Good morning and welcome to the Turning Point Brands' First 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] 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 operator. Good morning everyone. This is Louie Reformina, Chief Financial Officer. Joining me is Turning Point Brands' President and CEO, Yavor Efremov; and Graham Purdy, Chief Operating Officer. This morning we issued a news release covering our first quarter results.

This release is located in the IR section of our website at www.turningpointbrands.com. There is also a presentation we will be referencing on the call available on the site.

On that presentation if you turn to slide two, our disclaimers, during this call, we will discuss our consolidated and segment operating results and provide a perspective on our progress against our strategic plan.

As is customary, I'd 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 SEC. 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, Yavor Efremov..

Thank you Louie. Good morning everyone and thank you for joining our call. We had a strong start to the year with our first quarter results in line to slightly better than our expectation.

Zig-Zag continued its strong growth trajectory with another quarter of double-digit growth led by our US papers business building on its market share gains in the measure channel.

In addition we're showing good progress in our alternative channel efforts as we benefit from increased sales force focus into the channel and the secular growth in the industry. Stoker's MST also saw double-digit growth during the quarter.

While inflation is pressuring the consumer wallet Stoker's was well-positioned with its value proposition to capture share as consumers traded down during the quarter. Meanwhile, NewGen navigated an expected decline in sales resulting from the PACT Act as the regulatory environment.

Our vape distribution business remains profitable despite these challenges. I'm very proud of the fact that we completed the scope of both the ERP and the CRM system within the quarter and did so on plan and on budget.

While this is all in the first step of a long journey, I'm encouraged by the fact that we did all of that that needed to be done while still delivering a strong quarter. We did not cut corners and had full engagement in the process top to bottom. I believe this says a lot about the organization and its potential.

On April 14th, the FDA obtained regulatory oversight over non-tobacco and nicotine products. As a result these products are now subject to the same regulatory regime as tobacco-derived products. Premarket filings for non-tobacco nicotine products must be submitted by May 14th.

Products subject to a timely filing may remain on the market until July 13 unless they receive a negative action. After July 13th, these products become subject to enforcement.

We view FDA oversight as a critical component of effective regulation of the entire industry and while it may cause some short-term disruption around upcoming deadlines we view this as a long-term positive to level the playing field and continue to enhance our position in the industry.

With regard to our product portfolio, we aim to file new application for a number of non-tobacco nicotine offerings including our free nicotine pouch products and we are evaluating spending up to $10 million on PMTA applications throughout the year with a heavy focus on modern oral.

On capital allocation, we continue to buy back shares during the quarter after receiving increased authorization from our Board. We continue to be committed to not throwing our cash balance from here as we aim to use our cash flow to invest in our organic growth.

Practically, all remaining cash flow will be directed toward buybacks so long as the shares remain priced attractively. On the M&A front, as stated before, that is not our near-term focus.

However, to reiterate from the previous call, our intent is to be patient and do deals that leverage our brand and distribution expertise, and we will – and will be value-accretive to shareholders.

Any large-scale transaction we pursue will be synergistic and thus leverage an existing assets, including our distribution network to drive shareholder value. We may also pursue smaller tuck-in acquisitions that deliver capability to service our existing business that, we prefer to acquire rather than build organically.

We recently announced the hiring of a new CMO Summer Frein, who brings extensive consumer products industry experience and we're excited about what she and our marketing team can do to further build our brands.

In addition, we have also brought on a Chief Information Officer to oversee our technology systems, including our ERP implementation and a Chief People Officer to support our organizational infrastructure.

We have revamped our organizational structure to improve accountability and more clearly define functional responsibilities and the reporting structure within the organization. We have also realigned our segments reporting to better reflect the results of our vape business.

NewGen in the past was a combination of a profitable vape distribution business and our Nu-X product development platform. Effectively, we have streamlined and integrated the non-vape part of Nu-X into the rest of the organization from an operational and financial reporting standpoint.

NewGen results are now a clean representation of 100% of our vape organization is if it were a standalone entity. With that, let me turn the call back to Louie to go through our results..

Thank you, Yavor. Starting with our consolidated results on slide 4, Q1 sales were down 6.3% to $100.9 million with strong Zig-Zag and Stoker's growth, offset by double digit decline in NewGen, which is impacted by the regulatory environment including the PACT Act.

Adjusted gross margin increased 180 basis points driven by improvement in Stoker's gross margin along with the mixed benefits from increase in sales in our higher margin Zig-Zag and Stoker's segments and decline in lower margin in NewGen sales.

Adjusted EBITDA was down $2.7 million year-over-year, with the decrease coming from the expected decline in our vape distribution business. Now turning into the segment performance slide 5 for Zig-Zag product. Sales grew 11.4% year-over-year to $45.7 million, with 7.1% from volume and 4.3% on price mix.

Warps revenue was down 3% year-over-year, due to an industry decline in HDL wraps category offset by growth and natural leaf and hemp wrap. We believe that, trade was building up inventory in the first half of last year in HDL wrap and is now working its inventory for more normalized levels.

Partially, offsetting business was a ramped up the Zig-Zag natural leaf and hemp wraps during the quarter, which collectively accounted for double digit percentage for wraps sales during the quarter.

As a reminder, in our second quarter, we will have a tough comparable as last year's second quarter benefited from $2 million of pull forward of sales into the quarter.

Our US Papers and e-commerce business was up 41% year-over-year driven by growth in e-commerce and paper cone sales, as well as the planned $2 million inventory build during customers. E-commerce was up 2.6 times and now represent 21% of the sub segments, with strong growth expected the rest of the year.

Our B2B e-commerce business targeting the alternative channel led the growth and accounted for more than half of our E-commerce sales. Sales of cones products, was up 78% including over 4.4 times in our E-commerce channel and is now 25% of the sub segment.

Zig-Zag remains the number one premium and overall paper brand in the MSAi measured market with 33.3% share, which was up 30 basis points year-over-year. Zig-Zag was the number two brand in paper cones category in the MSAi measured market with 34.2% share.

Cones continues to remains large opportunity with only one-third of the world receiving paper products, also receiving cones during the quarter in the measured market. Overall, the paper category saw decline in MSAi down 3.5% during the quarter.

Canada was down 13% during the quarter, this expected decline was primarily due to the timing of orders from our third-party distributor last year, when we delivered our half of our sales for the full year in Q1 creating a sub comp. TPB Canada, which is the old recreation marketing business continue to perform well and grew double-digits organically.

The cigars and other subcategories grew 17% with growth in our cigars business and the addition of $22 million of wild hemp sales, previously recognized NewGen. We introduced our rough-cut natural leaf cigars during the quarter. We expect a steady built this year. Gross margins for the segment decline 300 basis points during the quarter.

The consolidation of TPB Canada was the biggest driver of decline. Given the lower margins from the DVW acquisition last year. Margins would have been down 80 basis points excluding TBP Canada in both periods. The decline driven by higher growth and lower margin products like our paper cones.

The operating margin declined for the quarter was due to the gross margin declined. The impact with DVW acquisition as part of the TPB Canada and the reallocation of segment costs in particular personnel from Nu-X now dedicated to Zig-Zag marketing. Increased sales and marketing costs and increased shipping costs also led to the decline.

We were also excited with the continued pressure of our marketing team to strengthen the Zig-Zag brand during the quarter. Following the launch of Zig-Zag Studio late last year, we recently launched a partnership with luxury fashion line AMIRI for Spring 2022 collection which is now available for purchase in stores like Zags and Bergdorf Goodman.

Zig-Zag accounted for 57% of our segment operating income in the quarter and continues to be our fastest growing segment. The fundamental long-term drivers for this segment remains intact, as cannabis continues to gain mainstream acceptance and new states come on board and legal recreational sales including New Jersey last week.

Turning to Slide 6 Stoker's product. Sales increased 8.4% to $31.7 million in the quarter with 0.3% in volume and 8.1% for price mix. Net sales for the MST portfolio grew at 11% and represented 65% of Stoker's revenue this quarter, up from 63% a year earlier.

Category volume was down 5.6%, while we were up 0.9% as our share grew 40 basis points to 5.7% during the quarter according to MSAi. Our shares in store selling was up 30 basis points to 9.0% with Stoker's now in stores representing 63% of industry volume, which still provides a long runway for our growth.

Chewing tobacco sales declined 3.6% from the previous year. Category volume was down 5.1% of the quarter according to MSAi. Stoker's Chew was number one chewing brand in the quarter gaining 100 basis points of share to 25.7% according to MSAi.

Despite the softening in the industry demand within the tobacco industry in general during the quarter, Stoker's performed as well as its value proposition products resonated well with consumers, especially in the current inflationary environment.

Segment growth margin is expanded by 150 basis points to 55.8% during the quarter, driven by price and incremental margin from our higher MSP volume. Operating margin increased 70 basis points with the higher gross margin from Stoker's sales partially offset, but the higher sales and marketing costs increased and increased shipping costs.

Turning to Slide 7, NewGen products. We continue to manage through a disruptive environment with sales down 37% from the previous year to $23.5 million. Our vape distribution business continues to be disrupted by the regulatory environment including the implementation of PACT Act late last year.

Adjusted gross margins were down 40 basis points year-over-year. Adjusted operating income was down $1.3 million due to lower sales and higher freight costs offset by lower valuable SG&A and reallocation of shared costs into the corporate segment as mentioned earlier.

NewGen result this quarter are now a cleaner representation of our vape business which remain profitable, despite the challenging environment. Encouragingly our B2B business at its strongest revenue month in the quarter in March and our B2C business continues to build its last mile distribution reach.

We are still awaiting progress in the FDA and our PMCA applications and continues to adapt our business based on the changing dynamics in the industry. Ultimately, we still believe that all the short-term challenges present an opportunity for us in the long term given our size and our ability to navigate the regulatory environment. Moving to Slide 8.

We ended the quarter with over $126 million of cash in the balance sheet and $147 million of available liquidity providing us with flexibility and capital deployment. We repurchased $10.6 million of shares during the quarter. As mentioned in the press release, we are maintaining our previous guidance as communicated in the Q4 earnings call.

In addition as Yavor mentioned, we are also projecting up to $10 million of PMTA expense which includes filing for additional products including our free nicotine patch. In regards to CapEx we are still reviewing projects that we believe will drive value to the organization which include the ERP upgrade.

We do expect the CapEx to be higher this year and hope to provide a firmer update once we have pricing on our ERP and CRM project later this year.

We are evaluating spending up to $20 million for the entire year, excluding the ERP project, with the increase as attributable to $9 million from a manufacturing automation project that we started last year and $8 million from a potential warehouse consolidation in automation projects that we are evaluating.

Thank you for participating in the call today. And with that, I would like to open the call for questions..

Thank you. [Operator Instructions] And we will take our first question from Eric Des Lauriers with Craig-Hallum Capital Group..

Great. Thanks for taking my questions and congrats on solid quarter here. I was just wondering, if you could just expand a bit more on the inflation cost that you guys are seeing, I see that, you called out some higher freight costs. Obviously, you guys do have some sizeable margins and ability to absorb that.

But just if you could give us a sense of what you're seeing from an inflation perspective and your ability to pass that on, that'd be great. Thank you..

Yes, sure. I mean, shipping is one of our larger variable costs, especially in our NewGen segment. So a lot of the shipping freight increases for the quarter for NewGen was related to the PACT Act implementation.

So our shipping costs, the percentage within that segment was up over 300 basis points year-over-year, in, what I would call, our Zig-Zag as products traditional channel, our shipping costs were up a little bit, but not to the extent that we saw in our in our NewGen segment..

And are you guys seeing any other material signs of inflation at this point, whether it be packaging or labor, or anything like that. Just any other sort of signs of inflation that you may or may not be seeing will be helpful. Thank you..

Yes, we're not immune obviously to the labor pressure and that everyone else is feelings, but we are kind of seeing that. We started seeing that already last year and we have our normal merit increase for our employees this year. And so, we're seeing it like everyone else is..

Okay. All right. That certainly makes sense. And then, just last for me here.

Could you just kind of help us understand the impact that you expect to see from adding CLIPPER distribution starting in the second half year? I mean, the way I kind of see it, sort of, adding this penetration into the alternative channel and a bit of a revenue synergies the other way around as well.

So, maybe, just kind of help us understand whether qualitatively or quantitatively, sort of, what you're expecting in the second half year with CLIPPER? Thank you. .

Sure. Yes, I mean, we mentioned that CLIPPER in the US-Canada is about -- lighter margin is about $500 million from a manufacturer revenue standpoint. They had about 3% share in the US and we were taking that over in the second half of this year.

There's going to be a transition period, as there are distributors that we are transitioning from, so we're a little bit cautious in terms of how we're protecting it, but long term it is a large opportunity for us, given the size of the market and given CLIPPER success in other markets where they've gained number one share.

Okay, great. Thank you very much. Appreciate it..

We'll take our next question from Vivien Azer with Cowen..

Hi. Thank you. Good morning. Louie, I was hoping to follow up first off with the comment that you made around softening tobacco demand through the quarter.

Any incremental color you can offer on that? Clearly, we can see in the scanner data higher gas prices are problematic for the category, but how is that materializing in terms of changes in consumer behavior? Thanks..

Sure. This is Yavor. Let me take this. Look, one area where we’re different from most of CPG companies is, our consumer shows up immediately after visiting the gas pump and there was a significant price shock on the consumer, which was so late in the quarter, late in Q1 and we've seen reverberate a bit into April.

Hopefully, that was temporary, appearances get adjusted. But the net result is, you have a consumer who is now spending a lot more at the gas pump, which, by definition means, there's a lot left to spend when they hit convenient store.

And what we've seen from a behavior perspective, as people are shifting one toward the cheaper price points, which benefits us. Obviously, we are the value brand and you saw that we're gaining share, we have continued to gain share throughout the quarter. That has continued as far as we can tell into April. So we're happy with gaining share.

At the same time the consumer has less money to spend, so you're seeing some trading away from pops and more towards cans because the can is obviously a lower price point even though it's more expensive and on a weight basis. Not sure, if that's helpful, but the pressure -- we're not at this point, it's too early to tell.

We're happy where we are we're continuing to take measures to make sure that we continue to gain share which we've done last quarter we're doing it today. But we'll see which way the quarter goes..

Yeah. And I think Vivien, I mean, I do a category is generally inelastic, but it's not immune to short term temporary shock..

Yeah, which dovetails perfectly into the follow-up which if our math is correct you guys realized a very healthy 8.1 point benefit from price-mix realization in the Stoker's segment in the quarter obviously pricing where you guys are not the price leader, but pricing from a category perspective has been incredibly healthy.

So, all else equal not talking about future price increases, but really maybe just remind us for the price increases that have already been implemented in the marketplace, like how does that flow through the next three quarters of the year.

When do we start anniversarying the last of those price increases such that absent any incremental price increases, when would you expect that to normalize, it's very healthy right now?.

Yeah. I mean generally the industry has been taking in the past two -- in the last two years the three price increases a year. And the last thing we just took one in February and the last we took last year was in June and October..

Got it, perfect, thank you so much..

We will take our next question from Susan Anderson with B. Riley..

Hi. Good morning, Alec Lagon for Susan [ph].

On Zig-Zag just looking at longer term say the next five years what do you think presents the largest opportunity of growth for the brand?.

Yeah. So for the Zig-Zag specifically after CLIPPER a large opportunity for us on a brand that we think is phenomenal and has that success internationally. So that is for a segment one of the big ones that I think you can drive decent amount of growth over the next couple years.

On top of that, we are continuing to introduce new products into the market so cigars, is a big opportunity for us. It's a very, consolidated market so it would not be easy but we started with the introduction of our rough cut natural leaf cigar product Q1 which we are excited about.

And on top of that, there's other new product launches, natural leaf continues to ramp up hemp wrap continues to ramp up we're going to launch other products like palm leaf sometime later this year into next year. And on top of that, we still feel we are under penetrated in the alternative channel.

As I mentioned B2B commerce led our growth in our Zig-Zag E-commerce business this year and a lot of that was driven by alternative channel sales effort. We're continuing to build our alternative channel sales force and we expect that to pay dividends for us over the next couple of years..

And just to reiterate that last point we are deploying significant resources into the alternative channel both in the form of hiring sales personnel as well as meaningful marketing efforts and we're seeing great traction and great returns so far so we'll keep doing that.

Have to say the obvious is legalization takes more-and-more space and makes it as rec becomes legal in more-and-more states and hopefully we'll get to federal legalization. Those are all trends we're going to ride for a long time and in terms of the alternative channel we're in the very early innings in terms of growth.

So we have a long, long, long path of hopefully consistent and strong growth. That's a good thing right now and then I don't have any reason to believe it's probably different..

Thanks. And I guess just to follow up on the Zig-Zag, I feel like is probably one of the most recognized smoking-related brands in the U.S.

and you just said that partnership with Amuri [ph], thoughts on, maybe licensing out the brand image or even expanding your apparel and collectable collections going forward?.

Look we have a fantastic team that's handling marketing. We just brought Summer Frein to run it. This is the reason we're investing heavily behind the brand. We did say on Q1 that that we will continue to support marketing. I think they've done a phenomenal job in developing relationships, partnerships, collaborations.

You should expect to continue to see that and we'll know a lot of it, because it's highly effective with of course the size of our competitors complementing it as long as it speaks for itself. That being said, we're highly unlikely to start licensing our brand. That's just not currently on plate..

Perfect..

If you look at our website today, we have a limited edition $1,000 box. So pretty hefty offering that we just launched and it's almost sold out already. So I think what they're doing in terms of, kind of, product development and partnership in general marketing has been beneficial for our brand..

[Operator Instructions] And we will take our next question from Gaurav Jain with Barclays..

Hi. Good morning. So a few questions. Number one is on the M&A front.

We had extensive discussion last quarter on how you are thinking about M&A, but Yavor if you had any further thoughts what have you looked at, anything interesting and which categories you might be looking at here?.

So look the quarter was entirely hands down and executed on the business. We have a lot on our plate, and as I mentioned both on the previous call and on this call, we view M&A as opportunistic and it's going to take time to actually find the right deal. I would reiterate what we've been saying; the right deal has to get synergistic.

We have to have an angle for it. Whether that's our distribution, which is obviously the most obvious thing or with some other asset that is unique to us that we bring to the table, the deal is going to be synergistic.

And again the only other qualifier I would add is we may do small tuck-ins to address things that they are going to buy them then deals are going to be small..

Okay. Thank you. And second is on this $10 million PMTA cost, which I don't recall were specified earlier and it is a decent amount of money. So could you just help us understand where you would be putting those PMTAs because I would have thought that you would be able to use the PMTAs that you filed last time largely to file the new PMTA.

So maybe you're going into some new products.

So can you just help us understand why we have this $10 million cost?.

Yeah. So let me start by just describing what the PMTA is meant to cover the focus of the PMTA filing is going to be modern oral to be clear. We have very little vape in it and the vape part is going to be in partnership with others.

So essentially we'll be supporting somebody else's PMTA or we'll have an arrangement with somebody else where we're spending very little money but hopefully getting the benefit of it. The parts where we spent the lion's share of the $10 million is our own proprietary products, which are going to be strictly modern oral.

One of them is free obviously, and we have another product, which we have not discussed, I'd like to hold off on discussing it. But it is modern oral, it is different. We think it's very different, we like a lot we'll see how it works. But we're very, very, very excited about it.

And that's what the PMTA is meant to cover in terms of when we discuss it, now you are correct, we did not discuss it on the previous earnings call.

We were still figuring out the exact timing and to be honest our preference would have been to file the PMTA later in the year after we've had more time to test the market to see reactions to get feedback and all of that got accelerated by the FDA and Congress and that's just the reality of it.

In terms of overall spend, I can tell you that we had about $9 million in the budget, it went to $10 million as a result of the acceleration, but we've been working on the PMTA for quite some time and this is not something you can do in the rush, which is why it would be interesting to see what people file because we've been working on our PMTA for months and months.

So you know -- go ahead..

I was just going to ask that if you're putting that much money behind modern oral PMTA then could you also then share what your learnings have been from free so far? In terms of like how much have you sold and what is the velocity? How many places are distributed? I mean I can see it online.

But how many stores distribute and how do you compare velocities of let's say free versus token or some numbers if you could share that would be quite helpful for us. .

Hi Gaurav, this is Graham here. Sort of consistent with our philosophy the last year and a half or so, we've taken a very measured approach to approaching the marketplace with the products in terms of store identification and salesforce allocation of time. To-date, we're in a roughly 15,000 stores.

The success of the product in those stores is incredibly encouraging. I'm not going to go into specific numbers I would just tell you that we're starting to cleave off some nice market share gains in those stores. .

And Gaurav the one thing I would add is just from a reorder perspective in comparison to other launches we've done. This has the highest reorders that we've ever seen. So, we thought that's encouraging and just to be clear I think our product is the only one that allows full step down from a higher level to a lower level.

So, if you're looking to quit we're walking you all the way from high to low. And that makes us very unique in the market to accomplish the same result where the competing product you have to be walking around with a multiple of vouchers which is not all that attractive..

Okay. Thanks a lot..

And there are no further questions at this time. Yavor, I will turn the call back over to you..

I would like to thank all of you. Obviously we had a very, very good quarter. I'd like to again thank everybody for their patience. We're obviously investing into the company. We're very optimistic. I've been here for a few months now and I can tell you that I'm more optimistic now than I've been in the last few months.

The more I learned about this company its people and its potential, the happier I am that I am here and the more I look forward to what we can do together. We look forward to kind of the next earnings call and talking to you guys. Thank you all..

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