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

We'll kick off our first session today. Thanks, everyone, for joining us today. I'm pleased to welcome Olaplex management team. JuE Wong, CEO of Olaplex; and Eric Tiziani, CFO of Olaplex. We currently rate Olaplex outperform as we believe Olaplex is a highly differentiated beauty company with competitive moats around its patented technology, Bis-amino. Olaplex products are highly efficacious, and we believe noticeable results for damaged hair drive a loyal hair stylist and consumer following. We currently have a price target of 22 based on 25x EBIT to EBITDA, and current valuation is very attractive at 14x. Just a brief introduction on JuE and Eric. JuE served as CEO of Olaplex since January 2020, and has extensive experience in scaling business and financial performance across all businesses. And also JuE started as a global Chief Executive Officer in Moroccanoil from 2017 to 2019. And Eric has been CFO of Olaplex since June 2021. And prior to joining Olaplex, Eric served as a financial leader over 21 years at Unilever, where he held 11 roles in 4 different countries. So with that, I'll kick off on our first Q&A.

And just to start maybe in your own words, what makes Olaplex differentiated in the market? And what are some of your core competencies?

Right. Very quickly, I look at Olaplex truly as a science-led, technology-driven company. It is so much about the community that we have cultivated, that we have nurtured. And primarily with that community, we are able to have a very synergistic and very reinforcing omnichannel. And each channel plays a very definitive role, but they come together very nicely. Our professional lends credibility and authority, our retail builds brand awareness and our direct-to-consumer allows convenience, and with olaplex.com, it's about consumer insights. And when you wrap all that together, you just mentioned about our financial profile, it allows us to be high growth, it allows our cash to be very strong in our cash flow, and more importantly we have continued to deliver. And so I feel very strongly that Olaplex is really in that leading cutting edge of what we believe is more than just what we say is what we deliver.

Right. Right. Yes, that's very impressive. And maybe with that, we'll just jump into sort of your marketing and flywheel. It's very impressive. You have a powerful flywheel with hairstylists. You only spend 4% to 5% of sales and marketing, which is incredible supporting your low 60% EBITDA margins. Could you just discuss how you leverage the community and maybe just longer term, is the 4% to 5% really sustainable to drive your 25% growth? .

Right. So Eric will always remind us 4% to 5%, when we were a $282 million company and then we become a $598 million, we have a midpoint of guidance closer to $826 million, that absolute dollar is tremendous. So we are spending and investing behind our disruptive marketing. You talk about the flywheel. If you look at how people have told us, independent research, that more than 60% of our consumers are basically saying, "I want to take recommendations from my professional hairstylists." So we are focusing on that stylist on the authority build. And then finally, I mean, the unlock, I think, for a lot of investors, is to understand that there are other metrics that people look at ourselves. If you look at earned media value, in 2021, our earned media value was $112 million, and our net sales reported, $598 million. That is more than 20% of what we would have spent. We've got the eyeballs. We've got the mind share. We've got the wallet share of those customers. And I think that is what investors should kind of focus on, not the traditional spend, but the disruptive way. And then finally, I would just add, content is king. And when you look at #Olaplex, we have a library of $4 billion equivalent from user-generated content that we can repost, repurpose and regrant. I mean that to me is not somebody that can wake up one morning and say. I mean, Eric used this analogy really well, you can't wake up one morning, decide that, "Okay, this is the Olaplex playbook. Let's just execute on it." You've got to build a good build.

Yes. That, I think, really differentiates Olaplex from other players. And you're in very attractive category. Prestige haircare has been outperforming the overall haircare as well. Are you seeing any sort of pullback in consumer spend lately, given what's happening? And if you were to rate from a scale of 1 to 10, how would you rate the consumer current state?

I guess this is a question for both of us.

Yes.

So I look at it this way. I think given that the hair category and the prestige hair category especially is a replenishable and is a consumable, we feel very encouraged that this is not something that on their balance sheet of whether they should give something up, that this is the first thing they will give up. And thanks to your research, we had a research to look at beauty resiliency. I think it is very encouraging to see how that, in hair care, close to 71% actually said they are unlikely going to change their behavior. So I feel very encouraged with that. But I think we all have to be sensitive. Consumers are going to worry. But I think the bulk items are going to what they worry about. And to quote Brian at Target, he still saw beauty growing. Well, luggage grew, beauty grew, but TV went down. So you know consumers are still spending. They're just shifting their spend. But beauty wasn't something they were giving up.

Right. And 1 to 10 scale, would you...

1 to 1 to 10, I think for me, I mean, the resiliency represents a 9. So I don't see a huge pushback.

Yes. Yes.

And I was just going to add, look, we saw that in the first quarter, the U.S. prestige hair care category grew 32% according to NPD data. So the answer to your question is not yet. I know we talk about consumer discretionary as a segment. Really, our product and our [indiscernible] as much like a consumer staple as it does consumer discretionary. So we didn't compare notes to you. I was going to say 8. So you're 9, I'm 8. We're pretty close.

Very close, yes.

So high enough, yes. And I mean you're not seeing any sort of slowdown in demand for your products yet?

At the moment, you saw what Eric provided, the guidance, we are still very encouraged.

Yes. Maybe just we'll touch on a little bit of a competitive landscape. You are the category leader creator, but there are a lot of entrants in the space and the larger players are trying to get into the space. So maybe just give us what do you think about the competitive landscape now? And do you continue to believe you have the edge to sort of outperform the others?

Yes. I would say that the competitive intensity we're seeing today is actually very similar to the competitive intensity and the competitive environment that we've been operating in for years, and it's also very consistent with what we expect to be in terms of intensity for the next several years. It is a fast-growing category with tailwinds. Of course, that's going to attract competition. And we think that's actually healthy for the category and there's actually room for a number of players to win in the category. We feel very well protected by our competitive moat, which starts with our technology, but then extends to elements of our model like our community, like the channel harmony that JuE mentioned, and we believe that our focus on growing the market, innovating, coming out with new and innovative products for our consumer is going to keep on growing the market. And I think we all know that when you do that, you win. So we think a good offense is the best defense here.

Yes. No. I mean one -- another aspect of your competitive moat is you're building the skinification of haircare, and you've got this sort of -- every time you launch new products, it doesn't cannibalize existing products and it kind of builds on to that. So maybe talk about that a little bit. How do you ensure that happens every time? Are you planning for 3, 4 products a year. And just in general, how do you think about the product innovation pipeline, how much in advance you kind of think about that? Yes.

I mean, we have a secret weapon, maybe not so secret after we keep sharing it. We have a transformation team that we call them future hunters. They're very data-driven. They understand the trends that they are focusing on and doing the analysis for us. We have reports that is trade reports, industry reports that we dive into. But what is important is just even if you look at a lot of hair care brands, right, prestige hair brands, if you stand in front of the merchandising unit, easily, they would have 40 to 50 SKUs. We have 9 retail SKUs. It will take us 20 years at 2 tail SKUs launch a year to get to that number of SKUs. And therefore, we can continue to not cannibalize ourselves. We can complement ourselves. You look at -- we own the treatment category. You look at shampoo and conditioner. We only have one daily shampoo, one daily condition. We launched our 4P, which is segmented care. So the runway is huge, and that's the largest segment in haircare. And then in styling, we are not even in the category buster in styling. So there is just a lot of room for us, and we are very encouraged because we have a clear line of sight through 2028 on what we are launching. And as people who are in the beauty business know, innovation takes 18 to 24 months to really come through. And so we are well ahead of the curve.

Yes. So it's -- do you think about the right number of SKUs long term or sort of 3 to 4 will, as you mentioned, until 2028 is the right way to think about it?

I think that's a good sort of like directional but we will always look -- I mean, if we have a technology that can really punch above its weight and really bring to the consumer that we are serving what they need and we can make it happen, we're going to do it sooner.

Yes. That's great. And maybe jump into guidance a little bit. You posted a great quarter, but you sort of reiterated the guidance. So maybe give us a rationale behind that. What are you seeing now that makes you confident that you still can achieve the guidance and maybe talk about downside and upside to your guidance as you see the situation folding out today?

Yes. I mean we introduced that guidance on March 8. So it was already pretty late in the first quarter. We had visibility to the fact that we were going to have a strong first quarter, and that was all reflected in the introduction of that guidance, which we would emphasize is at a very strong level. The midpoint growth and profit growth that we introduced as our guidance is top tier in the industry. And so therefore, we also said on our earnings call that we'd expect our growth to moderate into that range from the second quarter to the fourth quarter, really because of what we're lapping in 2021. We're starting to lap the new products that we launched, the new distribution that we gain, the momentum that we built, and we're seeing everything consistent with our ability to reaffirm that.

And I mean, supply chain is a major challenge to everybody. You've kind of also mentioned that. But how are you sort of mitigating that in the current environment, but you're still posting, I think your guide implies 63.5% the midpoint on EBITDA. So just curious how you're managing through raw material, freight cost inflation in the current environment?

Yes. I think there are 2 elements to this. One is just the general macro supply chain environment and the disruption in getting your products to the consumer. And we are incredibly proud of how we've been able to do that up until this point, and our plans to continue supporting that demand and growth moving forward as well. And we do that by decisions like the one that we took to increase our own inventory levels from about 4 to 5 months on hand to 6 to 7 months on hand. It gives us more resiliency, more time to react to issues. And we see it. We have excellent customer service. It's our customers telling us that. We just got a special award from Ulta, actually, a customer that we launched into this year for just top customer service in the category. From a cost perspective, we are seeing increased cost inflation even since introducing our guidance in the beginning of the year. What started in more of the freight and logistics space, now we're seeing in raw materials and packaging as well. That's why we remarked during our call, we expect our gross margin to sequentially come down in the second quarter versus the first quarter. But we were able to reaffirm our profit guidance for the year because of the mitigating actions that we're taking throughout the P&L, which will show up in Q2, but also throughout the course of the year as well.

Yes. And then maybe just sneak in one question along those lines. Your products are consistently priced at $28. How do you think about sort of raising pricing if needed? And how you think -- how do you assess that with your customers?

Yes. We're not going to comment on our intentions around strategic pricing, which is the lever that you're mentioning there. But we will say that we -- we believe strongly that we have the brand health and the brand equity to look at strategic pricing as a lever if and when we need to.

That's helpful. And maybe we'll dive into your 3 different channels now. Professional channel, we talked about that, how important that is and unique to your business. How do you think about the long-term growth potential of this channel? It's outperforming this year actually. People are going back to salons. So as we sort of lap the surge in demand, do you still think this will be a sustainable growth channel? And then what are some opportunities you see both in the U.S. and internationally?

So overarching for the professional channel is really about further penetration with the salons. As people who are in the professional sector knows with Professional Beauty, 90% of the professional stylists are what we call single payroll entity. So they normally do not buy a lot at once. But if they find that there is value in helping them perform a service, that is what they will gravitate to. So we believe very strongly that if we can up that average purchase per year from where we are seeing today versus the best customers that are buying our products at $1,000, $2,000, where the average is closer to $100, $200, that's an opportunity to penetrate deeper. We have a playbook that we have replicated in the U.S., for the U.K. and for Spain, and we have seen that being very successful, and that is with subdistributor, regional distributors in the professional market, and we go direct in retail and direct-to-consumer players. I think that combination will allow us to really continue the synergistic reinforcing omnichannel. And if you can replicate that model into key markets, you can then reinforce and you have economies of scale as you continue to drive and grow deeper into the business. And obviously, ultimately, it's the community. We will continue to educate behind that community, support their community, whether it's through social media, digital platforms. And our professional apps that we have to really entertain, educate and do e-commerce with them, as we call direct to pro. I think all of these initiatives are in play and what we need to do is to go deeper, wider depending on what we need to.

Yes, that's helpful. And maybe we move on to specialty retail. You've been really expanding your retail footprint. You entered Ulta. You're doubling your store count in Sephora Europe, and you are #1 brand in a lot of these places. How do you balance the channel so that you're not over distributed? You also have DTC as well. So just curious on that. And where do you see further opportunities in the U.S.? You're in a lot of major retailers now. So just curious on that.

Yes. I mean there are 2 elements of strategic thinking that go into those decisions for us. One is we want to go deep with our partners before we talk about going wider. And when we are at a point where we're talking about more breadth than going wider, it's really about the incrementality that additional customer partner is going to bring. And so let me just dive into that a little bit more. When we talk about going deep with our partners, we want to be the #1 prestige haircare brand with that partner and in the top 5 total beauty brands with that partner. And when that happens, the relationship strengthens, the support of one another strengthens and we believe we have the most success. And we've, as you mentioned, been having good success in reaching those milestones with our partners when we put in the work together. And then from a breadth perspective, you mentioned Ulta. We really look at the incrementality in that particular example, we really saw the incrementality of the Ulta consumer versus other partners that we have in the U.S. market, and we believe that's proving out in a really strong way.

And maybe we move to DTC. That's a powerful channel for you. You can get a lot of customer data. There's a quiz that you can take. And I'm sure you're seeing a lot of retention through that channel as well. And -- but it has been slowing a little bit this year as you lap the strong growth the prior year. How should we think about the long-term growth opportunity in this channel? And as you leverage the data, what does that provide you with? How does that inform your business in terms of product innovation, marketing, sort of that will be a good?

Yes. Yes. I mean, DTC is definitely a powerhouse for us, not only in terms of revenue generation, but also consumer insights, especially with olaplex.com. And also with the pure plays, you can see what works, right? When something does not work, you kind of like rejigger it right on the spot. I mean you can easily on the homepage or the pre pages make those changes. I think what is important to note is that because we have a reinforcing synergistic omnichannel and when consumer behavior start shifting, we are not concerned as to where one channel may show that they are moving to another channel. But rather that if they choose to, we are there for them. So consumer insights have shown us that more and more of them when they make the move because, we are seeing it also at [brick-and-mortars.com], whether it's sephora.com, ulta.com, as well as in international, there is a consumer shift but we are catching that, whether it's a pro or whether it's a brick-and-mortar retail. So I think what is important is to realize that consumers are not single channel shoppers, right? They will try to figure it out. I mean you look at ourselves. I used to spend so much more time online. And today, I don't do it as much. And you've got -- I mean, for those of you who sort of on TikTok, you'll know that there's a lot of influencers doing cry videos saying that why are my views down? Can you guys please like me, repost my TikTok videos because TikTok has an algorithm. If you don't get to a certain view, you don't get paid for advertising. So everybody is looking at that. But for us, what is important is we serve our customer. So when we say customer is king, we really believe in that.

Yes. And then maybe we -- you have some exposure outside of the U.S., China, you're also in that market. Are you seeing anything noticeable in outside of the U.S. in the current environment? And may be thinking about longer term in terms of international strategy, you kind of touched them already, but maybe help us walk through sort of your strategy outside of the U.S.

I think it's tremendous. And I think Eric has more to add to it. I mean how I look at it is that international is an opportunity for us to really dive deeper with the consumer, that is actually a lot advanced when it comes to skinification of hair. In China, the way they describe us before we even explain to them who we are when we first started, they actually said in Chinese and I actually [indiscernible] the Chinese because I did not want someone to do the interpretation for me. And it actually says Olaplex treats hair like skin. You cannot ask for a better refrain coming back at you, right, playing back to you. So I think what is going to happen for us is that the international market, we will continue to look at our synergistic omnichannel. But in key markets like China, where it's a digital first country, where we are seeing that 36% of the consumers are making decisions to buy online, both in the mainland market as well as the cross-border market, then you need to stay relevant in that channel with them. And we have seen that growth and their commitment and their connection, engagement and conversion with them. And then there are markets that will continue to apply where we go in pro first, followed by retail or concurrently with retail and DTC. But I think what is good about how we approach it is, we look at the market and where the market is going, and then we look at where our strengths are and what exactly the market wants. But the fact that so many more countries outside of the U.S. is really leaning in on skinification of hair, premiumization of hair and ritualization of hair, we feel that is why we keep -- you keep hearing us say, we have just scratched the surface. I mean the fact that the TAM for global haircare. When we were on the roadshow 9 months ago, it was $77 billion. Today, it's $88 billion. No other category in beauty has grown that fast.

I'll only add that our international business grew 46% in the first quarter. So very strong. It's just over 40% of our business. So it's proven, we've got a proven model. It's resonating -- the brand is resonating with consumers in the markets that we're doing business in. But the white space is immense. And so you had asked, over the longer term, we actually see even faster growth in international than in the U.S.

Right. And I mean you have tremendous white space within haircare, where you also have patents extending beyond haircare. I know you don't have immediate plans to go into skincare. But what are your sort of thinking around that? And I know your consumer, when you survey them, they are willing to try skincare. So just give us a little bit of how you're thinking about the categories outside of haircare?

I think it's encouraging. It's encouraging to see that the consumers are able to see us as more than a haircare company. Because it is difficult -- people in the beauty business would know that it's easier for a skin care brand to move into color and to move into hair care. It's quite difficult sometimes for a hair care brand to kind of go the other way. But the fact that our consumers do not see us just as a haircare brand, but a technology brand, it really has -- gives us options. But again, we emphasize. I mean, you'll hear Eric and I say this over and over again. We are leading, shaping and defining the prestige hair care category. We are not going to leave a vacuum for someone else to come in to fill it. We will continue to focus on hair because hair has a tremendous runway, and we are right in the thick of it. And even when we are in the thick of it, we are still small. I mean like $826 million at the midpoint is nothing. Look at the big boys, right? So we are there to get bigger and better.

Yes. And kind of tying everything together, we talked about all this growth strategy. But your long-term algo is 25% and EBITDA margin, 58%. How do you think about driving that sustainable 25% top line? And do you see upside to that in the longer term, too, given so many opportunities? I know skincare is not even in this number. So maybe just give us a sense of how you internally think about these long-term algo and how you strive to achieve these targets?

Yes. So what you're referring to there is the medium-term financial framework that we introduced at the IPO roadshow webcast, and it was the sustained 25% plus growth. And it really comes from 4 pillars. The first one is awareness. We actually start from today, still relatively low awareness level for the brand. Even just in the U.S., we only have 7% unaided awareness. We see other brands in the category that are at least in the mid-teens. And so that's there for the taking. That's a key pillar of growth for us. The second one is growing in existing points of distribution along the same vein, even at a customer like Sephora, where we've been very strong. Only 11% of Sephora shoppers are taking away Olaplex. We see lots of room to grow where we already exist. The third pillar is growing in new points of distribution. Examples of that would be customers like Ulta, Douglas that we've entered into this year with great success. And then the fourth one is really about new product launches and our innovation plans, which JuE talked about earlier, we see as highly incremental to our business in that time horizon because there are entire subsegments of the category that we either don't exist in or barely exist in and therefore, just have a lot of room to run. You mentioned, Jonna, that's the core haircare business. So we think about adjacencies. We think about other big market plays, and that could be potential upside to that. And on the margin bridge, from around the 63%, 64% that we're at today to -- in our guidance to the 58% plus, it's really some space in gross margin because as we look at new markets, as we look at new channel opportunities, what we're going to look at is the incrementality of those opportunities. Even if there are a couple of points below in margin, if it's highly incremental, we're going to go do that. It makes sense for us, it makes sense from a value creation perspective for the shareholder. And then in SG&A, there are 3 priorities for investment that we have consistently said we're going to keep on going after just as we have for the past several years. The first one is sales and marketing, to keep on investing in that disruptive sales and marketing model that JuE described earlier. The second one is R&D, so keep on complementing this rich funnel that we have. And then the third one is the organization, just continuing to build the capabilities we want in the organization, not just to deliver those financial numbers, but for the big ambition we've got for a much longer arc.

Yes. And then maybe one last question for both of you. As we close, what do you think is the most underappreciated by the market about Olaplex in the current environment? And any closing remarks you have?

Yes. I think I alluded to that when you asked me at the beginning. I think getting lumped with the cost of 2021 IPOs is truly unfair because numbers don't lie. Look at the data, plot us on a graph with all those. Even if it's just with them and against the S&P 500 companies, we are really in a class of our own. We have industry-leading margins, growth as well as EBITDA. I think people need to understand that we have consistently -- it's not just since we have been IPO, we have, as a company consistently delivered results, and we are not an overnight success. People tend to think that this is our eighth year. So I think that's something that I hope people will walk away, look at us independent of what your -- what other people may be looking at us as and you might be pleasantly surprised.

I'll just say competition is not new to us. A competitive environment is not new to us. And we see it almost the opposite way, which is competition is healthy. And wow, do we have a lot of white space to grow in this category for years to come. We feel like we're just getting started. .

Well, thank you.

Yes, right on the buzzer.

Yes, right on the time. Thank you so much, everyone, for joining us today.

Thank you, Jonna.

Thank you, JuE and Eric.

Thank you so much, Jonna. Thanks, everyone.

Thank you.