The Beauty Health Company

Good day and welcome to the Beauty Health Company first quarter 2023 earnings conference call. All participants will be in a 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 a touchtone phone. To withdraw your question, please press star then two. 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 our first quarter 2023 financial results, which were released this morning and can be found on our website at beautyhealth.com. We also encourage you to join the webcast available on our website which contains a presentation that will be referenced during this call. With me today are Beauty Health's President and Chief Executive Officer Andrew Stanlick and Chief Financial Officer Lian 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. 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 first quarter 2023 earnings call. Today, we'll discuss the drivers of our Q1 results and our raised outlook for fiscal 2023. I will discuss our performance and accomplishments for the first quarter. Later, Leanne will provide more detail on our financial results, after which we will be happy to take your questions. As always, I want to start by thanking our beauty health team members, our estheticians and provider partners, who together make up our global hydrafacial nation for their continued hard work, passion and creativity. During the first quarter, our team made meaningful progress against our five-point master plan, positioning us well to capture the tremendous growth we see ahead for our business globally. All in all, we delivered a solid 14% net sales growth for Q1, continuing a quarterly trend of double-digit revenue growth. Quarter one was highlighted by a particularly strong March, which was our second highest net sales generating month ever. demonstrating a building momentum ahead of the Q2 international launch of our Sundeo system and reinforcing our confidence in our 2023 guidance. Q1 performance overall was anchored by 21% year-over-year consumables net sales growth, a signal of the strong underlying demand for hydrafacial treatments as consumers continue to prioritize products and treatments that make them feel good about themselves. On slide 5, you see that consumables net sales in the Americas grew a staggering 34% for the quarter, demonstrating the continued strong consumer demand for hydrofacial. In EMEA, we achieved 13% growth year over year. Excluding Russia's 1.2 million contribution to Q1 consumables net sales in 2022, EMEA's consumable growth was 35%. In APAC, COVID-related shutdowns in China created consumable sales softness in January and February. However, March saw a rapid acceleration as the country reopened. On the delivery system side, net sales grew 9% year over year. As a reminder, we saw a very robust performance in the first quarter of 2022 with the launch of Sindeir, which creates a difficult comparison for growth in the first quarter of this year when combined with the loss of the Russia business. Additionally, we saw a natural degree of holdback on the delivery systems from providers outside of the U.S. in anticipation of Cinde's international availability in Q2 2023. Finally, going back to China, prolonged COVID closures during the early months of the quarter weighed on device sales performance. However, we saw a strong resurgence as of March. In fact, March shattered the previous monthly record for delivery system sales in China by two and a half times, as providers readied to meet consumer demand. After visiting China in April, my first time since the pandemic, I am very optimistic about the potential of returning to pre-pandemic growth rates. The investments we made in China in 2022 have served us well, and I can attest that we have a strong team and operational infrastructure in place in order to seize the large opportunity in the strategic market. Even with these factors at play, the number of new delivery systems sold globally during the quarter grew 4%. and our ASP grew 17% year over year. As we have previously discussed, the first quarter is historically our smallest quarter of the year due to the natural seasonality of our business. Looking ahead to the second quarter, we are very encouraged by the return of consumer and provider demand that we see from China and the early performance of Cindeo's international launch. This, together with the investments we made last year and favorable market trends, gives us the confidence to raise our 2023 net sales target and reconfirm our 2023 adjusted EBITDA margin guidance and long-term 2025 targets. As we typically do, I would like to walk you through the progress we have made against our five-point master plan in Q1. The strategy remains consistent and is laser-focused on delivering profitable growth while moving with speed and agility to capture the tremendous opportunity we see ahead of us. Starting with our first pillar on slide seven, in Q1, we marked the first anniversary of the US launch of Sendero, our revolutionary connected delivery system. March 30th, we announced Sendero's international availability to great excitement at the AMWC trade show in Monaco. Today, Cindea Systems are live in 14 of our direct markets, with the balance to follow by the end of the year. One year on from its debut, we have placed nearly 5,000 Cindea Systems across the world. We are very pleased with its uptake to date and expect growth to continue as we execute on our international Cindea launch and capitalize on broader sector tailwinds. In fact, the MedSpar channel, the core of our business, is expected to grow at a 14% CAGR for the next five years in the U.S. alone. And we'll continue our Cindea rollout with the distributor markets in 2024. In the meantime, our elite system will continue to be sold in our distributor markets, including those elites that we refurbish in connection with our Cindea trade-up program. The second strategic pillar is a commitment to investing in our providers. Our world-class training programs and experience centers are instrumental in fostering these connections. To date, we have trained more than 40,000 estheticians globally, turning them into ardent brand evangelists. In fact, those who have gone through one of our training programs not only generate double-digit growth in consumable purchases, they are much faster to purchase a second system for their practice. These trainings teach our providers valuable skills and best practices when it comes to hydrafacial treatments, and offer business-building acumen to drive practice growth. This month, we launched a new business-focused curriculum, a mini-beauty MBA, if you will, which targets med spa owners, medical directors, and physicians, further deepening our relationship with our community. These programs are taught virtually and in our experience centers across more than a dozen global cities, including New York, London, Paris, and Shanghai. The facilities act as more than just training hubs. They serve as showrooms to host influencers, editors, and key opinion leaders in every region. I recently had the pleasure of opening our new experience center in Beijing, our second in China after Shanghai. This state-of-the-art facility includes a live streaming studio for 24-7 production of localized, engaging content. Reopening China, we are incredibly excited about the opportunity in the strategic market. Next, we continue to build awareness for our much-loved Hydrafacial brand. The primary objective of our marketing engine is to drive traffic to providers, bringing buzz and hype through their doors. You may have seen this in our birthday cake takeover last week, photos of which you can see on slide 9. Rang the Nasdaq opening bell, showed up on Times Square billboards, and seeded birthday cakes to top influencers around the world. Together with our partners, we are creating unique attention-grabbing moments that capture the public's imagination. Just last week, our teams collaborated with Sephora's top doors across the U.S. to host exciting co-branded events. As a reminder, PERC bihydrafacial treatments are available at Sephora's in the U.S., Canada, the U.K., and Southeast Asia. We carefully measure a variety of consumer engagement metrics, such as earned media value and Google search trends, to ensure the effectiveness of our marketing programs. As I mentioned earlier, consumer enthusiasm for our brand remains as strong as ever, with the two most recent quarters representing our top two highest consumables net sales quarters ever. You can see from the headlines generated and consumer awards earned that Hydrafacial has never been hotter in the eyes of consumers. As one beauty editor put it, Hydrafacial is having a renaissance. Concretely, you can see on slide 10 the results generated in earned media value, which grew 134% year-on-year, despite comping against the buzz around Cinder's U.S. launch in Q1 of last year. Today, Hydrafacial is a leader in earned media value in aesthetics, with more than twice the combined EMV of the next five peer brands. we are reaching towards the level of conversation only seen by mainstream beauty brands, cracking the top 50 US skincare brands in March 2023, as measured by Tribe Dynamics. A rising consumer awareness also shows through in organic Google search trends, which are up 13% year-on-year and 53% versus 2021. As we discussed last quarter, the planned elevated investments we made over the past two years were designed to build scalable global infrastructure. One of the important elements of that investment was building our foundation in China, a critical growth market for us. With a TAM of at least two times that of the US, China is a massive untapped opportunity for beauty health. Recent reports estimate that China's middle and upper classes will increase by over 80 million to account for 40% of the country's total population by 2030, This is Hydrofacial's prime target consumer. While the COVID lockdown persisted longer than any of us reasonably predicted, we are pleased to see a budding resurgence in China as economic activity returned in earnest starting in March. Enthusiasm for beauty and aesthetics treatments in China is rapidly growing, particularly for non-invasive and minimally invasive treatments. Hydrafacia, with its gold standard positioning and relatively low cost of capital, is the perfect gateway product for providers to capitalize on this sector tailwind. During my recent visit to the market with Leanne, there was a palpable excitement around the launch of Cinder and its potential to revolutionize the future of preventative skin health. In fact, nearly all our providers now report operating at full capacity, with traffic nearly back to pre-COVID levels. We look forward to sharing more on our performance in the region over coming quarters as we continue to bring Hydrofacial to the opportunity-filled Chinese market. Moving on to our strategy as it relates to M&A on slide 12. Since our inception, our vision has been to build beauty health into a multi-brand platform through a build and buy strategy. have a strong cash position to pursue inorganic opportunities, and we continue to be opportunistic and evaluate opportunities that provide differentiated products or services, are complimentary to our platform and community, and are financially accretive. A tangible example of our approach to M&A is our recent acquisition of Skin Stylus, an FDA-cleared microneedling device that we discussed on our last earnings call. As an esthetician-founded brand, SkinStylus fits seamlessly into our platform and expands our portfolio in the treatment room. I am pleased to report the integration of the business is now complete. While we continue to expect an immaterial contribution to net sales from SkinStylus in 2023, we are very excited about the potential upside in 2024 and beyond, the details of which we will share in due course. Before Leanne begins her update, I would like to again thank our teams around the world for their strong performance. This quarter, we continued to drive double-digit top-line growth, announced the highly anticipated international launch for Cinder, and integrated a new product into our platform. Friends, we are seeing aesthetics play perfectly into our multi-brand ecosystem, supporting our strategy and validating our long-term growth runway. Continued strength of our consumables business, the growing consumer interest in our brand, and our unique third-party brand partnerships, when combined with the international expansion of our breakthrough Cindea system and competitive moat of patented technology, fuels our ability to win in 2023 and beyond. And with that, I will turn the call to Leanne.

Thank you, Andrew. And thank you, everyone, for joining the call. I'd like to take a moment to echo Andrew's gratitude to our teams and partners around the world. we delivered double-digit top-line growth in the first quarter against the timing of last year's US and DAO launch. Today, I will walk you through our first quarter results, cost and balance sheet highlights, and finally, our outlook for the rest of 2023. Turning to net sales on Spike17, we delivered net sales of 86.3 million in the first quarter, up 14% year-over-year, driven by strong demand for consumables, which grew 21% year-over-year. The net sales result is in line with our plan as we comped against Sundale's U.S. launch from Q1 last year and reflects an unsurprising impact from January and February COVID-related shutdowns in China. Our delivery system segment grew by 9% year over year. There are three primary drivers behind the moderated growth. First, comping against a strong launch of Sundale in the U.S. last year. the January and February COVID-related shutdowns in China. And third, providers outside of the U.S. holding purchases of delivery systems in anticipation of the Sendil International launch in Q2 2023. Addressing the first driver, Sendil's surprise and successful launch in the U.S. was in Q1 2022, making a year-over-year comparison difficult. On the second driver, As you recall, China broadly announced reopening at the end of last year. However, a wave of COVID infections shut down the market in January and February. Finally, in March, the market began rapidly recovering. As Andrew mentioned, in March 2023, we sold two and a half more China's previous high for systems sold in the month, giving us confidence around the opportunity in the region. Last, As is natural, international providers held purchases of delivery system in Q1 2023 in anticipation of Sandeo launch in Q2 2023. Importantly, Sandeo's international launch performance to date is promising, with strong traction across our launch market. As a reminder, the first quarter historically contributes the smallest net sales and adjusted EBITDA to our physical year. We have expected and continue to expect our growth to be back half-weighted in 2023. This is consistent with our historical business model and what we contemplated in our guidance. The momentum we see to date gives us the confidence to raise our 2023 outlook to a range of $460 to $480 million in net sales and reiterate our 18% to 20% adjusted EBITDA margin target, which I will explain in further details in a moment. Turning to our original performance on SPI-17, you will see the America segment was strongest with 19% year-over-year net sales growth. Growth in this region was driven by strong consumables net sales, which grew 34% year-over-year, a testament to the continued consumer demand for hydrofacial treatment. EMEA followed with growth of 10%. driven by pre-launch demand for refurbished EV systems and providers holding orders in anticipation of Sembail's Q2 2023 launch. As Andrew mentioned, EMEA's performance was impacted by a lack of net sales from Russia in Q1 2022. Excluding Russia's 2022 contribution of approximately 1.5 million, EMEA's total net sales growth was 20% year over year. Turning to APAC, despite the COVID shutdowns in China for the first two months of the quarter, we achieved growth of 6% year over year. As Andrew mentioned, we're encouraged by the recovery we have seen starting in March. Briefly touching on our KPIs on slide 18, we ended the first quarter with a net install base of 27,406 delivery systems, an increase of 26% year over year. Consistent with what we discussed last quarter, We saw systems unturned and become active again in Q1 in connection with China's recovery in March. Excluding trade-ups, we placed 1636 new delivery systems in the first quarter, representing growth of 4% year over year, despite lapping Sandeel's U.S. launch. Important to note, we expect trade-up volumes for Q2 2023 to materially step up from Q1 2023 as we execute our Sundale international launch strategy and drive continual adoption globally. This would follow a similar pattern to last year's Q2, with the exception of smaller contribution for international. Our ASP for the quarter grew 17% to $25,099, primarily driven by the increased mix of Sundale sold in Q1 of 2023, compared to the same period last year. As a reminder, Sundale launched in the U.S. in early March 2022. As we have stated before, while full-year ASP growth will be heavily influenced by the extent of trade-off systems sold, we continue to expect a high single-digit increase in the blended ASP for the year. Turning to slide 19, I would like to take a moment to remind you why we're so excited about our strategy and the future growth of our business. The top chart shows the annual consumables revenue per delivery system in the MedSpot channel, the core of our install base. As you see, delivery system revenue productivity grows over time as providers utilize their systems more often, upsell booster treatments, and expand treatments beyond the phase. We're just getting started in unlocking the embedded potential of our install base. The chart is a demonstration of the long-tailed lifetime value each one of our system placements represents. a promising source of upside for consumables net sales in the future as our install base matures. On the bottom chart, you can see how long it takes for our MedSpy install base to ramp up its productivity. As we have shared before, it takes at least four quarters before meaningful gains are seen. As we continue to rapidly expand, and build our footprint amidst a massively growing category, our install base is getting younger, shifting where we fall on these curves to the left. This means using a per system utilization metrics today understates the true potential and health of our business, as we believe our install base will ultimately mature and become more productive over the long term. Moving to slide 20. For the first quarter, we reported a GAAP growth margin of 62.7% or 70% on adjusted basis. Growth margin declined year over year on the GAAP basis due to 3 million of inventory optimization related write-offs, which was added back to adjusted growth margin. As we all know, the supply chain environment has been volatile since the start of the pandemic, forcing us to be resourceful with components to meet growing demand. As mentioned before, This means we have been inefficiently assembling systems during the supply chain volatility. Now that the supply chain is stabilizing, we are opportunistically value engineering our materials and processes by scrapping components in favor of more efficient options. We believe this will optimize our operations in the long term, but it does come with near-term expenses as we streamline our inventory. On an adjusted basis, gross margin declined by 133 basis points, permanently driven by the sale of lower-margin refurbished EV systems during the pre-Cindale international launch period. We continue to expect year-over-year gross margin expansion for fiscal 2023 as part of our journey towards our targeted 18% to 20% EBITDA margin. Given the similar trade-off dynamics with launching Sindale, we expect the gross margin for the first half of 2023 to be pressured, as it was in the first half of 2022, with expansion expected sequentially in the second half of 2023 with increased volume. Moving to the bottom right, we reported adjusted EBITDA of a negative $0.5 million for the quarter. As mentioned earlier, international launch costs for Sandeel were incurred this quarter, but given the Q2 2023 launch timing, the associate net sales upside is expected in the second quarter and beyond. This, along with the OPEX burden created by the January and February shutdowns in China and the lower growth margin inherent in refurbished EV sales, impacted our profitability for the quarter. Our adjusted EBITDA also included $1 million of patent litigation expense and $2.9 million of severance and restructuring expenses as we continue to optimize for profitable growth. I want to spend a few moments on slide 21 to remind you of the seasonality of our business, which bears repeating not only as we look at Q1 performance, but also our expectations for the full year of 2023. On the left, you will see our sequential net sales growth patterns throughout the year. Q1 sequential growth rate represents a 12 for the year, resulting in lower net sales compared to the preceding Q4 and the lowest quarter of the year. As we mentioned previously, this Q1 is no different. With China's shutdowns in January and February, and international providers holding back in anticipation of Sundial's Q2 2023 launch, amplifying the sequential seasonality. The second quarter typically gains momentum sequentially due to the marketing activities conducted in the first quarter. As a reminder, The second quarter of 2022 saw a one-time 23.3 million benefit from trade-off demand in connection with the U.S. Sundale launch. With the Sundale International launch now in full steam, we expect Q2-23 to experience a similar but less pronounced one-time spike in trade-off demand. Q3 continues to build on Q2's momentum, with relatively moderate sequential growth excluding trade-offs. This is due to a seasonal summer slowdown that is broadly applicable across the beauty sector, particularly in EMEA. Lastly, the fourth quarter builds off Q3 and is historically our highest dollar quarter of the year. It benefits from a peak in consumer demand, holiday promotion, and the desire by many of our partners to utilize remaining CapEx budget for the year. Moving to slide 22, I wanted to reiterate how to think about the sequencing for our profitability during the year. We turn on our strategic marketing investments early in the year, which subsides as we progress throughout the year. Our biggest and most productive trade shows occurs in the first half of the year, and the leads generated from these strategic investments support our funnel and fill the stronger sales and margins historically see in the second half of each year. On this slide, you can see the results of this quarterly sequencing in adjusted EBITDA contribution in 2022. Similar to last year, Q1 generates a minimal amount of the full year's EBITDA. Given our substantial fixed cost base, the net sales seasonality we just walked through naturally makes us a back half weighted business for EBITDA flow through. We extract operating leverage from the higher revenue in the back half of the year, and our marketing spend moderates as the year progresses. We expect our 2023 quarterly EBITDA contribution to follow a roughly similar cadence as shown on this slide, with the bulk of the EBITDA generated in the back half of the year as is customary for our business. Important to note, And as we just discussed, Q2 2022's EBITDA contribution reflects a higher trade-off volume than we currently anticipate for Q2 2023. I will now turn to slide 23 to walk through our cost details. Selling and marketing expenses for the first quarter were $38.7 million compared to $36.4 million in the same period last year. The increase is primarily due to higher personnel-related costs including sales commission expense. Selling and marketing expenses as a percentage of revenue decreased 342 basis point year over year, partially due to the lapping of Sunbill U.S. launch costs and increased operating leverage from higher revenue. First quarter G&A expenses of $30.4 million were $4.1 million higher year over year, primarily a result of an increase in software expenses, including certain contract termination costs and professional service fees, including patent litigation expenses, partially offset by lower recruiting-related expenses. On a run rate basis, our G&A expenses continue to hover around $20 to $22 million. Lastly, RMD costs continue to remain relatively flat. I will now move to our balance sheet highlights on slide 24. We ended the first quarter with roughly $532.3 million in cash and cash equivalents. We remain well capitalized to execute on our growth initiatives and continue to remain optimistic about M&A that accelerates the vision of our platform. As discussed during the last earnings call, we continue to make working capital investments during the first quarter in anticipation of Sandeo's international launch. With the launch now upon us, we expect to reduce our working capital balance going forward, primarily by working through our existing inventory. As we mentioned before, we expect to normalize to approximately one to two quarter worth of inventory on hand by the end of the year. Finally, our diluted share count at the end of first quarter stood at approximately 132.6 million. In April, we completed the second 100 million tranche of our accelerated share repurchase program. With the 200 million of total shares repurchases announced last year, we retired approximately 18.8 million shares at an average price of 10.78 per share. As Andrew mentioned, we continue to have strong underlying consumer demand. The global traction for Sundial has been strong, and China has shown a rapid recovery since March. These trends are part of what gave us the confidence to deliver the implied year-to-go net sales growth shown on page 25. As I mentioned earlier, we expect value engineering to create growth margin expansion and top-line strength to deliver operating leverage down the P&L, combining to reach an 18% to 20% adjusted EBITDA margin for the full year. As Andrew mentioned, we remain confident and on track to deliver our 2023 commitments. we continue to deliver double-digit year-over-year growth, fueled by our marketing efforts, driving sustained consumer demand throughout our markets and sector tailwinds. The execution of the Sunbill International launch to date has been promising, and we look forward to providing you with an update during our next earnings call.

Andrew and I will now gladly take your questions.

We will now begin the question and answer session. To ask a question, you may press star then one on your touch tone phone. If you are using a speaker phone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. In the interest of time, please limit yourself to one question. At this time, we will pause momentarily to assemble our roster. The first question today comes from Corinne Wolfmeyer with Piper Sandler. Please go ahead.

Hey, good morning, and thanks for taking the questions. So I'd like to touch a bit on kind of, one, what you saw throughout the months of the quarter. And you noted that, you know, there were some maybe customers that were waiting to purchase for Sundeo. Did you see those customers come back and those purchases come back now that Sundeo has been launched? And then as we look to, say, March, April, and even the early parts of May, can you comment on what kind of trends you've been seeing in demand, both on the delivery system side and consumable side? And particularly in China, has that demand, strong demand you saw in March continued throughout April and May? Thank you.

Good morning, Corinne, and thank you for the question. It's spot on. So, you know, I mean, overall, we go over a really solid Q1 in line with our plan. You're absolutely right. It was a build. We always had that normal seasonality in Q1, which we had in our plan. And if you look back on previous years, it's very consistent. And we did see it build. So as we say, March was actually our second highest month ever, which we were very happy with considering that's before the international launch of Cindeo. So, of course, driven by strong really across the board, but consumer boards, particularly across the court, performed well. So that gave us the confidence, really, of what we saw going into April globally in all markets, especially in China, where Leanne and I have just visited, to obviously raise the guidance for the year. And everything we've seen into Q2 is really positive. And, of course, Zendaya has got off to a tremendous start everywhere since we launched it early in Q2.

The next question comes from Margaret Cather with William Blair. Please go ahead.

Hey, good morning, everyone. Thanks for taking the question. You know, I wanted to maybe go a little bit deeper on some of the commentary on March and China. I know Corinne had just asked that, but was that primarily Shanghai? Are you getting some benefit from Beijing? And is there any commentary, I guess, that you could provide on the new experience center, whether that's driving demand and even a sense of scale, I guess, relative to what you saw, you know, early days in Shanghai as an example? Thanks.

Good morning, Margaret, and thanks for joining us. Yeah, no, exactly. In terms of China, of course, you know, January was very much, you know, we saw very impacted by COVID, February, Lunar New Year, but really from March onwards, we saw a tremendous bounce back, both with existing providers turning back on the machines, retraining staff, making orders, but then, of course, going into Q2, of course, the launch of Zendaya. And we've seen the pickup, of course, in Shanghai, Beijing, Shenzhen, but really across the board, Margaret, I think What we're finding all over China is after, you know, a couple of years of lockdown, there's a real, you know, hunger for aesthetics, beauty and skincare treatments. So, you know, we were really, really felt very positive when we spent a week or so over there. You know, of course, the Experience Centers really help us in rapidly training those staff who have obviously been locked down and bringing them up to speed on Hydrofacial and, of course, the new SINDEO system. So that's been working, you know, hard. The other great thing about the new Experience Center in China is that we've built a live-streaming studio within it so we can, you know, make content 24-7 to live-stream. And, you know, that's a key revenue driver in China.

Yeah, we're really bored with what we saw there.

The next question comes from Olivia Tong with Raymond James. Please go ahead.

Great, thank you. Good morning. It sounds like you had quite a strong April, so could you talk about the key drivers to that, maybe some quantification in terms of exit rate in the March quarter and how April into May has changed relative to that exit rate in March or, you know, compare and contrast Dan Feb performance versus April and first half of May. And then my second question is around consumables, because that seemed to be lower than expected. I get that, you know, Asia was obviously, China was obviously locked down at the beginning of the quarter. Was that demand lower than you had anticipated, and was it all Asia, or was the makeup of sales in the U.S. and Western Europe different than you had expected going into the quarter? Thanks so much.

Good morning, Olivia. I'll kick off and perhaps also hand over to Leanne. So, you know, we I think we've spoken all of us many times about the real natural and consistent seasonality we had in our business in Q1. And, you know, it was in line with what we planned with that slower January, slower February. And then a very strong resurgence bounce back in March and into April. I think, you know, what we were really happy with overall at the solid quarter is just, you know, we often talk about, and you and I have talked about this before, you know, the barometer of the health of our business, of course, that strong consumables growth and, you know, achieving plus 21% overall for the quarter. Plus 35% in America's, you know, when you think of EMEA, if you exclude the Russia business, which we lost the year before, that's another 35%. And APAC there, 22%. APAC was very back-weighted. So you can imagine the growth which we got in March was absolutely tremendous. But, of course, January and February was slower. And we've seen that go into Q2. And, of course, buoyed by the launch this day. If you think of the international markets, Olivia, we've had no new news on the system side for over five years. And a lot have happened in that time. So to go in with a big story, a big marketing push, all around the big trade shows, which were always very Q1 and early Q2 weighted, there's a lot of excitement. And that's translated into revenue and consumables pickups.

Yes, Aliva, just to build on that, from a launching dynamics point of view, as you can appreciate, it's almost destroyed it. We made the investment in Q1 and we're launching. As part of the launch, we sold a lot of these refurbished elites, almost just saying you can trade it up down the road. So as you can appreciate, these refurbished elites If we did sell some DAO versus that, you can see a potential 46 million top line and complete flow through to the EBITDA margin as well. Of course, those revenue generation would actually take place in the second quarter. So, you know, again, marketing investment, a lot of the investment were made in Q1, but then the revenue really comes through a build starting in Q2. Now, in terms of the consumables, the only other comment I'll make is I think the churn you know, really confused folks last time when we met because of the fact that China was shutting down and we're measuring, you know, if someone hasn't purchased consumables over 12 months, we deem them churned. The fact that China came back, that's why you're actually seeing the install base increase because of those stores or locations start to opening again. So I think, you know, when you see it in the grand scheme of things, the other thing to keep in mind, we had shared with the market we only run consumable promotions for the most part, twice a year, right? We do it during Black Friday. Then we do, again, Hydrofacial Birthday or Mother's Day right around May. So as a result, as you can appreciate, some of the APAC market, especially distributors, they kind of purchase based on the promotional period. So that explains the down 21, you know, partially what Andrew had mentioned for APAC consumables as well.

So there's a bit of timing, you know, when it comes to the Q1 results.

The next question comes from John Block with SQL. Please go ahead.

Thanks, guys. Good morning. I guess I'll ask a pretty direct question. You have a lot of confidence in the business. You raised the top line, the EBITDA absolute, but you seemingly missed your 1Q23 implied figures from the late February call. And I just want to sort of ask, I mean, is that fair? EBITDA was a tad negative. Gross margin was below the year ago. I think you sort of said you expected in line. So these are small deviations, but I want to make sure the messaging is pretty cleaned up. And what is it if that was the case? Because you called out China having a great march. So was it all attributable to the delay in capital purchases for EMEA that caused the supposed disconnect? And then just the follow-up is, you know, the consumable growth by region, those details were very helpful. the Americas number, consumable number, is very solid. So, Andrew, is it just, you know, attributable to the 1Q23 Americas environment on a relative basis better than EMEA and APAC? Or is it a Sandeo thing, you know, which would be encouraging because maybe we could extrapolate that to EMEA and APAC in coming quarters? Thanks, guys. Bonnie, John, thanks for your question.

I mean, the key message is, John, for us, it's a really solid quarter in line with our plan. I mean, we expected that natural seasonality, certainly across the Americas. I think the consumer war that a plus 35 was was something which we were extremely happy about. Outside of that, though, John, you're spot on. I think what we saw, and I think you and I probably spoke over last year, I think with the U.S. last year, we were able to surprise the market with the launch of Zendaya. I think what we found outside of the U.S. into Q1, there was a natural degree of holdback from providers in EMEA and in APAC because they sensed Zendaya was about to launch. I guess it's human nature. They waited for that to come. And of course, then when we did launch it, we really had very strong sales since into Q2. But that certainly explains that dynamic in any deviation you felt versus what you were expecting outside of the U.S. for Q1. But it was in line with our plan.

Yeah, John, just to address your question in terms of the guidance, you know, we were very thoughtful and purposefully sharing the seasonality, you know, when we had the conversation back in February. And the fact that, you know, given the launching time, you know, there's anticipated potential wait and slowdown to Andrew's point earlier. I think on the growth margin point, we were fully anticipating, you know, coming consistent to last year. But when you really think about the dynamic with the growth margin, there's a bit over 100 basis point difference. Most of that is, you know, folks really choose to buy the elite refurbished, which is what we plan to do as part of the trade-up program, especially when it comes to APEC and EMEA. And as you can appreciate, those trade-up, you know, elite refurbished, have very, very low margins because a lot of those came back from the trade-off with the U.S. So it's how we really book the revenue and margin. So these are very temporary impacts. If we sold both some deals and these refurbished leads, then we would have actually had a slight take-up. So there's a bit of the timing that's really impacting growth margin for Q1. And that's partially why we felt pretty confident going forward. You know, of course, we're going to continue to push for trade-off. And, you know, we still have refurbished Elite to go. But given the volume and the ASP coming with new Sandeep systems going forward, we believe, you know, consistently we will see the sequential improvement in growth margin.

The next question comes from Oliver Chen with TD Cowen. Please go ahead.

Hi, Andrew and Leigh Ann. On the guidance raise, what underpins your confidence there and also what's assumed in the China situation in terms of your guidance? A modeling question on your comments, Leigh Ann, on trade-up. How should we think about the margin impact this year relative to what you saw last year in the U.S. for our models? And you covered a lot of great detail on consumables. Just what's the bottom line on near-term growth versus long-term growth that we should incorporate into our thinking and algorithms? And then I should enroll in your beauty MBA. Congrats on that.

Good morning, Oliver, and thanks very much for your questions. I'll kick off and allow... Leanne, to follow up. But no, we feel good about raising the guidance from the year. I guess two very clear factors. First of all, what we have in the plan, but just combined with the momentum, frankly, we've seen coming out of March globally, and also with the really encouraging start to Sindayo. And then I think when you add on the real strong acceleration from China on in March, You know, that's what gives us the confidence to raise. And I think, you know, we spent the last couple of years, we spoke many times about building up that infrastructure, putting the sales team in place, the training and education centers, getting the right partners. And that's all in place now. And we're reaping the rewards of that. So, you know, it's a really positive moment for us.

Yeah, just to build on that, Oliver, as you can see for Q1, we actually did positive comp when it comes to America's new system sales, which speaks for volumes, right? So the part that's missed is really trade-offs. When it comes to the fact that we were launching last year, so we sold much more trade-offs last year's Q1 because it was a fresh launch when it comes to U.S. As we look at the margin, again, if you really think about the dynamic with the elite refurbished, You know, if those, call it 200, 300 units, we didn't sell the refurbished, we actually sold Fuang, Sembeo, you would have sold 4 to 6 million top line and directly flow through the bottom line. So in that vein, you know, we are going to push pretty aggressively, as we shared before, on trade-up overall, and that's going to be around the globe, right? we really want everybody to be on some deal because not only that provides data to everybody, better services, better product, newness, but also it really helps from a consumable management point of view. So in that vein, I think we will still anticipate sequential build when it comes to gross margin percentage because all the new units you know, with the margin now, gradually with the optimization should start to really flow through, especially also with the volume.

You know, as we increase in volume, you should start to see those leverage as well.

The next question comes from Alan Gong with J.P. Morgan. Please go ahead.

Hi, thanks for the question. I just had a quick one on, you know, I guess the language in your presentation. I think historically, you've really talked about, you know, new systems sold in the quarter. And this is the first time I think that you've phrased as new systems placed. So like, should we read into that as you're seeing, you know, maybe a bit more financing, maybe a bit more leasing, if you could, you know, double tap on that a bit. And also, I think you know, something that would really be helpful is this China dynamic, right? We understand that it really impacted the system bill numbers in fourth quarter, and we've seen a little bit of a reversal of that in this quarter. But is there any way to quantify that in terms of, you know, number of systems that turned back online in first quarter, and whether or not you expect that to be a similar dynamic to really keep in mind for second quarter? Thank you very much.

Okay, Alan. Great question. No difference. Sorry, we probably should have just been consistent, use the word sold. But placed and sold are exactly the same. The only reason we said that is to emphasize it's really placed without trade-up. It's just new system sold. It doesn't include trade-up. So just wanted to make that really clear. Obviously, the trade-up is not as pronounced compared to last year. In terms of the churn, you know, we're constantly measuring it based on purchase patterns. So the churn can change, you know, also based on who bought consumables again. Not only we're seeing it, and I believe most of the China numbers should have reflected already, based on the fact that they did come back, you know, in February timeframe. But also, even in the U.S., you know, we continue to observe as we run these consumable promotions, as we really target different tiers of customer, there are also, we're starting to see really positive signs you know, some of the providers starting to buy consumables again. So that will continue to improve as we become even more targeted, you know, targeting these providers to purchase consumables.

The next question comes from Bruce Jackson with the Benchmark Company. Please go ahead.

Hi. Good morning, and thanks for taking my question. It's about the new guidance. Last quarter, you said that the swing factor in the guidance was China, and you just took guidance up for the year. So reading between the lines, should we interpret that to mean that you're more confident about China, or are there some other geographies that are doing better than expected?

Morning. It's good to speak to you, Bruce. I think it's twofold. I think we've had a very Very encouraging start internationally to Sundeo overall. On top of the continued strength in the US, you saw that, of course, in that consumable number here in the Americas. But yes, John, China recovery is a key element of that. I think we've been extremely pleased with what we've seen so far from March and going into Q2. We'll follow it very closely, but that's what's giving us that real confidence, along with the Sundeo launch, to raise the guidance.

The next question comes from Linda Boltenweiser with DA Davidson. Please go ahead.

Yes, hello. One of the metrics we look at sometimes is Google search trends for hydrafacial. And what we've noticed lately is that the trend is still positive, like growth in searches year over year. But quite frankly, less positive than in the past. So in the past, maybe it'd be up 40%, 50% year over year. And now it's more up like 5% to 10% year over year. Is there any reason that those Google search trends would look differently? Thanks.

Morning, thanks for your question. I mean, twofold. I mean, first of all, for the quarter, just to clarify, Google search, organic search was up 13%, which I think when you take it back and think that's a pretty amazing result because it comped the launch of Cindea last year in the US and we had a huge push around that, as you're aware. So to comp that number with 13% is honestly, frankly, a tremendous effort. And of course, we're happy with that. I think ongoing, I mean, the growth remains very positive. It's just one measure we look at. But of course, the bigger you go, getting those huge comps will naturally slow down. It's just mathematics.

But it's, of course, a key focus for us at Search.

The next question comes from with BNP. Please go ahead.

Hi, thanks for taking my question. Do you feel more confident about the low end of the 18-20% with the rebound in China in March, April, and early May versus the gross margin impact in the first half. And then my second question, have you seen any signs of microheadwinds on hydrafacial in the U.S. and Europe at all? And maybe if I can add a third one, have you submitted the 510K application for the skin status facial indication? And should we expect more information during the next quarter? Thank you.

Morning, and thanks for your brilliant questions. So first of all, I'll kick off and then hand over to Leanne. First of all, if I tackle the question in relation to the economic environment, I mean, I think we often say that consumer was a barometer for the health of our business. And whilst, you know, no business is recession-proof or immune, I must say beauty, health, and hydrophage, we play in those categories which are more resistant, skincare, aesthetics. And, you know, despite the, I think what we're seeing when I speak to providers and I'm traveling all around the world is there's a real disconnect between what we were reading in the newspaper headlines and online with actually what providers are telling us. You know, many of our providers are fully booked months in advance. In fact, their biggest challenge is actually, you know, sometimes finding people to deliver the service. So it's very robust. We saw that throughout Q1 and certainly into Q2. So, you know, that's what gives us the confidence to raise the, you know, revenue. In terms of your question on the margin, we commit absolutely to the 18 to 20. I think what we want to do is come out of Q2 and then look at giving further clarity on any raised guidance for EBITDA for the rest of the year. But at the moment, we're absolutely committed to that range 18 to 20.

Yep. And just to build on that point, you know, if you think about the reason why we feel confident about the EBITDA flow through, I would say a couple of fold. One, on the growth margin, you know, we have been not only setting up the production site in China for the local production, but also continue to value engineer and manage our inventory flow through. And we've built in the trade-off assumptions already as we provided the guidance previously. So the more upside we can see with the growth of China, which actually have the highest ASP, highest gross margin percentage, combined with anticipated further sales of the Sandeo product, while without value engineering that, that gives us a lot of confidence on that sequential improvement for gross margin. Separately, as you can see, we actually invested pretty heavily in selling and marketing in Q1. The fact that we have 300 business point plus of leverage kind of speaks to volume. As the sales number goes up even further, you're going to continue to see that truly flow through to the bottom line. One thing I want to emphasize on the G&A is the fact that Q1 is usually the heaviest when it comes to professional service fees. Because we're expending professional service fees as they incur. So as you can imagine, all the SOX testing, the heavy audit fees, all of that kind of hit Q1. So that's another reason. So suffice to say, you should really see leverage coming through quarter over quarter.

And to address your final question you raised on skin stylists, that's an acquisition which we, of course, complete. We're extremely excited about that. At the moment, as you know, it's FDA cleared for abdominal scarring, and we're in the process of securing approval for other indications, and we'll, of course, keep you posted as that's progressing during the next quarters.

The next question comes from Ashley Helgens with Jefferies. Please go ahead. Hi.

This is Sydney on for Ashley. Just wanted to ask if you've seen or heard about any pullback in treatment add-ons or boosters, kind of given the macro, or if you have any expectations kind of for those levels going forward.

No, that's a great question. Thank you. In fact, quite the opposite. I mean, the consumables. strength in Q1 was, of course, driven by consumption. But I think what we've been finding is the attachment rate on our boosters as we really double down on our storytelling, add new exciting products, be it J-Lo, Dr. Babor, Murad. Of course, we announced the Dior partnership last quarter. The attachments rates have been increasing, and it's becoming a key element of our business as it grows, offering that kind of unique level of personalization and customization, which really no other aesthetics or beauty procedure can do other than hydrafacial.

So that's been a strong driver behind the consumables growth.

The next question comes from Kyle Rose with Canaccord. Please go ahead.

Great. Thank you for taking the question. I just wanted to kind of ask a dovetail on the previous question there on utilization. Maybe just any trends you're seeing from a utilization perspective in the Cindeo versus the non-Cindeo accounts. And then, you know, similarly, US, OUS, when we think about actual treatments provided or body areas treated, whether it's CaraViv or treatments outside the face. Just overall, if you could break down some of the utilization trends, that'd be very helpful.

Hi, Kyle. Absolutely. So to echo Andrew's sentiment, we didn't really push for boosters as hard prior to Andrew's joining. I think with both of the booster push, which really finish off the treatment, provide that personalization, but also extending to the body, we actually see that trend picking up around the globe. Especially when we were visiting in China, just the excitement and anticipation that we see folks are craving for that non-invasive personalized treatment. So we're seeing a lot of upside. And when you look at the data, Kyle, I would say it's a 50-50 split in terms of number of treatment increasing versus ASP and these different, you know, pricing that we added to the fold. You know, we're just getting started. So I'm really looking forward to see we continue to make improvement in that regard.

This concludes our question and answer session. I would like to turn the conference back over to management for any closing remarks.

Thank you, operator, and thank you all for joining us on today's call. In closing, we are pleased with the progress of Q1 and are positive about the momentum we see for Q2 and beyond. There is a sustained enthusiasm for hydrafacial treatments across the globe. Together with the rapid rebound we are seeing in China, excitement for Sundae's international availability, and sector tailwinds that are very much in our favor, we are confident in our outlook for 2023 and beyond. Once again, thank you for joining today's call and have a great day ahead.

The conference is now concluded. Thank you for attending today's presentation.