Turning Point Brands, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; comparison is with Q1 2023 unless otherwise noted. Amounts are in U.S. dollars. The company manufactures, markets, and distributes branded consumer products through Zig-Zag Products, Stoker’s Products, and Creative Distribution Solutions (CDS).
Financial performance and liquidity
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Net sales | $97.1 million | $101.0 million | Down 3.9% |
| Gross profit / margin | $51.9 million / 53.5% | $48.6 million / 48.2% | Profit up 6.8%; margin up 5.3 percentage points |
| Operating income | $19.3 million | $17.8 million | Up 8.0% |
| Net income attributable to TPB | $12.0 million | $7.6 million | Up 58.1% |
| Basic / diluted EPS | $0.68 / $0.63 | $0.43 / $0.41 | Higher year over year |
| Operating cash flow | $22.6 million | $15.4 million | Up $7.2 million |
| Capital expenditures | $0.4 million | $2.4 million | Down $2.1 million |
- Margins and earnings: Operating margin was approximately 19.9%, versus 17.7%. Higher gross profit and a much smaller investment loss supported earnings growth; Q1 2023 included a $4.9 million Docklight investment impairment. Q1 2024 included a $0.1 million investment gain. Net interest expense fell to $3.5 million from $4.0 million, mainly due to interest income on cash deposits.
- Non-GAAP measure: Adjusted EBITDA was $25.3 million, versus $20.8 million, up approximately 21.6%. Adjustments included $1.3 million of corporate and CDS restructuring costs, $0.8 million of FDA PMTA costs, and $2.1 million of stock-based compensation. The company cautions that this measure is not a substitute for GAAP results.
- Cash and working capital: Unrestricted cash was $130.9 million at March 31, 2024; restricted cash was $1.9 million. Current assets were $279.0 million and current liabilities $109.3 million. Working capital, defined by the company excluding cash, was $38.8 million, down from $49.4 million at year-end, primarily due to inventory payment timing and investment of $3.0 million in insurance deposits.
- Debt and liquidity: Gross notes were $368.5 million: $250.0 million of 5.625% senior secured notes due February 2026 and $118.5 million of 2.50% convertible notes due July 15, 2024. The balance sheet reports $59.4 million as current maturities. The $75 million asset-backed revolver was undrawn, with $59.0 million available based on the borrowing base and approximately $1.2 million of letters of credit outstanding. Management said cash, free cash flow, and facility availability should be sufficient to address the convertible-note maturity and foreseeable operating needs. Net cash provided by financing activities was negative $4.6 million, including $2.1 million of share repurchases and $1.1 million of dividends paid.
Material changes versus Q1 2023
- Zig-Zag Products: Sales rose 11.5% to $46.7 million; gross profit increased 23.0% to $27.5 million. Growth in U.S. papers and wraps was partly offset by lower Clipper sales compared with prior-year trade loading. Segment gross margin rose to 59.0% from 53.5%, primarily on product mix.
- Stoker’s Products: Sales increased 8.0% to $36.4 million; gross profit rose 6.9% to $20.8 million. Volume was up 0.1% and price/product mix up 7.9%. Stoker’s moist snuff and modern oral product FRE grew, partly offset by lower loose-leaf chewing tobacco sales. Segment gross margin edged down to 57.2% from 57.8%, partly because FRE carries lower margins.
- CDS: Sales fell 44.9% to $14.0 million and gross profit fell 47.4% to $3.6 million. The company cited lower liquid-nicotine distribution volumes and its decision to exit certain unprofitable brands and narrow its product range. Segment operating result was a loss of $3,000, compared with income of $261,000.
- Consolidated sales declined despite growth in the two core branded segments, as the CDS decline more than offset their gains. SG&A increased 6.1% to $32.6 million, including $1.3 million of restructuring costs and higher stock compensation and PMTA expenses.
- Operating cash flow improved, while investing cash outflow rose to $8.0 million, primarily reflecting purchases of captive-insurance investments. Q1 2023 financing outflow included $13.0 million of convertible notes repurchased; no such repurchase occurred in Q1 2024.
Outlook, risks, contingencies, and unusual items
- The filing provides no specific quantitative revenue, earnings, or cash-flow guidance. Management describes opportunities in organic growth, acquisitions, and joint ventures, and says inflation and consumer purchasing power remain relevant factors. It reports implementing price increases where feasible and maintaining a relatively stable variable-cost structure.
- The July 2024 convertible-note maturity is a near-term liquidity priority. The company states it expects to have sufficient liquidity, but the outcome depends in part on available cash, free cash flow, and borrowing-base availability under the ABL facility.
- Disclosure controls and procedures were reported ineffective as of March 31, 2024, solely due to a previously disclosed material weakness in IT general controls over user access and program change management for systems supporting financial reporting. No resulting financial-statement misstatements were identified. Planned remediation includes a new ERP system, improved control documentation, monitoring and testing, and Audit Committee reporting; management says remediation is not complete until controls operate effectively and are tested.
- Risks include extensive and evolving tobacco and nicotine regulation, potential flavor restrictions and FDA actions, product-liability claims, dependence on third-party suppliers and major retailers, illicit products, competition, inflation and consumer sensitivity, and leverage. The filing reports several lawsuits concerning malfunctioning vaporizer devices or batteries; the company is evaluating claims and defenses and notes it distributed, rather than designed or manufactured, the products at issue.
- A Tennessee warehouse tornado damaged leaf tobacco in December 2023. The company recorded a $15.2 million reserve in Q4 2023 and had a $15.2 million insurance recovery receivable at March 31, 2024; it believes recovery is probable and does not expect customer-delivery delays. The filing does not report receipt of that recovery by quarter-end.
- The company held approximately $28.4 million of MSA escrow assets at fair value. It says it has no remaining products covered by the MSA and expects no future escrow deposits absent a change in legislation. The escrow principal remains subject to restrictions.
- The company invested in TeaZa in January 2024, acquiring an 18.744% interest; it also has options to acquire additional interests. Q1 cash investment was $0.5 million, with a further $0.3 million payable to be offset against future profit distributions.
Important facts for investors to verify
- How the July 2024 convertible-note maturity is addressed, including actual ABL borrowing-base availability and the company’s post-maturity cash and debt position.
- Whether the IT-control material weakness is remediated, and whether implementation of the new ERP system affects financial reporting or operations.
- Whether CDS sales and profitability stabilize following the product-range changes, and whether core-segment growth continues to offset weakness there.
- Timing and amount of the expected insurance recovery for the tornado-damaged inventory, and any remaining risk that the claim is not fully recovered.
- Developments in FDA, state, and local regulation, as well as product-liability litigation and other contingencies.
- Shareholder-return capacity alongside debt repayment: Q1 repurchases were $2.1 million, $25.1 million remained under the repurchase authorization, and the company paid a $0.07-per-share dividend on April 12, 2024.