Good morning, everyone, and thank you for joining Oppenheimer's 24th Annual Consumer Growth and E-Commerce Conference. My name is Rupesh Parikh. I'm Senior Food, Grocery and Consumer Products Analyst here at Oppenheimer. I'm pleased to introduce our next presenting company, Waldencast. Joining us today are Michel Brousset and Manuel Manfredi, CFO. The format of today's session will be a fireside chat, and then we'll move to audience Q&A. So if you have questions, please enter them in the question panel below the video. Let's get started. First, I'd love to get your overall view of your consumer in the U.S. and your other key markets, and then is your team seeing any changes in consumer behavior lately?
Hi, Rupesh. How are you? First, thank you for having us. No, the health of our consumers, especially in beauty, is particularly strong. The beauty market, as you know, is a very resilient market, still growing. If you look at Circana, which is the data that covers the selective part of the business in the U.S., on top of a +14% growth for the category, year to date, the growth is +9%. This is, of course, across the category. We are, in fact, playing in the more privileged areas of the category, in the case of Milk, clean, premium makeup that is very dynamic, as well as for Obagi, the Physician Dispense dermatological space, which is a very dynamic, resilient business. So overall, the business continues to be strong, that is...
That dynamic in the U.S., we're seeing it across markets, with particular growth in developing countries, where as more middle-class consumers enter the market or desire greater levels of performance and premiumization. So in overall, the market and the consumer is very, very healthy.
Great. As you look at the beauty category for the year, what type of growth rates are you expecting for the category? If there's a way to further dissect that between skincare and makeup.
Yeah, it's a bit hard. I mean, it's a bit hard to predict exactly what, what the numbers is. As I said, Q1 was +9% on selective, and this is a split with skincare around about +10%, and makeup, which are the two categories in which we play, around +5%. We if you see, take a more historical view of the premium beauty category in the U.S., the category has typically grown somewhere around 4%-6% per year. We had +14% last year. We're +9% year to date. We should expect some level of normalization over time, but it is still a very, very healthy category. Now, what one has to understand is that overall beauty is very resilient growth overall. Of course, there's variation between categories, between skincare, makeup, haircare, et cetera.
Then as you look at the category, like, what are some of the bigger consumer trends you're seeing out there right now in beauty?
Yeah, I mean, I think what we see is a continued level of premiumization of the category, continued desire of consumer for higher and higher levels of performance. Within that, specifically in our categories, in the case of skincare, there is a clear trend toward clinical skin, which is where Obagi play. Consumers recognize the need for truth-based, evidence-based science and higher levels of performance. So we see a strong growth in the whole clinical science type of brands in skincare. In the case of makeup, we continue to see consumer engaging with more and more gestures. Also, younger consumers participating in the category as a consequence of what we call a TikTokification of beauty and even Generation Alpha consumers being interested in the category.
More gestures, a lot of engagement in the category, particularly of brands like Milk, who are not only high performance, but also clean, vegan, and cruelty-free brands, aspects that are perfectly aligned to the values of today's consumers.
Great. So now shifting to some company-specific questions, you're expecting accelerating top-line growth this year. What drives the stronger sales growth rates? And then what is your team's level of confidence in driving a, an acceleration?
No, we started the year very strongly, Rupesh. We had a plus 21% growth in Q1. We do expect an acceleration of the headline for a full year number ahead of that. The drivers continue to be what has been the same for the last since we acquired these two brands. The first one is, in the case of Milk, a broader level of awareness. This is a brand that, when we bought it, had a relatively low level of marketing, yet a massive amount of organic following. It's really a cult type of brand among Gen Z and millennial consumers. So we're investing more in awareness and marketing. The second one is our innovation continues to perform very strongly. You may have seen our recent launches, our three recent launches in Q1, which we announced.
The one that was particularly strong was our Jellies launch, and this is one perfect example of how Milk brings high-performance products in a way that is novel and new to the category. Then lastly, we're just at the beginning of the internationalization of the brand and the expansion of the footprint of the brand. The brand historically was essentially a North America Sephora brand. Sephora is our key partner throughout markets. We're expanding with them in other markets, as well as entering other retailers in markets where Sephora is not a dominant force. In the case of Obagi, likewise, we have stronger plans in our core physician dispense channel in the U.S.
We've expanded our penetration as well as the number of product we have per account, so that continues to perform very well. Our innovation as well is something that we've accelerated substantially on the Obagi brand. Our most recent launch, our Hydro Drops Eye Serum, sold out shortly after we launched, proving the strength of that franchise. And again, just like in Milk, is the internationalization of our business. We're just at the beginning of that process. We've integrated our Southeast Asia business, the Southeast Asia that was formerly a distributor business, into an internalized business.
I received this morning, in fact, a note from the team in Thailand celebrating our first order in Thailand, so we're entering new markets in Southeast Asia, and we're very encouraged by that.
Great, and then as you look at, you know, the balance here, what would you say the biggest risks are in driving that sales acceleration as the year progresses?
Yeah, I mean, I think we are, to interpretation, I mean, we are a very small player, and while the market is an important point of consideration, we don't really see the market as a way to set up our objectives. Frankly, our ability to grow is only limited by our ability to create great propositions that we engage with consumers. Propositions that are seductive and interesting. So I would say principally, if anything, would be an execution risk. We are quite confident in the plans, we're quite confident on how we are developing the brands. They're stronger than ever, both of them, and so we're very confident in the upcoming quarters.
I have a few questions just on Obagi. I know, I know we just discussed a little bit earlier. The derma skincare category has been very strong in recent quarters. How is Obagi benefiting from this? And then what do you think is driving the strong momentum behind this subcategory?
Yeah, as I said, maybe answer the question in reverse. I think the momentum of the category is driven by a consumer desire for stronger and stronger levels of performance. I think the important thing to understand in skincare is that this shift towards science-based, evidence-based, high-performance skin is not a trend. It's once a consumer shifts and realizes the impact that great skincare can do for delivering transformative results, it's hard for them to go back, than to work to just kind of mass level of skincare. So there's a fundamental shift in how consumers are doing it. There's more of a development, what we call Skin Intellectuals, consumers that really understand ingredients, consumers that really are engaged in the category, and that is driving the category, and specifically in the case of Obagi.
I mean, Obagi is a brand that when we bought it 2, nearly 2 years ago, it was a great brand with a great heritage, but just frankly, it needed a little bit of modernization and be brought to life with, number one, a higher level of innovation, a modernization of the brand and brand cues, which we have done, and we continue to be in the process to do. As well as building over time our connection with consumers in a more omni-channel way.
So connecting with consumers, not just with physicians, which is the primary form in which the consumers discover the brand today, but also reaching out to them in where they are and bringing them into the Obagi franchise, and ask them to go visit a dermatologist and ask about the great benefits that Obagi can provide.
The skincare, Obagi skincare brand is popular among dermatologists and skincare professionals. Our sense is that that traditional customer for medical-grade skincare products tend to lean a little bit older. So how do you describe your target demographic for Obagi? And then just given the recent uptick in derma skincare usage occasions for Gen Z and Gen Alpha, how do you plan on capitalizing on bringing these younger consumers into the brand, and how are you modernizing the brand?
Yeah, yeah, you got it exactly, exactly right. I mean, I think we are seeing a trend towards younger and younger consumers. I mean, our historical Obagi consumer, the average age was about 42 years old and relatively high income. It continues, and that is the core of what I would call the physician dispense channel. But as you pointed out, the trend was towards consumers being more involved in skincare. There's more procedures, there's more injectable procedures and filler procedures that are adjacent categories in which we don't participate, but that help us with being able to have more traffic into dermatologists and us providing adjacent solutions and for them.
Then in terms of the way we're doing, I think, you may have seen, and we will continue to do, changing a little bit of the tone of voice of Obagi, modernizing the branding of Obagi, bringing innovation, as I mentioned, for example, like Hydro Drops Eye Gel Serum, which is a fantastic product for under-eye treatment. That is kind of a key point of interest for younger consumers. And importantly, what we are seeing is the engagement that we're seeing through our digital channels with the brand; it brings a new, younger consumer to the category. And these consumers, interestingly, are buying products within our portfolio that is slightly different than people that are buying in the office.
So overall, overall, I think we're seeing a trend towards a bit younger consumer and a bit more engaged consumer with products that traditionally would have not been the primary form of engagement historically.
The last area I wanted to cover with Obagi is just your Southeast Asia. Can you remind us of key initiatives here, and then how should we think about the opportunity in Southeast Asia for Obagi?
Yeah, this has been, frankly, it was a bit of a thorn on our side at the beginning. We had a distributor in Southeast Asia that we replaced for various circumstances in which the distributor went out of business, and we internalized that business. So this is a process that is gonna take still a bit of time. We took that business internally. We just launched it in Vietnam at the end of last year. There was a primarily Vietnamese business historically. We relaunched the brand internally in Vietnam, as I mentioned, we're in the middle of launching in other countries. I mentioned Thailand, but also Singapore, India, Malaysia, as countries that are coming shortly. And the importance of the internationalization of the business is twofold.
It's not only a greater control of our distribution, but also the internalization, a lot of margin in that supply chain that was broken and a lot of players. So internalizing all that margin, controlling the brand better and expanding. So we think Southeast Asia is a very, very strong future reservoir of growth for us in a region that is particularly adept and is particularly interested in products like Obagi. So we have a very strong foundation that we'll build upon there to capture a substantial amount of business over time.
Great. So switching gears to Milk , how should we think about the Milk Makeup demographic?
Yeah, the core of the Milk Makeup is where... In reality, I mean, if you look at purely demographic in terms of ages, the core of the demographic is Gen Z and Millennials. And that is the ages. But the reality, if we dig a little bit deeper, is the Milk, the way we think about Milk is not so much an age, but an attitude. It's a consumer that thinks of beauty in certain performance ways, but also through certain values. It's a brand that celebrates self-expression, that celebrates clean, vegan, cruelty-free, has clean, cruelty-free values, but it also expresses the brand in a very specific way.
I would argue that, if you look at our Milk creative and the way we connect with consumers and the way the consumer is on Milk, it looks like nothing else in the market, and consequently has that very strong, dedicated following, that historically has been very, very, organic. So as we develop the brand over time, again, if you look at purely from a demographic standpoint, that demographic footprint is expanding as well.
Great. Just staying on Milk, can you update us on your efforts in leveraging social media, including partnerships with influencers and celebrities to grow awareness for the brand?
Yeah, this has been, I mean, is the key engine of growth behind Milk. Just a few numbers for you to dimensionalize. When we measure earned media value, that is the value of all the interactions that consumers are having through social platforms, in 2022, we were ranked number 22. So of all the makeup brands in the market, we're the number 22 makeup brand in the market, which is already a very strong showing, given the hundreds of brands that compete in makeup. In 2024, in Q1, we're ranked number 9, so it's a substantial amount of progression. In fact, in February, we ranked number 6.
I like to think number 4, because we were within a few thousand dollars with number 4, but officially we're number 6, and overall Q1, we're number 9. So a strong momentum and growth and engagement of these, of the consumer with our brand.
The clean beauty space has become more crowded in recent years. Anything you can share on what you're seeing from a market share perspective for Milk? What are key initiatives in place to differentiate the brand from the competition?
No, of course, I mean, in terms of of market share, it's difficult to measure the overall market, given our position. What I would tell you is in Q1, as an example, as I said, the market grew plus five, Milk grew plus 21, so we were four times the level of the market. So obviously, gaining share from that standpoint. We're still a very small player in the market, with lots and lots of opportunity to grow. We don't like to think as much about market share, because in beauty, the reality is that it's an expandable consumption category. You're only limited by your ability to innovate and connect, and you can always the consumer is always interested in buying an additional product.
We are on a strong path and a strong growth momentum.
Great. And switching gears to innovation, and I know, you know, when we had lunch too, you're very excited about the innovation pipeline for the company.
Yeah.
So if you can just share with us just overall how you're feeling about the innovation pipeline. Are there recent examples of success on the new product side that you can share with us?
Yeah, makeup, the makeup category is an innovation-driven category. I mean, it's important to stay relevant. It's important to stay relevant, I guess, in your core product, but also have a slew of innovation. It's coming in Q1, we had 3 fantastic new launches. Our KUSH Lip Oil, which was very strong, performed very strong. Our Cloud Glow Primer. It was also a very novel Galénic, and a very novel form of delivering a primer. And the Jellies launch, which is, frankly, I've been working in this business for 30 years, and I've probably come across a launch like that 4 or 5 times. Just for perspective, we sold out in 24 hours. We were at a 60,000-person waitlist within 24 hours of the launch.
And we just we bring it back in stock, and we can keep it, keep it in stock. It's absolutely flying. Importantly, now in Q2, we're right now in the middle of the launch of a line extension of our legendary KUSH Mascara, with the first tubing mascara in our range, and a twin brow, which is a new way of applying a product to your brows, in which it tubes and coats every single fiber to really deliver a very striking result. And that is again a new important part of us strengthening our presence in eye. And what I would say, Rupesh, is the way to think about innovation in Milk is-...
On the average Sephora, which is where our primary footprint is, we have about 180 SKUs, which may sound for people that are not in makeup like a lot of SKUs, but the reality, that is a very small number of SKUs. We still have a lot of opportunity of growth in key categories where we are not present. For example, liquid foundation is the largest category in makeup, and we don't have an offering yet, and so lots of places to grow over time through innovation on Milk.
Great. And then switching to Amazon, so we've seen more and more prestige brands begin to sell on Amazon. Both Obagi and Milk Makeup are sold on Amazon as well. So how is this channel performing versus your expectations? And is there any way to size for us how much of your sales come through Amazon, you believe are coming from new customers?
Yeah. I mean, Amazon, Amazon has... It's a, it's a very interesting example of how the consumer is voting with their, with their dollars, right? I think Amazon used to be a quite transactional site where beauty brands, it was just frankly, in the past, a bit difficult to build beauty brands, that it was just, and you were just focused on, on a quite transactional basis. Today, that ecosystem has changed quite substantially, and the Amazon team has done a great job at transforming the beauty experience, within the site. There is a, a massive amount of, of traffic in the site and a massive amount of interest of consumers of buying, products from Amazon.
It is still a relatively small portion of our business, very small portion of our business on both sides, which historically have been on Amazon more for just price integrity in the market, particularly in the case of Obagi and certainly in the case of Milk. It was more of a price integrity issue in the market. But we're seeing just purely organically, with not a lot of effort on our part, a substantial amount of growth in those channels, and it's a clear evidence of consumers voting with their dollars on how they want to engage with brands and where they want to buy brands. Now, that said, I'd say beauty is always an experiential category.
I mean, Obagi is a business that is and will always be a physician dispensed at the core business, where the recommendation comes from the physician. In the case of Milk, is also a sensorial experiential point. It's just to try, chase, and try for Milk, what requires a brick-and-mortar experience. But again, Amazon is important, it complements the distribution, and it's growing quite big, even though elevate from relatively small numbers for us today.
Then, you know, so Sephora has expanded at Kohl's in recent years. Milk is sold at Sephora and Kohl's. How has that channel performed for Milk?
Yeah, I mean, we're very happy with the performance of Sephora. It's our key partner. It's really underpinning, and both Kohl's, as well as the online, Sephora is really underpinning our growth. They're a great partner and is growing quite well.
As we look at white space for your brands, what are some of the bigger white space opportunities that you see from a distribution and geographic perspective going forward?
Oh, they're immense. I mean, we are just at the beginning. As I mentioned today, we are essentially at Sephora in North America. Let's take market by market. Let's say the U.S., where we have an exclusivity with Sephora today. They are a partner. We will continue to be partners with Sephora. We still have a lot of room to grow within that. On... If you take how many, it's only about 3% of Sephora consumers have bought Milk and at even time, so there's a lot of room to grow still with Sephora. There is, of course, given the performance of the brand and the innovation behind the brand, a very strong interest by other retailers to carry the brand, but we are taking things a bit cautiously and with right level of evaluation.
We don't want the brand to grow ahead of its awareness, so we're very disciplined in terms of our distribution expansion, and it's the same in the case of international. We are strengthening our presence within Sephora. We are roughly on about 40% of doors of Sephora internationally. But in markets like, for example, the U.K., where Sephora is just at the beginning, Sephora only have three doors today. We are at Boots, we're at Space NK. So we've expanded with other distributors. In the case of Scandinavia, we had a fantastic launch with Kiko in Norway and Sweden, and you may have seen the results where we are either number one or number two brand in the respective markets. We just expanded in Latin America with Blush-Bar, great partner in Latin America, in Chile, Colombia, and Mexico.
Number 1 brand in the number 1 or number 2 brand in the various markets. So it's a brand that has confirmed its universal appeal. And as I mentioned to you in other times, I think we think Milk has all the brand DNA, all the bones to be, over time, the number 1 beauty brand of the new generation. And we are confirming that and over and over in this growth path. If, of course, there's a lot of execution that needs to happen between now and then, but it does have the DNA to be able to do that, and we're very excited about the brand.
Yeah, I think your team does a great job with the brand. Then, you know, as you look at white space opportunities in other beauty categories, fragrances, et cetera, is that something on the radar in the near term?
Yeah, I mean, why not? I mean, I think we always have requests from consumers in categories like fragrance, body, and other things. In the case of Milk, maybe more to come.
Okay, that sounds great. Looking forward to that. And then just on the marketing front, can you walk us through your approach to marketing at Obagi and Milk, and the opportunities you see for both brands going forward?
Yeah. Well, the approach is a little bit different. If I start with Obagi, as I mentioned, we are a physician dispense brand, always first starting with a physician. It starts with real clinical science. It's a bit of a reverse approach, in which we start with product and clinical testing and demonstrate high levels of performance. As you can imagine, dermatologists don't recommend a brand on the basis of a TikTok or marketing campaign, they recommend a brand on the basis of performance and clinical science, and it is the most powerful form of recommendation. Imagine you're a consumer, you have an issue or a concern, you're coming to us to see a dermatologist, and that dermatologist is recommending Obagi. Again, they're not recommending it because it's this marketing, it's recommended because of its performance.
Because in a sense, it's a reputation of the dermatologist when they recommend something, and then the consumer experiences the results and as a consequence, has a very strong loyalty to the brand. Now, that has been our historical path. We are enhancing that path by connecting with consumers, not just inside the office, but also now outside the office, primarily through digital channels, and presenting them with the transformative results that Obagi can have if worked in combination with their dermatologist or aesthetician. So bringing new people into a category, bringing new people into dermatologist offices, asking for Obagi and asking for those great results. In the case of Milk, our approach remains the same for the last two years.
I mean, as I said, historically, the brand was not really marketed, there was not a lot of marketing spending behind the brand. Today, we are amplifying our social marketing in both ways that are organic as well as inorganic, with partnership with creators, as well as our partnership with our key retailer partners to enhance the brand. We are spending today about 2.5 times the level of marketing that we were spending prior to acquisition, which subsequent grows the top line, which now today, at a much, much enhanced gross margin, drives operational leverage on our G&A, and hence, the profitability performance that you're seeing on Milk.
Great. Now I'd like to wrap up with a few financial questions.
Yeah, of course.
So, first, how should we think about the growth rates for the Obagi and Milk brands longer term?
Yeah, I mean, we don't provide exact guidance longer term for both brands. I say we started Q1 at +21 overall, 21% for both brands. We expect in the overall year acceleration beyond that number. We are in the process of expanding quite a bit internationally, and we would expect over time, I think, I would just say, as I mentioned before, an overall algorithm for the company is on a longer term basis, growth in the high teens, low 20s over the next, call it, 3 years or so. And that's what we expect, this is without acquisitions, and this is what we expect the top line to be over time.
Just on gross margins, obviously, very impressive, your gross margins for both brands.
Yeah.
Can you just share your thoughts on the sustainability of the gross margin levels that we're seeing, and then, you know, how you think about normalized gross margins by brand?
Yeah, I mean, we've done quite a bit of work on improving gross margins on both brands, and the drivers are a little bit different by brand. Starting with Milk, this is a business that had gross margin in the 40s by the time we had acquired the business. We're now approximating our destination, which is, we expect long-term gross margins in Milk to be in the 72%-73% range or so. And they are quite sustainable. What you see in terms of improvement over the last year, what is important to highlight, this is not price-driven. This is fundamentally through better operational efficiency in the way we buy, the way we are forecasting, less obsoletes, and various other things. So we...
It is, we believe, a quite sustainable rate of growth of gross margin. In the case of Obagi, obviously, there's a massive increase of gross margin between 2022 and 2023 in our financials. That, in a sense, is a little bit artificial because of the restatement of the financials relative to Obagi Southeast Asia distributor. But some of it is actually operational, and when you see between the growth of 2023 and 2024, is purely operational through a combination of channel mix, our Omni-channel business as a more favorable gross margin mix, and as well as operational work. Now, I would say the gross margin in Q1 of Obagi is particularly strong.
I wouldn't expect the Obagi business to run at those levels of gross margin on a going basis, but we certainly expect overall gross margin of Obagi in 2024 to be, you know, quite a bit ahead of 2023. So I would expect Obagi in a longer term range with gross margin in the high 70s-low 80s. Yeah, that much.
Okay, and then just on EBITDA margins, so your team expects EBITDA margins to expand to the mid-teens. Can you walk us through some of the key puts and takes here?
Yeah. It's pretty simple because in a sense, it's more of the same as we grow the top line. So it's algorithm and operating model or recipe, if you want, is quite simple. It's a strong work on gross margin or operational efficiency at the gross margin level. Reinvest those savings or substantial parts of those savings into demand generation drivers, selling and marketing expenses that subsequently feed the top line and dilute G&A. And if you play that algorithm over time, you can see the strong acceleration of bottom line that you're seeing today and that we expect for the year, which we expect the year to finish EBITDA in the mid-teens.
Great. Then, you know, one final question to wrap up the discussion, if you can just remind us how you feel about your current liquidity position today?
Yeah, from a liquidity standpoint, we are comfortable with the liquidity of the company. This is a business today that operationally generates quite a bit of cash. It is true that because of the restatement, we had just a quite a bit of money, quite a bit of cash consumed into non-recurring items related to that restatement, and, like, a lot of cash consumption has gone into that. But the fundamental operational engine of the company and those... You know, those non-recurring will obviously, are non-recurring, so by definition, they will, they will, diminish over time. But the fundamental operational engine of cash of the company is super healthy. We generate cash at a very, very high rate from the businesses.
So once those are behind us, it'll be fine, and I'm sure the current liquidity is in a good place. We have a revolver that is, well, only partially used, so we don't have a liquidity concern in the short term.
Great. Well, thank you, Michel and Manuel, for joining us today.
Thank you, Rupesh.
Thank you.