Rockwell Automation Q1 2023 Earnings Call Transcript

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May 3, 2023

There are 8 speakers on the call.

Operator

Good morning, and welcome to the Turning Point Brands First Quarter 2023 Earnings Conference Call. All participants will be in a listen only mode and all lines have been placed on mute to prevent any background noise. After today's presentation, there will be an opportunity to ask questions. And please note this event is being recorded. I would now like to turn the conference over to Louis Raffarina, Chief Financial Officer, please go ahead.

Speaker 1

Thank you. Good morning, everyone. This is Louis Reformation, Chief Financial Officer. Joining me are Turning Point Brands' President and CEO, Graham Purdy and Chief Revenue Officer, Summer Freen. This morning, we issued a news release covering our Q1 results.

Speaker 1

This release is located in the IR section of our website, www.turningpointbrands.com. During this call, we will discuss our consolidated and segment operating results

Speaker 2

will be in a listen only mode and all lines will be in a listen only mode and all lines will be

Speaker 1

in a listen only mode and all lines will be in a listen only mode. As is customary, I direct your attention to the discussion of forward looking and cautionary statement

Speaker 2

will be in today's press release and the risk

Speaker 1

factors in our filings with the Securities and Exchange Commission. On the call today, we will reference certain non GAAP financial measures. These measures and reconciliations to GAAP can be found in today's earnings release, along with the reasons why management believes that they produce useful information. I will now turn the call over to our CEO, Graham Purdy.

Speaker 3

Thanks, Louie. Good morning, everyone, and thank you for joining our call. Our first quarter results were in line with our expectations and we are generally pleased with our start to 2023 as we are beginning to see traction from the initiatives we have put in place and consumers are responding as demonstrated by market share gains in all of our major categories. As we mentioned on our last call, We anticipated a tough comparison to Q1 of last year. Recall, the macro environment, principally inflation, started materially impacting our customers in the Q2 of 2022.

Speaker 3

Our results reflect an uncertain consumer environment where many of our end consumers continue to feel the impacts of prolonged inflation and higher interest rates. Moreover, As also discussed on our last call and reflected in today's numbers, our wholesale customers, particularly buyers of Zig Zag U. S. Paper and Wrap's portfolio, have been carefully monitoring inventory levels in response to the higher cost of financing their working capital. That said, We now think our customers' inventory adjustments are largely behind them.

Speaker 3

In fact, we expect the Zig Zag segment to demonstrate growth for the balance of the year, driven by new product introductions, further penetration of the nontraditional channel and normalization of U. S. Paper and wrap order patterns. We still see continued strength in the end markets given the secular tailwinds we are experiencing, and we're making progress penetrating the alternative space to better satisfy this growing consumer base. Stoker's had another solid quarter with strong market share gains in both the MST and loosely chewing tobacco categories as its value proposition continues to resonate with consumers.

Speaker 3

Moreover, as an organization, We've taken this opportunity to refocus on internal execution across all areas of our business to best position Turning Point for profitable long term growth to drive shareholder value. Since my appointment to CEO, the team has been focused on evaluating all aspects of our business will be in a listen only mode and all lines will be in a listen only mode and all lines will be in a listen only mode and all lines will be in

Speaker 2

a listen only mode and all lines will be in a listen only mode and all lines will be in a listen only mode and all lines will be in a

Speaker 3

listen only mode and all lines. Systems and logistics capabilities to become more efficient. We also continue to be proactive in optimizing our capital structure and opportunistically purchased another $13,900,000 notional of our convertible notes during the Q1, while maintaining a strong cash balance to help address further maturities. Let me now take you through some of the segment highlights. First, Zig Zag.

Speaker 3

Zig Zag remains the number one rolling paper and wraps brand in North America. Net sales decreased due to the previously discussed and anticipated reduction of trade inventory during the quarter. But we saw strong growth in our Canadian operation, other smoking accessories and our e commerce business had another quarter of double digit growth as we continue to build our presence in the alternative channel. In U. S.

Speaker 3

Papers and Wraps, despite the double digit decline we experienced in shipments, We had market share gains in the measured channel at retail and remain encouraged by our sales initiatives in the alternative channel, which Somer will discuss in a few moments. We have made significant progress in e commerce as now over 30% of Zig Zag's U. S. Paper sales, a meaningful improvement over the past 3 years. Clipper also had a strong quarter as we continue to penetrate the market through additional distribution.

Speaker 3

We believe that brands with scale are increasingly important in our enhanced portfolio across categories from traditional papers to cones, wraps, accessories And now Clipper allows us to offer our customers a more complete product assortment to address their needs across a variety of adjacent categories in the store. Moving on to Stoker's. As mentioned, Stoker's delivered another solid quarter with revenue up 6.2% highlighted by high single digit growth in MST and low single digit growth in loosely tuned tobacco, both reflecting market share gains, which gives us confidence in our approach. For us, the silver lining in the current economic environment is that it's led some dippers to try our Stoker's MST product for the first time as we continue to increase store penetration. We think our new customers are impressed with the value proposition of the product, high quality and flavor at a reasonable price.

Speaker 3

Based on past experiences, we expect many to stick with Stoker's even when economic conditions improve. Looking ahead, We are maintaining our full year 2023 adjusted EBITDA guidance. With that, let me hand the call over to Summer to walk through some progress and results of some of our specific go to market initiatives.

Speaker 4

Thank you, Graham. As discussed in prior quarters, we continue to focus heavily on growing the Zig Zag brand and have built a multiyear roadmap to continue to solidify Zig Zag's positioning as a lifestyle brand for this emerging generation and broadening its addressable market by accelerating growth in the alternative channel. As previously shared, while Zig Zag is relatively ubiquitous across what we call the traditional channel, we continue to push hard to capture our fair share and more in the alternative channel. This is especially important given the secular trends which are growing our addressable market. To that end, we continue to expand our product innovation that we believe resonates with consumers in both the traditional and alternative channel.

Speaker 4

Expanding our product portfolio allows us to increase our on shelf presence in key trade classes within alternatives such as dispensaries and head shops and allows us to continue to learn from these early adopters that we can leverage in the traditional channel. In addition, selling to manufacturers and cultivators is another opportunity we have to harness the brand's power to meet our end consumer with Zig Zag quality and branding. So far this year, we have expanded the Zig Zag product portfolio with 2 innovative offerings, palm rolls and 70 millimeter comb. Palm is a new substrate for Zig Zag Wraps taking learnings from our Canadian partners and the 70s are a smaller version of our powerful cone franchise are designed to meet consumers on the go. Both sets of new offerings have been received positively by the trade and in consumers and further reinforces Zig Zag's ability to satisfy ever evolving consumer preferences.

Speaker 4

In addition to our pipeline of new products and increased sales efforts to penetrate the alternative channel. We continue to build on past learnings with brands and partnerships, like our recent collaboration with Amiri, a high end fashion brand that are resonating with our existing and growing consumer base. These initiatives are a critical element of our multiyear plan to remain highly relevant and engage with our diverse and growing consumer base. As another example in our broad based strategy, we are currently collaborating with Hippie Sabotage, a popular independent music band, where we wrapped their tour bus with Zig Zag branding in addition to launching several brand activations alongside the band on its 35 city tour. We've seen a significant amount of consumer engagement through this partnership as this rolling zigzag billboard on wheels travels to key cities across the country.

Speaker 4

For the quarter, our e commerce and B2B business grew double digits and our pipeline of new initiatives is growing. The growth was due to continued investment in our sales team that led to growth in customers combined with increases in average order size as we expand our portfolio. We have more exciting initiatives underway and I look forward to sharing more updates in future quarters. Turning to Clipper. As we discussed, the brand is a well known top lighter brand in international markets and we believe we have a proven track record of leveraging our sales force and marketing engines to grow brands in the U.

Speaker 4

S. Our initial focus is to rapidly increase distribution and expand product assortment across all sales channels. Our longer term focus is building brand awareness and engagement by educating consumers on the Clipper brand at retail and through digital channels with highly relevant content explaining its unique features such as its ability to be refilled, is more environmentally friendly and has a unique packing tool with its detachable flint. We continue to grow our retail footprint and we recently secured placement into one of the largest U. S.

Speaker 4

See floor chains and we will begin shipping to a subset of their stores later this year. Securing this trade partner reflects the interest and value of Clipper's points of are in the market relative to the competition as the world's number one reusable lighter. We are also growing brand awareness and sales across other channels for Clipper such as our Q1 launch on Amazon and other sales and social digital channels. As noted in previous calls, we continue to believe this category is synergistic to our existing business represent plenty of runway given the roughly $500,000,000 market and our growth thus far. Moving on to Stoker's.

Speaker 4

Stoker's had a strong quarter and its positioning continues to benefit from the secular trend of consumer trade down as we execute to further increase store penetration. Stoker's delivers on the promise of a great dip at a fair price, which we believe resonates well with consumers, especially those facing a challenging inflationary backdrop and has likely helped to accelerate share growth and drive do for adoption. We ended the quarter with Stoker's at 66% weighted distribution, up from 64% in Q4 2022. On the product innovation front within Smokeless, we continue to support the free brand and remain committed to profitably competing are in the growing $1,000,000,000 white pouch category. We believe free point of difference with more satisfaction in every pouch will enable it to carve out a competitive and distinct position in the market.

Speaker 4

We see encouraging results both in store and online and will continue to refine our strategy and take learnings from our success in other product categories to efficiently scale into the segment as the category matures and becomes less promotional over time. In summary, we are hyper focused on maximizing the value of our world class brands and extensive distribution capabilities. Let me now turn the call back over to Louis to go through our results.

Speaker 1

Thank you, Summer. Starting with our consolidated quarterly results. Q1 sales were up 0.1 percent to 101,000,000 Adjusted gross margin was down 310 basis points to 48.2% due to segment and product mix. Adjusted EBITDA was $20,800,000 down $4,500,000 year over year due to the decline in Zig Zag gross profit. Go into segment performance.

Speaker 1

Zig Zag sales decreased 8.3% to $41,900,000 with volume down 8.6% and price mix up 0.3%. Our U. S. Papers and wraps businesses were down double digits Due to the anticipated reduction in traded inventory during the quarter, which we've previously discussed, but if you look through our shipments to retail, our sell through is are performing the market in a traditional channel. Our e commerce business, particularly B2B alternative sales grew double digits.

Speaker 1

Our Canadian and other smoking accessories categories also grew double digits during the quarter, both aided by clipper sales. Gross margins declined 4 20 basis points to 53.5 percent during the quarter, driven primarily by product mix, Principally, the trade inventory adjustment of higher margin U. S. Rolling paper and wraps products and further impacted by the contribution of for Lighters, which operates at lower gross profit margins. We expect higher gross margins sequentially as U.

Speaker 1

S. Paper and wrap sales normalize. Moving to Stoker's. Stoker's products net sales increased 6.2% to $33,700,000 in the quarter with a 0.3% volume increase 5.9 percent price mix increase. Net sales for the MSP portfolio grew high single digits.

Speaker 1

Focused volume is up 5.0 percent despite category volume down 4.9%, with share growing 60 basis points year over year to 6.4% during the quarter according to MSAI. Its share in store selling was up 50 basis points year over year to 9.7%, With Stoker's now in stores representing 66% of industry volumes, which still provides the long runway for growth. Chew sales were up low single digits from the previous year. Stokus Chew was the number one chewing brand in the quarter, Gaining 310 basis points a share to 29.8 percent according to MSAI. Overall, TPB loose leaf volume was flat versus a category which declined 7%.

Speaker 1

Category performance was driven by a larger decline in premium loose leaf compared to discount brands With TPB's volumes benefiting from consumer trade debt. Gross margin increased 200 basis points, primarily due to MSP pricing gains. Moving to CDS, our wholly owned distribution subsidiary. Sales were $25,400,000 and adjusted gross margins were 26.6%. Moving to our balance sheet.

Speaker 1

We repurchased $13,900,000 notional value of our convertible bonds during the quarter, and we ended the quarter with $104,800,000 of cash and and $128,400,000 of available liquidity, providing flexibility for further capital deployment. We continue to closely monitor the financing markets ahead of our July 20 have a range of 24 convertible note maturity. We believe our current cash balance and free cash flow generation provides us the necessary flexibility to address the maturity. Now on to guidance. At this point of the year, there will continue the economic uncertainty.

Speaker 1

We continue to project consolidated adjusted EBITDA of are $88,000,000 to $94,000,000 for fiscal year 2023. Other projections include effective income tax rate of 24% to 26%, up from previous projection of 22% to 24%. We continue to expect CapEx to be temporarily elevated this year at approximately $13,000,000 with $9,000,000 related to the manufacturing project we expect in the fleet this year. We We expect CapEx to return to more normalized levels in 2024. We expect to spend $12,000,000 to $15,000,000 in capitalized software implementation costs related to our ERP and CRM implementations, which are still expected to be completed by the end of the year.

Speaker 1

We continue to carefully evaluate potential PMK spend related to our modern oral products, all of which have been accepted by the FDA. Now, let me turn it back to Graham.

Speaker 3

Before I open the call to Q and A, I wanted to

Speaker 1

give you some thoughts on

Speaker 3

why I'm excited about The long term opportunity we have in front of us and why we have confidence in the balance of the year now that we believe the inventory reset is largely in the rearview mirror. We have a portfolio of iconic brands that consumers love. Zig Zag is the number one rolling paper and wraps brand in North America that is benefiting from secular growth trends in cannabis consumption, new product introductions and a compelling channel opportunity. We've entered a new category in Leiters with a proven global brand in Clipper that significantly expands the addressable market we compete in. For those of you that don't know, let me remind you that among mass market lighters, Clipper is differentiated by being one of the few that are refillable, providing an environmental benefit that's attractive to many of our customers.

Speaker 3

Stoker's is the number one loose leaf brand And Stoker's moist snuff remains one of the fastest growing brands in the category with a sizable share of market we have yet to penetrate. Will be aligned towards creating shareholder value by driving organic growth combined with acting financially disciplined. Thank you for participating in the call today. And with that, I'd like to open the call for questions. Are ready.

Operator

Thank you. We'll take our first question from Vivien Azer with TD Cowen.

Speaker 5

Hi, this is Victor Ma on for Vivien Azer. And thank you very much for the questions. I have a few. A key competitor in the U. S.

Speaker 5

Tobacco space recently revised down their expectation for price elasticities in the U. S. Cigarette market. While you don't play in that segment, can you comment on How are your views of price elasticities and MSD have evolved?

Speaker 3

Yes. I don't think there's any evolution in our thinking. We're generally a price follow in the industry. And so our plan is to continue to go and get more weighted distribution and continue to follow what the industry does. We've got a nice value proposition with our MST and I think we're well positioned in the current economic environment.

Speaker 5

Got it. Thank you. And then so high single digit growth in Stoker's would suggest that down trading is continuing in the MST space. Can you comment on how that's evolved and whether you expect down trading to persist or accelerate from here?

Speaker 3

Yes. I can't prognosticate whether it's going to accelerate in the future. It's been fairly consistent over the last few years. And so at this point in time, we're keeping our head down focused on our existing plan and taking what the market will give us.

Speaker 5

Got it. Thank you. And then on free, can you please expand on the rationale for expanding all the way down to a 3 milligram offering? Bulk of the category volume sits at the 6 milligram offering and the strategic rationale for the original free positioning was to go above that. So what's the risk that with an expanded range of nicotine offerings The differentiation around free gets diluted.

Speaker 4

Hi. Yes, thanks for that question. I think for free, it's important for us as Consumers are transitioning into that category to have a wide offering available for them. It doesn't mean that we'll keep all nicotine offerings on the market in perpetuity. But as we're learning about that consumer, we feel it's important for us to offer that variety for them up to this point.

Speaker 5

Understood. Thank you. And then just last question. So Zig Zag margins were under pressure, But they were better than what we expected. With the understanding that Clipper will continue to be a headwind next quarter, is it reasonable to expect Margin stabilization and recovery in the second half given the headwinds to the space in the U.

Speaker 5

S?

Speaker 2

We actually expect sequential increase just because with the inventory trade reduction, Most of those came from our higher gross margin products. So sequentially, you should see an uplift, but then after that you'll have Clipper continue to grow and so that will be a headwind to gross margins going forward.

Speaker 5

Understood. Thank you so much for the color. That's it for me.

Operator

Thank you. We'll take our next question from Eric De Laury with Craig Hallum.

Speaker 6

Great. Thank you for taking my questions. First, I was hoping you could just expand on or perhaps just reiterate some of the dynamics that you're seeing at Zigzag retail so far year to date. I think I just missed some of those comments. Obviously, you have some of your customers working through inventory, but some significant strength it seems like at the retail side.

Speaker 6

And I was hoping you could just expand on that a bit first. Thanks.

Speaker 3

Yes, Eric. Thanks for the question. We talked about this last There's really two dynamics, us shipping to our wholesale customers and then what our wholesale customers ship to retail and then ultimately what moves to the consumer. We grew share in all 4 of our major categories in the quarter. And so we feel good about what consumers pulling off the shelf.

Speaker 3

It was really just what we consider a disruption in trade inventories and the balance that occurred in 2022. So end markets, We feel good about the plan that we're on to continue to execute and win those consumers. It's just again A blip in time here for Q1 on the trade inventories.

Speaker 6

Okay, great. And then on the Zig Zag Innovation side, could you just give us some more color on Perhaps some of the innovation plans within kind of papers themselves, when you look at some of the Competitive offerings in the alternative channel, especially there seems to be much more SKUs than you would see at C Stores, for example. So Do you have plans to sort of expand the number of SKUs for Zig Zag Papers specifically and just kind of any additional commentary around Zig Zag

Speaker 4

Hey, that's a great question and one that we spend a lot of time talking about. As you noted, consumers, particularly in the non traditional space are continuously looking for product innovation and so it's something we're hyper focused on. As you may have heard on the call, we recently launched 2 products, palm rolls as well as 70 millimeter cones. And those were driven by some consumer insights that we have because we do spend a lot of time thinking about consumers, what they're looking for in the market and talking to our sales team about what they're seeing in the market. So we certainly have a pipeline of products that are underway and we're excited to bring to market.

Speaker 6

All right. Appreciate that color. And then last one from me here. It's a question I asked on the last call as well. But just wondering if you're seeing any changes to the competitive dynamics in the alternative channel specifically following the court order against one of your main Rolling paper competitors, any sort of increased opportunity to take share or just any additional comments you have there would be great.

Speaker 6

Thanks.

Speaker 4

Yes, sure. As to your point on the last call, we did talk about that initial chatter coming out of that court order that you referenced. And we certainly navigated through that with our customers and our consumers. Candidly, it's been a bit quiet and we continue to focus on maintaining our plan with Zig Zag with both our customers and consumers and are excited to keep plowing through the year with it.

Speaker 6

All righty. Thank you.

Operator

We'll take our next question from Hale Holden with Barclays.

Speaker 7

Hey, good morning. Sorry, I just have 2 on the same theme there on the innovation questions. But on the palm wraps On the 70 millimeter cones, are those additional shelf space allocation in most places or are they Substitutions for something else you might have on shelf.

Speaker 4

Great question. We are excited that in most cases they allow us to expand our shelf space. It's really important to us, particularly in the alternative channel to capture our fair share in that market. And so this is and opportunity that affords us the additional shelf space.

Speaker 2

Great. The last time

Speaker 7

you guys launched new Cone products, Definitely, it was noticeable in results. Are these do you think incremental or big drivers? It's just hard for me

Speaker 3

to know. Yes. It's in the early days of the launch. Our plan Is for the product to be incremental for the end consumer. Ultimately, what we're trying to do is provide a wide range of options, different sizes are for different consumer needs.

Speaker 3

So we view it as an incremental opportunity for the company.

Speaker 2

Great. Thank you so much. I appreciate it.

Speaker 3

Thank you.

Operator

And that does conclude the question and answer session. I'd like to turn the call back over to our presenters for any know our closing remarks.

Speaker 3

Thank you, operator. Appreciate everybody's time today and we look forward to speaking to you next quarter. Thank you.

Operator

Thank you. That does conclude today's presentation. Thank you for your participation. You may now disconnect.

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Rockwell Automation Q1 2023
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