Q1 2022 SmileDirectClub Inc Earnings Call
Okay.
[music].
Greetings and welcome to the Smile direct club first quarter 2022 earnings call.
At this time all participants are in a listen only mode.
And answer session will follow the formal presentation.
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During the conference over to your host Jonathan Fleetwood Director of Investor Relations you may begin.
Thank you operator, good morning, before we begin let me remind you that this conference call includes forward looking statements for additional information on Smile direct club. Please refer to the company's SEC filings, including the risk factors described there and you should not rely on our forward looking statements as predictions of future events all forward looking.
Statements that we make on this call are based on assumptions and beliefs as of today I refer you to our Q1 2022 earnings presentation for a description of certain forward looking statements. We undertake no obligation to update such information, except as required by applicable law and this conference call. We will also have a discussion of certain non-GAAP financial measure.
Yours, including adjusted EBITDA and free cash flow information required by regulation G of the Exchange Act with respect to such non-GAAP financial measures is included in the presentation slides for this call, which can be obtained on our website. We also refer you to this presentation for a reconciliation of certain non-GAAP financial measures to the appropriate GAAP.
Measures I'm joined on the call today by Chief Executive Officer, and Chairman, David Katzman Interim Chief Financial Officer, Troy Crawford and global head of F. D N, a and Investor Relations Jessie waiver, let me now turn the call over to David.
Thanks, Jonathan and good morning, everyone. Thank you for joining us today.
Want to start by thanking our team members for their tireless focus and commitment to our mission of democratizing access to care, while delivering quarter over quarter revenue growth of more than 20% shipment growth more than 15%.
Q1 financials performed according to plan and we made considerable progress in strengthening our liquidity position with $255 million secured debt facility.
While we have sufficient cash on the balance sheet to hit our target of generating positive cash flow by 2024.
This facility, which is secured against our accounts receivable cash in certain IP.
It gives us financial flexibility to continue making investments in key strategic growth areas of our business like partner network.
Going after the higher income consumer.
Small shop expansion and advancing our oral care products.
With the launch of our fast dissolving whitening strips, we successfully ended the quarter with our oral care products available in more than 16000 retail locations, which is up from 12900 stores at the end of Q4. We also continued our track record of oral care innovation with the introduction of our patented wireless premium whitening kit.
We expect continued success in this category for years to come as our brand and product offering and retail partnership scheme no matter.
We're also pleased with the progress we've made on profitably expanding our small shops.
At the beginning of the pandemic stay at home mandates and social distancing prompted us to reevaluate our small shop footprint focus on kits where possible.
Over the past few years, we have continued to reassess our small shop approach and ensure our shops are driving incrementals for the business.
We've also developed sophisticated models that enable us to better predict the most profitable channel shops, and the impression kits for driving incremental demand in a market that may not currently have a shop location.
In Q1, we opened seven net new shops in the U S and the early results from this strategy are promising in the coming quarters. We will continue to monitor progress and update you on further shop and event expansion into the markets. We see the most promise driving incremental demand with scans.
We've also made progress in the partner network during the quarter. We continued to focus on growing Smile direct club is awareness and credibility with G p's, while making operational improvements to our model that are paying off and improve practice productivity.
While Q1, we saw improvements in both submissions per practice and increases in total practices in our network.
As Troy mentioned during our last call. The focus has been on tightening the model to maximize engagement and productivity through submissions with an active practices.
Before we scaled our sales force to drive further practice growth practice productivity is an important metric, which ensures we are balancing the growth of our pipeline with our organizational focus on being the best possible partner to our G. P network.
And at the same time, driving the highest possible returns and generating near term profitable growth.
Our commitment to partner network is as strong as ever.
This initiative is expected to be a growth engine for the company that not only provides us with an incremental source of revenue from our core customer demographics with G. P submissions of their existing patients, but also creates a critical entry point into our business for the higher household income demographics.
As you know our current core customer has a median household income of $68000.
In many cases are safe effective teeth straightening option was the only one that they could afford we are extremely proud that our award winning telehealth platform has enabled us to democratize access to care for these one 7 million customers and counting.
With their support we've been able to expand the category while building this incredible brand with 60% aided awareness, becoming the number two player in clear aligner is worldwide.
And growing revenue at a compound annual growth rate of approximately 45% since 2017.
But as we've mentioned since our Q2 call last year. The core customer is highly sensitive to the impact of inflation is having on discretionary spending.
In Q1 of this year the acceleration continue with non discretionary inflation, increasing for our core demographics, roughly 9% versus seven 8% in Q4.
While we have taken steps to mitigate inflation within our business through price increases. We've also been able to support our customers through our vertically integrated financing program, but not raising their smile pay monthly payments.
The strain on our core customers ability to spend on discretionary high ticket items that had a meaningful impact on our ability to grow this segment and that's taken us from a record revenue quarter, just one year ago in Q1 of 2021 to where we are today.
While we believe strongly in our mission to democratize access to care and in our ability to achieve our long term growth targets with this demographic.
We also believe that the quality of our product the convenience of our telehealth offering and the awareness of our brand provides the right to win by taking share from traditional wires and brackets.
As well as other more expensive clear aligner therapy.
We know traditional orthodontic customers come from higher income households, they expect the same level of quality treatment and similarly rely on dental professionals friends that online reviews to make their decisions about orthodontic care, but they also have different needs and wants from those of our customers today.
While we continue to market to the higher income customer by building credibility through our challenger campaign.
We recognize the higher income households need more from us as an education and awareness of our brand they.
They need to start their journey with a general practitioner.
Which for our business means they wouldn't start their journey in either a small shop within a dental practice or through our partner network.
Which again underscores the importance of our investment and focus on growing our partner network channel.
We know that this channel serves a dual purpose in being both an incremental revenue stream for us with our existing customers today.
As well as an access point for our higher income customers by allowing them to start their journey the way they seem to prefer.
Which is to a neighborhood G. P office supplemented with our convenient telehealth platform and are advanced connected tools.
The research we've done on the higher income demographic also highlights other areas in our offering that we can modestly adjusting our service model at a higher price point to greatly improve our offerings appeal.
These insights also build on the value proposition, we can bring to our partner network model for the G. P.
While we are not ready to share the specific details of this premium offering the team is working diligently to get our huston market as soon as possible and begin rolling out in late 2022 or early 2023.
As you May recall in early Q1, we announced that in light of the current macro environment, we were reevaluating our international footprint for near term profitability right sizing, our operating structure and allocating capital to core growth initiatives that can produce the highest return on investment.
Our team members have demonstrated an incredible amount of grit and dedication as we've navigated this transition together.
While I'm pleased with how we've operated during this time as with any transition of this magnitude there have been challenges.
After the transition took place in February we began to experience some operational challenges within our customer care team that ive, Unfortunately impacted our customer experience and latest net promoter score.
The team acted quickly and built a remediation plan to bring us back to our target service levels in the coming weeks.
Our customers are a top priority and we always aim to deliver a best in class experience in April we spoke directly to our customers to acknowledge that we were not currently delivering against the high expectations, we have set for ourselves.
And what they have come to expect from S. D. C. These operational challenges are temporary in nature. We have made significant progress already that will be reflected in our NPS in future quarters.
Close I just want to reiterate my appreciation to the team.
As I mentioned the transition was a very difficult decision for me and the leadership team and in spite of the short term challenges we've been facing operationally.
Affirmative believe in our direction and focus.
This is not a story of retrenchment, but rather a story of how he focused investment in our game changing platform.
A few days ago, we announced that we won the Med Tech breakthrough award for best Telehealth platform.
Tech breakthroughs in the independent market intelligence organization that recognizes breakthrough people platforms and products within the health fitness and medical technology industries. Today, nearly 4000 nominations were considered for the 2022 program and as the winner of Best Telehealth platform. We are the only company recognized in the clear aligner space in 2022, and we do.
Joining an impressive list of top companies in the larger digital health industry.
While we recognize the need to deliver results against our financially strained core customer. This award underscores the importance of our breakthrough innovations.
It also demonstrates the importance of the work we're doing to expand the reach of this amazing brand and we spent the last seven years growing to the number one largest direct to consumer orthodontics brand and number two largest liner brand in the world.
In a short period of time. This revolutionary platform has helped more than $1 7 billion people get a smile, they love, while saving them over 5 billion collectively over traditional braces.
And now I'll turn the call over to Troy, who will provide more detail on our Q1 financial results and full year outlook right.
Thank you David.
I'll jump right to our results for the quarter.
Please be sure to review, our supplemental materials posted to our Investor website, which provide additional details on everything I will cover.
As David mentioned revenue for the first quarter was $152 million.
There's an increase of 20% sequentially.
This is driven primarily by 76000 initial aligner shipment at an ASP of 18 90.
Our Atlanta as shipment count was up over 15% from the fourth quarter.
The year over year revenue decline of 24% is representative of what we have seen play out in the economy over the last year.
We had a record quarter in Q1, 'twenty, one driven primarily by the impact of government stimulus on consumer spending but in Q2, we started to see the effects of the higher inflationary environment that continues to this day.
Despite the year over year decline the sequential increase from Q4 gives us some confidence that we can deliver on our revenue guidance for the full year.
Providing some details on the other revenue items implicit price concessions were 11% of gross Atlanta revenue down from 12% in the fourth quarter.
We do expect that D C. As a percentage of gross Atlanta revenue to trend back toward our historical level of 9% as we have seen no significant deterioration in the quality of the portfolio.
The fluctuation in the quarterly RPC percentage is impacted by the overall level of revenue recorded in that period as well as the rebalancing of reserves.
As we've mentioned in prior quarters, we maintain separate reserves for I P C cancellation.
We analyze and regularly rebalanced those reserves based on current information.
Reserves and other adjustments, which includes impression kit revenue refunds and sales tax came in at 7% of gross aligner revenue compared to 10% in the fourth quarter, primarily due to the lower refund rate and the aforementioned reserve rebalancing.
Financing revenue, which is interest associated with our small pay program came in at approximately $90 million, which is slightly down relative to Q4 due to the lower accounts receivable balance.
Other revenue and adjustments, which includes net revenue related to retainers whitening and other ancillary products came in at about $24 million or over 15% of total first quarter revenue and is up 6 million from Q4.
This increase was driven primarily from the rollout of our innovative new retail product.
<unk>, our whitening strips in Q1.
Now turning to smile pay and <unk>.
He wanted to share of initial lineup purchases financed or a smile pay program came in at approximately 60%.
This is in line with historical levels.
As David mentioned earlier, the small pay program is an important component to drive affordability with our customer base.
Overall small pay has continued to perform well and our delinquency rates in Q1 were consistent with prior quarters.
While admittedly our core customer and have had difficulty with the macro environment. The fact that we keep a credit card on file and have a low monthly payment gives us the confidence that small pay will continue to perform well.
While we have recently increased the price of our liners. We also extended the payment terms from 24 to 26 months and our small pay program to help maintain the affordability for our customers.
Turning to the results on the cost side of the business.
Gross margin for the quarter was 72%, which is more in line with our historical trend compared to the fourth quarter, which included some one time items, including startup costs associated with our small O S implementation at <unk>.
Higher retail inventory costs.
Our gross margin includes a significant portion of fixed cost and therefore higher revenue allows us to leverage those costs for a higher overall gross margin percentage.
Consistent with Q4, our second generation automation machines are producing approximately 90% of the liners in line with our internal target.
Streamlining is helping with turnaround time productivity reduction in scrap and a more consistent and superior product for our club members.
Marketing and selling expenses came in at 97 million or 64% of net revenue in the quarter compared to 79% of net rather than in Q4 2021.
The sequential decrease as a percent of revenue was primarily attributed to the increase in revenue, but it's also the result of a reduction in spend and targeted international markets that we suspended in January as well as increased marketing efficiency.
On small shops, we had a hunter and Kim permanent locations as of quarter end and held 130 pop up events over the course of the quarter for a total of 240 location site.
We had a decrease in shop locations from the fourth quarter, driven primarily by the closure of 38 shops in the international markets, where we suspended operations in January .
The pop up events aren't efficient way to meet our demand and enable us to fully leverage our small shop.
Flexibility for our customers that are coming to us through aided awareness referrals and marketing.
We continue to evaluate profitable expansion of small shops, and other scan distribution models, where we believe incremental demand exist to cover the additional cost would be location.
Pop up events have also been critical in supporting our partner network.
We now have over 673 partner network locations globally that are active or pending training, increasing our footprint from Q4.
As David previously mentioned partner network team has been extremely focused on tightening the miles and maximize engagement and productivity with an active practices and we've seen positive momentum on productivity throughout the quarter.
As mentioned earlier, our marketing and selling expenses in the quarter as a percentage of revenue declined to 64% compared to 79% in Q4 and reflect significant improvement due to the exit of specific international markets and are focused analysis regarding any investment in brand building to support our long term growth.
We did not see the full effect in the international market changes within the quarter as many of the changes were implemented after January .
We did see efficiency improvements in the U S and Canada during the quarter.
Sales and marketing as a percent of revenue was 78% and rest of world market compared to 61% in the U S and Canada.
The focus in Q1, and what will remain the focus is seeking to find efficiency in our spend.
Includes continued efforts to find greater unique reach and our spend on TV with Influencers and through our partner network offices as well as driving the most qualified leads through our site.
While I was 14 changes continue to be a challenge year over year.
To optimize our digital channels, we are finding levels of efficiency closer to pre hours 14 members.
It is important to keep in mind that digital marketing is a highly fluid process. It requires daily discipline on spend analysis assessment and reallocation.
We're always testing and analyzing new channel and the impact of the channel makes it amongst all channel.
With a targeted focus on efficiency and quality leads we are continuing to calibrate spanned across a diversified platform based.
In order to optimize continuously through the period to achieve the optimal balance of high funnel lead and bottom of funnel align herself.
General and administrative expenses were 71 million in Q1 compared to 74 million in Q4, 2021.
G&A costs were lower in the first quarter by approximately 10 million compared to Q4, when adjusting for incentive compensation differences between the quarters.
If you recall Q4, 2021 included a reversal of a four year bonus accrual.
Of approximately 9 million compared to a more normalized cost in Q1, 2022 4 million.
Stock based compensation costs was also lower than Q1 2022 compared to Q4 2021 by 2 million due to forfeiture of stock awards associated with the cost changes implemented in January.
The full effect of the cost actions in the quarterly run rate of G&A expense will be realized in the back half 2022.
And excluding stock based compensation and G&A, we expect to see a continued step down in G&A between Q1, and Q2 that should continue through the balance of the year.
Other expenses include interest expense of $1 6 million of which $1. One man is related to deferred loan costs associated with the convert we issued in 2021 and 500 thousands associated with leases.
Additionally, other expense was approximately 13 million consisting primarily of one time costs related to our January restructuring actions, including costs associated with severance and retention.
As well as store and facility closure costs related to our international operations.
All the above produces adjusted EBITDA of a negative 34 million in the first quarter, which is a 28 million improvement over Q4 2021.
Our first quarter net loss was 74 million compared to Q4, 2021 net loss of 95.
Breaking out adjusted EBITDA regionally the U S and Canada came in at negative 23 million and rest of World adjusted EBITA was negative 11 days.
Moving to the balance sheet, we ended the first quarter with 145 million in cash and cash equivalents.
Cash from operations for the first quarter was negative 61 million.
Operating cash flow was negatively impacted by the cost savings initiatives, we executed in Q1.
During the quarter, we spent approximately 20 million on team member related costs, such as severance and retention as well as costs associated with the exit of some geographies, including store and facility exit costs.
That's the 20 million of cash outflow, approximately 13 million flowed through restructuring costs in the P&L, but were added back to adjusted EBITDA for the quarter with the remainder of the cash outflow expense and restructuring throughout the rest of the year.
The total cost of the transition is still expected to be within our guidance of between 20 million and 25 million for the year.
Cash spent on investing for the fourth quarter was $15 million.
Free cash flow for the first quarter defined as cash from operations less cash from investing was negative $76 million.
We have previously noted that we have access to additional liquidity to invest in our growth initiatives, including any accelerated investments such as partner network ARINC.
Higher income customer penetration and small shop expansion.
As David mentioned earlier, we successfully increased our liquidity by completing a new $255 million debt facility secured by our small pay receivables that has a 42 month maturity and is structured as a delayed draw term loan facility.
At the time of clothing end of April we drew down $65 million on the facility most of which was required as an initial draw under the agreement.
As previously mentioned in.
In January we took actions to reorganize our company and meaningfully reduce costs overall.
Overall, these targeted cost reductions to optimize our operations to refocus our business on achieving near term profitability, while minimizing any impact on revenue.
These actions are tracking according to plan with a meaningful impact on our spending realized in the first quarter with full quarterly run rate savings anticipated in the second half of the year.
As noted in our press release, we have reaffirmed our 2022 and long term guidance as well as the assumptions underlining both that we provided on February 28 2022.
Overall, we are pleased to deliver Q1 result in line with our plan.
We delivered a significant increase of 15% in Atlanta orders compared to Q4.
And increased revenue across both our liners and oral care solution.
Increased gross margins.
Recognize deficiency gains with selling and marketing and G&A as a lower percentage of revenue.
And access to additional liquidity through our new debt facility.
This financial strength provides a solid foundation to help us achieve our 2022 and long term growth targets and provide the best club member experience.
Thank you to everyone for joining today with that I'll turn the call back over to the operator for Q&A.
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Our first question comes from the line of Chris Cooley with Stephens.
Please proceed with your question.
Good morning, and thank you for taking the questions and congratulations on the impressive start to the new year.
Just was hoping we could maybe get a little bit more color.
Around your thoughts strategically with the partner network and the new premium offering.
It sounds like you definitely have seen some gains there in terms of not only oh, I'm, sorry, new customers, but also just better utilization within those existing practices could you just maybe give us some metrics around that and kind of how you see that trending and then the end result of what you think that it can do in terms of lift in terms of growth.
And Martin Thank you.
Yeah.
Yeah, Chris Ah I can take that one so what we're seeing in partner network today is not our premium offering that's something that we introduced this quarter, we mentioned it in our deck and in our <unk>.
<unk> prepared remarks.
So this is this comes from a lot of research that we've done over the last couple of quarters, where we were seeing that the higher income consumer what.
One of the answers to players that they do want a local neighborhood G P or so to start their journey.
And to use that.
That network neighborhood network, if they choose to but also have the flexibility of using our telehealth platform.
So what we've been doing with the partner network today is more of the G. P's patient base, who wants to use smile direct club to straighten their teeth and we now have that offering inside the partner network. This new premium offering which is a complete new service that we're going to be rolling out in the 'twenty two it's not in the Mark.
Today It comes at a higher price point, there's more service associated with it there's more in it for the G. P, which is exciting and when we started out the partner network that was not it was not by design to appeal to the higher income consumer it just so happens that the two initiatives.
Most of them were independent initiatives are higher income consumer strategy as well as the partner network now have come together in the circles Cros, which is very exciting for us.
So what we're seeing today when we talk about we're getting more productivity per practice. That's in the core partner network with the G. P. Patients every month, we're seeing submissions, which is the productivity of those practices go up and that's what we've been we've been working on very hard to get it to a certain level, where it's profitable.
Its consistent and then we're going to really start to pour gas on it.
We're still in a state right now where were you know where we are opening more practices and because of this we call S. D. C plus that's the term for our new premium offering we are gonna have to.
Open up more offices.
Many of those would be our small shops inside the partner network. We've already got about a quarter of them are about 110 shops or inside a partner network requires that we have at least two operatory.
And space to operate inside a dental practice, but it's been a good good model. It's a good model for our core customers coming in.
There's some comfort in being inside a dental practice, but it also really helps with the partner network patients coming over and getting scanned and utilizing our services. So eventually we will move most of those are small shops inside of the partner networks to support the S. D. C plus well then also expand beyond that and just.
Having the partner network.
Treat and in service are hiring from consumers as they come through S. D C plus.
Thank you.
Our next question comes from the line of Alex Nowak with Craig Hallum. Please proceed with your question.
Great. Good morning, everyone. This is connor on for Alex I guess first off we saw the inflationary environment worse than in Q1, but it does look like your results are obviously starting to improve here. So.
And just some more color on you know where you're less exposed to those challenges in the first quarter here or or just some more color there would be helpful.
Yeah, I can take that one so yeah definitely pleased with the quarter.
A little over $150 million up 20% in revenue first of all Q1 is a better quarter than Q4 seasonally you know there is there is the new year, New you effect that takes shape every Q1.
But beyond that.
We have not seen inflation subside if anything that's at a higher level than its been I. Just think we're getting used to operating in this environment.
So the things that you know some of the newer marketing channels that we were forced to.
Start spending money and.
Because of Iowa's 14, we're starting to get our sea legs, we're becoming more efficient in those channels as we learn more we really weren't spending money and tic toc and snapshot at the levels that we are today a.
Podcast direct mail all channels.
Or being exposed to our marketing spend and we're getting more proficient in each of those channels and spending less and Facebook, which wasn't performing the other the other one that we don't talk a lot about is conversion improvement.
So there's conversion improvement within each channel kit and scan, we're always tweaking it with a better is better philosophy.
Everything from kit return rates are up acceptance rates are up so for the same dollars of marketing spend you know it.
It was a real gala that you'd have to go through to get a kit a successful kit back to order your liners and so you know after five six years.
Instant improvement in <unk>.
Really focus on improving.
Proving that the funnel conversion, we're making strides there. So we saw in Q1s. Some good improvement in conversion the other conversion improvement.
Is taking someone from a kit into a scan funnel.
The experience in the shops, and ultimately have a better conversion than someone doing it themselves at home with a kit and so we've seen an uptick in that as well coming out of Covid, we're starting to see more of our customers start in the shops, which is a better conversion and we're going to continue.
Push that channel as we mentioned, we opened up seven new shops in the quarter, we're opening more shops in Q2, as we see incremental they they have to be incremental and when we say incremental.
Let me define that for you. So it's it's not only.
Do we get more case starts because someone in that DMA. If we didn't have a shopping there would not have started with us because they don't want to do a kid at home. That's one incrementals the other incremental it is.
You convert a large percentage of the people who were doing kitchen at market.
To a to the shop. So you have a higher conversion. So if you have the same thousand people, who started with kitchen, a certainty of million now that we have a shot.
Let's say half of them now convert over to the shop, what was the higher conversion.
Covers the cost of that shop, and then as profitable incrementally so well.
It's not one thing it's really a game of inches and you know all of these things are performed to plan in Q1 and I think that's why we are we hit our numbers.
And just to build on that.
Just to build on that a little bit we did expect the seasonal uptick in our guidance for Q1, and we still expect that our as we as we look at the rest of the year at about 45% to 50% of our sales guidance range would be in the front half with about 50% to 55% in the back half based on the 600 to six.
$50 million full year sales outlook with the lower end of that range being impacted by continued difficulty in the macroeconomic environment and the high end of that we get a little bit of an improvement.
From an inflationary standpoint through the rest of the year. So just wanted to give you that that additional color.
Perfect. That's Super helpful. And then I guess second just if I can squeeze another one in update just a quick update on the competitive environment. You know, we're seeing a little bit more marketing from candidate and also like you know what are you seeing and how do you intend to kind of defend against those but potentially bigger budgets now.
Yeah, we're not we're not really seen I'm surprised you said that you know candidly really has dropped out of the D. T C space, they're not going direct you can't buy the product from them.
Their own network of GPS and Orthos, So I don't see their marketing spend.
Increasing at all and.
And bite I mean, you know as far as their numbers. They were on a conference call right. Now at same time as vessel will have to see how they're reported in but nothing has changed from a competitive standpoint that we see out in the marketplace I don't see any real increase spend.
For many of our competitors I think you know like I said I think the $152 million that we achieved this quarter was just a lot of work in this inflationary environment understanding our marketing spend to channels, where in all the conversion curves levers that we have we're very data driven metric company.
And.
It's it's a game of moving these levers.
A 1%, 2% conversions can be very meaningful in this business. When you have the kind of visitor traffic that we have in demand that we have come on to the website.
Okay.
Perfect I appreciate the color. Thank you.
And our next question comes from the line of Jon Block with Stifel. Please proceed with your.
Great Hey, guys. This is Tom stepping on for John Thanks for the questions.
If I can start with price Troy, maybe with you.
Can you talk about the cadence of how the recent price increase flows through the P&L will it be fully reflected maybe starting in two age and then David is there any thought around additional price increases this year.
Just given the inflationary environment and then your ability to execute on this effectively through the longer monthly terms.
So just to address the price increase so in the in the U S will have that rolled out during Q2. So by the time, we get to the end of Q2, it will be fully baked in for Q3, and then we're rolling it out internationally.
After that so yes back half of the year is when will we will start to see the full effect.
But of the price increase.
Yeah, just to add on that so it does take a while to have this flow through our system from website CRM.
Paid media all of it has to be adjusted so we started with the U S being the biggest market we have.
Got U K, Canada coming next but it's going to take through Q3 to get all of the six countries up to the $5 45 per cent price increase now we are looking at we don't have we don't anticipate another price increase in the liners, we aren't looking at retainers now our retainers or $99. It's good annuity.
So some people on subscription, but we have a flow of good flow of retainer business coming in every six months.
Their customer store retailer that has not gone up since we started this.
Business, you know seven years ago. So we anticipate we will take a price increase from retainers were just trying to figure out exactly how much that is.
<unk>, which will be helpful. Every every little bit helps and then this new premium offering we're talking about now that's both the retainer price increase premium offering for us D C, plus which really isn't getting even come out until almost the end of the year. None of that is built into the model. So those those are out of it.
If we roll out of a retainer price increase that'll be additive to the model.
Got it that's helpful and then.
Just my second question.
As it relates to the smile shop expansion and.
The profitability there can you talk about just what you're doing differently now relative to pre COVID-19. It sounds like more shops inside offices is helping and then importantly, what is the sustainability as we think about sort of per store profitability. Thanks, guys.
Yeah. So we're much more strategic and much more surgical about the shop footprint you know when we were growing like crazy in 2018 and 19, our first shop opening in 2016 in the summer.
We got up to over 300 shops in the U S with our partnership with Walgreens, and Walmart Cvs anyone who would take a shop in shop in.
And Covid you know we started to seen it before COVID-19 the COVID-19 with the shutdown of all the shops really allowed us to take a real long hard look at the Incrementals. You. These shops there is expense associated with them you know the labor the monthly rent.
Cetera, so even if they're profitable within a four wall that's not the way to look at it because that's how we were looking at it and most of them if not all of them were profitable within a four wall, which you have to say is.
Could I have gotten that business, otherwise with an impression kit even at a lower conversion.
We factor in the lower conversion of a kit in that market.
With the higher conversion of the shop at all the costs associated with the shop is it incrementally profitable. So we have a team that is headed by Jesse who's on this call from our RFP in 18, along with analytics and they are they look at every data point imaginable against match markets and we're still test and learn.
So we open up those southern markets.
In Q1, but some shops in new markets. Some are new markets some are incremental shops within existing markets.
And then we wait you know six to eight weeks to see to make sure that our hypothesis is accurate that this was incremental it's pretty easy to measure once they open obviously.
And then we go into the next round of extra so well I I don't want to say, we're gonna get back to 300 shops, because when we look at the numbers. We were just over saturated they were cannibalistic to each other but we will have more than 110 shops that we have today, that's and that does help with the conversion like we're talking about as well as new case starts.
Yeah, David if I can just build on that a little bit a.
Couple of things have changed since the time pre COVID-19 when the company had well over 300 shops as you pointed out.
One we do have the ability to look back at those shops and look at where we are today and we have a good test controlled dataset I mean, when you have fully saturated in the United States, it's hard to kind of tease out that incremental it and now we can do that today. So that we can crawl walk run into but I would say is the optimized number of shops and then.
The other thing too is the company has evolved in terms of its go to market for those what we call internally scan distribution models. So we don't have just a single thread of all shops Standalone today, we've got an operating model that has a different cost structure for a shop, it's stand alone or a <unk>.
Shop in dental practice or what we call a guide that could go work in a dental practice for one to two days, a week or even a pop up and with these different operating.
Operating models, we can then marry what we estimate to be the increments, how the opportunity in that market with the appropriate scanned distribution model and that really allows us to really focus on capturing what David said that incrementals at the highest contribution margin.
We're still early stages, and we're learning and I think what we'll find is yeah theres more opportunities probably then we can see them today, but as we get out in the market and test. It we have a lot of flexibility. Because these are short term leases and pop up events are obviously very temporary to evolve it to continue to tweak the model David pointed out.
Our process innovation culture. So it's a really exciting thing and we'll talk more about it I'm sure in the coming quarters.
Very helpful. Thanks, guys.
Yeah.
And our next question comes from the line of Matt <unk>.
Sick with credit Suisse. Please proceed with your question.
Hi, Thanks, so much for taking the question and congrats on a good start to the year your.
So a couple of questions just maybe on cadence from here. So first on on cash flows given given the restructuring and financing announced during Q1 as you mentioned in your prepared remarks, you know partial impact of some of those efforts during the quarter can.
Can you talk a little bit about that the cadence of operating cash use as we get into Q2 and Q3 and then you know maybe any sequential improvements on that front as you stabilize the topline and then I've got.
Got a follow up question as well.
Sure I'll take that so just related to the overall free cash flow was negative $76 million for the quarter. It was impacted by the restructuring events that we.
Executed in Q1, if you just look at what we've talked about before is kind of the way to think about free cash flow EBITDA minus the capex. So EBITDA was minus 34 million Capex was 15, and then we had a restructuring event, which cost us about $20 million from a cash flow perspective. The majority of that was spent and exit.
Costs related to some of our international facility as well as severance and retention costs related to the changes that were made so about $20 million of that overall 76 million was I would say one time now not all of that ran through the financial statements.
The P&L in Q1, only about $13 million of that was and within the P&L, which we broke out on our restructuring line item. So it will have some expenses for the rest of the year as we amortize those off about 8 million through the rest of the year, we're still within our guidance range that we gave originally a $20 million to $25 million impact.
Restructuring, but as we go into Q2 and the rest of the year as you remember that the changes that we made in Q1 at $120 million in savings that we identified we will start to see the impact of that from a full quarter expected in Q2, and then certainly in the back half of the year. So we do expect free cash flow.
To get better as we go throughout the year without the one time impact as well as the changes that we've made from a savings aspect, which which I think really goes to to define the flexibility that we have in the model and some of the things that Jesse you talked about the changes that we're making from an efficiency and an analysis standpoint, but we expect to see better margins.
Our ASP coming from the price changes are better marketing efficiency and as we exited some of those international markets, we'll see marketing costs come down and then G&A as well with the changes we made related to personnel to rightsize the business should be all positive impacts to free cash flow throughout the rest of the year.
That's great and the Capex element of that is is that still just kind of steady.
No that's consistent with 15 in Q1 or is that does that does that is there a trajectory to that number as well.
The original guidance. We gave was 60 to 70 million for Capex. This year, we're sticking to that guidance right. Now we've got some investments that we think we can make that are going to be very important for.
For the business, but we were gonna fit those into that to that guidance range.
Great and then you mentioned just I think in the last question that that you'd view, you're embarking on a number of different sort of fine tuning exercises and sort of and marketing and customer acquisition and.
Profitability, which is great I'm wondering should we expect as.
Should investors expect that to be sort of start to you know take shape or or you know see the clear benefits of some of those in Q2 or is that take you know a couple of quarters you know by the end of the year when when when do you think you'll have a really sharp view of how these new programs are are affecting our <unk>.
Both trends.
Yes, two things in that question, one was the incremental D or the the process.
Process improvements that we make we saw the benefits of that in Q1. So those are the things I talked about a kid conversion shop incremental marketing efficiency.
All of those little inches.
We're always working on and we were we started to see some of that in Q1, you'll continue to see that that's in our model that is in our model the new initiatives as far as partner network in S. D C plus which is now almost really one initiative because they feed off each other.
That is something that is as weak as we roll that out and that's going to be probably late 2022 into 'twenty three if it's a big initiative as.
As far as getting these partner networks stood up so that we can you know rollout with a national campaign.
At the higher income consumer with this premium offering we're working diligently on it but as that comes out we'll start to report on the kpis of that and so some more metrics and you'll start you'll see that in our 2023 numbers as we give guidance for that.
That's great. Thanks, so much.
Okay.
Our next question comes from the line of.
Robbie Marcus with Jpmorgan. Please proceed with your question.
Hi, this is actually literally on for Robbie today, Thanks for taking the question.
With all these macro challenges is there any color you can share on how smile pay dynamics have shifted over the last few quarters and what are you doing to mitigate any sort of final financial risk on that side is in place and continues to worsen.
Yeah, I'll take that so.
We haven't really seen any degradation I would say in our overall portfolio related to smile pay despite the macroeconomic situation I think one of the things that helps us certainly is to have a credit card on file with the customer.
Which kind of allows for easy payments.
We did raise prices, but where kind of offsetting the impact of that for the customer by extending the payment terms out to 'twenty six months versus 24, so it keeps their payment low at $89. So we're somewhat.
Offsetting the impact of that price increase for the consumer but overall I think we we watch are the small pay performance very closely you know there are some ups and downs between quarters, I would say and even amongst individual performance month to month, but overall I'd say, we're still considering.
The performance of that consistent with prior years, where we haven't seen any major impacts from an economic standpoint.
From that consumer.
Okay. That's helpful and just a quick follow up you've mentioned that these headwinds are really affecting your core demographic. So how have some of the non core markets you've moved into recently like teens in deposit campaign been trending recently, thanks, so much.
Okay.
Yes.
I'll take that one there really wasn't a direct teen initiatives I will tell you that S. D C plus going after the higher income consumer by using a partner network.
Local G P office as a way to start this also resonated very very high with the parent of teams. So that was a good outcome for us. So I think S. D C plus kind of rolled up knowing that goes after the higher income consumer but also goes after that teen market that we really under index.
Two you know we've never really gone after that market.
So.
That that initiative.
Well, we'll take shape.
And.
Yeah, I mean as far as far as Oh, there other initiatives and things that we're doing it's.
More back half of the year, and Oh, Troyer, especially if you want any color on any of that.
I would just say, yes, it's for the most part our results are driven by the our core consumer right now and that's the way we built our model.
So to the extent, we make additional investments and make inroads into that higher income consumer that's all opportunity for us so.
Well, we've been focused on it and trying to grow partner network and some of these other initiatives I think you know really all of that is in front of us I would say for the most part.
Okay.
And our next question comes from the line of Michael <unk> with Bank of America. Please proceed with your question.
Hey, Thanks for taking the question you got a couple of them, but I'll start with sort of like the big picture, one and it's a little bit of a follow on on on the last point you know if we if.
If we sort of take a step back and look at the big picture at the time of the IPO. The focus was really heavily on them. You know there. There are two targets that we're sort of guiding your your methodologies bits and it was one the lower price point and two was for patients and customers, who specifically did not want to go to the dentist or didn't.
Access to the dentist and if you fast forward to today you know obviously a lot of a lot has changed in the world, but you're increasingly emphasizing or focusing on the doctor directed channel or in the you know the.
Douglas Channel and now you've got the premium offering is the C plus and it seems like you're you know continually shifting more and more back into that.
They're part of the market, where you know the number one player align is so.
It's still you know I recognize it's still a small part of the business and in the former category still captures the majority of the opportunity but.
Any thoughts longer term on that shift.
Any learnings you can take from that on the size of the of the you know truly DTC platform and the at home platform, you know and the market opportunity there and you know how you stack up.
In a market, where you could be going more head to head with the would be established players and the doctor about the channel.
Yeah, Michael I think the way to look at it is we have this pure telehealth platform, which up until this inflationary headwind is doing really well. We just you know we talked about Q1 of 'twenty one was a record quarter for US you know.
199 million EBIT, a positive that was all of our core demographics $68000 of your customer.
That customer has been a workhorse for us and we will continue.
To grow the business with that customer we're not we're not abandoning that customer. We just feel we have we have the right to win as I stated in my my my remarks that we have the platform we have gen. Two.
Manufacturing, which is a really great product, it's really improved as far as.
Comfort.
Fit and are a smile O S, which is our software platform, which we have a great team of engineers.
Putting out new releases every quarter, we're doing more cases better outcomes. So we feel that the time is right.
To go after that that higher income consumer we have the platform. What was missing was they didn't want to totally do a pure telehealth play a research came back that they loved the telehealth aspects of it the convenience that that offers but not at the expense of not having someone in their neighborhood that they can go to if they need to or at least to start the journey.
So where these these initiatives are for growth and it really was a pivot away from international which was going to be a growth driver for us as we talked about it was the right thing to do to shut that down and most of these countries that were not performing or had long term prospects.
It was a cash drain there was a lot of regulatory hurdles in a lot of these countries that we have to overcome and so pivoting back to something that has a much better ROI. We can get this S. D C plus up by the end of the year.
Less costly than opening up international countries and start to really compete for that higher income consumer, which our research is showing that.
This model and platform is very appealing to them to have the best of both for US you know the telehealth and a physical location.
It's also then it gets us into more teen cases, which were were under serving as well. So I would look at it is not so much of a shift to more of an additive incremental.
Segment that we were not getting we were not getting that higher income consumer we were way under indexing to them.
And Theres No reason, it's 20 million plus case starts around the world.
And we were adding a new category for people, who can afford it which is typically when you disrupt the category. That's what you go after its pricing convenience price scheme number one by far which we came out with these where consumers who came to us who've been out of $45000 for T Street.
It's now time in the evolution of the product and the platform.
Now go after that higher income consumer that's exactly what we're doing.
Okay.
And a quick follow up on the N. P. S hit you used to call it out in the quarter.
One of them when you know when I ask on that given you've been hyper focused on NPS metric in prior on prior upgrades. How do you think that comes back timing wise do you have any lingering concerns from detrimental detrimental impact to the business and keep clarifying a little bit more detail you can talk about operational disruption as a result of the you know now.
In January .
What exactly was it that you think led to that pretty steep drop off.
Yeah. Good question and this one hurts internally because our DNA is all about the customer.
Everyone in the organization is extremely customer focused and.
We did not want this to happen and you know I'll I'll I'll I'll take the blame for that basically what happened was when we did our modeling project horizon, which was our restructuring.
We executed in January .
We looked at this very carefully and our service levels are what was needed and one of the one of the cost savings was to take out you know we were 24 seven and all of our teams in categories within our contact center, our dental team our customer care team member retention our.
Servicing smile pay all of it was 24, 7% when we felt like we realized we didn't have to do that and there could be some cost savings by eliminating midnight in some of these night shifts.
I T support helped us support and so we were gonna move some of those people into the other two shifts with three shifts three eight hour shifts, but what happened was a big chunk of our labor force their contact centers in Costa Rica.
Just you know hindsight's 2020, and what happened was when we offer than we thought they'd be happy about moving out of a midnight shift into a day shift and many of them had two jobs sorry can't do it.
And we were we were kind of caught up.
You know short staffed so we.
We still have to shut down those nighttime shifts to save on the I T and helped us and other support and now we're back filling we have a really good detailed plan.
To get back to our normal service levels.
Which we're proud of it and are important in this business by mid June . So 30 days from now every week, we're seeing improvement because we are having hiring classes and we are we are doing things to not only just hiring but also improve productivity within within each of the team members getting more productivity out of out of each of them.
Our R. R. N P S, which was up 55 last quarter or Q3 of 2021 went down to 37 is the lowest it's been a long time very upsetting to the leadership in the company, but youre going to see that bounce back. It's all hands on deck, it's not going to take long.
And we will get back to those.
Our service levels and NPS scores.
Okay, great. Thanks, a lot.
And as a final reminder, if anyone has a question you May press star one on your telephone keypad to join D questioning their thinking.
Our next question comes from final Laura Champine with loop capital markets. Please proceed with your question.
Thanks for taking my question. This morning, you've you've laid out for short term targets and in your presentation and still have long term targets do we get to see those long term targets for performance kick in in 2023, and your current view and when do we get to.
<unk> EBIT positive just knowing all that you know today.
Yeah.
Okay, I can take that so as far as EBITDA positive goes.
We're sticking with our original guidance, which is 2023 EBITDA positive and cash flow positive in 'twenty four.
25.
I would say as we start to get through.
Some of these initial investments and understanding what S. T E plus and some of these other initiatives mean I think it will start to take a look at our long term guidance and make sure that it's representative of what we see from a marketplace perspective, I'd say overall right now.
With the shorter term guidance the 600 to 650.
$600 million relates to.
Continuing a worsening of the environment with the 650, a little bit of an improvement I'm you know as we make investments in the business will take a look at that that shorter term guidance.
After the first half of the year and kind of potentially a rework that based on what we've seen but I would say, we're not ready to change long term guidance, yet until we get a little more perspective on.
How these investments are going to play out and win overall.
Got it and then just a follow on the credit facility that you've.
That you just reported about when do you think youll see peak borrowings on that on that facility.
But right now I'd say its all based on operating result, I think what it does is it gives us a lot of flexibility going forward and the ability to if we want to extend some of the investments we want to make we have the ability to do that so initially we took 65 million was the initial draw we took them up Italy really that was just to start it off.
But overall not necessarily projecting that we need additional capital, but it will all depend and certainly on a.
How this year plays out and then towards the back half of this year the investments that we want to make and how we see those play out as well I think the key thing for US is that we wanted to make sure. We had additional liquidity on the balance sheet. If we wanted to do make those additional investments to drive growth I mean, one of the things we looked at hard as a part of <unk>.
And as David mentioned earlier was really trying to focus on those investments that have the best return.
And that the shortest term to a higher.
Higher profitability. So it's that's really gave us the ability to essentially weather any storms in the future as well as make those investments in the business that we need to continue to drive growth.
Yeah, I would say just to add to that just adds to that Troy so with what the ending cash balance in Q1, roughly 145 close to $2 55, Youre looking at $400 million.
Available liquidity.
Not needed for the model you know so this is added liquidity you take cash when you can take it and if we want to start accelerating we see really good results coming out of US. This is causing the partner network and we want to really accelerate growth there with the with the near term payback.
Hum.
You know our ROI when we have those funds to do there and also if things really get bad and worse and so from a cash perspective, you should look at this company based on our models, what what kind of cash burn we're talking about for 2020 to EBIT positive in 'twenty three we have plenty of liquidity.
And the only to weather a storm at all sorts of fast forwarded and that's more heavily in things that are working.
So we feel we're in a really good position, we really excited about working with H B S. This is a group that we had worked with in the past.
Off of our smile pay a our balance and.
We are with him again.
To work with.
Got it thank you.
Yeah.
And we have reached the end of the question and answer session and this also concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.
Goodbye.
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