Good day and welcome to The Beauty Health Company First Quarter 2023 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Eduardo Rodriguez, Senior Director of M&A and Investor Relations. Please go ahead.

Thank you, operator and good morning, everyone. Thank you for joining The Beauty Health Company's conference call to discuss our first quarter 2023 financial results which were released this morning and can be found on our website at beautyhealth.com. We also encourage you to join the webcast available on our website which contains a presentation that will be referenced during this call. With me today are Beauty Health's President and Chief Executive Officer Andrew 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.

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. To begin, I will discuss our performance and accomplishments for the first quarter. Later, Liyuan 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 aestheticians and provider partners who together make up our global HydraFacial Nation for their continued hard work, passion and creativity. During the first quarter, our team made meaningful progress against our 5-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 1 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 Syndeo system and reinforcing our confidence in our 2023 guidance. Q1 performance overall was anchored by 21% year-over-year consumables net sales growth, a signal of the strong underlying demand for HydraFacial treatments as consumers continue to prioritize products and treatments that make them feel good about themselves. On Slide 5, you see that consumables net sales in the Americas grew a staggering 34% for the quarter, demonstrating the continued strong consumer demand for HydraFacial. 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…

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 Syndeo U.S. 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 Syndeo’s U.S. launch from Q1 last year and reflects an unsurprising impact from January and February core-related shutdown in China. Our Delivery Systems segment grew by 9% year-over-year. There are 3 primary drivers behind the moderated growth. First, comped against a strong longer in the U.S. last year. Second, the January and February COVID-related shutdowns in China; and third, providers outside of the U.S. holding purchases of delivery system in anticipation of the Syndeo International launch in Q2 2023. Addressing the first driver, Syndeo's surprise and successful launch in the U.S. was in Q1 2022, making a year-over-year comparison difficult. On the second driver, as you recall, China broadly announced reopening at the end of last year. However, a wave of COVID 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's previous high for systems sold in the month, giving us confidence around the opportunity in the region. Last, as is natural, international providers held purchases of delivery system in Q1 2023 in anticipation of…

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

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

Thank you for the question. It's spot on. So overall, we've delivered a really solid Q1 in line with our plan. You're absolutely right. It was a build -- we always had that normal seasonality in Q1 which we had in our plan. And if you look back on previous years, it's very consistent. And we did see it build. So as we said, March was actually our second highest month ever which is -- we are very happy with considering that's before the international launch of Syndeo. So of course, driven by strong really across the board but consumables, particularly across the core perform well. So that gave us the confidence really what we saw going into April globally in all markets, especially in China, where Liyuan and I had just visited to obviously raise the guidance for the year and everything we've seen into Q2 is really positive. And of course, Syndeo got off to a tremendous start everywhere since we launched it early in Q2.

The next question comes from Margaret Kaczor with William Blair.

I wanted to maybe go a little bit deeper on some of the commentary on March and China. I know Korrine had just asked that. But was that primarily Shanghai? Or are you getting some benefit from Beijing? And is there any commentary, I guess, that you could provide on the new experience center, whether that's driving demand and even a sense of scale, I guess, relative to what you saw early days in Shanghai as an example?

Yes. No, exactly. In terms of China, of course, January was very much -- we saw very impacted by COVID, February and New Year but really from March onwards, we saw a tremendous bounce back, both with existing providers turning back on the machine, retrain staff making orders. But then, of course, going into Q2, of course, the launch of Syndeo. And we've seen the pickup of course, in Shanghai, Beijing, Shenzhen but really across the board, Margaret. I think what we're finding all over China is after a year -- a couple of years of lockdown, there's a real hunger for aesthetic beauty and skin care treatment. So we really, really felt very positive when we spent a week or so over there. Of course, the experience centers really help us in rapidly training those staff. We have obviously been locked down and bringing them up to speed on HydraFacial and of course, the new Syndeo system. So that's been working hard. The other great thing about the new experience center in China is that we've built a live-stream studio within it. So we can make content 24/7 to live-stream and you know that's the key revenue driver in China. So yes, we're really boiled with what we saw there.

The next question comes from Olivia Tong with Raymond James.

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

I'll kick off and perhaps also hand over to Liyuan. So we -- I think we've spoken all of us many times about the real natural and consistent seasonality we had in our business in Q1. It was in line with what we planned with that slower January, slower February and then a very strong second --back in March and into April. I think what we were really happy with overall is a solid quarter, just -- we often talk about -- and you and I have talked about this before, the barometer of the health of our business, of course, that strong consumables growth and achieving plus 21% overall for the quarter, plus 35% in Americas. When you think of EMEA, if you exclude the Russia business which we lost the year before, that's another 35% and APAC there, 22%, APAC was very back weighted. So you can imagine the growth which we got in March was absolutely tremendous. But of course, January and February was slower. And we've seen that go into Q2. And of course [indiscernible] by the launches in day -- if you think of the international markets, Olivia, we've had no new news on the systems side for over 5 years and a lot have happened in that time. So to go in with a big story, a big marketing push all around the big trade shows which are always very Q1 and early Q2 weighted, there's a lot of excitement and that's translated into revenue and consumables pickup.

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

The next question comes from Jon Block with Stifel.

I guess I'll ask a pretty direct question. You have a lot of confidence in the business you raised the top line, the EBITDA absolute but you seemingly missed your 1Q 23 implied figures from the late February call. And I just want to sort of ask, I mean is that fair EBITDA, or it had negative gross margin, or was below the year ago? I think you sort of said you expect it in line. So these are small deviations but I want to make sure the messaging is pretty cleaned up. And what is it if that was the case? Because you called out China having a great March. So was it all attributable to the delay in capital purchases for EMEA that caused the suppose disconnect? And then just a follow-up is the consumable growth by region, those details were very helpful. The America's number -- consumable number was very solid. So Andrew, is it just attributable to the 1Q 23 Americas environment on a relative basis, better than EMEA and APAC? Or is it a Syndeo thing which would be encouraging because maybe we could extrapolate that to EMEA and APAC in coming quarters?

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

Yes. John, just to address your question in terms of the guidance. We were very thoughtful and purposefully sharing the seasonality when we had the conversation back in February. And the fact that given the launching time, there's anticipated potential weight and slowdown to Andrew's point earlier. I think on the gross margin point, we were fully anticipating coming consistent to last year. But when you really think about the dynamic with the gross margin, there's a bit over 100 basis point difference, most of that is folks really choose to buy that lead refurbish which is what we plan to do as part of the trade-up program, especially when it comes to APAC and EMEA. And as you can appreciate, those tried-up elite refurbish have very, very low margin because a lot of those came back from the trade-up with the U.S. So it's how we really booked the revenue and margin. So these are very temporary impacts. If we sold both be and these refurbishing leads, then we would have actually had a slight pickup. So there's a bit of the timing that's really impacting gross margin for Q1. And that's partially why we felt pretty confident going forward. Of course, we're going to continue to push for trade-up we still have refurbished [indiscernible]. But given the volume and the ASP coming with new Syndeo systems going forward, we believe consistently, we will see the sequential improvement in gross margin.

The next question comes from Oliver Chen with TD Cowen.

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

I'll kick off and allow Liyuan to follow up. But we feel good about raising the guidance on the year. I guess, 2 very clear banks, first of all, what we have in the plan but just combined with the momentum, frankly, we've seen coming out of March globally and also with the really encouraging start to Syndeo and then I think when you add on the real strong acceleration from China on in March, that's what gives us the confidence to raise. And I think we spent the last couple of years, we spoke many times about building up that infrastructure, putting the cells to in place, the training and education centers, getting the right partners. And that's all in place now and we're reaping the rewards of that. So it's a really positive payment for us.

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

The next question comes from Allen Gong with JPMorgan.

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

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

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

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

I think it's twofold. I think we've had a very, very encouraging start internationally to Syndeo overall on top of the continued strength in the U.S., you saw that, of course, in that consumable number here in the Americas. But yes, John, China -- Bruce, China recovery is a key element of that. I think we've been extremely pleased with what we've seen so far from March and going into Q2, we're followed very closely but that's what's giving us that real confidence along with the Syndeo launch to raise the guidance.

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

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

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

The next question comes from Navann Ty with BNP.

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

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

Yes. And just to build on that point, if you think about the reason why we feel confident about the EBITDA flow through, I would say, a couple fold. One, on the gross margin, we have been not only setting up the production site in China for the local production but also continue to value engineer and manage our inventory flow through. So -- and we built in the trade-up assumptions already as we provided the guidance previously. So the more upside we can see with the growth of China which actually have the highest ASP, highest gross margin percentage, combined with anticipated further sales of the Syndeo product, while we outvalue engineering, that give us a lot of confidence on that sequential improvement for gross margin. Separately, as you can see, we actually invested pretty heavily in selling and marketing in Q1. The fact that we have 300 basis points plus of leverage kind of speaks to volume as the sales number goes up even further, you're going to continue to see that truly flow through to the bottom line. One thing I want to emphasize on the G&A is the fact that Q1 is usually the heaviest when it comes to professional service fees because we're expense professional service fees as they incur. So as you can imagine, all the facts testing the heavy audit fees, all of that kind of hit Q1. So that's another reason. So suffice to say, you should really see leverage coming through quarter-over-quarter.

And to address your final question you raised on skin styles. That's acquisition which we, of course, complete in Q1. We're extremely excited about that. At the moment, as you know, it's FDA-cleared for abdominal scarring and we're in the process of securing approval for other indications. And we'll, of course, keep you posted as that's progressing during the next quarters.

The next question comes from Ashley Helgans with Jefferies.

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

No, that's a great question. Thank you. In fact, quite the opposite. I mean, our consumables strength in Q1 was, of course, driven by consumption but I think what we've been finding is the attachment rate on our boosters as we really double down on our storing telling as new exciting products, be it JLo, Dr. Babor, Moore, of course, we announced the your partnership last quarter. The attachment rates are increasing and it's becoming a key element of our business as it grows, offering that kind of unique level of personalization and customization which really no other aesthetics or beauty procedure can do other than HydraFacial. So that's been a strong driver behind the consumables growth.

The next question comes from Kyle Rose with Canaccord.

I just wanted to kind of ask a dovetail on the previous question there is on utilization. Maybe just any trends you're seeing from a utilization perspective in the Syndeo versus the non-Sendeo accounts? And then similarly, U.S., when we think about actual treatments provided or body areas treated, whether it's Karaviv or treatment outside the base. Just overall, if you could break down some of the utilization trends, that would be very helpful. Kyle, absolutely.

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

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

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

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