Waldencast plc

Thank you for standing by. This is the conference operator, and welcome to the WaldenCast second quarter fiscal 2022 earnings call. As a reminder, all participants are in listen-only mode, and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. To join the question queue, you may press star, then 1 on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star and 0. I would now like to turn the conference over to Alison Malkin of ICR. Please go ahead.

Thank you, and welcome to the WaldenCast PLC second quarter and first half 2022 earnings call. With me today is Michelle Broussette, founder, chief executive officer, and chief financial officer. For today's call, Michelle will begin with a review of the WaldenCast mission and the advantages of our business model, followed by a review of our second quarter and first half financial performance, and then provide additional details regarding our growth strategy and highlight our ESG accomplishments. After the prepared remarks, the operator will open the call to take questions. 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 WaldenCast 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 company's filing that it 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.waldencast.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 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 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.waldencast.com. I will now turn the call over to Michel Brisset.

Thank you, Alison, and good morning, everyone. I am pleased to speak to you today and share a strong second quarter and first half performance with a period marking an important milestone for our company as we enter the public markets as Waldencast PLC. Before I discuss our results for those new to Waldencast, Let me first highlight our mission and why we chose to play in the beauty and wellness space and believe we're uniquely positioned to build a global best-in-class operating platform in this beautiful industry, a platform built for both speed, scale, and profitability. I started Walden Gas three years ago with my co-founder, Hin Septi, following a wonderful 25-year career running consumer brands at Procter & Gamble and most recently L'Oreal, where I was Group President of North America Consumer Division, and before that, CEO of the UK and Ireland. With Waldencast, we have reimagined the beauty company of the future, the home of high-growth, highly profitable brands that have a relevant and authentic connection to the consumers of today and tomorrow. A best-in-class beauty and wellness multi-brand platform that creates, acquires, accelerates, and scales the next generation of high-growth, purpose-driven brands. First, we're a beauty player. Why? Because beauty is the most beautiful of businesses and a business that we know extremely well. First, the category is underpinned by attractive growth drivers with always growing consumer desire for quality over price, increasing appetite for innovative and higher performance products, particularly in categories like skincare and makeup. The ever-continued emerging market expansion with a rise of middle classes in huge markets like China, India, Indonesia, and Brazil. Acceleration and continued adaptability to e-commerce and beauty tech, particularly by skincare and makeup consumers. And second, it has proven resilience through various economic cycles. And while certain categories can be impacted by cyclical trends, beauty overall remains consistent thanks to its multiple subcategories. Beauty is also a highly fragmented market that is ready for a change as evidenced by interesting characteristics that have emerged. First, it is a highly fragmented market with the top five players representing only 32% of the market. Second, this is not a winner-takes-all market. It's a market of expandable consumption where a company's ability to grow is only limited by its ability to innovate and present to consumers new and interesting offerings and connecting with them in meaningful and relevant ways. Third, this consumer specificity of the category, plus the rise of digital and more responsive asset-like business models, has driven the rise of compelling emerging players, independent or indie brands, that are driving growth and gaining market share. This explosion of new indie brands creates a clear opportunity to aggregate emerging brands under a new, modern, multi-brand platform to help them accelerate growth and scale globally. What we're creating with Waldencast is an incredibly powerful combination. First, Waldencast is a multi-brand platform built for growth and profitability, a house of brands built for speed and scale. It's a balanced portfolio, placing some of the most structurally attractive segments in beauty and allow us to mitigate the risk linked to single subcategory fluctuations. We have the expertise in managing and scaling beauty brands and businesses, which we intend to do while keeping an asset-light structure and agility to retain the market responsiveness and speed of entrepreneurial indie brands versus the slow, inflexible, and costly traditional structures. Importantly, our management incentives create a strong alignment to long-term value creation through operational and capital allocation excellence. Now, before I share with you our Q2 performance that completed an outstanding first half of Waldencast, let me ground us first in the strong performance of the market we play in. Beauty is, once again, the most beautiful of businesses. Looking at MPD's U.S. Selective Market Data, where we play with our portfolio of brands, the market grew at a strong 17.3% in the first half of 2022. slowed down slightly due to a stronger 2021 base, but it's still very dynamic at 15.9% despite the challenging global context. Swimming on to makeup, the category has bounced back strongly post-pandemic, growing ahead of the category at 20%. In the first half, maintaining a strong 18.5% on Q2. This growth has been fueled by the reopening after the pandemic with consumers returning to their previous makeup habits, with 70% of them going back to similar routines or stating that they are wearing even more makeup. Similarly, skincare is still performing strongly at plus 11.6% on the first half, on top of the momentum the category has had during the last few years and accelerating in Q2 to plus 12.3%. Constantly fueled by premiumization and the rise of the skintellectual consumer, be starting more and more potent and performing products. Our starting point to the world-class journey are Obagi Skincare and Milk Makeup. We have two brands that play in the most attractive segments of their individual categories. Physicians dispense dermocosmetic skincare and premium makeup and that are outperforming their individual categories. Two real brands with a proven ability to connect and build authentic communities within their target audiences. and important to the world in God's vision, complementary brands with business models, channels, and consumer needs. Obagi Skincare is a crown jewel of the physician-dispensed skincare market. It is perceived by physicians and practitioners as the number one brand in the skin health space, participating in the most interesting, attractive, fastest-growing area of skincare. Obagi has exciting growth opportunities both within the existing business model and new levers, and is also a highly profitable business with high gross margins and bottom line profitability. Obagi brings to our platform robust financial operational expertise and a scheme biology know-how to benefit our wider portfolio now and in the future. Milk Makeup is a cult Gen Z brand with an incredible organic following through a diverse and inclusive community known for its cultural relevance and iconic products. Milk makeup brings to market unique, high-performance, easy-to-use products that are also vegan, clean, and cruelty-free. Its core values are community, self-expression, and inclusion. Milk makeup is already the number two clean makeup brand at Sephora, a category that is the fastest-growing part of the makeup market. But our goal is to drive milk makeup to, over time, become the top global beauty brand of the next generation. As I said, this is just the beginning of our journey. With these two brands, we're laying the foundation of what, over time, will be a company that will span all beauty categories, geographies, price points, and business models to become a global best-in-class beauty and wellness company. Now, let's look at our quarter and first half 2022 results. For Q2, the combined results of a virgin milk were very strong. On a pro forma basis, Net sales amounted to $77.1 million, a growth of 23.8% versus the same period a year ago, with a strong gross margin progression at 580 basis points to reach 75.1%. Adjusted EBITDA margin growing 310 basis points to 28.4%. It is important to know that at Waldencast, we manage the company on an annual basis, and quarter results should not be extrapolated to full-year results. Now for the front-half performance. On a pro forma basis, net sales amounted to $138.2 million, a growth of 24.6%. Gross margin improved by 294 basis points to reach 73.8%, and adjusted EBITDA grew 28.2% versus a year ago, reaching 23.5%. This performance was driven by Obagi's continued growth in core U.S. physician channel through deeper door and skew penetration on both core and innovation and building new successes in wider footprints internationally and on direct-to-consumer. It will make up impressive overperformance of the market, driven by increased awareness hallowing on base business, breakthrough NPD launches and door expansion, as well as substantial gross margin progress. The 5% growth over performance of 2021 versus our original projections at the time of the transaction announcement, plus the strong performance in the front half, give us a strong confidence to reaffirm our 2022 full-year projections at net sales of $256 million, gross margin at 74%, and adjusted EBITDA at approximately $15 million after incremental combined central public company costs. In the following slide, we provide the capitalization table at the current time. We have a total diluted shares of standards of approximately 112.7 million shares, as well as approximately 29.5 million warrants. Most of the sellers, founders, and management shares have a one-year lockup, with a small portion of seller shares with a six-month lockup. This diluted share count excludes approximately 16.1 million shares from management equity performance-based awards not yet allocated. The company has a total financing line available of $225 million, composed of a $175 million return loan and a $50 million revolver. On a performer basis, the company has net debt of approximately $142 million. Importantly, our shareholder base is solid. and provides a strong alignment and stability for the company with Obagi and Milk shareholders owning at transaction close approximately 45.9% and Waldeca's founders and sponsor members approximately 22.8%.