Greetings, and welcome to the Olaplex Holdings Second Quarter 2024 Earnings Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Patrick Flaherty, Vice President, Investor Relations. Thank you, Patrick. You may begin.

Thank you, and good morning. Joining me today are Amanda Baldwin, Chief Executive Officer. Before we start, I would like to remind you that management will make certain statements today, which are forward-looking, including the statements about the outlook of Olaplex'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 statement in the company's release and in the filings the company makes with the Securities and Exchange Commission that are available @www.sec.gov, and on the Investor Relations section of the company's website @ir.olaplex.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 financial measures should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. You will find additional information regarding these non-GAAP financial measures and a reconciliation of these non-GAAP financial measures 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 @ir.olaplex.com. Additionally, during this call, management will refer to certain data points, estimates and forecasts that are based on industry publications or other publicly available information as well as our internal sources. The company has not independently verified the accuracy or completeness of the data contained in the industry publications and other publicly available information. Furthermore, this information involves assumptions and limitations, and you are cautioned not to give undue weight to these estimates. With that, I will now turn the call over to Amanda.

Thank you. Patrick good morning everyone, and thank you for joining us today. We reported second quarter results in line with our expectations and reiterated our full year outlook as we achieved continued progress on our transformation plan as shared on recent earnings calls. We are on a journey to build a world class brand and a business that is well positioned for long term success. We are investing in and prioritizing the brand and product innovation strategies that are designed to deliver sustainable, consistent growth, while also taking actions to align our global distribution and infrastructure with the goals we have for this business. All this work is supported by the strong foundation of Olaplex, truly differentiated science that delivers superior results, a powerful R&D platform that drives impactful innovation, a passionate community of stylists and consumers who love our products, a unique global footprint with proven performance across geographies and channels and a talented team that is eager and prepared to execute on our mission to improve the hair health of millions of consumers around the world. While we know that this journey will take some time and that the path to creating a global and enduring brand is not always linear, we remain on track with the expectations we've set, delivering on our goals for the first half of the year and now shifting our focus in the back half of 2024 to executing on our product launches and key holiday period. Along with continued planning for 2025 and beyond, we recognize that there is more work ahead to bring Olaplex to its true potential, but I am incredibly proud of how our team has come together, confident in the direction we are taking and enthusiastic about what the future can be. Turning to the highlights for…

Thank you Amanda. I will cover our second quarter results and our outlook for the remainder of 2024. Net sales for the second quarter declined 4.8% year over year to $103.9 million, which is in line with our expectations. As a reminder, our Q2 net sales or sell in decline versus last year was better than the Q2 sell through decline versus last year at key accounts as we benefited from weaker prior year net sales comparator due to certain customer inventory rebalancing in Q2 of 2023 which depressed our 2023 net sales base. As we have previously discussed in recent earnings calls, we continue to believe that the months on hand inventory position at our major accounts on our core items remain in a healthy position from a selling perspective. This was partially offset by negative net sales impact in Q2 2024 related to our previously announced decision to rationalize our business with certain distributors that we believe are the source of diverted product in the marketplace or do not build equity in the Olaplex brand. Turning to performance by channel specialty retail net sales were up 22.4% compared to the second quarter of 2023 to $36.4 million due to the weaker prior year net sales comparator related to customer inventory rebalancing our professional channel net sales of $33.4 million declined 18.4% versus a year ago, partly due to the aforementioned distributed rationalization which primarily affects our professional business in Europe. This more than offset a modest increase in our North America professional business which benefited from lapping the impacts from customer inventory rebalancing in Q 220 23 the direct to consumer channel net sales decreased 11.5% to $34.1 million, driven by our focus to prioritize partners that build brand equity. This negatively impacted international e-commerce shipments in the…

Thank you. We'll now be conducting a question-and-answer session. [Operator instructions].Thank you. Our first question is from Dara Mohsenian with Morgan Stanley Investments. Please proceed with your question.

Hey, good morning. So Amanda, maybe just to start with, you mentioned the conclusions from your consumer survey showing the Olaplex brand has extendability. Is that more an innovations you're currently exposed to, expansion to other consumer subcategories you're not exposed to today? Not expecting full details, but conceptually maybe help us understand the opportunities going forward on that front. And then second, just related to that, it sounds like you're comfortable with the payoff from higher investment based on your prepared comments, brand equity scores, et cetera. Maybe can you just flesh out a bit more detail on the payback from higher spend versus what you originally expected when you put your plans into place? And with some of that exciting innovation that you mentioned today, or still to come, as I mentioned earlier and the new management additions, are you leaving this year at the right investment levels in terms of what's implied in your full year guidance, or might you continue to boost investments significantly over time versus this year's base? Thanks.

Morning. Thank you for the questions. Let me take each one in turn. First of all, with respect to the perception study that we did, again, that was really focused on making sure that we had data to back up some things that we were hearing as we're talking a lot to consumers, to our partners, to pros, it was a broader base piece of research and really focused on what is the equity that is in the Olaplex brand and what is the interest level and kind of innovation more broadly from the brand. So I would say it was much more about making sure that we had the ears and eyes open and interest in the brand going forward and that we understood kind of where, where our degrees of freedom were within that. So certainly was about innovation, but also about brand perception more generally and kind of the places that we need to take if we go back to sort of even our own priorities for this year, really thinking about tightening up our marketing messages, tightening up our education so that we had a lot more specificity around some of the things that were, I would say early hunches that we had coming in. So a lot more to come on that as we talk about sort of our longer term roadmap and what we expect that to be with respect to marketing spend both currently as well as the future. I think, look, we are on a journey, right? And I think that it's very important to me to make sure that as we are putting a increased dollar amounts into the market that we're doing it in the right way. To your point that we're measuring the impressions, BMV, the expectations that the consumer has, as well as the pro around what they're hearing from our brand. It's not an overnight switch. So I think we're sort of really thinking about making sure, especially with Katie coming on, that we're taking and learning and iterating on things as we move through the rest of the year. Not making any proclamations about what we'll do going forward yet, but I think we're going to learn a lot that's very important to our business in the next couple of quarters as we continue to improve on our marketing execution.

Thank you. Our next question is from Dana Telsey with the Telsey Advisory Group. Please proceed with your question.

Hi. Good morning, everyone. Can you unpack a little bit about the channels, the changes that you saw in specialty retail and DTC, where I understand the international e commerce shipments on DTC? What did you see as you went through the quarter? How did it differ by region? And then on the gross margin with 190 basis points of favorability with the in store obsolescence reserves, can you unpack the gross margin? What are the puts and takes going forward of what you're expecting it to look like? Thank you.

I'll take the first half of that, and then I'll turn it over to Patrick on the gross margin. I think the important thing for us to really make sure that we're sharing is that we're seeing what I would say, stabilization around consumer demand. So there are certainly things that you see in the sell in versus the sell through, but really from a sell through baseline demand for this business. That's where we're seeing consistency both in terms of volume as well as split within channels. Everything else is really related to inventory rebalancing, as we've been talking about for the last couple of quarters. That's really driving the uptick in retail. And then within professional, there's movements in international, really around again, that distribution cleanup work that we're doing. So I think that really what, I'm pleased to see the consumer demand, the real demand for the brand from both the consumer and the pro in a good place. And then we're moving through some different rebalancing from a sell in point of view.

Adriana, this is Patrick. Yes. So to cover your question on the gross margin. So in Q2, we came a little bit softer than what we expected. We were expecting some nice expansion. In Q2, we contracted about 80 basis points for the quarter, mainly driven by two factors. First, we mentioned that we shipped some samples to certain strategic customers. We know that sampling is a really effective conversion tool. So deployed more of those samples in the second quarter, which had an impact. We also had a little bit more of inventory obsolescence charges that we were originally expecting. Lapping inventory obsolete from a year ago was still a tailwind relative to what we expected that had a negative impact to the quarter. As we think about the back half of the year in Q3, specifically, we'd expect to see adjusted gross margin take a little bit of a dip from the second quarter just because of the sell in of our holiday kits, which are still highly profitable for us, but a little bit lower gross margin relative to the rest of the portfolio. And we expect that to see from into Q4. We'd expect nice gross margin expansion. We see gross margin uptick from Q4, but really for the back half of the year in Q3 and Q4, we're expecting gross margin expansion year over year, primarily from the tailwinds that we've been speaking about for the last couple of quarters, which is continuing to lap over inventory obsolescence from a year ago and benefiting from lower warehouse and distribution costs.

Got it. Thank you. And just overall on the category, Amanda, what are you seeing in the category? How do you see the promotional environment and with your new product introductions that are coming, how are they being launched this year? That would be different and you weren't there at the time. And how new products were launched last year from what you know? Thank you.

So, overall, what we see in the data is the prestige hair care category remains healthy and growing. And I think that's very important to us, obviously. And I think we're also, as category leaders, it's also our responsibility to continue to make sure that that happens. So we have not seen any changes in the data of the overall category throughout the year. As we've been talking about it, I think it remains healthy and it's an overall consumer macro trend that we're certainly well positioned to take advantage of. So no changes there. From what we've been talking about for the last couple of quarters with respect to marketing and how we're approaching launches, I think this really goes back again to some of the things that we've talked about with respect to our sales and marketing education, investments, to really make sure that for something like bond shaping technology, that we're being very clear about how the technology works, what separates it. The thing that I'm very excited about is that it is an insulin treatment. And so we're spending a lot of time making sure that we're communicating effectively to the pros how to use this product, also how it builds their business, how it actually allows them to speak to a brand new consumer. It's a huge consumer unmet need around curl and a particular need within the pro salon channel. So there's certain things that that is a great example of a launch that really has a pro first point of view, that has a scientific innovation point of view, and making sure that our marketing and our education supports that.

Thank you. Our next question is from Susan Anderson with Canaccord Genuity. Please proceed with your question.

Hi, good morning and thanks for taking my question. I was wondering maybe just to get your thoughts on the different channels, it looks like maybe there's a preference shift to shopping more in specialty retail and BTC versus the pro channel. So just curious if you could maybe talk about the dynamics there, is it, visits or conversion issues, and then also, is if there is some sort of shopping preference change, does that, change how you're thinking about your strategy around partnering with the pro channel? Thanks.

Thanks, Susan. So we have this discussed, and again, this remains relatively consistent, that there are some macro shifts in the pro channel. More broadly, one is around frequency of visits, that there has been a spread. I would say it's probably coming out of COVID as well as certain trends in hair color that have increased the time between visits. So that impacts obviously back bar business. And then within retail, as you referenced, there certainly are more options of places to buy pro first products like Olaplex. And that is not unique to us. That's something that exists across pretty much any brand within the salon channel. So those are things that are certainly putting pressure on the professional channel writ large. However, that does not change our point of view about the importance of the pro. If anything, it makes me more enthusiastic about it because of the role that the pro has put in our history. We certainly would be nowhere without them. I think we referenced on our prepared remarks how really spent the month of June, really with that community, and making sure that we're understanding and thanking them for everything that they've done. So I think as we think about it, there's certainly, again, look, I think that bond shaping is a great example of how do we provide additional ways in which you can build a pro business and a brand new treatment. And it's certainly something that's very revolutionary and unique to Olaplex is very exciting for us. So it doesn't decrease the importance of them. But there are certainly macro trends that we need to be aware of.

Okay, great. And then maybe if you could give some color just on kind of how sales trended throughout the quarter and maybe kind of how you exited the quarter. I mean, it definitely seems like you guys are at an inflection now and trending towards hopefully positive growth in the back half based on the guidance. And I guess should we think about that starting to happen in third quarter? How should we think about that trend line? Thanks.

Yes, this is Patrick. I could take that. I think there's so many different moving parts when you think about a sell in perspective from a year ago where we're lapping the customer inventory rebalancing and our pro and specialty retail channels, there's a lot of noise, really, as we think about stabilization of the business. As we've talked about in the past couple of quarters, we're really looking to sell through to really be an indicator of stabilization in the business. And we really, throughout the quarter, saw kind of consistent, stable sell through throughout the quarter in all three of our channels. So that certainly is encouraging. As you think about the back half of the year, as a reminder, we're up against, I'd say, a better underlying demand comparator. In the first half of last year, we were still experiencing some headwinds related to misinformation where the underlying trends in the business a year ago in the back half of 2023 were relatively stable. So we feel like being on a better underlying comparator certainly benefit the back half of the year in addition to the selling of our holiday kits and our new product watches.

Thank you. Our next question is from Olivia Tong with Raymond James. Please proceed with your question.

Great, thanks. Good morning. I wanted to dive into your gross margin outlook a little bit more, which is unchanged for the full year, and that implies a pretty big step up in second half, despite Q2 coming in weaker than expected, as you decide to obviously be more proactive on sampling. So can you help us understand your second half plans a little bit, especially if sampling drove the lower gross margin in Q2 and you have launches coming in second half, which I assume you want to be aggressive in terms of supporting. So a little bit more detail on your views on sampling and other trial building investments in second half of the new products would be great. Thank you.

Yes, Olivia, this is Patrick. I'd say, we typically have seen a sequential step down from Q2 into Q3 for adjusted gross margin, but now that we're coming off of a lower base in Q2. We're not going to see as much of a dip as we have seen historically, but we do, again expect a nice rebound moving into the fourth quarter as we move past sort of the seasonality of selling in those Hollywood kids during Q3.

So your Q3 and Q4, gross margin expectations relative to the start of the year, I assume, haven't changed very much or they're higher than you had previously anticipated?

Again, for the back half of the year, really largely consistent with what we had expected. We had expected gross margin expansion in the back half of the year, and we continue to.

Got it and then just following up on the pro channel, we talked a little bit about that already. But what's your view in terms of the underlying demand amongst professionals, obviously separating out the work you're doing in terms of diversion and the impact that that's having?

I'll take that one. I think what you're asking is demand from the pro, specifically with respect to backbar or retail. If you can just help me understand your question a little bit better.

Yes, more in the pro channel. Just, I mean, it's hard to figure out exactly how the pro channel is doing because so much of that is some, the declines, as you mentioned, have very much have a lot to do with controlling diversion. So if you exit that diversion, what is the, what does the demand look like in pro?

I think, largely consistent with everything else that we're seeing in the business where we're seeing movement towards stabilization and a consistent level of demand. I think, again, I, as we get into the back half, you have a new product launch, new innovation, new focus. I think we have been certainly making the pro a priority for the first half, putting more and more initiatives in place, expanding our sales team, making sure that we're communicating with them in new and exciting ways. That does take time to build. So I feel like we're on the right path in terms of how we're focusing on this channel. And it's really, we need to drive demand. Right. We need to ensure that we're bringing people to the salon for incremental reasons. I think we also have the benefit of a product that is one and two are universal across all other brands, and that's something that we can also take advantage of.

Thank you. Our next question is from Kate Grafstein with Barclays. Please proceed with your question.

Thanks. Just a question on the distributor rationalization work that you're doing in Europe. How far along are you in this process and what gives you comfort that the same thing doesn't have to be done in other international markets? And then just also wondering if you're starting to see an improvement in diverted product in the US?

Yes, I think we're right on track with this process and obviously it takes a lot of detailed work and there's two elements of it. One is our own internal operational processes around ensuring that we have the right track in trace. We're right on track and rolling that out and making sure that it is in the market and we can deal with future issues that way, as well as making sure that we have line of sight into the partners that we believe are the right partners for the future and the ones that we don't believe add to our brand. We're really working through that at the pace that I would expect to be at this point in time.

Thank you. Our final question is from Javier Escalante with Evercore. Please proceed with your question.

Hello. Good morning everyone. I wanted to, it's kind of like a repetition from a permutation from the prior questions. Is it that, how much of the improvement in the second half is dependent upon ending the diversion issue? Is it already done? Do you expect to continue, withdrawing inventories or withdrawing shipments to bad actors, so to speak? Do you have visibility of that? Is that quantifiable? Do you have it? What is going to happen in the second half, irrespective of what you are doing on the consumer side? And I have a follow up. Thank you.

Happy to take that one. So the work is still in progress. So we are not done yet, but I think we are working through it again at a pace that I would expect to. And these things are multilayered, as you can imagine. So there is more to come. I think at this point we haven't quantified that specifically, but I think we have line of sight into, what we need to do. I've spent a lot of time personally making sure that I understand what decisions are that need to be made and how we're going to do them. So again, it was something that coming in that I knew we needed to work on and we put the plans in place and expect to be continuing on the journey that we started earlier this year.

Understood. And it's always been a problem in professional hair care. The other thing that I wanted to ask you is when you mentioned stabilization, right on the consumer side, is that how you measure that stabilization, do you think has to do with a baseline market share that you are holding up to, or is it that you are flat in retail? What exactly stabilization means when it comes to retail? And if you can speak of the US separately from Europe, that would be very, very helpful.

Yes, I think the way that I think about stabilization and demand is the power of this product and its innovation. And quite frankly, the pro and the consumer, consumer natural demand for what we do. And it is really quite extraordinary when you think about the product is effective, it works, there's a lot of people who continue to use it. And that's really what I think of as the baseline demand. Right. The day in, day out. And again, this is something that was definitely confirmed in some of that consumer and pro research, is that there's a lot of people who rely on Olaflex as a part of their salon routine, as a part of their daily routine. And that is really testament to the power of the science and the power of the product and the underlying consumer and pro demand that exists in the business. So that's what I really think of as kind of stabilization, is finding that building upon that requires new innovation, new marketing to draw in new consumers who maybe didn't have the product that was the right fit for them before, or didn't know about Olaplex, or wasn't sure about why they wanted to do it. That's where and why, quite frankly, we've spent so much time on the innovation pipeline ensuring that we have the right marketing in place, because we have to drive incremental demand. Right. So that's sort of how I think about what exists and what we see day in, day out is quite frankly a testament to the power of the product. And then what we need to do is build off of that. I would say it's very similar in the US versus international. In the US, Yes, we have the difference of having distributors partners in the international and versus some more direct relationships in the US. But the underlying things that we're seeing and the underlying demand that we're seeing in both our sell through and as well as our sell, and at this point is really driven by consumers and who are using the product day in, day out and quite loyal to it.

So is it fair to say that essentially you think I, that the current level of sales represent some sort of a loyal user base, and from these is where you try to start building and grabbing back these lapsed users that for whatever reason abandoned the equity because of misinformation?

I think that we definitely have a base of which, off of which we're continuing to build. And I think that's the important thing that we've been looking for in the business, is really to make sure that we find that base, that baseline of demand, and off of which we are able to again bring in new consumers through innovation, through marketing, through making sure that we have the right product for them, and that they understand why Olaplex is different and unique. Thank you very much.

Thank you. This concludes our question-and-answer session. I would like to hand the floor back over to Amanda Baldwin for any closing remarks.

Thank you, everyone, for joining us today. We very much appreciate your interest in Olaplex. And I just wanted to take a moment to thank all of our Olaplex team, our pros, our clients, and our business partners with our continued commitment to moving this company forward. As always if you have any questions please reach out, and thank you again we look forward to speaking with everyone soon.

This concludes today's call. You may disconnect your lines at this time. Thank you for your participation.