Okay, thank you everyone for attending our conference today. I'm Susan Anderson, one of Canaccord's consumer analysts, and we're very excited to have Waldencast here with us today, and in particular, to host Michel Brousset, the founder and CEO of the company. Michel, perhaps you can start us off with a quick overview of what Waldencast does different versus its large beauty conglomerate peers, and how they can really differentiate themselves from their competitors and take share.
Yeah, of course, Susan. Thank you. Thank you for having me-
- here today. But Waldencast is a multi-brand platform. You should think about it as a house of brands that both creates and acquires-
... and scales high growth, purpose-driven brands, like brands of today.
I think the first differentiation versus other companies, it starts there, which is our portfolio of brands.
We have brands that respond perfectly to the needs of consumers today, and the
... most attractive parts of the market. So on one hand, we have Obagi-
... which is, I would argue, the crown jewel of the physician-dispense
... medical skincare market, positioned in the most interesting part of skincare, in a way that it's, in a way that is quite unique, both in terms of its equity and its performance.
And then we have Milk, which is, again, perfectly positioned in the clean makeup part of the categories.
Yeah
... high growth, younger brand that has an incredible cult following. So first thing is our brands themselves. But also importantly, beyond the brands, is our go-to-market way of going about the business. We are a company built for both scale and speed.
When we founded Waldencast, what we tried to do is take all the strong elements of the traditional strategic incumbents-
... the operational discipline, the scale, the ability to buy media in certain ways, a way to have supply chains that are quite robust, but at the same time maintaining the speed and the entrepreneurial spirit o
... independent brands. The way we do it is through our structure, the way we do it is the way every single element of how we are, our organization is built.
... is built for that. We are an asset-light structure. We don't own factories, we don't own laboratories, we don't own anything that is asset-heavy, precisely to give us the flexibility and speed to compete. Second, our teams are a structure only dedicated to individual brands, not some common structure, common denominator of how to manage a business, so they are single-mindedly rewarded and measured on the performance of the brands. And that combination results in a faster speed to market-
... a fast conversion into moving from trends and ideas into reality with the discipline and the operational scale-
... that comes with brands that is a multi-brand platform, that is only going to get better as we acquire more-
Yeah
... more brands.
Great.
What attracted you to acquire Milk and Obagi? I guess, what are those attributes?
Yeah.
You know, they're two different kinds of brands, but what are the attributes that attracted you to them?
Yeah. Well, first and foremost, they're brands. Sounds a little bit silly.
And, when I say they are brands, meaning they are not performance marketing engines masquerading as brands-
... they're not collections of product marketing as brands. They're brands with an authentic, robust consumer following.
But also importantly, they are leading players in the most attractive areas of the respective categories.
Let's take Obagi, as I said, as an example, you know, skincare is a big market, it's a growing market. Within skincare, premium is faster growing.
Within premium, the physician dispensed medical space-
... is even faster growing and is more structurally attractive.
Obagi is that crown jewel within that market.
Okay.
It's similar to Milk, they're positioned in that-
Yeah
... aspect of the market of, of prestige, makeup-
Okay
... that makes it so, so compelling.
Okay, great. And then I guess as you look to maybe acquire some more brands, there's a lot of beauty brands out there, right?
Yep.
So what are you looking for in attributes, or what categories maybe are you looking to fill in?
Yeah. Yeah, so I think one of the great things, or one of the characteristics of beauty, it's always been an acquisitive business. I mean, the business of the big groups of beauty have all been-
... like, you know, a company like L'Oréal, for example, there's only two brands that have been created by L'Oréal, the rest have been acquired.
Something similar in Estée Lauder. It's always been an acquisitive business. The reality is that today there is more, more beauty brands than there are acquirers-
... more beauty brands that they could be interested to acquire. So there's a plethora of brands that could be fit very well within our platform.
As I said, first and foremost, they're brands.
Yeah.
Second, they are complementary to what we're trying to build, which is, on one hand, a, if you want a professional division-
... so double down that professional, part of the business. On the other side, on the consumer side, we're quite flexible in terms of the type of categories that we would do.
It could be other makeup brands, it could be hair, we don't have a hair brand in the portfolio yet.
Skincare, fragrances, et cetera. But always within those areas of the business where the structural economics are interesting-
... where the structural economics are fundamentally sound.
Okay.
Got it. And then I guess, focusing on Milk for a minute, maybe if you could talk about where you see the opportunity within that brand to innovate, and what categories do you think, you can build upon within that brand?
Yeah. Oh, the opportunity is huge. We're just at the beginning with Milk. In the whole scheme of things, Milk is a very small brand, if you look at the gl
... kind of beauty and makeup market. Just if you look at different areas of or axes of growth, if we start with products, I mean, we only have about 100 and... The average Sephora has about 150-170 SKUs of Milk.
Which sound like a lot, but the reality is that in a beauty, in a makeup specialty brand-
It's a very small number of SKUs.
Yeah.
We are not in some key sub-categories within makeup. For example, let's say one like, liquid foundation-
... as an example, a big part of the category, 14%-15% of the category, we don't have an offering in that-
In that yet.
Okay.
Right, obviously, we're building to complement kind of the full range of the products. Then in other dimensions, in the U.S., we are exclusive at Sephora.
They are great partners, and we will continue to be exclusive at Sephora for the foreseeable future. But obviously from a distribution standpoint and footprint standpoint at a global level, there's a-
Yeah
... massive way of expanding.
Yeah.
There's lots of avenues within Milk to continue to expand the business.
Okay, great. And then I guess for Obagi, maybe if you could touch on the brand performance outside of Southeast Asia?
And then, when do you expect the brand in-?
Yeah
... Southeast Asia to kind of get back on track?
Yeah. No, the performance overall of Obagi has been very strong. So our business in the US and internationally, outside of Southeast Asia, is exceeding our business plan-
... which is both in sales and profitability, so it's a very robust performance. Southeast Asia, even though it was a discrete issue, for those in the audience that are not aware, we had an issue with our Southeast Asia distributor, which essentially disappeared, went bankrupt, so we had to acquire that business and rebuild that business in Southeast Asia, and internalize that business. Which allows us to have, one, number one, much more control of the brand-
... number two, internalize all that sales and profitability.
We launched into Vietnam in November of last year. Now we've expanded into Thailand, Singapore, and India.
Okay.
So we are building a much more robust business, but it's going to take a bit of time, I would say a couple of years, to clean up some of that distribution-
... that was left from the prior distributor.
Yeah. Okay, great. Then, you talked about, you know, kind of the supply chain and the speed to market being much, I guess, quicker than your competitors.
Can you talk about kind of where you're at in terms of, you know, from innovation to, you know, the shelf?
How long does it take you versus-
Yeah
... your competitors?
Well, it depends, it depends on the product, and it depends on the category. In the case of Obagi, where we are building a very science-driven, clinical testing type of business-
... it takes longer than makeup, which is a much more fun, reactive category. We can, I mean, from concept or idea to market, we can be in market in as fast as nine months, so-
Okay
... quite, quite fast relative to-
Yeah
... 2, 2.5 years from-
Yeah
... compared to other companies.
Mm-hmm. Okay, great. And how do you think about marketing, I guess, as a percent of sales? Like, what level do you think is appropriate, and then, you know, how do you market your brands? And it's probably different between maybe Obagi and Milk-
Okay
... or, you know, what forms of marketing do you like?
Yeah. Well, we are—they're very different in terms of dynamics. Of course, Milk today, we are in the low 20s% in marketing. We expect to—and we've been building that over time, and we invest in the brand and increasing the level of marketing and spend in absolute dollars as well as a % of sales. I think if we were to project, the going level of marketing support on Milk would probably be in the mid- to high 20s%.
Okay.
In the case of Obagi, we are in the teens.
In the teens today, and I think we expect that to build also over time into the high teens.
Okay.
The reason why Obagi, we're building into the high teens is because historically, Obagi was a brand that you discovered when you visited a dermatologist
There was very little out of the office awareness-
Yeah
... other than kind of that word of mouth or dermatologist awareness. And what is feeding a lot of our success is we started to increase the level of marketing outside of the office-
Okay
... with consumers, so they come to the office already, primed and already asking for Obagi-
... as a way to solve some of their skin concerns.
Okay, great. And then maybe just looking at the financials, if you could talk about the margins and the profitability of both brands, so Milk and Obagi. And is there opportunity also to increase the profitability as you scale those brands?
No, certainly. We're just at the beginning of the journey. I mean, just let's take Milk as an example. Milk was a business when we bought it two years ago, that in 2022, it's $47 million in sales and lost quite a bit of EBITDA. Last year, 2023, the sales were $100 million and was quite profitable-
... and continued to build that profitability. We have a 29% EBITDA margin in Q1.
Wow!
So a very strong build in what we call our virtuous circle, which is we take a brand, we focus on the operational effectiveness, particularly on gross margin initially.
Again, Milk was a business that had gross margin in the 40s, today it has gross margin in the 70s-
... after two years. Then reinvest that money into business drivers, so selling and marketing, that drives top line-
... that further drive gross margin, reduce G&A and drive profitability. So we create this kind of virtual circle on-
Yeah
... on the brands. So, Obagi is similar. It was a business that had gross margins in the 70s, were already good-
... gross margins. Our Q1 gross margins were 81%.
Okay.
An 81% gross margin on Obagi, that is a combination of operational efficiency as well as mix.
That allows us to deliver that level of profitability and bottom line profitability. So we're just at the beginning of the journey. We have today, already today on a kind of margin structure to EBITDA. We have margins in line with best-in-class, gross margins that are in line with best-in-class beauty peers
... if not better.
Okay.
And with that level of gross margin, and our growth is just going to continue to fuel our bottom line. So we expect this business to be this year for the overall group, growth acceleration from our Q1. Q1, we were plus 21%. On Q1, we expect to accelerate that on a full year basis, and we expect to deliver EBITDA in the mid-teens for this year.
Okay.
Building quite substantially over the EBITDA we had last year, and that will just continue to build as we build these brands.
Okay, great. And is that for the 21%, for the whole company, the-
For the whole company.
... acceleration?
Yeah.
Okay. Maybe if you could talk about then just, I guess, the drivers between the two-
Yeah
... two brands of the growth and-
Yeah, it's a little bit different between the two. I think Milk is being driven by essentially three things. First is, as I said, by the increase in marketing and marketing support and media behind the brand-
Mm
... that is driving the overall awareness of the brand. Milk was a business when we bought it that had an incredible cult following, but that was quite organic.
Mm.
There was not a lot of marketing and spending on it. So what we're doing here, opening the lens, if you want-
Mm
... more consumers looking at the brand. So number one is awareness. Number two is a makeup brand, and makeup lives and die by innovation.
Mm.
You may have seen some of our innovation on Milk that has just been absolute blockbusters in the...
Mm
... in the industry.
Yeah.
Q1, for example, the launch of Cooling Water Jellies.
Mm-hmm.
In 30 years in this business, I may have seen 4 or 5 like that in my-
Yeah
... in my entire career. It has propelled our business, not just our sales, but also the awareness and the following of, of-
Mm-hmm
...the brand. Milk is a brand that had earned media value ranking of about 20 or 22 when we bought it.
Okay.
We were number nine in Q1, number six in February at the peak of Jellies.
Wow!
Almost tied to number four, so I think of myself as number four, but we really were number six.
Yeah.
So kind of awareness, innovation, and then lastly, our continued expansion of our footprint internationally.
Mm-hmm.
We are in Sephora in the U.S., but we're expanding our footprint in other markets, where Sephora is not very strong. For example, we launched in the U.K.-
Mm-hmm
... with great results outside of Sephora, not just with Sephora, but also with Boots and Space NK. We launched in Scandinavia.
Okay
... with Lyko. We just expanded into Latin America, in Chile, Colombia, and Mexico, with Blush-Bar.
Mm.
What is interesting, the results across these markets, is that we tend to be either the number one or number two brand in those retailers.
Mm-hmm.
It shows the incredible, appeal, global appeal of a brand like Milk that is rooted in the heritage of New York City.
Mm-hmm
... a city of universal values and diversity and inclusion, but also self-expression that is so important-
Mm
... in makeup, with products that are high performance, vegan, clean, cruelty-free, that are completely relevant across, across the world.
Mm-hmm.
That's Milk. In the case of Obagi, what we are doing is a very strong expansion into our digital channels.
Mm.
Our digital channels is, has been a source of not just growth, but also favorable mix.
Okay
... and profitability into the business. It's recognized, just a recognition that for many of our consumers, we want to be able to lower the friction in terms of acquiring our products.
Mm-hmm.
Not just buy them at a dermatologist, but also give credit to a dermatologist for buying them.
Yeah
... in our digital, digital channels. And that has been a big, big part of that growth, beyond the fact that also we've increased substantially the level of marketing spending on the brand and broadening the awareness of the brand.
Mm.
And then lastly, as I said before, our international business continued to perform very strongly. Southeast Asia, we're from quite a bit of a business to nothing-
Mm
... and now we're rebuilding it, and it's growing at a very nice clip in a very profitable way.
Okay. Okay, great.
Mm-hmm.
And then, I guess maybe going back to Milk really quick-
Mm-hmm
... how do you see kind of like the growth between DTC and wholesale distribution expansion?
Yeah.
I guess in the U.S., is there opportunity as well for more wholesale distribution beyond Sephora?
Yeah. I mean, the realities of our direct-to-consumer business in Milk is relatively small.
Mm-hmm.
It's quite small. As I said, historically, it was a Sephora-exclusive brand-
Mm-hmm
... in the U.S.
Yeah.
We are one of the top brands in Sephora. There is, of course, the big opportunity ahead of us of potential expansion of distribution, but at the moment, we don't want to have the brand expand distribution ahead of its awareness.
Mm-hmm.
It's the fastest way to make a makeup brand non-profitable and not-
Yeah
... very well built. So we're very careful. Sephora is a great partner of ours. We continue to have lots of growth opportunities within Sephora, so at the moment-
Mm-hmm
... Sephora is our partner in the US.
Okay, great. And then maybe if you could just talk about the industry for a little bit, you know, the beauty industry itself in the-
Mm
... U.S. and globally. I guess, how do you see the health of it? You know, we saw a pretty big boom after COVID, and-
Mm-hmm
... things have slowed a little bit, but it's still very strong out there.
Yeah. I mean, people talk about a bit like American exceptionalism. There's a beauty exceptionalism in the sense-
Yeah, mm
... that it's quite unique. I mean, last year, the beauty segment where we play, which is premium beauty, grew 14%.
Mm.
Of course, you can't expect a 14% of the entire industry growth-
Mm
... every year. It is slowed down this year to more normal levels-
Yeah
... but it's still ahead of historical averages.
Mm-hmm.
Right? We're still, year to date, the business is about a +7.
Mm-hmm.
It's kind of the 6%-7% range for the, from the front half, so we're still ahead of historical-
Mm-hmm
... historical levels.
Okay.
That's the beauty of the beauty of beauty.
Yeah.
The most beautiful of businesses-
Yeah
... it's that ability to consistently grow and consistently-
Yeah
... deliver results over time.
Okay, great. Do you think that you'll stay within prestige brands, or do you think there's opportunity-
No, we're quite open.
... as well?
We're quite open at the moment.
Okay.
I mean, at the moment, we are in prestige. I mean, a lot of the opportunities today are in prestige, but you know, we're agnostic.
Okay.
What is more important to us is that the sub-segment in which we compete has favorable structural economics.
Mm-hmm.
There are segments within mass and prestige-
Mm
That those structural economics are not that interesting.
Mm-hmm.
So, it's more on a category. More specificity, what's the category price point combination?
Mm-hmm
... that make it interesting?
Yeah. Okay, great. And then maybe if you could just, you know, I don't know, take out your crystal ball, but-
Yeah
... how do you see the company over the next 3-5 years? You know, how many brands do you think you could have?
Yeah.
Or, you know, what will it look like?
Yeah, I mean, we are an acquisition company, of course, with all the issues we had in Southeast Asia, we're a bit distracted for some time-
Mm-hmm
... kind of managing through those issues and fixing those issues. But we're back now into, into the acquisition trail-
Mm-hmm
...looking for potential companies and potential partners in the journey. I think a reasonable pace of acquisition is about once a year, one a year or so-
Okay. Mm
... for the type of brands we acquire. Now, how many could we acquire over time? So what people ask me all the time is-
Hmm
... I don't know. I think L'Oréal has about 36, I think.
Mm.
L'Oréal has 29 or 30, I don't really know.
Mm-hmm.
A lot.
Yeah.
There's plenty of opportunity for us to grow over time.
Okay
... and continue to build value for the-
Yeah
... for our shareholders or for the company.
Are you seeing valuations come down at all for a lot of these beauty brands?
Not that much, to be honest.
Okay.
Some, but not that much.
Mm-hmm.
What it is is less an issue of valuations on... I think what we're seeing is not so much valuations come down. They have come down a bit, but not so much. It's more brands in the market-
Mm-hmm
... looking for
Okay
... looking for a deal.
And so maybe that's-
So-
Yeah
... and I think there is only so much, so many brands that can be absorbed by-
Mm-hmm, yeah
... by buyers.
Yeah.
I think that presents for us a great opportunity.
Would you buy celebrity brands as well?
You ask that question a lot. Generally, we prefer not to have celebrity brands.
Mm-hmm.
And but with a caveat, there are some brands that are celebrity brands that have transcended celebrity.
Mm-hmm.
But there's very few of them.
Yeah
... we prefer not to have brands that are built on the notoriety of an individual-
Mm-hmm
... but more their brands in themselves.
Yeah.
There's, you know, a couple that are like that.
Mm-hmm.
A lot of them are not, so.
Yeah.
Okay.
Okay, great. It looks like we have a few minutes left. So, I have one final question that we're asking all of our consumer companies.
Okay.
So my question is, how healthy do you think the consumer is today versus last year at this time? And you know, if you could forecast out, where do you think that health of the consumer is gonna be-
Mm-hmm
...in the back half of this year with, you know, inflation still pinching their wallets? Beauty still seems to be very strong, but-
Mm-hmm
... you know, just from kind of your lens, how are you viewing it?
Yeah, I think from a, I can only comment for the segments in which we play, which is the health-
Mm-hmm
... of the consumer is very strong.
Yeah.
We're seeing more and more consumers, particularly younger consumers, coming both into makeup as well as to professional skincare.
Yeah
... which bodes very well to the future of those categories. So-
Yeah
... I am not concerned at all with the health of the consumer.
Okay.
Um, yeah.
Are you seeing any promotional pressure at all in your categories that you play in?
Not abnormal or not any different-
Yeah
... than we have seen before.
Anything on go there.
Beauty is also relatively resilient to promotional pressure.
It's not necessary to... What, what drives a beauty purchase, particularly in the categories we have?
Yeah
... is not promotion
It's the quality and the expression of the brand
In the case of Obagi, where, you know, when you have a $500 Nu-Derm kit, whether it's $500 or $4 million
... that-
Yeah
... does not make a difference.
Okay
... it means the qual-