Turning Point Brands Inc (TPB) 2017 Q2 法說會逐字稿

Good morning, and welcome to the Turning Point Brands Second Quarter 2017 Earnings Conference Call. (Operator Instructions) Please also note, today's event is being recorded.

At this time, I'd like to turn the conference over to Mr. Mark Stegeman, Turning Point Brands' Chief Financial Officer. Sir, please go ahead.

Thank you, Jamie. Good morning, and thanks for joining our call today. I'm Mark Stegeman, CFO of Turning Point Brands. Participating with me on the call today are Turning Point Brands President and CEO, Larry Wexler; and Jim Murray, Senior Vice President of Business Planning.

Earlier today, we issued a press release covering second quarter and year-to-date performance. The release can be located in the IR section of our website, www.turningpointbrands.com. We'll also be posting a replay of today's conference call on our website.

This morning, we plan to discuss operating results and trends as well as progress towards our strategic growth goals. Following our formal remarks, we will open up the floor to Q&A.

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, we undertake no obligation to publicly update or revise any forward-looking statements.

We may also discuss today certain non-GAAP financial measures. These measures and reconciliations to the GAAP information along with the reason management believes they provide investors with useful information regarding the company's financial condition and results of operation are set forth in the press release.

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

Thank you, and good morning. I appreciate the opportunity to discuss our results and review the substantial progress we are making executing our strategic plan and expanding our presence within the growing OTP market.

Since we went public in May 2016, we have focused our energies primarily into 3 areas: first, building our core focus brands; second, acquiring OTP companies that expand our capabilities and offer growth opportunities; and third, building our company's infrastructure for growth.

We have made considerable progress in all 3 of these areas during the second quarter. Let's start with our focus brands. Led by Stoker's and Smokeless products and Zig-Zag in Smoking, our focus brands outperformed their competitors. In Smokeless, Stoker's remains among the fastest-growing MST brands, and Stoker's MST also achieved yet another record share in the quarter.

In chewing tobacco, Stoker's also produced a record quarterly share. Stoker's product quality and the enthusiastically engaged consumer base continue to propel the brand forward.

In Smoking, the iconic Zig-Zag brand strengthened its share in cigarette papers, where it's the #1 brand as measured by Nielsen dollar sales. In MYO cigar wraps, the Zig-Zag 'Rillo wraps rollout continues with great success, and the brand maintains its industry-leading share position. And finally, in NewGen, VaporBeast distribution engine generated strong gains to increase share of customer requirements as evidenced by larger order sizes and more frequent orders.

On the acquisition front, we completed our third transaction since we went public last year. On June 30, we acquired Vapor Shark, a well-regarded manufacturer of proprietary e-liquids and multichannel marketer of vaping products, including proprietary vaping devices. It's another excellent addition to our company. And I'll say more a little later about Vapor Shark, VaporBeast and the potential synergies we see.

The integration of the 5 Smokeless tobacco brands we purchased from Wind River in November 2016 is now largely complete, and the manufacturing has migrated into our chewing tobacco sourcing model. While we have not yet started to expand the retail footprint of the Wind River brands, they've already surpassed the market shares they previously held. We expect to expand distribution in targeted geographies in the fourth quarter to leverage the brand's inherent strength.

Regarding the third area, our corporate infrastructure, we're proactively enhancing our internal capabilities to make sure we have the right structure in place to foster and accommodate organic and acquisition growth. We're expanding our sales force and refining how we target growth opportunities. Year-to-date June, our manpower hours were up about 5% over a year ago. We're actively seeking to add sales professionals with good business acumen, a fiercely competitive spirit and a passion for delighting consumers.

We carefully monitor a select list of metrics to optimize sales force effectiveness. Year-to-date, productivity measures are encouraging. We have previously talked about how our shares and high-volume opportunity accounts often expand almost in a linear fashion as we increase call frequency. Year-to-date call frequency as part of our Stoker's MST share expansion strategy is up versus a year ago and, on a larger basis, stores contacted.

We're beefing up our compliance in regulatory structures to prepare for expanded FDA requirements. We're methodically adding key staff positions in legal, regulatory and scientific support areas, particularly in NewGen, as we gain additional perspective on the FDA requirements. Our investments in this area result in higher SG&A expense. We believe it's important to increase our capacity to meet the regulatory requirements which enable us to integrate and leverage the opportunities we see in our expanding vapor portfolio.

On the capital side, we are working to facilitate readily available funding. To that end, we filed an S-3 shelf registration -- provides us the potential to issue up to $200 million in equity capital. We do not have immediate plans for -- to use this equity pathway but is there and available if and when we need it. Mark will provide more detail on the filing when he discusses our financials.

We had a gratifying second quarter and first half, I'm pleased with what we accomplished, even though, as many of you has heard me say in the past, we're always hungry accomplish more and to do it more quickly.

Second quarter net sales grew almost 40% to a record $72.1 million. That figure includes the sales from VaporBeast and the Wind River Smokeless tobacco brands, both of which were acquired last November. And even though we did not own Vapor Shark during the second quarter, because we were influential in the management of the company, the accounting rules considered a variable interest entity, and their financials were consolidated into our results, including net sales, which totaled $3.2 million in the quarter. Gross profit rose 28.6% to a company-record $32 million, including $1.2 million from Vapor Shark. Net income attributable to TPB, which excludes Vapor Shark, was $7.4 million.

Let me give you a deeper understanding of the quarter's operating performance. First, let's talk about Smokeless Products, which covers our chewing tobacco and moist snuff or MST brands. Sales for the quarter rose to a record $22 million. Stoker's MST once again drove performance in smokeless with case shipments up about 10%. It's a remarkable growth story, particularly since it occurred in the face of a highly competitive environment, 1 less shipping day in the quarter, comparisons against good prior year numbers that benefited from $1.3 million in incremental sales due to the timing of the major tradeshow and the reverberations from a tax increase in Pennsylvania.

Entry volumes for MST were up about 1%, and chewing tobacco declined by approximately 10%. TPB expanded its market share in both MST and chewing tobacco in the quarter. Gross profit for the smokeless segment increased to a record $11.5 million, or gross margin expanded 220 basis points to $52.4 million.

While we continue to execute on our plan to build Stoker's MST profile in the store universe, chain-store placements were up in the quarter but partially offset by reductions in some of the lower-volume independent stores. Net new doors were less than 1,000 for the quarter as we intensified our strategy to strengthen retail sales call frequency in key outlets to drive organic sales growth.

We're part of a very competitive environment where there are significant levels of competitive promotion and high levels of advertising, but we're confident in our superior differentiated product that consumers love and our retail rollout strategy, which involves increasing the call frequency of sales visits in strategically important outlets.

Now turning to our Smoking products segment. Segment sales were $27 million in the quarter, up $200,000 over last year. Industry cigarette paper volumes increased by low single digits while MYO cigar wraps continued to deliver robust double-digit volume gains. Zig-Zag increased its market share in cigarette papers and maintained its industry-leading share in MYO cigar wraps on solid store advances for Zig-Zag 'Rillo size wraps.

The industry, including TPB, was impacted by California's imposition of a 65% excise tax on MYO cigar wraps. About 5% of cigar warp industry volume is in California and why -- we roughly parallel that percentage. California industry cigar wrap volumes for the quarter decreased by 17% versus last year's second quarter with our sales down in California by 27% versus last year's second quarter. We're addressing this initial adverse TPB trends with specific promotional strategies and new products. We anticipate that this tax will affect trade behavior for the next 6 months, and we'll continue to closely evaluate the tax impact on consumer behavior. Gross profit in the Smoking segment increased by $400,000 to $14.1 million, and gross margin increased 120 basis points to 52.2% of sales.

Turning to the performance of NewGen, it is clear that VaporBeast has made a dramatic impact on our NewGen business since we acquired it last November and made the sales distribution engine one of our core focused brands. Driven by VaporBeast's strong growth, the NewGen segment increased net sales by $19.9 million versus a year ago quarter to a record $23 million, which includes $3.2 million from Vapor Shark. At VaporBeast, we continue to see -- seeking to further bolster their strong growth and are executing incremental sales initiatives to further leverage our opportunities and reach. We're also seeing strengthening relations with our supplier base overseas.

Gross profit expanded to a record $6.3 million, a $6 million increase over last year, including $1.2 million from Vapor Shark. Gross margin expanded to 27.5% in the quarter versus 10% last year.

Move on to how our most recent acquisition of Vapor Shark fits into our developing vapor strategy. Vapor Shark is based in Miami and manufactures proprietary e-liquids and markets proprietary vaping devices to consumers through 34 Vapor Shark branded retail stores, its internet website and through its about 1,000 independent vape shops.

We started working with Vapor Shark in March through a strategic management agreement. In short order, helped them dramatically improve chronic out-of-stock inventory issues while bringing process improvements across the organization. Our business relationship evolved, and on June 30, we executed a warrant with marginal cost to acquire them.

In the second quarter, Vapor Shark sales were $3.2 million, and they lost just over $0.5 million, largely from onetime expenses related to streamlining operations and lower sales volume because of the out-of-stock situation I mentioned. As far as the Vapor Shark transaction, the former owner will operate the 7 company stores as franchise stores effective January 2018. As a result, going forward, TPB will only realize the wholesale value of these sales.

We see meaningful opportunities to leverage Vapor Shark's proprietary products to make further process improvements and to [gain] synergies in conjunction with VaporBeast distribution platform. This will take some time as much work needs to be done. While we have collaboratively resolved most of the critical out-of-stock issues, there are a number of structural and process improvements that are needed across the platform. And of course, there's the actual integration to unleash available synergies. Going forward, we're confident this will add long-term value to our shareholders.

Based on the most recent trends, a number of operational initiatives in the process of being completed and the just-mentioned corporate stores divestiture, we are currently projecting net sales for the next 12 months from Vapor Shark of approximately $10 million and income before taxes of about $1 million.

For Turning Point as a whole, star performers of each segment -- VaporBeast, Stoker's and Zig-Zag -- provide steady cash flows to fuel our future. We're using these funds for brand innovations, helping to finance our acquisition activity and building a stronger capital structure.

I'm sure the recent FDA announcement is on everyone's mind. We view competing in an FDA-regulated environment as one of our core competencies. We continue to strengthen and expand our regulatory expertise and capabilities. So let me say a few words about the recent announcement.

The FDA acknowledged that there's indeed a continuum of risk, and identified cigarettes as the largest tobacco public health issue. In the FDA press release, they mentioned that nicotine, while highly addictive, is delivered through products that represent a continuum of risk and is most harmful when delivered through smoke particles in combustible cigarettes. As you know, as an other tobacco products marketer, we do not sell cigarettes. The press release also encouragingly recognized the potential for innovation to lead to less harmful products. They announced meaningful extensions to premarket applications reaching into 2021 and '22. They also eliminated the sunset provision and will allow manufacturers to continue selling products while applications are under review by FDA.

Finally, and perhaps most encouragingly, they plan to make the product review process more efficient, predictable and transparent for manufacturers. The FDA will finalize guidance for premarket tobacco applications and issue regulations outlining what information it expects to be included in these applications.

We applaud the bold new approach by Commissioner Gottlieb and look forward to working with the FDA to implement a sensible regulatory regime based on the continuum of risk. We're doing what is necessary to preserve our ability to market quality products to adult consumers. There will be a cost. However, with the new additional time to prepare, and if the FDA establishes a product review process which is predictable and transparent, it should have a meaningful positive impact on TPB by creating a more well-defined pathway to [registrate] our current products and be especially helpful in articulating the route to future innovation.

As we go through the process, we are carefully scrutinizing each of our products to determine the potential cost of resources needed for full FDA compliance and approval. It appears some of our smaller products will not warrant such investment and are working through how to handle these products going forward. As part of our rigorous evaluation, we recently discontinued 6 MYO or RYO tobacco SKUs. These products collectively represented about $1.3 million in sales over the 12 months ending June. Given the exceptionally high federal excise tax on MYO tobacco and the Master Settlement Agreement obligations, profitability levels will not warrant the incremental investment required to achieve FDA go-forward selling forward -- selling approvals. We are striving to minimize any potential writeoffs. We'll apply the same rigor to the balance of our product line while streamlining the portfolio for improved focus.

We have developed a leadership team to drive FDA preparation, including R&D and QA and are adding high-quality professionals, principally in vapor, to manage our expanded portfolio. Our vapor infrastructure investments are necessary to meet the landscape needs, and are especially warranted given FDA's Commissioner Gottlieb's encouraging thoughts on the potential for innovation to lead to less harmful products.

We've said our regulatory resources provide a point of differentiation relative to the smaller companies that do not have or cannot afford these compliance measures. That remains true today, and we continue to talk with a number of OTP acquisition candidates that could further enhance our market position and product portfolio.

Before I turn the call over to Mark to address our financial highlights, let me summarize where we stand. As stewards of your investment, we remain focused on providing quality products that thoroughly delight adult consumers. Consumer satisfaction is of the upmost importance.

We will continue to drive our focus brands in our tobacco portfolio through the continuation of the rollout of Stoker's MST and Smokeless, and the market expansion of Zig-Zag 'Rillo cigar wraps in Smoking. In vapor, we have made substantial progress integrating and accelerating VaporBeast sales and margin contribution. We're now working to integrate and leverage Vapor Shark. We'll continue to explore acquisition candidates and opportunities in the OTP sector.

We are fully aligned with TPB's shareholders in the overarching goal of growing top line revenue and earnings. As part of that alignment in 2017, the board introduced a long-term management incentive program. While I won't go into full details, it is a multiyear program, payable in shares based upon achieving certain return on investment capital goals.

Now I'll turn it over to Mark for his remarks.

Thank you, Larry, and good morning again.

Before I get into the numbers, let me provide some color on our recent S-3 shelf registration that we filed with the SEC. We now have the ability to raise up to $200 million in capital in a variety of ways: common stock, preferred stock, depository units, warrants and units. Included under this $200 million shelf registration is a $50 million at-the-market facility, which enables us to issue shares as needed, depending on market conditions.

At the present time, we have no plans or intentions to utilize the facility, but it does give us added flexibility. For example, if an attractive large acquisition opportunity presented itself, we could consider augmenting debt with equity in order to manage our leverage. While we were very cognizant that the cost of equity is more expensive than debt, we would use this very carefully, but this gives us great financial flexibility and, importantly, speed.

In the second quarter, we issued 210,000 shares in connection with stock options that were expiring in September of this year. We expect that as many as 130,000 more shares could be issued in connection with the remaining options that are expiring in the third quarter. In the fourth quarter of 2018, another 110,000 options will be expiring.

Moving to acquisition accounting. As part of the Vapor Shark strategic partnership, TPB was granted a warrant to purchase the company for a nominal amount, which we executed on June 30. Under the transaction, we assume certain debts and other liabilities totaling approximately $3.9 million and acquired assets valued at $3.9 million.

As a result of Vapor Shark being classified as a variable interest entity, we consolidated the results for the quarter. While we will not separately disclose Vapor Shark results separately moving forward, the NewGen segment results in the quarter included approximately the following from Vapor Shark: $3.2 million in net sales, $1.2 million in gross profit, $1.8 million in SG&A and a net loss before taxes of $556,000, which is excluded from the net income attributed -- attributable to TPB.

As Larry mentioned, while we were very excited with the Vapor Shark acquisition and the potential it represents, there's much work that needs to be done to accelerate sales vitality and momentum. This will take time and effort. As a result, we're projecting net sales of $10 million and income before taxes of approximately $1 million over the next 12 months.

Now for our performance. Segment net sales mix [tends] to shift on the growth of VaporBeast. For the quarter, Smokeless represented 31% of net sales, Smoking 37% and NewGen, 32%. Net sales for the quarter increased 39.8% to a record $72.1 million, and gross profit for the quarter increased 28.6% to a record $32 million from $24.9 million a year ago.

Gross margin was 44.4%, down from 48.2% a year ago primarily as a result of a mix impact of VaporBeast's inherently lowered distribution margin. Going forward, we expect gross margin in the NewGen segment to hover in the mid-20% range.

Consolidated SG&A expense in the second quarter was $18.4 million compared to $14.1 million in 2016, driven principally by VaporBeast and Vapor Shark, strategic expenses, sales and marketing, and regulatory manpower enhancement as well as expenses for Vapor Beast SG&A in the quarter, which was $1.8 million. Strategic expenses were $400,000 in the quarter, up about that same amount from a year ago. Net product launch costs were $300,000 and $300,000 higher than last year's second quarter. Nonrecurring public company costs in relation to the 2016 IPO were $600,000 lower in 2017. Recurring public company costs were $400,000 in the quarter, up $200,000 from a year ago. And lastly, $77,000 was expensed relating to the long-term management incentive program that Larry mentioned earlier.

New-product launch costs for MST and costs of goods sold in this year's second quarter were $200,000 compared to $300,000 last year. Net income for the quarter attributed to TPB, which does not include Vapor Shark, was $7.4 million. Second quarter weighted average fully diluted share count was 19.6 million, and fully diluted EPS was $0.38 per share.

Now let me discuss some of the nonoperating drivers that improved our net income versus a year ago. For the quarter, interest expense was $4 million or $2.9 million lower than last year as a result of our lower debt post-IPO and the lower interest rates resulting from our February 2017 refinancing. Our MSA account during the quarter produced investment income of $100,000 compared to $300,000 last year. Finally, reported income tax expense was $2.8 million for the quarter versus $609,000 last year.

Net operating losses, or NOLs, available to offset federal income taxes amounted to approximately $33 million at quarter-end. We expect to utilize these NOLs into the first half of 2018. We continue to project our annual effective tax rate will be approximately 28% for 2017, however, due to NOLs, there will be no federal cash taxes until we fully utilize our NOLs in 2018. For the quarter, adjusted EBITDA increased 22.8% to $15.8 million versus $12.8 million last year.

Now let me discuss some other items in the quarter. Federal excise taxes included in cost of goods sold totaled $5 million. FDA fees accounted for in cost of goods sold amounted to $150,000. CapEx for the quarter was $200,000, and we expect full year CapEx of approximately $2 million. Net debt at quarter-end was $220 million. Net debt to adjusted EBITDA was 3.9x. Net debt to pro forma acquisition adjusted EBITDA was 3.7x.

With regard to the impact of excise tax changes, which I have mentioned on previous calls, relative to year ago comparisons, Pennsylvania's $0.55 per ounce excise tax on smokeless products began October 1, 2016, and continue to have a material impact on trade volumes in the quarter for both the industry and us. Year-over-year, Pennsylvania chewing tobacco volumes were down roughly 30% for both the industry and TPB. Pennsylvania MST year-over-year declines were greater than 10% for both the industry and TPB. Importantly however, and as anticipated, the sharp erosion associated with the tax increase is now moderating as both industry and TPB Pennsylvania Smokeless volumes are up mid-single digits on a sequential quarter basis.

Despite a number of competitive challenges in the quarter and significant integration work, we had a remarkably strong quarter with many company records achieved, including record retail market shares in both chewing tobacco and MST on the strength of Stoker's; record Smokeless net sales and gross profits; expanded retail market share in cigarette papers while maintaining our leadership position in MYO cigar wraps, both on the strength of the iconic Zig-Zag brand; record net sales and gross profits in NewGen on the power of VaporBeast; and most importantly, record total company net sales gross profit and adjusted EBITDA.

With that, I'll turn the call over to Larry for a few final comments before we turn to Q&A

Thanks, Mark. We had a good quarter. It revealed not only the strength of our organization but also our brands and our resolve. Although investor calls are typically most focused on the financial results, there are a number of other metrics that we measure to assess our progress. Some of the ones I consider most relevant in foretelling include: total sales calls made by the sales organization, up in the quarter and year-to-date versus year ago; store call frequency, as the number of times you visit and merchandise a store, is also up; retail store distribution on our focused brands, up for Stoker's chew, Stoker's MST cans and Stoker's MST cut -- tubs, distribution on Zig-Zag cigarette papers and 'Rillo wraps were also up; international sales, while still rather small, are up by a meaningful amount as we expand their brands to consumers around the world.

Our first 2 acquisitions are performing well with Wind River Smokeless shares up versus the pre-TPB era and especially encouraging (inaudible) sales results. And finally, while early, we made meaningful process -- progress in social media with the Stoker's own-your-own Instagram and YouTube channels and a zigzag.com update.

So in addition to the solid results we summarized this morning, we believe we have a firm foundation moving forward. I hope you sense that the entire management team is extremely enthusiastic and determined to achieve our strategic goals and increase the long-term value of our fine company.

We appreciate your participation on the call today. And with that, I'd like to open up the floor for questions.

(Operator Instructions) And our first question today comes from Vivien Azer from Cowen & Company.

So a number of questions from me. I'd like to please start with the MST category, if you don't mind. Mark, thanks for all that detail in terms of the impact from Pennsylvania. I mean, if my math is right, like, that would imply that maybe the industry wasn't a plus 1, but if we hadn't seen that tax increase, maybe it was a plus 1.5, which still fundamentally, is below kind of the new normal growth rate, right. I mean, if we go back a couple of years, MST used to grow 5. Now the new normal is 3.5. So 1.5 is a little bit surprising to me, one, because it's off trend; and two, because it's occurring while cigarette volumes are deteriorating, which historically has not been the case. So can you offer a little bit of color on kind of what you're seeing in terms of overall MST category volume growth?

Vivien, it's Jim. Couple of things. Remember how we measure MST and that's ex pouch because we don't compete in the pouch and snus segments. So historically, when you think of anywhere from 2% to 4%, perhaps, even 5% growth, that was a category level that the industry speaks about. We view it a little differently because we're not competing in the pouch segment. And so the pouch segment -- pouch and snus, but the pouch segment generally is growing close to double-digit rates. We're just not participating in that segment yet. Now I will also agree with you that the nonpouch business as we measure it has also slowed down. Why that's inconsistent with maybe declining cigarette -- I'm not so sure how to make that linkage, but there is this move to -- that we've seen over time in tobacco generally, to cleaner, more discreet, more convenient products to use, and so there's this shift out -- it still obviously an enormous category, but the shift out of the nonpouch segment into the pouch segment.

Just to follow up though, your point is well taken on the way that you measure it, but your numbers are not that all far off from Ultra. As Ultra has said that MST category on the first 6 months of the year was a plus 1, and they do measure pouch. So I'm still kind of just struggling on why the category is slowing?

Yes. I'm not so sure I can answer that. I'm disappointed to say that, but there's no question I'm fully aligned with you that the category has slowed down over, really, the last 18 months-or-so. The growth rates in the Smokeless MST category have unquestionably slowed down.

Okay. The good news, of course, is that Stoker's is gaining share, which was great to see. Jim or Larry, can you articulate what Stoker's share was, please, in MST in the quarter and then just provide a little context on kind of the sequential trajectory around those share gains?

Sure, Vivien. Stoker's share was 2.9% in the quarter. I think that was up 0.3% over last year. We continue to make gains. We're seeing -- which is sort of interesting, we're seeing growth in tubs starting to reaccelerate, and I think that as people get introduced to the brand through the cans, they're seeking out the value proposition of the tubs. So we're seeing growth of both -- across both cans and tubs. I think that's good news for the brand.

Indeed it is, and it seems that your volume market share gains are actually accelerating. So kind of digging into that, could you offer a little color on any new distribution gains that you realized in the quarter from a store count perspective?

Our store counts were up marginally in the second quarter. Chains were up and we lost some marginal independent accounts. So that netted to -- it's about less than 1,000 stores for the quarter. But I think that reflects a shift in strategy that we talked a little bit about last quarter and we're continuing. We're directing our field sales force to get more frequency in stores. We've done a number of studies that show that as we increase frequency in stores, our share gains are -- our share grows incrementally and significantly. So we're focused on our [strategically] important accounts and increasing the frequencies there as opposed to getting marginal independent stores that are out there. We do remain -- continue to remain focused on chain store acquisition. We believe that's a huge opportunity for us going forward.

(Operator Instructions) Our next question comes from Susan Anderson from FBR Capital Markets.

I was wondering, I may have missed this, but did you break out the impact that Wind River had on the Smokeless category? And then also, when do you expect it to really kind of start to contribute to growth after we start to cycle the acquisition?

Susan, thank you. We don't break out Wind River, but we did mention and in fact it is true that its share is actually up despite not being the focus of our sales force yet. We're looking forward to the fourth quarter where we'll start increasing the distribution on the Wind River brands.

Okay, great. And then in the NewGen category, the growth ex acquisitions, maybe just talk about what you're seeing in the e-cig category and then any update on Primal?

Yes, I think in the e-cig -- I will talk more about e-vapor, both the e-cigs and the other products. What we're seeing is growth in both the traditional retail as well as in the store universe, where VaporBeast sells their product. We're also seeing VaporBeast continuing to make incremental gains with their consumers with both average order sizes up as well as the order frequency. The stores are actually ordering more frequently. So we've -- what we see from that is that, while there's no syndicated data, we believe that the category is growing in these vapor shops.

Great, that's helpful. And then I guess any update on the acquisition pipeline? Would you feel comfortable given the slew of kind of recent acquisitions, making another one in the near term? And then how should I think about leverage targets now? I think you took on a bit more debt from Vapor Shark and then if there are more acquisitions in the future?

We are talking with a number of companies. It was nothing close to where we want to disclose any of those contacts. We do see it is still a pretty fertile field out there of companies. We're looking at them. As far as our leverage, and I guess you asked that within the context of acquisitions, if you add up all the acquisitions that we've done, it's been relatively leverage neutral and then maybe -- and slightly positive. There was some marginal increase in leverage from Vapor Shark, but we expect that to pay off pretty well in the future. We retain our -- we maintain our $2.5 million to $3.5 million goal. If you adjust our -- we're currently at $3.9 million, and I think if you adjust it for pro forma acquisitions, we're running about $3.7 million. (inaudible) By the end of the year, if current trends continue, we should be down pretty close or inside the range that we've been talking about.

(Operator Instructions) And at this time, I'm showing no additional questions. I'd like to turn the conference call back over to management for any closing remarks.

Thanks for joining us on the call today, everyone, and we look forward to discussing our Q3 2017 results with you in November. Have a great day.

Ladies and gentlemen, that does conclude today's conference. You may now disconnect your lines.