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Turning Point Brands Announces First Quarter 2023 Results

-Net Sales for Q1 2023 Increased 0.1 Percent Year-Over-Year

Turning Point Brands, Inc. (“TPB” or “the Company”) (NYSE: TPB), a manufacturer, marketer and distributor of branded consumer products, including alternative smoking accessories and consumables with active ingredients, announced today financial results for the first quarter ended March 31, 2023.

Q1 2023 vs. Q1 2022

  • Total consolidated net sales increased 0.1% to $101.0 million
    • Zig-Zag Products net sales decreased by 8.3% due to anticipated reduction of trade inventory during the quarter
    • Stoker’s Products net sales increased by 6.2%
    • Creative Distribution Solutions net sales increased by 8.0%
  • Gross profit decreased 6.1% to $48.6 million
  • Net income decreased 30.9% to $7.6 million
  • Adjusted net income decreased 18.1% to $11.9 million (see Schedule B for a reconciliation to net income)
  • Adjusted EBITDA decreased 17.7% to $20.8 million (see Schedule A for a reconciliation to net income)
  • Diluted EPS of $0.41 and Adjusted Diluted EPS of $0.62 compared to $0.55 and $0.71 in the same period one year ago, respectively (see Schedule B for a reconciliation to Diluted EPS)

Graham Purdy, President and CEO, commented: “We are encouraged by our first quarter operating results which fell within our expectations. The Zig-Zag segment had an anticipated inventory reduction with certain wholesale customers but saw strong performance from the alternative channel and the roll-out of CLIPPER lighters. With the adjustment in trade inventory, Zig-Zag is now well-positioned to demonstrate growth for the balance of the year. Stoker’s had a solid quarter of performance as the value proposition of Stoker’s MST and looseleaf led to another quarter of market share gains. We opportunistically purchased another $13.9 million in aggregate principal amount of our convertible notes during the first quarter while maintaining a strong cash balance. We are currently maintaining our annual guidance as we focus on executing against our plan for the balance of the year.”

Zig-Zag Products Segment (42% of total net sales in the quarter)

For the first quarter, Zig-Zag Products net sales decreased 8.3% to $41.9 million. TPB’s Canadian and other smoking accessories businesses saw strong growth during the quarter. This was offset by anticipated declines in the U.S. rolling papers and wraps businesses which were impacted by reduction of trade inventory during the quarter. For the first quarter, total Zig-Zag Products segment volume decreased 8.6%, while price / mix increased 0.3%.

For the quarter, the Zig-Zag Products segment gross profit decreased 15.0% to $22.4 million. Gross margin declined 420 basis points to 53.5% driven primarily by product mix including the decline of higher margin U.S. rolling paper and wraps products and contribution of CLIPPER lighters which operates at lower gross profit margins.

“Zig-Zag papers and wraps demonstrated solid results in-light of planned inventory reduction with certain customers. Our e-commerce business had another quarter of double-digit growth as we continue to build our presence in the alternative channel,” said Purdy. “The acceptance of CLIPPER lighters within the trade remains encouraging and sets up well for increased penetration going forward.”

Stoker’s Products Segment (33% of total net sales in the quarter)

For the first quarter, Stoker’s Products net sales increased 6.2% to $33.7 million on high single-digit growth of MST and low-single digit growth of loose-leaf chewing tobacco. For the first quarter, total Stoker’s Products segment volume increased 0.3%, while price / mix increased 5.9%.

For the quarter, the Stoker’s Products segment gross profit increased 10.1% to $19.5 million. Gross margin expanded 200 basis points to 57.8% due to MST pricing gains.

“Stoker’s saw another quarter of solid performance with strong market share gains in both the MST and loose-leaf chewing tobacco categories as its value proposition continues to resonate with consumers,” continued Purdy.

Performance Measures in the First Quarter

First quarter consolidated selling, general and administrative (“SG&A”) expenses were $30.8 million compared to $32.6 million in the first quarter of 2022.

The first quarter SG&A included the following notable items:

  • $0.1 million of ERP / CRM duplicative system costs compared to $0.3 million of ERP / CRP scoping expenses in the previous year
  • $0.7 million of stock options, restricted stock and incentive expense compared to $1.2 million in the year-ago period
  • $0.2 million of FDA PMTA-related expenses compared to $1.1 million in the year-ago period
  • $0.0 million of transaction expenses as compared to $0.4 million in the year-ago period
  • $0.0 million of restructuring costs as compared to $1.3 million in the year-ago period

Total gross debt as of March 31, 2023 was $398.6 million. The corresponding net debt (total gross debt less cash) at March 31, 2023 was $293.8 million. The Company ended the quarter with total liquidity of $128.4 million, comprised of $104.8 million in cash and $23.6 million of revolving credit facility capacity.

During the quarter, the Company repurchased $13.9 million in aggregate principal amount of its 2.50% Convertible Senior Notes due July 2024.

The Company recorded an impairment charge of $4.9 million during the quarter related to a minority investment in a development stage venture.

2023 Outlook

At this time, the Company is maintaining its previous expectation of full-year 2023 adjusted EBITDA to be $88 to $94 million.

Creative Distribution Solutions (“CDS”) (25% of total net sales in the quarter)

For the first quarter, CDS (formerly the Company’s “NewGen” segment) net sales were $25.4 million, gross was $6.8 million, and gross margin was 26.6%.

Earnings Conference Call

As previously disclosed, a conference call with the investment community to review TPB’s financial results has been scheduled for 10:00 a.m. Eastern on Wednesday, May 3, 2023. Investment community participants should dial in 10 minutes ahead of time using the toll-free number 888-330-2502 (international participants should call 240-789-2713), and follow the audio prompts after typing in the event ID: 6640134. A live listen-only webcast of the call will be available on 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 two 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 EBITDA, Adjusted EBITDA, Adjusted Net Income, Adjusted Diluted EPS and Adjusted Operating Income (Loss). A reconciliation of these non-GAAP financial measures accompanies this release.

About Turning Point Brands, Inc.

Turning Point Brands (NYSE: TPB) is a manufacturer, marketer and distributor of branded consumer products including alternative smoking accessories and consumables with active ingredients through its iconic Zig-Zag® and Stoker’s® brands. TPB’s products are available in more than 215,000 retail outlets in North America, and on sites such as www.zigzag.com. For the latest news and information about TPB and its brands, please visit 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, these statements are not guarantees of future performance and 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, its reports filed with the Securities and Exchange Commission (the “SEC”) and other public statements made from time-to-time speak only as of the date made. New risks and uncertainties come up from time to time, and it is impossible for TPB to predict or identify all such 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 those included it the Company’s Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and other reports filed by the Company with the SEC. These statements constitute the Company’s cautionary statements under the Private Securities Litigation Reform Act of 1995.

Financial Statements Follow:

Turning Point Brands, Inc.
Consolidated Statements of Income
(dollars in thousands except share data)
(unaudited)
 
Three Months Ended March 31,

 

2023

 

 

2022

 

 
Net sales

$

100,956

 

$

100,894

 

Cost of sales

 

52,339

 

 

49,100

 

Gross profit

 

48,617

 

 

51,794

 

Selling, general, and administrative expenses

 

30,775

 

 

32,565

 

Operating income

 

17,842

 

 

19,229

 

Interest expense, net

 

4,010

 

 

5,196

 

Investment loss (gain)

 

4,799

 

 

(78

)

Gain on extinguishment of debt

 

(777

)

 

-

 

Income before income taxes

 

9,810

 

 

14,111

 

Income tax expense

 

2,468

 

 

3,340

 

Consolidated net income

 

7,342

 

 

10,771

 

Net loss attributable to non-controlling interest

 

(255

)

 

(227

)

Net income attributable to Turning Point Brands, Inc.

$

7,597

 

$

10,998

 

 
Basic income per common share:
Net income attributable to Turning Point Brands, Inc.

$

0.43

 

$

0.60

 

Diluted income per common share:
Net income attributable to Turning Point Brands, Inc.

$

0.41

 

$

0.55

 

Weighted average common shares outstanding:
Basic

 

17,531,414

 

 

18,257,695

 

Diluted

 

20,669,152

 

 

21,749,510

 

 
Supplemental disclosures of statements of income information:
Excise tax expense

$

5,024

 

$

5,709

 

FDA fees

$

195

 

$

124

 

 
Turning Point Brands, Inc.
Consolidated Balance Sheets
(dollars in thousands except share data)
 
(unaudited)
March 31, December 31,
ASSETS

 

2023

 

 

2022

 

Current assets:
Cash

$

104,801

 

$

106,403

 

Accounts receivable, net of allowances of $101 in 2023 and $114 in 2022

 

8,584

 

 

8,377

 

Inventories

 

113,738

 

 

119,915

 

Other current assets

 

19,961

 

 

22,959

 

Total current assets

 

247,084

 

 

257,654

 

Property, plant, and equipment, net

 

24,364

 

 

22,788

 

Deferred income taxes

 

8,069

 

 

8,443

 

Right of use assets

 

11,722

 

 

12,465

 

Deferred financing costs, net

 

256

 

 

282

 

Goodwill

 

136,253

 

 

136,253

 

Other intangible assets, net

 

82,821

 

 

83,592

 

Master Settlement Agreement (MSA) escrow deposits

 

28,710

 

 

27,980

 

Other assets

 

20,647

 

 

22,649

 

Total assets

$

559,926

 

$

572,106

 

 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable

$

10,390

 

$

8,355

 

Accrued liabilities

 

25,932

 

 

33,001

 

Other current liabilities

 

20

 

 

20

 

Total current liabilities

 

36,342

 

 

41,376

 

Notes payable and long-term debt

 

393,578

 

 

406,757

 

Lease liabilities

 

10,072

 

 

10,593

 

Total liabilities

 

439,992

 

 

458,726

 

 
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; 19,901,989 issued shares
and 17,585,529 outstanding shares at March 31, 2023, and 19,801,623 issued shares and
17,485,163 outstanding shares at December 31, 2022

 

199

 

 

198

 

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

 

-

 

 

-

 

Additional paid-in capital

 

113,477

 

 

113,242

 

Cost of repurchased common stock
(2,316,460 shares at March 31, 2023 and December 31, 2022)

 

(78,093

)

 

(78,093

)

Accumulated other comprehensive loss

 

(2,234

)

 

(2,393

)

Accumulated earnings

 

85,133

 

 

78,691

 

Non-controlling interest

 

1,452

 

 

1,735

 

Total stockholders' equity

 

119,934

 

 

113,380

 

Total liabilities and stockholders' equity

$

559,926

 

$

572,106

 

 
Turning Point Brands, Inc.
Consolidated Statements of Cash Flows
(dollars in thousands)
(unaudited)
 

Three Months Ended March 31,

 

2023

 

 

2022

 

Cash flows from operating activities:
Consolidated net income

$

7,342

 

$

10,771

 

Adjustments to reconcile net income to net cash provided by operating activities:
Gain on extinguishment of debt

 

(777

)

 

-

 

Loss (gain) on sale of property, plant, and equipment

 

(6

)

 

1

 

Depreciation expense

 

776

 

 

871

 

Amortization of other intangible assets

 

771

 

 

463

 

Amortization of deferred financing costs

 

626

 

 

645

 

Deferred income tax expense (benefit)

 

299

 

 

(34

)

Stock compensation expense

 

743

 

 

1,159

 

Noncash lease income

 

(14

)

 

(5

)

Loss (gain) on investments

 

4,897

 

 

(14

)

Changes in operating assets and liabilities:
Accounts receivable

 

(216

)

 

(2,958

)

Inventories

 

6,173

 

 

(18,258

)

Other current assets

 

2,639

 

 

1,081

 

Other assets

 

(2,895

)

 

382

 

Accounts payable

 

2,051

 

 

22,101

 

Accrued liabilities and other

 

(7,025

)

 

(3,165

)

Net cash provided by operating activities

$

15,384

 

$

13,040

 

 
Cash flows from investing activities:
Capital expenditures

$

(2,435

)

$

(2,787

)

Restricted cash, MSA escrow deposits

 

-

 

 

(8,468

)

Proceeds on the sale of property, plant and equipment

 

3

 

 

1

 

Net cash used in investing activities

$

(2,432

)

$

(11,254

)

 
Cash flows from financing activities:
Repurchased Convertible Senior Notes

$

(13,002

)

$

-

 

Proceeds from call options

 

33

 

 

-

 

Payment of dividends

 

(1,052

)

 

(1,022

)

Exercise of options

 

357

 

 

245

 

Redemption of performance restricted stock units

 

(889

)

 

(1,141

)

Common stock repurchased

 

-

 

 

(10,622

)

Net cash used in financing activities

$

(14,553

)

$

(12,540

)

 
Net decrease in cash

$

(1,601

)

$

(10,754

)

Effect of foreign currency translation on cash

$

(1

)

$

(3

)

 
Cash, beginning of period:
Unrestricted

 

106,403

 

 

128,320

 

Restricted

 

4,929

 

 

15,155

 

Total cash at beginning of period

 

111,332

 

 

143,475

 

 
Cash, end of period:
Unrestricted

 

104,801

 

 

126,045

 

Restricted

 

4,929

 

 

6,673

 

Total cash at end of period

$

109,730

 

$

132,718

 

 

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 Net Income, Adjusted Diluted EPS, Adjusted Gross Profit and Adjusted Operating Income. We believe Adjusted EBITDA provides useful information to management and investors regarding certain financial and business trends relating to our financial condition and results of operations. Adjusted EBITDA, Adjusted Net Income, Adjusted Diluted EPS, Adjusted Gross Profit and Adjusted Operating Income are used by management to compare our performance to that of prior periods for trend analyses and planning purposes and are presented to our board of directors. We believe that EBITDA, Adjusted EBITDA, Adjusted Net Income, Adjusted Diluted EPS, Adjusted Gross Profit and Adjusted Operating Income are appropriate measures of operating performance because they eliminate the impact of expenses that do not relate to business performance.

We define “EBITDA” as net income before interest expense, loss on extinguishment of debt, provision for income taxes, depreciation and amortization. We define “Adjusted EBITDA” as net income before interest expense, loss on extinguishment of debt, provision for income taxes, depreciation, amortization, other non-cash items and other items that we do not consider ordinary course in our evaluation of ongoing operating performance. We define “Adjusted Net Income” as net income excluding items that we do not consider ordinary course in our evaluation of ongoing operating performance. We define “Adjusted Diluted EPS” as diluted earnings per share excluding items that we do not consider ordinary course in our evaluation of ongoing operating performance. We define “Adjusted Gross Profit: as gross profit excluding other non-cash items and other items that we do not consider ordinary course in our evaluation of ongoing operating performance. We define “Adjusted Operating Income” as operating income excluding other non-cash items and other items that we do not consider ordinary course in our evaluation of ongoing operating performance.

Non-U.S. GAAP measures should not be considered a substitute for, or superior to, financial measures calculated in accordance with U.S. GAAP. EBITDA, Adjusted Net Income, Adjusted EBITDA Adjusted Diluted EPS, Adjusted Gross Profit and Adjusted Operating Income exclude significant expenses that are required by U.S. GAAP to be recorded in our financial statements and is subject to inherent limitations. In addition, other companies in our industry may calculate this non-U.S. GAAP measure differently than we do or may not calculate it at all, limiting its usefulness as a comparative measure.

In accordance with SEC rules, we have provided, in the supplemental information attached, a reconciliation of the non-GAAP measures to the next directly comparable GAAP measures.

Schedule A
 
Turning Point Brands, Inc.
Reconciliation of GAAP Net Income to Adjusted EBITDA
(dollars in thousands)
(unaudited)

Three Months Ended

March 31,

 

2023

 

 

2022

Net income attributable to Turning Point Brands, Inc.

$

7,597

 

$

10,998

Add:
Interest expense, net

 

4,010

 

 

5,196

Gain on extinguishment of debt

 

(777

)

-

Income tax expense

 

2,468

 

 

3,340

Depreciation expense

 

776

 

 

871

Amortization expense

 

771

 

 

463

EBITDA

$

14,845

 

$

20,868

Components of Adjusted EBITDA
Corporate restructuring (a)

 

-

 

 

1,332

ERP/CRM (b)

 

138

 

 

330

Stock options, restricted stock, and incentives expense (c)

 

743

 

 

1,159

Transactional expenses (d)

 

4

 

 

425

FDA PMTA (e)

 

158

 

 

1,139

Non-cash asset impairment (f)

 

4,897

 

 

-

Adjusted EBITDA

$

20,785

 

$

25,253

 
 
(a) Represents costs associated with corporate restructuring, including severance.
(b) Represents cost associated with scoping and mobilization of new ERP and CRM systems and cost of duplicative ERP licenses.
(c) Represents non-cash stock options, restricted stock, incentives expense and Solace performance stock units ("PRSUs").
(d) Represents the fees incurred for transaction expenses.
(e) Represents costs associated with applications related to FDA premarket tobacco product application ("PMTA").
(f) Represents impairment of investment assets.
Schedule B
 
Turning Point Brands
Reconciliation of GAAP Net Income to Adjusted Net Income and Diluted EPS to Adjusted Diluted EPS
(dollars in thousands except share data)
 
(unaudited) Three Months Ended Three Months Ended
March 31, 2023 March 31, 2022
Net Income Diluted EPS Net Income Diluted EPS
GAAP EPS

$

7,597

 

$

0.41

 

$

10,998

$

0.55

Gain on extinguishment of debt (a)

 

(582

)

 

(0.03

)

 

-

 

-

Corporate restructuring (b)

 

-

 

 

-

 

 

1,017

 

0.05

ERP/CRM (c)

 

103

 

 

0.00

 

 

252

 

0.01

Stock options, restricted stock, and incentives expense (d)

 

556

 

 

0.03

 

 

885

 

0.04

Transactional expenses (e)

 

3

 

 

0.00

 

 

324

 

0.01

FDA PMTA (f)

 

118

 

 

0.01

 

 

869

 

0.04

Non-cash asset impairment (g)

 

3,665

 

 

0.18

 

 

-

 

-

Tax (expense) benefit (h)

 

415

 

 

0.02

 

 

152

 

0.01

Adjusted

$

11,876

 

$

0.62

 

$

14,497

$

0.71

 
 
Totals may not foot due to rounding
 
(a) Represents gain on extinguishment of debt tax effected at the quarterly tax rate.
(b) Represents costs associated with corporate restructuring, including severance, tax effected at the quarterly tax rate.
(c) Represents cost associated with scoping and mobilization of new ERP and CRM systems and cost of duplicative ERP licenses tax effected at the quarterly tax rate.
(d) Represents non-cash stock options, restricted stock, incentives expense and Solace PRSUs tax effected at the quarterly tax rate.
(e) Represents the fees incurred for transaction expenses tax effected at the quarterly tax rate.
(f) Represents costs associated with applications related to the FDA PMTA tax effected at the quarterly tax rate.
(g) Represents impairment of investment assets tax effected at the quarterly tax rate.
(h) Represents adjustment from quarterly tax rate to annual projected tax rate of 23% in 2023 and 2022.
Schedule C
 
Turning Point Brands, Inc.
Reconciliation of GAAP Operating Income to Adjusted Operating Income
(dollars in thousands)
(unaudited)
 
Consolidated Zig-Zag Products Stoker's Products Creative Distribution Solutions
1st Quarter 1st Quarter 1st Quarter 1st Quarter 1st Quarter 1st Quarter 1st Quarter 1st Quarter

 

2023

 

2022

 

2023

 

2022

 

2023

 

2022

 

2023

 

2022

 
Net sales

$

100,956

$

100,894

$

41,887

$

45,672

$

33,662

$

31,703

$

25,407

$

23,519

 
Gross profit

$

48,617

$

51,794

$

22,390

$

26,343

$

19,465

$

17,686

$

6,762

$

7,765

 
Operating income

$

17,842

$

19,229

$

13,641

$

18,737

$

14,563

$

13,506

$

261

$

678

Adjustments:
Corporate restructuring

 

-

 

1,332

 

-

 

-

 

-

 

-

 

-

 

-

Transactional expenses

 

4

 

425

 

-

 

-

 

-

 

-

 

-

 

-

FDA PMTA

 

158

 

1,139

 

-

 

-

 

-

 

-

 

-

 

-

Adjusted operating income

$

18,004

$

22,125

$

13,641

$

18,737

$

14,563

$

13,506

$

261

$

678

 
 

 

Contacts

Investor Contacts

Turning Point Brands, Inc.:

Louie Reformina, Senior Vice President, CFO

Turning Point Brands, Inc.

502.774.9238

ir@tpbi.com

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