Olaplex Holdings, Inc.

Greetings and welcome to the Olaplex Holdings Incorporated third quarter 2024 earnings conference call. At this time, our 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. As a reminder, this conference is being recorded. It is now my pleasure to introduce Patrick Flattery, Vice President of Investor Relations.

Thank you. You may begin. Thank you and good morning. Joining me today are Amanda Baldwin, Chief Executive Officer, and Catherine Dunleavy, Chief Operating Officer and Chief Financial Officer. 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 OilPlex'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 statement. Additional information regarding these factors appears under the heading Cautionary Note Regarding Forward-Looking Statements in the company's earnings release and the filings the company makes with the Securities and Exchange Commission that are available at www.sdc.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 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 other publicly available information. Furthermore, this information involves assumptions and limitations, and your caution not to give undue weight to these estimates. With that, I will now turn the call over to Amanda.

Thank you, Patrick. Good morning, everyone, and thank you for joining us. This morning, we reported third quarter net sales of 119.1 million, which declined 3.6% compared to a year ago. While this represented sequential improvement from Q2, we did underperform our expectations primarily due to weaker than expected results in our international business as we continue in our efforts to build the right foundation for the future. Adjusted EBITDA was 44.6 million for an adjusted EBITDA margin of 37.5%. Coupling our third quarter results with our updated learnings, we are revising our guidance for fiscal year 2024 and now expect net sales in the range of $405 million to $415 million and an adjusted EBITDA margin in the range of 29.9% to 30.6%. As we have shared on past earnings calls, we plan for 2024 as a year to begin our transformation taking a long-term view and prioritizing the strategies and initiatives aimed at building a healthier business. While we now believe it will take longer than originally expected to achieve our goal, we are making great progress and taking the steps we believe are necessary for the long-term health of the business. Much of this work has been happening behind the scenes, while at the same time this quarter, we announced three new innovative products, our number five leave-in conditioner, Bond Shaper Curl Rebuilding Salon Treatment, and number 10, Bond Shaper Curl Defining Gel. Although we were disappointed with this revised outlook for the remainder of the year, I remain confident that we have the right strategy and are implementing the right actions to achieve a solid foundation for long-term growth. Olaplex, at its core, is an innovative, science-enabled, and pro-inspired beauty company with demonstrated global appeal. As a top brand in the prestige hair care category, Olaplex had four of the five best-selling prestige hair care products year-to-date 2024, per Cercana's retail tracking data of the U.S. hair market. Our research indicates that the Olaplex brand remains strong with positive associations to build upon, including innovative, reparative, healthy, and effective. And we possess a healthy balance sheet and strong cash generation, which provide flexibility and enable us to invest in future growth. Overall, I continue to believe that the best years lie ahead for this company. Let me walk you through three key assumptions that drove the revision to our four-year outlook. First, we anticipate weaker performance from our international business as we reset for the future. We conducted a market-by-market review to better understand our business, evaluate our current structure and partnerships, and develop the go-forward roadmap for our global reach. I personally spent time meeting with many of our key partners and traveling the globe to see the brand in this current presentation on the ground and better understand the end consumer and unique markets. From this assessment, while the enthusiasm and passion for this brand remain incredibly high, we now believe that the issues within our international business are more complex than we originally anticipated. This requires simplifying our international model with fewer distributor partners, as well as developing localized direct or distribution approaches and brand support that are designed to be appropriate for the unique dynamics across the world. This work will take time, but we believe it will ultimately better position our business for long-term success. We have referenced throughout the year that we are consistently executing an international distributor rationalization program. This effort has primarily impacted our international pro business, where we have closed certain accounts that we believe were the source of diverted product, as well as our international DTC channel where we have deprioritized certain international e-commerce customers that we believe do not build equity in our brand. As the year has progressed, we now believe it is appropriate to further realign our distributor network to fewer, stronger partners with clear accountabilities for market and brand development. While this activity will reduce net sales in the near term, we believe we are selecting the right partners who are excited with where we are taking the brand and will prioritize Olaplex, better support our transformation, and be more integrated into our own internal processes. Additionally, while we are redefining our international go-to-market strategy, we have felt it prudent to wait to align our new marketing efforts to coincide with deeper partnerships and our new brand vision in order to position ourselves to maximize the return on the investment. As such, we believe the slower investment in international sales and marketing in the near term has contributed to a moderation in demand. Second, from a sales and marketing perspective, we now believe it will take longer to experience a lift in the overall demand from our brand investments. Earlier this year, we kicked off the beginning of our marketing evolution, building a stronger go-to-market engine, which includes elevated content creation and a creator-led approach, focused investments on launches and our core products, deeper coordination with our stylists and retail partners, and more efficient ROI-driven media spend. We recently started to deploy this new strategy in the U.S. we have observed positive early indicators that our new marketing activations are resonating with pros and consumers, with improvements in brand engagement and momentum in earned media value metrics. In this region, we continue to observe sell-through trends at our key accounts that are largely consistent on an absolute dollar basis with what we have seen throughout the year, demonstrating continued progress towards stabilization. However, coming into the year, we did anticipate that these investments would begin to yield growth across the entire business but we have not yet experienced the overall lift in demand that we were expecting. We are encouraged by the sell-through trends of our new products launched during the third quarter, supporting our belief that powerful innovation, clear messaging, and stronger execution can drive better results. We plan to apply these learnings next year across our entire portfolio, but as mentioned, we now believe it will take longer for this new strategy to yield improved top-line performance across the assortment. Third, the beauty market remains healthy, but also highly competitive. We previously believed that we would be able to pull back on promotional levels during the quarter, but now expect that the overall promotional environment will intensify during the holiday period and that we will need to participate effectively to win over the consumer. We continue to prioritize strategic promotions that maintain brand health and new customer acquisition, but we anticipate our promotional activity across geographies during Q4 will be higher than originally expected. At this stage in our transformation, we continue to believe marketing investment is essential for the long term as we engage with our community and broaden the knowledge of our competitive strengths, making a clear statement that Olaplex delivers results and stands apart from other brands. Therefore, we will continue to make such investments in the fourth quarter in an effort to maximize our performance during the important holiday season and build for the future. I am proud of the progress we have made so far on our transformation journey as we continue to execute against our three key strategic initiatives for 2024. As a reminder, these include maximizing the impact of our sales, marketing, and education investments to generate demand, strengthening our capabilities and culture to support our future, and developing the long-term roadmap and future vision for OLAPAC. As it relates to our first initiative to maximizing the impact of our sales, marketing, and education investments to drive demand. One of the most important priorities of our new sales and marketing strategy has been to return to our stylist roots and nurture our connection to the pro community. By showing up in salons and listening to stylist feedback, elevating our presence at industry shows, investing in additional educational tools, we aim to increase our visibility, demonstrate our commitment, and deepen our engagement with this key audience. As an industry leader, we also recognize the significant role we play in delivering innovation and new services that can help stylists make their business even more successful. To that end, among our new launches launched during the third quarter were two products for curly-haired consumers which were developed with a pro in mind. First, our Bond Shaper Curl Rebuilding Treatment, which is a three-step professional curl treatment to repair, redefine, and lock in the shape of natural waves, curls, and coils. created with new patented technology. And second, our number 10 Bond Shaper Curl Defining Gel, which is an at-home reparative curl styling gel that revives natural curl patterns. To support these launches, our education team, in partnership with our pro ambassadors and members of the Olaplex Pro Collective Influencer Team, educated at more than 50 national and regional trade events and hosted virtual training sessions to educate stylists and our distributor partners about our new technology. We are pleased with the early performance as early adopter salons across the globe are offering the Bond Shaper Curl Rebuilding Treatment to their clients and our number 10 Bond Shaper Curl Defining Gel ranked in the top three within Ulta Beauty's curl subcategory. Another important initiative for our marketing team during the third quarter was generating excitement and buzz of our consumer-focused new product launch, number five, Leave-In Conditioner. Supported by a holistic marketing plan with social media and experiential pop-up during New York Fashion Week and trade activations, powered with support from our influencers and pro-ambassadors, the campaign generated strong response with more than 2 million social media impressions, people testing the product and touting its efficacy. Exceeding initial forecast, number five leave-in conditioner became a top two SKU on olaplex.com and a top five SKU in Sephora's U.S. leave-in conditioner subcategory. As I mentioned earlier, we believe these successful launches are signs of a stronger innovation engine and improved marketing strategy, delivering enhanced creative partnerships and improved content creation. On our last earnings call, we highlighted a new marketing campaign launched during the second quarter featuring the transformative benefits of a complete routine of Olaplex No. 4 Bond Maintenance Shampoo and No. 5 Bond Maintenance Conditioner. The campaign grows positive lists and brand favorability above our peer benchmark, and Olaplex's brand engagement levels have risen year-to-date across our competitive set. Also, we believe our strategic participation in our customers' tentpole marketing events indicates strong consumer interest in our brand. For example, our performance during a key customer's promotion in July was very successful, with nearly 70% of customers during that period identifying as new Olaplex users and five of our SKUs featured in the event were the number one ranked items in their respective categories. And lastly, according to data tracked by Creator IQ, we regained our position as the number one U.S. hair care brand in earned media value in the third quarter, with momentum building throughout as we earned the number one spot in both August and September. Moving to our second priority to strengthen our capabilities and culture to support our future, We recently strengthened our leadership team with several highly talented appointments who we believe will position Olaplex for future success. Over the last several months, we've added a new chief operating officer and chief financial officer, Catherine Dunleavy, who is here with me today, as well as a chief marketing officer and a senior vice president of international, both of whom will be important leaders of our go-to-market strategies across the globe. With these new senior leaders in place, we are transforming how we work across the organization to strengthen our foundation. We have implemented and continue to deploy enhancements to new integrated business planning approach that will give us a better global view of the business. Also, we launched a new strategic planning process, bringing the leadership team across the organization together more frequently, working in even greater detail to craft the strategic plans for the future. As it relates to our marketing processes, We are streamlining and integrating how the entire marketing organization engages with our agency partners, developing a more disciplined approach that we believe will yield better planning and a higher quality creative content engine. We also expect this to strengthen each new product introduction as our new approach allows us to present marketing messages that are better aligned with how consumers interact with brands. We have more to do, but we're deep in this work. Overall, we believe we are creating a corporate culture that is more collaborative and makes informed decisions based on data and business processes that can be applied across the globe. It is rewarding and exciting to see our teams come together to work towards achieving a common goal. Our business leaders and team members are energized, committed, and working hard to move our business forward in a positive way. Our third priority is developing the long-term roadmap and future vision for Rolaplex. Supported by an in-depth brand perception study rooted in pro and consumer insights, we've developed a new and clear brand vision for Olaplex that will start to be visible to the pro and consumer in the coming year. At various stages of this work, we have been in active dialogue with our partners. The feedback from these conversations have been overwhelmingly positive, but there is strong support and excitement for this new phase of Olaplex. We also completely redesigned our new product pipeline, development, and go-to-market processes following the creation of our new innovation teams to align with our new brand vision. We rolled out new commercialization strategies for our product launches with additional enhancements planned for the next year. Additionally, as we work to inflect a growth, we're continuing to finalize our strategic plan and expect to provide details in early 2025. In conclusion, this is a truly transformational period for Olaplex that requires thinking and acting for the long term. I remain confident in the brand's strong foundation that we can build upon to return to sustainable growth truly differentiated science that would deliver superior results, a powerful R&D platform, a passionate community of stylists and consumers who love our products, and a unique global footprint, and a talented team that is dedicated to position this brand for success. With that, I will now pass it over to Catherine, who has been a tremendous partner already, and the company and myself are incredibly fortunate to have her with us on this journey.