Business Overview
Turning Point Brands, Inc. (TPB) is a leading manufacturer, marketer, and distributor of branded consumer products, including alternative smoking accessories and consumables with active ingredients. With a focus on iconic brands like Zig-Zag and Stoker's, the company has established a strong foothold in the rapidly evolving tobacco and alternative nicotine landscape.
Turning Point Brands has a rich history dating back to 1997 when it acquired the U.S. and Canadian rolling papers distribution rights for the Zig-Zag brand. This acquisition provided the company with a strong foothold in the premium rolling papers market, where Zig-Zag has maintained its position as the #1 premium and overall rolling paper brand in the U.S.
In 2003, the company further expanded its portfolio by acquiring the Stoker's brand, which has since become the #1 discount and overall chewing tobacco brand in the industry. Leveraging the Stoker's brand, Turning Point Brands introduced new products such as moist snuff tobacco, driving further growth in this segment.
The company has faced and navigated significant regulatory challenges over the years. In 2009, the Family Smoking Prevention and Tobacco Control Act granted the FDA regulatory authority over tobacco products, requiring Turning Point Brands to comply with new marketing, labeling, and approval requirements. In response, the company made substantial investments to ensure compliance, including establishing a team of regulatory experts.
Another ongoing challenge for Turning Point Brands has been competition from illicit sources, particularly counterfeit products. The company has implemented various tactics to combat counterfeiting, such as requiring sales force personnel to randomly collect products for authentication reviews and using private investigators to monitor retailers suspected of selling counterfeit goods. While Turning Point Brands has achieved some success in legal actions against counterfeiters, this remains a persistent challenge in the industry.
Turning Point Brands operates two primary segments: Zig-Zag Products and Stoker's Products. The Zig-Zag Products segment markets and distributes rolling papers, tubes, finished cigars, make-your-own (MYO) cigar wraps, and accessories. The Stoker's Products segment manufactures and markets moist snuff tobacco (MST), contracts for and markets FRE, its modern oral product, and contracts for and markets loose-leaf chewing tobacco products.
The company's products are distributed through a network of approximately 900 direct wholesale customers and an additional 600 secondary, indirect wholesalers in the U.S. Turning Point Brands' products are available in approximately 220,000 retail outlets across North America, including convenience stores, tobacco outlets, food stores, mass merchandisers, drug stores, and non-traditional retail channels.
The Zig-Zag products segment is centered around the company's iconic Zig-Zag brand, which holds the #1 position in both the premium and overall rolling papers categories in the U.S. with around 33% total market share. The company has also leveraged the Zig-Zag brand to successfully expand into the MYO cigar wraps market, where it maintains the #1 market position with approximately 48% share. In 2021, the company acquired certain assets from Unitabac, which provided a portfolio of cigarillo products to re-introduce the Zig-Zag brand into the large and growing cigarillo category.
The Stokers products segment is anchored by the Stoker's brand, which is a leading brand in both the moist snuff tobacco (MST) and loose-leaf chewing tobacco categories. Stoker's MST holds an 11.2% share in the measured stores with distribution and a 7.4% share of the total U.S. MST non-pouch market. Stoker's is the #1 discount and #1 overall brand in the chewing tobacco category with approximately 32.3% market share. The company's chewing tobacco portfolio is further strengthened by the Beech-Nut, Trophy, Durango and Wind River brands, collectively making Turning Point Brands the #1 marketer of chewing tobacco with around 37.2% market share.
The alternative smoking accessories market, which includes the company's Zig-Zag products, is experiencing robust secular growth driven by the legalization of cannabis in the U.S. and Canada, as well as positive shifts in consumer perception. The overall OTP (Other Tobacco Products) industry, which includes the company's Stoker's products, has exhibited low-single digit volume declines in recent years.
Financials and Performance
Financials
For the fiscal year ended December 31, 2024, Turning Point Brands reported total net sales of $360.7 million, up 11% from the previous year. The company's Zig-Zag Products segment generated $192.4 million in net sales, a 7% increase year-over-year, while the Stoker's Products segment reported $168.3 million in net sales, a 16% increase.
Gross profit for the full year 2024 was $201.6 million, representing a gross margin of 55.9%, down 39 basis points from the prior year. Adjusted EBITDA, a key metric for the company, increased 12% to $104.5 million in 2024, at the high end of the company's preliminary guidance range.
For the fourth quarter of 2024, Turning Point Brands reported net sales of $93.7 million, up 12.8% year-over-year. Adjusted EBITDA for the quarter was $26.2 million, representing a 5.3% increase over the prior-year period.
The company's annual net income for the fiscal year 2024 was $48 million, with annual operating cash flow of $61 million and annual free cash flow of $62.4 million. For the most recent quarter, net income was $12.2 million, a decrease of 14.9% year-over-year, primarily due to higher selling, general and administrative expenses.
Over 90% of the company's net sales in 2024 were derived from the U.S. market, with the remaining coming primarily from Canada.
Liquidity
The company's balance sheet remains strong, with $46.2 million in cash and cash equivalents as of December 31, 2024. Turning Point Brands' net debt stood at $202.5 million, with a net debt to adjusted EBITDA ratio of 1.9x, well within the company's target range of 2-3x.
The company's debt-to-equity ratio is 1.36, current ratio is 4.42, and quick ratio is 2.27. Turning Point Brands also has a $75 million asset-backed revolving credit facility, of which $57.4 million was available for borrowing as of the end of the fourth quarter.
Growth Strategies and Outlook
Turning Point Brands is focused on several key growth strategies to drive long-term value:
1. Expanding market share in existing product lines, both domestically and internationally: The company sees opportunities to gain share in its core Zig-Zag and Stoker's brands, as well as to expand its international presence, particularly in Canada and South America.
2. Developing new and innovative products: The company has a robust pipeline of new product introductions, including extensions of its Zig-Zag and Stoker's brands, as well as expansion into adjacent categories like modern oral nicotine products.
3. Leveraging its extensive distribution network: Turning Point Brands' nationwide distribution platform, which reaches an estimated 220,000 retail outlets in North America, provides a strong foundation for growth, both for its existing products and new introductions.
4. Pursuing strategic acquisitions: The company has a track record of successfully identifying and integrating acquisitions that complement its core business and brand portfolio.
For the fiscal year 2025, Turning Point Brands is guiding for adjusted EBITDA in the range of $108 million to $113 million, representing continued growth. This guidance reflects continued growth in their Zig Zag and Stoker's businesses, as well as significant acceleration of growth in their modern oral brands Free and Out. The company expects these modern oral products to generate $60 million to $80 million in combined revenue in 2025. The 2025 adjusted EBITDA guidance includes meaningful sales and marketing investments to support their growth plans for the modern oral business and reflects TPB's pro rata 50% share of the Alts economics.
Risks and Challenges
Turning Point Brands operates in a highly regulated industry, with the U.S. Food and Drug Administration (FDA) having broad authority over the manufacture, sale, and marketing of tobacco and nicotine-based products. Changes in FDA regulations or enforcement priorities could have a material impact on the company's business.
The company also faces competition from larger tobacco industry players, as well as the ongoing threat of illicit trade and counterfeit products, which can damage brand equity and erode market share. Managing the potential shift in consumer preferences towards lower-risk nicotine products is another key challenge the company must navigate.
Conclusion
Turning Point Brands has built a portfolio of iconic brands that have established a strong presence in the alternative smoking accessories and other tobacco products (OTP) markets. The company's focus on innovation, international expansion, and strategic acquisitions positions it well to capitalize on the dynamic changes occurring in the tobacco and nicotine landscape. While the industry faces regulatory uncertainties and competitive pressures, Turning Point Brands' experienced management team, robust distribution network, and solid financial position suggest the company is well-equipped to navigate these challenges and deliver long-term value for shareholders.