Greetings, and welcome to the Olaplex Holdings First Quarter 2023 Earnings Conference Call. At this all participants are in a listen-only mode. Brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Patrick Flaherty, Vice President of Investor Relations. Thank you, Patrick. You may begin.

Thank you, and good morning. Joining me today are JuE Wong, President and Chief Executive Officer; and Eric Tiziani, Chief Financial Officer. Before we start, I'd 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. Additionally, during this call, management will refer to certain data points, estimates and forecasts that are based on the industry publications or other publically available information as well as our internal sources. The company has not independently verified the accuracy or completeness of the data contained in these industry publications and other publicly available information. Furthermore, this information involves assumptions and limitations, and you are cautioned not to give undue weight to these estimates. With that, I will turn the call over to JuE Wong.

Thank you, Patrick, and good morning, everyone. Thank you for joining us today. This morning, we announced results for the first quarter of 2023 that were ahead of our expectations. And while we make progress, we know we have work to do to return the business to stronger growth. As discussed on our last earnings call, we view 2023 as a reset year, during which we are taking actions intended to build a stronger and more resilient Olaplex. As I will explain in more detail shortly, during the quarter, we made progress on our priorities for the year, and we believe that we are implementing the appropriate actions for resetting the business. Yet we also recognize that there is still important work ahead of us, shifting market dynamics and macro uncertainties continue to reduce our visibility, and we remain in the early stages of this plan, achieving its intended results. That being said, we believe the fundamental strength of our business and the category remain and our confidence in our patent-protected technology and the long-term potential for Olaplex are unchanged. Turning to a brief overview of the first quarter. Net sales of $113.8 million was slightly better than our guidance. As we previously communicated, our sales decline reflected a lower baseline level of consumer demand, the continued negative impact of customer inventory rebalancing efforts from certain Pro and Specialty Retail customers and a difficult comparison as we lapped the sell-in of a successful launch into Ulta Beauty a year ago. Overall, all three channels were essentially in line with our outlook. Lower sales coupled with our strategic decision to spend in support of our future growth with important investments in sales and marketing, R&D and workforce expansion led to adjusted EBITDA of approximately $50 million in the first quarter for…

Thank you, JuE, and good morning, everyone. In the first quarter of 2023, net sales declined 38.9% to $113.8 million versus $186.2 million last year. We believe that the quarter was negatively impacted by approximately $21 million of year-over-year inventory rebalancing at certain key professional and specialty retail customers. Also, we faced a difficult comparison relative to the first quarter of 2022 when we shipped an additional $10 million of inventory pipeline to support our strong launch in Ulta. By channel, professional channel sales were slightly ahead of our expectations and declined 37.2% to $48.4 million versus a 62.6% increase last year. Specialty retail sales decreased 45.8% to $34.9 million following 102.5% growth in the prior year period. And our direct to consumer channel sales were down 31.9% to $30.5 million compared to a 15.1% increase last year. Geographically, international sales were flat for the quarter, while the U.S. was down 60.3% with the impacts of customer inventory rebalancing and the lapping of the Ulta beauty launch specifically impacting the U.S. Moving down the income statement. Adjusted gross profit margin was 72.6%, declining 650 basis points from 79.1% in the first quarter of 2022. Approximately 250 basis points of this contraction reflects deleverage and inflation and our warehousing and distribution costs. 230 basis points related to higher inventory obsolescence reserve and 110 basis points from inflation on product costs with the remainder from increased sampling and unfavorable customer mix. These more than offset the benefit of the price increase we took from July 1, 2022 and favorable channel mix. Adjusted SG&A increased 59.6% to $32.9 million from $20.6 million in Q1 2022. The $12.3 million increase in adjusted SG&A from prior year is primarily the result of an $8.6 million increase in sales and marketing expense to drive demand as…

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first questions come from the line of Olivia Tong with Raymond James. Please proceed with your questions.

Great. Good morning. Thank you. I wanted to ask you two questions. First, on promotion. Clearly, promotion has been picking up. So can you talk about to what extent this has been driven by you versus the retailers? And we have obviously seen some products ending up in channels you probably didn't intend. So can you talk about what actions you're taking to control that? And then you mentioned getting gross margin back to somewhere in the mid-70s. If you could talk about the drivers to get back there, that would be helpful, too. Thank you.

Thanks, Olivia, for the question. What I will do is I'll take the promotion question and then have Eric comment on the diversion and the gross margin question. So I just want to be very clear, when we participate in promotion, we have said it before that we do promotions to really acquire new customers to the brand as well as allowing our loyal customers to buy deeper into the brand. And so as such, we partner with retailers on some of their promotions that really drive those goals that we have with them. So you've seen us in participation with Sephora in BI. But then we don't do anything that is off the cuff that doesn't drive those kinds of programming. So hopefully, that answers your question because what we want to be very clear again to double down is that we just don't do promotions indiscriminately for the sake of just driving sales.

Thanks, JuE, and hi Olivia. I'll take your question on diversion first. So just to be clear, Olaplex has not changed the selling model. We do not sell our products into grocery stores or other mass retailers. When we find products in unauthorized channels, we thoroughly investigate who supplied those products and take commercial and legal actions to prevent further diversion. We use tools on our products like QR codes. And I would just say that sadly, diversion is a problem that all consumer products manufacturers face, especially in beauty and fashion. And we're striving to minimize those opportunities for diversion. Based on the tracking we've been able to monitor, we believe the overall diverted volume in these channels remains relatively small. And your next question was on gross margin and getting to the mid-70s adjusted gross margin and what are the drivers of that? I would just say, as we return to growth, we expect volume leverage to help on the fixed cost component of that, specifically our fixed warehousing cost. Also, as we continue to work our own inventory levels down to our target levels that lowers those warehousing costs and enabled us actually worked through some of the higher cost inventory in our system and realize some of the benefits we're seeing in a more stable supply chain environment with costs coming down. And the last thing and the last driver there is the savings initiatives that we're putting in forward through our fuel for growth program. We see efficiency opportunities that we think can support adjusted gross margin at that level in the medium term.

Great, thanks. If I could just follow up one quick question, just early read-throughs on the Lash serum product and how that influences your decision-making around your – around expanding beyond cares. Thank you.

Thanks, Olivia. I'll take that question on Lash. So Lash is off to a great start as you have heard from our call just now. And what is encouraging as it validates that our technology can actually play in adjacency. So we will continue to monitor the success of it and how it's doing. And as we have said before, our technology has cross-category benefits and opportunities, whether it's in skin care or nail care. So this is a great example of us having permission to play in an adjacency category having been – have already been the top 10 beauty SKU as Space NK in the UK and also a strong seller at Sephora.

Thank you. Our next questions come from the line of Rob Ottenstein with Evercore. Please proceed with your questions.

Great. Thank you very much. A couple of questions. First and perhaps most important, obviously, the demand for the core products, the repeat purchase is there is an issue and there's a lot of possibilities, right. There has been the misinformation in social media that's been horrible. You've cited in the past competition you did a price increase. We don't know to what extent that had an impact. So just – and I know it's really hard to be precise on this, but if you could kind of give us your best sense of kind of the two or three drivers that have been most impactful on the base level of demand of the core products and whether over the quarter and into April now if you're starting to see any abatement in any of those negative factors. So that would be my first question.

Okay. Thanks, Robert, for that question. Let me take that. And then, Eric, if you want to add any or build on it, please do so. So first and foremost, we don't believe that price increase is a driver. In fact, we believe that it's a combination of factors, whether it's the macro environment, some more entrants into the space, higher level of discounting in the industry and some of the misinformation about our brand. But from the data we have seen in terms of sell-out trends, we have seen a stability since we reported last quarter, and we expect it to continue to do so. And that is because of all the execution that we are putting through in both sales and marketing, that includes people in store, the education, the sampling. So to answer your question as to what is the reason there is a combination of factors, as I've mentioned, but we are addressing that with the education, with the people in store, with a sampling program, with a more assertive PR program to correct the narrative that you are hearing that is a misinformation in the marketplace. And Eric, do you want to build on anything?

No, you said that, JuE, I would just echo we've seen sellout trends stable since our last call, and we're assuming improvement in that trend based on our actions and investments into the second half of the year.

Great. So you're seeing some traction there. That's great. And then shifting over to the international, how can you just give me a little bit more detail in terms of your ability to get more distribution internationally? I know you mentioned you're going into some more Douglas stores. When I was in Europe, your product is just selling off the shelf in Sephora and it was incredibly well placed and well positioned. So in that context, it's a little surprising that you're not up and doing better internationally given the still low levels of distribution and the more earlier stage in the brand's development. So perhaps you could give us a little bit more sense of what's going on in Europe.

Well, let me just take that. We have said that in 2023 is our reset year. So what we want to do is to really go deeper with our existing distribution and therefore, anniversarying Sephora in Europe, adding 280 doors to Douglas are part of that strategy, so that we can be an anchor brand and a brand that truly delivers performance when it comes to not only in the products but also in the revenue driving for those retailers. In terms of international, again, you can see there are other geographies that we have not gotten ourselves into in a meaningful way weather is in Asia, in the Middle East, in Latin America, and those are really ripe for the picking because when they see how the brand penetrates and delivers in North America, in Western Europe, it really drives brand awareness, brand recognition and brand desire. So international is definitely a huge opportunity for Olaplex, but we want to continue to build that foundation to make our brand more resilient and stronger for now and for the future.

Great. Thank you very much.

Thanks, Robert.

Thank you. Our next questions come from the line of Ashley Helgans with Jefferies. Please proceed with your questions.

Hi. This is Blake on for Ashley. I wanted to ask on the professional channel. If you could comment any more on how that trended throughout the quarter and just how those customers how are they buying their inventory in terms of closer to need? Also maybe just comment on time between salon visits if you've seen a change there from the end consumer as well. That's my first question. Thanks.

Hi, Blake. Yes, we've seen a consistent trend in the professional channel as what we've said in the previous quarter, which is that we do believe the current macro environment is impacting the professional channel and the stylist community a little bit more than what we've seen in other channels that is increasing the time between visits. We see that in data like what we get from Klein measuring front of salon sales, which in the fourth quarter of last year was actually down, the market was down 9%. So we've seen that continue, and we expect that to continue in 2023. That's balanced by the other channels. And I'll just put it in that context. We've always said that this is a category that is strong and resilient in the face of macro challenges. We expect that to continue, but not immune. And our expectation, at least as we aggregate what we see in retail and direct-to-consumer and Pro is more a category growth this year that would be in the mid-single-digit growth. So a slowdown, like I said, resilient but not immune to the macro uncertainty.

That's helpful. Thanks. And then on the guidance, I think, I might have missed it, but I heard you say you expect positive growth year-over-year in Q4. Did you mention your expectations for Q3 at all versus Q4? Just trying to think about the magnitude of difference in growth between Q3 and Q4.

We didn't comment specifically on Q3. We've said that we expect to return to growth in the fourth quarter of this year as we believe the actions, the investments that we're taking, we're going to test, learn and optimize. Those impacts are going to build gradually quarter-by-quarter as we get through the year. And as we exit the year and as we have some more favorable laps admittedly as well in the fourth quarter, we expect growth to return in the fourth quarter as we enter 2024.

Got it. Thanks so much.

Thank you. Our next questions come from the line of Jason English with Goldman Sachs. Please proceed with your questions.

Hi, folks. Thanks for sought me in. Let's pick up where you just left off, growth – sales returning to growth by the fourth quarter. What gives you confidence in that? And how much of this distribution related? What do you expect from accounts where you're currently distributed like U.S. Sephora or the Pro channel in the U.S.? And what are the demand indicators you're seeing today that gives you confidence that you found a level that you can grow off of?

Thanks, Jason, for that question. Let me start, and as usual, Eric has definitely built on it. I think first and foremost is the data that we have seen in our sell-out trends have been stable since we reported last quarter, and we expect that to continue to do so for the rest of the year. And why is that? Because we've been executing, as we've mentioned, on proven high return on investment, performance-based marketing that has been successful in the past. We have shot that. But we are going even further this year and given that it’s also our reset year. While it’s too early uncertain of our activations, but so far what we have seen is our educational marketing support around our core that we just launched is showing really good size of positive feedback both on the digital [indiscernible] perspective as well as sales stability in the – in our current and even new distribution that we have started late last year. With that said, the third party field people in store continues to help us generate the ability to educate and to really get feedback as to what the consumers are misunderstanding so that we can really double click on our education content and material. Then there are other things that we are now going to expand on, such as the out of home campaign and out of home advertising. And we have taken learnings very recently at late last year, early parts of this year where we had a times square billboard and we really directed traffic to the near end locations, which really shows that people were paying attention, our consumers were paying attention. We do believe that sampling will continue to be successful, but that is early days and retailers have come back and told us that they are going to give us feedback probably in Q3 or so because people who got their samples, but take time to try and then go back in store to convert. We are also starting more frequency contact with our pro community where it is not only about selling product knowledge information, but also helping them in their business so that they can actually benefit from us not only as a brand with products, but a brand with a purpose.

Okay. And you mentioned in your prepared remarks, I heard you say your core mission, and I’m going to paraphrase because you – there was – there were more different words around it, but core mission is to make people feel more confident with healthy hair. We’ve talked in the past about the potential to maybe diversify into skin. Does this focus core mission just imply just that like you’re really just going to focus on hair and we should ignore those type of adjacencies?

Well, the good news is you’ve seen us launch an adjacency in Lashbond, right? And it has done well and continues to capture the imagination of the consumers, our retail partners, including our professional beauty supply locations where they’re actually asking more for the products. So we believe that our technology now validates the fact that it can be outside of where hair is. We want to focus on hair in this reset year because it is going deeper, not wider. But technology play is a big one in the marketplace. And when the time is right where we have an intersection of a cutting edge technology and in a new segment that we can play in, then that is time for us to consider an adjacency of that nature, because we have always said it is not a question of needing to do it. It’s a question of wanting to do something, but it’s groundbreaking.

Got it. That’s helpful. Thank you.

Thank you.

Thank you. Our next questions come from the line of Korinne Wolfmeyer with Piper Sandler. Please proceed with your questions.

Hey, good morning. And thanks for taking the questions. So first I’d like to just touch on the guidance. I mean, you left it on unchanged and it’s still a pretty wide range for the year. And I understand it’s a reset year and we’re still trying to figure out where things will settle out. But what would give you more confidence, say in the coming quarters to start tightening that guidance?

Korinne, I’ll take that one. As you just said, we’re only one quarter into the reset year. We’re in the early stages of implementing our plan, these actions and these investments. And as we’ve said, we’re pleased with the progress thus far and we’re assuming that we’re going to yield the benefits of those actions and investments in the back half of the year. To answer your question, as we traverse through the year as we test, learn, and optimize, as we see the impacts of those take hold, that’s what would lead us to a position to tighten our range. We didn’t feel like that was appropriate at this point.

Got it. Thank you. And then just touching on some of the newer products. And I know you don’t really disclose sales by product. But is there any color you could provide us on how much some of the newer products like say 4D contribute – have been contributing to sales? And then as we think about, as you launched more adjacent products like Lashbond that kind of different price points than that kind of $30 range that you typically sell at. How should we be thinking about the margin differential of those products? And if those become a bigger part of the mix, how should we be thinking about the margin impact there? Thank you.

Korinne, I’ll take that one as well. So we’ve just launched 4D, we’ve just launched Lash. I would just characterize these as similar type launches as what we’ve had in the past. Every sub-segment of Lash and adjacent category is that those market sizes are different and we’d say that the Lash serum category based on the numbers that we have is a smaller category of course relative to hair, but a meaningful opportunity and completely incremental to us. So similar size type launches. And from a margin perspective, it’s not just the premium pricing, but it’s the cost that go into that. Lash is a good example of something that is has the potential to help gross margins from an accretive gross margin impact. That one is a bit higher than our normal category margins. And that’s going to continue to be an opportunity for us in the future as we evaluate with every launch that we put out into the market, what’s the appropriate price.

Awesome. Thank you.

Thank you. Our next questions come from the line of Jonna Kim with TD Cowen. Please proceed with your questions.

Thank you for taking my question. Just curious to see you can elaborate a little bit more on how the sales progressed in specialty retail on a sort of a like-for-like basis? Are you seeing any sort of progress there? And if you can comment on sort of the marketing spend over the medium term, do you continue to expend the elevated levels that you are investing now or how should we think about that? Thank you.

Hey, Jonna. I’ll take that on specialty retail trends and then marketing as well. So you’ve seen our specialty retail results in the first quarter. Those were particularly depressed again by the lapping of the very successful launch that we had in Ulta in the first quarter of last year as well as some of this customer inventory rebalancing that we’ve said we also experienced in the first quarter. Specialty retail sellout trends have been stable since our last call. We’ll recognize, you see the results in the first quarter that those have been – that performance has been behind the category in the first quarter, again, as we lap that very, very successful launch in Ulta. And so stable since our last call and very much we assume that trend will improve in the back half – on the back of our actions and investments. And you also asked about the marketing investments we’re making. As we said, Q2 has some additional investment against this upper funnel campaign that we’re very excited about to build the brand, to build equity and to build awareness around the brand. We’ve consistently said we’re going to test, learn, and optimize and that’s going to be part of it. We’re excited about that campaign.

Got it. Thank you.

Thank you. Our final questions come from the line of Jonathan Keypour with Bank of America. Please proceed with your questions.

Hi, all. Thank you and good morning. I’m just wondering in terms of how Olaplex goes to market, it seemed like maybe two years ago or a year ago, to rely very heavily on the salon professional channel. And now that is slowed understandably. I’m just wondering if there is a kind of high level shift in how Olaplex is attempting to reach new consumers?

Hey, Jonathan. Thank you for the question and I’ll take that. So one of the things that we want to be really clear about is our stylist community is the bedrock of Olaplex. Continuous independent study shows that the number one source of truth for consumers is recommendations by their hairstylists. We continue to enjoy their support, they standing by us, and we continue to really develop our relationships, business benefits for them. We are a brand with purpose for them, as I mentioned earlier. So we are going to be where our consumers are. Our consumers are taking recommendations from their stylists. They are listening to their own family and friends. So verified product reviews are very important. That’s where we are going to double click on making sure that our purchase verified product reviews are strong and that is through sampling. We can actually give people samples, they can try the product and they can go on and buy the product and then leave a product review. And the other one is family and friends. And this is why the social media aspect is so important because people go to social media platforms to really consume a lot of their product learnings and understanding. And so that’s why when we double click on addressing narratives, on educating about our products, helping people understand what are the benefits and the usage and tips, all this will add to the value of our brand and the receptiveness and the responsiveness to the brand. So in short, we are not making a change, but instead we are investing more behind the brand to a full funnel marketing approach.

Great. And then switching topics a bit in terms of the inventory rebalancing, so you guys called out $21 million this quarter. I mean, I’m assuming that it gets that difference between sell through and sell in narrows over the course of the year. I’m just wondering if you could give us any kind of directional ideas about maybe what the full year rebalancing impact will be – maybe how to sequence that through our models. And then if you can, I guess where that impact is most pronounced by channel? And that should be good.

Hey, Jonathan. Absolutely. I’ll take that. So let me just start by saying we have good visibility into inventory levels that most of our major U.S. accounts by item and we’re tracking sellout versus sell-in for the majority of our global business. You mentioned the $21 million year-over-year impact that we believe we experienced in the first quarter. We also on our last call talked about the impacts that we expect to lap in the fourth quarter of this year, which should be a positive. And so look, what is customer inventory rebalancing? All it is, is it relates to customers adjusting orders to align with sellout trends with macro conditions and their own decisions on month on hand levels. And so, we’re tracking and monitoring that closely. It’s dynamic. It happens every quarter to some extent on various items at various accounts. And we’re factoring all that into our current outlook into the guidance that we’ve provided. And as we’ve said, we’ve seen the sellout trend stabilized since our last call and assuming improvement in the back half.

Great. Thank you.

Thank you. That is all the time we have for questions today. I’m going to now like to hand the call back over to JuE Wong for any closing comments.

Thank you. Thank you, everyone. And we look forward to seeing everyone again at our next earnings call. Thanks. Bye.

Thank you. That does concludes today’s teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.