Good day, everyone, and welcome to the Turning Point Brands First Quarter 2019 Conference Call. Today's call 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'm Bobby Lavan, CFO of Turning Point Brands. Joining me today are Turning Point Brands' President and CEO, Larry Wexler; Graham Purdy, who heads the Nu-X subsidiary; and Jim Murray, Senior Vice President of Business Planning. This morning, we issued a news release covering our first quarter 2019 result. Its release is located in the Investor Relations section of our Web site www.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 statement 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 and 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. We undertake no obligation to publicly update or revise any forward-looking statements. In the call today, we'll reinforce certain non-GAAP financial measures. These measures and reconciliation to GAAP can be found in today's earnings release along with reasons why management believe that they provide useful information. I will now turn the call over to Larry Wexler, our CEO.

Thank you, Bobby, and good morning, everyone. Thank you for joining the call. This morning, I'll give you a look into the progress we made in the first quarter to position the company for significant long-term growth. While the first quarter efforts produce results in line with our expectations, more importantly, we greatly improved the foundation upon which we intend to build in the coming quarters and years. Our achievements continue to reveal not only the strength of our brands but also the integrity of our plan. First just look at our focused brands. As I said a number of times, brands matter and our brands are one of our most important assets. When a brand is successfully positioned and backed by solid marketing efforts, consumers develop a deeper attachment to the product qualities and attributes. Consumers ultimately embrace brands and not only provide differentiated product benefits, but also resonate with them. In the first quarter, Stoker's moist snuff set another record share on double-digit volume gains powered by the continued consumer enthusiasm in our existing stores 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 engaged. We have been specifically focused on chain distribution. Over the last 2 years, we have increased our penetration of the moist chain universe by more than one-third. In the quarter, Stoker's MST was introduced into approximately 3000 speedway branded convenience stores, while very early, preliminary results are encouraging. We now sell in the 15 of the top 25 chains. Our sales force has been executing and consumers have been responding. The iconic Zig-Zag brand remains the U.S. market share leader in both premium rolling papers and MYO…

Thank you, Larry, for the opportunity to share my enthusiasm for the transformation that is developing here at TPB and more specifically at Nu-X. As Larry outlined, our Nu-X subsidiary is laser-focused on creating new novel opportunities to broaden the revenue reach or our fine company. Initially, we are focused on 2 key areas of opportunity. The first is vapor with our proprietary RipTide product line. The e-cigarette market continues to realize massive gains as the population of combustible smokers increasingly look for alternatives. We spent much of the first quarter building inventories to support the second quarter rollout and this is where it gets particularly exciting. Our RipTide RipStick device and pod system is like no other entry into the marketplace before it. Out proprietary nicotine technology known as Nictech coupled with our flavor system creates a unique crisp and clean experience for adult consumers. Our pods are 1.4 milliliters as compared to less than 1 milliliter for most of the competitive set. The exceptional adult consumer value proposition coupled with what I believe to be superior satisfaction have proven to be especially compelling during our soft launch in the first quarter. Next week, we will begin the retail rollout of RipTide followed by turning on our e-commerce platforms and VaporBeast distribution to third-party vape shops. Our second focus at Nu-X is on the CBD wellness market, which is projected to be over $20 billion in the few short years. In the first quarter, we tested number third-party CBD products in our own ecosystem and we'll begin rolling out our proprietary Nu-X products in the second quarter. In its brief and evolving history, the CBD market has been filled with start-up enterprises, that in my opinion have launched me-too products and failed to deliver a consistent product over time. It is in this environment that I believe the well positioned Nu-X brand will thrive with consistently superior formulations. The Nu-X product assortment will not only have the specified milligrams, but will also be flavored with natural terpenes to add to their distinctive positioning. The initial Nu-X product line will include CBD e-liquids, tinctures and concentrates. Additionally, this quarter, we worked with our traditional farmer base to put hemp in the ground and locked in hemp purchases to support our initiatives into 2020. Nu-X is a beginning here at TPB and will not only expand our revenue reach, but also leverage our integrated selling assets from traditional retail to direct-to-consumer sales. Early progress is encouraging and tells me that we are on the right path to achievement. Now, as we release the organization to engage at retail while we begin to more fully realize optimal potential and gain a sustainable competitive advantage. And with that, I'll turn it over to Bobby. Bobby?

Thank you, Graham. What's going on in Nu-X is very exciting. I'll now just quickly run through the company results and segment operating performance. Company results in the quarter were positive and consistent with our long-term growth aspirations. Total company net sales were up 23.9% with gross profits increasing 27.2% and gross margins expanding 120 basis points. In Smokeless, the Stoker's brand continues to propel our Smokeless portfolio forward. Smokeless net sales increased 8.7% to $22.5 million in the quarter. Double-digit volume and revenue gains on Stoker's MST were partially offset by sales decline in chewing tobacco, attributable to the continuing shift to lower priced product and category decline. Net sales for the Chew portfolio declined by $500,000 in the quarter while MST advanced $2.3 million. Smokeless volume increased 4.8% with price mix advancing 3.9%. As we discussed a number of times, our Smokeless business is shifting on the powerful advantages of Stoker's MST. In the quarter, 52% of segment sales were derived from the MST, up from 45% in the year-ago quarter. Stoker's MST double-digit volume gains are now overtaking the scale of our chewing tobacco business and we're beginning to see favorable impact with expanding margins on volume and efficiency. Smokeless margins in the quarter were 53.6%, up 60 basis points from a year earlier. In both MST and chewing tobacco, Stoker's continue to grow retail market share. Turning to our Smoking Product segment. Smoking product net sales in the quarter decreased $1.5 million to $25.5 million. In the quarter, non-focused cigar products, which we've provided more disclosure on declined $500,000 and Canadian paper sales were down $1 million due to temporary disruption associated with new packaging regulations. Moving forward and until we get more clarity on the Canada new packaging regulations and transition plan, we will continue…

Thank you, Bobby. First quarter 2019 was a good quarter for the company. We continue to grow Stoker's MST with good success, realized improved margins across the board and achieved record net sales and gross profits at VaporBeast. We also initiated sales and marketing efforts on behalf of Nu-X, which greatly expands our opportunity for revenue achievement. These are exciting times at TPB. As we move forward, we will continue to execute our strategic plan by driving focused brand growth, expanding through acquisitions and innovation and strengthening our corporate infrastructure. Our company remains solid and resilient and our people remain committed to the journey. Thank you for participating for the call today. And with that, I'd like to open up the call for questions.

Operator, we're ready for questions.

[Operator Instructions] And we'll first hear from Vivien Azer of Cowen.

Hi. Good morning.

Good morning.

Good morning.

So, I was hoping to start with the NewGen segment, please, and specifically the very robust margin expansion that you saw on the quarter, far better than we had anticipated for any specific call out there, please.

Yes. I mean it's really bringing in the IVG B2C margins, B2C margins, you're selling direct to the consumer and those come in higher.

So is that a sustainable margin? How should we think about the evolution of that over the course of the year?

I mean our long-term guidance on the NewGen margin has been 25% to 30%. We'll say as the RipTide products, the CBD products flow through, those margins are going to hold.

Right. Just following up on NewGen, but from a regulatory standpoint. As you started to engage retailers in discussions around your new offerings on the nicotine vapor side as well as the CBD side, what are you hearing from retailers around in particular on CBD, any reticent to take on products or do they view kind of the FDA hearing in May as a catalyst? Let's just start there.

Yes, Vivien, it's sort of different in different pockets of the country. As you know, some states have different laws on CBDs than the -- that further restrict beyond the national laws. So you have these areas that have terrific enthusiasm and they can't wait to get into the category and there's other ones that are confused by some of the states' regulatory regimes. Generally, we are finding a lot of enthusiasm about CBDs and inside the company we're very enthusiastic about it.

And people -- our customers want to know that we stand behind our product that we're going to be here a year from now and 5 years from now and we're starting to see that. That's what you're going to need to see it in mainline, right, is that not only can you do the fill in, but you're also going to be able to do the sell-through. And they know that we're there when they talk to our regulatory team, they talk to our legal teams, they go through packaging regulations. We're not somebody they just met in Vegas.

Yes. That makes perfect sense. And just a last one from me, please. Given the array of CBD products that you'll ultimately contemplate, is there anything you can offer in terms of the staging of the rollout? Are there certain form factors that you might wait to hear from FDA on, or do you feel like you're in a position to launch a full product suite?

Vivien, this is Graham. So it's really a twofold. So if you look at our alternative channel distribution vis-à-vis VaporBeast, DirectVapor, there's a specific audience that has an appetite for sort of larger form factors like tinctures and larger bottles of e-liquid. We've also -- are on a dual path with creating products that are mainline retail ready, so smaller form factors in price points that are tighter into the types of price points and consumers are -- we generally see consumers willing to pay in traditional convenience. So we're very much on a dual pathway relative to trying to capitalize on the alternative distribution space that we have and offering the types of form factors. And quite frankly, the types of delivery vehicles whether it's tincture or inhalation topicals would have you. And then also, at the same time, creating products that work really -- what we believe will work really well for the mainline channel.

And I'm really happy that we sell $100 tincture bottles that have very good margins, but that's not the future of -- that's a small business for us versus how do you have a turning point Nu-X, CBD product in 150,000, 200,000 Zig-Zag stores. That has to be priced correctly. The market economics are not there yet, but we think that we're the sort of first mover and we set up the supply chain to provide that to sort of our chain and independent customers. And that's really what you should be focused on like selling $100 tincture bottles like we're doing it. It's great. Good margin, pays the bills, but the real driver forward of this business is going to be when you have a lower priced product in mainline.

That's really helpful. Thank you so much.

[Operator Instructions] Next we'll hear from Susan Anderson of B. Riley FBR.

Hi. Good morning. Nice job on the quarter and nice to see the rollout of the new products. Some color maybe just on the Nu-X products, the $10 million to $20 million you're expecting this year. I guess, maybe just the biggest drivers there are we -- should we think about as being RipTide or the CBD products, or how should we think about that?

Pick your -- as Larry says, pick your favorite child, I mean --

No. We're going full board on those and we expect to see progress on both fronts. I don't want to pick a percentage right now. We'll just see how the consumers play out.

Got it. Okay. And then maybe if you could talk about the performance of the Zig-Zag in the quarter in the U.S. ex the Canadian market, just curious how it performed once you exclude the impact of Canada. And then also, it sounds like the new products have been received well, but any color around the performance there versus the legacy products.

The performance was in line with the expectations. We are in a tight inventory position as it relates to cones. We can't get enough that we can sell, so performance was held back by that and we feel like that will open up in second quarter, but it is -- every cone we get we can sell. And so there -- I think performance was in line. We saw the inventory issue when we gave sort of the guidance in March, so if you came to us in December, I think, we would have thought that first quarter would have been higher. And so with more cones, we will sell more. And so that's -- we have opened up nationally but it still feels like we're in a supply constraint dynamic today.

Susan, we're very enthusiastic about the cones, as Bobby said, but if you go back to the theme that I had in my talk this morning that it's more convenient a way of consumers to consume and we think it may actually help the overall paper market by having that introduction.

Yes. I hate to come over the top here, but the commentary from our field sales force and our customers are they're incredibly enthusiastic about Turning Point Brands entering the cones segment. So it's really exciting product for sort of mainline retail. And as Bobby mentioned, we can sell everything that we can get.

Great. That sounds really good. And then, I guess last one just given a lot of moving parts within the NewGen segment now. Maybe if you could comment a little bit or get some color on just the distribution network that you guys have built-out through all the acquisitions such as VaporBeast and Vapor Shark, are you seeing increased sale going through that network or how should we think about that?

Well, I think you're seeing the increased sales in the numbers we're reporting, but essentially, the way we built-out this infrastructure is that VaporBeast services has a potential to service the 8,000 to 10,000 vape shops. It gets into roughly 4,000, about half of those vape shops in the course of a year. IVG has a B2C engine and it reaches over 2 million consumers. So we believe we have the broadest reach in the vapor space. And of course, you can't forget that our traditional sales force reaches a lot of consumers in the 100,000 stores that it reaches. So we think we got the space pretty well covered up.

Great. That's helpful. Thanks so much for all the color. Good luck for you guys next quarter.

Thank you, Susan. We look forward to talking to you.

Sounds good.

[Operator Instructions] It appears there are no further questions at this time. I'll turn the conference back over to our presenters for any additional or closing comments.

Okay. Thank you, everybody, for joining the call. We look forward to talking to you on the second quarter call where we'll be updating you on Nu-X and our progress on Stoker's and on Zig-Zag cones. Thank you very much.

That concludes today's conference. Thank you all for your participation. You may now disconnect.