Greetings. Welcome to Waldencast's First Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to Allison Malkin of ICR. Thank you.

You may begin..

Thank you, and welcome to the Waldencast plc first quarter fiscal 2024 earnings call. With me today are Michel Brousset, Founder and Chief Executive Officer; and Manuel Manfredi, Chief Financial Officer. For today's call, Michel will begin with an update on our business and vision and our performance within the context of the beauty market.

Manuel will follow with a review of our fiscal year 2023 and first quarter performance as well as our outlook for the remainder of 2024. Then, Michel will share our strategic growth initiatives for our Milk Makeup and Obagi Skincare brand. After the prepared remarks, the operator will open the call to take questions.

Before we start, I would like to remind you that management will make certain statements today, which are forward-looking, including statements about the outlook of Waldencast's business and other matters referenced in the company's earnings release issued today.

Each forward-looking statement is subject to risks and uncertainties that could cause actual results to differ materially from those projected in or implied by such statements.

Additional information regarding these factors appears under the heading, Cautionary Note Regarding Forward-Looking Statements, in the company's earnings release and in the company's filings that it makes with the Securities and Exchange Commission that are available at www.sec.gov and on the Investor Relations section of the company's website at ir.waldencast.com.

The forward-looking statements on this call speak only as of the original date of this call, and we undertake no obligation to update or revise any of these statements. Also, during this call, management will discuss certain non-GAAP financial measures, which management believes can be useful in evaluating the company's performance.

The presentation of non-GAAP measures should not be considered in isolation or as a substitute for results prepared in accordance with GAAP.

You will find additional information regarding the definition of these non-GAAP financial measures and a reconciliation of these non-GAAP to the most directly comparable GAAP measures in the company's earnings release.

A live broadcast of this call is also available on the Investor Relations section of the company's website at ir.waldencast.com, which will remain available until the company's next earnings call. I will now turn the call over to Michel Brousset..

Thank you, Allison, and good morning, everyone. I am pleased to speak to you all today and share our strong first quarter of 2024 results and resume our historical practice of holding earnings calls each quarter having completed our historical annual filings for the fiscal years 2022 and 2023.

I will start by anchoring us in our vision for Waldencast, which is to build, over time, a global best-in-class beauty and wellness platform that creates, acquires, accelerates, and scales the next generation of high-growth, highly-profitable purpose-driven brands.

We are a beauty and wellness pure player, an operating platform built for both speed and agility, reimagining the beauty company of the future as a home of the brands of tomorrow that connect with consumers' needs and their values.

We are a beauty pure player because beauty is the most beautiful of industries, one that has shown impressively consistent growth, profitability, and resilience, and because it's an expertise-led industry that we're expect in.

Prestige Beauty closed 2023 at plus 14%, more than double Mass Beauty, momentum that continued albeit with a moderating trend in Q1, with Premium Beauty growing plus 9%, but still ahead of its historical growth of the market.

While Prestige Skincare remains expanding in double-digit growth at plus 10% as consumers are increasingly looking for performance-led transformative products, Make Up, previously the fastest-growing category within beauty, registered a growth of plus 4% in Q1 as the category normalized after the post-COVID rebound.

The rate of growth is expected to accelerate, driven by the rising popularity and sophistication of makeup among younger consumers.

In particular, we see millennials and GenZ, purchasing makeup at significantly higher rates versus pre-pandemic levels as socializing resumed as well as the acceleration of innovation in the market after a pandemic low and the continued growth of brands like Milk Makeup that are inclusive, high performance, and aligned with our desire for clean, vegan and cruelty-free products.

This trend is expanding to Generation Alpha, thanks to the TikTokification of beauty by bringing consumers even earlier into a category.

While the market is a data point to inform our business plan, we believe that given our relatively small size in this very large beauty industry and the opportunities we have in terms of innovation, distribution, and geographical expansion, our ability to grow is only limited by our own ability to execute well against our strategies and continue to develop relevant, unique, and seductive consumer propositions.

Waldencast has two of the most exciting brands in the two biggest beauty categories, makeup, #1, and skincare, #2, in U.S. Prestige Beauty. Importantly, these categories are not only big but also high-growth, resilient, and structurally attractive.

Furthermore, our brands play in the fastest-growing subsegment of these two categories, prestige clean makeup and professional science-led skincare. Obagi Skincare is a crown jewel of the U.S. physician dispensed market.

It is perceived as the #1 physician-recommended medical skincare brand on the top patients' needs, leading in the most attractive, fast-growing subsegment of premium skincare.

With its breakthrough patented technology and transformative clinical skin results, it unlocks high loyalty from both consumers and physicians and it is perfectly positioned to answer the growing consumer need for high-performance effective skin care, while also paving the way for expansion into other categories.

Milk Makeup is cult Gen Z brand with an incredible organic following through an adverse and inclusive community known for its cultural relevance and iconic products. It is a leading clean makeup brand, the #2 clean brand at Sephora U.S., and one of the busiest brands in the U.S. coming from #19 in 2022 to #9 in Q1 2024, according to CreatorIQ.

Milk Makeup has accomplished this by bringing a relevant promise of cool, clean makeup that works. Our ambition and destination is to build over time, a best-in-class multi-brand portfolio. With Milk Makeup and Obagi, we started in prestige skin and color with a core business in the U.S.

across attractive growing channels, a growing international presence and the ambition to expand over time into further geographies, categories and channels through categories expansion of our existing brands, but most importantly, acquisitions.

And we will do that through our laser focus on building scale and speed, leveraging our unique pure-play beauty ecosystem, ensuring we diversify our portfolio across categories, channels, geography and price points to benefit from the resiliency of the category, focus on opportunities in targeted acquisitions for accelerated long-term growth and a focus on sustained and disciplined growth and profitability.

All this is led by a world-class team of beauty operators across the evolving ecosystem. And now with this, I will hand over to Manuel to lead us through our financial results..

Thank you, Michel. It is a pleasure to speak to you today on my first earnings call as CFO of Waldencast. As many of you are not familiar with me, let me start by sharing my background.

For the past 25 years, I have led financial organizations in the beauty and consumer products industry in Europe and North America, most recently as CFO of L'Oreal in Spain and Portugal.

Among other things, during my time at L'Oreal, I played a key role in the acquisition and integration of a new cosmetics brand, executed numerous transformational projects across the organization, and helped unlock value and identify growth opportunities for the company.

I am now eager to leverage my expertise to help Waldencast to achieve its ambition to build a best-in-class beauty and wellness multi-brand platform.

It has been six weeks since I joined the company, and I am already impressed with the strength of our brands, the innovation and differentiation we provide, the highly talented and motivated teams we have in place, and importantly, the significant growth opportunities that lie ahead of us. Now, turning to our review of our performance. While our U.S.

GAAP revenue are outlined in the earnings release, my comments today will focus on comparable net revenue, which we believe is a relevant metric to follow as it reflects the operating sales of our business, removing revenue related to the former Obagi Skincare China business, which was not acquired by Waldencast at the time of the business combination.

With that, let me share highlights of our fiscal 2023 performance, which were previously communicated, and then cover our first quarter 2024 results and outlook. For fiscal 2023, comparable net revenue was $212.5 million, an increase of 15.3%.

In Milk Makeup led our performance and exceeded $100 million revenue milestone, delivering net revenue growth of 38.6%. Obagi Skincare generated strong growth in the U.S. and internationally, excluding Southeast Asia, which was impacted by restructuring activities. Adjusted gross profit was $150.4 million, with an adjusted gross margin of 69%.

Adjusted EBITDA totaled $24.4 million, an increase of $33.2 million from 2022, with 2023 EBITDA margin totaling 11.2%. This reflects strong revenue growth and expansion in adjusted gross margin as well as the increased investment in marketing and central costs to support our growth as a public company. Net loss was $106 million.

Turning to 2024, we are very pleased with our first quarter performance, which included robust growth across our key performance metrics, including comparable net revenue, adjusted gross margin, and adjusted EBITDA margin versus the first quarter of 2023. Each of these metrics delivered accelerated growth from fiscal year 2023.

To this end, for this first quarter, comparable net revenue was $67.9 million, increasing 21% from Q1 2023, with balanced growth across our brands. Obagi Skincare and Milk Makeup delivered comparable net revenue growth of 20.6% and 21.5%, respectively, from Q1 '23.

Adjusted gross profit was $52.1 million, increasing 32.9% from prior year first quarter, while adjusted gross margin of 76.3% expanded a strong 1,100 basis points from Q1 2023, both brands contributing to this increase in margin rate.

Adjusted EBITDA totaled $11.4 million, increasing 12.9% from $10.1 million in the 2023 first quarter as strong revenue growth and gross margin expansion more than offset important investments in our team and in marketing and sales business drivers. As a result, we delivered a healthy adjusted EBITDA margin of 16.6%.

Net loss was $3.9 million, an improvement of $9.3 million from a net loss of $13.2 million in quarter one 2023. Turning to our outlook for the remainder of 2024. We are providing an annual outlook, which we believe provides a greater level of insight into our business.

And while we focus on every aspect of our business daily, we plan the business annually. With that said, we are very pleased with the performance of our brands and believe our strategy has poised us to deliver increasing rates of revenue growth as we move through the year and adjusted EBITDA margin expansion in fiscal 2024.

In total, for fiscal 2024, we expect comparable net revenue growth to accelerate from the 21% increase achieved in the first quarter, with a strong contribution from both our Obagi Skincare and Milk Makeup brands. Breaking this down further, at Obagi, we expect growth to be driven by the continued development of our U.S.

physician dispensed market as we strengthen our dermatological credentials, the strong innovation plan, and the continued expansion to our e-commerce and international presence. At Milk Makeup, growth is expected to be driven by the introduction of compelling, relevant innovation and brand collaborations and expansion in brand awareness.

From an adjusted gross margin perspective, we expect fiscal year 2024 to be, again, another positive story as we forecast adjusted gross margin to expand for both Obagi and Milk versus the rate achieved in 2023.

Keep in mind that while we expect this full year gross margin expansion on Obagi versus the prior year, Q1 2024 saw particularly strong gross margin expansion due to one-off effects in the Q1 2023 base, positively impacting the quarter.

We expect selling and marketing business drivers to increase while achieving operational leverage at the brand level by diluting fixed costs despite the increased investments in our teams to support the growth.

At the central cost level, we have invested to support our growth as a public company but have not captured yet the future savings we expect at the brand level by the development of our central structure.

The combination of a strong comparable net revenue growth, along with gross margin expansion, is expected to more than offset the SG&A and central costs to deliver a mid-teens adjusted EBITDA margin for the year, nicely ahead of the 11.2% adjusted EBITDA margin achieved in fiscal 2023.

Turning to our balance sheet and cash flow, we ended fiscal 2023 year with a solid balance sheet with no near-term maturities and ample liquidity to fund our asset-light business model. As of December 31, 2023, net debt totaled $141.8 million, and cash and cash equivalents were $21.1 million.

At the end of the first quarter 2024, net debt totaled $150.6 million and cash and cash equivalents were $26.8 million. We had positive cash flow from operations that was offset by non-recurring expenses related to the accounting restatement and SEC investigation.

Outstanding share count was little changed at 122.1 million shares at the end of the year-end 2023 and 122.2 million as of April 15, 2024. With that, I will turn the call back over to Michel..

number one, strengthening our dermatological skincare brand and physician-dispensed DNA; two, accelerate cutting-edge science-backed innovation that delivers transformative results; and three, grow brand awareness and footprint to reach more consumers domestically and internationally.

A key focus on Obagi since we acquired the brand has been to build on the very rich and deep heritage in physician dispense while modernizing the brand to bring a more effective, compelling, and relevant proposition to professionals and patients.

We are introducing a new brand visual ID that showcases the brand's credentials and results, A new visual identity that lives across multiple professional and consumer touchpoints that showcase our science credentials, clinical results, ingredients, as well, of course, transformative results.

And it culminates in the much-anticipated packaging redesign, which we built with clear objectives. Firstly, to build a relevant and cohesive brand proposition that is reflective of our dermatological credentials, as well as improve its navigation to help professional recommendation and in-practice display.

The design has been tested with both professionals and consumers and has received overwhelmingly strong positive feedback, and the results speak for themselves.

Our packaging testing showed that the panel found the brand much more appealing, 89% versus 77%, more distinctive 73% versus 61%, and much more recognized, 68% from 38%, and most importantly, a purchase intent that rose from 70% to 83%.

As we refresh the brand to make it more relevant, distinctive, and appealing, hence strengthening our medical prevention to existing and new audiences, we have also further deepened our dermatological routes by partnering with Dr. Suzan Obagi, as Obagi's first Chief Medical Director. Dr.

Obagi's credentials speak for themselves and she is a world-renowned dermatologist and cosmetic surgeon and will play a pivotal role in shaping our innovation, research, and educational projects. Physicians are at the heart of our brand and Dr.

Obagi, our Obagi Physician Counsel, as well as all of our physician partners bring unique insights into our product development cycle that feed research, innovation, clinical, and education to make sure we design products and protocols that over-deliver on the patient needs.

This innovation strategy has led to industry-recognized innovation, the latest one being the Obagi Daily Hydro-Drops Rejuvenating Eye Cream, that sold out in 72 hours across channels.

And we have more cutting-edge science-led innovation coming in the second half, new formats, new technologies, and always the same medical-grade efficacy and transformative results. Innovation that is also key to drive consumer awareness inside and outside of the physician channel and expanding our audience reach.

And a focus on recruiting new incremental consumers, younger consumers who currently are not aware of Obagi and are not yet in our heartland physician channel, which on average has an age of 42-plus years, to introduce into Obagi and the physician dispense ecosystem to further grow the category and fuel our brand growth flywheel.

In conclusion, we are more excited than ever of our business and our growth prospects. We have two powerful, high-growth compelling brands, perfectly positioned in the most attractive segments of the category in the beauty business, the most beautiful businesses.

We have a team of world-class operators and beauty experts that are passionate about delighting our consumers. We have very engaged communities that inspire us and seek our innovation.

Overall, we're very confident in our near- and long-term business prospects, having strengthened our business platform, improved our business processes, and delivered successfully against our visible growth strategies.

We continue to expect our efforts to lead to long-term value creation for Waldencast's stakeholders, and over time, build a global best-in-class beauty and wellness multi-brand platform. With that, I will turn the call over to the operator to begin the Q&A portion of the call..

Thank you. [Operator Instructions] Our first question is from Ashley Helgans with Jefferies. Please proceed..

Hi. This is [Sidney] (ph) on for Ashley. I know the recent Milk Jelly Tints launch was very successful with Gen Alpha.

Can you talk a bit more about what you're seeing with that consumer and kind of what you think attracts tweens to the brand?.

Yes, of course. Sidney, how are you? Well, Jelly goes far beyond Gen Alpha in fact. We've seen a relatively broad appeal. But of course, the key drivers of that in terms of Gen Alpha is being, number one, very interesting new texture as well as a very compelling, buildable color payoff.

And of course, executed beautifully by the team across different touchpoints with really breakthrough interest in creative. What we're seeing in Generation Alpha, I mentioned is the TikTokification of beauty.

We're seeing younger and younger consumers interested in beauty and participating in beauty, and as a consequence, more and more of them look for these breakthrough new forms, new innovations that become, in many ways, expandable and viral in some cases, in the case of our Jelly's launch.

So, it's at the same -- I think the Generation Alpha looks for the same thing that most consumers look, which is great products, great performance, and interesting, seductive textures, and creative..

Great. Thank you..

Our next question is from Jonna Kim with TD Cowen. Please proceed..

Hi. Thank you for taking my question. Just curious if you can dissect a little bit more into the growth drivers behind accelerating trends for the rest of the year versus first quarter? And also, it seems like you're accelerating marketing spend.

Could you talk about where you're allocating your spend and how you're sort of measuring ROI for your spend? Thank you so much..

Hey, Jonna, thank you so much. Yeah, I mean our growth drivers are a little bit different by brand, but they rely kind of on the same fundamentals. In the case of Milk, we are increasing now for -- since we acquired the company quite substantially, the marketing spend with a great ROI in return.

And we would see incremental marketing spend quarter-over-quarter as our business progresses. We hold a very tight measure of ROI behind it, and we're seeing great results from it. The second is innovation. We have a incredible -- we saw Q1 vintage of innovation with three great products.

We have very important products coming up as part of the launches. And number three is the strong growth we're seeing internationally. I think what is important to note on Milk is at the end of the day, a lot of this growth is really built on productivity.

We have not expanded substantially distribution other than on those places we highlighted, the U.K. where we expanded into -- well, first with Sephora and then Space NK and Boots and I guess Lyko in Scandinavia.

The majority of the growth -- the vast majority of the growth is coming from increases in the productivity of the consumers, become more aware of a brand or innovation performs strongly. In the case of Obagi, our U.S. physician dispense channel continues to be the bedrock of our brand. It's growing strongly.

We're building from strength to strength, recommitting to the brand DNA and recommitting to the core, but also omnichannel performance has been an important part of the growth, both obagi.com as well as other online retailers. International is starting to add to our growth quite substantially outside of Southeast Asia.

It's important to note that, as we mentioned in the presentation, for Southeast Asia, we are still below the level of sales that we had under the previous distributor model, but we're building a strong into what I think is going to be, where we are convinced it's going to be a much more robust larger and more profitable business in the region.

So, a little bit different by brand, as you can see. In terms of measuring ROI, that's a very core part of what we do. Allocation is different by brand. We have in Milk, quite a strong allocation against in-store support as well as social and influencer.

In the case of Obagi, a very single-mindedly focused against our physicians, physicians dispense and getting consumers to recognize Obagi and go to their doctors or dermatologists or physicians to ask for the brand..

Got it. Thank you so much..

Our next question is from Dana Telsey with Telsey Advisory Group. Please proceed..

Hi. Good morning. Can you talk a little bit about the gross margin side, distribution channels, what you're seeing in terms of product margin by distribution channel and brand, and the outlook going forward? Thank you..

Hi, Dana. Yes, of course. Again, a little bit different, by brand. Obagi, -- a lot of the strong progression that you see on Obagi is a combination of channel mix as our omnichannel e-com business grows strongly with -- but at the same time, also a [indiscernible] innovation. All of our new innovation comes [indiscernible] gross margin.

It's not only very compelling and very effective, but also you have a strong accretion in terms of gross margin.

In the case of Milk, the gross margin expansion has been very much driven by operational improvements as we scale, with improved forecasting, inventory management, more efficiently sourced products as we developed scale, it also allows us to get a little bit of benefit of that scale when it comes to the cost of goods.

So, we're seeing very strong positive contribution in our efforts. Now we expect a strong gross margin progression year-over-year. I think in the case of Obagi, Q1 gross margin is particularly strong. We think that it's still going to be ahead what Q1 gross margin value was, particularly strong.

So, net is, Obagi, we are benefiting from a bit of the channel growth of e-com. Milk is really a strong operational progression with not a lot of impact by channel into that mix..

Thank you..

[Operator Instructions] Our next question is from Linda Bolton Weiser with D.A. Davidson. Please proceed..

Yes, hi. I was wondering if -- on the Obagi side in terms of the Southeast Asian distributor in terms of getting that back to the size it was before, is that a one to two-year endeavor or a multi-year? Or what do you think the time frame will be to get that back to a bigger size? And do you think it can get to be as big as it was before? Thanks..

Thanks, Linda. Yeah, I think we believe that our Southeast Asia business over time is going to be substantially bigger than what it was under the prior distribution agreement, not only bigger but more profitable as we internalize a lot of that margin. It is going to be a journey. We relaunched the brand in Vietnam initially in November.

So, we are still in the very early stages of that process. We are launching into other countries, mainly Thailand, Singapore, India, and Malaysia in the coming -- in the near future. So, it is building rapidly and it's building rapidly at a profitable rate.

That said, I think it's going to be, in the case -- specifically in the case of Vietnam, where the prior distributor had a particular strength is going to take us I would say, another 18 months to 24 months to get back to the level of where we were before. But again, in a way that it's much more profitable earlier on and much more robust..

Okay. Thank you..

Thank you..

We have reached the end of our question-and-answer session. I would like to turn the conference back over to management for closing remarks..

Well, thank you, everyone, for joining us in what it is, again, a coming back to normality, I would say, quarterly filing in our business. We're very excited about this quarter and our prospects, and look forward to continue to sharing with you the progress we made as we build the next global best-in-class beauty and wellness company. Thank you..

Thank you. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation..