Waldencast plc

Greetings, and welcome to the WaldenCast third quarter and first nine months 2024 earnings call. At this time, all participants are in listen-only mode. If anyone should require operator assistance, please press star zero on your telephone keypad. A question and answer session will follow the formal presentation. You may be placed in the question queue at any time by pressing star one on your telephone keypad, and we ask you to please ask one question, one follow-up, then return to the queue. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Allison Malkin with ICR. Allison, please go ahead.

Thank you, and welcome to the WaldenCast PLC Third Quarter Fiscal 2024 Earnings Call. With me today are Michelle Broussette, Founder and Chief Executive Officer, and then Will Manfredi, Chief Financial Officer. For today's call, Michelle will begin with an update on our business and vision. discuss the company's performance within the context of the beauty market. Manuel will follow with a review of the third quarter and year-to-date performance and provide our fiscal 2024 outlook. Following this, Michelle will share the strategic growth initiatives for our milk makeup and Obagi medical brand. 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 WalmanCast business and other matters referenced in the company's earnings release issued yesterday. 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 statements appears under the heading Cautionary note regarding forward-looking statements in the company's earnings relief 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 and should be read in conjunction with this section entitled Risk Factors in the Company's Annual Report on Form 20F filed with the Securities and Exchange Commission on April 30, 2024. 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 the definition of these non-GAAP financial measures and a reconciliation of these non-GAAP 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, which will remain available for 90 days. I will now turn the call over to Michel Rousset.

Thank you, Alison, and good morning, everyone. It is a pleasure to speak with you today and share another quarter of a strong performance. On the top line, comparable net revenue growth of 34.6% accelerated from 21% in Q1 and 25.7% in Q2 as we anticipated. This reflects increased consumer demand for our Obagi medical and milk makeup brands and improved stock availability. Amongst our target audiences, our brands are consistently delivering strong innovation and community engagement. As a result, we're seeing ongoing success as we expand our global distribution. We saw in Q3 and throughout the year, robust growth evidencing the power of our operating platform that enable us to deliver increasing rates of profitability as we grow our market-leading brands. To this end, in the third quarter, adjusted EBITDA rose 134% to 16.3% of net revenue and expanded 720 basis points from the prior year. We continue to make progress towards achieving our vision to build 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. Our repeatable Waldencast operating virtual circle of growth and profitability is continuing to pay dividends as we continue to strengthen our efficiencies to drive gross margin expansion and invest into selling and marketing drivers to sustain and grow our top line momentum. While very pleased with our performance in the quarter and first nine months of the year, we believe we're just getting started in realizing our true potential. Let me share with you why. First, we possess the operational scale of a multi-brand platform that will only get better as we add more brands to the portfolio. These pair with infrastructure and beauty operational talent to support accelerated growth and maybe the margin expansion for our portfolio of market-leading brands. Second, we have a proven track record identifying, managing, and building global beauty brands on scale. This success and the many opportunities we see in front of us provide us with a visible path to continue to attract leading brands to our fold. Third, we have taken a balanced approach structuring our portfolio in attractive segments of the category that enable us to maximize growth and benefit from diversification. We operate in the two most structurally attractive segments of the skincare and makeup categories. Fourth, we operate an asset-light and highly efficient capital structure, which give us the speed and agility and return on capital with the operating discipline of a much larger company. And fifth, and equally important, is that our management incentives are highly aligned to value creation for our shareholders and our focus on rewarding long-term value creation through operational and capital allocation excellence. As you know, we possess two of the most exciting brands in the two biggest beauty categories. Our brands, playing the most attractive sub-segments of these two categories, prestige clean makeup and professional science-led skincare. Note Makeup is a cult favorite Gen Z brand and benefits organically from an engaged and diverse community due to its cultural relevance and iconic products. It is a leading clean makeup brand, the number two clean brand at Sephora US with 2.7 million Instagram followers and is quickly building a global following with leadership positions in several international markets. Makeup has accomplished this through its relevant promise of who will clean makeup that works. Obagi Medical continues its clear advantage as the number one U.S. physician-recommended medical-grade skincare brand for top-ranked patient needs, leading in the most attractive, fast-growing subsegment of premium skincare. Leveraging 39 R&D partners, Obagi Medical consistently delivers breakthrough patented technology and transformative clinically proven results. This drives high loyalty from both consumers and physicians. We continue to believe Obagi Medical is perfectly positioned to answer the growing needs for high-performance, effective skincare, while also paving the way for expansion into other categories. Yet, we have set our sights on building a much larger business, not just organically, but also through acquisition and brand development. We believe we are the perfect partner for indie brands as we preserve their brand DNA and allow our acquired brands to operate with autonomy, thereby maintaining the entrepreneurial spirit of each brand. At the same time, our platform provides many benefits, from the sharing of best practices to leveraging the collective expertise of the world ecosystem. Simply put, we provide the data, technology, talent, finance, legal and supply chain support that elevates profitability and accelerates growth. Let me share a real-life example. When we acquired Milk Makeup, it was a cold favorite, but not reaching its full potential. With our platform, we implemented the processes that improved decision-making, created efficiencies, and removed costs to drive profit growth while increasing high ROI marketing expense to accelerate top-line growth, and we expect this to continue. As a result, we have created an algorithm for long-term success as evidenced by the delivery of top-tier comparable net revenue growth of 26.9% in the first nine months of 2024, and a best-in-class adjusted gross margin of 74.8%. Our flywheel of growth and profitability is simple and repeatable, with our world-renowned talent and expertise that you can see it play in both Milk Makeup and Obagi Medical. When we add a brand to our portfolio, we first laser focus on expansion of gross margin by driving operational efficiencies. We then reinvest these savings into sales and marketing business drivers, which drives top-line growth, further enhancing gross margin, and delivering operational leverage by diluting fixed costs to produce robust profit growth. While we have scale, we're only at the beginning of our journey to building a best-in-class global multi-brand portfolio. Today, we possess two powerful brands that have garnered critical mass while still having substantial runway for growth. With milk makeup on Obagi Medical, we have a solid foundation in prestige scheme and color. We have a core business in the U.S. and a growing presence in Europe and in Asia-Pacific region. We're achieving a strong growth in attractive channels, including professional, specialty retail, and online, and expect this momentum to continue as we drive awareness for both brands beyond their core communities, continue to introduce more blockbuster innovations, and expand into other regions and categories. Our increasing success with both brands and the power of our unique pure play beauty ecosystem, an industry that requires deep and specific expertise, give us a distinct competitive strength in attracting other brands and founders into our platform. And now I will turn the call over to Manuel to review our financials and outlook.

Thank you, Michel. Good morning, everyone. I'm pleased to share our third quarter and first nine-month results for 2024 with you today. Our performance continues to reflect the successful execution of our strategy that provides a powerful framework to maximize the inherent strength of our meal makeup and Obagi medical brands. As shown this year, our strategy continues to deliver ongoing revenue and profit growth, and furthering our commitment to delivering shareholder value. Today, I will focus on our adjusted financial measures. you can find a reconciliation to gap financial measures in our press release from yesterday and in the appendix of this morning's presentation. Let's dive into the highlights of our third quarter performance. Net revenue was $70.2 million and represented a strong 30.46% increase in comparable growth. Obagi Medical and MealMakeUp achieved 45.5% and 23.5% growth, respectively. and both brands accelerated from Q2. Milk continues to grow strongly in Q3 2024, with increased global visibility boosted by new partnerships with four European retailers. We also expanded our product line, which has strengthened our presence, especially in North America. In Obagi, our growth has been driven by successful product launches of Elastic and Framili, and continued acceleration across digital channels. further supported by the benefits of the shift in our Amazon distribution model at the end of 2023 to a direct operating model. Additionally, it is benefiting in this quarter from improved inventory levels, an issue that limited our growth in Q2. That said, while the inventory levels are substantially improved, we're still not completely out of the woods and expect out-of-stocks to still be a factor into Q1 next year. Adjusted gross profit came in at $51.4 million. We continue to see significant year-over-year expansion in our adjusted gross profit margin, which rose 400 basis points to 73.2% in Q3 2024. This reflects growth of higher margin channels of distribution and lower inventory obsolescence versus Q3 last year. Adjusted EBITDA of 11.4 million, more than doubling with 134% increase from Q3 last year. Adjusted EBITDA margin expanded 720 basis points year over year, reaching 16.3%. This notable growth reflects strong revenue momentum and operational leverage, which more than offset the increased investment in marketing and international capabilities to support growth and future acquisitions. Our standing third quarter results have been on the momentum from a strong first half, leading to a remarkable year-to-date performance. For the first nine months of 2024, our net revenue reached $201.8 million, a solid 26.9% increase in comparable growth. Adjusted gross profit came in at $150.9 million, up 37%, with an adjusted gross profit margin of 74.8%, a 720 basis point improvement compared to the first nine months of 2023. Adjusted EBITDA grew by 54.9% to $29.1 million, driven by strong sales growth and improved gross margin, which more than offset our increases in marketing expenses. This brought our adjusted data margin of 14.4% in the first nine months of 2024, marking a 290 basis point increase from 11.5% in the same period last year. As we look ahead, our strong performance in the first nine months, the continued success of our growth strategy, and the continuous investment in our internal capabilities positions us well to carry on this momentum into the final quarter of the year. With this in mind, for the full year 2024, we reaffirmed our prior guidance and we continue to expect comparable net revenue growth to accelerate beyond the 25.7% increase we saw in Q2, and adjusted EBITDA margin to land in the mid-teens range, a substantial growth from the 11.2% adjusted EBITDA margin achieved in 2023. Turning to our balance sheet and cash flow. We ended the first nine months of 2024 in a solid financial position with no near-term debt maturities. Our business continues to have a strong adjusted EBITDA to cash conversion, driven by efficient working capital management and limited capex, thanks to our asset-light business model. Currently, a significant portion of this cash is allocated to cover non-recurring costs associated with the ongoing regulatory investigation. Once this matter concludes, we expect the cash generated by the business will help us to be in an even stronger financial position by improving our capital structure. As of September 30, 2024, we have cash and cash equivalent of $17.6 million, and we also have $30 million available on our revolving credit facility. Our NEP debt totaled $154 million, and as of November 15, 2024, First outstanding were $122.9 million. And now I will turn the call over to Michel.

Thank you, Manuel. Let's now look at the performance by brands, starting with Milk Makeup. In the first quarter, Milk Makeup generated net revenue of $31.5 million, an increase of 23.5% versus a year ago. Momentum for Milk Makeup grew in the quarter, driven by the increased awareness and buzz associated with the brand. the deliver of sought-after innovation, and our international expansion. Specifically, this quarter, we built on the success of the cooling water jelly tints with the introduction of two additional shades. And there's a second quarter, stock levels for jellies have improved, allowing the brand to better meet what has been unprecedented demand. We also launched Hydro Grip and Glow and Cush Higher Roller Brow and Mascara with further strength in our award-winning franchise in primers, and growing cold icons with our new product offerings. Adjusted gross profit margin of 66.6% declined 340 basis points from last year, driven by a shift in mix with increased lower margin holiday kits shipping in Q3 this year versus last year, and a shift in timing of off-price sales to third quarter this year from Q2 last year. In addition, Q3 2023, Adjusted gross profit margin had a favorable inventory provision, which aided the rate. As you will see in the next slide, makeup gross margin continues to improve. Adjusted EBITDA nearly doubled to $8.5 million, while adjusted EBITDA margin of 27.1% expanded 1,040 basis points from the third quarter of 2023. As a strong revenue and growth increase, gross margin dollars offset increased sales and market investment in support of growth. For the first nine months, Milk Makeup generated net revenue of $94.7 million, increasing 21.7% from the first nine months of 2023. Adjusted growth profit rose 25.2% to 65.6 million, with gross profit margin expansion of 190 basis points to 69.2%. And adjusted EBITDA rose 42.5% to 24.2 million from 17 million in the first nine months of 2023, with adjusted EBITDA margin expanding 370 basis points to 25.6% of net revenue versus the first nine months of 2023. Milk makeup saw balanced growth across geographies, reflecting the increased relevance of the brand across the world. Indeed, globally, more and more consumers are embracing milk makeup and what the brand stands for as we deliver on our promise to introduce cool, clean makeup that works. The brand generated outstanding growth across geographies in the first nine months of the year, with revenue up 22.3% in North America and 20.4% internationally. Milk Makeup's vision is to be the number one beauty choice of the next generation, Gen C and increasingly Gen Alpha, and we have a clear, proven, and sustainable growth strategy to get us there. A strategy that is anchored in four clear pillars. Expanding our already cold community by continuing to exchange with the existing one, as well as welcoming new groups and delighting both through our expertise, innovation, and values-based approach to makeup. Innovation and keep pushing the boundaries of what clean, cool beauty looks like by continuing to build iconic products such as our primer set, sticks, et cetera, as well as continuing to be the most innovative and exciting makeup brand with additions such as gelatins, lip oils, and other exciting products. Broadening our footprint of both existing categories, makeup and skincare, as well as geographies by entering new regions and spaces where we know there's a strong demand by the community. And lastly, leverage the world-in-cast platform to double down on our unique brand DNA and accelerate awareness, love, and beauty credentials for the brand. First, let's look at how are we expanding our community. NetMakeup has built organically through a very strong community relevance and engagement that keeps growing with 7.7 billion press coverage impressions year-to-date, fueled by the intrinsic love of the brand and by the excitement behind the MPD of $1.7 billion, which is 22% of year-to-date impressions. Similarly, when looking at earned media value, Milk Makeup is ranking year-to-date as the number 14 brand in the United States, with a very strong plus 83% growth year-over-year, as well as number 19 makeup brand globally, growing at 90%, highlighting also the strong desirability of the brand outside of the U.S., which is also a driver of our international expansion. The community law is anchored on iconic products, clean, cool beauty that works, bringing breakthrough innovation that is utilitarian, good for you, always vegan, clean, and cruelty-free. An iconic range with our cult and award-winning core of prime and set and sticks, as well as expansion to new categories like the sold-out jelly tint launched in early 2024. In Q3, we launched Hydro Creek Glow, a unique makeup hybrid that locks in luminosity for 12 hours. That builds on our iconic Hydro franchise, as well as playing into the glow boom, which is offering a benefit of long-lastingness. We also expanded our core jelly range originally launching four strong pale colors with two softer tints that appeal to an incremental consumer need and target. Lastly, as we have shown earlier, the demand for Milk Makeup International is very strong. And one of our latest expansion, early Q4, was India, where the brand was launched with a big bang in Sephora with phenomenal support from the community. Now, from the world of Milk Makeup, let's go to the world of high-performance skincare with Obagi Medical. Obagi Medical continues its excellent performance, recording net revenue of $38.7 million in Q3, representing comparable growth of 45.5% from the prior year third quarter. This growth was driven by the success of our growth strategies focusing on introducing blockbuster innovation, increasing our global distribution, and accelerating our e-commerce channel penetration. We are pleased to accomplish each of these objectives in the quarter. To this end, the quarter saw us launch two innovations, which we had previously announced in our last call. The power duo of elastiderm lift-up and sculpt facial moisturizer and advanced filler concentrate, which helped to elevate growth across the entire elastiderm franchise. We grew revenue across geographies and across channels, and we saw particularly strength in e-commerce, driven by our direct-to-consumer website and Amazon, aided by the tailwind of a new direct model with that digital partner. Additionally, with better in-stock positions, we were pleased to see our physician dispense channel return to growth in the quarter due to better in-stock levels of key products. We expect continuing supply chain improvements to further support expansion domestically and internationally in Q4 2024. Adjusted gross profit totaled $30.4 million, with adjusted gross margin expanding 1,010 basis points to 78.6% from 68.5% in the third quarter of fiscal 2023. Strong sales growth combined with significant expansion in adjusted gross margin more than offset the increased investment in business drivers, leading to adjusted EBITDA of $7.5 million, a 129.7% increase versus Q3 2023. Adjusted EBITDA margin expanded 770 basis points to 19.3%, from 11.6% in the third quarter of 2023. Now, looking at the first nine months of the year, Obagi Medical delivered net revenue of $107.1 million, representing comparable growth of 32% from the first nine months of 2023. Adjusted gross profit rose to $85.3 million, or 79.7% of net revenue, versus $57.8 million, or 67.8% of net revenue in the first nine months of 2023. This growth led to adjusted EBITDA of $20.7 million, a 60.5% increase from the first nine months of fiscal 2023, with adjusted EBITDA margin expanding to 19.3% from 15.1% the first nine months of 2023. Across geographies, Obagi Medical saw balanced growth, with a 42.1% increase in North America and a 32.8% increase internationally in the first nine months of 2024, compared to the prior year's first nine months. In the U.S., we saw outsized growth from our digital channels and a strong performance from our innovation. Internationally, our growth remains strong, and we continue to gradually reestablish Obagi Medical's presence in South Asia. Since the acquisition of Alvage Medica, our vision for the brand was very clear, to become the number one physician-dispensed dermatological brand in the world. And the growth is centered on three strategic pillars. First, double down on our brand's DNA, anchored on our professional credentials. Second, accelerate cutting-edge science-backed innovation that serves our physician and their patients. And lastly, grow the brand awareness and the footprint and drives point-of-market entry into our professional channel. Anchoring our brand DNA starts with medical-grade innovation, backed with best-in-class clinical tools. This is the role that our latest launch in elastiderm has targeted at. On elastiderm, the latest-in-scope facial moisturizer shows transformative results after three weeks and six weeks, on all key benefits, such as improving elasticity, fine lines, crepiness, and skin smoothness on independent clinical testing. Culminating at six weeks, with results showing 100% visible improvement of fine lines, 94% improvement to smoothness, 88% improvement to elasticity, and an 81% improvement in crepiness. On the last serum, Advanced Cellular Concentrate, the before and after, very visibly and visually, the transformative results of these products. And both innovations were launched with a best-in-class education toolkit that armed professionals with the science behind the innovation and the clinical results. This was also shown directly to consumers, and this is how some of our consumer advertising looks. So it is no surprise that with these execution results, MPD delivered versus expectations and contributed to grow the overall Elastiderm franchise by 189%, of which existing products accounted for 24% growth. Qualitatively, our physician partners were delighted that brought news to Elastiderm franchise while also answering through to incremental products that met needs of our patients. While also building awareness directly with consumers with a year-to-date earned media value growth of 165%, to attract them into the professional channel and accelerate the flywheel of their best skin with Obagi and our physician community. This awareness is built directly with consumers through social, but also editorial credentialing with 544 million impressions in Q3 just in the US. An acceleration that we see also internationally with 178 million impressions for top markets such as the UK.

To conclude,

We're very pleased to share a strong performance across both brands, reflecting the increased desirability, relevance, and awareness of our Obagi medical and milk makeup brands. Waldencast is poised for long-term profitable growth through the operational scale of our multi-brand platform with only two brands, but more to come in the future. Expertise in managing global beauty brands at scale with big growth opportunity in both geographic and category expansions. based on our balanced portfolio anchored in structurally attractive segments of the category, and backed by an asset-like, agile, and efficient structure that unlocks speed at scale, and management incentives aligned to long-term value creation. Thank you for being with us today. I will now turn the call over to the operator to conduct a question and answer session. Operator?

Thank you. We'll now be conducting a question and answer session. If you'd like to be placed in the question queue, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to move your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing star 1. And as a reminder, we ask you please ask one question, one follow-up, then return to the queue. Our first question today is coming from Jonah Kim from TD Cal, and your line is now live.

Hi, thank you for taking my questions. I know you can't give too much guidance for next year, but just wanted to get any color around as you look towards next year and lapping this year's huge success. How are you thinking about the cadence and the quality of innovation across both brands? And how can you drive sustained outside growth versus the market? Thank you.

Thank you for the call. We are, of course, very optimistic about next year. Our strategy for next year, frankly, remains the same across both brands. Continue to drive an increased awareness of both brands, a very strong innovation plan, and continue to expand our footprint. So the playbook is the same. We are, of course, now from a P&L structure standpoint, reaching gross margin levels at what we are expected to achieve. long-term to reach, we should expect less, of course, gross margin expansion, but even brands like Obagi, where we're nearly 80% gross margin, and we are approaching the destination of gross margin on milk. From a top-line standpoint, there is an immense opportunity ahead of us. We are on both fronts just at the beginning of the story. Our innovation here, we're particularly keen on the vintage of innovation that is coming on Obagi as well as on milk. We have, of course, on milk having its anniversary, jellies, which is a tremendous launch. It's a launch that was particularly effective this year. So we'll see how that moves in terms of innovation weight next year versus this year, but we have other substantial mechanical leaders in the ground to continue to drive top line. So we're very confident in that in our next year. We are not updating guidance yet, but generally speaking, we're looking to 2025 with a lot of optimism.

Just one follow-up. You mentioned gross margins a little bit, but in light of potential tariffs, how are you planning to manage the gross margins next year and beyond? Thank you.

We don't think gross margin tariffs are not a substantial impact to our business. In the case of Obagi, there is very little business sourced from China. Most of our, it's not Nearly 100% of our CMOs are North America-based. In the case of milk, we have roughly 10% to 15% of our cost of goods coming from China. But we have, as we have done in the past, ways to shift some of these to other places if that is necessary. So we don't expect the tariff impact to be material. We have still ample place within gross margin to manage that. As I mentioned, we don't expect a lot of gross margin expansion, even though we do have quite a bit of cost savings to be had in gross margin. We expect that to be reinvested into product packaging, and if need be, in the case of NEL, to be able to manage what we think is going to be ultimately a modest impact from tax.

Thank you. Thank you. Next question is coming in from Dana Telsey from Telsey Advisory Group.

Your line is now live.

Hi, good morning, and nice to see the progress. As you think about the gross margin on the milk side, I think you mentioned in the commentary about higher off-price sales. I think last quarter was lower off-price sales. What's the difference, and how do you see the trends of milk's gross margin going forward? And then, Michelle, can you just talk a little bit about how do you see the beauty industry performing in this past third quarter and looking into the fourth quarter compared to the first half of the year? And then I have a follow-up. Thank you.

Thank you, Dana. Yeah, gross margin on this, there's a little bit of a temporary, it's a bit of a facing issue on off-price sales. Last year, there were more in Q2. This year, there are more in Q3. They're not substantially significant. It's part of our planned kind of gross margin landing of the year. As I mentioned many, many times in these calls, we do not manage the company on a quarterly basis. We manage it on a daily basis, but we don't plan on landing a specific numbers on a quarterly basis. So it's part of just normal facing of how things are falling one place or the other in terms of off-price sales, where we clear remnants and various other things. So it's nothing structural. We have these quarter as well, the impact of our holiday kits, but it's coming also a little bit of facing differences versus last year. And as we mentioned on the release, in the base of last year in Q3, there was a bit of a provision release on milk. So There's nothing structural in the business or in the gross margins that we continue to make substantial progress. That is where I think at World Bank we excel on how to do. We are approaching, as I mentioned, we're approaching a bit of the destination where we want milk gross margin to even, where there's a little bit of room to improve for the next quarters and so on and so forth. Regarding the beauty market, I mean, the beauty market, I mean, we've discussed this before, and there's many people that have commented on these. The market continues to normalize. The prestige market is still plus 7% year-to-date. In the U.S., according to Zircana, makeup is plus 5%. Skincare has moderated a bit at plus 3%. But the market continues to be strong and thriving. It is one of the The beauties of the beauty industry, that is a business that is quite resilient, quite strong in terms of growth, and continues to deliver across multiple actors in the market profitability. There are, of course, some that have some specific, in many cases, self-inflicted issues, but the market is strong. Lastly, and again, a point that is very important when we view and the public views, while we think about growth, The market for us is just a data point. We are relatively small. We're a very small company, a very small player. Our ability to grow the business, as is demonstrated by the results that we continue to post quarterly, is more limited by our own ability to execute well, to grow our business, to create propositions that are compelling and seductive and interesting to consumers more so than the market. We have plenty, plenty, plenty of levers for growth in which the market What's important is just a data point of information. It's not something that sets apart our destiny.

Got it. And you had a follow-up. And the follow-up with Obagi, where are you on in-stock levels? How do you see those progressing? And also penetration into, continued penetration into other dermatologists' office. And then just for both brands, international, what you're seeing there. Thank you. Of course.

Yeah, as we mentioned in the last release and we mentioned today, we've had some issues of our own out-of-stock inventory on Obagi. These are in Q2. These are substantially better in Q3. We believe that it's going to take at least another couple of quarters to completely restore the levels of stock on the business. It's a consequence of, as we mentioned before, very strong demand for our products on Obagi as well as some inventory management that we did in prior years to be able to achieve the right level of working capital on the business. But today, we are substantially better than Q2. We're still impacting to some level Q3 and we think we're completely normalized by the end of Q1. In terms of penetration of physicians, we are among the most penetrated brands in physician offices and medical practitioners in the country. We are, of course, continuing to add accounts, and we continue to build that. Albeit, we think that there is a substantial opportunity in two ways, not just to build penetration, but also build dollars per account on the accounts where we are present. I think we could think that is a tremendous opportunity, and that's what we are seeing today in our numbers as we launch great innovation that is addressing new patient needs, new consumer needs, we are seeing more dollars flowing also from the same offices. So it is something of both interests of levers of growth, interests of decisions offices, but also dollars per office in what we are building. And then lastly, internationally, I mean, on both brands, we're just at the beginning. A couple of years ago, until recently, the case of Milk Makeup was essentially a North America brand with a little bit of an international business. We are growing substantially our international business. Same thing for Obagi, we're just at the beginning of that process. So we expect the international expansion of both brands to be substantial. And what is attractive about both brands is that it pent up, I would say, the brand equity reservoir that we have built in the U.S. allows us to launch efficiently in other markets, as demonstrated, for example, something we've shown you on milk, as well as Obagi, when we launch into a market without us doing particularly advertising or any particular demand creation plan in that market that is new, we have a tremendous amount of success. We showed you pictures before of the lines in Lico in its camping area of consumers waiting to buy milk right before, and it's obviously because they're heavily influenced by the social media and the global reach of our social media and community. So lots of opportunity internationally on both fronts.

Thank you. Thank you. As a reminder, that's star one to be placed into question Q. Our next question is coming from Ashley Helgens from Jefferies. Your line is now live.

Hi, this is Sydney on for Ashley. Any updated expectations for holiday promotional levels you can share? And I'm just curious, you know, what you're seeing kind of in terms of retailer caution toward inventory levels and any color you can get there. Thank you.

Of course. In terms of holiday plans, they're quite similar to what we've done in prior years. I think if you look at the market and what we expect of the market, In terms of holiday purchase intentions, we see that an increase of intentions by shoppers. I think Hircana published a report just recently in which 29% of shoppers plan to purchase beauty products as gifts this year. Notably, 41% of households with children intend to buy beauty this year, which is 11% point higher. than over in Texas and prior years. So the holiday season beauty continues to be becoming more and more a staple of the holiday season. And our plans remain fairly consistent from a promotionality versus orgies. Both fronts are not particularly promotional runs. We don't need to participate heavily in a promotion, but of course we participate in that market. Regarding the overall kind of retail environment, we are seeing, because of the macro environment and certain specific issues with some retailers, some more caution around management of inventory. We've seen that a little bit more so outside of North America than in North America, but we're not seeing more recently in North America. There's a bit of inventory correction and purchase correction that we're seeing on Celine on retailers. Difficult for us to predict whether it will continue into Q1 or not, but we are definitely seeing a bit of more prudency on levels of inventory and open to eye and things like that on the business.

Thank you. Thank you.

Next question is coming from Susan Anderson from Cannon Quarter. Line is now live.

Hi, good morning. Nice job on the quarter. Thanks for taking my question. I guess maybe just to start off, if you could talk about how you're thinking about the innovation pipeline for milk and, you know, just keeping consumers interested, how many new products do you expect to roll out each year? And then I don't know if you've talked about that, how much do new products make up of sales? And then just if you could talk about, like, near-term focus areas and white space for the brands. Thanks.

Yeah, thank you, Susan. I mean, innovation is the lifeblood of beauty and particularly in a makeup brand like Milk. We have, of course, seen this year with the launch of Jelly, I've seen very few times in my career a launch of that magnitude and that success. So we have the interesting task of having to anniversary that launch next year. But at the same time, when we look at milk and the number of subcategories, the number of penetration subcategories within makeup that we have, we're just a little bit. I mean, we do not have a presence in a number of important subcategories of makeup that allows us to have a substantial runway on a go-ahead basis. We're particularly excited about what's coming next year, which we will reveal in due time of new incremental changes categories for the company in a way that is very milk, that is very charismatic, unique, tangibly superior, with great design in a very milk way. So, we see innovation, as we know in beauty, particularly makeup, it's a little bit hard to forecast and a little bit hard to predict how exactly things are going to pan out, but because of our hand on the pulse with culture, with hand on the pulse with our community, We believe that we have a fantastic innovation plan for next year. We do not disclose percent of sales on the product and things like that, but we're very optimistic about what the innovation plan is for milk. It's part of the secret sauce of milk, which is having always a hand on the pulse on what innovation, what's happening in the government, and respond to things that are interesting and compelling.

Okay, great. And then, I don't know, do you have any thoughts just on how the Physician Dispense Channel is doing? I believe the, you know, the prestige data that we all get in the U.S. by Turkana maybe doesn't include that channel, so just curious if it's performing similarly to, you know, kind of the other data that we're seeing.

Yeah, you're right. The Turkana data does not include the Physician Channel. There's other sources that do that, but they don't do it with the frequency that Turkana does. So it's a little bit hard for us to assess exactly the quarter-to-quarter evolution. The latest numbers we have seen from industry sources is that it's growing around 6% to 8% in that range. But we don't have very firm quarter numbers, and they're more self-reported. So the quality of the data is not as robust, I would say. Now, that said, it is very clear, what is very, very clear, there's a very strong shift, I wouldn't even say a trend, a shift towards science-based medical skincare that we're seeing in that channel as well as away from the channel. Consumers demand higher levels of performance, higher levels of evidence, truth, and clinical data because they're more sophisticated, because they understand better consumer data, because they understand better how products work, because they understand better ingredients. And brands like Obagi that have a leading position in terms of recommended brand for the most important conditions by physicians is in a fantastic place to capitalize on that opportunity. Demand is still strong, very strong. As we mentioned before, in Q2, we had a bit of our own issues in terms of our ability to supply with our stocks and so on and so forth that are starting to normalize, I think, substantially this quarter. But the market is for medical, science-based decision expenses is thriving.

Okay, great. And then I guess last one for me, just any thoughts on the M&A landscape with indie brands. I guess, are you seeing any attractive opportunities? How are valuations? And then I'm just curious on your thoughts on the landscape in general. Do you think that it's becoming too saturated with too many brands or there's still a lot of opportunity there? Thanks.

Yeah, I mean, we can't comment on specific M&A plans, but there is certainly the beauty industry has always been a... an acquisitive market. If you look at the biggest players, L'Oreal or Loder, with the exception of, in both cases, two brands, everything else has been acquired. There's always been an acquisitive market. There are more, and there have always been, and particularly now, there are more brands that are interesting and attractive than there are buyers. There's plenty of targets for us that could be great opportunities to add to our portfolio. it but the way we're being the portfolio the way we want to do we're very choiceful about what we are to the portfolio so it's a it's a bit of a a process in which uh it's a kind of mutual mutual assessment of what we want to do and where to take the brown so there's there is uh lots of uh exciting things from a valuation standpoint valuations interestingly have not i mean there's been less there's been less transaction valuations have not come down substantially, at least yet, on most of the transactions. I think great assets and great brands are still in high demand. They will always be in high demand because beauty, different than other consumer categories, in my opinion, is more of a growth-driven story with very high gross margins. So the multiples you see in beauty are high because the fundamental expectation of an acquisition is not a cost savings or core synergies type of game that we see in other industries, but a way to fundamentally drive and accelerate growth. So plenty of great opportunities ahead of us.

Okay, great. Thanks so much. Good luck this holiday season.

Thank you. Next question is coming from Linda Bolton-Weiser from DA Davidson. Your line is now live.

Yes, hello. I was curious if you could update us on the unaided or aided, I guess, brand awareness of milk, of the milk brand, where it stands now, and how much improvement you've made recently. And what are your thoughts on distribution expansion for milk in the U.S.? Thanks.

I mean, we don't disclose specific awareness numbers. I think what we disclose is our community, which I think is the best proxy of people that engage. It's interesting, of course, to have aided and aided awareness. What is more important for a brand is how many people actually engage with you and follow you and build on our business. Just over the last year, if I take Instagram as an example, we've increased our followers on Instagram by 700,000, 2.7 million followers. Instagram followers. Our community continues to grow. We just crossed the one million. Last quarter, we crossed one million threshold on TikTok. So our community continues to grow and thrive. I think the buzz on the brand, as measured by the EMV, the earned media value, again, much better approximation to actual purchase and growth of the brand than just a generic awareness number, continues to grow and improve from the brand. We are number 14 in the U.S. year-to-date. We peaked during the Jelly's launch. at about number six during the Jelly's launch. So the brand continues to go from momentum to momentum. It is a brand that is getting to an awareness and a size that becomes interesting. Of course, everybody is looking at that and the buzz and the awareness of the brand, and there's a lot of potential distribution partners that are in the U.S. as well as globally very interested in carrying the brand and... and building on the brand, we have expanded distribution internationally. We have four new retailers that have built into this year. These are Liko that we showed you early on, Boots in the UK, Douglas in Germany, and so forth, India most recently, with tremendous success. So we are expanding distribution internationally where it makes sense, and we will continue to evaluate distribution opportunities that make sense. As we mentioned before, one thing that especially managing a maker brand where one has to be quite careful is not to expand distribution too far ahead of demand and awareness. And our approach to distribution has always been to control the distribution, keep it very tight and very productive.

So we want to maintain high level of productivity where we are.

Thanks. And just your comment about milk still has you know, subcategories that it can enter and expand further. Maybe you could just give us without, you know, specific numbers, but just give us which subcategories in particular can you name that milk is either not even in or is very small market share relative to the overall market share of the brand.

Yeah, of course, I can use the biggest category. Liquid foundation is the biggest category in makeup. Depending on how you read it, it's around 14% of the makeup market. We don't have a liquid foundation. We're not present in the biggest, just to take one example of many, we're not present in the biggest category of makeup, which is liquid foundation. Another example, lipsticks. We don't have any lipsticks in our business. Again, I am not saying we're going to launch in those categories, but I'm just saying in the near future, what I'm saying is there's plenty still of opportunity. What we have is very strong presence in a relatively small subset of categories. We have a very strong prime and set business where we are market leading positions in those categories, but we are not at all present in some others or barely playing in others. Plenty of opportunity also from a product and innovation standpoint. Obviously, you have to pace that innovation. We need to make sure that when we launch, we have a compelling, winning proposition to be able to enter those battles because some of those markets are very competitive, but also some of those markets are very attractive because if you crack them, like, for example, Complexion or Liquid Foundation or things like that, they tend to be high loyalty to stickier categories than other categories. So that's a couple of examples in that way.

Okay, thank you very much. Thank you. Next question is coming from Olivia Tong from Raymond James.

Your line is now live.

Good morning. This is Lillian on for Olivia. I wanted to ask about how you're thinking about marketing spend going forward. Should we anticipate a smaller level to this quarter, and how is marketing spend allocated between brands? Thank you.

Thank you, Lillian. Yeah, we've been – she saw from the presentation on our numbers and what we talked quite a bit, I mean, part of our model is to continue to increase marketing and marketing spending behind both brands. We are not yet at the destination of just a percent of sales on both brands. We're building year over year through, one, building efficiency on our gross margin operations, reinvesting that into business drivers of marketing and selling, which drive top line furthering for gross margin and the new genics. So, We will continue to increase media and marketing support on both businesses quite substantially. We've been increasing those quite substantially since we bought the both brands and we continue to do that into the future.

Thank you. We've reached the end of our question and answer session.

I'd like to turn the floor back over to Michel for any further closing comments.

Thank you very much for joining us on this call and looking forward to speaking to you. For some of you that are interested in speaking to you, the analysts and others in the future. Thank you so much. Take care.

Thank you. That does conclude today's teleconference. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.