AirSculpt Technologies, Inc.

Greetings and welcome to the AirSculpt Technologies second quarter fiscal 2024 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. I would now like to turn the conference over to your host, Allison Malkin with ICR. Thank you. You may begin.

Good morning, everyone. Thank you for joining us to discuss AirScope Technologies' results for the second quarter of fiscal 2024. Joining me on the call today are the company's founder and executive chairman, Dr. Aaron Rollins, and interim chief executive officer and chief financial officer, Dennis Dean. 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.airsculpt.com. We undertake no obligation to revise or update any forward-looking statements or information except as required by law. During this call, 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 10Q, which also will be available on our website. With that, I'll turn the call over to Dr. Rollins.

Good morning, everyone, and thank you for joining today's call. Earlier this morning, we announced second quarter results below our expectations amid a challenging demand backdrop. Despite these results, we remain committed to reestablishing our same store growth trajectory, opening and ramping our de novo centers, and improving our operating margins. To achieve these objectives, the management team's current focus is on back to basics. For us, that means investing prudently in our performance marketing efforts, providing the best experience for our patients, and letting our doctors do what they are expertly trained to do. which has performed best-in-class body contouring procedures using our proprietary AirSculpt technology. This morning, we also announced a series of management changes. Effective today, Dennis Dean will serve as our interim CEO, in addition to his ongoing role as CFO, as we work with a top-tier global executive search firm to lead our search for a permanent CEO. Dennis' proven financial acumen discipline leadership style, and passion for our firm's patient-centric mission will enable the company to improve performance as we pursue our back-to-basics approach. I will remain in my position as founder and executive chair. In this role, I'll continue to provide strategic guidance and clinical leadership gain from my 20 years of experience in the industry as a surgeon as well as a company executive. Before I turn the call over to Dennis, I would just like to comment on our very strong track record, having successfully completed more than 60,000 procedures since I founded the company in 2012. Our positive performance record, the proprietary technology we possess, and the large addressable market with which we operate in provides us with a vast opportunity from which to grow. We look forward to updating you on our progress as we dedicate our efforts to improving near-term performance and to building long-term shareholder value. I'll now turn the call over to Dennis to provide more details on the quarter, as well as our outlook for the year.

Thanks, Aaron. Good morning, everyone. It is a pleasure to speak with you today as interim CEO and ongoing CFO. I would like to also express my appreciation to the Board of Directors for their confidence in me and my new role. I recently celebrated my third year at AirSculpt, and in spite of a challenging past couple of quarters, I strongly believe that our best days lie ahead of us. I'm excited to lead the company as we intensify our focus on delivering positive patient experiences with our body contouring procedures across our national footprint of 28 centers in 19 states as well as in Canada and the United Kingdom. Our second quarter results reflected the increasingly difficult consumer environment which is being felt across the aesthetics market as well as other sectors. We are taking decisive actions to align our cost base to the current environment. To this end, we will allocate our resources to opportunities that deliver a high return on investment, including the continued opening of de novo centers and lead generative marketing while reducing marketing efforts that are longer-term oriented. In total, second quarter revenue decreased 8.4% to $51 million, reflecting a 17% decline in same-store revenue as compared to the prior year quarter. An adjusted EBITDA was down $7.7 million year-over-year. resulting from lower revenue combined with growth in brand awareness marketing activities and advertising cost inflation. While the results of the quarter were weaker than we expected, there were several bright spots in the quarter. Let me share some highlights. First, our 2023 de novo class performed ahead of our expectations, demonstrating the demand for our procedures and our ongoing ability to successfully identify and open strong centers. As a cohort, these locations continue to exceed our ROI expectations despite the challenging consumer environment. As it relates to this year's openings, we welcome patients to our new center in Kansas City, Kansas following quarter end and expect to open three additional centers in the third quarter and one in the fourth to end the year with 32 locations. The sixth center we had targeted will now be part of our 2025 plans. Lead generation activities provided a 30% sequential increase in lead volumes. However, we experienced lower than expected conversion rates, which we attribute to the difficult macro environment. Keep in mind that our average procedure cost is in the range of $12,000 to $13,000, which makes us a considered purchase for our customer base. We believe consumers are taking more time to evaluate their spending needs before scheduling procedures, which is a consistent theme highlighted by others in the aesthetic and higher end consumer and retail spaces. We continue to interact with these leads as they provide us with a robust customer profile from which to target going forward. Third, we have accelerated our cost management efforts. In fact, marketing costs are expected to decline by over $4 million in the second half of the year as compared to the first half spend. as we pivot away from brand awareness activities and focus our attention back to paid search, which typically provides a quicker conversion to a procedure due to a higher customer intent. That said, we expect second half marketing expenses will grow year over year by approximately two and a half million dollars as we continue to support lead generation for new center openings and incur higher cost in paid search due to inflationary and other competitive factors. We expect to mitigate a portion of this expense as we further reduced corporate overhead costs, which will generate an additional $1 million of expense savings in the second half of the year. We will continue to evaluate opportunities to further streamline our expense base. And fourth, we continue to possess a solid balance sheet with approximately $10 million in cash and a modest lever ratio at 1.81 times. Let me now share some specific highlights of the second quarter. As mentioned, revenue for the quarter was $51 million, an 8.4% decline over prior year quarter, with same-store revenue down 17%, mitigated by a strong performance from our 2023 de novo class and incremental revenue generated by two new centers that opened since the end of the second quarter of last year. As of June 30, 2024, we operated 27 centers versus 25 at the end of the second quarter of 2023, and as of today, we operate 28, as I mentioned earlier. Average revenue per case for the quarter was at the high end of our range at $12,916. This represented a 3% decline over the prior year quarter. The percentage of patients using financing to pay for procedures was approximately 52%, which is consistent with recent quarters. As a reminder, we received full payment of all procedures upfront and we did not have any recourse related to patients who financed their procedures with third-party vendors. Our cost of service declined $1.1 million from the second quarter last year, but increased as a percentage of revenue to 36.9% from 35.8%, reflecting the deleverage of certain fixed costs due to our sales decline. Selling, general, and administrative expenses increased 6.4 million, or 22.9%, in the second quarter compared to the same period in fiscal 2023. This increase was driven by marketing expense growth and a severance charge related to our leadership changes. As I previously mentioned, we will realize an incremental $1 million in corporate overhead savings in the back half of the year related to headcount reductions which have recently been made, and we expect to increase these savings even more as we continue to focus on cost reductions. Our customer acquisition cost for the quarter was $3,325 per case as compared to $2,250 in the prior year. This increase is due to further investments in our brand awareness activities. Excluding these activities, our CAC would have been approximately $2,800 per case. We expect our total CAC to decline sequentially as we move into the second half of the year as we shift away from brand awareness initiatives and return our focus to primarily paid search and social activities. Adjusted EBITDA was $6.9 million compared to $14.6 million in the second quarter of fiscal 2023. a decrease of $7.7 million. Adjusted EBITDA margin was 13.5% compared to 26.2% in the prior year quarter. Adjusted net income for the quarter was $5.1 million, or 9 cents per diluted share. Adjusted net income excludes $4.9 million in equity-based compensation and $4.1 million in restructuring-related severance costs. Turning to our balance sheet, we maintain a healthy balance sheet at quarter end. As of June 30, 2024, cash was $9.9 million, and we had $5 million available on our revolving credit facility. Our gross debt outstanding is now $71.8 million, and our leverage ratio at the end of the quarter as calculated under our credit agreement was 1.81 times. Cash flow from operations for the first six months of the year was $6.8 million, compared to $18.5 million for the same period of 2023. The decrease is primarily due to the decline in adjusted EBITDA. Also, during the first six months of the year, we invested $5.6 million, which was mostly related to new center openings. Let's now discuss our outlook for 2024. We continue to see near-term headwinds impacting same-store centers as we move into the third quarter and expect some modest improvements in the fourth quarter as a result of a lower comparative. Therefore, based on our performance in the first half of the year and the current macroenvironment headwinds we are experiencing, we are adjusting our guidance for full year revenue to a range of $180 to $190 million and adjusted EBITDA to a range of $23 to $28 million. Keep in mind that given the flow through of revenue from our highly variable cost base, a $1 million change in top line typically has a $650,000 change in adjusted EBITDA. I strongly believe AirSculpt is a 30% EBITDA margin business. And as we return to same store revenue growth, successfully roll out new centers, and continue to reprioritize our marketing initiatives, we will be positioned to achieve our historical EBITDA margin rates. In summary, I expect the actions we are taking to focus on our core and contained costs will enable us to navigate the current dynamic environment and provide us with a strengthened platform to execute the strategy that delivers consistent long-term profitable growth and increased value for shareholders. With that, I'd like to turn the call over to the operator for some questions. Operator?

Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. In the interest of time, we ask that you each keep to one question and one follow-up and rejoin the queue for additional questions.

We'll pause a moment to allow for questions. Thank you.

Our first question comes from the line of Corinne Wolfmeyer with Piper Sandler. Please proceed with your question.

Hey, good morning, team. Thanks for taking the question. The first one I'd like to touch on is just the general consumer trends you saw throughout the quarter. Did the volume fluctuate at all month to month? Did it progressively get worse? And also, what would you attribute the bulk of the decline to? Is it really just the macro? Are you seeing any more competitive pressures? Are GLP-1s becoming more of a pressure point than you once were projecting? Just any color there would be great. Thank you.

Sure, Corrine. So as it relates to sort of the trend throughout the quarter, we did see a little bit of fall off in the month of June. That was a little bit unusual from what we typically see. We started to see season pick up a little bit as we kind of moved into April and May. Clearly, it was less than what we normally experience. We did have a season, but it was very much muted, comparatively speaking. But that was sort of the cadence of it. June did slack off. The interesting thing about that is that our June lead volume actually improved. So our lead volume increased throughout the quarter. So that gave us and gives us continued optimism about there's still significant interest in AirSculpt. But what we're finding is that the customers are just holding back a little bit right now. And so conversion rates declined even in spite of the increase that we saw in our lead volumes. Right now, what we're feeling is the consumer And so we're, you know, experiencing, you know, just the, again, a lot of lead volumes, but just not ready to kind of pull the trigger and schedule the cases. And so we expect, you know, over time and as things improve that we will continue to kind of return back to those conversion rates that we've experienced in the past. But that was primarily what impacted the numbers. From a GLP-1 standpoint, we are seeing a lot of customers that are on GLP-1s when they enter the office. But right now it's really not something that we're seeing as a factor as it relates to the decision making. It's possibly that it's causing some additional sort of time as it relates to patients having the procedure done. But again, really it's primarily the macro from the economic factors.

Great, that's really helpful. And then on some of the marketing strategies and some of the A&P stuff that you called out and that you're changing, Can you walk us through what new tactics you're now implementing? We have seen some promos, but not sure how incremental those are to past quarters. And then what gives you confidence that that really is going to help that conversion improve? And then what timing are you embedding in your expectations for that conversion to improve? Thank you.

So from the standpoint of marketing, you know, the things that we've been doing over the last, I would say, year and a half have been very much sort of shifting around to brand awareness activities. We've continued, obviously, our page search activities and things of that nature. But, you know, for the quarter, we actually invested $2 million, a little over $2 million in other brand awareness initiatives. You know, I'm not saying that those are the wrong thing to do, but they have a much, much longer tail in regards to when those cases convert. And so we saw those historically as investments that we were making in a long-term future. And so what we've decided to do is let's go back to the basics, as Erin shared. You know, we know that paid search has been a very effective method for us to generate, you know, cases. Those patients typically have a higher intent of converting. than some of the less traditional things as it relates to brand awareness that we had been trying. So we're going to remove the brand awareness activities, go back to the basics, focus on the paid search activities that we've been doing that we know has worked for us in the past. And we believe that's going to, over time, begin to improve our conversion rates. When do we expect it? As I said, in the third quarter, we're keeping our outlook as if things aren't going to significantly change. You know, we were down approximately 17% in same store in the second quarter. We're modeling something somewhat similar to that in the third quarter with some improvement in the fourth, but most of the improvement that we're looking at in the fourth quarter is more related to we just have a lower comparative to work up against. So, again, we're excited about the lead volume that came in. We're doing some things around trying to improve the conversions. We're really working with our sales team and kind of realigning the way we incent our sales team and really focusing on the conversion rates from that standpoint and improving there. And so we think those are going to help us as we kind of move out through the rest of this year and going into next year.

Great. Thanks so much. Thank you.

As a reminder, if you'd like to join the question queue, please press star one on your telephone keypad. Our next question comes from the line of Josh Raskin with Netfron Research. Please proceed with your question.

Hi, thanks. So excluding stock comp, the SG&A expenses were still just over $29 million in the quarter. So can you just give us some color on how much of that was marketing or maybe sales and marketing costs? and maybe what specifically that was spent on. I heard the $2 million on brand awareness. And then how much of that total G&A do you view as variable? How much of that is personnel? And then how much of that is truly fixed?

Thanks, Josh. So when you're looking at it from an SG&A standpoint, there's a couple of large items that we want to make a call out on. One, we had a little over a $4 million charge on that goes up against the SG&A number related to severance activities from some of the management changes that we've made. So that's one component which, you know, will be 100% variable. It will go away from that standpoint. And then also, as you had called out, as we had spoke of, is the brand awareness marketing, which was a little over $2 million in the quarter. That is going to go away. So both of those items are 100% variable from that standpoint. The remaining sort of increase that we sort of saw was around professional fees primarily, some legal fees and those sorts of things. But the two largest drivers of that SG&A increase were the severance and the marketing that, again, both of those will be removed going forward.

Okay. Okay. That's helpful. And then can you just juxtapose the fact that rate seems to be holding up really well while the case count drops, you know, especially in the same store? Sure. What consumer behavior do you think sort of explains that? Do you think there's just no real price sensitivity to this consumer that, you know, discounting doesn't work?

I wouldn't say discounting doesn't work. We've, you know, if you were to go back a couple of years, we did some heavy discounting in the fourth quarter of 2022. And so it generated, you know, I think some volumes, but it, you know, from a profitability standpoint, we sort of saw a reduction there. It's not something that we really are targeting right now as far as doing discounts. And as you said, our rate has held up really well. I think it does speak to, quite frankly, the value that we offer. I think the consumer do see the value that AirSculpt brings to the table. And so I think that's one of the reasons why there's a comfort level in the rates that we charge is because people believe they're getting the value that we're offering to them. Yeah, I think our consumer is, again, little bit stretched right now and so that portion of the population that maybe is a little more cash you know conscience you know are the ones that are delaying their activities right now as far as scheduling cases but but we are pleased that the rate is held up uh it doesn't mean that we you know might not offer promotional things that that might drive some additional volume but at this point in time we've just chosen not to go that route okay i think this last one for me just same sort of cases down 14 but

that wasn't terribly far off from the 10% decline last quarter. So, you know, if you rewind three months ago when you guys confirmed guidance, like what did you think was going to snap back or maybe what changed in the last three months?

So, you know, one of the things I was sharing earlier is that we were starting to see our normal sort of sequential increase in our lead volumes. And so with that, we believe that we are going to begin to, as you said, sort of snap back. Now, we did call out, I think, if we were to go back to our notes from the first quarter, that we were expecting some same-store decline, somewhat probably similar as we saw in the first quarter. It did accelerate a little bit more. But again, where we felt coming out of the first quarter is our leads are coming in, and we're going to be able to kind of convert these. And so what we just saw was is the conversion rates just dropped. And again, we believe that's macro consumer related. But one of the things too, and keep in mind, we are a high price point and we are a low volume. So it doesn't take a significant amount of cases to move the needle one way or the other. And we saw those cases obviously move in the lower direction. But some of the things that we wanna focus on, getting back to the basics on how we're marketing, Changing a few things around how our sales team gets realigned in regards to conversions, we think we can bring those case volumes back up. And again, it doesn't take a significant amount of cases to come out of this.

All right. Thank you. Thank you.

I'm seeing no other questions at the moment. I'll turn the floor back to Mr. Dean for any final comments.

Well, I want to thank you for joining the call today, and we look forward to speaking with you when we report third quarter results.

Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.