined effective date of the expected new regulations.

This should correct in the middle of next year. In the U.S., our late first quarter 2018 launch of two new hemp rolling paper SKUs was met with strong trade support.

Through the third quarter, the hemp rolling paper market continues to demonstrate strong gains, with Zig-Zag already capturing approximately 20% share of the segment with distribution in 20,000 stores.

And in cigar wraps, Zig-Zag remains a strong leadership share position with greater than 75% of the market as measured by MSAi and a suite of new extensions being introduced to meet specific local market opportunities. In NewGen, we set another company record with net sales advancing 33.1% from a year ago.

In the quarter, NewGen now represents 40% of total company sales as poised for continued growth. With the purchase of IVG in September 1, we had one month of sales in the quarter. This acquisition greatly expanded our marketing capacity and consumer reach.

We anticipate that the long – that the team we acquired will have an impact across our full NewGen platform, bringing new techniques and skills to the company. IVG’s brands will also benefit from our extensive product portfolio and purchasing efficiencies.

VaporBeast delivered its highest quarterly sales ever, as the process improvements and efficiencies we put in place are more fully realized. Larger order sizes and more frequent orders continue to increase our share requirements in the stores we presently service.

At Vapor Shark, our focus on strengthening franchise and corporate store execution will also return the brand to B2C prominence over the next three quarters by leveraging the IVG best practices and processes.

We are now consolidating the Vapor Shark office into IVG in Miami Lakes, Florida and expect to realize improved execution and operating efficiencies in the first quarter of 2019. At Vapor Supply, we are working to reenergize the B2B wholesale platform and capturing share the corporate stores’ best practices across our complete portfolio of stores.

To our knowledge, the Vapor Supply stores in Oklahoma are among the highest revenue-producing stores in the industry, and we expect to transfer effective practices across our 51 franchise and 23 corporate store base. As previously announced, we are consolidating and discontinuing low performing assets in NewGen.

To date, we have shut down the cash and carry operations at Vapor Supply, closed one low performing store and began to wind down our Vapor Shark’s B2B wholesale sales, as we focus resources on high – higher-performing and higher-potential operations.

From a broader NewGen perspective, we continue our synergy initiatives and on track for full logistical integration in the second quarter 2019.

This integration, coupled with the scale we have assembled and our capabilities in China, is expected to produce incremental sales growth and profitability across our portfolio of NewGen assets as we move through 2019. Company results in the third quarter were encouraging and consistent with our long-term growth aspirations.

Record company net sales and gross profits has revenue advances across all three segments. Additionally, we continue to pursue accretive acquisitions that can accelerate our already positive momentum. However, in the short term, we are focused on working aggressively against our synergy and integration initiatives.

Before I turn the call over to Bobby, I wanted to speak briefly about the latest commentary coming out of the FDA. With regard to youth access issue that’s been all over the news of late, let me be clear, we support Commissioner Gottlieb and the FDA’s strengthening actions to limit access of vapor and tobacco products to minors.

We take the issue very seriously and maintain robust third-party authentication systems on each of our B2C sites. We’re also training and enforcing proper ID checks in each of our retail outlets. No tobacco or vapor products should be accessible to minors.

We support the Commissioner in the area of inappropriate packaging and marketing of vapor products. There’s simply no need for products in the market that resemble a child’s juice box. It is not acceptable, and we have adopted industry marketing standards and implemented processes to restrict those products from entering our distribution channels.

We continue to work with our third-party suppliers to stay within appropriate marketing guidelines. This situation is important, and we look forward to FDA’s efforts to further define the regulations in this area. It is our understanding that the FDA will issue a new action plan in the coming weeks, as I do address these access and appeal issue.

This is an important step, and we remain engaged with the FDA as we believe it is especially important to offer a variety of appropriately marked juice-flavored e-liquids to our adult consumers options as they seek a pathway away from the cigarettes.

The Commissioner recently reiterated his desire to preserve the availability of vapor products for adults. And Director Zeller has consistently reinforced the need to be guided by science-based decision-making.

We support the objective to prevent youth initiation, but remain focused on preserving the right to sell appropriately marketed products for adult use as an offering from smoking cigarettes. We believe this science demonstrates this is the right approach.

With that, I will turn it over to Bobby for more color on our segment performance and key financial metrics..

year-over-year impact of discontinued items on sales was $0.9 million in the quarter and expected to be $1 million in the fourth quarter. As previously mentioned, the company will have approximately a $1 million gain in the fourth quarter related to a certain ownership stake in the supplier that was loaned $6.5 million in the second quarter.

In Canada, we’re anticipating passage of new packaging regulations that could require artwork changes across the product line. Given the potential limitations on sell-through of old packaging, we are moving swiftly to decrease wholesale inventories to limit any potential write-off requirements.

As such, we voluntarily canceled $2.2 million of sales and expect fourth quarter sales to be lower by those $2.2 million. We expect some temporary disruption to continue into the first quarter, and we’ll provide additional guidance in the fourth quarter of this.

After all these adjustments, we project 2018 net sales to be in the range of $327 million to $333 million. While we are still in active dialogue with potential acquisition candidates, we expect to slow the activity pace to accelerate our synergy and integration activities.

That does not mean we are stopping, just slowing, with the goal of strengthening efficiency and margin realization. It was an impressive quarter on our long march towards realizing the full potential of our brand assets.

Our confidence in the TPB team and our progress against the strategic growth plan reinforced the board’s decision yesterday to increase our dividend by 12.5%. With that, I’ll turn the call back to Larry for closing comments..

Thank you, Bobby. Enthusiasm here at Turning Point Brands is exceptionally high, and the tremendous growth opportunities we see before us leave us even more excited.

We will continue to execute our carefully measured strategic plan by driving focused brand growth, expanding through acquisitions, solidifying our corporate infrastructure and strengthening out our capital structure. Our focus brands remain strong and prosperous, and we’ll continue investing to drive sustained gains.

Stoker’s delivered a record share in MST and strengthened year-over-year share in chewing tobacco. Smoking will continue to be highly encouraged by Zig-Zag’s strong share in both papers and MYO Cigar Wraps and the growth prospects from the dynamic Canadian market and innovative line of products we have in queue for both the U.S. and Canada.

Of course, our NewGen segment, which has grown to a record 40% of company revenues, offers meaningful growth and synergy opportunities. In the year-to-go period, we are focused on integration, synergy and maximizing customer satisfaction through best-in-class platform. So it’s a good quarter, but it’s never enough.

We remain committed to our long-term strategic plan to increase value for our shareholders. Thank you for participating in the call today. With that, I’d like open up the call for questions..

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Susan Anderson of B. Riley FBR. Please go ahead..

Hi, good morning. Thanks for taking my question. I guess, I was kind of curious on the VMR cancellation. Was there a cancellation fee at all? And then also maybe if you could just talk about kind of what you have in the pipeline, rolling out your own e-cig products and liquids.

And then, I guess, any time line you could provide on that, that would be great. Thank you..

Okay. So the contract with VMR actually anticipated that they would be bought at some point. And in the contract, there is a sharing of the sale price as well as protection on inventories. And so we’re looking forward to meeting with Juul and getting resolution on those items. As for new products, as you know, we don’t inform the market well in advance.

I think you will see interesting activity from us in the first half of next year, but I won’t go into specifics on what those products are..

Okay. Great. And then maybe a couple of follow-ups. On the SKU rationalization, maybe you can talk about the areas of business that you’ll be focusing on with that..

The SKU rationalization, it’s in the fourth quarter, is a wraparound from some V2 open system products and some cigar products – low-margin cigar products that we discontinued..

Got it. Okay. And then last one on the regulation in Canada around Zig-Zag. Maybe if you can just give a little bit more color on any impact to your cost there or any sales impact we should expect..

We don’t see any difference in cost other than we have to change the packaging that conform to the new regulations, which would just mean artwork changes for the most part. So there will be some new sealings and things like that, but it’s relatively minor..

Yes. And we expect kind of – we expect that there will be – with any sort of packaging change, there’s going to be a sell-through period and a sell-in period. So there will be – the numbers will kind of you should expect and kind of dip in the first half of 2019 and increase in the back half of 2019.

So no, we’re not giving 2019 guidance, but that’s the standard sell in, sell-through period..

Got it. Okay, that’s really helpful. I guess, that’s it for now. Thank you so much..

Thanks, Susan..

Thanks, Susan..

[Operator Instructions] The next question comes from Vivien Azer of Cowen and Company. Please go ahead..

Hi, good morning..

Good morning, Vivien..

Good morning..

So Larry, I hate to be a broken record, but you and I have kind of debated very publicly from time to time around kind of poly use and cross-category impacts. And what was interesting in this earning season was that one of your large competitors did finally publicly acknowledge that there is a negative impact on cigarettes from e-vapor.

And so I was just hoping that you could kind of retouch on how you’re thinking about cross-category impacts as it relates specifically to you guys in Smokeless because it is, historically, pretty surprising to see that Smokeless – I appreciate you guys had tough comps, but as a broader category comment that Smokeless continues to be weak in the face of weaker cigarette volumes.

Thanks..

Okay, Vivien. I was looking forward to this question. And I think, in your question, you’re talking about the elasticity between e-vapor and Smokeless because you said cigarettes – and I think everyone acknowledges that e-vapor certainly impact cigarettes.

As we started looking at the data and I think what you’re seeing impact is that there may be a lower inflow into MST where some of the young adults are choosing e-vapor as their choice for nicotine consumption relative to MST. So I think there is on the margin.

I don’t think – I personally don’t think that you’re seeing a lot of switching out of MST into e-vapor among the older, more established customers. So when you’re looking at total segment volumes, it’s probably showing up in lower inflow..

Okay. That makes sense, displacing an emerging consumer. As we think about on the FDA and thank you for your commentary around that and kind of your message broadly of being supportive of incremental regulation. I was wondering if you could offer a little bit more specificity around how you guys are thinking about flavors as well as form factors.

Thanks..

Okay. So there’s a couple of things there. First of all, as I said in my comments, we’re very supportive of limitations on youth access and appeal. We don’t believe minors should be using nicotine products, so we stand with the Commissioner on that.

In terms of flavors, it – this is something that I believe that if the right sizes are done, the science will show. I do not think that people come to vapor for a flavor. In other words, the fact that there is a, let’s call it, raspberry, pick any particular flavor, that people say, "Oh, there is a raspberry now in e-liquids.

I’m going to start vaping." I think people choose to come to vaping and then search around for the flavors. So I do think that flavors are important because I don’t know that people particularly enjoy the flavors of combustible cigarettes. And certainly, flavors has an appeal for people who choose to come to vaping.

They’re looking for a flavor that best suit them. And so I believe that the FDA will keep in place some flavor variety. I also believe that the way those flavors are marketed, there will be some restrictions and limitations, and I think that’s appropriate..

Terrific, thank you. Sticking with the FDA, how are you guys thinking about Altria’s support of raising the minimum purchase age for all tobacco products to 21? Thanks..

We believe that the mark to market will be the market. We think that age restriction, as they put in place, as appropriate as the government sees it, is fine. We’ll compete no matter what the – we also see that as a very minor impact on our business..

Terrific, thank you very much. And then just lastly, focusing on your core fundamentals and your core business. With Stoker’s, can we just revisit how you guys are looking at, like, the ultimate runway in terms of store count? And where do you think, like, the next catalyst to come? Thanks..

We believe there’s still lots of opportunity in chains. As you know, the selling process in chains is – takes a long time. And each chain opens up a window only a couple of times a year. To have that done, we’re making great progress. We’ve hired a number of new people in our key account selling organization.

We think that there’s been a significant upgrade there. And we are getting many more appointments and we’re getting higher up into the buying organizations. And so we think we’ll see a continued progress in chain stores. And we’re probably touching somewhere around 70,000 to 80,000 stores. There’s about 160,000 stores that are really in the business.

So there’s more to itself, but there’s about 160,000 stores that are appropriate targets. We’ll make continued progress about the rate that we’re having in the past..

2019 should be an interesting year for us, particularly on the national level. We – Stoker’s Moist has showed up on everybody’s radar screen, and so it is pretty exciting. So I think 2019 has opportunities for – to more distribution.

And something that we’ve been open about is that at some point, we don’t know what that point is, but there is an opportunity to close the gap between the 25% to 40% discount that we’re trading, our products trading relative to the big guys..

Thank you for that incremental color, Bobby. I appreciate it. Sticking with that theme, and I apologize for the long list of questions, things were indulging me. One of the themes that we’re seeing kind of in cigarettes where, obviously, you guys don’t play. It’s pretty sustained trade down.

So I was wondering if you could offer any color around the category composition in moist smokeless tobacco in terms of price point segmentation, so kind of premium mainstream discount, deep discount because it seems to me that you guys continue to be a beneficiary of down trading in that price gap, which is ultimately an opportunity to close it over time.

But in the near term, how much down trading do you guys think is happening in the MST category? Thanks..

Okay. So there’s definitely a shift away from premium to discount. And I guess, you’re calling it deep discount. When you look at even Copenhagen’s products, all the new products they’ve introduced were at the Grizzly price. And I don’t think I have to remind you that there’s the MistHub, Copenhagen and a few other brands at the premium.

And then you have Grizzly with – in bulk of Copenhagen’s new products at the next price point. And then there’s Longhorn and us at the low end. You’re definitely seeing down trading and that’s due to Copenhagen’s focus on introducing at the lower prices and our growth. We are clearly a benefit of that. I believe we have a high-quality product.

And over time, I think that it could be priced appropriately. But right now, as long as we’re growing, we need to get a consumer-induced sampling. And so we’ll continue to have a lower list price at retail, but we think the potential for that pricing should grow in the future..

Thank you..

This concludes our question-and-answer session. I would like to turn the conference back over to Larry Wexler, Chief Executive Officer, for any closing remarks..

Well, thank you, everybody. I appreciate your coming on the call, and we look forward to talking to you at next quarter. Thank you..

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect..