Good morning, and welcome to The Beauty Health Company's Fourth Quarter and Fiscal Year 2022 Earnings Conference Call. [Operator Instructions]. I would now like to turn the conference over to Eduardo Rodriguez, Senior Director of M&A and Investor Relations. Please go ahead.

Thank you, operator, and good morning, everyone. Thank you for joining The Beauty Health Company's conference call to discuss the company's fourth quarter and full year 2022 financial results, which were released this morning and can be found on our website at beautyhealth.com. Also available on our website is an investor presentation that will be referenced during this call. With me on the call today are Beauty Health's President and Chief Executive Officer, Andrew 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 such as adjusted gross margin and adjusted EBITDA. Reconciliation of these non-GAAP measures to the most comparable GAAP measures are included in the earnings release furnished to the SEC and available on our website. I will now turn the call over to Andrew.

Thank you, Eduardo. Good morning, everyone, and thank you for joining Beauty Health's Fourth Quarter and Full Year 2022 Earnings Call. To begin, I will discuss our performance and accomplishments for the year, my first serving as CEO of this incredible category-creating company. I am extremely proud of the progress of our team in these past 12 months, and I am pleased to share the results with you today. I will also discuss our outlook for 2023 before Liyuan provides more detail on the numbers. We will then be happy to take your questions. As always, I want to start by thanking our incredible Beauty Health one team. Our teams around the world worked tirelessly over the past 12 months to execute our strategy and deliver incredible growth and momentum amid uncertainty in the operating environment. Despite the macro backdrop, we delivered a year of record revenue. We launched the biggest product innovation in our company's history with Syndeo, our next-generation Hydrafacial delivery system. We continue to build the world's premier skincare booster portfolio, partnering with the best in the industry from Murad to JLO Beauty. We open more doors than any year before with exciting retail partnerships and expansive growth in the booming MedSpa channel, not to mention continued solid growth in our core medical channel. Our loyal provider community and consumer fan base remains highly engaged and is growing around the world. The planned investments we have made to scale our business over the last 2 years are driving strong top line growth and position us for margin expansion in 2023 and beyond. Let's now look at the results on Slide 5. In Q4 2022, we reported net sales of $98.1 million, our eighth consecutive quarter of delivering mid-double-digit top line year-on-year growth and of beating expectations. For…

Thank you, Andrew, and thank you, everyone, for joining the call. I would also like to take a moment to thank our teams and partners around the world. We exceeded top line expectations for the eighth consecutive quarter, and we continue to see momentum building across the business despite macroeconomic uncertainty. Today, I will walk you through our fourth quarter and full year results, cost and balance sheet highlights, and finally, our outlook for 2023. Turning to net sales on Slide 18. We delivered net sales of $98.1 million in the fourth quarter, up 26% year-over-year. This was driven by continued strong global demand for both delivery systems and consumables. As you can see, despite the negative impact of China's shutdown and foreign exchange headwinds, we have seen sequential net sales growth throughout the year when excluding the significant trade-up sales from the Syndeo launch during the second quarter. For the full year, we achieved net sales of $365.9 million, up 41% year-over-year or up 32% year-over-year when excluding the Q2 trade-up sales from Syndeo's U.S. launch. On Slide 19, you will see we drove strong double-digit growth across all 3 of our regions in '22. Looking at the fourth quarter. In the Americas, we continued our expansion, growing 29% year-over-year, driven by the continued success of both new Syndeo placements and trade-ups. In APAC, we grew 33% year-over-year, highlighting once again our team's resourcefulness in China while operating the business in a difficult environment. In the fourth quarter, there was a surge of COVID infections shortly after reopening, resulting in China effectively shutting down again. Post-Chinese New Year, with China reopening and the infected population largely recovered, we're starting to see increasing demand with our providers. In EMEA, fourth quarter net sales grew 12% year-over-year. The growth would have…

[Operator Instructions]. The first question is from Oliver Chen of Cowen.

[Indiscernible] on for Oliver. Congratulations on the acquisition. Just wanted to get more color on the potential synergies you expect from the new acquisition. And also in terms of China, I know you're giving a range in terms of EBITDA. But in your model, how are you thinking about sort of the recovery trend in China?

Thank you. Thanks for the question. I will kick off. First of all, we're very excited, of course, to announce this morning the acquisition of SkinStylus, an FDA-cleared microneedling device. And as I said in my prepared remarks, with our customer base, microneedling is the most complementary service towards Hydrafacial. In fact, many of our providers actively recommend or prescribe Hydrafacial to prepare consumers for microneedling to make sure their skin is clean in its optimal state. So for us, it's an absolutely complementary and perfect fit for the company because it really leverages our existing call points. So immediately, we can have leverage to our sales team as they can put this product, SkinStylus, in the bundle with Hydrafacial. So whilst -- as we've just announced the deal, we'll be working on integration. Revenue in 2023 will be limited, but we expect upside in 2024 and beyond. I couldn't be more excited. And Liyuan, I'll hand over to you for the second part of the question regarding how we see China and that 18% to 20%.

Absolutely. Thanks. Yes. So we're actually quite excited about some of the trends we're looking at right now from a consumer demand opening point of view. But for model assumptions, we assumed a very gradual opening. And part of the emphasis we're putting out there is if it does come back stronger, that's where you see potential upside. Otherwise, we model it based on gradual.

The next question is from Bruce Jackson of The Benchmark Company.

On the last conference call, you were discussing about moving some of your manufacturing, and developing a more global supply chain. Just I wondered if we could get a quick update.

Bruce, thank you very much for the question. Yes, as we spoke before in previous calls, 2021 and 2022, really, as we're a new public company, were those years of elevated investment when we were setting out systems and infrastructure, a new EPL in Europe. As well as during Q4, we completed the in-market manufacturing in China for the APAC region, which we're very excited about. As we look to enhance our margin from this year and the coming years ahead, that will be an important component. So we completed that during Q4, Bruce.

The next question is from Jon Block of Stifel.

Liyuan, the systems delivered in the quarter was 2,067, essentially is right in line with our estimate, but I believe the ending installed base was below. I think the trade-ups were a bit higher based on your commentary, but maybe if you can just detail for us, did the retirements pick up a bit to get to that ending installed base? And sort of a tack on to that question would just be, can you discuss the fourth quarter system ASP? I believe that was down sequentially. So I'm not talking about year-over-year FX, just again to be clear. That was down Q-over-Q. But I also think per the comments last quarter, you took price recently on the system. So please provide just color on the 3Q to 4Q ASP move, and I'll stop there.

Absolutely. In terms of the net installed base, Jon, as you know, we do calculate the churn based on purchase patterns. And given the shutdown period for China specifically and some of the other APAC region countries, that negatively impacted the net installed base. That's one of the biggest factors, obviously, we continue to look at across the globe as well as we measure the churn. Secondly, I think your second question -- sorry. Remind me again, the second question was on...

Just the ASP 4Q '22 versus 3Q '22 was down sequentially in light of what I think it was recent price increases. Maybe if you can just reconcile that for us.

Absolutely, Bruce. So the ASP, as we mentioned, they actually did go hand in hand with the gross margin trend as well. As we test and learn on the promotion for trade-up, right -- remember, we talked about we went aggressive with trade-up when we launched, and then we went very shallow in terms of the promotion in Q3. As we test more in Q4, giving a slightly deeper discount, we saw it does move the needle. But obviously, that negatively impact the ASP as well as gross margin. There's also partially -- as you recall, we're also marketing these refurbished leads, the last generation system, to different regions. So between distributor sales, given the shutdown in China and some of these refurbished resell in addition to the trade-up, those were the drivers actually move the needle when it comes to ASP for Q4.

The next question is Olivia Tong of Raymond James.

Can you talk about the launch of Syndeo internationally? Maybe compare and contrast your plans relative to the U.S. launch because obviously, it's a very different environment now versus last year when you launch in the U.S. And then just your thoughts on the contribution from U.S. in year two of Syndeo.

Thank you for your question. Yes, we're excited to launch Syndeo in Q2 of 2023. I think the benefit of us waiting a year is that we've got all the benefits from the learning and the optimizations we've made to our playbook from the U.S. So we're excited to launch it out sequentially globally from Q2 onwards, a rolling launch focused on key markets, first of all. So we're excited about that. And for the second part of the question, Liyuan?

The second part of the question in terms of the...

U.S. contribution.

Yes. So Olivia, as we model out the year, U.S. growth continue to be top of mind for us. And we kind of emphasize the fact that everybody is shooting on Syndeo. This is precisely the reason why we've been testing trade-up program. As we're launching globally, the fact that we are value engineering, we're optimizing, we actually learned a lot with this IoT product, we continue to believe U.S. play a very significant part. As we emphasize a lot of the upside actually really truly depends on the APAC region, how strongly it comes back. So that's where really the potential upside will lay for the year.

The next question is from Margaret Kaczor of William Blair.

I thought I would start maybe with the gross or operating margins. Just kind of doubling down, I guess, on the cadence during the year. Should we assume kind of adjusted EBITDA maybe is below the range in the first half? And would it be anywhere near as much below kind of the 2022 numbers and then above the range in the second half? All of that leading to this question of, could you reach, I guess, even the mid-20s to finish the year this year?

To answer that question, we really wanted to be clear in terms of the seasonality. When you look at Q1 being the lowest quarter of the year and the fact that we're launching globally Syndeo in Q2, I think -- and with all the investment we're going to be making on marketing to support the growth, all of which will speak to the higher investment for the first half of the year. And that also goes hand in hand with margin -- gross margin, right? The fact that we're going to push trade-up, we emphasized this whole year last year. As you add trade-up, it's incrementally have a positive flow through. But from a gross margin percent point of view, it will give you a temporary negative impact. So with that in mind, absolutely to confirm your comment, it's going to be very much [indiscernible] heavy for 2023.

The next question is from Allen Gong of JPMorgan.

I just wanted to follow up on a question that was asked earlier on the call just in terms of, I guess, the mix of new systems and churn in the quarter. You highlighted that China was one of the challenges there. So when I think about the trends you're seeing from China so far in the first quarter, it sounds like -- is it appropriate to think that we're seeing that more gradual improvement that you're assuming near the bottom end of your guidance? And then also when I think broadly about your assumptions for the year, when I think about that $450 million to $470 million, how should we think about that when it comes to the mix of growth you're seeing between systems and consumables?

Thanks for your question. I'll start with China and then hand off to Liyuan. I think, look, what we're seeing is, obviously, we're in constant contact with our team on the ground in China. I think what we're hearing is that after an initial surge in COVID infections after reopening, as we get into late February, the market now is pretty much fully open. And in fact, during the last two or three weeks, you've seen traffic gradually pick up. And our team estimates it's about 80% free COVID levels at this stage. So with that, we've taken a measured approach factoring in a limited contribution from China in the earlier part of the year, but we remain cautiously optimistic about Q2 and beyond. And of course, we're excited to launch Syndeo in that market during Q2. And of course, if the rebound in China is more accelerated than originally anticipated in the second half of the year, as Liyuan stated earlier, that's when we'd be looking at more of the 20% higher range of our adjusted EBITDA guidance for 2023. Moreover, should the market deteriorate, we'll quickly take steps to adjust levers of investments to protect the bottom line.

Yes. Allen, I think that's well summarized. I think the motto just confirms that, right? Q1 is almost over the fact that nothing really happens to after Chinese New Year kind of give you the sense of why we emphasize the gradual reopening. And you have to keep in mind, even the providers are very much focused on hiring, engaging their consumers and utilizing whatever the inventory they have at hand. So we took that into consideration. Hence, both of the revenue upside and EBITDA upside tie pretty closely to how robust the reopening will be.

The next question is from Korinne Wolfmeyer of Piper Sandler.

Congrats on the quarter. So first, I'd like to touch on you -- spend a lot of time overseas the past year, really understanding the market and preparing them for Syndeo. Can you just talk about what visibility you have into system placements in these international markets once you do launch in the second quarter? And I assume some of the partnerships you've developed will help here, but any color there would be helpful. And then secondly, just on marketing, can you just expand a bit on your ability to flex on marketing dollars that we do head into a tougher downturn or China goes back into lockdown? Can you just talk about your ability to be flexible with that marketing spend to maintain the margins?

Thanks for the question. Great to speak to you. So once again, I will kick off and then hand over to Liyuan for the second part of the question. I mean, clearly, despite the economic backdrop of last year, we're extremely pleased with the way our international markets perform, particularly our direct markets. If you consider EMEA, plus 46% up for the year despite the war, despite the FX headwinds would have even more if we are factoring constant currency. APAC, despite China with zero COVID policy, we grew 24%. So clearly, we're extremely excited to bring that Syndeo innovation during Q2. I think all the work we've done in the last two years, in '21 and '22, investing in that planned infrastructure build of teams, people, training, education center systems [indiscernible] the manufacturing in China, I must say we're really excited and cautiously optimistic about the year overseas. And despite that, if we -- we obviously expect a strong year in the U.S. where we have a booming medical spa channel. So it's -- we're very cautiously optimistic about the year. Liyuan, why don't you talk about the leads, which can flex if this doesn't plan out?

Yes. Absolutely. And then just to add on to even Andrew mentioned, I think there were a bit more of the recession's peak when they come to the end of the year. But it's just lessening to the team around the world, it seems that it turned to be a bit more positive. But again, we're being cautious, and we're going to continue to observe. Precisely as we shared before, Korinne, we're sort of 50-50 split when it comes to fixed and variable. And even on the fixed side of the equation, it's a lot of people cost. So to Andrew's point, if the market shut down, that's a lever you can't still pull. When it comes to variable, it's very much under our control. There are certain [indiscernible] locked in terms of investment, but we can pull that lever quite flexible around the globe.

The next question is from Ashley Helgans of Jefferies.

It's Blake on for Ashley. I might have missed it, but I was wondering if you could provide any commentary on your revenue contribution from Syndeo for new placements versus trade-ups throughout fiscal year 2023. Just was wondering how to think about that. If we could get any kind of commentary there. And then also just wondering if we could get an update on what are you seeing in terms of the health of your end consumer here in the U.S., and how that trended throughout the quarter.

Thank you, Blake. I'll kick off with the second part of the question and then Liyuan handle the first part. I must say, while no business is totally recession or economic uncertain proof, we found that our consumer and our provider has been extremely resilient. And we've seen -- as you've seen in our results, no slowdown in the demand for Hydrafacial. And as a proof point, you see that in our results. And I think there's obviously a few factors behind that. I think, first of all, if you consider our channels, our products are extremely democratic place when compared to other aesthetic services in many of our customers. So we're really active that gateway product for entering aesthetics. And we do a little bit, I think, of trade down from higher-priced products into Hydrafacial. I think consumers are maybe cutting back in other areas, but certainly not willing to cut back in that monthly Hydrafacial. It's an investment in their self-care, their confidence. So to date, we've seen no slowdown. I think we're benefiting really from the zoom boom and other broader ships something I talked on the call about this medicalization of beauty where consumers are increasingly interested to stop beyond perhaps the wellness trends of the past, the years and seek out a position and scientific endorsed products such as Hydrafacial. And we're really well captured to -- really well positioned to capture that shift. I think the final piece for the U.S., the med spa channel is booming. It's a key channel for us. AMSTAR recently published that between 2018 and 2022, the med spa channel in the U.S. grew , significant growth, and we're -- it's a big part of our business, and we're on that journey with all of our providers growing as they grow. Liyuan?

Yes. In terms of trade-up, we actually called out the dollar pretty specifically for the second quarter. It's over $20 million, and that's the biggest quarter that we had the trade-up impact. When you sit back and just think about how many systems we sold in terms of a percentage, it's roughly about 20% for the year of 2022.

The next question is from Kyle Rose of Canaccord.

I wanted to just touch on two things. One, the acquisition. I wonder if you could give us just an expectation for how we should think about the revenue contribution over the near to medium term as it folds in. And then secondarily, you really impressive leverage in the Q4. Obviously, it's seasonally strong with the revenue number there. But just was impressed by sales and marketing leverage given all of the initiatives you have going on. So it would just be helpful to understand how we should think about some of those incremental spend as we move through 2023.

Thanks for your question. I will kick off in terms of SkinStylus. So clearly, we've just announced it. We're very excited about it. We absolutely convinced that this microneedling device is new, better, different than anything else in the market, but it's an early emerging stage technology. So I think what you'll find is that we'll have, in 2023, limited revenue upside, but we have obviously significant plans for this ahead for 2024 and beyond. And I think in the coming months during later calls, I'll update you on the successful integration and what more you can expect from SkinStylus. But it's the perfect fit for our business. It's so complementary to Hydrafacial, our sales team, our BDM team. It's a really great fit for us. Liyuan?

So when it comes to marketing, last year, we've been emphasizing our own seasonality. We always invest heavier in the beginning of the year, and we anticipate the leverage to pay out in the second half. And you've sort of seen that during the fourth quarter. When it comes to 2023, clearly, there's committed events that we invest upfront. You can see [indiscernible] as Andrew was sharing. Especially with the second quarter of launch, there's a lot of preplanned events around the globe at play. But when you look at the second half, there's a lot of leverage we can pull and lever we can pull as we double down and getting more at least in order to convert, but then we can really decide on how big or small we can go when it comes to trade shows and other more physical activation.

The next question is from Navann Ty of BNP Paribas.

Just a question on China. There's a comment on the related return on investment. So shall we see further investment in China? And if yes, what's the timing of investments? In the U.S., my second question is, have you seen -- or do you expect a change in competitive pressure? And just a final quick one. Do you plan similar acquisitions in the low double-digit range in 2023?

Thank you. Thanks for your question. There's a lot in there. So let me start, first of all, with China. If you're relatively newer to our story, we've said that '21 and '22 as a new public company were our years of elevated investment where we set up globally our infrastructure systems and local manufacturing, training, education and teams, which we did in '21 and '22 and especially in 2022 in China. So the -- predominantly, the bulk of our investment is done in China, and that's where we're so well positioned now to capture the opening growth as this market starts to open, especially as we launched Syndeo in Q2 across the region.

Yes. I think the other question that you had in terms of acquisition, we've always looked through those three criteria that Andrew has mentioned. It has to be accretive to the bottom line and need not to be a fad, and they need to have a common call point. And we continue to be very mindful and thoughtful in terms of our execution.

And then the final question I'll take. You asked about the guidance for the year. Yes, I want to reiterate, we absolutely confident to deliver between the 18% and 20% adjusted EBITDA guidance we gave for 2023. The upper limit, as we discussed earlier, will be really dependent on China and also just reaffirming our long-term 2025 guidance, which we gave during Investor Day. Thank you.

The next question is from Linda Bolton-Weiser of D.A. Davidson.

Sorry if I missed this, but can you give an operating cash flow number for 2022? And then I know you kind of mentioned some investment in working capital. Is there some kind of a rough outlook that you have for operating cash flow in 2023? And then my second question is, what are you seeing or learning so far regarding the connectivity and the data and analytics you're able to have now with the connectivity of that new Syndeo device? What are you seeing or learning so far with that?

I'll address the free cash flow question first. We had spoken about we invested in working capital heavily in 2022 as we're getting ready to launch Syndeo globally. As we learned, if you recall, when we launched in the U.S., we run out of inventory. We were very quickly trying to speed up and really shift the units out. So we're in a really good position as you can observe our inventory balance. Obviously, if you look at us, we pay about $10 million in terms of interest. We pay about $20 million CapEx, if you assume the EBITDA margin will be guaranteeing for 2023. That by definition should be in a cash flow positive position. So then they all boil down to working capital. So once we launch globally in the second quarter, Linda, our expectations really managing that working capital closely, and you should see more of a beneficial trend coming through the second half of 2023. We feel positive about cash flow generation starting at the end of 2023.

Thanks, Linda. And in terms of what we're learning, coming up for nearly a year since we launched Syndeo in the U.S., we're learning a lot. I think we're learning, adjusting. It's giving us a number of insights, firstly, on the consumer and the number of sort of more depth of knowledge on the consumer. It's helping us develop new products and protocols such as body, which is obviously going to be a key strategically for us this year. Also, we're learning how to improve the system and the software. And we're always iterating and learning and improving the system based on provider feedback, based on what we're learning of that data. And that's why, again, I think it's another advantage why we waited for a year before launching internationally. We're able to take all of those learnings and optimize that for that launch in Q2 overseas. And I think in coming quarters, we'll share more insights with you on what we're learning.

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

Well, thank you, everyone, for your questions. Just to close, I'll reiterate our confidence in the path forward. I think with our investments now already complete, we have the infrastructure in place to deliver on our profitable growth strategy. I think we have an exciting year ahead with Syndeo's Q2 international launch, differentiated partnerships to drive consumable sales and recruit new consumers to the brand, China's reopening and the integration of SkinStylus. So we look forward to continue to execute and further our category leadership in 2023 and beyond. The team will be available today for any additional questions you have. Once again, thank you, and have a great day ahead.

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