Q4 2022 Beauty Health Co Earnings Call

Speaker 1: Good morning and welcome to the beauty health company's fourth quarter and fiscal year 2022 earnings conference call. All participants will be in listen only mode. Should you need assistance please bring the conference specialist by pressing the SRK followed by zero. After today's presentation there will be an opportunity to ask questions. Thank you.

Speaker 1: To ask a question you may pass star than one on your touch tone phone. To withdraw from the question queue, please pass star than two. We ask that you limit yourself to one question during Q&A.

Speaker 2: Thank you for joining the Beauty Health Companies Conference call to discuss the company's fourth quarter and full year 2022 financial results, which were released this morning and can be found on our website at beautyhealth.com.

Speaker 2: Also available on our website is an investor presentation that will be referenced during this call. With me on the call today, our beauty health president and chief executive officer Andrew Stanlick and chief financial officer Leanne Wu. Before we get started, I would like to remind you of the company's safe harbor language. Management may make forward-looking statements, including guidance and underlying assumptions. Forward-looking statements are based on expectations that involve risks and uncertainties that could cause actual results to differ materially. For a further discussion of risks related to our business, see our filings with the SEC. This call will present non- GAAP financial measures such as adjusted gross margin and adjusted EBITDA.

Speaker 3: A conciliation of these non- GAAP measures to the most comparable GAAP measures are included in the earnings relief furnished to the SEC and available on our website. I will now turn to call over to Andrew. Thank you Eduardo. Good morning everyone and thank you for joining Beauty Health's fourth quarter and full year 2022 earnings call. To begin, I will discuss our performance and accomplishments for the year. My first serving is here of this incredible, category-creating company. I am extremely proud of the progress for our team in these past 12 months and I am pleased to share the results with you today. I will also discuss our outlook for 2023 before Leanne provides more detail on the numbers. We will then be happy to take your questions. As always, I want to start by thanking our incredible Beauty Health One team. Our teams around the world worked tirelessly over the past 12 months to execute our strategy and deliver incredible growth. Our growth and momentum amid uncertainty in the operating environment. Despite the macro backdrop, we deliver a year of record revenue. We launch the biggest product innovation in our company's history with Sendeir. Our next generation, Hydea Facial Delivery System. We continue to build the world's premier skincare booster portfolio, partnering with the best in the industry from Murad to JLo Beauty. We open more doors than any year before with exciting retail partnerships. We can expand the growth in the booming MedSpark channel.

Speaker 3: investment and our China infrastructure buildup. Notwithstanding these challenges, we delivered adjusted EBITDA of 47.7 million for the full year, up 46% year over year. I'm also pleased to report that we achieved double digit growth in all three of our operating regions in 2022. Year over year, the Americas grew 44%.

Speaker 3: A pack increased 24%, and a mere was up 46%. These strong growth numbers are in reported currency. On a local or constant currency basis, the results are even stronger. Our strong growth is nothing new. We have averaged 48% growth per year since 2018 when excluding 2020 for COVID. Our period of planned heavy investment is now behind us. As a new public company, our global infrastructure build is largely compete and ready to scale. Our business model remains agile and we have strong fundamentals in place to capture the large profitable growth opportunities ahead of us. As a result of our momentum, we have full conviction in our long-range plan to deliver 600 to 700 million dollars net sales and adjusted EBITDA margin in the range of 25 to 30% by 2025. Targets we first shared at our beauty health investor they last fought.

Speaker 3: If 2022 is about establishing a new foundation, the focus of 2023 and beyond is about accelerating profitable growth. We will launch SINDO internationally in the second quarter of 2023. We have taken lessons learned from our highly successful US launch last year and look forward to growing SINDO soon to be global footprint. We will build our portfolio of products to sell to the hydrophacial providers, adding strategic and science bank boosters to our portfolio of personalized treatment options as well as through strategic M&A. We will expand our business in China as zero COVID policies ease and consumer activities returns and we remain optimistic on the outlook and our long-term opportunity in the strategic market. As you would expect, we will remain nimble and able to quickly pull levers to protect our margin should on the ground conditions in China to deteriorate. In totality, I am confident in our ability to generate net sales of 450 to 417 million and to deliver an adjusted EBITDA margin in the range of 18.

Speaker 3: to 20% for 2023. Turning to slide seven, we continue to make strong progress against our five-point master plan, which you are all familiar with. Our strategy to expand our footprint and increase provider and consumer access to hydrofacial is working. In fact, we have continued to expand our position as the market leader, with some research estimating our market share to be around 85%. It is hard to displace the go-to brand and hydrofacial has become an eponym for the category it created. In 2022, we delivered a record 8492 hydrofacial system globally, which includes 1,793 trade-up units just in day-o. This represents a 37% increase from 2021, highlighting consumer and provider resiliency and increasing demand globally for our products. Across distribution channels, we continue to see provider preference for the hydrofacial treatment and device. In fact, just last week, we received two Estetians Choice Awards from Dermoscope Magazine for best hydrodermabrasia machine for Sindhau and favorite signature treatment for hydrofacial. The validation of our Estetian community is more meaningful than anything else, and we wear this badge with great pride. I am thrilled with the expansion we saw in 2022, and more importantly, we continue to have a massive underpenetration growth from where in front of us to capture. We believe all of our providers should be on-s and there, and as you saw in 2022, we employed a strategy to push our provider network to upgrade to Sindhau.

Speaker 3: and you can expect us to continue this approach in 2023. Dindare, as our next-generation connected system, provides us with rich data insights into trends and consumer preferences that we have never had before, once again pushing the category forward. Ultimately, we envision that beauty health can become one of the largest sources of skin health data on the planet, and that is a powerful and compelling proposition. Turning to slide 9, we are driving consumable cells and recruiting new consumers into our brand with a steady pipeline of innovation, delivering regular upgrades to our boost of portfolio and treatment protocols. Each treatment delivered by our patented Magic One Hunt piece. We view this as a key competitor to the advantage. Our institutions are trained to tailor every treatment to a client's personal skin care needs, a differentiator that builds affinity for our brand. No other device in our category delivers our level of customization and personalization to the consumer, and this is the future of skin health. Each booster is developed with careful attention-pater ingredients, and our products are validated with clinical studies and overseen by our chief medical officer. We lead with the science-backed approach for our own Hydrofacial Boosters, and also for those that we co-create with other world-leading skin care experts. This allows us to accelerate our R&D capitalizing on the combined strength of our RP together with our partners. The Hydrofacial ecosystem that we have created with the partner brands and providers is a unique model in the industry. What's more, our partnerships with notable brands are key recruitment tools that bring new consumers into the Hydrofacial brand. We saw the success of this approach with JLo Beauty.

The study results generated widespread interest from providers and consumers alike with media coverage across beauty titled in broadcast chatter on social and a spike in orders for a clarifying boosters.

Interest in hydro facial signs that story it doesn't stop with providers consumers are increasingly interested too as they look to step beyond the wellness trends of postures and seek out position well scientific endorsement of their beauty and aesthetic choices.

It is a trend we call the medicalization of beauty.

Our long term shifting consumer mindset, the beauty health and hydro facial are intrinsically poised to capture.

Indeed, we see an embrace of decided by the earliest adopters and pacemakers in beauty and aesthetics influencers and celebrities.

To this end, we are partnering with a diverse range of influencers and celebrities to rapidly scale the hydro facial message.

Among the recent fans to professed their love for Hydro facial Lilly Collins 8-K, MLA in Paris shed the secret of hydro facial invoked France route.

She is social media megastar with more than 13 million photos showed her treatment and progress on her channels.

Louis to heavier in up and coming designer Prepped, all 38 of his models with a hydro facial before they want the runway at New York fashion week and of course Gela remains.

Cool supporter.

Moving to slide 13, we continue to innovate our partnership model just yesterday, we announced a new partnership with the iconic Dior beauty.

Together, we have developed a deal how it by hydro special experience, which includes a custom protocol and co branded booster that will be available exclusively in D. O spas around the world later in 2023.

Partnership incorporates the best of your skincare with hydro facial technology promises to resonate with a sophisticated beauty consumer we are yes, again, setting a brand apart and extending our competitive moat with this prestige beauty powerhouse.

Turning to slide 14.

The acceleration that we're seeing in our business is thanks to the planned investment we made in infrastructure and capabilities during the past two years.

Since joining the company last year I made several additions to fortify our executive leadership team and I'm confident that we now have the right team in place to drive our strategy forward and deliver profitable growth.

We open keep training and education centers in New York, London, Paris, and Singapore, I made planned investments and I'll provide a community to drive loyalty and awareness.

We also invested in foundational operational initiatives and infrastructure build that we expect will deliver future leverage.

These included progress on in region production in China.

Setting up a three PL partner in Europe .

And rolling out global ERP and CRM platforms.

Moving to M&A on slide 15.

As we progress into 2023, we remain committed to creating value for shareholders through disciplined capital allocation.

M&A remains a priority and we maintain a strong cash position to pursue opportunities to accelerate the platform.

We continue to evaluate options specifically those opportunities all brands that provide a differentiated product or service with a high net promoter score.

Complementary to our existing platform and community leveraging distribution call point and are financially accretive with compelling revenue growth and additive to our profitability.

Today I'm excited to announce a key strategic acquisition that will immediately build a product portfolio for providers, while providing BD health with a future second profitable growth revenue stream and a large and growing market.

<unk> Health has signed an agreement to acquire skin stylus and FDA cleared micro needling device <unk>.

Including all potential royalties the milestones the transaction is valued at approximately $15 million.

Macro needling is a rapidly growing non surgical procedure performed by qualified providers, including dermatologists plastic surgeons and their petitions. The treatment uses an array of tiny needles to create micro puncture in the skin to stimulate the body's natural wound response, which was associated with the creation of new collagen and smooth.

The summer even toned skin.

Today, the micro needling market size is around $540 million in the U S alone industry estimates put the growth rate at a high single digit CAGR to reach an expected 1 billion by 2030.

Micro needling is one of the top co treatments for hydro facial making a perfect fit to sell alongside hydro facial.

Many of our dermatologists plastic surgeons and institutions recommend a hydro facial is a pretreatment to ensure the skin is clean and its optimal state before micro needling.

Indeed, when I'm in the field with our providers. It is one of the most requested tools are efficient ask us to bring to market.

Consequently, micro needling represents a significant growth opportunity for BD health given the complementarity of the service the hydro facial in our existing distribution cool points.

What's more skin stylus also seamlessly fits into our existing razor razorblade commercial infrastructure.

The skin <unk> business model consists of the skin stylus device, along with single use cartridges containing the needle arrays to operate the device as a recurring revenue stream.

We have been actively looking in this space for over a year and after extensive research and analysis. We are highly confident that in the skin status device. We have found the best in class technology to add to our portfolio and to create sustained long term shareholder value.

Moving carefully studied the category. We believe skin cells offers provided us an innovation that is new better and different anything else on the market.

Specifically skin stylus is the only device with multiple arrays of needles at different heights to achieve optimal outcomes. Additionally, it offers a superior user experience to the provider with a patented designed to prevent cross contamination and the flexibility to operate it with or without a court the Maxim.

<unk> provide a flexibility.

Looking forward, we intend to make modest investments to see key regulatory approvals to expand the use of skin stylus for additional indications and to markets outside of the U S.

Skin stylus is an emerging technology at the beginning of its journey. The revenue will be limited in 2023. However, we expect upside from this acquisition in 2024 and beyond as we seek to leverage the BD health infrastructure and sales and marketing capabilities to capture share in this large and growing market.

We could not be more excited for the opportunity to bundle hydro facial together with the skin stylus device is a clear step towards realizing our vision to become the world's leading beauty health and wellness platform fueled by a community of engaged providers as petitions and consumers, we will share more about our plans.

As we work towards completing a successful integration of skin stylus into the BZ health portfolio.

And finally before I turn it over to Leann I want to again, thank our teams around the world and reiterate how proud I am of what we accomplished in 2022.

We drove strong top line and profitability growth launched.

Launched a groundbreaking technological innovation and since their announced marquee booster partnerships continue to expand our global retail footprint and grew consumer and provider interest in demand around the world.

With our planned investment phase largely behind US. We can now has intended turned to driving profitable growth in 2023 and beyond and we will continue to lead the way in this booming categories beauty aesthetics wellness and health.

I couldnt be more excited about the future of beauty health and with that I will now turn the call to land.

Thank you Angela and thank you everyone for joining the call.

I also like to take a moment to thank our teams and partners around the world, We exceeded top line expectations for the eighth consecutive quarter and we continue to see momentum building across the business.

Macroeconomic I'll start with you.

Today, I will walk you through our fourth quarter and full year results.

Cost and balance sheet highlights and finally, our outlook for 2023.

Turning to net sales of flight April , but deliver net sales of $8 1 million.

Third quarter up 26% year over year.

This was driven by continued strong global demand for both delivery system and consumables as you can see despite the negative impact of China shutdowns and foreign exchange headwinds, we had full sequential net sales growth throughout the year when excluding a significant trade up south from there from their launch during the second quarter.

For the full year, we achieved net sales of $365 9 million up 41% year over year or up 32% year over year when excluding the Q2 trade up sells from Sunday, Our U S launch.

On slide eight Youll see what drove strong double digit growth across all three of our regions in 2022.

Looking at the fourth quarter in the Americas, We continued our expansion growing 29% year over year driven by the continued success of both north and their placement and trade ups in APAC grew 33% year over year, highlighting once again, our tools will be first one net in China, while operating the business.

In a difficult environment.

In the fourth quarter, there was a surge of COVID-19 infection. Shortly after we open all resulting in China effectively shutting down again.

Chinese new year with China opening and in fact, it population largely recovered we're starting to see increasing demand with our providers.

In EMEA, our fourth quarter net sales grew 12% year over year.

<unk> would have been even stronger if not for an approximately $2 million constant currency foreign exchange headwind during the quarter.

And then to start the year strong and we expect this to continue throughout the region in 2023.

Even the promising trends, we're seeing in APAC and EMEA, we look forward to launching <unk> internationally in the second quarter of 2023.

Briefly touching on our Kpis on slide 20, we ended the year with a net installed base of 25336 delivery system, an increase of 24% year over year.

<unk> 2067 delivery system in the fourth quarter, nearly 10% of those peripheral sales where trade ups, which is an increase compared to the third quarter due to a testing slightly deeper promotions in Q4 versus Q3.

As Andrew mentioned, we believe all of our providers should be your Houston deal with some deals set to be global this year, we expect to continue promoting adoption amongst our existing provider base with tree that effort in 2023.

We have experienced no issue with our pricing power across delivery systems and customer both the average selling price or ASP alpha delivery system for the quarter was 24408.

Linda the ESP for 2022 was 23832, representing an 8% year over year increase versus 2021 in line with our high single digit expectation.

Lastly delivery systems revenue for the quarter was $50 7 million, resulting in 19% year over year growth in consumables revenue came in at $47 4 million growing 35% year over year.

I want to take a moment on slide 21 to discuss how we evaluate the performance of our consumables.

As you can see from the chart on the left we have demonstrated a sustained upward trajectory in consumables revenue quarter after quarter.

On the right of the site you can see why there is a high correlation between execution and expanding our footprint and cluster of the consumable revenue.

Things will continue to be in a high growth phase rapidly extending and selling their system.

Total consumable sales for us is a better measurement and a persistent utilization metric for our business.

As a reminder, we include one quarter's worth of consumables in the form of training kit for both new and trade ups and deal.

Actually we have previously mentioned the longer ramp and therefore, a longer tail of provider consumables consumption.

Steel and increasing that lifetime value, where it constantly introducing innovative new boosters and other product line extensions to stay nimble and increase the value delivered to consumers at each visit.

Moving to slide 22 for the fourth quarter, we reported a GAAP gross margin of 66, 4% or 72, 3% on adjusted basis.

For the full year GAAP gross margin was 68, 4% or 73% on adjusted basis.

These margins declined year over year on a GAAP and adjusted basis, driven by trade up make costs associated with Sunday lunch.

Lunch and international launch readiness.

Including trade up volumes and premiums paid on a salaried at manufacturing and shipping.

Mobile supply chain challenges inflationary pressures and foreign exchange headwinds.

As I mentioned previously we expect to drive gross margin expansion in 2023 as part of our journey towards an 18 to 20 per cent 20 twenty-three EBITDA margin.

Even the similar dynamics at play with some bail international launch we expect the gross margin for the first two quarters of 2023 to be similar to their respective quarters in 2022 with expansion occurring sequentially in the second half of 2023 post international <unk> lunch.

Moving to the bottom right, we delivered adjusted EBITDA of $16.3 million for the fourth quarter and 47.7 million for the four year as Andrew mentioned, our profitability was impacted by FX Hadwin and zero Covid policy in China in 2022.

For health Contextualized are kind of headwind, we invest it 70 million into our APAC operations in 2022, much of which was not productive due to the shutdown that.

Advantage is that we now have the team and the infrastructure in place ready to seize the opportunity of the reopening.

We also encourage one time expenses of around 3.8 million in patent litigation expenses.

And approximately 3.6 million in reorganization expenses for the year.

I want to spend a few moments of by 23 to remind you of the seasonality in our business.

On the left you see are sequential net cell growth pattern.

<unk> typically starts with a Q1 that is lower than the previous year's Q4 and results in Q1 being the lowest dollar revenue quarter of the year.

Second quarter gains momentum from the marketing activities come back to it in the first quarter, which typically results in a heavy sequential increase your revenue from Q1, two Q too.

In 2022, the second quarter benefited from U S lungs, and the tree that program, we anticipate a similar tailwind this year when we launched in daily in our international region in the second quarter of 2023.

The third quarter ceased growth a bit at a more moderate level relative to Q2 due to the season those summer slowdown experience across the beauty sector, especially in Amir.

Lastly, the fourth quarter is typically our highest dollar revenue quarter of the year.

[noise] holiday promotions seasonally Pete consumer consumption and desire to exhaust capex budgets drive higher demand.

Importantly, we make plans strategic investments in marketing early in the year to boost our productivity and support the stronger sales and margins C. In the second half.

On the right hand, slide you can see how this translates to a quarterly cadence of our adjusted EBITDA generation.

The seasonality would just walk through naturally makes the at the back have waited business awakes back the quarterly EBITDA contribution in 2023 to be similarly weighted as it was in 2022.

I will now turn to a site 24 to walk through a cough detail.

Selling and marketing expenses for the fourth quarter, where 39 million compared to $37.1 million in the fourth quarter last year. They increase is primarily due to a sales commission associated with higher revenue importantly, selling and marketing expenses as a percentage of revenue decreased 781 basis point here.

Over here demonstrating increased cost efficiency via operating leverage from higher revenue.

Fourth quarter, G&A expenses of $28.5 million or 3.4 million higher year over year permanently as a result of increased stock based compensation personnel related expenses as we scale and professional fees relating to our socks implementation, partially offset by fixed cost leverage.

Lastly, R&D cost of $1.4 million decrease approximately zero point $4 million from 242021, two Q4 2022 as weight lacked the nail development costs, partially offset by plan investments in our data infrastructure.

I will now move to our balance sheet highlight on 525, we.

We ended the year with roughly $568 $2 million in cash and cash equivalents.

Our first of $200 million salary to share repurchase programs launching September was completed during the quarter and retired at total of 9.3 million shares.

Or 700 million a salary share repurchase program announced in November is expected to be completed by the end of the second quarter of this year.

We remain well capitalized to execute on growth initiatives, while keeping strategic M&A opportunities actionable.

To that end, we're excited by our M&A announcement today with skin stylus and continuing to build on the promise of a connected portfolio of beauty health brands to serve our customers and consumers, while keeping the majority of our dry powder for future growth.

To prepare for our international stale lounge, we invest a significant working capital in anticipation of straw treat up demand similar to what we experience at the outside of the U S and their lunch we.

We anticipate lower working capital levels in the second half of 2023.

We continue to carry 750 million of 1.25% convertible notes you 2026 on the balance sheet.

Which way Opportunistically rates for M&A among other uses.

Are 50 million revolving credit facility you remain central.

Finally, our current shares outstanding are approximately 132.2 million.

Turning to flight twenty-six pulling two years of planned elevated investments to achieve scale.

Our goal and strategic focus now shifts to generating operating leverage and accelerating growth in China.

We're proud of how fast we scale the business, while simultaneously achieving strong that sales and profitability growth in 2022, despite a macro headwinds.

With continue that momentum in delivery system itself, the international long trips and daily in the second quarter and resilient consumer demand around the world. We estimate to deliver a net sales of 452 470 million for 2023 or 23 per cent to 28% growth versus 2022.

With our foundation set we're confident in our ability to deliver an adjusted EBITDA margin of 18% to 20% for 2023.

The chart on the right hand side of flight 26th Memo Street, how we expect realizes margin expansion as you can see we expect to leverage our fixed operating cost space to January margin expansion, which you're already starting to see in the 2022 fourth quarter results.

Moving to Gore's margin expansion as mentioned during our investors day, we believe we have substantial gross margin expansion opportunity to capture through valley engineering effort.

However, similar to what we saw in the first half of 2022, we expect the impact of tradeoffs. Since then they'll launch related promotions to create a temporary headwinds to our first half 2000 twenty-three gross margin <unk>.

Despite this we expect our continued valley engineering progress in 2000 for any free will show in the result in the second half of the year and result in full ear gross margin expansion versus 2022.

We continue to raining discipline cautious and measured performance in China and should the region a salary faster than currently anticipated or consciously often mystic about achieving of 2023 adjusted EBITDA Arjun towards the higher end of our guided ridge.

While 20 twenty-two wasn't year of great achievement. It was made more remarkable by the fact that we're overcame macro economic headwinds beyond our control our business overall continue to grow and all consumers around the world showcase their revealing.

I'm very proud of what we accomplished in 2022, and we look forward to continuing to execute on our strategy to drive profitable growth and 2020th Street beyond.

Andrew and I will now gladly take your questions operator.

We will now begin the question and answer session to ask a question you marry Crestar then one on your Touchtone phone.

If you're using a speaker phone please pick up your handset before pressing the keys.

Withdrawal from the question queue. Please press Star then too.

Reminder, please limit yourself to one question.

First question is from all of our chance of calling please go ahead.

Hi, This is Joan.

For taking our questions. Congratulations on the acquisition just wanted to get more color on the potential synergies you expect from the new acquisition and also in terms of China, I know, you're giving a a range in terms of EBIDTA, but in your model. How are you thinking about sort of recovery trend in China. Thank.

<unk>.

Thank you good morning, and thanks for the question I will take off festival.

Slices of cool this morning.

Acquisition of skin stylus on S B, I T and micro needling device.

As I said in my prepared remarks.

With our customer base micro needling is the most complementary service tools hydro <unk>.

Many of our providers actively recommended prescribe a hydro facial.

Consumers full Micronesia is mentioned as soon as clean and and multiple states. So for US it's absolutely complimentary perfect fit for the company and it because it really leverage our existing coal points. So immediately we can leverage to ourselves too as they can put this product skin started in the bundle.

<unk> so in a while.

Just announced the deal.

Will be working on integration Rev.

Revenue in 2023 will be limited, but we expect.

Side in 2024, I couldn't be more excited.

<unk> 100, which is the second part of the question regarding how we see China in the eighties.

Absolutely. Thanks, Yeah, So we're actually quite a.

Excited about some of the trend we're looking at right now I'm, a consumer demand opening point of view, but from auto assumption, we assume the very gladhill opening and part of the emphasis we're putting out there is if it does come back stronger that's why you see potential upside otherwise the model is based on fragile.

The next question I planned Bruce Jackson as a benchmark company. Please go ahead.

Hi, Good morning, and thank you for taking my questions and the last conference call you were discussing about.

Manufacturing.

Uhm developing more global supply chain, just because I wanted to give you a quick update thank you.

Good morning, Bruce and thank you very much for the question yes.

The foreign previous school 2021, and 2022 videos were a new public company with those years elevated investment.

And our systems and infrastructure.

<unk> in Europe as well as during Q4, we completed the market manufacturing in China for the APEC region, which we're very excited about as we look too.

Enhance our margin from this year in the coming years ahead that will be important components. So we completed that during Q for Bruce.

The next question is from John Block of Stifel. Please go ahead.

Thanks, guys and good morning.

Me and the system's delivered in the quarter was 2067 associated.

The rest of the Moon.

And I believe the ending installed base was below.

Freedoms were a bit higher based on your commentary, but maybe you can just detail for us to be retirements pick up a bit to get to the ending installed base.

Instead of a tack onto my question would just be can you discuss the fourth quarter system ESP.

I believe that was down sequentially, so I'm not talking about year over year effects, just again to be clear that we go into over too but it.

I also think per the comments last quarter you took place recently.

On the system. So please provide just color on the three <unk> and I'll stop there. Thanks guys.

Okay, absolutely Hagia in terms of the net install base John you know hopefully the turn based on purchase happen and given the shutdown period for China, specifically and you know some of the other APEC region country that negatively impacted the net you know installed.

That's one of the biggest factor obviously, we continue to look at you know across the globe as well as we measure the church.

Separately I think your second question I'm, sorry remind me again, the second question with them.

The <unk> you for 222 versus review twenty-two was down sequentially in light of what I figured was recent price increases maybe you can just reconciled but more so I can.

Absolutely so the AFC as we mentioned they actually did go hand in hand with the gross margin trained as well as we had to alert on a promotion for tradeoff Ray remember we talked about you know we went aggressive a tradeoff when we launch and knowing when very shallow in terms of the promotion Q3 as well.

<unk> and the television slightly <unk>, we saw it does move neato, but I'll be in payback negatively impact the S. T as well as gross margin. There's also partially as you recall were also marketing. These refurbish elite the last generation system to different regions. So between these two.

<unk> ourselves you know given the shutdown in China and some of these refurbished <unk> physician to the tradeoffs those were the drivers actually move the needle when it comes to AFP for Q4.

The next question is living your tongue Raymond James Please go ahead.

Alright. Thank you good morning can I talk about the launch on Sunday, Oh internationally, maybe compare and contrast, your plans relative to the U S launched because obviously.

It's a very different environment.

Now versus last year, when you watch in the U S. And then just your thoughts on the contribution from U S and <unk>. Thank you so much.

Good morning, Thank you for your question.

<unk> launched into in Q2 of 2023.

The benefit of waiting a year is that we've got all the benefits from the learning from the optimizations, we've made to him playbook from the U S. So we're excited to launch it out sequentially.

Globally from Q2 onwards, enrolling launched focused on key markets Festival. So we're excited about that.

For the second part of the question Ma'am.

The second part of the question in terms of the U S contribution yeah. So.

Olivia we model of the year, you know U S growth is continuing to be tough on line for us.

Kind of emphasize the fact that everybody should be on some nail. This is precisely the reason why was interesting tradeoff program as a launching globally. The fact that we are value engineering optimizing we're actually learned a lot with this ILP product. We continue to believe U S layer very significant significant part estimate emphasized a lot.

The upside actually really truly depends on the APEC region Ah how strongly it comes back so that's where it really the potential upsides will lay for the year.

The next question is from Margaret Catherine of William Blair. Please go ahead.

Okay. Good morning, everyone. Thanks for taking questions.

Thought I would start with the grocery operating margins just kind of.

W. I guess I'm, a I'm a cadence during the year you know should.

Should we assume kind of adjusted EBITDA, maybe is below the range in the first half and would it be anywhere near as much below kind of.

2022 numbers amount above the range in the second half.

All of that leading to this question of could you reach I guess in the mid twenties to finish the year.

This year.

Hey, Margaret.

To answer that question, we really wanted to be clear in terms of the seasonality you know when you look at Q1 being lowest quarter of the year and the fact that we're launching globally and deal in queue too I think you know a widow the left now we're going to be making a marketing to support the growth all of which will speak.

To the higher investment for the first half of the year and that also goes hand in hand with margin gross margin right. The fact that we're going to push tradeoff.

Emphasize this all year last year S. U at tradeoffs. It's you know incrementally have have a positive flow through a form of gross margin person's point of view. It will give you a temporary negative impact so with that in mind, absolutely to confirm your Coleman is going to be very much backyard.

Four 2023.

The next question is from <unk>, a J P. Morgan. Please go ahead.

Hi, Thanks for taking my question I just wanted to follow up on a question that was asked earlier on the call. Just in terms of you know I guess the mix of new systems and churn in the quarter you know your island at the China was one of the challenges there.

So when I think about you know the trends are saying I'm trying to so far in the first quarter you know.

It sounds like <unk> is it appropriate to think that we're seeing that more gradual improvement that you're assuming near the bottom end of your guidance and then also when I think more broadly about your assumptions for the year. When you think about that for 50 to 470.

How should we think about that when it comes to the mix of grocery seeing between systems and consumables.

Good morning, and thanks for your question I'll start with China, and then end up to I think look what we're seeing is obviously, we're in constant contact with our team on the ground and Sean I think what we're hearing is that often initial surge in COVID-19 infections off the reopening as we get into late February the market now.

It's pretty much fully Iceland, but during the last two or three weeks just seeing traffic gradually picked up at all all seem estimates, it's about 80% of pre COVID-19 levels at this stage so with that we've taken a measured approach bank doing in a limited contribution from China and the earlier part of the year, but remained cautious.

Optimistic about Q2 and beyond and of course, we're decided to launch in that in that market during Q too and of course, the rebound in China is more accelerated than originally anticipated.

The second half to be stated earlier, that's when we'd be looking at more of the the two.

23% higher range of adjusted EBITDA guns with 2023. Moreover, should the market deteriorate will quickly take steps to just leave it as an investment to protect the bottom line.

Yeah, and then I think thats, while summarize everything the motto just confirms that right unison Q1 is almost over the fact that nothing really happened to you after Chinese new year kind of give you a sense of why we emphasizes of gradually opening and you have to keep in mind.

And the provider is a very much focused on you know hiring engaging their consumers and utilizing whatever the inventory. They have at hand. So we took that into consideration. His both of the revenue upside in the EBITDA upside hi, pretty closely to how robust rail reopening will be.

The next question is from <unk> will admire Piper Sandler. Please go ahead.

Hey, good morning, I'll, congrats on the quarter and thanks for taking the questions.

So first I I'd like to touch on you.

Spend a lot of time overseas the past year really understanding the market and preparing them for some data can you just talk about what visibility you have into system placements in these international markets. Once you do lunch and in the second quarter and an ice cream from some of the partnerships you you've developed will help here, but any.

Color there'll be helpful. And then secondly decided marketing can you just expand a bit on on your ability to flex on marketing dollars say, we do head into a tougher downturn or China. You know it goes back and into Lockdown can you just talk about your ability to be flexible with that marketing sent to maintain the margins. Thank you.

Good morning, and thanks for the question Great speeches I once again I will kick off and then.

The second part of the question I mean clearly despite.

Despite the economic backdrop with last year, we are extremely pleased with the way.

<unk> markets perform particularly are 16 direct market would you consider.

Plus 46% for the year. Despite the war despite the ethics headwinds would've been even more equipment constant currency eggplant, Despite China with zero Covid policy. We grew 24%. So clearly we're extremely excited to bring that same day.

Innovation during Q too.

All the work we've done in the last two years and 21 and 22 investing in that plan infrastructure build up teams people training education Centre systems three bills in the manufacturing in China, I must say, we're really excited.

Mostly optimistic about.

The year over seas, and despite that if we were obviously expect a strong year in the U S where we have.

Medical Spa channels. So it's we're very cautiously optimistic about the year, yeah moderate you talk about the leavers, which can flex it doesn't plan out yeah, absolutely and then just to add on.

To even you know Andrew mentioned I think there were a bit more of the recession.

When it comes to the end of the year, but it's just you know listening to the team around the world. It seems that it turned to be a bit more positive, but again, what we're being cautious and we're getting a continuous officer.

Precisely as for sure before occurring we're sort of 50 50 split when it comes to fixed and variable and even on a fixed side of the equation there is.

It's a lot of people call so to Angelus point, if the market shut down <unk> you can see it when it comes to variable it's very much under our control.

There are certain things.

In terms of investment, but we can pull that lever.

Flexible around the globe.

The next question is from Ashley Hogans Jeffries. Please go ahead.

Good morning, its Blake on for Ashley.

Missed it but I was wondering if you could provide any commentary on your.

Revenue contribution firms in jail for new placements for start ups throughout fiscal year 2023, just wondering how to think about that.

We could get any kind of commentary there and then also just wondering if we could get an update on what are you seeing in the terms of the health of your end-consumer here in the U S.

How 'bout shredded throughout the quarter. Thanks, so much.

Think you'd like I'll kick off with the second part of the question and then.

<unk>.

The first book.

Well no businesses totally recession or economic I'm certain proof, we found that all consumer and I'll provide has been extremely rare.

Brazilians.

We've seen as you've seen in our results.

No slowdown in the demand for hygiene Facebook is approved <unk> and our results and I think there's obviously a few factors behind the I think first of all if you consider channels are products are extremely democratic plus.

When compared to other aesthetic services and many of our customers. So we're really active at gateway.

For entering aesthetics and reduce it a little bit I think of trade down from higher price products into hydro facial I think consumers.

Maybe cutting back in other areas, but certainly not willing to cut back and that monthly hydro facial it's an investment in itself.

That confidence so today, we've seen noticed.

No doubt I think they're benefiting really from you know the zoom boom and other broader shifts and there's somebody I talked to Nicole about this medicalization of beauty, where consumers are increasingly interested to stop beyond perhaps the wellness trends of the past two years.

Physician and scientific endorse products, such as hydro facial and with really well captured.

Really well positioned to capture that so shift I think the final piece of the U S.

<unk> channel is booming is the key channel for us.

<unk> recently published that between 2018 and 2022, the men's sports channel in U S grew 62% significant right somewhere and is a big part of our business somewhere on that journey with all of our providers growing a zebra.

Yes in terms of trade up in Alaska called other dollar pretty specifically for the second quarter, it's over $20 million and that's the biggest quarter of that we had the tree that impact when you sit back and just think about how many system. We sold in terms of a person.

It's roughly about 20% for the year of 2022.

The next question is from Kyle rows of Canaccord. Please go ahead.

Great. Thank you for taking the questions. This morning.

What does it just touch on two things one is the acquisition I'm wondering if you could give us just an expectation for how we should think about the revenue contribution over the near to medium term as it folds in.

And then secondarily, you really impressive leverage in the queue for obviously, a seasonally strong with with with the revenue number there, but just was impressed by the sales and marketing leverage given.

All of the initiatives you have going on so we could just be helpful to understand how we should think about some of those incremental spend as we move through 2023.

Yeah. Thank you very much.

Good morning, Count and again, thanks to your questions I will kick off in terms of skin status I played with with with just announced it we're very excited about it with absolutely convinced that this migraine devices that are different than anything else in the market, but it's an early emerging stage technology.

So I think what you'll find is that we'll have in 2000 twenty-three limited revenue upside that we have you know obviously.

And a significant plans for this ahead for 2024 and beyond and I think in the coming months during medicals I'll update you on the successful integration of more you can expect from skin status, but it's the perfect fit for our businesses. So complimentary to hydro facial our sales team <unk>. It's a.

Really great fit for Us man.

Kyle so when it comes to marketing you know last year with an emphasising our own seasonality, we're always in that heavier in the beginning of the year and we anticipate the elaborate to pay off in the second half and you sort of seeing that during the fourth quarter. When it comes to 2023, you know clearly there is committed events that way.

In verse upfront you can see and pass the night, Angela sharing and especially with the second quarter of long. So there's a lot of pre can F. Three plan events around the globe at play, but when you look at a second half there's a lot of leverage we can pool and lever we can pool, we doubled down and getting more you know.

Lead me in order to convert but then we can't really decide how how big or small we can go when it comes to trade shows and other more physical activation.

The next question is from Nirvana tie of BNP Parabola. Please go ahead.

Hi, Thanks for taking my questions just a question on China, There's a comment on that.

So shall we see further investment in China.

<unk>, what's the timing.

U S. My second question is have you seen <unk> change in pressure and just a final quick one do you plan to meter acquisitions in the low.

Double digit range in 2023, thank you.

Thank you. Thanks for your question, there's a <unk>. So let me start first of all with China, if you're relatively new at the loft story. We've said the 21 and 22 of the new public company, where our years of elevated investment, where we set up globally, our infrastructure systems on local manufacturing.

Training education, and teams, which we did and 21 and 22 and especially in 2022 in China. So the fruit, presumably the bulk of our investment is done in China, and that's where we're so well positioned now to capture the opening growth as this market starts to open especially.

We launched in day and Q2 across the region.

Yeah, I think the other question that you had in terms of a physician.

Look through those three criteria that Andrew has nation.

Has to be a credit to the bottom line and need not to be a sad you know and they need to have them come in <unk> and we continue to be very mindful thoughtful in terms of our execution and then the final question I would say he lasted about the guidance for the year I want to <unk> we.

Absolutely confident to deliver <unk> 18, and 20% adjusted EBITDA guidance, we gave for 2023.

Upper limit as we discussed earlier will be really depend on China and also just reaffirming our long term 2025 guidance, which we gave hearing invest today. Thank you.

The next question is from Linda Bolton Wiser of D. A David cents. Please go ahead.

Yes. Thank you I'm sorry, if I missed this but can you give an operating cash flow number 420, 22, and then I know you mentioned some investment I'm working capital is there some kind of a rough outlook that you have for operating cash flow in 2020.

Three and then my second question is what are you. What are you seeing are learning so far regarding the connectivity and the data and analytics, you're able to have now with the connectivity of that new Sunday a device. What are you. What are you seeing are learning so far with that thanks.

Having that I'll address the free cash flow question first you know we had spoke about investing in working capital heavily in 2020, Q as we're getting ready to launch the nail globally as we learned if you recall the way lunch in the U S. We ran out of inventory we were very quickly trying to.

Speed up and really and ship the unions out so we're in a really good position as you can't officer of our inventory balance and obvious as you look at at <unk>.

Pay about $10 million in terms of interests with pay about $20 million.

If you assume that EBITDA margin will be you know a guaranteeing 442023 that by definition should be in the cash flow positive position. So then it all boils down to working capital So Wednesday lounge globally in the second quarter, Linda our expectations really manage.

Networking capital closely and you should see you know more of a beneficial trend coming through the second half of 2023, we feel positive about cash flow generation starting at the end of 2023.

Thanks, Linda and in terms of what we're learning coming up squirrel.

Yeah since we launched in the in the U S.

We're learning a lot I think.

Learning adjusting it's giving us a number of insights firstly on the consumer and the number of.

Sort of more.

Depth of knowledge on the consumer it's helping us.

Develop new products and political such as body, which is obviously going to be a key strategic do for us for us this year.

So we're learning how to improve the system and the software and we're always iterating and learning and improving the system based on provide a feedback based on what we're learning of that data and.

That's why I again, I think it's another advantage why we waited for yeah before launching internationally, we're able to take all of those learnings and optimize that to the launching Q2 overseas and I think I'm coming courses, which are more insights review of what we're learning.

This concludes our question and answer session I would like to turn the conference back over to Andrew Sandwich for closing remark.

Well. Thank you everyone for your questions just the clothes are risks right confidence in the passport I think with our investments and are largely complete we have the infrastructure in place to deliver on a profitable growth strategy. I think we have an exciting year ahead, Whitsundays Q2 international launch differentiated partnerships.

Five consumable so <unk> you consumers to the brand China's redfin and integration of skin silence. So we look forward to continued to execute some further ah cancel the leadership in 2023 and beyond the team will be available today for any additional questions. You have once again, thank you and have a great day ahead.

That's what I think that's all concluded. Thank you for attending today's presentation you may now disconnect.