The Beauty Health Company (NASDAQ:SKIN) Q1 2023 Earnings Call Transcript May 10, 2023

The Beauty Health Company misses on earnings expectations. Reported EPS is $-0.04 EPS, expectations were $-0.02.

Operator: Good day, and welcome to the Beauty Health Company First Quarter 2023 Earnings Conference Call. [Operator Instructions] 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.

Eduardo Rodriguez: 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 Stanleick; and Chief Financial Officer, Liyuan Woo. 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.

Andrew Stanleick: 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. Again, 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 arthiticians and provider partners who together make up our global hydrofacial 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 Cyndea 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 hydrofacial 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 hydro facial.

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 systems 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 Synder, 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 Cinda international availability in Q2 2023.

We 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 2.5x as providers ready 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 has 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 Sindel’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. 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 7. In Q1, we marked the first anniversary of the U.S. launch of Sender, our revolutionary connected delivery system. On March 30, we announced Endo International availability to great excitement at the AMWC trade show in Monaco. Today, Sunday’s systems are live in 14 of our direct markets with the balance to follow by the end of the year. 1 year on from its debut, we have placed nearly 5,000 Syndeo systems across the world. We are very pleased with this uptake to date and expect growth to continue as we execute on our international Cyndea launch and capitalize on broader sector tailwinds. I — in fact, the Med Spa channel, the core of our business is expected to grow at a 14% CAGR for the next 5 years in the U.S. alone.

And we’ll continue Austin de 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 refurbished in connection with our Cyndea trade-up program. 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 efticians 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 hydrofacial treatments and offer business building acumen to drive practice growth.

This month, we launched a new business-focused curriculum, and mini-Beauty MBA, if you will, which targets medspa owners, medical directors and physicians, further deepening our relationship with our community. These programs are talked virtually and in our experience centers across more than a dozen global cities, including New York, London, Paris and Shanghai. The facilities acted more than just training hubs. They serve as showrooms to host influencers, editors and key opinion leaders in every region. As 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. The reopening in China, we are incredibly excited about the opportunity in the strategic market.

Next, we continue to build awareness for our much-loved hydrofacial brand. Primary objective of our marketing engine is to drive traffic to providers, bringing bus 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. Range NASDAQ opening bell showed up on Time Square billboards and feeded 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 bihydrofacial treatments are available at Sephora 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 2 most recent quarters representing our top 2 highest consumables net sales quarters ever. You can see from the headlines generated and consumer awards earned that hydrosacial has never been hotter in the eyes of consumers. As one beauty editor put it, HydroFacial 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 Bazar on Sinders U.S. launch in Q1 of last year. Today, HydroFacial is a leader in earned media value in aesthetics with more than twice the combined EMV of the next 5 peer brands.

We are reaching towards the level of compensation only seen by mainstream beauty brands, cracking the top 50 U.S. skincare brands in March 2023 as measured by TribeDynamics. Arising 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 2 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 2x that of the U.S., 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 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 noninvasive and minimally invasive treatments. HydroFacial with its gold standard positioning and relatively low cost of cattle is the perfect gateway product for providers to capitalize on this sector tailwind. During my recent visit to the market with Lean, there was a palpable excitement around the launch of Sindar and its potential to revolutionize the future of preventive 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 the 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. We have a strong cash position to pursue inorganic opportunities, and we continue to be opportunistic and evaluate opportunities that provide differentiated products or services, or complementary 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 astician-founded brand, skin styles fit 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 skin tiles 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 Liyuan begins our 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 and now it’s the highly anticipated international launch for [indiscernible] integrated a new product into our platform. trends 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 Cinder 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 Liyuan.

Liyuan Woo: 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 U.S. and 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 Slide 17. 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 Handel’s U.S. launch from Q1 last year and reflects an unsurprising impact from January and February cover related shutdown in China.

Our Delivery Systems segment grew by 9% year-over-year. There are 3 primary drivers behind the moderated growth. First, Compagas a strong launch of Sandlin the U.S. last year. Second, the January and February Kobe related shutdowns in China; and third, providers outside of the U.S. holding purchases of delivery system in anticipation of the Sandel International launch in Q2 2023. Addressing the first driver, Sindel’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 covet infection shut down the market in January and February. Finally, in March, the market began rapidly recovering.

As Andrew mentioned, in March 2023, we sold 2.5 more China previous high for systems sold in a 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 Cenveo launch in Q2 2023. Importantly, Sindel’s international launch performance to date is promising, with strong traction across our launch markets. As a reminder, the first quarter historically contributes the smallest net sales and adjusted EBITDA to our fiscal 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 will we contemplated in our site. The momentum we see to date gives us the confidence to raise our 2023 outlook to a range of $460 million 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 regional performance on Slide 17. You will see the Americas segment was strongest to 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 hydroficial treatment. EMEA followed with growth of 10%, driven by prelaunch demand for refurbished EV system and providers holding owners in anticipation of Cenveo’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 cobas shutdowns in China for the first 2 months of the quarter, we achieved growth of 6% year-over-year.

As Andrew mentioned, we are 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 installed base of 27,406 delivery systems, an increase of 26% year-over-year. Consistent with what we discussed last quarter, we sell systems and churn and become active again in Q1 in connection with China’s recovery in March. Excluding Traub, we placed 16 36 new delivery systems in the first quarter, representing growth of 4% year-over-year despite lapping Sindel’s U.S. launch. Important to note, we expect trade volumes for Q2 2023 to materially step up from Q1 2023 as we execute our Sindel international launch strategy and drive continued 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 Sandell sold in Q1 of 2023 compared to the same period last year. As a reminder, Sindel 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-up 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 Mass FA channel, the core of our installed base. As you see, delivery system revenue productivity grows over time as providers utilize their systems more often, upsell booster treatment and extend treatment beyond the face.

We’re just getting started in unlocking the embedded potential of our installed base. The chart is a demonstration of the long-tailed lifetime value, each one of our system placements represent a promising source of upside for consumables net sales in the future as our installed base matures. On the bottom chart, you can see how long it takes for our MSP installed base to ramp up its productivity. As we have shared before, it takes at least 4 quarters before meaningful gains are seen. As we continue to rapidly expand and build our footprint amidst a massively growing category, our installed base is getting younger, shifting were 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 installed base will ultimately mature and become more productive over the long term.

Moving to Slide 20. For the first quarter, we reported a GAAP gross margin of 62.7% or 70% on an adjusted basis. Gross margin declined year-over-year on a GAAP basis due to $3 million of inventory optimization related write-off, which was added back to adjusted gross 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, primarily driven by the sale of lower-margin refurbished EV systems during the pre-Saba 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-up dynamics with launching synbio, we expect the gross margin for the first half of ’23 to be pressured as we work in the first half of 2022, with the 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 Cindi 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 gross margin inherent in refurbished resale 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 pattern 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 shutdowns in January and February, and international providers holding back in anticipation of Cenveo’s Q2 2023 launch amplifying the sequential seasonality. The second quarter typical against momentum sequentially due to the marketing activities conducted in the first quarter. As a reminder, the second quarter of 2022 saw a onetime $23.3 million benefit from trade up demand in connection with the U.S. and Biolaunch. With the Sunday International launch now in full steam, we expect Q2 ’23 to experience a similar but less pronounced onetime spike in trade up demand.

Q3 continues to build on Q2’s momentum with relatively moderate sequential growth, excluding trade-ups. This is due to a seasonal summer slowdown that is broadly applicable across the beauty sector, particularly in EMEA. Lastly, the fourth quarter use of Q3 and is historically our highest dollar quarter of the year. It benefits from a peak in consumer demand, holiday promotion and the desire that 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 our strategic marketing investments early in the year, which subside as we progress throughout the year. Our biggest and most productive trade show occurs in the first half of the year and the lease generated from these strategic investments support our funnel and feel 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 moderate 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 EBITDA contribution reflects a higher trade-up 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 was $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 points year-over-year, partially due to the lapping of Sandi U.S. launch costs and increased operating leverage from higher revenue. Fourth 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 continued to hover around $20 million to $22 million. Lastly, R&D costs continue to remain relatively flat. I will now move to our balance sheet highlights on Slide 24. We — 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 Cenveo’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 1 to 2 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 share 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 Cenveo has been strong, and China has shown a rapid recovery since March. These trends are part of what gives 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 gross 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 commitment. We continue to deliver double-digit year-over-year growth, fueled by our marketing efforts, driving sustained consumer demand throughout our market and sector tailwinds. The execution of the Cenveo 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.

Q&A Session

Operator: [Operator Instructions] The first question today comes from Korinne Wolfmeyer with Piper Sandler.

Operator: The next question comes from Margaret Kaczor with William Blair.

Operator: The next question comes from Olivia Tong with Raymond James.

Operator: The next question comes from John Block with Stifel.

Operator: The next question comes from Oliver Chen with TD Cowen.

Operator: The next question comes from Allen Gong with JPMorgan.

Operator: The next question comes from Bruce Jackson with the Benchmark Company.

Operator: The next question comes from Linda Bolton-Weiser with D.A. Davidson.

Operator: The next question comes from Navann Ty with BNP.

Operator: The next question comes from Ashley [ph] with Jefferies.

Operator: The next question comes from Kyle Rose with Canaccord.

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

Andrew Stanleick: 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 hydrofacial treatments across the globe, together with the rapid rebound we are seeing in China, excitement for Sundar 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.

Operator: The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.