© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good day, and welcome to the MAV Beauty Brands Second Quarter 2021 Earnings Call. Today's conference is being recorded. [Operator Instructions]At this time, I would like to turn the conference over to Craig Armitage, Investor Relations. Please go ahead, sir.
Thank you, 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 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 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 Q2 earnings release, the statements and the MD&A on the IR section of the MAV Beauty Brands' website. Also, I'd highlight that in the financial discussion today, the comparisons are Q2 2021 versus Q2 2020, unless otherwise indicated.With that, I'll turn the call over to Chris Elshaw, Interim CEO and Chairman. Chris?
Thank you, Craig. Good morning, everybody. I'm very pleased to meet you all over the time. Let me introduce myself. My name is Chris Elshaw, and I have been Chairman of the Board of MAV Beauty Brands since our IPO. So with that, welcome to our second quarter 2021 conference call.The MAV Board strongly believes in this distinctive collection of entrepreneurial brands and the continued value of the MAV platform that we are developing in the beauty and personal care category. As such, we are committed to building upon MAV's past successes with more consistent business execution and ultimately, reported results. Part of that investment is in our investments in people. As you will have seen in the recent press release, Tim Bunch, our former President and CEO, has left the company. I'd like to thank Tim for his efforts while at MAV and wish him all the best for the future.As announced, Serge Jureidini will be joining us as President and CEO on August 17, and Laurel MacKay-Lee will be joining us as CFO on August 30. Until Serge joins us, I will serve as Interim CEO. I will give you more background on Serge and Laurel later in the call.Joining me on the call today is Niv Majar, our Interim Chief Financial Officer. Niv has done an admirable job filling in as Interim CFO and will continue as Vice President of Finance once Laurel joins.Those transitions notwithstanding, let me start with an overview of the quarter and some reasons for the results. Revenues were $29.1 million, down from $29.6 million, a decline of 1.8%. The year-over-year decrease mainly reflects net distribution decreases across a number of brands in the U.S. and Canada. And I'll talk more about that in a moment.For the international region, revenue increased by 34.7% to $2.1 million compared to $1.6 million, reflecting improved operating conditions as more markets fully reopen, benefiting both shipments and consumer sales. To give you a better sense of how our brands are performing in marketplace, let me give you some point-of-sale data. This data is the aggregation of point-of-sale data in our major retailers in the U.S. and Canada, representing approximately 75% of the business.Our overall retail sales are down low double digits for the last 13 weeks data available. However, as mentioned earlier, this reduction in net sales is largely a result of distribution decreases. Sales per week per point of distribution are up low single digits in the last 13 weeks and are accelerating in the last 4 weeks.So let me spend a moment getting into more details on the courses of these distribution changes and their impact on our reported results. Distribution changes year-over-year are a result of innovation, successes and focus. MAV's had some very successful innovation but has also had its fair share of failures. When there are large distribution increases, the new products that perform well often increase their distribution, whereas those that don't perform well are discontinued the following year.If too many of the new innovations do not perform, the result is a reduction in net sales, not only through low distribution but also from returns and markdowns. We will never entirely eliminate those innovations that do not succeed, no company does. But we have proven that we can produce very successful innovation, and we are already in the midst of a work stream to improve and optimize our innovation process and thus increase the proportion of successes each year.And now let's take a moment on gross profit margin, which was 40.1% compared to 51.3%, excluding the impact of the purchase accounting adjustment for The Mane Choice acquisition. The decline in gross profit and gross profit margin was a result of a number of items, an increase in the company's provision for inventory obsolescence to reflect changes in forecasted demand and expected selling price, the recognition of vendor commitments which are no longer required, increased sales of noncore products at lower gross margins and increased promotional spend. We are also seeing the beginning of cost pressures in supply chain inputs.Some of the obsolescence costs related to innovation that was not successful, as I mentioned earlier, and that we're in the process that fits in. These results are also a function of challenges in the supply chain. As with our innovation process, work is already underway to improve inventory management and customer service. We believe a focus on integrated business planning can, over time, significantly improve our performance here, reducing inventory carrying costs, obsolescence and customer compliance charges.Additionally, our control of trade spend can be further optimized. This reduction in gross profit and some increases in SG&A resulted in adjusted EBITDA of $3.8 million, down from $8.1 million. We believe these results are not a reflection of the potential of our business. And as our Board, we are not satisfied with this level of performance. I will talk more about actions to be taken in a moment.MAV has a portfolio of distinctive brands with each brand having a differentiated role in the resilient haircare category and good brand equity that can be built on over time. Marc Anthony has a strong and long heritage and has had some very successful new product developments over the years, including this year. In addition, we have continued opportunities for distribution and velocity growth, particularly in the U.S. MAV's channel.Renpure is returning to the value proposition that built the business, combining price, size and benefits attractive to our core consumer and seeing positive momentum. While distribution was significantly reduced this year from the high of last year, principally from the discontinuations amongst the advanced hair care range, which did not resonate with our consumers. Velocity on the remaining core items is significantly higher. And hence, we are being much more productive on the retailer shelf. Cake continues to attract new consumers and it continues upward trajectory with increasing sales, distribution and velocity with lots of runway ahead of us.Finally, The Mane Choice had a reduction in distribution across mass retailers. This reduction is a result of point SKUs from general market sets that were not a fit for our consumer as well as a cleanup of the multiple exclusives that reduced productivity and stretched marketing investments. The brand is now focused on a core assortment strategy that is intended to increase velocity of the top SKUs in order to realize organic growth.So from a brand point of view, I believe there is every reason to be optimistic. We have growth opportunities in velocity, distribution and portfolio expansion. So we believe that the business should be able to achieve above category growth rates in the medium and long term.As consumers return to some of their pre-pandemic behaviors, we will be increasing our investments in marketing and people. Over time, we expect this increased level will be offset by revenue growth and efficiencies generated by our platform. That said, we have already identified multiple significant improvement projects that we are starting and expect to provide valuable efficiencies.In addition, we have the advantages of the asset-light platform effect. Having multiple brands in the same channels managed by a shared platform should provide opportunities for profiting from operational effectiveness of the organization, enabling us to scale businesses and further build margins. In addition, when our capital structure allows, we will continue to make accretive acquisitions to further benefit from the platform.Last but not least, we have a team of dedicated and capable people working hard to build the growing profitable business. And particularly, we want to thank them for all they have done during the last difficult year. Given all these very positive attributes, we believe that our focus needs to be on improving execution and so obtaining more consistent results. Our processes and systems need a top to bottom review to improve them and consequently, the disciplined execution of our business plan. I've already outlined some areas of focus.Under the new leadership of Serge and Laurel, this work will be a priority. Our collective goal will be that over time, we will return to above category growth with category-leading EBITDA margins. We are very optimistic in the team's ability to restore a positive growth trajectory. However, we all acknowledge that this will take some time. Serge, Laurel and the whole team will be focusing on improving the business day by day.With that, perhaps now it's a good time to give you the backgrounds of Serge and Laurel. Serge Jureidini brings over 30 years of beauty and personal care business experience to his leadership of MAV Beauty Brands. Most recently, Serge was Chief Marketing Officer at Revlon Inc., a global cosmetics, skin care, fragrance and personal care company. Earlier in his distinguished career, Serge held senior positions in other beauty and personal care companies, including as the President and Chief Executive Officer of Arcade Beauty and President of Lancôme USA.Laurel MacKay-Lee is an experienced retail and finance executive with over 20 years of industry experience. Most recently, Laurel was Chief Operating Officer at Stream Commerce, a full-service e-commerce agency. Prior to this, Laurel was Vice President in various roles at The Shopping Channel, a division of Rogers Communications Inc. as well as having had a number of senior roles in prominent Canadian companies.I will now turn the call over to Niv to discuss the quarter's results in more detail.
Thanks, Chris. Good morning, and thanks for joining us today. Our full filings are available online, so let me focus on the main highlights of the period. Chris discussed revenue and gross profit margin in some detail, so I will start with gross profit.Gross profit decreased 19.6% to $11.7 million compared to $14.5 million for the reasons Chris outlined. Excluding share-based compensation charges, adjusted selling and admin expense was $7.8 million or 26.8% of sales, up from $7.1 million or 24.1% of sales. The year-over-year change mainly reflects higher overall compliance and professional fees.Adjusted EBITDA decreased to $3.8 million this quarter compared to $8.1 million last year, mainly due to lower gross profit margin, increased selling and admin expense and lower revenues. Net income was $4.1 million, up from $1.6 million last year, and adjusted net income decreased to $0.7 million or $0.02 per diluted share compared with $4 million or $0.10 per diluted share.Adjusted free cash flow for Q2 came in at $2.3 million versus $7.1 million, reflecting the reduction in cash flow from operations over the prior year. We used our free cash flow towards reducing debt by $2.5 million sequentially. Our net debt stood at $123.2 million at quarter end, which includes $7.5 million on our revolver and cash on hand was $17.8 million.I will now turn the call back to Chris for closing comments. Chris?
Thank you, Niv. In summary, my essential message today is that we have a distinctive collection of entrepreneurial brands in a resilient category. The benefits of an asset-light platform and many dedicated and capable employees. Under the leadership of Serge and Laurel, we intend to return to the growth and profitability profile we all believe our collection of brands and platform have the potential to deliver.Now operator, please open up the call for questions.
[Operator Instructions] We'll take our first question from Steph Wissink with Jefferies.
I have a few questions. The first is just on innovation. If you could just talk a little bit about some of the innovation successes and those that didn't work. Just trying to understand a little bit about order of magnitude in terms of the innovation that wasn't successful. And then how you're responding with emphasizing some of the innovation that is working.
Steph, thank you. So first of all, if you look back over a couple of years, what you see is that the most successful innovation from MAV is building on equities of existing franchises. So an example would be in Marc Anthony, the Curls range, for example, an example in Renpure would be on the larger value sizes.What doesn't work for us is where we are trying to create almost a new category and get behavioral changes, which are perhaps not so easy to get. So the POS that we launched some years ago were very innovative. Everybody loved them. They had a great response in research. They had a great response from customers. But they just didn't get traction in the marketplace. So we're currently in the midst of a pretty in-depth review of innovation by item, both our own and the competition and drawing lessons from that, those lessons will become principles by which we decide which innovation gets through the stage gate process.
All right. That's very helpful. And then I think you mentioned multiple significant improvement projects. If you can just help us think through order of prioritization as Serge and Laurel come in, where are you going to be focusing time in the next 6 to 12 months? And then what kind of sits out 12-plus months beyond?
Well, I would approach it by going down the P&L. So I would start with trade spend, which always needs optimizing. We always need to make sure that we're getting return on investments and only spending on productive activities. So that's a big area of focus because, obviously, you not only want to make sure that it's profitable when you do it, but you want to build the database of learnings so that you can replicate what works and avoid what doesn't. So that's the first bucket.The second bucket is all to do with cost of goods and inventory and that's to do with integrated business planning and making sure that the marketing plan aligns with the sales plan aligns with the purchase plan and that we are focusing on cost reduction in our procurement. We've recently just hired a head of procurement. And that when we -- again, back to the stage gate process, the innovation part, that we are launching new products, which are margin enhancing, not margin dilutive.So the combination of integrated business planning and the stage gate process are going to deal with a lot of opportunities that we have in the cost of goods area. And an ex-area I would consult would be in marketing. Of course, there were some areas of marketing where it's harder to measure return on investments and others where it's easier. But even where it's harder, you can establish properties. And again, you can build up your background of history and learning so that you would repeat the good things and avoid the bad things.But in all this, I would emphasize, you are going to have things that don't work. If you don't have things don't work, then you're not trying enough things. So there is going to be a proportion, someone famously said many years ago, half of my advertising spending is wasted, I just don't know which half. Well, knowledge has come a long way since then, and we know a lot more. So that whole assessment of return on investment in marketing is crucial.And then in the SG&A area, I mean, this is where we get things like compliance charges for late delivery and all that kind of stuff. Well, that's integrated in business planning. What that does is it provides you with the right inventory at the right time. And so your inventory carrying costs go down and your customer service rates go up. So I mean those are the broad buckets. Beneath each of those buckets are multiple streams of work, which are going to be underway improving the performance of our business over time.
All right. Last one for us. So just on your comments on being able to grow better than the industry. I'm curious what framework you're thinking about in terms of industry growth? Do you have a number that you're benchmarking to? Or is it more about the dynamic nature of the industry and just making sure that you're performing with some magnitude of outperformance to that dynamic number?
Yes. I mean, I really look at category growth rates. And category growth rates and they are amalgam of everything from the huge brands who due to their sheer size, if they grow 1%, then they're doing great kind of thing. We have the benefit of -- we are not fully distributed. Our portfolio is not fully developed, and we have opportunities to increase velocity through our marketing activity. So those are 3 levers that are available to us, which if you're a completely well-developed brand, you can't do all those things. But we've got although -- that runway ahead of us for years to time. Plus when we find the right accretive acquisitions, we start the whole process again.
And we'll take our next question from Matthew Lee with Canaccord Genuity.
So maybe just a follow-up question. When you think about the timing of reaching that growth rate, I mean, I know you guys kind of mentioned longer term, but is that a 2022 story or a 2023 story? Or how do you think about the timing of reaching industry-leading growth?
Well, you probably won't be surprised to hear that I'm not going to give you a date on that. It's one of those things whereby, first of all, we're at the start of all these projects. Secondly, we have a new leader joining. It takes some time to get this stuff going. It will be full hard if need to predict when that will be. What I can assure you is Serge and the team will be every single day focused on this, working towards it. And over time, we will make the progress we need to make.
Right. Fair enough. And then maybe on the EBITDA front, I mean, you kind of called out a couple onetime sounding items in terms of cost. Can you kind of break down the impact of those onetime costs on your results and kind of talk about other costs that might continue going further for the Q3 and Q4?
Sorry, which things are you thinking of in particular?
We're just talking about cost pressures from supply. You kind of mentioned an increase in SG&A. So I'm just wondering, are those onetime in nature? Or is there -- the cost profile we're looking at, the EBITDA profile we look at for the quarter is kind of what we should expect for Q3 and Q4?
Right. So yes, okay. So costs that come from the obsolescence, et cetera, as we work through our inventory over time, they will very much reduce. You'll never get rid of them entirely because the very nature of the category, whereby you have a lot of innovation as some of it doesn't always work. You're always going to have some level of that. But over time, that will reduce.In SG&A, largely to do with compliance costs. And as I mentioned earlier, as you set your integrated business planning process and you raise your customer service, and you optimize your inventory carrying then those compliance costs reduce. Again, given the nature of the industry, I doubt they will ever disappear entirely.And then I think the input costs that we're talking about, that's a bit of a crystal ball. As I said, we're starting to see some increased supply chain input costs which will start to appear in the second half. I think that's clearly normal, I've heard it in multiple earnings calls, it's not a MAV issue particularly. And that impact is hard to judge right now because you don't know what's going to happen to commodity prices and freight costs. But meanwhile, we're working on other efficiency projects inside so that we can at least mitigate some of the impact.
[Operator Instructions] Our next question comes from Sabahat Khan with RBC Capital Markets.
I guess just on the comments around the retail uptake of some of these new innovations. I guess, are you able to comment on how long the impact of some of these new launches that didn't work out might kind of remain in the market? Or was this product rationalization that you mentioned implemented relatively quickly and you're sort of only really offering your legacy products in the market at this point?
A lot of it has occurred because what happened was they came out at the end of last year, the start of this, which is why you see the net sales reduction. The portfolio is going to be constantly optimized forever. First of all, you launch new products and some of them fail. What you want to do is to make sure more succeed than fail, number one.Number two, consumer preference has changed over time. So even if you had a perfectly great product, I think a lot about, say, Argan Oil, which was huge years ago, but over time, consumer preference moved away from it. So over time, those things change. So I would say we've had a lot reflected in the results, but there will always be some elements of this going on. It's just the nature of the category in which we are in.
And then I guess in terms of kind of the new management coming on, should we expect some sort of -- I know it's 3-, 6-month type review. And do you expect that to be material where you may even kind of review some of your brand positioning? Or could there be a more significant rationalization across your portfolio? Just trying to think of the kind of changes we could expect in terms of strategy shift as new management may take on?
Yes. New management is going to arrive, and they're going to spend several months understanding everything about the business. You need to give them that time because you don't want to make major decisions and they need to fully understand the drivers of everything that's going on. And then we would expect to -- we view the 3-year strategy with them. And of course, if that results in any changes from us, the strategy we will, of course, communicate that. But I would say it's going to take -- we're now nearly in September, so call it 3 to 4 months for them to complete that work, and I'm sure we'll be talking to you once that's complete.
Okay. And then just last one for me. I think you mentioned some of the impact on the revenue line was because of some, I guess, delayed things or just some of that impact across retailers. Is that something that's expected to -- should we think that impacts revenue for the remaining kind of 2 quarters of the year? Or how should we think about the impact of that to the top line?
Well, clearly, if you have less points of distribution than you have the prior year that exists through the whole year, you have less opportunities to sell. What offsets that is that you have there in its place is more productive. So that's a balance. So I mentioned that our net sales were down, our point of sale is down in total because we have less points of distribution. But the velocity of what's there is improved because it's more productive SKUs. Now as we go through the year, we'll be revising our forecast, and we'll see -- are we -- are those 2 lines going to intersect. At this stage would deepen a lot of analysis work in order to figure that out.
And we'll take a follow-up question from Steph Wissink with Jefferies.
Just one quick follow-up. Actually, 2 parts to it, is related to the supply chain issues you mentioned and some cost pressures. I'm curious if you can talk a little bit about what you're seeing in the supply chain in terms of access to goods, but then also any plans to take pricing the pass through some of those rising input costs? So consumer pricing, excuse me, not customer pricing, but consumer end market pricing?
Sure. Well, let me start with the last one, you marked me actually. So yes, we are in the midst of conducting pricing studies right now to see where we are able to take pricing. But when you take -- you obviously don't want to disadvantage your overall gross margin when you do that. So the way we look at it is we test with consumers, and we see where is the optimal point for gross margin realization from a pricing point of view, and that's what we will then implement. So that work is in progress as of now, we don't know how much and where, but we are certainly focused on that.In terms of the cost pressures in the supply chain, we're seeing the cost of componentry rise, which is based on commodity costs, I think that's pretty normal across the industry. Freight, we read about freight costs from China every day, the difficulty of getting shipping and therefore, the cost pressures our producers. And access the goods, yes, that has improved for us, although I know across the market in general, there are still problems with access to goods. We did use in the past a lot of air freight, which, of course, is very expensive. That has fallen a lot this year. We're no longer relying on air freight. So these are -- it's definitely going to happen.Let's say, it's hard to say how much an impact it's going to have over time because you don't know if those costs are going to come down. I mean, if freight was at historical levels, you'd be forecasting to come down, but that's a difficult one to know. Now as I said earlier, those things are a bit out of our hands. A, we have hired procurement professionals to help us try and mitigate some of those things through negotiation. And b, we're working on just internal efficiency programs. So we try and offset as much of these things as we can.
Okay. Great. One final one is on Cake. I think that was the one brand that you mentioned was continuing to see higher sales, higher distribution and higher velocities. I wanted to just double-click on that brand, if we could, and talk a little bit about some of the trends you're seeing? And maybe if you could help us think about the overall size and opportunity of that brand?
Yes. So I think if you look at the life cycle of Cake, I think it's still early in its life cycle. I mean, consumers are still discovering us and we have relatively low awareness at this stage. As -- you're right, the velocity and the sales are doing well. We're very pleased with it. We've tried various different parts of innovation. We've found innovation that sticks to the core of Cake is the most successful. So really the job to be done on Cake is to expand the consumer universe. And in line with that, is to expand the distribution. Obviously, you don't want to get the 2 out of line. So I think there's years of runway for Cake.
And we have no further questions at this time. I'd like to turn the conference back to Chris Elshaw for any additional or closing remarks.
Thank you, everyone, very much for joining us today, and have a good day. Thank you and goodbye.
That does conclude today's conference. We thank you for your participation. You may now disconnect.