Good afternoon, and welcome to The Beauty Health Company Second Quarter 2024 Earnings Conference Call. [Operator Instructions]. Please note this event is being recorded. And I would like to now turn the conference over to Norberto Aja for Investor Relations. Please go ahead.

Thank you, operator, and good afternoon everyone. Thank you for joining The Beauty Health Company's conference call to discuss our second quarter 2024 financial results, which were released earlier this afternoon, and which can be found on our corporate website at beautyhealth.com. Leading the call today is BeautyHealth's Chief Executive Officer, Marla Beck, and our Chief Financial Officer, Mike Monahan. Before we begin, however, I would like to remind everyone 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. Listeners are cautioned not to place undue reliance on any forward-looking statements. For a further discussion of risks related to our business, please see the company's 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 in the earnings press release furnished to the SEC and available on our website. Following management's prepared remarks, we will open the call for a question-and-answer session. With that, I would now like to turn the call over to our CEO, Marla Beck. Please go ahead, Marla.

Thank you, Norberto. Good afternoon, and thank you for joining us today. During my short time as CEO, we have solved our most pressing device issues identified and began to address the remaining business challenges and made significant strides in realigning the cost structure and overall operations of the business. While this work will take some time, I am confident we are on the right path to return the company to long-term profitable growth. Today, I will walk through a summary of our second quarter results, and then, I will explain the initiatives we have already put in place to turn the business around, along with the longer-term initiatives we are executing against to fully realize the company's potential. Our plan revolves around the three core areas of focus that I outlined on our last earnings call, sales execution, operational excellence and financial discipline. Our second quarter results reflect a slower-than-expected recovery of device sales, partially due to macroeconomic pressures, as well as internal execution. We have an incredible global sales team, and we need to supply them with additional products, tools, processes and structure to capture the demand for our products. Hydrafacial was in a hyper-growth mode for many years prior to going public. During that time, the company did not fully implement an enduring and scalable infrastructure needed to maximize market share and drive profitability for a company of this size. We are in the process of fixing that. To drive top line growth, we've implemented three immediate actions to support sales and improve sales execution. First, we have refocused our sales and go-to-market efforts across our entire product portfolio in the U.S. including Elite and Allegro. This will allow us to offer more accessible price points other than Syndeo. This good, better, best approach affords our providers…

Thank you, Marla. Despite the headwinds the business faced during the first half of the year, I am encouraged by the progress we are making to both address the present challenges, as well as to strategically position the company to benefit from the many opportunities in front of us over the mid to long-term. Our second quarter outlook assumes near-term pressure on capital equipment sales, reflecting a challenging comparison due to the international launch of Syndeo in the prior year, along with some unfavorable macro conditions. As we progressed throughout the quarter, many of our smaller providers experienced prolonged pressures related to the tight credit environment, which had a greater-than-anticipated impact on sales. During the second quarter, we incurred several unanticipated inventory-related write-offs totaling approximately $17 million, which I will address in added detail shortly. Second quarter revenue came in below our guidance at $91 million, representing a 23% year-over-year decline. This reflects a 46% decline in global equipment sales, offset by a 7% increase in consumable sales. Adjusted EBITDA loss of $5.2 million versus a $12.4 million gain in the second quarter of 2023 was also below our prior stated guidance. Adjusted EBITDA includes $17 million in unanticipated inventory write-offs. On a pro forma basis, excluding these charges, we would have come in well above our guidance. More importantly, this has added proof that we are indeed making early progress in gaining cost leverage, while addressing historical operational issues that have impacted our bottom line results. Looking ahead, we are now projecting third quarter net sales of between $70 million to $80 million and an adjusted EBITDA loss of negative $6 million to negative $1 million. We expect revenue to increase sequentially from Q3 to Q4, leading to full-year 2024 revenue between $325 million to $345 million, and we…

Thank you, Mike. Despite our recent challenges, BeautyHealth is a unique company at the intersection of beauty, aesthetics, health and wellness. We are the market leader and category creator for minimally invasive skin health treatments with a brand that consumers ask for by name across the globe. Our business thrives because of the combined power of devices and consumables, what we refer to as medtech meets beauty. The combination of our patented technology with our clinically effective solution serums and peels results in healthy glowing skin that cannot be achieved with any other minimally invasive treatment. With one of the largest installed bases in the world, including over 33,000 devices, we are focused on optimizing this vast device footprint. Doing so will not only allow us to further expand our installed base, but serve as a powerful catalyst for our consumable sales. Looking beyond our sales, operational and financial initiatives, we've not lost focus on the potential of this business, including bringing innovation to the market. The work we are doing to lower costs and drive inventory improvements furthers our ability to accelerate the product pipeline and leverage our over 120 patents, as we look to bring new products to market. This fall, I'm excited to confirm that we will be bringing a new Hydrafacial booster to the market, the first supported by extensive clinical claims. We are in the early stages of evaluating the launch of the skincare lines planned for 2025, as part of our strategy to wrap the treatment room. It would serve as a complement to Hydrafacial, and we believe this will create added revenue for our providers, while extending the efficacy of our treatments. As we've highlighted before, consumables remain a significant opportunity and driver of margin expansion moving forward. We are also working to…

Thank you. [Operator Instructions] We will now take our first question from Susan Anderson with Canaccord Genuity. Please go ahead.

Hi, good afternoon. Alec Legg on for Susan. A question on the provider sentiment by region. So with the new machine placements kind of being the major headwind here, whereas consumables are still strong, can you give some details on the headwinds by region? It sounds like in China, it's more of a macro and credit issue, but what about provider sentiment around the reliability of the newest Syndeo machine? Any details there would be helpful? Thanks.

Yes, thank you for your question. First, I'll talk about Syndeo, which is our quality improvement program is showing significant results, and it was implemented just in this last quarter. So we're hearing great feedback from our providers around this Syndeo 3.0 systems. And the data is showing our return rate of new Syndeo 3.0 devices is significantly better than what we have experienced in the past. Additionally, the provider community continues to show unwavering passion for Hydrafacial and the devices. We did a recent survey with our U.S. providers and 90% said they have either increased or maintained their revenue from Hydrafacial treatments over the past 12 months and 95% of providers expect the trend to continue. So our consumables sales are strong, and the provider sentiment is great.

Thanks. And the consumer, it looks like they're still going. Is it the same consumer that's going in and maybe using add-ons to help boost the average price per treatment? Or is it new customer acquisition? Just any insight there?

I mean, I would say in terms of the end consumer that has to do with our providers and their insights. I think we can take some examples from our national accounts, which are seeing sort of a significant increase in consumables, and they tell us that Hydrafacial is really a traffic driver for them, so they're leaning into Hydrafacial.

Thank you. We will now take our next question from Allen Gong with JPMorgan. Please go ahead.

Thanks for the question. For the first one, I kind of want to dive into the guide a little bit more. You're pointing to sales of around $75 million in the third quarter, but then to get to the midpoint of your guide, you have a pretty strong rebound in the fourth quarter. And I know that your business model has always been pretty fourth quarter weighted, but this $10 million-plus step-up seems like similar to the normal seasonality that you would normally see supported by strong system sales. So if we're in kind of a weaker market environment and the cost of borrowing is a little bit worse, what gives you confidence that you'll see that normal seasonal step up?

Great question. I'm going to have Mike take that.

Yes, thanks, Allen. I think overall, when you look at the pressure we're seeing in -- on the capital side, we're seeing the largest point coming from outside of the U.S. So I think that's the first point I would make. The second point is the seasonality still exists within the business, the way we're seeing it now. We're just seeing that overall pressure because of interest rates environment and some of the access to credit. We're taking a couple of actions that we believe will start to see traction in the back half of the year. The first is overall financing. We introduced a couple of new financing programs to lower the barriers to entry for potential providers. This is where we're extending the payment period of up to three years and having it step up over the course of the period, where they're paying it back. We think we're going to get some traction off of that as we refine that through the second half of the year. The second point is we're opening up the product portfolio, as Marla mentioned. And we really think this will start to have an impact as well because the Elite and the Allegro are at lower price points and will enable some of our smaller providers, where we're seeing most of the pressure come from to access Hydrafacial and get in at a lower price point. So we are optimistic, and we feel confident in the guidance that we provided.

Got it. And then just as a quick follow-up. I know you highlighted strong consumables in the quarter, and you were able to grow year-over-year, but you're clearly working with a bit of a larger installed base this year, arguably, last year, consumables because you had the Syndeo launch with the kind of consumables bundled into those initial placements that could have arguably represents an easy comp. So what are you seeing in terms of the underlying demand for consumables and the health of that, especially, again, given the macro dynamic, fully understanding that you do play at the lower cost end of the spectrum. So you've been able to kind of avoid some of the end consumer softness up until now. Thank you.

Yes. I'm happy to talk about that. So as we grow our installed base, we're seeing an increase in the overall sales of consumables. Consumable sales per device did go down year-over-year in the second quarter. But if you look at the U.S. market, which is really our cleanest market to understand in terms of data, it was down 2% to 3%, driven by a lot of different factors, including the fact that we did not have any new launches this year. So if you look at the mix, it's our core consumables, our core solutions are up. It's our boosters that are not keeping pace, and that's primarily due to launches. And so, the core Hydrafacial business and core consumables business is incredibly strong.

Thank you. We will now take our next question from Ashley Helgans with Jefferies. Please go ahead.

Hi, this is Blake on for Ashley. Thanks for taking our question. I wanted to ask if you could comment at all first of all, on any monthly trends you saw in the business and kind of how to think about the current quarter-to-date on the top line?

Mike, do you want to take that?

Sure. The business tends to -- on the capital side to be back-end weighted. And so, we tend to close a lot of our capital equipment sales towards the end of the quarter. And so, the current monthly trends are consistent with what we've seen in prior quarters and how this business overall works. When we -- we also track consumable sales, which tend to be more consistent kind of throughout the quarter, and we factored that into the guidance we gave for Q3 and for the remainder of the year.

That's helpful. And then on the macro, I know you mentioned, I think, some more of the softness was skewed towards international. I didn't know if you could expand. I think we've seen a lot of the headlines, but anything you could provide color on in terms of how international is a little bit softer maybe in Europe versus Asia?

Mike, why don't you take that?

Sure. So we'll start in Europe. Europe, we have seen sensitivity to the interest rate environment and access to credit. That's been something that we're focused on. We started in the U.S. with the new financing options that we tested late in June and are continuing to refine. And we're looking to roll them out throughout EMEA, throughout the back half of the year. So we think that will have an overall positive impact. Each market within EMEA has a slightly different focus, some focused a little bit more on medical, some on non-medical. So we're digging into the channel segmentation, and we think we can have an impact there on a positive basis. Overall, in China and mainly in China, we're seeing a little bit less on the interest rate, and there's more some headwinds relating to competition. And then we have some internal execution that we're working on mainly around the number of sales reps that we have. We have a really terrific team in APAC, but we have a number of sales reps, positions that are open. So our leadership there is actively working to kind of bring them on, and we think that will have a positive impact once we have a full team.

Thank you. We will now take our next question from Margaret Kaczor with William Blair. Please go ahead.

Hey everyone. This is Macauley on for Margaret. Thanks for taking our question. Marla, I know you mentioned we should be getting more of that operational and efficiency update in Q3, but obviously, you brought on Sheri last quarter, and it seems like she's making some changes already that have been implemented. So wondering if we could get a bit more detail on what exactly has been implemented thus far, how those changes are directionally helping some of those efficiencies, both on the quality and the supply chain side of things.

Yes. She joined in April. So really, within the last quarter. A couple of things. One is the first focus was really on Syndeo, restoring the trust in Syndeo and driving our quality improvement program. So it was all hands-on deck for that, and we've seen amazing results. Now she's turning towards our global manufacturing and supply chain strategy, looking at new inventory management processes and really taking a hard look at our manufacturing capacity and how we improve our gross margins. And as mentioned, on our next call, we'll have a full strategy to share with you, but I want to give her time to really finish her evaluation and put together a strategy that is impactful to the bottom line.

Understood. Thanks for that. And then just a quick follow-up for Mike in terms of the cash balance and what you expect for the cash burn, as both in the back half and especially as we exit the year heading into '25?

Yes. I mean, our adjusted EBITDA guidance implies you're roughly flat to slightly down in the back half of the year on adjusted EBITDA. We're pulling back on some of the CapEx that we had just for some of the planned initiatives. And so, I would expect us to be -- to use cash in the back half of the year, but I don't look at it to be materially different from where we sit today from our goal. So we're sitting a little bit below $350 million today.

Thank you. We will now take our next question from Korinne Wolfmeyer with Piper Sandler. Please go ahead.

Hi, this is Sarah [ph] on for Korinne. First, just I'm thinking about the back half of the year, how should we be thinking about the top line cadence in Q3 and Q4 for both delivery systems and consumables? And then just in terms of innovation, where do you see the greatest white space opportunity? And then could we see that consumables innovation speed up sooner than that 2025, 2026 target?

I'll take the white space question and then turn it over to Mike to answer the cadence question. We're starting with our innovation pipeline, the first big launches in the next couple of months, which is our first clinically proven booster that enhances the Hydrafacial treatment. We are speeding up the innovation pipeline. But when we came to market this year, there was not much in the pipeline, and so, that takes a little bit of time. But we're confident that we will start to set pace in 2025 of both boosters, which enhance the Hydrafacial treatment and results and additional back bar and skin care products. But we do need until 2025 to do that.

For the revenue decline in the back half of the year, the primary driver of the decline was in the capital equipment in the forecast, not just Q2, but also in the forecast of Q3 and Q4. Consumables are down somewhat, but that's largely as a result of lower systems sold in Q2 to Q4.

Great, thank you.

And we will now take our next question from Jon Block with Stifel. Please go ahead.

This is Joe Federico on for Jon Block. Thanks for taking the questions. I think that you said that you've now completed the global Syndeo replacement program. But then as part of the new strategies, it seems like putting a greater emphasis on Elite and Allegro the legacy systems. I think you said 30% in the quarter were those legacy systems, non-Syndeo. I think that you said that should increase in coming quarters, but I was just curious if the replacement program is completed, why is it moving more towards those legacy systems? Is it just cost sensitivity from the providers?

Joe, that's a great question. Yes, we have completed the global Syndeo replacement program. The reason we opened up the portfolio was really for cost for the providers. There have been requests for more excessively priced devices. The cost of the Syndeo is significantly more. And so, given the macroeconomic trends and the difficulty in obtaining financing, the easiest thing -- the way to deal with that and to make more Hydrafacial devices available is to actually introduce to sort of try -- reintroduce to tried and tested sort of devices, the Allegro and Elite. And it really just makes the Hydrafacial device more affordable, but also it shows the demand for a device. This is a device that really adds to the revenue for the providers and is an economic engine for many single room aestheticians and also brand-new med spas. And so, it's an opportunity for people to get into a Hydrafacial device and a Hydrafacial business that they may not have had if we only focused on Syndeo.

Okay. That makes sense. That's very helpful. And then, Mike, maybe one for you just on EBITDA. Obviously, in the quarter, it was down year-over-year, but normalized was, as you said, better than guidance and also above our estimates. And then I think EBITDA guiding to down slightly in the third quarter before turning positive in 4Q. But my question is just why is there such a reversal from kind of the solid normalized level in 2Q expected in 3Q? Is that some of like the warranty accrual dynamics? Any color you could provide there, would be really helpful?

Sure. So the guidance in the back half of the year, the reason that there's a little bit more pressure is gross margins, we're expecting them to be consistent with more Q1, which were in the 63%, 64% adjusted gross margin range, and that's largely due to lower production planned in the second half of 2024. When that happens, we take a higher percentage of our operations, labor and overhead costs through the P&L, and that offsets some of the improvements we made. So that's one. And then two, OpEx costs in the second half are expected to be flat to slightly up sequentially when you look at kind of the first half of the year, and that's largely due to some additional professional fees we are incurring mainly around kind of legal and consulting fees related to the sales force work we're doing.

Thank you. [Operator Instructions] We will now hear from the line of Oliver Chen with TD Cowen. Please go ahead.

Hi, this is Neil Goh on for Oliver today. Would love to just circle back on Syndeo in terms of potential improvement [Technical Difficulty]. Is there anything that providers still asking for? You mentioned return rates are improving and then there's solid U.S. provider feedback. But how confident are you that those technical issues are away at this point now that we've had a couple of quarters of observations here. Thanks.

Thanks for your question. The feedback from our providers is quite good, and our return rate has declined significantly. So we feel really good about where we are. Our technical service team is really strong, and they're able to deal with any minor issues that we see in the field. And the response, not just from the providers, but from our sales teams, which is really important is incredibly positive.

Thanks.

And it appears that we have no further questions at this time. I will now turn the program back over to Ms. Beck for any additional or closing remarks.

Thank you so much. I would like to take a moment to express my gratitude to the entire BeautyHealth team for your unwavering dedication and commitment to placing our providers at the center of everything we do. We are diligently working to set forth a path for growth that leverages the inherent accomplishments and successes of the company. I'm confident that these challenges are fixable and that the steps we are taking will lay a strong foundation for restoring long-term profitable growth. Thank you to everyone for joining us today. We look forward to updating you on our next call.

And this does conclude today's program. Thank you for your participation. You may now disconnect.