Turning Point Brands (TPB) CEO Larry Wexler on Q4 2018 Results - Earnings Call Transcript

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About: Turning Point Brands, Inc. (TPB)
by: SA Transcripts
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Earning Call Audio

Turning Point Brands (NYSE:TPB) Q4 2018 Earnings Conference Call March 5, 2019 10:00 AM ET

Company Participants

Bobby Lavan - Chief Financial Officer

Larry Wexler - President and Chief Executive Officer

Graham Purdy - Head, Nu-X

Jim Murray - Senior Vice President, Business Planning

Conference Call Participants

Vivien Azer - Cowen & Company

Luke Hatton - B. Riley FBR

Bart Bramanti - Callahan Advisors

George Baxter - Sabrepoint Capital

Operator

Good day and welcome to the Turning Point Brands Q4 2018 Earnings Call. Today’s conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Bobby Lavan. Please go ahead, sir.

Bobby Lavan

Thank you, operator. Good 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, and you should not place undue reliance upon them, except as provided by the federal securities laws. And we undertake in 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 reconciliation 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.

Larry Wexler

Thank you, Bobby and good morning everybody and thank you for joining the call. I am 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, 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 focus brands. Brands matter are our brands are one of our most important assets. Consumers enjoy certain product qualities and attributes, but 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 plus 0.7% on continued shares 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 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. And 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-consumer 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 and then you can see them in the numbers.

Second 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 TPB veteran, Graham Purdy and we will be launching a suite of novel new products in vapor under the RipTide brand and the CBD is under the Nu-X brand. Product development work was completed late last year and we are now beginning to commercialize these new offerings, which will greatly expand our market potential. The whitespace with novel new products is abundant and we are especially excited as we now see the first fruits of our strategy.

The last product forum is building upon our corporate infrastructure strengths. Through our Vapor acquisition strategy, we have assembled a series of great companies that now can deliver as best-in-class wholesale distribution led by VaporBeast and world class B2C marketing under VaporFi and direct vapor 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 have made great progress in 2018 towards the goal of efficient infrastructure integration and we will 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. We are 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 core 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 21 – 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 price 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 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 address in 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 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 enthusiasts has demonstrated increasing preference for the convenience of preformed cones and a 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, 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 million in the fourth quarter and 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 it’s 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 systemwide stores that provide us with direct touch point with consumers for faster and more accurate trendspotting and unique ability to test and refine products based on upon their unfiltered feedback and guidance from consumers. Our innovative point-of-sale systems provide advance 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 suburb 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’s B2B distribution channel and our own ecosystem, we can then turn on the IVG, B2C marketing engine through aptly 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.

We’ve documented sales reserves from our own ecosystem of stores, VaporBeast distribution, achievements and high and insights from the B2C marketing campaigns, we now take the winning high velocity proprietary products directly to our sales force where we can target roughly 80,000 independent stores. And for the highest velocity proprietary products, we can turn on our national accounts team with a superior context 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 a higher throughput in activity in 2019 and beyond. These are exciting times as we now have the integrated skills and capacities to rigorously tech vet new products directly to consumers and assistance, 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 aegis 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 first quarter 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 parameters 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 shutdown the cash and carry operations at Vapor Supply. Closed low performing stores at IVG and now are evaluating a number of others in this 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 Vapor Shark and Vapor Supply e-liquid production to Louisville and began to wind down the Vapor Shark’s B2B wholesale sales as we focused 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. 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’ve already seen. Looking back, Vapor products were not yet commercially available. Cannabis was provoked and hemp-based products like CBDs were just 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 two-thirds of vapor sales in traditional retail assumed will come of herb, while also capturing Wall Street’s attention with its latest $38 billion valuation. According to Gallup, 2 in 3 American adults favor legalization of marijuana, and greater than 50% of the U.S. population, already visit states where some form of cannabis consumption is legal at the state level. In October, Canada opened new stores 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 for the Nu-X opportunity and our plans to cease the full potential. Graham?

Graham Purdy

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 am 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. The vaportype.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 22 and sold out the offer in less than 4 hours. B2B sales will be starting later this month via the VaporBeast distribution engine to third-party vape shops and the B2C sales engineered 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. And 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 first quarter. SEO for vaportype.com web platform is well underway, and discussions with social influencer, 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 is a fully integrated assault that could not have been achieved without the NewGen foundation and aegis 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 still in its infancy, many analysts estimate that CBD category is already a $600 million to $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 plus category in a few short years suggest 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 1 with SEO and social influencer deployment well underway. First shipments of our initial suite of proprietary Nu-X products began this week. But 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 our CBD portfolio with, in particular, emphasis on products that will be widely available in our traditional sales channel, products that will continue cannabinoids beyond CBD, products marketed in the nonpharmaceutical wellness space and products marketed in the fast-growing area of aromatherapy.

We have 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’re 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. And these are exciting times for 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?

Bobby Lavan

Thank you, Graham. First, let me recap our performance in Smokeless. On the continuing strength of Stoker’s, quarterly smokers 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 sale declines in chewing tobacco products attributable to the continuing shift to lower price 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 a 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, 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 continue to grow retail market share as measured by MSA. 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 of 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 and we canceled more than $2 million in Canadian paper orders due to 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 pipelines, Smoking Products 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 scale cigar sales received behind us. We are launching a suite of new product design for today’s consumer Zig-Zag enthusiasts. As we transition out of the cigar segment, the strength of our core papers in wrapped 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 superconvenient 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 measure 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 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 $1.6 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 rightsizing line rationalization efforts and the associated expenses, which negatively impacted margins by $1.3 million. Taking all of this into account, fourth quarter net sales on our core tobacco portfolio, which is smokeless plus smoking increased $300,000 to $50.2 million and reported gross profit after line rationalization 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 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 $20.4 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 and highly effective marketing campaign and improved sourcing in logistics. IVG’s first full quarter sales were in line with expectations and we are now in the process of working towards synergy initiatives to further strengthen margin contrition.

For the year 2018, NewGen net sales increased $39.9 million or 43.7% to $131.1 million, fourth quarter NewGen 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 nonrecurring 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 cost and variable vapor logistics expenses tied to higher sales. Fourth quarter SG&A included $2.5 million of nonrecurring charges, including $1.5 million of nonrecurring 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.

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 process costs versus $200,000 in 2017. We ended the quarter with $26 million drawn on our revolving facility. We committed to drawdown 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 3.4x and continues to be inside our 2.5 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 million to $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 to $20 million in revenues, bringing total TPB net sales in 2019 to $380 million to $405 million. 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 time lines. Once finalized, we expect inventories 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 cigars business and anticipate year-over-year net sales erosion of approximately $1.5 million, down from $3 million decline in 2018. In our press release, we put up 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 from the September 2018 acquisition of IVG, primarily due to accounting requirements of expensing and earn-out to the sellers.

And lastly, stock compensation expenses are projected to be $4 million compared to $1.4 million in 2018 million 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 to $75 million. 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 million to $4 million, 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 first quarter of 2019, including the estimated impact associated with Canadian packaging regulations is expected to be $89 million to $93 million. As we talked about before, M&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 track towards realizing the full potential of our brands.

With that, I will turn it over to Larry for closing comments.

Larry Wexler

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 would like to open up the line to questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Vivien Azer from Cowen & Company. Please go ahead. Your line is open.

Vivien Azer

Hi, good morning.

Larry Wexler

Good morning, Vivien.

Vivien Azer

Congrats on the strong quarter and strong outlook. My first question is just a point of clarification, Larry, so you guys were saying for MSAi, MST volumes down 3%, you are 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 snus, is that what you should think of that?

Larry Wexler

Yes, pouches have been growing relative to loose tobacco. As you know, we only complete in the tobacco that’s why we focus on that share in that particular segment of the market.

Vivien Azer

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 are going to need exposure to better performing sub-segments?

Larry Wexler

It’s always a possibility. There are different ways of approaching that market. We are looking at them. We have nothing to talk about today.

Vivien Azer

Okay, fair enough. Just thinking about the gross profit trajectory for the Smoking Products segment given some of the nuances around what’s happening in Canada and how you are going to have to manage your inventory like how should we think about modeling gross profits for that segment going forward?

Bobby Lavan

So, Vivien, it’s Bobby. So, one key point on inventory, so we don’t hold any Canadian inventory, but there is no drawdown issues from our income statement, it’s just a matter of our partner in Canada. If there are long inventory, they are not going to buy inventory from us. So there is no inventory rationalization that would flow through our income statement as it relates to Canada. There is just an element of orders and the packaging regulations keep getting pushed out. So, I would expect sort of first quarter is okay, second quarter is soft and then it should pickup kind of in the third and fourth quarter 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.

Vivien Azer

That’s super helpful. Thank you so much. And then just last one for me, really appreciate all the color and thanks for the callout 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?

Larry Wexler

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 if the guidelines will be provided so as you compete effectively in the market. And so I am looking forward to the meeting.

Vivien Azer

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?

Larry Wexler

I don’t anticipate any big changes. I think there is 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 are just trying to set some broad guidelines on the whole thing. Think of this as the 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.

Vivien Azer

Okay.

Operator

Thank you. Our next question comes from Susan Anderson from B. Riley FBR. Please go ahead. Your line is open.

Luke Hatton

Good morning. This is Luke Hatton on for Susan. First I was wondering as you rollout 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?

Bobby Lavan

Yes. So, here’s how you 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 wait it towards the second half and we have products in the market. There is an element of expenses of pushing products to 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 million to $20 million, but there is some in the first half.

Luke Hatton

Understood. Okay. And then, just from a higher level, what’s the sort of general time line for a successful product to move through that sales channel funnel that you’ve described going from release in the own stores through to the sales force?

Larry Wexler

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 second quarter mid second quarter. 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.

Luke Hatton

Got it. Thank you. And then so you provided color on sort of Vapor synergies that you’ve 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 third quarter here?

Bobby Lavan

Yes. I mean, the most significant synergy is we had inventory in 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 hundreds of thousands of units a week from San Diego versus shipping from Kentucky where UPS has their hub is dramatic.

Luke Hatton

Great, thank you. I think that’s it for me. Good luck next quarter.

Bobby Lavan

Thanks.

Operator

Thank you. Our next question comes from Bart Bramanti from Callahan Advisors. Please go ahead your line is open.

Bart Bramanti

Thanks for taking the call. So, with in the Smokeless segment, with the expansion, particularly, into the dollar store space with Dollar General being so successful. Is there any at 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 a potential for kind of SKU expansion outside of the Stoker’s brand in those spaces?

Larry Wexler

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, 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 second quarter of 2018. I think you I think we are focusing our efforts on generating a lot more news in the chain world.

Bart Bramanti

Okay. And then, also in the Smokeless segment, you commented on lower volume and price mix in the lose leaf line is kind of offsetting strong growth in the more Smokeless line. And so, on the call in August, you all said you see Stoker’s selling at a 25% to 40% discount in the lower-priced segment of MST. Is this still the case? Or can you give an update on where you’re stand in closing that price realization GAAP?

Bobby Lavan

We have made no changes to our pricing dynamic with MST. I mean, the growth in MST, we continue to enjoy consumer trial, and so it’s still a transition, but beyond the lookout.

Bart Bramanti

Alright. 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?

Larry Wexler

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 consumer induced sampling. We’re happy with the price positioning. Obviously, this is a competitive marketplace, there’s a lot of promotions out there, but we believe that our product has a lot of appeal among consumers and at the end of the day, it will do well.

Bart Bramanti

Okay thank you very much.

Larry Wexler

Thank you.

Operator

Thank you. [Operator Instructions] our next question comes from George Baxter from Sabrepoint Capital. Please go ahead your line is open.

George Baxter

Hi guys congratulations on aggressive developing business.

Larry Wexler

Thanks George.

Bobby Lavan

Thanks George.

George Baxter

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 VaporBeast to your vapor customers? And then, if you would just elaborate on the opportunities for distribution.

Bobby Lavan

Yes. So, we will sell third-party products the same way that VaporBeast 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. 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 discussed, is selling our own proprietary products. But we those products that you’ve seen in the Vapor Shark stores is a way for us to build and develop our systems. Selling CBD had tons of roles, 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.

Larry Wexler

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’re using a third-party product in part to learn a lot more about the consumer base for CBDs.

George Baxter

That’s great. And I also wanted to chat, I noticed also the RipSticks that they have shown up in the VaporBeast stores. I wanted to talk about your third-party or your influencer promotion, what your plans are there for promoting the product?

Graham Purdy

Yes, hi George, this is Graham. My comment on 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, and as Bobby likes to say a little more to come on the influencer strategy, but we’ve started casting in that out there and looking for the right types of influencers to promote the product.

George Baxter

And when might we see the RipSticks move from your owned franchise stores to broader distribution through VaporBeast? And then, ultimately through your, the broader distribution that you would sell, Zig-Zag or the Smokeless?

Graham Purdy

Sure. So, we’re actually in the process of soft launching in traditional retail as we speak. And taking look at a couple of very specific markets to launch, and so I could guess I could say that it’s underway right now. By second quarter, we’ll be in full swing across the omnichannel approach.

George Baxter

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 regulations. 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?

Graham Purdy

Sure. I can’t speak for our c-store customers directly. The use of nontobacco drive 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 and consumer. And so that to that respect, again, I can’t speak to what consumers what convenience stores are thinking about at this point in time.

George Baxter

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?

Larry Wexler

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. They just – make no mistake the use of TFN is to provide consumers with a better experience and that is why we’re using it.

George Baxter

Okay that’s great. Alright. 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.

Larry Wexler

Thanks, George.

Graham Purdy

Thanks, George.

Bobby Lavan

Operator, any other questions?

Operator

There are no questions at this time. [Operator Instructions] 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.

Larry Wexler

Thank you everybody for joining the call. We look forward to talking to you next quarter. Thank you.

Operator

This concludes today’s conference. Thank you all for your participation. You may now disconnect.