Olaplex Holdings, Inc. Q3 FY2022 Earnings Call

Good morning, and welcome to Olaplex Inc.'s Third Quarter 2022 Financial Results Conference Call. All participants are in a listen-only mode. After the speaker’s presentation we will conduct a question and answer session. As a reminder, this conference call is being recorded. I would now like to turn the call over to Allison Malkin of ICR. Please go ahead, Ms. Malkin.

Thank you. 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 Olaplex's business and other matters referenced in the company's earnings release issued today. Each forward-looking statement is subject to risks and uncertainties that could cause actual results to differ materially from those projected in or implied by such statements. Additional information regarding these factors appears under the heading Cautionary Note regarding forward-looking statements in the company's earnings release and in the filings the company 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 financial measures should not be considered in isolation, or as a substitute for results prepared in accordance with GAAP. You will find additional information regarding these non-GAAP financial measures and a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures in the company's earnings release. A live broadcast of this call is also available on the Investor Relations section of the company's website at ir.olaplex.com. I will now turn the call over to JuE Wong.

Thank you, Allison, and good morning, everyone. Before we get into the details of Q3 and the balance of 2022, I would like to take a step back for a moment to provide some perspectives on our business. Since our founding and over the course of the last year as a public company, we have built a business that is truly differentiated in the beauty category and specifically in prestige hair care. We created the bond-building hair care segment, launching a new subcategory that has changed the way consumers treat, protect and maintain healthy hair. We have been innovative, focusing on science-based, patent-protected technology and building an incredibly powerful brand. The quality of our products has contributed to our strong consumer loyalty and retention, which has translated into strong sales growth and industry-leading margins. Today, I will detail the steps we are taking that are intended to ensure that we have in place the processes and tools necessary to better drive and forecast consumer and customer demand, and ultimately re-establish our authoritative standing in the market. I will then share some details behind our longer-term plans that give us confidence in our growth trajectory. Ultimately, we believe that the fundamental competitive advantages of our business remain intact. And importantly, we are responding thoughtfully and quickly to the issues that have developed recently. I'll quickly provide some details on the quarter, and I will then discuss the actions we are taking in an effort to strengthen the business in the short term. I'll then turn the call over to Eric to discuss third quarter results in greater detail and will wrap up the call with some details of our long-range plan for the business. For the third quarter, our results were in line with what we provided on our business update call on October 18. Net sales were $176.5 million, up 9.2% compared to a year ago, and adjusted EBITDA of $102 million, declined 4.5% year-over-year versus up 63% last year, with an adjusted EBITDA margin of 57.8% for the third quarter this year compared to an adjusted EBITDA margin of 66.1% for the third quarter of 2021. Now let's discuss the actions we are taking to address some of the short-term issues we are experiencing. We are primarily focused on two key areas. Our first priority is to accelerate demand. Secondly, we are taking actions that are designed to enhance our forecasting capability. I'll start with the actions we are taking to drive demand. Let me start with our professional channel, which constitutes 43% of our business and consists of take-home retail products sold in the salon and products used in the back bar, including treatments. We continue to have the number one selling skills sold through salons in the U.S. in each subcategory. Shampoo, conditioner, and styling as per client through the second quarter of 2022. We have increased investment for the fourth quarter in building awareness across the stylist community in the key markets of the U.S., U.K., Australia, and France. We have also partnered with new trains and key opinion leader salons in the U.S. and Canada to further drive awareness, PR, and sales. We have proactively taken steps to rebalance inventory at one of our key U.S. distributors to improve overall inventory mix and provide a more stable foundation for 2023. And as we mentioned on our business update call, while we can't control the macro environment, we are taking steps to support our pro stylist community during this challenging time. In the U.S., we have relaunched our pro affiliate program, providing stylists with the ability to receive a commission on net sales when their customers buy Olaplex using an affiliate code at olaplex.com. In our specialty retail channel, we are enhancing exposure with several of our key retail partners and introducing programs that are designed to drive trial and customer acquisitions. To this end, at Sephora, beginning in the first quarter of next year, we will participate in sampling for the buy-online pickup in-store program, providing upwards to 500,000 samples of our No. 3 Hair Perfector. In past trials, the conversion to purchase with samples was extremely high, and we believe that this strategy will be highly effective for Olaplex at Sephora. At Ulta, we will be tapping into a 360 retail salon cross-shop strategy starting in January, providing our No. 3 sample with any Olaplex salon service. When we tested this at another retailer with a salon presence, we saw nearly 100% conversion to full size, and hope to also see positive results at Ulta. In the specialty retail channel, we are piloting a program to bring a third-party field sales team of educators trained by Olaplex into the top 75 Sephora and Ulta retail stores in the fourth quarter of 2022. This has been one of the most requested actions by our retail partners. We are expecting a meaningful sales lift during the program in these stores during the pilot program, and we will assess further rollout potential in 2023. Next, let's talk about visibility into demand trends. Given the rapidly evolving macro and competitive dynamics and the very high growth trend that we have been lapping, we recognize that we need to evolve our business forecasting processes and are currently implementing demand planning improvements that will help us better track underlying consumer and customer sentiment and behavior, which we believe will provide more insight into our channels. This includes new tools that are designed to allow our team better visibility in customer sell-through and inventory levels, where that data is available, in an effort to better predict future demand. Before I pass it over to Eric, I want to share an organizational update regarding our Investor Relations function. We are pleased to welcome Patrick Flaherty to Olaplex, who has joined us as Vice President of Investor Relations. Patrick comes to Olaplex with more than a decade of experience in Investor Relations across several industries and with deep knowledge of the beauty category after serving on the Investor Relations team at Ulta Beauty. With the appointment of Patrick, we look forward to continuing on our commitment to providing high-quality service to the investment community. At this point, I'll turn the call over to Eric to cover third quarter results and then will return to share our longer-range plan.

Thank you, JuE, and good morning, everyone. As we discussed with you on our business update call, we had a challenging third quarter. And as JuE just discussed, we are taking immediate action to address the issues we encountered, and we are confident in our long-term growth trajectory. First, we want to recap our results from our business update call on October 18 and share our finalized numbers. In the third quarter of 2022, net sales increased 9.2% to $176.5 million versus $161.6 million last year. By channel, specialty retail sales increased 60% to $74.2 million on top of a robust 128% gain in the prior year period. We saw continued growth from our highly successful launch into Ulta Beauty and higher sell-in to support the holiday season this year, including growth from selling more holiday kits versus last year. Professional channel sales declined 16% to $63 million versus a 58% increase last year, as our U.S. distributor partners reduced purchases to adjust inventory levels given softer demand from stylists, which we believe is partially driven by macroeconomic concerns. Our direct-to-consumer channel sales were down 2.6% to $39.3 million, following an 87% increase last year, due to slower sell-through related to weakening market growth and increased competitive activity, including discounting. In the third quarter, we also saw a key U.S. DTC customer reduce orders to meet lower targeted levels of inventory on hand. By geography, international led our growth with a 27.8% increase driven by strong contributions from the U.K., Italy, France, Germany, Canada, and our emerging cross-border e-commerce business in China. The U.S. declined 4.3%, driven by the aforementioned pressures in the professional and DTC channels. Moving down the income statement, adjusted gross profit margin was 75.1%, declining 480 basis points from 79.9% in Q3 2021, approximately 210 basis points of this contraction reflects deleverage and inflation in our warehousing and distribution costs, 150 basis points from inflation on product costs, and 160 basis points of unfavorable mix from the higher sales of holiday kits, with the balance related to unfavorable product and customer mix that is offset by the benefit of the price increase we took from July 1, 2022. Adjusted SG&A increased 27.9% to $28.4 million from $22.2 million in Q3 2021. The $6.2 million increase in adjusted SG&A from the prior year reflects investments made to support the long-term growth of our business, including a $4.3 million increase in sales and marketing expense, a $2.5 million increase in public company costs and other related expenses, a $2.2 million increase in workforce expansion, and a $2.1 million increase related to professional fees. Adjusted EBITDA declined 4.5% to $102 million versus $106.8 million in the third quarter of 2021. Adjusted EBITDA margin was 57.8% compared to 66.1% a year ago. Adjusted net income decreased 1.6% year-over-year to $73.3 million or $0.11 per diluted share from $74.4 million or $0.11 per diluted share in the 2021 third quarter. Adjusted net income benefited from lower interest expense year-over-year resulting from our first quarter debt paydown and refinance. Now turning to the balance sheet, inventory at the end of the third quarter was $151.3 million compared to $140.3 million at the end of the second quarter and $98.4 million at the end of 2021. As mentioned on our October call, this is higher than originally planned due to our lower sales delivery in the quarter. We have already altered our sourcing plans and slowed procurement to match the new sales forecast. Over time, this will lower our own inventory to target levels, and the timing of this will depend on sell-through trends. Turning to cash flow, we once again generated strong cash flow with $181.8 million in cash from operations through the end of the third quarter, up from $130.3 million for the same period last year. We ended the quarter with $249.4 million in cash and equivalents. Long-term debt net of current portion and deferred fees was $655.7 million. Now turning to our outlook. We are reiterating our fiscal year 2022 guidance that we provided on our business update call on October 18. We plan net sales in the range of $704 million to $711 million, an increase of 18% at the midpoint; adjusted EBITDA in the range of $425 million to $431 million, an increase of 5% at the midpoint; and adjusted net income in the range of $303 million to $307 million, an increase of 11% at midpoint. Similarly, at the midpoint of our fiscal 2022 sales guidance, our implied expectation for net sales growth by channel and geography remains consistent with what we shared on our October business update call. As it relates to the fourth quarter, while we have actions in place to accelerate growth, we are still planning for an increasingly difficult macroeconomic operating environment and for further inventory rebalancing by several key customers related to our slower sales momentum. Based on today's macro environment and our current forecast, we expect this inventory rebalancing to normalize by the end of the first quarter 2023 in our professional and specialty retail channels. As a reminder, our guidance for Q4 also reflects that we will not be able to lap the robust sales lift that we experienced during the fourth quarter holiday period last year when we grew 78%, benefiting from significant replenishment orders across our specialty retail and DTC channels at a time when we believe consumer demand was stronger and some of our competitors struggled with consistent supply. In summary, our recently revised guidance for the second half of 2022 sales represents a pause from the exceptionally strong performance that we have seen through the first half of 2022. We are confident that with our proven strategy, strong track record of execution, and leadership in a resilient, high-growth category, we have significant opportunities ahead.

And now I will turn the call back over to JuE to conclude with commentary on our long-term strategy. Thank you, Eric. And turning to our long-term strategic initiatives, we are focused on four key pillars that we believe will help us succeed in the years to come. They include igniting our global brand, disrupting with innovation, amplifying channel coverage, and charting new geographies. We believe that these pillars, taken together with our foundation in category-defining technology and meaningful connection with the consumer and stylist community, position us nicely for continued growth. Let's start with igniting our global brand. We have built one of the most powerful brands in the industry. We have successfully expanded awareness within our key segments and have seen our aided brand awareness increase 700 basis points from the beginning of the year based on our internal brand tracker. We know, however, that we cannot rest on our laurels, especially given the attractiveness of the market opportunity. As we have consistently said in the past, we plan to continue to increase our marketing investment to grow awareness and build equity for our brand. Our marketing model will continue to focus on the high ROI activities that have proven to be so effective for us to date, community engagement with our stylists and consumer sampling, performance marketing, and visual merchandising. This model has been highly effective at generating additional earned media value. We will continue to expand our global community reach with a focus on engagement across our pro, influencer, and fan communities, ensuring that we have more diverse audiences in mind. We intend to introduce a new seeding program to ensure we are fueling our robust, user-generated content library and powerful real people reviews. We will reinforce our pro’s as our opinion leaders and give them the platform to showcase their work. Next, we believe we can continue to grow our business through disruptive innovation and groundbreaking new products. We are a science-based beauty company. We have over 100 patents across the globe and a dedicated R&D team with an in-house innovation lab. In 2022, we launched No. 9 Hair Serum, No. 4C Clarifying Shampoo, and our broad-spectrum collating professional treatment. As you look ahead, we have an aggressive plan to launch non-cannibalizing pro and retail products over the next five years. With only 14 product offerings today, product expansion into attractive new segments remains a significant opportunity. We are planning to launch two to three retail SKUs and one pro backbar treatment product annually. In addition, we expect to launch into non-hair care adjacencies. We continue to have ample room for growth in increasing penetration with consumers in our existing points of distribution globally, as well as participating in new door growth with existing and new partners. In professional, we were only in 15% of U.S. salons in 2021 per client. This leaves us with a major opportunity. Historically, we have outperformed in moderate and value-oriented salons, but there are tremendous opportunities to introduce our products in premium and prestige salons, which is the foundation for our pro plan in 2023 and beyond. In the specialty retail channel, we have significant white space in penetration. In Sephora U.S., we believe approximately 12% of total Sephora shoppers purchase Olaplex, while a best-in-class brand across categories is closer to 20% to 25%. We have significant room to grow. Furthermore, as Sephora continues to expand into new geographies, there are new doors that will continue to have a 6-shelf linear dedicated space to Olaplex. At Ulta Beauty, we are still in the early innings of penetration with Olaplex pad in less than 5% of Ulta's shoppers' baskets. We believe penetration could increase significantly, given that Ulta is a destination for hair care, with hair care accounting for 20% of their total business. We also have an opportunity to secure multi-facing in-store space and expand reach within Ulta Salon, where only 25% of salon services used Olaplex. Next, let's discuss how we are growing geographically. Our priority international regions in the next several years will include Asia and Europe, and we have specific plans in place for new market entries and expansion. We believe that we have a very significant opportunity across Asia, and we know from our seeding efforts that the Olaplex brand is resonating well with consumers in those markets. We have recently launched a new master distributor in Southeast Asia and in South Korea. And in China, we continue to build significant momentum through the cross-border e-commerce channel. Across Europe, we are complementing our strong professional business with additional partners in specialty, retail, and DTC. Sephora Europe and Douglas remain two good examples of where we see both penetration and door growth opportunities. In addition, we believe that we can enter approximately 2,000 new premium specialty doors in the EU and there are additional opportunities to grow in pharmacies, many of which focus on beauty products. Travel retail also presents a big opportunity for us in the medium term. As previously mentioned, we intend to start by entering into travel retail in Europe beginning in Q4 of 2022. This is a channel that will further expand our visibility while generating sales. To close, it is important that I discuss why I remain so excited about this business and its long-term prospects. From a broader perspective, the retail beauty market, while not immune to macro factors, has proven to be resilient. Premium hair care is still in its early stages of adoption and is outperforming the rest of the prestige beauty market. Per NPD, prestige hair grew 23% in Q3 versus last year, with Olaplex growing 35% versus last year. Olaplex is the category leader in bond building with an incredibly powerful brand in the market. Based on our consolidation of third-party data sources, we believe our market share in U.S. retail plus front of salon sales in the first half of 2022 is 15%, which would make us the market leader. We have passionate consumers. As per our internal brand tracker of U.S. premium hair care consumers, Olaplex is the number one or number two leader in all 15 positive hair care attribute categories, which we believe helps us to drive consumer loyalty and allows us to sustain best-in-class conversion to purchase rates. We believe that we have the science-based technology to successfully expand into adjacent segments, both in hair care subcategories and in new categories. We believe that our patents and strong relationship with our channel partners provide a formidable competitive moat. We have a strong balance sheet, industry-leading margins, and strong cash flow generation, which provides the financial means to execute our vision and capture a significant portion of this large and growing market, and we have a talented, dedicated team with deep experience navigating through difficult market conditions. This concludes my prepared remarks, we will now turn the call back over to the operator for questions.

Our first question comes from Jonna Kim from Cowen. Please go ahead. Your line is open.

You've done really well in terms of marketing spend, keeping it in the low single-digit range. As you think about increasing brand awareness both in the professional channel and among consumers, do you expect you need to spend more in terms of marketing? And as you think about marketing strategy, what are some of the higher ROI channels that you can further invest in?

Thanks, Jonna. This is JuE, I will take that question. First of all, what we have always believed in is that our model really works when it comes to high-performance marketing, looking at our return on investment, and we have always said we will invest ahead of growth. And this includes our people, our R&D in terms of innovation, and in sales and marketing activities, initiatives, and strategies. And as you have seen, we continue to be the best in class, whether it's in our rankings across all channels: professional, retail, DTC. So we want to double-click on what works, which is engaging our customers on social media, being at where they shop. And in this case, you have just heard us say that we are going to be putting people into stores that not only are trained by us, but can actually educate consumers, educate in-store beauty advisers with those retailers, and more importantly, help with sell-through. So all of these activations are both near term, but will also establish a foundation for us as we move into 2023 and beyond.

I have a follow-up question. Considering the competitive dynamics you've mentioned, how do you view your innovation pipeline? Additionally, could you elaborate on your customers' likelihood to purchase new products upon launch, as well as any adjacent categories? Any insights you could share would be appreciated.

Yes, it is important to note consumers are always going to be looking for newness. But studies have also shown that consumers really also gravitate and go back to what works. And in this case, Olaplex is the creator of the bond-building category. And why I talk about that is your hair bonds is the foundational for hair health. If you do not take care of your hair bonds, no matter what you do, you're not going to address that, first and foremost, the foundation to give your hair the opportunity to stay healthy. So with that said, we hold those patents. We deliver on repairing hair bonds in the first application. And our leadership position will continue to drive interest in this category, which we really believe is a good thing because as more consumers know about it, they're going to want to test products. And I just want to conclude by just saying that we truly deliver what works. It is not just marketing speed and we don't lead with titan pending promise, we actually already have patents, well over 100 patents to really deliver on the promise that we say, which is repairing, strengthening and protecting your hair bonds.

Our next question comes from Olivia Tong from Raymond James. Please go ahead. Your line is open.

I wanted to start by asking about the new channels you mentioned, particularly the European specialty doors and travel retail that are entering this quarter. My understanding is that these channels typically have lower margins. Could you provide some insight into the margin impact from the planned expansion? Additionally, what is your perspective on long-term margins? You discussed several investments aimed at supporting growth, and I am also curious about whether you plan to fill the CRO role or add more personnel in areas such as demand forecasting, retail relationships, and marketing.

Eric, why don't you take the questions on the margins, and I'll come back in on the CRO role?

Of course. Thanks, JuE. So the first question about entering into some new customers and channels. We've consistently said that the way we evaluate these growth opportunities is through the primary lens of incrementality. We think that those customers in those new channels are going to be highly incremental to the business. And even with a slight margin dilution, that's going to be a positive thing for creating value for the business. And how that pertains and builds on your question around long-term margins, our message here is very consistent with what we've said in the past. We will continue to invest in marketing, R&D, and the organization ahead of growth. And because of the disruptive model that we have, we believe that even after those investments, we're going to have industry-leading profit margins in the medium term.

Thanks, Eric. And Olivia, let me follow up on your question regarding the CRO role. We are excited about this opportunity to sort of create this new role because all sales channels will report to this person. So in doing this, it creates really an opportunity to build on our already strong sales team and enhance connections across all our channels. The most important thing to note is that with something of that nature, where one person looks at all the channels, we will then be able to share best practices as well as leverage data to help us make better decisions, whether it's in sales, whether it's in collaboration with marketing, and then, ultimately, really driving healthy sell-through.

Our next question comes from Rob Ottenstein from Evercore. Please go ahead. Your line is open.

Great. Standing back, it sounds like September really slowed down a lot. I think you had mentioned before NPD sales were up 50% July and August. And then for the whole quarter, just 35%. So a pretty bad September. Can you give us actually kind of what happened in September and October in terms of e-commerce and retail? And to what extent do you think, if any, your price increase had an impact on the slowdown in sales? And as you stand back and think about it, how do you assess the execution on the price increase and the timing of it?

Thank you, Robert, for your question. Eric, would you like to address the latter part of Robert's question while I cover the first part?

Absolutely, JuE. So I'll say two things and then JuE, of course, you build on this. Let me start by actually answering your question about September and October. Clearly, we did see a slowdown in September. That's what we covered on our October 18 update call. And just speaking to October as well, this is very much about the fact that we don't believe we're going to be able to lap this exceptionally strong period that we had in the prior year holiday period when replenishment orders were very high, consumer demand, we believe, was stronger, and even some of our competitors, we believe, were struggling to keep stock. So that's what's being reflected in the NPD data. What I'll build on that though is because of the actions we're taking, the marketing activations we're putting in place, we are seeing positive early signals from the activities that we're implementing.

Eric, I understand that we are comparing against a strong performance from the previous year, which is clear. Can you provide any details regarding the actual sequential sales?

Yes. I mean sequential actual sales, and you'll see in NPD as well over time, are building. They're building because sales get stronger as the holiday season progresses, and maybe that's one more comment. What we've seen so far is the holiday season is consistent with our revised expectations, and that includes the fact that we think consumers are shopping a little bit later in the holiday than last year, where I think we can all remember because of the global macro supply chain concerns and worries about products being out of stock, everyone was driving for holiday even earlier, even in September last year. We're not seeing that trend this year, but we are seeing things pick up especially based on our own marketing activations for holiday in October.

Well, just in terms of September, what did the September actual like NPD sales on an absolute basis look like compared to July and August? So forget the year-over-year, just sequentially, did they increase in September or decrease? And what kind of order of magnitude?

Robert, can I answer that question and provide some clarity? We have always said that prestige beauty is resilient, but it is not immune to macro conditions. And so if you look at what NPD tracks of the 14 consumer groups, prestige beauty is still the strongest in terms of growth. And we participated in a category that is truly resilient, and we are leading in terms of the prestige hair category. So we feel confident that despite some of the consumer sentiment and the macroeconomic slowdown, and we are not immune to it, but we have activations and activities that will help us sell through that partners with our retail professional and DTC partners. And you heard Eric say that the near-term activations that we have put in, while it's early days, but I can share with you that the pilot programs that we implemented by putting in educators and salespeople into the stores is already showing very promising results.

Great. Just to circle back, do you believe that the price increase you implemented really had no impact on the slowdown?

No, we don't believe that.

Our next question comes from Jason English from Goldman Sachs. Please go ahead. Your line is open.

I have a couple of questions. First, regarding your last point, it's great to hear the positive feedback from the educators in the pilot stores. How widespread is this response expected to be in the fourth quarter? I assume it must be fully accounted for in the guidance you are reaffirming. Considering the margin profiles you are projecting for the fourth quarter, should we use this as a basis for estimating your future expenditures, whether on in-store educators, additional marketing efforts, or other engagement initiatives, including KOLs? Is this a reasonable reference as we think about 2023 and beyond?

I'll take the second part of the question, and then JuE, I think you want to answer on the nature of the pilots that we're doing. So look, Jason, I would say, no, we're not suggesting that fourth quarter in isolation is the right extrapolation point for looking at 2023 or beyond. Consistently, we're going to keep on investing in marketing and into the organization, and we believe we're going to be able to maintain industry-leading margins. But Q4 and the Q4 margin profile isn't what I would project forward.

And Jason, please continue.

Yes, it really was a two-part question. It was just one part question. So I think Eric covered it. I do have another question, though, just as we try to wrap our heads around what's happened with the business. Clearly, we all got a little too enthusiastic and excited about the sales trajectory of the business. And I think a lot of it is because we didn't appreciate that there was a cohort of consumers who probably came in who didn't really have the problems that your product solved; they came in because there was hype behind it, right? Like it was the shiny new toy. And now, there are other shiny toys that are out there. I've got no doubt that your product does solve a very real problem for a large cohort of consumers, but we appear to be in this washout phase of the others who've come in. Have you had any success kind of sizing those cohorts to understand how much of that revenue that you generated in the last year maybe came from the sickle consumer who's now moving on to the next thing? If so, can you share what you've learned and also share how you got to that answer?

Great. No, thanks a lot, Jason, for this question. And it is important to note that, yes, we created the category, we created a lot of excitement. But ultimately, it was not a brand that rests on marketing. It's not a brand that talks about the fact that, 'Oh, you may need this product.' It is scientifically proven and clinically supported. So when we say that consumers do understand, and that's why you're seeing the prestige hair category being tracked by NPD starting in 2015. What is important to note is that it is still in its early stages. Consumers are going to try different things, but they consistently look for value. So our transformation team on a monthly basis tracks what are the important attributes that consumers are looking for. They are looking for products that work. They are looking for products that consistently delivers on their promise. They're looking for brands that they can trust, not just on marketing hype or promises that they cannot deliver. We do all of that. And in fact, in those top 15 attributes, we ranked number one or number two against our competitive cohorts. So when you see that kind of results and you see what has happened in terms of our updated business update, it is definitely not us because the brand still resonates. If we did not resonate, then consumers, we will not be able to retain that. We are still the best in class when it comes to our consumer retention. And I know your question is a very big question. Hopefully, I have distilled the answer for you in such a way that you can see that the brand fundamentals are strong, and we are tracking attribute steps, captures that strong brand fundamentals.

Our next question comes from Jonathan Keypour from Bank of America. Please go ahead. Your line is open.

I would like to follow up on Jason's question and gain some insights from a competitive perspective rather than a user perspective. Could you elaborate on the sources of the pressure you mentioned? Is it primarily from large international companies with strong portfolios, small start-up brands, or brands with their own scientific foundations? I'm curious to understand whether the competition arises from brands that may be less effective for hair but have better marketing, or if it comes from brands where technology also plays a significant role in their appeal.

Thanks, Jonathan. Let me address that question. I want to confirm that we are still projecting a growth midpoint of plus 18%. Consider that we had plus 87% growth last year. Despite ongoing macro challenges, we remain on an upward path. We continue to generate cash, and our brand maintains strong consumer trust. Achieving the top spot in all trade channels reflects our connection with consumers. While competition and pricing strategies are significant, the category itself is gaining attention and appeal, which will attract new entrants. As Jason noted, consumers may be drawn to the latest trends, but ultimately, effectiveness is key. We believe we have the best opportunity to succeed due to our proven patent, which differentiates us from many brands still in the patent-pending stage. Our patented products are accessible for customers to experience and are backed by clinical claims. I wanted to clarify that point. We also recognize the importance of effectively communicating with consumers, which is why we have personnel in-store to connect directly with them amidst the noise.

I have a small follow-up related to this. Is there an approach or any contractual agreements or mechanisms in place to encourage your salon base to use Olaplex for a specific duration? Aside from the technology, functionality, and very positive consumer reaction to Olaplex, is there anything that ensures the salons you currently serve continue to use the product? Or is the situation less complicated?

Thank you for your question, Jonathan. I understand what you’re asking about their commitment to the brand. They are dedicated to working with us, and we constantly engage in focus groups and check-ins with the professional community. We have emphasized that these professionals are the ones who truly give us credibility. When we engage with them, they consistently tell us that we provide the opportunity to enhance their craft and reassure them that they can deliver the best results for their clients. If we can meet those expectations and help them improve their skills, they won’t have concerns about using bulk products and witnessing issues that consumers may face. When they see that Olaplex is responsible for positive outcomes, there is a strong demand for our product based on its performance. As we’ve mentioned before, in 2023, one of our key focuses will be on serving prestige and premium salons. This is essential because we have traditionally connected well with salons that purchase products for single services or a few at a time. Now, those premium salons are larger buyers, and as they become more conscious of what we offer, that represents a significant group we aim to target. You will see us allocate resources toward this initiative, especially in 2023, as we have already begun preparations for it this year.

Our last question will come from Ashley Helgans from Jefferies. Please go ahead. Your line is open.

We've noticed a step-up in the promotional level just at beauty retailers recently. Can you just give us an update on your expectations for promo levels during the quarter and the cadence throughout the holiday season?

Thank you for the question. It's difficult for me to provide a specific number. Our transformation team bases decisions on data points. It's important to highlight that there has been an increase in promotions across all consumer products, including beauty. However, Olaplex has strategically chosen not to engage in these increased promotions or overpromote. When we do choose to participate in promotional activities, it must focus on acquiring new customers and encouraging our loyal customers to buy more. We make these decisions based on our relationships with retailers, both online and offline, as well as our pro community, collaborating on specific activations. These activations provide us with consumer insights. We prefer not to take part in general promotions, especially if they merely prompt consumers to delay purchases. When we do engage in promotions, they are targeted and strategic. While there are more promotions available, we are not involved in more promotions than we were last year. Well, first of all, thank you so much for joining us today. I'd like to wish everyone a very happy and healthy holiday season, and I look forward to speaking with all of you at our upcoming conferences when we report Q4 results. So thank you, everyone.

This concludes today's conference call. Thank you for your participation. You may now disconnect.