$TPB: can Turning Point Brands be the third player in nicotine pouches? | Saberpoint Capital
Sabrepoint’s thesis is that TPB can become a durable third player in a nicotine-pouch market currently worth about $6.5 billion and growing roughly 22%. George Baxter argues the company combines established distribution, legal/regulatory competence and two credible brands—FRE and the Tucker Carlson-backed ALP—while most venture-funded challengers lack the capital or field salesforce to survive. His analogy is “Dr Pepper to Coca-Cola and Pepsi,” not displacing Zyn or Velo but maintaining roughly 5%-6% share, with a possible 5%-10% niche.
Nicotine pouches retain tobacco’s attractive economics while removing many of smoking’s practical and social constraints. They are cheap to manufacture, high-margin, addictive and usable on planes, in offices, elevators and movie theaters without the stigma of smoking. Baxter believes habitual users eventually associate one formulation with relief—nicotine withdrawal feels “just like hunger”—although Andrew Walker pushes back that flavors may make the category behave more like tea or energy drinks.
The American convenience-store channel may turn brand loyalty and shelf scarcity into stronger moats than European experience suggests. Roughly one-third of Swedish pouch sales occur online versus only about 4% in the U.S.; Americans tend to buy cans during daily convenience-store trips rather than committing to a $70-$80 online order. Retailers also prefer fewer, faster-selling brands, while TPB’s salesforce is expanding from roughly 260 to 320 representatives and can service independents that smaller competitors reach only through distributors.
Regulation is simultaneously weakening speculative pouch startups and reopening competition for the tobacco majors. The new PMTA pathway lets companies such as BAT and Philip Morris pursue flavors, strengths and formulations without acquiring every innovative startup, undermining the venture-backed strategy of winning shelf space and selling out to Big Tobacco. TPB’s edge is not immunity from that competition; it is that retailers asking “Will this company last?” can see an existing cash-generative business, legal/regulatory capability and national distribution behind it.
Near-term earnings are being suppressed by a deliberate—but not yet proven—investment year. Second-quarter revenue rose from about $116 million to $140 million, while spending accelerated on PMTA work, slotting fees, salespeople and the TKO/UFC partnership; Walker highlights concern over an estimated $20 million annual TKO commitment. Baxter expects store-launch fees to annualize downward over coming quarters and domestic production eventually to raise gross margin by roughly 15%, but concedes both timing and marketing ROI remain uncertain.
ALP is the portfolio’s breakout asset, while FRE remains the expensive brand-building experiment. Walker says the products themselves are effectively identical, yet ALP’s association with Tucker Carlson and a broader “rebellious” identity has produced dramatically better traction than FRE’s less coherent advertising. Walker’s key risk is celebrity leverage: Tucker owns half the venture and could demand better economics later; Baxter therefore expects TPB to pursue something like a 50%-to-70% increase rather than attempt an unaffordable full buyout.
At roughly $60 per share, Baxter believes investors are paying little for the pouch optionality—but he openly flags his own confirmation bias. He values Zig-Zag, Stoker’s and the other legacy assets at roughly $35-$45 per share, leaving about $15 per share, or approximately $300 million, for FRE and ALP. His upside case assumes a 10%-30% category CAGR through 2030 and ALP eventually reaching about 10% share, but he closes by admitting this is “the best idea of my career” and that domestic manufacturing already unfolded differently from his expectations.
1. TPB has turned a mixed legacy portfolio into a pouch platform
Baxter first encountered Turning Point Brands through its legacy collection: a U.S. license to distribute Zig-Zag rolling papers, Stoker’s moist snuff and older products such as chewing candy and Beech Nuts, plus an online vape distributor later damaged by the 2019 “Vapegate” crisis. Baxter attributed that incident to homemade marijuana pods containing vitamin E acetate. Zig-Zag remains high-margin but inventory-heavy; one shipment can supply a retailer for six months, producing long destocking cycles that obscure underlying demand.
Stoker’s has continued growing despite declines in the moist-snuff and chewing-candy markets, while the troubled vape operation was eventually placed into a joint venture in which TPB retained 49%. The strategic reset came with FRE’s nationwide launch in early 2024 and the subsequent 50/50 ALP venture with Tucker Carlson.
Baxter says pouches went from virtually nothing to approximately 48% of TPB’s recent revenue. Against that shift, the legacy businesses matter less as growth engines than as the cash flow and sales infrastructure supporting entry into a rapidly expanding category.
2. Pouches preserve nicotine economics while making consumption almost frictionless
Baxter’s historical framing is deliberately stark: cigarettes were socially destructive but perhaps “the most successful product in history.” He says a Philip Morris investment made 98 years ago would have delivered an average annual return of roughly 16.5% because addiction, low manufacturing cost and unusually durable brand loyalty created extraordinary economics.
The pouch category, barely established before COVID-19, is now about $6.5 billion. Recent Nielsen growth is approximately 22%, versus a five-year average around 37%-38%, giving TPB a high-margin growth market after years of operating legacy products facing secular decline.
Baxter’s strongest demand-side point is convenience. A smoker or vaper cannot consume on a four-hour flight, in an elevator, at a movie or inside an office; a pouch user can consume almost invisibly throughout the day. That allows nicotine to occupy occasions where cigarettes, alcohol and cannabis are socially or practically impossible.
The health-harm reduction argument matters, but Walker sees discretion as equally powerful: “Even if I make a wrong choice, no one will know.” Pouches therefore benefit both from younger consumers rejecting smoking and from existing nicotine users wanting a format compatible with modern indoor life.
3. Brand loyalty remains the central disagreement
Walker challenges the cigarette analogy because pouch users may rotate orange, mango, wintergreen and mint like tea or energy-drink flavors. His question is whether a category with easy experimentation will ever produce the near-absolute loyalty seen when a Marlboro smoker refuses a Winston.
Baxter concedes that casual and early-stage users experiment, but argues habitual users eventually connect relief with a particular release profile and formulation. After trying essentially every product, he repeatedly returns to ALP and FRE Wintergreen or Mint because they deliver the familiar “sense of relief and satisfaction”; addiction, in his formulation, feels “just like hunger.”
Baxter’s own friends complicate the “last pack” analogy. Many young pouch users do not tell themselves, “This is the last nicotine pouch”; they think, “This is who I am.” That could support long customer lives, but it also leaves unresolved whether identity attaches to nicotine pouches broadly or to one brand specifically.
4. U.S. distribution could produce a durable third winner
Only about 4% of U.S. pouch sales occur online, Baxter says, versus roughly one-third in Sweden. Free shipping commonly requires a $70-$80 order—about 15 cans—while many consumers prefer grabbing cans during a coffee or convenience-store trip, either from habit or because they resist stockpiling an addictive product.
Walker argues convenience stores already support numerous energy-drink, soda and flavor SKUs, so shelf space need not collapse to two pouch brands. Baxter’s rebuttal is that nicotine purchases are more purposeful: excessive choice slows customers and confuses clerks, while buyers report faster sales velocity from tighter assortments.
Zyn and Velo are major incumbents, but retailers do not want those suppliers dictating every promotion and rebate. TPB can schedule discounts more flexibly, serve price-sensitive customers and give stores bargaining leverage—creating room for a smaller “Dr Pepper” with perhaps 5%-10% share.
Survival capacity separates TPB from venture-backed brands such as Sesh, Lucy and Juice Head. Retail buyers repeatedly ask, “Will this company last?” TPB can answer with existing cash flow, regulatory experience and a field salesforce growing from roughly 260 to 320 representatives, versus startup teams often numbering only around ten.
5. PMTA reform helps Big Tobacco but may strand smaller challengers
The earlier regime imposed different filing deadlines on tobacco-derived and synthetic nicotine—roughly 2020 and 2022—and made every formulation or flavor change painfully slow. Baxter says this produced a vape market in which 70%-80% of products became illegal Chinese flavored disposables while compliant incumbents struggled to innovate.
Under the new framework announced in May, Baxter says companies can submit fresh scientific packages and pursue marketing authorization for new products. BAT has already started selling flavored e-cigarette pods, while Zyn plans a 1.5-milligram product; large companies no longer need to acquire a startup simply to obtain innovation.
That change damages the venture-capital playbook of paying slotting fees, winning a large chain and selling the brand to Big Tobacco. Without a credible acquisition exit, smaller companies may exhaust their funding, whereas TPB can finance continued participation from the broader business.
Product competition is nevertheless intensifying. Baxter considers Velo Plus “much better than Zyn” and says its share rose toward 20%, while Zyn fell from roughly 78% early last year to about 54%. Zyn Ultra appears largely to be cannibalizing original Zyn, with the combined franchise growing only about 2% year over year.
6. Today’s margin pressure contains identifiable—but delayed—relief
Walker frames the financial tension clearly: second-quarter revenue increased from roughly $116 million to $140 million, yet profits declined as management funded FRE, ALP, PMTA submissions, slotting payments and the TKO partnership. The concern is that investors are underwriting future economics while absorbing a potentially fixed annual TKO cost near $20 million.
Domestic manufacturing was supposed to offset part of that burden but has not begun. Baxter says current cost is around $1.40 per can; Indian manufacturing would cost about $1 per can plus $0.20-$0.25 of air freight and a 16% tariff. Moisture makes a six-week ocean voyage impractical. U.S. production could reduce cost toward $0.65 and raise gross margin by about 15%.
Equipment is installed in Louisville and one line is operational, but switching facilities before marketing authorization could restart the PMTA queue. Baxter views approval and the supporting supplemental submission as timing questions, not fatal obstacles, while admitting production might begin soon or slip toward next year.
Slotting economics should also normalize. A launch can cost roughly $1,000-$2,000 per store, but after a year successful products may shift toward about $0.50 per can—approximately $260 annually per store for FRE and $500 for ALP at cited velocities. Privately owned independent stores do not charge slotting fees, further favoring TPB’s direct network. Baxter expects improvement from the third and fourth quarters, with broader annualization by next year’s first or second quarter.
7. ALP has the brand identity that FRE is still trying to manufacture
FRE’s core problem was awareness, so TPB spent aggressively on UFC and other partnerships. Baxter accepts that the campaigns raise recognition but questions their coherence: playful commercials do not fully express the intensity implied by UFC, drifting, boxing, bull riding and strongman sponsorships. The desired message is closer to “Own Your Power.”
ALP succeeded by linking Tucker Carlson’s independent, conservative and rebellious persona directly to the brand, then broadening that identity through figures such as Conor McGregor. Baxter’s distinction is that ALP associates personalities with a consistent character; FRE has bought substantial exposure without yet defining what “FRE” means.
Walker says there is “absolutely no difference” between the underlying ALP and FRE pouches beyond packaging. If that comparison is right, ALP’s growth is evidence of branding power, but also suggests FRE’s marketing can improve quickly if TPB adopts ALP’s playbook and eliminates less productive spending.
Walker preserves the central governance risk: celebrity economics often become more favorable to the celebrity at renewal. Tucker owns half the venture and could threaten to promote another supplier. Baxter considers a full acquisition financially unrealistic and predicts TPB may instead raise ownership from 50% to roughly 70%, leaving Tucker invested but reducing his control.
Baxter estimates ALP generated approximately $280 million of revenue last quarter, up 300% year over year. At his suggested 10-times-revenue valuation, ALP would be worth about $2 billion and Tucker’s half about $1 billion, making a full buyout unaffordable and supporting his prediction of a partial purchase.
8. Valuation depends on execution, and the bull explicitly admits his bias
At approximately $60 per share and a $1.2 billion market capitalization, Walker arrives at enterprise value near $1.25 billion after correcting for cash and debt. Baxter values Zig-Zag, Stoker’s and the remaining established businesses at roughly $35-$45 per share, implying only about $15 per share, or $300 million, for FRE and ALP.
Management uncertainty increased when the CEO abruptly stepped down for personal reasons and chairman David Glazek, a Standard General veteran, took the role. Baxter sees Glazek as deeply informed and newly accountable: “He will not be able to avoid any mistakes going forward.” Yet low insider ownership, recent ATM usage and aggressive spending keep the alignment question open.
Baxter estimates directors collectively own around 5%, former CEO Larry Wexler about 2.5% and Glazek roughly 0.5%, while 11 activist holders together exceed 10%. That shareholder pressure, plus Glazek surrendering a comparatively lower-risk chairman position, should create urgency to show operating improvement.
The upside case assumes pouch-market growth of 10%-30% annually through 2030 and ALP eventually reaching about 10% share. In the stores where the products are present, George cites current shares of roughly 11% for ALP and 6% for FRE; together, ALP and FRE already represent more than half of online pouch sales, mostly through ALP. Baxter nevertheless closes with the essential warning: he publicly called TPB “the best idea of my career,” acknowledges confirmation and consistency bias, and admits, “Things unfolded in a way I hadn’t anticipated or expected.”
Full transcript
I’m delighted to have George Baxter of Sabrepoint Capital join us for the first time today. As those of you watching on YouTube may know from what’s behind him, George is a board-game enthusiast just like me. George, how are you doing?
I’m doing well. How about you, Andrew?
I’m doing well. I’m really happy to talk about the company we’ll be discussing today. I’ve been watching this company for a long time, so I’m excited to cover it in such detail.
Before we begin, I would like to reiterate that the content of this podcast is not investment advice. Please refer to the detailed disclaimers at the end of the podcast and in the show notes.
George, the company we’re going to talk about today is Turning Point Brands. The ticker is TPB. I’ve been watching this company for 11 years. The company’s growth story has been really interesting so far, and I understand that it’s highly popular among value investors and investors in tobacco and nicotine-related fields.
I’ll hand the microphone over to you. What kind of company is Turning Point Brands, and why are you so interested in it?
Like you, Andrew, we’ve also been watching Turning Point Brands since its inception. Sabrepoint recently celebrated its 10th anniversary, and Turning Point was one of the early-stage companies we invested in.
Turning Point is a really interesting company with quite a long history. I won’t go into detail, but initially it was a private-equity fund specializing in distressed debt. There’s an investment fund called Standard General, which is a type of private-equity, distressed-debt, and hedge fund.
Yes, that brings back old memories and makes me laugh. You probably made an arbitrage trade between Standard General and Turning Point. We were like that, too.
Yes, that’s correct. At the time we first looked into Turning Point, they were selling 3 product lines. Zig-Zag rolling paper held a license to distribute in the United States. They own several brands, some of which belong to the Zig-Zag line. They have a label that says “Zig-Zag,” but the design is slightly different.
There was also Stoker’s moist snuff and other old products, like chewing candy. Beech nuts were one of them, too. Stoker’s is a leader in the chewing-candy market, but the chewing-candy market as a whole is on a downward trend. Although the moist-snuff market is also on a downward trend, Stoker’s has continued to grow despite that decline because of its position in the market.
They also ran an e-cigarette business, but faced significant difficulties after the vape-gate incident in 2019. I remember Stoker’s being the largest online e-cigarette distributor in both the direct-to-consumer and business-to-business markets. They distributed products to various vape shops, so it was a kind of roll-up model.
There was an incident in which high school students died after vaping. With a little closer look, you could have figured out what was going on, but most people didn’t bother to look into it. They were using homemade marijuana pods, and I noticed that they had added vitamin E acetate to them. The vitamin E acetate damaged the lungs and caused difficulty breathing.
In any event, the vaping rate among teenagers was huge. I remember it being over 30% for high school students. As a result, a series of laws and regulations were enacted, and the PMTA, or Premarket Tobacco Product Application, process was established, requiring all new nicotine products to obtain authorization before being sold.
That’s important because it affects the nicotine-pouch market and today’s market dynamics. Around the end of 2024 or the beginning of 2025, Turning Point spun off its e-cigarette business into a joint venture in which it holds a 49% stake and removed it from its books.
1. The pouch launch: FRE and the Alp JV with Tucker Carlson
In early 2024, they began launching FRE nationwide, marking their first entry into the nicotine-pouch market. That’s the crux of today’s story. Later, they launched the ALP brand through a 50/50 joint venture with Tucker Carlson, which is probably the fastest-growing consumer-goods brand in the United States right now, regardless of scale.
That was excellent background. Let’s move straight to today’s story.
Turning Point Brands holds valuable existing businesses. Back then, there were a lot of reactions like, “You know, we had a lot of products like Zig-Zag and rolling paper.” When it was a private company, the debt-to-equity ratio was 7x, but looking at the stock price, people thought, “The stock is trading at 6x, and the cash flow is tremendous. This is more than enough to handle.” I had that thought.
Although there are valuable existing businesses like this, the reason investors are interested in Turning Point is precisely because of the nicotine-pouch business. There’s also FRE and a joint venture with Tucker Carlson.
Anyone who has been watching the nicotine-pouch market for a long time has likely heard of the brand ZYN. ZYN nicotine pouches are one of the largest products in this market. Nicotine pouches are a business with tremendous growth potential in the tobacco industry, and the tobacco and nicotine business is showing growth for the first time in a while.
Turning Point owns 2 brands, and you probably think, “Turning Point is an investment worth targeting for this growth trend.” Is it correct to think that way?
2. Why nicotine pouches look like the new tobacco
Yes, I’ve become interested in Turning Point again. We invested in 2020 and again in 2023. In 2020, all the businesses grew significantly.
As people stayed at home, the number of people ordering e-cigarettes online increased. As the number of people smoking marijuana also increased, the use of Zig-Zag rolling paper increased. Stoker’s also achieved quite good results during that period.
However, aftereffects appeared as a result. The rolling-paper business has a cyclical structure in which retailers build up and reduce inventory. If you ship a box of rolling papers to a retailer, it becomes inventory that can be used for half a year.
Therefore, it’s a business with slow turnover but high margins. However, inventory levels fluctuate significantly, so the period during which there appears to be no growth can be prolonged. It seems like now is exactly that kind of time. In addition, long-term headwinds are also affecting this business.
Anyway, we’re talking about nicotine pouches. Why are nicotine pouches so important? When considering nicotine and nicotine consumption, the health effects on smokers in today’s society are very serious.
As you know, according to the U.S. Centers for Disease Control and Prevention, the number of smoking-related deaths each year surpasses the peak of COVID-19 deaths. Approximately 280,000 people die each year from smoking-related diseases.
Therefore, although tobacco is a very destructive product socially, historically speaking, it was probably the most successful product in history. If you look at stock performance over the past 98 years, there aren’t many stocks that have existed for that long. One of them is Philip Morris, which has since been split into Altria and Philip Morris International.
If you had bought this stock 98 years ago, you would have achieved an average annual return of 16.5%. That’s a truly surprising figure. The reason is that cigarettes are highly addictive, consumers are highly loyal to brands, and production costs are very low.
As you know, there are significant barriers to competing with products that have very low manufacturing costs. The interesting thing about nicotine pouches is that the manufacturing cost is very low and the profit margin is very high.
3. Sponsor: Trata
In my opinion, all nicotine products eventually come down to brand loyalty. In the early stages, when people first start using a product, they tend to test various products, and those who use them occasionally will likely experiment even more. However, if you use nicotine habitually, you associate the satisfaction you get from nicotine with products you are familiar with.
From that point on, you become very attached to the product. It is just like how there are many people who drink cola but do not drink Pepsi. I am one of them, too. Unlike people who easily switch to other products, nicotine tends to create a strong attachment to specific formulations. This is because people experience the satisfaction of nicotine through that formulation. If a product with a different formulation is released, people will not feel satisfied.
This market barely existed before COVID-19, but it has now grown to approximately $6.5 billion. According to recent Nielsen data, the market is currently growing at approximately 22%. Of course, there are fluctuations in the growth rate, but over the past 5 years, it has recorded an average annual growth rate of about 37% to 38%. Therefore, this market is a very rapidly growing sector.
Within that market, Turning Point succeeded in increasing the share of revenue from nearly 0% to 48%, based on recent earnings reports, through FRE products launched nationwide in 2024 and ALP. In other words, 48% of current sales come from nicotine pouches.
4. Brand loyal like cigarettes, or fickle like energy drinks?
Great. It seems well organized. Simply put, the core of this investment logic consists of 2 things. First, Turning Point and nicotine pouches are like cigarettes. Historically, as you know, if you had invested in Philip Morris in 1970, you would be richer than Warren Buffett by now. Tobacco was a good category to invest in for all the reasons you mentioned.
The second point is that we need to specifically compare Turning Point with other investment strategies. There are companies that belong to great industries yet have become the subject of Warren Buffett’s jokes. I cannot think of any right now, though. Everyone expected cars to be the future, but there were thousands of listed car companies in the 1910s, weren’t there? Only about 3 of them survived, right?
So, I think I have grasped these 2 major points. Let’s talk about each one. First of all, I agree that cigarettes are a good investment category, but I have already covered HAYPP in previous episodes. In my opinion, small-cap value investors, in particular, are interested in HAYPP and are paying attention to the European market.
From what I have heard from people who invest in HAYPP, although I have not experienced it myself, nicotine pouches seem to be different in that people use different types interchangeably. For example, think about a person who drinks cola or smokes cigarettes. They are very loyal to specific brands. If you give Marlboro to someone who smokes Winston, they absolutely will not smoke it, right? Because it feels completely different.
However, the same goes for cars. People drink various flavors of tea interchangeably. Many people say that nicotine pouches are similar to tea: “Shall I try the orange-mango flavor today?” Energy drinks are also a good example. There are many people who drink Monster Energy one day and Red Bull the next.
The first thing I am curious about is why you are so convinced that people will become extremely loyal to a particular brand.
As I mentioned, I think there is some truth to my point. It aligns with my personal experience and the experiences of others I have observed. If you talk to people who use e-cigarettes from time to time, you can tell that nicotine addiction has not yet taken deep root in them. There are differences in the way nicotine is released and in other aspects of the experience.
As those of you who have experienced nicotine addiction know, it is just like hunger, isn’t it? Personally, I have tried every nicotine pouch available on the market. I admit that some products are definitely better than others, but I almost always come back to ALP and FRE, Wintergreen, and Mint.
This is because the product reminds me of a sense of relief and satisfaction. As time goes by, you go through a stage of testing various products, but eventually, you end up leaning toward a specific brand.
I am using Hype, and I definitely think it is necessary to go through the process of testing various products. However, this may be because product distribution methods differ between Europe and the United States. For example, in Europe, especially in Switzerland, there are shops that sell only nicotine pouches. There are several display stands lined with various nicotine pouches, just like in an iPhone store.
It is difficult to see such a sight in the United States. There are similar specialty stores for electronic cigarettes, but there are no such stores for nicotine pouches. In the United States, most distribution takes place through convenience-store channels.
Based on my conversations with buyers at places like Circle K and 7-Eleven, convenience stores are supposed to be convenient places. People want to go inside and quickly buy what they need, so there is a tendency to reduce the number of brands offered for sale. If we think about cigarette brands, it seems there are only about 6 or 7 brands suitable for sale in convenience stores. That is the main distribution channel.
My thoughts are based to some extent on experience. There may be cultural differences, or it may be a difference in distribution methods.
From HAYPP’s perspective, it is clearly in their best interest to emphasize that people want a variety of options. HAYPP can offer a wide variety of products that cannot be found at convenience stores. That might be possible in Sweden, though. I understand that in Sweden, about one-third of nicotine-pouch sales take place online. On the other hand, in the United States, it is only about 4%.
5. Why US pouch users buy at the C-store, not online
That is a truly surprising figure. Among my friends, those who use nicotine pouches use several a day, and many of them say they buy them at convenience stores. Even in New York, many people go to local supermarkets to buy nicotine pouches.
I know that there are many people who dislike buying in bulk. I really thought about it seriously, and I always said, “Everyone, if you use HAYPP, it will be just like Amazon Prime. You save a lot of money, and it gets delivered to your doorstep every day. You do not even need to stop by a convenience store and wait in line.”
They often say that. But people say, “No, I just like the ZYN pouch.” I do not know if it is because the market is still early, but it is really surprising that online sales are not even 4%.
One buyer I spoke with said that because automotive culture is so developed in the United States, people use convenience stores out of habit. I go to a convenience store even when I buy my morning coffee, and morning coffee needs to be fresh, right? So I thought about nicotine in a similar way to going to Starbucks in the morning and drinking coffee.
You buy a can of nicotine pouches and use 1 or 2, but it stays with you all day, or even for a whole week. Compare that with cigarettes. Everyone tries to quit smoking, you know. The interesting thing is that even though people can buy cigarettes more cheaply by the pack, they do not buy them by the carton. They say, “Okay, I will go buy just 1 or 2 packs. This is the last one. I do not want to buy too much.”
When you buy online, you usually have to purchase more than $70, $75, or $80 to get free shipping, right? To get free shipping, you have to buy about 15 cans. Otherwise, you have to pay $8, and since shipping is included, the savings from buying cheaply online completely disappear.
So, I think it is like smoking. People always have a corner of their mind that says, “I am smoking today, but I am not going to keep doing this. I might quit someday.” I think it is a similar mindset. So, I do not want to stack up multiple cans.
I do not do that. We always order online. There are a few reasons for doing so, but I will not go into detail. Anyway, thanks to that, I was able to get some information.
But I think that might be an influence from the past. What is interesting is that there are many people who do not buy online. You just mentioned smoking habits. You know those people who buy cigarettes and say, “This is the last pack.” When I look at the smokers I know, many of them have that mindset.
Perhaps the friends who use nicotine pouches think that way because most of them are still young, single men. However, almost none of my friends say, “This is the last nicotine pouch.” Rather, many of them think, “This is who I am. Using nicotine pouches is a part of me.”
By the way, Andrew, I have a question. When you meet friends who use nicotine pouches, how many of them actually switch between different products?
6. TPB's history: Zig-Zag, Stoker's, vapor and Standard General
I use a nicotine pouch when I wake up in the morning. I have one in right now, too. Except when I eat or sleep, I always use nicotine pouches, so I use them constantly. This is one of the reasons why nicotine pouches are such a good product.
If I were to smoke, my wife would not let me get away with it because I would smoke inside the house. I would have to go outside, and then I would become socially ostracized. If people saw me smoking, they would think, “That person is making a choice that ruins his life.” Now, even if I make a bad choice, no one will know.
7. How many brands can a C-store actually carry?
No, absolutely not. However, as you know, while the health benefits are one of the reasons this product is so good, convenience cannot be overlooked either. If I have to sit on a plane for 4 hours, I can’t smoke regular cigarettes or e-cigarettes, but I can use nicotine pouches. The same goes for elevators, movie theaters, and even working in an office.
For example, you can’t drink a beer while working at a bank at 11 a.m., but you can use nicotine pouches as much as you want. But if you say, “I just ate a marijuana gummy,” or “I smoked,” people will say, “What? Are you going to get fired?”
But when you think about it, it is a really interesting point. I agree. It is a growth business, after all. It is a business with excellent characteristics and strong growth drivers. Since it is much healthier than smoking, they are employing a strategy of “I won’t buy this” by leveraging the decline in smoking rates among the younger generation.
This type of business accounts for quite a significant portion of the market. However, just because a business is excellent doesn’t guarantee that the company will run well, does it? There are factors like industry structure and various others at play. The soft-drink business was excellent, but it wouldn’t have succeeded without investing in Coca-Cola or Pepsi. Coca-Cola and Pepsi did well, but other companies did not.
You also talked about the tobacco business in C-stores, didn’t you? The same goes for the convenience-store business. You mentioned, “It has now been consolidated into 7 brands, and display space is limited.”
Of course, I understand your point that one of the reasons for the merger was massive legal liability, but fixed costs are also considerable. In my opinion, taking 7-Eleven as an example, energy drinks keep coming to mind. When considering both the pros and cons, energy drinks are what come to mind.
There are 8 brands and 15 flavors of energy drinks, and they take up a huge amount of store space. If we think about carbonated beverages, Coke and Pepsi are the representative brands, but even Coke and Pepsi come in various flavors. There is Dr Pepper, as well as 7-Eleven’s own brand. They have the leeway to stock such a diverse range of products.
Therefore, the first point I want to refute is the idea that TPB will end up in this situation. I question whether there is truly enough space to accommodate multiple brands. You said before that it would be limited. I am worried that if everything is handled through top management, virtually unlimited authority will be granted.
According to an analysis based on conversations with buyers and their metrics, sales velocity is faster when there are fewer brands. This is because the primary reason people visit convenience stores is to purchase nicotine products, whereas they often come to buy beverages like cola simply to quench their thirst. Many products satisfy those needs.
One of the biggest reasons people go to convenience stores is to relieve an addiction. They might buy cola or something else, but the reason they go is precisely for that purpose. However, having too many products seems to make it harder to find what one wants. The same applies to the clerks. I have conducted hundreds of inventory checks, and I can’t even count how many times a clerk didn’t know what to sell.
Consumers are looking for a variety of nicotine pouches, but with so many types in the store, it isn’t easy to choose the one that suits them. Therefore, I believe that over time, the tobacco market will narrow down to 1 or 2 small-cap companies, unlike the current large tobacco corporations. Of course, there will be room for such companies, but if there are 5 or 6 of them, there probably won’t be any room left.
8. ZYN, Velo, and where TPB fits
Let me explain in more detail. If you think about small companies, everyone remembers that Philip Morris acquired Swedish Match, right? Philip Morris acquired Swedish Match. A major player entered the market, and what was next? It was Velo. Velo is British American Tobacco’s brand, with Reynolds as its U.S. subsidiary.
The fact that the major players acquired TPB, FRE, ALP, and others basically means that the major players will continue to dominate the market, but there will still be room for small companies. The third player, as you know, is like Dr Pepper to Coca-Cola and Pepsi.
My question is, why was it TPB of all things? Why should we provide help for free? And, come to think of it, as you mentioned regarding the regulations, were they really in such an advantageous position? I think we will have to talk about regulations someday.
These companies demonstrated foresight by obtaining approval before the government temporarily suspended all permits, and currently hold a market share of about 6%. I hear that the government is achieving remarkable results in implementing these regulations. Although there has certainly been trial and error, the government will push forward with these regulations more actively in the future.
In the case of Zyn, I think the original Zyn is a very dry product, while ALP and FRE are very moist products. Zyn is also planning to launch a new moist product, and as other companies launch moist products and product quality improves, the range of choices in the U.S. market will expand.
Can Altria maintain its current market share of 5% to 6%? I can’t even imagine a world where all markets transition to Zyn and Velo. For various reasons, one could consider a situation where the market splits into more than 20 brands. I am concerned that while the current situation is perfect for TPBs, it might lead to 1 of 2 other scenarios once PMTA restrictions are imposed. I think it would be difficult for TPBs to emerge as winners in such a situation.
9. Regulatory capture, Velo Plus, and ZYN losing share
Let’s think about this for a moment. The core of large tobacco companies is regulatory capture and distribution.
That is correct.
Yes, that is correct. These changes are being driven by large tobacco companies, right? If so, one might consider large tobacco companies to be moderate and smart. Of course, foolish things happened during the implementation process, though. Or at least that is what I think. Though I might be the fool.
Anyway, large tobacco companies have been pushing for this regulation. And as you mentioned, it seems they observed what happened in the e-cigarette market and simply copied it. With the introduction of PMTA, they had to follow the rules, so they couldn’t innovate and therefore couldn’t compete. Every new product had to go through the PMTA process, and that process took years. Furthermore, they couldn’t even add flavorings.
Currently, 70% to 80% of e-cigarettes are Chinese-made, disposable, flavored e-cigarettes, which are completely illegal. They are products distributed on the black market. Of course, companies must protect this market, as it is the core of future business. However, innovation must also be allowed at the same time.
One of the reasons I first became interested in TPBs was that I had tried various nicotine pouches, even though I wasn’t addicted at the time. Among them, FRE was the best. Later, Velo Plus came out. The early Velo products consisted of nothing but sawdust in small bags. They were truly terrible, and the flavor was almost artificial.
But Velo Plus was different. It was released, and it is a really good product. There is no doubt about it. It holds an overwhelming advantage in terms of dollar market-share growth. Its market share, which was about 2% to 3% lower than the old Velo, has now risen to 20%. So, it has taken a massive amount of market share from Zyn. It is definitely a better product. In my opinion, there is no doubt about it. It is much better than Zyn.
Furthermore, it is a moist product. Velo was launched at almost the same time as ALP. Regardless of scale, ALP is the fastest-growing company among all nicotine-pouch manufacturers. That is why Velo has grown alongside ALP.
I have tried all their products. I also tried the newly released moist-pouch product, and I heard that is its advantage. However, most people say the sensation is a bit strange. It feels like there is something slippery in their mouths, although there are some people who like it.
A product called Zyn Ultra has been launched, and it has just entered the distribution stage. If you look at Zyn and Zyn Ultra combined, they are growing by 2% year over year. So, the market share that Zyn Ultra is encroaching on is mostly coming from existing Zyn. It is a bad situation for Philip Morris.
Zyn is a premium product, after all. It is a top-tier product. It sells at a much higher price than other products. Interestingly, I believe one of the reasons the market grew by about 37% last year was the slowdown in Zyn’s growth. Early last year, Zyn’s market share was around 78%, but now it has dropped significantly to 54%.
The reason is that while the market is growing little by little, I thought the overall market was growing much faster. The interesting thing is that, in many ways, that supports your argument. Simply put, people who prefer lower-quality products like Zyn are more likely to continue using Zyn, while new users are more likely to choose superior products. This strongly supports customer loyalty.
10. PMTA changes shut the door on the VC-backed brands
Even if you agree with the hypothesis I presented—that competitors will appear—many people are already quite loyal to products that are free and completely open. Another point to note is that with the opening of the PMTA process—Premarket Tobacco Product Application—existing large corporations will benefit more than small businesses. As I briefly mentioned regarding the PMTA, previously, the scope of application was limited for tobacco-derived nicotine products.
They had to be submitted before a specific date in 2020. In the case of synthetically derived substances, they had to be submitted before 2022. It was necessary, and subsequently, deregulation was applied.
The FDA announced new regulations this May, stating that if a PMTA, or Premarket Tobacco Product Application, is submitted and approved—that is, if the FDA determines there is sufficient scientific evidence to make a marketing authorization decision—a product can be sold on the market. British American Tobacco, or BAT, has already started selling flavored e-cigarette pods, and Zyn plans to sell 1.5-milligram products.
They launched new flavors that had not received marketing authorization and for which applications had not been submitted before the previous deadline. Smaller companies such as Sesh, Lucy, Joey, and Juice Head were in an advantageous position because they submitted their applications before the deadline, and almost all of them received investment from private equity funds.
Their strategy—that is, the exit strategy for private equity or venture capital—was to enter the large convenience-store market. As you know, about 30% to 32% of all convenience stores are large chains that own more than 300 stores. Large corporations are currently operating in this space.
Small businesses must pay entry fees to get their products into large convenience stores and increase consumer acceptance. This is because large corporations were unable to innovate due to the requirement to go through the PMTA process. If a product gained consumer traction and secured market share, large corporations would have acquired that company and integrated it into their own lineup.
However, now that large corporations can apply for a new PMTA and achieve innovation independently, there is no reason for them to acquire small businesses. Consequently, the path to market entry has been blocked for many small businesses, and it is only a matter of time before their funds run out.
I think you are viewing the situation as if the industry, which was previously subject to PMTA regulations, has simply opened its doors. While Zyn will likely lead the market, TPB is in a good position because there is always room for third- and fourth-place brands to enter.
7-Plus is too small and consists of brands that are effectively defunct, as they are already competing with large corporations. We may not be able to completely overtake Zyn, but we can maintain a market share of 5% to 6%. We are doing so, and we are in a good position to create products for people who do not want Zyn.
For example, I am a Dr Pepper drinker. About 10% of people prefer Dr Pepper to cola, and we are well positioned to capture that 5% to 10%. As you mentioned, the market is showing double-digit growth, so we are essentially riding various trends.
Is this the correct way to put it?
11. Why C-stores want a third player on the back bar
There are a few points to consider. First, I do not view Turning Point Brands, as a small company, as being in direct competition with large companies. As you would know if you asked convenience-store purchasing managers, they need to sell products other than Velo or Zyn. This is because they need to run discount promotions.
There is always a customer base that buys the cheapest products, and they always prefer discounted items. The problem lies in the frequency with which large tobacco companies conduct discount promotions. Large tobacco companies provide a fixed schedule and decide when to hold discount sales.
Turning Point has flexibility, and I believe other small companies can do the same. We allow them to determine their own promotion cycles. By doing this, the company secures a competitive edge and alleviates competition to some extent.
As you know, no one wants a situation where a monopoly dictates the conditions. In the tobacco industry, large corporations already exert significant influence. For instance, they apply a sales-based rebate system uniformly across cigarettes, nicotine pouches, and e-cigarettes. Naturally, small businesses cannot do the same.
However, from the convenience store's perspective, they would likely want some store space allocated to other companies to maintain flexibility and increase their bargaining power compared with large players. Turning Point is the company that meets these conditions.
One of the most important questions for a convenience-store buyer is, “Will this company last?” Companies that have received venture-capital investment often close their doors after exhausting their funds. While they can attempt to attract additional investment, it is much more difficult than in the past because of the current regulatory environment. This is because successful exit strategies are lacking.
However, Turning Point is different. It has a sales team. As you know, all major companies, including Altria, have large-scale sales teams. They visit convenience stores in person to check for inventory shortages and establish product-display and placement strategies that contribute to increased sales.
Turning Point also maintains its own sales team, which allows it to maximize customer satisfaction. In 2024, the plan was to secure 100 regional sales representatives to support Zig-Zag and Stoker's, but the number is currently being expanded from approximately 260 to 320. Turning Point anticipates that a sales team of this size will be sufficient to establish a nationwide distribution network.
12. Financials: falling EBITDA, TKO deal and slotting fees
Now, let’s look at the financial aspects. Turning Point’s second-quarter results were announced, and it appears that revenue is steadily increasing. Second-quarter revenue rose from $116 million last year to $140 million this year.
While the growth rate is very fast, actual profits are declining. EBITDA is projected to fall from $120 million in 2025 to the current median guidance value of $75 million. In other words, EBITDA is decreasing. However, there is a valid reason for this: the company is investing in ultra-fast-growth brands such as FRE and ALP.
The company is promoting these investments. It also entered into a large-scale partnership with TKO and paid various expenses, including slotting fees, in the second quarter. Essentially, it is investing for growth.
However, seeing such massive investments, many people are concerned that these are investments aimed at securing market share, particularly the investment in the TKO partnership. In the past, an optimist and a pessimist held a phone discussion, and the pessimist viewed this company positively. I remember arguing, “I wanted to see it, but investing $20 million annually in a TKO partnership—I’m not sure if that’s correct—is risky. That is a massive fixed cost for this company.”
So, it seems that many people invest in growth with the hope that it will become economically viable later on. As you know, in the case of companies that have been generating cash flow for a long time, many people tend to view them solely from the perspective of being cash-generating companies.
However, if a company transforms into a growth company, the situation can change a bit. You can tell just by looking at Google. It was once a company boasting the world’s best cash flow, but now the scale of its capital expenditures is growing enormously. Nobody knows if this is good or bad.
However, those who invested expecting cash flow asked, “Are we really spending this much money on capital expenditures?” That is what you probably thought. There might be a bit of that here as well. I have brought up various topics, and I would like to hear your thoughts.
13. Made in India and air freighted: the $1.40 can
Anyway, good things are happening as we enter the year. In my opinion, the biggest flaw of Turning Point was the lack of communication. They made this year the year of investment, which surprised me a bit.
There were 2 things that happened. First, I thought that domestic production would start this year. This is a really important point, and I thought it would be possible until the first quarter. However, it has not been realized yet. This is mainly due to regulatory issues.
The equipment is in Louisville, and 1 line is operating normally, but domestic production has not yet started because we are waiting for PMTA orders. Both Philip Morris International and Altria are participating in a pilot program for these products, having received marketing orders.
Philip Morris and Altria produce within the United States, and I understand that domestic production results in a gross margin that is about 15% higher.
Yes, that is correct. We estimate that the current cost to produce 1 Turning Point can is approximately $1.40. If produced in India, we would have to pay about $1 per can to manufacturers or contract manufacturers in India, and we would also have to bear the additional cost of air freight. This is because the pouches contain moisture, so there is a high probability they will dry out if transported by ship for 6 weeks.
Ah, I see.
Yes. That is why everything has to be air-shipped. This effectively adds to the costs.
About 20 cents per can.
About 20 to 25 cents.
Prices have gone up now because of the war with Iran. Do you know how that war affected fuel prices?
On top of that, a 16% tariff is added. Indian-made products are subject to tariffs. That is because tariffs are imposed on imported goods. If production were to proceed domestically, the cost, currently at $1.40 per can, could drop to around 65 cents, or perhaps even lower, as we consider ways to use more efficient machinery.
So, what I was wondering was, “If production goes domestic, will everyone receive the same benefits?”
That is what I’m saying.
14. The PMTA path to US manufacturing and slotting fees rolling off
However, I think what you are saying is that these companies are effectively doing business with 1 hand tied because their competitors are already producing domestically. Since these companies are not engaged in domestic production, ultimately only the cost structure becomes equalized.
All right. You’re right. To proceed with the PMTA, you must designate a manufacturing facility.
To designate a new manufacturing facility, it must be substantially identical to an existing manufacturing facility. Generally, this means the same supplier, the same chemical composition, and consistency across all ingredients. It becomes very difficult, especially when manufacturing overseas.
However, if you make modifications before PMTA approval, it will be considered a new PMTA and may be pushed back in the review order. Therefore, supplementary data can be submitted after obtaining marketing authorization, and a new manufacturing facility can be designated only after submitting the supplementary data. That makes the process much simpler.
Previously, this was the cause of the delay, but under the new regulations, the situation is expected to be much better. Looking at the current situation, PMTA costs increased significantly in the second quarter. They surged from hundreds of thousands of dollars to over $3 million last quarter. I think you have submitted a new PMTA or are in the process of submitting it.
Once the PMTA is approved, we will be able to start production. Therefore, I think it is a matter of timing, not whether production starts.
It might be possible at any time, or it might take some time, because it must go through the FDA approval process, and there are various factors to consider even after submission. I am not sure if it has been submitted yet, but I expect it is likely in progress because research data is needed to support the new submission.
The new submission documents will include details regarding the designation of production within the United States. I think production will start in the second half of next year at the latest. I think it is in progress, and I think they expected that, by receiving marketing orders earlier, they could begin domestic production and offset a significant portion of the slotting fees.
The interesting thing about slotting fees is that all contracts are customized. The contracts with all the major convenience-store chains are different. If there is a slotting fee, you generally have to pay the initial cost of placing the product on the shelf—the initiation fee. Yes, competition in this field is very fierce.
That is because companies that have received venture-capital investment adhere to a strategy of opening stores only in large convenience stores. They do not have regional sales teams. If you look at LinkedIn, there are hardly any with more than 50 employees. The sales team consists of, at most, about 10 people.
On the other hand, Turning Point has 260 employees. Turning Point can also expand into independent stores within the distribution network. You know those people who literally load products into the back seat of a car? They come in, check the product, sell it, and take it away.
Other small competitors have to rely on large distributors such as Core-Mark or McLane. When Core-Mark and McLane sales representatives visit independent retailers, there are so many different products that you cannot even tell whether they are mentioning our products while selling them. That is why direct communication is difficult.
When it comes to slotting fees, usually, if you have a sales history of more than 1 year and the product’s sales volume is relatively good, you only have to pay $0.50 per can instead of an average of $1,000 to $2,000 per store.
As you can see from the sales figures, it would cost about $260 per store per year for FRE. In the case of ALP, since it holds about 11% of the market share in the stores where it operates, it would be about $500 per year. The difference between $1,000 and $1,200 is significant.
If we start converting all these costs to an annual basis, there will be some decrease starting in the third quarter, and it will increase further in the fourth quarter. By around the first or second quarter of next year, we expect all these large fees to be converted to an annual basis, leading to a significant improvement in margins.
Furthermore, as convenience stores increase the display space for nicotine pouches, these slotting fees are also decreasing. I used AI to read all the commentary regarding nicotine pouches from major convenience-store chains, and most of them said they are increasing their display space. This is because nicotine pouches have higher profit margins.
Regular cigarettes have a profit margin of about 10% to 11%, but nicotine pouches have a margin of 25% to 30%. In addition, companies have been receiving incredibly high slotting fees from small businesses. However, I think small businesses are currently financially weakened, so they cannot afford to continue paying fees this high. Store space has been expanded, and in some cases, additional display shelves have been installed at the back to sell more pouches.
These fees, as the company would also say, are gradually decreasing. Fees have been lowered this year compared with 2025, and new contracts are cheaper than previous contracts. Furthermore, we have made about half of the necessary progress in reducing the slotting-fee burden incurred at the store.
Privately owned stores are not subject to sales tax. Independent stores do not charge slot fees. Therefore, Turning Point is in an advantageous position in terms of cost. Compared with these small businesses, large corporations have a relative advantage because they target the market through regional sales networks.
Another advantage that can help improve margins is that, once a product is stocked by 70% to 80% of major distributors, local convenience stores and independent stores must also carry it. That is because customers are looking for the product. When the product reaches the stage where it is displayed in all stores, customers will look for it at stores carrying smaller competitors.
For example, a salesperson goes to a privately owned convenience store and says, “Do you have any FRE products? We have them at the 7-Eleven or Circle K across the street.” Imagine a situation where customers come to the store expecting that product, but they cannot actually find it.
15. Valuation: what the legacy business is worth
Let’s change the subject. We have already been talking for nearly an hour, so it might seem a bit silly to ask this at this point, but I still have many questions. First, shall we talk briefly about the company’s valuation? The current stock price is about $60 per share, and the market capitalization is about $1.2 billion. Net debt appears to be around $300 million, so I do not think anyone would find it strange if enterprise value were around $1.5 billion. Please let me know if I am wrong.
Oh, right. I did not subtract cash when calculating net debt. If we subtract cash, net debt is almost at a neutral level. Thanks to the financing, enterprise value would be about $1.25 billion. What do you think about the stock price being $60? What do you consider to be the fair value?
The existing business segments seem to be worth roughly $60. That is about $35 to $45 per share, mostly Zig-Zag and Stoker’s. Combining FRE and ALP, which account for 75% of the market capitalization, we can view them as worth about $15 per share, totaling around $300 million. I think they are worth much more than that.
ALP is the most important story. FRE is excellent, has performed well, and has grown well. However, there is some merit to the short-selling opinions. The point is that the return on marketing costs is not good. Marketing costs are always a difficult issue.
One of FRE’s problems was awareness. Many people did not know what FRE was and had never seen it, so the company put a lot of effort into increasing awareness. The collaboration with the UFC played a major role, and they also signed contracts with numerous other partners. I think it would be good to have influencers talk about FRE. In terms of brand awareness, I believe simply knowing what kind of brand FRE is would be helpful.
However, how good the return on investment will be remains to be seen, and I think skeptical views regarding FRE are inevitable.
16. FRE's marketing and the energy drink playbook
Wait, may we pause the discussion about FRE for a moment? There are many interesting aspects to it. You mentioned the UFC, and although the market share you are discussing is somewhat different, wasn't the biggest factor in Altria's return to the energy-drink market the energy drinks themselves?
While Coca-Cola and Pepsi failed in the energy-drink market, Monster and Celsius achieved great success, although they have since partnered to use Coca-Cola’s and Pepsi’s distribution networks. Come to think of it, these products targeted young men. Although Celsius is a bit different, sports-related products, like energy drinks, achieved great success. Energy drinks invested heavily in sports advertising, did they not? Like the UFC.
FRE filmed a UFC commercial, you know.
You could say that. The atmosphere is a bit different, though. Both are targeting influencers and competing with tobacco companies. Coca-Cola and Pepsi are masters of marketing, but they stick to traditional marketing methods.
Tobacco companies did not need to market in the United States for decades, did they? So tobacco companies are launching very aggressive and creative advertisements, aiming for the opportunity to get that market share for free. We are competing with companies that did not need advertising.
17. Alp, Tucker Carlson, and building a brand
I think this perspective and these parallel stories are really interesting. I would like to pause for a moment and talk a little more about Altria, because Altria is also an interesting part of the story.
Yes. A de facto moratorium on tobacco-product advertising has been implemented. As I mentioned, major tobacco companies have focused on dominating the challenges of distribution and regulation.
It is building international relationships that are even stronger than those of the U.S. State Department. The ability to operate within the legal system is immense. Turning Point also has that aspect, because I have been doing business in this kind of environment for a long time. The legal team is very competent. However, Turning Point was an innovative disruptor.
We couldn't win with discounts or economies of scale, so we had to rely on brand building. I think ALP was more successful than FRE in that respect. ALP had the advantage of having a huge star named Tucker Carlson. He is probably the most widely watched conservative commentator. Sales through conservative commentators are surprisingly profitable because recommending a specific product to viewers increases the likelihood of them purchasing it.
However, FRE pursued a much more aggressive strategy than the existing major tobacco companies. But again, they lack that experience. As you mentioned, Stoker's was a company that had suffered from financial difficulties in the past. I didn't spend any money at all. I visited in person. When I visited the headquarters in 2017, it seemed like it hadn't been remodeled since the 1960s. If I wanted to drink cola, I had to buy it from a vending machine.
Behind the manufacturing plant, there was a person who used old machine parts to fix machines. They were truly excellent at operating without money. But it's not easy to transition to a situation where you have to build a brand and invest a lot of money, is it? I think that is exactly the growing pain FRE is going through right now. Looking at the effectiveness of FRE advertising—I plan to speak with the marketing manager—I think it helps raise awareness of the brand. Increasing its share of stores would also be helpful to some extent.
However, I think that is exactly where FRE struggles. I think it is a process of building an identity. We need to think about what the word “FRE” means. The commercials are a bit distracting. There are a lot of fun and childish commercials, but I don't think they match the intensity associated with the TKO partnership. I think it would be better to emphasize a strong brand image like Under Armour.
Just like the FRE logo, it conveys messages like “Own Your Power,” “Power,” “Feeling,” and “Taste.” FRE sells high-concentration nicotine products, and that is one of FRE's differentiating factors. It is characterized by offering 12-milligram and 15-milligram nicotine products. I think the marketing message is a bit vague. They have invested a lot of money, but I think it would be more effective to collaborate with various organizations like the TKO partnership—not just the UFC, or Ultimate Fighting Championship, but also Formula Drift, NBR, or National Bull Riders Association, Zupa Boxing, and the World Strongman Championship.
I mean, what about intensity? I think they failed to properly convey the intensity. Personally, in terms of brand building, if I hold an ALP can, people will look at me and think, “Ah, that person uses ALP. Since Tucker Carlson is a huge fan of that brand, I can kind of recognize it.”
18. Alp JV economics and the celebrity risk
May I help you out a bit? We've already gone well over an hour, and we still have about 2 hours left. I apologize. We haven't even discussed the management changes yet. I have one question regarding management and one about ALP, and while there are many other questions, I think we should cover them later.
Let's start with the question about ALP. You just mentioned it and even looked it up, didn't you? ALP is a joint venture with Tucker Carlson, and it is achieving tremendous success. Of course, they don't disclose much information, but as you can see from the financial statements, a portion of the net profit is attributed to non-controlling interests. Since it is a joint venture with Tucker Carlson, half of the net profit goes to Tucker Carlson, and the other half remains with ALP. It is said that, in the second quarter, most of ALP's net profit is attributed to these non-controlling interests.
That net profit is the revenue of the ALP business, if the NCI split I just mentioned is true. ALP is growing rapidly. It is also related to Tucker Carlson. Setting aside political issues, as you know, brands promoted by celebrities, especially startup brands, do not bring very good results to partner companies for various reasons.
Tucker Carlson's brand value moves with him, and even if you have a formal contract with him, it is highly likely that whenever the contract expires, he will demand, “Give me a larger stake, or I will go to Philip Morris and advertise your products.” So, it seems as though all the economic aspects tend to work in the celebrity's favor over time.
That is why they formed a partnership and raised funds as if they were using an ATM. I intend to talk a little more about capital allocation over the remaining time. They used the ATM quite aggressively in the second quarter, and I think people were saying, “This must be to acquire an ALP stake or to stockpile funds to increase their stake from 50% to 80%.”
I am concerned that their major growth brand—a big brand that drives the entire business—is partnering with a celebrity. I think they could face a difficult situation in the long run. What do you think about the relationship between ALP and Tucker Carlson?
Well, that probably explains the success during the first 12 months. He talked about it endlessly on the podcast. However, as time went by, I think they captured Tucker Carlson's spirit—his rebellious side—quite well. He has his own thoughts, is independent, unconstrained by convention, and somewhat conservative. Or should I say he's conservative?
They signed a contract with the controversial, independent, and rebellious Conor McGregor. I can't remember the name, but there is also a new blogger who writes about robbery and discipline. He is famous for archery and high-intensity workouts. It seems like they keep focusing on this rebellious image.
That is exactly what a brand is. They are not trying to completely break away from the Tucker brand, but rather diversifying the brand by collaborating with various people beyond Tucker. One of the outstanding aspects of ALP, and what I believe FRE's marketing team can learn a lot from, is that ALP focuses on associating individual personalities with brand characteristics.
ALP is undoubtedly a superstar. Looking at its growth trajectory, FRE is also a pretty decent company. Of course, they are currently facing headwinds from sponsorship fees and marketing costs, but it is clear that management is not unaware of this expenditure problem. Reducing marketing costs is a means that management can utilize relatively easily.
19. Alp and FRE are the same product
I think that even if we don't reduce inefficient marketing spending, we can at least eliminate it and focus more on efficient marketing spending. I think we will be able to see such changes within the next few quarters.
Yes. One of the good things about ALP is that, for example, if a clothing brand like Under Armour features Stephen Curry as a model, the fans' interest fades, right? It is different from that brand image. However, if ALP features a celebrity like Tucker Carlson as a model, as you mentioned earlier, the product is quite addictive, so it will ultimately generate significant marketing effects.
As anyone who has used ALP knows, ALP and FRE are the exact same product. There is absolutely no difference. The only difference is that FRE looks like this and ALP looks like this. As you know, I think they take the FRE product, put it into the machine that makes ALP, pass the ALP can through the machine, and then make Wintergreen without changing the product—just changing the label.
20. CEO exit, insider ownership and the ATM
Let's wrap up the discussion about management here. It's hard to believe that an hour has passed and this hasn't been brought up, but I think this part is interesting. I have a lot to say about the management, but I'm recording right now. Is today September 30? It's September 29.
It was announced on September 21 that the CEO is stepping down. He is someone who has held the CEO position for a long time. I think it has been since 2022. I'm wondering if I should take on some management work. I thought it had been quite a while. Anyway, they say the CEO is leaving.
It states that it is due to personal reasons, and since his remarks were quoted in the press release, he may have something to say. But he is leaving quite suddenly, and the chairman is taking office as his successor. The new CEO is a finance expert. As you mentioned, he has experience working at Standard General.
I would also like to add a general question about what you think about the 3-person management system. Looking at the past history, it is a bit surprising that the insider ownership percentage is not very high. The pay is actually quite decent. Former Chairman Jeon sold 3 million shares at a price of over $100 per share.
They were quite aggressive in securing cash liquidity in the second quarter. In my opinion, considering that the company is currently led by a financial expert with limited stock holdings, that the insider ownership ratio is not high, and that there is a history of buying back treasury shares when the stock price fell significantly, it would be worthwhile to ask these questions.
21. The 2030 math: a $1,000 stock?
They have a history of insider selling and ATM usage. Honestly speaking, they did that when the stock price was in the triple digits, not in the $60 range. Observing all of that, I wondered, “Am I really thinking exactly the same way as them? Are they sending a signal that ‘we don't think the stock price is that cheap’?” I had that thought.
22. Will TPB buy more of Alp?
I’ve thrown out a few ideas, and I’d like to hear your opinions.
Yes, let’s start by quickly talking about the ATM issues related to ALP. They do not have enough funds to acquire ALP, right? According to our analysis, ALP generated approximately $280 million in revenue last quarter. It grew 300% compared to the previous year. For a company growing this fast, I think it is reasonable to pay 10 times its revenue, or about $2 billion. So Tucker’s stake would be $1 billion. They are not in a financial position to buy that.
I think they will use the ATM and acquire more of ALP. They will integrate ALP because it is essentially just a marketing department with a few sales representatives. ALP’s growth was achieved virtually without slotting fees. Starting this year, local sales representatives began taking ALP with them when going to sell FRE. Some relatively decent convenience stores that contacted ALP’s small team started adopting ALP.
Thanks to his relationships with UFC fighters, including Conor McGregor, ALP can be seen as having a closer connection to the UFC than FRE, even though FRE paid that much money. Therefore, there is some conflict regarding the marketing strategies between the 2 companies, which needs to be resolved through integration. Perhaps more of ALP’s marketing methodology should be adopted by FRE.
I think it will be a matter of acquiring a partial stake rather than acquiring the entire company. My prediction is that it will be done by increasing the stake from 50% to 70%. If that happens, Tucker will still be a shareholder, yet he will not be able to exercise significant influence over management as he does now.
23. David Glazek takes over
Let’s talk about the overall management of Turning Point. As mentioned earlier, the chairman took office as CEO, and he has a financial background. Although the stock price has risen significantly since he joined and took control of management, concerns still exist regarding someone with a financial background taking over management. What do you think of Turning Point’s overall management?
David Glazek was the portfolio manager in charge of Turning Point, which was the most successful investment among the companies Standard General invested in. Standard General has also had a few failed investments. There is no room for doubt.
I understand that Chairman Glazek has effectively acquired half of Turning Point’s shares. Originally, it was entirely debt, but I remember it was converted into equity for $11 million around 2010. Chairman Glazek has been involved in management, and I think this situation seems difficult. He has been regularly communicating with the heads of the company’s major business units from the same standpoint as a co-CEO. Ultimately, Chairman Glazek was closer to Graham’s boss, and I do not think this is a good situation.
However, Chairman Glazek is a very smart person. He could have given up management rights if he had wanted to. As chairman, he was in an advantageous position where he did not have to bear responsibility even if the business did not go well. The responsibility would fall on the CEO. However, now that he has taken the CEO position, he will not be able to avoid any mistakes going forward. He is entirely responsible.
I think that, since he received an annual salary of about $3 million while serving as chairman, he would not have taken on the CEO position unless he was confident that he had firm control of the company. This year was a year focused on investment. There were investment strategies that were somewhat aggressive, perhaps undisciplined and perhaps harsh, and marketing attempts also ended in failure.
It is also a problem that, even after paying slotting fees, the benefits are not fully realized. The product was not sufficiently mature and could not be placed on the shelves. In addition, there is also the effect of increasing annual sales. Therefore, he took the CEO position at a very opportune time.
As you mentioned, the board of directors does not hold many shares. I think they all own about 5% together. It appears that the largest shareholder is former CEO Larry Wexler.
Yes, that is correct.
His stake is about 2.5%, and it seems that Glazek owns about 0.5%. Turning Point currently has 11 activist shareholders, and their combined stake exceeds 10%. If performance does not improve in the short term, considering Glazek’s past management track record, it seems unlikely that he will remain in office for long.
He is clever, and he probably knows that he is under pressure. He also has tremendous motivation because he gave up the $3 million income he was receiving with relatively much less risk to take on this position. He also gains much more profit if he succeeds. I haven’t seen his employment contract yet, but I think that if Turning Point is successful, he will be able to gain much more financial benefit.
We’ll have to wait and see. I think it is very important to keep an eye on this point. That was the first thing I did. When they submitted the changes, I looked at the 8-K report. I thought, “The chairman who used to be the CFO is becoming the CEO? Sometimes you can get really interesting signals from 8-K reports.”
I don’t think he starts on October 1. The new contract hasn’t been disclosed yet, but I was very interested. I plan to keep a close eye on things going forward.
Well, I think Glazek is a smart person. I have spoken with him several times, and I think he has a thoughtful approach. The reason I liked Graham was that he was a sales expert yet possessed tremendous humility. Graham thought he had the ability to identify his weaknesses and have others fill in those gaps. I thought he would be able to do that because he had sufficiently good character.
We’ll have to wait and see if David can pull it off. He seems to believe he can do it.
Yes.
That is an open question, but regarding my thoughts on this stock, speaking in terms of valuation, I expect this market to grow at an average annual rate of 10% to 30% from now until 2030. Looking at the current online market share, ALP and FRE account for more than 50% of total online sales, including third-party online sales. ALP accounts for most of that.
Therefore, I think it is quite possible for ALP’s market share to reach 10%. Based on the market share of stores where ALP is currently located, assuming that ALP is present in 70% of all stores, ALP currently holds a market share of approximately 11%, and FRE holds a market share of approximately 6%. Therefore, I believe it is entirely possible for ALP’s market share to eventually reach 10%.
Of course, that is under the assumption that the current market share is maintained. Let’s assume that market share increases, the market penetration rate rises, and the market grows by 20%. So, you are expecting that by 2030, a stock currently worth $60 will reach $1,000, meaning the price-to-earnings ratio will be approximately 36 times?
I would like to talk a little more about this part. George, I am really sorry that it took an hour and 20 minutes. I guess I should go now. It was a really interesting time. Thanks to you, I had a great time.
24. George's bias disclaimer and his book
I just found out that there are Lost Cities besides Azul. I’m a Lost Cities player. It seems like you can always enjoy Lost Cities within the same city. George, it was a really interesting time. I learned many things, including business economics. Thank you for appearing. I look forward to seeing you again.
There is one thing I would like to say regarding all of this. I try to get better, but I have a biased perspective. As you know, I publicly said that this idea is the best idea of my career. This is because I can see the potential of this idea, so I suffer a lot from confirmation bias. There is also consistency bias.
By the way, I wrote a book, so I’m going to promote it a little right now. It is a book titled Understanding Behavioral Bias: A Financial Decision Guide, co-authored with neuroscientist David Crocetti. As I mentioned before, I have to admit that I have such a bias. However, it is important to at least understand what behavioral bias means.
There are also false beliefs. It is a very dangerous situation when people who have not conducted sufficient investigation become convinced. On the other hand, those who have done sufficient research realize that, although it may or may not be right in the end, the way to create alpha is to find good ideas, which is really difficult.
I feel like I’m coming up with too many ideas. It’s a really difficult part. When you work hard and come up with a great idea, do you know how it feels when you’re sitting in a position where you can wield it to your heart’s content? You worked so hard—what can you do now? Shall we do some index funds or video games?
I can tell you one thing for sure: things unfolded in a way I hadn’t anticipated or expected. For example, that is the case with domestic production. According to my forecast, EBITDA is expected to increase by about $90 million to $100 million by the end of the year. If all production can be done domestically, it means that additional profits will be generated. All of this is much more valuable.
I think Glazek will achieve results beyond that. Looking at his incentives, he is in a situation where he needs to demonstrate his ability to execute. I think he has been very deeply involved until now. The current situation seems to be the most favorable environment I have seen during the time I have been watching.
25. Wrap
Great. Then let’s wrap it up here. It was really good, George. We will talk again soon. Thank you, and have a good day.
This is a brief notice. Nothing in this podcast should be considered investment advice. The guest or host may own some of the stocks mentioned in this podcast. Be sure to do your own research and consult with a financial advisor before making an investment decision. Thank you.