Good morning, and welcome to the Turning Point Brands First Quarter 2018 Earnings Conference Call. All participants will be in listen-only-mode. [Operator Instructions]. After today's presentation, there will 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 Bobby Lavan, Chief Financial Officer. Mr. Lavan, please go ahead.

Thank you. Good morning, everyone. I am Bobby Lavan, the 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 first quarter 2018 results. The release is located in the Investor Relations section of our Web site, turningpointbrands.com, where a replay of today’s conference call will be available. In this call, we will discuss our consolidated and segmented operating results, outline our recently announced Vapor acquisition and how it fits with our operations and review our growth expectations for the rest of 2018. 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 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 about the company’s financial condition and results of operations. Before I turn the call over to our CEO, Larry Wexler, I’d like to share just a bit about myself, some preliminary observations about my tenure here at TPB and focus as we move ahead. Immediately prior to joining TPB, I was the CFO at General Wireless, where I reworked the financial reporting systems and helped build a robust distribution platform that linked multiple e-commerce sites and Amazon. As I’ve been drinking from the fire hose to learn all I can about TPB and the industry, I’ve been pleased by the caliber of the company’s team and their tireless commitment to transform and further accelerate profitable growth here at TPB. Over the next three months, I intend to focus on streamlining and building efficiencies to accelerate margin improvement in the existing enterprise. My goal is to optimize an already strong foundation through further synergy capture, particularly in NewGen, by also continuing our pursuit of accretive acquisition candidates. In the end, I’m especially pleased to have joined TPB and will work the entire team and you to relentlessly generate greater shareholder value. I will now turn the call over to Larry Wexler, our CEO.

Thank you, Bobby, and good morning to everyone, and thank you for joining the call. 2018 is off to a solid start. We are continuing to see the tangible benefits from executing our strategic plan, which includes driving growth of our focus brands, building on our corporate strengths and acquiring assets to further accelerate company gains. I’m delighted to have Bobby at my side, and together we have a heightened level of optimism about TPB’s future. Our confidence in the TPB team and our progress against the strategic plan are further reinforced by the Board’s decision yesterday to declare our third quarterly dividend of $0.04 per common share. Additionally, on April 30, we announced the acquisition of certain assets of Vapor Supply for $4.8 million in consideration. Headquartered in the heartland, Oklahoma-based Vapor Supply proves especially interesting to us for a number of compelling business reasons. With $25 million to $28 million in projected annual revenues and the available synergies associated with our existing NewGen platform, Vapor Supply will prove immediately accretive. Next, Vapor Supply manufactures and markets the popular DripCo brand of proprietary e-liquids, which will strengthen our production efficiencies and product portfolio in the liquids marketplace. Finally, the improved purchasing power and enhanced ability to better serve the vape store universe are expected to be powerful contributors to increase margin realization in the coming 18 months. We are very excited about Vapor Supply, our fourth acquisition since our IPO roughly two years ago. We presently have a team of people on the ground in Oklahoma working swiftly to integrate and transfer best-in-class processes, while implementing a number of immediate synergy initiatives. We’ll provide more on Vapor Supply next quarter. In our Smokeless segment, Stoker’s volumes continued to outpace the broader industry. In our Smoking segment, Zig-Zag remains a…

Thank you, Larry. I’ll follow up Larry’s remarks with additional figures that provide further insight into our operations. The year-over-year net sales mix continues to shift on the rapid growth achievements in the NewGen segment. Segment net sales mix in the first quarter was roughly 28% Smokeless, 37% Smoking and 35% NewGen. Given the Vapor Supply acquisition, NewGen will continue to expand as a percent of total TPB revenues. Gross margins for Smokeless and Smoking are roughly 50%, while NewGen is yielding somewhere between the high 20s to 30%, reflecting the lower margins typical of distribution operations. Because of NewGen’s sales growth, we continue to expect company-wide gross profit dollars going forward to increase, even though the overall gross margin percentage will be lower. Consolidated SG&A expense in the quarter was 22.1 million compared to 16.8 million a year ago, driven mainly by the inclusion of Vapor Shark’s SG&A expenses, higher legal costs and variable VaporBeast SG&A expenses tied to higher sales. Some of the SG&A items in the first quarter worth calling out include 1.6 million of incorporation of Vapor Shark’s financials, strategic expenses of 0.6 million, line rationalization costs of 0.6 million, nonrecurring finance department reorganization expense of 0.6 million and new product launch costs of 0.1 million versus 0.5 million a year ago. Cost of goods sold through gross profit in the quarter included new product launch costs of 0.6 million as compared to 0.1 million in the year ago, and line rationalization expenses of 0.4 million. Federal excise tax included in the cost of goods sold totaled 4.9 million, and FDA fee amounts to 0.2 million. In the first quarter and also in early 2017, the company refinanced its debt and modified its capital structure. The lower interest rates associated with these actions and lower debt…

Thank you, Bobby. We’re very excited about the developments that are taking place here at Turning Point Brands and the tremendous opportunities for growth we see before us. We have built this enterprise through a measured strategic plan that focuses on organic growth, expansion through OTP acquisitions, solidifying our corporate infrastructure and strengthening our capital structure. We continue to be encouraged by consumer acceptance of our differentiated smokeless offerings, Zig-Zag premium papers and MYO cigar wraps and the growth prospects from the dynamic Canadian market. We are enthusiastic about the prospects for our NewGen segment, the effect of the process improvements and higher sales at VaporBeast and Vapor Shark and the potential firepower that Vapor Supply adds to NewGen’s sales mix. I frequently tell people that our management group is not one that is easily satisfied and definitely not one to rest on the laurels of our accomplishments. We know that the consumer trust must be earned every day with each and every transaction. We intend to maintain that staunch commitment while we work to expand the opportunities to interact with our current and new consumers. This core consumer satisfaction is truly what will drive and maximize long-term shareholder value. Thank you for participating in the call today. And with that, I’d like to open up the call to questions.

We will now begin the question-and-answer session. [Operator Instructions]. The first question today comes from Vivien Azer with Cowen and Company. Please go ahead.

Hi. This is Gerald Pascarelli on for Vivien. Thanks very much for taking the questions.

Hi, Gerald. Nice to have you.

Thank you. A few on vapor for me. Just number one, with the latest vapor acquisition, can you speak to any potential revenue distribution and cost synergies this may create as you fold it into your existing vapor business?

Yes. At this point, we’re not prepared to guide to synergies. But as you can expect, we have an operation in California, an operation in Oklahoma and an operation in Miami. And they’re at this point three different distinct inventory sets. So there is an ability to sort of – to rationalize that inventory. Additionally, we have three different teams, three different systems, and those are things that we are working to integrate. So at this point, we’re not going to guide to synergies, but there will be synergies from those acquisitions.

Understood. Thank you. Next question, just given how active you’ve been in vapor M&A, are there any more gaps that you would look to fill going forward within your vapor portfolio?

I think what we’ve put in place what we call the bolt-on infrastructure necessary to compete in the vapor part of our business, the NewGen segment of our business, we do believe there are other opportunities out there for bolt-on acquisitions for plug and play – they would become plug and play at this point because of the infrastructure that we have. Right now we’re going to be focused – in the immediate future, we’re going to be focused on integrating these companies, getting them – putting in place best-in-class processes and obtaining the synergies that Bobby indicated might be out there.

Yes. The vaping supply chain is – we own stores, we own proprietary products, we own distribution. And so we are – the question is, is where is the winner going to be in the supply chain evolution and as the industry goes from an extremely fragmented industry to a consolidated industry. And so we are keeping sort of our options open at this point on where we want to overweight or overinvest in the space and where – that’s sort of the beauty of the situation that we’re in right now, is that we can kind of pick and choose our battles in this evolving space to optimize return on capital.

Understood. Very helpful. Thank you. Last one for me. So JUUL is clearly the hotly contested issue within U.S. tobacco. Can you speak to or discuss how that either hurts or helps your vapor business?

Actually, I think products like JUUL that appear to appeal to combustion consumers and bringing them to vapor I think helps the entire vapor category. Once they come to vapor, then they’re in the market where we can attract them to our products. JUUL apparently has some technology that appeals to people and is building the vapor business, and that’s all to everyone’s benefit.

Yes. I think we’re pretty excited about what’s happening with JUUL because vaping is a positive economic decision for combustible smoking consumers. And ultimately, if they are introduced to vaping, they’re going to see what’s out there and that is only a positive for – using the term rising tides raise all boats, I think that’s what JUUL does for us.

Very helpful. Thanks very much, guys.

[Operator Instructions]. The next question comes from Susan Anderson with B. Riley FBR. Please go ahead.

Hi. Good morning. Nice job on the quarter. I was wondering if you can maybe give a little bit more color on the Canadian market and opportunity for Zig-Zag and maybe just compare it a little bit to the U.S. market in terms of market share and the opportunity to roll out new products there.

Okay. As we’ve discussed on past calls, we work through a distribution partner in Canada, so we’re not directly involved in the day-to-day operations. We do provide them with products and positioning. The Canadian market is evolving fairly rapidly. They have had a new regulatory stance, particularly towards marijuana, where it becomes recreational in the middle of this year. There’s lots of – it’s a very dynamic market at this point, lots of new entrants. Our distribution partner is very active in taking on new products and gaining distribution. We’re very hopeful about – what that market is going to look like over the next 18 months.

Great. Thank you. And then nice to see the continued growth in Stoker’s MST. Maybe if you could give us an update where you are in terms of the doors you want to be in and how long it will take to get to the number that you’re looking for? And then just curious, have you seen any competitors react to you taking share in terms of maybe being a little bit more price competitive?

Okay. So just to the first part of your question, we’re in about 25% of MST stores. And that translates to roughly 50,000, 55,000 stores. We continue to grow share. As we’ve talked about, this is a kind of a slog. We’re going against some very big competitors. Our share crossed the 3 share point mark in the first quarter, continuing our progress. That’s up from about 2.7 in last year’s first quarter. We’re pleased with the progress we’re making. We also have instituted a number of promotions and we’re seeing consumers react positively to those promotions. And we think we’ve got a plan for going forward to continue on the track that we’ve been on in terms of growing. In terms of this economic environment, we believe Stoker’s is appropriately positioned. As you know, the tub which is basically 10 cans of product in one unit and is priced accordingly is up about – the tub itself is up about 7% over last year’s first quarter. And we think we’re appropriately positioned for today’s economic environment.

Great. That’s very helpful. And then last one, maybe if you could just give us an update on your expectations for leverage by the end of this year? Do you expect to continue to pay down debt? And then, how much is – is there any floating rate debt in there?

So we’ve expressed to the market that we’re – our target leverage is 2.5 to 3.5. We ended the quarter at 3.2x. I think we – that’s about the range we’re going to stay in. Obviously, we’re continuing to evaluate strategic opportunities and we don’t want to define ourselves to stay – an ending year level because we do want the ability to do acquisitions. But we have set up our debt structure in that we can pay down debt economically. And so we evaluate that on a quarterly basis. From a floating rate perspective, we did – when we refinanced the capital structure, we had 150 million of debt of floating, 55 million of fixed. We did flip into a fully floating rate structure. So right now, we have 200 million of floating. However, immediately after the refinancing, we swapped out 70 million of floating rate exposure to fixed, which cost us a little bit more of interest expense this year but protects us longer term. And again, that’s – we are consistently evaluating our capital structure and opportunities. But the company, relative to a year ago, is actually in a more fixed – has more fixed exposure than it did prior and we continue to focus on ensuring that we don’t take significant rate exposure, particularly in this environment.

Okay, great. Thank you. That’s very helpful. Thanks. Good luck next quarter.

Thank you.

Thanks.

As there appears to be no further questions, this will conclude our question-and-answer session. I would like to turn the conference back over to Bobby Lavan for any closing remarks.

Thank you everyone for joining the call, and we look forward to speaking to you in the future.

This conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.