PLBY Group, Inc. (NASDAQ:PLBY) Q2 2023 Earnings Conference Call August 9, 2023 5:00 PM ET

Company Participants

Ashley DeSimone - ICR
Ben Kohn - Chief Executive Officer
Mark Crossman - Chief Financial Officer and Chief Operating Officer

Conference Call Participants

Andrew Uerkwitz - Jeffries
Jason Tilchen - Canaccord Genuity
Alex Fuhrman - Craig-Hallum
Jim Duffy - Stifel
J.P. Wollam - Roth MKM
Greg Pendy - Chardan

Operator

Good afternoon, everyone, and welcome to PLBY Group's Second Quarter 2023 Question-and-Answer Session. Hosting today's call are Ben Kohn, Chief Executive Officer, and Mark Crossman, Chief Financial Officer and Chief Operating Officer. [Operator instructions] 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 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 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 8-K today.

Ben, do you have any comments before we take the first question?

Ben Kohn

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's 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 from me, and we anticipate sticking with this format going forward.

With that, we'll now begin our Q&A session. Operator?

Question-and-Answer Session

Operator

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

Andrew Uerkwitz

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 Birdette. Could 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?

Ben Kohn

Thanks, Andrew. I'll take that, and Mark, please pipe in. We have limited resources internally, and we have been spending a lot of time focused on selling levers. 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 Birdette for our financial advisor and based on market conditions, specifically the M&A market, and when we conclude the levers process, we will then evaluate the timing to start the Honey Birdette process.

Andrew Uerkwitz

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 seem 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.

Ben Kohn

Sure. Look, 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. 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 looked at actually some of the dating sites as, how do users onboard there? What are the best ones out there, like Bumble, et cetera? And we completely reworked the back end of the system to put in the right ID checks with state databases, et cetera, coupled with the right AI tools for moderation and then reworked the whole entire process to onboard creators and the data for that is extremely encouraging.

So if you look at what happened, 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%.

Sorry, they decrease 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 a 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 3x increase in the number of credit cards that consumers are entering versus before.

What's coming up, 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.

Andrew Uerkwitz

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

Operator

Our next question comes from the line of Jason Tilchen with Canaccord Genuity. Please proceed with your question.

Jason Tilchen

Great. Good afternoon and thanks for taking the question. Going back to the creator platform for a second, could 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 view a target level of GMV to get that creator platform to sort of break even or so? And then I have a follow-up after that. Thanks.

Ben Kohn

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?

Jason Tilchen

Sure. If you have like a target level of GMV that you're looking towards as sort of a breakeven point before that starts to be a positive contributor towards overall profitability?

Ben Kohn

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 million to $55 million of GMV.

Lance Barton

Yeah. So $50 million to $55 million of GMV, the business turns cash flow positive for the year and right now, we continue to see the growth that we've outlined in the previous calls. So if you annualized our weekly GMV right now, we would be in excess of $35 million. We took a little bit of a pause during the second quarter, onboarding creators as we were reworking 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.

Jason Tilchen

That'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?

Mark Crossman

Yeah. So a lot of the - this is Mark. A lot of the costs that we're seeing coming out over the course of this that we’re - the $8.5 million 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 headcount or 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.

Lance Barton

And specifically with the $8.5 million, 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 was actually repricing all of our insurance of the company. 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.

Jason Tilchen

Great. Really helpful. Thanks a lot.

Operator

[Operator instructions] Our next question comes from the line of Alex Fuhrman with Craig-Hallum. Please proceed with your question.

Alex Fuhrman

Hey, guys. Thanks very much for taking my question. Wondering if you can talk about the outsourcing of the Playboy 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?

Mark Crossman

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 margin. 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 it's 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.

Ben Kohn

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, 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 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.

Alex Fuhrman

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

Operator

Our next question comes from the line of Jim Duffy with Stifel. Please proceed with your question.

Jim Duffy

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

Mark Crossman

Yes, you should. It should be forthcoming.

Jim Duffy

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

Ben Kohn

Hey, Jim, it's Ben. Look, I can't predict buyers in M&A and sale processes. What I can say to you is we see multiple offers on lovers. We are under exclusivity with a party and that coupled with where we are, our finance team and accounting team decided that it warranted moving out to discontinued ops. And so when you look at our revenue that we reported, you have to add both discontinued ops and continuing ops together from apples-to-apples to the quarter.

As far as the art collection, we are in multiple conversations 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.

Jim Duffy

Helpful, thanks. And then with respect to Honey Birdette, I'm curious. Is the brand growing outside of Australia? And then within Australia, it seems like you're ripping the Birdette off of a promotional dependence. How long do you think it could be before that Australia business can rebase?

Mark Crossman

Yes, so the Australia business is decline - is outpacing the decline that we're seeing in the U.S. and Europe. But I make no bones about it, is the brand is declining in both the U.S. and in Europe. Now what we saw is there are kind of two things. The consumer right now is 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 shelves and so we actually saw extremely 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 tremendously and then of course you have the typical hangover in June from the big sales. So what we're seeing right now is conversion, traffic is there, but 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, 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.

Operator

[Operator instructions] Our next question comes from the line of J.P. Wollam with Roth MKM. Please proceed with your question.

J.P. Wollam

Hi, guys. I appreciate you taking my question. If we could maybe start just 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 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?

Ben Kohn

Thanks, JP. It's Ben Kohn. No, 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 some of the business and create and take back these flagship stores on T-Mall, 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 a few 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, it's been reported by others, it's not us, that the economic rebound people were expecting in China, 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 the stores and that's what we're focused on.

J.P. Wollam

Great. Really appreciate the follow 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, now that we kind of have a lot of high margin licensing rev and then kind of also Honey Birdette 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?

Mark Crossman

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, sorry, 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.

J.P. Wollam

Got it. Very helpful. Appreciate the help and best of luck.

Operator

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

Greg Pendy

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 Center [ph]. 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?

Mark Crossman

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 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 over to us and those revenues continue to build.

When I look at the concentration risk, what's encouraging to me is our GMV is, if you annualize your 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 a diversification point, where when we first started, you might have revenue concentration issues. Today, 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 creators, but it allows us to think more about the Playboy lifestyle 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.

Greg Pendy

That's very helpful. Thanks a lot.

Operator

There are no further questions in the queue. I'd like to hand the call back to Ben Kohn for closing remarks.

Ben Kohn

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