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

All right. Thank you all for joining us. Thanks especially to OLAPLEX for joining us at the conference. It's great to have you here. Joining us from OLAPLEX is JuE Wong, [Audio Gap] less familiar.

Right. So I'll get started. First of all, thank you, everyone, for coming. I really appreciate it. Well, one of the things that I look at over pages is to count -- sum it into 2 sentences is we are a science-led, technology-driven beauty company. And we have a patented, proven and potent hair care technology system that delivers consistent, reliable and transformative results in the very first use. And when you can do that each and every time, you win. And as to why I joined OLAPLEX. I mean, this is my fifth CEO role, second public company, fourth private equity-backed portfolio brand. So yes, I've seen a lot of P&Ls. I've seen a lot of teams. I've seen a lot of balance sheets. But what is so exciting about OLAPLEX, when I looked at it, it was the fact that it was high growth, highly cash generative, and an EBITDA margin that I know a lot of you think is just too good to be true. All those was just so compelling for me. And numbers are exciting for me because I was also recovering commodities trader for 7 years with Cargill. And I end up with crude oil and ForEx, so you can just imagine what my life is like. So this is just super exciting, and I joined OLAPLEX.

Yes. Thank you, JuE. So Eric Tiziani. Prior to joining OLAPLEX as CFO last year, I was with Unilever for 21 years in various finance leadership roles, CFO of Unilever North America, of Beauty and Personal Care globally. But more broadly, I've done M&A in one shape or form for about a decade. I've seen a lot of beauty, well-being companies, big-, small-, medium-sized. I had never seen a company with all of the elements of competitive advantage together like OLAPLEX had. When I met JuE, when I met the team, the chance to join this incredibly passionate organization, it was just -- was what I had been waiting for. And just to build on JuE's point about what is OLAPLEX, she talked about the science-led, technology-driven model. Because of the competitive advantages we have, yes, we are a very high-growth company and we are incredibly profitable and highly cash generating. We keep track of a chart of all the S&P 500 companies on an axis of profitability and revenue growth for 2022 analyst estimates, and OLAPLEX is all the way in the top right corner of that chart. So someday, maybe we'll share that chart with you.

I actually, when I saw that chart, I say I want that framed for my Christmas gift.

You both mentioned the team around you guys. So maybe just talk a little bit about the OLAPLEX team around you and what makes it, from your perspective, advantaged and a winning team.

In fact, when we ask our team to define who we are, they came up with powered by passion. You cannot find -- I have worked with so many different teams in my career. I have never met a team that is more vested in the business of OLAPLEX, where they put OLAPLEX before themselves. And I always joke, I always say that I can swim. If I jump into a pool, the ones that cannot swim will be the first one to jump in to save me. And those who can will probably look at their shoes and say, "Maybe you should go in." So that is the passion we have, the people that we have. And when I work with somebody like this, then the onus on us as leaders to really deliver for them.

Yes. We both use the word passion. One of my first observations joining the team was also just the laser-like focus on the OLAPLEX consumer, on the consumer and the stylist community.

Okay. So let's talk about the company's recent progress right up through the first quarter results, which were, I mean, strong, at least from my perspective. With sales 58% I think was the growth number. EBITDA margins, to JuE's point, 68%. This is extremely profitable, high-growth profile. How do you frame the long-term opportunity within global hair care or within the beauty? However you want to define your addressable market.

Well, let me start, and Eric definitely has better perspective than I sometimes because I get so wrapped up with the fact that this market is not just about the size of the prize. It's a fastest-growing beauty category. So as this category grows, when you look at something like a skin care, which is $140 billion in total addressable market, and hair care is only $88 billion. And of which, prestige hair care is under $20 billion. And we are leading, defining and shaping that category, and we are still a very small player. So the run rate is tremendous. I'm very excited because the opportunity to continue to shape the prestige hair care category is available to us, and especially when we lead with science and technology.

I would only add, we are proud of the fact that our results last year, the guidance that we've confirmed for 2022, those have only improved since the time of the IPO last summer. One of the big reasons for that was the successful launch into Ulta in the U.S. market this year, and that's a source of pride for us.

Maybe just to maybe touch upon that launch, and just what that has contributed and how that's furthered the story.

I'm going to steal Eric's thunder. I do that a lot. Steve has seen me done it. So done one of the things that Eric always talks about is that Ulta is a great sort of like place to kind of see the omnichannel working for us. We are an omnichannel brand that is truly reinforcing and synergistic. And if you look at Ulta, they have the professional, which is 1,300 salons; they have the retail, which covers mass masstige and prestige hair care. And they're a #1 hair care player. And then they have ulta.com. And what we are finding is 25% of their customers walking into the salon is actually asking for the OLAPLEX stand-alone treatment. And if you think about how powerful that is, again, another analogy that I'm stealing from Eric is a doctor-patient relationship. When our stylist writes a prescription for you to have this product, gives it to the beauty consultant, the beauty consultant walks to the counter, picks up the product, and the customer checks out. And for convenience, that customer is going to replenish online. So this is the reason why you've heard from Ulta in their -- not this last earning call, but the earnings call before. And those of you who are interested to listen to it, it's at 6.08 minute to 6.38. Right in that thing, they said OLAPLEX is the most successful beauty launch ever for Ulta beauty. And all of our SKUs at that time, and still is, their top 10 hair SKUs. So Ulta has been performing tremendously for us. We are excited because we would continue to reshape and define the opportunity for them.

That's it.

Sorry, Eric. I mean like...

Yes. I steal just as many analogies from JuE more.

So I want to -- just as the current cost and supply environment. I don't think it's as big of an issue for you as it is for many of the companies here this week. But maybe just a little perspective from your end on what the cost and supply headwinds are, whether it's inbound/outbound supply, how you're navigating those, and how it's impacting your plans and your priorities.

Absolutely. So on our Q1 results call, we did talk about cost inflation worsening. That exists in our warehousing and logistics costs. It also exists in the raw materials and packaging input costs that go into the product as well. And that, that would bring additional pressure on gross margin in the second quarter, cost inflation as well as some negative product and channel mix. And that we're able to reaffirm our full year 2022 profit guidance on the back of the mitigating actions we are planning to take across the P&L and over the course of the year. Amongst those mitigating actions, certainly, actions in cost of goods, negotiations with our suppliers. In SG&A, one example that we like to give is we've been actually been in-sourcing some roles that were previously done by third parties or consultants, more strategic for us and at a lower cost. And I'll also just comment on pricing. So we believe from the research we've done that we have the brand health and strength to take pricing. Now that we've spoken to all of our trade partners and we have this forum, we can confirm that, amongst the mitigating actions that we mentioned, we are taking a price increase in the back half of the year, beginning from July 1, on our take-home products globally. And that leads to an average price increase of about 5.5%. I would just say, I talked about product mix. An example of that, in the second quarter, we've launched a 1-liter size of our shampoo and conditioner currently exclusive to the professional channel. Is a product that's used in the back bar by the stylist when they're performing a service on their client. The professional is also going to be able to sell that to the consumer to take out of the salon as well. We believe just that example is going to, over time, be incremental to our business on both volume and gross profit dollars. It does come at some margin dilution based on our pricing slope. So those are some updates, all of which were included in our guidance that we reaffirmed.

The 5.5% is price only? That's not net of any mix up or down.

Price only. No, that's price only, averaged out across the portfolio.

Very good. Across the portfolio.

And this really is a good example of us, we talk about disrupting marketing spend. This is actually investing in our professional community because this is something they want, they need. And so by doing this, Eric mentioned that goodwill that we've all built then is going to be more long-lasting.

Great. Within -- given those headwinds, acknowledging the mitigating, how is that impacting if at all your strategic investments? Whether that's investments in R&D or brand building or digital capabilities or what have you. Is any of what you've seen of late from a cost challenge perspective delaying or altering your investment strategy?

I would say no. None of the mitigating actions that I just mentioned or that we've discussed involve slowing down the strategic investments that we're putting into sales and marketing, into R&D and into the organization. We're finding those mitigating actions in other ways in the P&L.

Yes. Let's drill into the company strategy and take it kind of piece by piece. The first tenet is to have the differentiated science-based, science-backed products. Let's start very, very basic. What makes -- what is the science behind your products that makes us it so differentiated? And I guess around that, corollary, is how protected is that science from an intellectual property perspective?

So I'll address that very quickly. If you look at our patent, it is protected. And what is important is, if you look at it, we have defended our patents, right? I mean, this is the kind of thing that, when the company first started, the founder actually really focused on filing the patent and protecting the patent. Size is a different changer for us because it allows us to deliver consistent transformative results in the very first application. And this is why it has lent itself so well with the professionals, because it raised the level of their artistry. It's great for the consumers because they see the results on their hair, and it keeps them engaged with the brand. And ultimately, it lends itself really well on social media. Because on social media, when you can actually see the before and after, it really helps with the engagement, the connection and the conversion.

Right now, you only have 12 SKUs, right? 12 products. And 9 of them are targeted at consumers, with the balance going to the professional channel. I guess, number one, how do those products interact with one another? How does the consumer engage with those in terms of overlaps and usage? And then as you think about growth going forward, how much of the growth is to come from expanding that portfolio versus just optimizing the opportunity on distribution of those core products?

I mean, we actually don't play in so many of the growth segments. We are in shampoo, we are in styling and we in own treatments. But if you think about it, we are not in thinning hair, we are not in hair sprays, we're not in dry shampoo, we're not in clarifying. These are all what our continuous feedback look wants from us. And in search analytics, clarify shampoo, dry shampoo, thinning hair, scalp treatments are highest-ranking. So our science and technology is going to deliver and look at what is needed by both the professionals and the end consumers.

And I would just say, with such a tight assortment, we see the incrementality from the innovation that we're going to bring to the table over the next several years because of the fact that we either don't play or we barely play in these subsegments. And just a little bit of education, the regimen is not difficult. When you talk about shampoo and conditioner, you're doing that every day, every other day. You're talking about coming out of the shower and using our styling products, which are #6, #7, #9 product. That's an everyday usage. And then the treatment products, #0, #3, #8, are something that you're typically doing once a week amongst your routine. And right now, consumers are going off-brand to fill those other roles, whether it's a hairspray or a dry shampoo or a volume-izing shampoo. So we see the incrementality from bringing those extra uses into the brand.

Given how much opportunity you have, how are those innovation opportunities, those R&D opportunities prioritized? How are they tested? How are they implemented? What's the regimen that you go through internally to prioritize and not go too far, too fast, too any directions?

Right. I mean, what is important is we have a continuous feedback loop that is from real time from our professionals and our end consumers. We also have a transformation team that looks at trend analytics, search analytics, trade reports, and figure out like what the future is. Our R&D team, which comprises of 11% of our workforce, of the 130 of us, 14 of them are in R&D, in a physical operating laboratory that is 10,000 square foot, really looks into signs and looks at the technology that is near in and far out. And then more importantly, once you have that formulation down pat, they're actually testing it with our hairdressers, our advocates and our internal consumers. And then after that, it rolls out to the hairdressers' clients, the advocates' clients. So we get a lot of real-time testing as to what people want. And when we have a product like this that is -- and we actually do not release a product unless it's close to 100%. So it's like 97% adopted rate, and that people will continue to want it, it then gives us a lot of confidence. And the proof of the pudding is in the eating. Ever since 2018, when we have launched our shampoo and conditioner, every one of our product launches is the #1 product launch in the U.S., as tracked by NPD.

How do you think about competition? I mean, I've heard other prestige beauty players talk more about opportunities in prestige hair care in the last couple of days than I have in the last couple of maybe years, which I don't know if is attributable to you or not. But clearly, the opportunity to some of the skinification of makeup, the skinification of hair care has become very topical in my mind rather suddenly. How are you positioned to potentially fend off incremental focus on your larger market from very well resourced competition? And what is -- what are the points of protection you think you have?

I think first and foremost is the technology, is the patented technology. We have proven that we are able to not only have a technology that works. We patent it, but we have also defended it when anyone infringes on our patents. The other thing about competition, again, Eric has told everybody that we have met in this room that it's no different from when we started in 2014, even though it precedes the both of us. But we have seen it. And I truly believe that competition is healthy because it raises awareness. When the big, established brands are going to be talking about it, consumers will start wondering, what is this about? And it really floats the opportunity to bring in consumers that ordinarily may not even think of prestige hair care. But we do know that when a consumer spends $100 on a skin moisturizer, it really doesn't make sense to spend $9.99 on hair care because they know the scalp is the continuation of your skin. So we are excited that the -- it's not just -- like I say, it's not the size of the prize, it's the size of the category growth that is potentially a lot more exciting. Eric?

That's right.

You kind of alluded to earlier that the channel focus of the business, right? And I think as a strategic pillar, you talked about channel harmony, right, between direct-to-consumer on the one hand, between specialty retailers and including retailer.com outlets, and then the professional channel. Maybe, a, what's the balance across your business? B, what's the growth profile against those channels? They're all growing, but what's the growth profile as you go forward? And then what is that channel harmony? How do those 3 legs of the stool get all tied together?

Well, let me answer the channel harmony and then Eric will answer the rest. I mean, for us, it's very simple. It's synergistic, the omnichannel is reinforced. Each channel helps the other channel to be stronger. It also allows our customers access to us 24/7 and convenience. And the way we have laid it out is that professional really lends credibility and authority into the group, retail builds brand equity and awareness, and direct-to-consumer allows us consumer insights, especially with oloplex.com. And then all the pure-plays allows convenience. If you wake up like I did, jet-lagged, 3 a.m. I wanted to claim my birthday gift and also buy a product, I did that online. It was very simple. And ultimately, I think what is important to note is that we have specific data. I mean, we can actually demonstrate that 35% of our customers at pro actually get recommended -- sorry, 35% of our customers are recommended by profession to buy at brick-and-mortar and direct-to-consumer. And 50% of our direct-to-consumer actually buys at brick-and-mortar as well as professional salons. So in terms of the make up of the channels?

Yes. So this will change quarter-to-quarter. But roughly, the professional channel is about 45% of our sales; specialty retail is around 30% of our sales; and the remainder, 25%, in direct-to-consumer, which just to clarify, includes both pure-play e-commerce retailers and our own olaplex.com. What we've said is, in the long arc, we expect specialty retail and direct-to-consumer to grow even at a faster pace than professional. As JuE just mentioned, the omnichannel model, all 3 are incredibly strategically important to us. And we expect all 3 to grow into our forward-looking models.

Do -- from a profitability perspective, from an investment prioritization perspective, are the economics dramatically different across the 3 channels?

I wouldn't say dramatically different. We don't get the profitability metrics, gross margin and EBITDA margin we have if all 3 aren't sufficiently very profitable. We do go to market differently in those channels. We don't disclose it, but we go to market differently in direct-to-consumer, retail and professional at different price points, as you'd imagine. And so there is a pecking order there in terms of the margin differentials. But I would actually say we're channel-agnostic because all 3 are strategically important. We want to be where our consumer is going to be. We don't want to fight gravity. We want to be there. And it's because of that reinforcing model.

In terms of the headroom for points of distribution, and I guess the prioritization of which points of distribution you go after hardest and first, what is -- how do you think about that? In terms of -- because there's lots of room for incremental distribution. How are you thinking about where you get the biggest bang for the buck in terms of incremental gains?

So you've heard me, I've seen -- I've been with many brands. I've seen how usually brands have to go to retailers and beg for distribution. In the case of OLAPLEX, our strategy is to go deep with our retailer partners online, offline, professional, so that when we become the #1 hair care brand, and in most cases, in all channels, we are the #1 hair care brand for them. But beyond that, we want to be top 5. When you get that kind of an anchor with a retailer, guess what? They are much more friendly to partner with you on messaging, on merchandising, on education. That is priceless because, again, we talk about our disruptive marketing model. If we didn't have that kind of a partnership, we will have to spend into it. But with that kind of partnership, there's reciprocity: We drive traffic into their store, they give us the exposure. So ultimately, we believe that we are not going to just go wide, we want to go deep. And you saw what we did. We extended our distribution in Sephora globally here in Europe where we doubled our door count. We just expanded into the Douglas, 126 doors after we showed promise on douglas.com. And in our first couple of weeks of launch, we rose to the #2 prestige hair care brand. And then you saw us when we -- in the U.S., we continue to open up with Sephora in Kohl's so that we can continue to benefit from the strategic rollout. So for us, the importance is go deep, not wide. And then when someone comes to you and asks for your merchandising to be distributed in their doors, you can now start having a much healthier negotiation rather than going to them first.

Great. Can we talk about Ulta versus Sephora versus Amazon, which you also sell through? Just compare and contrast the approaches to those 3 different retail partners. How, if at all, the approach is different? How the offerings are different? How the consumer is different? Because it's not every kind of high-end beauty company that is in all 3 of those channels.

So we did an independent survey. More than 60% of our customers want to take recommendations from their professional stylists, but 30-some percent actually said they want to look at verified purchase reviews. And we know a lot of people actually go to Amazon to look at the purchase reviews because there's a lot of them. But more importantly, OLAPLEX, especially in -- I mean, Amazon, especially in the U.S., actually helps to gate diversion and close out non-authorized website. So the customers on Amazon are constantly searching, but they also go with -- on that platform with an intention to buy. So we know that we can capture their attention. Sephora and Ulta have very nominal overlap when you look at the ZIP codes of their customers. And Ulta has always been very open. That 90% of their business gets done to the 32 million loyalty customers that they have. So we feel good about -- the fact that our business at Ulta has grown so strongly from the point of launch, and that our Sephora business, where we continue to be the #1 hair care and the top 5 beauty brand, really showcase for you that is synergistic and reinforcing as well.

We got about 10 minutes left, so I want to kind of prioritize our time. I want to talk a little bit about the asset-light business model, another pillar of the strategy. I'd love to hear you opine on some of the benefits of that. I think they're somewhat obvious in terms of the economic returns, but maybe you articulate better than I can. But also, are there any hidden risks in that? Because I'm sure it relies a lot on third-parties, and those third-party interactions potentially have risks. So how do you think about the balancing the obvious benefits with the tail risk?

Yes. I'll start with the benefits. Having this asset-light operations model, working with a network of third-party manufacturers and third-party logistics partners, has really enabled and allowed us to remain agile and very nimble at a time when agility was very important in the macro supply chain environment. And so that's been a benefit to us. We're really proud of the fact that we've delivered excellent customer service through all different portions of the post-pandemic supply chain environment. And it's because we've got great partners, we've continued to build out that network for resiliency, and we will continue to do so. What are the risks? I think the risks are that you don't have the right partners. Clearly, our results and our performance demonstrate that we do, and that we'll continue to make progress on finding the right partners in our network to support our growth in the future as well.

Great. Let's talk about geographic expansion. Talked about points of distribution. More -- you mentioned a couple of international opportunities that you've pursued. But as you think about broader international growth, how do you -- how does that weight in priorities in opportunities versus domestic?

Right. I mean, if you look at it, 46% of our business is currently in international. We are -- the strongest area for us is U.K. and Continental Europe. There is a huge white space for us in Asia. We have presence in Asia, but not in a way that our European counterpart has. And so there's a lot of opportunities for us there. We have started in Southeast Asia as partnerships with Sephora. We have a professional distribution. We've seen our success on our cross-border trading with Tmall Global in China, where we are consistently ranked in the top 10 with them. And then during activations, like 11.11 and 6-18, we actually will become the #1 hair care brand. Because in China and in Asia, they look at OLAPLEX that -- they define us as, this is the brand that treats hair like skin. And North Asia is important to us, but we execute on our professional distribution. So I think international is -- I mean, I know that our COO is not here. But when she was on the roadshow, Tiffany Walden, she will always say, "Every time that OLAPLEX gets into the space, we actually lead to charge for prestige hair care." And then retailer starts coming in, the pros starts coming in, DTC starts taking over. It just really shows that the opportunity for OLAPLEX is really about being there and making it happen rather than waiting for something to happen.

As -- how -- in terms of brand equity, brand awareness. As you go around the globe, is demand there? And it's -- that's your ability -- just your ability to supply it? Or is there a need to build that awareness and build that demand?

I think awareness-wise, we have a long way to go. I mean, our aided awareness is only between the 55% to 59%. Unaided, we are in single digit at 7%, 8%. So lots of runway compared to the established brands, where they are way above 70%, and in terms of unaided, they are 3x where we are. So that's huge runway for us.

And what does that cost? How do you do that? How do you -- how are your priorities?

I would just say it's the same model. So we believe we established in the U.S., in international markets like the U.K., a repeatable model that we are in the midst of deploying in many other markets. It's the omnichannel model, it's the same community-based sales and marketing engagement model. And we've seeded the business in so many key markets. The brand is resonating globally across these markets. It will be -- we're not starting from scratch anymore in terms of awareness, but it is a lot of white space in terms of building that awareness and growing the business. When we talked about where we're going to invest in the future, absolutely, it includes building out our organization. It includes sales and marketing. We're in France today. I mean, this is a market where we -- when you hit a certain scale, you want to localize your messaging, bring local capabilities as well. That's a part of it.

Do the macro -- is the macro backdrop, whether it's disruption in China, obviously Russia-Ukraine, just general prospects of macroeconomic weakness. Does that alter your prioritization at all or alter your programming in terms of what your business strategy is? Or it is stay the course?

I mean, I would really sort of look at staying the course because it is -- like I said, it's the fastest-growing category and it's consumable and replenishable. And prestige hair care and prestige beauty has shown a lot of resiliency. And we are not everywhere where like an established brand is. And so we've got just so much runway. Focus is really key for us. How do we go deeper? How do we become more material to the partners we are with? And then how do we scale even faster?

And the -- just the intellectual property protections that you have around your products. As you go around the globe, is that protection remain equally resilient? Or is there a risk there?

We have global filing, global protection. And that was the #1 thing that the founder did. It wasn't about setting up a website, selling to consumers. It was about filing the patent and protecting it, too.

And I think -- I mean, the patents you have -- maybe you can give us some numbers around this. But you've got a lot of patents. And I think you've got a lot of patents on that protect the core product. And you've also -- I think you've got patent protection that protects sort of tangential white space that would -- right? So can you give a little bit of perspective on?

Well, we have patents that protects the technology, we have patents that protects the application, and then we have another patent protection that we don't commercialize so that we can protect the utility of it. So all of that just means that anyone who thinks that they can infringe on our patent better think twice. And the reason why bond-building is such a big category and will be a growing category, and that we believe we will continue to leverage, is because hair bonds are hair-agnostic. Nobody in this room, if I took your hair, I will not be able to tell whether your bonds are male, female, how old you are or what ethnicity you are. And if I can help your hair bonds be better and stronger; repair, strengthen and protect it, you will then have the healthiest hair foundation. And then you can go out, comb your hair, color your hair, do whatever you want, and still be protected.

And that work is ongoing. It's not like you've got patents, and that's it. You're continually filing.

Yes. And they are continue to build -- yes. I mean, we have a chief scientist that's affiliated with MIT, an associate professor at NYU. And we are filing patents, writing white papers continuously.

Okay. Just about out of time. Despite all -- despite what we've been talking about, stock has been on the wrong side of the market momentum of late. What do you believe is most misunderstood or not understood well enough on the part of the market today?

Eric, I'll let you go first.

Maybe I'll start, and I'll go back to my introductory comments. In some sense, maybe we've been lumped in with the high-growth cohort of IPOs of 2021. We believe we really stand apart in our competitive advantages and our financial profile. Yes, we're high-growth. We are also very highly profitable and highly cash generating, which I think makes us unique, makes our value creation story incredibly attractive and unique as well.

And our performance, more and more established. Because I constantly hear, "Oh, you've got to become more like the heritage brand and more like the established brands." But when you, at this conference, you are hearing established and heritage brands are actually saying they want to lean in on digital to reach more people. They want to leverage technology so that they can educate and account-manage. And that they really want a synergistic omnichannel. We are already there. There's no pivoting, there's no restructuring, there's no re-arc. And so we believe very strongly that our model, again borrowing, I'll end this with Eric's analogy, is the future of work.

What about the objection that the business hasn't been recession-tested? What's the evidence that high end hair care -- I think there is evidence. But what is the evidence that high end hair care can penetrate through even a severe economic downturn?

I mean, the resilience of the prestige beauty has been proven. Plus, the fact that hair care is a consumable, is a replenishable. You're not going to stop washing your hair. We are at entry level prestige price point. We can actually take market share from masstige brands. And if there are tough times and people want to trade down, our price point is very accessible for them.

All right. We're out of time. We'll leave it there. Thank you very, very much. I appreciate it.

Thank you.

Thanks, everybody.

Thank you, everyone.