Olaplex Holdings, Inc. Q3 FY2021 Earnings Call

Good day ladies and gentlemen, and welcome to Olaplex Inc.'s Third Quarter Earnings Conference Call. At this time all participant lines are in a listen-only mode. As a reminder, this conference call is being recorded. I would now like to hand the conference over to Allison Malkin of ICR. Please go ahead.

Thank you, and welcome to the Olaplex third quarter fiscal year 2021 earnings call. With me today are JuE Wong, Chief Executive Officer and Eric Tiziani, Chief Financial Officer. For today’s call, JuE will begin with the review of Olaplex’s mission and strategy, and highlight our third quarter performance. Then Eric will provide additional details regarding the company's financial performance and introduce the company's outlook for 2021. Following these prepared remarks, the operator will open the call to take the questions you have for JuE and Eric today. Before we start, I would like to remind you that management will make certain statements which are forward-looking, including statements about the outlook of Olaplex business and other matters referenced in the company's earnings release issued today. Each forward-looking statement is subject to risks and uncertainties that could cause actual results to differ materially from those projected and/or implied by such statements. Additional information regarding these factors 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 that are available at www.sec.gov and on the investor relations section of the company's website at ir.olaplex.com. The forward-looking statements on this call speak only as of the original date of this call and we undertake no obligation to update or revise any of these statements. Also during this call, management will discuss certain non-GAAP financial measures, which management believes can be useful in evaluating the company's performance. The presentation of Non-GAAP measures should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. You will find additional information regarding these non-GAAP financial measures, and the reconciliation of these non-GAAP to the most directly comparable GAAP measures in the company's earnings release. A live broadcast of this call is also available on the Investor Relations section of the company's website at ir.olaplex.com. I will now turn the call over to JuE Wong.

Thank you, Allison and good morning everyone. I am delighted to speak to you today and share our strong third quarter performance. The quarter also marked an important milestone for our company as we completed our initial public offering. Before I discuss our results, for those new to Olaplex, let me first highlight who Olaplex is, why we believe we have been successful, and why we believe we are positioned to continue to be disruptors in the global haircare and beauty industry. Olaplex is an innovative, science-enabled, technology-driven beauty company with unique competitive advantages. We were founded with a mandate to deliver effective patent-protected and proven performance in the categories where we compete. We believe every person deserves to have healthy, beautiful hair and our commitment is to deliver results that are visible from the very first application. Studies have shown that 91% of women do something to damage their hair daily, but with consistent and regular use of Olaplex products, consumers will have stronger, healthier-looking hair. Our patent-protected technology allows all diverse hair types to see shine, hydration, less frizz, more body, and bounce because their hair is repaired, strengthened, and protected from that very first application. Today we have 11 key products, eight for take-home use and three exclusively for use by professional stylists, which are sold in three channels: professional, specialty retail, and direct-to-consumer. We believe we have been successful because our products are able to deliver visible results. Consumers who purchase at least one Olaplex product, on average, have purchased over three and a half other products from our product suite in the last 12 months. We are focused on innovation, with a strong pipeline of products under development. We have over 100 patents in our patent portfolio and patent protection in numerous countries around the world. These patents cover what we now sell, as well as what we expect to sell in the future. We are supported by a highly engaged community of over 250,000 professional stylists on our private Facebook group, and our Instagram community comprised of our committed trade partners and loyal growing consumer base, with 2.2 million followers, makes us the number one prestige haircare brand on social media. We have a synergistic omnichannel mix where each channel is mutually reinforcing across professional, retail, and direct-to-consumer, and all experienced strong growth in the third quarter of 58%, 128%, and 87% respectively. Our business is global with more than 40% of sales outside the U.S. in fiscal year 2020 and for the nine months ended September 30, 2021. We operate in a growing category with a large addressable market. According to Euromonitor, the global total addressable market for haircare is $77 billion, and within that, prestige haircare is the fastest-growing segment. In addition to hair, we have patents for applications of our technologies in skincare, which has a $140 billion TAM. We believe all of this positions Olaplex for consistent strong growth at robust margins that we consider to be among the best in our industry. Now turning to our third quarter results. Net sales rose 81%, driven by broad-based strength in our Olaplex regiment across our omnichannel distribution; from professional to specialty retail to direct-to-consumer. This growth comes on top of the already very strong growth in the third quarter of last year. Our margins remain strong in this third quarter of 2021, including a gross profit margin of 78.9%, adjusted gross profit margin of 79.9% and adjusted net income rose 62.6% to $74.4 million, with adjusted EBITDA increasing 63.3% to deliver an adjusted EBITDA margin of 66.1%. Our adjusted EBITDA margin in this year's third quarter includes investments to support future growth, which Eric will review in more detail shortly. Additionally, the quarter included progress against our growth initiatives with increased sales productivity, new product innovation, and growth from new distribution and international expansion. Sales growth was led by increased productivity in existing distribution across our professional, specialty retail, and direct-to-consumer channels. We launched three new highly incremental products this year; two for take-home use and one exclusive to the professional channel. In the third quarter, we launched 4P, our first Toning Shampoo. We are very excited about this product which uses our exclusive multi-patented technology to hydrate, strengthen, soften, and neutralize brassiness for brighter blondes, highlights, grays, and platinum strands. Third quarter sales also benefited from the first half introduction of the 4-in-1 Intense Moisture Mask, PRO-Rx treatment, a new professional backbar reparative treatment designed to moisturize and smooth hair while adding shine and body in just 10 minutes, as well as our first Bond Intense Moisture Mask. We expanded our distribution by adding shelf space in Sephora, increasing Olaplex's fixed linear square feet from three in the majority of U.S. locations as of the end of the quarter, and Olaplex was part of Sephora’s rollout into Coles with 200 locations through October. In October, we entered ULTA Salon with our professional offering, as their exclusive bond builder in salon services. Overall, I am extremely proud of our passionate and dedicated team that contributed to our strong performance this quarter, and believe we are well-positioned to continue our success for the benefit of all Olaplex stakeholders. As we look ahead, we remain excited about our business prospects and expect our positive momentum to continue in the near and long term. We believe we can expand our loyal base of Olaplex users globally and continue to launch incremental, non-cannibalizing new products supported by a robust innovation pipeline that focuses on solving real consumer problems. And now, I would like to turn the call over to Eric to review our financial results and guidance in more detail.

Thanks JuE and good morning everyone. I'm excited to speak with you all today. I'll begin with an overview of our business, then move to our third quarter results and finally I'll introduce our outlook for the full year 2021. Let me start by saying that I'm thrilled to be a part of telling the Olaplex story on behalf of our passionate team. Olaplex has an outstanding financial profile, with top-tier profitability metrics, deep competitive advantages, and a disruptive business model. We believe that our strategy provides us with a sustainable platform from which to deliver long-term sales and earnings growth. We see substantial white space to grow Olaplex within our core category of haircare across channels and geographies. Now turning to our results. Pertaining to any remarks on adjusted results, you can find reconciliation tables to the most comparable GAAP figures in our earnings release, which was also furnished on form 8-K with the SEC today. Net sales for the third quarter increased 81% to $161.6 million from $89.4 million during last year’s third quarter. As JuE mentioned, sales were strong across channels including a 58% increase in professional to $75 million and 128% increase in specialty retail to $46.3 million and an 87% increase in direct-to-consumer to $40.3 million. This growth was driven by increased velocity of existing products, successful product launches, and the addition of new customers. We're also happy with the resilience of our supply chain in the quarter, which enabled us to deliver this growth and build the appropriate inventory to support forward-looking demand. Gross profit rose 103.1% to $127.5 million from $62.8 million in the 2020 third quarter. Gross profit margin expanded 870 basis points to 78.9%. The margin increase was primarily due to lapping the one-time fair value inventory adjustment in the prior year period related to the business acquisition of Olaplex in January 2020. Adjusted gross profit increased 77.9% to $129.2 million from $72.6 million in the 2020 third quarter. Adjusted gross profit margin was 79.9% versus 81.2% in the 2020 third quarter. The 127 basis point decline was primarily due to higher input costs, particularly for inbound distribution in the current environment and some product mix. Our operating expenses consist primarily of SG&A and amortization of other intangible assets. SG&A in the third quarter of 2021 was $30.3 million, compared to $8.2 million in the 2020 third quarter. This increase was driven by $6.1 million of non-capitalizable IPO and strategic transaction cost and $1.4 million of stock comp expense, which are add backs for our adjusted EBITDA and adjusted net income. The increase was further driven by $4.3 million in cash settled unit compensation expense, $3.4 million in sales and marketing expense, $2.6 million in payroll for expansion of our workforce, $1.6 million in distribution and fulfillment costs related to the increase in sales volume and $2.6 million in other expenses relating to general business growth. Strong increases in sales and gross profit more than offset higher expenses leading to third quarter adjusted net income improvement to $74.4 million or $0.11 per diluted share, which gives effect to the corporate reorganization affected in connection with the IPO. This compared to $45.8 million or $0.07 per diluted share in the 2020 third quarter. Adjusted EBITDA grew 63.3% to $106.8 million from adjusted EBITDA of $65.4 million in the 2020 third quarter. Our adjusted EBITDA margin was 66.1% compared to an adjusted EBITDA margin of 73.1% last year for the third quarter, which reflects increased investment in SG&A to support our higher sales. This included a year-over-year increase of 170 basis points, expressed as a percentage of sales in sales and marketing expense, and a 141 basis point increase in payroll and other G&A excluding the IPO related and strategic transition costs. Additionally, adjusted EBITDA in the third quarter this year was negatively impacted by 265 basis points expressed as a percentage of sales due to the incremental cash settled units’ compensation expense. The majority of this is a one-time pull forward of vesting for approximately a four-year period into Q3, for one particular tranche of awards for non-executive employees which was triggered by the upsizing and pricing of the IPO. Turning to the balance sheet. As of September 30, 2021, we had cash and cash equivalents of $121.5 million and our long-term debt balance stood at $742.4 million. Inventory at the end of the quarter was $69.1 million compared to $21.2 million at the end of the fiscal 2020 third quarter. We are pleased with the composition of our inventory at quarter end, which is well positioned to meet demand. Regarding the cash flow statement, we had net cash provided by operating activities of $130.3 million for the nine months ended September 30, 2021 compared to $84.5 million for the nine months ended September 30, 2020. This was primarily driven by net income and the amortization add back, partially offset by investments in working capital. Additionally, our purchase of property and equipment primarily for internal use software during the period was slightly under $1 million, reflecting our asset-light business model. Now to your outlook. For fiscal year 2021, we expect net sales in the range of $580 million to $588 million. Based on the midpoint of this range, this is a 107% growth versus full year 2020. Adjusted net income is expected in the range of $263 million to $268 million or based on the midpoint, plus 103% growth versus full year 2020 and finally adjusted EBITDA in the range of $392 million to $398 million or based on the midpoint plus 98% growth versus full year 2020. Our full year 2021 outlook reflects our plans for growth, both with existing and new distribution opportunities. Keep in mind we are not able to provide without unreasonable effort a reconciliation of the guidance for adjusted EBITDA and adjusted net income to the most directly comparable GAAP measure because the company does not currently have sufficient data to accurately estimate the variables and individual adjustments included in the most directly comparable GAAP measure that would be necessary for such reconciliations. In summary, we are very pleased with our third quarter results and the positive momentum of our business, which is reflected in our full year 2021 outlook. We believe that our disruptive business model is working, and that our deep competitive advantages have us poised to continue delivering strong results. We look forward to reporting our progress in the quarters and the years to come. This concludes our prepared remarks and we will now turn the call back over to the operator for questions.

Thank you. Our first question comes from the line of Erinn Murphy with Piper Sandler. Your line is now open.

Great! Thank you, good morning and congratulations on your first quarter out of the gate. My first question is just for JuE on the launch of the 4P product. It seems incredible at least from our channel checks. Would love it if you could share a little bit more detail on how that compares to some of your former product launches over the history of the company, and then I do have a follow-up for Eric.

Yeah, thank you Erinn for the question. Yes, as we have said, the 4P’s, our Blond Toning Shampoo which is our first toning shampoo has been very well received, because most proper shampoos tend to be drying and only brighten the hair. In our case with our technology, with the patents that we have, we not only are able to repair with the Bis-amino, but we are also able to hydrate with many of the moisturizing ingredients that we have, and to highlight any kind of brassiness in blonds, as well as for people who are getting their hair to a natural gray situation. As a comparison, I would just say that it is very successful, it is definitely a product that is very professionally honed, and many of the customers are very much about looking for something of this nature that does not exist currently in the retail market. So we have been very happy with this performance.

Great to hear. And then I guess my follow-up is for Eric. On the fourth quarter implied guidance, I think it would imply about $152 million in sales at the midpoint and I guess I'm curious why is it implied down versus the third quarter, it was kind of $162 million quarter. Just given everything with 4P that JuE just talked about, holiday. Is there anything else on the sequential deceleration that you are implying at the midpoint for the fourth quarter? Thanks so much.

Yeah, thank you Erinn. So while we don't have a lot of material seasonality to our business, there is some. One thing that we do see is, in the third quarter we tend to sell in the kits that are sold through in end-of-the-year holiday and so that's one of the reasons that we traditionally see Q3 sales in absolute terms a bit higher than Q4. We also see, particularly in the professional channel, stylists buying up inventory in Q3 to get ready for the holidays, get ready for Q4 and that’s a seasonality we’ve seen over the years between Q3 and Q4. All of that said, we feel confident and good about the momentum we've reflected in our Q4 guidance and we think it's a strong quarter.

Our next question comes from a line of Dara Mohsenian with Morgan Stanley. Your line is now open.

Hey, good morning guys. So, much better revenue results than we expect on the professional side here in the quarter. Can you just discuss some of the key underlying drivers there as you look on a year-over-year basis? Obviously pretty strong growth year-over-year. How much of that was driven by a more normalized environment here from a COVID perspective versus other factors that maybe are more sustainable? And while we are on the subject, can you talk about longer term, sort of the biggest revenue opportunities as you look at growth over the next few years in the professional channel? Is it increasing the number of salons, customers within salons, etc., however you want to break it out, just also looking out from a longer-term perspective over the next few years.

Eric, if you want I'll take the question on the outlook and I’ll let Eric cover some of the more specific numbers. If you can look at what is happening with us in the United States, the number of stylists and salons for Olaplex are now above pre-COVID levels. We are seeing significant growth in our professional channel with both new and repeat customers, and outside of the U.S., all the professional markets are open. They are seeing some limitations in their ability to conduct business due to vaccine mandates, but we still believe that by the end of it because of our runway and opportunities, we are still going to continue to experience growth in the professional channel. So hopefully that answers your question on where we see ourselves on the professional side. I'll turn this over to Eric on the revenue expansion.

Thanks JuE, hi Dara. Yeah, so professional had a strong quarter in the third quarter. We think all of our channels did, and I must say it is broad-based. So broad-based across channels, but also within professional, it’s really momentum in our core portfolio as awareness is building. It was momentum in the new products that we launched, 4-in-1 which was our professional exclusive launch in the second quarter continued to do well in the third quarter as well as the launch of 4P. Also, the support for the holiday programming that's being sold in across all three channels reflects strong growth. We really just saw broad-based performance across the portfolio and across geographies.

Great! That's helpful, and just one follow-up in specialty retail. Obviously very strong growth, also in the quarter. So far, your retail partner footprint is fairly limited, obviously particularly in the U.S. Can you talk a little bit about the potential to expand to additional partners in the U.S. over the next couple of years here; the longer-term door opportunity versus where you stand today on the specialty retail side? Thanks.

Thanks Dara for the question. As you can see, we are very focused on our current distribution. If you look at our footprint, even at Sephora from our publicly resourced documentation, you will see that our penetration still has a lot of runway. While we are very successful standalone brand at Sephora, we have recently expanded into 200 doors with Coles through October and in October we entered into the ULTA Salon with our standalone treatment, as well as our professional offering. So we are going to continue to focus on our core distribution along with a couple of these new distribution opportunities that I just articulated for you and we believe that if we continue to monitor how we perform in those areas, we will continue to deliver the performance that we believe we can. Ultimately, what is exciting for us is our core footprint has still a lot of runway and opportunities for our sales to grow.

Great! Thanks guys.

Our next question comes from the line of Jason English with Goldman Sachs. Your line is now open.

Hey! Good morning folks. Thanks for slotting me in. Congrats on a successful IPO and a strong quarter out of the gates. I want to put a slightly finer point on Dara’s question there on distribution. You mentioned you've gone into the salons, the back bar at ULTA. Can you give us an update on how that's going so far? And can you describe maybe some of the criteria or milestones that need to be met for you to start to sell your products on the front end of the store there?

Thanks Jason for the question. So let me take your first part of your question. We are going to continue to monitor how our professional products are doing at ULTA, because we know that the opportunity to grow our service offering as well as the awareness at ULTA is tremendously high. We are going to track it by monitoring the number of customers that have color services, and how many of those customers choose to add Olaplex to their service as a key metric for success. As for expansion of distribution into specialty retail, as I've mentioned, we have so many opportunities with core accounts that we want to be the number one hair care brand in the top 5 beauty brands so that we become an anchor brand for them. When we are anchor brands for any of our partners, we then can really partner on marketing, brand building, as well as growth. So those are key growth considerations for us in our partnership with our existing players.

That's helpful, thank you. And you also just talking about expansion, but shifting from distribution to portfolio, you mentioned in your prepared remarks that you've got patents covering not only what you sell today, but what you could sell in the future and then you went on to specifically call out skincare. I think most listeners are going to interpret that as you foreshadowing a launch into skincare. So two questions or a two-part question, (a) is that a reasonable interpretation, and (b) if so, what and when would it look like?

Again, thank you Jason for the question. I think what we were doing is that we were just reiterating what we have previously shared. We have patent applications for skincare. We did a study through our transformation team with an independent agency to see if we have permission to play in categories such as skincare, and we saw the data as being very promising. Studies show that 82% of people familiar with Olaplex said they want to see us launch skincare, and 51% of them expressed they would switch their skincare to an Olaplex product sight unseen, because we lead with science and technology. So we know we have the permission to play and the permission to win. As to when we will get in there, at this time is all about exploring and giving ourselves options. I will not be able to provide anything definitive at this time.

Thank you. Good morning and congrats again. My question first is on innovation and is the success of 4P or the 4P launch, would allow you to potentially launch in hair dye infused with Bis-amino. I think that probably paves the way for you to do that, and I was curious to see if you are looking at that more closely. And then just a clarification on the ULTA Salon that par availability. And to your comments on waiting for that performance, is there any timetable for that decision and do you have any potential exclusivity with other retails including Sephora that needs to be lapped in order for you to go into ULTA or anything that prevents you from going right away?

Again, thank you so much for the question, because it helped us to clarify. First and foremost, we have a clear line of sight in our product development platform of launching an average of two to three products a year, all the way through 2024. The way our R&D work is, we are working on a long haul; we look at data-driven studies and trend analytics, and that’s how we will continue to really surf up what our consumers want and need, because consumer insights guide us in delivering the most appropriate product for the market. Secondly, in terms of ULTA, we are in early innings with ULTA. If you’ve seen, we’ve just entered the salon offering with them in October. We will continue to monitor our strength. Early indications show we are doing very well, thanks to our sales team led by Tiffany Warden, who is our COO and is keeping a close pulse on it. Regarding exclusivity, we are in Sephora, we are in Blue Mercury, and now we are in ULTA Salon. We will continue to focus on being the number one haircare brand, a top 10 beauty brand with all of these retailers so that we can continue to be an anchor partner with them.

Great, thank you. Congrats on the IPO in the quarter. The first question is around further increasing brand recognition, because obviously it sounds like your consumers are incredibly satisfied with the products. So we’ve obviously seen the holiday program at Sephora which looks like a great trial builder. Can you talk about other things that you're doing, either through the holiday season or beyond that helps build brand recognition and potentially the consumer base? Thank you.

Thanks Olivia for the question. I think what is important to note is, we are very focused on what builds long term growth. Studies have shown that there are three sources of truth when it comes to brand building and marketing awareness. The first and foremost, especially for hair, is recommendations from professional hairstylists. Building that community will continue to be our focus. The second area is product reviews and word of mouth, which is the third one, meaning that we are already in that space through our social media engagement, connection, and conversion with our performance marketing, whether it's via digital media or search engine optimization. We will continue all of these interactive tools to connect, engage and convert our customers. If we continue to do that, brand marketing and awareness will be much more organic as well as strategic, because this is in partnership with what we are doing, driving our traffic to both online and offline retailers that we partner with.

Hi Olivia.

Eric, do you want me to – do you want to take that?

Yeah, I’ll take that one. So we provided and introduced our full year 2021 guidance which takes us through Q4. We would anticipate providing full year 2022 guidance when we come together for Q4 results. So I can't say much there, other than we're happy with the guidance and outlook that we provided for 2021 and we're going to aim to grow at our ambition on top of that new hire base. But I'm not going to get into the quarters which there's always going to be some noise in the quarters. We're going to focus on delivering over longer periods of time, but thank you.

Thank you. Good morning everyone. We had a follow up question on costing. I think Eric in your prepared remarks you mentioned some inbound distribution costs, higher input costs. Just want to make sure we're thinking accurately about the fourth quarter, what's implied in the guidance for gross margin. And then if you could just remind us how your inventory mechanism works, is that the first-in, first-out, last-in first-out, how should we be thinking about the more recent costs versus what's on the balance sheet and any consideration for gross margins going forward. Thank you.

Absolutely! Thanks Stephanie. So yes, when we talk about Q3 gross margin performance in adjusted gross margin performance, we noted that there was some pressure there, particularly from inbound freight costs, the freight costs between warehouses, into our warehouses, that falls into our cost of goods, really in the current environment, and that's the current macro environment that we're well aware of and we do project that forward into 2022 and we've assumed that and we’ve reflected that in the guidance we provided for full year 2021. There's one other element in Q3 that we mentioned, which was some product mix. You know that really relates to – we do sell more kits in Q3 as we sell in Q3 for end-of-the-year holiday programming. It does come at a slightly lower gross margin and not something for example that we don't project forward into Q4, so it’s more of a Q3 thing, which is per usual, per our normal annual programming there.

I was just going to say in terms of our inventory builds, you know it does mean that we believe our base, our inventory accounting and cost accounting provide good line of sight to the finished goods costs and the input costs that we've assumed in our Q4 gross margin outlook.

Great! Thanks, good morning. I wanted to talk a little bit about DTC and I was curious if you could comment on how much of your gross quantitatively or qualitatively is coming from your own DTC website versus Amazon or other third parties. And then also, anything you can share on investments you’re making to improve the DTC experience beyond the kind of initial rudimentary diagnostic tool that exists today? Thanks.

Eric, do you want to take that, the first part, and I'll take the second part of what we're going to build out on the DTC.

Yeah, absolutely. Hi Lauren! I just took a look specifically at that and it’s a pretty easy answer. The growth we're seeing between our own dot com and pure play e-comm, so when we report direct-to-consumer, just to clarify for everyone, it combines both our own Olaplex.com and pure play e-comm. They are seeing very similar growth rates, so we're seeing similar trends across both.

Yeah, and so in terms of our own Olaplex.com, one of the things that we have also highlighted is that we are expanding our peaceful Olaplex.com to key markets, including markets outside of the U.S., like Canada, the U. K., Australia, and some of those markets that we have already shared earlier. What is important to note is that our high diagnostic program is also going through a 2.0 version. We believe that as consumers continue to engage in wanting to know more about their hair, we are expanding that opportunity for them to answer more questions, to provide more data about themselves, so that we can serve better recommendations and regiment programs for them. So those are all in the works and we are excited and hopefully we can share them at the appropriate time.

JuE, is any of that – is that in pilot today? Like I think you've talked a bit about your ability to collect data also. So I was wondering if that data collection that's already serving you so well is primarily from the existing diagnostic results or some of the – if there's a pilot of this 2.0 or is it still premature.

So our transformation team has been working on to make sure that the 2.0 is up to speed together with our e-comm team. What is important to know is that consumer insights have been gathered, you know not necessarily just on dot com, but also from our own sales team, and as you know, we updated our own dot com in April 2020, so there is a lot of data that we are able to glean from and be disciplined in analyzing those data to help us make better decisions.

Okay, great. And then I had one follow up on the professional conversation from earlier, which was I was just curious if there’s any insight on your strategy for penetrating the professional network outside the U.S., and just same kind of question I guess on DTC. Any insight on the positive surprise in professional this quarter being U.S. or international?

Yeah, so in terms of expansion we will continue against the plan we have. As we saw success in the U.S., that plan, that program we have, we will continue to implement into the international space which we are already partially executing, meaning that we will have multiple distributors serving each segment of the salon market, while we'll layer in specialty retail to drive brand awareness, partnering with premium retailers in those respective countries. As for DTC, it is about gaining consumer insights to serve what our consumers want and need while providing them with 24/7 convenience to purchase from us. Our international playbook and our domestic playbook is very similar, but we will look at the new answers that may present in each region or each market.

Lauren, just to expand on the question you had around the U.S. versus international, it was strong in both, but I will say it was particularly strong in the U.S., which is great to see as we have our channel flywheel has talked about really humming.

Okay, thank you very much.

Our next question comes from the line of John Kapoor with Bank of America. Your line is now open.

Hey guys! Congrats on a strong quarter. So I mean a bunch of good questions got asked. I wanted to tag one onto Stephanie's question around the inflation environment and all that. I understand you guys have a good line of sight on how to manage it. I was just wondering, near or long term, what is your willingness to move away from that $28 price tag that sort of has become associated with the brand? You know I just wonder how hesitant you guys might be to come away from that price point and if so, can you guys drive margin support from like pack size, architecture or mix or something like that. I just wanted to get a sense of the potential for margin support.

Absolutely John! Thanks for the question. So, as we see cost inflation pressures, our focus is on efficiencies we can drive in purchasing and efficiencies we can drive in our supply chain. Particularly as we're growing at the rate that we're growing, there are efficiencies that come from the higher volume and so that is an offset to some extent, both this year and what we see moving forward. We are not going to comment on any intentions we have on pricing, but you asked a great follow-up question, which is we're always looking at net revenue management opportunities, pack price architecture. As we go into new markets, as we launch new products, those are absolutely levers that we will pull over time and that we look at constantly. I’ll just close by saying, we believe the equity of our brand is very strong, and so we have options for the future, but we're not going to discuss our intentions there.

Yeah, fair enough. And then I guess lastly, I was just wondering about the innovation timeline in 2022. You know I think we all understand that you guys have a long runway of products lined up for the next few years. I was just wondering about timing. You know quarterly, when should we expect those to land? Should that – will you guys be consistent year-over-year when new products do land? And then I guess sort of as a follow-up, I was just wondering, and this was sort of a long shot, but you know the Bis-amino technology has done well to expand the product offering to 11 different products. I was just wondering if you know we should expect a new technology or new chemical near term or is that something that's slated for beyond 2025?

Well, thank you very much for that question. I’ll take your last question first, because that's very exciting for us. As we've mentioned before, as we were preparing for the IPO, it was very clear to us that R&D is a factor enabling technology-driven beauty company. Our technology piece is vital and we are not going to rest on our laurels. Our R&D team has already started, before even the IPO process, looking into partnerships with research institutes and universities, as well as biotech companies where we can partner and leap into the technology space and deliver results that are visible on the first application. Our R&D team, managed by a chief scientist with close to 30 years of experience, will lead that charge for us. So hopefully that answers your question on our R&D side and dependency on one or two technologies. The other question you asked about is our launch timing. We have as you’ve seen in 2021 launched three of our products. We are going to continue with that cadence of two to three products a year. When the time comes, we will make the announcements because they are critical to our marketing campaign. You will hear about it in good time and we are very excited about what we have in 2022.

Our next question comes from the line of Jonna Kim with Cowen. Your line is now open.

Hi! Thank you for taking our question. I'm just curious, I know it's early on, but Sephora and Coles, how those stories performed out of the gate versus the regular Sephora stores as you kind of monitor the progress. And just another follow up is obviously you have an impressively lean organization currently and as we scale the business across channels and geographies to expect to invest higher on headcount and just building up your organizations. Thank you so much.

So let me take the Sephora and Coles. It is very early days. They’ve just really launched through October, the 200 doors with us, but early indications are very promising. We are one of the few brands; they have 125 brands, and we are one of the 125 in a slate of 300 plus brands that Sephora has in their proper standalone stores. So to be part of the 125 means our performance is expected to continue to be strong, as we have always delivered for them. Regarding our organization, we are growing our organization. This is the reason you've heard from Eric that some of our expenses have been used for managing our plan to invest in growth. We will continue to do that, primarily because we expect ongoing growth and we need the people to support us.

Got it. Thank you and just one follow-up is, I know China is still small, but did you see any sort of notable performance there and sort of what initiatives do you have in place to drive higher brand awareness in the country? Thank you so much.

Right. We are very excited. 11/11 is just, in fact, tonight in China and we are seeing very strong early indications. Brands started promotions in mid-October which we've seen promising results. In fact, we believe our China team, particularly on Tmall Global, will continue to grow. The reason this is exciting for us is, we are able to build brand awareness online with the mainland Chinese consumers so that even when we break into the mainland Chinese market, those consumers will already be familiar with our brand.

Our last question comes from the line of Dana Telsey with Telsey Advisory Group. Your line is now open.

Good morning and congratulations on the results. As you launch new products, you've mentioned in the past about higher margins on the new products. What are you seeing in the new products? Is there a difference between the type of product and the margin you’d be achieving? And then I have a follow up on any update on the Tmall partnership? Thank you.

Hi Dana, I’ll take that first one. In our product development process, we will set thresholds and goals for the margins of those new products and really design around that. That has worked well for us to either be accretive or neutral to the rest of the portfolio. It will always depend on product by product; we do have some new products that are exclusively professional and others across channels. So we are not going to talk about specific margins at the product level, but we assure that we have a robust process that goes into design and ensuring they are profitable for us.

And do you have a follow-up on Tmall Global?

Exactly. How did that do, and then JuE how are you thinking about skin and I know that expanding into other categories and when do you start investing in a potential skin launch? Thank you.

So on that question, as I mentioned earlier, we are continuing to explore opportunities for ourselves. I cannot share with you definitively the timing of this because we ultimately need to understand the market better and we will conduct our due-diligence accordingly. Yes, regarding the Tmall approach, this is our first year anniversary in 2021. 11/11 will be where we are celebrating. We have data showing that we are one of the most socially buzzed brands in China and as you can appreciate, social media is a leading indicator of success in that market. We will continue to build brand awareness through our portfolio on Tmall Global online, driven by our social media platform build-out. Activation is a long-term game for us; we don't go in and out quickly. We measure our activations and double down on what works, and if it doesn't, we pivot to something else. So there’s discipline in our marketing strategy.

Thank you. There are no further questions. I will now turn the call back to CEO, JuE Wong for closing remarks.

Thank you so much, and thank you everyone for joining us today. We wish everyone a happy and healthy holiday season and a New Year. We look forward to speaking with all of you again at upcoming investor conferences and when we report our fourth quarter results in March of next year. We’ll see everyone soon.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.