SkinHealth Systems Inc.

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.

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.

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.