Good day and welcome to the Beauty Health Company Fourth Quarter and 2024 Full Year Earnings and Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Norberto Aja of 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 fourth quarter and 2024 full year financial results. We will release our results earlier this afternoon, which can be found on our corporate website at beautyhealth.com. Joining me on the call today is Beauty Health's Chief Executive Officer, Marla Beck; along with 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 and 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. A reconciliation of these non-GAAP measures to the most comparable GAAP measure 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 to review our fourth quarter and full year 2024 results. A year ago, I expressed my enthusiasm for the opportunity I saw in leading Beauty Health, an innovative category creator at the intersection of beauty, aesthetics, wellness and health that needed a transformational strategy and disciplined execution. Over the past 12 months, we have made significant strides in stabilizing operations, optimizing costs, reigniting our product pipeline, attracting top talent and building a stronger foundation for long-term profitable growth. Our fourth quarter financials demonstrate that our transformation efforts are beginning to take hold, with continued growth in consumable sales across all regions and substantial improvements in gross margin and bottom-line profitability. For the full year, we delivered net revenue of $334 million and adjusted EBITDA of $12.3 million, both of which exceeded our guidance. In addition, we reduced operating expenses by over $30 million demonstrating our commitment to financial discipline and operational excellence. More importantly, we are transforming our business to set us up for long-term leadership and scalability. Hydrafacial is in a hyper growth mode for many years, but lacked certain infrastructure, commercial execution and financial discipline needed for a sustainable high margin business. That has now changed. Let me walk you through our key accomplishments in 2024 and what's ahead. At the start of the year, we identified three transformation priorities: sales execution; operational excellence; and financial discipline. Starting with sales execution. During the fourth quarter of 2024, we continue to build a more robust and scalable go to market model as we refined our sales structure, expanded pricing options and introduced new tools to improve sales execution. We diversified our device sales strategy by expanding our good, better, best pricing model for Allegro, Elite and Syndeo. In…

Thank you, Marla. I'm encouraged by our performance in 2024 as we strengthened our financial foundation and delivered on our full year net revenue and adjusted EBITDA commitments, both exceeding the high end of our guidance. Fourth quarter revenue came in at $83.5 million representing a 13.8% year-over-year decline. We are seeing the continuation of a challenging environment for many of our providers as they remain cautious on capital equipment purchases, particularly in the international markets. As a result, we saw a decrease in global equipment sales of 40% in the fourth quarter. To improve access to our devices, we introduced a good, better, best strategy in 2024 by opening up our portfolio of select legacy devices at lower price points. In the fourth quarter, non-Syndeo sales represented 29% of total systems sold as compared to 21% in the prior year fourth quarter globally Current year fourth quarter non-Syndeo device sales represented 39% of systems sold in the Americas. Total units sold worldwide during the fourth quarter was 1,087 units with an average selling price of $24,650 compared to 1,551 units sold globally in Q4 2023. In the Americas, we sold 649 units compared to seven 758 in the fourth quarter of 2023. Additionally, we sold 140 units in APAC compared to 450 in Q4 2023 and 298 units in EMEA compared to 343 units in Q4 2023. For the full year, we sold 4,907 systems bringing the total active machines in the field to 34,735 units versus 31,446 units at the end of Q4 2023. Consumable sales for the quarter totaled $56.7 million or an 8.7% increase versus Q4 2023 with growth across all regions. These results bring our consumable sales for full year 2024 to $208.9 million compared to $191.4 million for full year 2023. For the full…

[Operator Instructions] And the first question will come from Susan Anderson with Canaccord Genuity. Please go ahead.

Hi, good evening. Thanks for taking my question. I wanted to maybe ask on the delivery systems, just kind of what you're seeing out there. From a macro perspective, it looks like you're expecting them to be down pretty significantly again in first quarter. Do you think this is really kind of all macro driven, or still kind of higher interest rates? Maybe if you could just give some more color there? Thanks.

Mike, do you want to take that?

Sure. Hi, Susan. Yes, that's what the main drivers are for overall delivery systems. We're seeing providers that are taking a little bit longer to make a decision, as to buy the device. And we believe that's driven by the uncertainty in the overall macro environment. And then the interest rates are continuing, to put pressure overall on that sales process. We are continuing to pull levers that we've talked about. We've - had success with introducing devices at lower price points and that's the good, better, best strategy. You saw that that's been improving as a percentage of overall sales. And we continue to work with - the sales force continues to focus on emphasizing the return on investment, from the Hydrafacial machine, which it can pay itself back in less than nine months.

Okay, great. Thanks for the color. And then maybe if I could add one more just on the consumable side. So obviously you continue to see growth there. How are you feeling just in terms of the consumer and their continued demand on the consumable side as we move into 2025? And then I was curious, did you see growth across all of the regions with consumables? Thanks.

Thanks, Susan. I'll start and then I'll have Mike add in. First, we noted consistent signature consumables revenue per system in the U.S. for 2024, compared to 2023. So consumers are continuing to prioritize Hydrafacial treatments as part of their skin health regimen, and we're excited to see that continued growth. In terms of macro, the trends are in our favor. Macro trends, you know, the GLP usage is certainly driving consumers and we're seeing a lot of treatment stacking on the part of providers where they require that Hydrafacial is the first treatment before lasers or other treatments. And some of the other trends around returning, to sort of this natural look is benefiting us. In terms of the actual global, I'll have Mike talk a little bit more in detail.

For regional growth, we expect consumables. I would expect to see growth. We factored in at the midpoint of our guidance growth for the Americas and EMEA, as we move China to a third-party distributor. We expect lower growth in Q4, sorry for the year in APAC as we make that transition.

Okay. Great. Thanks so much. Good luck this year.

Thanks, Susan.

And our next question will come from Oliver Chen with TD Cowen. Please go ahead.

Hi, Marla and Mike. Regarding what you're seeing, you made lots of improvements. What are you seeing with reliability now, Marla, in terms of the machines and the feedback you're getting and what inning you are there? And as we do think about good, better, best to Marla, what happens to the consumer in terms of incrementality versus cannibalization? It sounds like a really customer centric approach, to have all offerings. But I was curious about the dynamics of customers, perhaps trading up later or are you losing the better and best, when you sell the goods? And then Mike, on the modeling, as we think about regional modeling, I'd love some color in terms of the equipment sales by region. It's pretty different by region. And it could be also useful to dive into why third-party makes the most sense, in terms of that strategy you're choosing to take? Thank you.

Thanks, Oliver. Lots of great questions. So in terms of provider sentiment around Syndeo in 2024, we enhanced our manufacturing quality process, and invested in both customer service and technical support. We are seeing meaningful improvement in our overall manufacturing quality. We're seeing minor technical issues that remain, but we're able to quickly address them with our teams. And so, we're in a completely different position today, than we were a year ago. And then in terms of your next question, the good, better, best strategy, I think what's happening, is we're still seeing a number of trade ups even though, we're not doing sort of the trade up accounting strategy that, we did in the past. What happens is, there are a fair number of estheticians and med spas that want to get into Hydrafacial - into a Hydrafacial device. But don't have the credit to do so. Especially brand new businesses that don't have the credit history. I think credit markets, are a little tighter than they were in the past. So the provider may start with an Elite or an Allegro, and then trade up later. The trade ups are still very robust. I don't know Mike, if you want to add to that, and then take his third question about global demand.

Sure, let me focus on the global demand. I think in each of the regions, we expect overall equipment sales to be pressured. That's what the midpoint of the guidance assumes. I expect to see it the most in APAC, and that's largely from the transition from China from a direct model to a distributable model. And I'll talk about that in a minute. Second, we're seeing more pressure in EMEA than we are in the U.S. And so, while we still expect at the midpoint of our guidance, to see overall equipment sales to be down, we're expecting it to be a little bit less in the U.S., and specifically overall in the Americas. The reasons for China moving to a third-party distributor model, it's really around overall global focus, and the size and potential for us to execute within China. So China last year was a little over 20 million in revenue. And in terms of scale, we have quite a large infrastructure in order to support that revenue stream. Our belief was by moving to a distributor model, that particular distributor that we're working with can apply more focus to that particular region, and do it more efficiently. That enables us to drive profitability, even though there will be a lower revenue stream associated with that. So overall, we believe that this is the right move for the company, over the long-term, and we'll be able to return to growth and drive more profitability.

Okay. I know you've been making changes to your sales force. Where are you in that journey, Marla, in terms of where the sales force is now, and how it's structured versus prior? And Mike, on your regional comments, is there any color on EMEA? Because I imagine there's certain divergence between countries within EMEA, or maybe not? Thank you.

Oh, great question. So we have a new Chief Revenue Officer who's extremely focused on adding process and technology to, how our sales force addresses our provider needs. And in terms of our structure, we still have the same structure, which is we have capital sales managers that focus on selling the device. We have business development managers, which focus on driving consumable sales, and really partnering deeply with the providers to enhance the number of Hydrafacial treatments they're doing. And then we have regional trainers, which really focus on onboarding new providers. We have streamlined that for optimization, but it's really enabling our Chief Revenue Officer, to spend a lot of time in the field with our teams. So, we have reduced some of the numbers, but it's really about focusing on the providers and their utilization.

For your question, Oliver, on EMEA yes, the markets are very different on the direct side in EMEA. Our two largest markets are Germany and the U.K., and the smaller markets - are direct markets are France and Spain. We've seen the most success within EMEA in the German market, where they've been able to execute and have really focused in on the higher end of the market, the medical side of the business. And we've also made a number of leadership focused changes, brought in some new leadership in France. And then the new Chief Revenue Officer made some structural changes that we think will allow the team, to focus in the right areas to return the regions to growth.

Thank you. Best regards.

Thank you.

Our next question will come from Olivia Tong with Raymond James. Please go ahead.

Great, thanks. Good afternoon. Presumably at this point you have reasonably strong visibility on March quarter results. So could you talk about why the rate of decline worsens? What's implied is a pretty remarkable worsening in sales in Q1 versus the exit rate in Q4. I know you mentioned macros, but given the base change, already would expect that macros was already sort of embedded in there. And then on expenses, I know that first half is heavier on spend, given the trade shows and other events associated with that, but can you talk about your fixed cost base? Cost of the events and such that looks like? Probably you need to have at least $30 million in COGS, just - your sort of fixed cost base, as we think about the guide on Q1 results? Thank you.

Mike, do you want to take that?

Sure. So there's three factors driving the guidance in Q1 and the full year. The first is the China slowdown, and the shift to the distributor model. So on a year-over-year basis, the midpoint of the guidance assumes, $5 million to $6 million of the Q1 pressure year-over-year is driven by China. And China also is impacting on the full year, about $10 million to $15 million. So I think it's important to kind of model in that impact, because it is having an impact on the overall revenue. The second piece is, lower device sales globally due to the macro uncertainty, and the high borrowing costs we talked about. And then the third is, we're seeing lower consumable sales per device, despite consistent treatments due to a decline in platinum and deluxe treatment elections. So effectively what's happening, is we're seeing very similar number of treatments, for the end consumer coming in, but for the more expensive options they're electing for the more base Hydrafacial treatments. I think your follow-up question was really around specifically. Sorry, yes, the fixed costs, most of the variable costs in our business, are on the selling and marketing line. And they're really around commissions, and the marketing spend that we do. The variable costs in the G&A line, are largely around kind of salary and wages and professional fees, which make up a big portion of our G&A.

Got it. And then perhaps, I just want to follow-up on consumables, because despite the shift in systems, which we understand, you have continued to grow consumables at a fairly steady high single-digit rate. So can you talk through sustainability of that, and what your expectations are going forward?

I mean, I'll talk a little bit about strategy, and then Mike can talk about how he's thinking about the numbers. But we're incredibly focused on partnering with our providers, to drive utilization and therefore consumable sales. So, we think our wrap the treatment room strategy, and the launching of more clinically backed consumables really drives excitement, and attention to the treatment room. So with the success of Hydralock, which we launched late in 2024, it shows how impactful consumables launches can be on the business. Hydralock was roughly 15% to 20% of the revenue in its category for us in Q4. And so, it shows how consumable drive traffic, drive excitement, drive purchase. And so, it's really igniting this innovation pipeline around consumables. Especially in the back half of the year that can be impactful, to both our providers and the end consumers.

For overall consumable sales, there's two factors. There's the total number of systems deployed globally, and then the average sales per device. So last year, we talked about, we ended the year with over 34,000 systems globally. The average consumable revenue per system was about $6,300. And so as we look to the future in growing consumable sales, even though we're projecting a slowdown in terms of new capital and new devices is deployed. We still expect to grow that base, which is important. We're still bringing in new providers into the Hydrafacial brand. The second metric we are very focused in on, is to drive that consumable sales per device, which as I mentioned we saw some declines in that, primarily around the - not seeing folks elect in this economy, the higher price boosters or upsells. We are specifically focused on, as Marla mentioned, introducing new boosters, new products, putting the marketing behind those products in order to drive excitement, that we think we can start to grow that metric, which will further support the overall consumable sales in the business.

Understood. Thank you.

Our next question will come from Ashley Helgans with Jefferies. Please go ahead.

Hi. Thanks for taking our questions. So maybe first, now that the Syndeo issues have stabilized, are there any plans on releasing a new updated system? And if so, just curious how you'd approach the trade in, trade up dynamic. And then, any color you can give us on kind of the average income, of the Hydrafacial customer that'd be great? Thanks.

Thank you so much, Ashley. So in terms of investing in new device, we think - we believe that investing in innovation around our device is critical, and the team is working on that for the future, including leveraging some of our 179 patents into that. So we're excited about that, and excited about our commercial team in place that's helping us, work through this. In terms of trade in trade up. Mike, do you want to talk a little? I mean for the future we can talk about trading up into Syndeo now, and then go forward. We'll make that decision long-term. Mike, do you want to talk about that?

Yes I mean, once we have a new device, that's an important part of the business, to be able to introduce something new, and then be able to sell that to our existing provider base. So while we don't have anything planned, or factored into the 2025, that is a key piece of the business that we would factor in, and roll out at the appropriate time.

Great. Thanks so much.

And our next question will come from Jon Block with Stifel. Please go ahead.

Thanks guys. Good afternoon. Marla and Mike, I guess on that good, better, best. Can you get that good below the financing bogey? I mean the overall capital ASP, is I think roughly 25,000. Can good get down to, I don't know, 12,000, 15,000 and then sort of tack on some consumable commitment, from the practice to sort of remove this interest rate overhang that you guys keep on referring to. That's pretty pervasive. And then I'll ask my follow-up?

Mike, do you want to tackle that?

Sure. Hi, Jon. I think the device that we have the ability to do that, are on the used devices. You remember, we have the Elite systems that we took back as part of the trade up, when the company introduced Syndeo. We've had a lot of success in selling those at lower price points for providers, who are looking for, aren't willing to pay the 20, high 20s or aren't able to at this time. So we sold over, 500 of those devices globally last year, and we factored in approximately 500 into our guidance this year. And so in the near term, we think that's the lever that we would pull. And we've had great success. We have a lot of confidence in the quality of the device, and we're able to sell it at a lower price point. That particular device pressures our overall gross margins. It has lower gross profit, given the price point. The cost basis that we have for it. But it's still a way to get people into the brand, and drive future consumable sales. So we're utilizing that lever.

Got it. And thank you. And then, maybe for the follow-up, Marla, the prior management team, there was a ton of excitement for China and Hydrafacial and the long-term opportunity there. So I'm just curious, if you can talk to the decision to move to the distributor approach in China. Maybe if you can just flush out how you weighed the near term, versus the long-term and the change in the economics with the distributor. And then Mike, all of the models, I'm guessing from the sell-side had China direct. So is there a quick and dirty way, to pro-form it for us? I thought you might have said it's a $10 million to $15 million dilutive impact for revenue. But is there also some sort of accretive benefit from an EBITDA perspective? Because you guys might have been operating at a net loss in China, if you were direct this year? Thank you.

Great question, Jon. So in terms of China, we still think it's a significant and important opportunity. It's a large market with a large provider base and a large and consumer base. Our realization when we made this decision, was that the investment required to capture market share, was significant and we were better off as a company, focusing our investments in our core markets, and our product pipeline. And working with a distributor that had the wherewithal to be in market, be able to scale - the sales team and the marketing focus, and be more of an expert at China than we are. So our perspective hasn't changed from prior management. We still think it's an amazing high growth, high potential market. The perspective that's changed is, what do we think it takes to capture share, and are we willing to make that investment now or in the future? And our determination is right now, we want to focus on the core and partner with a great distributor, to access and grow the Chinese market. And then Mike, do you want to talk about the modeling?

Sure. On the financials, yes. I would assume $10 million to $15 million of top line pressure, as a result of the change. We're in the middle of working through that. So there will be sales disruption in the short-term as we make that transition. The purpose, as Marla said, of moving to a distributor is we believe, over the long-term it will be accretive. You take the expenses moving to a distributor, we can take out the large expenses that we have invested in the region, and drive profitability. We believe over the longer term during 2025, I would assume right now we haven't quantified the cost, to make the change. We're expecting to announce those costs later in Q2, once we have them finalized. But excluding those costs, I would anticipate that, you move from a slightly of a net loss, which we incurred in 2024 to EBITDA neutral, I would say in 2025, positioning the company for adjusted EBITDA growth in 2026.

Thank you.

And our next question comes from Navin Tsai with BNP Paribas. Please go ahead. Hello, Navin Tsai, your line may be muted.

Thank you. Thanks. Can you discuss the 2025 go-to-market strategy including pricing, the partnership strategy in the U.S. and internationally and R&D spend. And I also saw some policy making functions, being added to the Chief Revenue Officer and the Chief Supply Chain duties. So how does that translate into 2025 strategy?

In terms of pricing? Do you want to take that, Mike?

Sure. Our pricing strategy, we expect to be consistent in '25 with '24. I would model in some ASP year-over-year pressure is, what are the midpoint of our guidance factored in largely, due to product mix. And so as we continue to deploy the good, better, best strategy that impacts kind of overall pricing. Additionally, the mix of distributor versus direct, is modeled in to be slightly higher - of distributor revenue in 2025. On partnerships, I think I'm assuming you're referring to the consumables business in terms of booster partnerships versus direct, is that correct?

Yes, that's right. Thank you.

Yes. So in terms of booster partnerships, we continue to invest in both our Hydrafacial branded boosters, and in driving partnership booster sales. Our Hydrafacial branded boosters have obviously a higher gross margin. And so, our investment priority is in marketing those boosters, and in launching new boosters. But you will see a handful of partnerships, over the next couple of years in terms of innovation. But we saw with the success of Hydrafacial, Hydralock HA Booster, how important the clinical backing is, in terms of sell-through of our boosters. And so, we're able to do that and perform that clinical backing pretty quickly on our own. And so that's really our priority is Hydrafacial branded boosters.

Thank you. And one follow-up on the distributor model in China. If you could tell us more about the distributor you are working with, including their experience in aesthetics?

We were not able to announce that on this call, but we'll have more to talk about during Q2, when we expect to make the transition.

Sure. Thank you.

Our next question will come from Korinne Wolfmeyer with Piper Sandler. Please go ahead.

Hi, this is Sarah on for Korinne. Related to the progress on the manufacturing consolidation. How have results been with that? And then are you finding any capacity issues? And then, just how much better quality control, do you believe you have now?

All great questions. So we reshored manufacturing in the fall, that's complete. We put in our quality improvement program in the spring of last year, and so in our Long Beach facility. And we're excited about the results we have seen from that. And so, we feel like reshoring really had an impact in terms of our ability, to drive quality throughout our manufacturing, and do all of the testing that we think is critical. And then in terms of capacity, we have plenty of capacity, to manufacture all three of the devices that we're offering.

Great, thank you.

Our next question will come from Margaret Kaczor with William Blair. Please go ahead.

Hi guys, it's Max on for Margaret. Thanks for taking the question. Two quick ones from me. I'll ask both upfront. The first is on OpEx $30 million OpEx decrease year-over-year this year. I know you guys are focused on discipline spending, but just as we think about OpEx spend in '25. Mike, you had mentioned that majority of the variable costs, call them compensation related expenses. But is there more room for leverage here? Are you expecting any extra costs associated with the shift in China?

Mike, go ahead.

And then the second one. Sorry, just the second one.

Oh, go ahead, yes.

Just expectations for cash for the year on 2025. Now you guys repurchased some convertible notes in '24, but any color on plans for cash throughout the year? Thanks.

Go ahead, Mike.

Sure. So our guidance implies adjusted EBITDA improvement, on a percentage basis. If you take the midpoint of the revenue and the midpoint of the adjusted EBITDA range for the full year that we gave. That's driven by two things. One, we continue to expect adjusted gross margin to improve. Our operations team is doing a great job driving efficiency through - throughout the organization. And a piece of that relates to the last question that, came up around consolidating operations, and really getting leverage out of that. The second piece of it is the overall mix of the revenue streams. So we're forecasting a larger percentage of consumables, as a percentage of revenue versus prior year, which drive higher margins. And so that's the piece there. On OpEx, I would expect we modeled in, given the revenue, the forecasted revenue decline on a total dollar basis, to see the dollars come down in selling and marketing and G&A on a percentage basis. We modeled them to be relatively consistent at the midpoint from where we were last year. So most of the leverage is being driven by the gross margin improvements. Your second question on cash. At the midpoint of our guidance, I would assume that cash is largely or cash neutral, as you think throughout the year. Free cash flow neutral, as you think throughout the year. The first half of the year, is typically where we have a use of cash, and so there's a bit of pressure in the first half of the year. And then, as we enter into the back half of the year, just based on how our revenue stream flows, and what our expenses look like. We expect that to convert to a source of cash, ultimately putting us near neutral to the end - for the full year.

That's great color. Thanks guys.

This concludes our question-and-answer session. I would like to turn the conference back over to Ms. Marla Beck, CEO, for any closing remarks.

Thank you, operator. In closing, we are well positioned to build on our momentum driving innovation, operational excellence and deeper partnerships with our providers. Hydrafacial remains a strong global brand, and we believe our strategic focus will ensure sustained, profitable growth. I want to thank our team for their dedication and commitment. We're excited for the opportunities ahead, and confident in our ability to deliver long-term value.

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