The Beauty Health Company - Earnings Call - Q1 2021

Transcript

Speaker 0

Greetings, and welcome to the Beauty Health Company's call to discuss The Hydrofacial Company's first quarter results. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host today, Dawn Frankfort, Managing Director at ICR. Please go ahead.

Speaker 1

Good afternoon, everyone. Thank you for joining the Beauty Health Company's call to discuss The Hydrofacial Company's first quarter results, which we released this afternoon and can be found on our website at investors.beautyhealth.com. With me on the call is Brent Saunders, Executive Chairman of The Beauty Health Company Clint Carnell, Chief Executive Officer and Leanne Wu, Chief Financial Officer. Before we get started, I would like to remind you of the company's Safe Harbor language, which I'm sure you're all familiar with. 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 contain non GAAP financial measures such as adjusted gross profit, adjusted gross margin, adjusted EBITDA and adjusted EBITDA margin. Reconciliation of these non GAAP measures to the most comparable GAAP measure are included in the earnings release furnished to the SEC and available on our website. Now I would like to turn the call over to Brent Saunders, Executive Chairman of the Beauty Health Company.

Speaker 2

Thank you, Dawn, and thank you for joining our very first earnings call as a public company. Last week, we successfully closed our business combination and became the Beauty Health Company. This was not only an important corporate milestone for the company, but also a significant event in Beauty Health, which is a category we have pioneered. The capital and strategic resources from this transaction position us well to expand our footprint globally and deliver sustainable growth. In addition, Beauty Health is the ideal platform towards achieving our goal of building an enduring and premier company in the Beauty Health category.

I would like to extend my congratulations and appreciation to the team that made this combination possible. Between our management and Board of Directors with a diverse range of expertise, we are confident that we have assembled an accomplished team with significant experience to appropriately fuel and guide the growth of Beauty Health. Turning now to the business. As you will hear later from Clint and Leanne, this is a very resilient business as evidenced by the financial performance in the first quarter. And we believe we have plenty of growth opportunities ahead as we begin to emerge from the global pandemic.

My objective is to ensure that this new public company has the appropriate resources and team to deploy the right strategies in order to unleash growth. Over the mid and long term, I believe this is the ideal platform to create an enduring growth company in the category of beauty health. I'm excited about our next chapter as beauty health and the significant growth opportunity we have ahead.

Speaker 3

Thank you, Brent, and hello, everyone. It's great to be speaking with you today on our first earnings call as a public company. I will begin by discussing an overview of who we are at Beauty Health and why we are uniquely positioned for sustainable long term growth. After which, I will touch on some highlights from our first quarter and share our outlook and growth strategies. I will then turn the call to Leanne to discuss our first quarter financial performance in detail.

Over the past few months, we have shared with you our vision of creating a powerful consumer brand and platform business that redefines the emerging category we created of beauty health. With delivery systems of over 17,000 and millions of consumers treated worldwide today, we are the clear leaders in the category. We are bridging the gap in the skin health continuum by connecting consumers across the medical professional and retail skin care markets as well as enhancing outcomes for both skin correction and skin care. We are providing all of this beauty health for everyone across ages, genders, and races as we transform the beauty category. Our flagship brand HydraFacial is a highly effective, noninvasive, and approachable game changing treatment.

It is an accessible skin treatment that utilizes an innovative approach to cleanse, extract and hydrate skin, offering an immediate outcome and an instantly gratifying glow. In three steps in thirty minutes, we simply deliver you the best skin of your life. We're a platform business with the objective of building an enduring company in beauty health. We will continue to leverage our infrastructure, powerful technology and data as well as passionate community in the HydraFacial Nation. These initiatives will allow us to accelerate our global expansion and our product innovation efforts.

We are uniquely positioned for five key reasons. First, we operate in a large and growing market with favorable demographic trends. We have a first mover industry advantage in the beauty health category where we are clearly the leaders. Second, we have a technologically advanced offering with high consumer and provider satisfaction. We are excited by the support from our customers and our high NPS suggest customer approval ratings are strong.

Our flagship brand, HydraFacial, ranked the highest across branded aesthetician and medtech peers at a score of 80 among aestheticians and 40 among consumers. And third, through our partnership with aestheticians, we have created a passionate community of loyal and highly influential providers that is powering the success of our company. We invest in aestheticians by providing clinical training, professional development, and a holistic business education program called HydraFacial Connect. We aim to be the world's largest university and deploy our best petitions worldwide. What differentiates our partnerships is that we don't just sell products to customers, but rather we invest with our business partners.

As a result, we have created an extremely engaged community in the hydro facial nation, which deepens our relationships and enhances consumer engagement. We partner with and invest in our providers in order to deliver transformational experience to our end consumer. Fourth, we are seeing a sustainable shift in consumer behavior towards health and wellness. Consumers are seeking approachable and effective skin health solutions that bridge the gap between traditional beauty and health care options. And fifth, we operate a diversified channel mix that spans multiple touch points, including day and beauty retail, resort spas, and medical offices such as dermatology and plastic surgery.

We have partnerships across the ecosystem and our signature hydro facial treatment provides favorable economics for our spa and clinic owners. Taking this all together, we have a powerful flywheel to accelerate growth as we increase our investments in both training and marketing, expand our global footprint and accelerate R and D efforts to improve and elevate our offering and create innovative products. We operate a fast growing and highly profitable business model generating attractive adjusted gross margins of over 70% and a historical adjusted EBITDA margin of approximately 25%. However, given the significant opportunity we see ahead, we are elevating our investment levels over the next two years to fuel our high growth potential, After which we expect to return to our historically adjusted EBITDA margins as we moderate our increased spending levels. Turning briefly to an overview of our first quarter financial performance.

Our first quarter results demonstrate our brand is resonating globally. A portion of our outsized growth was related to COVID-nineteen, specifically the easier comps in the prior year. However, we saw significant growth of our 2019 levels, supporting the fact that we are executing on our initiatives. Our first quarter sales grew by 46 led by strength in our delivery system sales which nearly doubled and a 23% expansion in our consumable sales. Our adjusted gross profit increased nearly 60% from a year ago and our gross margin expanded five ninety basis points.

Our adjusted EBITDA significantly improved to $7,000,000 As we look forward to our second quarter and beyond, we remain focused on the significant multidimensional growth opportunities ahead, leveraging both our infrastructure and growing installed base to fund new investments. We plan to significantly increase our marketing spend to continue to build upon our growing brand awareness as well as ramp up our R and D initiatives to accelerate our innovation in the category we've created of beauty health. As a result of our strong performance, we are pleased to provide updated and increased top line guidance for 2021 of approximately 200,000,000 from our previously provided guidance of $181,000,000 This is based on our strong results in the first quarter, driven by a gradual global reopening from pandemic related closures in conjunction with the consumer behavioral shifts into health and wellness. In markets such as China, which have been reopened for longer, this shift in behavior is encouraging and meaningful. We are hyper focused on growing our global footprint by adding more access points, making consumers aware of the benefits of Beauty Health and investing in our partnerships.

We have four strategic growth initiatives. First, we are addressing the significant white space opportunity to drive consumer demand within the ecosystem by growing units and consumables in our existing markets. We are activating consumer demand by deploying tactics to speak directly with the consumer. This strategy creates omnichannel engagement with consumers that is digital, localized and personalized as well as agile and fast. We are focused on our sales and marketing efforts to drive consumer demand and increase system productivity globally.

And as part of our overall strategy to drive consumer demand, we will intensify our marketing of the brand to emphasize wellness and personalization messaging. We will increase training to elevate the aesthetician, build loyalty, as well as launch additional pop up stores. Second, we are quickly expanding our global footprint. We are building upon our capabilities to increase consumer demand globally through our established partnerships across many channels, as well as increasing our sales office resources with incremental support. We look forward to expanding our international footprint through distributor relationships in new markets as well as implement a direct to market approach in key strategic markets.

Third, we are accelerating our R and D efforts to improve and elevate our offerings as we look to accelerate our innovation initiatives in the beauty health category we created. We are enhancing our brand and product extensions to continue to fuel our category creator leading position and transform beauty health. As such, we will remain relentlessly focused on innovation. In 2022, we will launch our two point zero delivery system, Sendeo, as well as our At Home device, Project Casa. We will also continue to add innovation across all touch points, including serums, devices, and experiences.

As part of this innovation, we plan to launch at least one new serum a quarter including collaborations such as our Doctor. Murad co branded serum which drives increased consumer engagement with our own brand. Fourth, we will leverage technology to drive product and category expansion. We will transform our offering from analog to digital. This upgrade will allow us to enhance our data analysis capabilities in order to improve personalization and drive growth.

Through our innovation, we will be able to harness and leverage the power of data to provide our customer with a seamless experience whenever, wherever, and forever. In summary, we are excited for our future opportunities to deliver strong long term growth as we accelerate investments to build an enduring platform in the dynamic beauty health category we've created. Now I will turn the call over to Leanne who will discuss our financial performance in the first quarter in more detail and provide you with our financial outlook for the year as we continue to grow and reinvest in our business.

Speaker 4

Thank you, Clint and hello everyone. Before I begin, I'd like to thank our team for their continued dedication throughout this unprecedented period. The hard work and commitment of our people drove our impressive growth this quarter in a still challenging environment, demonstrating the unique flexibility of our team and our business model. We did see outsized performance this quarter despite the continued select global market closures related to COVID-nineteen government mandate restrictions. With that in mind, I will make select comparisons to our 2019 in my prepared remarks as it removes anomaly created by the COVID-nineteen related market closures, which also impacted 2020.

We believe this comparison will provide you with a more comprehensive understanding of our growth profile. Starting with our first quarter results, net sales of $47,500,000 increased 46 from 2020 and thirty seven percent from 2019. Our increase in revenue was primarily driven by significant expansion in our delivery systems with over 16,000 globally and strength in our predictable recurring consumable revenue streams. For the first quarter, Delivery Systems revenue increased 8251% and consumables were up 1923% from the same period in 2020 and 2019 respectively. Net sales in the Americas region increased 31% to $31,300,000 compared to $23,900,000 in the prior year or increased 18% compared to $26,500,000 in 2019.

The strength was driven by continued traction in The U. S. As well as accelerating consumer demand. It's important to note that with the second wave of COVID-nineteen, we had significant location closures in the first half of Q1 twenty twenty one. Although the market did reopen once vaccines were available, we still had our nonmedical channels in select states such as retail partners, gyms, hotels, casinos and spas with many closed locations.

All U. S. Locations operated with reduced capacity to accommodate state and local regulations. While the trend for the quarter was strong, we also saw consumable orders increase for customers starting to reopen, which contributed to our record first quarter. Net sales in the EMEA and APAC regions were up 89% to $16,300,000 compared to $8,600,000 in 2020 or up 98% compared to $8,200,000 in 2019.

The performance was driven by strength in China, France, Japan, Taiwan and Australia, partially offset by COVID-nineteen restrictions that led to closures in The UK and Germany. For APAC, keep in mind that during the first quarter of twenty twenty, many countries were already severely impacted by COVID-nineteen and as such experienced closures earlier than the rest of the world. Since we're opening in the late second quarter of twenty twenty, the trend has been sequentially improving for the APAC market. APAC region net sales for the 2021 was $8,800,000 compared to $1,700,000 in 2020 and $2,500,000 in 2019. On the other hand, EMEA was adversely impacted by COVID-nineteen closures during the first quarter of twenty twenty one.

EMEA region net sales for the first quarter twenty twenty one was $7,500,000 compared to $6,900,000 in 2020 or $5,700,000 in 2019. Gross profit was $31,700,000 in Q1 twenty twenty one compared to $18,900,000 in Q1 twenty twenty. Gross margin was 66.8% in Q1 twenty twenty one compared to 58.2% in Q1 twenty twenty. Adjusted gross profit in the first quarter was $34,300,000 or 72.2% of net sales. This compares to $21,600,000 or 66.3% of net sales in the first quarter of twenty twenty.

This five ninety basis point expansion in adjusted gross margin rate was primarily driven by cost savings initiatives as well as fixed cost leverage from higher sales. Selling, general and administrative expenses in the quarter were $27,900,000 as compared to $24,900,000 for the prior year. As a percentage of sales, SG and A decreased by seventeen eighty basis points to 58.7% compared to 76.5% in the first quarter of twenty twenty. This decrease was due to sales leverage and lower marketing spend related to decision to delay select marketing programs until COVID-nineteen restrictions were lifted and markets reopened, partially offset by increased sales commissions and personnel related expenses. Total operating expenses for the quarter were $29,400,000 compared to $26,300,000 in the same period last year.

Operating income for the quarter totaled $2,400,000 compared to an operating loss of $7,300,000 in the prior year. In addition to these GAAP measures, adjusted EBITDA is an important profitability measure that we use to manage our business internally. For the quarter, adjusted EBITDA was $7,000,000 versus twenty twenty's adjusted EBITDA loss of 2,100,000.0 The improvement in our profitability is a result of higher sales and gross margin improvement as well as a delay in select marketing spend, partially offset by increased commission and bonus related to the strong sales. Turning to the balance sheet. Cash and cash equivalents at the end of the quarter totaled $14,100,000 compared to $6,100,000 in the first quarter of last year.

Total debt for the quarter was $223,700,000 compared to $196,200,000 in the first quarter last year. The increase was driven by the $30,000,000 additional debt provided by our private equity owner during the pandemic. As part of our business combination with Vesper Healthcare, we repaid all outstanding debt on May 5. Now I'll share our outlook for the full year. As Clint mentioned, we expect net sales of approximately $200,000,000 up from our prior guidance of 181,000,000 We're leaving our adjusted EBITDA outlook at $25,000,000 as we intend to invest the additional sales generated back into the business.

We also anticipate capital expenditures of up to $15,000,000 in 2021. Our upward net sales guidance revision reflects our highly encouraging performance so far in 2021. Our forecast includes solid results in the first quarter and strong trends that have continued into the second quarter. However, given the uncertainty in the environment we're operating in, we remain cautious of the potential risk for further market closures for new COVID-nineteen strains and the uneven global rollout of the vaccines. Our second half guidance factors in a largely reopened global market, which would be negatively impacted if closures are reimplemented or persisted.

We plan to provide you with more color on our outlook once we have greater visibility into global market reopenings, which we hope to provide during our second quarter earnings call. With those comments, I'll turn the call back over to Clint for some closing remarks. Clint?

Speaker 3

Thank you, Lian. Our team's performance in the first quarter shows excellent execution. We continue to deliver on the guidance we provided in November during a highly uncertain environment. We remain focused on creating exceptional customer experiences and are seeing strong results from our investments in growth and innovation. As our markets reopen, we are encouraged by the demand for our services as consumer interest in health and wellness continues to accelerate.

Looking ahead, we are focused on building our strong community, executing our growth strategy and creating long term shareholder value. Thank you for your time and for joining today's call and we look forward to continuing to update you on our future progress. Operator?

Speaker 0

Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.