The Beauty Health Company

Greetings and welcome to the Beauty Health Third Quarter 2021 Earnings Conference 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 today's conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn this conference over to your host, Ms. Dawn Frankfurt, Managing Director at ICR. Thank you, ma'am. You may begin your presentation.

Good afternoon, everyone. Thank you for joining the Beauty Health Company's conference call to discuss the company's third 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 Brent Saunders, Executive Chairman, Clint Carnell, Chief Executive Officer, and Leanne Wu, Chief Financial Officer of the Beauty Health Company. Before we get started, I would 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 risks and uncertainties 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 call will contain non-GAAP financial measures, such as adjusted gross profit, adjusted gross margin, adjusted net income, adjusted EBITDA, and adjusted EBITDA margins. Reconciliations of these non-GAAP measures to 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 Brent Saunders, Executive Chairman of the Beauty Health Company.

Thank you, Don, and good afternoon, everyone. Thank you for joining us for a discussion of today's third quarter results. As I'm sure you saw in today's press release, I will be stepping into the role as the company's interim CEO effective January 1st, 2022. As part of this transition, Quinn will remain CEO through year end, at which point I will assume additional responsibilities of the CEO until a permanent successor is named. On behalf of the board, I want to thank Clint for his dedication and commitment to beauty health over the past five years. He has been a driving force behind the company's success, navigating beauty health through COVID as well as our business combination in May. Under his leadership, beauty health has become a solid platform for us to build upon as we look towards our next pillar of growth and begin to accelerate our acquisitions. Given these objectives and the strength of beauty health, Clint and the board felt that this was the ideal time to begin the CEO transition. We thank him for his contributions. While Clint and I have been working closely over the past few quarters, I'm excited to step in more fully and work with the team to continue to drive growth and focus on our strategic initiatives. This is a compelling time and I am excited about our future. The company has a strong foundation and I look forward to the next chapter and the significant growth opportunities we have ahead. I would now like to turn the call over to Clint.

Thank you, Brent, and good afternoon, everyone. Before digging into our performance, I would like to express my gratitude for being part of building this category-creating brand over the last five years. This has been an exciting journey, and I am pleased with what we have accomplished. I would now like to thank our employees and providers across the globe for all of their hard work and commitment during this challenging environment. They are vital to our success and propelled us to record performance again this quarter. During today's call, I will provide color on our third quarter performance as well as discuss our growth strategies and outlook for the remainder of the year. I will then turn the call to Leigh Ann for a more detailed discussion of our third quarter results as well as our updated 2021 financial outlook in more detail. We are very pleased with our results this quarter. as well as the strength of our year-to-date performance. Our sales and adjusted EBITDA continue to exceed our expectations and deliver new record results, while we continue to lead through macro challenges and select market closures related to the Delta variant surge. Our strength speaks to the diversification of our business across channels and geographies, as well as the favorable health and wellness tailwinds that remain strong, and we believe are here to stay. We are executing across all key strategic initiatives we laid out for you last December, and as of today, we grew our delivery systems to over 19,000 units as we leveraged our virtual and physical branding events to increase our consumer engagement with our beauty health community. We invested in international infrastructure, adding Indra and Stefan to lead the APAC and EMEA regions respectfully to meaningfully expand our business in these markets, and we are excited to add two additional products in the coming months. Now, turning to our financial results for the quarter, adjusted EBITDA was $5.8 million, once again driven by strong net sales growth of almost 100%, gross margin expansion, and disciplined expense management, despite challenges related to the Delta variant. We continue to accelerate our brand building initiatives to capitalize on the enormous white space opportunity we see ahead. We further strengthened our financial position with the completion of our convertible senior notes offering. which was upsized to account for the strong investor demand. We raised approximately $900 million in dry powder from this offering and the warrant redemption to escalate our strategic investments and build upon the strong platform we created in beauty health. Our brand building initiatives effectively strengthen our connection between our consumers and providers, which further expands our beauty health community. Our vision of creating a deep consumer connection with the beauty health community is a top priority, and we continue to make progress this quarter, improving our engagement with our customers by reaching them where they live, work, and play. As a result of these achievements, we are well positioned to deliver on our long-term strategic goals. We are raising our top line and EBITDA outlook for our full year 2021 to reflect the confidence in this business model, as well as our ability to execute against our multilevel growth trajectory. During the quarter, we continue to make progress on our strategic growth initiatives to build brand awareness, accelerate innovation, and expand our international presence. Our investments behind these initiatives remain elevated in order to create a deeply connected and engaged consumer within our beauty health community. It creates a strong community at the center of our vision and is essential to our long-term success. So I will now focus on these key initiatives in detail. we invested in branding initiatives to drive consumer awareness. And during the quarter, we accelerated our branding investments to engage with our consumers and providers both virtually and to a greater extent physically as we look to strengthen and build our beauty health community. We continue to invest in Hydrafacial Connect, our clinical training, professional development, and holistic education programs designed for the esthetician, creating a highly passionate and educated community of influential providers. Our business in the retail channel improved this quarter. As more locations reopened following COVID-related closures from March of 2020, we further expanded our presence in the retail channel with select partnerships during the quarter, including Nordstrom. While we are still early days with these partnerships and have not built meaningful revenue into our outlook for this channel, we do see it as a unique pathway to bring more consumers into our community. During the quarter, we accelerated our marketing initiatives, building on our second quarter's effective branding programs. Our Glovolution campaign has been highly successful by engaging consumers and estheticians on our U.S. coast-to-coast bus tour that started on June 4th and continues through the end of September. At each stop, we treated 250 consumers with hydrafacials onsite during a two-day period, working alongside our customers in delivering a compelling experience and reaching a meaningful number of consumers in each market we visited. We believe Glovolution has been highly effective and activating demand by driving community engagement with both estheticians and consumers. By creating a physical hydrofacial event, we drove brand awareness and consumer demand because you have to get it to get it. As we have previously discussed, two-thirds of consumers who try a hydrofacial for the first time will become repeat customers. And of those two-thirds, approximately one-third of the customers will become frequent super users, which is why building brand awareness and treating new customers is one of our top investment initiatives. Over the past year, we have transitioned our business from a B to B to a B to C and back to B, effectively connecting our passionate community. Second, we maintained our elevated investment level in innovation, creating product and technology to deepen the consumer engagement into our beauty health community. Improving our product offering and enhancing our technological capabilities to build upon our beauty health community is important, as we effectively increase our connection to our customers. Our upcoming new product launches remain on track, including the November 11th launch of our Grow & Go at-home device, which I will discuss in more detail in just a moment. During the quarter, we launched a new booster collaboration with Epicutis, targeting the neck and decollete areas and extending their treatments beyond the face. We also continue to test our app that builds consumer awareness and serves as a direct connection to the customer. And taken together, all of these initiatives allow us to better connect with our consumers where they live, work, and play, further expanding our direct-to-consumer capabilities and relationships. Third, we continue to expand our international infrastructure to support our strong international growth. With our sales internationally up over 105% this quarter, these markets remain a top investment priority. During the quarter, we entered South Korea through a new distributor partnership. We continue to globally increase marketing initiatives to expand brand awareness, as well as invested in our team to build the necessary infrastructure to support this growth. And as previously announced, Stevon Becker joined us as president of EMEA in October, and we are continuing to make select hires, particularly as we build out teams in local markets. We also made progress on our plans for headquarters in our EMEA and APAC regions, which we'll provide updates to during future calls. We are very pleased with our accomplishments this quarter and year to date, especially given the still volatile environment as it relates to the Delta variant and increasingly challenging worldwide macro concerns, which Liam will discuss in greater detail. The sustainability of the momentum we are delivering, despite these challenges, was further supported by our almost 100% sales growth this quarter and proof of our highly resilient business model. We are focused on creating a unique and powerful consumer brand and platform in beauty health with significant growth ahead. As we look forward to our fourth quarter and beyond, we will continue to leverage our infrastructure, grow our install base in order to fund our investments, capitalizing on these significant opportunities. And the combination of being well capitalized and our broad geographic presence allows us to pursue strategic acquisitions in a disciplined manner. Turning now to a brief overview of our guidance, as a result of another strong quarter, we are raising our top line and EBITDA guidance for 2021. We now expect net sales in the range of $245 to $255 million, up from our previous guidance range of $230 to $240 million. We also are increasing our EBITDA to $30 million from our prior guidance of $25 million, despite the significant investments we are making in our business. These upward revisions are based on the momentum in our third quarter results, and we will continue to invest ahead of our growth because we have a sense of urgency to capitalize on the category we have created. I will now provide you with details on our upcoming investments in our three key strategic growth initiatives. First, building and expanding consumer awareness remains a priority. Our marketing programs drive consumer awareness, which has proven to drive consumer demand. We are accelerating these marketing initiatives, building our team and expanding our partnerships, especially in the retail channel, in order to capitalize on the significant white space ahead. Our consumer activation programs are highly effective, and we will continue to leverage these events in select markets. Due to the success of Globalution, which wrapped up at the end of September, we are bringing the event to New York City for the second week in December to build consumer awareness and mark the one-year anniversary of our business combination announcement with Best for Healthcare. We are also excited about our Black Friday and Cyber Monday promotions, which historically generated meaningful customer engagement. On October 24th, we participated in the Nordstrom's Block Party. We also are expanding our presence in the retail channel through our new partnerships, including Ulta, Laser Centers of Australia, John Lewis in the UK, and Select Marriott International Resorts and Spots. We see retail as an important channel to further build our consumer awareness and diversify our operating model. As we continue to monitor and test new retail partnerships longer term, we see this channel as a significant opportunity. Second, we are increasing our R&D investments in innovation initiatives in order to deepen and expand our consumer and partnership connections with our beauty health community. Our innovation initiatives will enhance our ability to meet our consumers where they live, work, and play. And on November 11th, we are launching a limited number of our Glow & Go handheld devices, with a broader rollout expected in 2022. While we are testing the at-home market with our initial launch, we see this as a bigger opportunity over time. Our app, which we officially launched in October, allows us to engage with our consumer by providing self-skin assessments and an educational component, among many other features. We remain on track to launch our HydraFacial 2.0 connected device in early 2022. A major technology upgrade from our existing HydraFacial, innovation in products and technology remains an important component of our overall strategy to building our long-term vision the beauty health community. Third, we are accelerating the rollout of our global footprint as we build on our international infrastructure directly in key strategic markets and expand distribution partnerships into new markets. We are continuing to build our infrastructure and the team worldwide to capitalize on our significant international growth. Consistent with our strategy, we will continue to go direct in key markets where we see opportunities as well as establish new direct distributor partnerships in select new markets. Over the next few years, we expect our international business to exceed the U.S., and we are building the necessary infrastructure to capitalize on this opportunity. In conclusion, we are proud of our third quarter performance. The results we have delivered thus far in 2021 support the power of the platform we have created and the community connection we are building in the dynamic beauty health category. We are a rapidly growing business, capitalizing on our multiple levers of growth. And I'm now pleased to turn the call over to Leanne for a more detailed discussion of our third quarter financial performance, as well as provide you with our updated financial outlook for 2021. Thank you.

Thank you, Clint. And good afternoon, everyone. Before I discuss our performance this quarter, I also want to thank our employees and providers worldwide for their continued dedication and effort that is underpinning our growth. This record performance the successful completion of our convertible senior notes offerings, and the redemption of our outstanding warrants all demonstrate the flexibility of our business model and the confidence of our investors in allowing us to continue to rapid growth trajectory we are executing. I will review our third quarter results, touch on our balance sheet, and then provide details on our updated 2021 outlook. I will make select comparisons to our third quarter of 2019, as we believe it is a more meaningful comparison due to the COVID-19-related market closures in 2020. Let me start with our third quarter results. As Clint mentioned, we're very pleased with our record performance this past quarter as we continue to build on our strategic initiatives, which drove better-than-expected third quarter results across all metrics, despite Delta variant-related restrictions, especially in the EPAG region. Our systems and products have global appeal as reflected in our strong geographic segment growth in this past quarter. Net sales of 68.1 million increased almost 100% from last year's COVID impacted sales of 34.6 million and up 72% from 39.6 million in the third quarter 2019. The significant increase was largely due to expansion in our delivery systems. with over 18,500 active systems globally at the end of the quarter, and the continued strength in our consumables as COVID-19 restrictions lifted and more of our partners reopened. Strong trends in the U.S. and EMEA businesses and significant growth in the APAC region continued during the quarter, despite a worsening COVID trend. Now, I'll share a few highlights from our three regions. Third quarter sales in America's region increased to 45 million compared to 21.2 million a year ago and grew over 50% from our 2019 levels. The strength was driven by continued traction in the U.S. and solid performance in LATAM as markets reopened and consumer demand accelerated, as well as ongoing strength in our delivery system rollout. We continue to see select U.S. locations operate at reduced capacity to accommodate state and local regulations, especially in the non-medical channels. We also saw consumable orders increase for customers reopening, which drove the acceleration from our 2019 levels. As Clint mentioned earlier, marketing and training activations, such as Glovolution, also positively contributed to the increase in sales. Given the strong performance of Glovolution, We're extending the event into Q4, and we're holding the event in New York City during the second week of December. The NBA net sales of $12.6 million grew from $8.1 million in the prior year and expanded over 90% from the third quarter in 2019, driven by strength in the United Kingdom, Germany, France, Russia, and the Middle East. The pop-ups in the Middle East and the UK continue to feel growth for the regions. Our creative marketing in Spain and France also helped consumer awareness and contributed to the sales increase. In addition, we have also started to expand pop-ups into Germany and expect to see further acceleration in growth. Turning to APAC, mass sales of 10.5 million increased almost 100% from the prior year and over 200% from the third quarter of 2019. Primarily driven by growth in China and Australia, despite the restrictive COVID-related lockdowns implemented in Australia. In China, we're continuing to focus on our system rollout while building sales productivity and continuing to expand our presence in both the medical and non-medical channels. Our marketing and training programs in regional markets also drove growth. Trends in the APAC decelerated from the second quarter, primarily due to Delta variant-related shutdowns in Japan, Australia, and part of China during the third quarter. Overall, our growth has been demand-driven across all channels. We continue to see consumers asking for a hydrafacial by name, especially in our more mature markets. Given the current brand recognition and our initiative to build awareness, as well as international global self-care momentum, Beauty Health is attractively positioned to continue to both expand this category and take share globally. Moving to profitability, our growth margin was 67.6%, up from last year's 60.6%. On an adjusted basis, we expanded our growth margin by 320 basis points year over year to 71.5%. The increase was largely driven by fixed cost leveraging of higher-than-expected sales improved selling prices for delivery systems, as well as cost saving initiatives. This was partially offset by higher supply chain and logistic costs. On a sequential basis, our gross margin declined 340 basis points due to supply chain challenges and increase in logistic costs, as well as temporary impact from transitioning higher carrying inventory value related to the distributor acquisitions. We will continue to focus on enhancing our margin structure. However, we expect the continued headwinds from global supply chain challenges and inflationary pressure to weigh our margins into 2022. We currently anticipate a higher shipping cost to continue into next year, partially offset by an accretion in margins related to the acquired distributor and pricing initiative. During the quarter, there were a few significant non-cash accounting entries from the valuation of warrants and the convertible transaction, which we will address and adjust out as non-GAAP measures to focus our discussion on our core business performance. SG&A's business in the quarter were $49.7 million as compared to $17.6 million for the prior year. As a percentage of sales, selling and marketing increased by over 1,400 basis points to 44.7%, compared to 30.5% in the third quarter of 2020, which was constrained due to COVID. This increase was driven by greater sales commissions, higher personnel-related expenses, and increased marketing spending. During the quarter, we significantly ramped up our marketing spend as we strategically activated demand. We will continue to focus on optimizing our investment in sales, marketing, and training. particularly as we look to build upon our community engagement initiatives. Moving on to R&D, we invested $1.9 million in the third quarter of 2021, compared to $0.6 million in the prior year, as we accelerated our investment ahead of our launch of the Hydrofacial Nation app, the initial test of our new home device, and the upcoming launch of upgraded delivery systems. As Clint has shared, innovation is one of our main pillars of our strategic investments. We will continue to prioritize investments in innovation. Our G&A expenses of 19.2 million included 3.9 million of non-cash stock-based compensation expenses. Excluding this item, our G&A expenses were 15.3 million compared to 7.1 million in third quarter 2020. The increase in G&A expenses was driven by non-payroll-related public company costs of 1.7 million which includes B&O insurance, SAX compliance, and additional audit and tax-related services, as well as higher personnel-related expenses due to increased headcount. We expect such public company costs will continue at this level. During quarter, we accelerated our investment in building out the necessary infrastructure to support the significant growth in our international markets, as well as continue to strategically invest in EMBA and APAC base camps people and technology. We have gone live on our first global ERP platform, which includes CRM and e-commerce. Partnering with Oracle NetSuite, we are positioned to extend our brand to global markets and improve operational agility. This will never be pain-free, and we expect execution change to continue. The new ERP platform advances our cloud-native hydro-facial ecosystem and will be expanded to include new capabilities in 2020. We expect these investments to remain elevated over the next few quarters. We will continue to invest ahead of our significant growth opportunity in order to capitalize on our long runway ahead. In addition to gap measures, adjusted EBITDA is an important profitability measure that we use to measure our business internally. For the quarter, adjusted EBITDA was $5.8 million versus an adjusted EBITDA of $7.6 million in 2020. The decline in our profitability is the result of increased commissions and bonuses related to strong sales, an acceleration in our marketing and scaling spend, as well as increased headcount for future growth. This was partially offset by higher sales and gross margin improvements. Our adjusted net income for the quarter was $2.5 million. Weighted average shares outstanding were approximately $132.3 million in third quarter 2021. Subsequent to the quarter end, we announced plans to redeem our $15.3 million outstanding public warrants. On November 3rd, we completed the exercise and redemption of our public warrants, which amounted to about $185 million cash, which you will see in details in our press release dated November 8th. Turning to the balance sheet, we ended the quarter with $718.6 million in cash and cash equivalents. During the quarter, we priced our convertible senior notes offering, which we upsized to account for the strong investor demand, and successfully raised $728.7 million. With the proceeds, we purchased cap calls covering the aggregate numbers of shares that underline the notes in order to reduce potential dilution. and or offset any potential cash payments. With nearly $900 million in cash, we have the dry powder to continue to invest in our business, as well as pursue strategic acquisitions as we accelerate our initiative to capitalize on our significant opportunities in the rapid evolving beauty health industry. Now, I will share more details on our outlook for the full year. As Clint mentioned, we're raising our 2021 guidance. For fiscal 2021, we now expect net sales in a range of $245 to $255 million, barring any deterioration related to COVID-19 trends, and up from our prior guidance range of $230 to $240 million. We remain cautiously optimistic while observing select closures related to Delta variants in both APAC and EMEA regions. We're raising our adjusted EBITDA outlook to approximately $30 million, up from our prior guidance of approximately $25 million. This upward revision largely reflects our better-than-expected top-line trend so far this year, despite our ramp-up investment in increased spending on branding and global infrastructure initiatives that are accelerating our share gain worldwide. We continue to anticipate capital expenditure of up to $15 million in 2021. Our revised guidance for this year reflects our strong performance to date and solid trends that have continued into the fourth quarter. As we look beyond 2021, we're excited about the long-term opportunity across our multiple levels of growth as we capitalize on the significant opportunity in this category we created. However, given the uncertainty of the environment in which we operate and the incredible growth we're lapping in 2021, we remain cautious. We continue to face potential risks before their market closures related to COVID-19, global supply chain challenges, as well as inflationary headwinds related to higher raw material, shipping, and labor costs. Subsequent to quarter end, we have grown our delivery system install base to over 19,000. I would like to note that due to factors such as trading, trade-offs, various system price points, and our international distributor model, our total delivery system figure does not directly correlate to sales. In summary, we're very pleased with our performance so far this year. We have confidence that our proven operating model and key strategic growth initiatives will drive long-term profitable growth that will increase even greater shareholder value. With those comments, I'll turn the call back to the operator to open it up for questions. Thank you.

At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation film will indicate your line is in the question queue. You may press star 2 to remove your question from the queue. For participants using speaker equipment, it may be necessary for you to pick up your handset before pressing the star keys. One moment while we pull for questions. Our first question comes from the line of Oliver Chen with Cowan. You may proceed with your question.

And Brent and Clint, congrats on all that you've accomplished. The connected device, the 2.0 connected device sounds quite exciting. How should we think about how that may be launched throughout the year and also any guidance in terms of your thoughts on revenues in terms of the quarterly cadence? Also, the glow-and-go and the home device. We'd love to hear any initial learnings and how you're thinking about pricing and more broadly how this fits into the hydrafacial ecosystem. And then third, Leanna, modeling question. The guidance was encouraging. Was it the Americas that drove the most upside? We'd love context on that as well as helping us understand some of the factors you mentioned on supply chain and inflation and which factors may be outside of your control as we monitor those risks across the sector. Thank you.

Sure. Thanks, Oliver. I appreciate the kind words and the question. If you look at our organic growth on the hydrafacial system and our consumables, it's really been very, very solid. And those products work, and they feel good, and you get an immediate result. What we're doing is taking our technology now from analog to digital technology, And I think that's appropriate given, you know, we have over 19,000 providers out there. We're launching the Glow and Go, which is an exciting home device, really, where you can take artificial on the road with you. And so we're doing what, you know, I think best in class brands do these days, and that's connecting the consumers with our professionals, the estheticians with the company to ensure that we can meet them where they live, work, and play. The Glow and Go, we've had really good alpha and beta testing. We're super excited about it. You know, we don't have meaningful revenue in the model, so I would say that this is test and learn and to build it with our community. Project Sandeo, we're very excited and we remain on track with that product to be an H1 of next year. And as Leanne mentioned, there's going to be a lot of new product introductions. We expect a lot of trade-in, trade-off activity. And most importantly, we're just really, really excited about going to the next step in what we've committed to for the last several years in connecting the beauty health community. So, I'll turn it over to Leanne for the modeling question.

Yeah, I'll just quickly interrupt Clint, Oliver, and just say I saw the Cindeo device in the office last week, and it's slick. It's going to be a really nice new launch in the first half of next year.

Yeah, hey, Oliver. So on your questions, in terms of the guidance, you know, we actually mentioned the fact that the Delta variant really impacted some of the regions, especially with APAC. So there's that impact that we factored in as we look forward to Q4. In terms of the margin of supply chain, what we're really trying to say is for the third quarter, there's some temporary impact because as you can appreciate with all the four distributors, they have their inventory and the balance they're carrying is higher as they were functioning as the distributor. And that's going to go away as you think through Q4 and go forward. However, when it comes to supply chain, when it comes to the actual shipping cost, all of that, just like everybody else in the market, we continue to see pressure. that's going to impact us for going forward.

Thank you. And Brent and Clint, as you think about beauty health as a platform, what should we know about in terms of what's on your mind for a framework as you think about opportunities and you're well capitalized and you have a lot of expertise in terms of this major structural change with the consumerization of healthcare? Thanks.

Yeah, I think that's exactly right, Oliver. And, you know, I think as we As we've always maintained, as we think about the perfect M&A candidate or candidates, it's a product or brand with a high NPS score, Net Promoter Score. It allows us to get leverage on our call point, most specifically with the esthetician. That's someone we really want to grow with and support. We have a lot of loyalty there, and it's something that would give us a lot of leverage with our existing costs and infrastructure. And then, you know, ideally something that would add accretion to the P&L. You know, that being said, you know, obviously no deal is a perfect deal. Some deals are better deals. Some deals are not. So we're pretty fluid. But there's a lot of opportunities. We look at a lot of different things. But we don't feel any pressure. We want to do it in a very disciplined way. But we believe that that's a true growth lever for us in the future. Absolutely.

Thanks very much. Best regards.

Thanks, Albert. Our next question comes from the line of Steph Wissink with Jefferies. You may proceed with your question.

Thank you. Good afternoon, everyone. And Clint, it was bittersweet to see the announcement today. You'll definitely be missed. My question for you is, I think in the prepared remarks, the word accelerated was used a number of times regarding marketing, R&D investments, the rollout of international, the buyback of the distributorships. So can you talk a little bit about how much of the revenue upside has afforded you to accelerate the investments in the business? Any of that a pull ahead from what would have been investments in later years? And then if you think about the growth that could come behind that, where should we see the prioritization of growth? Do you expect international to be the single biggest growth driver, or are there other attributes of the model we should be watching over the next couple of years? Thank you.

Sure. Yeah, thanks, Stephanie, for the kind words. I'll handle the first part, and then maybe hand it to Brent for the second part. You know, if you remember when we merged with Vesper, you know, back last December, we thought that we were going to see acceleration. We got hit by the Delta variant closures, and I think Leanne and the team have done a great job providing guidance on how we, you know, manage through not just the pandemic, but we're thriving out of it. So what we've committed to investors is that we wouldn't spend on marketing and infrastructure and adding salespeople if we didn't have visibility to driving growth. So I think what you see in the Q3 results, hopefully you've seen in our first two quarters, is feathering in those investments, you know, really simply putting down more placements, driving the innovation to the two new products you're seeing, and we've increasingly spent on marketing and global infrastructure to get ahead of the growth. So it's very consistent with what we laid out last December when we did the pipe, very consistent with, I think, the three quarters now that we've recorded. And I think the team's done an amazing job working through what's still a challenging situation. So really good tailwinds, really disciplined expense management, being incredibly opportunistic where possible. And hopefully that's what you've seen in the Q3 results. So no pull forward on revenue, just to be clear. It's really just spending against those three pillars that we laid out back almost a year ago now.

Yeah, I think as you think about growth, I mean, I You know, one of the things I find most exciting about our company is there's so many levers of growth. And, you know, for us, as Clint said, it's about being very thoughtful and disciplined in how to invest behind those levers of growth because there's so many of them. You know, clearly international is a huge opportunity for us, and you see that in this quarter, particularly in Asia. And that's despite, you know, flare-ups in Delta variant and COVID closures. You know, new products is going to be a strong source of growth for the future. And frankly, M&A is, you know, a completely, you know, unplanned source of growth. But given the firepower we have and the cash we have on the balance sheet, that could be a huge source of growth for us in the future. Trying to predict which one is going to be the greatest, you know, is hard to say because it's like asking which kid you like the most. But clearly international is probably the most faked opportunity or the most advanced or mature opportunity for growth for us.

Thank you. That's helpful. And, Leon, can I ask one follow-up question? I think you mentioned higher pricing on delivery systems in the quarter. Help us think through some of the inflationary pressure and the power you see in your model to price into some of that inflation, whether it's on the systems or the consumable side. Thank you.

Hi, Steph. Yeah, so we actually shared that previously as well. we have a natural increase in ASP, partially because of the strong demand and really the mix. Historically, we were able to pass on cost and also increase in price, and we're certainly thinking that through as we go for next year as well. So that's truly big for the numbers, the guidance, and as we think through for the future as well.

Thank you.

Our next question comes from the line of Corinne Wolfmayer with Piper Stanley. You may proceed with your question.

Hi. Thanks for taking the questions, and Clint, it was great working with you, and you'll certainly be missed. So first for us, can you just talk a little bit about the growth and delivery systems that you saw? Is there any channel that stood out in the quarter as being stronger than others, and then how are you thinking about contributions from each channel going forward, especially as you continue to grow your various partnerships.

Yeah, that's great, Corinne. Thanks for the nice words. You know, if you think about what we've done the last three years, it's been quite a journey, but we've learned that to drive system placements, we need to drive consumer demand. So we've kind of flipped this upside down and have really worked to go from just a pure B2B play to a B2C back to B. And so I think around the world, as we're traveling with our distributors and our salespeople, we're finding that it's easier to sell hydrofacial units because more consumers are asking for it by name, and we're filling the existing ones up so people are buying multiple systems. So that's really exciting. I think it's a testament to where the brand's starting to get a really nice tipping point. In terms of the channels, they're all growing really nicely, and there's new channels emerging as we see experiential beauty health happening. That's, I think, as a result of our relationship, not just with Sephora, which is incredibly strong, but with Nordstrom's and John Lewis and Laser Centers of Australia, Really excited about these new emerging business partners. The one that's still depressed is our retail channel. And I think, you know, that is really, you know, as you see flare-ups and as you see restrictions from, you know, government restrictions. So I think if anything, the company, as we emerge from the pandemic and with the great news we've had in the last week, we should see all of these channels growing and really excited about it. It is important, though, the average high-deficient consumer, if you remember, gets treatments in 3.2 different locations. So, you know, we haven't lost those consumers. We just have moved them to different places and can't wait to help our retail partners get back on strong footing.

Great. Thank you. And then, so you've invested a ton in consumer awareness from Goldvolution Tour and social media. Is there any way that you can quantify how these investments may be translating to new customers or increase spend from your current customers? I understand it still may be early days in these, but is there any color you can provide that would be helpful? Thank you.

Yeah, well, we do know, you know, the data for the last several years has said, look, if some, you know, hydrafacial has had high single-digit awareness, when people get it, two-thirds of them stick and one-third become super consumers. So, you know, several years ago, we started the World Tour. During the pandemic, we designed that very cool semi that's called Glovolution. And what we find is whether we're in Dubai in a pop-up shop or London in a pop-up shop or one of our Glovolution stops, the data looks the same. 85% of the people that we drive to one of our physical activations have never had a hydrafacial. And upon leaving, 85%, they want to go get a hydrafacial. And so that has worked for us incredibly well. So we track the ROI on all of these events. I think increasingly the company is getting more sophisticated about the CAC to LTV relationship. but it's safe to say we wouldn't be doubling our marketing spend, particularly in these type of activations, if we didn't think it was well worth it. So we're not prepared to give the secret sauce, so to speak, but I think it's really targeted, very surgical-like marketing that drives physical sales, drives consumer awareness, and that turns into consumable sales because they're going to our placement. So it just tends to be a really great ecosystem that we found is very supportive. It's marrying the consumer awareness with great estheticians that are well-trained through HF Connect and just getting them to experience the benefits of the treatment.

Thank you.

Our next question comes from the line of John Block with Stiefel. You may proceed with your question.

Thanks, guys. Good afternoon. Maybe just to start, the midpoint of the 2021 guidance, I believe, implies a flat 4Q with 3Q. And usually we see a 4Q seasonal uplift Maybe if you could just talk to that a little bit. Is it conservatism? You know, just also talk about what would take you to arguably the high end of the range versus the low end. And maybe just as an attack on that, Leanne, is some of that a function of what you've witnessed in APAC? And are some of those APAC COVID headwinds beginning to abate here as we work our way throughout the fourth quarter?

Hi, John. Yeah, so I think there's definitely – point of view when it comes to APEC market, because that's the market that impacts us the most significantly when it comes to the third quarter. You probably saw the news as well, what happened to Shanghai DC. I think China, as a market, there's a lot of impact if the trend were to go on the worst side of the equation. We're also starting to see some ease up in Australia, but there's also other countries in APEC region. having a worsening trend. So overall, we did take that into consideration. You know, we have shared with you previously, we track our open and close pretty closely by region. So we build that into our guidance, if that makes sense.

Okay. Yep, certainly does. And maybe I'll follow up with you a little bit more offline there. Just to pivot and sort of the follow-up question, the global supply chain pressures that you guys mentioned, I don't think it impacts 2.0. I think you called it out, you know, 1H22. But Does it impact on how you roll it out? In other words, measuring the cadence of the rollout? We've done some checks, and there seems to be a really high want in the field from your current install base to possibly upgrade. So just as we think about those supply chain pressures, will you be able to fill all demand, call it new and potential upgrades, in your opinion, as early as the first half of next year? Thanks, guys.

Hey, Joe. Yeah, so as you can appreciate, you know, we're pretty thoughtful in terms of making the main delivery systems, especially we shared with you historically, we roll out, you know, call it 3,500, 4,000, right? So from a numbers point of view, while the supply chain remains to be constrained for all of us, we can plan ahead. So a lot of the real supply chain issue we're seeing, it's more when it comes to shipping or delays, more so than shortage, if that makes sense.

It's not a component issue necessarily for us. So we should be okay.

Perfect. Thanks, guys.

Our next question comes from the line of Amit Hassan with Goldman Sachs. You may proceed with your question.

Hi, thanks. This is Phil for Amit. Thanks for taking the question. Maybe my first one to follow on what John was just asking, the line of questioning. You know, we're starting to see case rates increase in parts of Europe. Some of the key countries that you all called out as areas of strength in this quarter. I'm just wondering if you can kind of follow on the APAC logic and talk about what you're seeing at this point from movement restrictions or otherwise in Europe that might be implied in the 4Q guidance. Thanks.

Yeah, John, this plan, look, as you know, I mean, we've been through the worst, hopefully the worst of the pandemic. We've managed through it. We've never let that be an excuse. We've just tried to shoot straight with the market on what our visibility is. But I think... There is no doubt that the macro terms of health and wellness and certainly the benefits that we have as macro tailwinds do not go away. So even when we see markets like Japan that shuts down or Australia shuts down, we see demand come back. And because we have such an omni-channel approach, geographic diversity, no concentration, I'm obviously going to be handing the keys over to Brent and team here, but I feel really comfortable that we've gotten very good at managing through this. So I don't think there's any reason to overthink that or to be too optimistic about it. We're giving you good guidance based on what we see out there in the marketplace.

Okay, that's fair enough. My second question was around utilization of the systems broadly. It's more of a broad question, I think, about the seasonality that you anticipate in the business going forward, but As part of the talk track today, it sounded like there were a number of factors that were kind of impediments to what would have otherwise been even stronger growth. The crude math, just treatments divided by systems, looks like a step down sequentially. Is that something that we should be anticipating going forward, that kind of 2Q to 3Q seasonality step down, and then recovery in 4Q? Is that what you all see in the underlying business, or are there some one times or otherwise that we should be thinking about? Thanks for the question.

Yes. Yes, I'll handle the high level first. As you're well aware, Q2 and Q4 tend to be stronger than Q1 and Q3. That has been a bit unusual because of the pandemic and the shutdowns, and also we have a market that's growing outside the U.S. very fast. So we're also laying down a lot of new systems, which take a while to mature. So when you're laying down a lot of new systems and you've got a little bit of an abnormal cycle because of the pandemic, I think it will normalize over time, and we'll be prepared to give you more granular information at that time.

Thanks for the question.

Our next question comes from the line of Kyle Rose with Canaccord. You may proceed with your question.

Great. Thank you for taking the questions, and I echo all the sentiments regarding Quinn's departure, so congratulations on everything you've accomplished. Wanted to maybe just touch a little bit more on the acceleration comments that I think was asked previously. The one thing, when I look back to where Guidance started the year and where we're at now, you've obviously had tremendous upside on a revenue perspective, and you've reinvested the majority of that back into the business. Obviously, you're raising EBITDA here a little bit. What I'm trying to understand is how should we think about leverage from a bigger picture perspective or over the medium term? When we think about some of the investments you're making with the global ERP and CRM system, just trying to really understand how How much is one time in nature versus going to be an ongoing expense line we should be thinking about?

Yeah, Kyle, I'll start. Thank you for the kind words. I'll start with the first part and then hand it over to Leanne. You know, from the start of this, from the pipe to the go public, we really wanted to be clear to investors that this was a growth story, that there were investments that we felt would accelerate shareholder value, and that we felt like we could set up a really nice revenue strategy and expense predictability that was heavy on investment. Traditionally, this company, or historically, has been very CapEx light. So if you remember, we agreed that we, or we signaled investors we wanted to double the marketing spend because consumer awareness drives revenue. We wanted to get the new products out because those have been stopped as we went into the pandemic. So we have two new exciting products coming. And then we wanted to build out the international infrastructure. And then we said we'd focus on M&A. So I think, you know, What Leanne and I have committed to is that for the next 18 months to really think about this being a growth story. Historically, under private equity management, we ran this at 25% to 30% EBITDA. There's no reason this company couldn't be run to really produce cash flows in that same level in the future. But this is a growth story out of the blocks, and hopefully we've delivered upon our commitments. And now we focus... on that fourth pillar. So that's the intent. I don't know, Leanne, if you want to add anything.

Yeah. Hey, Kyle. So to add to that, I think we mentioned that briefly prior. If you really think about this current year, R&D has been a pretty big focus, and we had mentioned we were buying speed, right, because we also wanted to speed up the process, accelerate it, and then we can start to test and learn some of the new product lines. I think Clint has also shared, usually we're at a three to five-year cycle when it's a really significant launch of a product, but then we're going to be active. So if you really think about this year, a big chunk of the R&D investment, you don't necessarily see the revenue until the following year. By the same token, marketing, that will continue as we see how we get a return on investment. As you mentioned earlier, you know, it's a cloud solution. There's some investment into these ERP and other space and people. We're investing heavy this year, which would really benefit, you know, the year after and go forward. We will anticipate the continuing investment, you know, go forward for the next couple of quarters. Now we should be at a pretty good position to really leverage for the future.

Thank you. That's very helpful. And then we spent some time already talking about Sandeo and Glow and Go, but I wanted to touch on just if we can go back to Caravive and Epicutis. I'm not sure if I'm pronouncing that right, but when I think about that, you're moving beyond the face into the scalp, and now you're moving into the decolletage in the neck, trying to understand what uptake has been of both of those products and just how you expect to see utilization trend from a longer-term perspective when we think about you know, moving beyond just the face and into some of those other areas?

Yeah, thanks, Kyle. I'll start with the first part. I mean, you know, I think three steps, 30 minutes best in your life. Hydrafacial has become really increasingly synonymous with kind of owning the healthy skin category. You know, we cleanse, extract, we hydrate, and I think the team's done a really nice job increasing consumer awareness about this being the first place to go. And I think beauty health is a natural extension of trying to increase that influence. If you look at the data, and I know you know this, Healthy Scalp is as big a market. Keraviv is a highly differentiated product. It works just like our skin health products in that it's an end product that makes everything else better, and Healthy Scalp is key to healthy new hair growth. So I think the team's really excited about it, and I would consider Keraviv just the first product in a portfolio of products for Healthy Scalp. Epicutis is new. I think as we look to improve the system, improve the ingredients, launched new products, you know, skin is your largest organ. It's all over your body. And so it's a really nice natural extension to the decollete. And I think the team is really excited about Epicutis, really proprietary product with really very good results. And so early days, but certainly the market data would say that if we execute upon it, it should be very promising areas of opportunity for the company. Great. Thank you for taking the questions.

Our next question comes from the line of Linda Bolton-Weiser with DA Davidson. You may proceed with your question.

Yes, hi, thank you. I was wondering if you could, I know you likely do not want to get into talking about guidance for next year, but I'm just curious if the numbers that you put out at the time of your de-stacking in terms of projections on revenue growth and EBITDA growth, Would those growth rates still hold true for 2022? Or maybe you can just kind of qualitatively discuss any differences that there might be versus what you had originally projected. Thanks.

I don't want to give Brent and the team a number that I, you know, I don't want to write a check that he can't cash, Linda. So, you know, I feel really good about what we've achieved. I feel very good about finishing the year. and transition in the business. We haven't ever had a better market position, a senior team that's reloaded, and a strategy that we're executing on some really nice new products, and a connected community. I think I'll leave it to Brent and the team on what future guidance is, but I felt it was important to deliver this company with a strong team, a strong product offering, a good market presence, and I'm sure he'll be here to provide you further guidance on it.

Yeah, I'll just chime in, and thanks, Clint. if you look at the numbers we provided in the de-SPACing or in the SPAC IPO or bridge data, we've well surpassed those. And the company is in a very strong position. We're very excited about future growth. But we're going to provide that guidance in the normal course, and we'll be doing that in the next, I guess, probably two months or thereabout.

Okay. Thank you. And... Can you comment on how churn is looking as your number of systems continues to increase? Is that churn increasing too, or is churn staying relatively stable?

So far, it's been relatively stable and consistent.

Yeah, and the next thing, if you look back, the product's been around since 2005. It's been consistent historically. So I don't think the addition of newer, higher volume production, I think, and reps Productivity should be a sign of strength of the brand, not concern. So nothing has changed so far.

And then finally, just on the M&A strategy, I was just curious if you wanted to take advantage of the channels that you're strong in. So would you consider acquisition of, say, like a Derm cosmetics brand that was distributed to doctors' offices? Or do you think you want to stick more in the device area?

Yeah, you know, I think we want to take advantage of the distribution we have. That is the call point of the esthetician, whether she's sitting in a doctor's office or a spa or a hotel or a retail channel. You know, it's really that call point. And so it could be skin care. It could be a device. It could be anything that really supports her practice and her growth. and helps her benefit her customer. That's how I think about it at a high level for sure.

Okay, thank you very much. Thank you, Linda.

Ladies and gentlemen, we have reached the end of today's question and answer session. I would like to turn this call back over to Mr. Brent Saunders for closing remarks.

Yes, so thank you, Operator. I just want to kind of end and say how pleased we are with our results for the quarter and how excited We are for our futures. We focus on executing our next phase of growth. We really thank everyone for joining us on the call today, and we look forward to keeping you all updated.

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