Beauty Health Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 9, 2023

There are 11 speakers on the call.

Operator

Morning, and welcome to the Beauty Health Company Second Quarter 2023 Earnings Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Eduardo Rodriguez, Senior Director of M and A and Investor Relations.

Operator

Please go ahead.

Speaker 1

Thank you, operator, and good morning, everyone.

Speaker 2

Thank you for joining the Beauty Health Company's conference call to discuss our Q2 2023 financial results, which were released this morning and me in person today are Beauty Health's President and Chief Executive Officer, Andrew Stanlick incoming Chief Financial Officer, Mike Monahan and Chief Operating Officer, Brad Hauser. Before we begin, I would like to remind you of the company's safe harbor language. Management may make forward looking statements, including guidance and underlying assumptions. Forward looking statements are based on expectations that involve risks and uncertainties that could cause actual results to differ materially. Listeners are cautioned not to place undue reliance on any forward statements.

Speaker 2

For a further discussion of risks related to our business, see our filings with the SEC. This call will present non GAAP financial measures. Reconciliation of these non GAAP measures to the most comparable GAAP measures are in the earnings release furnished to the SEC and available on our website. I will now turn the call over to Andrew.

Speaker 1

Thank you, Eduardo, and thank you, everyone, for joining us. Today's call is going to be organized a bit different than usual. First, we'll review the highlights of our Q2 results before turning to some key learnings and actions taken through this period of rapid growth. I will then walk you through our 2023 outlook, and we will conclude with a preview of our innovation pipeline from Chief Operating Officer, Brad Hauser. We expect you saw the press release this morning announcing Michael Monaghan as our new CFO.

Speaker 1

This is a critical role and I'm confident Mike brings the right expertise that we need for this next phase of growth. I am tasking Mike with enhancing our financial strategy, planning and reporting capabilities. To that end, I do want to thank Lianne for her leadership during a formative period for Beauty Health. She helped manage the company through a period of transformational growth, including navigating through the pandemic. We are grateful for her contribution and wish her well.

Speaker 1

Mike will assume the role of CFO effective tomorrow. Leanne will stay on as an advisor until September 1 to ensure a smooth transition. I will now hand off to Mike for a brief introduction.

Speaker 3

Thanks, Andrew. I'm happy to be here today, and I look forward to meeting and building relationships with you all over My decision to join Beauty Health is based largely on the incredible growth opportunity ahead. Beauty Health is an impressive company with solid business fundamentals As Andrew mentioned, my first day is tomorrow. I plan to use my 1st 90 days to immerse myself in the working to fully understand our financial controls, planning and reporting. I look forward to sharing my impressions with you all in due course.

Speaker 3

I will now turn the call back to Andrew.

Speaker 1

Thank you, Mike. We're happy to have you on board. I want to start by thanking the Beauty Health team around the world for their hard work There are 5 key takeaways from the quarter as we recommitted to our core business. First, we delivered net sales of 100 and 17,500,000 and adjusted EBITDA of 17,800,000 on continued demand for HydraFacial. These results represent net sales growth of 13% and adjusted EBITDA growth of 22%.

Speaker 1

As a reminder, This quarter, we are comparing against the U. S. Launch of Syndeo last year, the company's single biggest product launch to date, where we benefited from $23,300,000 of trade up demand. When excluding the impact of trade ups, Our total year over year net sales growth for Q2 2023 was 32%. The second sales, which were $51,900,000 up 34% year over year on increased volumes.

Speaker 1

3rd, as anticipated, we saw continued strength in EMEA and APAC. In China, We achieved year over year net sales growth of 2 65 percent or 167% when excluding trade ups. We continue to see reacceleration in China and remain enthusiastic about the growth potential of this market. The 4th takeaway. We generated adjusted EBITDA of $17,800,000 at a margin of 15.1 percent, owing to 7.1 percent of adjusted operating expense leverage compared to last year.

Speaker 1

However, those leverage gains were largely And the final takeaway for the quarter, based on the continued demand for Hydrofacial, the reacceleration in China and our ability to drive operating leverage, we are pleased to reaffirm our fiscal 2023 net sales And our long range 2025 guidance. We are refining our 2023 adjusted EBITDA margin guidance to a more precise range of 18% to 19%, reflecting the temporary gross margin headwinds we face. Before we review the details of the quarter further, turning to Slide 6, I want to take a moment to reflect on our recent growth and learnings. Since 2020, we have nearly doubled the size of our installed base. And by the end of this year, we expect to have roughly quadrupled net sales in just 3 years.

Speaker 1

We believe this performance is remarkable for any company. So as you can imagine with this type of growth trajectory, The road is not always smooth, and we certainly have some areas in which we can improve based on some key learnings that I would like to share with you. This improvement starts 1st and foremost with resolving our SYNDEO teething issues by the end of this year. Developed at speed during the pandemic, this high-tech delivery system launched just 28 days into my tenure, Brought HydraFacial out of the analog world and into the digital age, pushing the category forward. While SYNDEONet sales at the company's expense, even for the smallest issues.

Speaker 1

This intentional decision underscores our unwavering commitment to best in class Customer service. While it led to incremental unplanned costs, which have impacted us financially in the short term, This action has protected our relationship with our providers who are with Hydrofacial for the long term. I'm pleased to say that we have greatly reduced system exchanges. Today, with the changes I initiated, we are equipped to enhance the system's durability and we have begun to replace these components in existing devices in the field. As we grow past these teething dynamics, I am confident our newly strengthened product and software engineering teams helmed by aesthetics Industry veteran Brad Hauser, who I hired earlier this year, are well equipped to deliver on our vision for Syndeo.

Speaker 1

Our next learning comes from our forecasting process. Put simply, in this phase as a young public company, Some of our internal processes have not kept pace with the rapid growth and expansion of our multi geography business footprint. Under the experienced leadership of our incoming CFO, we plan to enhance our forecasting processes, including investing in unified global systems to further improve our predictive analytics capabilities. Additionally, value engineering Projects that we expected to expand gross margin have been delayed as we have instead dedicated resources to manage Syndeo's teething issues. I'm disappointed to say these dynamics have hampered our ability to meet our expected gross margin target for the year and we are retracting our gross margin guidance 25 as both China manufacturing and the planned value engineering project bear fruit.

Speaker 1

Finally, in 2021, we converted a number of international distributor markets to direct markets, several of which were quite small in scale. To be frank, some of these smaller markets carry a high opportunity cost. Going forward, I have made a decision to refine our focus and concentrate our resources on executing in our most important direct markets as the top priority. I share these learnings transparently after 18 months leaving this company and with a clear plan to move forward made stronger by fortified leadership, improved systems and a commitment to the customer experience that we are known for. Indeed, as we bounce back We have a deep competitive moat positioning us well for long term success.

Speaker 1

We have an incredibly unique business model and a long term high margin recurring revenue stream. We operate in a large and underpenetrated market and possess scientific and product competitive advantages. This is supported by a passionate community of providers and a powerful consumer brand that drives traffic to our customers. Moreover, we have an exciting pipeline of innovation to propel our future growth, which Brad will take you through a bit later. It is these strong fundamentals combined with favorable sector tailwinds that give me the confidence in the long term outlook for Beauty Health.

Speaker 1

Now I will turn the call over to Lianne to discuss our Q2 financial results.

Speaker 4

Thank you, Andrew, and thank you to everyone joining the call. Today, I'll walk you through our Q2 results, cost and balance sheet highlights, then hand back to Andrew to walk you through our outlook for 2023. Turning to net sales detail on Slide 10. We delivered total net sales of $117,500,000 in the 2nd quarter, up 13% year over year. This quarter, we're comparing against last year's U.

Speaker 4

S. Launch of Sendeo, which benefited from $23,300,000 of trade up demand. When excluding trade up, our total net sales growth for the quarter was 32%. In total, delivery system net sales were $65,600,000 roughly flat versus last year. When excluding trade up, delivery system net sales grew 30% year over year on volume growth of 56%.

Speaker 4

As expected, our trade up volumes declined 64% and contributed $11,600,000 to net sales. We continue to expect total trade up net sales in 2023 to exceed the $23,300,000 of trade up demand seen in Q2 of last year. We ended the quarter with a global installed base of 29,682 and sold 28 100 and 2 delivery systems at an average selling price of $22,900, a slight decline from last year. This was driven by a few factors. 1st, a mix shift in the Americas towards older generation of refurbished devices amidst tightening credit for providers and a degree of holdback from U.

Speaker 4

S. Providers anticipating Syndell enhancements to improve the user experience. 2nd, reduce EV pricing internationally following Sendeo's launch in our direct International Markets. Moving to Consumables. Strong growth in volume across the globe drove net sales growth of 34% to $51,900,000 And finally, breaking down our performance by region.

Speaker 4

In the Americas, We generated total net sales of $63,600,000 a decline of 16% when compared against last year. As expected, this was driven by fewer trade ups sold this quarter relative to Q2 of last year. When Sendeo U. S. Launch drove a bolus of trade up demand, when excluding the impact of trade up, Americas total net sales growth was 18%.

Speaker 4

Notably, the APAC region returned to its pre pandemic growth trajectory on the heels of China's recovery, Delivering $25,200,000 of net sales. As a region, APAC registered 143% year over year growth or 92% when excluding trade up. In EMEA, Sandeo's launch drove a healthy 61% net sales growth rate or 37% when excluding trade offs to deliver total net sales of $28,600,000 The growth came from strength across systems and consumables. As Andrew already mentioned, We faced meaningful gross margin headwinds this quarter. On Slide 11, you see that we delivered GAAP gross margin of 57.8% this quarter compared to 67.6% last year and adjusted gross margin of 64.8% this quarter compared to 71% last quarter.

Speaker 4

A primary driver behind this decline in adjusted gross margin is that we did not anticipate the extent of delivery system mix Shifting towards refurbished systems. Whereas refurbished systems were less than 1% of volume in the Q2 of last year, This quarter, they accounted for 17% of volume. Refurbished systems carry a higher cost in inventory, creating gross margin dilution when they are sold through. Importantly, each delivery system placed represents a predictable and high margin recurring cash flow in the form of future consumables revenue. Andrew will touch on this more in a moment, but this relationship It's a foundational tenant supporting our go to market strategy.

Speaker 4

Additionally, we continue to carry duplicative production costs, which we expect to resolve upon the completion of our transition to China production in the Q2 of 2024. For the quarter, we generated 100 basis points of adjusted EBITDA margin expansion. This was due to an 8 0.2% year over year reduction in selling and marketing as a percentage of net sales for the Q2, which was driven by lower sales commissions due to year over year mix shifting towards consumables, APAC and EMEA. The benefit was partially offset by gross margin headwinds already covered. Next, R and D costs remain relatively flat, trending at around $2,000,000 per quarter on an adjusted basis.

Speaker 4

Lastly, adjusted G and A expense of $20,400,000 is consistent to our run rate expectation of $20,000,000 to $22,000,000 per quarter and is expected to remain relatively fixed. Overall, we generated 7.1 percent in adjusted operating leverage. I will now move to our balance sheet highlights on Slide We ended the 2nd quarter with roughly $550,000,000 in cash and cash equivalents, an increase of $17,400,000 from March 20 inventory as we drive towards carrying 1 to 2 quarters worth on hand. Finally, our shares outstanding at the end of the second quarter Stood at approximately $132,900,000 We remain well capitalized to execute on our growth initiatives and continue to remain opportunistic with our capital allocation. Before I turn back to Andrew, I would like to express my gratitude our teams and partners globally for a wonderful 3 years.

Speaker 4

We have much to be proud of, and I am excited to see Mike take Beauty Health through to its next phase of growth. With that, I will now turn the call back to Andrew for a look at our outlook for the second half and full year 2023.

Speaker 1

Thank you, Lianne. On slide 15, we share our expectations for the second half of twenty twenty three. We reaffirm our 2023 guidance, driving to projected net sales of €460,000,000 to €480,000,000 And refine our adjusted EBITDA margin target to a more precise 18% to 19% range. We acknowledge that due to pandemic impacts, a new product and relative newness as a public company, modeling our growth has not been straightforward. As a result, we are providing incremental color to provide clarity on our expectations for the Q3.

Speaker 1

We expect this incremental color to be temporary and unnecessary to continue once we lap these dynamics early next year. Consistent with traditional seasonality in the medical aesthetics industry, we expect Q3 net sales to be in line to a slight step down from Q net We expect Q3 adjusted EBITDA margin to step up slightly from Q2 to a range of 18% to 20%, driven by minor sequential improvement in adjusted gross margin versus Q2, increased selling and marketing leverage as marketing investments for the medical aesthetics industry and ours is no different. With Syndeo's enhancements expect to be largely completed, resurgence in China as it comps the 2022 pandemic lockdowns and continued volume growth in consumables, We remain confident in our ability to land within our guided fiscal 2023 range. Our confidence is bolstered by the fundamentals of our business, which we spoke about earlier and the favorable market dynamics that we anticipate will continue to drive our business. With every system we place, we unlock a long term sustaining revenue stream.

Speaker 1

For those of you unfamiliar with our business, We are a razor razorblade model with profitable unit economics across our razors, which are our systems and our razorblades, which are our consumables in between delivery systems and consumables, with consumables typically being the recurring and predictable revenue generator. On Slide 17, you can see why this model is so appealing. The chart on the left depicts our historical consumables net sales based on the provider's equipment purchase year. In 2022, nearly 75% of our consumables net sales came from providers who have been our customers for 3 years or more. About half of the providers we first sold to 8 market.

Speaker 1

To date, we have placed more than 29,000 HydraFacial Systems globally, But we know there is a large and untapped market still available to us. We are less than 5% penetrated globally in our direct markets With our most mature market, the U. S, representing only mid teens penetration. There is still so much more room to grow and any number of factors that will deliver that opportunity, whether increasing points of distribution, product lines or treatment frequency.

Speaker 5

I want us to take a

Speaker 1

closer look at one of our single biggest growth opportunities, China. Our business is nascent in China, a market we view with a potential of 3 times of that of the U. S. Skin is reported as the number 2 health concern amongst Chinese consumers and more than 40% of Chinese consumers expect to increase their spending on Health and beauty products. Our gold standard positioning, coupled with an accessible price point and flexibility for Broader distribution than competitor devices is part of our recipe for success to capitalize on these tailwinds and drive penetration in the region.

Speaker 1

With just 2,000 systems in China today and $24,000,000 of revenue in the first half of this year, we are just getting started. As we continue to drive market penetration, perhaps the strongest lever we have available to us is the HydraFacial brand itself. Brands, none come close in terms of our earned media value. In the first half of the year alone, Hydrofacial generated €9,700,000 of EMV and with it, excitement and interest from consumers and providers alike. Brand building initiatives recruit new consumers to Hydrofacial Staining Google search volume are driven by standout brand activations like our annual Globelution tool, which was reimagined for 2023 And the recent Dior spa cruise, which featured a customized Zendaya in Dior's signature white and gold for the occasion.

Speaker 1

One of HydraFacial's unique competitive advantages is our omni channel presence and our ability to be wherever consumers seek out Beauty and Aesthetics. I am pleased to share that we will expand our partnership with Sephora in APAC this fall, taking Perk by HydraFacial to stores in Australia And Malaysia. We are already in more than 500 Sephora stores in North America and Sephora's Singapore flagship. Our brand building efforts have a meaningful impact on the adoption of HydraFacial BIPA providers, who regularly tell us One of the reasons they love HydraFacial is that it is the treatment consumers ask for by name. We recently conducted a fresh brand study with leading market research firm Ipsos.

Speaker 1

Aided brand awareness for HydraFacial is 41% amongst consumers of the and Professional Beauty category in the U. S, trailing only BOTOX at 72% awareness and Juvederm at 46%. What is perhaps more interesting is HydraFacial's conversion rate. Amongst those who know the brand, 60% try it. This is a higher conversion rate than BOTOX.

Speaker 1

Once consumers are aware and have tried the treatment, they recommend HydraFacial to their friends. Our refreshed Net Promoter Score, or NPS, is 55, an 11 point increase over data from last year and a best in class industry score. And complement those initiatives with product innovation and R and D. To tell you more about our innovation pipeline, I will now turn the call over to Beauty Health Chief Operating Officer, Brad Hauser.

Speaker 5

Thank you, Andrew. It's a pleasure to be here today. I have been in the aesthetic space for many years and I'm proud to have worked with many of the industry's most successful devices and brands. I must say, I have rarely been as excited about an innovation pipeline as I am about the opportunity in front of Beauty Health. Since joining in January, I've taken on end to end product oversight from innovation to production to go to market.

Speaker 5

My goal has been to focus the organization on innovations that will deliver long term sustained profitable growth. First, Zendeo. You all know it as our next generation connected device to deliver powerful insights and efficiencies for our providers. What we are unlocking next is Syndeo's one stop plug and play platform capabilities. We envision a future where Syndeo becomes a revenue generating Swiss Army knife serving as the centerpiece of the treatment room.

Speaker 5

Today, we plug and play our LED shield from LightStim. You can imagine in the future where we can power a dermatoscope or other skin assessment tools to give the Estes an in room diagnostic or even a laser or oxygen facial handpiece. With this, our providers can offer complementary treatments all in one device. We intend to add a new handpiece with complementary functionality to Syndeo every 12 to 18 months. And as Zendeo is the flagship device in our lineup, our new connected Allegro serves as the entry level offering.

Speaker 5

The upgraded Allegro provides the same trademark HydraFacial Glow, but without many of the defining features of Syndeo. The entry level pricing offers flexibility for us to attract even more providers, particularly newly graduated aestheticians just beginning their careers. Boosters are already central to the HydraFacial approach to personalization and co created R and D with a number of strong partners. You will continue to see us launch marquee booster innovations to drive newness on a regular cadence globally. These feel excitement and truly differentiate our brand.

Speaker 5

We expect to launch a collection of region specific boosters, Starting with China and addressing the skin needs and preferences of our largest growth market. HydraFacial Branded Skin Care is a logical extension that Providers can recommend to their clients to use at home. It is a natural add on for providers and puts HydraFacial in consumers' homes, enhancing our brand engagement. This next innovation is particularly exciting as it's been in the works for some time and opens a new channel for Beauty Health, hair salons. We intend to create a portable CaraVie specific device tailored to the needs of hairstylists.

Speaker 5

The device is designed for the tight quarters and the economics of a hair salon, a venue that is often the 1st place many consumers discuss hair loss concerns. We will start with a very thoughtful And finally, our soonest coming innovation is a consumer loyalty app that will put HydraFacial directly in the hands of consumers. The app is designed to draw consumers in and reward HydraFacial treatment frequency. With this, we aim to drive increased bookings to our providers, growing their businesses and fueling our own consumables growth. As the app matures, it is expected to become a cornerstone of our connected ecosystem.

Speaker 5

We're excited to be collaborating with Amazon Web Services and the AWS Generative AI Innovation Center To expand the functionalities of Syndeo Cloud, our beauty health loyalty platform and implement generative and predictive AI capabilities to rooted in clear consumer insights that are expected to deliver sustained long term growth. And with that, I turn it back to Andrew.

Speaker 1

Thank you, Brett. Indeed, we have never had a stronger innovation pipeline, and this will provide us with long term sustainable multidimensional growth opportunities. And we look forward to sharing more updates at the Beauty Health Investor Day in H1 of 2024. Operator, we're now ready to take any questions.

Operator

Thank you. We will now begin the question and answer session. At this time, we will pause momentarily to assemble our roster. The first question comes from Oliver Chen with TD Cowen. Please go ahead.

Speaker 6

Hi, thank you very much. Would love Your thoughts on the teething issues and what that implies in terms of timing and how much impact that is having across the Syndeos? As well as you thought about guidance, you mentioned some of those issues caused gross margin headwinds. How are you able to reaffirm the margin guidance in the context of that? And a follow-up on China, just we're seeing Some optimism, but some caution in China.

Speaker 6

Would love your reads on how that's interplaying with the traffic and what you're seeing. Thanks very much.

Speaker 1

Good morning. Good morning, Oliver. Thanks for the questions. So I'll start with the Syndeo issue. So As you know, our vision for SYNTHEO is that it's a connected platform and that Swiss Army knife at the center of the provider's treatment room.

Speaker 1

And when we launched it was a real leap forward. But I think as we've talked before with any high-tech IoT product, especially those first out of the gate like The ones in the U. S, there was an element of iterative improvement once it's in the real world. So in part, part of the teething issues were Software related and part of the issue was user experience and hardware. And I think as providers put some data to work over the course of last year, In the U.

Speaker 1

S. Going through hundreds of treatments, we observed opportunities to improve the customer experience and overall performance And reliability, so it pushed through new software updates, which very specifically was related to forcing a rinse cycle, etcetera, because we are finding that some of the first generations had some residue buildup and blockage And other ones were simply simple component upgrades. This has mainly been a U. S. Teething issue because Over the course of last year, we've talked about it on previous calls, we were able to make those amendments ahead of the international launch.

Speaker 1

We've been putting the customer first and obviously invested as we've spoken before about replacing Every machine, if a customer called in with a problem, we're very fast to take the machine back and switch it out. But of course, that cost us money, which was unplanned. But we felt that we must put the customer first. They're with us for the long term And that pays off and they appreciate that support. So we're putting the last of the Sort of fixes in terms of Q3 and we're in the U.

Speaker 1

S. Where we're making the amendments in terms of in field support and that will be completed by the end of Q3. In terms of your other questions, on gross margin, the pressure we had in Q2, very Specifically was just partially caused with what I've talked about Synde issues in the U. S. I think we're working with our providers.

Speaker 1

Some of them knew we're about to do these in market fixes given Q3. So there was a partial degree of holdback. On the other part with the high interest rates in the U. S. Particularly, we saw a degree of shift to lower price devices like the Allegro or Refurbished Shindeo devices.

Speaker 1

So that's what caused the gross margin shift. It's temporary. We are aware of it. We have a fix in place And we'll be back at this historic levels of gross margin by the middle of next year. And we do have a line of sight to our long range targets.

Speaker 1

You recall last September, we presented 500 basis points of margin accretion over the next 3 years from September. We have a line of sight to that because the China manufacturing will flow through by the middle of next year and the value engineering products, which we projects which we presented We'll also bear fruit. We had put those on hold because we've really dedicated our resources on addressing the Syndeo issues in the U. S, which was the right thing to do. We're on track there.

Speaker 1

And then your final question on China. I mean, as anticipated, both EMEA and APAC came back strongly, but particular In China, we are very pleased with the acceleration there in Q2, and I must say it's continued into Q3. As you know, Oliver, China is less impacted by those typically July, August, like the periods of consumption, which Europe and the U. S. Has.

Speaker 1

So China has continued to go well despite the economic headlines we're reading, we follow very closely, but the consumption of Consumables and systems remains very healthy.

Operator

The next question comes from Corinne Wolfmeyer with Piper Sandler. Please go ahead.

Speaker 7

Hey, good morning team. Thanks for taking the question. So I'd just like to touch on the guidance and really appreciate the Color you gave kind of on more of like the quarterly cadence on what you expect for Q3 and Q4. But it does kind of We've been to a pretty strong ramp in EBITDA margin in Q4. Can you just talk about, 1, what gives you confidence that see that big step up in Q4.

Speaker 7

And then 2, where is that really going to come from? If you're still going to see some added gross margin pressure, Is it really going to come from the marketing expense and SG and A? Just kind of where are we going to see that leverage pull through? Thank you.

Speaker 1

Corinne, thank you for the question. I'm glad you asked it, because I think it's important that we walk through this together on the call. We maintain our conviction and our ability to hit our guidance in the back half. We started this year mentioning this was going to get back Halfway to the year and that has not changed. I think as China recovers, we expect continued growth in the region.

Speaker 1

You recall, In Q3 and especially in Q4 last year, China was locked down. So we had no business. That's bounced back strongly as has EMEA. As you know, we've spoken before about the higher contribution margins for those international businesses, especially in Asia, so that contributes. Also, we are still in launch phase, dropping a lot of new systems globally.

Speaker 1

And in the back half of the year, We placed 30% growth on new systems globally in Q2. That will continue as we roll out ZYNDAO internationally in the second half as we count that. Thirdly, we've got, of course, exciting booster portfolio launches coming in the second half, including some local in Q4 Asian boosters, which Brad talked about in China. Moreover, we're getting as we experienced already this quarter, Degrees of operating leverage throughout the P and L beyond the fixed cost leverage you'd expect to see with our revenue growth. So in addition, as you mentioned, we expect to see Receiving OpEx investments, our marketing and advertising is very front half weighted because of all trade shows in our industry where we generate the leads and that typically receives.

Speaker 1

So we have line of sight to the back half. And I personally went Through the details of this financials for the back half of the year given the CFO transition, I feel confident in our ability to use various levers to achieve our guidance.

Operator

The next question comes from Margaret Kaczor with William Blair. Please go ahead.

Speaker 8

Hey, good morning. Thanks for taking the questions. I'm going to take a second crack at the guidance comment, both on the top line and the bottom line. You touched on it a little bit, Andrew, there, but maybe if we go into specifics. So if we look at the historical, I guess, Q4 trends pre COVID, those look like to me at least that they were up kind of in the mid-20s sequentially from Q3 to Q4, More recently in COVID, I guess, impacted here as it was in the teens, the number you provided today looks like it's closer maybe to the high 20s from Q3 to Q4.

Speaker 8

So again, is that more China? Is it something else? Are my numbers wrong? Maybe they are. And then as you think about adjusted EBITDA, does that EBITDA, I guess, rely on revenues kind of hitting the number that you've got?

Speaker 8

Thank you.

Speaker 1

Margaret, thank you. Great questions, important. So a few things as we unpack that. First of all, looking back at the historical years you Reference, remember, recall back that China was very nascent back then. We didn't have teams on the ground in Shanghai, Beijing, Shenzhen, which We have now as was EMEA.

Speaker 1

Now, of course, we've made all those investments during the last 2 or 3 years, which are really bearing fruits. So when you add on those building blocks with the expansion of our business, the Syndeo launch, the new consumables, That's how we bridge that. In terms of EBITDA, you are very confident in our ability to deliver the EBITDA with the momentum we have, With the leverage we're getting, we'll also see some gradual sequential improvement in gross margin in the back half of the year. And that's why we have confidence and line of sight to deliver the I got it. It's

Operator

provided. The next question comes from Jon Block with Stifel. Please go ahead.

Speaker 9

Thanks, guys. Maybe the first question, The year ago EBITDA figures have changed yet again. So I see in the PR, the 1H 22 EBITDA is now $18,300,000 It was $13,800,000 So it's revised higher by 30%. The 1H 'twenty two EBITDA margin arguably benefits by about 2 50 bps. And just from some of the footnotes, it seems like more add backs were baked in The year ago numbers, so that it's apples to apples with the 1H23 add back.

Speaker 9

So I guess, one, do I have that right? And then Leanne, how much does the 2023 EBITDA margin of 18% to 19% benefit from these incremental add backs relative to your original guidance when you gave that whenever that was 6 months ago. The follow-up, Andrew, the 'twenty three revenue is unchanged, the gross margins are arguably lower. So some of the EBITDA is being made up within OpEx, likely sales and marketing when you look at the adjusted numbers. Maybe just your comfort that you're not sacrificing, call it, investments in sales and marketing in 2023 In order to hit the near term margin targets, which might be creeping more longer term growth trajectory of longer term growth in 2024 and beyond.

Speaker 9

Thanks, guys.

Speaker 1

John, thank you. I'll take those. I'll start with your last question and then work back. First of all, just to reaffirm, we have and I have personally total confidence in our guidance in the years ago. On the way we're investing, we're learning all the time in terms of our sales and marketing.

Speaker 1

We've been operating in marketing spend sort of in that 10% to 12% of sales, and that's of course increased year on year value as we've grown bigger. And our spend is typically front weighted, But we've really shifted and learned about how we invest, be it from the globalution, which we've highlighted on the call, the way we're investing in broader reach Digital, which both the provider to drive conversion of new systems and consumers are actually being a lot more efficient in how we invest in our marketing Dollars, and we're seeing that in the ROIs we track. So I must say, we're feeling very confident that we're not in any way Reducing our funds there. We're just getting leverage from efficiencies in terms of OpEx And our structures which are bearing fruit, you saw that operating leverage come through this year already in Q2. In terms of your going back in terms of your adjustments.

Speaker 1

So yes, what in Page 2 of last year, We didn't put our bonus for our teams in the H2. We also to be apples to apples removed at this year because so much of our Comp is either base salary or equity. Indeed, we paid equity as a bonus to our teams this year. So we're very aligned with the shareholders. So we've taken that off page 2, so it's apples for apples.

Speaker 1

So that explains that adjustments included in the footnotes. Thank you. The next question comes from Navane Thay with BNP. Please go ahead.

Speaker 8

Hi, good morning. Thanks for taking my questions. Can you spend more time on the U. S. Credit Tightening conditions, so is that MedSpa struggling to find the starting financing?

Speaker 8

And did you really have market And also interested to know about the immediate priorities of Michael Monahan from his appointment tomorrow. Thank you.

Speaker 1

Thank you, Nevada. You're a little bit difficult to hear. But first of all, I'll address your first one. I think you were talking about the health of the market and general credit. I think first of all, you mentioned the medical spa.

Speaker 1

The medical spa, both in the U. S. And globally is very, very buoyant. As you know, it's over 60% of our business and the most productive and it's growing fast and continues. I think what I referred to in terms of the pressure on our gross margin related to systems actually is less so from the chains.

Speaker 1

They've continued to Invest and that's why even U. S. You saw that really strong growth in systems of 20% in Q2 and that's comping last year's Zingdale launch with new system, new doors increasing penetration and market share. I think where we've seen the pressure is those You know, aestheticians who are just out of school, they would be the just buying their first device. And I think, you know, what they've been telling us with higher interest rates, Financing now is they're getting quotes up to nearly 20% on financing and that maybe looking at Zendaya, which is Yes, recommended price of circa $40,000 that's a big ask for them to take on.

Speaker 1

I think that's why they've been seeking either refurbished Syndeo systems or the Allegro system, which is a perfect price point for them around $20,000 So we've been able to serve them. In saying that, We walked away from over $4,000,000 of sales in the U. S. Alone in Q2 Because despite good credit levels, a number of our providers just couldn't get the financing they want as tightening as tightened up with the rising interest rate. So that's really explains that.

Speaker 1

And of course, we're well served with the way we stratify Our portfolio with Allegro is that entry price point and then Zendaya, we're able to cover the market well.

Operator

The next question comes from Olivia Tong with Raymond James. Please go ahead.

Speaker 8

Great. Thanks. Good morning. I want to revisit gross margin again, because there are a couple of things that you said, Obviously, selling, old refurbished systems, Yale Agra, etcetera, which I imagine have lower gross margins relative to Tyndeo. Was it always part of the plan to do that?

Speaker 8

And are you continuing to sell old refurbished systems? And then can you talk about the gross margin differential between Some of the legacy systems and Syndeo, because effectively what it looks like is that you may be having A bit of a lower AUR relative to your prior expectations. And with that, kind of curious how Yes. How the building blocks to get to gross margin back to normal by beginning of next year? Thank you.

Speaker 1

Alevia, thanks for your question. I mean, first of all, just to confirm, Allegro is not gross margin accretive. It's not diluted. It's in line with the margin. I think what the margin pressure we faced has been more from The consumers, sorry, providers purchasing the lower margin refurbished Zendaya, that's what's dragged the margin down.

Speaker 1

So Allegro is a great margin, of course, at $20,000 it's a lower price point, but perfect for that Graduating aesthetician and then provider and then obviously the syndere for the provider wanting all the functionality, which Brad talked to. And then in terms of the gross margin, we will start to see a sequential improvement of that In the second half of this year and be back up by the middle of next year, we'll be over these short term headwinds. In essence, and we've I think we've talked about this before in previous At this stage, we have planned on twofold. 1, to have a lot more manufacturing in China. But at the moment, we've started that manufacturing.

Speaker 1

But as we've also been making addressing the teething issues on the devices in the U. S, in essence, we've been having double costs of that U. S. Production and as well as China. So that's been a gross margin hit.

Speaker 1

And moreover, we have Also had to postpone some of the value engineering projects, which we'll now address because we've really focused the team on addressing the syndevia issues in the U. S. We'll get over that during the end of Q3 and have line of sight back to gross margin of historical levels and more by the middle of next year.

Operator

The next question comes from Alan Gong with JPMorgan. Please go ahead.

Speaker 3

Hi, Dean. Thanks for the question. I kind of want to touch up on guidance again. When I look at it, it does look A bit more 4Q loaded than I think we were originally expecting. 2Q came in a little bit stronger on the top line than we were expecting.

Speaker 3

And I know there's like definitely a little bit of moving pieces the year given the kind of the cadence of Zendaya launches internationally. So is there any more color you can provide just on how you get confident in that really strong 4Q number? How should we think about systems are progressing? How should we think about disposables progressing?

Speaker 1

Good morning, Ellen. Thanks for the question. Again, an important one. As I said, we maintain our conviction in our ability to hit our guidance. And I think we've talked before about from the start of the year, we said it would be back weighted.

Speaker 1

I think there's a few building blocks in there. Of course, China was locked down really for us during much of Q3 and certainly Q4 of last year. You've seen how significant that is today on the call. That's, of course, bounced back strongly and continues to perform well into Q3. And the same with EMEA in general and both of those markets had higher contribution margins than American Business.

Speaker 1

As our business mix continues to weigh more towards international, we expect to generate degrees of operating leverage throughout the P and L beyond the fixed cost leverage you'd expect to So there's a fixed cost leverage. There's also the operating leverage, which is in terms of our investments. Our marketing and advertising is very front weighted because of around the trade shows in our business and we'll get leverage there in the second half as well as the consumables. We've also got The international markets when they launched Zendesk, they put through some price increases on the consumables, all of that flows through in the second half In Q4, which gives us line of sight to that step up in EBITDA margin, which you see.

Operator

The next question comes from Linda Bolton Weiser with D. A. Davidson. Please go ahead.

Speaker 10

Yes. Hi. Thank you. So your commentary about the small aestheticians in the U. S.

Speaker 10

Having trouble financing, It's a little bit of a different narrative about the positioning of your system because I guess we were thinking of it as position as the trade down lower more affordable system out there among us petitions. So it really changes, the positioning and how we think about it. Maybe you could talk about for the regular bigger doctors and whatnot, who have a budget, who spend Tighter as well. And so you may see less demand from them even though you've Sort of positioned us as the affordable system, it seems like maybe this is a stretch. Can you just talk about how that affects like your 4th quarter sales outlook?

Speaker 1

Linda, thanks very much for the question. I'd say with respect, I don't agree with your premise. I would say, first of all, the doctors and the medical channel And in the growing medical spa channel, they consider even the Sendo to be very cheap compared to the other boxes they sell from All the other brands you're very familiar with. I think and that for the aesthetician just leaving, that's why we've always had The Allegro business there as also the refurbishment of Syndeo, which makes them accessible. We see this as short term headwinds.

Speaker 1

Pricing resistance from aestheticians was never an issue until interest rates are so high. When you've got financing at 20%, Of course, that is the short term pain, which we'll get over. But fundamentally, you see, we still dropped 30% more systems new Globally in Q1, even in the U. S. As well, our systems sold during the quarter were up 25%.

Speaker 1

So it's there's no real barrier to pricing. And of course, we'll benefit, as you said in Q4, particularly from doctors in the medical channel, not only is that the biggest quarter of consumption for the year, but you're right, as they used to use up their Capital expenditure quota to get their tax incentives, that's a key time for purchasing, not just in the U. S. But globally and with the rollout of Zendesk And all the markets this year, there will be seizing opportunity to buy that. So that's why we see and anticipate demand to continue to build throughout the year.

Operator

The next question comes from Bruce Jackson with The Benchmark Company. Please go ahead.

Speaker 3

Hi, good morning and thank you for taking my question. I'm going to take another run at the revenue guidance from a geographic standpoint. Can you give us a little bit of color on some of the regional dynamics? So how do you expect the U. S.

Speaker 3

To unfold for the rest of this year? And is Asia and are Asia and Europe going to remain strong? And then longer term, how do you see the regional mix changing with your sales in 2024.

Speaker 1

Good morning, Bruce, and thanks for the question. And this is a topic which we'll follow really And I think as we look globally, despite the economic news headlines, globally, we see demand for Hydrofacel has remained resilient and as demonstrated by the accelerations in the consumable growth driven by volumes, Which we've seen in all regions as well as selling new systems. And while no company is recession proofing, Upper middle class consumers are better able to weather recessionary pressures and prioritize self care. So in terms of what we're seeing by region, I I mean, in the U. S, demand remains healthy.

Speaker 1

You see that in the growth of the consumables, 29% during Q2 In a strong Q1, our systems new systems we sold grew 25%, that's on the non trade up ones in the U. S, which is even more When we launched ZYNDA last year, so in essence, we've been increasing our penetration and we see a very healthy Market in the U. S. Is just where we've seen in terms on the device sales, not on the consumable sales, it's just some pressure On the on that ST because of the high interest rates, but that's why we've been able to not really lose business, we've been able to sell them refurbished in DAS All the Allegros. In terms of if we shift now to APAC, where we had a very strong quarter, of course, Really the news there is that reacceleration in China and despite the negative news headlines from China demand for Hydrofacial remains very healthy.

Speaker 1

We see less seasonality in China than what you typically do kind of in July August in Europe or the U. S, same for Latin America. And the Zendaya launch has been successful and I think really underscores the enthusiasm in that market. I mean, ultimately, In years to come, China will no doubt be our first market. The TAM there is 2, 3 times bigger than that of the U.

Speaker 1

S. And I think we're just getting started there with very, very low penetration as you saw In the presentation and of course, our positioning there as a cosmetic device, not a medical device, which is very different to our Peer brands in the region means that we have just a wider distribution and access to so many providers and consumers in that key market. And then for EMEA, we've been extremely pleased with how EMEA has recovered since last year, very successful launch of Cyndeo in its early days in EMEA, but new systems growth in Q2 growing 64%, consumer Bulls growing 28%, 29%. So, very pleased with the growth of that, EMEA, and showing continued strength.

Operator

The next question comes from Kyle Rose with Canaccord Genuity. Please go ahead.

Speaker 7

Hi, everyone. This is Caitlin on for Kyle Rose. Just on the Allegro system, could you provide a little more Color on kind of the distribution and how many systems are out in the market and the growth you're really seeing on those? And then just quickly on Skin Stylus, you received the 510 for the clearance for facial acne scarring recently. How are you thinking about launching this product on to your systems?

Speaker 7

Thank you.

Speaker 1

Thank you for the question. So the Allegro system, Allegro system has been around for many years. I would say it's a relatively small portion of our business, but has seen some growth recently predominantly in the U. S. From that first SD, we've talked about predominantly because of the high interest rates.

Speaker 1

And of course, we're very proud to be upgrading that, making some important changes, adding Some technology, so we can start collecting data like we do on Zendaya and also adding the anti twist lock counterfeit bottles like we have on Zendaya So really stamp out any of the sort of counterfeit solutions, which we had seen in pockets in the U. S. Before. So very excited to see those changes Allegro, it's got a similar margin to Syndeo, just a lower price point. And then for SkinCylus, of course, we're Really excited for the new clearance we got from the FDA last week.

Speaker 1

We're now the only microneedling device approved for face And abdominal use, as I said earlier, the revenue this year, frankly, won't be material for the company. But it's already Doing well. It's high margin, more accretive actually than sort of the historic high levels of HydraFacial. So it adds a lot. I think later in the year, Early next year, we'll give you more of a view on where we see the skin stylists global revenues for the years to come, not just in the U.

Speaker 1

S, but globally as we get approval to sell it overseas.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Andrew Standlick, CEO, for any closing remarks.

Speaker 1

Thank you, operator, and thank you again to everyone for joining today's call. Our second quarter results demonstrate continued demand for Hydrofacial and encouraging momentum The organizational and operational changes we have implemented, paired with our ability to unlock operating leverage and an exciting innovation pipeline position us to move forward with even greater confidence in executing against our FY 2023 and long range financial targets. As I mentioned, we look forward to hosting Investor Day in the first half of twenty twenty four, and we will share more details in the coming months. Thank you,

Operator

and have a wonderful day ahead. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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Earnings Conference Call
Beauty Health Q2 2023
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