Good morning and welcome to the Turning Point Brands Second Quarter 2021 Earnings Conference Call. All participants will be in a listen-only mode. All lines have been placed on mute to prevent any background noise. 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 your speaker Louie Reformina, Chief Financial Officer. Please go ahead.

Thank you. Good morning everyone. This is Louie Reformina, our Chief Financial Officer. Joining me are Turning Point Brands’ President and CEO, Larry Wexler, and Graham Purdy, Chief Operating Officer. This morning, we issued a news release covering our first quarter results. This release is located in the IR section of our website, 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 are pleased to report a quarter and once again outperformed our expectations. In the second quarter, revenue was up 17% to $123 million, above our prior guidance range. Adjusted EBITDA was up 32% to $30 million. Revenue growth was led by Zig-Zag, which had an exceptional quarter with over 70% growth. We are harvesting the fruits of our strategic growth initiatives and are continuing to outperform the market. You’re also aided by a favorable comparison against COVID disruptions in our wraps business that negatively impacted the prior year period and the consolidation of ReCreation Marketing’s results. There was progress throughout our product lines. Paper cones and e-commerce continued to provide a big boost to sales while our wraps business benefited from sales force execution against favorable market demand and benefited from the trade inventory load. In total, wrap sales doubled in the quarter. Stoker’s performed in line with our expectations and was up 8%, led by double-digit growth in MST, which continues to be well-positioned for the secular shift into the value category. Our chewing tobacco business gained share, although we had a modest sales decline as we compared against a competitor going offline in last year’s quarter. NewGen faced a tough year-over-year comparison and the new regulatory hurdle, yet outperformed our expectations during the quarter. The vape distribution team responded well to the implementation of the PACT Act, which made the logistics of delivering vape products to customers and consumers more challenging. While we still expect volatility in NewGen, we’re seeing progress in both the FDA’s efforts around the PMTA process and increased enforcement against unauthorized products still in the market. During the second quarter, the FDA issued 52 warning letters to manufacturers that did not submit the PMTA, bringing the total to 131 warning letters sent out since January to bolster its enforcement against illegal products in the market. Importantly, on May 20, the FDA posted its continued compliance list, which provides a directory of those deemed new tobacco products for which a PMTA was timely submitted. We believe this list will provide retailers and trade customers clearer guidance on which products they can carry. This includes our submissions for our deemed products, all of which have now received acceptance letters. A number of the products are now in scientific review. We are confident that we have submitted robust filings and anticipate working successfully with the FDA through the process. We believe that both the PACT Act and the PMTA process are creating barriers to entry in our business that will position us well in the long term as these factors force consolidation in the industry. We’ve also been very active in our capital deployment with share purchases and investments. In April, our subsidiary ReCreation Marketing acquired DVW, a distributor with a strong presence in British Columbia and with major national chains. While DVW has marginal profitability at the outset, it serves as a great platform to expand distribution of our more profitable proprietary products in an area where we previously had limited reach. Last week, we announced an $8 million investment in Old Pal, one of the most recognized brands in the cannabis space, with product offerings in seven states. Old Pal's nimble, asset-light, non-plant touching business model has allowed it to scale across multiple states. The team has been adept at managing the ever-changing complexities of the cannabis market. Old Pal fits well within our strategy of building a house of scalable well-known brands in the cannabis industry. Joining previous investments in Docklight, we chose the rights to the Marley brand for cannabinoids and dosist. We caught our attention with Old Pal due to their experienced management team and the awareness they have built with the brand even in states in which they do not currently operate. Our investment will allow them to accelerate their growth, also providing a prime opportunity to increase our own product sales presence in dispensaries. Yesterday, we also announced the acquisition of certain cigar assets of Unitabac. Cigars are a very important multi-billion dollar category where industry observers have highlighted that growth is being driven by cannabis consumption. Cigars are a perfect complementary product to our MYO cigar business, but one where we were lacking the necessary intellectual property to compete effectively in the space. Unitabac assets come with a portfolio of grandfathered products and other FDA pre-market filings providing us with a broader and more cost-effective platform to compete in the market. Our plan is to expand distribution for Unitabac’s brands while leveraging the IP to introduce line extensions in the Zig-Zag cigar portfolio. With approximately $180 million of liquidity on our balance sheet during the second quarter, along with strong free cash flow generation, we remained very active on the acquisition and investment front. With another solid quarter performance, we are able to raise our guidance once again and look forward to continuing our momentum. That’s some additional color and perspective on our quarter and the path forward. Let me turn the call over to Graham Purdy, Chief Operating Officer.

Thank you, Larry. Let me now give you a quick snapshot of the performance from the segment level. Zig-Zag Products saw double-digit growth in the quarter led by a doubling of sales in both our MYO cigar wraps and Canadian businesses, as well as strong double-digit growth in U.S. rolling papers, driven by e-commerce and paper cones. Our MYO cigar wrap business compared favorably against the prior year period, which saw a COVID-related disruption when our third-party manufacturer went offline. Retail sales accelerated, and we were able to leverage a more efficient supply chain post the Durfort acquisition to fill the backlog that built up heading into the current quarter. We further benefited from an inventory trade load-in as our customers built buffer inventory, which pulled roughly $2 million of sales into the quarter. In the U.S., Zig-Zag paper’s position as the leading premium and overall paper brand strengthened, increasing its share in the measured market by 2.4 points year-over-year to 35.1% according to MSAi. After not growing share for the first three years since our IPO, this was the eighth consecutive quarter in which Zig-Zag realized year-over-year share growth, reflecting the portfolio and channel efforts put in place to revitalize the business, where we are still in the early stages of this process. Our new products and our expanding e-commerce platform again provided a boost. During the quarter, our paper cones gained a 33.3% share of the second major channel according to MSAi, up 10.5 points from the previous year, as our volumes more than doubled. We continue to lead the growth and penetration of this product in convenience stores, and we are expanding our presence in the non-measured alternative channel, where Zig-Zag is still underrepresented. In Canada, we had a strong quarter of growth with our business more than doubling, as ReCreation marketing, which has now been consolidated, continues to ramp and is now bolstered by DVW. E-commerce was once again a big driver of growth, as our e-commerce business, which now accounts for double-digit sales of our U.S. paper sales, continues to make strides—up over 3.5 times last year’s levels and up 50% from the previous quarter. Stoker’s products experienced high single-digit growth in the quarter with double-digit growth from moist snuff being the main driver. Stoker’s market share increased to 5.8%, a little over 50 basis points compared to a year ago according to MSAi. Stoker’s moist snuff is now found in stores representing 62.2% of industry volumes, which is 3.8 points above last year’s level, leaving a significant runway for further growth. Chewing tobacco sales saw a low single-digit decline during the quarter after comping against a quarter that experienced 6% growth when a competitor experienced COVID-related disruptions in the prior year period. Despite the tough comparison, Stoker’s chew gained 20 basis points with a 26% share in the second quarter, according to MSAi, positioning Stoker’s as the number one chewing tobacco brand. With the continued secular shift into the value category and Stoker’s positioning as a leading value brand, the chewing tobacco business is well poised to provide us with a stable annuity stream of cash flow going forward. Moving to NewGen, we once again had a resilient quarter in a very disruptive environment. In our big distribution business, we saw double-digit declines against a tough comparison during the previous year when we benefited from a COVID-related disruption at a B2B competitor and strong B2C orders during state stay-at-home provisions. The business did benefit from advanced buying in April due to new shipping regulations around vaping as a result of the implementation of the PACT Act. We believe this boosted sales by $2 million during the quarter as customers adjusted to longer lead times by building inventory. The PACT Act had a meaningful impact on costs, as our outbound freight expense in the vape business, which we recognized in SGA, was up over 300 basis points as a percentage of its sales from the previous quarter, and this increase was only partially passed on to the customer. We believe that the additional costs and complexities around the logistics of delivering vape products to customers caused by the PACT Act are consolidating the industry further and positioning us well to gain share. Outside of vaping, while we haven’t seen major contributions to our growth, we are encouraged by the early reception of our free white nicotine pouch as we begin its rollout during the second quarter. Going forward, while we continue to expect short-term volatility in the vape distribution business, we feel confident about our long-term competitive standpoint and are excited about some of our new product launches, including free at Nu-X. And with that, I’ll turn it to Louie for a review of our fourth-quarter financial performance. Louie?

Thank you, Graham. Our performance in the second quarter was ahead of plan once again. Turning to the segment reviews, net sales for Zig-Zag products in the quarter increased 72.3% to $47.2 million, with a doubling of both our MYO cigar wrap and Canadian businesses and strong double-digit growth in U.S. rolling papers. Total Zig-Zag segment volume increased 64.6% while price mix increased 7.7%. According to MSAi, first-quarter industry volumes for U.S. rolling papers increased mid-single digits in the measured channel. During the quarter, our volumes grew at 2.8 times the rate of the overall market, with Zig-Zag contributing over 90% of the industry’s growth, with our paper cones being the major driver. This growth excludes the incremental volume growth we are seeing from the alternative and e-commerce channels, and highlights why cigar wrap industry volumes were up strong double digits in the quarter. We saw the segment's gross margin expand by 160 basis points to 58.8%. This was the result of the financial benefit of eliminating royalty payments to Durfort, resulting in higher margins for our MYO cigar wrap product. Zig-Zag accounted for 58% of our segment operating income in the second quarter and continues to be our fastest growing segment. Stoker’s products net sales increased 8.3% to $33.4 million in the quarter, with net sales for the MST portfolio growing 16.1%, representing 62% of Stoker’s revenues in the quarter, up from 58% a year earlier. Total Stoker’s volume increased 2.4% with price mix advancing 5.9%. Segment gross margins expanded by 80 basis points to 54.4% during the quarter, driven by pricing across the segment and fixed-cost leverage in our MST business. Year-over-year, industry volumes for MST were flattish, with chewing tobacco declining by approximately 3%. Stoker’s branded shipments to retail continued to outpace the industry in the quarter, growing its share in both chewing tobacco and MST. Moving to our NewGen segment, net sales decreased 10.0% to $42.1 million, driven by tough comparisons, although the vape distribution business was up 13% sequentially, which was above our expectations. We continue to expect near-term volatility due to the PMTA process in 2021, along with the impact of the PACT Act. For the quarter, NewGen's gross profit contracted 20 basis points to 33.5%. Now moving to the consolidated business. Adjusted EBITDA for the quarter was up 32% to $30.0 million. We achieved 41% incremental margins during the quarter, reflecting the strong performance in our core segments as we leverage our fixed cost structure. In this morning’s release, we updated our 2021 guidance as follows: net sales of $447 million to $462 million, up from previous guidance of $422 million to $440 million, including $109 million to $114 million in the third quarter. Adjusted EBITDA for the full year is now expected to be $108 million to $113 million, up from previous guidance of $103 million to $108 million. For Zig-Zag, we expect strong double-digit sales growth. As Larry mentioned, MYO cigar wrap benefited from roughly $2 million of orders from a trade inventory load that pulled forward sales from the third quarter. As a reminder, in 2020, our cigar wrap business benefited from $5 million in backlog build in the fourth quarter, as we recover from manufacturing-related disruptions early in the year. This will affect year-over-year comparisons during that fourth quarter. Going forward, we expect Zig-Zag gross margins to moderate slightly from second-quarter levels due to Recreation Marketing ramping up and the contribution of lower gross margins from its DVW acquisition. For Stoker’s, we expect high single-digit sales growth. In chewing tobacco, we are facing another tough comparison in the third quarter when we grew 10% year-over-year last year, as a competitor was temporarily out of the market. For NewGen, we now expect flat growth, up from previous guidance of mid-to-low single-digit declines in revenue, which includes low single-digit declines for vape distribution, also up from prior guidance of single-digit declines offset by growth in Nu-X. We believe vaping sales in the quarter benefited by $2 million as customers increased inventory levels while adjusting to longer delivery times due to the logistical challenges of the PACT Act. Moving to our balance sheet, we ended the quarter with $167 million of cash and a balance sheet and $179 million of available liquidity. This puts us in a strong position to execute on an active pipeline of opportunities. With that, I’ll turn the call back to Larry for closing comments.

We had a strong first half of the year. Our core businesses continued to perform, led by Zig-Zag’s performance. We’re benefiting from solid execution and a favorable environment driven by the secular growth in cannabis consumption. Stoker’s continues to drive share gains, and NewGen has performed well. This disruption of the PMTA process and the PACT Act are likely to be transformational events for the industry. A strong performance would not be possible without the continued efforts of our employees. I want to personally thank them once again for their commitment and contribution to our success. Thank you for participating in the call today. And with that, I’d like to open the call to questions.

We have our first question from Eric Des Lauriers from Craig-Hallum Capital. Your line is open.

All right. Great. Thanks for taking my question and congrats on a really impressive quarter here. So, first for me in NewGen, nice job weathering the volatility from both PMTA and PACT Act here, understanding the dust has not fully settled yet. But could you give us an update on the competitive landscape there and your ability to ultimately increase the mix of proprietary products?

As we’ve been discussing, there’s a lot of volatility in the business. We’ve seen a number of smaller competitors go out of business. We’ve also noticed that one of the larger competitors has grown a bit. Looking forward, we expect to see accelerated activity by the FDA, as it gets closer to their previously announced date for completing the PMTA process, which is in September. I don’t think they’re going to hit that. They’ve indicated that they won’t complete the process on time, but I think they will want to share some news regarding where they are along that process. So, we continue to see volatility. The USPS is still shipping some B2B products, so we haven’t seen the complete implementation of the PACT Act, which will be another disruptive event going forward.

Okay, great. It seems like you guys are well-positioned to handle all that. So good to see. Next one for me on the M&A front. You guys have made some nice investments in dosist and Docklight, now Old Pal, clearly building up an impressive brand portfolio, tying yourself to that high-growth cannabis segment. With Old Pal, you mentioned the fact that they are non-plant touching. Would you look to consolidate any of these non-plant touching cannabis brands in the near future here? Or should we think of these as remaining minority investments until we get some sort of federal reform?

Yes, they are minority investments at the moment, as you mentioned. I think our objective is that these are standalone companies right now. We have the option to deploy more capital. So I think the strategy here is to build a house of brands, diversify our portfolio, and double down as these businesses accelerate. We will consider bringing them in-house as we edge closer to federal legalization, but how we do that will be determined as the market evolves.

Okay. That makes sense. And then last one from me here just within the Zig-Zag business. I’m not sure if I missed it, but could you quantify to the best of your ability that inventory pull-through in the quarter, and then maybe just give us an update on the competitive landscape in that non-measured channel and your efforts to increase share there? Thanks.

Yes, Eric, so we estimate it’s about $2 million that was pulled into the quarter.

Yes, what happened was as we filled our backlog heading into the quarter, our trade customers wanted to build up inventory buffers given what happened with COVID over the last year. Therefore, we believe that the full $2 million of that inventory was pulled into the quarter.

Okay. That makes sense. And then just an update on the non-measured channel and the competitive landscape as it relates to your ability to penetrate there would be helpful. Thanks.

We continue to make progress. We actually tested sending some people to that area, and we liked the results of that test. We’re now in the process of hiring more people to address the non-measured channels. You’re starting to see some additional penetration by Zig-Zag in dispensaries and in head shops and other non-traditional areas. We still have lots of upside there. We’re not totally satisfied with our progress, but we’re making advancements.

Yes, I would say that the Old Pal investment, aside from being attractive on its own, serves as a great strategic complement to our strategy since Old Pal sells a decent mix of flower. It pairs well with our smoking accessories that go into dispensaries.

Your next question comes from the line of Gaurav Jain from Barclays. Sir, your line is open.

Hi. Good morning team, thank you for taking my questions. I have three questions. First, regarding the acquisition of Unitabac, can you provide some insights on how this opportunity might develop over the next few years? Zig-Zag has been experiencing rapid growth over the past 12 months, but now we are facing [indiscernible] comparables after six months. Is it feasible to maintain the current growth rate of 30% to 40% for Zig-Zag in the coming years as you expand the cigar business?

Yes, I don’t think we’re going to underwrite 40% growth forever. What I will say is that the markets we compete in now, with rolling papers and wraps, is less than $500 million from a wholesale manufacturer revenue standpoint. The cigar market, which is a perfect complement to our MYO cigar wrap product, is a $2.5 billion plus market and growing pretty nicely. This provides us with a great platform to enter that market more efficiently and more cost-effectively. So, that’s a big market opportunity for us to tap into with this acquisition.

Okay. That’s excellent. Secondly, on all these acquisitions that you have done, I would say they are now almost a year old. So what learnings have been derived, and have those aspirations met the targets you set when you invested?

Yes, I think we’ve seen gradual ramping in our expectations. It is a relatively new category in smokable hemp CBD. We feel it has growth potential, as some nicotine cigarette smokers are seeking alternative smoking experiences without nicotine. So, it has been as we expected. With dosist, we are pleased with their transformation efforts to expand the brand into other categories, like gummies and other forms, along with entering the CBD line, but it’s still early in the progress.

Sure. And lastly, a housekeeping item: what was the benefit of the consolidation of ReCreation Marketing, which I think has folded into the Zig-Zag line, if you could outline that for us? Were the benefits of this acquisition realized in this quarter?

Yes, we realized $2.5 million for the quarter from that consolidation. DVW had just over a month's worth of benefit during the quarter as well.

Your next question comes from the line of Susan Anderson from B. Riley FBR. Ma’am your line is open.

Yes, Alex Rygiel on for Susan. Just a question on Zig-Zag sales to the e-commerce channel. Have you ever disclosed what percentage of sales are through e-commerce and then just longer term, what percent of penetration would you aim to reach, and what’s the margin delta between selling through your e-commerce channel versus your partners?

Sure. It’s about 10% right now as a percentage of our U.S. paper sales. Our goal is to continue to ramp that. The one part of the business that we think has more significant opportunity to ramp is our B2B business. That would coincide with alternative strategies to get more of our product into dispensaries and head shops. Part of the strategy last year was using this platform and attending trade shows to sign up more consumers and customers; however, that did not materialize as expected last year due to the cancellation of trade shows. Thus, we continue to expect that e-commerce business to ramp for us.

And then I guess just the margin difference between selling through that channel?

It’s comparable at the moment. It can fluctuate depending on the product mix.

Okay. And then just another follow-up on Zig-Zag, focusing on that brand awareness. I think you’ve mentioned previously on expanding into apparel and accessories at the alternative channel. How is that progressing, and what do you think the longer-term opportunity for that would be?

It’s going well. It’s still a small piece of the business, but growing nicely. This also dovetails well into our head shops and alternative shops and e-commerce. These are products that didn't really have a home when our focus was primarily on convenience stores, where limited shelf space hampers those products. They are perfect products to get into head shops that want to embrace more of the lifestyle surrounding the brand. We’re seeing some success around that, as well as through our e-commerce channel. It’s still early for accessories, but we’re witnessing nice growth in that area.

Your next question comes from the line of Greg Pendy from Sidoti & Company. Please go ahead.

Hey guys. Thanks for taking my questions. Just shifting gears to Stoker’s. Can you walk us through the 8% growth? Did you take pricing typically in the May, June period? Earlier you mentioned the trade down; where do you think we are in terms of consumers trading down? Is it more intense than normal, or is it just on par with what you saw last year?

The trade down is a secular trend over many years. We did see some acceleration last year during the lockdown period of COVID, but I think it’s returning more towards traditional long-term secular rates.

Great. And then just in pricing, did you take some pricing on tubs and cans like you did in the prior year?

Yes.

Okay. And then just also moving on in terms of the buyback, it looks like you bought back a little bit more stock than you typically have. How are you thinking about the buyback in terms of any metrics we should consider that might have accelerated the buyback during this period?

Our buyback is intended to be opportunistic in situations where there are non-fundamental drivers affecting our stock price. We take those opportunities to be more aggressive in buying back shares.

All right. And then just one final one. Regarding the premium innovations that you’re seeing from papers to cones, where do you think we are in terms of that percentage? How much momentum does that have, or is it just a trend that you think has several years to go?

We are driving growth across two separate channels: the measured and non-measured channels. In the measured channel first, we are driving the growth of cones there. It’s still relatively new in the convenience store channel where only about 30% of stores that order papers also order cones. Thus, there’s a decent opportunity to increase penetration within our papers business in the measured channel. We’re still working to enhance our penetration. In the non-measured channel, we believe cones represent a bigger portion of the market where we are also underrepresented, indicating greater upside in that area.

Your next question comes from Vivien Azer from Cowen and Company. Your line is open.

Hi, this is on for Vivien. Thank you for taking my questions. My first question is about Zig-Zag. Can you provide more details on the growth you experienced by channel? Last quarter, we talked about your distribution opportunities in alternative channels. How significant was that channel's contribution, and can you share any insights into your improvements in that area?

Certainly. We saw strong growth across all channels. In the measured market, we’re gaining share with cones driving a big portion of our ability to increase share in that channel. In the non-measured channel, much of the growth there is incremental. E-commerce is a big driver, as I mentioned it now accounts for 10% of our U.S. paper sales, and that segment started to ramp significantly in Q2 of last year. We’re seeing healthy growth in each channel, with the non-measured channel helping to increase our penetration in stores.

Understood. Thank you. My next question is about Stoker’s. Despite a tough comparison, the business continues to perform well. Can you comment on the growth by form factor, specifically tubs versus cans?

With Stoker’s, we introduced the concept of tubs to the market, which are now the leading brand in that segment and a key driver of our growth. Tubs offer excellent value for consumers. When evaluated on a per can basis, they sell at a discount, and the convenience factor of only needing to go to the store once a week adds to their appeal. Cans serve as a great introductory product for tubs, leading consumers to migrate to the tubs.

Makes sense. Understood. Thank you. Lastly, as it relates to your recent investment in Old Pal, can you elaborate on the mechanics of how you were able to make that investment?

Absolutely. Old Pal is structured as a non-plant touching cannabis company, meaning they license out their brand to their partners. We were able to invest directly into that structure through a convertible note, which is convertible into a series of common shares as well.

There are no further questions at this time. Sir, please continue.

Thank you, everybody, for joining the call. We look forward to seeing you next quarter with more good news. Thank you.

This concludes today’s conference call. Thank you for participating. You may now disconnect.