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Good morning. My name is Jessica, and I will be your conference operator today. At this time, I would like to welcome everyone to the MAV Beauty Brands Q2 2019 Conference Call. [Operator Instructions] Thank you. Mr. Craig Armitage, you may begin your conference.
Thank you, operator, and good morning, everyone. Thanks for joining us today. Please 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 includes a summary of the significant assumptions underlying these forward-looking statements and certain risks and factors that could affect the company's performance and the ability to deliver on these forward-looking statements. The Q2 2019 earnings release, the financial statements and the MD&A are all available on SEDAR as well as the IR section of the MAV Beauty Brands website. I will now turn the call over to Marc Anthony Venere. Marc?
Thanks, Craig. Good morning, and welcome to our second quarter 2019 conference call. I'm joined today by Tim Bunch, President and Chief Revenue Officer; and Judy Adam, our Chief Financial Officer. We'll review the operating and financial highlights of the quarter before we open the call to questions.Halfway through the fiscal year and just over a year into our life as a public company, we are pleased with the overall direction of the business and our performance against the growth plan that we have outlined. Firstly, and most significantly, we continue to deliver organic growth well in excess of the haircare category average, which speaks to the robust consumer demand for our brands. Second, while we're expanding the distribution of all 3 brands, we're particularly excited by the progress of the acquired brands, Renpure and Cake. Our Global operating platform is helping to build these into bigger and more valuable brands. Under our stewardship, Cake has added 9 new SKUs, distribution has grown 15x and all signs point to it being a powerhouse global brand. Renpure has rolled out 38 new SKUs and is establishing itself as a leader in the natural personal care category. Certainly, there are operational adjustments and things that require improvement, like acceleration of our international sales and the continual build of our overall gross margins. However, we have made great progress in these areas and still feel there's future upside opportunity. For international, we have grown from 27 total countries at IPO to 32 to date, including several large and high potential countries such as China. These new markets take time to develop into consistent and profitable contributors. But our past experience in countries such as South Africa and Mexico gives us confidence that we will have success building these markets over the long term. Looking at gross margins. Our year-to-date 2019 margin of 49.3% is up 3 percentage points from where we finished in Q4 of 2018. And we have a clear plan to continue to grow gross margin going into 2020. On that note, I will turn the call over to Tim, who can provide more detail on our operating results and growth strategies. Tim?
Thank you, Marc, and good morning. I am going to briefly review our operating performance and strategic progress. We delivered double-digit organic growth in the quarter, highlighted by a 13% increase in North America, which represents 90% of our total revenue base today. Against the backdrop of low to no growth for big CPG brands, MAV Beauty Brands are named one of the fastest-growing hair care companies in the U.S. food/drug/mass channels, with double-digit growth in a category that is flat. Delivering on our primary growth strategy, MAV Beauty Brands launched winning innovation to further expand the shelf and door presence for all 3 brands in the first half of 2019, and sales have continued to accelerate in Q2 2019 through increased consumer engagement and marketing activity. Highlights of the MAV Beauty's 2019 innovation include Marc Anthony True Professionals showed strong growth in Q2 2019 with the new collection of Dream Big Volume masstige hair products. This collection has launched in more than 20,000 retail locations globally. Renpure's new Plant Based Beauty collection was launched with new packaging, new formulas and a global reach in social media influencer and PR campaign. With a differentiated positioning of performance products with the plant-based ingredients that are sold at a fair price, Renpure's new collections can be found across major North American retailers, including premium natural retailers that set the standard for natural products. Cake Beauty launched innovative products in major drugstore retailers in North America and continues to over-deliver our retailers' expectations. These strong incremental sales from Cake pave the way for the brand to expand shelf in hair care and other beauty categories over time. Building on our innovation, MAV Beauty's marketing strategies continue to develop authentic consumer connections, generate brand awareness and drive consumer demand for our products. In the second quarter, Marc Anthony True Professional had a significant uptick in sales due to a consumer-driven activation on TikTok, one of the fastest-growing social apps targeting Gen Z. TikTok users began posting videos using 2 of our most popular Strictly Curls products. To date, there have been over 8.5 million video views with the hashtag #strictlycurls. And all 3 brands were recognized by Self Magazine, a top health and beauty publication, winning Self's 2019 Healthy Beauty Awards' best shampoo for dry hair for Marc Anthony True Professional; best exfoliant for dry scalp for Renpure Plant Based Tea Tree Scalp Serum; and best shampoo for fine hair and best conditioner for fine hair for Cake Beauty's The Big Big Deal Shampoo and The Big Wave Conditioner. Our second core growth strategy, cross-selling, continues to generate excellent results for the company. On past calls, we've highlighted Cake's expansion in U.S. drug, where it continues to perform well above retailer thresholds and our expectations. We are also leveraging our strong relationships and go-to-market capabilities to bring the brand global. Since acquisition, we've introduced the brand in Mexico, Colombia, South Africa, Turkey, and then Q2, Cake shipped to Russia, Chile and the U.K. Our cross-selling success also extends to the Renpure brand. The new Renpure collections were designed for a broader global audience. And building on the Mexico launch in Q1, the brand expanded to Colombia and South Africa this past quarter. During the second quarter, we continued to establish the building blocks for future international sales growth. In 2018, we entered 10 new markets. Year-to-date, we've added 4 new markets, including Poland and the U.K. in Q2. Our third strategy has been to expand and grow in whitespace markets and retailers. Q2 proved to be a very successful quarter with this strategy. Just last month, we are excited to announce the new relationships with Boots, one of U.K.'s largest health and beauty chains. We launched 13 SKUs exclusively in 290 beauty-focused stores, including multiple flagship locations. In addition to opening a sizable new market for Cake, this represented the first brand in our portfolio to penetrate the U.K.The Cake Beauty brand has experienced incredible distribution growth as part of MAV's global operating platform. Since the brand was acquired, it's gone from 1 retailer in 1 country to 19 retailers in 9 countries. Another highlight has been continued growth of our e-commerce presence in China. Since launch in August 2018, Marc Anthony has shown solid results at Tmall global. We also recently launched a Marc Anthony flagship store at jd.com, the second largest online platform. While these are all important milestones toward building our international revenue base, we have experienced year-over-year variability in our net sales results as international distributors do not order with the same consistency as our North American retailers. In addition, broader economic weaknesses in certain markets have been an issue. As a result, international sales growth has been slower than we expected in the first half of 2019. And while we anticipate meaningful growth in the second half of 2019, it will be lower than our original expectations because of these factors. Overall, we are positioned to continue to develop above category top line growth in 2019. We are demonstrating the power of our global operating platform and the multiple levers of growth in our business. We are expanding all of our brands through winning innovation, cross-selling the portfolio and expanding into new territories. As we look to the balance of 2019, we anticipate [indiscernible] as we achieve the full scale and benefit of our global operating platform. Our outlook calls for higher growth in the second half of 2019, in line with our historical ramp up in the second half of the calendar year. The second half acceleration will be based on the combined impact of continued POS growth across the portfolio in North America, Cake's expansion and rapid growth in all channels and markets, further category expansion in the body wash and lotion categories, and shipments of 2020 innovation for planogram resets in January. I will now turn the call over to Judy to review the financials in more detail. Judy?
Thanks, Tim. Good morning, everyone, and thanks for joining us today. Our complete financials are available online so let me focus on the main highlights for Q2. Total revenue increased by more than 10% over the prior year to $25.2 million due to the organic growth of our brands, with strong North American sales growth of 13% offset by a modest year-over-year decline in our international business, as Tim outlined. Overall, effective execution in the first half of 2019 and revenue momentum positions us well to achieve accelerating growth in the back half of the year. Gross profit for the second quarter increased by 26% to $12.4 million. At 49%, gross margin percentage improved from 46.3% in Q4 2018 and was in line with our expectations. This reflects the positive impact of new innovations launched in recent quarters as well as initial cost optimization efforts. For the first half of 2019, gross margin percentage was 49.3%, and we expect continued improvements based on these same factors. Selling and administrative expense was $7.1 million in this quarter. Excluding stock-based compensation charges of $1.1 million, adjusted selling and admin expense was $6 million or 24% of sales, up from adjusted selling and admin expense in the prior year, reflecting public company costs and expansion of infrastructure to support future growth. With most of the growth investments now behind us, we expect to benefit from operating leverage over time. Adjusted EBITDA was $6.3 million in Q2 compared with $6.7 million in Q2 2018 for the reasons we've talked about, primarily higher SG&A expense to support growth and public company costs. Adjusted EBITDA margin was 25% in Q2 and just over 25% for the year-to-date period. We're anticipating adjusted EBITDA to accelerate in the second half of 2019, driven by increasing revenues, cost improvement and SG&A expense remaining near current levels. Adjusted net income was $2.5 million this quarter compared with adjusted net income of $1.1 million in Q2 2018. Adjusted earnings per share was $0.06 for Q2 2019, up from adjusted EPS of $0.04 in Q2 2018 on a diluted basis. The Q2 results also showed strengthening free cash flow, which we define as cash provided by operating activities plus cash used to purchase property and equipment. Free cash flow was $0.8 million in the second quarter, up from negative $4 million in Q2 2018. The year-over-year growth reflects increased cash from operating activities of $6.3 million, offset by a higher CapEx of $1.5 million from onetime investments on the construction of new corporate offices and implementation of our new appropriately-scaled ERP system. The majority of costs planned for these investments were incurred in the current quarter. In terms of capital allocation, we were very active with our NCIB program over the past several months. During Q2 and up to yesterday, August 6, we purchased and canceled 729,448 shares for proceeds of roughly $4.1 million. Recall, we have allocated up to USD 5 million for share buybacks from April 2019 to April 2020. Looking at the balance sheet at quarter end, our net debt after cash stood at $110 million and net leverage just over 4x. The increase in leverage this quarter is primarily due to the timing of CapEx spend and NCIB, the majority of our planned expenditures being incurred in Q2 2019. Now with the bulk of these investments behind us, our focus will -- with the higher free cash flow in the second half of 2019 will be to accelerate debt repayment. In summary, it was a solid first half, which sets us up well for higher growth in the coming quarters both on revenue and adjusted EBITDA. Based on the year-to-date performance, we are expecting to deliver results within the previously stated guidance range. However, we are tracking to the lower end of the range. Again, these results imply organic revenue growth well above industry average base but -- based on strong demand and market share gains for all 3 of our brands. We look forward to reporting on our progress with the release of our Q3 results in November. We'll now open the call up to questions. Operator?
[Operator Instructions] Your first question comes from Mark Petrie of CIBC.
I wanted to touch base on the gross margin percentage and the expected improvements in the second half. Could you give more detail on the specific drivers, maybe sort of rank order manufacturing, procurement, sales mix? And then give us a sense of your visibility today as to how each of those play out?
Yes. So the #1 way that we're going to get gross margin improvement is really with working with our manufacturers, who handle a lot of the procurement process, componentry and ingredients for us. So we look at the total cost of the product. So that's our #1 way. We've gone back with all of our manufacturers, partnered with them to reduce these costs. We've already started to see this improvement in this Q2 a little bit, and we'll continue to see that really ramp up and accelerate as we get into the back half of the year. Obviously, as you take on this inventory, you have to sell-through the inventory you have on hand and then the new items as they get a new launch, those would be at the lower cost of goods. We'll also get some minor savings within our distribution costs. That will come a little bit more in the back half. But the cost of goods for manufacturing, it's the #1 way for gross margin improvement.
And so the benefit from sort of the repackaging or reformulation on the Renpure plant-based category, is that fully reflected in Q2? Or is there also additional benefits still rolling through?
Yes. So from a new items that launched really in Q1 and Q2 of this year, we're already seeing the benefit of those new items at a lower cost of goods target and higher gross margin. We'll see going into the back half, especially as we get into Q4 for new items that are going to ship for the 20 planograms, those are going to be at even improved gross margins. So we get the benefit of the renegotiation of our base in Q3 and Q4 ramping up, but we also get the benefit of all the new items that we're launching in 2020 will be at strong gross margin profile for the company.
Okay. And how will the expected pickup in international revenue affect gross margin in second half?
Well, definitely we're seeing some softness in international. Again, international is a smaller part of our business, North America being around an over 90% of the business. So I wouldn't see a dramatic or a very significant impact from that process and international impacting our gross margin.
And then, so I guess, just to follow you up on that. Regarding the outlook, is the slower growth in international really the main or sole driver of revising to expect at a lower end of the range? Or what are the other drivers?
Yes, it is the primary driver. When you look at the total business, our North America business is very healthy from a POS standpoint and brand performance and the shipment performance. So seeing our double-digit growth and 13% growth in this quarter, in North America is very healthy. When you look at the new -- the international market, we're very pleased with the strong expansion of regions and brands. There has been a shipment variability, which we've talked about. We've also had region volatility within a few regions that has directly impacted some of the revenues. And overall, the growth in some of our new regions has been slower than what we anticipated. But overall, because of our healthy growth in North America, we feel that we're still within our guidance range at the lower end. And we do have a lot of faith that international will continue to expand and grow over time.
Okay. And then I guess, just the last one for me. I understand free cash flow improved from last year, but the conversion was still pretty minimal and we saw another quarter of working capital drain. I know there's been some elevated CapEx because of the office move and ERP rollout. But could you address the free cash flow conversion and what your outlook is for getting that back to the 50% plus range that you've discussed?
Well, yes. I mean the free cash flow conversion rates that we've been talking about is basically on a full year basis. As we've indicated, we're expecting a stronger back half than first half. So just looking at it -- looking at that metric on the first half isn't telling the full story. So we expect that conversion rate to increase as EBITDA grows in the back half. So that's primarily what's going to be driving that, that higher conversion rate.
Yes, as we look at our back half, this is really where the acceleration takes place. Historically, our revenues in the back half have always been higher. We anticipate the same this year. So revenue growth is going to come. We're going to have the cost reduction. Our CapEx is going to be lower and our SG&A is going to be in line with our expectations. This -- what this really does is generate a lot more EBITDA for us, and we're going to see that directly in the cash flow.
So is that 50% number sort of still achievable? And then, I guess, maybe with the lower end of the EBITDA range, I think you had previously talked about exiting 2019 around 2.5x leverage, maybe it's a bit higher than that, just given the lower EBITDA. Is that fair?
Yes. I mean I think definitely, those metrics all still makes sense. The bulk of both our CapEx spend and our NCIB all hit in Q2. So now with the bulk of that behind us, we really can focus on free cash flow towards paying down debt.
Your next question comes from Joe Altobello of Raymond James.
This is Adam on for Joe. I was -- I know you guys touched on POS versus the category, but I was just wondering what this growth was by brand, if possible? And second, I was also wondering if you guys would share the contribution of body sales in the quarter.
Could you repeat the last part? I got the first one in terms of POS by brand. What was your second part, Adam?
The second part was just on have you guys had any breakdown for the contribution of body sales in the quarter, or just kind of anything on general category expansion.
Yes. So the first, we're not segmenting our POS by brand because we're not going to report in that way. What I can tell you is when we look at the U.S. POS, and we look at our Canadian POS, which we both get from Nielsen, all 3 brands are in a very healthy and growing state. We're really happy with the expansion that we've seen at Cake and acceleration in Canada as we've readjusted the pricing, as we talked about in other calls. The Marc Anthony brand just continues to be on fire within North America. The social media impact has really accelerated this brand, and we're very pleased with it. And Renpure, with the new Plant Based Beauty, has done strong. With Renpure, we had a lot of historical product that was out there that really wasn't on strategy, not the right gross margin profile or positioning. Really, as we cleaned that up and launched the new Plant Based Beauty and seen that out, we're very pleased with that Plant Based Beauty and how it's performing within key retailers. The other piece I would just note is when you look at the top 10 haircare manufacturers, MAV Beauty is still in the top 10 and the fastest-growing within those in the top 10 U.S. through drug mass channels. So something to be very proud of for our company. In terms of contribution of body, with the body business, we're not going to segment on contribution by body. What I will tell you is you will see that within our core retail mass channel, our business is doing really strong when you look at Nielsen. So we're the largest mass retailer in North America. That brand has just performed far beyond the expectations of the buyer. I think that we'll see continued expansion of the body business as we look over time and potentially even going into some other categories. So a very big positive highlight for us.
That's very helpful. That's good color. And I was also curious on just your thoughts on maybe the marketing investment that you expect this year versus last year. Are you still looking for a slight increase here? Is that total demand spend, advertising and promotion? Just a little bit more clarity on that would be great.
Yes. So as we look at the marketing spend, we will be spending more in this year and compared to 2018. We continue to believe that investing in the shelf primarily is the #1 spend for us. That's where the transactions happen and we get the best ROI for your dollar. In terms of out of shelf, out of retail, we continue to believe and have seen the impact of our social influencer in PR model. That has been extremely efficient for us. We've been doing that across Marc Anthony for the past few years, and we really start seeing the impact of it. We've really applied it with Cake, really with our founder being the face of that brand and in social media presence. It's been amazing. And Renpure, we're continuing to accelerate it. Renpure, here over the last year, we put together a PR agency in place and a social influencer model behind it. We're starting to see traction out in the market. We believe that that's going to deliver long-term brand affinity and growth, and so we'll continue to invest in that.
Perfect. And if I can squeeze in one last one. I was just curious, real quick on -- if you guys share e-commerce as a percent of total sales or just a general sense. We were just kind of curious on that.
Yes, we don't share it as a percent of sales. I'll give some color. I think I've mentioned before, we believe in Amazon. We see the growth and we're putting a lot of focus there. We have a dedicated resource on the Amazon business as well as the third-party who helps us manage it. We have seen tremendous growth within our Amazon channel. And very much project that to continue growing over time, where we have also put resources within our retailer.com. The Walmart, target.com, shoppers.com, those are very healthy businesses. Those continue to grow and be of increasing importance to our retailers. Likewise, they are an increasing importance to us. So we've definitely invested in those. We can see it as a continued growth, and we look to grow faster than our peer set, just like we do on shelf.
Your next question comes from Steph Wissink of Jefferies.
I want to just unpack a bit more on the sales cadence for the year. I mean, Tim, maybe if you could take this one, but how should we think about your visibility into the international distributors into the back half? And what does your guidance contemplate in terms of the contribution of those international markets coming back online over the course of the next few months?
Yes. So as we look at international in the back half, we have a few benefits really helping us. So first, we have launched in a few countries, especially very meaningful countries like the U.K. market during the Q2 where we expect to have continued replenishment of health here coming into the back half. Also, like I said, we had some shipment variability that hit us within the Q2 timing. We look for that to level out here as we go into Q3, which will be a nice help for the business there. What we also anticipate as we look at our back half on international, which is kind of affecting what we've said in terms of how we're projecting the year, is there volatility within a few key markets. So we've had some volatility within Argentina and Turkey, and that has directly impacted some of our sales in the international market. So as we look at our core, we feel like we have healthy sales within our core regions. We look for our new regions to continue replenishment and driving growth in the back half. And we have already taken into account some of these more volatile markets that we have now derisked and taken out with our expectations because we don't anticipate near-term benefits or changes within their volatility.
Okay. That's great. And then, Judy, one for you on the SG&A. I think in your prepared remarks, you mentioned consistent with the Q2 run rate in the back half. I just want to make sure we understand. Is that consistent as an underlying run rate, $6 million or including the stock based comp? Are you talking in totality or more on the underlying base rate of SG&A?
Yes, Stephanie. Yes, I was talking more with respect to adjusted SG&A of $6 million, so excluding stock-based comp. As previously mentioned, yes, we've been ramping up on that SG&A or the core SG&A as we continue to invest in people and infrastructure, and we're now finally getting sort of a more consistent level and don't see that increasing too much further as the quarters roll on.
Okay. That's great. And then a last one for you, Marc. You mentioned in your remarks this excitement and enthusiasm regarding continued gross margin expansion into 2020. I'm wondering if you can just give us a little bit of insight into that level of enthusiasm, what you may be seeing in some of the early planograms for 2020, certainly Cake over-delivering, a nice contributor there. But maybe give us some sense of what you're seeing several quarters out versus just the next couple of quarters.
Yes, that's a great question, Stephanie. We've had -- I would say over the course of my time meeting with retailers, and especially some of the largest retailers in North America, the response and the receptiveness to our brands and the expansion of our collections going into 2020 has just been phenomenal, quite remarkable, actually. And the retailers are really looking at us now as a much bigger player, giving us a lot more of what some of the larger CPG brands would have been getting. So now we have the attention and the ear of the retailers, along with the authenticity, founder-led, very focused niche brands that we offer to them that offer them higher margin. So overall, I would say that the level of receptiveness to shelf expansion is quite remarkable, and we're going to see some of that as we get into Q4.
[Operator Instructions] Your next question is from Sabahat Khan of RBC.
Just maybe one more on the international side, I guess some of the puts and the takes that you're talking about. Maybe can you get a little bit more color on what those puts and takes are by region where you might be seeing some weakness and strength? And with regards to the Cake rollout into the U.K., was it sort of baked into your guidance already? Was this positive offset? I just want to get a little bit of color on what happened in the first half and also in terms of the visibility to the back half of the year on whether there's some more risk if shipments get pushed out, or how firm some of those back half shipments are.
Yes. So as we look at international, it doesn't have the same consistency as our North America market does, and we've been very steadfast in terms of that message track. As we look at the front half, the U.K. expansion was in there. We've had some early conversations with Boots over the prior year, and we really did anticipate that happening. And so that really follows in line right with our expectations. In terms of our core regions, we've talked about our core regions being Mexico, South Africa, Russia and Australia. Our core regions are all healthy. Our POS is strong there. There is still some shipment variability of when distributors take product. We saw a little bit of that happen here in Q2, and that shipment variability will work its way out between Q2 and Q3. As we go to the next tier, to kind of give you some color here, this is where I did call out a few markets have been volatile. And so this is where we started to see that, especially within Argentina and Turkey and a few others maybe where there's a little more softness versus those 2 having more of a disruptive international plan. So as we look at the back half, we feel very confident within our core regions that we're going to have consistent replenishment in line with what we've historically shown. We feel very confident within our new regions that have healthy economies that we're going to have continued replenishment. And as I said, we've derisked these more volatile markets where we feel like that there could be economic challenges that go beyond our category, our brand. And so we've derisked those markets as we put that forecast together. So overall, as we look through at a very granular level, we feel confident in terms of what we're putting forward now and speaking on the international. And as we look beyond, we'll take these learnings into account as we look at guidance in the future.
All right. And then on the Renpure, you rolled that out into Canada a little while back with one retailer. Just want to get an understanding of how that's tracking versus expectations and if there are other major retailers are on the Canadian side that, that offering could be rolled out to, whether it's just the haircare products or any of the other lines?
Yes. So this past year, we had called out here in Q1 we expanded Renpure, which had really tried to get into the Canadian market at the key retailers for many years and had just not been able to do. But leveraging the MAV Beauty platform, we were able to expand Renpure with a very strong presence in the largest drug chain in Canada. We're pleased the retailer is pleased with that performance. The core SKUs of shampoo and conditioner are doing very strong. And I anticipate as we look out in Canada market over time, we'll see further expansion at other core retailers with the Renpure plant-based offering.
And then just one last one for me on the cash on leverage. You talked a little bit about the uptick in cash flow in the back half of the year. Just big buckets, how should we think about 2020 in terms of the kind of free cash flow you're thinking you'll generate, maybe leverage exiting next year? And what expected CapEx spend? Or just any of the big buckets on the puts and takes in the cash flow will be great.
Well, as we mentioned before, we're not really focused on 2020 at this point. But we continue to believe as just kind of reiterating some of the things we've said in the past, we're an asset-light business. So this year, we were much heavier on CapEx. We don't anticipate that to happen next year. We also anticipate more -- further sales and EBITDA growth. So that's going to drive free cash flow as well. So I would say, consider those things as you're working through your free cash flow expectations for 2020.
Your next question comes from Vishal Shreedhar of National Bank.
Obviously, many successes at MAV and clearly, traction with some of the brands there, but I just want to take a few steps back and kind of ask about the -- kind of the investor promises at the IPO time frame. So management indicated that the business was very predictable at that time frame. So I understand international is volatile, and you've explained that. But the North American business, did it hit management's plans this quarter?
Yes. When you look at our North America business, we're very pleased with the growth. And even, especially like looking at the front half of what we've delivered in this year, we feel like our front half from a revenue delivery in the North America business, we are on track and it's very healthy. So from that standpoint, I think in terms of the predictability of our North America retailers and North America brands, we have really been able to show that and deliver on it. The international piece is a little bit more variable, and that has always been. It's a much smaller piece of our business, around 10%. But of our core 90% within the U.S. and Canada, we're pleased with the performance of the brands.
Okay. So when you said to another question asked that primarily the guidance going down to the bottom end of the range was primarily international, we should think that the North American business did perform to plan. Is that correct?
Yes. Our North America is around our expectations from all our core brand performance. And so I think you can anticipate going into the back half, that continued performance in growth of these brands that we're seeing in our POS growth will continue within the shipment growth in the back half.
Okay. And into H2, the guidance implies some pretty big margin expansion. And to what degree can you see that already? I mean is that pretty much baked in with the suppliers, and you can see that gross margin expansion and the planograms are set and the volumes are committed so you can see -- actually see that partial expansion? And if it doesn't go to plan, then what should investors look at as potentially the key reasons why it wouldn't go to plan?
Yes, it's Judy. I can answer that question. Yes. I mean we are really starting to see our cost reduction initiatives are starting to come through now. I mean first, you see it from a cash savings perspective in terms of the product cost of new innovations and new products. I mean as we sort of mentioned before, it will take time to work itself through to the P&L. And that's why we're only seeing some early to early materialization of those cost optimization in the first half of 2019 and accelerating into the back half. But yes, no, we are starting to see it come through now.
Okay. And granted, I understand, Judy, that you don't want to talk about 2020 right now, but investors are still in a position where you have to forecast. So I'll ask and maybe you can do your best. On 2020, the guidance that was provided in the IPO process, Judy, I don't think, you can correct me if I'm wrong, you have any say in that. So how should investors think about 2020? Is there any broad brush strokes that we should have? I mean they're pretty strong assumptions, and given the variability of international and some signs of slowing growth there, are there any data points that you can point us to that would help us as we contemplate that?
I'll just say that I think we're building momentum. We've got the right investments in place now and the right infrastructure in place to continue on our strategy of growth in all areas. I mean international has had a much slower start, but the[Technical Difficulty]Sorry about that. I think, yes, I mean, international was softer than we've expected. But the delay, I mean, we still -- it's still a long-term makes sense and will continue to progress. So it's -- we do anticipate, as I said, a stronger back half of 2019, and that will give us momentum into 2020.
And I'm just going to add on here. When you look at our North America business, the true health of a CPG brand is what is being pulled off by shelf by consumers. And this is a flat category, and we're consistently delivering double-digit POS growth for this company. And so to me, that momentum with our consumers really shows up within the growth of our business across our brands and our retailers. So we're looking forward to a great 2020 within our core markets. As we said, international will be at a slightly slower growth rate, what we're seeing in 2019. But we're very optimistic looking at our 2020 based on the pure health of these brands within North America.
And I guess I'll just add to one more point as well. I mean we talk a lot about gross margin expansion, but I also wanted to highlight that with our investments in SG&A now sort of leveling off, we're also anticipating expansion of EBITDA margin. So we delivered about 25% in our EBITDA margin, but we expect that to expand as the quarters roll on as the operating leverage continues to kick in.
Okay. Wonderful. And just in terms of the COGS reduction initiatives that you have with your suppliers, are those contingent on volume growth commitments to them? And how should investors think about that, particularly as it relates to the international piece?
Yes, there's no contingency. The international sources from our North America volume pool and so there's no separation of that. And there is no contingencies within the contract. So those are already negotiated. The rates are set. And then those will continue to roll out as we produce those products and they flow through our system in Q3 and Q4 ramping up into 2020.
And there are no further questions at this time. Please proceed.
Well, thanks again, everyone, for joining us on today's call. And please reach out with any further questions, and have a great day.
Thank you, everyone.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.