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Edited Transcript of TPB earnings conference call or presentation 31-Jul-19 2:00pm GMT

Q2 2019 Turning Point Brands Inc Earnings Call

LOUISVILLE Aug 6, 2019 (Thomson StreetEvents) -- Edited Transcript of Turning Point Brands Inc earnings conference call or presentation Wednesday, July 31, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Graham A. Purdy

Turning Point Brands, Inc. - President of Nu-X Ventures

* Lawrence S. Wexler

Turning Point Brands, Inc. - President, CEO & Director

* Robert Lavan

Turning Point Brands, Inc. - CFO & Senior VP

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Conference Call Participants

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* Luke Chamberlain Hatton

B. Riley FBR, Inc., Research Division - Associate

* Vivien Nicole Azer

Cowen and Company, LLC, Research Division - MD and Senior Research Analyst

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Presentation

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Operator [1]

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Good day and welcome to the Turning Point Brands' Second Quarter 2019 Call. Today's call is being recorded. (Operator Instructions)

I would now like to turn the conference over to Bobby Lavan. Please go ahead.

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Robert Lavan, Turning Point Brands, Inc. - CFO & Senior VP [2]

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Thank you, operator. Good morning, everyone. I am Bobby Lavan, CFO of Turning Point Brands. Joining me today are Turning Point Brands' President and CEO, Larry Wexler; Graham Purdy, who heads the Nu-X subsidiary; and Jim Murray, Senior Vice President of Business Planning. This morning, we issued a news release covering our second quarter 2019 results. This release is located in the Investor Relations section of our website, where a replay of today's conference call will be available.

In this call, we will discuss our consolidated and segment operating results and provide perspective on our progress. As is customary, I direct your attention to the discussion of forward looking and cautionary statements in today's press release and the risk factors in our filings with the Securities and Exchange Commission. This disclosure outlines various factors that could cause actual results to differ materially from projections or forward-looking statements that may be cited in today's discussion. These forward-looking statements and projections are not guarantees of future performance, and you should not place undue reliance upon them, except as provided by federal securities laws. And we undertake no obligation to publicly update or revise any forward-looking statements. In the call today, we will reference certain non-GAAP financial measures. These measures in reconciliations to GAAP can be found in today's earnings release along with reasons why management believe that they provide useful information.

I will now turn the call over to Larry Wexler, our CEO.

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Lawrence S. Wexler, Turning Point Brands, Inc. - President, CEO & Director [3]

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Thank you, Bobby, and good morning, everyone. Thank you for participating in the call. This morning, I'll update you on several recent announcements and give you a perspective on the progress we've made in the second quarter to position the company for enduring long-term growth.

Second quarter performance of our core tobacco business was in line with our expectations and Nu-X outperformed. We further strengthened the foundation upon which we intend to build in the coming quarters and years. Our achievements continue to reveal not only the strength of our brands, but the integrity of our plan.

First, let's touch on some recent announcements that are generally transforming our company, while also better positioning us for accelerated growth. You recall that Nu-X was formed to leverage our existing capabilities in traditional retail distribution, e-commerce marketing and regulatory affairs to capitalize in the burgeoning trends in the alternative product space. CBDs are demonstrating explosive sales advances and represent a sweet spot of opportunity for TPB. Our proficiency in regulatory affairs and familiarity with cannabis-related products makes us well suited to aggressively pursue growth to not only proprietary products, but also acquisitions. Nu-X-related sales in the first quarter totaled $800,000 and gained speedy momentum with second quarter sales growing to $4.3 million.

As an integral part of our CBD and alternative products plan, on June 26, we announced that we had been granted conditional approval for Kentucky hemp processing. Of course, hemp is the plant material that is most commonly used to harvest CBDs for use in wellness-related products. Direct access to the -- this agricultural stock, coupled with our highly efficient processing capabilities at Canadian American Standard Hemp, positions us favorably in the blossoming CBD industry.

Given the almost linear growth in our internal CBD sales in the quarter, we remain highly enthused about the opportunity for robust sales advances. Done properly and compliantly, these are the kinds of gains that can truly propel the company forward in 2020 and beyond. The concepts and opportunities are boundless.

On July 19, we announced the acquisition of Solace Technologies for $15.25 million, $8.25 million in cash and $7 million in performance-based restricted stock units of TPB, which vest over 3 years based on specific total Nu-X sales achievements. Solace is headquartered in Southern California and report to Graham Purdy, President of Nu-X Ventures.

Now let me tell you why we pursued the Solace company. Yes, they have built a powerful and highly innovative global e-liquid brand. However, the real upside is the alternative products pipeline they bring and their creative product development team.

Solace management team generally impressed us. And with the performance-based stock lockups we have in place, that pipeline and creativity will further accelerate our Nu-X game plan. Welcome to our new partners at Solace.

On July 24, we announced an equally exciting investment in ReCreation Marketing in Canada. Our $3 million investment provides us with 30% stake in the company and the organization and leadership teams on the ground in Canada to accelerate not only our RipTide introduction, but also other alternative products. We also have an option to increase our ownership to -- stake to 50%.

ReCreation was founded by industry experts and professionals, with the contacts and capabilities to deliver widespread distribution, not only traditional channels, but also in the alternative channels including alternative shops and dispensaries. Welcome, team ReCreation.

And our final piece of recent news was the July 25 successful completion of the convertible senior notes deal for $172.5 million in new capital. I will leave the details to Bobby to explain in a bit. But the deal gives us a war chest of capital to make investments and acquisitions to drive long-term shareholder value.

Now I'll turn and share some high-level specifics in how our focus brands performed in the quarter. As I said before, we view our brands as living organisms. They grow and thrive when successfully positioned and backed by solid marketing efforts. Our brands are one of our most important assets. Consumers choose to adopt brands for the long term that not only provide differentiated product benefits, but also resonate with them.

Let's start with a fresh look at the Nu-X portfolio of products. Proprietary RipTide pod-based vaping system is positioned to meet former smoker preferences at value price point. With the leading brand doing $60 million pods per month, there is meaningful opportunity in the market. RipTide is different and unique, starting with the e-liquid flavors we selected. All RipTide pods feature our proprietary Nictech liquid. Nictech provides a clean, crisp flavor profile and yields uncompromised satisfaction. The 1.4 milliliter pods provide a meaningful value advantage versus the competition. And with a unique pod design, we have overcome the challenges many face in delivering clean, crisp flavors on larger tanks.

The RipStick device is sleek and comfortable in the hand. With 5 flavors and 2 nicotine strings, RipTide is uniquely well positioned to capitalize on the growing body of adult consumers choosing the convenience of pre-filled pods. In the quarter, RipTide distribution was expanded to over 8,000 retail stores. As of today, we are in 12,650 stores.

Moving to CBDs. In the quarter, we tested a series of third-party products, brands and formats under the e-commerce platforms at both IVG and VaporBeast. We also commercialized a number of these in our own retail outlets. The proprietary Nu-X premium CBDs were also launched online in tinctures, e-liquids and concentrate formats, flavored with natural terpenes. Consistent month-over-month online sales gains are delivering the results we anticipated.

As we move through the third quarter, we'll be taking novel suite of Nu-X CBD products, positioned specifically for traditional retail, where we anticipate robust trade acceptance. Our first entry will be a CBD disposal that will began distribution in the third quarter.

Moving to Smokeless. In the second quarter, Stoker's Moist Snuff set another record share on double-digit volume gains, powered by continued consumer enthusiasm in our existing stores and expanded retail distribution. Our sustained shared momentum clearly demonstrates the consumer appeal of our exclusive production process and the allegiance of the customers we have engaged. We have been especially focused on higher-volume chain distribution. With 80,000-plus retailers choosing to stock and sell Stoker's Moist, we are now in stores that represent over 50% of the weighted distribution. These aren't just any stores. As we've discussed before, we leverage the MSA database to target the highest-volume opportunities, thereby maximizing the selling and merchandising capabilities of the field sales organization.

In the quarter, Stoker's MST growth was propelled by consumer trial initiatives and continued growth in 3,000 Speedway-branded convenience stores. While still early on, the velocities and trajectory of Speedway are highly encouraging.

The iconic Zig-Zag brand remains the U.S. market share leader in both premium rolling papers and MYO Cigar Wraps. In the second quarter, we continued our retail expansion and merchandising of the 2018 launch of Zig-Zag organic hemp papers. While the hemp segment is only 6% of the category, it is growing in popularity, and the segment is critically important to maintaining brand relevance with today's consumer. In just over 1 year, we have emerged as the #1 hemp SKU in terms of sales volume. This achievement and a 30 share demonstrates how Zig-Zag delivers value to the category and our loyal brand of consumers. While we're pleased with our progress, there's much additional opportunity to realize and many more consumers to engage.

In the quarter, we also expanded the new Zig-Zag cones to over 10,000 stores and unbleached papers to just under 7,000 locations, with encouraging consumer and trade enthusiasm. Each of these segments are growing as a result of shifting consumer preferences. And Zig-Zag intends to meet those wants and needs. The cone's short stock position has slowed our progress, but we're confident that we will get supplemental supplies in the third and fourth quarters.

In NewGen, VaporBeast net sales grew double-digits as compared to a year ago, on larger and more frequent orders from vape shop customers. Since the acquisition in September 2018, IVG sales of direct-to-the-consumer products continue to increase in each of the last 2 quarters.

Let me quickly address the regulatory arena. Our science and legal teams continue to make good progress as we move down the FDA pathway. We've adjusted our plans and expect to make acceptable initial filings under the new accelerated timing.

So to recap, second quarter results and achievements are highly encouraging. In Smokeless, Stoker's continued its strong growth trajectory, recorded another record share and delivered record segment sales and gross profits. In Smoking, Zig-Zag remains an iconic opportunity brand, while retaining its share leadership position in the U.S. in both premium rolling papers and MYO Cigar Wraps.

And Nu-X sales increased from $800,000 in Q1 to $4.3 million in the second quarter. And with the third quarter acquisition of Solace, investment in ReCreation Marketing and a successful convertible debt deal, we were in better position for accelerated growth and additional acquisitions.

To add some color on year-to-date and upcoming Nu-X activities, let me turn the call to Graham Purdy, President of Nu-X.

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Graham A. Purdy, Turning Point Brands, Inc. - President of Nu-X Ventures [4]

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Thank you, Larry. Second quarter Nu-X sales of $4.3 million were up from $800,000 in Q1, a nice step onward in our journey towards accelerated growth.

Having said that, I seldom look back as the future is made with a keen focus forward. Adult consumers' wants and needs are dynamically changing. The exodus of smokers from combustion to vaping continues unabated. There's also a swelling demand for alternative products, most notably hemp-derived CBD products. These 2 categories, pod-based vaping and CBDs, are the tip of the Nu-X spears we work towards accelerating growth over the coming years.

But rest assured, there are myriad of other opportunities in the product development pipeline. RipTide and our Nictech technology delivered compelling results in the quarter. Store counts are increasing week-over-week and reorder rates are proving encouraging.

Looking forward, our integrated sales efforts have already unlocked some additional blockbuster chains for third quarter implementation that is likely to yield significant gains quarter-over-quarter. Equally exciting, we are already well on our way to opening the Canadian market to RipTide with our partners at ReCreation Marketing. We're collaboratively working towards a fourth quarter introduction plan to key national accounts, high-volume independent stores and alternative channels.

In terms of our entry into the CBD market, I'm especially pleased with progress today. You will recall that we invested in Canadian American Standard Hemp, or CASH, in the fourth quarter of 2018. Our working relationship is strong, and the proprietary and highly efficient processing will enable us to compete with great effectiveness as the landscape shifts in many anticipated ways. In June, we advanced our CBD effectiveness again with the conditional approval for Kentucky hemp processing. Now with direct access to the agricultural stock and the highly efficient processing at CASH, we have further enhanced our positioning in the burgeoning market.

Second quarter e-commerce CBD sales grew at an almost linear fashion, month-over-month since inception. Nu-X proprietary CBDs almost doubled from May to June. With CBDs, unlike all other highly regulated products, there are clearly defined rules that define the proper boundaries and marketing communications. Our regulatory affairs group is highly respected in the industry and engaged across the entire spectrum of activity. Given our familiarity with the rules, regulations and bright-lines, we understand how to properly market and communicate with the alternative market space. Our view -- I view our regulatory affairs group as a unique and compelling asset as we move forward in this dynamic space.

Proper communication and positioning are hallmark of our execution. Over the last several months, we have learned a great deal about consumers' wants and needs in terms of the product format and milligram content. We harvest our consumer lessons from not only our robust sales data, but also directly from consumers in our controlled-store environments. With this learning in hand, we are now readying a late third quarter expansion in Nu-X proprietary CBD products across our entire sales funnel, including traditional retail.

These novel new products have been tested with consumers and exposed to select trade partners where we have received a resounding yes. I'm not going to go into any details on the novel new product introductions. Suffice to say, we're especially excited with not only our progress to date or more so with the building momentum enthusiasm of our trade partners.

And finally, a few thoughts on the July Solace Technologies acquisition. First, the highly talented Solace management team will be a great resource and asset to the -- to team Nu-X, where our goal is to provide high-quality, innovative new products to meet the ever-changing needs of adult consumers, to go where the wants are and to meet them head on with superior products. We have deliberately and fully aligned the incentives to ensure that the entire team is swiftly and professionally satisfying consumer desires, while maximizing total Nu-X sales.

Second, the Nu-X pipeline of highly innovative product concepts just got much richer and faster. Solace's innovation and product development team are first-class. At Nu-X, we are seeking to become a leader in the alternative product space and team Solace will greatly accelerate these ambitions. Working together as a cohesive team, we will leverage the rich capabilities of TPB in regulatory affairs, while unleashing the creativity at Solace and Nu-X to accelerate the new product pipeline.

And finally, Solace successfully built a powerful global and highly differentiated first-class e-liquid brand. We will integrate the Solace e-liquid manufacturing and distribution into our existing infrastructure to realize improved efficiency and margin attainment. Nu-X ventures is a shining light here at TPB. Results to-date are encouraging, but only a shadow of what's to come.

And with that, I'll turn it over to Bobby for a review of our second quarter financial performance. Bobby?

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Robert Lavan, Turning Point Brands, Inc. - CFO & Senior VP [5]

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Thank you, Graham. Total company net sales and gross profits were each up 15.1% with gross margins expanding in each of our 3 reportable segments, something we're really focused on.

Before I dive into the segment and consolidated performance in the quarter, I've gotten plenty of questions on the July 25 convertible senior notes. Let me address that here. Market's acceptance and interest levels were deep, broad and the deal was multiple times oversubscribed. So much so that we elected to upsize the offering from $125 million to $150 million, and the underwriter exercised the greenshoe early on Monday, bringing total gross proceeds to $172.5 million. The notes will accrue interest at 2.5%, significantly down from our current levels. In connection with the pricing of notes, the company entered into a capped call transaction, with certain financial institutions to offset dilution. The capped call transactions will be initially priced at $82.86 per share, which represents 100% premium to the closing price on July 25. Economically, therefore, the company will incur no dilution as a result of this transaction until the stock price exceeds $82.86, and then only at very low levels.

We used some of the proceeds to pay down our LIBOR plus 700 second lien note. The elimination of second lien greatly simplifies our financial structure and enhances our acquisition flexibility. In our filings you will find modified total leverage covenants with a first lien credit facility that gives us significant room to accommodate the convertible debt. The notes mature in 2024, giving us ample runway to be -- more aggressively pursue our growth plan.

Total net proceeds to our balance sheet after expenses, capped call and the second lien pay-down was $110 million, and we look -- really looking forward to investing those dollars.

Moving to the segments. In Smokeless, the Stoker's brand continues to fuel solid results. Smokeless net sales increased 7.2% to a record $26.2 million in the quarter. Double-digit volume and revenue gains on Stoker's Moist, which were partially offset by sales declines in chewing tobacco, attributable to a long-term category decline in the continuing shift to lower priced product.

Net sales for the Moist portfolio represent 53% of Smokeless revenues in the quarter, up from 45% a year earlier. This is the story we've been telling you, and this is a story we're very excited about.

Smokeless volume increased 3.1% with price mix advancing 4.1%. Stoker's Moist count exceeded 80,000 with weighted distribution now over 50%, reflecting our successful expansion into higher-volume large chains, including Speedway. I'm excited for the trajectory here, and we believe that there are another 50,000 stores that we can add to close the gap.

Smokeless growth's profit increased $1.5 million or 12.2% to a record $14.1 million. Stoker's Moist double-digit gains are now overtaking the scale of our chewing tobacco business, and we're beginning to see the favorable impact of expanding margins. Smokeless margins in the quarter were 53.7%, up 240 basis points from a year earlier.

Turning to our Smoking product segment. Smoking sales decreased $4 million on a year-over-year basis to $25.4 million. The Canadian packaging and labeling disruption continued with a year-over-year revenue headwind of $2.5 million in the quarter. Additionally cigars, which we've told you we are deemphasizing, declined approximately $1 million, while trade inventories for U.S. papers depleted about $400,000.

Smoking volumes declined 13.9%, mostly on the Canadian delays and cigar erosion, and price mix increased 0.4%. As we said in the press release, the Canadian issue bottomed in May, and we will recapture weakness in the entire segment in the second half of the year.

Zig-Zag U.S. paper share increased sequentially on new product momentum and remains #1 premium in rolling paper brand.

Zig-Zag also retained its leadership in make-your-own-cigar wraps. Rolling consumers continue to migrate to super-convenient products like paper cones. While the Zig-Zag cones introduction has been met with great enthusiasm, our supplies remain constrained throughout the second quarter and slowed our progress. We now expect supplemental supplies in late third quarter and plan to further accelerate momentum at that time. Zig-Zag Hemp papers continue to be a big success, with brand capturing 30% of the growing hemp business. These new product introductions under Zig-Zag, including unbleached papers, continue to generate greater consumer engagement and brand satisfaction. Smoking margins in the quarter increased by 240 basis points to 54.2%.

Moving to our growing NewGen segment, where the primary focus is on the Nu-X growth. For the quarter, total NewGen segments grew 52.8% to $41.8 million. Nu-X is trending better than our original forecast. With the addition of Solace and ReCreation teams in the proprietary products in the queue for the third quarter wholesale's funnel expansion we remain particularly enthusiastic. The Nu-X pipeline of innovation is especially rich and will only be enhanced through the alternative products at Solace. VaporBeast and IVG continue to demonstrate positive year-over-year momentum, while also accelerating their Nu-X e-commerce support initiatives. The V2 products, which is included in the NewGen segment, shutdown is now largely complete. V2 sales in the quarter were off a year ago by $700,000. Third and fourth quarter 2018 V2 sales were $1.8 million and $2.2 million, respectively. We anticipate that sales of the RipTide portfolio will more than offset these year-ago V2 revenues.

Second quarter NewGen gross profit increased $5.3 million or 65.6% to $13.4 million. Gross margin expanded 250 basis points to 32.0% from net sales, reflecting the higher B2C margins at IVG and proprietary Nu-X CBDs. In the quarter, there is about $2 million of tariff expense.

Moving to the consolidated business. Absent to vendor settlement gain received from the V2 shutdown, SG&A was $26.8 million, which includes a full quarter of IVG expenses as well as Nu-X-specific expenses of $1.3 million. This compares to $22.1 million in the previous year.

Adjusted EBITDA for the quarter was $18.3 million as compared to $17.2 million in the prior year. Net debt-to-adjusted EBITDA was 2.9x. In this morning's release, we also increased our 2019 guidance, projected 2019 TPB-based business net sales of $370 million to $385 million. We now anticipate that the Nu-X launch which is now underway in both vapor and CBD products will contribute another $18 million to $28 million in revenues, up from our previous guidance of $10 million to $20 million. Of that, $4 million increase comes from Solace and $4 million comes from better performance at the Nu-X business, bringing total TPB net sales in 2019 to $388 million to $413 million.

Importantly, we intend to fully invest Nu-X gross profits to maximize sales and market achievements. This year, the company now expects certain SG&A expenses in 2019, including $2 million in transaction expenses resulting from Solace acquisition and IVG earn-out payments. The earn-outs that we've given to both IVG and Solace sellers are -- need to be expensed because they are employees of the company.

We've have now increased our dollars we will spend in Nu-X infrastructure growth to $3 million from $1.6 million. And as Larry discussed, we are preparing for the PMTA deadline, and due to accelerated deadlines, we will pull forward some 2020 FDA PMTA expenses into 2019. We now expect to spend up to $5 million in preparation for the FDA PMTA pathway during 2019, up from the previous guidance of $1.5 million.

Stock compensation and noncash expense in 2019 is projected to be $4 million, which is no change from the previous guidance. Excluding these SG&A expenses just described in Nu-X operating performance, we project 2019 adjusted EBITDA of $72 million to $76 million, up from our previous guidance of $70 million to $75 million. This excludes the net $5.5 million gain from the distribution agreement termination, which we disclosed last quarter.

We expect the 2019 effective income tax rates to be 21% to 23%, and we are slightly increasing our CapEx guidance from $3 million to $4 million to $4 million, as we invest more in the business. Net sales for the third quarter of 2019 is expected to be $99 million to $103 million. Crossing the $100 million is a great accomplishment for this company.

M&A discussions continue as we evaluate potential partners and targets. There's a lot more to come. We see significant volatility in the market, and I've seen more investment and acquisition opportunities in the past few months that I've seen in my 2 years here. That is why we raised the capital, and we're very excited to deploy it. The second quarter demonstrated that our transformation is materializing in very tangible ways. More work to be done, but we are headed in the right direction.

With that, I'll turn the call back to Larry for closing comments.

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Lawrence S. Wexler, Turning Point Brands, Inc. - President, CEO & Director [6]

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Thank you, Bobby. Second quarter 2019 was a good quarter for the company. We continue to grow Stoker's MST with excellent success, realizing improved margins across the board and sharply increase Nu-X sales. These are exciting times here at TPB and the integrity of our plan remains intact and reinforced.

Looking forward, we'll continue to execute our strategic plan by driving focused-brand growth, expanding through acquisitions and innovation and strengthening our corporate infrastructure. Our company remains solid and resilient, and our people remain committed to the journey.

Thank you for participating in the call today. And with that, I'd like to open up the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We will take our first question from Susan Anderson from B. Riley FBR.

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Luke Chamberlain Hatton, B. Riley FBR, Inc., Research Division - Associate [2]

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

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Lawrence S. Wexler, Turning Point Brands, Inc. - President, CEO & Director [3]

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

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Robert Lavan, Turning Point Brands, Inc. - CFO & Senior VP [4]

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

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Luke Chamberlain Hatton, B. Riley FBR, Inc., Research Division - Associate [5]

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

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Robert Lavan, Turning Point Brands, Inc. - CFO & Senior VP [6]

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

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Operator [7]

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(Operator Instructions) We will take our next question from Vivien Azer from Cowen and Company.

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Vivien Nicole Azer, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [8]

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

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Robert Lavan, Turning Point Brands, Inc. - CFO & Senior VP [9]

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So Vivien, as you know, sort of -- Canada is a little backwards on CBD in cannabis and marijuana. So at the end of the day, Turning Point did not have an infrastructure. In Canada, we sell Zig-Zag through a partner up there. So that was why we invested in the ReCreation guys; we put $3 million in there. We've hired a team of regulatory partners up in Canada and ultimately, the ReCreation guys do have a partnership with RoseLife, which is a Tilray investment. And ultimately, they are going to navigate those waters for us. We are developing the recipes, the products, how we're -- as we talked about, we're very focused on the lower-dollar price targets -- products. And ultimately, our partners up there are going to deal with those nuances. And we're still kind of waiting for the CBD market to open up a little bit more.

Ultimately, we have processing technology. But to do the processing, it's going to have to be in Canada. So we're going to have find either a processing partner or we're going to have to invest a few million dollars to build a processing facility in Canada. Finding hemp in Canada is actually fairly easy, and it's dramatically cheaper than it is in the U.S. But really when it comes to the province nuances, we're going to have to rely on our, sort of, partners to navigate those waters, which they're doing today.

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Vivien Nicole Azer, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [10]

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

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Lawrence S. Wexler, Turning Point Brands, Inc. - President, CEO & Director [11]

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

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Robert Lavan, Turning Point Brands, Inc. - CFO & Senior VP [12]

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Yes. And I look at the FDA PMTA process as 2 parts. There is a significant economic part, which is you have to effectively just spend money with a lab to have your products tested for certain contaminants. And that is the process that we're pulling forward because we just need to make -- you just have to make sure that's done. There is a second part, which is effectively documenting 2 parts: one is proving that our products are a positive health benefit relative to cigarettes; and then second, which we believe is a more loose part, but really going to be a focus, is the age issue with vaping products. And this is one of the reasons that we bought IVG in September 2018. It's because IVG sells to 1.5 million consumers. We have all of the demographic data from that portfolio versus -- that getting demographic data in the field in brick-and-mortar retail, not so easy. We have database of 1.5 million consumers. We know what they're buying, we know their age trends. We do a lot of age-gating.

And so ultimately, we can take the SKUs that we're running through the PMTA process and show that they are used by adult consumers. And we can show that very statistically. And it's just going to -- effectively, we were hoping we could do that over 18 months. Now we just have to do it over 10 in the worst case scenario. It's just a timing issue, it's not really -- we have the information. And so while I understand why Altria says it's onerous, but they've also -- from their prospective, the bar is almost a little bit higher just because of the issues they've had. And so as long as we can prove that our products are being used by adults, which they are, and I've seen the data and the IVG data shows that, we feel like the process is not, I -- wouldn't use the word onerous, it's just tight.

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Vivien Nicole Azer, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [13]

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

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Lawrence S. Wexler, Turning Point Brands, Inc. - President, CEO & Director [14]

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

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Robert Lavan, Turning Point Brands, Inc. - CFO & Senior VP [15]

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

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Operator [16]

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

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Lawrence S. Wexler, Turning Point Brands, Inc. - President, CEO & Director [17]

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