Turning Point Brands, Inc. (TPB) Q4 2016 Earnings Report, Transcript and Summary

Good morning and welcome to the Turning Point Brands Fourth Quarter and Full Year 2016 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there'll 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 Mark Stegeman, please go ahead.

Thanks, Stephen. Good morning and thank you for joining our call. I'm Mark Stegeman, CFO of Turning Point Brands. As is customary, today's call is being recorded and will be available on our website. Earlier today, we issued a press release outlining our 2016 fourth quarter and full year results. You can access that release from the IR section of our website www.turningpointbrands.com. On today's call, we plan to discuss the Company's performance, highlight progress towards our strategic goals and later open the floor to Q&A. Participating with me on the call today are Turning Point Brands President and CEO, Larry Wexler; and Jim Murray, Senior Vice President of Business Planning. Today's remark contained forward looking statements and projections of future results. I direct your attention to the forward looking and cautionary statements disclosure in today's press release on our website and the risk factors in our filings with the Securities and Exchange Commission, for a review of the various factors that could cause actual results to differ materially from projections or forward looking statements. 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, we undertake no obligation to publicly update or revise any forward looking statements. We may also discuss today certain non-GAAP financial measures; these measures and reconciliations to the GAAP information along with the reasons management believes that provide investors with useful information regarding the Company's financial condition and results of operation are set forth in the press release. I will now turn over the call to Larry Wexler, our CEO.

Thank you, Mark, and good morning and thank you everybody for joining the call. 2016 was a pivotal year for our company. We had record sales an increase of 4.5% to $206 million. Gross profit grew 4.2% to company record of 100 million. Net income for the year was just under 27 million. The fourth quarter was solid as well. Net sales were 53.8 million, and gross profit was 26.2 million both of which were higher sequentially and better than year ago quarter. Our core tobacco portfolio of smokeless and smoking performed very well with net sales of 7.2% and gross profits up 6.4% over the year ago quarter. As a reminder, we compete in three OTP segments, smokeless products which includes chewing tobacco and MST; smoking products primarily cigarette papers and MYO cigar wraps, and NewGen with liquid vapor products, tobacco vaporizers and herbal smoking products. We've three focused brands that drive companywide cash flow. In smokeless, the highly innovative Stoker's brand which we built is the number two position in chewing tobacco and is now also among the fastest growing MST brands. In smoking, the iconic Zig-Zag brand where it is the number one premium cigarette paper and number one MYO cigar wrap. And our newest brand VaporBeast, the leading e-commerce provider of a wide assortment of vaping products to non-tradition retail, an important outlet for NewGen products. In addition to managing the business to record achievements in 2016, we took four significant steps to increase shareholder value. I'll begin with few balance sheet achievements that are important for our long-term growth goals. At the beginning of 2016, our leverage profile was approximately six times EBITDA and most of our cash flow serviced our highly leveraged capital structure, to more fully develop our organic growth opportunities and to capitalize on the opportunity to be a consolidator in the other tobacco products or OTP space. We decided to raise equity to deleverage our balance sheet and provide a publically traded stock we could use of acquisition currency. So, our first step was our successful IPO in May. In addition, we've confidence in our strategic vision and in conjunction with the IPO, our major shareholder converted to a debt into equity. By the end of 2016, we reduced our leverage ratio to about four times EBITDA. The second step in strengthening our financial profile was the refinancing of our 2014 credit facility which we completed last month. We now have a new $250 million facility that should provide us with an estimated $5 million in annual interest savings or 15 in portion of our debt against a rising interest rate environment. Most importantly, we have greater flexibility with capacity to increase the facility by $40 million to an accordion feature, which will accommodate our organic growth objectives and acquisition strategies. Third major post IPO accomplishment was our acquisition of five regional smokeless tobacco brands from the Wind River Tobacco Company. This is a great example of regional plug-and-play acquisition that we're now integrating into our supply and logistics network for expanded U.S. distribution later this year. These brands account for about 2% of industry chewing volumes, but they command an 8% MSI share in stores in which they have achieved retail distribution. A plug-and-play acquisition like this is attractive because we can add brand to our consumer franchise while we leverage our existing SG&A infrastructure providing incremental profitability. Lastly, in the fourth quarter, we acquired VaporBeast which we strategically characterized as a bolt-on infrastructure acquisition. For context, let me take a few minutes to share our thesis on the vapor segment and frame and VaporBeast fits in. Liquid vapor product is a big category with more consumers than the entire community of smokeless tobacco users. So, it's a big opportunity. Vaping products evolved rapidly over the last few years as you saw in the devices and e-liquid flavors grew substantially. Because of that growth in product breadth, non-traditional retail channels emerged marketing extraordinarily wide array of NewGen products such as e-liquids, vaporizers, and accessories with new users. The wide assortment simply became too complex and numerous for most traditional retailers. Sales shifted rapidly to non-traditional retail outlets serviced through new non-traditional supply chain. So acquiring VaporBeast was an effective way for us to accelerate our sales penetration into non-traditional retail without having to divert our sales force from our traditional retail sales efforts. That's where we believe strategic VaporBeast acquisition will prove to be a NewGen turning point. We gained immediate access to a developing channel and the knowledge we will gain which products and product attributes consumers desire will help drive our marketing strategies. We also use this data to carefully craft go to market plans to leverage the VaporBeast distribution platform to penetrate non-traditional retail with TPP products, while also working to expand some of the proprietary brands more fully. We also have an opportunity to marry their exceptional e-commerce platform with our retail sales force to create a more comfortable and competitive sales enterprise. We see numerous other opportunities for this acquisition. Applying our analytical and sales methodology to help VaporBeast in their customer, streamlining internal processes especially in supply chain to improve effectiveness and strengthen partner relationships and leverage their e-commerce platform across our entire product line. We believe VaporBeast will approve to be a transformative acquisition that delivers robust sales and offers significant synergies meaningful growth opportunities. As a reminder, at the time of the acquisition VaporBeast annual revenue was about $53 million with almost $7 million in EBITDA, although the category experienced some turmoil over the past few months FDA deeming regulations and growth is moderate we are starting to see momentum building. Importantly, after we completed the VaporBeast and Wind River brand acquisitions, our leverage remain virtually unchanged. There are still many other OTP companies seeking strategic alternatives in light of the evolving FDA regulatory requirements, where we do not currently have any firm agreements, we are actively engage in exploring potential accretive acquisitions. Our management team and all employees are excited as we have begun to pursue the growth strategy that we’ve been articulating to our shareholders, continue to developing of our focus brands, bolstering organic growth with sales force expansion and new product development and acquire OTP companies that enhance our market position, product portfolio and best infrastructure and we are delivering. Now, let me highlight some of the segment results. Smokeless sales for the year were up 4.9% to a company record 77.9 million. We continue invest in consumer trial incentives for Stoker’s MST cans and expand retail availability with good success, as we added over 5,000 new stores in the fourth quarter. By the non-cash LIFO variants of $0.9 million and heavy brand building investments in promotional products, we increase gross profit for the year to 38.6 million. Quarterly net sales were 19 million roughly comparable with the previous quarter were 2.3% below 2015. This was a result a few declines, lower MST unit revenue from elevated sales incentives, one last shipping day a natural expected increase in Stoker’s MST relative to introductory year ago period. The fourth quarter was highly competitive quarter for all especially for smokeless tobacco or the MST was continued and significant new state taxes impacted issues. The year-over-year industry volumes for chewing tobacco declined by greater than 10% while MST volumes in the quarter were also saw current MSAi. Despite this challenging environment, TPB outpatient industry and grew our MSAi share in both chewing tobacco and MST which Stoker’ MST expanding approximately 7% in the quarter. Gross profit for the smokeless segment for the fourth quarter was 9.1 million trying to 1.5 million versus last year’s exceptionally strong quarter, largely because of non-cash LIFO variants of 0.9 million, 0.5 million in Stoker’s MST cans launch cost and the volume impact discussed above. Gross margin excluding LIFO declined to 50.2% or 52.4% for the reasons I just mentioned and a mix shift in sales as we continue to grow MST to be a larger percentage of our smokeless portfolio and it carries a low margin in shifts. We continue to make great progress in the rollout of Stoker’s 1.2 ounce cans into more retail doors, and we more than doubled our retail distribution MST cans since the end of 2015 and there is still more opportunity. Additionally, we are anticipating positive gains from expansion Wind River smokeless brand in the latter half of ’17. Turning to smoking products. For the year, sales increased 4.8% to $111 million on continuing strong advances for the rollout Zig-Zag Cigarillos cigar wraps. Gross profit for the year was 9% to 57.6 million. For the smoking product segment, net sales for the quarter were 27.6 million an increase of 14.9% from a year ago quarter. Growth was driven by continued gains in Zig-Zag Rillo cigar wraps and strong orders for Zig-Zag cigarette papers. Including to MSAi, industry volumes for cigarette papers declined by high single digits in the last quarter of 2016 while MYO cigar wraps increased by high-single-digits. Zig-Zag increased market share versus a year ago period in both MYO cigar wraps and in cigarette papers. Gross profit for this segment increased 24.7% to 15.2 million. Gross margin increased to 55.1% of net sales. I talked quite a bit about the impact of VaporBeast or NewGen earlier. Net sales for the year were up 23 million as we begin with the transformative VaporBeast integration. Sales for the year include one month of VaporBeast. Gross profit for the year decreased from 4.9 million to 4.1 million on declining electronic sales to traditional retail and high returns as traditional retail resets the smaller in-store product shifts. Net sales for the quarter were 7.3 million, up 4 million as a result of including a month’s net sales from VaporBeast. Gross profit for the NewGen segment increased for the quarter versus a year ago by 1.1 million, reflecting a one month of VaporBeast performance in segment results. NewGen gross margin increased to 25.8%. This year, we will see growth in this segment as we leverage our new acquisition. To summarize in 2017, our priorities remain clear. Integrate and ultimately leverage the 2016 acquisitions continued the Stoker’s MST can expansion, continued brand and business building efforts and specifically expand Zig-Zag Rillo wraps and the explore in cap debt potential acquisition categories. With that, I would like to turn over the call to our CFO, Mark Stegeman to discuss the financial highlights for the year in more detail, some additional insights on the refinancing and the impact of tax and other financial initiatives.

Thanks, Larry. As Larry outlined, 2016 was an incredibly busy and productive year in which we delivered some transformational accomplishments. I want to express my sincere thanks to entire Turning Point Brands organization as well as our financial and legal team partners whose combined efforts were critical to our successes. Thank you. I’ll start by augmenting some of Larry’s comments. For the quarter with respect to our segments, smokeless volumes decreased 1.9% as we realized strong MST gains offset by slower than industry to declines, which are substantially higher sales price per case. Price mixed decreased 0.4%. Smoking product volumes increased 11.1% in the quarter, while price mix increased 3.8%. As Larry mentioned, we had a strong quarter for Zig-Zag cigarette papers. Year-end trade inventories appear higher than usual, and we anticipate lower replenishments of announce a 0.5 million to 1 million in the first quarter this year. Fourth quarter 2016 smoking products results include FDA user fees and cigars for the first time with aggregate fees and associated federal exercise taxes of less than 200,000. NewGen volume increased to 104% while price mix accounted for an increase of 14.9%, reflecting the inclusion of VaporBeast for one month. Consolidated SG&A expenses in the fourth quarter were 16.2 million compared to 12.4 million in 2015 due to acquisition expenses of 1.1 million, incremental SG&A related to the VaporBeast acquisition of 600,000, one-time write down of note receivable of 400,000, IPO related compensation expenses of 300,000. Fourth quarter new product launch cost and SG&A of 400,000, an increase of 200,000 from a year ago and recurring public company cost of 200,000. Non-recurring launch cost for MST and cost to consoled in 2016s fourth quarter was 0.5 million and no such cost were included in cost to goods sold in the fourth quarter of 2015. We earned 200,000 for the quarter and 800,000 for the year for our master settlement agreement accounts. Net income increased to 26.9 million for the year which was boosted by a $12.6 million tax benefit in the fourth quarter from the reversal of the deferral tax valuation allowance. This is complex accounting, but to try and simplify this we previously had a reserve against our NOL deferred tax assets because of the uncertainty of being able to utilize them under GAAP. We now expect to utilize these NOLs after which we will be taxed at normal federal income tax rates. Fully diluted weighted average shares outstanding for the quarter were 19.7 million. Fully diluted earnings per share were $0.87 for the quarter and $1.49 for the full year. For the year, interest expense was 26.7 million versus 34.3 million in 2015, reflecting a material benefit of lower post IPO debt levels. For the year, adjusted EBITDA was 52.4 million versus 50.6 million and for the quarters 13.5 million versus 11.2 million last year. Subsequent to year-end in February of 2017, we ranged a new 250 million credit facility which lowers our average cost of debt from approximately 8.5% to around 6.3% and based on our current balance sheet is expected to reduced interest expense by about 5 million annually. Let me elaborate on our new credit facility, the $250 million facility has two tranches, a first and a second lane. The first lane facility consist of a $50 million revolving credit facility, a $110 million first out term loan that entices over five years and 5% for the first three years, 7.5% for the next two years and steps up to 10% in the last year, and a 35 million second out term loan which amortizes at 1% per year. There is also an access cash flow recapture formula of calculation accommodates acquisitions. Larry also mentioned that the first lane facility includes an according feature that allows us to borrow up to an additional 40 million while there are conditions we would have to satisfy. This feature gives us ready-to-go additional net capacity for accretive acquisitions. The first out term loan and the revolving credit facility have a five year maturity and the second out term loan has a five and quarter year maturity. The first out term loan and the revolver are priced at LIBOR plus 250 to 350 based upon our senior debt leverage ratio. The second out term loan is priced at LIBOR plus 600 basis points subject to a floor of 1%. In comparison, our pricing on the former first lien facility was LIBOR plus 650 subject to a LIBOR floor of 1.25%. The first lien facility contains certain financial covenants including maximum senior leverage ratio of 3.75 times with annual step downs of maximum total leverage ratio of 4.7 times also was step downs at a minimum fixed charge coverage ratio of 1.2 times. I'll remind you that our long-term targeted net debt to EBITDA is 2.5 to 3.5 times. Pro forma for the acquisitions we made in 2016 and this new credit facility, pro forma net debt to adjusted EBITDA at year end was approximately 3.9 times. The second tranche is a $55 million second lien term loan with a 5.5 year maturity and a fixed rate of 11%. This represents a savings for the Company. At current market conditions this is equivalent to a floating rate loan at around LIBOR plus 850 to 875 basis points compared to our prior $60 million second lien term loan that were set at LIBOR plus 1,025 basis points with 1.25% LIBOR floor. This tranche is $5 million lower than the previous second lien tranche and is at a fixed rather than a variable rate. As a result of that extinguishment class from the new facility will incur a non-cash charge of approximately 6 million in the fourth quarter of 2017. Let me move from the refinancing and review some of the other key metrics. Federal excise taxes included in our sales and cost to sales totaled 4.6 million for the quarter and 20.5 million for the year. FDA fees accounted foreign cost to goods sold amounted to 132,000 in the quarter and 413,000 for the year. NOLs available to offset federal income taxes amounted to 34 million at year end. CapEx for the year was 3.2 million included the purchase of our Dresden manufacturing facility for 1.3 million. In 2017, we expect to return to our historic asset like CapEx levels of roughly 2 million a year. Net debt at year end was 215.3 million and net debt to adjusted EBITDA was 4.1 times. Pro forma for our February refinancing and November acquisition EBITDA net debt to adjusted EBITDA was 3.9 times. At the outset of the fourth quarter, Pennsylvania implemented $0.55 per ounce excise tax on all smokeless products effective October 1st. Pennsylvania represents about 3% of industry chewing tobacco volumes and 6% of industry MST volumes. The implementation included afore tax which likely intensify trade reaction to the tax and resulted in industry shipments declining by double-digits versus the year ago quarter. While we expect the declines some moderate, we will continue to monitor the impact of the tax on consumer behavior. California voted to approve state excise tax increases on a variety of tobacco products. In addition to the $2 increase on cigarettes effective April 1, 2017, there will be increased in state excise taxes on OTP as well. While the Board equalization has not yet defined the OTP increase, the industry estimates that will result in an increase from roughly 27% of the wholesale cost to 65%. Importantly, excise taxes will now be extended to vapor and cigar wrap products. In 2017 and going forward, we expect an annual non-cash amortization expense of approximately 700,000 relating to our 2016 acquisitions. In summary, 2016 sales for Turning Point Brands increased 4.5% to a record 206.2 million. For 2017, we will have a full year of both VaporBeast and the Wind River smokeless brands and expects total company sales volume growth between 26% and 31% and price mix contributing 2% to 4%. With that, I will turn the call over to Larry for a few final comments before we turn to Q&A.

Thanks Mark. In a short period, the TPB has been a public company. I am pleased with our accomplishments. We're on our way, but we're not there yet. We remain a work in progress supported by energetic, innovative and resourceful team focused on accomplishing our goals of growth and increased shareholder value. As we wrap up, I would like to leave you with some key takeaways about our future opportunities. First, our core portfolio is performing exceptionally well, driven by our smokeless and smoking focused brands. VaporBeast and its unique sales engine have potential to be a transformative acquisition to reach the non-traditional retailers outside of our current sales force footprint. Wind River brands currently limited to 25% of the market have meaningful expansion potential. And finally, we believe there are strong consolidation opportunities in the OTP industry. We are innovative and nimble company pursuing targeted long-term growth by never forgetting the consumer, and for providing them with great products. We appreciate your participation in today's conference call. With that, I'll open up the floor for questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Vivien Azer with Cowen. Please go ahead.

I wanted to kick things off please with a question on Stoker's. Larry, you mentioned some really significant encouraging distributions gains in the fourth quarter, but you also commented on opportunity for more ECB gains. So can you help kind of frame how big do you think the distribution gain opportunity is for Stoker's in the can and what would you expect to accomplish in 2017? We'll start with that. Thanks.

Vivien, thanks for the question. We do see an opportunity for more gains and we think the -- there's going to be a shift in the mix of those gains more chain stores versus independent stores. We start all independent stores to get, but we're going to highlight the focus on chain. As you know, the change is little harder to predict exactly when they will come, but we do see continued expansion of store doors in 2017.

And as we think about the impact in California and this is an MST specific question please. Can you just remind us how to think about price lasts to fees for that segment? Your competitors don’t talk about it all that much, we tend this year about cigarette price elasticity. So anything that you would offer there as we kind of think about the volume pressure we would anticipate in California would be helpful? Thank you.

Yes, if you go back and think about the large price increases that happened with SCHIP back in 2009. I think what we expect, right, we expect to see I think that has been the general case. If there is some disruption in the short term, but consumers tend to go back to their former patterns after that short disruption. So, I think you will see kind of an interesting quarter or two and then you'll start to settle out. But in general -- in general, it’s fairly low price elasticity across most tobacco products.

Okay, perfect. That’s helpful. And then on NewGen, at the CAGNY Conference in February, Altria had noted that their estimation was that the total vapor category and this is all channel was roughly flat at about $2.5 billion year-on-year. And so I’m just wondering, does that seem like a good read to you? And what do you think it’s going to take to reinvigorate the total category? Surely, there are some underlying mix shift their where probably open systems are growing at the expensive close to the total category nets out, but just love to hear your thoughts on kind of the evolution of the category from a revenue perspective and a mix shift perspective? Thanks.

What we saw from the category readiness that with the FDA deeming regulations, there was some I'd call it turmoil. We believe there was turmoil, but there was some dislocation as people start adjusting and sort of trying to understand what the FDA deem is actually meant. I think that settled down and we're starting to see a little bit more momentum picking up, but there is a lot of people using combustible products today and most of them were looking for an alternative, and we do think that the products and distribution visibility of these products will attract those people over time. As I said, we are starting to see a little bit of movement picking up and we expect that to continue.

That’s helpful. And just last one from me just to double back to MST. Larry, you noted higher promotional investments behind that segment, which makes a kind of sense you've added 5,000 new doors, but seemingly that’s weighed on your gross margin some in the quarter. So, how do we think about the cadence of promotional investments through 2017 on MST, please? Thanks.

Yes, with the size of our sales force we tend to -- we can’t concentrate our promotions quite like the larger companies can, so we tend to be spread out our warrantee quarters. I think the third and fourth quarters both reflected a little bit more so in the fourth quarter. We will have periodic promotions going into the marketplace and obviously as we implement these stores we'll be promoting those stores as well. So, you will see for the time of time that we will have these promotional burst, but what I see in the market right now is that. When we put these promotions out there, it tends to put a lot of products into individual stores and we tend not to get reorders from those stores for a couple of weeks. And then after a period of time, we're starting to see reorders and as order flows started picking up towards the end of the fourth quarter and that’s forward-looking. So, we think promotion has been one of the success with accomplishes goals and we expect the using as from time-to-time going forward.

[Operator Instructions] And the next question comes from Susan Anderson with FBR Capital Markets. Please go ahead.

I was wondering, if you could maybe just give a little bit color on the trajectory of NewGen excluding VaporBeast particular with the Primal rollout? And then just any more color you can give on Primal and the performance there in the U.S. and Canada and initial response and then how many doors it's in right now and any expansion there?

Okay. Let’s talk a little bit -- let's talk about the concept for the Primal brand. What we see is a growing category around the world of non-tobacco, people enjoying non-tobacco smoking experiences and we put the current Primal products out there to start testing, to start seeing how consumers respond to it. We’ve gotten some great qualitative feedback from both the consumers and the trade, and we've learned a lot of over the last couple of months. We do have some new products that we’re looking at. We're looking at introducing; applying that learning into the marketplace, we're thinking got a solid foundation. We're out in talking about the number of stores at this point. I think I’d like to focus on the fact that the learning that we’ve had and some of the things that will be implementing over the second half of the year. Because of the newness of the distribution, it’s pretty hard to see what the loss integrates are. But we do see, we’re already getting some very good qualitative feedback from consumers. Now, we get other questions on Canada. The Canada program was delayed, its product that is now in Canada, and they'll be starting implement in the first quarter this year. Unfortunately, we did have -- we do have some delays in that program.

And then I guess with the acquisition of Wind River smokeless brands. You've talked about at ramping as we kind of go throughout later 2017. How should we think about? What are you expecting from the grocery of those brands? And how should we think about the contribution?

Well, right now it’s distributed in about 75% of the -- the 25%, I said 75, sorry about that. 25% of the market and in those stores it has each year. If you look at the Wind River brands, they have a very similar profile to Stoker's. I don’t know that we’ll get into as many stores that Stoker's get into, but there is a very substantial opportunity to increase the Wind River distribution. And as I said, we’ll be starting at later half of the ’17. We got to make sure all our systems are set and we switch the production over for Wind River into our current supplier. And once that happens, we will turn the sales force lucid. I think we'll be hearing some pretty good news from Wind River in the second half of the year.

And then I guess last one for me. Just on the acquisition pipeline now with a few under your belt I guess. How should we think about going forward, do you guys have bandwidth to make more acquisitions currently? Or is it more you want to swallow these couple of that you made first? And then also maybe if you can just talk about the acquisition pipeline and what you're seeing out there?

Well, I think we’ve learned a lot with these first two acquisitions. Even the ones that seem like simple plug and play do take a lot of work from the organization. So, we’re going to take a few months to look at and digest the current acquisitions. But we do see that we have capacity to add on more companies and we do think that we’ve learned a lot, but that have to do it. And so, it should be even more effective in doing it doing the future. I don’t think the organization itself is limiting factor, it's just a matter of when the opportunities arise we'll act on them. At this point, we have capacity to absorb more companies in 2017.

The next question comes from Ernie Segundo with Pandion Capital. Please go ahead.

I have question regarding the returns that you mentioned in this relative to -- fourth quarter relative to the year ago product introductions. Can you give a little more color on that please?

When you have a product like -- I assume you're talking specifically about the Moist Snuff returns, that's [Indiscernible]. If I miss the question then I'll go back and ask the question you have?

No, that’s what I was talking about. Thanks.

Products, tobacco products, specifically Moist Snuff has a certain shelf life and so when we were reintroducing the product last year, we were right the beginning of our instruction, we started in the summer of 2015. And so, it was very little product there was reaching end of its little bit shelf life at the end of 2016 -- I've given in 2015. So, in 2016, we had product out there. That was out there for and so the retailers start sending it back. We're actually insisting with design to keep fresh product in front of the consumers. So, it is very normal in Moist Snuff to have a certain very good return. We just didn’t experience it at the end of 2015. This product was just had out our factory and we recently reached to stores. We actually sent our sales guys into the store to pick up outdated product. We want our consumers to get the precious most valuable springs that we can give them at retail. And so basically, it was expected, it's nothing unusual. We’re not saying anything out of line from what we thought we would get in terms of returns, it's just natural evolution of the new product introduction.

Okay. That makes sense. I understand the dating. Your product in general is much more long dated than some of the competitors correct?

That is true. Where do we process and package it, does give us we believe is a longer shelf life.

Could you talk a little bit more on the distribution side of the Stoker's in a can, Moist Snuff and where you are in the ramp to gain broader distribution as well as how you plan to support it with any kind of consumer pull-through advertising you may be contemplating given that it’s a not everywhere like the big competitors?

Right, obviously, we have a smaller sales force in [Indiscernible] it takes a little bit longer as introduced the product. In 2016, we added about 5,000 stores a quarter and we ended the year with about 51,000 stores. That was probably heavily weighted to independents although we do have a large number of chain stores. Going forward, there're more independent opportunities. We'll finish cycling those probably in the first half of 2017 and we expect a disproportionate share of our new store gains to be from chains. We do have ambitious internal targets, but this time particularly because of the chains the timing on chain implementations really varies, I hesitate to give quarter-by-quarter targets for now. But we believe this is a long-term project for us, we're going to stay on it. It's going to be one of our top two priorities for the entire year. It has enormous long-term payout. The Moist Snuff I think leaning, it's very tough, it's a very brand loyal segment, but as hard it is to get market share. Once you have, it's pretty hard to lose it because those consumers stay very brand loyal, and I think it is almost like an annuity that once you get the consumer you keep them for a long period of time and so we're going to stay focused on it. We think it as a great potential for the Company.

And then finally on the acquisition, potential acquisition front, could you at least discuss a little bit which of your segments that would likely be targeted then or you open everywhere in all you categories?

We're pretty open, basically when we look at acquisitions, we look at them in sort of couple of buckets. The first one is we look for products that are aligning with our current distribution and our current logistical systems, manufacturing systems. So, we call those plug and play, so we can bring these products on, we can put them on the price list immediately, start getting some economic gain -- wipe out the overhead, get some economic gains. But in certain cases for instance like in the Wind River or part of that when we bought Stoker's way back in 2003, these are brands that have regional strengths and we can then put them in our sales force bag and expand their distribution and get much large economic gain. Those are type of acquisitions we look at are ones that expand our capabilities, VaporBeast is example of that one, we call it bolt-on infrastructure acquisitions where we can actually expand where we're capable of doing, getting us into new markets, new channels, and with new scales. Look, our hypothesis has been that the FDA is putting pressure on the companies in the OTP space. There were 300 tobacco only companies in that space. So, we see there're opportunities there were also NewGen as large turmoil going on there and we also see it in that space as well. So, if we can find good opportunities that fit with our strategic objectives, we'll jump on no matter what segment there.

This concludes our question-and-answer session for today. I would now like to turn the conference back to Mark Stegeman for any closing remarks.

Thanks for joining us on the call today. We look forward to discussing Q1 '17 results with you in May. Have a great day.