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…

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…

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.