Rockwell Automation Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 2, 2023

There are 9 speakers on the call.

Operator

Good morning, and welcome to the Turning Point Brands Second Quarter 2023 Earnings Conference Call. All participants will be in listen only mode. All lines have been placed on mute to prevent any background noise. After today's presentation, there will be an opportunity to ask questions. Please note that this event is being recorded.

Operator

I would now like to turn the conference over to Louis Reformina, Chief Financial Officer. Please go ahead.

Speaker 1

Thank you. Good morning, everyone. This is Louis Raffimena, Chief Financial Officer. Joining me are Turning Point Brands' President and CEO, Graham Purdy and Chief Revenue Officer, Summer Freme. This morning, we issued a news release covering our 2nd quarter results.

Speaker 1

This release is located in the IR section of our website, www.turningpointbrands.com. During this call, we will discuss the consolidated and segment operating results And provide a perspective on the operating environment and our progress against our strategic plan. As discussed earlier, I direct your attention to the discussion of forward looking and cautionary Statements in today's press release and the risk factors in our filings with the SEC. 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 reasons why management believes that they provide useful information.

Speaker 1

I will now turn the call over to our CEO, Grant Purdie.

Speaker 2

Thanks, Louie. Good morning, everyone, and thank you for joining our call. Our 2nd quarter results demonstrated continued progress against our plan. During the June quarter, we showed revenue growth of both Stoker's and Zig Zag As we continue to gain traction from the initiatives we put in place and consumers are responding as demonstrated by market share gains in most of our major categories. Given our solid start to the year, we are raising our annual EBITDA guidance to $90,000,000 to $95,000,000 Of course, Our business, like many other consumer oriented companies, is not without challenges.

Speaker 2

Our results continue to reflect the impacts of prolonged inflation and higher interest rates. As we've shared previously, our wholesale customers, particularly buyers of our Zig Zag Paper and Wraps portfolio, have been carefully monitoring inventory levels in response The higher cost of financing the working capital. While we think the bulk of our wholesale customers inventory adjustments are largely behind them, We still saw further destocking with certain customers in the Q2. Despite this transitory dynamic, We're confident that the Zig Zag brand continues to strengthen based on several factors we track. Our sell through was better than our reported results, And we are encouraged by our wholesale customers and retail customers' response to our expanding portfolio, which includes Clipper lighters and our recent new product introductions.

Speaker 2

We are also encouraged by our continued penetration of the alternative channel driven by continued secular tailwinds that are expanding our addressable market. We are having success not only winning new untapped alternative customers, but our new and existing alternative Customers are showing more interest in taking on more complete Zig Zag portfolio. This not only increases our order sizes, but also provides valuable shelf space Merchandising Real Estate within these stores to build brand awareness as we satisfy evolving and consumer preferences. As many of you can probably see in your hometowns, the alternative channel is consistently expanding by virtue of additional states green lighting medical and recreational cannabis. In addition to more legal dispensaries, other alternative retail outlets and manufacturing processing facilities are drafting off this trend.

Speaker 2

Our zigzag B2B e commerce business selling into that channel was up over 30% during the quarter, excluding Clipper, which also contributed to our sales within the channel. Stoker's had another strong quarter with revenues up 7.3% and market share gains in both the MST and loosely tuned tobacco categories As its value proposition continues to resonate with consumers, MST continues to expand distribution and gain market share, Turning Point Brands became the number one manufacturer of loosely products for the first time in its history. On Free, our modern oral product, We're increasingly optimistic about our prospects and given positive consumer feedback and results in recent test markets. We also continue to be proactive in optimizing our capital structure and opportunistically purchased another $15,100,000 notional of our convertible notes during the Q2, bringing the total as of the end of the quarter to $39,000,000 while maintaining a strong cash balance to help address future maturities. 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 3

Thank you, Graham. As discussed in prior quarters, our focus on growing the Zig Zag brand is a critical element of our plan. We continue to execute against our multiyear roadmap to solidify Zig Zag as a lifestyle brand, especially in the alternative channel, which is clearly expanding across the United States. We recognize the immense value of growing brand awareness, trial and conversion and ultimately becoming a ubiquitous brand that a consumer is able to find anywhere. To that end and as an important example of our progress, we are proud to share that we have partnered with 2 of the top 5 largest multistate dispensary operators or MSOs to build dedicated in store presence for our products.

Speaker 3

Last quarter, we also expressed the value of Product innovation to the Zig Zag portfolio as an essential necessity to expand our on shelf presence across trade classes, Along with the launch of palm rolls and 70 millimeter cones, both sets of new offerings and especially the 70 millimeter cones have proven to resonate well with both the Trade and our consumers and show momentum in the marketplace. In addition to consumable product innovation, we also believe it is important to develop other accessories and Such as apparel, which has previously had great success. As part of our strategy to both expand our product lines and sales channels we recently launched in Zumiez, one of the largest brick and mortar specialty apparel stores with over 600 locations across the United States. Expanding these partnerships serves as a large sales and marketing opportunity for the Zig Zag brand and speaks to the strength of the We have received encouraging feedback and engagement thus far. Turning to Clipper, as we've 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 3

S. We continue to increase distribution and expand product assortment across all sales channels, while building brand awareness and engagement by educating consumers on the Clipper brand at retail. In addition, we see traction on Amazon and across our social channels. Amazon was a new channel for Clipper in the United States launching in Q1 2023 and has proven to be an important sales avenue for consumers. Our social channels highlight that consumers are interested in the points of difference of Clipper versus competitive lighter brands by way of significant and increasing engagement.

Speaker 3

As noted in previous calls, we believe this category is complementary to our existing business and are optimistic that plenty of opportunity remains in This roughly $500,000,000 market. Moving to smokeless, Gram already mentioned the continued strength in Stoker's during the quarter. On the product innovation front and as noted in prior calls, we remain committed to profitably competing in the growing $1,000,000,000 White Pouch category with a free brand. Our progress across the channels in which we compete gives us confidence that we will carve out a competitive and distinct position in the market. We look forward to sharing more detailed plans and remain committed to scaling in this segment over time.

Speaker 3

In summary, we continue to focus on maximizing the value of our brand, Executing against the plan we've established and growing our business with both our retail and end consumers. We are hyper focused on maximizing the value of our world class brands and extensive distribution capability. 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. C2 sales were up 2.6 percent to $105,600,000 Adjusted gross margin was down 30 basis points to 49.7 percent Due to segment and product mix, adjusted EBITDA was $25,300,000 up 2.2% year over year. Going into segment performance, Zig Zag sales increased 1.1 percent year over year to $46,700,000 Our U. S.

Speaker 1

Papers and wraps businesses were down as we saw further trade inventory rightsizing during the quarter, But we continue to remain encouraged by end market demand. Our e commerce business, particularly B2B alternative sales, redoubled it. Our Canadian and other smoking accessories category saw strong growth during the quarter, both aided by Clipper sales. Gross margins declined 60 basis points to 56.6 percent during the quarter, driven primarily by product mix. Notwithstanding the trade inventory fluctuations we have seen this year, end demand for our papers and cones products continued to be strong.

Speaker 1

Q2 2023 U. S. Paper and e commerce sales are double the levels of the Q2 of 2019, Which speaks to the cyclical growth trends in our market share gains over the last few years. On to Stoker's. Stokus products net sales increased 7.3 percent to $36,100,000 in the quarter with a 0.7% volume increase and a 6.6% pricemix increase.

Speaker 1

Net sales for the MST portfolio grew double digits. Focus volumes was up 2.5% despite category volume down 5.6% With share growing 60 basis points year over year to 6.9% according to MSAI. Its share in store selling was up 30 basis points year over year 10.3%, it's Stoker's now in stores representing 67% of industry volumes, which still provides a long runway for growth. Choo sales were down mid single digits from the previous year. Stokus Choo was the number one Choo brand in the quarter, meaning 280 basis points of share to 30.7 percent according to MSAI.

Speaker 1

Overall, TTP loose leaf volume was down 2.8% The category which declined 8.5%. Category performance was driven by a larger decline in premium loosely Compared to discount brands, with TPB's volumes benefiting from consumer trade down as Stoker's volumes grew from the previous year. Gross margin increased 160 basis points to 55.4%, primarily due to MST pricing gains. Moving to CDS, our wholly owned distribution subsidiary. Sales were $22,800,000 and adjusted gross margins were 26.7%.

Speaker 1

Moving to our balance sheet. We repurchased $15,100,000 notional value of our convertible bonds during the quarter. And we ended the quarter with $100,500,000 of cash and $124,100,000 of available liquidity, providing flexibility for further capital deployment. We continue to closely monitor the financial markets ahead of our July 20 24 convertible note maturity. We believe our current cash balance and free cash flow generation provide us the necessary ability to adjust the maturity of the remaining $133,500,000 of convertible notes.

Speaker 1

With our first half performance, we now expect Consolidated adjusted EBITDA of $90,000,000 to $95,000,000 for fiscal year 2023 compared to previous outlook of $88,000,000 to $94,000,000 Other projections include effective income tax rate of 24% to 26%. We continue to expect CapEx to be temporarily elevated this year Up to $13,000,000 with $9,000,000 related to a manufacturing project, which we expect to complete late this year, although timing of payments may split to the Q1 of 2024. We expect CapEx to return to more normalized levels in 2024. We also 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. We currently expect to spend approximately $2,000,000 for

Speaker 2

Thanks, Louie. To conclude, we had a solid start to the year and we remain focused on demonstrating further progress for the balance of the year. Thank you for participating in the call today. And with that, I'd like to open the call for questions.

Operator

We'll pause for just a moment to compile the Q and A roster. Your first question comes from the line of Vivien Ather from TD Cowen.

Speaker 4

Hi, good morning.

Speaker 1

Hi, Vivian.

Speaker 4

Good morning. So I wanted to start on Zig Zag. Certainly a nice move sequentially And good to hear that a lot of the inventory noise is behind you. Is there any way for you to quantify kind of what you think It might be a potential inventory headwind in either the Q3 or the back half and maybe just kind of more broadly holistically, How we should think about, modeling the sequential revenues in particular in light of the new partnership with the MSOs that you announced today? Thank you.

Speaker 5

Yes. I mean, on a sequential basis, I would say that, we think most of the inventory reductions behind, but you are still seeing it in certain areas. I would say

Speaker 1

that we should continue to see sequential improvement

Speaker 5

in Q3 versus Q2 on ZIGA. I thought I was going to model it out.

Speaker 1

I would kind of point out that last year we did have when you look

Speaker 5

at a year over year comparison, we did point out Q3 of last year had $5,000,000 of pull forward given the program was that we ran During that period last year.

Speaker 4

Noted. That's really helpful. And then as we kind of think about the gross margin progression On Zig Zag, seemingly kind of just a better top line performance has helped narrow the Rate of gross margin compression in 2Q versus 1Q, is that right? And, are there incremental considerations inventory or otherwise, maybe Negative mix from the MSO partnership that we should be cognizant of as we think about Zig Zag margins in the back half?

Speaker 5

Yes. The big driver that we have from Q1 to Q2 is that, If you recall, the products that were subject to the trade inventory reduction in Q1 were our papers and wraps, which carried higher gross margins. Obviously, those rebounded in Q2 sequentially. So we had a nice lift in gross margin in Q2. Going forward, as we continue to grow our paper cones And Clipper and some of our other kind of lower gross margin businesses, I would expect our gross margins to have that same kind of headwind as we've experienced in the past.

Speaker 4

Super helpful. Thank you for that. Maybe pivoting to free, the modern oral category has been Incredibly topical this earnings season from your larger competitors. Any incremental insights you can offer around kind of Performance, how you guys are feeling about the traction it's gaining with consumers, the 3 milligram offering, anything incremental on that would be great.

Speaker 3

Yes. Hi, Vivian. This is Summer. We continue to get really great feedback from both the trade and our consumers. We have the ability to really look at what consumers are doing within our own websites and their purchase patterns and we remain really encouraged by what we're seeing.

Speaker 3

We also feel really great about our product assortment. As you noted, our points of difference in milligram strength sort of separate us and we are excited about what we're seeing there as well. As we think about the playbook going forward, obviously we've learned a lot about how to go to market through the success we've had with Stoker's and so borrowing from that playbook will definitely be influencing our go to market strategies in the near future.

Speaker 4

Got it. Last one for me on Stoker's, perfect segue. We're seeing some changes in the competitive landscape in Cigarettes, I don't think it's yet, kind of impacted the broader traditional moist smokeless tobacco category, But any kind of insights you can offer on the competitive landscape in MSC more broadly?

Speaker 2

Yes. Vivien, it's Graham. Look, I think the sort of a tale of 2 cities, the value category, I think, continues to Successful in MST and the premium brands are struggling at this point in time. I think a little bit of that has to do with sort of The macroeconomic environment, but also the pricing activity that they're taking. We sort of remain committed to this down the street plan that we've had for many years, Continue to get win more stores, continue to win more chain accounts, continue to opportunistically price when that allows and we're Excited about the continued runway that we have with Stoker's.

Speaker 4

Sounds good. Thanks for all that guys.

Speaker 2

Thanks, Vivien.

Operator

Your next question comes from Michael Legg from The Benchmark Company.

Speaker 6

Thanks. Great quarter guys. I appreciate to see these results in tough environment. I want to understand a little bit about the MSOs, getting 2 in the top 5. Can you talk a little bit about Whether you're displacing other products that's there, if it's additive for the MSOs and what you're looking forward to getting in there over time?

Speaker 6

Thanks.

Speaker 3

Yes. Hi, this is Summer. In terms of getting into the MSOs, I think for us it's about getting Broader presence in these very important retail environments for us so that Zig Zag continues to carve out its space in that environment. Won't go into the competitive nature there in terms of what we'll be taking the shelf space of or not. But for us, it's really about Continuing to get into the alternative space, expand our footprint there and the growth opportunities that remain.

Speaker 6

Okay, great. Thanks. And then just on Clipper, can you talk about where you see your penetration today? I mean, are we 10% into the market? Are we How much more runway is there for you to go?

Speaker 6

Thanks.

Speaker 3

Yes. So as noted that category is Pretty tremendous for us in the United States. We've been at it for almost a year now and we continue to see distribution expand Quarter over quarter and we're continuing to gain distributors as well both in the traditional and the alternative space. So Making inroads there and continue to see growth in that space both in store and as shared we're on Amazon now as well. So The growth there is encouraging as well.

Speaker 6

Okay. And then with the Zoomies, I mean, what type of level of apparel sales are we thinking? Is this The small piece to start or are there a lot of other retailers you're talking with and where do you see that going?

Speaker 3

Yes. So for us, It's as much of a sales opportunity as it is a marketing opportunity. Introducing into Zumie certainly affords us the opportunity to be at the table with other Partnerships as well. And when we think about going into Zumiez, we think about creating walking billboards for our brand and that is a tremendous marketing opportunity for Zig Zag. And the fact that it's resonating in the early days of us getting into Zumiez is Very exciting for us and the opportunity the brand has going forward.

Speaker 6

And what type of margin potential do you think you have in the Powell?

Speaker 3

I don't know if we're sharing what the margin potential is quite yet with apparel, but certainly can follow-up on that.

Speaker 6

Thanks. Okay. Great quarter. Thanks guys.

Speaker 3

Thank you. Thanks Mike.

Operator

And your final question comes from Eric De L'Oreal from Craig Hallum, Capital Group.

Speaker 7

Great. Thank you for taking my questions. First one for me, a follow-up on one of Vivien's questions, just On the sort of continued strong performance of Stoker's MST and just overall that sort of value segments continuing to Be successful against premium. You called out that you're in 67% of the stores by volume. Obviously, leaving about a third of the market available to you guys, so strong opportunity there.

Speaker 7

It seems to me like that opportunity has kind of been out there for a while. So I'm just kind of wondering what the overall sort of road map there looks like and maybe another way of thinking about it would be just sort of what might Cause you to lean into that opportunity maybe more than you have in the past? Thanks.

Speaker 2

Yes. Look, great question, Eric. I don't think We've made any modifications to our strategic approach around Stoker's. It really is sort of trench warfare. It's One sort of time, it's a chain at a time.

Speaker 2

At the same time, we've sort of maintained this ethos about being profitable while we do it, so not going out and While we do it, so not going out and irrationally spending money to gain distribution. And so I think that the pathway we're on, we We continue to grow that weighted distribution. We continue to win stores. We continue to win chain accounts. So I think that long runway is something that's very exciting for us, Especially with the pricing dynamics in the category.

Speaker 2

We're one of the few that's actually growing volume in the space. So obviously, that leads to share growth. And we got the benefit of fast following pricing from large competitors. So a lot of great dynamics. I wouldn't anticipate any change to our current thinking about how we go to market there.

Speaker 7

Okay. Yes. That certainly makes sense to me. Obviously, continuing to Benefit in more ways than one with just kind of status quo. So that certainly makes sense to me.

Speaker 7

Moving to Zig Zag here, Definitely very encouraging to hear that the B2B alternative channel sales are up 30%, I think it was. So that's great to hear that these sort of initiatives are kind of catching momentum here. I was wondering if you could expand a bit On the Zig Zag Innovation Pipeline, you touched on it a bit in the prepared remarks. I'm just wondering if you could expand on that, whether there's any difference in the sort of measured channel versus the alternative channel and Just overall, if you could give a bit more insight into the innovation pipeline for Zig Zag and how you're kind of expecting that to translate to overall sales growth? Thanks.

Speaker 3

Yes, sure. So as noted on the call, we recently put into market palm rolls and 70 millimeter cones. We've especially seen a lot of great traction across both the alternative and the traditional channel with 70 millimeter cones. Just tells us that consumers are both interested in the Zig Zag brand as well as interested in that particular product assortment or lineup. So I think there's a lot of runway for us to still get into stores there.

Speaker 3

And on palm rolls, more focused on the alternative side at this point, but It seems like consumers and the dispensary owners are very interested in that assortment as well.

Speaker 5

Yes. I would also add that The All Gen All and e commerce platform, the already comes up provide sounds like great channel for us to try out products and prove it out before we Launches into the C store. So we've been doing that with some of our new innovation.

Speaker 7

That's right. And as we go forward, so we sort of have palm And especially the 70 millimeter cones helping to drive results currently and in the recent past. I'm just wondering on the road map like sort of as we look into 2024, should we expect a significant proliferation in the number of you guys are servicing, is it really kind of focusing on these, finding 1 or 2 that really work and kind of Investing behind those a bit. I'm just kind of wondering how we should think about the innovation pipeline going forward, just considering how much it has Ben, a driver of the growth here.

Speaker 3

Yes. So for us, 2 things are really important. One, what is the consumer wanting from us, right? And staying ahead of the consumer is really critical for us, especially as we think about Growing the Zig Zag brand into the future and as we think about what these various channels are looking for. Additionally, I would add that getting shelf space in the alternative channel is really important for us.

Speaker 3

And so as Louie noted, testing in the alternative channel What products make sense is the profitable way for us to think about growth in this space as well And not over investing in product innovation is an important watch out for us. So I think it's a very balanced approach we're trying to strike So that we're staying ahead of the consumer, but also staying relevant with the product innovation that we bring to market in a profitable way.

Speaker 7

That makes sense. And then the last one for me is kind of similar to the Stoker's MST outlook here. I just wanted to circle back on the free pouches. Just wondering if you're seeing any kind of green shoots of Any inflection in market share or if there's any sort of anticipation Of a significant ramp in the free pouch sales or if this is going to be sort of that similar Trench warfare, I mean, obviously, it's a very hot category with many big players here. Is it that sort of 1 by 1 trench warfare?

Speaker 7

Or is there anything that you guys are seeing, any green shoots kind of call out on any inflection point in growth here. Thanks.

Speaker 3

Yes. So we're very encouraged by the progress thus Sorry, I think you hit the nail on the head when you refer back to Stoker's and very steady growth there. I do think it's a fair point on the trench warfare piece as well. So we're very mindful of that. Profitably growing in the space is a top focus for us.

Speaker 3

So I think the Stoker's references was right on.

Speaker 7

Okay, great. Appreciate it. Thank you.

Speaker 3

No problem.

Speaker 2

Thanks, Eric.

Operator

Next question comes from Andrew Rem.

Speaker 8

Hey guys, I got to say, Really like the intro music, pretty sure that's the primary reason your stock is up today. So kudos to

Speaker 5

you. Thanks, Andrew.

Speaker 8

Summer, just on your last comment there regarding innovative products, When you say, test, can you what is an example of testing?

Speaker 3

Yes, that's a great question. So what we have the opportunity to do in the alt channel and on our e commerce channels Put a product into market and sort of gain an understanding of what consumers feel about it in terms of purchase patterns, getting feedback through our Web getting feedback through the dispensary channel and then determining if it makes sense based on the interest to expand it out further. It's really as simple as that. If we find a product doesn't make sense and it's only good to be a temporary offering for example, We won't expand it out further. We had some product earlier this year, Rose Wraps that we concluded just made sense for us to have as a temporary product and We'll decide later if it's something we expand further, but that's an example of when we tested, understood it was great for a moment and more to come if we'll do something Beyond, but I think that's an example of a test that we did and how we think about it.

Speaker 8

So do you When you test, are there specific stores or geographies? And what is the duration of a test?

Speaker 3

Yes. I think it varies from product to product based on the market conditions and the product that we're testing.

Speaker 8

Do you start with some initial timeframe and then based on as results come back That may expand or shorten. So it's very much like a feedback loop? Absolutely. Okay. Also, could you talk about, I don't know exactly how to say this, but Clipper and Free, What is the marketing roadmap if it's like a Phase 1, 2, 3, but Kind of walk through each of those products, maybe Clipper since it's more recent.

Speaker 8

But just understanding, When you think about marketing, what are the different phases that a new product like that goes through?

Speaker 3

For CLIPr, when we first introduced the product, we really broadly focused on building product awareness And that is what's done in a pretty traditional way across in store and online. So think in store point of sale, advertising, Displays that sort of thing, pretty typical to other businesses. And in terms of online using social channels such as Instagram or TikTok to market that brand, so a pretty traditional playbook as it pertains to Clipper. As it pertains to free, Similar story in terms of the marketing channels that we've been leveraging, albeit for free starting on a smaller scale given the background that we've talked

Speaker 8

So if you use TikTok as an example, are you using influencers? You're creating your own content? How do you do that?

Speaker 3

It certainly varies as it pertains to CLIPr. We have done a little bit of both.

Speaker 8

Sorry, am I still on?

Speaker 2

You are.

Speaker 8

Okay. I'm sorry, Somer, the last part of what you said

Speaker 3

Oh, no problem. I said as it pertains to CLIPr and your question was specific to TikTok and the advertising approach we leverage There, it's a little bit of both.

Speaker 1

Okay. And then

Speaker 8

You bet. On the Zumiez collaboration or partnership there, why is Zumiez a good initial partner? Then you also talked about looking at that as an opportunity to expand. So I wondered if like would a hot topic as a brand fit well with what you're trying to accomplish there?

Speaker 3

So, Zumiez is great because they have a broad brush of Stores across the United States, they're specialty apparel retailer. For us, as noted in a prior question, I think the opportunity with partnerships Like that afford us as much of a marketing opportunity as it is a sales opportunity. As we think about partnerships Beyond Zumiez, I think we'll take it on a case by case basis, but Zumiez is a great proxy for us to think about other potential retail partnerships in the future.

Speaker 8

Okay. Thanks a lot you guys. Appreciate it. Great quarter.

Speaker 5

Thanks, Andrew.

Speaker 3

Thank you.

Operator

There are no further questions at this time. Mr. Gramperti, I turn the call back over to you.

Speaker 2

Yes. Thanks, operator. Appreciate everybody's time today. We're excited about the results in Q2 and we remain committed

Powered by Quartr
Earnings Conference Call
Rockwell Automation Q2 2023
00:00 / 00:00