PLBY Group, Inc.

Good afternoon, everyone, and welcome to PLBY Group's second quarter 2023 question and answer session. Hosting today's call are Ben Cohn, Chief Executive Officer, and Mark Crossman, Chief Financial Officer and Chief Operating Officer. To join the queue to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Please ask one question and one follow-up question and then re-queue for additional questions. While we wait for the queue to fill, we remind everyone that the information discussed today is qualified in its entirety by the Form 8-K that has been filed today by PLBY Groups, 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 on 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 its historical results and forecasts, 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 may refer to non-GAAP financial measures. Such non-GAAP measures are not prepared in accordance with generally accepted accounting principles. A reconciliation of non-GAAP financial measures to the most directly comparable GAAP measures is available in the earnings release PLBY Group filed with its form 8K today. Ben, do you have any comments before we take the first question?

Thank you, operator, and good afternoon, everyone. We have changed our earnings call format, so starting this quarter, we no longer hold prepared remarks. Instead, we will go right into the Q&A dialogue. We see other companies doing this, and we feel it is a better use of time And it also leans into an open or more open dialogue instead of taking half a conference call to regurgitate what should be in an earnings release. Also in our release, we will leave with a business update for May, and we anticipate sticking with this format going forward. With that, we'll now begin our Q&A session. Operator?

Thank you. Our first question comes from the line of Andrew Yerkwicz with Jefferies. Please proceed with your question.

Hey, thanks for taking my question, and I appreciate the new format. Just two questions. The first one, I think on the last earnings call you mentioned reviewing the strategic value of honey per debt. Can you just give an update on that? It seems like a great asset, but it is facing some macro headwinds according to the press release. I'm just curious where you stand on that particular asset.

Thanks, Andrew. I'll take that, and Mark, please pipe in. You know, we have limited resources internally, and we have been spending a lot of time focused on selling lovers. That business has now been moved to our discontinued ops in the financial statement. We have multiple offers for that business. We are under exclusivity with a party. At the same time, we are working on putting materials together for Honey Burdette for our financial advisor. And based on market conditions, specifically the M&A market, and when we conclude the leverage process, we will then evaluate the timing to start the Honey Burdette process.

Got it. That's helpful. Thank you. And then switching over to the creator platform, I guess like two half questions here. The first, is you made several changes in the quarter that seemed to have a very positive outcome. Can you just remind us what your roadmap is on adding features and other updates to the platform? And then secondarily, AI has been all the rage. How are you guys thinking about leveraging AI and maybe discovery and other areas? Thank you.

Sure. We are constantly updating the platform and we're using data to help us do that. So the biggest change that we undertook during the quarter was actually changing our onboarding process. And there were certain things that the consumer or the user does not see that we had to put in place and expand, you know, for example, our moderation tools, making sure that we create a safe platform, not only for the company, for our creators, but also that complies with our credit card companies. And so historically we were onboarding creators in a very manual way. People would apply, but the process to actually onboard a creator was all manual. And so we, we looked at actually some of the dating sites as you know, how do users onboard there? What is, what are the best ones out there like Bumble, et cetera. And we completely reworked the backend of the system. to put in the right, you know, ID checks with state databases, et cetera, coupled with the right AI tools for moderation, and then rework the whole entire process to onboard creators. And the data for that is extremely encouraging. So if you look at what happened, you know, we increased our creator count at the end of July to almost 4,000, earning creators in July. About 1,400 of those earned for the first time in July. The bulk of that came in the second half, and the trends have continued. in August. What this allows us to do is now really focus on platform marketing versus what I would say is individual creator recruitment. And at the same time, when you look at the concentration of where our revenue is coming from and how many creators, what's most encouraging to me is we have decreased the percentage of weekly GMB that our top 10 creators contribute to the platform by over 20%. Or, sorry, they decreased by over half, really, more than half. But it's 20 percentage points they've decreased. And so what that tells me is that our revenue mix is becoming much more diverse. And it speaks to the health of the platform that we have a lot more earning creators. We look to continue that moving forward. Other changes we made, we greatly enhanced and rebuilt our live product. There's a lot more coming with that in the future, including a one-on-one live feature. We also did something that others don't have, which is either an entry fee or pay per minute. And then we also changed where credit cards are put in the system. And so when does a consumer put a credit card in? We just recently did that a few weeks ago. And we've seen a three X increase in the number of credit cards that consumers are entering versus before what's coming up. And lastly, we started to test what I would say is legacy content in the system. So we took 12 former playmates of the company and we created profiles distinguished from other active creator profiles in the system. This is all part of a much larger play that we'll get into as we go into the fall. How do we integrate the various pieces of this company into one hero product, which is our creator platform? And then really, how does that integrate into the Playboy lifestyle? But those are the highlights of the changes. There's a lot more coming, and there's a lot more that was done that users might not see that goes into setting up where we're moving throughout the fall and into next year with the product.

Got it. Thank you. That's very helpful.

Thank you, Ben.

Our next question comes from the line of Jason Tilton with Canaccord Genuity.

Please proceed with your question.

Great. Good afternoon. Thanks for taking the question. Going back to the creator platform for a second, can you please remind us, maybe update us on the level of investment in that platform that's being made on sort of a quarterly basis and how you sort of view a target level of GMV to get that creator platform to sort of break even or so? I'm going to have a follow-up after that. Thanks.

Yeah, so the level of investment we're seeing in the creator platform right now is mainly coming out of OpEx. So it's roughly in line with where we were last quarter. And what was the second part of your question?

Sort of if you have like a target level of GMV that you're looking towards as sort of a break-even point before that starts to be a positive contributor towards overall profitability.

Yeah, I think if we continue to run at the rate we're at, we'll be able to get there by year end. But we'd have to see a little bit of growth. I think that number is probably around 50 to 55 million of GMV.

Yeah, so 50 to 55 million of GMV, the business turns cash flow positive for the year. And, you know, right now we continue to see the growth that we've outlined in the previous calls. So if you annualized our weekly GMB right now, we would be in excess of 35 million. You know, we took a little bit of pause during the second quarter on onboarding creators as we were, we worked in the process. It just wasn't a good use of human capital. And so the acceleration we saw at the end of the July and that's continued through August, especially when we look at the number of applications and now really turning to platform marketing is very encouraging for us moving forward.

It's really helpful. And then just on the $8.5 million of cost savings that you called out in the press release, Can you just talk about where those are coming from and sort of the specific level that were already taken out in Q2 versus sort of the timeline for when the rest of that we should expect to be coming out of the business?

Yeah, so a lot of the – this, Mark – a lot of the costs that we're seeing coming out over the course of this, the 8.5 that we announced, is I would say a mix between headcount and basic operating expense for systems that we're using throughout the company. The original cost that we had talked about in the first quarter, a lot of that was coming out of our IT and our supply chain costs. As I said, that'll play out over the course of the next two to three quarters.

Yeah, and specifically with the 8.5, that... Although we've achieved some of that in the month of July, in the second quarter, there's very little, if any, of that in the second quarter. So we, as we talked about previously, are rebuilding the business line item by line item. And so a huge example and a big part of that is actually repricing all of our insurance in the country. We've seen multiple millions of dollars of savings just through insurance, and we're in a much better market today than we were two years ago as well for insurance.

Great. Really helpful. Thanks a lot.

Just as a reminder, it is star one to ask a question.

Our next question comes from the line of Alex Furman with Craig Hallam. Please proceed with your question.

Hey, guys. Thanks very much for taking my question. You know, wondering if you could talk about the outsourcing of the Playboy series. e-commerce business. Can you give us a sense of how profitable that business has been historically? Are you going to have any ongoing expenses related to that business to offset the 15% licensing fee you're going to receive? And then can you just talk about maybe what your licensee there might be able to do in terms of growing the brand or expanding to new types of items?

Yeah, this is Mark. So we had pretty heavy losses from that business in the past when I came in, and part of it was we wanted to turn those losses to profits. We didn't have the infrastructure in place to make the product ourselves, so we had very low margins on it, sub-50% starting margins. And so we licensed it out, and right now the agreement, we don't have any costs that we have to bear. So that 15% hits pretty much straight to the bottom line. So from our perspective, it'll be profitable day one. And I think his minimum guarantees right now started about $5 million a year. So that's about 750 to the bottom line to us just in year one. And the overall goal is in the course of the next three years to grow that to be a $20 million business, if not more.

Yeah, Alex, it's Ben. I'll just chime in. In the second quarter, we had seven figures of losses still related to playboy.com, the e-commerce store. And so if you look at our adjusted EBITDA, when we talk about actually being positive without those losses, because we have now closed that deal and outsourced it, you know, EBITDA would have been positive in the second quarter if it weren't for those losses and some costs related to the China J one-time costs related to the China JV. And so, um, You know, the partner was actually in the office yesterday, very encouraged by their early work and actually some of the collaborations they're working on for Playboy merchandise going forward.

Okay, thank you both. That's very helpful.

Our next question comes from the line of Jim Duffy with Stiefel.

Please proceed with your question.

Oh, thank you. Hi, Ben. Hi, Mark. Hey, guys, typically you follow the 10Q coincidental with earnings. Should we expect that tonight?

Yes, you should. It should be forthcoming.

Okay, great. And then considering your comments, is it fair to say you expect monetization of both Lovers and the ARC collection before year-end?

Hey, Jim, it's Ben.

Look, I can't predict, you know, buyers and M&A and sale processes. What I can say to you is we receive multiple offers on lovers. We are under exclusivity with a party. And, you know, that... that coupled with where we are, um, you know, our, our finance team and accounting team decided that it warranted moving out to a discontinued ops. And so when you look at our revenue that we reported, you have to add that, you have to add both discontinued ops and continuing ops together, you know, for an apples to apples for the quarter, you know, as far as the art collection, we are, we are in multiple conversations, um, and down the road with multiple parties on selling it either in one or multiple auctions. Some of those will happen before the end of the year, and we are going beyond just the art collection. I think there's some stuff from our archives that's very interesting, and then we still have a lot of remnants with furniture from the mansion, et cetera, that we plan on selling.

Helpful. Thanks. And then with respect to Honeybird Data, I'm curious, is the brand growing outside of Australia? And then within Australia, it seems like you're ripping the Band-Aid off of a promotional dependence. How long do you think it could be before that Australia business can rebase?

Yeah, so the Australia business is outpacing the decline that we're seeing in the U.S. and Europe. Um, but I, you know, make no bones about it is, uh, the brand is declining about the U S and, uh, in Europe. Now, what we saw is, you know, there are kind of two things that consumer right now is, um, you know, really pushing towards services and essentials, and we're not necessarily an essentials product, but we see when we have a sale, this stuff flies off the shelf. And so we actually saw extremely, um, high positive comp sales in both all three regions. when we had just a seven-day sale over Memorial Day weekend. So May comped up, you know, tremendously. And then, of course, you have the typical hangover in June from the big sale. So, you know, what we're seeing right now is conversion. Traffic is there. The conversion moves up and down with whether we're on sale or not. And to your point, we were on sale last year, I think. It was about 118 days during the year. And this year, you know, we're coming up on September. September, we're on sale almost for the entire month. We'll run a Labor Day sale. We'll be in. We'll be out. And I think that's the goal is to really push towards profitability and not push towards revenue growth.

Thank you.

As a reminder, it is star one to ask a question.

Our next question comes from the line of J.P. Willem with Roth Advisors.

mkm please proceed with your question hi guys i appreciate you taking my question um if we could maybe start just uh in terms of the licensing business and the joint venture you made a call out just about kind of some of the geopolitical situation i'm i'm curious if there's been any kind of changes to what the JV looks like and or is going to be able to achieve relative to when you first got into that.

Thanks, JP. It's Ben Cohen. We just had a call with our partners last night. I think that the business plan that we set out with them and really crafted last year was to create and take back these flagship stores on Tmall, Douyin, and the platforms so that we could control the sale process, obviously not controlling inventory or manufacturing, but really control the sale process with the consumer. It's something that the platforms wanted and the business models in China have changed. The specific issues in China, and Chris Riley or GC and myself were just there two weeks ago, really relate to macroeconomic issues. So the economy is very, very poor in China. Outside of the luxury consumer, it's not good on the ground there. And then on top of that, moving money out of China right now, it's just a much more laborious process than it was historically, where banks sometimes are rejecting wires going out because they are leaving the mainland. even moving money to Hong Kong at times can be challenging. And so the overall opportunity and what the business plan has not changed, it's just that the timing of things, you have to be flexible with what's going on on the ground there. I think that, you know, it's been reported by others, it's not us, that, you know, the economic rebound people were expecting in China, you know, post the three years of lockdowns they had, did not happen. And I think the consumer over there is wary right now. And so it actually helps us to some extent as we're talking and negotiating with our partners to take back some of these stores.

And that's what we're focused on.

Great. Really appreciate the power there.

And then one more, if I could just follow up. In terms of gross margin, obviously kind of a lot of moving parts in the P&L this quarter with the move to discontinued ops. But just curious, you know, now that we kind of have a lot of high margin licensing rev and then kind of also Honey Burdette as a big contributor, is 2Q's gross margin somewhat indicative of kind of the base business going forward of how that should look? Or is there anything just to point out that would mislead us about Q2?

Yeah, this is Mark. It did tick up a little bit from the high margin businesses. Yeah, that's true. The one thing I would look at is the licensing business that you'll probably see that tick down a little bit because we did have a pickup from a reversal of a commission that we had in there. So licensing will come down a little bit. But to your point, you will see HB start to lift.

And so I think if you net the two together, they should be roughly about the same. Got it. Very helpful. Appreciate the help and best of luck.

Our next question comes from the line of Greg Pendy with Shordan. Please proceed with your question.

Hey, guys. Thanks for taking my question. Just then, I think earlier you kind of gave us the revenue dependence of the top 10 performers on Centerfolds. Just kind of wondering, could you share any color on how many of those performers are exclusive to the platform and kind of how you're kind of thinking about that dependence going forward?

Sure. Thanks, Greg.

So we don't have exclusivity with any of our creators. Our creators are free to do whatever they want, and I think that's consistent with the with the creator economy, right? They want to be able to monetize where they want to monetize. What I would say, and again, largely, once a creator has an audience on the platform, that audience tends to stay with that creator on the platform. And I don't see most of our creators on other platforms. We've actually been successful during the quarter actually with creators that have wanted to leave other platforms starting to move their move over to us. And those revenues continue to build. When I look at the concentration risk, you know, what's, what's encouraging to me is, you know, our GMB is on a, if you analyzed our weekly basis is now in excess of $35 million. And when I look at what our top 10 creators contribute versus where they were a few months ago as a percentage, that number continues to come down because we've added so many other creators now that are earning. And so from the diversification point, you know, where, where, when we first started, you might have revenue concentration issues today, you know, amongst on that platform, not in the company as a whole today, you really don't have that. And so what it leads to is a much more consistent daily growth on the platform than if one of the creators historically was on vacation or sick or something. You could have seen more daily or hourly variability than what you're seeing today. And so this to me is what we've been focused on, which is really building out that middle of the platform and health on it. And I'm encouraged. We made this change in the beginning of July. It's something that was months in the making. and very encouraged by the results. It also allows us to reprioritize the human capital internally, really now starting to focus on platform marketing. Again, we haven't spent a dollar so far really of TAC against this. All of the customers have come through the graders, but it allows us to think more about the Playboy lifestyle and and marketing in very smart ways, the platform versus what I would say is a very labor-intensive individual creator recruitment, just given how we were set up internally from a tech perspective.

That's very helpful. Thanks a lot.

There are no further questions in the queue.

I'd like to hand the call back to Ben Cohn for closing remarks.

Thank you, Operator. I appreciate everyone joining, and we look forward to talking to you on our next quarterly earnings call. Thank you.

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.