Executive Summary / Key Takeaways

• Turning Point Brands is strategically pivoting, leveraging cash flow from its established Zig-Zag and Stoker's heritage brands to aggressively invest in the high-growth modern oral nicotine pouch and alternative distribution channels.
• The modern oral segment, encompassing FRE and the newly launched ALP (via JV), is demonstrating significant momentum, with consolidated nicotine pouch sales guidance for 2025 increased to $80 million-$95 million, supporting a long-term target of double-digit market share in the category.
• Recent financial performance in Q1 2025 exceeded expectations, driven by a 62.7% surge in Stoker's net sales (primarily modern oral and MST growth), contributing to a 28.1% consolidated revenue increase and a 12% rise in Adjusted EBITDA for the quarter.
• The company faces notable risks, including regulatory uncertainty surrounding FDA PMTAs, potential tariff impacts on imported goods ($5-$7 million estimated impact on 2025 guidance), intense competition from large, well-capitalized players, and the need to remediate material weaknesses in internal IT controls.
• Management has reaffirmed its 2025 Adjusted EBITDA guidance of $108 million-$113 million, reflecting anticipated continued growth, strategic investments in high-potential areas, and expected headwinds.

Setting the Scene: A Strategic Pivot in a Dynamic Market

Turning Point Brands, Inc. (TPB) operates at the intersection of established consumer product categories and rapidly evolving alternative markets. With a history stretching back to 1988, the company has built a portfolio of well-known brands like Zig-Zag in rolling papers and Stoker's in smokeless tobacco. These heritage brands have long served as the foundation of TPB's business, providing stable revenue streams and generating significant cash flow. However, recognizing the shifting landscape of adult consumer preferences and regulatory dynamics, TPB has embarked on a strategic pivot, aiming to leverage these foundational strengths to capture growth in next-generation product categories, most notably modern oral nicotine pouches and the expanding alternative distribution channel.

The industry landscape is characterized by intense competition, significant regulatory oversight, and changing consumer behaviors. Large, entrenched players like Philip Morris International (PM), Altria Group (MO), Vector Group (VGR), and British American Tobacco (BTI) dominate various segments, bringing scale, extensive distribution, and substantial resources to bear. While TPB competes directly with these giants in areas like moist snuff (MO) and cigars/papers (VGR), its strategic focus lies in identifying and capitalizing on niche opportunities and emerging trends where its agility and established distribution network can provide a competitive edge.

TPB's core strategic response to this dynamic environment involves a dual approach: maintaining the profitability and market position of its heritage brands while aggressively investing in areas poised for secular growth. This strategy is underpinned by a focus on expanding distribution, enhancing brand relevance, and pursuing targeted innovation, particularly within the modern oral and alternative channels.

Central to TPB's future growth ambitions is its foray into the modern oral nicotine pouch market with its FRE brand and the recently launched ALP brand through a joint venture with Tucker Carlson Network (ALP Supply Company JV). While specific technological details beyond product features like long-lasting, vibrant flavor options, comfortable mouth feel, and flexible nicotine levels (including the strategic expansion into the high-volume 3mg and 6mg strengths) are not extensively detailed, the company emphasizes product differentiation based on consumer feedback regarding mouthfeel and flavor. This focus on product attributes that resonate directly with consumers is a key part of its strategy to compete in a crowded market. The company's R&D efforts appear directed towards expanding its product portfolio within these categories and potentially exploring domestic manufacturing options, the latter aimed at improving profitability and mitigating supply chain risks, depending on the potential tariff environment. Operationally, TPB relies heavily on third-party manufacturers (approximately 75% of production by net sales), with in-house manufacturing focused primarily on moist snuff tobacco. The company is also implementing new ERP and CRM systems, an operational technology initiative, although it has faced challenges with related internal controls.

The competitive landscape for TPB is multifaceted. In traditional tobacco, its Stoker's MST and chewing tobacco brands compete effectively, gaining market share (MST share growing to 7.6% in 2024, chewing tobacco #1 brand with 32.9% share in Q4 2024) by offering a strong value proposition ("great fit at a fair price") and expanding distribution, even as the overall category volumes decline. In the alternative smoking accessories space, Zig-Zag leverages its iconic brand and broad SKU portfolio to position itself as a one-stop shop, capitalizing on the secular tailwind from cannabis legalization and the convergence of traditional and alternative distribution channels. Here, TPB benefits from long-standing relationships with traditional distributors, which management believes provides a strong foundation as these distributors increasingly target the alternative market. In the burgeoning modern oral category, TPB faces direct competition from major players like Altria (with ZYN) and BTI (with Vuse). While these competitors possess greater scale and R&D resources, TPB aims to carve out significant share through product differentiation (mouthfeel, flavor, nicotine range), strategic investments in distribution (targeting chains and leveraging its existing network), and distinct go-to-market strategies for its FRE (brick-and-mortar focus) and ALP (online/D2C focus) brands. TPB's financial metrics, such as operating margins (18.49% TTM), while healthy, generally trail those of larger, more established competitors like PM (40% operating margin) and MO (45% operating margin), reflecting differences in scale, product mix, and market positioning. However, TPB's focus on high-growth segments and agile strategy execution positions it to potentially outpace the growth rates of its more traditional rivals.

Performance and Strategic Execution

Turning Point Brands' strategic focus on high-growth areas is beginning to yield tangible results, particularly within the Stoker's segment, which now encompasses the rapidly expanding modern oral business. The company's first quarter 2025 results demonstrated significant momentum, with consolidated net sales increasing by 28.1% to $106.4 million compared to $83.1 million in Q1 2024. This growth was predominantly fueled by the Stoker's segment, which saw its net sales surge by 62.7% to $59.2 million, up from $36.4 million in the prior year period. Management attributed this substantial increase primarily to $20.0 million in sales from modern oral products and $2.4 million in growth from Stoker's MST. The volume increase in Stoker's products contributed $20.0 million to the segment's growth, while price/product mix added another $2.8 million.

The Zig-Zag segment also contributed positively, with net sales increasing by 1.2% to $47.3 million in Q1 2025 from $46.7 million in Q1 2024. This growth was driven by a $1.5 million increase in cigar products and a $0.5 million increase in Canadian products, partially offset by declines in higher-margin U.S. papers and wraps (-$0.8 million) and the Clipper lighter business (-$0.5 million).

Consolidated gross profit rose by 23.3% to $59.6 million in Q1 2025, compared to $48.4 million in Q1 2024. However, the consolidated gross profit margin slightly decreased to 56.0% from 58.2%, primarily due to a shift in product mix towards lower-margin offerings. Within the segments, Zig-Zag's gross profit decreased by 7.2% to $25.6 million, with margins declining to 54.1% from 59.0%, reflecting the unfavorable mix shift away from higher-margin papers. Conversely, Stoker's gross profit jumped by 63.6% to $34.0 million, with margins slightly increasing to 57.5% from 57.2%, driven by the significant increase in modern oral sales.

Operating expenses saw an increase, with selling, general, and administrative expenses rising by 25.2% to $36.4 million in Q1 2025, primarily due to increased shipping and selling costs associated with the surge in modern oral sales and joint venture-related corporate expenses. This led to consolidated operating income increasing by a more modest 20.3% to $23.2 million, with the operating margin decreasing to 21.8% from 23.2%. Segment operating income reflected these trends, with Zig-Zag's operating income declining by 5.9% to $16.9 million (margin 35.8%) and Stoker's operating income soaring by 56.8% to $24.1 million (margin 40.8%). Unallocated corporate costs, including PMTA expenses ($1.6 million in Q1 2025 vs. $0.8 million in Q1 2024), also increased, contributing to the overall expense growth.

Below the operating line, interest expense, net increased due to the issuance of the higher-rate 2032 Notes used to redeem the 2026 Notes, and the company recognized a loss on extinguishment of debt related to this transaction. Net income attributable to Turning Point Brands, Inc. increased by 19.8% to $14.4 million in Q1 2025. Adjusted EBITDA, a key metric for management, increased by 12% to $27.7 million for the quarter, demonstrating continued profitability growth despite increased investments and operational costs.

Liquidity remains robust, with $99.6 million in cash on hand as of March 31, 2025, and $62.2 million available under the 2023 ABL Facility. The recent debt refinancing, issuing $300 million of 7.62% Senior Secured Notes due 2032 to redeem the $250 million 5.62% notes due 2026, has extended the company's debt maturity profile while increasing its overall debt level and interest expense.

The new notes are secured by a first-priority lien on substantially all assets of the company and its domestic restricted subsidiaries and contain customary covenants, including restrictions on restricted payments like dividends, subject to earnings and market capitalization requirements. The company's adjusted working capital saw a modest increase in Q1 2025, primarily driven by higher current assets. Cash flow from operations decreased slightly in Q1 2025 compared to the prior year, mainly due to unfavorable working capital changes, while financing activities provided a significant cash inflow related to the debt issuance.

The company remains within its target net leverage range of two to three times.

Operationally, TPB continues to focus on expanding distribution across its portfolio. In the alternative channel, Zig-Zag is successfully increasing average order sizes and gaining valuable shelf space. The launch of new hemp wrap offerings and the vibrant new look for papers cartons are aimed at enhancing brand visibility and consumer appeal. In the Stoker's segment, expanding distribution for MST tubs remains a priority. For modern oral, the focus is on growing the sales force, increasing store visits, improving merchandising, and securing placement in chain accounts, alongside strategic marketing campaigns and enhancing the online presence. The partnership with Gopuff for "Instant Delivery" for ALP via its website highlights an innovative approach to direct-to-consumer fulfillment.

Outlook, Risks, and Competitive Positioning

Turning Point Brands' outlook is heavily influenced by the anticipated trajectory of its modern oral business and its ability to execute against its strategic investment plans while managing inherent industry risks. Management has reaffirmed its 2025 Adjusted EBITDA guidance of $108 million to $113 million, signaling confidence in continued growth. A key driver for this outlook is the significant acceleration expected in modern oral sales, with the full year consolidated nicotine pouch sales guidance (including both FRE and ALP) increased to a range of $80 million to $95 million, up from the previously announced $60 million to $80 million. This upward revision reflects the strong momentum observed, particularly the nearly tenfold year-over-year and twofold sequential growth in white pouch sales in Q1 2025.

The guidance incorporates planned strategic investments in the white pouch business, including increased sales and marketing spend, sales force expansion, online platform improvements, and efforts to secure chain account distribution. These investments are expected to support the company's long-term target of achieving double-digit market share in the white nicotine pouch space, a category analysts believe could exceed $5 billion in manufacturer revenue by the end of the decade. Management noted that these investments would somewhat constrain the rate of EBITDA growth in 2025 relative to sales growth.

External factors impacting the outlook include a potential $5 million to $7 million tariff impact on imported products, assuming a 10% tariff rate, and FX headwinds in the Zig-Zag segment due to a stronger euro. Despite these headwinds and the planned investments, the company anticipates mid-single-digit growth in its business excluding the modern oral segment in 2025. Budgeted capital expenditures for 2025 are $4 million to $5 million, with an additional $3 million to $5 million expected for modern oral PMTAs.

However, the investment thesis is not without significant risks. The regulatory environment, particularly concerning the FDA's oversight of tobacco and nicotine products, remains a primary concern. The timing and outcome of PMTA applications for modern oral products are uncertain, and changes in FDA enforcement priorities or potential flavor bans could materially impact the business. The company is also subject to product liability litigation, including lawsuits related to previously sold vaporizer devices, with potential losses not currently estimable. Supply chain disruptions, dependence on third-party suppliers, and potential increases in tobacco/nicotine taxes also pose risks. Furthermore, the company has disclosed a material weakness in its internal controls over financial reporting related to IT general controls, which is currently undergoing remediation and is expected to be fully addressed by the end of fiscal year 2025. The terms of the new 2032 Notes also impose covenants that could restrict future operations, including the ability to make restricted payments like dividends if certain financial conditions are not met.

In the competitive arena, TPB faces formidable opponents. In the modern oral space, it competes with market leaders like Altria's ZYN. While TPB's FRE and ALP brands are gaining traction, achieving the targeted double-digit market share will require sustained investment and successful execution against larger, more established players. TPB's competitive advantages lie in its established distribution network (over 220,000 retail outlets), strong brand equity in its heritage segments, and an agile approach to emerging categories and distribution channels. Its focus on product differentiation in modern oral (mouthfeel, flavor) and leveraging its existing sales force for cross-selling opportunities (modern oral into Zig-Zag's alt channel network and vice versa) are key strategic responses to the competitive pressure. However, TPB's smaller scale compared to multinational tobacco companies results in certain disadvantages, including potentially higher operating costs per unit and less extensive R&D resources, which could impact profitability and innovation speed. The company's ability to continue expanding distribution, particularly into national chain accounts for modern oral, will be critical in competing effectively against rivals with broader retail penetration.

Conclusion

Turning Point Brands is navigating a complex yet opportunity-rich market by strategically focusing its resources on high-growth areas while relying on the stable foundation provided by its iconic heritage brands. The divestiture of the CDS segment has sharpened management's focus on the core business, particularly the promising modern oral nicotine pouch category. The significant growth momentum demonstrated by the FRE and ALP brands, reflected in the increased 2025 sales guidance, underscores the potential of this strategy.

While the company faces notable challenges, including regulatory uncertainties, intense competition from larger players, and operational control remediation, its established distribution network, brand recognition, and targeted investments position it to capitalize on evolving consumer preferences. The strategic emphasis on product differentiation in modern oral, coupled with leveraging cross-selling opportunities in the expanding alternative channel, provides a clear path for growth. For investors, TPB represents an opportunity to participate in the growth of next-generation nicotine products and the alternative consumption market, balanced against the inherent risks of a highly regulated and competitive industry. The successful execution of its modern oral expansion and the effective management of regulatory and operational challenges will be key determinants of TPB's ability to translate its current momentum into sustained long-term value creation.