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spk07: Ladies and gentlemen, good morning and welcome to the Beauty Health Company third quarter 2022 earnings call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. To withdraw your questions, please press star, then two. Please note this event is being recorded. I would now like to turn the conference over to Eduardo Rodríguez, Senior Director of M&E and Investor Relations.
spk03: Please go ahead. Thank you, Operator, and good morning, everyone.
spk15: Thank you for joining the Beauty Health Company's conference call to discuss the company's third quarter 2022 financial results, which were released this morning and can be found on our website at beautyhealth.com. Also available on our website is an investor presentation that will be referenced during this call. With me on the call today are Beauty Health President and Chief Executive Officer Andrew Sandlich and Chief Financial Officer Leanne Wu. Before we get started, I would like to remind you of the company's safe harbor language. 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 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 margin and adjusted EBITDA. 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 will now turn the call over to Andrew. Thank you, Eduardo.
spk09: Good morning, everyone, and thank you for joining our 2022 third quarter earnings call. Over the next 30 minutes, I will update you on our successful quarter of top line growth and the progress we have made across our strategic master plan. Leanne will then walk you through the financials in more detail before we take your questions. As always, I want to start by recognizing and thanking the exceptional beauty health teams and community around the world. Our performance reflects their passion and commitment to living our purpose each day, building confidence for our consumers, providers, partners, and employees. As you will see from our results, our community remains loyal and highly engaged around the world, craving that confidence-boosting hydrafacial glow. We continue to execute against the strategy we previously communicated, and we're investing to build our infrastructure for scale to drive long-term growth and margin expansion. Together, these factors underscore the strength of our resilient business model, and I'm confident in our outlook. I'm pleased to report that we once again delivered ahead of top-line expectations, marking this the seventh consecutive quarter of doing so. I am especially proud of our team for delivering these results despite a difficult macroeconomic environment and headwinds such as FX pressures and the unexpected persistence of the zero COVID policy in China. I will get into that a little bit more detail later. Even against this complex macro backdrop, we saw positive momentum in both delivery system and consumable sales, producing net sales of $88.8 million, up 30% year-over-year, one of our strongest quarters on record. We also reported quarterly adjusted EBITDA of $16.5 million in the period. We achieved mid-double-digit top line growth in all three of our operating regions. Year-over-year, the Americas region grew 30%. APAC increased 44%, and EMEA was up 21%. Based on our progress, I am pleased to announce we are raising our 2022 net sales guidance to a range of $360 to $365 million. Since we last spoke, two key macroeconomic factors have become magnified. The U.S. dollar index has reached a 20-year high. When compared to FX rates at the start of 2022, the stronger U.S. dollar has created an $8 million year-to-date headwind in our foreign direct market. Second, China recently renewed its commitment to a zero COVID policy. As we have stated previously, we conservatively modeled a gradual reopening in China to occur in the back half of this year, and invested in the local infrastructure to capture the anticipated demand. Unfortunately, an even more conservative scenario is unfolding, with market closures and restrictions in China continuing to persist. Despite this, our APAC team delivered 44% net sales growth year over year. In the near term, we remain cautiously optimistic about China's reopening. We are monitoring the situation closely and expect to prudently manage additional investment in the market. Longer term, the market continues to be a focus for our growth strategy. Given these developments, we are taking a measured approach to revise our 2022 adjusted EBITDA outlook to a range of $45 to $50 million. We have an agile business model and we remain cautiously optimistic in our ability to achieve 50 million in EBITDA. But we believe it is responsible that we update our guidance to a range reflecting these macroeconomic challenges. Once markets normalize, we have strong fundamentals in place to capitalize on the demand and capture profitable growth. Looking ahead, we still expect to drive year-over-year adjusted EBITDA margin improvement and our overall three-year plan as discussed during our investor day. Turning to slide six, we continue to make progress against our five-point master plan. First, our strategy to expand our footprint and increase consumer access to hydrofacial is working. Moving to slide eight. Fueled by Cinder's US sales momentum and strong global demand, we have sold nearly 6,500 delivery systems year-to-date, already eclipsing 2021's record year with one quarter still to go. I want to take a moment to highlight our pricing initiatives. So far this year, we have realized a 7% increase to our average selling price when compared to 2021. This is despite having over six times the number of lower-priced trade-ups when compared to 2021, with credit to the launch of Cindea. As we have stated previously, we remain on track to realize a high single-digit average price increase on delivery systems for the year. On the consumable side, you'll remember from last quarter's call that we instituted a mid-single-digit price increase in the U.S. in May. We have not seen any deterioration in demand as a result. In fact, utilization has improved year over year despite China's closure, and we are pleased with the top-line performance in what is usually a seasonally slower quarter. We expect to take pricing on consumables and systems in Europe in the fourth quarter. Turning to slide nine, we continue to see a healthy growth throughout our omnichannel network as we seek to meet consumers where they live, work, and play. A significant portion of consumers get their hydrafacial at med spas, a channel that continues to show healthy consumer demand and no signs of a slowdown. We also continue to expand our hospitality and retail presence, key channels for broadening our brand visibility and bringing new consumers into the community. In the hospitality space, we entered our first one hotel location in Kauai, Hawaii, We also expanded to iconic hotels like the Mandarin Oriental in Hong Kong and the Addition in Miami Beach. During the quarter, Hydrafacial launched in Sephora's first store of the future in Singapore. We plan to expand this important and growing partnership further across Asia. As you know, we are already in every Sephora door in the U.S., with recent additions in Canada. In Germany, we launched in Douglas' luxury flagship in Düsseldorf, Germany's beauty and lifestyle hub. We also expanded to new locations with existing retail partners, such as John Lewis throughout the UK and Galerie Lafayette in France. Moving to slide 10, our providers are central to our success and are among our most influential brand ambassadors. Over many years, we have cultivated a unique and growing Hydrafacialist community. Our estheticians are the heart of our brand and one of our most powerful assets. This community would be extremely difficult to replicate. We continue to show our commitment to esthers and look forward to welcoming even more talented estheticians to be part of the hydrafacial nation. Skincare specialist jobs are among the fastest growing occupations in the US, projected to grow 17% by 2031. This job growth mirrors accelerating consumer skincare demand and further validates our investment in our vibrant community of STs. In fact, recently we shared our commitment to our providers in a big way. In a love letter to Hydra Facelifts on National Esthetician Day, we hosted a beautiful billboard in Times Square, honoring our esthetician partners on the big screen and generating 1.4 million impressions in just two days. On slide 12, our growing and loyal community of professional estheticians continues to drive brand awareness, earned immediate value and utilization. We are proud to be one of the world's top educators of estheticians, training more than 35,000 globally online and across our 13 experience centers around the world. In addition to evangelizing existing providers through our proprietary HFX training courses, we also have curriculums at aesthetic schools to induce student estheticians to our brand. I'm proud to say that Hydrafacial currently features in the curriculum at more than 80 of the top aesthetic schools in the US, including Aveda Institute and Paul Mitchell School, with plans to significantly expand that footprint around the world. The third pillar of our master plan, we continue to invest in initiatives to drive brand awareness. Our 8% aided brand awareness represents our biggest opportunity for growth. This initiative is critical to unlock and improve utilization as we continue to rapidly expand our in-store base. Moving to slide 15, our marketing investments are creating results. We saw continued momentum with increasing consumer interest in the quarter. Earned media values continues to shatter historical performance with 2022 year-to-date already surpassing 2021's total EMV. Additionally, our worldwide Google search has trended meaningfully upward over the last two years. In October, we officially launched the highly anticipated Hydrafacial Booster Partnership with J.Lo Beauty. Together, we developed an efficacious booster, which has been incredibly well received by our consumers and providers. It created an incredible buzz across social media, and early results are encouraging. The J-Lo Booster was our most successful booster drop yet, with pre-sales selling out on the first day and impression numbering in the hundreds of millions. The J-Lo Booster exemplifies our strategy in action. We offer unmatched treatment optionality to providers and consumers, broadening our brand's reach and awareness worldwide, while maintaining our position at the forefront of innovation, skin science, and consumer relevance. In addition to the JLO Beauty Booster this quarter, we expanded our booster strategy and further hydrofacial leadership as a truly unique platform of personalized skincare solutions. With around 20 boosters to choose from, every hydrofacial treatment is fully customizable for all skin types and needs. You'll have seen our latest partnerships announcements in just the last few days with skincare leaders Dr. Dennis Gross and Glyto. We are also leveraging cutting-edge science to create a novel exosome booster, announced earlier in the third quarter, to address signs of aging and inflammation in the skin. The efficacy of our booster formulas and treatments is gaining industry recognition. Our Hydrafacial by Murad clarifying booster, launched in the second quarter, has been named the best pro-facial for acne by Cosmopolitan Magazine. No other company offers boosters and the level of personalization that Hydrafacial provides. It is a unique differentiator and offers us a clear competitive advantage in the industry. Moving to slide 18, we continue to build excitement for our brand outside of the provider's offices. Following the success in the US, we expanded our Glovolution tour to APAC and EMEA for the first time in 2022. These differentiated, experiential marketing events create excitement and fandom among consumers and providers alike and are strengthening our brand. This quarter alone, we took Glovolution to 15 cities across the world, reaching millions of new consumers in the process. We are moving towards an immersive approach that leverages pop-ups, our footprint of 13 experience centers globally, and multimedia for an adaptable and agile 360-degree activation format. As appetite for our differentiated operating continues to grow globally, we are expanding our global infrastructure capabilities and leadership to meet increasing demand. You can see some of this progress on slide 20. Last week, we appointed David Aquino as Executive Vice President of Global Operations, leading production, supply chain, quality, distribution, and logistics. And I'm pleased to welcome David to the beauty health team. We also continued investing in operational initiatives and infrastructure that we expect to deliver future leverage, including progressing on the expansion of in-region production in China, furthering our value engineering efforts, and building IT infrastructure to fuel future growth. Moving to M&A on slide 21. M&A does not happen in a vacuum, and we are committed to creating value for shareholders through disciplined capital allocation. whether that be by M&A or opportunistically buying back our stock. At the end of September, our board authorized a share repurchase program of up to $200 million, of which $100 million was deployed in an accelerated share repurchase program. The buyback decision was taken part of a larger disciplined capital allocation strategy, and we continue to maintain a strong cash position to pursue opportunistic M&A. M&A remains a priority.
spk01: You'll recall our M&A criteria on slide 22.
spk09: Opportunities that provide a differentiated product or service with a high net promoter score. Brands or services that are complementary to our existing platform and community, leveraging the esthetician core point. And investments that are financially accretive with a compelling revenue growth and profitability profile. Our M&A philosophy remains unchanged from what we outlined at Invest Today. prioritizing responsible and prudent capital allocation. Finally, before I turn it over to Lian, I want to thank again our teams around the world and reiterate how proud I am of what we accomplished in the first nine months of the year. The global macroeconomic environment and dynamic COVID-19 situation in China present challenges that are not unique to beauty health. With the bulk of our investments nearly completed, we remain confident in the ability of our team to continue to execute on our master plan. With that, I will now turn the call to Leanne for a more detailed discussion of our third quarter results.
spk08: Thank you, Andrew. And thank you, everyone, for joining the call. I would also like to thank our dedicated teams and partners around the world for delivering this quarter's results. We exceeded top-line expectations for the seventh consecutive quarter. and we navigated a volatile global environment. The underlying momentum across our business continues to grow, and the team is laser focused on delivering profitable growth, despite the complex macro environment. Today, I will discuss our third quarter results, balance sheet highlights, and our outlook in a bit more detail. Let's start with our net sales results on slide 25. We delivered net sales of 88.8 million, up 30% year-over-year. This was driven by continued strong global demand for delivery systems and consumables. As a reminder, the third quarter tends to be seasonally slower due to summer holidays, and we typically ramp up to our biggest quarter of the year in the fourth quarter. Note that we view our seasonality trends on a normalized basis, which would exclude revenue associated with elevated trade-up demand such as what we saw in the second quarter this year with the U.S. launch of Sundale. Turning to our regions on slide 26, we drove double-digit growth across all three of our regions year-over-year. In America, we grew 30% year-over-year, driven by the continued success of Sundale placements. In APAC, we grew an impressive 44% year-over-year, despite seeing only small re-openings in China during the quarter and a headwind from FX rates. This demonstrates our team's resourcefulness and resilience in China to continue operating the business in a very difficult environment. I will touch more on this strategically important market in a moment. Outside of China, we saw continued strength in markets across the APAC region. EMEA grew 21% year over year, despite a meaningfully strengthening dollar, which negatively impacted our top line by approximately $3 million, and roughly $2 million of lost opportunity in Russia compared to last year's third quarter. Andrew and I had the opportunity to visit EMEA during the quarter and remain optimistic about the region's outlook. From Paris to London to Frankfurt, our providers all mentioned seeing increasing demand for medical aesthetics, but no signs of slowing demand in their practices. we will diligently monitor this region, responding as market conditions warrant by exercising our flexibility with strategic investments. Briefly touching on our KPIs on page 27, we shipped 1,860 dealer systems in a quarter. As expected, we saw less pronounced trade-up levels without additional promotions, consistent to our historical experience. we ended the quarter with an install base of 24,473 delivery systems. Lastly, the average selling price, or AST, of a delivery system in the quarter increased to 25,947. As Andrew mentioned, we increased pricing across delivery systems and consumables in the U.S. As a reminder, we guided to a high single-digit blended AST increase for 2022. Moving to slide 28, we reported a gap growth margin of 69.3% or 75.1% on adjusted basis. These margins increased by 174 basis points and 355 basis points year over year on a gap and adjusted basis respectively. Primarily driven by fixed cost leverage associated with higher volume and stronger realized delivery system pricing, partially offset by headwinds from global supply chain challenges inflationary pressures and FX rates. Further, adjusted growth margins benefited from a one-time write-off primarily related to the discontinued Glow and Go pilot program. As we mentioned in September, we're underway with our value engineering efforts, such as localized manufacturing and supply chain optimization, with some savings expected to flow through towards the end of the fourth quarter. Moving to the bottom right, we reported adjusted EBITDA of $16.5 million for the third quarter, which was driven by strong demand for Sundale in the U.S. and Elite internationally. Fixed cost leverage associated with higher volume and stronger real life delivery system pricing partly offset by the impact of FX rates, supply chain headwinds, sales commissions associated with higher revenue, and net increase in the personnel-related expenses. This brings our year-to-date EBITDA up to $31.4 million. I will now turn to slide 29 to touch on our updated outlook. As Andrew mentioned, we raised our guidance for net sales to a range of $360 to $365 million, up from our previous guidance of $340 to $350 million. The continual momentum in delivery system placement and strong demand from consumers worldwide are the drivers behind the race. partially offset by a slower than expected reopening in China and FX headwinds. As you know, we employed an intentional strategy of guiding to a $6 amount for 2022 EBITDA to allow for outsized investment into global infrastructure for future growth. Year-to-date, those global expansion investments have totaled $20 million, much of which is fixed, including hiring talent across our 16 direct markets and opening new experience centers in Shanghai, Singapore, London, Paris, and Frankfurt. As you heard from Andrew, our guidance previously anticipated gradual reopening of China throughout the second half of 2022. With China's renewed commitment to its zero COVID policy at the party congress in October, we now expect markets in China to remain restricted longer than originally anticipated. Despite this, we remain bullish on the long-term growth opportunity China represents for our business. In addition to China's lockdown headwinds, we have observed a year-to-date FX impact of approximately $8 million to revenue as measured in constant currency, which flows through to meaningfully impact EBITDA. As a result of these macroeconomic factors affecting our ability to generate operating leverage, we are revising our EBITDA outlook to a range of 45 to 50 million for 2022. As Andrew mentioned, while we remain cautiously optimistic in achieving 50 million EBITDA, we believe it is responsible to update our guidance to reflect these macroeconomic challenges. I will emphasize that we continue to execute against these headlines under our agility-oriented model. Upon completion of elevated investments to build scalable infrastructure, our goal and strategic focus were shipped to creating margin expansion. As mentioned in September, we expect operating leverage from our investments to drive year-over-year improvements in adjusted EBITDA margins. As a team, we're maniacally focused on our commitment to achieve profitable growth. I will now turn to slide 30 to walk through our cost details. Breaking down the OPAC items, selling and marketing expenses in the third quarter were $39.8 million compared to $30.5 million in the quarter last year, primarily driven by sales commissions associated with higher revenues, increasing planned marketing programs, and a net increase in personnel-related expenses. The increase in selling and marketing expense was partially offset by a $2.6 million reduction in accrual for estimated bonus expenses which were originally accrued at 200% of target amount. As a percentage of sales, selling and marketing was 44.8% of net sales, in line with last year's third quarter of 44.7%. As Andrew mentioned earlier, we constantly evaluate our marketing initiatives to maximize the ROI efficiency of our spend. We also continue to invest in our training programs, such as those hosted at our experience centers and our Hydrofacial Connect program. Compared to 19.2 million last year, our third quarter 2022 G&A expenses of 23.8 million primarily reflect increases in professional fees and expenses associated with our continued hiring to build scaled global infrastructure, including stock-based compensation and recruiting fees. The increase in G&A was partially offset by a 2.9 million reduction in the accrual for estimated bonus expenses, which were originally accrued at 200% of target amount. We anticipate higher G&A expense in upcoming quarter, given the extensive services related to our SOX testing and the completion of our global ERP implementation by January 1st, 2023. Moving down to R&D, the 2.2 million expense is consistent to our run rate trend for the past several quarters. I will now move to our balance sheet, highlights on page 31. We ended the quarter with roughly $684 million in cash and cash equivalents. As Andrew mentioned, we deployed $100 million in the share buyback during the quarter under an ASR. We also continue to invest in inventory to position ourselves to meet expected demand. With the build serving as a hedge against potential supply chain bottlenecks, and the anticipation of launching Zendale internationally the first half of next year. With our cash balance, we remain well-capitalized to execute our growth initiatives while keeping strategic M&A opportunities actionable. Our $750 million of 1.25% convertible notes until 2026 remain on the balance sheet. As we shared previously, we raised the capital for M&A among other capital allocation initiatives. Our 50 million revolving credit facility remains end drawn. Finally, our current shares outstanding approximately 143.2 million. This figure reflects the retirement of approximately 7.7 million shares initially delivered to us in connection with our ASR, representing 80% of the estimated number of total shares to be repurchased under the program. As a reminder, we have board authorization for an additional $100 million of share repurchases. In closing, I'm proud of what we accomplished in the first nine months of the year. Quarter after quarter, this year and throughout its history, this business has proven resilient during volatile macroeconomic environments. We continue to remain confident in our ability to execute our strategy to deliver profitable growth. Andrew and I will now gladly take your questions.
spk02: Thank you very much.
spk07: We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Ladies and gentlemen, please limit your questions to one per participant. Should you have a follow-up question, we would request you to rejoin the question queue.
spk02: The first question comes from Oliver Chen from Colvin.
spk07: Please go ahead.
spk14: Hi, Andrew and Leigh Ann. Great quarter. As we think about your guidance, what's embedded for what you're seeing in America's in Europe, and on the China side, what risk factors are you monitoring? It sounded like you're incrementally cautious given the dynamic situation there. As a quick follow-up, as we model marketing as a percentage of sales, just the near-term view on that and longer-term, there's a big awareness opportunity. I know you're balancing that relative to spend. Thank you very much.
spk09: Good morning, Oliver, and thank you for joining the call. I mean, firstly, I'm extremely proud of what the team has achieved in Q3. You know, we achieved our second highest revenue quarter, increased utilization, record levels of EMV, and continued strength in Google Trends. And all this despite, as you raised, the macroeconomic environment, FX headwinds, the war in Europe, and, of course, the persistent lockdown. in China. And that said, as we look to Q4 to answer your question, we're taking a very measured view. The new news since we spoke at Invest Today is, of course, the macroeconomic environment deteriorated at an accelerated pace, with the new news, of course, which was China's decision to adopt an even stricter zero-COVID policy when we forecast a gradual reopening. That said, we achieved 44% growth in China last quarter, in APAC last quarter. In those windows of when China reopened, we saw the business bounce back very rapidly. So it gives us a lot of confidence when it does open up. For Europe, and Leanne and I have just recently turned from an extended trip in EMEA, we were extremely pleased to see the buoyancy of the consumer and demand. We met providers across England, the UK, France, and Germany, and again, very, very buoyant consumer and provider. And the U.S., another tremendous quarter plus demand. 30% strength of the consumer, strength, continued strength of Syndia, which gives us a lot of confidence. We're seeing absolutely no slowdown. Having said that, we're mindful of the near-term impact of macro pressures. So we've updated our FY22 EBITDA guidance for Q4 to reflect these related risks in a, I would say, measured manner. However, we remain cautiously optimistic to achieve the $50 million and confident, certainly, to land in the range we've given. Leanne, anything to add?
spk08: Yep, absolutely. Hi, Oliver. So just to double-click on your point, It's been a balancing act, right? On one hand, we absolutely need to invest in buying speed, as we discussed previously. We've seen some of these return on investment, especially when you see the improvement on brand awareness, that really will benefit us in the long run. We also had mentioned, you know, we did invest in APAC and EMEA as we turned these distributor purchase from last year into direct and continue to really feel growth for the future. So I think as a team, we feel very strongly about the future growth. At the same time, though, we're being cautiously optimistic given the condition in China. You are seeing limited opening, right? That's actually feel that 40% growth in APAC. Suffice to say, you know, we've seen it again and again post the first round of pandemic, how strongly APAC bounced back. You know, with a 200, 300% growth. So I think the team is ready and we are, you know, we have the muscle to pull the lever up and down. One thing to really emphasize is on the investment for marketing. You know, we did invest for Q3 heavily in marketing. On one hand, raise consumer awareness. On the other hand, double down to make sure we get the leads so we can feel growth for the fourth quarter. So, suffice to say, for Q4, we will naturally ease off marketing investments to make sure we finish the year strong.
spk02: Thank you. Best regards. Thank you. Thank you. The next question comes from Corinne Wolfmayer from Piper Sandler.
spk07: Please go ahead.
spk06: Hey, good morning, Andrew and Leanna. Congrats on the quarter and thanks for taking the question. I just like to ask quickly about the cadence of delivery system sales that you saw throughout the quarter. Is there any color you can provide on, you know, maybe was it heavier towards the front end of the quarter? Was it heavier towards the back end? How has that been trending here in the early parts of Q4? And then has there been any impact on the interest rate environment here? Thank you.
spk09: Good morning, Corinne, and thanks for the question. I'll kick off and let Leanne add. We've seen actually consistent demand across the quarter in all regions, actually. Of course, APEC was, of course, impacted by the opening and closing and opening and closing. in China. But across that, we've seen very robust demand, no slowdown. And of course, in the U.S., we continued with the rollout of Cindea very strongly and prepared for our international launch of Cindea in overseas markets in the H1 of 2023. Leanne?
spk08: Hi, Corinne. To answer that question, you know, in this medical device business, it's usually, you know, a quarter and heavy. And any given month, because of the way we generate our leads, usually is month and heavy as well, especially on the medical device side. That's just the way our seasonality and rhythm works. Obviously, we haven't seen slowdown, as Andrew mentioned, in the U.S. market. We're very encouraged as we continue to visit our providers, and the sentiment seems to be strong, given the type of consumers we service.
spk02: Thanks. Thank you.
spk03: The next question is from the line of John Block from Stifel. Please go ahead.
spk11: Great. Thanks, guys. Good morning. First one, just a little detail, but I think I heard, Andrew or Leanne, you call out FX impact of $8 million on the top line. Is there just an EBITDA number you can give us? I don't know, $2 million, $3 million? It seems like we're getting caught up on $2 million, $3 million in EBITDA, so just curious if that's all FX-related. And then let me just ask about the phasing of 2023 for EBITDA, because I think it's important to maybe try to clean that up as best as possible. Should we expect sort of a repeat of what we had here in the U.S. in 22? In other words, call it a back-and-weighted 23 EBITDA number, because you're going to launch in DAO internationally. That usually means a little bit of a gross margin hit. You've got the upfront launch costs associated with that. So I'm not asking for the guide per se, but maybe just importantly walk us through the the phasing or the cadence based on that international Cindea launch? Thanks, guys.
spk08: Hey, John. Good to hear your voice. I'll start with the phasing. I think, you know, suffice to say, we have that seasonality we've shared prior. We always have a strong Q4 and then followed by sort of a drop for seasonality for Q1. And then from there, you know, Q2 is a build and then drop slightly in Q3, usually because of the summer holiday. Then finish with a strong Q4, you know, as we shared at the investors day. I think from an EBITDA flow through point of view, it very much follows that cadence. And especially you have to invest earlier in order to see the leads you generate from all the marketing activity to flow through to fill the sales. So in that vein, you're absolutely right, John. When you think about Q1, obviously you're going to enjoy less of the leverage point because of the revenue construct. And usually the EBITDA is lower for Q1. It builds a little bit for Q2. And you have to keep in mind, if we're launching Sundale globally, you're going to see almost a little bit of the repeat of the trade-off dynamic, which is going to impact our growth margin once we launch. And then it's going to come down a bit in the second half of the year. But we usually still invest a bit more for marketing. Then we let that flow through. So as a result, you usually see the strongest EBITDA flow through in the fourth quarter of the year. Back to the constant currency comment. Because of the way we record keep, a lot of the expenses are burdened on the US side. So when you think about that true flow through for our international market, the flow through is very significant. So, you know, obviously, you can almost see it as a 40%, you know, percent plus flow through because of the way we're constructed, if that makes sense.
spk11: Yeah, so 3.5 million on the 8, you know, 40% call it, roughly, 3, 3.5.
spk02: Thank you, John. Thank you. The next question comes from Margaret Kegson.
spk05: Hey, good morning, everyone. Thanks for taking the questions. I wanted to talk a little bit about kind of the growth that you're seeing in impressions. Obviously, incredibly good traction that we're seeing there. And that's partly driven on the marketing spend. But as we move into, I guess, 2023 and beyond, you know, can you talk about the leverage that we should expect to see here? You know, what should the FX impact be on the top and the bottom line? You know, rough math based, again, on what we see today. And I guess as we look at the long-term guidance provided at the analyst day, has anything changed, you know, between now and at that point in time? Thanks, guys.
spk01: Good morning, Margaret.
spk09: Thanks for the questions. I mean, first of all, I'll kick off. Address your last point first. We remain fully confident in the, you know, the strength of our underlying business fundamentals, which we presented at the Invest Today. And, you know, which we've just demonstrated, you know, This by raising our guidance for the full year as a proof point for the continued strong demand and utilization we're seeing. And of course, as you mentioned with the impressions, it's being fueled by an investment we're making in marketing to drive utilization, as well as the new booster partnerships, which we have with J-Lo, the ones we've announced this week from Glytone. and Dr. Dennis Gross. So our long-term plan remains firmly on track. And I think it's important to note our revised EBITDA guidance does not reflect a demand or profitability problem. Rather, the guidance reflects just this potential of temporary macro pressures blunting our operating leverage. And as we said, we remain really cautiously optimistic about our ability to achieve 50 million EBITDA guidance this year. I'll let Leanne add in more detail.
spk08: Thanks Andrew. Hi Margaret. So on the point of currency, you know, we've been exploring hedging programs this year, but as you know, there's a lot of uncertainty in terms of the direction of the currency. So I think the team is laser focused on how do we come up with natural hedge, right? Making sure the expenses are matching even more for the revenue for all of these international local market and continue to explore potential for, you know, hedge programs as well. So as a result, you know, given the currency shift, it's difficult to foresee what is the impact, but we're proactively managing that ahead.
spk02: Thanks. Thank you. The next question comes from Alan Gong from J.P.
spk07: Morgan. Please go ahead.
spk00: Hi, guys. I had a quick question on the top line. You know, it's been really great to see that capital momentum has really continued at, I would say, a pace quite a bit stronger than initially contemplated. But when we really think about the underlying consumable pull through, you know, I think there is an understanding now that there is a bit of a delay, especially with Cindeo, where you offer a free quarter or so of consumables along with the initial sale. But even stripping out, you know, some of the strong Sandeo sales you've had so far this year, it does look like consumables are lagging a little bit behind expectations. You highlighted that you're continuing to see, you know, strong demand from the end consumer. So I guess could you dive a little deeper into why the consumables haven't really caught up as much as would be implied by your install base?
spk09: Morning, Ellen, and thanks for the question. You're absolutely right. I mean, we're extremely proud of Q3. It's actually our second highest revenue quarter. And you're right, we increased utilization despite, you know, China being pretty much locked down and as well as, you know, the war in Europe and the impact there. So despite that, and of course, as you rightly pointed out, with the launch of Cinder, we give away the starter pack to get our providers going. So despite all of that, utilization still increased. So I think we're really actually happy with that. And of course, with the investments we're making in marketing, the new booster portfolio, which we've launched, that will continue to increase. Leon, if you have anything to add.
spk08: Thank you. Hi, Alan. Just to double-click Andrew's point, as we shared with you, yes, every single new system we sell, including the treat-ups, we have provided one quarter worth of consumables. In addition to that, as we sell more second systems and multiple systems, we often see those takes even longer time to ramp up. Because imagine they've already got a machine or two at the practice. Now they're adding additional ones. So we usually see a quarter to two quarters lag. This is why as we really laying down a lot of systems, it takes time for the consumable to catch up around the globe. I would also say the way we measure, we're actually trying to figure out the proxy based on the true utilization rate. So based on that true utilization rate, we actually did see slight improvement, especially for the market that's not negatively impacted by closure like China or Russia was part of the equation and now it's not. So with that said, we continue to measure progress and this is why we're investing in brand awareness because by definition that also helps with utilization in addition to expanding in boosters and other types of consumables. So the team is on it to continue to improve utilization. Thanks.
spk00: Got it. And then, you know, a quick follow up. I want to click a bit more on 2023 as well. You know, you provided an 18 to 20 percent target for just the next year at the recent analyst day. As you've highlighted, macro pressures have gotten worse. Currency, you know, has continued to get worse as well. And if currency is going to reflect an incremental headwind of this year, then it's only fair to assume that for part of next year, it's likely to reflect the challenge as well. So when I think about that 18 to 20 percent, how should we think about that? framed in terms of these ongoing challenges.
spk09: Aladin, thank you. We remain absolutely committed to the 18 to 20%. For a few reasons, you'll recall this year, 21 and 22 have been what we've discussed many times over the years, our years of elevated investment. As a new public company, we've made all those investments to bring us up to SOX compliance, to set up the 3PL networks, to set up in-region manufacturing in China, to set up the teams around the world, the ERP, the systems. Many of those investments are one-offs. In fact, we've been paying double for them this year. If you can imagine our 3PL in Europe, We already had an existing partner. We've created a new one. We're double paying. None of those investments will be made repeated next year. So there's a number of one offs this year, which will give us leverage next year. We're, of course, monitoring the situation in China very closely. But we are, you know, at some stage it will need to open up and we'll be ready to capture that growth quickly. when it does. In the meantime, we have other levers which we can manage very maniacally in terms of our variable expense. So we remain committed to our 18 to 12% EBITDA guidance for 23.
spk02: Thank you.
spk07: Reminder to the participants to please limit your questions to one per participant. Should you have a follow-up question, we would request you to rejoin the question queue. The next question comes from Ashley Helgin.
spk04: from jeffries please go ahead hi thanks for taking our questions um we're starting to see some signals of a trait of a trade down in some beauty categories we're just curious if you're seeing any of this for hydrafacial and then any details you can provide us on traffic during the quarter trends throughout the quarter and maybe anything quarter to date thanks so much
spk09: Good morning, Ashley, and thanks for your question. I'll start with your question on traffic. I mean, traffic, there's always seasonality in Q3, particularly in EMEA. This summer, compounded by the extreme hot weather and many people taking extending holidays following the COVID lockdown. So we really saw it build over the quarter. In EMEA, of course, APEC was up and down, mainly linked to China. Outside of that, traffic remained very strong. And in the Americas, and particularly in the US, in the Americas, we grew 30%. Traffic has been and continues to be very robust. I mean, Leanne and I spent a lot of time visiting providers all over the world, and especially in the US recently. and there is no signs of a slight impact. In terms of trade-down, we haven't experienced any of that for hydrafacial, but actually, we gain because typically in 60% of our businesses in the medical channel, doctors, plastic surgeons, et cetera, by far, we are the lowest cost service in a physician's office. So actually, as we saw in 08, 09, when this company was private, our business actually benefits from trade down for more expensive, more invasive procedures during periods of economic contraction. So we set to gain, you know, we really are a lifeline for our providers. When people can't afford the more expensive services, they want to keep up their skin health, keep up their investment in their confidence. So they buy a very accessible, affordable price hydrafacial. So we've seen the benefit, and I think that explains why we've seen no slowdown in terms of our business.
spk02: Wonderful. Thank you so much.
spk03: Thank you. The next question comes from Kyle Rose from Canada Genuity.
spk07: Please go ahead.
spk12: Great. Thank you for taking the questions. Just wanted to touch on, you know, you've had Sandeo out, I think, for, you know, six months on the market or maybe a plus or minus. You know, one of the big promises of it is the connected aspect of it and the ability to, you know, really drive a flywheel effect from a marketing perspective. Just wanted to see, you know, where you're at as far as, you know, harnessing some of that data and being able to, you know, leverage your marketing activities and maybe an expected timeline of when we should see that, you know, meaningfully change over time.
spk09: Good morning, Carl, and thank you. Yes, six months since the launch of Cinder, and we couldn't be happier with the rollout, of course, as we're expecting to launch in H1 of 2023 internationally, so working hard to prepare that. Look, we're learning a lot, Carl. I think we're gathering a huge amount of data. I think as we talked about Invest Today, I think once we build up a robust network you know, set of distribution across the U.S. We'd like to share that. Of course, the very first customers and providers who bought Zendaya were actually the ones who helped us co-develop it. So there's an inherent bias, positive bias, in the data we collected for those first providers. So that's why we've paused on sharing, but I think we're learning a lot and obviously taking a lot of that learning as we improve the system ahead of the rollout internationally. So, you know, we'll be looking to share more data on that next year.
spk02: Thank you. Thank you.
spk03: The next question comes from Bruce Jackson from the Benchmark Company.
spk07: Please go ahead.
spk10: Hi, good morning, and thank you for taking my question. Now, as you monitor the situation in China, can you tell us what factors you're watching and how that feeds into your decision process as to whether to accelerate launch activities?
spk01: Good morning, Bruce. Thanks for the question. Absolutely.
spk09: I mean, clearly, we have a very strong team on the ground. in China, with offices, of course, in Beijing and Shanghai. So we're obviously in constant contact with that team and our provider network there. And it's, you know, obviously, it's been very interesting for us to follow as we have these periods of closure, followed by extremely rapid bounce backs as the market opens. So look, we are preparing for a H1 2023 launch of Cindeo in China. We have made the investments this year, of course, in the team, the infrastructure, the in-region production, which we talked about at the Invest Today. So we're ready to ramp up and seize the growth opportunities as the market opens, knowing we have a proof point that when it opens, Bruce, we'll really capture that upside.
spk08: Hey, Bruce, it's Leanne here. Just to double click on your comment on the levers. You know, we actually did a lot of test and learn, especially when they come to marketing activation. You know, we know how to move it up or down. You know, we've been living through that the whole year, last year. This is why you actually do see as we invest, despite the fact that the country is locked down for an extended period of time, we still generated sales. It's precisely because how we approach the lever. Suffice to say, we've been very thoughtful in terms of who to hire, right? Most of the folks we hire ahead are salespeople, marketing people, and training folks, because those folks are really important. But you have to pre-prepare them so they really understand how to win the market as we expand thoughtfully which region within China to go. So just want to overemphasize the fact that, you know, we made the investment. We have the core team, but we're also very agile. So we know how to turn it up and down if need be. Thanks.
spk10: Thank you, and congratulations on the quarter.
spk02: Thank you.
spk03: Thank you. The next question comes from Olivia Tong from Raymond James. Please go ahead.
spk13: Hi, this is Devin Weinstein on for Olivia Tong. Appreciate you taking our questions. Wanted to ask a little bit about the customer trends that you were seeing. I heard you say that you're not seeing any trade down, but perhaps are there any, are you seeing less frequent visits from end consumers? Are they coming in the same amounts? And then would also like to hear from your esthetician customers, are there, is there any flowing to the sales cycle or any fallback in demand? And then if not, if conditions were to worsen in the macro, what would be your first levers that you would pull to re-accelerate demand, whether it be increased marketing spend or perhaps some kind of promotional activity or anything else that comes to mind?
spk01: Evan, thanks very much for your question.
spk09: As I said earlier, you know, Leanne and I with the team have done a lot of traveling in the last few months, both across Asia over the summer, EMEA in the fall, and most recently last week across the U.S. And wherever we go and speaking to providers, estheticians, the medical channel, there is no slowdown. The consumer remains very buoyant in investing in their skin health, investing aesthetics across a range of categories. In fact, you know, one of the Biggest questions or comments we get from providers, it's not, there's no slowdown in demand, no increase in cancellation of bookings at all. It's finding enough staff to deliver the demanded services across a range of products, including hydrafacial. So extremely buoyant. So, you know, absolutely no slowdown there. And of course, you know, as I referred to earlier to another question, Hydrofacial is one of those products which, particularly in the medical channel, benefits during these periods of economic contraction or uncertainty because whilst consumers may shy away from high investments in in surgery or fillers or big laser treatments, they still want to invest in their skin health, their confidence to keep that regimen going. And at only $150 as a starting price for hydrofacial, it's an extremely affordable and sticky service. And most of our customers sell packages or subscriptions, so they're locked in for those monthly visits. So that's what reflects the strong demand which has been flowing into our results. In terms of, I mean, we haven't seen any slow demand at all, but in terms of the levers, you know, as Leanne talked to earlier, we're extremely variable in our investment, and it's very easy for us to ramp up or down marketing. We tend to avoid promotions. That's not really part of our business model. But really, you know, really doing the on-ground events, the trial, and the brand awareness events, particularly as we launch boosters such as J-Lo or the recent ones from Glytone and Dr. Dennis Gross, they all help drive marketing. utilization and consumption.
spk08: Hey, Devin, just only one point I'm going to double click. I think we shared with you last quarter as well. If you look at our consumer base, they are higher middle class, right? Because we often say our consumers visit our location at any given point, 3.2 places a year. So they show up in various areas. But more importantly, our super consumers, most of them on average are upper middle class. This is the part, you know, both Andrew and I, as we visit, it kind of validate that point. And we have applications come every month at our you know, experience center for training. And we're constantly getting that real-time information. By the way, when we went to Europe, you know, almost to our surprise, some of these locations, either being in Paris or even in Frankfurt, we see a lot of men, you know, in the waiting room for their procedures, which is just another validation of, you know, how folks feel about medical aesthetics in general.
spk02: That's all. Great to hear. Appreciate you taking our questions. Thank you.
spk03: Thank you. The next question comes from Linda Bolton-Weiser from DA Davidson.
spk07: Please go ahead.
spk16: Hi, yes, thank you. I was wondering if you could update us on the reengineering of the Sundeo system and what's the progress so far on that, and what does that mean for margins in 2023?
spk08: Hi, Linda. So on the value engineering, this is a system that we're getting ready to launch globally. So it's a constant effort as we tweak the different kind of components that we use to enhance. And we're learning a lot. Given the region production that's ongoing in China as well, that would really benefit us. But suffice to say, we have ordered and continue to order raw components just to make sure we have enough for to feel the growth so as you saw you know we invested a lot in inventory for future growth as well this is why we guide it to you're probably not going to see you're going to see continued improvement on growth margin but you're not really going to see that true unlocking starting the end of the year beginning of next year thanks thank you
spk03: This concludes our question and answer session.
spk07: I would like to turn the conference back to Andrew Stanley for closing remarks.
spk09: Thank you, everyone, for your questions. To close, I will say we are proud of our results, remain confident in our strategy to deliver profitable long-term growth. We see strong demand around the world and will continue to build our business according to our five-point master plan with disciplined management, our investment leaders to achieve our commitments. I want to say a big thank you to our dedicated team and our passionate community of consumers and providers who are at the heart of our business.
spk02: Thank you, everyone, for joining today's call. Thank you. The conference has now concluded. Thank you for attending today's
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