Turning Point Brands Announces First Quarter 2019 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 first quarter ended March 31, 2019.

Results at a Glance

First Quarter 2019
(Comparisons vs. same period year-ago)

  • Net sales increased 23.9% to $91.6 million;
  • Gross profit increased 27.2% to a record $40.5 million;
  • Net income increased $3.5 million to $6.6 million;
  • Adjusted EBITDA increased 17.3% to $16.1 million (see Schedule A for a
    reconciliation to net income);
  • Diluted EPS of $0.33 and Adjusted Diluted EPS of $0.43 as compared to
    $0.15 and $0.35 in the year-ago period, respectively (see Schedule C
    for a reconciliation to Diluted EPS); and
  • Other highlights from the first quarter:

    • Stoker’s MST double-digit volume gains continue with sustained
      store gains and elevated brand adoption;
    • Zig-Zag’s leadership position strengthens with novel new product
      launches including paper cones and unbleached rolling papers; and
    • NewGen net sales growth of 66.3% including Nu-X initial sales of
      both RipTide vaping and CBD products.

“The first quarter was a strong free cash flow quarter, driven by
drawing down tariff inventory offset by working capital investments in
CBD, Riptide and Nu-X assets. 2019 will be a transformative year, driven
by store gains on MST, Zig-Zag new product launches and significant
growth in NewGen from Nu-X gains,” said Larry Wexler, President and
Chief Executive Officer.

Recent Events

TPB received $6.7 million in April 2019 related to the termination of a
distribution agreement. Net of legal costs and reserves for anticipated
future returns associated with the termination, TPB expects to recognize
a $5.5 million gain in the second quarter.

On April 30, 2019, the TPB board of directors declared a quarterly
dividend of $0.045 per common share. The dividend will be paid on July
12, 2019, to shareholders of record on the close of business on June 21,
2019.

Smokeless Products Segment (25% of total net sales in the quarter)

For the first quarter, Smokeless products net sales increased 8.7% to
$22.5 million on the continuing double-digit volume growth of Stoker’s
MST, partially offset by declining sales in chewing tobacco, largely
attributable to long-term segment erosion and a continuing shift to
lower price products. In the quarter, total Smokeless segment volume
increased 4.8% and price/mix advanced 3.9%.

Year-over-year industry volumes for chewing tobacco and MST1
each declined by approximately 2% in the quarter, 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 delivering another record share in the quarter.

For the quarter, gross profit for the Smokeless segment increased 9.8%
to $12.1 million. Segment gross margin expanded 60 basis points to 53.6%.

“Stoker’s MST double-digit advances continue to be fueled by consumer
adoption in existing stores and the addition of large, higher velocity
chains,” said Wexler.

________________________________
1TPB measured
industry MST volumes excluding pouch and snus products.

Smoking Products Segment (28% of total net sales in the quarter)

For the first quarter, net sales of Smoking products decreased $1.5
million to $25.5 million, attributable to delayed Canadian paper orders
as a result of the previously communicated packaging regulations and to
decelerating losses in the low-margin cigars business. First quarter
2019 sales of low priority cigar products were $1.1 million versus $1.6
million in the year prior. In the quarter, Smoking products volume
declined 8.4% on Canadian paper timing and cigar erosion while price/mix
increased 2.9%.

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 and initial introductory shipments of paper cones
and unbleached papers, while also modestly increasing share in the MYO
cigar wraps category. A broadened assortment of new Zig-Zag products are
scheduled for the balance of 2019.

According to MSAi, first quarter industry volumes for U.S. cigarette
papers increased low-single-digits while MYO cigar wraps decreased by
mid-single-digits on year-ago pipeline and promotional volumes.

Smoking products gross profit for the quarter increased $0.3 million to
$13.5 million with gross margin expanding 400 basis points to 52.8%.
Gross profit and gross margin in the quarter were impacted by the
aforementioned Canadian order flow disruption.

Canada drove a $1.0 million year-over-year revenue headwind in the first
quarter.

“Our enhancements to the Zig-Zag portfolio are positioning the brand to
benefit from the tailwinds of legal recreational cannabis,” said Wexler.

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

For the first quarter, NewGen segment net sales grew 66.3% to $43.6
million on continued VaporBeast momentum and including the IVG results,
which was purchased in September 2018.

In the quarter, gross profit for the NewGen segment increased $7.3
million to a record $14.9 million. Gross margin for the quarter expanded
by 500 basis points to 34.2%, reflecting the higher margin IVG B2C
business. First quarter 2019 NewGen results include $2.0 million of
tariff expense and $0.5 million of duplicative warehouse costs.

Initial shipments of Nu-X RipTide vaping products were principally
concentrated in our own eco-system, as we complete our inventory build
to support a broader roll-out in mid-second quarter and beyond. Nu-X
first quarter results also included initial shipments of a novel suite
of new CBD products. The Nu-X product launches open up significant
terrain for TPB brand building. RipTide is positioned to compete for the
greater than $6 billion in e-cigarette related sales2 and
hemp-based CBD products are sited to compete for what is already an
estimated $600 million dollar segment and which is projected to grow to
greater than $20 billion3 in a few short years. In the
quarter, initial introductory shipments of the Nu-X RipTide vaping
systems and new CBD products delivered $0.8 million in net sales, with
sales doubling month over month throughout the quarter.

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. The inclusion of
IVG’s VaporFi and DirectVapor B2C businesses also contributed to solid
advances in the quarter. As previously communicated, vapor integration
synergies started in late 2018 and are expected to be completed by late
third quarter 2019. In the quarter, we closed the VaporBeast San Diego,
California warehouse and consolidated operations into the Louisville,
Kentucky facility.

“Having initiated Nu-X sales of both RipTide and CBD products, TPB has
greatly expanded its revenue potential with promising new products,”
said Wexler. “As we move into the second quarter and beyond, we intend
to leverage our B2B and B2C assets as well as our traditional salesforce
to sharply broaden retail penetration and deliver high-performance
products to penetrate these large and growing segments.”

________________________________
2Wells Fargo
Securities e-cigarettes

3Brightfield Group

Other Events and Performance Measures in the First Quarter

First quarter consolidated selling, general and administrative (“SG&A”)
expenses were $28.4 million compared to $22.1 million in 2018, due to
the inclusion of the IVG and Vapor Supply SG&A and transaction expenses
related to the IVG acquisition.

First quarter SG&A included $2.3 million of the following:

  • $0.9 million of transaction expenses including an earnout for IVG
    management as compared to $0.4 million a year-ago;
  • $0.5 million of severance related expenses for organizational changes
    as compared to $0.6 million a year earlier;
  • $0.5 million of duplicative warehouse expenses associated with
    consolidating VaporBeast operations into the Louisville facility; and
  • $0.4 million of introductory Nu-X product launch costs in 2019 versus
    $0.1 million in 2018.

Interest expense for the quarter was $3.9 million as compared to $3.7
million in the year-ago period.

Income tax expense for the quarter was $1.8 million versus $0.8 million
a year earlier.

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

Capital expenditures in the first quarter 2019 totaled $0.9 million.

Total debt at March 31, 2019 was $206.9 million. Net debt at March 31,
2019 was $205.2 million, compared to $217.4 million as of December 31,
2018, a decrease of $12.2 million. Net debt at March 31, 2019 to rolling
twelve months Adjusted EBITDA was 3.1x (see Schedule B for a
reconciliation).

2019 Outlook Update

We reaffirm our guidance provided March 5, 2019.

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. As a result of the
temporary disruption, second quarter 2019 Canadian paper sales are
expected to be off $2.4 million as compared to year-ago.

V2 e-cigarettes will be discontinued in mid second quarter. V2
e-cigarette sales for the four quarters of 2018 were $1.9 million, $2.0
million, $1.8 million and $2.2 million. The RipTide vaping products
launch is expected to more than offset these sales.

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; $1.2 million
    in transaction expenses resulting from the September 2018 acquisition
    of IVG, primarily due to accounting requirements of earnout payments;
    and
  • Stock compensation and non-cash incentive 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.

Excluding the SG&A expenses described above and Nu-X operating
performance, we project 2019 Adjusted EBITDA of $70 to $75 million. This
excludes the aforementioned $5.5 million gain related to a vendor
payment.

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.

Net Sales for the second quarter 2019, including the estimated impact
associated with the Canadian packaging regulations, is expected to be
$90 million to $94 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.
Wednesday, May 1, 2019. Investment community participants should dial in
ten minutes ahead of time using the toll free number 888-599-8686 (International
participants should call 786-789-4797). 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
March 31,
2019 2018
Net sales $ 91,628 $ 73,942
Cost of sales   51,164     42,133  
Gross profit 40,464 31,809
Selling, general, and administrative expenses   28,429     22,068  
Operating income 12,035 9,741
Interest expense, net 3,856 3,654
Investment income (144 ) (95 )
Loss on extinguishment of debt 2,384
Net periodic benefit income, excluding service cost   (11 )   (43 )
Income before income taxes 8,334 3,841
Income tax expense   1,774     809  
Consolidated net income $ 6,560   $ 3,032  
 
Basic income per common share:
Consolidated net income $ 0.34   $ 0.16  
Diluted income per common share:
Consolidated net income $ 0.33   $ 0.15  
Weighted average common shares outstanding:
Basic 19,559,596 19,221,892
Diluted 20,045,964 19,762,194
 
Supplemental disclosures of statement of income information:
Excise tax expense $ 4,976   $ 4,811  
FDA fees $ 134   $ 140  
 
       
Turning Point Brands, Inc.
Consolidated Balance Sheet
(dollars in thousands except share data)
 
March 31, December 31,
ASSETS 2019 2018
Current assets:
Cash $ 1,741 $ 3,306
Accounts receivable, net of allowances of $47 in 2019 and $42 in 2018 4,343 2,617
Inventories 90,871 91,237
Other current assets   11,666     14,694  
Total current assets 108,621 111,854
Property, plant, and equipment, net 10,942 10,589
Right of use assets 10,951
Deferred financing costs, net 818 870
Goodwill 145,961 145,939
Other intangible assets, net 34,979 35,339
Master Settlement Agreement (MSA) escrow deposits 31,045 30,550
Other assets   4,225     4,236  
Total assets $ 347,542   $ 339,377  
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable $ 15,070 $ 6,841
Accrued liabilities 20,419 22,925
Current portion of long-term debt 12,000 8,000
Revolving credit facility   14,000     26,000  
Total current liabilities 61,489 63,766
Notes payable and long-term debt 180,900 186,715
Deferred income taxes 2,172 2,291
Postretirement benefits 3,092 3,096
Lease liabilities 9,504
Other long-term liabilities   1,544     886  
Total liabilities   258,701     256,754  
 
Commitments and contingencies
 
Stockholders’ equity:
Preferred stock; $0.01 par value; authorized shares 40,000,000;
issued and outstanding shares -0-
Common stock, voting, $0.01 par value; authorized shares,
190,000,000; issued and
outstanding shares – 19,576,398 at March 31, 2019, and 19,553,857 at
December 31, 2018
196 196

Common stock, nonvoting, $0.01 par value; authorized shares,
10,000,000; issued and outstanding shares -0-

Additional paid-in capital 111,089 110,466
Accumulated other comprehensive loss (2,614 ) (2,536 )
Accumulated deficit   (19,830 )   (25,503 )
Total stockholders’ equity   88,841     82,623  
Total liabilities and stockholders’ equity $ 347,542   $ 339,377  
 
       
Turning Point Brands, Inc.
Consolidated Statement of Cash Flows
(dollars in thousands)
 
Three Months ended March 31,
2019 2018
Cash flows from operating activities:
Consolidated net income $ 6,560 $ 3,032
Adjustments to reconcile net income to net cash provided by
operating activities:
Loss on extinguishment of debt 2,384
Loss on disposal of property, plant, and equipment 23
Depreciation expense 531 560
Amortization of other intangible assets 359 176
Amortization of deferred financing costs 237 238
Deferred income taxes (29 ) 793
Stock compensation expense 466 197
Changes in operating assets and liabilities:
Accounts receivable (1,726 ) 965
Inventories 366 5,237
Other current assets 2,984 (2,051 )
Other assets (427 ) (23 )
Accounts payable 8,229 2,955
Accrued postretirement liabilities (9 ) (14 )
Accrued liabilities and other   (3,539 )   (6,029 )
Net cash provided by operating activities   14,025     8,420  
 
Cash flows from investing activities:
Capital expenditures $ (886 ) $ (363 )
Restricted cash, MSA escrow deposits   1,702     (530 )
 
Net cash provided by (used in) investing activities   816     (893 )
 
     
Turning Point Brands, Inc.
Consolidated Statement of Cash Flows (Cont.)
(dollars in thousands)
 
 
Three Months ended March 31,
2019 2018
Cash flows from financing activities:
Proceeds from 2018 first lien term loan $ $ 160,000
Payments of 2018 first lien term loan (2,000 )
Proceeds from 2018 second lien term loan 40,000
Payments of 2018 revolving credit facility (12,000 )
Payment of dividends (880 )
Payments of 2017 first lien term loan (140,613 )
Payments of 2017 second lien term loan (55,000 )
Proceeds from (payments of) 2017 revolving credit facility, net (8,000 )
Payments of financing costs (3,279 )
Exercise of options 187 20
Redemption of options   (12 )    
Net cash used in financing activities $ (14,705 ) $ (6,872 )
 
Net increase in cash $ 136 $ 655
 
Cash, beginning of period:
Unrestricted 3,306 2,607
Restricted   2,361     4,709  
Total cash at beginning of period $ 5,667   $ 7,316  
 
 
Unrestricted $ 1,741 $ 3,792
Restricted   4,062     4,179  
Total cash at end of period $ 5,803   $ 7,971  
 

Non-GAAP Financial Measures

To supplement our financial information presented in accordance with
generally accepted accounting principles in the United States, or U.S.
GAAP, we use non-U.S. GAAP financial measures, including EBITDA,
Adjusted EBITDA, Adjusted diluted EPS, Net Debt, Adjusted Gross Profit
and Adjusted Operating Income.

Contacts

Robert Lavan, Senior Vice President, CFO
ir@tpbi.com
(502) 774-9238

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