Turning Point Brands, Inc.

Good morning, my name is Chris and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Turning Point Brands 2021 Q3 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star then the number one on your telephone keypad. And if you'd like to withdraw your question, please press star one again. Thank you. Louie Reformina, Chief Financial Officer, you may begin.

Thank you. Good morning, everyone. This is Louis Refumina, our Chief Financial Officer. Joining me are Turning Point Branch President and CEO Larry Wexler and Graham Purdy, Chief Operating Officer. This morning, we issued a news release covering our third quarter results. This release is located in the IR section of our website, www.turningpointbranch.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 in our strategic plan. 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 SEC. 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 guaranteed to future performance, and you should not place undue reliance upon them except as provided by the federal securities law. 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 reconciliation of the GAAP can be found in today's earnings report, 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, Louis, and good morning, everyone. Thank you for joining the call. Our third quarter performance fell in line with our expectations. Revenue was up 6% to $110 million. However, our core business was up 11%. Adjusted EBITDA was up 10% to $26 million and outpaced revenue growth. Zigzag saw 17% growth during the quarter as a result of contributions from our strategic initiatives, including paper cones, e-commerce, and growth within our newly consolidated Canadian business. This was despite a headwind we had in our wraps business from a trade inventory load that had pulled forward sales into the previous quarter. We're excited about our upcoming product launches in the fourth quarter and beyond, and new marketing initiatives aimed to energize the Zig-Zag brand to drive growth going forward. Stoker saw a 2% growth driven by double-digit growth in MST. This offset a decline in our chewing tobacco business, which faced a very challenging comp against the third quarter of 2020 when it saw double-digit growth as a result of a competitor being offline due to a COVID-related disruption. MST continued its steady share gain and continues to be favorably positioned for the secular shift to the value category. NewGen, which navigated around another quarter of disruption around the PMTA process, declined 3% during the quarter, but saw a 22% growth in gross profits from the comparable period in the previous year, when we saw transitory pricing pressure ahead of the PMTA deadline. This year, the quarter was challenged by the uncertainties around market denial orders, or MDOs, issued by the FDA related to the PMTAs. We disclosed in mid-September that we received an MDO for certain of our proprietary vapor products, which was primarily comprised of our non-menstrual and non-tobacco e-liquids. Based on the rationale outlined in the MDO, We believe that there was an oversight in the handling of our application. Our letter appeared to be a form letter, which was similar to those received by numerous other industry participants, many of which we believe did not have complete applications. In addition, there were references in the MDO that conflicted with the actual application we submitted. We filed a petition for relief earlier this month and were subsequently notified by the FDA that our MDOs were rescinded. Our applications have now been put back under review. We have dedicated significant time and resources to the PMTA process, having spent close to $19 million since we began the process, including $1 million just this past quarter, to ensure that we had a robust application that demonstrated that the marketing of these products are appropriate for the protection of public health. Or in other words, taking into account the risk of these products attracting never users, youth, and former users, It demonstrated how effective these products, these vapor products, are in motivating consumers to dramatically reduce or completely cease the use of combustible cigarettes. We believe our application makes this case with a lot of science behind it, and our strong regulatory team and capabilities has produced an application that sets us apart. As an example of the depth of our science, including in our filing, our population health impact model which was developed specifically for our phylums, was recently published in a peer-reviewed journal. With the rescission of the MDOs, we're looking forward to engaging with the FDA and having an evidence-based, scientific review of our products, and are hopeful that the FDA will maintain a pathway to market for potentially lower-risk products for the more than 30 million adult cigarette smokers in the United States. As we await the ultimate outcome of the PMK process, we have had to manage through a dynamic environment created by the uncertainties around the process. Over the last two months, MDOs have been issued to most of the liquid vape market, but without clarity from the FDA on the actual products including MDOs, which has led to uncertainty with our customers on what products they can carry. Meanwhile, disposable vape products, some of which are still under review, are offering a wide variety of flavors and have been taking share in the market. In addition, both e-liquid and disposable vape manufacturers are now switching their product offerings to synthetic nicotine, which is currently viewed as a gray area regarding FDA regulation. Needless to say, this is creating a lot of confusion in the market and requiring us to be nimble while ensuring we are compliant. To effectively compete, we have to balance carrying enough inventory and a diversified portfolio while mitigating our risk on products that may have to come off the market. As a result of this trade-off, we have been reducing our inventory exposure, which in the short term will impact our sales until we get clarity on the regulatory and competitive landscape. Last week, the USPS also issued its final rule eliminating the shipping of e-cigarettes under the PACT Act. The major private carriers, for the most part, had already stopped shipping vapor products earlier this year. This will require us to ramp up and shift into our alternative shipping network, which we have been building throughout the year. We think we can get through the quarter. We think we can get there during this quarter, but we also have to manage competing against players that are skirting regulation until there is enforcement. We believe the hurdles created by both the PMTA process and the PACT Act, and ultimately be a positive for us from a competitive standpoint, in the longer term in this large category. But it may cause some disruption in the shorter term as our customers and consumers adjust to an evolving market. With the clouded short-term visibility created by this environment, we believe it is prudent for us to adjust our expectations for our vape business as reflected in the guidance we issued this morning. While we manage through this transitory period, we are being conservative in that guidance. We will remain nimble with our vape business, but longer term, we still believe that vape consumers will not go away. We are well positioned to serve them with our products, and most importantly, our distribution infrastructure, as we await clarity from the PMTA process and eventual FDA enforcement. Now let's move on to capital deployment. Today we announced an increased share repurchase program that reflects our positive outlook on the prospects of our company. In August, we increased our stake in recreation marketing from 50 to 65%. Recreation marketing has been instrumental to our growth in Canada, including placing ZigZag in close to 80% of the volume-weighted distribution within private dispensaries in the country. They are quickly becoming a one-stop shop for alternative smoking accessory products in Canada through an extensive variety of third-party and proprietary product offerings. Recreation Marketing will also be transitioning its name to Turning Point Brands Canada Corporation to better reflect the strategic importance and how integral they are to the organization. While this quarter was otherwise relatively quiet from an acquisition and investment standpoint, we maintain a very healthy pipeline of opportunities synergistic to our company. With over $150 million of liquidity at the end of the quarter, we remain well positioned to capitalize on these opportunities. Looking forward, while our vape business has created unwanted volatility and certainly grabbed the hold of the headlines and interest regarding our company, recently, it is important to note that our core business with ZigZag and Stokers, which competes, comprises a vast majority of our segment operating income, are performing well and continue to remain favorably positioned in their markets. We remain optimistic in the outlook of our core business and we will continue to adapt our vape business appropriately to a dynamic market. To add some color and perspective on our quarter and the path forward, let me turn the call over to Graham Purdy, Chief Operating Officer.