Beauty Health Q2 2024 Earnings Call Transcript

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August 8, 2024

There are 8 speakers on the call.

Operator

Please standby. Your program is about Good afternoon, and welcome to the Beauty Health Company Second Quarter 20 24 Earnings Conference Call. Later, you have the opportunity to ask questions during the questions and answer session. Please note this event is being recorded. And I would like to now turn the conference over to Nubrata Arja for Investor Relations.

Operator

Please go ahead.

Speaker 1

Thank you, operator, and good afternoon, everyone. Thank you for joining the Beauty Health Company's conference call to discuss our Q2 2024 financial results, which were released earlier this afternoon and which can be found on our corporate website at beautyhealth.com. Leading the call today is Beauty Health's Chief Executive Officer, Marla Beck and our Chief Financial Officer, Mike Monahan. Before we begin, however, I would like to remind everyone of the company's safe harbor language. Management may make forward looking statements, including guidance and underlying assumptions.

Speaker 1

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 looking statements. For a further discussion of risks related to our business, please see the company's 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 press release furnished to the SEC and available on our website.

Speaker 1

Following management's prepared remarks, we will open the call for a question and answer session. With that, I would now like to turn the call over to our CEO, Marla Beck. Please go ahead, Marla.

Speaker 2

Thank you, Norberto. Good afternoon and thank you for joining us today. During my short time as CEO, we have solved our most pressing device issues, identified and began to address the remaining business challenges and made significant strides in realigning the cost structure and overall operations of the business. While this work will take some time, I am confident we are on the right path to return the company to long term profitable growth. Today, I will walk through a summary of our 2nd quarter results and then I will explain the initiatives we have already put in place to turn the business around along with the longer term initiatives we are executing against to fully realize the company's potential.

Speaker 2

Our plan revolves around the 3 core areas of focus that I outlined on our last earnings call, sales execution, operational excellence and financial discipline. Our second quarter results reflect a slower than expected recovery of device sales, partially due to macroeconomic pressures as well as internal execution. We have an incredible global sales team and we need to supply them with additional products, tools, processes and structure to capture the demand for our products. HydraFacial was in a hyper growth mode for many years prior to going public. During that time, the company did not fully implement an enduring and scalable infrastructure needed to maximize market share and drive profitability for a company of this size.

Speaker 2

We are in the process of fixing that. To drive top line growth, we've implemented 3 immediate actions to support sales and improve sales execution. 1st, we have refocused our sales and go to market efforts across our entire product portfolio in the U. S, including Elite and Allegro. This will allow us to offer more accessible price points other than Zendaya.

Speaker 2

This good, better, best approach affords our providers 3 distinct price points when it comes to their equipment purchasing options. Over 30% of devices sold in the Q2 in the United States were non Zendaya, either Elite or Allegro. With price sensitivity among many of our smaller business owners, we can expect this number to grow. 2nd, we have engaged an outside consulting firm to help us restructure our sales strategy, including better processes, tools and technology to support our capital sales managers and business development managers. Examples include stronger analytics to improve our lead targeting, segmenting and pipeline forecasting.

Speaker 2

We expect this project to be completed by the end of Q3 and to begin to see results later this year. Lastly, we are lowering barriers to entry by improving the availability of financing options, in particular with new and or single location providers. In June, we developed and launched new options to lower the upfront investment required for new customers to purchase a device. We will continue to refine these offerings in the second half of the year. In addition to the above, we are also evaluating our geographic footprint.

Speaker 2

A few years ago, the company expanded into several new direct markets. To have a meaningful impact in our respective markets, we need to focus, invest and invest behind the brand in a targeted way. We were in the process of reevaluating our go to market strategy in each country to determine the best way to leverage our brand and products to generate attractive returns. We will have a more detailed update on this initiative on our Q3 call. Regarding operational excellence, I am pleased with our progress.

Speaker 2

Our new Chief Supply Chain and Operations Officer has been in the seat for just a few months and has already made meaningful contributions. To best address the headwinds related to Zendaya, she has instituted a quality improvement program that has resulted in improved Zendaya system performance and customer satisfaction. We've also completed our global Syndeo replacement program ensuring all our providers are able to operate on the latest 3.0 standard device. In addition, we've taken the first steps toward refining our global supply chain strategy. We are implementing new inventory management processes and working to realign our global manufacturing capacity and improve our gross margins.

Speaker 2

On our next call, I will share the results of this review and the actions we will take. And as for financial discipline, we significantly reduced our operating expenses. Our first half twenty twenty four operating expenses are down $24,000,000 versus the prior year. This was achieved through diligent management of expenses and shifting the corporate culture towards cost consciousness and data driven decision making. It is important to note that our global footprint is a driver of our operating expenses.

Speaker 2

As we look at each region, we will be evaluating the growth potential and the cost to support each of the markets. I am confident that the above actions will best position the company to take advantage of the large and growing market and leverage the incredible HydraFacial brand and products. I will now turn the call over to Mike to discuss our Q2 financial results and revised guidance. After Mike finishes his prepared remarks, I would like to close with discussing our innovation strategy and plans that are underway to capture market share in the future. Mike?

Speaker 3

Thank you, Marla. Despite the headwinds the business faced during the first half of the year, I'm encouraged by the progress we're making to both address the present challenges as well as strategically position the company to benefit from the many opportunities in front of us over the mid- to long term. Our Q2 outlook assumed near term pressure on capital equipment sales reflecting a challenging comparison due to the international launch of Zendaya in the prior year, along with some unfavorable macro conditions. As we progress throughout the quarter, many of our smaller providers experienced prolonged pressures related to the tight credit environment, which had a greater than anticipated impact on sales. During the Q2, we incurred several unanticipated inventory related write offs totaling approximately $17,000,000 which I will address in added detail shortly.

Speaker 3

2nd quarter revenue came in below our guidance at 91,000,000 dollars representing a 23% year over year decline. This reflects a 46% decline in global equipment sales, offset by a 7% increase in consumable sales. Adjusted EBITDA loss of 5,200,000 versus a $12,400,000 gain in the Q2 of 2023 was also below our prior stated guidance. Adjusted EBITDA includes $17,000,000 in unanticipated inventory write offs. On a pro form a basis, excluding these charges, we would have come in well above our guidance.

Speaker 3

More importantly, this is added proof that we are indeed making early progress in gaining cost leverage while addressing historical operational issues that have impacted our bottom line results. Looking ahead, we are now projecting 3rd quarter's net sales of between $70,000,000 to $80,000,000 and an adjusted EBITDA loss of negative $6,000,000 to negative $1,000,000 We expect revenue to increase sequentially from Q3 to Q4, leading to full year 2024 revenue between $325,000,000 to $345,000,000 And we expect full year adjusted EBITDA to be in the range of a loss of negative $10,000,000 to breakeven. Capital expenditures are expected to be approximately $12,000,000 for the full year 2024. This guidance implies continued pressure across our top line driven by equipment sales, specifically outside of the United States, along with a challenging margin operating environment. We expect to deliver positive adjusted EBITDA in the 4th quarter, reflecting increased sales over the 3rd quarter, along with the impact we expect from the various initiatives Marla outlined in her prepared remarks.

Speaker 3

Our guidance range is wider than we have given in the past given the macroeconomic uncertainty and continued realignment of our operations. Taking a closer look at Q2 results, overall revenue was $90,600,000 compared to $117,500,000 in the prior year period and $81,400,000 in Q1 of this year. The decline in revenue was primarily driven by soft capital equipment sales. This brings our 6 month revenue total to $172,000,000 compared to 203,800,000 dollars for the first half of twenty twenty three. From a geographical perspective, revenue in the Americas declined 9%, while revenue across APAC and EMEA declined by 46% 33%, respectively.

Speaker 3

In APAC, China accounted for $7,800,000 of the region's revenue, a decline of 52.8% year over year. The decline in China reflects a 65.2% drop in new system sales, partially offset by an increase in consumables growth. As a reminder, the Syndeo launch in China in Q2 2023 drove increased sales. We are actively working on solutions to grow our market in China. In EMEA, capital equipment declined 51% due to comping the Zendaya launch in the prior year, coupled with interest rate pressures and financing challenges, which slowed the sales cycle.

Speaker 3

Looking at equipment sales, during the quarter, we sold 1285 systems at an average selling price of $27,400 This brings the total year to date to 2,702 systems and the total active machines in the field to 33,504 units versus 29,682 units at the end of Q2 2023. Moving to consumables, sales grew 6.7 percent to $55,400,000 reflecting the continued and growing demand for HydraFacial. Consumable sales were led by an 8.3% increase in the Americas and a 7.6 6% increase in APAC, while EMEA consumable sales were flat. This brings our consumable sales for the 1st 6 months of 2024 to 101 dollars compared to $92,800,000 for the 1st 6 months of 2023. This led to a GAAP gross profit of 40,900,000 dollars compared to $67,900,000 in Q2 of 2023, resulting in a GAAP gross margin of 45.2% versus 57.8 percent in Q2 of 2023.

Speaker 3

Cost of sales was flat year over year due to inventory charges approximately $17,000,000 offset by lower sales. The charges result from a write down of delivery system inventory, excess raw materials and other inventory related charges. Adjusting for non cash charges such as depreciation, amortization and stock based compensation, we delivered adjusted gross profit of $44,800,000 for a 49.4 percent adjusted gross margin. We did not adjust for inventory related charges in Q2 2024. We expect adjusted gross margin to be relatively consistent or to slightly improve compared with our 1st quarter levels for the balance of 2024 as we continue to work to evaluate and optimize our supply chain strategy.

Speaker 3

As it relates to operating expenses, I'm pleased to report a decline of $17,900,000 down approximately 22% year over year as we continue to have success in more strategically managing expenses. Selling and marketing expense was down approximately 29% to 30,500,000 dollars reflecting a lower marketing spend as well as lower compensation and sales commissions. R and D expense was also down 1,700,000 dollars while G and A expense was $31,400,000 down 10.5% with savings primarily driven by lower compensation Within the quarter, the company recognized a $17,300,000 gain on the repurchase of its convertible notes. This resulted in a net income of $200,000 compared to $3,400,000 in Q2 of 2023. Normalizing for non cash items and certain discrete charges, our adjusted EBITDA was a loss of 5,200,000 dollars compared to an adjusted EBITDA gain of $12,400,000 in Q2 2023.

Speaker 3

As I mentioned during my guidance as well as lower revenue. Moving to the balance sheet, we ended the quarter with approximately $349,500,000 in cash. As of today, we deployed $156,000,000 of cash to repurchase $192,000,000 of our convertible debt. We feel we have a healthy and robust liquidity position to adequately support the business, including our growth initiatives. This sentiment is further strengthened by the cost reductions we are gaining as we take additional actions to improve the efficiency of the business.

Speaker 3

Looking at inventory, we ended the quarter with approximately $77,100,000 a decrease compared to $91,300,000 in December of 23. The decrease was primarily driven by lower purchases and excess and obsolescence charges. As of June 30, we have 689 Elite trade up machines that expect to sell over the next 18 We completed our Zendaya replacement program during the quarter. As of June 30, we have a $900,000 accrual that will be used for certain in process replacements. Our warranty accrual of approximately $7,000,000 as of June 2024 is in place to cover our total global inclusive of extended Zendaya warranties we issued to support our providers during 2023.

Speaker 3

In closing, I would like to reiterate our commitment to the turnaround plan Marla outlined. We firmly believe that focusing on the 3 core priorities of sales execution, operational excellence and financial discipline will position us to achieve long term profitable growth. I also want to acknowledge the hard work and resilience of our team. While we have faced significant hurdles, our commitment to improving just about every aspect of our business remains unwavering. I will now turn the call back to Marla.

Speaker 3

Marla?

Speaker 2

Thank you, Mike. Despite our recent challenges, Beauty Health is a unique company the intersection of beauty, aesthetics, health and wellness. We are the market leader and category creator for minimally invasive skin health treatments with a brand that consumers ask for by name across the globe. Our business thrives because of the combined power of devices and consumables, what we refer to as medtech meets beauty. The combination of our patented technology with our clinically effective solution serums and peels results in healthy glowing skin that cannot be achieved with any other minimally invasive treatment.

Speaker 2

With one of the largest installed bases in the world, including over 33,000 devices, we are focused on optimizing this fast device footprint. Doing so will not only allow us to further expand our installed base, but serve as a powerful catalyst for our consumable sales. Looking beyond our sales, operational and financial initiatives, we have not lost focus on the potential of this business, including bringing innovation to the market. The work we are doing to lower costs and drive inventory improvements furthers our ability to accelerate the product pipeline and leverage our over 120 patents as we look to bring new products to market. This fall, I'm excited to confirm that we will be bringing a new HydraFacial booster to the market, the first supported by extensive clinical claims.

Speaker 2

We are in the early stages of evaluating the launch of a skincare line planned for 2025 as part of our strategy to wrap the treatment room. It would serve as a complement to HydraFacial and we believe this will create added revenue for our providers while extending the efficacy of our treatments. As we've highlighted before, consumables remain a significant opportunity and driver of margin expansion moving forward. We are also working to enhance our digital capabilities to support our product strategy, reduce friction and provide a seamless user experience for our providers and their clients. We will continue to reinforce our value proposition as a business and revenue generator for our providers.

Speaker 2

Investment by our providers in a hydro facial device has the potential for a payback in less than 6 months and has proven to be a driver of incremental revenue for providers. Long term market trends are in our favor, including a return to a more natural looking aesthetic and increase in the use of weight loss drugs driving demand for skin rejuvenation treatments and the popularity of lasers paired with HydraFacial treatments. I observed this recently while touring and talking with our providers and doctors in Europe. We are working with leading dermatologists to validate the power of lasers combined with HydraFacial treatments with clinical data and hope to see this study published soon. Although marketplace dynamics have changed our 2024 outlook, I am confident the actions we have taken so far will create a solid foundation and help restore growth across our business and improve margins as these headwinds subside.

Speaker 2

We are on track to finish the year with improved operations, more effective sales execution and a lower cost structure. We will take whatever actions necessary to return to top line growth and improved margins. I will now turn the call back to the operator for Q and A.

Operator

Thank We will now take our first question from Susan Anderson with Canaccord Genuity. Please go ahead.

Speaker 4

Hi, good afternoon. Alec Legg on for Susan. A question on the provider sentiment by region. So with the new machine placements kind of being the major headwind here, whereas consumables are still strong. Can you give some details on the headwinds by region?

Speaker 4

It sounds like in China, it's more of a macro and credit issue, but what about provider sentiment around the reliability of the newest Zendaya machine? Any details there would be helpful. Thanks.

Speaker 2

Yes. Thank you for your question. First, I'll talk about Zendaya, which is our quality improvement program is showing significant results and it was implemented just in this last quarter. So we're hearing great feedback from our providers around the Zendaya 3.0 systems and the data is showing our return rate of new Zendaya 3.0 devices is significantly better than what we have experienced in the past. Additionally, the provider community continues to show unwavering passion for HydraFacial and the devices.

Speaker 2

We did a recent survey with our U. S. Providers and 90% said they have either increased or maintained their revenue from the Hydrafacial treatments over the past 12 months and 95 percent of providers expect the trend to continue. So our consumable sales are strong and the provider sentiment is great.

Speaker 4

Thanks. And then the consumer, it looks like they're still going. Is it the same consumer that's going in and maybe using add ons to help boost the average price per treatment? Or is it new customer acquisition? Just any insight there.

Speaker 4

I

Speaker 2

mean, I would say in terms of the end consumer that has to do with our providers and their insights, I think we can take some examples from our national accounts, which are seeing sort of a significant increase in consumables and they tell us that Hydrofacial is really a traffic driver for them. So they're leaning into Hydrofacial.

Operator

Thank you. We will now take our next question from Alan Gong with JPMorgan. Please go ahead.

Speaker 3

Thanks for the question.

Speaker 4

For the first one, I kind of want to dive into the guide a little bit more. You're pointing to sales around $75,000,000 in Q3, but then to get to the midpoint of your guide, you have a pretty strong rebound in the 4th quarter. And I know that your business model has always been pretty 4th quarter weighted, but this $10,000,000 plus step up seems like similar to the normal seasonality that you would normally see supported by strong system sales. So if we're in kind of a weaker market environment and the cost of borrowing is a little bit worse, what gives you confidence that you'll see that normal seasonal step up?

Speaker 2

Great question. I'm going to have Mike take that.

Speaker 3

Yes. Thanks, largest point coming from outside of the U. S. So I think that's the first point I would make. The second point is the seasonality still exists within the business.

Speaker 3

The way we're seeing it now, we're just seeing that overall pressure because of interest rates, environment and some of the access to credit. We're taking a couple of actions that we believe will start to see traction in the back half of the year. The first is overall financing. We introduced a couple of new financing programs to lower the barriers to entry for potential providers. This is where we're extending the payment period up to 3 years and having it step up over the course of the period where they're paying it back.

Speaker 3

We think we're going to get some traction off of that as we refine that through the second half of the The second point is we're opening up the product portfolio as Marla mentioned. And we really think this will start to have an impact as well because the Elite and the Allegro are at lower price points and will enable some of our smaller providers where we're seeing most of the pressure come from to access HydraFacial and get in, in a lower price point. So we are optimistic and we feel confident in the guidance that we provided.

Speaker 4

Got it. And then just as a quick follow-up, I know you highlighted strong consumables in the quarter and you were able to grow year over year, but you're clearly working with a bit of a larger installed base this year, arguably last year consumables because you had the Zendaya launch with the kind of consumables bundled into those initial placements that could have arguably represented an easy comp. So what are you seeing in terms of the underlying demand for consumables and the health of that especially again given the macro dynamic fully understanding that you would do play at the lower cost end of the spectrum. So you've been able to kind of avoid some of that end consumer softness up until now? Thank you.

Speaker 2

Yes, I'm happy to talk about that. So as we grow our installed base, we're seeing an increase in the overall sales of consumables. Consumables sales per device did go down year over year in Q2. But if you look at the U. S.

Speaker 2

Market, which is really our cleanest market to understand in terms of data, It was down 2% to 3%, driven by a lot of different factors, including the fact that we did not have any new launches this year. So if you look at the mix, it's our core consumables, our core solutions are up. It's our boosters that are not keeping pace and that's primarily due to launches. And so the core hydro facial business and core consumables business is incredibly strong.

Operator

Thank you. We will now take our next question from Ali Ashley Helgans with Jefferies. Please go ahead.

Speaker 5

Hi, this is Blake on for Ashley. Thanks for taking our question. Wanted to ask if you could comment at all, first

Speaker 4

of all, on any monthly trends you saw

Speaker 5

on the business and kind of how to think about the current quarter to date on the top line?

Speaker 2

Mike, do you want to take that?

Speaker 3

Sure. The business tends to on the capital side to be back end weighted. And so we tend to close a lot of our capital equipment sales towards the end of the quarter. And so the current monthly trends are consistent with what we've seen in prior quarters and how this business overall works. When we try we also track consumable sales, which tend to be more consistent kind of throughout the quarter.

Speaker 3

And we factored that into the guidance we gave for Q3 and for the remainder of the year.

Speaker 5

That's helpful. And then on the macro,

Speaker 4

I know you mentioned, I think, some more of

Speaker 5

the softness was skewed towards international. I didn't know if you could expand. I think we've seen a lot of the headlines, but anything you could provide color on in terms of how international is a a bit softer maybe in Europe versus Asia?

Speaker 2

Mike, why don't you take that?

Speaker 3

Sure. So we'll start in Europe. Europe, we have seen sensitivity to the interest rate environment and access to credit. That's been something that we're focused on. We started in the U.

Speaker 3

S. With the new financing options that we tested late in June and are continuing to refine. And we're looking to roll them out throughout EMEA, throughout the back half of the year. So we think that will have an overall positive impact. Each market within EMEA has a slightly different focus, some focus a little bit more on medical, some on non medical.

Speaker 3

So we're digging into the channel segmentation and we think we can have an impact there on a positive basis. Overall in China and mainly in China, we're seeing a little bit less on the interest rate and there's more some headwinds related to competition. And then we have some internal execution that we're working on mainly around the number of sales reps that we have. We have a really terrific team in APAC, but we have a number of sales reps positions that are open. So our leadership there is actively working to kind of bring them on.

Speaker 3

And we think that will have a positive impact once we have a full team.

Operator

Thank you. We will now take our next question from Margaret Kaczor with William Blair. Please go ahead.

Speaker 5

Hey, everyone. This is Macaulay on for Margaret. Thanks for taking our question. Marlo, I know you mentioned we should be getting more of that operational and efficiency update in Q3, but obviously you brought have been implemented. So wondering if we could get a bit more detail on what exactly has been implemented thus far, how those changes are directionally helping some of those efficiencies, both on the quality and the supply chain side of things?

Speaker 2

Yes. She joined in April, so really within the last quarter. A couple of things. One is the first focus was really on Zendaya restoring the trust in Zendaya and driving our quality improvement program. So it was all hands on deck for that and we've seen amazing results.

Speaker 2

Now she's turning towards our global manufacturing and supply chain strategy, looking at new inventory management processes and really taking a hard look at our manufacturing capacity and how we improve our gross margins. And as mentioned, on our next call, we'll have a full strategy to share with you, but I want to give her time to really finish her evaluation and put together a strategy that is impactful to the bottom line.

Speaker 5

Understand. Thanks for that. And then just a quick follow-up for Mike in terms of the cash balance and what to expect for the cash burn as both in the back half and especially as we exit the year heading into 'twenty five?

Speaker 3

Yes. I mean, our adjusted EBITDA guidance implies you're roughly flat to slightly down in the back half of the year on adjusted EBITDA. We're pulling back on some of the CapEx that we had just for some of the planned initiatives. And so I would expect us to be to use cash in the back half of the year, but I don't look at it to be materially different from where we sit today from our goal. So we're sitting a little bit below $350,000,000 today.

Operator

Thank you. We will now take our next question from Corrine Wolfmeyer with Piper Sandler. Please go ahead.

Speaker 6

Hi. This is Sarah on for Karim. First, just on thinking about the back half of the year, how should we be thinking about the top line cadence in Q3 and Q4 for both delivery systems and consumables? And then just in terms of innovation, where do you see the greatest white space opportunity? And then could we see that consumables innovation speed up sooner than that 2025, 2026 target?

Speaker 2

I'll take the white space question and then turn it over to Mike to answer the cadence question. We're starting with our innovation pipeline, the first big launches in the next couple of months, which is our first clinically proven booster that enhances the HydraFacial treatment. We are speeding up the innovation pipeline, but when we came to market this year, there was not much in the pipeline. And so that takes a little bit of time, but we're confident that we will start to set pace in 2025 of both boosters, which enhance the HydraFacial treatment and results and additional back bar and skincare products. But we do need till 2025 to do that.

Speaker 3

For the revenue decline in the back half of the year, the primary driver of the decline was in the capital equipment in the forecast, not just Q2, but also in the forecasted Q3 and Q4. Consumables are down somewhat, but that's largely as a result of lower systems sold in Q2 to Q4.

Speaker 6

Great. Thank you.

Operator

And we will now take our next question from Jon Block with Stifel. Please go ahead.

Speaker 7

Hey, everyone. This is Joe Federico on for Jon Block. Thanks for taking the questions. I think that you said that you've now completed the global Syndeo replacement program. But then as part of the new strategies, it seems like putting a greater emphasis on Elite and Allegro, the legacy systems.

Speaker 7

I think you said 30% in the quarter were those legacy systems, non Syndeo. I think that you said that should increase in coming quarters, but I was just curious if the replacement program is completed, why is it moving more towards those legacy systems? Is it just cost sensitivity from the providers?

Speaker 2

That's a great question. Yes, we have completed the global Zendaya replacement program. The reason we opened up the portfolio was really for cost for the providers. There have been requests for more excessively priced devices, the cost of the Syndeo is significantly more. And so given the macroeconomic trends and the difficulty in obtaining financing, the easiest thing the way to deal with that and to make more hydro facial devices available is to actually introduce to sort of try reintroduce to tried and tested sort of devices, the Allegra and the Elite.

Speaker 2

And it really just makes the HydraFacial device more affordable, but also it shows the demand for a device. This is a device that really adds to the revenue for the providers and is an economic engine for many single room aestheticians and also brand new med spas. And so it's an opportunity for people to get into a HydraFacial device and a HydraFacial business that they may not have had if we only focused on Syndeos.

Speaker 7

Okay. Makes sense. That's very helpful. And then Mike, maybe one for you just on EBITDA. Obviously, in the quarter was down year over year, but normalized was, as you said, better than guidance and also above our estimates.

Speaker 7

And then I think EBITDA guiding to down slightly in the 3rd quarter before turning positive in 4Q. But my question is just why is there such a reversal from kind of the solid normalized level in 2Q expected in 3Q? Is that some of like the warranty accrual dynamics? Any color you could provide there

Speaker 3

would be really helpful. Sure. So the guidance in the back half of the year, the reason that there's a little bit more pressure is gross margins, we're expecting them to be consistent with more Q1, which were in the 63%, 64% adjusted gross margin range. And that's largely due to lower production planned in the second half of twenty twenty four. When that happens, we take a higher percentage of our operations, labor and overhead costs through the P and L and that offsets some of the improvements we made.

Speaker 3

So that's 1. And then 2, OpEx costs in the second half are expected to be flat to slightly up sequentially when you look at kind of the first half of the year. And that's largely due to some additional professional fees we are incurring mainly around kind of legal and consulting fees related to the sales force work we're doing.

Operator

We will now hear from the line of Oliver Chen with TD Cowen. Please go ahead.

Speaker 4

Hi, this is Joe Gao on for Oliver today. I would love to just circle back on the new Syndeo in terms of potential improvements. Is there anything that you're still asking for? You mentioned return rates are improving and then there's solid U. S.

Speaker 4

Provider feedback. But how confident are you that those technical issues are away at this point now that we've had a couple of quarters of observations here? Thanks.

Speaker 2

Thanks for your question. The feedback from our providers is quite good and our return rate has declined significantly. So we feel really good about where we are. Our technical service team is really strong and they're able to deal with any minor issues that we see in the field. And the response not just from the providers, but from our sales teams, which is really important, is incredibly positive.

Operator

Thanks. And it appears that we have no further questions at this time. I will now turn the program back over to Ms. Beck for any additional or closing remarks.

Speaker 2

Thank you so much. I would like to take a moment to express my gratitude to the entire Beauty Health team for your unwavering dedication and commitment to placing our providers at the center of everything we do. We are diligently working to set forth a path for growth that leverages the inherent accomplishments and successes of the company. I'm confident that these challenges are fixable and that the steps we are taking will lay a strong foundation for restoring long term profitable growth. Thank you to everyone for joining us today.

Speaker 2

We look forward to updating you on our next call.

Operator

And this does conclude today's program. Thank you for your participation. You may now disconnect.

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