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spk01: Greetings and welcome to Smile Direct Club fourth quarter 2022 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. Please note this conference is being recorded. I will now turn the conference over to Jonathan Fleetwood, Director of Investor Relations. Thank you. You may begin.
spk05: Thank you, Operator. Good morning. Before we begin, let me remind you that this conference call includes forward-looking statements. For additional information on SmileDirectClub, please refer to the company's SEC filings, including the risk factors described therein. You should not rely on our forward-looking statements as predictions of future events. All forward-looking statements that we make on this call are based on assumptions and beliefs as of today. I refer you to our Q4 2022 earnings presentation for description of certain forward-looking statements. We undertake no obligation to update such information except as required by applicable law. In this conference call, we will also have a discussion of certain non-GAAP financial measures, including adjusted EBITDA and free cash flow. Information required by Regulation G of the Exchange Act with respect to such non-GAAP financial measures is included in the presentation slides for this call, which can be obtained on our website. We also refer you to this presentation for a reconciliation of certain non-GAAP financial measures to the appropriate GAAP measures. I'm joined on the call today by Chief Executive Officer and Chairman David Katzmann and Chief Financial Officer Troy Crawford. Let me now turn the call over to David.
spk09: Thanks, Jonathan, and good morning, everyone. Thank you for joining us today. Let me begin my comments by congratulating the entire SDC team for delivering on both our key strategic initiatives as well as financial results in 2022 in line with the updated full-year outlook that we provided on last quarter's call. Our disciplined cost management throughout 2022 allowed us to deliver comparable adjusted EBITDA, even though we saw a decline in full-year revenue. And we were able to produce a $38 million improvement in free cash flow over 2021. The leverage that we have built in our operating model reflects a much more efficient organization that is better positioned to achieve profitability with modest top-line growth. Despite the macroeconomic challenges we are all facing, our team continues to execute at a high level on our mission to democratize access to a smile each and every person loves by making it affordable and convenient for everyone. As we've discussed throughout the year, our four strategic pillars to fulfill our mission are to expand our reach through transformative innovation, given by a winning team with rigorous financial discipline. Let me review our fourth quarter and full year 2022 results in this context to illustrate how we're performing along these pillars. First, let me start with our pillar to expand our reach. This expansion not only relates to our existing customer base, which currently consists of households with annual incomes of approximately $65,000, but also includes plans to serve entirely new customer segments with our solutions-based on their unique needs and preferences for their teeth straightening journey. Our company's foundation began by serving those without any access to orthodontic care by providing doctor-directed teeth straightening, leveraging our telehealth platform through a direct-to-consumer business model. As I'll discuss later in my comments, we have made investments in our technology platform over the years to expand our reach to new customer segments that would like to begin their journey through different channels rather than a pure telehealth avenue. including by visiting our small shop retail locations, in-person doctor visits leveraging our partner network, including our new SDC Care Plus model, and by utilizing our proprietary AI technologies that we have developed for customers to utilize their own mobile device to begin their treatment planning journey with SDC. Our goal is to not only expand within our current customer base, but to also provide compelling solutions for higher-income demographics, along with capturing a larger share of the team market. Our second pillar is creating transformative innovations to serve the growing and unique needs for both our current customer base as well as expanded segments of higher income demographics and teams. We have invested over $400 million in capital expenditures during the past five years to develop both our state-of-the-art production facility and robust technology platform. Our wholly-owned FDA-registered facility in Nashville, Tennessee, uses one of North America's largest fleets of 3D printers. to manufacture both clear aligners and retainers utilizing our proprietary Gen2 manufacturing technologies. Our Gen2 aligner manufacturing produces twice as many aligners with approximately one-third the number of team members and twice as many retainers with the same headcount. Our key transformative innovations that we have been developing over the years and began discussing on our 22 earnings calls will fully roll out in 2023. These key growth drivers include our innovative SmileMaker platform featuring our mobile 3D scanning technology and our Care Plus offering, which provides an in-person doctor access channel for customers to begin their Smile Direct Club journey, leveraging our expanding partner network locations. I'm pleased to report that our SmileMaker platform, or SMP, successfully launched in Australia in late November and achieved our goal of offering a technology that allows customers to digitally capture images of their existing smile with their own mobile device, and submit those images to our enhanced AI engine to develop an automated draft treatment plan that allows customers to buy their aligners immediately after seeing their potential new smile. This innovative technology shortens the buying cycle from days or even weeks to mere minutes, while providing our customers with a great digital experience. As we anticipated would be the case in our Australian test launch of our SmileMaker platform and the app that enables its use, We are seeing strong improvements in the outcomes and conversion metrics from this innovative platform. Based on the increased conversion from lead to aligner order in Australia with S&P, we believe the upcoming U.S. launch has the potential to add a meaningful increase in revenue and adjusted EBITDA in the second half of 2023. When combined with CARE+, S&P will have the potential to deliver approximately $125 million in incremental revenue and 80 million in adjusted EBITDA to our core business guidance for 23, which can be viewed in our investor deck beginning on slide 31. Troy will touch on this later in his remarks, but it's important to note that we have not factored any contributions from SMP into our current 2023 top line or bottom line guidance. We learned many lessons during this test launch, and our team has been working hard to make enhancements so that we can ensure a premium first-in-class experience for our customers in the U.S. before our launch in Q2. Everything from onboarding to the time it takes to complete a successful 3D scan and then render your new smile through an interactive custom treatment plan is being tweaked for optimal performance. Our second growth initiative that we began discussing in our 22 earnings call was our Care Plus offering. This elevated service model allows dentists and orthodontists, and specifically the under-penetrated general practitioners market, to utilize SDC aligners and our robust telehealth platform to meet the demands of the more traditional orthodontic customers, higher-income households, and parents of teens that desire added access to in-person dental professionals but also want the convenience of telehealth for follow-up care. Dental practices have expressed enthusiasm for the unique turnkey orthodontics as a service nature of this hybrid solution, which requires minimal incremental investment for equipment and product training and no upfront fees to be paid to the manufacturer. We have launched this premium service care plus offering at a price of $3,900 for our pilot phase through certain of our participating partner network doctors in Denver, Orlando, Sacramento, and San Diego. As with our SMP launch in Australia, we will factor any learnings from this pilot launch to fast follow a rollout more broadly to all of our partner network locations throughout 2023. Early results from the pilot launch across these four key markets have been positive and we will share deeper insights in the potential growth and revenue from this offering on future calls. We will drive these transformative innovations with a winning team, our third pillar. We seek to attract and retain the top talent and partners across not only Orthodontia, but the entire medical technology industry. Our achievements building and supporting our team has been recognized by third parties in 22, including awards from Comparably for both Best Place to Work for Career Growth and Best Leadership Team, but also named to Forbes Best Employers for Diversity list. Our team has gained valuable insights both from experience within the industry as well as supplementing with top talent from other industries and functions across product development, sales and marketing, research and development, and partnership engagements. Underlying the advancements of these strategic priorities is our commitment to rigorous financial discipline, our fourth and one of our most important pillars. We took action in January to reduce roughly $120 million in costs so that we can accomplish our objective of positive free cash flow by Q4. Our continued focus is to prioritize investments across all areas of our organization that will drive profitable revenue growth and improve cash flows. Despite the tough macroeconomic environment that is forecasted to continue in 23, we are dedicated to maintaining financial discipline through our cost controls and cash deployments as we manage our business during the year. We'll provide details regarding our 2023 outlook. However, it's important to highlight that we plan to exit 2023 with positive quarterly adjusted EBITDA and free cash flow run rates. We have the solutions, technology platform, team members, and financial discipline to achieve this target. In addition to the exciting enhancements for our liner customers, we continue to enhance our retail portfolio as evidenced by the recent launch of our sensitivity whitening kit in February. This is in addition to the October release of our new countertop flosser, which offers another premium convenient smile solution for customers and is available both from our online store and over 12,000 retail locations like Walmart, CVS, Walgreens, and others. I also want to recognize our customer care team for their relentless efforts to provide our customers with the level of service and support they've come to expect from our brand. As we've discussed in our previous calls, our contact center team was able to overcome some temporary challenges in the first quarter of 22 and quickly get back to industry-leading service and delivering a superior customer experience. On last quarter's call, we highlighted that we have built a robust manufacturing and innovative treatment planning infrastructure utilizing next-generation technologies. We recognize the value of these assets and continue to have discussions with industry leaders on partnership opportunities, including licensing our breakthrough technologies in addition to wholesale and our white-label production opportunities for aligner products. We believe unlocking the potential for these partnerships is strong and additive to our current focus on building the future of technology-driven orthodontia. Combining our innovative solutions and available production capacity, along with our growing credibility in the dental market, places us in a great position with additional options to further monetize our collection of business assets. We look forward to sharing more on these opportunities in the coming months. We continue to make great progress in expanding our partner network program, the exclusive channel through which our customers will be able to receive our Care Plus offerings. We ended the quarter with 1,078 active locations, which is a meaningful increase of 128 locations from our third quarter footprint. Our Care Plus solution has generated stronger interest from practitioners to join our partner network, which aligns perfectly with our pillar to expand our reach across an expanded addressable market. It's important to highlight that we do not need to have coverage of every general practice in our network to drive scale, but want to ensure that we have a foundational presence in all key markets. that allows a customer a short commute for an in-person visit. A key part of the value proposition for the doctor's practice is the ability to leverage the sales and marketing firepower of SDC to drive customers to any of our partner network offices for our Care Plus offering. Some of our Care Plus pilot launch partners are already considering eliminating completely their own marketing efforts once they have time to evaluate the effectiveness of SDC-driven leads, their new traffic to their practice, and raising their overall profile within their market. Not only will this provide an untapped revenue opportunity for the practice with our Care Plus solution, it also provides the practice an opportunity to convert that Care Plus customer to a lifetime patient of their practice without any incremental orthodontia training or marketing dollars spent from the practice. We've already received direct feedback from some partners indicating that they see great value from the additional foot traffic from SDC Care Plus driven leads and eager to turn these customers into patients of their own practice for life. Regarding existing partner network patients, CarePlus provides the practice an additional T-straining offering at competitive price points for customers compared to existing market solutions. All the other CarePlus turnkey benefits for new patients also scale for existing practice patients. Minimal upfront or incremental costs, optimization of patient share time, leveraging SDC's brand awareness, and benefiting from the company's product and process innovations. Early feedback from our pilot launch from our four DMAs has shown these synergies playing out for both the practitioner as well as SDC, and capturing a greater piece of the addressable market of consumers looking for an accessible, affordable teeth straightening option. As we come upon our nine-year anniversary as a company in May, it's worth reflecting on how our model has evolved. While we initially started with only one channel for customers to start their journey through impression kits, Our business model now enables customers to begin their journey to an affordable, healthy smile through whichever channel meets their unique preference. Our historical direct-to-consumer model was soon enhanced with the addition of our Smile Shop in-person retail locations. A few short years later, recognizing that some customers want to start their journey in a doctor's office and that these same doctors wanted a more affordable and convenient solution for their patients so as to reach more than the top 1% who could afford traditional types of treatment, we created and brought to market our partner network program. Our partner network growth has not only provided access for a greater reach across customer geographies, but in 23, it will be the channel for our new premium service Care Plus solution. As we have continued to focus on innovation and access to care, we have brought the future forward and fully leveraged our in-house technology developments to bring our SmileMaker platform to life, allowing customers to begin their smile journey from their own handheld device. Regardless of which channel a customer chooses to begin a journey towards a healthy smile, all of these channels are supported by our telehealth platform that provides 24-7 access to dental professionals, ensuring results and maintaining access to a high quality of care. We have built a vertically integrated clear aligner business that participates in all areas of the value chain in the growing market of consumers searching for teeth straightening solutions. We are quickly changing the landscape of the clear aligner industry, and we are committed to seeing SDC reach its full potential with both customer satisfaction and financial returns for our shareholders. Troy will expand on our financial outlook, including our early look at sequentially delivering stronger aligner orders and company revenue in the first quarter over our recent fourth quarter results. And now I'll turn the call over to Troy, who will provide more detail on our Q4 and full-year financial results to present our full-year 2023 outlook. Troy?
spk06: Thank you, David. I will cover our financial results for the quarter. Please be sure to review our supplemental materials posted to our investor website, which provides additional details on everything I will cover. To start, we released preliminary 2022 results on January 17th, and the finalized results are within the ranges we previously provided. Our continuous focus on rigorous financial discipline has allowed us to streamline operations and support costs and create efficiency across the organization and this has led to quarterly year-over-year improvements in EBITDA and free cash flow despite the decline in sales. We also gave 2023 guidance for our core business that included cost savings initiatives of between $120 million and $140 million to retain the goal of being run rate adjusted EBITDA and free cash flow positive by the end of the year. In this difficult economy, we recognize that we must right-size our cost structure to support a more difficult sales environment. Our core business guidance does not include the exciting new initiatives that are being deployed in 2023. As David noted, SDC Care Plus launched in February in four test markets with expansion coming to the rest of the U.S. during the year, and we are planning on launching the SmileMaker app in the U.S. during Q2 2023 based on the learnings we've gotten from the initial regional launch in Australia back in November. I plan to give some color related to the potential impact of these initiatives later in the comments. But first, I want to cover our results for Q4 and the full year of 2022. Revenue for the fourth quarter was $87 million, which is a decrease of 19% sequentially and 31% on a year-over-year basis. This was primarily driven by continued challenging macroeconomic conditions driven by high inflation, which has been particularly difficult for our core customer. We shipped approximately 41,500 initial liners in the quarter, down 21% sequentially, at an ASP of $19.60. Our ASP increase of $58 over the third quarter was primarily driven by lower promotional activity. Our year-over-year revenue results are largely reflective of the trend of what we have seen play out in the economy throughout 2022. Providing some details on other revenue items, implicit price concessions were 14% of gross aligner revenue, up from 10% in the third quarter. Fluctuations in the quarterly IPC percentage is impacted by the overall level of revenue recorded in the period, which can drive deleveraging as well as the rebalancing of reserves. As we have mentioned on prior calls, we maintain separate reserves for IPC and cancellations, and we analyze and regularly rebalance those reserves based on current information. The full year implicit price concessions as a percentage of gross line of revenue were 11%. While our fourth quarter revenue was impacted by the continued macro headwinds, affecting our customers, our restructuring plan implemented in January of 2022 drove meaningful improvements in our cost structure and free cash flow. Much like we saw in Q2 and Q3 results, despite a $40 million year-over-year decline in revenue from the fourth quarter of 2021 compared to the current quarter, we improved adjusted EBITDA by $14 million and improved free cash flow by $16 million. For the full year, despite a $167 million reduction in year-over-year revenue, adjusted EBITDA only decreased 1 million and free cash flow improved 38 million. Delivering these full-year adjusted EBITDA and free cash flow results illustrates the discipline and financial rigor that we have put in place since the beginning of 2022 in the face of a very difficult macroeconomic environment. Reserves and other adjustments, which include impression kit revenue, refunds, and sales tax, came in at 10% of gross line of revenue compared to 10% in the third quarter. Financing revenue, which is interest associated with our small pay program, came in at approximately $7 million, which is a decrease of $1 million from Q3 and down approximately $2 million year-over-year due to the lower accounts receivable balance. Other revenue adjustments, which includes net revenue related to retainers, whitening, and other ancillary products, came in at $16 million, or 19% of total fourth quarter revenue. Now turning to small pay, In Q4, the share of initial liner purchases financed through our small pay program came in at 63.7%, which is above historical levels of approximately 60%. Our small pay program is an important component to drive affordability with our customer base. And overall, the program has continued to perform well, with our delinquency rates in Q4 relatively consistent on a dollar basis, despite the increase as a percentage of revenue compared to prior quarters due to lower current quarter sales. The fact we keep a credit card on file and have a low monthly payment gives us the confidence that SmilePay will continue to perform well. Turning to results on the cost side of the business, gross margin for the quarter was 61%, which was down from 70% in the third quarter. About half of the margin rate decline was driven by the deleveraging of fixed costs on lower sales volume, with the remaining difference attributable to higher impression kit volume, which carries a higher cost relative to sales, as well as lower retail margins and higher holiday shipping costs. Our team continues to focus on efficiency through cost controls and programs that will see improvement in margins as the top line returns to growth and we get the added benefit from operating leverage. Marketing and selling expenses came in at $64 million or 74% of net revenue in the quarter, compared to 79% of net revenue in the fourth quarter of 2021 and 55% in the third quarter of 2022. marketing and selling expenses increased as a percentage of revenue in the fourth quarter, primarily as a result of seasonal increases to drive promotions during the holiday season to capture sales driven by new year, new you demand in the first quarter. A key focus for 2022 was seeking to find efficiency in our spend. We've been experimenting more with pulsing spend with targeted dark weeks versus having an always-on strategy in our top of funnel channels such as TV, which allows us to take advantage of our very high-aided awareness and optimizing our marketing spend. It is important to keep in mind that digital marketing is a highly fluid process that requires daily disciplined spend analysis, assessment, and reallocation. With a targeted focus on efficiency and quality leads, we are continuing to calibrate spend across a diversified platform base to optimize continuously throughout the period to achieve the right balance of high funnel leads and bottom funnel aligner sales. On SmileShops, we had 124 permanent locations as of quarter end. and held 32 pop-up events over the course of the quarter for a total of 156 location sites with a net increase of seven shop locations from the third quarter. As we indicated on our earnings call, increasing customer access to our solutions through both the scaling of our partner network channel and the upcoming launch of our SmileMaker platform and app drove a reduction in the number of pop-up events in the fourth quarter. We will continue to monitor our strategies to expand our reach that supports incremental demand without cannibalizing sales from existing channels. As David mentioned earlier, we now have over 1,078 North America Partner Network locations that are active or pending training, increasing our footprint by 128 practices from Q3. The Partner Network team has been focused on optimizing productivity and preparing for our Care Plus solution launch with existing practices. Our recent announcement of our Care Plus offering, which launched in four test markets in February, continues to drive positive momentum from interested providers to join our partner network. Our partner network footprint will both scale our operations for our current submission trajectory, but will also serve as a key channel as we fully roll out our Care Plus premium service offering to all U.S. markets in 2023. General and administrative expenses were $60 million in Q4, compared to $76 million in the third quarter. The sequential decrease from the third quarter was driven by lower incentive compensation costs based on full-year results, as well as lower legal expenses and reduced depreciation and amortization costs as a result of decreased capital spending. For the full year 2022, general administrative expenses were down $47 million over the prior year, primarily due to the cost actions taking place in January of 2021, lower stock compensation expenses, and a continued focus on cost controls throughout the year. Interest expense of $6.6 million, of which $5.2 million is related to the secured debt facility issued in April of 2022, and $1.4 million is related to deferred loan costs associated with the convert we issued in 2021. Additionally, one-time costs related to lease abandonment, impairment, and other store and restructuring costs was $1.6 million, consisting primarily of costs related to our January 2021 restructuring actions, including costs associated with retention, as well as store and facility closure costs related to our international operations. We incurred gains of $3.4 million due to unrealized foreign currency translation adjustments and insurance proceeds from our April 2021 cyberattack of approximately $7 million. All of the above produced adjusted EBITDA of negative $47 million in the fourth quarter, which is a $14 million improvement over the fourth quarter of 2021, despite a $40 million decrease in revenues. For the full year, adjusted EBITDA was down only $1 million, despite a $167 million decrease in full-year revenue. Our fourth quarter net loss was $69 million, compared to a Q4 2021 net loss of $95 million. Breaking out adjusted EBITDA regionally for the fourth quarter, the U.S. and Canada came in at negative $34 million, and the rest of the world adjusted EBITDA was negative $13 million. Moving to the balance sheet, we ended the fourth quarter with $118 million in cash and cash equivalents. $187 million in net accounts receivable, and $127 million drawn on our $255 million debt facility with HPS. Cash from operations for the fourth quarter was negative $51 million, while cash spent on investing for the quarter was negative $12 million. Free cash flow for the fourth quarter defined as cash from operations less cash for investing was negative $63 million, which is a $16 million improvement over the fourth quarter of 2021. As David also mentioned previously, we took actions in January of fiscal year 2023 to meaningfully reduce our cost structure. This realignment optimizes our operations based on the anticipated continued macro headwinds impacting our top line results. These actions are expected to reduce costs between $120 and $140 million. While the exact breakdown of the components of the cost savings could change during the year, the following should help you understand where the savings will occur. We anticipate reductions between approximately 60 to 65 million to marketing and selling expenses, but a focus on leveraging our recent trends of improved marketing efficiencies. We expect general administrative cost reductions between 50 million to 55 million. Lastly, we will be reducing capital expenditures by 10 to 15 million based on prioritization of capital projects, focusing on our new initiatives and other technology products that have the ability to drive nearest term profitability. The cost changes we were putting in place put us on a path to positive adjusted EBITDA by the third quarter of 2023 and toward positive free cash flow by the fourth quarter. We recognize that in this difficult sales environment, we need to realign our cost structure to attain EBITDA profitability on our core business, and any upside that we see from our initiative launches will be additive to results at a very high efficiency level. For our full year 2023 guidance, which represents our core business only, we expect to deliver. Revenue between $400 million and $450 million, with macro factors being the key differentiator between the low-end and high-end of guidance. Gross margin between 72% and 75%. Adjusted EBITDA between negative $35 million and negative $5 million, driven largely by top-line revenue results with positive adjusted EBITDA achieved by the third quarter. CapEx between $35 and $45 million, and our one-time cost from our reorganization action in January 23, between $12 and $15 million. It's important to note that this outlook does not factor any contributions from our SmileMaker platform rollout or the launch of our Care Plus program in the U.S. market. As evidenced by our realignment actions taken in January, we continue to maintain focus on our cost structure to drive stronger bottom line and cash flow results. In addition to the guidance for our core business, we want to provide some insights regarding the potential contributions from our growth initiatives, including SMP and Care Plus solutions. Based on the increased conversion from lead to aligner orders in Australia with S&P, we believe the upcoming U.S. launch has the potential to add a meaningful increase in revenue and adjusted EBITDA in the second half of 2023. Collectively, our growth initiatives have the potential to deliver approximately $125 million in incremental revenue and $80 million in adjusted EBITDA to our core business guidance. This estimate is based on the early indications of contributions based on our pilot launch of S&P in Australia last November with plans for a U.S. rollout by the end of the second quarter this year and a continued rollout of our Care Plus solution to more partner network locations over the balance of 2023. We will provide updates throughout the year as we scale these initiatives and capture more data from the full market launches. Please see our investor deck for additional information. With both our new small maker platform and Care Plus solution now live in limited geographies, our investments and innovations are becoming a reality in the market. We are leveraging the proprietary end-to-end business model that we have built to lead the industry on many fronts. We are well-positioned to participate across an increasing number of channels in the clear aligner category to meet customers wherever they wish to begin their SDC journey, from their own home to one of our small shop retail locations, from an in-person visit at one of our partner network providers and now from the technologies enabled in their own mobile device. With that, I would like to turn the call back over to David for some closing remarks.
spk09: Thanks, Troy. Despite the challenges facing the consumer, we were able to manage our cost structure and deliver improved bottom line and cash flow results despite a reduction in revenue. This goes to our fourth pillar of financial discipline. We will continue with significant improvements in 23 by achieving positive quarterly EBITDA and free cash flow in Q4. We look forward to our upcoming U.S. launch of our SmileMaker platform by the end of the second quarter and the expanded rollout of our Care Plus offering across U.S. markets throughout 2023. We'll continue to update the market with additional insights regarding these initiatives, along with any of our other exciting innovations and achievements and key milestones. Thank you to everyone for joining today. And with that, I'll turn the call back over to the operator for Q&A.
spk01: Thank you. If you would 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 would like to remove your question from the queue. And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question is from Brandon Coulard with Jefferies. Please proceed.
spk07: Hey, thanks. This is Matt on for Brandon. Quick question on the SmileMaker platform. Curious if we should think about that just as a tool for newer patients in the funnel, or is there a way you can plan to go back to the legacy funnel to push the rollout of the platform to drive improved conversion on that legacy area of the funnel? I think historically, about 40% of cases were from leads seven months and older. So We'd just love to learn a little bit if you could perhaps roll that out to the legacy funnel, or we should think about this all incremental on new leads coming into the funnel. Thanks.
spk09: Yeah, it's David. I can take that one. So that's exactly how we went to market in Australia at the end of November. The advertising kicked in for new customers, both on TV and in digital, but we went into our CRM flows, which are deep, and anybody that was a potential kit or scan lead we introduced the SmileMaker platform and it's seen really good uptake in that funnel. So when we launched in the US, we have millions of leads that we will go back to that don't cost anything from an advertising standpoint, try to get people to engage through the SmileMaker app, which is a lot less work than doing an impression kit or actually booking an appointment and driving to a smile shop. So we anticipate the same thing will happen in the U.S.
spk07: Okay, thanks. And then I appreciate the color on the potential, you know, $125 million revenue and $80 million EBITDA contribution in Troy. Is there any more color you can provide there on the split of the two? Should we think about, you know, each kind of representing about half the incremental opportunity? Any more color there would be appreciated. Thanks.
spk06: Yeah, I would say that it's going to be SmileMaker app weighted, definitely, and then towards the back half of the year. We have the Care Plus initiative that launched in four markets here recently, but that rollout will likely be a little slower than what we would see from the SmileMaker app. Once we get it live in the U.S., it should have a more immediate impact, and we'll be able to do things like go back to prior leads, and things like that. So there's bigger opportunities, certainly, with the SmileMaker app. And again, the majority of that would be in the back half of the year.
spk02: Super. Thank you.
spk00: Our next question is from John Block with Stacel.
spk01: Please proceed.
spk08: Hey, guys. This is Tom Stephanone for John. Thanks for the questions. I'll stick with SmileMaker and CarePlus. Troy or David, maybe if you guys... can walk us through the key parts of the actual bill that gets you to the $125 million in revenue. It's a big number, really impressive, especially for less than a year of contribution. On SmileMaker, it sounds like Australia is going really well so far, but how do you arrive at those numbers specifically? It sounds like it's primarily SmileMaker. So maybe on that, can you just discuss key metrics and assumptions maybe between leads, conversion, you know, other assumptions that you're making.
spk09: Yeah, I can take that one, Tom. So what we've seen, and by the way, before we even launched and we first talked about this innovation, we put in our investor deck a funnel and showed, you know, all the different steps that you have to go through to get an impression kit, get a good impression, upload your photos, send the impression kit back. Same thing with the shop. As far as showing up for the appointment, getting your treatment plan, it takes 48 to 72 hours. And all the fall-off that happens from lead to aligner sale in the legacy go-to-market strategy. What we had showed in the investor deck was about a 50% increase in conversion. If you remember, we showed, and I think we have it in our deck today as well. We have that same slide that shows what happens when you eliminate all those steps in the process and how you can increase your conversion. And we threw out – it wasn't just hypothetical. It was based on the drop-offs that we were seeing in the kit and scan funnels and how by shortening that life cycle to minutes from days and weeks, we could improve conversion. Ironically enough, we're seeing very similar lead to conversion to aligner conversion numbers as what we had put out prior to launch. We're constantly making enhancements, improvements. How long does it take to render the custom smile planner for doing the 3D scan? How many people we can get through 3D scan? How long it takes to upload and get their custom smile plan? So all these things that we've been working on over the last 90 days in Australia have come to a much better conversion from LEED. And LEED is what we call the custom smile plan, the CSP. the customer gets after doing about a two-minute scan of their teeth with their phone and that is what we're translating into um the 125 million which like you said the vast majority of that is going to be smile maker versus care plus because care plus is a market by market rollout and we're only in four markets today so the vast majority of the 125 million is based on that conversion lift that we're seeing in australia now The U.S. tracks very similar to Australia. It's one of the reasons we chose that market. But there are some nuances. The marketing channels are different. TV is different. The payment platform that we use in the U.S. is a little different. But overall, based on what we're seeing in conversion, we anticipate the potential to get to that $125 million in the back end. It is only six months. You're right. But those are the numbers if we hit the conversion curves that we're hitting in Australia. Got it.
spk08: That's helpful. And then my second question is maybe just around trends. If you guys are willing to share any color on quarter-to-date case volume trends. I guess just curious in particular how the early part of the year may have gone, just given its importance when thinking about you know, typical seasonality benefits that occur. And then, Troy, maybe this is more for you, but similarly, can you give us a rough sense just for how to think about the cadence of revenue or case volumes on a quarterly basis this year? Thanks.
spk06: Yeah, we don't give quarterly guidance specifically, but I would say, you know, our expectation related to Q1 is that we would get more of a normalized seasonal lift in Q1. I mean, we definitely saw some better attach to kits and scans coming out of Q4. We planned that in Q4, and we're seeing that flow through in sales, I would say, in Q1. So I'd say you look at kind of historical, what we'd see as a normal seasonal lift for Q1. I think we can expect that this year. And again, the back half of the year, I would say, is going to be driven by the combination of these initiatives, as well as just what's going on in the overall economy when we announced our core guidance of $400 to $450 million. The low end of that guidance range really considers that the economy doesn't get any better or maybe slightly worse in the back half, where the higher end of that guidance says the economy gets a little better. But at least I would say from Q1's perspective, think about what our normal seasonal lift is in Q1, and then it'll play out the rest of the year based on how these new initiatives go as well as what we see from an overall economic standpoint.
spk02: Great, thanks.
spk00: Our next question is from Michael Ryskin with Bank of America.
spk01: Please proceed.
spk04: Good morning. This is Peter on for Mike. Thanks for taking the question. On pricing, you guys have pointed to 4% to 5% net ASP hikes annually on average in the long-term model. That was updated roughly a year ago. Is that roughly in play for this year?
spk02: How are you guys thinking about pricing?
spk06: Yeah, I can take that. Yeah, I mean, we plan to put some pricing changes in place later in the year, I would say. So I'd say even though we've not given out new numbers related to the long-term model, I think we can certainly think about price increases. The things that we did last year from a price increase standpoint was You know, we didn't change the standard price that the customer would pay through our small pay program. So we're able to kind of extend those payment terms a little bit and keep the overall price on a monthly basis very consistent. So we kind of make it easier on the overall customer, you know, in these tough economic times, certainly. But we do look to increase prices in the future. We've not released what the timing of that would be, but I think we can depend on some level of sales enhancement from price increases as we go throughout the year.
spk04: All right. Thank you for that. And then just curious if you're still exploring any larger, further cost savings initiatives or, you know, at this point, do you think you've kind of mostly maximized what you can do on that front to, you know, support the currently expected revenue range or any other, you know, didn't want to go there?
spk06: Thank you. Yeah, sure. It's been a focus of ours, I'd say, over the last two years, certainly. And when we talk about our pillars here, that we've been working towards. Really, financial discipline is one of those things that we're focused on. So we announced 22 cuts that we've executed fully. Then obviously we came back with some more cuts in 2023 as well. What we're focused on here is to make sure that on a core business basis, we can still get to profitability by the end of this year. And then as we launch these new initiatives, those will be additive. We don't expect to add a lot of additional costs related to these new initiatives. So we expect that much of what we draft from a revenue standpoint will flow through at a very high margin as we've kind of given you some initial information related to that. But I think there still are opportunities inside of our overall cost structure to get more efficient. I think that is one of the things that we're certainly focused on. You know, we're going to make sure we get to that Q3, Q4 guidance range from an EBITDA perspective. You can't always control the sales piece of it, but we certainly have the ability to control the cost side. So, it will continue to be a focus of ours throughout this year.
spk02: Thank you, guys.
spk00: As a reminder, it is star one on your telephone keypad if you would like to ask a question.
spk01: Our next question comes from Robbie Marcus with JP Morgan. Please proceed.
spk03: Oh, great. Thanks for taking the questions today. Maybe to start, I wanted to go to your base business guidance. It still does imply a pretty big step up on an average quarterly basis from fourth quarter. And there's been, I would say, a little less visibility than normal given the economy now. So how do you get confidence in that pretty significant step up quarter to quarter? from fourth quarter, given the forward-looking views on interest rates and the economy, where we are today?
spk06: Yeah, I can take that. I mean, what we're seeing today, certainly from a first quarter standpoint, I think gives us a little bit of confidence just because we typically see a seasonal lift from Q4 to Q1. I'd say much of what we've forecasted out for the remainder of the year really is macroeconomic focused. So the higher end of our guidance range that we have out there at 450, we do expect the back half of the year to be a little better. Again, if we don't see that likely come in at the bottom end of the range. And then we've got the new initiatives to focus on as well. I know that this is core business is what we're talking about in general, but obviously what we launched from a new initiative standpoint is also going to impact that as well. So it's really macro-focused. I think we've seen a little bit of a flattening. I think what we've talked about previously is we really feel the beginnings of the economic strain on the consumer. We felt that first last year when we talk about comparisons in the overall market. And I think as we see the flattening, I think we'll see that first as well. So, you know, obviously it is, you know, a challenge in this environment, I would say. You know, our core customer is in that $65,000 range, and they were the first to feel these effects. But, again, I think we have opportunities going in the future as we focus on things like the teen market and this higher-income consumer. So I think there's opportunities there. But, yeah, it will play out, you know, very consistent with what we see in the overall market. So I would say we're certainly not out of the woods related to the overall economic situation. We'll just have to see how it plays out in the back half.
spk03: Okay, but just to be clear, all of those additional opportunities are not assumed in the base business cut, right?
spk06: That's right. Yeah, the initiatives are all on top of what we consider to be our base business.
spk03: Great. And then just one more. You know, it seems like you've been drawing on your debt facility and you plan to be free cash flow break even in fourth quarter. What should we assume for further draw in the first three quarters of the year? Thanks.
spk06: Yeah, so there's, you know, certainly opportunities in lots of different ways related to liquidity. I'd say we're, you know, pretty confident in what we have from a resource standpoint and the path to execute our plans related to liquidity. You know, financial discipline is certainly one of the things we're focused on. You know, we did the significant cost cuts to get us to that flat EBITDA or positive EBITDA by Q3. and then positive free cash flow by Q4. Obviously, the initiatives will be an important part of what we will be able to deliver this year. And we have some availability left on the HPS facility as well as we have availability on our ATM facility as well. But much of what those draws will be will be based on kind of how revenue goes throughout the year. I'd say one thing that's a little bit unique for us, we have a different kind of conversion cycle, cash conversion cycle, You know, sales can be unpredictable, I would say, but about 60% of those sales that come in, they go to the actual receivable that we collect them over two years. So, you know, the unique aspects of this and what we, you know, focused on when COVID hit was despite the fact that sales came down quite a bit, you know, we were still collecting on those two-year-old, you know, receivables. So it gives us more predictable cash flow incoming, and we can focus on things like cost control, marketing, things like that. you know, to manage those costs down. You know, obviously that's not your long-term strategy, but it's effective in a short-term perspective until, you know, the economy improves. So we have some confidence certainly related to what we can bring in from a cash standpoint. You know, our focus is going to be on the cost control side of this and managing EBITDA and free cash flow throughout the year.
spk03: Great. Thanks.
spk00: We have reached the end of our question and answer session and that will conclude today's conference.
spk01: You may disconnect your lines at this time and thank you for your participation.
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