VMR Products Call Replay And Key Take-Aways

Today we hosted a conference call on electronic cigarettes & e-vapor products with Jan Andries Verleur, CEO and co-founder of VMR products, a leading global online manufacturer with brands V2 Cigs and Vapor Couture.   


Jan co-founded VMR Products in 2009. Beyond the company’s online presence, its products are found in 40,000 domestic retail locations and 50,000 worldwide. The call is part of a series of talks we’ve held with industry experts (previous speakers included CEOs of NJOY, LOGIC, Ballantyne Brands and Victory). On the call Jan offers valuable industry commentary – including key insight on sales and consumer trends that may be shifting to larger e-vapor products and away from Big Tobacco’s smaller “cig-alike” e-cig offerings.


Below we provide key commentary from a robust Q&A with Jan.  We also encourage you to listen to the recording. 


Click for the replay podcast

Click for LOGIC’s presentation



Key Q&A Callouts:

  • Are Proposed FDA Regulations surprisingly light? There was no proposed bans or limits on marketing, flavors, or online sales?   Jan says VMR is very active in regulatory affairs and met with OMB prior to proposed regulations … he believes that regulatory proposals are responsible and take into account the importance of innovation.
  • Retail versus Online Consumer and Online regulatory concerns. He says in retail stores there’s only limited shelf space/limited SKU breadth, so you can only have so much of the consumer’s attention, however online is different… online users visit websites numerous times before making a buying decision, consult third party reviews and blogs, and so therefore they’re a higher educated consumer. The name of the game for online business is SKU breadth, but by limiting the sale of these products online you essentially hand the industry over to tobacco players. He thinks the OMB appropriately addressed this issue by not restricting (online) accessibility.
  • E-cig vs E-vapor trends. What is the function of the recent decline in measured e-cig sales? (Sales have flattened since the summer 2013 and are down a second consecutive month to -6.1%Y/Y in the four weeks ended June 15th, according to IRI). Jan underlines that the e-vapor category (and not the traditional e-cig or “cig-alike” aka micro-cigs category that most of Big Tobacco primarily sells) has not seen any substantial decline on volume, when looked at globally.  The area of decline is in micro-cigs, specific to trade, and he believes it’s a function of the lack of product quality (and therefore experience) delivered to the retail end user.
  • Large scale vaporizers appeal is the newest trend online, and their appeal is strong battery life (not limited to the confines of a small cig-alike) and amount of liquid they hold. These products are just now beginning to find their way into retail trade, but of course are not being specifically counted with Nielsen and SMA data, because they’re often sold in alternative (non-counted) channels.
  • “Cig-alikes” have Consumer Appeal? According to Jan, consumers are not looking for a product that looks identical to cigarettes they’re looking to leave behind (Hedgeye note: this flies squarely against NJOY’s  messaging), they are looking for a product that fulfills and satiates their appetite for nicotine without smoke (and less harm) that’s convenient. He believes larger devises are winning out because 1) they can provide a longer battery life, and 2) they offer a greater level of differentiation from traditional tobacco smoking.  He however doesn’t think the cig-alike category will disappear as there will be people that don’t wish to deal with refilling e-juice, etc. 
  • On optimism around future Cig-alike technology. He expects that improvement in future version of cig-alike versions will more evenly balance the playing field with larger e-vapor products, and that ultimately (regardless of form), both smaller and larger sized devises can win consumer appeal if the quality/user experience in delivering the nicotine is high (without combustion).
  • How large is the U.S. e-vapor category worth today?  Jan thinks the cig-alike category is around $350MM online, and large scale devises (or non cig-alike) are worth $200MM online to $350MM. For trade, in what can be tracked, the figure is near $1B, but there’s also offline trade that can’t be tracked.  All U.S. vapor products could be as high as $2B in 2014.
  • Any thoughts on blu's recently launching/testing a vapor product in the UK?   The product that blu has tested (blu pro kit) is essentially a private label technology that blu decided to sell. It is essentially a rebranded, generic product that’s similar to many like it produced in China. On July 4th, VMR is bring online V2 Pro series (3-in-one-vaporizer that can vaporize anything the consumer wants to).
  • Color on the quality of the e-liquid, battery, atomizer from China?  Manufacturing shifting to U.S.A.?  Jan says when it comes to product quality it’s all about who you are buying from, and this can be found in all places from Idaho to Uzbekistan, so manufacturing in China is all about quality of the relationship. He says companies that don’t have the staff on the ground to manage the manufacturing process will be at a great disadvantage when it comes to regulatory issues.
  • Geographic Opportunities?  Yes - Europe, China, Russia.  Today over 70% of VMR’s revenue is in the U.S., but Europe and PRoC are its targeted growth markets. In 2016/17 he thinks China will emerge as a huge opportunity for vapor technologies. He also views Russia favorably, especially as tobacco regulation comes down more heavily on where you can purchase it and higher excise tax. Finally, Europe, especially when talking about large scale devises has a lot of growth runway (the U.K. is currently the largest market worth around $350MM).   
  • Latin and South American Opportunities?  Jan says it’s a good market but there are a series of problems throughout the region. He say VMR is successful in Ecuador; growing in Colombia; had regulatory issues in Costa Rica, Panama is closed down; Brazil is difficult unless doing domestic manufacturing. From a regulatory and business perspective as of today, Jan is much more favorable on the opportunity in Europe, China, and Russia.
  • Disposables versus rechargables micro-cigs? Does one lead to the other, or based on occasion?  Jan believes that disposables play very well at retail, while they’re very hard to sell online. The reason for that is the online consumer will realize that best products aren’t disposables, and it’s more economical to buy rechargable (especially as online buyers tend more towards bulk buying at a discount). Unlike tobacco trends in where 70% of smokers buy a pack a day (rather than a carton), Jan believes that consumers that committed to the e-cig/e-vapor category will drift into rechargables and large scale devise products over disposables. Expects disposables to remain 50% of c-store sales, but to diminish in future years.
  • Consumer and Vape Shop Demands.  Jan describes a typical vape shop consumer looking for an endless supply of e-liquids, wants devise selection, and may look for the $50, $100, or $250 vaporizer. (There are roughly 15,000 vape shops across the U.S.).   He views this type of consumer very differently than a traditional cigarette smoker looking for an alternative to combustion, who likely gravitates towards the c-store. In any case, no c-store will be selling a $200 vaporizer, so he see some clear lines in the sand based on channel with some opportunity for product/consumer overlap. 


We invite you to read a note published this morning titled Tobacco Trends – PM Shorter Term Struggles Persist; LO Bulls that details our updated outlook on the tobacco and e-cig/e-vapor markets.  Jan’s commentary, along with all the CEOs we’ve profiled, in conjunction with new data we’ll soon be releasing on an e-cig/e-vapor survey, help to inform our thinking on the direction of the category, and therefore estimate the impact on Big Tobacco’s portfolio.


We hope you can join us for future expert calls, including our next E-cig Speaker Series featuring CEO John Wiesehan Jr. of Ballantyne Brands on July 16th at 11am EST. More details to follow. 


Happy 4th of July!!!



Howard Penney

Managing Director


Matt Hedrick



Fred Masotta


Tea Leafing the June Jobs Report

Editor's note: This is a complimentary research insight from Hedgeye macro analyst Christian Drake. Click here for more information on our products and services.


On a month-to-month basis, the payroll estimates from ADP and the Bureau of Labor Statistics can differ substantially.  However, on a multi-month, moving average basis, the relationship between the ADP & Non-farm private payroll (NFP) figures is pretty decent. 


This is more analytic musing than convicted forecasting, but for the co-integration tea leafers…..the regression using the 3M rolling average in the ADP series (updated for this morning’s data) suggests +217,000 on the June NFP Private payroll print (current estimate = 213,000)

Tea Leafing the June Jobs Report - tea leaf reading


Historically, it appears the tendency is for NFP to re-couple to ADP after outlier moves (counting actual payrolls may be more accurate than calling up some smaller cross-section and asking questions….whoulda thunk). 


More to be revealed tomorrow morning...


Tea Leafing the June Jobs Report - ADP vs NFP

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Sleepy Grain Markets

Takeaway: With the subdued threat of a U.S. drought affecting the harvest, volatility and bullish sentiment have collapsed from the April highs.

Volatility can turn quickly with high-frequency data, and currently equities aren’t the only asset class with a relatively complacent outlook on market catalysts into the summer months.     

With commodities being the biggest outperformer through the first half of 2014, the CRB Index (+8.50% YTD) is experiencing its largest YTD increase since 2009 (+13.20%). What started off as some of the most volatile markets across all asset classes on the speculation of a drought in the U.S., investors in the grain markets remain skeptical of a forward-looking catalyst for price action into the harvest.

  • Basis on 1st and 2nd month corn futures is trading at a year-to-date high (Jul-Sep. spread)
  • Spot implied volatility has trended back to historical averages from April highs

Sleepy Grain Markets - corn implied vol chart


Sleepy Grain Markets - soybeans implied vol chart


Sleepy Grain Markets - wheat implied vol



Arguably the most important grain number of the year into the heat of harvesting season, the USDA reported Q2 stockpiles. The report shuddered any pre-season threat of a drought-fueled rally into harvest season. The USDA estimates Corn and Soybean Stocks may reach record levels. Bullish sentiment as measured by the CFTC’s weekly reporting of the net length of aggregate futures and options positions in the market peaked with prices at the end of April and has since declined significantly:


Sleepy Grain Markets - Table of CFTC Sentiment


Sleepy Grain Markets - Chart of CFTC Contract Positions YTD


  • Corn: After rallying to +22% on the year through the end of April, corn is now trading in negative territory after the print showed higher than expected stockpiles for Q2. The USDA now estimates the largest stock ever for the 2014 harvest:
    • Q2 Stocks: 3.85Bn vs. 3.72Bn estimate
    • 2014 USDA estimate: 13.94Bn Bushels (all-time high)

Sleepy Grain Markets - USDA Corn Stocks


  • Soybeans: After reaching +17% YTD at the end-of-April highs, soybeans have since retreated -10% to +7% through Q2. The USDA report this week also exceeded expectations with record acreage expected to be planted
    • Q2 Stocks: 405MM vs. 382MM estimate

Sleepy Grain Markets - USDA Soybean Stocks


  • Wheat: Reached a may 6th YTD high of +21% and has since plunged to -7% through Q2 (-4.5% week-to-date)
    • Q2 Stocks: 590MM vs. 597MM estimate

Sleepy Grain Markets - USDA All Wheat Stocks


The consumption of commodities is paid for in real, inflation-adjusted U.S. Dollars. With the driving force of high-frequency macro data points changing forward-looking expectations for the dollar and rates on a daily basis, the outlook for those who consume in U.S. dollars moves in tandem. We observe a noticeable relationship between these marginal changes and commodity prices and believe this will continue to be a potentially catalyst inducing volatility in commodity markets, weather aside.


Ben Ryan







Despite Monday’s Reuter’s headline “ISLE is in advanced talks to sell itself to GLPI” - we are skeptical as we see hurdles to such a combination despite modest value creation.


While the Reuter’s headline read ”ISLE is in advanced talks to sell itself to GLPI, noting that discussions were renewed in recent months after a sales process earlier this year fell apart”...frankly speaking, we found the timing of the headline unusual as well as disingenuous.  Could someone simply have been “talking up their book” on the last day of the month as well as the quarter? Regardless of the headline, we are skeptical as we see several hurdles to a potential transaction between ISLE and GLPI and we outline the reasons below.



Recall on Tuesday, March 18th we held a thought-leader call with REIT Attorney Ed Glazer regarding gaming companies converting or selling assets to a REIT.  During that call, Mr. Glazer outlined all the compelling reasons for why current gaming operators would not be able to either convert to or conduct a tax-free spin-off a REIT.  At that time, our position was the outlying and divergent opinion.  Here we are more than 90 days later and no gaming operator has announced its intent to spin-off a REIT via a tax-free or a taxable process.  However, we have renewed headlines regarding a gaming operator (ISLE) in discussions with Gaming & Leisure Properties (GLPI), the PENN sponsored, gaming-focused REIT spin-off.



First, Isle of Capri owns three commercial casinos in Iowa – Isle Bettendorf (Bettendorf), Isle Waterloo (Waterloo) and Isle Lady Luck (Marquette).  During 2013, the properties generated the following GGR:  Bettendorf $72.3 million, Waterloo $85.7 million and Lady Luck $28.8 million while on a last twelve month basis through May 2014 GGR was: Bettendorf $70.5 million, Waterloo $85.5 million, and Lady Luck $27 million.  Approximately 20% of ISLE's net revenues come from Iowa.


As background, Iowa currently has 18 commercial casinos and recently approved a 19th casino license for the development of Wild Rose Entertainment Jefferson casino with more than 500 slots and up to 15 table games.  Beyond cannibalization from additional Iowa casinos, Iowa GGR is adversely impacted from the addition of VGTs in Illinois.  During 2013, Illinois VGTs generated more than $51 million in GGR from Western Illinois counties viewed as feeder markets to the casinos located along Eastern Iowa on the Mississippi River. The ultimate death knell to Iowa will be when Nebraska approves commercial gaming.


Second, on Tuesday April 29th, GLPI’s Senior Vice President, Corporate Development, Steven Snyder, while speaking at a Goodwin Proctor-sponsored REIT discussion regarding “Competing in the New York Resort Casino Market” said “GLPI is very concerned about the Iowa Superior Court interpretation and ruling (in the IRGC vs. Argosy dispute) and as a result GLPI would NOT pursue any additional gaming acquisitions in Iowa.  As background, the Iowa Superior Court ruled that, in Iowa, a gaming license is held by the non-profit business partner and not the gaming operator – in a ruling between the Iowa Racing & Gaming Commission and Argosy Sioux City.    


Third, at the end of 1Q 2014, GLPI had $48 million of cash on its balance sheet and $550 million remained available under the Credit Facility.  At March 31, 2014, GLPI had $150 million drawn in its $700 million revolving credit facility and a fully drawn $300 million Term Loan A facility. GLPI has limited cash on hand but could draw down on its corporate credit facility.


Fourth, GLPI announced its intent to acquire The Meadows for $465 million, with a targeted closing date during 1Q15.  The acquisition will likely involve an equity issuance as well as debt assumption.  The May 14th GLPI press release reads "The purchase price, which the Company (GLPI) intends to fund with a combination of equity and debt"Enter the equity overhang!


Next, we believe any transaction (despite a low probability because of the Iowa issue) would involve a sale/lease back by ISLE and not the acquisition/sale of the entire ISLE entity. 


In the event GLPI were to buy the entire ISLE entity, GLPI would need to complete a second transaction which is the sale of the OpCo - given the rules that govern Taxable REIT Subsidiaries.  Given the negative feedback GLPI management received following the announced Meadows acquisition - and required second step of selling The Meadows OpCo, we view any transaction involving a second step as less desirable and a lower probability event.


This said, in the event GLPI were to consummate a sale/lease back with ISLE, such a transaction would likely require a sizable GLPI equity issuance - about 10.8 million shares (enter a larger equity overhang!) at today's GLPI share price as well as the assumption of approximately $612 million in debt.


Consequently, we model a theoretical sale/lease back along the lines of the PENN/GLPI spin-off where PENN pays GLPI 16.5% of Net GGR in the form of rent, which approximately translates into a 75% EBITDA margin.  However, given the size of ISLE we assume a slightly lower 70% EBITDA margin on the GGR.



Finally, in our opinion, Mr. Carlino moved from PENN to GLPI as a means to "preserve" his personal and family wealth - not put the family fortunes more at risk in an industry experiencing both cannibalization as well as contraction.  That said, why would Mr. Carlino "go all in" both in terms of acquisition strategy as well as increase the pressure on GLPI stock from a massive equity overhang?



While a sale or sale/lease back transaction involving ISLE would create incremental shareholder value for current ISLE shareholders, we view such a transaction with GLPI as a lower probability event - primarily since GLPI publicly said it would not pursue further gaming acquisitions in Iowa (a declining market) and a transaction with ISLE would require both a large assumption of debt as well as a sizable equity issuance, in addition to the equity issuance required to complete the acquisition of The Meadows for $465 million.  This said, maybe GLPI pursues a strategy to sale/lease back a single ISLE asset such as Pompano.

DFRG: A Castle-in-the-Air

The Hedgeye Macro Team gave us the honor of penning this morning’s Early Look.  We decided to write on our most recent best idea, short Del Frisco’s Restaurant Group (DFRG), in a note we believe is appropriately titled “A Castle-in-the-Air.”


EARLY LOOK: A Castle-in-the-Air

“Dreams of castles in the air, of getting rich quick, do play a role – at times a dominant one – in determining actual stock prices.”

-Burton G. Malkiel


For the past several days, I’ve been reading a gem of a book recommended by my colleague, Howard Penney.  Malkiel’s A Random Walk Down Wall Street is a timeless, thought provoking piece that most curious investors would enjoy reading poolside on a beautiful summer day.  I certainly did.  After all, restaurant research isn’t limited to cheeseburgers and fries.  In fact, a large part of our job pertains to understanding both human and market psychology.  The castle-in-the-air theory, which concentrates on the psychic values of investors, serves as a constant reminder of this fact. 


For those unfamiliar with its origin, the castle-in-the-air theory was popularized by John Maynard Keynes in 1936.  While we tend to disagree with Keynes’ and his disciples on a number of economic issues, the notion that stocks trade off of mass psychology is widely appealing.  Accordingly, some investors attempt to front run this onslaught of groupthink, not by identifying mispriced stocks, but rather by identifying stocks that are likely to become Wall Street’s next darling.  All told, this can be a profitable strategy – until it’s not.


DFRG: A Castle-in-the-Air - chart1


Back to the Global Macro Grind...


We believe we’ve identified one of Wall Street’s current darlings and recently added it to the Hedgeye Best Ideas list as a short.  Del Frisco’s Restaurant Group (DFRG) owns and operates three distinctly different high-end steak chains.  After coming public in July 2012, the stock has gained over 114%; quite impressive, by any measure.  More importantly, however, we believe cheerleading analysts and the subsequent madness of the crowd have propelled the stock during this time.  Is it reasonable to call a company whose adjusted EPS declined 7% in 2013 one of the greatest growth stories in the restaurant industry?  We think not. 


As Malkiel goes on to say:


“Beware of very high multiple stocks in which future growth is already discounted, if growth doesn’t materialize, losses are doubly heavy – both the earnings and the multiples drop.”


Beware indeed.


The truth is, the company currently screens as one of the most expensive stocks on both a Price-to-Sales and EV-to-EBITDA basis in the casual dining industry.  While we’re not insinuating DFRG is the beneficiary of a “get-rich quick speculative binge,” we are confident the stock is severely dislocated from its intrinsic value.


Part of the hype has been driven by the company’s positioning within the restaurant industry.  Del Frisco’s caters to the high-end consumer; a cohort that the stock market would suggest is doing quite well.  While this may be true, we believe the high-end consumer has been slowing on the margin as inflation in the things that matter (food, energy, rent, etc.) continues to accelerate.  Contrary to popular belief, high-end consumers can feel the pinch too and two-year trends at the company’s hallmark concept, Del Frisco’s Double Eagle Steakhouse, would suggest the same. 


Admittedly, the Double Eagle Steakhouse, though slowing, is a healthy concept.  But it’s only 25% of the overall portfolio.  The other 75% consists of a fundamentally broken concept (Sullivan’s) and an unproven growth concept (Grille).  Naturally, the Street is discounting an immediate turnaround at Sullivan’s and a flawless rollout of the Grille, neither of which we see materializing.  In fact, we continue to expect restaurant level and operating margin deterioration throughout 2014.  This has less to do with all-time high beef prices (32.8% of Del Frisco’s 2013 cost of sales) and the recent wave of minimum wage increases (25% of Del Frisco’s restaurants have exposure), than it does with the fact that the company is systematically growing at lower margins and, consequently, returns.


More broadly, there are a number of red flags that the Street is unwilling to acknowledge right now including decelerating same-store sales and traffic trends, declining margins, declining returns, increasing cost pressures, expensive operating leases, peak valuation, positive sentiment and high expectations.  We simply refuse to give the company credit for what it has not proven and while we can’t hit on all the minutiae of our thesis in this note, we do have a 67-page slide deck that does precisely that (email for more info).  In short, our sum-of-the-parts analysis suggests significant downside.


You can delay gravity, but you can’t deny it.  Needless to say, we don’t expect this particular castle-in-the-air to stay there much longer.


DFRG: A Castle-in-the-Air - chart2


Howard Penney

Managing Director


Fred Masotta


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.45%
  • SHORT SIGNALS 78.38%