Earnings Call Transcript
Olaplex Holdings, Inc. (OLPX)
Earnings Call Transcript - OLPX Q4 2021
Operator, Operator
Ladies and gentlemen, thank you for being here and welcome to Olaplex Inc.'s Fourth Quarter Earnings Conference Call. All participants are currently in a listen-only mode. Following the presentation, there will be a question-and-answer session. I would now like to hand the conference over to your speaker for today, Allison Malkin. You may begin.
Allison Malkin, Moderator
Thank you and welcome to the Olaplex's Fourth Quarter 2021 and 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 highlights of our fourth quarter and fiscal year as well as the priorities we have set for the business in fiscal 2022. Then Eric will review our financials in more detail and provide our guidance. Following the prepared remarks, the operator will open the call so that we can answer your questions. 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 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 are 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 a 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. With that, I will now turn the call over to JuE Wong.
JuE Wong, CEO
Good morning everyone, and thank you, Allison. I am pleased to speak with you to share our fourth quarter and fiscal year 2021 results. Our performance marked an excellent finish to a strong year of growth at Olaplex and surpassed the guidance we introduced on our Q3 earnings call, reflective of the power of our technology and our approach to hair care, and the focused execution of our strategies by our team. I would like to thank all our team members for their valuable contributions. As more consumers and professionals have come to know, our success is a direct result of our products that work to improve hair health from the very first use. Olaplex repairs hair bonds with a unique system so that hair can be a healthy canvas to receive other treatments, whether chemical, color, straightening or otherwise. Olaplex is also highly beneficial as a standalone treatment as we damage our hair bonds daily. Hair bonds are hair agnostic serving any hair type, regardless of a person's age, gender, or ethnicity. This gives us a vast expansion opportunity from which to grow and has led to Olaplex being part of millions of consumers' haircare regimen, and a must-have treatment for stylists to apply on their clients. We see the skinification of haircare as an ongoing trend, and one that we believe has tremendous runway ahead as we apply our patent-protected technology to meet current and new consumers’ needs for products that are used every day for hair protection and repair and products for style. With 11 established products and more than 100 patents for existing and new technologies, we have a competitive moat and are confident in our ability to deliver consistently strong sales growth at robust EBITDA margins into the future. The fourth quarter saw net sales increase 79% and adjusted EBITDA increase 68.2% with an adjusted EBITDA margin of 66.5%. For the fiscal year, net sales rose 112% and adjusted EBITDA increased 105.1% with an adjusted EBITDA margin of 68.3%. The year marked several noteworthy accomplishments, which we are proud to share. Olaplex was honored with 33 industry awards, the most ever in our history, surpassing the combined number awarded to us in our seven-year history. According to the NPD Group retail tracking data, Olaplex had the best-selling prestige hair products with our No. 3: Hair Perfector. Olaplex had the best-selling prestige shampoo, and Olaplex had the best-selling prestige conditioner. Continuing with our track record of A-plus new product launches, Olaplex had the best-selling haircare launch with No. 8 Bond Intense Moisture Mask. Again, per the NPD Group retail tracking data, the prestige haircare market grew 47% in the U.S. in 2021. As a result of our focus on market developments, fueled by innovation and product excellence, Olaplex gained 500 basis points of market share in this category during this period. Olaplex was the number one haircare brand by Tribe Dynamics, Earned Media Value in 2021, and had started 2022 in the same position. Outside the U.S., on Singles Day in China, we were the number one haircare brand across all classes of trade on TIMO Global for the period from October 20 to November 11. We were also the number one haircare brand at Sephora Europe in 2021. We continue to lead in social media. As of December 31, 2021, the Olaplex hashtag has been used over 12.9 million times across social media platforms by our community of professional hairstylists and consumers who create their own content about their haircare regimen. In fact, during 2021, we had exceptional engagement. We ended the year with an Instagram community of over 2.2 million followers, which generated 2.6 million likes and an average of approximately 13,500 story views a day. Our passionate consumer base is also demonstrated by our presence on TikTok, where our videos have been viewed over 10.6 million times between October to December of 2021. As of December 2021, videos using the Olaplex hashtag have been viewed over 542 million times since the hashtag first appeared on the platform. We continued our sustainability goals to reduce our carbon footprint and maintain our leadership in diversity and inclusivity. We promote hair health without threatening the environment with cruelty-free and non-toxic formulas that are sulfate-free, phthalate-free and phosphate-free. By limiting secondary packaging since 2015 we have prevented 35 million pounds of greenhouse gas from being emitted into the environment and saved 57 million gallons of water from waste. 82% of our Board is female, 18% of our Board are racial minorities, and 76% of our employees identify as female, 46% are racial minorities. We expanded our talent base increasing executive leadership and our associate base across the organization to support our growth. Since the beginning of 2021, we have added 19 professionals to our senior leadership, including the addition of our Chief Scientist, Lavinia Popescu; Chief Transformation Officer, Juliane Park; Chief Financial Officer, Eric Tiziani; and Charlotte Watson as our Chief Marketing Officer, as well as six leaders in R&D and seven leaders in professional and retail sales. We also expanded talent within finance and operations adding a Senior Vice President of Operations, a Senior Vice President of Accounting, and Vice President of Finance. We successfully completed our initial public offering and subsequent to year-end, our cash flow-generating business model allowed us to optimize our capital structure with a new term loan and revolving credit facility that lowered our outstanding debt and ongoing interest expense while maintaining sizable cash on hand and liquidity to meet organic or inorganic investment opportunities we find to keep driving our business. As it relates to the fourth quarter, our sales continue the positive momentum we delivered during the first three quarters of the year, with growth across products, channels, and geographies. In terms of product, core products drove our growth and our primary focus. 24 of our 33 awards in 2021 were for our core products of No. 0, 3, 4, 5, 6, and 7. We saw very strong growth from our new product launches throughout the year. Among the three new innovations in 2021, two were for take-home use and sold across channels. The No. 4P: Blonde Enhancer, No. 8: Bond Intense Moisture Mask and one is also for the professional segment the No. 4-in-1 Moisture Mask professional salon treatment. These launches show our continued commitment to providing high-performance products to both hair professionals and end consumers. We have proven that innovation complements our core as our consumers have purchased four or more of our products on average. Our market leadership and our success invite others to participate in the categories we serve, further growing interest for our products. With competition, there will be a growing interest and awareness in the hair category. We believe this benefits Olaplex as we can leverage our leadership position to continue to disrupt, lead and shape the market by investing in our innovations and further distance ourselves from the competition. Overall, the expansion opportunities presented by our patent-protected technologies give us a significant competitive advantage, which we expect to capitalize on to further set us apart from peers. Turning to our sales channel, our omni-channel business model again delivered broad-based growth across our three channels: professional, specialty retail, and direct-to-consumer. For the full fiscal year 2021, compared to 2020, the professional channel, which represented 43% of our business, grew 66%. Specialty retail grew 247%, and direct-to-consumer grew 117%. Growth within specialty retail was driven by productivity gains, recurring doors, and from the expansion of space and new retail partnerships. The fourth quarter also saw initial shipments to Ulta Beauty in preparation for a full retail store and online rollout that occurred at the start of 2022. The direct-to-consumer channel continued its robust growth across both olaplex.com as well as with our e-commerce partners. On olaplex.com we expanded into new markets, such as the UK and Australia, and continue to see healthy momentum in average order value and retention, particularly through our virtual bundles. The professional channel also delivered strong growth, both in the U.S. and internationally. We remain focused on both expanding penetration with new stylists as well as in expanding the purchases of existing customers. In one of our biggest professional customers, in the last 12 months, we saw 25% growth in new customers and 20% growth in purchases by existing customers. As many of you are aware, we have a sizable international business with over 40% of our sales achieved outside the U.S. in 2021. On the international front, we grew 91% for the full fiscal year 2021 compared to 2020. We are taking our omni-channel playbook that has worked so well for us in markets like the U.S. and the UK, and we are applying this model with significant success in other key markets. Italy and Spain were good examples of this in 2021. While we remain at an early stage of our growth in China, we were also very pleased with our results in cross-border e-commerce into China with TIMO Global. Overall during Singles Day for the period from October 20 to November 11, we were the number one haircare brand across all trade on TIMO Global. We know that Asia, and in particular China offers us a significant growth opportunity. We are proud of our 2021 accomplishments and are intensely focused and excited about our opportunities in 2022. As our guidance suggests, we are expecting another strong year of growth at robust margins. Our priorities in the year ahead are focused on increasing loyalty and brand affinity with each use of Olaplex across our core, the launch of two to three new products and identifying and capitalizing on opportunities to expand our distribution around the world. Our loyalty continues to grow, as demonstrated by social media followers, views and posts increasing from year-end. Currently, we have well over 750 million TikTok views for #Olaplex, 2.2 million Instagram followers, and 13.2 million posts on Instagram for #Olaplex. All of this translates to a rich user-generated content library that we can continue to leverage in our marketing and community-building efforts. Across our current distribution, we are intensely focused on increasing productivity, which will be complemented by expansion into new distribution, both in the U.S. and internationally. At the start of the year, we entered Ulta Beauty with our full portfolio, thereby introducing Olaplex to Ulta's 35 million loyalty members. Performance thus far has surpassed our expectations and Ulta's. At the same time, we continue to grow in double-digit percentages with Sephora, with Olaplex penetration at Sephora moving from 9% in 2021 to 12% of Sephora's customers currently. In the U.S., we are currently in all of Sephora's stores, and we will be doubling the Sephora Europe store count in 2022. In addition, we will be expanding our support at Kohl's store count from 200 to 650 in 2022. Further to our success with Douglas on dotcom, we will also enter more than 100 Douglas stores in Germany in 2022 as we continue to drive expansion into key international markets. We have a rich pipeline of innovation to support our 2022 plan, and we expect to continue to introduce two to three new products each year. As you saw from us in 2021, while we don’t provide information on expected launches for competitive reasons, these introductions are planned well in advance of launch and are included in our guidance. I would be remiss if I did not acknowledge the completion of our initial public offering in September. I would again like to thank the team and our business partners for their hard work and dedication to contributing to our successful offering in our first fiscal year as a public company. We believe that we are still in the early stages of realizing the full potential of Olaplex, and we seized significant opportunities for fiscal 2022 and well beyond with our disruptive business model and unique competitive advantages. As I've said before, every great story has a beginning, a middle, and an end, and in the case of Olaplex, it is all just the beginning. And with that, I will now turn the call over to Eric.
Eric Tiziani, CFO
Thanks, JuE, and good morning, everyone. I'll be covering our fourth quarter 2021 and fiscal year 2021 financial results as well as the introduction of our fiscal year 2022 guidance. As JuE noted, the fourth quarter capped off an outstanding year for Olaplex. I'd like to begin by acknowledging the Olaplex team who made this possible. We more than doubled the business, having $316 million of net sales and $210 million of adjusted EBITDA in 2021 amidst a volatile macro environment. This is a testament to the depth of our competitive moat, the resilience of our operations, and the passion that we have to serve the Olaplex community. Our growth was broad-based across products, channels, and geographies, and we expect this to continue in 2022 and our growth was very profitable with adjusted EBITDA and adjusted net income also growing triple digits. We entered 2022 with strong momentum. Our outlook for 2022 has only improved since our IPO in September 2021, and we have strong conviction that our strategy will continue to deliver healthy growth with robust profitability. Now turning to our financial results, my remarks will focus on our adjusted results. You can find reconciliation tables to the most comparable GAAP figures in our earnings release, which was also furnished on our form 8-K with the SEC today. Highlights of our fourth quarter included the following: net sales grew 79% to $166.5 million, with 95% growth in the U.S. and 61% growth internationally. This was yet another quarter of sequential growth, and a quarter in which each of our sales channels exceeded our expectations. Specialty Retail led the way with 332% growth to $59.6 million as we benefited from strong momentum in existing distribution, as well as supporting new distribution. This included continued velocity gains at Sephora, the launch into Sephora at Kohl's in 200 locations and the initial pipeline to support our retail and dot.com launch into all of Ulta in January 2022. This initial pipeline accounted for $15 million in net sales in the fourth quarter in line with our expectations. Excluding the Ulta pipeline sales, specialty retail still would have grown over 220%, and the total business would have grown over 60% in the quarter versus the same quarter last year. Direct-to-consumer sales rose 85% to $49.7 million, continuing our strong growth at olaplex.com and across our e-commerce partners. This was supported by increased digital marketing spend and the expansion of olaplex.com into new markets, such as the UK and Australia. Professional sales grew 9% to $57.1 million. This was slightly ahead of our expectations. We have historically seen some seasonality in this channel with higher shipments in the third quarter versus the fourth quarter due to the ordering patterns of stylists leading up to the winter holidays. However, we were lapping our fourth quarter of 2020 that had higher shipments related to the reopening of salons. I'll note here that the full year 2021 net sales growth in professional was strong at 66%, and we expect Q1 2022 growth to also be strong for the professional channel, as we continue to realize both higher penetration and higher velocities. Adjusted gross profit margin was 80.4% versus 81.6% in the fourth quarter of 2020. The 120 basis point decline was primarily due to higher inbound logistics and warehousing costs. Adjusted SG&A was $22.6 million, compared to $10.2 million in the fourth quarter of 2020. The increase was driven by an incremental $2.7 million in sales and marketing expense, $3.6 million in payroll for expansion of our workforce, and $6 million in other expenses relating to general business growth, such as outbound freight and public company costs which were not present in 2020. Adjusted EBITDA grew 68.2% to $110.7 million. Adjusted EBITDA margin was 66.5% compared to an adjusted EBITDA margin of 70.6% in the fourth quarter of 2020. Adjusted EBITDA margin this year reflects the decrease in adjusted gross margin and the increased investment in SG&A to support our higher sales. This included a year-on-year increase of 103 basis points as a percentage of sales in sales and marketing expense, and a 160 basis point increase in payroll and other G&A including public company costs. Net income increased to $69.3 million, growing by 108% versus the fourth quarter of 2020. Adjusted net income increased to $71.4 million or $0.10 per diluted share. This compared to $46 million or $0.07 per diluted share in the 2020 fourth quarter and represents 55% growth year-over-year. Now, I'll move on to the financial highlights for the fiscal year 2021. Total net sales increased 112% to $598.4 million with 131% growth in the U.S. and 91% growth internationally. Adjusted gross profit margin was 80.5% versus 81.6% in 2020. The 110 basis point decline was primarily due to inflationary cost pressures, mostly for inbound freight and warehousing. Adjusted SG&A increased 134% to $72 million in 2021. In 2021, this represented 12.1% of net sales, compared to 11.0% of net sales in 2020, and 2021, compared to 2020 the increases include $9.8 million in sales and marketing expense, $8.6 million in payroll driven by the expansion of our workforce, $6 million in distribution and fulfillment costs related to the increase in product sales volume, $5.5 million in cash settled units, and $11.2 million in other SG&A expenses pertaining to general business growth, including public company-related costs. Net income increased 462% to $221 million. Adjusted net income increased 110% to $275 million and adjusted EBITDA grew 105% to $409 million. We generated $0.40 in adjusted net income per fully diluted share, versus $0.21 in 2020. Turning to the balance sheet, inventory at the end of 2021 was $98.4 million, compared to $33.6 million at the end of 2020. We are comfortable with the level and composition of our inventory, which supports the strength of our business. This includes higher intrinsic inventory levels versus prior periods due to the longer lead times required given the macro supply chain environment. Overall, we believe we're well positioned to meet the continued high demand we're seeing in 2022. Turning to cash flow, our asset-light business model continues to drive very strong operating cash flow generation. At year-end, cash provided by operating activities rose $71 million to $200 million reflecting our strong EBITDA performance, which more than offset our investment in working capital. We continue to possess a strong balance sheet with higher cash and lower debt compared to 2020. As of December 31, 2021, we had cash and cash equivalents of $186.4 million, an increase of $175 million from 2020, and long-term debt was $738 million, a decrease of $17 million. On February 23, 2022, we completed a refinancing of our credit facilities that further reduced long-term debt and lowered our current underlying interest rates by 300 basis points. Now, let's look forward to our fiscal year 2022. We are expecting another strong year of growth in 2022 as we leverage our competitive advantages and continue to disrupt the market as a leader in prestige haircare. Our 2022 guidance reflects broad-based growth from our core, as well as new products, our three sales channels, existing distribution points, as well as new distribution points, particularly in specialty retail, and from both the U.S. and international. Our investment priorities to drive this growth also remain consistent, doubling down on our disruptive sales and marketing model, increasing investment in R&D to support science-based innovation and further investing in the organization to measure the growth of the business including costs relating to becoming a public company. For fiscal year 2022 we expect net sales in the range of $796 million to $826 million. Based on the midpoint of this range, this is 36% growth versus 2021. Adjusted net income in the range of $363 million to $379 million or based on the midpoint 35% growth versus 2021, and adjusted EBITDA in the range of $504 million to $526 million, or based on the midpoint 26% growth versus 2021. We would also like to provide the following additional impacts. We expect Q1 2022 net sales growth to be higher than the full year 2022 guidance, led by strength in specialty retail and professional above what we expect from DTC as we ramp the higher DTC trends experienced in Q1 2021. Our expectations for Q1 net sales growth to be above the growth for the full year was expected, given that last year's new product launches and distribution gains were largely introduced after Q1. This is already factored into our full-year guidance. Also, keep in mind that our guidance includes an expectation for adjusted gross margin to be down moderately versus 2021 as we absorb cost inflation that is not entirely offset by our mitigation efforts inclusive of cost savings initiatives and tactical pricing. Regarding interest expense, given the successful refinancing and based on our assumptions on future interest rates, we expect annual interest expense to be $40 million, of which $12 million will be in the first quarter. Lastly, our effective tax rate is expected to be approximately 21% in 2022. Keep in mind that we're not able to provide without unreasonable effort a reconciliation of the guidance for adjusted EBITDA and adjusted net income for 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 pleased with our accomplishments in 2021 and even more enthusiastic about the opportunities that lie ahead. We believe that we're at an early stage of growth, with high potential and ample whitespace both to grow our core, as well as expand our portfolio and distribution into new areas. We expect our disruptive business model and deep competitive advantages to drive this growth in 2022 and well beyond. This concludes our prepared remarks, and we will now turn the call back over to the operator.
Operator, Operator
Thank you. Before we begin the Q&A portion, I would like to turn the call over to JuE for a few remarks.
JuE Wong, CEO
Thank you very much, and first of all thank you everyone for taking the time to attend our earnings call. We would like to start by saying that our thoughts are with those in Ukraine and the innocent lives being lost due to this horrific war. The impact on the people of Ukraine is obviously top of mind, but we do appreciate you being here with us today to discuss our results. I also want to address the misinformation surrounding Olaplex and Lilial upfront in view of taking questions on it during the Q&A. In the last 10 days, misinformation on Olaplex had started with regards to Lilial and our products. We have been actively communicating across all our channels to ensure that our customers have access to the facts and to alleviate any anxiety that has been caused by this misinformation. Lilial is a fragrance ingredient commonly found in beauty and household products. In September of 2020, the EU Regulatory Authority announced their intent to phase out the use of butylphenyl methylpropional which is Lilial. On March 2022, out of concern that Lilial when used at certain quantities could have negative impacts on women's fertility and reproductive system if ingested. In response to the EU's phase out of Lilial, we no longer produce products with Lilial. Prior to the EU's phase out, our No. 3 Hair Perfector product contained very small amounts of Lilial to enhance the product's fragrance. Lilial was never an active or functional ingredient in our products and independent medical and chemistry experts have confirmed that a very small amount of Lilial 0.0119% previously used by Olaplex. in its rinse-off No. 3 Hair Perfector product had no impact on fertility and the reproductive system. We have provided updated and detailed information on our website under the FAQs. There is also a link to an article citing experts from the medical and science community, as well as the original study that led to the phase out of Lilial. We take pride in our investment in R&D and our commitment to ensuring that our products are designed and produced with the safety and health of the consumer at heart and will continue to abide by health and safety standards as they evolve. As we have always been, we will continue to proactively and transparently communicate with our customers and the market to ensure they are well informed about our products. Thank you for your attention and I will now turn this over to the operator for Q&A.
Operator, Operator
Thank you. Our first question comes from the line of Dara Mohsenian with Morgan Stanley. Your line is open.
Dara Mohsenian, Analyst
Hi, guys, good morning.
Eric Tiziani, CFO
Good morning.
Dara Mohsenian, Analyst
So, I wanted to ask about the Ulta rollout. It sounds like it's going well, even better than expected so far. Can you just be a bit more specific on the ultimate level of contribution you might see there as the business builds out going forward? And then so far, can you also talk about the incrementality you're seeing to your total business from Ulta sales so far through early March here, versus maybe cannibalizing some of the rest of your portfolio? And then last, just in a broader sense, what type of impact you expect on your household penetration of the Olaplex brand in general from the Ulta launch and what are you guys seeing so far there? Thanks.
JuE Wong, CEO
Thank you, and this is JuE. Let me take that question and Eric, please feel free to build on it. So first of all, your question regarding how our business is doing, we have obviously monitored very closely, and we are happy to report we are the number one brand at Ulta for haircare. In terms of services, 25% of our callers' services at Ulta use Olaplex as an additive, and that service is ahead of plan. In terms of cannibalization, Ulta really does almost close to 90%, 95% of their business with their 35 million loyalty customers and we now have the ability to be exposed to that 35 million customers that we probably would not have gotten full exposure to had we not been in Ulta. And regarding the question you asked in terms of impact on household, obviously, we don’t see that because we are getting into new markets and given our results thus far, where it is both our expectation as well as Ulta's, we are very confident that we will continue on the path of delivering what the consumers are looking for and what they need from us that is the Ulta gas techniques and wants things from us. Eric, do you have anything to add to this?
Eric Tiziani, CFO
Hi, JuE, hi Dara. I would only add one thing, Dara: to put it simply, when you think about our 2022 full-year guidance, you see basically the rest of our business on plan and this overperformance that we're seeing in Ulta is leading to the strong guidance that we've been able to report.
Dara Mohsenian, Analyst
Okay, that's very helpful. And if I can slip in one more, Eric, on that point, just as you think about 2022 guidance, obviously the broader market concerns about the indirect fallout from Russia, Ukraine, and weaker consumer spending for beauty companies in general, particularly premium ones like yourself. So just how do you think about the potential impact if weaker consumer spending develops on your business? Obviously, you guys don't have a long history through economic cycles, but maybe the experience during COVID, and how that might inform any impact? And as you think about your 2022 guidance, have you built in some conservatism on that front, either directly for weaker consumer spending or maybe other areas as you think about your 2022 guidance and the clarity behind that? Thanks.
Eric Tiziani, CFO
Yes, Dara, I'll take that and, JuE please add as you see fit. So first, let me just address the question about Russia and Ukraine, just for everyone's information. We have no direct operations in Russia, Ukraine, or Eastern Europe. Our direct exposure to Russia and Ukraine is very small, much less than 1% of sales, and only between one and 2% if you include all of Eastern Europe. Your question is broader than that, Dara: what about consumer spending? What about our macro outlook for the year? And we've reflected our assumptions in that guidance. We haven't seen an impact yet to the prestige haircare category, which has proven to be resilient through multiple crises. I'll point to the market growth that we saw in the U.S. in 2021, at least as measured by NPD: that U.S. retail market was 47%, and we expect that same market to grow double digits again in 2022.
Dara Mohsenian, Analyst
Great, that's helpful. Thanks, guys.
Operator, Operator
Thank you. Our next question comes from the line of Andrea with JPMorgan. Your line is open.
Andrea, Analyst
Thank you, good morning. JuE, Eric, I just wanted to perhaps bridge the top line, the sales growth that you have embedded for 2022. I know you normally don't break it down between new doors and distribution or same doors, but you did say many times innovation is the biggest component. So I was hopeful you could elaborate more. I'm assuming and correct me if I'm wrong, you're not embedding any haircare or I'm sorry, any skincare or nail care or even color hair color on this top line, so I just want to clarify that. Part of also the concern that investors had is the cost pressures to your third-party manufacturing. It looks as if it wasn't like a big impact this year. So I was hopeful to see if the contracts are broadly long-term and then you're not seeing much of a pressure that would need to be passed on to pricing at this point, if there is any pricing embedded in your guidance? Thank you so much.
Eric Tiziani, CFO
Thanks, Andrea, I'll take that. So first, on the breakdown of our 2022 growth guidance, I won't break it down specifically for 2022, but I'll reiterate the way that we've described our long-term algorithm here, which is broad-based growth. About a third of it comes from our core, about a third from the impact of innovation and new products, and about a third from new distribution. It won't be exactly that in every single year, but that's more of a long-term algorithm that you can think about. Regarding cost pressures, we are seeing cost inflation on average, not just with our third-party manufacturers, but more broadly in terms of market indices in the mid to high single digits, which we expect to partially offset with our cost savings initiatives and tactical pricing. Our contracts with our third-party manufacturers are long-term. We work with them on a quarterly to six-month basis or as needed to review cost increases they are experiencing, but also the increased volumes that we're driving at those third-party manufacturers as well and leveraging those efficiencies. So we built our assumptions on cost inflation into this guidance, and we'll continue to evaluate it as more information becomes available.
Andrea, Analyst
That's helpful. And just to clarify, so there is no major innovation outside of hair for this year?
JuE Wong, CEO
That's correct, yes. I mean, as we have accretive sales, the runway and opportunity for hair is tremendous, and we currently have only 11 established SKUs, so the focus is going to be on hair, yes.
Andrea, Analyst
Thank you very much. I'll pass on.
JuE Wong, CEO
Thank you.
Operator, Operator
Thank you. Our next question comes from the line of Jason English with Goldman Sachs. Your line is open.
Jason English, Analyst
And sorry, JuE, and I know you said you want to keep Lilial out of Q&A and address it upfront. But I do have a quick question on it. We see a big spike in like Twitter mentions and Reddit posts and Google searches; they all look like they faded since. But even if there's not substance behind the concerns for perception matters, have you seen any negative impact in retail sales related to this?
JuE Wong, CEO
I think you know, what I want to point you back to is the fact that we are addressing it on all fronts. This only happened in the last 10 days. So we are monitoring and looking at everything from all angles. But the primary concern now is to really address all of this misinformation because you can appreciate how some of the anxiety that has been created for women when they read about infertility. We are happy to be able to cite experts not affiliated with Olaplex nor paid by us, confirming that there was no impact on fertility.
Jason English, Analyst
Okay. Then let me move on to a different question, and that's China. Can you give us more detail around your strategy? I think as you've entered most markets, you've kind of seeded in salons and then scaled beyond. China seems like a very different approach where you're just coming through cross-border. Is it going to stay that way? Do you have a salon strategy? If you could just expound upon your plans in that market? Thank you.
JuE Wong, CEO
Yes, thanks for the question. First of all, we have done independent studies with our transformation team, identifying where consumers really look at buying innovative haircare products, and our studies have shown that TIMO, jd.com e-commerce site, is where a lot of consumers are buying their products. That doesn't mean that beauty salons do not factor in; but what I'm trying to convey here is that we are on the right platform marketing-wise, as far as communicating who Olaplex is gaining share and wallet share. Our Singles Day results indicate that we are the number one brand for haircare on TIMO Global across all classes of trade, which gives us confidence that our strategy is working. While it is still a small piece of our business, it represents an opportunity that we will continue to monitor closely.
Jason English, Analyst
Got it. Thank you, and that's helpful. I'll pass it on.
Operator, Operator
Thank you. Our next question comes from the line of Jonna Kim with Cowen. Your line is open.
Jonna Kim, Analyst
Thanks for taking my question. I'm just curious: One of your key strengths is your ability to launch new products that do not cannibalize existing sales. So, just curious if you're seeing similar trends with your recent launches, and sort of how should we think about the cadence of new product launches this year? Also, just curious about the professional channel, as you know, within the U.S. as things go back to sort of normalcy, do you expect to see sort of higher growth in that channel? So that would be helpful to get color. Thank you so much.
JuE Wong, CEO
Well, thank you again for the question. I'll take the last ones first and then build on that. First of all, our professional channel is very important to us. It lends authority and credibility. We will continue to support that channel, whether it's in marketing, communications, education, or in social media connection. That is a well-known focus of ours. In terms of new launches, while we will continue to look at two to three launches as we say, the way we would cadence the launch is going to be per discussions with our retailers to ensure that we get the best exposure, both in retail, in physical brick-and-mortar and online in the digital presence. This gives us a lot of opportunity to optimize the exposure of the launch as well as the brand. Obviously, this is planned out well in advance and already calendarized, but I'm not at liberty to share the specific date because of competitive reasons. But ultimately, we are not just looking at one thing at a time. We are looking at core growth, innovation, as well as international and U.S. expansion. So all of those triggers will be pulled to ensure that we continue to grow this brand by leading it, shaping it, and defining it.
Jonna Kim, Analyst
Thank you.
Operator, Operator
Thank you. Our next question comes from the line of John Kapoor with Bank of America. Your line is open.
John Kapoor, Analyst
Hi, good morning everybody. I just had two questions: one about the skinification of hair care that you mentioned in the prepared remarks. I was just wondering how that may or may not influence innovation planning for the next few years. Then in terms of advertising, I was just wondering if the mix of that advertising and promotion, the expenditures you guys are planning, is that going to be more of the same kind of social media weighted towards the professional channel, or is there going to be a little bit more traditional and digital advertising and maybe some more influencer-type sponsorships and things like that?
JuE Wong, CEO
Great question, and let me take that. One of the things is that we are a very data-driven company just as we lead with our science-enabled and technology-driven innovation pipeline. When we look at data, it tells us and our transformation team is the one to go out there and conduct independent research. Data shows that 67% of customers tell us that their first source of truth is recommendations from hairdressers. Therefore, we are doubling down on supporting the community in helping us message what Olaplex is and how the products are performing, so that we can get credibility to redirect interest into specialty retail and direct-to-consumer. We have data showing that 35% of our customers are recommended by their stylists, and that 50% of our online customers also buy at brick-and-mortar and with professionals. With that said, we are confident if we continue to let data drive us into making those connections, that engagement and ultimately the conversion, we will always win. We have also brought on Charlotte Watson, our CMO. She has years of experience in traditional as well as relevant marketing tactics that we are going to explore. What is important is that our communication and marketing continue to resonate with our end consumers at retail and online, as well as with our professional stylist partners.
John Kapoor, Analyst
Great, thank you.
Operator, Operator
Thank you. Our next question comes from the line of Olivia Tong. Your line is open.
Olivia Tong, Analyst
Great, thanks, good morning. In terms of the retail expansion into Ulta, do you have a sense of what percent of consumers are new to the brand? And is there any difference in the trends you see at Ulta versus any of your other retailers? And then also, just a quick question on the quarterly cadence and whether you expect growth to be relatively similar by quarter in 2022, or are there some puts and takes to consider because of launches in the base or launches expected this year, and just any impact that you saw from Omicron and if you've bounced back yet? Thanks.
JuE Wong, CEO
All right. Do you want to take the question on the financial piece, and then I'll build on the trend?
Eric Tiziani, CFO
Yes, exactly. I'll take your second question, Olivia, hi. So, let me talk about the quarters for 2022. In our prepared remarks, I made the statement that we expect Q1 of 2022 to have net sales growth higher than the full-year 2022 guidance, particularly driven by specialty retail and professional. We expect professional to have a strong Q1 as well, more so than direct-to-consumer, because direct-to-consumer is lapping a Q1 of 2021, which was especially high due to certain consumer behaviors related to COVID at that time. Q1 growth is going to be higher than the full-year guidance, because last year's new product launches and distribution gains were largely introduced after Q1, so it has a bit to do with what we're lapping. After Q1, we expect that growth will be stable along the lines of our full-year growth guidance. There will always be some quarterly volatility, but we see the full-year growth guidance being very strong, very healthy, and a number that we believe is going to be well ahead of the market. Additionally, regarding Omicron, we saw very slight impacts, particularly in our salon channel in January, relating to cancellations and lack of workers, but by February that was completely back to normal.
JuE Wong, CEO
Thanks, Eric. Regarding Ulta trends, we continue to be the number one hair brand at Ulta and the number one volume driving brand out of the gate in January when we launched with them, and continue to do so. This trend indicates very positive results for us because we are serving customers that do not overly overlap. This means our message towards both the professional customers and the mass audiences is proving effective. All these indicators show that there are many customers who have yet to experience Olaplex.
Olivia Tong, Analyst
Thanks, that's helpful. And then in terms of the margin, your EBITDA margin guide would assume something around a 500-basis point decline. So, can you just help parse it out a little bit for us, in terms of your views on how much of that is logistics versus incremental sales and marketing versus expenditures in building out additional partnerships whether retail or geographies and other capabilities? Thanks.
Eric Tiziani, CFO
Yes, Olivia, I'll take that. You know, the bridge from the 2021 adjusted EBITDA margin to what you see in our guidance hasn't really changed in the way we've been talking about it. From an SG&A perspective, our priorities are the same. We're going to double down on the sales and marketing model that's been working so well for us, in addition to our sales. So, we expect to see an increase in that as a percentage of sales. We're also going to increase our investment in R&D behind our science-based innovation and will see increases in hiring people into the organization and building up capabilities to support our growth. This includes costs related to being a public company for a full year versus only a quarter of 2021. One other factor is that we expect moderate reductions in our adjusted gross margin in 2022 versus 2021, and we are addressing cost inflation impacts to ensure we are responsive.
Olivia Tong, Analyst
Thank you.
Operator, Operator
Thank you. As a reminder, ladies and gentlemen, we ask that you limit yourself to one question please. Our next question comes from the line of Robert Ottenstein with Evercore. Your line is open.
Robert Ottenstein, Analyst
Great. Thank you very much. I was just wondering if we can go back to Q4 and then looking at Q1, just in terms of how the channel growth developed. If you could give us a little bit more detail on that; retail was much better than expected, Pro was better, DTC was a little bit less, and then you noted that you expect Pro to be very strong in Q1. So, maybe just discussing a little bit more detail about what's going on between the different channels compared to your prior thinking, as well as any impact that may have in terms of your margins, given the fact that DTC obviously has much higher margins and that was a little bit weaker?
Eric Tiziani, CFO
Thanks, Robert. I'll take that one. If we look first at the fourth quarter of 2021, we came in ahead of the guidance we had given with our Q3 results, and that beat was broad-based. Each of our three sales channels exceeded expectations. Specialty Retail saw the biggest beat with 332% growth, which was driven by existing and new distribution. Direct-to-consumer also showed fantastic results. As we extend this forward to Q1, like I said, Pro and retail are strong. Direct-to-consumer growth is expected to be lower due to the timing of what we are lapping in Q1 of 2021. I wouldn’t focus too much on that quarterly volatility by channel; all three channels are important and will grow nicely per our full-year guidance. And yes, direct-to-consumer comes at a higher margin for us, which does provide a margin tailwinds over the longer arc of time versus just one quarter.
Robert Ottenstein, Analyst
Is there a big difference in those trends between the U.S. and Europe?
Eric Tiziani, CFO
Not particularly. Particularly again, if you look at the full-year basis, and get away from sort of the quarterly noise, we see consistent trends by channel in both the U.S. and International.
Robert Ottenstein, Analyst
Great, thank you very much.
Operator, Operator
Thank you. Our next question comes from the line of Korinne Wolfmeyer with Piper Sandler. Your line is open.
Korinne Wolfmeyer, Analyst
Hi, good morning, and thanks for taking the question, and congrats on the quarter. Just wanted to touch on, you mentioned in your prepared remarks the potential for inorganic growth opportunity. Just curious what kinds of things you'll be looking at here? Is this eventually a way for you to expand more out of haircare? Would you be targeting larger assets or smaller; just any color here would be helpful.
JuE Wong, CEO
Thank you for the question; I'll take that. When we mention organic and inorganic growth opportunities, we want to be open to opportunities as they arise. Given the strength of our cash flow, we have the ability to assess what these opportunities would mean for our business. Therefore, we remain open to possibilities.
Korinne Wolfmeyer, Analyst
Thank you.
Operator, Operator
Thank you. Our next question comes from the line of Lauren Lieberman with Barclays. Your line is open.
Lauren Lieberman, Analyst
Great, thanks. Hi everyone. This call has gone on a long time and we've covered a lot of ground, so I'm just going to leave it and we can follow up offline. Thanks.
Allison Malkin, Moderator
Yes, operator, if you could please turn the call back over to JuE Wong for closing remarks. Thank you.
Operator, Operator
I will now like to turn the call back over to JuE for closing remarks.
JuE Wong, CEO
Well, thank you again for joining us today. We look forward to speaking with all of you at upcoming investor conferences and when we report first quarter results in May. Have a great day everyone.
Operator, Operator
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.