Q2 2023 AirSculpt Technologies Inc Earnings Call
Greetings and welcome to the Air Sculpt Technologies, Inc. Second quarter 2023 earnings call. At this time, all participants are in a listen only mode.
And answer session will follow the formal presentation, if anyone should require operator assistance during the call. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
At this time I would like to hand, the call over to Dennis Steen Chief Financial Officer. Thank you you may begin.
Good morning, everyone and thanks for joining us to discuss air Sculpt Technologies' results for the second quarter. Joining me on the call today is the company's founder and executive Chairman, Dr. Aaron Rollins and Chief Executive Officer, Todd Magazine.
Before we begin I would like to remind you that this conference call May include forward looking statements. These statements may include our future expectations regarding financial results and guidance market opportunities and our growth.
Risks and uncertainties that may impact these statements and could cause actual future results to differ materially from currently projected results are described in this morning's press release and the reports we will file with the SEC.
All of which can be found on our website at investors <unk> elite body Sculpsure Dot com.
We undertake no obligation to revise or update any forward looking statements or information, except as required by law.
During our call today, we will also reference certain non-GAAP financial measures, we use non-GAAP measures in some of our financial discussions as we believe they more accurately represent the true operational performance and underlying results of our business. A reconciliation of these measures can be found in our earnings release as filed this morning and in our most recent 10-Q.
<unk> filed which will also be available on our website with that I'll turn the call over to Aaron.
Thank you Dennis and good morning to everyone joining the call our results for the second quarter were very strong and further demonstrates the demand for Air School, Tom and Dennis will provide more specific details about our performance in their remarks, but let me say that I'm. So pleased with how we have grown the company to the place. It is today, we have performed over.
40000 procedures in our history and are now offering here scoped in three countries. I believe we are well positioned for continued long term growth and significant shareholder value creation.
As I shared previously I have shifted more of my time to clinical excellence and innovation on the innovation front. We recently rolled out are scope lift a facial fat transfer procedure that can eliminate wrinkles resort loss volume to areas of the face and provide more volumes and the lips as you know the broader filler market is over $4 billion.
Which expands our already significant tam to over $11 billion.
Our new procedure offer significant benefits compared to artificial facial pillars, we use the clients' own fat, which I referred to as liquid gold.
Actual filler material. This increases the body's acceptance of the filler and provides a more natural permanent and consistent results.
It's all highly concentrated with the clients own stem cells artificial fillers, which as you may have read recently are resulting in adverse hypersensitivity reactions lymphatic drainage issues and may not be fully absorbed by the body.
Artificial facial filler injections must be touched up every 12 to 18 months, whereas our procedure is one and done it's permanent that's supposed to convenience and a value driver for our clients bottom line with the addition of air scope left we are broadening our offering as well as our competitive moat. We have rolled out this procedure in about a third of our centers include.
London, and we will continue to expand it to the rest of the fleet over the coming months as we train up our doctors, we are starting to test more new procedures and working on many other exciting new and enhanced innovation initiatives that I will share at a later date overall, our team is delivering consistent performance and executing on our key growth areas our strategy.
Continues to focus on strengthening the air sculpt brand accelerating our store openings and further enhancing our profitability as we scale our business both domestically and internationally with that let me now turn things over to Todd.
Thank you Aaron and thank you to everyone on the call for joining us today.
It's been over six months since I joined Air Sculpt and my excitement for the company and its future has grown exponentially.
Our highly differentiated proposition, our incredibly talented team and our significant runway of opportunity or just some other reasons for my increased optimism.
Let me now turn to our most recent performance I am pleased with our second quarter results highlighted by revenue growth.
<unk>, 12% year over year, which was nicely ahead of our projections. This growth was led by 13% year over year case growth in a sequential uptick in our average revenue per case, a procedure rate, which was about $13300.
Our volume growth for the quarter was led by de Novo centers that opened over the past 12 months and I'm pleased how they are performing.
Following our strong first half performance, we now expect to achieve the upper end of our revenue guidance range for 2023.
Similar to prior calls my comments this morning will be centered around three important areas.
The focus in 2023.
As a reminder, they are strengthening the organization by bringing in additional talent and improving our processes.
Focusing on revenue growth, which includes ramping up our de Novo expansion program and.
And finally, right sizing our cost structure and strengthening our capabilities to support a much bigger and more robust fleet or centers.
First on strengthening the organization.
Our additions to the executive team are complete for now.
Our team now is a powerful combination of legacy executives with tremendous entrepreneurial experience and new executives, who bring enterprise experiences and building and scaling businesses and organizations.
Expect these changes to result in more consistent revenue generation and margin achievement.
In terms of revenue growth, we have opened four of the five de Novo centers that we committed to at the beginning of the year, We expect Raleigh, North Carolina, The fifth center to open by the end of the third quarter, which is in line with what we had expected in our original outlook.
All of our de Novo centers are performing at or above expectations, including our London office, which is off to a very good start.
Consumer interest at dislocation is very high and we continue to be optimistic that this will be a flagship location as well as a gateway to other international markets.
Our de Novo pipeline remains robust and we are happy to announce this morning that we expect to open at least six new locations. In 2024, we will provide more details about the specifics of these centers and our third quarter call.
Importantly, we have worked with a well regarded real estate analytics company to build a model that has helped guide our future location decisions and gives us even more confidence in the performance of our future de novo locations.
Our real estate analytics work over the past few months also included quantifying the U S, Canada and rest of World de Novo opportunity I'm excited to share that this work suggests that the global opportunity for Air School is around 500 locations, a 20 times increase over our current fleet.
Keeping with new revenue growth drivers, we launched our first significant celebrity partnership in June to help us drive greater brand awareness one of our biggest opportunities. We are proud to showcase the transformative aeroscope results of actress television personality and entrepreneur.
Jenny Mccarthy.
Jenny came to Doctor Rollins, a few months ago, because like many women. Her age there were parts of her body. She didn't like no matter how much you worked out our diet. It after one session, which included her abdomen and waste. The results were extraordinary in fact, it is no coincidence that after Dr. Rollins did Genies proceed.
<unk> she was offered the opportunity to be in Kim Kardashians skins shape. Our campaign, we literally help turn journey into a 50 year old swimsuit model.
During the short time, our journey across the initiative has been in the market. We have already seen an uptick in brand awareness and a significant demand related specifically to her procedure.
Given these results we have already begun searching for the next big celebrity whose body. We can help transform and whose story can help us continue to drive awareness of the Ers golf brand.
Finally, I am very pleased with the progress we have made in our cost management efforts. We have already acted on a significant number of the areas that we identified as opportunities for streamlining our cost structure and improving our processes I feel confident that we are firmly on track to meet and potentially exceed.
The targets, we have laid out which is $2 $5 million of cost savings in 2023, and a run rate of $5 million as we exit the year.
Overall I am pleased with the results of the quarter and continue to feel very good about our ability to deliver on our financial commitments to our investors in the balance of the year and beyond.
Before I turn the call over to Dennis I'd like to say, thank you to the team at our school, both our clinical and business professionals are incredibly passionate about our patients and our company and worked tirelessly to consistently deliver an experience. Unlike any other in the world of aesthetics.
Now I'll walk you through the financials and our outlook for the year Dennis.
Thanks, Todd our revenue for the quarter was $55 7 million, a 12, 2% increase over the prior year quarter.
Our growth was led by approximately 13% increase in case volumes, which was primarily due to the addition of six de novo centers versus the prior year base as of June 32023, we operated 25 centers versus 19 at the end of the second quarter of 2022.
Our average revenue per case for the quarter was approximately 13300, a one 1% decrease over the prior year's quarter and a 700 increase over the first quarter of 2023, driven primarily by procedure mix.
This was above our target range of 12 to $13000, which we attribute to our continued optimization of our procedure bundling promotional strategy. While we continue to target a 12 to $13000 average sale price, we do expect quarterly fluctuations or percentage of patients using financing to pay for procedures remain in the 40 <unk>.
<unk> range and has been very stable from quarter to quarter in spite of the uptick in interest rates.
Our same store revenue was down approximately 4% compared to the prior year period, which was in line with our expectations for perspective, Q2, 2020 today benefited significantly from the pent up demand created by Covid, resulting an artificially high procedure volumes with the completion of our second quarter.
<unk>, we are mostly beyond the COVID-19 noise in our comp calculations, we continue to be encouraged by the demand, we're seeing and we expect to achieve mid single digit comp growth in the back half of 2023.
Our cost of service as a percentage of revenue was 35, 8% versus 35, 8% in the same period last year and our customer acquisition cost for the quarter was approximately $2250 per case, which was comparable to 2000 in the prior year period.
Our gross margin per case was approximately $8500 during the quarter, which reflects an approximate four times return on our customer acquisition cost, we expect our CAC to be in the low 2000 range for the near term and we expect it to decrease overtime as we execute on further brand awareness initiatives.
For the quarter, our adjusted EBITDA was $14 6 million compared to $14 million from the prior year period as reported last month, our adjusted EBITDA results now include Preopening costs for de Novo centers in our calculation. This impact was approximately $1 4 million in the current quarter and $1 2 million in the prior year quarter.
As a reminder, this change in presentation does not impact our expected cash flow our leverage ratios as calculated under our credit facility.
Our adjusted EBITDA margin was 26, 2%, which was a decline of 190 basis points versus the prior year quarter due to the increase in expense growth related to clinical and other support related investments.
On a sequential basis, our adjusted EBITDA margin increased by 560 basis points.
We expect further margin improvement in the second half of 2023 compared to the prior year periods. As a result of our cost management initiatives, taking effect as Todd noted, we expect to achieve approximately $2 $5 million of in year savings related to this work.
Our liquidity position continues to be very strong our cash position as of June 32023 was $28 million and our $5 million revolver remains undrawn, our gross debt outstanding was $83 9 million and our leverage ratio at the end of the quarter as calculated under our credit agreement was one six times.
Cash flow from operations for the quarter was $12 2 million, which represents an adjusted EBITDA conversion ratio of 84% and we expect an adjusted EBITDA conversion ratio of approximately 65% for the full year.
We invested $2 2 million primarily related to opening new centers and we had a use of cash from our financing activities of approximately $579000.
We remain on track for healthy free cash flow generation in 2023, we continue to expect our primary uses of cash flow during the year will be to fund growth investments for the business such as adding de Novo centers driving technology innovations and brand awareness initiatives. We also expect to continue to strengthen our balance sheet throughout the rest of the year.
<unk> asked to further increase shareholder value.
Additionally, consistent with the first quarter earnings release, we provided non-GAAP measure, reflecting adjusted net income per share diluted.
<unk> of 13.
We believe this measure presents useful information to investors by highlighting the impact to earnings per share of selected items used in calculating our adjusted EBITDA.
This morning, we are confirming our 2023 revenue guidance range of $187 million to $192 million, representing 11% to 14% increase over 2022 as Todd noted based on the strong first half results and continued momentum in the early part of the third quarter, we expect to achieve the high end of our target guidance range with our.
De novo centers driving the magnitude of our year over year revenue growth and our expectation of returning to positive same store growth in the back half of 2023.
We are also confirming our 2023 adjusted EBITDA guidance range of 43% to $45 million, which represents year over year growth of 11% to 16% and based on our current performance and confidence around achieving our cost initiatives. We expect to achieve the high end of this range with that I'd like to turn the call over the operator for some questions.
Operators.
Thank you we will now be conducting a question and answer session.
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Our first questions come from the line of Josh Raskin with Nephron Research. Please proceed with your questions.
Hi, Thanks, and good morning.
I wanted to start with the same store growth I think previously last quarter, you guys had talked about sort of a zero to one and now it seems like you know.
Real ramp up in the second half and I know there was a little bit of an easier comp issue, but as we sort of think about maybe even 2024, what same store case growth. So as opposed to look like or what are your expectations as you guys move forward.
Hey, Josh it's Dennis.
So yes, one of the things that we did call out on the remarks was that the same store number we expected it to be a little bit of a decline year over year, we did have.
A bit of pent up volume that was impacting us last year and it was just exasperate, obviously with Q2 being our largest quarter from seasonality standpoint.
Again, we do believe what we are seeing a mid single digit range for the back half of this year.
Obviously, we're not giving 2024 outlooks, yet, we'll do that as we kind of get towards the year end call, but but we think that.
Getting out of the Covid noise, we again, we're in the low to mid single digits. We think is probably a suitable range.
Perfect and then next year, you talked about six centers I'd be curious to get the rationale for ramping up I know Todd talked about this since he started in terms of ramping up the number of centers, but why are you feeling comfortable and then should we be expecting a higher level of startup costs that are now included in EBITDA.
Hey, Josh it's Todd how are you doing.
So we feel very good about the six one of the things I've talked about and it's been a big focus of mine is to make sure that we can ramp that up and obviously as I noted in my remarks, we now have a.
Kind of a pathway towards a significant increase.
But we're also the other part of this I think it's really important as we want to make sure. We have the operational capability to open and operate those locations. So we're in the process of building that we're building a small de novo team. So I feel very comfortable with with six and obviously our goal is to continue to ramp that up over time, but we feel very good about that.
And as I stated, we now have kind of a future map of where to go and significant runway of opportunity. So we're optimistic that that number will continue to go up in the out years.
Got you and then just last one for me and I was a minute.
Just a real quick I'm, sorry, Dennis if you have something there.
Well I was just going to follow up on your Preopening cost part of your question too I was wondering I think yes you.
You did five this year one of those was London again, we're not laying out the specifics of which locations we're going to go into next year, but.
But obviously going into an international moves a little bit from an increased standpoint, but again, we went five this year forecasting six next year I mean, you can kind of work through the math on that so we don't expect anything significantly different as it as it relates to adding one more.
Got you, Okay and then.
Last question just is you know theres been an obvious spike in <unk>, one <unk>, one prescriptions and a lot of media attention I'm. Just curious how you think that impacts your patients do they see that as a potential alternative or is that a companion to air Scott I'd just be curious to see if you're seeing any trends around that.
Thanks, so much it's their enrollments.
Brad you asked are we get this question a lot and I think it's important to talk about those.
Epic and other GOP, one inhibitors are weight loss drugs and.
First golf as body contours, and what's great is theyre very symbiotic and they are not competitive in any way, we see it's been a tailwind for us now and we see it so often.
We internally call it airs epic because we see so many people who are autos epic actually getting air scope because now they can give themselves permission. If you lose $25 30 pounds and your arms and Chin still bother you youre, even more likely to come in when you lose weight it doesn't just melt.
Of your body evenly so it actually creates a really great tailwind for us.
We also see people who go on those epic after having Eric scope to kind of take another step in their journey and we loved that too so.
We're a big fan and we see it actually opening the market.
That's helpful. Thank you.
Sure.
Thank you. Our next question is coming from the line of current <unk> with Piper Sandler. Please proceed with your questions.
Hey, good morning team. Thanks for taking the question and congrats on a really good quarter.
So first I would like to kind of go back to that volume question earlier and trying to better understand what is really the opportunity for volume growth within each existing center and how can we expect that kind of like same store center case number to trend over the longer term and then as we look forward the growth.
You're going to keep coming from the unit expansion versus pricing and same store cases. Thank you.
Hey, Karen.
What we see again as we kind of look forward in the future we think.
Low to mid single digit.
Is kind of.
The place we want to be from a same store perspective, clearly historically theres been so much.
Variability from quarter to quarter, just from the Covid years, and those sorts of things, but we think that that's a healthy range for us that we're.
We're pretty comfortable with.
We kind of get through that I mean, as our fleet gets larger and larger small.
Single.
Low single digit same store growth will obviously drive a substantial portion of revenue growth, but we're going to continue to see de novo as being a very healthy part.
All of our expectations.
Hi, Todd how are you doing.
Just add on to the outlook.
I would look at it as we're focused really on two things.
That obviously is continuing to expand through de Novo and also on continuing to drive comp store growth honestly I think there's a lot of opportunity there and we're hyper focused on that right now.
As Dr. Raj mentioned in his remarks were continuing to rollout new procedures, which we think are definitely going to have a comp benefit for us we talked about some of the brand awareness initiatives that we are really expanding and increasing our effort. There that will help as well and then we're doing a lot of things internally in terms of and I have talked.
About improving our processes and really enabling the business to get much more sophisticated which we think is also going to help. So we have a lot of new things that we're doing so that should definitely help us to deliver the the comp growth that Dennis talked about and then we've been a de novo growth story, and we're going to continue to focus on.
On that but we can walk and chew gum at the same time so.
We're very confident and we're building those capabilities to really drive our white space opportunity, but also to continue to drive comp growth, which we feel very confident in.
That's great to hear thanks for all the really helpful color and then just on.
Kind of as you expand your de novo's, and Youre, adding more and more centers. Each year can you talk about how the hiring environment has been both in terms of getting surgeons onboard getting nurses and staff and the doors I know historically, that's been a little bit of a challenge here and there and so just curious how that's trending and how you've been able to.
<unk>.
Ramp up the hiring process.
Yes. Thank you.
Thanks for the question, it's Erin Rollins.
As for nursing, we've actually made some changes recently that have been really beneficial which is that.
Although we have our ends in every office, we're also utilizing our nurses.
In other levels of Allied health professionals to broaden our work for us. So now we have <unk>.
<unk> or <unk>, depending on the state and medical assistance actually for non nursing jobs that are.
Of a clinical in nature.
So that's been going really well and for doctors.
It's ever gone since I started the company now that we have almost 90 surgeons our referral network amongst those surgeons is superb.
Our surgeons a referral fee if we hire someone they refer and thats been a huge driver.
We have many offices that have more surgeons actually who want the job then we have spots to fill so were doing excellent.
To say that.
Surgeon recruiting team is just superb we have two people and they're just doing a wonderful job, we couldnt be happier with them.
Awesome. Thank you and then just quickly if I could squeeze in one more I think you've previously talked about.
Kind of a long term EBITDA target.
30% kind of getting back to that previous <unk> that you are doing.
A couple of years ago.
With the new EBITDA calculation is that still intact or can we assume that that's going to be maybe a little bit weaker longer term. Thank you.
Yes, it's a great question Korean yards, so we had to make the adjustment on the EBITDA calculation.
Yes, absolutely thats going to slow that that ability to reach that 30% number it's going to push it back a little further in the future.
We were to look at like for like we still don't see any changes again this change was purely a.
The presentation doesn't impact cash flow or anything like that doesn't impact operations, but to your point.
If you adjust that through.
No longer getting credit for the pre opening that's going to that will slow that process down of hitting that 30% number.
Thank you our next questions come from the line of Parker Shneur <unk> with Raymond James. Please proceed with your questions.
Hey, good morning. Thanks for the question. This is Parker on for John Ransom at Raymond James.
I was just hoping to ask about the new procedure are scoped list.
Generally what's the price point for this add on procedure.
What's the uptake how many youre procedures have you done I know, it's still new in the rollout and then is this something that can be done alongside of larger procedure like in abdomen and it would be done at all in the same setting or can or does that happen to be kind of a separate appointment maybe just talk more dive down into <unk>.
Yes, sure it's enrolling so first of all.
You can do it in conjunction with any ear scope procedures. So you could do it with a <unk> you could deal with it adds I mean, you can do with arms. It doesn't really matter. In fact, if you don't want air scope, because youre really skinny, we can still harvest enough fat.
Because it only requires a few tablespoons of set so we could actually just do a patient we would never have done before and are scope them just to harvest that for their filler. So it can be done in conjunction with anything and it really it takes about 15 minutes extra in terms of pricing. We haven't we haven't said exactly what.
It is but there is several areas on the face from the temples down to the churn to do including lips nasal labial folds.
Cheekbones draw line in the CIT itself.
And.
Each area will be between $502000. So it just depends on how many areas of their face they want done, but once we fill through their fat and start I mean, it's it's basically cost us nothing to do so I'm really really delighted to offer it in terms of our rollout.
Right now its rolling out we have.
Almost half of our offices are doing it.
We have a trading module that we're just getting everybody to do now.
Are docs are really excited about a lot of them have done it in their private practice. So it's not a heavy lift at all.
<unk>.
What we do every day.
We're the only scaled fat transfer player that there is so fast transfers for us as part of our DNA.
I would see this becoming meaningful in 2024 from a revenue perspective or not.
In 2023, as we roll it out.
Okay.
And then just moving on to the de Novo openings I. Appreciate the comments on you think Theres 500 locations globally.
Maybe just drill down and how many markets do you think are available just yet.
Nine states.
Good morning, so off the top of my head I don't know how many I mean there is.
There are dozens and dozens of markets.
We've done a very sophisticated model working with a third party.
To help us look at the runway of opportunity so.
Yes.
In terms of actual number as I said about 500 globally about 60% of that is in the U S and Canada.
A lot of those are kind of new markets White space markets. There are also some infill opportunities.
We're very very optimistic and are feeling very good about those opportunities and the modeling really takes our current stores and basically projects. So we feel very confident in the opportunity and this is really across geographies. It really demonstrates the portability.
<unk> of this model.
And recall that were roughly $9 million <unk> business. So.
So not only are we going to be able to do.
Locations in that.
General.
<unk> number but also we have a little bit of unit economic flexibility to go down a bit and still have very very strong returns.
So we feel very good about that and again, it's going to enable us to get into lots of different markets beyond just kind of the most obvious.
Both in the U S and Canada and then even.
Significant opportunity internationally so.
The good news is we now have a roadmap and we know exactly where to go.
And obviously, we're starting to attack that as we as we look into 2024.
Thank you as a reminder, if you would like to ask a question. Please press star one on your telephone keypad.
Our next questions come from the line of Simeon Gutman with Morgan Stanley . Please proceed with your questions.
Hey, guys. This is Jackie Seth <unk> on for Simeon. Thanks, So much for taking our question.
Is there anything to call out on the promotional environment are things, becoming more competitive is this embedded to your assumptions on profitability for the year anything to call out there. Thanks, so much.
Good morning, Jackie this is Todd.
We're really not seeing I mean look momentum has been great and it continues as we kind of enter into the third quarter.
Really no significant changes as we mentioned in our opening remarks, we are continuing to do bundling of our procedures, obviously that means getting people to consider more body parts and giving them a value as they bundle and we're really seeing that strategy being very successful for us.
Which is obviously very very encouraging absolutely nothing that were seeing in the marketplace from a competitive standpoint or any kind of.
Quote recessionary headwinds, we're not seeing any of that our business continues to be very strong demand is very strong and we're feeling very very good about it so really kind of.
Onward, and upward and really excited and we're obviously excited about finishing out the year strong.
Got it thanks, so much and maybe just one more I guess, however, London Keith.
The new centers that are trending relative to the north American veterinary singer and your medics, Mark key markets anything to call out there on the ramp.
Yeah. So let me start and then I'm going to turn it over to Eric. So first of all wondering is off to a good start and very much meeting our expectations.
Recall that we just opened this in June in fact, we only have really one week of second quarter performance and the numbers here, but early on we are feeling very very good meeting our expectations I will turn it over to Aaron who spent a lot of time there. This has been.
A labor of love for him for sure so I'm going to let him give a little more color commentary.
More information on London.
Delighted to say that we actually have four surgeon.
Working there now one of them is key.
Key opinion leader Thats flying from America to London, because he likes London. So he flies in but we have three British surgeons working there every day and I've spent a lot of time there I have to say, we've never had more PR than we've had in London I just did the morning show there.
And.
I am delighted with the office is one of our Naas locations and the trends we're seeing in ASP.
Are significantly higher than our U S ASP.
Not because we're doing it it's because of the market.
<unk> market price there is just a lot higher I also have to say that.
From a competitive standpoint, it's really an incredible place to be.
Thanks, so much.
Thank you there are no further questions at this time I would now like to turn the floor back over to Todd magazine for closing comments.
So thank you and thanks, everybody for joining us this morning, we're obviously.
Very encouraged by our continued strong business performance. We're excited about the balance of the year and we look forward to reconnecting in a few months and talking about more good results. So have a great rest of summer and we'll talk to you in a few months.
Thank you. This does conclude today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and enjoy the rest of your day.