Lawrence Wexler - President and Chief Executive Officer Robert Lavan - Chief Financial Officer James Murray - Senior Vice President of Business Planning

Luke Hatton - B. Riley FBR, Inc.

Steven Schneiderman - Cowen & Co. LLC.

Vivien Azer - Cowen & Co. LLC.

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; and Jim Murray, Senior Vice President of Business Planning.

This morning, we issued a news release covering our second quarter 2018 results. The release is located in the IR 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 factors that could cause actual results to differ materially from projections or forward-looking statements that may be cited in today's discussion. These forward-looking statements and projections are not guarantees of future performance, and you should not place undue reliance upon them, except as provided by federal securities laws.

And we undertake no obligation to publicly update or revise any forward-looking statements. In the call today, we will reference certain non-GAAP financial measures.

These measures and reconciliations to GAAP can be found in today's earnings release along with reasons why management believes that they provide useful information. I will now turn the call over to Larry Wexler, our CEO.

Thank you, Bobby, and good morning, everyone. And thank you for joining the call.

Second quarter 2018 is yet another impressive step forward on our strategic growth plan. We're continuing to see the concrete benefits from effectively executing our programs.

Our strategy remains to drive the growth of our focused brands, build on our corporate strengths and acquire assets to further accelerate company gains. Second quarter results reflect the benefits of this strategy.

Sales and gross profit increases across all three of our segments, which collectively delivered record net sales and gross profit for the company. In Smokeless, on the continued strength of Stoker's, revenue increased to a record $24.4 million, up 10.8% a year-ago on growth in both chewing tobacco and robust advances in MST.

Stoker's chewing tobacco set a new share record, crossing 19 share points in the second quarter, where promotional efforts drove expended trial and new products continuing to demonstrate strong volume advances. In MST, Stoker's also set a new share record of 3.3 share points nationally and 7.1 share points in stores where we had retail distribution.

As I've said before, we believe the seven share points represents the brands growth potential, and we are focused on expanding retail distribution with the end goal of ubiquitous availability. In the quarter, we continue to make strong advances against this goal, including the chain-wide rollout to all Dollar General stores.

While the average category velocity in the dollar store channel is not equivalent to an average C-store, it does broaden consumer availability and gauge a growing body of smokeless enthusiasts. Perhaps most importantly, we are highly encouraged by our initial read on our share of replenishment shipments to the chain.

Importantly, we think the record 3.3 share is somewhat overstated in the quarter due to the opening order fill quantities to the Dollar General chain. In the quarter, we also saw impressive results in our growing social media campaign and are even more excited by what's now underway in the third quarter with the world's largest tub event, which is building brand equity, with momentum appearing not only on our own site, but also on YouTube and Instagram.

The consumer engagement is highly encouraging and reinforces not only our quality, highly differentiated product but also deep and growing base of loyal Stoker's enthusiasts. I'm exceptionally pleased by our long and sustained progress with Stoker's, not only MST, but also chewing tobacco.

In the quarter, MST promotional stock for the industry was up by greater than 20% to a year ago and just shy of that in chew. Despite not increasing our promotions in line with the industry, the robust growth in the quarter is a testament to the strength of our brand and the quality product we serve up each and every day.

We set ambitious internal goals with Stoker's MST, and we were fully committed to a long enduring effort to make it a leading brand with widespread retail availability. As I've always said, building long journey but one we are fully prepared to travel with a great enthusiasm.

In the Smoking segment, Zig-Zag remains our focused brand for good and compelling reasons. Zig-Zag's iconic equities provide the foundation for continued growth in both the U.S.

and the promising and evolving Canadian marketplace. The Zig-Zag brand delivered strong net sales advances in U.S.

papers, Canadian papers and MYO cigar wraps, driving segment sales up by 8.5`% in the quarter. These strong gains were more than sufficient to offset our strategic decision to deemphasize the low-margin cigars category and the MYO cigarette tobacco line, which we rationalized in the third quarter of 2017.

In Canada, we're just working towards legalized recreational cannabis in the fourth quarter. We introduced two new Zig-Zag SKUs in late fourth quarter of 2017 and have expanded distribution to our partner to greater than 10,000 retail stores out of the 25,000 to 30,000 opportunity set.

In the second quarter of 2018, we supplemented the rolling papers line with three additional SKUs including two new hemp products and the popular ultrathin variety. Perhaps most encouragingly, we have additional new products planned for stage implementation and expansion throughout the balance of the year.

In U.S., our late first quarter 2018 launch of two new hemp rolling paper SKUs was met with strong retail straight support, which outstripped our forecasted inventory requirements. While still too early to assess consumer adoptions, we are pleased at this stage and have already expanded distribution to approximately 15,000 stores and increased our orders accordingly.

In cigar wraps where Zig-Zag has a strong leadership share position, we further expanded our 'Rillos line with additional SKUs to broaden stores, but also in specific high-tax states. The early results are encouraging as evidenced by increased distribution and higher net sales.

Zig-Zag continues to retain its share leadership position in the premium papers market in both U.S. and Canada and continues to hold greater than 75 shares in cigar wraps.

In NewGen, we set yet another company record with net sales advancing 18.7% from a year-ago. VaporBeast continues to generate increased revenues through more frequent orders and higher order sizes, thereby increasing our share requirements in the stores we presently service.

Continued progress at Vapor Shark including a broadening retail assortment, is driving favorable trends in both the franchise and corporate stores. While Vapor Shark is the smallest entity in our NewGen segment, we expect favorable margins to materialize in this business over the next few quarters.

We closed our acquisition of Vapor Supply on May 1. The seven Oklahoma corporate stores are performing exceptionally well where a number of strategic moves are being implemented to driving better financial results.

With regard to Vapor Supply B2B business, we have addressed the wholesale stocking issue and we're now identifying the high-priority integration initiatives to optimize performance. Our focus in the third quarter is on implementing effective process and technology improvements to realize improved velocity.

This will take some time to fully address to our satisfaction. We have complete confidence in our ability to do so.

We are taking a hard look at the Vapor Supply operations and ensuring that sales dollars flow to the bottom line. We're reviewing the various assets we acquired and prioritizing those that have greater long-term potential.

From a broader NewGen a portfolio of companies and established a foundational platform to build upon. Our goal is to move towards greater integration across all three platforms with a single ERP structure while also optimizing efficiency and logistics.

I'm pleased to say that we successfully completed the Vapor Shark e-liquid manufacturing and logistics move and integration into our Louisville facility in the late second quarter. This has reduced our Miami footprint and expected to generate improved economics over the next two quarters and beyond.

We're now preparing to move additional Vapor products inventory into the Louisville pick-and-pack facility to capitalize on the ideal location, given the neighboring UPS hub, which will shorten order to delivery timing, plus greater customer satisfaction and reduced total logistics costs. On the cost leadership side, we opened the China office, which is greatly improving order and inventory management and access to new products, which will lead to greater speed to market, lower cost and provide us with significant leg up to the competition.

Net-net, we expect our thoughtful integration plan to result in greater overall sales velocity and product. From my vantage point, our results in the second quarter are exciting and consistent with long-term growth aspirations.

I'm a difficult one to satisfy. I think the results speak for themselves, record net sales and gross profits with advances in all three segments.

Additionally, we continue to pursue accretive acquisitions that can accelerate our already positive momentum while working aggressively against our synergy and integration initiatives. And with that, I'll turn it over to Bobby for more color on our segment performance and key financial metrics.

Thank you, Larry. First, let me recap our performance in Smokeless.

Net sales increased 10.8% over the year ago period to a record $24.4 million in the second quarter of 2018. Smokeless volume increased by 6.5% with price mix increasing 4.3%.

Once again, the Stoker's brand was a locomotive fueling this growth. Key shipments of Stoker's moist increased by more than 10% in the quarter.

Industry volumes of chewing tobacco declined by approximately 3% in the quarter while industry moist volumes were soft by about 1% to a year ago. In both moist and chewing tobacco, Stoker's continue to grow market share as measured by MSAi.

Smokeless segment gross profit increased 8.5% to a record $12.5 million while gross margins contracted 120 basis points due to – to 51.3% due to a year ago LIFO expense of a negative $400,000. Absent the LIFO expense, gross margin expanded 70 basis points.

Turning to our Smoking Products segment. Smoking Products net sales increased 8.5% to $29.3 million.

Smoking volume increased 3.4% with price mix increasing 5.1%. Zig-Zag premium cigarette papers and MYO cigar wraps continued to perform exceptionally well with revenue advances in U.S.

papers, Canadian papers and cigar wraps. In the quarter, Zig-Zag rolling papers and cigar wraps were up a combined $3.8 million on strong promotional participation, more than offsetting our deliberate move away from lower-margin cigar products and our line rationalization of MYO tobacco.

Industry volumes of U.S. cigarette papers decreased by low single-digits, while MYO cigar wraps produced mid single-digit category gains.

Zig-Zag continue to maintain a share leadership position in both premium papers and MYO cigar wraps. Gross profit for the quarter of $15.2 million was up 7.5% or $1.1 million higher than the prior year despite an adverse year-over-year euro impact of $600,000.

Gross margin was 51.8%, down from 52.2%, primarily due to exchange rates. Taking all of this into account, net sales in our core tobacco portfolio, which is our Smokeless and Smoking Products segments combined, expanded 9.6% to $53.7 million and gross profit grew by 8% to $27.7 million.

I'll now turn to our NewGen segment, which continues to gather momentum from the initiatives we have been executing. For the quarter, segment sales grew $4.3 million or 18.7% to a record $27.4 million.

Similarly, gross profit increased by $1.7 million to a record $8.1 million. Gross margin expanded by 200 basis points to 29.5% of net sales.

We successfully transitioned the Vapor Shark e-liquid manufacturing and logistics operations into our Louisville facility in late second quarter. We expect to realize Vapor Shark margin improvements as we move through the year-end.

Additionally, we will be moving additional Vapor stock into a Louisville pick-and-pack facility to support both VaporBeast and Vapor Supply. Centrally locating stock near the Louisville UPS hub will shorten order-to-delivery time frames for improved customer satisfaction and reduced delivery costs.

Our efforts in NewGen through year-end are sharply focused on integration and synergy realization, coupled with process improvement, including the new operations teams we have on the ground in Asia to improve order and inventory management and total cost management. The quarter had one more shipping day as compared to a year ago.

Consolidated SG&A expense in the quarter was $21 million compared to $18.3 million a year ago, driven mainly by the inclusion of Vapor Supply's SG&A expense, transaction costs and variable Vapor SG&A expenses tied to higher sales. Some of the SG&A items in the fourth quarter – or in the quarter included strategic expenses of $1.0 million and other non-recurring expenses of $0.1 million.

Absent these SG&A expenses in the quarter would have been 24.6% of net sales. The weighted average fully diluted share count during the quarter was 19.8 million shares.

Fully diluted EPS was $0.47 per share and adjusted diluted EPS was $0.50 per share in the quarter. We ended the quarter with $16 million drawn on our revolving facility.

The revolver draw reflects the following activities in the quarter: $4.8 million for the previously announced acquisition of Vapor Supply, an additional $1 million for related transaction expenses and $1.8 million to normalize depleted inventories at Vapor Supply, $6.5 million one-year senior secured loan to a Turning Point Brands supplier to ensure inventory requirements going forward, $3.5 million to pay down the $2.0 million VaporBeast seller note and $1.5 million for escrow associated with the November 2016 VaporBeast acquisition and $2 million amortization on a 2018 credit facility. It was a heavy cash quarter from those perspectives.

Adjusted EBITDA for the quarter was $17.2 million as compared to $15.8 million in the prior year. Net debt to adjusted EBITDA was 3.4 times within our targeted range of 2.5 times to 3.5 times.

This was an unusually heavy quarter for non-operating cash uses, and we expect to end the year towards the mid level of a 2.5 to 3.5 range. CapEx in the quarter was $600,000.

It was an impressive quarter on our long march towards realizing full potential of our brand assets. Our confidence in the Turning Point Brands team and our progress against the strategic plan were further reinforced by the Board's decision yesterday to declare a fourth quarterly dividend of $0.04 per share.

With that, I'll turn the call back to Larry for closing comments.

Thank you, Bobby. We remain especially excited about the continued transformation here at Turning Point Brands and the tremendous growth opportunities we see before us.

We will continue to execute our carefully measured strategic plan that focuses on organic growth, expansion through acquisitions, solidifying our corporate infrastructure and strengthening our capital base. Our focused brands remain strong and vibrant and we'll continue investing to drive sustained gains.

Stoker's delivered record shares in both MST and chewing tobacco, which yielded record Smokeless net sales and gross profit in the quarter. In Smoking, we continue to be highly encouraged by Zig-Zag's strong share in both papers and MYO cigar wraps and the growth prospects from the dynamic Canadian market, which together delivered 8.5% increase in net sales.

And of course, our NewGen segment continues to offer bright growth opportunities. In the year to go period, we are focused on the integration, synergy and maximizing customer satisfaction through best-in-class platform.

So it's a particularly good quarter, but our management group wants to deliver more. We are not easily contented and remain steadfast in our commitment to our long-term strategic plan to increase value for our shareholders.

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

Good morning. This is Luke Hatton on for Susan.

Good morning.

Good morning. I was just wondering, can you talk a little bit more about your expansion into Dollar General, sort of how that came about?

And then is there potential to expand into other discount retailers as well?

We have focused our national accounts group on significant change to increase the retail distribution of our products. It was a fairly normal process.

They were looking to expand their portfolio, growing their tobacco category. We were there speaking to them about the possibilities of using Stoker's to help do that, and we came to a mutual agreement to do so.

Essentially, in each Dollar General store, there is a fixture that has – in which Stoker's and a number of other products are featured very – they have a primary feature in the stores. We're fairly happy with that.

And basically, we're somewhat pleased with the volumes we're seeing so far. It's pretty early, but we're seeing – we're very pleased with the volumes we're seeing so far coming out of those stores.

Great. And then so over the past couple of quarters, you've talked about growing that sort of that – the sales and marketing force.

And I was just wondering, sort of how are you thinking about the size of that sales force going forward? Are you still growing it?

And is there an optimal size that you're driving towards?

When we embarked – well, first of all, yes, we're still on the plan. We are still growing the sales force.

We added a couple of new people into the national – in the key account group. We're very pleased with those hires.

We're staying on plan with the field force. When we embarked on this, we thought that we could as much the size of the field sales force and still produce marginal profitability.

We've seen nothing to change that. So we're staying on our long-term plan that we talked about.

Great. Thank you.

That’s it for me.

Hi. This is Steve Schneiderman on for Vivien.

Just wanted to go through a couple of things real quick. One, we saw that NewGen slowed down a little bit in the quarter.

Can you kind of talk about what happened on there?

Yes. We are pretty pleased with what's going on with NewGen.

I think a couple of things you've got to think about is that Vapor Shark entered into the numbers in the second quarter of last year. And in terms of Vapor Supply, we're very pleased with what's going on with the stores.

They've actually outperformed their expectations. On the B2B business side, on Vapor Supply, we found that we had to build inventory – the inventory mix is not where we like and it took a couple of weeks to get the inventory right, and we'll start seeing some benefits from that going forward.

In the VaporBeast platform, we're very pleased with – you see our margins are up, sales growth continues. The bulk – one of the things that also factor into your models is that VaporBeast sales last year started accelerating at the end of the first quarter.

So now it's going against somewhat higher comparables than they were in the first quarter.

Great. Thank you.

And just to kind of give you some – just some – NewGen is where we've put the vape business. But inside NewGen, there is another $2 million to $3 million of non-vaping businesses, and that business, we are winding down is the way that I would put it.

And so that business – there is $2 million to $3 million that will slowly come out of that business. So the vape business is growing significantly as we've discussed.

And that business is coming down.

Got it.

Good morning, guys.

Hi Vivien. How are you doing?

Good. So Bobby and Larry, I just wanted to start off with guidance, given where you are for the first half of the year and with comps getting tougher in the back half.

What gives you confidence in the achievability of the high-end of the range, please?

So the comps, they actually get easier in the back half. So we had a lot of drawdowns on the Smoking side of the business and in the second half of last year, so the comps are easier there.

Additionally, we have easier comps on VaporBeast in the fourth quarter. And then thirdly, we have – Vapor Supply was in the numbers for 1.5 months in the second quarter and will be in full numbers in the third quarter and fourth quarter.

Okay. Thanks for that.

Smoking is – you should – the comps in Smoking are – remember, we had a lot of that rationalization that we disclosed. It gets much easier to comp against in the third and fourth quarter.

And then you just have some drawdowns last year that will be very easy to comp against.

Okay, that makes sense. I guess, I was more focused on the Smokeless, which tends to be a pretty big contributor to your topline growth where the comps get much tougher in the back half, but that will make sense.

In the press release, you cited "a soft MST category". Larry, I know you've just like steeped in, in the industry knowledge and a lot of historical perspective.

So like maybe a bigger picture question as it relates to MST softness. You and I have kind of discussed cross elasticity of demand between cigarettes and MST over time.

That seems to be breaking down a little bit. I'd love your thoughts on why you think that's happening.

Do you think that vaping is contributing to that dynamic? Thanks.

Well, okay. So I don't know if we should share this with everybody on the call.

We've had a lot of fun talking about this. But I do think that vaping is impacting on cigarettes.

I think the products in vaping are getting better and they're more satisfying. I've never been a giant – I know you and I disagree on this, but I've never been a giant believer on cross elasticities between cigarettes and moist.

I do believe that nicotine users do cross categories, but I don't think the smokeless experience is a natural crossover from the smoking experience. It just delivers in a very different way.

But I think vaping is something that is impacting all the nicotine consumption, but I think it's more – the biggest impact is on cigarettes.

So then what would you attribute the softness to in the category?

I think the – with moist, you've seen a trend, and I think that there's probably something about the population mix. But I also think that promotional patterns may be changing and there may have been a shift in promotional patterns that – for this particular quarter.

But I'll tell you what, I'll go to school, Vivian, and by the next quarter call, I'll have a much more detailed answer for you.

That would be great. And I saw already the – like kind of prep on this point quarter-after-quarter, but it just seems like the very steady kind of 5% growth is like just at memory at this point for MST as is kind of the [30%] growth that we've kind of gotten used to.

So I'm just continuing to scratch my head over that. So any insights over the next coming quarters would be great.

My last question, and I apologize if someone asked it, I was on and off the call trying to get into the queue, any updates on FDA in particular as it relates to vapor?

I continue to be encouraged by how Gottlieb is approaching the issue of vaping. The FDA always talked about the continuum of risk as being something that was important to them.

And I think this change we've seen there is that Gottlieb is integrating that into the way they're approaching regulations. I'm very optimistic that there'll be some very – much more careful thought than maybe we thought in the past about how to provide gateways for new products to get to the market and how they can continue to improve the consumer's experience.

I think there's been a shift there, and we're looking forward to seeing that play out. I think the FDA is starting to become a little more open in terms of taking in industry comments.

I think there's going to be a lot of visits to the FDA over the next 10 to 12 weeks. And hopefully, they'll come in – down and start putting out their programs, we are get through the PMTAs.

And I think that pathway will be accessible for people who are focused on doing the right thing, which we are. So I'm very optimistic about that.

Okay. Thanks very much.

End of Q&A

Thank you, everyone, for joining.