Good day, and 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. I would now like to turn the conference over to Bobby Lavan. Please go ahead, sir.
Thank you, operator. Good morning, everyone. I am Bobby Levin, CFO of Turning Point Brands. Joining me today are Turning Point Brands' President and CEO, Larry Wexler Graeme 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 Q4 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 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 or projections are not guarantees of future performance, and you should not place undue reliance upon them except as provided by the federal securities laws, and 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, and good morning, everybody, and 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 Q4 was especially dynamic and 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 focused brands.
Brands matter and our brands are one of our most important assets. Consumers enjoy certain product qualities and attributes, but they openly adopt brands that not only provide the product benefits, but also resonate with them. In the 4th 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, plus 0.7% on continued shares changed 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 Q4, we further penetrated the retail universe with our organic hemp papers becoming the 2nd 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.
And VaporBeast delivered record quarterly net sales and gross profits, while the IVG direct to consumer online engine delivered expected results in this 1st 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 and IBG. These collective resources combined with our China team greatly advanced our ability to achieve faster and broader consumer trial and sales and you can see it in the numbers. 2nd platform is executing against our acquisition and innovation strategy.
On November 26, 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. And on January 15, we announced the formation of our newest subsidiary Nu X Ventures. Nu X will be headed by TPV veteran, Graham Purdy, and we'll 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 and 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 and 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 VaporPhy and Direct Vapor names at IBG. 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 and 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. And 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 as we delivered record net sales of $94,300,000 and record gross profit of $38,700,000 up 28.2% and 20.1 percent 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 2nd 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 2nd largest brand. Due to the sustained growth consumer demand for Stoker's MST, during the quarter we upgraded the can 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 1 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 Q4, we also finalized our go to market plans for 2019, which features several new product lines, including unbleached papers and in paper cones. Given that the rolling paper enthusiasts has demonstrated increasing preference for the convenience of preformed 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 a legal use of recreational cannabis commenced in late October 2018. Our Canadian portfolio now includes a number of novel new products, including OrganiChem papers and Zig Zag paper cones, which first shipped in October with great trade enthusiasm. Importantly, and 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 $2,000,000 in the 4th quarter, anticipate this slowdown continuing until we get clarity on the regulations. Until such time, we'll be operating in an inventory drawdown environment to minimize obsolescence risk.
At the present time, we're 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 NewGen segment, let me give you a brief perspective on the strategic path we have established. Our mortgage coverage model now includes approximately 80 TPB system wide stores that provide us with direct touch point with consumers for faster and more accurate trend spotting and unique ability to test and refine products based on 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 3rd 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 3rd 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 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 IVG B2C marketing engine to rapidly build awareness, trial and sales of higher margin proprietary products.
IVG's VaporPhy and Direct Vapor 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 for the highest velocity for Parte 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've been building and leveraging and we're 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 direct wing consumers and the systems, process and people to reach a greater market than any time in our history. Having laid out this strategy, let's 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, service 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 1, we realized our Q1 of sales. Sales for the quarter were in line with our expectations and 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 Prowless 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 and 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 moved VaporShark and VaporSly e liquid production to Louisville and began the wind down of VaporShark's B2B wholesale sales we focus resources on high performing and higher potential operations. From a broader NewGen perspective, continue our synergy initiatives and are on track for accounting and system wide logistical integration in the Q2 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 new gen assets as we move through 2019. Company results in the 4th 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 the notions on the fringe of the market. Jump a few short years forward and today, vapor products are now widely available in both traditional retail and vape shops and online via direct to consumer sales on the Internet. A new product by a startup enterprise took the market by storm now commands greater than 2 thirds of vapor sales in traditional retail is even become a verb, while also capturing Wall Street's attention with its latest $38,000,000,000 evaluation. According to Gallup, 2 in 3 American adults favored legalization of marijuana and greater than 50% of the U. S.
Population already lives in states with 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. And 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 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 18.
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. Thevapriptide.comb2cwebsite is alive with online marketing efforts now beginning to build traffic. We launched a small trial promotion to our adult consumer database on February 22 and sold out of the offer in less than 4 hours. B2B sales will be starting later this month via the VaporBeast distribution engine to 3rd party vape shops and the B2C sales engine at IBG will also be initiated and will accelerate awareness, trial and sales.
Riptide is scheduled for a 2nd quarter launch in traditional retail where we intend to leverage our field sales force. Importantly, we've been in discussion with a large number 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 Q1. SEO for vapriptide.comwebplatform 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 Q2.
Early qualitative reaction from our customers and consumers is very encouraging. You will note that this is a fully integrated assault that could not have been achieved without the NuGen 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 that CBD category is already a $600,000,000 to $2,000,000,000 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 $15,000,000,000 plus 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 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 nuex.com website went live March 1 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 tend 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 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 3 years. These markets are developing quickly and we are fortunate enough to assemble 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 and this infrastructure can also be used for a number of other sales channels. IVG will help quickly establish our products and brands in the online environment and 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. And 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 $23,100,000 in the Q4 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 price products and category declines.
Net sales for the Chiu portfolio declined by $300,000 in the quarter, while MST advanced $2,400,000 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 1 year as we continue to fuel Stover's MST skyward.
Incremental margins will improve on volume gains. For the year 2018, Smokeless net sales increased $5,500,000 to $90,000,000 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 $11,900,000 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 percent or $1,000,000 and gross margin contracted 50 basis points to 51.2%.
For the year 2018, Smokeless gross profit increased 8.9 percent to 46,500,000
dollars Turning
to our smoking products segment. Smoking products net sales in the quarter decreased $1,800,000 to 27 $100,000 In the quarter, non focused cigar products declined $400,000 year over year and we canceled more than $2,000,000 in Canadian paper orders due to the temporary disruption associated with new packaging regulations. Moving forward and until we get clarity on the Canada 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 $3,000,000 total smoking net sales increased $1,600,000 to 1 $111,500,000 As the remaining $5,500,000 tail of lower margin cigar sales recedes behind us, we are launching a suite of new products designed for today's consumer zigzag 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 underreported channels, including dispensaries. Our data point suggests that Zig Zag paper cones could prove to trigger a meaningful shift in measured demand in category growth. Importantly, new product introductions on Zig Zag continue to nurture greater consumer engagement and brand satisfaction. Gross profit for the quarter of $13,900,000 was off $1,200,000 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 profit decreased by $1,600,000 to $13,900,000 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 rightsizing line rationalization efforts and the associated expenses, which negatively impacted margins by $1,300,000 Taking all of this into account, 4th quarter net sales in our core tobacco portfolio, which is smokeless plus smoking increased $300,000 to $50,200,000 and reported gross profit after line rationalizations grew by $400,000 to $25,800,000 For the year, core tobacco portfolio net sales increased 3.6 percent to $201,500,000 with gross profit advancing 3.7 percent to 99,800,000 dollars Moving to our growing NewGen segment, which continues to build momentum from the strategic initiatives and accretive acquisitions we have been delivering. For the quarter, segment sales grew $20,400,000 or 86.2 percent to a record $44,100,000 driving NewGen to 47% of company revenues. VaporBeast set another record for both quarterly net sales and gross profit and highly effective marketing campaigns and improved sourcing and logistics. IVG's 1st full quarter of sales were in line with expectations and we are now in the process of working towards synergy initiatives to further strengthen margin contribution.
For the year 2018, NewGen net sales increased $39,900,000 or 43.7 percent to 131,100,000 dollars 4th quarter new gen profit gross profit increased by $6,100,000 or 89.4 percent to a record $12,900,000 Gross margin expanded by 50 basis points to 29.3 percent of net sales. In the quarter, there were $1,300,000 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 $13,900,000 to a record $39,000,000 with gross margin expanding to 29.8%. Consolidated SG and A expense in the quarter was $27,800,000 compared to $21,600,000 a year ago, driven by the inclusion of Vapor Supply and IBG's SG and A expenses, transaction costs and variable vapor logistics expenses tied to higher sales. 4th quarter SG and A included $2,500,000 of non recurring charges, including $1,500,000 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 act bonuses in 2017. 4th quarter cost of goods sold included $1,700,000 of line rationalization expenses. This expense should help drive less noisy results going forward. Dollars 500,000 of warehouse reconfiguration expenses $100,000 of introductory new product launch costs versus $200,000 in 2017. We ended the quarter with $26,000,000 drawn on our revolving facility.
We committed to draw down significant inventory in the Q1 and have already paid down $12,000,000 on our revolver through the end of February. Adjusted EBITDA for the quarter was $17,200,000 as compared to $14,800,000 in the year prior. Net debt to adjusted EBITDA was 3.4x and continues to be inside our 2.5x to 3.5x target. In this morning's earnings release, we also provided 2019 guidance, which included projected 2019 TPB business base business net sales of $370,000,000 to $385,000,000 We anticipate that the Nu X launch, which is already underway in both Vapor and CBD products will contribute an additional $10,000,000 to $20,000,000 in revenues, bringing total TVB net sales in 2019 to $380,000,000 to $405,000,000 Importantly, with the singular goal of achieving targeted expectations, we intend to fully reinvest Nu X gross 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 the Canadian packaging guidelines are finalized, including certain transition timelines. Once finalized, we expect inventories replenished 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 $1,500,000 down from a $3,000,000 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 $1,600,000 to support the Nu X infrastructure, which will be heavily weighted towards the first half.
Dollars 1,500,000 in preparation for the FDA's PMTA pathway and $1,200,000 in transaction expenses resulting from the September 2018 acquisition of IVG, primarily due to accounting requirements of expensing and earn out to the sellers. And lastly, stock compensation expense are projected to be $4,000,000 compared to $1,400,000 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 and A expenses described above and the Nu X operating performance, we project 2019 adjusted EBITDA of $70,000,000 to 75,000,000 dollars We expect the 2019 effective income tax rate to be 21% to 23%, slightly higher than the previous year And capital expenditures are expected to be approximately $3,000,000 to $4,000,000 including certain investments in our MST operations with an anticipated 1 year payback. Moving forward, we will begin to provide quarterly net sales guidance.
Net sales for the Q1 of 2019, including the estimated impact associated with Canadian packaging regulations, is expected to be $89,000,000 to $93,000,000 As we talked about before, M and A activity is important in the company and has picked up and we continue to evaluate potential partners and acquisition targets. More to come. It was another good quarter on our long trek towards realizing the 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.
And with that, I'd like to open up the line to questions. Operator?
We will now begin the question and answer session. Our first question comes from Vivien Azer from Cowen and Company. Please go ahead. Your line is open.
Hi, good morning.
Good morning. Good morning, Vivian.
Congrats on a strong quarter and My first question is just a point of clarification. Larry, so you guys are saying for MSAI, MST volumes down 3%, you're excluding pouches and snus products. Altria reported adjusted domestic smokeless category volumes down 1.3%. Is it just the delta like being driven by outperformance of pouches and SNFs? Is that how
we should think about that? Pouches
have been growing relative to loose tobacco. As you know, we only compete in the tobacco. That's why we focused on that share in that particular segment of the market.
Yes. So as a follow-up to that, how are you guys thinking about pouches? Like 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? Like how should we think about modeling gross profits for that segment going forward?
So there's Javier, it's Bobby.
So one key point on inventory. So we don't hold any Canadian inventory, but so 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. So 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. So I would expect sort of Q1 is okay, Q2 is soft and then it should pick up kind of in the 3rd Q4 from a Canadian perspective. And the Canadian business kind of comes in a little bit lower than our segment margins, and so you should just model it that way.
That's super helpful. Thank you so much. And 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 compete effectively in the market.
And so I'm looking forward to the meeting.
And do you think that the guidelines are going to focus primarily on, like 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 on the 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. So 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?
Yes. So here's how you it's as we indicated, it's going to be 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 and we have products in the market. There is an element of expenses are pushing products in market, consumer trials. And so that's how I would model it.
We are going to give you sort of quarterly guidance and so you should be able to track it throughout the year. But I would really sort of back end that 10 $1,000,000 to $20,000,000 but there is some in the
first half. Understood. Okay. And then 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 release in the owned 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 it in we put the bottled liquid into our stores a couple of months ago. We gather 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 Q2 mid Q2. CBD is different. CBD 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. So we probably won't be going to retail until later in the year.
Got it. Thank you. And then, so you provided color on sort of vapor synergies that you realized in 4Q. And I was just sort of wondering, what are the what sort of synergies remain for before they're all fully in place at the end of the Q3 here?
Yes. I mean, 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.
And so just the math of shipping 100 of 1000 of units a week from San Diego versus shipping from Kentucky, where UPS has their hub is dramatic.
Thank you. Our next question comes from Bart Bramante from Callahan Advisors. Please go ahead. Your line is open.
Thanks for taking the call. So within the smokeless segment, with the expansion, particularly into the dollar store space with Dollar General being so successful, is there any are you all making a move into the Dollar Tree Family Dollar brand trying to cover the other half of dollar stores in America? And then in the dollar store space, is there potential for kind of 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 got us a lot of exposure and a lot of distribution, but we're much more focused on the high velocity chain stores at this point. We had introduced the product into Murphy Oil with great success in the Q2 of 2018. I think we are focusing our efforts on generating a lot more news in the chain world.
Okay. And then 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. And so on the call in August, you all said you see Stoker selling at a 25% to 40 percent 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 enjoy consumer trial. And so it's still a transition, but be on the lookout.
All right. Are you all seeing kind of competitors following suit a little bit in continued new product releases in the lower price points in MST? Is that something that we're seeing kind of the market adapt to?
No, there is a high level of promotion in the MST market. So 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. And 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. And but 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. Our next question comes from George Baxter from Sabre Point Capital. Please go ahead. Your line is open.
Hey, guys. Congratulations on the progress of developing the business.
Thanks, George.
My question, I wanted to focus a little bit on 3rd party CBD distribution. I noticed that at Vapor Shark stores, they were selling 3rd party CBD. I think it began in the 4th quarter. Can you talk about how broadly you anticipate selling 3rd party CBD? Will you sell through VaporBeast to your vapor customers?
And then if you would just elaborate on the opportunities for distribution?
Yes. So we will sell 3rd party products the same way that VaporBeast is the market leader in selling 3rd party vaping products. We will do the same with CBD. We believe the customer base is extremely similar and overlaps. And the attention we've gotten has been extremely positive.
And so we see it as a huge market, but obviously, the Holy Grail, as we've discussed, is selling our own proprietary products. But we use those products that you've seen in the Vaporshark 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 3rd party products to sort of fund learning the system and building that we believe will be our edge versus our competitors out there.
It's also as we mentioned, George, that we 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 were using those 3rd party products in part to learn a lot more about the consumer base for CBDs.
That's great. And also wanted to chat, I noticed also the RipStix that they have shown up in the VaporBeast stores. I want to talk about your 3rd party or your influencer promotion, what your plans are there for promoting the product?
Yes. Hi, George, this is Graeme. How are you? Hi. This is my command performance here.
Hey, listen, so on the influencer 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. And so our influencer strategy is looking towards the marketplace for people that touch those types of consumers. So as Bobby likes to say, a little more to come on the influencer strategy, but we've started casting that out there and looking for the right types of influencers to promote the product.
And when might we see the RipStix move from your owned and franchised stores to broader distribution through VaporBeast and then ultimately through your the broader distribution that you would sell Zig Zag or the smokeless?
Sure. So we're actually in the process of soft launching in traditional retail as we speak and taking a look at a couple of very specific markets to launch in. And so I could guess I could say that it's underway right now. By Q2, we'll be in full swing across the omnichannel approach.
And is there because it's not a tobacco based formula, is there and 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 are that won't be restricted? Or if you would talk about their stance relative to the Ripstick?
Sure. I can't speak for our C store customers directly. The use of non tobacco derived nicotine for us was 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 and consumer. And so that to that respect, again, I can't speak to what convenience stores are thinking about at this point
in time. And 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 alignment 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.
Thank you.
Operator, any other questions?
There are no questions at this time. 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.