Waldencast - Q1 2024

Transcript

Operator (participant)

Greetings, welcome to Waldencast's first quarter 2024 earnings conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star 0 on your telephone keypad. Please note, this conference is being recorded. I will now turn the conference over to Allison Malkin of ICR. Thank you. You may begin.

Allison Malkin (Managing Director)

Thank you, and welcome to the Waldencast plc first 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 our performance within the context of the beauty market. Manuel will follow with a review of our fiscal year 2023 and first quarter performance, as well as our outlook for the remainder of 2024. Then Michel will share our strategic growth initiatives for our Milk Makeup and Obagi Skincare brands. 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 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 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. 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 (CEO)

Thank you, Allison, and good morning, everyone. I am pleased to speak to you all today and share strong first quarter of 2024 results and resume our historical practice of holding earnings calls each quarter, having completed our historical annual filings for fiscal years 2022 and 2023. I will start by anchoring us in our vision for Waldencast, which is to build, over time, 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. We are a beauty and wellness pure player, an operating platform built for both speed and agility, reimagining the beauty company of the future as the home of the brands of tomorrow that connect with consumers' needs and their values.

We are a beauty pure player because beauty is the most beautiful of industries, one that has shown impressively consistent growth, profitability, and resilience, and because it's an expertise-led industry that we're expert in. prestige Beauty closed 2023 at +14%, more than double mass beauty. Momentum that continued, albeit with a moderating trend in Q1, with premium beauty growing +9%, but is still ahead of the historical growth of the market. While prestige skincare remains expanding in double-digit growth at +10%, as consumers are increasingly looking for performance-led transformative products, makeup, previously the fastest growing category within beauty, registered a growth of +4% in Q1 as a category normalized after the post-COVID rebound. The rate of growth is expected to accelerate, driven by the rising popularity and sophistication of makeup among younger consumers.

In particular, we see Millennials and Gen Z purchasing makeup at significantly higher rates versus pre-pandemic levels, as socializing resumed, as well as the acceleration of innovation in the market of a pandemic low and the continued growth of brands like Milk Makeup that are inclusive, high performance, and aligned with their desire for clean, vegan, and cruelty-free products. This trend is expanding to Generation Alpha, thanks to the TikTokification of beauty by bringing consumers even earlier into a category. While the market is a data point to inform our business plan, we believe that given a relatively small size in this very large beauty industry and the opportunities we have in terms of innovation, distribution, and geographical expansion... Our ability to grow is only limited by our own ability to execute well against our strategies and continue to develop relevant, unique, and seductive consumer propositions.

Waldencast has two of the most exciting brands in the two biggest beauty categories, makeup number one and skincare number two in U.S. prestige beauty. Importantly, these categories are not only big, but also high growth, resilient, and structurally attractive. Furthermore, our brands play in the fastest-growing subsegments of these two categories, prestige clean makeup and professional science-led skincare. Obagi Skincare is a crown jewel of the U.S. physician-dispensed market. It is perceived as the number one physician-recommended medical skincare brand on the top patients' needs, leading in the most attractive, fast-growing subsegment of premium skincare. With its breakthrough patented technology and transformative clinical skin results, it unlocks high loyalty from both consumers and physicians, and it is perfectly positioned to answer the growing consumer need for high-performance, effective skincare, while also paving the way for expansion into other categories.

Milk Makeup is a cult Gen Z brand with an incredible organic following through a diverse and inclusive community known for its cultural relevance and iconic products. It's a leading clean makeup brand, the number 2 clean brand at Sephora US, and one of the busiest brands in the US, coming from number 19 in 2022 to number 9 in Q1 2024, according to CreatorIQ. Milk Makeup has accomplished this by bringing a relevant promise of cool, clean makeup that works. Our ambition and destination is to build, over time, a best-in-class multibrand portfolio. With Milk Makeup and Obagi, we started in prestige, skin, and color, with a core business in the US across attractive growing channels, a growing international presence, and the ambition to expand over time into further geographies, categories, and channels through category expansion of our existing brands, but most importantly, acquisitions.

We will do that through our laser focus on building scale and speed, leveraging our unique pure-play beauty ecosystem, ensuring we diversify our portfolio across categories, channels, geography, and price points to benefit from the resiliency of the category. Focus on opportunities in targeted acquisitions for accelerated long-term growth, and a focus on sustained and disciplined growth and profitability. All this led by a world-class team of beauty operators across the Waldencast ecosystem. And now, with this, I will hand over to Manuel to lead us through our financial results.

Manuel Manfredi (CFO and Principal Financial Officer)

Thank you, Michel. It is a pleasure to speak to you today on my first earnings call as CFO of Waldencast. As many of you are not familiar with me, let me start by sharing my background. For the past 25 years, I have led financial organizations in the beauty and consumer products industry in Europe and North America, most recently as CFO of L'Oréal, Spain and Portugal. Among other things, during my time at L'Oréal, I played a key role in the acquisition and integration of a new cosmetics brand, executed numerous transformational projects across the organization, and helped unlock value and identify growth opportunities for the company. I am now eager to leverage my expertise to help Waldencast to achieve its ambition to build a best-in-class beauty and wellness multibrand platform.

It has been six weeks since I joined the company, and I am already impressed with the strength of our brand, the innovation and differentiation we provide, the highly talented and motivated teams we have in place, and importantly, the significant growth opportunities that lie ahead of us. Now, turning to our review of our performance. While our U.S. GAAP revenue are outlined in the earnings release, my comments today will focus on comparable net revenue, which we believe is a relevant metric to follow as it reflects the operating subset of our business, removing revenue related to the former Obagi Skincare China business, which was not acquired by Waldencast at the time of the business combination. With that, let me share highlights of our fiscal 2023 performance, which were previously communicated, and then cover our first quarter 2024 results and outlook.

For fiscal 2023, comparable net revenue was $212.5 million, an increase of 15.3%. Milk Makeup led our performance and exceeded the $100 million revenue milestone, delivering net revenue growth of 38.6%. Obagi Skincare generated strong growth in the US and internationally, excluding Southeast Asia, which was impacted by restructuring activities. Adjusted gross profit was $150.4 million, with adjusted gross margin of 69%. Adjusted EBITDA totaled $24.4 million, an increase of $33.2 million from 2022, with 2023 EBITDA margin totaling 11.2%. This reflects strong revenue growth and expansion in adjusted gross margin, as well as the increased investment in marketing and central costs to support our growth as a public company.

Net loss was $106 million. Turning to 2024, we are very pleased with our first quarter performance, which included robust growth across our key performance metrics, including comparable net revenue, adjusted gross margin, and adjusted EBITDA margin versus the first quarter of 2023. Each of these metrics deliver accelerated growth from fiscal year 2023. To this end, for this first quarter, comparable net revenue was $67.9 million, increasing 21% from Q1 2023, with balanced growth across our brands. Obagi Skincare and Milk Makeup delivered comparable net revenue growth of 20.6% and 21.5%, respectively, from Q1 2023.

Adjusted gross profit was $52.1 million, increasing 32.9% from prior years' first quarter, while adjusted gross margin of 76.3% expanded a strong 1,100 basis points from Q1 2023, with both brands contributing to this increase in margin rate. Adjusted EBITDA totaled $11.4 million, increasing 12.9% from $10.1 million in the 2023 first quarter, as strong revenue growth and gross margin expansion more than offset important investments in our team and in marketing and sales business drivers. As a result, we delivered a healthy adjusted EBITDA margin of 16.6%. Net loss was $3.9 million, an improvement of $9.3 million from a net loss of $13.2 million in Q1 2023.

Turning to our outlook for the remainder of 2024, we are providing an annual outlook, which we believe provides a greater level of insight into our business. And while we focus on every aspect of our business daily, we plan the business annually. With that said, we're very pleased with the performance of our brand, and believe our strategy has poised us to deliver increasing rates of revenue growth as we move through the year, an Adjusted EBITDA margin expansion in fiscal 2024. In total, for fiscal 2024, we expect comparable net revenue growth to accelerate from the 21% increase achieved in the first quarter, with a strong contribution from both of our Obagi Skincare and Milk Makeup brands.

Breaking this down further, at Obagi, we expect growth to be driven by the continued development of our U.S. physician-dispensed market as we strengthen our dermatological credentials, the strong innovation plan, and the continued expansion to our e-commerce and international presence. At Milk Makeup, growth is expected to be driven by the introduction of compelling, relevant innovation and brand collaborations and expansion in brand awareness. From an adjusted gross margin perspective, we expect fiscal year 2024 to be again another positive story, as we forecast adjusted gross margin to expand for both Obagi and Milk versus the rates achieved in 2023. Keep in mind that while we expect this full year gross margin expansion on Obagi versus prior year, Q1 2024 saw particularly strong gross margin expansion due to one-off effects in the Q1 2023 base, positively impacting the quarter.

We expect selling and marketing business drivers to increase while achieving operational leverage at the brand level by deleting fixed costs despite the increased investment in our teams to support the growth. At the central cost level, we have invested to support our growth as a public company, but have not captured yet the future savings we expect at the brand level by the development of our central structure. The combination of a strong comparable net revenue growth, along with gross margin expansion, is expected to more than offset the SG&A and central cost to deliver a mid-teen adjusted EBITDA margin for the year, nicely ahead of the 11.2% adjusted EBITDA margin achieved in fiscal 2023. Turning to our balance sheet and cash flow.

We ended fiscal 2023 year with a solid balance sheet, with no near-term maturities and ample liquidity to fund our asset-light business model. As of December 31, 2023, net debt totaled $141.8 million, and cash and cash equivalents were $21.1 million. At the end of first quarter 2024, net debt totaled $150.6 million, and cash and cash equivalents were $26.8 million. We had positive cash flow from operations that was offset by non-recurring expenses related to the accounting restatement and SEC investigation. Outstanding share count was little changed at 122.1 million shares at the end of year, end 2023, and 122.2 million as of April 15, 2024. With that, I will turn the call back over to Michel.

Michel Brousset (CEO)

Thank you, Manuel. Now, let's take a look at our results and our plans by brand, and let's start with Milk. Milk Makeup completed an excellent year of growth in fiscal 2023. As we noted, we expect to build upon this success in 2024. Net sales were $100.5 million, increasing 38.6% from 2022. Our adjusted gross profit was $66.7 million, or 66.4% of net revenue, and Adjusted EBITDA of $18.4 million, or 18.3% of net revenue. In the first quarter, Milk generated net revenue of $34.5 million, an increase of 21.5% from the first quarter of fiscal 2023. Milk's excellent quarter was led by growth in North America and through strong e-commerce growth, with continued traction from our international expansion.

Adjusted gross margin grew an impressive 500 basis points to 71.3% of net revenue, as we benefited from our efforts to lower costs and increase efficiencies in sourcing and distribution, and better management of our inventory, driving to lower obsolete inventories. Adjusted EBITDA rose 12.4% to $10 million, with adjusted EBITDA margin of 29.1%, as a strong revenue on gross margin expansion was mitigated by increased investment to drive sales. Now, Milk Makeup's mission is to be the number one global beauty brand of the next generation. This is a brand that has been built in its DNA to be that brand, uniquely connecting with their needs, values, and passion points. Milk Makeup, beyond a brand, is a movement.

It is rooted in its community, inspired by the energy, vibrancy, and diversity of New York City, and powered by high-performance clean products. Milk Makeup is anchoring three core pillars: brand, community, and product. On brand, our priority is to double down on our DNA, what makes our brand unique, desirable and relevant, and accelerate our awareness towards broadening our brand love and beauty credentials. Community is, remains, and will always be at the heart of what we do, and we nurture our deep connection with our core audience, as well as welcome new groups. Last but not least, on product, we will keep nurturing category-leading heroes, innovation, leading launches, and always delighting our consumers with high performance, clean utility. Our mission is to help our community live their look, an invitation for self-expression and living their truth. Our model begins and ends with community.

We spark their inspiration and creativity with products they will love. We partner with them and amplify their voices, and they do the rest, share the love and passion for the brand and products, further building and inspiring our wider community. Our Milk Makeup team is not only among the best of the industry, but very embedded into the culture of consumers today. They are our special power, highly committed to our brand values, super passionate about our vision, and very reflective of the diversity of our community. This passion is contagious, and we had just in Q1, almost 20,000 qualified job applications for our brand's positions. In terms of our innovation, relevant, unique, seductive innovation is a proven engine behind our success. Our market-leading innovation brings the DNA of our brand to our community through clean beauty products that work.

Produced products that deliver on performance and allow self-expression while being good for you. Clean, vegan, and cruelty-free, values that highly connect with our community. Our product strategy has three pillars. Over the years, we've built strong cult icons in Prime and Set, and our award-winning multi-stick franchises. We will continue filling the stronghold through always on core activations and product extensions, such as recently launched and super exciting Pore Eclipse Matte Blur, a complementary addition to our Pore Eclipse Prime and Set franchise. Our second priority is also to surprise and delight our community across new segments, eye, lip, and complexion. A highlight has been the viral Odyssey Lip Gloss launched in the back half of 2023, which continues to build momentum this year. Most importantly, we want to remain the most exciting and innovative makeup brand for the new generation.

Just in Q1 2024, we turbocharged our innovation, and launched three category-leading products. First, our Cloud Glow Priming Foam, an industry-first texture for primers with a striking glow finish. KUSH Lip Oils, building on our successful KUSH franchise, are a sheer, non-sticky, hydrating lip oil that deliciously delivers an intense hit of hydration and shine. And last but not least, our viral Cooling Water Jelly Tint, a long-lasting lip and cheek stain with a super unique, hydrating, bouncy jelly texture for a buildable burst of color. I have personally not seen many launches like this one in my career.

The strength of this innovation and the power of our brand and community propelled Milk Makeup to become the number 9 EMV brand, makeup brand in the U.S. in Q1 2024, peaking at number 6 in February, with 1.2 billion impressions, 58 million views, and further growing our community by 372,000 followers and counting. And not only a huge buzz with our community and our social, but also solidifying our credibility and our authority with already 11 top beauty awards year to date, and the year is only at the beginning. Now, this community love is not limited to the United States, but expands globally. Starting with our launch in Scandinavia, with Lyko, where consumers and parents queued for hours in anticipation for the much-awaited Milk Makeup launch at the retailer.

We are now the number 3 makeup brand in the entire store, and number 1 and number 2 opening makeup brand in Norway and Finland, respectively. By the way, all of us at Waldencast and Milk want to specially thank Roy, who drove 8 hours so that her daughter, Jessica, could be able to be there for the launch of Milk at Lyko. This is just an example of that community love and passion for the brand. Now, the brand love and frenzy has also reached the UK with the launch of Milk Makeup at Boots in Q1, and this comes on top of our successful performance at Sephora UK and Space NK.

Further confirming its global appeal, the brand frenzy expands to Latin America, with Milk Makeup becoming the number 1 makeup brand in Mexico, Colombia, and Chile at our retail partner, Blush-Bar, and making it to a top position at number 5 and number 3 overall beauty brand, respectively, at that retailer. As we close a great Q1, we're looking forward to even more exciting innovations with the recently launched Pore Eclipse Matte Blur, as well as much-anticipated new mascara launch in our KUSH Cult franchise, with KUSH High Roll Mascara and Brow Gels. Now, from clean, cool makeup that works, let's move to the world of science-led, transformative skincare. As discussed earlier, Obagi finished fiscal 2023 with $112 million in comparable net revenue, increasing slightly at 0.2% from fiscal year 2022.

Revenues reflected a strong growth in the U.S. and internationally outside of Southeast Asia, where with a new direct go-to-market model, we did not capture yet the revenue related to a former Southeast Asia distributor. With our new market model in place, we have begun to rebuild our presence in Southeast Asia, with the region expected to contribute strongly to Obagi's growth in the future. Adjusted gross profit totaled $83.7 million, with a gross margin rate of 71.2%, and adjusted EBITDA of $20.8 million led to a healthy margin of 17.7%, despite the restructuring costs of our Southeast Asia business. With the first quarter, Obagi resumed strong revenue growth, recording $33.4 million in comparable net revenue, an increase of 20.6% from Q1 2023.

Revenue was driven by the strength of our innovation, robust growth across key channels, including US physician-dispensed and e-commerce channels, further supported by the expansion of our international distributors. Adjusted gross profit totaled $27.5 million, with adjusted gross margin expanding to 81.4% from 64.8% in the first quarter of fiscal 2023. Strong sales growth, combined with significant expansion in adjusted gross margin, more than offset increased investment, leading to adjusted EBITDA of $6.7 million. Adjusted EBITDA margin expanded 260 basis points to 20% from 17.4% in the first quarter of 2023. When we double-click by region, we see that the growth of Obagi has driven both domestically and internationally, respectively, at 43.5% and +22%.

This international growth figure excludes Southeast Asia, where we are still in the ramp-up period of our newly restructured Southeast Asia business, which is not yet at the level of sales we achieved under the prior distribution model. For Obagi, our vision is to be, over time, the number one physician-dispensed dermatological brand in the world, providing targeted solutions to professionals and consumers to deliver transformative, visible results. Today, we're the number one U.S. physician-recommended brand in the U.S. on top key skin concerns: pigmentation, fine lines, and wrinkles, as well as sagging skin, which represent two-thirds of skincare sales in the channel. To become the number one physician-dispensed dermatological brand in the world, we have three core strategies. Number one, strengthening our dermatological skincare brand and physician dispense DNA. Two, accelerate cutting-edge, science-backed innovation that delivers transformative results.

And three, grow brand awareness and footprint to reach more consumers domestically and internationally. A key focus on Obagi, since we acquired the brand, has been to build on the very rich and deep heritage in physician-dispensed, while modernizing the brand to bring a more effective, compelling, and relevant proposition to professionals and patients. So we are introducing a new brand visual ID that showcases the brand's credentials and results. A new visual identity that lives across multiple professional and consumer touch points, that showcases our science credentials, clinical results, ingredients, as well as, of course, transformative results. And it culminates in the much-anticipated packaging redesign, which we built with clear objectives. Firstly, to build a relevant and cohesive brand proposition that is reflective of our dermatological credentials, as well as improve its navigation to help professional recommendation and in-practice display.

The design has been tested with both professionals and consumers, and has received overwhelmingly strong positive feedback, and the results speak for themselves. The packaging testing showed that the panel found the brand much more appealing, 89% versus 77%. More distinctly, 73% versus 61%, and much more recognized, 68% from 38%. Most importantly, a purchase intent that grows from 70% to 83%. As we refresh the brand to make it more relevant, distinctive, and appealing, hence strengthening our medical credentials to existing and new audiences, we have also further deepened our dermatological roots by partnering with Dr. Suzan Obagi as Obagi's first Chief Medical Director. Dr. Obagi's credentials speak for themselves, as she's a world-renowned dermatologist and cosmetic surgeon, and will play a pivotal role in shaping our innovation, research, and educational projects. Physicians are the heart of our brand, and Dr.

Obagi, our Obagi Physician Council, as well as all of our physician partners, bring unique insights into our product development cycle that feed research, innovation, clinical, and education, to make sure we design products and protocols that over-deliver on the patient needs. This innovation strategy has led to industry-recognized innovation, the latest one being the Obagi Daily Hydro-Drops Rejuvenating Eye Gel Cream, that sold out in 72 hours across channels. And we have more cutting-edge, science-led innovation coming in the second half, new formats, new technologies, and always the same medical-grade efficacy and transformative results. Innovation that is also key to drive consumer awareness inside and outside of the physician channel and expand our audience reach. And a focus on recruiting new incremental consumers, younger consumers, who are currently not aware of Obagi.

They are not yet in our heartland physician channel, which on average has an age of 42+ years. To introduce into Obagi and the physician-dispensed ecosystem to further grow the category and fuel our brand growth flywheel. In conclusion, we're more excited than ever about our business and, and our growth prospects. We have two powerful, high-growth, compelling brands, perfectly positioned in the most attractive segments of the category in the beauty business, the most beautiful of businesses. We have a team of world-class operators and beauty experts that are passionate about delighting our consumers. We have very engaged communities that inspire us and see our innovation. Overall, we're very confident in our near and long-term business prospects, having strengthened our business platform, improved our business processes, and delivered successfully against our visible growth strategies.

We continue to expect our efforts to lead to long-term value creation for Waldencast's stakeholders, and over time, build a global, best-in-class beauty and wellness multi-brand platform. With that, I will turn the call over to the operator to begin the Q&A portion of the call.

Operator (participant)

Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue, and for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment while we pull for questions. Our first question is from Ashley Helgans with Jefferies. Please proceed.

Ashley Helgans (Senior Vice President and Senior Equity Research Analyst)

Hi, this is Sydney, on for Ashley. I know the recent Milk Jelly Tint launch was very successful with Gen Alpha. Can you talk a bit more about what you're seeing with that consumer and kind of what you think attracts, you know, tweens to the brand?

Michel Brousset (CEO)

Yes, of course, Sydney. How are you? Well, jellies is, goes far beyond Gen Alpha. In fact, we've seen a relatively broad appeal. But of course, the key drivers of that in terms of Gen Alpha is being, number one, a very interesting new texture, as well as a very compelling, buildable color payoff. And of course, executed beautifully by the team across different touch points with really breakthrough, interesting creatives. What we're seeing in Generation Alpha, as you mentioned, is the TikTokification of beauty. We're seeing younger and younger consumers interested in beauty and participating in beauty. And as a consequence, more and more of them look for these breakthrough, new forms, new innovation that becomes, in many ways, expandable and viral in some cases, like the case of our jellies launch.

It's at the same, I think we see Generation Alpha looks for the same things I think most consumers look, which is great products, great performance, interesting, seductive, textures and creative.

Ashley Helgans (Senior Vice President and Senior Equity Research Analyst)

Great. Thank you.

Operator (participant)

Our next question is from Jonna Kim, with TD Cowen. Please proceed.

Jonna Kim (VP)

Thank you for taking my question. Just curious if you can dissect a little bit more into the growth drivers behind accelerating trends for the rest of the year versus first quarter. Also, it seems like you're accelerating marketing spend, just to talk about where you're allocating your spend and how you're sort of measuring ROI for your spend? Thank you so much.

Michel Brousset (CEO)

Hey, Jonna, thank you so much. Yeah, I mean, our growth drivers are a little bit different by brand, but they rely kind of on the same fundamentals. In the case of Milk, we are increasing now, since we acquired the company, quite substantially, the marketing spend with a great ROI in return. And we would see incremental marketing spend quarter over quarter as our business progresses. We hold a very tight measure of ROI behind it, and we're seeing great results from it. Second is innovation. We had an incredible, you saw Q1 vintage of innovation with three great products. We have very important products coming up as part of the launches. And number 3 is the strong growth we're seeing internationally.

I think what is important to note on Milk is, at the end of the day, a lot of this growth is really built on productivity. We have not expanded substantially distribution other than on those places we highlighted, the U.K., where we expanded into. Well, first with Sephora and then Space NK and Boots, and I guess, Lyko in Scandinavia. The majority of the growth, the vast majority of the growth, is coming from increases in productivity as the consumers become more aware of the brand or innovation performs strongly. In the case of Obagi, our U.S. physician-dispensed channel continues to be the bedrock of our, of our brand is growing strongly. We're, we're building from strength to strength, recommitting to a brand DNA and recommitting to a core.

But also, omni-channel performance has been an important part of the growth, both our Obagi.com as well as other online retailers. Internationally, it's starting to add to our growth quite substantially outside of Southeast Asia. It's important to note that, as we mentioned in the presentation, for Southeast Asia, we are still below the level of sales that we had under the previous distributor model, but we're building a strong into what I think is going to be, what we are convinced is going to be a much more robust, larger and more profitable business in the region. So, a little bit different by brand, as you can see. In terms of measuring ROI, that's a very core part of what we do. Allocation is something different by brand.

We have in Milk quite a strong allocation against in-store support, as well as social and influencer. In the case of Obagi, it's very single-mindedly focused against our physicians, physician dispense, and getting consumers to recognize Obagi and go to their doctors or dermatologists or estheticians to ask for the brand.

Jonna Kim (VP)

Got it. Thank you so much.

Operator (participant)

Our next question is from Dana Telsey with Telsey Advisory Group. Please proceed.

Dana Telsey (CEO and Chief Research Officer)

Hi, good morning, good morning. Can you talk a little bit about, on the gross margin side, distribution channels, what you're seeing in terms of product margin by distribution channel and brand, and the outlook going forward? Thank you.

Michel Brousset (CEO)

Hi, Dana. Yes, of course. Again, it's a little different by brand. Obagi, a lot of the strong progression that you see on Obagi is a combination of channel mix as our omni-channel e-com business grows strongly with... but at the same time, also a great innovation. All of our new innovation comes at our greater gross margin. It's not only very compelling and very effective, but also give us a strong accretion in terms of gross margin. In the case of Milk, gross margin, the gross margin expansion is very much driven by operational improvements as we scale, which includes forecasting, inventory management, more efficiently sourced products. As we, develop scale, it allows us to get a little bit of benefits of that scale when it comes to cost of goods.

So we're seeing very strong positive contribution in our efforts. Now we expect a strong gross margin progression year-over-year. I think in the case of Obagi, Q1 gross margin is particularly strong. We think that it's still going to be ahead, but Q1 gross margin of Obagi was particularly strong. So net is Obagi, we are benefiting from a bit of channel growth of e-com. Milk is really a strong operational progression with not a lot of impact by channel into that mix.

Dana Telsey (CEO and Chief Research Officer)

Thank you.

Operator (participant)

As a reminder, it is star 1 on your telephone keypad if you would like to ask a question. Our next question is from Linda Bolton Weiser D.A. Davidson, Please proceed.

Linda Bolton Weiser (Managing Director and Senior Equity Research Analyst)

Yes, hi. I was wondering if on the Obagi side, in terms of the Southeast Asian distributor, in terms of getting that back to the size it was before, is that a 1-2-year endeavor or multi-year, or what do you think the timeframe will be to getting that back to a bigger size? And do you think it can, it can get to be as big as it was before? Thanks.

Michel Brousset (CEO)

Thanks, Linda. Yeah, I think we believe that our Southeast Asia business over time is going to be substantially bigger than what it was under the prior distribution agreement. Not only bigger, but more profitable as we internalize a lot of that margin. It is going to be a journey. We relaunched the brand in Vietnam, initially in November, so we are still in the very early stages of that process. We are launching into other countries, namely Thailand, Singapore, India, Malaysia, in the coming, in the near future. So it is building rapidly and is building rapidly at a profitable rate.

That said, I think it's going to be, in the case of, specifically the case of Vietnam, where the prior distributor had a particular strength, it's gonna take us, I would say another 18-24 months to get back to, to the level of where we were, where we were before. But again, in a way that it's much more profitable earlier on and much more robust.

Linda Bolton Weiser (Managing Director and Senior Equity Research Analyst)

Okay, thank you.

Michel Brousset (CEO)

Thank you.

Operator (participant)

We have reached the end of our question and answer session. I would like to turn the conference back over to management for closing remarks.

Michel Brousset (CEO)

Well, thank you everyone for joining us in what it is again, a coming back to normality, I would say, quarterly filing in our business. We're very excited about this quarter and our prospects, and I look forward to continue to sharing with you the progress we made as we build the next global best-in-class beauty and wellness company. Thank you.

Operator (participant)

Thank you. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.