Olaplex Holdings, Inc.

Greetings. Welcome to Olaplex Holdings Inc. Second Quarter 2023 Earnings Results Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to Patrick Flaherty, Vice President of Investor Relations. Thank you. You may begin.

Thank you and good morning. Joining me today are Julie 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.oplex.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 helpful 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 GAAPs. you will find 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.oaplex.com. Additionally, during this call, management will refer to certain data points, estimates, and forecasts that are based on industry publications or other publicly 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 any 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 Zhu Yiwang.

Thank you, Patrick, and good morning, everyone. As outlined in our press release, issued this morning, we had a challenging second quarter. Net sales of $109 million were below our expectations of modest sequential improvements from the first quarter. And adjusted EBITDA was $36.7 million, or a margin of 33.6%. With weaker than expected results in the second quarter, Coupled with our updated assumptions for the remainder of the year, we are reducing our guidance for fiscal 2023, expecting net sales in the range of $445 million to $465 million. Overall, our business continues to be negatively impacted by competition, a more promotional environment, and misinformation related to our brand. Despite these headwinds, we are continuing to invest by increasing efforts on upper funnel marketing designed to build brand equity and expanding our focus and support for the important professional community. Let me take a step back and walk through the perspective of what drove the revision to our full year outlook. Earlier this year, we announced that we are approaching 2023 as a reset year to build a stronger and more resilient foundation to position Olaplex for long-term growth. The prestige hair care category, which Olaplex revolutionized in 2014, has evolved into a healthy, and vibrant category, but with more competition. In order to support our future growth, we must continue to amplify our investments and expand our marketing and educational capabilities. And to that end, we initiated an integrated, full funnel marketing approach this year to build brand awareness, increase consideration, and drive conversion. And beginning in the second quarter, we invested heavily in Upper Funnel and other creative marketing activities aimed at building long-term equity around the sign and emotional connection associated with the Olaplex brand. When we introduced annual guidance earlier this year, our visibility was limited as there was uncertainty regarding how shifting market dynamics would impact the business. We anticipated that trends would stabilize in the second quarter and sales demand would rebound in the second half of the year as our increased investments in sales, marketing, and education began to yield returns. We also expected to benefit from new product introduction and new distribution gains. However, we have now seen a weaker sales trend persist since our first quarter earnings call in May through June. While our loyal customers remain highly engaged with Olaplex, we believe a continuation of negative factors has impacted the business. We recognize that these factors are having a particularly negative impact on the performance of our professional channel and views of the brand with some members of the stylist community. As a result, we are revising our forecast for the balance of the year using this recent trend as the run rate for the business. We recognize that it will take a sustained and balanced approach to investing in marketing, education, innovation, and brand building activations to grow the business. Several key assumptions have changed in this new outlook. First, demand slowed as trends weakened in our professional and specialty retail channels due to slower sell-outs and some customers right-sizing their inventory positions. Second, while we are beginning to see some positive early indicators from our upper funnel market campaigns, we are not yet experiencing the lift that we were anticipating across the business, and we expect that this activity will begin to deliver stabilization on an absolute basis rather than growth during the second half of the year. And third, given our updated view on our trend line, we believe it is prudent to lower our expectation for consumer demand associated with new product introductions and new distribution gains. Eric will provide more details on our outlook later on in the call. We believe we made progress towards achieving stabilization. Based on data from a third party, we have seen a lift in awareness and positive opinion of Olaplex following the start of our upper funnel marketing campaign in June. Similarly, Olaplex.com has experienced increased traffic and improved conversion after the campaign launch. And because that channel tends to act as a leading indicator given its close proximity to the end consumer, we believe the messaging, content, and creative asset of the campaign are resonating. And as we balance sell-in activities with demand, we believe the months-on-hand inventory positions at our major accounts on our core items are in a much better place relative to their targets. We have worked to normalize inventory levels with these partners in response to slower than originally planned sales and decisions from these partners to lower overall months on hand levels than previously carried. To put this in context, in the first half of 2023, net sales or sell-in declined 44% overall, while sell-out at key accounts was down approximately 26%. Some of this difference can be attributed to the lapping of previously communicated prior year one-offs, namely our one-liter pipeline launch, alter pipelines in Q1 of 2022, and the impact of our July 1st, 2022 price increase. The remainder of the difference between sell-in and sell-out can be attributed primarily to this continued customer destocking action in response to our lower demand. Our team is focused on executing and improving our sales trend through brand building and education activations that we believe are the strongest levers to engage loyal users and bring new and lapsed customers to Olaplex. We are increasing the amount of investment for this year and are adjusting the mix of that investment as we test, learn, and optimize our initiatives. We are raising our expectation for marketing inclusive of sampling and certain sales and marketing payroll to increase to a range of $80 million to $85 million in 2023. compared to our previous expectation of $70 million and up from $40 million in 2022. With this change, we are increasing aspects of our new brand campaign, repurposing some of the upper funnel out-of-home activations towards media and connected TV, and focusing more effort on improving our standing with the pro community. As we adjust our plan for the year, we continue to make progress against our four key priorities. These are accelerating investments in sales and marketing, increasing and evolving our educational assets, reasserting our position with our pro and specialty retail partners, and improving our approach to PR. Let me now walk you through the progress we made on this initiative during the second quarter. Beginning with sales and marketing, year-to-date, we invested approximately $40 million of the planned $80 million to $85 million investments for the year. In May, we kicked off an integrated full-funnel creative campaign titled Strength Starts Inside, featuring hate media, digital, social, connected TV, audio, and out-of-home activations. With this campaign, we intend to amplify our scientific authority by highlighting how Olaplex builds strength from the inside with our patented DysAmino technology, as well as strengthening emotional connections with our community of pros and customers who aspire to bring out their own inner strength. And in June, we generated excitement of our nine-year anniversary as a company by celebrating National Olaplex Day. To celebrate this milestone, we hosted events with our professional ambassadors and activated fully branded Gorilla Street sampling teams near local Sephora and Ulta Beauty doors in New York, Los Angeles, and Chicago. Turning to education. we continuously look for new and better ways to inform stylists and consumers about the superior performance of our iconic products. In that vein, we are implementing a more active and engaged approach to field education and are establishing our own internal retail field sales team. You may recall that during the fourth quarter of last year, we deployed a pilot of a third-party field sales team trained by Olaplex, and following positive results, expanded the program to 400 Sephora and Ulta beauty doors during the first quarter. This program has demonstrated the impact we can have in driving in-person education with consumers and beauty advisors. An internal retail field team is not only more cost efficient than engaging with a third party, but we believe that we will have even better control of training on the Olaplex brand. Our third priority is to reassert our position with our professional and specialty retail partners. The professional community remains at the foundation of our brand and its core to maintaining our credibility in the category. We know it is critical to address and solve the issues we are facing in that channel by increasing our visibility and investing more to deepen engagement with stylists. To that end, the team is implementing new and incremental full 360 activations to show our support for the pro audience, driven primarily by participating in high-visibility distributor-led events, stylist appreciation days, and in-store activities. In addition, we continue to increase in-person and virtual sales contacts and trainings with our new field sales managers and expanded education team, both in North America and internationally. We piloted and expanded data-driven programs to help our distributor partners target and secure new Olaplex salons and are advancing our key opinion leader program by adding new salons and cultivating relationships with existing partner salons. For specialty retail, we are continuing to partner with our key accounts to expand CRM campaign and education content. We also introduced new visual merchandising reflective of our new brand campaign and made progress on international expansion. Our fourth priority this year is to build out and enhance our PR capabilities. With a focus on strengthening our global reputation, scaling influencer marketing and delivering growth in earned media value, our PR assets are aimed at telling the story of our brand and educating consumers about our technology. We are broadly distributing content in partnership with our brand ambassadors, focused on Olaplex and Hair Health via digital and social channels. We intend to continue to develop the Olaplex Scientific Advisory Board program, which consists of a group of medical and scientific experts who will help guide us on ways to develop educational content that underscores the safety and scientific capabilities of our product. We also continue to actively defend our brand against allegations that claim Olaplex products cause hair loss. In July, the court granted Olaplex's motion to sever and dismiss the claims. As a result, all 101 plaintiffs are currently dismissed without prejudice. Turning to our progress on investing in our people, and building out our team. I am pleased that JP Bilbrey has joined our board in the newly created role of Executive Chair. JP joined us about a month ago, bringing extensive experience with growing and evolving global consumer brands after having served as the President and Chief Executive Officer of the Hershey Company and currently serving on the board of directors of Tapestry, Elanco Animal Health, and Colgate Palmolive. It is a testament to the opportunities ahead of Olaplex that we could attract a leader of his caliber and credentials. JP will be valuable addition to the Olaplex team, and we are thrilled to welcome him to the board. I look forward to partnering with him and receiving his guidance on ways to implement best practices and processes as the company scales. In summary, while it is a challenging period for Olaplex, we continue to be confident in the long-term opportunities for this business. The prestige hair care category is in its early stages of growth, and we are an industry leader, offering truly differentiated science with our patented Bisamino technology. We believe we can reach new customers and reclaim users as we invest in our marketing models and develop within the international markets. And we believe we have a compelling multi-year innovation pipeline that enables us to expand our product offering. With that, I will now pass it over to Eric to cover our second quarter results in more detail and provide additional information on our revised outlook for 2023. Eric?