TPB - Fundamentals, Financials, History, and Analysis
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Turning Point Brands, Inc. (NYSE:TPB) is a leading manufacturer, marketer, and distributor of branded consumer products. The company operates in three segments: Zig-Zag Products, Stoker's Products, and Creative Distribution Solutions. With a focus on iconic brands like Zig-Zag and Stoker's, TPB has established a strong presence in the alternative smoking accessories and other tobacco products (OTP) industries.

In the fiscal year 2023, Turning Point Brands reported annual net income of $38.5 million and annual revenue of $405.4 million. The company generated robust annual operating cash flow of $66.9 million and free cash flow of $61.2 million, showcasing its ability to consistently generate substantial cash flow.

The company's first quarter of 2024 results demonstrated continued progress. Consolidated net sales decreased 3.9% year-over-year to $97.1 million, but excluding the Creative Distribution Solutions (CDS) segment, overall revenue was up 10%. Gross margin expanded 530 basis points to 53.5%, and adjusted EBITDA increased 21.6% to $25.3 million.

Business Overview

Zig-Zag Products Segment: Driving Growth through Alternative Channels

The Zig-Zag Products segment, which includes rolling papers, tubes, finished cigars, and accessories, reported a 11.5% increase in net sales to $46.7 million in the first quarter of 2024. This growth was driven by strength in the U.S. papers and wraps businesses, as well as continued momentum in the alternative B2B channel, where sales grew over 60% year-over-year.

Turning Point Brands has been strategically expanding its presence in the alternative channel, which includes cannabis dispensaries, head shops, and other non-traditional retail outlets. The company's diverse product portfolio, including papers, wraps, and accessories, has resonated well with this evolving customer base. Additionally, Zig-Zag's focus on building its brand as a lifestyle product has further enhanced its appeal in the alternative market.

Stoker's Products Segment: Consistent Performance with Promising Modern Oral Opportunity

The Stoker's Products segment, which encompasses moist snuff tobacco (MST) and loose-leaf chewing tobacco, reported an 8% increase in net sales to $36.4 million in the first quarter of 2024. This growth was driven by a 6.7% increase in MST sales and a 0.1% volume increase, despite a 4.6% decline in loose-leaf chewing tobacco.

Stoker's continues to be a steady growth engine for Turning Point Brands, with the MST portfolio gaining market share and the company's new Modern Oral product, FRE, showing promising early results. FRE sales more than tripled in the quarter, as the company focuses on prudently ramping up sales and distribution efforts to achieve steady growth over time.

Creative Distribution Solutions Segment: Maintaining Profitability

The Creative Distribution Solutions (CDS) segment, which includes the company's liquid nicotine and other non-tobacco/nicotine product distribution businesses, reported net sales of $14.0 million in the first quarter of 2024. While this represents a 44.9% decrease from the prior-year period, the segment maintained profitability, generating approximately $600,000 in adjusted EBITDA.

Turning Point Brands has previously communicated its intention to maintain the CDS segment as a profitable cash-flowing business, without allocating significant management time or resources. The company remains focused on its core Zig-Zag and Stoker's segments, which continue to drive the majority of the company's growth and profitability.

Financials

Robust Financial Position and Liquidity

Turning Point Brands ended the first quarter of 2024 with $130.9 million in cash on the balance sheet. This strong liquidity position, combined with the company's projected free cash flow generation, provides ample resources to address the upcoming maturity of the company's $118.5 million in Convertible Senior Notes due in July 2024.

The company's capital structure also includes $250 million in Senior Secured Notes due 2026, which bear a 5.625% interest rate. Turning Point Brands' financial flexibility and prudent capital management have enabled it to navigate the evolving regulatory landscape and invest in growth opportunities.

Outlook

Guidance and Outlook

For the full year 2024, Turning Point Brands is reaffirming its guidance for consolidated adjusted EBITDA in the range of $95 million to $100 million. This guidance does not include any contribution from the CDS segment, which generated approximately $600,000 in adjusted EBITDA during the first quarter of 2024 and $2 million for the full year 2023.

The company's confidence in its outlook is underpinned by the strong performance of its core Zig-Zag and Stoker's segments, as well as the promising early results from the national launch of its FRE Modern Oral product. Turning Point Brands remains focused on expanding its distribution, introducing new products, and leveraging its iconic brands to drive long-term growth and shareholder value.

Risks and Challenges

As with any consumer goods company, Turning Point Brands faces various risks and challenges, including regulatory changes, competition, and evolving consumer preferences. The company operates in industries that are subject to significant oversight and potential restrictions, such as the FDA's regulation of tobacco and nicotine products.

Additionally, the company faces competition from both legal and illicit sources, which can impact its market share and pricing power. Adapting to changing consumer preferences, particularly in the alternative smoking accessories and OTP markets, is also a key challenge that Turning Point Brands must navigate.

Conclusion

Turning Point Brands has demonstrated its ability to navigate a dynamic industry landscape and deliver consistent financial performance. The company's diversified portfolio of iconic brands, strategic focus on alternative channels, and prudent capital management have positioned it for continued success.

With strong liquidity, a healthy balance sheet, and a promising outlook for its core Zig-Zag and Stoker's segments, Turning Point Brands appears well-equipped to capitalize on growth opportunities and create value for its shareholders. As the company continues to execute on its strategic initiatives, investors should closely monitor its progress in the quarters and years ahead.

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