Good day and welcome to the Turning Point Brands Third Quarter 2019 Call. Today's conference is being recorded. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] I would like to turn the conference over to Robert Lavan. 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; Graham Purdy, who heads the Nu-X subsidiary; and Jim Murray, Senior Vice President of Business Planning. This morning we issued a news release covering our third quarter 2019 results.

This release is located in the Investor Relations section of our website, 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 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 reconciliations to GAAP can be found in today's earnings release, along with reasons why management believes that they provide useful information. I'll now turn the call over to Larry Wexler, our CEO..

Thank you, Bobby, and good morning, everyone. Thank you for joining the call. The news this quarter relating to the Company's broad portfolio of products was dominated by the controversy surrounding vaping caused by an outbreak of illness among vaping consumers.

The impact on the vaping industry was substantial and has the potential to overshadow the strong and compelling results in other parts of the Company. Stoker's continues to produce accelerated growth.

Smoking has begun its recovery from the Canadian inventory drawdown and Nu-X continues its growth trajectory even in this challenging environment of vaping headlines. News on vaping illnesses dramatically disrupted our third-party distribution business starting in mid-August.

The current environment of misinformed headlines and consumer confusion has impacted the behavior of both consumers and store owners. As a result, we are taking immediate action to strip costs from the TPB infrastructure to rightsize our organization.

Specifically, the Company intends to accelerate cost reduction plans, which are expected to deliver $8 million to $10 million of annualized savings. These cuts will come from warehouse and business consolidation plans in various vaping properties and other related corporate activities.

The goal is to reduce costs while preserving e-commerce capabilities to support our growing assortment of our proprietary Nu-X products and to maintain sufficient strength in nicotine vaping to participate in any potential recovery. This week we implemented a 10% headcount reduction.

While it pains me to lose valuable employees, it was imperative to rightsize the business in light of the changing environment. And finally, given the uncertainty and confused consumer base in the third-party vaping distribution business, the Board of Directors is simultaneously exploring strategic alternatives for some of these businesses.

There could be no assurance that this process will result in the approval or completion of any particular strategic alternative or transaction in the future.

Moving to the quarter and our performance metrics, we remain particularly pleased with the strength of our core tobacco products in both smokeless and smoking and with the strong momentum at Nu-X. Stoker's MST delivered yet another record share in the quarter, propelling segment sales growth upward by 20%.

Stoker's MST same-store sales velocity has strengthened by 33% versus a year ago, demonstrating genuine product satisfaction. Smoking sales increased by 7% on solid per store velocities of Zig-Zag cones and nice volume advances in Cigar Wraps, where Zig-Zag commands greater than 75% share.

Despite the vapor headlines' impact on the RipTide launch, total Nu-X sales increased from $4.3 million in second quarter to $6.3 million in the third quarter.

The Nu-X product pipeline supported by our team at Solace is robust and on track to bring forward additional lines in the fourth quarter that will take the Company and Nu-X into entirely new spaces, including what I call white spaces, where there genuine voyage that represent meaningful potential sales opportunities.

We are fortunate to have a strong foundation of Stoker's in smokeless and Zig Zag in smoking, which collectively delivered 82% of year-to-date EBITDA. These brands are thriving and we continue to position Nu-X to enter attractive growing markets. The vape business has been disrupted by the current controversy.

We have plans already in motion to reduce our financial exposure to third-party aspects of these businesses. At the same time, TPB remains heavily committed to capitalizing on our core competencies in branding, distribution, product development, and regulatory affairs to create market leading adult actives products.

This includes investing in the FDA PMTA process for TPB's proprietary brands, as well as growing the CBD and other actives businesses.

Over the last few years, we have made investments acquiring powerful e-commerce platforms for both B2B and B2C environments, We now fully intend to leverage these capabilities to propel our proprietary product portfolio of products. These investments are not going to waste.

On the contrary, we have millions of data points on consumer purchase behavior and preferences that we can leverage to emerge out of the FDA PMTA process as one of the few marketers of open systems. I've seen major shifts in tobacco business over my 36 years in the industry.

The PMTA is one of those moments, and we are confident that we will be able to be on the right side of that process. We've got some additional color on year-to-date and upcoming Nu-X activities. Let me turn the call over to Graham Purdy, President of Nu-X..

Thank you, Larry. Third quarter Nu-X sales of $6.3 million were up from $4.3 million in Q2. While the 45% advance is a nice step onward in our journey toward accelerated growth, I'm not satisfied, we're not satisfied. As we discussed before, there is a swelling demand for alternative products, most notably hemp derived CBD products.

In the third quarter, we introduced Nu-X CBD pens across the TPB platform. These disposable CBD pens position us favorably in the traditional retail with a first-mover advantage. There are five products in the line each carrying a particular mood positioning like relax, focus or happy.

The retail price point of $19.99 each has been very well received by both the trade and consumers alike. I'm pleased to report that initial results are in fact very encouraging, and we sold out this month. Further retail expansion is in queue for the fourth quarter.

While exploring potential product development concepts with Premier retailers, we incurred a compelling narrative that gives us an especially high level of enthusiasm for the Nu-X portfolio of novel alternative products.

Leading retailers are actively engaged in trying to assemble a suite of quality CBD products, but only from trusted partners and suppliers into TPB. We have a long track record of not only bringing winning, high velocity products and brands to our partners, but also an industry-leading reputation for standing behind our products.

When we discuss our new products with them, the enthusiasm is palpable. They are eager to work with us to chart their path forward with alternative products. In the fourth quarter, we will be broadening the suite of Nu-X CBD products to meet the demands and desires of our retail partners and consumers.

The Q4 product selection flows out of learnings and understandings from our e-commerce and retail experience. A few of those Q4 introductions include Nu-X CBD liquid shots.

These two ounce bottles with 30 milligrams of CBD in energy and stress relieving flavor profiles are new and unique formats that are sure to create speedy interest, trial and sales. Shots are scheduled for late November shipment to the trade.

Also in November, Nu-X CBD Tincture's in 15 ml bottle, with 250 milligrams of CBD will be available in four flavors. This product will be well-positioned as an entry point for new consumers and in December, Nu-X CBD gummies and gel capsules. With almost 40% of CBD consumers purchasing edibles, these product formats have emerged as specialty integral.

The products are available in a wide range of flavors and are infused with CBD rather than being sprayed on, a better solution for the consumers. In the coming months, we'll be focused on introducing the CBD portfolio within traditional retail.

The discussions to-date indicate a great deal of trade enthusiasm for products supported by a company who can be trusted on product quality and merchandising support. We appreciate dealing with one company, who delivers quality products across the formats that cover 70% of sales in the category.

We see this as a unique opportunity to build on the early success of the Nu-X pens, establish the brand and propel us to the forefront of this growing category. Looking forward to Q1, 2020 and beyond, our new product pipeline remains especially robust, with highly innovative products, uniquely positioned to meet specific consumer needs and desires.

While we are certainly focused on attaining a market leadership position in the rapidly growing CBD market, Nu-X means much more than just CBDs. Nu-X is all about bringing forth innovation in a wide variety of new alternative products. As we move into 2020, you'll begin to see the creativity and depth of our innovation development team.

Moving to RipTide. In the quarter, we expanded U.S. retail footprint by approximately 7,000 doors, including two large leading convenience store chains. Early traction has been good, albeit a bit muted by the vape headlines.

In looking at same store sales to evaluate early consumer satisfaction, we are observing a steady increase in velocity rates in the associated share gains. At the present time, we are doing a deep dive research project to fully understand progress through an intensive targeted store revisit program.

In the 3,000 stores that we have revisited already, our RipTide share is now up to 6%. Based upon preliminary findings in late Q3, we have already implemented a number of packaging and product improvements, which will hit retail later this quarter.

Importantly, we are finalizing the Canadian retail introduction with our partners at ReCreation Marketing. ReCreation placed their opening PO and preliminary feedback from large account presentations is highly encouraging with major players in the queue for RipTide distribution.

RipTide was well presented at the Vapex for the largest vape show in the UK last week. All of us at TPB are especially excited with not only our Nu-X progress to-date, but more so with the building momentum and enthusiasm of our trade partners. Results to-date are encouraging, but only a shadow what's to come.

And with that, I'll turn it to Bobby for a review of our third quarter financial performance.

Bobby?.

Thank you, Graham. Company results in the third quarter were a bit of a mix, as we move swiftly to address the vapor disruption. Performance in our smokeless and smoking businesses were positive and consistent with our long-term growth plan.

Total company net sales were up 16.1% with gross profit advancing 18.2% in gross margins expanding in each of our three reportable segments. Before I dive into the segment and consolidated performance in the quarter, let me update on our ReCreation Marketing investment in Canada.

As we announced on last quarter's call, in July, we made a strategic investment in ReCreation Marketing in Canada. ReCreation is a specialty marketing and distribution firm that targets up to 30,000 retail outlets including convenient stores, newly established cannabis dispensaries.

We are also readying other alternative products for ReCreation team to introduce in Canada in 2020 and I'm personally excited about this ventures impact on our future financials. In smokeless, the Stoker's brand continues to generate great momentum. Smokeless net sales increased 20.4% to $26.2 million in the quarter.

Net sales for the moist portfolio represented 58% of smokeless revenues in the quarter, up from 48% a year earlier, a trend we continue to expect to accelerate. The smokeless volume increased 15.1% with price mix advancing 5.3%. Notably, TPB followed the October industry price increase on moist products, the third price increase in 2019.

Year-over-year industry volumes for chewing tobacco and moist declined by approximately 6% and 2% in the quarter, respectively. Stoker's shipments to retail outpaced the smokeless industry in the quarter, growing its share in both chewing tobacco and moist. Smokeless gross profit increased 23.3% to $13.6 million.

Stoker's moist robust volume gains are now overtaking the scale of our chewing tobacco business and we're beginning to see the favorable impact of operational leverage. Our capital expenditure projects this year will reap incremental benefits next year.

Turning to smoking products, segment net sales increased 7.6% to $30.2 million on particularly strong promotional results on Zig-Zag cigar wraps. Cigar wraps trade inventories increased on strong promotional participation rate, while U.S. rolling paper inventory is depleted, essentially offsetting each other.

Non-focused cigar in MYO pipe products declined $0.5 million. Smoking volume increased 3.6% and price mix increased 4%. Zig-Zag's U.S. paper share increased sequentially and versus year ago on new products momentum and remains the number one premium rolling paper brand.

Zig Zag's expansion into the Canadian alternative channels is scheduled to begin early next year. U.S. rolling consumers continue to migrate to super convenient products like paper cones.

The Zig Zag cones introduction continues with store count standing at 16,000 at quarter end, while we have much more distribution gain preliminary results are encouraging with Zig-Zag capturing 20% of cones category volumes in the MSA measured universe. According to MSA, third quarter industry volumes for U.S.

cigarette papers and MYO cigar wraps increased by low single digits and mid single digits, respectively. Moving to our NewGen segment, our vaping product sales were disrupted on significant media headlines. In the quarter, total NewGen segment sales grew 20.5% to $40.4 million.

Importantly, total NewGen sales in September were approximately 30% below August. Not knowing the duration or the trajectory of the current disruption or the specific nature of any regulatory changes on flavored vaping products, we are moving swiftly to right-size the business.

These warehouse and business consolidation plans will be completed in the fourth quarter. Nu-X, which has been our primary focus in NewGen generated a 45% increase in sales from the prior quarter to $6.3 million. The spread of gross sales to net sales on RipTide hit almost 30% due to heavier than expected introductory promotion.

We continue to gain share with RipTide, but not at all costs. Year-to-date Nu-X net sales were $11.4 million. We expect this trajectory to continue. Late fourth quarter initiatives include significant new product introductions into growing in novel spaces. To recap the quarter, third quarter NewGen gross profit increased 21.5% to $12.6 million.

In the quarter, there were $2.6 million of tariff expenses. Moving to the consolidated business consolidated SG&A expense in the quarter was $29.8 million. Nu-X specific SG&A expenses in the quarter totaled $2.5 million. Adjusted EBITDA for the quarter was $18.8 million as compared to $16.5 million in the prior year.

We continue to balance growing EBITDA investing in the business. Net debt to adjusted EBITDA was 3.3 times inside our targeted range of 2.5 times to 3.5 times. In this morning's release, we also updated our 2019 guidance, which includes the following.

Projected 2019 total net sales of $360 million to $367 million comprised of base business net sales of $343 million to $347 million and Nu-X sales of $18 million to $20 million. This is a reduction from prior guidance due to the aforementioned vaping disruption.

Importantly, we still intend to fully invest Nu-X gross profits to maximize sales in market achievements. The Company expects certain SG&A expenses in 2019, including $2 million in restructuring and warehouse organization costs, which includes $600,000 in severance that will be expense in the fourth quarter.

$1.6 million in transaction expenses resulting from the Solace acquisition and IVG earn-out payments, $5 million to support Nu-X infrastructure, which is primarily RipTide launch costs. We expect to spend $3 million to $5 million in preparation for the FDA's PMTA pathway during 2019. We expect the Final Regulation for PMTAs in the coming months.

Stock compensation and non-cash incentive expense in 2019 is projected to be $4.5 million, which has increased due to accounting requirements to expense the performance-based restricted stock units that were part of the Solace acquisition. We project 2019 adjusted EBITDA of $69 million to $72 million.

We expect the 2019 effective income tax rate to come in at the low end of the range of 21%. Capital expenditures are expected to be approximately $4 million, including certain investments in our MST operations, where we will reap the benefits from operational leverage next year.

And finally, net sales for the fourth quarter of 2019, are expected to be $79 million to $85 million. M&A discussions continue as we evaluate potential partners and targets, very excited about this potential part of the business. You should expect us to do deals in the next year.

The third quarter proved to be challenging on the vapor side, and rewarding on smokeless, smoking NU-X, which remain the company's priorities. Fourth quarter, we will be implementing our cost savings and integration initiatives, while delivering compelling new products to consumer. With that, I'll turn the call back to Larry for closing comments..

Thank you, Bobby. As you heard this morning, the vapor challenge is a disruption to an otherwise exceptionally strong quarter for the company. I'm confident in our cost savings and process integration initiatives will produce to revitalize engine that can drive forward and deliver compelling growth for the company.

My confidence is supported by simple math. First, smokeless and smoking products represent 82% of year-to-date adjusted EBITDA. Both categories performed well in the third quarter.

Second, our cost savings initiatives of $8 million to $10 million annually are likely do establish a positive operating foundation from which we can weather the current environment. Third, releveraging our distribution capabilities to aggressively enter the CBD category within traditional retail.

The category with great potential, another building block for the Nu-X brand. Looking forward, we will continue to execute our strategic plan by driving focused brand growth, expanding through acquisitions and innovation and strengthening our corporate infrastructure , while simultaneously delivering the designated cost savings and synergies.

Our company remains solid and resilient, and our people remain committed to the journey. Thank you for participating in the call today. And with that, I'd like to open the call to questions..

Thank you. We will now begin the question-and-answer session. [Operator Instructions] First question comes from Vivien Azer with Cowen & Company..

Hi. Good morning..

Good morning..

Hi Vivien..

So Larry, I was intrigued by your comment on the consumer insights that you've gathered from millions of data points. I'm sure there is a lot, still to analyze, but can you give us a little teaser on some of the high level takeaways that you've discerned from all that consumer data? Thank you..

Yes. As you know, we have a very deep B2C database where we communicate and have age profiles and flavor preferences from those consumers. When you look at our products we sell on B2C, it has a fairly older profile, which takes us away from the whole youth issue.

And we also have a very good understanding of the age distributions among different flavors. I think this would be very important in the PMTA process. When you look at it on this,, the science, but you also have all the behavioral.

We are on top of the behavioral and we know what our products are doing and where the consumers are buying and who, which consumers are buying them. So we think this gives us a huge advantage in that process..

Is it possible at all to offer any kind of high level commentary on mix across different flavors in particular given that your consumer base does skew a little bit older on, I'm kind of, I think about these flavors in three buckets. So you've got traditional tobacco, you've got mint flash menthol and then you've got everything else.

Do you have any insight you can offer there? Thanks..

Yes. Everything else has the dominant profile among consumers. It is, is there a submission and our understanding is that when people move away from combustion, they want to move away from tobacco and menthol type flavors.

The other thing is interesting is that you see some of these flavors that have names that on the surface may appear to appeal to younger audiences. Now, we don't sell to anybody under 21 currently.

But if you look at these age profiles, you'd be surprised at how old some of the age profiles are and some of these, I guess notorious or at least flavor names that seem to draw a lot of attention. It's sort of interesting to look at the data Vivien, and we'll try to give you a little more insight sometime in the future..

Yes. Tobacco and menthol on the open-systems is about 10% to 15% of flavor sales, of our sales. The rest being other flavors, which is a hodgepodge of 130 different combination. So I mean, it's adults use certain flavors and we think that we have the data to prove that..

Well, that's far lower than I would have guessed for tobacco, menthol and mint. That's very helpful. Thank you for that, Graham. On the CBD vapes, very encouraging that you guys sold out this month.

Can you quantify it all what retail distribution looks like now and then maybe expand on your commentary around expanded retail distribution going forward? Thank you..

Thank you. Right now, Vivien, it seems there's a couple of thousand stores we started late. We ran out of stock, but great qualitative take away from retail in terms of velocity rates, take rates, etc, very, very encouraged. We have supply coming in right now, but we're early in the process, a couple of thousand stores at the present time..

That's really helpful. And then given your commentary around the disconnect between growth and net sales on RipTide. I'm curious whether there is any promotional spending happening on the CBD vapes as well? Thank you..

There is nothing on CBD. Frankly at this point CBD margins are dramatically stronger than the segment margins. I think the promotional spending on RipTide is fairly unique, and from our perspective, can't last. And so it's, but that is what's going on in the market, but you won't see that same sort of spread between gross and net on the CBD side..

Very helpful. And then just last one for me. Given the out-of-stocks on CBD in your aspirations to expand distribution, are there capacity bottlenecks that you have to work through, and how are you going to address those, if so? Thank you..

There is no capacity bottlenecks. It's just, we're selling out faster than we thought. Frankly, we feel our CBD pen is unique. We feel the four, five products that are coming over the next months are extremely unique and we're using our data to sort of ramp up there.

There is a massive market that still has been on touch on the CBD side in national chains that we were pretty excited about..

Yes, Vivien. This is Graham here. We launched this, our pen amid the sort of the firestorm that hit vape. So we had sort of throttled down our expectations from a retail distribution perspective, like a take rate perspective and that proved to be, to not actually play out. So it was very encouraging from that perspective..

That's terrific. Thank you very much..

And our next question comes from Susan Anderson of B Riley, FBR..

Hi. Good morning, thanks for all the details this morning, very helpful. And I was wondering, I guess with the pressure on vapors, curious what you're seeing. It looks like your other more traditional categories saw some pretty good strength this quarter.

Are you seeing consumers now switch back, maybe if there is any color you can give on that, if it's benefiting your other more traditional categories? Thanks..

On the margin that may be happening, but, I think the strength of our, strength of the core tobacco business is strength of the brands.

Stoker's has been on a roll for a while pre-dated that rolled, predated the vaping controversy and Zig-Zag in smoking, you're seeing a little bit bounce back that we told you about that was coming from the Canadian restocking. I think these brands are thriving. I think they are strong independent of any of the controversy.

But again on the margin, I think it probably is helping. It certainly is not hurting those brands..

Great. That's helpful.

And then I guess looking out to next year, how should we think about kind of where the vape business settles out in terms of revenue or EBIT if there is any color you can provide just from a modeling perspective?.

It's still early days. So let's talk about EBIT in October sales. From an EBIT perspective, we're committed to growing EBITDA, right. We're not in the business of losing money. So that's a key dynamic on the vape side. From a sales perspective, we believe that there is still a business in selling open-systems, vape products.

We are committed to going through the PMTA. So we will derive numbers through proprietary products.

So I think that kind of from a modeling perspective, you should sort of look at the trend lines today and that's directionally correct, but then there is stuff to put on top of that, which is our proprietary products, our proprietary open-systems products through the PMTA..

Okay. Great. That's really helpful. And then I guess maybe just shifting to Stoker's, very nice growth there.

I guess how should we think about that trajectory? How many additional doors can you expand into, how are you guys thinking about that growth over the next year?.

Yes. We're in about 50% of the weighted market share at this point.

So there is, there are 200,000 doors that sell moist, but we really are focused on the extra 50,000 that will close that 50% gap and so that's, there is multiple years of growth trajectory still here and we are, not only are we focused on growing store count, but we are focused on same-store sales growth, which is becoming a very important performance metric for the management team, and so it's a dual-prong approach.

And so there is years of growth in that business..

Great. And then, I guess, just one last one on RipTide. You talked about selling in Canada and UK.

I guess what's the opportunity there? How should we think about that opportunity versus the U.S., as we look out over the next couple of years?.

Yes, I think the way to think about it is from a modeling perspective, if you've got, you've got the U.S. vape market, which is $4 billion, $5 billion at the manufacturer level. You've got, Canada and the UK have a higher propensity of vaping, but you have smaller populations, right? And so that you can sort of play with that math.

We gave you our market share in the independents that we're focused on is 6%. I mean that's, you guys work on these assumptions, but that's what we're sort of underwriting to..

Great. That's helpful. Thanks so much guys..

[Operator Instructions] At this time, we have no further questions in queue. This concludes our question-and-answer session. I would like to turn the conference back over to the presenters for any closing remarks..

Thank you everybody. Look forward to talking to you in the next quarter..

Thank you, ladies and gentlemen. This concludes today's teleconference. You may now disconnect..