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Good morning, ladies and gentlemen, and welcome to the MAV Beauty Brands First Quarter 2021 Earnings Conference Call. [Operator Instructions] This call is being recorded on Monday, May 10, 2021. I would now like to turn the conference over to Craig Armitage. Please go ahead.
Yes, operator, and good morning, everyone, and thanks for joining us today. Just a quick note before we get started that our remarks today may provide certain information regarding our expectations, future plans and intentions that may constitute forward-looking statements. I would refer you to the most recently filed MD&A or the AIF, both of which are available on our website and on SEDAR. These documents do include 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, you'll find the Q1 earnings release, the financial statements and the MD&A on the Investor Relations section of the MAV Beauty Brands website. I'll now turn it over to Tim Bunch. Tim?
Good morning, and welcome to our first quarter 2021 conference call. Joining me for the call is Judy Adam, our outgoing Chief Financial Officer; and Niv Majar, Vice President of Finance and Interim Chief Financial Officer. This year started strong with double-digit year-over-year velocity growth and better than category point-of-sale growth in North America. This translated into meaningful sequential quarterly improvements in revenue, gross margins and adjusted EBITDA, while year-over-year sales were stable after adjusting for the effect of pantry loading that happened in March 2020 at the onset of the COVID-19 pandemic. Total revenue decreased by 8.7% over Q1 2020, which, as noted in 2020, benefited from pantry loading at the onset of the pandemic. While operating conditions approved from the fourth quarter, there's no question that COVID-related factors continue to present some challenges in the first quarter. As I will discuss in a moment, our outlook is improving and sets us up for a strong trajectory as we move through 2021. A core part of the MAV thesis is that we can outperform the category average over time. We are confident that our portfolio of brands and some of the most attractive subsegments of hair care can generate above-category returns over most periods. Keep in mind this is against the long-term trend line of plus 2% to 3% growth in an industry that has shown great resilience over sustained periods of time and through multiple economic cycles. I'm pleased to report we enjoyed positive point-of-sales growth within the quarter. We anticipate that MAV's sales momentum will accelerate throughout the year as economies open up and consumer behavior begins to normalize post-COVID, presenting a more favorable operating environment for brick-and-mortar retail. We are already seeing this take shape in many parts of the U.S., and Euromonitor is predicting a bounce-back year in 2021. There are multiple drivers and reasons for optimism as we look ahead. Importantly, our total portfolio experienced double-digit velocity growth year-over-year, driven by new planogram resets with contributions coming from all 4 brands. Velocity is an important measure of brand health and a leading indicator that gives us optimism as we think about 2021. Our e-commerce performance is another bright spot. Sales from these channels grew over 3x in 2020, which gave us great momentum heading into 2021. Our sales through Amazon continued to scale rapidly for Q1 2021, driven by increases in brand penetration and conversion rates. In late 2020, we expanded our e-commerce team, and this is an area where we will continue to invest in 2021 with a focused strategy to win the digital aisle. While we expect substantial Amazon growth in 2021, we still have significant runway in future years. Our outlook for 2021 also reflects early indications that our innovation and new branding are winning in the marketplace. You may have noticed the evolution of the Marc Anthony brand. We introduced a new visual identity, logo, packaging earlier this year, which build on the brand's great foundation in innovation and professional quality products at an accessible price. In addition to the broader rebranding, we introduced new sizing formats of the top shampoos and conditioners SKUs specifically for the mass segment, which supports our strategy to accelerate growth in this channel. Our core set has been very productive with strong velocity. Among other brand highlights, we're seeing encouraging growth in the refocused Renpure planogram. We introduced 24-ounce formats for our mass customers, and these are performing above threshold so far in 2021. Cake continues to see strong growth across all accounts both in the U.S. and Canada, and we expect further distribution expansion in 2021. The Mane Choice faced additional headwinds through 2020 given store closures in specialty beauty and the relative strength of the brand in that channel. However, the brand outperformed the category in Q1. It's showing strong recent momentum and is set up well for the rest of 2021 in our view. I will now turn the call over to Judy to discuss the financials.
Thanks, Tim. Good morning, and thanks for joining us today. Our full filings are available online, so let me focus on the main highlights. Our results highlight the resilience and durability of our categories and the benefit of the diversification of our platform across brands, consumers, segments, channels and geographies. Despite experiencing some impact from severe weather across major parts of the U.S. in March, our year-over-year net sales were stable after adjusting for the effect of the pantry loading in March 2020. Revenue was $28.6 million compared to $31.4 million in Q1 2020. Revenue from North America decreased by 9.8% to $27.3 million compared to $30.2 million in Q1 2020, largely due to the pantry loading last year. And for the International region, revenue increased by 18% to $1.4 million compared to $1.2 million in the prior year. Shipments across the world showed initial signs of recovery, and we anticipate this will continue through the year. Q1 gross profit decreased to $13.6 million from $14.4 million or $16.1 million in the prior year, excluding the impact of the purchase accounting adjustments from The Mane Choice acquisition. The decrease is primarily due to lower net sales year-over-year and some sales mix variations. Gross profit margin was 47.5% in Q1 2021 compared to 51.1%, excluding the impact of purchase accounting adjustments in the prior year. The decline in the current period reflects product sales mix and a modest near-term increase in cost of sales due to the tail end of COVID supply disruptions as we have seen across the industry. Excluding share-based compensation charges, Q1 adjusted selling and admin expense was $7.1 million and 24.7% of sales, down from $7.7 million and 24.4% of sales in the same period last year. The year-over-year change mainly reflects our close management of our cost structure. Adjusted EBITDA for Q1 decreased to $6.4 million from $8.3 million in the prior year. The change is due to lower net revenues and the factors discussed earlier, including sales mix and COVID-related impacts. Q1 net income increased to $1.6 million or $0.04 per basic and diluted share from $1.2 million or $0.03 per basic and diluted share last year. And adjusted net income was $2.6 million or $0.06 per diluted share, down from $3.6 million or $0.09 per diluted share last year. Adjusted free cash flow for Q1 came in at $1.6 million, up from negative $2.9 million last year. Free cash flow in the prior period was impacted by delays in customer invoicing related to the ERP implementation. Cash on hand was $18.2 million at quarter end, which includes $10 million drawn on our revolver. Our net debt stood at $125.3 million at quarter end. Furthermore, during the quarter, we made earn-out payments of $2.5 million in relation to the Cake and Mane Choice acquisition. There are no further earn-out payments scheduled for fiscal 2021. I will now turn the call back to Tim for closing comments. Tim?
Thank you, Judy. And I want to thank you for the great contributions you have made to MAV Beauty. As we look forward, we are optimistic that 2021 will provide more favorable operating conditions for our retailers, especially in the back half of the year as the vaccination rates increase and the economy opens up. Against this improving backdrop, our orientation shifts to growth. With strong brand fundamentals and sales velocity on our new planograms, we look to continue above category performance from our portfolio with growth across digital channels and our traditional retail relationships in food, drug and mass. We look forward to reporting on our progress with the release of our Q2 results in August. Now we'll open up for any questions. Operator?
[Operator Instructions] Okay. Your first question comes from Matthew Lee from Canaccord Genuity.
So I just wanted to ask about the strategic review. I'm sure your team is looking at a variety of options from the firm, but can you give us some color as to what type of deals you might be leaning towards right now?
Yes, there's not much we can say on the strategic review at this point that we haven't said already. The Board has formed a special committee. They're looking at a broad breadth of options. And as I said, they'll report back when there's a time and appropriate things to say.
Great. And then maybe we can talk a little bit about the momentum you're seeing in sales. Are you expecting to return to year-over-year revenue growth by Q2?
As we looked at our POS sales, we really already have seen that in Q1 year-over-year. We feel like shipment sales will follow closely with POS over time, but we're not giving direct guidance in terms of our growth rates for Q2.
All right. Okay. And then -- and I understand that, but maybe just thirdly here, on the EBITDA margin front, I noticed that you called out changing sales mix as a reason for declining margins. Is that sort of implying that e-commerce sales might be a little bit lower margin? Or is it more with regards to what products are being sold?
Yes, it's more in regards to what products are being sold. Our e-commerce margins really are in line with our broader company margins. And so that is another driver in there. But we are seeing with the different products that are being sold in Q1 primarily related to shipments, but this will level out over time.
Your next question comes from Joe Altobello from Raymond James.
Great. So first question on POS, you mentioned it was positive in Q1, yet your sales in North America were down 10% year-over-year. How much do you think weather impacted your sales in Q1 in February and maybe March?
Weather definitely had an impact, but the primary impact to us was related to the shipments that happened with pantry loading last year. That was by far the biggest impact that we were up year-over-year against. And then weather paid a minor but not near as significant as the pantry loading.
Okay. So on the pantry loading, I think you said in your press release and this morning that if you exclude that, sales were stable year-over-year. Does that mean flat? And does that mean that the pantry load was about $3 million in the base period?
Yes. We said mostly stable, and it's related -- there are other factors in there like the weather and other pluses and minuses that came into the quarter. There's always positives and minuses. But primarily, it was the pantry loading. The pantry loading made up the large percentage of that delta between last year to this year.
Okay. And last question for me, was there any catch-up in replenishment orders in March and April post the storms? And is consumer takeaway and shipment growth in line at this point, I guess, going forward?
Yes, what we saw in March was a better stabilization. It's hard to say exactly what was maybe a catch-up order or not because you're dealing with a region, and you're getting big national account orders. We believe there was some small catch-up that happened there in March. But as we looked at the end of the March and April, we're seeing things really stabilize. And this is what makes us so optimistic for the year ahead. Given the fact our velocities are up, our POS sales were up and COVID rates are declining in the U.S. especially, albeit there's still some challenges in Canada, this makes us feel like we're set up in a really great place as we look at the back half of this year.
But POS and shipments, you're saying, are pretty much in line at this point.
Yes, POS are in a very positive place of where we'd hope them to be. And I'll tell you, the velocity was a key highlight because that was even exceeding our expectations.
Your next question comes from Vishal Shreedhar from National Bank Financial.
This is Paul Hyung on for Vishal Shreedhar. I want to ask about the performance in Canada given ongoing shutdown. What are you currently seeing? Is there a difference in growth in Canada trends versus the U.S. trends relative to 2019?
Yes. We don't really segment by region, by Canada and North America. We segment North America and International. But as -- I can give a little flavor in terms of Canada in general. Canada has been more even than the U.S. throughout the shutdown periods and through the whole COVID. So definitely, you had some declines, especially when COVID originally came in, in March 2020 and April 2020, but it was not as extreme as the U.S. market. And we're seeing that even now. While COVID is in a stronger lockdown period, there's definitely a COVID impact. But it feels like it's more of an even pace, and we look to that to improve as we get through Q2.
Okay. Since the pandemic began, you noted the relative strength in shampoos and treatments and lower demand for styling products. Are you seeing consumer preference changes as a result of this pandemic?
Absolutely. Shampoos and conditioners perform -- continue to perform well as people still wash their hair at a regular pace. What we've seen accelerate are treatment products, more deep treatment, moisturizing, what I would call hair health products, which is good for us because we have that diversified portfolio across our brands where we can meet that need. Where we're seeing declines is on what I call short-term stylers, short-term stylers being dry shampoos and also hair sprays. Those we've seen a decline. Now we're going to be monitoring those closely as we go into Q2, especially in regions of the U.S. that are opening up. We're going to see if this is a trend that continues or if it's something that maybe has a longer impact. But as we have a fairly strong breadth of mix across hair care, we've really been able to pivot and meet the need of the consumer where they go.
Okay. Lastly, can you comment on the momentum behind the Renpure brand? That product is in a good niche for natural products. Is management satisfied with the performance? And does the consumer understand the brand proposition?
Yes, I think this is one of our highlights, really for Q1. Renpure has always had a very strong core distribution that has continued to perform year-over-year, namely at the largest mass retailer in the U.S. Here, over the past couple of years though, we've been working on the price-sizing value equation for consumers. And we have -- we did a test last year that worked really well, some 24-ounce products in another mass retailer. Those worked really well in the test, and we expanded the whole line into those here. We're seeing significant velocity increases, and the brand has had one of the biggest velocity jumps year-over-year of any brand in our portfolio and so tremendous, tremendous development there. We feel like the products on shelf of Renpure are really performing at or above category thresholds, and we're really excited about the future of Renpure.
Your next question comes from Steph Wissink from Jefferies.
It's Grace Menk on for Steph Wissink. Can you hear me?
Yes, we can.
Okay. Great. So following up a little bit on the comments you made on the hair care segment, what are the key trends that you've been seeing emerge more recently in the past couple of months in mass?
Yes, in the past couple of months in mass, in particular, we are seeing consumers return to a more variety of what they're purchasing, especially in probably one mass retailer. One is probably more still your standard shampoo and conditioner. The other mass retailer seeing consumers buy a more variety of type products, inclusive of styling and treatment, and those segments are continuing to perform well. So we're very optimistic. This is early signs in terms of consumers returning back to having more products in their basket and a larger basket ring for each shopping trip.
Got it. And then on the kind of the performance of the business by channel, if you could just give some color there by e-comm and then also just by specialty beauty, drug, mass, et cetera.
Yes, e-com, we don't get competitive data on that as frequent. We get that only on as big national reports come out. But what we're seeing on our business is really the momentum is continuing to accelerate, and we feel like this is really driven by the amount of resources we're putting against it both on a commercialization driving but also on an operational side to make sure any fulfillment is top-notch. Drug definitely took a hit through the COVID. As consumers consolidated their shopping trips, food and mass retailers is probably were the more sustaining throughout. We believe, though, that COVID can play a key role in the market as -- that drug can play a key role in the market as COVID releases a bit and consumers return to their regular shopping behavior. Specialty, specialty definitely take a hit as store closures last year. We're seeing year-over-year strength on specialty now. The stores are mostly open with good operating hours. And consumers are starting to return back to those stores, albeit it's probably at a greater lag than in some of the other channels. And mass, as we spoke, mass has had mixed results dependent on the retailer. I would say one of the core mass retail is definitely up in a really strong place. And the other continues to have some COVID effects. We believe, though, mass over time will continue to be a very large and important segment of this business because of the ease of shopping and trips consolidation and their new renewed focus on e-commerce.
Okay. That's very helpful. And then anything on the pipeline for innovation as you look out the remainder of 2021?
Yes. Most of our planograms reset in Q1 with a few exceptions. And so what I could say more is we're very excited about how our new innovation. As those just set in Jan, February or March, how they're performing. And so every year when you set that on, you put your best foot forward to have your best innovation, your best sizing value equation for the consumer. And what we're seeing, which is relating into a very strong double-digit velocity increase, is very positive for our future outlook.
That's great. And then just lastly on any key merchandising events in the June or September quarter last year that we should be thinking about lapping when we're modeling out those quarters.
Yes. Last year, we talked a little bit about retailers moving away from core beauty items from their promotional space. We're still in a period with COVID where retailers are making these decisions anywhere from 3 to 6 months on advance, and so there's nothing to report at this point. But as we move through the quarter, there may be new information as to how retailers are increasing promotion. We believe that they will as COVID decreases and there's a less focus on daily essentials like antiseptics or wipes or toilet paper and more of a greater focus on beauty as consumers return to the shelves. But at this point, there's nothing to report definitive. We continue to work those plans with our retailers.
[Operator Instructions] Your next question comes from Sabahat Khan from RBC Capital Markets.
Okay. Great. Just on the commentary earlier about the rebranding of the Marc Anthony brand, any comments on any of the other brands where you might be contemplating that? And maybe the thought process behind this rebranding or the repositioning, is it more just where it is in the life cycle? Or is it more competitive? Just some color on this repositioning and any other brands you might be considering.
Yes. First, I'll speak to the rebranding on Marc Anthony. This was a multiyear effort. We brought in a new Head of Marketing about 3 years ago, who is now our CMO, Kimberly Konstant. And she spearheaded this opportunity and has really resulted in some great sales momentum and retailer excitement. As we look at the rest of the brands, we feel like Cake is in a great branding position. We feel like Renpure has a really distinct clear positioning but probably has some optimization on the packaging, which we're continuing to evaluate. And then we feel like The Mane Choice really speaks well to its consumer. So we'll do this as an ongoing effort. We really always take as -- every year, we look at our packaging and what can be improved. But I would say of any brand, I think Renpure in the next year, we'll probably have some modifications to make it even stronger and building on its great philosophies we're seeing this year.
Okay. Great. And then just kind of the commentary earlier around the performance at 2 different mass retailers, I guess, is that just a function of the -- maybe the depth of SKU offering you might have one -- have that one versus the other? Or is it more related to maybe where those stores are located? Just trying to understand why there might be a distinct difference between what's being sold at one versus the other or the consumer uptake.
Yes. The great news is from a MAV Beauty standpoint, we're actually performing very well at both of those retailers. Renpure is having the highest velocity that we've seen. And Marc Anthony is actually significantly up in distribution and growth in both those retailers. The comment was more in relation to those retailers in this category in general. This -- and how they're performing from the category. But that's a difference than what we're actually seeing on our business, which has really good momentum.
Okay. Great. And then just lastly, I guess, is there any changes -- you noted that you made some changes on the e-commerce side later last year. I guess where we are in the pandemic, I guess, is there any more changes, whether it's more capabilities or resources on the e-commerce side, maybe some more focus on maybe expanding the product footprint? Just as we come out of the pandemic, is there any repositioning of the business or behind-the-scenes work that you're looking into?
Absolutely. So we've made continued investments over the last 3 years within our e-commerce. One of the bigger investments was late in this last year, bringing in a very seasoned e-commerce director who is spearheading new opportunities. And we're going to be building resources under that individual. We've also made changes on our operational side, making sure that our fulfillment is top-notch to support both Amazon, retailer.com and DTC business. The other areas that we're looking at is how do we make sure that we have the right product and product portfolio on each of these sites as well as the right marketing plans to grow them. Some of the things, to give a little flavor, looking at bundled packaging, where you're selling more than 2 items at once. Taking advantage of the trend where we're seeing very often as people are buying shampoos from us, they're buying the conditioner as well at more than a 50% rate. And so now moving to where we have bundled offerings, so it's a higher dollar [ ring ] and a higher profit for us -- us and the retailer. So those are some of the things that we'll be moving forward with as we go into 2021.
There are no further questions at this time. Please proceed.
All right. With that, I will thank you for attending today's call. Please reach out with any further questions. Have a good day. Bye-bye.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.