Q3 2022 Plby Group Inc Earnings Call

November 9, 2022

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The conference will begin shortly to raise your hand during Q&A.

You can dial star one one.

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The conference will begin shortly to raise your hand during Q&A you can dial star one one.

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The conference will begin shortly to raise your hand during Q&A you can dial star one one.

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Good day, and thank you for standing by.

Welcome to the P. L D Y groups third quarter 2022 earnings conference call.

At this time all participants are in a listen only mode.

After the speaker's presentation, there will be a question and answer session.

To ask a question during the session you will need to press star one one on your telephone.

Please be advised that today's conference is being recorded.

I would now like to hand, the conference over to your host today actually decent mountain at ICR. Please go ahead.

Okay.

Good afternoon, everyone and welcome to P. L. D Y groups third quarter 2022 earnings Conference call I'm Ashley do you send on from ICR.

Hosting today's call are <unk>, Chief Executive Officer, and Lance Barton Chief Financial Officer.

After our prepared remarks, we will open up the call for questions. When we will be joined by Ashley character President of global consumer product.

The information discussed today is qualified in its entirety by the form 8-K that has been filed today by P. L. B Y Group, Inc, which may be accessed on the SEC's website and plc why group's website.

Today's call is also being webcast and a replay will be posted to <unk> 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 PLD wise views and assumptions regarding future events and business performance at the time they are made and.

And we do not undertake any obligation to update these statements.

Forward looking statements are subject to risks, which could cause P. L. B Y groups actual results to differ from its historical results and forecast.

Clothing, those risks set forth in <unk> 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 P. L. B Y 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 measure is available in the earnings press release P. L. D Y filed with its form.

8-K today.

And now I will open the call to Dan Cohen.

Please go ahead.

Thank you Ashleigh and good afternoon, everyone. As we have stated throughout 2022, we had two golf this year the consolidation of our DTC businesses and the continued build out of our creator by digital platform.

I am pleased with the progress we have made against both goals in the past quarter.

While our short term results continued to be impacted by global macro and FX headwinds.

Quarter was defined by a number of positive results executing against our plan.

This inflationary period continues to impact consumer retail businesses with higher costs rising interest rates.

Over supply and declines in discretionary consumer spending.

As a result, our revenue continues to come under pressure and consumers are projected to pullback on holiday stuff.

Inventory is reaching peak levels, while consumer demand flows and customer acquisition costs are increasing.

Despite this we remain hyper focused on our goals and I think a number of steps to navigate the challenging macro environment, we have removed nearly $18 million of annualized operating expenses from the company.

Part of this reduction includes the sale of the big body aircrafts, which we sold for $17 5 million generating more than two X return on our initial cash investment in <unk>.

More than 10 billion pressing questions in under two years of ownership.

<unk> brand Playboys, it's one of the reasons, we believe the continued investment in our greater platform is so crucial.

Demand for these luxury and iconic brands.

Sure.

<unk> continues to perform well, especially given the macroeconomic environment and the strong U S. Dollar that continues to impact results. We opened a new store in short Hills, New Jersey and plan to open our Tampa, Florida impairment, New Jersey stores before the end of the year.

We also began to expand 100 into new categories and launched the Essentials collection in October SL.

Essentials was the best release of the year for the brand, but more importantly, it attracted a new audience and its first week, 22% of the essential sales were to customers who are new to the brand. We will continue to invest in diversifying the product. So it expands our addressable market.

We also launched <unk> sexual wellness products rubber stores to great success, and we will continue to replace third party products with higher margin.

<unk> operated inventory.

Following on the success of our hunting product store and the luxury high traffic Westfield century City mall in Los Angeles.

We opened our first owned Playboy pop up store in mid October we.

We are excited to test this elevated mall based pop up as a prototype for permanent brick and mortar locations targeting the Playboy consumer.

This space features rotating iconic Playboy favorites brand collaborations and seasonal lines and we are encouraged by its early success with <unk>.

Stores off to a great start in the first few weeks revenue is comparable to the average <unk> store in the U S. The current margin for Playboys pop up location is also seven percentage points higher than Playboys E Commerce margin and we expect that to increase as we incorporate more of our owned and operated merchandise due to the store.

We also continue to make great progress developing new those higher margin owned and operated products.

Last week, our first true private label consumer product for Playboy launch with Playboy lingerie to great. Early success. This is the beginning of a larger Playboy lingerie and intimates collection as well as a full line of new private label products, you will see over the next year playbook.

<unk> Dot com continues to perform well with revenue growth of over 100% through the first three quarters. This year.

Within our licensing business. We're excited about recently launched brand partnerships in Asia.

<unk> My Sugar Bay, Trendy Japanese streetwear brand Andrew.

And the experiential lounge collaborations with retail pop up in Walgreen nightclub, one oak in Tokyo in the U S. We set the tone for the ear stocking trend with Playboy and studs why Teekay collection for those who love bold self expression.

We have also launched new collaborations with Osha on the swimwear and global sports Giant lids, which officially dropped in mid October levers remains down year over year long term, we believe playboy needs to be integrated into or replace levers as the brand.

We are currently working through our branding strategy and have launched Playboy pressure products and lumber stores based on performance, we will begin to solidify our plans to integrate <unk> into playbook.

Yeah, Andy continues to struggle for a number of reasons as we have previously discussed the traditional <unk> customer has been massively impacted by inflation and the brand itself is not clearly differentiated within the market. It's trading products sell at a low margin and have historically relied almost 100% on performance marketing.

With the iOS changes last year of the <unk> business has become even more challenging to operate efficiently. We are currently reviewing strategic alternatives for the long term debt of Dnb within our company.

That brings me to the Playboy creator platform, our Playboy creator platform as the most strategic opportunity we can continue to invest it.

First and foremost it represents enormous revenue opportunity as a product onto itself.

We believe it can be a highly effective top of the funnel customer acquisition engine that we expect will lower our customer acquisition costs across all of our <unk> wide business lines overtime and third we can believe it can become the Playboy magazine of the 20, <unk> century, and its ability to drive enormous cultural relevance.

And priceless emotional connections with a massive consumer base around the world.

On the first point, we strongly believe that the paywall kreger space is ripe for a brand that is aspirational.

One that creators are proud to show off their affiliation with and one that is the safe by creators and consumers alike.

Nearly 70 years, the pages of Playboy with a place for creators of their time to freely express themselves and monetize their sex appeal in a sophisticated and aspirational way.

This brand authenticity makes Playboy today enormously appealing as a high end space for creators and talent to launch their careers and make money from those fans who are eager to connect with them.

We are confident that there is an enormous market share to be taken given the power of our brand and the trust we have with the creator community makes us uniquely positioned to win.

But of course.

Not all of it will take we also need to have the product experience and value proposition for creators and users superior to our competition.

Im excited to report today on the immense progress our team has made on all of these fronts in September our new product and technology team migrated our creator products to a newly built platform.

The goal of our re platform was twofold to enable rapid product development to deliver a product to creators and their fans.

Good if not better than the competition.

To ensure a sustainable cost base with infrastructure that will scale with the business.

Since the re platform, we have reduced our ongoing infrastructure costs by roughly 90%, we vastly improved key functionality for creators focusing first and foremost on optimizing their ability to monetize our engagement with our fans. For example, we now offer superior messaging capabilities custom person.

<unk> data analytics and advanced content organizational tools for creators to most effectively engaged with and monetize their fan relationships.

We are now continuously rolling out data informed product enhancement and have heard tremendously positive feedback from the creator community.

Since the new platform has gone like the number of creators who are making money in any given week has doubled the number of actively paying users has doubled and continues to grow week over week and most importantly on average each week, 70% of our creators are making more money than they've made the previous week.

We're very encouraged by the strong desire, we see from top and emerging creators become part of Playboy and we're confident that we can provide them with a superior product experience to the competition. We're also thrilled to start integrating our creators more deeply into the Playboy ecosystem in mutually beneficial ways and more broadly to integrate the creator platform is.

Massive customer acquisition engine across our business smart.

Every creator we speak with wants to become a Playboy fashion, the voucher or they want to model it really Playboy fashion campaign and most of all they want to aspire to join the ranks of the celebrities and Influencers, who showed up in the pages of Playboy before them as stars a Playboy covers editorial P. Charles and Victorias, the fact that our playbook.

Lingerie model search has already generated more than 10000 applicants less than halfway through the opening submission proves that the potential to be on the base of Playboy is an enormously effective creator tool.

These are the creator opportunities that only Playboy can offer this is our unmatched value proposition we.

We have started testing our way into building more integrated relationships with creators to expand the benefits we can derive across our business lines.

You've likely noticed as more of a social posts now feature Playboy creators showing off their favorite Playboy merchandize and our fashion campaigns featuring Playboy creators.

As paid digital marketing continues to become less effective and efficient with privacy changes in their industry challenges.

Expanding our owned network of fashion Influencers and affiliates is of enormous strategic advantage.

And of course, as we scale our actively engaged graders. We believe this should exponentially scale. The traffic, we're generating thus growing our customer database and helping us drive reduce CAC across the organization.

The most coveted kreger experiences like editorial collaborations fashion campaign shoot and creative director partnerships will be reserved for our highest performing and most influential creators are yen be wanted roads collection released in Q3 was a great early test how we can execute these special opportunities for creators in a way.

That drives accelerated growth across our business lines. This past summer, we gave longer the opportunity to serve as a creative director on her own DMD one jewelry line.

<unk> partnered hand in hand, with our in house design team to develop per owned brands again Z collection, which was released on her birthday in September .

The built in promotional mono drove to the collection across our social media channels drove an 84% uptick in traffic TMT dot com and a 37% decrease in daily revenue at a margin 10% higher than similar launch right.

We also saw Playboy creators like Amanda certainty organically support launder pointing to the value of nurturing a playboy community of creators.

We strongly believe that by putting creators at the center of everything we do we will activate the flywheel of growth across the organization I'm very encouraged by the accelerated progress our team has accomplished across product technology and our creator value proposition, we are well poised to enter this great brand 70 appear.

Which just so happens to be the year of the rabbit with great brands and business momentum driven by our creators.

With this team in place we look forward to what we will continue to accomplish together as I said in our last call. The path forward will not always be a straight line.

Long term plan is intact.

I am proud of how this team is executing especially in the past few months as the new members are beginning to hit their stride.

You have one of the biggest brands in the world and I am confident the business plan. We have is unique differentiated and will deliver I'll now turn the call over to Lance.

Thanks, Ben third quarter revenue grew 9% year over year to $63 6 million. Our topline results were impacted by $1 2 million FX headwind and a 27% reduction in marketing spend versus the prior year quarter as we prioritize higher margin spend over revenue growth.

On a constant currency basis revenue growth was up 11%.

Revenue in our direct to consumer segment was up 22% year over year to $44 million and on a constant currency basis was up 25%.

Similar to the trends we found the first half of this year, we continued to see strong revenue growth hummingbird at an.

Offset by significant decline, the E&E and to a much lesser extent flowers.

<unk> posted solid growth revenue was up 34% year over year to just over $21 million in the third quarter.

Constant currency basis revenue grew 41%.

As Ben mentioned, we expect to open three new stores in the fourth quarter, which will bring our U S store footprint to 11 by the end of the year.

We've also signed a lease in Boca Raton, Florida with plans to open next summer and are working to land additional suitable locations in the U S and Europe planning to open in the back half of next year.

Playboy E Commerce revenue was up 58% year over year in the third quarter, driven by a 338% increase in email and SMS.

We also saw strong results in other key holiday weekend sale periods, such as July 4th and Labor day due to a significant improvement in stock levels across our best sellers and a strong finish to the quarter.

Essentially stocking our Halloween costumes early.

The success, we saw in email and SMS is that a direct result of building.

RM team and programs that focus on customer segmentation.

Capabilities and a digital marketing strategy to reward our loyal customers through early access events and new product launches.

It's also particularly interesting given we've not yet started to tap into the E Mail database that the Playboy creator platform form rates, which we believe will be a powerful unlocked to drive growth and reduce customer acquisition costs for our direct to consumer business over the long run.

<unk> revenue declined 50% year over year in Q3, while <unk> revenue declined 10%.

While the current macro environment continues to negatively impact discretionary spending habits of the target the A&D and leverage consumer we're focusing on the levers within our control. This is Matt is spending less on digital marketing in light of the reduced efficiency, we have seen in those channels ultimately leading to lower revenue and increased profitability.

<unk>.

Third quarter revenue in the licensing segment declined 13% year over year to $14 9 million.

Klein, mostly driven by a $1 $7 million reduction in Overages that we received compared to last year.

Our retail partners are facing similar challenges in the current macroeconomic environment.

From a GAAP earnings perspective, we had a number of extraordinary noncash charges in Q3 that drove our net loss such as the impairment of intangible assets and inventory reserves.

In the third quarter, we recognized around $306 million of impairment charges related to the write down of goodwill trademark and other intangible assets.

The need for impairment was due to the reduction of our financial outlook associated with ongoing macroeconomic uncertainty along with a higher discount rate being applied to our forecast.

In the third quarter, we also recognized $5 $9 million of inventory reserves.

Noncash provision was driven by a number of historical factors along with our strategic plan to further consolidate our businesses and improve margins.

One major factor is the supply chain challenges that we've encountered over the last two years, leading to later seasonal inventory not turn as quickly as the inventory that arrived on time.

Additionally, the significant decline in the A&D revenues has left us with low quality at a low margin wholesale inventory that we need to liquidate as we realign our business around higher quality and higher margin owned and operated Playboy products.

As I mentioned on the last earnings call revenue was incredibly difficult to forecast in the current environment and as such we remain very focused on the cost levers that we control.

We have made significant progress on our expense reduction initiatives, taking roughly $18 million of annualized opex out of the business.

This puts our baseline level of Opex, excluding stock based comp and other noncash charges at roughly $165 million annually and we will continue to control costs tightly so that we can manage through the current economic environment.

These cost reduction initiatives have led to improvements in both EBITDA profitability and cash flow.

EBITDA for the third quarter was over $700000, a sequential improvement of $3 $3 million, despite $1 8 million less revenue compared to the second quarter.

Our total cash position has been stable since the end of September and we currently have over $65 million in cash equivalents, including Cowen restricted cash.

Even with continued investment into our growth initiatives, we expect cash flow from operations to remain roughly neutral through the end of this year.

We have multiple levers to further reduce costs, if circumstances dictate given us the financial flexibility to manage within the covenants of our amended credit agreement as we head into 2023.

With that I'll ask the operator to please open the line for questions.

If you'd like to ask a question at this time. Please press star one one on your telephone.

Please standby, while we compile the Q&A roster.

Our first question comes from the line of Alex Fuhrman with Craig Hallum. Your line is now open.

Great. Thanks, very much for taking my question I wanted to ask about the potential integration of the Playboy and levers brands or using the Playboy brand more to reinvent the levers stores can you talk a little bit about.

The timing of when we might start to see this are you envisioning Playboy branded storefronts in the in the former levers locations, where the current levers locations, but would love to just hear more about this strategy and what we could expect to see next year.

Thanks, Alex and actually before Ashley and then get into that I misspoke.

I wanted to make sure I update at the impairment charges were actually 301 $9 million of impairment charges, but ill, let Ashley and Ven answer your question, Yes, Alex I'll, just start with a high level and I'll turn it over to Ashley to get into more of the specifics as we look to simplify and streamline our business.

We are a brand that is probably one of the most recognized brands in the world.

December will be in the 70 of the year.

And the organic awareness and traffic that drives.

Leads us to believe that long term continue to transition and rebrand other businesses that don't fall within either Playboy or hunting for that.

It makes the most sense to really drive a cohesive ecosystem.

With that I'll, let Ashley get into a few more of the specifics aren't lovers.

Hi, so jumping in their own levers our first introduction into this is to launch Playboy pleasure. So we started.

Receiving the inventory on this and we'll be lights up and our lever stores in time for our peak selling for Valentine's day.

We're also evaluating some new store opportunities, we have within the leverage business, where we are going to brand those as Playboy pleasure store and that will enable us to continue to sell the strong merchandise we have through the leverage brand, but tomorrow.

It's exponentially add the honeyberry that product that we are seeing successes as well as rolling out a much bigger expression of our Playboy pleasure product and so we're going to start with.

Playboy pleasure line, and then lead into additional store opportunities that we will either rebrand or.

Integrate into the leveraged business that exists today, Alex I think long term as we stated our century city store is off to a great start as a hero Playboy store I think that you can imagine that levers will be.

<unk> something with the Playboy name, yet, but might be Playboy pleasure or something else as we worked through that branding as we enter 2023.

Okay. That's really helpful. Thank you and then if I could ask also about the licensing business can we get an update on how the licensing business in China is going there's been a lot of headlines in the news about continued lockdowns and things like that and just curious how that impacts your business and what the outlook is next year for <unk>.

Business.

Worked out some payment plans with our partners because they have been impacted by the Covid lockdowns. Their business has been impacted it's important for everyone to just be aware that they continue to pass some of those payments do get delayed because.

A lot of people don't know this but the payment that they make it they are subject to a withholding tax at the time that they send out the wire. So current China banking regulations require our partners to pay those payments in person.

When a section of China goes into Lockdown, they end up closing banks, our partners actually can't go in person to make that payment. So thats led to some delays, but what we have seen as soon as as banks reopen our partners come out and pay ASO.

Going to continue working with them and are pleased with where they are Alex. Let me just also add long term as we sort of think about 2023 and beyond.

I think I've stated this historically, but for the past couple of years, we believe transitioning our China business into a joint venture would be the most beneficial to provide long term stability and growth in the market.

Over the past few months, we've made substantial progress towards a potential joint venture with a sophisticated operator and so as we move forward.

I think that is the best structure for our business and also provides the most stability and long term growth and that's what we're focused on.

Terrific Thats really helpful. Thank you very much.

Thanks, Alex.

Our next question comes from the line of Jason Tilton with Canaccord Genuity. Your line is now open.

Yes, thanks for taking the question.

In the prepared remarks, you mentioned that the inventory in stocks for much better over the summer as you sort of tried to get stuff in stock ahead of the holiday season. So I'm curious if you could talk about how demand trended into October .

Leading into Halloween relative to both of your expectations over recent months and relative to last year, where you saw strong demand, but could be if the visit.

The out of stocks.

Hi, Jason this is actually so I'll speak to Halloween there are two flavors of the Halloween business. The season. So we saw really strong demand and continued excitement around our Playboy brand and so we delivered a strong Halloween season with continued interest in the <unk> suite.

And also integrated some additional Andy Halloween costumes into the Playboy business and we saw that through much of Q3 and then into October .

Randy side with Lance fewer alluded to in <unk>.

The script earlier we.

Have significantly reduced our paid media spend last year, we were operating with Andy in a very different way, where we are driving revenue at the expense of profitability and going after top line aggressively as we've seen in effective marketing.

As we book.

The iOS privacy changes have hit us we have significantly reduced the paid media side with an Ida earnings and further resolved that may topline more challenging for Andy and so while we negative comp we improved our earnings relative to last year, and what we saw which we feel pretty good about as we reduced our paid media spend by two five times versus.

The decline we saw in revenue so our decline in revenue was significantly lower than the decline we saw in our paid media spend and again that just speaks to the earnings okay.

Thanks, That's really helpful. Just one follow up on that on center fold. It was really great detail you shared about the progress being made there on the tech side.

I was just wondering how do you view the go to market strategy. There do you feel like the product is at the point, where youre going to start expanding.

Expanding.

The outreach to consumers and also how do you view the competitive landscape, obviously listen existing players there Twitter over recent weeks has mentioned the possibility of launching sort of similar tools and services to there. So just curious how you view the competitive landscape going forward there.

Sure. So look I am pleased with where the product is today and the improvements we've made we've reduced our tech infrastructure costs by over 90%.

But more importantly, we are able to rollout changes very very quickly in a matter of hours or days versus where we were before in the old platform in a matter of weeks or months.

There is still room to improve the product.

The way we're thinking about.

What was the central product, which is really now Playboy as we integrate everything together that is really our magazine moving forward of the 20 <unk> century, and so youll continue to see improvements to the homescreen to the search functionality.

But we know what the consumer is wanting.

It comes down to messaging, we have started to onboard creators at a faster pace over the past few weeks now that we feel very comfortable with the product.

And when we think about the top of the funnel and the integration that it provides for the rest of the ecosystem, you're seeing it through our social media posts and so instead of just posting a T shirt and then a creator we're now posting that creator in the T shirts, and we've had engagements on their social media that have topped $1 3 million views doing.

That.

And so I am I remain.

<unk> bullish I remain that this is the best investment we can continue to make long term as Lance said, we saw a massive increase.

In our E mail and SMS Playboy Dot com.

Without tapping into.

Tens of thousands plus.

Customers that we have received.

We see their E mail on etc. Paul do so as we move forward.

This is a brand that has worked with creators for the past 70 years, that's really what drove this brand at the end of the day.

And that's what we're returning tale and I believe that if we are successful and continue to be successful with the creators.

That we bring onto the platform it will not only lead to a very profitable business.

And two centers, both by itself, but it will drive the rest of the business as well.

This is actually I'll, just jumping quickly on that but one of the other things that we've done to integrate across both our central business and our consumer products business. We currently have a model search going on through that.

Partner orbit.

You have a goal of acquiring 20000 additional.

Kind of customers and who are file and what we're seeing is as we have applicants into this program. We are able to ship them into the creator program and have a significant amount of interest from those same applicants who joined center called Enterprise. This is a big win where there's a significant amount of synergy between.

<unk> creators that wanted to be part of Playboy and that includes participating in whether it's a campaign for lingerie or signing up to become a greater percent of phone yes.

It's everything we do is going to be centered on one ecosystem moving forward.

The nice thing about the <unk> platform as well as we now have a technology stack that is very very flexible.

Current and modern and as we look to further consolidate the business and integrate products.

Such as our legacy products, we now have a platform that we can do that on which allows us to have better operating efficiency moving forward.

Great. That's very helpful. Thanks, a lot.

Our next question comes from the line of Jim Duffy with Stifel. Your line is now open.

Okay.

Thank you good afternoon.

Hey, Im traveling I joined the call late so forgive me if I'm retreading content covered earlier in the prepared remarks, but lance could you give us a rundown on cash balances liquidity.

Cash flow projections and interest expense projections. Please.

Yes sure.

So from a cash perspective as I mentioned.

We're pretty much flat today to where we where we ended the quarter right around $65 million of cash equivalents and restricted cash.

In terms of where we see things moving forward.

Our business our businesses are creating cash flow right, but we are reinvesting that cash flow back into these growth initiatives around building out that creator lab platform.

Building out our owned and operated business on the direct to consumer side, because we see the long term potential for.

<unk> margin uplift there. So we can make a choice that we could not be investing back into those businesses and produce more cash flow, where we're trying to strike a fine balance here between reinvesting that cash flow into the business.

But not investing too much in the current environment. So.

That's really how we're thinking about it right now.

I also said on the call we've got a lot of levers right now within our control in terms of managing our costs managing investment back into the business.

Ben also talked about the re platforming we did.

On the creative led platform and some of the efficiencies that we were able to wring out of that I mean, when you think about it on an annualized basis.

Can save around one.

Just on the infrastructure costs alone based on the work that we've done there.

So we're going to continue again to make those near term investments.

And kind of balance everything in terms of our liquidity needs.

And make sure that we're living within the covenants of our credit agreement and like I said, we've got a lot of different levers that we can pull if need be but I think right now where we're managing as best as we can through the current environment and we feel good about the flexibility that we maintain.

Understood.

Through the lens of the leveraged profile you see opportunity to improve the EBITDA and that's where you see here.

Your best focus.

I look over the long term right you've got we're really just starting to put out our private label products and.

We're seeing it right now with the initial launch of Playboy lingerie.

We'll see it with the upcoming launch of.

Playboy product in and lever stores.

So we see real ability to drive increased improved product margin there.

And yes, I think these are these investments that we're making we've talked about this kind of time and again, we're making near term investment that we expect to pay off over the long term.

In terms of margin pick up.

I think you'd also asked about the.

The interest expense I mean look.

Hard to know exactly where rates are going to end up a continue to increase.

Our interest payment this year is still at the LIBOR plus 625.

And labor being a 50 bps floor that we're still locked into through through this next payment period, but look next year I anticipate the the debt service cost to go up by at least $10 million or more so we're factoring that into our investment plans for next year.

To make sure that we're like I said cash flow breakeven.

For the year and Thats really what were targeting is to reinvest back into the business in a thoughtful way.

And preserve cash to weather the current environment.

Makes sense and let's say here you say the expense rate of $165 million annually to have that correct. Yes.

Okay.

And then one coming your way I'm very interested in your comments on the potential conversion to a JV structure in China is there a contractual window in the current license agreement that allows you to do that without compensating the licensing partner.

And I'm I guess I'm curious what you'd see is the realized margin opportunity versus <unk>.

License royalty rate.

You think it gives that strategic justification.

Jim not to not answer your question, but unfortunately at this time I can't answer that question as you can imagine.

For legal reasons and also just for business reasons.

I'll, just sort of reiterate where enough for.

Just to follow up on what you had ask Lance to.

What we're focused on right now is continuing to streamline the business and I believe that we now have the team.

And the pieces in place. So you look at what Ashley's team has done which really didn't get into place until July timeframe.

With what they've developed in a short period of time with lingerie, what they have coming over the next.

Year with private label product all of these things allow us to enhance our margins and then you start to think about the consolidation.

Of our what I would say is these very small legacy businesses into what I would tell you is hero products moving forward in that.

Gives us a lot of flexibility moving forward from a cost perspective.

And so that's what that's what we're focused on.

Yes.

As we approach 2023, we need to continue to invest in the things that are strategically important we've seen great growth on center fold.

Other areas in Playboy lines raise off to a great start.

Coupled with making sure that we maintain plenty of headroom with our covenants and our cash balances.

Given no one knows how long the economy will will be where it is and if it will get worse or not but we're planning we're planning for the worst and making sure that we maintain maximum flexibility as a company.

Very good thank you.

Our next question comes from the line of George Kelly with Ross. Your line is now open.

Hey, everybody thanks for taking my questions.

So first for Lance.

Regarding your <unk>.

Formulated the guidance.

You provided it but.

I think last quarter, you called them than not annualized non product cost isn't there a second part of the Formula which is what the product costs are on top of that I think it was 25%. So just curious if any of that has changed.

Yes, no no real change on the on the product side I mean the.

The one thing that we are seeing.

Youre, obviously seeing that across the board and you'll see you saw it in the third quarter Youre going to see it in the fourth quarter as is.

Step that stepped up promotional activity right. There is a lot of inventory that we've got to move that other competitors in the retail space have to move so that will have an impact on near term product margins, but in terms of.

Input cost, they're not really changing in terms of how we're thinking about it over the long term.

Okay, Yes, and I'll just I'll just jump on the jump in on that so we know there is there.

Significant improvement with the owned and operating coming we are also evaluating other costs related to our fulfillment model and that scenario, where just from my past, we have an opportunity to reduce spending cost and so we're looking pretty heavily into how we can go after savings there across our brands and then identify.

Obviously, the improved product margin and have tightened buys on inventory in the current quarter all the way through the front half of next year and tightening those buys does enable us to really reduce the amount of power we have to do heading into Q1.

We will be up against aggressive promo next year, just because we've been promoting through Q3.

But we are we are feeling good about how we've tightened by knowing that the economy slowing and that 25% number has been consistent over the last two quarters. So it.

It's not moving a ton.

Okay and then next question.

You talked a lot about sort of consolidating and really investing in the core power brands I'm curious if that could involve any outright sort of.

Asset sales.

Or could there be other potential asset sales that you are considering.

So without talking about.

Where we're moving from a strategic perspective at this point I would say that we our goal is to have as many arrows in our quiver as possible.

And we will always we will always look at things Opportunistically as fiduciaries, but right now we're focused on is consolidating the businesses. We have around the brands that we know that work, which are honeyberry Playboy.

And one of the challenges with the 70 year Old company is you have a lot of small business lines that take back office infrastructure.

Finance accounting legal HR et cetera to maintain.

And now that we've seen the traction we started to see on center falls that allows us moving forward to be strategic in how we consolidate business lines.

With the goal of improving our efficiency.

And so right now as we said we're looking through everything from a strategic standpoint, we think there's a real opportunity to lower our fulfillment costs.

And we'll have to think through the long term and how that fits into the Playboy ecosystem saving consolidation can take many different forms right. We've talked about the consolidation really on the brand side.

And how do we leverage the Playboy brand within levers within E&E, because those arent really brands.

Standalone. We also we haven't really talked about it on this call but.

Storage <unk>, we've talked about the product I.

I guess breath, Andy which was kind of historically, how they operated with.

Well over 10000 15000 skus.

That creates real.

Fulfillment headaches and challenges when you're a small ish company like Andy is and so part of that consolidation is how do we move through kind of that wholesale third party low margin low quality inventory, how do we reduce the number of Skus and drive.

More higher margin skus through that business. So that's another way that we think about consolidation as Ben mentioned.

Yeah.

If we are able to consolidate warehouses to consolidate operations on that side of the house.

When we look at standard fulfillment cost as a percent of revenue we run.

Incredibly high relative to where we think we should be over the long term. So we think theres railroad to drive efficiency through that but going back to that consolidation point, we've got to really figure out how to kind of tie all this together both from an inventory perspective and from a systems perspective.

Yes.

Okay. Thank you.

I'm showing no further questions in queue at this time.

This concludes today's conference call. Thank.

Thank you for participating you may now.

Now disconnect.

The conference will begin shortly to raise Johan during Q&A you can dial one one.

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Okay.

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Okay.

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Yes.

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Good day, and thank you for standing by.

Welcome to the P. L. B Y groups third quarter 2022 earnings conference call.

At this time all participants are in a listen only mode.

After the speaker's presentation, there will be a question and answer session.

To ask a question during the session you will need to press star one one on your telephone.

Please be advised that today's conference is being recorded.

I would now like to hand, the conference over to your host today actually decent mountain at ICR. Please go ahead.

Yeah.

Good afternoon, everyone and welcome to P. L. D Y groups third quarter 2022 earnings conference call.

Actually do you send on from ICR.

Hosting todays call are Ben Cohen, Chief Executive Officer, and Lance Barton Chief Financial Officer.

After our prepared remarks, we will open up the call for questions. When we will be joined by Ashley character President of global consumer product.

The information discussed today is qualified in its entirety by the form 8-K that has been filed today by <unk> Group, Inc, which may be accessed on the SEC's website and plc why group's website.

Today's call is also being webcast and a replay will be posted to <unk> 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 <unk> 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.

Thanks.

Forward looking statements are subject to risks, which could cause <unk> actual results to differ from historical results and forecast.

<unk> those risks set forth in <unk> 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 <unk> 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 measure is available in the earnings press release, PLD why filed with its form.

Good day.

And now I will open the call to Dan Cohen.

Please go ahead.

Thank you Ashleigh and good afternoon, everyone. As we have stated throughout 2022, we had two goals. This year the consolidation of our DTC businesses and the continued build out of our creator web digital platform.

I am pleased with the progress we have made against both goals in the past quarter.

While our short term results continued to be impacted by global macro and FX headwinds.

<unk> was defined by a number of positive results executing against our plan.

This inflationary period continues to impact consumer retail businesses with higher costs rising interest rates oversupply and declines in discretionary consumer spending.

As a result, our revenue continues to come under pressure and consumers are projected to pullback on holiday stuff.

Inventory is reaching peak levels, while consumer demand flows and customer acquisition costs are increasing.

Despite this we remain hyper focused on our goals and have taken a number of steps to navigate the challenging macro environment, we have removed nearly $18 million of annualized operating expenses from the company.

Part of this reduction includes the sale of the big body aircrafts, which we sold for $17 5 million generating a more than two X return under our initial cash investment and more than 10 billion pressing questions in under two years of ownership.

We believe there are further cost reductions to be realized and we are working towards simplifying our business and reducing operational complexity to achieve those savings as a result, our business will align around <unk> and our hero brand Playboys. It's one of the reasons. We believe the continued investment in our greater platform is so crucial.

Demand for these luxury and iconic brands.

We also began to experience hummingbird into new categories.

Once the essentials collection in October .

Essentials was the best release of the year for the brand, but more importantly, it has attracted a new audience.

Its first week, 22% of the essential sales were to customers who are new to the brand.

We will continue to invest in diversifying the product so as to expand our addressable market.

We also launched plenty of sexual wellness products at lumber stores to great success, and we will continue to replace third party products with higher margin.

<unk> operated inventory.

Following on the success of our <unk> store in the luxury high traffic Westfield century City mall in Los Angeles, We opened our first owned Playboy pop up store in mid October .

We are excited to test this elevated mall based pop up as a prototype for permanent brick and mortar locations targeting the Playboy consumer.

Space features rotating iconic Playboy favorites brand collaborations and seasonal lines and we are encouraged by its early success. The store is off to a great start in the first few weeks revenue is comparable to the average <unk> store in the U S.

Current margin for Playboys pop up location is also seven percentage points higher than Playboys E Commerce margin and we expect that to increase as we incorporate more of our owned and operated merchandise due to the store.

We also continue to make great progress developing new those higher margin owned and operated products.

Last week, our first true private label consumer product for Playboy launch with Playboy Andre to great. Early success. This is the beginning of a larger Playboy lingerie and intimates collection as well as a full line of new private label products, you will see over the next year.

Playboy Dot com continues to perform well with revenue growth of over 100% through the first three quarters. This year.

Within our licensing business. We're excited about recently launched brand partnerships in Asia <unk>.

<unk> My Sugar Bay, a trendy Japanese street wear brand.

And an experiential lounge collaboration with retail pop up in Walgreen now nightclub one oak in Tokyo in the U S. We set the tone for the ear stocking trends with Playboy and studs why Teekay collection for those who love bold self expression.

We have also launched new collaborations with Osha on the swimwear and global sports Giant lids, which officially dropped in mid October .

Leverage remains down year over year long term, we believe playboy needs to be integrated into or replace lovers. As the brands. We are currently working through our branding strategy and have launched Playboy pleasure products and lumber stores based on performance, we will begin to solidify our plans to integrate lubbers into playbook.

Yeah, Andy continues to struggle for a number of reasons as we have previously discussed the traditional E&C customer has been massively impacted by inflation and the brand itself is not clearly differentiated within the market. It's trading products sell at a low margin and have historically relied almost 100% on performance marketing.

With the iOS changes last year of the <unk> business has become even more challenging to operate efficiently.

We are currently reviewing strategic alternatives for the long term fit of Dnb within our company.

That brings me to the Playboy creator platform.

Playboy creator platform as the most strategic opportunity we can continue to invest it first and foremost it represents enormous revenue opportunity as a product onto itself.

And priceless emotional connection with a massive consumer base around the world.

On the first point, we strongly believe that the paywall creator space is ripe for a brand that is aspirational.

One that creators are proud to show off their affiliation with and one that is the safe by creators and consumers alike for.

For nearly 70 years the pages, a playbook with a place for creators of their time to freely express themselves and monetize their sex appeal in a sophisticated and aspirational way.

This brand authenticity mixed Playboy today enormously appealing as a high end space for creators and talent to launch their careers and make money from those fans who are eager to connect with them.

We are confident that there is an enormous market share to be taken given the power of our brand and the trust we have with the creator community makes us uniquely positioned to win but of course, it's not all it will take we also need to have a product experience and value proposition for creators and users superior to our comp.

Petition I.

I am excited to report today on the immense progress our team has made on all of these fronts in September our new product and technology team migrated or greater product to a newly built platform.

The goal of our re platform was twofold to enable rapid product development to deliver a product to creators and their fans as good if not better than the competition and to ensure a sustainable cost base with infrastructure that will scale with the business.

<unk> data analytics and advanced content organizational tools for creators to most effectively engaged with and monetize their fan relationships.

We are now continuously rolling out data informed product enhancement and have heard tremendously positive feedback from the creator community.

Since the new platform has gone <unk> the number of creators who are making money in any given week has doubled the number of actively paying users has doubled and continues to grow week over week and most importantly on average each week, 70% of our creators are making more money than they need the previous week.

A massive customer acquisition engine across our business lines.

The fact that our Playboy lingerie model search has already generated more than 10000 applicants less than halfway through the open submission proves that the potential to be on the base of Playboy is an enormously effective creator tool.

These are the greater opportunities that only Playboy can offer this is our unmatched value proposition we.

We have started testing our way into building more integrated relationships with creators to expand the benefits we can derive across our business lines.

You've likely noticed as more of a social posts now feature Playboy creators showing off their favorite Playboy merchandize and our fashion campaigns featuring Playboy creators.

As paid digital marketing continues to become less effective and efficient with private see changes in their industry challenges.

Expanding our owned network of fashion Influencers in the affiliates is an enormous strategic advantage.

The most coveted kreger experiences like editorial collaborations fashion campaign shoot and creative director partnerships will be reserved for our highest performing and most influential creators are yen. He wanted roads collection released in Q3 was a great early test how we can execute these special opportunities for creators in a way.

That drives accelerated growth across our business lines. This past summer, we gave long or the opportunity to serve as a creative director on her own E&E lingerie line.

<unk> partnered hand in hand, with our in house design team to develop her own brands at the end of the collection, which was released on her birthday in September .

The built in promotional monitor drove to the collection across our social media channels drove an 84% uptick in traffic TMT dot com and a 37% increase in daily revenue at a margin 10% higher than similar lingerie.

We also saw Playboy creators like Amanda certainty organically support longer pointing to the value of nurturing a playboy community of creators.

Which just so happens to be the year of the rabbit with great brands and business momentum driven by our creators.

With this team in place we look forward to what we will continue to accomplish together as I said in our last call. The path forward will not always be a straight line.

Long term plan is intact and I am proud of how this team is executing especially in the past few months as the new members are beginning to hit their stride.

One of the biggest brands in the World and I am confident the business plan. We have is unique differentiated and will deliver I'll now turn the call over to Lance.

Thanks, Ben third quarter revenue grew 9% year over year to $63 $6 million, our topline results were impacted by $1 $2 million of FX headwinds and a 27% reduction in marketing spend versus the prior year quarter as we prioritize higher margin spend over revenue growth.

On a constant currency basis revenue growth was up 11%.

Revenue in our direct to consumer segment was up 22% year over year to $44 million and on a constant currency basis was up 25%.

Similar to the trends we saw in the first half of this year. We continued to see strong revenue growth in the hummingbird and play point offset by significant declines in A&D and to a much lesser extent flowers.

<unk> posted solid growth revenue was up 34% year over year to just over $21 million in the third quarter and on a.

Constant currency basis revenue grew 41%.

Ben mentioned, we expect to open three new stores in the fourth quarter, which will bring our U S store footprint to 11 by the end of the year.

<unk> also signed a lease in Boca Raton, Florida with plans to open next summer and are working to land additional suitable locations in the U S and Europe planning to open in the back half of next year.

Playboy E Commerce revenue was up 58% year over year in the third quarter, driven by a 338% increase in email and SMS.

We also saw strong results in other key holiday weekend sale periods, such as July 4th and Labor day due to a significant improvement of in stock levels across our best sellers and a strong finish to the quarter from essentially stocking our Halloween costumes early.

The success, we saw an E mail SMS as a direct result of building CRM team and program to focus on customer segmentation.

SMS capabilities and a digital marketing strategy to reward our loyal customers through early access events and new product launches.

It's also particularly interesting given we've not yet started to tap into the E Mail database, the Playboy creator platform form rates, which we believe will be a powerful unlocked to drive growth and reduce customer acquisition costs for our direct to consumer business over the long run.

<unk> revenue declined 50% year over year in Q3, while <unk> revenue declined 10%.

While the current macro environment continues to negatively impact discretionary spending habits of the target the A&D and leverage consumer.

We're focusing on the levers within our control.

This is spending less on digital marketing in light of the reduced efficiency, we have seen in those channels ultimately leading to lower revenue and increased profitability.

Third quarter revenue in the licensing segment declined 13% year over year to $14 9 million the.

The decline, mostly driven by a $1 $7 million reduction in Overages that we received compared to last year as our retail partners are facing similar challenges in the current macroeconomic environment.

From a GAAP earnings perspective, we had a number of extraordinary noncash charges in Q3 that drove our net loss such as the impairment of intangible assets.

Inventory reserves.

In the third quarter, we recognized around $306 million of impairment charges related to the write down of goodwill trademarks and other intangible assets.

Need for impairment was due to the reduction of our financial outlook associated with ongoing macroeconomic uncertainty along with a higher discount rate being applied to our forecast.

In the third quarter, we also recognized $5 9 million.

Inventory reserves.

This noncash provision was driven by a number of historical factors along with our strategic plan to further consolidate our businesses and improve margins.

One major factor is the supply chain challenges that we've encountered over the last two years, leading to later seasonal inventory not turn as quickly as the inventory that arrived on time.

Additionally, the significant decline in A&D revenues has left us with low quality and low margin wholesale inventory that we need to liquidate as we realign our business around higher quality and higher margin owned and operated Playboy products.

As I mentioned on the last earnings call revenue was incredibly difficult to forecast in the current environment and as such we remain very focused on the cost levers that we control.

We have made significant progress on our expense reduction initiatives, taking roughly $18 million of annualized opex out of the business.

These cost reduction initiatives that led to improvements in both EBITDA profitability and cash flow.

Adjusted EBITDA for the third quarter with over $700000.

<unk> improvement of $3 $3 million, despite $1 8 million less revenue compared to the second quarter.

Our total cash position has been stable since the end of September and we currently have over $65 million in cash equivalents, including crypto and restricted cash.

Even with continued investment into our growth initiatives, we expect cash flow from operations to remain roughly neutral through the end of this year.

We have multiple levers to further reduce costs, if circumstances dictate giving us the financial flexibility to manage within the covenants of our amended credit agreement as we head into 2023.

With that I'll ask the operator to please open the line for questions.

If you'd like to ask a question at this time. Please press star one one on your telephone.

Please standby, while we compile the Q&A roster.

Our first question comes from the line of Alex Fuhrman with Craig Hallum. Your line is now open.

The timing of when we might start to see this or are you envisioning Playboy branded storefronts in the in the former levers locations with a current levers locations, but would love to just hear more about this strategy and what we could expect to see next year.

Thanks, Alex and actually before I actually get into that I misspoke.

I wanted to make sure I updated the impairment charges were actually $301 9 million of impairment charges, but I'll, let Ashley and Ven answer your question, Yes, Alex I'll, just start with a high level and I'll turn it over to Ashley to get into more of the specifics as we look to simplify and streamline our business.

We are a brand that is probably one of the most recognized brands in the world in December we'll be in that 70 at the year.

And the organic awareness and traffic that drives.

Leads us to believe that long term continue to transition and rebrand other businesses that don't fall within either Playboy or hunting for that.

It makes the most sense to really drive a cohesive ecosystem.

With that I'll, let Ashley get into a few more of the specifics aren't lovers.

Hi, so jumping in there on levers our first introduction into this is to launch Playboy pleasure. So we started.

Receiving the inventory on this and we'll be lights up in our leverage stores in time for our peak selling for Valentine's day.

We're also evaluating some new store opportunities we have within the leverage business, where we are going to brand does is Playboy pleasure store and that will enable us to continue to sell the strong merchandise we have through the leverage brand, but tomorrow.

Exponentially add the Honeywell that product that we are seeing successes as well as rolling out a much bigger expression of our Playboy partner product and so we're going to start with.

Playboy pleasure line, and then lead into additional store opportunities that we will either rebrand or <unk>.

Integrate into the levers business that exists today, yes, Alex I think long term as we stated our century city store is off to a great start as a hero Playboy store I think that you can imagine that levers will be.

Brad it's something with the Playboy day minute, but might be Playboy pleasure or something else as we worked through that branding as we enter 2023.

Business.

So we haven't had any revenue impact because as we mentioned before our partners pay us in advance. So we have received more payments in the revenue that we've recognized we did talk about last quarter. How we've we've worked out some payment plans with our partners because they have been impacted by the Covid lockdowns their businesses.

Impacted it's important for everyone to just be aware that they continue to pay off some of those payments do get delayed because.

A lot of people don't know this but the payment that they make us are subject to a withholding tax at the time that they send out the wire. So current China banking regulations require our partners to pay those payments in person.

To continue working with them in and pleased with where they are Alex. Let me just also add long term as we sort of think about 2023 and beyond.

I think I've stated this historically, but for the past couple of years, we believe transitioning our China business into the joint venture would be the most beneficial to provide long term stability and growth in the market.

Over the past few months, we've made substantial progress towards a potential joint venture with a sophisticated operator and so as we move forward.

I think that is the best structure for our business and also provides the most stability and long term growth and that's what we're focused on.

Terrific Thats really helpful. Thank you very much.

Thanks, Alex.

Our next question comes from the line of Jason <unk> with Canaccord Genuity. Your line is now open.

Yes, thanks for taking the question.

Leading into Halloween relative to both of your expectations over recent months and relative to last year, where you saw strong demand, but could be if the visit.

The out of stocks.

Hi, Jason This is Ashley so I'll speak to Halloween there are two flavors of the Halloween business. This season. So we saw really strong demand and continued excitement around our Playboy brand and so we delivered a strong Halloween season with continued interest in the <unk> suite and also integrated some additional Andy Halloween cause.

<unk> ended the Playboy business and we saw that through much of Q3 and then into October .

Randy side with fewer.

Fewer alluded to in the in the.

Script earlier, we have significantly reduced our paid media spend last year, we were operating with Andy in a very different way, where we are driving revenue at the expense of profitability and going after top line aggressively as we've seen ineffective marketing.

Results as we've look at iOS privacy changes that hit US we have significantly reduced the paid media side with an Ida earnings and so as a result that may topline more challenging for Andy and so while we negative comps, we improved our earnings relative to last year.

What we saw which we feel pretty good about as we reduced our paid media spend by two five times versus the decline we saw in revenue. So our decline in revenue was significantly lower than the decline we saw in our paid media spend and again that just speaks to the earnings okay.

Thanks, That's really helpful. Just one follow up on that on center fold. It was really great detail you shared about the progress being made there on the tech side I was just wondering how do you view the go to market strategy. There do you feel like the product is at the point, where youre going to start spending.

Expanding.

The outreach to consumers and also how do you view the competitive landscape, obviously listen existing players there Twitter over recent weeks as mentioned the possibility of launching sort of similar tools and services to there, but just curious how you view the competitive landscape going forward there.

Sure. So look I am pleased with where the product is today and the improvements we've made we've reduced our tech infrastructure costs by over 90%.

But more importantly, we are able to rollout changes very very quickly as a matter of hours or days versus where we were before on the old platform in a matter of weeks or months.

There is still room to improve the product.

The way we're thinking about.

But we know what the consumer is wanting.

No no.

Down to messaging, we have started to onboard creators at a faster pace over the past few weeks now that we feel very comfortable with the product.

That.

And so I remain bullish I remain that this is the best investment we can continue to make long term and as Lance said, we saw a massive increase.

In our email and SMS Playboy Dot com.

That's without tapping into.

Tens of.

<unk> plus.

Customers that we have.

We see their E mail on etc. Paul do so as we move forward.

This is a brand that has worked with creators for the past 70 years, that's really what drove this brand at the end of the day.

And that's what we're returning tale and I believe that if we are successful and continue to be successful with the creators.

That we bring onto the platform it will not only lead to a very profitable business.

<unk> by itself, but it will drive the rest of the business as well.

This is actually I'll, just jumping quickly on that so one of the other things that we've done to integrate across both our central business and our consumer products business. We currently have a model search going on through <unk>.

Partner orbit, we have a goal of acquiring 20000 additional.

Kind of customers and who are file and what we're seeing is as we have applicants into this program. We are able to ship them into the creator program and have a significant amount of interest from those same applicants to join centerfold enter practice is a big win where there's a significant amount of synergy between.

<unk> creators that want to be part of Playboy and that includes participating in whether it's a campaign for lingerie or signing up to become a greater percent of phone. Yes, I think it's everything we do is going to be centered on one ecosystem moving forward.

And the nice thing about the <unk> platform as well as we now have a technology stack that is very very flexible.

It's current and modern and as we look to further consolidate the business and integrate products.

Such as our legacy products, we now have a platform that we can do that on which allows us to have better operating efficiency moving forward.

Great. That's very helpful. Thanks, a lot.

Our next question comes from the line of Jim Duffy with Stifel. Your line is now open.

Okay.

Thank you good afternoon.

Hey, I'm traveling I joined the call late so forgive me if I'm retreading content covered earlier in the prepared remarks, but lance could you give us a rundown on cash balances liquidity.

Cash flow projections and interest expense projections. Please.

Yes sure.

So from a cash perspective as I mentioned.

We're pretty much flat today to where we where we ended the quarter right around $65 million of cash equivalents and restricted cash.

Yes.

In terms of where we see things moving forward.

Our business our businesses are creating cash flow right, but we are reinvesting that cash flow back into these growth initiatives around building out that creator led platform.

Building out our owned and operated business on the direct to consumer side, because we see the long term potential for.

From a margin uplift there. So we can make a choice that we could not be investing back into those businesses and produce more cash flow, where we're trying to strike a fine balance here between reinvesting that cash flow into the business.

But not investing too much in the current environment. So.

That's really how we're thinking about it right now.

I also said on the call we've got a lot of levers right now within our control in terms of of managing our costs managing investment back into the business.

<unk> also talked about the re platforming we did.

On the creative led platform and some of the efficiencies that we were able to wring out of that I mean, when you think about it on an annualized basis.

Can save around one.

Shift on the infrastructure costs alone based on the work that we've done there.

So we're going to continue again to make those near term investments.

And kind of balance everything in terms of our liquidity needs.

Understood.

Through the lens of the leveraged profile you see opportunity to improve the EBITDA and that's where you see here.

Your best focus.

Look over the long term right you've got we're really just starting to put out our private label products and.

We're seeing it right now with with the initial launch of Playboy lingerie.

We'll see it with the upcoming launch of.

Playboy product in and lever stores.

So we see real ability to drive increased improved product margin there.

And yes, I think these investments that we're making we've talked about this kind of time and again, we're making near term investment that we expect to pay off over the long term.

In terms of margin pick up.

I think you had also asked about the.

The interest expense I mean look.

Hard to know exactly where rates are going to end up a continued to increase.

Our interest payment this year is still at the LIBOR plus 625.

And liver being a 50 bps floor that we're still locked into through through this next payment period, but look next year I anticipate the the debt service cost to go up by at least $10 million or more so we're factoring that into our investment plans for next year.

To make sure that we're like I said cash flow breakeven.

For the year and Thats really what were targeting is to reinvest back in the business in a thoughtful way.

And preserve cash to weather the current environment.

Makes sense and let's say here you say the expense rate of $165 million annually to have that correct. Yes.

Okay.

And then Ben one coming your way I'm very interested in your comments on the potential conversion to a JV structure in China is there a contractual window in the current license agreement that allows you to do that without compensating the licensing partner.

And I'm I guess I'm curious what you'd see is the realized margin opportunity versus.

License royalty rate.

Do you think it gives us strategic justification.

Jim not to.

Not answering your question, but unfortunately at this time I can't answer that question as you can imagine.

For legal reasons and also just for business reasons.

I'll, just sort of shows the rate where enough for.

And just to follow up on what you would ask Lance to.

What we're focused on right now is continuing to streamline the business and I believe that we now have the team.

And the pieces in place. So you look at what Ashley's team has done which really didn't get into place until July timeframe.

With what they have developed in a short period of time with lingerie, what they have coming over the next.

Year with private label product all of these things allow us to enhance our margins and then you start to think about the consolidation.

Of our what I would say is these very small legacy businesses into what I would say theres hero products moving forward in that.

Gives us a lot of flexibility moving forward from a cost perspective.

So that's that's what we're focused on.

Yes.

As we approach 2023, we need to continue to invest in the things that are strategically important we've seen great growth on center fold.

Other areas in Playboy launch, where he is off to a great start.

Coupled with making sure that we maintain plenty of headroom with our covenants and our cash balances.

Very good thank you.

Our next question comes from the line of George Kelly with Ross. Your line is now open.

Hey, everybody thanks for taking my questions.

So first for Lance.

Regarding your <unk>.

Kind of Formula.

You provided it but.

I think last quarter, you called them the non annualized non product cost isn't there a second part of the Formula which is what the product costs are on top of that I think it was 25%. So I'm just curious if any of that has changed.

Yes, no no no real change on the on the product side I mean the.

The one thing that we are seeing everything youre, obviously seeing thats across the board and you'll see you saw it in the third quarter Youre going to see it in the fourth quarter as is.

Stepped at stepped up promotional activity right. There is a lot of inventory that we've got to move that other competitors in the retail space have to move so that will have an impact on near term product margins, but in terms of.

Input cost there, they're not really changing in terms of how we're thinking about it over the long term.

Okay, Yes, and I'll just I'll just jump on that jump in on that so we know there is there.

There is significant improvement with the owned and operated coming we are also evaluating other costs related to our fulfillment model and that scenario, where it gets from my past.

Had an opportunity to reduce spending cost and so we're looking pretty heavily into how we can go after savings there across our brands and then identify obviously the improved product margin and have tightened buys on inventory in the current quarter all the way through the front half of next year and tightening those buys does enable us to really redeem.

The amount of power, we have to do heading into Q1.

We'll be up against aggressive promo next year, just because we've been promoting through Q3.

We are we are feeling good about how we've tightened by knowing that the economy's line and that 25% number has been consistent over the last two quarters. So.

It's not moving a ton.

Okay and then next question.

You talked a lot about sort of consolidating and really investing in the core power brands I'm curious if that could involve any outright sort of.

Asset sales.

Or could there be other potential asset sales that you are considering.

So without talking about where we're moving from a strategic perspective at this point I would say that we our goal is to have as many arrows in our quiver as possible.

And one of the challenges with the 70 year Old company is you have a lot of small business lines that take back office infrastructure.

Finance accounting legal HR et cetera to maintain.

And now that we've seen the traction we started to see on southern fault that allows us moving forward to be strategic in how we consolidate business lines.

With the goal of improving our efficiency.

And so right now as we said we're looking through everything from a strategic standpoint, we think there's a real opportunity to lower our fulfillment cost.

And we'll have to think through the long term and how that fits into the Playboy ecosystem.

Consolidation can take many different forms right, we've talked about the consolidation really on the brand side.

And how do we leverage the Playboy brand within levers within E&E, because those arent really brands.

Standalone. We also we haven't really talked about it on this call but.

<unk>, we've talked about the product I guess breath, Andy which was kind of historically, how they operated with.

All over 10000 15000 skus.

That creates real.

Film It headaches and challenges when you're a small ish company like Andy is and so part of that consolidation is how do we move through kind of that wholesale third party low margin low quality inventory, how do we reduce the number of Skus and drive more.

Our higher margin skus through that business. So that's another way that we think about consolidation as Ben mentioned.

If we are able to consolidate warehouses to consolidate operations on that side of the house.

When we look at standard fulfillment cost as a percent of revenue we run in.

I had a kind of tie all this together both from an inventory perspective and from a systems perspective.

Okay. Thank you.

I'm showing no further questions in queue at this time.

This concludes today's conference call.

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Q3 2022 Plby Group Inc Earnings Call

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