Good morning, and welcome to the Turning Point Brands First Quarter 2018 Earnings Conference Call. All participants will be in listen only mode. Please note this event is being recorded. I would now like to turn the conference over to Bobby Lavin, Chief Financial Officer. Mr.
Lavin, please go ahead.
Thank you. Good morning, everyone. I am Bobby Lavin, the CFO of Turning Point Brands. Joining me today are Turning Point Brands' President and CEO, Larry Wexler and Jim Murray, Senior Vice President of Business Planning. This morning, we issued a news release covering our Q1 2018 results.
The 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 segmented operating results, outline our recently announced Vapor acquisition and how it fits with our operations and review our growth expectations for the rest of 2018. 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, and you should not place undue reliance upon them, except as provided by 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 reasons why management believes that they provide useful information about the company's financial condition and results of operation. Before I turn the call over to our CEO, Larry Wexler, I'd like to share just a bit about myself, some preliminary observations about my tenure here at TPB and focus as we move ahead. Immediately prior to joining TPB, I was a CFO at General Wireless, where I reworked the financial reporting systems and helped build a robust distribution platform that links multiple e commerce sites and Amazon. As I've been drinking from the fire hose to learn all I can about PBB in the industry, I've been pleased by the caliber of the company's team and their tireless commitment to transform and further accelerate profitable growth here at TPB.
Over the next 3 months, I intend to focus on streamlining and building efficiencies to accelerate margin improvements in the existing enterprise. My goal is to optimize and already strong foundation through further synergy capture, particularly in NewGen, while also continuing our pursuit of accretive acquisition candidates. In the end, I'm especially pleased to have joined TBB and will work with the entire team and you to relentlessly generate greater shareholder value. I will now turn the call over to Larry Wexler, our CEO.
Thank you, Bobby, and good morning to everyone, and thank you for joining the call. 2018 is off to a solid start. We're continuing to see the tangible benefits from executing our strategic plan, which includes driving growth of our focused brands, building on our corporate strengths and acquiring assets to further accelerate company gains. I'm delighted to have Bobby at my side and together we have a heightened level of optimism about TPP's future. Our confidence in the TPP team and our progress against the strategic plan are further reinforced by the Board's decision yesterday to declare our 3rd quarterly dividend of $0.04 per common share.
Additionally, on April 30, we announced the acquisition of certain assets of Vapor Supply for $4,800,000 in consideration. Headquartered in the Heartland, Oklahoma based Vapor Supply proved especially interesting to us for a number of compelling business reasons. With $25,000,000 to $28,000,000 in projected annual revenues and the available synergies associated with our existing NewGen platform, Vapor Supply will prove immediately accretive. Next, VaporSupply manufactures and markets the popular DRIPCO brand of proprietary e liquids, which will strengthen our production efficiencies and product portfolio in the liquids marketplace. Finally, the improved purchasing power and enhanced ability to better serve the vape store universe are expected to be powerful contributors to increased margin realization in the coming 18 months.
We're very excited about Vapor Supply, our 4th acquisition since our IPO, roughly 2 years ago. We presently have a team of people on the ground in Oklahoma swiftly to integrate and transfer best in class processes, while implementing a number of immediate synergy initiatives. We'll provide more on vapor supply next quarter. In our Smokeless segment, Stoker's volumes continue to outpace the broader industry. In our smoking segment, Zig Zag remains a category leader and is favorably positioned with new products, and we see potential in both the promising Canadian and U.
S. Marketplaces. The NewGen segment is experiencing record sales, resulting from process improvements and the application of best practices at VaporBeast and VaporShark. Our sustained efforts generated a net sales increase of 10.7 percent to $73,900,000 in the 1st quarter. Gross profit increased 15 percent to $31,800,000 Net income was $3,000,000 and adjusted EBITDA was 13,700,000 dollars Slide 1 dates fewer shipping day in the quarter.
This performance is both gratifying and encouraging. We continue building the company's strengths and capabilities from the professionals and scientists involved in the FDA compliance to our data driven sales force and the development and marketing of our products. Our goal is to accelerate the sales of our focused brands and supplement this organic growth with select accretive acquisitions that expand our capabilities. I turn to our segment's performance, you will see that TPB's strengths stem from a proven ability to nurture our focused brands. These are iconic brands that continue to prove their value consumers each and every day, complemented by new products and channels that fulfill emergency preferences.
Our brand focus and the cash flows generated provide the foundation of our future growth. First, let me recap the performance of Smokeless Products segment. Net sales increased 2.5% over a year ago to $20,700,000 in the Q1 of 2018. Once again, the Stoker's brand was the engine fueling this growth. Case shipments of Stoker's MST increased by more than 10% in the quarter.
In both MST and chewing tobacco, Stoker continued to expand market share. One of the factors fueling Stoker's MST growth is wider retail storage penetration. MSAI reported stores with Stoker MST distribution advanced by approximately 7% in the quarter compared to a year ago. Although we think the effective net news gain is something less than that based on our internal tracking. Nonetheless, we remain pleased with the progress, and we've grown distribution to around 25% of all MST outlets, while seeing significant advances in our social media tracking, demonstrating improved consumer engagement.
Building a wider market for Stoker's is going to take time, but we know our highly differentiated product quality is enthusiastically embraced by our loyal consumers. We'll continue to monitor market trends, use data analytics to target more outlets with the greatest potential for Stoker sales. Smokeless segment gross profit increased 18.7 percent to $11,000,000 where our gross margin expanded 7 30 basis points to 53% due to price increases, product mix and LIFO expense. Without LIFO expense in the equation, gross margin expanded 140 basis points to 52.7%. Now turning to our smoking product segment, Zig Zag Premium Cigarette Papers and MYO Cigar Wraps continue to perform well, once again holding leading market shares as we introduce an expanded distribution of new products for both the U.
S. Market and a dynamic and promising Canadian marketplace. In the quarter, cigarette paper sales were up $1,000,000 offset by our deliberate move away from lower margin cigar products, our line rationalization of MYO tobacco and 1 fewer shipping day. Smoking product net sales decreased $200,000 to $27,000,000 I mentioned new product introductions. For the Canadian marketplace, our partner continues to prepare for the coming recreational legalization of marijuana this summer.
Late last year, Zig Zag Orange and King-size Slim were introduced and the rollout is meeting with good success across Canada, although it will take a couple of more quarters to better understand the impact on the brand. In the Canadian market, they have expanded the recently launched Zig Zag Paper products to approximately 10,000 stores and we have additional product launches contemplated for later this year. In the U. S. Market, late in the Q1, we began expanding 2 new Zig Zag hemp paper products with solid trade enthusiasm.
Gross profit for the quarter of $13,200,000 was $500,000 lower than the prior year due to a year over year euro impact of $800,000 Gross margin was 48.8 percent, down from 50.4%, primarily due to the exchange rates. Let me update you on a couple of issues we mentioned in the last call. Earlier this year, we reported on our cooperation with the Chinese authorities, which began enforcement actions, targeting parties involved in counterfeiting cigarette papers, including Zig Zag. On this front, we remain actively engaged and steadfast in our determination to protect the brand's integrity and its ability to grow in the marketplace. While legal expenses in the quarter associated with counterfeit were meaningfully higher than a year ago, we are committed to purging this equity drain on the Zig Zag brand and are encouraged by our sustained efforts to date.
Regarding California's 65 percent excise tax on MOYO Cigar Wraps, the industry continues to witness depressed sales volume in the state. The industry volumes were down 5% a year ago. Importantly, we continue to see increased volumes in adjacent states, which suggest some level of shipping demand. We've launched a number of new promotional strategies in California and we'll continue to monitor the situation closely to adjust our strategy as necessary. Taking all this into account, net sales in our core tobacco portfolio, which is our smokeless and smoking products segments combined, expanded 0.7 percent to $47,700,000 and gross profit grew by 5.2 percent to $24,200,000 dollars I'll now turn to our growing NewGen segment, which continues to gather momentum from the process and marketing initiatives we have been executing at VaporBeast and Vapor Shark.
For the quarter, segment sales grew $6,800,000 or 35 percent to a record $26,200,000 Similarly, gross profit increased by $2,900,000 to a record $7,700,000 Gross margin expanded 490 basis points to 29.2 percent of net sales. VaporBeast, the sales distribution engine we acquired in late 2016, has been a key factor behind this growth. We continue to make substantial progress meeting the needs of nontraditional retailers, which make up our existing store as demonstrated by larger order sizes and increased order frequency. At Vapor Shark, the operational improvements we're making have strengthened sales in both the company owned and franchised stores. In the quarter, we opened 2 new VaporShark franchise stores and we continue to gain insights into consumer trends and preferences with these operations.
We are readying the integration of manufacturing and distribution of Vapor Shark eLiquids into our Louisville facility to improve operating and distribution efficiency. The process remains on track to be completed by the end of the second quarter. I've discussed how VaporBeast and Vapor Shark provide the infrastructure for our growth in the vapor marketplace. As we move into the second and third quarters, we will focus on integrating the VaporSupply acquisition into our NewGen platform and unleashing the synergies we've identified. By replacing ineffective workflows with simpler solutions, eliminating duplications and bringing streamlined processes, we are contributing proven best in class procedures that result in strengthened sales and profitability.
As the company growth continues to materialize, both through the organic expansion of our Focus brands and through the addition of acquired operations, it's imperative to anticipate future needs and evolving our infrastructure to meet these new demands. Over the years, we've continued to upgrade our professional staff to prepare for the implementation of FDA's expanded mandates. And we continue to proactively review our product portfolio to discontinue products that do not warrant the expense, while sharpening our focus on key areas and investing in brands with greater margins with long term potential. We've been encouraged by the FDA's comments on its new nicotine regulatory policy and continue to be hopeful that the goal of improving public health can be obtained in ways that do not overly constrain the industry's ability to innovate and prosper. Regarding our financial infrastructure, we restructured this area in March to upgrade, streamline and better integrate operations.
We continue to emphasize the importance of having strong capital structure to enhance our flexibility for future growth. In our sales organization, we continue to expand in size and effectiveness to strengthen retail distribution and merchandising. In the quarter, sales and marketing headcount is plus 3% to year end 2017. We are seeing good progress with both in store promotional efforts and targeted social media and direct mail being deployed to increase awareness, trial and sales. Each quarter, I increasingly optimistic about the company and our ability to pursue and realize future opportunities.
We continue to deliver on the important metrics, sales, gross profit and adjusted EBITDA, while strengthening our capital position. We believe in the strategic plan we are taking and the measures we are taking to execute that plan. With that, I'll turn the call over to Bobby to review our financial highlights.
Thank you, Larry. I'll follow-up Larry's remarks with additional figures that provide further insight into our operations. The year over year net sales mix continues to shift on the rapid growth achievements in the NewGen segment. Segment net sales mix in the Q1 was roughly 28% smokeless, 37% smoking and 35% NewGen. Given the Vapor Supply acquisition, NewGen will continue to expand as a percent of total TPB revenues.
Gross margins for smokeless and smoking are roughly 50%, while NewGen is yielding somewhere between the high 20s to 30%, reflecting the lower margins typical of distribution operations. Because of NewGen sales growth, we continue to expect company wide gross profit dollars going forward to increase even though the overall gross margin percentage will be lower. Consolidated SG and A expense in the quarter was $22,100,000 compared to $16,800,000 a year ago, driven mainly by the inclusion of VaporShark's SG and A expenses, higher legal costs and variable VaporBeast SG and A expenses tied to higher sales. Some of the SG and A items in the Q1 worth calling out include $1,600,000 of incorporation of VaporShark's financials, strategic expenses of $600,000 line rationalization costs of $600,000 nonrecurring finance department REIT organization expense of $600,000 and new product launch costs were $100,000 versus $500,000 a year ago. Cost of goods sold and gross profit in the quarter included new product launch costs of $600,000 as compared to $100,000 in the year ago, in line rationalization expenses of $400,000 Federal excise tax included in the cost of goods sold totaled $4,900,000 and FDA fee amounts to $200,000 In the Q1 and also in early 2017, the company refinanced its debt and modified its capital structure.
The lower interest rates associated with these actions and lower debt levels have helped bring interest expense to a new low of $3,700,000 in the quarter or 25.9 percent lower than a year ago. As part of the 2018 refinancing, we executed an interest rate swap agreements for 70,000,000 dollars thereby reducing our exposure to floating interest rates. The weighted average fully diluted share count during the quarter was 19,800,000 shares. Fully diluted EPS was 0 point was $0.15 per share and adjusted diluted EPS was $0.35 Consistent with our historical reporting of adjusted EBITDA, we have initiated reporting of adjusted diluted EPS and a historical schedule is provided in the release. We ended the quarter with no cash drawn on our revolving credit facility.
Net debt to adjusted EBITDA was 3.2 times within our targeted range of 2.5 to 3.5 times. Capital expenditures in the quarter were $400,000 Before I turn the call back to Larry, I'd like to take a few moments to update you on our outlook for 2018. Including the Vapor Supply acquisition, but absent any additional acquisitions and net of anticipated loan rationalizations, we expect 2018 net sales growth of 12% to 16%. Absent any additional acquisitions and one time expenses, 2018 SG and A expense as a percentage of net sales are projected to be 25% to 27% of sales. We expect interest expense for 2018 to be approximately $14,000,000 which includes $1,000,000 in non cash deferred financing charges.
New product launch costs, including the $700,000 recorded in the Q1 are estimated to be approximately $1,900,000 for the year. And lastly, capital expenditures for 2018 are expected to be at the lower end of the previously announced $2,000,000 to $3,000,000 range, including expenditures associated with logistics efficiency and integration of the Vapor Shark e liquid manufacturing and distribution facility relocation in Louisville. We expect to realize these benefits from these moves by the end of the year. With that, I'll turn the call back to Larry for closing comments.
Thank you, Bobby. We're very excited about the developments that are taking place here at Turning Point Brands and the tremendous opportunities for growth we see before us. We have built this enterprise through a measured strategic plan that focuses on organic growth, expansion through OTP acquisitions, solidifying our corporate infrastructure and strengthening our capital structure. We continue to be encouraged by consumer acceptance of our differentiated smokeless offerings, Zig Zag Premium Papers and MYO Cigar Wraps and the growth prospects from the dynamic Canadian market. We are enthusiastic about the prospects for our NewGen segment, the effect of the process improvements and higher sales at VaporBeast and VaporShark, and the potential firepower their vapor supply adds to the NewGen sales mix.
I frequently tell people that our management group is not one that is easily satisfied and definitely not one to rest on the laurels of our accomplishments. We know that the consumer trust must be earned every day with each and every transaction. We intend to maintain that staunch commitment while we work to expand the opportunities to interact with our current and new consumers. This core consumer satisfaction is truly what will drive and maximize long term shareholder value. Thank you for participating in the call today.
And with that, I'd like to open up the call to questions.
The first question today comes from Vivien Azer with Cowen and Company. Please go
ahead. Hi, this is Gerald Pascarelli on for Vivien. Thanks very much for taking the questions.
Thank you. Nice to have you.
Yes. Thank you. A few on Vapor for me. Just number 1, with the latest Vapor acquisition, can you speak to any potential revenue distribution and cost synergies this may create as you fold it into your existing Vapor business?
Yes. At this point, we're not prepared to guide to synergies. But as you can expect, we have an operation in California, an operation in Oklahoma, an operation in Miami. And there are at this point 3 different distinct inventory sets. So there is an ability to sort of to rationalize that inventory.
Additionally, we have 3 different teams, 3 different systems, and those are things that we are working to integrate. So at this point, we're not going to guide to synergies, but there will be synergies from those acquisitions.
Understood. Thank you. Next question, just given how active you've been in vapor M and A, are there any more gaps that you would look to fill going forward within your vapor portfolio?
I think what we've put in place the what we call the bolt on infrastructure necessary to compete in the vapor part of our business, new gen segment of our business. We do believe there are other opportunities out there for bolt on acquisitions for plug and play. They would become plug and play at this point because of the infrastructure that we have. Right now, we're going to be focused in the immediate future, we're going to be focused on integrating these companies, getting them putting in place best in class processes and attending the synergies that Bobby indicated might be out there?
Yes. The vaping supply chain is, we own stores, we own proprietary product, we own distribution. And so we are the question is, is where is the winner going to be in the supply chain evolution and as the industry goes from an extremely fragmented industry to a consolidated industry. And so we are keeping sort of our options open at this point on where we want to overweight or overinvest in the space. And we're that's sort of the beauty of the situation that we're in right now is that we can kind of pick and choose our battles in this evolving space to optimize return on capital.
Understood. Very helpful. Thank you. Last one for me. So Juul is clearly the hotly contested issue within U.
S. Tobacco. Can you speak to or discuss how that either hurts or helps your vapor business?
Actually, I think products like Juul that appear to appeal to combustion consumers and bringing them to vapor, I think helps the entire vapor category. Once they come to vapor, then they're in the market for where we can track them to our products. Juul apparently has some technology that appeals to people and it's building the vapor business and that's all to everyone's benefit.
Yes. I think we're pretty excited about what's happening with Juul because vaping is an positive economic decision for combustible smoking consumers. And ultimately, if they are introduced to vaping, they're going to see what's out there and that is only a positive for using the term rising tides, raise all boats. I think that's what Juul does for
us. Very helpful. Thanks very much, guys.
Next question comes from Susan Anderson with B. Riley FBR. Please go ahead.
Hi, good morning. Nice job on the quarter. I was wondering if you can maybe give a little bit more color on the Canadian market and opportunity for Zig Zag and maybe just compare a little bit to the U. S. Market in terms of market share and opportunities to roll out new products there?
Okay. As you know, as we've discussed on past calls, we work through a distribution partner in Canada. So we're not directly involved in the day to day operations. We do provide them with products and positioning. The Canadian market is evolving fairly rapidly.
They have had a new regulatory stance, particularly towards marijuana, where it become recreational in the middle of this year. There's lots of it's a very dynamic market at this point, lots of new entrants. Our distribution partner is very active in taking on new products and gaining distribution. We're very hopeful about what that market is going to look like over the next 18 months.
Great. Thank you. And then, nice to see the continued growth in Stoker's MST. Maybe if you could give us an update where you are in terms of the doors you want to be in and how long it will take to get to the number that you're looking for? And then just curious, have you seen any competitors react to you taking share in terms of maybe being a little bit more price competitive?
Okay. So, just the first part of your question, we're in about 25% of MST stores. And that translates to roughly 50,000, 55,000 stores. We continue to grow share. As we've talked about, this is a kind of a slog.
We're going against some very big competitors. Our share crossed the 3 share point mark in the Q1 and continuing our progress. That's up from about 2.7 in last year's Q1. We're pleased with the progress we're making. We also have instituted a number of promotions and we're seeing consumers react positively to those promotions.
And we think we've got a plan for going forward to continue on the track that we've been on in terms of growing. In terms of this economic environment, we believe Stoker's is appropriately positioned. As you know, the tub, which is basically 10 cans of product in 1 unit is priced accordingly is up about the tub itself is up about 7% over last year's Q1. And we think we're appropriately positioned for today's economic environment.
Great. That's very helpful. And then last one, maybe if you could just give us an update on your expectations for leverage by the end of this year. Do you expect to continue to pay down debt? And then how much is is there any floating rate debt in there?
So we've expressed to the market that we're our target leverage is 2.5x to 3.5x. We ended the quarter at 3.2x. I think we that's about the range we're going to stay in. Obviously, we're continuing to evaluate strategic opportunities and we don't want to define ourselves to stay an ending year level because we do want the ability to do acquisitions. But we have set up our debt structure and that we can pay down debt economically.
And so we evaluate that on a quarterly basis. From a floating rate perspective, we did when we refinanced the capital structure, we had $150,000,000 so much of debt of floating, dollars 55,000,000 of fixed. We did flip into a fully floating rate structure. So right now we have $200,000,000 of floating. However, immediately after the refinancing, we swapped out 70,000,000 dollars of floating rate exposure to fixed, which cost us a little bit more of interest expense this year, protects us longer term.
And again, that's we are consistently evaluating our capital structure and opportunities. But the company relative to a year ago is actually in a more fixed has more fixed exposure than it did prior and we continue to focus on ensuring that we don't take significant rate exposure particularly in this environment.
Since there appears to be no further questions, this will conclude our question and answer session. I would like to turn the conference back over to Bobby Lavin for any closing remarks.
Thank you everyone for joining the call and we look forward to speaking to you in the future.
This conference has now concluded. Thank you for attending today's presentation. You may now disconnect.