Good day, welcome to the Turning Point Brands Q4 2018 earnings call. Today's conference is being recorded. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. I would now like to turn the conference over to Bobby Lavan. Please go ahead, sir.
Thank you, operator. Morning, everyone. I am Bobby Lavan, CFO of Turning Point Brands. Joining me today are Turning Point Brands President and CEO, Larry Wexler; Graham Purdy, who heads our newest subsidiary, Nu-X; and Jim Murray, Senior Vice President of Business Planning. This morning, we issued a news release covering our fourth quarter and full year 2018 results. This release is located in the investor relations section of our website, turningpointbrands.com, where a replay of today's conference call will be available. In this call, we will discuss our consolidated and segment operating results and provide our perspective on our progress. As is customary, I direct your attention to the discussion of forward-looking and cautionary statements in today's press release and the risk factors in our filings with the Securities and Exchange Commission.
The disclosure outlines various factors that could cause actual results to differ materially from projections or forward-looking statements that may be cited in today's discussion. These forward-looking statements and projections are not guarantees of future performance. You should not place undue reliance upon them except as provided by federal securities laws. We undertake no obligation to publicly update or revise any forward-looking statements. In the call today, we will reference certain non-GAAP financial measures. These measures and reconciliations to GAAP can be found in today's earnings release, along with the reasons why management believes that they provide useful information. I will now turn the call over to Larry Wexler, our CEO.
Thank you, Bobby. Good morning, everybody. Thank you for joining the call. I'm especially pleased to have this opportunity to not only share with you our progress against our long-term plan, but also to highlight a number of recent significant activities against it. The fourth quarter was especially dynamic. We continue to see the concrete results of working against the plans and programs we have announced. We advanced the company in each of the three legs of our strategic platform. The first is driving the growth of our focus brands. Brands matter. Our brands are one of our most important assets. Consumers enjoy certain product qualities and attributes. They ultimately adopt brands that not only provide the product benefits, but also resonate with them.
In the fourth quarter, Stoker's Moist Snuff set another share record on double-digit volume gains fueled by continued consumer enthusiasm and expanded retail distribution. Our share in stores where we have achieved retail distribution is now greater than 7%, demonstrating the strength of our proprietary production process and the loyalty of the consumers we have welcomed to the portfolio. In fact, Stoker's posted its largest annual share gain in 2018, + 0.7% on continued chain stores distribution expansion and growth in existing stores. The iconic Zig-Zag brand remains the U.S. market share leader in both premium rolling papers and MYO cigar wraps. In the fourth quarter, we further penetrated the retail universe with our organic hemp papers becoming the second-largest hemp SKU in the category, despite being in the market less than a year.
We also began executing our plans for a number of new products, including unbleached papers and paper cones, which launched these past few weeks. VaporBeast delivered record quarterly net sales and gross profits, while the IVG direct-to-consumer online engine delivered expected results in this first full quarter under the TPB family of brands. The IVG acquisition was a strategically important element in our total market coverage model. We now have the skills and competencies to achieve traditional retail distribution with our sales force, alternative shops via VaporBeast, and direct to consumers via online marketing at IVG. These collective resources, combined with our China team, greatly advanced our ability to achieve faster and broader consumer trial and sales, you can see it in the numbers. Second platform is executing against our acquisition and innovation strategy.
On November 26th, we announced our strategic investment in Canadian American Standard Hemp, or CASH. CASH is headquartered in Warwick, Rhode Island, and manufactures CBD that is sold in tinctures, topical formats, and vape cartridges. Our partnership with CASH is already providing quick dividends, as we are now launching our own set of proprietary products to expand our sales footprint in the fast-growing CBD market. On January 15th, we announced the formation of our newest subsidiary, Nu-X Ventures. Nu-X will be headed by TPB veteran Graham Purdy, will be launching a suite of novel new products in vapor under the RipTide brand and in CBDs under the Nu-X brand. Product development work was completed late last year, we're now beginning to commercialize these new offerings, which will greatly expand our market potential.
The white space for novel new products is abundant, we're especially excited as we now see the first fruits of our strategy. The last platform is building upon our corporate infrastructure strengths. Through our vapor acquisition strategy, we have assembled a series of great companies that now can deliver us best-in-class wholesale distribution led by VaporBeast and world-class B2C marketing under VaporFi and DirectVapor names at IVG. This scale and robust set of competencies will form the foundation for future growth, not only in vapor, but also in alternative products. We made great progress in 2018 towards the goal of efficient infrastructure integration we'll be realizing the margin benefits in the second half of 2019 by further integrating our logistics. Perhaps most importantly, with this infrastructure now in place, we intend to deploy these world-class resources against our Nu-X proprietary products.
While also tapping our traditional sales force to achieve widespread availability in both CBDs and vapor. Our science and legal teams continue to make great progress as we move down the FDA pathway. Of course, we continue our pursuit of hungry talent across our entire company. But most importantly, in our retail sales force, we have consistently proven that additional manpower improves marketplace results. You will recall that we have carefully measured the efficiency of adding manpower to our traditional sales force and demonstrated a powerful correlation between retail call frequency and brand market share, particularly in MST. Based upon these quantitative findings, we increased the traditional sales force by approximately 10% in 2018 and expect to remain on that path in 2019.
Overall, fourth quarter results reflect the strength of our strategy as we delivered record net sales of $94.3 million and record gross profit of $38.7 million, up 28.2% and 20.1% respectively. Turning to the segments. In smokeless, Stoker's MST volume growth remains robust, and double-digit advances delivered another record share of 3.5% nationally. Share gains in the Spotlight chain accounts we opened in the second and third quarters of 2018 remain highly encouraging. Despite slower sales of loose-leaf and a shift to lower priced products in chew, in the quarter, total smokeless revenues advanced double digits. Stoker's chew outperformed the category in the quarter and remained the second largest brand. Due to the sustained growth of consumer demand for Stoker's MST, during the quarter, we upgraded the canned manufacturing line in Louisville, Kentucky for higher throughput and capacity. The new higher speed line is now fully operational.
As we continue to grow volumes, we can anticipate improved margin contribution. Moving forward, we also have a 2019 CapEx initiative at our Dresden, Tennessee facility, which will result in a meaningful improvement in margin. We expect this initiative to be completed at the end of 2019 with favorable marginal contribution of close to one point materializing in 2020. In the smoking segment, Zig-Zag continues to produce encouraging results. Zig-Zag's iconic equities provide the traction for continuing growth in both the U.S. and the promising and evolving Canadian marketplace, where recreational cannabis use became legal in October 2018. Zig-Zag retained its leadership position in premium papers and continues to command about 30% of the total market as measured by MSAi. In the fourth quarter, we also finalized our go-to-market plans for 2019, which features several new product lines, including unbleached papers and paper cones.
Given that the rolling paper enthusiast has demonstrated increasing preference for the convenience of pre-formed cones and the strong gains in unbleached rolling papers, we're especially excited about these launches, which are now underway. In cigar wraps, Zig-Zag retained a strong leadership position with greater than 75% of the market, as measured by MSAi, and a suite of new extensions are being introduced throughout 2019 to meet specific local market opportunities. In Canada, Zig-Zag is well-positioned with an expanding portfolio to meet varying consumer preferences as the legal use of recreational cannabis commenced in late October 2018. Our Canadian portfolio now includes a number of novel new products, including organic hemp papers and Zig-Zag paper cones, which first shipped in October with great trade enthusiasm.
Importantly, as mentioned last quarter, our Canadian progress will be temporarily disrupted due to proposed new packaging guidelines that require changes across the entire product line. As a result, we voluntarily canceled orders for $2 million in the fourth quarter and anticipate this slowdown continuing until we get clarity on the regulations. Until such time, we will be operating in an inventory drawdown environment to minimize obsolescence risk. At the present time, we are waiting for the Canadian government to establish transition guidelines, but anticipate inventories returning to target levels shortly after the transition is put in place. I believe Zig-Zag is poised for new growth trajectory in 2019 as we leverage its equities by delivering a suite of new products to satisfy emerging demands. Turning to the exciting New Gen segment, let me give you a brief perspective on the strategic path we have established.
Our market coverage model now includes approximately 80 TPB system-wide stores that provide us with direct touchpoint with consumers for faster and more accurate trend spotting and a unique ability to test and refine products based upon their unfiltered feedback and guidance from consumers. Our integrated point-of-sale systems provide advanced alerts on shifting consumer preferences and allow us to test different merchandising strategies in third-party establishments. Our RipTide product was developed through the feedback generated by consumers in this environment. The next step in our new products is VaporBeast, which delivers best-in-class B2B wholesale distribution of third-party and proprietary products to approximately 4,000 independent and chain vape stores across the country.
Since our acquisition in December 2016, VaporBeast has generated consistent sales advances through superior marketing and superb customer service. VaporBeast serves as a critical role in our process of broadly deploying proprietary products to alternate channels that are first proven successful in our own store ecosystem. As certain proprietary products prove successful through the VaporBeast B2B distribution channel and our own ecosystem, we can then turn on the IVG B2C marketing engine to rapidly build awareness, trial, and sales of higher margin proprietary products. IVG's VaporFi and DirectVapor channels are particularly adept at targeting potential consumers for products with varying attributes and benefits. With documented sales reserves from our own ecosystem of stores, VaporBeast distribution, achievements, and insights from the B2C marketing campaigns, we can now take the winning high-velocity proprietary products directly to our sales force, where we can target roughly 80,000 independent stores.
For the highest velocity proprietary products, we can turn on our national accounts team with their superior contacts and professional relationships, and category management selling skills can deliver another 75,000 high-volume banners chain stores. TPB's market coverage model is a key asset that we have been building and leveraging, and we are now poised for higher throughput and activity in 2019 and beyond. These are exciting times as we now have the integrated skills and capacities to rigorously vet new products directly with consumers and the systems, process, and people to reach a greater market than any time in our history. Having laid out this strategy, let us look at the quarter.
VaporBeast delivered another record for both quarterly net sales and gross profit through highly effective marketing strategies initiated to grow our vape shop universe of stores serviced and to capture a greater share of requirements among those we have been servicing. Our Asia sourcing team has proven to be highly effective at identifying and sourcing winning new products while also reducing total logistics expense. With the purchase of IVG on September 1st, we realized our first quarter of sales. Sales for the quarter were in line with the expectations. We initiated a number of synergy programs, including office consolidation and combined company sourcing for improved operating margins. As we look to the future, we will leverage the IVG B2C prowess in support of the Nu-X new products plan, including both CBDs and vapor.
As previously announced, we are consolidating and discontinuing low-performing assets in NewGen. To date, we have shut down the cash and carry operations at Vapor Supply, closed low-performing stores at IVG. We are evaluating a number of others in the system. Consolidated Vapor Shark and Vapor Supply into new Louisville Pick and Pack distribution center, allowing us to close the Oklahoma operation and Vapor Shark's warehouse. We've moved Vapor Shark and Vapor Supply e-liquid production to Louisville. We began the wind down of Vapor Shark's B2B wholesale sales as we focus resources on high performing and higher potential operations. From a broader NewGen perspective, we continue our synergy initiatives and are on track for accounting and system-wide logistical integration in the second quarter of 2019.
This integration, coupled with the scale and skills we have assembled along with our capabilities in China, is expected to produce incremental sales growth and profitability across our portfolio of NewGen assets as we move through 2019. Company results in the fourth quarter were positive and consistent with our long-term growth aspirations. Record company net sales and the highest quarterly gross profit ever. Additionally, we continue to innovate, as evidenced by our Nu-X CBD and vapor announcements, while also pursuing accretive acquisitions and investments like CASH CBD partnership that provide the pipeline and platform for exciting new products for Nu-X. Before I turn the call over, let me just summarize some of our thoughts on our recent announcements regarding the formation of Nu-X Ventures. Nu-X has been germinating in the TPB opportunity garden for quite some time.
We have long recognized the ever-accelerating pace of change in OTP and the consumer product marketplace more broadly. These times are dynamic and require new methods and practices to compete more effectively. Flashback just a few short years ago and digest the transformation we have already seen. Looking back, vapor products were not yet commercially available. Cannabis was verboten, and hemp-based products like CBDs were just notions on the fringe of the market. Jump a few short years forward. Today, vapor products are now widely available in both traditional retail and in vape shops and online via direct-to-consumer sales on the internet. A new product by a startup enterprise took the market by storm and now commands greater than 2/3 of vapor sales in traditional retail and has even become a verb, while also capturing Wall Street's attention with its latest $38 billion valuation.
According to Gallup, two in three U.S. adults favor legalization of marijuana, and greater than 50% of the U.S. population already lives in states where some form of cannabis consumption is legal at the state level. In October, Canada opened its doors to legal recreational cannabis, and with the passage of the Farm Bill in December, hemp-based products, including CBDs, are now cleared for U.S. commercial sales. Nu-X Ventures was formed to capitalize on these dynamic opportunities. The prospects are unparalleled, and the harvest can be rich for the well-prepared and thoughtful marketer. With that, let me ask Graham Purdy to share some additional insights on the Nu-X opportunity and our plans to seize the full potential. Graham?
Thank you, Larry. Good morning, everybody. These are perhaps the most exciting of times here at TPB. Nu-X was conceived and born out of consumer exuberance for novel new vapor and CBD products, as well as a wide range of other opportunities we won't comment on today. I'm excited to announce that Nu-X officially began broad commercialization with the introduction of our proprietary RipTide small form factor pod vapor system beginning in the week of February 18th. A liquid bottle format was introduced to our stores earlier after extensive testing and consumer influenced refinements. Distribution of RipTide products has already been obtained in our own corporate and franchise store universe with encouraging qualitative feedback. The vaperiptide.com B2C website is alive with online marketing efforts now beginning to build traffic.
We launched a small trial promotion to our adult consumer database on February 22nd and sold out of the offer in less than four hours. B2B sales will be starting later this month via the VaporBeast distribution engine to third-party vape shops and the B2C sales engine at IVG will also be initiated and will accelerate awareness, trial, and sales. RipTide is scheduled for a second quarter launch in traditional retail, where we intend to leverage our field sales force. Importantly, we've been in discussion with a number of large influential chain customers, and the reception has been exceptionally strong. Our omni-channel sales plan for RipTide will be in full swing by the end of the first quarter. SEO for vaperiptide.com web platform is well underway and discussions with social influencers is in full swing.
We anticipate seeing the initial results of our optimization and influencer strategy beginning in the second quarter. Early qualitative reaction from our customers and consumers is very encouraging. You will note that this was a fully integrated assault that could not have been achieved without the NewGen Foundation and Asia sourcing team we have fought so hard to build and perfect. Now let me touch on our Nu-X CBD plan. CBDs represent a potentially massive opportunity as the market develops across multiple platforms. While it's still in its infancy, many analysts estimate the CBD category is already a $600 million-$2 billion fragmented category with no clear brand leaders.
Sustained growth in Google search trends, coupled with Cowen Equity Research indicating that some 7% of American consumers are already using CBDs, and that the market could be a $15 billion+ category in a few short years suggests that our Nu-X launch plan could prove to be especially promising. In this dynamic environment, we have moved swiftly to introduce our own premium line of CBDs. The Nu-X line of CBD products was developed with our partners at Canadian American Standard Hemp, or CASH. Our associates at Rhode Island-based CASH are especially creative and have developed a proprietary process for harvesting CBDs from the hemp plant in a highly efficient manner. Our nu-x.com website went live March 1st with SEO and social influencer deployment well underway. First shipments of our initial suite of proprietary Nu-X products began this week.
Look, our goal at Nu-X is to create a world-class portfolio of self-care, wellness, and enjoyment products that our customers will be proud to sell and our consumers will enjoy using. While Nu-X will initially focus on both vapor and CBDs, the product pipeline is abundantly rich. The plan for Nu-X is aggressive. For 2019, we intend to fully reinvest all the Nu-X gross profits back into the business. Our back half of the year plan includes the launch of products that will round out our CBD portfolio with a particular emphasis on products that will be widely available in our traditional sales channel, products that will contain cannabinoids beyond CBD, products marketed in the non-pharmaceutical wellness space, and products marketed in the fast-growing area of aromatherapy. We've also begun laying the foundation to tap into a wide range of alternative markets when the time is right.
At Nu-X, our aspirations and expectations run deep. Nu-X opens the door to a new paradigm of even greater success and sits on the foundational infrastructure we have established over the last three years. We are fortunate enough to have assembled a number of world-class companies that can transform our strategic aspirations into a market reality. VaporBeast will drive distribution and sales to the vape shop universe. This infrastructure can also be used for a num ber of other sales channels. IVG will help quickly establish our products and brands in the online environment. Of course, we will tap into our professional traditional retail sales force and our national accounts team to achieve widespread visibility and presence. These are exciting times at TPB. I'm surrounded by a fantastic team of professionals dedicated to capturing the emerging opportunity.
With that, I'll turn it over to Bobby for more color on our segment performance and our key financial metrics. Bobby?
Thank you, Graham. First, let me recap our performance in smokeless. On the continuing strength of Stoker's, quarterly smokeless net sales increased 10.2% to $23.1 million in the fourth quarter of 2018. Double-digit volume and revenue gains on Stoker's MST were partially offset by sales declines in chewing tobacco products attributable to the continuing shift to lower priced products and category declines. Net sales for the chew portfolio declined by $300,000 in the quarter, while MST advanced $2.4 million. Smokeless volume increased 5.5% with price mix advancing 4.7%. As you've heard me say before, our smokeless business is at an inflection point as the double-digit volume advances of Stoker's MST overtake the scale of our chewing tobacco business. In the quarter, chew was 52% of smokeless net sales. In the year ago quarter, chew was 59% of smokeless sales.
That's a dramatic swing towards MST in just one year as we continue to fuel Stoker's MST skyward. Incremental margins will improve on volume gains. For the year 2018, smokeless net sales increased $5.5 million to $90 million. Industry volumes of chewing tobacco declined by approximately 6% in the quarter, while industry MST volumes were soft by about 3% to a year ago. In both MST and chewing tobacco, Stoker's continued to grow retail market share as measured by MSAi. In the quarter, smokeless segment gross profit increased 15.8% to $11.9 million, while gross margins expanded 250 basis points to 51.6% due to LIFO variances in both years. Absent the LIFO expense in both periods, gross profit increased 9.1%, or $1.0 million, and gross margin contracted 50 basis points to 51.2%. For the year 2018, smokeless gross profit increased 8.9% to $46.5 million. Turning to our smoking products segment.
Smoking products net sales in the quarter decreased $1.8 million to $27.1 million. In the quarter, non-focused cigar products declined $400,000 year-over-year. We canceled more than $2 million in Canadian paper orders due to the temporary disruption associated with new packaging regulations. Moving forward, and until we get clarity on the Canadian new packaging regulations and transition plan, we will continue to be in an inventory drawdown position to minimize obsolescence risk. Additionally, as part of our efforts to prioritize higher opportunity businesses and minimize FDA-related expenses on lower margin product lines, smoking product line rationalization efforts reduced sales in the quarter by approximately $200,000 as compared to a year ago. Smoking volume and price mix each decreased 3.1%. Despite a year-over-year decline in low margin and lower priority cigar sales of $3 million, total smoking net sales increased $1.6 million to $111.5 million.
As the remaining $5.5 million tail of lower margin cigar sales recedes behind us, we are launching a suite of new products designed for today's consumer Zig-Zag enthusiast. As we transition out of the cigar segment, the strength of our core papers and wraps categories will become more apparent. Industry volumes of U.S. cigar papers decreased by mid-single digits, while make-your-own cigar wraps were off high single digits to a year ago on promotional timing. Based upon our internal analysis of the rolling papers category, a good portion of the reported MSAi weakness in rolling paper sales is due to the growth of super convenient products like paper cones in under-reported channels, including dispensaries. Our data point suggests that Zig-Zag paper cones could prove to trigger a meaningful shift in measured demand and category growth. Importantly, new product introductions on Zig-Zag continue to nurture greater consumer engagement and brand satisfaction.
Gross profit for the quarter of $13.9 million was off $1.2 million from the prior year, principally due to COGS line rationalization expenses of $800,000 in the aforementioned Canadian paper PO cancellations. Reported gross margin was 51.2%, down from 52.3%, primarily due to the above-mentioned line rationalization expenses. Absent LIFO expenses in both years, gross profits decreased by $1.6 million to $13.9 million, with gross margin declining from 53.5% to 51.3%. For the year 2018, total smoking products reported gross profit was soft by $100,000 to a year ago, principally as a result of right-sizing line rationalization efforts and the associated expenses, which negatively impacted margins by $1.3 million. Taking all this into account, fourth quarter net sales in our core tobacco portfolio, which is smokeless plus smoking, increased $300,000 to $50.2 million, and reported gross profit after line rationalizations grew by $400,000 to $25.8 million.
For the year, core tobacco portfolio net sales increased 3.6% to $201.5 million, with gross profit advancing 3.7% to $99.8 million. Moving to our gro wing NewGen segment, which continues to build momentum from the strategic initiatives and accretive acquisitions we have been delivering. For the quarter, segment sales grew $20.4 million or 86.2% to a record $44.1 million, driving NewGen to 47% of company revenues. VaporBeast set another record for both quarterly net sales and gross profit on highly effective marketing campaigns and improved sourcing and logistics. IVG's first full quarter of sales were in line with expectations. We are now in the process of working towards synergy initiatives to further strengthen margin contribution. For the year 2018, NewGen net sales increased $39.9 million or 43.7% to $131.1 million. Fourth quarter New Gen gross profit increased by $6.1 million or 89.4% to a record $12.9 million.
Gross margin expanded by 50 basis points to 29.3% of net sales. In the quarter, there were $1.3 million of non-recurring line rationalization and warehouse reconfiguration inventory expenses, half of which were related to non-vaping businesses. For the year, NewGen gross profit increased by $13.9 million to a record $39 million, with gross margin expanding to 29.8%. Consolidated SG&A expense in the quarter was $27.8 million compared to $21.6 million a year ago, driven by the inclusion of Vapor Supply and IVG's SG&A expenses, transaction costs, and variable vapor logistics expenses tied to higher sales.
Fourth quarter SG&A included $2.5 million of non-recurring charges, including $1.5 million of non-recurring transaction expenses as compared to $200,000 a year earlier, $200,000 of strategic expenses versus $900,000 a year ago, $500,000 of introductory new product launches in 2018, in line with the year prior. $200,000 of line rationalization expenses, which was the same amount in 2017, and $100,000 for warehouse reconfiguration expenses in 2018 versus $100,000 for tax bonuses in 2017. Fourth quarter cost of goods sold included $1.7 million of line rationalization expenses. This expense should help drive less noisy results going forward. $500,000 of warehouse reconfiguration expenses and $100,000 of introductory new product launch costs versus $200,000 in 2017. We ended the quarter with $26 million drawn on our revolving facility. We committed to draw down significant inventory in the first quarter and have already paid down $12 million on our revolver through the end of February.
Adjusted EBITDA for the quarter was $17.2 million as compared to $14.8 million in the year prior. Net debt to adjusted EBITDA was 3.4 x and continues to be inside our 2.5x-3.5 x target. In this morning's earnings release, we also provided 2019 guidance, which included projected 2019 TPB base business net sales of $370 million-$385 million. We anticipate that the Nu-X launch, which is already underway in both vapor and CBD products, will contribute an additional $10 million-$20 million in revenues, bringing total TPB net sales in 2019 to $380 million-$405 million. Importantly, with the singular goal of achieving targeted expectations, we intend to fully reinvest Nu-X growth profits to maximize sales and market achievements. We expect to update our Nu-X guidance on a quarterly basis.
The company continues to expect volatility in Canadian paper sales until such time as Canadian packaging guidelines are finalized, including certain transition timelines. Once finalized, we expect inventory to replenish to standard operating norms. Consistent with our goal of an ever-sharper focus on compelling business opportunities, we expect to continue to evolve out of the low-margin cigar business and anticipate year-over-year net sales erosion of approximately $1.5 million, down from a $3 million decline in 2018. In our press release, we put out more disclosure of our cigar sales historically. The company anticipates certain expenses in 2019, including $1.6 million to support the Nu-X infrastructure, which will be heavily weighted towards the first half, $1.5 million in preparation for the FDA's PMTA pathway, and $1.2 million in transaction expenses resulting for the September 2018 acquisition of IVG, primarily due to accounting requirements of expensing an earn-out to the sellers.
Lastly, stock compensation expense are projected to be $4 million compared to $1.4 million in 2018 due to a higher stock price and to a realignment of incentives for both executive management and deep into the organization to the stock price. We have conformed adjusted EPS to adjusted EBITDA to exclude stock compensation. Excluding the SG&A expenses described above and the Nu-X operating performance, we project 2019 adjusted EBITDA of $70 million-$75 million. We expect the 2019 effective income tax rate to be 21%-23%, slightly higher than the previous year, and capital expenditures are expected to be approximately $3 million-$4 million, including certain investments in our MST operations with an anticipated one-year payback. Moving forward, we will begin to provide quarterly net sales guidance.
Net sales for the first quarter of 2019, including the estimated impact associated with Canadian packaging regulations, is expected to be $89 million-$93 million. We talked about before, M&A activity is important to the company and has picked up. We continue to evaluate potential partners and acquisition targets. More to come. It was another good quarter on our long trek towards realizing full potential of our brands. With that, I'll turn it over to Larry for closing comments.
Thank you, Bobby. I trust each of you can sense our enthusiasm for the promising journey we have embarked upon. Enthusiasm here at Turning Point Brands is exceptionally high, and the tremendous growth opportunities we see before us leave us even more excited. We will continue to execute our carefully measured strategic plan by driving focused brand growth, expanding through acquisitions, and strengthening our corporate infrastructure. Thank you for participating in the call today. With that, I'd like to open up the line to questions.
Operator?
We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from Vivien Azer from Cowen and Company. Please go ahead. Your line is open.
Hi, good morning.
Morning.
Good morning.
Congrats on a strong quarter and strong outlook. My first question is just a point of clarification. Larry, you guys are saying for MSAi, MST volumes down three, you're excluding pouches and snus products. Altria reported adjusted domestic smokeless category volumes down 1.3%. Is it just the delta being driven by outperformance of pouches and snus? Is that how we should think about that?
Yeah, pouches have been growing relative to loose tobacco. As you know, we only compete in the tobacco. That's why we focus on that share in that particular segment of the market.
Yeah. As a follow-up to that, how are you guys thinking about pouches? Is there a day where you feel like you're going to need exposure to that better performing sub-segment?
It's always a possibility. There are different ways of approaching that market. We're looking at them. We have nothing to talk about today.
Okay. Fair enough. Just thinking about the gross profit trajectory for the smoking product segment, given some of the nuances around what's happening in Canada and how you're going to have to manage your inventory, how should we think about modeling gross profits for that segment going forward?
One key point on inventory, we don't hold any Canadian inventory, there's no drawdown issues from our income statement. It's just a matter of our partner in Canada. If they're long inventory, they're not going to buy inventory from us. There's no inventory rationalization that would flow through our income statement as it relates to Canada. There's just an element of orders and the packaging regulations keep getting pushed out. I would expect first quarter is okay, second quarter is soft, then it should pick up kind of in the third and fourth quarter from a Canadian perspective. The Canadian business kind of comes in a little bit lower than our segment margins, you should just model it that way.
That's super helpful. Thank you so much. Just last one for me. Really appreciate all the color and thanks for the call out on the CBD market timing, or sizing rather. How are you guys thinking about the FDA's hearing in April? Any expectations around that in terms of FDA and Gottlieb commentary around CBD?
No, I think their meeting is a reflection of what's going on in the CBD market. They just want to get out in front of it and set some guidelines. I think the FDA is probably going to be fairly open to and positive to the market. I don't expect any big negative outcome from that. I just think that the guidelines will be provided so that you can compete effectively in the market. I'm looking forward to the meeting.
Do you think that the guidelines are going to focus primarily on packaging and product claims, or do you think there could be incremental restrictions around form factors that are already available in the marketplace?
I don't anticipate any big changes. I think there's a lot of noise in the marketplace, and as you know, the Farm Bill sort of clarified a little bit where CBD stand in the market, and I think that they're just trying to set some broad guidelines on the whole thing.
First step.
Think of this as a first step. The FDA, as you know, is an organization that doesn't move particularly rapidly, and I think that this is partly getting out in front, starting to gather information, and I expect broad strokes, not a lot of detail in the outcome of the meeting.
Okay, perfect. Thank you very much.
Thank you. Our next question comes from Susan Anderson from B. Riley FBR. Please go ahead. Your line is open.
Good morning. This is Luke Hatton on for Susan. I was just wondering, as you roll out new and proprietary products this year, how should we be thinking about the launch cadence going throughout the rest of the year, and is there any sort of cadence difference between the different segments?
Yeah. As we indicated, costs are going to be front-end loaded, revenues are going to be back-end loaded, and that is how you should model it. I would really weight it towards the second half. I mean, we have products in the market. There is an element of expenses of pushing products to market, consumer trials, that's how I would model it. We are going to give you sort of quarterly guidance, you should be able to track it throughout the year. I would really sort of back end that $10 million-$20 million, but there is some in the first half.
Understood. Okay. Just from a higher level, what's the sort of general timeline for a successful product to move through that sales channel funnel that you've described, going from releasing the own stores through to the sales force?
It will be different for different products. I think that the vapor product, it's a much more defined product category. We put the bottled liquid into our stores a couple of months ago. We gathered some data. We tailored some of our programs. We'll probably roll out, I think Graham mentioned, we'll probably start rolling it out to our traditional sales force sometime in the second quarter, mid-second quarter. CBDs is different. CBDs is a market that is sort of forming right now, and we're going to be gathering a bit more information from our sales channels before going to retail. We probably won't be going to retail until later in the year.
Got it. Thank you. You provided color on sort of vapor synergies that you realized in 4Q, and I was just sort of wondering what sort of synergies remain before they're all fully in place at the end of the third quarter here?
Yeah. The most significant synergy is we had inventory in a significant amount of locations, and so you get an ability to consolidate those locations and create a scenario where you only are picking inventory from a few places is so dramatic, and that is the edge that Turning Point has. Additionally, up until a week ago, we were shipping a significant portion of our business from San Diego to the East Coast. We've consolidated that into Kentucky. Just the math of shipping hundreds of thousands of units a week from San Diego versus shipping from Kentucky, where UPS has their hub, is dramatic.
Great. Thank you. I think that's it for me. Good luck next quarter.
Thanks.
Thank you. Our next question comes from Bart Bramanti from Callahan Advisors. Please go ahead. Your line is open.
Thanks for taking the call. Within the smokeless segment, with the expansion, particularly into the dollar store space with Dollar General being so successful, are y'all making a move into the Dollar Tree, Family Dollar brand, trying to cover the other half of dollar stores in America? Then in the dollar store space, is there potential for SKU expansion outside of the Stoker's brand in those spaces?
No, I think that the way we look at the market is that dollar stores are generally lower volume stores. It was nice to get Dollar General. It certainly gathers a lot of exposure and a lot of distribution. We're much more focused on the high velocity chain stores at this point. We had introduced the product into Murphy USA with great success in the second quarter of 2018. I think we are focusing our efforts on generating a lot more news in the chain world.
Okay, also in the smokeless segment, you commented on lower volume and price mix in the loose leaf lines kind of offsetting strong growth in the moist smokeless line. On the call in August, y'all said you see Stoker's selling at a 25%-40% discount in the lower price segment of MST. Is this still the case, or can you give an update on where you stand in closing that price realization gap?
We have made no changes to our pricing dynamic with MST. I mean, the growth in MST, we continue to enjoy consumer trial. It's still a transition, but be on the lookout.
All right. Are y'all seeing kind of competitors following suit a little bit in continued new product releases in the lower prices points in MST? Is that something y'all are seeing kind of the market adapt to?
No, there is a high level of promotion in the MST market. In certain stores, you'll find products that are even priced below us. One of the reasons why we chose this pricing strategy is the fact that we have a relatively small sales force, and we can't do the types of store-by-store promotions that the bigger companies can do. We have this lower list price in order to get what we call a consumer-induced sampling. We're happy with the price positioning. Obviously, it's a competitive marketplace. There's lots of promotions out there. We believe that our product has a lot of appeal among consumers, and at the end of the day, it'll do well.
Okay. Thank you very much.
Thank you.
Thank you. Again, if you have a question, please press star then one. Our next question comes from George Baxter from Sabrepoint Capital. Please go ahead. Your line is open.
Hey, guys.
Hi, George
Congratulations. On the progress of developing the business.
Thanks, George.
Thanks, George.
My question, I wanted to focus a little bit on third-party CBD distribution. I noticed that at the Vapor Shark stores, they were selling third-party CBD. I think it began in the fourth quarter. Can you talk about how broadly you anticipate selling third-party CBD? Will you sell through Vapor Beast to your vapor customers? Then if you would just elaborate on the opportunities for distribution.
Yeah. We will sell third-party products the same way that Vapor Beast is the market leader in selling third-party vaping products. We will do the same with CBD. We believe the customer base is extremely similar and overlaps. The attention we've gotten has been extremely positive. We see it as a huge market, but obviously the holy grail, as we've discussed, is selling our own proprietary products. Those products that you've seen in the Vapor Shark stores is a way for us to build and develop our systems. Selling CBD has tons of rules, tons of taxes. There are certain states that are cut out, and we use those third-party products to sort of fund learning the system and building that infrastructure that we believe will be our edge versus our competitors out there.
It's also, as we mentioned, George, that what we call our own ecosystem is a great learning environment, and we get to talk to consumers and find out what they like, what type of formats they like, what type of concentrations that they like. We're using those third-party products in part to learn a lot more about the consumer base for CBDs.
Great. Also wanted to chat, I noticed also the RipTide, that they have shown up in the Vapor Beast stores. Wanted to talk about your third party, or your influencer promotion, what your plans are there, for promoting the product.
Yeah. Hi, George, this is Graham. How are you?
Hi.
This is my command performance here. Hey, listen. On the infl uencer side of the equation, we're taking a measured approach right now. Obviously, we're focused on the adult consumer, and we're particularly focused on the adult cigarette consumer. Our influencer strategy is looking towards the marketplace for people that touch those types of consumers. As Bobby likes to say, a little more to come on the influencer strategy, we've started casting a net out there and looking for the right types of influencers to promote the product.
When might we see the RipTide move from your owned and franchise stores to broader distribution through VaporBeast, ultimately, through the broader distribution that you would sell Zig-Zag or the Stoker's?
Sure. We're actually in the process of soft launching in traditional retail as we speak, taking a look at a couple of very specific markets to launch in. I could say that it's underway right now. By second quarter, we'll be in full swing across the omni-channel approach.
Because it's not a tobacco-based formula, therefore, I believe it's outside of the purview of FDA regulation, are convenience stores seeing this as a possible means to be able to sell flavored juices that won't be restricted? Or, if you would, talk about their stance relative to the RipTide.
Sure. I can't speak for our C-store customers directly. The use of non-tobacco derived nicotine for us was a means to continue to innovate in the category. We're strong believers in innovation and trying to find products that make sense for the adult end consumer. To that respect, again, I can't speak to what convenience stores are thinking about at this point in time.
Finally, since the FDA guidance on selling or restricting the sale of flavored juices in convenience stores, have you guys seen an increase in demand at your retail level and through VaporBeast, for flavored juice sales, through that channel, which is not so restricted?
Look, George, we are in a lignment with the FDA in terms of their long-term goals for adult consumers. The product has been designed to provide a benefit to the consumers. As the regulatory environment evolves, we will adhere to the regulatory environment. Make no mistake, the use of TFN, is to provide consumers with a better experience, and that is why we're using it.
Okay. That's great. Congratulations, guys. Really appreciate the hard work and the success you guys have had over the last several years, and look forward to what is to come.
Thanks, George.
Thanks, George.
Operator, any other questions?
There are no questions at this time. As a reminder, if you have a question, please press star then one. Okay, as there are no further questions, this concludes our Question and Answer Session. I would like to turn the conference back over to the speakers for any closing remarks.
Thank you everybody for joining the call. We look forward to talking to you next quarter. Thank you.
This concludes today's conference. Thank you all for your participation. You may now disconnect.