Q3 2023 The Beauty Health Co Earnings Call
Good afternoon, and welcome to the Beauty Health Company third quarter 2023 earnings Conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the Starkey followed by zero. Please note. This event is being recorded I would like now to turn the conference over to Norberto.
<unk> Investor Relations. Please go ahead.
Thank you operator, and good afternoon, everyone. Thank you for joining us today to discuss the beauty health companies third quarter 2023 financial results, which we released this afternoon and can be found around website at beauty health Dot com.
With me today are beauty health Board member and incoming interim Chief Executive Officer, Marla Beck, and our Chief Financial Officer, Mike Monahan today's call will not include a Q&A session. The management will be available afterwards for any follow up questions you may have.
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 that 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 further discussion of risks related to our business.
Please see our filings with the SEC. This call will present non-GAAP financial measures a reconciliation of these non-GAAP measures to the most comparable GAAP measures can be found in our earnings press release.
Filled with the SEC today and available on our website.
With that I would now like to turn the call over Tomorrow. Please go ahead.
Thank you know Roberto and thank you everyone for joining us on the call today.
Before I start on behalf of the board I would like to thank Andrew for his leadership and commitment to beauty health I look forward to partnering closely with him during this transition period.
I'm excited to joined Ehealth as the interim CEO for those of you who do not know me I've spent my entire career in the beauty and wellness space, notably a C. E O lindmark carry for 22 years I founded Blue Mercury in 1999, and built the company from zero to a strategic sale to Macy's in 2015.
After which I ran blue Mercury is a division of Macy's for six years under both Terry Lundgren and Jeff can add.
My focus has always been on building a high growth profitable enduring company with an acute focus on the customer high performing teams and operational excellence I look forward to bringing the skill set to beauty health and working with the team to drive revenue profit and build an enduring company while delivering long.
<unk> term value to our shareholders.
I'm confident like experience will serve beauty health well in addressing current challenges while delivering on the many opportunities ahead of us.
Since joining the board it has become evident that hydro pesos ability to engage and attract consumers is differentiated with the and the aesthetic place where consumers are more likely to know about generic treatments like pillars are laser rather than a specific treatment brand name.
Regularly providers report that their decision to buy a device is in part because our clients ask for our hydro facial treatment by name.
This represents a significant competitive advantage for BD health.
My focus is to protect hydro facials incredible brand equity and to address provider experienced challenges with some Dale hydro facials newest generation delivery system well, we can all acknowledge that many mistakes were made with regards to this in detail.
We always put our customers first as a result, we are taking some tough actions this quarter to do the right thing.
Once we work through these we can again go back to empowering the team to continue to drive our revenue and capitalize on our substantial growth opportunities.
Believer in beauty health current strategy to capitalize on the Blue Sky potential in front of us and we welcome the opportunity to execute on our vision.
With that I will turn the call over to Mike to discuss the quarter's performance.
Thank you Marla and thank you everyone for joining us today I also want to thank Andrew for his service, even though we have only worked together for a short time I came to know him as a passionate and dedicated leader and wish him the best in the future.
Today, we released a significant amount of information so I'd like to state a few things upfront.
First our recent financial performance is not acceptable the board and management are committed to delivering future value for our shareholders and have taken steps to position the company for long term future success.
Second we did not take the decision to impair our earlier generation delivery system slightly our longstanding provider relationships play a critical role in our continued success nearly half of the devices. We sold in the past nine to 11 years are still active.
Providing reliable products and services is always our primary goal and the decisions. We made this quarter protect our customers and the hydro facial brand.
Third our recent performance is largely a result of provider experience issues with <unk> in the U S.
We have taken the learnings to avoid any similar issues in the future we want to be very clear that the impact applies only to providers, who use and day of one point or two point out delivery systems. There was no impact on the safety or efficacy of the hydro facial treatment.
We believe our latest generation Sunday, a 3.0 provides the best experience for our providers.
Fourth.
We believe the fundamentals of our business and future opportunity remains strong the issues. We face are execution all in nature not strategic.
On the systems side, it's important to highlight that our products are accessibly priced relative to other medical devices lowering the barrier to entry for providers.
In addition, the economics of hydro facial to the provider are extremely compelling with an average system payback period of under six months.
Our business is a razor razorblade model with our consumable segment, representing a growing predictable long term and high margin recurring revenue stream.
Even with the Sunday of disruption overall consumable sales grew 17% year over year.
As we continue to grow our delivery system installed base and put this in day of issues behind US we expect to see further acceleration in our consumables business.
We have a tremendous runway to grow domestically and overseas despite challenges with U S delivery system sales this quarter, China continued its high growth at plus 79% or plus 98% year to date and continues to have strong average selling prices positioning the Asia Pacific.
Region for continued long term profitability.
In the upcoming quarters, our goal is to execute with a simpler structure to meet the high expectations of our providers customers and shareholders.
The first step in this process will be delivering on both phases of our committed strategic transformation program.
Fifth our balance sheet and liquidity remains strong and we are positioned to make it stronger with the strategic transformation program we are undertaking.
We ended the third quarter with $559 million of cash and have access to an undrawn $50 million credit facility.
As a member of the management team I can assure you there is a strong commitment from the board and the management team to deliver the best provider in customer experience and to create value for our shareholders.
The remaining time I will address this in Dio program, our third quarter results, our financial guidance and the status of our strategic transformation program.
Starting with the <unk> program.
As we highlighted in the press release earlier. This afternoon, we incurred a $63 $1 million restructuring charge this quarter due to some deyoe provider experience issues.
As a result of these challenges there was a slowdown in U S system placements that led to lower than expected overall net sales growth.
To provide some background since day, one point out of launched in the U S. In March of 2020 to.
The launch was met with excitement and swift provider adoption.
However, after some time in the field some providers experienced frequent treatment interruptions and issues, such as distractive noises and difficult bottle insertion.
Most importantly, there was an issue with low flow and clogs in the system.
Simply put <unk>, one point out did not meet the high standards that the user experience that hydro <unk> has been known for over its 26 year history.
Throughout 2022, and the first half of 2023 the company made several enhancements to some day I owe to address and remediate these issues releasing Sunday O 2.0 into the field.
Despite these efforts many of the issues continue to persist.
After rigorous testing and development, including simulating over 10 years of heavy in use in office use. We believe we have addressed this in dio issues with our current Sunday with three point out a standard implemented in July of this year.
We are very pleased with the real world performance over the four months in day, a three point out has been in the field.
Additionally, <unk> three <unk> devices coming off the production line and existing Sunday OS in the field.
That have been enhanced to the three point out standard have a return rate in line with hydro facials low historical benchmark.
To stand behind our commitment to our customers and protect the company's brand reputation, we decided that with respect to San Diego devices, We will only market and sell Sunday of three point now.
With this decision we designated the approximately 4300 Sunday of one <unk> and two point no devices and inventory as obsolete, resulting in an impairment charge of $18 8 million.
Additionally, during the quarter, we incurred $12 3 million in costs associated with enhancing or replacing approximately 2850 Sunday of one point out and to point out devices in the field.
Lastly, we accrued incremental costs of approximately $32 1 million to enhance or replace the roughly 4510 day of one point and two point out devices yet to be addressed in the field.
This decision was made after concluding it was too costly to diagnose repair and resell returns and day of one point out or to point out devices in inventory.
In addition by replacing the systems are enhancing currently.
Functioning systems in the field, we are ensuring provider satisfaction and safeguarding our brand equity.
We will also extend all Sunday of warranties by one year to further support our providers.
We do not believe the extended warranty we will have a material impact on our financial statements.
Despite these challenges we want to reiterate that the business model remains fundamentally sound and the impact has been contained to a portion of our providers without spreading to the end consumer.
In addition, the strength and reputation of the hydro facial brand and our long term opportunity remain intact.
We base. This assessment on two key data points first our recently conducted provided survey showing our net promoter score or NPS remains best in class in the aesthetic device category.
As a reminder, NPS as a measure of how likely it is for a user of our brand to recommend it.
Second our passionate community of hydro facialist surround the world or what we refer to as the hydro facial nation towers are 30000 active delivery systems globally, our footprint within the medical aesthetics industry is unparalleled.
Yeah.
Next we'll move on to Q3 results.
Net sales for the third quarter grew by 10% to $97 $4 million. This came in well below the company's expectations with underperformance in U S delivery systems, partially offsetting strong performances in APAC and EMEA.
From a geographic perspective, Americas declined 11% year over year due to this and diode challenges we just discussed.
APAC revenue grew 63% year over year to $24 7 million.
China accounted for $16 9 million and plus 79% year over year growth driven by strong delivery system placements, reflecting our success in penetrating the market and the significant potential to grow our nascent presence there.
EMEA grew 37% year over year to $21 1 million with the strength coming from system placements and consumables net sales specifically in the UK and Germany.
Year to date, nearly 45% of our net sales came from markets outside of the U S.
Moving onto net sales by product type or consumables business, which accounted for approximately 48% of our net sales in the quarter saw a 17% year over year increased to $46 $4 million. This further demonstrates our challenges are largely around delivery systems and more importantly that.
The consumer continues to see high value in hydro facial treatments.
On the systems side, we saw 4% year over year growth to $51 million, which was weighed down by performance in the U S.
Notably delivery systems net sales in APAC, and EMEA were plus 102% and plus 35% respectively.
During the quarter, we sold 2140 systems at an average selling price of $23 9000 down year over year, primarily due to an unfavorable mix shift towards distributor revenue.
Of the 2140 systems 362 were trade ups.
During the quarter, we reached a global installed base of 30074 systems.
Yeah.
We had a consolidated GAAP gross loss of $12 6 million, resulting in a GAAP gross margin of negative 12, 9%.
This was primarily driven by the <unk> program charges of approximately $63 1 million. Additionally.
Additionally, this quarter, we incurred discrete charges of $6 4 million related to discontinued excess and obsolete inventory.
Normalizing for these charges depreciation amortization and stock based compensation adjusted gross profit was $60 9 million for a 62, 5% adjusted gross margin.
The adjusted gross margin was impacted by higher manufacturing labor costs, and overhead, which we expect will subside as we continue to move portions of our manufacturing to China and sell through higher priced inventory purchased in 2022.
Selling and marketing expense was $30 7 million or down approximately 23% year over year, primarily due to strategically pulling back marketing spend given the issues regarding some dale.
The decline was further driven by lower compensation and sales commission expense, partially offset by a reversal of cash incentive accruals in the prior year.
Going forward, while remaining disciplined we plan to prioritize marketing initiatives to strengthen provider confidence and drive further awareness of our brand.
Our data suggests hydro facials consumer brands has never been stronger and our provider penetration is still low.
R&D expense was $1 8 million for the quarter relatively flat with historical trends.
G&A expense was $37 million or plus 55% year over year, primarily driven by higher compensation severance share based compensation and software expenses the reversal of cash incentive accruals in the prior year was also a driver.
Altogether. This resulted in a net loss of $73 8 million normalizing for discrete charges. Our adjusted EBITDA was $9 1 million, primarily due to gross margin pressures.
This compares to a net loss of <unk> 1 million and adjusted EBITDA of $16 3 million when excluding any adjustments for discretionary cash incentives.
Moving to the balance sheet, we ended the quarter with approximately $559 million of cash on hand.
Our cash balance reflects the repurchase of <unk> 8 million shares at an average price of $5 83 per share during the quarter.
As of quarter end, we had approximately $95 million remaining in our existing share repurchase authorization.
As of September 30th we had approximately $132 6 million shares outstanding.
We feel comfortable with our current liquidity position and together with our board will continue to evaluate capital allocation, including liability management.
Our inventory stood at approximately $74 9 million at the end of September a decrease compared to $109 7 million at December 31 last year, primarily as a result of the impairment charges taken during the third quarter.
As of the end of the third quarter, we had approximately 1300 trade up of leads and our inventory marked at fair market value as we sell through these systems there will be minimal gross profit given the trade up accounting treatment and rules. We are estimating approximately 10% of this inventory will sell through in Q4 of 2023.
Given the third quarter results, we are revising our previously stated fiscal 2023 guidance. We now expect fiscal 2023 net sales in the range of $385 million to $400 million and adjusted EBITDA margin of 5% to 6% respectively.
This reserve represents approximately 7% net sales growth at the midpoint on a year over year basis.
Our updated 2023 outlook reflects the work that remains to be done to reaccelerate and <unk> adoption in the U S.
While we are optimistic in our ability to execute against this goal this will take time.
As a result, we are suspending our long term 2025 financial outlook.
Lastly, I want to update you on our strategic transformation program, we announced in September.
This initiative is expected to have a significant impact on our financial profile and we remain on track to deliver over $20 million in annualized cost savings primarily through G&A efficiencies during Q1 2024.
We expect to incur approximately $9 million to $11 million of cost to achieve for these phase one annual savings.
The costs to achieve are primarily related to severance and consulting expenses.
In parallel we have begun work on phase two of the project, which is focused on optimizing our manufacturing and supply chain footprint and continued optimization of our organizational structure.
We expect phase II will deliver over $15 million in annualized cost savings during Q2 2024.
We expect to provide more detail in the new year around the savings and any related cost to achieve.
In closing, while we are disappointed in our results and recognize that there is work ahead, we are committed and confident in our ability to reaccelerate <unk> adoption in the U S and to further our execution across our international businesses.
Importantly, our long term strategy and our business fundamentals remain intact.
Yes.
We look forward to speaking with all of you and sharing our progress as we continue to execute against our strategy.
While we will not be hosting Q&A on this call. If you have any questions. Please reach out to our Investor relations team at IR at beauty health Dot com.
Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
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