Q4 2023 The Beauty Health Co Earnings Call
Clean beauty health Board of directors in 2022, because I saw a much loved brand in an underpenetrated market the space, where beauty meets aesthetics I built my career in this space and brings significant experience in sales operations and new product development to the role I founded Blue Mercury and <unk>.
<unk> hundred 99, as a specialty beauty retailer featuring a selection of curated products alongside in store aesthetic treatments. It is a common format today, but it was novel when we started.
We grew Bloomberg three to nearly 200 stores with two private label skincare brands, a healthy e-commerce business and strong loyalty penetration before a strategic sale to Macy's in 2015.
Well my passion for this sector and knowledge of products and formulations served me well it was operational excellence financial rigor and a clear commitment to the consumer that made blue Mercury as success.
I can see clearly how to put these elements in play for beauty health.
Over the last few months I've spent my time meeting with our providers getting to know our sales team testing our products and gaining a deep understanding of our operational capabilities.
This time I've come to understand the unique proposition of our brand and products the engagement of our providers and consumers and the wide open opportunity ahead.
I also understand the careful work that will be required for beauty health to meet our ambitions and growth potential.
The board the executive management team and I are fully aligned to deliver against three key priorities over the near term, we will drive sales excellence operational excellence and financial discipline.
Our first priority is sales excellence.
The treatment room as the center of our business and providers and our sales teams are the face of the brand in many ways I learned early in my career the importance of staying close to the customer from helping aesthetician turn rooms that are blue Mercury store in Georgetown because they were so busy with treatments or helping to sell on the retail floor during the busiest khalid.
<unk> periods.
And so that's how I ask the beauty health Executive Committee to start the year in the treatment rooms with providers, we fanned out across the globe with our frontline sales teams to meet more than 50 providers in the past 50 days.
The feedback was insightful and grounding I will share just a few themes we heard.
First providers know and appreciate that we put them front and center.
Second they agree that despite the issues with the early versions of some jail today, a 3.0 is a better platform.
Third they recognize and value the unmatched efficacy of our treatment and the power of the hydro facial brand to bring consumers through their doors.
Importantly, the challenges providers experience with Sunday of one point or 2.0, having an impact.
<unk> the consumer experience.
We hear repeatedly from providers that hydro facial is a brand clients ask for by name. We see this in the study consumables revenue growth in the Americas.
And an indicator metrics like Google search trends, which show an uptick in interest globally, a 21% in 2023 versus 2022.
We are fortunate to have an experienced and tenured sales team who have developed deep relationships with our providers. It is incredible to see their connections and willingness to go above and beyond.
Our training and education team is best in class supporting providers in their craft and helping them to build profitable revenue streams for their businesses.
And our marketing team is thoughtfully building on our brand loved by providers and consumers alike, and incredibly unique and valuable element of our business in an industry that is largely driven by brand less treatment modalities.
We will continue to hold ourselves to high performance standards expected from hydro facial and always put our providers and consumers first.
Our second priority is operational excellence, we will tighten our operations prioritizing our focus on our strongest growth opportunities and establishing accountability across our supply chain.
We are undertaking a total review of our full manufacturing and operations footprint and we'll provide an update on our final findings later this year.
Much of the recent focus has been on executing this in Dio program announced last quarter, ensuring all Sunday is globally meet our latest three point out a standard and that we protect our valuable provider relationships.
The early feedback regarding Sunday, a 3.0 is positive while we still hear some concerns regarding the three point out system. The level is consistent with the industry to industry standards and we are addressing issues that come up quickly.
We will continue to prioritize operational excellence and always with the provider in mind.
Finally, our third near term priority is financial discipline, we will be cost conscious and everything we do balancing our cost structure with revenue and opportunity, we will bring increased transparency and consistency to our financial results through improved forecasting Mike and I are aligned.
This point would you can see clearly in our fourth quarter results with revenue and adjusted EBITDA in line with guidance, Mike will share. These details shortly.
These three near term priorities sales excellence operational excellence and financial discipline are foundational and necessary to operate from a position of strength and leverage the opportunities in front of us.
Since joining the board in June of 2022, a few things have become very clear to me about the significant growth runway, which we will begin to which we will see begin to take shape in the second half of 2024 and beyond.
We see an attractive opportunity around consumables to drive further penetration. This is a focus of mine we will have more to report on our plans and progress later this year.
We also see a clear opportunity to grow our device installed base by leveraging the specific value we bring to each provide our channel whether a medical practices med spas hospitality locations retail or with single room Estes.
We were in the early innings of addressing the opportunity across the vast majority of markets, where we operate increasing penetration in existing markets to achieve scale is something we are confident we can execute on.
I want to emphasize however that our focus for now is squarely on implementing a transformation of the company. This entails driving sales excellence globally, keeping our provider at the center of everything we do.
Investing the necessary resources to drive operational excellence and operating with added financial discipline and with a more strategic and the optimal deployment of our resources as.
As we continue to build and rebuild the foundation of beauty health I'm confident we will soon be able to leverage the opportunities ahead of us to deliver long term value to our employees partners and shareholders.
We have a magnificent brands terrific products strong partner and customer relationships health.
Healthy underlying market trends and ample resources. There is no reason why we shouldn't count on better times ahead.
With that I will now turn the call over to Mike to share details of our Q4 and full year 'twenty three performance.
Thank you Marilyn I'll start by commenting on our full year 2023 financial results and fourth quarter performance as well as provide details behind our financial guidance for 2024.
Revenue for the full year 2023 came in at 398 million, representing eight 8% year over year growth revenue was driven.
Driven by steady consumables growth in the Americas, and strong international performance with nearly 43% of sales coming from APAC and EMEA.
Global equipment revenue was relatively flat for the year up 2%, primarily driven by lower provider adoption in the Americas <unk> challenges.
Total active machines in the field increased 24% to 31446 units over the course of the year as we grew our provider base.
Consumable sales increased 19, 9% year over year to $191 4 million, reflecting continued and growing consumer interest in the hydro facial treatments.
Consumables represented 48, 1% of total revenue.
Gross margin for the full year 2023 was 39% versus 68% in the prior year period on a GAAP basis, and 62, 8% versus 72, 6%, respectively. When we adjust for noncash expenses and selected add backs.
The primary drivers of the decline on a GAAP basis, where the Sunday, a 3.0 program and higher charges related to other discontinued excess and obsolete products.
Adjusted EBITDA came in at $24 3 million or six 1% of revenue versus $46 1 million or 12, 6% of revenue in the prior year, representing a 47, 2% decline year over year.
Moving to fourth quarter performance fourth quarter, 2023 revenue and adjusted EBITDA results were at or above the guidance. We gave on our third quarter earnings call <unk>.
Revenue for the quarter declined by one 3% year over year to $96 8 million.
We saw Americas revenue declined eight 5% year over year, primarily driven by soft device sales due to customer caution around <unk> and higher interest rates.
As Martin mentioned, we are beginning to see some deyoe concern subside and expect capital momentum will pick up.
For the quarter APAC revenue grew 17, 3% year over year to $18 7 million.
China accounted for $14 2 million of the region's contribution showing 71, 8% year over year growth.
Performance was driven by strong delivery system placements, reflecting our success in penetrating the market and the significant potential to grow our nation presence as well as a partial COVID-19 shutdown during a portion of Q4 2022.
EMEA Q4 revenue grew eight 4% year over year to $18 $8 million with strength coming from consumables.
Moving on to revenue by product type for.
For the quarter consumable sales of $52 2 million eclipse equipment sales accounting for 53, 9% of revenue and a 10% year over year increase.
On the systems side, we saw a 12% decline year over year in revenue to $44 6 million driven by lower system sales in both the Americas and EMEA, partially offset by 66% revenue growth in APAC.
During the quarter, we sold 1551 systems at an average selling price of $28783 up year over year, primarily due to a favorable mix shift towards direct markets in APAC, and EMEA and a higher percentage of Sandoz systems sold.
Of the 1551 systems 341 more trade ups.
We delivered consolidated GAAP gross profit of $45 $7 million, resulting in a GAAP gross margin of 47, 2%.
During the fourth quarter, we incurred inventory related charges of $8 7 million, we did not add back these charges to our adjusted gross margin as our intention is to minimize our add backs going forward.
In 2024, we're focused on improving our demand planning process and overall inventory management.
Adjusting for noncash charges, such as depreciation amortization and stock based compensation and incremental Sunday O program charges. Adjusted gross profit was $52 8 million for a 54, 6% adjusted gross margin.
Selling and marketing expense was $32 million down approximately 17, 9% year over year, reflecting a strategic pullback in marketing spend as well as lower compensation and sales commissions.
R&D expense was $3 million up $1 6 million year over year.
G&A expense was $29 million up $5 million year over year, primarily driven by higher severance bad debt reserve depreciation and amortization and software expenses.
Altogether. This resulted in a net loss of $9 4 million.
Normalizing for noncash items and certain discrete charges, our adjusted EBITDA was $3 4 million, primarily due to gross margin pressure.
This compares to a net income of $6 5 million and adjusted EBITDA of $17 6 million in Q4 2022.
Moving to the balance sheet, we ended the quarter with approximately $523 million of cash.
As of December 31, we had approximately $70 million remaining on our existing share repurchase authorization.
In the fourth quarter, we repurchased nine 9 million shares at an average price of $2 80 per share.
In January of 2024, we deployed $57 8 million of cash to purchase $75 million of our debt.
We feel comfortable with our current liquidity position and together with our board will continue to evaluate capital allocation, including debt management.
We will provide investors with any updates on our capital allocation on future quarterly calls.
Our inventory stood at approximately $91 3 million at the end of December a decrease compared to $109 $7 million in December 2022, we.
We increased our inventory during the fourth quarter as we began to build and deliver replacements and day with three <unk> units to our provider base.
Additionally, at the end of the fourth quarter, we had approximately 1300 trade up elites on our balance sheet at the estimated resale price less our cost to yourself.
We are planning to sell through this inventory over the next two years and it factored in roughly half of the existing inventory to be sold during 2024.
Starting in 2024, we are no longer taking back older equipment to resell and instead, we will offer our providers other incentives to upgrade.
Including our sales of new 3.0 machines, we ended our fiscal year 2023, with roughly 9510 diode systems. So globally and approximately 3000 systems are left to be upgraded to the 3.0 model.
We continue to make progress on this initiative and expect to be completed with the program during the first half of 2024.
Our December year end accrual for this one day or replacement program was $21 million.
Down from approximately $32 million at the end of September 2023.
We have a year end warranty accrual of approximately $6 million as of December 2023 to cover our total global systems inclusive of extended <unk> warranties, we issued to support our providers during 2023.
Next I want to update you on our business transformation program that we announced in September.
As a reminder, our initial target for the program was $20 million in annualized phase one cost savings beginning in March 2024, with an incremental $15 million of annualized phase two cost savings beginning in June 2024.
<unk> gross cost savings of approximately $15 million were realized in Q4 of 2023 by reducing our workforce by roughly 10% plus.
Planned phase II cost savings were expected to be driven by optimizing manufacturing operations and reducing operating spend.
In 2024, we made the decision to reallocate most of these initial unexpected cost savings towards necessary investments in systems processes and training to implement stronger management of and controls around our supply chain and inventory.
We recently identified a material control weakness in our inventory controls and are making the necessary investments to address this issue immediately.
We expect many of these investments to be short term in nature and to position us to realize meaningful cost savings in future years. Additionally.
Additionally, we will continue to work through other areas, where we believe we can drive efficiencies and reduce our overall spend we believe these actions will result in long term net savings.
I would like to take a moment to discuss the revenue cadence and seasonality of our business.
Revenue is typically highest in the second and fourth quarters of the year. This is due to two factors first capital purchases historically, our largest in the fourth quarter as our provider base often has clear visibility into their annual capital spend allowance by that point in the year.
Second the second and fourth quarters will often have the highest consumer demand for hydro facial treatments in the spring and then again in the fall. This is consistent with the aesthetics and beauty trends and bolstered by our twice annual consumables promotion periods.
In May and Black Friday in November.
Given the size of our growing business. These two drivers have an impact on the cadence of our revenue.
At the same time as the first quarter of each year is a traditionally slower revenue period for the business, we see a large share of sales and marketing spend in the form of the major trade shows and events during Q1.
These shows and events are important lead generators and training for the year, but the spend versus revenue puts pressure on the quarter's EBITDA.
It is important to remember that our business is a razor razorblade model with roughly even revenue split between capital and consumables today.
Our consumables segment represents a growing predictable and high margin recurring revenue stream.
Longer term as with any razor razor blade model, we can expect consumables will become a larger portion of our revenue mix and the seasonality of the business will flatten with revenue, becoming more evenly distributed over the year.
Keeping in mind, the seasonality of our business I'll move on to guidance for 2024.
In the first quarter, we expect net sales to be $77 million to $83 million and an adjusted EBITDA loss of $6 million to $9 million.
We expect revenue to be down year over year in the first quarter of 2024, primarily driven by soft equipment sales in the Americas as we regain provider confidence and some day, a 3.0 with a return to growth in the back half of the year.
Additionally, we expect to face a challenging year over year comparison for system sales in APAC and EMEA in the first half of 2024 with our international <unk> launch in the 2023 comparable period.
Yeah.
Adjusted gross margin is expected to be lower in the first half of 2024 compared to the first half of 2023, as we make investments in our controls processes and procedures and overall supply chain.
For the full year, we expect to improve slightly year over year with supply chain efficiencies later in 2024, partially offset by pricing pressure as we transition away from our trade up program and support our sales efforts with lower average selling prices for our systems.
Additionally, in the first half of the year, we will plan to continue to invest in sales and marketing to generate leads as is typical in our industry.
These expenses are expected to lessen in the second half of the year.
Resulting from the above assumptions for the full year 2024, we are projecting revenue growth to be flat to up single digits year over year, but expect to deliver adjusted EBITDA of $40 million or greater as we are prioritizing growing profitability alongside the foundational priorities Marla discussed.
As we stated on our previous earnings call. Our goal is to execute with a simpler structure, while meeting the high expectations of our providers consumers partners and shareholders. Our action plan is clear.
We will increase our footprint through new capital equipment sales, we plan to increase consumable sales per system stabilize the business and complete our Sunday, a 3.0 replacement program and drive profitability.
I'll now turn the call to the operator for Q&A.
Ladies and gentlemen at this time, we'll begin the question and answer session.
Again to ask a question you May press Star and then one on your Touchtone telephone.
If you are using a speaker phone we do as you. Please pick up your handset prior to pressing the keys.
Withdraw your question you May press Star two.
In the interest of time, we do ask you please limit yourselves to a single question.
At this time, we will pause momentarily to assemble the roster.
Yeah.
And our first question today comes from Olivia Tong from Raymond James. Please go ahead with your question.
Okay.
Good afternoon.
I Wonder if they'll open the comments that you made about sales growth.
Okay.
That's sort of all.
Low to mid single digit growth in Q2 to Q4. So when you talk about the building blocks to get you there and then secondly, you mentioned.
In your prepared comments, just strategic pullback in marketing.
No.
We also said that the customer Didnt really see any issue and that was a really important point. So could you talk about the decision to sort.
Sort of curtail marketing because I would imagine that you have given the disruption behind them.
Yeah, you would want to maintain that marketing and.
To make sure that they stay.
They arent.
Thanks, so much.
Okay.
Hi, This is Mike I'll I'll just the first four are both questions I can address the first part was around the overall guidance. So let me talk a little bit about what's driving that.
So there's a couple of anticipated drivers of pressure in the first half of the year that I can talk through.
And then we're expecting to return to growth on the top line in the back half of the year. The first driver is system sales are projected to grow in Americas as we complete our Sunday of replacement program, we're already starting to see increased interest as we move past the challenges of the <unk> launch.
The second piece I mentioned in the prepared remarks is in the international markets. We launched <unk> in the first half of last year. So as we look to to that comp.
It gets a little bit easier in the back half of the year.
As we move past that.
The third piece is really around consumable sales per system.
As a result of some of the challenges with some data we saw pressure in the back half of 'twenty three we're actively working with our providers to support them and we expect to increase those consumable sales per system and as we enter into the back half.
The second part of your question was around marketing spend we traditionally spend more marketing upfront as we talked about.
Related to provider.
Trade shows conferences, they tend to be Frontloaded in Q1, specifically and a little bit in Q2 during the year and a significant portion of that expense runs through our sales and marketing. So you start to see that typically you brought them down in the back half of the year. One thing I would like to highlight is we still have allocated costs and the <unk>.
Half of the year. So it's not like we're turning that spend off we're still planning on spending and supporting our providers. It just to a lesser degree in the second half than it is in the first half.
Our next question comes from Oliver Chen. Please go ahead with your question.
Alright, Thanks, Marlene Mike.
On some of our research, we're still seeing some issues with <unk> 3.0, but it sounded like.
In really good shape, just any color on what gives you confidence in risk factors, there and as you mentioned our supply chain and control both have opportunity. How would you contrast, what needs to be done with respect to controls.
Relative to supply chain.
And finally capital allocation priorities, you mentioned them on the call just would love a framework for how you're thinking about capital allocation priorities going forward. Thank you.
Okay.
Okay.
Okay.
I'll start and then Mike can pick up the rest but.
So I would say I listened to as <unk> pointed out we're encouraged by what we're seeing it's better than one point I want to point out, but we still have work to do around getting quality to the level at which we think is what we want and so theres still work.
But but we've made a ton of progress so.
I think that's a start I'm going to let Mike take the supply chain and capital allocation pieces of your question and add anything to sort of what I said, if you would like Mike.
Sure.
Overall operations, we're making investments in.
Information management, so systems, our overall process and procedures.
And to make sure we're looking at the right things in managing our overall inventory controls and that's some of the things I've talked about.
Why are we assess ourselves with our material weakness.
The material weakness is really around making sure we have the right people with the right experience and the right processes in place to effectively manage inventory and the related obligations.
The second part of your question around capital allocation.
That's something right now where we're spending time with the board we have a capital allocation committee on the board we meet regularly.
And are discussing I don't really have anything more than what we've actually done to address right now, but as soon as we do make any additional changes or we will be sure to update investors then.
Our next question comes from Allen Gong from J P. Morgan. Please go ahead with your question.
Yes.
Thanks for the question and congratulations Mara for the position.
Just to start off on the kind of like a higher level.
I would imagine that your previous targets.
Moving on to that the 2022 analysts there are no longer in effect, but just when we think about the.
Outlook for the company and once we move past. This continued transition period in 2024, how should we think about your prioritization between driving in your top line growth and EBITDA. It seems like you know in 2024, you're kind of re basing EBITDA growth that might be suffering a little bit as a result, so how should we think about that going forward.
Okay.
We're not in a position to give long term guidance today, but we can talk about is our focus is we really believe that there's growth in this business a lot of room to grow we think that we can grow profitably and that's a specific focus of what we're working through now the <unk>.
<unk> that we expect to improve upon over the long term as we think theres opportunity in gross margin and then as you look in Opex, we talked about some of our initial opex savings that we're reinvesting back into the business over the short term, but we do believe there is long term scale in our operating.
<unk> that we can realize we're just taking a little bit of time this year too.
Make sure we can implement them in an effective way.
Our next question comes from Susan Anderson from Canaccord Genuity. Please go ahead with your question.
Hi, good afternoon, Alex leg on for Susan just wondering if you could talk about the trends of the consumable sales by region. It looks like Americas was very strong this quarter, but APAC kind of took a step back.
And then can you provide any details such as usage frequency by machine and then some of the add ons.
And then longer term, where do you think that add on business can go.
Sure I can talk a little bit about the consumables growth and then I can move on so.
Overall, the increase in consumable growth was driven by the Americas and EMEA.
And it was offset in APAC as you mentioned APAC consumables revenues down 30% year over year in the fourth quarter that was primarily driven by softness in the distributor channel, which we're in the process of of Theres, often some timing relating to the distributor channel, but we're in the process of addressing and researching right now it's important to note China.
Consumable sales, which are mostly sold directly.
We're down a couple of percentage points year over year. So as we continue to grow our system space in APAC. We believe there is a large opportunity to drive consumable revenue in the future.
Some of the things that we're investing behind our additional boosters and products that are specifically.
Designed for the APAC market that we can talk about kind of later this year as we plan to launch them.
The second part of your question I think was around.
Overall consumables usage, we're still working through the specific metrics that we want to communicate externally, but one of the key metrics that we focus in on internally as consumable sales per system.
And you know some concerns around this in Dallas, we found out just any color you can give us on like the concerns you are hearing from the providers will be Super helpful. And then you had a significant growth in China any kind of color on the market. There like where you are like what inning youre in in the China market, how much more runoff.
You still have there would be super helpful as well thanks.
Ah I can take and if more of that has anything to add so let me take care, there's not really much more I have to add the memorial I talked about about what we're seeing with some Dale you know I'll just kind of repeat these are more quality control issues that we're addressing and when you look at the overall guidance and when we talk about reinvesting.
<unk> back into the business in the near term, it's really around those types of things to ensure that when our product comes off.
The production line that we are doing the right things in terms of inspecting it making sure it gets to our ultimate provider in good shape. Some of the issues. We've had recently are around if some of the products have moved during shipping so its creating noise.
Some of the there has been some aesthetic like problems with scratches or issues with the with the machine itself. So we're working to kind of make sure we address that and make sure that our providers get.
Quality product upon receipt.
The second part of your question was around China, China, Yes.
Yes, we think we're early in China as we've talked about we think there's a lot of growth there we're still.
Working to introduce new boosters, new products on the consumables and as you can see based on the results. We are still growing quite nicely in terms of deploying equipment, there and we expect that to kind of continue and factored that into our guidance.
Yeah.
And ladies and gentlemen, with that we'll conclude today's question and answer session.
Like to turn the floor back over to MS back for any closing remarks.
Right.
Okay.
Yeah.
You all for joining US today. We're excited this is at the beginning of our time with you and look forward to really a.
Doubling down and getting to where we need to be.
Thank you.
Okay.
Yes.
And ladies and gentlemen, with that we'll conclude today's conference call and presentation. We thank you for joining you may now disconnect your lines.