Good day and welcome to the Turning Point Brands' Second Quarter 2019 Call. Today’s call is being recorded. [Operator Instructions] I would now like to turn the conference over to Bobby Lavan. Please go ahead.

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 second quarter 2019 results. This release is located in the Investor Relations section of our website, 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 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. This 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 the 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. Thank you for participating in the call. This morning, I'll update you on several recent announcements and give you a perspective on the progress we've made in the second quarter to position the Company for enduring long-term growth. Second quarter performance of our core tobacco business was in line with our expectations, and Nu-X outperformed. We further strengthened 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 the integrity of our plan. First, let's touch on some recent announcements that are generally transforming our Company, while also better positioning us for accelerated growth. You recall that Nu-X was formed to leverage our existing capabilities in traditional retail distribution, e-commerce marketing and regulatory affairs to capitalize on the burgeoning trends in the alternative product space. CBDs are demonstrating exclusive sales advances and represent a sweet spot of opportunity for TPB. Our proficiency in regulatory affairs and familiarity with cannabis related products makes us well suited to aggressively pursue growth through not only proprietary products, but also acquisitions. Nu-X related sales in the first quarter totaled $800,000 and gained speedy momentum with second quarter sales growing to $4.3 million. As an integral part of our CBD and alternative products plan, on June 26 we announced that we had been granted conditional approval for Kentucky hemp processing. Of course, hemp is the plant material that is most commonly used to harvest CBDs for use in wellness related products. Direct access to this agricultural stock coupled with our highly efficient processing capabilities at Canadian American Standard Hemp, positions us favorably in the blossoming CBD industry. Given the almost linear growth of our internal CBD sales in the quarter, we…

Thank you, Larry. Second quarter Nu-X sales of $4.3 million were up from $800,000 in Q1, a nice step onward in our journey toward accelerated growth. Having said that, I seldom look back as the future is made with a keen focus forward. Adult consumer’s wants and needs are dynamically changing. The exodus of smokers from combustion to vaping continues unabated. There is also a swelling demand for alternative products, most notably hemp derived CBD products. These two categories, pod-based vaping and CBDs are the tip of the Nu-X spears we work toward accelerating growth over the coming years. But rest assured, there are myriad of other opportunities in the product development pipeline. RipTide and our NicTech technology delivered compelling results in the quarter. Store counts are increasing week-over-week and reorder rates are proving encouraging. Looking forward, our integrated sales efforts have already unlocked some additional blockbuster chains for third quarter implementation that is likely to yield significant gains quarter-over-quarter. Equally exciting, we are already well on our way to opening the Canadian market to RipTide with our partners at ReCreation Marketing. We are collaboratively working toward a fourth quarter introduction plan to key national accounts, high volume independent stores and alternative channels. In terms of our entry into the CBD market, I'm especially pleased with progress to-date. You'll recall that we invested in the Canadian American Standard Hemp, or CASH, in the fourth quarter of 2018. Our working relationship is strong and their proprietary and highly efficient processing will enable us to compete with great effectiveness as the landscape shifts in many anticipated ways. In June, we advanced our CBD effectiveness again with the conditional approval for Kentucky hemp processing. Now, with direct access to the agricultural stock and the highly efficient processing at CASH, we have further enhanced…

Thank you, Graham. Total company net sales and gross profits were each up 15.1%, with gross margins expanding in each of our three reportable segments, something we're really focused on. Before I dive into the segment and consolidated performance in the quarter, I've gotten plenty of questions on the July 25 convertible senior notes. Let me address that here. Market acceptance and interest levels were deep, broad and the deal was multiple times oversubscribed. So much so that we elected to upsize the offering from $125 million to $150 million and the underwriters exercised the green shoe early on Monday, bringing total gross proceeds to $172.5 million. The notes will accrue interest at 2.5%, significantly down from our current levels. In connection with the pricing the notes, the Company entered into capped call transactions with certain financial institutions to offset dilution. The capped call transactions will be initially priced at $82.86 per share, which represents a 100% premium to the closing price on July 25th. Economically, therefore, the company will incur no dilution as a result of this transaction until the stock price exceeds $82.86 and then only at very low levels. We used some of the proceeds to pay down our LIBOR plus 700 second lien notes. The elimination of the second lien greatly simplifies our financial structure and enhances our acquisition flexibility. In our filings, you will find modified total leverage covenants with our first lien credit facility that gives us significant room to accommodate the convertible debt. The notes mature in 2024, giving us ample runway to be more aggressively pursue our growth plan. Total net proceeds to our balance sheet after expenses, capped call and the second lien pay down was a $110 million, and we are really looking forward to investing those dollars. Moving to…

Thank you, Bobby. Second quarter 2019 was a good quarter for the Company. We continue to grow focus Stoker's MST with excellent success realizing improved margins across the board and sharply increased Nu-X sales. These are exciting times here at TPB and the integrity of our plan remains intact and reinforced. Looking forward, we will continue to execute our strategic plan by driving focus 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 in the call today. And with that, I'd like to open up the call for questions.

Operator?

We will now begin the question-and-answer session. [Operator Instructions] We will take our first question from Susan Anderson from B. Riley FBR. Please go ahead.

Good morning. This is Luke Hatton on for Susan. So I know you said you wouldn't provide details about the new CBD products for retail, but can you give us a sense of the scale and timing of that retail launch? And then are there certain regions you'll be focusing on or how are you approaching that roll out?

Good morning. Luke. I did mention in the script that our first product will be a CBD disposable that will be starting going through our sales funnel, as we call our sales funnel, on the e-commerce side late in August and we will be getting to retail in September and that'll be a launch across – national launch. I might add, though, we're very careful about jurisdictions where you cannot sell CBDs. We have update website continuously to make sure we stay on top of that and will be out in the market in September.

And Luke, we’re pretty excited about it. Right now, we're selling $100 tincture bottles. That is where the market is right now, but we're seeing a lot of demand from our chain customers who want CBD on their shelves. But as we all know and as we've been telling the market, a chain can't carry $100 tincture model. They're really looking for a product that's sub-$20. So you'll see our CBD disposal in the market at prices that really can bring a new wave of consumers into the CBD space.

Understood. Thank you. And then just switching over to the smokeless, can you just remind us on the details of how that margin profile will change as the MST scales and continues to increase penetration in that segment?

Yes. If you go to 2017, margin in moist was kind of in the 30%s, now it's stepped up significantly, it's still below the segment margin. And every quarter we're just seeing continued margin expansion. We have about $3.5 million of unabsorbed overhead that doesn't change whether we sell 1,000 cans or 10,000 cans and so you're going to continue seeing that kind of margin improving.

Great. Thank you. Good luck next quarter.

Thank you.

Thank you.

[Operator Instructions] We will take our next question from Vivien Azer from Cowen & Company. Please go ahead.

Thank you. Good morning.

Good Morning.

Good Morning, Vivien.

So sticking with CBD, can we just dive a little bit deeper into your aspirations around launching product in the Canadian marketplace? The regulatory landscape is a bit more nuanced relative to the U.S. So could you speak to the relationships that you're establishing with the provinces themselves in terms of product approval and how you're thinking about navigating that regulatory landscape relative to the U.S.? Thanks.

So, Vivien, as you know, sort of Canada is a little backwards on the CBD and cannabis and marijuana. So at the end of the day, Turning Point did not have an infrastructure in Canada. We sell Zig-Zag through a partner up there. So that was why we invested in the ReCreation guys. We put $3 million in there. We've hired a team of regulatory partners up in Canada, and ultimately the ReCreation guys do have a partnership with ROSE Life, which is a Tilray investment. And ultimately, they're going to navigate those waters for us. We are developing the recipes, the products. As we talked about, we're very focused on the lower dollar price target products, and ultimately, our partners up there are going to deal with those nuances and we're still kind of waiting for the CBD market to open up a little bit more. Ultimately, we have processing technology, but to do the processing, it's going to have to be in Canada. So we're going to find either a processing partner or going to have to invest a few million dollars to build the processing facility in Canada. Finding hemp in Canada is actually fairly easy, I mean, it's dramatically cheaper than it is in the U.S. But really, when it comes to the province nuances, we're going to have to rely on our partners to navigate those waters, which they're doing today.

Sure. That's helpful. Thank you. Question on the PMTA process, there was a lot of discussion on that yesterday on Altria's earnings call and I think the message from them was that this accelerated deadline is quite onerous. Obviously, you're pulling forward, your spending or the expenses associated with the PMTA process. But can you just offer your take on how onerous this process is going to be under this accelerated deadlines and how that impacts how you're thinking about M&A? Thanks.

Okay. So, the process is still fairly opaque. They have pulled the timing on it. We have anticipated what the FDA is going to do. We have plans in place to meet what we see is the obligations. If you look at the obligations, they are statutory as well as guidance driven and we have everything lined up to want to march against that. We believe we’ll have filings that will meet the hurdle to getting past the first gate of the FDA by the deadline.

And I look at the FDA PMTA process as two parts. There is a significant economic part, which is, you have to effectively just spend money with a lab to have your products tested for certain contaminants. And that is the process that we're pulling forward because we just need to make – you just have to make sure that's done. There is a second part, which is effectively documenting two parts. One is proving that our products are a positive health benefit relative to cigarettes. And then, second, which we believe is a more loose part, but really going to be a focus is, the age issue with vaping products. And this is one of the reasons that we bought IVG in September of 2018, because IVG sells to 1.5 million consumers. We have all of the demographic data from that portfolio versus – getting demographic data in the field and in brick and mortar retail not so easy. We have database of 1.5 million consumers. We know what they're buying, we know their age, trend. We do a lot of age gating. And so, ultimately, we can take the SKUs that we're running through the PMTA process and show that they are used by adult consumers, and we can show that very statistically. And it's just going to – effectively we were hoping we could do that over 18 months. Now, we just have to do it over 10 months in a worst case scenario. It's just a timing issue, it's not really – we have the information. And so while I understand why Altria says it's onerous, but they've also – from their perspective, the bar is almost a little bit higher just because of the issues they've had. And so as long as we can prove that our products are being used by adults, which they are, and I've seen the data and the IVG data shows that, we feel like the process is not – I wouldn't use the word onerous, it's just tight.

Perfect. That's very helpful. And the last one from me also referencing some Altria commentary yesterday. Their estimate for the MST category was that it declined 1.5%. You guys have a 3% volume decline estimate; do you have any sense of what's driving the delta there?

Each have different databases and the issue on MST and you're seeing some our new technologies coming to the marketplace, that are somewhat interesting. And we've actually looked at some of the product and Altria did talk about this a little bit. We looked at some of those white pouch products and it was sort of interesting, it was pretty early in the evolution of these products. We sent some people in and what we found was that the sales in the stores – these MST sales in the stores were only marginally impacted. What we saw with new people coming into the category – interestingly enough, what we found was that there was a significant number enough that at least the trade started mentioning it, of women coming into the category with the white pouch. So we see those – long-term this evolution and we found it very interesting.

And we expect the moist market to be flat to declining, but that's not our focus right now. Our focus is the 80,000 stores we're in, represents 50% of the market opportunity. There are another 50,000 stores that represent that other 50% and this company never really like was very focused on pushing into chains as much as we have over the past year, and so while the market declines, that's fine, there is just share for us to get.

Terrific, thank you very much.

[Operator Instructions] There are no further questions. And this concludes our question-and-answer session. I would like to turn the conference back over to Larry Wexler for any closing remarks.

I'd like to thank everybody for joining the call and we look forward to talking to you at the end of the third quarter. Thank you very much.