Zig-Zag Sales Drop 8% Sequentially in Q1

Turning Point Brands Announces First Quarter 2023 Results

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

LOUISVILLE, Ky.–(BUSINESS WIRE)-May 03, 2023-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 The acceptance of CLIPPER lighters within the trade remains encouraging and sets up well for increased penetration going forward.

Graham Purdy, President and CEO

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.

Financial Statements Follow:

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.

Original Press Release

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