Q2 2023 SmileDirectClub Inc Earnings Call
Greetings and welcome to the Smile direct club second 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.
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As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host Mr. Jonathan Fleetwood director of Investor Relations. Thank.
Thank you Mr. Fleetwood 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 I'll 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.
For each of Q2 2023 earnings presentation for a description of certain forward looking statements. We undertake no obligation to ethics, such information, except as required by applicable law.
In this conference call. We also have a discussion of certain non-GAAP financial measures, including adjusted EBITDA and free cash flow.
Information required by regulation G. 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 and thank you for joining us today.
I wanted to give my comments by congratulating the entire STC team for delivering on both of our two key 2023 strategic initiatives.
Expanding the launch of our mobile scanning filemaker platform.
From Australia to now include the U S market and leveraging our growing small shop footprint to drive up sells for our Careplus offering.
Our innovative technology, driven solutions combined with disciplined cost management allowed us to deliver solid results. Despite the continuing challenging economic backdrop impacting our core customer.
Our Q2 revenue of 102 million decreased $24 million from the prior year period.
Adjusted EBITDA improved by 10 million in free cash flow by 8 million compared to the prior year.
This marks the fourth straight quarter of year over year, adjusted EBITDA improvement and fifth straight quarter of year over year free cash flow improvement.
Let me provide more insights regarding our two key transformative initiatives that have started to show how they can drive meaningful efficiencies and growth.
First I'll start with a smile make or platform or S. M P.
S&P is our mobile three D scanning technology that allows customers to begin their teeth straightening journey by digitally capturing two D images of their existing smiles on a mobile device and submitting the images to our enhanced artificial intelligence engine to develop an automated three D drafting a plant.
After a pilot launch of S&P in Australia at the end of November we made a number of enhancements and modifications.
And last our latest updated version in the U S. On a limited basis for the first time in late May on the iOS platform.
Android is still being worked on but we expect a fast follow later this month.
That's the U S launch the App has consistently been in the top 10 in the Apple store medical category we.
We will continue to get learnings from different uses for S. N P. As we test different marketing channels and customer demographics.
An exciting enhancement that we have now developed to be used without some P is the launch of our new AI capability.
It creates photo realistic after rendering showing the new alignment of the cheap and the consumer's mouth.
This provides customers with a more enhanced visualization of what the final result will look like in their mouth.
Additionally, our draft custom Smile plans are sent via text to S&P users, which promotes viral sharing of the customers potential new smiles, providing the opportunity for consumers to drive additional S&P referrals.
Leveraging all of the benefits of S&P together drives improved financial performance on top of our core business.
S&P is showing signs of driving stronger marketing efficiencies through tangible benefits by reducing our cost per lead.
Now turning to our second growth initiative, we are excited about developments with our premium service careplus priced at $3900.
This elevated service model allows both dentists and orthodontists and specifically the Underpenetrated general practitioners markets can you utilize that Steve Shea liners in a robust telehealth platform to meet the demands of the more traditional orthodontic customers 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 offering will position us to see to capture a larger piece of the higher income consumer in teen market as well as provide a premium option for existing customers, who want the option of both virtual and in person care along with other careplus only benefits.
Well my private launch learnings in the U S. We identified and have implemented a go to market strategy that leverages, our growing small shop footprint.
To expand the Kerr plus offering to the consumers.
And our pilot small shops, we have seen a meaningful take rate by our existing customers, who opt into Kerr plus but the added benefits.
Despite the higher price point.
By the end of August our team members at all U S. Small shop locations will have the ability to provide our customers with a dual journey.
And their appointment educating consumers and driving awareness and insights for both our traditional care offerings as well as our premium Kerr plus offering.
And then refer customers to a nearby partner network location for their Careplus journey.
Feedback has been positive from dental practitioners as this provides a steady referral of careplus customers to.
To drive additional revenue streams to the practice, but with the bulk of the sales process being completed by small shop team members.
We also plan on piloting Kerr plus in the U K in the back half of the year.
As we scale, our careplus offering from our pilot launch. We also continue to make progress in growing our partner network programs.
The channel through which our customers will be able to receive our careplus offered.
We ended the quarter with 1100, and 56 active locations compared to 1095 locations last quarter.
To build our coverage for our foundational presence in all key markets to support our Careplus solution.
Regarding the cost worth a short commute friend person visit.
This is a strong value proposition for our partner network by leveraging the sales efforts with small shops drive careplus consumers to their practices.
And benefit from a full sales and marketing firepower of STC.
We continue to manage our business with our commitment to rigorous financial discipline with the benefits of a disciplined paying off.
Although the second quarter top line results, followed our typical seasonal downward Q1 to Q2 revenue trends.
We were able to deliver stronger bottom line and improved cash flow results based on our continued focus on our underlying cost structure.
As I mentioned in my opening remarks, this marks the fourth straight quarter of year over year adjusted EBIT improvements.
And fifth straight quarter of year over year free cash flow improvements.
We continue to have discussions with interested parties to improve our liquidity position by expanding our ABL facility.
By our successful small pay collateral as.
As well as other interested investors, who see the value in STC is the leader in affordable teeth, straightening, especially with the successful launch of our two key initiatives.
I want to thank all of our team members, who have worked long hours to bring these two important initiatives to the market.
It's been a long road, but what's the sacrifices S M P and careplus begin to pay off.
Every single one of them. He was responsible for bringing over 2 million, new smiles to customers and saving them collectively over $6 billion.
While we continue to face a difficult and unpredictable macroeconomic environment for.
For our core business, our dedication to maintaining financial discipline through our cost controls and cash deployments and the addition, and the initial success of our new initiatives will enable us to manage our business throughout 2023.
We have the solutions technology platforms team members business strategies and financial discipline to achieve our operational and financial targets.
And now I'll turn the call over to Troy, who will provide more detail on our Q2 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 detail on everything I will cover let.
Let me begin by thanking the entire STC team for maintaining cost focus which keeps us on track to hit our target of positive adjusted EBITDA next quarter and positive free cash flow in the fourth quarter. This year.
The quarter's results reflect the impact of the continued macroeconomic headwinds affecting our core customers are restructuring plans drove meaningful improvements in our cost structure and free cash flow as David mentioned for the last four consecutive quarters, we have improved year over year EBITDA.
In the current quarter, we improved adjusted EBITDA by 10 million and improved free cash flow by 8 million. Despite a 24 million year over year decline in revenue from the second quarter of 2022 compared to the current quarter.
Revenue for the second quarter was $102 million, which is a decrease of 15% sequentially and a decrease of 19% on a year over year basis.
The sequential decline was within our guidance range and was driven by the typical seasonal trends coming off of the new year, New you effect from Q1.
The sequential decline improved compared to the last year. Despite our Q1 results over performing our expectations.
A lot of revenue was driven by our shipment of over 46750 initial and liners in the quarter.
A S P a 1976.
We've been focused on reduced discounting and other efficiencies in our revenue processes, which has driven our E. S. P to an all time high.
As a result of the introduction of the Kerr plus initiative as well as price increases that were launched in late July we expect the ASP to continue to increase.
Providing some details on the other revenue items implicit price concessions were 10% of gross aligner revenue down from 11% in the first quarter.
The percentage recognized in the current quarter is in line with our historical performance with some improvement since the first quarter.
The consistency we've seen in the IPC continues to show that we've not seen any material change in the quality of our receivables despite challenging macroeconomic conditions.
Reserves and other adjustments, which include impress you get revenue refunds and sales tax came in at 10% of grocery Atlanta revenue compared to 9% in the first quarter.
Financing revenue, which is interest associated with our small pay program came in at approximately $7 million, which is consistent with Q1, 2023 and down approximately $2 million year over year due to the lower accounts receivable balance.
Other revenue and adjustments, which includes net revenue related to retainers whitening and other ancillary products came in at 19 million an increase of approximately 1 million over both the first quarter of 2023 and the prior year quarter.
The increase in other revenue was primarily driven by an increase in retained ourselves, which as we grow our customer base is becoming a larger percentage of overall revenue.
Now turning to smile pay in Q2, the share of initial aligner purchases financed or a small pay program came in at 66, 4%.
Which is above the historical levels of approximately 60% is reflective of the impact of the difficult macroeconomic environment is having 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 Q2 consistent with historical levels.
Fact that we keep a credit card on file and have a low monthly payment gives us the confidence that small team will continue to perform well.
Turning to the results on the cost side of the business.
Gross margin for the quarter was 71, 6%, which was down from 72, 5% in the first quarter.
The lower gross margin rate was driven primarily by the deleveraging of fixed costs in our manufacturing process on lower sales.
Marketing and selling expenses came in at $50 million or 49% of net revenue in the quarter compared to 71 million or 57% of net revenue in the second quarter of 2022.
The $21 million and 800 basis point year over year decrease in terms of both dollars and rate.
Represent improvements in marketing efficiency across the business largely driven by advanced media targeting.
With these improvements we are continuing to drive lower customer acquisition costs for our legacy business. In addition, with the soft launch of our small maker at.
We are seeing significant improvements in cost per lead and cost per app download.
With a focus on efficiency and reduce lead times, we are continuing to optimize spend across multiple channels to treat the right balance of high funnel lead and bottom funnel align ourselves.
On small shops, we had 128 permanent locations as of quarter end, which is an increase of 20 shops since the first quarter of 2023.
And we held 58 pop up events over the course of the quarter for a total of 186 location sites.
The new small shops will allow the company to efficiently expand its reach without cannibalizing existing outlets and as service incremental customer demand generated by the new channels like the AI powered stomach a platform as well as our Careplus initiative.
We will continue to analyze our store portfolio for expansion opportunities to support our careplus growth leveraging our dual journey strategy that provides our small shop team members the opportunity to upsell our careplus offering.
Our end goal is to increase customer access to our solutions through the scaling of our partner network channel expansion of our small shop footprint and the market adoption of our small microcap.
We now have 1156, North American partner network locations that are active or pending training.
The partner network team has been focused on optimizing productivity and preparing for our broader careplus solution launch based on the learnings from our test launch in four markets beginning in February .
Our partner network footprint, where both scale, our operations or our traditional Kerr business, but will also serve as the key channel.
Our Careplus premium service offering has rolled out to all U S small shop markets. This month.
General and administrative expenses were $60 million in the quarter compared to 72 million in the second quarter of 2022 and $65 million in the first quarter of 2023.
The decrease from the prior year quarter and last quarter was driven by the cost savings initiatives, we put in place at the beginning of the year as well as the continued focus on cost control.
As of the end of the second quarter most of the G&A cost control initiatives have been completed however, you will see the full effect of the savings in Q3, and Q4 2023 as the execution of the initiatives took place throughout Q2 'twenty three.
This will result in lower G&A costs throughout the rest of the year and maintain our focus on right sizing. Our overall operating expenses based on core revenue expectations.
Other expenses include interest expense of eight and a half million.
Of which $7 1 million is related to the secured debt facility issued in April 2022, and one for me just related to the deferred loan costs associated with the convert we issued 2021.
Additionally, one time costs related to lease abandonment and impairment and other store and restructuring costs were eight and a half million consisting primarily of costs related to our restructuring actions, including severance as well as store and facility closure costs.
And other expenses, we recognized losses of <unk> 3 million, primarily due to unrealized foreign currency translation adjustments recorded in the quarter.
All of the above produced adjusted EBITDA of negative 14 million in the first quarter, which is a $10 million improvement over the second quarter of 2022, despite a $24 million decrease in revenue.
For the full year, adjusted EBITDA has improved by $18 million compared to the prior year.
This quarter represents our fourth consecutive quarter of reporting improving year over year adjusted EBITDA results and as we are on track for continued improvement and delivering positive adjusted EBITDA in the third quarter.
Our second quarter net loss was 54 million, which is an $11 million improvement over the prior year period.
Breaking out adjusted EBITA regionally for the second quarter, the U S and Canada came in at negative $6 million and rest of world adjusted EBITDA was negative $8 million.
Moving to the balance sheet, we ended the second quarter with $58 million in cash and cash equivalents of 179 million in net accounts receivable and 137 million drawn on our $255 million debt facility with H P. S.
Cash from operations for the second quarter was negative $18 million, while cash spent on investing for the quarter was negative $10 million.
Free cash flow for the second quarter defined as cash from operations less cash from investing was negative $28 million, which is an $8 million improvement over the second quarter of 2022.
On a year to date basis, our free cash flow has improved by over $43 million.
Our focus on rigorous financial discipline has improved our efficiency.
Our free cash flow has continued to consistently improve as we progressed through the year and we just posted our fifth consecutive quarter of improving year over year free cash flow.
We are also maintaining our financial goals for the year as the cost changes we've put in place continue to drive us towards positive adjusted EBITDA in the third quarter of 2023 and positive free cash flow by the fourth quarter we.
We recognize that in this difficult sales environment, we needed to realign our cost structure to attaining EBITDA profitability on our core business and then the upside that we see from our initiative launches will be additive to the results at a very high efficiency level.
As noted in our earnings press release, we have updated our 2023 guidance that we originally provided on February 28 2023.
The changes in guidance relates primarily to the new initiatives, S&P, and Careplus, which have launched and while not fully available across our network until later this quarter. They will begin to impact our overall volume expectations as we progressed throughout the back half of the year.
As a result, we are adding the new initiatives to our core guidance and adjusting our sales guidance up for the year the.
The new initiatives were somewhat delayed this year compared to the original expectations due to our continued focus on launching in a way that was best for our customers while meeting our efficiency goals.
At the same time challenges to the consumer spending and sustained high inflation continued to impact our overall expected demand in 2023 is to our core business.
We started the year with an expectation that the inflationary environment with somewhat improved and we have not seen that play out so far.
We have also invested in additional small shops, because they are a key component in returning to growth and driving our small maker and careplus initiatives.
As a result, these added costs as well as the sales impact from a cautionary environment offset the margin added for the new initiatives.
However, we still expect to deliver positive EBITDA in Q3 of 'twenty, three and positive free cash flow in Q4 of 'twenty three based on our original guidance for full year 2023 revenue and costs and the investment out like now include contributions from the 2023 rollout of the small maker platform and the launch of the Kerr plus solution.
Which we continue to scale and expect to contribute to revenue and adjusted EBITDA in the back half of the year.
For our full year 2023 guidance, we expect to deliver revenue between $425 million and $475 million gross margin between 73 and 76%.
Justice EBITDA between negative 40 million and negative 10 million driven largely by the topline revenue results with positive adjusted EBITDA achieved by the third quarter.
Capex between 30, and $35 million and our onetime costs from our reorganization action in January 2023 between 12 and 15 nine.
Related to our balance sheet and general liquidity.
<unk> of STC entered into a revolving credit agreement in the amount of 10 million to provide working capital to help fund the newly launched S&P and Kerr plus growth initiatives as the company continues to work toward restructuring its balance sheet.
As we've discussed previously the goal of any future financing transaction. The company would enter into will be focused on improving our capital structure by bringing in additional funding while lowering our overall debt.
With that I would like to turn the call back over to David for some closing remarks.
Thanks Troy.
We look forward to continued market adoption of our smile make a platform.
And fully rolling out our careplus offering to all U S small shop locations this months and launching in the UK in the back half of the year.
We will continue delivering on our mission to democratize access to a smile each and every person loves.
I'm proud of our team's long term focus on developing and making these renovations of reality.
And now we are at an exciting stage in bringing these solutions to the market multiple channel options convenient to each customer's unique preferences.
We will continue to update the market with additional insights regarding these initiatives or with any of our other innovations achievements and key milestones. Thank.
Thank you for joining today with that I'll turn the call back over to the operator for Q&A.
Thank you we will now be conducting a question and answer session.
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One moment please poll for questions.
Thank you and our first question comes from the line of Michael Raskin with Bank of America. Please proceed with your question.
Hi, Thanks for taking the question. This is Peter on for Mike.
Can you discuss the contribution embedded in the second half guide from small maker and Kerr plus in terms of dollars and volume and can you kind of discuss the confidence that you have that you're not cannibalizing the prior existing business there. Thanks.
Yeah, I can cover that.
Well, we you know, we typically don't break out what small maker and careplus can contribute in the back half of the year. We are modeling some of that now but with those two initiatives just in the early launch phase to not quite launched I think it's too early to give.
That guidance, just yet and in quite frankly, a with S&P. They can almost morph into an order coming from two different ways through both our typical small assessment or through the app itself. So there's a little bit of mix, there too, which we're working through to understand if you started on the App you could finish it.
A different way and vice versa, as well, especially in these early stages. So we haven't broken out the impact of those yet for the back half of the year as we get there.
We'll start to provide more color on on what each of those initiatives is actually contributing to the bottom line, but one of the things you'll see is that from a ASP standpoint, youll see our ASP increasing in the back half of the year, we actually had a record during this quarter and with the price increases we put in place are on.
On the whole aligner business as well as what Kerr plus can contribute in the back half of the year, we'll see a higher asp's associated with that but we do expect that those initiatives will contribute to the back half of the year, the extent to which that happens and how we break those out I think is a little bit yet to be determined just based on what we see with the actual results as we go.
Throughout the back half of the year.
Okay, and then I guess on the pad.
The profitability and cash flow is the $10 million credit agreement is that enough to bridge you to becoming fully cash flow positive even if opex cuts you know maybe lead to further revenue declines.
Or kind of what's the next option or two you know that can be available if you need more financing beyond that thanks.
Yeah. So we are very focused on it.
Liquidity improvement.
<unk>. The reason, we entered into a $10 million founder funded line of credit.
Just to provide that provide that bridge there is opportunities for that to be increased as well we have to work through our ABL agreement to do that but we are focused on those things as well.
As you know I think what we've released previously we've got a process going on right now we've been working closely with bankers on finding additional liquidity and kind of restructuring the balance sheet are those discussions have continued on it and are very productive. There are a lot of interested parties out there I think it's up to us really to find that optimal financing.
Out there as we we announced previously one of the goals of that future financing transaction would be to improve the capital structure, while lowering our overall debt and I think we have lots of options out there to us, including working with current investors as well as others.
So we've been able to manage the cash flow and the capital some of the mitigating things we have out there I think you had mentioned is that.
We've been on a cost cutting initiative to make sure that our G&A expenses are consistent with kind of our core revenue guidance.
And we've got the new initiatives that are watching that will start to contribute to.
So the profitability in the back half of the year.
And then you know I think as we've also announced pretty positive EBITDA.
So we've been on kind of a long path towards this towards getting back to positive EBITDA growth and work now focused on Q4 as well to try to reduce that overall cash burn.
Kind of consistent with working on the overall capital structure as well.
Alright, Thank you guys.
Yes.
Thank you and our next question comes from the line of Robbie Marcus with Jpmorgan. Please proceed with your question.
You know from our end it looks like you were pretty much in line with consensus numbers and then ended up raising sales guidance for the year I. Appreciate there are some new efforts coming in the back half, but any kind of tangible you know commentary you could put around.
How much is ascribed to that and then to get to the middle and high end of the guidance range implies a pretty big step up in third and fourth quarter. What are some of the assumptions underlying the middle and top end of guidance versus the low end.
Yeah. It was it was a little bit of a mix definitely when we looked at the back half of the year.
We're launching these new initiatives, we felt like it was the right time to start including those new initiatives in our results.
Like I had said previously there's a little bit of a mix there and the fact that you could be impacting that as a customer our sales results either coming through S&P.
While my graph or coming through our traditional online what we call a smile assessment.
Coming to our webpage.
And Theres a little bit of mix there would we first initially do this because we it takes sometimes months for a customer to ultimately convert and they could have started with us on a smile assessment and then end up.
Using the small microcap to actually Kim.
Convert so theres, a little bit of mix going in there and that's why we're.
Hesitant to kind of break it out now, but wait until we see how some of these metrics start to play out and then we can provide more guidance.
As far as how we break out the.
The new initiatives and the sales associated with those we effectively added in the new initiatives and then we actually reduced.
Kind of the core guidance in the back half of the year, we we assumed in our original plan at the beginning of the year.
That the the economy with somewhat improved in the back half we had a very challenging fourth quarter last year, we don't expect that to to repeat this year and so as you look at kind of Q3 and Q4, we did see a little bit of weakness there, we effectively took down our core guidance, but much of that was offset certainly by the new <unk>.
It is and when you when you talk about looking at Q2 to Q3 to Q4, there is a little bit of a step up there most of that being driven by the small maker app as well as careplus.
We've also got price increases that we've got in the marketplace right.
Right now as well so those things helped to do have to drive those sales in the back half as well. If you think about from Q2 to Q3, I don't expect a lot of drop off.
From Q2 to Q3, and I think we would see a little bit of an increase as well throughout the year as the initiatives take hold.
Great I appreciate that and then maybe one follow up for me you know I.
New patient set about 20% why do you think that metric hasnt picked up higher over time.
Yes.
Yeah, I can take that one robby.
It's been consistent right. So it's based on.
Legacy business and how people are able to refer I think what's exciting is what we are seeing I mentioned in my.
Paired remarks.
Is that we're getting a lot of sharing of the app, especially when someone gets their new smiles they take their or go through there.
You come out the other side with a treatment plan and now we actually have a image of your your mouth.
With your new Smile, your actual teeth, showing how theyre going to.
Move in and see the actual positioning and that's what people are excited about and so I think youre going to start to see that number tick up based on what we're seeing from a people getting excited and sharing on social media sharing across their platforms.
Whether it's showing a friend or spouse appearance.
So they are about the new smile, and I think that will start to drive.
This 20% number up but I agree with you. It's been it's been steady it's something that will really help with with CAC and our overall acquisition cost if we can get our customers in our champions out there and I think we have the tool to do it with small maker.
Great. Thanks, a lot.
Okay.
Thank you as a reminder, if you would like to ask a question. Please press star one on your telephone keypad.
Our next question comes from the line of Jon Block with Stifel. Please proceed with your question.
Thanks, guys good morning Troy.
<unk>.
I believe you said, 137% to $2 50, hps's drawn but.
What are the remaining if I've got that right what 113 can be drawn call at her.
And covenants and then.
Just a quick look through your filing your 10-Q, the ongoing litigation with align.
It seems that you are now on the hook for a pretty material payment I think it's $63 million to align I know theres not call. It final final, but it seems pretty far down the road. So maybe you can talk about the next steps there and what happens with the balance sheet, if that were to be finalized.
Yeah.
Well the answer to take the first part of that question the related to our ABL. It is somewhat limited. It's you know it's a complicated calculation on how we get to what the actual borrowing base is but it is somewhat limited on the upside it's linked to accounts receivable to the to the extent that accounts receivables not growing it limits.
Our ability to draw more on the ABL itself.
That being said again, I think we've been able to manage liquidity pretty well.
And this additional funding that's coming from the line of credit from the founders of the intent is that that could be expanded as well.
So that's kind of our path towards what.
What we would consider a bigger transaction it could be in the future that as we look to restructure the balance sheet our long term.
Related to align itself.
Theres not a final award yeah. It is it has not been confirmed and it's not payable at at this time.
We've filed petitions to vacate that award we continue to.
We'll see.
How that plays out long term.
Yeah, we could find that in multiple ways, but ultimately it probably wouldn't be due for quite some time as we continue to defend against it.
Yeah, I'll just add Troy.
I'm sorry, John also Theres appeal rights words weren't state court right now.
We expect a good outcome, but if not there.
There is the option for us to appeal that judgment, which we will do.
Also going back to the H B S facility, we have been in conversations with H B S to expand that but also other ABL facilities, we have.
Negotiations or conversations I would say with other ABL facilities that are looking at providing an expansion to what we currently have with H.
H P. S. So there's there's lots of options out there I think with our initiatives in market now and it's not conceptual anymore, it's actually happening with.
Like we said all all 100 plus.
Small U S small shops will be able to offer the dual journey to our customers, which is a really nice up sell at $3900 and you guys will start to see that in our a O V as it increases quarter over quarter.
And also the efficiencies of smell a maker of what we're seeing with smartphone maker and we had talked about in previous conference calls well. It's it's a good conversion driver. It also is showing us that dollar for dollar spent and market more customers are interacting with the brand. So our lead cost is down versus.
Our typical smile assessment approach so yeah.
And spent a dollar in the market.
And the number of people are downloading the app is much greater than the people that were interacting with a smile assessments either way you get there whether you increase conversion are you lower lead costs and improves your CAC.
Thanks for that David that's actually a really good segue to my second question.
You answered it but the <unk> treasurer, roughly $222 million, implying two wage at the mid point of your guide is about the same as what age.
The gross margin should go a bit higher part of the guide but.
Can you elaborate on how you call it good enough.
<unk> see on an opex to turned the corner on EBITDA the guidance sort of implies you'd generate $15 million of positive EBITDA in two weeks you get to the midpoint of the guidance.
It all sorted that sales and marketing because you've done a great job on G&A, but it does seem to be sort of run rating pardon. The slide 55 ish mid fifties over the past two to three quarters or so.
What's the.
The biggest lever to pull in as it <unk> due to the better conversion rates that you just alluded to thanks guys.
Yeah, I can take that.
It's a combination of a lot of things against Ben.
Somewhat of a journey for us to get.
From where we announced in Q1, what these initiatives were and what the cost savings initiatives that we put in place as well so it's been a little bit the journey for us but.
It's a combination of things so you're right that the.
The new initiatives will start to drive more sales there, they're very efficient. So if you think about things like careplus.
The additional dollars that we get from Kerr plus it at $3900 versus our $22 50 product.
Those those flow through to EBITDA at a very high efficiency rate. So the additional dollars that we drive with careplus flow through at about 60%.
We don't expect that we have to spend a lot more marketing to drive these new initiatives, it's really fed by what our store associates can sell in market to our customers and kind of that upsell opportunity there. So.
Not only are we seeing what David explained as is lower lead acquisition cost.
Coming from S&P, but we're also able to drive additional sales through stores themselves without the additional marketing. So it flows through there and we do expect to see lower selling and marketing costs.
In the future as we drive that efficiency, we've kind of driven down to a certain level and I kind of consider that that efficiency that we've driven thus far to kind of be more consistent throughout the end of the year, we will spend a little bit more money on small shops, we've opened up some additional small shops, but again.
We consider that profitable investment.
Cause that that additional spend we have there will drive higher conversion.
In our stores and it's just a better experience overall for our customer.
And then from a G&A perspective, we did we've driven G&A down from last year, certainly Q1 was lower Q2 was lower than that but.
All of the initiatives that we talked about at the beginning of the year. We're still in process. In Q2. So we continue to believe we will have savings from a run rate standpoint from Q2 into Q3 and Q4 as well. So it's a combination of all those things that are driving the higher EBITDA.
In Houston.
And Q4 as well.
Okay.
Thank you.
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Thank you for your participation.
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