The Beauty Health Company

Q4 2021 Earnings Conference Call

2/22/2022

spk04: Greetings and welcome to the Beauty Health Company 2021 fourth quarter and fiscal year earnings conference call. At this time, all participants are in a listen-only mode. A brief question-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 Frankfort, Managing Director at ICR. Thank you, ma'am.
spk07: You may begin. Good afternoon, everyone. Thank you for joining the Beauty Health Company's conference call to discuss the company's fourth quarter 2021 financial results, which we released this afternoon and can be found on our website at investors.beautyhealth.com. Also available on our website is an investor presentation that will be referenced during this call. With me on the call is Brett Saunders, Executive Chairman, Andrew Stanleck, President and 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 underlining assumptions. Forward-looking statements are based on expectations that involve risks and uncertainties that could cause casual 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 margin. Reconciliation of these non-GAAP measures to the most comparable GAAP measures are included in the earnings release furnished to the SEC and available on our website. I would like to turn the call over to Brent Saunders, Executive Chairman of the Beauty Health Company.
spk02: Thank you, Dawn, and good afternoon, everyone. Thank you for joining us for a discussion of our fourth quarter and full year 2021 results. I would now like to formally introduce Andrew to all of you and welcome him to the Beauty Health team. We are honored to have him join the company at such an important time in our history. Andrew's track record of success Extensive knowledge of the beauty and luxury retail industries, digital marketing expertise, and international expertise are invaluable as we expand the beauty health category and build our platform. I'll briefly turn the call over to Andrew.
spk01: Thank you, Brent. Good afternoon, everyone, and thank you for joining us today.
spk05: I joined the company just over two weeks ago, and I want to start by thanking all the team at Beauty Health for the warm welcome that I have received. I have spent my first two weeks on a listening tour, meeting associates and customers, and what has struck me is the palpable excitement that everyone shares regarding the tremendous opportunity ahead of us. I am proud to join this talented team and excited to lead the next step of the journey in this category-creating company. I join at a pivotal moment in the company's growth trajectory, and I am fully aligned with Brent and the board's strategic growth initiatives and thrilled for the opportunity to execute against this dynamic strategy the team has implemented. By way of introduction, I am a beauty industry veteran with over 25 years of experience in beauty and luxury retail, specializing in brand development, digital transformation, and multi-channel distribution, including D2C. I am a global citizen, having lived in eight countries across four continents including seven years in Asia. I started my career at Unilever in sales and marketing before spending 13 years at L'Oreal. I then spent five years leading Coach's business in Southeast Asia Pacific and Europe before joining Coty in 2017 to run its Europe business. Over the last four years, I led Coty's America consumer beauty and luxury divisions. Additionally, I served as the global CEO for Coty's joint venture with Kylie Jenner's beauty business, and I helped Kim Kardashian West oversee her KKW beauty business. I am grateful and honored to be the Beauty Health CEO at such an exciting time for the company. I look forward to leading the next chapter of growth as we build upon our impressive platform and global community. And with that, I will now turn the call back to Brent.
spk02: Thank you, Andrew. I would like to thank our employees, providers, and the global beauty health community who remain resilient and passionate about our products and services. This community is key to our performance, and we will continue to invest in and nurture its growth. During today's call, I will provide details on our fourth quarter and full year 2021 performance. I will then turn the call to Andrew to discuss our growth strategies and 2022 guidance. Leanne will follow with more details on the fourth quarter results and our 2022 guidance. To start, I want to spend a moment on page five to highlight the key takeaways from our results. First, our significant net sales growth demonstrates the strength of our brand. We are very pleased that we exceeded our guidance, growing by 118.3% compared to 2020, and 56.2% compared to 2019. This marks four quarters of beats despite the pandemic. Second, our fourth quarter gross margin expansion of 1,210 basis points on a gap basis and 870 basis points on an adjusted basis showcases our ability to generate fixed cost leverage on our infrastructure investments and rapid net sales growth. Third, the planned execution of our strategy remains in place. We are thrilled Andrew is our CEO and he is aligned with our existing strategy, ensuring a smooth transition. He will take you through our master plan in a moment. Fourth, the growth opportunity remains significant. We remain as enthusiastic as ever about the opportunity ahead of us. Andrew and Leanne will walk you through our outlook in more detail. Lastly, 2022 is expected to be our final investment-focused year in which we build the global infrastructure needed to fully capture the opportunities in front of us. We are pleased with the progress of our build and expect to begin to realize the benefit of these investments next year. Turning to our financial results for the quarter, net sales were $77.9 million, marking the fourth consecutive quarter of a beat and a 56% increase compared to the fourth quarter of 2019. Our growth was primarily driven by performance in the medical channel, where the end of the calendar typically simulates high activity as providers exhaust what is remaining of their capital budgets. In the non-medical channel, we saw Sephora, our number one customer, reopen and offer perk by Sephora, and we expanded our presence in the channel via partnerships with Nordstrom and Ulta. Adjusted EBITDA was $8.5 million, driven by strong net sales growth, gross margin expansion, and disciplined expense management. We drove our fourth quarter performance with strategic investments, including selectively spending on digital marketing initiatives, investing in Hydrafacial Connect, and hosting a Globalution event in New York City. All of these initiatives drive greater connections between our consumer and providers, creating the virtuous cycle of community engagement and long-term sustainable growth. Importantly, we also wrapped up the foundation for a digitally connected community, preparing our new delivery system, Cindeo, for imminent launch. Cindeo represents a crucial milestone in our path to meaningfully evolve the consumer and provider experience, and I look forward to sharing more updates in the future. Overall, we are incredibly proud of our accomplishments this quarter, and are even more excited about the opportunity ahead. I will now turn the call over to Andrew, who will walk you through our strategy for 2022 and beyond. Andrew?
spk05: Thank you, Brent. I'd like to turn to page six of our presentation, which contains our master plan. We are a category creator. We deliver beauty health experiences, reinventing our consumers' relationship with their skin, their bodies, and their self-confidence. Our master plan is built upon five strategic growth initiatives that I will walk you through now. First, we plan to expand our footprint by selling innovative products and connected experiences to our beauty health community. Tyndao means connect in Greek, and this product is a milestone for us in connecting our community. The imminent launch is a significant technology upgrade from our existing hydrofacial delivery system, evolving from an analog, to digital by collecting data to fully understand consumer and provider behavior. With this data, we'll have meaningful opportunity to boost engagement and utilization by storytelling, branding, and gamification. Second, we're investing in our providers as we enhance the overall consumer experience. A great demonstration of this pillar is the Hydrofacial Connect, a unique activation and engagement program that empowers beauty health professionals to expand their knowledge of our products and experiences, industry and marketing. We will continue to invest in this initiative and others to turn our providers into brand evangelists and advocates providing first-class experiences to consumers. Third, we are nurturing our relationship with consumers to build awareness and drive them to our providers. We will pursue high ROI investments within our golden triangle of sales, marketing, and training to catalyze our presence in B2C channels and expand our reach to consumers where they live, work, and play. These investments to bolster our trusted community include a focus on our growth marketing efforts, where I intend to leverage my extensive networking experience to build campaigns in paid social, influencer, and content marketing. We'll supplement these efforts with events in hydrafacial experience centers globally and Glovolution. both which have proven efficient in generating awareness. Fourth, we are building the global infrastructure to support our growth ambitions and connected platform. Similar to last year, we refer to 2022 as a heavy investment year, as we complete the infrastructure build needed to support the significant growth opportunity ahead of us. These investments create degrees of operating leverage we plan to capture to accelerate our profitability in the future, Next year, we will focus on climbing towards our historical adjusted EBITDA margin levels. Finally, M&A. In the few weeks I've been here, I have grown increasingly excited about the potential acquisition opportunities available to us. We will use M&A in a disciplined manner to expand our platform, focusing on financially accretive, differentiated products that leverage our beauty health community. At a high level, we believe this strategy translates to another year of double digit growth in 2022, with net sales expected in the range of 320 to 330 million. We expect adjusted EBITDA in 2022 to approximately 50 million. Leanne will discuss our 2022 financial guidance in greater detail shortly. In conclusion, I am very excited about leading this company and where we are heading. the platform is well-positioned to capture the white space between medical, aesthetics, and skincare. With the imminent launch of Cinder, we will seamlessly connect our beauty health community, bringing a level of visibility into consumer and provider behavior we have never had before. Combined with a multi-channel and growth marketing focus, we are setting ourselves up for a memorable 2022. I will now turn the call over to Leanne for a discussion of our fourth quarter performance and additional details on our financial outlook for 2022. Lian.
spk08: Thank you, Andrew. And thank you, everyone, for joining us this afternoon. Before I discuss our fourth quarter results and full year 2021 results, I want to officially welcome Andrew. I'm thrilled he has joined the team and know his global leadership expertise across beauty and luxury, as well as his innovative and proven digital marketing capabilities will be critical as we build beauty health for the next stage of growth. I also want to thank our dedicated team across the globe for their continued hard work. Our success in 2021 would not have been possible without the commitment of our employees and providers. I will discuss our fourth quarter results, touch on our balance sheet, discuss our full year 2021 highlights, and close with details on our 2022 guidance. Note that I will make sales comparisons to our fourth quarter of 2019. as we believe it is a more relevant comparison due to the COVID-19 related market closures in 2020. Before discussing fourth quarter and full year 2021 results, I wanted to take a moment to provide a brief overview of the hydrafacial business model as shown on page eight of our presentation. We employ a razor blade model, and we start by selling a delivery system, the razor, and associated consumables, the reservoirs, to providers. As providers perform hydrofacial experiences on consumers, they exhaust their supply of consumables and reorder, driving growth in our consumables revenue segment. The purchasing decision for delivery systems generally boils down to three reasons. The most common reason is providers buying their first hydrofacial delivery system. Second, they see our existing providers return to us to purchase additional systems so they can increase the volume of hydrofacial performed in their practices. Last, we also have providers treating other branded delivery systems or upgrade their previous generation delivery systems for the current model, which we call treat-ups. Treat-ups have historically represented low single digit percentage of delivery system sales for the year. I'd like to spend a moment to explain the key performance indicators at the bottom of this page, which we plan to disclose quarterly going forward. We use these KPIs internally to measure the health of our business. First is our delivery system ASP, or the average selling price of a system sold during a given period. Second is delivery system sold, which measures the number of systems sold during the given period. Third is our install base. which measures the number of systems actively performing hydrofacial treatments. As disclosed in the press release, we sold 6,191 delivery systems in 2021, compared to 4,080 in 2019, an increase of over 50%. Our install base stands at 20,399 as of December 31st, 2021. I will now turn to our fourth quarter results on page nine. As Brent mentioned, We're very proud of our strong performance this quarter and how we navigated the headwinds related to COVID. Our results for the quarter and full year further demonstrate the strength of our platform, as well as the diversification and flexibility in our business model. Our products and experiences continue to resonate worldwide, driving strong performance across geographies again this quarter, even in APAC, where select markets were closed. On the top left of the page, you will see net sales of 77.9 million increased 105.6% from last year's COVID impacted sales of 37.9 million and up 56% from 49.9 million in fourth quarter 2019. This meaningful increase was driven by growth in our delivery system, which expanded our install base to 20,399 as of the end of the quarter and continued growth in our consumables. We sequentially increased the quarterly number of delivery systems sold throughout the year, totaling to 6,191 for 2021. It is the highest number of systems sold in the year in our history. Now I'll share a few details from our three regions. Fourth quarter sales in America's region increased to 50.4 million compared to 26.9 million a year ago and grew 47.5% from 2019. Our strong performance in the U.S. was driven by continued increase in our sales productivity, fueled by strong conversions from our marketing-driven leads. Our last stop of Govolution in New York also helped fuel the growth. Furthermore, we're encouraged by growth in LATAM, where we're pleased to now be directing parts of this market through the acquisition of our distributor in Mexico. We also saw growth from other distributor regions and are encouraged by the early trends we're seeing in Brazil. EMEA generated fourth quarter net sales of $15.5 million versus $6.1 million in the prior year and expanded 84.2% from the fourth quarter in 2019, driven by strength across our key markets, especially Germany, the UK, France, and Spain. In EMEA, our fourth quarter digital marketing campaigns yielded strong results, as did our pop-up events in key markets. Turning to APAC, our net sales of 12 million increased almost 147.3% compared to 4.8 million in 2020, and 64.1% from the fourth quarter of 2019, primarily driven by growth in China and Australia, even in the face of restrictive COVID lockdown. While we have seen sequential improvement from Q3 to Q4 of 14.2%, countries such as China, Japan, and Australia continue to enforce citywide shutdown The restrictive lockdowns continue into January and February, especially in China, with its zero-tolerance policy as it prepares for the Winter Olympics and the busy Chinese New Year travel period. Despite the temporary COVID headwind, China remains a key strategic market where we see significant opportunity. In Japan and Australia, we see promising trends and loosening of the restrictions in February. We're continuing to focus on our system rollout in APEC, building commercial infrastructure, and expanding our presence in the medical and non-medical channels. Overall, demand remains strong across all channels and geographies. Awareness of the hydrofacial brand continues to improve as we expand our footprint and build upon our marketing initiatives. We're well-positioned to capitalize on the strong global interest in beauty health and further expand the category we created. I want to briefly touch on the seasonality pattern of our business with a chart on the top right of the page. As a reminder, our historical seasonality usually starts with a low Q1 and sequentially builds up to a high volume Q4, which is historically driven by year-end capital expenditures in the US medical channel. Sales in the first quarter typically show a sequential decline in the mid to high single-digit range from Q4 due to lower productivity related to the post-holiday period and field marketing activation events in January. The sequential growth returns in the second and third quarters as we ramp up our marketing spend. The fourth quarter is usually our biggest quarter for the year, as the trends I previously mentioned serve to boost our productivity. As shared previously, marketing investment has a direct correlation to sales, especially with digital and event-driven promotions. The bottom right chart shows our adjusted EBITDA by quarter throughout 2021. Given the pandemic, we did not invest into marketing until the second quarter when vaccines became more widely accessible. We saw a significant buildup in Q3 and ramped it back down in Q4 given Omicron surge. Excluding any COVID impact, the underlying growth trend continues to be very strong across all regions. Quarterly comparisons versus 2019 quarters is not indicative of future growth trends given the growing mix of non-medical channels, global expansion, distributor acquisitions, and COVID impact on 2021. On the bottom left of page 9, our GAAP growth margin was 72.9%, up from 60.8% last year. On an adjusted basis, our growth margin expanded 870 basis points year-over-year to 76.5%, as we generated fixed cost leverage, improved selling prices for our delivery systems, and continue to pick up margin in the regions where acquired distributors. This was partially offset by higher supply chain and logistic costs. I am now turning to page 10. While enhancing our margin structure is an important focus, we expect global supply chain headwinds and inflationary pressures to weigh on our margins in 2022. We anticipate higher shipping costs continuing throughout the year, partially offset by an accretion in margins related to acquired distributors as seen in Q4 2021. SG&A expenses in the fourth quarter were $62.1 million compared to $26.9 million for the fourth quarter of 2020. Breaking this down, selling and marketing increased by approximately 5.6 percentage points to 47.6% of sales, compared to 42% in the fourth quarter of 2020. This increase was driven by greater sales commissions, increased global marketing spend, and higher personnel-related expenses as we grow our sales force across the globe to feel future growth. We continuously assess our marketing initiatives to maximize the efficiency of our spend. Similar to prior COVID surges, we selectively reduce our marketing spend in certain markets based on severity throughout the quarter. Additionally, we continue to invest in training programs, such as Experience Center Training and Global Connect programs. We will continue to focus on optimizing our investment in sales, marketing, and training, particularly as we launch Sundale. Touching our R&D, we invested $1.9 million in the fourth quarter of 2021, compared to $0.9 million in the prior year, as we invest in our product development and innovation pipeline. As previously mentioned, innovation is a key tenet of our strategic investment philosophy, enabling us to create differentiated products that drive rapid expansion and share the beauty health market opportunity. Our G&A expenses of $25 million, the increase in G&A expenses was driven by $3.8 million of non-cash stock-based compensation, non-payroll-related public company costs of $1.5 million, which includes B&O insurance, stocks compliance, and additional audit and tax-related services, as well as higher personnel-related expenses due to increased global headcount. We expect such public company costs to continue. During the quarter, we increased our investment in building our international infrastructure. As previously shared, we successfully rolled out the first phase of our global ERP platform in November, including CRM and new B2B and B2C platforms, The global ERP increases our agility and improves productivity by leveraging technology. We will continue to expand and integrate our ERP globally over the next few quarters. In addition to the gap measures discussed, adjusted EBITDA is an important profitability measure that we use to manage our business internally. For the quarter, adjusted EBITDA was $8.5 million versus an adjusted EBITDA of $3.6 million in 2020. The increase in our profitability was a result of higher sales and gross margin improvement, partially offset by increased commission bonuses, elevated marketing and scaling spend, and higher headcount. And now onto the balance sheet highlights on page 11. We ended the quarter with approximately $901.9 million in cash and cash equivalents. At this level of cash, we have ample dry powder to support our rapid expansion, as well as pursue a disciplined M&A approach that capitalizes on the significant opportunity between aesthetics and beauty in this large and growing category. During the quarter, we completed the redemption of our outstanding public warrants, eliminating a remnant of our SPAC. After accounting for the results of this redemption, we have approximately 7 million private warrants outstanding, the vast majority of which are held by Brent and the rest by others from our initial investor group. We continue to carry 750 million in convertible notes on the balance sheet. We raised this debt in the third quarter of last year to have dry powder for strategic acquisition, among other uses. While the conversion price of the debt is $31.76, we used a portion of the proceeds to enter into a cap call purchase agreement that protects against dilution up to a stock price of $47.94. During the quarter, we closed the $50 million revolving credit facility for our U.S. operations. The use of proceeds for this line of credit is to fund our short-term working capital requirements and general corporate purposes. The facility allows for the flexibility to pursue M&A, and does not encumber our OUS operation. Our convertible nodes are excluded from its leverage covenant. The undrawn commitment fee of the facility is less than $200,000 per year. Finally, weighted average shares outstanding were approximately $146.3 million in Q4 2021, and our current share outstanding is approximately $150 million. Flipping to page 12. We're very proud of what we accomplished in 2021. Since going public in May, we went direct in seven new countries, including acquiring four distributors, added $892.4 million in cash to our balance sheet, implemented phase one of our global ERP system, began global network optimization with sourcing, production, and logistics, had 10 research analysts launch coverage on our stocks, and delivered four quarters of revenue beat as we increase the business momentum and gain near-term clarity amidst the pandemic. We finished the year with 260.1 million revenue, a 56.2% increase from 2019, 74% adjusted gross margin, and 850 basis point increase from 2020, 32.7 million in adjusted EBITDA. While we historically averaged 3,500 to 4,000 delivery systems sold per year. In 2021, we sold 6,191 new delivery systems, a company record and remarkable performance in light of pandemic-related closures. Our install base currently sits at 20,399 delivery systems and we remain excited about our ability to expand our footprint in the future. Turning to page 13, I will now share more details on our outlook for 2022. For the year, we expect net sales in the range of 320 to 330 million, barring any deterioration related to COVID. While we are beginning to see a waning impact from the Omicron variant and remain cautiously optimistic, we do expect pressure from select market closures during the first quarter, particularly in APAC. This pressure has been factored into our 2022 net sales guidance. We're providing an adjusted EBITDA outlook of 50 million. We continue to expect our investments to remain elevated this year as we build our platform for future growth. Next year, we believe the benefits of these investments will position us for future growth while we focus on optimization to our profitability, climbing towards our adjusted EBITDA margin levels. I will now touch on some of the key drivers behind our guidance. We plan to launch Sundale in the first half of 2022 and anticipate a high single-digit ASP increase on our delivery systems and consumables. As we have mentioned, a key initiative is a profitable land grab in rolling out delivery systems. In addition to expanding our footprint, we also anticipate a portion of our providers will upgrade their existing delivery systems to Sundale. While the ASP on upgrades is lower than the ASP of new delivery systems, The unit economics on upgrades remain profitable to us, and we expect the sales from upgrades to be accretive to EBITDA and earnings. We anticipate a temporary potential low to mid-single-digit impact to our gross margin due to lower ASP if we experience an elevated mix of delivery system sales from upgrades. On the cost side, we're not immune to global supply chain challenges and inflationary pressure on raw materials, shipping, and labor costs. Lastly, we anticipate capital expenditure of up to 20 million in 2022, as we continue to build our regional headquarters, expand our global network optimization and technology platforms. In conclusion, we're extremely pleased with our performance for the fourth quarter and full year 2021, and we're excited about our momentum heading into 2022. 2021 was a historic year for us, and we look forward to taking advantage of the compelling growth opportunities in 2022 and beyond. With the proven flexibility of our business model, we're confident in our path to drive shareholder value for years to come. I will now turn the call back over to the operator for questions.
spk04: At this time, we'll be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation 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 poll for questions. Our first question comes from the line of Oliver Chen with Cowan. You may proceed with your question.
spk03: Oliver Chen Hi. Thank you very much. Great quarter. Hi, Brent, Andrew, Leann. Andrew, as we look ahead, unaided awareness is a big opportunity. What do you see as the opportunities in terms of marketing spend and investment, particularly as you think about Asia? Would love your thoughts on regions as this intersects and also longer-term marketing as a percentage of sales. And then, Brent, would love your thoughts on M&A. I know Beauty Health Company has a special relationship with estheticians. Your thoughts on what you're seeing in the marketplace now and also a framework for what might be most synergistic, and I had a follow-up for Leanne. Thank you.
spk05: Oliver, thank you. It's Andrew. I'll kick that off and then hand off to Leanne and Brent. If we break your question down, I think firstly, you're absolutely right. One of my key observations on my listening tour during this first two weeks is that, you know, actually the team have a great strength in terms of sales and education, and I would argue In my experience, it's best in class. Also, I've seen a real capability in that event marketing, as we've seen with the Glovolution. But the opportunity to grow awareness is significant. And I think that's where I see the biggest opportunity. And we'll be building up our capability in terms of digital marketing, the team and capability. And in terms of investment, I think we're happy with the investment we have. I think we're going to look to allocate that in different areas, which really drive the awareness. I sense coming into this, and I said this to Brent and the board during the interview process, I feel with Hydrofacial, we're set on the the biggest secret, the best kept secret in the beauty and wellness industry. During my interview process, I did a lot of due diligence, spoke to many people. And like me, I've been in the industry all my life. And many of us have not heard about this fantastic brand. But when you experience it, you really get it. And our conversion rate is very high. So obviously, it's a major opportunity. I think I'll hand over to Leanne to talk in more detail about the rest of the questions.
spk08: Actually, I think, Andrew, you have addressed it. And the only thing I'll add, Oliver, is as you know, even for 2021, we said we were going to double down on marketing. Historically, we invest about 6%. We were committing 12%. But given the pandemic, we're really dialed down in Q1 and we're dialed down in Q4 because when you have a variant, it just doesn't make that much sense. So we actually did spend less than that 12%. That's still a really good target. So to Andrew's point, it's really a matter of reallocating the capital. So, Bryn, I'll hand it to you, other Oliver's questions.
spk02: Yeah, Albert, you want to just repeat what else? A question?
spk03: Yeah, I'm curious about M&A and the market environment and also key synergies and a framework, you know, for how you're approaching what's ahead with that journey as beauty health as a platform. Thanks.
spk02: Yeah, so, you know, we've been pretty active evaluating targets. We were last year and we continue to to do that this year. I think what's starting to change is, frankly, the reason we haven't done one yet, which is valuations. So last year, we were seeing very high expectations on valuations, and in many cases, outlandish. And as you know, we are a very disciplined team. We are starting to see some green shoots of people recognizing that the markets probably aren't what they used to be. and valuations are starting to come in line. The IPO alternative is not as attractive as it used to be. So I think that's good. We have a couple of things that we're evaluating, as we always are. And Andrew's starting to get deep into it as well. And so it's great to have another strong mind looking at these things. But we're going to stay disciplined. We're going to continue to follow our criteria of looking for things that have a high MPS score that that allow us to leverage our current distribution capabilities, i.e., the estheticians in large part, and something that would be accretive to our financials and our growth. So, you know, those are our criteria, and we have lots of opportunities, and we're going to continue to stay very focused and disciplined.
spk03: Thank you very much. And, Leanne, just to follow up on modeling, how should we think about consumables relative to delivery system growth? And as we Think about your forecast. What about the number of units relative to ASP? And what's embedded roughly in terms of how many people may upgrade to Sundeo? Thanks a lot for any detail.
spk08: Yeah, no, absolutely, Oliver. So this is a really important year, obviously, as we launch Sundeo. Directionally speaking, you know, as we have shared, you know, I have mentioned, we always thought that consumables should be running ahead of delivery systems. But as you see, our number one strategy is actually profitable land grab. So you can see, you know, even for 2021, despite the pandemic, we deliver over 6,000 versus historical 3,500 to 4,000 systems. So with that in mind, that remains to be number one priority of ours. So for our own modeling purposes, we're still assuming that 50-50 split. In terms of ASP, you know, directionally speaking, what we have mentioned is a high single digit rate for both of the delivery systems and the consumables. So that would be a safe number to use as we model out the ASP. I think the final question that you had raised in terms of how do we think about the upgrade cycle? So this is why we're trying to emphasize the fact that when it comes to trade-offs, it will be accretive to both of the top line and the bottom line. And we will really test and learn to see how many of our key customers that purchased the last 12 to 18 months choose to upgrade with us. So really, the way we think about it depends on the percentage of penetration of the upgrade. Let's say if it's a low single-digit historical, then you're talking maybe a low single-digit impact to gross margin percentage or AST. But really, it's a creative, again, to EBITDA. But let's say a quarter of the delivery system that we sell are actually, you know, trade-offs, and they're really recent purchase trade-offs. Then you might have a risk running to a 5% impact to the gross margin percent. But it's all accretive. It's above and beyond, you know, kind of what we assume in our guidance and model.
spk03: Thank you very much. Best regards. Thanks, Alva.
spk04: Our next question comes from the line of Bruce Jackson with the Benchmark Company. You may proceed with your question.
spk12: Hi, thanks for taking my question. It's a nice quarter. I just have one question on the manufacturing side. Some other industries are experiencing chip shortages. I'm wondering if you can get an adequate supply of parts for the new delivery system, and are you going to be able to meet demand?
spk08: Hey, Bruce. Great to hear your voice. Yeah, so we actually tried to address this previous day as well. Because we're a growth company, because of the fact that we're launching a brand new system, our approach has been just purchasing ahead. So we have been buying ahead, use our capital to secure all the parts that will be required as we launch the system this year.
spk12: Okay, great. And actually, I might sneak in one more question on capital deployment. Obviously, you've got an active M&A program going right now. what are the other potential uses for capital deployment and then how would you prioritize those?
spk02: Yeah, so maybe I'll take a stab at that. Look, capital allocation is a critical part of how we think about our business and our responsibilities. Clearly, you know, we're in growth mode and we have an amazing platform in Hydrofacial. And we have, you know, from day one, I've been very open with our investors that we plan to do M&A to take advantage of this distribution capability that we have and this great brand and capability of our team. That being said, we evaluate that against all other alternatives, and those alternatives include things like a buyback. And so anything that we look at in the M&A category has to be evaluated against buying our own stock as well. That being said, the preference is for growth and the preference is to invest in M&A, but the standard and benchmark has to be looking at the alternatives and seeing what's the right thing for all of our shareholders.
spk01: All right. Super. Thank you very much.
spk04: Our next question comes from the line of Corinne Wolfmayer with Piper Sandler. You may proceed with your question.
spk10: Hi, thanks for taking the question from the quarter and welcome Andrew. I'm looking forward to working with you more. So first I wanted to touch on what you've been seeing throughout the early parts of the first quarter here. I know you did mention a little bit on typical seasonality trends, but have you seen anything specific in terms of traffic flow related to Omicron? We haven't heard much impact from that in our checks, but just curious what you've been seeing.
spk08: Hey, Corinne. It's Lian here. So I would say, you know, when you look at our regions, you know, we continue to see the similar trend with high demand when it comes to personal care, especially for Americas and EMEA regions. When it comes to APAC, I think we kind of emphasize that. That's the only market, you know, we've been sharing with you guys since Q2 is the approach that the governments take are different compared to, you know, Americas and EMEA. So that trend continues, especially when it comes to China. The government continues to take a stand of being very disciplined about shutting down cities. So that's the only thing that we truly observe that's continue being impacted by COVID.
spk02: You know, I do think we're going to start to see China open up a bit more. Obviously, they're opening up to foreigners and others. So, you know, we'll take it as it comes. But it's completely baked into how we think about the year. And we've been pretty flexible and nimble in just trying to manage through that. We've gotten quite good at it, unfortunately. It's not something you ever wanted to, but we're quite good at it.
spk10: Awesome. Thank you. That's really helpful. And maybe this one for Andrew. I know we've talked a lot about the marketing strategies for the year, but Can you just provide any further detail on what you plan to implement once we start hitting the ground running here in the next couple months? You have a lot of good experience with influencers and stuff like that, so just any further detail on what you plan to implement over the next couple months, couple quarters?
spk05: Sure. Hi, Corinne. It's great to speak to you. Yeah, I mean, just two weeks in, and as I mentioned earlier to Oliver, I think we've got really strong capability in product, innovation, distribution, education, and in the events. I think where I'm working with the team now to pivot is in terms of, you know, how we're using our digital influencer marketing to really drive brand awareness. And it's really focused on our critical launch, which is the launch of Cyndia, which is our new delivery system, which we're imminently about to launch. And I'm really impressed with that technology in these first few weeks. It's new, better, different than anything else on the market. It's a real leap forward in experience and technology. I describe it goes from analog to real digital experience. And of course, that's going to give us so much more data. It connects the consumer, the provider, the efficient, of course, the the company, which will enable us to be a lot more nimble and agile in the way we market and drive awareness and engage with our consumers in future and also measure consumption. It's going to give us a proximity to measuring the business, which we've never had before. So it's really exciting. But my key back to your original question, my key objective is really raising the awareness because we're so confident in the technology. We're so confident in the education. and the skills of the opticians community that we can convert the user.
spk01: We just got to get them crossing that threshold and coming into the experience.
spk10: Thank you.
spk01: Thank you.
spk04: Our next question comes from the line of Amit Hassan with Goldman Sachs. You may proceed with your question.
spk11: Hi, this is Phil on for me. Thanks for taking the question. I wanted to dig back in a little bit more on guidance and the split between delivery systems and consumables. Leigh Ann, you emphasized the 4,000 systems annually a couple of times during this call, but very clearly blew through that number this year. And the guidance from our standpoint looks pretty similar, 6,000 plus systems next year to be able to get to the numbers. I'm just Wondering if you want to update that and provide a different outlook with this much stronger kind of infrastructure that's been built over the last few years, guidance kind of going forward for system placements as we move ahead.
spk08: Yeah, no, absolutely. I think, you know, when we think about the number one strategy initiative is truly rolling out as many systems as possible, right? The fact that we're actually hiring more folks around the globe truly also have that in mind. So a great point in a sense, we are sequentially improving in productivity every quarter on the number of systems being rolled out. And, you know, we fully expect that trend or the push to continue.
spk05: And if I can just add, and thanks for the question, I think, look, I'm a new CEO. We're a relatively new team and public company. And, you know, we take the commitments we give on guidance very seriously to our investors. So, you know, we're absolutely laser focused on delivering on those commitments. And I think, you know, you can expect us to be very straightforward and clear going forward. Thank you.
spk11: Yeah, that's a great follow-up, Andrew. Thanks for that color. If we flip over to the consumable side, I think it's sort of the opposite. It still seems like treatments per system were a little bit repressed due to movement restrictions and the other things going on kind of from a broader macro landscape. So it looks like this year, you know, your consumables are likely to exceed the revenue that's going to be generated from delivery systems, even in kind of an upside scenario. So I'm just interested sort of what's embedded from a treatment per system standpoint in your model moving forward. Is that something that you expect to exceed what we saw in 2019 before the pandemic hit? Thanks so much for the question.
spk08: Yeah, absolutely. The team is focused on really driving that utilization and, you know, that engagement. To your point, from a performance point of view, those are all the key elements of the strategy we're focusing on. We anticipate, you know, driving at a minimum a similar level of the utilization barring any of the pandemic impact.
spk01: Okay. Thanks all for the question. Thank you.
spk04: Our next question comes from the line of Olivia Tong with Raymond James. You may proceed with your question.
spk06: Great. Thanks. Good afternoon. And congrats, Andrew. It's nice to speak with you again. Perhaps you want to start just talking about what you think are perhaps the greatest immediate opportunities for the beauty health company in your view. And then with respect to the Cindeo launch, are there new third-party relationships you're bringing in to help leverage the data you'll now be collecting? How do you work that into, you know, a potential digital social media enhancement strategy? Just would love a little bit more detail in terms of the benefits that 2.0 offers and how you plan on leveraging that. Thank you.
spk05: Hi, Olivia. Thank you. And it is great to speak to you again. Look, it's been a great and intense first two weeks. And, you know, first of all, I'm really focused on and full alignment with the existing strategy the team had in place. So I think the focus now, of course, is on accelerating that and executing it flawlessly. And I think me picking up the reins is a continuation of that strategy. I think in terms of priorities, the number one priority for me and the team is really ensuring a flawless launch of the new Cinde delivery system. Cinde, as I mentioned earlier, means connected in Greek, and it's our top priority. Then we're going to really focus on expanding our footprint to more doors. And obviously, that system gives us a level of connectivity and visibility through its connectedness with consumers, providers, and estheticians, which will really help drive other aspects of our business. I think secondly, the other key opportunity I see, and the company has real competitive advantages here, is with the training and education. That is a really key lever in developing our trusted esthetician community and turning them into brand evangelists and advocates, you know, influencers per se. I think there's much more we can do to really amplify their voice. The third one is, is really, is both expansion in the U S but also geographic expansion. I, you know, I feel we're really under penetrated. When you look, you know, if you take just the U S market for one example, and in just one channel of the U S which is the medical channel, Today, you know, a brand like Botox, we estimate to be in about 40,000 points of distribution. When you consider today that globally, globally, hydrofacial is only in 20,000 points of distribution. Just in that channel alone, we have significant opportunity. And of course, there's the non-medical, what we've been doing in spas, hotels, gyms, our partnership with Sephora. We have pilots in Nordstrom and Ulta, which is really exciting. And then, of course, the geographic expansion and having spent so much of my life living in many markets, including the seven years in Asia, I see just a huge opportunity there. We're very nascent there. In fact, we're really just getting going outside of the U.S. for the development of this brand. So geographic expansion is a really big opportunity. Fourthly, and Leanne mentioned this earlier on the call several times, it's about building up our global infrastructure and connected technology platforms to really fuel the growth and community engagement we need. Part of that, of course, is increasing our talent base. And Brent and Leanne have been doing that in the last few months. We've appointed leaders in both EMEA and Asia to help fuel that growth. And obviously, we talked about this earlier. The fifth sort of priority and opportunity is M&A. And as Brent has already mentioned, we're going to really take a very disciplined approach to ensuring that we identified A brand or product is both accretive and complementary, so we can really derive the synergy from our existing fixed cost base. So plenty of opportunity.
spk01: It's a really exciting time.
spk06: I think that's helpful. And then the focus on growing the systems is clearly paying dividends, but as a few have touched on already, the consumables growth hasn't quite accelerated to the same extent. So what gives you guys the confidence to price on consumables And then just broadly, your thoughts in terms of, you know, the mix of product going forward, the range of product in office versus in retail versus in home as you, you know, clearly the focus in the near to medium term is on Zendaya, but clearly there's other products that you're looking to sort of diversify or at least enhance, excuse me, the product portfolio with. I'd love a little bit more detail there.
spk05: Absolutely. So why don't I kick off on that one? In terms of the consumable trends, look, based on my experience, and I recently, of course, left a big beauty company, we're really sure from the conversations we've had with providers and statisticians is that the trend and sellout on those products is predominantly just impacted by the impact of COVID and Omicron. And as we see markets opening up, we see those trends improving. So we're quite confident in the trend, which we spoke to earlier, and embedded in the guidance. And, of course, as we go forward, if we just focus on consumables, you know, again, using my experience, I see a major opportunity to expand our offering in this area. There's a number of gestures and treatments which we could bring in to complement the really strong portfolio we have. Then more widely, and I spent time in the first two weeks working with the R&D team, and we have a very impressive facility Here in Long Beach, our R&D and production, by the way, we'd be lovely to host you here. But I think, you know, when we look at the portfolio and the innovation pipeline, I think there's a couple of things which really spring to mind. Of course, we've got hydrofacial we can offer there. But we've all seen and you've seen that with the growth of peer companies, the major opportunity with hair and scalp care. Post-COVID, that's become a major part of people's self-care regime. We have a fabulous product. I really believe it's new, better, different with Keraviv. There's much more we can do to really grow that, both in the U.S. and globally, especially in Asia, where scalp treatment is so key. Our focus now is in there, but absolutely, that will be something which we really get behind in the coming months ahead. Also, we continue the glow-and-go model. the take-home product, which we've been piloting, and we continue to review that carefully. That's another opportunity. Plus some other things in the pipeline, which I'm not ready to talk about today, but the portfolio is strong.
spk01: Great. Thank you, Bester Block, and look forward to seeing you. Thank you.
spk04: Our next question comes from the line of John Block with Stiefel. You may proceed with your question.
spk00: Thanks, guys. Good afternoon. Andrew, maybe on that last point, is there anything on glow and go that's reflected in the 2022 guidance? I wasn't just sure, you know, crystal clear on that. Maybe you can just comment on that. And then just, I know you're out there, you're piloting it. Maybe talk to us about the learnings so far on glow and go, anything that you want to convey on pricing in terms of feedback from the field. Thanks.
spk05: John, thanks for your question. So yes, in terms of Glow and Go, we haven't included it in our guidance. This is a true pilot, test and learn. And we obviously continue to roll that out. I only want to launch something which we're really confident will be new, better, different than anything else on the market. I'm not ready yet to talk about pricing. It really is in the early stages of testing. And I saw my first review of it last week. Leanne, anything to add on your side on this?
spk08: Nope. Hi, John. I think that covers it.
spk00: Okay, great. And then just for the follow-up, some numbers that I'll just throw at you. But, you know, I thought the, I don't know, I thought the 2022 adjusted EBITDA guidance was really impressive. And I calculate 25%, the 25% of the incremental revenue is expected to drop down to EBITDA in 2022. And that seems like a really big number in light of the investments that you're still putting into this business. And then, Andrew, I think in the press release, you talk about growing into your historical adjusted EBITDA margins, maybe as early as 2023. So just to be clear, what did you consider historical to be? And are we looking at a business that even with these investments, you might see an adjusted EBITDA margin north of 20% next year, next year being 2023? Thanks for your time, guys.
spk05: John, thank you. So I will start and then hand off to Leanne. I mean, In summary, you know, 2021 and 2022 are big investment years. You'd expect that with the launch of a completely new delivery system. And these happen every three to four years. That's the rhythm of our business. But it is, you know, as we said in the press release, and I think we talked earlier on the call, as we get to 2023, Absolutely, we expect the investment to provide that synergy and start on that journey, that multi-year journey to get back to historical levels of EBITDA. Liane, anything to add?
spk08: Yeah, thank you, John. I think, you know, obviously we'll provide that guidance as we're getting closer to 2023. But if you recall, John, historically speaking, obviously it's a different model under private equity. We were generating over 20, you know, 25% EBITDA. Suffice to say, the heavy investment that we're making, a lot of that are core infrastructure and people and system costs. A lot of these will have great leverage once we sell more when it comes to, you know, raising top line. So, directionally speaking, this is a very profitable business. So, we're just head-on executing.
spk01: Thank you, guys. Thank you.
spk04: Our last question comes from the line of Margaret Cascore with William Blair. You may proceed with your question.
spk09: Hey, guys. This is Maggie Bowie on for Margaret today. Just wanted to ask her a question on the revenue guide. So you guys are assuming a first half launch of the next-gen system. So what is assumed in this guide for the progression of the launch in terms of timing and priority of new and existing accounts on a global basis?
spk08: Mike Nygren, And Maggie i'm going to let me and take that one hey Maggie so for you know, we have shared that you know us will launch. Mike Nygren, followed by the rest of the market and we have also shared that ASP direction will go up high single digits and those are the levers that we have used to build out our model.
spk09: Okay, got it. Thank you. And then just one last one. Given the impact of COVID, particularly in the APAC region, does this impact your plans for international expansion during 2022, if at all? And then what's assumed in the guide here, just in terms of execution on that international expansion? Thank you.
spk05: Thanks, Maggie. No, I think our plans remain absolutely unchanged. And I think I talked earlier on the call that we see both, you know, growth in the U.S. in terms of expanding our footprint in new doors with Sodeo, increasing productivity, and thirdly, geographic expansion is, you know, three major tenets of our strategic growth plan. And it's, you know, full steam ahead with those plans.
spk08: Maggie, the only other thing I'll just add is we've always been very surgical in terms of how we hire. We kind of expand in range, right? Like we usually go pretty deep in each geography. so that we continue to go with that approach as we expand internationally. Okay, great. Thank you.
spk01: Thank you.
spk04: Ladies and gentlemen, we have reached the end of today's question and answer session. This does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation and enjoy the rest of your day.
Disclaimer

This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.

-

-