Q4 2022 SmileDirectClub Inc Earnings Call
Other expenses include interest expense of $6 6 million of which $5 2 million is related to the secured debt facility issued in April of 2022, and $1 4 million is related to deferred loan costs associated with the convert we issued in 2021.
Additionally, onetime costs related to lease abandonment impairment and other store and restructuring costs was $1 6 million consisting primarily of costs related to our January 2021 restructuring actions, including costs associated with retention as well as store and facility closure costs related to our international operations we.
We incurred gains of $3 4 million due to unrealized foreign currency translation adjustments and insurance proceeds from our April 2021, cyber attack of approximately $7 million.
All of the above produced adjusted EBITDA of negative $47 million in the fourth quarter, which is a $14 million improvement over the fourth quarter of 2021, despite a $40 million decrease in revenue.
For the full year adjusted EBITDA was down only $1 million, despite a $167 million decrease in full year revenue.
Our fourth quarter net loss was $69 million.
Third to our Q4 2021 net loss of $95 million.
Breaking out adjusted EBITDA regionally for the fourth quarter. The U S and Canada came in at negative $34 million and rest of world adjusted EBITDA was negative $13 million.
Moving to the balance sheet, we ended the fourth quarter with $118 million in cash and cash equivalents.
<unk> hundred $87 million and net accounts receivable and a $127 million drawn on our $255 million debt facility with hps.
Cash from operations for the fourth quarter was negative $51 million, while cash spent on investing for the quarter was negative $12 million three.
Free cash flow for the fourth quarter defined as cash from operations less cash from investing was negative $63 million, which is a $16 million improvement over the fourth quarter of 2021.
As David also mentioned previously we took actions in January our fiscal year 2023 to meaningfully reduce our cost structure. This realignment optimizes our operations based on the anticipated continued macro headwinds impacting our topline results.
These actions are expected to reduce costs between 120 and $140 million.
The exact breakdown of the components of the cost savings could change during the year. Following should help you understand where the savings will occur we anticipate.
Reductions between approximately $60 million to $65 million to marketing and selling expenses with a focus on leveraging our recent trends of improved marketing efficiencies.
We expect general and administrative cost reductions between $50 million to $55 million.
Lastly, we will be reducing capital expenditures by 10% to $15 million based on prioritization of capital projects, focusing on our new initiatives and other technology products that have the ability to drive nearest term profitability.
The cost changes, we're putting in place put us on a path to positive adjusted EBITDA by the third quarter of 2023 and toward positive free cash flow by the fourth quarter.
We recognize that in this difficult sales environment, we need to realign our cost structure to obtain EBITDA profitability on our core business and any upside that we see from our initiative launches will be additive to the results at a very high efficiency level.
For our full year 2023 guidance, which represents our core business only we expect to deliver revenue between $400 million and $450 million with macro factors being the key differentiator between the low end to high end of guidance.
Margin between 72 and 75%.
Adjusted EBITDA between negative $35 million of negative $5 million driven largely by topline revenue results with positive adjusted EBITDA achieved about third quarter.
Capex between 35% and $45 million and our onetime costs from our reorganization action in January 23 between 12 and $15 million.
It is important to note that this outlook does not factor any contributions from our small maker platform rollout for the launch of our Careplus program in the U S market.
As evidenced by our realignment actions taken in January we continue to maintain focus on our cost structure to drive stronger bottom line and cash flow results.
In addition to the guidance for our core business, we want to provide some insights regarding the potential contributions from our growth initiatives, including SMP and Careplus solution base.
Based on the increased conversion from lead to Aligner orders in Australia with S&P.
We believe the upcoming U S launch has the potential to add a meaningful increase in revenue and adjusted EBITDA in the second half of 2023.
Collectively our growth initiatives have the potential to deliver approximately $125 million in incremental revenue and $80 million and adjusted EBITDA to our core business guidance.
This estimate is based on the early indications of contributions based on our pilot launch S&P in Australia last November with plans for U S rollout by the end of the second quarter. This year and it continued rollout of our Careplus solution to more partner network locations over the balance of 2023.
We will provide updates throughout the year as we scale these initiatives and capture more data from the full market launches.
Please see our investor deck for additional information.
With both our new small macro platform and care plus solution now live in limited geographies, our investments and innovations are becoming a reality in the market. We are leveraging the proprietary end to end business model that we have built to lead the industry on many fronts.
We are well positioned to participate across an increasing number of channels in the clear aligner category to meet customers wherever they wish to begin their STC journey from their own home.
One of our small shop retail locations from an in person visit at one of our partner network providers and now from the technologies enabled and their own mobile device.
With that I would like to turn the call back over to David for some closing remarks.
Thanks, Troy despite the challenges facing the consumer we were able to manage our cost structure and deliver improved bottom line and cash flow results. Despite a reduction in revenue.
Let's go through our fourth pillar of financial discipline, and we will continue with significant improvements in 'twenty three by achieving positive quarterly EBITDA and free cash flow in Q4.
We look forward to our upcoming U S launch of our <unk> platform by the end of the second quarter and the expanded rollout of our care plus offering across U S markets throughout 2023.
We will continue to update the market with additional insights regarding these initiatives along with any of our other exciting innovations and achievements of key milestones.
And to everyone for joining today and with that I'll turn the call back over to the operator for Q&A.
Thank you if he would like to ask a question. Please press star one on your telephone keypad.
Confirmation tone will indicate your line is in the question queue. You May press star two if he would like to remove your question from the queue for.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
Our first question is from Brandon Couillard with Jefferies. Please proceed.
Hey, Thanks. This is Matt on for Brandon quick question on the Smile maker platform curious if we should think about that just as the tool for newer patients in the funnel is there or is there a way you.
Plans to go back to the legacy funnel to push the rollout of the platform should drive improved conversion on that legacy or the final I think historically about 40% of cases, where from lead seven months and older. So.
Would just love to learn a little bit if you could perhaps roll that out to the legacy funnel or we should think about this all incremental new leads coming into the funnel.
Yes, it's David I can take that one so that's exactly how we went to market in Australia at the end of November .
The advertising kicked in for new customers, both on television and in digital but we went into our CRM flows which are deep and anybody that was a potential chit or scan lead we introduced smile maker platform is seeing really good uptake in that.
And that.
Funnel, so when we launched in the U S. We have millions of leads that we will go back to that don't cost anything from an advertising standpoint.
Try to get people to engage through the stomach.
Which is a lot less work than doing an impression kit or actually booking an appointment and driving to a smile shop.
So we anticipate the same thing.
But in the U S.
Okay. Thanks, and then.
I appreciate the color on the potential $125 million revenue and $80 million EBITDA contribution and Troy is there anymore.
Color you can provide there on the split.
The two should we think about each representing about half the.
The incremental opportunity anymore color there would be appreciated thanks.
Yes, I would say that it is.
Going to be small maker app weighted definitely and then towards the back half of the year.
We have the Careplus initiative that launched in four markets.
Here recently, but that rollout will likely be a little slower than what we would see from the small maker at once we get it lives in the U S. You.
You should have a more immediate impact and we will be able to do things like go back to prior needs and.
And things like that so there's a bigger opportunity certainly with this model make rap and again the majority of that would be in the back half of the year.
Super Thank you.
Our next question is from Jon Block with Stifel. Please proceed.
Sure.
Hey, guys. This is Tom Stefan on for John Thanks for the questions.
I'll stick with Smile make green Careplus.
Troy or David maybe if you guys can walk us through the key parts of the actual bill that gets you to the $125 million in revenue, it's a big number really impressive, especially for less than a year of contribution.
On smile make or it sounds like Australia is going really well so far but.
How do you arrive at those numbers specifically it sounds like it's primarily smile maker. So maybe on that can you just discuss key metrics.
<unk> maybe between leads conversion.
Other other assumptions that youre, making.
Yes, I can take that one time, so what we've seen.
By the way before we even launched and we first talked about this innovation.
We put in our investor deck, a funnel and showed all of the different steps that you have to go through to give the impression kit.
A good impression upload your photos of your impression kit back same thing with the shop as far as showing up for the appointments getting your treatment plan.
<unk> 48 to 72 hours and all the falloff that happens from lead to aligner sale in the in the legacy <unk>.
Go to market strategy what.
What we had showed in the investor deck was about a 50% increase in conversion.
If you remember we showed I think we have it in our deck.
Today as well.
We had that same slide that shows what happens when you eliminate all of those steps in the process and how you can increase your conversion we throw out it wasn't just hypothetical was based on the drop off that we're seeing in the scam funnels and how by shortening the lifecycle to minutes from days or weeks with improved conversion.
Ironically enough, we're seeing very similar.
Our lead to conversion to aligner conversion numbers as what we had put out prior to launch.
We're constantly making enhancements improvements how long does it take to render the custom smiles plan that's doing the <unk> scan how many people we can get through <unk> scan.
How long it takes.
Upload and.
And get their customer trials and so on.
All of these things that we've been working on over the last 90 days in Australia have come to a much better conversion from lead lead is what we call. The custom smile plan to CSP that the customer gets after doing about a two minute scan of their teeth with their phone.
And that is what we're translating into.
The $125 million, which like you said the vast majority of that is going to be small maker versus <unk>, plus with secure pluses a market by market rollout.
We're only in four markets today, so the vast majority of the $125 million is based on that conversion lift.
Seeing in Australia now.
Yes, the U S.
Tracks very similar to Australia, it's one of the reasons, we chose that market, but there are some nuances.
Marketing channels or different TV is different.
The payment.
Form that we use in the U S is a little different but overall based on what we're seeing in conversion, we anticipate the potential to get to that $125 million in the back half.
It is only six months you're right.
But.
Those are the numbers if we hit the conversion curves that were hitting in Australia.
Got it that's helpful. And then my second question is maybe just around trends you guys are willing to share.
Any color on quarter to date case volume trends.
I guess just curious in particular, how the early part of the year may have gone just given its importance when thinking about.
Typical seasonality benefits that occur and then Troy maybe this is more for you but.
Similarly can you give us a rough sense for how to think about the cadence of revenue or our case volumes on a quarterly basis. This year. Thanks.
Yes, we don't give quarterly guidance, specifically, but I would say our expectation related to Q1 is that we would get.
More of a normalized seasonal lift in Q1, I mean, we definitely saw.
Some better attach to kits and scans coming out of Q4, we plan that in Q4, and we're seeing that flow through in sales I would say in Q1. So if you look at kind of historical what we'd see as a normal seasonal lift for Q1 I think we can expect that this year and again the back half of the year I would say, it's going to be <unk>.
<unk> by the combination of these initiatives as well as just what's going on in the overall economy, when we announced our core guidance of $400 million to $450 million.
The low end of that guidance range really considers that the economy doesn't get any better or maybe slightly worse in the back half where the higher end of that guidance as the economy gets a little better.
But at least I would say from Q1's perspective think about what our normal seasonal lift in Q1.
And then it will play out the rest of the year based on how these new initiatives go as well as what we see from an overall economic standpoint.
Great. Thanks.
Okay.
Our next question is from Michael <unk> with Bank of America. Please proceed.
Good morning. This is Peter on for Mike. Thanks for taking the question.
Thank you guys had pointed to this quarter to 5% net AFP hikes annually on average in the long term model that was stated roughly a year ago is that roughly in play for this year. How are you guys thinking about.
Yes, I can take that yes.
I mean, we plan to put some pricing changes in place later in the year I would say, let's say, even though we've not given out new numbers related to the long term model I think we can we can certainly think about.
Price increases the things that we did last year from a price increase standpoint was we didn't change the standard price that the customer would pay through our smile pay program. So we're able to kind of extend those payment terms, a little bit and keep the.
Keep the overall price on a monthly basis very consistent so we kind of make it easier on the overall customer in these tough economic times, certainly, but we do look to increase prices in the future we'd not released what the timing of that would be but I think we can't depend on some level of sales enhancement from price increases as we go throughout the year.
Alright. Thank you and then just curious if you are still exploring any larger further cost savings initiatives are.
At this point do you think you've kind of mostly maximize which you can do on that front.
The currently expected revenue stream.
Okay.
Great. Thank you.
Yes sure.
It's been a focus of ours I would say over the last two years, certainly and we will talk about our pillars.
That we that we've been working towards really financial discipline is one of those things that we're focused on so I mean, we announced 22 cuts that we executed fully.
Obviously, we came back with some more cuts in 2023 as well.
We're focused on here is to make sure that.
On a core business basis, we can still get to profitability by the end of this year and then as we launch these new initiatives those will be additive we don't expect to add a lot of additional costs related to these new initiatives. So we expect that.
Much of what we drive from a revenue standpoint will flow through at a very high margin as we've kind of given you. Some initial information.
Formation related to that but I think there still are opportunities inside of our overall cost structure to get more efficient I think that is one of the things that were certainly focused on.
We're going to make sure we get to that Q3 Q4 guidance range from an EBITDA perspective, you can't always control the sales piece of it but we certainly have the ability to control the cost side. So it will continue to be a focus of ours throughout this year.
Thank you guys.
As a reminder, it is star one on your telephone keypad. If you would like to ask a question. Our next question comes from Robbie Marcus with Jpmorgan. Please proceed.
Oh, great. Thanks for taking the questions today.
Maybe to start.
I wanted to go to your base business guidance.
It still does imply a pretty big step up on an average quarterly basis from fourth quarter.
And there has been I'd say, a little less visibility than normal given the economy now so how do you get confidence in that pretty significant step up quarter to quarter.
Fourth quarter.
Given.
The forward looking views on interest rates and the economy.
Where we are today.
Yes, I can take that.
What we're seeing today certainly from a first quarter standpoint, I think gives us a little bit of confidence just because we typically see a seasonal lift.
Q4 to Q1, I would say much of what.
We forecasted out for the remainder of the year really is macroeconomic focus so the higher end of our guidance range.
That we have out there at $4 50, we do expect the back half of the year to be a little better again, if it if we don't see that likely come in at the bottom end of the range and then we've got the new initiatives to focus on as well I know that this is core businesses, what we're talking about in general, but obviously, what we launched a new initiative standpoint is also going to impact that is.
Well.
So it's really macro focused I think we've seen a little bit of a flattening I.
I think what we've talked about previously as we really feel the.
Beginning to the economic strain on the consumer we felt that first last year.
When we talk about comparisons and the overall market.
And I think as we see the flattening I think we will see that first as well.
So obviously it is a challenge in this environment I would say our core customers.
That $65000 range and they were the first to fill these effects.
But again I think we have opportunities go into features we focus on things like the teen market and has higher income consumer so I think theres opportunities there, but yes, it will play out.
Yes.
Very consistent with what we see in the overall market. So I would say, we're certainly not out of the woods related to the overall economic situation will just have to see how it plays out in the back half.
Okay, but just to be clear all of those additional opportunities are not assumed in the base business got right.
That's right, yes. The initiatives are all on top of what we consider to be our base business.
Great and then just one one more.
It seems like you've been drawing on your debt facility and you plan to be free cash flow breakeven in fourth quarter, what should we assume for further draw in the first three quarters of the year.
Yes, there is.
Certainly opportunities in lots of different ways related to liquidity I'd say, we're pretty confident in what we have from a resource standpoint, and the path to execute our plans related to liquidity.
Financial discipline is certainly one of the things we're focused on we did a significant cost cuts to get us to that.
Flat EBITDA positive EBITDA by Q3, and then positive free cash flow by Q4.
Obviously, the initiatives will be an important part of what we will be able to deliver this year.
And we have some available left some availability left on the HTS facility as well as we have availability on our ATM facility as well, but much of what those draws.
It will be will be based on kind of how revenue goes throughout the year I'd say, one thing that's a little bit unique for us and we have a different kind of a conversion cycle cash conversion cycle.
Sales can be unpredictable I would say, but about 60% of those sales that come in they go to the actual receivable that we collect them over two years.
So the unique aspect of this and what we.
Focus on when Covid hit was despite the fact that sales came down quite a bit we were still collecting on those two year old receivables.
It gives us more predictable cash flow in coming and we can focus on things like cost control marketing things like that.
To manage those costs down and obviously, that's not your long term strategy, but it's effective in a short term perspective until the economy improves so.
We have some confidence certainly related to what we can bring in from a cash standpoint.
Our focus is going to be on the cost control side of this and managing EBITDA and free cash flow throughout the year.
Great. Thanks.
We have reached the end of our question and answer session and that will conclude today's conference. You may disconnect. Your lines at this time and thank you for your participation.
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Okay.
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Yeah.
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