Q4 2021 Beauty Health Co Earnings Call
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Greetings and welcome to the Beauty Health Company 2021 fourth quarter and fiscal year earnings Conference call. At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during todays conference. Please press star zero on your telephone keypad.
A reminder, this conference is being recorded I would now like to turn this conference over to your host MS. Dodd Frank Sports managing director at ICR. Thank you Ma'am you may begin.
Good afternoon, everyone. Thank you for joining the beauty Health Company conference call to discuss the company's fourth quarter 2021 financial results, which we released this afternoon and can be found on our website at investors that beauty health Dot com.
Also available on our website is an investor presentation that will be referenced during this call.
With me on the call is Brent Saunders executive Chairman.
Stanleigh, President and Chief Executive Officer.
I am well Chief financial Officer of the Beauty Health company.
Before we get started I would 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 underlying assumptions forward looking statements are based on expectations that involve risks and uncertainties that could cause casual result to differ materially.
For a further discussion of risks related to our business see our filings with the SEC This call.
Paul will contain non-GAAP financial measures such as adjusted gross profit adjusted gross margin adjusted net income adjusted EBITDA and adjusted EBITDA margin reconciliation of these non-GAAP measures to the most comparable GAAP measures are included in the earnings release furnished to the F. B C and available on our website.
Now I would like to turn the call over to Brent Saunders Executive Chairman of the beauty Health company.
Thank you Don and good afternoon, everyone.
Thank you for joining us for a discussion of our fourth quarter and full year 2021 results.
I would now like to formally introduce Andrew to all of you and welcome him to the beauty health team.
We are honored to have him join the company at such an important time in our history.
Andrew its track record of success.
That's a knowledge of the beauty of buzzword retail industries digital marketing expertise and international expertise are invaluable as we expand the beauty health category and build our platform.
I'll briefly turn the call over to Andrew.
Thank you Brian Good afternoon, everyone and thank you for joining us today.
I joined the company just over two weeks ago, and I want to start by thanking all the team of beauty health for the warm welcome that I have received.
I have spent my first two weeks on a listening tool meeting associates and customers I'm always struck me is the palpable excitement that everyone shares regarding the tremendous opportunity ahead of us.
I am proud to join this talented team and excited to lead the next step of the journey in this category creating company.
I joined at a pivotal moment in the company's growth trajectory.
I'm fully aligned with Brian and the board strategic growth initiatives and thrilled with the opportunity to execute against this dynamic strategy. The team has implemented.
Yeah.
By way of introduction I'm, a beauty industry veteran with over 25 years of experience in beauty and luxury retail specializing in brand development digital transformation and multichannel distribution, including DTC.
I am a global citizen, having lived in eight countries across four continents, including seven years in Asia.
I started my career at Unilever in sales and marketing before spending 13 years at L'oreal and then spent five years, leading coach's business in Southeast Asia Pacific and Europe before joining Coty in 2017 to run its Europe business.
Over the last four years I'll, let Cody America, consumer beauty and luxury divisions.
Additionally, I served as the global CEO , but cochise joint venture with Kylie Genesis beauty business and I helped Kim Kardashian West oversee her K K W. Beauty business I am grateful and honored to be the beauty health <unk> at such an exciting time for the company I look forward to leading the next chapter of growth.
As we build upon our impressive platform and global community and with that I will now turn the call back to Brent.
Thank you Andrew.
I'd like to thank our employees providers and the global beauty helped humidity.
Resilient and passionate about our products and services.
This committee is key to our performance and we will continue to invest in and nurture its Roe.
During today's call I will provide details on our fourth quarter and full year 2021 performance.
I will then turn the call to Andrew to discuss our growth strategies in 2022 guidance.
I will follow with more details on our fourth quarter results and our 2022 guidance.
To start I want to spend a moment on page five the highlight the key takeaways from our results.
First our significant net sales growth demonstrates the strength of our brand.
We are very pleased that we exceeded our guidance for all of them buy 118, 3% compared to 2020, and 56, 2% compared to 2019.
This marks four quarters a beat despite the pandemic.
Our fourth quarter gross margin expansion of 1210 basis points on a GAAP basis, and 870 basis points on an adjusted basis showcases our ability to generate fixed cost leverage on our infrastructure investments and rapid net sales growth.
Sure the planned execution of our strategy remains in place.
We are thrilled Angelo as our CEO and he is aligned with our existing strategy, ensuring a smooth transition.
Take you through our master plan in a moment.
Yeah.
Fourth the.
The growth opportunity remains significant and we remain as enthusiastic as ever about the opportunity ahead of US Andrew will walk you through our outlook in more detail.
Lastly, 2022 is expected to be our final investment focused year in which we build the global infrastructure needed to fully capture the opportunities in front of US. We are pleased with the progress of our build and expect to begin to realize the benefit of these investments next year.
Turning to our financial results for the quarter net sales were $77 9 million, marking the fourth consecutive quarter of a beat.
56% increase compared to the fourth quarter of 2019.
Our growth was primarily driven by performance in the medical channel, where the end of the calendar, you're typically stimulates high activity as providers exhaust what is remaining of their capital budgets.
The non medical channel, we saw support our number one customer reopen and upper PERC by support and we expanded our presence in the channel via partnerships with Nordstrom and Ulta.
Adjusted EBITDA was $8 5 million driven by strong net sales growth gross margin expansion and disciplined expense management.
We drove our fourth quarter performance with strategic investments, including selectively spending about digital marketing initiatives investing in hydro faithful connect and hopefully the blood dilution event in New York City.
All of these initiatives drive greater connections between our consumer I providers, creating the virtuous cycle of community engagement and long term sustainable growth.
Importantly, we also wrapped up the foundation for our digitally connected community.
Parents are new delivery systems, and Dale for imminent launch.
That represents a crucial milestone in our path to meaningfully above the consumer and provider experience I look forward to sharing more updates in the future.
Overall, we are incredibly proud of our accomplishments this quarter and are even more excited about the opportunity ahead I will now turn the call over to Andrew who will walk you through our strategy for 2022 and beyond.
Sure.
Thank you Brent I'd like to turn to page six of our presentation, which contains our master plan.
We are a category creator, we deliver beauty health experiences reinventing, our consumers' relationship with their skin their bodies and their self confidence.
Master plan is built upon our five strategic growth initiatives that I will walk you through now.
First we plan to expand our footprint by selling innovative products and connected experiences to our beauty health community.
<unk> means connect in Greek and this product is a milestone for us and connecting our community. The imminent launch is a significant technology upgrade from our existing hydro facial delivery system.
Moving from an analog to digital by collecting data to fully understand consumer and provider behavior with this data, we'll have meaningful opportunity to boost engagement and utilization last storytelling branding and gamification.
Second we're investing in all providers as we enhance the overall consumer experience a great demonstration of this pillar is the hydro facial connect our unique activation and engagement program that empowers beauty health professionals to expand their knowledge of our products and experiences industry and marketing we will continue.
To invest in this initiative and others to turn us provide us into brand evangelists and advocates providing first class experiences to consumers.
Third we are not sharing our relationship with consumers to build awareness and drive them to our providers, we'll pursue high ROI investments within our Golden triangle of sales marketing and training to capitalize our presence and b to C channels and expand our reach to consumers where they live.
Work and play.
These investments to bolster our trusted community include a focus on our growth marketing efforts, where I intend to leverage my extensive network and experience to build campaigns and paid social influencer and content marketing.
It will supplement these efforts with events and hydro facial experienced centers globally and globe elution, both which have proven efficient in generating awareness.
Fourth we are building the global infrastructure to support our growth ambitions and connected platform.
Similar to last year, we refer to 'twenty to 'twenty two is a heavy investment year as we complete the infrastructure build needed to support the significant growth opportunity ahead of us.
These investments create degrees of operating leverage we plan to capture to accelerate our profitability in the future next year, we will focus on climbing towards our historical adjusted EBITDA margin levels. Finally.
M&A.
In the few weeks I've been here have grown increasingly excited about the potential acquisition opportunities available to us.
We will use M&A in a disciplined manner to expand our platform focusing on financially accretive differentiated products that leverage our beauty health community.
At a high level. We believe this strategy translates to another year of double digit growth in 2022 with net sales expected in the range of $320 million to $330 million.
We expect adjusted EBITDA in 2022 to approximately 50 million Leann will discuss our 2022 financial guidance in greater detail shortly.
In conclusion, I am very excited about leading this company and where we are heading the platform is well positioned to capture the white space between medical aesthetics, and skincare with the imminent launch of <unk>, we will seamlessly connect our beauty health community, bringing a level of visibility into consumer and provider behavior, we have never had.
Before combined with a multichannel and growth marketing focus we are setting ourselves up for a memorable 2022 I will now turn the call over to Leon for discussion about fourth quarter performance and additional details on our financial outlook for 2022 .
Yeah.
Thank you Angela and thank you everyone for joining us this afternoon before.
Before I discuss our fourth quarter results and full year 2021 week out I want to officially welcome Angela and thrilled that he has joined the team and know his global leadership expertise across beauty and luxury as well as innovative and proven digital marketing capabilities will be critical as we build beauty.
For the next stage of growth.
I also want to thank our dedicated team across the globe for their continued hard work.
Our success in 2021 would not have been possible without the commitment of our employees and providers.
I will discuss our fourth quarter results.
Touch on our balance sheet.
That's a full year 2020 , one highlight and close with detail on our 2022 guidance.
Note that I will make sales comparison to our fourth quarter of 2019 as we believe it is a more relevant comparison due to the COVID-19 related market closures in 2020.
Before discussing fourth quarter and full year 2021 results I wanted to take a moment to provide a brief overview of the hydro facial business model as shown on page eight.
Our presentation.
We employ a razor razorblade model and we start by selling a delivery system, the razor and associated consumables, the razor blades to providers.
S providers perform hydro social experiences consumers they exhaust their supply of consumables and the older driving growth in our consumables revenue segment.
The purchasing decision for Delever system generally boil it down to three regions the.
The most common reason its providers buying their first hydro station every system.
Again, they see our existing providers, we turned to us to purchase additional systems. So they can increase the volume of hydro facial performed in their practices.
We also had provider treaty and other branded delivery system or upgrade their previous generation delivery systems, but the current model, which we call treat apps tradeoffs have historically represented low single digit percentage of delivery system sales for the year.
I'd like to spend a moment to explain the key performance indicators at the bottom of this page, which we plan to disclose quarterly going forward.
Use these kpis internally to measure the health of our business first.
First is our delivery system E. S. P. R. The average selling price of our systems sold during a given period second is delivery system felt which measures the number of systems sold during the given period.
Third is our installed base, which measures the number of systems actively performing hydro facial treatments.
As disclosed in our press release, we still have 6191 delivery systems in 2020 , one compared to 4080 in 2019, an increase of over 50% our install base again at 20399 as of December 31st 2021.
I will now turn to our fourth quarter results on page nine.
As Brent mentioned, we are very proud of our strong performance this quarter and how we navigated headwinds related to COVID-19 .
Our results for the quarter and full year further demonstrating the strength of our platform as well as the diversification and flexibility in our business model.
Our products and experiences continue to resonate worldwide.
Having strong performance across geographies again this quarter, even in APAC, whereas select markets were closed.
On the top left off the page you will see net sales of $77 9 million increased hungry 056 percent from last year's Covid impact just south of $37 9 million and up 56% from $49 9 million in fourth quarter of 2019.
This meaningful increase was driven by growth in our delivery system, which expanded our installed base of 20399 as of the end of the quarter and continued growth in our consumables, we sequentially increased the quarterly number of Delever system. So throughout the year totaling just 6191 for 2010.
One it is the highest number of systems. So you may hear in our history.
Now I'll share a few details from our free region fourth quarter sales in the Americas region increased to $50 4 million compared to $26 9 million a year ago and grew 47, 5% from 20 nature. Our strong performance in the U S was driven by continued increase in our sales productivity fueled by.
Wrong commercially from marketing driven leads.
Our last stop go evolution in New York also helped fuel the growth.
Furthermore, we're encouraged by growth in Latam, where we're pleased to now be the Iraqi in parts of this market.
Acquisition of our distributor in Mexico. We also saw growth from other distributor regions and are encouraged by the early trends, we're seeing in Brazil.
EMEA generated fourth quarter net sales of $15 5 million versus $6 1 million in the prior year and expanded 84, 2% from the fourth quarter in 2019, driven by strength across our key markets.
Especially Germany, the UK, France, and Spain in EMEA, our fourth quarter digital marketing campaigns yielded strong results.
He had a pop up events in key markets.
Turning to APAC, our net sales of 12 million increase almost 147, 3% compared to $4 8 million in 2020, and 64, 1% from the fourth quarter of 2019, primarily driven by growth in China, and Australia, even in the face of restrictive Covid Lockdown.
While we have seen sequential improvement from Q3, Q4 of 14.2% countries, such as China, Japan, and Australia continue to enforce citywide shut down.
50 of Lockdown continued into January and February , especially in China, but its zero tolerance policy as it prepares for the Winter Olympics, and the BD Chinese new year travel period.
By the temporary Covid headwind, China remains a key strategic market, where we see significant opportunity.
In Japan, and Australia, we see promising trends and loosening of the restrictions in February we're continuing to focus on our system rollout in APAC building commercial infrastructure and expanding our presence in the medical and nonmedical channels.
Overall demand remains strong across all channels and geographies our awareness of the hydro facial brand continues to improve as we expand our footprint and build upon our marketing initiatives, we're well positioned to capitalize on the strong global interest in beauty health and further extend the category we created.
I want to briefly touch on the seasonality pattern of our business with the chart on the top right off the page.
As a reminder, our historical seasonality usually starts with a low Q1 and sequentially deals up to a high volume in Q4, which has historically driven by year and capital expenditures in the U S Medical channel.
So in the first quarter typically show a sequential decline in the mid to high single digit range from Q4 due to a lower productivity related to the post holiday period and field marketing activation event in January the sequential growth return in the second and third quarters as we ramp up our marketing spend the fourth quarter if you.
Really our biggest quarter for the year as the twins I previously mentioned startups to boost our productivity.
As shared previously marketing investment has a direct correlation to yourselves, especially with digital and event driven promotions. The bottom right chart shows our adjusted EBITDA by quarter throughout 2020 , one given the pandemic, we did not invest into marketing and to the second quarter with vaccines became more widely.
Basketball, we saw a significant build out in Q3 and ramped it back down in Q4, even army cornstarch.
Excluding any COVID-19 impact that.
Underlying growth trend continues to be very strong across all regions.
Quarterly comparisons versus 2019 quarters is not indicative of future growth trends given the growing mix of non medical channels global expansion distributor acquisitions and Covid impact on 2021.
On the bottom left of page nine our GAAP gross margin was 72, 9% up from 68% last year.
Adjusted basis, our gross margin expanded 870 basis point year over year to $76 five person as we generate it fixed cost leverage improved selling prices for our dealer body system and continue to pick up margin in the region were acquired distributors. This was partially offset by higher supply chain and logistic.
It costs.
I am now turning to page 10.
While enhancing our margin structure is an important focus we expect global supply chain headwinds and inflationary pressures to weigh on our margins in 2022, we anticipate higher shipping costs continuing throughout the year, partially offset by an accretion in margins related to acquired distributors as seen in Q4.
'twenty one.
SG&A expenses in the fourth quarter were $62 1 million compared to $26 9 million for the fourth quarter of 2020.
Taking this down selling and marketing increased by approximately five six percentage points to 47, 6% of sales compared to 42% in the fourth quarter of 2020.
This increase was driven by greater sales commissions increased global marketing spend and higher personnel related expenses as we grow our sales force across the globe to fuel future growth.
We continuously assess our marketing initiatives to maximize the efficiency of our spend.
Similar to prior Covid circus, we selectively reduce our marketing spend in certain markets based on severity throughout the quarter.
Additionally, we continue to invest in training programs, such as experience Center training and global connect programs. We will continue to focus on optimizing our investment in sales marketing and training, particularly as we launch some bill.
Touching on R&D, we invested $1 9 million in the fourth quarter of 2021 compared to 0.9, mainly in the prior year as we invest in our product development and innovation pipeline. As previously mentioned innovation is a key tenant of our strategic investment philosophy, enabling us to create.
Appreciate it products that drive rapid expansion and share the beauty health market opportunity.
Our G&A expenses of 25 million the increase in G&A expenses was driven by $3 8 million of noncash stock based compensation now payroll related public company costs of $1 5 million, which includes D&O insurance Sox compliance and additional audit and tax related services as well as higher.
Personnel related expenses due to increased global head count, we expect such public company cost to continue.
During the quarter, we increase our investment in building our international infrastructure as previously shared we successfully rolled out the first phase of our global ERP platform in November , including CRM, and new B to B and B to C platforms, the global ERP increases our agility and improves.
The activity by leveraging technology, we will continue to expand and integrate our ERP globally over the next few quarters.
In addition to the GAAP measures discussed adjusted EBITDA is an important profitability measure that we use to manage our business internally for the quarter. Adjusted EBITDA was $8 5 million versus an adjusted EBITDA of $3 6 million in 2020, the increase in our profitability was the result of higher sales and gross.
The improvement, partially offset by increased commissions bonuses elevated marketing and scaling spend and higher head count.
And now onto the balance sheet highlights on page 11, we ended the quarter with approximately $901 9 million cash and cash equivalents at this level of cash we have ample dry powder to support our rapid expansion as well as pursue a disciplined M&A approach that capitalizes on this significant opportunity.
Energy between aesthetics and beauty in this large and growing category.
During the quarter, we completed the redemption of our outstanding public warrants, eliminating a remnant of our snack after accounting for the results of this redemption, we have approximately 7 million private warrants outstanding the vast majority of which are held by Brent and the rest of my others from our initial Investor group.
We continue to carry a 750 million in convertible notes on the balance sheet, where races that in the third quarter of last year to have dry powder for strategic acquisition. Among other uses while the conversion price of the debt is $31.76. We used a portion of the proceeds to enter into a.
Cap call purchase agreement that protects against dilution up to a stock price of $47.94.
During the quarter, we close to 50 million revolving credit facility for our U S operations.
Of course seeds for this line of credit to fund, our short term working capital requirements and general corporate purposes.
Facilities allows for flexibility to pursue M&A and that's not encumber, our O U S operation.
Our convertible notes are excluded from its leverage covenants.
But Andrew can come in and see of the facility is less than 200000 per year.
Finally weighted average shares outstanding were approximately $146 3 million in Q4, 2021, and our current shares outstanding is approximately $150 million.
Flipping to page 12, we're very proud of what we accomplished in 2021 since going public in May we went direct in seven new countries, including acquiring for distributors.
Added $892 4 million cash to our balance sheet implemented phase one of our global ERP system began global network optimization with sourcing production and logistics had 10 research analysts launched coverage on our stock and delivered full quarters of revenue beat as we increase the business momentum.
Again near term clarity amidst the pandemic.
We finished the year with $26 1 million revenue of 56, 2% increase from 2019, 74% adjusted gross margin.
850 basis point increase from 2020.
$32 7 million in adjusted EBITDA.
We historically averaged 3500 to 4000 delivery systems sold per year in 2021, we're still at 6191, new delivery systems.
Company record a remarkable performance in light of pandemic related closures. Our installed base currently sits at 20390 Nike ever systems, everybody. We remain excited about our ability to expand our footprint in the future.
Turning to page 13, I will now share more details on our outlook for 2022.
For the year, we expect net sales in the range of $3 20 to 330 million barring any deterioration related to COVID-19 .
While we are beginning to see a waning impacts from the army Cranberry and remain cautiously optimistic we do expect pressure from select market closures during the first quarter, particularly in APAC. This pressure has been factored into our 2022 net sales guidance.
We're providing an adjusted EBITDA outlook of $50 million, we continue to expect our investments to remain elevated this year as we build our platform for future growth next year. We believe the benefits of these investments will position us for future growth, while we focus on optimization to our profitability.
Climbing towards our adjusted EBITDA margin levels.
I will now touch on some of the key drivers behind our guidance we plan to launch some deal in the first half of 2022 and anticipate a high single digit ASP to increase our delivery systems and consumables.
As we have mentioned our key initiatives is a profitable languet enrolling all deliver systems. In addition to expanding our footprint. We also anticipate a portion of our providers will upgrade their existing universe systems. This is dale.
While the E. S. P. I agree is lower than the ASP of new delivery systems, but unit economics on upgrades remain profitable to us and we expect to sell from upgrades to be accretive to EBITDA and earnings we anticipate a temporary potential low to mid single digit impact to our gross margin due to <unk>.
Lower asps.
If we experience an elevated mix of delivery system sales from upgrades on.
On the cost side, we're not immune to global supply chain challenges and inflationary pressure on raw materials shipping and labor costs.
Lastly, we anticipate capital expenditure of up to $20 million in 2022, as we continue to build our regional headquarters expand our global network optimization and technology platforms.
In conclusion, we're extremely pleased with our performance for the fourth quarter and full year 2021 and we're excited about our momentum heading into 2020 to 2021 was a historic year for us and we look forward to taking advantage of the compelling growth opportunities in 2022 and beyond with.
The proven flexibility of our business model, we're confident in our path to drive shareholder value for years to come.
I'll now turn the call back over to the operator for questions.
Yeah.
At this time, we'll be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two to remove your question from the queue for participants using speaker equipment. It may be necessary for you to pick up your handset before pressing the star keys.
One moment, while we poll for questions. Our first question comes from the line of Oliver Chen with Cowen You May proceed with your question.
Alright, Thank you very much great quarter, Hi, Brent Andrew Leann Andrew.
Andrew as we look ahead unaided awareness is a big opportunity what do you see as the opportunities in terms of marketing spend and investment, particularly as you think about Asia would love your thoughts on regions as the center section also.
Term marketing as a percentage of sales.
And then Brent would love your thoughts on M&A I know you Beauty Health company has a special relationship with our statistics.
Your thoughts on what you're seeing in the marketplace now and also a framework for what might be most synergistic and I had a follow up for land. Thank you.
Oliver. Thank you, it's Andrew I'll kick that off and then hand off to Leann and Brian If we break your question down I think firstly, you're absolutely right. One of my key observations on my listening tour. During this first two weeks is that.
Actually the team have a great strength in terms of cells in education and I would argue in my experience. It's best in class also had seen a real capability in.
That event marketing as we've seen with the glow evolution, but the opportunity to grow awareness is significant.
And I think that's where I see the biggest opportunity and we and it will be building up our capability in terms of digital marketing the team and capability.
And in terms of investment I think we're happy.
Happy with the investment we have I think we're going to look to allocate that in different areas, which really drive the awareness I I sense coming into this and I said this the Brent and the board during the interview prices.
Phil with Hydro fascia was set on the the biggest secret the best kept secret in the beauty and wellness industry.
During my interview process I did a lot of G diligence spoke to many people like me I've been in the industry. All my life and many of US had not heard about this fantastic brand, but when you experience. It you really great at it.
Get it in our conversion rate is very high. So obviously, it's a it's a major opportunity I think I'll hand over to Leon to talk in more detail about the rest of the question.
I'm actually I think Andrew you have addressed it and the only thing I'll add Oliver as you know you know even for 2020 . One we said we were going to double down on marketing right. Historically, we invest about 6%. We currently we're committing a 12%, but given the pandemic, we really fell down in Q1 and without doubt in Q4, because you know when you are.
Have a variant it just doesn't make that much sense. So we actually did spend less than that 12%. That's still a really good target. So to angela's point, it's really a matter of allocating the capital for Brent Hello to you other Oliver's question.
Yeah, I'll, where do you want to just repeat what else.
Yes.
Asked about M&A and the market environment and also a key synergies and a framework for how you're approaching what's the head what that journey is beauty health as a platform. Thanks.
Yeah. So you know we've been pretty active a.
Evaluating targets, we were at last year, and we continue to do that this year.
I think what's starting to change is as is frankly the reason we haven't done one yet which is valuations. So last year. We were seeing you know very high expectations on valuations in many cases, you know outlandish and as you know we we are very disciplined team we.
We are starting to see some green shoots of people recognizing that the market is probably aren't what they used to be and valuations are starting to go to two.
I'm in line that the IPO alternatives is not as.
Attractive as it used to be so I think that's good we have a couple of things that we're evaluating as we always are and Andrew's are starting to get deep into it as well and so it's great to have another.
Strong mind looking at these things, but we're going to stay disciplined we're going to continue to follow our criteria looking for things that have a high NPS scores that allow us to leverage our current distribution capabilities.
You'd be a statistic is in large part.
And and something that would be accretive to our financials and our growth. So you know the.
Those are our criteria and we have lots of opportunities and we're going to continue to stay very focused and disciplined.
Thank you very much and then just a follow up on modeling how should we think about consumables relative to delivery system growth and then as we think about your forecast.
What about the number of units relative to Asps.
And what's embedded roughly in terms of how many people may upgrade to some danielle thanks, a lot for any detail.
Yeah, no absolutely Oliver. So this is a really important year, obviously as we launched Dale Directionally speaking you know as we have shared you know I have mentioned, we will always thought the consumable should be running ahead of delivery systems, but as you see our number one strategy is actually profitable line graph you can see you.
Even for 2021, despite the pandemic, we deliver over 6000 versus historical 3500 to 4000 system. So with that in mind that needs to be number one priority of ours. So for our own modeling purposes, we're still assuming that 50 50 split.
In terms of E. S. P. You know Directionally speaking, what we have mentioned is a high single digit rate for both of the delivery system and consumables. So that would be a safe number to use as we model out E. S. P. M. I think that the final question that you had raised in terms of how do we think about the upper.
Cycle. So this is why you know we're trying to emphasize the fact that you know when it comes to trade off right. It will be accretive to both of the top line and the bottom line and we were really test to learn to see how many of the of our key customers that purchased the last 12 to 18 months truth to upgrade with that so really.
But the way we think about it depends on the percentage of penetration of that let's say, if it's a low single digit historical man, you're talking maybe a low single digit impact to gross margin percentage or S. P. A really it's accretive again to EBITDA, but let's say a quarter of the delivery system that we sell are actually.
You know trade up then and there really recent purchase tradeoffs that you might have a risk rating to a 5% impact to the gross margin percent, but it's all accretive it's above and beyond you know kind of what we assumed in our guidance and model.
Thank you very much best regards.
And all of them.
Our next question comes from the line of Bruce Jackson with the Benchmark Company. You May proceed with your question.
Hi, Thanks for taking my questions and nice quarter I just have one question on the manufacturing side. Some other industries are experiencing chip shortages I'm wondering if you can get an adequate supply of parts for the for the new delivery system and are you going to be able to meet demand.
Hey, Bruce Great to hear your voice yeah. So we actually tried to address this previously as well because we're a growth company because the fact that we're launching a brand new system. Our approach has been just purchasing ahead. So we have been buying ahead use our capital to secure all the parts that will be required as well.
The system this year.
Okay great.
And actually I might sneak in one more question on capital deployment, obviously, you've got an active M&A program going right now what are the other potential uses for capital deployment and then how would you prioritize those.
Yeah, So maybe I'll take a stab at that look at capital allocation is a is a critical part of how we think about our or our our business and our responsibilities clearly you know where we're in growth mode, and we have an amazing platform and and hydro faithful.
We have got them from day, one I've been very open with with our investors that we plan to do M&A to to take advantage of this distribution capability that we have and this great brand and capability of our team that being said you know we evaluate that against all other alternatives and those alternatives include things like a buyback and so.
So you know anything that we work at it.
In the M&A category has to be evaluated against buying our own stock as well that being said the preferences is for growth in the preferences to invest in M&A, but but the standard or benchmark has to be looking at the alternatives and saying, what's the right thing for all of our shareholders.
Alright Super Thank you very much.
Excellent.
Our next question comes from the line of Corinna Wolf Mayer with Piper Sandler You May proceed with your question.
Hi, Thanks for taking the question congrats on the quarter and welcome Andrew I'm looking forward to where it might be more so first I wanted to touch on what you've been seeing throughout the early part of the first quarter here I know you did mention a little bit on your typical seasonality trends, but have you seen anything specific in terms of trap.
Flow related to omicron them, we haven't heard much impact from that in our checks, but just curious what you've been seeing.
Hey, Karen it's Liam here, So I would say you know when you look at our regions. You know we continue to see the similar trend with high demand when it comes to personal care, especially for our Americas and EMEA regions. When it comes to APAC I think we kind of emphasize that that's the only market you know it would be.
When do you guys think Q2 is the approach that the government take are different compared to you know Americas and EMEA. So that trend continues, especially when it comes to China.
Government continues to take a stand of being very disciplined about shutting down cities.
So that's the only thing that was truly observe that some continue being impacted by COVID-19 .
I can't say, we're going to start to see trying to.
Open up a bit more obviously, there are opening up to to foreigners and others. So you know well we'll.
I will take it as it comes but it's completely baked into how we think about the year and we've been pretty flexible nimble and and just trying to manage through that.
We've got them quite good at it Unfortunately, it's not something we ever wanted to but we're quite good at it.
Awesome. Thank you that's really helpful and maybe this one for Andrew I know, we've talked a lot about the marketing strategies for the year, but can you just provide any further detail on what you plan to implement them. What once you start hitting the ground running here in the next couple of months on you have a lot of good experience with.
Influencers and stuff like that so just any further detail on what you plan to improve.
And over the next couple of months couple of quarters.
Sure Hi, Karen it's great to speak to you.
Yes, I mean, just two weeks in and as I mentioned earlier to Oliver I think we've got really strong capability in product innovation distribution education, and the events I think where I'm working with the team now it's a pivot is in terms of how we're using our digital influencer marketing.
To really drive brand awareness and it's really focused on our critical launch which is the launch of San Diego, which is a new delivery system, which were imminently about to launch and I'm really impressed with that technology. In these first few weeks, it's new that are different than anything else in the market. It's a real leap forward in experience.
On technology I describe it goes from mist of analog to rural digital experience and of course, that's going to give us so much more data. It connects the consumer the provide the efficient of course, so the company, which will enable us to be a lot more nimble and agile in the way, we market and drive awareness and engagement.
Age without consumers in future and also measure consumption, that's going to give us a proximity to measuring the business, which we've never had before so it's really exciting but Mike T.
Back to your original question My key objective is really raising the awareness because we are so confident in the technology with a confident the education and the skills will be efficient community that we can convert the user we just got to get them crossing that threshold and coming into the experience.
Thank you.
Thank you.
Our next question comes from the line of Amit Hassan with Goldman Sachs. You May proceed with your question.
Hi, This is Phil on for me Thanks for taking the question.
Wanted to dig back in a little bit more on guidance and the split between delivery systems and consumables.
Can you you've emphasized the 4000 systems annually a couple of times during this call, but very clearly blew through that number this year and in the guidance from our standpoint looks pretty similar 6000, plus systems next year to be able to get to the numbers I'm. Just wondering if you want to update that and provide a different outlook with this much stronger kind of infrastructure. That's been built over the last few years.
<unk> guidance kind of going forward for system placements as we move ahead.
Yeah, No absolutely I think you know when we think about that number one strategy and you should initiative is truly rolling out as many systems as possible by the fact that we're actually hiring more folks around the globe are truly also had that in mind. So a great point in a sense we are sequentially.
Proving in productivity every quarter on the number of system being rolled out and we fully expect that trend or the push to continue and if I can just add and thanks for the question I think look.
I mean, you see a relatively new team in public company.
We take the commitments, we gave on guidance very seriously to our investors.
Absolutely laser focused on delivering on those commitments and I think you can expect us to be very straightforward.
And clear going forward.
Keith.
Yeah, that's a great follow up Andrew Thanks for that color.
If we flip over to the consumables side I think it's sort of the opposite would still seems like treatments per system were a little bit repressed due to movement restrictions and the other things going on in kind of from a broader macro landscape. So it looks like this year you know your consumables are likely to exceed the revenue that's going to be generated from delivery systems, even in kind of an upside.
Scenario, so just interested sort of what's embedded from a treatment persistence standpoint in your model moving forward and so that's something that you expect to exceed what we saw in 2019 before the pandemic. It. Thanks, so much for the questions.
Yeah, absolutely. The team is focused on really driving that utilization and you know that engagement to your point from a performance point of view those are all the key elements of the strategy, we're focusing on we anticipate driving at a minimum the similar level of the utility.
Asian, barring any of the pandemic impact.
Okay. Thanks, all for the question.
Thank you.
Our next question comes from the line of Olivia Tong with Raymond James You May proceed with your question.
Great. Thanks, Good afternoon, and congrats Andrew it's nice to speak with you again.
Perhaps really start just talking about what you think are perhaps the greatest immediate opportunities for the beauty health company in your view and then with respect to the Sunday lunch.
Are you are there new third party relationships you bring in to help leverage the data you'll be collecting.
How do you work that into you know a potential digital social media enhancement strategy just to put them up a little bit more detail in terms of the benefits of 2.0 offers and how you plan on leveraging that thank you.
Olivia Thank you and it is great to speak to you again look it's been a great.
The first two weeks.
And first of all I'm really focused on in full alignment with the existing strategy and the team had in place. So I think the focus now of course is on accelerating that and executing flawlessly and I think be picking up the range is a continuation of that strategy I think in terms of priorities.
The number one priority for me and the team is really ensuring a flawless launch of the new same day delivery system units and as I mentioned earlier, which means connected in Greek and top priority then we're going to really focus on expanding our footprint to more doors.
And obviously that system gives us a level of connectivity and visibility through its connectedness with consumers providers.
Titians, which will really help drive other aspects of our business I think.
Secondly.
The other key opportunity ICR and the company has really bumped competitive advantages here is with the training and education that is a really key lever.
In developing our trusted at fishing community and turning them into brand evangelists and advocates influences per se I think there's much more we can do to really amplify their voice.
Third one is really is both.
Expansion in the U S, but also geographic expansion.
I feel we're really underpenetrated when.
When you look if you take just the U S market for one example, and then just one channel of the U S, which is the medical channel.
Today in a brand like Botox, we estimate to be in about 40000 points of distribution. When you consider today that globally globally hydro <unk> in 20000 points.
Points of distribution just in that channel alone, we have significant opportunity and of course, there's the nonmedical, what we've been doing and spas hotels gyms.
Our partnership with Sephora, we have pilots in Nordstrom, and ultra which is really exciting and then of course, the geographic expansion and having spent so much of my life living in many markets, including the seven years in Asia I see just a huge opportunity that we're very nascent there in fact, we're really just getting going outside of the U S for the development This brand.
So geographic expansion is a really big opportunity firstly.
Leon mentioned this earlier on the call several times, it's about building up our global infrastructure and connected Tech technology.
Technology platforms are really fueled the growth and communicate our community engagement we need.
Out of that of course is increasing our talent base and we've been in it.
<unk> been doing that in the last few months.
Appointed leaders in but EMEA and Asia to help fuel that growth.
And obviously, we talked about this earlier the fifth sort of approach an opportunity is M&A and as Brent has already mentioned, we're going to really take a very disciplined approach to ensuring that we identified a brand of product is both accretive and complementary. So we can really derive the synergy from our existing fixed cost base. So plenty.
We have opportunity, it's a really exciting time.
Thanks, that's helpful and then the the focus on growing their systems is clearly paying dividends, but that's a few I've touched on already the consumables growth hasn't quite accelerated to the same extent.
You know what gives you guys the confidence to price on consumables and then just broadly your thoughts in terms of.
The mix of product going forward the range of product in office versus retail versus in home. As you you know clearly the focus in the near to medium term results and day out, but clearly there's other products that you are looking to sort of diversify or at least enhance excuse me the product portfolio with I'd love a little bit more detail there.
Absolutely so why don't I kick kick off on that one in terms of the consumable trends look based on my experience Oney recently of course left a big beauty company.
We are really sure from the conversations we've had we've provided in institutions is that the trend in sell out a nice product is it predominantly just impacted by the impact of Covid and omicron and as we see markets opening up we see those trends improving so we're quite confident in the trend, which we spoke to early.
And embedded in the guidance.
And of course as we go forward. If we just focus on consumables you know again using my experience I see a major opportunity to expand our offering.
In this area, there's a number of gestures and treatments, which we could bring in to complement their really strong portfolio. We have then more widely and I spent time in the first two weeks working with the R&D team and we have a very impressive facility here in long Beach R&D.
R&D and production.
By the way.
Lovely to host you here, but I think when we look at the portfolio and the innovation pipeline I think there's a couple of things, which really spring to mind of course, we've got Hydrophane. We can offer there, but we've all seen and you've seen that with the growth of peer companies. The major opportunity with Heron sculpt care post COVID-19 , that's become a major part of peoples.
Health care regime, we have a fabulous product I really believe its new better different with Caribbean. There's much more we can do to really.
Grow that are both in the U S and globally, especially in Asia with Sculpsure is so key our focus now is Sunday, but absolutely that will be something which we really get behind in the coming months ahead.
So we continue the glowing go model the take home product, which we've been tied up.
Piloting and we continue to review that carefully that's another opportunity for some other things in the pipeline, which I'm not ready to talk about today, but the the portfolio is strong.
Great. Thank you best of luck and look forward to seeing you. Thank you.
Our next question comes from the line of Jon Block with Stifel. You May proceed with your question.
Thanks, guys. Good afternoon, Andrew maybe on that last point is there anything a glowing glow and go that's reflected in the 2022 guidance I wasn't sure of.
Crystal clear on that maybe if you can just comment on that and then just I know you're out there you're piloting it maybe talk to us about the learnings so far on glove and go well, but anything that you want to convey on pricing in terms of feedback from the field.
John Thanks for your question so yes in terms of.
Glo and go we haven't included it in our guidance. This is a true pilot test and learn.
And we'll obviously continue to rollout that that out.
And you want to launch something which we are really confident will be new better different and anything else on the market.
I'm not ready yet to talk about pricing. It really is in the early stages of testing and I saw my first review of it last week.
Leon anything to add on your side on this no hi, Joe I think that covered.
Okay, Great and then just for the follow up some numbers and then I'll just throw at you, but I thought the.
I think the 2022 adjusted EBITDA guidance is really impressive and I calc and 25% and 25% of the incremental revenue is expected to drop down to EBITDA in 2022 and that seems like a really big number in light of the investments that youre still putting into this business and then Andrew I think in the press release you talk about.
Rolling into your historical adjusted EBITA margins, maybe as early as 2023, so just to be clear like what did you consider historical to be and now we're looking at a business that even with these investments.
Might see an adjusted EBITDA margin North of 20% next year next year being 2023, thanks for your time guys.
John Thank you so I will start and then hand off to Leann.
I mean in summary, 2021 and 2022 a big investment years, you would expect that with the launch of a completely new delivery system and these happen every three to four years, that's the rhythm.
<unk> of our business.
But it is.
<unk> said in the press release, and I think Brent talked to earlier on the call as we get to 'twenty to 'twenty three absolutely. We expect the investment to provide that synergy and stuff on that journey that multi year journey to get back to historical levels of EBITDA Leon anything to add yeah. Thank you John I think you know obviously, we'll provide that.
Guidance as we're getting closer to 2023, but if you recall John historically speaking, obviously, it's a different model and their private equity, where we're generating over 20, 25% EBITDA suffice to say the heavy investment that we're making a lot of that our core infrastructure and people.
And system cost a lot of these will have great leverage once we sell more when it comes to raising topline. So directionally speaking this is a very profitable business. So we're just head on executing.
Thank you guys.
Thank you.
Our last question comes from the line of Margaret Cask score with William Blair. You May proceed with your question.
Hey, guys, it's Maggie Billy on for Margaret Today, just wanted to ask a question on the revenue guide that you guys are assuming a first half warrants had been nexgen system and so what is assumed in the guide for the progression of the launch in terms of timing and priority of new and existing talent account.
Global basis.
Hi, Maggie let leann take that one he Nike.
So for you know we have shared that you know you asked well launch followed by the rest of the market and we have also shared that S. P. Directionally. It will go up high single digits and those are the levers that we have used to build out our models.
Okay got it. Thank you and then just one last one given the impact of Covid, particularly and the APAC region and does.
Does this impact your plans for international expansion during 2022, if at all and then what's assumed in the guide here just in terms of execution on that international expansion. Thank you.
Thanks Maggie.
No I think.
Plans remain absolutely unchanged and I think I talked earlier on the call that we see.
You know growth in the U S in terms of expanding our footprint in new doors today, increasing productivity and thirdly geographic expansion is.
Three major tenants of our strategic growth plan and it is C&I.
Full steam ahead with those plans.
So maybe the only thing I would just add is we've always been very surgical in terms of how we hire we kind of expand in rate Ray like what usually go pretty deep in each geography. So that we continue to go with that approach as we expand internationally.
Okay, great. Thank you.
Thank you.
And gentlemen, we have reached the end of today's question answer session. This does conclude today's conference you may disconnect. Your lines at this time. Thank you for your participation and enjoy the rest of your day.
Goodbye.
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Yeah.