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

Okay. Okay. Exciting for me. This is my last one of the day. So I've been going since 8:00, this could going to be a nice break. I'm eager to get to break my team and I'll get back there. A huge thank you for all the heavy lifting he's been doing in terms of writing notes. And I'm looking forward just to getting in hopefully getting these things turned out pretty quickly. So we're here with a still relatively recent company in the public markets, but I'm going to start with a bit of a preamble. So I'm not a big golf fan, although some of you may know, I live in Jupiter, Florida, which is like a golf capital of the world. And one other guy who lives there is Tiger Woods. And I was entrenched by his rise to success in the late 1990s. He seemed almost superhuman that eventually, it all came crashing down as personal issues and injuries rose causing many to reclaim end to his golfing career. But then in 2018, he was back winning tournaments, phenomenal come back. So what's my point? Well, the journey for the next company on stage has some parallels. Olaplex was founded in 2014. Within 5 years, it was generating $150 million in sales. And just 2 years later, it had quadrupled to $600 million. It seems like a super human accomplishment. But now the growth has been crashing down. And investors question whether or not the brand can ever mount a comeback. Well, the company's leadership team is not only adamant that's possible, they argue that's inevitable. And here today to tell us what's happened, why the recent setback is just a pause in the long run way of growth, is the firm's CEO, JuE Wong; and CFO, Eric Tiziani. JuE, Eric, thank you so much for joining us.

Thank you, Jason.

So I don't know if you agree with the parallels, but let's hope that, that comeback story is exactly what we're seeing and talking about here at Olaplex in the next couple of quarters. So as we step back. So far, we've got 2 chapters, right? We've got the chapter of phenomenal growth. We've got the chapter of taking a pause, a reset and let's hope the third chapter is one of revitalization. I know you guys are confident we'll get there. But before we get to the revitalization. Let's first ground ourselves in the very first chapter. What led to such a phenomenal success?

Right. That's a very good question. And like anything you need to have a product line that works. And we have a product line that not only works but it's backed by patented and proven technology. So when we saw that growth, it was really because it delivered on its promise and people could see the results.

And that evidence, I think, was borne out first in the salon channel where they became phenomenal advocates for you. How critical were they to the rise and start-up of the Olaplex brand?

The professional community, the stylist continues to be the backbone of who Olaplex is because when we do independent survey, whether many years in a row, we still show that the #1 source of truth is recommendations of hair stylist to their clients. So this is why when we talk about in our reset year, how important it is that we continue to engage them, educate them and support them.

And it sounds like that's where we should be. If that's tip of spear here. That's where we should be looking for proof points that the business is finding stability in turning. It's going to be led out at the professional channel. Is that your expectation?

No, it is -- the professional channel, let's first define it. We are truly an omnichannel, right? The professional channel gives us what we call the credibility and the authority. The retail channel gives us brand awareness and the direct-to-consumer channel allows our consumers to have convenience where they can reach us wherever, whenever and however they want to. So it is synergistic. One channel cannot do without the other. But ultimately, the reset year is about building a stronger and more resilient Olaplex to really be able to target and work with all of these channels.

And why do we need a reset? And what drove -- the business was going exponential growth? What caused the pause? What caused the actually -- not to pause, the drop, like the drop in demand that's caused this reset.

So you -- and definitely, Eric will build on this. You sort of said it yourself. We grew tremendously. When we went IPO -- following the IPO in September, we reported a plus 82%. And then a plus 112% and last year was a plus 18%. All of this growth was because we have products that work, our technology is there. And we felt like with -- all that is happening. We saw what was happening with the macroeconomics. We saw the promotionality that was happening in the category. The category is still the fastest-growing prestige hair category albeit at a slower pace, and there was also a lot of misinformation about Olaplex out there. We thought that it was important to take a reset because we could. We're still -- where we asked to cash generating, highly profitable, and we have the opportunity to really take this reset and get ourselves to a stronger and better place. So that is why we took it. And we feel like things are working out because we mentioned in our last -- in our Q1 earnings call that there were certain key things we were doing, spending and investing more behind sales and marketing, more education, engaging our stylists and having a more assertive PR program, and we were happy to report just on May 9 that from the Q1 reporting, our sell-through is stable, and we believe it will continue to do so.

Where is it stable? It's stable Q-on-Q, stable year-on-year? What does stable mean?

Yes. The intent of that comment is to say that the sellout dollar trend in absolute dollars has stabilized across channels, and we track that through sell-out data that we receive from all of the accounts -- key accounts in the U.S. and most of our distributors internationally as well. That has stabilized since our Q4 call at the end of February up until this point. And we think that, that's step one, that's step. The actions we've taken have worked to stabilize that trend as we continue to invest and build momentum as we go into the second half of the year.

Is that like dollar, like-for-like?

Yes. These are absolute dollars...

Because your distribution expansion still in the system, right?

That's mostly in our international markets. And so on a like-for-like basis, step 1 was stabilized the sales against some of the challenges that we experienced in the last few quarters and build and build from there. And we believe in the investments and actions that we're taking will help us to build that momentum into the back half.

And the international business has been performing substantially better. Is that really just distribution? Or what do like-for-like sales look like internationally?

Yes. It's not just distribution. So in the first quarter of the year, international sales were flat, relatively much better than the U.S. Within that, we have parts of the business in Western Europe, where we're deploying our omnichannel strategy. We've anniversaried a lot of the distribution gains there, but we're still seeing strong tailwinds. We have parts of the world, you know well, our cross-border e-commerce business into China is growing and becoming a more material part of our business there as well. Those are all tailwinds. Those were offset by some of the more mature international markets like the U.K., Australia, that had trends more similar to underlying trends in the U.S.

Okay. And I think the rumors, the bad PR, we're talking about the hair loss stuff, right?

Yes.

And even I was looking on Sephora last week as I'm typing up some questions for this, and I'm looking at the reviews. And there's days old reviews that people say, my hair fell out. So it's -- and they're top, like I click a review, they're top of the list. It's the first thing I see as a consumer looking here. So it sounds like we haven't -- those haven't gone away. They're still pervasive. How do you get them to go away if they're not founded in something. Like if they're baseless, why are they still there and recurring so much?

So I think what is important is to take a little bit of a step back. When we look at this, we also take independent sort of survey with a third party to come really understand where is the sentiment, where are the -- where is the conversation and where is the chatter and we are finding that positive sentiments are trending out. Negative sentiments are trending down. Yes, you are saying that when you go on certain sites, you're seeing some negative reviews, but we have been very clear and very transparent in making sure that we help ourselves kind of like look at where all those information is being directed. So we have published clear methodology of how our products are being tested so that they actually, we can prove that is compliant against FDA standards against the manufacturing compliance of safety and that our products do not cause hair loss or hair breakage. And when we are able to do that, not only through -- in a PR setting, but also in an education setting, with our stylists, with our business partners, with the beauty advisers, it will help intercept and bring the noise down. But we are not going to rest on the fact that sentiments have improved because you just brought it up, look, I'm seeing it on a reviewed website or a site. So we will continue to be diligent because ultimately, conversations need to be had, we are emphatic to the people going through this emotional toll, but we can category with the testing that we have done with the information that we have on our health hub, we are confident that our products do not cause hair loss or hair breakage.

Has anything changed in the formula? That's -- and you've been out there in the market for 9 years.

Since 2014.

Yes. And nobody was complaining about losing their hair until all of a sudden, just a couple of months ago.

Well, I don't think that people are complaining for the sake of complaining, right? I think what happens is -- it's a fact of life when a brand gets to a certain high profile, you generate a lot of buzz and interest, positive or negative. It is the job of the brand to help answer those misinformation.

And you weren't ready, right? You weren't ready to respond to that -- or respond to it quickly because you didn't have the right people, the right investment, the right capabilities. That's what's happening in the reset period.

Well, I think the reset acknowledges the fact that we need to do more. We actually did come out and very transparently short and published the testing methodology. What we are saying is that we've been doing a lot of things, but what we need to do is more of that. So what are the more? The more is in sales and marketing. We have always been very focused on performance marketing, which is the lower funnel of marketing. We are now looking at a full funnel, which includes brand building, consideration, which is more like education and then the performance which we have always done. So it's amplifying what works for us and then double clicking on things on new activations that even perform better for us.

We just had WeightWatchers on stage beforehand. And we talked about media and they're spending a couple of hundred million behind their brand. We had Freshpet on earlier a small company, pet food company. They're spending $80 million in media buy, you don't really do any traditional media. Is that in the consideration as you're looking to go up the funnel.

So if you think about it, when we started in 2014, we took a new model, but we also took a harder road. It is much easier or much harder, I would say, to try to build a relationship to build advocacy and to build long-lasting support for the brand. But that's what we took. We started with the stylist. We really gave them and elevated their artistry with the technology that we have. And now what we are already in this reset year is how do we help amplify the brand awareness so that pro community continues to benefit. Our retailers continue to have the ability to drive traffic to their doors and then our direct-to-consumer continues to provide that convenience. So it is very intentional where we have come from. You're absolutely right. In the beginning, it was more organic, but it was also very deliberate why we did, what we did because we needed to build the foundation. Now given our cash -- our ability to generate cash that we do, we are highly profitable, we can now invest more materially and more deliberately into the business.

Okay. And the long-entrenched relationships with the pros, the salon stylists out there. Have you seen any of that conviction that loyalty that commitment to you wane in the wake of some of these concerns out there?

So they have struggled. I mean I'll be honest with you. They have struggled with all this misinformation coming at them. Hair stylists are very emotionally intelligent individuals. And when they see hurt like this, they want the brand to give them the tools to respond to it. So we have been doing that. We could have been faster in doing that. That's why we are doing what we're doing now in the reset year to provide them the tools, the knowledge to really help advocate for the brand in a way, in a knowledgeable way, not in a competitive way.

Okay. Okay. And are these concerns as pervasive internationally as they are in the U.S.

So we talked about the international growth -- or that it was flat year-over-year in sales in the first quarter, more insulated, particularly in non-English-speaking markets than some of the trends we've seen in those markets in the U.S. And there are tailwinds there. And there's a tremendous amount of white space to continue that growth for years to come.

But it's flat with meaningful distribution expansion in pharmacies and more Douglas stores and Travel Retail suggesting that if we strip those out, the business is declining at probably a fairly substantial level in those markets as well.

As I mentioned, there's a mix impact within there as well of those parts of the world that are in good growth levels and some of the markets that are more mature that were more impacted by some of the same challenges we've seen in the U.S.

And what are the same challenges?

Like we said, macro misinformation and promotional intensity somewhat linked to the macro as well. The U.K. would be a good analogy example of that closer to the trends that we've seen in the U.S.

And the competitive piece is a bit surprising because my perception was you'd weathered a lot a storm. I mean years ago, Wella came out with Wella [indiscernible]. I mean you can't copycat any closer. L'Oréal had come out with a number of products. Estée had come out with Bumble and Bumble, the big well yield competitors had already come at you. And all of a sudden, the competition was an issue. I think your business was growing exponentially through that. What made it more vulnerable in the last year to competition?

I think it's a tie-in with not only competition, but also the intensity in promotions. When you have promotions that are used to be promotions will calendarize. You can't know when they are coming, whether a retailer A was going to come up with an annual program. But today, you can tell almost every other week, people in this room itself, we'll be getting an e-mail soliciting that there is a special promotion and add on [indiscernible] what time it will last. Competition at the end of the day, we have not filed 1 competitor or 1 competitive set of brands that are taking material market share away from us. What we do believe is that the consumers may be interested to try something, and they will. I mean like it's human nature. But at the end of the day, we are very confident our product works because we have the technology not only to back it, we have the support of the stylists, and we are able to really show before and after they are very compelling. So the confidence is not from a fourth place, but rather seeing is believing and the products are delivering the results. And we are still the #1 brand across the channels, #1 prestige haircare brand across all the channels that we play in. And in virtually every segment that we participate in, we have the #1 brand, and we are a partner of choice with our retailers. So we need to really continue to capture that love and that interest and double-click on this reset year by investing behind it and really getting our message out collectively through all the cohorts in this space.

You're still the #1, but you're losing a lot of share year-on-year. Is that right?

I think -- sorry, go ahead.

Yes. If you look at the first quarter alone, we were lapping the incredibly successful launch that we had into Ulta in January of last year. So that is true. We declined more than what the category grew in the first quarter. And that was expected. That's what we included in our guidance outlook for the first quarter.

How about in Sephora.

We don't comment on specific customer trends, but that's true across the NPD space, which captured specialty retail and direct retail.

Yes. I ask only because I totally get it on Ulta. I mean that was a massive launch with -- that was really, really heavily supported. So it's going to be hard to comp the comp but the rest of your retail universe doesn't have the same type of comps and hence the nature of the question.