Good day and welcome to the Turning Point Brands' First Quarter 2020 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 like to turn the conference over to Mr. Louie Reformina, Vice President of Business Development. Mr. Reformina, the floor is yours sir.

Thank you. Good morning everyone. This is Louie Reformina, Vice President of Business Development. Joining me today are Turning Point Brands' President and CEO, Larry Wexler; Graham Purdy, Chief Operating Officer, and Bobby Lavan, Chief Financial Officer. This morning we issued a news release covering our first quarter 2020 results. This release is located in IR section of our website, www.turningpointbrands.com where a replay of today's conference call will also be available. In this call, we will discuss our consolidated and segment operating results and provide our perspective on our progress against our strategic plans. 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 actual -- 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, Louie, and good morning, everyone. I want to thank you for joining the call during this trying time, and hope you and your family are staying safe. Our first quarter was strong, particularly considering the disruption of all businesses across the country at the end of the quarter. We outperformed our expectations across all our major business lines. Tobacco, both Smokeless and Smoking exceeded expectations, even after discounting for our estimates of sales pulled forward due to the current environment. We're especially encouraged by the results of our reorganization of the vape business with sales growing more than 10% sequentially each month of the quarter. That aside, our focus is on the safety and well-being of our colleagues and in communities and customers we serve. I would like to thank our employees for the job they have done to ensure a safe working environment for each other and our communities and express how truly proud and inspired I am of the resiliency they have shown in their commitment to serve our customers' needs. As an organization, we've implemented several changes to enhance safety and mitigate risk in our work environment. For our warehouse and manufacturing operations, these include split shifts where appropriate, temperature scans, contactless hand sanitizing stations, protective equipment, social distancing guidelines, and increased cleaning and sanitation. We canceled all unnecessary travel, implemented telecommunicating where possible. Like many companies, we have changed the way we communicate through increased use of video conferencing and I've implemented tele-selling initiatives throughout the salesforce. Some of these changes are proving to be rewardingly efficient and are likely to remain in place even after this crisis and lead to ongoing cost savings. We have deferred annual compensation increases for corporate employees other than those contractually required. We've also put on hold new…

Thank you, Larry. Let me now give you a quick snapshot of the performance from our core tobacco business. Our results were strong in the quarter driven by robust customer demand. Smokeless saw double-digit growth in the quarter. Stoker's moist snuff delivered another record share, up one full share point compared to a year ago to 4.8 with our share in stores receiving the product now at 8.5% Stoker's moist snuff is now in stores which represent 56.6% of industry volumes. Both cans and tubs delivered significant gains during the quarter with most of the growth driven by same-store sales games. As Larry mentioned, we saw particular strength in our Stoker's tubs shipments at the end of the quarter. Chewing tobacco sales held flat as ongoing category decline was offset by Stoker's chew continuing to expand its share. Stoker's chew registered 22 share in the quarter, remaining the second largest brand in the category while closing the gap with the market later. Smoking saw double-digit growth in the quarter, led by strong double-digit growth in U.S. rolling papers and high single-digit growth and cigar wraps. In the U.S., Zig-Zag Papers remained the leading premium paper brand increasing its share year-over-year for the third consecutive quarter. Growth was driven by strengthen our core products along with contributions from our new products, where we continue to leverage Zig-Zag's iconic positioning. Zig-Zag organic hemp papers are now in approximately 39,000 retail outlets, while paper cones and unbleached papers are now in approximately 31,000 and 21,000 retail outlets respectively. Zig-Zag share of paper cone category has climbed from 5% to 27% over the last year to position Zig-Zag as the number two cones brand, while Zig-Zag Paper is the number one hemp paper brand with a 28 share. We're especially excited about the first…

Thank you, Graham. Company results in the first quarter were stronger than we expected with every segment coming in ahead of plan and benefited from accelerated demand, trade loading, and strong execution. Before I review the segment consolidated performance for the quarter, let me first summarize some recent developments. PMTA has been moved out for months to September 9th. This does not impact our full year plans and we continue to expect to spend a total of $15 million to $18 million on the process. On April 8th, TPB and Standard Diversified, SDI announced a definitive agreement for tax-free merger and transaction executive completed by the summer. SDI shareholders will receive 0.97 shares of TPB common shares for each common share of TPB held by SDI. At the close of the transaction, we're pleased to have come to an agreement on this and transaction will effectively retire 1.5% of our shares outstanding and eliminate the overhang of a holding company structure. Turning now to segment reviews. In Smokeless, the Stoker's continues to deliver sustained growth momentum. Smokeless net sales increased 17.5% year-over-year in quarter. Net sales for the MST portfolio grew 33% and represented 59% of Smokeless revenues in the quarter, up from 52%. a year earlier. Total Smokeless volumes increased 16.7% with price mix advancing 0.8%. We believe trade loading impacted our sales by approximately $ million in the quarter. Year-over-year industry volumes for MST increased by approximately 2% with chewing tobacco eroding by approximately 4%. Stoker's shipments to retail continue to outpace the Smokeless industry in the quarter, growing its MSAi share in both chewing tobacco and MST. Turning to smoking products, segment net sales in the quarter increase 13% with double-digit growth in the U.S. rolling papers, partially offset a year-over-year decline of $500,000 in non-focus cigar…

Thank you, Bobby. While we continue to deal with a challenging environment, the company executed well during the quarter and shows its resilience and its ability to meet consumers' needs. We remain committed to our goals of growing our tobacco business, creating operating leverage and finding new market opportunities. Company has implemented a number of new initiatives, however, the timing and the impact of their implementation may be impacted by the current environment. But as you can see our numbers, while we remain optimistic based on what we saw before the economic disruption. Our company remains solid and resilient and our people remain committed to the journey. Thank you for participating in the call today. With that, I'd like to open the call for questions.

Thank you sir. We will now begin the question-and-answer session. [Operator Instructions] And the first question we have will come from Vivien Azer of Cowen. Please go ahead.

Thanks. Good morning. Appreciate the question. Hope everyone is safe and healthy. Just wanted to start with the supply chain disruption that you called out from one of your suppliers in the Dominican Republic. Seems like they're back online. Just remind us how big a piece of the business that impacts and how you're thinking about kind of bringing inventory and products back online if in fact you were short on supply. Thanks.

Yes, so Wrap is about 15% of our sales. It is a lower margin product. We're assuming right now about a $5 million hit the quarter from the wraps business now, it's been down three weeks, so we think that that $5 million probably conservative, but that's where we're at, at this point.

And is that supplier back online or no?

They are.

Okay, got it. Perfect. Thanks. On the Smokeless side of the business, clearly very strong share momentum even pre-COVID. Larry, I was intrigued by your comment that you think that there might not be as much pantry destocking as we've seen for other CPG categories. Certainly, that was evident in some of the Nielsen data that we saw today. Just in terms of what you're hearing from your retail customers, any issues with foot traffic? Like certainly we're hearing it from the beverage guys, the gas, certainly your data wouldn't suggest it. But just curious any incremental insights you're hearing from your retail partners around foot traffic impacting consumer demand?

Okay, so what we've been hearing from the field and what I've seen in driving around is that you're seeing fewer people in the stores, but they're buying more. I was in a -- I saw someone walked out of the C store with a whole pocket full -- a whole bag full of product where it usually would go and just buy one can or one pack of cigarettes at a time. What we've seen in our shipments is that it's remained pretty consistent. We spoke about the lift that we had at the end of the quarter. We have not seen the payback that we thought we might, particularly on moist snuff. I think one of the aspects of our products, particularly, the tub is that it's very convenient in these times where a consumer consider buying a handful of cans can go in and buy the tub that can last about a week. And as we've talked about in the past, the cans have been a good feeder into the tubs. I think that just has been accelerated by the current conditions where people can't get out of their houses as much.

Yes, that makes good sense. Are you hearing anything -- and I want to come back to the health of the Stoker's brands specifically, but just to follow-up on my original question, are you hearing any commentary around consumer demand shifts around even the paycheck cycle or some of the stimulus checks that I think went out on 12 or 13 days ago on April 15th? Thanks.

We haven't really seen that. It's still -- this has only been going on for a month and change. And so we get very focused on selling to the stores, obviously sell out if needed. But at this point we haven't seen sort of -- other than sort of bulk buying, we haven’t seen sort of a dramatic shift in our consumers. I would also say that our Smokeless segment is definitely less city-driven. And so we're in places that people aren't as locked down. On the Smoking side, our product is very associated with people on a recreational basis. So, people are staying at home, and they're just using our products. So, we feel a little bit sheltered to those issues.

Yes, that seems reasonable. The comment on pricing in in the press release and potential pricing delays. Can you just expand on that? I mean it seems appropriate given kind of the commentary we've heard from Philip Morris International last week about their expectations for pricing in the back half and international markets. But in the U.S., you're obviously not the price leader. So, just wanted to get some more color on that comment. Thanks.

Yes. So, the big guy took an MST price increase at beginning of the year. We did not follow. And the expectation would be that like they took a price increase last year in April 30th, we expected that as well on MST. That seems like it's going to be delayed. That being said, we feel that we can't take price increases on cans, but we can take price increases on tubs. So, it will be a slight modification to our plan, but we don't think it's significant relative to the full year plan.

Perfect, that's all really helpful. I'll turn it back into the queue. Thanks.

[Operator Instructions] The next question will come from Susan Anderson of B. Riley FBR.

Hi, good morning. Nice job in the quarter. I was curious -- I mean, this has -- but for the MST growth, how much do you think was that trade down versus stocking up? Did you guys kind of parcel out where you think kind of like the growth came from -- the outsized growth?

Yes, I mean, the outsized growth came from tubs, which is a trade down. But I think at the end of day the business was growing significantly up until the last few weeks of March and then it's just shut up. So, the business continues to be double-digit strength with or without sort of these trade down.

Got it. Okay. And then do you think any of that is stocking up that maybe will hit later quarters, or are you seeing that it was kind of straight growth?

Yes, we're assuming a $2 million giveback in the second quarter.

Okay.

Now, the one thing I'd say is we haven't seen it in April, which we think is -- goes to the strength of Stoker's brand. So, we're pretty excited about that. But we have been assuming that $2 million giveback in the second quarter.

Okay. And then, I guess ,what the NewGen segment now being reset for the vape business, how should we think about the margins there as we kind of look out over the next couple years? What are you guys expecting in terms of expansion at all or how should we think about that now with the reset?

Yes, I mean, I don't think we're going to change our long-term guidance on NewGen anytime. I mean 30%, gross profit has been something that that business has sat at for the past few years. But as we've discussed, we expect gross margin increases in NewGen. That's what we've been working towards with our proprietary brand. I'll tell you, we, we did put out a new investor presentation on our website that sort of quantify this a little bit with the long long-term target being 50%. But that's something that is going to take a while to get there.

Yes, okay. Got it. And then can you talk about just what you're seeing on the acquisition front? It sounds like you're seeing maybe an increase in potential opportunity out there. what categories are you seeing these opportunities and are you seeing prices maybe become more attractive?

Yes, I mean, we're seeing a ton of opportunity in the cannabis and in the smoking space. So -- I mean you should expect us to get stuff done there. We think that -- we raised this capital last summer under the assumption that we were going to get more exposure to the cannabis space into the smoking space and we're seeing that play out. I would tell you, the carnage that we expected in the cannabis space is playing out is worse than we thought which sometimes makes steelmaking impossible. Just that things are -- one of our competitors posted that they had to take a massive bad debt expense in a quarter because people aren't paying their bills. So, it makes it -- no one's going to do deals when they can't even pay the bills. So, it's complicated, but this is what we're set up for. We didn't think it was going to play out exactly this way, but this is what we are prepared for.

Got it. That's helpful. And then lastly, just modeling question, I guess. So, the actions you're taking for COVID, such as like, the increased wages, more employees, like should we think about that impacting SG&A materially, or how should we think about that and kind of out the next quarter?

Yes, I would say actually, it's going to go the other way. I would say the expenses that we're paying whether it's more overtime or hourly wage increases, those are more than offset by sort of decreases in business where we've cut back on non-essential spend, T&E has been pulled back significantly. So, we're not expecting any sort of SG&A creep at all.

Great, that's helpful. Thanks so much. I'll jump back in. Good luck next quarter.

[Operator Instructions] Next we have a follow-up from Vivien Azer of Cowen. Hello, Ms. Azer, your phone might be muted ma'am.

It sure was. Thank you very much for the prompt operator. Thank you for the follow-up. Just wanted to follow-up on the PMTA. Just -- obviously, accommodative ruling from the judge in Maryland given all the disruption from COVID-19, are you guys planning on using the full length of that extension? Is there value in getting your submission in? We saw that Imperial brand, for instance, today just filed on [Indiscernible]? Is there a benefit to getting to the kind of front of the queue if you will? Thanks.

There's no benefit. I mean the only benefit is on flavored pods, which is not a significant part of our PMTA. Right, because remember, our -- the PMTA we're filing on open systems, the open systems are still out on the market.

Okay. But just in terms of getting like feedback earlier from the FDA, no value in that at all, because they're just going to work through everything all at once?

Yes, I mean, we're having dialogue with the FDA. So, it's -- we're getting feedback already. So, that's it. So, submitting the PMTA early, really doesn't get you much, particularly on the lower interest category, which is the open systems. And so we'll file a little bit early, but we're not in like some rush to do it.

Got it. And then just from a cost perspective, obviously, you're just having your team work remotely, but I'm curious just in terms of utilizing third-party resources to the extent that you are whether any delays are going to drive some inflation in the cost if the work is taking longer?

To be fair, it's a little bit of whack-a-mole. But I don't expect any significant creep. There's some consultants we have on retainer that they'll stay on an extra few months and so that's an extra 25,000 here 25,000 there, but the bulk of the expense was going into lab capacity. And so that lab capacity did not increase because of extended time.

Understood. Thanks for the follow-up. I appreciate it.

At this time, we're showing no further questions. We will go ahead and conclude the question-and-answer session. I would now like to turn the conference call back over to the management team for any closing remarks. Gentlemen?

Thank you everybody for joining the call. See you next quarter.

Thank you, sir and to the rest of the team for your time also today. The conference is now concluded. At this time, you may disconnect your lines everyone. Take care and have a wonderful day.