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Good morning, ladies and gentlemen, and welcome to the MAV Beauty Brands Fourth Quarter 2020 Earnings Conference Call. [Operator Instructions] This call is being recorded on Wednesday, March 31, 2021. I'd now like to turn the conference over to Craig Armitage. Please go ahead.
Thank you, Colin, 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 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 Q4 earnings release, the financial statements and the MD&A on the IR section of the MAV Beauty Brands website. With that, I'll turn the call over to Tim Bunch. Tim?
Good morning, and welcome to our Fourth Quarter 2020 Conference Call. Joining me for the call is Judy Adam, our Chief Financial Officer. In addition to discussing the fiscal 2020 financial results, we'll provide some visibility into Q1 2021 results and discuss the CFO transition we also announced today. As we look back on 2020, it was an extraordinary year in many ways. We were certainly not alone in navigating new challenges caused by COVID-19. Our retailers faced many obstacles, from reduced foot traffic, to store closures, to changing consumer preferences. On the whole, MAV faced these challenges and fared quite well, and I would again commend our team and our partners for their efforts in these difficult times. As you see in the results today, our business remained solidly profitable and generated healthy free cash flow for the full year despite headwinds in retail. We believe this demonstrates the resilience and durability of our categories and the benefit of the diversification of our platform across brands, consumers, segments, channels and geographies. Unfortunately, several COVID-related factors combined to have a pronounced impact on our fourth quarter results, and consequently, our sales and EBITDA results fell short of our expectations. There were 2 primary factors affecting sales, which we outlined when we pre-released our Q4 results earlier this year. To remind you, as the quarter progressed, there was a marked drop off in industry-wide sales, which you see reflected in the Nielsen POS data. These declines resulted in decreased and delayed retailer replenishment. And in general, we saw retailers managing their inventory levels and investment to reflect lower sell-through. The second factor we discussed was temporary disruptions in our third-party warehousing and manufacturing operations. COVID has resulted in periods of reduced productivity at certain facilities, although we have avoided extended closures to this point. This resulted in certain orders and shipments being delayed in the fourth quarter. Offsetting these factors, our e-commerce results remained very strong. Sales from these channels doubled in the fourth quarter from the same period last year and represented high single-digit percentage of total sales. For the full year, sales were up 3x over the prior year. In recent months, we've reallocated investment both in personnel and marketing activity. In addition, revenue from international customers increased by 72.8% to $1.6 million compared to $0.9 million in Q4 2019. One of the other impacts we highlighted in our results today was lower gross margin, which when combined with lower sales in the period, resulted in a decreased EBITDA. This was primarily a result of additional costs associated with annual retailer shelf resets, which resulted in higher than normal markdowns and discontinuations that partly reflect shifting consumer preferences during the pandemic. We discussed some of these trends during 2020. For example, the category has seen bigger declines in short-term styling products. In terms of SKU distribution, the markdowns were largely offset by new SKU introductions, which we believe will perform better than the SKUs that were replaced. While this results in a modest decline in total points of distribution, it will likely have a lower impact on our weighted distribution, which will become clearer in the data in the next couple of months. Also, this will not necessarily be reflected in lower net sales as those items discontinued tend to be low performing, and we believe that we have replaced them with higher-potential products. Coming out of Q4, sales stabilized and improved in the first quarter, especially in January and February. However, we experienced some impact from the severe weather across major parts of the U.S. in March. And in terms of gross margins, Q4 was an exceptional occurrence. Under normal conditions, our business model should enable us to increase gross margins over time, as we have said previously. While we will continue to monitor and adjust to the market conditions, we are optimistic that 2021 will present a more favorable operating environment for our retail partners as vaccination rates increase and the economy reopens. Before I turn the call over to Judy, I want to quickly touch on the CFO transition. As we announced with earnings today, Judy will be leaving MAV Beauty Brands to pursue other opportunities. To ensure a smooth transition, Judy will be with us through the end of Q1 reporting in May. We also announced that Niv Majar, Vice President of Finance, will assume the position of Interim Chief Financial Officer until a replacement is found. Niv was on Judy's team for several years and has had leadership experience at public companies serving in various finance and controller roles. I look forward to working closely with Niv in the coming months. Judy has been a great business partner over the past 2 years, and I thank her for the commitment and leadership she brought to MAV. A lot has been accomplished during her time with the company, and our business is in a much better place today. I will now turn the call over to Judy to discuss the financials.
Thanks, Tim. Good morning, and thanks for joining us today. Our full filings are available online, so let me focus on the main highlights. Before I begin, I would just like to quickly say this has been a highly rewarding chapter in my career, and I will certainly miss working with Tim and the great team we have built at MAV. The business is on a strong foundation with a diversified portfolio and unique operating platform. The full year 2020 financial results tell a story of relatively solid performance and resilience in the face of some real challenges in retail. Revenue, net income and free cash flow all showed year-over-year growth and adjusted EBITDA was similar to the prior year, which mainly reflects the addition of The Mane Choice. We were not immune from the effects of COVID, however, which leads me to the Q4 results. Total revenue was down 23% over the prior year to $23.8 million, in line with our preliminary results range. For the full year, total revenue increased by 7.4% to $116.5 million, mainly as a result of The Mane Choice acquisition in Q4 2019. Q4 2020 profit decreased year-over-year to $9.5 million from $13.4 million in the same period last year. Q4 2020 gross profit margin was 40% compared to 43.4% in the prior year period. Excluding the impact of the purchase accounting adjustment for The Mane Choice, gross profit margin was 47.8% in Q4 2019. The decline in the current year was primarily driven by higher than normal markdowns and discontinuations that were largely replaced with new innovation, as Tim mentioned. In terms of points of distribution, the discontinuations were largely offset by new SKU introductions. Excluding share-based compensation charges, Q4 adjusted selling and admin expense was $6.1 million and 25.8% of sales compared with $6 million and 20.2% of sales in the same period last year. The year-over-year change in selling and admin as a percentage of sales really just reflects the lower revenue number as we continue to manage our expenses carefully. Adjusted EBITDA for Q4 was $3.4 million, down from $8.5 million in the prior year. Lower sales and particularly the lower gross margin were the primary factors for the decrease. For the full year, we reported adjusted EBITDA of $28.5 million, down modestly from 2019. Q4 adjusted net income was $0.8 million, down from $2.3 million last year. On a full year basis however, adjusted net income grew 11% to $12.6 million and adjusted diluted EPS increased to $0.30 per share from $0.28 per share in 2019. Adjusted free cash flow remained strong in the quarter with $4.8 million, up from $3 million last year, reflecting lower working capital investment in the quarter, which offset lower cash from operations. However, because the sales decline occurred in the latter part of the fourth quarter, we anticipate collections will be negatively impacted in the first part of Q1 2021. For the full year 2020, adjusted free cash flow grew 37% to $13.4 million. Cash on hand was $19.1 million at year-end, which includes $10 million drawn on our revolver. We have continued to maintain a balance on the revolver because at this time, we believe it's prudent to have additional liquidity on hand. Our net debt stood at $124.4 million, down $4.9 million from Q3. Including the results of The Mane Choice for the trailing 12 months, our net debt to adjusted EBITDA ratio was 4.4x due to the Q4 business impacts we discussed. I will now turn the call over to Tim for closing comments. Tim?
Thank you, Judy. 2020, and in particular the fourth quarter, presented some challenges to be sure. But we have persevered and continue to believe our brands and unique operating platform position us well for above-category growth over time. As vaccinations increase and restrictions ease in 2021, we are optimistic that our retailers will benefit from improved operating conditions, including increased foot traffic, longer operating hours and limited store closures. Regardless, we will continue to invest in e-commerce and expect continued strong growth from these channels in 2021. We have a diversified portfolio of 4 on-trend brands that we expect will deliver above-category growth over time. We look forward to reporting our progress with the release of our Q1 results in May. We'll now open up the call to any questions. Operator?
[Operator Instructions] Your first question comes from Joe Altobello from Raymond James.
I guess, first question, since we are here at March 31, curious if you can give us any update on Q1, at least directionally, in terms of sales and EBITDA, particularly given the commentary that you mentioned this morning on weather issues that you experienced in March.
Yes, definitely can do it. So as we looked at Q1, I'll tell you a little bit about the cadence. Jan and Feb, from a total category and our business, especially Jan, came in very similar to year-over-year. What we did see though is, as the severe weather storms hit in late February, we saw softened replenishment in March coming from the data that we have to date. And so I can really speak better to revenue versus EBITDA, so we'll do that at this point. What I'll also tell you is, as we look at our own internal POS, and this is actually POS of what the retailers say is being bought and purchased in their stores, and this is slightly different than Nielsen because it includes all of Canada and our top -- includes our top retailers at Canada and the U.S., we're seeing some modest growth of our portfolio in North America. And so we feel very optimistic that we're off to a good start on our business in 2021.
Got it. That's very helpful. And then, in fact, that was my second question, so I'll move to another one for a follow-up. In the press release this morning and obviously back in mid-Feb, you guys alluded to a strategic review process. And with that, a number of outcomes that could come from that. Can you elaborate on that a little bit? What you're looking to do with the company at this point or with certain of your businesses at this point?
I can tell you what we shared before, but not much new stuff. As we said prior, the process is ongoing. And our intent is not really to disclose developments with respect to the strategic review process, unless there's something more finalized to report or the special committee recommends that to the Board and management. In terms of what is being considered. The mandate is to identify, review and evaluate all potential strategic alternatives that may be available to the company. But that's really the extent of our disclosure at this point.
Your next question comes from Steph Wissink from Jefferies.
I want to follow-up on Jay's first question just with respect to the cadence of the first quarter, maybe think about it in the first half. If you are seeing some softened replenishment in March and your POS is actually pacing ahead, do you expect some degree of catch-up effect? And how should we think about that kind of flowing through the quarterly model here in the first half of 2021?
Yes. Without -- as I think of what will happen in Q2, very similar to what we saw in Q4. In Q4, there was a slowdown and retailers pulled back on some of their inventory levels. We saw in January that they started ordering more in a normalized way. I anticipate, given that the storm is over and -- is over and people recovered, and we're already starting to see a tick back on some of the category-wide sales across competitors and everyone on Nielsen, that orders in Q2 with follow more of a normal course pattern.
Okay. If you could just remind us, last year, what you saw in March, April in response to some of the pantry-loading and stock-up effect? Is there anything we should be aware of in the comparisons in the POS that would be unusual?
Yes. Definitely, the POS in March of last year, especially the last 2 to 3 weeks of March in 2020, there was a significant pantry-loading. And so we saw that and we saw that in our numbers, and even had some of that come into our shipments in last year March because it came in so fast that retail has reacted very quickly to it. What we also saw in April was, April was a very down month across the category and for our business as well as many people just were not going into retail locations and retailers were still struggling to figure out how they operate with a reduced capacity, sometimes reduced personnel, and reduced foot traffic. And so for us, definitely, we're up year-over-year in March with a stronger POS and shipments. But what we see in April is a very low benchmark in terms of where POS and shipments were, and we'll anniversary that in this Q2.
Okay, that's great. 2 really quick ones. The first is just on the fourth quarter gross profit hit from the changeover of some of the, I suppose, kind of terminated SKUs, replacing with some of the new innovation. Was the impact to the gross margin what you expected? Or was it something more than what you expected?
Yes, it was slightly more than what was expected, and part of this is from the reduced sell-through. So as consumers were not in stores or buying our category as much in Q4, we expected some of these SKUs that were going to be changed over would have sold through more. But as the category and our brands took a hit with COVID in that quarter, what we found is that compounded because we had a higher markdown allowance as well because more product was up on shelf and retailers wanted to do the planogram shifts.
Okay. That's great. And then last 1 is just on the rotation and innovation. Can you maybe talk a little bit more, contextualize for us which brands in the portfolio, where you're at through that rollout of new innovation, what we should be thinking about for 2021 in terms of new product programs?
Yes. What I'll do instead of maybe going by brands, because we're not going to segment it much by brands. I can talk more about segments of the whole category and business. Like -- well, and I'll give some examples. We had launched some dry shampoos and had done a test with CVS. Things like dry shampoos and hair stylers like hairsprays just did not perform in this year. And so retailers have really made some big decisions to minimize those. And then where they're going much harder is they're going more into their standard shampoos and conditioners. They're also going more into treatments, and curls continues to just perform, which is great because several of our brands address curls head on. And so the curls market has been another big, expanding strength of the whole category.
[Operator Instructions] Your next question comes from Saba Khan from RBC.
Okay, great. As you kind of think about sort of the trends during Q1, did you all see any real variation in terms of channel? I think you mentioned the weather had an impact in March, but did you see a bit of a shift to e-commerce? Or was it just a broad-based slowdown through the quarter?
So in terms of e-commerce, it's difficult to get broader category insights of where competitors, so I can speak in terms of what, our brand. We saw a continued strength in e-commerce coming out of 2020 and already in Q1 2021. And so our e-commerce engines continues to be going, which I think is somewhat related to people not being able to go into stores as frequently, or not desiring to, but it's also related to the reallocation of resources that we've done there with the right teams, the right products and the right marketing investment. In terms of channels that got impacted, there's been more separation of different channels, like a mass versus drug over the last 2 quarters. So what we've seen is drug has been hit with the hair category much more severely than what mass has. But even within mass, there's a large discrepancy. One mass retailer is up high single to low double digits and one mass retailer is down high single digits. And so what we're finding is retailers who are serving the consumer and really creating safe shopping environment that consumers want to be in and the right e-commerce or pickup and delivery options are performing well. And so that's where you see a separation between some of the retailers or channels.
Okay, great. And then as we think about the progression of results through 2021, can you maybe give us some directional commentary on how we should expect leverage to trend? Do you expect this more to be a Q2 deleverage, H2 deleveraging? And how do you expect that to flow for the rest of the year?
With that, I'll turn that one to Judy. Judy?
Yes, Saba. Yes, as we mentioned on previous calls, debt reduction remains a high priority for us. And as we look ahead, we expect modest CapEx as well as modest earn-out payments in 2021. So we do expect further deleveraging as we progress through 2021.
Okay. Great. And then just one last one. I guess, based on the trends you mentioned earlier around e-commerce, are you expecting to -- in terms of CapEx, is there any amount being directed toward e-commerce? Any additional capabilities or supply chain investments? Or is it just traditional CapEx as you go for the rest of this year?
Yes. Definitely, on CapEx, we do expect it to be slightly lower than the current year. But we'll continue to invest in our ERP system, primarily with respect to building out our e-com capabilities.
[Operator Instructions] It appears there are no further questions at this time. Please proceed.
All right. With that, I'd like to thank everyone for joining us on today's call. Please reach out if you have 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.