All right, we're going to get started. My name is Jonna Kim, and I cover beauty and specialty retail at TD Cowen. I had the pleasure of moderating a fireside chat with Waldencast CEO, Michel Brousset, and Waldencast is a beauty company with the vision to build a global best-in-class beauty and wellness operating platform by developing, acquiring, accelerating, and scaling the next generation of conscious and purpose-driven brands. With that, I'll jump into Q&A. Thank you, Michel.
Thank you.
To start, for those who are less familiar with Waldencast, obviously you can talk about Milk Makeup, but could you briefly talk about what the company is and what makes your brands unique in the very competitive market today?
Yeah, of course. First, thank you for being here. It's great. We're a relatively new platform, I guess, or future consolidator, as we were talking a bit earlier. We went public July of 2022 of last year. Our vision is to be the next generation, be a next-generation global best-in-class beauty and wellness company. We have two brands today that are, I would say, archetypical of how we intend to build the company. One is Milk Makeup. I would argue one of the hottest brands in makeup today, if not the hottest brand in makeup today. By the way, if you have not checked our launch, it's called a Skin Tint this week. Do yourself a favor, do your friends a favor, buy it. It will change your life, or at least it'll change your complexion. It's an amazing, amazing launch.
Milk Makeup is this kind of cult following, really with a bull's eye on Gen Z, which overspills into millennial and Gen Alpha makeup brands with a really amazing organic following. Leader in its field, one of the largest clean makeup brands with really high performance, really charismatic products that are interesting, a number of leadership positions in the market on different of the subcategories of makeup. Obagi, which is a much older brand, both in its consumers as well as its existence, which is one of the leading physician dispensed. According to Kline, the third official kind of study of the front, the fastest growing skincare brand in the physician dispensed space of the top 10 of brands in that space. It is a brand that is differentiated on a superior formulation and products that dermatologists recommend.
It's the number one well-known recommended brand by dermatologists. They are done, as we've seen in other panels, on the basis of its science and its performance, not on what TikTokers say, but what in reality the brand performs. Two brands in the portfolio. The intent is that we intend to build a company by both brand creation as well as brand acquisition. We're always actively looking at those two venues for brand creation. What we've been able to do as part of Waldencast since we started two years ago on the numbers for those that are more financial types, what we have today is among the fastest growing, maybe the fastest growing, if I need to check, but among the fastest growing beauty companies in the public markets. A company that has the highest gross margin among public companies in the market.
I cannot put it out in an official presentation, but arguably I would be willing to bet to anybody one of the highest marketing ROIs in the company, in the industry. We have high growth, high gross margin, very high marketing ROI. What we have, though, is we're relatively small size. We're just at the beginning. Our G&A weighs relatively heavily into the P&L. On top of that, we're a public company with a fund of being a public company. Despite that, we are today at an operating level already in line with the average profitability of the industry. We're just at the beginning. We have this combination of factors that has super high gross margin, which is the engine of profitability of the business, and very high marketing ROI, high growth.
You can see projecting in the future the super exciting company that we're building. And we're just at the beginning.
Just starting at high level, in terms of just beauty trends that you're seeing, anything notable in the industry today? What is your take on the overall category? As we heard, it's stabilizing last year. What's your take on the overall category?
I mean, beauty is, I say it always, beauty is the most beautiful of businesses. There is no business like beauty. Yes, there is a lot of dramatic and hysterics about the category and so on and so forth. The reality is that it is a normalization of the category. Last year, the category grew 7%, but it is still ahead of historical levels of 4%-6% in the U.S. The consumer and the category is extremely healthy. There are, of course, like there has always been in the category, fluctuations on the individual subcategories, whether fragrances is up like it is today or haircare or skincare or makeup. There are these temporary fluctuations that happen. Fundamentally, the consumer category and beauty is super healthy. It has been for 3,000 years. It is not going to change, right?
I mean, the appetite for beauty is not something that has been invented in the last 20 years. It's something that has existed for a long time. Overall, I mean, the category is quite healthy. If I may, for a company like ours, like Waldencast, which is relatively small, I mean, very, very small in the whole scheme of things, the growth of the category doesn't really matter. Our growth is more driven by our own ability to innovate, create great propositions, execute on our plan, expand distribution, and so on and so forth. That's why our game plan and the growth we had ahead of us is quite robust.
Yeah. Wanting to touch a little bit on the innovation, it's quite important for both brands. Milk, you mentioned, I think Jelly Tint was the second largest launch in Prestige last year. What's sort of in the pipeline across both Milk and Obagi and to the extent that you can share? What is the cadence of launch or mix of newness, would you say, for both brands?
Yeah, I mean, they're very different businesses. Obviously, Milk Makeup is makeup. It's a game of fun and innovation. We had last year, you mentioned our launch of Jellies last year, which was an extraordinary launch. I've been in this industry for over 30 years. Maybe I've seen it four or five times, something like this. Our weight of innovation was particularly high last year. Our typical, we're aiming on Milk on a weight of innovation around 25%-30% of sales. Quite high weight of innovation. Innovations, we launch multiple products and multiple franchises in any given year. Now, Obagi has two dimensions. One is the nature of the category that is, frankly, just less innovation-driven.
A brand that historically, I mean, Obagi is an amazing brand with amazing products, but went through a number of ownerships over time, some more fortunate than others in history. Before we bought it, it had a relatively low level of innovation. Since we bought it, we've accelerated the pace of innovation. My partner and co-founder is right there, sitting there. She's in charge of that, of driving growth for the business. We've increased the weight of innovation to the more or less low teens on that brand. That's where we expect that level of innovation to be over time. The innovation in these two brands is a little bit different. I think Milk today, incredible brand, but it's still relatively small. We have leadership positions in a number of subcategories, like, for example, primers and sticks and things like that.
We do not have really a presence in many categories. We do not have a liquid foundation. We are launching Skin Tint, which technically is a skin tint. If you hear, if you read some of the, or you see some of the reviews by influencers today, they almost call it a foundation because it is kind of a quite blendable build-up texture to it. It is our first entry into kind of liquid foundation, the largest category in makeup, where we do not have that with a product that is just frankly extraordinary. The innovation in Milk is really focusing on adding subcategories where we do not really have a significant presence, while at the same time innovating in those where we have strength like primer. Obagi is different. We continue to drive products that create transformative solutions, transformative outcomes for consumers and patients.
It is really underpinned by molecule and product innovation around technology on face, as well as in more recent times, entering other parts of the body. I mean, we are really on the face, but we have launched things for lashes and brows as well as for chest and other things. You can imagine other places where skin is important, where Obagi can play an important role in the routine of consumers and patients and the recommendation of dermatologists.
Just delving deeper into Obagi, what are the main opportunities that you see for the brand? What's your take on the overall physician-dispensed market? How much room do you have within the space to grow?
Yeah, I mean, the physician dispense market, I mean, we had a panel earlier, is a super interesting space. If you think about skincare, skincare is a big, large category growing. Now we're growing a little bit less, but always growing. Within that premium skincare, growing even faster. Within premium skincare, physician dispense dermo is the fastest growing part of that market. It's not only the fastest growing part of the market, it's the most structurally attractive. It's where you have the highest margins. For perspective, the gross margins of Obagi are 80%-81%. These are software-level gross margins. It's a super, super profitable business at a gross margin level. It's very sticky because you are selling fundamentally transformative solutions.
You are not selling kind of general hydration creams that you may or may not use, that are watermelon or they're this or they're that, where they're nice, but you can shift. You're transforming people's skin. They are, from a consumer standpoint, extremely sticky. From a physician or practitioner standpoint, extremely sticky. Again, all at 81% gross margin. It is a tremendously profitable and interesting business. It is high growth. We are just at the beginning. We are today with Obagi one of the most highly penetrated brands in that segment in the U.S. There is a lot of room to grow. I mean, we are highly penetrated in derms, but we have still opportunity with plastic surgeons, medical spas. There is a whole trend towards that, towards growth. We are only scratching the surface on international.
There are other brands in the space that have kind of seized that opportunity earlier than us and have a very nice presence internationally. We're just at the beginning of that journey. The runway of Obagi, we aim to make Obagi over time the world's largest physician-dispensed dermo-cosmetics brand. We're just at the beginning. That brand belongs to somebody else, but we are with that aim over time.
Yeah. You talked about the customers being very sticky. Maybe just go deeper into your acquisition and retention strategy around your core customers and any characteristics that you can share on sort of every spend or just frequency of engagement would be helpful.
Yeah. I mean, to answer the question, the way I like to think about it or like to illustrate it is think about the consumer. Who's the consumer of Obagi? First, Obagi is typically discovered at a dermatologist. Most people that even work in beauty have never heard of Obagi historically. You're typically discovered at a dermatologist. You are a consumer that is engaged enough, has a problem, half a problem, and you're going to a dermatologist. There's always a number of things and other treatments they're going to recommend Obagi. They don't recommend Obagi because a TikToker said it's good or advertising is nice or whatever. They recommend it because of the clinical studies and the patent that we have that delivers superior results to others and that will have great outcomes for that patient. Now you're a consumer.
Typical profile is 42, relatively wealthy. You're paying for that dermatologist visit. First, you're paying for the dermatologist visit. Second is if you are a typical consumer, let's say, that has hyperpigmentation like I do from growing up in Peru under the sun, you're going to buy a Nu- Derm Kit, which is our flagship kit. That kit is about $525. It is another kind of big piece of commitment. That kit is going to transform your skin. Guaranteed, I bet you, I bet you anything is going to transform your skin and remove hyperpigmentation within eight weeks. Remove it. Now you're hooked. You're hooked at $525 kit, 81% gross margin. The reason why that doctor recommends Obagi one more time is because it works. They're not going to take a risk with a patient, right?
In addition, is that retention, the way to think about it, is not just the consumer. It's why practitioners recommend Obagi. Yes, it's a great product that works. That's a big part of it and the fundamental part of it. It's the clinical testing. It's also the service. It's also the relationship. It's a salesperson that is there in that office sharing and teaching their staff how to sell skincare and so on and so forth. Now, one thing that we've done that accelerates this in the acquisition is that historically, people discovered the brand when they went to a dermatologist. We've changed that. That's what is feeding a lot of our brands. We've taken the brand outside of the dermatologist's office and advertising the brand directly to consumers. Yes, I mean, we're not inventing the wheel.
Just basically say, you have this problem, use Obagi, go to the dermatologist, right? It is a very simple thing. Really driving our retail business, particularly our online business, as a way to reduce friction for repurchase of the brand to consumers. That combination of factors makes Obagi the fastest growing brand in the space. I am on the top 10 brands that are in the space today in the U.S.
Could you just talk about your partnership with, you're on Amazon now. How has it been for the Obagi brand? To your point, you're getting sort of customers outside of the physician's office. Yeah, we'd love your thoughts there.
Yeah. Amazon, I mean, the origins of our Amazon presence were originally simply just price control. I mean, there's always some entrepreneurial esthetician or doctor that would sell things online. Originally, our presence on Amazon is just purely for price control, to control the pricing of the brand and avoid issues. Now, it is a business that is still relatively small, growing, but it's becoming bigger and bigger, not because of us, but just as a consequence of the power of that platform. More and more consumers are buying beauty on that platform. It is undeniable. By the way, the Amazon beauty team is doing an extraordinarily good job at doing that. It is more a price defensive move, but that is feeding the business quite well, just as a consequence of more and more consumers buying on Amazon.
Moving to Milk, which is a totally different type of business.
Totally different.
Yeah. The customer set is.
Yeah, from white coats to blue hair.
Yeah. The customer set is also much younger. Just could you just talk about the core customer base? How do you ensure you retain these customers? It's a lot harder to retain these customers because they shop at so many different brands. I would love your thoughts around how the core customers inform your innovation and also the marketing process.
Yeah. I mean, it's a different business and it's different consumers, makeup. To retain customers, you've got to be exciting. Being a boring brand is death. Being an old brand is death in makeup. You've got to be exciting. What is interesting about Milk Makeup, and we really believe this about makeup, is that Milk Makeup has the bones, the DNA, we think, to be, if not the leading, among the leading makeup brands of the new generation. Because of the performance of this product, because of its value, because of its beauty point of view, meaning what is beauty for this brand is not the traditional view of a highly produced supermodel. It's a brand that is inclusive. It's a brand where these are the tools. This is a brand that its values fundamentally resonate with the audience.
It is an audience that is getting bigger. What is exciting is you want to own that young consumer. We aim to do with Milk Makeup to the makeup business probably what MAC did to beauty in the 1990s, to makeup in the 1990s, and maybe Maybelline did it in the 1980s or before. That is number one, it is exciting. Now we have a combination of products. In order for the brand to be profitable over time, like any makeup brand to be profitable over time, you have to have a combination of that exciting, that core crucial product that people are going to come back over and over and over to. I mean, great brands have things like that, for example. I mean, respect to Estée Lauder or Double Wear, it is still the number one liquid foundation in this country.
It was launched, I don't know, 40 years ago. I don't know how long it's been launched. It's still a great product. For us, that's Hydro Grip, so our primer, which is not just my opinion. I think a lot of people's opinion, the deepest primer in the business. Its market share and its size is reflected by that, in which consumers come back over and over and over and over to that primer. There's a lot of people trying to copy it by painting it the same color and trying to be, but fundamentally, Hydro Grip is Hydro Grip. We have these very exciting products like Jellies, where just frankly, what is the repeat rate on Jellies? I have no clue. Probably very low. It's a product that is exciting, that is of the moment, that is great, that you have to keep exciting consumers.
Now, Skin Tint, which is what we're launching today, is particularly important for us for the reasons I mentioned. First, it allows us to enter in a big way complexion where we have barely no presence today with a product that is, as I said, not just fantastic, but its characteristics have very strong margin profile. If we are successful at establishing, we'll see. We're one week in working particularly well. If it's successful, it gives us another high repeat pillar into the brand where we don't have to kind of constantly recruit. It's got to be exciting. If you're boring, like anything in life, you're dead.
Yeah. You recently announced your partnership with Ulta on the Milk side.
Yeah, launching tomorrow.
Yeah, launching tomorrow. Could you just talk about the opportunity there? Why did it make sense? You're now, I believe, available over 600 stores first in the spring. What is the timing on the rollout to the entire store footprint?
I don't know if we'll ever roll out to the entire store. That's a different point. I think the death of a makeup brand is when you are overly distributed and you are in places where you don't have enough productivity. We were actually the ones that constrained the numbers to the right store so you have the right productivity. No, it's very exciting. I mean, Milk Makeup was born in partnership with Sephora in 2016. Sephora has been an exclusive partner of Milk in the U.S. and many other countries for many, many, many years. It's great. They've been great partners. They help us build the brand. They continue to be great partners. They continue to help us build the brand. Like everything in life, good things come to an end.
Like everything in life, Milk has become of a size that just can't stay constrained within the four walls of Sephora. We're not the only brand that does this. At the same time, we think that expanding the footprint beyond Sephora into Ulta is important to make the brand available to more and more consumers. It is a very important initiative for us. In other markets, we've done the same thing. For example, in the U.K., we're not exclusive of Sephora. We're in a number of places. In Scandinavia, we've been expanding distribution beyond Sephora into Lyko and others. It is part of a natural evolution of the growth of a brand. So far, very successful for the brand.
As Sephora, how much room is there still with that retailer? Could you just comment on broader distribution strategy for the brand?
There's still a lot of room within Sephora. I mean, Sephora, if you take how many people actually bought Milk in any given year, it's about 3%. So 3% of consumers of Sephora have ever bought Milk. Or sorry, have bought Milk in any given year. A big makeup brand has in the low teens. There's still a lot of room of growth within Sephora, partly because the average Sephora has about 180 SKUs of Milk. It sounds like a lot, but for a makeup brand, it's very small. A makeup specialist brand could have 500-700 SKUs. A lot of innovation that we can bring on top. I mean, Sephora's natural growth is going to be part of that. We still think there's a lot of room to grow in Sephora.
Certainly, our plan for this year is, despite the Ulta expansion, to have a strong growth plan in Sephora.
Just the broader distribution strategy beyond?
I mean, the broader distribution strategy first is guided by our consumer. Second is guided by we never want to be distribution ahead of awareness. We monitor that very closely in terms of when the brand is ready. We've been chased by, we are being chased by Ulta as well as other retailers for a long time to expand. We want to keep a much more disciplined approach. Why? Because of brand equity reasons, but also important profitability reasons. You don't want to have a whole bunch of CapEx and footprint that you have to update all the time where you don't have the right productivity. That's why we built such an exciting business with Milk. Milk was, these are public numbers I can share, Milk was hoping to do $47 million the year we acquired the brand.
It's going to do well over $100 million, well over much more than that. I can't tell the number now. I just cut myself into a pickle. A lot. It was a minus $9 million of profitability when we bought the brand. Year to date, it's in the high 20s. We built this super high growth, super profitable business that is very responsive to activity. We have done that by tripling the marketing spending in the brand. We have a very high marketing ROI on that brand. We are very, very disciplined. That's part of what we approach as operators of the business with high, high level of discipline on expansion and investment.
I mean, you mentioned marketing ROI being really high. What is the right level of spend for each brand in terms of percentage of sales? What are some, I guess, areas that you can still make improvements across both brands?
Yeah. I mean, we're just at the beginning. I mean, our long-term aim for Milk is to have marketing as a percent of sales in the mid to high 20s. You'd compare, for example, my former employer, L'Oréal, is about 30%. For a makeup brand higher than that. We think that that is probably the right level. We're far away from that still. Obagi is obviously a different model, even though we are spending more and more marketing into it. It's probably in the high teens in that range as a long-term algorithm for the brand.
Just in terms of overall margins, I mean, very strong gross margins across. What are some levers that you can pull to improve your profitability across both brands? What are some key priorities?
Yeah. I mean, that's kind of the fundamental kind of repeatable virtuous circle that we built. What we do is, as a fundamental approach, is, first is we buy brands, real brands, not performance marketing engines masquerading as brands or weird algorithms masquerading as brands and things like that. Real brands where consumers have an organic following. They are a values-based affinity, in the case of Milk or in the case of the dermatological community, an affinity and a history with a brand. We on purpose find places where, I mean, we want brands that are "undermanaged" somewhere. In the case of Milk, for example, when we bought the business, had two opportunities. One, operationally, had a big gross margin opportunity. When we bought the business, there's something that most investors were not touched, had a 42% gross margin. Today, it has a 71% gross margin.
We're comfortable with that because we're operators. We're not private equity or venture capital or finance guys who bring other good things to the business. We're operators. We moved the business from 42% to 71%, as an example, in the case of Obagi, from 62% to 81% in terms of gross margin. When we take that gross margin improvement, and we invest it into business drivers, marketing and sales, business drivers that drive the top line, that further drive gross margin, and then dilute DNA. As I said, today, that mix has already we have already the highest gross margin among beauty public companies. Obagi is probably at its destination when it comes to gross margin. We still have efficiency to get out of that, but we're going to reinvest it into product, and we're going to reinvest it into quality.
Milk is in the 70%-71% range. We're aiming kind of in the mid to somewhere around 73% or so in gross margin, so a bit of gross margin to eke out from. Continue to increase marketing as a percent of sales and dilute DNA. This combination today, as I said, puts us today very small at the average profitability in terms of mid teens EBITDA. Again, we're just beginning. We think that combination allows us to have, over time, a superior P&L on the business without adding acquisitions and brand creation.
Both brands have international presence. Any notable trends that you're seeing by different geographies at this point? How would you rate the health of the consumer? Beauty consumer.
Generally speaking, the health of the consumer, as I said, is very strong. I think internationally, different trends. For example, we do not have, other than in Obagi through a distribution deal, we do not have a presence in China. I do not want to have a presence in China at least for the moment. I think it is too competitive, too expensive, too complex. We see how it is complicated for other players. I mean, our focus, I mean, the majority of our business today is the U.S. We are kind of cracking Europe and growing in Europe quite substantially. There are still places where we have a presence that we barely are at the beginning. We have a presence in the Middle East, for example. There is a very interesting developing market that is super exciting. Southeast Asia, super exciting market, lots of people, developing middle classes.
Doesn't have the problems of China. It's a bit more complex because of languages and barriers, but ultimately, very, very exciting market. Latin America, for instance, we launched Milk in Blush Bar, a great partner of ours. We're the number one brand at Blush Bar in Mexico, Chile, and in Colombia, which tells you kind of that universal appeal of Milk Makeup values and the values of New York and the values that we can take a lot of places. We're not in Brazil, one of the biggest markets in the world, despite a lot of Brazilian investors that complain that they cannot buy Obagi and Milk in Brazil. We haven't touched that market because of its own Brazilian complexities. Our runway is huge. A big part of the growth of these, the organic growth that is going to come from these brands, is international.
In terms of future acquisitions, as you think about them, what are key criteria that you evaluate brands with? Has your strategy changed at all, just given the recent dynamics in the market?
It hasn't changed, but it has raised a light bulb, really, the recent dynamics in that. We have two types of external business development, three types of external business development. One is create brands. We have, outside of Waldencast, a public company. We have a private company that does that. Our acquisition is beauty in general. We're quite category agnostic. We want real brands, as I said, probably somewhere between $20 million and $150 million in sales as a typical target. There is an opportunity for growth somewhere. That's my standard kind of answer. In addition, we're looking through other ways of business development at bringing other verticals within the existing brands that are external business development and not necessarily acquisitions that we could bring. I think the market characteristics are interesting. You've been asking panelists, what is a controversial thing?
That people say, I'm going to say something that perhaps is evident to many, but perhaps controversial is the majority of sponsors and brands today don't have an exit. Don't have an exit in cash, as it used to be, this idea of there's a pot of gold at the end of the rainbow because I sell to L'Oréal or Lauder, et cetera. I think the vast majority of brands today don't have an exit. As a consequence, that has created an opportunity for us, which is, other than a big pile of cash coming from the deep pockets of the L'Oréals, of the Lauders of the world, we have the second best thing, which is public security. That is the opportunity.
I think that has opened up a universe of brands that are much larger than we would have thought before or targeted before because of this opportunity. We are just at the beginning. We have an incredible engine as a company in terms of what the business performance is, two great brands, and a massive amount of external business development opportunities ahead of us.
I mean, similar vein, but as we close out, what are you most excited about Waldencast over the next three to five years and your favorite brand outside of your Waldencast platform?
What I'm excited, I mean, I'm excited about so many things. As I said, the issue I have, my biggest weakness is to control my excitement, which is I pursue too many ideas and too many things. As a consequence, I don't sleep enough. I work too much and travel too much. A lot of great opportunities ahead of us that are exciting. It's hard to pick one. Normally, I don't like to answer the question of what's my favorite brand outside Waldencast. There are so many. There are so many brands that are interesting that could be, that for me, are personally interesting, but as well as interesting from a business standpoint.
Yeah.
I'm going to dodge that one.
Yeah. OK. Thank you for your time today.
Thank you, Jonna. Thank you so much.