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Good day, ladies and gentlemen, and welcome to the MAV Beauty Brands Second Quarter 2022 Earnings Conference Call. Today's conference is being recorded.
At this time, I would like to turn the conference over to Mr. Craig Armitage. Please go ahead, sir.
Thank you, and good morning, everyone. Just a quick note before we get started that our remarks today may provide certain information regarding our expectations, future plans and intentions that may constitute forward-looking statements. I would refer you to the most recently filed AIF and to the MD&A, which are available on our website and on SEDAR. These include a summary of the significant assumptions underlying these forward-looking statements and certain risks that could affect the company's performance and the ability to deliver on these forward-looking statements. You'll find the Q2 earnings release, the financial statements and the MD&A on the IR section of the website. And I'd also highlight that the discussion today, the financial discussion, comparisons are generally going to be Q2 2022 versus Q2 2021 unless otherwise stated.
With that, I'll turn it over to Serge. Please go ahead, Serge.
Good morning, and welcome to MAV's second quarter conference call. I hope you're all enjoying this summer. I'm joined by Laurel Mackay-Lee, our Chief Financial Officer. This morning, I will comment on the overall performance of the period and share some insights on the work we're doing with our brands and with the platform more broadly to improve sales results and operational execution. As you recall, Q1 was a challenging quarter with a significant disruption to our third-party logistics network. With tremendous effort from our team and partners, we're able to return to pre-disruption service levels in April at the start of Q2. While we move past this to a challenge, we continue to face several headwinds in the second quarter, leading to a year-on-year decline in net sales of 10% to $25.4 million. In particular, we are continuing to see the impact of net distribution losses and general consumption softness relative to the same period in 2021. The weaker performance of 2 of our brands, Renpure and The Mane Choice, offset the positive performance of our 2 other brands, Marc Anthony and Cake. For context, the U.S. haircare category grew by 2.8% in dollars for the 2022 due to the period ending July 16. This is similar to the long-term average in the category that has proved to historically be quite resilient. From a volume perspective, as measured in units, we have seen a recent decline in the category, offset by price increases across the industry to combat cost inflationary pressures. As in Q1, mass portfolio continued to lag the broader market in Q2 with consumption down high single digits as a result of the underperformance of Renpure and The Mane Choice and despite strong results from e-commerce, where we continue to experience robust performance led by double-digit increases with Amazon. Put simply, we continue to have meaningful work to do to stabilize the business and close the gap with a total market performance of stated aims for 2022. To recap, our priorities are as follows: we focus on product innovation across brands and collections, we believe we have some compelling innovations for 2023, we've had positive early feedback on several of these innovations and we will be getting additional retailer input in the coming months through line reviews. Building on the success to date of e-commerce, we plan to accelerate digitization across the portfolio. Simultaneously, we're strengthening our efforts to build brand awareness and desirability by prudently and gradually increasing our marketing investments. We also need to continue to heighten the platform operating performance with consistent execution. Let me now touch on some of the key things we're doing to improve the performance of each of our brands and the overall backload platform. Marc Anthony, the top performer in the portfolio, had another good quarter, meaningfully exceeding the overall category mainly as a result of distribution expansion in U.S. mass. The brand also continues to show strong double-digit growth in e-commerce, and we're investing in further efforts to accelerate digitization. For example, we're developing [ suiting ] offering for the channel and making a number of e-commerce-compliant packaging enhancements to reduce bagging fees.
While the brand has a solid distribution footprint in the U.S., brand awareness has ample room to grow, and that's an important priority. We're inspired by the levels reached in Canada, where we have built a well-established name and customer base over time. Toward this end, we're strategically investing in [ intense ] campaigns, digital marketing and traditional PR. Incremental innovation is another growth driver, and the team is very excited about the 2023 innovation for Marc Anthony, which build on the brand's heritage and affordable and accessible professional quality salon-inspired products. We're deep in the preparation and launch-planning and look forward to sharing more later this year. There's no question that it has been a challenging period for Renpure as a result of distribution losses in 2021 and 2022, which have weighted on our overall year-to-date net sales. We continue to strongly believe in the fundamentals of the brand and all signs point to efficacious key and sustainable beauty as a long-term growth segment. The stabilized performance and return Renpure to growth mode, we have been working on essentially renovating the brand. Extensive work has got into packaging design enhancement, formula improvements as well as brand positioning for a relaunch in the first half of '23. There are some encouraging initial signs, including a positive reception from our trading partners and from testing that was recently done with consumers, which also reinforced to us their strong brand equity and potential that exists with Renpure. By the time of our Q3 results, we'll have a better picture of whether this work will grow shelf space in 2023. The Mane Choice is also facing headwinds in 2022 from our distribution, and a similar effort is underway to leverage the distinct and premium positioning of the brand that's effective formula for healthy hair solutions for the multicultural consumer. We're also focusing on our proven product successes and building core collections around these pillars. The Mane Choice competes in a highly attractive growing segment of the market, serving the vast needs of the multicultural consumer, and we believe that our beauty, health, science and community focus will help us drive momentum. Our fourth brand is Cake. Coming off a multiyear growth period, net sales were double digit in the second quarter. Consumption, as in Q1, was impacted by some supply disruption, notably from delays in sourcing certain ingredients and components for top-performing SKUs. E-commerce continues to show sustained growth, and we believe the brand demonstrates foundational elements for long-term growth through consumer satisfaction and strong loyalty amongst users as evidenced by reviews and repeat rates that surpassed many key competitors. They love the packaging, the formulas and the product performance.
The stable distribution partners were focused on maximizing the brand strength to unlock its potential in 2023 and beyond. This includes launching on-time innovation, increasing brand awareness and driving trial.
In addition to these important brand initiatives, we continue to focus inwards on better and more consistent execution from an operations perspective. There are multiple key work streams underway. Let me touch on a few of them. The first is distribution improvements. Although the cyberattack on our primary third-party logistics partner was not within our control, we're using this event to reassess our logistics go-to-market network. In addition to ensuring supply continuity, we have identified efficiencies and cost-saving opportunities that will begin to materialize in 2022 and more fully in 2023. The second area is mitigating the impact of inflation pressure on our manufacturing and supply chain costs. For context, our year-on-year cost inflation is now up to double digits. In key mitigation and price increases, we have taken select price increases on a number of our products, which are already partly offsetting cost pressure. Addressing inflation is an undergoing process, and along with price increases, we have identified and prioritized a list of initiatives to mitigate the impact and achieve meaningful savings on cost of goods. The third priority is to reduce noncompliance charges. This has been in focus for some time, and unfortunately, the 3PL disruption led to higher noncompliance charges in Q2, which were a factor in lower sales year-over-year. There are multiple inputs to reducing noncompliance charges, and we're addressing the issue from various angles, from on-time and full focus or enhancement to our packaging to minimize additional e-commerce fees or more recently with the usage of a software tool that automates the process of identifying and disputing current and past reductions. Most importantly, to ensure execution of stress across all these areas, we continue to focus on building and strengthening the team. We believe we're making steady progress in what remains a competitive labor market. I will now ask Laurel to cover the financial highlights in greater detail.
Thank you, Serge. Good morning, and thank you for joining us today.
As Serge highlighted, net sales decreased from $28.3 million last year to $25.4 million this quarter. In North America, revenue decreased to $22.9 million, reflecting the net distribution losses, along with inventory adjustments, principally on The Mane Choice brand. For the international regions, revenue increased by 15.9% to $2.5 million in Q2 2022, reflecting growth in certain emerging regions.
Q2 2022 gross profit was similar to the prior year at $10.8 million compared to $10.9 million in Q2 2021. Gross profit margin was 42.4% this quarter, an increase from 38.5% in Q2 2021, which represented a low mark in the prior fiscal year. The gross margin improvement over the prior year is mainly attributable to a more profitable sales mix and lower inventory provisions. We've been working to combat the inflationary headwinds on product costs, which are prevalent across our industry. We implemented select price increases and continue collaborating with our third-party manufacturers, logistics partners and other vendors on operational procurement initiatives. We expect to see some benefits as we move through 2022 and a more pronounced effect in 2023. As noted at year-end and disclosed in the earnings release, certain comparative figures have been revised to reclassify noncompliance charges from selling and administrative expenses to revenue to conform with IFRS 15 and the financial presentation adopted for the current period. While total EBITDA dollars remain the same, the reclassification slightly reduces net sales and dilutes the gross margin percentage. Lastly, I should note, we filed our insurance claim in Q2 related to the third-party logistics partner disruption, which we expect will partially cover the negative impact of this incident. Excluding share-based compensation, selling and administrative expense for Q2 2022 was $7.3 million compared with $7.0 million in the prior year. As a percentage of revenue, selling and admin increased to 28.7% in the current quarter from 24.7% in Q2 2021, driven by the lower sales base in 2022. Q2 adjusted EBITDA decreased to $3.5 million from $3.8 million in the same period last year, reflecting lower revenue. In Q2 2022, we reported net income of $3.3 million versus net income of $4.1 million in Q2 2021. The year-on-year decrease principally reflects the variance in integration, restructuring and other expenses which reported a remeasurement gain in Q2 2021 on the deferred consideration for The Mane Choice acquisition. Adjusted net income decreased to $0.5 million compared with $0.7 million in Q2 2021. Diluted adjusted earnings per share was $0.01 per share this quarter compared with $0.02 per share in the same period last year.
Q2 cash flow from operations came in at $1.3 million versus $2.5 million in Q2 2021. We also reported lower adjusted free cash flow of $1.3 million, down from $2.3 million in last year's Q2. Positive free cash flow enabled us to further reduce our debt during the quarter. Our liquidity at quarter end supported early payment of the required principal payment for Q3. At quarter end, net debt was $117.5 million, a decrease from $118.7 million at the end of quarter 1 and a $4 million increase from $121.5 million at year-end. At the end of June, our cash position was $11.2 million.
In closing, while we continue to face some headwinds, we remain confident the steps we are taking will help stabilize the business as we move through the coming quarters and set us up for improved results in 2023 and beyond as we look to regain organic momentum and properly leverage and realize the financial benefit of an efficient operating platform. We appreciate your support and patience as we execute on this plan. Kyle, would you please open the call up to questions?
[Operator Instructions] We take our first question from Steph Wissink with Jefferies.
We have 2 questions. The first, just related to the brand performance, if you could help us think through where you are along your pathway of recovery and what you anticipate for brand performance in the back half if there's any shifting from the first half. And then secondly, with respect to the gross profit margin, it was nice to see the profit margin increase year-over-year. And I think you mentioned inventory provisions were lower. So just talk a little bit about inventory levels on your balance sheet at the trade. Do you feel like inventory is now clean? And as you move into the back half of the year, the burden from inventory provision should come down.
Thank you for the questions. We'll address the sales gross margin and inventory in orders. So I'll take the first one. Our results and sales are very much linked to our distribution footprint. And very often, the major changes and shifts happened early in the year. So we anticipate the current trend to continue and continue to see similar performance in Q3 and Q4 than we've seen earlier this year in terms of distribution. At the same time, e-commerce continues to perform well, and we think that it will continue to accelerate.
And on the inventory front, I would say, for the first half, certainly the 3PL disruption caused a little bit of a hiccup just in terms of having inventory in different places. But by the end of Q2, I would say inventory levels are at a very healthy state. We continue to monitor kind of the overall portfolio, making sure that we've got the high-moving, high-performing SKUs in stock on a consistent basis. So that's something that we have increased visibility to, and we continue to monitor. So your question, do we feel like it's all behind us? Naturally, we're always monitoring this, but I would say we feel like we're in a good spot at this point.
That's helpful. My follow-up question is on shelf space. Any changes, either positive or negative, to space plans even on a preliminary basis for 2023? Just based on the performance of the business, I'm wondering if you're losing or gaining shelf space currently and then projected.
Yes. There's minimal shift in shelf space midyear. So a few retailers took midyear resets. Our -- the impact we've seen in midyear is not significant.
And Serge, any changes in expectation for '23 based on your innovation pipeline?
It's too soon. Unfortunately, we haven't received any indications yet, formal ones. We're cautiously optimistic that our innovation was well received by the trades, notably on Marc Anthony or on Renpure. However, we do not have hard data to substantiate our appreciation of these positive meetings. Hopefully, by the time we publish Q3 results, we'll be able to tell you where we stand with notably the largest retailers.
Okay. Helpful. And one more I'm going to throw out, just in terms of the debt pay down. I just wanted to understand if there's any other principal payments or maturities that you're responsible for over the course of the next 12 to 18 months.
Yes. As part of the credit facility amendment that we did last year, we have a 5% amortization of the debt principal that is required. So at this point, we're on track with that, and we're ahead because we made the Q3 repayment early as a result of a good cash position at the end of Q2. So for the next 12 to 18 months, we would be required to make that 5% repayment.
[Operator Instructions] It appears there are no further questions at this time. I'd like to turn the call back to Serge for any additional closing comments.
Thank you again for joining us on today's call. We appreciate your continued support. I look forward to reporting on our progress with Q3 results. Have a good day. Thank you.
And this concludes today's call. Thank you for your participation. You may now disconnect.