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spk01: Good day, and thank you for standing by, and to welcome to the Beauty Health Company's second quarter 2021 earnings call. At this time, our participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one on your telephone. If you require any further assistance, please press star zero. I'm going to hand today's conference over to your speaker, Dawn Frankfurt. Please go ahead.
spk07: Good afternoon, everyone. Thank you for joining the Beauty Health Company's conference call to discuss the company's second quarter 2021 financial results, which we released this afternoon and can be found on our website at investors.beautyhealth.com. With me on the call is Clint Cornell, Chief Executive Officer of the Beauty Health Company, and Leanne Wu, Chief Financial Officer. Before we get started, I'd like to remind you of the company's Safe Harbor language, which I'm sure you're all familiar with. Management may make forward-looking statements, including guidance and underlying assumptions. Forward-looking statements are based on expectations that involve risk and uncertainty that could cause actual results to differ materially. For a further discussion of risks related to our business, see our filings with the SEC. This column contains non-GAAP financial measures, such as adjusted gross profit, adjusted gross margins, adjusted net income, adjusted EBITDA, and adjusted EBITDA margins. Reconciliations of these non-GAAP measures of the most comparable GAAP measure are included in the earnings release furnished to the SEC and available on our website. Now, I would like to turn the call over to Clint Carnell, Chief Executive Officer of the Beauty Health Company.
spk02: Clint Carnell Thank you, Dawn. Good afternoon, everyone, and thank you for joining us today for a discussion of our second quarter results. Before I get started, I'd like to first thank our employees and providers worldwide. Despite the still challenging environment, our employees and providers have shown a level of resilience and passion, enabling us to achieve our record performance. They are at the center of everything we do and the key driver of our success. And we simply could not have achieved any of this without them. Now, turning to a review of our quarter, We are very pleased with our second quarter performance and strong first half of 2021, with both sales and adjusted EBITDA materially exceeding our own expectations. Our key strategic initiatives continue to gain traction, and we are capitalizing on the favorable self-care trends, which we believe represent a lasting shift in consumer behavior towards health and wellness. Now, subsequent to the quarter end, we have grown our delivery systems to over 18,000 units as we accelerate our investments in brand building programs and forge significant progress on strengthening our global connection with our consumers. And while a portion of the outside growth was related to easier comps from COVID-19 closures in the prior year, we drove significant growth compared to 2019 levels. We are also pleased to welcome distributors in Germany, Australia, France, and Mexico to the Hydrafacial family. And we're thrilled to have them join the team as we see these markets as strategic to growing our business internationally. Turning to the financials, adjusted EBITDA was $11.4 million, driven by strong net sales growth of over 370% year over year. Significant gross margin expansion and disciplined expense management while we continue to ramp up our strategic investments. We further strengthen our financial position, paying off our debt, and improving our leverage profile following our business combination in May. We are making significant progress on our vision of deeply connecting our consumers to the beauty health community where they live, work, and play. And we remain firmly on track to achieve our long-term strategic goals as our brand is resonating globally. We are, therefore, raising our full-year top-line 2021 guidance on the back of our strong results, and I will discuss those in more detail. For today's call, I will provide color around our second quarter performance and then discuss the confidence we have in our growth strategies and outlook, given the evolving consumer behavior favoring beauty health and our unique business model driven by our hydrofacial nation. I will then turn the call to Leanne, who will discuss both our Q2 results and updated 2021 financial outlook in more detail. Now, as I mentioned, our second quarter results exceeded expectations across the board. Sales strengthened as we moved through the period and meaningfully exceeded pre-pandemic 2019 levels, increasing 57% versus 2019. And on a year-over-year comparison, our second quarter sales grew by over 370%, led by continued strength in our delivery systems, which increased 481% and a 290% increase in our consumable revenue. Our adjusted gross profit increased over 500% from a year ago, generating a 75% adjusted gross margin. And as I previously mentioned, our adjusted EBITDA improved to $11.4 million, which drove an adjusted EBITDA margin improvement of 2,480 basis points compared to the prior year. During the quarter, we continued to build our platform with the objective of establishing a connected community in beauty health that benefits everyone, the consumer, the provider, and our companies. We continue to make progress this quarter on our key three growth initiatives, which are comprised of raising consumer awareness, delivering innovation, and expanding our international infrastructure. So I'd like to touch on those with some specificity. First, with respect to our efforts to drive consumer awareness, we accelerated our investments to build awareness of the Hydrofacial brand, leveraging our passionate community in the Hydrofacial nation, and expanding our marketing efforts. We continue to build on our Hydrofacial Connect, our clinical training, professional development, and holistic business education program as we strive to be the world's largest university for estheticians. And through our partnership with estheticians, we have created a passionate community of loyal and highly influential providers. We're also beginning to see our business in the retail channel improve as more locations reopen following the closures related to COVID-19. We continue to make progress on expanding our retail partnerships and extending into the consumer's awareness of our brand. As markets reopen this quarter, we began to activate these marketing initiatives, accelerating our investments and brand building programs. We hosted our first inaugural virtual event in Las Vegas on May 1st called EstiPalooza that drove over 1,500 people to register and stream the event beside our 150 in-person attendees properly distanced. Glow Evolution, our U.S. coast-to-coast bus tour, kicked off in Miami on June 4th and will continue well into September. During this event, we were able to provide treatments to 250 customers on-site over a two-day period. We also hosted two international pop-up events, a Dubai and a London Experience Center. Now, these events are highly effective at activating demand. They drive community engagement with the esthetician and consumer awareness which turns results into consumer demand. At the same time, we strategically implement promotional offerings in order to activate delivery system sales, effectively expanding our partnership in these select regions. This allows us to build the delivery system capacity in these locations to meet the expanded consumer demand these events create in their local markets. Our strong consumer multiplier effect make these events highly effective. Because you have to try it to get it. And approximately two-thirds of consumers who try a hydrafacial for the first time become repeat customers. And of those two-thirds, roughly one-third of the customers will become frequent super users of hydrafacial going six to eight times per year. And in our most recent events, approximately 85% of people who try hydrafacial for the very first time have said they plan to do another treatment. Given that once we know people learn about hydrafacial, they become repeat users, we are intently focused on building awareness of the brand and treatment with consumers through these programs. Second, we continue to invest in our innovation initiative in order to create products and technology that seamlessly connects our hydrafacial community. As we previously mentioned, we are accelerating our R&D investments to make sure we are delivering the right product, the right technology to build upon our connected community. Our upcoming new product launches, which I will discuss in more detail in a moment, remain on track, and we could not be more thrilled about launching them. We are adding innovation in our serums, including a Dr. Murad co-branded serum that launched during the quarter. We are testing our new app that allows us to connect with our consumers and providers directly, where they live, work, and play as we expand our direct-to-consumer connected capabilities. And while our app remains in beta mode, we are highly encouraged by the early response we are seeing from our customers. Third, we continue to build our international presence this quarter as we invested in growth and announced the acquisition of four distributors. Global expansion is a top priority for our team with sales increasing over 400% this quarter. We are investing in marketing initiatives globally to grow consumer demand while scaling our infrastructure and the team to support our rapid expansion. During the quarter, we announced agreements to acquire four global distributors, including our partners in Germany, Australia, France, and Mexico, for a total purchase price of approximately $35 million in cash and stock. These acquisitions are consistent with our focus on accelerating our growth internationally, which further solidifies our direct presence in key strategic markets. We're building out our international infrastructure with plans for headquarters in EMEA and APAC, as well as larger teams in the local markets. We are extremely proud of what we have accomplished this quarter, as well as the past year, particularly given the challenging environment. The sustained momentum this quarter of over 370% sales growth is further proof of our powerful consumer brand and platform business we have built in beauty health. As we look forward to our third quarter and beyond, we see significant opportunity for our business by leveraging our infrastructure and growing our install base to fund these new investments. As a result of another strong quarter, we are raising our top line guidance for 2021. We now expect sales in the range of $230 to $240 million, and that's up from our previous guidance of approximately $200 million. This increased top line guidance is based upon our strong results in the second quarter, as well as the continued momentum in self-care coming out of the pandemic. We see this sustainability in health and wellness as a lasting shift in consumer behavior. we see significant opportunity and are accelerating our investments to capitalize on the multidimensional growth ahead of us. And now I'd like to walk you through details of our upcoming investments and our three key strategic growth initiatives that I previously highlighted. First, building and expanding our consumer awareness is an important priority for us. By increasing our consumer awareness through accelerated marketing initiatives, continuing to build out our team and expanding our partnerships Particularly in the retail channel, we will address the significant white space opportunity before us. We will continue to deploy our highly effective events in order to activate consumer demand. Our Glovolution coast-to-coast U.S. bus tour will continue through September. And you may have seen on August 4th, we announced the appointment of Ben Baum to the newly created role of Chief Experience Officer. This position is an important step in further supporting our consumer awareness strategy. We are also expanding our presence in the retail channel with our new Nordstrom's partnership, where we'll be entering select locations. This partnership will further build upon our focus to expand our presence in the retail channel, as we see significant opportunity to extend consumer awareness through this channel. Second, we are increasing R&D investments to accelerate the rollout of innovation that will connect our entire hydrofacial community. We're testing the launch of our connected handheld device in the fourth quarter. with a broader rollout expected in 2022. We remain on track to launch our Hydrafacial 2.0 connected device in 2022. And we are also continuing to test our app, which will expand our ability to seamlessly connect with our consumer, and early results are highly encouraging. We are launching innovative products and technologies, driving our longer-term focus on building a seamlessly connected and interactive beauty health community. We believe the ability to directly interact with the consumer and engage them through our connected community will be an important driver of our long-term business. Third, we are accelerating our global footprint as we go direct in key strategic markets and build presence in other markets through new distribution partnerships. We will continue to add incremental resources to our team globally in order to meet the growing consumer demand as well as expand our infrastructure to support this rapid growth. This includes the announcement on August 4th of Stefan Becker being named our president of EMEA, effective this October. We also hired Indra Panamel as president of APAC, who joined just yesterday the Beauty Health family. And we are continuing to establish new distributor partnerships in certain markets, and we'll go direct in other markets where we see an important strategic opportunity. Our international presents a compelling opportunity for us, which we expect will exceed our US business in just a couple of years. In conclusion, we are extremely pleased with our second quarter results. The momentum in our business is further proof of the strong foundation we have built as a platform company in the dynamic beauty health category. This is a growth story with significant opportunity, and we are well positioned to capitalize on multiple opportunities. as we accelerate these investments in our business and build a unique, connected community. And now I'd like to turn the call over to Leanne, who will discuss our financial performance in the second quarter, as well as provide you with our updated financial outlook for the year, as we continue to deliver profitable growth and reinvest in our unique platform. Leanne.
spk05: Thank you, Glenn. And good afternoon, everyone. Before I begin, I'd like to thank our team around the globe for their continued dedication throughout the quarter. The hard work and commitment of our people drove our impressive growth this quarter. This, along with de-stacking and closing four distributors' acquisitions in a still challenging environment, demonstrates the unique outcome-driven growth mindset of our team and our business model. Just as a reminder, since we finalized the reverse merger on May 4th of this year, the beauty health financials reflect mainly hydrofacial historical information. There were a few significant non-cash accounting entries from the valuation of our warrants and mark-to-market valuation of the 7.5 million earn-out shares related to the four distributor acquisitions, which we will address and adjust out as non-GAAP measures to focus our discussion on our core business performance. I'm going to reveal our second quarter results touch on our balance sheet, and then provide details on our updated 2021 guidance. I will make select comparisons to our second quarter of 2019 in my prepared remarks, as we believe it is a more meaningful comparison due to the COVID-19 related market closures in 2020. Let me start with our second quarter results. As Clint mentioned, We are very pleased with our record performance this past quarter as we continue to build on our key strategic initiatives with second quarter results exceeding our expectations across all matrix. Since many of you may be new to our company, let me take a minute to talk about our business model. We have a fairly predictable sales cycle with our seasonally strongest quarters in the second and fourth quarters of the year. Net sales of 66.5 million increased materially from last year's COVID impacted sales of 14.1 million and up 57% from 42.3 million in second quarter 2019. The significant increase was largely due to expansion in our delivery system with almost 18,000 active system globally at the end of the quarter and acceleration in our consumables as COVID-19 restrictions lifted and more of our partners reopened. The strength in the US and EMEA businesses continued while the strong growth in the APAC region accelerated in the quarter. Now I'll share a few highlights from our three regions. Second quarter sales in America's region increased to 42.7 million compared to 9.5 million a year ago and grew over 34% from our 2019 levels. The strength was driven by continued traction in the US, primarily due to higher sales representative productivity and our solid delivery systems rollout. It's important to note that more of our partners began to reopen as vaccines were available and government restrictions were lifted. However, we still had partners in non-medical channels in select states who did not reopen until late in the quarter. Some U.S. locations continue to operate with reduced capacity to accommodate state and local regulations. We also saw consumable orders increase for customers reopening, which contributed to our record second quarter. As Clint mentioned earlier, marketing and training activations, such as Estee Palooza and Glovolution, also positively contributed to the increase in sales. Estee Palooza celebrated Hydrofacial's birthday on May 1st, And we successfully created our own Prime Day promotional activity. That sales event was equal to our Black Friday volume. We're very selective with our promotional events and focus on efforts on digital and physical marketing activation with a trackable outcome. EMEA net sales of 11.4 million grew from 2.1 million in the prior year and expanded 46% from the second quarter in 2019. driven by strength in the United Kingdom, Russia, and the Middle East. This result is especially impressive given the continued COVID-related closures we have experienced in many European markets. Pop-up activations and other marketing events launched by our distributors also positively impacted our results. Turning to APAC, net sales of 12.4 million meaningfully increased over 350% for both of the second quarter of 2020 and 2019, primarily driven by growth in China, Japan, Taiwan, and Australia. While we continue to be very focused on our system rollout in China, we have experienced increased sales productivity and continue to expand our presence in the region through both medical and non-medical channels. Our marketing and training programs throughout the ATAG market also contributed to the sales increase, for both delivery systems and consumable sales. Overall, our growth has been demand-driven across all channels. Consumers are asking for hydrofisher services by name, especially in our more mature markets. Against this backdrop, Beauty Health is well-positioned to continue to take share as our brand awareness expands globally. Moving to profitability, our adjusted growth margin was 75%, up significantly from last year's COVID impact at 51%, and a 270 basis point sequential improvement from the first quarter of 2021. The bulk of the increase for both comparisons were driven by several sustainable attributes, including fixed cost leverage from higher sales, improved selling price for delivery systems, as well as cost-saving initiatives. We remain focused on enhancing our margin structure through strategic initiatives while managing the global supply chain risks. SG&A expenses in the quarter were $70.6 million as compared to $11.6 million for the prior year. As a percentage of sales, selling and marketing decreased by approximately 440 basis points to 39.4% compared to 43.8% in the second quarter of 2020. This decrease was mainly due to sales leverage. The increase of 340 basis points compared to the first quarter of 2021 was due to our strategically planned ramp up in marketing expenses. As we shared during our first quarter 2021 earnings call, we delayed select marketing programs until COVID-19 restrictions were lifted and markets reopened in the second quarter. Creating consumer demand is our key investment strategy. and we will continue to focus on optimizing our investment in sales, marketing, and training, as well as strengthening our community engagement. Moving on to R&D, we invested $3 million in the second quarter of 2021 to accelerate our launch of the Hydrofacial Nation app, our new home device, and our upgraded delivery system. As Clint has shared, innovation is one of the main pillars of our strategic investments. we will continue to invest in innovation in the second half of 2021. Our G&A expenses of 44.4 million included 30.4 million of transaction costs and 3.5 million of non-cash stock-based compensation expenses. Excluding these items, our G&A expenses were 10.5 million compared to 10 million in Q1 2021. The increase in G&A expenses against the first quarter of 2021 was mainly driven by non-payroll related public company costs of 0.9 million, which includes DNO insurance and SOX costs. We expect such public company costs will continue, totaling approximately 3 million for the second half of 2021. We also have started to invest in technology and international infrastructure, and expect such investments to ramp up in the second half of 2021. As a leader in this category, we're accelerating our investments to capitalize on the long run ahead of us for growth. In addition to gap measures, adjusted EBITDA is an important profitability measure that we use to manage our business internally. For the quarter, adjusted EBITDA was 11.4 million versus an adjusted EBITDA loss of 1.1 million in 2020. The improvement in our profitability is the result of higher sales and growth margin improvement, partially offset by increased commissions and personnel-related expenses due to strong sales and increased headcount for growth, as well as increased marketing and skilling spend. Our adjusted net income for the quarter was $7.8 million. Weighted average shares outstanding were approximately $92 million in Q2 2021. As of today, we have approximately 133 million shares outstanding, including the 7.5 million earn-out shares issued for the four distributors' acquisitions closed by July 1, 2021. Our 15.3 million public warrants and 9.3 private placement warrants are not exercisable nor redeemable until October 2, 2021. Turning to the balance sheet, we ended the quarter with more than $100 million in cash, and cash equivalent with no outstanding debt. As a reminder, we repaid all outstanding debt on May 5th as part of our business combination with Vesper Healthcare. Now, I will share more details on our outlook for the full year. As Clint mentioned, we expect net sales in the range of $230 to $240 million, barring any deterioration related to COVID-19 trends, up from our prior guidance of approximately $200 million. As I stated previously, sales in the first quarter have historically been higher than sales in the third quarter. We remain cautiously optimistic while observing more closures related to Delta variant in both APAC and EMEA regions. We're leaving our adjusted EBITDA outlook at 25 million as we intend to prioritize investing the additional sales generated back into the business through increased spending on branding and global infrastructure initiatives that will accelerate our share gain in the global beauty health category we created. While we might not see significant returns on these investments immediately in the second half of 2021, we believe investing ahead in our international infrastructure, including people and systems, will provide us with speed and readiness for both growth deployment and potential M&A. We continue to anticipate capital expenditure of up to $15 million in 2021. Our upward net sales guidance revision reflects our highly encouraging performance so far in 2021. Our forecast includes solid results in the first half and strong trends that we have continued into the third quarter. However, given the uncertainty of the environment in which we're operating, we remain cautious of the potential risk for the further market closures from the new COVID-19 Delta variant and the uneven global rollout of the vaccines. As Clint noted, our second half guidance factors in the largely reopened global market, which would be negatively impacted if closures persisted. Subsequent to quarter end, we have grown our delivery systems install base to over 18,000. I would like to note that due to factors such as trading, trade-ups, various system price points, and our international distributor model, our total delivery systems figures do not directly correlate to sales. In summary, we're pleased with our strong first half of 2021, and we have solid visibility as we look ahead to the remainder of the year, barring COVID. We have confidence that our strategy will uniquely position beauty health for global growth as we focus on creating long-term shareholder value. With those comments, I'll turn the call back to the operator to open it up for questions. Operator? Thank you.
spk08: If you have a question at this time, please press star then 1 on this telephone. If you would like to withdraw your question, please press the pound key. Our first question comes from the line of Matthew O'Brien with Piper Sandler. Your line is open. Please go ahead.
spk03: Good afternoon. Thanks, sir, for taking the questions. Leanne or Clint, I'm just curious about the comments right at the end there as far as the guidance for the year. You know, you're not assuming any real COVID impact in the back half of the year. I know there's some hot spots, but you're assuming things are open. The distributors, those new distributors are kicking in. All these investments somewhat will be kicking in. So the back half guidance doesn't assume much in the way of growth versus the first half of the year. Was there maybe some delays as far as ordering in Q2 that showed up that won't occur in Q3? Or are you just trying to be somewhat conservative as a newer public company?
spk02: Yeah, thanks, Matt. Appreciate you joining in for the question. This is Clint. Yeah, we want to be thoughtful, obviously, with the guidance that I think that 2020 and early 2021 showed us. We have a very durable business. and any challenges related to COVID-19 and the current Delta variant appear to be temporary. So, you know, we feel really good about the visibility of the back half of the business, back half of the year. Okay, so just more conservative than anything else?
spk05: Well, technically speaking on our guidance, we did capture some of the trend into Q3, Matt, and we're assuming Q4 will open up more. That's how we model the numbers out.
spk03: Okay. Okay. Thanks for that. And then, Clint, the delivery systems number, again, was kind of eye-popping from the release. So can you talk a little bit about, you know, where some of that's coming from? And then, you know, I think it's the best quarter you've ever had from a delivery systems perspective. Again, I don't know if there was some pent-up demand from, you know, earlier this year that showed up in Q2, which should have been in Q1. But I would think that's a leading indicator for the growth of the business going forward. Um, so if you can just talk about some of the channels where you saw some of that, some of that performance, and then what we should think about in terms of how those systems should ramp over the next, you know, six to 12 months.
spk02: Sure. Sure. Matt, I think, you know, one is we're benefiting from macro. tailwinds on a focus on health and wellness, and certainly the Zoom boom effect has benefited Hydrofacial. I also think during the lockdowns, we worked very hard to work with our Hydrofacial community, in particular the estheticians, med spa owners, and physicians that were concerned about their wherewithal, and I think we're being rewarded for that as we've come back into the marketplace. We continue to increase our spend on consumer awareness. And as more consumers come into those delivery systems, we're getting multiple system purchases. So we see leads at an all-time high. We see yield rates very strong. And that's good for the business when we're laying down more delivery systems than expected. And we'd hope to see that trend continue. Got it.
spk03: If I could sneak one more in here, the investments, you know, you're increasing guide, the guide by about 35 million bucks, but EBITDA staying the same. So you've talked about these investments. Is it primarily for international infrastructure or there's some other areas on the investment side that's ramping up, you know, domestically? You called out some of the things, but, you know, if you can maybe bucket where some of those returns could be a little bit sooner than, than that you've kind of previously planned versus more of a 22 event, I think that'd be helpful.
spk02: Thanks. Sure. It's a great question. So, you know, the three buckets are pretty simple. Consumer awareness. When consumers become aware, like things like the Dubai, the London Experience Center, Globalution, a very high percentage of those consumers is their first time They're very sticky, and they become, you know, really great lifetime value for us and part of the Hydrofacial Nation. So raising consumer awareness has really been opportunistic for us. Accelerating innovation, you know, we have Project CASA and Cindeo on track. and really excited about those and getting some great early feedback. And the app is out in beta. So we really have accelerated, you know, a pretty transformative product development process that we're real pleased with. And then, yes, finally, you know, you see the growth in the international numbers. And while we're really, really excited about that, we've got to get in front of the infrastructure, the systems, the processes, the personnel. You're seeing us hire Stefan, Ben, and Indra, you know, very senior leaders with significant successful experience scaling multinational organizations. And so we feel given the tailwinds we have in the performance of the business, we need to keep our foot on the accelerator and ensure that we have all the infrastructure in place to handle the growth that we're seeing, particularly outside the U.S. where we have less infrastructure and want to ensure the same consumer experience, the same provider investment, and the same type of NPS scores for the company and the product.
spk05: And that just to add to that point to bucket ties, right? So the things that we've been consistently talking about, we actually know how to test and learn and react when it comes to marketing activation. We're just turning that up around the globe. And obviously it depends on the country and the situation we can turn that up or down. So we're planning to turn that up based on the trend we're seeing. In terms of the R&D, we're buying speed and we're going to continue to do that. And that's a bit of an incremental investment you're looking at in that bucket. I think the biggest investment is truly to Clint's point on growing people process and systems, especially when it comes to international infrastructure. But there's other things, you know, we mentioned the fact that we're implementing ERP system, you know, we're a public company ready. We're adding the layers to that as well. So there's a little bit of investment on the overall infrastructure that but very much emphasize and kind of pull up in terms of the speed when it comes to international infrastructure.
spk03: Got it. Thank you. Thanks, Matt.
spk08: Thank you. Thank you. And our next question comes from the line of stuff with Jefferies. Your line is open. Please go ahead.
spk06: Thank you. Good afternoon, everyone. I have a follow-up question on Matt's prior question, but just wanted to unpack R&D, spend a little bit. I think, Leanne, you mentioned speed. But just curious a little bit of how we should think about the R&D step up in front of the handheld device in the fourth quarter and then 2.0 as you plan for 2022. Hi, Steph.
spk05: Yeah, so what we meant by that is obviously as we roll out, there's an element of using external support, and it's also where the production is taking place. So we're sort of in that transitional period to ensure we can roll out the product on time and also very robust rollout. So when we talk about really investing into speed, it's not only just the R&D function, but also execution that's bucketized in that category when it comes to rollout product, if that makes sense.
spk06: That's very helpful. So just in terms of framing the adjusted EBITDA guidance, would you recommend the biggest step function maybe to a prior expectation would be a slightly higher R&D spend versus maybe what we had modeled?
spk05: I think to the degree, as we mentioned, the more emphasized R&D, I would say, is the smaller bucket and followed by really marketing element. And then there's actually more dollar being invested in infrastructure and international scaling.
spk06: Okay, that's really helpful. And then on marketing, I wanted to just unpack a little bit of what you're finding as you think about your new device launches. Any change in your go-to-market strategy or the commercial mix of how you plan to market, whether that's to the consumer or to your professional partners?
spk02: Yeah, Seth, as Clint, as we look, there's a couple of things that our company, I would say, evolving to is really a B to C to B company. If you think about it, we have a significant provider base out there that's continuing to accelerate when you see the units out there, raising consumer awareness. But now when you look at the app, you look at the Wi-Fi connectivity and the relationship we're building directly with the consumers, we're building you know, consumer capabilities with our channel partners that's really accelerating brand awareness, increasing utilization and making our providers more profitable. So I think it's the fact that the company has really Really adding, if you look at the three executives we just added, really good consumer experience, creating brand awareness that creates the activation of Hydrafacial, and that experience then becomes one that builds engagement with our company and results in the consumable revenue that really is key to our P&L.
spk06: Very helpful. Congrats on a good quarter, everybody. Great. Thank you. Thank you.
spk08: Thank you. And our next question comes from the line of Linda Boltenweiser with DA Davidson. Your line is open. Please go ahead.
spk09: Yes, hi. Thank you. I was wondering if you could talk a little bit more about the distributor acquisitions and what the effect on the income statement is. I would imagine it lifts your sales a little bit, but maybe it increases your SG&A. And then kind of what you think that will mean longer term as you take these distributors internal?
spk02: Yeah. Hi, Linda, and thanks for the question. I'll answer the first part and then hand the second part to Leanne. First, I think it's unusual, but it's a way that I think has been successful for us in that we go in and we acquire our existing partners and we secure those principles because those local relationships are so important. So we don't expect disruption of the business. And we also did these really in a collaborative manner with our distributors. And so what we're bringing them is they've grown to the point where they need infrastructure, they need systems and processes, and they need the ability to do the things we're doing globally, right? Raise consumer awareness through marketing and physical events, more sophisticated digital transformation skill sets. And then the ability to roll out products in a more disciplined way. So we are going to be building out infrastructure for these distributors, but they've already grown to a pretty sizable business in these countries. So just think about it supercharging in these markets, getting close to the consumer and doing all the things that we do in the domestic markets. I think you'll see us be really interested in being opportunistic on those, but really no disruption to business. And they're already well-run businesses. So this is supercharging it. And, Lynn, I don't know if you, from a numbers standpoint, you know, there's a significant discount that we provide to the distributors that they then pass along to the end providers. So we obviously pick that up and feel that it was good for the distributor and good for us as a valuation to purchase them.
spk05: Yeah, so, Linda, as we shared previously, you know, when we model out the number, we were already assuming we're going to take these four distributors out. the second half of the year. Obviously, if you think about what the four distributors are, right, Germany, France, Australia and Mexico. So it depends on the geography and where they are with the trend. You know, obviously, there's going to be that top line transfer to Clint's point. We've shared with you previously, it's almost up to 50% of transfer. So you're actually going to see that pickup, which we modeled in our numbers already on the top line. But part of the investment is precisely to Clint's point, investing into our infrastructure globally at both EMEA and APAC level so we can support the further growth to the direct market.
spk09: Okay. Sounds good. And then I was just Curious if, you know, a lot of companies are talking about component shortages. Are you experiencing any shortages of any of your components or any difficulties at all in the supply chain as you meet the robust demand for your products?
spk05: Yeah, Linda, you know, we've always been top of mind when it comes to the supply chain, right? Like if you look at our day-to-day business, we're trying to diversify our vendor base and we're trying to really create a way of securing these components and make sure we have enough of it to catch up to the demand level or the sales level. Obviously, as we innovate into these new product lines, I think the chip shortage, for example, you experience that everywhere globally, right? So there is a certain level of that. That's precisely part of the reason we're being very thoughtful in terms of how do we roll out these new product lines. But very much top of mind for us. And I think we shared previously, we've been working on network optimization, really having the goal of having some of these products closer to our end customer. And that actually helps from a supply chain point of view as well in the long run.
spk02: And also, Linda, you know, historically, we were owned by private equity. And one of the big parts of our investment thesis was to improve supply chain, improve our demand planning. And I think the team's really done a nice job. If you remember, we moved into a new facility at the end of 19. And then COVID actually gave us a chance to build the core competencies. So I think it's more external challenges that Leanne and the team are doing a great job of mitigating the risk against. So I would say it's just any CEO, CFO that don't put supply chain on yellow right now are being too optimistic, but I don't think there's anything fundamental to our business that is overly concerning. It's just a challenging external environment that I think everybody's experiencing.
spk09: Okay, great. And then finally, I'll just give it a try, but are you willing to disclose the number of systems that were sold in the quarter or year to date?
spk05: Yeah, so Linda, I think we talked about this, right? This is why in the prepared remarks, I kind of emphasized the point that we have trade-ins, trade-offs, we have distributor model that's a bit different. We're actually launching new type of delivery systems. This is why we want to make sure directionally, we always tell you, right? At the end of the quarter, we're almost at 18,000, for example, for the quarter, and then after it's over. So we'll give you very much directionally where we are, but at the end of the year, we'll give you the precise number. But I just want to emphasize as a proxy, right, we shared with everybody, you know, you can do an average, you know, call it 20,000 per unit. You can do your modeling that way. But as we move, especially rolling your product out, those profiles could shift and change. So we just want to be very, you know, make sure everybody's mindful. We'll give you the precise number by the end of the year.
spk09: Okay. Thank you very much and congratulations.
spk08: Thank you, Linda. Thank you. And our next question comes from the line of Kyle Rose with Canaccord. Your line is open. Please go ahead.
spk10: Great. Thank you for taking the questions. I think in the prepared remarks, you commented just on some positive pricing trends you're seeing on the box side. Is that related to the acquisition of the international distributors, or is there a different trend in the U.S. that you'd like to call out there?
spk02: Yeah, I think not yet on the international side, Kyle, and thanks for your question and for joining us. Not yet because, you know, we just did those acquisitions the 1st of July. So that wouldn't be reflective. I just think we're seeing overall strength in the brand. Our sales force has very high retention rates. We're seeing really strong unit productivity. So I think, you know, when ASPs are going up, typically it's an underlying strength of the brand. It's demand and it's the ability to price, you know, competitively in the marketplace. So I think, you know, to the earlier question that Linda had, that's why we're really trying to be thoughtful about disclosure of units, because we have a lot of trade-in trade-ups. We have a lot of upgrades and second systems, and then we have next generation products, which are different. But there's no question we're seeing strength in ASPs, strength in units, and that's good for the recurring revenue model that we have.
spk10: Great. And then can you maybe just talk a little bit more about the app that you're working on now and in testing, maybe how you envision that from a longer-term perspective, interacting and maybe connecting the company closer to consumers as well as physicians or estheticians?
spk02: Sure, sure. And I'll give you this directional, Kyle, because we're still working on our go-to-market strategy and we're testing and learning as we always do. We're working with our channel partners. You know, we've got the app out there and essentially the app is just a tool to help consumers understand what their underlying skin conditions are. and what types of services or products they should be using for that. It just is basically a nice guide to take into your medical spa, derm or plastic or day spa to talk with that esthetician and give her a starting point for the conversation to equip you as a consumer better. I think going forward, what you'll see from us is if you buy the home-held device, that you'd scan the QR code and it would connect you to the app. And that way we know that you have a home device that will interact with the 2.0 device where you potentially are sharing your data so that your esthetician knows what type of skin care regimen you have, what type of products and services you've been doing, what you believe your skin condition is. So what we're looking to do is really just hug that consumer in their journey for good skin health and give the provider more knowledge so that when you present yourself in that 30-minute or hour consultation and treatment that we're just, you know, we're really giving you better performance from the hydrofacial products that our providers are promoting out there. It really is connectivity no different than what you see in other consumer-facing products. We're just bringing that to an area that historically has been a little technology-weary, and that's consumer health care.
spk10: Great. And then just last question for me is some of the diligence we've done when talking to physicians and users is that I might like something a little bit more acne-focused or at least to customize based on the oil levels on specific patients. I wonder if you could maybe comment on that a little bit and maybe any updates with respect to the, you know, I think you've talked historically about, you know, one new serum a quarter. Obviously, you talked about the one that you launched in the Q2. So maybe, you know, forward trends with respect to the serums and boosters you plan to launch. Thank you.
spk02: Sure. Sure. Thanks, Kyle. Yeah, I'll answer this in two parts, and I'll try to make it simple. And my children will probably shoot me after this call because both of them are on a hydrafacial treatment regimen because they've suffered from acne. They're athletes. They always have oily, sebaceous glands, and hydrofacial is great for that. Our position as a company has been to not overemphasize the clinical claims because, as you know, acne is a very diverse condition, and there's lots of different types of acne, and the world is littered with pharmaceutical companies that have actually gone bust trying to to cure for acne. So what we leave is as an end company, we work with our dermatologists, plastic surgeons, all of our estheticians to make hydrafacial part of that treatment regimen, but we really let the provider in conjunction with other treatments or services improve that patient's outcome. I think it's safe to say we do have more specific acne-focused serums we are working on, and we'll look to bring those to the market. But I think first and foremost, we really look to under-promise and over-deliver with the consumer and the provider. And we believe that medical diagnosis of something like acne and trying to help that consumer with that condition is is better served having the professional guide along with the treatment regimen than having the company dictate a claim that maybe we can't meet all the time.
spk10: Great. Thank you for the perspective.
spk02: Thank you.
spk08: Thank you. And our next question comes from the line of Ahmed Hussain with Goldman Sachs. Your line is open. Please go ahead.
spk04: Oh, thanks. Hey, good afternoon, folks, and congrats on a nice quarter. Maybe I'll just start with coming back to the guide for a second. I just want to make sure we're all kind of level-set in our expectations for 3Q and 4Q. Can you, just given especially what's going on in the U.S. with Delta, give any more color as to what you're seeing so far this quarter? And really how to think about it. You gave a little bit of kind of general guidelines to think about 3Q versus 1Q. What else you could add for 3Q and 4Q for us to consider to get those numbers tight and where you want us to have them? And then related on a prior question also is just what is the contribution from the distributors that you purchased that are going to direct now? What is that contribution in the increased guide that you gave?
spk02: Sure. Thanks for joining. Thanks for the question. I'll answer the first part of that and then maybe turn it over to Leanne. Look, we're looking at Delta just like we looked at COVID. We have an incredibly durable business. We see these challenges as temporary and we're just leading through them. And I don't think any CEO or management team will tell you this is fun, but I will tell you, we just see a robust business. We see really strong consumer demand. We see very resilient providers. And we're very diversified. And if you look at our channels, we've got great diversification. We've got great global diversification. And it's a product that's really desirable when you've got the type of macro tailwinds we do. So I think we're trying to be thoughtful with the top line guidance. We're continuing to invest in the business because we believe that we need the infrastructure in place and that raising consumer awareness are things that are increasing shareholder value short and longer term. And so we just see this Delta variant as just an external nuisance. It's a very serious situation. But in terms of our business, we feel really good about the durability of the business and the temporary nature of any flare-ups that we see. And that's what we're hearing from our channel partners as well as our distribution partners around the world.
spk05: Yeah, and I need to add to that, you know, you're talking about the current trend. Obviously, if you look at by geography, there's always open close, right? Even if you look at Q2, I think a lot of European countries went through a lot of the round of, you know, by country opening and closing. If you look at the Delta variant, you know, right now it's probably impacting APAC the most, right? Because you saw the news in Japan, you're seeing some of the trend that's happening in China. So, you know, some of these current trends we have added into our Q3 numbers, you know, by the same token, if you think about the distributors, you know, based on by country and by region, we kind of figure that out for Q3, Q4 as well. Directionally speaking, the additional accretion on the revenue, it's not that material in terms of truly changing the trend for Q4.
spk04: Okay, okay. And then I was hoping for just an update on both Sephora and the progress you're anticipating there this year, and also the new Nordstrom partnership would be great. Any more detail and color you could give around that?
spk02: Sure, I'll take that. Sephora continues to be just a fantastic partner of the beauty health company. And I think they're being, I don't want to speak for them. I think they're being challenged as a retailer providing services and monitoring the situation just like we are. But I would say that both of us are on our front foot and providing the services where possible. And we'll continue to work with them to open where they're able to. Nordstrom's, to be clear, Sephora is perked by Hydrafacial, and it's a fantastic treatment at their skin studios. The Nordstrom's relationship will be the Hydrafacial system in their flagship stores, and as a kid who grew up in Seattle, that was fun to see that one come full circle, and we're really excited about it, and we'll keep everyone posted as we have more of these channel partners. you know, just to level set, we see these partnerships with retailers as a really good win-win. One is we help provide them services and experiences that drive consumers in to buy more products from them. And what we get in return is it really brings us closer to the consumer, raises awareness around the benefits of hydrafacial, and then we're able to drive people back out to our professional channel, our med spas, our derms, our plastics, our day spas. And so It's really a flywheel of influence, us getting closer to the consumer and for them capturing those consumers and keeping them there because of the experience that they're receiving through the hydrofacial treatment. So you can expect to see more of those from us. And I just want to level set on how we view that relationship beyond just the revenue component.
spk05: And I mean, just to add to that point, right, we don't have a revenue penetration or a concentration problem here or a situation here. Because if you think about we had shared with you previously, Even if you look at a Sephora or any of these relationships, they're all less than 5%. So we actually have a lot of customers, and we're working with all of them.
spk04: Thanks so much. Thank you.
spk08: Thank you. And our last question comes from the line of Bruce Jackson with Benchmark. Your line is open. Please go ahead.
spk11: Hi. Good afternoon. Thank you for taking my questions. The gross margins in the quarter were impressive, and I was wondering what the role of mix and volume were in driving the gross margin improvement.
spk05: Hey, Bruce. Yeah, so as we mentioned, I think the fact that the leverage on sales played a pretty significant role in addition to the fact that we've had savings initiatives that come to fruition, especially impacting the first half of the year. So I think that was the main factor contributing to that. We continue to work on the accretion, but obviously, as we mentioned earlier, there's always the supply chain, you know, risk that could negatively impact or offset some of these accretion, if that makes sense.
spk02: And historically, Bruce, you know, we only moved in this building in December of 19. It was really designed to give us significant capacity. And then during COVID, we had a chance to automate our warehouse management system. We reduced the amount of people was required through that. And so there was a lot of noise as we started to ramp up in early 2021. And so we're pleased with the way the facility is working, the automation investments we made, and we've got a lean, better performing personnel team here at headquarters. So We're pleased with it, but there was some noise that we're pleased to see coming out of the system and more normalizing.
spk11: Okay. And then do you think these levels are sustainable going forward?
spk02: Well, we've raised our guidance twice, and, you know, it's been during a challenging time and as a new public company. So we want to be thoughtful about the guidance, Bruce, and we want to – ensure our investors that we do what we say we'll do, that we continue to raise consumer awareness, continue to put placements out there of systems, and that we build out the infrastructure so that as this growth continues the way that we would expect it to, that we can still have really high NPS scores with the consumer and the providers. We try not to overcomplicate our business You know, our master plan right in our website says sell a lot of product, continue to invest in our providers. HF Connect is quickly becoming the largest university or educator of estheticians. You can see the consumer activations that are happening in Dubai, London, Glovolution. And now we've got next generation technology that's going to connect that community. And if we do that, hopefully our consumers trust us as a source for beauty health. For providers, if we deliver value and they're profitable, they'll buy more systems and more serums from us.
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