Playboy - Earnings Call - Q3 2020

Transcript

Operator (participant)

Thank you for standing by. Welcome to the Playboy Management's prepared remarks to discuss third quarter and nine-month year-to-date financials through September 2020. Listeners are in a listen-only mode, and there will not be a Q&A session following the prepared remarks. The information discussed today is qualified in its entirety by the Schedule 14A that has been filed today by Mountain Crest and may be accessed on the SEC's website. Please note that the press release issued this morning and related SEC documents can also be found on Mountain Crest's website at https://www.mcacquisition.com. Also, statements we make during this call that are not statements of historical facts constitute forward-looking statements that are subject to risks, uncertainties, and other factors that could cause our actual results to differ from historical results and/or from our forecast, including those set forth in Mountain Crest's Schedule 14A, filed today and the exhibits thereto.

For more information, please refer to the risks, uncertainties, and other factors discussed in Mountain Crest's SEC filings. All cautionary statements that we make during this call are applicable to any forward-looking statements we make wherever they appear. You should carefully consider the risks, uncertainties, and other factors discussed in Mountain Crest's SEC filings. Do not place undue reliance on forward-looking statements, which we assume no responsibility for updating. In addition, statements made today regarding expected cash, leverage, and equity ownership following the transaction do not take into account any possible redemptions of existing Mountain Crest shareholders prior to the business combination.

In addition to the company's GAAP results, management will also provide certain results on a non-GAAP basis, which excludes non-cash stock-based compensation, non-recurring and non-operating expenses, expenses related to mergers and acquisitions transactions, and certain other non-cash or recurring or non-recurring items. Please refer to Mountain Crest's Schedule 14A, filed today, and the exhibits there too for a detailed reconciliation of GAAP and non-GAAP results. Hosting today's call is Ben Kohn, Chief Executive Officer of Playboy Enterprises. I will now hand the call over to Ben Kohn. Ben.

Ben Kohn (CEO)

Thank you, Operator. Good morning, everyone. Today, we released a financial and operational update for the third quarter and year-to-date period through September 30th, 2020. Revenue and Adjusted EBITDA for both periods grew double and triple digits year over year, and we are tracking ahead of our recently announced year-end 2020 financial goals, which we now expect to meet or exceed. We also announced an important step today: the change of our parent company name to PLBY Group, marking a critical signal of our ambition to become the leading pleasure and leisure platform in the world.

With the committed capital and the fundamental financial strength and flexibility we expect at the close of our merger in two months, we are well on our path toward our goal of $100 million in Adjusted EBITDA by 2025, and poised to capture a significant share of the four growing addressable markets where we believe we have an inherent and formidable competitive edge. First, sexual wellness, a category contributing about 40% of our revenues today, where our intimacy products and lingerie sold both on our own digital distribution as well as across major U.S. retailers, are driving growth into an addressable market we anticipate will reach $400 billion in the next four years. Second, style and apparel, which is about 50% of our revenues today, where we have seen robust performance of our fashion and accessory lines in Asia and in the U.S.

During the first nine months of this year. Third, in gaming and lifestyle, where we currently drive over $50 million of global gross gaming sales on casino-style games, including with our partners Microgaming and Scientific Games. And fourth, in beauty and grooming, where we are building a strong foundation for fragrance, skincare, men's grooming, and cosmetic product lines. Our third quarter 2020 net revenues of $35 million is up 86% year-over-year, with net income improving to $1.3 million from a $3.4 million loss in the year-ago period. Adjusted EBITDA of $7.4 million in the third quarter was up 130% year over year. On a nine-month basis, we generated net revenue of $101.3 million in 2020, up 78% over the same period in 2019.

Net loss improved by $12.8 million to a loss of $4.8 million, and adjusted EBITDA was $21.8 million, up $12.3 million, or 129% over the same period in 2019. Direct-to-consumer sales in the sexual wellness category contributed to most of the rapid growth year over year. In addition, our double and triple-digit year-over-year revenue and adjusted EBITDA growth also reflects the long-standing global strength of our licensing business with its geographic scale and diversity and massive reach, despite some limited pandemic-specific headwinds in gaming and lifestyle and style and apparel, which we expect to normalize in 2021. The licensing business continues to provide highly visible and consistent cash generation, including $400 million of forward-booked contracted minimum guaranteed cash flows, a fantastic foundation upon which to further our own product development and direct-to-consumer build-out. The third quarter was particularly exciting for us.

We launched Playboy-owned and operated sexual wellness products and saw a strong crossover between our brands with the successful Playboy Midsummer Night's Dream lingerie collection on Yandy. We also made strategic hires in digital product and data science that will play an important role in scaling our D2C platform and driving superior lifetime value of our customers across multiple brands and consumer touchpoints. As I mentioned a moment ago, these financial results and our commitment to operational excellence bode well for our ability to meet or exceed our recently updated full-year 2020 targets of $137 million in revenue and $28 million in Adjusted EBITDA, as well as our ability to achieve our long-term growth plans. We have a clear and detailed path to achieve our goals, and it starts with the vision to build the number one pleasure and leisure platform in the world.

This underscores everything we do and becomes incredibly powerful in the context of our financial transaction, where the combination of committed capital, free cash flow generation, and low leverage ensures we are nimble and formidable as we pursue rapid organic and acquisition-like growth in 2021 and beyond. The Mountain Crest deal, which should close in late January, in combination with the financial strength in our business today, provides a path to deliver long-term shareholder value that we believe is exceptional in the market today. With the foundation of high margin and global revenue streams, massive consumer reach driven by an irreplaceable global iconic brand, and strong visibility with $400 million of forward-booked cash flows, we are thrilled by the financial flexibility we gain through the Mountain Crest combination because it unlocks our ability to aggressively pursue growth in various forms. Some of these details are as follows.

First, interests between management and shareholders in the Playboy-Mountain Crest merger are well aligned. Existing Playboy equity holders, including management, believe in our company's long-term plan and expect to own at least 66% of the company at close and will continue to do so via a one-year lockup. Second, our committed capital, unrestricted cash, provides us with the necessary capital to fuel our growth strategy going forward, and we will take the necessary steps to ensure that our balance sheet is strong. One key point to highlight is that we are actively exploring refinancing our debt given record low rates, and with the anticipated proceeds from the Mountain Crest transaction, we expect to have a debt-to-Adjusted EBITDA-weighted bridge ratio of under two times.

Today, we're a capital-light business, and we have $180 million of NOLs inherent in our business, and we expect to provide a significant tax shield against future income. This is particularly key as we are a management team with decades of M&A experience, and as we have communicated, expect M&A to be one component of our overall growth plans. Lastly, since announcing the business combination with Mountain Crest, our acquisition pipeline has become more and more robust, and we are pleased with our relative positioning amongst smaller, capital-constrained players with fewer resources. This is particularly the case in the sexual wellness category, a category we believe we have a unique opportunity to lead in.

All in, as we re-enter the public markets via this attractive merger, the game-changing financial flexibility in our pending capital structure provides the firepower we need to grow this company both organically and inorganically, which brings me to the name change of our parent company following the Mountain Crest merger. We're so excited to announce our new corporate positioning as the PLBY Group, a signal of our ambition to build the leading platform for pleasure and leisure brands and businesses around the world. We are privileged to have as our cornerstone the original lifestyle brand, Playboy, with its immense global reach, delivering consumer products and experiences that help people around the world enjoy their lives more fully. PLBY Group will serve as a holding company that owns, incubates, and acquires brands and businesses across our four key adjustable markets.

We expect to complete the name change in the first quarter of 2021, when we also plan to announce the completion of the business combination. Shortly thereafter, we expect to report full-year 2020 results. Thank you for joining us today, and we look forward to communicating with you again soon.