Good morning and welcome to the Turning Point Brands first quarter 2021 earnings conference call. All participants will be in listen-only mode. All lines have been placed on mute to prevent any background noise. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Louie Reformina, the incoming Chief Financial Officer. Please go ahead.

Thank you. Good morning everyone. This is Louie Reformina, our incoming CFO. Joining me are Turning Point Brands' President and CEO, Larry Wexler, Graham Purdy, Chief Operating Officer and Bobby Lavan, our outgoing CFO. This morning, we issued a news release covering our first quarter 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 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 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. We started the year with another strong quarter. In the first quarter, revenue was up 19% to $108 million, above our prior guidance range. And adjusted EBITDA was up 57% to $28 million. Revenue growth was led by our core Zig-Zag and Stoker's segments, which were up a combined 27% despite challenging comps from last year's lockdown related inventory runs. A number of favorable trends that started in 2020 have continued even as the country has begun to open up. Our Zig-Zag products segment saw another quarter of tremendous growth as we continued to outperform a healthy market with our execution. New product SKUs in e-commerce were strong contributors to growth and we ramped up distribution of Blunt Wraps during the quarter. We acquired the rights to this brand in a Durfort transaction last year. Canada also outperformed with recreation marketing results now consolidated within this segment. In Stoker's, MST drove our gains as same-store sales growth continued its strong trend. Stoker's remain the fastest-growing brand in MST, according to MSAi and continues to be well-positioned for the secular shift to the value category. NewGen saw solid growth during the quarter despite continued disruption resulting from industry reactions to the PMTA process. Encouragingly, the FDA has stepped up its enforcement efforts, issuing warning letters to 31 manufacturers in March after issuing 29 letters in February and 19 in January. We expect continued volatility for NewGen as the PMTA process improves and still continues. In addition, late in the quarter, vaping benefited from volatility as the industry responded to the looming implementation date of the PACT Act in the second quarter. Customers bought forward late in March and competitors experienced some disruption. The PACT Act is creating further…

Thank you Larry. Let me now give you a quick snapshot of the performance from segment level. Zig-Zag products 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 paper's position as the leading premium and overall paper brand strengthened, increasing its market share in the measured universe by 3.5 points year-over-year to 33.3%, according to MSAi. This was the seventh consecutive quarter Zig-Zag has realized year-over-year share growth. All our major product lines contributed to this growth, supplemented by our new products and our expanding e-commerce platform. In paper cones, we were the number one brand in the MSAi measured channel with 41.4% market share in the first quarter, up 21.4 points from the previous year. Our cone sales more than quadrupled year-over-year. It was over 19% of our U.S. paper sales in the first quarter and we would expect it to continue to ramp through the year. We continue to lead the growth and penetration of product in convenience stores and are expanding our presence in the non-measured alternative channel, including head shops and dispensaries, where most of that market currently exists and where Zig-Zag is still underrepresented. As a reminder, cones are highly accretive to our business. Cones are a more convenient product for the adult consumer and one cone effectively sells for four to 10 times the price of an individual sheet of our regular rolling paper at retail, a significant increase to our addressable market on a per usage basis. In Canada, we had a strong quarter of growth. Recreation marketing, which is now being consolidated contributed low single digit to our segment sales as their business continues to accelerate. Zig-Zag is now in dispensaries that cover roughly 75%…

Thank you Graham. Our performance in the first quarter was once again ahead of our plan. Turning to the segment reviews. Zig-Zag products net sales in the quarter increased 41.8% to $41 million with strong double digit growth in U.S. rolling papers, MYO cigar wraps and Canadian papers which benefited from roughly $2 million to $3 million of deliveries pushed into the first quarter of 2021. Total Zig-Zag segment volume increased 36.9% while price mix increased 4.9%. According to MSAi, first quarter industry volumes for U.S. rolling papers increased double digits with over half the growth driven by cones. Our volumes grew at two times the rate of the overall market. And if you strip us out, we grew 3.5 times the rate of our competitors. This excludes the incremental volume growth we are seeing from the alternative and e-commerce channels. MYO cigar wrap industry volumes were up strong double digits in the quarter. During the quarter, we saw the segment's gross margin expand significantly by 490 basis points to 60.7%. This was the result of the financial benefits of eliminating royalty payments to Durfort resulting in higher margin for our MYO cigar wrap product and accretive contribution from our e-commerce business, which is currently trending above the segment average. Zig-Zag accounted for 58% of our segment operating income in the first quarter and continues to be our fastest growing segment. Stoker's products net sales increased 10.4% to $29.3 million in the quarter. Net sales for the MST portfolio grew 17% and represented 63% of Stoker's revenues in the quarter, up from 59% a year earlier. Total Stoker's volume increased 5.1% with price mix advancing 5.3%. The year-over-year industry volumes for MST declined by approximately 2% with chewing tobacco declining by approximately 4%. Stoker shipments to retail continued to outpace…

Thanks Louie. We had a strong start to the year. Our core businesses, especially Zig-Zag, continued to perform exceptionally. And we are optimistic about the longer term prospects of our NewGen business as we believe that we have a competitive advantage navigating the PMTA process and the PACT Act which is likely to be transformational events for the industry. With our business momentum and our balance sheet, we remain well-positioned as a company. Our performance would not be possible without the continued efforts of our employees and I want to personally thank them once again for their commitment and contribution to our success. I also want to take time to thank Bobby Lavan for his contributions to the company over the last three years. Bobby has been instrumental in reshaping our balance sheet and repositioning our company for growth. We wish Bobby all the best in his next opportunity. Thank you for participating in the call today. And with that, I would like to open up the call to questions.

[Operator Instructions]. We do have a question is from the line of Vivien Azer with Cowen.

Hi. Thank you. Good morning.

Hi Vivien.

So I wanted to start off with the Zig-Zag segment, really tremendous growth, far better than we were looking for. The share momentum certainly is encouraging and it seems like you guys have incremental distribution opportunities even from here. I was wondering if you could help us think about framing EPD or percent distribution? It's easier to track in measured channels but it's a little bit more nebulous when you guys start expanding into non-measured channels. So how should we think about that? Thanks.

Yes. So you are right. It is harder to track in the non-measured channels. Our only estimates of the alternative channel is about 40% of the market but we may have underestimated that. We still think that we are in the high single digits, low double digits share in that alternative channel. So there is still plenty of runway for us to grow there, especially with the 30% share that we have in the measured channel. So I think we are still just getting started in terms of our efforts in the alternative channel.

Understood. Thanks for that. And just on the revenue accretion that you are seeing from cones. It's certainly showing up in the gross margin, which is great to see. But when you said that cones can go from anywhere from a four to 10X premium, that strikes me as a f very wide range relative to a single sheet. So what drives the variability in that pretty tough competition?

Yes. So it's really kind of depending on the product you are switching from. So if you look kind of on our website, you know if you look at a book of French orange papers, that's $2.50 for a booklet of 32. And so that drives four time increase on the retail price for that product. But if you look at our unbleached rolling papers, which comes in a pack of 50, that's a 10 times increase to the price of the unbleached paper.

Perfect. Okay. Thanks for that context. Last one, housekeeping item on the Zig-Zag segment. Can you quantify the magnitude of the revenue shift, I believe it was from Canada, out of 4Q into 1Q?

Yes. So that was just a delayed shipment from Canada. Sot that's about $2 million to $3 million that we experienced shifting over from Q4 of last year to Q1 of this year.

Perfect. Okay. Moving on to the Stoker's segment. I was hoping to get your perspectives on some of the commentary coming out of Capitol Hill around tobacco tax conversation, please?

Is that a tax question? I didn't -- you broke out.

That's right. It's a tax question.

So as you know, you have been following this business for a long time. There is always conversations about taxes. And taxes go up at the state level all the time. The experience that we have had, that we have seen is that there is really low activities in our markets. We do see some shifting to value after significant tax increases in states. As you know, the Durbin Bill is the first proposal. It's very extreme. We expect it to come in better than that. And even if it did, we are very well positioned. We did some back of the envelope analysis that says after implementation of Durbin Bill, a pack of cigarettes would be $8 and change and a can of Stoker's would be $5 and change. So I think we are still very well positioned even that tax bill goes through.

Yes. That makes sense from a supply and demand perspective, for sure Larry. And then if you could just expand on that thought and just speak to the implications for a federal tax on vape?

Well, there's many implications from that. One is that once the federal government taxes your product, it tends of become, not a partner, but it certainly legitimizes it and it may relieve some of the pressure. We believe that vape consumers, even the states have put on state excise taxes, state with the product, consumers tend to have incorporated their products into their daily lives. And ultimately, unfortunately the consumers will pay the tax. Almost all of the taxes go through to the consumer and consumers will pay the tax.

Understood. Thanks very much for the color.

And your question is from the line of Susan Anthony with B Riley financial.

Thanks. Nice job in the quarter. It's good to see the accelerated growth continue into the first quarter. I was wondering if maybe you could talk a little bit about the longer term operating margin opportunity for the Stoker's and Zig-Zag segments? I guess, how much opportunity is there to continue to expand the margins there?

Yes. So we will start out with the Zig-Zag segment. We were not as focused on expanding the gross margins of the Zig-Zag segment. Part of that is going to be driven by the product mix. For example, we mentioned paper cones, which is a highly accretive product for us from an addressable market perspective. But it may come at a lower gross margin than what we have for traditional our papers product, which is fine because it expands the gross profit dollar opportunities. So what we are really focused on with Zig-Zag is leveraging the gross profit dollars on the fixed cost SG&A for that segment. So don't look for too much gross margin expansion on the Zig-Zag segment from here. On the Stoker's, that's a different story because MST is a product that we manufacture in-house. So we should still keep driving the incremental margins as we grow the volumes of that business.

Okay. Great. That's really helpful. And then maybe can you talk a little bit on the Nu-X brands and the response you are seeing from the consumer? It seems like with a better guidance there in the NewGen category, it looks like it's doing a bit better than expected?

Yes. So part of that is being driven by the PACT Act implementation that we mentioned earlier. So we did see some pull forward in sales as our customers kind of pre-bought in advance of higher shipping cost a result of the PACT Act. There is going to be some short term volatility but we are seeing a big opportunity for us as the market consolidates with our competitors going away. So I think that's part of what you are seeing in the strength on the NewGen side of the business.

Okay. Great. And then I guess just last one really quick, if maybe you can give us an update on what you are seeing on the acquisition front? Where you are seeing the opportunity in terms of by segment? And kind of where you are really focused on?

Sure. So we just did this investment in Docklight which we are very excited about. The focus there is really, we want to build a house of brands in the cannabis space that complements our investment in dosist. We are looking to do a few more of these, not too many. And you know, we kind of view this as a way of dipping our toes in the water and eventually acquiring these brands into part of the consolidated company. We have mentioned that we are active in the cigar space. It is a $2.5 billion market opportunity for us. So we are evaluating opportunities from an acquisitions perspective there. So look for us to do something there in the short to medium term. We are also focused on expanding our product offerings. So we are touching 210,000 retail outlets in North America. There is a lot of other products that go into these stores, which are mostly C-stores that we can drive through the same sales infrastructure that we are currently on using. So we are looking at what we would call it [indiscernible]. So there is various opportunities that we are pursuing.

Okay. Great. I guess just one follow-up, I guess, for the investment such as Docklight. How are you guys thinking in terms of the timeframe there eventually making a full investment in the company?

So Docklight comes with an option of investing another slug into the business. Eventually, the way we are approaching the cannabis segment is, we think that the market today is going to be significantly different than the market five years from now. So making investments, small investments in the companies like dosist and Docklight with an opportunity to investigate another chunk and eventually fold them into our company, is the course that we are taking there

Great. Okay. Thanks so much. Good luck for the rest of the year.

And your next question is from the line of Eric Des Lauriers with Craig-Hallum.

All right. Great. Thanks for the question and congrats on another really strong quarter again. Focusing on the Zig-Zag business, obviously really strong growth there as well and I am just trying to parse through that measured versus the alternative channel opportunity. How should we think about that opportunity in terms of papers versus wraps? Any major difference in either current distribution or sort of market share potential that you guys see for papers versus wraps in that alternative channel?

Yes. So the alternative channel is really mostly a papers opportunity. So a part of that is the need of tobacco license to sell our wraps product. And so that fits mostly in our measured channel still. So really the opportunity is in terms expanding our presence in alternative more of a papers business. And that's true for both the U.S. and Canada.

Okay. And then I am assuming that it's sort of a higher mix of cones in the alternative channel than in the measured channel. But any sort of ability to quantify the opportunity for cones versus booklets in that alternative channel?

Yes. So it is a heavier your mix of cones in the alternative channel versus papers. And we think that the cones market is as large as the paper booklets market and it is more represented in the alternative channel today than it is in the convenience store channel. Really, we are driving the growth in the convenience store chain right now.

Okay. Great. That's very encouraging upside to gross profit there. I guess, switching gears a little bit here focusing on M&A. So you talked on M&A in the past in terms of filling gaps in not only your product portfolio but the infrastructure as well. As it relates to the cannabis M&A opportunity, it seems like you guys are doing a really good job filling in the product side with dosist, Wild Hemp and Docklight. But could you touch on any of the infrastructure side of those acquisitions and maybe help us understand what product or infrastrature gaps you might still be targeting for M&A in the cannabis sector?

Yes. So we kind of view ourselves as a branded consumer products company, right. And cannabis is a large and growing market that really we are looking to extend our exposure in. Obviously, with dosist, one of the strongest brands on the vape side and now on the gummy side in California. And Bob Marley, which is one of the most iconic brands in the cannabis space that we have added to our portfolio of brands that complements Zig-Zag well. So we are looking to extend our exposure there further. And we are focused on brands, but we are also looking across the supply chain to see if there are opportunities out there to help extend the reach of our brands further.

Okay. Great. That's helpful. Thanks again and congrats again on strong quarter.

Your next question is from the line of Haley Holden.

Thanks for taking the call. I just have two for you. Following up on the M&A theme, I was wondering if there have been any changes with some, either the tax noise out of Washington and regulatory news out of the FDA in terms of your ability to underwrite potential M&A transactions or sellers coming out of the woodwork?

We haven't really seen much changes yet. I mean obviously, there is still a lot of uncertainty in terms of what's happening on the tax rate. So I don't we have really seen much in terms of any activities or results to potential changes on the tax rate.

Okay. And then my second question was, I think you mentioned in the script the potential for higher freight costs in the second quarter. And I was wondering if you could just give us a little more color on that?

Yes. So a lot of that is being driven by the PACT Act implementation. So we are forecasting a decent increase in terms of kind of our ability to fulfill orders. So some of that is going to be passed on to the Consumer. But there is also a big opportunity for us from a market share perspective as some of our competitors are going away this upcoming second quarter. So we are looking to invest or grow our market share next quarter or this coming quarter.

Great. Thank you very much.

And your next question is from the line of Greg Pendy with Sidoti.

Hi guys. Thanks for taking my questions. Just real quick on the FDA warning letters. Are those predominantly open tank players? Or is that just a mix of both vape type of players?

The bulk of them are the open tank players, a lot of mostly liquids.

Okay. Great. And as we are thinking about, I guess, this year, I believe you took price increases in Stoker's in May and July, if I am not mistaken. Is there an expectation for some price increases coming through this year around those times?

The price increases in Louie's comments are fairly regular. So yes, we expect the schedule be somewhat similar to last year's.

Okay. Great. And then just one final question. Can you just kind of, just in general, how should we be thinking about in Zig-Zag, the e-commerce channel. How big is that right now? Or is it just too small to kind of quantify at this point?

So within our U.S. papers business, it's double digits of our sales. So we expect that to continue to ramp for us through the year.

Okay. Great. Thanks.

And sir, there are no further question. Mr. Reformina, do you have any final remarks?

I will turn the call over to Larry.

Well, thank you everybody for joining the call. We look forward to seeing you again in the next quarter. And stay safe and see you in July. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.