AirSculpt Technologies - Q1 2023

Transcript

Operator (participant)

Good morning, welcome to AirSculpt Technologies' first quarter 2023 earnings conference call. Currently, all participants are in a listen-only mode. As a reminder, today's call is being recorded, and we have allocated one hour for prepared remarks and Q&A. At this time, I'd like to turn the conference over to Dennis Dean, Chief Financial Officer at AirSculpt Technologies. Thank you, sir. You may begin.

Dennis Dean (CFO)

Good morning, everyone, and thanks for joining us to discuss AirSculpt Technologies' results for the first quarter. Joining me on the call today is the company's founder and Executive Chairman, Dr. Aaron Rollins, and Chief Executive Officer, Todd Magazine. Before we begin, I would like to remind you that this conference call may include forward-looking statements. These statements may include our future expectations regarding financial results and guidance, market opportunities, and our growth. Risks and uncertainties that may impact these statements and could cause actual future results to differ materially from currently projected results are described in this morning's press release and the reports we will file with the SEC, all of which can be found on our website at investors.airsculpt.com. We undertake no obligation to revise or update any forward-looking statements or information except as required by law.

During our call today, we will also reference certain non-GAAP financial measures. We use non-GAAP measures in some of our financial discussions as we believe they more accurately represent the true operational performance and underlying results of our business. A reconciliation of these measures can be found in our earnings release, as filed this morning, and in our most recent Form 10-Q, when filed, which will also be available on our website. I'll turn the call over to Dr. Rollins. Aaron?

Dr. Aaron Rollins (Founder and Executive Chairman)

Good morning, thank you for joining us on the call today. I'm very pleased with our first quarter results, which included double-digit revenue and case growth and a sequential increase in average revenue per case. Our new center in Orange County, California, is off to a great start, and we are also very excited to announce that yesterday we received final approval to open our flagship center in London. This timing is consistent with what we had planned. We have a full complement of physicians to staff the center, enabling us to perform training cases starting next week and paid cases starting in June. Our next opening will be in Austin, which like Orange County, is positioned for a strong launch. We expect to receive our final occupancy permit shortly, enabling us to open in the month of May.

Our de novo pipeline continues to remain full, and we are confident in our new location opportunities for 2024 and beyond. We've been an innovative company, and we continue to be committed to our innovation pipeline, which includes new solutions that will lead to incremental patient engagement, which will be available later this year. Finally, as you will hear from Todd, we are making good progress on our cost management initiatives, which will help us fuel our de novo and innovation growth into the future. Overall, our team remains focused and enthusiastic about continuing to strengthen the AirSculpt brand and profitability and scale our business both domestically and internationally. Let me turn the call over to Todd to talk more about the quarter and our focus for the rest of the year. Todd?

Todd Magazine (CEO)

Thank you, Aaron, thank you to everyone on the call for joining us today. I am pleased with the first quarter results, as highlighted by revenue growth of approximately 16% year-over-year, which was nicely ahead of our projections. This growth was led by 15% year-over-year case growth and a sequential uptick in our average revenue per case or our procedure rate, which was about $12,600. As we shared previously, our average rate will have some variability on a quarter-to-quarter basis due to procedure mix and promotion activities, but we expect it to be consistently in the $12,000-$13,000 range. Importantly, a significant portion of our first quarter growth was led by our de novo centers that came on board over the past 12 months.

I am pleased with their performance and continue to feel very good about our de novo pipeline going forward. On our last call, I highlighted the three areas that I will be focused on in 2023. As a reminder, they were strengthening the organization by bringing in additional talent and improving our processes; focusing on revenue growth, which includes ramping up our de novo expansion program; and finally, right-sizing our cost structure and strengthening our capabilities to support a much bigger and more robust fleet of centers. Let me first provide an update on our cost management efforts. As a reminder, we committed to cost savings of $2.5 million for 2023 and a run rate of $5 million as we exit 2023.

We brought in an external consulting firm to partner with our team and to help guide us in identifying several areas where we can be more efficient on process and cost. While we are still in the early stages of this effort, I am pleased to share that we are firmly on track to meet the targets we set. This will be reflected in our margins in the back half of the year. Importantly, these improvements in processes and cost structure will allow us to continue to reinvest in our de novo openings, as well as drive brand awareness activities. For perspective, we made a small investment in the first quarter in a social media influencer, and the results were extremely positive. Our goal is to continue to find ways to fund initiatives like this in order to help us drive awareness of AirSculpt amongst our target consumer.

As it relates to strengthening our talent, I'm excited to share that we have added a new human resources leader as well as a new information technology leader to our executive team. The final of my three focus areas is our de novo expansion plans. As Dr. Aaron Rollins noted, this is an exciting time for AirSculpt as it relates to de novos, in particular, given the fact that we will now have a truly international footprint with the opening of our London center. I have been spending a significant amount of time on our de novo expansion program, where we have added tools and capabilities that will help us continue to identify new and robust sites across the U.S., as well as continue to expand internationally. This work has given me more confidence that the runway of opportunity for new AirSculpt centers remains extremely robust.

Overall, I am pleased with the results of the quarter and continue to feel good about our ability to deliver on our financial commitments to our investors in the balance of the year and beyond. Before I turn the call over to Dennis, I would like to say thank you to the team at AirSculpt. Both our clinical and business professionals are incredibly passionate about our patients and our company, and work tirelessly to help deliver an experience unlike any other in the world of aesthetics. Now let me turn the call over to Dennis to walk you through our financials and our outlook for the year. Dennis?

Dennis Dean (CFO)

Thank you, Todd. Our revenue for the quarter was $45.8 million, a 15.9% increase over the prior year quarter. Our growth was led by approximately 15% increase in case volumes, which was primarily due to the addition of four de novo centers versus the prior year base. As of March 31st, 2023, we operated 23 centers versus 19 at the end of the first quarter of 2022. Our average revenue per case for the quarter was approximately $12,600, a 0.4% increase over the prior year's quarter and a $400 increase over the fourth quarter, driven primarily by procedure mix. This was within our target range of $12,000-$13,000. We expect to sustain this range for the near term.

Our cost of services as a percentage of revenue was 39.3% versus 37.1% in the same period last year. The increase is primarily related to the addition of clinical related costs to support our growth, and our Customer Acquisition Cost for the quarter was $2,360 per case. For the quarter, our Adjusted EBITDA was $10.7 million and our Adjusted EBITDA margin was 23.4%, which was a decline of 140 basis points versus the prior year quarter due to the increase in expense growth that we have previously discussed. On a sequential basis, our Adjusted EBITDA margin increased by 130 basis points. Our liquidity position continues to be very strong.

Our cash position as of March 31st, 2023 was $11.3 million, and our $5 million revolver remains undrawn. Our gross debt outstanding was $84.5 million, and our leverage ratio at the end of the quarter is calculated under our credit agreement was 1.7 times. Cash flow from operations for the quarter was $6.2 million, which represents an Adjusted EBITDA conversion ratio of 58%, and we continue to expect an Adjusted EBITDA conversion ratio of approximately 55% for the full year. We invested $3.8 million, primarily related to opening new centers, and we had a use of cash from financing activities of approximately $700,000. Additionally, consistent with the fourth quarter earnings release, we provided a non-GAAP measure reflecting adjusted net income per share diluted for the quarter of $0.10.

We believe this measure represents useful information to investors by highlighting the impact of earnings per share of selected items used in calculating our Adjusted EBITDA. We remain on track for healthy free cash flow generation in 2023. We continue to expect our primary uses of cash flow during the year will be to fund growth investments for the business, such as adding de novo centers and driving technology innovations. We also expect to continue to strengthen our balance sheet throughout the rest of the year, positioning us to increase shareholder value. This morning, we are confirming our 2023 revenue guidance range of $187 million-$192 million, representing an 11%-14% increase over 2022. We continue to expect contributions from our de novo centers to drive the magnitude of year-over-year revenue growth.

As previously discussed, we started performing cases this past month at our Orange County location, and we are scheduled to begin performing cases at our Austin center next week. As Dr. Rollins and Todd mentioned, we are pleased to report that our center in London is approved to open, and we will begin scheduling paid cases starting in June. Our remaining two center locations, Raleigh and San Jose, are scheduled to open late in the third quarter, which will give us a total of 5 new centers added for 2023. We are also confirming our 2023 Adjusted EBITDA guidance range of $48 million-$50 million, which represents year-over-year growth of 11%-16% and margins of approximately 26% at the midpoint of both revenue and EBITDA guidance.

We expect the second quarter will be our strongest quarter, while we expect the seasonal patterns in the back half of 2023 to be similar to that of the back half of 2022. With that, I'll turn the call over to the operator for some questions. Operator?

Operator (participant)

Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press Star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from the line of Simeon Gutman with Morgan Stanley. Please proceed with your question.

Simeon Gutman (Executive Director and Senior Equity Analyst)

Hey, good morning, everyone. My first question is on the same-store case growth or the same centers case growth. Can you talk about how the 0.9, I think that was the number, or the 0.8, was, relative to your expectations? What should we think about as the kind of sustainable, appropriate level of growth for this business?

Dennis Dean (CFO)

Hey, thanks, Sammy. It's Dennis. Yeah, from a same store perspective, we are fairly in line with kind of what we expected. You know, kind of go forward basis right now, we're comfortable kind of in this, you know, flat to 1% sort of same store growth. That's kind of what we're forecasting out from that standpoint.

Simeon Gutman (Executive Director and Senior Equity Analyst)

Then maybe the follow-up then, the momentum that you're carrying, is that with regard to new center openings, or should that same center growth get a little bit better from that level?

Dennis Dean (CFO)

Well, again, we're comfortable with, you know, the relatively flat same store. I do believe that we're seeing some momentum out there, and, there's potentially some opportunity there, to expand on that. You know, a lot of the momentum we're seeing is on new center growth as well as, you know, the.

Todd Magazine (CEO)

Existing

Dennis Dean (CFO)

... existing business is holding up really well. You know, as we can kind of look at our rate per case and those types of things, we're seeing positive momentum there.

Simeon Gutman (Executive Director and Senior Equity Analyst)

Okay. Thank you. Good luck. Take care. Thanks.

Operator (participant)

Thank you. Our next question comes from line of Joshua Raskin with Nephron Research. Please proceed with your question.

Joshua Raskin (Research Analyst)

Hi. Thanks. Good morning. cost of service line, you know, as a % of revenues remains a little more elevated than we've seen in the past. you know, I know you've talked, is that mostly just the investments in quality and, you know, the other areas you've spoken on? I'm just curious if there's any inflationary items that are in there or anything new to point out.

Dennis Dean (CFO)

Josh, it's Dennis Dean. Nothing really significant there, Josh. It has, it's a little above where we were last year at this time. You know, we've talked a lot about the clinical investments and quality investments we've been making. It's definitely a focus for us to kind of, you know, work on that as well to kind of expand our margins, but that impacted us or continues to impact us a bit. We've also got a number of de novos that are, you know, that are coming online. As you know, you know, early on those, you know, you don't have as much, you know, margin expansion. We're, you know, as those begin to mature, we'll see improvement there just as they ramp up. We feel good about where we are.

We think there's opportunity to expand from there.

Joshua Raskin (Research Analyst)

Gotcha. You know, I know it's always a concern, just economic pressures. I'm just curious, what are the best metrics to monitor? You know, is it just simply case growth? Is it more on the rate side? Are there metrics that you guys are measuring, financing, things like that we don't sort of necessarily see that give you insights into, you know, how the economy's impacting the business?

Todd Magazine (CEO)

Yeah. Hey, Josh, it's Todd. I would say really the two things that we look at is obviously demand, and then our procedure rate. You know, obviously what we saw in Q1 and what we're carrying into Q2, we're seeing very strong demand, and we're seeing our procedure rate essentially right in the middle of the range that we expected. You know, from our perspective, we're really not seeing any, you know, broader economic issues on our business. Demand continues to be strong. You know, there's clearly a demand for our product and people are willing to pay, you know, the rates that ultimately we believe are appropriate for this business. To us, we feel really good about that.

We haven't really seen a change in financing in terms of percent of people that are relying on financing. That hasn't really changed at all for us this quarter. Really there's no indication at this point that there's any, you know, headwinds that are, you know, coming at us from the broader economic market, which, you know, is really encouraging for us.

Joshua Raskin (Research Analyst)

Yeah. If I could just sneak one more quick one in. Just, 2Q guidance. I heard, you know, strongest quarter, which is seasonally consistent, but any reason not more specific, you know, sort of what you did last quarter?

Dennis Dean (CFO)

You know, Josh, as you know, the timing of, you know, producing numbers last quarter, you know, we didn't report until, you know, first part of March, so we almost had the entire quarter complete. We had a much level, you know, much, heavier confidence level. That was the reason we gave that. You know, we're reiterating full year. You know, we have confidence in the numbers. As you said, you know, Q2 is our strongest quarter. Again, that's kinda where we are from that standpoint. It's very early into the, to the second quarter. Things are going well. Momentum is again, like we said, has been very, very strong and positive.

That was the reason why there was a guidance assistance after the, you know, the year-end call for the first quarter.

Joshua Raskin (Research Analyst)

Makes sense. Thanks.

Operator (participant)

Thank you. Our next question comes from line of Korin Wolfmeyer with Piper Sandler. Please proceed with your question.

Korinne Wolfmeyer (Senior Research Analyst)

Hey, good morning. Thanks for taking the questions and congrats on the quarter. Kind of piggybacking off some of those previous questions, can you just talk about what kind of like the promotional environment this past quarter looked like? I mean, if I recall, I think you had some heavier promotional activity in Q4. Did that have to continue at all into Q1? As we think about, you know, outlook for the rest of the year, how are you baking in promotional need into expectations, especially with the, you know, the still volatile macro backdrop? Thank you.

Todd Magazine (CEO)

Yeah. Thanks, Korin. Thanks for the questions. Todd. I would say that Q1 promotionally was very consistent with what we've done historically. I think as we mentioned on the last call, part of what our promotion plan was to not necessarily discount

But to actually do bundling, to try to drive value and get people to add more body parts and provide value by giving people kind of a bulk discount, if you will. We use that, you know, promotional strategy, you know, throughout the quarter very consistently with what we've done historically. That's one of the reasons that our rate ended up in the, you know, $12,600 range. Really nothing, you know, unique about what we did in the quarter. It was very, you know, promotion is one of the tools that we use to obviously drive the business and, you know, we feel very good about that. I don't see that really changing throughout the year.

I think promotions, you know, like other levers, are just kind of one of the, you know, one of the items that we use to help drive the business. You know, we're not seeing any major changes there. Again, our goal is to not discount necessarily, but to create value, and give people an opportunity to, you know, really get the AirSculpt experience through, you know, adding other, body parts. That's really worked effectively for us. That's our approach, and we feel really good about it for the, for the balance of the year.

Korinne Wolfmeyer (Senior Research Analyst)

Very helpful. Thank you. Then just on, you know, some of the margin trajectory, can you talk about, a little bit on, you know, what specific levers you're pulling on to improve that margin, both as we progress throughout this year and then into 2024 and 2025? If, if the gross margin isn't gonna change that much, maybe we'll get a little bit of improvement. Then is it really gonna come from that, like, marketing and ad spend, or can you just provide a little bit more detail there? Thank you.

Todd Magazine (CEO)

Korinne, it's Todd again. You know, one of the, as I mentioned, you know, three areas of focus for me, one of them obviously is really on the cost management side of things. You know, we're really looking up and down the P&L and trying to find ways to be more efficient. We're in the early stages of this, as I said, you know, in my remarks, and we're working with an external party to help us do that. I feel very confident that there are areas of opportunity, you know, particularly about becoming more efficient, not necessarily cutting. You know, we feel good that we're gonna be able to get to the two and a half million dollars that we committed for this year.

That will have a margin improvement, you know, as we kinda go into the back half of the year. The run rate, as we also said, is in the $5 million range. You know, all of that will have, you know, help our margin as we continue throughout the year. You know, as I said, we're looking up and down the P&L and I think we feel very good about the early work we've done and the opportunities. You know, we're reiterating that we believe we're gonna get to that $2.5 million this year and the $5 million as we exit the year.

Dennis Dean (CFO)

Korinne, we are heavily focused on getting that margin number above 30%. We don't expect to necessarily be there this year, but that is our, that is our target. We have a pretty high level of confidence that we should be able to get there as we work into 2024. As, you know, as you could imagine, I mean, we did invest quite a bit in our corporate structure this past year. A lot of that's now fixed into the cost structure, similar like public company costs. As we continue to drive top line, we'll start to achieve additional margin expansion there due to those fixed costs.

Korinne Wolfmeyer (Senior Research Analyst)

Very helpful. Thank you.

Operator (participant)

Thank you. Ladies and gentlemen, if you'd like to join the question queue, please press star one on your telephone keypad. Our next question comes from the line of Parker Snure with Raymond James. Please proceed with your question.

Parker Snure (Analyst)

Hey, good morning. This is Parker on for John Ransom. Maybe just talk about London and just your expectations there. You know, obviously since it's, you know, a much different market than the kind of North American market. Are there different dynamics at play there that you would expect? I mean, maybe different pricing, different economics with the surgeons. Just broadly, you know, is plastic surgery, you know, popular over in the U.K.? I mean, is there a certain level of patient education that you're gonna have to do to kind of, you know, get people to notice it over there? Just maybe just talk about your expectations in the London market.

Todd Magazine (CEO)

Hi, this is Aaron Rollins. Thank you very much for the question. I'm very, very bullish on the London office. In fact, I fly there next week to start our actual live training cases in London. I can tell you that I've been there multiple times now for press interviews, and plastic surgery is wildly popular in London. What's really interesting is that it's the first market we've gone into where we have really no competitor. In fact, finding out that even the doctors finding out that you can do what we do while a patient's wide awake was like science fiction to them. Our market research there has shown that we very well might get a higher ASP. We won't know that until we start actually booking cases.

Due to the pound conversion, and the market in general, I mean, we have such a captive market, and we don't have the same competitive environment for leads and ads. I couldn't be more excited about the London office. Also to answer your question, there is one thing that's different there, and that's that. Well, first of all, we're paying the doctors exactly the same as we do now. That's 20%. There's no change there. The only change is, in the U.K., there's something called a cooling-off period. From the time someone books until they get their surgery, it has to be a minimum of 2 weeks.

Dr. Aaron Rollins (Founder and Executive Chairman)

We will be seeing consultations shortly, and then it'll be 2 weeks before our first paid cases can start.

Parker Snure (Analyst)

Okay, that's very helpful. I believe in the prepared remarks, Aaron, you hinted at some new solutions coming on in the back half of the year. Is this stuff that we've heard before or are these kinda, you know, new things? Just maybe just touch on that comment a little bit.

Dr. Aaron Rollins (Founder and Executive Chairman)

I'm glad you asked. We're working on rolling out a new procedure, that's all we're gonna say for right now until we have more data, et cetera. We always wanna underpromise and overdeliver. I look forward to speaking with all of you more about that.

Parker Snure (Analyst)

Okay. If I can just squeeze in one last one, maybe just give us an update on the metabolic study and how that's tracking and any updated thoughts on when that'll be out and you'll have some data on that?

Dr. Aaron Rollins (Founder and Executive Chairman)

Great question. In the interest of creating shareholder value and improving our margin, the study we found to be very expensive. For now we've put the study on pause, and instead we're pursuing scholarly articles. However, I do see a time when we have another study that we're interested in doing that might actually create much more shareholder value, and depending on what that would cost, we might pursue that instead. We already know that, and it's already been proven that liposuction creates a very significant drop in triglycerides. That's already out there, and I didn't see any reason to replicate a well-proven study. I'd rather create something new and show that AirSculpt can do things that other people can't.

Parker Snure (Analyst)

All right. Thank you so much.

Dr. Aaron Rollins (Founder and Executive Chairman)

Sure.

Operator (participant)

Thank you. Ladies and gentlemen, that concludes our question and answer session. I'll turn the floor back to Mr. Magazine for any final comments.

Todd Magazine (CEO)

Melissa, we really appreciate everybody for joining us today. Have a great weekend and we will talk to you soon.

Operator (participant)

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.