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Good morning, ladies and gentlemen, and welcome to the MAV Beauty Brands Q1 2020 Earnings Call. [Operator Instructions] This call is being recorded on June 5, 2020.And I would now like to turn the conference over to Craig Armitage. Please go ahead.
Thank you, Joanna, and good morning, everyone. Thanks for joining us today. Just a quick note that our remarks today may provide certain information regarding management's expectations, future plans and intentions that may constitute forward-looking statements. I would refer you to the most recently filed MD&A which is up on our website and on SEDAR, which includes a summary of the significant assumptions underlying these forward-looking statements and certain risks that could affect the company's performance and the ability to deliver on these forward-looking statements. Again, the Q1 2020 earnings release, the financial statements and the MD&A are all available on the IR section of the MAV Beauty Brand's website.I'll now turn the call over to Tim Bunch. Tim?
Good morning, and welcome to our first quarter 2020 conference call. Joining me today is Judy Adam, our Chief Financial Officer.To begin, I want to acknowledge and thank our dedicated team and extended partners for their work over the past few months. Our teams have adapted and given significant effort to continuing serving our consumers and retailers during this difficult period.On today's call, we will quickly cover the operating and financial results from the first quarter. A lot has changed since the end of March, so we will also give some visibility to publish marketplace data for the period of April through mid-May.We entered 2020 with strong business fundamentals, a renewed strategic plan and streamlined organizational structure and fully staffed leadership team, leaving us well positioned to continue to grow our portfolio organically. While the business environment clearly has been more challenging recently, I'm pleased with our team's response in the first quarter and how we quickly responded and adapted so far.Our first quarter financial results showed strong year-over-year growth. Revenue increased by 30% and adjusted EBITDA was up 34% from the organic growth of our portfolio and the addition of The Mane Choice. From a regional perspective, this growth was entirely driven by our North American business, which generated revenue of $30.2 million, up 34% from last year.In terms of sales and consumer demand, there were tailwinds and headwinds in the period. Importantly, our largest retail partners in food, drug and mass, necessary providers of daily essentials have remained open during the COVID-19 pandemic albeit with various in-store restrictions and altered consumer shopping patterns. The vast majority of our total sales are through these retailers.The year-over-year organic growth reflects 2 primary factors: First is the positive impact of our innovations and shelf expansion. We're an innovation-led business. And Q1 shipments were particularly strong for the Marc Anthony and Cake brands due to the 2020 shelf resets. Second, like many essential goods, certain MAV products experienced a spike in sales in March, which we attribute to the pantry loading effect, which was most evident with shampoo, conditioner and body wash SKUs.While e-commerce did not have a material impact on the year-over-year revenue increase in Q1, I would also highlight that e-commerce sales experienced accelerated growth as a result of the shifting habits of consumer spending during the pandemic. Q1 e-commerce sales more than doubled over last year, which includes Amazon, direct-to-consumer and retailer.com properties.In terms of headwinds, the first quarter sales reflect the initial impact of store closures among specialty beauty retailers. Both Sally Beauty and Ulta Beauty had store closures in March and are just now beginning to open select locations. These retailers are key customers of MAV and significant retailers of The Mane Choice.The international business continued to experience softness and is expected to be affected by global economic uncertainty through the balance of the year. International revenue was $1.2 million, down from $1.6 million in the prior period. The COVID-19 crisis has created new challenges as several retailers in our core markets were closed and international shipments have been delayed dramatically due to logistics. We are monitoring the global economic situation closely and taking the best efforts to adapt to the situation as it unfolds.From a supply perspective, our operations team moved quickly at the start of 2020 with contingency planning for both product componentry and raw ingredients. In addition to increasing our inventory of componentry, we have added to our safety stock on core SKUs. Although this has helped minimize the impacts, we have faced some delays in the availability of select packaging and components.As with consumer demand, there are uncertainties on the supply side. Our ability to manufacture and distribute products through our third-party partners in North America is essential to our business. Therefore, we will continue to take proactive steps and minimize the risk to supply disruptions where possible. Given how dramatically the COVID-19 crisis accelerated post-Q1, we want to provide some visibility into the second quarter performance of the U.S. market for April through mid-May.One primary reference point is the Nielsen POS data for the haircare category. Looking at the first 7 weeks of the second quarter, the haircare category in the U.S. food, drug and mass channel declined by mid-single digits. Over the same period, the Nielsen data shows MAV's portfolio decreasing slightly more. Our relative underperformance over this period reflects our portfolio's weighting in stylers and treatment, which declined more than the overall category, and our strong presence in the drug channel, which experienced lower sales and foot traffic than mass and food. While these are helpful data points, I should note that they do not provide a complete picture. For example, they don't include Canada or the specialty beauty channel.Setting aside the challenging near-term environment, there were bright spots across the portfolio. Marc Anthony continues to perform well across almost all channels and key accounts with particular strength in the U.S. mass channel and Canada. With Renpure, we introduced larger-size shampoos and conditioners for the mass channel this year, and these have performed well to date with above-threshold velocity. Renpure also broadened its footprint in Canada. Cake had 2 important distribution wins in the quarter. The brand expanded its footprint in our flagship U.S. drug retailer with a second shelf, representing 14 new SKUs. And we launched 15 of the core haircare products at Ulta, both in-store and online.Lastly, The Mane Choice had its first listings in our largest mass customer in Canada. The Mane Choice also launched an Ulta online and will be across stores when they reopen. The initial online results are encouraging, and we look forward -- we look to further build our partnerships with the beauty supply channel when retail returns to a more normal state. With a diversified brand portfolio, a broad customer base and asset-light business model, we believe MAV is well positioned to adapt to this changing business environment and mitigate the negative impacts as best as possible.With that, I will ask Judy to quickly discuss the financial results.
Thanks, Tim. Good morning, and thanks for joining us today. Our full filings are available online, so let me focus on the main highlights for the quarter.Overall, as Tim said, the first quarter results showed strong increases in sales and EBITDA. Dollar revenue increased 30% over the prior year to $31.4 million, reflecting organic growth in North America, which included significant shipments for our Marc Anthony and Cake brands as well as the first full quarter of sales from The Mane Choice.Gross profit was $14.4 million in Q1, up 20% from last year. The first quarter cost of sales increased as a result of purchase accounting adjustments for The Mane Choice acquisition of $1.7 million. Adjusted for the impact of the purchase accounting adjustment, gross profit margin was 51.1% compared to 49.6% in Q1 2019.Excluding stock-based compensation charges of $0.6 million, adjusted selling and admin expense was $7.7 million or 24.4% of sales compared to $5.8 million or 24.1% of sales in the same period last year. Starting in March, we made some shorter-term spending reductions, taking a focused view on discretionary expenses to prioritize cash and liquidity during this uncertain period.Adjusted EBITDA increased 34% over last year to $8.3 million compared with $6.2 million in Q1 2019. And adjusted EBITDA margin increased to 26.5% in the quarter compared with 25.8% last year. Adjusted net income was up 35% to $3.6 million or $0.10 per basic share and $0.09 per diluted share compared with $2.7 million or $0.07 for basic and diluted share in Q1 2019.As we have discussed in previous earnings calls, we spent 2019 developing a new ERP system, which ties to our broader strategy to implement an efficient and scalable infrastructure. The new ERP system went live at the beginning of 2020, and we were able to fill all customer orders in Q1 2020, including addressing higher-than-expected demand for certain products. One short-term impact from the ERP implementation was delays in customer invoicing, which contributed to a higher receivables balance at quarter end. This is a onetime issue related to the ERP implementation. We've identified and addressed the problem and are seeing an improvement already in Q2. A higher accounts receivable balance was a primary contributor to the increased working capital investment in the first quarter.In addition, we had increased inventory relative to year-end as we took proactive steps to ensure healthy inventory levels across the portfolio to avoid potential supply shortages due to COVID-19. These additional working capital requirements reduced our free cash flow in Q1, which was negative $2.9 million compared to positive free cash flow of $0.3 million last year. At quarter end, our net debt stood at just over $137.8 million. And including the results of The Mane Choice for the trailing 12 months, our net debt-to-adjusted EBITDA ratio was approximately 4x.At quarter end, we had cash of $4.2 million and an undrawn balance of $16.5 million on our revolver facility. In short, we believe we have ample and sufficient liquidity based on our current view of market conditions, and we will continue to proactively manage expenses to preserve operating profitability.I will now turn the call over to Tim for closing comments. Tim?
Thank you, Judy. In summary, Q1 showed strong year-over-year revenue growth. We'll continue to focus on the fundamentals, while navigating new challenges from the COVID-19 crisis. We are fortunate to have a diversified portfolio in a recession-resilient category. While we anticipate a sales impact in Q2, we are taking appropriate action to align our operating expenses and to support the growing e-commerce channels.We thank our staff and partners for their great effort in helping us through this challenging period. We look forward to reporting on our progress with the release of our Q2 results.We'll now open up the call to any questions. Operator?
[Operator Instructions] Your first question comes from Mark Petrie from CIBC.
I guess wondering if you could just give us a better sense of sort of the revenue growth pace through Q1, sort of maybe Jan and Feb versus March. Just trying to get some context for how much of the revenue growth in the quarter was, the shelf space versus stockpiling?
Yes. So what makes Q1 interesting is we reset all of our planogram resets in Q1. So what you see in Jan and Feb is where the reset time period happens. And every year, we have a continued growth because of our expanded distribution from January through March. This makes it more challenging to isolate the effect of any pantry loading that we would see.Now what we have known from looking at reports is we have seen pantry loading in the mid-March period with a trail-off in the last week. So -- but isolating the exact effect of that is very challenging because we haven't got to what a normalized basis is for the new planogram resets.
Okay. And you highlighted the data for April through mid-May, which was helpful so thanks for that. And then also that it didn't include some of -- some key channels and didn't include Canada, obviously. Canada, I guess your channel exposure is a little more favorable. Is that fair to say? And how should we think about the performance of Canada in Q2 thus far?
Yes. So we don't segment out U.S. or Canada, and we don't have Nielsen data for that same time period. So what I can tell you is from a retail stores being open in Canada, we do not have as many beauty specialty distribution, and almost the vast majority of all our retailers in Canada did remain open as we primarily sell through mass, drug and food. The beauty specialty impact was much more in the U.S. market, which hit our total business but more prominently in The Mane Choice brand, which has beauty specialty as a core of its retail.
Okay. And then I guess just last, I'm just sort of curious at a higher level, how you have adapted your promotional practices and spending levels in light of the pandemic. And obviously, there's been a dramatic change in terms of in-store experience and shopping behavior. And just sort of curious to hear, how you've adapted thus far and what you sort of expect for the balance of the year?
Yes. The primary focus of our adoption is to be communicating and partnering with our retailers to meet their needs and to adapt to how they're changing their in-store environment. What we've seen and I noted in March is retailers are starting to take promotional space to focus on some essential products like hand sanitizers, paper towels, toilet paper. And so as we look at promotional space through Q2 and into Q3, we are seeing that there are changes within that.Now there are also opportunities. Many of our retailers are putting a lot of focus into their retailer.coms. We're partnering with them there. And where there is promotional opportunities that they see our brands being a great fit, we have the scale and the relationships with our retailers to make those happen.
And so in terms of like absolute levels, are you seeing a shift? Or has there been a shift in terms of how much you're investing in ad and promo?
It varies by retailer and by region. And so overall, what we'll see is our promotional that is off shelf is down as we look into what we have seen already in Q2. But as we project that forward, there are also other promotional opportunities like online and fliers, which continue to be opportunities for the brand that we take advantage of.
The next question comes from Joe Altobello from Raymond James.
First question, I wanted to kind of delve in a little bit more into the Q1 revenue number. You mentioned it was organic growth, perhaps helped a little bit by pantry loading. Could we parse out what the contribution from The Mane Choice was in the quarter to see what the underlying business did?
Yes. We don't segment out by brand. So we're not going to provide brand-level results. What we will say is definitely the #1 contributor to our growth was the fact that we had shelf reset and that we have expanded shelf for many of our brands like Marc Anthony, Cake, but even shelf resets with Renpure and The Mane Choice. The second effect really was there was an element of pantry loading, and we do assume for that March period.For The Mane Choice's impact, what I would tell you on The Mane Choice is we believe that it's a great brand with a long-term growth potential. But what we did see in Q1 is there was definitely a hit as a large -- many of their specialty beauty retailers did shut their doors.
Yes. No, absolutely. And that leads to my next question, which is if you look at your retailer base across, let's say, North America, what percentage of your retail doors are currently open either to store traffic or curbside?
Yes. So we do not have an exact percent. What I would tell you, it is the far, far vast majority. So our primary retailers across North America are Walmart, Target, CVS, Rite Aid, Walgreens, Shoppers, Loblaws, and all of those retailer locations remained open.And so what you have seen now is there's a smaller segment of beauty specialty, and that would be the Ulta, the Sally's and also includes some multicultural beauty supply channels that did have to shut doors. Some of those have begun to reopen. And then, of course, Ulta started the curbside pickup. That's a smaller piece of our overall business. It's a more -- it's a larger size for The Mane Choice. But in terms of overall percent of revenue, we're not disclosing that.
Okay. And maybe one last one if I could. You mentioned taking out some discretionary operating expenses. Can you quantify roughly how much of that is coming out of the P&L?
Yes. We're not going to quantify, and also we're in mid-quarter. It's an effect that we're taking within Q2. And so what I'll tell you is we're looking at tightening the belt. When this all hit, we knew that we needed to protect liquidity, to protect profit. And so we started with where is spending that just makes sense that we can cut and not going to impact our consumers or our retailers. And so we cut a lot of our travel, which just makes sense. We cut a lot of our other expenses that could cut on a day-to-day without affecting retailer, consumer. And we really are taking weekly measures to make sure that our spending is in line with our revenue coming in to ensure profitability and liquidity for the business moving forward.
Your next question comes from Steph Wissink from Jefferies.
Tim, I'm going to try to come at Joe's question just a slightly different way on the organic growth. If you were to look at the business as if it was combined in the first quarter last year, did the business overall grow? Or is there anything you can share with us in terms of a pro forma growth rate?
Yes. So we're not going to share from a pro forma growth rate. But what I will say is if you look at the business combined year-over-year, the overall business did grow. And so we feel like our overall portfolio is a healthy growing portfolio, but we're not going to disclose on a pro forma basis.
Okay. And then my second question is your international business is quite small relative to the total scope of the company. I'm just wondering if you can elaborate a little bit on your thoughts strategically on that international expansion, if now is the right time or if it's better for you to focus more on your North American accounts and expanding your presence. If you could talk a little bit about just the prioritization of international within the scope of the strategy.
Yes. From a priority, North America is the #1 focus of our business, and that is where a large part of our efforts are. Now in international, we do believe that we have good retail locations and good distribution partners. And we're continuing to maintain that business, and we'll continue to do so, albeit what we are doing is making sure that our efforts are really focused on where we're going to see growth in 2020. And those efforts are going to be in North America.
Okay. That's great. And final one for us is just on e-comm. You guys had a really successful social campaign with TikTok last year. Your social presence has continued to evolve across your brands. And certainly, The Mane Choice also had a really strong engagement level. So just wondering, as you think about e-comm, how you tied together some of your key social insights with some of the opportunities to distribute, whether that's Amazon or the dotcoms of your partners. How do you think about building your brands online going forward?
Yes. There's actually been a lot of evolution here. I've talked for a long period about how we invested early in Amazon. And we continue to see really great growth rates. Several of our products are even on first page searches of core hair categories, which we're very proud of, given the size of our portfolio.What I would also say has evolved is with The Mane Choice, which has a very healthy direct-to-consumer business. We're now looking at how do we leverage those learnings and those technologies on our total portfolio. And so there's a lot here that we're doing and investing and evolving it. And then, of course, it ties so seamlessly with what we're doing in social, PR and then digital. We've seen already the impact of some of our digital efforts over the front half that are coming in and feeding into either Amazon or DTC. So the whole ecosystem of that has been working. It's an investment for us and something that I look to continue to grow as we move forward.
[Operator Instructions] Next question comes from Matthew Lee from Canaccord.
If I recall correctly, you mentioned earlier on that your exposure to specialty retail is under 10%. Has that changed at all?
No. The specialty retail exposure has not changed.
Okay. And just in terms of The Mane Choice, I mean in terms of the deferred consideration. With COVID-19 disproportionately affecting that segment, will it maybe change the ability for that -- them to hit the targets required for that payment? Or have you kind of changed the parameters?
We haven't changed any parameters. And in terms of anything in terms of earn-out, we're midyear. And so it'd be far too premature to talk about earn-out structures for 2020.
Okay. And then just on the free cash flow side, I mean is that entire working capital drain related to the system changeover? Or are you may be seeing some bad debts from retailers as well?
Matt, it's Judy.
Judy, would you like to take that?
Sure. Matt, yes -- no, the main driver of the increased working capital investment is definitely increased AR, which was up $6.9 million in Q1. We don't have any concerns on the collectibility front of it, and it's really at the onetime issue relating to this ERP implementation. As you know, ERP implementations are complicated and challenging, and we did experience some delays in getting our invoicing fixed. And -- but now it's been addressed, and we're starting to see improvement already in Q2.
Okay. That's great. And then just lastly for me. In terms of cost reductions, is MAV receiving any government benefits to offset maybe wages, for example?
No, we're not.
There are no further questions. You may proceed.
All right. We would just want to say thanks again for joining us on today's call. Please reach out with any further questions, and have a good day. Thank you.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating, and we ask that you please disconnect your lines.