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Good morning, ladies and gentlemen, and welcome to the MAV Beauty Brands Second Quarter 2020 Results Conference Call. [Operator Instructions] This call is being recorded on August 14, 2020.I'd now like to turn the conference over to Craig Armitage. Please go ahead.
Thank you, Pam, and good morning, everyone. Thanks for joining us today. Just a quick note before we get started that our remarks today may provide certain information regarding management's expectations, future plans and intentions that may constitute forward-looking statements. I'd refer you to the most recently filed MD&A or the AIF, which are up on our website and on SEDAR. These include a summary of the significant assumptions underlying these forward-looking statements and certain risks that can affect the company's performance and the ability to deliver on these forward-looking statements. Again, you'll find the Q2 earnings release, the financial statements and MD&A on the IR section of the MAV Beauty Brands website. With that, I'll turn it over to Tim Bunch. Tim?
Good morning, and welcome to our second quarter 2020 conference call. Joining me for the call is Judy Adam, our Chief Financial Officer. Today, we will cover the operating and financial results from the quarter and provide a few high-level comments on recent marketing trends. In a challenging and rapidly evolving business environment, MAV reported solid results for the second quarter. We've talked about the resiliency of our business in the past, and we believe this has been front and center in 2020. At the simplest level, we sell high-quality products at an affordable price point, where people can buy them and essential food, drug and mass location. We believe this is a fundamentally sound and resilient model. Even in these challenging times, people continue to buy the hair care and body care brands they love. I would also call out the great efforts of our dedicated team and extended partners who have gone to extra lengths to continue serving our consumers and retailers during this difficult period. Thank you for your commitment to MAV Beauty Brands. Building on a strong first quarter results, total revenue increased 17% and adjusted EBITDA rose 28% in Q2. From a regional perspective, this growth was driven by our North American business, which generated revenue of $28.1 million, up 24% over last year. The year-over-year growth mainly reflects the addition of The Mane Choice to our portfolio. However, our other brands had solid results. Again, this speaks to the resiliency of our brand-driven business model. From an organic growth perspective, there were some previously discussed headwinds in the quarter. But we also had some offsetting tailwinds such as strong brand fundamentals and e-commerce sales. We believe this is the best way to frame the results and key drivers for the quarter. In terms of tailwinds, foremost, we're fortunate that consumers had access to our products during the lockdowns. Many purchase decisions are made at shelf, and the vast majority of our food, drug and mass retailers remained open throughout the past 5 months of the crisis. Clearly, the pandemic has altered consumer behavior, accelerating the shift to e-commerce. Our investments in this channel over the past year and Amazon direct-to-consumer and retailer.com properties have enabled us to capitalize on this trend. E-commerce will continue to be a focus and driver for the future. Our second quarter e-commerce sales more than doubled over last year, and e-commerce share of total revenue is now in double digits. We also continue to increase distribution of our portfolio as Cake expanded in U.S. drug and specialty. And Renpure expanded further in Canada. In terms of headwinds, while the majority of food, drug, mass retailers have been open during the COVID-19 emergency measures, category sales were lower at the start of Q2 because of various in-store restrictions and altered consumer shopping patterns. When we talked in June, we referenced a Nielsen POS data for the hair care category. In the first 7 weeks of the second quarter, basically half of the quarter, the hair care category declined by mid-single digits. The market stabilized and improved in late May and June. And in June, Nielsen POS data shows that the category stabilized and was only slightly down in comparison to prior year time period. While these are helpful data points, I would once again note they do not present the complete picture for MAV because results for Canada and the specialty beauty channel are not included. In addition to reduced foot traffic, some promotional activity was curtailed in recent months as retailers tried to rethink how to allocate promotional space in their scores during this pandemic. One other headwind we called out last quarter was the impact of store closures among specialty beauty retailers. These retailers are key customers of MAV and significant retailers of The Mane Choice. Like many retailers, both Sally Beauty and Ulta Beauty faced the shutdowns of the retail stores for a significant portion of the second quarter, after which they commenced the Phase 3 start of store operation. All 3 of our brands that sell in the channel stand to benefit, in particular The Mane Choice. In fact, the reopenings were a positive driver in late Q2 as our specialty beauty retail partners were able to accept new inventory to support the brand's planned shelf expansions for 2020, of which had not yet shipped because of store closures. Lastly, our year-over-year performance was affected by continued softness in our international markets We expect this portion of our business, or roughly 5% of net revenue this quarter, to be affected by global economic uncertainty through the balance of the year. Stepping back, our vision for MAV is to take strong brands in attractive categories and leverage our operating platform to support their growth. Looking at the recent progress and performance of each of these brands, Marc Anthony True Professional continues to perform well across almost all channels and key accounts with particular strength in Canada. Renpure had strong sales in the body wash segment through Q2. In hair care, we continued to optimize the proposition. This year, we introduced larger-size shampoos and conditioners for the mass channel, and many of these have performed well above category thresholds. And as mentioned, Renpure also broadened its footprint in Canada. Building on Cake's retail expansion in Q1, Cake launched its facial skin care line, a new category for the brand. This category expansion is being piloted in Canada, at our 2 largest retailers. We plan to expand Cake's facial skin care line in the future as we get good consumer and retail data of this initial launch. Lastly, The Mane Choice is performing well across channels that remained open: mass, drug, food and e-commerce. The multicultural segment continues to grow rapidly, well above overall market. And we are pleased to serve the needs of the textured hair consumer with a great, authentic brand. From a supply perspective, as we outlined on the prior call, the steps we took at the start of 2020 have served us well to date, and we will continue to take proactive measures to minimize the risk to supply disruptions. In the near term, with the -- we will continue to carry higher safety stock on core SKUs. With that, I will ask Judy to review the financial results in more detail.
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, we delivered a strong second quarter in the face of a challenging market environment. Total revenue in the quarter increased by 17% over the prior year to $29.6 million, reflecting the acquisition of The Mane Choice in late 2019 and the tailwinds and headwinds Tim outlined. On a year-to-date basis, total revenue was $61 million, up 24% over the prior year both from acquisition and organic growth. Gross profit was $14.5 million in Q2, up 18% from last year. Adjusted for the impact of a $0.7 million purchase accounting adjustment, gross profit margin continued to show steady improvement at 51% compared to 49% in Q2 2019, reflecting product cost savings and the addition of The Mane Choice to the portfolio. On a year-to-date basis, gross profit, adjusted for the impact of the purchase accounting adjustment, was $31.2 million, and gross profit margin was 51%. Excluding share-based compensation charges of $0.6 million, adjusted selling and admin expense in Q2 was $7.1 million or 24% of sales compared with $6 million or 24% of sales in the same period last year. While we reduced certain discretionary expenses during the quarter, we also increased our spending on Amazon as we are seeing a high ROI on the spend. In addition, there were temporary increases in operational costs such as outbound freight charges due to expediting shipments. To prioritize cash and liquidity during this uncertain period, we will continue to manage costs very carefully in the coming quarters. We have the flexibility in our cost structure to react quickly to significant changes or opportunities in market demand. Adjusted EBITDA increased 28% over last year to $8.1 million compared with $6.3 million in Q2 2019. Year-to-date, the business generated adjusted EBITDA of $16.4 million compared to $12.5 million in the prior year period. We also saw EBITDA margin expansion during the quarter with adjusted EBITDA margin increasing to 27.2% in the quarter compared with 25% last year and also show improvement from Q1 of this year. Adjusted net income was up 59% to $4 million or $0.11 per basic share and $0.10 per diluted share compared with $2.5 million or $0.07 per basic share and $0.06 per diluted share in Q2 2019. On a year-to-date basis, adjusted net income grew 46% to $7.7 million or $0.21 per basic share.Free cash flow was a highlight of the quarter, improving to $7.1 million from $0.8 million in last year's Q2. In addition to EBITDA growth and lower CapEx, a major factor in the improvement was lower net working capital from a significant decrease in receivables. As discussed in our Q1 earnings call, we experienced temporary delays in customer invoicing resulting from the implementation of a new ERP system at the start of the year, and we were able to collect on these in Q2. On a year-to-date basis, factoring out the quarter-to-quarter variability, free cash flows grew 279% from $1.1 million last year to $4.2 million in the current year. In terms of uses of cash in the quarter, we paid out the 2019 earn-out from The Mane Choice acquisition of $4 million and received $1 million in cash related to working capital adjustments. At quarter-end, we had cash of $14.9 million. Given the economic uncertainty, we determined it was prudent to have additional liquidity and temporarily drew down an extra $6.5 million from our $20 million revolver facility. Our net debt stood at $133.6 million at quarter-end, and, including the results of The Mane Choice for the trailing 12 months, our net debt-to-adjusted EBITDA ratio was approximately 4x. In summary, our Q2 and year-to-date results reflect the key features of our financial profile: attractive gross and EBITDA margins and an asset-light business, enabling strong free cash flow generation. Our #1 priority for free cash flow use in the near term is debt repayment and reducing our leverage ratio. I will now turn the call over to Tim for closing comments. Tim?
Thank you, Judy, and thank you to all our staff, employees and customers and partners for their efforts in these difficult times. We are pleased with how we navigated the second quarter and with the results we have delivered in both Q1 and now Q2. MAV Beauty Brands' core business fundamentals are strong and have proven to be a solid foundation as we navigate an unprecedented and challenging year. We operate in a resilient category with a diversified portfolio of consumer-focused brands. We have robust margins and have created a nimble, asset-light operating model that enables us to react to the changing environment. Looking ahead to the second half of 2020, there are unknowns and likely challenges ahead, including the potential of economic fallout from COVID-19 and further lockdowns. However, based on the fundamentals of MAV's operating model, we are well positioned to address these challenges and continue to grow our portfolio over time. We look forward to reporting on our progress with the release of our Q3 results. We'll now open the call up to questions. Operator?
[Operator Instructions] Your first question comes from Sabahat Khan with RBC Capital Markets.
I just want to get a little bit more color. You called out some organic growth in Canada and the U.S. Can you maybe talk about how that trended through Q2 and whether some of the customers that may have bought additional product or new customers to the category, whether you saw them come back to the market whether later in Q2 or into Q3 to buy more MAV stuff?
Yes. Overall for the quarter, I would characterize this we had overall solid performance. But slight contraction is expected due to COVID and some other factors primarily in the U.S. I'll give a little flavor in terms of brand because when you get to the brand, that's where you see some real detail. So while we don't segment by brand, this will be a little more color in terms of directional performance.Mane Choice and Cake, as we look at Q2, was up year-over-year. Renpure, as expected with some of the sharp contraction that we talked prior, was down slightly more than the category overall. Marc Anthony was a different one because Marc Anthony was slightly down, but this is different in -- because we were anniversary-ing the TikTok viral explosion that we had last Q2. So if you remember, last Q2, the brand went viral on TikTok, and it really resulted in significant sales. We're anniversary-ing that. But as I look at sales in May and June, June was one of the highest months of the first half and very strong sales. What I'll note is, as well, and this wasn't in Q2, this has happened just recently, we did a promotion on TikTok this past weekend that just exploded again with great success. It's already -- the Strictly Curls hashtag is already up to 1.7 billion views on TikTok. It was actually picked up by Award.com and even syndicated on Yahoo!, some of the traction and results of it. So we feel like going into Q3, that sets the brand up in a great place for continued growth.
And the -- and maybe I didn't hear right, but are you calling out maybe some COVID-related headwinds heading into Q3 just broadly? Or was that just some of the headwinds you saw during Q2?
Yes. I think there is going to be some lingering effects of COVID. As we look at Q3, we feel like in Q2 we've proved the resiliency of our business model. And we feel like going into Q3, that sets us up in a very positive spot. However, we have to note that there are some lingering effects of COVID. There are some different changing consumer patterns. There is some reduced promotional opportunities from retailers. But early signs, as I look at the POS data, the market is stabilized, and we feel like our resilient and nimble operating model sets us up to adapt to the dynamic marketplace that we'll see in Q3.
Okay. And the e-commerce growth that you called out having doubled, was that through the dot-com platforms of the brick-and-mortar retailers? Or was that through some of this Amazon activity that you mentioned?
Yes. I would say most notable was Amazon as well as our direct-to-consumer efforts, which we do across Cake and The Mane Choice. So those were tremendous adds. Our retailer.com properties also increased, as would be expected during this time period as many consumers went online. However, when we look at our Amazon and our DTC properties in comparison to what we know of the industry, of the mass, food, drug -- food, drug, mass, hair care market, we feel like those were exceptionally strong for us.
Okay. And then just last one from me. Do you have some outlook or directional commentary on how you expect the leverage to evolve through the rest of this year and maybe exiting 2020?
Yes. Judy, would you like to take that?
Sure. Yes. Our -- we were really pleased with our free cash flow during Q2. But also on a year-to-date basis, our free cash flow was $4.2 million, up from $1.1 million last year. And what it demonstrates is that it's driven from EBITDA growth, lower CapEx and modest working capital investment. We did have higher working capital investment in inventory as, we had mentioned previously, we're trying to carry some higher inventory levels to make sure we have appropriate levels during this COVID environment as we're seeing longer lead times to get some componentry. But as we look into the back half, we see no further earn-out payments required in 2020 as well as lower CapEx. And so we can now focus on free cash flow towards debt reduction. And that's going to be our #1 priority in the near term.
Your next question comes from Joe Altobello with Raymond James.
I want to stay on the retail theme here. Obviously, you mentioned that things have started to stabilize, at least from a category perspective, in the U.S. Could you give us some sense for what you're seeing so far in Q3, maybe July and August, in terms of category growth or nongrowth in the U.S.?
Yes. So we have better July data than August just from Nielsen reporting. What I'll tell you is July is looking very similar to June, where it has stabilized but is slightly down year-over-year from a category perspective. And so I don't think that all of the understanding is fully fleshed out yet, but what we're seeing in Q3 is not really concerning to us thus far based on our category.
And is there a wide divergence between your retail numbers in the U.S. and Canada? And if so, why do you think that is?
Yes. So we saw less of a COVID impact in Canada in April, where we saw a much steeper decline in the category overall. In Canada, it felt like it was more of a stable POS trend that we saw across our retailers. And so that's where it is slightly different in that marketplace.
Okay. Great. And just one last one for me. You mentioned e-com is now a little bit north of 10% of your total sales. Where do we stand from a margin perspective? Are you guys agnostic between e-com and brick-and-mortar sales?
Yes. We really are in terms of the margin. As we look at our margin profile in our e-commerce business, they're in line with our other balance-of-business margin profile. So we feel like given the consumer trends and the growing dynamic in e-commerce, it's a great place for us. We invested early on Amazon, I've been talking that for well over a little over a year or 2, and definitely on DTC now with The Mane Choice. And so to me, I feel like we're really seeing the benefits of that.
Your next question comes from Vishal Shreedhar with National Bank.
I missed some of the commentary off the top. I was wondering if you commented already on your P&L performance versus the POS performance, if your P&L was above or in line or below POS.
So we didn't draw a comparison to that specifically. What I'd say is from our P&L, we showed strong EBITDA growth for the quarter. Obviously, going into Q2, we called out that we had taken some cost reduction measures to make sure that we protected the business going into a very uncertain time period. From a POS standpoint, overall our performance was solid, and we feel like comparative to our category benchmarks, we're very pleased with. And then I'd say, it's tied up by brand. As I look at the total front half from a POS standpoint, we feel like that the portfolio across the 2 quarters is in a very solid position and really reflects the strong brand fundamentals.
Okay. Great. But just specifically, was -- did the POS growth outpace the revenue growth? Or is it the other way around?
Yes. So right now, we don't segment out our POS and report that directly. So we don't report that by brand, where we're at. What I'll tell you is our revenue growth was very strong, very reflective of the addition of The Mane Choice, which was not in our numbers last year, but also strong fundamentals across the balance of the portfolio.
Right. Okay. No -- and that's fair when you consider the acquisition. I guess what I was trying to really get at is, was there some stock-up effect in the quarter when retailers were restocking, and that drove the revenue a little bit stronger than POS on a normalized year-over-year basis?
Yes. Yes, and I'll comment on that. So from a retailer stock-up, what we really saw was in Q1, that is where there was some stocking of consumers that did have effects with retailers in Q1 taking some of the additional inventory. We didn't really see that come into April from a stock-up. However, it's not really -- and we're not able to fully -- to dissect exactly what is the stock-up for them. However, at the end of Q2, as I noted, specialty retailers did open up, and we definitely saw we got some incremental sales in the balance of Q2 from specialty retailers opening up and taking new inventories to reset those planograms that they were midway on when they had the shutdown. And so that was an impact at the end of Q2.
Okay. And with respect to international sales, obviously you called out some of the headwinds, and they're understandable. But wondering if now that things have started to stabilize, if there are going to be plans to reinvigorate that business. Or is that more status quo for the time being and then we'll focus on that at a later point?
Yes. At this time, we're monitoring and assessing where to invest on international. We're focusing on core regions. We believe that our core regions are our best opportunity to have long-term growth. However, due to the economic uncertainty and various regions in very different situations due to COVID, right now we're taking a step back, assessing it, and we'll continue to drive that business as it is profitable.
Your next question comes from Matt Bank with CIBC.
I want to start by asking on sales trends by product type. So can you talk about hair care and body wash and styling products, please?
Yes. So in hair care, there's definitely been a shift for consumers. What we're seeing strength in is shampoos, conditioners and treatments. And there's a movement, what I'd almost say is really looking at health and beauty less so than just the immediate look. So where you're seeing declines is more on short-term styling products such as hair sprays. And so that's definitely a category shift that we're seeing through the pandemic. We don't know if this is a near term as many people are working from home or if this is a longer-term impact. However, given our portfolio plays across and we have a strong footing in all of these segments, we feel like we're also able to adapt and adapt our consumer marketing behavior to meet the consumer need where they're at. So from a -- so that was from a styling and conditioners on hair. From a body, we definitely saw a surge of body that started in March and continued through part of Q2. And so that has now normalized, I'd say, coming out of Q2 and going into Q3, but there was a surge in body that definitely helped propel especially the Renpure brand, which has a strong body presence.
Okay. Great. And then I wanted to ask on e-commerce. You mentioned in the script increased investment in Amazon. Can you talk a bit more on your Amazon strategy, please?
Yes. So for Amazon, we actually sell to Amazon just like a retailer from our vendor status across the balance of our brands. And when we do that, we can control the amount of marketing and promotional efforts that we put in the channel and actually measure a direct ROI of every dollar spent. And so as we saw more consumers coming into the channel of Amazon, we are able to ramp up our investment, continue a very, very strong ROI, and it yielded great results for us. What we're seeing coming into Q3 that I'm very proud of is even as consumers are coming into brick-and-mortar retailers, our Amazon business is continuing to sustain at a very high level. And we feel like that this has just been one opportunity that we're able to, at least these initial stages of COVID, exit with a very strong platform for growth.
Okay. And then the last one for me is, can you talk about gross margin? So you made some good progress in the first half of the year. Should we expect a sequential improvement into Q3 and Q4?
Sure. This is...
Yes. Judy, do you want to?
Sure. Sure, yes. Yes. So Q1 and Q2, we delivered a 51% gross margin, and we feel like this is a sustainable level for us in this low 50% range. What it's highlighting is the productivity and efficiency savings we've been talking about for a while as well as the addition of The Mane Choice is also a net positive effect. But I would also highlight that our gross margin can fluctuate quarter -- between the quarters depending on sales mix, and that can change by a couple of percentage points as a result of that. But overall, on a more annualized basis, we feel like this low 50% range is sustainable.
Your next question comes from Matthew Lee with Canaccord.
Congrats on a good quarter. Can you maybe give us an understanding on what contribution The Mane Choice made on revenue and EBITDA even just directionally for Q2?
Yes. We don't segment the brands separately on it. What I'll tell you is The Mane Choice is a solid part of our business and had good growth even in Q2 year-over-year from the channels that we monitor with Nielsen. However, that's not reflective of the total business because Sally Beauty and Ulta and other specialty beauty retailers weren't in. In terms of the actual percent of what the business is, that's just -- we're not going down to that level of segmentation in our reporting.
Okay. Maybe directionally then, would you say that The Mane Choice is more specialty heavy than the other parts of your business that's more impacted?
Yes. Definitively. The Mane Choice has a significant share of its sales in Sally Beauty, which closed during most of Q2. And also, The Mane Choice had a very large expansion in Q1, and Ulta, which was somewhat disrupted due to the timing of COVID. But beyond that, the business also plays in the multicultural beauty supply channels, which were also affected by COVID. So in comparison to the balance of our business, Mane Choice definitely had a much higher impact of COVID due to store closures.
Right. And then now that specialty retailers are open, you're expecting this in Q3 to kind of subside?
Yes. We do look -- as -- no one can predict where COVID is going and if we'll have any more closures in Q3. However, as we look, more of our channels are -- or stores are opening up that sell The Mane Choice, which can only be a value-add to our business.
[Operator Instructions] Your next question comes from Steph Wissink with Jefferies.
I'm going to try to ask a question just a slightly different way. But if you were to extract The Mane Choice from the business, did the underlying business grow in the quarter? I think you mentioned, Tim, that Renpure and Marc Anthony were down. But with Cake, did the business underlying grow year-over-year?
Yes. Cake grew year-over-year and driven highly by its expansion in both retail outlets as well as its shelf expansion. And that's from the POS data, Nielsen POS, as well as shipments. From a Marc Anthony, like I said, there was a year-over-year we're anniversary-ing that TikTok. But when you look at the trend line of Marc Anthony through 2020, we're exiting the quarter in a very strong place, and we feel very positive about Marc Anthony brand going into the back half.
Okay. That's helpful. And then on e-com, I think The Mane Choice also had a decently sized direct-to-consumer business. So can you also extrapolate out your e-com comment up 2x? How much of that came from the integration of The Mane Choice's DTC business versus your underlying business expanding from a channel perspective?
Yes. So when we quoted the 2x, that's actually on a pro forma basis. So we took that in context to what The Mane Choice did in the prior year. And so that's even comparing to its prior DTC and e-commerce business year-over-year. So ex -- taking that out, we would have been even up further, which I think just further shows the impact that we've been able to drive both on the DTC business, which is up, and Amazon and our retailer.coms.
Great. And then my last one is on the Cake launch of skin care. I know one of the initiatives when you bought that brand was really to widen out the classifications of the brand. And so maybe talk a little bit about what you're learning early on in skin care, how you're launching that, where you're launching that and maybe the expansion plans, if that is successful going forward.
Yes. So we partnered with our 2 largest retailers in Canada, a major drug and a major mass retailer. And we partnered with them and launched the brand here in Q2. The initial results that we're seeing are positive. However, I would caveat that by -- it's a very different time period with COVID, and some of the supply of those products were even impacted due to COVID as different components were harder to source during that time period. And so from initial results, we're very pleased. From a product and what we're hearing from consumers, from feedback with consumers who've tried it, is extremely positive. And so I feel like that is probably the best testament to the future potential. As we look forward, we believe that there is potential for Cake to expand into facial skin care across the U.S., and we're having conversations on that and look to talk more about that in future quarters.
There are no further questions at this time. Please proceed.
All right. With that, I just want to thank everyone for calling in today. Please reach out with any further questions. Have a good day.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a great day.