When Louie Reformina traded in his 20-year Wall Street career for his first operational role, he joined a company, Turning Point Brands, that had a long history of distress. Although it had a highly recognized and successful brand in Zig Zag rolling papers, the company had been built through a series of leveraged buyouts and, for many years, was struggling with a weak balance sheet that left it unable to invest in growth.
“It was operating at six times its leverage,” said Reformina, who came on board the company as a business development executive in 2019 and named CFO last month. “At one point, they were at $40 million of EBITDA and $40 million in cash interest payments, and that doesn’t allow you to invest properly.”
The company’s turnaround began in 2016, when it gained access to public capital through an IPO, enabling it to clean up its balance sheet and broaden its product reach into growth areas.
“We built this NewGen business through a series of acquisitions,” Reformina said this week in a CFO Thought Leader podcast. “We have products there leveraging the vape market, CBD market, and some of our cannabis-related investments, so it’s a platform that provides us with strong optionality in these nascent markets.”
Capital deployment
As CFO, Reformina’s focus will be on deploying some $160 million in cash on its balance sheet to leverage what’s expected to be a surge in demand for rolling papers, vapes, and other products as more states legalize cannabis.
“Most of our products are being driven by the secular growth in the cannabis space,” he said. “I think there’s a path for us to be a billion-dollar enterprise in the next few years and a lot of that will be driven by how we deploy our capital.”
On Wall Street, where Reformina had positions in Goldman Sachs and Perella Weinberg Partners, he worked with many companies that pursued inorganic growth to climb out of the hole they were in, so he feels he’s in a good position to manage what’s expected to be a busy period of acquisitions.
“We have this great opportunity here where our equity value is $1 billion, we have $160 million of cash, and will generate at least $50 million of free cash flow this year,” he said. “That is a decent amount of capital and dry powder to do something big from a transformation perspective.”
The company also has the ability to tap public markets to get more capital if it needs it, setting it apart from many of the other companies positioning themselves for growth as cannabis legalization spreads.
“The unique thing about us playing in cannabis-related spaces is that we are NYSE listed,” he said. “And because of current regulatory requirements, a lot of competitors don’t have that same access to capital. The next couple of years will be very important to how we position ourselves.”
Mature products
The future wasn’t always this bright for the company. In addition to Zig Zag, it had a successful dipping tobacco product brand, called Stokers. Both of these brands generated stable income, almost entirely through sales in some 210,000 North American convenience stores. But the total market was relatively small, about $500 million, and not growing.
“The important thing about these two businesses is they’re both recession-resistant, so they provide us with great assets that generate stable cash flow, whether the sun comes up or not,” he said.
Given the company’s heavy debt load, though, pushing into the growing CBD and other cannabis-related markets was key to its strategy.
“The company had IPO'd in 2016 but it’s still hard for companies and management teams to pivot from survival mode to growth and often you need an outside catalyst or a change agent to do that,” he said.
The change agent in this case was Standard General, an investment firm that took a controlling stake in the company.
“They had put in the CFO in 2018,” he said. “I joined in 2019 to help pivot the company for growth.”
It was Zig Zag that made the company attractive to him, Reformina said; not only was it the strongest brand of any company he had worked with on Wall Street, but the coming growth of cannabis products meant the company had a solid foundation on which to turn around its fortunes.
“In the U.S. there’s certainly been a sea change, not just in people approving legalization of cannabis, but in the mindset of people viewing cannabis as more of a health and wellness product,” he said. “So, I thought it was an attractive opportunity to join and over the last year we’ve proven out there was a lot of low-hanging fruit with Zig Zag.”
Expanded sales channels
As he executes on the capital deployment strategy, he’ll be evaluating companies that can help the company expand its distribution.
Its traditional distribution channel — convenience stores — isn’t expected to be the way cannabis products will be sold as their popularity expands, so he plans to build on a marketing company that Turning Point acquired last year to grow its ecommerce presence. He’ll also look for ways to get better positioned at dispensaries and other types of outlets.
“It’s what we call our alternative channel: head shops, dispensaries and ecommerce,” he said. “What happens when there’s legalization is, the consumer would [no longer] purchase their rolling paper at a convenience store; they would now go to a dispensary and buy their product and buy the rolling paper there or often at the head shop next door to it. And we didn’t have any ecommerce business until last year. That was a big hole for us.”
With $160 million ready to go, he has the resources to fill that hole now.
