Q4 2022 Olaplex Holdings Inc Earnings Call
Greetings and welcome to the all the Flex Holdings incorporated Fourthquarter in fiscal year 2022 earnings results Conference call.
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A question and answer session will follow the formal presentation.
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I would now like to turn the call over to Patrick clarity Vice President of Investor Relations. Thank you.
You may be gay.
Thank you and good morning.
Joining me today are G E Wong President and Chief Executive Officer, and Air to Jani Chief Financial Officer.
Before we start I'd like to remind you that management will make certain statements today, which are forward looking including statements about the outlook of fitness.
And other matters breakfast any companies screens released issue 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 statement.
Additional information regarding these factors appears under the heading cautionary note regarding forward looking statements and the company and the company screens release and in the silence. The company makes the Securities and Exchange Commission that are available at Www Dot S E C Dot Gov.
And on the Investor Relations section of the company's website at I R double flex Dot com.
The forward looking statements on this call speak only as in the original date of this call and we undertake no obligation to update or advise any of these statements.
Also during this <unk> <unk> it will discuss certain non gets Nancy measures, which management believes can be useful in evaluating the company's performance.
The presentation of <unk> financial measures.
Not be considered in isolation for as a substitute for results prepared in accordance with gap.
You will find information regarding these non-GAAP financial measures and a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures and the company's doing these releases.
A live broadcast of this call is also available on the Investor Relations section of the company's website at <unk> Dot com.
Additionally, during this call management will forward a 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 independent to verify the accuracy or completeness out the data contained in the industry publications or other publicly available information.
Furthermore, this information of <unk> Sumption has been limitations anywhere cautions not to get undue weight to these estimates.
With that I will now turn the call over to Julie one.
Thank you Patrick and good morning, everyone. Thank you for joining us today as disclosed in today's press release following multiple years of strong growth. We expect 2023 that sales down 15% from last year and adjusted EBITDA down 32 per cent.
In each case at the midpoint of our annual guidance range.
This expectation follows an analysis of recent business trends the issues, we face and that goes opportunities in front of us based.
Based on this work, we realized that we need to invest more to keep pace with a rapid growth and current scale.
I actually look at all plan for 2023 with macro uncertainties and quickly changing market dynamics, reducing visibility, we see the D to reset and <unk>, our core business with a long term view.
We are disappointed with this outlook and hold ourselves accountable for getting to this position and for improving the business.
This year, we have a clear focus on increasing investments in sales and marketing education, and I'll partner relationships and we believe this initiative will optimize our potential and position <unk> to resume growth in 2024 and beyond.
On today's call I will walk you through our analysis and how we are addressing the issues and opportunities.
It is important to take a step back and acknowledge what we believe are the lessons learned.
Going back to the very beginning in 2014, <unk> disrupted and grabbed the Lucia noise. The <unk> category, improving health for millions of consumers and since then we have experienced tremendous growth quickly growing from $148 million in sales and 20.
19, the $704 million in 2022.
During this time, we have a focus on driving a synergistic omnichannel strategy.
Building out the infrastructure to enable all goes and investing in science and innovation capabilities to fuel further product introductions.
<unk> longterm growth potential with a leadership position and the ability to shape the global prestige heck him market. Our market was just attractive healthy and it is early stages of growth.
That set with a recent change in momentum you know business, we have taken time over the past several months.
Not only assess impacts from the macro environment, but also identify areas of our business that we could have managed better S scales.
Well, let's take stock of the core fundamental strengths behalf and will continue to differentiate <unk>.
Start with the macro.
Factors that we have discussed previously, but it's important to revisit we have seen you as professional stylus find less and by closer to need S. They report clients lengthening the time between so long distance.
Consumers have been price sensitive at all strategy to avoid over promotion to manage the health of the branch that's been a negative factor in the short term.
And certain pro and specialty retail customers have lower inventory levels to adjust to those trends, while global supply chain constraints east.
Moving on to what we could have done better.
We identified four key capabilities that we believe we need to invest in more and that need to be further strengthened.
But.
As the category leader, we have the resources and we need to invest even more to build awareness and defend the branch something natural competitive intensity that exist in an attractive categories. We recognize that we could have benefited more it'd be <unk> place.
Chief marketing officer sooner than January 2022.
<unk> the key internal marketing functions. These teams are now in place and building our efforts for 2023 and beyond next.
S. L assortment has grown through new product launches.
See the opportunity to invest more in education to help stylus and consumers fully understand the facts about our size advocacy and benefits for all head types, we have highly talented educators on our team who deeply understand the needs of style.
<unk> and consumers, but it always scale today and with the global reach of all bread. We are presented new challenges that require new approaches to informing consumers about the superior performance set all products deliver.
Oh, so oh partner relationships remain strong, but we need to show even more support for professional and retail communities.
Oh, a extra ordinary community a stylus remains at the foundation of our brain and a call to maintaining our credibility in the category.
And the associate of all partners X S advocate for out Brad speaking to consumers about the benefits that <unk> delivers we need to invest further in this relationships, so that silas and retailers can speak to consumers about our brand and ultimately.
<unk> businesses.
And lastly, we need to act faster and be better equipped to deal with negative P. R and misinformation about all brands.
Such as has suffered over the past year.
This information is not uncommon in our industry, we need to be better prepared to identify and address negative narrative and minimize the impact on the bread.
Importantly, the cough fundamental strength of the brand remain unchanged. This starts with a science based technology and the <unk> ingredient that is woven into an assortment delivery superior performance and fueling innovative multi year.
New product pipeline in <unk>, Adjacencies and new categories.
We also have best in class loyalty stylus.
Consumers alike or products delivered real benefits to consumers and help I'll Stylus partners Rosa businesses respondents two on fourth quarter external branch tracker continue to report high Trust and <unk> and we remain the leader on numerous equity state law.
<unk> that dry consumer loyalty, including highest quality products Nick's head calcium.
And scientifically proven to benefit.
The relationships remain solid, but as I mentioned, we thing we can do even more by leveraging additional resources at our disposal today to deepen engagement.
Oh, so many areas of our business that'd be belief Ah well developed we have consistently invest it and call processes and systems in science technology and operations that have supported incredible broke and are ready to scale, we have always demonstrate a strong discipline <unk>.
Managing our cost base will continue to do so we believe that now is the time to continue investing in the organization to position us with a longterm growth strategy that we seek to execute even through a more challenging gear on the top line.
Turning to the year ahead, all priorities are tied directly to addressing this aforementioned opportunities head on they include accelerating investments in sales and marketing.
Increasing and evolving our education efforts re asserting a position with pro and retail partners and improving our approach to P. R.
Beginning with sales and marketing, we are amplifying, our sales and marketing effort and accelerating the activity that have proven successful in the past in 2023, we expect marketing inclusive of sampling in sales and marketing payroll to increase the 17th melody.
Dollars from $40 million in 2022.
Increased marketing investments will focus on amplifying our branch authority and credibility to drive global recognition and awareness of <unk>.
Additionally, we will continue to invest in high R O I activity, including digital community engagement.
<unk> marketing and visual merchandising activities the strategic approaching all of this activity is aimed at building awareness, increasing consideration of all brand and ultimately driving conversion.
We will also focus on enhancing our sampling program given the efficacy of our products sampling is a highly effective tool for acquiring new customers and then abeline existing users to bite deeper into our bread.
Very solid conversion rate of 30% to 40% to.
For this and we will increase sampling at first from the <unk> symbol at least six millon samples in 2022, two roughly 10 million samples this year.
That's a key objective this you will be increasing our education and training efforts on the <unk> bread.
This will allow us to more carefully explain the merits of our products and how to apply and combine all products for optimal results.
Will occur across both our professional network as well as our consumer community.
One highlight of all education efforts refreshed marketing initiative around our core assortment.
Recognized the need to formalize a consistent always on approach marketing our call products with an anchor around number three as our heroes Q.
Actually launch new products number three needs to remain top of mind and one number three has been very successful.
Believe the opportunities to better educate on the product and how it is utilised.
Along with new elevated content and visual asset across channels. The messaging of this initiative is intended to a phone our leadership and the Bun building space.
And for the benefit of all products, <unk>, <unk> and tips and introduce new claims and testimonials about the superiority of the results to deliver.
Turning to our focus on the stylus community and I'll specialty retail partners.
Getting without professional business.
To support strong relationships and built further awareness and affinity in this community. We are reinventing the contact and increasing the number of our sales focus curriculum programs throughout the pro network, we are evolving virtual education classes contact and communication.
But the pro community, including significant improvements to all pro App.
Yeah, depending partnerships without distributors by improving joint business planning and increasing the size of a <unk> support team.
Leading to an increased frequency of contact the distributor sales teams.
By adding a new and expanding current partnerships with key opinion leader salons, we intend to further penetrate premium and <unk> a part of the category maybe under in depth.
Specialty retail.
In addition to enhancing visual merchandising, adding more digital education programs and deploying target CRM and loyalty program. We are rolling out a third parties feel sales team education program <unk> into most of flora and ultra detailed doors.
You may recall that we pilots at this program during the fourth quarter in about 75 doors and we're pleased with the results showing meaningful sales uplift in participating doors.
This year, we are scaling this program to 400 stores nationwide prioritizing key market and will be engaging directly with consumers, but also driving education of <unk> with in store associates.
Oh, so adding resources and building our P. R capabilities, which includes taking a more proactive and offensive position to thwart negative narrative and correct misinformation about <unk> in the market not only are we refuting <unk> accurate information when you <unk>.
<unk> <unk> Oh, so focused on getting ahead of rumors and potential misinformation by proactively and brought me distributing content focused on <unk> and help the social channels and paid media.
<unk> I want to address the recent negative media headlines a claim <unk> products cause hair loss.
Anyone experiencing hair loss and heartbreak H, we understand the emotional toll it has and empathetic to the impact on your wellbeing.
<unk> <unk> products do not cause hair loss or head breakage <unk> products are safe and effective as millions of all consumers can happily a test and that's evidenced by I'll publish H R. I P. T test results.
Also recognize the concerns at this misinformation may cause a loyal customers Silas and retail partners when hearing baseless claims about a product they love and trust.
Unfortunately, there is no barrier to prevent this and it is not unusual for consumer products to be targeted despite the lack of evidence.
<unk>. This allegations can only be completely refuted in the fullness of time.
Yeah actively defending <unk> against this allegation, we recently posted on a website independent third parties test results that show our product are things. We have received positive consumer feedback on the video testimonials published across all social media channel.
Email and website and social media sentiment on this topic continues to tread more positively.
In conclusion, we recognize that this reset will not be easy, but our team is pet to execute against this priority.
Just a number one professional bumped build a bread and the war and loved by millions we lead the attractive fast growing prestige paraquet category and we are focusing our resources to extent that leadership, we are confident that our scale future growth opportunities.
Industry, leading profitability strong balance sheet and robust patch generation, we will emerge from this year, even stronger as an organization as a business and S. A bread.
At this point I'll turn to call over to Eric to cover all fourth quarter results and provide additional details on our outlook for 2023, Eric.
Thank you Julie and good morning, everyone.
In the fourth quarter of 2022 net sales decline 21.5%.
130.7 million versus 166.5 million last year.
We believe that fourth quarter net sales were negatively impacted by approximately 29 million at several of our T customers. These customers lowered their orders to rebalance inventory in response to lower levels demand and to target overall lower levels of months on hand than previously cared.
I channel professional sales declined 3.9% to 54.9 million.
Versus a 9% increase last year, which was in line with our expectations.
This decline was driven by reduced purchases by our Silas community in the U S. In the UK, partially driven by the tougher macro environment impacting the professional channel.
This was evidenced by the latest available find data, which showed total market front Epsilon sales in the U S declined by 2% in the third quarter.
<unk> front of sale sell through in the third quarter was up 2% compared to last year.
Specialty retail sales decreased 45.3%.
32.6 million following a robust 332 per cent gain in the prior year period.
Performance was below the expectations, we provided on our third quarter call, reflecting a softening and replenishment demand in an increasingly competitive environment, including heightened promotional activity during the holiday season.
In addition, as we previously communicated we were laughing the 15 million initial wave of ultra pipeline fill in queue for 2021.
And our direct to consumer channel sales were down 13.2% to 43.2 million.
Hollowing in 85 per cent increase last year.
D T C sales were better than our expectations driven by strength during the key holidays, selling weeks, especially black Friday, and cyber Monday across old Flex Dot Com and R. D. T C partners.
Sales were down across geographies with international down 13.4% in the U S down 28% the U S largely linked to the fore mentioned specialty retail drivers, including the lapping of the ultra pipeline.
Moving down the income statement.
Justin gross profit margin was 72.5 per cent declining 790 basis points from 84% in queue for 2021.
Approximately 300 basis points of this contraction reflects deleverage and inflation and our warehousing and distribution costs 190 basis points of unfavorable product mix.
160 basis points from inflation on product cost with the balance primarily related to increased sampling an unfavorable customer mix.
He's more than offset the benefit of the price increase we took from July 1st 2022.
Adjusted SG&A increased 27.6% to 28.8 million.
From 22.6 million in queue for 2021.
The 6.2 million increase and adjusted SG&A from prior year is primarily the result of a 5.8 million dollar increase in sales and marketing expense to drive demand and support the longterm growth of the business.
The remainder of the increase is attributable to workforce expansion and other related expenses.
Adjusted EBITDA declined 38.9% to 67.6 million versus $110.7 million in the fourth quarter of 2021.
Adjusted EBITDA margin was 51.7 per cent compared to 66.5% a year ago.
Adjusted net income decreased 32.3% year over year to 48.3 million or.
Or seven cents per diluted share.
From 71.4 million or 10 cents per diluted share in the 2021 fourth quarter.
Justin net income benefited from lower interest expense year over year due to our debt pay down and refinance in the first quarter of 2022.
Now I'm trying to get the balance sheet.
Inventory at the end of the fourth quarter was $144.4 million.
Down from $151.3 million at the end of the third quarter.
The reduction in inventory levels as a result of our decision to alter our sourcing plans and slow procurement to match, the new sales forecast, which more than offset building inventory of new skews as we prepare for product launches this year.
Turning to cash flow.
We remain asset light and strong cashflow generating business.
During 2022, we generated 255.3 million in cash from operations.
Of 27.6% from 200 million for the prior year.
This included cash from operations growing year over year in the fourth quarter.
For 2023, we anticipate another year of healthy cash generation as we maintain a high level of profitability and improve our working capital position primarily through lower inventory.
We ended the year with $322.8 million in cash and equivalents.
Longterm debt net of current portion is referred fees was $654.3 million.
Now <unk>.
Turning to our financial outlook.
As Judy mentioned earlier in the call. We believe 20 twenty-three represents a temporary step back and our longer term growth trajectory as we laptop comparators in the first half of the year and seek to rebuild our momentum through the execution of our strategy.
We fully recognize that this guidance is disappointing versus expectations for 2023.
And it's Julie mentioned earlier, we take full accountability for what we consider to be key lessons learned and getting here.
On that note.
I think it's important to acknowledge how we approached guidance for 2000 twenty-three, which we've noted as a reset year on our path back to growth in 2024 and beyond.
First and foremost.
We've considered and reflected our current view of consumer demand.
Taking into account that it will take some time for our marketing and sales actions to have their full impact.
Second.
Given the uncertainty of the macro environment and quickly changing market dynamics, we believe a wider guidance range is appropriate for us in 2023.
Lastly, we are seeking to provide additional details related to some of the noteworthy net sales milestones in the prior year and current ear to help show the underlying business trends.
As you will see this leads to a plan in which we believe both net sales and profit trends will improve sequentially as the year progresses.
<unk>, leading to growth in the fourth quarter and as we enter 2024.
Let me start with the drivers and our outlook for the first quarter.
First we expect the continuation of the negative effects from inventory rebalancing from certain pro and specialty retail customers, which we have mentioned on prior calls.
Based on current sell in and sell through assumptions, we expect the next year over year impact of this to depressed selanne gross for both the pro and specialty retail channels for Q1 by approximately $25 million in aggregate.
We are also facing a difficult year over year comparison with our successful launch an ultra beauty.
Although the selling for our lunch and also began in the fourth quarter of 2021.
In response to strong sell through we shipped an additional 10 million of inventory pipeline in the first quarter of 2022.
We are now lapping those shipments in the first quarter of 2023.
Next while we were forecasting incremental growth from the selling of new product introductions. In 2023. This is more than offset by a lower baseline level of demand for core products.
Altogether at the mid point of our annual guidance. We currently expect net sales have declined 41% in Q1, which compares to a revenue increase of 57.6% in Q1 22, representing a 7% decline on Ah to your stomach.
By channel.
Professional sales are expected to decline, 43% falling growth of 62.6 per cent in Q1 22.
Specialty retail sales are expected to decline, 47% following <unk> 102.5 per cent in Q1 22.
In direct to consumer sales are expected to decline, 28% following <unk> a 15.1% in Q1 22.
Moving to the second quarter, we expect net sales to sequentially improved compared to Q1.
What remains down significantly compared to the year ago period.
This is due to the continuation of a lower baseline level of demand as well as lapping too challenging comparators from Q2 2022.
First we will be laughing and approximately 22 million net sales impact in the second quarter of 2022 from the introduction of one liter size offerings in the North American professional channel, which we do not expect to offset in 2023.
Second.
In the second quarter of last year, we experienced some pull forward and demand as some specialty retail customers chose to buy ahead of our announced price increases a year ago.
Although the impact of this pull forward Riverton Q3. This results in a 10 million headwind in the second quarter of 2023.
When looking at channel performance in queue too because of the issues I just mentioned, we expect the professional channel to be the most challenged followed by specialty retail N D. T C.
As we move into the second half of the year, we're no longer face with any material headwinds from inventory rebalancing. The introduction of one leaders or earlier timing of shipments ahead of price increases.
We expect to benefit from the net impact of new product introductions and <unk>.
Additional distribution games that are strategic and build brand equity. We also expect to begin to benefit from an improvement in baseline demand do two or increase investments in education sales and marketing.
Taken together for fiscal 2023, we expect.
Net sales in the range of 563 million to $634 million.
Based on the mid point of this range this is down 15% versus 2022.
Justin net income in the range of $176 million to $224 million or based on the mid point 36 per cent decrease versus 2022.
And it just it EBITDA in the range of $261 million to 322 million are based on the mid point 32 per cent decrease versus 2022.
Embedded in our guidance is a 300 to 400 basis point decline in gross margin for the year as inflation and warehousing and distribution costs and deleverage from lower sales volumes more than off set the positive impact of cost savings and price increases implemented in the second half of last year.
As Julia indicated earlier, given the confidence in our long term strategy.
Making the strategic decision to invest for the challenges we're experiencing in 2023.
So at the mid point of our guidance, we expect adjusted EBITDA margin of approximately 48.7% for 2023.
Down from 60.9 per cent last year.
We expect adjusted EBITDA margins below this level in the first half of the year with the most contraction in Q1.
Higher than this right in the second half with an improvement in the top line drops operating leverage.
We expect interest expense to be 40 million and an effective tax rate of approximately 25% for the year.
As I mentioned earlier, we anticipate another year of healthy cash generation and 20 twenty-three even in a reset ear as we maintain a high level of profitability and improve our working capital position.
In summary.
We believe 20 twenty-three represents a reset and our longterm growth trajectory as we repositioned the business for future growth.
Although we are facing headwinds we remain confident that are differentiated product technology strong engagement.
And disruptive innovation.
Along with the execution of our strategy.
Pack from reinvesting in core processes.
Will enable us to return to sales growth with top tier industry profitability and cast generation.
This concludes our prepared remarks.
Now turn the call back over to the operator for questions.
Operator.
Thank you we will now be conducting a question and answer session.
If you would like to ask a question. Please press star one on your telephone keypad.
A confirmation total indicate your line isn't the question queue.
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We ask that you please limit yourself to one question and one follow up into requeue for any additional questions. One moment. Please while we poll for your questions.
Our first question is coming from the line of Bill Chapel with true of security. Please proceed with your questions.
Thanks, Good morning.
[noise] can you hear me <unk> Yep Yep, we can't hear Ya.
I just wanted to I guess.
And you talk about the marketing promotion trial drive you know for for this year certainly makes sense just trying to understand as you look back.
Do you think.
Part of the the the reason or.
<unk> kind of the the shortfall, we moved to the or slow down to the back half of the year was because you weren't doing enough in terms of marketing advertising or is this more to kind of.
And that enable you to hit the potential is removed two three years old.
<unk>. This is Julie I'll I'll take the question.
So.
One of the things that you know we want to highlight is obviously is that we're going to be one reason. It is a combination of factors. If you look at what we have shirt previously that's the macro economic environment and we have always said you know we are resilient, but we are not immune <unk> macro economic conditions.
Their social increase competition and again, we acknowledge competition is good because it elevates the awareness or the category higher level of discounting for sure I've heard the set list.
Misconceptions about all brands.
All of this play a factor <unk> you know some pause we looked at it but what is very important to understand too is Ah bread is still very strong the fundamentals of the branch if it's right there for us to see you know.
Starting with the technology that we bring to the table, especially with a patented technology we.
We deliver very <unk>.
<unk> and I'll innovation is set for multi is so.
Hopefully answer your questions on this point because if you look at even southern key metrics that's b.
The track primarily because it shows the health of the branch which includes.
Like retention our retention is strong I mean this is based on independent third party data that only trying to retention across.
Retail is significantly higher than <unk>.
Retain from 2021 to 2022, we have also shut in the past that while our customer acquisition has slowed.
<unk> <unk> is the lowest amongst here.
So I hope that this gives you some reasons to understand how we got here.
Yeah, absolutely and and I guess, just kind of a follow up to that looking into professional channel and kind of calling it.
Probably the weaker of the of the three channels this year.
Have you already made drives are already been able to kind of turn the the recommendations that that seems to such an important for recommending the whole portfolio that it comes from the stylus.
Have you already and I know you've been over the past few months, you've seen a turn in terms of recommendations and improvement there or is that something really expecting kind of over the next few months.
Well, we have already started you know.
Working on improving our relationships with a stylus community with always done that but what we are going to do is we're going to die that we're gonna <unk> that coverage and get support with a stylus community, which includes both virtual and in person as well as support in.
Doors.
All of this will help with the communications messaging and the branding and stylus as you know loved the interaction with <unk>. When we do survey of the survey and communications with them the things that they loved most about US is the community that we have built with them and around them.
Got it thanks, so much.
Thanks Bill.
Thank you. Our next question is coming from the line of Dana Telsey with Chelsea Advisory Group. Please proceed with your questions.
Hi can you hear me okay.
Yes.
Hi, as you think about this the brand and the product how you're thinking about new product introductions.
Timing and magnitude, how you're thinking about the core product and addressing either do you need to re marketed in a way or how do you think of being able to get that core customer back and has any surveys that you've done giving you indications of what P.
People need to see what they'd like to see and what does this mean in terms of pricing and how you price the product and this more promotional environment. Thank you.
Thanks data for that question, let me sounds like break it down first of all.
Oh, well product innovations and launches as we have previously shirt, we will continue to do two to three a year.
Because b belief that by doing a very focus innovation lodge and have us during those launches will help with our retailers to partner with us to really drive representation in store and online and offline.
Terms of all innovations to date, what you have seen in 2023, we have lunch hour 40, dry shampoo and it is one in fact it is the number one dry shampoo and all of the channels that we have launched in and we actually do have an exclusive lodge at the moment withdrawal and with a specific especially.
T retailer. So it shows you how powerful it is when even the Wendell <unk>.
Launch its exclusive we still retain and game number one position.
In total studies and surveys of what we have learned we continue to see very highly drank that recommendation by hairstylist on our products to the consumers is keen for the bread and so this is the reason why you have hurt me said doing <unk>.
<unk> that we are going to focus on it always on number three campaign and number three.
All of us to understand that it's I'll I'll call you wrote Q, even though all of us used us very well because you can be the number one <unk> beauty had kept bread without having all the skills rising but number three is all core is Arturo and what we are doing is we are making sure that we have it.
Always on campaign to really educate two message and to help stylus and consumers and our retail partners understand the <unk> and how it halos the rest off all offering.
Got it and on pricing <unk>, how do you see pricing going forward.
Alright, you on mute.
Hi, Dana <unk>. So as you know, we're a premium price product and the prestige category. We believe we're at the right price for the consumer and relative to our competition. What we Wanna do is continue to offer Arkansas rumors and our stylist you know <unk>.
Into the branch to.
The trial and the branch in in sizes and offerings that makes sense for them. So we believe we're we're adequately priced any promotional activity. We do is only going to be focused on trial and building the regimen behind the brand. We've always said, we choose not to over promote as a strategy.
And as the new cost structure. The business would you say the cost structure going forward that would be and more normalized cost structure.
What what I'd say Dana is that we recognize the need to increase our sales and marketing investment as the market leader in the category and that's consistent with what we said in the past we've just recognize we need to do more.
And that's what we're doing this reset your 2023, we expect that to continue and as we.
We returned to gross as we regain the leverage from that growth and I'll also add as we improve gross margin when that leverage returns you know, we expect that to help fuel the investments that we're making in the business.
Thank you.
Thank you. Our next question is coming from the lineup Andrea to share with J P. Morgan. Please proceed with your questions.
Hi. This is <unk>. So you had mentioned before I, even today as part of your focus for 2023 that you will be continuing to penetrate it to premium and prestige salons, where you are underneath that Ah such can you. Please delineate or give us more color on what are some of the steps have been taking.
And when what is the response to you're seeing and when do you anticipate to see some favorable aspects the reflected on your numbers. Thank you.
Thank you. Thank you for that question. This is Julie I I will take that question. So first and foremost we have added resources two hour protein to make sure that those premium and <unk> can be covered we have also make sure that they have access to our director pro platform because.
Most of this premium salons do like an automated process to place orders and to really get access to education.
All content as well as social media content S. A C 601.
Had a program and install it for more than two years is a.
Specialists and this is this will help <unk> understanding and driving <unk> premium and key opinion need us a lot. So we have already implemented a lot of the recommendations and strategy that'd be beliefs was set us up right.
To really address this cohort of specialty and premium so long.
And.
If we would not be at a place to tell you exactly when people see the results that we are seeing a lot of adoption, especially from a director pro App, but people are signing up and wanting to get more education more understanding about the branch. So that's a great solid first indication of how this program is working.
Thank you for that just a quick follow up can you give us a sense of the magnitude of how many how many salons, you're seeing our interest level or is that something you.
But refrained from right now.
What I would just give you is what the profession of Beauty Association data point 0.2, while the premium key opinion leaders to launch a relatively small they do represent a very <unk> part of the revenue generated by the Salon community Oh Boy, it's more important is.
The premium <unk> and <unk> are the ones that really also set a <unk> and a conversation and.
Ah really also very much a community that really wants more information <unk> education of materials and we all situated and.
Really position right at this point to help them with all of the ones and Johnny.
Thank you I'll pass it on.
Thank you.
Thank you. Our next question has come through the line is Lauren Lieberman with Barclays. Please proceed with your questions.
Great. Thanks for morning, Uhm, I guess, you know first that one thing that you have an address on the call. This morning, so far Sophie investments in improving forecasting capabilities. So just wondering you know how that kind of playing in I. You know if there's a very concrete does this plan for this year, but do you think about some of the tool.
We discussed back in the fall without trying to build more visibility into inventory not just the U S. But it gets increasingly internationally was I was just curious about that.
To begin thanks.
Thanks, Lauren it's Eric here I'll take that one.
Absolutely on our previous call, we talked about the need to improve our forecasting tools and processes that progress is underway and we're happy with the progress we're making that includes new tools, we put in place and the demand planning space to better link sell in and sell through at our key accounts.
It's also neutrals, we've put in place.
Material reset resource planning tools for next week. So we feel like we're on a good track. There you know we we did hit.
Within our guidance range in the fourth quarter of an inch those forecasting tools at helping us take the signals were seeing from current consumer demand and project. It forward into the outlook we provided.
Okay.
And then my other question was just I thought the focus on number three was was really interesting and particularly in the context, an idea of a consumer having a more constrained wallet and meeting to make choices. So that may be the full regimen, it sort of less attainable, let's call. It <unk>.
To what degree that factoring in you know and you were thinking about marketing and education and.
You know it sort of being a one product versus a <unk> regimen approach and and is that gonna be part of the marketing going forward.
Thanks, Laura I'll take the question Lauren one of the things I've seen Colton to note is that <unk> is a bomb building treatment place in <unk>.
<unk> of hair care that includes shampoo conditioner styling extra all of 10 minutes and then you look at that the foundation of it is having your Barnes B pet when you get that'd be pet.
Everything else falls into place and that's why the focus on number three because there's no other product or technology out there that can truly say it'd be past the disulfide bonds. The way. We do you have seen US you know without patterns <unk>, you know articulate at the pattern while that it's really.
Oh, great. The size is powerful we want to make sure that we are in a friendly consumer facing where the consumers can understand why Bob building is such a bug repair treatment is such an important foundation for that and then once that get message well educated well.
And they understand the need for that <unk>. The rest of the regiment becomes very much intuitive right because you have to shampoo and condition. Your hair you have to you know you do style your hair and you'll also need to treat your head with a Hamas at least once or twice a week. So we can be lead by focus.
A number three back to our core a halo the rest of our <unk>.
Okay, Great and then sorry, one more.
Released on cost savings G&A kind of if you look towards the back half that kicking in I was just curious.
Surprised to hear I mentioned of cost savings at all just giving Halloween. The company has has been so how significant.
This role of cost savings, you think about the the profitability and Opex equation for 23.
Oh of course Lauren.
As normal course of business, we're always going to be looking for opportunities to find efficiencies and our cost base.
That don't have anything to do with those investments, we're making in sales and marketing and the core capabilities of the organization that that's where we're putting our money. So to give you. An example, you know non people related costs in N. G. In a you know some of the money that we spend with consultants those are efficiencies that we.
Been driving in 2022, and 10, two and 2023 and the other key area here as in our cost to get you know as we can better negotiate prices with our suppliers as we can find efficiencies in how we go to market, we put a fuel for growth program in place together ideas from all across the organization to do exactly.
That so I look at it as the classic good cholesterol bad cholesterol type of approach.
Okay, Great I really appreciate that.
Thanks <unk>.
Thank you. Our next question is coming from the line of Susan Anderson with Canaccord January . Please proceed with your <unk>.
Hi, Good morning. Thanks for taking my question I was wondering if you could talk about just fell through and the retail channel I'm not sure. If you mentioned that versus obviously saelens I'm curious kind of where <unk> performed in the quarter versus the industry.
I C as in thanks for the question so.
Let me start by saying that in the fourth quarter. The sell through was you know was robust and one third party data source that we can point to is N P D where in the U S retailing and D. T C market.
Oh Flex grew well ahead of of the category.
As we enter into our queue one outlook, we see similar sell through trends across the specialty retail frankly across channels and I'll. Just note here that because of the inventory rebalancing in packs that we've mentioned in both the fourth quarter of 2022, and the first quarter of 2023.
<unk> our cells through performance is actually materially better than the cell in the net sales declines that you're saying.
Great and then maybe if you could talk about the performance of the dry shampoo I know, it's probably early days, but just curious any it really reads. There and then also other new products you have plan for the rest of the year.
And then I'm curious can you talk about maybe just the dollar impact you expecting this helen for from new products in 2023.
Yeah, Let me take that question and I just want to process. We don't break down you know what we are selling in terms of launches, but what we can tell you is our every one of our lunch is validated by treat data has been the number one large boat in unit sales and.
<unk>. So it was no different lost your number nine was indicated at the top revenue generating skew in terms of its launch full the heck had a procedure category. We've just launched dry shampoo as your scene at the end of February early March exclusively with one specialty retailer, but also with all our <unk>.
Channel and that is the number one dry shampoo in every one of those channels that we have launched it. So you can tell again when we put all our lunch. It's generally is the best in class because the world doesn't need another shampoo doesn't need another try shampoo it has to deliver on what.
His face it does and so we are very encouraged by the results, especially also by the proven by the ranking hopefully that answer your question I apologize that you know, we we can break it down for you.
Uhm is such as to what the swelling is for the lunch. It yeah. Yeah that that's helpful that sounds really good and then lastly, if I could just add uhm I'm curious so the professional channel. The first quarter guide is obviously pretty much you know.
More of a decline in what we saw in the fourth quarter and then you have the inventory rebalancing how much of that $25 million isn't this long channel and then also beyond that I guess, what's driving those worst expectations.
I see so.
We're not breaking out the magnitude of the inventory rebalancing across specialty retail and pro but I will just.
Say again consistently here that the shelter that we're seeing in the professional channel is is better you know the projection for that in the first quarter is better than the guide we've given on cell in because of that inventory rebalancing.
And you know it really is about all of the investment actions that at Julie's mentioned throughout the call some of which are directly focused on the professional channel and the pro community we expect those.
To take hold and they are taking hold now, but we expect them to have their fullest impact as the year progresses, and that's why we're calling out sequential improvement as the your progressive.
Okay, great. Thanks, So much you guys could like the rest of the year.
Thank you. Thank you.
Okay, and our final questions will come from the line of Jonathan keyboard with Bank of America. Please proceed with your questions.
Hi, Good morning, everybody. Thank you for the question.
I guess I I'm curious about you know, there's there's gonna be there's $25 million lap in one two and there is the the the 10 million and pipeline fill it just looks like if your back out you know if you try to normalize what <unk> looks like it's still about a 20.
3% to 5% decline factoring in all of the all of the.
The seasonal kind of impacts [laughter] is that sort of where we should think about the the the state of demand is that is that you know like basically down 25 per cent of sort of what is happening to underlying demand is that is that sort of a fair.
Magnitude I guess.
Hi, Jonathan it's Eric here, So that's exactly the right map when you back out the Ah factors that we disclose related to inventory rebalancing and pipeline lapping but of course, there are other factors, but but doing the math that way is is accurate and and I think you get to that range of about minus 20.
Three to minus 25% in the first quarter. If you apply that same math to the balance of the year. You know you see how we get to the mid point of our range with some some modest sequential improvement leading up to this return to growth as we as we exited the ear and go into 2024, and you know <unk> fundamentally.
That that outlook is driven by the recent trends we've seen in consumer demand just keep in mind. We also believe we're laughing, particularly tough comps in you know that that prior year 2020 at two period and and we seek to build a momentum as we do.
Right right. Thank you, Okay, and then you call. This a reset your I agree that's that's probably the right you know tack to take I'm. Just wondering if there was a there was a previous question about this but is this a dbase here as well it should we should we fundamentally kind of change maybe how we were thinking about.
What longterm <unk>.
<unk> could look like.
I mean, it just like I understand that things are going to have to come down based on.
Inventory rebalancing, but right there seems to be all for some.
You know degradation of consumption and then kind of an acknowledgement of the need to to spend more behind the business too.
To properly communicate and compete I guess should we think about this as being a rebase where you know.
Three to five years from now sales.
You know it won't be you.
Won't be able to be reaccelerated to where we thought they might've been able to go a year ago, and where margins are going to sit at a at a at a level comfortably lower than than where we started a year ago is that a fair thing a fair assessment of <unk>.
So Jonathan let me take this question you know first and then I'll have Eric built on it I just want to kind of clarify and really double click on this the fundamentals of both the bread and the category is very strong. If you look at <unk>. We are at all early innings right we have some.
Not fully pen to trade it in so many of our distribution and yet we are ranked number one so that's a lot of opportunity for us. That's why we wanted to double click on the sales and marketing on the education is spelled S.
Really looking at all pro Stylus and then you can look at all of the international <unk>, where we have room to play we are not in the middle East in a material way, we are not in Latin America and the material way, we are not in Asia Pacific Asia in a material way <unk> old rug place with a bread. So I would look at it as a rebate.
It's a reset yet because what we want to do is continue to invest behind what we have already invested this technology infrastructure our capabilities in innovation and then double click on the sales and marketing.
The the P. R. P. The education piece in a community building Pete all of this with just get us to us stronger and better you.
<unk> one to turn it over to ever because you also have some number of questions that you want to you know get ready to clarify.
Absolutely. Thank you Julie and thank you for the question Jonathan.
The short term is important but the long term is even more important and that's what we're focused on you know I think he can appreciate the focus here has been on the reset for 2023 and repositioning ourselves to that return to growth or not in a position to give you know new numbers or or re framing or medium term outlook here, we will do so at the appropriate.
What time.
I will just say, we we believe in the longterm.
Outlook and potential for this business and and that we expect to me you know growing this business ahead of the global prestige category and returning your profit growth as well and will bring more details when we can.
Okay, and then I <unk>, if I could have one more follow up on on the the distribution Runaway you mentioned international and it's it's sort of the other kind of wings of of gross you guys could go into it seems like the <unk> you know fixing up the U S is probably priority number one at least 2023 I'm just wondering if you could identify maybe some of the.
Distribution opportunities you guys see in in the states and if you guys have taken any kind of.
You know, it's kind of a different approach to where you are willing to play where you're not willing to play those kinds of.
Those kinds of decisions, you're making at this point.
So very quickly Jonathan if you looked at 2023 and the U S will only 15 per cent penetrated a profession. That's a long that's a cute strongly we are now just early innings with a kit K O P. And then lead US a lot. So on the pro site, that's tremendous opportunity for us our penetration at <unk> and <unk> are still very.
Small in the case of the phone we have been steadily growing but in also.
<unk> <unk> <unk> and yet we are the top ranking heck head, Brian . So that's a lot of opportunities in the U S. In Dolphin America alone and so is the focus on what we have going deeper we will win.
Great. Thank you.
Thank you.
Okay. We have reached <unk> sorry go on.
No no go ahead operator.
We have reached the end of our question and answer session I went and I'd like to turn the call back over to you for closing remarks.
Yes. Thank you so much everyone for joining us and hope to see you again.
Earning call.
Bye.
Thank you. This does conclude today's teleconference. We appreciate your participation may.
Disconnect your lines at this time.
Enjoy the rest of your day.