Q3 2024 Waldencast PLC Earnings Call

Speaker Change: Greetings and welcome to the Waldencast's third quarter and first nine months 2024 earnings call. At this time all participants are in a listen-only mode.

Speaker Change: If anyone should require operator assistance, please press star zero on your telephone keypad.

Our question and answer session will follow the formal presentation.

Speaker Change: You may be placed into the question queue at any time by pressing star 1 on your telephone keypad and we ask that you please ask one question, one follow-up, then return to the queue.

As a reminder, this conference is being recorded.

Speaker Change: It's now my pleasure to turn the call over to Allison Malkin with ICR. Allison, please go ahead.

Allison Malkin: Thank you and welcome to the Waldenkast PLC 3rd Quarter Fiscal 2024 Earnings Call. With me today are Michel Brousset, Founder and Chief Executive Officer, and Manuel Manfredi, Chief Financial Officer.

Speaker Change: For today's call, Michel will begin with an update on our business and vision, and discuss the company's performance within the context of the beauty market. Manuel will follow with a review of the third quarter and year-to-date performance, and provide our fiscal 2024 outlook.

Speaker Change: Following this, Michel will share the strategic growth initiatives for our Milk Makeup and Obagi Medical brand.

Speaker Change: After the prepared remarks, the operator will open the call to take questions.

Speaker Change: Before we start, I would like to remind you that management will make certain statements today, which are forward-looking, including statements about the outlook of WalnutCast business and other matters referenced in the company's earnings release issued yesterday.

Speaker Change: Each forward-looking statement is subject to risk and uncertainty that could cause actual results to differ materially from those projected in or implied by such statements.

Speaker Change: Additional information regarding these statements appears under the heading Cautionary Note Regarding Forward-Looking Statements in the company's earnings release and in the company's filings that it makes with the Securities and Exchange Commission.

Speaker Change: and should be read in conjunction with this section entitled Risk Factors in the Company's Annual Report on Form 20-F filed with the Securities and Exchange Commission on April 30, 2024.

Speaker Change: The four 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.

Speaker Change: Also, during this call, management will discuss certain non-GAAP financial measures, which management believes can be useful in evaluating the company's performance.

Speaker Change: The presentation of non-GAAP measures should not be considered in isolation or as a substitute for results prepared in accordance with GAAP.

Speaker Change: you will find additional information regarding the definition of these non-GAAP financial measures and a reconciliation of these non-GAAP to the most directly comparable GAAP measures in the company's earnings relief.

Speaker Change: A live broadcast of this call is also available on the Investor Relations section of the company's website at ir.waldencast.com, which will remain available for 90 days. I will now turn the call over to Michel Brousset.

Michel Brousset: Thank you, Allison, and good morning, everyone. It is a pleasure to speak with you today and share another quarter of a strong performance.

Michel Brousset: On the top line, comparable net revenue growth of 34.6% accelerated from 21% in Q1 and 25.7% in Q2 as we anticipated. This reflects increased consumer demand for our Obajo Medical and Milk Makeup brands and improved stock availability.

Michel Brousset: Among their target audiences, our brands are consistently delivering strong innovation and community engagement. As a result, we are seeing ongoing success as we expand our global distribution.

Michel Brousset: We saw in Q3 and throughout the year robust growth evidencing the power of our operating platform that enabled us to deliver increasing rates of profitability as we grow our market leading branch.

Michel Brousset: To this end, in the third quarter, adjusted EBITDA rules 134% to 16.3% of net revenue and expanded 720 basis points from the prior year.

Michel Brousset: We continue to make progress towards achieving our vision to build a global best-in-class beauty and wellness platform that creates, acquires, accelerates, and scales the next generation of high-growth, highly profitable, purpose-driven brands.

Michel Brousset: Our repeatable, world-encapsulating virtual circle of growth and profitability is continuing to pay dividends as we continue to strengthen our efficiencies to drive cross-margin expansion and invest into selling and marketing drivers to sustain and grow our top-line momentum.

Michel Brousset: While very pleased with our performance in the quarter and first nine months of the year, we believe we're just getting started in realizing our true potential. Let me share with you why.

Michel Brousset: First, we possess the operational scale of a multi-brand platform that would only get better as we add more brands to the portfolio.

Michel Brousset: These pair with the infrastructure and beauty operational talent to support accelerated growth on EBITDA margin expansion for our portfolio of market-leading brands.

Michel Brousset: Second, we have a proven track record identifying, managing, and building global beauty brands on scale. This success, and the many opportunities we see in front of us, provide us with a visible path to continue to attract leading brands to our fold.

Michel Brousset: Third, we have taken a balanced approach to structuring our portfolio in attractive segments of the category that enable us to maximize growth and benefit from diversification. We operate in the two most structurally attractive segments of the skincare and makeup categories.

Michel Brousset: Fourth, we operate an asset light and highly efficient capital structure, which give us the speed and agility and return on capital with the operating discipline of a much larger company.

Michel Brousset: And fifth, and equally important, is that our management incentives are highly aligned to value creation for our shareholders and are focused on rewarding long-term value creation through operational and capital allocation excellence.

Michel Brousset: As you know, we possess two of the most exciting brands in the two biggest beauty categories.

Michel Brousset: Our brands play in the most attractive sub-segments of these two categories, prestige, clean makeup, and professional science-led skincare.

Michel Brousset: Nude Makeup is a cult favorite Gen Z brand and benefits organically from an engaged and diverse community due to its cultural relevance and iconic products.

Michel Brousset: It is a leading clean makeup brand, the number two clean brand at Sephora US with 2.7 million Instagram followers and is quickly building a global following with leadership positions in several international markets.

Michel Brousset: Makeup has accomplished its relevant promise of fully clean makeup that works.

Michel Brousset: OVALU Medical continues its clear advantage as the number one U.S. physician-recommended medical-grade skincare brand for top-ranked patient needs, leading in the most attractive fast-growing subsegment of premium skincare.

Michel Brousset: Leveraging 39 R&D partners, Obagi Medical consistently delivers breakthrough patented technology and transformative clinically proven results.

Michel Brousset: This drives high loyalty from both consumers and physicians. We continue to believe Obagi Medical is perfectly positioned to answer the growing needs for high-performance, effective skincare, while also paving the way for expansion into other categories.

Thank you.

Speaker Change: Yes, we have set our sights on building a much larger business, not just organically, but also through acquisition and brand development.

Speaker Change: We believe we are the perfect partner for indie brands, as we preserve their brandy and say, and allow our acquired brands to operate with autonomy, thereby maintaining the entrepreneurial spirit of each brand.

Speaker Change: At the same time, our platform provides many benefits, from the sharing of best practices to leveraging the collective expertise of the WorldENCAS ecosystem.

Speaker Change: Simply put, we provide the data, technology, talent, finance, legal and supply chain support that elevates profitability and accelerates growth.

Let me share a real-life example.

Speaker Change: When we acquired Milk Makeup, it was a cult favorite, but not reaching its full potential.

Speaker Change: With our platform we implemented the processes that improve decision-making, created efficiencies, and removed costs to drive profit growth while increasing high ROI marketing spend to accelerate top-line growth, and we expect this to continue.

Speaker Change: As a result, we have created an algorithm for long-term success as evidenced by the delivery of top-tier comparable net revenue growth of 26.9% in the first nine months of 2024 and a best-in-class adjusted gross margin of 74.8%.

Speaker Change: Our flywheel of growth and profitability is simple and repeatable, with our world-class talent and expertise that you can see it play in both Milk Makeup and Obaginatica.

Speaker Change: When we add a brand to our portfolio, we first laser focus on the expansion of gross margin by driving operational efficiency.

Speaker Change: We then reinvest these savings into sales and marketing business drivers, which drive top-line growth, further enhancing gross margin, and delivering operational leverage by diluting fixed costs to produce robust profit growth.

Thank you for watching!

Speaker Change: Well, we have scaled. We're only at the beginning of our journey to building a best-in-class global multi-brand portfolio. Today, we possess two powerful brands that have garnered critical mass while still having substantial runway for growth.

Speaker Change: With Milk Makeup on Obagi Medical, we have a solid foundation in prestige skin and color.

Speaker Change: We have a core business in the U.S. and a growing presence in Europe and in Asia-Pacific region.

Speaker Change: We're achieving a strong growth in attractive channels including professional, specialty retail and online, and expect this momentum to continue as we drive awareness for both brands beyond their core communities, continue to introduce more blockbuster innovations and expand into other regions and categories.

Speaker Change: our increasing success with both brands and the power of our unique pure play beauty ecosystem.

Speaker Change: An industry that requires deep and specific expertise gives us a distinct competitive strength in attracting other brands and founders into our platform.

Speaker Change: And now, I will turn the call over to Manuel to review our financials and outlook.

Thank you, Michel. Good morning, everyone.

Manuel Manfredi: I'm pleased to share our third quarter and first nine-month results for 2024 with you today.

Manuel Manfredi: Our performance continues to reflect the successful execution of our strategy that provides a powerful framework to maximize the inherent strengths of our MIL-MECAP and OB-GYN medical brands.

Manuel Manfredi: As shown this year, our strategy continues to deliver ongoing revenue and profit growth, and furthering our commitment to delivering shareholder value.

Manuel Manfredi: Today I will focus on our adjusted financial measures. You can find a reconciliation to GAAP financial measures in our press release from yesterday and in the appendix of this morning's presentation.

Let's dive into the highlights of our third quarter performance.

Manuel Manfredi: Net revenue was $70.2 million and represented a strong 30.46% increase in comparable growth.

Manuel Manfredi: Obagi Medical and Milmecap achieved 45.5% and 23.5% growth, respectively, and both brands accelerated from Q2.

Manuel Manfredi: Milk continues to grow strongly in Q3 2024, with increased global visibility boosted by new partnerships with four European retailers.

Manuel Manfredi: We also expanded our product line, which strengthened our presence, especially in North America.

Manuel Manfredi: In Ovaji, our growth has been driven by successful product launches of the Elastidem family and continued acceleration across digital channels, further supported by the benefits of the shift in our Amazon distribution model at the end of 2023 to a direct operating model.

Manuel Manfredi: Additionally, it is benefiting in this quarter from improved inventory levels, an issue that limited our growth in Q2.

Manuel Manfredi: That said, while the inventory levels have substantially improved, we are still not completely out of the woods and expect out-of-stocks to still be a factor into Q1 next year.

Adjusted gross profit came in at $51.4 million.

Manuel Manfredi: We continue to see significant year-over-year expansion in our adjusted gross profit margin, which rose 400 basis points to 73.2% in Q3 2024. This reflects growth of higher margin channels of distribution and lower inventory obsolescence versus Q3 last year.

Manuel Manfredi: I just tipped off $11.4 million, more than Dublin, with a 134% increase from Q3 last year.

Adjusted EBITDA margin expanded 720 basis points year-over-year, reaching 16.3%.

Manuel Manfredi: This notable growth reflects strong revenue momentum and operational leverage, which more than offset the increased investment in marketing and international capabilities to support growth and future acquisitions.

Thank you for watching!

Manuel Manfredi: Our outstanding third quarter results have built on the momentum from a strong first half, leading to a remarkable year-to-date performance.

Manuel Manfredi: For the first 9 months of 2024, our net revenue reached $201.8 million, a solid 26.9% increase in comparable growth.

Manuel Manfredi: Adjusted gross profit came in at $150.9 million, up 37%, with an adjusted gross profit margin of 74.8%, a 720 basis point improvement compared to the first nine months of 2023.

Manuel Manfredi: Adjusted EBITDA grew by 54.9% to $29.1 million, driven by strong sales growth and improved gross margin, which more than offset our increases in marketing expenses.

Manuel Manfredi: This brought our adjusted data margin of 14.4% in the first 9 months of 2024, marking a 290 basis point increase from 11.5% in the same period last year.

Manuel Manfredi: As we look ahead, our strong performance in the first nine months, the continued success of our growth strategy, and the continuous investment in our internal capabilities positions us well to carry on this momentum into the final quarter of the year.

Manuel Manfredi: With this in mind, for the full year 2024, we reaffirmed our prior guidance and we continue to expect comparable net revenue growth to accelerate beyond the 25.7% increase we saw in Q2.

Manuel Manfredi: and adjusted EBITDA margin to land in the mid-teens range. A substantial growth from the 11.2% adjusted EBITDA margin achieved in 2023.

Manuel Manfredi: Turning to our balance sheet and cash flow, we ended the first nine months of 2024 in a solid financial position with no near-term debt maturities.

Manuel Manfredi: Our business continues to have a strong adjustability to cash conversion, driven by efficient working capital management and limited capex, thanks to our asset-light business model.

Manuel Manfredi: Currently, a significant portion of this cash is allocated to cover non-recurrent costs associated with the ongoing regulatory investigation.

Manuel Manfredi: Once this matter concludes, we expect the cash generated by the business will help us to be in an even stronger financial position by improving our capital structure.

Manuel Manfredi: As of September 30, 2024, we have cash and cash equivalent of $17.6 million, and we also have $30 million available on our revolving credit facility.

Manuel Manfredi: Our net debt totaled $154 million, and as of November 15, 2024, their outstanding were $122.9 million.

And now, I will turn the car over to Michel.

Thank you, Manuel.

Michel Brousset: Let's now look at the performance by brands, starting with Milk Makeup.

Michel Brousset: In the third quarter, Mill Makeup generated net revenue of $31.5 million, an increase of 23.5% versus a year ago.

Michel Brousset: Momentum for MakeMakeUp grew in the quarter driven by the increased awareness and buzz associated with the brand. The delivery of sought-after innovation and our international expansion.

Michel Brousset: Specifically, this quarter we built on the success of the cooling water jelly cans with the introduction of two additional shades, and versus second quarter, stock levels for jellies have improved, allowing the brand to better meet what has been unprecedented demand.

Michel Brousset: We also launched Hydro Grip and Glow and Cush Higher Roller Brow and Mascara with further strength in our award-winning franchise in primers and growing cult icons with our new product offerings.

Michel Brousset: adjusted gross profit margin of 66.6 percent, declined 340 basis points from last year.

Michel Brousset: driven by a shift in mix with increased lower-margin holiday kits shipping in Q3 this year versus last year, and a shift in timing of off-price sales to Q3 this year from Q2 last year.

Michel Brousset: In addition, Q3 2023, a justice gross profit margin had a favorable inventory provision which aided in their rate.

Michel Brousset: As you will see in the next slide, makeups cross-margin continues to improve.

Michel Brousset: Adjusted EBITDA nearly doubled to $8.5 million, while adjusted EBITDA margin of 27.1% expanded 1,040 basis points from the third quarter of 2023, as a strong revenue and growth increase gross margin dollars offset increased sales and market investment in support of growth.

Michel Brousset: For the first nine months, Milkmaker generated net revenue of $94.7 million, increasing 21.7% from the first nine months of 2023.

Speaker Change: I mean we just need to address issues like food insecurity and access to health information.

Speaker Change: to $24.2 million from $17 million in the first nine months of 2023, with adjusted EBITDA margin expanding 370 basis points to 25.6% of net revenue versus the first nine months of 2023.

Speaker Change: Milk makeup saw balanced growth across geographies, reflecting the increased relevance of the brand across the world. Indeed, globally, more and more consumers are embracing milk makeup and what the brand stands for as we deliver on our promise to introduce cool, clean makeup that works.

Speaker Change: The brand generated outstanding growth across geographies in the first nine months of the year with revenue up 22.3% in North America and 20.4% internationally.

Speaker Change: Milk Makeup's vision is to be the number one beauty choice of the next generation, Gen C and increasingly Gen Alpha, and we have a clear, proven and sustainable growth strategy to get us there.

a strategy that is anchored in four clear pillars.

Speaker Change: Expanding our already cold community by continuing to exchange with the existing one, as well as welcoming new groups and delighting both through our expertise, innovation and values-based approach to make-up.

Speaker Change: Innovation, and keep pushing the boundaries of what clean, cool beauty looks like by continuing to build iconic products such as our Primer Set, sticks, etc., as well as continuing to be the most innovative and exciting makeup brand with additions such as jelly tints, lip oils, and other awkward, exciting products.

Speaker Change: broadening our footprint of both existing categories, makeup and skin care, as well as geographies by entering new regions and spaces where we know there's a strong demand by the community.

Speaker Change: And lastly, leverage the World Incuss platform to double down on our unique brand DNA and accelerate awareness, love, and beauty credentials for the brand.

Speaker Change: First, let's look at how are we expanding our community. Milk Makeup has built organically through a very strong community of relevance and engagement that keeps growing with 7.7 billion press coverage impressions year-to-date, fueled by the intricate love of the brand and the excitement behind the NPD and $1.7 billion, which is 22% of year-to-date impressions.

Speaker Change: Similarly, when looking at earned media value, Milk Makeup is ranking here today as the number 14 brand in the United States, with a very strong plus 83% growth year over year.

Speaker Change: as well as number 19 makeup brand globally, growing at 90%, highlighting also the strong desirability of the brand outside of the US, which is also a driver of our international expansion.

Speaker Change: The community love is anchored on iconic products, clean, cool, beauty that works, bringing breakthrough innovation that is utilitarian, good for you, always vegan, clean, and cruelty-free.

Speaker Change: An iconic range with our cult and award-winning core of prime and set and sticks, as well as expansion to new categories like the sold-out Jelly Tint launched in early 2024.

Speaker Change: In Q3, we launch HydroGrip Glow, a unique makeup hybrid that locks in luminosity for 12 hours.

Speaker Change: That builds on our iconic Hydro franchise, as well as playing into a global boom that is offering a benefit of long-lastingness.

Speaker Change: We also expanded our core jelly range, originally launching four strong pale colors with two softer tints that appeal to an incremental consumer need and target.

Speaker Change: Lastly, as we have shown earlier, the demand for milk make-up internationally is very strong. And one of our latest expansions, early Q4, was India, where the brand was launched with a big bang in Sephora, with phenomenal support from the community.

Thank you.

Speaker Change: Now, from the world of milk makeup, let's go to the world of high-performance skincare with Obagi Medical.

Thank you.

Speaker Change: Covaggio Medical continues its excellent performance, recording net revenue of $38.7 million in Q3, representing comparable growth of 45.5% from the prior year third quarter.

Speaker Change: This growth was driven by the success of our growth strategies focusing on introducing blockbuster innovation, increasing our global distribution, and accelerating our e-commerce channel penetration.

Speaker Change: We are pleased to accomplish each of these objectives in the quarter.

Speaker Change: To this end, the quarter saw us launch two innovations, which we had previously announced in our last call. The power duo of elastic and lift-up-on-scope facial moisturizer and advanced filler concentrate.

which helped to elevate growth across the entire Elastigirl franchise.

Speaker Change: We grew revenue across geographies and across channels, and we saw particular strength in e-commerce, driven by our direct-to-consumer website and Amazon, aided by the tailwind of a new direct model with that digital partner.

Speaker Change: Additionally, with better in-stock positions, we were pleased to see our physician-dispensed channel return to growth in the quarter.

you do better in stock levels of key products.

Speaker Change: We expect continuing supply chain improvements to further support expansion domestically and internationally in Q4 2024.

Speaker Change: Adjusted gross profit totaled $30.4 million with adjusted gross margin expanding 1,010 basis points to 78.6% from 68.5% in the third quarter of fiscal 2023.

Speaker Change: A strong sales growth combined with significant expansion in adjusted gross margin more than offset the increased investment in business drivers leading to adjusted VDAL $7.5 million, a 129.7% increase versus Q3 2023.

Speaker Change: Adjusted EBITDA margin expanded 770 basis points to 19.3% from 11.6% in the third quarter of 2023.

Speaker Change: Now, looking at the first nine months of the year, Obagi Medical delivered net revenue of $107.1 million representing comparable growth of 32% from the first nine months of 2023.

Speaker Change: Adjusted gross profit was to $85.3 million or 79.7% of net revenue versus $57.8 million or 67.8% of net revenue in the first nine months of 2023.

Speaker Change: This growth led to adjusted EBITDA of $20.7 million, a 60.5% increase from the first nine months of fiscal 2023, with adjusted EBITDA margin expanding to 19.3% from 15.1% the first nine months of 2023.

Speaker Change: Across geographies, Obagi Medical saw balanced growth with a 42.1% increase in North America and 32.8% increase internationally in the first nine months of 2024 compared to the prior year's first nine months.

Speaker Change: In the U.S., we saw outsized growth from our digital channels and a strong performance from our innovation.

Speaker Change: Internationally, our growth remains strong and we continue to gradually re-establish America's presence in Southeast Asia.

Speaker Change: Since the acquisition of Avalge Medical, our vision for the brand was very clear, to become the number one physician dispensed dermatological brand in the world.

and the growth is centered on three strategic pillars.

Speaker Change: First, double down on our bronze DNA anchored on our professional credentials.

Speaker Change: Second, accelerate cutting-edge science-backed innovation that serves our physicians and their patients. And lastly, grow the brand awareness and the footprint and drive point-of-market entry into our professional channel.

Speaker Change: Anchoring our brand DNA starts with medical-grade innovation, backed with best-in-class clinical tools. This is the role that our latest launch in elastiderm has targeted at.

Speaker Change: On elastin, lift and sculpt facial moisturizers show transformative results after 3 weeks and 6 weeks on all key benefits such as improving elasticity, fine lines, crepiness and skin smoothness on independent clinical testing.

Speaker Change: culminating at six weeks with results showing a hundred percent visible improvement of fine lines, ninety-four percent improvement to smoothness, eighty-eight percent improvement to elasticity, and an eighty-one percent improvement in correctness.

Speaker Change: on the Laga Cinema Advanced Silver Concentrate, the before and after, very visibly and visually.

Speaker Change: the transformative results of these products. And both innovations were launched with a best-in-class education toolkit that armed professionals with the science behind the innovation and the clinical results.

This was also shown

Speaker Change: directly to consumers, and this is how some of our consumer advertising looks.

Speaker Change: So, it is no surprise that with this execution, consultees MPD delivered versus expectations and contributed to grow the overall elastoderm franchise by 189%, of which existing products accounted for 24% growth.

Speaker Change: Qualitatively, our physician partners were delighted that Broad New England Institute lasted on franchise while also answering two incremental products that met the needs of their patients.

Speaker Change: while also building awareness directly with consumers with a year-to-date earned media value growth of 165% to attract them into the professional channel and accelerate the flywheel of their best skin with Obagi and our physician community.

Speaker Change: This awareness is built directly with consumers through social but also editorial credentialing with 544 million impressions in Q3 just in the US.

Speaker Change: an acceleration that we see also internationally with 178 million impressions for top markets such as the UK.

To conclude...

Speaker Change: We're very pleased to share a strong performance across both brands, reflecting the increased desirability, relevance, and awareness of our low-budget medical and milk-makeup brands.

World Encaps is poised for long-term profitable growth.

Speaker Change: through the operational scale of our multi-brand platform, with only two brands but more to come in the future.

Speaker Change: Expertise in managing global beauty brands at scale with big growth opportunity in both geographic and category expansion.

Speaker Change: based on a balanced portfolio anchored in a structurally attractive segment of the category.

Speaker Change: and Bachuen Acid Light Agile and Efficient Structure that Unlocks Speed at Scale.

and management incentives aligned to long-term value creation.

Speaker Change: Thank you for being with us today. I will now turn the call over to the operator to conduct the question and answer session.

operator

Speaker Change: Thank you. We will now be conducting a question and answer session. If you would like to be placed into question queue, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue.

Speaker Change: Our first question today is coming from Jonah Kim from TD calendar line is now live

Speaker Change: get any color around as you look towards next year and lapping this year's huge success. How are you thinking about the cadence and the quality of innovation?

Speaker Change: across both brands and how can you drive sustained outside growth versus the market. Thank you.

Speaker Change: Thank you for the call. We are, of course, very optimistic about next year. Our strategy for next year, frankly, remains the same across both brands. Continue to drive.

Speaker Change: and increase awareness of all fronts, a very strong innovation plan and continue to expand our footprint. So the playbook is the same.

Speaker Change: Now, from a P&L structure standpoint, reaching in gross margin the levels of what we are expected long-term, long-term to reach, we should expect.

Speaker Change: From a top-line standpoint, there is an immense opportunity ahead of us. We are on both fronts just at the beginning of the story. Our innovation here, we're particularly

Speaker Change: keen on the vintage of innovation that is coming on Obagi, as well as on milk. We're happy, of course, on milk having two anniversary jellies, which is a tremendous launch. It's a launch that was particularly effective this year.

Speaker Change: So, we're very confident in that in our next year. We are not updating guidance yet, but generally speaking, we're looking to 2025 with a lot of optimism.

Speaker Change: And just one follow-on, you mentioned gross margins a little bit, but in light of potential tariffs, Anouk, how are you planning to manage the gross margins next year and beyond? Thank you.

Speaker Change: Yeah, we don't think gross margin is substantial. Tariffs are not a substantial impact to our business in the case of Obagi.

Speaker Change: There is very little business sourced from China. Most of our, if not nearly 100% of our CMOs are North America-based. In the case of milk, we have roughly 10 to 15% of our...

Speaker Change: are cost of goods coming from China, but we have, as we have done in the past, ways to shift some of these to other places if that is necessary. So we don't expect the tariff impact to be material.

Speaker Change: It's still ample place within gross margin to manage that. As I mentioned, we don't expect a lot of gross margin expansion, even though we do have quite a bit of cost savings to be had in gross margin. We expect that to be reinvested into product.

Speaker Change: packaging and if need be in the case of NEL to be able to manage what we think is going to be ultimately a modest impact on taxes.

For more information visit www.FEMA.gov

Thank you.

Speaker Change: Thank you. Next question is coming from Dana Telsey from Telsey Advisory Group. Your line is now live.

Hi, good morning, and nice to see the progress.

Speaker Change: As you think about the gross margin on the milk side, I think you mentioned in the commentary about higher off-price sales. I think last quarter was lower off-price sales. What's the difference and how do you see the trends of milk's gross margin going forward? And then, Michel, can you just talk a little bit about how do you see the beauty industry performing in this past third quarter and looking into the fourth quarter compared to the first half of the year? And then I have a follow-up. Thank you.

Speaker Change: Thank you, Dana. Yeah, gross margin on milk, there's a little bit of a temporary, something of a facing issue on off-price sales. Last year they were more in Q2, this year they're more in Q3. They're not substantial or significant, it's part of our plan.

Speaker Change: kind of gross marginal landing of the year. As I mentioned many, many times in these calls, we do not manage the company on a quarterly basis. We manage it on a daily basis, but we don't plan on landing a specific number on a quarterly basis. It's part of a normal phasing of

Speaker Change: of how things are falling one place or the other in terms of off-price sales.

Speaker Change: and Bunke, but the condensed milk the impact of our holiday kids, but it's coming also a little bit of facing differences versus last year.

Speaker Change: As we mentioned on the release, in the base of last year in Q3 there was a bit of a provision release on milk. So there's nothing structural on the business or on the gross margins and we continue to make substantial progress. That is where I think at World Bank we excel on how to do.

Speaker Change: to improve for the next quarters and so on and so forth.

Speaker Change: Regarding the beauty market, I mean the beauty market, I mean we've discussed before and there's many people that have commented on these, the market continues to normalize. The prestige market is still plus 7% year to date.

Speaker Change: in the U.S., according to Zircana, makeup is plus five. Skincare has moderated a bit at plus three, but the market continues to be strong and thriving. It is one of the.

Speaker Change: quite strong interest of growth and continues to deliver across multiple

Thank you very much.

in many cases, self-inflicted issues, but the market is strong.

Speaker Change: Lastly, and again a point that is very important when we view and the public views what we think about growth, the market for us is just a data point. We are relatively small, we are a very small company, a very small player. Our ability to grow the business as is demonstrated by...

Speaker Change: by the results that we continue to post quarterly is more limited by our own ability to execute well, to grow our business, to create propositions that are compelling and seductive and interesting to consumers more so than the market. We have plenty, plenty, plenty of.

Speaker Change: levers for growth in which the market, while important, is just a data point of information. It's not something that sets apart our destiny.

And you had a follow-up question.

Speaker Change: And to follow up with Obagi, where are you on in-stock levels? How do you see those progressing?

and also penetration into

Speaker Change: continued penetration into other dermatologists office and then just for both brands, international what you're seeing there. Thank you. Yeah, as we mentioned in the last release and we mentioned today, we've had some issues of our own out-of-stock inventory on

Speaker Change: On Obagi, in Q2, these are substantially better in Q3. We believe that it's going to take at least another...

Speaker Change: a couple of quarters to completely restore the levels of stock in the business is a consequence of...

Speaker Change: As we mentioned before, very strong demand for our products on Obagi, as well as some inventory management that we did in prior years to be able to achieve the right level of working capital on the business. But today...

Speaker Change: We are substantially better than Q2, we are still impacting to some level Q3 and we think we'll completely normalize by the end of Q1.

Speaker Change: In terms of penetration of physicians, we are among the most penetrated brands in the world.

Physician Officers and Medical Practitioners in the country.

Speaker Change: great innovation that is addressing new patient needs, new consumer needs, we are seeing more dollars flowing also from the same offices.

Speaker Change: So it is something of both interests of levers of growth, in terms of decisions, offices, but also dollars per office in what we are.

Speaker Change: North America brand with a little bit of international business. We are growing.

Speaker Change: substantially our international business. Same thing for value, just at the beginning of that process. So we expect the international expansion of both brands to be substantial. And what is attractive about both brands is that it pent up

Speaker Change: I would say that the brand equity reservoir that we have built in the U.S. allows us to launch efficiently in other markets, as demonstrated by, for example, some of the things we've shown you on milk, as well as on algae.

Speaker Change: in Lico, in Scandinavia, of consumers waiting to buy milk right before and it's obviously because they're heavily influenced by the social media and the global reach of our social media and communities. So lots of opportunity internationally on North Bronx.

Thank you.

Speaker Change: Thank you. As a reminder, that's star one to be placed into question Q. Our next question is coming from Ashley Helgens from Jefferies. Your line is now live.

Speaker Change: Hi, this is Sydney on for Ashley. Any updated expectations for holiday promotional levels you can share? And I'm just curious, you know, what you're seeing kind of in terms of retail or caution toward inventory levels and any color you can get there. Thank you.

Speaker Change: In terms of holiday purchase intentions, we see that an increase of intentions by shoppers. I think we kind of published a report just recently in which 29% of shoppers plan to purchase beauty products at gift this year.

Speaker Change: The holiday season beauty continues to be becoming more and more a staple of the holiday season and our plans remain fairly consistent from a promotionality versus other years. Both brands are not particularly promotional brands.

Speaker Change: participate heavily in a promotion, but of course we participate in that market.

Speaker Change: Regarding the overall kind of retail environment, we are seeing, because of the macro environment and certain specific issues with with some retailers, some more caution around management of inventory.

Speaker Change: We've seen that a little bit more so outside of North America than in North America, but we're not seeing it more recently in North America.

Speaker Change: inventory correction and purchase correction that we're seeing on selling on retailers. Difficult for us to predict whether this will continue into Q1 or not, but we are definitely seeing a bit of more prudency on...

Speaker Change: on Levels of Inventory and Open2I and things like that on the business.

Thank you.

Speaker Change: Thank you. Next question is coming from Susan Anderson from Cannon Quarter. Line is now live.

Susan Anderson: Hi, good morning. Nice job on the quarter. Thanks for taking my question.

Speaker Change: I guess maybe just to start off, if you could talk about how you're thinking about the innovation pipeline for milk and, you know, just keeping consumers interested, how many new products do you expect to roll out each year? And then, I don't know if you've talked about, but how much do new products make up of sales? And then just if you could talk about, like, near term focus areas and white space for the brands. Thanks.

Speaker Change: Thank you, Susan. Innovation is the lifeblood of beauty and particularly in a makeup brand like Milk. We have of course seen this year with the launch of Jelly's, I think very few times in my career, a launch of that magnitude and that success.

Speaker Change: We obviously have the interesting task of having the anniversary of that launch next year. But at the same time, when we look at milk and the number of penetration subcategories within make-up that we have.

Speaker Change: They were just a little bit. We do not have a presence in a number of important subcategories of makeup that allows us to have.

Speaker Change: a substantial runway on a go-ahead basis. We're particularly excited about what's coming next year, which we will, you know, reveal in due time.

new incremental

Speaker Change: for the company in a way that is very milked, that is very charismatic, unique, tangibly superior with great design in a very milked way. So we see innovation as we know in beauty, but it's a little bit hard to forecast and a little bit hard to predict.

Speaker Change: We believe that we have a fantastic innovation plan for next year. We do not disclose percent of sales on the product and things like that, but we're very optimistic about the innovation.

Speaker Change: It's part of the secret sauce of milk, which is having always a hand on the pulse on what innovation, what is happening in the world, and respond to things that are interesting and compelling.

Speaker Change: Okay, great. And then, I don't know, do you have any thoughts just on how the physician defense channel is doing? I believe that, you know, the prestige data that we all get in the U.S. by Turkana maybe doesn't include that channel, so just curious if it's performing similarly to, you know, kind of the other data that we're seeing.

Speaker Change: Yeah, you're right, the Circana data does not include the 50 chain channel, there's other sources that do that, but they don't do it with the frequency that Circana does. So it's a little bit hard for us to assess exactly the quarter-to-quarter evolution. The latest numbers we have seen from industry sources is that it's...

Speaker Change: It's not as robust, I would say. Now, that said, it is very clear, what is very, very clear, there's a very strong shift, I wouldn't even say a trend, a shift towards science-based medical skincare that we're seeing in that channel as well as away from the channel.

Speaker Change: Consumers demand higher levels of performance, higher levels of evidence, truth.

Speaker Change: and the clinical data because they're more sophisticated, because they understand better consumer data, because they understand better how products work, because they understand better ingredients.

It's a fantastic place to capitalize on that opportunity.

Thank you for your time, and I appreciate it.

this quarter, but...

Speaker Change: the market is for medical, science-based diseases and dispenses is thriving.

Speaker Change: Okay, great. And then I guess last one for me, just any thoughts on the M&A landscape with indie brands. I guess, are you seeing any attractive opportunities, power, valuations? And then I'm just curious on your thoughts on the landscape in general. Do you think that it's becoming too saturated with too many brands, or there's still a lot of opportunity there? Thanks.

Speaker Change: Yeah, I mean, we can't comment on specific M&A plans, but there is certainly the beauty industry has always been a...

Speaker Change: acquisitive market. If you look at the biggest contractors, L'Oreal or Loder, with the exception of Silveisto, in both cases two brands trading equidistantly but acquisitively. There are more brands

Speaker Change: great opportunities to add to our portfolio, but the way we're building the portfolio, the way we want to do it, we're very choiceful about what we add to the portfolio. It's a bit of

Speaker Change: a process in which it's a kind of mutual assessment of what we want to do and where to take the ground. So there is lots of exciting things. From a valuation standpoint, valuations interestingly have not...

Speaker Change: I mean, there's been less transaction valuations have not come down substantially, at least yet on most of the transactions, I think.

Great assets and great brands are still in high demand.

accelerate growth. So plenty of great opportunities ahead of us.

Okay, great. Thanks so much. Good luck this holiday season.

Speaker Change: Thank you. Next question is coming from Linda Bolton-Weiser from D.A. Davidson, your line is now live.

Linda Bolton-Weiser: Yes, hello. I was curious if you could update us on the unaided or aided, I guess, brand awareness of milk, of the milk brand.

Linda Bolton-Weiser: where it stands now and how much improvement you've made recently and what are your thoughts on distribution expansion for milk in the U.S.? Thanks.

Speaker Change: We don't disclose specific awareness numbers. I think what we disclose is our community, which I think is the best proxy of people that engage. It's interesting, of course, to have aided and aided awareness, what is more important for a brand is how many people actually engage with you and follow you.

Speaker Change: and built on our business. Just over the last year, if I take Instagram as an example, we've increased our followers on Instagram by 700,000, 2.7 million.

Speaker Change: Instagram followers. Our community continues to grow, we just crossed the 1 million.

Speaker Change: last quarter because of 1 million thresholds on TikTok. So our community continues to grow and thrive. I think the buzz on the brand as measured by the EMV, the earned media value, again, much better approximation to actual purchase and growth of the brand.

That's just a generic awareness number.

Speaker Change: continues to grow and improve from the brand. We are number 14 in the U.S. year to date. We peaked during the Jelly's launch at about number six during the Jelly's launch. So the brand continues to grow from momentum to momentum. It is a brand that is getting to an awareness and a size that becomes interesting. Of course...

Speaker Change: Everybody is looking at that, and the bots, and the awareness of the brand, and there's a lot of...

Speaker Change: potential distribution partners that are in the U.S. as well as globally very interested in

Speaker Change: and building on the brand. We have expanded internationally. We have four new retailers that have built into this year. These are Lico that we showed you early on, Boots in the UK, Douglas in Germany and so forth, India most recently.

Speaker Change: with tremendous success, right? So we are expanding distribution internationally, where it makes sense, and we will continue to evaluate distribution opportunities that make sense.

Speaker Change: As we mentioned before, one thing that, especially managing a major brand, where one has to be quite careful is not to expand distribution too far ahead of demand and awareness.

Speaker Change: and our approach to this has always been to control the distribution, keep it

Speaker Change: very tight and very productive. So we want to maintain high level of productivity where we are.

Speaker Change: Thanks and just your comment about milk still has you know subcategories that it can enter and expand further maybe you could just give us without you know specific numbers but just give us which subcategories in particular can you name that milk is either not even in or is very small market share relative to the overall market share of the brand

Speaker Change: Yeah, of course, I can use the biggest category. I mean, liquid foundation is the biggest category in makeup. Depending on how you read it, it's around 14% of the makeup market. We don't have a liquid foundation.

were not present in the biggest.

Speaker Change: Just to take one example of many who are not present.

Speaker Change: in the biggest category of makeup, which is liquid foundation. Another example.

We don't have any lipsticks in our business.

Speaker Change: Again, I am not saying we're going to launch in those categories, but I'm just saying in the near future, what I'm saying is there's plenty still of opportunity. What we have is a very strong presence.

Speaker Change: in a relatively small subset of categories. We have a very strong prime and set business.

Speaker Change: where we are a market-leading position in some categories, but we are not at all present in some others, or barely playing in others. So, plenty of opportunity also from a product and innovation standpoint. Obviously, we have to pace that innovation. We need to make sure that when we launch, we have a compelling, winning proposition to be able to...

Speaker Change: to enter those battles because some of those markets are very competitive but also some of those markets are very attractive because if you crack them like for example a complexion or liquid foundation or things like that they tend to be high loyalty to stickier categories and other categories.

So, those are a couple of examples.

Okay, thank you very much.

Speaker Change: Thank you. Next question is coming from Olivia Tong from Raymond James. Your line is now live.

Speaker Change: Good morning, this is Lillian on for Olivia. I wanted to ask about how you're thinking about marketing spend going forward. Should we anticipate a similar level to this quarter and how is marketing spend allocated between brands? Thank you.

Thank you.

Thank you Lillian.

Speaker Change: One, building efficiency on a gross marginal operation, reinvesting that into...

business rivals of marketing and selling which

Speaker Change: We will continue to increase media and marketing support on both businesses quite substantially. We've been increasing those quite substantially since we bought the both brands and we continue to do that into the future.

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