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Good day, and welcome to the MAV Beauty Brands' First Quarter 2022 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Craig Armitage. Please go ahead, sir.
Thank you, and good morning, everyone. 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 refer you to the most recently filed AIF and the MD&A, which are available on our website and on SEDAR. These 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. You'll find the Q1 earnings release, financial statements and MD&A on the IR section of the website as well. I'd also highlight that the financial discussion today comparisons are generally Q1 2022 versus Q1 2021, unless otherwise stated. With that, I'll turn it over to Serge. Go ahead, Serge.
Thank you, Craig. Good morning, and welcome to MAV's First Quarter Conference Call. I'm joined by Laurel Mackay-Lee, our Chief Financial Officer. From a revenue perspective, it was a challenging first quarter with total revenue decreasing to $21.1 million. There were 2 main factors for the decline. First, we unfortunately experienced a significant disruption to our third-party logistic network, which had a meaningful negative impact on revenue. This affected order outflow capabilities and resulted in a shift of shipments into Q2 as well as a loss of certain sales orders. The magnitude of these impacts was consistent with what we outlined in our March earnings call. In the face of these challenges, I'm proud to say our team responded quickly and cohesively. We immediately put in place a remediation plan to ensure continuity through collaboration -- collaborative efforts with our 3PL partner as well as alternate 3PL partners in the U.S. and Canada. We're in regular contact with our all our retailers and strategically prioritized fulfilling orders to minimize out-of-stock situations at shelf. As of April, we returned to pre-disruption service levels, and our focus is now shifting from recovery efforts to leveraging the learnings from managing through this challenge and optimizing the current distribution network. Lastly, we are moving forward with our insurance claim this quarter that we expect will partially cover the negative impact of the cybersecurity incident on our business. The second key factor leading to the year-on-year sales decline was the continued impact of single-digit net distribution losses and general consumption softness relative to the same period in 2021. It's helpful to frame our performance relative to the U.S. hair care category. For the 2022 year-to-date period ending April 23, the category is up 2.4%. MAV's portfolio continued to lag the broader market during the same period, down high single digits, mainly as a result of the underperformance of Renpure and The Mane Choice. In March, we talked about some of the actions we're taking to improve our results. These are not immediate fixes. They will take time to implement and, from my experience, to iterate and refine. Let me briefly review the brands. Marc Anthony continues to be the top performer in the portfolio, posting double-digit growth for the quarter, driven mainly by expansion in the U.S. Mass channel. The brand also continues to show strong double-digit growth in e-commerce. We are leaning into this momentum with further efforts to accelerate digitization. The brand's mission is to make pro-quality salon-inspired products affordable and accessible. This is a dynamic and growing segment of the market, and we believe that we can continue to bring on-trend professional innovation to the everyday consumers. Renpure faced headwinds coming into this year based on distribution losses, both in 2021 and 2022. We, however, continue to believe we can stabilize the brand and return it to growth over time. Clean sustainable beauty is an attractive segment of the market, and we see an opportunity to better differentiate the brand and enhance its touchpoints. The work is well underway and early feedback from several recent retailer meetings makes us cautiously optimistic. We'll share more as 2022 unfolds, and we get a better picture of whether this work will positively impact shelf space for 2023. The premium, healthy natural hair solution brand, The Mane Choice services the vast needs of the multicultural consumer and her diverse color patterns, developing effective formulas with amazing sense infused with vitamins and other essential nutrients. In Q1, similar to Renpure, The Mane Choice reduced distribution in the U.S. Our main push with this brand is to focus on our proven product successes and build our core collections around these products, leveraging white space. Our fourth brand is Cake. Coming off a multiyear growth cycle, sales were modestly down in the first quarter. In brick and mortar, points of distribution are relatively stable versus prior year. However, we're experiencing some supply disruption, notably from delays in sourcing certain regions and components. This is partly offset by e-commerce, which continues to show sustained growth. We continue to believe this brand has the foundational elements for long-term growth. It is a top 10 brand today with its key U.S. drug customer. In addition, Cake consumers absolutely love the products, and they're very willing to share their views. As we look at the path forward to unlock the potential of this brand in 2023 and beyond, it is about maximizing the brand strength from its sensorial formulas or premium packaging to its unique positioning of naturally luxe beauty that celebrates confidence, individuality and kindness. With a challenging first quarter behind us, our focus returns entirely to enhance execution across the business and building the awareness and desirability of our brands. In 2022, we aim to stabilize the business and gradually close the gap with market performance. Our stated plan includes refocusing on product innovation across brands and collections. We believe we have some compelling innovations that we're bringing to our retail partners for 2023, we will be getting additional feedback on these initiatives in the coming months.
E-commerce sales have started strongly in 2022 led by Amazon, and we plan to accelerate digitization. Simultaneously we'll strengthen our efforts to build awareness and desirability by prudently and gradually increasing our marketing investments. We're also hard at work to continue building our strength and strengthening the team across almost all areas of the business.
From an operations perspective, we're clearly focused on consistent execution to drive better service level and margin improvements, among other outcomes. There's much work on the way here and lots more to be done, and we hope to show more tangible benefits as the year moves along. While Q1 sales results were challenging, we were encouraged by the sequential improvement in gross margin and free cash flow. Overall, we look forward with confidence in the fundamental strength of our platform and believe the steps we are taking will translate to improved and more consistent performance over time. I'll now ask Laurel to cover the financial highlights in greater detail.
Thank you, Serge. Good morning, and thank you for joining us today. As Serge highlighted, net sales decreased from $28 million to $21.1 million this quarter reflecting net distribution losses in combination with retail velocity variances and inventory adjustments as well as the disruption to our third-party logistics network. In North America, revenue decreased 25.4% to $26.6 million. For the international region, revenue decreased 8.1% to $1.3 million in Q1 2022. These revenue impacts caused gross profit to decrease to $9.3 million in Q1 2022 compared to $13 million in Q1 2021. This -- sorry, gross margin profit was 44.1% this quarter, a decrease from 46.3% in Q1 2021. This contraction is mainly attributable to increased supply chain input costs and higher trade spend, including noncompliance charges. However, we were encouraged by the marked sequential improvement from Q4 2021 gross margin of 38.9%. This improvement was due to lower inventory provisions and write-offs and lower trade spend, particularly markdowns and other allowances. As we discussed on the last call, to mitigate the impact of inflationary headwinds, we have implemented price increases on certain products, and we are working with our third-party manufacturers, logistics partners and other vendors on operational procurement mitigation initiatives. We expect to see additional benefits as we move through 2022. Excluding share-based compensation, selling and administration expense for Q1 2022 was $6.5 million, consistent with the prior year. As a percentage of revenue, selling and admin increased to 31.8% in the quarter from 24% in Q1 2021, driven by the lower sales base in 2022. Q1 adjusted EBITDA decreased to $2.9 million from $6.4 million in the same period last year, reflecting lower revenue and gross profit. Adjusted net income decreased to $0.1 million compared with $2.6 million in Q1 2021. Diluted adjusted earnings per share was $0.00 per share this quarter compared with $0.06 per share in the same period last year. In addition to the sequential improvement in gross margins, we reported stronger Q1 cash flows from operations, which came in at $3.7 million versus $1.6 million in Q1 2021. We also reported higher adjusted free cash flow of $3.7 million, up from $1.6 million in last year's Q1. This year-over-year improvement in free cash flow mainly reflects a positive noncash working capital variance, notably increased accounts receivable collections. Positive free cash flow enabled us to reduce debt during the quarter. At quarter end, net debt was $118.7 million, a decrease of $2.8 million versus $121.5 million at year-end. At the end of March, our cash position was $13.2 million. Lastly, we were in compliance with our financial covenants at quarter end.
In closing, we navigated an unexpected issue in Q1, and our focus now shifts back to the steps we've outlined to stabilize the business and achieve improved and consistent results for our stakeholders. Jess, would you please open up the call for questions?
[Operator Instructions] We'll take our first question from Steph Wissink at Jefferies.
We have a couple of questions, but I'd like to start with the third-party logistics, cybersecurity issue. Is there any way to quantify what that might have represented in missed revenue? And then I understand you're back to your operating plan in April, but were those lost sales? Or are those sales that shift and that you can reclaim as the year progresses?
Steph, it's Laurel. Thanks for the question. There's -- yes, there's a couple of different impacts from the 3PL disruption. We would estimate there was about $1 million of lost sales where customers were going to the shelf and the product they wanted was not available. So we think that, that's about $1 million of lost sales. And that would be taken into consideration with the insurance claim that we intend on filing this quarter. So we'll look to match that. But then we also had about $2 million of shift from Q1 to Q2 in terms of orders that we had in the pipeline, but we just couldn't pick, pack and ship them by the end of the quarter. So it's just a timing shift.
Okay. That's helpful. And then as we step back and think about the business in terms of growth, you called out online a number of times as an area of persistent strength. How are you thinking about your bricks-and-mortar distribution, rebuilding the shelf space that you may have lost in the past. Maybe talk to us a little bit about what we should expect in terms of the traditional store channel for you over the course of the next several quarters.
Stephanie, this is Serge. So obviously, we mentioned that for each one of the brands, we have a different strategy and different focus. And we're in the mix actually of the beginning of the season of line reviews for 2023. We're really very much focused on innovation. We've identified white space for the brands and for the markets and now presenting our initiatives to the trades. And as we mentioned on the largest ones, we're cautiously optimistic based on initial feedback, but it's still very early in the season to be able to quantify it or affirm the impact it will have for 2023.
Okay. And are there any specific trade channels, whether it's mass or drug specialty where you feel like you're leaning in and having better success?
We think that the -- first, like the big growth for us is really the U.S. market, where we still have, in our view, a lot of room for expansion in terms of presence of our brands and our collections. And within this market, both the drug channel customers like Ulta, Sally Beauty or the U.S. Mass Target or Walmart all present significant opportunities across our brands.
Okay. Last one really quick one is just on pricing. Just hearing across the board price increases coming through on the back of inflation. Could you talk a little bit about like-for-like pricing versus innovation-driven pricing? And what should we expect for pricing?
We're looking at the weighted average of price increase in the mid- to high single digits, that has been implemented across the board. And obviously, when we look at innovation for next year, we're still discussing with our retail partners on what is the right level of pricing. But we're also monitoring very closely the continued inflation pressure that we're seeing coming on the manufacturing side or transportation.
[Operator Instructions] And at this time, I do not have any other questions signaled.
Well, thank you for joining us on today's call. We appreciate your continued support and look forward to reporting on our progress in August with Q2 results. Thank you again, and have a good day.
Ladies and gentlemen, that will conclude today's conference. We thank you for your participation. You may disconnect at this time.