Good morning, and welcome to Olaplex Inc.'s Third Quarter 2022 Financial Results Conference Call. All participants are in a listen-only mode. After the speaker’s presentation we will conduct a question and answer session. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the call over to Allison Malkin of ICR. Please go ahead, Ms. Malkin.

Thank you. Before we start, I would like to remind you that management will make certain statements today which are forward looking, including statements about the outlook of Olaplex's business and other matters referenced in the company's earnings release issued today. Each forward-looking statement is subject to risks and uncertainties that could cause actual results to differ materially from those projected in or implied by such statements. Additional information regarding these factors appears under the heading Cautionary Note regarding forward-looking statements in the company's earnings release and in the filings the company makes with the Securities and Exchange Commission that are available at www.sec.gov and on the Investor Relations section of the company's website at ir.olaplex.com. The forward-looking statements on this call speak only as of the original date of this call, and we undertake no obligation to update or revise any of these statements. Also, during this call, management will discuss certain non-GAAP financial measures, which management believes can be useful in evaluating the company's performance. The presentation of non-GAAP financial measures should not be considered in isolation, or as a substitute for results prepared in accordance with GAAP. You will find additional information regarding these non-GAAP financial measures and a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures in the company's earnings release. A live broadcast of this call is also available on the Investor Relations section of the company's website at ir.olaplex.com. I will now turn the call over to JuE Wong.

Thank you, Allison, and good morning, everyone. Before we get into the details of Q3 and the balance of 2022, I'd like to take a step back for a moment to provide some perspectives on our business. Since our founding and over the course of the last year as a public company, we have built a business that is truly differentiated in the beauty category and specifically in prestige hair care. We created the bond-building hair care segment, launching a new subcategory that has changed the way consumers treat, protect and maintain healthy hair. We have been innovative, focusing on science-based, patent-protected technology and building an incredibly powerful brand. The quality of our products has contributed to our strong consumer loyalty and retention, which has translated into strong sales growth and industry-leading margins. Today, I will detail the steps we are taking that are intended to ensure that we have in place the processes and tools necessary to better drive and forecast consumer and customer demand, and ultimately re-establish our authoritative standing in the market. I will then share some details behind our longer-term plans that gives us confidence in our growth trajectory. Ultimately, we believe that the fundamental competitive advantages of our business remain intact. And importantly, we are responding thoughtfully and quickly to the issues that have developed recently. I'll quickly provide some details on the quarter, and I will then discuss the actions we are taking in an effort to strengthen the business in the short term. I'll then turn the call over to Eric to discuss third quarter results in greater detail and will wrap up the call with some details of our long-range plan for the business. For the third quarter, our results were in line with what we provided on our business update call…

Thank you, JuE, and good morning, everyone. As we discussed with you on our business update call, we had a challenging third quarter. And as JuE just discussed, we are taking immediate action to address the issues we encountered, and we are confident in our long-term growth trajectory. First, we want to recap our results from our business update call on October 18 and share our finalized numbers. In the third quarter of 2022, net sales increased 9.2% to $176.5 million versus $161.6 million last year. By channel, specialty retail sales increased 60% to $74.2 million on top of a robust 128% gain in the prior year period. We saw continued growth from our highly successful launch into Ulta Beauty and higher sell-in to support the holiday season this year, including growth from selling in more holiday kits versus last year. Professional channel sales declined 16% to $63 million versus a 58% increase last year, as our U.S. distributor partners reduced purchases to adjust inventory levels given softer demand from stylists, which we believe is partially driven by macroeconomic concerns. And our direct-to-consumer channel sales were down 2.6% to $39.3 million, following an 87% increase last year, due to slower sell-through related to weakening market growth and increased competitive activity, including discounting. In the third quarter, we also saw a key U.S. DTC customer reduce orders to meet lower targeted levels of inventory on hand. By geography, international led our growth with a 27.8% increase driven by strong contributions from the U.K., Italy, France, Germany, Canada and our emerging cross-border e-commerce business in China. The U.S. declined 4.3%, driven by the aforementioned pressures in the professional and DTC channels. Moving down the income statement. Adjusted gross profit margin was 75.1%, declining 480 basis points from 79.9% in Q3 2021, approximately…

Thank you, Eric. And turning to our long-term strategic initiatives, we are focused on four key pillars that we believe will help us succeed in the years to come. They include igniting our global brand, disrupting with innovation, amplifying channel coverage and charting new geographies. We believe that these pillars, taken together with our foundation in category-defining technology and meaningful connection with the consumer and stylist community, position us nicely for continued growth. Let's start with igniting our global brand. We have built one of the most powerful brands in the industry. We have successfully expanded awareness within our key segments and have seen our aided brand awareness increased 700 basis points from the beginning of the year based on our internal brand tracker. We know, however, that we cannot rest on our laurels, especially given the attractiveness of the market opportunity. As we have consistently said in the past, we plan to continue to increase our marketing investment to grow awareness and build equity for our brand. Our marketing model will continue to focus on the high ROI activities that have proven to be so effective for us to date, community engagement with our stylists and consumer sampling, performance marketing and visual merchandising. This model has been highly effective at generating additional earned media value. We will continue to expand our global community reach with a focus on engagement across our pro, influencer and fan communities, ensuring that we have more diverse audiences in mind. We intend to introduce a new seeding program to ensure we are fueling our robust, user-generated content library and powerful real people reviews. We will reinforce our pro’s as our opinion leaders and give them the platform to showcase their work. Next, we believe we can continue to grow our business through disruptive innovation…

[Operator Instructions] Our first question comes from Jonna Kim from Cowen. Please go ahead. Your line is open.

You've done really well in terms of marketing spend, keeping it very low in the low single-digit range. As you think about increasing brand awareness both in the professional channel and among consumers, do you expect you need to spend more in terms of marketing? And as you think about marketing strategy, what are some of the higher ROI channels that you can further invest in?

Thanks, Jonna. This is JuE, I will take that question. First of all, what we have always believed in is that our model really works when it comes to high-performance marketing, looking at our return on investment, and we have always said we will invest ahead of growth. And this includes our people, our R&D in terms of innovation and in sales and marketing activities, initiatives and strategies. And as you have seen, we continue to be the best in class, whether it's in our rankings across all channels: professional, retail, DTC. So we want to double click on what works which is engaging our customers on social media, being at where they shop. And in this case, you have just heard us that we are going to be putting people into stores that not only are trained by us, but can actually educate consumers, educate in-store beauty advisers with those retailers, and more importantly, help with sell-through. So all of these activations are both near term, but will also establish a foundation for us as we move into 2023 and beyond.

And just one follow-up. Given the competitive dynamics you touched on this a little bit, but how do you think about your innovation pipeline? And could you just touch on -- I know your customers are likely to purchase new products when you launch and even adjacent categories, but just any color would be helpful on how you're thinking about that.

Yes, it is important to note consumers are always going to be looking for newness. But studies has also shown that consumers really also gravitate and go back to what works. And in this case, Olaplex is the creator of the bond building category. And why I talk about that is your hair bonds is the foundational for hair health. If you do not take care of your hair bonds, no matter what you do, you're not going to address that, first and foremost, the foundation to give your had the opportunity to stay healthy. So with that said, we hold those patents. We deliver on repairing hair bonds in the first application. And our leadership position will continue to drive interest in this category, which we really believe is a good thing, because as more consumers know about it, they're going to want to test products. And I just want to conclude by just saying that we truly deliver what works. It is not just marketing speed and we don't lead with titan pending promise, we actually already have patents, well over 100 patents to really deliver on the promise that we say, which is repairing, strengthening and protecting your hair bonds.

Our next question comes from Olivia Tong from Raymond James. Please go ahead. Your line is open.

I wanted to start with -- you mentioned a couple of new channels, particularly European specialty doors, travel retail entering this quarter. My understanding is that these are lower margin channels. So can you give us just a sense of the margin impact from some of the planned expansion? And then just generally, your view on longer-term margins. You talked a lot about a few investments to support growth, just thinking through other potential areas, whether you intend to backfill the CRO role or add any additional personnel in our capacities, whether demand forecasting, retail relationships, marketing, those kinds of things.

Eric, why don't you take the questions on the margins, and I'll come back in on the CRO role?

Of course. Thanks, JuE. So the first question about entering into some new customers and channels. We've consistently said that the way we evaluate these growth opportunities is through the primary lens of incrementality. We think that those customers in those new channels are going to be highly incremental to the business. And even with a slight margin dilution, that's going to be a positive thing for creating value for the business. And how that pertains and builds on your question around long-term margins, our message here is very consistent with what we've said in the past. We will continue to invest in marketing, R&D and the organization ahead of growth. And because of the disruptive model that we have, we believe that even after those investments, we're going to have industry-leading profit margins in the medium term.

Thanks, Eric. And Olivia, let me follow up to an answer on your sort of the CRO role. We are excited about this opportunity to sort of create this new role, because all sales channels will report to this person. So in doing this, it creates really an opportunity to build on our already strong sales team and enhance connections across all our channels. The most important thing to note is that with something of that nature, where one person looks at all the channels, we are then able to share best practices as well as leveraging data to help us make better decisions, whether it's in sales, whether it's in collaboration with marketing, and then, ultimately, really driving healthy sell-through.

Our next question comes from Rob Ottenstein from Evercore. Please go ahead. Your line is open.

Great. Standing back, it sounds like September really slowed down a lot. I think you had mentioned before NPD sales were up 50% July and August. And then for the whole quarter, just 35%. So a pretty bad September. Can you give us actually kind of what happened in September and October in terms of e-commerce and retail? And what extent do you think, if any, your price increase had to the slowdown in sales? And as you stand back and think about it, how do you assess the execution on the price increase and the timing of it?

Eric, do you -- thanks, first of all, Robert, for the question. Eric, do you want to take that back half of the question, and I'll talk about the first half of Robert's question because that is in overall.

Absolutely, JuE. So I'll say two things and then JuE, of course, you build on this. Let me start by actually answering your question about September and October. Clearly, we did see a slowdown in September. That's what we covered on our October 18 update call. And just speaking to October as well, this is very much about the fact that we don't believe we're going to be able to lap this exceptionally strong period that we had in the prior year holiday period when replenishment orders were very high, consumer demand, we believe, was stronger, and even some of our competitors, we believe, we're struggling to keep keeping stock. So that's what's being reflected in the NPD data. What I'll build on that though is because of the actions we're taking, the marketing activations we're putting in place, we are pleased and we are seeing positive early signals from the activities that we're putting in place. And on pricing, we have no evidence to date, whether it's from consumer feedback or stylist feedback, that the pricing action that we took in July of this year is having a negative impact on our business. So we don't believe that's a primary driver.

Eric, just -- I get the tough lap with the prior year, and that makes a lot of sense. Can you give us any details in terms of sequential actual sales?

Yes. I mean sequential actual sales, and you'll see in NPD as well over time, are building. They're building because sales get stronger as the holiday season progresses, and maybe that's one more comment. What we've seen so far is the holiday season is consistent with our revised expectations, and that includes the fact that we think consumers are shopping a little bit later in the holiday than last year, where I think we can all remember because of the global macro supply chain concerns and worries about products being out of stock, everyone was driving for holiday even earlier, even in September last year. We're not seeing that trend this year, but we are seeing things pick up especially based on our own marketing activations for holiday in October.

Well, just in terms of September, what did the September, actual like NPD sales on an absolute basis look like compared to July and August? So forget the year-over-year, just sequentially, did they increase in September or decrease? And what kind of order of magnitude?

Robert, can I answer that question and provide some clarity. We have always said that prestige beauty is resilient, but it is not immune, right, to macro conditions. And so if you look at what NPD tracks of the 14 consumer groups, prestige beauty is still the strongest in terms of growth. And we participated in a category that is truly resilient, and we are leading in terms of the prestige hair category. So we feel confident that despite some of the consumer sentiment and the macroeconomic slowdown, and we are not immune to it, but we have activations and activities that will help we sell through that partners with our retail professional and DTC partners. And you heard Eric said that the near-term activations that we have put in, while it's early days, but I can share with you that the pilot programs that we implemented by putting in educators and salespeople into the stores is already showing very promising results. We have seen week over week that has more than doubled our week-over-week sales. And this is a pilot program in limited stores. So we feel confident that activations like this will continue to help set us up for success, both the near term as well as for the future.

Great. And then -- and so -- and just to circle back, so the price increase that you took, you don't believe really had any impact on the slowdown?

No, we don't believe that.

Our next question comes from Jason English from Goldman Sachs. Please go ahead. Your line is open.

A couple of questions. First, on the last point, great to hear the response you're saying so far from the educators you're putting in these pilot stores. How broad-based is it in the fourth quarter? Is it -- I guess, it must be fully reflected in the guidance, which you're reiterating. As we look at these type of margin profile for the fourth quarter that you're projecting, is this what we should anchor to as we contemplate like the amount of money you're going to have to spend going forward, whether it be in store educators, the plus-up, and other marketing, the engagement, more KOLs, everything you've talked about, is that a good interpoint as we think about '23 and beyond?

I'll take the second part of the question, and then JuE, I think you want to answer on the nature of the pilots that we're doing. So look, Jason, I would say, no, we're not suggesting that fourth quarter in isolation is the right extrapolation point for looking at 2023 or beyond. Consistently, we're going to keep on investing in marketing and into the organization, and we believe we're going to be able to maintain industry-leading margins. But Q4 and the Q4 margin profile isn't what I would project forward.

And Jason, I'll take the -- sorry, go ahead, Jason.

Yes, it really was a two-part question. It was just a one-part question. So I think Eric covered it. I do have another question, though, just as we try to wrap our head around what's happened with the business. Clearly, we all got a little too enthusiastic and excited about the sales trajectory of the business. And I think a lot of it is because we didn't appreciate that there was a cohort of consumers who probably came in who didn't really have the problems that your product solved, they came in because there was hype behind it, right? Like it was the shiny new toy. And now, there are other shiny toys that are out there. I've got no doubt that your product does solve a very real problem for a large cohort of consumers, but we appear to be in this washout phase of the others who've come in. Have you had any success kind of sizing those cohorts to understand how much of that revenue that you generated in the last year maybe came from the sickle consumer who's now moving on to the next thing? If so, can you share what you've learned and also share how you got to that answer?

Great. No, thanks a lot, Jason, for this question. And it is important to note that, yes, we created the category, we created a lot of excitement. But ultimately, it was not a brand that rests on marketing. It's not a brand that talks about the fact that, “Oh, you may need this product”. It is scientifically proven and clinically supported. So when we say that consumers do understand, and that's why you're seeing the prestige hair category being tracked by NPD starting in 2015. What is important to note is that it is still in its early stages. Consumers are going to try different things, but they consistently look for value. So our transformation team on a monthly basis track what are the important attributes that consumers are looking for. They are looking for products that work. They are looking for products that consistently delivers on their promise. They're looking for brands that they can trust, not just on marketing hype or promises that they cannot deliver. We do all of that. And in fact, in those top 15 attributes, we ranked number one or number two against our competitive cohorts. So when you see that kind of results and you see what has happened in terms of our updated business update, it is definitely not us because the brand still resonate. If we did not resonate than consumers, we will not be able to retain that. We are still the best in class when it comes to our consumer retention. And I know your question is a very big question. Hopefully, I have kind of distil the answer for you in such a way that you can see that the brand fundamentals are strong, and we are tracking attribute steps, captures that strong brand fundamentals.

Our next question comes from Jonathan Keypour from Bank of America. Please go ahead. Your line is open.

I guess tacking on to Jason's question, I just wanted to get a sense of, from a competitive standpoint instead of from the user standpoint, if you could kind of help us understand where that pressure that you cited is coming from. Is it mainly from the large international players with well-supported portfolios? Or is it these small start-up brands? Is it brands that have their own scientific backing? And is it just brands that kind of -- basically, I just want to get an idea of, is the competition you're seeing coming from a brand that is maybe less useful in hair but is marketed better? Or is it coming from brands where the technology is also a selling point?

Thanks, Jonathan. Let me take that question. I just want to very -- at the very top, still confirm that we are still guiding to a midpoint of plus 18% growth. I mean if you think about it, we were at plus 87% growth last year. Despite all of the macro headwinds, despite all of the conditions that we have shared with you, we are still on an upward trajectory. We are still generating cash. And we are a brand that consumers still believe in because you don't get that kind of ranking -- I mean you don't get to be number one in all channels of trade by not resonating with your consumers. So when we talk about competition or composition discounting, we are not negating that they are important. But what we are saying is that this category is getting more attention. It is attractive. People are going to come in. As Jason mentioned, consumers are going to shape up the some shiny penny. But at the end of the day, it has to deliver results. And we believe we stand the best chance to get there because we have a patent that is proven. A lot of brands continue to save patent-pending. And patent pending is different from patented and is available to the customers, where they can actually check out and see that our patent works, and we support it with clinical claims. So I just wanted to kind of clarify on that point. And we know that we need to continue to be very mindful of how we speak to the consumers, and that is the reason why we have people in store now that we can cut through the noise and be right there where the consumers are.

I guess one small follow-up that's related. Is that an approach -- are there any contractual publications or mechanisms or anything like that to keep your salon base using Olaplex for a certain time period? Is there really -- is there any kind of -- aside from the technology and the function and the consumer reaction to Olaplex, which is admittedly very positive, is there anything, I guess, keeping the salon base you currently have using the product? Or is it a little more -- is there less friction there?

And thanks for that question, Jonathan. I know what you're trying to ask so to say, are they committed to working with the brand regardless? Their commitment to us and have -- so we do constant focus group, we do constant check-in with the professional community, because we have said time and time again, they are the ones who really gives us that authority. So when we're tracking with them, the most important thing that they tell us is we give them the opportunity to elevate their craft. We give them the opportunity to really know that they can deliver the best for their clients. When you are able to deliver on those promises for them and elevate their craft the way we can, but they don't have to worry going back to the ball and unwrapping those force and seeing that consumers have breaks, when they don't see that, and they know Olaplex is the reason why, we continue to generate a lot of people wanting to use the product for its performance. But I think you've heard us say in our scripted remarks, one of the things that we are going to be doing a lot of in 2023 is to also go out and really serve the prestige and premium salons. And that is important because we have always, historically, resonated with a lot of the salons that go into the beauty supply stores that buy their products on one service at a time, sometimes a couple of services at a time. Now those premium and precise salons are bigger buyers. And when they are more aware of what we can do for them, that is a powerful cohort that we want to go after. And in that regard, you will see us putting assets behind that, especially in 2023, which we have already started planning for this year.

Our last question will come from Ashley Helgans from Jefferies. Please go ahead. Your line is open.

We've noticed a step-up in the promotional level just at beauty retailers recently. Can you just give us an update on your expectations for promo levels during the quarter and the cadence throughout the holiday season?

Thanks very much for the question. I can speak for everybody, and it's difficult for me to kind of give you a quantifiable number. But our transformation team -- again, we try to make decisions on data points. And what is very important to note is there is no doubt that there has been increased promotions across all consumer products, and beauty is no exception. But Olaplex has chosen very strategically not to participate in those increased promotions and overpromote. And when we do decide to participate in any kind of promotion activities it has to do two things for us. It has to help us acquire new customers, and it has to help our loyal customers buy deeper into the brand. And how do we make those decisions? Because of our relationship with our retailers, both online and offline and our pro community, you see us working with them on specific activations. And when we do that kind of specific activations, we actually get consumer insights. So we don't want to participate in general promotions, especially if all it does is to encourage consumers to wait. But when we do, do it, it is very targeted and it's very strategic. And just to confirm, yes, there are more promotions out there, but we are not participating in more promotions that we did last year.

We are out of time for questions today. I would like to turn the call back over to JuE Wong for closing remarks.

Well, first of all, thank you so much for joining us today. I'd like to wish everyone a very happy and healthy holiday season, and I look forward to speaking with all of you at our upcoming conferences when we report Q4 results. So thank you, everyone.

This concludes today's conference call. Thank you for your participation. You may now disconnect.