Q2 2021 Beauty Health Co Earnings Call

[music].

Good day, and thank you for standing by and welcome to the beauty health companies second quarter 2021 earnings call.

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Today's conference over to your speaker.

Non Frankfurt. Please go ahead.

Good afternoon, everyone. Thank you for joining the beauty health companies conference call to discuss the company's second quarter 2021 financial results, which we released this afternoon and can be found on our website at investors got beauty health Dot com.

With me on the call if Clint Cornell cheap.

Chief Executive Officer of the Beauty Health company.

<unk> Chief Financial Officer.

Before we get started I'd like to remind you of the Companys Safe Harbor language, which I'm sure you're all familiar with.

Management may make forward looking statements, including guidance and the underlying assumption.

Forward looking statements are based on expectations that involve risks and uncertainties that could cause actual results to differ materially.

For a further discussion of risks related to our business see our filings with the SEC.

This call will contain non-GAAP financial measures such as adjusted gross profit adjusted gross margin.

The net income adjusted EBITDA and adjusted EBITDA margin reconciliations of these non-GAAP measures of the most comparable GAAP measure are included in the earnings release furnished to the SEC and available on our website.

Now I would like to turn the call over to Clint Carnival cheap.

Chief Executive Officer of the Beauty Health company.

Thank you Dawn and good luck.

Afternoon, everyone and thank you for joining us today for a discussion of our second quarter results.

Before I get started I would like.

The first 3 to our employees and providers worldwide.

Despite the still challenging environment, our employees and providers have shown a level of resilience and passion, enabling us to achieve our record performance.

They are at the center of everything we do and the key driver of our success.

We simply could not have achieved any of this without them.

Now turning to a review of our quarter.

Very pleased with our second quarter performance and strong first half of 2021 with both sales and adjusted EBITDA materially exceeding our own expectations.

Our key strategic initiatives continued to gain traction and we are capitalizing on the favorable self care trends, which we believe represent a lasting shifts in consumer behavior towards health and wellness.

Subsequent to the quarter end, we have grown our delivery systems to over 18000 units as we accelerated our investments in brand building programs and towards significant progress when strengthen our global connection with our consumers.

While a portion of the outsized growth was related to easier comps from COVID-19 of closures in the prior year, we drove significant growth compared to 2019 levels there.

We're also pleased to welcome distributors in Germany, Australia, France, and Mexico to the hydro facial friends family and we're thrilled to have them join the team as we see these markets are strategic to growing our business internationally.

Turning to the financials adjusted EBITDA was $11.4 million driven by strong net sales growth of over 370% year over year.

Significant gross margin expansion and disciplined expense management, while we continue to ramp up our strategic investments.

Further strengthen our financial position paying off our debt and improving our leverage profile following our business combination and Mac.

We are making significant progress on our vision of deeply connecting our consumers to the beauty health community, where they live work and play and we remain firmly on track to achieve our long term strategic goals as our brand is resonating globally.

We are therefore, raising our full year topline 'twenty to 'twenty 1 guidance on the back of our strong results and I will discuss those in more detail.

For today's call I will provide color around our second quarter performance and then discuss the confidence we have in our growth strategies and outlook given the evolving consumer behavior favoring beauty health.

Our unique business model driven by our hydro <unk> issue.

I will then turn the call to Leann, who will discuss both our Q2 results and updated 2021 financial outlook in more detail.

No as I mentioned, our second quarter results exceeded expectations across the board.

Sales strengthened as we move through the period and meaningfully exceeded pre pandemic 2019 levels, increasing 57% versus 2019.

On a year over year comparison of our second quarter sales grew by over 370% led by continued strength in our delivery systems, which increased 481% and a 290% increase in our consumable revenue.

Our adjusted gross profit increased over 500% from a year ago generating a 75% adjusted gross margin.

And as I previously mentioned, our adjusted EBITDA improved to $11.4 million, which drove an adjusted EBITDA margin improvement of 2000, and 480 basis points compared to the prior year.

During the quarter, we continued to build our platform with the objective of establishing a connected community in beauty health that benefits everyone. The consumer to provider and our company. We continue to make progress this quarter on our key 3 growth initiatives, which are comprised of raising consumer awareness delay.

<unk> innovation and expanding our international infrastructure.

So I'd like to touch on those with some specificity.

First with respect to our efforts to drive consumer awareness, we accelerated our investments to build awareness of the Hyatt official brand leveraging our passionate community and the high deficient nation and expanding our marketing efforts. We continue to build on our hydro Fisher connect our clinical training professional development and holistic business education Pro.

Graham as we strive to be the world's largest universities forest petitions.

And through our partnership with best petitions, we have created a passionate community of loyal and highly influential providers.

We're also beginning to see our business in the retail channel improve as more locations reopened following the closures related to COVID-19.

We continue to make progress on expanding our retail partnerships and extending into the consumers' awareness of our brand.

As markets reopen this quarter, we began to activate these marketing initiatives accelerating our investments in brand building programs.

We hosted our first inaugural virtual event in Las Vegas on May 1st called SD Palooza that drove over 500 people to register and <unk> event.

Beside our 150 in person attendees properly distanced.

Hello evolution, our U S coast to Coast bus tour kicked off in Miami on June 4th and will continue well into September. During this event, we were able to provide treatment to 250 customers on site over a 2 day period.

We also hosted 2 international pop up events of Dubai, and London experience Center.

Now these events are highly effective in activating demand.

To drive community engagement with the <unk> and consumer awareness, which turns results into consumer demand.

At the same time, we strategically implement promotional offerings in order to activate delivery system sales effectively expanding our partnership in these select regions.

This allows us to build the delivery system capacity in these locations to meet the expanded consumer demand. These events create in their local markets.

Our strong consumer multiplier effect make these events highly effective because you have to try to get it and approximately 2 thirds of consumers who try our hydrophilic will for the first time become repeat customers and of those 2 thirds roughly 1 third of the customers will become frequent super users of hydro facial going 6 to 8.

<unk> per year.

And in our most recent events approximately 85% of people who try artificial for the very first time and so they plan to do another treatment.

Given that once we know people learn about hydro facial they become repeat users. We are intently focused on building awareness of the brand and treatment with consumers through these programs.

Second we continue to invest in our innovation initiatives in order to create products and technology that seamlessly connects artificial community as.

As we previously mentioned we are accelerating our R&D investments to make sure we're delivering the right product the right technology to build upon our connected community.

Our upcoming new product launches, which I will discuss in more detail in a moment remain on track.

We could not be more thrilled about launching them.

We are adding innovation our systems, including the Doctor Murad Cobranded serum that launched during the quarter.

We are testing, our new app that allows us to connect with our consumers and providers directly where they live work and play as we expand our direct to consumer connected capabilities.

Our app remains in beta mode. We are highly encouraged by the early response.

Seeing from our customers.

Third we continued to build our international presence this quarter as we invested in growth and announced the acquisition of <unk> distributors.

Global expansion is a top priority for our team with sales increasing over 400% this quarter.

We are investing in marketing initiatives globally to grow consumer demand, while scaling our infrastructure and the team to support our rapid expansion.

During the quarter, we announced agreements to acquire 4 global distributors, including our partners in Germany, Australia, France, and Mexico for a total purchase price of approximately $35 million of cash and stock.

These acquisitions are consistent with our focus on accelerating our growth internationally, which further solidifies our direct presence in key strategic markets.

We're building out our international structure with plans for headquarters in EMEA, and APAC as well as larger teams in the local markets.

We are extremely proud of what we've accomplished this quarter as well as the past year, particularly given the challenging environment.

Our sustained momentum this quarter of over 370% sales growth is further proof of our powerful consumer brand and platform business, we have built and beauty health.

As we look forward to our third quarter and beyond we see significant opportunity for our business by leveraging our infrastructure and growing our installed base to fund these new investments.

As a result of another strong quarter, we are raising our top line guidance for 2021.

We now expect sales in the range of $230 million to $240 million.

And that's up from our previous guidance of approximately $200 million.

This increased top line guidance is based upon our strong results in the second quarter as well as the continued momentum in self care coming out of the pandemic, we see the sustainability in health and wellness as a lasting shift in consumer behavior.

We see significant opportunity and are accelerating our investments to capitalize on the multi dimensional growth ahead of us.

And now I'd like to walk you through details of our upcoming investments in our 3 key strategic growth initiatives that I previously highlighted.

First building and expanding our consumer awareness is an important priority for us.

By increasing our consumer awareness through accelerated market initiatives, continuing to build out our team and expanding our partnerships, particularly in the retail channel, we will address the significant white space opportunity before us.

We will continue to deploy our highly effective events in order to activate consumer demand.

Our global Lucian Coast to Coast U S Bus tour will continue through September.

And you may have seen on August 4th.

We announced the appointment of Ben Baum to the newly created role of Chief experience Officer.

This position is an important step in further supporting our consumer awareness strategy.

We are also expanding our presence in the retail channel with a new Nordstrom partnership will be entering select locations. This partnership will further build upon our focus to expand our presence in the retail channel as we see significant opportunity to extend the consumer awareness through this channel.

Second we are increasing R&D investments to accelerate the rollout of innovation that will connect our entire high deficient community.

We're testing the launch of our connected handheld device in the fourth quarter with a broader rollout expected in 2022.

We remain on track to launch our hydro facial to point out connected device in 2022.

And we are also continuing to test, our app, which will expand our ability to seamlessly connect with our consumer and early results are highly encouraging.

We are launching innovative products and technologies driving our longer term focus on building a seamlessly connected and interactive beauty health community.

We believe the ability to directly interact with the consumer and engage them through our connect community will be an important driver of our long term business.

Third we are accelerating our global footprint as we go direct in key strategic markets and build presence in other markets through new distribution partnerships. We will continue to add incremental resources to our team globally in order to meet the growing consumer demand as well as expand our infrastructure to support this rapid growth.

This includes the announcement on August 4th of Stefan Becker being named our President of EMEA effective this October.

We also hired <unk> as president of APAC, who joined just yesterday, the beauty health family.

And we're continuing to establish new distributor partnerships in certain markets and we will go direct in other markets, where we see an important strategic opportunity or international presents a compelling opportunity for us, which we expect will exceed our U S business and just a couple of years.

In conclusion, we are extremely pleased with our second quarter results.

The momentum in our business is further proof of the strong foundation, we have built as a platform company in the dynamic beauty health category.

This is a growth story with significant opportunity and we are well positioned to capitalize on multiple opportunities as we accelerate these investments in our business and build a unique connected community and.

And now I'd like to turn the call over land, who will discuss our financial performance in the second quarter as well as provide you with our updated financial outlook for the year as we continue to deliver profitable growth and reinvest in our unique platform man.

Thank you Glenn and good afternoon, everyone.

Before I begin I'd like to thank our team around the globe for their continued dedication throughout the quarter the hard work and commitment of our people Shaw our impressive growth this quarter.

Along with these backhaul and closing 4 distributor acquisitions in a still challenging environment.

We're facing an outcome driven growth mindset of our team and our business model.

Just as a reminder, since we finalized the reverse merger are made for a bit here, but bill C health financials reflect mainly hydro facial historically information there were a few significant non cash accounting entry from the validation of whereas and mark to market valuation of the $7.5 million earn out shares.

Related to the <unk> acquisition, which we will address and adjust out as non-GAAP measures to focus our discussion our core business performance.

I'm going to review, our second quarter results touch on our balance sheet and then provide details on our updated 2021 guidance I will make select comparisons to our second quarter of 2019 in my prepared remarks, as we believe it is a more meaningful comparison due to the COVID-19 related market.

<unk> in 2020.

Let me start with our second quarter results as clinicians.

We're very pleased with our record performance this past quarter as we continue to build on our key strategic initiatives with second quarter results exceeding our expectations across all metrics.

As many of you may be new to our company, let me take a minute to talk about our business model.

We have a fairly predictable sales cycle with our seasonally strongest quarter in the second and fourth quarters off of the year.

Net sales of $66.5 million increased materially from last year's Covid impacted sales of $14.1 million and up 57% from 42, <unk> <unk> second quarter 2019 the.

This significant increase was largely due to the expansion in our delivery system with almost 800000 active system globally at the end of the quarter and acceleration in our coastal aboard as COVID-19 restrictions lifted and more of our partners re opened a.

The strengthening of U S and EMEA businesses continued while the strong growth in APAC region accelerated in the quarter.

Now I'll share a few highlights from our straight regions second quarter sales in the Americas region increased to $42.7 million compared to $9.5 million a year ago and grew over 34% from our <unk> level at the store.

<unk> was driven by continued traction in the U S primarily due to higher sales representative productivity.

Solid delivery systems rollout.

It is important to note that more of our partners began to reopen as vaccines, where available and government restrictions were lifted however.

However, we still had ponderously nonmedical channels in select states, but do not be open until late in the quarter.

Some U S locations continue to operate with a huge capacity to accommodate state and local regulations. We also saw customer orders increase for customers reopening which contributed to our record second quarter.

Thats clinician earlier marketing and training and activation such as <unk> and global Ocean also positively contributed to the increase in sales as the asset pools are celebrated hydro stations birthday on may 1st and we successfully created our own prime day promotional activity that sales event with <unk>.

Equal to our Black Friday volume, we're very selective with our promotional events and focus our efforts on digital and physical marketing activation with a trackable outcome.

EMEA net sales of $11.4 million grew from $4.1 million in the prior year and expanded 46% from the second quarter in 2019, driven by strength, even in the United Kingdom, Russia, and the Middle East. This result is especially impressive given the continued COVID-19 related closures we have.

Experienced in many European markets.

How 'bout excavations and other marketing events lunched IR distributors also positively impacted our results.

Turning to APAC net sales up $12.4 million meaningfully increased over 350 per cent for both of the second quarter of 2020, and 2019, primarily driven by growth in China, Japan, Taiwan and Australia.

While we continue to be very focused on our system rollout in China, we have experienced increased sales productivity and continue to expand our presence in the region for both medical and Nonmedical channel.

Our marketing and training program for all the APAC market also contributed to the sales increase for both delivery system and consumable sales.

Overall, our growth has seen demand driven across all channels consumers are asking for hydro Fisher services by main especially in a more mature market.

Against this backdrop, the UC health is well positioned to continue to take share as our brand awareness expand globally.

Moving to profitability, our adjusted gross margin was 75% up significantly from last year's Covid impact at 51% and a 270 basis point sequential improvement from the first quarter 2021.

The increase for both comparisons are driven by several of our sustainable attributes, including fixed cost leverage from higher sales.

Improved selling price for delivery system, as well as cost saving initiatives.

We remain focused on enhancing our margin structure third strategic initiatives, while managing the global supply chain risks.

SG&A expenses in the quarter were $70.6 million as compared to $11.6 million for the prior year.

As a percentage of sales selling and marketing decreased by approximately 440 basis points to 39, 4% compared to 43, 8% in the second quarter of 2020. This decrease was mainly due to a self leverage the increase of 340 basis points compared to the first.

Quarter of 2021 was due to our strategically planned ramp up in marketing expenses as we shared during our first quarter 2021 earnings call with you late select marketing programs until COVID-19 restrictions were lifted and Mark Mark It's Ray open in the second quarter.

Yeah.

Creating consumer demand is our key investment strategy and we will continue to focus on optimizing our investment in sales marketing and training as well as strengthening our community engagement.

Moving on to R&D.

<unk> 3.9 million in the second quarter of 2021 to accelerate our launch of the Hydro station nation, App, our neocon device and our upgraded delivery system.

As Clint has shared innovation is 1 of the main pillars of our strategic investments, we will continue to invest in innovation in the second half of 2021.

Our G&A expenses of $44.4 million included $30.4 million of transaction cost and $3.5 million of noncash stock based compensation expenses.

These items are G&A expenses were $10.5 million compared to 10 million in Q1.2021.

The increase in G&A expenses against their first quarter 2021 was mainly driven by non payroll related public company costs of <unk> 9 million, which includes D&O insurance and Sox costs.

We expect such public company cost will continue totaling approximately $3 million for the second half of 2021.

We also have started to invest in technology and international infrastructure and expect such investments to ramp up in the second half of 2021.

As a leader in this category, we're accelerating our investments to capitalize on the long run ahead of us for growth.

In addition to GAAP measures adjusted EBITDA is an important profitability measure that we use to manage our business internally for.

For the quarter.

Adjusted EBITDA was $11.4 million.

Versus an adjusted EBIT loss of $1.1 million in 2020.

They can pull thing in our profitability as a result of higher sales and gross margin improvement, partially offset by increased commissions and personnel related expense.

Due to strong sales and increase head count growth as life increased marketing of scaling spend.

Our adjusted net income for the quarter was $7.8 million.

Weighted average shares outstanding were approximately $92 million in Q2.2021 as of today, we have approximately 133 million shares outstanding including the $7.5 million earn out shares issued for the 4 distributors acquisition close by July 1.2021.

All $15.3 million public warrants and $9.3 private placement warrants are not exercisable.

Exercisable, nor redeemable until October 2021.

Turning to the balance sheet, we ended the quarter with more than 100 million cash and cash equivalents with no outstanding debt. As a reminder, we repaid all outstanding debt and makes it as part of our business combination with best for health care.

Now I will share more detail on our outlook for the full year.

As Cliff mentioned.

That net sales in a range of $230 million to $240 million barring any deterioration related to COVID-19 trends.

From our prior guidance of approximately 200 million.

As I stated previously so in the first quarter has historically been higher than sales in the third quarter.

We remain cautiously optimistic while observing more closer related to Delta Varian in both APAC and EMEA 8 vacant.

We're leaving our adjusted EBITDA outlook at $25 million as we intend to prioritize investing the additional sales generated back into the business. So increased spending on branding and global infrastructure initiatives that will accelerate our share gain in a global beauty health category, we created.

While we might not see significant returns on these investments mediately in the second half of 2021 way to believe investing ahead in our international infrastructure, including people and systems will provide us with feet and readiness for both growth deployment and potential M&A.

We continue to anticipate capital expenditure of up to $15 million in 2021.

Our <unk> net sales guidance revision reflects our highly encouraging performance so far in 2021.

Our forecast includes solid result in the first half and strong trends that we have continued into the third quarter.

However, given the uncertainty of the environment in which we're operating we remain cautious of the potential risks for the further market closures from the new COVID-19 Delta there.

And I didn't even global rollout of the vaccines.

As Colin noted our second half guidance factors in a largely open global market, which would be negatively impacted if closure persistent.

Subsequent to quarter end, we have grown our delivery system installed base to over 18000.

I would like to note that due to factors such as trade in trade up various system price point and our international distributor model, our total delivery system speakers.

Do not directly correlate to yourself.

In summary, we're pleased with our strong first half of 2021, and we have solid visibility as we look ahead to the remainder of the year barring COVID-19.

We have confidence that our strategy will uniquely position beauty health for global growth as we focus on creating long term shareholder value.

But those comments I'll turn the call back to the operator to open it up for questions.

Great.

Thank you if you have a question at this time. Please press Star then 1 telephone if you will.

To withdraw your question. Please press the pound key.

Our first question comes from the line of Matthew O'brien with Piper Sandler. Your line is open. Please go ahead.

Good afternoon. Thanks for.

For taking the questions I guess lean or client I'm, just curious about the comments right at the end there as far as the guidance for the year, you know you're not assuming any real COVID-19 impact in the back half of the year I know there are some hotspots, but they're assuming things are open the distributors. Those distributors are kicking in all of these investments somewhat will be kicking in.

So the back half guidance doesn't assume much in the way of growth versus the first half of the year was there maybe some delays as far as ordering in Q2 that showed up that won't recur in Q3 or are you just trying to be somewhat conservative.

And the newer public company.

Yes, Thanks, Matt I appreciate you joining us for the question. This is Clint.

Yes, we want to be thoughtful obviously with the guidance, but I think that the.

2020, and early 2021 showed us we have a very durable business and.

And any challenges related to COVID-19, and the current Delta variant appear to be temporary so we feel really good about the visibility to the back half of the business.

Back half of the year, Okay. So just just more conservative than anything else.

Yes.

Well technically speaking on our guidance, we did capture some of the trend into Q3, Matt. We're assuming Q4 will open up more that's how we model the numbers out.

Okay. Okay. Thanks for that and then.

Clients the delivery systems number again was what was kind of eye popping from the release. So can you talk a little bit about that.

Some of that's coming from and then I think it's the best quarter, you've ever had from a delivery systems perspective, again I don't know if there was some pent up demand from earlier this year that showed up in Q2. It should have been in Q1, but I would think that's a leading indicator for the growth of the business going forward.

So if you can just talk about some of the channels, where you saw some of that some of that performance and then what we should think about in terms of how those systems should ramp over the next 6 to 12 months.

Sure sure Matt I think 1 is we're benefiting from macro.

Tail winds on our focus on health and wellness and certainly the zoom boom effect has benefited hydro facial I also think bring the lockdowns. We worked very hard to work with our hydro Fisher community and particularly the institution's med spa owners and positions that were concerned about their wherewithal and I think we're being.

Rewarded for that as we've come back into the marketplace. We continue to increase our spend on consumer awareness and as more consumers come into those delivery systems, we're getting multiple system purchases. So we see lead to an all time high we see yield rates very strong in.

That's good for the business when we're laying down more delivery systems unexpected and we'd hope to see that trend continue.

Got it and if I could sneak 1 more in here the investments Youre, increasing guide the guide by about 35 million Bucks, but EBITDA staying the same so you talked about these investments is it primarily for international infrastructure.

Some other areas on the investment side, that's ramping up.

Domestically.

Called out some of the things, but if you could maybe bucket, where some of those returns could be a little bit sooner than than you had kind of previously planned versus more of a 'twenty 2 event.

Be helpful. Thanks, sure that's a great question so the.

3 buckets are pretty simple consumer awareness.

When consumers become aware like things like the Dubai, The London experience Center Global Lucian.

A very high percentage of those consumers their first time.

They are very sticky and they become really greater lifetime value for us and part of the hydro facial nation. So raising consumer awareness has really been opportunistic for us.

Accelerating innovation, we have project costs in <unk>.

On track and really excited about those and getting some great early feedback and the App is out in beta so we really have accelerated.

Pretty transformative product development process that we're real pleased with and then finally, you see the growth in the international numbers and well, we're really really excited about that we've got to get in front of the infrastructure. The systems. The processes. The personnel Youre seeing is higher Stephane, Ben and Indra very senior leaders.

With significant successful experience scaling multinational organizations and so we feel given the tailwind that we have and the performance of the business, we need to keep our foot on the accelerator and ensure that we have all the infrastructure in place to handle.

The growth that we're seeing particularly particularly outside the U S, where we have less less infrastructure and want to ensure the same consumer experience. The same provider investment in the same type of NPS scores for the company and the product.

And Matt just to add to that point kabaka ties right. So the things that we've been consistently talking about we actually know how the patent literally act when it comes to marketing activation. We're just turning that up around the globe now obviously it depends on the country in a situation, we can turn that up or down. So we're planning to turn that off based on the trial.

We're seeing in terms of the RMB, whereby E and we're going to continue to do that and that's a bit of incremental investment you are looking at in that bucket I think the biggest investment is truly to Clinton Pointe are growing people process and systems, especially when it comes to international infrastructure, but theres other things.

The fact that we're implementing ERP system, we're a public company ready, we're adding layers to that as well, but there is a little bit of an investment on the overall infrastructure, but very much emphasize and kind of pull up in terms of the fee when it comes to the international infrastructure.

Got it thank you.

Thanks, Matt Thank you.

Thank you and our next question comes from the line of Steph Wissink with Jefferies. Your line is open. Please go ahead.

Thank you good afternoon, everyone I have a follow up question on <unk>.

Matt Prior question, but just wanted to unpack R&D spend a little bit I think you mentioned speed, but just curious a little bit of how we should think about the R&D step up in front of the handheld device in the fourth quarter and then 2.0 as you plan for 2022.

Hi, Seth yes, so what we meant by that is obvious as they rollout theres that element.

<unk> of using external support and it's also where the production taking place. So we're sort of in that transitional period.

Sure we can roll out the product on time.

And also are robust.

Very robust rollout so when we talk about really investing into feed is not only just the R&D function, but also execution that spot capacity in that category well when it comes to rollout product if that makes sense.

That's very helpful.

In terms of framing that adjusted EBITDA guidance would you recommend the biggest step function maybe to prior expectation would be a slightly higher R&D spend versus maybe what we had modeled.

I think to the degree as we mentioned the more emphasized.

R&D I would say, it's a smaller bucket and followed by really marketing element and then there is actually more dollars being invested in infrastructure and international scaling.

Okay. That's really helpful. And then on marketing I wanted to just unpack a little bit of what you're finding as you think about your new device launches.

And your go to market strategy or the commercial mix of how you plan to market.

Whether that's to the consumer or to your professional partners.

Yes, so at this point.

As we look there's a couple of things that our company would say evolving to is really a b to C to be company. If you think about it we have.

Significant provider base out there thats continuing to accelerate when you see the units out there raising consumer awareness, but now when you look at the App you look at the Wi Fi connectivity.

And the relationship we're building directly with the consumers we're building.

Consumer capabilities with our channel partners, that's really accelerating brand awareness, increasing utilization and making our providers more profitable. So I think it's the fact that.

The company has really.

Really adding if you look at the 3 executives, we just had a really good consumer experience, creating brand awareness that creates the activation of hydro facial and that experience then becomes 1.

It builds engagement with our company results in the.

Consumable revenue that's that really is.

A key to our P&L.

Very helpful. Congrats on a good quarter everybody.

Great. Thank you.

Thank you and our next question comes from the line of Linda Bolton Weiser with D. A Davidson. Your line is open. Please go ahead.

Yes, hi, Thank you I was wondering if you could.

Talk a little bit more about the distributor acquisitions and.

What's the effect on the income statement is I would imagine it lifts your sales a little bit, but maybe it increases your SG&A.

And then kind of what you think that will mean longer term as you take these distributor internal.

Yeah, Hi, Linda and thanks for the question I'll answer the first part and then the second part the Leann.

First.

I think it's unusual but it's a way that I think has been successful for us and we go in and we acquire our existing partners and we secure those principles because those local relationships are so important so we don't expect disruption to the business and.

And we also did these really in a collaborative manner.

With our distributors and so what were bringing them as they've grown to the point, where they need infrastructure Navy systems and processes.

We need the ability to do the things, we're doing globally right raise consumer awareness through marketing and physical events more sophisticated digital transformation skill sets.

And then the ability to rollout products in a more disciplined way. So we are going to be building out infrastructure for these distributors, but the bulk already grown to a pretty sizable.

Our business in these countries. So just think about Supercharging and these markets getting closer to the consumer and doing all the things that we do in the domestic markets I think youll see us be really interested in being opportunistic on those but really no disruption of the business and they are already well run businesses. So this is supercharging and Atlanta.

From a.

A number of standpoint, you know there is a significant.

Discount that we provide to the distributors.

They didn't pass along to the end providers. So we obviously pick that up and feel that it was good to the distributor and good for us the valuation you purchased them.

Yeah, So Linda as we shared previously when we model out the number we were already assuming we're going to take these 4 distributors on the second half of the year and obviously do you think about what the for a distributor to tolerate Germany, France, Australia, and Mexico. So it depends on the geography, and where they are with the trend you know obviously, there is going to be that top line.

<unk> shared with you previous a it's almost up to 50% of transversal, you're actually going to see that pick up which we modeled in our numbers already on the topline, but part of the investment is precisely to Clint's point investing into our infrastructure globally at both EMEA and APAC level. So we can support.

Are there further growth through the direct market.

Okay.

Sounds good and then I was just curious if I'm you know a lot of companies are talking about component shortages are you experiencing any shortages of any of your components or.

Any any difficulties at all in the supply chain as well.

Robust demand for your products.

Yeah Linda.

We've always to be in.

Top of the mind when it comes to the supply chain right like if you look at our day to day business, we're trying to diversify our vendor base and were trying to really create a way of securing these components and make sure we have enough of it to catch up to the demand level or the south level, obviously as we innovate into these new <unk>.

<unk> I think the chip shortage for example, you'll experience at everywhere globally right. So there is certain level of that that's precisely part of the reason, we're being very thoughtful in terms of how the way we roll out these new product lines, but you know very much top of mind for us and I think we have shared previously we've been working on network optimization.

Really having a goal of having some of these product closer to our end customer and actually help from a supply chain point of view as well in the long run.

So Linda historically, we were we were owned by private equity and <unk>.

1 of the big parts of our investment thesis was to improve supply chain improve.

Improve our demand planning and I think the team has really done a nice job. If you remember we moved into a new facility at the end of 19, and then Covid actually gave us a chance to build the core competencies. So I think it's more external challenges that we and the team are doing a great job of mitigating the risk against so I would say, it's just any CEO CFO that don't.

Put supply chain on yellow right now are being too optimistic, but I don't think there's anything fundamental to our business that is overly concerning it's just a challenging external environment that I think everybody is experiencing.

Yeah.

Okay, Great and then.

Finally, I was I'll just give it a try but are you willing to disclose the number of systems that were sold in the quarter or year to date.

Right.

So Linda I think we talked about this and this is why in the prepared remarks I kind of emphasize the point that we have trade in trade up we have distributor model that is a bit different were actually launched launching new type of delivery system. This is why we want to make sure. It Directionally. We always tell you right at the end of the quarter were almost at 18.

For example for the quarter and after it's over so we'll give you a very much directionally, where we are but at the end of the year, we'll give you a precise number but I just want to emphasize as a proxy right with shared with everybody. You know you can do on average call. It 20.20000 per unit you can do your modeling that way, but as we move especially.

Rolling new product out those profile could shift and change. So we just want to be very make sure everybody's mindful. It will give you the precise number by the end of the year.

Okay. Thank you very much and congratulations.

Thanks Linda.

Thank you and our next question comes from the line of Kyle Rose with Canaccord. Your line is open. Please go ahead.

Great. Thank you for taking the questions.

I think in the prepared remarks, you commented just on the positive pricing trends youre seeing on the box side is that related to the acquisition of the international distributors or is there some or is there a different trend in the U S that you'd like to call out there.

Yes, I think not yet on the international side.

And thanks for your question and for joining us.

Not yet because we just did those acquisitions the first of July.

So that wouldn't be reflective I, just think we are seeing overall strength in the brand or.

Our sales force has very high retention rates, we're seeing really strong unit productivity. So I think when.

When asp's are going up typically it's.

Underlying strength of the brand its demand and the ability to price.

Competitively in the marketplace.

So I think being able to the earlier question Linda here, that's why we're really trying to be thoughtful about.

Disclosure of units because we have a lot of trade and trade ups. We have a lot of upgrades in second systems and then we have next generation products, which are different.

But theres no question were seeing strength in Asps strengthened units.

And that's good for the recurring revenue model that we that we have.

Great and then can you maybe just talk a little bit more about the app that youre working on now and testing maybe how.

Do you envision that from a longer term perspective, interacting and maybe connecting the company closer to consumers as well as as well as well as you know.

Physicians are S deficiency.

Sure sure and I will give you. This directional cargoes, we're still we're still working on our go to market strategy and we're testing and learning as we always do we're working with our channel partners.

We've got the App out there and essentially App is just a tool to help consumers understand what their underlying skin conditions are and what types of services or products. They should be using for that and just as basically a nice.

Guide to take into your medical derm, and plastic or day spa to talk with bass fishing and give her.

Starting point for the conversation with you as a consumer better.

I think going forward, what youll direction see from US is a few by the home held device that you scan the QR code and it will connect you to the App in that way. We know that you have a home device that will interact with the 2 point or device, where you potentially you're sharing your data so that youre as petition knows what type of skincare.

Our regimen you have what type of products and services you have been doing what you believe your skin condition is.

So what we're looking to do is really just a hug that consumer.

In their journey for goods can help them give them provider more knowledge. So that when you present yourself in that 30 minute or hour.

Consultation and treatment that we're just we're really giving you better.

Performance from the 100 official products that our providers are promoting out there. So it really is connectivity no different than what you see in other consumer facing products. We're just bringing that to an area that historically has been a little technology <unk> and that's our consumer health care.

Great and then just last question for me is you know.

Some of the diligence we've done we've been talking to physicians and end users is that.

Like something a little bit more acme focused or at least you know to customize.

Based on the oil levels on specific patients I Wonder if you could maybe comment on that a little bit and maybe any updates with respect to you know I think you've talked historically about 1 new serum.

Obviously, you talked about the 1 that you launched in the Q2, just so maybe.

Forward trends with respect to your serum and boosters you plan to launch. Thank you sure sure. Thanks, Paul Yeah I'll answer this in 2 parts and I'll try to make it simple and my children will probably shoot me. After this call because both of them are on a hydro treatment regimen, because they've suffered from acme, they're athletes they always have oily sebaceous glands.

And hydro Ficials, great for that our position as a company has been to not over.

Emphasize the clinical claims because as you know athene has a very diverse condition and theres lots of different types of Acme and the world is littered with pharmaceutical companies that have actually gone bust trying to secure for acne. So we leave us as an and company we work with our dermatologists plastic surgeons.

All of our applications to make hydro facial part of that treatment regimen, but we will let the provider in conjunction with other treatments where services improve that patient outcome I think it's safe to say, we do have more specific acme focused <unk>. We are working on and we will look to bring most of the market, but I think first and foremost.

We really look to under promise and over deliver with the consumer and the provider and we believe that medical.

Diagnosis of something like Acme in and trying to help that consumer with that condition is better served having the professional guide guide along with the treatment regimen and then they have in the company a dictator claim that isn't maybe maybe we can't meet all the time.

Great. Thank you for the perspective.

Thank you.

Thank you and our next question comes from the line of <unk> with Goldman Sachs. Your line is open. Please go ahead.

Thanks, Hey, good afternoon folks and a nice nice congrats on a nice quarter.

Maybe ill just start with coming back to the guide for a second I just want to make sure where we're all kind of level setting our expectations for <unk> and <unk> can you just given especially what's going on in the U S with Delta give any more color as to what youre seeing so far this quarter and really how to think about you gave a little bit of.

Kind of general guidelines to think about <unk> versus <unk>, what else you could add for <unk> and <unk>.

To consider it take to get those numbers tight and where you where you want us to have them and then on a prior question related on a prior question also is just what is the contribution from the distributors that you purchased that are going to direct now what is that contribution and the increased guide that you gave.

Sure. Thanks for joining thanks for the question I'll answer the.

The first part of that and then maybe turn it over to to land.

Look we're looking at Delta just like we look at Covid, we have a <unk>.

Credibly durable business, we see these challenges as temporary and we're just leading through them and I don't think any CEO or management team will tell you. This is fun, but I will tell you. We just see a robust business, we see really strong consumer demand, we see very resilient providers.

And we're very diversified and if you look at our channels. We've got great diversification, we've got great global diversification and.

And it's a product.

Really desirable when you've got the type of macro tailwind as we do so I think we're trying to be thoughtful with the top line guidance, we're continuing to invest in the business because we believe that we need the infrastructure in place and they're raising consumer awareness of our things that are increasing shareholder value short and longer term.

And so we just see this delta variant is just.

And external nuisance, it's a very serious situation, but in terms of our business. We feel really good about the durability of the business and the temporary nature of any flare ups that we see and Thats what were hearing from our channel partners as well as our distribution partners around the world.

Yeah, no I need to add to that you know you're talking about the current trend of Esa. If you look at by geography, There's always open and close right. Even if you look at Q2, I think a lot of the European countries went through a lot of the ground US you know a by country opening and closing if you look at the Delta There and you know right now is probably impacting <unk>.

Pack the most right because when you saw the news in Japan, Youre seeing some of that trend that's happening in China. So some of these current trend we have added into our Q3 numbers.

By the same token token if you think about the distributors.

Yeah.

Based on by country and by region with kind of figure that out for Q3 Q4 as well the Iraq Directionally speaking the additional accretion on the revenue it's not.

That material in terms of truly changing the trend for Q4.

Okay. Okay, and then I was hoping for an update on both sephora and the progress you're you're anticipating there. This year and also the new Nordstrom partnership would be great any more detail and color you could give around that.

Sure I'll take that support continues to be just a fantastic.

Partner of the BD Health company.

I think there are being I don't want to speak for them I think they're being challenged as a as a retailer providing services and monitoring the situation just like we are but I would say that both of us are on our front foot and providing the services where possible and we will continue to.

To work with them to open where they are where they are able to.

Nordstrom's to be clear support as PERC by hydro facial and it's a fantastic treatment their skin studios. The nordstrom's relationship will be the hydro facial system in their flagship stores and we sell them as a kid who grew up in Seattle that was fun to see that when come full circle and we're really.

Excited about it and we'll keep everyone posted as we have more of these channel partners I think.

Just to level set we see these partnerships with retailers as a really good win win 1 is we helped provide them services and experiences that drive consumers in.

To buy more products from them and what we get in return is it really brings us closer to the consumer raises awareness around the benefits of hydro facial and then we're able to drive people back out to our professional channel or med spas or terms or plastics or day spas and so it's really a flywheel of influence us getting closer to the consumer.

For them, capturing those consumers and keeping them there because of the experience that they're receiving through the hydrophilic treatment. So.

Can expect to see more of those from us and I just wanted to level set on how we view that relationship beyond just just the revenue component and Amit just to add to that point, we don't have a revenue penetration or concentration problem here or a situation here because if you think about we had shared with you previously even if you look at <unk>.

<unk> or any of these relationship no less than 5%. So we actually have a lot of customers and we're working with all of them.

That's good color. Thanks, so much.

Thank you.

Thank you and our last question comes from the line of Bruce Jackson Jackson with Benchmark. Your line is open. Please go ahead.

Hi, good afternoon, and thank you for taking my questions.

The gross margins in the quarter were impressive.

Was wondering if what the role of mix and volume and drive gross margin improvement.

Hi, Bruce Yeah. So as we mentioned I think the fact that the leverage on sales play a pretty significant role. In addition to the fact that we've had savings initiative, that's come to fruition, especially impacting the first half of the year. So.

That was the main.

Factors contributing to that we continue to work on the accretion, but obviously as we mentioned earlier, there's always the supply chain.

Risks that could negatively impact our offset some of visa accretion if that makes sense.

Historically, Bruce we only moved in this building in December of 19.

It was really designed to give us significant capacity and then during Covid, we had a chance to automate our warehouse management system, we reduce the amount of people was required through that and so there was a lot of noise as we started to ramp up in early 2021, and so while we're pleased with the way the facility is working the automation.

<unk> investments, we made and we've got a lean better performing.

Personnel team here at our headquarters so we're pleased with it but there was there was some noise that we're pleased to see coming out of the system in a more normalizing.

Okay, and then do you think these levels are sustainable going forward.

[laughter].

Well, we've raised our guidance twice and it's been during a challenging time and as a new public company. So we want to be thoughtful about the guidance.

Bruce and we want to we want to ensure investors that we do what we say we'll do.

That we continue to raise consumer awareness continued put placements out there of systems and that we build out the infrastructure.

So that as this growth continues the way that we would expect it to.

We can still have really high NPS scores with the consumer and the providers, we try not to over complicate our business.

Our Master plan right on our website says sell lot of product continue to invest in our providers HFF connect is quickly, becoming the largest university or educator vest petitions.

You can see the consumer activations that are happening in Dubai, London Global Ocean and now we've got our next generation technology is going to connect to that community and if we do that hopefully our consumers Trust us.

As a source for beauty health.

For providers, if we deliver value and theyre profitable by more systems and more service from us and we just try not to over complicated just real real pleased to see the way the quarter and the first half of the year has come come through for us as a new public company.

Okay, great well congratulations on the quarter and thank you for taking my question.

Thanks, Bruce I appreciate it.

Thank you and that does conclude our question and answer session and I would like to turn the conference back over to Clinton Parnell for any further remarks.

Great well, thanks, everyone I appreciate you joining us today and thank.

Thank you for the thoughtful questions from our analyst community and we look forward to sharing our Q3 results and please follow us at hashtag Heidrick, <unk> nation, and on Instagram and Facebook and more importantly, I want to assure all of you getting your hydro visuals and we'll talk next quarter. Thanks, so much.

Goodbye today's conference.

This concludes today's conference call. Thank you for participating you may now disconnect.

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