Turning Point Brands (TPB) – Roll Your Own
Turning Point Brands (TPB) is a Louisville, Kentucky based $566M market cap independent provider of “Other Tobacco Products” operating predominantly in the US with 94.2% of its revenue derived from domestic sales.
On January 14th there was a buyer of 900 April 30 calls, now reflected in open interest, this same strike saw a buyer of 1,000 calls on January 10th as well. Daily average options contract volume is just 72 making these lots highly unusual in nature.
Business Segments
Turning Point Brands has three reportable segments:
1) NewGen products (40.2% of net sales). This segment’s sales are from e-cigarettes, e-liquids, vaporizers as well as some other tobacco-less products that may or may not contain nicotine. Sales are primarily through e-commerce platforms Vapor World and VaporFi as well as traditional retail outlets such as VaporBeast, Vapor Shark and recently acquired IVG.
2) Smoking products (33.7% of net sales). Segment includes cigarette papers & tubes, finished cigars, make-your-own cigar wraps, and pipe tobacco. Most recognizable within this category is their brand of Zig-Zag wrapping paper which continues to see increased sales.
3) Smokeless products (26% of net sales). Included in this category are moist snuff which the company manufactures and markets, and chewing tobacco products which they market and also contract for others.
Acquisitions
During 2018, Turning Point acquired two vapor-product related suppliers. In April 2018 Vapor Supply and some of its affiliates, including ecig.com, vaporsupply.com domains, were purchased for $4.8M in cash. This will give more presence within the vape market as Vapor Supply not only manufactures and markets proprietary e-liquids, it also operates its own stores.
In September 2018 Turning Point acquired IVG for $23.7M in cash, stock and a note which matures in February 2020. IVG will also add more exposure to vapor market through its online store and brick and mortar locations.
In late November 2018, a minority stake of 19.99% in Canadian American Standard Hemp Inc was acquired. CASH is a privately-owned company that processes hemp, produces tinctures, capsules, topical products, vape products and oral sprays containing cannabidiol isolate. CASH forecasts their market opportunity to grow from 2017’s $8B to $100B within the US and $250B worldwide in ‘the future’.
Financial Performance
The company is light on presentation material, their last release is from early 2018 which highlights FY2017 events. Nevertheless, it can be seen that Turning Points management has paid down debt and reduced leverage from 6.1x in 2014 to 3.3x at the end of 2017, meanwhile Interest Expense declined to $14.8M from as much as $44.1M in 2013.
Free cash flow continues to improve, as CapeEx was reduced to 3.4% of EBITDA in 2017, FCF increased to $58M on $285.8M in net sales reciepts, a 38.6% improvement year-over-year. Gross profit had gone up as well, from $100.4M to $124.9M, or +24.4%.
Their most recognized brand is Zig-Zag rolling paper which remains the #1 premium product in both the US and Canada, holding a 31% market share in 2017 on nearly $29M in sales. There are two new SKUs that were developed in 2018 for the Canadian market, based on expected cannabis legalization (since approved), however this is waiting regulatory labeling currently.
Possible Burns
In October 2018, one of Turning Point’s e-cigarette suppliers, VMR Products, was acquired by Juul Labs for $75M. Under the terms of their contract, VMR terminated sales to Turning Point but allowed them to sell their existing V2 brand inventory which is expected to be exhausted after 1Q2019. Management has stated that they intend to replace these with other ‘new initiatives’, without providing further details at this time.
During their last quarter’s conference call in early November, management said their Canadian distribution would be temporarily disrupted as new packaging guidelines would require changes to accommodate recent legalization of recreational cannabis. As such, shipments with existing packaging were reduced for the quarter and the impact is anticipated to continue through 1Q2019, a return to normal flow was forecast for the ‘middle of’ 2019.
ICR Conference
Turning Point Brands will be presenting at the ICR Conference in Orlando on January 15th, 2019. Aside from its main presentation at 16:30 ET, they will also host breakout sessions through the day for investors. Their next earnings release, although not confirmed, should be during the early part of February.
