PLBY Group, Inc. (NASDAQ:PLBY) Q4 2022 Earnings Call Transcript

PLBY Group, Inc. (NASDAQ:PLBY) Q4 2022 Earnings Call Transcript March 17, 2023

Operator: Greetings and welcome to PLBY Group’s Fourth quarter and Full Year 2022 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. As a reminder, this conference is being recorded. It is now my pleasure to introduce your Ashley DeSimone with ICR. Thank you. You may begin.

Ashley DeSimone: Good afternoon everyone and welcome to PLBY Group’s fourth quarter and full year 2022 earnings conference call. I’m Ashley DeSimone from ICR. Hosting today’s call are Ben Kohn, Chief Executive Officer; and Lance Barton, Chief Financial Officer. After our prepared remarks we will open up the call up for questions when we’ll be joined by Ashley Kechter, President of Global Consumer Business The information discussed today is qualified and its entirety by the Form 8-K that has been filed today by PLBY Group, 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’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’s actual results to differ from its historical results and forecast, including those risks set forth in PLBY’s filings with the SEC and you should refer to and carefully consider those for more information. These 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 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. So much has changed with the company since we last spoke in November that we want to level set where we were, where we are and where we are going. We are one of the most valuable brands in the world, Playboy. This is a brand that drives billions of dollars in consumer spend and has almost 100% global awareness. Our business is now on solid financial footing post our $70 million debt paydown. We also have additional levers we can still pull internally to build additional cash reserves or paydown more debt should we choose to, without raising more equity at today’s prices. To maintain our current financial flexibility, we are changing our business model and moving to a capital-light model with a singular focus on Playboy and Honey Birdette.

Our new model gives us a combination of strong cash flow from our licensing segment, high growth potential through our creator platform in Honey Birdette and less operational complexity by eliminating non-profitable business units and non-core assets. Within Playboy, we are focusing on two things. First, our licensing and strategic partnerships business. The business has a lower risk profile, $346 million of future royalty guarantee payments through 2031, high-quality recurring cash flows and the opportunity to be much larger than it is today. We intend to scale this business through a JV approach to supplement licensing’s current high cash flow generation and to optimize it globally. In 2022, the licensing business produced approximately $61 million of revenue, and we believe through the right partnerships, we can more than double this business over the next few years.

Second, our creator platform. This is our hero Playboy product moving forward, and it returns the company to its roots as the place for creators to be seen and discovered. The business is growing at over a 9% weekly CAGR since relaunch in mid-September 2022, with pro forma annualized weekly GMV already in excess of $15 million. We are approaching monthly cash flow breakeven with our fixed costs under $500,000 a month. At Honey Birdette, we are excited about the future and believe there is a huge opportunity for growth in the U.S. and Europe. In 2022, our U.S. stores generated 38% four-wall EBITDA margins, not including the incremental e-commerce they drive in their local geographies, and we see a total market opportunity of at least 100 stores domestically.

Given our capital-light model, we are engaging an adviser to raise growth capital at the Honey Birdette level to accelerate the execution of our growth strategy. This new focus on these three units is the right direction moving forward. And one, I am confident we will be able to execute. When we went public in 2021, our investor base and expectations were different and the capital markets were happy to accommodate different growth-focused business models. The world today is different, and we believe our new business plan aligns well with what we have heard from our current investor base, which is capital-light, higher margin, simplicity of execution and making sure we have sufficient runway to execute on business priorities with less financial leverage.

The first step to transform the business model was to deal with the debt burden and ensure we have more than a sufficient runway to execute on this transition. Management and our Board are aligned with our shareholders and believe in our business model moving forward. It’s why I invested over $1.2 million and why Rizvi invested almost $30 million in the rights offering. We paid down $70 million of debt over the past three months, which in turn significantly reduces our interest expense moving forward. Now that our balance sheet and liquidity are more secure, I want to discuss what we won’t be doing. First, on the cost side, we eliminated $18 million of annualized costs last year and had identified a minimum of $15 million of additional annualized cost cuts.

$10 million of which we implemented this week. The rest will be accomplished as we continue to simplify the business. In addition to the $15 million, we expect additional direct cost reductions related to the sale of business units. Second, we are very close to selling the Yandy and expect the deal to close in the coming weeks. Third, we have also done a strategic review of our Lovers business, which we bought for approximately $25 million or roughly five times EBITDA at the time. Lovers is still producing roughly the same cash flow as when we bought it, and we will be reviewing strategic alternatives for Lovers future as part of the PLDY Group in the coming months. Lastly, we have grown Playboy e-commerce from basically zero in 2020 to $22 million of revenue in 2022.

But given the cost to build the team, develop private label products and acquire customers, the business still lost in excess of $7 million in 2022. Given the losses in operational complexity, we are exploring alternatives to significantly reduce or eliminate those losses altogether. One alternative would be to convert the business to a JV or a licensing deal. The second would be to shrink the revenue and SKU count and significantly reduced paid marketing. In both scenarios, the products will still be available at our website, and our customers will not experience any change. We will use our creator platform as the primary way to market the products. After such a restructuring is complete, we would expect to have a much simpler business model and one that allows us to have laser focus on our core licensing business, our creator platform and Honey Birdette.

Assuming the intended restructuring is completed, all of our business units are projected to become profitable. We have posted a new investor deck to our investor website that outlines our focus moving forward, as well as pro forma revenue and costs for what the business would have looked like last year had the restructuring occurred. Lance will give you more details in a few minutes. As I said earlier, our focus moving forward is in three core areas. First, our creator platform. The creator platform is the most strategic and high-growth potential business we could have invested in over the past year. And it is truly differentiated from the competition given our brand and what that means to creator. So why is this so strategic? First, it returns to companies to its roots as the place to be and be seen for creators, and it brings heat to everything we do in the future.

Second, it creates a flywheel for the rest of the business because those creators bring their audiences to Playboy, allowing us to sell those audiences other products, whether they are our own or from our licensing partners. And third, the business scales very quickly, and the long-term cash flow dynamics are superb. We have limited fixed costs and our revenue is 20% of GMV generated by the creator. We believe over time, there are other value-added services we can offer to increase that percentage. I’m excited to share some early numbers since the September relaunch at single the platform’s progress. We have registered about 1.4 million users to the platform with no marketing spend. If you annualize our weekly GMV today, assuming no growth, we would do over $15 million in GMV this year.

And that’s with only about 1,500 active creators. However, our weekly growth in GMV since relaunch has been over 9%, with that growth rate accelerating over the past four weeks to over 18% weekly as the network effect starts to take hold and we have increased the number of new creators joining. There have been 40 million messages to through the platform. Users are coming to interact with a message with creators. Our average earning creator is on track to generate over $12,000 in GMV per year, and our top creators are on track to generate GMV well into the millions. The vast majority of our creators earn money via connecting with their fans with safe for work content and conversations. Based on reported data, our understanding is that Playboy creators are earning multiples of what average creators earn on competitive paywall platforms.

We’ve achieved this progress for three key reasons. First and foremost, as I talked about in our last earnings call, we now have a world-class product and technology team. Our product today is on par with our competitors from a feature and functionality perspective and has been built with the capacity to scale and innovate much faster. Just last Friday, we rolled out new profile designs to further enhance the creator and user experience. We also improved our search functionality to support our creators and expanding their Playboy fan bases. The second driver of our recent progress has been quickening the pace of accepting creators onto the platform from our waitlist. Tens of thousands of prospective creators have now applied. With the recent migration of the platform to playboy.com and expanded grassroots promotion, we are hearing incredible excitement within the creator community that Playboy is their top choice platform.

Something important to note here is that we hear from our creator community how excited they are to be part of an elevated and exclusive platform, one that does not allow the explicit content that our bigger — biggest competitor does. And most importantly, they want to be part of a platform that they are proud to show off. Being accepted to become a Playboy bony is now something that creators are so excited to promote across our social media platform. This point of pride is something that no one else can replicate. And third, our in-house creator team has been hard at work building out creator success tools to support those creators we accept onto the platform. We’ve seen an enormous desire from our creator community to participate in the full Playboy lifestyle.

And we’ve gone testing perks for top performers, such as the opportunity to model in Playboy fashion contains, attend Playboy events and more. As you may have seen, we just announced the return of the ultimate perk for creators, the chance to be featured in the Playboy Magazine. Unlike so many creator led platforms trying to scale, we have a formidable and unreliable tool, the magazine. We will be bringing back the magazine in a digital first forum to serve as a huge promotional platform for our top creators as well as to continue working with celebrities across Playboy covers and editorial features to drive big traffic numbers into the platform. We are thrilled to tease the new magazine experience with the release of the Playboy cover seat featuring one of our top creators October 2011 playmate Amanda Cerny.

Amanda can also pay for special access to behind-the-scenes content on her own Playboy channel. Here is what to expect from here. First, we will continuously improve the product experience for our creators and their fans. For creators, we are focused on making it as easy as possible to make money and to grow your fan base to make even more money. For fans, we’re focused on making it as seamless as possible to find your favorite creators to follow and support. We have begun exploring how AI tools can optimize the creator and fan experience. Second, we are always working to enhance our value propositions greater, and this is where the digital magazine comes in. We will be rolling out more editorial like features for top creators for the chance to truly feel like they’ve made the cover of Playboy.

In addition, creators will soon have expanded opportunities to become Playboy fashion affiliates across Playboy and Honey Birdette. Our goal is to continue to scale our creator base, ensuring maintaining Playboy’s high standards of representing our brand. By year-end, I would like to get to 10,000 creators earning money on the platform. And lastly, across all areas of our organization, including licensing in Honey Birdette, we are working to leverage our creator community as built-in organic marketing machine. We expect creators will make more money on Playboy than on the other platform that becoming affiliates and being paid for selling products. Our Playboy creators deliver big brand buzz and drive meaningful monetization from the audiences they attract.

Further, they are the embodiment of the aspirational lifestyle that both Playboy and Honeybee brands represent in the world. Our second core area of focus is our licensing and strategic partnership business. We made significant progress on a number of fronts during 2022 on our strategic partnerships and licensing business. I recently returned from Hong Kong after not traveling there since COVID-19 started and met with our largest licensing partners. Three years ago, we began setting the stage to transform our business in China from an outsourced licensing business with limited sales and distribution visibility to a joint venture operating model that gives us more control of the brand and brings us closer to the end consumer. As part of this evolution, we met with the Fung Group three years ago.

And while it took longer than anticipated, given the impact of the global pandemic and China’s zero COVID policy, we are now pleased to report that we have partnered with the Fung Group retail brand management unit for China. The goal of the Playboy China is threefold. First, partner with trusted operating teams in China with experience across apparel, supply chain, product design, retail execution, brand marketing, trademark enforcement and above all, strong relationships with the online sales platforms in China. It is not our intent to directly operate a retail or e-commerce business or take on the financial burden associated with inventory and operational complexity. Our goal is creating a best-in-class in-country team who truly understands the China market and has the right experience and relationships to hold our licensees accountable and replace them should the need arise.

Two weeks ago, we began the process of establishing new ground rules with our licensees for how and where Playboy branded products are sold to ensure greater consistency and control across the market. This includes potentially restructuring our agreements so that from a financial perspective, the JV will manage the flagship e-commerce stores to track online sales and ensure quality control and design across all Playboy branded products. In essence, our licensees still supply approved products and keep inventory, but the JV will control the gateway to the consumer and the overall brand experience. The JV will enable us to work together with the e-commerce platforms to control how Playboy is sold and ensure that JV is capturing online sales data and enforcing shutdowns on counterfeiters and unauthorized stores.

Second, have stronger relationships and broader reach to take advantage of emerging product categories that Playboy has not entered to expand our lifestyle offerings and accelerate growth. In just a few weeks, our new JV partner has developed the strongest and most diverse new business pipeline we have seen in years for China. Third, reduce the operational burden by transferring our management product approval and legal complexity of operating in China to a highly experienced partner in the local market. Finally, the China JV structure has allowed us to significantly reduce the amount we pay our licensing agent on a cash basis and enables our new partner, the Fung Retailing Group, to earn up to 15% ownership of the China business at a $250 million valuation.

We believe the JV we have established in China is a good model for other parts of our licensing business, especially as we think about when our contract expires in 2028 with our global licensing agent, which we were paying approximately $9 million annually too. We have over 180 licensees and trying to manage them from California is no easy task. Operationally, the JV model allows us to do less at corporate while gaining region or product-specific expertise for business growth and management. We are currently looking to take this JV model to other parts of the world or product categories where we see huge growth potential. Another JV we established was with our Spirits partner. In addition to the $13 million they previously raised, they have commitments for up to another $20 million of additional investment.

We own 20% of the operating Spirits business on a fully diluted basis, plus we generate an annual license fee. To date, Playboy Spirits has launched limited edition collector items in the bourbon, tequila and cognac categories. What we are most excited for is the launch of ready-to-drink cocktails later this year. Again, we are partnering with a management team that have domain and operating expertise and leveraging their organizations to build businesses, which not only pay us to licensing fee, but also provide us with the equity upside. Lastly, our Playboy Pleasure line of products is off to a great start at Lovers stores, generating on average 100,000 in weekly sales only at Lovers. We set this up as a licensing deal and plan to aggressively expand that product line and distribution with our partner.

We have already secured over 1,000 third-party retail location to carry the product starting this week. Let’s talk to more detail about Honey Birdette, our third core area of focus because I continue to believe that business is a $1 billion opportunity based on the current revenue and EBITDA growth profile. When we bought Honey Birdette in 2021, the business was doing approximately $73 million in revenue on a trailing 12-month basis and grew to $84 million in 2022. Although 2022 was a very tough year with significant inflation that we believe affected demand, inventory over buy, supply chain issues, as well as competitors discounting, the brand remains extremely strong. In the first three quarters of 2022, we had to discount our inventory more than the business had historically given the macroeconomic environment and excessive inventory purchase prior to our acquisition of Honey Birdette.

Starting in Q4, we made the decision to limit promotional activity moving forward and to focus on brand health. It was a tough decision from a financial perspective because even at discounted prices, it is still a high-margin business, but it’s the right long-term brand decision. The stores we have opened in the U.S. over the past year are off to a great start. Our average store in the U.S. is producing over $1 million annually, which is double the average store in Australia, with our best store doing $1.8 million. In the U.S., we are averaging a 38% four-wall EBITDA margin compared to 34% in Australia. Average order volume, or AOV, in the U.S. is $230 compared to $135 in Australia. The U.S. now represents 38% of the total revenue and Australia 49%.

Given the attractive economics, we believe there is a long-term opportunity to open more than 100 stores in the U.S. We hope to open four to six new stores this year. It takes time to find the right mall locations, especially given our small footprint of 800 to 1,000 square feet. Before I turn it over to Lance, I want to set the record straight on some misperceptions and reiterate why I am excited for the future. First, I and the named executive officers have never sold a share of stock for personal gain. The company does not net settle equity grants as other companies do as the payment of employee taxes would be a drain on balance sheet cash and hence forces the employee to sell shares of settled grant to pay the tax. The only stock we have sold is to pay the taxes required with the exercise of options or settlement of other grant as is legally required.

In fact, I have bought stock personally three different times since we went public. The last time is part of the rights offering where I invested over $1.2 million, and Rizvi invested almost $30 million. Second, I want to clarify how stock-based compensation is accounted for in the financial statements. All equity grants are initially valued based on the value of the underlying stock on the date of grant, applying different valuation models to different kinds of grants. Expense for equity grants is accounted for both as of the date of grant and each quarter thereafter for the remaining life of the grant, in each case based on the grant date valuation regardless of subsequent changes in market value of the underlying stock. Thus, even in quarters without equity grants, the company is required to show expense for existing prior grants based on their initial valuations.

The quarterly stock-based compensation expense is not compensation of an award holder divided by the then current share price. Further, such quarterly expense does not mean there is any new or additional compensation to existing grantholders nor any additional dilution related to the quarterly expense. The last time our executive officers received any grants was in April 2022, and quarterly expense for the life of those grants will be based on the valuation as of April 2022. Moving forward, we will have a much simpler, less capital-intensive business with the right combination of cash flow from our licensing business, coupled with potentially significant growth in cash flow from our creator platform and Honey Birdette. We have a manageable amount of debt, a substantial amount of cash on our balance sheet and the ability to generate extra liquidity via the sale of non-core assets, including our extensive art collection.

In my opinion, our current valuation is very dislocated from the immense value of the sum of the parts represent, including our lucrative brand, Playboy, are approximately $300 million of federal net operating losses, our extensive art and archive collection, the present value of our forward booked licensing revenue and the value of Honey Birdette. We believe in our business plan, but should it not materialize in the way we believe it will, that we will explore appropriate strategic options to maximize shareholder value. Lastly, before I turn the call over to Lance, I want to thank him for his partnership and hard work over the past two years. Lance will be departing the company in Q2 and will work with us to ensure a seamless transition. Lance helped us lead us through a period of growth and transformation as a newly public company, and we wish him the best in his future endeavors.

Lance?

Lance Barton: Thank you for the kind words, Ben. It has been a privilege to be part of such an iconic brand, and I’m grateful to the entire organization for all that we’ve accomplished. I continue to believe in the potential value of this company, and I’m excited for the team to execute on this new strategy. Given our restructuring plan, I will briefly touch on certain Q4 results and then discuss what the business looks like pro forma taking into consideration all of the planned changes. In the financial slides of the presentation that we’ve posted to our investor site, we’ve provided more granularity on full year revenue by brand within each of our reporting segments. We’ve also provided total company annual costs on an as-reported basis, a non-GAAP adjusted basis on a pro forma basis after stripping out the costs related to the businesses that we no longer intend to operate.

Fourth quarter results were impacted by a number of factors. One, we didn’t execute as well as planned on our IT system implementations last year, which disrupted fulfillment operations and resulted in increased cost to remedy. Two, we pulled back aggressively on performance marketing due to both continued softness and efficiency and the aforementioned fulfillment challenges. Three, macro headwinds persisted impacting consumers and partners alike, along with $1.6 million of lost revenue due to foreign currency exchange rates. And four, reduced promotional activity at Honey Birdette led to lower sales, while increased promotional activity to liquidate inventory at Playboy and Yandy led to lower product margins. Total Q4 revenue was $68.5 million, a decrease of $27 million year-over-year.

Of the total revenue decrease, $13.4 million came from the direct-to-consumer segment, $1.7 million from licensing primarily due to a reduction in overages received and $11.4 million from digital, reflecting no NFT revenue in the fourth quarter of 2022. Now turning to the restructuring. Our investor presentation shows both revenue and cost on a pro forma basis for what the business would have looked like in 2022 had the restructuring been done at the beginning of last year. Overall revenue would have been $212 million, less the $73 million cost of sales and $113 million of selling and administrative expenses would have resulted in just over $25 million of pro forma EBITDA. This pro forma assumes no revenue or cost related to Yandy or Playboy direct-to-consumer.

It also assumes that the additional $15 million of cost savings we have identified are removed, along with $3.5 million of creator platform upfront launch costs that were onetime in nature. The pro forma selling and administrative costs do not remove any other incremental costs related to the creator platform, which were roughly $8 million in 2022. There is also no annualization of revenue or cost for the Honey Birdette stores we opened at various points during the year. For 2023, we are not giving specific guidance at this point given the restructuring is ongoing and some of the timing related to sale of assets is a moving target. The primary differences between 2022 on a pro forma basis and 2023 relate to four areas. First, we plan on opening four to six new Honey Birdette stores, mostly in Q4.

Second, we are going to continue to protect the Honey Birdette brand and will not be discounting merchandise outside of our normal pre-COVID sale periods, which will make the first three quarters of 2023 a tough year-over-year comparison from a revenue perspective. Third, we are seeing signs that our creator platform is beginning to scale and believe it will be cash flow neutral to positive for the year. And lastly, is related to the timing of when certain cost reductions or exits of businesses occur as we won’t get a full year benefit of some of these actions. With the successful completion of the rights offering, we have reduced total leverage, eliminated our minimum cash covenants entirely and eliminated leverage covenants to the second quarter of next year.

In the last three months, we’ve paid down $70 million of debt in addition to the quarterly amortization payments and currently have $157 million of total debt outstanding with approximately $35 million of cash and equivalents on the balance sheet today. We have no exposure to Silicon Valley Bank or Signature Bank, and our cash has held between top-tier financial institutions in the U.S., U.K. and Australia. Our debt service for the year is expected to be approximately $19 million. We believe that our current balance sheet covenant waivers through the second quarter of 2024 and our focus on managing the business for cash flow gives us ample runway and liquidity to continue executing on our plans for Playboy and Honey Birdette. With that, I’ll ask the operator to please open the line for questions.

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Q&A Session

Operator: Thank you. Ladies and gentlemen, at this time we will begin doing your question-and-answer session. Our first question comes from the line of Alex Fuhrman with Craig-Hallum. If everyone could please limit themselves to one question and one follow-up, so we may get to everyone’s questions. Alex, please proceed with your question.

Alex Fuhrman: Hey, guys. Thanks very much for taking my question. I’m trying to understand a little bit better the pieces of the business and how much they might be worth, especially now that it sounds like you’re going to be focusing just on Playboy and Honey Birdette. I think Honey Birdette is, I guess, an easy enough business to understand, but the Playboy brand shows up across different categories and regions and business models. Can you give us a little bit more color to help us size up the value of those different pieces? I think you had recently said there was a third-party valuation of $250 million put on the China licensing JV, of which you own a majority of that. But how can we think about the value of the Playboy licensing business outside of China as well as centerfold some of the legacy Playboy TV and Plus assets as well as just the option to enter new categories and regions where you’re not currently in?

Ben Kohn: Hey, Alex, it’s Ben Kohn. Thanks for the question. Look, there’s multiple different ways to value Playboy. Playboy is one of the largest brands in the world and basically has a 100% unneeded global awareness. When I think about the components myself and what led me to write another check into the company, I think about the present value of our licensing business. That is a business that is underexploited today in a lot of the parts of the world. So, I think as we mentioned in the beginning, we have roughly $346 million of forward book cash flow. Those are only minimum guarantees. That doesn’t include overages and other things and then what would be the terminal value on that. We’ve talked about our art collection historically.

There are our Playboy TV, our Playboy business, which are legacy businesses still generate cash flow. When you think about the value of the creator platform that we’re building, and it’s off to a good start, if you annualized your weekly GMV today, you would get in excess of $15 million. And if you look at that growth rate, it’s growing at 9% weekly CAGR. And so, when you look at the cash flow that generates, we talked about the $500,000 of monthly fixed costs and that we take 20% of what our creator makes. And so that business starts to scale very — when that business starts to scale quickly, the amount of cash that can spin off is absolutely huge.

Lance Barton: The last piece that I don’t think you mentioned then was Honey Birdette. If you remember, we paid around $300 million for that. Obviously, it was a different time. But when you think about — we’ve grown revenue since we acquired it. And if you think about EBITDA margins on that business being quite healthy, put a price on it. But I think, again, you could probably get a pretty decent value for Honey Birdette as well.