Q3 2022 Airsculpt Technologies Inc Earnings Call

[music].

Good morning, and welcome to Air Sculpt Technologies third quarter 2022 earnings Conference call. Currently all participants are in a listen only mode. As a reminder, today's call is being recorded and we have allocated one hour for prepared remarks and Q&A.

At this time I'd like to turn the conference over to Dennis Steen, Chief Financial Officer at Air Sculpt technologies. Thank you you may begin.

Good morning, everyone and thanks for joining us to discuss air Sculpt Technologies' results for the third quarter. Joining me on the call today is our founder and Chief Executive Officer, Dr. Erin Roberts, and our Chief operating Officer Rockville Horse.

Before we begin I would like to remind you that this conference call may include forward looking statements.

These statements may include our future expectations regarding financial results and guidance market opportunities and our growth.

Risks and uncertainties that may impact these statements and could cause actual future results to differ materially from currently projected results are described in last night's press release and the reports we have filed with the SEC all of which can be found on our website at investors <unk> elite body Sculpsure dotcom, we undertake no obligation to revise or update any forward looking.

Statements or information, except as required by law.

During our call today, we will also reference certain non-GAAP financial measures, we use non-GAAP measures.

And some of our financial discussion because we believe they are more accurately represent the true operational performance and underlying results of our business.

A reconciliation of these measures can be found in our earnings release filed last night and in our most recent quarterly report when filed which will also be available on our website with that I'll turn the call over to Dr. Rolla Erin.

Good morning, and thank you for joining us on the call today before.

Before we discuss the quarter I wanted to take a moment to recognize all the veterans that have served our great country. We truly appreciate all that you do and thank you for your dedication to keeping our country safe.

Recently, we celebrated our one year anniversary as a publicly traded company.

We've accomplished many things this past year from performing over 30000 procedures to expanding our footprint across the U S and soon to be Canada.

While also paying a meaningful special dividend as a way of deploying our capital allocation strategy.

For the third quarter I want to call out three key items that impacted our results.

First the timing of opening our new de Novo locations, specifically, Philadelphia and Boston.

Other than expected we.

We had anticipated opening Boston in the second quarter. It opened in the third.

We are excited to open Philadelphia. This week, we had anticipated the opening in the third quarter.

Second several surgeons in some of our larger more mature centers took extended vacations well.

While we forecasted earn normal seasonal impact for the third quarter. These vacations caused a more pronounced seasonality effect than we typically see we.

We do expect a significant number of these cases to be deferred to future periods and we are already seeing some of those cases returned in the fourth quarter.

Third nursing costs in the quarter as well as year to date have run higher than we anticipated.

Dennis will provide more details in the financial review I would like to point out that we made the decision to increase investment in our clinical infrastructure.

<unk> are central to that initiative.

Although there is a near term impact to margins as a result of this investment we believe it is a strategic longer term investment consistent with our commitment to quality.

Moving to our de Novo expansion strategy I'm very excited to report that our first international Centre in Toronto, Canada.

Scheduled to open at the end of this month, we still have a vast number of markets to move into and we look forward to bringing air scope further across the U S and across the globe.

As for the Air scope brand, we continue to invest heavily in brand awareness and other marketing related activities. You may recall from last quarter's call, our new chief marketing officers started in July .

We believe the investments we've been making in this area and the work. She is doing will result in meaningful growth for us in the future.

We have also been very active in building out our team to support our rapid growth both for new domestic sites and for our international expansion plans. We are focused on reinforcing our critical infrastructure and related nursing and training teams to sustain our long term growth plans.

Is extremely important for us to enhance our training and oversight capabilities. So that we can not only grow rapidly, but do so while maintaining safety and quality to protect their patients and our brand.

As mentioned in our second quarter call. We continue to add enhancements to the Air School procedure. During the quarter. We began offering are scope plus at most of our centers are scope plus provides enhanced skin tightening and we recently began a rollout of air sculpt smooth, which offers a treatment for the long term reduction of the appear.

In cellulite.

We take pride in continuing to offer new service offerings that are effective and provide tremendous results to our patients.

I'm sure. Some of you are interested in the status of very health Research study.

As previously reported we are undertaking a research study on the effects of our procedures have on the metabolic parameters of our patients I'm happy to say that we have received approval from the institutional review board to begin enrolling patients, which we plan to do this month and we expect the results of the study to be completed in 2023.

With that I will turn the call over to Ron to discuss more about our operations and de Novo activities Ron.

Thank you Dr. Rhonda and good morning, everyone as Dr. <unk> mentioned, our de Novo openings. This year were delayed relative to our expectations. However, we expect meaningful growth from these sites as they mature as a reminder, it takes approximately 24 months for a new center to reach full maturity. Our most recent de novo opening.

<unk> performed its first procedures this week.

We are excited about opening our Toronto office at the end of the month and believe that it will be an exceptional market for us.

Providing meaningful revenue growth as it ramps up this opening has taken a bit longer than our typical domestic center I want to thank our team for their efforts in getting the center across the finish line. Once Toronto opened this will bring our total number of center openings for the year before which is in line with our guidance for the year.

Bring our total center count to 22.

Our pipeline of new markets continues to grow as well, we announced last quarter that Austin and Irvine will be our next two domestic centers. We expect these centers to open in the first half of 2023.

We are now, adding Raleigh, North Carolina, and San Jose, California, as additional locations, we expect to open in 2023, and we look forward to sharing more about our growth strategy on our year end call.

Since our founding we've been committed to providing exceptional quality and care to the patients we serve as Dr. Raj mentioned, we made several investments this year targeted towards our clinical development and operational teams. These investments were made to prepare the company for accelerated growth and while it's had an impact on.

Our margins in the current year, we are confident we will achieve margin expansion by leveraging these costs as we continue to open new centers and grow our revenues with that I'll turn it back over to Dennis to provide additional details on our financial results Dennis.

Thanks, Ron.

Revenue for the quarter was $38 9 million or 12, 2% increase over the prior year quarter, and our cases increased approximately 5%.

The increase is primarily the result of adding four de novo centers over the prior year quarter, which expanded our footprint to 20 centers as of September 30th 2022.

Our average revenue per case for the quarter was 13500, a 7% increase over the previous year's quarter and we are pleased that our average revenue per case on a sequential basis has remained consistent.

Our same center revenue decreased approximately 2% over the prior period as Dr. Robin's remarks, we had a meaningful number of physicians, who took extended vacations during the quarter and our more mature centers, which impacted our same store growth. We do expect many of these cases to be deferred into future periods and we have started to see an uptick in our sales early in the fourth quarter.

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Our cost of services as a percentage of revenue was 38, 3% versus 32, 9% in the same period last year. This increase is primarily related to the addition of clinical and support resources. We've added this year plus an increase in hourly wages as we seek to recruit and retain our nursing staff relative.

Relative to our expectations. The combined impact was approximately $800000 in the third quarter and approximately $2 8 million for the year.

As Ron mentioned, we expect meaningful improvement in our margins as our revenue growth continues and we begin to leverage some of these costs that are more fixed in nature.

Our margins in the quarter were also impacted approximately 140 basis points due to the de novo openings in the past year and we expect to achieve margin expansion as these centers mature as a reminder, we have a highly variable cost model, our physician and supply costs, which comprise most of our cost of service expense are 100% variable as we don't incur.

These costs until the cases performed.

Customer acquisition costs was approximately 2650 for the quarter.

We continue to invest in brand awareness activities during the quarter and expect to achieve meaningful revenue increases in future periods as a result.

On a sequential basis, our total cash spent on acquisition costs was mostly unchanged. So the increase in our customer acquisition costs was due to the sequential volume decline.

Our adjusted EBITDA was $9 2 million for the quarter.

Adjusted EBITDA included approximately $1 8 million of public company related costs, which did not exist in the prior year quarter. As we were a private company going forward year over year public company costs should be more comparable now that we have been public for a full year as revenues continue to grow we anticipate a return to adjusted EBITDA margins to be greater than 30% as well.

Continue to leverage our fixed overhead costs.

Moving onto liquidity, our cash position as of September 30th 2022 was $7 $6 million and our $5 million revolver remains undrawn. Our long term debt was approximately $83 million and our leverage ratio at the end of the quarter was calculated under our credit agreement was one seven times.

I'm also pleased to announce that earlier this week, we closed on a new $90 million credit facility, which consists of 85 million of term loans and a $5 million revolver. The proceeds were used to pay off our existing credit facility, which was set to mature in October of 2023.

This new agreement will reduce our cash interest by approximately 2 million annually on a go forward basis. It has a five year maturity with no prepayment penalties given the current economic environment. We are very pleased to have completed this transaction with more favorable terms than our previous facility and it positions us well to continue to execute on our strategic growth plans.

Yes.

Cash flow from operations for the quarter was 329000.

Our cash from operations for the quarter was impacted by our third quarter estimated cash tax payments of approximately $4 $2 million.

We saw an uptick in our cash interest on a sequential basis of approximately $300000 due to the rise in interest rates, while our cash from operations was lower during the quarter. We are forecasting sufficient cash flow going forward to fund our operations and to continue to grow the business.

We invested $4 6 million during the quarter, primarily related to opening new centers and purchasing equipment as part of our rollout of air sculpt plus and our cash flow from financing activities was a use of $23 4 million, primarily due to paying the special dividend of $22 8 million during the quarter.

Finally as for the outlook for the year, we are lowering our revenue guidance to a range of $168 million to $170 million for the full year, which represents 26% to 28% increase over the two 'twenty over 2021, and we are lowering our adjusted EBITDA outlook to approximately $45 million to $47 million with that I'd like.

I turn the call over to the operator for a few questions.

Operator.

Thank you at this time well be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is into question. Kim you May press star two if you'd like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.

In the interest of time, we ask that you each keep to one question and one follow up thank you.

Our first question comes from the line of Josh Raskin with Nephron Research. Please proceed with your question.

Sorry back sorry about that you guys hear me okay.

Yes, yes definitely hear you okay perfect sorry about that can you just give some more specifics I'd start with the vacation days for the physicians I guess the two questions. There would be one oh, what do you think is causing that right. The physicians are only getting paid per procedure right. So you know I assume they understand you know prolonged vacations means no pay and then do you track that number.

Vacation days is there a sense of how many days the positions we're out in <unk> this year versus last year.

Thank you they're enrolling so.

Traditionally in.

Physician vacation days haven't been a major problem and we haven't needed to track them or have a major and well enforced vacation policy. This is the first time that we've been.

So impacted by physician vacations now sometimes physicians have to have a family emergency sometimes there is all sorts of commitments that require them to Miss days and I don't feel like there's anything we can do about that but moving forward. We do plan on having a more.

Elasticity and redundancy in our M D model than we've had before to account for those and any planned vacations were asking for a very advanced notice we have on boarded seven new doctors and three Q.

And we have a more physicians in our pipeline that is typical of our physician recruiting efforts and our internal team are going extremely well and the team's doing a great job.

Okay, Hi, Josh and then.

Yeah, Hey, Josh I was just going to follow up real quick you had asked something about some some days.

We saw about 120 open days from physician vacations in the in the third quarter, which is which is really significant and if you think about like Dr. Robin said, we don't have a good a metric from the prior year.

The ability to travel international was substantially light last year. It was just very almost very impossible to travel overseas and so we just saw a huge number and if you kind of look at 120 days of.

Physician vacations kind of our average sort of estimate of.

A couple of procedures in a day and our current rates you can kind of get into that sort of estimate of an impact of close to $3 million in the quarter.

Okay got you three minutes Super helpful and then can.

Can you just revisit the conversation around fixed versus variable I heard you say you know large majority of it is all variable, but revenues were down 11 million sequentially cost of services was only down two and a half million sequentially. So that seems a lot more fixed than I had previously thought.

Yeah. So on the cost of service side, you know the physicians and the supplies are 100% variable, we don't pay a doctor unless they perform a case and obviously if we don't perform a case, we won't incur the supply we have enhanced our nursing costs, which is built you know additional fixed costs in our structure around that is Dr. Ron has talked about in the safe.

And the quality and those those types of things. So so those that line item has has developed into somewhat of a more of a fixed item.

We also have marketing costs. If you work your way all the way down to the EBITDA line. We spent the same amount of cash in the third quarter as he did in the second quarter in marketing and advertising.

That was a choice and a decision we made it was it's a variable cost line item, we can move that number up and down based on what we see and what we expect.

But again.

Extremely highly variable structure and if we wanted to choose to reduce our advertising we definitely can do that.

Yeah. So your nurses are salaried now so there you're you're paying for them regardless of whether it's you know, there's two or three or one doctor in the center for the day.

The nurses that we've added this year are more in our salary base, they're there they're regional type structures from an overhead standpoint, so their salary based and then we've added certain individuals in centers with that are kind of managing that leased the site itself that are falling under more of a salary based decision.

Okay, and then just last one sorry for the third one here is it.

Any thought on pausing new centers I heard you've got for it in the pipeline for next year I know you talked about three to four so that sort of on the high end of a typical year, but any sense of pausing until you get a better sense of market trends or just sort of preserve cash.

Oh, no. We are absolutely not we have no intention to pausing our de Novo development strategy and we're going full force.

Josh I think one thing that's important to note here too even though the quarter.

It was softer than we forecasted our lead volume activity has remained very steady. So they're there are not a lot of indicators out there that would lead us to saying we need to potentially put a pause as a matter of fact, we think there's so much opportunity there.

Building, an infrastructure to potentially accelerate in the future.

Yeah, Yeah, that's alright, that's positive alright. Thank you.

Thank you. Our next question comes from the line of Whit Mayo with SBB Leerink. Please proceed with your question.

Yeah, maybe just to follow up on that last question is there any data that you have dentist that you can share around leads and then additionally, anything around close rates. When you look at the consultation so that presumably the elevated physician vacation time negatively impacts the console rates too but just.

Any any of the any metrics that you can share that could give us a sense of sort of how the close rates are trending.

Yeah. So we don't have any metrics to necessarily share publicly but what we can say is that again, our lead volume has remained consistent or close rates for consults have remained consistent couple of other factors that we look at two our rates have.

Remained very consistent our financing as a percent of our business has remained consistent around 40%. So all of these sort of indicators about the business nothing has changed again other than just this significant impact in the quarter from doctors taking time off.

Yeah.

A quarter or two ago, you guys made some investments so I think he referenced earlier in your prepared remarks around some of the physician recruiting bringing onboard additional staff to help support that yet I think you said you brought on.

Seven new physicians in the quarter, how many of those are staffing the de novo's versus legacy centers, just any progress you could share around.

How you feel about those those investments.

Sure.

Of that seven we have a mix where I don't have the exact number for you, but we have new new centers staffing of our surgeons and also back filling legacy centers.

But we really do have more physicians in our pipeline than we typically have because the team is doing such a good job and our de Novo is coming online to already have a very good position team in place.

And when it was about 50%.

About 50%.

Okay about half of them were legacy half of them are de novo's Yep and just last one here can you just remind me the percent of your your nurses that are full time versus contract and and I think you gave.

Some commentary around you know increase wage pressure can you just maybe elaborate a little bit on that.

I don't have the exact number but we're close to probably 25 to 30 nurses that are on a full time basis from a salary perspective.

We again added a regional overhead structure this year, which we didn't have in past just to be able to monitor our growth keep quality and safety of the Paramount.

So that's that's that's kind of in a in a ballpark I don't have the exact FTE count in front of me.

We also hired another physician trainers. So we now have a one on each coast. So we can onboard physicians more efficiently.

Okay. Thanks, guys.

Thank you. Our next question comes from the line of John Ransom with Raymond James. Please proceed with your question.

Yeah.

Hey, good morning.

Just to kind of back up and ask more.

Had a question I guess so.

I mean, what we're seeing is we're seeing costs go up and you're obviously revenue doesn't come in and say you have to have some confidence in the <unk>.

Demand picture, but I know your leads are generated only a week or two out but what what.

What work have you been able to do to get.

Visibility of competence in the intermediate term demand picture, but you at least some of that's continued.

Tony.

Thank you that's Aaron Rollins.

We really believe demand should be strong given the consistency we're seeing with lead volume. So lead volume is right on track and as you can see from our fourth quarter guidance contemplate sequential improvement in <unk> and we're really excited about the momentum we're seeing we don't comment.

On intra quarter trends, but but clearly our guidance suggests a some momentum.

The other thing is should we see any softening or business model tends to be resilient due to our low fixed cost structure as well as our low leverage. So we believe we are well positioned if we see any indicators of a softening in demand.

But we are not so we also target a higher end demographic that is more recession resistant.

Okay. So I mean, just to be clear if we look at the third quarter revenue shortfall.

Physician outages versus deferrals.

And I'm, sorry, if you've spiked decided I joined the call a few minutes late but what's the next do you think of just not having doctors versus people pulling back on schedule.

Schedules.

So the number we shared John was.

The impact in the quarter was about 3 million from from doctors vacations. When we go back and look at the schedule under the days they were out.

One of the things too that that hit us in Enron and and Doctor rounds, I think both spoke of it in their comments and as it related to the de Novo timing are.

We saw about $1 million impact from de novo's that we'd expected to come on them I'm bit center glad to get them open obviously I'll call Adelphia, and and then and then Boston, but there was about a million dollar impact to what we had forecasted for the quarter for those.

We have debated.

We also saw demand from three queue that was where the patient wanted to consult and wanted the procedure, but didn't want to actually have the procedure until the fourth quarter and sometimes into 2023. So we saw procedures deferred many times because the patient had a big vacation planned.

Mhm Gotcha, Okay, alright, thank you.

Thank you. Our next question comes from the line of corn with Meyer with Piper Sandler. Please proceed with your question.

Hey, good morning, guys and thanks for taking the questions. So first for me can you just provide any further color on maybe what caused the delay.

New center build outs I mean.

It seems like that that's all I wanted to see where some months delay I mean, just any color on like why that's what's happening with that.

Maybe supply chain and struggling to get parts and pieces like that I mean anything macro wise just any color you can provide there and then as you think about 2023.

What's giving you confidence in the centers that you're planning to call on online on time. Thanks.

Sure Hey, Karen it's Ron how are you.

You know you hit it on the head it's permitting.

Lead times, and then just some delays in construction, whether that's some some manpower in every.

Every actual sites a little bit different every location is a little bit different but if you look at it.

Permitting lead times, two biggest two biggest things, especially on on some millwork items in supply chain as you said and that remains out of our are typically out of our control. We will ensure we have the correct.

Clinical and operational staff in place as well prior to throat opening because that's you know that's on that's on US and your follow up question in terms of you know our confidence we.

We are extremely confident in and what we've set out and in opening our Austin and Orange County in the first part of the year and Raleigh, and San Jose and then the second part of 2023 as well.

That's very helpful. Thank you and then.

But there may be patients that were deferred in Q3 due to vacation can you provide any color on you know what is the capacity at your centers to take on additional patients. If they were to let you know that I could we see all of those come back here in Q4 will that be spread over Q4, Q1 Q2, maybe.

Q3, just what is what is the capacity of the standards to take on this kind of access and manage that got pushed back.

We have excellent capacity now that all of our centers have at least two operating rooms. It gives us it gives us a lot of elasticity elasticity and scheduling and that's why we're building more redundancy into our search and models. So that we can when there is surge demand a weekend, we can meet that.

Demand and as I said, Oh, the color on the patients that came in the third quarter again lead volume was normal in the third quarter.

Demand was normal it's just that you know.

But if the patient wants to get surgery around Thanksgiving.

Thanks, giving or Christmas or in the new year or you know whenever they have a vacation at work scheduled.

Then we want them to do it when it makes sense for them. So we see that deferral both in the fourth quarter and we see it also trailing into next year.

That's very helpful. Thank you and then if I could just squeeze in one more can you just provide a little bit of color on how utilization is gonna be yeah.

Like are salt life's in airports.

Have those picked up a bit over the past few months.

Just any perspective or color you can provide on I'll take them both.

Yeah.

Dennis do you have any numbers on that.

Well, we don't provide specific numbers on it but what we can say is is that Q3 for air sculpt smoothed was was very much a training quarter. So not a lot of of actual cases performed yet some but again most of this is due to training you have to integrate you have to train everyone. You have to train. The sales team you have trained nurses you have to train the doctors.

You can understand the undertaking it takes to rollout a new surgical type procedures. So we expect to get improvement as we move into the fourth quarter and particularly into 2023 from that air sculpt plus again somewhat of a rollout. If you will for the centers that didn't have it we are seeing good steady results in the air.

Smoothed, which is giving us continued.

Right.

I think impacting our rates.

Touch there so it's going quite well, we've now rolled them out to 100% of the centers and we expect some meaningful growth going into next year from it.

Another thing I'd like to mention about what one thing about air scope smoother I think is relevant is that we really did just launch it and we're doing a P. R. A PR campaign around it actually did something yesterday for a market and I feel that permanent removal of cellulite, while you're awake.

You can see immediately on the table is something incredible and unprecedented and I think there's going to be great demand for it.

Really excited about you know building PR around it and marketing this to our existing and new patients.

Thank you.

Thank you. Our final question. This morning comes from the line of Simeon Gutman with Morgan Stanley . Please proceed with your question.

Hi, This is actually Hannah pit talk on for Simeon. Thanks for taking the question. We're hearing a lot about kind of a slowing in consumer discretionary spend especially concentrated in high ticket purchases and you sound pretty constructive on your run rate, but are you seeing any trends within your customer base that reflect that in any way, whether that's kind of.

Fewer body areas per patient lower attachment rates higher revenue skewed toward the higher income patients or are any lower conversion from consultation to procedure.

We really aren't one way to answer the question is to look at financing rates and our financing rate of right around 40% remains consistent.

And Moreover, there's no meaningful change that we've seen in approval rates for patients, we really do target a higher end demographic and you know the price of gas isn't going to affect whether or not they get a mommy makeover.

But oh I.

Any follow up questions.

Yeah, I would say to Hana that you had talked about pricing is that the right again Q3 to Q2 sequential.

Continued debt to be in the 13 to 13 range I mean that rate can bounce around I mean 12 to 13000 of cases is a good rate.

But again it has held up quite nicely.

Maybe if I can squeeze in a quick follow up.

Obviously pricing varies patient to patient, but have you kind of quote unquote taken price at all this quarter or this year and then do you have kind of space to do more of that or philosophically. How do you think about it is there a way to offset maybe some lower case rates temporarily.

We're confident our current pricing offers great value for our patients anywhere.

And then average price between the 12 thousands to the 13000.

Okay.

Got it thanks guys.

Thank you ladies and gentlemen, this concludes our question and answer session I'll turn the floor back to Dr. <unk> for any final comments.

Thank you so much we really appreciate everyone's interest and all your questions and we look forward to reporting our next quarter.

Thank you. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.