Waldencast plc

Thank you, and welcome to the WaldenCast PLC third quarter fiscal 2022 earnings call. With me today are Michelle Brissette, founder and chief executive officer, and Philippe Bautier, chief financial officer and chief operating officer. For today's call, Michelle will begin with a market update on the beauty market, followed by a review of our third quarter financial performance and details on our growth strategy and highlights of 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 guidance on future earnings, WaldenCast strategic initiatives, plans to expand both internationally and domestically, and other matters referenced in the company's earnings release issue 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 risks and uncertainties appears under the heading Cautionary Note Regarding Forward-Looking Statements in the company's earnings release and in the company's filings 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 it 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 nine GAAP financial measures and a reconciliation of these nine GAAPs to the most directly comparable GAAP measures in the company's earnings relief. A live broadcast of this call is also available on the investor relations section of the company's website at ir.waldencast.com. A replay of the webcast will be available approximately two hours following the live call and remain on the investor relations website for 90 days. We have provided adjusted results, which allow for a comparable presentation of our performance versus the prior year, reflecting the timing of the business combination, which occurred inter-quarter. As such, our Q3 gap financials include a predecessor period, prior to the closing date of the business combination, and a successor period, all periods on and after the acquisition date. While our first half performance was provided on a performer basis, as the entire period was prior to the consummation of the business combination with Obagi Global Holdings Limited. In addition, our segment data includes an allocation for WaldenCast Central costs, reflecting the corporate expenses that are not allocated to our Obagi skincare and milk makeup brands, and on a gap basis, non-recurring transaction costs related to the business combination. In addition, our income statement includes the metric comparable net sales, which excludes the Obagi China business, which was distributed to Cedar Walk, the sole shareholder of Obagi skincare prior to the business combination. The presentation of comparable net sales removes non-recurring sales from both the current year and prior year periods. You will also see an adjustment to adjusted gross profit in our Obagi skincare financials given the sales of our distributor in China for adding non-material margins. Finally, adjusted EBITDA excludes non-operating transaction costs. you will find a table that reconciles our adjusted results to GAP in our press release and in this presentation, as well as in our FCC filing on Form 6K that was issued earlier this morning. I will now turn the call over to Michel Brissette.

Thank you, Alison, and good morning, everyone. I am pleased to speak to you today and share a strong third quarter performance from all the staff. Before I discuss our results, I would like to start by stating our ambition at Wildicus. Our aim is to build over time a global best-in-class beauty and wellness platform that creates, acquires, accelerates, and scales the next generation of high-growth, highly profitable, purpose-driven brands. We are a beauty and wellness pure player, an operating platform built for both speed and agility. reimagining the beauty company of the future as the home of the brands of tomorrow that connect with consumers' needs and their values. We are a beauty player because it is not only an industry we know extremely well, but also because it is the most beautiful of businesses. It has a strong growth and resilience as demonstrated by the market evolution today, despite a broader, more challenging macro environment. It has very attractive structural economics. and it's a business where focused expertise matters to build long-term, profitable, and relevant brands. The market today continues in a strong growth trajectory, despite some punctual challenging areas. In the U.S., which is our main market as of today, premium beauty year today through the end of September is growing strongly at 16.4% in value and in units at 13.7%. Q3 trend remains in line with a strong growth with value at plus 15% and units at plus 12.7%, reflective of both an increased consumption, more units, and premiumization. Makeup year-to-date is growing even faster than the broader beauty category at 18.3%. This ongoing acceleration is driven by consumers going back to their pre-COVID habits, going back to the office, seeing friends, and socializing. with one quarter of the women indicating that they are actually wearing more products versus a year ago, a trend led by Gen C with 48% of them stating that they are using more products. Skincare is not only growing but has accelerated in Q3 with year-to-date growth at 13% in value and accelerating Q3 to 15.5% in value. A key driver of skincare growth over the last year has been driven by the raised price of science-led, high-performance skincare, as evidenced by social media conversations for science and dermatology-led skincare, growing 57% versus year-over. The first two brands in our portfolio, Obagi Skincare and Milk Makeup, play in the most attractive segments of those high-growth categories, science-led skincare and clean makeup. Obagi Skincare is a crown jewel of the physician-dispensed market, It is perceived as the number one brand in the skin health space by practitioners in the most attractive, fast-growing sub-segment of premium skincare. With its breakthrough patented technologies and transformative clinically proven results, it unlocks high loyalty from both consumers and physicians that is perfectly positioned to answer the growing consumer need for high-performance, effective skincare. It also paves the way for our expansion into other categories, not just for the Obagi brand, but also a wider portfolio through its deep understanding of skin biology, which is a great springboard for innovation in other beauty categories. Milk Makeup is a cult Gen Z brand with a large and engaged organic following through a diverse and inclusive community known for its cultural relevance and iconic products. It is a leading clean makeup brand, today the number two clean makeup brand at Sephora U.S., and with a full intention to close the gap to number one. It brings a connecting, relevant promise of cool, clean makeup that works for the attractive Gen Z demographic and increasingly beyond. Now, with that as an initial frame, I would like to turn the call over to Philippe Gauthier, who is the CFO and COO who will lead us through the financials.

Thank you, Michel. It is a pleasure to speak to all of you today on my first starting scroll as WeldonCast PLC's Chief Financial Officer and Chief Operating Officer. While I'm new to WeldonCast, I've been leading the finance and operations of a number of prestigious global consumer brands for more than 30 years, and I am extremely excited to support WeldonCast and our ambition. to create a global best-in-class beauty and wellness operating platform. Our third quarter results continue our strong trend with double-digit growth in net sales, comparable net sales, and significant expansion in adjusted gross margin and adjusted EBITDA as compared to the third quarter of 2021. We are pleased to deliver this strong performance, which reflects the growing loyalty to our OBG skincare and makeup brands, even the efficacy of our products, the power of our innovation and the successful execution of our growth strategies. This led to total net sales rising 10.3% and an increase of 18.2% on a comparable basis. excluding the Obagi China business that was distributor to its sole shareholder, Centerwalk Skincare Limited, prior to the business combination, as well as the related party cells to the distributor post-combination. Therefore, on a like-for-like basis, which better reflects the ongoing operating business and how we manage the current business, comparable net sales grew plus 18.2%. Comparable net sales are also the indicator which is consistent with the way net sales were communicated in the previous quarters, as all pro forma figures have been prepared, excluding Obagi China. Adjusted gross margin expanded 155 basis points as the business benefits from our growing scale, efficiency in sourcing, pricing, and gross to net efficiencies. Keep in mind again that our adjusted gross margin removes Obagi's former China business and the impact of the inventory fair value step-up driven by the acquisition of Obagi Skincare and Milk Make. Strong sales growth. An expansion in gross margin more than offset investment in corporate and mounting expenses, which include wild and gas central expenses post-combination, fueling a strong 126.3% increase in adjusted EBITDA to 15.3 million, representing 19.4% of net sales. Turning now to the driver of sales growths. At Obagi, sales were led by continued growth in our core U.S. physician dispense business, along with strong international growth. We also invested in enhancing our digital capabilities to accelerate our D2C expansion. At Milk, growth was impressive, far outpacing the industry given by the strengths, the brand's hero products, and the team's ongoing ability to delight consumers with must-have innovation. One of our objectives was to improve gross margin and milk, and we were very pleased to see the initial benefits of our work focused on increasing efficiencies in sourcing and distribution. We're investing a portion of this savings in brand marketing, which is paying dividends, with the increased investment driving customer engagement, trial, and sales. We also believe milk has all the makings of a strong global brand and are beginning to capitalize on its international market opportunities. We're excited by this quarter's results, but it is very important to highlight, as Michel did in the previous earnings call, that we manage the company's performance on an annual basis, and quarterly results should not be extrapolated to full year results. Also, Importantly, that we are still working through the full technical accounting implication of the combination of the three entities and the carve-out of the Obagi China business distribution. Our earnings release provides some detailed reconciliation between our unaudited GAAP financials and non-GAAP measures. When reading our financial statements, And in the appendix of this presentation, you should note there is a clear division between the predecessor period that includes financials up to the acquisition date and successor period that includes the acquisition date and all periods thereafter. The predecessor and successor results shown are not comparable. The successor period includes the completed financial statements of Waldencast, Obagi, and Milk. whereas the predecessor period includes only Obagi's financial statements. Let's take now a closer look at our combined financial profile. As I mentioned, net sales were 78.9 million, of which comparable net sales were 74.5 million, an increase of 18.2% versus last year. Breaking this down further, Obagi skincare sales were 60.4 million, of which comparable net sales were 55.9 million, increasing 12.1%, with the difference between the two related to the cutout of the Chinese distribution business. Mills makeup net sales was 41.7% to 18.5 million, both on the net sales and comparable net sales basis. Therefore, total comparable sales, the better measure of the ongoing operating company grew 18.2% for Q3. Group adjusted gross margin for Q3 was 53.5 million or 71.9%, an increase of 155 basis points versus a year ago. Breaking this down further, Budget skincare standalone adjusted gross margin was 41.9 million or 75% at 20 basis point versus one year ago. Nailed makeup adjusted gross margin was 11.6 million or 62.5% of dead cells up a strong 930 basis point from one year ago. Adjusted DBA for the group rose 126 to $15.3 million from $6.8 million last year. There's a strong expansion to 19.4% from 9.5% margin in the third quarter of 2021. Again, both brands saw impressive growth with Obagi Skincare seeing an increase of 109% to $16.3 million for an adjusted year of 27%. And milk makeup generating improvement measures the DBDA of $1.9 million to a profit of $4.9 million from a loss of $1 million in the third quarter of 2021. The wild and cast central expenses represents ongoing corporate costs and public company costs that are not allocated to our brand. This is shown here on an adjusted data basis and does not include transaction charges and non-recurring items. The following slide, we provide our capitalization table as of September 30, 2020. We had total financing line available of $225 million, composed of $180 million gross debt and net debt of $149 million. It's worth mentioning that we have put in place post-quarter end interest hedging of some of our debt. This hedge mitigates our interest rate exposure to the extent we have floating rate debt in a rising interest rate environment. Importantly, our shareholder base is solid and provides a strong alignment and stability for the company with OBG and milk shareholder Owning as of September 30, 2022, approximately 45.9%, and Wild and Cats founders and sponsors approximately 22.8%. We have total diluted shares outstanding of approximately 114 million shares, as well as approximately 29.5 million warrants. Most of the sellers, founders, and management pairs have a one-year lockup from the day of the business combination, with a small portion of seller shares with a six-month lockup. This diluted share count excludes approximately 3.9 million shares for management equity performance-based awards not yet allocated.