The Beauty Health Company

Q4 2022 Earnings Conference Call

2/28/2023

spk15: Welcome to the Beauty Health Company's fourth quarter and fiscal year 2022 earnings conference 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 touch-tone phone. To withdraw from the question queue, please press star then two. We ask that you limit yourself to one question during Q&A. Please note this event is being recorded. I would now like to turn the conference over to Eduardo Rodriguez, Senior Director of M&A and Investor Relations. Please go ahead.
spk00: Thank you, operator, and good morning, everyone. Thank you for joining the Beauty Health Company's conference call to discuss the company's fourth quarter and full year 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's President and Chief Executive Officer, Andrew Stanlick, 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 a further discussion of risks related to our business, see our filings with the SEC. This call will present 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.
spk08: Thank you, Eduardo. Good morning, everyone, and thank you for joining Beauty Health's fourth quarter and full year 2022 earnings call. To begin, I will discuss our performance and accomplishments for the year. my first serving as CEO of this incredible category-creating company. I am extremely proud of the progress of our team in these past 12 months, and I am pleased to share the results with you today. I will also discuss our outlook for 2023 before Leanne provides more detail on the numbers. We will then be happy to take your questions. As always, I want to start by thanking our incredible Beauty Health One team. Our teams around the world worked tirelessly over the past 12 months to execute our strategy and deliver incredible growth and momentum amid uncertainty in the operating environment. Despite the macro backdrop, we delivered a year of record revenue. We launched the biggest product innovation in our company's history with Cindeo, our next generation hydrofacial delivery system. We continue to build the world's premier skincare booster portfolio, partnering with the best in the industry from Murad, to JLo Beauty. We open more doors than any year before with exciting retail partnerships and expansive growth in the booming MedSpa channel, not to mention continued solid growth in our core medical channel. Our loyal provider community and consumer fan base remains highly engaged and is growing around the world. The planned investments we have made to scale our business over the last two years are driving strong top-line growth and position us for margin expansion in 2023 and beyond. Let's now look at the results on slide five. In Q4 2022, we reported net sales of 98.1 million, our eighth consecutive quarter of delivering mid-double-digit top-line year-on-year growth and of beating expectations. For the full year, our planned strategic investments paired with continued consumer and provider demand drove strong sales growth of 41% year-over-year to $365.9 million. This growth represents the resiliency of our business and the increasing demand for hydrofacial, despite the challenging macro backdrop. In particular, foreign exchange headwinds in Europe were significantly impactful, and China's zero COVID policy delayed return on our planned investment in our China infrastructure buildup. Notwithstanding these challenges, we delivered adjusted EBITDA of 47.7 million for the full year, up 46% year over year. I'm also pleased to report that we achieved double-digit growth in all three of our operating regions in 2022. Year over year, the Americas grew 44%, APAC increased 24%, and EMEA was up 46%. These strong growth numbers are in reported currency. On a local or constant currency basis, the results are even stronger. Our strong growth is nothing new. We have averaged 48% growth per year since 2018 when excluding 2020 for COVID. Our period of planned heavy investment is now behind us. As a new public company, our global infrastructure build is larger to compete and ready to scale. Our business model remains agile and we have strong fundamentals in place to capture the large profitable growth opportunities ahead of us. As a result of our momentum, we have full conviction in our long-range plan to deliver $600 to $700 million net sales and adjusted EBITDA margin in the range of 25% to 30% by 2025, targets we first shared at our Beauty Health Investor Day last fall. If 2022 is about establishing a new foundation, the focus of 2023 and beyond is about accelerating profitable growth. We will launch Sindho internationally in the second quarter of 2023. We have taken lessons learned from our highly successful U.S. launch last year and look forward to growing Sindho's soon-to-be global footprint. We will build our portfolio of products to sell to hydrafacial providers, adding strategic and science-backed boosters to our portfolio of personalized treatment options, as well as through strategic M&A. We will expand our business in China. as zero COVID policies ease and consumer activities returns, and we remain optimistic on the outlook and our long-term opportunity in the strategic market. As you would expect, we will remain nimble and are able to quickly pull levers to protect our margin should on-the-ground conditions in China deteriorate. In totality, I am confident in our ability to generate net sales of $450 million to $470 million and to deliver an adjusted EBITDA margin in the range of 18 to 20% for 2023. Turning to slide seven, we continue to make strong progress against our five-point master plan, which you are all familiar with. Our strategy to expand our footprint and increase provider and consumer access to hydrofacial is working. In fact, we have continued to expand our position as the market leader. with some research estimating our market share to be around 85%. It is hard to displace the go-to brand, and Hydrafacial has become an eponym for the category it created. In 2022, we delivered a record 8,492 Hydrafacial systems globally, which includes 1,793 trade-up units to Sundeo. This represents a 37% increase from 2021, highlighting consumer, and provide a resiliency and increasing demand globally for our products. Across distribution channels, we continue to see provider preference for the hydrafacial treatment and device. In fact, just last week, we received two Esthetician's Choice Awards from Dermascope Magazine for Best Hydrodermabrasion Machine for Cindea and Favorite Signature Treatment for Hydrafacial. The validation of our esthetician community is more meaningful than anything else, and we wear this badge with great pride. I am thrilled with the expansion we saw in 2022, and more importantly, we continue to have a massive underpenetrated growth runway in front of us to capture. We believe all of our providers should be on Sendair, and as you saw in 2022, we employed a strategy to push our provider network to upgrade to Sendair, and you can expect us to continue this approach in 2023. Sendair is our next generation connected system, provides us with rich data insights into trends and consumer preferences, that we have never had before, once again pushing the category forward. Ultimately, we envision that beauty health can become one of the largest sources of skin health data on the planet, and that is a powerful and compelling proposition. Turning to slide nine, we are driving consumable cells and recruiting new consumers into our brand with a steady pipeline of innovation, delivering regular upgrades to our booster portfolio and treatment protocols. With our portfolio of approximately 20 skincare boosters and a wide range of treatment tips, including a wide head body tip and our patented wet diamond abrasion tip, a hydrofacial has never been more customizable for the consumer with each treatment delivered by our patented Magic 100 piece. We view this as a key competitive advantage. Our estheticians are trained to tailor every treatment to a client's personal skincare needs, a differentiator that builds affinity for our brand. No other device in our category delivers our level of customization and personalization to the consumer, and this is the future of skin health. Each booster is developed with careful attention paid to ingredients, and our products are validated with clinical studies and overseen by our chief medical officer. We lead with this science-backed approach for our own hydrafacial boosters and also for those that we co-create with other world-leading skincare experts. This allows us to accelerate our R&D, capitalizing on the combined strength of our R&P together with our partners. The hydrofacial ecosystem that we have created with the partner brands and providers is a unique model in the industry. What's more, our partnerships with notable brands are key recruitment tools that bring new consumers into the hydrofacial brand. We saw the success of this approach with J-Lo Beauty, our biggest ever booster launch in the U.S. last four years. and we are preparing to expand J-Lo to EMEA and APAC during the first half of this year. Last week, we announced our latest booster and protocol with prestige skincare brand Omrovica, which speaks to a most discerning consumer. And finally, we are bolstering our treatment innovation pipeline with Hydra Body Treatments, new protocols and tips that give providers the ability to use their delivery systems on other parts of the body beyond the face. Importantly, these treatments represent a promising source of consumables growth for us, covering larger treatment areas, as well as offering providers new revenue streams from their existing hydrafacial systems. And this is yet another win-win experience for our providers and us. Hydrafacial is among the world's top educators and we continue to invest in our providers as a key pillar of our five-point master plan. Investments in our growing and loyal community, what we call the hydrafacial nation, continue to drive brand awareness, earn the media value, and ultimately sales growth. In addition to our renowned HFX trainings, we also regularly engage with our providers at high-profile trade shows. Here on slide 10, you can see our impressive presence at January's IMCAS trade show in Paris, an event which brings together the top doctors, estheticians, and skin health leaders from across the globe. Across the globe, we see the love for our brand growing exponentially. On slide 11, you can see two metrics we follow as indicators of brand awareness among providers and consumers, earned media value and Google search trends. In 2022, we grew earned media by 85% year over year, driven by an exponential jump in influencer and press activity. In 2022, we were the fastest growing brand in terms of EMV of any aesthetics brand measured by tribe dynamics. Additionally, our worldwide Google search activity has continued to trend meaningfully upward over the last four years. Indeed, in 2022, we established a new higher baseline for performance. In all of our storytelling, we remain anchored in science, which is our touchstone and represents the core of our brand DNA. It is from science where hydrafacial created the hydrodermabrasion category and is where we continue to lead the industry and remain unrivaled by competitors. A new clinical study published in the peer-reviewed Journal of Clinical and Aesthetic Dermatology found that hydrafacial clarifying treatments improve acne concerns for 100% of study participants. It is a secret our statisticians have long known and are further validated with clinical results. The study results generated widespread interest from providers and consumers alike, with media coverage across beauty titles and broadcasts, chatter on social, and a spike in orders for our clarifying boosters. Interest in hydrafacial science and storage doesn't stop with providers. Consumers are increasingly interested, too, as they look to step beyond the wellness trends of past years and seek out physician or scientific endorsements of their beauty and aesthetic choices. It is a trend we call the medicalization of beauty, a long-term shift in consumer mindset that beauty health and hydrafacial are intrinsically poised to capture. Indeed, we see an embrace of this idea by the earliest adopters and tastemakers in beauty and aesthetics, influencers and celebrities. To this end, we are partnering with a diverse range of influencers and celebrities to rapidly scale the hydrafacial message. Among the recent fans to profess their love for hydrafacial, Lily Collins, aka Emily in Paris, shared the secret of hydrofacial in Vogue France. Irucci, a social media megastar with more than 13 million followers, showed her treatment in progress on her channels. Louis de Javier, an up-and-coming designer, prepped all 38 of his models with a hydrofacial before they walked the runway at New York Fashion Week. And of course, Jayla remains a most vocal supporter. Moving to slide 13. We continue to innovate our partnership model. Just yesterday, we announced a new partnership with the iconic Dior Beauty. Together, we have developed a Dior powered by Hydrafacial experience, which includes a custom protocol and co-branded booster that will be available exclusively in Dior spas around the world later in 2023. Partnership incorporates the best of your skincare with Hydrafacial technology, promises to resonate with a sophisticated beauty consumer. We are yet again setting our brand apart and extending our competitive moat with this prestige beauty powerhouse. Turning to slide 14. The acceleration that we are seeing in our business is thanks to the planned investment we made in infrastructure and capabilities during the past two years. Since joining the company last year, I made several additions to fortify our executive leadership team. And I'm confident that we now have the right team in place to drive our strategy forward and deliver profitable growth. We opened key training and education centers in New York, London, Paris, and Singapore, and made planned investments in our provider community to drive loyalty and awareness. We also invested in foundational operational initiatives and infrastructure builds that we expect will deliver future leverage. These included progress on in-region production in China, setting up a 3PL partner in Europe, and rolling out global ERP and CRM platforms. Moving to M&A on slide 15. As we progress into 2023, we remain committed to creating value for shareholders through disciplined capital allocation. M&A remains a priority, and we maintain a strong cash position to pursue opportunities to accelerate the platform. We continue to evaluate options, specifically those opportunities or brands that provide a differentiated product or service with a high net promoter score, are complementary to our existing platform and community, leveraging the Estetian core point, and are financially accretive with compelling revenue growth and additive to our profitability. Today, I'm excited to announce a key strategic acquisition that will immediately build our product portfolio for providers while providing Beauty Health with a future second profitable growth revenue stream in a large and growing market. Beauty Health has signed an agreement to acquire Skin Stylus, an FDA-cleared micro-needling device. Including all potential royalties and milestones, the transaction is valued at approximately $15 million. Microneedling is a rapidly growing non-surgical procedure performed by qualified providers, including dermatologists, plastic surgeons, and estheticians. The treatment uses an array of tiny needles to create micropunctures in the skin to stimulate the body's natural wound response, which is associated with the creation of new collagen and smoother, firmer, even-toned skin. Today, the microneedling market size is around $540 million in the U.S. alone. Industry estimates put the growth rate at a high single-digit CAGR to reach an expected 1 billion by 2030. Microneedling is one of the top co-treatments for hydrofacial, making a perfect fit to sell alongside hydrofacial. Many of our dermatologists, plastic surgeons and estheticians recommend a hydrofacial as a pre-treatment to ensure the skin is clean and in its optimal state before microneedling. Indeed, when I'm in the field with our providers, it is one of the most requested tools our estheticians ask us to bring to market. Consequently, microneedling represents a significant growth opportunity for beauty health, given the complementarity of the service to hydrafacial in our existing distribution core point. What's more, SkinStylus also seamlessly fits into our existing razor blade commercial infrastructure. The SkinStylus business model consists of the SkinStylus device, along with single-use cartridges containing the needle arrays to operate the device as a recurring revenue stream. We have been actively looking in this space for over a year, and after extensive research and analysis, we are highly confident that in the SkinStylus device, we have found the best in-class technology to add to our portfolio and to create sustained long-term shareholder value. Having carefully studied the category, we believe SkinStylus offers providers an innovation that is new, better and different to anything else on the market. Specifically, SkinStylus is the only device with multiple arrays of needles at differing heights to achieve optimal outcomes. Additionally, it offers a superior user experience to the provider with a patented design to prevent cross-contamination and the flexibility to operate it with or without a cord for maximum provider flexibility. Looking forward, we intend to make modest investments to seek key regulatory approvals to expand the use of SkinStylus for additional indications and to markets outside of the US. As SkinStylus is an emerging technology, at the beginning of its journey, the revenue will be limited in 2023. However, we expect upside from this acquisition in 2024 and beyond, as we seek to leverage the beauty health infrastructure and sales and marketing capabilities to capture share in this large and growing market. We could not be more excited for the opportunity to bundle Hydrafacial together with the Skin Stylus device. It is a clear step towards realizing our vision to become the world's leading beauty, health, and wellness platform, fueled by a community of engaged providers, estheticians, and consumers. We will share more about our plans as we work towards completing a successful integration of skin stylists into the beauty health portfolio. And finally, before I turn it over to Leanne, I want to again thank our teams around the world and reiterate how proud I am of what we accomplished in 2022. We drove strong top line and profitability growth, launched a groundbreaking technological innovation in Sindeo, announced marquee booster partnerships, continue to expand our global retail footprint, and grew consumer and provider interest and demand around the world. With our planned investment phase largely behind us, we can now, as intended, turn to driving profitable growth in 2020 through and beyond. And we will continue to lead the way in this booming category of beauty, aesthetics, wellness, and health. I couldn't be more excited about the future of beauty health. And with that, I will now turn the call to Leanne.
spk01: Thank you, Andrew. And thank you everyone for joining the call. I would also like to take a moment to thank our teams and partners around the world. We exceeded top line expectations for the eighth consecutive quarter, and we continue to see momentum building across the business despite microeconomic uncertainty. Today, I will walk you through our fourth quarter and full year results, cost and balance sheet highlights, and finally, our outlook for 2023. Turning to net sales on slide 18, we delivered net sales of 98.1 million in the fourth quarter, up 26% year over year. This was driven by continued strong global demand for both delivery systems and consumables. As you can see, despite the negative impact of China's shutdown and foreign exchange headwinds, we have seen sequential net sales growth throughout the year when excluding the significant trade-off sales from the Sundale launch during the second quarter. For the full year, we achieved net sales of 365.9 million, up 41% year-over-year, or up 32% year-over-year when excluding the Q2 trade-up sales from Sundale's U.S. launch. On slide 19, you will see we drove strong double-digit growth across all three of our regions in 2022. Looking at the fourth quarter, in the Americas, we continued our expansion. growing 29% year-over-year, driven by the continued success of both news and daily placements and trade-ups. In APEC, we grew 33% year-over-year, highlighting once again our team's resourcefulness in China while operating the business in a difficult environment. In the fourth quarter, there was a surge of COVID infections shortly after reopening, resulting in China effectively shutting down again. Post-Chinese New Year, with China reopening and the infected population largely recovered, we're starting to see increasing demand with our providers. In EMEA, fourth quarter night sales grew 12% year over year. The growth would have been even stronger if not for an approximately $2 million constant currency foreign exchange headwind during the quarter. Sentiment to start the year is strong, and we expect this to continue throughout the region in 2023. Given the promising trend we're seeing in APEC and EMEA, we look forward to launching Sunvale internationally in the second quarter of 2023. Briefly touching on our KPIs on Spike20, we ended the year with a net install base of 25,336 delivery systems, an increase of 24% year-over-year. We shipped 2,067 delivery systems in the fourth quarter. Nearly 10% of those system sales were trade-offs. which is an increase compared to the third quarter due to testing slightly deeper promotions in Q4 versus Q3. As Andrew mentioned, we believe all our providers should be using Sundial. With Sundial set to be global this year, we expect to continue promoting Sundial adoption amongst our existing provider base with trade-off efforts in 2023. We have experienced no issue with our pricing power across delivery systems and consumables. The average selling price, or ASP, of a delivery system for the quarter was 24,408. The blended ASP for 2022 was 23,832, representing an 8% year-over-year increase versus 2021, in line with our high single-digit expectation. Lastly, Delivery systems revenue for the quarter was $50.7 million, resulting in 19% year-over-year growth, and consumables revenue came in at $47.4 million, growing 35% year-over-year. I want to take a moment on site 21 to discuss how we evaluate the performance of our consumables. As you can see from the chart on the left, we have demonstrated a sustained upward trajectory in consumables revenue quarter after quarter. On the right of the slide, you can see why. There is a high correlation between execution in expanding our footprint and pull through of the consumable revenue. Things will continue to be in this high growth phase of rapidly expanding and selling new systems. We view total consumables net sales growth as a better measurement than the per system utilization metric for our business. As a reminder, we include one-quarters worth of consumables in the form of training kits for both new and trade-ups and deals. Additionally, we have previously mentioned the longer ramp and therefore longer tail of provider consumables consumption. To fuel an increase in that lifetime value, we're constantly introducing innovative new boosters and other product lines extensions to stay nimble and increase the value delivered to consumers at each visit. Moving to site 22. For the fourth quarter, we reported a gap growth margin of 66.4% or 72.3% on an adjusted basis. For the full year, gap growth margin was 68.4% or 73% on an adjusted basis. These margins declined year-over-year on a gap and adjusted basis driven by trade-up mix, costs associated with Sundial's UI launch, and international launch readiness, including trade-up volumes and premiums paid on accelerated manufacturing and shipping, global supply chain challenges, inflationary pressures, and foreign exchange headwinds. Most first-generation IoT products require continuous improvement based upon user experience. From our Sunday launch, we gained valuable insights through provider feedback. Because our providers are always our number one priority, we implemented a program to replace all systems, regardless of issue, until October 2022. As a result of this one-time program, we incurred $2.4 million in non-recurring logistics and servicing costs in 2022. Through the program, we have also optimize Sundale in preparation for our international launch in second quarter of 2023. As we have mentioned previously, we have the value engineering and optimizing Sundale for its international launch. As part of this optimization process, we increase our raw material inventory write-offs and warranty reserves for the fourth quarter, which negatively impacted the quarter's gross margin by approximately 2%. As we mentioned previously, we expect to drive gross margin expansion in 2023 as part of our journey towards an 18 to 20% 2023 EBITDA margin. Given the similar dynamics at play with Sunbeo International Launch, we expect the gross margin for the first two quarters of 2023 to be similar to their respective quarters in 2022, with expansion occurring sequentially in the second half of 2023, post-international Sunbeo Launch. Moving to the bottom right, we delivered adjusted EBITDA of $16.3 million for the fourth quarter and $47.7 million for the full year. As Andrew mentioned, our profitability was impacted by FX headwinds and zero COVID policy in China in 2022. To help contextualize our China headwind, we invested $17 million into our APAC operations in 2022, much of which was not productive due to the shutdowns. The advantage is that we now have the team and the infrastructure in place, ready to seize the opportunity of the reopening. We also incurred one-time expenses of around $3.8 million in patent litigation expenses and approximately $3.6 million in reorganization expenses for the year. I want to spend a few moments on Flight 23 to remind you of the seasonality in our business. On the left, you see our sequential net sale growth pattern. The year typically starts with a Q1 that is lower than the previous year's Q4 and results in Q1 being the lowest dollar revenue quarter of the year. The second quarter gains momentum from the marketing activities conducted in the first quarter, which typically results in a heavy sequential increase in revenue from Q1 to Q2. In 2022, the second quarter benefited from Sundale US launch and the TREDAP program. We anticipate a similar tailwind this year when we launch Sundale in our international region in the second quarter 2023. The third quarter sees growth a bit at a more moderated level relative to Q2 due to the seasonal summer slowdown experienced across the beauty sector, especially in EMEA. Lastly, The fourth quarter is typically our highest dollar revenue quarter of the year, as holiday promotions, seasonally peak consumer consumption, and a desire to exhaust CapEx budgets drive higher demand. Importantly, we make planned strategic investments in marketing early in the year to boost our productivity and support the stronger sales margins seen in the second half. On the right-hand slide, you can see how this translates to a quarterly cadence of our adjusted EBITDA generation. The seasonality we just walked through naturally makes us a back half weighted business. And we expect the quarterly EBITDA contribution in 2023 to be similarly weighted as it was in 2022. I will now turn to site 24 to walk through our cost detail. Selling and marketing expenses for the fourth quarter were $39 million compared to $37.1 million in the fourth quarter last year. The increase is primarily due to sales commission associated with higher revenue. Importantly, selling and marketing expenses as a percentage of revenue decreased 781 basis points year-over-year, demonstrating increased cost efficiency via operating leverage from higher revenue. Fourth quarter G&A expenses of 28.5 million were 3.4 million higher year-over-year, primarily as a result of increased stock-based compensation, personnel-related expenses as we scale, and professional fees relating to our SOC implementation, partially offset by fixed cost leverage. Lastly, R&D costs of 1.4 million decreased approximately 0.4 million from Q4 2021 to Q4 2022, as we lapped Sundale development costs, partially offset by planned investments in our data infrastructure. I will now move to our balance sheet highlights on slide 25. We ended the year with roughly $568.2 million in cash and cash equivalents. Our first of 200 million accelerated share repurchase programs, launched in September, was completed during the quarter and retired a total of 9.3 million shares. Our second 100 million accelerated share repurchase program, announced in November, is expected to be completed by the end of the second quarter of this year. We remain well-capitalized to execute on our growth initiatives while keeping strategic M&A opportunities actionable. To that end, we're excited by our M&A announcement today with Skin Stylist, and continuing to build on the promise of a connected portfolio of beauty health brands to serve our customers and consumers, while keeping the majority of our dry powder for future growth. To prepare for our international sale launch, we invested significant working capital in anticipation of strong trade-off demand, similar to what we experienced at the onsite of the U.S. deal launch. We anticipate lower working capital levels in the second half of 2023. We continue to carry $750 million of 1.25% convertible notes due 2026 on the balance sheet, which we opportunistically raised for M&A, among other uses. Our $50 million revolving credit facility remains undrawn. Finally, our current shares outstanding are approximately $132.2 million. Turning to slide 26. following two years of planned elevated investment to achieve scale. Our goal and strategic focus now shifts to generating operating leverage and accelerating growth in China. We're proud of how fast we scaled the business, while simultaneously achieving strong net sales and profitability growth in 2022, despite the micro headwinds. With continued momentum in delivery system sales, the international launch of Sunvale in the second quarter and resilient consumer demand around the world, we estimate to deliver net sales of 450 to 470 million for 2023, or 23% to 28% growth versus 2022. With our foundation set, we're confident in our ability to deliver an adjusted EBITDA margin of 18 to 20% for 2023. The chart on the right-hand side of slide 26 demonstrate how we expect to realize this margin expansion. As you can see, we expect to leverage our fixed operating cost base to generate margin expansion, which you already started to see in the 2022 fourth quarter results. Moving to gross margin expansion, as mentioned during our investor's day, we believe we have substantial gross margin expansion opportunity to capture through value engineering efforts. However, Similar to what we saw in the first half of 2022, we expect the impact of trade-offs and Sundial launch-related promotions to create a temporary headwind to our first half 2023 growth margin. Despite this, we expect our continued value engineering progress in 2023 will show in the result in the second half of the year and result in full-year growth margin expansion versus 2022. We continue to remain disciplined cautious and measured on performance in China. And should the region accelerate faster than currently anticipated, we're cautiously optimistic about achieving a 2023 adjusted EBITDA margin towards the higher end of our guided range. While 2022 was a year of great achievement, it was made more remarkable by the fact that we overcame macroeconomic headwinds beyond our control. Our business overall continued to grow and our consumers around the world showcase their resilience. I am very proud of what we accomplished in 2022, and we look forward to continuing to execute on our strategy to drive profitable growth in 2023 and beyond. Andrew and I will now gladly take your questions.
spk02: Operator.
spk15: We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you are using a speaker phone, please pick up your handset before pressing the key. To withdraw from the question queue, please press star then two. As a reminder, please limit yourself to one question. The first question is from Oliver Chen of Cowan. Please go ahead.
spk13: Hi, this is Joellen. Thanks for taking our questions. Congratulations on the acquisition. Just wanted to get more color on the potential synergies you expect from the new acquisition. And also in terms of China, I know you're giving a range in terms of EBITDA, but in your model, how are you thinking about sort of the recovery trend in China? Thank you.
spk08: Thank you. Good morning. Thanks for the question. I will kick off. First of all, yeah, we're very excited, of course, to announce this morning the acquisition of SkinStylus, an FDA-cleared microneedling device. And as I said in my prepared remarks, with our customer base, microneedling is the most complimentary service towards hydrofacial. In fact, many of our providers actively recommend or prescribe a hydrafacial to prepare consumers for microneedling to make sure their skin is clean and its optimal state. So for us, it's an absolutely complementary and perfect fit for the company because it really leverages our existing core points. So immediately we can have leverage to our sales team. as they can put this product, SkinStatus, in the bundle with Hydrafacial. So, you know, whilst, you know, as we've just announced the deal, we'll be working on integration. Revenue in 2023 will be limited, but we expect upside in 2024 and beyond. I couldn't be more excited. And, Leanne, I'll hand over to you for the second part of the question regarding to how we see China and that 18% to 20%.
spk01: Absolutely. Thanks. Yeah, so we're actually quite... excited about, you know, some of the trends we're looking at right now from a consumer demand opening point of view. But for model assumptions, we assume the very gradual opening. And part of the emphasis we're putting out there is, you know, if it does come back stronger, that's where you see potential upside. Otherwise, we model it based on a gradual opening.
spk15: The next question is from Bruce Jackson of the Benchmark Company. Please go ahead.
spk06: Hi, good morning, and thank you for taking my questions. On the last conference, Kyle, you were discussing about moving some of your manufacturing and developing a more global supply chain. I just wondered if we could get a quick update. Thank you.
spk08: Good morning, Bruce, and thank you very much for the question. Yes, as we spoke before on previous calls, 2021 and 2022, really as we're a new public company, were those years of elevated investment when we were setting up systems and infrastructure, a new EPL in Europe, as well as during Q4, we completed the in-market manufacturing phase. in China for the APEC region, which we're very excited about. As we look to, you know, enhance our margin from this year and the coming years ahead, that will be an important component.
spk16: So we completed that during Q4, Bruce.
spk15: The next question is from John Block of CECL. Please go ahead.
spk04: Thanks, guys, and good morning. Leanne, the system delivered in the quarter was 2067. Essentially, it was right in line with our estimate. But I believe the ending install base was below. I think the trade-ups were a bit higher based on your commentary. But maybe you can just detail for us, did the retirements pick up a bit to get to that ending install base? And sort of the tack on to that question would just be, can you discuss the fourth quarter system ASP? I believe that was down sequentially. So I'm not talking about year over year effects. Just again, to be clear, that was down Q over Q. But I also think per the comments last quarter, you took price recently on the system. So please provide just color on the 3Q to 4Q ASP move. And I'll stop there. Thanks, guys.
spk01: Yes, absolutely. Hey, John. In terms of the net new surveys, John, as you know, we do calculate the terms based on purchase patterns. And, you know, given the shutdown period for China specifically and, you know, some of the other APEC region countries, that negatively impacted the net, you know, install base. That's one of the biggest factors. You know, obviously, we continue to look at, you know, across the globe as well as we measure the term. Separately, I think your second question, sorry, remind me again, the second question was on
spk04: Just the ASP for Q22 versus 3Q22 is down sequentially in light of what I think it was recent price increases. Maybe you can just reconcile that for us. Thank you.
spk01: Absolutely, Bruce. So the ASP, you know, as we mentioned, they actually did go hand in hand with the growth margin trend as well. You know, as we test and learn on the promotion for trade-offs, right? Remember we talked about, you know, we went aggressive with trade-off when we launched and then we went very shallow in terms of the promotion in Q3. As we test more in Q4, you know, giving slightly deeper discount, we saw it does move the needle, but obviously that negatively impacts the ASP as well as growth margin. There's also partially, as you recall, we're also marketing these refurbished elite, the last generation system, to different regions. So, you know, between... Distributor sales, given the shutdown in China, and some of these refurbished elite sales, in addition to the trade-off, those were the drivers that actually moved the needle when it comes to ASP for Q4.
spk15: The next question is Olivia Tong of Raymond James. Please go ahead.
spk14: Great, thank you. Good morning. Can you talk about the launch of Zendaya internationally, maybe compare and contrast your plans relative to the U.S. launch? Because obviously it's a very different environment now versus last year when you launched in the U.S., and then just your thoughts on the contribution from U.S. in year two of Cindeo. Thank you so much.
spk08: Good morning, Olivia. Thank you for your question. Yeah, we're excited to launch Cindeo in Q2 of 2023. I think the benefit of us waiting a year is that we've got all the benefits and the learning and the optimizations we've made to our playbook from the U.S., So we're excited to launch it out sequentially, you know, globally from Q2 onwards, a rolling launch focused on key markets, first of all. So we're excited about that. And for the second part of the question, Leanne?
spk01: The second part of the question in terms of the... U.S.
spk08: contributions.
spk01: Yeah. So, you know, Olivia, as we model out the year, you know, U.S. growth is continuing to be top of mind for us and We kind of emphasize the fact that everybody should be on Sundale. This is precisely the reason why we've been testing trade-off programs. As we're launching globally, the fact that we are value engineering, we're optimizing, we actually learned a lot with this IoT product. We continue to believe U.S. play a very significant part. As we emphasize, a lot of the upside actually really truly depends on the APAC regions. how strongly it comes back. So that's where really the potential upside will lay for the year.
spk15: The next question is from Margaret Casper of William Blair. Please go ahead. Hey, good morning, everyone.
spk10: Thanks for taking the questions. I thought I would start maybe with the gross rate operating margins, just kind of doubling down, I guess, on the cadence during the year. you know, should we assume kind of adjusted EBITDA maybe is below the range in the first half? And would it be anywhere near as much below kind of the 2022 numbers and then above the range in the second half? All of that leading to this question of could you reach, I guess, even the mid-20s to finish the year this year? Thanks.
spk01: Hey, Margaret. To answer that question, we really wanted to be clear in terms of the seasonality You know, when you look at Q1, you know, being the lowest quarter of the year, and the fact that we're launching globally in Q2, I think, you know, with all the investment we're going to be making on marketing to support the growth, all of which will speak to the higher investment for the first half of the year. And that also goes hand in hand with margin, growth margin, right? The fact that we're going to push trade up, you know, we emphasize this all year, last year, you know, as you add trade up, it's you know, incrementally have, you know, positive flow through. But from a gross margin percent point of view, it will give you a temporary, you know, negative impact. So with that in mind, absolutely to confirm your comment, it's going to be very much back year heavy for 2023.
spk15: The next question is from Alan Gong of JPMorgan. Please go ahead.
spk05: Hi. Thanks for taking the question. I just wanted to follow up on a question that was asked earlier on the call just in terms of, you know, I guess the mix of new systems and churn in the quarter. You know, you highlighted that China was one of the challenges there. So when I think about, you know, the trends you're seeing from China so far in the first quarter, you know, it sounds like, is it appropriate to think that we're seeing that more gradual improvement that you're assuming near the bottom end of your guidance? And then also when I think more broadly about your assumptions for the year, when I think about that 450 to 470, how should we think about that when it comes to the mix of growth you're seeing between systems and consumables?
spk16: Good morning, Alan. Thanks for your question.
spk08: I'll start with China and then hand off to Leanne. I think, look, what we're seeing is obviously we're in constant contact with our team on the ground in China. I think what we're hearing is that after an initial surge in COVID infections after reopening, as we get into late February, the market now is pretty much fully open. And in fact, during the last two or three weeks, we've seen traffic gradually pick up. And our team estimates it's about 80% of pre-COVID levels at this stage. So with that, we've taken a measured approach, factoring in a limited contribution from China in the earlier part of the year. But we remain cautiously optimistic about Q2 and beyond. And of course, we're excited to launch Shenzhou in that market during Q2. And of course, if the rebound in China is more accelerated than originally anticipated, In the second half of the year, as Leanne stated earlier, that's when we'd be looking at more of the 20% higher range of our adjusted EBITDA guidance for 2023. Moreover, should the market deteriorate, we'll quickly take steps to adjust levers of investment to protect the bottom line.
spk01: Yeah, Ellen, I think that's well summarized. I think the model just confirms that, right? You know, since Q1 is almost over, the fact that nothing really happens until after Chinese New Year kind of gives you the sense of why we emphasize the gradual reopening. And you have to keep in mind, you know, even the providers are very much focused on, you know, hiring, engaging, you know, their consumers and utilizing whatever the inventory they have at hand. So we took that into consideration. Hence, both of the revenue upside and EBITDA upside tied pretty closely to how robust the reopening will be.
spk15: The next question is from Corinne Wolfmeyer of Piper Sandler. Please go ahead.
spk09: Hey, good morning, all. Congrats on the quarter, and thanks for taking the questions. So first, I'd like to touch on you've spent a lot of time overseas the past year really understanding the market and preparing them for Cingeo. Can you just talk about what visibility you have into system placements in these international markets once you do launch in the second quarter? And I assume some of the partnerships you've developed will help here, but any color there would be helpful. And then secondly, just on marketing, can you just expand a bit on your ability to flex on marketing dollars? Say we do head into a tougher downturn or China, you know, goes back into lockdown. Can you just talk about your ability to be flexible with that marketing spend to maintain the margins? Thank you.
spk08: Good morning, Corinne, and thanks for the question. Great to speak to you. So once again, I will kick off and then hand over to Leanne for the second part of the question. I mean, clearly, despite the economic backdrop of last year, we're extremely pleased with the way our international markets perform, particularly our 16 direct markets. If you consider, you know, a mere plus 46% up for the year despite the war, despite the FX headwinds, it would have been even more if we factored in, constant currency. APEC, despite China with zero COVID policy, we grew 24%. So clearly we're extremely excited to bring that Sinde innovation during Q2. I think all the work we've done in the last two years, in 21, in 22, investing in that planned infrastructure build of teams, people, training, education center systems, and the manufacturing in China, I must say we're really excited and cautiously optimistic about the year overseas. And despite that, we obviously expect a strong year in the U.S. where we have a booming medical spa channel. So we're very cautiously optimistic about the year. Leanne, why don't you talk about the levers which can flex if it doesn't plan out?
spk01: Yes, absolutely. And then just to add on, to even, you know, Andrew mentioned, I think there were a bit more of the recessions, you know, when they come to the end of the year, but it's just, you know, listening to the team around the world, it seems that it turned to be a bit more positive, but again, we're being cautious and we're going to continue to offer. Precisely as we shared before, Corrine, we're sort of 50-50 split when it comes to fixed and variable. And even on the fixed side of the equation, you know, it's a lot of people call. So, you know, to Andrew's point, if the market shut down, that's a lever you can still pull. When it comes to variable, it's very much under our control. You know, there's certain things that can be locked in terms of investment, but we can pull that lever quite flexible around the globe.
spk15: The next question is from Ashley Helgens of Jefferies. Please go ahead.
spk07: Good morning. It's Blake on for Ashley. I might have missed it, but I was wondering if you could provide any commentary on your revenue contribution from Cindeo for new placements versus trade-ups throughout fiscal year 2023. Just was wondering how to think about that, if we could get any kind of commentary there. And then also just wondering if we could get an update on what are you seeing in the terms of the health of your end consumer here in the U.S.? ? and how that trended throughout the quarter. Thanks so much.
spk08: Thank you, Blake. I'll kick off with the second part of the question and then Leanne, you know, handle the first part. I must say, you know, while no business is totally recession or economic uncertain proof, we found that our consumer and our provider has been extremely resilient. And we've seen, as you've seen in our results, you know, no slowdown in the demand for Hydra FacePoint. And as a proof point, you see that in our results. And I think, you know, there's obviously a few factors behind that. I think, first of all, if you consider our channels, our products are extremely democratic placed when compared to other aesthetic services and many of our customers. So we really act as that gateway product for, you know, entering aesthetics. And, you know, we do see a little bit, I think, of trade down from higher-priced products into hydrafacial. I think, you know, consumers are, you know, maybe cutting back in other areas, but certainly not willing to cut back in that monthly hydrafacial. It's an investment in their self-care, their confidence. So, to date, we've seen no, you know, slowdown. I think we're benefiting, really, from, you know, the Zoom boom and other broader shifts. You know, something I talked to on the call about this medicalization of beauty where consumers are increasingly... interested to stop beyond perhaps the wellness trends of the past few years and seek out in a physician and scientific endorsed products such as hydrafacial. And we're really well captured to, you know, really well positioned to capture that shift. I think the final piece for the U.S., you know, the med spa channel is booming. It's a key channel for us. You know, AMSPA recently published that between 2018 and 2022, the MedSpa channel in the U.S. grew 62%, significant growth. And it's a big part of our business, and we're on that journey with all of our providers growing as they grow. Leanne?
spk01: Yes. In terms of trade-up, you know, we actually called out the dollar pretty specifically for the second quarter. It's over $20 million, and that's the biggest quarter that we had the trade-up impact. You know, when you sit back and just think about how many systems we sold, you know, in terms of a percentage, you know, it's roughly about 20% for the year of 2022.
spk15: The next question is from Kyle Rose of Canaccord. Please go ahead.
spk03: Great. Thank you for taking the questions this morning. I wanted to just touch on two things. One, the acquisition. I wondered if you could give us just an expectation for how we should think about the revenue contribution over the near to medium term as it folds in. And then secondarily, really impressive leverage in the Q4. Obviously, it's seasonally strong with the revenue number there. But just was impressed by the sales and marketing leverage given all of the initiatives you have going on. So it would just be helpful to understand how we should think about some of those incremental spend as we move through 2023. And thank you very much.
spk08: Good morning, Carl, and again, thanks for your question. I will kick off in terms of skin stylists. So, clearly, we just announced it. We're very excited about it. We're absolutely convinced that this micro-ring device is new, better, different than anything else in the market. But it's an early emerging stage technology. So, I think what you'll find is that we'll have, in 2023, limited revenue upside, but we have, you know, obviously... significant plans for this ahead for 2024 and beyond. And I think in the coming months during later calls, I'll update you on the successful integration and what more you can expect from Skin Stylist. But it's the perfect fit for our business. It's so complementary to Hydrafacial, our sales team, our BDM team. It's a really great fit for us. Leanne.
spk01: Hey, Kyle. So when it comes to marketing, you know, last year we've been emphasizing our own seasonality. We always invest heavier in the beginning of the year, and we anticipate that leverage to pay off in the second half. And you're sort of seeing that during the fourth quarter. When it comes to 2023, you know, clearly there's committed events that we invest up front. You can see MCAS, you know, as Andrew was sharing, especially with the second quarter of launch, there's a lot of pre-pandemic pre-planned event around the globe at play. But when you look at the second half, there's a lot of leverage we can pull and leverage we can pull as we double down and getting more leads in order to convert. But then we can really decide on how big or small we can go when it comes to trade shows and other more physical activations.
spk15: The next question is from Navon Tai of BNP Paribas. Please go ahead.
spk12: Hi, thanks for taking my questions. Just a question on China. There's a comment on the delayed return on investment. So shall we see further investment in China? And if yes, what's the timing of investments? In the U.S., my second question is, have you seen or do you expect a change in competitive pressure And just a final quick one, do you plan similar acquisitions in the low double-digit range in 2023? Thank you.
spk08: thank you uh thanks for your question there's a lot in there um so let me start first of all with china um if you're relatively newer to our story we've said that 21 and 22 as a new public company were our years of elevated investment where we set up globally our infrastructure systems and local manufacturing training education and teams which we did in 21 and 22 and especially in 2022 in China. So the, you know, predominantly the bulk of our investment is done in China. And that's what we're so well positioned now to capture the opening growth as this market starts to open, especially as we launched in there in Q2 across the region.
spk01: Yeah, I think the other question that you had, you know, in terms of acquisition, you know, we've always looked through those three criteria that Andrew has mentioned, you know, it has to be a creative to the bottom line and need not to be a Fed, you know, and they need to have the common call point. And we continue to be very mindful and thoughtful in terms of our execution.
spk08: And then the final question I'll take, you asked it about the guidance for the year. Yeah, I want to reiterate, we're absolutely confident to deliver between the 18% and 20% adjusted EBITDA guidance we gave for 2023. The upper limit, as we discussed earlier, will really depend on China and also just reaffirming our long-term 2025 guidance, which we gave during Investor Day. Thank you.
spk15: The next question is from Linda Bolton Weiser of DA Davidson. Please go ahead.
spk11: Yes, thank you. Sorry if I missed this, but can you give an operating cash flow number for 2022? And then I know you kind of mentioned some investment in working capital. Is there some kind of a rough outlook that you have for operating cash flow in 2023? And then my second question is, What are you seeing or learning so far regarding the connectivity and the data and analytics you're able to have now with the connectivity of that new Cindeo device? What are you seeing or learning so far with that? Thanks.
spk01: Linda, I'll address the free cash flow question first. We had spoke about we invested in working capital heavily in 2022 as we're getting ready to launch Zendale globally. As we learned, if you recall, when we launched in the US, we ran out of inventory. We were very quickly trying to speed up and really ship the unions out. So we're in a really good position as you can observe our, you know, inventory balance. You know, obviously if you look at us, you know, we pay about 10 million, you know, in terms of interest, we pay about 20 million CapEx. You know, if you assume that EBITDA margin will be, you know, a guaranteeing for 2023, That, by definition, should be in a cash flow positive position. So then they all boil down to working capital. So once we launch globally in the second quarter, Linda, our expectation is really managing that working capital closely. And you should see more of a beneficial trend coming through the second half of 2023. We feel positive about cash flow generation starting at the end of 2023.
spk08: Thanks, Linda. And in terms of what we're learning, you know, coming up for nearly a year since we launched in the U.S., we're learning a lot. I think, you know, we're learning, adjusting. It's giving us a number of insights, firstly, on the consumer and the number of, you know, sort of more customers. depth of knowledge on the consumer. It's helping us develop new products and protocols, such as Body, which is obviously going to be a key strategically for us this year. Also, we're learning how to improve the system and the software, and we're always iterating and learning and improving the system based on provider feedback, based on what we're learning of that data. And that's why, again, I think it's another advantage why we waited for a year before launching internationally. We're able to take all of those learnings and optimize that for that launching Q2 overseas. And I think in coming courses, we'll share, you know, more insights with you on what we're learning.
spk15: This concludes our question and answer session. I would like to turn the conference back over to Andrew Stanlick for closing remarks.
spk08: Well, thank you everyone for your questions. Just to close, I will reiterate our confidence in the path forward. I think with our investments now largely complete, we have the infrastructure in place to deliver on our profitable growth strategy. I think we have an exciting year ahead with Sundare's Q2 international launch, differentiated partnerships to drive consumable sales and recruit new consumers to the brand. China's reopening and the integration of skin stylists. So we look forward to continue to execute and further our category leadership in 2020 through and beyond. The team will be available today for any additional questions you have. Once again, thank you and have a great day ahead.
spk15: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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