Olaplex Holdings, Inc. (OLPX) Earnings Call Transcript & Summary

Good morning, everyone. I'm Dara Mohsenian, Morgan Stanley's household products and beverage analyst. I'm very pleased to welcome Olaplex to Morgan Stanley's Global Consumer and Retail Conference. I think it's actually their first conference ever after going public. So we're very happy to have them here, and thanks for joining us, JuE and Eric. So before we begin, just some important disclosures. Please see the Morgan Stanley research website at www.morganstanley.com/researchdisclosures for disclosures. You can contact your Morgan Stanley sales representative if you have any questions. Also please click the first slide of Olaplex's presentation to view the company's safe harbor statement. So with that, we're very pleased to welcome Olaplex here today, including JuE Wong, who is the CEO of Olaplex; and Eric Tiziani, CFO. It's been a very exciting few months for Olaplex who recently went public in September after a strong track record of outsized revenue growth over the last few years as well as high margins. That's really unprecedented, in my viewpoint, in the 2 plus decades I've looked at consumer staples companies and they're coming off a set of strong Q3 results. And they also had some news recently this week in terms of expanding into Ulta stores. So it's a great time to have them here. Thank you very much for coming, guys.

And maybe we'll just start on the Ulta news. First, maybe just give us some details on the Ulta rollout, how quickly is it going to occur across the store base. But more importantly, what are the launch plans in terms of display and activation in store, et cetera? And then second, can you help us dimensionalize the magnitude of opportunity in Ulta, how you think about it maybe versus your existing retail segment footprint today?

Well, first of all, thank you, Dara. I'll take that question, and thank you for having us, and thanks, everyone, for listening in. I think the Ulta partnership is definitely very exciting for us. You asked about the rollout. The rollout is going to be to its entire 1,250 doors and it will happen in the first week of January of 2022. We will have front-of-store tables for the launch, and then we will move to a permanent NCAP. We have activations to drive Ulta's loyalty customers, both on and offline. Plus we have that 9,000 of their stylists recommending us to their end clients. And since we have been their exclusive bond-building brand since October, we are confident that this curated and nurture and captive audience at Ulta will continue to look at us at helping the recommendations and doing the replenishment. And when you ask about dimensionalizing the Ulta opportunity, if you look at the Ulta business, 95% of their revenue is generated from about the $32 million of their loyalty customers. And that's only about 30% overlap with their existing distribution locations. We feel confident that we can actually reach quite a material base of customers because we can provide them the convenience to shop when they previously may not have been able to shop at brick-and-mortar given that we are not in those locations. And Ulta is also the largest hair care retailer, with 9,000 stylists as I mentioned before. And hair is about 20% of their total business. So if you can look at the reporting that some of us have gotten in terms of data, they are also 7x the size of Sephora when it comes to hair. So you can say that we are definitely excited by the data. We believe that given that we are the #1 prestige hair care brand across all of our channels of distribution, that our performance also will continue to really serve us well. You asked about in terms of whether it's in the numbers, Eric can definitely expand on that. But what I can say is that we definitely have Ulta in the mix in terms of our financial modeling, but we will need to continue to track that performance, and we will plan on coming in fiscal year of 2022 with guidance at the right time next year when we will reflect what we are seeing at Ulta at that time. Hopefully, that answers your question on the Ulta rollout and where we see ourselves.

Yes, that's helpful. And then, Eric, it was very clear based on the release that it was in your Q4 guidance you've given previously. Should we think about some of this possibly being incremental to the longer-term outlook you've given? Was it sort of contemplated eventually anyway? How do you think about that? And then, I guess, more importantly, thinking about it strategically, you guys have expanded household penetration pretty rapidly over the last few years. But obviously, this is sort of a big step function up. So how do you think about the opportunity to expand household penetration? We're in sort of in unchartered territory, but maybe the Sephora experience and what happened there. So, a, just thoughts on contribution from a longer-term perspective versus what you expected prior; and then b, how this might impact household penetration and how we should think about that longer term?

Yes, I'm happy to take that, Dara, and thanks for having us here today. So an assumption that we would move into Ulta Retail was contemplated in the medium-term targets that we talked about on our IPO road show. We didn't have the details then though. And so we're going to have an opportunity, as JuE just mentioned, to sharpen our outlook starting with the full year 2022 guidance when it's appropriate to give that. So it was in there conceptually, but we're going to have more details, and we're going to be tracking the performance for it. And you just said it, and based on what JuE just talked about in terms of the nature of Ulta, this is going to be a huge awareness driver for Olaplex. And we still start from a relatively low base of awareness even in the U.S. And so being in those 1,250 plus Ulta stores is certainly going to help with awareness. We like to think that's the tide that's going to rise all boats, and that's going to drive increased household penetration because we believe we're going to be reaching new customers and consumers.

Great. That's helpful. And then maybe short term, we can look backwards for a bit. The revenue upside that came through in Q3 was so substantial, it's probably worth taking a little bit of a short-term look backward. In terms of the upside, was that more sort of initial conservatism? Not assuming everything went right or were there specific factors that came in well above what you expected. And I'm just thinking about what that means going forward. The Q4 guidance was also well above what was expected. Maybe some of that was the timing of Ulta. So just trying to understand the upside we saw short term in Q3, the underlying drivers behind that, and how sustainable that is when you look going forward, particularly given it was such a large magnitude of upside.

Yes. I think that's a good question to track it through Q3 and Q4 and how we think about what's driving it. So we were very happy with our Q3 performance and results and the momentum that we demonstrated. It was very broad based across the business, across our 3 channels. And if I think about the drivers, they are the drivers that we believe are sustainable into Q4 and beyond. So one, we continue to see awareness build for the brand. Two, we saw our innovations, particularly our 2021 launches performed very well. Q3 included the launch of 4P, our toning shampoo. We saw a very strong sell-in for our holiday programming. And since then, we've seen excellent sell-out on that holiday programming. In many of our key accounts, we saw that the kits that we brought to the market rise to the best performing items in that store. And I think on your question, if there's one thing that in particular, we may be we were a bit cautious about in the summer when we were forecasting Q3 was really about the unknowns, what was going to happen with Delta, et cetera. And that's one area where we believe we very effectively managed our supply chain, mitigated risk, and showed continued resilience for Olaplex's performance through all phases of this pandemic we've been experiencing. So that was part of what drove a little bit of extra upside in Q3. And lastly, in Q3, this wasn't material to the quarter, but I think it's strategically important. We started to see those first pipeline shipments for our new distribution points at Sephora at Kohl's, as well as Ulta salons. All of that really drives forward into Q4. And so our confidence in taking up our Q4 guidance and full year 2021 guidance was really very consistent with that. We have the confidence to do that because of how we've been managing our supply chain to meet increased demand. And I'll just say that last piece there, the majority of that upside in Q4 was the underlying momentum of the business. A smaller part of that was, in fact, the pipeline shipments that we're currently sending to Ulta to get the product on shelf early January.

Okay. And you're not really assuming what's implied in your guidance that revenues continue to build in Q4 versus Q3 even as the business scales up in theory. You've generally posted sequential revenue improvement and with some of the pipeline fill potentially for Ulta. So is that sort of also an uncertain environment, you just can't assume everything goes right. How do you think about that? I know part of that is the timing of shipments in for the gift sets, but it doesn't seem like that's a huge amount. So I'm just trying to understand that. And again, maybe that's just getting back to it's an unknown situation here in terms of the industry environment.

It's less about that. So the headline, Dara, is we believe the Q4 guidance we've given is actually very consistent with the momentum that we've been seeing in the business for the past few quarters. And there is some noise in the comparator that I think -- in the comparators, both absolute sales quarter-to-quarter and even growth versus last year that on a quarterly basis create some noise. And so the first point is the growth that we guided for in Q4 is over 60%. On a 2-year CAGR basis, it's over 90%. And that's exactly in line with what we did in Q3 and Q2. Part of why that's happening is if we look specifically at Q4 of last year, traditionally, we see professional and absolute sales taper down and off in the fourth quarter. We didn't see that last year because last year, salons were reopening. We expect that to normalize in 2021. You mentioned the gift sets. We sell the gift sets in Q3 and Q4. We sell more of them in Q3. It's just a nuance in the absolute sales quarter-to-quarter that is part of our business. And lastly, innovation. Innovation, launch timing will always create a little bit of noise quarter-to-quarter in absolute sales. And we have the launch of 4P in Q3. And so that's also part of what you see in that absolute sales trend from Q3 to Q4. But underlying the headline is the momentum is just as strong in Q4 as Q3, we believe.

Right. Okay. Great. And then JuE, maybe getting back to household penetration, we talked about it in reference to Ulta and the big opportunity there. But your brand generates very high loyalty, repeat rates. Awareness is still below other hair care brands out there that are more scaled. So maybe you could just talk in general about how you drive higher household penetration over time, what the strategies are to do that. Obviously, Ulta fits into that somewhat. But looking at besides Ulta, what are the key areas you can drive household penetration going forward?

So we measure a lot of what we are seeing in the space, whether it's from agencies like Meltwater, Spate New York, Google Analytics. And what we are really seeing is that our brand awareness aided is slowly increasing, and the loyalty of those customers that we are amassing is actually very encouraging because what it does show us, it validates our disruptive marketing model is working. And what is that? We built our community, right? And when we build our community, we are curating them, we are cultivating them, we are nurturing them. And then we use data-driven performance marketing to really provide measurable dividends. So all of this is actually seen in a couple of metrics that we measure. First of all, I talk about how our brand awareness has been on a steady uptrend. But in the last 90 days alone, what we have found is that our community under #olaplex has created something like well over 400,000 pieces of user-generated content for us that we can now reuse, repurpose and repost to really expand on brand awareness and brand relevance. And if I just use an at-week benchmark that each post costs an average of $300 to produce, this 400,000 pieces equates to $120 million in content value. And when Tribe Dynamics does the same measurement, but this time on earned media value, we continue to rank as the #1 earned media value hair care brand. So what all this tells me is that when -- with our marketing programs and with the ability to really communicate with the consumers and our trade partners directly, that awareness were built, but it's going to be more long-lasting and it's going to be more loyal rather than just us trying to get more eyeballs on the brand without understanding who we are and without having them engage with us and convert with us ultimately.

Great. That's very helpful. And I think one of the biggest questions that comes up with your company is, as I mentioned earlier, really attractive revenue growth rates and expansion over time, really high margins. That's great news, congrats, but it's not lost on other CPG companies out there, right, some of which have large scale. So as you think about your positioning in the bonding category, maybe you could take a step back and just talk about what you think the barriers to entry are for your business relative to some of these other competitors that are looking to move into the bonding category with more similar or even inferior type of products. But clearly, there's a lot of competition. So maybe talk a little bit about the barriers to entry you think are in place and why you feel comfortable you can continue to prosper from a market share standpoint longer term?

Yes. I love this question because this is the kind of question that really shows that Olaplex really created that bond-building category. And we did this 7 years ago. And what we have done is we have defended ourselves with the patents that we have. And we believe that because of this patent portfolio, it really offers what we call the true solution to preventing and repairing hair damage. And if you think about it, before us, every hairstylist or every colorist that's doing a chemical service, there's always the uncertainty, "Am I going to get the optimal results that I want?" Since with us, what they have found is that the result is proven time and time again. And with that, it is very difficult for somebody to then say, "Look, I'll just switch out to something else.", because it works. And the fact that for 7 years, we have both the commercial success and also industry awards, showcasing that we really deliver the results, we feel very confident and we feel very encouraged that our patents are delivering the performance and the consumers are voting with their wallets because they see not only the performance but the consistent results that they expect from a brand like us. The other thing we do too is that the stylist community, they are the ones who's going to continue to work behind their chair. They're going to see results from it. And they -- that word of mouth is actually more powerful than anything that we can ask them to say on our behalf. Because when you see it, you experience it and your client turns around from behind the chair and tell her that they just feel so great and they know that they're going to continue to have those kind of performances, we feel very strongly that this is what is going to keep us competitive and relevant.

Right. Okay. Great. That's very helpful. And can you talk a little bit about the professional opportunity longer term, maybe dimensionalize the growth opportunity in terms of penetration of salon owners, maybe increasing sales per salon owner, perhaps looking at the retailers that service the professional business. Just help us sort of dimensionalize the longer-term opportunity on that side of the business versus where it is today.

Right. So let's look at the Pro business in the U.S. first, because there's a little bit of numbers here to unpack. What we are always very encouraged with is that we are a professional brand and omnichannel brand really led by professional where it really gives us the credibility, right? And then retail gives us that brand awareness and then direct-to-consumer really drives consumer insights for us. But starting with the Pro and especially in the U.S. where it's one of the largest player in the business. The Professional Beauty Association reports that in 2020, the professional market is about $62 billion in revenue, of which 77% are in hair salon and services. And when I talk about hair salon and services, I'm talking about chemical, color, perming, styling which includes hair cutting. So when I take that 77% of that $62 billion, what you are saying is that in hair alone in the professional sector represents $48 billion, and Olaplex is a player in this $48 billion segment. We reached about 250,000 stylists on our own Facebook groups alone, where there are about 800,000 stylists in the U.S. So you can see the potential for us to continue to gain recognition and awareness with the rest of the professional community. We also know that our best professional customers spend about an average of 20x more than our other professional customers on an annual basis. So by just increasing that conversion, we will see material results. And as I mentioned, the U.S. leads the rest of the world in the professional salon channel. And so, as such, as this sector continues to grow globally, we are well positioned to participate in the growth.

Great. That's very helpful. And maybe a similar type of question on the retail store side of the business. It looks like from a retailer perspective, some of the analysis we've done, you could probably get to about 4x the store count that you're in today. Is that a reasonable level? Maybe just talk about the potential expansion in terms of number of doors at brick-and-mortar over time and the potential opportunity for your business within the hair bonding category you're in today.

So retail is a great place to kind of build brand awareness for us. And I think if you look at where we are today at Sephora, we just expanded into Ulta and this is -- Sephora has a global footprint. Ulta is more in the U.S. By our own reporting in our S-1 when -- before we went up -- sorry, when we went IPO, you saw that Sephora had about 8% to 9% penetration, Olaplex had about 8% to 9% of penetration with Sephora. Just by expanding on that penetration, we can really be very material again in terms of what our results can be and best-in-class benchmark for penetration of a brand with any hair retailer is anywhere between 24% to 30%. So we have anywhere from 7x to 10x growth opportunity by just penetrating with our existing retailers. So to us, that footprint is very powerful and something that we really want to focus on. We also pride ourselves that if we are already the #1 hair care brand with any of our retailers, what we want to do is become the top 5, top 10 beauty brand. And when we are able to become that kind of a ranking with them, it just means that our marketing, collaboration, our messaging and our branding opportunities become that much more amplified and optimized.

Okay. Great. And as we think about potential application of some of your technology or just brand equity outside of hair bonding today into other potential product categories like skin care, nail care, brow care, salon or at-home color, there are a variety of categories you could bring up, maybe can you rank order what might be the biggest -- what might be the closest prioritization for your company, how realistic some of these areas are for expansion as you look out longer term from a multiyear standpoint?

Yes, bar none, hair care is our focus. And hair is the biggest opportunity for us because if you look at the prestige nature of hair care, it's the fastest growing here in the U.S. One of the fastest growing in Asia. So we believe that we have a lot of runway and headroom to really focus on hair. I know the reason why several people have brought up other categories with us is we have patent applications that really have skin care and nail care application. But at the same time when we mention that is because we wanted to see if we have permission to play and win in those categories. So we did commission an independent study to kind of see what exactly is -- where we can actually be very material. And 82% of the data point shows that people who are familiar with Olaplex was willing to look at a skin care brand from us, and 51% of the 82% actually said that they would switch their skin care brand to us sight unseen because Olaplex leads with size and technology. So those are very encouraging data points. But like I say, we want to focus on hair, at least to give us permission to be the leader that we are. And given that the TAM is sizable at $77 billion globally, we really do not want to take our eyeball off it.

Okay. And maybe you could also discuss international expansion potential. And I guess the same question is take us through Asia, take us through Latin America, take us through Europe. But Asia, it's a little bit of a different market, right, given the lack of salon penetration versus other regions. So I'm specifically focused on Asia, your growth strategy there. The customer is a little different. The professional side of the business is different. So how might your strategy be different there than you've seen in other markets? And take us through the long-term expansion opportunity. Latin America and Asian business today, really small. Do you plan to launch aggressively there over time? And then also, obviously, the Europe business is well developed, but maybe you can take us through the growth opportunities in Europe also.

Yes. So maybe let's start on a global footprint, right? And you are right. What we do see is that in some regions, the professional channel is less sort of robust, but it doesn't mean that it's not growing. So a good example is a lot of our game plan and playbook that we have in the U.S. can be replicated in Europe, and we have seen that work in the U.K., in Spain, in Italy. And so we feel confident that leading with the professional, gaining their credibility, that brand awareness through retail and that direct-to-consumer with consumer insights can really help us amplify our growth. So that, in Europe, will continue to be the playbook. If you look at Asia, where Asia is -- their professional channels may be less sort of built out, but what is interesting is they are very interested in looking at hair care exactly like skin care. And we've seen that time and time again, and nothing was clearer than in the last 11/11 in China, where we became the #1 hair care brand on Tmall Global on 11/11, primarily because we were leading with science and technology. The consumers wanted a product that delivers on performance and less about the hype. So that really is very telling, coming from a community that has already been leading with skin care ideation. So we feel confident that our platform does gain traction in Asia. And then when you look at the Latin America piece of the business, we are already in Mexico, in Chile, and we are doing really material sort of penetration in those markets in terms of education, gaining brand awareness on social media. We have a whole Olaplex Espanol for Facebook and Instagram that has their own entire ability to communicate to message and to brand while taking a lot of directions, obviously, from our U.S. counterpart. So all of this will only continue to help us gain better traction. And I think as long as we stay consistent in our messaging, in our branding and in our community build, we will definitely be able to kind of win in those key markets.

Great. That's helpful. Can you dimensionalize the Europe opportunity for us a bit more from here and how you think about that specifically?

I think it's difficult for me to put dollars behind it. But what I can tell you is that if you look at Europe, they are mirroring a lot of what the U.S. is doing because if you think about the hair type and the hair damage that is caused by chemical services is very consistent. And at the end of the day, that is what over Olaplex does best. We don't pretend to kind of walk in and say that we do everything well. But what we do the best is we make sure that your hair, like a canvas, is repaired. And after that, whatever you do to your hair, whether you go out into the environment and there's pollution, whether you're in front of a screen and there's light hitting you or whether you want to go and comb your hair 100x to give it that shine, you have the repair already been sustained by us. And so we feel that the European market will continue to appreciate it because you've seen our growth there as well. But more importantly, I if you think about hair, hair is not something that you can just pull up your hair and you can show someone and kind of say, "Can you tell the ethnicity of that person?" You really can't. You can only see what the hair type is. And so with that, we are confident that it's actually not ethnic-specific or not even geography specific.

Okay. And Latin America, is that a big near-term opportunity? Is that more longer term out? Just how do you think about that conceptually? To get a bit...

Yes. I think Latin America is a focus for us, and we will continue to be relevant in that market, because what is important for us is that we serve all hair types, and we have distribution that is already established there. Our education continue to resonate. We are building a strong community. So we were not kind of -- not be focusing on any specific region. But what we want to do is to make sure that wherever we are, we are going -- we are penetrating deeper with education, with social media and the ability to communicate who we are to them. So the branding and the messaging is going to be key for us.

Okay. And then Eric, maybe looking at your long-term top line growth forecast, you're in the 25% range, maybe can you help break that down for us a bit into the different buckets? What are the most important drivers of that? How sustainable are those drivers as you look going forward and think about the business and how much visibility do you have on each of them?

Yes, Dara. That 25% [ clause ] is a number we talked about in the IPO road show as a long-term view. And really, the message there is we believe we have the competitive advantages to sustainably and consistently grow well ahead of the market in the long term. And to answer your question, it's broad-based. And so I think important to note that it's well diversified and not over reliant on one particular component of growth. And what I mean by that is it's broad-based across our 3 channels: professional, specialty retail and direct-to-consumer, although we think specialty retail and direct-to-consumer will grow a bit ahead based on what we see in the market. It's broad-based across drivers of growth. So when I make these comments, please take them on the kind of long arc, not necessarily in every year, but about 1/3 from innovation, about 1/3 from new distribution opportunities and about 1/3 from just the core and increased velocity. The next thing I'd say is we were just talking about international. And we have so much white space in the U.S. We also have incredible white space internationally in so many markets that are at various stages of the Olaplex growth journey, some of which have only been seeded. And so we think in the longer term, international can grow slightly ahead of the U.S. underpinning that long-term growth rate, but we saw loads of room to go in the U.S. as well.

Okay. And maybe let me end on gross margins here. We've obviously seen some pretty pronounced cost pressures in the CPG group in general. I know it's less relevant for your business, particularly given your higher gross margins. But just any thoughts around the cost environment in general, supply chain, which has been difficult from an industry perspective. Anything surprising you guys on that front? And if you did see costs in your business move up substantially, how do you think about pulling levers to offset that as you think about your business?

Absolutely. And again, I have to say here, we've been really proud of how we've been able to manage this and mitigate risks, both from a cost perspective and from a sheer resiliency perspective. We're constantly working with our suppliers and partners on resiliency and managing costs. I want to note that our focused portfolio, 11 key products and the -- you think about the sales that we do on 11 key products, that productivity is really important for us. It's important for us. It's important for our partners. It's part of what helps us drive efficiencies and mitigate some of the cost inflation that we've been seeing. We're not immune to those macro challenges that are out there, but that focused assortment has helped us. And we're continuing and constantly evaluating savings opportunities and net revenue management opportunities to help mitigate some of the cost inflation that's quite natural and will happen every year. We are certainly seeing some of that a little bit more pronounced and expect it to continue through at least the middle of next year.

Okay. And maybe we could just end on supply. Obviously, demand has come in stronger than expected. Are you comfortable you have available supply with your suppliers even despite this outsized growth and you have wiggle room on that front as you look at the business going forward?

Yes. We've been delivering excellent customer service. That's what we hear from our customers. We believe they're managing their inventories well. We pointed out in our Q3 earnings call that we ended Q3, September 30th with healthy levels of inventory that are going to allow us to meet the demand we're seeing in Q4, and we'll continue to use the same playbook around resiliency and leaning into being ready to meet that demand where it is.

Great. Well, this has been a very informative conversation. We really appreciate the 2 of you joining us, and we're out of time, so we'll end things there. Thanks again, guys.

Thank you very much for having us.

Thank you so much, Dara.

Take care, everyone. Bye.