Q1 2023 SmileDirectClub Inc Earnings Call

Greetings and welcome to the Smile direct club first quarter 2023 earnings call. At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone.

Keypad.

As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host Johnson Fleetwood director of Investor Relations. Thank you. Sir you may begin. Thank you operator, good morning, before we begin let me remind you that this conference call includes forward looking statements.

For additional information on Smile direct club, please refer to the company's SEC filings, including the risk factors described therein, you should not rely on our forward looking statements as predictions of future events. All forward looking statements that we make on this call are based on assumptions and beliefs as of today.

I refer you to our Q1 2023 earnings presentation for a description of certain forward looking statements.

We undertake no obligation to update such information, except as required by applicable law.

In this conference call. We will also have a discussion of certain non-GAAP financial measures, including adjusted EBITDA and free cash flow.

Information required by regulation G of the Exchange Act with respect to such non-GAAP financial measures is included in the presentation slides for this call, which can be obtained on our website.

We also refer you to this presentation for a reconciliation of certain non-GAAP financial measures to the appropriate GAAP measures.

I'm joined on the call today by Chief Executive Officer, and Chairman, David Katzman, and Chief Financial Officer, Troy Crawford.

Let me now turn the call over to David Thanks, Jonathan and good morning, everyone. Thank you for joining US today I want to begin my comments by thanking the entire S. D. C team for continuing to deliver on both of our two key strategic initiatives through the enhancements and upcoming U S launch.

Of our mobile scanning smile make or platform and the launch of our premium service care plus four pilot markets all while meeting our financial goals for the first quarter of 2023 are focused on producing innovative technology driven solutions, while maintaining disciplined cost controls allowed us to deliver sequential revenue improvement over Q4.

$33 million or a 38% quarter over quarter increase.

And adjusted EBITDA improvement of 21 million.

The revenue increase was driven by an initial aligner shipment volume increase 44%.

Which combined with our cost management, not only improve the bottom line.

But also delivered an improved free cash flow sequential performance of 23 million, let me start by providing an update regarding the status of our two key transformative innovations that will drive meaningful growth first.

First innovation is our smile make or platform as a reminder, smile maker or S. M. P features our mobile <unk> scanning technology that allows customers to begin their teeth straightening journey from their own mobile device. We successfully launched S. M. P. In Australia at the end of November and are excited to announce our plans are on target for our U S launch in the next two weeks.

We have made numerous improvements to our smile make a platform based on the learnings from our Australia launch both in technology updates as well as customer journey enhancements, which allowed us to develop a stronger solution and go to market strategy for the U S.

Small maker is our internally developed innovative AI technology that allows customers to digitally captured to the images of their existing small on a mobile device.

And submit the images to our enhanced AI engine.

To develop an automated three D draft treatment plan that allows customers to buy their liners and meet immediately after seeing their potential new smile from a business perspective. This greatly shortens the time line from initial customer engagement to making a buying decision from days or even weeks to mere minutes, while providing our.

Our customers with a great digital experience.

As I mentioned the U S launch remains on track to launch in the next couple of weeks since the U S is a completely different market in terms of advertising channels consumer preferences as well as our backend payment processor with smile pay our plans are to have a soft launch introducing small maker within select marketing platforms and gather learnings before full rollout our second growth engine.

As our care plus offering this elevated service model allows both dentists and orthodontists that specifically the Underpenetrated general practitioners market utilize S. D C O liners, and our robust telehealth platform to meet the demands of the more traditional orthodontic customer higher income households, and parents of teens.

Does that ever added access to in person dental professionals, but also want the convenience of telehealth for follow up care.

We believe that this offer will position us D C to capture a larger piece of the hiring from consumer and T market.

As well as provide a premium option for our existing customers, who want the option of both virtual and in person care.

From our initial research, which has been confirmed with the launch of our pilot markets.

Customers and dental practices value the unique turnkey orthodontics as a service nature of our hybrid Careplus solution from our practitioners perspective. This solution requires minimal incremental investment for equipment and product training.

Any upfront fees paid to smile direct club for consumers they value the opportunity to purchase a premium service offering at an affordable price with a higher level of direct access for in person dental professional visits from a go to market strategy. We also discovered that many of our partner network practices appreciated having smile direct club team members on site to support the introduction of the sale of that.

Kerr plus offering we have introduced smile direct club sales specialist and targeted partner network practices to better educate customers on the differences between our two service offerings are plus and our traditional virtual care offering.

Based on these insights we developed a dual journey offering that educates them allows customers with bookings at <unk>.

Careplus partner network practices, the option to choose between Careplus and virtual care, regardless of the initial appointment's I booked within the practice, we launched this premium service care plus offering at a price of $3900 for a pilot phase two participating partner network doctors in Denver, Orlando, Sacramento and San Diego.

And plan to expand to more markets in the upcoming months.

We continued to make progress with finding the right number of locations within our partner network program exclusive channel through which our customers will be able to receive our careplus offering we ended the quarter with 1095 active locations. It's important to highlight that we do not need to have coverage of every general practice in our network, but want to ensure that we have a foundational presence.

In all key markets that allows a customer a short commute for an in person visit a key part of the value proposition for the Doctor's practice is the ability to leverage the sales and marketing firepower of S. D C to drive customers to any of our partner network offices for our care plus offering.

Early partner feedback has indicated a S. D C care plus leads are driving new foot traffic to their practice.

Finding an opportunity for the practice to turn these customers into patients of their own for further dental care.

Additionally, some partners are benefiting from increased untapped revenue opportunities by selling the Kerr plus solutions to their existing patient base further monetizing chair time with their patients underlying the advancement of these strategic priorities is our commitment to rigorous financial discipline, our first quarter bottom line results highlight our commitment to growing our business, while keeping our focus on our cost controls.

We took actions in January to reduce costs by approximately $120 million to drive positive adjusted EBITDA by Q3.

And positive free cash flow by Q4.

With the results of Q1, we are on target to achieve our objectives.

In addition to our January cost actions, we recently announced in our March 8-K filing and our discussions with some of our existing convertible bondholders.

For reference we issued approximately $750 million in convertible debt in Q1 of 'twenty, one which is scheduled to mature in February of 26.

Or based on market conditions, we are exploring an opportunity to reduce some of this outstanding debt. While also adding liquidity to our business. We are pleased to inform our investors that those negotiations have progressed with certain of the convertible debt holders with respect to a potential transaction, we anticipate being able to share more with our investors in the very near term.

Any financing transaction the company would enter into would be focused on improving our capital structure by bringing in additional funding and lowering our overall debt, we continue to face a difficult and unpredictable macroeconomic environment. However, it's important to note that our dedication to maintaining financial discipline through our cost controls and cash deployment, regardless of topline results.

We manage our business throughout 2023, we have the solutions technology platform team members and financial discipline to achieve our operational and financial targets and now I will turn the call over to Troy, who will provide more detail on our Q1 results.

Troy.

Thank you David.

I will cover our financial results for the quarter. Please be sure to review our supplemental materials posted to our Investor website, which provides additional details on everything I will cover.

Revenue for the first quarter was 129, which is an increase of 38% sequentially and a decrease of 21% on a year over year basis.

We are pleased with our sequential growth that exceeded our typical seasonal trend from the fourth quarter to the first quarter.

Aligner revenue was driven by our shipment of over 59500 initial liners in the quarter up 44% sequentially at an a S. T at 1949 a.

The year over year revenue decline was primarily driven by continued challenging macroeconomic conditions driven by high inflation, which has been particularly difficult for our current core customer provider.

Providing some details on the other revenue items implicit price concessions were 11% of gross aligner revenue down from 14% in the fourth quarter. The percentage recognized in the current quarter is in line with our historical performance with the fourth quarter impacted by lower overall says fluctuations in the quarterly IPC percentage are impacted by the overall level of revenue.

Quoted in the period.

Can drive deleveraging as well as rebalancing of the reserves.

Mentioned on prior calls we maintain separate reserves for IPC and cancellations and we analyze them regularly rebalanced those reserves based on current information.

While our results reflect the impact of the continued macro headwinds affecting our core customers.

Our restructuring plans drove meaningful improvements in our cost structure and free cash flow for the last three consecutive quarters with improved year over year EBITDA in the current quarter, we improved adjusted EBITDA by $8 million and improved free cash flow by $36 million, Despite a $32 million year over year decline in revenue from the first quarter of 2022 compared to the current quarter.

Reserves and other adjustments, which include impression kit revenue refunds and sales tax came in at 9% of gross Aladdin revenue compared to 10% in the fourth quarter financing revenue, which is interest associated with our small pay program came in at approximately $7 million, which is consistent with Q4, 2022 and down approximately $2 million year over year.

Due to the lower accounts receivable balance other.

Other revenue adjustments, which includes net revenue related to retainers whitening and other ancillary products came in at $18 million, an increase of 2 million over fourth quarter 2022 revenue and a decrease of $5 nine compared to Q1 2022 as a reminder, in the comparable first quarter last year, we began the rollout of our innovative new retail.

Including our whitening strips, which drove an initial increase in revenue now turning to smile thing in.

In Q1, the share of initial aligner purchases finance there are small pay program came in at 65, 5%, which is above historical levels of approximately 60% and is reflective of the impact of the difficult macro environment on our core customer.

Small pay program is an important component to drive affordability with our customer base and overall the program has continued to perform well with our delinquency rates in Q1, returning to more historical levels, particularly when compared to Q4, which on a lower sales base Deleveraged. The fact that we keep a credit card on file and have a low monthly payment gives us the.

Confidence that small pay will continue to perform well turning to results on the cost side of the business gross margin for the quarter was 72, 5%, which was up from 61% in the fourth quarter.

As a reminder, the lower gross margin rate in Q4, 2022 was driven by the deleveraging of fixed costs on lower sales volumes and higher impression kit volume, which carries a higher cost relative to sales as well as lower retail margins and higher holiday shipping costs.

As expected in the current quarter the efficiencies from our cost control initiatives drove the improvement in margins as the topline grew and we benefited from the operating leverage.

Getting in selling expenses came in at $72 million or 60% of net revenue in the quarter compared to $97 million or 64% of net revenue in the first quarter of 2022.

While our marketing and selling expense increased $8 million from the fourth quarter of 2022 to take advantage of seasonal factors. We continued to drive additional efficiencies in our first quarter 2023 spend with an improvement of 1400 basis points when compared to the fourth quarter.

With a targeted focus on efficiency and quality leads we are continuing to calibrate spend across a diversified platform base to optimize continuously throughout the period.

You have the right balance of high funnel leads and bottom funnel a lot ourselves on small shops, we had 108 permanent locations as of quarter end and held 62 pop up events over the course of the quarter for a total of 170 location sites. The fluctuation in shop count as a result of detailed analysis, we have undertaken to analyze it.

Profitability of each store location, our ability to drive marketing efficiency as well as convenience for our customer base.

We expect to expand our small shop footprint as we optimize locations to support growth initiatives with our broader care plus rollout.

Our end goal is to increase customer access to our solutions through the scaling of our partner network channel.

Imagine of our small shop footprint and the upcoming launch of our small maker platform and App.

We will continue to monitor our strategies to expand our reach that supports incremental demand without cannibalizing sales from existing channels. We now have 1095, North American partner network locations that are active or pending training.

Partner network team has been focused on optimizing productivity and preparing for a broader care plus solution launch based on the learnings from our test launched in four markets beginning in February .

Our partner network footprint will both scale our operations for our current virtual care business, but will also serve as a key channel as we fully rollout our careplus premium service offering to all U S markets General and administrative expenses were 65 million in the quarter compared to 71 million in the first quarter of 2022, a decrease from the prior year.

It was driven by the cost savings initiatives, we have put in place as well as a continued focus on cost control.

The increase in G&A compared to the fourth quarter of 2022, it was primarily related to lower incentive compensation expense recorded in the fourth quarter. As a result of adjustments based on full year operating results G&A cost control initiatives, we announced at the beginning of the year have been implemented and we will see lower G&A costs throughout the rest of the year as we continue to folk.

On right sizing our overall operating expenses based on core revenue expectations. Other expenses include interest expense of $7 7 million of which $6 3 million is related to the secured debt facility issued in April 2022, and $1 4 million as it relates to deferred loan costs associated with the convert we issued in 2021. Additionally.

One time cost related to lease abandonment impairment and the other store and restructuring costs were $8 7 million, consisting primarily of costs related to our January restructuring actions, including costs associated with severance as well as store and facility closure costs and.

In other expense, we recognized gains of $1 5 million, primarily due to unrealized foreign currency translation adjustments recorded in the quarter. All the above produced adjusted EBITDA of negative $27 million in the first quarter, which is an $8 million improvement over the first quarter of 2022, despite a $32 million decrease in revenue this quarter represents our.

Third consecutive quarter of reporting improving year over year adjusted EBITDA results and we are on track for continued improvement with our efficiency and cost control initiatives put in place at the beginning of the year. Our first quarter net loss was $66 million compared to Q1, 2022 in that loss of 73 million breaking.

Breaking out adjusted EBITDA regionally for the first quarter U S and Canada came in at negative $15 million and rest of world adjusted EBITDA was negative 12 million.

Moving to the balance sheet. We ended the first quarter with 86 million in cash and cash equivalents of 184 million in net accounts receivable and 136 million drawn on our $255 million debt facility with H P. S cash from operations for the first quarter was negative $33 million, while cash spent on investing for the quarter was negative eight.

Free cash flow for the first quarter defined as cash from operations less cash from investing was negative $41 million, which is a $36 million improvement over the first quarter of 2022 cost changes we've put in place continue to drive 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 recognized that in this difficult sales environment, we needed to realign our cost structure to attaining 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 as noted in our press release, we have reaffirmed our two.

'twenty three guidance as well as the underlying assumptions that we provided on February 28 2023.

It's important to note that this outlook does not factor any contribution from our Snowmaker platform rollout in the U S or the launch of our Careplus program.

As David mentioned earlier, we've been negotiating with certain of our holders of our convertible notes and those have progressed with respect to a potential transaction.

We anticipate being able to share more with our investors in the very near term.

Any financing transaction the company would enter into will be focused on improving our capital structure by bringing in additional funding and lowering our overall debt with our upcoming small maker platform launch in the U S and our Careplus solution. Now lies in limited geography, our investments in innovations are becoming a reality in the market.

We have gained valuable insights from our test market launches, which will enhance our go to market strategy as we roll out these solutions to the broader market.

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 that says Darren.

From their own home to one of our small shop retail location.

In person visit one of our partner network providers and now from the technologies on their own mobile device. In addition, we are on track to meet our positive EBITDA and free cash flow goals in the back half of the year to stabilize our balance sheet enabled us to execute on our new initiatives.

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

We look forward to our upcoming U S launch of our Smile make a platform over the next few weeks and the expanded rollout of our care plus offering to additional U S markets.

We will continue to update the market with additional insights regarding these initiatives along with any of our other exciting innovations and achievements with key milestones.

Thank you to everyone for joining today and with that I'll turn the call back over to the operator for Q&A.

Okay.

Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if he would 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.

One moment, please while we poll for questions.

Our first question comes from Jon Block with Stifel. Please proceed with your question.

And good morning.

David maybe the first one for you just the one to 23 results.

You know our 228, 29% of full year revenue at the midpoint in the quarterly growth was solid so it would sort of suggest some momentum in the business return, but that seems a bit at odds with the full year revenues right. So maybe if you could just talk to is it something just conservatism is it just early in the year is it.

Choppy out there I guess, what I'm trying to get at is can you talk about the environment, which had been challenging per your prior comments with inflation et cetera, but are you seeing that starting to thaw. It anyway, and then I'll ask my follow ups.

Yeah, John I know, it's still a tough market out there you know the macro our customer, especially that $65000 a year.

Income consumer yeah. It was a good quarter, especially over Q4 and in some of the cost savings initiatives that we did versus Q1 of 2022.

But I think we're right on track for hitting our guidance of 400 to 450 million. This is where we thought we would be based on what we're seeing in the economy. So I, we're not seeing any thawing out Oh.

Our consumer, especially in discretionary spend.

Good quarter, and we'll we'll keep marching on our core business to hit that.

Guidance of $400 million to $450 million on the top line.

That's helpful. And then I guess I'll ask sort of a follow up to that and then Troy. My second question. The follow up would be just be after <unk> results Troy anything cadence wise I think your cases, usually downloading PD <unk>, the guy who would seem to imply that but maybe you could just talk to the cadence.

It's just the EBITDA the positive EBITDA aspirations in the back part of the year.

How do you get there and try I know you alluded to lower G&A for the rest of the year, but the GM guide.

Suggest it doesn't go much higher so I guess, what I'm getting at is what's been the problem for the past handful of years right, which is can you drive that CAC much lower while maintaining the top line because in the past we've sort of seen that high correlation between the cat and the volume number on the liners. Thanks guys.

Yeah, when when thinking through kind of Q2 and in the cadence I think what we can expect you're right Q1 is the seasonally high quarter end and we were pleased with the with what came through in the quarter, particularly on top of what we saw from a overall volume standpoint in Q4, I think what you can see in Q2.

B a a.

Similar decline to what we've seen from Q1 to Q2 traditionally that is what we would expect there and I'd say for the for the full year, you know with our $400 million to $450 million guidance that there's a decent size range. There that I think we could be at the top or bottom end of that just kind of depending on how the overall macroeconomic conditions.

Les out through the rest of the year.

When I think about the overall bottom line piece you know Q1, we didn't have all of our cost savings initiatives implemented at that time. So we will see G&A come down, but we're also planning for <unk>.

Selling and marketing efficiency as.

As well in Q2 as well as the back half of the year and we are driving more efficiency through marketing and that's that's really been a huge initiative for us that we started last year and really has continued all the way through this year as well, but being very cost conscious financial discipline, it's gonna be a key for us through the back half of the year.

We do have some I think some revenue opportunities as well we've looked at pricing.

For both you.

You know kind of touch ups as well as our overall.

Cost of a of an aligner treatment plan and.

Retainers as well, we're looking really all across the business you know inflation is impacting us and and some of that's going to ultimately flow through our revenue as well as we look at our overall cost structure. So I think we have a lot of things going our way kind of in the back half of the year that will help to drive our improving EBITDA and and free cash flow and.

And if you know we've been on that trend. So this was our third consecutive quarter of improving EBITDA. We just barely missed the fourth quarter from last year from Q2.

We've been on quite a trend on cost control and and revenue enhancements margin enhancements and things like that to get to a point just on our core business alone to getting to that positive EBITDA level and then obviously, we've got the initiatives that we're looking forward to as well as those launch those will be additive to both revenue and bottom line.

Great. Thanks for the color.

Yeah.

Our next question comes from Brandon Couillard with Jefferies. Please proceed with your question.

Thanks. This is Matt on for Brandon David maybe one for you can you give a bit more color on what the team's doing ahead of the smile maker launch here in the U S.

Sure some of the learnings from Australia, I think you mentioned, both tech and consumer learnings that you have.

Looking to tweak here I'd be curious to get a little more color on that and then updated thoughts on how youll target millions of existing but you do have within the U S funnel.

Once the product's life. Thanks.

Yeah. So you know it's been such a new innovative product and smile maker with a two D. Three D. AI technology, it's been every week.

We're looking at enhancements and tweaks and making really good progress in Australia, we're still not done but we're at a point now that we feel that we can launch the U S and in that we'll be launching within the next two weeks.

And we'll continue to tweak in the U S. The U S as well obviously each market stands on its own some of the marketing.

Channels are different our payment processing back end is different but we have to make sure that those are a rock solid but you know we're we're very excited about what we're seeing both really does two things it.

Designed to enhance conversion because you don't have this long.

Slow through the system like you do with kits and scans, which you know kids can take up to two weeks before you get it back and get a treatment plan get your photos uploaded.

Small shop visit you Gotta do you have to book it usually you know the average person is three to five days.

And make sure that they can show on that they're not reschedule so well.

What would sort of make or does is allows that customer Walter in the moment, while they either heard from a friend or foreseen or add on T V or baseball could go immediately download the app.

Scan their teeth and all the metrics around that.

It had been significantly improved the number of starts has been improved.

Completions people you know.

Being able to get through the scan because theirs.

Overnight, there's nine poses that they have to go through between the straight on her upper they're lower et cetera. So all those things. The team is constantly working on to improve the metrics. So that we can get more people through the funnel on the other end and get what we call a custom small plant lead which then right at that moment two to three minutes into after dealing with it.

They can buy their of liners and so that's improving conversion, but the other one that we found is.

Is is really helping the success of small maker is the amount of people that are visiting the site or going to the app store based on the advertising of this innovative technology. So.

In the U S market with our normal kittens scan and our marketing which has been.

Very very successful and we have 60% aided awareness.

This new technology, and the and their creative in our TV spots, which you'll soon see in the U S and in Facebook and all the different channels is bringing more visitors per dollar spent so either way you cut it either you improve your conversion or you you stretch your marketing dollars more both of those are going to improve the CAC, which is what we're after.

And we're seeing it and we expect to see it after some tweaking in the U S. We are doing a soft launch so.

So when we launched in two weeks you can go to the App store.

And you'll still skews, you'll see the product and you use it we're not going to be marketing on television right away, we're not gonna be marketing at different digital channels right away until we get some of the tweaks and enhancements that we need and then as we see the same success that we saw in Australia, where we have different phases to introduce it in different marketing channels and eventually it'll be.

100 per cent everywhere, you see small direct you'll see smaller.

Thanks, That's really helpful and then referrals as a percent of our line of orders ticked down a little bit here to 19% in the quarter per cent been below 20.

Anything specific to spike out and once you sort of the step down in referrals. Thanks.

No we're really not seeing it I mean it was it was I think you know very slight yeah, we've been up as high as what 'twenty two 'twenty three and I were at 19, I, there's nothing from a customer care standpoint for any <unk>.

Satisfaction with the brand or the service.

Not overly concerned about the another thing that small maker has done is it because of the cool technology, we're getting more people to share the app, which is really nice because that's that helps drive down your CAC, it's free advertising so there's a function.

Within once you get your customer smiled plan to be able to share that out with others and we're seeing people use that and we didn't have that kind of.

Ability for customers to share.

Hmm.

You know directly interacting with them that.

Super Thank you.

Our next question comes from Dylan Carden with William Blair. Please proceed with your question.

Thanks, Tom I know, we don't talk about it a lot, but I was just kind of curious if the significant portion of the business the decline in sort of ancillary revenues.

Is that expected to follow closely to a liners or you know one would think that you're pushing doors and pushing product to that channel that you would see maybe more stability.

I'd say overall the ancillary revenue changes are really driven more by the retail business.

And we did have some product launches last year.

It drove a little bit.

So we we had launched our whitening strips are new whitening strips last year.

And I think that's really what impacted it but certainly I mean, what we've seen from our overall retail environment and the macroeconomic environment has impacted the retailers that we work with and so they pulled back some clearly I think we have some real innovative products that we've got out there that I think you can still do.

Drive some volume growth, but I think it's going to follow the macroeconomic trend and we did see we have seen some pullback certainly in Q4 and Q1 from some of the retailers.

And then.

Thank you on the smiles shops down to 81 in the United States.

You know kind of more significant reduction over time broadly I know you've closed some markets, but what's the kind of end goal here I mean do they serve a purpose and there's sort of new vision of the business or are they kind of continue to wind down as you grow practices.

And then any way to kind of get at.

A measure of organic growth in the business kind of netting out perhaps some closures.

Yeah.

Well I think you know what we've really done is analyzed that portfolio very closely you're right over time, certainly before Covid. We were we were more of a H shop locations in person scan type business, but that shifted back once once COVID-19 started were about 50 50.

Between kits and scans so its pretty well distributed I'd say really the focus we've been we've been utilizing is really looking at those stores from a profitability standpoint.

And then looking at them from a proximity to our customer base standpoint, and then trying to drive marketing efficiency through some of those stores as well because we do get higher conversion rates from scans, but it's really a process of US you know analyzing those store locations, we'll actually see some additional stores that we're gonna add back here.

The near future, but again, what we've done is kind of rationalize that overall footprint.

From a profitability and location standpoint, but it is a huge opportunity for us to increase.

<unk> marketing efficiency as well because we can market and some of those areas, where we have a small shop and drive volume there.

Versus a a a kit market by itself, so it'll fluctuate it'll fluctuate around a little bit, but it's really a focus for restaurant profitability and just making sure from a financial discipline standpoint, we're looking at that store base is how it can be additive to the overall business.

So it is an important part of what we're doing going forward I think we've looked at you know could we have shops inside of our partner network locations.

And and there is an opportunity there, but I think it's going to be a mix and I think we're still working through that.

From an overall profitability standpoint, you just make sure we have that right mix, where we're in front of the right customers and making it convenient for them too.

Start with us, but and then you know kind of maintenance.

Yes.

Okay.

That's tough enough thanks, guys.

Yeah.

As a reminder, if you would like to ask a question. Please press star one on your telephone keypad.

Our next question comes from Robbie Marcus with Jpmorgan. Please proceed with your question.

Great Good morning, and thanks for taking the questions.

Maybe to start you talked about the expected ramp in guidance so for the rest of the year.

Wanted to dig into you know what kind of economic environment Youre, assuming there you know right now unemployment is at or near record lows, but inflation is high you know what's assumed in the guidance range and you know how are you planning for and preparing.

For a possible recession in the future. Thanks.

So I'd say overall, when we think about the back half of the year and what we expect from a macroeconomic perspective, we don't really plan for anything to improve dramatically in the back half.

And I think we again, we gave a relatively what I would say a relatively moderate range the 400 to 450 and up.

You know the way, we'd think about it as the bottom into that range was a little bit of a worsening of the environment and the high end of the range would be a little bit better environment. So I'd say, we're kind of middle of the road.

As far as what we expect in the back half of the year clearly.

We're not seeing any benefit from the employment rate necessarily really all of this from our standpoint, we really feel like is is the lessening of the discretionary income available in that in our key demographic.

What we've pushed towards or are these new initiatives care plus having that launched in four markets and then expanding that throughout the rest of the year to enter into that higher income consumer as well as the teams which were underpenetrated.

In that area and you know, there's a ton of opportunity in that teen market. So you know having the Kerr plus solution available in the market places is really important.

For us to kind of.

Expand what that expand the customer base that we're selling to you know obviously, we're never going to move away from that key demographic that we're focused on but you know having.

Multiple offers that can provide a little more revenue with it with a little bit of a different model. I think is an important thing we're looking at and then overall from a increasing EBITDA perspective in the back half of the year and how do we think about it going into.

24.

The way we're planning for.

The overall macroeconomic condition and if it gets better or worse is really through cost control and right sizing.

Our expenses to be profitable at these lower revenue levels and then as we gain traction with the small maker app and some of these higher income and teen initiatives with care plus those should be very additive because they don't really add a lot of cost to the overall business.

So to the extent, we can leverage revenue and lower our G&A and other kind of fixed cost that's really how we think about the future.

As you know being able to weather these storms of bad macroeconomic conditions and then when growth returns at some point in the future and hopefully sooner than later, we should have a business model that would be you know highly.

Highly profitable from a from an efficiency standpoint.

Yeah.

Great maybe just a follow up on that you know as you try and target these hiring to M. P.

<unk>.

Is there any rebranding you need to do with smile direct and.

How do you plan to take the product and drive it.

Secondly into these higher income patients when they're there is such an established brand out there already with with.

Name brand recognition in the Doctor's office.

Yeah. That's a good question Robbie so if if anyone on the call or anyone has access to get into the four markets Denver, Sacramento, San Diego and Orlando, you'll see the branding.

A lot of that was done through research, we had entertained a name change a little different than some of the car companies that have.

A higher brand.

And so they won't use the base brand like Toyota <unk>, Toyota or others.

But what the research show was that it wasn't about the brand it was more about the.

The virtual or tele health aspect of it that these hiring consumers.

Really one of the in person experience at least especially to start and then a couple of steps along the way like they liked the telehealth for the convenience play, but there they didn't want to have a pure telehealth place and Fortunately for us because we spent a lot of money on branding we have that 60% of your awareness it wasn't about trends not transacting.

They felt the brand was.

Meet them or only targeted towards the lower consumer so.

I think the team did a great job with care plus and how we've woven that into the Smile direct club initial brand and you can see that and like I said in those four markets the website looks different.

Landers for care plus are different the one thing that I talked about in my prepared remarks that I want to point out.

That's why you have a pilot and it's it's iterative and we're learning as we're going we're all paying attention and focused on what's happening in these partner network locations that are offering care plus we have.

I think we're in 14 locations between the four markets.

And within those we have are as Troy talk about some of our small shops, just the standard virtual care S. D. C offering is inside those partner networks.

That are now offering care plus our initial hypothesis was that the customer was going to see the marketing or come to the site C care plus and then book an appointment as a care plus customer.

And they would get the care plus journey when they went into the it's the opposite would mean during that visit they get to meet the dentist, who will be overseeing treatment they didn't meet.

Some people.

The staff from the office.

What we found is that our sales specialist or small guys.

We started offering what we call a dual journey.

So.

Even if that person is coming in as a STC virtual care have no interest in care, plus we're presenting that to them as two offerings.

She now has care and care plus when we talk about the differences and we talk about the monthly payment differences.

It's a $26 a month difference if you choose small ones $89 $115 little more down payment of $500 instead of $2 50, but what we're finding.

Is this upsell opportunity, which we had not initially planned for some customers.

With every single customer walks in that door, we're offering both options.

Options, we're seeing a take rate it's early it's early on.

It's not big numbers, but.

It's it's looking promising and if we can then roll that out to the 80 or 100, and then probably give us an opportunity to open up more shops because of the higher it would be it only takes 10%. If we have 10% of our customers that we offer that to take advantage of care plus that's 25% increase in revenue because of that 39 or at a price point Saint <unk>.

I mean, that's a lower cat same marketing dollars now you're still at $3900 product and there is some added expense with that but about as we've said on previous calls about 30% to 35% of that extra $2000.

Flows through to EBITDA, so about $700.

So that's that's meaningful so.

More to come on that and as you know if if we end up through our testing rolling that out to all of our small shops and moving more of our small shops inside part of number of offices. We will keep you posted on that but that is something we're looking at.

As a as a potential possibility.

Because of Careplus.

Great. Thanks, a lot.

Yeah.

Our next question comes from Michael re skin with Bank of America. Please proceed with your question.

Hi, This is Peter on for Mike. Thanks for taking the question I could you just elaborate on I guess the latest you're seeing on the competitive front, perhaps touching on thoughts on maybe any share gains or losses there.

Yeah, I don't see much.

Much going on in the market I know, there's some competitive products that that might be eating a little bit into invisalign market share at the ortho office you know were.

We're more direct to the consumer and now through care plus.

Morton G P focused not ortho focused.

So I think it's still the same set of of competitors you know on the DTC side, it's really bite, which is owned by done supply.

And as far as our specific offering care plus through the partner network I don't see anybody doing that which is little lower chair time.

Higher higher priced product utilizing the G P in the journey, but.

As much as we can using our telehealth platform. So we reduce that short time for the G. P.

And you know its been very favorably received and most of these G piece that we're signing up don't.

Don't have don't offer any kind of teeth straightening. So there's a big market out there because the vast majority don't well over 50% don't offer any kind of two street part.

Part of it was that they didn't want to take up the chair time, they didn't want to be the training. They didnt want the upfront fees, where you gotta pay lab fees. So we've I think we've solved for that.

That concern and.

Just you know I think the competitive set looks very similar to what it what it has over the last year since Kansas dropped out of the D C market.

Okay.

Alright, Thanks for that and then I'm just curious if you could provide any further update on the financing front and available sources of cash are you kind of mentioned that the filing regarding to convert from March any.

Any further up there update there or elsewhere you can provide.

Thank you.

No I would say that as we as we put in our prepared remarks and in our earnings release and you know from our 8-K.

Filling back at the I think it was end of March early April .

We're in negotiations with certain of the holders of the convertible notes.

These are notes that were issued in 2021.

We announced that.

Those negotiations have progressed.

With respect with respect to a potential transaction and we anticipate being able to share more.

More about those negotiations in the very near term.

Alright, that's it for me thanks, guys.

We have reached the end of our question and answer session. This concludes today's conference. Thank you for your participation you may disconnect your lines now.

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