Q2 2023 The Beauty Health Company Earnings Call
Good morning, and welcome to the Beauty Health Company second quarter 2023 earnings call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing Star then zero on your telephone.
G pad.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad to withdraw your question. Please press Star then two please note. This event is being recorded.
I would now like to turn the conference over to Eduardo Rodriguez Senior director of M. N E and Investor Relations. Please go ahead.
Thank you operator, and good morning, everyone. Thank you for joining the beauty health companies conference call to discuss our second quarter 2023 financial results, which were released this morning and can be found on our website at beauty health Dot Com. We encourage you to join the webcast accessible on our website, which contains a presentation that will be referenced during this call.
With me in person today, our beauty <unk>, President and Chief Executive Officer, Andrew Stanley incoming Chief Financial Officer, Mike Monahan, Chief operating Officer, Brad Houser.
Before we begin 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 listeners are cautioned not to place undue reliance on any forward looking statements for a further discussion of risks related.
To our business see our filings with the SEC.
This call will present non-GAAP financial measures reconciliation of these non-GAAP measures to the most comparable GAAP measures are in the earnings release furnished to the SEC and available on our website I.
I will now turn the call over to Andrew.
Thank you Eduardo and thank you everyone for joining us today's call is going to be organized a bit different than usual first will review the highlights of our Q2 results before turning to some key learnings and actions taken through this period of rapid growth.
I will then walk you through our 2023 outlook and we will conclude with a preview of our innovation pipeline from Chief operating Officer, Brad Houser.
We expect you saw the press release this morning announcing Michael Monahan as our new CFO .
This is a critical role in I'm comforted that might bring the right expertise that we need for this next phase of growth.
Tasking, Mike with enhancing our financial strategy planning and reporting capabilities.
To that end I do want to thank Linda for her leadership during a formative period for beauty health she.
She helped manage the company through a period of transformational growth, including navigating through the pandemic. We are grateful for her contribution and wish her well Mike will assume the role of CFO effective Tomorrow, Leann will stone as an adviser until September 1st to ensure a smooth transition I will now hand off to Mike for a brief introduction.
Thanks, Andrew I'm happy to be here today, and I look forward to meeting and building relationships with you all over time my decision to join beauty health is based largely on the incredible growth opportunity ahead beauty health is an impressive company with solid business fundamentals that I believe has a lot of room for profitable growth.
As Andrew mentioned my first days Tomorrow I plan to use my first 90 days to immerse myself in the business working to fully understand our financial controls planning and reporting I look forward to sharing my impressions with you all in due course I will now turn the call back to Andrew.
Thank you Mike we are happy to have you on board.
I want to start by thanking the beauty health team around the world for their hard work in the second quarter and ongoing contributions as we focus on driving long term shareholder value.
Now for the second quarter results. There are five key takeaways from the quarter as we recommitted to our core business.
First we delivered net sales of $117 5 million and adjusted EBITDA of $17 8 million on continued demand for hydro facial these.
These results represent net sales growth of 13% and adjusted EBIT growth of 22%.
As a reminder, this quarter, we are comparing against the U S launch of <unk> last year. The company's single biggest product launch to date, where we benefited from $23 3 million of trade up demand.
When excluding the impact of trade ups, our total year over year net sales growth for Q2 2023 was 32%.
The second takeaway is consumer engagement, where our brand continues to grow we see this in strong consumables net cells, which were $51 9 million up 34% year over year on increased volumes.
Third as anticipated we saw continued strength in EMEA and APAC and China, we achieved year over year net sales growth of 265% or 167% when excluding trade ups.
We continue to see Reacceleration in China and remain enthusiastic about the growth potential of this market.
The fourth takeaway, we generated adjusted EBITDA of $17 8 million at a margin of 15.1% owing to 7.1% of adjusted operating expense leverage compared to last year.
However, those leverage gains were largely offset by $6, 1% of adjusted gross margin headwinds partially caused by sin day, a U S launch related impacts, which leann will discuss in a moment.
And the final takeaway for the quarter based on the continued demand for hydro facial the reacceleration in China, and our ability to drive operating leverage we are pleased to reaffirm our fiscal 2023 net sales and a long range 2025 guidance, we are refining our 2023.
Adjusted EBITDA margin guidance to a more precise range of 18% to 19%, reflecting the temporary gross margin headwinds we face.
Before we review the details of the quarter further turning to slide six I want to take a moment to reflect on our recent growth and learnings.
Since 2020, we have nearly doubled the size of our installed base and by the end of this year, we expect to have roughly quadrupled net cells in just three years. We believe this performance is remarkable for any company.
So as you can imagine with this type of growth trajectory. The road is not always smooth and we certainly has some areas in which we can improve based on some key learnings that I would like to share with you.
This improvement starts first and foremost with resolving our cinder teething issues by the end of this year.
Developed at speed during the pandemic. This high Tech delivery system launched just 28 days into my tenure brought hydro facial out of the analog world and into the digital age pushing the category forward.
Well since their net sales since launch have been impressive we have experienced teething issues with this new technology. You may recall, we were quick to exchanges and data devices at the company's expense even for the smallest issues.
This intentional decision underscores our unwavering commitment to best in class customer service.
While it led to incremental unplanned costs, which have impacted us financially in the short term. This section has protected our relationship with our providers are with hydro facial for the long term.
I am pleased to say that we have greatly reduce system exchanges.
Today with the changes I initiated we're equipped to address issues with over the air software updates or infield support.
And we have identified simple component upgrades to enhance the systems durability and we have begun to replace these components and existing devices in the field.
As we grow past these teething dynamics I'm confident our newly strengthened product and software engineering teams Helms by aesthetics industry veteran Brad Houser, who I hired earlier this year are well equipped to deliver on our vision for Sunday.
Our next learning comes from our forecasting process.
Put simply in this phase as a young public company some of our internal processes have not kept pace with the rapid growth and expansion of our multi geography business footprint.
Under the experienced leadership of our incoming CFO , we plan to enhance our forecasting processes, including investing in unified global systems to further improve our predictive analytics capabilities.
Additionally value engineering projects that we expect it to expand gross margin have been delayed as we have instead dedicated resources to manage 10 days teething issues.
I am disappointed to say these dynamics have hampered our ability to meet our expected gross margin target for the year and we are attracting a gross margin guidance for 2023.
We maintain a line of sight to delivering our targeted 500 basis points of gross margin expansion by the end of 2025 as both China manufacturing and the planned value Engineering project bear fruit.
Finally in 2020, one we converted a number of international distributor markets to direct markets several of which were quite small in scale to be Frank some of these smaller markets carry a high opportunity cost go.
Going forward I have made a decision to refine our focus and concentrate our resources on executing in our most important direct markets as the top priority.
I share these learnings transparently after 18 months, leading this company and with a clear plan to move forward made stronger by fortified leadership improved systems and a commitment to the customer experience that we are known for.
Indeed, as we bounce back from the Tinder U S launch issues I have never been more excited about the future of this company.
As page eight illustrates we have a deep competitive moat positioning us well for long term success.
We have an incredibly unique business model and our long term high margin recurring revenue stream.
We operate in a large and underpenetrated market and possessed scientific and product competitive advantages.
This is supported by a passionate community of providers and a powerful consumer brand that drives traffic to our customers.
Moreover, we have an exciting pipeline of innovation to propel our future growth, which Brad will take you through a bit later.
It is these strong fundamentals combined with favorable sector <unk> that give me the confidence in the long term outlook for beauty health now I will turn the call over to Leann to discuss our Q2 financial results.
Thank you Danielle and thank you to everyone joining the call.
Our second quarter results.
Awesome.
Alright.
To walk you through our outlook for 2023.
Turning to net sales.
We delivered total net sales.
In the second quarter.
Perfect Yeah over here.
Quarter, we're comparing against last year.
You asked lunch Alstom deal, which benefited from 23 point of.
Ill try that.
When excluding trade up our total net sales for the quarter was 32%.
Codell.
Sales were $65.
Roughly flat versus last year.
Excluding trade up.
System sales grew 30% year over year volume growth.
Okay.
I suspect that our trade up volumes declined 64% and contributed $11 6 million for myself.
We expect total trade up.
2023.
The 28.
Million of trade up.
So true of last year.
We ended the quarter with a global installed base of 29682, and so 2022 delivery system.
Average selling price of 22.9 thousand.
A slight decline from last year.
It was driven by a few factors.
Sure.
Yes.
So what's the older generation of refurbished devices and the HIFU.
Providers and I think we all hope at some U S provider.
<unk> from Dalian harmful to improve the user experience.
Second radio.
Internationally.
Cindy was launched in our direct international market.
Moving to consumables strong growth in volumes across the globe.
Sales growth of 34%.
One 9 million and finally, breaking down our performance by region.
We generated total net sales of 66 million.
Client.
When compared against last year.
As expected this was driven by fear of trade up so this quarter relative to Q2 of last year Wilsonville U S launch drove a bolus of trade up.
When excluding the impact of trade up America total net sales growth with eight 4%.
Notably the APAC region returned with pre pandemic growth trajectory on the heels of China's recovery.
During $25 2 million of Michelle.
As a region APAC registered 143% year over year growth or 92% when excluding trade up.
In EMEA than deals launch drove a healthy 61% net sales growth rate of 37% when excluding trade up to deliver total net sales of $28 6 million.
ROE came from strength across systems and consumables.
As Andrew already mentioned, we face meaningful gross margin headwind this quarter.
On slide 11, you'll see that.
We delivered GAAP gross margin of 57, 8% this quarter compared to 67, 6% last year and adjusted gross margin of $64 eight person this quarter compared with 71 person last quarter.
A primary driver behind this decline Jessica gross margin is that we do not anticipate the extent of delivery system.
Shifting towards refurbished systems.
Whereas refurbished systems were less than 1% of volume in the second quarter of last year. This quarter, they accounted for 17% of volume with.
Refurbished systems carry a higher cost inventory, creating gross margin dilution when they are so so.
Importantly, each delivery system play represents a predictable and high margin recurring cash flow in the form of future consumables revenue.
Andrew will touch on this more in a moment, but this relationship it's a foundational tenant supporting our go to market strategy.
Additionally, we continue to Perry.
<unk> production costs, which we expect to resolve upon the completion of our transition to China production in the second quarter of 2024.
For the quarter, we generated 100 basis points of adjusted EBITDA margin expansion. This was due to an eight 2% year over year reduction in selling and marketing as a percentage of net sales for the second quarter, which was driven by lower sales commissions due to a year over year mix shifting towards correct.
Both APAC and EMEA.
The benefit was partially offset by gross margin headwinds already covered.
Matt.
These costs remain relatively flat at around 2 million per quarter on adjusted basis.
Lastly, adjusted G&A expense of 24 million is consistent to our run rate expectation of 20 to 22 million per quarter and I expect it to remain relatively sick.
Overall, we generated seven 1% in adjusted operating leverage.
I will now move to our balance sheet highlights on slide 13.
We ended the second quarter with roughly 550 million in cash and cash equivalents, an increase of $17 4 million from March 2023.
Notably we continue with the trend of reducing our working capital balance, which was largely driven by a reduction in inventory as we drive towards carrying one or two quarters worth on him.
Finally, our shares outstanding at the end of the second quarter stood at approximately $32 9 million.
We remain well capitalized to execute on our growth initiatives and continue to remain opportunistic with our capital allocation.
Before I turn it back to Andrew I would like to express my gratitude to our teams and partners globally for wonderful three years.
We have much to be proud of and I am excited to see Mike take beauty health <unk> through its next phase of growth.
With that I will now turn the call back to Andrew for a look at our outlook for the second half and full year 2023.
Thank you Leann on.
On slide 15, we share our expectations for the second half of 2023, we reaffirm our 2023 guidance driving to projected net sales of $460 million to $480 million and refine our adjusted EBITDA margin target to a more precise 18% to 19% range.
We acknowledge that due to pandemic impacts our new product launch and relative newness as a public company modeling out growth has not been straightforward.
As a result, we are providing incremental color to provide clarity on our expectations for the third quarter.
We expect this incremental color to be temporary and unnecessary to continue once we lap. These dynamics early next year.
Consistent with traditional seasonality in the medical aesthetics industry. We expect Q3 net sales to be in line to a slight step down from Q2, net sales figures or a range of $110 million to $120 million.
We expect Q3, adjusted EBIT margin to step up slightly from Q2 to a range of 18% to 20% driven by minus sequential improvement in adjusted gross margin versus Q2.
Increased selling and marketing leverage as marketing investments seasonally recede in the back half of the year and tight cost discipline with G&A.
Q4 is historically the largest quarter for the medical aesthetics industry and ours is no different.
Within days in Huntsville is expect to be largely completed resurgence in China as it comes the 2022 pandemic Lockdowns and continued volume growth in consumables, we remain confident in our ability to land within our guided fiscal 2023 range.
Our confidence is bolstered by the fundamentals of our business, which we spoke about earlier and the favorable market dynamics that we anticipate will continue to drive our business.
With every system, we place we unlocked a long term sustaining revenue stream.
For those of you I'm familiar with our business. We are a razor razorblade model with profitable unit economics across our raises which are our systems and our razor blades, which are our consumables in the forms of our theorems boosters and treatment tips.
Today, our revenue split is roughly 50 50 between delivery systems and consumables.
With consumables typically being the recurring and predictable revenue generator.
On Slide 17, you can see why this model is so appealing.
The chart on the left depicts our historical consumables net sales based on that provide us equipment purchase here.
In 2020 to nearly 75% of our consumables net sales came from providers, who have been our customers for three years or more.
About half of that provide as we first sold to eight to 10 years ago are still active and reordering high margin consumables. This long profitable tell is virtually unheard of in the aesthetics market.
To date, we have placed more than 29000 hydro facial systems globally, but.
But we know there is a large and untapped market still available to us.
We are less than 5% penetrated globally in our direct markets with our most mature market the U S representing only mid teens penetration.
There is still so much more room to grow in any number of factors that would deliver that opportunity with the increasing points of distribution product lines or treatment frequency.
I want us to take a closer look at one of our single biggest growth opportunities China.
Our business is nascent in China, a market, we view with a potential of three times of that of the U S.
Skin is reported as the number two health concern amongst Chinese consumers are more than 40% of Chinese consumers expect to increase their spending on health and beauty products.
Our gold standard positioning coupled with an accessible price point and flexibility for broader distribution than competitor devices as part of our recipe for success to capitalize on these <unk> and drive penetration in the region.
With just 2000 systems in China today, and $24 million of revenue in the first half of this year. We are just getting started.
Okay.
As we continue to drive market penetration, perhaps the strongest lever we have available to us is the hydro facial brand itself.
Hydro facial is unrivaled at generating buzz.
Amongst our peer set of aesthetics brands, none come close in terms of our earned media value.
In the first half of the year alone hydro facial generated $9 7 million of ANV and with it excitement and interest from consumers and providers alike.
Brand building initiatives recruit new consumers to hydro facial and ultimately drive traffic through the doors of our providers, while other aesthetics brands declined worldwide, Google searches the hydro facial were up 10% in Q2 as more consumers sought us out.
ANV and sustaining Google search volume driven by standout brand Activations like annual glow evolution tool, which was re imagined for 2023 and the recent Dior spot crews, which featured a customized Sunday and deals signature Weitzen gold for the occasion.
One of hydro facials unique competitive advantages is our omnichannel presence and our ability to be wherever consumers seek out beauty and aesthetics I am pleased to share that we will expand our partnership with Sephora in APAC. This fall, taking pegged by hydro facial to stores in Australia, and Malaysia were already in.
More than 500, Sephora stores in North America, and Sephora, Singapore flagship.
Our brand building efforts have a meaningful impact on the adoption of hydro facial by providers, who regularly tell us that one of the reasons. They love hydro facial is that it is the treatment consumers ask for by name.
We recently conducted a fresh brand study with leading market research firm Ipsos.
Aided brand awareness for hydro facial is 41% amongst consumers of the aesthetics in professional beauty category in the U S trailing only botox at 72% awareness and Juvederm up 46%.
What is perhaps more interesting is hydro facials conversion rates amongst those who know the brand 60% try. It. This is a high conversion rate the botox.
Once consumers are aware and have tried to treatment they recommend hydro facial to their friends.
Our refresh net promoter score or NPS is 55, and 11 point increase over data from last year and a best in class industry School.
P. S. As a reminder is a measure of how likely it is for a consumer of our brand to recommended we will continue to build the hydro facial brand and complement those initiatives with product innovation and R&D.
To tell you more about our innovation pipeline I will now turn the call over to beauty health Chief operating Officer, Brad Houser.
Thank you Andrew it's a pleasure to be here today.
I have been in the aesthetic space for many years and I'm proud to have worked with many of the industry's most successful devices and brands.
I must say I have rarely been as excited about an innovation pipeline as I am about the opportunity in front of beauty health <unk>.
Since joining in January I've taken on end to end product oversight from innovation to production to go to market.
My goal has been to focus the organization on innovations that will deliver long term sustained profitable growth.
First Sundar you all know it is our next generation connected device to deliver powerful insights and efficiencies for our providers.
What we are unlocking next is scenarios, one stop plug and play platform capabilities, we envision a future where some day it becomes a revenue generating Swiss army knife, serving as the centerpiece of the treatment room.
Today, we plug and play our Leidy shield from life's them.
You can imagine in the future, where we can power a dramatic scope or other skin assessment tools to give the STS and in room diagnostic or even a laser or oxygen facial handpiece with this our providers can offer complementary treatments all in one device.
We intend to add a new handpiece with complementary functionality tooth and nail every 12 to 18 months.
And <unk> is the flagship device in our lineup our new connected Allegro serves as the entry level offering.
The upgraded Allegro provides the same trademark hydro facial glow, but without many of the defining features of the nail.
The entry level pricing offers flexibility for us to attract even more providers, particularly newly graduated a statistic just beginning their careers.
Boosters are already central to the hydro facial approach to personalization and co created R&D with a number of strong partners.
You will continue to see us launch marquee booster innovation to drive newness on a regular cadence globally.
These fuel excitement and truly differentiate our brand.
We expect to launch a collection of region specific boosters, starting with China, and addressing the skin needs and preferences of our largest growth market.
Hydro facial branded skincare is a logical extension that providers can recommend to their clients to use at home and as a natural add on for providers and puts hydro facial in consumers' homes enhancing our brand engagement.
This next innovation is particularly exciting as it's been in the works for some time and opens a new channel for BD health hair salons.
We intend to create a portable care of these specific device tailored to the needs of hair stylists. The devices designed for the tight quarters, Ian the economics of a hair salon a venue that is often the first place many consumers discuss hair loss concerns.
We will start with a very thoughtful pilot to ensure we fully understand this new market and we'll be excited to update you on our progress as we learn more.
And finally, our soon as coming innovation is a consumer loyalty app that will put hydro facial directly in the hands of consumers.
The App is designed to draw consumers in and reward hydro facial treatment frequency.
With this we aim to drive increased bookings to our providers growing their businesses and fueling our own consumables growth.
At the Atmos yours, it is expected to become a cornerstone of our connected ecosystem.
We're excited to be collaborating with Amazon Web services, and the AWS generative AI innovation center to expand the functionalities of pseudo cloud, our beauty health loyalty platform and implement generative and predictive AI capabilities to better personalize the consumer's beauty wellness experience.
In summary, we have an exciting innovation pipeline rooted in clear consumer insights that are expected to deliver sustained long term growth.
With that I turn it back to Andrew.
Thank you Brad Indeed, we have never had a stronger innovation pipeline and this will provide us with long term sustainable multi dimensional growth opportunities and.
And we look forward to sharing more updates at a beauty health Investor day, an H one of 2024.
Operator, we're now ready to take any questions.
Thank you we will now begin the question and answer session.
I'll ask a question you May press Star then one on your telephone keypad.
If you're using a speaker phone please pick up your handset before pressing the keys.
Any time your question has been addressed and you would like to withdraw your question. Please press Star then two.
Please limit yourself to one question.
At this time, we will pause momentarily to assemble our roster.
The first question comes from Oliver Chen with TD Cowen.
Please go ahead.
Yes.
Alright. Thank you very much would love your thoughts on the teething issues and what that implies in terms of timing and how much impact that is having across the sunbelt as.
As well as as you thought about guidance you mentioned some of those issues caused gross margin headwind how are you able to reaffirm.
But the margin guidance in the context of that.
Follow up on China, just we're seeing some optimism, but some caution in China would love your reads on how thats enter playing with the traffic and what you're seeing thanks very much.
Good morning, Good morning, Oliver Thanks for the questions. So.
So I'll start with the Sunday issue. So as you know our vision for <unk> is that it.
Connected platform and that Swiss army knife of the central to providers treatment room, and when we launched it was.
Real leap forward, but I think as we've talked before with any high Tech Iot product, especially those first out of the gate the ones in the U S. There was an element of efficiency improvement once it in the real world. So impart part of the teething issues, where software related and part of the issue was user.
<unk> hardware and I think and has provided some day to work over the course of last year, particularly in the U S going through hundreds of the treatments we.
The opportunities to improve the customer experience and overall performance and reliability. So it pushed through new software updates.
<unk> very specifically was related to forcing a written cycle et cetera, because we are finding that some of the first generations had some residue buildup and blockage and other ones. We're simply simple component upgrades. This is mainly being a U S. Teething issue because over the course of last year, we've talked.
You bet it on previous calls we were able to.
Make those amendments ahead of the international launch so.
Putting the customer first and obviously invested as we've spoken before about replacing every machine.
Customer called into the problem with very fast to take.
Take the machine back and switch it out.
But of course that cost us money, which was unplanned, but we felt that we must have the customer first that with us for the long term.
Days off.
I appreciate that support so.
Putting the last of the.
Sort of fixes in terms of Q3.
In the U S, where we're making the amendments in terms of in field support and that will be completed by the end of Q3.
In terms of your other questions on gross margin.
The pressure we had in Q2 very specifically was just.
Possibly close with what I talked about tinder issues in the U S. I mean, we were working with our providers. Some of them you were about to do these in market fixes good giving Q3. So there was a partial degree of hold back on the other part with the high interest rates in the U S. Particularly we saw a degree of shifts are lower.
Devices like the Allegro or refurbish and data devices. So that's what caused the gross margin shift.
It's temporary.
We are aware of it we have a fix in place and we'll be back up to historic levels of gross margin by the middle of next year and we do have a line of sight to our long range targets, you'll recall last September we presented.
500 basis points of margin accretion over the next three years from September we have a line of sight to that because the China manufacturing will flow through about the middle of next year and the value engineering products.
<unk>, which represented will also bear fruit, we have put those on hold because we've really dedicated our resources on addressing the same day issues in the U S, which was the right thing to do so we're on track and then your final question on China as anticipated, both EMEA and APAC came back strongly but particular Lee.
In China.
We are very pleased with the acceleration there in Q2 and I must say it's continued into Q3 as you know all of our China is less impacted by those typically in a July August .
Like to periods of consumption, which Europe and the U S has so I can tiny China's continues to go well. Despite the economic headlines are reading we follow we follow it very closely but the consumption of consumables and systems remains very healthy.
The next question comes from Corinne Wolf Meyer with Piper Sandler. Please go ahead.
Hey, good morning team. Thanks for taking the question. So I just want to touch on the guidance and really appreciate the color you gave kind of mark like the quarterly cadence expect for Q3 and Q4, but it does kind of.
We then to a pretty strong ramp in EBITDA margin in Q4 can you just talk about one what gives you confidence that we'll see that big of a step up in Q4, and then two where is that really going to come from if you're still going to see some added gross margin pressure is it really going to come from the marketing.
Expense and SG&A, just kind of where are we going to see that that leverage quarter. Thank you.
Sure and thank you for the question and I'm glad you asked it because I think it's important that we work through this together on the call we maintain our conviction and our ability to hit our guidance in the back half and we started this year mentioning this was going to be back half weighted year and that has not changed I think it's as China recovers, we expect continued growth.
And the region, you'll recall in Q3, especially in Q4 last year, China was locked down. So we had no business that has bounced back strongly as has EMEA and as you know we've spoken before about the higher contribution margins.
Margins for those international business, especially in Asia. So that contributes also we are still in launch phase dropping a lot of these systems globally.
In the back half of the year.
Right.
Great for new systems globally in Q2 that will continue as we rollout <unk> internationally in the second half as we saw thirdly, we've got of course exciting boost portfolio launches coming in the second half, including some local in Q4 agent boosters, which Brad talked about in China. Moreover.
We are getting as we experienced already this quarter degrees of operating leverage throughout the P&L beyond the fixed cost leverage you would expect to see with our revenue growth. So in addition, as you mentioned, we expect to see receding Opex investments.
Marketing and advertising is very front half weighted because of all the trade shows in our industry, where we generate the leads and that typically receipts that we have line of sight.
The back half and I personally went through the details of the financials for the back half of the year given the CFO transition I feel confident in our ability to use various levers to achieve our guidance.
The next question comes from Margaret Kayser with William Blair.
Please go ahead.
Hey, good morning, Thanks for taking my questions I'm going to take a second crack at the guidance comment.
Both on the topline and the bottom line and you touched on it a little bit Andrew there, but maybe if we go into specifics.
If we look at the historical I guess Q4 trends pre COVID-19.
Those looked like to me at least that they were up kind of in the mid 20% sequentially from Q3 to Q4, you know more recently.
I guess impacted here as it was in the teens. The number you provided today it looks like its closer maybe at a high 20% from Q3 and Q4 so.
Is that more China is it something else.
The numbers are on maybe they are.
Are you thinking about adjusted EBITDA does that EBITDA, yes rely on revenues.
The number that you've got thank you.
Margaret Thank you great questions important so a few things as we unpack that first of all looking back at the historical years, you referenced remember recall by that China was very nascent back then we didn't have teams on the ground and in Shanghai, Beijing, Shenzen, which we have now as well.
EMEA now of course, we've made all those investments during the last two or three years, which are really bearing fruit. So when you add all those building blocks with the with the expansion of our business that <unk> launched the new consumables.
How we bridge that in terms of EBITDA you are very confident in our ability to deliver the EBITDA with the momentum we have with the leverage we're getting we'll also see some gradual sequential improvement in gross margin in the back half of the year and that's why we have confidence and line of sight to deliver the guidance provided.
The next question comes from Jon Block with Stifel. Please go ahead.
Thanks, guys.
Maybe the first question.
Year ago, EBITDA figures have changed yet again, so I see in the PR.
$1 22, EBITDA is now $18 3 million.
Was $13 8 million revised higher by 30%.
Mm 122, EBITDA margin arguably benefits by about 250 bps.
And just from some of the footnotes it seems like more add backs were baked in to.
A year ago number so that it's apples to apples with the $1 23 add back. So I guess, one do I have that right and then Lee and how much does the 2023 EBITDA margin of 18% to 19% benefit from these incremental add backs relative to your original guidance. When you gave that whenever that was it.
Months ago.
Follow up Andrew the 'twenty two revenues unchanged gross margins are arguably lower so some of the EBITDA is being made up within opex.
Likely sales in marketing when you look at the adjusted numbers.
Maybe just your comfort that you're not sacrificing.
Investments in sales and marketing in 'twenty three in order to hit the near term margin targets, which might be.
<unk> more longer term growth trajectory of longer term growth in 'twenty four and beyond thanks guys.
John Thank you I'll take those I'll start with your last question and then work back first of all just to.
We have and I have personally total confidence in our guidance in the year to go.
On the.
The way, we're investing we're learning all the time in terms of sales a month, we've been operating and marketing expense sort of in that 10% to 12% of sales and that's a cost increase year on year in value as we've grown bigger.
And I'll spell.
Spend is typically front weighted but we've really shifted and learn about how we invest a bit from the globe dilution, which we highlighted on the call. The way we are investing in broader reach digital which both a.
Provider to drive conversion of new systems, and consumers are actually being a lot more efficient in how we invest in our marketing dollars are missing that in the Rois. We track. So I must say, we're feeling very confident that we're not in any way rich.
Reducing.
Funds that were just getting leverage from efficiencies in terms of Opex.
Our structures, which are bearing fruit as you saw the operating leverage come through this year already in Q2 in terms of your going back in terms of your adjustments so yes.
In page two of last year, we didn't put.
Bonus.
Teams in the H two we also have to be apples to apples removed this year, because so much of a.
<unk> is our the base salary or equity indeed, we paid equity as a bonus to our teams. This year. So we're very aligned with them.
With shareholders. So we've taken that on page two so it's apples to apples so that explains that adjustment since putting in the footnotes.
Thank you.
The next question comes from Navan tight with BNP.
Please go ahead.
Hi, good morning, Thanks for taking my question.
From a long time ago.
My question is that Nexstar Macbeth struggling to find great authority.
Good greenhouse market furbished.
Idaho.
And also interested to know about.
Michael Monahan from appointment Tomorrow. Thank you.
Thank you you are a little bit difficult to hear but first of all I will address your first one I think you were talking about the health of the market in general credit I mean first of all you mentioned the medical Spa the medical Spa, both in the U S and globally is very very buoyant as you know, it's over 60% of our business and the most productive.
And it's growing fast and continues I think what I referred to in terms of the pressure on our gross margin related to systems actually is less so from the chains they've continued to invest and that's why even the U S. You saw that really strong growth in systems of 20% in Q2, and that's Comping last year's 10 dialogue.
With new system users, increasing penetration and market share I think where we've seen the pressure.
Institutions, who are just out of school they would be just buying their first device and I think what they've been telling us with higher interest rates financing now is they're getting quite up to nearly 20% on financing and that.
And if you are looking at <unk>, which as you know.
Recommended price of circa $40000.
A big.
Asked for them to take on I think that's why they've been seeking either refurbished and data systems or the Allegro system, which is a perfect price point for them around $20000. So we've been able to serve them in saying that we walked away from over $4 million.
Sales in the U S alone in Q2, because it despite good credit levels, a number of our providers just couldnt get the financing. They won is tightening is correct and it tightened up with the rising interest rates.
Thats really explains that.
Of course with well served with the way we stratify our portfolio with led grow is that entry price point and then we're able to.
The market well.
The next question comes from Olivia Tong with Raymond James. Please go ahead.
Great. Thanks, Good morning, I wanted to revisit the gross margin again.
A couple of things that you said.
This is Tony.
Refurbished system sales library, et cetera, which I imagine have lower gross margins relative chippendale wasn't always part of the plan to do that and are you continuing to sell ultra refurbished systems and then can you talk about the gross margin differential between.
Some of the legacy systems and <unk>.
Oh.
Because effectively what it looks like is that you may be having a bit of a lower AUR.
Relative to your prior expectations.
And with that.
And I'm curious how how are you.
The building blocks to get some gross margin.
Bye.
Thank you.
Thanks for your question I mean first of all just to confirm Allegra.
Gross margin Decretive, it's not diluted.
It's in line with the margin I think what the margin pressure, we faced has been more from the REIT.
Consumers.
Sorry providers purchasing the lower margin refurbished 10 days, that's what state the margin down. So <unk> is a great margin across at $20000 lower priced platelet perfect for that graduating S. Titian and then provider.
And then obviously the <unk> that provided one thing all the functionality, which Fred talk too.
And then in terms of the gross margin, we will start to see a sequential improvement of that in the second half of this year and be back.
By the middle of next year will be over the short term headwinds in essence.
By the middle of next year will be over the short term headwinds in essence.
We've talked about this before on previous calls at this stage, we had planned on twofold, one to have a local manufacturing in China, but at the moment, we'd started that manufacturing, but as we've also been making addressing the teething issues on the devices in the U S. In essence, we've been having double cost of that U S production and as well as Chi.
So thats been a gross margin hit.
Moreover, we have.
Also had to postpone some of the value engineering projects, which will now address because we've really focused the team on addressing the issues in the U S will get that during the end of Q3 and have line of sight to gross margin of historical levels and more by the middle of next year.
The next question comes from Alan <unk> with JP Morgan. Please go ahead.
I think thanks for the question.
To touch up on guidance again, when I look at it does look a bit more <unk> loaded than I think we were originally expecting execute came in a little bit stronger on the top line that we were expecting and I know there is definitely a little bit of moving pieces to the year given the kind of the cadence of some day of launch it internationally. So is there any more color you can provide just on you know how.
Do you get confident and that really strong perfect number how we should think about system sales progressing how we should think about disposable sourcing.
Good morning, Alan Thanks for the question again, an important one as I said, we've maintained maintain our conviction in our ability to hit our guidance and I think we've talked before about from the start of the year. We said it would be back weighted I think it was a few building blocks in there of course, China was locked down.
It really for us doing much of Q2, and certainly Q4 of last year, you've seen how significant that is today on the call. That's of course bounce back strongly and continues to perform well into Q3 and the same with.
EMEA in general and both of those markets have higher contribution margins on American business.
As our business mix continues to weigh more towards international we expect to generate degrees of operating leverage throughout the P&L beyond the fixed cost leverage you'd expect to see so there is a fixed cost leverage there is also the.
<unk> leverage reduced in terms of our investment in marketing and advertising is very front weighted because of around the trade shows in our business and we will get leverage in the second half as well as the consumables you've also got the.
The international markets, when they launched and day that they put through some price increases on the consumables all of that plays through in the second half in Q4, which gives us line of sight to that step up in EBIT margin, which you see.
The next question comes from Linda Bolton Weiser with D. A Davidson.
Please go ahead.
Yes, hi, Thank you so your commentary about the small as statistics in the U S.
If you're having trouble financing, it's it's a little bit of a different narrative about the positioning of your system. Because I guess, we were thinking of it is positioned as the trade down lower more affordable system out there among obstetricians so it really changes.
The positioning and how we think about it maybe you could talk about.
For the regular bigger doctors and whatnot.
We have a budget who send it to their budget by the end of the year.
They need to have a bigger fourth quarter.
It's sort of this issue seeping into that bigger provider as well and so you may see less demand.
From them, even though you've sort of positions us as the affordable system. It seems like maybe this is a stretch.
Can you just talk about how that affects like your fourth quarter sales outlook.
Linda Thanks, very much for the question.
I would say with respect I don't agree with your premise I would say first of all the doctors and the medical channel.
And the growing medical Spa channel they consider even the same day to be very cheap compared to the other boxes. They sell some or all the other brands you are very familiar with I think.
For the addition, just leaving that's why we've always had the Allegro business. There as also the refurbishments of Tinder, which makes them accessible.
We see this as a short term headwind.
Pricing resistance.
From a physician's is never an issue until interest rates are so high.
<unk> got financing at 20% of course that is the short term payments you'll get over the fundamentally see we still have dropped.
30% more.
<unk> new globally in Q1.
And even in the U S as well our systems sold during the quarter were up.
25% so.
There's no real barrier to pricing.
And of course, we'll benefit as you said in Q4, particularly from doctors and the medical channel not only is that the biggest quarter of consumption for the year, but youre right as they used to use up the capital expense required to.
To get their tax incentives that the key time for purchasing not just in the U S, but globally and with the rollout and that in all the markets. This year that we'll be seizing opportunities to buy that so thats why we see and anticipate demand to continue to build throughout the year.
The next question comes from Bruce Jackson with the Benchmark Company. Please go ahead.
Hi, Good morning, and thank you for taking my question I'm going to take another run at the revenue guidance from a geographic standpoint.
Can you give us a little bit of <unk>.
Color on some of the regional dynamics.
How do you expect the U S. John called for the rest of this year.
As Asia, and Asia, and Europe remained strong and then longer term how do you see the regional mix changing with your sales in 2024.
Good morning, Bruce and thanks for the question.
This is a topic, which drove followed pretty closely and I think.
As we look globally, despite the economic news headlines globally, we see demand.
<unk> remained resilient.
Demonstrated by.
The accelerations in the consumable growth driven by volumes, which we've seen in all regions as well as selling new systems.
While no company is recession proof.
Middle class consumers are better able to weather recessionary pressures and frostbite self care.
In terms of what we're seeing by region I mean in the U S.
No.
Demand remains healthy you see that in the growth of the consumables at 29% during Q2.
Strong Q1.
Systems, New systems, we sold in a.
It grew 25% that's in the non traded at once in the U S, which is even more than when we launched <unk> last year. So in essence, we've been increasing our penetration we see.
A very healthy market in the U S is just where we've seen incentives on the device sales not only the consumable sales is just some pressure on the on that.
SD because of the high interest rates, but that's why we've been able to not lose business, we've been able to sell them refurbished in days for the <unk> in terms of.
Shifting now to APAC, where we had a very strong quarter of course really the news there is that reacceleration in China. Despite the negative news headlines from China demand for hydro facial remains very healthy we see less seasonality in China than what you typically do kind of in July and August in Europe , or the U S. St.
For Latin America, and the <unk> launch has been successful and I think really underscores the enthusiasm in that market I mean ultimately.
In years to come China, No doubt.
Our first market. The Tam there is two three times bigger than that of the U S. And I think we're just getting started with very very low penetration as you saw in the in the presentation and of course, our positioning there as a cosmetic device northern medical device, which is very different to a payer brands in the regions that we have just said.
Wider distribution and access to semiannual providers and consumers in that key market and then for EMEA. We've been extremely pleased with how EMEA was recovered since last year.
Successful launch of since.
Early days in EMEA.
<unk> systems growth in Q2, growing 64% and our consumer Bulls growing 28, 29% so.
Pleased with the growth of that.
I'm showing continued strength.
The next question comes from Kyle Rose with Canaccord Genuity. Please go ahead.
Hi, everyone just katelyn on for Kyle Rose.
On the Allegro system could you provide a little more color on kind of the distribution and how many systems are out in the market and the growth Youre really seeing on those and then just quickly on skin Stylus received five 10-K for the claims for facial acne scarring recently, how are you thinking about launching this.
Product on onto your systems. Thank you.
Thank you for the question so the <unk> system.
Our system has been around for many years I would say a relatively small portion of our business that has seen.
Some growth recently predominantly in the U S from that first SD, we've talked about predominant because of the high interest rates and of course, we're very proud to be upgrading that making some important changes, adding some technology. So we can start collecting data like we do on Sunday and also adding the anti twist counterweight bundles that we haven't seen that.
So really step out any of the sort of counterfeit solutions, which we had seen in pockets in the U S. Before so very excited to see those changes on our lead growth. It's got a similar margin to synergize, the lower price points and then for skin Stylus of course, we're really excited for the new clearance, we got from the FDA last week.
We're now the only micro needling device approved for face and abdominal use as I said earlier.
The revenue this year frankly won't be material to the company.
But it's already doing well, it's higher margin more accretive actually then.
That's sort of the historic high levels of hydro facial so it adds a lot I think later in the year early next year, we'll give you more of a view on where we see the skin stylist our.
Global revenues for the years to come not just in the U S, but globally as we get approval to sell it overseas.
This concludes our question and answer session I would like to turn the conference back over to Andrew <unk> CEO for any closing remarks.
Thank you operator, and thank you again to everyone for joining today's call. Our second quarter results demonstrate the continued demand for hydro facial and encouraging momentum across our most important growth market.
Organizational and operational changes, we have implemented paired with our ability to unlock operating leverage.
Pricing innovation pipeline position us to move forward with even greater confidence in executing against our FY 2023, and long range financial targets as I mentioned, we look forward to hosting an investor day in the first half of 2024, and we will share more details in the coming months. Thank you and have a wonderful day.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
[music].