Turning Point Brands, Inc. Announces Fourth Quarter and Full Year 2018 Results

LOUISVILLE, Ky.–(BUSINESS WIRE)–Turning Point Brands, Inc. (NYSE:TPB), a leading provider of Other
Tobacco Products (“OTP”) and adult consumer alternatives, today
announced financial results for the fourth quarter and full year ended
December 31, 2018.

Results at a Glance

Fiscal Year Ending December 31, 2018

(Comparisons vs. same period year-ago)

  • Net sales increased 16.4% to a record $332.7 million;
  • Gross profit increased 14.1% to a record $142.6 million;
  • Net income attributable to Turning Point Brands, Inc. increased 25.1%
    to $25.3 million;
  • Adjusted EBITDA increased 7.6% to $64.6 million (see Schedule A for a
    reconciliation to net income); and
  • Diluted EPS of $1.28 and Adjusted Diluted EPS of $1.77 as compared to
    $1.04 and $1.36 in the year-ago period, respectively (see Schedule C
    for a reconciliation to Diluted EPS)

Fourth Quarter 2018

(Comparisons vs. same period year-ago)

  • Net sales increased 28.2% to a record $94.3 million;
  • Gross profit increased 20.1% to a record $38.7 million;
  • Net income increased 41.6% to $5.0 million;
  • Adjusted EBITDA increased 16.6% to $17.2 million (see Schedule A for a
    reconciliation to net income);
  • Diluted EPS of $0.25 and Adjusted Diluted EPS of $0.49 as compared to
    $0.18 and $0.39 in the year-ago period, respectively (see Schedule C
    for a reconciliation to Diluted EPS); and
  • Other highlights from the fourth quarter:

    • Stoker’s MST retail distribution expansion continues to fuel
      double-digit volume gains;
    • Zig-Zag’s leadership position in wraps and papers endures with
      novel new product launches on track for first quarter 2019 and
      beyond; and
    • NewGen net sales growth of 86.2% with record sales at VaporBeast
      and the inclusion of the September 2018 acquisition of
      International Vapor Group (“IVG”) and its strong B2C marketing
      platform

“2018 was a solid year of achievement for team TPB. Not only did we
produce record net sales and gross profit, but we also rounded out our
non-traditional distribution infrastructure with two vaping
acquisitions, made our first investment in the hemp and CBD space and
established the foundation for the successful launch of our Nu-X
division, while continuing to grow our focus brands,” said President and
Chief Executive Officer, Larry Wexler. “2019 will be a transformative
year for Turning Point Brands as we begin to integrate the e-commerce
strengths of our vaping infrastructure with the breadth of our core
tobacco bricks and mortar salesforce.”

“Total TPB net sales continue to grow robustly on the strength and
success of our focus brands,” said Larry Wexler, President and CEO.
“Stoker’s MST achieved another record share in the quarter. Zig Zag
organic hemp rolling paper products continue to expand retail
distribution and the new product pipeline for 2019 is full of exciting
new novel introductions. VaporBeast delivered yet another record in
quarterly net sales and gross profit and was complemented by a full
quarter of B2C powered sales at IVG.”

Recent Events

On November 26, 2018, the company announced that it acquired a minority
interest (19.99%) in Canadian American Standard Hemp (“CASH”). CASH has
management and production facilities located in Warwick, Rhode Island
that currently produce tinctures, capsules, vape cartridges and oral
sprays that contain cannabidiol isolate (“CBD”) developed through highly
efficient, proprietary processes. TPB has rapidly collaborated with CASH
to develop our own suite of proprietary products which entered commerce
in the first quarter of 2019.

On January 15, 2019, TPB announced the formation of Nu-X Ventures,
dedicated to the development, production and sale of alternative
products including CBD’s and pursuing acquisitions in related spaces.
The creation of Nu-X Ventures allows TPB to leverage its management
expertise in traditional OTP to alternative products. The TPB management
team has over 100 years of collective experience navigating federal,
state and local regulations that are directly applicable to the growing
alternatives market. The acquisitions of VaporBeast and IVG coupled with
TPB’s large traditional sales and distribution network provide the
infrastructure to reach greater than 185,000 retail outlets in the
U.S. and millions of consumers through its B2C sales engine. Utilizing
these core competencies, TPB is poised to both produce and distribute a
diverse range of products under the Nu-X division. The company has a
robust pipeline of products that will be released throughout 2019 and
beyond.

On March 4, 2019, the TPB board of directors declared a quarterly
dividend of $0.045 per common share. The dividend will be paid on April
12, 2019, to shareholders of record on the close of business on March
22, 2019.

Smokeless Products Segment (24% of total net sales in the quarter)

For the fourth quarter, Smokeless products net sales increased 10.2% to
$23.1 million on the continuing double-digit volume growth of Stoker’s
MST, partially offset by declines in chewing tobacco, attributable to
increased competition and a continuing segment shift to lower price
products. In the quarter, total Smokeless segment volume increased 5.5%
and price/mix advanced 4.7%.

For the full year 2018, Smokeless products net sales increased 6.5% to a
record $90.0 million. For the year, total Smokeless segment volume
increased 2.6% and price/mix advanced 3.9%.

Year-over-year industry volumes for chewing tobacco declined by
approximately 6% in the quarter, while industry MST1 volumes
slipped by approximately 3% to year-ago, according to MSAi. Stoker’s
shipments to retail outpaced the smokeless industry in the quarter,
growing its MSAi share in both chewing tobacco and MST. Stoker’s MST
cases shipped in the quarter rose by greater than 10%, while
establishing yet another record share in the quarter.

For the quarter, gross profit for the Smokeless segment increased 15.8%
to $11.9 million. Segment gross margin expanded 250 basis points to
51.6%. For the year 2018, segment gross profit increased 8.9% to a
record $46.5 million, while gross margin expanded 110 basis points to
51.6%.

“Stoker’s MST double-digit advances remain highly encouraging with
continued adoptions by higher velocity larger chains, a trend we expect
to continue into 2019,” said Wexler.

Smoking Products Segment (29% of total net sales in the quarter)

For the fourth quarter, net sales of Smoking products decreased $1.8
million to $27.1 million, largely attributable to the $2.2 million in
fourth quarter Canadian paper orders we voluntarily canceled as a result
of the previously communicated packaging regulations and to diminishing
losses in the low-margin cigars business. In the quarter, Smoking
products volume and price/mix each decreased 3.1%.

For the full year 2018, Smoking segment net sales increased $1.6 million
to $111.5 million. Smoking products volume and price/mix each increased
0.7%.

In the quarter, Zig-Zag retained its U.S. share leadership position in
premium cigarette papers with the successful expansion of organic hemp
rolling paper products while also modestly increasing share in the MYO
cigar wraps category. A broadened assortment of novel new Zig-Zag
products are scheduled for first quarter 2019 and beyond.

According to MSAi, fourth quarter industry volumes for U.S. cigarette
papers decreased by low-to-mid-single-digits, while industry MYO cigar
wraps were off high single-digits on promotional timing.

Smoking products gross profit for the quarter decreased $1.2 million to
$13.9 million with gross margin decreasing 110 basis points to 51.2%.
Gross profit in the quarter was impacted by the aforementioned canceled
Canadian PO’s and $0.8 million of COGS line rationalization expenses on
discontinued products, as we concentrate resources behind higher
priority businesses. For the year 2018, Smoking segment gross profit of
$57.0 million was soft to year ago by $0.1 million, while gross margin
contracted 80 basis points to 51.2%. Gross profit for the year was
impacted by $1.3 million in line rationalization expenses on non-core,
discontinued products.

“The iconic Zig-Zag brand is well positioned to benefit from the
tailwinds of legal recreational cannabis, particularly given our
schedule of novel new product introductions in 2019,” said Wexler.

Fourth quarter sales of low priority cigar products were $1.2 million vs
$1.6 million in the year prior. For the full year 2018, sales of cigar
products declined $3.0 million to $5.5 million.

________________________________________________________
1
TPB measures industry MST volumes excluding pouch and snus products.

NewGen (New Generation) Products Segment (47% of total net sales in
the quarter)

For the fourth quarter, NewGen segment net sales grew 86.2% to a record
$44.1 million on continued VaporBeast momentum and a full quarter of IVG
results. For the full year 2018, NewGen net sales increased $39.9
million to a record $131.1 million.

In the quarter, gross profit for the NewGen segment increased 89.4% to a
record $12.9 million. Gross margin for the quarter expanded by 50 basis
points to 29.3%. In the quarter, there were $1.3 million in COGS line
rationalization and warehouse reconfiguration inventory expenses as
compared to $0.1 million in the prior year. For the full year 2018,
NewGen gross profit increased $13.9 million to a record $39.0 million,
while gross margin expanded by 230 basis points to 29.8%. Gross profit
for 2018 includes $1.5 million of line rationalization and warehouse
reconfiguration inventory expenses.

VaporBeast’s key performance metrics indicate sustained progress against
our goal to grow sales in the existing store base, as evidenced by
increases in both order sizes and order frequency, which delivered
record revenues in the quarter. IVG’s VaporFi and DirectVapor B2C
businesses also contributed to solid advances in the quarter. As
previously communicated, vapor integration synergies started in the
fourth quarter and are expected to be fully in place by late third
quarter 2019. Fourth quarter 2018 NewGen results include $1.1 million of
tariff expense and a $1.0 million offset to SG&A from the previously
announced second quarter loan to a supplier.

“As we press forward with our vapor integration strategy, we intend to
leverage the IVG B2C marketing capabilities while combining certain
logistics activities across the VaporBeast, Vapor Shark, Vapor Supply
and IVG platforms,” said Wexler. “We intend to leverage these assets,
including our national salesforce, to launch proprietary Nu-X products
in CBD and vapor to further accelerate company momentum. Our new
proprietary vapor product line under the RipTide brand name began
shipping in February 2019 and Nu-X branded CBD products are queued up
for first quarter distribution in our own ecosystem and thereafter
across all of our channels and platforms.”

Other Events and Performance Measures in the Fourth Quarter

Fourth quarter 2018 consolidated selling, general and administrative
(“SG&A”) expenses were $27.8 million compared to $21.5 million in 2017,
due to the inclusion of the IVG and Vapor Supply SG&A and transaction
expenses.

Fourth quarter SG&A included $2.5 million of the following:

  • $1.5 million of transaction expenses including an earnout for IVG
    management as compared to $0.2 million a year-ago;
  • $0.2 million of strategic expenses as compared to $0.9 million a
    year-earlier;
  • $0.5 million of introductory new product launch costs in 2018
    including $0.2 million for Nu-X related expenses versus $0.5 million
    in 2017;
  • $0.2 million of line rationalization expenses in both 2017 and 2018;
    and
  • $0.1 million of expense related to shutting down the Oklahoma Vapor
    Supply warehouse in 2018 and $0.1 million of Tax Act bonuses in 2017

Fourth quarter 2018 cost of goods sold included $2.3 million of the
following:

  • $1.7 million of line rationalization expenses in 2018 as compared to
    $0.1 million in 2017;
  • $0.5 million of warehouse reorganization expenses related to inventory
    rationalization; and
  • $0.1 million of introductory new product launch costs compared to $0.2
    million a year earlier

Interest expense for the quarter was $4.0 million as compared to $3.9
million in the year-ago period.

Income tax expense for the quarter includes $0.5 million of expense or
7% of pre-tax income as a result of updating our state tax expense based
on our 2017 tax filings. The effective tax rate for 2018 was 20.0%.

For the quarter, fully diluted weighted average shares outstanding were
20.0 million.

Capital expenditures in the fourth quarter 2018 totaled $0.7 million.

Total debt at December 31, 2018 was $220.7 million. Net debt at December
31, 2018 was $217.4 million, compared to $199.4 million as of December
31, 2017, an increase of $18.0 million, primarily due to the IVG
acquisition in the third quarter. Net debt at December 31, 2018 to
rolling twelve months Adjusted EBITDA was 3.4x (see Schedule B for a
reconciliation).

2019 Outlook

Absent any acquisitions, the company projects 2019 base business net
sales to be $370 to $385 million. Additionally, the company anticipates
that the Nu-X division will deliver an additional $10 to $20 million in
net sales, bringing total TPB 2019 net sales to $380 to $405 million.
The company intends to fully reinvest Nu-X gross profit to maximize
sales and market achievement. We expect to update our Nu-X guidance on a
quarterly basis.

The company anticipates continued volatility in Canadian paper sales
until such time as the Canadian packaging guidelines are finalized,
including certain transition timelines. Once finalized, we expect
inventories to replenish to standard operating norms.

In our evolution out of the low margin cigars category, we anticipate
year-over-year net sales erosion of approximately $1.5 million. Net
sales of cigars products for the years 2016, 2017 and 2018 were $12.7
million, $8.5 million and $5.5 million, respectively.

The company anticipates certain SG&A expenses in 2019, including:

  • $1.6 million to support the Nu-X infrastructure, which will be heavily
    weighted towards the first half of 2019
  • $1.5 million in preparation for the FDA’s PMTA pathway; and
  • $1.2 million in transaction expenses resulting from the September 2018
    acquisition of IVG, primarily due to accounting requirements of
    earnout payments.

Excluding the SG&A expenses described above and Nu-X operating
performance, we project 2019 Adjusted EBITDA of $70 to $75 million.

Stock compensation expense in 2019 is projected to be $4.0 million
versus $1.4 million in 2018. The increase is attributable to the higher
stock price and realigning incentives for both executive management and
deep in the organization to the stock price.

The company expects the 2019 effective income tax rate to be 21-23%.

Capital expenditures for 2018 are expected to be approximately $3.0-$4.0
million, including certain investments in our MST operations with an
anticipated one-year payback.

Moving forward, we will begin providing quarterly net sales guidance.
Net Sales for the first quarter 2019, including the estimated impact
associated with the Canadian packaging regulations, is expected to be
$89 million to $93 million.

Earnings Conference Call

As previously disclosed, a conference call with the investment community
to review TPB’s financial results has been scheduled for 10 a.m.
Tuesday, March 5, 2019. Investment community participants should dial in
ten minutes ahead of time using the toll free number 800-458-4121 (International
participants should call 786-789-4772). A live listen-only webcast of
the call is available from the Events and Presentations section of the
investor relations portion of the company website (www.turningpointbrands.com).
A replay of the webcast will be available on the site three hours
following the call.

Non-GAAP Financial Measures

In addition to financial measures prepared in accordance with generally
accepted accounting principles in the United States (GAAP), this press
release includes certain non-GAAP financial measures including Adjusted
EBITDA, Adjusted diluted EPS, Net Debt, Adjusted Gross Profit and
Adjusted Operating Income. A reconciliation of these non-GAAP financial
measures accompanies this release.

About Turning Point Brands, Inc.

Louisville, Kentucky-based Turning Point Brands, Inc. (NYSE: TPB) is a
leading U.S. provider of Other Tobacco Products and adult consumer
alternatives. TPB, through its focus brands, Stoker’s® in
Smokeless products, Zig-Zag® in Smoking products and
VaporBeast® and VaporFi® in NewGen products,
generates solid cash flow which it uses to finance acquisitions,
increase brand support and strengthen its capital structure. TPB does
not sell cigarettes. More information about the company is available at
its corporate website, www.turningpointbrands.com.

Forward-Looking Statements

This press release contains forward-looking statements within the
meaning of the federal securities laws. Forward-looking statements may
generally be identified by the use of words such as “anticipate,”
“believe,” “expect,” “intend,” “plan” and “will” or, in each case, their
negative, or other variations or comparable terminology. These
forward-looking statements include all matters that are not historical
facts. By their nature, forward-looking statements involve risks and
uncertainties because they relate to events and depend on circumstances
that may or may not occur in the future. As a result, actual events may
differ materially from those expressed in or suggested by the
forward-looking statements. Any forward-looking statement made by TPB in
this press release speaks only as of the date hereof. New risks and
uncertainties come up from time to time, and it is impossible for TPB to
predict these events or how they may affect it. TPB has no obligation,
and does not intend, to update any forward-looking statements after the
date hereof, except as required by federal securities laws. Factors that
could cause these differences include, but are not limited to:

  • declining sales of tobacco products, and expected continuing decline
    of sales, in the tobacco industry overall;
  • our dependence on a small number of third-party suppliers and
    producers;
  • the possibility that we will be unable to identify or contract with
    new suppliers or producers in the event of a supply or product
    disruption;
  • the possibility that our licenses to use certain brands or trademarks
    will be terminated, challenged or restricted;
  • failure to maintain consumer brand recognition and loyalty of our
    customers;
  • substantial and increasing U.S. regulation;
  • regulation of our products by the FDA, which has broad regulatory
    powers;
  • uncertainty related to the regulation and taxation of our NewGen
    products;
  • our products are subject to developing and unpredictable regulation;
  • our products contain nicotine which is considered to be a highly
    addictive substance;
  • possible significant increases in federal, state and local municipal
    tobacco- and vapor-related taxes;
  • possible increasing international control and regulation;
  • our reliance on relationships with several large retailers and
    national chains for distribution of our products;
  • our amount of indebtedness;
  • the terms of our credit facilities, which may restrict our current and
    future operations;
  • intense competition and our ability to compete effectively;
  • uncertainty and continued evolution of markets containing our NewGen
    products;
  • significant product liability litigation;
  • some of our products are subject to developing and unpredictable
    regulations
  • the scientific community’s lack of information regarding the long-term
    health effects of electronic cigarettes, vaporizer and e-liquid use;
  • requirement to maintain compliance with master settlement agreement
    escrow account;
  • competition from illicit sources;
  • our reliance on information technology;
  • security and privacy breaches;
  • contamination of our tobacco supply or products;
  • infringement on our intellectual property;
  • third-party claims that we infringe on their intellectual property;
  • failure to manage our growth;
  • failure to successfully integrate our acquisitions or otherwise be
    unable to benefit from pursuing acquisitions;
  • fluctuations in our results;
  • exchange rate fluctuations;
  • adverse U.S. and global economic conditions;
  • sensitivity of end-customers to increased sales taxes and economic
    conditions;
  • failure to comply with certain regulations;
  • departure of key management personnel or our inability to attract and
    retain talent;
  • imposition of significant tariffs on imports into the U.S.;
  • reduced disclosure requirements applicable to emerging growth
    companies may make our common stock less attractive to investors,
    potentially decreasing our stock price;
  • failure to maintain our status as an emerging growth company before
    the five-year maximum time period a company may retain such status;
  • our principal stockholders will be able to exert significant influence
    over matters submitted to our stockholders and may take certain
    actions to prevent takeovers;
  • our certificate of incorporation and bylaws, as well as Delaware law
    and certain regulations, could discourage or prohibit acquisition bids
    or merger proposals, which may adversely affect the market price of
    our common stock;
  • our certificate of incorporation limits the ownership of our common
    stock by individuals and entities that are Restricted Investors. These
    restrictions may affect the liquidity of our common stock and may
    result in Restricted Investors being required to sell or redeem their
    shares at a loss or relinquish their voting, dividend and distribution
    rights;
  • future sales of our common stock in the public market could reduce our
    stock price, and any additional capital raised by us through the sale
    of equity or convertible securities may dilute your ownership in us;
  • we may issue preferred stock whose terms could adversely affect the
    voting power or value of our common stock; and
  • our status as a “controlled company” could make our common stock less
    attractive to some investors or otherwise harm our stock price.

Financial Statements Follow:

 
Turning Point Brands, Inc.
Consolidated Statement of Income
(dollars in thousands except share data)
 
      Three Months Ended
December 31,
2018     2017
Net sales $ 94,291 $ 73,563
Cost of sales   55,547     41,299  
Gross profit 38,744 32,264
Selling, general, and administrative expenses   27,761     21,526  
Operating income 10,983 10,738
Interest expense 4,013 3,894
Interest income (5 ) (7 )
Investment income (96 ) (104 )
Net periodic benefit (income) expense, excluding service cost   (45 )   6  
Income before income taxes 7,116 6,949
Income tax expense   2,132     3,430  
Consolidated net income $ 4,984   $ 3,519  
 
Basic income per common share:
Consolidated net income $ 0.25   $ 0.18  
Diluted income per common share:
Consolidated net income $ 0.25   $ 0.18  
Weighted average common shares outstanding:
Basic 19,550,002 19,207,490
Diluted 20,040,428 19,722,513
 
Supplemental disclosures of statement of income information:
Excise tax expense $ 4,789   $ 4,811  
FDA fees $ 156   $ 140  
 
 
Turning Point Brands, Inc.
Consolidated Statement of Income
(dollars in thousands except share data)
 
      For the year ended
December 31,
2018     2017
Net sales $ 332,683 $ 285,777
Cost of sales   190,124     160,807  
Gross profit 142,559 124,970
Selling, general, and administrative expenses   94,075     75,290  
Operating income 48,484 49,680
Interest expense 15,086 16,904
Interest income (267 ) (15 )
Investment income (424 ) (438 )
Loss on extinguishment of debt 2,384 6,116
Net periodic benefit expense, excluding service cost   131     180  
Income before income taxes 31,574 26,933
Income tax expense   6,285     7,280  
Consolidated net income 25,289 19,653
Net loss attributable to non-controlling interest       (556 )
Net income attributable to Turning Point Brands, Inc. $ 25,289   $ 20,209  
 
Basic income per common share:
Net income attributable to Turning Point Brands, Inc. $ 1.31   $ 1.06  
Diluted income per common share:
Net income attributable to Turning Point Brands, Inc. $ 1.28   $ 1.04  
Weighted average common shares outstanding:
Basic 19,355,607 18,989,177
Diluted 19,827,562 19,513,008
 
Supplemental disclosures of statement of income information:
Excise tax expense $ 19,835   $ 19,646  
FDA fees $ 586   $ 584  
 

Contacts

Robert Lavan, Senior Vice President, CFO
[email protected]
(502) 774-9238

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