Good day and welcome to the Turning Point Brands Q4 2018 Earnings Call. Today’s conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Bobby Lavan. Please go ahead, sir.

Thank you, operator. Good morning, everyone. I am Bobby Lavan, CFO of Turning Point Brands. Joining me today are Turning Point Brands’ President and CEO, Larry Wexler; Graham Purdy, who heads our newest subsidiary, Nu-X; and Jim Murray, Senior Vice President of Business Planning. This morning, we issued a news release covering our fourth quarter and full year 2018 results. This release is located in the Investor Relations section of our website, turningpointbrands.com, where a replay of today’s conference call will be available. In this call, we will discuss our consolidated and segment operating results and provide our perspective on our progress. As is customary, I direct your attention to the discussion of forward-looking and cautionary statements in today’s press release and the risk factors in our filings with the Securities and Exchange Commission. The disclosure outlines various factors that could cause actual results to differ materially from projections or forward-looking statements that may be cited in today’s discussion. These forward-looking statements and projections are not guarantees of future performance, and you should not place undue reliance upon them, except as provided by the federal securities laws. And we undertake in obligation to publicly update or revise any forward-looking statements. In the call today, we will reference certain non-GAAP financial measures. These measures and reconciliation to GAAP can be found in today’s earnings release, along with the reasons why management believes that they provide useful information. I will now turn the call over to Larry Wexler, our CEO.

Thank you, Bobby and good morning everybody and thank you for joining the call. I am especially pleased to have this opportunity to not only share with you our progress against our long-term plan, but also to highlight a number of recent significant activities against it. The fourth quarter was especially dynamic, and we continue to see the concrete results of working against the plans and programs we have announced. We advanced the company in each of the three legs of our strategic platform. The first is driving the growth of our focus brands. Brands matter are our brands are one of our most important assets. Consumers enjoy certain product qualities and attributes, but they ultimately adopt brands that not only provide the product benefits, but also resonate with them. In the fourth quarter, Stoker’s moist snuff set another share record on double-digit volume gains fueled by continued consumer enthusiasm and expanded retail distribution. Our share in stores where we have achieved retail distribution is now greater than 7%, demonstrating the strength of our proprietary production process and the loyalty of the consumers we have welcomed to the portfolio. In fact, Stoker’s posted its largest annual share gain in 2018 plus 0.7% on continued shares chain stores distribution expansion and growth in existing stores. The iconic Zig-Zag brand remains the U.S. market share leader in both premium rolling papers and MYO cigar wraps. In the fourth quarter, we further penetrated the retail universe with organic hemp papers becoming the second largest hemp SKU in the category despite being in the market less than a year. We also began executing our plans for a number of new products, including unbleached papers and paper cones, which launched these past few weeks. And VaporBeast delivered record quarterly net sales and gross profits, while…

Thank you, Larry. Good morning, everybody. These are perhaps the most exciting times here at TPB. Nu-X was conceived and born out of consumer exuberance for novel new Vapor and CBD products as well as a wide range of other opportunities we won’t comment on today. I am excited to announce that Nu-X officially began broad commercialization with the introduction of our proprietary RipTide small form factor pod vapor system beginning in the week of February 18. A liquid bottle format was introduced to our stores earlier after extensive testing and consumer influenced refinements. Distribution of RipTide products has already been obtained in our own corporate and franchise store universe with encouraging qualitative feedback. The vaportype.com B2C website is alive with online marketing efforts now beginning to build traffic. We launched a small trial promotion to our adult consumer database on February 22 and sold out the offer in less than 4 hours. B2B sales will be starting later this month via the VaporBeast distribution engine to third-party vape shops and the B2C sales engineered IVG will also be initiated and will accelerate awareness, trial and sales. RipTide is scheduled for a second quarter launch in traditional retail where we intend to leverage our field sales force. And importantly, we’ve been in discussion with a large number – a number of large influential chain customers and the reception has been exceptionally strong. Our omni-channel sales plan for RipTide will be in full swing by the end of the first quarter. SEO for vaportype.com web platform is well underway, and discussions with social influencer, is in full swing. We anticipate seeing the initial results of our optimization and influencer strategy beginning in the second quarter. Early qualitative reaction from our customers and consumers is very encouraging. You will note that this…

Thank you, Graham. First, let me recap our performance in Smokeless. On the continuing strength of Stoker’s, quarterly smokers net sales increased 10.2% to $23.1 million in the fourth quarter of 2018. Double-digit volume and revenue gains on Stoker’s MST were partially offset by sale declines in chewing tobacco products attributable to the continuing shift to lower price products and category declines. Net sales for the Chew portfolio declined by $300,000 in the quarter, while MST advanced $2.4 million. Smokeless volume increased 5.5% with price mix advancing 4.7%. As you’ve heard me say before, our Smokeless business is at an inflection point as a double-digit volume advances of Stoker’s MST overtake the scale of our chewing tobacco business. In the quarter, Chew was 52% of smokeless net sales. In the year-ago quarter, Chew was 59% of Smokeless sales. That’s a dramatic swing towards MST in just 1-year as we continue to fuel, Stoker’s MST skyward incremental margins will improve on volume gains. For the year 2018, Smokeless net sales increased $5.5 million to $90 million. Industry volumes of chewing tobacco declined by approximately 6% in the quarter, while industry MST volumes were soft by about 3% to a year ago. In both MST and chewing tobacco, Stoker’s continue to grow retail market share as measured by MSA. In the quarter, Smokeless segment gross profit increased 15.8% to $11.9 million, while gross margins expanded 250 basis points to 51.6% due to LIFO variances in both years. Absent the LIFO expense in both periods, gross profit increased 9.1% or $1.0 million and gross margin contracted 50 basis points to 51.2%. For the year of 2018, Smokeless gross profit increased 8.9% to $46.5 million. Turning to our Smoking Products segment, Smoking Products net sales in the quarter decreased $1.8 million to $27.1 million.…

Thank you, Bobby. I trust each of you can sense our enthusiasm for the promising journey we have embarked upon. Enthusiasm here at Turning Point Brands is exceptionally high and the tremendous growth opportunities we see before us leave us even more excited. We will continue to execute our carefully measured strategic plan by driving focused brand growth, expanding through acquisitions, and strengthening our corporate infrastructure. Thank you for participating in the call today. And with that, I would like to open up the line to questions. Operator?

[Operator Instructions] Our first question comes from Vivien Azer from Cowen & Company. Please go ahead. Your line is open.

Hi, good morning.

Good morning, Vivien.

Congrats on the strong quarter and strong outlook. My first question is just a point of clarification, Larry, so you guys were saying for MSAi, MST volumes down 3%, you are excluding pouches and snus products. Altria reported adjusted domestic Smokeless category volumes down 1.3%. Is it just the delta like being driven by outperformance of pouches and snus, is that what you should think of that?

Yes, pouches have been growing relative to loose tobacco. As you know, we only complete in the tobacco that’s why we focus on that share in that particular segment of the market.

Yes. So as a follow-up to that, how are you guys thinking about pouches? Like is there a day where you feel like you are going to need exposure to better performing sub-segments?

It’s always a possibility. There are different ways of approaching that market. We are looking at them. We have nothing to talk about today.

Okay, fair enough. Just thinking about the gross profit trajectory for the Smoking Products segment given some of the nuances around what’s happening in Canada and how you are going to have to manage your inventory like how should we think about modeling gross profits for that segment going forward?

So, Vivien, it’s Bobby. So, one key point on inventory, so we don’t hold any Canadian inventory, but there is no drawdown issues from our income statement, it’s just a matter of our partner in Canada. If there are long inventory, they are not going to buy inventory from us. So there is no inventory rationalization that would flow through our income statement as it relates to Canada. There is just an element of orders and the packaging regulations keep getting pushed out. So, I would expect sort of first quarter is okay, second quarter is soft and then it should pickup kind of in the third and fourth quarter from a Canadian perspective. And the Canadian business kind of comes in a little bit lower than our segment margins and so you should just model it that way.

That’s super helpful. Thank you so much. And then just last one for me, really appreciate all the color and thanks for the callout on the CBD market timing or sizing rather, how are you guys thinking about the FDA’s hearing in April, any expectations around that in terms of FDA and Gottlieb commentary around CBD?

No, I think their meeting is a reflection of what’s going on in the CBD market. They just want to get out in front of it and set some guidelines. I think the FDA is probably going to be fairly open to – and positive to the market. I don’t expect any big negative outcome from that. I just think that if the guidelines will be provided so as you compete effectively in the market. And so I am looking forward to the meeting.

And do you think that the guidelines are going to focus primarily on like packaging and product claims or do you think there could be incremental restrictions around form factors that are already available in the marketplace?

I don’t anticipate any big changes. I think there is a lot of noise in the marketplace. And as you know, the Farm Bill sort of clarified a little bit where CBD stand in the market. And I think that they are just trying to set some broad guidelines on the whole thing. Think of this as the first step, the FDA as you know is an organization that doesn’t move particularly rapidly. And I think that this is partly getting on the front, starting to gather information and I expect broad strokes, not a lot of detail in the outcome of the meeting.

Okay.

Thank you. Our next question comes from Susan Anderson from B. Riley FBR. Please go ahead. Your line is open.

Good morning. This is Luke Hatton on for Susan. First I was wondering as you rollout new and proprietary products this year, how should we be thinking about the launch cadence going throughout the rest of the year? And is there any sort of cadence difference between the different segments?

Yes. So, here’s how you as we indicated it’s going to be costs are going to be front-end loaded. Revenues are going to be back-end loaded, and that is how you should model it. I would really wait it towards the second half and we have products in the market. There is an element of expenses of pushing products to market, consumer trials, and so that’s how I would model it. We are going to give you sort of quarterly guidance, and so you should be able to track it throughout the year. But I would really sort of back end that $10 million to $20 million, but there is some in the first half.

Understood. Okay. And then, just from a higher level, what’s the sort of general time line for a successful product to move through that sales channel funnel that you’ve described going from release in the own stores through to the sales force?

It will be different for different products. I think that the Vapor product, it’s a much more defined product category. We put it in we put the bottled liquid into our stores a couple of months ago. We gather some data. We tailored some of our programs. We’ll probably roll out I think Graham mentioned, we’ll probably start rolling it out to our traditional sales force sometime in the second quarter mid second quarter. CBD is different. CBD is a market that is sort of forming right now. And we’re going to be gathering a bit more information from our sales channels before going to retail. So, we probably won’t be going to retail until later in the year.

Got it. Thank you. And then so you provided color on sort of Vapor synergies that you’ve realized in 4Q? And I was just sort of wondering what are the what sort of synergies remain for before they’re all fully in place at the end of the third quarter here?

Yes. I mean, the most significant synergy is we had inventory in significant amount of locations. And so, you get an ability to consolidate those locations and create a scenario where you only are picking inventory from a few places is so dramatic and that is the edge that Turning Point has. Additionally, up until a week ago, we were shipping a significant portion of our business from San Diego to the East Coast. We’ve consolidated that into Kentucky. And so just the math of shipping hundreds of thousands of units a week from San Diego versus shipping from Kentucky where UPS has their hub is dramatic.

Great, thank you. I think that’s it for me. Good luck next quarter.

Thanks.

Thank you. Our next question comes from Bart Bramanti from Callahan Advisors. Please go ahead your line is open.

Thanks for taking the call. So, with in the Smokeless segment, with the expansion, particularly, into the dollar store space with Dollar General being so successful. Is there any at all making a move into the Dollar tree family, Dollar brand trying to cover the other half of Dollar stores in America? And then, in the Dollar store space, is there a potential for kind of SKU expansion outside of the Stoker’s brand in those spaces?

No, I think that the way we look at the market is that Dollar stores are generally lower volume stores. It was nice to get Dollar General. It certainly gathers a lot of exposure and a lot of distribution, but we’re much more focused on the high velocity chain stores at this point. We had introduced the product into Murphy Oil with great success in the second quarter of 2018. I think you I think we are focusing our efforts on generating a lot more news in the chain world.

Okay. And then, also in the Smokeless segment, you commented on lower volume and price mix in the lose leaf line is kind of offsetting strong growth in the more Smokeless line. And so, on the call in August, you all said you see Stoker’s selling at a 25% to 40% discount in the lower-priced segment of MST. Is this still the case? Or can you give an update on where you’re stand in closing that price realization GAAP?

We have made no changes to our pricing dynamic with MST. I mean, the growth in MST, we continue to enjoy consumer trial, and so it’s still a transition, but beyond the lookout.

Alright. Are you all seeing kind of competitors following suit a little bit in continued new product releases in the lower price points in MST? Is that something that we’re seeing kind of the market adapt to?

No. There is a high level of promotion in the MST market. So, in certain stores, you’ll find products that are even priced below us. One of the reasons why we chose this pricing strategy is the fact that we have a relatively small sales force and we can’t do the types of store-by-store promotions that the bigger companies can do. And we have this lower list price in order to get what we call consumer induced sampling. We’re happy with the price positioning. Obviously, this is a competitive marketplace, there’s a lot of promotions out there, but we believe that our product has a lot of appeal among consumers and at the end of the day, it will do well.

Okay thank you very much.

Thank you.

Thank you. [Operator Instructions] our next question comes from George Baxter from Sabrepoint Capital. Please go ahead your line is open.

Hi guys congratulations on aggressive developing business.

Thanks George.

Thanks George.

My question, I wanted to focus a little bit on third-party CBD distribution. I noticed that at the Vapor Shark stores, they were selling third-party CBD. I think it began in the fourth quarter. Can you talk about how broadly you anticipate selling third-party CBD? Will you sell through VaporBeast to your vapor customers? And then, if you would just elaborate on the opportunities for distribution.

Yes. So, we will sell third-party products the same way that VaporBeast is the market leader in selling third-party vaping products. We will do the same with CBD. We believe the customer base is extremely similar and overlaps. And the attention we’ve gotten has been extremely positive. And so, we see it as a huge market. But obviously, the holy grail, as we discussed, is selling our own proprietary products. But we those products that you’ve seen in the Vapor Shark stores is a way for us to build and develop our systems. Selling CBD had tons of roles, tons of taxes. There are certain states that are cut out, and we use those third-party products to sort of fund learning the system and building that infrastructure that we believe will be our edge versus our competitors out there.

It’s also as we mentioned, George, that we what we call our own ecosystem is a great learning environment and we get to talk to consumers and find out what they like, what type of formats they like, what type of concentrations that they like. We’re using a third-party product in part to learn a lot more about the consumer base for CBDs.

That’s great. And I also wanted to chat, I noticed also the RipSticks that they have shown up in the VaporBeast stores. I wanted to talk about your third-party or your influencer promotion, what your plans are there for promoting the product?

Yes, hi George, this is Graham. My comment on performance here. Hey, listen, so on the influencer side of the equation, we’re taking a measured approach right now. Obviously, we’re focused on the adult consumer, and we’re particularly focused on the adult cigarette consumer. And so, our influencer strategy is looking towards the marketplace for people that touch those types of consumers. So, and as Bobby likes to say a little more to come on the influencer strategy, but we’ve started casting in that out there and looking for the right types of influencers to promote the product.

And when might we see the RipSticks move from your owned franchise stores to broader distribution through VaporBeast? And then, ultimately through your, the broader distribution that you would sell, Zig-Zag or the Smokeless?

Sure. So, we’re actually in the process of soft launching in traditional retail as we speak. And taking look at a couple of very specific markets to launch, and so I could guess I could say that it’s underway right now. By second quarter, we’ll be in full swing across the omnichannel approach.

And is there because it’s not a tobacco-based formula, is there and therefore, I believe it’s outside of the purview of FDA regulations. Are convenience stores seeing this as a possible means to be able to sell flavored juices that are that won’t be restricted or if you would talk about their stance relative to the RipStick?

Sure. I can’t speak for our c-store customers directly. The use of nontobacco drive nicotine for us was a means to continue to innovate in the category. We’re strong believers in innovation and trying to find products that make sense for the adult and consumer. And so that to that respect, again, I can’t speak to what consumers what convenience stores are thinking about at this point in time.

And finally since the FDA guidance on selling or restricting the sale of flavored juices in convenience stores, have you guys seen an increase in demand at your retail level and through VaporBeast for flavored juice sales through that channel, which is not so restricted?

Look George, we are in alignment with the FDA in terms of their long-term goals for adult consumers. The product has been designed to provide a benefit to the consumers. As the regulatory environment evolves, we will adhere to the regulatory environment. They just – make no mistake the use of TFN is to provide consumers with a better experience and that is why we’re using it.

Okay that’s great. Alright. Congratulations guys. Really appreciate the hard work and the success you guys have had over the last several years and look forward to what is to come.

Thanks, George.

Thanks, George.

Operator, any other questions?

There are no questions at this time. [Operator Instructions] As there are no further questions, this concludes our question-and-answer session. I would like to turn the conference back over to the speakers for any closing remarks.

Thank you everybody for joining the call. We look forward to talking to you next quarter. Thank you.

This concludes today’s conference. Thank you all for your participation. You may now disconnect.