(PLBY)
Q1 2023 Earnings-Transcript
PLBY Group, Inc. misses on earnings expectations. Reported EPS is $-0.58 EPS, expectations were $-0.17.
Operator: Greetings, and welcome to PLBY Group’s First Quarter 2023 Earnings Conference Call and Webcast. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Ashley DeSimone with ICR. Thank you. You may begin.
Ashley DeSimone: Good afternoon, everyone, and welcome to PLBY Group’s First Quarter 2023 Earnings Conference Call. I’m Ashley DeSimone from ICR. Hosting today’s call are Ben Kohn, Chief Executive Officer; and Marc Crossman, Chief Financial Officer and Chief Operating Officer. The information discussed today is qualified in its entirety by the Form 8-K that has been filed today by PLBY Group, Inc., which may be accessed on the SEC’s website and PLBY Group’s website. Today’s call is also being webcast and a replay will be posted to PLBY Group’s Investor Relations website. Please note that statements made during this call, including financial projections or other statements that are not historical in nature, may constitute forward-looking statements.
Such statements are made on the basis of PLBY Group’s views and assumptions regarding future events and business performance at the time they are made and we do not undertake any obligation to update these statements. Forward-looking statements are subject to risks which could cause PLBY Group’s actual results to differ from its historical results and forecast, including those risks set forth in PLBY Group’s filings with the SEC, and you should refer to and carefully consider those for more information. This cautionary statement applies to all forward-looking statements made during this call. Do not place undue reliance on any forward-looking statements. During this call PLBY Group will be referring to non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with Generally Accepted Accounting Principles.
A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is available in the earnings release, PLBY Group filed with its Form 8-K today. I will now open the call to Ben Kohn. Ben, please go ahead.
Ben Kohn: Thank you, Ashley, and good afternoon, everyone. Before we get started, I would like to introduce Marc Crossman, our new Chief Operating Officer and Chief Financial Officer, who joined us just about a month ago. Marc brings a wealth of operating experience both in consumer products, and the technology sectors to the team. As you will hear in a few minutes, Marc is in the beginning stages of helping me rebuild our cost infrastructure, and has already identified millions of dollars of cost reductions, not previously identified that we will be going after in the coming months. With Marc now on the team, I have reorganized our management team. Marc, will be taking over consumer products in addition to his CFO responsibilities, and I will be focusing on our creator platform and licensing.
I’m pleased to report that in Q1 GMV on our creator platform increased 2.4 times over Q4. And since our last earnings call on March 16, our weekly GMV as of last week has increased a further 70%. We have also made significant progress transitioning the business to a capital light model. This afternoon, I’m going to share updates in three key areas. First, I’m going to dive into more detail on the growth of our creator platform, and why we’re so excited about the momentum we’re seeing. Second, I’ll share an update on the work we’ve done to improve the long-term economic of our JV in China, as well as other updates on our licensing business. And third, I’ll expand on the progress we’ve made streamlining our operating model and reducing both our operating expenses and our gross debt.
Marc, will then walk you through some updates on Lovers and Honey Birdette, and provide you with more detailed financial information. First, on our creator platform. As shared at the start, Q1 was up 2. 4 times and we have grown an additional 70% since our last earnings call. Our weekly growth rate year-to-date has remained above 10%, so we’re really excited about the growth in revenue that our creators continue to generate on the platform. As of last week, we now have approximately 2,200 monthly earning creators and approximately 1.9 registered users, which means that our creator and fan bases are not only growing, but also individually spending and earning more than they were last quarter. And lastly, as we’re scaling, we’re seeing the economies of scale with our cost structure and we’re continuing to re-negotiate more favorable terms with our key vendors.
For example, we just added a new payment processing partner that lowers our fees by approximately 50%. Since we last spoke, our product engineering and design teams have remained focused on continuously improving the creator and fan experiences. On the creator monetization side, we have significantly improved our onboarding flows to support creator in earning their first dollars more quickly. We’ve continued to iterate on our profile design to drive more creator fan conversations and engagement, which leads to greater monetization and we’ve rolled out the ability to offer bundled subscription offers, promotional discounts and more. We’ve also been focused on ensuring a differentiated product experience from our competitors in the space. Playboy has a history of unprecedented ability to meet new stars, and our creator platform is no different.
Creator discovery and promotion is an area we believe we can win it. Since we last spoke, we’ve introduced the centerfold of the day section, a new UI that enables searching by categories of creators, as well as interest tags that creators can label themselves with for further exposure. We hear from creators every day how proud they are to be on Playboy, and we’re dedicated to helping them be discovered and make more money than they can make on other competitive platforms. Today, creators earned income on our platform in four key ways. Roughly 60% of greater revenue is generated via messaging, whereby fans engage with creators in ways they cannot on other platforms, and purchase content the creators send them in direct messages. Roughly 15% is generated via monthly subscriptions, and another 15% is generated via content unlocked directly on the wall of a creator’s profile.
And lastly, roughly 10% is generated via tips. At this stage, we split GMV 80% to the creator and 20% to Playboy. In addition to the continuous work we’re doing to improve creator monetization, we also intend to soon roll-out value-added features and offerings that allow us to increase our percentage of those economics. You can imagine advanced features or special access such as the ability for fans to show up at the top of the creator’s inbox, or exclusive access to extended Playboy photo shoots, archival playmate galleries, or one of our iconic Playboy parties all over the world as perks that would become part of a Playboy membership proposition that sits on top of individual creator monetization. We are still in the early stages of developing this membership value proposition, and its potential peers, but our goal is to ensure that as we scale our platform, we can meaningfully expand its profitability with services that have more favorable economics to Playboy.
I’m very encouraged by the momentum to-date with our creator platform and look forward to keeping you up to speed on our progress. Next, I am pleased to report that since we last spoke in March, we successfully negotiated amendments over a number of our licensing agreements as part of our recently formed China joint venture. The goal of these renegotiations was to both support our existing licensees, whose businesses were significantly impacted by the COVID shutdowns from last year, while also establishing new more favorable foundation agreement terms to drive a more diversified and sustainable business within our China joint venture going forward. While the revised agreements call for lower minimum guarantees, in exchange we have removed exclusivity clauses, added stronger audit controls and visibility to sales data, take it back product categories, significantly increased our royalty or percentage of sales and are working on transferring the ownership of the partner’s e-commerce stores to the Playboy China joint venture.
One thing to note is that during the first quarter, we did not book any revenue related to one of these licensees, as we are in the process of negotiating a revised agreement. We have now signed an agreement with our partner, and are now working on collecting those royalties. We have also made significant progress with Douyin, the TikTok of China to establish a flagship e-commerce store that our Playboy China joint venture is expected to own. Douyin is now one of the largest e-commerce engines in China, and Playboy had previously been blocked on Douyin based on our legacy licensing model. Our JV with the Fung Group and a revised contract with our licensee solved this issue. Moving forward, to solve the Douyin issue, we anticipate that our licensing partners will sell through Playboy China’s joint venture, Douyin store, which will help us more effectively control the Playboy brand positioning, pricing, product design and marketing and collect cash while our licensing partners operate manufacturing, fulfillment and product inventory.
All of this is part of our larger strategy to diversify our revenue across partners and businesses in China, while having increased visibility into direct sales, and more directly controlling the consumer facing components of the brand. Last quarter, we set forth our intention to transform our U.S. Playboy D2C business to a licensing model. We have now signed a binding term sheet with a non-affiliated partner who brings a wealth of experience, improving track record of success, in developing and executing effective e-commerce strategies and brand development. This partner was instrumental in launching several of Playboy’s hugely popular collaborations with streetwear brands including Fragment, Anti Social Social Club and Revenge. Their passion for a brand and understanding of today’s customers are unparalleled.
This transition is underway with the deal expected to close by June 1, and we are excited for the next chapter of the Playboy shop and its enormous potential for innovation, including the integration with our creator platform and community experiences that only Playboy can provide. Moving forward, our partner will take over all costs and operations of our shop, and we will receive 15% of net revenue. We remain optimistic about the continued demand for the Playboy brand, and unlocking its power across new categories and territories around the world. Our new sexual wellness licensees surpassed $1 million in total sales, since launching at our Lover stores and are now rolling out to third party retailers. We signed an amendment in Q1 to accelerate growth in LATAM, UK and Europe.
In Q1, our team closed a total of 15 new licensing agreements of which 13 were international across fashion collaborations as well as new men’s grooming and home decor categories. Lastly, I’m happy to report on the progress we’ve made transition business to a capital light model, reducing our operating expenses and reducing our gross debt. With the momentum we’re experiencing with our creator platform, and the high margin revenue we see from licensing, we have decided to fully exit serving as the operator of our consumer product businesses. This means that in addition to selling Yandy, which we previously reported, we will now be taking three additional steps. First, as we just mentioned, we recently signed a binding term sheet to license our Playboy D2C business.
Second, we’ve engaged Sage Group to explore all strategic alternatives for Lovers. And third, we’ve engaged Moelis & Company to explore all strategic alternatives for Honey Birdette. Because of this decision to fully exit the operations of D2C and retail consumer products, we’ve recently eliminated $3 million of personnel costs. As we continue to execute the remaining steps, we anticipate meaningful additional cost savings. We expect this decision to be net neutral to profitable to Playboy given that the additional cost savings are expected to more than offset any loss and contribution margin from these businesses. We also expect that our free cash flow should be higher as we won’t have inventory or the CapEx related to store maintenance and openings.
Lastly, I want to share some positive news on a debt restructure and refinancing we just completed. Specifically, we were able to negotiate the assignment of approximately $91 million of our senior debt from certain of our lenders to a primary lender at $87.25 on the dollar, resulting in a discount of approximately $12 million. We also negotiated the exchange of our preferred stock which is held by one of our lenders, for additional principal of our senior debt at a $7 million discount to the current liquidation value. In order to accommodate the restructuring of our senior debt and preferred stock, we amended and restated our senior debt agreement with Fortress and our other lenders. The restated facility actually lowers our total cost of capital by lowering the interest rate, so that in total our cash interest cost remains substantially the same, while eliminating the accrual and payment in kind features of the preferred stock.
Fortress has also made available to us $12 million discount obtained from the other lenders as new cash on our balance sheet. In total, we will have $210 million of gross debt outstanding down from $216 before, inclusive of the preferred stock. But we now have an additional $12 million of cash on our balance sheet, bringing total cash to an excess of $35 million. The bulk of the restated facility has no amortization payments, thus saving the company over $2 million of cash during such period and has no leverage covenants until Q1 2025. The restated facility had no fees associated with it and has no prepayment penalty. We can elect at our option to prepay it at any time. Our intention is to prepay for that facility as soon as we can. To the extent possible, we would like to use the proceeds from the asset divestitures we discuss, as well as the proceeds we hope to generate from selling our art collection, a process we have recently kicked off to pay down debt.
Before handing the call over to Marc, I want to conclude by saying how excited I am by the momentum of our creator platform and our singular focus on the Playboy brand. With that, I’ll hand the call over to Marc.
Marc Crossman: Thank you, Ben, and hello everyone. Since joining as CFO and COO, I’ve been working closely with Ben, to rebuild our cost structure and fully move the Company towards a capital light model. As a part of this process, we are aggressively reducing cost not needed to support our two business lines moving forward, the creator platform and licensing. These two businesses have greater potential for growth, higher margins and lower working capital requirement. Before I get into the financials, I want to share with you a few of the initiatives we’re taking at both Lovers and Honey Birdette. At Lovers, our store traffic is down commensurate with the industry and in the absence of deploying significant sums of money to marketing we’re focusing on lifting our margins and diversifying our product assortment to give us the flexibility to run promotions in-line with our competitors.
Regarding margins, we are leaning into our Playboy Pleasure’s line of sex toys, a licensed product. Playboy Pleasure just crossed $1 million in sales and carries roughly 25 points higher gross margins versus our average gross margin and it’s only been in stores for a couple of months. We have a new Playboy Pleasure’s assortment landing in Q2 and are developing another special line for later this year. In the last month of the quarter, we saw an improvement in conversion and average transaction value. And starting in June, we plan to bring our promotional efforts in-line with our competitors to accelerate our revenue growth. Turning to Honey Birdette. Our sales were down year-over-year for three primary reasons. First, as we previously discussed, we did not run our March promotional event this year.
Second, the particularly difficult macro environment in Australia. And third, switching our digital advertising agency, which impacted our online sales or about half of our sales. While we can’t impact the macro environment in Australia, we are planning on running our June sale one week earlier to capture Memorial Day weekend sales. In addition, we plan to ramp-up our digital advertising spend in the back half of the quarter with our new agency, as they were able to get Meta to unblock our advertising and have seen our blended row as returned to normal. By way of background, Meta had blocked our advertising in the first quarter because they deemed it to be sexually explicit material. As a result, our blended return on advertising, spending dropped from 18 times to 13 times over the year.
We’re also making a couple of additional changes to the business. We’re going to reduce our SKU count starting in the fourth quarter of this year. It will allow us to make smaller inventory buys per collection without sacrificing the depth of our size scale. The result should increase our inventory turnover and free-up working capital without reducing the number of new collections we launched per year. We are also aggressively cutting our supply chain costs. We found inefficiencies in all areas of our shipping and logistics. Given the strategic alternatives we’re exploring, we’re going to pause on opening new stores. We remain very excited about the brand’s position in the market and its long-term growth potential. Turning to Q1 results. We finished the quarter with net revenues of $51.4 million.
Our direct-to-consumer business was down to $12.7 million or 25%. I want to point out that revenues from our Yandy and Playboy.com businesses, were down $4.9 million. However, Yandy was just sold after the end of the quarter, and we recently signed a binding LOI for license Playboy.com. Accordingly, after the second quarter, we won’t recognize revenue from Yandy, and will only recognize licensing income from Playboy.com, which will be reflected in our licensing segment. Revenues from the remainder of our direct-to-consumer segment were down $7.8 million. The majority of the decline was attributable to reduced traffic both in-store and online. During the quarter, we were not as promotional and allocated fewer dollars to paid marketing in both our Lovers and Honey Birdette businesses.
Furthermore, as we previously communicated, we chose to full go with sale in March at Honey Birdette as compared to a year ago. Not running the March sale at Honey Birdette alone resulted in a reduction of $2 million of sales in the quarter. From our advantage point, it is clear that economic conditions are weighing on our consumer both domestically and abroad, and sales and promotions are increasingly driving the purchase making decision. Licensing revenue decreased by $5 million versus the prior year period. While there is no doubt weaker consumer demand experienced by our licensing partners in China and the U.S. was a challenge, the vast majority of the decline was attributable to the timing $3 million of cash receipts from one of our largest licensees in China.
We booked revenue from that licensee on a cash collected basis. However, as Ben mentioned, we recently agreed to revise deal with that partner and expect to collect the past due cash this quarter. Revenue in our digital subscriptions and content segment was essentially flat. The growth we are seeing from our creator platform, 2.5 times in Q1 GMV versus Q4, is offsetting the secular declines in linear television, whether the gains being made by our creator platform, we should anticipate seeing this segment growing on a consolidated basis in the near future. Adjusted EBITDA was a loss of $10.8 million. However, $1.7 million of the losses were attributable to Yandy. $2.6 million of the losses were attributable to Playboy.com, and $2.4 million of the losses were related to reserve against slow moving Honey Birdette inventory.
Excluding those items, adjusted EBITDA would have been a loss of $4.1 million and if the China revenue had come in on time, adjusted EBITDA would have been close to breakeven. It is also worth noting that the cost cuts we made in March are largely not reflected in our first quarter adjusted EBITDA result, which for the quarter would have been approximately $2 million. This number is only for the actual cuts made in March and not those previously identified to be made in the future. Since March, we have cut approximately $3 million of additional annualized headcount, and after a continued review of the various business lines and operating processes, we’ve identified additional cost savings through re-price prioritizing our spend on critical technology and re-configuring our supply chain economics.
Our goal is to simplify our technology stack and cut our supply chain costs while doing so with a leaner organization. We believe we can reduce our expenses by another $7 million on a run-rate basis, after the transition costs will occur over the next couple of quarters. I want to reiterate that the cost savings related to technology, supply-chain and inventory will take a couple of quarters to show up in our P&L. While we are not providing revenue and EBITDA guidance at this time, we plan to resume issuing guidance after we have finished implementing our operational changes and made further progress on our transition to the capital light business model. To be clear, the capital light business model to which we are transitioning has the same capacity for EBITDA generation and better revenue growth prospects, albeit with relatively small CapEx and working capital needs.
Before I open the line for questions, I want to reiterate that given the cash on the balance sheet post-debt restructuring and the changes we are making to the business, we have more than ample liquidity moving forward. With that, I’ll ask the operator to please open the line for questions.
Operator: Thank you. Ladies and gentlemen, at this time we will be conducting a question-and-answer session. [Operator Instructions]. Our first question comes from the line of Jason Tilchen with Cannacord. Please proceed with your question.
Operator: Our next question comes from the line of Alex Fuhrman with Craig-Hallum. Please proceed with your question.
Operator: Our next question comes from the line of Jim Duffy with Stifel. Please proceed with your question.
Operator: Our next question comes from the line of George Kelly with Roth Capital Partners. Please proceed with your question.
Operator: [Operator Instructions]. There are no additional questions. I’d like to hand it back to Ben Kohn for closing remarks.
Ben Kohn: Appreciate everyone taking the time and we look forward to speaking to you on our next earnings call. Thank you.
Operator: Ladies and gentlemen, this does conclude today’s teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.