Good morning and welcome to the Turning Point Brands Third Quarter 2020 Earnings Conference Call. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Louie Reformina, Chief Business Development Officer. Please go ahead, sir.

Thank you, operator, and good morning, everyone. This is Louie Reformina, Chief Business Development Officer. Joining me 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 third quarter 2020 results. This release is located in the 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 a perspective on our progress against our strategic plan. 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. 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. I will now turn the call over to Larry Wexler, our CEO.

Thank you, Louie, and good morning, everyone. Thank you for joining the call. Our third quarter once again exceeded our expectations, as you realized $104 million in revenue and $24 million of EBITDA. Our strategic growth initiatives are paying dividends. And we're responsible for most of the growth that we achieved during the quarter as we executed well in the favorable demand environment. Though we’ve provided a volatile selling environment for the company, we are able to navigate it successfully and accelerated number of positive trends across all four of our focus product lines. Within Smokeless, MST same-store sales momentum continued, as we kept building our distribution footprint. Secular consumer trade-down trends remain in place, with our value proposition driving trial by new customers, many of which we end up winning over. In addition, the pricing environment remains healthy as we took our second price increase on both cans and tubs last week, while still maintaining a significant price discount to our larger competitors. We also saw accelerated double-digit growth with our loose leaf chew business as a targeted sales force initiative, initiated in the first quarter, positioned us to achieve solid distribution and market share gains in the COVID impacted environment. In Smoking, we saw our highest growth rate in recent history, driven by our product and channel growth initiatives behind our rolling papers and cigar wraps businesses. With the close of Durfort transaction, we're also forming a closer and more direct relationship with our third-party MYO cigar web manufacturer in Dominican Republic. This helped ramp production back up from the COVID related disruptions experienced earlier in the year. Increased cannabis consumption is also benefiting us, the more encouragingly majority of our growth during the quarter came from internal initiatives, through recently introduced products and the ramp up of…

Thank you, Larry. Let me now give you a quick snapshot of the performance from a segment level. Our results were strong in the quarter driven by strong execution of our initiatives in a favorable demand market environment. Smokeless saw double-digit growth in the quarter. The majority of the growth is driven again by same-store sales gains as Stoker’s Moist Snuff market share was up 60 basis points compared to a year ago to 5.1% according to MSAi. Our [sharing] stores receiving the product was at 8.6% up 40 basis points from the previous year. And Stoker’s Moist Snuff is now in stores representing 59.4% of industry volumes, which still leaves a long runway for further gains. Our growth and share performance would have been even stronger had we done our promotions in line with our timing the previous year, instead of doing it later into the fourth quarter this year, with about a million year-over-year getting pushed out to the fourth quarter. Chewing tobacco sales saw double-digit increases targeted sales initiatives put in place earlier in the year led to meaningful expansion of Stoker’s chew. Stoker’s chew registered a 24.3% share in the quarter, which is up 2.9 share points from the previous year. Our sales initiative led to 14% more stores ordering Stoker's chew compared to the previous year. This is quite an accomplishment by our sales force in a very matured category. Smoking saw double-digit growth in the quarter led by strong double-digit growth in both U.S. rolling papers and MYO cigar wraps. In the U.S., Zig-Zag papers strengthened is the leading premium brand, increasing its share in the measured market by 4.2 percentage points year-over -year to 35.3% according to MSAi. This was the fifth consecutive quarters Zig-Zag has realized year-over-year share growth. [Family of skews]…

Thank you Graham. Company results in the third quarter we're ahead of plan once again. Turning to the segment reviews. Smokeless net sales increased 13.7% to $29.8 million in the quarter. Net sales for the MST portfolio grew 16.3% and represented 59% of Smokeless revenues in the quarter up from 58% a year earlier. Total Smokeless volume increased 10.3% its price mix advancing 3.4%. Note that our price mix thus far this year is still being weighed down by copying again in under accrual of allowances related to faster than expected ramp up over chain wins in the previous period, we should have a catch up here in fourth quarter. We've also recently implemented another price increase in MST, along with the industry effective last week. Of note, this is the second consecutive year the industry has taken three price increases. Year-over-year, industry volumes for MST grew by approximately 2% with chewing tobacco growing by approximately 1% in the quarter. Stoker shipments to retail continued to outpace the Smokeless industry in the quarter growing its MSAi share in both chewing tobacco and MST. I also wanted to take a minute to address COVID consumption in our quarterly segment results. While it's difficult to analyze precisely, we believe COVID consumption patterns positively impacted Smokeless sales by about 600,000 in the quarter, with a similar amount in the second quarter. Turning to Smoking products, segment net sales in the quarter increased 19% to $36 million with strong double-digit growth in U.S. rolling papers in MYO cigar wraps. It's more than offset a $2 million decline in our Canadian papers business, which prepared against an inventory loading during last year's third quarter. Non-focus cigars and MYO pipe declined 300,000. Total Smoking segment volume increased 18%, while price mix increased 1%. We recently agreed…

Thank you, Bobby. Our company continues to progress in the right direction. As demonstrated by our results thus far this year, we are reorienting our team towards faster growth. Our initiatives are building momentum. We're realizing operating leverage to help our bottom line. You can see it in our results across all our product lines, and the feeling inside the company is palpable. We have executed a number of strategic acquisitions are executing on our PMTA strategy and developing a robust pipeline of new products prepare for the future. I want to thank all of our employees who are executing in these difficult times. They have demonstrated their commitment to our success. Thank you for participating in the call today. With that I'd like to open up the call to questions.

[Operator Instructions]. At this time, we'll pause momentarily to assemble our roster. The first question is from Vivien Azer with Cowen. Please go ahead.

Hi, good morning.

Good morning.

Good morning.

So I wanted to start with the Smoking segment, the strong double-digit growth is certainly encouraging to see I think you guys, I think rightly point out that you do have a tremendous trademark in that segment. I am curious though, given the distribution gains that you cited for Zig-Zag in the quarter, how much of a benefit was that in terms of volume sale?

Yes, I mean -- so the volumes on our business are actually held pretty tight. It's about three months. So there was as we called out about $3 million to $5 million from wraps. So that was offsetting the fact that there is a trade took down inventory on wraps all the way down in the second quarter. On the paper side, there wasn't a volume sale, there's just -- there was higher consumption.

Got it. Okay, that's helpful. Thank you for that. On the Smoking segment, interesting call out, I think on loose leaf, which I kind of had like a written-off as a segment but could be candid. I'm just wondering is the growth that you're seeing in that segment, do you think that's a function of downgrading in the overall oral nicotine category?

Down trading at Smokeless is a longer term trend. I think it was a accelerated a bit by COVID. But I think the important thing about the loose leaf is that we recognize that nobody was paying attention to it. And we put in place a series of initiatives Stoker's has been growing in that segment, sharing that segment on a very consistent basis for a long period of time. And we saw an opportunity when un-grafted and then COVID came along and just accelerated.

That's helpful Larry. And yes, absolutely, you're right to point out that the down trading has been a long-term phenomenon. I'm wondering into the quarter, as kind of the Phase 3 stimulus checks kind of ran out. And there's not been a Phase 4, have you noticed an evolution in consumer behavior intoquarter around that?

No, it's interesting. I've been following some of the reports from NACS. And it seems as though, these lessons last year that I saw which would go -- went into early September, that the consumers have stayed pretty solid. In our business, we have seen continued strength. So we haven't seen any effects of that yet. I think that, I guess the extra $300 that was sent out for a period of time helps on that front.

Right. And as we think about 2021 and I know it's premature to kind of think about guidance, but to the extent the consumer is under more pressure given unemployment rates and delays and incremental stimulus from the government. How are you guys thinking about positioning your business from where I sit, I feel like you guys are well positioned to pick up share in down trading, but are there like incremental strategic initiatives that you can pursue to really being into that? Thanks.

Yes, we think about -- we're sort of Texas hedged. We get down trading if the consumer gets their time. So that has been very helpful for us. But that's been a trend we've seen for years and COVID really accelerated it. We are preparing for discretionary income to stay flat. But for consumers to be able to go spend money at restaurants and movie theaters versus spending it on staying home and using Zig-Zag or Stoker's. So we are preparing for that both, we have this product, new product pipeline, including on that sort of the value segments in Smoking that we're really excited about that will sort of offset more than offset that next year.

Okay, that's helpful. That seems reasonable enough. Last question, I'd be remiss if I didn't ask about cannabis. So any background on how the relationship with dosist evolved. And in examining the cannabis opportunities that were you guys singularly focused on vape or re-exploring other verticals? Thanks.

So we've talked to a lot of different people in the cannabis section in the category, it's been something that's been of interest to us for a long time. And we went through this process of looking at the various investment opportunities. And we started focusing on brands, we believe that we are good stewards of brands and we are a consumer-brand company. And as we looked around, we found that of all the people that we've met in cannabis that people that at the dosist seemed to understand marketing, there's some real pros there. And we think that they have -- they built a very good brand, obviously, [indiscernible] last year sort of stunted their growth a little bit, but they responded and the slate of new products that they're just entering the markets, market we saw there a lot of great opportunity. We think they're going to be a terrific partner. And we're especially excited about the co-developing this CBD brand for our main channels. We think that the CBD market is one that is under branded, as very few brands that have emerged. And we like their approach in both cannabis and in CBD. They don't focus just on the molecule selling 100,000 milligrams of this, 200 milligrams of that they're really focused on the consumer and the desired end state. And those are the type of people we're looking for. We think those are the type of people that we will win in the long run.

Got it. Thanks so much.

The next question is from Susan Anderson with B. Riley. Please go ahead.

Hi, good morning, nice job in the quarter.

Good morning.

Good morning, Susan.

Good morning. I guess just a follow up on the cannabis side of things and the partnership with dosist, what's the plan for distribution of the product meaning your website, stores etcetera and then, I don't know if you talked about this historically, but how big do you think this category could be for you looking at longer term?

So let me be a little clear on the investment. We actually invested in dosist’s, thc-free for their business in their Canadian operation. As part of that investment, should cannabis become legal -- legalize, then we would receive warrants in the total company. So in the short run, our attention is going to be focused on the thc-free part of their business. And we won't be carrying any of the cannabis products with our sales force.

Got it. That's helpful. And then just looking at the big category, so the competitor is liquidating right now, when do you guys think that will be complete? So you guys could get back to kind of like more normalized sales and margins there?

Yes, as we've sort of been projecting all year, we would see two quarters of significant volatility, that volatility really started at the end of August, when a very large distributor liquidated, we're still seeing that inventory in the system. We expect to see that inventory in the system through sort of the end of the year and maybe a little bit into the first quarter of next year. But the real next sort of catalyst is, the FDA is going to start enforcing and they're going to put out a list of saying what products are allowed to be on the market. And when that happens, we'll see the market clean up very quickly. But, we originally thought that that would come out in October, then we kind of pushed out our extraction in December and now it feels like it's a first quarter 2021 dynamic.

Got it. Okay, that's helpful. And then lastly, just on the margin difference between [indiscernible] and Solace in Nu-X in the meeting category, I don’t know if you could talk about just kind of the differences in margin there and then also the mix of sales. And I guess looking out longer term, how do you guys kind of envision that mix changing?

Yes, so vape, which is, there's two parts of it, there's third-party distribution of vape. And then there's proprietary distribution of vape. Third-party distribution of vape comes in at between 20 and 40. And let's say for round number is 30. Nu-X and Solace come in significantly higher than that. And such in the quarter, we wrote-off $2.7 million of inventory. And that flows straight to the bottom line. So, we do expect things like Solace and Nu-X to continue to take the day in the segment and grow, while we expect the rest sort of vaping from a third-party perspective to just stay flat.

Great. That's helpful. Thanks so much. Good luck next quarter.

Thank you.

The Next question is from Gaurav Jain with Barclays. Please go ahead.

Hi, good morning, everyone.

Good morning.

A few questions, so one is probably the investments you have done in dosist, Wild Hempettes, what would be -- how should we model the equity income line going forward, like would there be losses that they could put there?

Yes, so dosist’s, you should you should keep flat. We have a non-controlling warrant that exercises on legalization. So we'll just have it as cost method, at least in the near-term. From a WildHemp perspective, from a equity perspective, nothing will change there until we potentially bring it more in-house. But there are significant contributions to our sales and gross margin perspective. And so I would be less focused on the equity method modeling, and I would be more focused on what those WildHemp bring to our business from revenue and gross profit perspective.

Is there any way to dimensionalize how much that benefit might be in the next --?

Yes, Gaurav this is Graham. So if you're looking out into ‘21, the product currently sits in about 7,000 stores and they're selling about a carton, a store a month. Product sells for right around $40. And it carries traditional tobacco margins. Our goal in ‘21 is to push that product in upwards of 20,000 stores throughout the course of the year. So I think that gives you a pretty good perspective on sort of how we think about it.

Okay, you've also mentioned that you're looking at further investments like these investments, [indiscernible] and Wild Hempettes? So do you think, if you do like five, seven of these investments, then the narrative actually gets very confusing for investors, because there is -- unless you provide a lot of information about these investments, otherwise, how will investors analyze these investments?

Yes, I think that dosist is sort of a good example of what we're looking into, where we make a financial investment, and we get a strategic business back. So with dosist, we have this financial exposure to this business that we're very excited about. At the same time, we're partnering with them on a national CBD brand, where right now, all of our core customers are looking to us to say, I want to sell CBD, but how are you going to generate poll, and you're going to generate poll with great marketing organizations. And so that's sort of the partnership there. With WildHemp, we made a strategic investment in the business allowed the owners to sort of take some capital off the table of a business that they built. And at the end of day, we just gave you the financials that were close to them. So, I don't think our investors should be overly focused on us trying to make massive multiples on our money, and we do focus on that, what is the strategic benefit to the business and how does that flow through the income statement ultimately.

Sure. One last question just on the big outperformance that you have had this year, I mean, clearly, it's linked to some of the costs that haven't occurred like travel expense and maybe lower promotion and marketing throughout the industry. So is it possible to dimensionalize that as to just understand what the headwind might be an FY ‘21 or FY ‘22 whenever things normalize?

Yes, we're still going through budgets, but I would say travel is off by about a $1.5 million. I don't think all that's coming back. So I would model some of that coming back. But I wouldn't say that all it's coming back. Our marketing budgets are off by at this point a few million and our lot of our marketing is done at the store level. So it's not really down as much. And so, I would expect that to come back. We do actually, though, still have some cost cuts that we expect into next year. So there's going to be some creep, but it's not going to be as significant as you're not going to wake up and have double-digits in SG&A or anything like that.

Sure. And these costs per quarter costs are you're talking of annual costs?

That’s full, that’s annualized.

Okay, thank you.

The next question is from Eric Lauriers with Craig-Hallum Group. Please go ahead.

Hi, great. Well, thanks for taking my questions. Congrats on a very strong quarter and a really exciting investment here in dosist. If I could just start there on dosist, so you guys called out scalability and their marketing pros as the two of the reasons why you decided to go with those guys. Can you give us any examples of what are you seeing in the business that gives you confidence that it is scalable and cannabis, you are dealing with some fragmented state markets? So maybe just kind of talk a little bit about what you're seeing in terms of scalability and then with their marketing that seem to be a big push for this co-created CBD brand. So maybe you just provide us with some examples of their marketing or sort of what we can expect on that front?

Yes, one of things that interest us on dosist is the way they approach the market, so when they came to market with their disposable they actually had a dose control which I guess as name implies. But dose controlled device, so that the consumer could actually can control with their experiences. And on top of that -- and series of products that are geared towards that individual and state. So for instance, in their comp product, they'll have a different combination of terpenes and strains, and other biomass in along with the THC, in order to enhance that particular experience. From my standpoint, it's somewhat unique in the marketplace because they're really focused on segmenting the market and delivering to the consumers exactly what they expect. And so it's that type of thinking, it’s that type of marketing ability, I think will help them succeed in the long run. Now as far as scalability and going across state lines, obviously, when you look at the MSOs, it's a lot more difficult. So a lot of capital in those stores, they have a product line that is portable, they partner with different companies, different suppliers in each state, that make the product to their specs, to their formula, and they're able to cross state lines thereby.

Okay, great, that's helpful. And then in terms of the CBD brand that you guys are looking to co-create with them any color you can provide on product format or whether it's a sort of a family of product types here, just any kind of color on what we can expect at this point?

It'll be a family of products. And again, it'll be geared to the consumer benefit as opposed to just selling the molecule which I think will be a differentiating factor in this market.

Okay, great. And then switching gears to NewGen and PMTA here. So, we did see a number of competitor websites coming down, I understand that there's sort of a void with certain products that may exit the market that you guys will look to fill with your brands and increase your proprietary mix. But just kind of looking a bit more on the growth side of things, any early feedback you can provide in terms of whether it's visits to your websites or your competitor websites or just increased demand for your brands that you're seeing at this point?

I would say feedback so far has been good. If not, I actually saw a study this morning that was great. But it's still early. Really, we've seen one of the biggest changes in sort of consumer products that it just happened almost overnight. And so people who are seeing there going, do I want to try this tobacco liquid versus this tobacco liquids. So we're still seeing, it's still early days, I would tell you that our vape shop partners are very excited that we kept Horizon and FreeMaX in the market. And Horizon and FreeMaX are two the top brands in sort of tanks and coils, which is the razor bladeon the open systems industry. People are very excited that those guys are still around, they still early days. I mean, we're feeling good. But we do need all of this legacy inventory to flush through the system before we can call it a win.

Okay, that makes sense. And then last one for me, can you just kind of talk about some of the M&A opportunities that you're seeing in light of this PMTA disruption. I mean obviously, with dosist and WildHemp, there's a number of very attractive M&A that you guys have been executing on of course, but when we look at the new tobacco products side of the nicotine vape side of the business, can you just kind of talk about the M&A environment post PMTA here?

Yes, so one thing that's really important about the PMTA is, the PMTA is not a process specific to vaping. It's specific to tobacco products. So the entire industry, whether you're a vape company or a cigar company, is going through the same thing, where we're trying to figure out, do I want to be involved in this space? And so we're getting tons of incoming calls and so right now, we are very focused on larger cash flowing M&A. I think dosist was a good investment for us, we'll continue to look for investments like that. But right now, the focus is on cash flowing M&A that comes out of the entire tobacco industry sort of being having a gut check and saying, do I want to be here?

Okay, great. And so you guys are getting some more increased calls. And it sounds like that M&A environment is perhaps a bit more targets that are coming available post PMTA here?

Extremely active.

Alright, great. It's great to hear. Well, congrats, again, guys on both the strong quarter and the strong investment here and in dosist, really an exceptional brand. So congrats and looking forward to the future here.

Thank you.

The next question is from Greg Pendy with Sidoti. Please go ahead.

Hi, guys. Just wanted to clarify, you said the 600,000 COVID impact on -- was that the entire Smokeless category or just cans and tubs? And then in addition, just given the volumes you're seeing it Smokeless? How much or can you just give us a little bit on where do you think manufacturing capacity is? And is there any point of step up where you have to add towards manufacturing capacity? Thanks.

So, on your first question 600,000 for the total category in Smokeless. It was about the same in the second quarter as well. From a capacity perspective, we've been chasing capacity for a few years now. So you do see that our CapEx is a little bit higher, we are putting in efficiencies, we have room for a second line. And I would just tell you, right now we run four day a week. So we could add shifts. And so, we feel like we have at least a few more years before we really start hitting bottlenecks or ceiling. So we're feeling pretty good about that. But it doesn't mean a little bit more CapEx and some more shifts to manage these step ups in volume.

Perfect, that helps. Thanks.

[Operator Instructions] This concludes our Q&A session. I would like to turn the conference back over to Mr. Louie Reformina, for any closing remarks.

Thank you, everybody. We look forward to speaking to you next quarter. Thank you for joining the call.

Thanks, guys.

Thank you.

This conference is now concluded. Thank you for attending today's presentation. You may now disconnect.