Turning Point Brands Announces Second Quarter 2022 Results

Jul 27th, 2022 11:30 EST

LOUISVILLE, Ky.--(BUSINESS WIRE)--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 second quarter ended June 30, 2022.

Q2 2022 vs. Q2 2021

  • Net sales decreased 16.1 percent to $102.9 million
    • Combined net sales for Zig-Zag and Stoker’s Products demonstrated resilience decreasing 0.9 percent for the quarter
    • NewGen net sales declined by 45.1 percent (declined 2.1 percent sequentially)
  • Gross profit decreased 14.2 percent to $51.5 million
  • Net income decreased 64.7 percent to $5.4 million
  • Adjusted EBITDA decreased 17.6 percent to $24.7 million (see Schedule A for a reconciliation to net income)
  • Diluted EPS of $0.30 and Adjusted Diluted EPS of $0.70 as compared to $0.73 and $0.84 in the same period one year ago, respectively (see Schedule B for a reconciliation to Diluted EPS)

“We are pleased with the stable performance of both the Zig-Zag and Stoker’s segments during the quarter in light of a heightened inflationary environment for our customers with rising prices at the pump impacting consumer traffic in convenience stores. While overall sales decreased 16 percent from the previous year, Zig-Zag and Stoker’s sales were steady despite weakness in the wraps and loose leaf subsegments. Zig-Zag maintained its leading positions in both the roll-your-own paper and cigar wraps markets while Stoker’s MST experienced accelerated share gains driven by consumer trade-down to the value category. Despite NewGen revenue decreasing 45 percent from last year, the segment remained relatively stable from the previous quarter and profitable as we continue to monitor FDA regulatory developments,” said Yavor Efremov, President and CEO. “We continued to deploy a substantial amount of our free cash flow towards share repurchases during the quarter while maintaining a strong balance sheet providing us with optionality on further capital deployment.”

Mr. Efremov concluded, “Going forward, we maintain a favorable outlook on our underlying business and our competitive positioning. However, given the market environment during the second quarter, along with continued inflationary pressures and resulting uncertainty of consumer confidence, we feel it is prudent to adjust our outlook for the year.”

Zig-Zag Products Segment (45 percent of total net sales in the quarter)

For the second quarter, Zig-Zag Products remained broadly in-line with a record performance in 2021 with net sales decreasing 2.1 percent to $46.2 million against a tough comparable period when sales increased 72.3 percent in the prior year period. TPB’s U.S. rolling papers and e-commerce business, and its Canadian business both grew double-digits. However, this was offset by a decline in the cigar wraps business driven partially by a trade inventory reduction during the current period compared against a trade inventory load in the prior year period. Wild Hemp sales moved into the Zig-Zag Products segment during the current year period, which contributed $0.2 million, or 0.4 percent to segment sales. For the second quarter, total Zig-Zag Products segment volume decreased 2.3 percent, while price / mix increased 0.2 percent.

For the quarter, the Zig-Zag Products segment gross profit decreased 4.7 percent to $26.4 million. The segment’s gross margin declined 160 basis points to 57.2 percent driven primarily by strong growth in lower gross margin products.

“Paper cones and Zig-Zag’s e-commerce business once again drove the growth within our U.S. papers business,” said Graham Purdy, Chief Operating Officer. “Our wraps business saw a double-digit decline due to a tough comparable against a trade inventory load in the prior year period. We are excited to have recently launched distribution of CLIPPER lighters which we expect to ramp up through the second half of the year.”

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

For the second quarter, Stoker’s Products net sales increased 0.7 percent to $33.6 million. MST grew mid-single digits but was offset by a decline in loose-leaf chewing tobacco. MST represented 65 percent of Stoker’s Products revenues in the quarter, up from 62 percent a year earlier. FRE nicotine pouch products’ sales moved into the Stoker’s Products segment during the current year period and contributed $0.2 million or 0.5 percent to segment sales. For the second quarter, total Stoker’s Products segment volume decreased 6.1 percent, while price / mix increased 6.8 percent.

For the quarter, the Stoker’s Products segment gross profit decreased 0.4 percent to $18.1 million. The segment’s gross margin contracted 60 basis points to 53.8 percent due to an inventory write-down of certain FRE products due to rationalization of the product line ahead of the regulatory filing deadline. The segment’s gross margin expanded 80 basis points excluding FRE.

“Stoker’s continued to outperform the market with share gains in both the MST and loose-leaf chewing tobacco categories during the quarter,” continued Purdy. “With the current inflationary environment accelerating the secular down-trading trends in the industry, Stoker’s remains well positioned within its categories as a leading value brand.”

NewGen Products Segment (22 percent of total net sales in the quarter)

For the second quarter, NewGen Products net sales decreased 45.1 percent to $23.1 million. The regulatory environment for the vape businesses continues to impact sales.

For the quarter, the NewGen Products segment gross profit decreased 50.6 percent to $7.0 million. The segment gross margin contracted 340 basis points from the previous year to 30.1 percent due to product mix and the competitive environment.

“Despite another challenging quarter further impacted by new regulation around synthetic nicotine products, our vape business remained profitable,” concluded Purdy. “Meanwhile, our distribution capabilities continued to improve through the quarter as we position our business for a post-PMTA environment while our vapor products’ applications remain under FDA review.”

Performance Measures in the Second Quarter

Second quarter consolidated selling, general and administrative (“SG&A”) expenses were $33.3 million compared to $35.1 million in the second quarter of 2021.

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

  • $0.3 million of restructuring expenses compared to none in the previous year
  • $0.9 million of ERP / CRM scoping expenses and duplicative system costs compared to none in the previous year
  • $1.5 million of stock options, restricted stock and incentive expense compared to $2.8 million in the year-ago period
  • $0.4 million of transaction expenses compared to $0.7 million in the year-ago period
  • $2.0 million of FDA PMTA-related expenses compared to $0.6 million in the year-ago period
  • $1.6 million from the accounting consolidation of Turning Point Brands Canada compared to $1.1 in the year-ago period with the increase driven by the inclusion of a full quarter of the DVW acquisition in the current period

Total gross debt as of June 30, 2022 was $422.5 million. The corresponding net debt (total gross debt less cash) at June 30, 2022 was $315.1 million. The Company ended the quarter with total liquidity of $128.8 million, comprised of $107.4 million in cash and $21.4 million of revolving credit facility capacity.

During the quarter, the Company spent $8.8 million to repurchase 301,662 shares at an average price of $29.16 per share. The Company also recorded an additional impairment of $6.3 million during the quarter related to its investment in dosist.

2022 Outlook

Due to the uncertain macro environment and slower than expected improvement in our NewGen Products segment, the Company now expects the following full-year 2022 results:

  • Zig-Zag Products sales of $193 to $200 million (compared to previous outlook of $193 to $203 million)
  • Stoker’s Products sales of $127 to $133 million
  • Consolidated adjusted EBITDA of $97 to $103 million

Earnings Conference Call

As previously disclosed, a conference call with the investment community to review TPB’s financial results has been scheduled for 8:30 a.m. Eastern on Wednesday, July 27, 2022. 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 diluted EPS and Adjusted Operating Income. 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, and its emerging brands within the NewGen segment. TPB’s products are available in more than 215,000 retail outlets in North America, and on sites such as www.zigzag.com and www.solacevapor.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 June 30,

2022

 

2021

 
Net sales

$

102,925

 

$

122,643

 

Cost of sales

 

51,456

 

 

62,670

 

Gross profit

 

51,469

 

 

59,973

 

Selling, general, and administrative expenses

 

33,323

 

 

35,094

 

Operating income

 

18,146

 

 

24,879

 

Interest expense, net

 

5,144

 

 

5,522

 

Investment loss (income)

 

6,227

 

 

(110

)

Income before income taxes

 

6,775

 

 

19,467

 

Income tax expense

 

1,569

 

 

4,424

 

Consolidated net income

 

5,206

 

 

15,043

 

Net loss attributable to non-controlling interest

 

(218

)

 

(312

)

Net income attributable to Turning Point Brands, Inc.

$

5,424

 

$

15,355

 

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

$

0.30

 

$

0.81

 

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

$

0.30

 

$

0.73

 

Weighted average common shares outstanding:
Basic

 

18,063,259

 

 

18,975,522

 

Diluted

 

21,443,279

 

 

22,489,662

 

 
Supplemental disclosures of statements of income information:
Excise tax expense

$

6,141

 

$

7,687

 

FDA fees

$

171

 

$

180

 

 
Turning Point Brands, Inc.
Consolidated Balance Sheets
(dollars in thousands except share data)
 

(unaudited)

 

 

June 30,

 

December 31,

ASSETS

2022

 

2021

Current assets:
Cash

$

107,429

 

$

128,320

 

Accounts receivable, net of allowances of $161 in 2022 and $262 in 2021

 

9,177

 

 

6,496

 

Inventories

 

115,129

 

 

87,607

 

Other current assets

 

27,353

 

 

26,746

 

Total current assets

 

259,088

 

 

249,169

 

Property, plant, and equipment, net

 

22,376

 

 

18,650

 

Deferred income taxes

 

2,111

 

 

1,363

 

Right of use assets

 

13,749

 

 

15,053

 

Deferred financing costs, net

 

335

 

 

388

 

Goodwill

 

162,385

 

 

162,333

 

Other intangible assets, net

 

86,566

 

 

87,485

 

Master Settlement Agreement (MSA) escrow deposits

 

29,224

 

 

31,720

 

Other assets

 

28,475

 

 

35,399

 

Total assets

$

604,309

 

$

601,560

 

 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable

$

14,436

 

$

7,361

 

Accrued liabilities

 

34,560

 

 

32,937

 

Other current liabilities

 

38

 

 

38

 

Total current liabilities

 

49,034

 

 

40,336

 

Notes payable and long-term debt

 

415,410

 

 

414,172

 

Lease liabilities

 

11,934

 

 

13,336

 

Total liabilities

 

476,378

 

 

467,844

 

 
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; 19,797,735 issued shares and 17,890,441 outstanding shares at June 30, 2022, and 19,690,884 issued shares and 18,395,476 outstanding shares at December 31, 2021

 

198

 

 

197

 

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

 

-

 

 

-

 

Additional paid-in capital

 

110,563

 

 

108,811

 

Cost of repurchased common stock (1,907,294 shares at June 30, 2022 and 1,295,408 shares at December 31, 2021)

 

(68,287

)

 

(48,869

)

Accumulated other comprehensive loss

 

(2,064

)

 

(195

)

Accumulated earnings

 

85,641

 

 

71,460

 

Non-controlling interest

 

1,880

 

 

2,312

 

Total stockholders' equity

 

127,931

 

 

133,716

 

Total liabilities and stockholders' equity

$

604,309

 

$

601,560

 

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

Six Months Ended June 30,

2022

 

2021

Cash flows from operating activities:
Consolidated net income

$

15,977

 

$

26,570

 

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

 

-

 

 

5,706

 

Gain on sale of property, plant, and equipment

 

(8

)

 

(2

)

Depreciation expense

 

1,750

 

 

1,546

 

Amortization of other intangible assets

 

919

 

 

954

 

Amortization of deferred financing costs

 

1,291

 

 

1,251

 

Deferred income tax (benefit) expense

 

(146

)

 

1,027

 

Stock compensation expense

 

2,661

 

 

4,263

 

Noncash lease income

 

(6

)

 

(19

)

Loss (gain) on investments

 

6,258

 

 

(34

)

Changes in operating assets and liabilities:
Accounts receivable

 

(2,673

)

 

3,955

 

Inventories

 

(27,499

)

 

(12,007

)

Other current assets

 

(598

)

 

813

 

Other assets

 

624

 

 

599

 

Accounts payable

 

7,240

 

 

1,423

 

Accrued liabilities and other

 

1,359

 

 

1,370

 

Net cash provided by operating activities

$

7,149

 

$

37,415

 

 
Cash flows from investing activities:
Capital expenditures

$

(5,694

)

$

(2,170

)

Acquisitions, net of cash acquired

 

-

 

 

(3,419

)

Payments for investments

 

-

 

 

(8,657

)

Restricted cash, MSA escrow deposits

 

(10,078

)

 

(20,147

)

Proceeds on the sale of property, plant and equipment

 

63

 

 

2

 

Net cash used in investing activities

$

(15,709

)

$

(34,391

)

 
Cash flows from financing activities:
Proceeds from Senior Secured Notes

$

-

 

$

250,000

 

Payments of 2018 first lien term loan

 

-

 

 

(130,000

)

Settlement of interest rate swaps

 

-

 

 

(3,573

)

Payment of dividends

 

(2,181

)

 

(2,006

)

Payments of financing costs

 

-

 

 

(6,921

)

Exercise of options

 

475

 

 

886

 

Redemption of options

 

(155

)

 

(2,111

)

Redemption of performance restricted stock units

 

(1,228

)

 

-

 

Common stock repurchased

 

(19,418

)

 

(14,086

)

Net cash provided by (used in) financing activities

$

(22,507

)

$

92,189

 

 
Net (decrease) increase in cash

$

(31,067

)

$

95,213

 

Effect of foreign currency translation on cash

$

56

 

$

315

 

 
Cash, beginning of period:
Unrestricted

 

128,320

 

 

41,765

 

Restricted

 

15,155

 

 

35,074

 

Total cash at beginning of period

 

143,475

 

 

76,839

 

 
Cash, end of period:
Unrestricted

 

107,429

 

 

157,474

 

Restricted

 

5,035

 

 

14,893

 

Total cash at end of period

$

112,464

 

$

172,367

 

 

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, 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 diluted EPS, 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 diluted EPS 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 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 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 EBITDA Adjusted diluted EPS 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

June 30,

2022

 

2021

Net income attributable to Turning Point Brands, Inc.

$

5,424

$

15,355

Add:
Interest expense, net

 

5,144

 

5,522

Income tax expense

 

1,569

 

4,424

Depreciation expense

 

879

 

758

Amortization expense

 

456

 

479

EBITDA

$

13,472

$

26,538

Components of Adjusted EBITDA

Corporate restructuring (a)

 

270

 

-

ERP/CRM (b)

 

861

 

-

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

 

1,502

 

2,764

Transactional expenses (d)

 

364

 

702

FDA PMTA (e)

 

1,957

 

-

Non-cash asset impairment (f)

 

6,300

 

-

Adjusted EBITDA

$

24,726

$

30,004

 
 
(a) Represents costs associated with corporate restructuring, including severance.
(b) Represents cost associated with scoping new ERP and CRM systems.
(c) Represents non-cash stock options, restricted stock, incentives expense and Solace performance stock units.
(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 in dosist.
Schedule B
 
Turning Point Brands
Reconciliation of GAAP diluted EPS to Adjusted diluted EPS
(dollars in thousands except share data)
(unaudited)

Three Months Ended

June 30,

2022

 

2021

GAAP EPS

$

0.30

$

0.73

 

Corporate restructuring (a)

 

0.01

 

-

 

ERP/CRM (b)

 

0.03

 

-

 

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

 

0.05

 

0.09

 

Transactional expenses (d)

 

0.01

 

0.02

 

FDA PMTA (e)

 

0.07

 

-

 

Non-cash asset impairment (f)

 

0.23

 

-

 

Tax (expense) benefit (g)

 

0.00

 

(0.01

)

Adjusted diluted EPS

$

0.70

$

0.84

 

 
 
Totals may not foot due to rounding
(a) Represents costs associated with corporate restructuring, including severance, tax effected at the quarterly tax rate.
(b) Represents cost associated with scoping new ERP and CRM systems tax effected at the quarterly tax rate.
(c) Represents non-cash stock options, restricted stock, incentives expense and Solace PRSUs tax effected at the quarterly tax rate.
(d) Represents the fees incurred for transaction expenses tax effected at the quarterly tax rate.
(e) Represents costs associated with applications related to the FDA PMTA tax effected at the quarterly tax rate.
(f) Represents impairment of investment in dosist tax effected at the quarterly tax rate.
(g) Represents adjustment from quarterly tax rate to annual projected tax rate of 23% in 2022 and 2021.
 
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

 

NewGen Products

2nd Quarter

 

2nd Quarter

 

2nd Quarter

 

2nd Quarter

 

2nd Quarter

 

2nd Quarter

 

2nd Quarter

 

2nd Quarter

2022

 

2021

 

2022

 

2021

 

2022

 

2021

 

2022

 

2021

 
Net sales

$

102,925

$

122,643

$

46,226

$

47,202

$

33,588

$

33,369

$

23,111

$

42,072

 
Gross profit

$

51,469

$

59,973

$

26,430

$

27,743

$

18,079

$

18,146

$

6,960

$

14,084

 
Operating income

$

18,146

$

24,879

$

18,503

$

21,338

$

13,378

$

13,826

$

552

$

1,657

Adjustments:
Corporate restructuring

 

270

 

-

 

-

 

-

 

-

 

-

 

-

 

-

ERP/CRM

 

861

 

-

 

-

 

-

 

-

 

-

 

-

Transactional expenses

 

364

 

702

 

-

 

-

 

-

 

-

 

-

 

-

FDA PMTA

 

1,957

 

-

 

-

 

-

 

-

 

-

 

-

 

-

Adjusted operating income

$

21,598

$

25,581

$

18,503

$

21,338

$

13,378

$

13,826

$

552

$

1,657

 

 

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