Good day, and welcome to the Turning Point Brands' Second Quarter 2018 Earnings Conference Call and Webcast. 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. Please go ahead.

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…

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…

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.

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from the line of Susan Anderson of B. Riley FBR.

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.

Next question comes from the line of Vivien Azer of Cowen and Co.

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.

The next question comes from the line of Vivien Azer of Cowen.

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

[Operator Instructions] This concludes 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.