The Honest Company, Inc.

Ladies and gentlemen, thank you for standing by and welcome to the Honest Company's first quarter 2022 earnings 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. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Mr. Steve Austin-Feldt, VP Investor Relations at the Honest Company.

Great, thank you. Good afternoon, everyone, and thank you for joining our first quarter 2022 conference call. Joining me today are Nick Vlahos, our Chief Executive Officer, and Kelly Kennedy, our Chief Financial Officer. Before we start, I'd like to remind you that we will make certain statements today that are forward-looking within the meaning of the federal securities laws, including statements about the outlook of our business and other matters referenced in our earnings release issued today. These forward-looking statements involve a number of risks and uncertainties that could cause actual results to differ materially. Please refer to our release issued today as well as our SEC filings for a more detailed description of the risk factors that may affect our results. Please also note that these full-length key statements reflect our opinions only as of the date of this call. We undertake no obligation to revise or publicly release results of any revision to these full-length key statements in light of new information or future events except as required by law. Also, during this call, we will discuss certain non-GAAP financial measures which adjust our GAAP results to eliminate the impact of certain items. You'll find additional information regarding these non-GAAP financial measures and a reconciliation of these non-GAAP to GAAP measures in the financial results section of today's earnings release. In addition, a live broadcast of this call is also available on the investor relations section of our website at investors.honest.com. With that, I'll turn the call over to Nick.

Thanks, Steve. Good afternoon, everyone, and thanks for joining us today. As noted in today's earnings release, our first quarter results were in line with the outlook we provided in our last earnings call. As we highlighted in that call, first quarter revenue was impacted by unfavorable sales comparisons, as well as consumer channel shifts that resulted in a year-over-year decline in revenue for the quarter. Over the last four quarters, our core category revenue was up 6% versus prior year, a solid comp over COVID-driven demand in the year-ago period. As we look to the balance of the year, we're excited to share that we're on track for delivering new product innovation and expanding our retail footprint to build a solid foundation for future growth. Despite unprecedented volatility and macro environment challenges, I'm pleased we were able to maintain our financial outlook for the year. Today, we are reaffirming our full-year outlook with mid-single-digit growth over the remainder of the year as we gain distribution with new strategic retail partners, launch new margin-accretive products, and continue to invest in our digital capabilities. I'd like to start by sharing some thoughts on the macro challenges the industry is currently facing, starting with inflation. Costs affecting every part of the P&L are rising, impacting product, logistics, warehousing, labor, and administrative costs. In response, we remain in close contact with our suppliers and partners to understand and address any potential cost impacts. Additionally, to help mitigate inflationary pressures, we've executed to high single-digit price increases on our product portfolio. While it is still early, an initial read of our first round of pricing is in line with our expectations. We have seen a modest decline in volume, but over time, we expect velocities to rebound. As indicated by tracked data sources, the demand from consumers looking for clean, natural solutions remains strong despite higher shelf prices. We expect to mostly offset the current inflationary impact in 2022 through these pricing actions, supported by cost savings and favorable mix. If we see further input cost escalation, we believe we can take additional pricing later in the year to preserve margins. Turning to supply chain, it's important to note that a majority of our products are manufactured in North America. Our diapers, which are nearly half of our portfolio, have seen limited supply chain issues. Our skin and personal care products, which represent roughly a third of the portfolio, have ingredients and packaging that are sourced internationally but are predominantly manufactured in North America. As a result, we've experienced some supply chain impacts in personal care and beauty. Our main exposure to global supply chain disruptions is with our baby wipes, which represent less than 20% of our revenues. Over the past six months, we've experienced intermittent auto stocks on key items due to COVID-related factory shutdowns and demand-driven ocean freight and port delays. We're predominantly back in stock in baby wipes by the end of the first quarter, but expect a continuation of supply chain constraints for the foreseeable future. During Q1, we invested to increase core inventory levels by roughly 10% to mitigate the impact of supply chain delays. We also want to address the impact of conflict in Ukraine on our business. Similar to most beauty brands, we source certain ingredients, specifically sunflower seed oil, for which Ukraine is a key producer. The conflict in Ukraine has disrupted supply or driven higher prices on these ingredients from that region and impacted the market for certain ingredients from other regions, like palm kernel oil. While this represents a risk, we believe we have supply assurance or alternate sources of supply to continue to meet consumer demand. Lastly, I'd like to reinforce that Honest remains in a healthy balance sheet position with no debt and sufficient cash available to fund our growth investments. As a result, we are not directly impacted by the rising interest rate environment. Now, turning to our core growth drivers, marketing, innovation, and retail distribution. Starting with marketing, we continue to invest at a high level in support of our brands, with marketing spend at 20% of sales in the first quarter. While that was down on a dollar basis versus a year ago, it's important to recognize we were supporting a significant launch, our clean, conscious diaper in the year-ago quarter. What's more important is that our high level of marketing support this quarter reflects our commitment to supporting our brand in two ways. First, as noted last quarter, rising digital marketing costs are leading us to shift traditional marketing investment more towards shopper marketing and other vehicles to reach consumers in store. This is a good example of our return-based approach to directing brand investment to where it will drive growth most cost-effectively. Second, shifting dollars from marketing to in-store demand building activity supports the strong growth we see with key retail partners and aligns with our retail distribution expansion in the second half of the year. In short, Honest is a strong lifestyle brand that spans across multiple categories with a high degree of consumer loyalty, continued market share gains against conventional brands, and increasing household penetration, which grew to nearly 5% by the end of 2021. Turning to innovation. We have a robust innovation pipeline coming out in the second half of the year. In addition to a packaging refresh for our personal care line and training pans, we are launching a new concealer line, a suite of clean, clearing skin products, an extension of our best-selling clean mascara, and expanding our supplement slot. The new innovation is on track to ship across the second and third quarters. On the distribution front, our expansion in-store with key strategic retail partners is on track to roll out in the second half of the year. We will be launching Honest Diapers, Wipes, and Personal Care on Walmart.com in early Q3 and then launching in Walmart stores across the country in the fourth quarter. Not only is Walmart the largest seller of diapers in the U.S., but their strength in the south and southeast regions will significantly benefit on us as our ACV in those markets is underdeveloped, the lowest of all US regions. We are also expanding distribution nationally at Ulta, which we will pivot from being solely online to launching in store across the country. In addition, we're expanding our supplements line to add sleep, stress, immunity, and hair health. These will be available in store and online at GNC and at honest.com. On the international front, we're pleased to announce that we have signed a partnership with Super Ordinary, a leading global brand accelerator to launch our products in Asia in the back half of 2022 through our flagship store on Tmall. Super Ordinary has a proven track record for launching premier US beauty brands into China. While management efforts will be focused on delivering our strategic growth initiatives in North America in the near term, we are pleased with this new partnership that will set the foundation for future global expansion. Overall, we're excited about our progress delivering marketing, innovation, and retail distribution initiatives that will drive growth for the remainder of 2022 and into 2023. I'll close by saying that despite a tough Q1, the Honest brand continues to resonate strongly with the consumer. We've significantly grown household penetration and brand awareness over the last two years, and our market share continues to increase. We maintain our conviction that Honest can be the new modern CPG brand while driving our mission to inspire everyone to love living consciously. Now, I will turn it over to our CFO, Kelly Kennedy.