Q2 2022 SmileDirectClub Inc Earnings Call

Greetings and welcome to the Smile direct club second quarter 2022 earnings call.

At this time all participants are in a listen only mode.

A question and answer session will follow the formal presentation.

Pretty much require operator assistance during the conference. Please press star zero on your telephone keypad.

As a reminder, this conference is being recorded.

I'd now like to turn the call over to Jonathan what director of Investor Relations. Thank you 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 therein and you should not rely on 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 Q2 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.

In this conference call. We will also have a discussion of certain non-GAAP financial measures, 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, and Chief Financial Officer, Troy Crawford.

Now I'll turn the call over to David.

Thanks, Jonathan and good morning, everyone. Thank you for joining us today.

To start off by congratulating Troy Crawford on his official appointment to CFO .

Troy has made numerous contributions to ask D. C over the past couple of years, most recently in driving efforts around focused investments and financial discipline.

In addition, I wanted to take this opportunity to welcome both Linda Williams, and Alex Demetrius to our board of directors.

Both Linda and Alex come to US is accomplished executives in their respective fields, we will bring in an invaluable perspective as we navigate this environment and phase of our business.

I'd also like to thank the contact center team for quickly returning our service levels back to their targets by the end of May.

As we discussed in our Q1 call transition challenges and our contact center temporarily impacted our ability to deliver our customers with the level of care that they have come to expect from our brands.

And these challenges were reflected in our Q1 N P S reading.

While our next N P. S reading isn't until Q3 internal metrics continue to point to an improving trend that we expect to be reflected in our next quarterly N. P. S update.

In addition, our internal brand tracker indicators have shown improvement quarter over quarter for the U S.

Which further indicates that the work of our contact center team is paying off for our customers.

Our ability to quickly resolve those contact center challenges and substantially complete all other initiatives. We implemented at the start of Q1 have enabled us to achieve more than $120 million in annualized cost savings.

As we've seen in the past few months the timing of this transition was critical in light of the uncertainty we're all facing today surrounding the state of the consumer and trends in consumer discretionary spending.

Okay.

While we were encouraged coming into the year with our Q1 shipment lift over Q4 challenges on consumer spending accelerated during Q2.

And for our business. This is all this acceleration began to materialize in the back half of the quarter.

We do not like to comment on monthly order trends, but we believe it is important for our investors to understand that initial evaluation interests remain relatively stable heading it tonight.

However, aligner order trends began to slow in mid May.

Before dropping further in June .

During this time, we saw traffic to our insurance page increase on a year over year basis, as we expect more customers. We're actively looking for ways to supplement their purchase.

Our takeaway here is that demand for our products remains strong but strains on consumer spending are continuing to hurt our ability to convert at the levels, we need to drive revenue growth.

Challenges to consumer spending accelerated faster than anticipated during the quarter.

Which when combined with reduced stimulus sustained high inflation and a shift in discretionary spending towards services.

Resulted in less predictable demand curves.

I'm pleased to report that our cost cutting initiatives from Q1 that paid off during the last quarter and we were able to improve both adjusted EBITDA and free cash flow by $11 million and 41 million respectively.

Despite consumer spending decreases resulted in our top line being down quarter over quarter by $26 million.

These efforts can also be seen when you look at our performance year over year, while revenue was down 48 million relative to Q2 of 2021.

We were able to sustain adjusted EBITDA during Q2 of 2022 within approximately 700000 of what we achieved in 'twenty one.

Yeah.

Trey will go into the details on how we were able to achieve these results during the quarter, but I do want to thank the team again for their tireless efforts during the past two quarters to further optimize our business operations.

With leverage in our operating model. These results reflect a much leaner organization that is better positioned to achieve profitability with modest topline growth.

While these right sizing efforts have allowed us to make meaningful progress on positioning our business towards profitability.

We recognize that re engaging topline grow through innovation is just as important to the long term success of our business.

From the beginning innovation has been core to achieving our vision and is critical to the next phase of our growth and ability to deliver shareholder value.

Our vision and mission are much greater the manufacturing and marketing clear liners. The aspirational vision of our organization is to be the world's leading oral health brand by helping more people realize the life changing potential the confidence smile.

And that vision, our mission has always been democratize access to a smile each and every person loves.

And for us to realize our vision through our mission, we must expand our reach within and beyond our existing core customer base.

This is where our focus on partner network aligner product innovations STC, plus oral care and shop expansion fits into what we do.

Expanding reach comes through continuously bringing transformative innovation to the market across an entire portfolio of both consumer facing and non consumer facing innovations.

As you'll see in our Investor presentation, our innovation portfolio includes innovations throughout the journey.

And at the product level and.

And over the last eight years, our continuous investments across the portfolio have allowed us to consistently deliver in all categories.

Recently, we've continued to make progress on making it easier to get started with the overall experience to our partner network and that's D C plus efforts.

We ended the quarter with 690 locations and have seen meaningful increase in submissions per practice driving total submission growth of more than 75% quarter over quarter, and nearly 170% versus Q4 of 'twenty one.

While partner network is still a relatively small contributor to our topline.

This foundation is exactly what we need in place for us to further lean into our S. D C plus offering.

Which will be exclusively available either in a small shop within a dental practice or through our partner network locations.

The FCC plus offering was designed to specifically target the higher household income consumer.

And our intense qualitative and quantitative research, we learned that higher income consumers will be far more attracted to our brand at a premium price when paired with greater access to a general practitioner throughout treatment.

We believe the offering that we designed which includes access to a local G. P on an in office basis great.

Greater access to care through our telehealth platform.

Retainers for retention after treatment and other S. D. C products is perfectly designed with the consumers needs in mind.

But these additional services, which are augmented by our proprietary tech platform.

Despite being able to price this offering at $3900, which improves not only the economics to us and our partner offices, but also enables us to provide this enhanced access to care, while remaining price competitive but the premium service.

The S. D C. Plus pilot is currently on track to launch in select partner network markets. In late Q4, this year or early Q1 of 'twenty three.

This is the first time since we launched S. D. C that we will offer a choice for our customers depending on the service level that they desire.

Okay.

We're extremely excited about what this offering means for our customers our partner network G P's in our business.

We will continue to keep you update on the progress of the pilot and the results we're seeing as we enter those markets in the quarters ahead.

While we make it as easy as we can to get customers started with our kitten scan options. The journey to purchase today is not ideal.

Still too difficult and requires too much from our customers before they get to see their new smile and purchase.

By using kits and scans as been a viable starting point to get us in the market. It was always a temporary solution until we were able to develop breakthroughs with AI technology that allow customers to use their smartphones to get started and purchase in a matter of minutes.

I think it's important to illustrate the magnitude of the drop off we experienced with the current kits and scans process when looking at our current website traffic to purchase volume.

Today, we have $4 6 million visitors to our site each month with around two 5% of them converting to an aligner order after falling out over multiple weeks across several touch points in the journey.

We have illustrated this point in our investor deck based on today's volumes, which is a small improvement of 25 basis points and our site conversion.

We would expect more than 200 million of additional line of revenue.

Up to $160 million in additional adjusted EBITDA on an annualized basis.

And when benchmarking other ecommerce businesses. This conversion rate should be closer to 2% to 3% of web visitors converting to an aligner order, which is four to six times, where we are today.

The demand is here is incredible and we view closing the gap on our site conversion is one of the most significant near term opportunities ahead of us today.

While we've made continued strides to improve the journey and reduce the falloff between site visit and purchase the vision all along was to have the AI capabilities to use the power of your smartphone to get an accurate scan and reduce the friction points for customers to buy their new smile.

This is why we're currently in the process of finalizing development of our mobile <unk> scanning application, what we call our smile maker platform.

Which is our proprietary patent pending phone based scanning app.

That allows customers to see their draft custom treatment plan of how their teeth will move and how long it will take and then purchase within minutes of downloading a free up.

This technology delivers on the original vision of our founders from making it easy to get started with treatment and no other clear aligner option out there can do what we're developing.

It has taken years of modeling and machine learning with dozens of AI engineers and ph D. Scientists to finally get to this point.

This transformative experience takes the gauntlet between site visit and purchase it exists today out of the equation.

We believe the potential lift in conversion here is significant.

Our initial smile shop rollout in 2016 to new markets serves as a good reference point for what the opportunity is here.

Prior to shops customers only had impression kits to be able to start their journey.

With the introduction of small shops, we gave people an alternative channel with a better experience they provide a treatment plans more quickly.

And when we initially rolled out our shops, we immediately experienced more than a two times lift in sales net of the control markets with the same marketing.

Okay.

Similar to shops, but on a much greater scale, we believe the opportunity with our smile make our platform is going to be a significant growth catalyst for our business.

Again with no change in web traffic or marketing spend a 25 basis point increase in our site conversion would generate more than 200 million an additional line of revenue and up to $160 million in additional adjusted EBITDA on an annualized basis.

Mobile <unk> scanning capabilities, we're always part of the original vision and it had been a considerable part of our R&D efforts for more than three years.

From the beginning we knew that it would take years to capture critical mass of data for AI to work and now with more than $1 7 million smiles in more than 3 million treatment plans in our database. Our AI team has worked tirelessly to bring this to market.

This technology is right around the corner unmatched by any other clear aligner provider today and has the power to completely change the trajectory of our business and the experience of our customers.

Current project plans talking to launch later this year and one of our smaller international countries with a fast follower in the United States by the end of Q4 or early Q1.

We are extremely excited about this offering for the world to experience and we'll be keeping you updated on progress in the quarters ahead.

As you can see we've been able to deliver so much in a short period with our amazing team of accomplished executives fully committed and hardworking team members phds material scientists and AI engineers.

When we combine these elements grounded in innovation with rigorous financial discipline.

We believe we have a winning formula for achieving our full potential and maximizing shareholder value.

At the beginning of transforming S. D C from a marketing led company to drive growth to a technology innovation led company with a steady pipeline of new and innovative products to drive growth.

We plan on introducing new iterations and releases to our AI work as well as new materials for liners in oral care products.

All of which we will be discussing in an upcoming investor day, we plan to hold at our manufacturing facility in Nashville at the end of the year or first quarter of 2023.

I've said it many times before but I think it's worth repeating.

With an annual Tam of 500 million customers worldwide, and only 4% to 5% of them taking advantage of teeth straightening.

The opportunity here is massive.

Despite the limitations in serving those customers today, we've been able to help more than $1 7 million customers getting a smile they love while.

Saving them over $5 billion.

I'm, 100% committed to seeing this business succeed and look forward to sharing more on our progress.

With not only our smile make a platform partner network in S. D C plus but also across our innovation portfolio in the quarters ahead.

And now I'll turn the call over to Troy, who will provide more detail on our Q2 financial results and full year outlook Troy.

Thank you David.

I will jump right into 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.

Revenue for the second quarter was $126 million, which is a decrease of 17% sequentially and 28% on a year over year basis.

This was primarily driven by a worsening of the macroeconomic conditions and increasing inflation, which has been particularly difficult for our core customer.

We shipped approximately 63000 initial liners in the quarter down 18% sequentially.

At an a S P at 1917.

Our ASP increase of $27 over the first quarter was primarily driven by price increases implemented in the U S. In may.

And then the U K in late June .

With additional geographies targeted for increases during the second half of 2022.

Our year over year revenue results are largely reflected of what we've seen play out in the economy over the last 12 months combined with challenges associated with privacy changes coming from the hours 14 rollout that really started to take shape in Q2 of last year.

Providing some details on the other revenue items implicit price concessions were 10% of gross aligner revenue down from 11% in the first quarter.

We do expect that we see as a percentage of gross aligner revenue to trend back towards our historical levels between nine and 10%.

As we have seen no significant deterioration in the quality of the portfolio.

Fluctuation in our quarterly IPC percentage are impacted by the overall level of revenue recorded in the period as well as the rebalancing of reserves.

As we've mentioned in prior quarters, we maintain separate reserves for IPC and cancellations.

We analyze and regularly rebalance those reserves based on current information.

While our second quarter revenue was impacted by the continued macro headwinds affecting our customers. Our restructuring plan implemented in January is driving meaningful improvements in our cost structure and free cash flow.

About a 26 million sequential drop in revenue from the first quarter of 2022, we improved EBITDA by $11 million and improved free cash flow by $41 million.

Compared to the second quarter of 2021, despite a $48 million reduction in revenue, we saw less than a $1 million decrease in EBITDA and free cash flow was 17 million better.

Reserves and other adjustments, which includes impression kit revenue refunds and sales tax came in at 8% of gross aligner revenue compared to 7% in the first quarter.

Financing revenue, which is interest associated with our small pay program came in at approximately $9 million, which is in line with Q1, but down approximately 3 million year over year 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 $18 million or 14% of second quarter revenue.

Other revenue and adjustments were down sequentially due to the launch of our new whitening strips and strength of initial orders in the first quarter.

Now turning to smile pay in Q2, the share of initial Atlanta purchases financed through our smallpox program came in at approximately 61%, which is in line with historical levels.

Our small pay program is an important component to drive affordability with our customer base and overall small pay has continued to perform well.

With our delinquency rates in Q2 consistent with prior quarters.

Admittedly our core customer has had difficulty with the macro environment. The fact that we keep the card on file and have a low monthly payment gives us the confidence that small pay will continue to perform well.

Despite the macro headlines in the market, we have not seen an increase in our delinquency rates in our smile pay portfolio.

Turning to results on the cost out of the business grows.

Gross margin for the quarter was 73%, which was up 131 basis point increase from the first quarter.

Lower revenues that reduce operating leverage this gross margin increase was driven by improvements in labor efficiency, along with other cost control initiatives.

Our team will continue to focus on efficiencies to drive solid margins across the business and we will see further improvements as the top line returns to growth and we get the added benefit from operating leverage.

Marketing and selling expenses came in at $71 million or 57% of net revenue in the quarter compared to 64% of net revenue in the first quarter.

The sequential decrease as a percent of revenue is primarily the result of the heightened focus by our teams I'm driving increased marketing efficiency across platforms coming out of Q1 and into Q2, when we see demand typically soften.

A key focus for 2022 is seeking to find efficiency in our spend.

We have been experimenting more with pulsing spend with targeted dark weeks versus having an always on strategy and our top of funnel channels, such as TV, which allows us to take advantage of our 60% aided awareness and optimize our marketing spend.

It is important to keep in mind that digital marketing is a highly fluid process that requires daily discipline of spend analysis assessment and reallocation.

We're always testing and analyzing new channels and the impact of channel mix amongst all segments.

With a targeted focus on efficiency and quality leads we are continuing to calibrate stand across the diversified platform base in order to optimize continuously through the period to achieve the optimal balance of high funnel the bottom funnel aligner sales.

On small shops, we had 118 permanent locations as of quarter end and how the 114 pop up locations over the course of the quarter for a total of 232 location size with a net increase of eight shop locations from the first quarter.

The increase in shop locations with split evenly at for each between the U S and international markets.

We'll continue to strategically expand our shop footprint two locations that support incremental demand without cannibalizing sales from existing channels.

We're encouraged by the early results of this deployment strategy and expect to continue these measured shop expansions for the balance of the year.

We now have 690, <unk> North American partner network locations that are active or pending training, increasing our footprint from Q1.

Partner network team has been extremely focused on tightening the model to maximize engagement and productivity within active practices and we've seen positive momentum and productivity throughout the year.

As David mentioned, we have seen momentum through increases in submissions for practice, which has driven total submission growth of more than 75% over the first quarter and almost 170% versus Q4 of 2021.

Our growing partner network footprint, well not only to scale our operations for current submission trajectory.

Also serve as a key channel when we began scaling our S. T E plus premium service offering to the market in 2023.

General and administrative expenses were $72 million in Q2 compared to $71 million in the first quarter.

G&A expenses decreased 3 million, when excluding stock based compensation and depreciation and amortization costs quarter over quarter.

Excluding these same items when compared to the prior year G&A was down approximately $14 million as a result of cost savings initiatives taken back in January this year.

Other expenses include interest expense of $4 5 million of which $2 9 million is related to our new secured debt facility issued in April and $1 3 million is related to deferred loan costs associated with the convert we issued in 2021.

Additionally, one time costs related to the leasing lease abandonment and impairment and other store and restructuring costs was $3 2 million, consisting primarily of 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.

We also incurred $5 8 million and other expenses primarily related to the impact of unrealized foreign currency translation adjustments.

All of the above produced adjusted EBITDA of negative $23 million in the second quarter, which is an $11 million improvement over the first quarter. Despite a $26 million decrease in revenue.

Our second quarter net loss was 65 million.

Third to our Q1 2022 net loss of $73 million.

Breaking out adjusted EBITDA regionally the U S and Canada came in at negative $13 million and rest of world adjusted EBITDA was negative $10 million.

Moving to the balance sheet, we ended the second quarter with $158 million in cash and cash equivalents.

22 million in net accounts receivable and 65 million drawn on our new $255 million debt facility with H P. S.

Cash from operations for the second quarter was negative $18 million.

Cash spent on investing.

For the second quarter was also 18 nine free.

Free cash flow for the second quarter defined as cash from operations less cash from investing was negative $36 million, which is a $41 million improvement over the first quarter of 2022.

This amount represents the strongest free cash flow in any quarter since Q3 of 2020 as the cost saving and efficiency measures. We have been discussing that started to show effects.

In fact, we delivered better free cash flow than Q1 of 2021, when we reported our best revenue quarter ever at over $199 million.

As we have discussed we continue to see macroeconomic challenges that are impacting our customers' willingness to make a purchase decision.

Without any signals of improvement in the near term.

Our outlook shows a trajectory of lower aligner orders for the remainder of 2022.

Based on this view, we are revising our full year 2022 guidance, which assumes no material impact from currency fluctuations and includes all incremental investments for the year associated with partner network and incremental shop expansion.

This guidance also does not include any material impact from the launch of our smile make or platform in the back half of the year.

Small maker could have a meaningful impact on our conversion rate as the purchase of the liners has accelerated and the customer journey, reducing between one to three weeks of time between scan to treatment plan review and purchase.

This will help to effectively manage funnel drop offs, which should lead to impactful potential sales increases.

You can see this funnel conversion highlighted in our earnings deck posted on our Investor website.

This increase in conversion and requires no additional marketing so any increase will impact EBITDA at a very efficient rate.

For full year 'twenty, two we now expect to deliver revenue between 450 and $500 million.

Gross margin between 69, 5% to 71, 5% based on reduced operating leverage due to lower top line.

Adjusted EBITDA between negative $180 million and negative $140 million driven mainly by topline results.

Our capex outlook remains the same at $60 million to $70 million and our onetime costs from our reorganization actions in January remains the same between 20 and $25 million.

We have added guidance on our year end cash balance with a range of $120 million to $160 million, which is dictated by our financial results and includes expected borrowings on our existing credit facility.

While the second quarter came in at the bottom of our guidance range. We have taken some significant measures to strengthen our balance sheet with a new credit facility that was put in place in early Q2.

We're also on track with the cost cutting measures we initiated at the beginning of the year to rightsize the organization and have put in place additional efficiency initiatives to lower costs to offset the impacts of lower volumes.

All of these initiatives have played a role in contributing to what we're experiencing with better adjusted EBITDA trends in the quarter.

In this very challenging environment, we are extremely focused on operating efficiency to offset the impact of the macroeconomic environment.

We are also on the cusp of launching a couple of very important new initiatives and our <unk> platform and S. D C plus which could have a material impact on the company results.

I would like to turn the call back over to David for some closing remarks.

Thanks Troy.

The macro business challenges, we've been facing I'm extremely encouraged by what's ahead in the innovation, we're bringing to market.

From the very beginning of our vision has been to allow people to start the journey to get a smile. They love from a device in the palm of their hand.

We look forward to sharing more exciting updates regarding our technology innovations, including our smile make a platform an STC plus along with other innovations over the coming months.

For joining today and with that I'll turn the call back over to the operator for questions and answers.

Thank you we will now be conducting a question and answer session I 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 if you would like to remove your question from the queue for participants using speaker equipment may be necessary to pick up your handset before pressing the star keys, one moment. Please while we poll for your questions.

Our first questions come from the line of Jon Block with Stifel. Please proceed with your questions.

Thanks, guys. Good morning, Troy, maybe one for you.

Several questions to it and David then I'll circle back Troy the the one point to 160 cashier and.

Does that assume the full draw down on the $2 55 securitization facility I think I've got that number right.

And then let me just tack on a couple of more just any thoughts around three Q4 Q Rev EBITDA cadence.

And maybe one more to just tack on that the 2023 EBITDA positive that I think you guys have previously alluded to is that still intact and then I'll just ask my follow up to David after thanks.

Yeah to start with the cash balance so yeah 120 to 160 is what we're targeting.

At the end of the year. It does include an assumption of some borrowings on our facility.

But a lot of things will go into that in the end number including you know kind of what the revenue number is for the back half of the year as well as some of the cost savings initiatives that we're working on as well.

Also we're being opportunistic in the marketplace around what could be available. So we've kept.

Kind of our our contacts in place and to the extent that we can.

Drive more liquidity in the marketplace, we will do that so there's a lot of factors that go into that does include some draws I would say, but I don't think it takes all of that and certainly a lot of other factors involved to get to the full cash balance.

From a.

Cadence standpoint, I would say, we don't generally give quarterly guidance, but I would say you can you can kind of split it up pretty evenly I would say, but I don't know depending on how the market overall market goes and what the macroeconomic looks like it could be a little different between quarters, but I think he can safely kind of split it.

And then your final question was on 23, EBITA I believe obviously.

We're still.

Sticking to our long term guidance, which includes the mid teens CAGR that goes out to 'twenty six.

We do feel like that's relatively conservative when we think about getting back to 2019 volumes by 2026, but it's not going to be completely linear.

Big initiatives that we're launching towards the back half of this year, which are which we believe can be meaningful to the impact on 'twenty three our earnings and I think as we get closer to a 23, we'll be able to give more specific guidance about that EBITDA number for 'twenty three but right now we're sticking with our our longer term guidance.

Okay very helpful and maybe David just on the follow up you talked to the trends throughout the quarter. Your cases were down I think high teens sequentially.

Another you know the biggest player was flat sequentially give or take there was a smaller player up 20% to 30% Q over Q.

Maybe your average house hold income is there's a little bit lower than the others, but it just seems very different from some of the figures we've seen from the other major clear aligner players in the industry. So maybe if you can speak to that is this all a function of your lower end household income.

Income consumer or is there more to it around the N. P. S. You know on the mend and a couple other things thanks guys.

Yes, John .

It definitely is not.

<unk> of the M. P S. We quickly.

Corrected that actually as I mentioned in my prepared remarks, with our contact center and we'll report on that New NPS score in Q3. It really is a function of our core demographic is $65000 a year, which is was hit the hardest by this compounded inflation effect and we saw it accelerate in Q2 as we stated.

When you talk about comparison.

Our company is in the clear aligner space, they're targeting a much higher income consumer.

<unk> $5000 plus a S. P. So there is a difference.

Part of our new initiative to go after that higher household income will help we're not we're not abandoning our core customer.

We think especially with the new tools that we have in our <unk> platform, we're going to be able to convert at a higher rate even if even when demand is down the conversion will be higher if you don't have to go through that gauntlet as we talked about with kits and scans. So it's finally here, it's very exciting times for US we've been waiting for this for years it was always.

The founding vision of how to go to market using this kind of technology and I'll tell you Jonathan other businesses I've disruptive we've had the same issues, where it takes time to develop the tools that fit your go to market strategy and in order to grow prior to having these innovative tools, we were more of a marketing led company and.

What youre seeing is the beginning shift. This is the first time, we're talking about our smile maker platform with.

With the leading mobile <unk> scanning device youre going to Youre going to see a shift now from the.

Our ability to grow which has been marketing led the innovation lab, there's a pipeline of innovations that will continue.

To come out in the marketplace.

The scanning side, a material size new materials for a liners all kinds of new stuff.

Which is truly what this company was built for the innovation and when we have you in for our Investor day, which it'll be the first one we've had since we went public in 2019, you'll see we're gonna open the hood, you're going to see and I think you'll be really surprised that the innovations it's technology our our.

Factoring facility in our Gen two.

It can be very exciting for our investors and analysts to come in and take a look.

That's great helpful color. Thanks, guys.

Thank you. Our next question is coming from the line of Robbie Marcus with Jpmorgan. Please proceed with your questions.

Hi, This is actually Lili on for Robbie. Thanks, So much for taking the question I thought you guys implemented a price increase in the quarter. So just given how sensitive your core demographic has been to these inflationary headwinds have you seen that price increase effect demand and how should we be thinking about price trending over the rest of the year.

Yeah, I can take that one so it was a 4% to 5% price increase depending on the country. It's still not fully rolled out we spoke to more countries. It is rolled out in the U S and we didn't see any type of conversion.

Detriment at all.

The smile pay side, which is really about affordability.

We kept the $89 per month, and we just extended two months of the terms. So instead of 24 months is 26 months. So for the price conscious consumer still very affordable, it's the least costly option out there if they want to straighten your teeth.

And prior to Covid, we have been taking regular price increases and we saw the exact same thing when we took at this time no no falloff in conversion.

At the end of the day demand is down right, so and we've adjusted our marketing spend accordingly.

People just aren't spending on discretionary items, especially goods versus services at 65000, all your customer I was doing everything they can with almost 10% inflation now to stay on top of their expenses. So.

Demand down conversion about the same and so.

As far as price increase didn't hurt the business at all.

Got it that's helpful and then as a follow up moving into the higher income demographic is obviously, a big strategic except for it is in and puts you up against some of the bigger competitor is more directly. So are there any metrics you can share on the success of the challenger campaign, so far and how well you've been winning in this higher end.

Market. Thanks, so much.

Yes, the challenge your campaign with something that was really a marketing story, so really alert.

The world in the consumer who is interested in teeth straightening that youre paying a three time markup for a similar type of service, where we did find it through as we stated it's really intense qual and Quant research that consumer likes to telehealth platform, but doesn't want to have a pure telehealth play.

I need to play in that market. So the higher income consumers to be able to have a physical location, but they can go to especially to start their journey. They want they want to see a GPU or an ortho and an all in an office.

Get a and.

An exam and then use that telehealth platform. In addition to the brick and mortar for convenience.

For added service 24, seven coverage and so that's what our our STC plus does it's it's a premium price.

First time since we launched we will have two different price points with our $2000 telehealth pure telehealth play an S. D. C will have a $3900 price point and that was tested in our research as well what is the right price point consumers felt that was still a value to the current offerings out there at $5000 plus because what's you're getting you're getting the exact service that youre getting there.

The brick and mortar.

Doctor involvement you can go if you've never want it.

Interact with our Telehealth platform you don't have to there's no requirement, but what we what we saw in the researches that people intend to start their journey.

The brick and mortar get introduced to the Doctor. Then also you'll have a second doctor on your case or telehealth ortho or G. P.

And then a dedicated success team 20.

$24 seven.

Excess ability to upload and monitor yourself from home. So there is no need to go back into that office, if you desire to do so so.

We think the research shows that this is the offering that the consumer wants.

This dual access to both a brick and mortar Anatol I hopefully.

Great. Thank you.

Thank you our next questions come from the line of Erin Wright with Morgan Stanley . Please proceed with your questions.

Great. Thanks can you speak to the traction with your partner network. It looks like it ticked slightly higher quarter over quarter, and the stickiness of those relationships and the feedback and engagement level of the practitioners and how do you think the practitioner is my sign two innovation like this my Omega platform and in just that.

What's happened is that you still need a separate scan I guess, how did the logistics work and what.

What do you need in terms of regulatory approval and end and when will that materialized for you in terms of meaningful financial contribution.

Yeah, a lot in that question there and so.

Let's start with the partner network locations. So part of networks was launched ahead of S. D. C. Pluses in the research that we did on that high income consumer was designed to to get.

The current GP market get some of their patients and to Smile direct club.

Now that we have S. D C plus and that is scheduled to launch in select D. M. As we're launching four D M. As at the end of the year.

Partner network is really morphed into smile direct into STC, plus it's really one initiative now so every office.

That we sign up we will have two offerings, one would be exactly the telehealth.

She play which is the current partner network and then they'll also be able to offer but $3900.

Dual approach, where we're that G. P. In that office will play a bigger role in servicing that patient.

Fees are much higher to the office. We also did research on that both existing GPS that are interpreting that relocation of potential G. P's and it came back very very favorable as far as.

They added fees.

And the ability for us to.

Send new leads into those offices every single STC plus customer that comes to our site that wants to transact will start their journey and one of those GP offices. So there's a lot of lead flow and higher income lead flow that is gonna be once those offices, so that was very appealing to them as well.

As far as the small make or platform that you.

You asked about regulatory approval. So what this is is where we're able to take that.

Through your smartphone and video of your Smile It takes about a minute.

About nine poses we call it and will demonstrate that to you.

Months ahead.

And what it does is it.

Is getting all of your teeth to beat for the ability for us to take a two D image into a three D image, which then allows us to create that treatment plan that everyone knows in this industry now that's driven plan today is enough.

It has enough fidelity to allow the customer to see how their teeth are going to move it looks identical to what they would get after doing an impression kit or intra oral scan.

At the dentist office.

It has the three D viewer. It shows your top Archibald March and you can see how your teeth will move over time and also tells you the duration of how long it's going to take to move your T. What it doesn't do today is it it doesn't give you enough detail to make an aligner.

<unk> do you need to close to a 100 microns of detail so that aligner fits snugly around her teeth.

After the consumer scans or T. It takes about a minute, they're easy to do they're going to get there.

It will be called draft treatment plan, but it will be almost identical to what the final what we call smile prescription planting will be which is signed off by the doctor.

Which allows us to make those a liners.

The consumer will be able to buy because that's what they're after they have to understand what the new smiles will look like how long is it going to take so the ability to buy moves way up funnel as we illustrated in our investor deck.

One to three weeks today, because you've got order cats, you've got to do the Kid you Gotta do it right got upload your photos to get that treatment plants today after scanning with our mobile <unk> scanning app theyre going to be able to get their custom treatment plan within minutes and then the next step is bye bye with Paypal buy with Apple pay and <unk>.

Credit card and by airliners and are off to the races, where we do need to do is after they buy.

We will we will then send out an impression kit today to get a more high definition or high fidelity.

<unk>.

Order for us to make the liners, but their orders are in place we commit to a certain date as long as they get that impression kit back in time.

That will do that.

Our plans are to continue to iterate on this small maker platform. The next 2.0 version will be where we don't need to do that kit. We have another interim step to get up more high fidelity scan and then eventually what we call the Holy Grail would be that we won't have to do anything at all it's all about just more data.

That's more machine learning.

Being able to take a fraction of that back molar and recreate it.

With accuracy enough to make it a liner.

Yeah.

This is a good first step this is revolutionary in the industry.

Consumers today can't get see what the new salons, who looked like unless they completed an impression kit or go to a local brick and mortar office within an oral scanner to see and that and then have to wait the other part of the the AI. That's really compelling is the fact that we automated the stream of plaintiff classes today or prior to today before this filemaker platform.

It takes about 30 minutes for a CAD Cam setup tech two to create a treatment plan most of them are in Costa Rica.

We have a big Labor force there.

We have automated that and we have two AI had been able to create that treatment plan within a matter of minutes. If we weren't able to do that then this whole thing wouldn't work, whereas the consumer wouldn't be able to see instantly.

What their new Smile will look like in and be able to make their buying decisions. So that's another huge element.

So the success in so I'll make a platform.

Okay. Thanks, and you mentioned splitting third quarter fourth quarter evenly from a topline perspective, I believe but like what gives you visibility on that is that assume an incrementally worse macro backdrop for you and then what more can you do from a cost discipline standpoint, if we do.

That macro backdrop.

From here thanks.

Yeah, I can take that I mean.

I think what we've proven is that we've been able to be very flexible. We're looking at a lot of cost savings initiatives. We started the year with $120 million savings initiative, we're well on track for that we continue to look at efficiency measures across the organization to find additional savings certainly.

I would say general guidance around how the split up Q3 and Q4, but we are we really didn't give that guidance overall.

But I'd say, if you look at what the overall for the year is related to EBITDA as well as revenue. We don't really expect the end of the year to get any better we did see some decline obviously between may and June and into July as well.

So it's really a little bit of an unknown and that's why we gave the guidance range that we did but it's hard to predict right now with what's going on in 40 year highs and inflation and things like that really see the stress on our consumer to kind of predict exactly where Q3 and Q4 will shake out.

Okay, great. Thank you.

Thank you. Our next question is coming from the line of Joe <unk> with William Blair. Please proceed with your questions.

Yeah, Hi, Thanks, a lot I'm, just trying to sort of understand guidance here, you're getting the sales outlook and the gross margin, but there seems to be a pretty heavy lifting to boil. It all down to your EBITDA and sorry between marketing and sort of G&A, how should we think about where to sort of pause at some of that cost pressure.

Yeah, I can take that so coming.

Coming into the year, we gave the full year guidance, we saw Q1 come in with a lift over Q4, we felt really good about it what.

What we saw again in early May and then starting to come into June and July that is that consistent decline, but we focused on efficiency throughout.

And looking at cost savings through that through the end of the year I think one of those triggers we can pull based on where.

Where we see the sales coming in is certainly marketing and I think what you saw in Q2 was a better EBITDA results better free cash flow results and much of that came from from efficiency measures inside of marketing as well. So we typically don't give the breakout between G&A and and marketing are from an overall expense standpoint, but rest assured that where we're at.

Looking at all of those as potential levers depending on how sales come in over the back half of the year as to where we pull those triggers to to reduce cost and and you know kind of save EBITDA, which has kind of been the trend we've seen.

Coming into Q2, we really feel good about the cost initiatives that we put in place and our ability to execute on those we will consider it.

<unk> continued to be a very cost conscious through the rest of the year to make sure that we lessened the impact on EBITDA of any additional impacts from from negative sales trends.

Okay, but I guess my question is it seems like just to get to the EBITDA guidance you'd have to assume almost Pete costs for both those line items and my thinking about that wrong is there sort of onetime items items that are embedded in that outlook.

But we do have some investments and partner network and small shops that we outlined in the investor deck.

But overall, yes, we have a very flex.

Flexible environment, there's a lot of mixed there are some fixed costs there, but we've taken a lot of those out. So you do see a lot of flow through.

From the negative sales trends all the way to EBITDA on the other side of that is these initiatives are able to.

To provide additional revenue in the back half of the year and certainly into 2023, we'll see the exact opposite of that which is that those that that revenue will flow through at a very efficient EBITDA rate as well. So I think one of the things we talked about was even at a 25 basis point change in our conversion rate would drive an additional $200 million in sales and about.

$160 million in EBITA and it also works the opposite way with some themselves as we've taken.

Cost out of the business down to just what is really the variable cost that are left.

Thank you.

Yeah.

Thank you. Our next question is coming from the line of Michael Raskin with Bank of America. Please proceed with your questions.

Great. Thanks for thanks for taking the question I wanted to follow up on something you touched on a couple of times, but the small maker platform.

Could you just help us triangulate that 25 basis point lift in conversion.

Why is that the right jumping off point I mean sort.

Sort of what would work can be done to show that that's the uplift that could be expected.

And sort of as you know is there further upside to that over time is that the second generation that you talked about you know having be completely.

Completely cutting out the impression kit, if that's what's necessary to achieve that just sort of the timing and the rationale for that metric.

Yeah, Michael I can take that so first of all and it's on slide 10 of our Investor deck, you can see the funnel current state versus small maker state. That's 25 basis point was an illustrative example, now it wasn't just finger in the year and said Hey, what if we get a 25% basis point improvement. It was based on current state are called action today is my candidate.

That's all that started lead Gen. Workhorse, that's helped people typically start to see if there are candidates.

Yeah.

Very simple assessment or liquids.

The other side of it they they they hit a lander that says either you or you arent and then your next step is to buy a kit or book a scan.

Today or with the new Smile maker, what's going to happen is the call to action is sheer new smile download our free app and within 60 seconds.

You'll get you'll see your new smile, well show them, the App and in full view how cool. It is all the AI technology as you can see that one of the slides.

It took some snapshots from the video.

So what what Windows and we just said hey, if X percentage of people today are doing the smile assessment, let's just assume the same percentage of people do the.

Take the or download the free app and due to the mobile <unk> scan okay.

Actually a more compelling thing youre getting more out of it then you are just Uh huh.

Green light or Red light, you are Canada, or you're not so, but we just assume let's just say it's the same.

And then we just said okay now from there we can convert they can actually buy their liners. They don't have to book, a scan or buy a kit and go through that whole gauntlet.

To get it back or show up at the shop, and then help us make our shipment plan for them.

We applied a pretty modest conversion rate the number of downloads that we're getting although they're not all going to buy right. There on the site.

Like not all of them when they get to the end of the Smile assessment will buy a kit or book a scan.

Good chunk of them do and then the rest come through CRM or our contact center.

But at the end of the day, we said hey, they have the ability to buy now they can see their new smile with your customer treatment plant know exactly how long it's going to take we've made it very easy with Paypal options and if you look at other ecommerce companies.

You know most most e-commerce businesses that I've been associated with over the years, but 2% to 5%.

Visitor traffic conversion, depending on the E S P and the complexity, but we're at 5% right now and it's not because we are at 0.5% of our demand. The demand is pretty good getting 150 to 200000 visitors a day, it's pretty darn. Good people are interested in this product. What happens is we made it very difficult for them to get to the finish line.

To buy their liners once they have the treatment plant in our current model the conversion is extremely high.

It's surprisingly high.

Once again to get to that 25 basis point improvement, we didn't apply that same conversion not even close.

We just made some assumptions and anything can happen I mean, it could be.

It could be something less than that it could be something much higher than that as we said if you get up into the normal e-commerce conversion when the person's emotionally charge and they are excited about the product when they are on the site and they can see what the new their new smiles will look like what will that conversion, but time will tell but it's it's around the corner. You know this is not something that we jumped up.

As a as a way to fix the current macro environment. This is this was something that we looked at doing when we founded the company how difficult was it going to be to use your smartphone.

The <unk> to get a treatment plan to buy your liners and it's taken all of these years Fortunately for us.

When it comes to AI and machine learning you don't know when it's gonna be available.

Not like a software and a cadence of releases and you can you can time it.

It just hit sometimes after a certain number of models.

Teams worked on and for US it hit back in March.

A very exciting time in the company and then we.

Company has been hyper focused on getting this out to market, we have to rework all of our websites all of our marketing feature.

Feature small makeup platform in all of our advertising and like we said the plan is to.

We're going to launch us in.

In Q4, and a smaller international country work out some of the bugs with a fast follow on bi.

By the end of the year or if not very early in Q1 in the U S and we'll see what those numbers are we'll share those numbers, but.

But they can be meaningfully bigger than us.

Time will tell.

Okay.

Great I appreciate all the color and then follow up I had was on just going back to the global macro condition and the situation today I think you'd indicated that you expect that to linger for the rest of the year could you talk us through a scenario where it continues to remain under pressure next year I think for bank of America, our base assumption.

Now just among our strategy is that you know.

The economic conditions.

Persist for at least the first half of next year, possibly the entire year. So how would that factor into your plans you talked about flexibility in your cost base sort of walk us through the scenarios. If this is a this is around for another year year and a half the challenges to the consumer.

Yeah, Yeah, yeah, Thanks, Michael can chime in.

Any color if you want but we.

We have two levers to pull one is on the cost savings side, which we started those initiatives in Q1 and you can see in Q2 here, even though the top line wasn't there. It did pan out we were able to preserve cash we had we had the least amount of cash burn that we've had even with our record Q1.

We can now play with we found a very efficient way to play with marketing, which is our biggest operating expense lines.

Fliting not always on we have 60% aided awareness, we don't have to be on 52 weeks a year and all the different channels that we have so we've been able to pull back.

Save some money and not have an effect.

Topline or.

Actually with the bottom line and cash so we'll continue with the cost initiatives. We also have a lot of things that we're working with our vendors and our software suppliers.

Guinea better cost there so we have a constant focus.

Proving the operating expense structure within this company.

Other side of it.

Is that the two and they are the only initiatives in the company right. There are no other initiatives other than small maker platform, an STC plus in both those counter at the macro environment. So we're both going to launch by the end of the year, we're going to start to see results and hopefully both work the way that we think will work.

Based on the research that we've done in the conversion funnel improvements that we think we're going to get.

Which will really happen.

With the macro because.

So she pluses going after that higher income consumer, which you know.

It is doing better than our 60000 are consumer in this environment. So that's going to help but even on the conversion side, even if a lower demand all of a sudden that demand goes from under 50000 visitors a day to 100000, if you're still converting at 25% or 25 Bips better.

It's going to significantly help.

Your cash situation your EBIT situations. So we're fortunate that we have both these things that we've been working on for quite some time.

That are going to launch it in the market.

So weather.

The economy gets better or not if either or both of those initiatives start to bear fruit, it's really going to help.

Our total revenue and EBITDA profile.

Okay, great Yeah, that's it thank you.

Those also come with very.

Very little additional marketing spend if any.

Really able to leverage those two initiatives for higher sales with very little additional marketing.

Great. Thanks, guys.

Thank you. Our next question is coming from the line of Laura Champine with loop capital. Please proceed with your questions.

Thanks for taking my question the technology to them two to replace the kits when does that roll out in full and what kind of marketing spend do you intend to support that with.

Yes, so it's going to launch in Q4, and the international country, we're not identifying their country will obviously hear about it when it does it's a smaller country.

But we'll get good learnings from it.

And we.

We'll see what kind of technical bugs, we have we're trying to understand what percentage of the customer base will be able to scan with their smartphone whether its android or iPhone and we're not going back to all the early early versions, but we would like to capture about 95% of the people will be able to get a good accurate scan and the treatment plan fast follow so that'll.

That'll happen in Q4, our anticipation is 60 days 45 to 60 days later, we will launch in the U S. As the next country.

And then U K and Canada will follow on in Q1, and Q2, but we're gonna start to see results in Q4 here from this initiative.

And.

Obviously very excited to report on that.

And so.

You'll hear more about that after I forgot the second part of your second parts of the question. Besides the launch timing what level of marketing spend do you intend to use for it.

Yeah. So today, it's the way we built the P&L and the forecast is the same marketing spend right because when we market out there whether it's T V or Facebook search the consumer doesn't necessarily know what to expect.

When they get to the site, what what do I have to do to engage with the brand well.

Slowly learned that Oh, I got a I got to order an impression kit or I got a book a scan.

And go to a smile shop.

What they're going to learn with the same marketing spend is that you can interact with the brand today.

This cool technology.

Phone scanning device.

And see what your new smiles going to look like play with it it's got six different views spins around a 360 degree fashion. So we.

We don't anticipate a higher marketing spend there there is a lot of debate internally that we would actually be able to stretch our marketing further because the same marketing spend showcasing this technology could get more people to interact with the brand versus today, it's all about convenience price and come to Smile direct club could started for free.

<unk> versus we will now start to showcase the scanning technology in our advertising show them, what they'll get in a full blown treatment plan and how long it'll take to get through the smile, which could.

Have your marketing dollars stretch further and get more people to the site with the same spend.

Got it and then just a housekeeping thing where do you expect equity based compensation to be in the back half.

Yes, we typically don't break that down slightly but I would say we've had some volatility in the first part of the year a lot of that had to do with the restructuring initiatives that we were that we were operating under so it was a little lower in this quarter I'd say, our general run rate is probably in the more like in the $10 million range, but we've seen some.

Volatility just because of the turnover we have are related to some of the cost changes that we've made.

Got it thank you.

Thank you our final questions come from the line of Dylan Carden with William Blair. Please proceed with your questions.

Hey, I really appreciate the follow up here I realize that we haven't spoken to and maybe you won't but the economics on the STC plus you know the.

<unk> thousand 900, you know how youre booking that on your end from revenue standpoint sharing it with your partner any color you can give on that.

Yeah.

Troy you can you can follow up but we're not getting a lot of detail, but it is significantly more to the partner network G. P office is.

Our current partner network offering so a big chunk of that extra $2000.

As for the Doctor. There's also costs that we have for the success team and also.

Four sets of retainers that are included with it so there's some additional costs, but the net net.

Margin, there's a lot more margin increase out of that $2000 on the topline that goes to S. D. C. I don't know if were sharing out the exact percentage of that choice.

We estimate to be about 30%, so we will share with that.

Obviously, the G. P will get a bigger chunk of that which will give them incentive to get excited about the program, but should flow through at about 30%.

30% to you.

<unk> thousand $900.

Right understood often really appreciate it guys. Thanks.

Thank you we have reached the end of our question and answer session. This does conclude today's teleconference. We appreciate your participation you may disconnect your lines at this time.

Enjoy the rest of your day.