Playboy, Inc.

Good afternoon, everyone, and welcome to PLBY Group's second quarter 2022 earnings conference call. I'm Ashley DeSimone from ICR. Today we have with us Ben Cohn, Chief Executive Officer, Lance Barton, Chief Financial Officer, and Ashley Kector, President of Global Consumer Goods. The information discussed today is qualified in its entirety by the Form 8K 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're 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 historical results and forecasts, including those risks set forth in PLBY Group's filings with the SEC. 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 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 filed today in its form 8K with SEC. I will now open the call to Ben to please go ahead. Ben?

Thank you, Ashley, and good afternoon, everyone. Today's climate is very different from when we first began to transform what had been a legacy media and licensing company into a fast-growing consumer and digital business. However, the robust demand for Playboy and HoneyBudet continues to hold strong, and I am optimistic about the recent trends we are seeing on Centerfold. That said, given the uncertainty in the macro environment, We have taken a close look at the factors within our control and have taken actions to best position the business to weather the headwinds and drive long-term growth. To that end, we restructured our debt and secured liquidity. We have amended our senior secured credit agreement to give us extra headroom to invest in the growth areas of the business and have drawn down on the remaining $25 million in Series A preferred stock with Fortress. We now have approximately 70 million in cash equivalents, including crypto and restricted cash on our balance sheet. We are also conducting a strategic review of the business, streamline costs from non-core areas, while continuing to invest in growth areas, with the goal of being cash flow breakeven by the end of this year. The prioritization, along with our amended credit agreement, gives us the flexibility we need to execute on our strategy. I remain committed to our plan, which focuses on two key areas, growing and consolidating our consumer business with a focus on high margin owned and operated products, and second, building out our creator-led platform, Centerfold. My confidence in the business and commitment to our long-term plan are evidenced by the approximately $850,000 of shares I bought in Q1, in addition to the $500,000 of shares I purchased when we went public. No named executive officer has sold any shares except to cover the tax obligation related to those shares. However, the selling of shares for tax purposes has subject those executive officers to short swing profit rules. Hence, no named executive officer has bought any additional shares in Q2. At the corporate level, We have not repurchased shares given the rapidly deteriorating macroeconomic environment we witnessed just after we announced the buyback. Those headwinds have had a more significant impact on consumer spending than we expected or accounted for in our original forecast. However, we are also seeing some very encouraging bright spots in the business. Inflation is not only driving higher fulfillment and product costs, but it is also putting pressure on consumer spending. In keeping with recessionary buying trends, we are seeing a greater impact on our value-oriented consumers versus our luxury or higher-end consumers. Both Playboy and Honey Burnett cater to consumers drawn to luxury and aspirational brands, and we continue to see strong consumer demand for both brands, which are up considerably through the first six months of the year on a year-over-year basis. Playboy D2C revenue is up over 150%, And Honey Burdette is up approximately 28% on a pro forma basis. Playboy continues to see strong global consumer demand with the Gen Z customer and the strength of our strategic partnerships, which include recent premium collaborations with Yves Saint Laurent featuring Romeo Beckham, Fila, and Studs. And we are expanding our portfolio to include Playboy Lingerie, designed by the Honey Burdette team, which will launch later this year. Honey Burdette continues to deliver strong revenue growth and margins despite the macroeconomic headwinds. We conducted a soft launch with UPAY to provide Honey Burdette customers with a third-party gifting option. From the early data, we are seeing strong conversion rates and direct acquisition of new customers. Given the success of the pilot, we are incorporating the option for all customers and will be adding wishlist functionality. We are exploring using cases for our other brands as well as for Centerfold. On the retail front, our Miami store continues to be one of our top performers. We opened a new location in East London in late Q2, and more store openings are planned over the next few quarters. We will continue to expand Honey Burdett's retail footprint, diversify our product offerings, and grow brand awareness in the United States. The end-year lovers are seeing the opposite sales trends. as their cost-conscious customer is getting hit extremely hard at the gas pump and in the grocery store, leading to less spend on discretionary items. Compared to 2021, year-to-date revenue through the end of July declined $22 million between Yandy and Lubbers combined, with over $18 million of the decline coming from Yandy. Supply chain disruptions continue to pressure margins throughout the business because seasonal inventory arrived off-cycle and had to be managed through disciplined promotions. Supply chain issues also impacted our ability to have the materials needed to launch new products and to keep product stock during key seasonal windows. To manage through this, we have advanced stock key inventory, including our top sellers and seasonal items like Halloween costumes, and are introducing more owned and operated products throughout our business. Rising customer acquisition costs and last year's iOS privacy changes have significantly impacted performance marketing, particularly for Yandy. According to our external marketing partner, iOS IDFA updates led to a 50% year-over-year drop in Facebook conversion rates for fashion and apparel brands in Q2. As a result, brands have shifted budget away from Facebook and toward Google, which has driven up competition and prices for keyword spending in what has historically been one of our key customer acquisition channels. We are combating these trends by shifting spend to other social channels and have plans to leverage the Playboy name across our portfolio to elevate positioning and broaden our reach. For Yandy, this involves a full rebrand under the Playboy halo. For Lovers, we are planning on a new sexual wellness line called Playboy Pleasure and will be featuring Yandy and Playboy merchandise in our Lover stores. We view these marketing headwinds as concrete evidence as to why Centerfold is so strategically important for our long-term customer acquisition strategy on D2C. The Centerfold platform has the potential to drive organic customer acquisition and further target our product marketing. As I mentioned last quarter, there are three key elements required to make Centerfold successful, the brand, the product, and the creators. As for the brand, Playboy is one of the most recognized brands in the world, and we will be leveraging its massive reach as we integrate Centerfold within Playboy.com over time. ultimately driving all customers into one ecosystem. The Centerfold product, the platform itself, and the pace of progress to advance it have not met my expectations. When we decided to launch Centerfold, we had two options. Build the platform from the ground up, a 12-month process in the best-case scenario, assuming we had a full team in place, which we did not, or buy an existing platform to accelerate our market entry. We chose the latter. which provided speed to market and the ability to test and iterate on the product. The coding that goes into the back end to support messaging, payments, and creator records is extremely complicated. And unfortunately, our initial team, which was largely comprised of third-party offshore developers, was unable to make the needed progress on the platform. However, having a live product in market has provided us with much-needed test data to inform, prioritize, and accelerate our current product roadmap and creator strategy. Given the product issues we encountered, I quickly identified the need to upgrade our technology talent and recruited a new in-house tech team earlier this year, including product and engineering leaders from Uber, Google, Square, and Y Combinator. Since they have come on board, we've seen dramatic improvements in the stability of the platform and in new bulk features and back-end enhancements that will be rolled out later this year. From day one, the new team has been laser focused on building a seamless creator platform with intuitive UI, leveraging data from our existing business and the ongoing feedback loop with creators and fans to inform our priorities and refine the platform. The relationship and expertise from our new team have also enabled us to work with premier technology and payment providers to ensure best in class functionality, accelerate development and lower overall cost base. With Centerfold's improved technology, successful test cases, and a tailored creator strategy, we are executing on our Centerfold strategy in earnest. As the new technology improves, we work closely with our existing creators to monetize our audiences. A few weeks ago, we began onboarding new creators, and some of them are already approaching $10,000 in gross bookings in their first month, while also continuing to attract both new users and new creators onto the platform. We are encouraged by the momentum we are seeing across the creator base. For example, one of our creators who we recruited from within our Playboy ecosystem is now generating nearly $100,000 in gross bookings per month. She and her peers are also collectively bringing in millions of unique visitors, many of whom convert to registered users who then engage with and become paying fans of multiple creators on Centerfold. Our top referrer, for example, has driven over 100,000 registered users onto the platform through her personalized referral link across multiple third-party platforms, including Instagram and Reddit. What we need to do now is scale these wins. So we are leveraging what we've learned about these top performers to create repeatable processes, inform which types of creators to onboard, and arm them with the best practices to grow their subscriber base and optimize their performance on Centerfold. Before I became the CEO of PLBY Group, I was in private equity for a long time and had been through many economic cycles before. While the road ahead won't always be smooth, I'm encouraged by our momentum and confident in our people, our brand, and our long-term plan. I'll now turn the call over to Lance.

Thanks, Ben. The second quarter revenue grew 31% over the prior year quarter to $65.4 million. Our growth was driven entirely by our direct-to-consumer segment, which was up 59% year-over-year to $44.6 million. As Ben alluded, within direct-to-consumer, we have seen a real bifurcation of performance, with HoneyBredette and Playboy achieving continued growth, while Yandy and Lovers have experienced worsening trends as the year has progressed. HoneyBredette revenue was up 32% year-over-year to $22.4 million in the second quarter, and up 37% on a constant currency basis. Growth at HB was driven by a 15% increase in brick-and-mortar revenue and a 49% increase in e-commerce. Solid growth on both fronts, despite Australia being more heavily impacted by the current macroeconomic situation and relatively low brand awareness for HoneyBurnett in the U.S. Playboy e-comm revenue in the second quarter grew 90% year over year, and revenue in the month of July eclipsed Yandy for the first time ever. While the Playboy brand continues to grow, our supply chain was hit especially hard in our licensed inventory, where we are heavily reliant on our partners around the world. We've made strides to increase our owned and operated portfolio. This includes bringing design and marketing in-house and hiring key people in these two areas from Victoria's Secret, Abercrombie, American Eagle, Calvin Klein, and GapBody. The buying behavior of customers at Yandy and Lovers has been severely impacted by inflation, leading to a year-over-year decline in revenue of $8 million in the second quarter, the bulk of which was driven by Yandy. Yandy is also part of an unsustainable marketplace wholesale model with low margins and a highly saturated competitive set, which creates higher risk and exposure to supply chain challenges due to our supplier impacts. For example, Yandy was running a 50% out of stock rate during the first part of the second quarter. To mitigate this in the short term, we've made an effort to secure safety stock for our top 20 selling items, as well as our Halloween merchandise. Similar to what we're trying to do at Playboy, our long-term focus at Yandy is to grow our own and operated business, which should ultimately yield higher margins, more control, and enable a shift to profitable growth with less spend and paid media. Lovers saw significant raw material cost increases impacting product margins, and when combined with high fixed costs due to our store footprint, There is less flexibility for us to address the revenue shortfalls we have experienced due to declines in store traffic. Similar to what we experienced at Playboy and Yandy, we are highly dependent on a vendor model and their supply, which resulted in supply chain disruptions and out-of-stock items. That said, we've integrated our lovers and Yandy buying teams, driving efficiencies and enabling us to reduce headcount. In our licensing segment, Q2 revenue was flat year-over-year to $15.9 million. Given the macro climate, some of our apparel and gaming partners have experienced weaker trends as the year has progressed, resulting in a reduction of reported revenue on our end. We believe these are more category-wide headwinds and not specific to our brand, as other partners have produced better-than-expected results, which help to offset the declines. Reported revenue from our partners in China was stable. However, the severity of COVID lockdowns in the country resulted in cash payments coming in after the quarter ended. We have signed amendments with our major partners that put them on payment plans to help them during this time. Instead of being paid by our partners semi-annually, we are shifting to more frequent payment plans for the next several quarters that will result in the majority of the expected cash payments arriving this year with some amounts deferred to future periods. There is no revenue impact related to the new payment terms as the overall contractual values remain intact. All partners have made their first payments. We've already received nearly half of the amounts that were past due, and we will continue to monitor the situation closely. In light of all of the macro challenges that have impacted our business and the uncertainty that lies ahead, we are withdrawing our prior financial outlook and suspending guidance for the remainder of this year. It's clear that our rate of revenue growth does not materialize as previously expected, and we must adapt our investment strategy accordingly. As Ben mentioned, we are currently undergoing a strategic review so that we can position the company to be cash flow breakeven by the end of this year. While we remain focused on sustaining investments that we believe are most critical to executing on our long-term strategy, of growing our direct-to-consumer and digital businesses, we are also focused on rationalizing our business to improve operating efficiency. We may incur a transition cost that impacts our financial results this year as we implement these changes, but we believe the work that we are doing now will allow us to enter 2023 as a more streamlined and efficient company, well-positioned to capture the global demand we continue to see for the Playboy and HoneyBurnett brands. Although revenue is difficult for us to forecast in the current environment, we're very focused on cost levers that we can control. Embedded in our prior fiscal year 22 adjusted EBITDA outlook was an expectation that on a pro forma basis, non-product costs would increase by a little more than $30 million this year, an increase of roughly 17% year over year to over $210 million annually. Over half of that expected cost increase for this year, for more than $17 million, was expected to be driven by our investments in building out both our direct-to-consumer business and centerfold. Around $7 million of the expected cost increase is due to technology and infrastructure costs, as we work to consolidate operations, build a unified back-end across all of our direct-to-consumer businesses, and remedy our IT controls. The remaining $6 million or so is largely driven by corporate and public company costs, such as higher insurance and audit fees, along with additional resources in areas that the company has historically underinvested in, such as finance, accounting, tax, and compliance. Based on the cost reductions that we started making to the business last quarter when we took out approximately $5 million of annualized overhead, Our current run rate on non-product costs is just under $200 million annually. As part of our ongoing strategic review, we are closely scrutinizing our investment plans for the remainder of the year, determining potential tradeoffs and reducing costs where we can, such as eliminating planned hiring, reducing marketing spend, delaying planned product or store launches, and reducing headcount. We intend to be responsive to what we are seeing in the marketplace and to control our costs tightly so that we can manage our liquidity and balance sheet accordingly. One example of this is our near-term store expansion plans for Honey Burdette. Although the business continues to grow nicely, we are taking a more disciplined and cautious approach to store openings this year. We have already opened stores in Miami and Stratford, UK and assigned leases for Short Hills, New Jersey and International Plaza in Tampa. but we have decisions to make on the remaining store openings that were planned for this year. Our existing U.S. stores have performed quite well, averaging a million dollars in annualized revenue per store with 30% four-wall EBITDA margins, which makes for a compelling argument to push forward with our previously communicated plans.