LOUISVILLE, Ky.–(BUSINESS WIRE)–Turning Point Brands (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, 2019.
Results at a Glance
Fiscal Year Ending December 31, 2019
(Comparisons vs. same period year-ago)
- Net sales increased 8.8% to $362.0 million;
- Gross profit decreased 4.1% to $136.7 million as a result of certain restructuring expenses;
- Net income decreased $11.5 million to $13.8 million primarily as a result of $24.7 million of fourth quarter restructuring costs;
- Adjusted EBITDA increased $2.7 million to $67.3 million (see Schedule A for a reconciliation to net income); and
- Diluted EPS of $0.69 and Adjusted Diluted EPS of $1.86 as compared to $1.28 and $1.79 in the year-ago period, respectively (see Schedule C for a reconciliation to Diluted EPS)
Fourth Quarter 2019
(Comparisons vs. same period year-ago)
- Net sales decreased 14.9% to $80.2 million;
- Gross profit decreased 68.3% to $12.3 million as a result of certain restructuring expenses;
- Net income decreased $17.2 million to a net loss of $12.3 million primarily as a result of $24.7 million of fourth quarter restructuring costs;
- Adjusted EBITDA decreased 17.3% to $14.2 million (see Schedule A for a reconciliation to net income); and
- Diluted EPS of $(0.62) and Adjusted Diluted EPS of $0.41 as compared to $0.25 and $0.51 in the year-ago period, respectively (see Schedule C for a reconciliation to Diluted EPS)
“We entered 2019 with strong momentum across the board. However, in late summer, negative media headlines began to impact the vaping market resulting in a sustained and dramatic business disruption in both the third and fourth quarters. We reacted quickly, consolidating the vaping business and cutting company-wide headcount by more than 10%. Fourth quarter 2019 was a solid quarter for our core tobacco segment and an important transition period for our NewGen segment,” said Larry Wexler, President and CEO.
“As part of our previously announced review of strategic alternatives on third-party vaping, we restructured our operations into one system closing two offices, shut down unprofitable dropship and third-party resellers, consolidated four warehouses into one and continued to eliminate underperforming stores and deemphasize retail operations. We have stabilized the vaping business at smaller, but still profitable levels. We will continue to evaluate the business as we progress through the PMTA process.”
“Our ambition continues to focus on creating value for our shareholders by delivering quality products to satisfy the evolving preferences of consumers in the actives market. In 2020, we expect to continue growing market share and driving operating leverage in MST, expanding Zig-Zag in the alternatives space and further enhancing our product pipeline at Nu-X. Additionally, we look forward to potentially significant upside as the FDA PMTA process provides a sizeable opportunity as the industry consolidates.”
On December 23, 2019, TPB announced it had executed a binding letter of intent with BAT’s Canadian subsidiary, our Canadian partner and distributor of Zig-Zag rolling papers (“BAT Canada”). The newly executed agreement provides the foundation for accelerated success in the dynamic Canadian marketplace with the ability to complement the traditional Direct-Store-Delivery network of BAT Canada with supplemental distribution in the alternative channels space, including dispensaries, through our recently established partnership with ReCreation Marketing. Our first Zig-Zag papers purchase order from ReCreation Marketing was received in February 2020.
On February 25, the TPB board of directors approved a $50 million share repurchase authorization, which is intended for opportunistic execution based upon a variety of factors including market conditions. The program will be subject to the ongoing discretion of the board. “The new share repurchase authorization demonstrates our commitment to allocate capital in a manner that maximizes total shareholder return,” said Wexler.
The board increased the dividend approximately 11% and declared a quarterly dividend of $0.05 per common share. The dividend will be paid on April 10, 2020, to shareholders of record on the close of business March 20, 2020.
Since the SG&A reduction plan we announced in November, the company has executed approximately $7 million of run-rate cost savings out of the $8 – $10 million committed. TPB expects to reach the target range by the end of the second quarter. TPB ended the year with $95 million of cash on the balance sheet and $141 million of available liquidity dedicated to capital deployment. The company continues to actively engage in potential acquisition discussions with multiple candidates. There can be no guarantee that these discussions will result in any transactions.
Smokeless Products Segment (31% of total net sales in the quarter)
For the fourth quarter, Smokeless products net sales increased 8.0% to $25.0 million on continuing double-digit volume growth of Stoker’s MST, partially offset by declining sales in chewing tobacco. MST represented 54% of Smokeless revenues in the quarter, up from 48% a year earlier. In the quarter, total Smokeless segment volume increased 6.5% and price/mix advanced 1.5%.
For the full year 2019, Smokeless product net sales increased 11.0% to a record $99.9 million. For the year, total Smokeless volume increased 7.3% and price/mix advanced 3.7%.
“Stoker’s MST gains continue to be powered by consumer enthusiasm in existing stores and broadened availability in higher velocity chains, producing yet another record share. Cans continue to create a tailwind for tubs which more fully binds the consumer to the brand,” said Graham Purdy, Chief Operating Officer.
For the quarter, Smokeless segment gross profit increased 5.1% to $12.6 million. Segment gross margin contracted 140 basis points to 50.2%, driven primarily by higher promotional support levels.
For the year 2019, segment gross profit increased 12.4% to $52.3 million, while gross margins expanded 70 basis points to 52.3%.
Smoking Products Segment (34% of total net sales in the quarter)
Fourth quarter net sales of Smoking products increased 1.9% from year-ago to $27.6 million. Fourth quarter Smoking products volume decreased 0.6% while price/mix increased 2.5%.
For the full year 2019, Smoking products net sales decreased $2.8 million to $108.7 million, principally due to the previously discussed Canadian papers disruption and a $2.4 million erosion in Cigars / MYO / Pipe. For the year, total Smoking segment volumes decreased 4.9% and price/mix increased 2.4%.
Zig-Zag cones continue to grow from expanded distribution and increased market share in stores selling. At the end of the quarter Zig-Zag cones were available in approximately 22,000 retail outlets and, according to MSAi, had captured a double-digit market share.
“We are especially encouraged with the continued progress on our new introductions, where the latest MSAi data indicates we have the number one hemp product and have already captured greater than 20% of the measured cones market,” said Purdy.
For the quarter, Smoking products gross profit increased 12.0% to $15.5 million as compared to year-ago with gross margin expanding 500 basis points to 56.3%.
For the year 2019, Smoking segment gross profit increased 4.1% to $59.4 million, while gross margin expanded 340 basis points to 54.6%.
NewGen (New Generation) Products Segment (35% of total net sales in the quarter)
For the fourth quarter, NewGen segment net sales contracted 37.3% to $27.6 million as a result of consolidation of operations and the previously discussed disruption in the vapor market. Fourth quarter net sales results include $1.5 million of contra revenues related to forecasted returns. CBD, Solace and other Nu-X products continued to grow in the quarter.
For the year 2019, NewGen net sales increased 16.9% to $153.4 million.
“The vape disruption drove profitability of the NewGen segment negative starting in September, which continued through November when we restructured the business. We have fully addressed the obsolete inventory issue associated with the accelerated PMTA timing and newly announced flavor regulation. We simultaneously initiated a methodical restructuring effort to provide a clean runway for renewed growth. We have shrunk the vape business down to a flexible and profitable size as the industry consolidates due to the PMTA,” said Purdy.
NewGen gross profit in the quarter was impacted by $23.2 million of related write-offs and reserves primarily associated with the vape disruption. For the full year 2019, NewGen gross profit decreased $13.9 million to $25.1 million as a result of the vape disruption and certain one-time write-down and write-off expenses associated with our NewGen restructuring. Fourth quarter 2019 and full year 2019 NewGen results include $2.7 million and $9.3 million of tariff expense, respectively.
Other Events and Performance Measures in the Fourth Quarter
The fourth quarter had notable non-recurring impacts:
- $24.7 million in corporate and vape restructuring reserves consisting of vapor inventory reserves, severance and location closure costs;
- $2.5 million of Nu-X launch costs as compared to $0.6 million in year-ago launch costs;
- $1.9 million in FDA PMTA expenses as compared to $0.0 million a year-ago;
- $0.2 million of transaction expenses, principally related to the Solace and ReCreation Marketing transactions as compared to $1.7 million a year-ago for transaction and strategic expenses;
- $4.9 million non-cash gain related to restructuring of post retirement plan; and
- $2.0 million non-cash mark-to-market gain related to our investment in…