Waldencast Acquisition Corp

NASDAQ:WALD

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Operator]

Greetings. Welcome to the Waldencast Second Quarter and First Half 2024 Earnings Call. [Operator Instructions] Please note this conference is being recorded.

I'll now turn the conference over to Allison Malkin of ICR. Allison, you may begin.

[Allison Malkin]

Thank you, and welcome to the Waldencast PLC Second Quarter Fiscal 2024 Earnings Call. With me today are Michel Brousset, Founder and Chief Executive Officer, and Manuel Manfredi, Chief Financial Officer.

For today's call, Michel will begin with an update on our business and vision and discuss the company's performance within the context of the beauty market. Manuel will follow with a review of the second quarter and first half performance and provide our fiscal 2024 outlook. Following this, Michel will share the strategic growth initiatives for our Milk Makeup and Obagi Medical brand. After the prepared remarks, the operator will open the call to take 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 Waldencast business and other matters referenced in the company's earnings release issued yesterday. 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 statements appears under the heading Cautionary Note Regarding Forward-Looking Statements in the company's earnings release and in the company's filings that it makes with the Securities and Exchange Commission that are available at www.sec.gov and on the Investor Relations section of the company's website at ir.waldencast.com, and should be read in conjunction with the section entitled Risk Factors in the company's annual report on Form 20-F filed with the Securities and Exchange Commission on April 30, 2024.

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 the definition of these non-GAAP financial measures and a reconciliation of these non-GAAP to the most directly comparable GAAP measures in the company's earnings release.

A live broadcast of this call is also available on the Investor Relations section of the company's website at ir.waldencast.com, which will remain available until the company's next earnings call.

I will now turn the call over to Michel Brousset.

[Michel Brousset, executive]

Thank you, Allison, and good morning, everyone. I am pleased to speak to you today and share our strong second quarter performance that saw accelerated comparable growth of 25.7% versus a first quarter increase of 21% and capped a very successful first half of the year. Our performance demonstrates the power of our multi-brand platform and the progress we're making to achieve our vision for Waldencast. This vision is to build a global best-in-class beauty and wellness platform that creates, acquires, accelerates and scales the next generation of high-growth, highly profitable, purpose-driven brands.

As you have heard me say before, we're a beauty pure player because beauty is the most beautiful of industries, one that has shown impressively consistent growth, strong profitability and resilience. The U.S. market for prestige beauty remains strong, up 8% for the first half. This follows significant growth over the past 2 years as the category continues to normalize following unprecedented growth.

For the first half, Prestige Skincare grew 7% and Prestige Makeup grew 5%. Circana notes that this growth reflects an accelerated bifurcation emerging in the beauty industry, highlighted by the continued growth in prestige relative to mass and is indicative of the continued premiumization of the beauty category with consumers looking for higher levels of efficacy and performance.

Our growth has far exceeded the category as our brands, Milk Makeup and Obagi Medical, are only at the beginning of their ambition to be market-leading brands in their respective categories and are very well positioned to deliver consistent growth over time.

We have 2 of the most exciting brands in the 2 biggest beauty categories, Makeup, #1, and Skincare, #2, in the U.S. prestige beauty market. Our brands play in the fastest-growing subsegments of these 2 categories, prestige clean makeup and professional science-led skincare.

Obagi Medical outperformed the U.S. Prestige skincare market by a factor of 5x in the first half and continues its clear advantage as the #1 physician-recommended medical-ready skincare brand for top-ranked patients' needs, leading in the most attractive fast-growing subsegment of premium skincare.

With its breakthrough patented technology and transformative clinically-proven results, it unlocks high loyalty from both consumers and physicians and it is perfectly positioned to answer the growing consumer needs for high-performance effective skincare, while also paving the way for expansion to other categories.

Milk Makeup grew 3x faster than the U.S. Prestige makeup market in the first half. The brand, a cult-favorite Gen Z brand, benefits organically from an engaged and diverse community due to its cultural relevance and iconic products. It is a leading clean makeup brand, the #2 clean brand at Sephora U.S., and is quickly building a global following with leadership positions in several international markets. Milk Makeup has accomplished this through its relevant promise of cool, clean makeup that works.

But we're just at the beginning of our journey to building a best-in-class global multi-brand portfolio. Today, we possess 2 powerful brands that have garnered critical mass while still having substantial runway for growth. With Milk Makeup and Obagi Medical, we have a solid foundation in prestige skin and color with a core business in the U.S. and a growing presence in Europe and the Asia-Pac region.

We are achieving strong growth in attractive channels and expect this momentum to continue as we drive awareness of both brands beyond its core communities, continue to introduce more blockbuster innovations and expand into other regions and categories. Our increasing success with both brands and the power of our unique pure-play beauty ecosystem gives us a distinct competitive strength in attracting other brands and founders to our platform. Our platform, built for scale and speed, will only get better as we create and acquire more brands and scale them profitably and efficiently.

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

[Manuel Manfredi, executive]

Thank you, Michel, and good morning, everyone. I'm pleased to share our strong second quarter and first half results for 2024 with you today. These results highlight the continued success of our strategic initiatives and our commitment to delivering shareholder value. Today, I'll focus on our adjusted financial measures. You can find a reconciliation to GAAP financial measures in our press release from yesterday and in the appendix of this morning's presentation.

Let's dive into the highlights of our second quarter performance. We saw a robust 25.7% year-over-year comparable growth, which exceeded the 21% growth we achieved in Q1, aligning with our prior guidance. We continue to see significant year-over-year expansion in our adjusted gross-profit margin. And we maintained a double-digit adjusted EBITDA margin, positioning us well to meet our annual profitability goals.

A key point to note is that, as we have indicated in the past, while we monitor our business daily, we plan on it on an annual basis. This annual planning approach allows us to navigate quarterly fluctuations without compromising our strategic objectives. We are pleased to achieve this result despite the fact that in both brands we experienced out-of-stocks in some of our key products, particularly some of our key launches, as strong consumer demand outstripped our expectations.

Specifically, for second quarter, net revenue was $63.3 million, reflecting 25.7% comparable growth for Q2 2023. Obagi Medical and Milk Makeup achieved 30.9% and 20% growth, respectively. Adjusted gross profit came in at $47.5 million, with an adjusted gross margin of 75.0%, a notable 650 basis point increase from Q2 2023. Adjusted EBITDA was $6.3 million, up $2.4 million from Q2 2023, as strong revenue growth and gross margin expansion more than offset important investments to support our team, marketing and sales business drivers.

Building on our strong second quarter, our first half 2024 has been excellent. For the first half of 2024, net revenue was $131.6 million, marking a 23.1% increase from the first half of 2023. Adjusted gross profit increased by 36.4% to $99.5 million, with the adjusted gross margin expanding significantly by 890 basis points to 75.6%.

Adjusted EBITDA rose by 27.2% to $17.7 million, reflecting strong sales growth and improved gross margins, which more than offset our investment spending. This led to an adjusted EBITDA margin of 13.4% for the first half, up from 12.7% in the same period last year.

Now looking ahead, our strong first half performance, the ongoing success of our growth strategy and the operational efficiencies that we have implemented positions us well to maintain our positive momentum throughout the year and beyond. For the full year 2024, we expect comparable revenue growth will continue to accelerate beyond the 25.7% increase we saw in Q2, raising our guidance communicated in Q1.

Adjusted EBITDA margin is expected to land in the mid-teens, aligned with our prior guidance, and substantially higher than the 11.2% achieved in 2023. This improvement comes even as we continue to invest in our sales and marketing growth drivers. We expect second-half adjusted EBITDA to exceed first-half results, both in absolute terms and as a percentage of revenue.

Turning now to our balance sheet and cash flow. We ended the first half of 2024 with a solid financial position, with no near-term maturities and ample liquidity to fund our asset-light business model. As of June 30, 2024, cash and cash equivalents were $19.7 million. We also have $30 million available on our revolving credit facility. And net debt totaled $155 million. We achieved positive operating cash flow, excluding non-recurring costs associated with legal and advisory fees. As of August 15, 2024, share outstanding were 122.7 million compared to 122.2 million as of April 15, 2024.

And now I will turn the call over to Michel.

[Michel Brousset, executive]

Thank you, Manuel. Now let's look at the performance by brands, starting with Milk Makeup. As Manuel shared with you, in the second quarter, Milk Makeup generated a net revenue of $28.7 million, an increase of 20% versus a year ago. Growth was driven by the increased buzz and awareness of the brand, the success of our innovation and the continued strength in international markets.

Unprecedented demand and in particular the fantastic success of our Cooling Water Jelly Tints launch led to some out-of-stocks, which dampened the growth potential in the early part of the quarter. That said, revenue accelerated toward the end of the quarter across geographies as we increased inventory levels to support the higher level of demand.

Adjusted gross profit margin of 69.7% grew an impressive 360 basis points versus Q2 last year as we continued to deploy our operational efficiency playbook and benefited from increased efficiencies in sources and distribution, as well as better management of our inventory.

Adjusted EBITDA rose 48% to $5.7 million, while adjusted EBITDA margin of 19.8% expanded 370 basis points from the second quarter of 2023, as the strong revenue and gross margin expansion was mitigated by increased sales and marketing investment in support of key launches that will set us up for acceleration in the second half.

Now for the first half, Milk Makeup generated net revenue of $63.2 million, increasing 20.8% from the first half of 2023. Adjusted gross profit rose 29.2% to $44.6 million, with gross profit margin expansion of 460 basis points to 70.6%. And adjusted EBITDA rose 23.4% to $15.7 million from $12.7 million in the first half of 2023, with adjusted EBITDA margin expanding to 24.9% of net revenue.

Milk Makeup is quickly becoming a true global powerhouse, with consumers around the world embracing what we stand for and our consistent ability to deliver sought-after innovation. The brand saw impressive growth across geographies during the first half of the year, with revenue up 15.5% in North America and 33.3% internationally. Our vision for Milk Makeup is to be the #1 choice of the next generation, uniquely connecting with our needs, values and aspirations.

Our mission is to create a space in beauty for all, always fearless in innovation, agility and self-expression. Our path is clear, guided by our vision and anchored by our mission to create beauty for all. Number one, build a brand that is highly relevant to our audience today and tomorrow. Two, nurture a global community of highly engaged consumers and partners.

Three, delight with products that are famously unique and tangibly better. Milk products are like no one else's. Four, expand our presence through distribution that is always brand building and community connecting. Five, continue to fuel the brand to deliver strong, profitable growth. And lastly, lift our culture of creativity inside and out.

Our North Star is our community of creators, listening to them, seeing them, understanding them, feeling their creativity and self-expression, helping them live their look. We are the tools and they are the artists. We inspire, we never prescribe. Our connection to our community and celebration of their self-expression led Milk Makeup to double its earned media value year on year and climb 7 ranks versus January 2023, a true measure of growing desirability and awareness and an important predictor of a brand's future growth.

Awareness driven by outstanding social results across the 2 main metrics, larger community and higher engagement. Our new followers grew by 538,000 in the front half of 2024, which is an impressive 254% acceleration year-on-year. Most video views almost doubled at 95%, up to 89 million views, with engagement jumping by 286%.

This community social buzz is amplified by strong editorial coverage, with 5.4 billion press coverage impression in the front half of 2024, of which 1.4 billion is new products alone, growing 60% year-on-year, featuring in particular our viral Cooling Water Jelly Tint and our other launches in all major publications, an illustration of the power of products that are famously unique, highly desirable and performance that delivers on consumer needs.

The secret sauce of our product innovation is a single-minded focus on products that deliver, are simple yet powerful consumer proposition of clean, cool, beauty that works. We deliver never-before-seen innovation formats that deliver strongly on the performance benefit and stay true to our brand and community values, always vegan, clean and cruelty-free. Our products look and feel like no one else's and are highly recognizable in the category that at times is a sea of sameness.

Over the years, we have built strong cult icons and award-winning franchises in Prime and Set and sticks, and we'll continue fueling those strongholds. And when we're talking about award-winning, our community was set alight with the 11 Olympic medal winner and the greatest gymnast of all time, Simone Biles, using our best-selling Hydro Grip Primer as a first step on her get-ready-with-me routine ahead of her impressive performance at the Paris Olympics last month. The greatest of all-time gymnasts wearing the greatest of all-time primer.

In addition to our stronghold in our core categories, no pun intended, we're also delighting our community by expanding into new high replenishment segments such as eye with a launch of Kush Eye Roller Mascara and Brow Tints, as well as in lip, with the latest shade extension of our Odyssey Lip Gloss franchise. Moreover, we're still at the very beginning of our viral, many-times-sold-out, once-sold-every-30-second, multi-award-winning Cooling Water Jelly Tint, driving a record buzz, record community building and record sales. More exciting things to come in this franchise in the second half.

Now, this franchise has been showered in editorial awards, which strongly contributed to 22 awards that the brand has won year-to-date, and we're still counting. It was also particularly exciting to all of us at Waldencast to have Milk Makeup named by WWD as one of the most powerful beauty brands fueling the industry's growth.

Our most recent market expansions continue to confirm the global appeal and desirability of our Milk Makeup brand. The quality of our products and our brand values resonate universally. Our launches in the U.K., Scandinavia and Latin America are performing ahead of our expectations, as evidenced by the compelling stats you see on the screen.

Now, from the world of Milk Makeup, let's go to the world of high-performance skincare with Obagi Medical. Obagi Medical delivered another outstanding quarter of growth with revenue of $34.6 million, representing comparable growth of 30.9% from the prior year. This strong growth was driven by the progress made on our strategic priorities that focus on increasing digital channel sales, building our international business and accelerating our innovation with the introduction of highly effective blockbuster products.

Similar to Milk Makeup, some of this growth was dampened by out-of-stocks on key products as the strong demand outstripped supply, which particularly impacted our U.S. physician dispensed channel. Inventory levels on key out-of-stock items have now substantially improved and we expect acceleration in Q3.

Adjusted gross profit totaled $27.4 million, with adjusted gross margin expanding 850 basis points to 79.3% from 70.8% in the second quarter of fiscal 2023. And strong sales growth combined with significant expansion in adjusted gross margin more than offset the increased investment in business drivers, leading to adjusted EBITDA of $6.5 million, a 55.4% increase versus Q2 2023. Adjusted EBITDA margin expanded 230 basis points to 18.6% from 16.3% in the second quarter of Q2 2023.

Now looking at the first half, Obagi Medical delivered net revenue of $68.4 million, representing comparable growth of 25.4% from the first half of 2023. Adjusted gross profit rose to $54.9 million or 80.3% of net revenue versus $38.5 million or 67.4% of net revenue in the first half of 2023. This growth led to adjusted EBITDA of $13.2 million, a 37.1% increase from the first half of fiscal 2023, with adjusted EBITDA margin expanding to 19.3% from 16.9% in the fiscal 2023 first half.

Across geographies, Obagi Medical saw balanced growth with a 37.6% increase in North America and a 35.2% increase internationally in the first half of 2024 compared to the prior year's first half. In the U.S., we saw outsized growth from our digital channels and a strong performance from our innovation. Internationally, we're very pleased to continue to re-establish Obagi Medical's presence in Southeast Asia and expect to build on this momentum this year.

Our vision for Obagi Medical is to be the #1 physician-dispensed dermatological brand in the world, providing targeted solutions to professionals and consumers that deliver transformative, visible results. We're proud to be a leading U.S. physician-recommended brand for the top 3 skin concerns for physicians and patients, hyperpigmentation, fine lines & wrinkles, and sagging skin & loss of elasticity. These conditions account for roughly 2/3 of the physician-dispensed category.

Our growth strategy follows 3 pillars: first, strengthen our professional dermatological skincare brand's DNA; second, accelerate cutting-edge, science-back innovation that delivers transformative results; and third, grow brand awareness and footprint to reach more consumers domestically and internationally.

Now, when we acquired the brand, one of our clearly stated growth opportunities was to modernize the brand and usher it into a new area of dermatological skincare that will delight both our physicians and our consumers. I am pleased with the progress we have made and excited to share with you a small slide of what we are rolling onto the market.

Our Obagi Medical brand positioning is anchored in 4 core pillars that are also the 4 cornerstones of our iconic Obagi Medical square. First, science is the answer. At Obagi Medical, science has always been the foundation of our brand. Our science and clinical results have been trusted by physicians for more than 35 years. But science is never settled and neither are we, always pushing to innovate, test and research beyond our best to discover better ways to transform our skin.

Second, higher standards are our standards. We know our products are transformative because we hold ourselves to a higher standard where clinically proven is just a starting point. We go beyond clinical with our rigorous testing and data-backed results to prove the transformative power of each and every one of our products.

Three, we're diverse by design, an important word we value. We pioneered clinical testing against the entire Fitzpatrick skin spectrum and continue to develop products systematically tested on every skin tone and type. And fourth, trust is always our strength. Simply put, our products just work. And that's why generations of consumers and physicians around the world have trusted us with their skin and their reputation for 35 years.

That is how we deliver clinically proven, science-backed, visible transformative results on all skin tones, thanks to our cutting-edge science and medical-grade ingredients developed in partnership with 39 research and development partners and leveraging Waldencast's open development ecosystem, with a leading clinical testing program having conducted 329 studies, 100 product tested and up to 10 different tests performed per innovation.

Many of you have spoken to us over the years about the various elements of the brand mix, that we're in need of a refresh. And we're happy to present to you beyond a refresh, a leapfrog that we believe strengthens Obagi Medical's leadership position. The strength of our Obagi Medical position brought to life with our iconic logo and square adapted to all touch points to communicate science, performance and how we stand as uniquely Obagi, be it in our typography, photography or product and packaging. Bringing our new brand universe in an immersive way in and out of a physician's office for an elevated experience that reflects the authority and performance we're known for.

An identity anchored in our medical blue as we increase more consumer and media touch points in and out of the physician's office to make uniquely memorable, relevant and compelling. A new elevated style that spotlights the heart of our brand, science and performance, while educating our community on the potency and superiority of our range, and make it more accessible to professionals and consumers alike.

One of the first innovations that is fully benefiting from the new brand positioning and imaging is our new launches in our strategic ELASTIderm franchise. Launching one of our greatest innovations so far, bringing medical grade lifting to new heights. We will be extending our best-selling ELASTIderm franchise with the launch of ELASTIderm Lift Up and Sculpt Facial Moisturizer, clinically proven to visibly lift and sculpt facial contours in only 6 weeks. And its partner, ELASTIderm Advanced Filler Concentrate, clinically proven to visibly reduce the appearance of fine lines with a single application. Two blockbuster innovations playing in one of the top skincare segments of the physician channel, delivering visible, clinically-proven results.

The new ELASTIderm Lift Up and Sculpt Moisturizer expands our portfolio in the heartland of anti-aging and day cream category, a format where we're currently under-indexed, comes supercharged with a clinical dossier showing product efficacy in as little as 3 weeks of use and visible transformations used before and after. The perfect launch pad to communicate our medical authority in and out of that practitioner's office.

New ELASTIderm Advanced Filler Concentrate is a non-injectable, instant fine line filler with impressive clinical results after a single application, and further improvement after 8 weeks, showing a 19% reduction in the appearance of fine lines and forehead lines.

And lastly, we'll continue the momentum by raising brand awareness with Obagi Medical. We are excited because we're just at the beginning. Obagi Medical is today the #3 fastest growing earned media value beauty brand. We expect further acceleration as we invest in growth drivers and deploy the new branding, packaging and, of course, medical-grade innovation.

As you can see, we are more excited than ever about our business and our growth prospects. We have 2 powerful, high-growth, compelling brands perfectly positioned in the most attractive segments of the beauty business. We're now focused on stepping up our investment in our brands and the development of our communities. This combination of a strong community engagement and seductive, high-performance products is driving increased global demand for our brands, which coupled with the power of our Waldencast platform and talented teams are well-positioned to drive long-term profitable growth.

I'm always thankful for the continuous support of our consumers, investors, partners and employees and everyone who shares our dream of building a global best-in-class beauty and wellness operating platform. Overall, we continue to expect our efforts to lead to long-term value creation for all Waldencast's stakeholders.

And with that, I will turn the call over to the operator to begin the Q&A portion of the call.

[Operator]

[Operator Instructions] Our first questions come from the line of Ashley Helgans with Jefferies.

[Unknown Analyst]

This is Sydney on for Ashley. I was just wondering if you can talk a little bit about the promotional environment and kind of what you've seen and are expecting going forward. And then also just any color you can share on the innovation pipeline in 2H.

[Michel Brousset, executive]

I'll break the question in 2 parts. Our brands are relatively unexposed to promotional fluctuations. In the case of physician dispensed, Obagi Medical, we run and the market runs relatively standardized promotions. It's relatively price inflexible. And in the case of Milk, the segment of the market has been relatively flat in terms of promotion. We don't see any significant or substantial amounts of increase in promotion or net price erosion as a consequence of that.

From an innovation standpoint, which is what is driving our brands, we are -- as you saw, we have an incredible half 1 of innovation on both brands. And frankly, we are super excited what is coming in half 2. So we continue to accelerate the innovation on both brands, is a key part of our strategy. And I think innovation so far has been delivering very well.

[Operator]

Our next question has come from the line of Olivia Tong with Raymond James.

[Olivia Tong Cheang, analyst]

I thought it might be helpful to understand what you see as sort of a steady state revenue growth? And also, how you think about the EBITDA margin expansion opportunity, recognizing, of course, the expectations for an improved second half on both those line items.

[Michel Brousset, executive]

Sorry, Olivia -- Olivia, sorry, you're breaking up. Could you please repeat your question?

[Olivia Tong Cheang, analyst]

Oh, sorry. Sure. I'll be a little louder too. I was hoping you could talk a little bit about what you think of as a steady state revenue growth? And how you think about the EBITDA margin expansion opportunity from here, recognizing, of course, that you talked about second half doing better than Q2 or second half doing better than first half when it comes to EBITDA? Particularly given the volatility in the past, it would be helpful to do that. So that's the first question.

The second question is around just the competition in your categories. We've obviously seen some deceleration in the category after a very strong period of growth. So if you could just talk about the competitive environment both in -- for Milk and also for Obagi in the derm, skincare area? And then lastly, just what you had referred to, to be out of stocks that you've been dealing with?

[Michel Brousset, executive]

So on the first part of your question, kind of steady state revenue growth, as you can -- we provided guidance for the year. We have not provided guidance beyond that. But I think what we are seeing is an acceleration, as we communicated, an acceleration on the back half from the Q2 number. I think we expect an algorithm of a company that is high growth and certainly well ahead of market growth. And EBITDA, as you saw, we continue to build EBITDA toward our destination of structural economics. So we expect -- and I've communicated this in the past, we expect on a long-term basis, on a steady state basis.

We already have a structural economics in the company that are comparable and, in many cases, superior to best-in-class beauty from a gross margin perspective, which is only going to help us build our EBITDA as we continue to grow our brands. Ours, very simply, is a growth story. We continue to grow the brands, as you can see, at a very accelerated pace, which -- what is already the engine of the company, which is the gross margin level that is very, very attractive.

So as we grow the company, we will continue to execute what is our virtuous cycle, which is revenue growth translated to very strong gross margin growth reinvested into business drivers of marketing and sales that further drive growth and dilute G&A to deliver increases in EBITDA.

In terms of competition, the category -- I mean, beauty has always been a very competitive market. It is a market of competition. But frankly, as I've said before, we do not think too much about competition. We're such a small company in the whole scheme of things in the beauty market that our limitation to grow is only our own ability to create great consumer propositions that are interesting and compelling to consumers combined with our own ability to execute.

So the beauty market has always been competitive. It is a competitive market. But there is -- it's not a winner takes all market. It's an expandable consumption category. And while competition is a point of information, frankly, we don't think too much of competition. We think more of how do we create great breakthrough propositions, like, for example, what we've done in Milk Makeup jellies, which is we invented a completely new product that is incredibly seductive and interesting for consumers that really has no competition. And as a consequence, we benefited from a tremendous impact on our top line growth, our sales and our social and community metrics.

And lastly, in out-of-stocks, out-of-stocks was a bit of a headwind in Q2. Frankly, in some ways we were victims of our own success. Things, particularly like Makeup, or things like jellies are particularly difficult to forecast when you are creating a new-to-the-world proposition. And we could have grown substantially more on the basis of that, of those out-of-stocks. Same thing at Obagi. Our innovation performed better than we expected. But in fairness, we also were managing our base inventory a bit tighter than perhaps we should have with hindsight 2020.

In terms of on a go-forward basis, I think most of the out-of-stock issues are behind. We are fully stocked on jellies. And if you were to go today to a Sephora or to one of our outlets, you don't have to fight for one of the jellies that you had to fight a little bit before. You will see inventory and consumers buying this inventory at a rapid pace. But we still have a little bit of an effect -- we still have a little bit of an effect on out-of-stocks, particularly in the Obagi business in Q3, but substantially less than what we saw in Q2.

[Operator]

[Operator Instructions] Our next questions come from the line of Linda Bolton-Weiser with D.A. Davidson.

[Linda Bolton-Weiser, analyst]

Congratulations on the great growth. So I was curious -- I didn't catch if you were kind of talking about the advertising and promo ratios in each of the brands. Maybe you don't want to disclose those. But maybe you can give us a sense for if you feel the spending levels as a ratio are kind of where you want it to be for each of the 2 brands? Or do you envision even further increase in A&P kind of in the future years?

[Michel Brousset, executive]

So we think that -- so we -- since we started this journey 2 years ago, as you know, Linda, we've accelerated quite substantially the level of marketing investment as we build our brands. We certainly expect half 2 to continue to invest even further than we invested in half 1, which was already a substantial increase versus last year. But what we follow is a very strong ROI mindset behind that marketing expense.

In terms of on a long-term basis, are we at the level of marketing investment long term? No, we believe that -- I think there is still substantial room to grow and support both in terms of a percent of sales as well as absolute value as we continue to build a business. But that is part of our kind of virtuous circle. And what we do is we invest, we drive operational efficiency, which we invest in business drivers to drive the top line growth and dilute our G&A. So in both cases, in both brands, we expect to continue to increase our marketing support and sales support on both brands, that with -- resulting, as I said, in increases in our EBITDA contribution.

[Linda Bolton-Weiser, analyst]

Okay. And just one follow up. In terms of Obagi, maybe you could remind us just -- is Obagi using distributors pretty much in all of its international markets or just some of them? And can you just explain to us, like, do we need to worry about, like, too much inventory in the distributor channel? Or how should we think about just how you execute there internationally on Obagi?

[Michel Brousset, executive]

So our international structure today is relatively simple. As you know, we internalize the distribution of Obagi in Southeast Asia. So in Southeast Asia what we use is our own subsidiary now, moving from an old distributor model that we have in Southeast Asia. For all the challenges and trials and tribulations we had with that distributor in 2022, that is now fully behind us. And now we have our own subsidiary in Southeast Asia. And in every other international market, we use distributors.

And what we do is we have a very strict monitoring in those distributors from our sell-in, sell-through and sell-out basis. For most distributors -- we don't have sell-out for all distributors. But in terms of all the major distributors, we have a very strong monitoring sell-in, sell-through and sell-out in places where we can have sell-out. So we do not have any concerns about too much inventory on distributors at international level.

The international footprint, just to finalize, is we're on a journey on that, on the other distributors, the outside of Southeast Asia distributors. And just frankly, we have some excellent distributor partners. And there are some distributors where we need to execute a bit of a change on go-to-market structure, which we'll be doing over the next couple of years or so as we transition that into a more efficient distributor model. But overall, we have no concerns about inventory build whatsoever on international distribution.

[Operator]

Our next questions come from the line of Dana Telsey with Telsey Advisory Group.

Dana, could you check if you're self-muted, please?

[Dana Telsey, analyst]

Yes. As you think about the drivers of the strong gross margin expansion that you had and the international expansion that Milk and Obagi are seeing, what's driving that? How do you think about the growth going forward and what it could mean for the business?

[Michel Brousset, executive]

On gross margin, the story remains the same, and it's a little bit different by brand, but the story remains the same. In the case of Obagi, it is fundamentally driven by 2 things. One is a very strong and favorable channel mix as we develop our digital channels on Obagi. And the second one is operational efficiency that we continue to build on those businesses. As you know, we are already at a very high gross margin level. I'm saying we are about at the destination level of Obagi in terms of gross margin.

I think any future efficiency, whether it's still to have as part of that operational efficiency, we plan to reinvest it into product and formulation and acquire quality offering to our customers. So we expect Obagi to be roughly at its destination. Milk, as you saw, was a business that was gross margin in the 40s when we bought it, and now it's approximating where we want it in terms of destination. It's been driven primarily through operational efficiency.

So we continue to build that operational efficiency, a bit of mix, all the kind of detail of how do you build a great operating margin. And thanks for highlighting the point of gross margin, because that, at the end of the day, is the engine of the company. And as we grow the business at that very attractive level of gross margin, it allows us a substantial amount of fuel to reinvest in building our brands and deliver profitability over time.

In the case of international, a little bit different, again, by brand, because the models are different. We have some substantial growth coming on Milk, as you saw from the results as we -- most of it is really productivity driven, it's productivity out of our own businesses, but we have some modest distribution expansion. As you know, we entered the U.K. market not long ago, but it's still relatively modest in the number of stores where we are, and it's doing very well and exceeding our expectations of how it's performing in the U.K.

We also expanded distribution, our footprint in Scandinavia with Leco, and it's been a fantastic success. We talk about the last quarter of lines and lines and lines of consumers waiting to buy Milk as we expanded. And also, a small but important expansion into Latin America, particularly in Chile, Colombia, and Mexico with Blush Bar. That has been a tremendous success and which, as we saw in the presentation and we saw before, we are the #1 or 2 brand in the store for those markets, which is validating just the universal appeal of the Milk brand across the world. And there's much more to come in the future.

In the case of Obagi, as I said, we have a bit of a bifurcated model. One is our -- if you're going to distribute our business outside of the U.S., which is everywhere outside the U.S. with the exception of Southeast Asia, we continue to build from strength to strength. We invest in the brand, professionalize the way we're managing those distributors, realign some of those distributors. There's still a bit of work to do that we need to do over the next 2 or 3 years at strengthening that distribution network, look for internalization where appropriate, et cetera.

And then we have Southeast Asia, where, as you know, we are rebuilding our business in Southeast Asia after the collapse, if you want, of our former distributor, and we're very pleased with that progress. We launched initially in Vietnam in November of last year, and now we've expanded into Thailand, Singapore and most recently India, and the business is performing very well. And we have now an internalized model that allows us to have a much better profitability on a going basis as we capture all the margin on that supply chain.

[Operator]

We have reached the end of our question-and-answer session. I would now like to hand the call back over to Michel Brousset for any closing comments.

[Michel Brousset, executive]

Thank you very much. Well, thank you, everybody, for joining us today. We're very excited about the Q2 results and the closing of half 1. And as we communicated on the earnings release, we're very, very confident about our outlook for the year. And thank you very much for being here and for your support. Have a good day.

[Operator]

Thank you. This does conclude today's conference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.